Robert Grundke
OECD Economic Surveys: Latvia 2026
Abstract
Despite strong reductions in greenhouse gas emissions (GHGs) compared to 1990, progress has slowed significantly since 2005. Emissions are particularly high in transport, agriculture and residential buildings, while the land use, land use change and forestry (LULUCF) sector has become the largest emitting sector instead of acting as a carbon sink. To reduce emissions, it is key to strengthen carbon pricing by gradually phasing out tax expenditures and subsidies for fossil fuels. This should be combined with compensating poorer households, who are most affected from higher carbon prices, and improving active labour market policies and training to support workers during the green transition. Accelerating the expansion of renewable energy supply, while further strengthening grid capacity, is key to reduce emissions in other sectors and enhance energy security. Improving public transport quality would help reduce emissions from private commuting. Rewetting drained peatlands, where feasible, and improving forest management are key to reducing LULUCF emissions.
Latvia has significantly reduced greenhouse gas (GHG) emissions compared to 1990. In 2022, emissions were 61% lower than in 1990, when excluding the land use, land-use change and forestry (LULUCF) sector. Nevertheless, a large part of this reduction happened in the early 1990s due to a decline of GDP by about 50% during the country's transition to a market economy (Zvidrins, 1998[1]). Since 2005, Latvia has decoupled GHG emission growth from GDP growth, but total GHG emissions have only slightly declined, against the trend in the EU and mainly due to high emissions in transport, agriculture and residential buildings (Figure 2.1). In addition, emissions in the LULUCF sector have strongly increased, resulting in the sector being a net contributor to GHG emissions instead of acting as a carbon sink. In 2023, net emissions from the LULUCF sector represented a third of all GHG emissions. Including emissions from LULUCF, total GHG emissions have increased by 4% from 1990 to 2023, and more than tripled between 2005 and 2023.
Note: LULUCF stands for land use, land-use change and forestry. GDP per capita refers to GDP USD PPP at 2020 prices divided per population, energy intensity refers to total energy supply per unit of GDP (USD PPP at 2020 prices), and CO2 intensity of the energy mix refers to CO2 emissions per unit of total energy supply.
Source: OECD Green Growth Indicators database; OECD Environment Statistics database; OECD National Accounts database.
If additional policy measures are not implemented as planned, Latvia will not reach the national and EU 2030 targets for reducing GHG emissions in the LULUCF sector and sectors covered under the Effort Sharing Regulation (ESR), such as transport, residential buildings or agriculture, risking costly compensation measures according to EU regulation (European Commission, 2024[2]). The National Energy and Climate Plan (NECP) was updated in 2024 to specify a broad range of additional measures to accelerate emission reductions, improve energy efficiency and raise the share of renewables in total energy consumption (European Commission, 2025[3]). However, even under the updated NECP, the target for the LULUCF sector will not be met by a wide margin. Although additional measures to reduce emissions in the ESR sectors and raise the share of renewables in total energy consumption would be sufficient to meet the 2030 targets if implemented as planned, they require large additional public and private investments. The NECP mentions the use of several EU funds until 2027, but the funding for the majority of additional measures and information on how to crowd-in private investment remain unclear (European Commission, 2025[3]; Steinbuka and Krasnopjorovs, 2024[4]). Moreover, many of the additional measures are challenging and difficult to implement in time to reach 2030 targets (State Audit Office Latvia, 2024[5]).
Stronger efforts to accelerate the green transition hold great potential to raise energy security, encourage the development of new business models and support economic growth. The ending of fossil fuel imports from Russia in 2023, the disconnection from the Russian electricity grid and connection to the European grid in 2025 have significantly improved energy security. However, Latvia remains heavily dependent on fossil fuel and natural gas imports, exposing it to global energy price increases and supply disruptions, exemplified by the recent energy price surge due to the Iran war (see Chapter 1) (IEA, 2024[6]). Accelerating the expansion of wind and solar energy supply and the modernisation of the electricity grid are key to further raise energy security. At the same time, this also holds large potential to improve the terms of trade and strengthen the competitiveness of the Latvian economy. Moreover, investing more in research and development (R&D) of green technologies, including in cooperation with other EU countries, would help lower abatement costs and support the development of new business models and economic growth (IEA, 2021[7]; Stern, 2022[8]).
A key step for ensuring a successful green transition is to improve the monitoring and evaluation of climate policy measures. A centralised monitoring tool for NECP measures has been established, which is welcome. However, it is key to improve the evaluation of climate policy measures, as reaching the ambitious climate targets for 2030 will require focusing the available funding on those measures with the largest impact on emission reductions (State Audit Office Latvia, 2024[5]). Moreover, better understanding the economic and distributional effects of different climate policy measures, including market- and non-market-based measures, is key for improving their design and raising public acceptance for the green transition.
