Daniel Nachtigall
Laura Smith
OECD Economic Surveys: Croatia 2026
Abstract
Croatia has significantly reduced greenhouse gas (GHG) emissions since 2007 and met its emissions targets. However, accelerated climate policy action is needed to further reduce emissions. This requires an effective policy package that includes phasing out fossil fuel subsidies, introducing more consistent carbon pricing, deregulating electricity prices, and speeding up permitting procedures to facilitate renewable energy deployment. Stronger incentives are needed to reduce car dependency, shift to more sustainable modes of transport, and adopt low- or zero-emission vehicles. Reforming financial support for renovations and workforce upskilling would help accelerate upgrades to the relatively energy‑inefficient building stock. Adaptive measures to address climate risks and protect public finances from their impact are increasingly urgent.
Croatia reduced emissions significantly but remains more emission-intensive than many OECD countries. Greenhouse gas (GHG) emissions – excluding land use, land-use change and forestry (LULUCF) – peaked in 2007 and declined by 20% between 2007 and 2023 (Figure 3.1, Panel A). This reduction was primarily driven by gains in energy efficiency and to a lesser extent by the decarbonisation of energy use, particularly in the energy industries and manufacturing sectors (Figure 3.1, Panel C). Transport emissions are still on the rise. Per capita emissions are lower than the EU and OECD averages, reflecting its relatively lower level of economic development. Croatia also met its emissions targets under the Kyoto Protocol and EU frameworks in the past. The LULUCF sector is a carbon sink thanks to extensive forest cover. However, the volume of absorbed GHG emissions has declined since 2005 due to increased harvesting as well as climate-related stressors such as droughts and heatwaves. The carbon sink potential is not expected to recover to previous levels.
Note: In panels B and C, GHG emissions exclude land use, land-use change and forestry (LULUCF).
Source: Croatia: NDC-CTF, OECD, “Air emissions - Greenhouse gas emissions Inventories”, OECD Environment Statistics.
Additional measures and large investments are needed to reach climate targets. In line with the EU 2050 target, the Climate Change and Ozone Layer Protection Law embeds a net zero target by 2050 in law, which should strengthen enforceability, long-term stability and, thus, effectiveness. Croatia’s climate policy is largely aligned with EU legislation. Its final updated National Energy and Climate Plan (NECP), submitted in 2025, highlights that GHG emissions reductions will be aligned with the EU “Fit for 55” target (Government of the Republic of Croatia, 2025[1]). In sectors outside of the EU emissions trading scheme (EU ETS), i.e. emissions from transport, buildings, small industry and agriculture, emissions must decline by 16.7% by 2030, compared to 2005 levels. With existing measures, emissions are set to decline by 8.2%, falling short of the 2030 target. With additional measures, emissions are expected to decline by 21.3% by 2030. Most reductions are expected to come from increasing energy efficiency, electrifying end-uses, and expanding renewables. The NECP also aims to increase the share of renewables in gross final energy consumption from 31% in 2020 to 42.5% in 2030, and to reduce primary and final energy consumption to 8.05 and 5.88 megatons of oil equivalent (Mtoe), respectively. These targets are slightly less ambitious than those implied by EU legislation (44%, 6.83 Mtoe, and 5.85 Mtoe, respectively). To meet its 2030 targets, the NECP estimates total investment needs for the energy sector of EUR 45.5 billion (58% of 2023 GDP), mostly concentrated in the buildings sector and to a lesser extent the power and transport sectors.
Reducing energy-related emissions is critical, as they account for more than two-thirds of total GHG emissions (Figure 3.1, Panel B). However, energy-related emissions are below the EU average, largely due to a comparatively high share of renewables, which accounted for 26% of total energy supply and 69% of electricity output in 2023. The transport sector is the largest emitter with 30% of national emissions (Figure 3.1, Panel B). Energy industries contribute 16% of total emissions, a lower share than most OECD and EU countries. This is due to a large share of hydropower as well as nuclear energy imports from the jointly owned power plant in Krško, Slovenia, which supplies around 15% of Croatia’s electricity needs. Reducing energy-related emissions requires increasing energy efficiency, reversing the growth in transport-related emissions, and a decisive shift from fossil fuels towards renewables.
Reducing energy-related emissions can also improve energy security. Croatia remains heavily dependent on fossil fuel imports, sourcing around 75% of its natural gas and 78% of its oil from abroad. The government plans to expand domestic oil and gas production. While this helps improve energy security by reducing dependence on fossil fuel imports, investments in fossil fuel infrastructure risk slowing down the clean energy transition and may become stranded assets in light of the EU net-zero target. According to IEA scenarios, no new investments in fossil fuel supply are needed to reach net-zero by 2050 (IEA, 2021[2]).
Croatia uses a diverse mix of policy instruments to reduce emissions (Figure 3.2). Recent evidence suggests that a well-balanced combination of diverse policy instruments is more effective than relying on few policies (Stechemesser et al., 2024[3]) (D’Arcangelo, Kruse and Pisu, 2024[4]). In recent years, the authorities substantially accelerated climate action, outpacing that of OECD partner countries, i.e. OECD accession and non-OECD G20 countries (Figure 3.3, Panel A), by adopting new and strengthening existing policies as defined in the OECD Climate Actions and Policies Measurement Framework (CAPMF) (Nachtigall et al., 2022[5]). However, Croatia still has significant scope to step-up climate policies compared to many OECD countries, particularly in the area of market‑based instruments – such as carbon pricing and phasing out fossil fuel support (Figure 3.3, Panel B). Climate action is particularly strong in the buildings and industry sectors (Figure 3.3, Panel C) where climate‑related EU Directives were transposed into national law, such as those on building performance and industry emissions. Yet, sectoral climate action is below that of OECD countries in all sectors and below that of OECD Partner countries in the building sector.
