Journal Issue

Protecting the Ozone Layer

International Monetary Fund. External Relations Dept.
Published Date:
January 1992
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Financial incentives would help developing countries accelerate the implementation of the Montreal Protocol

Over the past year, scientific evidence has continued to mount showing that stratospheric ozone layer depletion is even more serious than thought only a few years back. This poses a major problem, because the ozone layer shields life from a harmful solar ultraviolet radiation known as UV-B. Although ozone depletion has been most pronounced at the poles, its effects will also be serious at other latitudes, since UV-B, like all solar radiation, increases in intensity toward the equator. At higher latitudes, people will face a greater risk of skin cancer; at lower latitudes, more crop damage and health effects such as cataracts and immune system impairment are likely to occur; and vital links in food chains on land and sea might be broken.

While the ozone problem has been caused principally by industrialized countries, developing countries will have to join them in reaching a solution. Their participation is currently facilitated by the 1987 Montreal Protocol (MP), but if the phaseout needs to be accelerated, additional financial incentives and a more flexible way of carrying out the accord would be required.

International response

The depletion of the ozone layer results from a complex series of reactions catalyzed by certain long-lived ozone depleting substances (ODSs) in the atmosphere—mainly chlorofluoro- carbons (CFCs) and halons— that are of recent and man-made origin. CFCs are used chiefly as refrigerants, aerosols, foaming agents, and electronic parts cleaners, while halons are used in fire fighting. Although such compounds were first made in the 1930s, it took almost 50 years for them to reach dangerous levels in the atmosphere. Not until 1974 was their critical effect on the ozone layer discovered, and only since 1985 has any international action been taken to limit their emissions. Ironically, it is the very inertness, nonflammability, and nontoxicity of ODSs that initially earned them such a clean bill of environmental health.

The international response began with a meeting attended by 49 nations in 1985, under the auspices of the United Nations Environmental Programme (UNEP). In an accord known as the Vienna Convention for the Protection of the Ozone Layer, these countries established a framework for further scientific studies and assessments, and the future development of specific protocols. The first of these was the MP, originally signed by 21 nations (up to 76 as of March 1992). It set schedules for gradual reductions in the consumption of two groups of ODSs (CFCs and halons), based on each participant’s use during 1986—the current goal is complete phaseout by the end of the century. Each group has its own phase- out schedule, such as that shown in Chart 1.

Chart 1CFC phase-out schedule for developing countries

Percentages are based on the lower of: (a) average consumption in the years 1995 to 1997; and (b) 0.3 kilograms per capita.

Source: The World Bank.

But it is the weighted sum of the consumption of all substances within the group that is relevant, as the weights try to capture relative impact, called “ozone-depleting potential” (e.g., halons generally are up to ten times more damaging than CFCs). The MP also places restrictions on trade in ODSs with nonsignatories.

The MP recognized that developing countries contributed only a small—albeit rapidly growing—fraction of total ODS emissions (see Chart 2), and had contributed even less on a cumulative basis. Therefore, they were not expected to cut ODS use as quickly or by as much as industrialized countries (there is a ten-year grace period on starting baselines and percentage cutbacks), or to divert scarce development resources for the phaseout.

In an effort to help developing countries phase out all ODSs by 2010, the Interim Multilateral Fund under the Montreal Protocol (IMFMP) was set up in 1990 on a three-year pilot basis, to provide concessional finance and outright grants (on top of those available under existing aid programs)—the first time developed countries ever offered funds to developing countries to meet global environmental goals. The IMFMP, which can disburse up to $200 million, is jointly administered by the World Bank, UNEP, and the United Nations Development Programme, with the Bank handling the project financing arrangements. Grant financing is available to eligible countries (i.e., those that use less than 0.3 kilograms of ODS per head per year) to cover the incremental costs of various agreed phase- out activities. These include reconfiguring CFC plants to produce substitutes, retooling refrigerator factories, recycling, technical assistance, and training.

