Latvia needs to plan the use of the Emission Allowance Auction Instrument (EKII) funds in a more targeted way, the State Audit Office (SAO) has concluded in an audit.
According to the information provided by the SAO in the audit “Are the funds of the Emission Allowance Auction Instrument planned in a cost-effective manner?” revealed that greenhouse gas (GHG) emission reductions are not being achieved with the least financial effort. Moreover, the available funding is not being used to mitigate climate change for a long time, with already 320 million euros accumulated by the end of 2023, thus not contributing to Latvia’s GHG emission reduction targets.
An emission allowance is a licence to emit GHGs granted to companies and countries by the European Union (EU) to limit emissions and fight climate change. The EKII, in turn, is the money raised from auctioning the emission allowances allocated to Latvia, which is to be channelled into measures to help meet climate targets.
According to the SAO, a comparison of the cost-effectiveness of all eight EKII project tenders implemented so far with the cost-effectiveness of other mitigation measures shows that all EKII project tenders implemented so far have relatively low cost-effectiveness – they are 14 to 88 times more expensive than other mitigation measures. Moreover, the future measures to be co-financed from EKII funds have also been identified in the National Energy and Climate Plan updated by the Ministry of Climate and Energy (MoCE) in 2024 without a cost-effectiveness assessment.
Inga Vilka, Member of the Council of the State Audit Office, points out that climate policy objectives cannot be achieved without financial investments, but at the same time it is necessary to be aware that financial resources are limited and therefore it is necessary to assess the optimal solutions for their investment. She points out that already seven years ago, when assessing the use of funds earmarked for climate change mitigation under the Climate Change Financial Instrument (CCFI) and the EKII, the SAO concluded that they were being invested in inefficient projects.
“The recommendation made at the time to prioritise measures based on cost-effectiveness calculations was not implemented. Unfortunately, past experience has not been taken into account and, consequently, has not been used to improve operational efficiency. This audit also shows that data-driven selection of EKII measures is still not done,” concludes Vilka.
It also found that available EKII funds are not being used in a timely manner to implement climate change mitigation measures.
By the end of 2023, only 34% of the 489 million euros available for the EKII in Latvia – or 169 million euros – have been spent. Faster implementation of GHG emission reduction measures is more cost-effective, but EKII funding is only used within four to six years after it is received, the SAO points out.
The auditors estimate that the continued non-utilisation of the available EKII funding has already reduced its value by 70 million euros by the end of 2023. This misses the opportunity to implement measures that would reduce GHG emissions by an average of 9 012 tonnes per year. Moreover, only 86 million euro or 51% of the EKII funding has been used to implement GHG emission reduction measures, while 76 million euro or 45% has been used to support electricity end-users, a measure that has not led to GHG emission reductions.
MoCE has pointed to limited capacity to prepare new calls for proposals, which hampers the use of EKII funding. However, it has not offered ministries the possibility to use the available EKII funding and to participate, although they have indicated the need for funding and their readiness to engage in the development of new project tender regulations for the areas under their responsibility, the SAO notes.
The audit concludes that spending on the administration of the EKII is increasing, but performance indicators are not changing. Despite the fact that the rate of utilisation of EKII funding in Latvia is four times lower than in the EU Member States as a whole, EKII administration expenditure has almost tripled to 3.1 million euro in 2023 compared to 2022. In 2024, this expenditure is 54% higher than in 2023, at 4.7 million euro.
The SAO notes that from 2023, 26 positions are to be funded for the EKII administration, which is ten more than in 2022. This funding is used not only for staff directly related to climate action, but also for 100% of other MoCE staff, such as the Secretary of State, the Minister’s Chief of Staff and the Parliamentary Secretary. In view of the creation of 21 new positions in the MoEC this year, supported by the Cabinet, it is expected that the remuneration expenditure financed by the EKII will continue to increase, as well as the overall administrative expenditure.
The SAO also points out that there is a lack of transparency and public involvement in the use of EKII funds. Although the MoCE is required to submit an information report to the Cabinet of Ministers by the 1st of April each year on the use of auction proceeds in the previous year, including the GHG emission reductions achieved, the information report for 2023 had not yet been submitted by November. However, the reports from previous years do not provide complete information. For example, the 2022 report does not provide information on the 76 million euros or 82% of the 2022 EKII funding spent on a one-off measure to support electricity end-users, and no report provides information on the available EKII balance, the SAO notes.
The auditors consider that public involvement in improving the effectiveness of the EKII is formal. Although an EKII Advisory Board has been set up to promote transparency in the use of EKII funds and to involve public representatives in monitoring the management and implementation of the EKII, it has not been convened for more than six years. It can therefore be concluded that decisions on the use of EKII funding have been taken without public participation, without ensuring a balance of different interests in the decision-making process.
The audit made four recommendations to MoCE. One recommendation aims to ensure that all EKII activities are selected on the basis of cost-effectiveness calculations. The second recommendation aims at improving the cost-effectiveness of the prioritised EKII actions by at least 30% compared to the current cost-effectiveness. The third recommendation aims at ensuring that the amount of administrative expenditure to be paid from EKII funding does not exceed 7% of the annual funding disbursed in EKII calls for proposals. The auditors recommend that the funds raised from the auctioning of emission allowances should be spent within an average period of three years.
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Publish date : 2024-11-12 16:00:00
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