Note: Croatia charges a fee on carbon dioxide emissions from fossil fuels used in stationary sources, but exempts EU ETS installations, which account for most emissions. Therefore, the CAPMF does not consider the fee a carbon tax.
Note: OECD partner countries include non-OECD G20 countries and OECD accession countries. Climate action is measured as a combination of policy adoption and policy stringency on a scale from 0 (no climate action) to 10 (strong action). Some of the CAPMF data for Croatia, notably on market-based instruments is missing (e.g. Public Research and Development expenditures). Imputing this data does not change the results.
Carbon pricing remains relatively low. In 2023, the average net effective carbon rate (NECR) – a combination of the carbon price from emissions trading systems, carbon taxes, and fuel excise taxes adjusted by fossil fuel subsidies (FFS) – was EUR 59.8 (OECD, 2024[6]), one of the lowest rates among EU countries (Figure 3.4, Panel A). 38% of GHG emissions – primarily non-CO2 emissions – either do not face a carbon price or are subject to a negative ECR, one of the highest shares in the EU. The EU ETS covers around 30% of total GHG emissions. Since Croatia joined the EU ETS in 2013, EU ETS prices increased from EUR 6 in 2013 to around EUR 90 in 2023. This increase contributed to 25% of emissions reductions in ETS sectors over the same period.
Note: Excluding biofuels CO2. Cross-country comparison of effective carbon prices for 2023 is affected by temporary energy price support measures in many OECD countries in response to the energy crisis.
Source: OECD (2024), Pricing Greenhouse Gas Emissions 2024: Gearing Up to Bring Emissions Down.
Carbon prices in non-ETS sectors could be strengthened. Fuel excise tax rates are slightly higher than the minimum tax rates set by the EU Energy Taxation Directive. Yet, tax rates on transport fuels are among the lowest in the EU. A revision of the Directive aims to align tax rates with environmental impact and eliminate fuel taxation exemptions, but it has yet to be adopted. Net effective carbon rates in the transport and buildings sectors will increase once the EU ETS II becomes operational, most likely in 2028, which will cover emissions from fuel combustion in transport, buildings and small industry. While this marks a positive step, the government should consider further increasing carbon pricing as the EU ETS II does not cover all emissions and is subject to price uncertainty as witnessed in the EU ETS, where prices were below EUR 10/tCO2e on average between 2005 and 2019. Increasing carbon pricing is particularly relevant for the building sector, where the net effective carbon rate is negative (Figure 3.4, Panel B). Raising carbon prices in non-ETS sectors would also contribute to harmonising carbon prices inside and outside the EU ETS, helping to align marginal abatement costs, thus improving the overall cost-effectiveness of emissions reductions. In addition, harmonising carbon prices would also level the playing field between similar activities within and outside the EU ETS. This is especially relevant in the building sector where large district heating networks are covered by the EU ETS whereas smaller heating systems – such as individual gas boilers – are not. As a result, less environmentally friendly small-scale heating systems currently enjoy a competitive advantage over more effective district heating.
Fossil fuel subsidies (FFS) should be phased out. They use scarce public funds and distort price signals, encouraging fossil fuel production and consumption, thereby increasing emissions. These subsidies are most prevalent in the buildings sector. In response to the energy price surge following the war in Ukraine, Croatia reduced the value‑added tax for natural gas from 25% to 5% and capped both electricity and natural gas prices for households and small and medium-sized enterprises at around EUR 60 and EUR 40 per MWh, respectively. Electricity and gas price caps were extended multiple times, most recently in September 2025. While the price caps were increased, reducing the overall support, they remain in place for households and small firms. The total fiscal cost of the price caps between October 2022 and March 2025 amounted to around EUR 900 million, more than 1% of 2023 GDP. While fossil fuel subsidies may improve energy affordability, they are not an efficient way to reduce energy poverty as benefits are distributed across all customers regardless of need. Phasing out these subsidies as soon as possible in favour of targeted support for vulnerable households through targeted transfers would be a more effective use of public funds (see Chapter 1).
Vulnerable households need to be protected from energy price hikes in an efficient way. Strengthening carbon pricing and phasing out FFS can raise energy prices and have negative distributional effects. As low-income households spend a disproportionately large share of their income on energy, they are particularly vulnerable to price increases, raising concerns about equity, affordability and political acceptance. Recycling carbon pricing revenues can help mitigate negative effects while enhancing political acceptability. Many OECD countries recycle revenues from carbon taxes and ETS and to a lesser extent from fuel excise taxes (Marten and van Dender, 2019[7]). Croatia earmarks 90-100% of its EU ETS revenue for investments in low-carbon technologies. Additionally, it is expected to receive around EUR 2 billion from the new EU Social Climate Fund to help prevent increases in energy and transport poverty resulting from the introduction of the EU ETS II. Recycling revenues through universal transfers – as in Switzerland – is straightforward to administer, reduces the negative distributional effects and increases political acceptability, but is not well targeted. Instead, targeting vulnerable households would be more cost-effective and would further improve political support (Dechezleprêtre et al., 2022[8]). For example, Canada provided higher transfers from its carbon pricing scheme to rural households, who are more vulnerable to energy price increases due to higher mileage and car dependency, until 2025. Ireland earmarks some of the carbon tax revenues to social welfare programmes (OECD, 2021[9]). Effective targeting requires clear definitions of energy and transport poverty as well as an effective system to identify the beneficiaries and implement the transfers. The government is currently developing these definitions in preparation for the implementation of the Social Climate Fund.
