Srdan Tatomir
OECD Economic Surveys: Estonia 2024
Abstract
Estonia has made substantial progress in reducing greenhouse gas emissions, but it will need to accelerate the pace of decarbonisation to halve emissions by 2030 relative to 2005. Carbon prices have risen over time due to higher EU ETS prices, but they will need to rise further. The energy sector remains carbon intensive due to continued reliance on oil shale but, despite its recent contribution to energy security, the government needs to commit more firmly to phasing out oil shale from energy production over time. Biomass will continue to be important but Estonia will need to reduce rising emissions from forests and changing land use. The use of wind and solar energy has expanded and administrative barriers have been removed to encourage further development. The electricity grid needs to be further strengthened to accommodate more renewable energy and enable greater interconnectivity. Transport emissions have been broadly unchanged, but the introduction of the new motor vehicle tax, increasing electrification and public transport investment should reduce emissions. Improving the energy efficiency of buildings will help support decarbonisation. Estonian labour markets are flexible and well placed for the shift to a greener economy, and targeted support is being provided to the Ida-Viru region, where the oil shale industry is concentrated.
Estonia has made progress in reducing greenhouse gas (GHG) emissions over time, but it will need to accelerate the pace of decarbonisation in order to achieve climate neutrality by 2050. The GHG intensity of the economy has decreased by a third since 2005, but it remains one of the more energy-intensive OECD economies (Figure 4.1, A). Overall, emissions were only slightly lower in 2021 than in 2005 (Figure 4.1, B). Energy sector emissions have decreased substantially, while transport emissions have not fallen and land use, land use change and forestry (LULUCF) is now emitting net positive GHG emissions (Figure 4.1, C). This puts Estonia’s new targets, part of the EU Fit for 55 goals, at risk. Climate adaptation costs are likely to be lower than in many countries, but Estonia will still be affected by more extreme weather events and rising sea levels (Maes et al, 2022). In order to halve its GHG emissions by 2030, Estonia will need to significantly accelerate its pace of decarbonisation and reduce annual emissions by around 5% each year, requiring a concerted effort across the economy.
Note: LULUCF stands for land use, land use change and forestry. The targets in Panel B are Estonia’s goals consistent with Fit for 55 objectives.
Source: OECD Greenhouse Gas Emissions database.
Ensuring energy security during the transition to climate neutrality is a key issue. Estonia was one of the most energy independent European countries in 2022 as it imported less than 10% of its energy needs. However, as it shuts down its oil shale industry, Estonia will need to replace this with new energy production and imports. Ensuring electricity connectivity and sufficient domestic energy production will be crucial to achieving a stable energy supply.
A comprehensive set of policies will be necessary to achieve the transition to net zero (D’Arcangelo et al, 2022). Many of Estonia’s GHG emissions rules and regulations are set at the EU level, including through the EU Emissions Trading System (ETS). Higher and consistent pricing of carbon will provide market incentives to decarbonise, while well-designed standards and regulations can create a supportive market framework conducive to green investment in energy, transport and buildings. A range of policies at the national level can contribute to this effort and the effectiveness of EU measures. Complementary policies that facilitate the labour market transition, while protecting the socially vulnerable, are important in ensuring a broad-based and inclusive green transition.
The investment required to achieve climate neutrality by 2050 is substantial and will rely both on private and public sector finance. Many of the measures will be capital-intensive and investment needs to be made up-front. In 2019, the research institute SEI estimated that the green transition would require investing 4% of GDP each year in 2021-2030, 2% by 2040 and 1% between 2040 and 2050 (SEI, 2019). The private sector is expected to account for three quarters of the total, or 3% of GDP this decade, by investing in renewable energy, low-carbon transport and building renovation. Public sector investment will be crucial to develop the energy and transport infrastructure that enables decarbonisation and to upgrade public sector buildings. EU funds including the Recovery and Resilience Plan (RRP) and ETS revenues are expected to finance around half of Estonia’s climate-related needs over 2021-2027.
