The explanatory memorandum for the draft bill begins with summaries on topics related to global warming and climate policies. It also broadly defines terms associated with these subjects. Much of the content consists of well-known information, including self-congratulatory passages on past achievements.

For instance, on page 11 of the memorandum, it states: "According to the Environmental Performance Index, published in June 2024 by Yale and Columbia Universities, Estonia has made the most progress in improving environmental conditions among the countries of the world. The data show that in the past decade, emissions have decreased to the extent necessary to reach climate neutrality by 2050 in only five countries worldwide – Estonia, Finland, Greece, Timor-Leste and the United Kingdom."

However, the memorandum also contains a significant amount of vague, slogan-like text with little substance.

For example: "To achieve the goals of mitigating and adapting to climate change, the selection of technologies must consider efficiency, the sensible use of resources and minimal greenhouse gas emissions."

Or: "In various sectors, activities, methods and nature-based solutions that help sequester carbon reserves will be preferred and promoted. /.../ Knowledge of such solutions is still emerging."

While the Climate Resilient Economy Act aims to set greenhouse gas reduction targets for various sectors with the force of law, the memorandum does not provide much justification for how these target levels were determined or how they might be achieved. It mainly references international agreements to which Estonia has committed itself.

Energy

In the energy sector, the drafters of the explanatory memorandum for the bill highlight that by 2036, electricity will no longer be produced from oil shale. These capacities would be partially replaced by gas-fired plants with a capacity of 1,000 to 1,300 megawatts, which would operate on biomethane or green hydrogen starting in 2040. The investment is estimated at €200 million.

The memorandum also specifies that a tender should be organized specifically for the construction of offshore wind farms with an annual production of two terawatt-hours. According to the Ministry of Climate, the cost to electricity consumers would be €130 million per year, amounting to €2.6 billion over 20 years. The total investment cost would be €5.6 billion.

Additionally, the Ministry of Climate foresees the necessity of establishing a 500-megawatt pumped hydro storage plant. The investment would amount to €1 billion, which the ministry believes should be made by a private investor.

Strengthening power lines, including ensuring climate resilience and keeping up with consumption growth, would require €853 million. Replacing natural gas and wood-fired district, local and point heating systems with heat pumps would cost €1.3 billion. Both investments would also be borne by the private sector.

A 2023 update to the Green Tiger Energy Roadmap, commissioned by the Ministry of Climate and cited in the explanatory memorandum, estimates that the energy sector will need a total investment of €20.3 billion by 2040. The amounts presented in the Climate Resilient Economy Act's explanatory memorandum are significantly lower.

The Ministry of Climate also emphasizes that companies currently using oil shale must reprofile themselves. The memorandum's authors suggest that the most promising new fields for today's oil shale companies include the production of oil and fine chemicals from plastic waste, the chemical valorization of wood, the production of renewable energy and fuels based on it – such as hydrogen and e-fuels – and the mining and valorization of new critical minerals.

"The added value of the oil shale industry is high, the industry is capital-intensive, and as it is dependent on oil prices, it is a so-called successful exporter, with companies' sales revenue from oil shale amounting to approximately €500 million in 2022. On the other hand, considering the scale of this industry, the ratio of the carbon content of oil shale to export added value is significantly higher compared to other industries," the memorandum states.

Officials estimate that if companies are given a 10-15-year perspective to phase out oil shale mining, they will have time to reshape their business strategies. The authors of the memorandum also believe that potential socioeconomic problems could be mitigated by the €564 million Just Transition Fund, which would support the establishment of new enterprises in Ida-Viru County.

The memorandum notes that the end of oil shale mining could result in the loss of 5,000 jobs, with 8,000 people at direct risk of poverty. However, such a scenario is only realistic if no new businesses and jobs emerge to replace the oil shale sector.

The Ministry of Climate estimates that the closure of the oil shale industry would reduce state budget revenues by €140.6 million annually due to lower environmental fees, €130 million annually from mining rights fees, and €12 million annually from special water use permits. Revenues from mining rights and special water use fees for several local governments would also decrease.

Additionally, in 2019, employees of the oil shale sector in Ida-Viru County paid a total of €18.3 million in income tax, accounting for one-fifth of the county's income tax revenue.