Renewables already account for a relatively large share of power generation, but further acceleration of deployment is needed. The share of renewables has increased steadily over the last decade, mainly driven by a recent expansion of wind power (Figure 3.5, Panel A). In 2024, Croatia’s share of renewables in power production was 73%, one of the highest shares in the OECD (Figure 3.5, Panel B) thanks to significant hydropower resources. The government aims to increase the share of renewables in power consumption (including nuclear energy imports from Slovenia) from 55.5% in 2022 to 76.7% in 2030. Strengthening renewables is necessary in view of rising electricity demand due to electrification, expected to increase from around 1 700 TWh in 2023 to over 1 900 TWh by 2030, and the closure of Plomin, the country’s only coal power plant. The share of coal in electricity generation decreased from around 20% in 2016 to 8% in 2023. Plomin is scheduled to close in 2032 – later than in most other European countries – but may retire earlier as high EU ETS prices challenge coal’s competitiveness. Accelerating the coal phase-out would curb GHG emissions, enhance air quality and underscore the urgency to scale up renewables.
Source: OECD calculations based on IEA (2025), World Energy Balances database.
The deployment of renewables – notably wind and solar photovoltaics (PV) – needs to accelerate. Despite having some of the best solar resources in the EU with 2 000 to 2 700 hours of sunshine per year, solar power only accounted for 4.6% of electricity generation in 2024. This is one of the lowest shares in the OECD and EU and considerably lags behind countries with similar solar insolation (Figure 3.5, Panel B). Solar electricity production matches well with Croatia’s consumption and production profile, characterised by peak consumption and reduced hydro output during summer months. These seasonal patterns – driven by demand for air conditioning and reduced river flows – are expected to intensify due to climate change. Solar potential is estimated to be around 7 GW, among which 1.5 GW is solar rooftop (PBL, 2023[10]). Unlocking this potential will be key to meeting rising electricity demand.
The deployment of renewables faces several challenges. Key obstacles include grid bottlenecks, slow permitting procedures and capped electricity prices. The ageing grid increasingly jeopardises the connection of new power plants, which are needed in view of rising electricity demand. Planned investments in grid modernisation and expansion are expected to solve this bottleneck. In addition, uptake of renewables is slowed down by an incomplete regulatory framework. For example, lack of clarity related to updated grid connection fees have resulted in regulatory uncertainty that has led some investors to withdraw. Despite some recent progress, permitting times for utility-scale solar PV and wind in Croatia are among the highest in the EU, far exceeding the limits set by the EU (Figure 3.6). The government is considering the creation of designated renewable acceleration areas with grid connection to speed-up deployment and permitting times (Wind Europe, 2024[11]). To further reduce permitting delays, the authorities should further invest in administrative capacity. Despite some progress, further streamlining the permitting process – for example, by simplifying the assessment for some environmental obligations as done in Germany – could help shorten approval times. Establishing a one-stop shop for permitting would reduce the administrative burden of renewable energy producers. Additionally, providing clear deadlines for permitting to local authorities and introducing a silent-is-consent rule, an automatic approval of the permitting request after the deadline passed, as is the case in Italy for small-scale RES plants, would further accelerate the process.
Rooftop PV has expanded, but further efforts are needed. Due to slow permitting times and grid congestion, most of the recent growth in solar PV was driven by rooftop installations. While producing electricity on-site faces higher economic costs compared with utility-scale projects, it requires less investment in grid infrastructure, reduces detrimental effects on biodiversity and enhances the resilience of the power system and energy security. To facilitate rooftop deployment, the government abolished the VAT on solar panels, removed some regulatory barriers, and revised the majority voting rules in multi-family homes. However, the uptake of solar PV on multi‑family buildings remains extremely limited due to outdated ownership laws and restrictive grid connection rules (European Commission, 2024[12]). Importantly, incentives for rooftop solar investments are weakened by artificially low electricity prices for households, capped at EUR 0.07 per kWh (up from EUR 0.06 in 2024), although price caps were increased in 2025. Removing this cap would restore price signals. Additional measures – such as mandating solar rooves on large parking lots – as done in France and in neighbouring Slovenia – could also boost deployment while creating shaded areas that protect drivers from heat. Mainstreaming the e-permitting system for rooftop solar PV – as piloted and applied in Zagreb – would reduce administrative costs and encourage broader adoption.
Source: WindEurope, Wind Energy Permitting Insights, https://windeurope.org/intelligence-platform/product/permitting/; Ember, https://ember-energy.org/latest-insights/europes-race-for-wind-and-solar/.
