The Economic Instruments used for Environmental Purposes in the Eastern Europe, Caucasus and Central Asia (EECCA) Region: Words or Actions?

The Economic Instruments used for Environmental Purposes in the Eastern Europe, Caucasus and

Central Asia (EECCA) Region: Words or Actions?

By

Ifigeneia Lentza

Master of Laws in Environmental Law and Policy

AN INTERNSHIP REPORT

Submitted to the

Centre for Energy, Petroleum and Mineral Law and Policy

October 2011

ii

Table of Contents

Table of Abbreviations ......................................................................................................... iii

List of Tables and Figures .................................................................................................... iv

Acknowledgements ............................................................................................................... v

Declaration .......................................................................................................................... vi

Abstract .............................................................................................................................. vii

1. Introduction ....................................................................................................................... 1

2. What are the economic instruments? .................................................................................. 4

2.1 Categorization of economic instruments....................................................................... 5

2.2 Advantages of economic instruments ........................................................................... 5

3. The EECCA experience..................................................................................................... 7

3.1 Economic Instruments used in EECCA ........................................................................ 8

3.1.1 Pollution Charges.................................................................................................. 9

3.1.2 Product Charges and Fiscal Instruments .............................................................. 12

3.1.3 Charges and taxes for the use of natural resources ............................................... 14

3.1.4 Other types of payments ...................................................................................... 18

3.1.5 Environmental Funds .......................................................................................... 21

4. Conclusions and assessment of the use of economic instruments in EECCA .................... 24

4.1 Deficiencies of the existing environmental policy ...................................................... 27

5. Conclusion ...................................................................................................................... 29

Bibliography ....................................................................................................................... 30

iii

Table of Abbreviations

C-a-c Command-and-control

EECCA East Europe, Caucasus and Central Asia

EIs Economic Instruments

EPR Environmental Performance Review

GDP Gross Domestic Product

MACs Maximum Allowable Concentrations

MPLs Maximum Permissible Levels

NEF National Environmental Fund

OECD Organization for Economic Co-operation and Development

UNECE United Nations Economic Commission for Europe

UN United Nations

UNEP United Nations Environmental Programme

US United States

VAT Value Added Tax

WHO World Health Organization

iv

List of Tables and Figures

Figure 1. The EPR Status (dark green: Second review countries, light green: first review

countries) .............................................................................................................................. 1

Figure 2. Categories and types of economic instruments for environmental purposes ............ 6

Figure 3. 2008 Presidential Decree on Water Tariffs in the Tbilisi region ............................ 19

Figure 4. Total environment related expenditure by ownership in Kyrgyzstan ..................... 22

Table 1. Selected EECCA indicators and world income-group comparators .......................... 8

Table 2. Overview of the use of economic instruments for environmental protection and

natural resource management (updated until 2010) ................................................................ 9

Table 3. Revenues from pollution charges and fines in Kazakhstan ..................................... 11

Table 4. Revenues and expenditures of local funds in Moldova, 1998-2004 ........................ 11

Table 5. Excise taxes levied on petrol and diesel for motor vehicles, 2004-2006 ................. 12

Table 6. Fees for the use of water resources (water abstraction fees) ................................... 15

Table 7. Selected fees for the use of wild animals and plant species in Tajikistan, 2010....... 17

Table 8. Water supply and sewage tariffs in Turkmenistan .................................................. 20

Table 9. Revenues of environmental funds in Ukraine, 1998-2004 ...................................... 22

v

Acknowledgements

I would like to thank Mr. George G. Georgiadis, Environmental Affairs Officer,

Environment Division, UNECE and Mr. Antoine Nunes, Environmental

Performance Programme Manager, Environment Divison, UNECE, for their valuable

help and support during my internship, on which I have based this report.

vi

Declaration

I, Ifigeneia Lentza, hereby certify that I am the author of this work; that I have

consulted all the references cited; that the work, of which this dissertation is a record,

has been completed by me and that it has not previously been accepted for a higher

degree.

Ifigeneia Lentza

October 25, 2011.

vii

Abstract

The use of market-based instruments to achieve environmental objectives has been

slowly introduced to the policy making of most developed countries in the last twenty

five years. The trend towards their increased use lies to the fact that they provide a

more flexible way for internalizing the externalities brought to the environment by the

various sources of pollution, than other regulatory, command-and-control instruments.

However, their effective use might be jeopardized where lack of the necessary

institutional and regulatory framework and, of course, lack of an adequately formed

market can be observed. This is the case in most of the countries that are characterized

as “economies in transition”. Many of these countries are facing a rapid economic and

industrial growth, which is not followed by the commensurate environmental

protection. In the pursuit of the so called sustainable development, the East Europe,

Caucasus and Central Asia (EECCA) countries have been introducing, for a while

now, legal frameworks providing for the use of these instruments, but, either because

of inadequate control mechanisms or misuse of the relevant revenues, they have not

always been effective. This report aims to describe the economic instruments existing

in the EECCA region, analyze their purpose and function and, finally, assess their use

and its effectiveness when it comes to their practical application. The report will be

based on the findings of the 2nd Environmental Performance Reviews of the countries

in question.

1

1. Introduction

During my three month internship with the United Nations Economic

Commission for Europe (UNECE), I worked in the Environment Division and, more

precisely, in the Environmental Performance Reviews (EPR) team. The EPR team is

responsible for the preparation of the individual reviews for each non-OECD member

State of UNECE1. These reviews aim to assist the countries in the alignment of their

economic growth and the protection of the environment, in order to achieve a

sustainable development, by proposing environmental measures and policies and

encouraging international cooperation. OECD was initially responsible for this task,

but, ever since 1993, at the Luzern Declaration, these reviews have started to include

the whole Europe region and became “a part of the regular programme of the

UNECE”2.

Figure 1. The EPR Status (dark green: Second review countries, light green: first review countries)3

1 Introducing Environmental Performance Reviews, at http://live.unece.org/env/epr/welcome.html

(Last visited, September 27th, 2011). 2Ibid. 3 Ibid.

