The Baltic states' economies are currently in a transitional phase in meeting climate-neutrality requirements, in which ambitious investment in renewable energy is running up against structural challenges around labour, financing and the slow pace of decarbonisation. While the region has shown resilience against external shocks and continues to post moderate GDP growth in 2026, meeting the European Union's Green Deal targets calls for immediate, targeted solutions.
Key challenges
Heavy dependence on fossil fuels and the burden of subsidies persist. Politicians' efforts to soften the effects of the energy crisis by subsidising fossil fuels or introducing price caps slow the shift to green energy in the long run and keep emissions high. The Baltic states also face a shortage of skilled “green workforce” – the economic transformation requires specific specialists. The unfavourable demographic situation and the mismatch between skills and market demand are among the biggest obstacles to Baltic development. Innovation and private investment levels also remain low: although investment is growing, the region still lacks close cooperation between researchers and businesses, as well as effective local capital-market instruments. In the Baltics, the transport and housing sectors – particularly the slow pace of building insulation – still account for a large share of emissions, a point criticised by international organisations such as the OECD.
Proposed solutions
Governments need to phase out fossil-fuel tax breaks. Financial support should be directed specifically at households at risk of energy poverty, to improve energy efficiency. Targeted state and university support is needed to retrain the workforce for the green economy, providing training in areas such as renewable energy and energy efficiency. The range of green financial instruments needs to be expanded in cooperation with banks and public programmes. The Baltic states need to build a joint innovation ecosystem to turn research projects into high-value-added export products. Investment needs to be accelerated in safe cycling infrastructure, public transport and mass insulation of multi-apartment buildings, which delivers an immediate reduction in energy consumption and emissions.
Latvia, Lithuania and Estonia compared on green investment
The Baltic states are pursuing different strategies, which is producing uneven progress towards climate neutrality.
Lithuania is unquestionably the leader in renewable energy. It currently leads the region in the build-out of wind and solar capacity, having successfully introduced a “prosumer” model with generous subsidies for households. Lithuania is also actively pushing forward the first Baltic Sea offshore wind farm project.
Estonia, by contrast, has historically had the highest per-capita emissions in the region, having long relied on oil shale. It is now making a rapid transition, investing in green hydrogen, energy storage systems and cleantech start-ups.
Latvia, compared with its neighbours, has strong potential in hydropower and biomass. It has a historically green electricity-generation profile thanks to the cascade of hydroelectric plants on the Daugava. However, investment in new wind farms – such as “Latvijas vēja parki” – and in electrifying the transport sector has moved more slowly than in the neighbouring countries. The pace of building insulation remains a major challenge.
Available EU funding instruments for corporate decarbonisation. Businesses in the Baltics currently have access to substantial financial support from several European Union sources. The Recovery and Resilience Facility is a highly significant source of support for digitalisation and energy efficiency. Companies can receive co-financing to replace production equipment with more efficient models, install solar panels for self-consumption, and automate processes. The EU Cohesion Policy 2021-2027 includes programmes administered by local agencies – in Latvia, LIAA and ALTUM. “Green” loans with a capital rebate are available, under which part of the loan is written off once energy-efficiency targets are met. The Just Transition Fund is specifically targeted at the regions most affected by the transition, such as Ida-Viru County in Estonia, supporting the creation of new, environmentally friendly jobs and business diversification. The Innovation Fund, meanwhile, is an EU-wide programme for large-scale innovative projects aimed at low-carbon technologies and industrial decarbonisation.
Retraining programmes for the labour market
To address the skills shortage, governments are running targeted adult-education programmes. Initiatives by the state employment agencies across the Baltics offer lifelong-learning vouchers to employed and unemployed people alike. Priority is given to programmes linked to digital and green skills, such as smart energy-system management and sustainable construction. Leading Baltic universities – RTU, TalTech and Vilnius University – offer short, intensive courses for engineers and managers on the circular economy, implementing ESG (environmental, social and governance) criteria, and energy auditing. In cooperation with construction and energy associations, training is organised for installers and technicians working with heat pumps, solar power plants and building-insulation materials.
The forestry sector in the Baltics currently finds itself caught in the crossfire between the European Union's biodiversity targets and the need to preserve economic competitiveness. From the standpoint of both policymakers and forestry businesses, climate neutrality is changing the rules of the game — from plain timber extraction to a high-value-added bioeconomy.
Balancing nature protection and the economy
Policymakers' main task is to meet European climate targets without undermining the region's core export industries. Meeting the Land Use, Land-Use Change and Forestry (LULUCF) targets, however, is the most problematic area. The Baltic states are bound by strict CO₂-sequestration targets for the forestry and agricultural land sectors. As stands age, natural sequestration declines, which is pushing governments towards politically restricting harvest volumes or creating incentives for carbon farming. Following the initial debates and implementation phases, the much-discussed EU Deforestation Regulation, or EUDR, has become a reality. The regulation's requirements for full timber traceability – geolocation data – have now become routine. At the policy level, it is important to provide centralised, digitalised state registers to ease the administrative burden on businesses. Policymakers are also actively working on regulation for “carbon farming”. Mechanisms are being developed to pay landowners for carbon sequestration – for example, by growing more productive stands or restoring peatlands – rather than only for timber volume.
