The climate-fiscal timebomb: Estonia

08 March 2026

Fiscal outlook

Estonia recorded a deficit of 1.7% and a debt-to-GDP ratio of 23.5% in 2024.

Deficit measures the level of borrowing in a given year. Debt-to-GDP compares the total public debt to the size of the economy. Both are currently used to determine how much borrowing a member state is allowed to undertake. However, neither measure in itself determines a government’s capacity to sustain higher levels of public investment. Fiscal sustainability depends on growth, the multiplier effects of investment, interest rates, inflation, the structure of the economy and external risks such as climate change. NEF advocates moving away from strict numerical debt targets.

Rising climate costs

Heatwaves are getting stronger, droughts longer and downpours more dangerous year by year. Estonia recently experienced its longest and most intense May heatwave, lasting a total of 18 days in the Southern part of the country. Heatwaves now cause an estimated 36 premature deaths each year in the countries five largest cities alone. At the same time the Baltic Sea is witnessing rising temperatures, decreases in the ice extent and increases in the annual mean precipitation, threatening its biodiversity and ecosystem health. Relentless rainfall and prolonged droughts are also posing major challenges for both crops and soils in Estonia, threatening the country’s food system. This led the government to announce a state of emergency in agriculture due to adverse weather condition in August 2025, and granting €3.3m aid to farmers hit by weather related losses.

What NEF’s modelling shows

Organisation for Economic Co-operation and Development (OECD) projections show Estonia’s GDP declining by 9% by 2050 and 13% by 2070 under current policies. Our modelling shows the following:

Under current policies (BAU – business as usual), Estonia’s debt is projected to be 32 pps higher than the climate-agnostic baseline in 2050 and 107 pps higher in 2070.

With early EU mitigation and sufficient adaptation spending, debt is 103 pps higher in 2050 and 179 pps in 2070.

Delayed EU investments and insufficient adaptation results in higher debt levels of 59 pps in 2050 and 102 pps in 2070.

EU early action combined with global cooperation results in 27 pps higher debt levels than the climate-agnostic baseline in 2050 and 33 pps higher levels in 2070.

Progressive taxation such as a wealth tax combined with EU early action would increase debt by 77 pps in 2050 and by 125 pps in 2070 compared to the climate-agnostic baseline.

Note that Estonia is an outlier: by 2070 its debt-to-GDP ratio is lower under BAU than under the early action scenario and early action appears more costly than late action. These results reflect top-down, assumption-heavy modelling and should be interpreted as illustrative rather than as forecasts. Adaptation costs allocated on the basis of GDP, CRI score and population and end up large relative to GDP in some outlier countries: under an early action scenario, adaptation investment reaches around 5% of GDP in Estonia. For all other countries it’s below 2%. By contrast, Estonia ranks among the least affected in terms of GDP losses from climate damage under BAU.