4.1. Integration of the economy and the environment · Integration of the economy and the...

Integration of the economy and the environment 397

4.1. Integration of the economy and the environment

A variety of policy instruments are deployed to integrate the environmental dimension ineconomic decision making:

• Environmental impact assessment (EIA) of major projects is now a well-establishedprocedure, although the effectiveness of EIAs depends on their being undertakensufficiently early in the project cycle to influence project design.

• Legislation (the EU has an estimated 315 environmentally related Directives), theeffectiveness of which depends on implementation by Member States (and also bythe accession countries).

• Environmental management and auditing (EMAS) covers more than 1 500 registeredsites across the EU (over 75% of them in Germany); the EU EMAS scheme ischallenged by the international management scheme ISO 14000 which in somerespects is less demanding.

• Voluntary Agreements, of which there are more than 300 in the EU, mostly in theNetherlands and Germany. The major issue is to make them credible and transparent,with third-party verification of binding targets.

• Subsidies, which may be environmentally damaging (supporting intensive agricultureor the coal industry) or beneficial (for example agri-environmental support).

• Environmental taxation: the main issue now is to shift from piecemeal environmentaltaxation to a more thorough ecological tax reform where labour taxes are replaced byenvironmental taxes.

In addition there are several instruments which have hitherto been less widely used –examples include extended cost-benefit analysis, tradeable permits and greenprocurement.

The EU Fifth Environmental Action Programme (5EAP) identifies sectors of economicactivity which have major environmental impacts:

• Agriculture: eco-efficiency has improved in terms of emissions per unit of agriculturalproduction, and fertiliser and pesticide use per hectare. Organic agriculture still playsa limited role. Agri-environmental measures are being applied on a considerablescale, but subsidies with a possible negative influence on the environment (like aconsiderable part of price supports) are still common and specific environmentaltaxation almost non-existent.

• Industry: eco-efficiency has improved for air and water emissions, but not for solid andhazardous waste: there is considerable scope for environmental taxation andvoluntary agreements aimed at reduction of the generation of wastes.

• Energy: eco-efficiency is improving as the emissions of most air pollutants per unit ofpower generated are declining while energy demand is stable. Only about 5% of EUenergy comes from renewable sources, and this could be increased by increasedfunding of renewables and taxes to internalise the environmental damage of fossil fuels.

• Transport: environmental damage is increasing, as a result of growth in the number ofcars, road freight and air passengers, and increased congestion, despite improvedvehicle fuel efficiency and use of catalytic converters. Environmental taxation onvehicle fuels is now widespread (although aviation fuel remains untaxed), and roadpricing may change travel behaviour.

Main findings

Closing the gaps398

• Households: the number of households in the EU is growing at 1.6% per year, asaverage household size declines. There is growth in energy use and waste generation,although waste recycling is increasing particularly in countries which have introducedcomprehensive programmes with charges for household waste collection and a well-financed recycling network. There is still scope for (higher) charges for householdenergy and water use. Eco-labelling of products is still developing slowly and coversonly a small share of available household appliances.

1. Why and how to integrate economy and environment in the EU

The importance of integrating environmen-tal considerations into economic andsectoral decisions was officially recognised inArticle 6 of the consolidated AmsterdamTreaty, which established an obligation tointegrate environmental requirements intoall EU policies and actions. Recent EUprogress in the process of implementation isdemonstrated by the outcomes of the CardiffEuropean Council (of EU Member States;European Commission, 1998a) and theAarhus Conference (of Ministers of theEnvironment of UNECE countries), bothheld in June 1998 (see Chapter 1.1).

As analysed in the previous chapters, envi-ronmental problems arise from economicactivities – for example air pollution fromtransport, industry and power generation, orwater pollution from households, industryand agriculture (see EEA, 1998, Chapter 14for a summary). While environmentalregulators can make policies that influencethese other sectors, it is much more efficientand effective if policy makers in each sector– transport, agriculture, industry etc. –directly consider environmental concernswhen they formulate policy. This process isknown as the ‘integration’ of economic orsectoral policy with environmental policy.

Integration is a central objective of the FifthEuropean Environmental Action Pro-gramme (5EAP), which was adopted in 1992.It states that ‘the strategy of the Programmeis to create a new interplay between the maingroups of actors (government, enterpriseand public) and the principal economicsectors (industry, energy, transport, agricul-ture, tourism) through the use of an ex-tended and integrated range of instru-ments.’

The final purpose of integration is, ofcourse, to reduce the environmental damagefrom sectoral activities. Evidence presentedin this chapter will show a decrease in

environmental damage associated with someeconomic sectors, notably industry, withinthe EU. This is known as ‘decoupling’, sincethere is no longer a fixed relationshipbetween production and the associatednegative environmental effects. Decouplinginvolves a reduction in the ratio of physicalemissions or natural resource use per unit ofeconomic output, either from increasingefficiency through technological changes ora shift to a less environmentally damagingproducts. However, in some sectors, theincreased scale of economic activity – such asthe growth in the number of cars andhouseholds – will lead to growing environ-mental damage. These so called ‘scale’effects may be enough to overtake any gainsin reduced damage per unit of output, sothat total environmental damage caused bythe sector will rise overall. The big questionis whether technological growth and productshifts will be rapid enough to keep pace withEU-wide demands for a higher standard ofliving. The situation is summarised in Table4.1.1.

Progress towards integration has been madein agriculture, with reduced fertiliser (andpesticide) use per hectare, and a growingarea devoted to environmentally beneficialactivities. The energy and industrial sectorsare also showing some improvements withdeclining air pollution per unit of output.However, the available data suggests thatsolid waste and hazardous waste from indus-try are increasing. Two sectors, where dam-age is still growing, are transport and house-holds, both because of scale effect and thelack of efficiency gains substantial enough tooffset this.

While much of the policy discussion focuseson the environmental damage which is nottaken into account (technically speaking,internalised) in economic decision-making,it is important to note that economic systemsalso fail to account fully for environmentalbenefits. The agricultural sector not onlyproduces pollution and landscape destruc-tion, but also creates living landscapes that


are widely appreciated by people at large.For example, after deducting environmentaldamages from the net product of UK agricul-ture, there is nonetheless an estimated 24%increase in the ‘true’ output of the agricul-tural sector because of its contribution tobiodiversity conservation, amenity and thesequestration of carbon dioxide (Adger andWhitby, 1991, 1993; OECD, 1997a).

The process of integrating economic andenvironmental policy is complex, and severalpossible criteria for judging progress towardsintegration have been proposed (see Chap-ter 1.1) (EEA, 1998, Chapter 14; OECD,1996a). The most effective approach is toexamine the extent to which each sector hasimplemented key instruments for integra-tion. These instruments can be subdividedinto their target group (government, firmsand public) or their aim (for example,information, regulation, incentives etc.).The 5EAP highlights four main sets ofinstrument: regulatory instruments, market-based instruments (including economic andfiscal instruments and voluntary agree-ments), horizontal supporting instruments(research, information, education etc.) and

financial support mechanisms. These will bereviewed further in the next section.

2. Overview of key instruments for integrating economic and environmental policy

The main instruments for integration of theenvironmental dimension in economicdecision-making are summarised in Figure4.1.1. Some instruments, such as environ-mental taxation, are suitable for more thanone sector while others, such as liability rulesare targeted at a single sector, in this case,industry. This section will focus on the cross-sectoral instruments – in particular, environ-mental impact assessment (EIA), regula-tions, voluntary agreements, subsidy reformand environmental taxation – with sector-specific instruments covered in the sectoralreviews that follow.

While the comparison between information,regulatory and incentive approaches iscomplex, there is strong evidence that theeconomic approaches may reduce overallcompliance costs for industry and house-

Source: EEA, Eurostat

Table 4.1.1.Overview of sectoral trends relevant to environmental damage in the EU

Sector

Scale ofconsump-tion/production

Efficiencygains

Shift tolessdamagingproductsorservices

Agriculture

Utilisedagricultural areafell by 0.7% a yearfrom 1990-94

Fertiliserconsumption fellper ha by 1.6% ayear from 1985-94

Share of agricul-tural land devotedto organic agri-culture is rising,though stillrelatively low at1.6%; agri-environ-mental measuresnow account for20% of agriculturalland, exceedingthe target of 17%set out in the 5EAP

Industry

Manufacturingproduction stablesince 1990

Air pollution perunit of produc-tion decliningIndustrial wastehas increased1.4% per capitaper year since1985 in selectedcountries

-

Energy

Final energyconsumptionper capita hasbeen stablesince 1985

CO2, SOx andNOx emissionsper kWh havedeclined from1980-1990

Renewableenergy was5.3% of totaldomesticenergyconsumptionin 1996 – thesame as in1985

Transport

Stock of cars risenby 4% a year since1986,

Road freight hasrisen by 5% a yearsince 1980,

Air traffic hasincreased by 7.8%a year since 1985

CO2 emission pervehicle-km hasremainedconstant, NOx hasslightly declined ,and SOx hassignificantlydeclined from1990-1995

Passenger rail use,and rail and inlandwaterway freighthave remainedstatic since 1970and are now lessthan 20% of totaljourneys

Households

Number ofhouseholdshas increasedby 1.2% a yearfrom 1991 to1995

Waste percapita hasbeen rising by3% per yearsince 1980

-

Closing the gaps400

Eco-Audits/managementProduct labelling

Public information/EducationAwards/Recognition

Life-Cycle Analysis (LCA)Cost-benefit analysis

Green accountingResearch and development

Environmental Impact AssessmentStrategic Environmental Assessment

Emission StandardsLicensing/Permitting/Bans

Liability RulesGreen procurement

Voluntary agreementsSubsidy Reform

Marketable PermitsEnvironmental taxation

Tradable permits/Joint Implementation

Information-based

strategies

Directive-based

regulations

Incentive-based

instruments

Correct lackof

information

Mandatespecific

behaviour

Changeincentives

Source: Adapted from EEA,1997

Figure 4.1.1 Range of instruments for environmental policy

holds. Additionally, some economic instru-ments raise financial revenues, which couldbe used to reduce other distorting taxes inthe economy, particularly those taxes thatgive disincentives for employment. This isknown as the double dividend effect, becausetaxation deters environmentally damagingactivities (the first dividend) and otherdistortionary taxes are reduced (the seconddividend). However, other research suggeststhat the reality is far more complex(Goulder, 1995). Due to these perceivedbenefits, this chapter reviews all the maininstruments, but focuses on the incentiveapproach: subsidy removal, environmentaltaxation and voluntary agreements.

For each of the cross-sectoral instruments,there has been progress both at the EU leveland Member State level (Table 4.1.2).

2.1. Information-based strategiesInformation-based strategies work on theassumption that environmental policy,however devised, works better when besidespolicy makers, citizens are better informed.EU institutions have been taking an activerole in co-ordinating and developing theseinstruments, both as environmental policymeasures and to ensure that they do not leadto barriers to trade (see Chapter 4.2).

2.1.1. Environmental impact assessmentThe EU has been active in promotingEnvironmental Impact Assessment (EIA),and Directive 85/337 has led to a majorgrowth in EIA activity. EIA is widely used in

all sectors to reduce environmental damagefrom major investment projects. There werean estimated 7000 EIAs per year within theEU in the early 1990s, with more than 70%in France. The main problem is to ensurethat EIA is done sufficiently early in theproject cycle to influence project design. Areport for the Commission (EuropeanCommission, 1993a) found that: ‘there isclear evidence that project modificationshave been and are taking place, due to theinfluence of the EIA process. However, thereis also evidence that as yet, its impact is notas widespread as intended and that modifica-tions are mainly confined to those of aminor or non-radical nature’. The amendedEIA Directive 97/11/EC aims to overcomesome of these problems by broadening andclarifying the scope of projects which areEIA mandatory.

