2. GENERAL ENERGY POLICY

tax instrument in the form of a EUR 2 per tonne of CO2 surcharge to the ambient air pollution charge for all facilities larger than 2 megawatts (MW), regardless of whether it is within the EU-ETS or not. However, major electricity producers are exempt from this charge if they invest in retrofitting. There is also no carbon-related tax for other sectors, including the transport sector. The government has no plans to introduce a market-based CO2 emission pricing system for the non-ETS sector.

The 2017 OECD Economic Survey of Estonia found that financial incentives to prevent or reduce environmental damage are too low and recommended to set tax rates on oil shale, vehicle and energy use at a level that better reflects the environmental damage they generate (OECD, 2017), despite the fact that environmental taxes already account for a relatively large share of tax revenues. But the negative externalities of fossil fuels are currently not sufficiently reflected in the existing tax rates and there is a significant number of tax exemptions and reduced tax rates which are counterproductive for meeting the climate targets.

The 2016 reform of the oil shale extraction tax has even further reduced the impact of taxation in the oil shale sector, questioning even more whether Estonia could reach its targets for an energy transition as per the NDPES 2030 (see Chapter 3) (OECD, 2017).

However, the oil shale sector is not the only sector that could benefit from a more strategic use of taxation to steer behaviour. As Estonia grows richer, demand for mobility increases and is largely satisfied through individual motorised transport. Individual vehicle ownership is now higher than the EU average. Estonia does not levy an outright carbon tax on transport fuels, nor does it levy a vehicle registration or road use tax for private vehicles. Estonia therefore has one of the oldest and heaviest vehicle fleets in Europe. Innovative pilot projects like the provision of free public transport for Estonian citizens in Tallinn (see Box 7.1 in Chapter 7) and efforts to introduce smart mobility in Tallinn need to be supplemented by clear tax incentives and other price signals to steer behaviour in the desired direction.

Assessment

This review comes at a very interesting time for Estonia, as the country enters a period in which it has to start reducing GHG emissions in non-ETS sectors and where quickly rising CO2 prices drive the transformation of the power sector, which relies for 76% of electricity production on burning of oil shale. Other emerging challenges are the need to increase the share of renewables in transport fuels and improving energy efficiency across the economy.

The country has a unique energy history. The shift to a market economy after regaining independence in 1991 resulted in a significant decrease in gross inland consumption, from 9.8 Mtoe in 1990 to 5.5 Mtoe in 2016, and GHG emissions droppd by roughly 50% in the same time period. But in recent years energy consumption and emissions have grown again, despite a decreasing population. In most IEA member countries, economic growth is decoupled from energy consumption and emissions, but this is not the case yet in Estonia. There does not appear to be any specific cause for this other than higher electricity exports. However, there appears to be a general lack of urgency to act on efficiency and climate-related issues as demonstrated by the fact that concrete planning for reaching the 2030 targets has not yet commenced.

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2. GENERAL ENERGY POLICY

a broad range of energy targets. The decarbonisation depicted in the NDPES 2030 requires significant investment.

Coherent policy measures have to be developed and monitored to ensure that the targets are achieved. Removing regulatory barriers (i.e. geographical restrictions due to defence requirements, access to balancing market) can help trigger investments and comply with energy and climate targets. In line with EU regulation, Estonia submitted its draft national Energy and Climate Plan to the European Commission in December 2018; the final plan will be submitted by the end of 2019.

Finally, a word on the steering power of taxation. Taxation for revenue is well understood, and in some cases revenues can be used to influence behavioural change, like insulation of houses and encouraging a modal shift by providing free public transport. The government could also make better use of taxation itself to steer behaviour. Currently, the energy tax system hardly takes into account negative externalities of energy production and consumption. For instance, excise duties are not linked to carbon content or emissions of particles, but are the result of political compromises. A flat rate – regardless of the source of energy – taxes electricity output. As of January 2019, excise tax reductions of up to 90% for electricity-intensive industries apply, which are paired with substantial energy efficiency efforts of these industries, when such reductions are granted. The government should consider increasing the effective cost of CO2 emissions across the board, include sectors where CO2 emissions are currently not priced, and regularly review the actual energy and emission savings obtained by granting tax exemptions for investing in energy efficiency.

Recommendations

The government of Estonia should:

Clarify energy and climate targets for 2030 and 2050 and implement a regular monitoring system of progress achieved towards these targets.

Further develop concrete policy measures in line with 2030 and 2050 targets.

Co-ordinate the design and implementation of climate and energy policies with its Nordic and Baltic neighbours.

Develop pathways for decarbonising electricity production and phase out oil shale in a socially and economically viable manner.

Review energy taxation of all fuels to reflect their external costs, including carbon content, and to accelerate the switch to low-emission technologies, notably in the transport sector.

Continue to remove regulatory barriers to investment in low-carbon energy production and energy infrastructure, notably restrictions.

References

EC (European Commission) (2018), Digital Economy and Society Index (DESI) 2018

Country Report Estonia, EC, Brussels,

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