Estonia is well endowed with fossil fuels mainly in the form of oil shale. Oil shale was historically the source of electricity, supplying around 80% of the electricity consumed in Estonia in 2018. The use of oil shale has been decreasing, dropping to 49% in 2021. Meanwhile, the use of renewable energy sources have been increasing mainly in the form of biomass, wind energy and solar PV. The oil shale based electricity production has undergone major changes with opening of the new Auvere Power Plant in 2018 and the closing of old ones. Estonia imports most of the natural gas and petroleum products it consumes. Imported natural gas is mainly used for the purposes of heat generation in district heating and industrial boilers.
OECD Inventory of Support Measures for Fossil Fuels: Country Notes
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Estonia
Energy resources and market structure
Note: Estonia’s energy supply is characterised by its strong reliance on domestically produced oil shale. Most of the oil shale production is transformed into other petroleum products (i.e. for heating, chemicals manufacturing, marine fuels) that are exported, and is counted as negative to oil in total energy supply, resulting in a negative share in the energy supply mix.
Source: IEA (2022), "World energy statistics", IEA World Energy Statistics and Balances (database).
The oil market in Estonia is fully open to competition. The wholesale market for liquid fuels is concentrated in the hands of ORLEN Lietuva and Neste Oy. A number of companies, such as Canadian Circle K and Finland’s Neste, serve the retail market for liquid fuels. Three companies, two of which are privately owned, produce shale oil locally. The main producers of shale oil are Enefit Energiatoomine AS, a subsidiary of the state-owned energy production group Eesti Energia, and Viru Keemia Grupp AS. Estonia is a net exporter of shale oil, exporting more than 1 million tonnes and importing none. Shale oil is mainly used as a shipping fuel.
The Estonian natural gas market has been fully opened to competition since 2007. Its natural gas infrastructure is connected to the Russian, Latvian and Finnish gas transmission systems, which allows imports from the Russian Federation (hereafter “Russia”), the Latvian underground storage and since 2015 the Lithuanian LNG terminal. In 2018, 18% of the imported gas was of Lithuanian origin. From 2016, the Baltic States have been working towards a unified natural gas market regulation. The aim is to facilitate a uniform regulation for all the market participants in the Baltic States, paving the path for a more competitive market. The largest Estonian seller of natural gas is EG (Eesti Gaas AS), whose market share is about 60% and is privately owned. The company also owns the largest natural gas distribution company and is one of five importers of natural gas.
In 2022, Estonia underwent several efforts to halt energy trade with Russia. In February, Estonia called for the European Union to wean itself off Russian gas.1 In April of 2022, Estonia announced that all gas imports from Russia would end by the end of the year.2 In September 2022, Estonia imposed a ban on Russian natural gas imports.3
The Balticconnector gas pipeline construction started in 2016 using financial support from European Commission. The pipeline links Estonia to Finland, which strengthened the security of supply and diversified the alternative supply channels in the Eastern Baltic Sea region. Additional EU financially supported enhancements to the Estonian-Latvian interconnection will enable better access to storage in Latvia. With the commissioning of the Balticconnector, the single Finnish-Estonian-Latvian gas market was established on 1 January 2020. By the end of 2022, the Baltic States will be physically connected with the Polish gas infrastructure. By then the interconnection between Poland and Lithuania will be completed and functioning.
The electricity market in Estonia is small compared with that of other EU countries. Estonia is well interconnected with both Finland and Latvia as well as Russia as the Baltic states used to be part of the former Soviet Union’s north-western common power system. A direct interconnection to Finland was established in 2006, enabling access to the Nordic energy market (Nord Pool). In 2014, this connection was further strengthened via a new direct interconnector (Estlink 2). As of 2012, Estonia is part of the Nord Pool Spot market, having its own price area. The Estonian wholesale prices are often the same as the Finnish. Eesti Energia is the largest seller of electricity, holding a market share of about 60%. It also owns the largest of the 33 distribution networks (Elektrilevi OÜ), accounting for 86% of the distribution market.
