According to the Kyoto Protocol for the period 2008-2012, Latvia has to decrease its GHG emissions by 8% below 1990 levels. However, the country has a relatively comfortable situation to meet its Kyoto reduction target as the economy has declined considerably in the beginning of 90ies and its high share of renewable energy sources in the power generation sector. On the other hand, this comfortable situation should not be improperly used and Latvia has a high potential to increase energy efficiency in the power and industrial sector reducing its GHG emissions. The objective of this research is to analyse and understand impact and the effect of two economical instruments: the European Union Emission Trading Scheme and CO2 tax scheme - on carbon dioxide emission reduction in Latvia.