The European Union will launch its second emissions trading system, known as ETS2, the year after next. This system will apply to road transport and building heating.

Created to help curb climate change, the system means that fuel sellers and heat producers must pay for the amount of carbon dioxide their fuels emit. These costs are passed on to consumers, leading to increased prices for both fossil fuels and home heating.

Laura Remmelgas, head of the climate department at the Ministry of Climate, told ERR that the price of gasoline is expected to rise by 12 cents per liter in 2027, while fossil diesel fuel will go up by 14 cents per liter.

Back in October, the ministry estimated that gasoline and diesel prices would rise by 10 and 12 cents per liter, respectively. This means that under the new forecast, fuel prices are set to increase more than previously anticipated.

The ministry's estimate for the price hike of natural gas remains unchanged. Just as in the fall, the Climate Ministry now projects a 17 percent increase.

According to Remmelgas, the rise in home heating costs will primarily affect people with individual gas boilers or homes heated by smaller boiler plants that use natural gas. The price increase will not affect district heating networks, she added.

For example, the Competition Authority stated that although natural gas has the largest share of heat production in the city of Narva's district heating system, the carbon cost has already been factored into the price.

In fact, trading in ETS2 futures has already begun on the international ICE exchange and prices in the first weeks have been much higher than previously expected.

Remmelgas said the Climate Ministry has not yet analyzed how the higher-than-expected futures prices might affect the final price of ETS2 emission units. For now, the ministry continues to rely on the European Commission's earlier projections.

According to Remmelgas, discussions are actively ongoing within the European Union on how to make the emissions pricing mechanism more predictable and how to lower the projected price of ETS2 units overall.

"There are also major countries leading the initiative to lower prices. France is playing a leading role, but Germany and Italy are also involved," Remmelgas said.

The Estonian government itself hopes the entire ETS2 system can either be scrapped or, at the very least, delayed by a couple of years. According to officials, Estonia does not have many allies in the EU on this issue.

Previous media reports have noted that Poland, the Czech Republic, Slovakia and Bulgaria have also called for postponing the system. Remmelgas confirmed that no other countries have joined this list in the meantime.

€186 million over seven years to alleviate price rise

To help offset the rise in fuel and heating costs brought on by the new emissions trading system, the European Union has created what is known as the Social Climate Fund.

The Social Climate Fund is set to run from 2026 to 2032. Over this seven-year period, Estonia has been allocated €186 million in support from the EU. On top of that, Estonia will contribute a 25 percent national co-financing share — roughly €50 million.

Kairi Nisamedtinov, an adviser at the Ministry of Finance's foreign funds department, said that this funding will not be drawn from other EU programs in the coming years but will be provided in addition to existing support.

"Given Estonia's needs, the amount is not large enough to solve all the problems related to our homes and transportation. This is a temporary measure intended to help people get through the transition more smoothly over the next couple of years," she said.

According to the plan, €142 million of the €186 million will go to the Ministry of Climate, while the Ministry of Regional Affairs and Agriculture will receive €40 million.

Nisamedtinov noted that the Ministry of Regional Affairs estimates it will be able to use €6 million of that funding next year and around €4 million the following year.

"The Climate Ministry has indicated that their measures are more complex, so implementation will take more time," the adviser explained.

She added that the Ministry of Finance hopes to submit the plan for using the Social Climate Fund to the European Commission next month. Before that, the plan must be approved by the Estonian government.

Apartment buildings with single parents, pensioners to be reconstructed

According to the Social Climate Fund regulation, the money must go to lower-income households that cannot afford to renovate their homes. It is also intended for people who lack the financial means to purchase a less polluting vehicle or to use alternative forms of transportation.

However, Estonia has not yet clearly defined who exactly should be eligible for the funding and who should not.

"The definition will likely be based on household income and how much people are spending on housing costs," said Nisamedtinov.

The support is also intended for micro-enterprises — businesses with fewer than 10 employees — that face similar challenges.

Nisamedtinov explained that the Climate Ministry has proposed five measures in which to invest the €142 million over the seven-year period.

She said the largest portion of the funding is expected to go toward renovating apartment buildings: €95 million for full-scale renovations and €10 million for phased renovations.

Compared with current home renovation programs, this measure would specifically target people who are likely to be more affected by rising heating costs.

"As things stand, it's likely that the support would go to pensioners, single parents, households with more children or residents of apartment buildings in rural areas — people who have so far been unable to afford home renovations," the adviser said.

€12 million for loan compensation for less fortunate families

The Climate Ministry has proposed allocating €20 million for the construction and renovation of social housing.

To support vulnerable households, the ministry also plans to set aside €12 million. Nisamedtinov explained that if an apartment building has recently been renovated, this measure would help vulnerable households manage repayments on loans taken out by their housing associations.

"At the start of a renovation project, residents face high costs. While heating expenses may go down, the housing association takes on loans and other additional costs. This measure is meant to ease the burden for vulnerable households during that period when these costs are especially difficult to manage," said the Ministry of Finance adviser.

Another €5 million is planned to help residents relocate from emptying apartment buildings into energy-efficient housing with stable occupancy levels.

"The relocation would be from homes where, for example, only half or fewer of the apartments are still occupied. A pilot project in Ida-Viru County has been successful, and the Climate Ministry hopes to continue it," said Nisamedtinov.

Of the €40 million allocated to the Ministry of Regional Affairs, most is expected to go over the next seven years toward purchasing environmentally friendly buses or supporting demand-based transportation services, she added.

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