Support mechanisms for renewable energy should target emerging technologies. In a welcome step, the government switched its major support scheme for renewables from feed-in-tariffs to auctions using a contract for difference scheme in 2016. Compared to feed-in-tariffs, auctions are generally more cost-effective as they adjust the support price to reflect producers’ production costs more dynamically. Going forward, non-mature technologies warrant further support. The authorities are exploring new technologies such as floating solar PV – where a 400 MW plant is undergoing environmental impact assessment – geothermal energy and offshore wind. Croatia has rich geothermal potential capable of providing zero-carbon dispatchable electricity. Though not yet cost-competitive compared to other renewables, costs are expected to fall rapidly (IEA, 2024[13]). Offshore wind potential is estimated at 25 GW. As a first step, the government secured EU technical support to refine regulations, assess feasibility, and draft a development plan.
Increasing shares of variable renewable energy sources such as wind and solar PV require greater system flexibility to balance electricity demand and supply. This can be achieved through interconnections, storage and demand response measures. Croatia has strong links with neighbouring power systems, already meeting the EU’s 15% interconnection target by 2030. Further expansion of interconnectors, particularly with Bosnia and Herzegovina, is under consideration. The government allocated EUR 640 million from the Recovery and Resilience Fund for grid reinforcements and storage to better accommodate the integration of renewables. The current power storage capacity is around 1 GW, mostly in the form of pumped hydro. The NECP foresees to expand pumped hydro capacity and investment of EUR 250 million in approximately 250MW battery storage capacity.
Demand response needs to be strengthened. Despite some progress in the last years, smart meter rollout remains below 30%, lower than that of other EU countries (EU ACER, 2024[14]). This essentially prevents most households and firms from taking up dynamic electricity tariffs which incentivise consumers to adapt their consumption to market conditions, for example by reducing consumption at peak times when prices are high. In addition, Croatia provided the least amount of information to consumers on electricity bills among all EU-27 members (EU ACER, 2024[14]). Enhancing the information requirements for electricity suppliers – such as including comparisons with peer or historical usage – can effectively nudge consumers to reduce electricity consumption in a cost-effective way.
The potential expansion of nuclear power requires careful assessment. Nuclear energy accounts for around 15% of electricity consumption. In 2023, the operational lifetime of the Krsko nuclear plant – jointly owned with Slovenia – was extended to 2043. Croatia has expressed support for the joint construction of a new nuclear power plant with Slovenia, with Slovenia expected to make a final decision by 2028. In February 2025, Croatia established a working group to explore options for the construction of both conventional nuclear power plants and small modular reactors. Additionally, this working group is preparing new nuclear energy legislation, which includes provisions for the establishment of an independent regulatory body. As with all major energy projects, significantly expanding or building new nuclear capacity should be guided by a comprehensive cost-benefit analysis that considers full lifecycle costs, including plant construction, nuclear waste storage, and the decommissioning of retired facilities. The estimated cost of the new nuclear power plant ranges from EUR 9.6 billion and EUR 15.4 billion (12-20% of 2023 GDP), depending on the capacity installed. However, recent European nuclear projects such as Hinkley point C in the United Kingdom, Flamanville in France, Olkiluoto 3 in Finland and Mochovce 3 in Slovakia – a nuclear reactor type similar to the one proposed for Krsko 2 – suffered significant cost overruns and delays. Robust contingency planning is therefore essential to mitigate these risks.
Reducing emissions in the transport sector will require both increasing the share of low- or zero-emission vehicles and reducing car dependency by shifting transport towards more sustainable modes such as public transport, walking and cycling. Transport sector emissions increased strongly between 2000 and 2023 (Figure 3.1, Panel C). Vehicle ownership per capita nearly doubled between 2000 and 2024 – one of the largest increases in the EU – although it still remains below the EU average. Consequently, the modal share of passenger cars has increased from 81% in 2000 to 84% in 2023, exceeding the EU-average (Figure 3.7, Panel A). With an average age of 13 years, Croatia’s fleet is slightly older than the EU average (12 years).
Incentives to reduce car dependency need to be strengthened. Investments in roads combined with rising car ownership have led to significant traffic and air pollution problems, primarily in urban areas. Zagreb ranked among the 25 most congested cities in Europe in 2023 and 2024 and frequently experiences poor air quality (Bastea, 2024[15]). Some cities such as Zagreb reallocated some road and parking space towards public transport, walking and cycling alongside reforms to parking tariffs. However, residential parking tariffs remain low, ranging between EUR 3 and 13 per month in Zagreb. Congestion charges could help reduce traffic and car dependency while generating public revenues. However, political acceptability remains a barrier. To improve public acceptance, cities like Zagreb could consider piloting congestion charges with a trial period followed by a referendum, as successfully implemented in Stockholm.
Despite some progress, further support is needed to promote sustainable modes of transport such as rail, cycling and walking. Croatia has one of the lowest shares of investments in rail infrastructure relative to total surface transport infrastructure among EU countries (Figure 3.7, Panel B). It lacks high-speed railway lines, and its network is mainly single-track, with less than 40% of Croatian railway lines electrified, below the EU average. To address this, the government announced plans to invest more than EUR 4 billion in rail infrastructure projects over the next decade, most of which co-financed by the EU. These investments aim to modernise and expand the rail network, making inter-city transport and work commutes by rail more attractive. In addition, the NECP envisions to invest EUR 470 million in urban public transport while the National Bicycle Traffic Development Plan earmarks around EUR 90 million for investments in cycling infrastructure between 2023 and 2027. As with all major public investments, these investments should be guided by a comprehensive cost-benefit analysis that considers the costs - such as construction and maintenance - and the benefits in terms of enhanced accessibility and reduced emissions, using an internal carbon price equal to the social cost of carbon. To fully realise the potential of the infrastructure upgrade, complementary investments in enabling infrastructure are needed – such as park-and-ride facilities or bicycle parking around train stations – to support multi-modality. Yet, limited co-ordination between the country’s national rail provider as well as sub-national and national governments often undermines efforts to support multi‑modality and make sustainable transport more attractive. For example, the national road code blocks cities from allowing bicycles to drive in the opposite direction to cars in one-way streets – a practice that has boosted the cycle network and increased the attractiveness of cycling in many European cities, including Paris and Brussels.