From raw material to carbon product
For businesses, climate neutrality is no longer “green rhetoric” but a precondition for obtaining financing and holding on to market share. Exporting round timber or wood chips yields low margins and a high transport-emissions footprint. Businesses are investing in deep wood processing – glued timber structures, CLT panels for construction, wood chemistry and insulation materials that “lock in” CO₂ for the long term. Latvian businesses are actively drawing on ALTUM and LIAA support programmes for energy efficiency in production, for example, more modern and efficient timber-drying kilns and local solar-park solutions for production sites. The shift of harvesting machinery and transport to alternative fuels and hybrid technology is also becoming a requirement in major procurement tenders.
Buyers in Scandinavia and Western Europe are demanding precise data on a product's life-cycle emissions – so-called EPD (Environmental Product Declaration) statements. Companies unable to prove their sustainability digitally are losing export markets.
Where both sides – policymakers and businesses – need to work together
Timber construction needs to be promoted far more actively. Policymakers need to change building regulations and public-procurement conditions to set a minimum share of wood materials in public buildings. This would guarantee businesses a domestic market and help the state meet its climate targets. State support is needed for pilot projects that produce biochemicals from wood by-products, replacing fossil-based plastics and adhesives. Targeted stand regeneration needs to be encouraged. State programmes for breeding quality planting stock ensure that future forests grow faster and sequester more CO₂, which benefits both the state's balance sheet and future forestry businesses.
Lithuania's approach – mandatory bio-resource quotas in the public sector
Lithuania's strategy is built on direct, aggressive state intervention in the market. Policymakers have introduced a legal requirement for all new public-procurement projects to ensure that at least half of the materials used in a building are of organic origin. This 50% quota counts not only load-bearing timber – solid-wood CLT or glued GLT beams – but also other bio-resources, including timber facade elements, window frames and even thermal-insulation materials based on wood or hemp fibre.
From a forestry business's point of view, this kind of regulation eliminates the biggest investment risk – a lack of market demand. Businesses can safely invest in expensive production lines and modernisation, because state and municipal orders for schools, kindergartens and administrative buildings will guarantee a stable domestic market. Lithuania has also deliberately overhauled its national building codes, easing fire-safety requirements and height restrictions for timber-framed buildings, which had long been the main bureaucratic obstacle across the Baltics.
Estonia's approach – digital carbon accounting and nationwide flagship projects
Estonia is placing the emphasis on data digitalisation and engineering readiness at scale. Estonian policymakers have not simply set percentage limits, but have fully integrated building registers with automated life-cycle assessment (LCA) systems. To obtain a building permit or win a public tender, a company must digitally demonstrate the building's carbon footprint over its entire lifespan. This automatically favours timber, which sequesters CO₂ as it grows and then locks it into the building's structure.
To encourage the private sector and demonstrate the viability of such a policy, the Estonian state itself finances ambitious flagship projects, the largest of which is the solid-timber office and public complex Loodusmaja – the Nature House – in Tallinn. The project serves as a platform where the local forestry industry, working with scientists, tests the latest materials and joints in a real-world setting. Thanks to this state pressure and support, Estonian businesses have become the most digitally advanced in the region – Environmental Product Declarations (EPDs) are already available for their products as standard, opening doors to the most demanding markets in Western Europe and Scandinavia, where low emission levels are a mandatory precondition.
To fold Estonia's and Lithuania's successful experience into Latvian legislation and forestry practice, policymakers and forestry businesses need to act along three parallel tracks – through public-procurement regulation, further modernisation of building codes, and the rollout of digital tools.
Amendments to green public-procurement legislation
The most effective way to adopt Lithuania's model is to make targeted amendments to Cabinet of Ministers Regulation No. 353, “Requirements for Green Public Procurement and the Procedure for Its Application”.
The legislation needs to require that in state- and municipally funded building or reconstruction projects – schools, kindergartens, administrative centres – a set percentage of the load-bearing structures or of total material volume, initially 20-30% and gradually rising to 50%, must come from renewable bio-resources. The regulation must clearly define that this share includes not only solid timber – CLT, GLT – but also local thermal-insulation materials and finishing materials. This would create an immediate, predictable domestic market for Latvian producers.
Adapting Latvia's building codes for hybrid and high-rise construction
Although Latvia has recently made significant improvements to its fire-safety regulations (LBN 201-15), this is not enough to compete on a large scale with its neighbours.
Under the oversight of the Ministry of Economics, policymakers need to fully lift the historical, unjustifiably strict limits on the height and number of storeys for timber structures, where a business can demonstrate the material's fire resistance through engineering analysis and testing. Working with the Forest and Wood Products Research and Development Institute (MeKA), the state needs to include pre-approved, standard timber-structure connection details in the building-code annexes. This would help designers and architects, who often shy away from choosing timber because of bureaucratic obstacles and the complexity of the expert assessments involved.
Integrating the digital construction system with carbon accounting
Following Estonia's digital approach, Latvia needs to use its existing Construction Information System (BIS) to automate CO₂ accounting. A Life-Cycle Assessment (LCA) module needs to be built, and a mandatory digital calculator needs to be built into BIS that automatically computes a building's environmental impact over its materials' entire lifespan. As designers enter data on the concrete, steel or timber used, the building's carbon footprint would be visible immediately.
A National Environmental Product Declaration (EPD) database needs to be established. The state needs to legally recognise and promote EPD certification for local producers. Once a Latvian forestry company's product is registered in this database, the BIS system would automatically grant it “green points”, or a procurement advantage, since timber serves as a carbon store.