Environmental management in centrally-planned non-market economies of Eastern Europe

THE WORLD BANK SECTOR POLICY AND RESEARCH STAFF Environment Department Environmental Management in Centrally-Planned Non-Market Economies of Eastern Europe Piotr Wilczynski July 1990 Environment Working Paper No. 35 This paper has been prepared for internal use. The views and interpretations herein are those of the author(s) and should not be attributed to the World Bank, to its affiliated organizations or to any individual acting on their behalf. ACKNOWLEDGEMENT This paper has been prepared by Dr. Piotr Wilczynski, consultant to the Environmental Policy and Research Division of the Environment Department. It reports on findings that are particularly significant in the context of the overall work program of the Environmental Policy and Research Division. The genesis of the paper was a seminar given by Dr. Wilczynski while he was a Visiting Scholar at the University of Maryland. Because of the interest aroused, it was decided to expand that presentation into this paper. During this process many valuable comments and suggestions have been received in particular from Richard Ackermann, Michael Colby, David Craig, John English, Mark Kosmo, Steve Lintner, Ernst Lutz, Branko Milanovic, and Peter Whitford, and editorial assistance was provided by Steve Dryden. Environment Working papers are not formal publications of the World Bank. They present preliminary and unpolished results of country analysis or research that is circulated to encourage discussion and comment; citation and the use of such a paper should take account of its provisional character. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. Because of the informality and to present the results of research with the least possible delay, the typescript has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. ABSTRACT Environmental degradation in Eastern Europe is a serious problem. The level of air and water pollution and soil degradation threatens the health of the people of the region, and appGars to be blocking further economic development. Until recently problems stemming from ecologically uncontrolled economic growth of those countries were primarily localized. This paper shows that the state of environmental quality in Eastern Europe is a consequence of economic policies pursued by the region's Communist governments since they came to power following World War II. A policy of forced industrialization, with an emphasis on heavy industry, created an economic structure that has caused extensive environmental damage. The intensive use of energy and resources throughout the region was one of the main causes of environmental problems, and a barrier to economic restructuring. The region's Communist governments have failed to develop incentives to discourage the over use of energy and resources, and thus prevent further abuse of the environment. The paper emphasizes that the price structure used for natural resources, energy, fuel and raw materials had led to their inefficient use. The "low" price level for energy consumption and the subsidies given to enterprises, which encourage ecologically unsound behavior, also helped to create environmental problems. Communist governments in Eastern Europe did not take envLonmental problems seriously. Combined with centralized decision-mdking, this attitude prevented regional and municipal authorities from taking action to improve environmental quality at the local level. Non-market economies face the same type of technological externalities as market economies. The paper presents an outline of pollution control policies in non-market economies and examines why those policies have failed to maintain national standards of environmental quality. ENVIRONMENTAL MANAGEMENT IN CENTRALLY PLANNED NON-MARKET ECONOMIES OF EASTERN EUROPE Page I. ECONOMIC POLICY IN EASTERN EUROPE AND THE ENVIRONMENT ............ 1 A. Economic Structure .......................................... B. Industrial Structure and Its Environmental Impact............. 2 C. Energy and Resource Use and Environmental Damage.............. 2 II. ECONOMIC REASONS FOR HIGH ENERGY AND RESOURCE USE................. 7 A. The Political System ......................................... 7 B. Natural Resources and the Environment as Undervalued Assets ......................................... 8 C. Prices of Fuel, Energy and Natural Resources.................. 9 D. Price Structure of Natural and Recyclable Resources........... 9 E. Policy of "Low" Prices for Consumer Goods.....................11 F. Vertical and Cross Subsidization .............................11 G. Domestic Prices do Not Reflect International Costs ...........12 III. POLLUTION CONTROL POLICY IN EASTERN EUROPE........................12 A. Environmental Legislation and Administrative Systems..........12 1B. System of Fees and Fines .....................................14 C. Ecological Funds .............................................29 D. Tax Policy ...................................................36 E. Sources of Financing Environmental Protection ................37 F. Linkage of Economic Incentives with the Financial System of an Enterprise .....................................40 G. Institutional and Economic Reasons for the Inefficiency of Existing Policy ..........................................41 References ............................................................43 May 30, 1990 I. ECONOMIC POLICY IN EASTERN EUROPE AND THE ENVIRONMENT A. Economic Structure 1. After World War II, Communist parties aligned with the Soviet Union took power in Bulgaria, Czechoslovakia, East Germany, Hungary, Poland and Romania. These countries were forced to adopt the Stalinist model of economic growth, based on state ownership of the means of production and rapid industrialization. The emphasis on heavy industry, and the vigorous development of the fuel and energy sectors, reduced support for agriculture, limited spending on consumer needs and discouraged the development of the service sector. International economic cooperation was limited chiefly to other members of the Council for Mutual Economic Assistance (Comecon), the Communist bloc economic organization, which shared the same policies and goals. The Eastern European countries relied for the most part on the Soviet Union for technology and assistance. 2. A minimal level of industry must exist in every country, and in this respect the drive for industrialization in Eastern Europe can be justified. Before the war, the economies of the region, with the exception of Czechoslovakia and East Germany, were primarily agricultural. But the emphasis on industrial development led to unbalanced economies that -- with the possible exception of Hungary -- failed to respond to efforts at reform. The reason these efforts failed was that they ignored the crucial issue of property rights, and the role of the market in their allocation. 3. Government control of the marketplace doesn't guarantee that it will set proper prices for, among other things, natural resources. There is a natural tendency in an administered system to set low prices for those goods and services which are seen as basic to the society. This naturally will include land for production of food, etc., water, energy, and basic industrial products. But the environment is both a source of resources and also a reception for production and consumptive wastes. An environmentally sound policy must include some mechanism to regulate the use of scarce resources and prevent the abuse of nature, which has a limited capacity to absorb pollutants. Undervaluation of resources inevitably results in their overexploitation as well as pollution externalities. The governments of Eastern Europe failed to implement reforms that would deal with these environmental problems, and their legal systems continue to treat such resources as air and water as common property. 4. Eastern Europe completed the process of industrialization in the Sixties, and expanded its ecoromic relations with the West during the next decade, receiving loans and other forms of assistance that allowed an improvement in living standards. Since this aid was not used to make necessary economic reforms, however, it enabled the countries to continue to try to expand in the same resource intensive way as before, and further environmental damage resulted (see M. Janicke, H. Monch, and T. Ranneberg). 5. As measured by its share of GDP, the industrial sector in Eastern Europe remains larger than the region's agriculture and service sectors. And the industry sector takes up a larger portion of GDP and the work force in the 2 these centrally planned economies than it does in comparable market economies (See Table 1). When market and mixed economies reach a certain size, industry ceases to grow as a portion of GDP, and begins to shrink as the service sector takes up an increasing share. This shift by itself begins to reduce the "resource intensity" of the economy's activities. But in the centrally planned economies, the share of the industry sector has continued to grow (see Kabala), with a corresponding effect on the environment. B. Industrial Structure and Its Environmental Impact 6. This policy of forced industrialization of the Eastern European countries was carried out through setting preferences in investment policy for the development of the heavy industry and energy sectors. This approach was based on an input-output model of the economy which placed emphasis on ensuring the supply of basic industrial goods for the economy, and thereby stimulating or facilitating the growth of the rest of the economy. This supply, rather than demand, driven approach led to structural distortions and relatively high resource and energy intensity. 7. The analysis of industrial structure shows that, between 1960 and 1975, the share of industrial employment in seven sectors, which place heavy demands on the environment and natural resources, actually rose in all Eastern European countries except Hungary (See Table 2). The effect of this heavy emphasis on resource intensive industry might not be so serious were it not for the fact that these countries are relatively highly populated, and thus pollution damages to human health are considerably higher. Moreover in East Germany and Czechoslovakia, the quality of coal resources is low and this results in a high level of emissions and demages, and in Poland water resources are relatively scarce. Thus, the share of the fuel and energy, iron and steel, and mineral and chemical industries in air pollution in Poland is 90%, whereas their share in total industrial output is 30%. The share of those branches in water usage and pollution is similar. 