2.1.2. Strategic environmental assessmentOne of the main shortcomings of projectEIA is that it is applied at a very late plan-ning stage. Therefore, Strategic Environ-mental Assessment (which applies theprinciples of environmental assessment topolicies, plans and programmes) is alsobeing taken forward by the EU. There iscurrently discussion on a proposed Directive(COM(96)511) which would require envi-ronmental assessment of certain plans andprogrammes which are part of the town andcountry planning decision-making processes.This would also include certain sectoralplans and programmes. However, the omis-sion of SEA for policies leaves the Commis-sion behind the forefront of internationalpractice (Sadler and Baxter, 1997). WithinMember States, Netherlands has taken thelead, with a statutory requirement for SEA ofcertain plans and programmes since 1987.Denmark and Finland are similarly ad-vanced, requiring SEA for certain plans,programmes and policies.

2.1.3. Cost-benefit assessmentThe importance of cost-benefit analysis wasnoted in the 5EAP which states the need forthe ‘development of meaningful cost-benefitanalysis methodologies’. There has nowbeen a growing willingness to use suchapproaches (Pearce, 1998). A number ofattempts have been made to evaluate envi-ronmental externalities across the EU insevral sectors, such as energy (EuropeanCommission, 1998b), transport (ECMT,1998) and waste (Coopers and Lybrand et al.,1997). On the operational side, the Struc-tural Funds require that; ‘all major projectproposals are now required to include an


assessment of costs and benefits includingthose relating to the environment’ (Euro-pean Commission, 1996b). The EuropeanInvestment Bank has also introduced proce-dures to evaluate environmental externalitiesin some sectors (IVM and EFTEC, 1998).

2.2. Regulatory approaches: environmental legislationWhile information-based strategies caninfluence behaviour, they do not generallyrequire compliance (except in the case ofUS ‘right-to-know’ type policies). Mostenvironmental policy in the EuropeanUnion and at Member State level is executedthrough regulations, or what is called ‘com-mand and control’.

With more than 315 pieces of Communityenvironmental legislation, the EU hasdeveloped a fairly comprehensive set ofenvironmental Directives. Most of theDirectives relate to industry, agriculture andtransport, but there are a growing numberin the energy and household sector.

Improving implementation is an urgentpriority since in 1995 Member States hadnotified implementing measures for only91% of the Community’s environmentalDirectives, leaving as many as 20 or 22directives not transposed (transferred intonational legislation) by some Member States.In the same year, 265 suspected breaches ofCommunity environmental law were re-ported, which is 20% of all infringementsregistered by the Commission that year. InOctober 1996 over 600 environmentalcomplaints and infringements were out-standing against Member States, with 85awaiting determination by the Court ofJustice (European Commission, 1996c). In1998, the latest round of infringementproceedings announced showed that themajority of the EU Member States were stillbeing targeted by the Commission for non-compliance with 12 environmental direc-tives.

Future EU legislation will focus on follow-ups to existing legislation and updating. Thegreater regulatory challenges are twofold:first, to ensure the widespread implementa-tion of EU legislation in existing MemberStates and second, to cope with enlargementof the Union, as the economic and financialconstraints of the new countries will requirecomplex transitional arrangements. Up to1998 many Accession Countries were makingslow progress in adoption of EU environ-mental standards (European Commission,

1998c). The main area of weakness was poorinstitutional capacity in environmentalinspectorates. The longer term challenge ofenlargement is that there may, in the future,be pressure to make new and even existingenvironmental legislation much moreflexible, and indeed use means other thanlegislation to attain the goal of environmen-tal improvement in order to take intoaccount the economic and environmentaldiversity of Member States.

2.3. Incentive approachesThe use of economic and fiscal incentiveswas emphasised in the 5EAP: ‘In order to getprices right and to create market-basedincentives for environmentally friendlyeconomic behaviour, the use of economicand fiscal incentives will have to constitutean increasingly important part of the overallapproach. The fundamental aim of theseinstruments will be to internalise all external

Source: EEA

Table 4.1.2.Progress at EU and Member State level inintroducing key instruments

Instrument

Research anddevelopment

EnvironmentalImpact Assessment(EIA)

Environmentalmanagementsystems

Regulations(emissionstandards,licensing/permitting/bans)

Voluntaryagreements

Subsidy reform

Environmentaltaxation

EU level initiatives

Funding in the 5th researchframework programme willbe EUR 2 billion for theenvironment

Directive on EIA in 1985(revised in 1997)

Eco-Management and AuditScheme (EMAS) from 1993

About 315 environmentalrelated Directives (includingupdated Directives)

Guidance to Member States(European Commission,1996a)

Agreements on energyefficiency in washingmachines and TVs; and CO2emissions with auto industry

Reform of CommonAgricultural Policy, CommonFishery Policy, StructuralFunds, Cohesion Fund,European Investment Bank

Guidance to Member States(COM(97)9)

Mineral Oils Directive (1992)Proposal for VAT on energyto be harmonised anddiscussion of pesticide tax

Member State initiatives

Support for cleantechnology in manyMember States

About 7000 EIAs per annumconducted across EU

About 1500 sites registeredwith EMAS by 1998

About 90% of EU Directiveshad been transposed intonational legislation, but stillweaknesses inimplementation

More than 300 voluntaryagreements agreed from1990-96, mostly for industry,with about 100 in Germanyand 100 in the Netherlands

Reform of domestic energyand industrial subsidiesunderway

Growth in environmentaltaxation with Nordiccountries leading the way.EUR 6 billion raised bypollution taxes in EU in1996 – a 100% increasesince 1990

Closing the gaps402

environmental costs incurred during thewhole life cycle of products – from sourcethrough production, distribution, use andfinal disposal – so that environmentallyfriendly products will not be at a competitivedisadvantage in the market place vis-à-visproducts which cause pollution and waste.’

2.3.1. Voluntary agreementsDuring the 1990s, voluntary agreements(VAs) have grown in popularity as a means ofinternalisation (Box 4.1.1), particularly inthe industrial sector; ‘Environmental agree-ments with industry have an important roleto play within the mix of policy instrumentssought by the Commission. [...] They can

offer cost-effective solutions when imple-menting environmental objectives and canbring about effective measures in advance ofand in supplement to legislation. In order tobe effective, it is essential, however, to ensuretheir transparency and reliability.’ (Euro-pean Commission, 1996a).

Table 4.1.3 shows that all Member Stateshave experimented with some form ofvoluntary agreements. In 1996 some 305national agreements were recognised in theEuropean Union but many more exist at sub-national level (European Commission,1997a). They are focused on many differentsectors but 20% of these were in chemicals;

Box 4.1.1. How do voluntary agreements work?

Voluntary agreements (also known as covenants ornegotiated agreements, as they may not be strictlyvoluntary) involve a polluter negotiating with aregulatory authority to reduce pollution or modifyresource depletion. VAs may take several forms. EEA(1997) distinguishes those which determine thetarget for reduced environmental impact, from thosewhere the target is already established, with the VAfocusing on the detailed implementation of action toachieve the target. The term ‘voluntary agreement’covers a wide range of commitments, varying interms of their legal characteristics, reportingmechanisms, monitoring arrangements, etc.

Voluntary agreements differ from conventionalregulatory policy in several ways. First, the actualtarget of policy may be part of the VA. In othercases, however, the VA is simply substituted as themeans of achieving a target that would have beenimplemented anyway. Second, formal legislation isgenerally avoided, although the threat of thatlegislation often remains. The VA effectivelybecomes a means of ‘putting the polluter’s house inorder’ in order to avoid the legislation. In othercases, the threat is of sanctions for not achievingthe VA target, rather than the threat of legislationto mandate the target. The difference in effect heremay be negligible and the extent to which suchagreements are truly ‘voluntary’ has beenquestioned (Segerson and Miceli, 1996).

Voluntary agreements remain controversial as apolicy mechanism for achieving environmental goals.On the positive side they impart considerableflexibility to the polluter as to how to meet anagreed target. In this respect they are likely tominimise compliance costs, an important feature ofmodern environmental regulation. From thepolluter’s point of view they may also have a benignpublic image: the industry is seen to be taking actionon its own, even if there is a less well publicisedthreat of sanction behind the agreement. From theregulator’s standpoint there is the advantage ofavoiding costly legislation, although this may beoffset by the need to monitor the agreement andput pressure on to achieve the environmental goals(European Commission, 1997c).

As to environmental effectiveness, there iscontradictory evidence about the extent to which

firms achieve the environmental targets in VAs. Inthe USA there is some evidence that firms in VAsover-comply (Schmelzer, 1996), whilst someEuropean studies find that environmental goals arerarely met at all (Bizer, 1999). The EEA assessmentof six cases (EEA, 1997) judged that agreementshad been effective in a few cases but thatinsufficient information was available to assess theremainder. For those VAs where the target itself isnegotiated, there are some suspicions that theresulting goal is less than would have been the casehad legislation occurred. This perception tends tobe reinforced if the VA excludes representationfrom environmental interests; i.e. is exclusivelybetween polluter and regulator. Not all policy areasare suitable for conventional approaches, however,and VAs may be especially suited to contexts wherehighly technical and complex factors makeconventional legislation difficult. This is a well-known issue in regulation, namely one where theinformation rests with the polluter and the costs ofacquiring the information by the regulator are veryhigh (so-called ‘asymmetric information’).

Finally, doubts have been cast about other aspectsof VAs. Because of their potential for high publicitythat benefits the industry, there is an incentive to‘free ride’; i.e. for a single firm to secure thebenefits of the publicity without undertaking anyaggressive measures. The extent of this free-ridingis generally unknown (Storey, 1996). There are alsoconcerns about the extent to which VAs can restrictcompetition and will affect trade within the EU, byforcing co-operation between competitors. At themoment there appears to be no evidence that thisis the case, but some commentators perceive it as areal risk.

At the moment, experience is too new for theeffectiveness of such agreements to be determined.The EEA survey (1997) suggests that they havebeen partly responsible for observed environmentalimprovements, and have been associated with theintroduction of environmental managementschemes in some firms. On the other hand, Bizer(1999) reviews eight voluntary agreements andfinds that none of them can be regarded as costeffective – i.e. none produced a betterenvironmental solution than alternative forms ofregulation.


12% in food products, tobacco and bever-ages; 11% in transport, communications andstorage; 11% in metals; 10% in non-metallicmineral products; 10% in electricity, gas andwater supply; and 10% in rubber and plasticproducts. Sector definitions can overlapsomewhat. The Netherlands and Germanyaccount for some two-thirds of prevailingagreements. Voluntary agreements areunlikely to be suitable for all sectors; inparticular, they are not easily applicable toheterogeneous sectors such as agriculture.Most agreements have been for waste man-agement, followed by air pollution andclimate change. Examples include agree-ments on producer responsibility for packag-ing in Sweden, Germany and the UK, and anagreement in Portugal between the Ministryof Environment and the paper industry.

To date most VAs have been concludedwithin Member States, but there is now adesire to initiate more EU level agreements.The first EU level agreement came in 1997with a 20% improvement in energy effi-ciency by 2000 (from a 1994 baseline)agreed with the washing machine andtelevision/video recorder industry. InOctober 1998, a landmark agreement wasreached between European car manufactur-ers and the Commission that average CO2

emissions from cars would be reduced by25% from 1996 to 2008. The Commission isnow discussing voluntary agreements withthe EU airlines industry and the pulp andpaper industry. In addition to actual agree-ment, the EU issued a Communication in1996 to Member States (European Commis-sion, 1996a) that presents guidelines for theuse of voluntary agreements. The Communi-cation stresses that while VAs have someadvantages, they should be more credibleand transparent with third-party verificationof binding targets.

