To green its transport sector, Latvia will have to solve a puzzle

Dienas Bizness, 26.11.2024

Decarbonising transport will require not only changing the vehicle fleet but also focusing on producing green fuels in Latvia. At the same time, an increase in energy prices is inevitable, and Social Climate Fund resources could be used to mitigate this impact for the less affluent.

These insights were shared during the discussion “Which Fuel Will Be Cheaper, and How Will We Compensate for Price Increases?”

It was also concluded that fuel blended with bio-components becomes cheaper than pure fossil fuel, but Latvia’s ability to achieve the targets set for 2030 was assessed as uncertain.

Triple mechanisms simultaneously in transport decarbonisation, both EU and Latvian actions must be threefold. “Currently, fossil fuels are cheaper than renewable resources, and they are relatively underused. At present, there are subsidies for both fossil and renewable resources.”

“In the future, fossil fuels will become more expensive, renewable resources will be more widely used, and mechanisms to compensate for price increases will be applied,” explained Armands Gūtmanis, board member of the Sustainability Cluster Latvia.

He noted that Latvia has set a target to reduce greenhouse gas emissions (those not included in the Emissions Trading System, ETS) by 17%, with transport accounting for 37.2% and agriculture 26% of these emissions. “Current calculations for 2030 paint an unattractive picture – there is a risk that Latvia will not only fail to reduce transport emissions but may even increase them by 1.7%,” explained A. Gūtmanis.

He pointed out that by recognizing this risk, it is possible to mitigate the consequences – by implementing several measures – but in the worst-case scenario, Latvia will have to purchase CO₂ emission quotas from other countries.

“This summer, the Cabinet of Ministers reviewed a report on greenhouse gas emissions and their projections. It was noted that, in Latvia, neither the existing nor additional measures would make it possible to achieve the 17% CO₂ reduction target, so further measures will be needed,” emphasized A. Gūtmanis. He indicated that already in 2024, the annual emission reduction target is unlikely to be met. Former Estonian Prime Minister Kaja Kallas, in a Riigikogu session, predicted that for Latvia’s northern neighbor, purchasing emission quotas could cost up to €225 million per year. “If Latvia does not meet the greenhouse gas emission reduction target for fuels, then, as experience from other member countries – Spain, France, Italy – shows, penalties will also have to be paid, and the set target will still have to be achieved,” warned A. Gūtmanis.

He pointed out that the prices of different types of fuel already vary today, and this difference is likely to increase further in the coming years. “The government has the opportunity to act to keep fuel price increases as low as possible, which is important not only from the perspective of socio-economic fairness but also because higher costs will be reflected in the prices of goods and services and will affect the purchasing power of residents, particularly those with lower incomes or beneficiaries,” emphasized A. Gūtmanis.

We Can Produce Fuel Ourselves

Aija Timofejeva, Director of the Energy Sustainability Department at the Ministry of Climate and Energy, emphasized that transport energy should be understood not only as conventional fuel but as any form of energy that powers transport. She noted that from 2030 it will be mandatory for all EU member states to have a specified share of renewable energy in their fuels.

Currently, Latvia imports almost all of its transport energy, even though there is the potential to produce it domestically, which would make it cheaper and provide an additional benefit to the national economy.

“Data show that excise tax rates do not really correlate with diesel fuel prices. For example, the highest price in October was in Finland, while the highest excise tax rates were in Italy and Belgium,” explained A. Timofejeva. She noted that diesel prices in Latvia were the highest in the Baltic states, even though excise tax rates are nearly identical. An even more paradoxical picture emerges when looking at the share of renewable energy in transport: Sweden has 29%, while Latvia only 3% (Lithuania – 7%, Estonia – 9%), with only Croatia being lower at 2%. “Malta has one of the lowest diesel prices, but the third-highest share of renewable energy in transport (11%),” added A. Timofejeva. She reminded that Latvia’s figures were negatively affected by the temporary suspension of the mandatory biofuel blending requirement.

Although by 2030 all countries are required to achieve a 29% share of renewable energy in transport, as of 2023, Latvia’s share was only 1.9%, Estonia’s 6.9%, and Lithuania’s 7%.

