A Special Green Deal for Ukraine To implement the European Green Deal in the war-torn country, it needs to be transformed from a lofty slogan to a pragmatic development strategy

Economic growth and investment, social reconstruction and human capital, the role of local authorities and the path to the European Union: these four dimensions of Ukraine's reconstruction are the focus of this year's Ukraine Recovery Conference", which will take place on June 11 and 12 in Berlin.

Right now, physical security and endurable living conditions are much more pressing issues for virtually every Ukrainian than limiting global warming and ensuring a healthy environment. The European Union’s ambition to reach net-zero in CO2 emissions by 2050 seems far removed from the concerns of a country that is fighting for survival. This has important consequences for how to integrate Ukraine into the EU’s Green Deal.
It will only be “owned” by the Ukrainian population and its politicians if it can substantially contribute to a robust economy that underpins prosperity and security. In other words, Ukrainians will not be content with vague promises of green economic “opportunities.”

There is a risk that the EU accession process might trigger an undesirable dynamic that undercuts the legitimacy of the European Green Deal in Ukraine. European negotiators might be pushed by interest groups—such as incumbent EU businesses that seek protection or environmentalists that see a lot of low-hanging fruits—to demand very ambitious targets and standards while Ukrainian negotiators under enormous pressure to make quick progress on EU accession might not be in a position to push back—even if implementation of some elements is unrealistic. If in addition the economic and social fallout of implementation is left to be handled by the Ukrainian political system (i.e., no specific funds and exemptions are granted), the legitimacy of the Green Deal might suffer a severe blow in Ukraine.

Any Ukrainian government that would try to dutifully implement transformative environmental regulation promised in the accession process would be faced with a populist opposition that would point out the cost of policies initially conceived in Brussels. This will make the corresponding government and “the EU” the culprit for any transformation pain.

Alternatively, an ineffective pro-forma transposition of laws and targets to tick the necessary boxes of the accession process would not only fail to reach the desired targets, but would also undermine trust in European institutions. At worst, it might lead to a perception of Brussels as a remote capital that is best dealt with by repeating the slogans but ignoring the essence (unless micro-managed). Hence, an “imposed” Green Deal only anchored in the accession process and largely pre-conceived in Brussels might backfire.

A Sustainable Growth Strategy

However, the Green Deal does not need to become a divisive agenda of meeting externally mandated standards and targets. If well designed, the Green Deal—in the sense of a new environmentally-sustainable economic model—might become a strategy that enjoys domestic consent and constitutes a ain building block for a prosperous and secure Ukraine. It could open new export markets and future-proof areas of economic specialization for a country that needs to move up the value chain to catch up with its European peers in terms of per-capita income. It is a precondition for attracting much needed investment in long-lasting productive assets, which will heavily rely on being attractive to private investors. 

The country has historically suffered from underinvestment in industry, infrastructure, and buildings. In addition, the war is profoundly affecting Ukraine’s economy. The population has substantially decreased and been dislocated; risk and capital costs have increased; infrastructure and other capital stock have been damaged capital stocks. Achieving lasting prosperity and security requires a massive up-tick in investments. Even with a reasonable amount of donor support, the required investment volumes for strong and lasting growth will not be met. Therefore, Ukraine needs to attract a significant amount of private investment, but an inflow of private investments will only materialize if they can generate lasting value for investors. In the short term this requires fixing urgent bottlenecks—such as infrastructure—to keep the economy going. But it also requires a credible growth outlook. 

Ukraine cannot wait until the war ends. Pilot projects and policy pathways need to be set up now.

Ukraine rightly sees its economic future in the EU. Its funds, institutions, and the internal market provide a powerful package for economic prosperity—as exemplified by the impressive economic growth experienced by the former communist countries since joining the EU in 2004, primarily Poland. This is a attractive perspective for investors—but it also implies that myopic economic policy choices, such as undercutting environmental standards, could cause investors to doubt if the government itself believes in speedy accession. By way of contrast, a clear pathway for implementing European Green Deal
policies reduce uncertainty for investors.

The success of a Green Deal in Ukraine depends on implementing policy instruments that attract foreign private investment and encourage more efficient usage of resources. Thereby, policy instruments need to be targeted to the Ukrainian realities of today. Policy instruments that consistently combine much needed domestic policy reform, catalytic partner support, and external commitments achieve much more than any of these levers alone.

Ukraine cannot wait until the war ends. Pilot projects and policy pathways need to be set up now. This will enable the strengthening of implementation capacity both on the national and local level. Ultimately these preparations will allow for the scaling up of these activities to make a macroeconomic contribution toward Ukraine’s green recovery.