2.3.2. Subsidy reformBoth at EU and Member State level, thereare major subsidy programmes that affectenvironmentally important markets, such asenergy, agriculture, transport, heavy industryand fisheries. Due to the existence of subsi-dies, product prices can be lower, even at alevel that may not cover private costs. Whilesuch subsidies are often introduced forsound social and economic reasons, theysometimes have deleterious effects on theenvironment because they encouragewasteful production or the excessive use ofdamaging inputs (e.g. fertilisers, pesticides)(Table 4.1.4). Generally, subsidies aredeclining, although subsidies to agriculture

through the Common Agriculture Policy(CAP) and to the coal industry in certaincountries remain high, and may have consid-erable negative environmental impacts.There is widespread agreement that subsi-dies should, as far as possible, be reduced inan effort to reduce environmental damage.In undertaking subsidy reform, it is possibleto introduce environmentally beneficialsubsidies which are in effect payments forthe provisions of external benefits. Forexample, as part of CAP reform, there hasbeen an increase in payments to farmers forenvironmentally positive land use. Thesebenefits include the provision of amenityand natural assets such as woodland, lakesand ponds, stone walls and traditionalbuildings. A fuller description of the sectorspecific subsidies is given in Sections 3-7below.

2.3.3. Environmental taxationEnvironmental taxation was stressed in the5EAP and Member States have been active inincreasing taxation, particularly in the

5EAP Sector

Member Agricul- Energy Industry Transport Tourism TotalState ture number

Austria ✓ 20

Belgium ✓ ✓ 6

Denmark ✓ ✓ ✓ 16

Finland ✓ 2

France ✓ ✓ 8

Germany ✓ ✓ 93

Greece ✓ ✓ ✓ 7

Ireland ✓ 1

Italy ✓ 11

Luxembourg ✓ ✓ 5

Netherlands ✓ ✓ ✓ 107

Portugal ✓ ✓ 10

Spain ✓ 6

Sweden ✓ ✓ ✓ 11

UK ✓ 9

EU15 312

Source: EEA, 1997

Table 4.1.3.Environmental agreements by Member State andsector, 1996

Closing the gaps404

Nordic countries. However, progress at theEU level remains slow up to now; the Com-mission’s 1992 proposal for an EU-wideCO2/energy tax was not adopted (seeSection 2.2 in Chapter 3.1). The EU adoptedin 1992 the Mineral Oils Directive, a fiscalharmonisation measure setting a minimumlevel of excise duty on motor fuels in allMember States. There are now a number ofinitiatives to increase activity in this area inline with the concerns raised in the 5EAP:‘As such charges become more widespreadand have real environmental impact and inconsequence, generate greater financialincome, some intervention at Communitylevel may be necessary to ensure that charg-ing systems are designed in a transparentand comparable way, and to ensure thatdistortions of competition within the Com-munity are avoided’. There are proposals toimpose minimum rates of excise duties onenergy across the EU and for a frameworkfor pesticide taxes. In addition, the Euro-pean Commission issued in 1997 a Commu-nication on environmental taxes and chargesin the Single Market (European Commis-sion, 1997c) which concludes that there isconsiderable room for Member States tointroduce fiscal instruments in keeping with

the legal and competition rules of the SingleEuropean Market.

At the Member State level, most states havetaxes on motor fuels but significant differ-ences remain in other areas, in particularagricultural inputs, air transport and water.Three major surveys by the OECD (1989,1994, 1997b) show the use of economicinstruments is on the increase, althoughprogress has been modest. In 1987, Euro-pean countries had around 137 examples ofeconomic instruments; environmentallybeneficial subsidies played a significant role,accounting for the vast majority of instru-ments in place in Germany and just underone-half of those in Finland. In 1992, thetotal number of instruments had increasedto 157 and in 1997 the total number was 134,but subsidies were excluded from the surveyand more countries were surveyed. Althoughoverall progress has not been dramatic,substantial changes have taken place in somecountries. Denmark effectively more thandoubled its use of non-subsidy instrumentsin the five years between the two surveys, asdid Germany. Since 1992 further changesoccurred, with the Scandinavian countriessubstantially increasing the use of economicinstruments, along with the Netherlands,Belgium and Austria (Figure 4.1.2). Thenumber of taxes alone, however, has alimited value as an indicator of progress. Taxrevenues from the UK, for instance, arehigher than in many other countries.

The revenue from transport and pollutiontaxes represented only 1.8% of total EU taxrevenue in 1996, although this proportion islarger for the Netherlands (5.5%) andDenmark (4.9%). By 1996, pollution taxesraised EUR 6.7 billion in the EU, whiletransport taxes raised EUR 45 billion. Forpollution taxes this is a 100% increase inrevenue since 1990. Transport taxes are veryvariable between Member States (see alsoSections 6.5 and 6.6 below). Taxes classifiedas energy taxes, however, represented alarger proportion, at 5.3% of EU tax revenueon average, up to around 8% in Portugaland Luxembourg and around 7% for Italyand the UK. While the number and revenuesof environmental taxes have been growing,their magnitude still remains low and theystill make up a limited proportion of thetotal revenue from taxes and social contribu-tions and a very small proportion of GDP(Figure 4.1.3).

The progress in adopting economic instru-ments in the economies in transition is not

Source: Steele, Hett & Pearce, 1999 based on data from OECD, 1998a; IEA, 1998; ECMT,1998; European Commission, 1997b

Table 4.1.4. Potential environmental effects of sectoral subsidies

Sector

Agriculture

Energy

Transport

Industry

Approximatesize (EUR )

65 billion(1997)

9.3 billion(1995)

0.44 billion(1995) toroad freight

25.2 billion(1994) –excludingGermany(=17.4billion, 1994)

Type of subsidy

Commodity pricesupport. Subsidieson inputs (fertilisers,pesticides, capital,water).

General support(R&D, extension).

Support to coalproducers. Generalsupport to fossilfuels. Support toelectricity sector.

Revenues collectedfrom road users isless thanexpenditure on roadmaintenance etc.

Subsidies to encou-rage location incertain areas. Sub-sidies for certainindustries (steel,ship-building andtextiles).

Potential environmentalimpacts

Negative impacts:increased pollution fromintensive agriculture andhabitat destruction due toprice guarantees.

Positive impacts: agri-environmental schemes,support for environmentallybeneficial activities.

More pollution from coaland fossil fuels in general.

Reduced energy efficiency.

More road transport andhence more air pollution,noise etc.

Increased production insome environmentallydamaging industries (e.g.steel).


0

5

Austria

Belgium

Denmar

k

Finland

France

German

y

Greece

Irelan

dIta

ly

Luxe

mbourg

Portugal

Spain

Sweden

United K

ingdom

20

15

10

The Neth

erlands

Num

ber

of

envi

ronm

enta

l tax

es

25

Figure 4.1.2Number of environmental taxes in EU countries, 1996

Source: OECD, 1997b

0

1

2

3

4

1990 19951991 1992 1993 1994 1996

Env

ironm

enta

l tax

es%

of G

DP

Energytaxation

Pollutiontaxation

Transporttaxation

Figure 4.1.3Energy, pollution and transport taxes as % of GDP

in the EU, 1990-96

Note: for comparison withother diagrams taxes areshown here as percentage ofGDP and not, as is morecommon, as percentage oftotal revenues from taxesand social contributions.

Source: Eurostat

included in the OECD and EEA surveys. AUNEP Compendium of case studies ofeconomic instruments in central easternEuropean Countries (UNEP, 1997) suggeststhat economic instruments are quite wide-spread, reflecting the fact that an environ-mental tax base existed in some countriesbefore transition, although such taxes weregenerally ineffective (Box 4.1.2).

Further progress on economic instrumentscan take place in three areas (EEA, 1996):their extension to more countries, increasingharmonisation and capability at the EU level,and developing new tax bases. Extension tomore countries requires that other countriesfollow the more radical steps taken by theNetherlands and Scandinavia. Increasedharmonisation is often advocated because offears that environmental taxes, especiallyenergy taxes, will have effects on competitive-ness within the Single Market, thus providinga justification for action at EU level in accord-ance with the subsidiarity principle. But manyenvironmental taxes will tend to be modestfractions of industrial production costs, sothat competitiveness effects will be small ornon-existent. Additionally, environmentaldamages vary by Member State so that theeconomic rationale for harmonisation is notalways present. Nonetheless, moves towardsharmonisation clearly provide one way inwhich the scale and extent of economicinstruments can be extended. Steps to de-velop new tax bases are already in progresswith discussion of innovative charges onpesticides and air fuels, but could also includewater resources and hazardous chemicals.

In the longer term, there may be a moreradical shift away from taxing ‘goods’ likelabour towards taxing ‘bads’ such as environ-mental damage. This was discussed in theCommission White Paper on Growth, Com-petitiveness and Employment (EuropeanCommission, 1993b) which concludes:‘Finally if the double challenge of unemploy-ment/environmental pollution is to beaddressed, a swap can be envisaged betweenreducing labour costs through increasedpollution charges’. Some countries arealready applying this. The tax reform inDenmark provided for marginal incometaxes to be lowered by about 8-10% between1994 and 1998, and for the phasing in ofnew green taxes worth EUR 1.6 billion (EEA,1996). The total redistribution of the taxburden in Sweden was equivalent to 6% ofGDP, while the tax shift between labour andenergy accounted for 4%. The 1998 Frenchbudget included a new generalised pollution

tax grouping taxes on water, air pollutionand waste, which will be used to lower taxeson labour. Similar reforms have taken placein Norway and the Netherlands, whilst theUK has introduced a landfill tax with therevenues being used to reduce labour taxesand support environmental trusts. It is likelythat in the future, this shift to taxing envi-ronmental damage to reduce labour taxes,known as ‘ecological tax reform’, will grow.

The result of this shift is that, when environ-mental taxes are combined with reductionsin distortionary taxes, not only does theenvironment improve, but there may also bepositive economic effects. This is known as

Closing the gaps406

the ‘double dividend’ and has recently beenestimated at an EU level (Jarass, 1997). Workby the Norwegian Tax Commission suggeststhat raising environmental taxes equal to 1%of GNP, and reducing labour taxes by anamount equal in revenue terms would raiseemployment by 0.7%, reduce the consumerprice index by 1.2% and raise disposableincomes by 0.2% by the year 2010 (Moe,1996). A recent study for the UK finds thatseven new environmental taxes could helpcreate 391 000 jobs (Cambridge Econo-metrics, 1997).

2.3.4. Tradable permits and joint implementationThe 5EAP highlights the possibility of moreinnovative economic incentives: ‘It will beimportant to study also the extent to whichpossible options such as tradable permitscould be utilised to control or reduce quanti-ties (of pollution)’. With such programs afixed total quantity of allowed pollution(emission budget) is set and allocated in theform of tradable permits to the regulatedcommunity. The polluters have the choicewhich policies or measures to use to complywith the overall target. Among the possiblecompliance options is the acquisition ortransfer of tradable permits. Similar programscan be used to limit or control resourceextraction (e.g. fish catch, water use). Whilethis approach has yet to penetrate Europe,

they are commonplace policy weapons for thecontrol of air pollution in the US and forfisheries management in the US, Australiaand New Zealand (OECD, forthcoming1999). Germany is about to introduce atrading scheme for volatile organic com-pound emissions from small industry. Theonset of further restrictions on sulphur andnitrogen emissions in Europe and the imple-mentation of the Kyoto Protocol to theFramework Convention on Climate Changeare likely to see more attention to tradablequota systems in Europe.

2.4. The use of policy instruments in the EU: a summaryThe sectoral distribution in the use of themain policy instruments discussed above issummarised in Table 4.1.5. Due to thecharacter of the various sectors, the applica-bility of the instruments varies, which is oneof the reasons behind the distributionshown. In this respect it needs to be stressedthat, as mentioned before, such a quantita-tive overview certainly is not intended forprogress evaluation towards some targets.

3. Agriculture

The agricultural sector is still rich in marketdistortions which encourage harmful agricul-

Box 4.1.2. Economic instruments in economies in transition (central and eastern Europe, Accessioncountries)

Pollution charges have traditionally been in place inthe transition countries. Due to their levels being toolow and the lack of institutional mechanisms for fullcollection, they had little effect in the 1980s.Currently, though, economic instruments are gainingimportance in the ‘new’ environmental policy.