Strengthening carbon pricing would help reduce emissions. The EU Emissions Trading System (ETS) maintains strong incentives to reduce emissions and invest in clean technologies in the energy, industrial processes, aviation and maritime transport sectors. However, emissions from these sectors account for only about 17% of Latvia’s total emissions (Figure 2.1), as the share of energy-intensive manufacturing in GDP is low. About 83% of emissions are not covered by the EU ETS, and effective carbon rates are lower than the OECD average (Figure 2.2), particularly in the residential building sector and for energy-related emissions in the agricultural sector. This is related to tax expenditures and subsidies for fossil fuel, which amounted to EUR 5.8 per ton of CO2 emitted in 2023, slightly above the EU and OECD average, and equivalent to about 0.5% of GDP (OECD, 2024[9]; IEA, 2024[6]). Examples include the tax relief for fossil fuels used by households for heating purposes, excise duty reliefs on diesel and natural gas used for agriculture and aquaculture, or the natural resource tax exemption for peat used for combustion installations not covered by the EU ETS. Moreover, diesel is taxed lower than gasoline, even though emissions of CO2 and local air pollutants per litre of diesel are higher (OECD, 2022[10]). The government should systematically evaluate all existing subsidies, tax exemptions and reduced rates for fossil fuels and gradually phase them out. Although excise taxes on fossil fuels have been significantly increased in recent years, they are mostly defined as nominal values and should be regularly adjusted to inflation. Starting from 2028, the EU emission trading system ETS 2 will strengthen emission reduction incentives for the road transport, building, and construction sectors. This could be complemented with introducing emission pricing in agriculture and the LULUCF sector (see below).
Net effective carbon rate, EUR per tCO2e, 2023
Source: OECD (2024), Pricing Greenhouse Gas Emissions 2024: Gearing Up to Bring Emissions Down, OECD Series on Carbon Pricing and Energy Taxation, OECD Publishing, Paris, https://doi.org/10.1787/b44c74e6-en.
In Latvia, more than 60% of electricity is already generated by renewable energy sources, mostly hydropower (Figure 2.3). Further increasing this share by accelerating the expansion of wind and solar energy, and reducing the use of imported natural gas, holds large potential to raise energy security. It would also improve the trade balance and support economic growth through more competitive electricity prices, as electricity generation from wind and solar is cheaper than generation from natural gas. A high share of renewables in electricity generation can also contribute to Latvia’s comparative advantage with respect to other EU countries, by attracting firms aiming to green their energy usage. As capacity for hydro power is limited, increasing wind and solar power supply is also key to lower emissions and meet higher projected electricity demand related to the electrification of the building and transport sectors (European Commission, 2025[3]).
Due to Latvia’s comparative advantage in wind energy, expanding wind power installations onshore and offshore should be a key policy priority (Child, Bogdanov and Breyer, 2018[11]). However, wind park development is lagging behind that of other Baltic countries (State Audit Office Latvia, 2024[5]). This is related to local resistance to wind park developments and the administrative burden involved in local land planning and permitting procedures, which only start after a comprehensive and lengthy environmental impact assessment has been conducted, causing high uncertainty for investors. A recent bill plans to frontload local land planning and permitting procedures as well as harmonise and centralise environmental impact assessments at the national level, which will help reduce the administrative burden if implemented. Strengthening cooperation across municipalities would help improve the quality and efficiency of land planning and permitting procedures (see Chapter 4). Improving data on maritime spatial planning could help develop offshore wind parks. Moreover, ensuring the competitive neutrality of the state-owned enterprise (SOE) that dominates the electricity generation sector is key to facilitate market entry of new firms and raise incentives for innovation and productivity growth (see the previous OECD Economic Survey of Latvia). For example, current regulation gives preferential rights for the SOE to develop wind parks in state-owned forests (IEA, 2024[6]). In contrast to wind energy, solar energy has expanded significantly in recent years due to reductions in regulatory burden and subsidies for installation of solar panels and heat pumps in residential buildings, and efforts in this direction should continue as planned.
Electricity generation by source, %
Source: OECD calculations based on IEA World Energy Balances database.
A rapid expansion of wind and solar energy supply, which is less stable over time due to changing weather conditions, and higher electricity demand because of electrification will pose challenges to the transmission network. Limited grid capacity and long waiting times for grid connections have hampered the development of wind parks, but also of electricity storage parks, which are needed to better balance electricity supply and demand (Artelys, 2024[12]). This is related to weak long-term planning and governance issues in the energy sector (State Audit Office Latvia, 2024[5]). It is welcome that Latvia has finalised its long-term energy strategy in 2024, but there is still room to improve coordination on energy policy within the central government. The recent introduction of flexible transmission system services, which give priority access to storage capacity as well as to renewable power generation in exchange for allowing preventive curtailment in case of grid congestion, has the potential to significantly reduce waiting times for grid connection permits, as experiences in the Netherlands and Ireland show. Moreover, the introduction of financial guarantees for connection agreements made it possible to obtain a more accurate picture of actual grid capacity reservations, significantly increasing the capacity available for the flexible transmission system service. This should be combined with better integrated planning of transport and energy infrastructure projects, as the connection of wind and storage parks to the main transmission lines could be facilitated by using buffer zones along roads and rail lines.