Carbon pricing plays a key role in reducing emissions
The reduction of Estonia’s GHG emissions has significantly been influenced by EU rules and regulations, including through the EU ETS. In 2021, 61% of Estonia’s GHG emissions were covered by ETS prices. The EU plans to cover non-ETS sectors, such as transport, buildings and agriculture, in the ETS 2 emissions trading scheme from 2027 onwards. Carbon prices will need to increase to drive further decarbonisation: a recent OECD study suggests that ETS prices in the EU might have to rise to EUR 180 per CO2 tonne by 2030 to achieve Fit for 55 targets and will need to be even higher to achieve climate neutrality by 2050 (Chateau, Miho and Borowiecki, 2023).
Estonia has set carbon taxes domestically to support climate goals and further measures would contribute to reaching the targets efficiently. The national carbon tax that applies to small heating systems (6% of all emissions) will be raised from EUR 2 to EUR 25 in mid-2024. However, as in many countries, the taxation of carbon content varies across fossil fuels. It ranges from EUR 35 per tonne of CO2 equivalent on coal to EUR 225 on gasoline (OECD, 2023a). In Estonia, the average net effective carbon price in 2022 has been below neighbouring Baltic EU countries and below most OECD countries (Figure 4.2).
To price carbon emissions more consistently and in line with climate goals, a number of measures should be undertaken. First, the government should restore excise duties to pre-pandemic levels by 2027 as planned (IEA, 2023). To minimise the risk of a sharp adjustment later on, Estonia could further raise carbon taxes ahead of ETS 2 that will apply from 2027. Second, exemptions from excise duties, such as for fuels used in fishing and maritime transport, and reduced rates, such as for diesel fuel used in agriculture, should be removed. The excise rate on diesel should be increased so that it at least aligns relative to petrol in terms of carbon emissions. An ongoing government review of environmental charges and taxes presents an opportunity to increase effective prices on GHG emissions and will be facilitated by upcoming climate legislation and reforms that give more emphasis to climate policy (see Box 4.1). Raising the magnitude of planned increases in excise duties by another EUR 6 per CO2 tonne equivalent, that is by 50%, could bring additional revenue worth around 0.3% of 2022 GDP.
Net effective carbon tax rates, 2021
Note: Net effective average carbon rates are calculated as weighted average carbon prices across sectors net of fossil fuel support.
Source: OECD Net Effective Carbon Rates database.
Estonia is updating its National Energy and Climate Plan for 2030 to reflect the new and more ambitious EU climate targets. This is informing the development of a new Climate Law, which will provide the legislative framework for achieving climate neutrality by 2050. The aim is to provide a legal basis for procedures, a framework, and tools that future governments can use to execute climate policies. The government is conducting a broad public consultation on the Climate Law with the aim to send a draft law to parliament in mid-2024 in order to enforce it from 2025 onwards.
Recent reforms have also focused on improving administrative capabilities to deliver the green transition. The responsibilities for climate policy have previously been spread across several ministries and government agencies. Reforms enacted in July 2023 have consolidated several functions within a new Ministry of Climate expanding its scope to cover 90% of all GHG emissions. The new ministry is centred around the previous Ministry of Environment but now includes construction, transport, energy and maritime departments from the Ministry of Economic Affairs and Communication. The Minister of Climate is responsible for achieving Estonia’s climate change goals while ensuring conditions for balanced and sustainable development of the economy (IEA, 2023). This reform should improve cooperation across different policy areas and lead to a more integrated approach to the green transition.
Furthermore, Estonia has established a Climate Council in 2023 as recommended by the previous Survey. Its initial role will be to advise on climate strategy and legislation, but it will also be expected to monitor progress and assess performance on Estonia’s climate goals in the future. The 15-member Climate Council is made up of a diverse set of scientists and specialists, including those from the energy, transport and information technology sectors. The advisory council will be complemented by an executive group comprising ministries and government to ensure continued progress on Estonia’s climate goals (IEA, 2023).
Decarbonising the energy supply
Decarbonising electricity production and deepening electrification will be key to achieving the green transition. Electricity demand in Estonia could rise by 7.5% between 2025-2030 and by around 60% by 2050 (Elering, 2022). Historically, domestically produced oil shale has generated most of Estonia’s electricity (see Box 4.2). Renewable energy will not only need to replace oil shale, but also expand electricity production to meet higher demand. Around a third of all energy used was from renewable sources in 2021, close to the Fit for 55 target, but the ambition is to double this by 2030. Estonia’s targets are ambitious and aim to cover 100% of its electricity consumption from renewable sources, primarily wind, by 2030. Diversifying renewable energy and improving interconnections to other countries to manage intermittent production are needed to further expand renewables use.