8. Continued growth of industry in this mold creates what one might describe as an "ecological barrier" i.e., the point at which the ecosystem can no longer absorb society's discarded pollutants. At this stage, environmental problems hinder further economic grow,h. According to Polish experts, their country suffers losses of GDP in the range of 10 percent to 15 percent annually because of poor enviromental protection. It is likely that the other countries of Eastern Europe are similarly hurt by excessive pollution. C. Energy and Resource Use and Environmental Damage 9. Until the mid-Seventies, socialist industrialization boosted the supply of energy resources by setting purely quantitative goals for production, did little to regulate demand, and led to inefficient consumption in Eastern Europe. Between 1968 and 1983, prime energy intensity in the Comecon countries rose to a level four times higher than in the West (see Table 3). This supply driven economic growth was carried out in a situation where long run marginal costs of coal and mineral production were rising. The ever increasing capital requirements of these industries themselves became a barrier to economic reform as the resources available for investment in those ECONOMIC STRUCTURE IN GOP 1979, % IN TOTAL EMPLOYMENT, 1979, % AGRICULTURE INDUSTRY SERVICES AGRICULTURE INDUSTRY SERVICES BULGARIA 19 63 18 38 36 24 CZECHOSLOVIKIA 8 71 18 11 48 41 GDR 10 69 21 10 50 40 HUNGARY 15 59 26 16 52 32 POLAND 16 64 20 31 39 30 ROMANIA 14 50 36 33 34 33 ITALY 7 43 50 11 45 44 SPAIN 9 31 60 15 40 45 FRANCE 5 34 61 9 39 52 NETHERLANDS 4 37 59 6 45 49 UNITED KINGDOM 2 36 62 2 42 56 Sources: World Development Report, 1981. Winiecki, 1988 4 SHARE OF SOME BRANCHES OF INDUSTRY* IN TOTAL EMPLOYMENT (t) 1950-1975 COUNTRY 1950 1975 BULGARIA 31.4 41.1 CZECHOSLOVAKIA 50.1 58.3 GDR 57.2 57.4 HUNGARY 58.2 49.7 POLAND 47.6 53.9 ROMANIA 41.2 47.8 *1. Energy industry 2. Fuel industry 3. Iron and steel industry 4. Metal and engineering industry 5. Building materials industry 6. Pupl and paper industry 7. Glass and ceramics industry 5 Table 3 Energy and Material Intensiveness of the European CMEA Countries and Selected Developed Countries (1980) Gross Energy Raw Steel National Energy Use Steel Use Consumption Consumption Income Kgoe/US$ Kg/US$ Country Kce/cap. kg/cap. US$/cap. Bulgaria 5,678 320 4,150 1.37 0.08 Czechoslovakia 6,482 706 5,320 1.11 0.12 Hungary 3,850 340 4,180 0.92 0.08 G D R 4,708 566 7,180 1.03 0.08 Poland 5,690 513 3,900 1.43 0.13 Romania 4,593 562 2,340 1.96 0.24 Austria 4,160 355 10,230 0.41 0.03 Denmark 5,225 356 12,950 0.40 0.03 France 4,351 422 11,730 0.37 0.04 F R G 5,727 609 13,590 0.42 0.04 Italy 3,318 412 6,480 0.51 0.06 Japan 3,690 512 9,890 0.57 0.05 Spain 5,727 244 5,400 1.06 0.05 United Kingdom 4,835 237 7,920 0.61 0.03 United States 10,410 490 11,360 0.92 0.04 6 "more advanced" sectors, into which the economy might have expanded, were consequently diminished. 10. The main reason for the excessive use of energy and fuel was their artificially low price, which did noz reflect the cost of production. In Poland, research (Wilczynski et al) has shown that structural changes between 1960-70 had a negative influence on energy and coal use by industry. Between 1970-85 structural changes had a positive, but limited, impact on the use of energy and coal. The drop in usage was caused by some increased efficiency in use rather than by structural changes in the economy. 11. The ecological consequences of high fuel and energy use can be shown by the relation between GDP levels and emission of sulphur dioxide (S02). Research (see J. Slama) has shown that when Comecon countries reach GDP levels comparable to Western European countries, the amount of S02 emissions is four times higher than in the West. This is explained primarily by the more energy-intensive composition of GDP as shown in Table 4 and a higher concentration of S02 in energy sources, rather than by the type of fuel combustion, technology processing and the lack of pollution control equipment. In Comecon countries, there is a 30 percent higher emission of S02 in every million tons of energy consumed. 12. The high level of fuel and energy use in the East can also be illustrated by the consumption of coal. The West consumes about 600,000 tons of energy in hard coal equivalent for every $1 billion of GDP. To reach the same level of GDP, Eastern European countries consume about 1.6 million tons -- the result of inefficient production, and shoddy technology. 13. One of the major reasons for the large amounts of S02 in the Comecon countries is their growing reliance on lignite, which has the highest concentration of S02 among the most common used energy sources (see J. Slama). It is doubtful that the centrally planned economies will begin using pollution control technology, but if they decide to confront the S02 problem, they may find it cheaper to switch to energy sources that have a lower level of SOZ than to install equipment that filters out the pollutants. 14. An equally important environmental issue in Eastern Europe is water management. All of the countries have water quality problems because of the growing amount of sewage and industrial effluents, especially around areas of industrial development and urban centers. Data on water quality is scarce and there is an insufficient exchange of information between Eastern European countries. But the data available from Poland, which by some measurements has the most dire water quality problem in the region, does help to illustrate the situation. 15. The fuel and energy sectors and heavy industry in Poland account for 80 percent of the demand for water by the entire industrial sector. The fuel and energy sectors produced 80 percent of the industry-related waste water pollution (including thermal pollution) in 1985, followed by the chemical industry (8 percent), metallurgy (5 percent) and the pulp and paper industries (2.5 percent). 7 16. Structural changes in Polish industry between 1975-85 had little impact on water pollution. The average level of individual industrial effluents declined, but increased production caused the number of industrial effluents to grow. It is estimated that by the year 1990, 50 percent of Polish river water will be unusable for industrial production or by municipalities, and an additional 35 percent of the rivers will be very highly polluted (unsuited for any use). There are already water shortages caused by pollution: between 1975-85 the number of towns or cities in which there were periodic or permanent shortages rose tenfold to 10,000. 17. Other Eastern European countries show a similar decline in water quality. In East Germany over 80 percent of the rivers are highly polluted. Twenty percent of Bulgaria's rivers are virtual open sewers. In Czechoslovakia, 47 percent of the sewage was left untreated in 1980. By comparison, Hungary looks better: all industrial effluents are to be treated by 1990, and 94 percent of municipal sewage is to be treated. But the Danvae River, which accounts for 70 percent of Hungary's surface water resources, poses a special problem because most of its pollution comes from neighboring countries. 18. Environmental damage is also caused by the disposal of solid wastes that degrade farmland and pollute groundwater resources. Only about 10 percent of industrial solid wastes (a third of which are highly toxic) are currently recycled. Saline water from mines reportedly deposits 8,000 tons of salt daily into the Vistula and Odra rivers of Poland. An additional ecological problem is landscape, which is reduced by mining and related activities. Coal mining in Eastern Europe has damaged about 200,000 hectares and this area is increasing. 19. Looking from a historical perspective at the low quality of the current state of the natural environment in Eastern European countries, it can be said that one of the main reasons for it was the policy of economic development in use. Rapid industrialization with preferences for heavy and extractive industries and quantitative goals for individual enterprises and sectors resulted in creating and extending the so called open model of economic growth. This model is characterized by treating natural resources and the assimilation capacity as free goods. Unsound economic development muat in the long run lead to over exploitation of the natural environment and its natural resources. II. ECONOMIC REASONS FOR HIGH ENERGY AND RESOURCE USE A. The Political System 20. Economic reasons must not be seen as the sole cause behind the high use of energy and fuel in Eastern Europe. The political system itself is the primary reason that this pattern exists. It should come as little surprise, therefore, that the debates underway in these countries have produced a consensus linking changes in environmental policy with changes in the political system. 8 21. The Soviet-style system, with its emphasis on centralized, bureaucratic control, required quantitative goals for production throughout the economy. The government "fed" the economic departments with the money and means of meeting these goals. Because there was little constraint on spending in the Communist system, the supply of energy and fuel was constantly under expansion. Demand, which was also controlled by the government, was kept separate. 22. The economic reforms introduced in Poland and Hungary failed because they didn't change the autocratic political system. Without democracy, there was no way to set up a market economy, and no means to build the political support for the sometimes painful changes in the economy that would lessen environmental damage. 23. The main economic goal of the Eastern European countries, following the Soviet example, was to create a relatively self-sufficient system. Foreign trade was carried out to import the necessary goods (raw materials, including those used for agriculture and machinery), which were exchanged for hard coal and other natural resources and material intensive products. Combined with the emphasis on heavy industry, this policy of economic independence only reinforced the system's reliance on energy-intensive growth. 24. In addition, the government's monopolistic control of the economy and its emphasis on quantitative goals for existing products blocked research and development and the creation of new or improved products or technologies. A factory which wished to change its product line would have to persuade the planners that there was a requirement not provided for in the plan, and arrange for the changed inputs required by the new production plan. These efforts would not result in any automatic increase in returns to the enterprise or its employees and, therefore, suc;h pessibilities were seldom pursued. B. Natural Resources and the Environment as Undervalued Assets 25. The issue of ownership of natural resources and the overall environment in Communist countries is very complicated. It is clear that the lack of a strong system of property rights has contributed to the growth of ecological problems. Even in Poland, where 80 percent of agricultural land is privately owned, the government until recently did not guarantee the right to sell the land, or the exercise of other common rights of ownership. The control by the state of property results in prices for land and resources that are too low and reflect bureaucratic goals rather than the scarcity of the good. The state, in effect, grants the right to use natural resources free of charge or at a token cost. 26. State enterprises using the right to exploit a natural resource receive a bonus for increasing their output. But since the enterprise does not own the property, it bears no cost related to the rapid depletion of the resource, and has no reason to treat the resource as a valuable asset. This has led to a good deal of wasted resources. In the Soviet Union, for example, the losses in hard coal mining increased from 18-20 percent to 25-28 percent between 1940 and 1968. It is estimated that about 60-70 percent of ore and 20 percent of 9 iron ore is left deposited in the mining sites, and the losses are even hi&her in other resource areas (see N.P. Fiedorenko, T.S. Chaczaturow). These losses only increase the demand for new sources of mineral deposits and lead to greater environmental damage. The enterprises have no incentive to try and find substitutes or improve technology, since the state will ensure access to alternative reserves and pumps in the necessary resources to ensure output targets are met; a process which Kornai has referred to as the "pumping and sucking" phenomenon. 