2

The Environmental Performance Review procedure only begins at the request

of the interested country. When the agreement becomes official, the EPR team, along

with national and international experts, assesses the country’s environmental

performance and management, focuses on the specific problematic areas and

recommends ways to improve them. A standard form of an EPR will cover issues

“related to policymaking, planning and implementation, the financing of

environmental policies and projects, and the integration of environmental concerns

into economic sectors, in particular the sustainable management and protection of

water resources and the protection of the Caspian Sea, waste management, air

management, and forestry, biodiversity and protected areas”4.

As it can be observed, an EPR is divided in, at least, 10 chapters covering the

aforementioned issues. However, since one of the tasks assigned to me, was to draft a

report assessing the economic instruments used in these countries for environmental

purposes, I am going to focus on this subject. Despite the fact that the economic

instruments have been acknowledged as more flexible and, potentially, more effective

instruments, when it comes to environmental purposes, one should not use as a

compass the experience of developed countries. The challenge here is, exactly, the

fact that we are facing developing countries and economies in transition, so any

solution, should focus on the country’s specific needs and capabilities. In most of

these countries living conditions are far below the average and poverty prevails. Their

main focus, right now, is to try and emerge economically and, usually, the means to

succeed this lead to an industrial growth and rapid development which has adverse

impacts on the environment. Keeping this in mind, it is obvious that “environmental

policy cannot be divorced from economic policy and development strategy”5.

The aim of this report is to present the various economic instruments used in

the EECCA countries for environmental purposes, describe their purpose and their

4 UNECE Environmental Performance Reviews: Azerbaijan 2011 (Second Review), p. iii, EPR Series

No. 32, UN Publication 2011. 5 Panayotou, Theodore, Economic Instruments For Environmental Management and Sustainable

Development, p. 2, International Environment Program Harvard Institute for International Development

Harvard University, December 1994.

3

function and, finally, assess the practical application in terms of effectiveness, by

using the experience of some of these countries who have been using, slowly but

steadily, economic instruments in order to achieve environmental objectives6.

6 There are 12 EECCA countries: Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan,

Moldova, Russian Federation, Tajikistan, Turkmenistan, Ukraine, Uzbekistan.

4

2. What are the economic instruments?

Ever since environmental policy has become an active part of the countries’

overall policies, governments have been seeking the most efficient and cost-effective

ways to deal with pollution. The first approach in order to deal with pollution sources

was through the, so called, “command-and-control” instruments, which is a regulatory

approach. C-a-c instruments try to yield results by setting uniform technology-based

and performance-based standards7. The drawback of this approach lies to the fact that

it focuses on specific results, without taking into account the nature of each industry

or the means to achieve the targets set by them and, thus, resulting in a large financial

burden to the firms and little or no incentive at all for the use of less polluting

technologies. “There is no reward for beating a target, only the risk that the regulator

will promptly raise the standard to reflect the new technology”8.

Economic instruments are considered to be a more flexible way to achieve the

same results, but in a much more cost-effective manner. They “are defined as

economic incentives designed to ensure that environmental costs and benefits are

included in the decision-making of enterprises and households in order to promote

environmentally sound and efficient production and consumption patterns”9. The

focus in, what is called “internalizing the externalities” brought to the environment by

the various polluters, from individuals to large firms and plants (Polluter Pays

Principle10). Their main driver is the fact that polluters do not usually bear the

environmental cost of their actions, thus creating a huge social cost11. Economic

7 Austin, Duncan, Economic Instruments for Pollution Control and Prevention – A Brief Overview, p.

2, World Resources Institute, September 1999, at http://pdf.wri.org/incentives_austin.pdf (Last visited,

October 10th, 2011). 8 Ibid. 9 ECE, Committee on Environmental Policy, Turkmenistan EPR, 2nd Review, Unpublished. 10 “Principle 16: National authorities should endeavour to promote the internalization of

environmental costs and the use of economic instruments, taking into account the approach that the polluter should, in principle, bear the cost of pollution, with due regard to the public interest and

without distorting international trade and investment.”, Rio Declaration on Environment and

Development 1992, at

http://www.unep.org/Documents.Multilingual/Default.asp?documentid=78&articleid=1163 (Last

visited, October 10th, 2011). 11 Denne, Tim, Economic Instruments for the Environment, p. 2, Environment Waikato Technical

Report 2006/23, Covec Ltd. 2005.

5

instruments create non polluting incentives, since reparation costs might end up being

greater than the prevention costs. Furthermore, the environmental cost is integrated

into the price of goods, so that consumer’s awareness is raised and more accurate

market signals are conveyed12.

2.1 Categorization of economic instruments

There are many different types of economic instruments, which can be divided

in seven categories: a) property rights, b) market creation (tradeable permits, etc.), c)

fiscal instruments (pollution taxes, product taxes, etc.), d) charge systems (user

charges, road tolls, etc.), e) financial instruments, f) liability instruments, g)

performance bonds and deposit refund systems13. This big variety of choices allows

each polluting part to choose the most cost-effective way to reduce their harmful and

polluting behavior, depending on each country’s policy and institutional conditions, as

well as its financial capability14 (See Figure. 2).

2.2 Advantages of economic instruments

EIs have various advantages compared to regulatory tools, like offering great

flexibility to polluters to move independently when choosing the means to achieve

their environmental targets at the least possible cost15. They provide incentives for

technological progress, generating both environmental and financial benefits (“win-

win”)16, since the different operations, industries, as well as individuals, will be

constantly trying to find ways to reduce the costs brought to them by pollution taxes

and charges. They lead to the raising of revenue that could provide the financing for

12 UNEP Briefs on Economics, Trade and Sustainable Development - Information and Policy Tools

from the United Nations Environment Programme, Economic Instruments for Environmental

Protection, p. 1, UNEP/ETB Publications, July 2002. 13 See Panayotou, supra note 5. 14 UNEP, The Use of Economic Instruments in Environmental Policy: Opportunities and Challenges, p.

12, UN Publications 2004. 15 Bernstein, J., D., Economic Instruments (Chapter 6), Water Pollution Control - A Guide to the Use of

Water Quality Management Principles, Published on behalf of the United Nations Environment

Programme, the Water Supply & Sanitation Collaborative Council and the World Health Organization

by E. & F. Spon, 1997 WHO/UNEP. 16 See UNEP, supra note 10.

6

pollution abatement infrastructure and decreasing the financial burden that the society

has to bear.

