The State Audit Office of Latvia has concluded after the audit that use of Emission Allowance Auction Instrument (EAAI) funds is not planned in a cost-effective manner, as the reduction of greenhouse gas (GHG) emissions does not occur with the least use of financial funds. In addition, the available funding has not been spent for climate change mitigation for a long time, having already accumulated 320 million euros by the end of 2023, thus not contributing to the achievement of the GHG emissions reduction targets set for Latvia.
BRIEFLY
- Latvia is committed to reducing GHG emissions and achieving climate neutrality.
- The EAAI is a financial instrument aimed solely at achieving climate policy objectives.
- The EAAI funds have been available to Latvia since 2012. By the beginning of 2024, 489 million euros have been received and 169 million euros have been spent.
- Until the end of 2022, the Ministry of Environmental Protection and Regional Development was responsible for the administration of EAAI whereas the Ministry of Climate and Energy is responsible for EAAI since 2023.
- All EAAI project tenders implemented so far are of relatively low cost efficiency. In addition, due to long-term non-use of the available EAAI funding, the value of the funds has already decreased by 70 million euros.
- The administrative expenses financed by EAAI increase every year. The EAAI administration expenses were 3 million euros in 2023 but they are planned to be 4.7 million euros in 2024.
The Emission Allowance Auction Instrument is the funds obtained from the auctioning of emission allowances allocated to Latvia, which can be channelled to measures to promote the achievement of climate targets. An emission allowance is an allowance to emit GHGs that is granted to businesses and countries by the European Union to limit emissions and fight climate change.
“Climate policy goals cannot be achieved without financial investments. At the same time, one should be aware that financial resources are limited and therefore it is necessary to evaluate the optimal solutions for investing resources. Already when evaluating the use of funds intended for climate change mitigation within the framework of the Climate Change Financial Instrument (CCFI) and EAAI seven years ago, we concluded that they were invested in ineffective projects. The recommendation given then on the determination of priority measures to be supported based on cost-effectiveness calculations was not implemented. Unfortunately, previous experience has not been taken into account and has not been used to increase operational effectiveness accordingly. This audit also shows that there is still no data-based selection of EAAI measures,” indicated Ms Inga Vilka, Council Member of the State Audit Office of Latvia.
The implemented EAAI project tenders have not been cost-effective. In 2017, the performance audit of the State Audit Office of Latvia concluded that the first two EAAI project tenders were several times less cost-effective than the average of all previously implemented CCFI project tenders. While auditing, we found that despite the irregularities highlighted in the previous audit, two more similar project tenders were later announced whose cost effectiveness was seven times lower on average than the measures criticized in the previous audit. Comparing the cost-effectiveness of all eight EAAI project tenders implemented so far with the cost-effectiveness of other climate change mitigation measures, we see that all EAAI project tenders implemented so far have relatively low cost-effectiveness because they are from 14 up to 88 times more expensive than other climate change mitigation measures. Moreover, the future measures to be co-financed from EAAI funds are also determined in the National Energy and Climate Plan updated last year by the Ministry of Climate and Energy without an evaluation of their cost effectiveness.
The available EAAI funds are not used in time for the implementation of climate change mitigation measures. By the end of 2023, only 34% or 169 million euros were spent out of available EAAI funding of 489 million euros in Latvia. Faster implementation of GHG emission reduction measures is more cost-effective, however EAAI funding is only used within four to six years of receipt. The estimates of the State Audit Office of Latvia show that if the available EAAI funding is not used for a long time, its value has already decreased by 70 million euros by the end of 2023. Thus, the opportunity to implement measures that would reduce GHG emissions by an average of 9,012 tons per year has not been used. In addition, only 86 million euros or 51% of the spent EAAI funding have been spent for the implementation of measures to reduce GHG emissions while 76 million euros or 45% have been used to support end-users of electricity, that is, a measure that has not resulted in a reduction of GHG emissions.
The Ministry of Climate and Energy has indicated a limited capacity for the preparation of tenders for new projects which hinders the use of EAAI funding. However, it has not offered line ministries the opportunity to use the available EAAI funding and get involved, even though they have indicated the need for funding and their willingness to get involved in the development of new project tender regulations for the areas under their responsibility.
Expenses for EAAI administration are increasing, but the performance indicators are not changing. Despite the fact that the level of EAAI funding absorption in Latvia is four times lower than in the EU Member States as a whole, expenses to administer EAAI have increased in recent years by reaching 3.1 million euros in 2023 which is almost triple as much compared to 2022, but they are 54% higher in 2024 compared to 2023 and total to 4.7 million euros.
One should add that the funding of the EAAI administration is intended for 10 positions more than in 2022 from 2023. From this funding, remuneration is paid both to the employees directly related to climate and 100% to other employees of the Ministry of Climate and Energy, such as a State Secretary, a Head of the Minister’s office and a Parliamentary Secretary. Taking into account the establishment of 21 new positions in the Ministry of Climate and Energy supported by the Cabinet of Ministers this year, it is expected that the remuneration expenses financed from EAAI, as well as the total administration expenses will continue to increase.
There is a lack of transparency and public involvement. Although the Ministry of Climate and Energy must submit an informative report to the Cabinet of Ministers by April 1 every year on the use of auction revenues in the previous year, including the achieved reduction in GHG emissions, the informative report for 2023 was not submitted by November. In their turn, the reports of previous years do not provide complete information. For example, the report for 2022 does not provide information about 76 million euros or 82% of the EAAI funding spent in 2022 for support to electricity end-users in a one-time measure. In addition, no report contains information on the available EAAI balance.
Public involvement in improving the effectiveness of EAAI is formal. Although an EAAI Advisory Board has been established whose purpose is to facilitate the transparency of the use of EAAI funds and to involve public representatives in monitoring the management and implementation of EAAI, it has not been convened for more than six years. Therefore, one can conclude that decisions on the use of EAAI funding have been made without public participation without ensuring the balance of various interests in the decision-making process.
Recommendations of the State Audit Office of Latvia #PēcRevīzijas
After the audit, there were four recommendations issued to the Ministry of Climate and Energy, whose implementation will provide that (1) all EAAI measures will be selected based on cost-effectiveness calculations; (2) the cost-effectiveness of the selected priority EAAI measures will improve by at least 30% compared to the previous cost-effectiveness; (3) the amount of administration expenses to be paid from EAAI funding will not exceed 7% of the funding paid out in EAAI project tenders per year; (4) the funds obtained from auctions of emission allowances will be used over three years on average.
Additional information: audit report summary.
About the State Audit Office of Latvia
The State Audit Office of the Republic of Latvia is an independent, collegial supreme audit institution. The purpose of its activity is to find out whether the actions with the financial means and property of a public entity are legal, correct, useful and in line with public interests, as well as to provide recommendations for the elimination of discovered irregularities. The State Audit Office conducts audits in accordance with International Standards of Supreme Audit Institutions of the International Organization of Supreme Audit Institutions INTOSAI (ISSAI), whose recognition in Latvia is determined by the Auditor General. Upon discovering deficiencies, the State Audit Office of Latvia provides recommendations for their elimination, but it informs law enforcement authorities about potential infringements of the law.
Additional information
Ms Gunta Krevica
Head of PR and Internal Communication Division
Ph. 23282332 | E-mail: Gunta.Krevica@lrvk.gov.lv