27. Some Eastern European countries have introduced fees for the right to use natural resources, but these fees in no way represent the scarcity of the goods. The level of such a fee in Poland depends on the mineral type, and is charged as a certain percentage of the transaction price. The fees range from 0.6 percent for hard coal, and six percent for crude oil and natural gas. The law permits some enterprises to receive an exemption from payment, or a fee reduction. C. Prices of Fuel, Energy and Natural Resources 28. The governments of Eastern Europe, fearing that "high" prices of energy and resources would block rapid industrialization, set these prices at relatively low levels and kept them constant in real terms. The share of energy and resources in the cost of production was two to three times lower in Eastern Europe than in advanced Western nations, and the prices were kept low even when the costs of mining and energy grew because of worsening mining conditions. These artificially low prices, discouraged the development of energy-saving technology and any emerging ethos of conservation. 29. It has been argued that low energy prices promote social equity. But subsidized prices only deepen unfairness in a society, favoring energy-intensive industries and the wealthier individuals who use energy-intensive goods. In addition, the subsidies are a burden on the state budget, reducing the money available for social welfare spending. D. Price Structure of Natural and Recyclable Resources 30. The low prices of natural resources discourages recycling, which leads to the creation of further pollution, including toxic wastes that are a problem in all of the Eastern European countries. In Poland, the prices of scrap materials and fees for storage of wastes are lower than costs for their removal. Poland makes little attempt to recycle its water -- despite the fact that it is poor in water resources -- because the costs to the user are lower than those of the supplier. 31. A similar situation exists with lumber and the regeneration of forests. The stock of forests has been gradually reduced by the low, government-supported price of lumber, which encourages continued harvesting of trees. Table 4 shows the prices at which state-owned Polish companies sell lumber, compared to the price that would allow those companies to earn a profit. The proposed prices are 3-4 times higher. The results of these policies can be seen in the fact that between 1950 and 1980, 115 million m/2 10 Table 4 Prices of Lumber m3 in Poland in 1987 - 1988 Average Price of State Wood Proposed Price for Prices in the First Specification Company in 1987 1988 Half of 1988 m3 M3 Lumber 4,964 15,857 7,745 Large Timber 5,211 16,642 8,284 Coniferous Large Timber 5,330 17,113 8,279 Coniferous Timber Coming From Saw Mills 6,782 21,666 10,835 Source: Partyka i in.: Baza wyjsciova cen drewna - Koszty spoleczne. Warszawa, Instytut Badawczy Lesnictwa, 1988. Maszynopis, s. 26. 11 of large timber was lost. The potential current stock of forests was reduced by 10 percent (see Kozlowski). E. Policy of Low Prices for Consumer Goods 32. One of the features of the centrally planned economies is a policy of "low" prices for food and housing. Low prices for these goods have a typical social function. It is therefore obvious that this policy must be a burden for the state budget. The state housing and rent policy has a purely social character. Rents are subsidized by the budget. Electricity and heating, water and other municipal services are subsidized. 33. The results of this situation are as above. The policy of emphasizing supply of steel and concrete and their low price led to housing designs based on their use. Switching to other materials would greatly increase the cost of construction. 34. Subsidizing all forms of energy for consumers leads to its over consumption by residents. The insulation in apartment buildings is notoriously poor but this does not directly affect the occupants because the systems of distributing heating are such that residents have no ability to individually rationalize usage. Residents cannot control the temperature in their flats. In Poland also the lack of water-meters is one of the main reasons of excessive water demand and its waste by residents. 35. Low prices on energy and water stimulate excessive demand for them and at the same time create an impression that they are free goods. And, although industry is the main consumer of energy and water, it can easily be argued, in a situation such as that described above, considerable savings in energy and water use could be achieved. This is broadly discussed in para. 63 on Implementation of fees. 36. Low prices for municipal services, which are centrally subsidized, combined with the lack of real local institutional participation, prevents efficient and long-range planning at that level. This is the main reason why the technical infrastructure in most of the towns in CPC's does not satisfy the needs of inhabitants. Changing this energy policy of low prices of basic goods and services will be a major challenge for the governments of Eastern Europe because it will require changing deeply ingrained habits. F. Vertical and Cross subsidization 37. The use of subsidies to support state energy-producing enterprises, besides excluding competition and preventing bankruptcies, has stimulated and acted to hide waste. Careless management practices have not been penalized. (a) Vertical subsidies include subsidies coming from the state budget for unprofitable enterprises, which leads to careless management and maintenance and slows structural changes. The state also uses other forms of subsidization such as prices, taxes, low interest-rate loans (quite often negative real rates). These forms of subsidization are quite often used to 12 support the development of very large industrial enterprises (or the so called "giant construction sites of socialism"), which are usually linked with the heavy industry and energy sectors. 38. Central planning and state ownership combined with the policy of state financial subsidies creates monopolies, the creation of which is heavily supported because it makes central management easier and more feasible. The internal financial system of those state monopolies initiates cross subsidization and the support for the policy of quantitative, centrally established goals. Furthermore, the elements of this system have considerable political weight within society and provide political support for continued resource and energy-intensive policies. The state's generous financial support for energy-producing enterprises has allowed them to escape the consequences of polluting, because the government pays whatever fines or fees are imposed as a result of violations of environmental laws. C. Domestic Prices Do Not Reflect International Opportunity Costs 39. Domestic prices in Eastern Europe have borne little relation to those of the world market. The Communist system deliberately downgraded the importance of foreign trade in the economy, and extended its control of prices to control of exchange rates. Exports are encouraged only to earn hard currency that is needed to buy certain foreign goods, as determined by the government's economic plan. As it has become more difficult to export manufactured goods in larger quantities, Eastern European countries have taken the easier course and increased their exports of raw materials, fuel and food products (see Winiecki). 40. This kind of foreign trade policy, which provides no incentives for changing the economic system, has been justified on the grounds that it insulates Communist countries from inflationary trends in the outside world. But this policy, which encouraged an energy intensive economy, indirectly contributed to an increase in pollution and destruction of the environment. III. POLLUTION CONTROL POLICY IN EASTERN EUROPE A. Environmental Legislation and Administrative Systems 41. Protection of the environment in Eastern Europe is carried out by legislative, administrative and economic means. The juridicial system of protecting the environment has undergone an evolution. Eastern European countries started regulating the relation of man and the environment by introducing laws to protect such elements as the air, water, soil, space, fauna and flora. Gradually, this fragmentary approach was replaced by a complex body of law protecting the environment.. The constitutions of the countries impose an obligation on the state to ensure the protection and rational development of the environment. From the legal point of view, environmental protection was declared to be one of the basic functions of the state. 13 42. An analysis of the environmental legislation divides the countries into two groups: a. Countries with a complex body of law protecting the environment (GDR, Hungary, Poland and Romania); and b. Countries without such a body of law (Bulgaria, Czechoslovakia). Their system consists of a number of separate laws. 43. Although there are some differences in the legislative concepts of those countries, the laws all address the following areas: a. The conservation of nature and the protection of the "landscape." This includes the protection of natural parks, sanctuaries, monuments of nature, valuable landscapes, and especially important species of fauna and flora that are in danger of extermination; b. Protection of natural and environmental resources; C. Protection of man's environment against pollution. This includes protection of water, air and soil against pollution, the use and recycling of wastes, and protection against noise, vibration and radiation (see W. Radecki). 44. The statutes contain a comprehensive set of ambient and emission standards for air and water quality, a system of environmental impact statements, permits, legal and administrative sanctions and an institutional system. They also introduce a wide system of user charges and environmental protection funds. 45. The administrative structure of environmental protection is headed by a Ministry or a Committee. The lower levels of the structure, located at the local levels of the state administration, are formally subject to control by the local government. The environmental interests of local areas should, in theory, be defended by the lower levels of the state administration. But industrial polluters, who have a right to appeal to those institutions, will usually prevail in any dispute, given the state's emphasis on greater production. 46. In general, the government sets the basic instruments (legal and economic) for the policy of environmental protection and,through the institutional systems, as the ultimate responsibility for seeing the policy is enforced. The worsening environmental conditions in Eastern Europe show that the law is violated and that the institutions responsible for enforcing the law are incapable of carrying out their duties. This is also true for the non-governmental organizations, such as citizen ecological movements. 47. The effectiveness of the laws protecting the environment can also be explained by these observations: 14 a. Laws do not function in a vacuum but are a part of every society, which can show more or less respect for the law. The amount of respect depends on historical experience and also or the way institutions responsible for respecting the law act. b. The law itself cannot change technologies used in Eastern Europe, or the way the countries are managed. If this were true, the law would have to be used against institutions responsible for the degradation of the environment. 