C-a-c instruments set a certain standard or level of allowed pollution, which, if

exceeded, could lead to sanctions. However, little or no incentive at all is provided

with this process, since the polluter will end up having the dilemma “pollute or pay” a

sum which usually is far from discouraging. EIs, provide these incentives and, more

importantly, take into account the individuality of the polluter. They greatly reduce

the social cost that non-polluters have to bear by strictly applying the “polluter-pays

principle”. Finally, they can be adjusted into corresponding to each country’s

financial and institutional profile.

Figure 2. Categories and types of economic instruments for environmental purposes17

17 See Panayotou, supra note 5 at 9.

7

3. The EECCA experience

As it was aforementioned, the challenge, when dealing with economies in

transition and developing countries, lies exactly to the fact that they do not yet have

an organized and structured economy and, as a result, a market and, in many

occasions, their institutions, their regulations and their policies are inadequate to

support the application of economic instruments for environmental purposes.

However, “the use of economic instruments in EECCA dates back to the period of the

Soviet Union”18, mainly through some pollution charges and environmental

payments. With the breakup of the Soviet Union in 1991 and the gradual transition of

the resulting countries, the new governments had a great deal of issues to cope with

and environmental management was not their top priority. Despite being left with an

important legacy of environmental policies and regulations from the former Soviet

Union, most of them were outdated and did not correspond to the new facts.

The EECCA region itself has many differences between its countries and this

can be reflected to the rhythm of progress, economic development and transition to

democracies19. There are great differences in their total population, the GDP, as well

as the mortality rates and poverty. As a result, some of them show more obvious signs

of development and have been able to expand and simplify the existing environmental

management tools.

Population Urban

Population

GDP Land area Under-five

mortality

rate

Passenger

cars

(millions) (percentage) ($ billions) (Thousand

sq. km.)

(Per 1000

live births)

(Per 1000

people)

Armenia 3.1 64 8.7 28.5 22 96

Azerbaijan 8.8 52 43.0 82.6 34 72

Belarus 9.7 74 49.0 202.9 12 240

Georgia 4.3 53 10.7 69.5 29 95

Kazakhstan 15.9 58 115.3 2,699.7 29 164

Kyrgyzstan 5.3 36 4.6 191.8 37 44

Moldova 3.6 41 5.4 32.9 17 101

Russian Fed. 141.9 73 1,231.9 16,376.9 12 206

18 OECD, The Use of Economic Enstruments for Pollution Control and Natural

Resource Management in EECCA, p. 4, Fourteenth EAP Task Force Meeting, 10-11 February 2003,

Tbilisi, Georgia, at http://www.oecd.org/dataoecd/37/18/26732337.pdf (Last visited, October 12th,

2011). 19 OECD, Environmental Management in Eastern Europe, Caucasus, and Central Asia, p. 25, OECD

Publishing, 2005.

8

Population Urban

Population

GDP Land area Under-five

mortality

rate

Passenger

cars

(millions) (percentage) ($ billions) (Thousand

sq. km.)

(Per 1000

live births)

(Per 1000

people)

Tajikistan 7.0 26 5.0 140.0 61 29

Turkmenistan 5.1 49 19.9 469.9 45 80

Ukraine 46.0 68 113.5 579.3 15 138

Uzbekistan 27.8 37 32.1 425.4 36 n. a.

Low income

countries

846.1 29 431.5 17,303.9 118 n. a.

Middle income

countries

4,812.5 48 16,206.0 78,352.9 51 36

High Income

countries

1,116.6 77 41,607.7 33,905.1 7 432

Table 1. Selected EECCA indicators and world income-group comparators20

3.1 Economic Instruments used in EECCA

The most common EIs used in the EECCA region are pollution charges, which

include emission charges, water use charges and charges for the use of subsoil

resources. Few of the countries have introduced charges for the waste discharge and,

even fewer, user and product charges. Many of these charges remain to the stage of

provisions and are not active, and, if active, the numerous exceptions, subsidies and

low collection rates, render them ineffective. Environmental funds exist in most of the

countries, however, they are either inactive or not have enough revenues to support

environmental investments. Despite the fact that most of these instruments have a

mainly revenue raising purpose, these revenues are not even earmarked for

environmental purposes in many cases. Environmental liability systems and basic

environmental taxes (such as fuel and annual vehicle taxes) can be found in all

EECCA countries. Out of the 12 countries being a part of the EECCA region

(excluding Russia, which is not being part of the EPRs, since it is not considered an

economy in transition) Moldova, Ukraine, Kazakhstan and Belarus stand out in being

more advanced when it comes to applying economic instruments for environmental

purposes. In the section below, a more detailed presentation of the instruments used in

the region and their function will follow.

20 World Bank, World Development Indicators 2011.

9

Arm Aze Bel Geo Kaz Kyr Mol Rus Taj Tur Ukr Uz

Pollution Charges

Air Emissions X X X X X X X X X X X X

Water Effluents X X X X X X X X X X X X

Solid Waste X X X X X X X X X X X X

Non-compliance fees X X X X X X X X X X X X

Product charges/taxes

Products with various

harmful Substances

X

Charges on

pesticides/fertilizers

X

Tax diff. for unleaded

gasoline

X X X

Charge on sulphur

content in fuels

X

Other instruments for

environmental

protection

Deposit-refund system ,

(glass bottles)

X

User charges water

supply/wastewater

X X X X X X X X X X X X

User charges municipal

solid Waste

X X X X X X X X X X X X

Other waste disposal

charges

X X X

Environmental liability

payments

X X X X X X X X X X X X

Payments for natural

resource use

Water abstraction fees X X X X X X X X X X X

Fees for non-

consumptive use of

water

X X X X X X X X

Forest fees and charges

X X X X X X X X X X X X

Taxes/charges for

subsoil Resource

X X X X X X X X X X X X

Payments for use of

biological resources

X X X X X X X X X X X

Table 2. Overview of the use of economic instruments for environmental protection and natural resource

management (updated until 2010)21

3.1.1 Pollution Charges

“Charges are defined as payments for use of resources, infrastructure, and

services and are akin to market prices for private goods. They differ from market

prices for private goods because they are not market determined but are

administratively set by a government agency, a public utility, or other types of

regulated natural monopoly”22. The most commonly used economic instruments in

21 See OECD, supra note 18 at 23. 22 See Panayotou, supra note 5 at 19.

10

the EECCA region are pollution charges. These can be further divided into emission,

product and user charges23.