Improving the grid infrastructure and the integration into the European electricity grid is key to raise energy security and reduce prices. The successful disconnection from the Russian electricity grid in 2025 indicates that recent investments in the grid and connection points with neighbouring countries have been successful in better integrating the regional electricity market (IEA, 2024[6]). Since 2019, the declining use of natural gas in electricity generation has been accompanied by rising electricity imports, mainly from renewable energy production in other Baltic and Nordic countries. However, there is still scope to improve the integration with the EU electricity grid. This would facilitate the pooling of renewable energy from a large geographical area and significantly raise efficiency and reduce costs for grid management, mainly due to reduced needs for domestic flexible generation and storage capacity (Ferrucci and Ugur, 2025[13]). Available resources from the EU Recovery and Resilience Fund should be complemented by more domestic funds to further modernise the grid infrastructure, including transmission lines and connection points as well as applying grid enhancing technologies, such as tools to manage redispatch, dynamic line rating or curative redispatch (Artelys, 2024[12]). The government could also consider pooling of funds with neighbouring countries to develop grid infrastructure that provide shared benefits across borders. Significant investments are also needed to develop grid lines for offshore wind parks (IEA, 2024[6]).
Further improving incentives to balance supply variations and demand would help improve grid capacity. Existing dynamic electricity prices could be complemented with re-introducing time-varying grid charges and further raising awareness among consumers on the benefits of shifting demand. Latvia has almost complete coverage with smart meters, but only about half of consumers use existing time-varying electricity prices to shift demand across time (IEA, 2024[6]). Introducing also time-varying grid charges and further promoting the use of available technologies, such as smart thermostats and water heating, to shift electricity use across time and reduce peak demand times on the grid could help minimise generation and transmission costs and improve grid capacity. This should be combined with implementing the planned removal of consumption tariffs on temporarily stored electricity and reducing the natural resource tax on batteries to incentivise the use of commercial batteries in the electricity system (IEA, 2024[6]). Further expansion of solar energy combined with decentralised battery storage can also help to stabilise demand and supply, particularly in the context of changing weather conditions.
Greater reduction of emissions in the transport sector is a main priority, as transport is the largest source of emissions in Latvia, besides the LULUCF sector (Figure 2.1). The car fleet renews only slowly, likely reflecting the limited financial resources of households and businesses to purchase cars, and buying used cars run by diesel is still common. As a result, Latvia has one of the oldest car fleets among OECD countries, with a high share of diesel cars, and the share of battery-electric vehicles in new car sales is much lower than the EU average (ACEA, 2024[14]). Moreover, the trend towards low-density development in the suburbs and the concentration of high-wage jobs in Riga city contribute to high emissions due to increased commuting. This is exacerbated by the prioritisation of cars in urban planning, underdeveloped public transport infrastructure and cooperation issues in the Riga metropolitan area, leading to a decline in the use of public transport and an increase in private car use (Figure 2.4). This has also raised pollution and congestion, exacerbating mismatches in the labour market and weighing on health outcomes (see Chapter 3).
Better coordination between Riga and municipalities in the Pieriga region and improved urban planning, which focuses on densification, is needed to make public transport and shared mobility more attractive and cost-effective. Currently, each municipality is responsible for its own transport infrastructure and public transportation system, and weak coordination causes inefficient public transport connections, un-coordinated schedules, and a fragmented ticketing system. As many middle- and high-income households have moved outside of Riga and the largest share of municipal revenue comes from personal income taxes (PIT) levied at the place of residence, resources for new investments in the transport infrastructure of Riga city remain limited, while commuting has strongly increased. Establishing a metropolitan transit authority, as planned, and pooling resources for transport infrastructure investments could help prioritise investments and facilitate coordination of public transport services. This could also be combined with reforming the municipal equalisation system to allocate a share of PIT revenues according to the place of work (see Chapter 4). A recent pilot project to introduce a single-ticketing system including Riga and specific regional trains is welcome and should be expanded to the whole metropolitan area, while better coordinating connections and synchronising schedules. Moreover, dedicating more special lanes for public buses and tramways would help to make public transport more attractive in times of high congestion. This should be combined with offering more park-and-ride options outside Riga and introducing congestion charges for private car use. There is also scope to review the reduced taxation of benefits arising from personal use of company cars so that it discourages excessive use of private vehicles and long-distance commuting (OECD, 2019[15]).
Accelerating the electrification of transport is key for reducing emissions. As the quick replacement of the large amount of old diesel cars by electric vehicles (EVs) is complicated due to the relatively low purchasing power of many households, Latvia’s NECP emphasises the need for expanding the use of biofuels and bio-methane to reach emission reduction targets. Equipping diesel cars to be able to use biofuels is technologically feasible at low cost, and biofuels can be sustainable when produced with low-emission energy and made from wastes and residues. However, while this might serve as a transitional solution, building up the necessary charging and distribution infrastructure for biofuels and biomethane might lead to lock-in effects, complicating the switch to EVs in the medium- to long term (European Commission, 2025[3]). Moreover, rising demand for biofuels and biomethane in combination with planned fiscal incentives for their use might in turn lead to increased supply, risking increasing emissions in agriculture or the LULUCF sector, where emissions are not taxed (see below) (OECD, 2023[16]). The government should better focus its efforts on enabling the expansion of charging infrastructure for EVs and continuing to electrify public transport. The market for used EVs has grown strongly in recent years. However, the administrative burden for installing charging stations in older multi-apartment buildings remains high, as the land is usually not owned by apartment owners as a result of the privatisation process in the 1990s (Zelmenis, 2023[17]). Facilitating planning and approval procedures for installing charging stations where land and buildings are in shared ownership is key to accelerate the expansion of the charging infrastructure. In addition, introducing a Euro‑standard component into the annual motor vehicle tax, which is already modulated according to CO2 emissions, would incentivise fleet renewal and help reduce high air pollution. To increase rail electrification, which remains low at 13.7% in 2023, a substantial rise in investment is needed, which in addition to EU funding will also require domestic funds. The use of new electric trains and improved timetables supported a strong increase in rail passengers since 2023, exemplifying the large potential of rail investments for greening the transport sector.
