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Cleaning Up Eastern Europe

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1992
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Contrary to doom and gloom scenarios, environmental conditions can be greatly improved with sensible policies and modest investments

Our image of Eastern Europe these days has been greatly influenced by graphic reports of the environmental damage caused by big heavy industrial plants. Stories of steel mills, chemical plants, and power stations—especially in the so-called “Black Triangle” covering Saxony, Upper Silesia, and northern Bohemia—belching fumes into the air, or noxious chemicals into rivers, sound reminiscent of England’s “dark satanic mills” of the late 1800s. Gone unnoticed in the rush to conclude that the entire region is an ecological disaster zone is the fact that there are large areas of relatively untouched forest, lakes, and wetlands.

This erroneous picture of Eastern Europe matters because problems that seem overwhelming tend to lead to inertia. Indeed, some observers—noting the grave economic problems that these countries must face as they undertake stabilization programs and market-oriented reforms—dismiss cleaning up the region as a luxury that cannot be afforded. Others argue that tackling the environment is a priority, and that vast sums of foreign assistance will be needed. Neither side is right. Both fail to identify a set of environmental priorities that can be addressed at reasonable cost through sensible policy reforms and modest investments.

To map the way forward, four questions must be answered: (1) How bad are environmental conditions relative to countries with similar incomes and industrial bases? (2) How much will the transition to market structures help? (3) What environmental policies should be adopted? and (4) What are the key investments required? Only then can we begin to develop an agenda for action.

An ecological disaster?

When assessing environmental problems, the most commonly used benchmark is damage to human health. On this score, air quality ranks as Eastern Europe’s most acute problem, in large part because of the difficulty of avoiding exposure. Metal dusts—especially lead—and suspended particulate material (dust and smoke) are the main culprits, damaging the development of children and giving rise to excess mortality and ill health from respiratory diseases (bronchitis, emphysema, and asthma). Exposure to high concentrations of sulfur dioxide exacerbates the effects of particulates and, along with nitrogen oxides, can cause difficulties of its own. Water pollution is also a serious cause for concern, though simple measures can remedy the problem or limit exposure. For example, bottled water supplies reduce the threat to the health of newborn babies in those rural areas where high nitrate levels are found in groundwater used for drinking. Still, the careless disposal of toxic or nuclear wastes in some localities threatens the quality of surface and groundwater sources on which many people rely.

From an economic standpoint, there are other costs, too. The need to spend money on maintaining or replacing physical assets (buildings, pipes, roads, and bridges) that have been damaged by dirt or acidity in the air, or by saline water is certainly the biggest of these costs. There are also losses from diminished productivity of farms and forests. Nonetheless, the sums involved are small relative to the estimated costs of poor air quality to human health.

But are Eastern Europe’s problems really any worse than those in other parts of the world? A worldwide network of monitoring stations in large cities provides comparable data on air quality that lead to some surprising conclusions. It is true that the levels of dust and smoke and sulfur dioxide in some towns and cities (Teplice in Czechoslovakia, Katowice in Poland, and Magnitogorsk in Russia) are deplorable, especially in the winter. However, many urban areas in China, India, and Latin America experience levels that are similar or far worse. Even more relevant, as Chart 1 shows, the average exposures to air pollutants in the main towns and cities are no worse, and in some cases better, than west European cities with similar income levels and industrial structures (Athens, Madrid, and Milan). Moreover, most large cities in Eastern Europe meet the European Community (EC) standards for both average and extreme (98th percentile) exposures to particulates. And although many east European cities experience extreme exposures to sulfur dioxide in excess of the EC standard, the same is true in Western Europe. Thus, the air quality problem is largely one of local concentrations of pollution associated with specific industries. Hardest hit are urban areas with a concentration of heavy industrial plants, and those where coal is the predominant fuel. For major cities, intermittent peaks in exposure levels are the primary concern. The combination of high levels of particulates, sulfur dioxide, and water vapor over several days (the classic London smogs of the past), poses the greatest danger to individuals with respiratory or heart conditions.

