Analysis of the impact of Community Policies on Regional...

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Analysis of the impact of Community Policies on Regional Cohesion

CONTRACT NUMBER: 2002 CE 16 0 AT 171

INDEX FINAL REPORT

European Commission DG Regional Policy

October, 2003

FINAL REPORT

TABLE OF CONTENTS

A. GENERAL INTRODUCTION 1. BACKGROUND 2. SOME CONSIDERATIONS TO THE COHESION AND THE COHESION AND CONVERGENCE THEORETICAL FRAMEWORK 3. AIMS OF THE STUDY 4. METHOD OF APPROACH 5. FIRST OUTLINE OF METHODOLOGY

5.1. GATHERING QUANTITATIVE AND QUALITATIVE INFORMATION 5.2. CO-ORDINATION ISSUES 5.3. GOVERNANCE

B. ACADEMIC LITERATURE REVIEW. THEORIES ON THE EVOLUTION OF REGIONAL IMBALANCES. EMPIRICAL EVIDENCE.

1. INTRODUCTION 2.CONVERGENCE AND DIVERGENCE THEORIES

2.1. OLD AND NEW NEOCLASSICISTS 2.2. CUMULATIVE DIVERGENCES: FROM MYRDAL TO ENDOGENOUS GROWTH 2.3. PHASES AND THE COMPENSATING POWER. BETWEEN SISYPHUS AND ACHILLES 2.4. FROM CENTRE-PERIPHERY TO DEPENDENCE.

3. STAGES IN THE EUROPEAN UNION INTEGRATION AND COHESION REASONING 4. EMPIRICAL LITERATURE AND EVIDENCE

4.1. EMPIRICAL LITERATURE 4.2. THE EUROPEAN UNION: DIVERGING CONVERGENCE 4.3. IMPACT OF STRUCTURAL FUNDS

C. CONTRIBUTION OF THE AGRICULTURAL POLICY TO THE REGIONAL COHESION

EXECUTIVE SUMMARY PLAN OF WORK MOTIVATIONS AND APPROACH DEVELOPMENTS OF THE CAP IMPACT ON SOCIAL COHESION IMPACT ON TERRITORIAL COHESION IMPACT ON GLOBAL COHESION PERSPECTIVES AND “APPROPRIATE PROPOSALS” CONCLUDING REMARKS

Analysis of the impact of community policies on regional cohesion FINAL REPORT. DG REGIO EC

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1. MOTIVATIONS AND APPROACH 1.1. MOTIVATIONS OF THE STUDY 1.2. METHODOLOGICAL APPROACH

2. DEVELOPMENTS OF THE CAP 2.1. PAST DEVELOPMENTS 2.2. PRESENT MAIN FEATURES OF THE CAP 2.3. PRICE SUPPORT POLICY 2.4. RURAL DEVELOPMENT POLICY 2.5. REFORM PROPOSALS

3. IMPACT ON EU SOCIAL COHESION 3.1. IMPACT OF THE PRICE SUPPORT POLICY 3.2. IMPACT OF THE RURAL DEVELOPMENT POLICY+ 3.3. IMPACT OF A STRUCTURAL POLICY IN AGRICULTURE

4. IMPACT ON TERRITORIAL COHESION 4.1. CHANGES IN INCOME DISPARITIES 4.2. IMPACT OF THE PRICE SUPPORT POLICY 4.3. IMPACT OF RURAL DEVELOPMENT POLICIES 4.4. IMPACT OF A STRUCTURAL POLICY IN AGRICULTURE

5. IMPACT ON GLOBAL COHESION 5.1. EXPORT SUBSIDIES 5.2. TRADE-DISTORTING DOMESTIC POLICIES

6. PERSPECTIVES AND PROPOSALS 6.1. PRICE POLICY 6.2. RURAL DEVELOPMENT 6.3. STRUCTURAL POLICY IN AGRICULTURE

7. C0NCLUDING REMARKS APPENDICES (tables & figures) D. CONTRIBUTION OF THE STATE AID AND SERVICES OF GENERAL INTEREST ON THE REGIONAL COHESION

I.- STATE AID 1. ANALYSIS OF STATE AIDS SINCE THE II COHESION REPORT

1.1. INTRODUCTION: STATE AIDS AND COHESION. A PRESENTATION AND APPROXIMATION TO THE DEBATE OF STATE AID CONTRIBUTION TO ECONOMIC AND SOCIAL COHESION. 1.2. FINAL REGULATION ASPECTS IN STATE AIDS ISSUES 1.3.CHARACTERIZATION OF PUBLIC AIDS 1.4. QUANTITATIVE ANALYSIS 1.5. RESULTS: OBSERVED TRENDS

II.- SERVICES OF GENERAL INTEREST


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FINAL REPORT 1.- INTRODUCTION 2.- STATE AIDS AND SGI 3. THE GREEN BOOK ON SGI 4.- DIRECTING PRINCIPLES AND SGI CHARACTERIZATION 5.- SOCIAL AND TERRITORIAL COHESION AND THE SGI 6.- CASE ANALYSES ON COJEC RESOLUTIONS

6.1. POSTAL SERVICES 6.2. CABOTAGE SEA TRANSPORT 6.3. AIR TRANSPORT 6.4. TELECOMMUNICATIONS

7.- CONCLUSIONS Y OBSERVED TRENDS E.- CONTRIBUTION OF THE ENVIRONMENTAL POLICY ON THE REGIONAL COHESION

EXECUTIVE SUMMARY 1. INTRODUCTION 2. BACKGROUND: THE SECOND REPORT ON ECONOMIC AND

SOCIAL COHESION 2.1. EU WASTE POLICY 2.2. EU WATER POLICY 2.3. OVERALL POLICY EFFECTS

3. EU ENVIRONMENTAL POLICY1 3.1. FIFTH ENVIRONMENT ACTION PROGRAMME (1992-2000):

“TOWARDS SUSTAINABILITY” 3.2. STRATEGY FOR SUSTAINABLE DEVELOPMENTSIXTH

ENVIRONMENT ACTION PROGRAMME: “ENVIRONMENT 2010: OUR FUTURE, OUR CHOICE” 3.3. ENVIRONMENTAL TAXES AND CHARGES 3.4. WASTE MANAGEMENT 3.5. WASTE MANAGEMENT 3.6. WATER 3.7. AIR POLLUTION 3.8. KYOTO PROTOCOL ON CLIMATE CHANGE

3.9. INTEGRATION OF ENVIRONMENTAL POLICY INTO ALL EU POLICIES: THE CASE OF THE COMMON AGRICULTURAL POLICY (CAP)

4. COST AND EMPLOYMENT EFFECTS OF EU ENVIRONMENTAL POLICY

4.1. WASTE POLICY 4.2. WATER POLICY

1 This section is based on European Commission (2003).


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4.3. AIR POLLUTION POLICY 4.4. ANALYSIS OF AGGREGATE RESULTS

5. EU FINANCIAL INSTRUMENTS EFFECTS OF EU ENVIRONMENTAL POLICY2

5.1. STRUCTURAL FUNDS 5.2. COHESION FUND 5.3. SECTOR-SPECIFIC FINANCIAL INSTRUMENTS 5.4. EUROPEAN INVESTMENT BANK: EIB PROJECT FUNDING

6. FINANCIAL CONTRIBUTION OF THE EU TO THE IMPLEMENTATION OF ENVIRONMENTAL POLICY

6.1. STRUCTURAL FUNDS 6.2. CONCLUSIONS 6.3. COHESION FUND

6.4. STRUCTURAL AND COHESION FUNDS: MAGNITUDE AND EFFECT ON COHESION 6.5. CONCLUSIONS

7. THE EFFECTS OF CLIMATE CHANGE POLICY ON COHESION 7.1. CURRENT EMISSIONS, KYOTO PROTOCOL TARGETS AND

REQUIRED REDUCTION EFFORT 7.2. MEASURES OF DIFFICULTY TO REDUCE EMISSIONS

7.3. THE RELATIONSHIP BETWEEN THE DIFFICULTY TO REDUCE EMISSIONS AND THE REQUIRED REDUCTION EFFORT: EFFECTS ON ECONOMIC AND SOCIAL COHESION 7.4. CONCLUSIONS

8. THE EFFECTS OF ENVIRONMENTAL TAXATION ON COHESION 8.1. INTRODUCTION

8.2. THE EFFECT OF ENVIRONMENTAL TAXATION ON INCOME DISTRIBUTION

8.3. THE EFFECT OF ECOLOGICAL TAX REFORMS ON EMPLOYMENT 8.4. CONCLUSIONS

9. SUMMARY AND CONCLUSIONS

9.1. COSTS AND EMPLOYMENT EFFECTS OF EU ENVIRONMENTAL POLICY

9.2. FINANCIAL CONTRIBUTION OF THE EU TO THE IMPLEMENTATION OF ENVIRONMENTAL POLICY 9.3. THE EFFECTS OF CLIMATE CHANGE POLICY ON COHESION 9.4. THE EFFECTS OF ENVIRONMENTAL TAXATION ON COHESION

BIBLIOGRAPHY

2 This section updates European Commission (1996a).


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FINAL REPORT ANNEX I: Regional Case Studies on 28 regions

VOLUMEN I: BE – BELGIQUE / BELGIUM HAINAUT

DE – DEUTSCHLAND / FEDERAL REPUBLIC OF GERMANY OBERBAYERN SAARLAND MAGDEBURG

GR – ELLADA / GREECE KENTRIKI MAKEDONIA KRITI ES – ESPAÑA / SPAIN PRINCIPADO DE ASTURIAS CATALUÑA ANDALUCÍA

VOLUMEN II: FR – FRANCE NORD – PAS-DE-CALAIS BRETAGNE LIMOUSIN

IE – IRELAND BORDER, MIDLAND AND WESTERN SOUTHERN AND EASTERN

IT – ITALIA / ITALY TOSCANA SARDEGNA

VOLUMEN III: NL – NEDERLAND / THE NETHERLANDS FLEVOLAND

AT – ÖSTERREICH / AUSTRIA STEIERMARK

PT – PORTUGAL ALGARVE AÇORES FI – SUOMI / FINLAND ITÄ-SUOMI


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FINAL REPORT ETELÄ-SUOMI SE – SVERIGE / SWEDEN NORRA MELLANSVERIGE AND ÖVRE NORRLAND

UK – UNITED KINGDOM WEST MIDLANDS HIGHLANDS & ISLANDS NORTHERN IRELAND


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Analysis of the impact of Community Policies on Regional Cohesion


FINAL REPORT INTRODUCTION AND EVOLUTION OF

REGIONAL IMBALANCES

VOLUME I


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October, 2003

FINAL REPORT WORKTEAM RESPONSIBLE FOR THE ELABORATION OF An Analysis of the

Impact of Community Policies on Regional Cohesion.

ACKNOWLEDGEMENTS:

The evaluation Team would like to thank the following people for their participation in the

report and their constructive inputs into the study.

THE PANEL OF EXPERTS:

Director and coordinator: RICARDO RODRIGUEZ CONTRERAS. Associate

Member of LABOUR ASOCIADOS S.L.L. Expert on Regional Policy and Cohesion: LAUREANO LÁZARO ARAUJO.

EUROMASTER professor, Carlos III University of Madrid. Expert on Common Agricultural Policy. SECONDO TARDITI. Professore di

Economia e Politica Agraria. Facoltà di Economia, Università di Siena. Expert on State Aid Policy. BERNARDO HERNÁNDEZ BATALLER. Guest

professor, Carlos III University of Madrid. CES Adviser of the European Communities.

Expert on Environmental Policy. MIGUEL BUÑUEL GONZÁLEZ. Associate Professor of Applied Economics, Complutense University of Madrid. President of EnvEco Consulting.

NILA TARANCO SEGOVIA. Technical Consultant of LABOUR ASOCIADOS S.L.L.

MEMBERS OF THE STEERING GROUP IN CHARGE OF THE

REALISATION OF THE 28 REGIONAL CASE STUDIES: - Hainaut (Belgium) and Nord-Pas-de-Calais (France): JOS JANSSENS, from

PRIMULA s.a.r.l. France. - Obernbayern, Saarland and Magdeburg (Germany): HERMANN BIELER, from

EWR Consulting. IMU Munich. Germany. - Kentriki Makedonia and Kriti (Greece): MILTIADIS STAMBOULIS, Zoe

Vadratsika, Vasiliki Dimitriou and Thomas Raptis from GNOSI ANAPTYXIAKI. Thessaloniki. Greece.

- Principado de Asturias, Cataluña and Andalucía: RICARDO RODRÍGUEZ CONTRERAS and Nila Taranco Segovia, from LABOUR ASOCIADOS S.L.L. Madrid. Spain.

- Nord-Pas-de-Calais (France): JOS JANSSENS, from PRIMULA s.a.r.l. France. - Bretagne (France): Dr. VINCENT LAMANDE from the Université de Bretagne

Occidentale. Brest, France; Dr. Alain Laurent, Corinne Mignon and Olivia Thomas from the Université Pierre Mendès, Grenoble, France.

- Limousin (France): PASCALE TORRE, Sophie Chouzenoux, M. Somdecoste, M.A. Roddier, M. S. Dubois, from: LAPE Université de Limoges. France.

- Border, Midland and Western and Southern and Eastern (Ireland): MICHAEL J. BANNON, Ma, Phd. Department of Regional and Urban Planning. University College. Dublin. Ireland.


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FINAL REPORT - Toscana (Italy): FRANCESCO GRILLO and Annamaria D’angelo from Vision &

Value. Rome, Italy. - Campania (Italy): RAFFAELE BRANCATI, from MET, University of Camerino,

Italy. - Sardegna (Italy): FRANCESCO GRILLO, Julie Pellegrin and Annamaria D’angelo

from Vision & Value. Rome, Italy. - Flevoland (The Netherlands): HERMAN KATTELER and Marijke Eppink, from

ITS. Nijmegen. The Netherlands. - Steiermark (Austria): MICHAEL ERHARDT, from E W R Consulting GMBH.

Frankfurt am Main. Germany. - Algarve and Açores (Portugal): MIGUEL LEBRE DE FREITAS, Francisco Torres,

Marta Dias and Ricardo Silva, from Group of Economic Policy Analysis, Universidade de Aveiro.

- Itä-Suomi and Etelä-Suomi (Suomi/Finland): MARGITTA LUKKARINEN and Laura Flinkkilä, from Oy Coop Consult AB, Kokkola, Finland.

- Norra Mellansverig and Övre Norrland (Sverige): BJÖRN HELLQVIST, from Björn Hellqvist Konsult Ab. Hammarö. Sweden.

- West Midlands, Highlands & Islands and Northern Ireland (United Kingdom): DAVID BRADLEY, from CURDS. Centre for Urban and Regional Development Studies. University of Newcastle Upon Tyne. United Kingdom.