Energy prices and taxes
The Estonian Competition Authority (ECA) is responsible for approving and reviewing the rates of transmission and distribution services of network operators, and the principles upon which connection charges are based. The electricity prices depend on the market, based on demand and supply. Natural gas prices in the wholesale market are negotiated and depend on prevailing market prices. Excise duty are levied on all energy products, except for peat and biofuels. A value-added tax (VAT) of 20% are levied on all energy products.
Figure 2. Total tax rebates and support for fossil fuels in Estonia
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Recent developments and trends in support
Support for fossil fuels in Estonia takes the form of exemptions to excise duties and reduced rates for specific fuels and usage. Marked diesel fuel used in agriculture is subjected to a reduced tax rate while exemptions are also applicable for fuels used for fishing. There are exemptions applicable for fuels used for mineralogical processes and in electricity production. Exemptions under these sectors are provided for by an EU directive and equivalent measures are present in Estonia’s neighbouring EU countries. Support has fallen since 2011, when at the end of that year, exemptions to the forestry and construction sectors were abolished. On May 2015, the Excise Duty Exemption for Heating Fuels Used by Households was discontinued. On the other hand, estimates for Feed-In Premium for Fossil Fuels Used in CHP Plants have become available for the period 2010-2018. However, such a support scheme has come to a hold and will be replaced by a competitive tender. The renewable energy fee set up in 2007 helps to finance the subsidisation of renewables-based electricity and combined heat and power generation in the country. Since 2019, energy-intensive sectors can apply for reduced excise duty rates when they meet the necessary conditions set in the legislation. In a recent development, the government for construction of a shale oil plant has extended an aid worth EUR 125 million.
COVID-19 has led to large fluctuations in the fossil fuels market, with record falls in oil prices and low energy consumption due to the mobility restrictions brought by the pandemic. As part of its pandemic relief measures targeting domestic consumers, the administration decided for lower excise duty rates on several fuels and electricity between 1 May 2020 and 30 May 2022 resulting in an estimated revenue foregone of EUR 76 million. General use diesel excise duty will be lowered from EUR 0.493/litre to EUR 0.372/litre. The excise duty rate on diesel fuel is linked to the excise duties on various other fuels, so as a result, the excise duty rates on light fuel oil, and heavy fuel oil and shale oil which are similar to diesel, will also be reduced. The excise duty on diesel fuel used in agriculture will also be lowered from EUR 0.133/litre to EUR 0.100/litre. The excise duty for natural gas will be lowered to from EUR 0.07914/m3 to EUR 0.04/m3. The rate of the excise duty on electricity will be lowered to EUR 1/MWh from EUR 4.47/MWh.
Before COVID-19, some business organisations also pointed at potential leakage of excise duty revenues in cross-border use, such as for road freight. The actual size of the leakage is very difficult to determine, however, it should be acknowledged that as such leakages might occur, the rates should reflect the respective rates in the main transport corridors.
The fiscal cost of support measures for fossil fuels in Estonia was estimated at EUR 277.32 million in 2022 (Table 1). Ninety-five per cent (95%) was directed at end user beneficiaries, as opposed to 4% directed to firms. Support was mainly given out in the form of direct transfers (EUR 196.14 million) accounting for 71% of the total fiscal cost of support measures. Tax expenditures amounted to EUR 81.18 million.
The fiscal cost of support measures for fossil fuels has increased by 544% since 2017. Since last year, tax expenditures have increased by 135%, from EUR 34.35 million to EUR 81.18 million and direct transfers increased by EUR 196.14 million. All growth rate percentages above are expressed in terms of nominal national currency amounts.