“Currently, Latvia ranks first for the lowest share of renewable energy in fuel. According to the current plan, Latvia is not planning to wait until 2030, but the system could gradually be implemented as early as 2027 to start reducing quota payments,” explained A. Timofejeva. She noted that for each percentage point of bio-component blended into diesel to green it, quota payments could be avoided. “This is the discussion about what is cheaper: blending renewable fuel or paying the quota. What we have calculated shows that bio-blending is cheaper than fossil fuel,” said the Director of the Energy Sustainability Department.

She explained that imported fossil diesel costs €150/MWh, which is equivalent to the price of first-generation diesel produced in Latvia. In comparison, modern biodiesel, which could also be produced in Latvia, costs €158/MWh, while biomethane produced in Latvia costs €50–60/MWh, and locally produced electricity costs €85/MWh.

At the same time, it must be considered that from 2027, an additional emissions tax of €0.13/l will apply to fossil fuels, and from 2030 – €0.30/l, making them even more expensive. A. Timofejeva also forecasted that the price of emission quotas will rise, further increasing the cost of fossil fuels.

“If a transport energy standard is adopted that requires greening the energy portfolio, then by 2030 the price of green fuels could be €0.06/l lower than if emission quotas have to be purchased,” A. Timofejeva showed in calculations under several assumptions.

She noted that the requirements are planned to be implemented gradually so that consumers can adapt, but potential producers of green transport fuels will be able to develop and implement their plans, diesel Fuel Price, €/liter, October 2024 source: Ministry of Climate and Energy,Finland, Belgium, Netherlands, EU Average, Latvia, Estonia, Lithuania, Bulgaria, Maltaotherwise, there will be a price spike that will negatively affect consumers.“Producing green transport fuel ourselves is much safer, and it will also create new jobs,” added A. Timofejeva.

Choosing the Cheapest Greening Models

Justs Dimants, lead researcher at the Sustainability Cluster Latvia, emphasized that when considering the various climate and renewable energy targets to be gradually achieved by 2030, along with the associated costs, it is necessary to identify the most cost-effective scenarios. “Most cost-effective” means taking into account both the price of renewable fuel itself and the necessary subsidies from our national budget and EU fund budgets.

“We sum up these two costs and calculate how much we pay for reducing one ton of CO₂. The responsible body – the Ministry of Climate and Energy – has repeatedly emphasized this efficiency parameter: how many euros we will pay per ton of CO₂,” he explained.

“It’s good that the discussion on this aspect has begun. Some scenarios require aggressive subsidies (for fuel production, infrastructure development, vehicle purchases), and accordingly, large expenditures in these areas,” noted J. Dimants. He emphasized that other scenarios do not require subsidies because they make use of already established infrastructure and vehicle fleets.

“One quite realistic way to achieve the 16% reduction target in greenhouse gas emission intensity outlined in the Transport Energy draft law would be to use R33 fuel (composed of 26% renewable diesel HVO and 7% conventional first-generation biodiesel – this fuel has been tested and positively evaluated in Germany and can be used in all diesel vehicles), E10 gasoline, renewable electricity, and replace the currently used natural gas with biomethane,” explained J. Dimants.

“Consumers support the established decarbonisation targets and the use of renewable energy resources, but the question is only about their ability to pay for them,” emphasized Baiba Miltoviča, President of the European Economic and Social Committee’s Transport, Energy, Infrastructure, and Information Society Section, and board member of the Latvian Consumer Interests Protection Association.

She was quick to point out that there is no consensus among consumers regarding the means and methods to achieve these targets.

“In Europe, technology neutrality is supported, and no single option is highlighted. Therefore, electrification, hydrogen, modern biofuels, biomethane, e-fluids, batteries, and the corresponding infrastructure will all play a role in transport decarbonisation,” said B. Miltoviča. She emphasized that the Latvian government has two major instruments to limit fuel prices – Firstly, encouraging wider use of renewable resources (including locally produced ones), supporting the purchase of sustainable vehicles, and investing in public transport. Secondly, targeted use of European Social Climate Fund money to compensate for price increases and make prices lower than fossil fuels, considering members of society with relatively low incomes. According to B. Miltoviča, identifying such members of society should begin already at this stage.