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FINAL REPORT A. EXECUTIVE SUMMARY

CONTENTS Background 1 Contribution of the CAP to the cohesion

1.1. Impact on social cohesion 1.2 Impact on environment 1.3. Impact on territorial cohesion 1.4. Impact on global cohesion 1.5. Structural policy in the agriculture

2. Contribution of the EU Environment policy to the cohesion

2.1. Costs and employment effects of EU environmental policy 2.2. Financial contribution of the EU to the implementation of environmental policy 2.3. The effects of climate change policy on cohesion

3. The role of State aids and Services of General Interest on the cohesion

3.1. Trends in aid typologies 3.2. Main results 3.3. Services of General Interest and cohesion

4. Joint Valuation of results obtained in the case studies carried out in 28 regions

4.1. Preliminary considerations on case study development 4.2. Community policies and cohesion 4.3. Coordination in Community policies implementation 4.4. Governance


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Background

The European Commission, D.G. Regional Policy intends to produce a study entitled “An analysis of the impact of community policies on regional cohesion”. The Commission is required to submit a report every three years on the extent of progress towards the objective of economic and social cohesion, and the manner in which various policies have contributed to this.

The objective of strengthening economic and social cohesion is mentioned explicitly in Article

2 of the Amsterdam Treaty and as the first objective of the Union. More specifically, Article 158 states that cohesion is a precondition for harmonious development in the EU: 'in order to promote its overall harmonious development, the Community shall develop and pursue its actions leading to the strengthening of its economic and social cohesion.' This article, moreover, goes on to stress that fostering cohesion requires that 'the Community shall aim at reducing disparities between the levels of development of the various regions and the backwardness of the least favoured regions or islands, including rural areas.'

Still in the Treaty, the first paragraph of article 159 establishes that “Member States shall

conduct their economic policies and shall coordinate them in order to attain also the objectives mentioned in article 158. By stating and developing Community policies and activities and developing the interior market, objectives in article 158 shall be considered, participating in their achievement.” Therefore this explicit forecast forces all community policies, without exception, (those in articles 3 and 4 of the Treaty) to contribute in reducing inequalities and reinforcing cohesion, so that they shall have to adapt their statements, objectives and actions to the objectives of economic and social cohesion.

The contribution of CPs, as a whole, to cohesion has been present in the EU’s institutional

debate in the last few years. A reasonable preoccupation exists due to the negative consequences that the applying of some CPs could be having. This is reflected in the II intermediate Report on economic and social cohesion1, when mentioning that “the content of these policies should also consider the enormous diversity and the greater territorial imbalances in the extended Union”.

Basically the study has two main components:

- An in-depth research of the results of three Community policies: Common Agricultural Policy, State Aids and Environment Policy

- A case study on 28 regions, each of which must be closely analysed in relation to the impact of the more relevant Community policies operating on the region financed by direct programmes or through the Structural Policy actions.

In practice, the two components of the study constitute separate studies and imply different

methodologies of analysis. The three policies selected (CAP, Environment and State aids) obey different objectives and action logics as stated in the technical specifications. Each one exemplifies a different type of impact from the perspective of cohesion; in any case, together with structural policies – and even transport policies – they probably represent the most powerful impacts that CPs could have. This diversity in objectives and actions causes the methodology used to require different analysis methods in order to tackle the study of their contribution to cohesion.

1 COM (2003) 34 final


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regional cases. The regions have been selected by the Commission. Most of them are Objective 1, although some have been chosen from Objective 2 and some are even very developed, so as to be able to examine contrasts. The 28 regions do not make up a representative sample from a statistical point of view but they do represent the variety and regional diversity of the EU. The analysis of regional cases offers the possibility of comparing in practice, on the ground, the impact of different Community policies.

As regards to the study cases, some considerations should be made from a methodological

point of view. In first place, the broad view needed to analyse the set of Community policies in a region. This task requires a great effort, especially in those regions, usually Objective 1, that have a certain density of Community policy implementation, that is, where a number of them are active and mainly with a high intensity in regional policy.

The project team has been constituted into two groups, differentiated in the different level

of tasks to be carried out:

- A Steering committee integrated on the one hand, by experts in regional development, and, on the other, by specialists in each of the three CPs (CAP, Environment and State aids) which are the main objects of this general study.

- Regional consulting teams that carry out the case studies. These teams have been built preferentially taking as reference the member States to which these selected regions belong.

1. Contribution of the CAP to the cohesion

1.1. Impact on social cohesion

The impact of price support on households could be equivalent to a regressive income tax, as

poorer households spend a larger share of their income in food and beverages than richer households. On the other hand, income transferred to farms is proportional to the size of production, consequently larger and better-off farms are benefiting much more than small farms from price support. Moreover, within larger farms extra profits benefit mainly landowners rather than employed people. Artificially increasing the income of better-off people at the expense of worse-off people deteriorates the social cohesion among European citizens. Their faith in the European Union as a just and useful supranational government is undermined.

The extensive use of supply management policy measures substantially reduced surpluses,

which are apparent indicators of the existing misallocation of resources. The large sum of money spent for sterilizing a basic economic resource as arable land and the financial resources spent in the inevitable bureaucratisation and monitoring of supply management policy measures are still visible. Such malfunctioning of the CAP is perceived in contrast with social cohesion.

By maintaining a considerable surplus of labour in agriculture in many regions, the farm

structure remains fragmented and largely inefficient, leading to high costs of production. As a consequence, the extra costs paid by consumers in terms of higher food prices, and by taxpayers in terms of higher taxes needed to finance producer subsidies for various commodities, do not fully benefit farmers in terms of increased incomes. A large share of such transfers are needed to pay the higher production costs due to the delay in structural adjustment. The CAP would solve at best the problems of poor farmers by helping them to increase the size and improve the management of their farms in order to lower production costs, or to find a better job outside agriculture.


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Within the CAP, the “price” policy has been by far predominating the “structural” policy in the early decades and the “rural development policy” in most recent years. This is apparent in terms of the absorbed share of the common agricultural expenditure, of the income redistribution generated by the manipulation of agricultural market prices, and of the external effects on rural environment. Unfortunately the price support policy generated undisputable net negative effects on resource allocation, on income redistribution and on environmental protection. A limited number of relatively rich people has been granted with privileges at the expense of a large number of poorer people and at a high social cost in terms of deadweight losses.

Such policy is in contrast with the European Cohesion and should be further reformed

especially in favour of a complementary structural policy able to reduce the number of small inefficient farms and solve the agricultural income problems for good.

1.2. Impact on environment

The impact of the common price policy on the environment is mixed. On the one hand it is

undeniable that, although the income transfers generated by the price support policy are more concentrated on rich, intensive agricultural areas, a minor part of such transfers reach poor marginal areas. They contribute to the maintenance of positive externalities in terms of human settlements on otherwise abandoned territories, often contributing to better landscape and to improved rural development.

On the other hand, in various instances price support contributes to increasing pollution and

other negative externalities on the territory. Probably the main negative externality of higher producer prices is the incentive to use more chemical fertilizers, especially nitrogen, which are polluting especially superficial waters and underground aquifers. If producer prices are maintained at high levels and arable land is withdrawn from cultivation, farmers could tend to use extra fertilisers and other polluting inputs, such as pesticides, in order to increase output on the limited cultivated land.

Sometimes the price support of some commodities is directly damaging the environment.

Instead of present undifferentiated EU-wide price support, the local implementation of targeted agri-environmental subsidies would have favoured non-arable cultivations in steep cultivated areas, improving environment sustainability.

The large diffusion of supply management policies and the related bureaucratisation of the agricultural economy, request from farmers extra time and work for red-tape administrative duties, foster political patronage, and create new opportunities for fraud.

1.3. Impact on territorial cohesion

The work carried out in occasion of the first Cohesion Report of the Commission, followed by

the work carried out in the Second Cohesion Report, used a more complete approach to the analysis of the income redistribution generated by the CAP at regional level. All people affected by the CAP were taken into account, not only farmers. For every European region also income transfers from consumers and taxpayers towards agricultural producers were estimated. The overall impact of the CAP on interregional income redistribution, and consequently on interregional cohesion is clearly positive. On average richer regions are transferring substantial amounts of resources to poorer regions. Such result is due to the fact that, as a general rule, poorer regions are less populated and agriculture accounts for a larger share of their GDP. On the contrary, consumers and taxpayers in urbanised regions, as a general rule, are more numerous and bear a large burden for transfers benefiting farmers who are more concentrated in less populated and often poorer rural


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regions. Consequently any policy transferring money to agriculture is likely to reduce income disparities between richer and poorer regions

Still, such positive impact of the CAP on interregional income redistribution and on

interregional cohesion cannot be taken as a strong motivation for maintaining the present features of the CAP price policy for at least two reasons. Firstly, the beneficial effect on interregional cohesion would be the same if transfers generated by the CAP were compensating farmers for positive externalities and for improving the structure of their farms, in other words, if such transfers could be better justified on sound economic and social grounds. Secondly, if such transfers from rich to poorer regions were allocated to the best social or economic uses, without sectoral constraints, in favour of poorer Member States and Regions, their impact on interregional cohesion would be much larger and transparent.

The Rural development policy should be made of intersectoral policy measures which are

better targeted to specific objectives at local level. In this respect, as a general rule, it is more efficient and equitable than the price support policy. Public resources can be oriented to the poorer regions and can be targeted to the investments which are most productive for society as a whole. As a consequence its impact on European cohesion is likely to be, on the whole, positive.

The Rural development policy, by its nature, can be better oriented to poorer Member states,

regions and areas. Consequently its impact on interregional cohesion is generally positive although it could be largely improved..

1.4. Impact on global cohesion

The CAP impact on global cohesion should then be taken into consideration, given the

predominant role of the EU in international politics and its efforts in international cooperation. EU-15 and its member countries are by far the largest contributors to international cooperation in favour of Less Developed Countries, much larger than the US and Japan.

According to the notifications by member states at WTO, required after the GATT-WTO

Marrakesh Agreement on Agriculture, the EU-15 is paying almost 90% of all world export subsidies. The income transfers generated by the policy measures classified during the GATT negotiations in the “amber” and “blue” boxes, are another parameter for assessing the impact of agricultural policies in directly or indirectly distorting international trade. The EU-15 is responsible for about three quarters of the “amber and blue box” income transfers to farmers generated in the world as a consequence of agricultural policies.

The global impact of the present price support policy of the CAP is substantial and is damaging

numerous less developed countries whose main resources for their economic development are agricultural. Access to the EU-15 market for agricultural commodities is prevented both by import levies and by domestic subsidies, while the access to Third country markets is also subject to indirect unfair competition by the EU, whose export subsidies depress world market prices.

It is apparent that the present price policy of the CAP is contrasting global cohesion. On the

contrary structural and rural development policy measures, as a general rule, are fair to international trade partners and allow supporting our agriculture in a more efficient and equitable way, without seriously damaging world trade partners.


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1.5. Structural policy in agriculture

The basic importance of a structural policy is apparent if we consider that in the EU-15 about 50% of the labour force employed in agriculture is working in undersized farms and the gross productivity of labour could be doubled or tripled just by providing such farmers with a better proportion of capital and land. As arable land cannot be expanded, it is important that in some member countries and regions, where the labour force is redundant and farms are too small and inefficient, a direct structural policy is implemented in order to increase the local productivity of labour and agricultural incomes. If the productivity of labour is not increased, farm incomes will always be either unacceptably low or permanently supported by the government.

Structural policies are more difficult to implement than just providing farmers with higher

output prices and direct payments. On the other hand many farmers, especially the aged and inefficient ones, prefer to receive unconstrained price support and payments rather than financial support under constraints for improving their farm structure and management. After the classification of the Guidance section of FEOGA in the structural funds, the mainstream agricultural policy has been mainly dealing with market support and rural development, almost forgetting the urgent need for restructuring inefficient farms. The share of the FEOGA Guidance section is still in the order of 6% of total agricultural expenditure, while the actual financial aid explicitly oriented to farm restructuring accounts for a much smaller share.

The impact of a well targeted and managed Structural policy in agriculture could be much more

favourable to interregional cohesion. A better intersectoral allocation of the labour force would reduce income disparities between poor agricultural households and some of the richer households in non-agricultural sectors of production

2. Contribution of the EU Environment policy to the cohesion

2.1. Costs and employment effects of EU environmental policy

Achieving the objectives of EU environmental policy is costly, but at the same time it creates important income and employment opportunities. Taking a sample of ten EU environmental directives (Hazardous Waste Incineration Directive, Packaging and Packaging Waste Directive, End-of-Life Vehicles Directive, Urban Waste Water Treatment Directive, Drinking Water Directive, Nitrates Directive, Sulphur in Liquid Fuels Directives, National Emissions Ceiling Directive, Large Combustion Plants Directive, and Directive on Volatile Organic Compounds resulting from certain industrial activities), total investments for the EU associated with these directives amount to more than 257 billion Euros (in 1995 price levels) between 1990 and 2010. At the height of implementation of the directives, additional operating expenditures of almost 14.5 billion Euros per annum are also estimated. The annualised total costs for the EU are close to 42 billion Euros.

In terms of costs per capita, the highest costs tend to be experienced by the most developed

Member States, since they suffer the highest pressures on the environment, have lower assimilative capacity of the receiving environment, present higher opportunity (especially labour) costs, and have higher demand for environmental quality. However, the same cost per capita in two countries with different levels of development does not reflect the same level of effort. Therefore, in terms of the effects of environmental policy on economic and social cohesion, we should look at costs as a percentage of GDP, which tend to decrease as GDP per capita grows, indicating that the effort implied by the implementation of environmental policy tends to be higher in less rich Member


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States. Netherlands, Belgium, Austria and Germany somehow break the general trend, being the countries with the highest costs per capita and still having the highest cost per unit of GDP (except Germany, surpassed by Greece and Portugal in this respect). The particular position of these four countries, as well as other effects that determine the particular position of each Member State, depend on country-specific factors, such as the differences in the relative importance of affected economic sectors, like the highly developed oil refining and agricultural sectors in Netherlands and Belgium, which make them have high costs of compliance in relation to the air sector directives.

With regard to linked employment, the best estimate of the annualised full-time equivalent

(FTE) job opportunities created by these directives is more than 435,000 FTE jobs per annum for the whole EU. There exists a clear negative relationship between the employment opportunities created by environmental expenditure, measured as a percentage of the number of unemployed workers, and current levels of unemployment, which could lead to the conclusion that employment opportunities linked to environmental policy are mostly created where they are less needed. However, the number of job opportunities created per unit of expenditure provides a better sense of the effect of environmental expenditure on cohesion, and this variable is inversely related with GDP per capita, which demonstrates that the less rich Member States benefit more from environmental expenditure than richer countries, in the sense that more jobs are created per unit of expenditure. This fact can be explained through labour cost differences between Member States, since these costs tend to be higher in richer countries, which leads to lower job creation per unit of environmental expenditure.