Ratio between the number of passengers using public transport (bus, train, metro, tram) and the total number of road and rail passengers, %
Source: Odyssee-Mure database.
About 15% of Latvia’s GHG emissions are from the residential sector, driven by weak energy-efficiency due to outdated heating systems and poor insulation (Figure 2.1). The building sector accounted for 42% of total energy demand in 2023, which is higher than in other OECD countries with similar weather conditions (IEA, 2024[6]). The share of households owning their apartment is above 80% and among the highest across the OECD, since ownership was transferred to tenants at below market prices after the collapse of the Soviet Union. However, many homeowners are reluctant or do not have the financial means to undertake costly renovations, complicating the modernisation of the housing stock and improvements in energy efficiency. Housing investment has been low for many years despite increases in real estate values, which was also related to a declining population and weak access to finance for firms and households since the global financial crisis, as discussed in the previous OECD Economic Survey of Latvia (Figure 2.5) (OECD, 2023[18]).
The lack of investment in building renovations and low energy efficiency is a particular problem in older multi-apartment buildings from the Soviet era, which are concentrated in the capital and other larger cities. These buildings can comprise up to 400 owners with very different financial possibilities and attitudes, which complicates decision-making and management of building renovations. Despite the availability of EU funds for energy efficiency renovations, only about 4% of apartment buildings needing renovations have been renovated, and not all available funding could be spent (State Audit Office, 2025[19]). Recent reforms aim at facilitating decision-making processes of owner communities by allowing remote and electronical voting as well as decisions by an active minority of owners. The plan to define the community of apartment owners as a legal subject could also help reduce the administrative burden involved in loan and public funding applications. However, simplifying application procedures and reducing uncertainty due to frequent changes in funding conditions, including by making funding less dependent on EU funds, are also key to further reduce barriers for apartment owners to invest in energy efficiency.
Investment in dwellings, % of GDP
Source: OECD National Accounts database.
The implementation of standardised modular renovation techniques could help reduce the costs and time of renovations and facilitate decision making in multi-owner buildings. These techniques rely on prefabricated substructures that are applied to existing buildings and comprise all the components needed for the retrofit (e.g. windows, energy generation and distribution systems, mechanical ventilation). They are particularly suited for Soviet era multi-apartment buildings as these were also built based on pre-fabricated modules with limited architectural diversity. While traditional retrofitting approaches involve extensive workforce needs on site and significant risks of errors, a prefabricated approach can decrease the assembly risk on site and reduce costs due to economies of scale and time savings at the installation stage (OECD, 2025[20]). This can also facilitate decision-making processes of owner communities as the existence of a default solution limits the scope for contractors to introduce more expensive solutions. The plan to develop standardised construction designs to facilitate technical documentations for Soviet era multi-apartment buildings should be complemented with the introduction of pilot projects to explore the application of modular renovation solutions, as successfully done in six EU countries (OECD, 2025[20]). Positive experiences from publicly funded pilot projects could help reduce uncertainty among firms and households about these technologies and raise awareness. Allowing municipalities to participate in building renovations would facilitate such pilot programmes, as for example done in Lithuania, where municipalities have initiated retrofitting projects for multi-owner buildings. If the pilot projects are successful, the government should consider targeting fiscal incentives for building renovations to modular renovation solutions for multi-apartment buildings. Moreover, increasing competition in the construction sector and addressing labour shortages is key to lower costs of renovations. This will require strengthening competition enforcement and the fight against informality to lower barriers to entry, while facilitating labour migration (see Chapter 1).
Higher energy prices due to the war in Ukraine have strengthened incentives for renovations and the shift to lower-emission heating systems. This has been reflected in increased applications for public funding. Consequently, the recent decline in energy prices emphasises the need for increasing effective taxation to uphold incentives to decrease emissions in the building sector (Figure 2.2). Before the EU ETS 2 system is introduced in 2028, excise taxes on fossil fuel used for heating should be raised and existing tax exemptions should be phased out. Better targeting existing heating subsidies at vulnerable households and making them conditional on apartment owners’ consent to planned building renovations would also help improve energy efficiency.
