Chapter 3. Towards green growth

Lithuania’s economy grew relatively strongly over the decade prior to the COVID-19 pandemic. Gross domestic product (GDP) per capita in the country converged rapidly towards levels in the upper half of OECD member countries. While GDP per capita was around 60% of this upper half in 2010, it rose to more than 80% in 2020 (OECD, 2020a). This rise was due both to strong growth in GDP and a significant decline in total population over this period.1

A comprehensive package of fiscal and financial measures averted a sharp GDP contraction in 2020. The government announced an overall package of EUR 5 billion (10% of GDP) in March 2020 (OECD, 2020a). Initiatives under the package and subsequent measures provide funds for the health-care system and emergency management. They also introduce measures to preserve jobs and incomes, maintain business liquidity and stimulate the economy. Measures include short-time wage subsidies that ensure workers receive at least the minimum wage; a flat benefit (EUR 257 per month) for the insured self-employed; and increased sickness benefits for employees infected by the virus. There are also loan and tax payment deferrals, soft loans to eligible small and medium-sized enterprises (SMEs) and temporary rental subsidies to businesses.

The pandemic markedly affected private consumption. Most retail shops and the catering sector were closed during the lockdown in the spring of 2020. These closures combined with uncertainty about labour income to reduce private consumption. Meanwhile, a drop in investments was recorded in the fourth quarter of 2019.

Exports, including of transportation services, have been an important growth factor for Lithuania’s economy in recent years. However, the fragile situation in international trade and requirements stemming from reforms in the road transport sector in the European Union (EU) were expected to cool this trend. On the other hand, accelerated EU investment and additional government projects in response to the COVID-19 crisis are projected to drive increases in overall gross capital formation.

In June 2020, the government adopted its DNA of the Future Economy Plan that aimed to move the country to a sustainable, innovative and high value-added economy (JSC ESTEP Vilnius, 2020). It includes short- and long-term investment projects in five priority areas: human capital; digital economy and business; innovation and research; economic infrastructure; and climate change and energy. A total of EUR 6.3 billion in investment was planned between July 2020 and December 2021, of which 25% will be dedicated to environmental and climate change issues, resource and energy efficiency.

In early 2021, this plan was abolished but will be partially implemented through other policies. These include the National Progress Plan (NPP) for 2021-30, the Plan on the implementation of the Government programme (under preparation), the National Energy and Climate Plan (NECP), the 2021-27 EU Investment Programme and the 2021-26 New Generation Lithuania recovery plan. The recovery plan includes a large number of measures to implement the NECP, including development of renewable energy sources, green transformation in transport and greening the buildings sector (Chapter 1).

Lithuania approved the National Strategy for Sustainable Development (NSSD) in 2003. It was updated in 2009, in line with the EU Sustainable Development Strategy (Government of Lithuania, 2018). The government established the National Commission for Sustainable Development in 2000 to assess progress in implementation. The Commission, headed by the Prime Minister, includes ministers and representatives of non-governmental organisations, business associations and research institutions. In 2018, the country presented its progress towards sustainable development in a voluntary national review on implementation of the 2030 Agenda (Government of Lithuania, 2018).

In 2020, the government adopted the NPP, the overarching framework to implement Agenda 2030 (Government of Lithuania, 2020). The NPP sets three horizontal principles: sustainable development, innovation and equal opportunities for all, as well as ten strategic goals (Table 3.1). With respect to the Sustainable Development Goals (SDGs), it recognises progress on SDG 15 (Life on land) but highlights challenges to SDG 10 (Reduced inequalities) and 13 (Climate action). Lithuania is on track to meet its climate change objectives for 2020 but risks missing its 2030 climate change targets (EC, 2020b). Achieving climate goals will be challenging as Lithuania will have to update the NECP and the NPP (which reiterates NECP objectives) to reflect the more stringent targets adopted by the European Union for 2030 to achieve carbon neutrality by 2050 (Chapter 1). Lithuania anticipates investment needs of EUR 14 billion to implement NECP measures, most of it coming from public funding.

The sheer number of concurrent strategies related to the environment in Lithuania is problematic. There are over 200 strategic planning documents with various time spans (Blöchliger and Strumskyte, 2021). Ensuring the consistency of all these strategies is a challenge. In principle, every agency is guided by overarching strategies, in particular by the NSSD and the Progress Strategy “Lithuania 2030”. However, the last update of the NSSD dates from 2011, i.e. before the UN Agenda 2030 was established in 2015. The voluntary national review on the implementation of the Agenda 2030 found that Lithuania’s strategic planning documents reflected most SDGs and their targets (UN, 2018). Although the review assessed progress on all SDGs, it did not identify the environment as a priority. Finally, the compatibility between the NSSD and Lithuania 2030 is unclear. In 2018, the government announced it would update Lithuania 2030 in line with Agenda 2030, but this work is still ongoing (Blöchliger and Strumskyte, 2021).

In 2020, the prime minister established a government working group to better co-ordinate the implementation of the NECP for 2021-30 and address topics on the EU’s Green Deal agenda. The working group includes vice ministers and other high-level representatives of key ministries in charge of NECP implementation. It usefully co-ordinates, among others, the transfer of NECP measures and indicators into national investment planning documents.

Total tax revenue equalled around 30% of GDP in 2019, well below the OECD average of around 34% the same year. Among European OECD countries, only Ireland, Switzerland and Turkey raised a lower amount of tax revenue compared to GDP in that year. The tax share compared to GDP has varied somewhat over the last decade. It was equal to the 2018 level between 2006 and 2009 but decreased to 27% compared to GDP in 2011-13. Since then, it has been gradually increasing again.