Chart 1East or West, poor cities have the worst air quality

(Mean annual concentrations in micrograms per cubic meter)

Source: Global Environment Monitoring System

As for water, the picture appears to be much the same, although the data are limited and hard to interpret. Certainly, levels of heavy metals in soils and river sludge are alarmingly high around metallurgical plants throughout the region. Major rivers in Poland and Ukraine are also badly polluted with saline wastewater from coal mines. But the Rhine is probably Europe’s dirtiest large river, while the Mersey, the Po, and even the Thames are as, or more, polluted than equivalent rivers in Eastern Europe on many indicators of water quality.

Parts of this article are based on material presented in “Are the Costs of Cleaning Up Eastern Europe Exaggerated? Economic Reform and the Environment,” by the author, Oxford Review of Economic Policy, Vol. 7, No 4, 1991.

So how can we reconcile the generally moderate levels of air and water pollution with the widespread perception that there are gross violations of environmental standards throughout Eastern Europe? The answer may well be that the region’s standards have been absurdly tough compared to those of the EC and the United States. For example, several countries have set maximum exposures over 24 hours for air pollutants similar to the annual average exposures implied by EC standards.

What is more, the region’s pollution problems are no worse than those of Western Europe and North America some 20-30 years ago. Memories are short, but environmental conditions in the coal and steel communities of the eastern United States, Japan, the Ruhr, and south Wales were little different from those in similar east European communities today. In effect, the region is caught in an economic and industrial time warp, with all of the characteristics of the rich countries in the 1950s and early 1960s.

High coal use. Few west European households now rely upon coal as a domestic fuel, but its use is still widespread further east (see Chart 2). This is critical because the burning of coal by households and in small boilers has always been the primary cause of smogs and of the most damaging exposures to particulates and sulfur dioxide.

Chart 2Small-scale consumers still use coal in Eastern Europe

(Average consumption per person in 1988)

Source: International Energy Agency.

Old technology. Emissions of dust containing heavy metals from the metallurgy industry is the other major cause of concern. Most steel mills in the region rely upon old open-hearth furnaces that emit much more air pollution per unit of output than the basic oxygen or electric arc furnaces standard in rich countries. The region’s nonferrous metal smelters, especially for lead and aluminum, have primitive arrangements for filtering metal dusts from the exhaust gases coming from their furnaces, compared with the options provided by modern technology.

Low energy prices. Aggravating matters have been the low energy prices charged in most east European countries, relative to those in Western Europe from 1980-90, even when converted at heavily overvalued exchange rates (see Chart 3). The same has been true for most natural resources, so that there was little incentive to save energy and raw materials. As a result, these countries rank as the most profligate users of energy per dollar of GDP in the world, with energy intensities five or more times those in comparable west European countries.

Chart 3Not even close to west European levels Energy prices

(Index, west European average=100)

Sources: International Energy Agency and national authorities.

Note: Prices in local currencies have been converted to DM using the official commercial exchange rates.

Transition to markets

Before drafting an agenda for action, it is reasonable to wonder how much the economic transformation already underway in the region will help clean up the environment. Because a large fraction of emissions come from a small number of industrial sectors—notably electricity generation, metallurgy, and building materials for air pollutants; and paper and pulp, textiles, and food processing for organic effluent discharged into waterways—changes in the overall level and composition of industrial production should have an important bearing on pollution levels. But the outcome need not be entirely beneficial in the short or medium term.

New investments embodying modern technologies will lead to a fall in the amount of pollution per unit of output. However, industrial restructuring will not lead to the rapid closure of all the heavy industrial plants that disfigure the environment. Although these industries are inefficient by western standards, what matters is how they compare with other industries within the same country. Those that are performing relatively well (e.g., metallurgy in Czechoslovakia) should not be expected to contract rapidly, so that the fall in total emissions may be less than the decline in total industrial output.

Market-oriented reforms will also help by establishing proper incentives to use energy and other natural resources much more efficiently, even without new investments prompted by industrial restructuring. In the past two years, most east European countries have substantially raised real energy prices as a key part of their reform programs. As enterprises respond to past and future increases, the energy intensity of economic activity may well fall by at least one half by the end of the decade. Higher energy prices will also bring about a shift in the composition of fuel use. As coal prices rise relative to other forms of energy, the long-standing tradition of encouraging domestic coal consumption to lower dependence upon imported supplies of oil and gas will be broken.