48. Full legal protection of the environment requires the break-up of state monopolies and other more important monopolies. B. System of Fees and Fines 49. An important element of the pollution control policy in Eastern Europe is the system of fees and fines. Fees are treated as prices for the right to use natural resources, but also as prices for the right to pollute the environment. The system of fees and fines is linked with environmental standards, norms and permits. Using environmental resources in accordance with the conditions of a permit results in a payment of user fees. 50. Among the methods used to protect the environment, fees and fines are considered to play the most important role. If properly designed, they can: - influence the costs of production and take into account the social costs of environmental degradation; - be more effective than regulation alone by allowing the firm a choice as to how it pollutes the environment and how much. It also allows more choice regarding pollution control technology; and - provide money to cover the increasing cost of protecting the environment. 51. Fees and fines are effective, however, only if they are set at the proper level. Rates that are too "low" are the basic reason for the ineffectiveness of the system. Charges and fines for water intake and discharge of waste water and atmospheric air pollution and disposal of solid and hazardous wastes are of particular importance in the system. 52. Given the goals the system of charges is set up to achieve, the charge rates should be set in two ranges: a lower one that will provide an incentive for the further improvement of the efficiency of an enterprise which is already meeting required standards, and an upper level which fully compensates for environmental damage, and thus fully internalizes the environmental costs. The lower rates would ensure protective action on the level of a direct emittent, which means that its level should be determined in relation to the unit investment costs as well as the operating costs of the environmental protection equipment. 15 53. Establishment of a charge rate on the level equal or higher than unit costs of pollution reduction will only encourage environmentally sound practices only if the enterprise is interested in the maximization of profit through cost reduction. Setting the rate at a higher level would mean that the system of charges reflects the losses brought about by pollution emission, and creates financial conditions for compensation. Charge rates thus should not exceed the established limits. 54. In the countries which are analyzed here, the following fees are applied for environmental protection: (a) Water Pollution. Water intake fees are paid by all enterprises that use at least 40 thousand cubic meters annually. The level of the 1,e rate depends upon accessibility of water in particular regions (e.g., in th southern voivodships I of Poland the fees are higher than in other regions). Currently, water intake fees are used for municipal water intake. Fees are also paid for surface and underground water. The level of these fees depends on regional differences in water supply and the purpose of its utilization (Poland, Czechoslovakia, Hungary, GDR). The fees are paid by industry, the service sector, and the inhabitants of municipalities and farmers. There are quite a few exemptions from payment, mainly for health care units, the military and the Ministry of Internal Affairs (Czechoslovakia, Poland and to some extent also Hungary). Water permits are required by law (water intake and sewage disposal). Those permits are a base for billing and they set limits for water use. 55. The disposal of municipal sewage and inAustrial waste water into surface and underground water requires a special permit. The sewage and waste water fee is defined in terms of the sewage type, the concentration of pollutants, and the purity of the body of water that will receive the sewage. The fees are defined according to some specified chemical pollution coefficients. (b) Air Pollution. Fees for emission of air pollutants are used in Czechoslovakia and Poland, while fines are the main instrument of air pollution control in other countries. Polluters are required to obtain a point source emission permit. Fees are computed with respect to kinds and amount of air pollutants (in Poland the list of pollutants contains fifty four substances). The fee rates pertain only to emission sizes not exceeding the permissible point source emission norm. The fees paid by the polluters to the government are a price that is paid for the right to utilize the environment as a receptor of pollutants. This fact does not relieve the polluter from liability for damages and losses that occur. Therefore, when pollution harms forests, agricultural production or persons, compensation is required. (c) Forest land conversion. In Poland, forests are protected by fees for the removal of trees and fees for converting forest land to non- forest use. Fees for removing trees are based on the kinds of species taken 'Local unit of government below the national level. 16 out and the circumferences of the trunk measured at a height of 130 centimeters. For trees removed from health resort protection zones, protection zones in industrial areas, and from urban green areas, the fees are one hundred percent higher. Fees for convering forest land to other purposes include an initial single payment and a fixed annual payment for acquired land. The initial payment is based on the species, and the fees are calculated in terms of the lost production and an element to provide for landscape or other non- production values. For forest land, an additional fee for the premature harvesting of standing timber is charged. If the forest is exposed to harmful emissions of particulates and gases, compensation in paid by the polluter to the owner (state or private) of the forest. (d) Land and soil protection. Here, fees for converting agricultural land to non-agricultural use are paid by the owner or user to the government. Fees for converting cropland to other purposes also comprise two elements: an initial single payment for removing land from agricultural cultivation, and a fixed annual payment for acquired land. The initial payment is based on the ground quality estimated productivity of the soil, and the fees are calculated in terms of the lost production. In Poland, owners of farms located in the protected zones of industrial plants are entitled to receive compensation for losses caused by industrial activity. (e) Use of wastes. In Poland fees for storage of wastes and payments for the Scrap Materials Fund (SMF) are used as incentives to cut down the amount of wastes in storage. Those fees depend upon the amount, kind and danger to the environment. The wastes utilized for "productive" purposes can be exempted from changes. The payments for the SMF pertain to these enterprises that impair or lessen the usefulness of wastes, or resell them to other business organizations. Fee Policy 56. The wide range of fees for pollution control that is used in Eastern Europe shows that, at least in theory, their policies are based on the principle that the polluter pays. But data and research show that these changes have little or no impact. There are many reasons for this situation. 57. Research in Poland during the past year has showen that the level of fees is generally substantially below the marginal pollution abatement costs. The results show that in 1983 the average (unit) abatement costs of BOD in the effluent from the pulp and paper industry in relation to fee rates were between 0.43 - 8.57 (ratios of abatement costs to the fee). A much higher difference was noted in COD reduction costs when compared with the charge rate, i.e., 0.49 - 24.4, and suspended matter (3.54 - 168.53). This means that the average abatement costs of sewage and waste water were in some cases lower than the fee rate and in other cases they were much, much higher. A similar tendency was observed in the fertilizer industry and in the metallurgic industry. 17 58. A similar conclusion can be drawn when air pollution fee rates are analyzed and compared with the costs of abatement. The abatement costs are usually lower than the fee rates in cement and fertilizer plants. But in metallurgic and copper industries the abatement costs are 30-40 times higher. In general, it appears that the fee rates provide no real economic incentive for reducing environmental pollution. 59. On the other hand, the level of the fees in no way reflects the economic losses caused by pollution. For example, it has been estimated that in 1979, in order to compensate the losses caused by air pollution in the Katowice voivodship the fee rate should have been increased by 64-84 times. 60. Water users' fees in Poland, a country with a very limited stock of water resources, were below the costs of supplying water to households. In fact, until recently no charges were levied for use of ground water. 61. It is well known that there is considerable potential for savings by rationalization of the structure of fees imposed on final consumers of particular services rendered by public facilities. At present those plants most often have the role of "an accountant" rather than of an independent economic enterprise. This results from the fact that some services are calculated not on the basis of adequate measurements of the amount and quality of a given service, but on the basis of statistical estimates. 62. The manner in which fees are calculated for water taken from the urban network illustrates this approach. It is not individual consumption that is measured, but the level of consumption of a larger group (a building, housing estate, etc.). It is obvious that such a mechanism does not encourage consumers to save water, and is a classic example of the problem of open access to common property resources. 63. Similar situations occur in other services rendered by public utilities. The range of waste can be estimated on the basis of the results of "the Torun-Grudziadz experiment," in which households were provided with proper measuring devices. The largest savings were achieved in hot water use (50-60 percent). Power consumption for heating purposes was lowered by 18-25 percent, gas consumption by 30 percent, and cold water by 20-23 percent (see Malkiewicz, A.). These results clearly indicate great potential for reduction of excessive use of natural resources. They also show that to improve the profitability of municipal utilities a considerable increase of fees is possible which, when accompanied by a decrease in the amount of those services utilized, will not affect household budgets. 64. Rational use of environmental resources requires both "proper" prices and measurement of their use. This should always be the first option that governments choose, especially when the resources are limited and the quality of the environment is as poor as it is in the case of Poland's water resources. 65. In general, it is clear that the existing system of fees neglects the important problem of the locational dimension of scarcity of environmental resources and the current state of the environment. The relatively low level 18 of fees was a signal for producers and consumers to overuse environmental resources. Simply speaking, it was cheaper to pollute than to undertake any action to control pollution. 