Climate minister: Economy must fit inside the confines of nature

Kristen Michal.
Kristen Michal. Source: Ken Mürk/ERR

Our motto at the Ministry of Climate has been that the economy must fit in the confines of nature, and that a smaller environmental footprint constitutes a competitive edge, Minister of Climate Kristen Michal tells ERR in an interview. Michal gives the example of fossil fuel energy that has become uncompetitive during periods of low electricity prices.

Let us start with the climate law. I looked at the results of a poll commissioned by the Government Office where people were asked whether they understand the necessity of the climate law. While the results were mixed, people also did not say they understand why we need the law. The draft bill's legislative intent document is also quite vague. As climate minister, do you know where you're going with the law and why do we need it so desperately? Is there something clearly missing from existing legislation?

In short, we need to sum up for the economy and the Estonian people the requirements pursuant to various different policies in Estonia and from the outside, phrase their funding – whether it's public funds, consumer taxes or something else. Thirdly, to measure how all of it affects our emissions, environment and future.

From these three aspects will be born the understanding of how we can turn a smaller environmental footprint into a competitive edge for Estonia. That is what the climate law is about.

Having worked on legislative intent and policy before, I can say that a legislative intent document needs to pose the question of why a piece of legislation is needed, how it should come about and in which kind of framework. It would be even better if there was an after-the-fact analysis once the law enters into force.

/.../ The climate law is rather a framework where half of projected benefit for society will come from mutual understanding and debates.

Over the next year, we plan to hold a climate law debate where we will involve scientists, entrepreneurs, young people, interest groups, including local governments, sector associations and major business organizations. Next, we will try to phrase the future of competitiveness before the bill lands in the parliament next fall. The pace is quite fast.

I would say that we have had too few debates on climate, that we need to hold more, and that a certain Estonian position must be born out of them. It would be very strange if we said that the climate law needs to be a collection of requirements for which we need approval in a month's time – that would not serve our purpose.

Therefore, I think we are off to a good start, and I can see a lot of people resonating with it – some are critical, others say our ambition does not go far enough. A solid start to the debate.

The start of the debate seems to be a request for people to tell the ministry what to do. We can see no initiative from the ministry.

I will put it mildly when I say that it would be quite peculiar for us to ask people to make our choices for us for the next five, ten or 50 years. We are trying to propose different approaches in different fields, and we are.

The way the climate law is being put together is that we have the Climate Council, representatives of major business organizations, conservationists, scientists, university representatives – smaller working groups where we will be discussing these topics.

Whether energy or some other field where we will look at specific targets, requirements and plans we want to have. We will ask how they fit together with money, how we can manage the necessary resources in the future and how all of it will fit together with climate policy and emissions. Emissions are not the only aspect of climate policy, there is also diversity etc.

And that will come together for that framework. I believe it will be a fundamental piece of legislation for climate policy, the environment and the economy.

Let us look at what you think or would like for the law to achieve. Should we stop mining oil shale in Estonia, should we dial back emissions of all kinds as quickly as we can? In what do you perceive a solution?

I perceive the solution as being able to turn a smaller environmental footprint into a competitive advantage.

Our motto at the Ministry of Climate has been that the economy must fit in the confines of nature, and that a smaller environmental footprint constitutes a competitive edge. The idea is that the world is changing whether we like it or not, even the most skeptical among us have to admit that certain changes are taking place – average temperatures are up, the weather has become more turbulent etc. The causes of climate change are one thing, while alleviating their effects or climate security makes for another.

If we were to look for a competitive advantage for Estonia in there, renewable energy, which is far cheaper than fossil fuels today, gives citizens lower power bills, while it also gives us a clearer conscience, cleaner natural environment, and our industry a base on which to build future activities.

The major advantage of such activities is that they're export capable as renewable energy, which today rather constitutes a competitive edge, will be a matter of basic hygiene ten or 15 years from now.