Revenues from environmentally related taxes (1.9% of GDP in 2019), mainly energy taxes, remain significantly below the OECD Europe average (2.3% of GDP) (OECD, 2021a). Taxes on transport are low and did not consider the environmental performance of vehicles until recently (EC, 2020a). The 2019 law on Motor Vehicle Registration Tax linked the rates to carbon dioxide (CO2) emissions and fuel type. However, these rates still do not provide a sufficient incentive to buy less-polluting cars, drive less or use public transport.

Excise duties for fuels have been increased; however, the difference between diesel and petrol remains high. The largest part of the transport fleet consists of almost 1.5 million passenger cars, 69% of which are diesel cars, with an average age of 16 years and average CO2 emissions of 160-170 g/km. (Government of Lithuania, 2019).

Lithuania also applies broad-based taxes on air and water pollution, covering a large number of pollutants. However, the tax rates applied are low compared to estimates of the social damages caused by the pollution. The system resembles the pollution taxes applied in the two other Baltic states, Estonia and Latvia, where the pollution taxes also provide limited incentives to reduce pollution levels and serve more to raise revenue.

The low overall tax share compared to GDP partly explains the relationship of revenues from environmentally related taxes and GDP. These revenues in Lithuania are lower compared to GDP than the average for OECD Europe. However, they are slightly higher than the average in these countries when compared to total tax revenues (Figure 3.1). As in most other OECD member countries, energy products – especially motor vehicle fuels – generate most of the revenues.

Like all EU member states, Lithuania levies taxes on motor vehicle fuels and other energy products, as required by the EU’s Energy Tax Directive (Official Journal of the European Union, 2003). Also, like in most other countries, the tax rate applied to diesel is much lower than the rate applied to petrol. For a long time, the tax rate on diesel equalled the minimum rate according to this directive of EUR 0.330 per litre. Conversely, the tax on unleaded petrol exceeded the somewhat higher minimum rate of EUR 0.359 per litre on this fuel. However, from 1 January 2018, the diesel tax rate was increased to EUR 0.347 per litre. Two years later, both tax rates were increased, reaching EUR 0.372 and EUR 0.466 per litre of fuel, respectively. In spite of these increases, the diesel tax rate remains significantly below the tax rate on petrol. This is detrimental to the environment because diesel combustion causes higher emissions of CO2 and local air pollutants per litre than petrol combustion. In one positive development, the tax rate on diesel in the agriculture sector almost tripled from 1 July 2015 to 1 January 2020, reaching EUR 0.06 per litre, still relatively low.

The country does not apply an explicit carbon tax. As illustrated in Figure 3.2, the effective carbon tax rates applied to energy products used for non-transport purposes are much lower than the tax rates applied in the transport sector. Taxes on transport fuels can also be used to (partly) address externalities to which non-transport fuel uses are not contributing (traffic accidents, road wear and tear, congestion, etc.). However, such considerations cannot explain the large differences in the effective carbon tax rates applied. This is particularly the case regarding coal, coke and lignite, for which tax rates have not increased in nominal terms since 1 January 2007.

The EU Emissions Trading System (ETS) covers use of energy products in large industry. In March 2021, the allowance price under the EU ETS equalled around EUR 35 per tonne of CO2 emitted.2 However, an increase in energy taxes would seem appropriate for non-transport uses not covered by the EU ETS. This is the case even if Figure 3.3 indicates that effective carbon taxes outside the transport sector are higher than in most other OECD members in Europe.

Lithuania also applies an excise duty on electricity, with a tax rate of EUR 0.52 per MWh for business uses and EUR 1.01 per MWh for non-business uses. These rates are just above the minimum tax rates set in the EU’s Energy Tax Directive. Given the EU ETS covers electricity generation, an increase in taxes on electricity use would only help reduce EU-wide CO2 emissions to a limited extent. Primarily it would shift emissions to elsewhere in this system.

The low tax rate for diesel compared to petrol has contributed to a rapid dieselisation of the vehicle fleet over the past decade. This, in turn, has a strong negative impact on emissions of local air pollutants, with negative consequences for human health. Between 2010 and 2019, the share of diesel-fuelled passenger vehicles jumped from 15.2% to 69.2% – the highest diesel share in all EU countries (Chapter 4) (EEA, 2019).Hence, despite its lower tax rate per litre, use of diesel raised more than four times as much revenue as petrol in 2019.

Lithuania is planning to eliminate the preferential excise tax rates on fossil fuels and to introduce a CO2 element into the excise tax (for non-ETS sectors) as of 2024 or 2025. The government also proposes to increase the excise tax rate for diesel fuel so that it exceeds the rate for petrol, as well as to significantly reduce the allowances for farmers to acquire diesel fuel at a preferential price. These would all be steps in the right direction.

As the road transport sector decarbonises over the medium to long term, revenues from motor vehicle fuels will decrease. A gradual shift from an energy-based approach towards distance-based transport taxes in Lithuania could establish a stable tax base in the road transport sector in the long run. A distance-based tax system could apply different tax rates depending on several key factors. These are where and when the driving takes place; the type of vehicle being driven; and different externalities (air pollution, road wear and tear, accidents, etc.) (Van Dender, 2019).