Pollution charges in the EECCA region are usually air pollution charges, water

effluent charges and, less often, waste related charges and fees. These are based on a

maximum allowed limit, which, if exceeded, results in a non-compliance fee. Those

limits are the so called Maximum Permissible Levels (MPLs) of pollution and are

determined based on ambient environmental quality standards, Maximum Allowable

Concentrations (MACs), different for each pollutant24. The trend is the same for most

of the countries: charges are too low to create any incentives, collection rates are

slow, revenues are not always earmarked for environmental purposes, as they should,

and the numerous exemptions lead to ineffectiveness. Furthermore, especially when it

comes to air pollution charges, these focus on an incredibly large number of

pollutants, thus rendering monitoring and implementation dysfunctional and not cost-

effective25. The water effluent charge system is in many occasions too simplified,

leading on a charge based on the amount of wastewater discharged, not taking into

account the individual pollutants that it contains, like it is being done in the rest of

Europe.

Ukraine has shown great progress in the field on pollution charges, mainly in

the area of air and waste pollution. Charges have increased to adjust to inflation,

which is one of the main causes for the low charge rates and the real value of their

revenues, and collection rates improved dramatically. Belarus has, now, one of the

highest charges for air pollutants in EECCA, but it still focuses on over a hundred of

them26, while Moldova levies charges on “1000 air pollutants, 27 water effluents, and

five different types of waste”27. Progress can also be observed in Kazakhstan, where,

“in 2006, revenues from pollution charges amounted to 26.5 billion tenge ($210

23 OECD, Economic Instruments for Pollution Control and Natural Resources Management in OECD Countries: A Survey, p. 15, Working Party on Economic and Environmental Policy Integration, OECD,

1999. 24 See OECD, supra note 18 at 26. 25 ECE, Committee on Environmental Policy, Belarus EPR, 2nd Review, Series No. 22, p. 88, United

Nations Publications 2005. 26 Belarus EPR, 2nd Review, Series No. 22, p. 87, UN Publications 2005. 27 Republic of Moldova EPR, 2nd Review, Series No. 23, UN Publications 2005.

11

million), up from 4.5 billion tenge in 2000”28; however, they are not earmarked for

environmental purposes. Azerbaijan showed an upward trend in revenues, as well.

Despite there not being a change in the rates of pollution charges, fines and penalties

were increased in 2007, resulting in a more than three times higher sum of average

annual payments in 2008-2009, compared to the one in 2003-200529.

Table 3. Revenues from pollution charges and fines in Kazakhstan30

Table 4. Revenues and expenditures of local funds in Moldova, 1998-200431

28 Kazakhstan EPR, 2nd Review, Series No. 27, p. 89, UN Publications 2008. 29 Azerbaijan EPR, 2nd Review, Series No. 31, p. 72, UN Publications 2011. 30 See Kazakhstan, supra note 27 at 90. 31 Moldova EPR, 2nd Review, Series No. 23, p. 83, UN Publications 2005.

12

3.1.2 Product Charges and Fiscal Instruments

Product charges are almost nonexistent in the EECCA region. They are

defined as “charges levied on products that are harmful to the environment when

used as an input to the production process, consumed, or disposed of”32. What can be

found in a greater amount is a series of fiscal instruments, such as taxes on

environmentally harmful products (see figure 2). Sulphur content in fuel oil,

pesticides, fertilizers and leaded gasoline are some of the substances classified as

harmful. A common product tax used in a few EECCA countries is the one

differentiating between leaded and unleaded gasoline. Moldova is taking the lead in

these steps with an “ad valorem excise tax rate on diesel (1 per cent) twice as high as

that on unleaded petrol” and, as a result, “large price increases of imported fuel in

recent years saw the petrol-diesel price differential decline from 23 per cent in 2002

to about 5 per cent in the first quarter of 2005”33. In Georgia, leaded petrol was

officially phased out in 2000, in 2001 in Ukraine and in 2003 in Kazakhstan. Around

101 pesticides are being taxed in Tajikistan.

Table 5. Excise taxes levied on petrol and diesel for motor vehicles, 2004-200634

Notes: Excise taxes for retail sale by oil refineries via their own retail networks. 1 ton of gasoline/diesel =

1,356 litres. Prices in U.S. cents are calculated using the average annual exchange rate for 2006 (US$ 1 = 126.1

tenge).

Fiscal instruments in EECCA are mainly used in the transport and energy

sector. Along with an upward trend in the economic development of the countries in

the region, a great increase in car ownership has been observed, contributing

32 See Bernstein, supra note 15. 33See Moldova, supra note 30 at 77. 34 See Kazakhstan, supra note 27 at 95.

13

significantly in the degradation of the urban environments. In an effort to minimize

the consequences, the governments have been trying to introduce instruments

targeting the transport sector. These are excise taxes, VAT and custom duties on

imported vehicles and fuels, car registration fees, annual vehicle taxes, pollution

charges for mobile sources and road transit taxes. The road taxes are usually

differentiated according to foreign and domestic owners and according to engine

volume or the type and size of the vehicle and the days spent in the country

(Azerbaijan for example). Excise taxes on imported vehicles are not always

discriminating against old models, thus, failing to create incentives for the use of

newer and, hence, less polluting cars. In Georgia, there are no technical restrictions on

imported cars and, very often, the proper import and registration procedures are not

being followed. Furthermore, the excise and property taxes decrease as the car ages

creating the disincentives that were mentioned above35. Taxes on vehicle fuels are

usually negligible and are mainly revenue raising instruments. Car registration fees

are also, in many cases, “independent of the technical characteristics of the car”36.

The energy sector is the most heavily subsidized sector in the EECCA region.