In Scandinavia, companies are asked to describe their activities map – where do you get your materials, what do you do etc. The financial sector is laying down intense pressure in Estonia and elsewhere. A representative from LHV was present for the climate law's introductory event and said that the bank keeps a close eye on environmental criteria and their performance when assessing self-financing risks.

So if you ask me what I expect from the debate and the law, while we will be providing concrete items, we will not be providing ready-made answers. Otherwise, the only debate would be over whether they're acceptable or not. We want all sides to contribute to phrase a competitive advantage for Estonia in a changing world of reduced environmental impact and a cleaner natural environment.

We need to find a way for the environment and the economy. And I believe our chances are very good indeed.

Kristen Michal. Source: Ken Mürk/ERR

Listening to what the critics have said, Juhan Parts suggested that not everything the green transition entails might achieve the intended result. For example, boosting the relative importance of renewables means both terrestrial and offshore wind farms and solar power plants, which need to be backed up by gas plants.

In other words, we have no good solutions for rapidly decarbonizing Estonia's energy generation while keeping the price, irrespective of whether it is subsidized or market-based, competitive when compared to neighboring countries, which means we may end up in a situation where industrial activity becomes unfeasible in Estonia.

There are a lot of claims lumped together here. I will try to address them one by one, and I apologize in advance if I'm being evaluative. First, I would ask whether we should do nothing if current solutions cannot fully answer every question. I believe we need to address it in either case, keep moving in the right direction.

Now, whether renewable energy is preferable – I believe people have already realized that fossil fuels, the ones Juhan Parts praises, only get a foot in the door during periods of peak and volatile prices.

I know that Juhan Parts has proposed building a second Auvere [oil shale] power plant (Auvere 2). As we found before, the banks are no longer financing such activities. It is quite clear we would not find a bank willing to finance building Auvere 2.

Let us presume it would cost €650-800 million, or let's say just under a billion euros to build. That would buy us another fossil fuel power plant for... expensive electricity that only makes the market when prices are soaring and is, therefore, only fired up from time to time.

I would say that Juhan Parts' plan is mediocre, and that's being kind. I will not hold it against him that he is proceeding based on outdated data, that of climate change skeptics, in light of looming European Parliament elections. But one reason I am glad that Juhan Parts is making statements and expressing such an opinion is that we hoped the climate law debate would become a part of European Parliament elections topics next summer. I hope there will be many debates on this issue in which candidates are welcome to participate.

Talking about the future of renewable energy, we are in the middle of a boom in Estonia. Of course, our networks are from an earlier time, we need more [capacity], while many renewables solutions are already highly efficient and the average price of electricity is coming down.

Yes, of course, renewable energy is uncontrollable, as anyone who is up to speed on energy knows, and no chair can rest on just one leg, meaning that we also need controllable capacity. These are the Narva Power Plants in Estonia today.

Elering will hold a new power generation capacity auction in 2025 where we will have new bidders, whether we're talking about gas, biogas or other fuels. It is also possible the auction will be held sooner. We need answers in the field of power storage, whether cheaper storage devices or pumped storage. The nuclear plant debate will not kick off before next year. So there are many questions for the future of energy. But as a general rule, renewable energy tends to be cheaper on the market today than fossil alternatives, which is why Juhan Parts' Auvere 2 is a thing of the past rather than the future.

While building a second Auvere plant is in no way realistic today, the current mix of renewables requires gas-powered plants – which currently exist in Latvia and Lithuania – to balance it out. In other words, today's renewable energy is deeply dependent on a fossil fuel (gas). Without it, we wouldn't have one or the other.

We will be taking an analysis on the future steps in renewable energy to the government in roughly two weeks. We will likely see a lot of new capacity – wind, offshore wind, and we also have a lot of solar. We need to invest in grid development, also outside Estonia. Storage and controllable capacity make for another key topic. Energy is a major system that needs to be balanced.

I was in Ida-Viru County a few days ago where I also visited [oil shale power company] Enefit Power, and I can tell you that fossil fuel energy is kept off the market when prices are low. That is the reality today.