But how far will sensible economic policies improve the environment? To answer that question, a model for energy demand and environmental emissions up to the year 2000 was constructed for Bulgaria, Czechoslovakia, Hungary, Poland, and the states of the former USSR. It assumes that (1) energy prices will move up to west European levels by end-1993 (e.g., Poland’s industrial sector will face real increases of between 47 percent for gas and 425 percent for coal); (2) energy users will respond to higher prices over several years; (3) industrial sectors will be restructured in line with comparative efficiency; and (4) new investments will gradually reduce emissions per unit of output to current west European levels over the period 1995-2010.

The results show that the response to these policy changes should reduce aggregate emissions of energy-related air pollutants by 60 percent or more by the beginning of the next century (see Chart 4). Up to 1995, a significant portion of that drop would come from the decline in economic activity—as has already been observed in Poland and Hungary. But after that, when it is assumed that total output will rise, the continuing decline reflects the combined effects of higher energy prices and new investment in less-polluting technologies. The path is not as smooth for metal dusts. In their case, industrial restructuring would initially increase the level of total emissions. Later in the decade, as better technology is introduced, emissions should fall rapidly, even with an increase in output.

Chart 4Economic reform will solve many problems of air quality Aggregate emissions

(Index, 1989=100)

Note: The projections take account of energy conservation induced by higher prices, changes in GDP, shifts in the composition of industrial output, and, post 1995, new investment in less-polluting technologies.

For most forms of water pollution, the basic story line is similar, although the results are much less encouraging. Raising pesticide and fertilizer prices to world levels, together with the breakup and privatization of state farms, should reduce application rates and the runoff of chemical residues into rivers and groundwater sources. However, total discharges of organic wastes, chemicals, and other water pollutants from industry may not be much affected by the process of industrial restructuring. The main source of water pollution—municipal wastewater—can be dealt with only by major investments to rehabilitate existing, or build new, sewage treatment facilities.

Better environmental policies

The gains from introducing sensible economic policies should be reinforced by good environmental policies. In the past, local and national governments always gave priority to reaching production targets. As more power is given to environmental agencies at a local level and as governments disengage from direct involvement in the ownership and management of industry, it should be possible to establish a more effective system of environmental regulation. But with falling output and rising unemployment, the authorities may be understandably reluctant to enforce strict rules if that means closing down plants.

A clear set of priorities and targets that can be realistically achieved over the next five years must be established. Policymakers should, in particular, build upon one good feature of the existing regulations—systems of emission fees and fines imposed on polluters. The problem with these charges has been that they were set too low, not systematically adjusted in line with inflation, and either not enforced or simply regarded as a cost to be passed on to consumers. But if they were raised dramatically (maybe by as much as 50 times) and enforced, the charges would provide a powerful incentive for enterprises to find low-cost methods of abating emissions, even if large investments in new plant and technology were not affordable. In this way, the ingenuity and skills of plant managers could be mobilized to achieve better environmental performance, while avoiding the danger of enforcing outdated or costly technology standards.

One word of caution, however. Pollution charges should be reserved for dealing with emissions from large- or medium-sized industrial plants that can be monitored at reasonable cost. This includes air pollutants such as dust, sulfur dioxide, nitrogen oxides, and even carbon dioxide, and water pollutants such as organic material, suspended solids, and some heavy metals. Toxic chemicals, other heavy metals, and trace pollutants cannot be regumetals, and trace pollutants cannot be regulated by this approach. When monitoring emissions is too expensive, blunter forms of regulation (e.g., technology standards) may be appropriate.

Poland has raised the level of its pollution charges by about ten times in real terms since 1990. These charges, which go into a National Environment Fund to finance various environmental investments, now provide a genuine incentive to reduce emissions. As a result of the fall in output and the higher pollution charges, the situation in Katowice, for example—where steel mills, nonferrous metal smelters, chemical plants, power stations, and a wide range of other industrial plants caused extreme levels of exposure to pollutants—has changed radically. Air quality has improved significantly, and enterprises are considering, or investing in, environmental controls.

While the changes in Poland are a major step forward, weaknesses remain. An example is the charge for saline water emissions, which is too low to force the mines concerned to control their discharges. The government is worried—and understandably so—that higher charges would cause the mines to shut down, with a loss of jobs and greater dependence upon imported energy. However, the costs of the damage caused by saline water are equally real, even though they may not be immediately apparent.