In Poland emitters of air pollutants must have a validpermit which in turn is contingent upondemonstrating the fate of emissions using dispersionmodels. All permitted polluters must then pay acharge on emissions and fines if emissions exceedthe standard set. Fines are about 10 times theemission charges. The emission charge was US$2 pertonne of SO2 emitted in 1990 increasing to US$96 in1996. Revenues raised in 1994 totalled some US$105million from the SO2 tax alone. Revenues arehypothecated to various environmental funds atlocal, regional and national levels. To date thecharge has probably not encouraged theintroduction of abatement equipment beyond majorenterprises since it is too low. Nonetheless,compliance appears to be improving, andenvironmental funds play a positive role.

Hungary introduced a packaging waste charge in1996. Charges are paid according to the weight ofthe packaging material, with a discount for thedegree of recycling beyond some obligatory target.

Sources: Lehoczki and Sleszynski, 1997; Balogh and Lehoczki, 1997; Seják, 1997.

The recycling may be undertaken by the payer ofthe charge or through a binding contract with arecycling organisation. Major packagingcorporations and users of packaging have alreadyinstigated recycling measures. The charge rates aremainly based on the costs of treating packagingwaste and are levied at the first point of sale tominimise the complexity of the charge system.Actual revenues are projected to be around US$13million per annum.

In the Czech Republic large and medium-sizedpolluters have, since 1992, had nine years by whichto comply with air emission standards comparableto those in the EU. Emission charges cover nearly90 pollutants and are an integral part of theprogramme of compliance. Charges were set to besimilar to average abatement costs, when thesewere known, with a discount for contexts wheretechnologies are under development, and asurcharge of 50% for non-compliance. Othercharges are based on effluent and waste. Therevenues from the waste charge are recycled to thecommunities in the locations where the waste site islocated – effectively a form of compensation.Natural resource charges on converted agriculturalland, groundwater, surface water and mineralextraction are also in place.


tural practices. The Agenda 2000 reformspromise to further the current progress inthis area. However, integration with a real andlarge-scale effect on the environment has yetto be realised. Overall, progress towardsinternalisation in agriculture is moving in theright direction by reducing environmentallydamaging subsidies and introducing eco-nomic instruments, but at a slow pace.

3.1. Environmental assessment of the sectorThe agricultural sector has shown decliningair emissions and fertiliser use since the late1980s (Figure 4.1.4). The decline in fertiliseruse can be attributed to several factors,including increased use of manure, andtechnical change (see Chapters 2.2 and 3.5).This trend is likely to continue with stricterimplementation of the Nitrate Directive andthe CAP reforms. The decline in livestocknumbers has helped to reduce methane andammonia emissions, although livestockfarming still contributes significantly to totalmethane emissions (42%) (see Chapter 3.1and 3.4). The number of pigs is still rising,with high concentrations in certain parts ofthe EU and accompanying manure prob-lems. The overall livestock density has notdeclined, which also points to the continua-tion of the nutrient load in areas withintensive farming systems. Pesticide use (intonnes of active ingredient) has stabilised inthe EU, although the newer pesticides aremore biologically powerful and applied insmaller quantities. Energy use per unit ofproduction continues to grow, althoughenergy use in agriculture amounts to a verysmall proportion (less than 2.5%) of overallenergy consumption. Agriculture is thelargest consumer of water in southernEurope, and this is increasing. One positivetrend is that the share of agricultural area inthe EU devoted to organic agriculture hasbeen steadily increasing, although at ap-proximately 1.6% in 1997 the effect of this isprobably insignificant. The social context ofthe agriculture-environmental debate cannotbe ignored. In the 1980s, about three millionpeople in the EU12 left agriculture, a de-cline of almost 40%, highlighting the impor-tance of diversification of the rural economy(see Chapter 3.13).

The environmental impacts of agriculture inthe Accession Countries are mixed. Intensifi-cation has occurred, but in areas outside thecollective farms and following the declines inoutput since 1990 the use of inputs such asfertilisers and pesticides was relatively low inmost countries and the associated pressureson nature and wildlife were less than in

much of western Europe (European Com-mission, 1998d) (see Chapters 2.2 and 3.13).

There are many ways to reduce environmen-tal damage from agriculture. The assessmentwill focus here on measures targeting bothinputs (pesticides, fertilisers, and water) andoutputs (agricultural area and livestockdensity).

3.2. Quantified environmental damageIn comparison with other sectors such asenergy and transport, the agricultural sectorhas not been the subject of attempts tomeasure environmental damages on asystematic basis. A recent investigation of UKagriculture (Pretty et al, 1999) estimates theexternal costs in 1996 to be almost EUR 2.3

40

60

80

100

120

140

1980 1985 1990 1996

Agricultural productionEnergy usePhosphate fertilisers CH4 emissionsNitrogenous fertilisers

Index starts at 40

Ind

ex (1

980

= 1

00)

Figure 4.1.4Agricultural production and selected emissions tothe environment

Source: EEA

Table 4.1.5.

Agriculture Industry Energy Transport Households

EIAs per year 16 26 8 30 20 (waste)(period1989-1991:7000 per year)

Directives 30 40 5 14 9(315 in total)

Voluntary 3 88 5 4 -agreements (305)

Environmental 3 9 18 54 16taxation(134 taxes)

Environmental - 88 4 8 -ManagementSystems(1714 registeredEMAS sites)

Summary of use of instruments in each sectorwithin the EU (in %)

Sources: EIA: derived from European Commission, 1993a; EC Directives: Haigh, 1998;Voluntary agreements: European Commission, 1996a; Environmental taxation: OECD, 1997b;EMAS: ERM (forthcoming).

Closing the gaps408

billion, of which EUR 320m is from damagesto water resources, EUR 700m is attributedto air emissions, EUR 140m is damage towildlife, landscape and genetic diversity, andaround EUR 1 billion is damage to humanhealth from BSE (‘mad cow disease’) andrelated diseases.

3.3. RegulationsSeveral EU policy measures are beginning toexert a greater influence on the agriculturalsector and its environmental impacts, includ-ing the Nitrate, Pesticides and HabitatDirectives (see Chapters 2.2, 3.5 and 3.11).However, legislation has not always beensuccessful, for example the widespreadfailure to implement the 1991 NitrateDirective which has resulted in legal pro-ceedings by the Commission against 13 ofthe Member States (ENDS, 21 October,1998). The EU has also passed two Directives(EEC 2092/91 and EEC 2078/92) setting upa harmonised framework for organic pro-duction and organic livestock farming.

3.4. Subsidy reform and agri-environmental measuresThe European Union subsidises agricultureon a substantial scale. The main forms ofsubsidy are (a) market price supportwhereby farmers are guaranteed prices thatare often above world prices, and (b) directpayments to farmers. Other forms of supportalso exist. Direct payments have been grow-ing since the 1992 CAP reforms, the aimbeing a gradual reduction in price supportto be replaced by direct payments withtargeted objectives, including payments toset aside land from agricultural use andprogrammes to promote environmentalobjectives (see Chapter 3.13). Whereas pricesupport accounted for virtually all EUsubsidy in the mid 1980s, currently directpayments are having account for over two-third of the agricultural budget. Most, butnot all, switches from price support to directpayments have been environmentally benefi-cial (OECD, 1997a, c; OECD, 1998a,b).

In 1997 total agricultural subsidies (bothenvironmentally beneficial and environmen-tally damaging) amounted to some EUR 65billion, or some EUR 440 per household. Byfar the greater part of this sum (60%) isaccounted for by milk and beef (Figure4.1.5). The trend of subsidy is downwardsfrom a peak of over EUR 90 billion in 1990,but the 1997 subsidy (for the EU15) is aboutthe same as that in 1986 (for the EU12), sothat the actual fall in the total subsidy isslightly larger than shown in the figures.

The general effect of the 1992 CAP subsidyreform has been beneficial to the environ-ment, although in some cases policy changeshave shifted input-intensive activity from onelocation or one activity to another. However,a Commission progress report on the 5EAP(European Commission, 1996d) argued that:‘the CAP reform did little to systematicallyintegrate environmental concerns. Even ifsecondary positive effects can be expectedfrom the reduction of price supports andfrom extensification, it should be avoidedthat these reductions will lead to the aban-donment of agriculture in certain lessfavoured zones, which would have negativeimpacts on biodiversity and the landscape.’

In terms of introducing environmentalbeneficial subsidies the main EU instrumenthas been the so called agri-environmentalmeasures (Regulation EEC No 2078/92)which provide 50% EU financing forschemes that improve the environment andcontribute to rural development. Between1993-1997 the EU budget for this was EUR 5billion – about EUR 1 billion per year – butstill only 1.5% of what is spent on CAP as awhole. Generally these schemes have beenwell subscribed, with agri-environmentmeasures accounting for 20% of agriculturalland and exceeding the target of 17% set inthe 5EAP (see Box 3.13.7 in Chapter 3.13).However, research in the UK (National AuditOffice, 1997) found that payments weresometimes set below levels to compensatefarmers for average profit foregone. Thereare also concerns that the scheme requiresonly very modest environmental improve-ments from farmers, as has been the case insome German schemes. In addition, CAPprovides an ‘extensification premium’ toproducers whose stocking density is particu-larly low. There is also funding for environ-mentally sustainable farming, such as inte-grated pest management in the fruit andvegetable industry.

The CAP reform included in Agenda 2000,on which agreement was reached in March1999, responds to the challenge of enlarge-ment which will lead to 50% increase inagricultural land and a doubling of the farmlabour force, so that maintaining the presentCAP structure would be very expensive andlead to large EU surpluses in sugar, milk andmeat. The political agreement reached onAgenda 2000 includes a 15% cut in thecereals intervention price in two stepsstarting in 2000/2001, a cut in beef priceguarantees by 20% by 2002 and in the dairysector a 15% cut in intervention prices in


0

10

20

40

1980 1985 1990 1995 1997

30

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70

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90

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50

Sub

sid

ies

to a

gric

ultu

re‘0

00 m

illio

n (1

997)

EC

U

Year

Grain Other crops Milk & Beef Other livestock

Figure 4.1.5Agricultural subsidies in the EU, 1980-1997

Note: 1997 figures are estimates. Figures shown are for producer subsidy equivalent.

Source: OECD, 1998b

three equal steps starting in 2005/2006. Inall cases, lost income will be replaced bydirect payments, with provision for MemberStates to define environmental conditionsfor farmers to receive the direct payments –an approach known as ‘cross compliance’.There will also be a greater role given to theagri-environmental measures and increasesin the extensification premium.

However, these proposals have been criti-cised as not going far enough: the totalspending on rural development and theenvironment will only be 10% of the CAPbudget; there is still no clear timetable forthe phased removal of production support;and, it is left to the countries how to apply‘cross-compliance’.

At the national level, perhaps the mostobvious subsidies with an environmentaleffect are to irrigated agriculture in southernEurope. Municipalities supplying water toagricultural units in the Po Basin in Italy arerequired to charge prices based on costrecovery but in practice numerous exemp-tions are granted. In Spain, agriculturalabstraction is subject to a levy which is notrelated to volume of water used, but to areaof land, and there is a shortfall betweenrecovered costs and the costs of supply. Inother countries, subsidies may take the formof exemption from taxes: this is so in Portu-gal where irrigation water is exempted froma new tax introduced in 1995 and in theNetherlands where farmers are exempt fromthe groundwater extraction tax (see Chap-ter 3.5).