Source: Eurostat; OECD ITF database.
Croatia has made progress in greening its motor vehicle taxation, but further reforms could enhance its effectiveness. In 2021, the government adjusted the vehicle registration tax by introducing an environmental component. The level of the one-off tax payment increases with both the car’s price and its carbon intensity, incentivising the purchase of smaller, cleaner cars. Electric vehicles are fully exempt, while hybrid vehicles benefit from a discount, further strengthening incentives to purchase low-emission cars. While this reform is a step in the right direction, the annual road motor vehicle tax remains misaligned with environmental goals. This tax is based on engine size and vehicle age, with older cars paying lower taxes than newer ones. Vehicles older than 10 years are exempted, which provides incentives for the usage of older, typically more polluting cars. Removing this exemption and adding an environmental component to the annual tax would help accelerate the phase-out of older vehicles while further promoting the adoption of cleaner alternatives.
The share of EVs in new car sales was the lowest in the EU in 2025 (Figure 3.8, Panel B) and their share in the stock of vehicles remained below 1% in 2024. Purchasing decisions for EVs often hinge on factors such as the retail price, operational savings, as well as practical considerations like the vehicle's range and the availability of charging stations. In 2024, Croatia’s Environmental Protection and Energy Efficiency Fund subsidised the purchase of EVs for both electric and plug-in hybrids with up to EUR 9 000, excluding models priced above EUR 50 000. With a budget of EUR 15 million, the scheme was heavily oversubscribed. EV subsidies mainly benefit wealthier households, leading to concerns about equity and fairness (Borenstein and Davis, 2024[16]). For the next funding round, the government plans to shift financial support from private cars to taxis and delivery vehicles for which emission reductions from electrification are expected to be greater due to higher mileage. However, this plan is inefficient. As the financial attractiveness of EVs increases with the distance driven due to high upfront and low operational costs, users with high mileage already have strong financial incentives to purchase EVs even in the absence of financial support. Requiring car retailers to show full lifecycle costs of all cars would provide buyers better information.
Expanding the EV charging network is key to support wider EV adoption. Concerns about insufficient range remain a major barrier. Despite some progress, Croatia has one of the lowest charging network densities in the EU (Figure 3.8, Panel A). Under the EU Recovery and Resilience Fund, Croatia aims to double the number of chargers, including 100-200 fast-charging stations, to have a station every 60 kilometres along major roads. Charging stations close to population centres where demand for charging is higher will be prioritised. However, this is inefficient as private investments in public charging stations is economically viable where demand is high. Instead, the government could target subsidies for public charging stations in underserved rural areas where private investments are commercially less attractive or unviable—similar to Slovenia’s approach. Concerns have been raised regarding excessively high prices by some operators (European Alternative Fuels Observatory, 2024[17]). These could be addressed by regulating prices on charging rates.
Source: OECD calculations based on European commission, European Alternative Fuels Observatory, https://alternative-fuels-observatory.ec.europa.eu/.
Advanced biofuels could be better channelled towards hard-to-abate sectors. The NECP sets a target for renewables (e.g. biofuels, electricity) to account for 24.6% of road transport’s energy consumption by 2030, a significant increase compared to less than 3% in 2022. Biofuels, in particular advanced biofuels, are expected to deliver the largest part to this target. While first-generation biofuels have been associated with significant emissions resulting from indirect land use change due to competition with food crops, advanced biofuels—using waste, residues, or non-food feedstocks—have less detrimental effects. However, given that advanced biofuels are predominantly imported and not yet widely available, while EVs are becoming more cost-competitive, advanced biofuels should better be channelled towards hard-to-abate sectors such as maritime and aviation transport, which currently lack commercially viable alternatives (OECD, 2021[18]). The renewable energy target is expected to be fulfilled through a renewable obligation for fuel distributors. Currently, this obligation is set for each type of renewable fuel separately, which is not cost-effective. Allowing fuel distributors greater flexibility in complying with the obligation would lower compliance costs. Additionally, enabling trading of certificates between traditional fuel distributors and EV charging operators – as in California – would also generate additional revenue streams for EV charging operators, potentially lowering charging prices and providing further incentives for EV uptake.
The buildings sector remains energy inefficient. Buildings account for 42% of final energy consumption and 12% of national GHG emissions (Figure 3.1, Panel B). Between 2010 and 2023, energy intensity in the residential sector declined by 25%, reflecting progress in efficiency and renovations. However, Croatia’s building stock is much less energy efficient than in most OECD countries (Figure 3.9, Panel B). Most multi-family buildings date back to the country’s socialist period (1945-1990) and are characterised by inadequate insulation and outdated building techniques and materials, leading to poor energy efficiency (Svirčić Gotovac, Đokić and Adamović, 2023[19]). The country faces a dual challenge of heating in winter and cooling in increasingly hot summers – pressures further intensified by the seasonal surge in tourism, which raises cooling demand. The country has pledged to reduce CO2 emissions in buildings by at least 80% by 2050 (Government of the Republic of Croatia, 2025[1]). This goal contributes to but is not fully aligned with the EU Energy Performance of Buildings Directive (EPBD) which mandates full carbon neutrality by 2050 (European Commission, 2024[20]). To reduce emissions in the buildings sector, renovating the building stock, transitioning to low-carbon heating sources, and eliminating natural gas subsidies will be crucial.
