„Fit for 55“ is a massive 12,000-page legislative proposal the most important provisions of which that have an effect on the activities of VKG are the following:

• Changes in the emission trading system (ETS) - the emission trading system continues to be the main tool for implementing Europe’s green policy and is based on the taxation of CO₂emissions of selected economic sectors. Estonia’s shale oil production is also included among these sectors that have to pay tax into the European Union treasury for CO₂ emissions. As shale oil competes with other oil products in the global market, the establishment of a tax burden on carbon would render shale oil unable to compete compared to producers outside Europe who do not have to pay tax for carbon emissions. Shale oil production is therefore included among production sectors with a risk of carbon leaks and producers are issued free of charge CO₂ quotas in order to maintain their competitiveness. The proportion of the free of charge quotas varies from year to year and as the average over the past four years, VKG has been issued free of charge quotas in the extent of about 80% of the emissions. This means that 20% of the emissions have to be covered with quotas bought from the market. Considering the CO₂ price rise that we saw in 2021, VKG’s annual tax burden has risen from the former 8 million euros to 20 million euros and there is absolutely no clarity as to how rapidly this will continue to grow in the future. The steep CO₂ price increase was caused by the proposal made by the European Commission in the Fit for 55 package to reduce the overall amount of the free of charge quotas to be issued in 2021–2030 by the average of 4.2% a year. The reduction of the quota supply is supposed to take the CO₂ price up and that in turn is supposed to reduce emissions, as companies would be looking for solutions to reduce the CO₂ expenses or, if they cannot do that, the weaker ones will die out and the demand will decrease as a result. The presentation of the proposals caused CO₂ price to rise rapidly in 2021 and this was taken advantage of by speculators who discovered that it is an investment opportunity with a guaranteed yield. In total, the CO₂ price nearly tripled in 2021, rising from 32 euros/t at the beginning of January to 89 euros/t during the cold period at the beginning of December. This increase is multiple times more rapid than any impact assessment or analysts could forecast even at the beginning of the year. In theory, the rapid CO₂ price increase should have steeply reduced emissions, but in reality the emissions grew everywhere in Europe in 2021 due to the economic activity recovering after the corona crisis. It can therefore be concluded that the current ETS does not fulfil its purpose, because emissions grow despite the CO₂ price rise. In addition, the unpredictability of the ETS means that companies lack clarity as to how quickly the CO₂ price rise will render them insolvent and whether it is worth making any investments into reducing their footprint. Thirdly, the steep increase in the CO₂ tax burden has through soaring energy prices reached the end consumers who suffer the most because of that, while speculators and politicians who distribute the collected money at their own discretion reap the profits. As the current system has turned out to be unpredictable and uncontrollable, VKG made a proposal to the Government of the Republic to replace the current complex ETS with a simple transparent and predictable carbon tax which would allow companies to assess the feasibility of investments into reducing the CO₂ footprint and would not allow speculators to get rich on account of the green policy. The Government understands the problems, but admits that it is not able to control the process, as the steering wheel has been given to the European Commission.
• Increased CO₂ removal targets - in addition to the reduction of emissions, a proposal was also made to increase the net removal of greenhouse gases (GHG) in the EU’s forestry and land use sectors (LULUCF) to at least 310 million tonnes of CO₂ equivalent by 2030. Estonia received a proposal to increase the net removal of GHG from the former 0.7 million tonnes to 2.5 million tonnes by 2030. Such a goal is clearly disproportionate for Estonia and would mean a rapid contraction of the Estonian forestry sector by at least a third. This proposal influences VKG through the proposed bioproducts production complex investment project. Although the said production complex would entail capturing 0,46 million tonnes of CO₂ equivalent into bioproducts, making the investment would be impossible if a decision is made to abruptly reduce felling volumes in order to achieve short-term goals by 2030, as there would be no raw material in the market to supply the production complex. Considering the overall wellbeing of the Estonian nation, VKG has made a proposal to the Government of the Republic to reject the GHG net removal targets for 2030 that have been assigned to Estonia.

„The Fit for 55“ package also contained many other proposals that would have a direct or indirect effect on the activities of VKG (among other things, the replacement of free of charge quotas with a carbon border adjustment mechanism, more economic fuels in marine transport, etc.). The impact of those proposals on VKG is currently difficult to assess, but it is clear that those proposals rather impair the competitiveness of the Estonian shale oil industry on the global fuel market.

As a part of the legislative package, a proposal for the wording of the LULUCF Regulation is made, obligating Estonia to bind 2.5 million tonnes of CO₂ equivalent in the forestry and land use sectors by 2030. This goal is clearly disproportionate for Estonia and would mean the contraction of the Estonian forestry sector by more than a half. The forest management and environmental protection objectives would in essence be replaced by the objective of achieving the CO₂ targets.

In the coming years, VKG is planning to invest in a bioproducts production complex which will entail binding 0.46 million tonnes of CO₂ equivalent into products. The planned project cannot be implemented, if it is not possible to valorise Estonia’s renewable forest resource due to the fulfilment of climate goals. VKG has made a proposal to the Government of the Republic to reject the wording of the LULUCF obligation to be placed on Estonia and to support the management of Estonian forests, aiming at a reasonable management of forests.

The Riigikogu approved the fundamental positions of the Government of the Republic for negotiating the package only at the beginning of 2022. Regrettably, the positions of the Government of the Republic did not take into account the proposals made by VKG and the Estonian Chemical Industry Association and other professional associations and primarily the need to shape Estonia’s positions on the basis of a thorough impact assessment and substantive inclusion. The Fit for 55 negotiations will last until the second half of 2023. The plan is to achieve political agreements on Fit for 55 at the EU Council level in the summer of 2022