The examples of carbon pricing and the derisking of sustainable power investments illustrates how targeted Green Deal instruments can strengthen Ukraine’s security, prosperity, and attractiveness in a specific sector.

Carbon Revenues for Growth

Carbon pricing is the centerpiece of industrial decarbonization in the European Green Deal. Full access to the internal market, let alone EU membership, is not conceivable without adequately pricing industrial greenhouse gas emissions. Due to Europe’s carbon border measures, emission-intensive producers will incur penalties when entering the European market.

But simply imposing EU carbon pricing on current Ukrainian companies would force many of them out of business. Such a shock therapy would be met with strong political resistance. In contrast, a policy mix that allows companies in Ukraine to conduct industry-decarbonization investments would not only be economically sensible, it would also mitigate the political backlash against carbon pricing. It could rest on three complimentary pillars: First, EU-compliant standards for new investments to avoid lock-ins; second, a clear pathway of introducing increasing costs for greenhouse gas emissions; and third, tools to support the transition of existing industries decarbonizing To encourage and enable Ukraine to move quickly on this crucial matter, the EU might test out a promising new instrument. Rather than supporting decarbonization projects in Ukraine directly, Brussels can promise to match the Ukrainian government’s carbon-pricing revenues with additional loans or grants. This would commit as well as encourage the Ukrainian government to speed up the carbon pricing trajectory

Both the carbon revenues and the matched money might be pooled into a fund that is jointly operated and serves investments in transitioning Ukrainian industry (and possibly compensating most vulnerable consumers). Investment supports could be distributed in transparent processes.

A well-governed and endowed fund can become a real engine for a green transformation of Ukraine and efficient postwar recovery. The efficient and credible “recycling” of carbon revenues based on a governance architecture that involves international partners could mitigate the concerns of Ukrainian businesses, while Ukraine’s partners might obtain extraordinarily strong transformative leverage as their support not only encourages in dividual projects but enables meaningful economy-wide carbon pricing.

De-risking Power Investments

Ukraine’s electricity sector needs huge investments to address the existing backlog, war-related destruction, and its transformation needs. Attracting private investors will be crucial to mobilize the required construction.

The implementation of Green Deal instruments should start immediately. Time is of the essence.

Moreover, given the scale of destruction, it is evident that decentral flexible generation, storage, and renewables will have a crucial role of providing resilience during the war; solutions that have limited variable cost and low cumulative emissions will also be valuable thereafter. To encourage efficient deployment and usage of such assets, private investments reflecting market signals would be very valuable.

But the existing regulatory framework, war-related risks, uncertainty about the future electricity system, and high capital costs make the sector virtually uninvestable. There are no easy fixes, as investors do simply not trust long-term payment promises by the Ukrainian state or other market participants.

To overcome this, international supporters should not “just” finance individual assets but develop and support financial mechanisms (e.g., a clean electricity trust fund) that guarantees certain revenues from private investments in desirable Green Deal compatible technologies. This would lower the corresponding rates for the eligible investments―making it possible for the government and market to actually meet them―building trust and a true market over time. If, in return for accepting such a financial exposure, donors demand some tricky reforms (such as enforcing transparency and accountability of distribution companies), such conditionalities could trigger further investments.

Under a well-designed and executed system, private investment should far exceed what donor grants could deliver, which would avoid the activation of public guarantees.

A Tailor-Made Solution

Just implementing the letters of the EU energy and climate acquis does not guarantee a successful Green Deal for Ukraine. The country is justifiably focused on quick economic wins and less concerned about longterm environmental and economic benefits.

A Green Deal for Ukraine will hence have to look very different from a Green Deal for, say, Luxembourg. The good news is that for Ukraine the EU accession process and donor support provide valuable commitment devices for reforms and investments in sustainable solutions. These credibility anchors can be used to make otherwise impossible progress. To do so, the Green Deal needs to be translated into concrete co-designed and co-sponsored instruments to catalyze private investments. The narrative is convincing, but heavily contingent on good policy, both by Ukraine and its partners. 

Implementation of Green Deal instruments should start immediately. Time is of the essence for building human networks, capacity, and trust. To underpin the fast scaling of private investments Ukraine needs to catch up with its future EU peers.

Georg Zachmann
is a senior fellow at Bruegel and scientific lead at Green Deal Ukraina.

Internationale Politik (IP), Germany's leading foreign affairs magazine, published a special issue for URC 2024. You can find Georg Zachmann's article "A Special Green Deal for Ukraine" on pages 58-61.

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