On 24 April 2023 the OECD published a report outlining the reform options for Lithuanian climate neutrality by 2050. The report sets out the policy options that could be followed by Lithuania to reach its target for climate neutrality, taking account of the current and planned climate policies. The paper examines the options and assesses their potential for achieving the climate goals.

After presenting the outcome of the modelling performed to assess the effectiveness of various policy options, the paper presents an analysis of carbon pricing and the role of innovation, assessing the financial requirements for the transition to net zero, and looking at the implications of carbon pricing for equality.

As part of its recommendations the report highlights the importance of setting price signals at the same time as supporting innovation; and looks at revenue recycling options that can ease concerns about inequality.

The report notes that Lithuania already has a comprehensive policy mix covering the most important economic sectors, and there are economic incentives for decarbonising key activities, with tight regulations and capacity building measures. There is also a key policy proposal to increase excise duties and to introduce a carbon price in 2025.

The report indicates that current policies are not sufficient to achieve the 2030 climate policy goals. Although a high carbon price trajectory would decrease emissions significantly, it would not be enough to achieve net-zero emissions by 2050. The emissions in the transport and industry sectors are difficult to control even with high carbon prices. Innovation and technology diffusion are therefore also important for these sectors and for the agriculture sector where other greenhouse gases are emitted in addition to carbon dioxide.

More targeted support for innovation and for technology adoption would address emissions in transport and industry. It is also important to enhance carbon sinks and reduce agriculture emissions.

The proposed draft law on excise duties would increase the coverage and rates of fuel excise taxes and introduce a carbon tax component, but the carbon tax component would not apply to installations subject to the EU emissions trading system (ETS); and would therefore not address some of the potential issues such as price volatility. A carbon levy with a pre-determined path complementing EU ETS prices would be clearer for business.

The report notes that the impact of carbon prices on household living costs would be significant, but much smaller than the effects caused by the high levels of inflation currently experienced in OECD countries. The effects of the carbon pricing would generally be similar across income groups.

The revenues from carbon taxes would be significant, amounting to around 1.3 % of GDP. These could be directed back to households as part of a broader policy package. This revenue recycling could be used to achieve the desired distributional outcomes.