Oil shale remains an important source of energy, but it will need to be phased out. The use of the carbon-intensive oil shale to generate electricity decreased since 2018 although it bounced back during the energy crisis in 2022, providing energy security as it was used to produce around 60% of the electricity production (Figure 4.3). Rising EU ETS prices have increasingly shifted activities towards oil shale liquefaction, which is 40% less carbon intensive to produce, and now accounts for a third of overall output. The government has invested in the development of a new shale oil liquefaction plant in 2020, although in 2023 the Supreme Court reduced the number of years it will be able to operate. While liquefaction renders the pace of winding down oil more flexible, fossil fuel subsidies and further investment are inconsistent with meeting climate goals (IEA, 2023). The current government does not intend to give out new licences to open new oil shale mines and remains committed to ending its use in electricity production by 2035 and to ceasing use of oil shale in any energy production by 2040. To ensure market expectations are aligned with the government’s climate goals, it should include this commitment in the upcoming Climate Law. A legal commitment would raise the bar for future governments to reverse course.
Note: * Bioenergy includes solid primary biofuels, liquid biofuels biogases and renewable municipal waste.
Source: Statistics Estonia (KE033), IEA.
Biomass, an important and reliable domestic source of renewable bioenergy, has limited room to expand. It overwhelmingly comes from domestic forests as a by-product of forestry activities and 40% was exported in 2021. However, the LULUCF sector has changed from a carbon sink to a carbon emitter (Figure 4.5, A) due to an increase in forest land emissions that has resulted from maturing forests and increased felling rates. Wetlands emitted GHG due to peat extraction and peat use. The need to reduce LULUCF emissions provides limited room for felling rates to increase and requires more emphasis on afforestation and peat extraction (Figure 4.5, B). This will constrain domestic biomass availability. While the Forestry Development Plan 2021-2030 has been delayed, the upcoming Climate Law will explicitly set national LULUCF targets and provide a framework and policy instruments to achieve reductions in emissions. The government has widened the state forest management company’s environmental objectives, but will need to follow up with a LULUCF strategy once the Climate Law is passed. Given the scale of the challenge, this could benefit from an increased role of outside expertise and advice on how best to boost LULUCF carbon sequestration. Monitoring will be essential in managing LULUCF emissions. While Estonia has a well-developed national forest inventory system, it should invest more resources to better analyse the collected data and improve the frequency of data collection. Further developing remote sensing capabilities, such as multispectral satellite imaging, could help (Laing et al, 2021).
Oil shale is a hydrocarbon-rich sedimentary rock, different to light crude oil that is sometimes referred to as shale oil. Most of the reserves are in the United States but Estonia’s reserves, accounting for 5% of the global total, have the highest energy value and are similar to brown coal. Oil shale can be burned to produce electricity and one of its by-products is a gas that can be used for district heating. It can be used to produce oil for maritime use, a process which is 40% less CO2 intensive than generating electricity. Waste products, such as ash, can also be used for making concrete.
In the 1990s, as Estonia regained independence, it faced falling export demand from Russia and low oil prices. This led to a rapid reduction in oil shale output and employment (Figure 4.4). Despite a trend decline, oil shale continued to be a significant source of Estonia’s energy over the past three decades. The oil shale industry accounted for around 3% of GDP in 2021 and 1% of all employees (Statistics Estonia, 2023). It remained responsible for 62% of total energy supply in 2022. Within Ida-Viru, it continues to employ around 5,000 workers and contributes to 40% of the region’s GDP.
Note: The employee figures are indicative and only refer to the Ida-Virumaa region.
Source: Ministry of Finance; Statistics Estonia.
Note: The dashed lines in Panel B represent national estimates of the sustainable net felling rates for 2020-30.
Source: OECD Forest database; and Statistics Estonia.
