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International Monetary Fund. European Dept.

The war in Ukraine has reinforced the need to accelerate the green transition and reduce dependence on fossil fuels in the EU. While Estonia has substantially advanced toward achieving its Green Deal’s commitments, the progress which has been mostly driven by the restructuring of the oil shale industry, could temporarily be jeopardized by energy security constraints. At the same time, progress with GHG reductions in the transport and building sectors has remained modest. The review of Estonia’s comprehensive climate policies reveals room to further incentivize efficiency and promote greener energy sources and sustainability in the transport and building sectors. The analysis shows that the adoption a carbon tax in sectors not covered by the EU-ETS system, supported by appropriate sectoral policies, would help incentivize a greater efficiency in the building and transport sectors and reduce GHG emissions, while generating a net positive welfare effect and a more inclusive growth.