On 1 July 2020, the government introduced a new tax on the registration of passenger and light-duty vehicles. The tax rates are differentiated according to the vehicle’s CO2 emissions and type of fuel used. The tax only applies to vehicles that emit more than 130 grammes of CO2 per kilometre driven (g CO2/km). For vehicles with higher emissions, the tax rate increases in steps for each additional 10 g CO2/km. In each of the steps, the tax rate applied is twice as high for diesel vehicles as for petrol vehicles. The tax rate applied to vehicles driven by various forms of natural gas is 10% lower than the rates that apply to petrol vehicles.

The tax aims to encourage the purchase of vehicles with lower CO2 emissions within each fuel category without stimulating a shift from petrol to diesel vehicles (which would generate unwanted local air pollutants). Applying this tax to vehicles with CO2 emissions lower than 130 g CO2/km might make the policy more effective.

The tax rates applied are relatively low, especially for non-diesel vehicles. For diesel and petrol vehicles, the tax rate increases between each step by EUR 30 and EUR 15, respectively. If a new vehicle is driven 200 000 km over its lifetime, each step represents an increase of 2 tonnes in lifetime CO2 emissions. Thus, each additional tonne of CO2 emitted by diesel and petrol vehicles over their lifetimes is taxed at EUR 15 and EUR 7.50, respectively. These tax rates are low compared both to the prices for emission allowances in the EU ETS3 and to estimates of social costs of CO2 emissions.

Most passenger vehicles registered for the first time in Lithuania are second-hand cars, which might not be driven as much as 200 000 km on Lithuanian roads. If they are driven 100 000 km in Lithuania, each tonne of CO2 emitted over their remaining lifetime would be taxed twice as much as indicated above. This rate would be more or less on par with the current price of allowances in the EU ETS for diesel vehicles. However, according to the High-Level Commission on Carbon Pricing (2017), EUR 60 per tonne of CO2 is a midpoint estimate for the social cost of carbon (SCC) in 2020. More recently, Carleton and Greenstone (2021) indicate an SCC in 2020 of USD 125, or around EUR 100, per tonne of CO2 emitted. Hence, an increase in the tax rates from EUR 30 and EUR 15, respectively, could still be warranted.

The registration tax is applied to the first registration in Lithuania of each new or second-hand passenger car, as well as each time the vehicle changes hands. The latter provision is likely to be abandoned under the government’s tax reform proposal. Lithuania does not apply an annual tax on motor vehicle ownership but is considering such a tax for passenger cars. The annual tax rates would depend on the same factors as the registration tax and be calculated as a fraction of it. Ideally, they should also be a function of the distance driven each year.

Since 2000, Lithuania has also applied a “Eurovignette” system for heavy-duty vehicles. Rates depend on the vehicle type, the “Euro” class of the vehicle and the period of road use (a week, a month or a year). This system does partially address the externalities caused by the vehicles, but the rates do not vary with the number of kilometres driven.

Lithuania is preparing a new road charging system that will depend on the distance driven and on the Euro class of the vehicle. Testing is expected to begin in 2022 with implementation to follow a year later. The charges will apply only to motorways and highways, covering 1 700 km of roads. Charges will not vary with the time of day of driving, which would have helped reduce congestion and traffic accidents.

Income tax treatment of the benefits an employee receives from using a company-owned car for private purposes can have important impacts on the environment, congestion and road accidents (Harding, 2014; Roy, 2014). In Lithuania, in accordance with the provisions of the Law on Personal Income Tax, such benefits are considered to be the employee’s taxable income in kind. The in-kind benefits can be calculated in two ways:

  • Actual market price of a rented car. In this case, the benefits are assessed based on the period that the car is used for private purposes. When this period is less than a month, benefits are calculated in proportion to the period of use.

  • Actual market price of the car. In this case, there is no need to determine the amount of personal use as the employee’s in-kind benefits are calculated as a percentage of the price of the car. This percentage is 0.75 when the employer covers some or all fuel costs related to personal use. It is 0.70 when the employer does not cover any fuel costs related to personal use.

Thus, the taxation does not depend on the distance driven by the employee for private use. Moreover, the estimated benefits do not consider whether the employer covers other operating expenses than fuel. For the employee, the marginal cost of driving an additional kilometre with the car is therefore zero.4

The percentage gap between cost and benefit of a company car in Lithuania was among the highest in EU member states in 2015 (Princen, 2017). Therefore, Lithuania could consider an increase in taxation of such in-kind benefits.

The Law on Personal Income Tax provides some tax relief for commuting expenses. The employer may buy public transport tickets for employees directly from the transport company or offer compensation to employees. These tickets could be used for transport to or from work. The benefit received by the employee is not treated as taxable income, but employees have no way to deduct commuting expenses from their taxable income. The fact that commuting expenses are not deductible can help limit urban sprawl and does not discriminate against active modes of commuting, but a deduction for expenses related to public transport could be a possibility.

Taxation of employees’ free parking spaces depends on the circumstances. If a company pays for parking spaces for the use of specific employees, such in-kind benefits are treated as taxable employment income. However, if parking spaces rented by a company are used by employees randomly, such benefits will not usually be taxable.

Lithuania applies taxes on a wide range of air and water pollutants emitted from stationary sources by entities that must obtain a single-medium pollution permit or an integrated pollution prevention and control permit (Chapter 2). The air pollution tax covers around 300 different pollutants. Most are placed in four groups, with tax rates inversely proportionate to ambient air quality standards (concentration limits) for respective pollutants.