66. In 1987 the share of fees for air pollution, sewage disposal and water consumption, in costs of units representing industries that were significant polluters of the environment was between 0.216 and 0.750 percent (see Table 5). The energy and mining industries which are the heaviest polluters had to pay charges of 10.7 m1n z1 or 0.5 percent of costs (See Table 62. Chemical and light industry, which put large amounts of sewage into surface waters, had to pay 12.7 mld zl, or 0.12 percent of costs. Of course, not all charges were paid. These are "average" numbers referring to all units of a given branch of industry. In particular units, the share of fees in costs can be broken out. For example, a study carried out in metallurgical and chemical plants, that are heavy polluters, showed that the share of charges for air pollution, sewage disposal and water consumption in costs was respectively: a. Lenin steelworks 0.3%; 0.5% and 0.4% (1983) b. Chemical Plants "Police" 0.2%; 0.4% 0.45% (1983) c. Nitric Plants in Tarnow 0.2%; 1.0% 0.3% (1983) 67. According to another investigation carried out in 1988 of 30 plants harming the environment, the share of these charges in direct costs in 1986 was 1.17 percent and 0.98 percent in 1987 (Poskrobko B., Szelagowski, Z., 1988). 68. With a few exceptions, the share of charges in costs does not exceed 1 percent. It is obvious that such a low rate does not provide any incentive for enterprises to take steps to reduce their emissions, etc., and thus avoid paying fines. The rates are set at such a low level that they do not even ensure the minimum efficiency of the system of fees. The fact that fees are usually much lower than the costs of pollution abatement makes polluion abatement unprofitable for the plant. On the other hand, because the level of fees is low, there is considerable scope for raising them and increasing funds available to pay for other environmental improvements. 69. It is also important that the relationship of profits to charges is often determined by other aspects of the enterprises' financial system. The influence of changing the relation of prices of materials, raw materials, and ready made goods to charges for economic use of the environment may be an example. Large increases in charge rates in 1982 were followed by some increase of the share of charges in production costs. Unfortunately, in the succeding years charge rates did not change (that is, until 1986), while prices in general nose steadily. So the relation of charges to prices of other goods was getting worse and their stimulating function was weakened. This means that pollution charges need to be indexed to reflect changes in inflation. 70. If the share of fees in the costs of production of Polish enterprises varies between zero and several percentage points, then the users of environmental resources, including polluters, have little incentive to 19 Tahbl__5 Share of Fees in the Costs of Production of 1400 Enterprises (Industries: Fuel and Energy, Metallurgy, Engineering, Chemical, "Light") 1987 Fees for air pollution 0.22 % Fees for sewage disposal 0.16 % Water users' fees 0.06 % Fees for waste storage 0.13 % Fees for tree removal 0.01 0.58 % 20 Table 6 Share of Charges in Costs with Reference to Branches of Industry in 1987 -------------------Charges for--------------------- Specification air pollution sewage disposal water consumption in share in share in share bln in bln in bln in z1 costs z1 costs Zl costs Metallurgical and machine industry 9.96 0.2 1.09 0.02 2.17 0.07 Chemical and light industry 0.47 0.016 12.7 0.15 3.98 0.05 Mining and energy 10.7 0.5 4.73 0.22 0.641 0.03 Source: Data from the Statistical Yearbook 1988, Warsaw. 21 reduce environmentally harmful actions. Therefore fees do little to encourage the rational use of water resources, space, and wastes (recycling), or the reduction in levels of air pollution. At the same time they have no influence on the allocation decisions of industry and municipalities, and do not affect the choice of technology. 71. In the Communist economic model, fees perform only a transfer function. They are a specific type of a tax usually indifferent to economic units. It would be naive to assume that increasing the fees would be an effective way of solving the problem of poor use of environmental resources. "Proper" prices are needed, but their effectiveness depends first of all on the role that money plays in the economy and of the role of the market as a mechanism of allocating factors of production. Here we are analyzing a system in which money has a passive function and allocation and investment decisions are made by the state, directly or indirectly. 72. The use of fees, fines and other incentives makes sense when enterprises follow the principle of maximizing profits by reducing costs. Another approach (provided the state is committed to protecting the environment) would consist of using direct administrative control to enforce observance of environmental standards. But this would mean that ecological goals cannot be pursued effectively on a low-cost basis. 73. Studies carried out in the United States have shown that command and control methods for protecting the environment are socially more costly than policies based on fees or emission trading. These studies have also shown that administrative policies do not maximize social welfare. Therefore, if an administrative policy fits better in a non-market economy, it means that this economic system is, from the social point of view, less efficient and needs thorough reform. Fines -- Theory and Law 74. Fines used to protect the environment are penalties for violations of environment permits. Any use of the environment requires, in general, that a permit be issued. Non-compliance with the conditions of the permit (excessive water intake, water and air pollution) gives the local environmental authorities the right to impose a fine. 75. Fine rates are several times higher than the relevant fee rates and, moreover, the range of their application is considerably broader. Fines are not a form of compensation for pollution, however. In addition, they do not cover the clean-up costs at an area harmed by pollution, or the contributions of enterprises to a relevant ecological fund. This contribution is connected with the size of damage. 76. In Poland, Czechoslovakia, GDR and Hungary, there are fines for violating permits for a) water intake, b) sewage disposal, and c) waste water disposal. Fines for excessive emission of air pollutants are used in Czechoslovakia, Hungary, Poland. Fines are imposed on enterprises, and individuals are also liable for violations. In Hungary, if a point-source norm is violated then the polluter must notify the local authorities. If this . 22 duty is not fulfilled then the fine is increased by 50 percent. The polluter must fulfill an administrative decision, otherwise the financial sanction will be increased by 100 percent. The law also allows a reduction in the level of the fine if a polluter installs pollution control devices or does not allow him to fulfill the point source norm. The fine can also be reduced when its payment would cause "great 6conomic" losses (see W. Radecki, J. Malecki). 77. Apart from fines for polluting the environment, there is also exists a system of fines for improper use of environmental resources. For example, when new construction is undertaken, topsoil from the site is required to be removed and transported to another site where it an be put to beneficial use, e.g., restoration of degraded land. Fines can be levied for failure to do so, and for using agricultural land for a non-agricultural purpose. In forests, (unlawful use of forestry grounds or their damage, removal of trees and bushes without the required permits and destruction of vegetation, delays (in relation to required time periods) in the afforestation of grounds used formerly for non-forest purposes, and the collection of wastes in inappropriate places, are other actions that violate the regulations. Implementation of Fines 78. The attitude of the government toward environmental protection is reflected by the number of permits, the level of auditing and the enforcement of fines. While 39,851 plants in Poland were registered by the inspecting services of environmental protection in 1987, only 35.4 percent of the plants had been given standards for permissible emission. Least progress had been made in the mining and energy industries. Out of 2,469 plants, only 9.9 percent had permissible emission limits standards. This is particularly important because about 75 percent of the emission of sulphur dioxide originates in mining and energy. The situation in the metallurgic and machine building industry, where 21.5 percent of the plants have permissible emission standards, is a little more advanced but still far from satisfactory. 79. It is a matter of particular concern that priority in setting emission limits has not been given to those plants with the greatest levels of pollutant emissions - a group dominated by the mining, energy, machine building and chemical industries of the 310 plants in this group only 74 (i.e., 24%) had had allowable levels set by 1987. 80. The system of air pollution control should not be judged just on the basis of the number of enterprises with emission standards. Equally essential, and perhaps more important, is that permissible emission standards should be set at a level that will in fact fulfill the norms of pollutant concentration in the air. When establishing the norm of emission for a given enterprise, the local authorities usually face the problem of whether to establish emission standards that they know cannot be met, or to establish norms that are realistic under prevailing technical and economic conditions. 81. While it is difficult to estimate on a national scale, it is apparent that in the majority of cases, permissible emission levels are established too tolerantly. This results in a concentration of pollution in the air that exceeds environmentally acceptable limits. There is a 23 discrepancy between the standards of permissible pollution concentration in the air set for the whole country and the standards of emissions established for particular polluters. The rules also allow less stringent emission standards in case of "lack of proper technical solutions," which causes permissible concentrations of particular substances in the air to be exceeded. 82. The system of issuing permits for sewage discharges also is experiencing delays in implementation meets. In 1987 the number of plants having water permits still did not exceed 50 percent, and this did not vary greatly among industries. a. mining and energy 47% b. metallurgic and machine building industry 59% c. chemical and light industry 45% d. construction and building materials industry 52% e. agriculture and food economy 53% f. administration and space economy 41% g. health and social care 48% h. milk cooperatives 37% i. others 40% 83. The data presented for air and water shows that one of the key elements of the system of environmental protection, the issuing of permits for environmental usage, has been given little attention by the government. The effectiveness of the permit system for dust-gas pollution emission, water consumption and sewage disposal requires that the local services of environment protection conduct proper inspection and auditing. The activities of the environmental protection services are obviously insufficient when only slightly over one-third of plants have air pollution permits and less than a half of plants have water permits. 