Tariffs are too low, monitoring is dysfunctional and there is not enough funding for an

adequate infrastructure. Household tariffs are often much lower than the industrial

ones. For example, in Ukraine, “as of November 2005, the price of gas was US$ 37

per thousand cubic metres for households, US$ 46.2 for budget financed (public

sector) organizations, US$ 42 for heating utilities and US$ 72 for industrial users”37;

However, significant increases were planned in 2007. Kyrgyzstan has shown progress

in this sector, by introducing a new electricity tariff policy in April 2008, which will

lead to increases in electricity prices, particularly to the ones paid by households.

Heating and hot water tariffs were also increased, as a consequence of the high cost

gas imported from Uzbekistan38. In Uzbekistan, energy tariffs currently cover both

operational and maintenance costs. Georgia appears to have a leading role, having

introduced the so called increasing block tariff system, in which “the price of

electricity per kWh remains constant within a certain range of consumption but rises

35 Georgia EPR, 2nd Review, Series No. 30, p. 86, UN Publications 2010. 36 See Kazakhstan, supra note 27 at 95. 37 Ukraine EPR, 2nd Review, Series No. 24, p. 101, UN Publications 2007. 38 Kyrgyzstan EPR, 2nd Review, Series No. 28, p. 85, UN Publications 2009.

14

when consumption exceeds the upper limit of the defined range”39. With this system,

energy-savings are advocated, along with provisions for social aid to low-income

households. The block tariff system, the re-metering and the increase in the collection

rates has led to higher revenue and, as a result, increased foreign investments in the

sector.

3.1.3 Charges and taxes for the use of natural resources

Natural resource charges can be found in almost all EECCA countries. These

usually include the following:

• Water abstraction charges

• Land taxes

• Forestry taxes

• Fees for the use of flora and fauna

• Charges for the use of subsoil mineral resources

Taxes and charges on the use of natural resources mainly aim to raising fiscal

revenue. Despite their effort to advocate reasonable use of natural resources, they

most often fail to create the relevant incentives, since they are too low. However, they

are able to provide significant environmental revenues, which can be used for the

financing of environmental infrastructure.

Water abstraction charges vary across the different user groups and river

basins and, for the transportation of water, on the fleet type40. In Kazakhstan, permits

are issued for water abstraction specifying maximum permitted volumes and “actual

water abstraction in excess of the permitted maximum level is charged at three times

the normal rate”, while “water abstraction without permit is subject to a charge rate

that is five times the basic rate”41. Taxes on the use of water resources can also vary

39 See Georgia, supra note 33 at 84. 40 See Ukraine, supra note 35 at 74. 41 See Kazakhstan, supra note 27 at 93.

15

according to the type of activity and to whether it is underground or surface water, as

is the case in Uzbekistan, where individuals owning farms are subjected to lower rates

and enterprises that supply water to the population are being taxed only for their

personal use of water42. In Georgia, according to the 2004 Law on Fees for the Use of

Natural Resources, fees for water abstraction are close to zero and have not been

changed since 1998. Ukraine is probably the only country where “the water tax has a

potentially larger impact on preventing wasteful use of a precious resource”43.

Table 6. Fees for the use of water resources (water abstraction fees)44

Note: The national currency was converted into US dollars using the official average monthly exchange rate for October 2009 (1 US$ = 1.68 lari)

Land taxes are, usually, the main source of revenues from all environmental

charges and also contribute to a great extent to the various environmental funds. In

Ukraine, for example, the land tax accounts for almost three quarters of the natural

resource taxes. In Kyrgyzstan, the Land Code provides for higher rates for irrigated

areas and lower ones for pasture and, also, differentiates them according to the

geographic area and population size, while the new 2009 Tax Code sets the basic rates

which were adjusted to inflation45. In Azerbaijan, the Tax Code sets lower rates for

land owned by physical persons and housing funds. “For example, in Baku, citizens

only pay 0.6 manat per 100 m2 against 10 manat for other types of users. Land used

by public authorities or budget-financed organizations and forest and water reserves

are exempted from the tax”46.

42 Uzbekistan EPR, 2nd Review, Series No. 29, p. 70, UN Publications 2010. 43 See Ukraine, supra note 35 at 74. 44 See Georgia, supra note 33 at 79. 45 See Kyrgyzstan, supra note 36 at 82. 46 See Azerbaijan, supra note 28 at 70.

16

Forestry taxes or stumpage fees for the cutting of trees also exist in a number

of EECCA countries. In Belarus, the forestry tax depends on the tree species, the

diameter of the trunk and the nature of felling. However, the rates have been

significantly lower than the other EECCA countries, with an increase observed in

2004, when the fee generated around US$ 22 million compared to US$ 11 million in

200347. In Kazakhstan, these rates have not been changed since 2002 and their

revenues cover just one 10 per cent of the necessary funds for forest protection. In

Georgia, stumpage fees vary between 2 to 47 lari, depending on the factors mentioned

above48.

The Fee for the use of flora and fauna serves a similar purpose to the forestry

tax, but it exists in even fewer countries. One of these countries is Kazakhstan, where

there is a fee for the use of protected natural parks. In Kyrgyzstan, the 2008 Law on

Payments Rates for the Use of Fauna and Flora sets the basic rates for each type of

animal and plant, depending on the type of use and the user, but only for the use of

fauna. For the use of flora there is no differentiation between users and the use by

locals for scientific purposes benefits from a zero rate49. In Georgia, they apply a

system of licenses for the use of certain types of wild flora, according to the 2005 Law

on Licenses and Permits, which are allocated through auctions. A permit is also

required for the use of flora and fauna in Tajikistan. In Tajikistan, certain hunting fees

are so high that they do not support legal hunting, thus leading to illegal exploitation,

especially of the species listed in the Red Book, and others are too low to create any

significant revenue50.

47 See Belarus, supra note 25 at 90. 48 See Georgia, supra note 33 at 78. 49 See Kyrgyzstan, supra note 36 at 82. 50 Tajikistan EPR, 2nd Review, Series No. 33, p. 94, UN Publications 2011.

17

Table 7. Selected fees for the use of wild animals and plant species in Tajikistan, 201051

Note: Markhor = wild goat of mountainous regions from Afghanistan to India. Figures in US dollar were calculated using the average annual exchange rate for 2009 (1US$ = somoni 4.14)

Charges for the use of subsoil mineral resources exist in all EECCA countries

and their main purpose is collecting fiscal revenue. In Kazakhstan, in order to have

the right to exploit subsoil mineral resources, apart from a contract granted by the

Ministry of Energy and Mineral Resources, according to the 1996 Law on Subsoil and

Subsoil Use, and the payment of other general taxes, “users of subsoil resources are

subject to special charges (notably bonuses and royalties), which are defined in the

Tax Code”52. These are a subscription bonus and a commercial discovery bonus.