With regard to the distribution over time of the cost and employment effects of investments,

the sector that determines most of the cost and employment effects of environmental investments after 2000 is the air sector, while the water sector was the most important in the previous decade. However, given its high costs, the remaining expenditure associates with the Urban Waste Water Treatment Directive makes it the single most important directive also after 2000, followed by the National Emissions Ceiling Directive. The importance of the air sector in the following years will be even greater than what these estimates indicate, since large investments in this sector will be required in relation to the Integrated Pollution Prevention and Control (IPPC) Directive and the climate change compromises under the Kyoto Protocol.

The annualised costs at the height of implementation as a percentage of the turnover of each

Member State’s eco-industries in 1999 shows large differences across environmental sectors. In the case of waste, this index is 17 per cent for the whole EU, varying across Member States from 7 per cent in Austria to 40 per cent in Sweden. Although the percentages are significant, they are rather reduced in comparison with the other sectors, indicating that the waste sector has already a long tradition, and waste management is a mature eco-industry.

The annualised expenditure required to achieve the targets of the water directives is 43 per cent

of the 1999 turnover of the EU eco-industries. Also in this case, we can find large differences across countries: from 20 per cent in France to 128 per cent in Ireland (the only country where the size of its water eco-industry in 1999 was smaller than the annualised expenditure required by the water directives at the height of implementation). The air eco-industry is the smallest one in comparison to the volume of expenditure required to meet the objectives of the directives. For the fifteen Member States combined, the annualised cost at the height of implementation amounts to 90 per cent of the size of the air eco-industry in 1999, with country variations from 9 per cent in Denmark to 1,133 per cent in Greece. Besides Greece, we find several Member States where the 1999 size of their air eco-industries is smaller than the expenditure required to achieve the targets of the air directives at the height of implementation: Belgium (230%), Ireland (180%), Luxembourg (214%), Netherlands (266%) and Portugal (137%).


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FINAL REPORT

The EU eco-industries have grown significantly from 1994 to 1999, especially in Greece, Portugal and Spain. This makes us confident that cohesion countries are growing their eco-industries in response to the implementation of EU policy, and hence the positive cohesion impact of environmental expenditure is not under risk. Moreover, considering each sector individually, there exists a clear link between the size of the eco-industries and the percentage of investment linked to EU policy already undertaken, which indicates that EU policy is a crucial factor fostering the growth of eco-industries. This evidence also shows that we are likely to see an important growth of the air eco-industry that will meet the requirements imposed by the investments linked to the air directives that must be undertaken during the present decade.

2.2. Financial contribution of the EU to the implementation of environmental

policy

Of all the financial instruments for the environment in place in the EU, the European Regional Development Fund and the Cohesion Fund are the most significant because of their quantitative volume. LIFE is significant because it is the only financial instrument specifically tailored to the environment, but it is quantitatively minor in comparison with the Structural and Cohesion Funds.

Looking at the programming period 2000-2006, the European Regional Development Fund is

the main driver of environmental expenditure from EU sources. It represents 79 per cent of all environmental Structural Funds for the EU as a whole. The European Agricultural Guidance and Guarantee Fund is the second most important financial instrument for the environment, with 19 per cent of all funds allocated for environmental expenditure. The Financial Instrument of Fisheries Guidance and the European Social Fund are insignificant, although the European Social Fund is clearly underestimated, since there are sizeable funds allocated for environmental education of employed and unemployed workers that are not included in our information. These funds are also an important driver for the allocation of national funds for environmental expenditure: 72 per cent of the size of the Structural Funds. Private funds accompanying the Structural Funds for environmental expenditure add 29 per cent more to these funds.

The European Regional Development Fund also finances other environmentally beneficial

expenditure (environmentally-friendly transport infrastructure, and planning and rehabilitation of industrial and military sites and urban areas), which makes it even more important as the main driver of environmentally related expenditure. The importance of these funds as drivers for the allocation of national funds is even more important than in the case of environmental expenditure: 96 per cent of the size of the Structural Funds. Private funds add 21 per cent more to Structural Funds.

The payments made through the Cohesion Fund to Greece, Ireland, Portugal and Spain for

environmental projects from 1993 to 2002 have grown steadily from 279 million Euros in 1993 to 1.3 billion Euros in 2002. The average yearly total amount paid for the ten year period is 838 million Euros. This figures underestimate the environmental impact of the Cohesion Fund, since the rest of funds, which finance transport projects, should be considered as environmentally beneficial expenditure when financing environmentally-friendly transport infrastructure.

If we aggregate the annualised budgeted environmental expenditure from the Structural Funds

for the programming period 2000-2006 with the 2000-2002 average payments made through the Cohesion Fund for environmental projects, we see that the total annualised Structural and Cohesion Funds for environmental expenditure in 1995 price levels represent more than 3 billion Euros; two thirds coming from the Structural Funds and one third from the Cohesion Fund. Spain is the largest beneficiary in absolute terms, with 1.4 billion Euros, which signify 44 per cent of all funds. In this respect, Spain is followed by Italy (14%), Greece (11%), Germany (9%) and Portugal (8%), the


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FINAL REPORT

only countries receiving more than 5 per cent of the total funds. In relation to GDP, these funds represent a small 0.04 per cent for the whole EU. This percentage is surpassed only by Greece (0.31%), Portugal (0.26%), Spain (0.25%), Ireland (0.17%) and Italy (0.05%). In per capita terms, the EU average of 8.16 Euros per capita is only exceeded by Ireland (37.35 € per capita), Spain (34.59 € per capita), Greece (31.18 € per capita) and Portugal (25.92 € per capita).

In relation to the total 1999 estimate of environmental expenditure in each country, these funds

represent in average a small 2 per cent. However, this percentage is very significant for the four cohesion countries: 20 per cent in Greece, 19 per cent in Ireland, 17 per cent in Spain, and 15 per cent in Portugal. Italy, with 3 per cent, is also above the EU average, but far from the cohesion countries. More important it is the size of EU funds in relation to the best estimate of the annualised costs of the ten directives studied, which is greatest for Spain, with 48 per cent, followed by Greece and Portugal, with 39 per cent, and Ireland, with 32 per cent. Besides these four countries, Italy (9%) is again the only Member State surpassing the EU average of 7 per cent. This sizeable percentages imply that the burden of EU policy for the less rich Member States is greatly softened by the Structural and Cohesion Funds, which in turn makes easier that the expenditure associated to these directives is additional, in the sense of not replacing other productive expenditure.

Including environmentally beneficial expenditure together with environmental expenditure

brings the total annualised environmental Structural and Cohesion Funds from 3 to 5.2 billion Euros. Again, Spain is the largest beneficiary in absolute terms, with 1.8 billion Euros (36% of all funds), followed by Italy (14%), Greece (13%), Germany (12%), Portugal (11%) and France (5%), the only countries above 5 per cent of the total funds. The funds for the whole EU represent 0.07% of EU GDP. The same as when not including environmentally beneficial expenditure, this percentage is exceeded only by Greece (0.61%), Portugal (0.55%), Spain (0.34%), Ireland (0.21%) and Italy (0.08%). In per capita terms, the EU average of 13.73 Euros per capita is only surpassed by Greece (61.35 € per capita), Portugal (55.15 € per capita), Spain (46.71 € per capita) and Ireland (44.68 € per capita).

We can conclude that the distribution of Structural and Cohesion Funds for environmental and

environmentally beneficial expenditure certainly contributes to economic and social cohesion, since the countries with lower GDP per capita receive more funds per capita than the Member States with higher GDP per capita. The cohesive impact is especially strong with regard to the three poorest Member States, Portugal, Greece and Spain, which represent 16 per cent of the EU population and 10 per cent of the EU GDP, but receive 59 per cent of environmentally related Structural and Cohesion Funds. If we add the other two Member States below the EU average GDP per capita, Italy and UK, we see that the poorest five countries represent 47 per cent of the EU population and 35 per cent of GDP, but obtain 78 per cent of the funds.

Only the funds received by Ireland do not favour cohesion, since the enormous growth of this

country in the last years has brought it above the average GDP per capita, while still being formally a cohesion country. As a result, the Cohesion Funds received by this Member State have a negative cohesion impact, although scarcely significant overall, given the relatively small size of Ireland.

In short, the European Regional Development Fund and the Cohesion Fund allocated for

environmental purposes produce strong positive effects on economic and social cohesion. Moreover, they are very important as a guarantee that environmental expenditure is additional (that is, it does not simply replace other productive expenditure) in the poorest Member States. This increases the likelihood that the potential income and employment opportunities associated with the expenditure necessary to implement EU environmental policy translate into actual income and employment.


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FINAL REPORT

2.3. The effects of climate change policy on cohesion

Under the Kyoto Protocol, the EU assumed the commitment of reducing its emissions of green-house gases (GHGs) by 8 per cent relative to 1990 levels by 2008-2012. This global EU commitment was redistributed among Member States by the Council of Ministers through the “burden sharing” agreement. Above all, this agreement means that richer Member States must reduce their emissions more than the agreed 8 per cent, while cohesions countries are allowed to increase their emissions. Therefore, EU cohesion objectives were taken into account in the redistribution of the Kyoto Protocol commitment. However, the usual indicators show that cohesion countries are currently the Member States farthest away from complying with the burden sharing agreement.

From 1990 to 2001, the EU has reduced its GHG emissions by 2 per cent, still far from the 8

per cent compromise for the period 2008-2012. Looking at what percentage of Member States’ current GHG emissions must be reduced to comply with the burden sharing agreement, the largest reduction effort must be undertaken by Denmark and Austria, which need to decrease their 2001 emissions by 21 per cent, followed by Ireland and Spain (14%), Belgium and Italy (13%), Netherlands (10%) and Portugal (7%). Relatively low reductions from current emission levels are required for Finland (5%), Germany (4%), and Greece and UK (1%). France is exactly in its compliance level, while Luxembourg and Sweden could increase their emissions by 28 and 7 per cent, respectively, and still be in compliance.

The percentage of required reduction does not measure effort in terms of how costly or difficult

the required changes in emissions may be. As a first approximation to a measure of the difficulty for each country of reducing its emissions, we could look at GDP emission efficiency. In principle, the more efficient a country already is, the more difficult (expensive) will be for it to increase its efficiency even more. Hence it will be cheaper to decrease emissions for inefficient countries than for the most efficient ones. A second approximation to measuring the difficulty of GHG emission abatement is given by emissions per capita. In this case, we should expect that it becomes more costly to reduce emissions as emissions per capita decrease, since it will be more difficult to reduce them and maintain or increase the standard of living of population.

The Member States with both emissions per unit of GDP and per capita above the EU average

are Ireland, Greece, Finland, Belgium, Netherlands and UK, which, according to the previous discussion, should have the lowest difficulties reducing their GHG emissions. On the contrary, Sweden, France and Austria, being below the EU average both in per unit of GDP and per capita terms, should have the strongest difficulties reducing their emissions. Three of the four richest Member States, Luxembourg, Denmark and Germany, emit GHGs above the average in per capita terms, but below the average in relation to GDP. The opposite is true of Portugal, Spain and Italy, which are three of the four poorest EU Member States, whose emissions exceed the average in relation to GDP but are below the average in per capita terms. The situation of the latter six countries is less clear.

In order to determine what is the final effect on cohesion of the EU burden sharing agreement,

we hypothesize that the financial flows produced between countries as a result of the exchanges of allowances in the market for GHGs that will be established in the EU is a good proxy for the direction of that effect. If the Emission Trading Directive is approved as scheduled, the EU will have the first trans-national GHG emission trading scheme in the world as soon as of 2005. Cohesion will be increased if this market leads to financial flows from more to less developed Member States. However, if the result is that poorer countries must buy permits from richer


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FINAL REPORT

Member States, the indication is that climate change policy will contribute negatively to cohesion in terms of its implementation costs.

The likely position of a country as a buyer or seller in the allowances market may depend on

the relationship between the reduction effort from current emission levels that each Member State needs to exercise to meet its Kyoto Protocol target, and the average of the difficulties to reduce emissions arising from already low values of emissions per unit of GDP and from already low per capita values. The Member States with both above average difficulties to reduce their emissions and strong reduction efforts required to comply with their obligations under the burden sharing agreement should be expected to be net buyers in the EU emission trading market. The clearest of these cases is Austria, which needs to reduce its emissions by 21 per cent to comply with its target, and at the same time suffers strong difficulties to reduce emissions. Italy could also be a net buyer, since it needs to reduce emissions by 13 per cent and presents above average difficulties to reduce emissions. On the contrary, any country with low difficulties and low required effort should be expected to be a net seller of emission allowances, but there is no Member State in such a situation. Nevertheless, Greece and UK’s required efforts, although positive, are small, while their difficulty is well below the average, and hence we would expect them to be net sellers.

Luxembourg, France and Sweden would find difficult to reduce their emissions further, but

they are not required to make any reduction effort, since they are the only countries already in compliance. Given that Luxembourg could even increase its emissions by 29 per cent and remain in compliance, it could be a net seller of allowances. More difficult it is that France and Sweden become net sellers. France is just in compliance and it would find difficult to obtain further reductions. Reductions would be even more difficult for Sweden, especially given its political decision of phasing out nuclear power; hence it is unclear if Sweden may become a net seller or increase its emissions.

Most Member States, including UK and Greece, whose case we have already considered, are

required to reduce their emissions, but their difficulty of doing it is lower than the EU average. Among these countries there exist very different situations. Denmark and Germany are almost on the average difficulty. Given that Denmark is the country that needs to undertake the largest reductions (21%) and presents an average difficulty to reduce emissions, we should expect that it joins Austria as a clear net buyer of allowances. The case of Germany is less clear, since its required reduction effort is moderate and its difficulty is average; it could be a seller or a buyer. For the rest of countries, Ireland, Belgium, Finland, Netherlands, Portugal and Spain, required efforts to reduce emissions are significant, but at the same time it should be less difficult for them than for the rest of Member States to reduce their emissions. Hence it is unclear if they will be able to sell allowances, if they will have to use them all or even be net buyers. If any of them becomes a buyer, Spain is the most likely to be one of them, since this country presents the highest difficulty (although below the EU average) among these six Member States and the highest required reduction together with Ireland (14%).

Therefore, we expect that two of the richest Member States, Austria and Denmark, are net

buyers of allowances, and probably Italy and Spain, whose income per capita is below the average. Among the net sellers, we expect two countries under the EU average GDP per capita, Greece and UK, and probably Luxembourg, the richest Member State. France and Sweden will probably be in a neutral position, while the situation of the rest of countries is uncertain. If we would look only to the most likely positions, Austria and Denmark as buyers and Greece and UK as sellers, we would find some indication of positive effects on cohesion of the implementation of climate change policy through a emission trading scheme. However, the picture is less clear when we consider that it is likely that Italy and Spain are buyers and Luxembourg a seller.