While the Ministry of Climate acknowledges the need to account for declining revenues, it sees potential compensation through the increase of other environmental fees or replacing environmental fees with revenues from electricity excise taxes. The ministry believes that the decline in local government revenues could be partially offset by wind turbine fees.

Transport

To reduce emissions in the transport sector, the Ministry of Climate has outlined plans including the development of bicycle and pedestrian paths worth €99.3 million, the expansion of a Tallinn tram line with an investment of €223.3 million and public transportation-oriented planning costing €174 million. Additionally, ongoing projects like the construction of Rail Baltica and the purchase of new passenger trains are also part of the strategy.

Further plans include promoting electric vehicles with a budget of €66.6 million, replacing 3,000 public sector vehicles with electric cars for €16.5 million and 1,360 buses with zero-emission vehicles at a cost of €300 million.

The Ministry of Climate believes that replacing public sector vehicles with electric ones will further increase the popularity and accessibility of electric vehicles in the private sector, as implementing this measure will require investments in expanding the charging infrastructure.

Allowing longer and heavier trucks will require a €122 million investment in infrastructure. The Ministry of Climate estimates that these trucks could reduce company costs by €50 million annually.

The use of heavier and longer trucks is expected to reduce truck mileage by 10 percent and emissions by 20 percent, according to the explanatory memorandum's authors.

Moreover, there are plans to promote the use of biomethane, electricity or hydrogen in heavy-duty vehicles and to make state-owned ships CO2-neutral at a cost of €500 million. By 2040, most vehicles are expected to be zero-emission, as stated in the explanatory memorandum.

Additionally, the plan includes fully electrifying the railway network and increasing the number of electric vehicles in Estonia to 30,750 by 2030. The plan also includes replacing 6,240 taxis in Tallinn, 619 in Tartu and 46 in Pärnu with electric taxis at a cost of €17.5 million, to be borne by the companies themselves. Furthermore, 30 taxis in Tallinn are expected to run on hydrogen.

Regarding electric taxis, the authors of the explanatory memorandum suggest that transitioning to them is financially advantageous for taxi companies. "Since the operating and maintenance costs of electric vehicles are significantly lower than those of internal combustion engine vehicles, the total cost savings outweigh the additional costs associated with the higher purchase price of the vehicles," the memorandum states.

The memorandum's authors do not specify how much or how the use of biomethane, electricity or hydrogen in heavy-duty vehicles could be promoted, but they do expect emissions reductions. They note that the shift requires an additional 470 megawatts of wind energy capacity and the production of 37,500 tons of hydrogen per year.

In the maritime sector, the Ministry of Climate sees an opportunity to reduce emissions by converting or replacing 200 state-owned ships with CO2-neutral vessels. Additionally, 13 state-owned ferries would be made emission-free. The total cost is estimated at €500 million.

The Ministry of Climate estimates that the construction of bicycle, pedestrian and railway infrastructure will create new jobs, and the production of domestic transportation fuels – renewable electricity, hydrogen, biomethane – will significantly increase employment in the energy, transport and agricultural sectors. The production of biomethane will especially boost employment in rural areas where the production facilities are located, according to the memorandum.

Furthermore, the authors of the memorandum note that the analysis of Estonia's hydrogen resources suggests that the adoption of hydrogen technologies after 2030 could create an additional 21,000 to 42,000 jobs, mostly in the manufacturing industry related to hydrogen production and distribution.

However, what the authors do not mention is that the same study estimates that achieving this additional employment would require investments in hydrogen ranging from €22.4 billion to €44.7 billion.

The authors of the bill suggest that a motor vehicle tax, linked to public transportation-oriented planning, could help people transition to more sustainable modes of transportation.

"The impact of the measures is largely positive, particularly for public health, general well-being and equal opportunities, as the measures aim to make urban environments healthier, more attractive and more accessible," the memorandum notes.

Overall, effective public transport planning should result in several new developments being multifunctional by 2040, including schools and grocery stores within walking distance for residents. The density of city centers in larger cities will increase, and light traffic routes and public transport will be the most convenient ways for residents to make their daily commutes, according to the memorandum.

"The development of bicycle and pedestrian paths will have significant positive effects on residents' mental and physical health, as it will increase physical activity. Improved bus and rail connections will make public transport the fastest and most convenient way for many people living west of Tallinn to commute to the capital. This will reduce the advantage that higher-income car users have in accessing jobs and services, which will ultimately reduce social inequality in society," the memorandum states.

