OECD Inventory of Support Measures for Fossil Fuels: Country Notes

Ukraine

This note is based on fossil fuel support data collected for the year 2021 and therefore reflects the situation before Russia launched its large-scale war of aggression against Ukraine in February 2022 and takes no account of changes in the energy sector since.

Energy resources and market structure

In 2019, 68% of total energy supply (TES) in Ukraine was covered by domestic production, with the largest shares coming from nuclear (912 PJ), natural gas (683 PJ) and coal (605 PJ). While making gains over the past few years, the share of renewable energy in TES, mainly biofuels, remains marginal at a mere 5%.

 

Source: IEA (2022), "World energy statistics", IEA World Energy Statistics and Balances (database).

In the same year, electricity production amounted to 154 TWh. Nuclear and coal-fired power plants contributed 54% and 29% to Ukraine’s electricity generation mix, respectively, while the share of gas-fired power plants was approximately 8%.

Ukraine is a net energy importer seeing the share of imports in its TES growing, from 27% in 2013 to 37% in 2019. This increased dependence on imports is largely explained by coal supply disruptions due to military operations in the Donbas region since 2014. The introduction of the reverse flow gas imports back in 2014 helped diversify suppliers with a view of strengthening the country’s energy security. Following the large-scale aggression by Russia against Ukraine beginning February 2022, it is anticipated that the above described energy supply trends will drastically change as the country’s energy infrastructure suffers heavy damages from the hostilities.

The Ministry of Environmental Protection and Natural Resources and the Ministry of Energy are responsible for setting the country’s policy in the environmental and energy domains, respectively. On the other hand, the National Energy and Utilities Regulatory Commission (NEURC) is responsible for energy and utilities price setting, licensing and executing state control functions. In Ukraine, state-owned energy enterprises still dominate the market while the role of private players is increasing as a result of enhanced competition in the sector since the Maidan revolution. Among other reforms started in the energy sector in recent years, the government has undertaken corporate governance reforms of key state entities in the energy sector, particularly the oil and gas vertically-integrated company – Naftogaz, and the transmission system operator – Ukrenergo, as well as the unbundling of oblenergos (regional companies that previously combined electricity supply and distribution functions).

Energy prices and taxes

Between 2017 and 2021, pricing policy in the energy sector underwent considerable changes and revisions in a gradual transition towards fully liberalised market prices. Responsibilities for energy price setting are distributed between the regulator (NEURC), the Cabinet of Ministers and local authorities.

The retail price of natural gas for households and religious organisations was liberalised on 1 August 2020. However, in response to the adverse economic effects related to the COVID-19 pandemic, the government has capped the gas price for these consumer groups at 6.99 Ukrainian Hryvnias (UAH) per cubic metre (including value-added tax [VAT] and transportation fees) up until 31 March 2021. As of the beginning of 2021, the Regulator is responsible only for setting tariffs for the monopolistic segment of the gas market (gas transportation and distribution, etc.). The pricing and marketing of petroleum products are fully liberalised. However, in May 2021, the government introduced a cap on the trade margin for diesel and petrol for the period of the quarantine due to COVID-19.

The standard VAT rate of 20% applies to most energy products and is incorporated in tariffs for end-users. Two cases of VAT exemption were identified and presented in the OECD Inventory. Excise tax is applied on motor fuels (rates varying with the type of product), liquefied petroleum gas (LPG) and electricity. With the introduction of the new Tax Code in 2010, Ukraine’s government introduced a carbon tax initially at a very low rate, until reaching the higher rate of UAH 10/tCO2 in 2019.

Figure 2. Total tax rebates and support for fossil fuels in Ukraine

 

 

1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.

2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.

3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.

4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.

Source: OECD Inventory of support measures for fossil fuels (2023).

Recent developments and trends in support for fossil fuels

The bulk of government support for fossil fuels in Ukraine targets consumers either through budgetary transfers to cover losses of utility providers due to regulated below-market tariffs or through social subsidies and benefits allocated directly to households. Over the last five years, the government of Ukraine undertook considerable reforms in the energy sector. Most notable among these is the substantial increase of utility tariffs applied in 2014, 2015 and 2016, which helped reduce the deficits of utility providers and consequently cut or eliminate various government compensations schemes. Rather than keeping low tariffs for all households for social and political reasons, the government has gradually reformed its social support programmes to target eligible low-income households.