The development of renewable wind and solar energy will need to accelerate from 1TWh to around 9TWh of electricity supply to achieve the target of covering 100% of electricity demand by 2030 (Figure 4.6, A). Producing electricity from renewable sources is now cheaper than producing it from fossil fuels and there has been plenty of investor demand for developing renewables in Estonia, despite some of the lowest feed-in premia in Europe (IEA, 2023; Wind Europe, 2022). However, administrative barriers remain. Estonia has upgraded its defence radars, which have previously limited onshore wind parks, and it has conducted an audit as part of the EU RePowerEU scheme to identify and remove the biggest bottlenecks in planning, permitting and building renewable energy projects (MEAC, 2023). This should significantly reduce permitting times (Figure 4.6, B). Moreover, it is designating special go-to areas that have been pre-approved for renewables. To support this process, it should establish a single contact point, such as a one-stop shop for all regulations and permits, to streamline renewable development as has been done for offshore wind in Denmark.
Note: In Panel B, the EU limit of 24 months is stated in the Renewable Energy Directive (2018/2001). Countries analysed make up 96% of installed 2021 wind capacity. Data only available for the countries presented in Panel B. Estonia’s estimates come from the draft update of the National Energy and Climate Plan 2030.
Source: Eurostat Complete energy balance database (nrg_bal_c); WindEurope; EMBER; and GlobalData.
Deeper electrification will necessitate investments in the grid to expand its capacity and flexibility in order to accommodate renewables. The electricity grid will require investment throughout the country, but especially in the western regions and coastal areas where there is more wind. Elering, the transmission service operator, is building a connection for ELWIND, a joint Estonian-Latvian government offshore wind project. RePowerEU funds, part of Estonia’s RRP, will support grid infrastructure investment with EUR 70 million over 2023-26. Private investors need to apply and pay for a grid connection, but grid investment plans and connection costs can still lack sufficient details, which hampers investment (Tallat-Kelpšaitė et al, 2020). Nevertheless, overall demand for connections rose 250% in 2022 and, given the number of renewables projects in planning phases, there is a risk of insufficient grid capacity to accommodate them (Elering, 2022; Renewables Estonia, 2023). To support renewable development, Estonia should invest more resources, including additional workers, into expanding the grid and provide more clarity on its development plans.
Enabling more interconnections with other countries will be key to managing fluctuations in demand and supply and ensuring adequate energy security. While Estonia has been among the least energy-import dependent countries in the EU, it has recently become a net importer of electricity. In natural gas, despite the recent damage to the Finnish-Estonian gas pipeline, access to Latvian storage facilities has provided sufficient energy security in natural gas. However, the electricity grid remains exposed to sudden disruption from Russia. Estonia has been cooperating with Latvia and Lithuania to speed up the switch to the continental European grid and now plans to do so in February 2025. Additional interconnections, such as EstLink 3 with Finland, would help boost interconnectivity.
A comprehensive approach will be required to reduce transport emissions, which account for 15% of total GHG emissions. Estonia is aiming to reduce transport emissions by 24% in 2030 relative to 2005. This will be a significant challenge given that transport emissions in 2021 were higher than in 2005 and 90% came from road transport. Rising living standards and relatively low vehicle taxation has led to more car purchases and driving over the past three decades (IMF, 2022). Car ownership is higher than in most other EU countries and the car fleet is one of the oldest, with some of the largest engines (Figure 4.7, A) (EC, 2023). New vehicles have the highest average CO2 emission levels in the EU (Figure 4.7, B). Current policies outlined in the Transport and Mobility Development Plan 2021-2035 should reduce emissions by only 13% by 2030 (SEI, 2022). To accelerate the pace of emission reductions, transport energy efficiency and emissions intensity need to improve.
Source: Eurostat (road_eqs_carage, sdg12_30).