3.5. Environmental taxationEconomic instruments that affect agricultureinclude taxes on pesticides and fertilisersand charges on excess manure. Compared toother sectors, experience with environmen-tal taxation in the agricultural sector is verylimited (Table 4.1.6). Pesticide taxes of 3%and 5% of retail price levels have beenintroduced in Denmark and Sweden and areunder discussion in the UK and the Nether-

lands (European Commission, 1997c). In1998, the Danish tax on insecticides wasincreased to 54% of the retail price and thetax on other pesticides to 33% of the retailprice. The European Commission recentlycommissioned feasibility studies on thepossibility of introducing EU-wide taxes onpesticides and fertilisers, and an EU-wideframework could be proposed if diverseaction by Member States is perceived tothreaten to distort the single market. Thereis yet little consensus about these taxes acrossthe EU, but the consultations and discus-sions continue.

4. Industry

Attempts at integration in the industrialsector have been underway for at least thelast two decades. During this period, air andwater emissions have declined althoughwaste generation has been stable or increas-ing. While traditionally regulations alone

Table 4.1.6.

Environmental A B D DK E F FIN GR I IRL L NL P S UK CZE HUN POL IS N CHtax measures

Fertilisers * *

Pesticides * * * *

Manure charges *

Source: OECD, 1997b

Environmentally related taxes and charges in the agriculture sector, 1996

Note: List of country codesat the end of the chapter.

Closing the gaps410

were used, there is now growing reliance onmore innovative approaches such as volun-tary agreements, environmental manage-ment, liability and green procurement andenvironmental taxation. These instrumentsare still only developing and there is scopefor wider appliance across the EU.

4.1. Environmental assessment of the sectorThe industrial sector was historically the firsttarget of environmental concern and so therange of instruments to promote integrationis most comprehensive in this sector. Despiteincreasing industrial production over the1980s, emissions to air have significantlydeclined, especially emissions of SO2 (Figure4.1.6).

Ind

ex (1

980

= 1

00)

20

40

60

80

100

120

1980 1985 1990 1996

Industrial productionEnergy useCO2 emissionsSO2 emissions

Index starts at 20

These developments can be partly linked tochanges in legislation – the industrial sectorwas among the first to be targeted by EUenvironmental legislation, and severalproblems have been addressed throughimproved efficiency or end-of-pipe measures.The changing structure of the EU econo-mies has also undoubtedly contributed tothese changes (see Chapter 2.2).

Information from countries where data isavailable shows that the generation ofindustrial solid and hazardous waste hasgenerally been stable or increasing. In mostcountries, industrial waste generated percapita exceeds the amount of municipalwaste, except in Portugal and Denmark. AsChapter 3.5 shows industrial water abstrac-tion in most European countries has beendeclining in the 1980s, primarily due toeconomic recession and technologicalimprovements. Environmental damage fromindustry in the Accession Countries is lowerin absolute magnitude compared to the

Figure 4.1.6 Economic and environmental trends in theindustrial sector, 1970-96

Source: EEA

EU15, but the intensity (e.g. waste generatedper unit of GDP) is greater (OECD, 1998c).Liability for environmental damage (espe-cially for soil contamination) is an importantissue in these countries.

There are many strategies to reduce damagefrom the industrial sector. This section willfocus on the key instruments availableincluding regulations, environmental man-agement, subsidy reform and environmentaltaxation. Eco-labelling and product stand-ards are reviewed in Section 7.4 below.Voluntary agreements are not covered hereas they have already been reviewed in Sec-tion 2.3.1 above.

4.2. Environmental expenditureQuantitative estimation of the aggregateenvironmental damage from industry isexceedingly difficult. However, there is someinformation available on identified annualexpenditure by industry on compliance withenvironmental regulations. The currentexpenditure for maintaining and operatingenvironmental protection facilities, includ-ing payments to others for waste and wastewater treatment, is in the order of 0.1 to0.5% of GDP. Investments each year are inthe same order of magnitude (Figure 4.1.7).

4.3. RegulationsIn the past, the main instrument in theindustrial sector has been regulation at theMember State level, harmonised by EUDirectives. At the EU level the key Directivesrelate to hazardous waste, air emissions fromindustrial plants, chemicals and integratedpollution control through Integrated Pollu-tion Prevention and Control (IPPC). IPPChas dramatically changed the way industrialpollution is regulated in many countries.The most important industrial Directivecurrently under discussion is an overhaul ofEU controls on dangerous chemicals.

4.4. Environmental management systemsEnvironmental management (also known aseco-audit) is a voluntary scheme for produc-ers designed to alert both producers andconsumers on the need to use natural re-sources responsibly and minimise pollutionand waste. The EU Eco-Management andAudit Scheme (EMAS) was adopted in 1993and became operational in 1995 with the firstawards made by accredited environmentalverifiers appointed in each Member State.Companies wishing to register their sites withEMAS must adopt a company environmentalpolicy, conduct an environmental review of allenvironmental issues and impacts, and in


0.00

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Austria*

United K

ingdom*

The Neth

erlands*

*

Portugal*

*

German

y**

Finland*

France

*

Other

Waste

Wastewater

Air & climate

*1994 **1995

Environmental protection investmentsas percentage of GDP

%

0.00

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0.30

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Austria*

United K

ingdom*

The Neth

erlands*

*

Portugal*

*

Finland*

Other

Waste

Wastewater

Air & climate

*1994 **1995

Current expenditure aspercentage of GDP

%

Figure 4.1.7Environmental protection investments and currentexpenditure for environmental protection by industry

Notes: The category ‘other’includes soil andgroundwater, noise andvibration, biodiversity andlandscape, radiation,research and developmentand other activities. Formany countries data isavailable for a few of thesecategories only. Totals canthus not be compared.Comparison is furtherlimited by the varyingstructure of the economies.For instance, the highexpenditure on waste watertreatment in the UK is dueto the privatisation of wastewater collection andtreatment in that country.Due to the nature of theactivity the amount ofinvestment can varyconsiderably from year toyear. For Austria only 1994figures are available.

Source: Eurostat

light of this review establish an environmentalmanagement system at their site. This man-agement system must be audited at least everythree years and the results of the audit andthe initial environmental review must be usedto prepare an environmental statement whichis disseminated ‘as appropriate’ to the public(Haigh, 1998).

By 1998 there have been 1500 sites regis-tered with EMAS, with about 75% in Ger-many. Interestingly, while most sites areindustrial, there are also a number of trans-port and energy related sites. While thenumbers applying for EMAS is growing, it isa tiny proportion of the estimated 1.7million industrial enterprises in the EU. Astudy by the Commission to review EMAS(Hillary, 1998a) found various shortcomings.One of the problems is the overlap betweenthe EU EMAS and its international equiva-lent ISO 14000, although attempts weremade to register for ISO 14000 even afterhaving received EMAS. The main reason isthat for many global enterprises the ISO14000 is more attractive as its marketingpotential is not limited to Europe as in thecase of EMAS (Hillary, 1998b). It is alsoargued that ISO 14000 is less demandingthan EMAS since it does not require thepublication of a validated environmentalstatement or continuous improvement inenvironmental performance (only in thesystem). Some fear that this may lead topressure to ease some of the EMAS require-ments (Haigh, 1998). In November 1998,the Commission published its proposals torevise EMAS to increase take-up and credibil-ity, proposing to extend the scheme tosectors other than manufacturing.

There has been only very limited quantita-tive attempts to evaluate EMAS. An Austrianstudy found that firms undergoing EMASregistration earn their investment in lessthan 14 months on average, through re-duced production costs (Austrian EconomicChamber, 1996). In March 1996, DeutscheBank announced favourable rates of interestfor EMAS registered sites because it regardsEMAS validation as a clear sign of reducedenvironmental risks. In addition, a numberof German insurance companies view theexistence of EMAS as a favourable factorwhen assessing company premium levels(Taschner, 1998).

4.5. Environmental liabilityIn January 1998, the Commission publisheda Working Paper on an EU environmentalliability regime, and a White Paper was

expected in May 1999. The liability wouldapply to ‘operators’ and ‘any waste operator(including the waste producer)’. It wouldnot be applied retroactively, but it wouldallow public interest groups to have legalrights to take cases and the burden of proofwould be on industry. Although it willprobably take up to 2002-3 for the liabilityregime to come into force, opposition to theWhite Paper by the industry has alreadystarted with claims that this will mean signifi-cant costs to the industry.

At the Member State level, Finland hasalready introduced liability legislation. About

Closing the gaps412

2000 Finnish industrial firms have beenlegally obliged to purchase environmentalliability insurance from January 1, 1999. Thenew insurance requirement covers thesituation where a firm that has causedenvironmental damage cannot be found oris bankrupt, or where the source of damagecannot be agreed. The law is not appliedretrospectively and therefore does not applyto cases of soil contamination caused before1999.

4.6. Subsidy reformIn general, industrial subsidies in the EUdeclined considerably between 1992 and1994, (Germany was the exception, assubsidies increased during the unificationprocess). In 1994 subsidies amounted toEUR 42.6 billion (European Commission,1997b). There was a substantial decline inthose types of aid most likely to go to mobileinvestment projects (e.g. regional aid, R&D,and general aid programmes). There hasalso been an increase in the use of moretransparent forms of aid in virtually everyMember State (e.g. grants and tax reduc-tions) versus a decrease in less transparenttypes of aid (e.g. loan guarantees and equityparticipation). In the OECD, more than 50%of sectoral programmes designed to benefita single industry go to the shipbuilding,textile or steel industries, which togetherrepresent approximately only 9% of manu-facturing GDP in OECD countries (OECD,1996b). The environmental impacts ofsubsidy reform are unclear, although theyshould be beneficial in energy-intensiveindustries such as iron and steel.

In terms of environmentally beneficialsubsidies, Austria, Denmark, Greece and theNetherlands operate subsidies for industrialpollution control. A number of schemes(Denmark, Greece and the Netherlands) areaimed at the development and demonstra-tion of clean technology, e.g. up to 40% ofthe costs to the industry. In Austria, enter-prises can claim up to 30% of the costs ofwastewater treatment plants. In the Nether-lands, there is a subsidy to promote cleanprocessing of waste from the fishing industrywith the budget of DFL 0.18 million in 1997.In addition, Austria, Denmark, France,Finland, the Netherlands and Portugal applymore relaxed accountancy rules, i.e. acceler-ated depreciation, for environmental invest-ments.

4.7. Environmental taxes and chargesThe main environmental levies affectingindustry seems to be charges on (hazardous)

waste generation followed by charges onwater effluent (Table 4.1.7). Effluent chargesare well established and were imposed inFrance since the 1960s and since the 1970sin the Netherlands. In both countries thecharge was related to oxygen-demandingmaterials and heavy metals and helpedstimulate a reduction (Tuddenham, 1995;Hotte et al., 1995). Industry is also affectedby general energy/CO2 taxes. Charges onenvironmentally damaging inputs to theindustrial production process such as oilsand solvents are not as widespread.

5. Energy

Economic instruments are in common use inthe energy sector. However, to reach targetsof 12% of energy from renewables and 18%of electricity from co-generation in thecontext of more liberalised energy marketsand falling oil prices will require toughpolicy measures, which might includeincreased subsidies to renewables and co-generation, greater use of voluntary agree-ments with electricity companies and highertaxes on fossil fuels.

5.1. Environmental assessment of the sectorAtmospheric emissions from power genera-tion, have declined since the 1980s (Figure4.1.8). These declines have been mostmarked for sulphur dioxide (50% declinefrom 1980 to 1994) and nitrogen dioxide(23% decline from 1980 to 1994). This hasbeen the result of fuel shifts and technicalimprovements, such as increased generationefficiency, and pollution abatement, such asthe installation of ‘scrubbers’ to reduceacidifying and summersmog related emis-sions. However, it is likely that the potentialfor such efficiency improvements andpollution control is now declining as, forinstance, fuel shifts can be applied onlyonce. Future reductions in atmosphericemissions, such as the 8% cut in greenhousegas emissions required by the Kyoto Protocol(see Chapter 3.1), will need to come fromgreater use of renewables. Whilst there isconsiderable variation across Member States,on average only 5% of the EU energy supplyin 1995 was from renewables, mostly hydroand biomass. There is thus clearly consider-able potential to expand renewables particu-larly in countries where their use is low, suchas Belgium, Ireland, the Netherlands andthe UK. On average 9% of EU electricitycomes from co-generation (also known ascombined heat and power), but this percent-age is much lower in Greece, France and


Ireland. In the Accession Countries theenvironmental effects of energy generationare smaller in absolute magnitude, but theintensity (as measured by energy supply perunit of GDP) is greater compared to those ofthe EU15 (IEA, 1998) (See Chapter 2.2).