84. Air Pollution. The number of plants inspected is now very small in relation to the total number of plants included in the records of the inspective services (in recent years about 10 percent of the plants have been inspected). (See Table 7.) The number of inspectors has been the same for a long time (5,300-5,400 per year) but, with a simultaneous growth of the number of plants covered, the average number of inspections of a plant per year has clearly decreased (from 1.6 to 1.4 inspections). So it is obvious that low frequency of inspections in the plants covered, and the fact that about 90 percent of plants are not inspected at all, means that the norms of permissible emissions are unlikely to be set. 85. The number of measurements of air pollution taken by authorized agencies is small and random. Data in Table 7 show that on average, plants were inspected only every eight months. This means that in most cases no systematic inspection was being carried out. Furthermore, only a small part of the measurements of air pollution result in the discovery that permissible emission standards are being exceeded. In 1982, out of 5,462 inspections, only 12 percent revealed violations of standards. In recent years this situation has improved somewhat, with about 20 percent of the inspections resulting in the discovery of violations. 24 Table 7 The Activity of the Inspecting Services of Environment Protection Concerning Atmospheric Air Pollution Plants on records of Number of Average Number Year the inspecting inspections of inspections services of annually envir, protection total plants inspected number number 1982 6911 3431 49.6 5462 1.6 1983 10980 3612 32.8 5745 1.6 1984 12259 3604 29.4 5480 1.5 1985 12064 3463 28.7 5133 1.5 1986 35307 3844 10.9 5320 1.4 1987 39851 3960 9.9 5398 1.4 Source: Data of the Central Statistical Office Environment Protection 1983-1988 Warsaw. 25 86. Since in most industrial areas of the country, pollution is heavy, this means either that standards are not set at levels which will significantly lower pollution levels or that measurement efforts are not being targeted at areas with most severe pollution problems. 87. The number of plants fined, compared to the total number of plants with established permissible emission levels, reveals the range of inspection activity. In 1987, out of 14,097 plants with set emission levels, fines were imposed on 314 (2.2 percent). It is difficult to believe that only 2.2 percent of the plants with emission standards exceeded these norms. There certainly must have been more, but fines were not imposed on them. 88. As far as branches of industry are concerned, fines were imposed as follows: a. mining and energy -- 21 units, that is 8.6 percent of all units of the sector with emission standards; b. metallurgy and machine industry -- 46 units (6.8 percent); C. chemical and light industry -- 60 units (7.3 percent); d. construction, and public utilities -- 55 units (2.9 percent); e. agriculture, forestry and food economy -- 57 units (1.9 percent); and f. remaining industries -- 75 units (0.1 percent). 89. The indicators for mining, energy and chemical industries are, however, misleading because units grouped in particular industries have different standards of pollution emission. If the number of units on which fines were imposed were to refer to the total number of units grouped in one industry (in the records of the protective services), the distribution of penalties would be: mining and energy, 0.85 percent of all units in the branch; metallurgy and machine industry, 1.5 percent; chemical and light industry, 3.2 percent; construction, and public utilities, 1.2 percent; agriculture, forestry and food economy, 1.0 percent; remaining branches of industry, 0.34 percent. The country-wide average was 0.79 percent. Small fines are imposed on the mining and energy/industry which contributes the most to dust-gas pollution. Despite such large emissions the penalties are only slightly higher than the "country average." The remaining industries, which cause very little air pollution, are treated more severely. Generally, however, the enforcement of the system of fines appears inconsistent and, as a result, lacs credibility. 90. Water and Semage: The environmental protection services inspect about 50 percent of plants on record each year and in absolute numbers the amount of these plants rose between 1982 and 1987 by about 9.3 percent (see Table 8). Each year the number of inspections per plant has dropped. In 1982, each plant was "visited" by inspectors 1.81 times per year, while in 26 Tahbl8 Activity of the Inspecting Services of Environment Protection for Surface Waters Year Plants on inspecting No. of Average No. Inspections with services records Inspections of sewage samples Inspections taken Total Plants Inspected No. 0 Amt. No. 0 1982 13523 6995 52 12682 1.81 9462 75 1983 13680 7232 53 12855 1.78 9716 75 1984 13810 7215 52 12194 1.69 8857 73 1985 13894 6809 49 11032 1.62 7982 72 1986 13316 7489 56 11636 1.55 8264 71 1987 15150 7643 50 11622 1.52 7959 68 Source: Data of the Central Statistical Office Environment Protection 1983-1988 Warsaw. 27 1987, 1.52 times (on the average, every 8th month). In addition, sewage samples were not taken at every inspection. In 1982 sewage samples were taken during 75 percent of inspections and in 1987 during 68 percent of the visits. 91. Violating the norms of water pollution established for the economic subject in the water permission can be detected on the basis of the results of measurements of the number, state and composition of the drained off sewage. The number of plants that are inspected and the number of inspections are growing steadily. Although in recent years the number of plants inspected exceeded the number of plants having set standards for discharge to a water course, it still amounted to 50 percent of all the plants registered by the inspecting services of environmental protection. The system of inspections for water pollution seems to be better than the one covering air pollution. About 50 percent of inspections in plants find that the standards of sewage disposal are being exceeded. The growing number of plants fined compared to the number of plants with standards of sewage disposal (in recent years it exceeded 50 percent) proves there has been a steady increase in the enforcement of the system of fines (Table 9). 92. The plants which paid fines made up of 25 percent of the total number of plants on record. In 1987 the percentage for particular branches of industry was (the first number stands for plants subjected to fines, the number in parentheses stands for plants on record): a. mining and energy -- 28.3% (16.8%) b. metallurgy and machine industry -- 46.4% (26.3%) c. chemical and light industry -- 63.3% (32.9%) d. construction, and public utilities -- 58.3% (28.0%) e. agriculture, forestry and food economy -- 53.8% (24.4%) f. health and social care -- 43% (22.3%) g. milk cooperatives -- 75% (37.9%) h. transportation -- 68.3% (26.4%) i. remaining industries -- 47.6% (18.1%) 93. It is difficult to estimate the effectiveness of the system of fines regulating water consumption because those fines were not applied until 1985. In 1987 fines were imposed on 13 units (0.1 percent) out of the total number with water intake standards. This number apparently does not reflect the real size of the phenomenon. Collection of Fines 94. It is difficult to estimate the effectiveness of the fine collection system because the Central Statistical Office lacks complete data. There is a low collection rate for fines, particularly in relation to fines for exceeding pollution standards in drained-off sewage. In 1987, only 41.2 percent of the amount due for violation of pollution norms in drained off sewage was paid (in 1984, this figure was 40 percent). The collection rate for air pollution fines was higher and amounted to 90 percent (in 1984, this figure was also 90 percent). The collection rate for fines in particular branches of industry varied. In 1987, industry paid only 32.9 percent of its fines for sewage disposal and units of space economy and construction paid 21.1 percent (see 2R Table 9 Plants which Paid Fines for Sewage Disposal in the Years 1982-87 Plants having standards of sewage disposal Year Total No. Those on which fines were imposed number 1982 7426 2294 30.9 1983 7633 2690 35.2 1984 7575 2760 36.4 1985 6497 3112 47.9 1986 6634 3497 52.7 1987 6724 3673 54,7 Source: Data of the Central Statistical Office, Warsaw Environment Protection 1983-1988 29 Table 10). Of the fines imposed, 83.7 percent fell on units in those two branches. This determined the generally low level of fines paid. 95. One of the reasons why there was such a big difference between the number of fines levied and those paid was the practice which continued until the end of 1987 of remitting the whole or part of the fine. Considerable limitations on the remission of fines were introduced on January 1, 1988, and this should improve the collection rate. In 1989, however, new environmental regulations provided for the postponement of payments, or payments in installments, if an enterprise was taking action to end the violation (that period cannot exceed five years). This regulation will probably reduce the collection rate. 96. Fines for exceeding environmental standards directly lower the level of profit. Because the fines are an element used to calculate income tax on a plant in Poland, they increase the amount of tax paid. Theoretically, then, a fine can force a plant to fulfill ecological requirements. But to do this, it is necessary for a fine to have a proper "weight." 97. In 1987 the share of fines imposed in profitz, in metallurgic, machine, light, chemical industry and in energy and miring, balanced between 0.051 percent (metallurgic and machine industry) and 0.58 percent (energy and mining) (Table 11). 98. Only part of the fines was paid. According to another investigation (Poskrobko B.), which included 52 industrial plants causing heavy ecological damage, the share of fines imposed amounted in 1987 to 1.51 percent and the paid amount was 0.31 percent. The average amount of fine for one plant indirectly proves the low effectiveness of fines (Table 12). For example, in 1987 3,673 plants were punished with fines for exceeding sewage disposal standards. The total sum levied was 8,117 mln zl. of which 4,461.4 mln zl was imposed on the 75 most harmful plants, which meant an amount of 59.5 mln zl per plant. The remaining 3,598 plants had to pay 3,656.1 mln zl (about 1 mln zl per plant, the equivalent at the price of three color television sets). So, in a decisive majority of cases fines have not forced plants to follow standards for the use of environment resources. C. Ecological Funds 99. The system of environmental fees and fines is the main source of revenue for the ecological funds. There are five such funds in Poland. The most advanced is the Environmental Protection Fund, which was founded in 1980 and receives fees collected for the use of environmental resources. The fund(s) also receive fines levied for violations of environmental laws, and compensations payments made for environmental damages. The Environmental Protection Fund finances activities to promote the protection and rational use of environmental resources. The Water Fund was established in 1975. It finances the building of sewage treatment plants and water recycling systems. 100. On July 1, 1989 the two funds were merged into the National Fund of Environment Protection and Water Economy. Table 13 presents the amount and structure of revenues for both funds in the years 1935-1987. The share of 30 Table 10 Percentage of Paid Fines in Relation to Calculated Fines, for Various Branches of Industry in 1987 The Amount of Fines imposed* paid to imposed for exceeding norms (%) sum of pollution of air (mln z1) in drained pollution off sewage Min. of Ind. 5030.0 61.1 32.9 91.9 Min. of Space Econ. and Construction 1859.8 22.6 21.1 72.2 Min. of Agriculture, Forestry and Food Economy 681.6 8.4 106.2 96.7 Min. of Transport, Shipping and Com. 124.6 1.5 136.0 95.9 Centr. Assoc. of Milk Cooperatives 259.4 3.3 92.0 103.2 Remaining 278 3.4 70.5 101.8 Total no. 8233.9 100.0 41.2 90.0 Share of Imposed Fines 100% 83.6% 7.0% *Together with fines for exceeding the standards of permissible noise, vegetation damage, removing trees and bushes, and gathering waste materials contrary to the laws -- 9.4 percent of all fines. 