Role of public investment

Given that better economic and environmental policies will take care of a large part of the emissions causing the most serious health and economic damage, where should public and private investment be directed?

Pollution charges and stricter environmental regulations will steer private investment toward more efficient and less-polluting technologies. A modest share of public investment could then be used to accelerate implementation of EC emission standards. However, the main focus for public investment should be on reducing emissions from small industrial units, the services sector, and households.

Reduce coal use in small boilers and houses. Most small-scale users of coal are happy to switch to gas, even if it costs more, because it is convenient and labor-saving. The major constraint is the availability of capacity in local gas distribution networks. In Bulgaria, gas supplies have been restricted to large industrial consumers, while in Poland, local pipelines were designed to meet household demand for cooking but not heating. Thus, a substantial investment program spread over a decade or more will be needed to develop the necessary infrastructure. Priority should clearly be given to areas where exposure to particulates and sulfur dioxide due to the burning of coal is particularly high.

Encourage household energy conservation. Anyone who has visited Eastern Europe in the winter knows that the standard way of dealing with overheated rooms is to leave the window open. Apartments, offices, and other buildings have few controls to regulate heating levels, and even meters to measure household consumption are rare. Installing these devices will take a long time, involving large amounts of manpower and money. In the meantime, measures to control temperatures and energy use for entire buildings would help significantly, even though there will be inevitable incentives for households to “free ride.” For these changes to be effective, however, governments must not shy away from raising fuel prices sufficiently to reflect the full economic cost of consumption, including seasonal peak load charges where appropriate.

Find low-cost methods of treating sewage. Full treatment of the large volumes of sewage that pollute rivers and groundwater is far beyond the region’s investment resources. Even so, some west European donors have urged that new municipal wastewater treatment plants conform to current EC requirements. This is a classic case of the best being the enemy of the good. The crucial challenge is to invest in sewage treatment facilities that remove 60-80 percent of the organic material and suspended solids, but which can be upgraded to provide fuller treatment when additional resources become available.

The way forward

The image of Eastern Europe as an ecological disaster is not only misleading but counterproductive, as it gives rise to the impression that enormous resources will be required. It is, therefore, crucial to offer both politicians and the public the prospect of substantial improvements in the next three to four years if effective environmental policies are to be implemented. The priority should be on reducing air pollution in localities where significant health damage is occurring. Three sets of measures would do this:

• Insist that nonferrous metal smelters either install filters to eliminate most of their heavy metal dust emissions, or close down within two to three years.

• Push prices of all fuels up to world market prices as quickly as possible and then impose additional taxes on the use of coal (with the highest rates for brown coal and lignite), gasoline, and diesel fuel. Rebates should be given to enterprises that can show that their emissions fall below an appropriate standard.

• Establish a fund, perhaps using revenues generated by the fuel taxes, that would finance a program to extend gas distribution in cities with the worst air quality. The fund should also make loans to enable households, cooperatives, and municipalities to convert from coal to gas boilers for domestic heating.

But it must be recognized that—based on the experience of Western Europe and North America—tackling the region’s most important environmental problems will take one or two decades. Resources will be scarce and the demand for investment high. It is critical that clear priorities be established and the most cost-effective methods adopted. The rich countries have tended to rely upon inefficient environmental policies to avoid making difficult choices. Countries in Eastern Europe do not have the luxury of following such a wasteful path and should not be urged or forced to do so by their richer neighbors.

If, however, sensible policies are adopted, the quality of the environment could be greatly improved by the year 2000. London’s experience with getting rid of its notorious smogs exemplifies what is possible. Even before gas became widely available, industrial smoke emissions fell by 60 percent from 1950 to 1960, and domestic emissions by 20 percent, because of a shift from coal to oil and electricity. The average number of smogs per year dropped from over 50 to less than 20 during this period, and the annual mean smoke concentration decreased by one half. In the following decade, as the Clean Air Act was implemented and natural gas use spread, the industrial smoke problem was effectively cured, while domestic emissions fell by almost 60 percent. Thus it seems perfectly reasonable for all east European countries to set themselves a target of reducing smoke and sulfur dioxide exposure by 75 percent over the next decade in all cities whose average exposures are more than twice the EC guidelines.

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