While we're on the subject of Ida-Viru County, I learned this week, to my great surprise, that the Sõnajalg brothers' planned Aidu wind farm is still eligible for subsidies of €120 million based on a support scheme that ended in 2016. This does not seem like a sensible use of taxpayer money to me. We could buy a lot more power generation for that money if we channeled it elsewhere. Does it seem sensible to you?

We introduced changes to that system of subsidies in 2016, when I still served as economy minister. The mechanism was different then and no longer seemed sensible, looking at market developments – the technology had become a lot more competitive and the future appeared different.

Today, we are buying renewable energy at reverse auctions, which is the most favorable option for the taxpayer.

The Aidu wind farm has been a matter of contention also for previous governments. But it is Elering that has to decide whether it still fits in the old scheme, like the Mustamäe cogeneration plant in Tallinn.

That is frankly just as incomprehensible.

The government needs to play by the rules, and let's say Elering is doing that, while the support period will not be as long nor the sum as great as what has been suggested. While it's not up to me to say when the Sõnajalg brothers' wind farm will be operational, whether it's 2024 or 2025, the scheme will expire in 2032 either way, meaning that the support period will be shorter.

But again, it will likely end up in court and will be for Elering to sort out. It has more to do with past decisions than today's renewables prospect.

Kristen Michal. Source: Ken Mürk/ERR

The question of whether it is sensible use of taxpayer euros is raised also looking at recent decisions. For example, we plan to support hydrogen projects with €50 million. And yet, hydrogen power is nowhere near ready for grid applications.

We are supporting different paths of innovation. Not all projects immediately provide tangible results but they do give us know-how.

I recently met with my Finnish colleague, and they are investing hundreds of millions, billions even in hydrogen applications through the private and public sectors. It is just one of many fields. The world is looking for different technologies. The future will likely see a sensible balance of [different] technologies. Many have invested in solar panels in Estonia, even though it seemed unattainable and unfeasible only a short while ago. Provided there is enough consumption, it is an entirely sensible project.

There is a search for solutions today, and I would not get hung up on one solution over many others. Perhaps it will not be hydrogen, perhaps it will be something else in the future, while the search for opportunities and innovation continues.

How do you feel about a nuclear power plant?

My view is scientific. I have made it a goal to do what I can to make sure we will end up with a facts-based debate. We will get a thorough report on the feasibility of nuclear power in Estonia this December. It will cover security concerns, the nature of nuclear legislation, what kind of regulator will we need.

While I think families will not be discussing it over Christmas dinner, the debate will likely kick off in January.

We will also need a parliamentary debate as decisions of this magnitude require a mandate or at least a favorable atmosphere.

Estonians as a whole tend to be in favor. I believe it reflects the fact that Finland's Olkiluoto plant is pushing prices down and is seen as a zero emissions and stable option. Another aspect is Russia's war in Ukraine where they managed to create price fluctuations by manipulating the energy market.

Again – I'm working on making sure it will be as knowledge-based as we and our partners can make it.

But personally, would you rather support it or not?

I'm a knowledge-based agent in energy – give me figures, give me choices and let us decide based on that, not based on what I like or dislike.

Fine. You mentioned solar panels. Looking at activities we have favored on the government level, we have various schemes for supporting people buying things – a lot of solar panels have been installed using state subsidies. There have also been renovation subsidies and the like.

Does it not appear to you that recent environmental policy has been aimed at the middle class and the wealthy? If we add electric vehicle grants to the mix, it seems that the less fortunate part of society is saddled with new climate obligations and taxes the money from which is used to support wealthier people's purchases or renovations?

That is a very good question. Climate law deliberations need to make sure the changes do not create new inequality, the law will need to include all of society. The pace and nature of changes must be clear.

Renewable energy is leading to cheaper [energy] prices, which is something people understand.

They haven't so far.

They have. The price has even dipped into the negative.

Renovation is another activity I believe everyone understands. Let it be said that a lot of public funds will go toward renovations in the coming years. We have €160 million for it in next year's budget, and we're looking to spend a little over a billion euros by 2030. This comes to around €2.5 billion if we factor in self-financing. It will be spent on renovating apartment buildings and private residences.