Moreover, Latvia should consider raising excise taxes for the use of biomass in heating to better incentivise the use of non-combustion and more efficient wood-based heating systems. The higher prices for fossil fuel have led to a strong increase in the use of biomass in heating plants in recent years, reaching a share of 79% in 2024, which was facilitated by the switch from natural gas to biomass in widespread district heating systems (Latvian Statistics Institute, 2024[21]). When considering total energy demand for heating and cooling, including household consumption, the share of biomass stood at about 64% in 2022 (IEA, 2024[6]). In 2024, almost 100% of biomass burned in heating plants was based on wood products, such as wood chips, firewood, wood waste, pellets or briquettes (Latvian Statistics Institute, 2024[21]). The emissions related to burning biomass from domestic origin, however, are not accounted for in the building sector, but in the LULUCF sector, where they are not taxed (see below) (OECD, 2023[16]). As forest growth takes time, emissions in the LULUCF sector have strongly increased in recent years and accounted for a third of all GHG emissions in Latvia in 2024 (Figure 2.1). Moreover, before the war in Ukraine started, Latvia imported large quantities of timber from Russia and Belarus and the related emissions were accounted for in these countries, where legal protection against unsustainable harvesting of wood is much weaker (OECD, 2023[16]). Taxing the use of biomass in heating more would also help incentivise more efficient wood-based heating systems and reduce high air pollution, which is an important factor for high preventable mortality rates (see Chapter 3). The recent introduction of a natural resource tax on unprocessed wood is welcome, but it should be further increased.
Since the 2000s, the LULUCF sector has turned from a large carbon sink into Latvia’s largest net GHG emitting sector (Figure 2.1). This is mainly due to increased harvesting in forests, but rising net emissions from organic soils on forest, crop and wetlands and the expansion of land under settlements have also played an important role (Figure 2.6). About 53% of Latvia’s land area is forest land, which is among the highest share across the OECD. Since a land reform in 2000, about 46% of this forest land was privatised, while 48% continues to be managed by a state-owned enterprise (SOE) and 4% by municipalities. Since the land reform, harvesting rates have steadily increased, mainly due to rising demand from domestic wood and furniture industries, representing one of the largest manufacturing and export sectors. Although strict forest protection laws require replanting with trees or regeneration of harvested forest land, net emissions have increased as young trees capture less carbon than mid-age trees. The age structure of Latvian forests, with large parts having reached harvesting age during the last decades, has also contributed to higher harvesting rates and rising net emissions. In recent years, harvesting rates have increased particularly strongly due to the bark beetle outbreak and rising timber prices related to disruptions of timber imports during the pandemic as well as due to EU sanctions against Russia and Belarus.
To reduce net emissions and at the same time support economic activity, it is key to improve forest management. Due to high precipitation rates, a large share of Latvia’s land area consists of wetlands. As trees are much smaller when growing on wetlands, more than half of wet forest land has been drained since the 1960s to raise the productivity of forests. This has increased the volume of standing wood as well as carbon captured by forests. However, weak management and the decay of drainage systems, including in forests restituted to private owners during the land reform in 2000, has led to rising water levels, decreasing forest productivity and rising net GHG emissions, including through methane emitting organic processes. The accumulation of deadwood, while being a biodiversity asset, has also contributed to rising emissions. Fragmented ownership of privatised forests has contributed to weak forest management, as it complicates coordination, particularly concerning the maintenance of the drainage infrastructure, and because many owners of small forest areas face low economic incentives for pro-active forest management and lack the necessary expertise (Latvian State Forestry Institute, 2024[22]). Collective management models and streamlined land consolidation mechanisms could help improve forest management. For example, Finland has introduced professional management associations and a legal structure that allows multiple owners to pool parcels into a single, jointly held property. Participation in these jointly owned forests is encouraged by tax incentives on timber income from these associations. This should be combined with improving monitoring and enforcement of existing forest protection laws by strengthening cooperation between the two agencies that are responsible for managed and unmanaged forests, respectively (see Chapter 4).
Land-use, land-use change and forestry emissions (LULUCF), tonnes of CO2-equivalent, thousand
Source: OECD Environment Statistics database.
Forest management should also improve on publicly owned forests. A recent evaluation report found issues with decaying drainage systems, reforestation, timely sanitary harvesting, and protection against pests in municipal-owned forests (State Audit Office, 2024[23]). Fostering the use of more resilient tree types, reducing the pre-valence of monocultures, and a more pro-active management of the forest age structure, including by reducing rotation periods, can help limit the impact of diseases like the bark beetle outbreak. Applying mineral fertilizers and wood ash and conducting comprehensive thinning to support tree growth, while expanding afforestation of crop- and grassland, can also help improve forest growth and carbon capture. Supporting the use of harvested wood products in construction can also help improve carbon capture. Measures to limit urban sprawl and promote densification could help reduce deforestation due to new settlements (see above and Chapter 4).