The tax rate for each group was increased significantly from 2020 to 2021. For some pollutants, such as particulate matter, heavy metals and volatile organic compounds, gradual increases in the tax rates are foreseen until 2023.

However, even the expected tax increases are low compared to the estimated social costs of different pollutants. Tax rates for SO2 and NOx emissions from stationary sources are set to remain stable at EUR 0.136 and EUR 0.256 per kg of pollutant, respectively. However, van Essen et al. (2019) indicate that the damage costs of these pollutants were EUR 6.4 and EUR 7.1 per kg emitted,5 respectively. Damage costs include health effects, crop loss, biodiversity loss and material damage from transport emissions of different air pollutants.

For ammonia emissions, the tax rate of EUR 0.004 per kg increased to EUR 0.02 per kg as of 2021. However, van Essen et al. (2019) suggest the damage costs of such emissions (from the transport sector) in Lithuania were EUR 7.9 per kg emitted. For particulate matter emitted from combustion, the tax rate of EUR 0.25 per kg emitted will increase gradually to EUR 0.45 per kg until 2023. For PM2.5, the cost of transport emissions in rural areas is EUR 38 per kg.6,7

The tax rates for water pollutants are set per tonne of the discharged pollutant, but an individual tax rate is set only for the main five pollutants: biological oxygen demand (BOD7), total nitrogen, total phosphorus, suspended matter, sulphates and chlorides. All other pollutants are included in a list of taxable substances, which is divided into five groups with a tax rate set for each group. The pollutants are allocated to these groups according to the harmfulness of the substance. The last amendments of these tax rates came into effect in January 2021. These changes increased rates for all the main pollutants except suspended matter; the increases were significant for chlorides and sulphates.

The tax includes possible relief for certain natural and legal persons. Such persons could receive a tax benefit if they pay out of their own funds to reduce the amount of pollutants discharged by at least 5% below the set maximum allowable pollution limits. However, the tax reduction is limited to the period of implementation of abatement measures, not to exceed three years.

Lithuania could consider reducing the number of pollutants covered for both air and water pollution taxes. At the same time, it could increase tax rates to better reflect the environmental damages of emissions or effluents.

Lithuania imposes taxes on surface water and groundwater extraction by households and businesses. The tax rates vary according to the intended use of water resources. This tax aims primarily to promote sustainable water use and cost recovery of water services. Water users extracting 10 m3 or more of groundwater per day, or using it for commercial purposes, are obliged to pay the tax. Since July 2020, a permit has been required for groundwater resources used in agriculture when the extracted amount reaches 100 m3 per day. Surface water use is taxed if the extracted amount is 100 m3 or more per day from a single surface water body. Lithuania plans to lower the tax exemption to the first 10 m3 of groundwater or surface water abstracted for commercial purposes (including agriculture) in 2024 and eliminate it completely in 2028.

The tax rate for groundwater used in households is EUR 0.03 per m3. The same rate applies in agricultural uses that exceed 100 m3 per day (there is no tax on smaller abstractions). When the groundwater is used for manufacturing purposes, the tax rate is EUR 0.1 per m3. Revenues from the tax have gradually increased, reaching around EUR 9 million in 2017. They go mostly to the national budget, but a small part is allocated to municipalities where resources are extracted.

Support to fossil fuels increased in the past decade (Figure 3.4) through exemptions from excise duties and reduced rates for specific fuels and usages. This support was equal to 34% of energy tax revenue in 2019. There are reductions in excise duties applicable for fuels used for business purposes and heating, and exemptions for air and water navigations, and some other uses. In 2015, exemptions for fuels used in agriculture and fishing were converted into reductions in the excise duty. Reduced excise duties on petroleum products used in agriculture and fisheries make the largest share of support to fossil fuels (29% in 2019), followed by exemptions for international aviation and shipping (27% in 2019). The government introduced a reduced excise duty tax rate for natural gas used as motor fuel in 2018.

At the end of 2019, the government approved EUR 275 million worth of state guarantees for a loan for the Klaipėda liquefied natural gas (LNG) terminal. This loan allowed purchase of an LNG ship-storage facility and the restructuring of the LNG terminal’s maintenance costs. Support for fossil fuels continues as Lithuania tries to ensure energy independence while reducing the spending of households on energy consumption. Additional support measures have been reported in the production and transportation sectors (OECD, 2020a).

Lithuania has committed to rationalise inefficient fossil fuel subsidies as part of SDG 12, which calls for ensuring sustainable consumption and production patterns. The NECP lists energy subsidies (although not related amounts) and envisages phasing out distortive tax incentives for fossil fuels by 2025, (Table 3.2). The government eliminated pollution tax reductions for operators engaged in several activities, including agriculture, from 2021. Other phase-outs should be implemented as planned.

Parliament adopted a law on the Innovation Promotion Fund in June 2020. The Fund will provide loans, guarantees and risk capital for start-ups and research and development (R&D) projects. The maximum subsidy per applicant is EUR 200 000, but the amount of the subsidy for a project may not exceed 70% of total eligible costs. The funding guidelines may set a lower amount.

Price premiums and priority access to the grid are in place for producers of electricity based on renewable sources. These incentives only apply where a producer participates in a technology-neutral auction and, if successful, offers the lowest price premium. The Law on Energy from Renewable Sources sets a target of at least 5 TWh of electricity generated from renewable sources in 2025. If the target is reached before 2025, with power plants constructed without support, further auctions will not be organised and the need for continued support will be assessed.