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FINAL REPORT

Another way of looking at the effects on economic and social cohesion is comparing both the difficulty to reduce emissions and the required reduction effort with GDP per capita. The first of these comparisons indicates that there exists a positive relationship between difficulty and wealth. In this sense, cohesion seems reinforced by climate change policy, since the highest effort in terms of overcoming difficulties will be exercised by the richest Member States. However, this general trend is not extremely significant, and we see Italy, below the average GDP per capita, with a difficulty above the average, while Ireland, Netherlands, Belgium and Finland, all above average GDP per capita, have the lowest difficulty but for Greece’s. However, the situation of Belgium and Netherlands is the consequence of them having highly developed oil refining sectors, which make both countries high in both emissions per capita and per unit of GDP, but not necessarily less difficult to reduce emissions. Ireland is also an unusual case, given its tremendous growth in recent years, which has brought this formally still a cohesion country above average GDP per capita. With regard to the relationship between the required reduction effort and GDP per capita, and if we ignore the peculiar position of Luxembourg, which is an outlier, there exists a positive trend too, which also suggests that cohesion is reinforced by climate change policy. However, Spain and Italy, both significantly below the average GDP per capita, must exercise a large reduction effort, well above most richer Member States’.

In short, we can find some indications that suggest that climate change policy may reinforce

cohesion overall, although probably not in the cases of Spain and Italy. However, this is a very preliminary analysis, and more accurate conclusions could be derived from a study where emissions and GDP are disaggregated by sector (at least, industrial, residential and commercial, agricultural, transportation, waste management, and energy and mining).

3. The role of State aids and Services of General Interest on the cohesion

3.1. Trends in aid typologies

The change in percentage of aids granted to horizontal objectives, especially to the industry sector and aided regions, has been relatively small, since variations have been kept under 9% in most member States. However, there is a trend to designate industry aids to the completion of horizontal objectives. This trend seems to confirm the gradual fulfilment of the objectives set by the European Council.

The greater part of industry aids in the Union, 56%, are used in regional objectives, most of

them in less developed regions, that is, those that can opt to regional aids in conformity to sub-section a) of section 3 of article 87 of the Treaty.

As regards the instruments used in granting aids to the industry sector on a Community level,

budget spending is used the most, with a percentage close to 75%, although it is distributed unequally amongst member States since some member States grant part of industry aids as tax relief, as an alternative to budget spending.

The total amount of regional aids in the EU is still decreasing slightly. None of the member

States that grant part of the regional aids to the industry sector above the EU average are cohesion countries, except for Greece.

A gradual decrease in total aids granted has occurred in the European Union in relation to

G.D.P. percentage. Percentage per employed person: has decreased in the European Union as a whole. It decreases in most of the cohesion countries, except for Ireland, whilst this percentage increases in Denmark, Luxemburg and the Netherlands.


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FINAL REPORT

Percentage of public spending: has decreased in the European Union as a whole. This decrease is also significant in most cohesion countries (Greece, Spain, Portugal) except for Ireland where it increases. On the other hand, a slight increase in percentage of public spending exists in Denmark, Luxemburg and the Netherlands due to aids designated to environmental protection, training and employment.

State regional aids in each member State as a percentage of total national GDP: has maintained

a fairly constant level in the 1995/1999 period. However, a significant decrease can be found in Germany, Greece, Ireland, Italy and Luxemburg, whilst a slighter decrease can be found in Belgium, Sweden and the United Kingdom.

3.2. Main results

1. The global levels of state aids in the European Union have continued to decrease. This

gradual and slow decrease implies a progressive fulfilling of the political objectives to reduce aids set by the European Councils.

2. Disparities existing between member States regarding resources assigned to national state aids are, on the other hand, also decreasing.

3. The difference in the levels of State aids granted to the richer member States and the four cohesion countries has hardly decreased.

4. Regional aids are decreasing gradually. Thus, total regional aids in 1999 rose to 10,784.9 million euros, of which 3,701.2 million euros belong to regions in article 87, 3-c) and 7,083.7 million euros belong to regions in article 87, 3-a).

The total amount of regional aids, granted by the member States in 1995 rose to 23,589 million euros, whilst in 1999 this amount was 10,784.9 million euros. Thus, the total amount of regional aids has decreased to under a half in this period. The decrease in amount and level of aids has been especially significant in those regions where the economic situation is very unfavourable in relation to the Union as a whole (art.87, 3, a). Here, the amount of aids granted in 1995 was 20,505.9 million euros, whereas this figure dropped to almost a third in 1999, reaching 7,083.7 million euros.

However, regional aids that allow the development of certain regions as long as the designated

aids do not alter the exchange conditions in ways contrary to the common interest (article 87, 3, c) have not decreased but increased, since in 1995, 3,083.1 million euros were granted whilst in 1999 these state aids rose up to an amount of 3,701.2 million euros.

Regarding the global level of regional state aids, global trends in the cohesion member States

are the following:

- Regional aids in Greece have decreased, since 721.8 million euros were granted in 1995 and 378.8 million euros were granted in 1999. This trend is reverted in 2001 when 419.2 million euros are granted.

- The global amount of regional state aids increases in Spain, rising from 284.8 million

euros in 1995 to 382 million euros in 1999. This trend continues in 2001 when aids amounting to 408.2 million euros are granted.


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FINAL REPORT

- The amount of regional aids in Ireland decreased from 158.5 million euros in 1995 to 109.9 million euros in 1999. This trend was changed in 2001 when the amount of regional aids granted was 429.9 million euros, a significant increase.

- The amount of regional state aids has increased considerably in Portugal, rising from

186.9 million euros granted in 1995 to 516.8 million euros in 1999. This trend is reverted in 2001 when 64.3 million euros were granted.

The following trends have been observed regarding regional aids granted on the basis of the

Treaty’s article 87,3,a):

- In Portugal, the amount granted in 1999 was 516.8 million euros, more that double the figure for 1995, 186.9 million euros.

- In Ireland, the amount of regional aids granted for article 87,3,a) decreased from 158.5

million euros in 1995 to 109.9 million euros.

- In Spain, this type of regional aids increased from 73.9 million euros granted in 1995 to 92.7 million euros granted in 1999.

- In Greece, the amount for this type of aids decreased to almost a half, from 721.8

million euros granted in 1995 to 378.8 million euros granted in 1999.

The following trends have been observed regarding regional aids on the basis of the Treaty’s article 87,3,c):

- This type of aids has gradually increased in Spain, where 210.9 million euros were

granted in 1995 and 289.3 million euros were granted in 1999.

- This type of state aids do no exist in Ireland, Greece and Portugal.

- Thus, it can be established that a coherent action with respect to regional state aids in the so-called “cohesion countries” does not exist, as these increase in some countries (Portugal/Spain) and decrease in others (Ireland/Greece).

As regards regional aids granted to member States that do not belong to the “cohesion

countries” it can be said that the amount of regional state aids has significantly decreased in all member States, except in France and Austria where an increase in these types of regional aids was found in the period 1995-1999. However, the trend in 2001 has been a decrease in regional state aids in all member States that are not “cohesion countries”.

Analysing the global differences in the Community under the lens of cohesion, the amount of

state aids in the four cohesion countries has hardly increased, as it has decreased in Greece and Spain, and increased in a limited way in Portugal and significantly in Ireland.

Other trends can be observed:

a. The more prosperous member States (Denmark/Germany/Italy/Luxemburg) grant a

high percentage of regional state aids.


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FINAL REPORT b. In the “cohesion” States, behaviour is unequal. Whilst in some member States

(Ireland/Greece) the percentage is significant with respect to the total amount, in other member States (Portugal/Spain) this levels of State aids remain low.

c. In the cohesion member States that keep lower levels of regional state aids, these

percentages are lower than those granted to regional state aids by “non-cohesion” member States, except only for the Netherlands.

3.3. Services of General Interest and cohesion

The Green Book highlights, in matters concerning territorial cohesion that SGI are a part of the

values shared by all European societies, constituting an essential element of the European society model. It highlights its importance in improving the quality of life, the fight against social exclusion and isolation. They constitute a “cohesion factor”, especially, regarding the rendering of universal service to all citizens independent of their economic, social or geographic situation.

The way these services are organised differs according to the traditions, history, and

geographical conditions of each member State, and so the Union respects this diversity and the roles corresponding the national, regional and local authorities when guaranteeing the welfare of its citizens.

The interrelation between competition regulations – especially in matters of State aids – and

SGI must be balanced. Article 86-2 is written in a “negative” fashion: it allows the non-applying of Treaty regulations when their applying makes the fulfilling of missions given to services of general economic interest (SGEI) impossible.

However, article 16 of the Treaty imposes a “positive” obligation, both on the Community as

on member States, each one within its own competences, so that they ensure that these services work on the basis of principles and conditions that permit the fulfilling of the missions they were given.

On the other hand, services of general economic interest, apart from constituting a

“fundamental right” per se, are often characterized by serving as basis and/or protection or reinforcing of other fundamental rights. Thus, for example, secrecy of communication and right of privacy are guaranteed by the postal services, or transport services guarantee the movement of people, which forms part of the circulation of people at the same time.

Economic growth tends to benefit more developed territories, better trained people, as well as

areas that have more adequate infrastructures. A policy tending to correct these negative effects is necessary on behalf of the public authorities. In the market economy, concentration of wealth happens in areas that have operational infrastructures as well as high level of qualification.

To recognise SGI on a Community level and to improve their running on the local or regional

plan must constitute fundamental Union objectives. Market mechanisms, with the efficiency and dynamics that usually characterizes them, must be combined with rising and modern SGI, which strongly contribute to social and territorial cohesion of the Union, to have a balanced European construction.

Social and territorial cohesion covers several fields in the life of society that have SGI rendered

to them: access to education, employment, housing, ordering of territory, access to financial services for disadvantaged people, amongst others. These services must be conceived as services identified on an adequate territorial level to ensure a high quality of rendering.


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FINAL REPORT

A true territorial cohesion must allow the recognition of a person’s choice to live where they wish, including isolated or insular regions, benefiting of equivalent services than other people. Thus, SGI contribute to structure the territories as they should not leave any part of them out of the rendering of essential services.

The contribution of SGI to promote social and territorial cohesion can be seen in:

a) Territory is a very important dimension in sustainable development and SGI are structuring elements in matters of town and country planning, above all, for the rendering of regular and continuous services in rural, isolated, peripheral and insular areas.

b) In the framework of sustainable development, every society must have its members’

welfare as its aim, led by solidarity and preserving natural resources for future generations. All political powers must guarantee, effectively, each person’s enjoyment of one’s own fundamental rights. The prohibition of all discrimination must have more importance over other rights, and constitutes the most important right in matters of social cohesion.

c) They ensure solidarity between regions, because by means of subsidies, or any formulae

of “péréquation tariffaire” (single unitary tariff) that take into account the service’s financial equilibrium, they allow the rendering of the service at an affordable cost for those users situated in those regions further away, peripheral or scarcely populated. They are a supplementary factor in social cohesion on a local, national or European level.

Taking into account the contribution of SGI in town and country planning and in the

economic and social fields we can conclude that by being part of solidarity policies, the recipients of these services can all be citizens with a guaranteed access to these services rendered. Universality and equality characterize the services rendered.

4. Joint Valuation of results obtained in the case studies carried out in 28 regions

4.1. Preliminary considerations

This work has been developed with a bottom-up perspective. Results must be considered from this perspective. Therefore, we are not dealing with an evaluation focusing on activities and results but with the analysis of on-the-ground observations. A joint analysis cannot be expected, but a descriptive assessment of results can. Therefore, appreciations must be situated in general, without pretending them to be neither statistical exploits of the data obtained nor a representation of the set of selected regions.

The obtaining of information has constituted a proof of the state of regions in their ability to

produce data that relate the regions’ development with the effect of CPs as a whole and not only on the effect of structural Funds.

Data collection has been carried out on a documentary basis, as well as on in-depth interviews

carried out with subject scripts with common contents, questionnaires adapted to the reality of each member State and each region and discussion groups. A final homogenous presentation format was prepared for all case studies.


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FINAL REPORT

Twenty eight regions from thirteen EU countries, with different characteristics within them, have been analysed in the case studies as a representation of the territorial disparity and plurality in the Europe of 15. Almost half2 are Objective 1, according to the classification of funding areas referred to in the Structural Funds in the 2000-2006 period. Five others3 are located in the Transitional Objective 1 Aid period. The remaining are either Objective 24, or have areas with Objective 2 and areas in Transitional Objective 2 Aid period5.

Population belonging to these 28 regions is 60,264,000 (sixty million two hundred and sixty

four thousand) people, 15.91% of the total EU-15 population. Andalucía, Cataluña, Campania and West Midlands, in this order, are the regions with a higher population, over five million people. The population density in these regions is extremely variable, oscillating between 3.3 pp/Km2 in Övre Norrland in Sweden, or 9.7 pp/Km2 in Itä-Suomi in Finland, or 9.2 pp/Km2 in Highlands and Islands in United Kingdom, where one of the examples of greater density can also be found, 412.4 pp/Km2 in West Midlands.

With respect to GDP per head (PPS), there are regions such as Southern and Eastern in Ireland

and Toscana, in Italy, and Oberbayern in Germany that present higher levels than the European average from 1998 to 2000. Under the Community average are West

2 Magdeburg (DE); Kentriki Makedonia and Kriti (GR); Principado de Asturias and Andalucía (ES); Border,

Midlands and Western (IE); Campania and Sardegna (IT); Algarbe and Açores (PT); Itä-Suomi (FI) and Övre Norrland (SE). Norra Mellansverige (SE) part Objective 1 and part Objective 2.

3 Hainaut (BE); Sourthern and Eastern (IE); Flevoland (NL); Highlands & Islands and Northern Ireland (UK). 4 Cataluña (ES) and Limousin (FR) 5 Oberbayern and Saarland (DE); Nord-Pas-de-Calais and Bretagne (FR); Toscana (IT); Steiermark (AT);

Etelä-Suomi (FI) and West Midlands (UK).


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FINAL REPORT


21

Economy Labour market Demography

GDP/head (PPS) Unemployment rate

(%) Employment rate (ages 15-64 as % of pop.