The main strategies to reduce environmentaldamages from the energy sector are to reduceenergy demand (through energy efficiency),lower environmental damage from fossil fuelsources, switch to natural gas and renewablesand increase co-generation. The issue ofenergy efficiency is reviewed in detail in thesections on households and industry, so herethe focus is on fuel shifts, increased use ofrenewables and co-generation.

5.2. Environmental damageThe most developed sectoral study of environ-mental damage, the ExternE programme ofDGXII, is for energy production (EuropeanCommission, 1998e). It presents estimates ofmainly air pollution damage in units of EUR/kWh or EUR/tonne of pollutant, which canreadily be compared with costs of pollutionabatement. Damage categories includehuman health (morbidity and prematuremortality), corrosion and soiling of buildingsand materials, crop losses, global warmingand freshwater pollution.

The most significant damages are thosecaused by emissions of particulate matter,due to its impacts on human health (morbid-ity and mortality) (see Chapter 3.10). This isfollowed by nitrogen dioxide, which incombination with volatile organic com-

40

60

80

100

120

140

1980 1985 1990 1996

Electricity generationCO2 emissionsNOx emissionsSO2 emissions

160

Ind

ex (1

980

= 1

00)

Index starts at 40

Figure 4.1.8Economic and environmental trends in the energysector, 1980-96

Source: EEA

pounds contributes to the formation ofozone, which impacts on morbidity andmortality and also damages crops. The roleof carbon dioxide in total damage, throughits contribution to global warming, is alsosignificant. In this case, it is the sheer volumeof carbon dioxide emissions which result insuch high total damage estimates: amongstthe various pollutants, carbon causes thelowest damage per tonne.

5.3. EU policyEU energy policy was most recently set out inthe 1996 White Paper which gives threemain objectives: security of supply, improvedcompetition and protection of the environ-ment. While the Commission argues that

Table 4.1.7.


Lubricant oil * *charge

Oil pollution *charge

Solvents *

Water effluent * * * * * * * *charges

Tax on ground * *water extrac-tion

Hazardous * * * * * * * * * * *waste charge

Land fill tax * * *or charge

Environmentally related taxes and charges in industry, 1996

Source: OECD, 1997b

Closing the gaps414

market liberalisation will help renewables,others disagree arguing that they may beundermined by their higher price (IEA,1999). In 1996 the Commission published aGreen paper on renewables and this wasfollowed up with a White Paper in 1997(European Commission, 1997d) whichstated that: ‘Renewable sources still make anunacceptably modest contribution to theCommunity’s energy balance.’ The docu-ment proposed a target of 12% penetrationof renewables by 2010 in the EU. However,the target was not approved by the EnergyCouncil and a proposed Directive will onlycall for 5% share in electricity productionfor each country. To achieve this objective,the recent Directive on the Internal Marketin Electricity allows Member States to givepreference to renewables. The Commissionalso proposed that 18% of EU electricityshould be produced by co-generation by2020 – a doubling from the current figure –and this was welcomed by the Energy Coun-cil.

5.4. Subsidy reformEnergy subsidies targeted to fossil fuels areone of the largest subsidies with possibleenvironmental effects (Figure 4.1.9). TheUK systematically reduced subsidies to coalproduction to below EUR 0.2 billion by1995. However, German subsidies remainhigh, at EUR 4.7 billion in 1998, and Span-ish subsidies were over EUR 1 billion in 1996(IEA, 1998). Germany expects to havereduced its coal subsidies to EUR 2.8 billionin 2005.

Reduced subsidies to coal production willmost probably lower emissions of conven-tional air pollutants and carbon dioxide.The extent of this environmental effect

depends on what is used as a substitute forsubsidised coal. In some cases, for example,it is likely to be imported coal, whereby theextra demand for imported coal will likelyhave the effect of raising world market pricessince the EU is a major coal consumer. Therise in world-market prices would in turnencourage worldwide reductions in coalusage, reducing carbon dioxide emissions(Anderson and McKibbin, 1997). In othercases the substitute would be natural gaswhich has a lower environmental impact perunit of energy than coal: the environmentimpact is therefore directly beneficial.

However, subsidisation has other effects, forexample by encouraging energy-intensiveindustries to locate in subsidised areas.There is some evidence that aluminiumsmelters, for example, have been encour-aged by subsidies. Since aluminium is anenergy-intensive industry, the subsidy alsohas the effect of discriminating against theuse of recycled secondary aluminium whichis far less energy intensive (Koplow, 1996).Various studies have shown that there aretriple-dividends from reducing subsidies:energy costs fall because substitute sourcesare encouraged, environmental impacts arereduced and government finances improve(OECD, 1997d). Individual case studiessuggest, however, that environmental ben-efits could be quite small: the gains fromremoving subsidies range from around 1%of the sector’s contribution to carbon diox-ide emissions in a selection of EU countries,to 5% in Norway. For comparison, significanteffects of up to 16% of emissions would besecured in Russia (OECD, 1998d). Moresubstantial environmental impacts arise ifthe analysis is extended to worldwide impactsthrough the effects on the world marketprice of coal.

The main focus of EU energy subsidies is onthe production side. By contrast, subsidies ineastern Europe focus on keeping consumerprices down. Since 1990 supplies from theRussian Federation have dropped and theeffect has been a substantial reduction insubsidies. The scope for further reductions,especially in the coal sector, appears largebut there are clear trade-offs betweensubsidy reduction and employment concerns(World Bank, 1997).

In terms of environmentally beneficialsubsidies, many countries have introducedsubsidies for renewable energy and this waswelcomed in the recent Commission WhitePaper on Renewables. In Denmark, wind

Foss

il fu

el R

+D

bud

get

s(m

illio

n E

CU

)

Co

al PSE(m

illion E

CU

)

0

100

200

300

400

1987 19951989 1991 19930

5000

10000

15000

20000

Figure 4.1.9 Subsidies to coal and to fossil fuel research anddevelopment, 1987-1995

Note: Total subsidies forcoal are shown in producer

subsidy equivalents (PSE) forGermany, Spain plus the UK.

Fossil fuel Research andDevelopment budgets are

for EU15.

Source: IEA, 1998


energy has been promoted by an investmentsubsidy and electricity tax repayment. InGermany, generous subsidies through aminimum tariff are provided making Ger-many the second largest wind generator inthe world (after the US). In the UK, subsi-dies through competitive tendering for arenewable quota have led to a substantialdecline in the costs of generation, althoughthe UK remains the country with the lowestreliance on renewables in the EU at only0.7% of total energy consumption. Thecompetitive tendering approach is also usedin France and Ireland, and it seems that thismore cost-effective approach will be in-cluded in the forthcoming Directive pre-pared by the Commission. At the EU level,subsidies are provided by the ALTENERprogramme which has now been extended.

5.5. Environmental taxationEnvironmental taxation on the use of fossilfuels was welcomed by the European Com-mission, as a means to increase the competi-tiveness of energy from renewable sources(European Commission, 1997d). This isespecially important given the decline inworld oil prices and the ongoing liberalisa-tion of electricity markets. Recent taxes focuson CO2, as well as nitrogen and sulphuroxides (Table 4.1.8). The Netherlands,Austria, Belgium and the Scandinaviancountries have introduced CO2 taxes. Morerecently, in January 1999, Italy became thefirst southern European country to intro-duce a CO2 tax, which will be used to fund awage subsidy to employers. While efforts tointroduce an EU-wide CO2 tax have not –thus far – met with success, progress is beingmade on a Directive that would for the firsttime impose EU-wide minimum rates ofexcise duty on most energy products. How-ever, the proposal requires unanimity to bepassed and a decision has been delayed toMay 1999. Sweden introduced in 1992 a NOx

charge on large combustion plants which ledto a fall in NOx emissions per unit of inputenergy from 159mg/MJ to 103mg/MJ by1993 (OECD, 1997d).

5.6. Joint implementationOne of the most innovative instruments isjoint implementation (JI) under the Frame-work Convention on Climate Change. JI ingeneral involves an agreement between twocountries whereby one country (the inves-tor) reduces pollution in the second country(the host) and counts the reduction inpollution as a credit against some nationaltarget. JI exists under the Montreal Protocol(see Chapter 3.2) with ‘trades’ in CFCemissions and is enabled under the SecondSulphur Protocol under the UNECE Con-vention of Long Range Transboundary AirPollution (see Chapter 3.4). A specificapplication based on the JI notion is the‘Activities Implemented Jointly (AIJ)’ phaseof the Climate Change agreement (seeChapter 3.1). This was initiated in 1995 andwill terminate in 2000. Under AIJ investorcountries fund or undertake emissionreduction or sequestration projects in hostcountries. In the pilot phase, no credits areconstituted or counted against nationalemission targets. The Kyoto Protocol opensthe way for project-based JI between Annex Icountries (OECD plus the economies intransition) and the developing countries.Since the source or location of greenhousegas emissions is irrelevant to the effect onglobal climate change, JI projects offermutual gains: the investor undertakesemission reductions at lower cost; the hostbenefits through the transfer of improvedtechnology, e.g. power station technology ora sequestration project (afforestation,reduced deforestation), which may stimulateeconomic development and improve theenvironment. Currently about 100 officialAIJ projects are implemented. Numerous AIJ

Table 4.1.8.


CO2/ Energy * * * * * * * * *taxation

Sulphur tax * * * * * *

NOx charge * * * *

Other excise * * * * * * * * * * * * * *taxes

Source: OECD, 1997b

Environmentally related taxes and charges in the energy sector, 1996

Closing the gaps416

projects with the involvement of Europeancountries as the host exist, especially inRussia, the Czech Republic, the Baltic States,Poland, Hungary, Romania, Bulgaria andCroatia. European investor countries includeSweden, the Netherlands, Norway, Germany,France and Belgium.

6. Transport sector

While many instruments are being appliedto reduced transport damage, these arebeing overwhelmed by the rapid rise indemand for transport. There remain implicitsubsidies to commercial freight and theairline industry through untaxed kerosene.While environmental taxes on fuel havebeen successful in increasing demand forunleaded petrol, they have not had mucheffect on reducing driving. Serious consid-eration needs to be given to comprehensiveurban road-pricing schemes which no EUcountry has implemented yet.

6.1. Environmental assessment of the sectorTransport is the fastest growing sectorrelevant to the environment (Figure 4.1.10;see Chapter 2.2). Passenger vehicle-kilome-tres and freight tonne-kilometres grew by1.8% and 3.2% respectively in 1995, whilepassenger-air miles grew at 11 %. Emissionsfrom motor vehicles have significantlyincreased as car ownership has risen (andthe number of people per car has declinedin the EU from about 2 in the early 1970s toabout 1.6 in the early 1990s). Environmentaldamage per vehicle-km has remained fairlyconstant as measured by carbon dioxide andnitrogen dioxide emissions per vehicle-km,although sulphur dioxide emissions per

vehicle-km have significantly declined. Thislack of progress, despite pressure on carmanufacturers to improve fuel efficiency,arises from the gap between actual and testvalues for fuel efficiency due to poor drivingbehaviour and urban congestion whichprevents the fuel efficiency being achieved(IEA, 1997).