Private persons and firms can receive up to EUR 1 000 if they scrap old, highly polluting cars. Firms can only receive the support to help finance the purchase of electric vehicles (EVs). Private persons can use the grant to buy a more environmentally friendly vehicle than the one they scrap (electric or other non-diesel car first registered in 2013 or later, with CO2 emissions not higher than 130 g/km); to buy e-scooters; or to pay for alternative transport (bicycles, public transport). As of January 2021, more than 15 000 old vehicles had been scrapped.

In addition, households and firms can get a subsidy of EUR 5 000 for the purchase of a new EV. Households can also get a grant of EUR 2 500 to buy a second-hand EV. While such subsidies can help promote the sales of EVs, it would be costly to achieve a high share of such cars in the total vehicle fleet by almost exclusively relying on subsidies for the purchase and use of EVs.

Support is also available for renovation of private houses and for installation of renewable energy systems in such buildings. Such projects can receive grants of up to EUR 14 500; EUR 14.3 million was provided in 2020. There are also subsidies available to help replace old and polluting boilers in households with heat pumps or eco-design solid biofuel boilers. Such schemes could reduce energy use and improve the comfort of the houses covered. However, the promotion of solid biofuel boilers can have negative local air pollution impacts. In addition, ex post assessments of renovation support schemes in other countries have rarely found that net benefits to society have exceeded the costs due to unexpected changes in households’ behaviour and support for projects that would have been carried out anyway (so-called free-riding) (Nauleau, 2014; Alberini, Gans and Towe, 2016; Alberini, Bigano and Boeri, 2013).

Support is available in the Rural Development Programme (RDP) for farmers and agricultural firms with a view to maintain or restore biodiversity on agricultural land. Land users are supported under two conditions: they restore degraded habitats of protected species in their holdings; or they need to protect domestic animals against wolves.

Lithuania promotes connection to centralised wastewater networks to encourage environmentally friendly behaviour of companies and households. Funding, provided partially by the Environmental Investment Fund, is allocated to municipalities that connect the households to the infrastructure. Funding to develop centralised wastewater infrastructure is provided by the Water Management Fund as well.

The support under the EU’s Common Agricultural Policy (CAP) has led to a 20% increase in the area of agricultural land compared to the years since Lithuania’s accession to the European Union in 2004. Direct support for crop production has had the greatest negative impact on the achievement of climate goals. Support linked to the declared crop area has led to cultivation of organic soils; increased use of synthetic fertilisers and fossil fuels; and reduced grassland and pasture area. EU payments for farming in less favourable agriculture areas should be linked to key environmental targets that promote sustainable agriculture. These include targets that relate to soil, landscape and biodiversity concerns. Compensation with public funds for crop farms in cases of drought, rain and frost has discouraged crop farms from adopting their own mitigation and adaptation strategies related to climate change.

At the same time, farmers receive “green payments” of EUR 50/ha under the CAP (EUR 155 million/year) if they comply with three practices that go beyond statutory management requirements and good “agricultural and environmental condition of land” standards: crop diversification (to make the soil more resilient), conservation of permanent grassland (to support carbon sequestration and protect biodiversity) and delineation of ecological focus areas (to create habitats for biodiversity).

Many agricultural support measures were implemented under the 2014-20 and earlier RDPs, which Lithuanian authorities deem to have had a positive environmental impact. Lithuania devoted 37% of its RDP budget to the environment and climate, exceeding the 30% share imposed by the CAP. The main measures aimed at improving biodiversity, water and soil (EUR 100 million/year), sequestering carbon (EUR 6.4 million/year) and reducing GHG and ammonia emissions (EUR 1.3 million/year). In particular, the RDP promotes organic farming (EUR 32.7 million/year), "agri-environment-climate measures" (EUR 9.1 million/year), forest ecosystem services, including carbon sequestration (EUR 6 million/year), development of the Natura 2000 network and improvement of water quality (EUR 3 million/year). In addition, more than half of the environment and climate budget of the RDP concerns "areas facing natural constraints”, mainly wetlands (EUR 61 million/year).

RDP payments encourage farmers to implement environmentally friendly practices beyond those imposed by the CAP. The RDP approach is based on adoption of an agricultural practice known as design-based policy. According to Lithuanian authorities, the most positive policies for nature conservation are support to manage natural meadows and pastures. Conversely, policies that have a negative effect on nature conservation include support to renovate drainage systems in areas less favourable for intensive agriculture. In these latter cases, farmers would have been better off adapting to local natural conditions and applying nature-based solutions as much as possible (Science for Environment Policy, 2021). The financial support schemes have, among other things, led to extensive use of restored wetlands as hay meadows or pastures. Achieving cost-effectiveness in design-based policies requires knowledge of good practices specific to each environmental objective (climate, air, water, soil, biodiversity), precise targeting of local practices and information on abatement costs of each farm.

Most groundwater users must pay a water abstraction tax for any uses exceeding 10 m3 per day. However, farmers are only subject to the tax if they abstract more than 100 m3 per day (Section 3.3.6). This provision can cause higher water abstractions than what would be optimal from a social point of view. It is scheduled to be phased out gradually by 2028.

Stationary installations in Lithuania have been participating in the EU ETS since its establishment in 2005. Since 2012, EU ETS has included aircraft operators (Directive 2003/87/EC); it covers 87 installations and 2 aircraft operators in the country. Installations under the EU ETS need a greenhouse gas (GHG) emissions permit from the Environmental Protection Agency.