Aged 15-64), 2001

Region

1995

, EU

15 =

10

0

2000

, EU

15 =

1

00

Ave

rage

19

98- 1

999-

2000

, EU

15=

100

Tota

l, 19

91

Tota

l, 20

01

Tota

l, 19

91

1000

inha

bita

nts,

2000

Popu

latri

on d

ensit

y (i

nh./k

m²)

, 200

0

BE Belgique-België 112,5 107,4 108,2 6,1 6,6 59,7 10246 335,7

BE32 Hainaut 75,9 70,8 70,8 10,7 12,8 52,3 1279 337,8 DE Deutschland 110,0 106,4 106,3 5,3 7,8 65,7 82188 230,2

DE21 Oberbayern 148,9 154,4 152,3 2,1 3,1 73,4 4056 231,4 DEC Saarland 104,5 96,8 97,0 5,9 7,9 61,6 1070 416,2 DEE3 Magdeburg 66,3 69,1 69,4 9,9 15,4 61,5 1214 103,5

GR Ellada 65,9 67,7 67,6 6,9 10,2 55,6 10558 80,2 GR12 Kentriki Makedonia 64,4 67,9 68,4 5,5 10,8 54,5 1809 96,2 GR43 Kriti 65,2 66,1 66,6 3,6 5,8 64,6 566 67,9 ES España 78,2 82,2 81,2 16,0 13,1 60,6 39927 79,1 ES12 Principado de Asturias 68,9 70,9 69,9 16,1 14,4 53,0 1053 99,7 ES51 Cataluña 95,5 99,5 98,2 11,8 8,8 71,6 6170 193,2 ES61 Andalucía 58,0 61,2 60,2 24,7 22,3 49,9 7237 82,9 FR France 103,8 101,1 99,8 9,0 8,5 62,7 60589 111,4

FR3 Nord - Pas-de-Calais 82,5 80,6 79,5 11,6 12,6 54,0 4009 323,0 FR52 Bretagne 87,0 86,2 85,1 8,6 6,6 63,7 2929 107,6 FR63 Limousin 84,1 82,0 80,8 7,9 6,4 63,5 711 42,0 IE Ireland 93,2 115,2 111,2 14,6 3,7 65,1 3799 54,1

IE01 Border, Midland andWestern 70,5 83,8 81,3 13,6 4,6 62,1 1002 30,1

IE02 Southern and Eastern 101,5 126,4 121,9 15,0 3,4 66,1 2797 75,6

IT Italia 103,4 102,0 102,9 8,7 9,5 54,5 57762 191,7

IT51 Toscana 112,6 113,5 113,4 6,4 5,0 60,7 3543 154,1 IT8 Campania 65,3 65,3 66,0 17,8 22,4 40,7 5774 424,7 ITB Sardegna 76,0 75,5 76,6 15,7 19,1 45,2 1646 68,3

NL Nederland 109,2 111,2 113,6 5,7 2,3 74,1 15922 469,9

NL23 Flevoland 83,3 79,9 82,1 5,8 1,9 75,6 323 226,9

AT Österreich 110,3 114,3 111,7 3,8 3,4 67,8 8110 96,7

AT22 Steiermark 92,0 95,9 93,7 4,2 3,5 65,9 1202 73,4

PT Portugal 69,7 68,0 70,7 3,6 4,0 68,8 10231 111,3

PT15 Algarve 71,7 66,0 69,8 3,9 3,6 67,5 381 76,4 PT2 Açores 51,5 51,7 52,6 3,7 2,2 60,2 239 102,8

FI Suomi/Finland 96,9 104,0 102,0 7,0 9,1 69,1 5176 17,0

FI13 Itä-Suomi 75,2 74,5 74,6 9,7 13,5 61,6 684 9,7 FI17 Etelä-Suomi 90,6 96,0 94,4 7,6 9,8 69,1 1818 34,5

SE Sverige 106,1 106,6 105,5 2,7 5,1 74,4 8871 21,6

SE06 Norra Mellansverige 102,8 91,0 92,5 3,4 7,3 71,4 831 13,0 SE08 Övre Norrland 105,6 92,0 93,8 4,3 7,0 71,0 511 3,3

UK United Kingdom 96,4 100,3 101,4 8,6 4,8 71,6 59756 245,1

UKG West Midlands 89,6 92,0 92,9 8,8 5,7 70,9 5363 412,4

UKM4 Highlands & Islands 77,3 75,4 75,8 : 3,7 69,8 368 9,2

UKN Northern Ireland 78,6 77,8 78,7 16,0 7,4 64,4 1699 120,0

EU15 EU15 100,0 100,0 100,0 7,9 7,6 64,3 378914 118,7 Source: Eurostat (REGIO, LFS), national statistical institutes + calculations DGREGIO from the Second progress report on

economic and social cohesion. Selection of the main regional indicators.

FINAL REPORT

Midlands (UK), Sardegna in Italy, Steiermark in Austria, Etelä-Suomi in Finland, Açores in Portugal, as well as the two regions in Greece. On the other hand, in the same time period, there are regions with a worse situation relative to the Community average, such as Hainaut in Belgium – classified as Transitional Objective 1 Aid -, Saarland in Germany, the three regions in France (Nord-Pas-de-Calais, Bretagne and Limousin), Highlands and Islands in the UK and the two regions in Sweden.

4.2. Community policies and cohesion

No conclusive or definite conclusions can be established. Every region is different and

represents in itself a set of factors, with formal or informal interconnections, of institutional, economic and social capital on which CPs are implemented with a greater or lesser impact. The importance of the starting point, the diagnosis of the region in terms of strengths and weaknesses, has to be highlighted, even for Objective 1 regions. They do not all possess the common characteristic of being less developed regions with an agricultural profile. Other regions suffer structural difficulties for their development, such as islands or mountainous, isolated or peripheral regions. Some regions come from a traumatic industrial decline and others develop from an extremely primary productive structure. Diversity is one of the key factors to understand the different effects that community action has on each region.

Regional information is still scarce from the point of view of financial impact and information.

Regional teams have taken a long time to obtain the information, especially quantitative data. It isn’t easy to find funding data either and even less so, evolution of this data. It is surprising that there is no concern to “put together” all community income received by a region for the different support concepts. Except for regional policy, it isn’t usual to carry out the exercise of comparing them with national, and in their case regional, contributions.

In general, there is a lack of homogenisation and systematic analysis of data on a regional

level. With some exceptions, a balance-study does not exist on income from the EU in terms of regional budget payments. That is, knowledge of what type and what amount the community payments have been for each policy developed on a regional level (by the central and/or regional administration) in the previous programme period. It seems there is a considering of community contributions as an additional spending, without an origin-application analysis of community spending in relation to regional income from national spending (perhaps the only exception is carried out in the infrastructure investment budget, where budget accounting facilitates this exercise). This analysis, especially in some Objective 1 regions that obtain considerable volumes of community contribution for different concepts would be a helping instrument for development planning. From this perspective, there is still a long way to go as regards the transparency of community funding management.

The view that community cohesion policy is exclusively regional policy and, specifically, the

actions of structural and cohesion Funds, is completely widespread on a regional scale (even on a national scale). A greater work in dissemination of cohesion and rebalancing objectives sought by community policies should be considered. The ERDF constitutes the display of community policy with a profile which is more defined and recognisable. This is due not only to the amount of resources but also to the objectives linked to infrastructure investment. Right now, the ERDF, and to a lesser extent the ESF, represents the greatest expression of community cohesion policy identity. It is recognised so, independently from the fact that CAP can have potentially greater effects in the short run.


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Community action and decentralization

CP impact varies ostensibly depending on administrational structure and the political territorial

system of sharing power. In those regions where a decentralized power exists, with the ability of some policy management, including the availability of a budget, CP effectiveness apparently tends to be greater. The administrational and management structures show an ability to absorb the effects of CPs, both for financial management and community spending, and for those other policies that do not have a spending attached to them. Although the possibility exists that the community dissolves in the activities of regional power, it doesn’t seem that this possibility has a serious effect on the greater or lesser clarity of community actions.

Everything seems to indicate that the existence of the institutional tradition of collaboration and

of stable partnerships of programming and cooperation favour the dissemination of community policies, especially those managed from the national, and even community, level (as is the case of RDT). In every case, and especially for structural policies, the creation of instruments accompanying the structural actions (Contrat de plan Etat-Région in France, Landesinitiativen in Germany, Regional Development Agencies in the United Kingdom) is described as useful to management, as well as involving transparency, dissemination and promoting participation.

Interior Market Policy

The most communitarian of all policies, as is the interior market policy, possibly represents a

special characteristic: the inclusion in fact of a community policy in the regional heritage (aquis). The construction of an interior market is not considered, mainly, from the regional perspective, not even as the result of a policy but as a situation encountered as a logical, normal consequence of the space for European integration. The effects of the interior market are not identified because they are assumed naturally. In this sense, its effects are considered to be very positive. This is recognition is more implicit than explicit, as the construction of an interior market has, in a certain way, already been internalised as a common Community property. The policy is not identified but its effects are. In some case studies of Objective 1 regions, the positive perception regarding the impact of the interior market in terms of convergence and cohesion is more moderate. The conditioning on regional competitiveness factors implied by the shortage in communication infrastructures or the peripheral characteristics of a territory have an influence on this valuation. In general, the opening to new opportunities of economic activity is considered to have a greater impact, even, than that of infrastructure investment, especially in Objective 2 regions.

The lack of basic infrastructures or the marked peripheral territorial character in Objective 1

regions, still recognising their importance, restrain the positive perception as regards the impact of the interior market since trade and product distribution costs remain unaltered and, therefore, their competitiveness factors are not seriously favoured. However, the entering of community investment in less developed regional markets is described.

Finally, introducing the interior market in regions that have suffered industrial decline (West

Midlands, Asturias, Magdebourg, Saarland) has contributed to the process of structural adjustment, generally speeding it up – since these are phenomena usually started beforehand – and, together with the collaboration of structural policy, contributing to limit social damages and to accompany regeneration. In this sense, it can be stated that the interior market policy, as a response from the EU to the globalization process and combined with the support of other community policies, especially the structural funds, has contributed in a latent and hidden way to regional growth and cohesion.


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Regional Policy

Regional policy conforms the nucleus of community action in the regions, as has been shown before. It is thus perceived by the overwhelming majority. With hardly any exceptions, the identification between cohesion policy and the action of Structural funds is almost complete.

The positive results of regional policy with respect to cohesion are also mainly recognised and

recognisable. This is a common, almost indisputable opinion, and is also found in different operative programme evaluations in the previous programming period. From the regional perspective, calculations – based on econometric projections – on the contribution of financial transfers to growth in terms of regional GDP can be more disputable. According to regional experts and heads, they are guideline calculations that do not consider the multiplicity of factors that influence regional development or other indirect effects. In any case, the assessment of the contribution to cohesion and the reduction in regional disparities is extremely positive. The reflection upon “it would not have been the same if it hadn’t been for…structural fund action” is always there.

The positive effects of Community actions are described even in Objective 2 regions where

contribution of Structural Funds is more modest with respect to regional GDP and, therefore, its effects in relation to cohesion are more limited and even, as described in the case studies, almost imperceptible or neutral. The latter assesses that they have not contributed to increase differences or to deepen the sub-regional imbalances in those regions with negative or excessive growth in recent years.

Only in some cases is a complete or integral contribution of regional policy to cohesion

discussed. Without entering the casuistry of the priority axes of intervention, it seems that it is infrastructure investment – and mainly in road transport that improves interior access -, including environment, and actions destined to improve human resource qualifications that receive a better assessment from the point of view of contribution to cohesion.

Regional policy has had other indirect effects beyond financial contribution, which has been

very important in some Objective 1 regions. The incorporation of the strategic focus, of community procedures, of follow-up and evaluation systems have been described in a number of case studies as enriching to the regional areas of structural policy planning and management. Considering regional policy as a long-term action is placed together with this regional logic, in contrast to other community policies with a greater sector or immediately relevant character such as RDT or CAP. The importance given to the multiplying effects of some community initiatives (specifically LEADER) and to the so-called innovative actions, whose profitability in terms of contribution to cohesion is significantly higher that the community spending attached to them, can also be highlighted.

It is also significant that, in general, addressees do not distinguish between the different

natures of Community financing. Considering their different origin and bases, there is no difference made between financing from Structural Funds (a policy that establishes a “priority”, and therefore optional, spending) and aids from CAP, that is a policy that imposes compulsory financing, a right of farmers to receive payments according to their production.


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CAP The contribution of CAP to cohesion is still a difficult and ambiguous assessment, from the

regional perspective. It is without a doubt one of the CPs that has greater direct effects, given the characteristics of its application until the present reform. From the case studies, the influence of CAP on cohesion is significant in maintaining agricultural income, and therefore, cohesion. Its positive effects in helping to modernise productive structures and farms has also been generally described. Therefore, the role of CAP to favour a non-traumatic restructuring of land and cattle, by maintaining incomes related to production and helping to keep population in the rural environment, can be considered to be fundamental.

In Objective 1 regions, financial contributions of CAP are even more significant than those

from Structural Funds. A decrease both in the level of farming employment and of the relevance of agriculture in GDP has been found, in general, in the studied regions, in coherence with the trend in the EU as a whole. In some Objective 1 regions CAP is pointed out to be, in practice, a way of survival for a certain type of small farm exploitation, including the important role of keeping the rural population in their natural environment. However, a scarce contribution of CAP to cohesion has been referred to in some case studies, considering the dependence on assistance generated by the direct payment mechanism amongst other effects (Azores, Ireland). Likewise, problems caused on the environment have been mentioned repeatedly (Algarve, Azores, Oberbayern).

On the other hand, the concern for the CAP’s excessively sectorial and short term points of

view is also mentioned. From this perspective, the assisting effect of direct payments, which in the long run will cause stagnation that will not favour the potential for endogenous development in the sector, is questioned. Uncertainty caused by its implementation with respect to sub-regional results in terms of cohesion and equity are also quoted.

As regards to reduction in inequalities, comments are made in a number of case studies that

locate CAP contributions especially in farm exploitations or in the more developed and profitable areas within a region. This effect tends to increase intra-regional differences and between regions (West Midlands, Ireland, Nord-Pas-de-Calais). CAP contribution to cohesion, as a short or middle term sectorial policy, tends to act primarily by keeping up incomes. As it has been plainly said, the only evaluation carried out on CAP is payment to farmers.

However, it must be highlighted that the sectoral vocation of CAP is far from the regional

vision. In this sense, agricultural and rural characteristics of each region – the starting point – determine the role of CAP from the perspective of cohesion.

In the rural areas of some case studies (Andalusia, Kentriki Makedonia) the multiplying effect

of favouring access of urban markets to farming products has been highlighted especially. This result is obtained by the conjunction of CAP and Regional Development Fund effects, that is, the combination between direct aids, the improvement of infrastructures (roads, electricity lines) and the modernization of farming structures. A multiplying effect is obtained in these cases.

Common Fisheries Policy receives a contradictory valuation in the affected regions. It is

considered that the objectives of sector adjustments that were sought have been met (fleet modernisation, catch reduction, maintenance of resources) but whether these objectives have contributed to cohesion is put into question. In most case studies (Andalusia, Algarve, Crete) the poor working of accompanying Community aids with a social and economic character to fishermen has been criticised (aids to boat crews, early retirement). On the other hand, the component in


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common policy represented by agreements with third-party countries has had a very negative impact in regions such as Algarve or Andalusia since no agreement was reached with Morocco.