The Ministry of Climate acknowledges that in rural areas, giving up personal vehicles or the increased costs associated with them could significantly complicate daily mobility, and to address this, public transport should be developed and support measures should be created for vulnerable groups to help them replace their vehicles with newer and more efficient ones.

Regarding businesses, the authors of the memorandum note that while the added value of the transport sector may decrease due to a drop in car sales and repair services, companies will achieve savings on fuel and other transport-related costs. Planning that favors walking, cycling and public transport may also improve the competitiveness of small businesses, such as local shops, according to the memorandum.

"Additionally, a healthy and human-scale urban environment will attract more skilled foreign labor to Estonia. The development of railway infrastructure will promote business activity in Tallinn by improving commuting options between the capital and other municipalities. The southern rail connection with Europe will also improve, and the reduction in logistical problems due to increased train frequency may benefit companies. As residents spend less on transportation, income may be redirected to local businesses in other sectors. Construction companies will directly benefit from infrastructure investments."

The Ministry of Climate expects that the overall economic situation of residents and households will improve, as more efficient and sustainable transport solutions will lead to savings on car and fuel costs.

"The development of light traffic routes will increase mobility freedom among different traffic groups, particularly among lower-income individuals, as owning and maintaining a bicycle is more affordable and therefore accessible to more people than owning a car. The Estonian Mobility Survey shows that the highest number of daily cyclists is among those with lower incomes," the authors of the memorandum note.

The Ministry of Climate estimates that reducing emissions in the transport sector could increase property prices in city centers, on which the ministry has mixed views.

"Namely, the rise in property prices could significantly increase rental prices, especially in Tallinn and Tartu, leading to higher living costs in these areas. However, in many smaller towns, the increase in property value could help secure loans, for example, for home renovations," the memorandum states.

Buildings

To reduce emissions in the building sector, the Ministry of Climate proposes the renovation of 14,000 apartment buildings covering 18 million square meters and 100,000 single-family homes totaling 14 million square meters. Additionally, the plan includes the renovation of 27,000 non-residential buildings with a total area of 22 million square meters, as well as the development of more energy-efficient street lighting and support for low-carbon construction.

The Ministry of Climate estimates that taxpayer support for apartment building renovations could amount to €1.6 billion, with residents contributing an additional €2.2 billion, making a total investment of €3.8 billion. However, the ministry does not foresee any support for single-family home renovations in the Climate Resilient Economy Act's explanatory memorandum.

The authors of the memorandum state that if all buildings could be renovated, heating costs would decrease. However, since the increase in renovation costs is greater than the reduction in heating costs, household purchasing power would decline. "Nevertheless, it is important to remember that renovation is inevitable because the older building stock is deteriorating," the memorandum states.

"When planning the complete renovation of the current building stock, it should be noted that some households are not capable of financing the renovations. Even with support measures in place, building renovations require a financial contribution from the owner, and lower-income households are unable to afford this. Households in economically unstable situations will need additional support to participate in energy-saving measures," the authors of the memorandum note.

Furthermore, the Ministry of Climate emphasizes that priority should be given to areas outside Tallinn when supporting renovations. Distributing support based on market conditions would direct funds to more affluent regions. In addition, the ministry suggests implementing other measures, such as state guarantees for home purchase and renovation loans outside major cities, and greater involvement of local governments in measures that support building renovations.

Processing industry

The manufacturing and construction sectors are the only areas where the Ministry of Climate anticipates an increase in emissions in the near future. However, by 2040, emissions are expected to return to 2022 levels. This projected increase is linked to the production of fuel from oil shale, and the Ministry of Climate believes that discontinuing shale oil production could significantly reduce emissions in the sector.

Additionally, the ministry plans to replace 20 percent of natural gas used in industries with biomethane, support the adoption of resource-efficient and climate-friendly technologies, facilitate the transition to new business models and promote the production of renewable electricity in industrial areas.

One measure proposed by the Ministry of Climate is to prioritize low-emission industries that offer higher added value. The authors of the memorandum note that there is significant interest from new industrial enterprises in establishing operations in Estonia.

