As a consequence of the political changes in 1991, Lithuania is currently facing the challenge of developing an efficient energy supply system. Owing to the outdated energy system and the lack of domestic energy resources, Lithuania has to find the pathway for a sustainable economic development. However, such a strategy should be developed with consideration for the requirements of environmental protection complying with international protocols. Therefore, the energy-flow optimization model extended by environmental modules (EFOM-ENV) of the Commission of the European Communities has been adapted and applied to Lithuania. This has been carried out in a joint co-operation project of the Institute for Industrial Production and the Lithuanian Energy Institute, financed by the Deutsche Forschungsgemeinschaft (DFG). To study the effects of budget limitations during the transitory period from a centrally planned to a market economy, new constraints concerning investments and fuel imports in hard currency have been introduced. Among others, these effects have been analyzed with regard to their impacts on the development of cost-efficient emission reduction strategies.