Until now, Estonia’s current vehicle taxation has not been related to GHG emissions (Figure 4.8). New vehicles are subject to VAT and there was a low and flat vehicle registration fee for new and used vehicles imported to Estonia (EUR 192). Heavy goods vehicles pay a toll (EUR 500-1300), but there are no road user charges on private vehicles. Fuel excise duties are high and make up most of the transport-related tax revenue. In OECD countries, there has been an increasing emphasis on using vehicle taxes for environmental goals (see Table 4.1 in the Annex for examples). The government is now introducing a new motor vehicle tax where the registration fee and an annual vehicle tax will each combine a fixed fee with taxes related to the vehicle’s gross weight and CO2 emissions. The motor vehicle tax will cover all vehicles from 2025 onwards with few exceptions. However, the annual tax decreases with vehicle age to make it more affordable for those on lower incomes who tend to have older cars. For example, owners of vehicles older than 15 years will pay only 10% of the annual tax their vehicle is liable for based on its weight and emissions. Given that 70% of the current passenger car fleet is older than 10 years, the new taxes risk being too low to significantly reduce emissions. This underlines the importance of targeted measures to help low-income households meet their transport needs in a cleaner way that would allow more effective action against more polluting vehicles.
A comparative overview of components of car taxation for different types of cars in selected OECD countries, 2022
Note: The purpose of this chart is to allow a comparison of the level of taxation across selected member countries and not to reflect the actual local market prices. Therefore, to ease cross-country comparisons on the level of taxes it is assumed, for the purpose of this table, that the selling price before tax of the vehicles is the same in all countries. To ease comparison between countries, the cars are divided into four categories of vehicles considered typical cars: electric SUV, hybrid sedan, electric sedan and fuel 4X4 pick-up.
Source: Annex Table 4.A.2. in OECD Consumption Tax Trends 2022.
Estonia should also consider a targeted scrappage scheme for older vehicles that would incentivise drivers to upgrade to more fuel-efficient vehicles. This could be subsidised by newly generated vehicle tax revenues and should focus on those with lower incomes. Some European countries have proxied for low income based on the vehicles’ age and mileage with higher subsidies for older vehicles (Svoboda et al, 2023). Experience from the US, Germany and France shows that such schemes, if well-designed and well-targeted, can effectively lower emissions (OECD, 2011). This could be coupled with introducing minimum emissions standards that rise over time and are consistent with reducing transport emissions. For example, in February 2023, the EU Parliament has voted for a ban on sales of new internal combustion vehicles from 2035. Setting legally binding emissions targets can influence market expectations and strengthen government accountability (D’Arcangelo et al, 2022).
In the medium to long term, distance-based charging is more efficient and can better align usage with the ‘polluter pays’ principle. It allows prices to be differentiated based on geography and time. For example, charges could be higher on routes where alternative modes of transport exist and where congestion is an issue. Equally, lower charges could be set for rural and lower income areas. Furthermore, distance-based charges could guard against future declines in transport-related tax revenue. Excise duties levied on fuels currently account for about 4% of Estonia’s total tax revenue, which the rising share of zero-emission vehicles will erode over time. For example, in Slovenia, simulations suggest a 56% decline in total tax revenues derived from passenger cars in 2050 relative to 2017 levels (OECD/ITF, 2020). The state of Victoria in Australia has piloted distance-based charging, albeit with charges at a low level. Estonia would have to invest in technology solutions to monitor driving distances but, given its relatively advanced levels of e‑government, it is well placed to benefit from distance-based charging.
Despite the country’s compact geographic area, the share of electric vehicles (EVs) is among the lowest in the EU (Figure 4.9, A). While low excise taxes on electricity and upcoming registration fees and annual taxes make EVs relatively more attractive than petrol and diesel cars, EVs can still be expensive to purchase given modest income levels. Zero-emission vehicles continued to be subsidised with the latest scheme worth EUR 8.5 million introduced in 2023 (KiK, 2023). However, the scheme is too small. It provides support for fewer than 2,000 vehicles and should be better targeted with more generous support for less expensive EVs in order to broaden affordability. Purchase incentives by different types of bands exist in Hungary, Italy, Germany and France (ACEA, 2023). The scheme could also directly target high-mileage vehicles, such as taxis, as done in Greece. In addition, many countries offer financial assistance with setting up charging infrastructure at home or at workplaces. This is done in Austria, Italy, Spain, Sweden and the UK (ACEA, 2023). Estonia’s bus fleet is mainly fuelled by natural gas and could also benefit from electrification to reduce emissions (IEA, 2023).