Cars now make up about 80% of passenger-kilometre journeys, while heavy good vehi-cles make up about 76% of freight tonne-kilometres, and there are limited possibilitiesfor switching to more environmentallyfriendly alternatives such as clean vehicles,public transport, cycling or even walking.The development of low emission carspowered by electricity, gas or biofuels hasbeen slow in most countries. There is somepenetration of gas cars in the Netherlandsand Italy, biofuel cars in Sweden and electriccars in Italy, but they still make up a smallshare of the fleet. It is projected that theshare of passenger transport by car in theAccession Countries will increase from 45%of the total in 1994 to 80% in 2030.

Growth in the use of motor vehicles alsocauses environmental effects in an indirectway. Investments in road infrastructure,which lengthened Europe’s roads by 3% in1996, have effects on nature and biodiversity.Similarly, the production of vehicles is apolluting process. The stock of vehicles isgrowing at 4% a year.

Attempts to integrate environmental con-cerns into the transport sector were recentlyoutlined in a report by the Transport Coun-cil presented at the Vienna EuropeanCouncil in December 1998. This reporthighlighted the need for measures that:enhance fuel efficiency and reduce emis-sions and noise; make the best use of avail-able infrastructure; and, achieve a shift toless environmentally damaging modes oftransport. As a first step the report arguedthat progress is required in transport pricingand environmental costs, the revitalisation ofrail transport and the promotion of inlandwaterways, maritime transport and combinedtransport. The way these measures have beenintroduced in the past years is reviewedbelow, focusing on the different instrumentsavailable, including regulations, voluntaryagreements, subsidy reform and environ-mental taxation.

6.2. Quantified environmental damageExternalities from road transport comprise:noise nuisance; local, regional and global air

80

100

120

140

160

180

1980 1985 1990 1996

Passenger transportGoods transportCO2 emissionsNMOVC emmissionsNOx emissionsEnergy use

Ind

ex (1

980

= 1

00)

Index starts at 80

Figure 4.1.10 Economic and environmental trends in thetransport sector, 1970-96

Source: EEA


pollution; water pollution from road runoff;risk of accidents and congestion, althoughthe last two categories are disputed in anumber of studies. Figure 4.1.11 shows theestimates of the monetary costs of environ-mental damage from road transport aspercentage of GDP for each country.

Figure 4.1.11 suggests that road transport maygenerate damage equal to some 2-5% of GNP.These estimates are consistent with the EU-wide damage estimates reported in ECMT(1998) of some 4.1% of GNP (see Section 3 inChapter 3.12). However, methodologies anddata sources vary and it is difficult to beprecise about the exact contribution of thedifferent types of externality. Moreover,treating all accident costs as externalities iscontroversial. As long as individuals are awareof risks when they make their decision totravel, that risk is ‘internalised’ and does notconstitute a genuine externality. The overallscale of transport externalities is thereforeopen to some debate. ECMT (1998) reportsminimum damage costs of 2% of GNP forPoland and estimates of 4-5% for the CzechRepublic, which is comparable with the EUcountries.

6.3. RegulationsRegulations have traditionally been the maininstrument for reducing vehicles emissions,often in the form of EU Directives, althoughthis is now being complemented by the use ofvoluntary agreements. The latest new stand-ards on car and light van emissions and fuelquality agreed in 1998 under the Auto/Oilmeasures are expected to make new vehiclesin the EU about 70% less polluting in 2010.The new Directives will also require newvehicles to be fitted with on board diagnosticsto monitor emissions, petrol- engined vehiclesby 2000 and diesel-engined vehicles by 2005(see also Chapters 3.4 and 3.12, Section 4.1).

6.4. Voluntary agreementsVoluntary agreements have been used on theMember State level to make the car industryfinancially responsible for scrapping old carsin an approved manner. Many countries,including Germany, Austria, the Nether-lands, UK, France and Italy have voluntaryagreements in place. At the EU level, alandmark voluntary agreement was drawn upwith the EU car industry to agree a 25%reduction in average carbon dioxide emis-sions from new cars between 1998 and 2008.

6.5. Subsidy reformSubsidies to the transport sector primarilycomprise non-recovery of the full costs of

0

2

4

6

8

Austria

Belgium

Denmar

k

Finland

France

German

y

Greece

Irelan

dIta

ly

The Neth

erlands

Norway

Portugal

Spain

Sweden

Switzerla

nd

United K

ingdom

10

% o

f GD

P

Figure 4.1.11Environmental damage from road transport as % ofGDP, 1991

Source: Maddison et al. (1995) plus modifications.

providing infrastructure, e.g. roads provisionand damage repair, policing and emergencyservices, road lighting and safety barriers.Other costs may include the provision of freeparking space, often encouraged by localzoning regulations (e.g. a given amount ofparking space per building). These subsidyelements need to be distinguished from thefailure to charge for external costs such asnoise, air pollution and social severanceeffects (see next Section). Failure to recoverinfrastructure costs results in an effectivesubsidy and hence a distortion of competi-tion between modes of travel.

Nearly all (95%) of the relevant subsidy is torail, not roads – which is the result of publicservice obligations or the positive intention tosupport a more environmentally benignmode of transport. Only freight transport byroad ‘receives’ a subsidy as about 82.5% ofinfrastructure costs are covered by relevanttaxes. The results show that the subsidy toroad and rail for EU plus Norway and Liech-tenstein is EUR 8.93 billion, which amountsto some 0.15% of GDP of (ECMT, 1998).

However, within these European numbersthere is very high variation (Figure 4.1.12).Road users in Denmark, Sweden, the Nether-lands, Ireland, and the UK pay considerablymore than the infrastructure costs, whileroad users in Belgium, Finland, FranceLuxembourg, Norway, Spain and Switzerlandare subsidised by more than 15% of totalcosts. For rail, the variation is much less

Closing the gaps418

marked, with a fairly uniform subsidy ofabout 45% of total costs except in Finlandand Sweden with very subsidised rail services(ECMT, 1998).

0

50

Austria

Belgium

Denmar

k

Finland

France

German

y

Greece

Irelan

dIta

ly

Luxe

mbourg

Norway

Portugal

Spain

Sweden

Switzerla

nd

United K

ingdom

200

150

100

The Neth

erlands

% o

f inf

rast

ruct

ure

cost

sco

vere

d b

y ro

ad u

sers

Figure 4.1.12 Percentage of infrastructure costs covered by roadusers, 1995

Source: ECMT, 1998

Subsidies can also include tax exemptions.Transport subsidies in Germany may amountto some EUR 10.7 billion (Federal Environ-mental Agency, 1997). Nearly half of this sumis accounted for by the differential tax ratebetween diesel and gasoline (EUR 4.6 billion)and a third by oil tax exemption for aviationand inland navigation. The remaindercomprises cost-deductions for commuting towork, and various exemptions from vehicleexcise duty, depreciation allowances etc.

The most significant environmental impactof transport subsidies are to the airlinesector, in particular the exemption of kero-sene from excise duties, and the absence ofVAT on ticket sales. A negative environmen-tal effect arises due to the substitution effects(travel by air rather than other modes) andthe volume effects (increased air travel). Theown price elasticity for flying is relativelyhigh, estimated at between -0.8 and -2, sothat a 1% increase in prices leads to a 0.8%to 2% decrease in demand for flying (Euro-pean Commission, 1997c). Some countrieshave been pressing the International CivilAviation Organisation (ICAO) to acceptaviation fuel taxation by 2001, and there isdiscussion of imposing either a tax oninternal EU flights – more than half allflights from EU airports – or a charge basedon km flown in EU aerospace (a feasibilityreport is due in 1999). In January 1999,Norway unilaterally imposed a tax on kero-sene which would raise prices by about 25%.However, the tax is revenue neutral asNorway also reduced its existing environ-mental levy on air passengers.

The European Commission has been activein trying to encourage a reduction in trans-port subsidies and a switch to marginal costpricing. The 1995 Commission Green paper‘Towards fair and efficient pricing in trans-port’ stressed the importance of marginalcost pricing and this was followed up in 1998with a White Paper on Fair Payment forInfrastructure Use (European Commission,1998f). This gives concrete proposals forincreased charges on commercial road use.

In terms of environmentally beneficialsubsidies, many countries support publictransport. At the EU level there has beenfunding for the Trans-European TransportNetworks (TENs, see Box 2.2.9 in Chapter2.2) which now benefits the railways follow-ing pressure by the European Parliament. Inrelation to the future TENs budget line, theEuropean Council in June 1995 decided that75% of the total allocation of EUR 1 800

United Kingdom

Sweden

Spain

Portugal

Netherlands

Luxembourg

Italy

Ireland

Greece

Germany

France

Finland

Denmark

Belgium

Austria

0 10 20 30 40 50 60

Proportion of external costs* covered by revenues** in transport

Rail

Road* environment and infrastructure costs**Revenue for road: vehicle registration taxes, fuel taxes, road use tolls and parking charges

% of external costs

Figure 4.1.13How much of the external costs and infrastructurecosts of freight transport are covered by taxes andcharges?

Note: Data is lacking for Air and Maritime transport.

Source: IWW/INFRAS, 1995; ECMT, 1998


million on transport projects should bespent on 14 TEN priority projects, amongwhich rail and combined transport amountto 90%.

There are also a number of environmentallyfriendly subsidies for cleaner transporttechnologies such as the ‘car stock moderni-sation subsidy’ granted by the French gov-ernment to all new car purchasers. Similarly,since 1990, Greece has been applying taxexemption for new cars fitted with a catalyticconverters provided the buyer has alreadyscrapped his/her old car. Around 300 000old cars were scrapped and pollution consid-erably reduced already in the early stages ofthe policy.

6.6. Environmental taxationAn EU expert group appointed to advise theEuropean Commission on transport pricinghas recommended an EU-wide charge onexternal costs, stating ‘Costs that are alreadyincurred somewhere in the economy will beborne directly by those causing them: thiswill encourage a decrease in the overall level

Table 4.1.9.Environmentally related taxes and charges in the transport sector, 1996

Source: OECD, 1997d, eEnvironmental A B D DK E F FIN GR I IRL L NL P S UK CZE HUN POL IS N CHtax measures

Motor Fuels:

Leaded / * * * * * * * * * * * * * * * * * * * *unleaded(differential)

Diesel * * * * * *

CO2 /Energy * * * *taxation

Sulphur tax * *

Other excise * * * * * * * * * * * * * * * * *taxes (otherthen VAT)

Gasoline * * * * *(qualitydifferential)

Vehicle-related taxation:

Sales/Excise/ * * * * * * * * * * * * * *Regist. taxdiff (cars)

Road/ * * * * * * * * * * * * * *Registration/tax diff (cars)

Employer-paid * * * * * * * * * * *commutingexpenses taxed

Air Transport:

Noise charges * * * * * * * *

Other charges * * *

of these ‘external’ costs’. This approach wasaccepted by the Transport Council of Minis-ters in their report on sectoral integration tothe Vienna Council of Ministers: ‘TheTransport Council will carry forward workon the issue of the integration of quantifiedenvironmental costs into transport pricing inthe Community’.

Figure 4.1.13 shows the extent to whichrelevant taxes and charges on road and railfreight transport cover the estimated envi-ronmental damages (‘externalities’) andinfrastructure costs.

A first step towards full coverage of environ-mental costs was taken in December 1998under the ‘Eurovignette’ Directive, whichaims to harmonise road charging of heavylorries through the EU single market. FromJuly 2000, annual charges will range from amaximum of EUR 1 550 for the heaviest andmost polluting lorries to EUR 750 for thelightest and cleanest lorries. A similarapproach will be implemented in Switzer-land which will charge all Heavy Goods

Closing the gaps420

Vehicles per transit, with heavier and morepolluting vehicles paying a higher charge.Table 4.1.9 shows that indirect taxes onvehicles are widespread as are fuel taxeswhich are more closely linked with theamount of travel. The importance of trans-port taxes in terms of revenues varies consid-erably between the countries. In 1996 forFrance, Ireland and Luxembourg transporttaxes were around 1% of total revenues fromtaxes and social contributions, while inDenmark, Ireland, Spain and the Nether-lands they amounted to 4%.