Environmental Policy

From the regional perspective, the regulation dimension of EP is left in the background. In

general, community EP are associated to infrastructure, equipment investments and financial endowment of the ERDF and, in their case, the Cohesion Fund. Again with this community policy, the first perception is linked to community spending, leaving the significant normative impact that this policy has in the background.

An increasing citizen environmental conscience, which could be claimed to community action,

is referred to in the case studies. Spending activities that have recovered deteriorated environmental areas can be claimed on this social tendency, some of these becoming symbolic and whose impact goes beyond the environment. This tendency varies according to each region and depending on the degree of environmental wealth. (Itä-Suomi, Asturias, Limousin).

The impact of EPs on employment creation in the sector is talked of in some regions. This

tendency is linked to more developed regions in the case studies.

Although complaints are made about the limiting community regulations for some entrepreneurial and economic activities, these are assumed with the undeniable costs they cause. From the point of view of regional agents, both government and non-government, the long-winded network of environmental regulations and their constant profusion are mentioned with resignation, although they are mainly considered as an inevitable imposition. The apprehension and the feeling of inequity of some environmental regulations is also talked of in their implementation to SMEs when they are thought out for large industrial businesses. However, the importance in everyone obeying regulations and that regional dumping does not happen is stressed: that is, that a bordering or cross-border region develops more than another because the environmental regulations that control, for example, the construction of transport infrastructures, are not obeyed. This concern is also shown in some regions because of the extension effect, fearing that the transition periods for the implementation of community environmental regulations, and therefore the lower costs, could be used by businesses to move their production to new member States. This is linked, in general, to the worry referred to in some case studies regarding the fact that there are no regions using the lower environmental costs to attract business investments, that is, there is a exigency to respect the same rules for all as regards the complying of community environmental policy regulations.

In regions with great environmental wealth (Sweden, Finland, Austria) EP impact has not been

very intense given the high level from which it started when entering the EU. However, EP has helped to backbone the national actions and their different programmes.

The arising of environmental problems originating in economic reactivation and the

development of some regions, especially derived from traffic, are also referred to.

RDT

The characteristics of European RDT policy implementation has not facilitated the assessment of its effects or its contribution to cohesion. In general, it seems that direct Framework programme management from the European Commission has implied problems in obtaining of information. Its thematic character and its focus in R&D in former framework programmes has not facilitated its transparency either. Its effects from the perspective of cohesion in the selected regions has been, apparently, very limited.


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Objective 1 regions have had, on the other hand, a poor participation given their potential in RDT. Objective 2 regions (Oberbayern, Catalonia), by means of their research centres, research personnel and businesses, have participated more actively in proportion to their size (population). The change in focus of the VI Framework Programme in order to favour a greater business participation and applied innovation has been received with interest, although the need to work in networks could also make access to researchers and centres in less developed, peripheral regions, or those with a weaker starting point, more difficult.

However, as in the case of environmental policy, significant synergies have been identified

between R+D and Cohesion policies. Most case studies, especially in Objective 1 regions, have highlighted and valued investments in infrastructures and equipment in R+D financed by Structural Funds. In some cases, the proportion between RDEF funding and that from the Framework Programme has been mentioned as being 90%-10% in investments carried out, respectively. Given these conditions, RDT contribution to cohesion in the form of Framework Programme has been commonly valued as being very modest, taking into account that Structural fund contribution to this policy, until now, has also been valued as poor.

State Aids

State aids in a regional level are still a difficult source to investigate. It is difficult to assess

their contribution to cohesion, although data of aids and their types are kept on a central level. From the regional perspective, they are included in the heritage of stimuli to regional development. In some specific regions, the concern for possible dumping that could happen by implementing State aids in other bordering regions has been referred to, highlighting the idea of the extent and potential of these aids.

The worry for the potential barrier effect that State aids could cause if they were intensively

implemented in outermost regions has been occasionally pointed out (Allemagne, Nord-Pas-de-Calais, Steiermark). Likewise, a lack of connection between State aids and a long-term regional development strategy or the lack of coordination with other Community policies such as CAP has also been referred to (Algarve, Nord-Pas- de-Calais, Sardegna). Sporadically, and within the context of globalization, interior market and competitive power, a concern has been mentioned on the fact that State aids could contribute to increase intra-regional disparities due precisely to their accelerating effect on industrial mutation and the concentration of lost employment in certain areas of the region (West Midlands, Oberbayern).

A Register of State Aids that allows transparency has not been developed on a central scale,

although some regions have formally created it for aids in their territory. The share of funding that Structural Funds (ERDF) designate as national state aid is not transparent either.

The scale of intervention (NUTS III)

Most regions suffer territorial imbalances. In general, CPs and especially regional policies

contribute to growth and economic and social cohesion as a whole. It is difficult to assess if they also contribute towards internal regional rebalancing and an integrated and harmonious development. Structural and historical starting deficits condition the development of community action. On the other hand, regional rebalancing investments are greatly affected by national political decisions. In this sense, community action tends to dissolve with development priorities established by member States.

Case studies refer to “the importance of the small” in relation to the scale of interventions. The

significant effect of some reduced community programmes and initiatives thought out for specific


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objectives is noticed. The intensity of their impact is comparatively greater than the resources destined towards their activities. It is highlighted that, beside their specific results, some programmes and initiatives such as LEADER I and II or INTERREG have promoted a community culture of cooperation amongst municipalities and territories, as well as broadening the view of local actors. Specifically, the different LEADER programmes have been greatly valued, with (unexpected) successful results compared to their objectives. The Territorial Employment Pacts or the preparation of Local Agendas 21 also receive a good assessment in terms of promoting cohesion around common and shared objectives in NUTS III and in mobilizing cooperation energies, not only in the same region but with regions in other countries also.

The impact of other small programmes with a non-regional focus, that however receive a good

assessment, has also been described. For example, SOCRATES, with relative significance in the promoting of youth mobility in Universities, fulfilling an important role in regional development. Other actions such as PEACE I and II have also been positively valued, although they have received criticism due to the alleged politicization of the measures developed, given the peculiar conflict situation in that area.

It could be said that community initiatives fulfil the dissemination of community governance

better, in the sense of promoting European values, whilst structural actions are more adequate for cohesion and growth objectives.

Also, the general impression is that the impact of community actions is greater as one reaches

the “centre” and decreases in the peripheral areas.

4.3. Coordination in Community policies implementation

We understand, from the perspective of these case studies, that the different CPs include the objective of social and economic cohesion in their general objectives as a whole. The question is, therefore, whether this objective has been attained in the implementation of these policies.

Once again, the tendency described in the regions refers mainly to the degree of coordination in

structural policy management, without considering the possible level of coordination amongst the set of CPs and not only regional policy.

Coordination depends, firstly, on the existence of a strong and solid regional management. The

possibility of real and effective coordination between different community policies increases where this structure exists, normally protected by a political representation (regional government and the ability to manage their own budget). Secondly, it depends on the intensity of policy implementation. In Objective 2 regions, where CP and especially regional policy has less quantitative importance, the possibility of coordination is further weakened. In Objective 1 regions, with a greater intensity of community support, at least some communication and information exchange on the actions of the different policies should occur, but frequently seems not to.

In general, a formal coordination between the set of CPs implemented in a region does not

seem to exist or be appreciated, except in the case of extremely decentralized regions where coordination takes place in the government and even parliament level. This situation seems to be brought about by the different focus of policies (non-territorial, except in the case of structural action) rather than by a lack of coordination in origin (ab initio) between the definition in cohesion objectives and programme implementation. In this sense, the complexities of PC procedures such as State competence-aids in the regions makes coordination more difficult as it is fragmented amongst the managers of aids to receiving businesses, those in charge of relations with the European Commission and regional economy departments that plan the aids. The transversality of Environmental CP does not help, sometimes, to an adequate coordination.


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There are different opinions with regards to coordination in structural Fund implementation. An advance has apparently been made in issues of coordination and in some regions a satisfactory level is described by means of established procedures and committees. However, in other regions the lack of coordination in the implementation of structural Funds themselves is criticized together with the usual criticism due to the complexity of the management systems and the excessive bureaucracy. In any case, it seems that there is still a long way to go in this issue.

Finally, coordination and the need to control the implementation of public (national and

community) spending are still associated, beyond the fact that a level of coordination amongst those community policies that do no necessarily have spending attached to them should exist.

4.4. Governance

In general, it is agreed that CPs and, especially, regional policy have contributed to generate

institutional building in the last decade. The strengthening of planning and management structures for the actions aimed at cohesion on a regional level has run parallel to multi-annual investments of community action.

However, it seems that community action has not promoted decentralization processes of

national action towards the regions, at least institutionally. We must highlight, as an exception, the creation of accompanying instruments of structural policy implementation that promote networks and cooperation.

If governance is also a simplifying of procedures, the new programming period has not

contributed towards it. The dissatisfaction of regional heads with management systems, which have, in their view, become more complicated in the last few years is mainly shown. This criticism affects other community policies such as RDT through the Framework Programmes.

Cooperation with social and economic agents is described as a significant advance. However, it

seems to be more of a testimonial rather that effective measure. Participation is carried out in an extremely institutional level, more as a transfer of information rather than as consultation and cooperation. Only in those regions where a tradition of cooperation and partnering with the private sector existed previously is this relationship positive and creates collaboration synergies.


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GENERAL TABLE OF CONTENTS Volume I

A.- INTRODUCTION 1. BACKGROUND 2. AIMS OF THE STUDY AND METHOD OF APPROACH 3. FIRST OUTLINE OF METHODOLOGY

3.1. Gathering quantitative and qualitative information 3.2. Co-ordination issues 3.3. Governance

B.- ACADEMIC LITERATURE REVIEW. THEORIES ON THE EVOLUTION OF REGIONAL IMBALANCES. EMPIRICAL EVIDENCE.

SUMMARY 1. INTRODUCTION 2. CONVERGENCE AND DIVERGENCE THEORIES

2.1. Old and new neoclassicists 2.2. Cumulative divergences 2.3. Phases and the compensating power 2.4.From centre-periphery to dependence.

3. STAGES IN THE EUROPEAN UNION INTEGRATION AND COHESION REASONING 4. EMPIRICAL LITERATURE AND EVIDENCE

4.1. Empirical literature 4.2. The European Union: diverging convergence 4.3. Impact of Structural Funds


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Volume II C. CONTRIBUTION OF THE AGRICULTURAL POLICY TO THE REGIONAL COHESION

EXECUTIVE SUMMARY 1. MOTIVATIONS AND APPROACH

1.1. Motivations of the study 1.2. Methodological approach

2. DEVELOPMENTS OF THE CAP

2.1. Past developments 2.2. Present main features of the cap 2.3. Price support policy 2.4. Rural development policy 2.5. Reform proposals

3. IMPACT ON EU SOCIAL COHESION

3.1. Impact of the price support policy 3.2. Impact of the rural development policy 3.3. Impact of a structural policy in agriculture

4. IMPACT ON TERRITORIAL COHESION 4.1. Changes in income disparities 4.2. Impact of the price support policy 4.3. Impact of rural development policies 4.4. Impact of a structural policy in agriculture

5. IMPACT ON GLOBAL COHESION

5.1. Export subsidies 5.2. Trade-distorting domestic policies

6. PERSPECTIVES AND PROPOSALS

6.1. Price policy 6.2. Rural development 6.3. Structural policy in agriculture

7. CONCLUDING REMARKS Appendices (tables & figures)


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Volume III D. CONTRIBUTION OF THE OF THE STATE AID AND SERVICES OF GENERAL INTEREST ON THE REGIONAL COHESION

I. STATE AID 1. ANALYSIS OF STATE AIDS SINCE THE SECOND COHESION REPORT

1.1. Introduction 1.2. Final Regulation Aspects in State Aids Issues 1.3. Characterization Of Public Aids 1.4. Quantitative Analysis 1.5. Results: Observed Trends

II. SERVICES OF GENERAL INTEREST 1.- INTRODUCTION 2.- STATE AIDS AND SGI 3.- THE GREEN BOOK ON SGI

4.- DIRECTING PRINCIPLES AND SGI CHARACTERIZATION 5.- SOCIAL AND TERRITORIAL COHESION AND THE SGI 6.- CASE ANALYSES ON COJEC RESOLUTIONS

6.1. Postal Services 6.2. Cabotage Sea Transport 6.3. Air Transport 6.4. Telecommunications

7.- CONCLUSIONS AND OBSERVED TRENDS


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Volume IV E.- CONTRIBUTION OF THE ENVIRONMENTAL POLICY ON THE REGIONAL COHESION EXECUTIVE SUMMARY 1. INTRODUCTION 2. BACKGROUND: THE SECOND REPORT ON ECONOMIC AND SOCIAL COHESION

2.1. EU waste policy 2.2. EU water policy 2.3. Overall policy effects

3. EU ENVIRONMENTAL POLICY6

3.1. Fifth environment action programme (1992-2000): “towards sustainability” 3.2. Strategy for sustainable development. Sixth environment action programme: “Environment 2010: our future, our choice” 3.3. Environmental taxes and charges 3.4. Waste management 3.5. Waste management 3.6. Water 3.7. Air pollution 3.8. Kyoto protocol on climate change 3.9. Integration of environmental policy into all eu policies: the case of the common agricultural policy (cap)

4. COST AND EMPLOYMENT EFFECTS OF EU ENVIRONMENTAL POLICY

4.1. Waste policy 4.2. Water policy 4.3. Air pollution policy 4.4. Analysis of aggregate results


5.1. Structural funds 5.2. Cohesion fund 5.3. Sector-specific financial instruments 5.4. European Investment Bank: EIB project funding

6 This section is based on European Commission (2003). 7 This section updates European Commission (1996a).


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FINAL REPORT 6. FINANCIAL CONTRIBUTION OF THE EU TO THE IMPLEMENTATION OF ENVIRONMENTAL POLICY

6.1. Structural funds 6.2. Conclusions 6.3. Cohesion fund 6.4. Structural and cohesion funds: magnitude and effect on cohesion 6.5. Conclusions

7. THE EFFECTS OF CLIMATE CHANGE POLICY ON COHESION

7.1. Current emissions, Kyoto protocol targets and required reduction effort 7.2. Measures of difficulty to reduce emissions 7.3. The relationship between the difficulty to reduce emissions and the required reduction effort: effects on economic and social cohesion 7.4. Conclusions

8. THE EFFECTS OF ENVIRONMENTAL TAXATION ON COHESION

8.1. Introduction 8.2. The effect of environmental taxation on income distribution 8.3. The effect of ecological tax reforms on employment 8.4. Conclusions


9.1. Costs and employment effects of EU environmental policy 9.2. Financial contribution of the EU to the implementation of environmental policy 9.3. The effects of climate change policy on cohesion 9.4. The effects of environmental taxation on cohesion

Bibliography


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FINAL REPORT ANNEX I: Case Studies on 28 regions

Volume I: BELGIUM

Hainaut GERMANY

Oberbayern Saarland Magdeburg

GREECE Kentriki Makedonia Kriti

SPAIN Principado de Asturias Cataluña Andalucía

Volume II:

FRANCE

Nord – Pas-de-Calais Bretagne Limousin

IRELAND Border, Midland and Western Southern and Eastern

ITALY Toscana Sardegna Campania

Volume III:

THE NETHERLANDS

Flevoland AUSTRIA

Steiermark PORTUGAL

Algarve Açores

FINLAND Itä-suomi Etelä-suomi


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FINAL REPORT SWEDEN

Norra mellansverige Övre norrland

UNITED KINGDOM West Midlands Highlands & Islands Northern Ireland


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A.- INTRODUCTION

1. BACKGROUND The European Commission, D.G. Regional Policy intends to produce a study entitled “An

analysis of the impact of community policies on regional cohesion”. The Commission is required to submit a report every three years on the extent of progress towards the objective of economic and social cohesion, and the manner in which various policies have contributed to this.

