This IEA Energy Policy Review comes at a critical moment for Estonia, which is facing notable challenges amid the climate and energy crises and the Russian Federation’s invasion of Ukraine. The IEA commends Estonia for the steps it has taken to end all remaining energy trade with Russia while ensuring regional energy security, and for the work to accelerate the energy transition, including setting a 2050 carbon-neutrality target and a target for 100% of annual electricity demand to be covered by renewable energy by 2030. These targets require major investments across all sectors and improved energy sector planning.

Estonia has notably decreased its greenhouse gas emissions (GHG), mainly due to an overall reduction in electricity and heat generation from oil shale and growth in generation from wind, solar photovoltaics (PV) and domestic forestry biomass. However, starting in 2020 net GHG emissions have been increasing due to a rebound in electricity and heat generation from oil shale and to land use, land-use change and forestry (LULUCF) becoming a net emissions source, mainly due to increased emissions from forests. 

This report provides policy recommendations to help Estonia address its energy sector challenges and drive a clean, secure and just energy transition. It highlights international best practices relevant to Estonia and details areas where Estonia’s leadership can assist other countries with their energy sector challenges.

Existing policies are insufficient to meet Esonia’s ambitious targets, but new policies are being developed to support more robust emissions reductions. Estonia’s ambitious targets require accelerated renewables deployment, increased electrification and phasing out oil shale generation while ensuring a just transition that maintains energy affordability and supports economic development in the oil shale region. The IEA commends Estonia for establishing a Ministry of Climate with broad-ranging authority over the energy system and for starting work on a climate law. These steps will help provide the policy clarity and broad action needed to meet Estonia’s climate and energy ambitions. The IEA recommends Estonia pass a climate law that sets legally binding targets for carbon neutrality and intermediate emissions reductions, allocates responsibilities for implementation, and sets clear targets for phasing out oil shale and other fossil fuels.

Changes to fiscal and tax policy are needed to encourage consumers to move away from fossil fuels and support the uptake of low-emission, more efficient, renewable and innovative options. Estonia’s excise duty rates are not based on GHG emissions or other environmental factors. In addition, Estonia is the only IEA member country without taxation on private vehicles and has one of the oldest and least efficient vehicle fleets. IEA recommends a broad effort to align price signals with climate and energy goals by updating energy excise duties; increasing carbon prices; quickly introducing vehicle taxation to drive uptake of efficient vehicles, including electric vehicles (EVs); and ending support for fossil fuels. This should be done in a way that generates sufficient revenue to support a just clean energy transition.

A major electricity system transformation is needed to achieve the 100% renewable electricity target and put Estonia on the path to climate neutrality. The IEA commends Estonia for taking steps towards these targets but notes a lack of clarity on how they will be achieved and whether existing energy sector planning processes will effectively guide the country to a carbon-neutral energy system. The IEA recommends that the government ensure co-ordination between all components of electricity sector planning, including electrification, to clarify to energy sector stakeholders which pathways to climate-neutral electricity generation will be supported by policy, market regulations and incentives. It is also important that the government develop a streamlined and transparent system for spatial planning and permitting of renewable energy and supporting infrastructure to ensure projects can be deployed at the needed pace.

Meeting climate targets will require stronger forestry and biomass policies. To meet its climate targets, Estonia needs to increase LULUCF emissions removals. However, LULUCF has been a notable emissions source every year since 2018, driven mainly by changes to Estonia’s forests, including increased logging. Forestry biomass plays a major role in Estonia’s energy system, accounting for 23% of total energy supply in 2022 (compared to the IEA average of 3.5% in 2022) and is a key fuel for heating. The European Union ban on wood imports from Russia could increase demand for Estonia’s forestry energy products (40% of which were exported in 2021), potentially increasing prices and reducing domestic availability. Measures to boost LULUCF carbon absorption could reduce the availability of biomass for energy. The IEA recommends that the government develop strong measures to ensure that LULUCF delivers net emissions reductions in line with climate and energy targets, including a robust forest inventory methodology, well-enforced biomass sustainability criteria and clear estimates on the environmentally sustainable level of biomass available. In addition, efforts to reduce emissions from heating should focus on heat pumps and thermal storage.

Estonia has taken steps to ensure regional gas security while working to reduce its gas demand and decarbonise its gas supply. Natural gas plays a relatively minor role in Estonia’s energy system and is used mostly for heating. In 2021, natural gas accounted for just 8.6% of total energy supply (versus the IEA average of 30%) and came mostly from Russia. In 2022, Estonia took swift actions to end its reliance on Russian gas and secure regional gas supply and reduced gas demand to 5.8% of total energy supply. This included co-operation to open a new supply route from Finland’s liquefied natural gas (LNG) terminal through the Balticconnector pipeline. Despite damage to this pipeline in October 2023, Estonia has a secure gas supply thanks to its emergency gas reserve in Latvia’s storage facility and access to Lithuania’s LNG terminal. At the same time, Estonia has successfully boosted biomethane production and, with further efforts, could decarbonise its entire gas supply. The IEA recommends the government swiftly decarbonise the gas sector by developing a comprehensive policy for boosting biomethane production and demand.

Estonia is leveraging a high level of digitalisation to support innovative efforts in the energy sector that can serve as examples for other countries. The online e‑construction platform allows users to access information and documents related to most buildings, including building permits, energy demand and energy performance certificates (EPCs). Estonia is also developing a methodology to calculate dynamic EPCs based on metered energy demand, exploiting the country’s 100% coverage of smart meters. These steps would help to address the strong need for increased data on and action to improve the energy efficiency of Estonia’s old and relatively inefficient building stock.

Estonia is also a leader in boosting critical minerals supply, an essential element for the energy transition. Estonia is home to one of the few rare earth elements processing facilities outside of the People’s Republic of China. Construction has started on a factory that will produce rare earth permanent magnets used in EVs and wind turbines, with a goal to start production in 2025, making it the first rare earth magnet factory in Europe. Estonia also has large phosphate deposits that may contain other critical minerals and present an opportunity for Estonia to support the energy transition and expand its economy, with the potential to use skills and expertise from the oil shale industry. The IEA encourages Estonia to quickly determine its critical minerals production capacity and the investments needed to bring any such resource to market, and to explore other areas that can support a just and inclusive energy transition. The IEA emphasises that expansion of critical minerals production should avoid and mitigate adverse impacts on the environment and local communities.