Rail transport has considerable potential to reduce emissions by encouraging further modal shifts away from road transport for both passengers and freight. However, most of the trains still run on diesel and only 10% of 2,143 kilometres of the rail network are electrified, the lowest share in Europe (Figure 4.9, B). With the help of EU Structural Funds and ETS revenue, Estonia plans to invest EUR 361.5 million, or around 1% of GDP, to achieve full electrification by 2028, but has only signed a contract for the first stage of electrification in 2023 (Estonian Railways, 2022). Rail Baltica, set to be finished by 2030, is expected to boost passenger and freight volumes as it connects Tallinn to Warsaw. However, the project has been beset by delays in the past. In Estonia, land acquisition has fallen behind schedule by five years (Riigikontroll, 2021). However, construction should start on a quarter of the Estonian mainline in 2024. Good risk management and cost control will be key to ensuring successful completion (Riigikontroll, 2019).
Source: Eurostat (road_eq_carpda, RAIL_IF_TRACKS).
Public transport should play a bigger role. Estonia’s transport plan is aiming for 55% of people to commute by public transport, by bicycle or on foot, but only 34% of people did so in 2021 and this share has been steadily declining over the past decade. As Tallinn and the surrounding Harju county account for half of all transport emissions, public transport use in these areas can significantly reduce emissions. To this end, the Tallinn Old Port tram line will be extended by 2024 and bicycle infrastructure is being expanded. The second largest city, Tartu, should also bolster public transport. In more rural regions, people are less satisfied with public transport. As fixed routes and timetables do not serve all residents in some areas, demand-based transport could improve efficiency and accessibility as in Sweden. Given its potential the government is planning to develop demand-driven mobility over 2023-26 (Kirsimaa and Suik, 2020).
The increasing share of remote work could reduce emissions by reducing the need to commute (Hook et al, 2020). The potential for teleworking depends on the sector, with higher estimated shares of teleworkable jobs in financial services, ICT and public administration (Sostero et al, 2020). About 35% of all jobs in Estonia are estimated to be amenable to telework and two additional days of teleworking per week could reduce emissions by 6% (EEA, 2022). Urban sprawl and reliance on cars have increased and the provision of public transport links is not a compulsory requirement for new developments within or outside urban areas (OECD, 2022). To boost energy efficiency over time, spatial planning needs to prioritise increasing density, particularly around public transport links. Limits on land taxes should be relaxed to encourage more efficient land use. Furthermore, spatial policy needs to be better coordinated with public transport planning.
Emissions from buildings, which consume around half of Estonia’s energy, have fallen slightly since 2005 (IEA, 2023). Although buildings mostly consume renewable energy, particularly in smaller homes, further electrification can lower emissions and improving energy efficiency would reduce energy demand and free up renewable capacity. About 90% of buildings were built before 2000 and many are not well insulated, leading to relatively high residential energy consumption (Figure 4.10). Stringent energy efficiency standards were introduced for new buildings in 2019, but renovation of existing buildings is a very cost-effective way of reducing emissions. Full renovation could lower heating consumption up to 70% and electricity consumption up to 20%, resulting in 90% fewer emissions by 2050 (MEAC, 2020). However, progress on renovation has been uneven and insufficient.
Policies supporting residential renovations should be broadened. The Enterprise and Innovation Foundation (EISA), a government agency, offers state-backed guarantees and grants for improving energy efficiency with higher generosity for rural dwellings and low-income regions, and for larger efficiency improvements. With the support of EU Structural Funds, it has almost doubled its support for renovating apartment buildings over 2021-2027 to around EUR 400 million. However, this is expected to support the renovation of less than 5% of buildings built before 2000 and the first round of grants was quickly exhausted (IEA, 2023). Furthermore, setting up one-stop-shops, which provide technical assistance and financing advice, can accelerate the renovation process as has been done in Sønderborg, Denmark.
Total CO2 emissions and energy use of the residential sector, 2020
Source: OECD Greenhouse Gas Emissions database; and IEA World Energy Balance database.
Further progress is needed on renovating non-residential buildings. The pace of renovations seen in 2017-2020 needs to quadruple to achieve national targets (SEI, 2022). Landlords have little incentive to improve energy efficiency as energy costs have usually accounted for 2-3% of operating costs and are paid by the tenants. Moreover, uncertainty regarding building regulations has made long-term real estate investment planning more difficult (Kuivjogi et al, 2021). To incentivise building owners to upgrade, Estonia should introduce minimum energy efficiency requirements for all existing non-residential buildings and gradually increase them over time to lower emissions.