There are rural areas where the subsidies are bigger, considering lower real estate value. This needs to be kept in mind.

However, studies do indicate that decisions to replace heating systems or modes of transport are rather made by the wealthier half of society. It also makes sense. It's easier to look for savings if you can rely on new technology. However, we will try to bring the whole of society along with us in this search for a competitive edge, because let's be honest – if a person pays less for energy, fixes up their home, it is also beneficial from the point of view of the power system – peak consumption will fall, grid investments can be a little more modest, and it is also good for climate if energy is used more sensibly.

Financial benefit and climate policy will coincide in that aspect, while it is also true that modernization and progress tends to rather favor the more successful part of society. But that has been the case throughout history. It is our task to try and balance the corresponding policy.

I cannot really see any efforts to balance it. When you say that the owner will have to pay 50 percent and the state the other 50 percent in a project to renovate a private residence in Ida-Viru County, we are not really talking about supporting less fortunate people but still rather the wealthier part of Ida-Viru residents.

I cannot say whether helping to renovate Ida-Viru apartment buildings counts as supporting the wealthy, while what I'm talking about is the subsidy being relatively lower in higher-income areas. That much we can do.

If the person sees something as beneficial for themselves, they will make the choice [to renovate] as they're interested in lower power bills.

Provided they can come up with the self-financing. Listening to what the banks are saying, how people live from payday to payday, having very little in the way of a financial buffer, they will rather be unable to participate in such support schemes.

Yes, while it would be much harder still without the subsidy schemes. It is our task to find new possibilities, which also stem from new technologies, if only aforementioned renewable energy, providing enterprise with an export-capable base – so that people could make more money and create new wealth.

Because the only way to cope with higher prices, a smaller market and less competition in some areas is to make sure people in Estonia become wealthier and our economy creates more value added – that needs to be the goal of our activity, there is no other way.

Kristen Michal. Source: Ken Mürk/ERR

I read an opinion piece by climate scientist Anger-Kraavi who suggested in no uncertain terms that if we fail to get the lion's share of society on board with the climate debate or the fight against climate change, we will very likely fail. Rather, what will happen in a democratic society is that power will move into the hands of people who will terminate or reverse recent efforts. You have no such fear?

I don't. Apparently, I have more faith in the common sense of Estonians. Rather, I feel that people are looking for answers to such questions as, what needs to be done, what is the cause of climate change, how can we adjust and boost our climate resilience. How to cope when there is more rain than usual, when the weather gets very hot. All of these questions need answering. The Anger-Kraavi article you referred to also had entirely sensible points, where it recommended skeptics to understand that climate change is real and needs to be addressed. We are on the same page there.

The pace needs to be sensible and inclusive, and that is why I say that the climate law will not solve all the problems in the world. It needs to be a year-long debate where everyone participates. As said before, the alternative would be to say we have the answers, let's not ask questions.

We are starting a debate complete with questions, and I believe it is good we are already seeing it among both skeptics and proponents. We will eventually draw conclusions together. I believe that the Estonian people will make smart choices also in this matter, and that the debate will not be overshadowed by breaking news topics.

You understand that if we're talking about spending billions of euros to effect meaningful change in society, renovate something, develop a new energy system etc. – these billions will not go where people expect them to go. For example, healthcare, education, infrastructure. Spending billions this way, people need to very clearly understand why we are doing it.

Yes, and there is no disagreement here. People want to understand how the decision was made, better yet, discuss it together. That the decision is based on a principle that will also be observed moving forward. That is why we'll have a climate law, why our climate policy is knowledge-based.

We will be phrasing domestic and external requirements, ask whether the resources will come from the taxpayer or somewhere else. Next, we will measure effects on climate, which will allow us to say that these decisions will have such and such effects, and that we stand united behind them. I believe it is a rather smart way of going about it.