Finally, there is a rent tax on the export of crude oil. In Kyrgyzstan the royalty on

gross revenues from development and regeneration of mineral raw materials can vary

between 2 and 10 per cent, leading to an average of only “2.2 per cent of total budget

revenues in 2004–2007, equal to 0.3 per cent of GDP in 2007”53. The rates of the

royalty depend on the type of the material, increasing with the deposit size for gold,

silver and platinum. For subsoil users in Uzbekistan, again the rates depend on the

different types of minerals, but they are subjected to three types of taxes: subsoil use

tax, excess profit tax and signing and commercial exploration bonuses54. In Georgia,

as is the case with all natural resources, auction-based licenses are required for the

exploration and use of mineral resources, as well as oil and gas. However, apart from

the licenses, user fees for the exploitation of minerals are also required, for the

abstraction of which, charges range from 0.20 to 200 lari per ton/m3 of sand/gravel55.

51 Ibid. 52 See Kazakhstan, supra note 27 at 94. 53 See Kyrgyzstan, supra note 36 at 82. 54 See Uzbekistan, supra note 40 at 70. 55 See Georgia, supra note 33 at 78.

18

A similar system of licenses and other fees is in place in Tajikistan, which “has the

world’s largest reserves of barite, lead and tungsten, and is also among the leading

countries as regards reserves of chromite, silver, zinc and manganese”56. In

Azerbaijan, the mining tax constitutes the bulk of the environmental revenues.

3.1.4 Other types of payments

Apart from the economic instruments discussed above, there is a range of

other payments theoretically aiming to the protection of the environment. These are

user charges for different utilities, deposit refund systems and environmental liability

schemes.

Deposit refund systems have only been reported to function in Kyrgyzstan.

These systems aim to promote recycling and safe disposal of certain products,

providing an economic incentive. They function by adding a certain charge on the

price of the product, which is returned (refunded) to the consumer if he returns the

product itself or its packaging.

User charges exist in almost all EECCA countries and they mainly “aim at

covering the cost of providing a service, typically for water supply and sewerage or

municipal solid waste collection, treatment and disposal”57.

A common trend in tariffs, in all EECCA countries, is the fact that water

charges are significantly higher for industrial users than for households and the cross-

subsidization between these two sectors is of a great degree. Lack of metering does

not encourage reasonable consumption of water. In Belarus, despite the fact that

individual meters are installed in all new buildings, water tariffs for households are

too low, as is the case with the collection rate, thus resulting in insufficient revenues

to cover the maintenance and operating costs of the water infrastructure58. The same

issues of low tariffs and cross-subsidization exist in Ukraine, as well. However, one

can observe signs of improvement, since, “in 2004, actual payments were almost 100

56 See Tajikistan, supra note 48 at 95. 57 See Belarus, supra note 25 at 90. 58 Ibid.

19

per cent of the amounts due”59. Still though, tariffs cannot cover maintenance costs

and need to be raised. Efficiency is also a big problem in Ukraine, where there are

important water leakages and excessive electricity consumption.

User charges for water supply in Kazakhstan are set by local governments or

the water utilities and a “flat” tariff principle is in place, i.e. “the price per m3 is the

same, independent of the total level of water consumption”60. The differences

between prices for drinking water in the cities of Kazakhstan are significant, which

“(including VAT) varied in the period 2004–2005 from 9.33 tenge ($0.07) per m3 in

Almaty to 32.75 tenge ($0.24) per m3 in Shymkent”61 and revenues do not always

cover maintenance and operating costs, resulting in deterioration of water

infrastructure. Another important issue is the one concerning the access to safe

drinking water which becomes an acute problem in many rural areas, as “only 11 per

cent to 33 per cent of rural residents rely on piped water” in Azerbaijan62. In

Georgia, the differences in tariffs between household and non-household customers

are huge, even after the 2008 Presidential Decree No. 2459 on water tariffs in Tbilisi

(see Figure 3). Finally, water supply to the population in Turkmenistan is free of

charge, according to the 2010 Law on Drinking Water.

Figure 3. 2008 Presidential Decree on Water Tariffs in the Tbilisi region63

59 See Ukraine, supra note 35 at 78. 60 See Kazakhstan, supra note 27 at 92. 61 Ibid. 62 See Azerbaijan, supra note 28 at 75. 63 See Georgia, supra note 33 at 82.

20

Table 8. Water supply and sewage tariffs in Turkmenistan64

Note: Exchange rate 1 US$ = 2.85 manat. Pcpd = Per capita per day.

The trend in waste charges is that revenues can merely suffice for cost-

recovery and waste management needs to be given special attention. In Kazakhstan,

disposal of municipal waste is being done at landfills and there are no incineration

facilities. Charges are defined by the number of persons per household. In

Kyrgyzstan, payment rates are too low and in rural areas there is no waste collection

and removal system, while, “in the cities household waste is dumped in landfills and

unofficial sites without separation”65. A step forward was taken in 2005 with the State

Programme (2006–2010) on Use of Industrial and Domestic Waste, which

encourages the involvement of the private sector in waste management and external

financing66. In Georgia, significant increases in waste collection charges were made in

2007, which are now 1.2 lari (US$ 0.70) per person per month, up from 0.4 lari (US$

0.24) in preceding years67. However, charges outside Tbilisi are close to zero,

collection rates, though improved, are still too low and the system of a fixed payment

per month does not reflect actual waste generation. Resolution No. 185 of the Cabinet

of Ministers of Azerbaijan dated 12 May 2008 on the Approval of the Rules for the

Determination of Fees for Collection, Placement, Use and Disposal of Wastes

determined a new fee setting system, which distinguishes between different types of

waste, introduces exemptions encouraging recycling and increases tariffs exceeding

specified limits. Despite the fact that all EECCA countries, apart from Tajikistan, are

parties to the Basel Convention on the Control of Transboundary Movements of

64 See Turkmenistan, supra note 9. 65 See Kyrgyzstan, supra note 36 at 87. 66 Ibid. 67 See Georgia, supra note 33 at 81.

21

Hazardous Waste and their Disposal, they find it hard to comply with its provisions,

due to lack of financial and administrative capacity68.