Significant investments are needed to decarbonise the buildings sector. The government’s plan for reducing emissions in the building sector is outlined in its Long-Term Renovation Strategy of the National Building Stock by 2050 (LTRS). The strategy aims to increase the building renovation rate from 1% per year in 2021 to 3% by 2030, 3.5% by 2040, and 4% by 2050. These targets align with EU goals, which aim to raise the annual renovation rate of Member States to 3% by 2030, with deep renovations – those reducing emissions by 50% or more – accounting for 70% of the total. Future investment needs are estimated at EUR 9.45 billion (12% of 2023 GDP) by 2030 and EUR 32.28 billion (41% of 2023 GDP) by 2050 (Government of the Republic of Croatia, 2020[21]). While national and EU public funds, such as the European Regional Development Fund (ERDF) and the Cohesion Fund, have helped initiate renovations and mobilised private funds, they represent only a fraction of the total funding required – highlighting a significant private investment gap.
Current market signals are insufficient to incentivise the level of private investment needed for building decarbonisation. This is largely due to fossil fuel subsidies in the residential sector, which have resulted in a negative net effective carbon rate (Figure 3.4, Panel B). Fossil fuel subsidies suppress effective carbon pricing and weaken climate policy action in the buildings sector (Figure 3.9, Panel A), thereby undermining incentives to invest in energy efficiency and low-carbon heating technologies. As discussed above, fossil fuel subsidies are untargeted and not cost-effective in addressing energy poverty. To align pricing mechanisms with efforts to decarbonise buildings and ensure a more effective use of public funds, fossil fuel subsidies should be phased out urgently and replaced by targeted transfers for vulnerable households.
Financial support for building renovations could be better targeted to the most vulnerable households and energy-inefficient buildings. Residential buildings account for 75% of the total building stock, making their energy renovation a critical priority. Croatia has supported residential building renovation efforts through funding under programmes like the Operational Program Competitiveness and Cohesion 2014-2020 and the National Recovery and Resilience Plan (NRRP) 2021-2026 to incentivise renovations. Despite these efforts, the annual renovation rate was 0.7% in the 2014-2020 period, below the pace needed to meet targets set out in the Long-Term Renovation Strategy (Government of the Republic of Croatia, 2020[21]). Under the NRRP, co-financing for renovation projects based on expected emission savings was prioritised, ensuring that the most impactful renovations were addressed first. These programmes offered generous co-financing – ranging from 60% to 100% of eligible costs – with higher support for comprehensive renovations. While these programmes were successful in incentivising renovations, they may not have been cost-effective. Switching from grants to subsidised loans, or using on-bill financing – as recommended in the last Economic Survey (OECD, 2023[22]) – would maximise the impact of public funds. The Slovak Republic, for instance, supports renovations through a revolving fund that is almost entirely self-financed (OECD, 2024[23]). If grants continue to be used, they should be reserved for the most vulnerable households at high risk of energy poverty.
Note: Climate action is measured as a combination of policy adoption and policy stringency on a scale from 0 (no climate action) to 10 (strong action).
Source: (Nachtigall et al., 2022[5]), https://oe.cd/dx/capmf; IEA (2025), IEA Energy end-uses and efficiency indicators database.
Energy performance certificates (EPCs) could play a stronger role in supporting building decarbonisation by complementing pricing instruments (OECD, 2024[24]). They provide standardised, reliable information on a building’s energy efficiency and offer guidance on how to improve performance. In line with EU regulations, EPCs are currently required for new buildings and during property transactions. Expanding their coverage could improve the targeting of financial support towards the worst-performing buildings, as countries like France and the Netherlands have done.
Addressing barriers such as multi-ownership issues and a shortage of skilled green construction workers is crucial for accelerating energy renovations. Croatia has the fourth-highest rate of home ownership in the EU at 91%, well above the EU average of 69% (Eurostat, 2024[25]). While home ownership itself is not a barrier, in multi-apartment buildings, where renovation decisions require the agreement of most co-owners, achieving consensus can be challenging. To address this, the Act on the Management and Maintenance of Buildings, effective since January 2025, introduces the concept of a legally recognised association of co-owners. This entity is designed to streamline procedures, enabling co-owners to complete administrative tasks – such as entering contracts and applying for renovation funding – without the need to collect individual signatures. Expanding the EPC system could enhance renovation planning in multi-family buildings. Building-level EPCs help identify priority buildings and share energy performance data, as in France, where they support mandatory 10-year renovation plans for co-owned buildings older than 15 years. (Government of France, 2025[26]).
