The move bucks the trend for local governments, as well as the national one, holding off on establishing large industrial facilities, ERR reports.

The municipality, Lüganuse, Ida-Viru County, says the construction of the facility does not hinge on the grant, adding that a special plan had been filed Thursday last week (link in Estonian).

Lüganuse mayor, Andrea Eiche (Reform) told ERR: "First off, this is certainly no sweetener for the municipality, in the hopes that some kind of benefit will arise. The sum, in the context of the municipality's budget, is still relatively small. It's certainly not a decisive development."

VKG themselves referred to it as a good-will gesture, which will also off-set what the company called injustice in the current tax system.

Ahti Asmann, VKG board chair, said: "We have seen where the oil shale industry paid 80 percent of Estonia's environmental taxes, of which six percent came back to Ida-Viru County."

"So it has been observed that taxes collected from a region do not return to this region. Naturally we can't build up the state taxation system with our own local tax system, but we have found that this type of good will gesture is a good offer," Asmann added.

Andrea Eiche told ERR that Ida-Viru rural municipality, as well as Lüganuse, will be the principal beneficiaries of the pulp mill.

VKG will provide the €125,000 subsidy annually, once the mill is operational.

The special plan filed by the Lüganuse municipality has a three-year term, when feasibility studies on the project, particularly from an environmental perspective, will be hammered out.

VKG announced its pulp mill plans in July, saying the establishment of the plant at Lüganuse would create around a thousand jobs.

Despite pulp mill plans in recent years coming to nothing, following environmental protests, VKG says the pulp mill would boost renewable energy production at a time when the EU recently unveiled its long-term package of climate goals.

This is because pulp mills generate renewable energy during their processes.  

Pulp mills use boilers which can be used to generate CO2-neutral biomass-based electricity; crude tall oil and turpentine are some of the by-products of the process.

Pulp mills do require large quantities of water, however, and must be located near a water source. In the case of the proposed Lüganuse facility, water pumped out of nearby oil shale mines could be used.

The mill would be built just outside of Kohtla-Järve, Ida-Viru County.

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