Lithuanian EU ETS operators emit about 30% of national GHG emissions. Most gases are emitted from three installations that produce ammonia and nitric acid, refined petroleum and cement. All operators of stationary installations and aircraft operators in the EU ETS must monitor and report their annual emissions in accordance with Commission Regulation (EU) No 601/2012. Third-party verifiers accredited by a national body must verify reported emissions. In Lithuania, foreign accreditation bodies report on emissions as the country has no verifiers accredited domestically.

As noted in Section 3.3.1, the price of emission allowances in the EU ETS was around EUR 35 per tonne of CO2 emitted in March 2021. As indicated, according to the High-Level Commission on Carbon Pricing (2017), EUR 60 per tonne of CO2 would be a midpoint estimate for the SCC in 2020. According to the Commission, EUR 60 would be a low-end estimate for the SCC in 2030. Carleton and Greenstone (2021) indicate the SCC was already around EUR 100 in 2020. Lithuania could consider gradually introducing a minimum (“floor”) carbon price to give firms more certainty about future costs of emitting GHGs. This, in turn, would stimulate innovation and adaptation. To that end, it could follow the example of the Netherlands (Box 3.1).

Local authorities apply user charges to water supply and sewage treatment, pursuant to the provisions of the Law on Drinking Water Supply and Waste Water Management. According to this law, water service prices should be non-discriminatory and comply with the polluter-pays principle.

The methodology for setting the prices of drinking water supply and wastewater treatment services provides for full cost recovery. For example, the price of water must include the following elements: materials, maintenance and consumables, fuel, electricity, heating, depreciation of fixed assets, wages, services and other contract work, the social security tax, the land tax, land rent, the real estate property tax, the natural resource tax, pollution taxes, payments to the guarantee fund and other expenses.

Waste management is subject to the polluter-pays principle. To that end, three parties could be responsible for waste management costs: by the original waste producer; the current or previous waste holders; or the producer or importer of the products from which the waste came. Municipalities organise municipal waste management systems and proper waste management services.

Cost recovery is one of the principles of municipal waste management pricing in Lithuania. This means that revenue generated from residents should cover the costs of the service. Payments for waste management services, required in all municipalities, consist of a fixed and a variable component. The fixed part covers all the necessary costs related to municipal waste management. This includes all administrative and long-term operation of infrastructure and the costs of renewal. The variable part can be set according to the number and size of mixed municipal waste containers used; the frequency of emptying them; or the weight of mixed municipal waste generated.

In addition, EU funds and the Waste Management Programme finance new waste collection measures, recycling infrastructure and its development to help municipalities to collect and recycle more waste. The programme is funded from revenues of the tax on environmentally harmful products and packaging (paid by producers and importers) and of the landfill tax. The funds finance the setting up, operation and development of waste management schemes, including investment projects. The programme also supports training, education and provision of information to the public and municipal staff related to waste management. It can also provide grants to municipalities and subsidies to economic entities to operate and develop waste management schemes.

Municipalities set charges for municipal waste services within limits established by the government. The draft Waste Management Law would cap charges for municipal waste collection services for each region. The charge promotes sorting of municipal waste at the source and reduction in waste sent to landfills. The draft National Waste Management Plan for 2021-27 requires municipalities to sort biodegradable municipal waste (green and food waste) and to collect it separately. This is in line with the EU requirement to collect bio-waste separately beginning in 2024. Municipalities in the Alytus region have started separate food waste collection, including collection from flats. According to regional authorities, the cost of municipal waste management did not increase as a result of these measures. Municipalities in other regions are still implementing this requirement.

Lithuania appears to have met its 2020 target of 50% for municipal waste recycling and preparation for reuse, but recycling of specific municipal waste streams remains a challenge (EC, 2020b). It introduced a landfill tax in 2016, with tax rates varying across different waste categories but has postponed planned increases of the tax multiple times. In 2020, the rate for non-hazardous waste remained at EUR 5 per tonne. This rate was not enough to divert waste from landfilling and reach post-2020 recycling and reuse and landfill reduction targets.

The rate is set to increase by EUR 5 per tonne each year starting from 2021 until it reaches EUR 25 per tonne in 2024. However, the government had proposed increasing the rate to EUR 50 per tonne. Even this rate would still be among the lowest in the European Union. In addition to discouraging recycling, such a low rate contributes to a relatively high share of waste sent to landfill (Figure 3.5) despite major improvements in the recycling rates over the last decade (see Chapter 1).

Lithuania reduced the tax rate for hazardous waste in 2021 from EUR 70.96 per tonne to EUR 50 per tonne of waste. The reduction intended to prevent hazardous waste from being declared as non-hazardous waste and landfilled at a lower tax rate. As the rate for hazardous waste will remain higher than for non-hazardous waste, such illegal behaviour could still take place.

Lithuania could consider a tax on incineration of waste to further promote reuse and recycling. The government, however, is concerned about incineration becoming too expensive an option compared to landfilling. It would rather subject incineration to price regulation while using other measures to encourage waste recovery.

Lithuania applies taxes on packaging that vary according to weight and materials. In 2021, for example, the tax rate is EUR 125 per tonne of paper and cardboard packaging, EUR 225 per tonne of glass packaging and EUR 618 per tonne of plastic and polyethylene terephthalate (PET) packaging. A higher rate of EUR 900 per tonne applies to composite packaging materials.