In terms of fuels, producer support measures are concentrated in the coal sector as various budget transfers have been provided to support inefficient and unprofitable state-owned coal mines. The drop in the total Producer Support Estimate after 2013 is explained by temporary loss of government control of territories in the Donbas region where most state-owned coalmines in Ukraine are located, and, on a smaller scale, by reforms in the coal sector.

In addition to housing and utility subsidies and benefits, the government introduced an additional support programme (worth UAH 1.4 billion) in the 2021 budget to compensate certain categories of consumers for having cancelled a reduced electricity tariff (0.9 UAH/kWh) for the first 100 kWh consumed as well as for having cancelled other reduced electricity tariffs. This measure was introduced to strengthen the social protection of certain categories of electricity consumers during the COVID-19 pandemic. Compensation are provided to households living in apartments and houses equipped with electric heating as well as to large families and family-type orphanages. Only those households which are not receiving support under the housing and utility subsidies programme are eligible to apply for this compensation.

Government support to fossil fuels in Ukraine was estimated at UAH 44.56 billion in 2021 (Table 1). Eighty-three percent (83%) was directed at end user beneficiaries, as opposed to 17% directed to firms. Support was given out in the form of direct transfers (UAH 42.92 billion) accounting for 96% of total support, of which Compensation for the increase in electricity tariffs to certain categories of consumers is the main component. Tax expenditures amounted to UAH 1.64 billion.

Government support to fossil fuels has decreased by -1% since 2016. In 2021, tax expenditures have decreased by -22% (year-on-year), from UAH 3.57 billion to UAH 1.64 billion and direct transfers decreased by -65%, from UAH 70.68 billion to UAH 42.92 billion. All growth rate percentages above are expressed in terms of nominal national currency amounts.

Table 1. Government support to fossil fuels by mechanism, in billions of national currency

	2016	2017	2018	2019	2020	2021
Tax expenditures	2.130	2.717	3.841	8.695	3.568	1.636
Direct transfers	42.699	65.919	65.883	42.494	70.680	42.924
Total	44.829	68.636	69.724	51.189	74.248	44.561

1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.

2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.

3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.

4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.

Source: OECD Inventory of support measures for fossil fuels (2023).

Table 2 highlights a selection of measures that provide large amount of support and a selection of measures that have experienced a large variation since 2016. A description of these measures is provided in Table 3.

Table 2. Selected support measures for fossil fuels with a large fiscal cost (in billions of national currency)

Measures providing large amount of support in 2021		2021	2016	Nominal variation since 2016
Tax expenditures
	Temporary VAT relief for supply of coal and/or products of its enrichment on the customs territory of Ukraine	1.526	2.116	-0.591
	Decreased excise tax for operations related to the sale of aviation gasoline and jet fuel (produced in Ukraine as well as imported)	0.111	0.000	0.111
Direct transfers
	Direct payments of benefits and housing subsidies to households to partially cover utilities, solid and liquid furnace fuel and LPG costs	36.825	0.000	36.825
	Restructuring of coal and peat industry	4.615	0.107	4.508
	Decommissioning of unprofitable coal mining enterprises	0.548	0.000	0.548
Measures experiencing a large variation since 2016		2021	2016	Nominal variation since 2016
Tax expenditures
	Temporary VAT relief for supply of coal and/or products of its enrichment on the customs territory of Ukraine	1.526	2.116	-0.591
	Decreased excise tax for operations related to the sale of aviation gasoline and jet fuel (produced in Ukraine as well as imported)	0.111	0.000	0.111
	Excise tax relief for operations related to the sale of LPG at specialised auctions for the needs of households	0.000	0.014	-0.014
Direct transfers
	Subvention from the state budget to local budgets for the provision of benefits and housing subsidies for utility payment to low-income households	0.000	38.127	-38.127
	Direct payments of benefits and housing subsidies to households to partially cover utilities, solid and liquid furnace fuel and LPG costs	36.825	0.000	36.825
	Restructuring of coal and peat industry	4.615	0.107	4.508

This table highlights a selection of measures that provides large amount of support and a selection of measures that have experienced a large variation since 2016. Data for 2021 for Ukraine and other EaP countries are provisional OECD-generated estimates based on energy consumption data and do not represent official budgetary figures.

Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax relative to a jurisdiction’s benchmark tax system, to the benefit of fossil fuels. Hence, (i) tax expenditures estimates could increase either because of greater concessions, relative to the benchmark tax treatment, or because of a raise in the benchmark itself; (ii) international comparison of tax expenditures could be misleading, due to country-specific benchmark tax treatments.