Table 1. Fiscal cost of support measures for fossil fuels (in millions of national currency)
|
|
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
|---|---|---|---|---|---|---|
|
Tax expenditures |
42.896 |
40.943 |
45.431 |
34.784 |
34.354 |
81.180 |
|
Direct transfers |
0.152 |
0.000 |
0.000 |
0.000 |
0.000 |
196.141 |
|
Total |
43.048 |
40.943 |
45.431 |
34.784 |
34.354 |
277.321 |
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Table 2 highlights a selection of support measures associated with a large fiscal cost. A description of these measures is provided in Table 3.
Table 2. Selected support measures for fossil fuels with a large fiscal cost (in millions of national currency)
|
Measures associated with large fiscal cost in 2022 |
2022 |
2017 |
Variation since 2017 |
|
|---|---|---|---|---|
|
Tax expenditures |
||||
|
Excise Duty Reduction for Diesel Fuel and Light Heating Oil Used for Special Purposes |
40.000 |
38.000 |
2.000 |
|
|
Lower excise rate on diesel in Agriculture And Fishing |
26.667 |
(Started in 2022) |
26.667 |
|
|
Price ceiling for household gas consumers |
6.315 |
(Started in 2022) |
6.315 |
|
|
Direct transfers |
||||
|
Compensation of 100% of gas network fee for all consumers |
41.000 |
(Started in 2021) |
41.000 |
|
|
Electricity network fee compensation for all low-income households |
40.144 |
(Started in 2021) |
40.144 |
|
|
Partial electricity price compensation for households |
35.962 |
(Started in 2022) |
35.962 |
|
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports).
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Table 3. Description of selected support measures for fossil fuels
|
Excise Duty Reduction for Diesel Fuel and Light Heating Oil Used for Special Purposes |
Since 1997, a reduced rate of the fuel excise duty is applied to special uses of diesel fuel and light heating oil, for the purpose of which both diesel and light heating oil are marked with a special fiscal marker. In the period between 2004 and 2011, marked diesel was used as fuel in rail transport of passengers and goods, water cargo, fishing vessels, stationary engines and for heating and in combined production of heat and electricity. In the same period, marked light heating oil was used as fuel in rail transport of passengers and goods, water cargo, fishing vessels, stationary engines, tractors and other machinery used in agriculture, forestry and construction, machines and vehicles that do not use public roads and in combined production of heat and electricity. Since 2012, marked fuels can no longer be used in machinery used in forestry and construction. Since 2015 light heating oil marking was abolished and since May 2015 the use of marked diesel oil is only allowed in machinery, tractors and non-road mobile machinery used for agricultural purposes and in drying facilities that are used to dry agricultural produce. Data for this measure has been provided by the Ministry of Finance of Estonia. |
|
Lower excise rate on diesel in Agriculture And Fishing |
Excise duty on fiscally marked diesel used in agriculture and fisheries cut to the EU minimum level EUR 21 per 1 000 liters. |
|
Price ceiling for household gas consumers |
Partial gap price compensation (80% of consumption of price exceeding EUR 80/kWh up to 2 600 kWh |
|
Compensation of 100% of gas network fee for all consumers |
Compensation of 100% of gas network fee for all consumers |
|
Electricity network fee compensation for all low-income households |
Compensation of 80% of increase in energy prices for low-income households |
|
Partial electricity price compensation for households |
Partial electricity price compensation (up to 5 cents/kWH) of price exceeding 8 cents/kWh before VAT) for households |
Data sources
Note on the Methodology
Aggregate numbers from the Inventory represent the fiscal cost of support measures for fossil fuels. They should not be interpreted as a level of support for fossil fuels, nor as an indicator of the extent to which the considered policies are favourable or unfavourable to climate mitigation.
The Inventory reports tax expenditures as estimates of revenue foregone due to measures that reduce or postpone tax payments relative to a jurisdiction’s benchmark tax systems to the benefit of fossil fuels producers or users. Tax expenditure estimates can thus increase over time due to either an increase in the offered concession (relative to benchmark tax systems) or an increase in the benchmark itself. Cross-country comparisons of tax expenditures can also be misleading due to differences in countries’ benchmark tax systems.