The objective of strengthening economic and social cohesion is mentioned explicitly in

Article 2 of the Amsterdam Treaty and as the first objective of the Union. More specifically, Article 158 states that cohesion is a precondition for harmonious development in the EU: 'in order to promote its overall harmonious development, the Community shall develop and pursue its actions leading to the strengthening of its economic and social cohesion.' This article, moreover, goes on to stress that fostering cohesion requires that 'the Community shall aim at reducing disparities between the levels of development of the various regions and the backwardness of the least favoured regions or islands, including rural areas.'

Still in the Treaty, the first paragraph of article 159 establishes that “Member States shall

conduct their economic policies and shall coordinate them in order to attain also the objectives mentioned in article 158. By stating and developing Community policies and activities and developing the interior market, objectives in article 158 shall be considered, participating in their achievement.” Therefore this explicit forecast forces all community policies, without exception, (those in articles 3 and 4 of the Treaty) to contribute in reducing inequalities and reinforcing cohesion, so that they shall have to adapt their statements, objectives and actions to the objectives of economic and social cohesion.

The Treaty, by making explicit the aim of reducing disparities in economic development,

implicitly requires that EU policies, and cohesion measures in particular, should influence factor endowment and resource allocation and, in turn, promote economic growth. More specifically, cohesion policies are aimed at increasing investment to achieve higher growth and are not specifically concerned either with expanding consumption directly or with redistribution of income. This differs fundamentally from national cohesion policies which are in part aimed at transferring income to the poorest areas.

2. AIMS OF THE STUDY AND METHOD OF APPROACH The main objective of this study is to raise understanding of policies and their interactions,

in order to improve the effectiveness of community level interventions, building upon the approach and results from the previous reports (First and Second Reports on Economic and Social Cohesion), and extend these to take into account recent policy developments.

Basically the study has two main components:

an in-depth research of the results of three Community policies: Common

Agricultural Policy, State Aids and Environment Policy a case study on 28 regions, each of which must be closely analysed in relation to

the impact of the more relevant Community policies operating on the region financed by direct programmes or through the Structural Policy actions.


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FINAL REPORT The specific objectives of the study are to analyse the contribution of CPs towards cohesion

in terms of their impact on:

Convergence generated in the region; Social cohesion and the improvement of quality of life, as other effects produced

by the application of CPs which are not directly related to economic convergence; Co-ordination in the implementation of Community policies and, particularly,

between these and structural policy. The dimension of governance.

In practice, the two components of the study constitute separate studies and imply different

methodologies of analysis. With regards to the three policies selected, it must be highlighted that each has its own methodology, detailed in each of the corresponding chapters that deal with them. . During the course of this work, CAP has undergone a serious reform, which has added an added element of guidelines for the future to our research.


point of view. In first place, the broad view needed to analyse the set of Community policies in a region. This task requires a great effort, especially in those regions, usually Objective 1, that have a certain density of Community policy implementation, that is, where a number of them are active and mainly with a high intensity in regional policy. In this sense, carrying out ground work on a regional level at a time when the EU’s future financial prospects are being discussed, including Cohesion policy, the Convention’s constituting process or the CAP reform, is not exactly the best working scenario. The timing for the carrying out of regional case studies is stormy in terms of uncertainty and perhaps, due to this, even exciting and rich in radicalised opinions.

On the other hand, ground work has had to coincide with several assessments of regional

policy, something which always makes access to official information sources more difficult, something which already has a high demand for opinion and data. In this sense, this work is not intended to be an assessment, but the carrying out of an analysis on how the contribution of Community policies and the Community in general (the acquis of governance) has influenced in a region’s development in the last few years.

The overall methodological approach was largely detailed by the tender documentation for

the project. In particular, it contains the elements that the Commission requires to be the purpose of a specific study, in other words:

A collection of expenditure data of Community Policies, at regional level, in order

to obtain a general framework, including all financial elements and quantitative indicators of the activities of the policies and regions.

A quantitative analysis of the impact on social and economic cohesion. Particularly, in the distribution of public expenditures at regional level (state, regional and local), and the effects on regional inequalities.

The effect produced by non-financial elements of the policies. An assessment of the objectives of Community Policies in comparison with

objectives of cohesion policy and their interaction with structural regional interventions.

An analysis of implementation procedures of Community Policies (governance). The study is based on the analysis of regional cases. The regions have been selected by the

Commission. Most of them are Objective 1, although some have been chosen from Objective 2 and


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FINAL REPORT

some are even very developed, so as to be able to examine contrasts. The 28 regions do not make up a representative sample from a statistical point of view but they do represent the variety and regional diversity of the EU. The analysis of regional cases offers the possibility of comparing in practice, on the ground, the impact of different Community policies.


point of view. In first place, the broad view needed to analyse the set of Community policies in a region. This task requires a great effort, especially in those regions, usually Objective 1, that have a certain density of Community policy implementation, that is, where a number of them are active and mainly with a high intensity in regional policy. In this sense, carrying out ground work on a regional level at a time when the EU’s future financial prospects are being discussed, including Cohesion policy, the Convention’s constituting process or the CAP reform, is not exactly the best working scenario. The timing for the carrying out of regional case studies is stormy in terms of uncertainty and perhaps, due to this, even exciting and rich in radicalised opinions.

On the other hand, ground work has had to coincide with several assessments of regional

policy, something which always makes access to official information sources more difficult, something which already has a high demand for opinion and data. In this sense, this work is not intended to be an assessment, but the carrying out of an analysis on how the contribution of Community policies and the Community in general (the acquis of governance) has influenced in a region’s development in the last few years.


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FINAL REPORT

LIST OF SELECTED REGIONS

MEMBER STATE

Selected Region

BELGIUM Steiermark

GERMANY Magdeburg Oberbayern Saarland

FINLAND Etelä-Suomi Itä-Suomi

FRANCE Bretagne Limousin Nord-Pas-de-Calais

GREECE Crete Kriti Macedonia

IRELAND Border, Midlands and Western Southern and Eastern

ITALY Campania Sardinia Toscana

PORTUGAL Algarve Açores

SPAIN Andalucia Cataluña Principado de Asturias

SWEDEN Norra Mellansverige Övre Norrland

THE NETHERLANDS Flevoland

UNITED KINGDOM Highlands & Islands Northern Ireland West Midlands


40

FINAL REPORT The project team has been constituted into two groups, differentiated in the different level

of tasks to be carried out:

A Steering committee integrated on the one hand, by experts in regional development, and, on the other, by specialists in each of the three CPs (CAP, Environment and State aids) which are the main objects of this general study.

Regional consulting teams that carry out the case studies. These teams have been built preferentially taking as reference the member States to which these selected regions belong.

3. FIRST OUTLINE OF METHODOLOGY The three policies selected (CAP, Environment and State aids) obey different objectives

and action logics as stated in the technical specifications. Each one exemplifies a different type of impact from the perspective of cohesion; in any case, together with structural policies – and even transport policies – they probably represent the most powerful impacts that CPs could have. This diversity in objectives and actions causes the methodology used to require different analysis methods in order to tackle the study of their contribution to cohesion.

The other component in the project requires a different methodology. From the perspective

of regional case studies, which constitutes the basis of this study, we hope to examine the effects that CPs as a whole could have had on regional development. That is, to what degree could CPs have contributed to this development in terms of supporting convergence and to the region’s progress. This analysis has to be extended also to other aspects not directly budget related or related to income transfers. Aspects related to qualitative progress, or in which way have CPs contributed to reinforce the capacity of regional endogenous development, also has to be studied. Finally, how the influence of CPs in terms of coordination in their application has happened (if it has done so), as well as the influence of governance in the process have to be analysed.

Basically, the work process is shown in diagram 1. Starting from the basic information

known on the evolution of cohesion (in terms of economic and social convergence and other indicators on technological infrastructures), the obtaining of qualitative and quantitative information is dealt with, on the one hand, on regional development characteristics occurred in the last few years, and, on the other, of data and effects of greater impact community policy application.

The results obtained from this data collection phase are grouped into three main categories,

in order to proceed to its analysis:

To what degree and how have the most relevant CPs contributed to economic and social cohesion (development and growth). Convergence is understood here as growth that reduces disparities between regions.

To what degree have CPs contributed to generate autonomous capacities of converge and cohesion, situating the region in a better relative position than before applying the CPs.

How this contribution has happened in terms of CP implementation, from the perspective of application coordination and other effects related to governance.


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FINAL REPORT In the first case, we would be talking of a direct and evident contribution, based on

confirmed facts (amount of community aid spending, infrastructure building, etc.) and probably on empirical studies carried out already. The analysis of CP influence on classic convergence indicators (GDP, employment, etc.) is not carried out here because it corresponds to another type of analysis with greater quantitative and econometric characteristics. Our perspective does not include, either, an examination on regional development in comparison to national growth (to what extent does growth and disparity reduction bear a relation to the member States’ evolution), since it would require statistical regressions, which are not the aim of this study.

The second case deals with checking if CP contribution has worked and improved the basic

factors that influence the capacity for autonomous development. Thus, we delve deeper in the previous issue, since we could deduce whether a certain development model has been followed (based on infrastructures, technology investment, etc.). This analysis is complicated and depends largely on the regions’ starting point, especially in the less developed ones.

Finally, the third case deals with analysing how CP efficiency could have been improved,

examining aspects relative to its coordination in practice, and what effects has the community acquis had on the applying of cohesion policies (whether capacities for regional planning have been reinforced, cooperation between administration and other private agents, whether networks have been created etc.).

Considering that the period examined is not a very long cycle, the analysis of these results

groups will produce conclusions in the form of tendencies respect to CP contribution to the region.


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FINAL REPORT Diagram 1. Methodology of the regional case study Impact of community policies Regional Development

Another information, data and indicators on:

Sectorial characteristics Quality of labour market Human Resources qualification Migration Poverty and social exclusion Technology, R&D, Innovation Infrastructures, Telecommunications Etc….

Quantitative information Community policies expenditure Expenditures at national and regional-local level

Qualitative information Effects on social and economic convergence Non financial effects: quality of life, implications related to regional development Co-ordination and governance issues

RESULTS ON

Regional Development Contribution of Community policies

Co-ordination and governance

ANALYSIS CONCLUSIONS

on the impact of community policies regarding to regional development aimed to cohesion

RECOMMENDATIONS how to improve effectiveness of the community policies addressed to cohesión.


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FINAL REPORT 3.1. Gathering quantitative and qualitative information The study focuses on the impact of CPs on cohesion, that is, information must be obtained

in order to carry out an analysis on all the CPs that are being implemented in one region. A variety of actions, programmes and Community measures may be in effect (particularly financed by the different axes of Structural Funds). In this case, and for this study, it is interesting to analyse those CPs that are most relevant and have the greatest weight (both qualitative and quantitative) in the region, including those that may have not had a significant impact in terms of financial flows.

In many cases Community policies are financed by Structural Funds, for example a large

part of “social” policy. In particular, the European Social Fund finances actions aimed at reinforcing the educational-professional level, the operation of labour markets, company creation, sectorial change, etc... In other cases, Community policy does not entail costs: it is a policy of regulations (as is the case with the Environment), or a free competition policy (which restricts and conditions State aids).

Selecting the information to be obtained, the sources and the key people and institutions

that will provide the information will depend on the characteristics of each region and country (structure according to which political power is shared), management capacity, number and density of relevant Community policies, types of operational programmes applied to structural funds, etc.

From the point of view of completing a rich enough scenario from which to gather opinions, the following areas of interest are suggested.

ORGANISATIONAL CHART ON THE QUALITATIVE INFORMATION COLLECTION

Interest Type of Information wanted Examples of selected opinions

Global evaluation Institutional Authorities and national and regional managers of CPs

Sectorial evaluation

Directly affected at sectorial level by Community Policy

Agricultural organisations (CAP) Research Centres and Universities (R&D and Innovation)

Evaluation of agents Qualified opinion Local authorities, employers,

trade unions, etc…


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FINAL REPORT

3.2. Co-ordination issues The contribution of CPs, as a whole, to cohesion has been present in the EU’s institutional

debate in the last few years. A reasonable preoccupation exists due to the negative consequences that the applying of some CPs could be having. This is reflected in the II intermediate Report on economic and social cohesion8, when mentioning that “the content of these policies should also consider the enormous diversity and the greater territorial imbalances in the extended Union”.

CPs can be contradictory in their application. It is worth pointing out cases in which

different policies contradict each other. Co-ordination is to be examined in order to assess whether it has been a determining factor for the efficiency and impact that CPs can have on cohesion. The final objective of this part of the study is to analyse and obtain conclusions on how to improve co-ordination in order to make CPs a better contribution to cohesion. The aim is to obtain information in order to draw conclusions on the degree of co-ordination between the different Community policies which are most relevant and have the greatest impact on the region, paying special attention to co-ordination with Structural Policy.

This evaluation is difficult to carry out. Sometimes the absence of co-ordination is more

obvious when it is seen in the territory itself, through the evidence of the implementation of policies which contradict, limit or annul each other (due to the absence of an adequate development or planning model). Co-ordination or the lack of it is difficult to quantify, so most of the information to be obtained in this sense will be qualitative and will be provided by the key informant (regional and local authorities, policy managers…). Quantitative data can also be of help, for example, periodicity of formal co-ordination meetings (monitoring committees) or systems and procedures of communication between the different levels of policy design and management.

3.3. Governance The application of governance to economic and social cohesion has been carried out after

an analysis and discussion over its potential effects. Both considerations formulated in the Governance White Book9 as those in previous works carried out have been considered for this, especially those by the so named Group 4c that carried out its tasks in relation to the “articulation of the different territory levels, local and regional, in social cohesion and sustainable development.”

As a consequence of this, the following observation fields to analyse the impact of

governance have been established: 1. Improvement of the orientating principles in CP management and application.

That is, not of management systems and procedures but of the background criteria that could influence in a more effective and efficient management.

2. Some aspects to consider:

The degree of concentration or dispersion existing in CP management. If competences are disperse, what coordination mechanisms or formulae are being used.