Measures appearing in the Inventory are classified as support without reference to the purpose for which they were first put in place or their economic or environmental effects. No judgment is therefore made as to whether or not such measures are inefficient or ought to be reformed.

Source: OECD (2022), Inventory of Fossil Fuel Support Measures (database).

Table 3. Description of selected support measures for fossil fuels

Decreased excise tax for operations related to the sale of aviation gasoline and jet fuel (produced in Ukraine as well as imported)	Operations related to the sale of aviation gasoline and jet fuel (produced in Ukraine as well as imported) are subject to excise tax without increasing coefficient. According to the Ministry of Finance, revenue forgone due to this measure is estimated at UAH 5.2 bln in 2019 and UAH 2.2 bln in 2020.
Temporary VAT relief for supply of coal and/or products of its enrichment on the customs territory of Ukraine	Operations related to the supply of coal and/or products of its enrichment are exempt from VAT. This measure was introduced back in 2016 and was expected to be terminated by 1 January 2022. However, it has been already extended several times.
Decommissioning of unprofitable coal mining enterprises	According to the Cabinet of Ministers Resolution No. 93 (2018), recipients of budget funds are state-owned coal and coal processing enterprises, which are listed for liquidation by the Cabinet of Ministers of Ukraine. Budget funds could be allocated to a range of measures, particularly, settlement of arrears of wages and electricity consumed, land-use payments, environmental and health protection measures. In 2019, approximately UAH 128 mln was allocated for these purposes from the state budget and around UAH 265 mln in 2020 (State Treasury Service, 2021b, 2020).
Direct payments of benefits and housing subsidies to households to partially cover utilities, solid and liquid furnace fuel and LPG costs	In 2019, the government of Ukraine introduced a new budget programme for social support of households, which completely substituted previously existing measures in 2020 (see UKR_dt_18 and UKR_dt_19 in Inventory). Beneficiaries are low-income households, which received partial compensation for utility, solid and liquid furnace fuel and LPG costs. The amount of support is estimated on the basis of a formula taking into account the monthly average household income in relation to the subsistence minimum.
Restructuring of coal and peat industry	The government introduced a budget programme on restructuring the coal and peat industry back in 2005 and it is still operational. According to this Resolution, budget funds can be used for settling arrears of wages and social payments, settling arrears for the electricity consumed in the previous years, as well as for technical re-equipment and modernisation of coal mines.
Excise tax relief for operations related to the sale of LPG at specialised auctions for the needs of households	Operations related to the sale of LPG for the needs of households at specialised auctions (under a procedure defined by the Cabinet of Ministers) are exempt from excise tax. This measure was introduced back in 2011 and is still valid. However, the Ministry of Finance does not expect any revenue foregone due to this measure for the 2020 budget.
Subvention from the state budget to local budgets for the provision of benefits and housing subsidies for utility payment to low-income households	Certain categories of households are eligible for a subsidy for partial compensation of utility bills according to the procedures defined in Resolution of Cabinet of Ministers No. 848 of 21 October 1995. Means-testing is based on a formula which takes into account the household’s income and subsistence minimum according to Resolution No. 1 156 of 27 July 1998. Besides, there is a long list of preferential categories of consumers (e.g. citizens affected by the Chernobyl disaster, participants in military actions and disabled persons after World War II), which are eligible for this social support providing their monthly average household income is not higher than a certain level following the procedure outlined in Resolution of Cabinet of Ministers No. 389 of 4 June 2015. In 2020, this budget programme was substituted by the measure “Direct payments of benefits and housing subsidies to households to partially cover utilities, solid and liquid furnace fuel and LPG costs” (UKR_dt_20).

Data sources

Country data in OECD.stat

OECD Fossil Fuel Support Portal

National data sources

Note on the Methodology

Aggregate numbers from the Inventory represent the fiscal cost of support measures for fossil fuels. They should not be interpreted as a level of support for fossil fuels, nor as an indicator of the extent to which the considered policies are favourable or unfavourable to climate mitigation.

The Inventory reports tax expenditures as estimates of revenue foregone due to measures that reduce or postpone tax payments relative to a jurisdiction’s benchmark tax systems to the benefit of fossil fuels producers or users. Tax expenditure estimates can thus increase over time due to either an increase in the offered concession (relative to benchmark tax systems) or an increase in the benchmark itself. Cross-country comparisons of tax expenditures can also be misleading due to differences in countries’ benchmark tax systems.