Environmental liability systems exist in all EECCA countries, holding liable

any polluter for the damage he might inflict to the environment. The polluter will then

have to compensate either the state or individuals and the compensation will be

calculated according to each country’s provisions. Such systems can provide real

incentives for precautionary measures to be taken in order to avoid environmental

damage and its subsequent compensation. Despite existing though, in many cases,

courts will not award the damages requested, as is the case in Moldova69.

Furthermore, the environmental liability systems should not just function on a basis of

monetary compensation, but actual ecosystem rehabilitation as well, something that is

not required by polluters in EECCA countries, a region where even the monetary

compensation might be negligible. In Kyrgyzstan, the law allows the authorities to

retain a large percentage of the pollution charges and damage compensations, thus

encouraging an interest to the maximization of revenues rather than addressing

environmental problems70. Ukraine’s damage compensation system is too

complicated, since it based on numerous factors such as “type of emission, type of

area affected, size of the area, duration of the violation, period of violation (e.g.

holidays or workdays) and so on”71.

3.1.5 Environmental Funds

Despite not being an economic instrument per se, environmental funds are an

important parameter in the field of environmental protection and needs to be

mentioned. They gather and provide the funding for various environmental activities

such as infrastructure. In most EECCA countries, revenues for the funds accrue from

environmental charges and taxes.

68 See OECD, supra note 19 at 43. 69 See Moldova, supra note 31 at 74. 70 See Kyrgyzstan, supra note 36 at 41. 71 See Ukraine, supra note 35 at 40.

22

In Ukraine, funds play an important role in their environmental protection

strategies. Along with the National Environmental Fund (NEF), they have established

27 regional funds and thousands of local funds, resulting in a total number of 10,084

funds and forming a three-tier system72. They revenues demonstrated a sharp increase

during the years 2001-2004, representing an average 29.1 per cent of total

expenditures73. The reform introduced in 2005 improved the system, by turning it into

a two-tier one with better distribution between the national and regional funds.

Table 9. Revenues of environmental funds in Ukraine, 1998-200474

Figure 4. Total environment related expenditure by ownership in Kyrgyzstan75

72 See Ukraine, supra note 35 at 78. 73 Ibid. 74 Ibid. 75 OECD, Monitoring Environmental Expenditure in Eastern Europe, Caucasus and

Central Asia, Implementing the OECD/Eurostat Standards in the Kyrgyz Republic and

Ukraine , p. 51, OECD 2006.

23

In Kyrgyzstan as well, environmental funds are the main source of financing

environmental expenditures76. Revenues from pollution charges accounted for 80 per

cent of total revenues in 2007. Despite some progress being made in the field of

managing the environmental funds, there is a need for further identification of

environmental priorities. “There is neither an overall financing strategy in place nor

clear procedures for selecting projects or effectively monitoring and evaluation

practices”77. Environmental funds are also in place in Uzbekistan, Azerbaijan,

Tajikistan, though not really functional and mainly used for administrative needs, and

Turkmenistan, where it was abolished in 2008 and its place took two special accounts.

In all these countries the environmental funds could be improved, in line with the

Organisation for Economic Co-operation and Development (OECD) St Petersburg

Guidelines for Environmental Funds in the Transition to a Market Economy and

Good Practices for Public Environmental Expenditure Management in Transition

Economies78.

76 See Kyrgyzstan, supra note 36 at 88. 77 Ibid. 78 See Uzbekistan, supra note 41 at 79.

24

4. Conclusions and assessment of the use of economic instruments in

EECCA

A common feature observed in the EECCA region, and highlighted through

this report, is the existence of a wide policy and regulatory framework, providing for

the use of a range of economic instruments. The relevant legislation is quite often, if

not always, in place, but it is unenforceable and inconsistent79. In many cases, the

mechanisms needed for the implementation of the regulation are either non-existent or

dysfunctional and there is lack of adequate monitoring. Taxes and charges are mainly

aimed to raising fiscal revenues for the state and do not work towards achieving

environmental purposes and creating non-polluting incentives.

Pollution charges

A finding for all EECCA countries is the fact that they focus on a significantly

large number of pollutants, and particularly air pollutants. This results in an inefficient

monitoring and a not at all cost-effective managing system. In most countries charges

are too low to create any incentives and their revenues do not suffice for the financing

of environmental expenditures. “Nominal rates have also declined significantly in

real terms due to the lack of compensation for the considerable cumulative

inflation”80. The numerous exemptions from payments also have an impact in the

revenue stream but, more importantly, they do not advocate the implementation of the

polluter-pays principle. In addition, given the fact that these exemptions are usually

granted to the bigger polluters, there is a significant deteriorating effect to the

environment as well. The MPLs of pollution are often not high enough and the non-

compliance fees are negligible, not providing incentives for behavior and technology

change, since it is less expensive to pollute and pay than to invest in precautionary

measures and infrastructure. This is contrary to general experience, which has shown

that it is “much more costly to address environmental degradation later than to

prevent it in the first place”81. The tariff and Emission Limit Values setting

79 See OECD, supra note 19 at 13. 80 See Turkmenistan, supra note 9. 81 See Georgia, supra note 33 at 92.

25

procedures are opaque, not only in Kazakhstan, but in other EECCA countries as well.

Collection rates and payment compliance need further reinforcement.

Product Charges and Fiscal Instruments

“Product charges on environmentally harmful products can be an effective

economic instrument as regards products that pollute when they are consumed or

emissions that are difficult to monitor”82. However, they are almost nonexistent in the

EECCA countries as it was aforementioned, with the exception of the differentiation

in prices and taxes between leaded and unleaded petrol, which can be observed in

Moldova and Georgia and Kazakhstan.

There is a wide range of fiscal instruments provided for in laws in all EECCA

countries, such as excise taxes, VAT and custom duties on imported vehicles and

fuels, car registration fees, annual vehicle taxes, pollution charges for mobile sources

and road transit taxes. Despite their existence though, they fail to create the necessary

non-polluting incentives. The renewal of the fleet is not encouraged, since older cars

benefit from smaller excise taxes, both on the imported and on the domestically

owned vehicles.