According to the EISA Foreign Investments Center, potential new companies and projects include carbon-neutral hydrogen and its derivatives (including methanol) production, wind turbine and accessory manufacturing, biofuel, biochar and paper production, rare earth-based permanent magnet production, a hydrometallurgy plant, electronics and cable production, fuel production from plastic waste, carbon-neutral cement production, vertical farming, sports technology and the defense industry.

Although these new companies are expected to have lower carbon emissions, they may still increase Estonia's overall emissions, which is partly why the climate law anticipates an increase in industrial emissions until 2030.

The Investment Center projects that these new enterprises could bring a total investment of €5.8 billion, generating tax revenues related to construction and operations of around 30 percent, or €1.7 billion, and creating 4,000 new jobs. While the Ministry of Climate considers it unlikely that all these projects will materialize, the forecast provides an estimate of their potential cumulative impact.

The ministry also views industrial CO2 emissions as a future business opportunity in carbon capture and utilization. However, the authors of the memorandum note that the technological readiness of these solutions is still low, meaning they have not yet been scaled or commercially implemented.

"There is also a lack of knowledge about the reliability of these technologies and all associated costs. CO2 capture technologies require large amounts of energy, which means that their adoption is not feasible until renewable energy is widely available and competitively priced," the memorandum states.

Waste

In the area of waste management, the Ministry of Climate estimates that no new measures are necessary, as existing ones should be sufficient to reduce sector emissions by nearly half by 2040. The largest portion of emissions comes from the landfilling of biodegradable waste, and the ministry suggests that composting or producing biogas from this waste should lead to a reduction in emissions.

However, the authors of the explanatory memorandum note that there is still a lack of comprehensive understanding of the overall impact of the waste sector on greenhouse gas emissions and the potential for emission reductions in the transition to a circular economy. They also emphasize that the state should decisively support products with a smaller environmental footprint.

"A market for products with lower greenhouse gas emissions needs to be created, primarily through the state's leadership and by increasing demand through procurement processes. It is also important for the state to establish a reliable information system regarding residual materials and to support the development of new processing capabilities," the memorandum states.

The memorandum does not specify the costs associated with these initiatives or how they should be implemented.

Agriculture

In the agricultural sector, the Ministry of Climate proposes several measures to reduce emissions, including a 20 percent reduction in the use of mineral fertilizers compared to 2021 levels, which would require a budget allocation of €14.2 million. Additionally, at least 5 percent of dairy cows should be moved from barns to pastures.

Pasturing can help reduce ammonia emissions from ruminants, as a significant portion of urea from urine is absorbed into the soil before it can break down and volatilize as ammonia, according to the Ministry of Climate.

Land use changes should include converting 1,000 hectares per year to wetland cultivation, which involves re-flooding drained fields. In some areas, simply blocking drainage ditches might suffice, while others may require more extensive work.

The Ministry of Climate notes in the explanatory memorandum that there are currently no good practical examples of wetland cultivation. The ministry suggests that cultivating reeds, cattails, sedges and black alder could become niche activities for some producers if a market can be found, but are unlikely to become major industries.

"If natural grasslands, which have not previously been used for agriculture, are converted into wetlands, it is unlikely they will be used for grazing or haymaking. Before rewetting these areas, it is crucial to study how restored wetlands will impact the surrounding water regime, and it is also unclear how much it will cost to restore these areas," the authors of the memorandum state.

Additionally, 3,000 hectares per year of peat soil fields should be converted to grasslands. The ministry suggests that this could be somewhat offset by converting mineral grasslands into arable land. The authors of the bill acknowledge that converting 20,000 hectares of arable land into permanent grassland will incur additional costs, as the income from grasslands is lower than from arable land.

However, this measure is considered one of the most significant in reducing greenhouse gas emissions, according to the Ministry of Climate. The decreasing profitability of agriculture would weaken competitiveness, and the resulting decline in purchasing power would reduce GDP, note the authors of the memorandum. However, they do not provide an estimate of how costly this measure will be or how much GDP will decline.

The ministry also recommends afforesting 750 hectares of arable land annually with trees and establishing tree groves and hedges. Additionally, 250 hectares per year should be converted into tree plantations on agricultural land.

The Ministry of Climate also estimates that semi-natural habitats, such as heritage meadows, maintained by fossil fuel-powered mowing at the expense of taxpayers, contribute to reducing greenhouse gas emissions.