As of 2022, a new tax system that differentiates between recyclable and non-recyclable packaging will help further promote recycling. The tax rates for both categories in 2021 will be maintained or increased slightly for reusable packaging and recyclable one-way packaging. Conversely, the rate for non-recyclable one-way packaging will increase from 2022 to EUR 875 per tonne for plastic and PET, and to EUR 188 per tonne for paper and cardboard.

The country also applies taxes on certain products that harm the environment (e.g. in relation to waste handling). For example, in 2021, the tax rate for car and motorcycle tyres is EUR 300 per tonne; EUR 600 per tonne for other tyres weighing more than 3 kg; EUR 4 469 per tonne for batteries; and EUR 714 per tonne for oil and air filters for cars.

In 2016, Lithuania introduced a deposit-refund system for disposable beverage packaging. Producers and importers that supply alcoholic or alcohol-free beverages in disposable glass, plastic or metal containers that hold between 100 millilitres and 3 litres must participate in the system. Individuals who buy such beverage containers marked with the deposit symbol pay the deposit (EUR 0.10) at the point of sale. They can collect a refund after delivering the packaging to a reverse vending machine. In 2019, the system contributed to the collection of 92% of applicable packaging. While setting up such a system can be expensive, it can help reduce littering and contribute to reuse of containers or to recycling of the materials they contain.

A tax on the sale of timber is levied on state forest holders, and since 2015, on private forest holders. Further, there is a tax on the extraction of a number of mineral resources, including sand, peat, anhydrite, dolomite and amber. Recreational fishing has also been taxed since 2012. Fishing is, however, free for persons under 16 years of age.

Over the past decade, public (mostly local government) expenditure on environmental protection (current expenditure and investment) decreased from 1.3% of GDP in 2010 to 0.3% in 2018 (Figure 3.6). This amount was less than half the EU average of 0.8% (Eurostat, 2020). Government investment in wastewater infrastructure fell drastically, while investment in waste infrastructure has varied over the years. Ancillary producers’ investment in air and climate protection has also fluctuated.

Despite progress, the share of population connected to public sewage treatment plants remains below the OECD average. Early in 2017, 54 agglomerations were in breach of several provisions of the Urban Waste Water Treatment Directive (EC, 2019). According to OECD projections, compliance with EU legislation on water supply and sanitation will require a 40% increase in annual investment by 2030 (OECD, 2020b). Revenues from tariffs cover 70% of the costs of providing water services; the public budget subsidises about 30%.

The country is projected to face difficulties meeting financing requirements due to affordability issues and limited access to private funding (OECD, 2020b). For this reason, the following actions are needed:

  • Make the best use of assets and financial resources by further consolidating municipal and local services to improve operational efficiency and financial sustainability through economies of scale. As water users are reluctant to connect to central water supply and sanitation infrastructure, connection could be encouraged through charges.

  • Minimise future financing needs by ensuring that tariffs reflect the costs of service provision, with social measures to address affordability.

  • Harness additional sources of finance by, for example, tasking the Lithuanian Public Investment Development Agency to attract private investment.

Lithuania was allocated EUR 10 billion from the European Structural and Investment Funds (ESIF)8 for 2014-20, equivalent to 3.4% of annual GDP (Figure 3.7). By mid-2020, 94% of the total amount planned was allocated to specific projects. In all, 55% was spent, above the EU average of 47%. About 30% of the ESIF target environmental protection, resource efficiency and climate-related objectives, including in agriculture and fishing.

Investment needs in sustainable energy and climate policies are estimated at 3% of 2019 GDP annually over the next decade (EC, 2020a, Table 3.3). Lithuania has identified EU funds and other external sources (50%), state funding (21%) and the private sector (29%) as sources of funding. However, it can be challenging to mobilise private funding.

Lithuania aims for a 45% share of renewables in gross final energy consumption in 2030 (compared to 25.5% in 2019). This is significantly higher than the minimum share of 34% mandated by the European Union as part of its renewable energy target (EC, 2020b). The country intends to achieve this high share by organising technology-neutral auctions and through widespread deployment of small-scale renewable energy installations owned by individual energy consumers and communities. Regarding electricity generation, Lithuania aims to cover 45% of its electricity consumption from renewable energy sources, mostly from wind, by 2030. It also projects that at least 30% of consumers will generate electricity for their own use. In heating, the share of renewables is planned to rise from 47% to above 67% by 2030. The share of planned renewables in district heating for 2030 is 90%; district heating covers 53% of the country’s heat demand, rising to 76% in cities. In transport, Lithuania aims to reach a 15% share of renewables (EC, 2020b).

Government of Lithuania (2019) describes investment needs for the planned policies and measures but does not explain the methodology for assessing these needs (EC, 2020b). The overall investment figures add up to EUR 14.1 billion from 2021 to 2030. The European Commission estimates that investment needs correspond to average annual investments of around 3% of GDP (EC, 2020b). The need for public funding is estimated at EUR 9.8 billion from 2021 to 2030. National and municipal budgets, along with electricity and heat tariffs, are expected to cover about 21% of this funding. Meanwhile, EU funds, including the European Regional Development Fund, Cohesion Fund and Modernisation Fund, cover 50%. The difference between the total investment need and the estimated public funding is meant to be covered by private funds.