Further efforts are needed to address labour and skill shortage in the construction sector (see Chapter 2). Shortages are exacerbated by the construction boom following the 2020 earthquake and the ageing population. A significant portion of the construction workforce is comprised of foreign workers, who often lack green skills and experience with local materials and regulations. To bridge this gap, initiatives like providing training vouchers for green construction skills covering topics like sustainable building practices, energy-efficient technologies, renewable energy integration, and the use of green building materials is a positive step (ReferNet Croatia and CEDEFOP, 2025[27]). Continued efforts to up-skill and re-skill the workforce will be critical to address green skills shortages. Furthermore, enhancing coordination between labour market and environmental policies could better support the green transition. This could include joint planning, skills development, and employment initiatives, such as the Netherlands' Action Plan for Green and Digital Jobs, which aims to tackle labour market challenges linked to the climate and digital transitions (Krasavina, 2025[28]).
In parallel to improving efficiency, the swift decarbonisation of heating supply is crucial for reducing emissions in the building sector. Natural gas boilers account for 21% of residential heating and oil boilers for 2%, while 43% of heating energy comes from biofuels, primarily woody biomass (Eurostat, 2025[29]). Woody biomass is a renewable resource primarily sourced from domestic forests, three-quarters of which are state-owned and certified under the Forest Stewardship Council (FSC) standards. However, burning biomass for heating contributes to air pollution and reduces the potential of forests as carbon sinks (PEFC Council, 2025[30]). Given pressures from increased logging and climate-induced stress, prioritising heat pumps and renewables such as geothermal and solar thermal sources may offer a more sustainable path forward. Currently, financial support for switching to heat pumps is available when paired with building envelope upgrades. The country also invested EUR 50 million in the exploration of geothermal energy. Alongside financial measures, new regulatory measures could further drive the shift away from fossil fuels. For example, Slovenia has banned the installation of individual gas boilers while Austria’s Renewable Heat Act requires the phase-out of all coal and oil heating systems by 2035 (IEA, 2024[31]).
District heating should be expanded and decarbonised, and this transition requires strong support to municipalities. Currently, district heating accounts for approximately 14% of total heat supply and its primary feedstock is natural gas (EU Covenant of Mayors, 2024[32]). Expanding the district heating system would be feasible in urban areas with sufficient population density to support greater coverage. For example, district heating currently serves only one-third of Zagreb. The government allocated EUR 80 million under the Modernisation Fund in 2025 and EUR 39.9 million under the project D2Heat, co-funded by the EU, to accelerate the upgrade of the country’s district heating network (Aragón, 2023[33]). Local authorities play a pivotal role in the expansion of district heating which hinges on effective coordination. For example, incentivising individual heat pump adoption in areas targeted for district heating expansion could be counterproductive as the cost-effectiveness of district heating relies on connecting a sufficient number of households. To facilitate coordination across heating technologies, the EU’s Energy Efficiency Directive mandates that municipalities with over 45 000 inhabitants prepare local heating and cooling plans. However, many smaller municipalities lack the technical expertise and resources to meet these demands. Providing targeted support to these authorities is key, as heating and spatial planning are critical tools for driving the shift to renewable heating sources and expanding district heating networks. Encouragingly, some municipalities have shown initiative. While the EU Energy Performance of Buildings Directive (EPBD) requires all new buildings to be nearly zero-energy buildings (NZEBs) since 2021, the city of Karlovac went further by revising its spatial plan to completely prohibit individual fossil fuel heating in new developments, requiring connections to district heating or renewable sources to avoid lock-in in fossil-based technologies (EU Covenant of Mayors, 2025[34]). Strengthening coordination and supporting municipalities will be crucial for scaling these efforts and accelerating district heating expansion.
Climate-related hazards and extreme weather events have significant health and economic costs with potential knock-on effects for public budgets and fiscal sustainability. Between 1980 and 2023, climate-related extreme events caused 910 fatalities and EUR 4.1 billion economic damages (almost 6% of 2023 GDP) in Croatia, one of the highest among EU countries in terms of percentage of GDP (Figure 3.10, Panel A). While climate impacts differ across regions, 91% of the population has experienced at least one extreme weather event in the last five years, well above the EU-average of 80% (European Investment Bank, 2024[35]). River flooding poses a significant hazard (Figure 3.11, Panel A). Excluding the coastal zones, 15% of the Croatian territory is at risk of flooding, including population centres like Zagreb and Rijeka, which experienced flash floods in 2022. In 2024, the country faced severe floods from heavy rain, alongside record March rainfall, damaging storms, and widespread summer heatwaves. Low-lying islands and river deltas are increasingly vulnerable to sea-level rise and related coastal flooding and salinisation. The National Disaster Risk Assessment from 2024 also identified wildfires and earthquakes as priorities for disaster risk management. The future impact of climate-related hazards will depend on how well the authorities and affected sectors prepare for climate change and manage these growing risks.
Adaptation measures are key to reducing climate risk and limiting health, economic and fiscal costs (OECD, 2024[36]). Investing in prevention is significantly more cost-effective than ex-post disaster relief and recovery. According to the European Investment Bank, every EUR 1 invested in prevention saves between EUR 5 and EUR 7 in repair costs (European Investment Bank, 2024[37]). The National Adaptation Strategy, adopted in 2020, proposes 83 measures in eight priority sectors, including agriculture, forestry, tourism, and energy (Government of the Republic of Croatia, 2020[38]). The Strategy estimates investment needs of EUR 3.7 billion (5% of 2023 GDP) for implementation up to 2040. To operationalise this strategy, the government is currently developing a National Adaptation Plan. It will be important that the Plan establishes well-defined performance indicators to track progress and assess effectiveness of adaptation measures.