Implementing the protocol

This unprecedented agreement to protect the global environment is now under close scrutiny as nations worldwide attempt to arrange similar conventions on issues such as climate change and biological diversity. On the positive side, industrialized countries have moved more quickly than anticipated to phase out use of the ODSs—in part, thanks to strong support from industry (which is developing chemical alternatives and new technologies) and scientific confirmation of the gravity of the problem. The economic cost of this phase- out has also been lower than had been expected. At the same time, however, the political compromises that were necessary to establish the MP have restrained certain outcomes that are economically desirable

One is accelerated phaseout. Even though the benefits of protecting the ozone layer have not been precisely valued, the international consensus is that they will greatly exceed the costs of doing so. While early action to protect the ozone layer may raise the costs above what they would have been under a more leisurely phase-out scenario, the added benefits of accelerated phase- out should easily outweigh the extra costs. Yet the MP provides no incentives for accelerating the phaseout beyond the targets set.

Another is global cost effectiveness. Some of the quickest and least costly options (such as recycling) are now in developing countries, because many of these have already been undertaken in industrialized countries. Indeed, it is economically beneficial for the global community to finance them—as it does to some extent through the IMFMP—but even greater benefits could be achieved by adding financial inducements to spur more rapid action.

The difficulty in maximizing these desired outcomes can be traced to several features of the existing approach.

  • The fixed ODS phase-out schedules focus the attention of decisionmakers on simply meeting these minimum targets at the lowest possible cost, instead of increasing the benefits through incentives for more rapid phase- out.

  • Meeting separate schedules by country and by ODS group is not an efficient way of minimizing costs. While the impact of ozone depletion at one place will differ from that at another, it will depend on the total ODS accumulation in the atmosphere and not on where the ODS is vented. The efficient approach, therefore, is to phase out those ODS groups that yield the greatest avoided ozone-layer damage per dollar spent, in whichever countries such opportunities occur.

  • By paying only the incremental costs of developing countries, industrialized countries fail to provide any financial inducement for accelerated phaseout. A recipient country that is merely reimbursed is no better off whether it takes early action or none at all. The unrealized gains from the missed opportunities in developing countries are the huge differences between the benefits of ozone protection and the costs of the phaseout. The unrealized gains would still be substantial, even if the benefits were very conservatively estimated as merely the savings that would result from avoiding the far more costly measures needed for industrialized countries to accelerate phaseout of the same amount of ODS.

  • The incremental cost criterion also increases administrative costs and introduces some delay in processing because it is very difficult to apply in a consistent, transparent, unambiguous, and reasonably efficient manner—especially if applied, as it is now, at the level of the individual enterprise.

Ways to improve implementation

While it is unlikely that a new convention or substantially revised Protocol can be negotiated soon, there are several ways of working within the existing framework to speed up the phaseout.

Schedules. Even without abandoning schedules, there are two ways of improving the way they are used (i.e., of speeding up implementation and reducing costs).

The first (currently under consideration) is to encourage countries to waive the grace period, or at least not use it fully—bearing in mind that there are financial implications, as the incremental costs of the phaseout and the obligations of the IMFMP would increase. In some countries, the grace period has led to complacency about the need to take action, while in others it has not been regarded as a concession at all, and is unlikely to be used fully. Indeed, many relatively advanced developing countries have taken early and decisive action despite the fact that this will lower the baseline consumption upon which their future targets will be based. Typical actions were the banning of ODSs in aerosol use (Egypt), insecticides and small fire extinguishers (Brazil); the use of import quotas (Singapore and Hong Kong); and negotiated industry actions (Mexico).

The second way involves supplementing the present approach by financing well-known, low- cost technologies on a generic, limited-appraisal basis across countries. This would speed up adoption of new technologies, while still leaving individual country schedules as the “safety- net” obligation.

Chart 2CFC and halon use by region

Source: The United Nations Environmental Programme.

Incremental costs. If financial inducements were provided to them, developing countries could go quickly beyond the unilateral and economically attractive actions already undertaken. However, even if the incremental cost criterion is retained as a central element in the IMFMP, there are two complementary ways in which the administrative costs and delays can be reduced.

The first is to provide a lump sum reimbursement for the incremental costs of a country program—rather than to finance individual projects. This would give recipients the flexibility to adopt the most cost-effective mix of phase-out policies and investments, without the tedious requirements of justifying incremental cost at the micro-project level. In particular, developing countries would be free to use approaches with market-oriented elements— as is being done in Singapore and Hong Kong. While measuring program-based incremental costs at the country level would be more difficult, a flexible approach to reimbursement could be based on industry norms. The second way is to decentralize project implementation and disbursement as much as possible, through the use of financial intermediaries in each recipient country.

Mohan Munasinghe

Kenneth King

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