About half of the drained forest land consists of peat land, which has likely contributed to rising net GHG emissions. Although drainage can reduce methane emissions from organic soils and support forest growth and carbon capture by trees, carbon emissions from organic soils increase due to drainage (Samariks et al., 2024[24]). More in-depth analysis should be conducted to determine the optimal groundwater level in peatland forests and expand the rewetting of drained organic soils in forests (European Commission, 2025[3]). This could be combined with expanding drainage of mineral soil wetlands in forests, including by simplifying and accelerating related administrative procedures, to raise forest productivity and partly compensate for productivity losses related to rewetting forests on drained peatland. Introducing the possibility to sell carbon credits, which forest owners could earn for capturing carbon, through complementing the EU ETS and ETS 2 emissions trading schemes with the planned EU carbon removal certification framework, similar to the emissions trading scheme in New Zealand, could help support emission reductions in private forests. Another option is to introduce subsidies to incentivize carbon capture activities, as done for example in Germany. These steps should be combined with setting clear objectives for the state forest SOE to improve the existing drainage infrastructure and expand the rewetting of forests on drained peatlands. Promoting continuous-cover-forestry (CCF) to avoid clear-felling can help reduce soil emissions on nutrient-rich peatlands, while maintaining harvesting rates.
Besides rising net emissions from forests, the drainage of organic wetlands for peat extraction has significantly contributed to rising net emissions. Peat extraction has increased significantly since the mid-2010s, resulting in Latvia becoming the global leader in exports of peat and peat products, mostly used for horticulture. In 2023, about 15% of all GHG emissions were related to peat extraction, while the peat sector contributed about 1% of GDP and employed about 2000 persons (Wetlands International Europe, 2025[24]; Zala Briviba, 2024[25]). Initiating rewetting of drained peatlands where feasible, combined with targeted afforestation is key for reducing net emissions in LULUCF (European Commission, 2025[3]). The authorities consider to first concentrate on border regions to support national security objectives, as for example done in Poland. In the medium-term, a plan to transform the peat sector is key to reduce adjustment costs for workers and regions, as the use of peat might gradually decline due to EU regulation. This could involve fostering the wet cultivation of crops on peatland to develop alternative income opportunities for affected populations.
Since 2005, GHG emissions in the agricultural sector have increased by 26%, resulting in agriculture being the second largest emitting sector (excluding LULUCF) (Figure 2.1). The main factor for rising emissions has been an increase in arable land and fertilizer use, including a trend towards more land-intensive cereals production, while grassland area has decreased. This has been related to the restoration of private property rights and the transformation into a market economy as well as Latvia’s entry into the EU in 2004 and the EU’s Common Agricultural Policy (CAP), which subsidised large-scale intensive agricultural production. A large share of arable land in Latvia consists of drained peatland, which represents an additional factor for high GHG emissions from agricultural land use. Moreover, about 42% of agricultural emissions in 2023 are related to enteric fermentation processes of livestock. Fostering the use of digital technologies to better target fertilizer application, including legumes in crop rotation for nitrogen sequestration and promoting agroforestry, manure management and organic farming hold large potential to reduce GHG emissions from agricultural soils. This should be combined with better maintenance of drainage systems, as excess water levels reduce soil quality requiring more fertilizer use. Improving the quality and digestibility of feed by creating appropriate feed rations and enriching them with fats can help reduce methane emissions and raise productivity in livestock holding. To better incentivize these practices to reduce GHG emissions, the government should consider introducing emission pricing in agriculture, as for example planned in Denmark. This should be combined with conditioning existing domestic and EU agricultural subsidies on sustainable practices to reduce emissions (OECD, 2023[16]).
Poorer households suffer disproportionally more from higher carbon prices, because emission intensive goods and services account for a higher share of their consumption expenditures. Simulations conducted for this Survey show that, absent accompanying support measures for households, strengthening emission reduction efforts to reach EU climate targets in 2030 would reduce real GDP by 0.6% and have regressive effects on the purchasing power of households along the income distribution (Box 2.1) (Lutz et al., forthcoming[26]). However, if a larger part of the rising carbon pricing revenues were recycled to households, while subsidies to energy-intensive firms declined, more ambitious emission reduction efforts could have more progressive effects compared to the reference scenario (Figure 2.7). Importantly, this could also improve overall efficiency. Using a larger part of carbon pricing revenues for equal lump-sum transfers to all households instead of subsidising firms would only lead to a decline of GDP by 0.4%, while progressivity increases (Figure 2.7). Using means-tested transfers to vulnerable households instead of an equal lump-sum transfer to all households would further improve progressivity and could raise overall public acceptance (Dechezleprêtre et al., 2022[27]). If instead of transfers to households the additional carbon pricing revenue is used for reducing personal income tax rates, efficiency gains are larger as labour supply expands. However, the regressivity of stronger emission reductions increases, as lower income households do not benefit from income tax rate reductions, as most of their income is already exempted due to existing tax allowances (Figure 2.7).
Change in real purchasing power by household income decile relative to the average change between the respective policy scenario and the BAU scenario, %
Note: The graph shows the change in real purchasing power by household income decile relative to the average change between the respective policy scenario and the business as usual (BAU) scenario (see Box 2.1).