“We call on the government to initiate a public consultation on the groups that should receive compensation from the Social Climate Fund due to increased fuel costs. To facilitate the discussion, here are some hypothetical examples: families with low incomes struggling with rising living costs; low-income pensioners facing difficulties adapting to increasing energy and transport expenses; people with special needs; individuals who rely on public transport; residents of rural or remote regions who depend on personal transport because public transport options are limited,” proposed B. Miltoviča.

She noted that such discussions have already begun in other countries. It should be taken into account that EU member states must develop and submit their national social climate plans to the European Commission by June 30, 2025.

“Overall, this will allow the green transition to proceed fairly and help consumers make more sustainable choices,” said B. Miltoviča.

At the same time, she quickly added that energy is a fundamental element of society and cannot be treated like other goods, especially since access to energy is a basic right that should not be taken away from anyone.

“It is expected that the costs of fossil fuels will soon increase to limit carbon emissions,” noted B. Miltoviča.

Half a Billion Euros over Seven Years

To ensure a fair and inclusive transition process, the European Union has established the Social Climate Fund, which will become operational in 2026. The fund’s revenue will come from the auctioning of emission quotas.

“The work initiated by the European Union and its member states on implementing the Green Deal will continue with full force in the coming years, because it is clear that retreating in the face of climate change and geopolitical challenges is neither possible nor postponable. It is worth remembering that one of the central elements of the Green Deal is emissions trading, i.e., putting a price on carbon,” explained Andris Kužnieks, Deputy Head of the European Commission Representation in Latvia. He emphasized that the new quota trading system, which will start operating in 2027, will provide significant support for achieving climate goals, directing investments toward decarbonisation and further reducing emissions.

“It is essential to use the opportunities of the newly established Social Climate Fund, which will be financed both by member state contributions and other secured finances, to provide support to the most vulnerable groups of society and ensure fairer conditions in the green transition,” said A. Kužnieks. He reminded that newly appointed European Commission President Ursula von der Leyen has proposed guidelines to launch a new clean industry course for decarbonisation, promote lower energy prices, include a target of 90% emission reduction by 2040 in the European Climate Act, and establish a European climate adaptation plan to support EU member states in climate resilience and preparedness.

A. Kužnieks pointed out that from 2027, the new EU emissions trading system will cover CO₂ emissions from buildings, road transport, and fuel used in small-scale manufacturing. Currently, emissions from buildings and transport do not meet the 2030 targets – together, these sectors produce 30% of EU emissions. It is estimated that the new emissions trading system will ensure a significant reduction in emissions by 2030 – 42% compared to 2005, which corresponds to an average annual reduction of 5.1%.

Initially, the Social Climate Fund will be financed from revenue generated by auctioning 50 million ETS quotas (approximately €4 billion). Primarily, the fund will be financed from revenue from the new emissions trading system – approximately €65 billion, with an additional 25% contribution from member states. The total budget will be approximately €86.7 billion from 2026 to 2032. Latvia’s maximum allocation from this program would be €463.676 million (Lithuania – €664.17 million, Estonia – €186.244 million, Poland – €11.439 billion).

It should be noted that Latvia’s €463 million from the EU will be supplemented by national co-financing of approximately €150 million, resulting in a total of around €600 million, or roughly €100 million per year on average. Part of the fund will be used to reduce energy taxes and levies or provide other forms of direct income support to offset the increase in road transport and fuel prices until 2032, provide incentives for building renovation and the transition to renewable energy, and promote a shift from private to public transport, car-sharing, and the development of cycling infrastructure. A. Kužnieks pointed out that each EU member state must prepare a national Social Climate Plan with structural measures and investments that it plans to implement during the period from 2026 to 2032, and submit it to the European Commission by June 2025. The European Commission will evaluate the implementation of the plan and approve payments if the member states have satisfactorily achieved the targets set for the plan’s execution.

To support this process, the European Commission launched the Technical Support Instrument, which will assist 10 member states in preparing their plans. “Latvia is one of them,” noted A. Kužnieks.