One way to reduce emissions in agriculture could be the transition to alternative fuels, such as hydrogenated vegetable oil (HVO), according to the Ministry of Climate. This would not require replacing the existing machinery fleet, but it would increase production costs for farmers. This change would affect approximately 7,000 farmers.

A key issue in the emission calculation methodology, as noted by the authors of the memorandum, is the production of HVO from palm oil fatty acid distillate, a byproduct of palm oil processing. The carbon emissions from palm oil production and deforestation must be considered, so it is essential to ensure that HVO meets sustainability criteria.

If 10 percent of diesel fuel used in agriculture is replaced with HVO by 2025, and the share of HVO is increased to 25 percent by 2030, the additional cost to producers is estimated at €140 million, according to the Ministry of Climate.

The ministry also notes that since HVO is two-thirds more expensive than marked diesel fuel, exempting it from excise taxes would reduce excise tax revenues.

The authors of the explanatory memorandum also foresee the establishment of five to seven biogas plants by 2030, with a total cost of €82 million, half of which would be covered by the state. Additionally, up to 5 percent of tractors could be replaced with trucks running on biomethane, at a cost of €132 million, with the state covering half of this amount. The ministry also supports the use of no-till farming technology.

Land use

In the land use and forestry sector, the Ministry of Climate proposes reducing the annual logging volume from an average of 11.4 million cubic meters to 9.9-10.2 million cubic meters, which represents a reduction of about 10 percent.

According to the Ministry of Climate, this reduction in logging would lead to a decrease in added value by approximately €225 million and a reduction in tax revenues by €64 million.

The ministry also plans to establish new tree plantations on 500 hectares of agricultural land annually and to accelerate the harvesting of sparse commercial forests to speed up forest regeneration. Additionally, the ministry suggests that further valorization of 2.2 million cubic meters of wood, including chemical and microbiological processing on-site, could generate an additional €39.6 million in added value.

The ministry also aims to reduce emissions from horticultural peat extraction by 12 percent by 2030, by 50 percent by 2040 and to cease extraction altogether by 2050. Depleted peatlands should be restored as wetlands or reforested.

Peat consists of about 50 percent carbon, which is released as CO2 when it decomposes. The Ministry of Climate estimates that extracting one ton of horticultural peat results in the release of 1.09 tons of CO2. The disappearance of the peat sector would reduce Estonia's economy by approximately €150 million, according to the explanatory memorandum. In 2022, peat-related sales revenue for peat extractors amounted to €405.8 million, with companies involved in peat collection and resale generating an additional €43.8 million in sales.

The peat sector directly employs about 800 people, with an additional 1,400 jobs indirectly linked to the sector.

In summary

All in all, the Ministry of Climate assesses that the environmental impact of the proposed Climate Resilient Economy Act will be positive, primarily through the mitigation of climate change, which will reduce pressure on the natural environment. Regarding economic impact, the authors of the explanatory memorandum acknowledge that the changes will result in both costs and benefits for different economic sectors and society as a whole.

The ministry states in the memorandum that the Climate Resilient Economy Act will require new public investments of €3 billion, with an additional €11 billion expected from the private sector.

The authors of the explanatory memorandum also highlight that climate policy creates new business opportunities.

"An increasing number of startups have found new market niches and have even entered international markets, offering solutions for optimizing energy consumption (e.g. in buildings, for electric vehicle charging), environmentally friendly material technologies (ranging from nanofibers and fungal proteins to green carbon), remote sensing solutions, hydrogen technologies and more," the memorandum states.

"Additionally, entrepreneurs are developing climate-friendly solutions in the maritime sector, and the commercial potential for maritime technologies and ship retrofitting is significant, although these ventures may require incentives to get started. It is critical that these solutions be scalable and reach industrial production. Therefore, it is important to focus on pilot production when planning support," the authors note.

However, they also point out that most companies will need to adapt to climate policies and climate change in some way.

Moreover, the explanatory memorandum for the Climate Resilient Economy Act lacks a clear overview of the potential decrease in tax revenues, GDP, exports and production that might result from the law's implementation. There is no comprehensive assessment of how much production costs in Estonia might increase overall or in specific sectors.

Additionally, the few specific investments mentioned do not cover all the projected costs.

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