On 15 May 2026 the Ukrainian Ministry of Economy released a draft law for public consultation titled “On the Principles Governing the Operation of the National Greenhouse Gas Emission Allowance Trading System”. The draft law sets out the fundamental rules of Ukraine’s ETS and establishes a Modernization Fund, which would use ETS revenue to promote energy efficiency and low- and zero- carbon investments within ETS-covered sectors.
Scope and coverage
According to the draft law, the system will cover installations above inclusion thresholds in the power, industry, aviation, and maritime sectors, thereby mirroring the coverage of the EU ETS, though some differences in scope and coverage may apply.
Phase one: no emissions cap and progressive compliance
The first phase of the Ukraine ETS is expected to run from 2028 until three years after the martial law, introduced in response to Russia’s war of aggression against the country, is lifted. During this phase, there will be no total emission cap, and the total number of allowances issued each year would equal the total verified GHG emissions for the preceding year. Allocation will be based on auctions with a fixed price floor, and the share of the compliance obligation will grow progressively from 10% in 2028 to 100% in 2034, reflecting the phasing-in approach under the EU Carbon Border Adjustment Mechanism (CBAM).
Phase two: absolute cap and secondary market
From the second phase, an absolute emission cap will apply. This will be set based on the confirmed emissions from the ETS’s first phase and a linear reduction factor as approved by the Cabinet of Ministers of Ukraine. The draft law provides for the possibility of revising the established annual emissions cap upwards if the difference between the cap and the total confirmed emissions in a given year exceeds 5%. In this phase, a secondary market will be launched, with trading open to ETS participants and other market players.
Compliance options
In both phases, there is no free allocation envisaged. Covered entities can meet their compliance obligation through one of three options: (1) surrendering emission allowances; (2) providing a “decarbonization credit certificate”; or (3) making a fixed-price payment (a “replacement fee”). According to the draft law, a decarbonization credit certificate is a document issued by the Modernization Fund to an installation operator, certifying the implementation of an eligible investment and innovation project that can benefit from the Fund’s financial support. The certificate also gives the operator the right to reduce its compliance obligation under the ETS by up to 10%, taking into account the cost of a certified investment project.
Phase three: alignment with the EU ETS
Phase three begins when Ukraine joins the EU and thus the EU ETS. The draft law provides that the rules of the Ukraine ETS phase three will largely align with the EU ETS rules, with some exceptions.
Voluntary CBAM contributions
Additionally, the draft law states that in phases one and two, installation operators or other entities exporting certain carbon-intensive goods, may make a voluntary carbon border adjustment contributions to the Modernization Fund intended to “correspond to the financial obligation of the importers under the EU CBAM framework”. The Modernization Fund and the voluntary contributor should sign an agreement enabling the contributor to receive up to 90% of their contribution back to finance decarbonization projects. The rules, methodology, and the process for obtaining consent for such voluntary payments are to be specified in secondary legislation.
The public consultation period for the draft law spans 30 days from the publication date.