31 able 11 Share of Fines in Profits with Reference to Branches of Industry in 1987 in bln at and % Fines imposed for exceedin standards air pollution sewage disposal water consumption Industries in share in in share in in share in bln profits bln profits bln profits s1 zl z Metallurgy and machine industry 0.242 0.021 0.403 0.03 - Chemical and light industry 0.198 0.028 4.0 0.6 Mining and energy 0.054 0.058 0.516 0.6 0.008 0.0 Source: Data from the Statistical Yearbook 1988 Warsaw: Note: One U.S. Dollar - approximately 9,500 Zloty. 32 Table 12 Fines for Exceeding Pollution Norms in Drained-off Sewage in the Years 1982-1987 Fines for exceeding pollution normi it drained-off sewage Year No. of Punished Amount of Fines Average Fine for One Plant Plants (mln zl) (mn zl) 1982 2294 888.9 0.39 1983 2690 1450.6 0.54 1984 2760 2128.3 0.77 1985 3112 3137.8 1.01 1986 3497 10427.8 2.99 1987 3673 8187.5 2.21 Source: Data of the Central Statistical Office Warsaw Environment Protection 1983-1988 33 Table 13 AMOUNT AND STRUCTURE OF REVENUES COMING FROM FEES AND FINES TO ECOLOGICAL FUNDS IN THE YEARS 1985-87 (In Million Zloty and Percentage) REVENUES SOURCE OF ------1858----- ------186----- ------1987----- REVENUES AMOUNT ShAre AMOUNT Share AMOUNT Share mln Zloty % mln Zloty % mln Zloty % The Environment Protection Fund TOTAL Number 32,832.3 100.0 40,846.5 100.0 86,644.8 100.0 A) Fees for Air Pollution 8,021.5 24.4 10,136.7 24.8 29,072.0 33.6 B) Fines for Air Pollution 356.2 1.2 533.0 1.3 582.0 0.6 C) Fines for Water and Ground Pollution 2,411.1 7.3 6,898.0 16.9 3,773.5 4.4 D) Other 22,043.5 67.1 23,282.5 57.0 53,215.6 61.4 The Fund of Water Economy TOTAL Number 20,369.2 100.0 18,896.2 100.0 47,246.6 100.0 A) Fees for Water Consumption 4,095.3 20.2 4,902.7 25.9 10,833.0 22.3 B) Fees for Sewage Disposal 8,034.7 39.4 7,626.3 40.4 25,448.3 53.9 C) Other 40.4 6,367.2 33.7 11,235.3 23.8 Source: Data from the Statistical Yearbook, 1988, Warsaw. 34 fees and fines for water consumption, sewage disposal and dust-gas pollution constitutes about 50 percent of revenues. The remaining revenues come from fees and fines for the use of other elements of the environment, payments for losses resulting from polluting the environment, from voluntary donations and material services, etc. Fees for air pollution (21.7 percent of revenues in 1987), fees for sewage disposal (19 percent) and for water consumption (7.9 percent) (Table 14) constitute the most important part. The share of fines is much lower, although it varies considerably in particular years depending on the collection rate (for fines for sewage disposal it was 11.5 percent in 1986 and 2.8 percent in 1987). 101. A third fund, the Cropland Protection receives dues and fees for agricultural lands that have been used for non-agricultural purposes, as well as fees for the creation of landfills and dumps, etc. The fund is used for projects to restore damaged lands. 102. The Forest Fund, created from contributions related to the conversion of forest land for other purposes, is devoted to the development of wasteland into forests, the abatement of emission of harmful pollutants and the intensification of forest production. 103. The fifth fund, the Scrap Materials Fund, is derived from fees levied on enterprises which do not take steps to recycle usable waste products, e.g., aluminum, glass, scrap metal, etc., but merely dump them. The fund is used to finance recycling programs. 104. The funds are divided into two categories: the central, which are at the disposal of the central government (ministries) to finance the national plan, and the local, which are used by the local administration to serve investment needs at the state level. 105. In practice, the rate of growth of the revenues of those funds is lower than the changes in the level of fees and fines. This is a result of a substantial discrepancy between the volume of total assessed fees and fines and those that are collected from polluters. This difference is a result both of the lack of collection by the central and local administration responsible for protecting the natural environment, as well as the power of anti- ecological lobbies at the central and local level. This process is also strengthened by some economic factors that make delayed payments cheaper. The penalty fee is lower than the rate of inflation. If fines are imposed on polluters, they can take the case to court, which automatically stops and delays payment of fines. 106. An important effect on that difference has a method of assessment of due payments from those that pollute. According to that method polluters are responsible for supplying information on the amount and quality of used water, sewerage, and the quantity of emission of particulate and gases. If the amount of pollution exceeds the amount allowed by the permit, polluters do not report that fact. Since the frequency of inspection is low, the polluters Ae unrestrained and do not bear the full cost of polluting. Obviously, any type of pollution control policy requires an efficient monitoring system. Without it pollution control will remain wishful thinking. A shortage of monitoring 35 Table.1A AMOUNT AND STRUCTURE OF REVENUES COMING FROM FEES AND FINES FOR THE EPF AND THE FE TOGETHER IN THE YEARS 1985-87 (IN MIN 21 AND PERCENT) REYENUES SOURCE OF ------.2M----- ------12=6----- -----...-.- REVNES AMOUNT Shae AMOUM Shar Mh mln Zloty a sl Zloty % mln Zloty % The EPF and the FWE - Together 53,201.5 100.0 59,742.7 100.0 133,892.4 100.0 Fees for the Air Pollution Emission 8,021.5 15.1 10,136.7 17.0 29,072.9 21.7 Fines for Air Pollution 356.2 0.7 533.0 0.9 582.8 0.4 Fines for the Water and Ground Pollution 2,411.1 4.5 6,898.0 11.5 3,773.5 0.8 Fees for Water Consumption 4,095.3 7.7 4,902.7 8.2 10,533.0 7.9 Fees for Sewage Disposal 8,834.7 15.1 7,626.3 12.8 25,448.3 19.0 Remaining 30,282.7 56.9 29,649.7 49.6 64,480.9 48.2 Source: Individual listing. 36 equipment and its inefficient utilization on both sides (i.e., the polluters and state), creates a good basis for dispute which usually ends in a delay or no payment. 107. A major defect of the ecological funds is the control exercised by the national authorities, either directly or indirectly. If the government defines what part of the funds is to be used at the local level and if it has the right to transfer the funds from one state to another this leads to inefficient use. This policy weakens the interest of localities in the long- run planning and monitoring and implementation of environmental protection. A lack of real local self-govern.ent results in purely bureaucratic behavior by local governments, which places a higher value on output than on sustainable development. 108. The ways in which the ecological funds have been used also raises some questions. Principles set for grants from the funds for the years 1986- 1990 stated that they should supplement investment outlays for the protection of the environment by not more than 40 percent. Research in two voivodships of southern Poland showed that in reality the share of those earmarked funds in financing environment activities ranged from 80 percent to 100 percent (see Bogacka E.). Quite often those activities were of little importance, and in some cases the funds were used to finance projects unrelated to environmental protection. 109. The funds were also used to finance enterprises running deficits or on the edge of profitability. It was common to find that the funds were used by the local governments to cofinance municipal enterprises and other units for which the local government was a founding institution (see Bogacka - Kisiel E., Lyszczak M.). As a result, the funds' outlays were scattered among many projects, decreasing their effectiveness and expanding the time span of investment activities. D. Tax Policy 110. The tax system - in particular, income tax reduction - is also used to protect the environment. Tax reductions are granted to any enterprise that will make investments aimed at protecting the environment. That relief amounts to 30 percent of the total cost of investment, provided that the project will be completed in less than five years. A 20 percent income tax cut is granted if a by-product production is started that will use wastes, scrap or low quality materials. 111. Turnover tax relief is given to those enterprises that sell products made from wastes instead of high quality raw materials. 112. Income tax may be increased if an enterprise has paid fines and compensation for violations of ambient standards or other permits that were issued for using environmental resources. In such cases the size of the fines and compensation payment increases the basis for taxation. 113. A further tax based incentive for investment in pollution abatement is through a waiver of amortization payments. Investments are required to be 37 amortized and the enterprise is required to do so by paying the state according to an agreed schedule. This repayment requirement is waived for investments for pollution abatement. 114. The tax policy described here was introduced in Poland a few years ago. So far, there is insufficient data to judge whether the policy has affected pollution control decisions made by enterprises. But one remark seems obvious. The fees and fines paid by the users of environmental resources will not motivate polluters to reduce the harm they cause to the environment, if the legal and administrative system is ineffective. Therefore, there is a limited demand for investments. It is cheaper to pollute and pay fees and fines. This behavior is also encouraged by the lack of monitoring devices. 115. Tax rebates for environmental protection are less competitive than preferences for increasing production and export. This is because the sum of all tax rebates cannot exceed 30 percent of the tax due. An enterprise that can choose the tax relief it receives will favor increasing exports over controlling pollution. 116. It is therefore important that this type of a preferential tax policy be replaced by a policy of setting "proper" user's charges, fees and fines and full enforcement. The market allocation of environmental resources will only be efficient provided the costs of production embrace the social costs. The incentive to reduce environmental damage in the production and service sectors will increase. Finally in the case of a country like Poland, which faces a huge foreign debt and budget deficit, such a preferential tax policy cannot be sustained. Since exports are encouraged, domestic prices should fully reflect the internal and external costs of production. E. Sources of Financing Environmental Protection 117. The state budget, local budgets, ecological funds, credit, and financial resources of enterprises are the sources of financing environmental protection in Communist countries. (See Table 15.) One of the features of non-market economics is the central government's authority over revenue collection and spending. In Poland before the economic reforms were introduced the investment outlays and costs of environmental protection were financed by the state budget. After ecological funds were introduced, the role of the state budget declined as a source of financing pollution control. The share of investment outlays covered by enterprises grew as the economic reforms got underway. 