Source: (Lutz et al., forthcoming[26])
Improving active labour market and training policies is key to reduce adjustment costs for workers during the green transition. According to the simulations conducted for the Survey, a significant share of the work force will need to move to jobs in other sectors and firms which will require re- and upskilling to adjust to changing skill requirements (Figure 2.8, Panel A). Particularly the energy-intensive and other manufacturing industries as well as business services would reduce employment, while wood manufacturing, renewables and utilities sectors would expand their activities and increase labour demand. However, if carbon pricing revenues used to subsidise energy intensive firms in the reference scenario are shifted to finance a reduction in income taxes, total labour supply and employment expands compared to the benchmark (Figure 2.8, Panel B). More sectors expand employment, including the business services sectors, and additional workers enter the labour market who need to adapt to the skill requirements of their new job. Workers that keep their jobs will also likely face changes in the task content and skill requirements of jobs during the green transition.
Spending for active labour market policies and training is low and should be increased (Figure 2.9). In addition, better cooperation between the public employment agency, training providers and firms is key to provide training courses that help the unemployed acquire the skills that are needed in local labour markets. Further accelerating the update of professional qualification requirements would help facilitate accreditation and the timely adaptation of training content in vocational education and training (VET) and continuing vocational education and training (CVET) to skill needs in local labour markets. The planned re-design of the funding system for VET schools, which are also responsible for CVET, should be used to strengthen incentives for better adapting course content to skill needs of firms, for example by introducing performance criteria such as labour market outcomes of course participants. This should be combined with improving coordination among firms and raising incentives to participate in VET and CVET design, implementation and on-the-job training, in cooperation with VET schools and other training providers. The large number of small firms, who lack management skills to implement effective human resource practices or do not have sufficient resources to provide training, is one main factor for why training investment of Latvian firms is among the lowest across the EU (OECD, 2022[28]). Only about half of firms are members of an employer organisation, which is far less than the EU average. The establishment of a skills fund, as recommended by previous OECD Economic Surveys of Latvia, is welcome, but its funding should be mainly based on employer contributions to raise ownership and better incentivise active involvement of firms in VET and CVET design and implementation (OECD, 2023[29]). In 2026, firms only finance about 5% of the established skills fund.
Analysis conducted for this Survey uses the OECD ENV-Linkages model to simulate the economic and distributional effects of different climate policy scenarios reaching the EU Fit For 55 emission reduction targets. The OECD ENV-Linkages model is a dynamic multi-sectoral, multi-regional computable general equilibrium model that links economic activities to energy and environmental issues (Chateau, Dellink and Lanzi, 2014[30]). This model is combined with a micro-simulation model which uses data from the EU household consumption survey for Latvia to analyse the distributional effects of the different climate policy scenarios across household groups along the income distribution.
Data from the European Commission on Latvia’s national energy and climate plan is used to establish a business as usual (BAU) scenario for Latvia up to 2035, which is based on policies implemented in 2025 and against which all other model scenarios are compared. Under this BAU scenario, which is based on the scenario with existing measures (WEM) from the National Energy and Climate Plan (NECP), Latvia does not reach its emission reduction targets in the NON-ETS sectors in 2030 (European Commission, 2025[3]). All other policy scenarios reach the EU Fit for 55 emission reduction targets but differ in the allocation of carbon pricing revenues. The first policy scenario (reference scenario) allocates 40% of the revenues from the ETS 1 to energy intensive firms in the form of output-based subsidies, 50% to investments in the electricity grid and heating infrastructure, and 10% to reduce the income tax for households. Revenues from the ETS 2 are allocated according to the following shares: 50% for the electricity grid, 20% to reduce the income tax and 30% to the general government budget. These allocations are based on historical averages for EU countries for the ETS 1 and on EU government plans for the ETS 2 (ICAP, 2025[31]). The second, third and fourth policy scenarios keep allocating 50% of the revenues from the ETS 1 and ETS 2 to investments in the electricity grid and heating infrastructure, while the second and third scenario (lump-sum and means-tested transfer scenario) allocate the other 50% to finance transfers to households, and the fourth scenario (income tax scenario) allocates these 50% to finance reductions in personal income tax rates. The second scenario allocates equal lump-sum transfer to all households, while the third scenario targets transfers to income-poor households.
Source: (Lutz et al., forthcoming[26])
Regional heterogeneity in labour market tightness is high and might further increase during the green transition. Most vacancies are concentrated in the metropolitan area of Riga, particularly in ICT and business services sectors, which are likely to further expand during the green transition (Figure 2.8, Panel B). To improve matching in the labour market it is key to strengthen public employment services and raise regional labour mobility. Better training and remuneration of job counsellors and the expansion of successful training programmes is key and should be financed by domestic resources to provide more continuity in public employment services, as the strong dependence on EU structural funds has complicated the continuity of successful programmes in the past (OECD, 2019[32]). Moreover, only about half of the unemployed receive unemployment benefits and duration of benefits is low, which reduces matching quality in the labour market and forces many unemployed to accept low-wage job offers (OECD, 2022[33]). Increasing the eligibility of unemployment benefits, as recommended by the 2022 OECD Economic Survey of Latvia, coupled with the provision of re- and up-skilling opportunities would help smooth the transition to higher-skilled and better paying jobs. This should be combined with improving the transport infrastructure and digital connectivity in remote areas to foster labour mobility. While the introduction of mobility subsidies for the unemployed is welcome, expanding affordable housing opportunities in urban centres remains a key policy priority to reduce regional mismatch in the labour market, as discussed in previous OECD Economic Surveys of Latvia.