Renovation of public buildings should be accelerated. The government aims to renovate 3% of all public buildings per year by 2030, but the rate of planned renovation is 60% of the required volume to reduce emissions sufficiently (IEA, 2023). More funding needs to be allocated for renovating public buildings. Future renovation should be prioritised based on efficiency but less than 10% of all buildings have a valid energy performance rating (EPC). Estonia will calculate EPCs based on energy usage by 2025 and plans to merge the data with an e-construction platform that it is developing. This is welcome as higher transparency on energy efficiency will help better inform public and private investment.
Policy will need to support workers to ensure a fair and just green transition. Employment is expected to shift towards low-carbon sectors, such as services and renewable energy, and away from energy-intensive sectors due to decarbonisation of the economy (Borgonovi et al, 2023). Estimates for Estonia suggest that the share of GHG-intensive jobs is similar to the EU average and many of these jobs might be at risk during the transition (Figure 4.11). A quarter of GHG-intensive employment is in the oil shale industry in Ida-Viru, the poorest region of Estonia, where they account for 10% of the region’s jobs.
Source: Causa, O., and E. Soldani (2023), Lost in Transition? Labour Market Effects of Greening the Economy, OECD Publishing, Paris.
The EU Just Transition Fund is essential in supporting Ida-Viru in the green transition. EUR 354 million in grants, equivalent to almost 5% of the region’s annual GDP, will be allocated over 2023-27 towards diversifying economic activity away from fossil fuels in collaboration with local institutions. There are also plans for reskilling and upskilling of around 11,000 local workers and jobseekers with a special focus on helping oil shale workers transition to other jobs. The funds are distributed until 2029 but, given the experience of coal transitions in other countries, long-term support will be required. Estonia should also develop a longer-term regional development plan, at least until oil shale in the energy sector is phased out in 2040. Furthermore, there are risks around timely implementation. By 2025, projects accounting for nearly half the allocated amount are expected be completed. This is faster than previous EU-funded projects (Figure 4.12, A). After some delay, the government has appointed an official to coordinate the transition in late 2023. Estonia should consider allocating more resources to coordinating and executing the development plan.
There are more jobs at risk than those in the oil shale sector. Heavily polluting industries account for 4% of all jobs. The labour market is well placed to adjust due to its flexibility and good rates of training and further education among workers. A forward-looking system, OSKA, helps anticipate labour market trends and inform policies accordingly, and spending on training in active labour market policies has risen steadily since 2017. However, specific workers in sectors such as manufacturing might find it difficult to switch jobs (OECD, 2023). Active labour market programmes for oil shale workers should be extended to other occupations at risk of unemployment, such as plant machine operators and wood workers.
Redistributive policies will be essential in cushioning the financial impact of the green transition on socially vulnerable households. The transition is likely to be regressive, on balance, as lower income households spend proportionally more on carbon-intensive goods and have fewer means to invest in more efficient cars and houses. Simulations for Estonia confirm that higher carbon prices could have an uneven impact on households (Figure 4.12, B) (IMF, 2022). Surveys suggests redistributive policies can help build broad public support for the green transition (Dechezlepretre et al, 2022). Estonia has recycled half of its ETS revenues up to 2023 into green infrastructure projects, such as improving the energy efficiency of public transport and buildings. However, the recycled revenues are not directly used to support lower-income households. A recent study for Lithuania suggested broad lump-sum transfers or targeted support, financed by carbon tax revenue, could significantly offset income losses due to higher carbon prices for most households (Immervoll et al, 2023). In Austria, a lump-sum has been paid to residents since 2022, varied regionally, as part of its Klimabonus programme. Estonia should consider more progressive support, particularly as carbon prices rise and transport is decarbonised.
Note: Panel B shows the fall in household consumption across income deciles from a linear phase-in of a $75 per tonne of CO2 equivalent (tCO2e) on non-ETS emissions over 2024-2030.
Source: IMF (2022); European Environmental Agency database.
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