While fuel taxation is an important first step,road pricing is sometimes considered as amore effective restraint on vehicle use. Forexample, in the Netherlands a 30% fuelprice increase would reduce urban traffic by4.8% and overall national traffic by 7.1%(NOVEM, 1992). However, in the UK roadpricing through a toll in urban areas wouldhave a much larger effect (due to the higherprice elasticity of demand) so a 1% increasein tolls leads to a 1% fall in traffic demand(Goodwin, 1992). So far, no EU MemberState has introduced urban road pricing,although legislation is underway in the UK.Norway has introduced tolls in Bergen andother cities, leading to a 6-7% decline intraffic in the first year and rising car occu-pancy (Larson, 1988).

7. Households

Overall, evidence on the environmentalinfluence of the household sector is lacking.However, trends in consumption patternsdominate improvements in packaging,energy-efficiency and resource use, and thisemphasises the importance of trying toinfluence or restrict demand. It is difficult toevaluate the effectiveness of many policies tothis end, either because they have been inplace for too short a time to allow for athorough investigation, because they are notoperating in isolation but affected by otherwider changes in a country’s economy, orbecause they seek to influence behaviourwhich is not easily observable, e.g. house-holds’ energy-saving measures. Preliminaryevidence (OECD, 1998e) demonstrates thatpackages of measures, addressing severalaspects of sustainable consumption, areparticularly successful.

7.1. Environmental assessment of the sectorThis section focuses on three main environ-mental impacts from households: air emis-sions, solid waste and water use. Figure

4.1.14 gives an overview of relative perform-ance in these areas.

Generally, the patterns are linked to percapita income levels of the countries: in-creased income levels spur demand forconsumer goods, and therefore richercountries tend to produce more emissionsand waste. Conversely, higher incomecountries are more likely to provide theinfrastructure for households to be con-nected to water treatment networks. Thecontribution of households to environmen-tal stresses can be significant (Table 4.1.10):the share of household CO2 emissions as apercentage of total emissions is over 20% onaverage, reaching almost 40% in France, dueto the structure of electricity production(with a high share of nuclear energy) in thiscountry.

Trends in consumption patterns have, todate, overwhelmed improvements in theefficiency of energy and resource use(OECD, 1998e) (see Chapter 2.2). Growthin household energy consumption, thenumber of households, ownership of dura-ble household goods and private cars havebeen driving forces for energy consumptionand emissions. Influencing households’consumption patterns is therefore a poten-tially powerful means of addressing environ-mental problems.

Serious efforts to change consumptionpatterns are underway across EU MemberStates, due to increased recognition thatcurrent patterns are unsustainable andconcrete evidence that changes in practicescan deliver significant environmental im-provements without major negative effectson living standards (OECD, 1998e). There isconsiderable scope for governments to curbthe impacts of the household sector, and agrowing array of policy instruments availableto affect consumer behaviour. Strategies forreducing damage from the household sectorgenerally focus on energy efficiency, wastereduction and recycling (including packag-ing) and lowered water pollution through arange of instruments, including regulations,subsidy reform, environmental taxes, con-sumer information and eco-labelling.

7.2. Quantified environmental damageThe only attempt to quantify environmentaldamage in the household sector relates towaste. While there are several studies on theeconomic value of environmental damagefrom waste disposal, the wide variety ofmethods used for disposal in the European


Country DK D F IRL NL A P FIN S UK N

% total 18 16 39 20 21 28 12 17 23 34 14emissions CO2

Source: Eurostat

Table 4.1.10.Percentage of CO2 emissions attributable to

households, selected European countries, latestavailable year

refrigerator freezer washer dishwasher oven

Germany 21 37 18 29 16

Denmark 29 40 35 55 13

Source: IEA (1997)

Table 4.1.11.Reduction in energy intensity of new appliances

Union makes generalisation difficult (seeChapter 3.7). One wide-ranging studysuggests that environmental damages fromlandfill average some 2-20 euros per tonneof waste, and from incineration 11-23 euros/tonne (Coopers and Lybrand et al., 1997).Since some 100 million tonnes of municipalwaste goes to landfill in the EuropeanUnion, external costs from this aspect oflandfill alone could amount to EUR 200million to 2 000 million. For incineration thefigure would be about 30 million tonnes andEUR 330 million to 690 million. The figuresare speculative because of the limited natureof the physical data and the absence ofdetailed country-by-country estimates ofenvironmental costs.

Little information is available on householdcontributions to atmospheric emissions.Nevertheless, the data on CO2 emissions inTable 4.1.10 suggests that household energyuse in the EU causes environmental damageof over EUR 1 billion per year.

7.3. RegulationsAs analysed in Chapter 3.5, Member Statesare on track to comply with the Directive onurban wastewater treatment (EuropeanCommission, 1997e). The law will eventu-ally require collection and secondarytreatment of wastewater from all urbancentres in the EU. The EU is currentlydeveloping minimum energy efficiencystandards for household equipment such asrefrigerators, which could be used toconstrain household demand for energy.Energy efficiency improvements havecontributed significantly to constraininghousehold demand for energy to date:Table 4.1.11 shows the reduction in energyintensity of new appliances in Germanyfrom 1978 to 1985 and Denmark from 1970to 1994. The table gives the ratio of testednew appliance electricity use in the recentyear to that of the earlier base.

A number of other regulatory measures havebeen taken by individual Member States,which will have the effect of reducing theimpacts of households on the environment.Water consumption in Austria has beensignificantly reduced by the mandatoryinstallation of 3/6 litre dual-flush toilets innew and replacement buildings; in France,standards for insulation of new buildingsrequire the use of double glazing, whichshould allow for a 10% reduction in heating;in the UK, water companies have the powerto restrict the use of hose-pipes in regionssuffering from water shortage.

Notes: percentage of population not served by waste water treatment, all data for 1990;generation of municipal waste: all from 1992 except Austria, Germany, Sweden: 1990; CO2

emissions: Portugal: 1990; Denmark 1991; Germany, Luxembourg: 1993; Austria, Ireland:1994; Netherlands, Sweden: 1995.

Source: EEA, Eurostat

CO2 emissionsper capita fromhouseholds(kg per capita)

% populationnot served bywaste watertreatmentnetwork

Generationof municipalwaste percapita (10’s kgper capita)

0

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German

y

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d

The Neth

erlands

Luxe

mbourg

Portugal

Spain

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50

60

70

80

90

100

Figure 4.1.14Environmental pressures from households(selected EU countries)

In the area of waste, regulations in the formof waste reduction and recycling targets havebeen important in bringing about impressiveincreases in recycling. For example, 20% ofbeverage cartons were recycled in 1997 inthe EU with Germany leading the way at69% with France, Italy, Spain and the UK atless than 2%. By 1997, over half of all steelpackaging was recycled in 8 Member States.

7.4. Consumer information and eco-labellingProvision of information is a potentiallypotent way of influencing household de-mand by allowing consumers to make

Closing the gaps422

Table 4.1.12. Environmentally related taxes and charges for households, 1996

informed choices about the environmentalimpacts of their consumption decisions (seeChapter 4.2). Many Member States havedeveloped effective eco-labelling schemes,such as the German Blue Angel scheme, andthe EU has sought to develop an EU wideeco-label with a flower logo. By the end of1997, there had been 183 EU eco-labelsissued to products. However, the implemen-tation of the scheme is still seen as too slowand in 1997 Denmark decided to follow themuch more advanced Nordic Swan schemerather than the EU eco-label. Revising theEU label has been under discussion since1996 and in 1998 the Commission acceptedthat Member State schemes should operatealongside the EU scheme, and that thescheme will remain a simple pass or failrather than a graded scheme which was seenas too complicated for consumers. Somecountries have also taken a more dramaticapproach with an Integrated Product Policy,which addresses the whole lifecycle of aproduct. This is now being discussed at theEU level (European Commission, 1998g).

Measuring the success of eco-labellingschemes is difficult (see Chapter 4.2, Section3.2). Eco-labelled products have capturedsignificant market share only in the Swedishmarket, where for example, eco-labelled

detergents have 90% market share(Eiderstrom, 1998). The OECD (1997f)found that eco-labelling programmes were ingeneral more successful in areas which hadalready benefited from high consumerenvironmental awareness.

The importance of providing consumerinformation is illustrated by the penetrationof compact fluorescent lights (CFLs) whichare 60% more energy efficient than incan-descent light bulbs. Only 30% of householdsin the EU have more than one CFL, butDenmark and the Netherlands have thehighest use of CFLs due to extensive publicpromotional campaigns. The sales of CFLsdoubled in Sweden following a publicinformation campaign at the start of 1998.

The balance of evidence suggests thathousehold concern about the environmentis increasing (see Chapter 4.2), althoughinvestigations of actual changes in behaviouris more limited.

7.5. Subsidy reformIn the water sector, efforts to encouragereduced water subsidies for households weremade in the draft Water Framework Direc-tive, but some Member States objected to anexplicit reference to ‘full cost recovery’.


Batteries * * * * *

Plastic Carrier * * *Bags

Disposable * * * * * * *Containers

Tyres * *

CFCs and/ * * *or halons

Disposable *razors

Disposable *cameras

Water charges * * * * * * * * * * *

Sewage charges * * * * * * * * * * * * * *

Municipal * * * * * * * * * * * * * *waste charges

Waste disposal * * * * * * * * * * * * * * * * *charges

Source: OECD, 1997b


30

25

20

15

10

5

00 5 10 15 20 25 30 35

United Kingdom

FranceGermany

Denmark Italy

Sweden

Finland

Norway

Norway

Finland

Sweden

ItalyFrance

United KingdomGermany

Denmark

Price($1985(PPP)/GJ fuel of electricity use)

Ene

rgy

use

per

cap

ita(G

J/ca

p)

Fuel use Electricity use

Figure 4.1.15Household Energy Use and Prices, 1993

Note: Data on energy use isadjusted to a commonwinter climate.

Source: IEA, 1997

Household consumption is increasinglybeing charged to cover operating costs, butthe capital costs of water supply are oftenstill subsidised. Metering is widespread inEurope, but some households still lackmeters, particularly in Norway, UK andIreland. In Ireland, domestic water con-sumption is completely subsidised followinga decision in 1996, and new water supply isfinanced solely by central government, oftenwith the use of Structural and CohesionFunds. Similarly, Italian domestic watersupply continues to be subsidised, althoughcharges have increased substantially in thelast twenty years. It is thought that 70% ofcapital expenditure is financed from localand central government. In Spain, anestimated 50% of water supply infrastructurecosts are met from public sources, and thereis an unknown subsidy to municipal opera-tional costs. The effect of removing con-sumer subsidies can be dramatic. In theformer East Germany, subsidy removal andmetering led to a 30% decline in water use(OECD, 1997g).

7.6. Environmental taxationTable 4.1.12 provides an overview of progresson environmental taxes applicable to house-holds in the EU, EFTA and Accession Coun-tries at the end of 1996. Most countries haveintroduced some sort of environmental taxesor charges which fall on households, butprogress in some, particularly Denmark andHungary, is far more advanced than average.

The case for use of economic instruments asa means of altering household behaviour iscompelling. Figure 4.1.15 demonstrates thatprices have a clear influence on households’behaviour. Household fuel use, relative toincome, tends to be higher in low pricecountries, a result that holds especially truefor electricity.

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Country codes used in the tables in this chapter:A: AustriaB: BelgiumD: GermanyDK: DenmarkE: SpainF: FranceFIN: FinlandGr: GreeceI: ItalyIRL: IrelandL: LuxembourgNL: The NetherlandsP: PortugalS: SwedenUK: United KingdomCZE: Czech RepublicHUN: HungaryPOL: PolandIS: IcelandN: NorwayCh: Switzerland

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