Employment changes by sector, differences to the business as usual (BAU) scenario, thousands, 2035
Note: The graph shows employment changes by sector compared to the BAU scenario (see Box 2.1). EITE industries are energy-intensive and trade exposed industries, for example metal, chemical, paper or ceramic industries.
Source: (Lutz et al., forthcoming[26])
Public expenditure on active labour market policies, % of GDP, 2023
Source: OECD Labour Force Statistics.
Climate change can imply large economic and social costs (Costa and Hooley, 2025[34]). In Latvia, the number and frequency of extreme weather events have increased, and the share of built-up areas exposed to river flooding is the highest in Europe (Figure 2.10). Climate forecasts predict a further increase in precipitation levels of up to 10% over the next 50 years, while drought periods are expected to become longer and more frequent (Ministry of Environmental Protection and Regional Development, 2019[35]; Latvijas Vides, Ģeoloģijas un Meteoroloģijas centrs, 2025[36]). While climate-related damages have already been significant, estimated at EUR 164 million for the forestry sector alone during the last decade, the negative impact is likely to reach on average 10-20% for agricultural yields and 25-50% for tree growth and timber value (Lupkina et al., 2022[37]). To reduce these losses and mitigate the consequences of climate change for the population, adaptation policies should be mainstreamed in all government activities.
Share of built-up area exposed to 100- year river flooding, %, 2022
Note: A ‘100-year flood’ is a flood that statistically has a 1-percent chance of being equaled or exceeded every year.
Source: OECD International Programme for Action on Climate (IPAC) dashboard, https://www.oecd.org/climate-action/ipac
Adaptation policy efforts should focus on further improving the monitoring and evaluation of climate risks as well as the existing drainage infrastructure. Although a Climate Change Adaptation Plan was adopted in 2019, the quantitative assessment of climate risks and their effects on economic sectors and regions could further improve (European Commission, 2025[3]). The Latvian Environment, Geology and Meteorology Centre (LEGMC) has developed flood maps and supports municipalities to improve climate profiles, which rank climate risks. Further improving the evaluation of economic and social effects of climate risks could help to better coordinate and target adaptation measures across municipalities and raise spending efficiency, including of EU funds. Improving the existing drainage infrastructure should be another key policy priority. As average precipitation levels are high and wetlands are widespread, a large share of agricultural and forest land has been drained during Soviet times to raise productivity. After the land reform in 2000, the fragmentation of ownership and failure of legislation to establish clear responsibilities for maintaining collective drainage systems led to the decay of the drainage infrastructure in many areas, increasing the risk of floods (Jurkāns and Rakiša, 2025[38]; State Audit Office, 2020[39]). To improve the situation, it is key to establish a comprehensive monitoring of the drainage system and allocate EU funds to where they are needed the most. In addition, as EU funds are limited, property tax revenue, including from agricultural and forest land, should be raised, possibly conditional on risk-exposure of the respective land plot, to finance the necessary maintenance works of drainage systems (OECD, 2025[40]).
Expanding the coverage of climate risk insurance could help incentivise farmers and property owners to invest in adaptation measures and reduce fiscal risks. Although adaptation measures, such as improving drainage systems or damage reduction measures for buildings, would directly benefit farmers and property owners, lack of information, financial constraints, or coordination issues hamper their implementation (Wreford, Ignaciuk and Gruère, 2017[41]). In addition, in Latvia, farmers regularly receive ex-post disaster compensation financed by the EU agricultural reserve, which may cause moral hazard problems and disincentivize farmers from better preparing for future climate risks. Introducing mandatory climate risk insurance could help improve incentives for climate adaptation and reduce fiscal risk. Higher risk-premia for more exposed areas could incentivise farmers and property owners to invest more in adaptation measures, while insurance companies would also have incentives to raise awareness, improve cooperation among farmers or property owners, and invest in adaptation measures to reduce business risk. Although the government currently co-finances climate risk insurance, contributing up to 50% of the insurance costs, coverage remains low with only about 30% of crop land being insured (Rural Support Service, 2025[42]; Ambote, 2024[43]). If mandating insurance is politically not feasible, agricultural subsidies should be made conditional on investing in adaptation measures and having a climate risk insurance. Funding for subsidising insurance premia should be maintained and possibly expanded to climate risk insurance of properties. To prevent widespread insolvencies of insurers in case of large natural disasters, a state-backed reinsurance fund could be established to ensure financial support for victims when claims exceed insurers' capacity. For example, France has implemented such a reinsurance fund financed by an additional premium on property insurance contracts and reinsured by the state-backed Caisse Centrale de Réassurance (CCR), which provides unlimited coverage with a government guarantee. To incentivise insurers to promote responsible risk management among their customers, insurers are rewarded with more favourable terms when accessing the reinsurance fund if they actively encourage and facilitate risk mitigation efforts.
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