Charges and taxes for the use of natural resources

Such charges can be found in all EECCA countries; however, they are mainly

aimed to raising fiscal revenue and the rent of the resource area. They are often too

low to create incentives for reasonable use of the resources, or too high, thus resulting

in illegal activities. The exemptions from taxes in the water sector, according to the

type of activity undertaken, such as agriculture, create disincentives and encourage

unreasonable use of the resource. When it comes to the extraction of subsoil mineral

resources, a comprehensive licenses and permits system, along with other special

payments, is in place in all the countries in the region, but the procedures for granting

the permits and their payments need to be more transparent.

82 See Azerbaijan, supra note 28 at 73.

26

Other payments

Deposit refund systems, though existent in some cases need to be further used

and encouraged. User charges exist in all EECCA countries; however, a common

trend is their low tariffs below cost-recovery levels, both for water supply and for

waste collection and disposal. There is a great degree of cross-subsidization between

the household and the industrial sector, while charges are much higher for the latter.

Individual metering is rarely found, thus not encouraging economic use of water. The

low water tariffs and collection rates are responsible for the insufficient revenues

when it comes to covering the maintenance and operating costs of the water

infrastructure. Waste management, apart from being characterized, as well, for its low

tariffs, is not adequately regulated. The system currently used, with a fixed payment

per person is neither efficient nor effective. Environmental liability systems exist in

all EECCA countries, but they do not always result in adequate compensation, either

due to the negligence of the courts or because of the low compensations given and the

lack of nature rehabilitation. Finally, the system of collection of damage

compensations in some countries, does not advocate the interest in environmental

protection, but a revenue raising mentality.

Environmental funds

Environmental protection is, of course, not a priority in the EECCA countries,

since their main concern is a transition to a market economy. However, environmental

expenditure should be given greater priority both in the public and the private sector.

Environmental funds need a better management in most of the countries and the

competent authorities should keep records of any expenditure in order to advocate

transparency. An important issue is the fact that there are numerous environmental

funds in each country, rendering their monitoring and management dysfunctional.

“The existing fragmentation, with thousands of local funds, leads to inefficient

spending as a result of lack of consistency in overall environmental priorities”83. In

order for the fund revenues to be maximized, the earmarking for environmental

83 See Ukraine, supra note 35 at 82.

27

purposes needs to be enhanced so that revenues from the different pollution charges

and taxes accrue to the environmental funds and not the state budget.

4.1 Deficiencies of the existing environmental policy

When designing its environmental policy, a country needs to take into account

both its financial and administrative capacities. Their priorities need to be well

defined so that the instruments used in order to support such a policy will be able to

function properly and have the desirable effect. A common feature in all EECCA

countries, is the fact that they design a wide range of economic instruments without

setting specific targets and without linking them to distinguished environmental

problems. Furthermore, not having the experience that most OECD countries have,

they apply a system that uses only economic tools without relating them to certain c-

a-c instruments in order to form a basis and set the standards to be achieved through

these EIs.

The fact that EECCA countries do not take into account the administrative

capacity parameter becomes obvious when examining the pollution charge systems in

place. The thousands of pollutants subjected to charges are impossible to monitor,

thus rendering the instrument ineffective. The management and monitoring of product

charges is less demanding and, hence, easier to function in such conditions.

Obviously the countries in the region do not have a “well-functioning market-

based economy”84. This might render certain economic instruments ineffective, due to

the close links between the industry and the governments, the subsidies offered to

them and their involvement in the tariff setting. The absence of a well formed

economy leads to absence of investment due to the creation of an uncertain

environment and of course the lack of capital within the public and private sector.

EECCA countries need to enhance their international cooperation in order to

encourage foreign investment. However, “the low priority of environmental

84 See OECD, supra note 18 at 62.

28

sustainability in national development agendas is a barrier to increased

environmental assistance”85.

Compliance and enforcement are also significantly weak in the EECCA

region, due to lack of staff and the relevant incentives. Opaque procedures along with

corruption lead to a great degree of non-compliance.

Despite the existence of an extensive legal framework providing for

regulations aimed to the environmental protection, these are not implemented.

Secondary legislation, necessary for setting standards and specifying the function of

the economic instruments, is absent. Furthermore, it is often that provisions are not

reflecting the financial and administrative capacity of the governments, proof of the

lack of clear environmental targets. “Many Soviet regulatory documents are still in

force, and it is not always clear which regulations apply in a specific case, leading to

inconsistencies in implementation of environmental policies, and limiting their

effectiveness”86.

85 See OECD, supra note 19 at 64. 86 Ibid, at 29.

29

5. Conclusion

This report has attempted to present, describe and analyze the economic

instruments used in the EECCA countries for environmental purposes, based on my

work with the EPR team in UNECE. These countries are characterized as economies

in transition, trying to create a market-based economy. Evidently, economic growth is

their main priority; however, taking into account the acute environmental problems

existing in these countries, they cannot ignore the fact that they need to develop in a

sustainable for the environment manner.

The use of economic instruments in order to achieve environmental objectives

is not new in the EECCA region. A big part of them, however, are outdated since they

were inherited from the former Soviet Union and not in line with the current

environmental requirements. The administrative deficiencies and the lack of adequate

monitoring and management systems render the EIs ineffective. Not having specific

environmental targets, the economic instruments cannot create the necessary

incentives. Charges are too low, subsidies exist in a great degree, there is lack of

transparency in the tariff setting procedures and almost all instruments aim at raising

fiscal revenues.

One cannot ignore the important economic issues these countries currently

have to deal with. However, it would be horribly inconsiderate to ignore the adverse

effects of all types of pollution to the population of these countries. Considering the

countries’ capacities, market-based instruments are the most viable way to regulate

pollution. Instruments, such as product charges and pollution charges are easy to

monitor and manage and can yield the desirable results. The introduction of secondary

legislation is imperative, along with the simplification and rationalization of the

environmental earmarking and expenditures. Finally, creating a certain environment

will help attract foreign investment, as well as domestic private investment, to

ameliorate the infrastructure.

30

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