This report reviews reform options for decarbonisation in Lithuania and seeks to inform the update of its National Energy and Climate Plan. It draws upon the OECD’s multidisciplinary expertise on tax policy, financial markets, social affairs, science, technology and innovation, and economic modelling to highlight a number of key policy insights:
Lithuania’s existing policy mix is broad and comprehensive, with generous financial incentives for climate mitigation actions and technology adoption, regulations, and complementary measures across all key economic sectors. However, greater ambition is needed to reach Lithuania’s climate targets.
Enhancing price signals is key. Lithuania’s current policy mix relies primarily on expensive subsidies, with carbon price signals still broadly below needed levels. The proposed excise duty amendment would increase price signals considerably, particularly due to its carbon price component, making up the ambition gap to 2030. The ETS 2 would have a similar effect, enhancing climate policy ambition. Both proposals could be supplemented by carbon price floors to further increase price signal credibility. Moreover, the revenues generated by carbon pricing would allow for important recycling measures, helping to alleviate the social burden of climate ambition.
Carbon pricing alone is not enough for Lithuania to reach net-zero by 2050. Certain CO2 emissions in the transport and industry sectors remain hard to abate at current levels of technological development, even at very high carbon prices. This underlines the importance of innovation and technology diffusion in these sectors, with hydrogen in particular likely to play a key role given the prominence of emissions from road freight transport and ammonia production. Targeted technology support is essential to promote technology adoption and innovation. Lithuania currently relies too heavily on horizontal tax breaks for technology support. Enhancing carbon sinks will also be key to balancing out residual emissions, particularly in the agriculture sector.
The economic costs of high climate ambition are minimal. Even excluding co-benefits and avoided damages, modelling shows that significant emissions reductions only cause a small slowdown in annual growth rates at constant technological development. Factoring in innovation, co-benefits and avoided damages would likely balance out these minimal economic costs.
Public finance needs to be used more efficiently. A current focus on grants and subsidies threatens to crowd out private investment. Small capital markets should be further expanded regionally to leverage considerable interest in green spending amongst investors, with financial instruments tailored to different investor needs. Capacity-building to enhance finance absorption will be key.
The distributional incidence of proposed carbon prices is flat. This implies that revenue recycling can be devised to target distributional outcomes as desired, with lump-sum transfers to all households in particular offering broad progressive outcomes.