118. Czechoslovakia has a federal water fund that finances investments of water reservoirs, sewage treatment plants, and other facilities. In Hungary, a similar water fund is used to support the financing of capital projects. This fund is also used to subsidize construction of sewage-treatment plants, research work and bonuses for the economic use of water. In Poland, ecological funds have a similar function as in Czechoslovakia and Hungary. A common feature is that the state has control (direct or indirect) over the source of financing for environmental protection. Although some ecological 38 TABL 15 SOURCES OF FINANCING INMESTMENTS IN 63 HEAY POLLUTORS (ENTERPRISES) (In Percent) ENVIRONNENT MS PROTECTION INVESTMENTSa SOURCES OF FINANCING 1983-85 1986-90 1983-85 1986-90 Budget Subsidies 5.5 17.0 2.1 4.0 Enterprises Development Fund 70.6 57.0 46.8 53.0 Bank Credit 10.5 19.0 3.5 8.0 Ecological Funds 7.6 4.0 46.86/ 29.0b/ Other Sources 5.8 3.0 0.8 6.0 TOTAL 100.0 100.0 100.0 100.0 Share of Environment Protection Investments in Total Investments x 14.8 / 14.0 A/ Planned. k/ Environmental Protection Fund and Water Economy Fund. g/ This index for the whole industry was 3.7%. Sonrce: K. Gorka, R. Szura, Zrodla finansowania inwestycji ochrony arodoviska w: Zastosowanie instrumentow ekonomicznych i prawnych w ochronie srodowiska naturalnego, PTE Krawkow, 1988. 39 funds in Poland have been partially decentralized, the government continues to earmark user charges and fines for environmental funds. 119. The central control of ecological funds, combined with the domination of local government administration over people's councils, does not allow localities to devise utilization policies based on local needs. Only a high degree of economic and political decentralization of environmental protection policy will make it effective. For years, the Minister of Environmental Protection in Poland had the right to grant a polluter an exemption from fees and, fines had often used that right. This meant that the community affected by pollution lacked the right to improve its environmental quality. The community was also deprived of its right to financial compensation from the polluter. 120. Ecological funds should be used to aid the enterprise's own pollution control activities provided that this aid will take the form of loans and not subsidies. The boards of those funds may use a preferential interest rate. Its level may depend on the scale of local preferences for environmental protection. The decision as to where and how much should be spent should be left to the decision of the local (provincial) government. 121. Bank credit is one of the means currently used in Poland to encourage the interest of enterprises in pollution control, Enterprises are offered preferential rates and preferential terms. Those preferences are of both an indirect and direct nature. The indirect form concerns only those investments that deal with fuel and energy, the conservation of natural resources and materials and pollution control activities. The direct form deals with the creation of favorable credit conditions. This includes: (a) Easy access to bank credits; (b) An increased shared of the credit in financing investment; 2 (c) A longer repayment period for investments. (d) Preferential lending rate. In Poland this rate is equal to 50 percent of the basic rate. 122. It is worth noting that in Poland credit interest is counted in the costs of production. When cost plus pricing is used and a seller's market exists then the level of interest rate is of little significance for the investment and production decisions made by enterprises. 123. The success of the credit policy depends on the banks'lending ability. An analysis of the bank-,'lending ability in Poland between 1982-87 shows that the share of credits for the state-owned economy decreased compared 'Currently the policy of the National Bank of Poland allows a pollution control investment to be fully financed by a bank loan 40 to the total amount of credits granted. This share declined from 71.9 percent in 1982 to 40 percent in 1987. At the same time the share of investment credits in the total amount of credits for that sector heavily declined from 17 percent in 1982 to 7 to 8 percent in the years 1987-88. The current economic situation limits the possibility of using this source to finance environmental protection in Poland. 124. The final method of financing environmental protection involves the enterprises' own resources. In the current Polish economic system enterprises accumulate investment funds in the "development" fund for which the profit is the main source. This fund is then available for investment by the enterprise. This process, which was introduced along with the economic reforms, replaced a "command and control" based procedure in which investment funds were allocated by a higher level of the government. With this centralized structure and its emphasis on quantitative production goals, which were estimated in the national plan, use of resources to meet environmental objectives was given a low priority, even though they may have been specified as objectives of the plan. 125. Public utilities receive investments funds from the local budget and from the local ecological funds. The state budget is also a source of funding for the local technical infrastructure. Public utilities must be subsidized because the user charges are set below operating costs. This policy must be changed, preferably through decentralization. This would encourage municipal ownership, which would allow for the imposition of local taxes and more realistic user charges. Such a situation would be in the interest of the locality, and, by creating a new source of financing, would enable it to solve many local environmental problems. F. Linkage of Economic Incentives With the Financial System of an Enterprise 126. The aim of ecological protection through economic regulation is to preserve the environment at the least cost. Although there is opposition to economic regulation, it is the cheapest way in terms of social costs, of discouraging excessive use of environmental resources. Economic efficiency is improved because the full cost of the product or process, including pollution costs, are then taken into account in producers' and consumers' decisions. The rest is done by market forces, which make the best use of those resources. If we admit that a market-based economic system leads to higher productivity, than a non-market system, then the market should regulate the environmental sphere as well. Creating an "ecological market economy" requires that the state and/or local self-governments enforce institutional changes. Regulatory practice is essential because of the widely accepted idea of the market failures. Internalization of negative, ecological externalities broadens the scope of costs that are taken into account by the economic units. And although we might run into problems of second-best, this approach in the end should result in higher efficiency when compared with a command and control policy. 127. The issue of linking the natural environment with economic activity has only been raised in very recent years in Eastern European countries. 41 Say's category of free goods, the Marxist theory of value and so-called social ownership should be seen as theoretical barriers since Marxist thought has no practical value for resolving environmental problems. 128. The use of economic instruments for environmental protection in Communist countries is, generally speaking, properly combined with the financial system of enterprises. The user charges and fees for environmental resources are included in the costs of production, and fines for excessive use of those resources reduce profit or the development fund. But because the financial system of enterprises and economic regulation do not promote rational economic behavior by enterprises, it is obvious that even the most properly designed system of incentives will not be efficient. If we assume that fees, user charges and fines fully express scarcity (in theory), an enterprise will recognize this fact. But the government's emphasis on increasing output neutralizes,-this decision with reliefs, grants, subsidies, and exemptions. Ao"practice shows, this happens whenever the economic consequences of overusing environmental resources threatens the financial condition of an enterprise, and especially its ability to pay its employees (see the section on implementation of fines). 129. Polish experience indicates that the economic system of protecting the environment is inefficient in stimulating proecological activity by individual firms within the context of a centrally planned economy. Therefore, without broader institutional and economic changes, it will be impossible to achieve environmental goals in a least cost way. G. Institutional and Economic Reasons for the Inefficiency of Existing Policy 130. Among the reasons for the current state of environmental quality in Eastern Europe is the refusal of governments to take the problem seriously. This attitude can be seen in the size of investment and financial outlays for environmental protection as well as in the disregard for the law, in censorship and control of public information on the environment, and in the choice of ineffective economic incentives to promote environmentally safe behavior by firms. 131. The centralization of governmental decision-making weakens local authorities and enterprises. In environmental matters, this is very important because the problems of pollution and degradation are of a local nature and their symptoms are spread out over a large area. The policy must be adapted to take local problems into account, which will require some trade-offs between different goals. Any attempt to reduce environmental degradation will be counter-productive if there is failure to respect the needs and encourage the participation of groups that are most affected by change (see Barbier). In practice, this means that localities must be granted the right of self- organization and the freedom to express their needs and ideas. These localities must also have financial self-sufficiency. The decentralization of power will create new institutions, which is important, because the issue of environmental protection is related to a number of social objectives, including cultural diversity, institutional sustainability and social justice. 42 132. From an economic perspective, the ineffectiveness of environmental protection policy in Eastern Europe is linked to the system of user charges, fees and fines. Those "prices", as research in Poland has shown, continue to be below the marginal costs of pollution control and supply. Since there is no mechanism for adjustment for inflation those "prices" fail to act as economic incentives. If we add to that the cost plus pricing method and lack of economic competition, then those "instruments" have only a bookkeeping value for enterprises. 133. In addition, the system of fines is neutralized by the use of soft budgets. Charges for using environmental resources fail to reflect the abundance of resources and the spatial environmental assimilative capacity. 134. The ecological funds are directly or indirectly centralized, which leads to inefficient use. Ecological tax benefits are too weak in comparison with the support given to increasing industrial production and exports. 135. 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