Lithuania’s innovation performance has improved but remains weak by EU standards (EC, 2020b). Investment in R&D is at 0.88% of GDP, well below the EU average. It has not yet recovered from a sharp drop in 2016. This is mostly because of the fall in public R&D intensity due to diminishing rates of investment from ESI Funds. Public R&D intensity went from 0.75% in 2015 to 0.57% in 2019. By contrast, business R&D expenditure has been growing steadily since the 2008 economic crisis, reaching 0.43% of GDP in 2019. The government’s goal of a 1.9% R&D intensity by 2020 will not be reached.

Removing barriers to innovation and to doing business will speed up the technological upgrading of the economy (EC, 2020b). Institutional constraints are limiting the growth of companies and inhibiting innovation. The predominant type of business in Lithuania is microenterprise, which is generally less innovative and productive than other firms. At the same time, R&D intensity is relatively low and spending remains inefficient and overly reliant on European funds. Likewise, public research and innovation are held back by a cumbersome institutional network and a shortage of qualified researchers. Businesses face difficulties accessing finance and international markets. In some sectors, notably energy, regulatory barriers hamper firm entry and competition. Another persistent obstacle to doing business is the insolvency framework, although the new insolvency law may improve the situation. Therefore, more action is required to stimulate productivity growth by improving the efficiency of public investment. Further action is also needed to improve the coherence of policies to support science-business co-operation and to consolidate research and innovation implementing agencies.

Lithuania is catching up with eco-innovation, ranking 18th among the 28 EU countries in 2019 (EC, 2020b). The government’s R&D budget on energy and environment decreased (Figure 3.8). The number of patent applications for environment-related technology remains extremely modest (OECD, 2021b) (Figure 3.9). Lithuania still lacks specific policies targeting eco-innovation despite recent progress in promoting circular economy (EC, 2020b).

The NECP presents a number of interventions under different programmes relevant for energy research and innovation (EC, 2020b). The cumulative budget of these programmes adds up to more than EUR 1 billion for 2018-23, including both national and EU public resources. Overall, the measures are fairly specific and the budget is considerable. However, they spread across many different “intervention areas”, which may reduce overall impact in the energy sector. The programmes and measures presented are consistent with the objectives of EU energy and climate policy (EC, 2020b). According to the NECP, Lithuania considers hydrogen as a promising area for energy innovation and an opportunity for acquiring new energy competences. It suggests that energy storage followed by hydrogen-based solutions could cover the increasing need for flexibility.

In September 2020, the Ministry of Energy adopted an action plan for strengthening the Lithuanian energy innovation ecosystem. The plan presents a comprehensive strategy for the energy sector innovation. It details actions to improve availability of funding, preparation of energy projects, investments in human resources in the private and public sector. It also boosts collaborative activities, including at EU level under the EU research frameworks (IEA, 2021).

Lithuania only partially addressed recommendations from the European Commission to clarify the national objectives and funding targets regarding research, innovation and competitiveness in the final NECP (EC, 2020b). The timeline and policies and support measures post-2023 remain to be developed.

Gross value added in the Lithuanian environmental goods and services sector increased by 69% in real terms between 2010 and 2018, while total employment in the sector increased by 56% (Eurostat, 2021). This means that gross value added per person employed increased considerably over this period. Lithuania anticipates the climate transition will have a positive employment impact, with a 1.56% annual increase in overall employment between 2020 and 2030 (EC, 2020b).

Just and fair transition aspects are well integrated into the NECP, which considers the circular economy’s social impact (by tackling energy poverty) and its effect on employment (EC, 2020b). However, the plan could still benefit from having a more specific list of measures and a timeline for their implementation.

Lithuania was less affected by the COVID-19 pandemic than most other OECD member countries. However, employment and incomes have been negatively affected. The government tries to stimulate the incomes of firms and households, and to promote new employment opportunities. In 2020, “green” firms could get higher support than other firms, but this measure has ended. While it can be “fair” to support the incomes of all those negatively affected by the pandemic, recovery measures could also promote a greener economy.

Lithuania does not have many highly polluting firms. However, the few exceptions are important cornerstones in their local communities. They could find it difficult to survive when, for example, carbon prices increase. Experiences from other countries indicate it can be difficult for such communities to establish alternative activities until the closure or restructuring of an unviable firm has been announced.


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← 1. Between 2010 and 2018, total population in Lithuania decreased by around 10%, from 3.1 million to 2.8 million, cf.

← 2. The allowance prices are not shown in Figure 3.2.

← 3. In March 2021, the allowance price was around EUR 35.

← 4. If an employee uses a car only to reach the place of work or to come home from the working place, such use of the car is not considered to be private purposes.

← 5. For NOx, this is the estimate van Essen et al. (2019) presents for transport emissions that occur in rural areas. Estimates for damage costs of NOx emissions from transport occurring in cities are almost twice as high.

← 6. For PM2.5 emissions from the transport sector in metropole areas, van Essen et al. (2019) estimate the damage costs to be EUR 300 per kg emitted.

← 7. An earlier paper, Štreimikienė and Ališauskaitė-Šeškienė (2016), presents estimates of the social cost of emissions from the energy sector, based on the so-called ExternE project of the European Commission. Among other areas, that paper indicates that human health-related external costs of PM2.5 and NOx emissions from the energy sector in Lithuania were around EUR 11 and EUR 4 per kg of emission in 2010, respectively.

← 8. European Regional Development Fund, Cohesion Fund, European Agricultural Fund for Rural Development, European Social Fund, European Maritime and Fisheries Fund and Youth Employment Initiative, including national co-financing.

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