The government recently fiercely debated next year's state budget. Looking at the draft budget today, the €1.7 billion planned deficit in a situation where we have no investments other than Rail Baltica, I see no room in the budget for launching the things you are proposing. What might be major climate change investments?

We have the money. I can tell you that we have €160 million for the things I've been trying to explain, including renovations, in next year's budget. What we spend on environmental restoration and biodiversity will double and reach a record level. There will be another €20 million for this over the next four years.

So if it is a question of money, I can tell you that we have it – €111 million over seven years.

Rather, the point is that we are already so deep in the red, while the Reform Party promised to sort out public finances. I cannot see order in public finances or any course plotted in that direction. Deficits of this magnitude have been planned by the Ratas and Kallas administrations. What about the state budget?

I expect the budget to be passed more or less as it reached the parliament. Next will come a debate over our choices in the next cycle.

The International Energy Agency, attached to the OECD, which Juhan Parts also mentions, said that they do not understand renewable energy. I would suggest they understand it perfectly well having said that electricity is the new oil. There will be progress in this field, which will provide an economic base.

Tõnu Mertstina wrote in Äripäev that steps taken in Estonia will not be able to replace falling foreign demand immediately, while they can make enterprise and local activities more competitive. And that is what we are doing in our administrative area. We are trying to find ways and foster our companies becoming more competitive. Of course, tidy state finances also fit in this picture.

The debate is ongoing, and I see several areas where the Estonian state and people can create wealth for themselves, such as mineral resources, in addition to energy.

We likely have billions upon billions there, and if we can make use of them wisely and in an environmentally sparing manner, we may be able to create something similar to Norway's national wealth fund. There are possibilities, we just need to sensibly debate them.

You mention expanding and opening new mines in Estonia in the climate law's legislative intent document.

Today, the Estonian Geological Service is looking into raw materials of the future, especially phosphate rock and rare earth metals. /.../ Once the resources have been mapped, we will be able to phrase, two to five years from now, how we might use these future resources. Whether it can be done in an environmentally sparing manner and how best to add value.

If the answer is yes, if we can do it in a way that spares the environment and find a way to add value, it amounts to hundreds of billions in potential revenue. Personally, I would put most of it in a fund, which would grow and make sure Estonia has reserves for the future.

To settle our debts using mining proceeds and put the rest of the money away following the example of Norway?

I still believe we need to dial back spending and review our activities where possible. If the money can be found, it will go toward competitive ability and new advantages in our field. It is possible to make sensible decisions even in lean times.

Which taxes would you hike?

I do not need to give you a hypothetical answer as we are already doing it. Construction material fees, which were initially meant to rise slower...

Those are marginal.

They are not marginal if you talk to companies. We are hiking construction material resource fees and oil shale fees. Taxes are going up in our administrative area, taxes that are tied to pollution and resource use. We are also hiking fees in the fields of transport and environment.

Therefore, we are contributing quite a lot to the state budget, and I hope we will see much of the money put back in the field so we can invest it in competitive ability.

Still, it will not cover the €400 million in unspecified revenue written into Estonia's state budget strategy (RES) regarding which the government should agree on something next year.

Yes, but I don't think anyone expects those €400 million to be found in a single area. In the end, tax burden is falling as a whole, which needs to be compensated in the interim years, also by asking ourselves what level of services we expect. But that is a fiscal debate and not a climate-related one.

Estonia's looming car tax is expected to yield €200 million instead of the initially proposed €120 million. [PM] Kaja Kallas told Vikerraadio that the main criticism of the car tax plan is that it fails to consider emissions to a sufficient degree. Will it now?

It is a work in progress today. We have been discussing it with the Ministry of Finance and the coalition for over a week. Based on these conversations, it seems to me that not just our ideas, but also proposals from elsewhere have been heeded. There has been a serious attempt to design it following principles of sparing mobility where those who pollute less and own lighter vehicles pay less and vice versa.

That is one of the principles we want to see, and it is very good if the Ministry of Finance, which is responsible for taxes, decides to consider this aspect.

Kristen Michal. Source: Ken Mürk/ERR


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