Source: European Environment Agency (EEA), https://www.eea.europa.eu/en.
As temperatures keep rising, adapting to heat stress will be increasingly important. Climate models predict an increase in the number of hot days – well above the EU-27 average (Figure 3.11, Panel B). Due to the urban heat island effect, hot temperatures are most prevalent in cities, among which Zadar and Rijeka are expected to experience the strongest temperature increases (Agapito, Herceg-Bulić and Güttler, 2023[39]). In response, cities in co-operation with the national government have taken measures to adapt to urban heat. The national government invested significant effort and financial resources to support cities to develop green infrastructure. For example, Zagreb integrated green urban infrastructure as part of its rebuilding efforts following the 2020 earthquake, strengthening its position as one of the European capitals with the highest share of green urban infrastructure (European Environment Agency, 2024[40]). Beyond mitigating heat stress, green infrastructure also has significant co-benefits: it supports mental and physical health, reduces urban flood risk and sequesters carbon emissions – making it a cost-effective, nature-based solution for urban adaptation. Increasing daytime temperatures may also deter beach tourism along the Adriatic coast – posing significant economic risks as tourism accounted for 20% of GDP and 28% of total employment in 2023. To reduce the sector’s vulnerability to rising temperatures, it will be important to extend the main tourism season beyond the peak summer months and diversify the tourism model by leveraging Croatia’s natural and cultural heritage.
Note: Hot days are defined as those with maximum temperatures above 35°C.
Source: OECD ‘Climate Action Dashboard’; OECD forthcoming.
Insurance coverage for climate-related extreme events should be strengthened. Despite being available on the market, insurance coverage remains low compared to EU and OECD countries, similar to other countries in central and eastern Europe (Figure 3.10, Panel B). Low insurance coverage is partly driven by high-risk premiums in risky areas, although perceived costs often exceed actual premium levels (Krišto, Kedžo and Škrinjarić, 2024[41]). Private insurance can play an important role in resilience by increasing risk awareness, incentivising risk reduction, and supporting private investments in adaptation. Broader insurance uptake could also reduce the government’s contingent liability for post-disaster relief and reconstruction support while enabling a faster recovery through timely disbursements of funds. The government developed publicly available risk maps for floods, wildfires and earthquakes, which can support informed decisions and encourage insurance uptake. Requiring sellers and landlords to provide information on climate-related risks in advance of a real estate purchase or rental would further increase uptake while improving the location decisions of households and firms. Currently, there is no mandatory natural hazard insurance. Mandatory property insurance against climate-related hazards, particularly in high-risk areas, would ensure that losses are covered. Under a mandatory scheme, insurance premiums would provide information on actual risk but may be unaffordable to the most vulnerable. To address this, a government-backed reinsurance system, financed through a fixed levy on all insurance policies, similar to France’s ‘CatNat’ system, could limit exposure and cost for insurance companies while ensuring that damages from climate-related hazards are covered. Targeted premium subsidies for vulnerable households may still be warranted but should be used sparsely to preserve incentives for risk reduction.
The resilience of public finances should be strengthened against climate-related hazards. Currently, disaster relief and rebuilding efforts are financed through the public budget, supplemented by support from the European Union Solidarity Fund. Broadening private insurance coverage would reduce the exposure of the public budget to climate hazards. Developing a climate fiscal strategy would help identify and mitigate the fiscal risks associated with natural hazards (see also Chapter 1). This could include assessing contingent liabilities, budgeting for disaster response, and integrating climate risks into long-term fiscal planning. The authorities could establish a contingency fund or explore risk financing instruments such as catastrophe bonds or parametric insurance for critical infrastructure and other public assets to increase fiscal space following disasters. Contingency funds – such as Calamiteitenfonds in the Netherlands – provide immediate liquidity following disasters, without requiring additional budget approvals. Issuing catastrophe bonds – insurance-linked securities that provide funding for disaster recovery efforts in exchange for periodic interest payments – transfer risk from the government to the financial sector while reducing financial strain on budgets in the event of extreme events. To further strengthen the resilience of the financial system the authorities could require all domestic financial institutions to assess their climate-related risks. The Croatian National Bank has already issued supervisory expectations and recommendations on assessing climate and environmental risks for less significant institutions. Commercial banks’ climate-related and environmental risk management should complement climate risk stress tests carried out by the European Central Bank.
The cost of physical infrastructure to protect against climate risks such as flood protection needs to be shifted towards the beneficiaries. To limit flood risk exposure, the construction of new homes and infrastructure in flood-prone areas has been banned. However, around 25% of the population remains at risk of river flooding, partially due to illegal construction in the past, which has been partly legalised ex post. Currently, protection measures are funded through national or sub-national budgets and national agencies. Looking ahead, stronger incentives for private adaptation finance will be essential, alongside new revenue sources for municipalities and the national government. Taxes and fees can both raise funds and provide incentives to reduce exposure to climate risks, following the ‘beneficiary-pays’ principle. For example, Dutch Water Boards collect water board taxes for dyke maintenance proportionally to beneficiaries’ interest, differentiating between various stakeholders such as farmers, homeowners and businesses (OECD, 2020[42]). In addition, complementary tools—such as building codes that integrate adaptation to climate risks through requirements for stronger materials or more robust drainage—can help mainstream climate resilience into infrastructure planning.
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