Whether Structural Fund management systems have simplified or become more complex in comparison to the previous period

8 COM (2003) 34 final


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The financing route CP resources take, including Structural Funds, from them leaving Brussels until they reach their end recipient. Are the same guidelines used if they deal with a public recipient (differentiated between national, regional and local levels) or a private recipient? How long does the transfer take from leaving Brussels to reaching its end recipient? Would it be possible to shorten these times?

2. Cooperation and partnering elements, that is, the active involvement of other agents,

institutional, public or private, in the CP design, planning and implementation, and, in short, in cohesion policies.

Some aspects to consider:

The way in which cooperation and involvement of national, regional and local authorities, economic and social agents, non governmental organizations and interested parties is articulated

Whether cooperation is real and effective or testimonial only. Whether it adds or decreases efficiency to management Whether involvement spending is financed and who by, the assignment of aids

itself, or participants themselves. 3. Decentralization in cohesion policy implementation, understood as a process that allows

putting expected results and alleged objectives closer. Logically, this process has to be valued in relative terms and depending on each member State’s political-territorial configuration.

Considering that decentralization must add effectiveness and efficiency to management, it

could be valued whether there is a balance between the roles of different government levels, competence and function attribution and responsibilities taken on.

4. Transparency of cohesion policies, understood as a set of aspects related to external

communication and community action visibility itself.


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B.- ACADEMIC LITERATURE REVIEW. THEORIES ON THE EVOLUTION OF REGIONAL IMBALANCES. EMPIRICAL EVIDENCE.

SUMMARY The terms of reference established that the final report started with a valuation of recent

literature related to regional development and convergence. This exercise should serve to situate the current reference parameters in issues of regional cohesion and convergence, to help in interpreting the results and to understand the potential implications of these results better. Finally, it should contribute to situate the conclusions of this study in relation with the existing discourses.

The generalised use, and even the appearance of the term convergence in economic

writings and speeches is a typical phenomenon in the nineties that can be explained by the legal requirement of the European Union Treaty (EUT) that the economy of States aspiring to enter the European Monetary Union (EMU) should meet certain requirements which were called convergence conditions.

Nuances in the term’s use were slowly introduced, until a difference was made between

nominal convergence and real convergence. The first expression was used to refer to the conditions to be met in order to belong to the EMU. What is meant by real convergence, so called because it can be measured by means of relative variables to the real economy, referred to a group of countries or regions, is usually the approximation of the citizens’ living standards, quality of life and welfare in a country or region to those enjoyed by those more advanced in the group. It is understood that this approximation takes place within a general upward tendency, by means of more intense relative improvements of those left behind, not by paralysis or worsening of those in front, since it is convergence in wealth, not in poverty.

In other terms, real convergence is a process tending to reduce inequalities, derived from

either geographical, economic or social circumstances, that separate citizens one from the other, and to promote equal opportunities for all those who form a group, whichever country or region they were born in or live in. This conception of real convergence is intimately related with the notion of equal capacity and equal opportunities for development.

Modern debates on convergence and divergence are linked to, on the one hand, the

configuring of the Community regional policies as an instrument to reinforce the European Union cohesion. On the other hand, from the scientific and even ideological perspective, they have given rise to a renaissance and revision of the neoclassical theory of growth.

During the second half of the eighties a series of researches were published trying to

explain why developed regions could favour from a higher rate in economic growth than underdeveloped regions. They tried to explain the evidence that development differences between countries and regions were not shortening, but becoming more patent. This meant putting in question the theoretical bases of the neoclassical growth model.

In short, one of the neoclassical model’s basic suppositions is that marginal profits of

production factors, and so their returns, are decreasing. From this hypothesis, having identical production functions in different regions, and with perfect mobility of goods and factors, what would happen would be that work force would emigrate from less developed to more developed areas attracted by higher wages, causing a profit contention in the latter.


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FINAL REPORT On the other hand, in less developed regions a margin would remain so that greater profits

would attract capital. Capital and work force accumulation in more developed areas would have a limit as the progressively decreasing investments and wages would hold accumulation back. Thus, in the long term, the more intense growth rate in underdeveloped areas in comparison to developed areas as a consequence of the cross movement of capital work factors, would make the whole system evolve towards convergence.

The neoclassical theory starts from unrealistic hypotheses (perfect mobility of factors,

correct functioning of supply and demand, price flexibility, zero transport costs, etc.). Its inability or deficiency to explain reality led to a revision of the basic supposition of diminishing returns by the new critics to the model. According to some authors, the main reason for the maintaining, and even rise in divergence is that the diminishing returns supposition of the neoclassical scheme is not true. More developed regions have a greater growth capacity due to increasing returns in some circumstances. This is possible with the joint action of various elements, not only because of the effect of agglomeration economy or accumulation of public capital, but due to training and human capital investments also and, perhaps above all, because of technological capital accumulation, which is incorporated into the model as a production factor, next to the traditional capital and work force. In these circumstances, due to the appearance of increasing returns, developed countries have an endogenous growth capacity that causes divergence not to disappear.

In parallel to this and from another perspective, changes took place in the European Union

(EU) in regional policies, as a consequence of one of the defining features of the European Union Act: its project of building a single interior market, with free circulation of trade and of capital and work production factors, and freedom of establishment. Almost all benefits that would come to the EU as a whole from the constituting of a single market, that would promote the growth of the community economy as a whole, would disappear when valuing ex ante the distribution of benefits.

In that moment, debate was directed towards the question of the advantages that the more

developed regions and countries would obtain, against the less developed ones, with the new step towards economic integration offered by the implementation of the single market, due to the tendency that would be generated to concentrate activity, income and wealth in more developed areas, due precisely to the dynamics that would be triggered by the more intense integration and liberalization of the market forces.

Risking a greater divergence in development and welfare levels within the EU, that an

interior market with greater imbalances could imply, a consensus was reached to reform structural funds, notably increasing the amounts for financing, within the possibilities of the community budget, and concentrating its interventions in regions with problems, particularly in the less developed ones, in order to reinforce economic and social cohesion in the EU. This was how a deep reform in community regional policies came about, financed with all structural funds and not only from the Regional Development European Fund (RDEF) and designed as an attempt to counterbalance the destabilizing dynamics that the starting of the single market would generate.

In this sense, the approach to endogenous growth found its place within the framework of

economic and social cohesion policies carried out in the EU to aid regions with problems. This approach, put forward by Myrdal, with a wider perspective, extensible to the whole social system, comes to say that, in absence of intervention in the opposite direction, the dynamics of the market forces promote a growing income and wealth accumulation in more developed areas, increasing divergence between countries and regions. That is, the system does not move on its own accord towards any type of equilibrium between forces, but is constantly moving away from this position.


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A change, normally, does not give rise to compensating changes, and an automatic tendency to the stabilizing of the system does not exist.

However, contrasting with the endogenous growth approach, new theoretical

approximations based on neoclassicism have again been disseminated in the nineties. Studies on the evolution of convergence or divergence have proliferated, taking the European Union average as a comparison point. Some of these have a predominantly empirical character whilst others have almost exclusively academic objectives. Contributions coming from the United States and Canada have also been remarkable.

The essential argument of the new approaches, based on empirical work, consists in

restating the diminishing returns hypothesis, now extended to technological accumulation. Setting it out briefly, it would mean that more developed regions, with a greater innovation capacity than less developed ones, could enjoy the benefits of technological progress, but would also have to pay for the process costs. Nonetheless, less developed regions could practically benefit from the same advantages than more developed regions by means of technological dissemination mechanisms, with much lower costs, namely those of absorption and adaptation. In consequence, the system would evolve towards convergence. What type of convergence are we talking about is another issue, and one on which the assigning or not of a role to regional policies is dependent upon. Another issue, also, is the rate at which it converges. On the other hand, other views with greater nuances exist that start off from less strict hypotheses and are not so unidirectional when predicting the results of territorial dynamics.

These neoclassical-origin approaches coincide in differentiating between three types of

convergence, although some authors point to many more. A first type of convergence of a variable, income per person, for example, can be talked of, if dispersion for the values taken as a sample, decreases in time, with respect to the average (sigma convergence). Absolute beta convergence is talked of when all incomes per person tend towards the same equilibrium point, which is possible because regions with a lower level grow at a faster rate than regions in a better situation, and they grow reaching the highest stationary equilibrium level, common to all. This definition implies the supposition that regional economies have similar characteristics. In the case of conditional beta convergence each regional economy converges to the equilibrium value corresponding to its own stationary state. That is, it is a type of convergence compatible with the maintaining of divergences. In this meaning, the specific factors of each region’s economies are taken into account, such as differences in infrastructure equipment, production factors, productive structure, etc which are those that allow for differences to continue.

Having done this brief revision, it is convenient to notice that the approach of this work

pretends to be situated in a perspective closer to endogenous development. This consideration, that is, the threat of regional divergences and imbalances as a consequence of the European economic integration process – within the world globalisation framework – is reinforced with the extension to new countries. As a whole, the less developed territorial areas in the EU, including extension regions, which have less comparative advantages and are in worse competition conditions, could, in the long run, benefit less than developed central regions with capital, technology and agglomeration economy.

This in spite of the efforts towards cohesion of community regional policies. Even the

better conceived, designed and executed policy is not capable on its own of solving the problems derived from economic integration, nor of replacing the lack of a model for regional or even national development. It cannot either be capable, on its own, of correcting the territorial differences in living standards. It has been commonly admitted in the European Union that


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imbalances between the regions that comprise it have not been reduced with the same intensity as differences between the States.10.

Our approach considers the action of regional cohesion policies in two basic dimensions:

on the one hand, as a direct compensation policy to favour social and economic cohesion; and, on the other, as a provider of stimuli that promote the capacity of endogenous development in the regions, in a wider dimension. In this latter sense, the contribution to the creation of a public stock activating growth and convergence is included, but also the reinforcement of inspiring principles typical of community policies that should favour the creation of a common cohesion capital (social, institutional, professional...). Principles that operate in turn as multiplying factors of intangible income and potential convergence. These two dimensions are the bases for the line of research followed in the study of the analysis of the impact on cohesion of the contributions of community policies

The regional cases have been the bases of the work that has been carried out, as established

in the terms of reference. In general terms, the data obtained and the analysis carried out, as well as the results obtained reinforce the belief in the starting hypotheses, in a perspective closer to endogenous development. This consideration, that is, the threat of regional divergences and imbalances as a consequence of the European economic integration process – within the world globalisation framework – is reinforced with the extension to new countries. As a whole, the less developed territorial areas in the EU, including extension regions, which have less comparative advantages and are in worse competition conditions, could, in the long run, benefit less than developed central regions with capital, technology and agglomeration economy.

These two dimensions are the bases for the line of research followed in the study of the

analysis of the impact on cohesion of the contributions of community policies.

1. INTRODUCTION The implementation of the single market has had undoubted positive effects for the

European economy as a whole. However, from certain theoretical approaches and from observations on certain social and economic situations, it can be stated that these benefits are not shared equally in the land. It is sometimes argued that as a consequence of the intensifying of the free market forces in the European Community, territorial dynamics tend to emphasize its imbalanced character.

That is why there is an appeal to continue with policies to strengthen economic, social and

territorial cohesion and towards regional development actions. This does not imply that government approaches are uniform. On an internal level, depending on the ideology that in each case inspires the political programmes, they do not always coincide necessarily and absolutely on the instruments and methods to attain the objective of regional development. The diversity of points of views in a pluralistic society is not only legitimate but unavoidable. On a European Union scale, different stances can be observed between some States and others. The member States’ positions frequently depend on their development level and their net creditor or debtor position relative to the Community budget.

10 Second Report on economic and social cohesion (2001)


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FINAL REPORT On the other hand, it would make no sense to say that in regional politics one always has to

do the same things in the same ways, or that it is above and beyond ideologies. A brief and quick review on the theories that literature on regional analysis offers on the evolution of regional imbalances is enough to show the ideological imprint of many approaches that are apparently aseptic and exclusively scientific.

Many experts coincide in admitting the existence of an interaction between theory and

practice, in general, and between regional/spatial economic theory and regional policy, more specifically. This approximation is interesting to us in our case. There are theories, in the field we are dealing with, based on trying to explain observed social and economic phenomena, that have led to policies. This is the case of the polarization theory, first carried out with precision by Perroux in 1950 with further future developments by himself and other colleagues. This approach inspired and theoretically sustained polarized development strategies that were tested in Spain and Latin America in the 60s and the first half of the 70s. In this example, theory has gone ahead of regional policy.

In the opposite sense, certain doctrinal approaches have come about after trying to explain

existing situations and the underlying policies of certain empirical realities. This is the case for the dependence or centre-periphery theory that arose as a theoretical drawing-up to explain relations between development and underdevelopment. That is, in this case, the observing of facts helped to develop a theory.

It is more difficult in other cases to know which one came first, perhaps because neither of

them, theory nor practice, tried to get ahead, but found themselves mid-way instead. For example, the neoclassical understanding, which has had broad repercussions and influences in certain times and places, did not arise to deny the need of regional politics. However, it is unquestionable to say that the supporters of giving prominence to the market to solve economic problems can and usually do rely on the laissez faire way of thinking to justify their inhibition when applying policies that tend to correct regional imbalances.

The interrelation between theory and praxis in the regional field justifies this section

dedicated to reviewing the main theories on the evolution of regional imbalances and contrasting them with observations on regional trends in matters of convergence and divergence.

At first glance, two main schools of thought, one opposing the other, stand out as

referential paradigms. At one end, the neoclassical model stands out. Its most important conclusion is that the

market promotes regional convergence, without any need of public political interventions and perhaps with the condition that these interventions do not happen, making the territorial system evolve towards the disappearance of regional disparities.

At the other end, it is thought that market forces generate dynamics that, far from making

regional imbalances evolve towards their disappearance, they tend to accentuate them and to become deeper, in an accumulative process of income and wealth concentration in the more developed regions. In order to avoid a worsening of the imbalanced situation, it will be necessary to apply an efficient public action aimed at breaking this imbalancing dynamic.

It is interesting, on a pedagogical level, to show these two schools of thought as reference

points. However, they are not the only ones (Cuadrado-Roura and Parellada 2002). Other intermediate approaches exist, based on the supposition that regional economies are going through a series of phases in their historical process of development, each of which marks an overcoming of


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the previous situation. That a relation exists between the evolution of regional disparities and the running of the economic cycle is defended in some approaches.

More radical schools than those shown as paradigms can also be quoted. The denial of the

capitalist system’s ability to promote regional convergence, given its nature and essence, not even with policies to strengthen economic, social and territorial cohesion can be interpreted as another variation of radicalism.

The argument of theories explaining the evolution of regional imbalances never

disappeared completely, but lay dormant for some time. The economic crisis triggered by the rise in oil and raw material prices led the economists’ attention to be preferentially focussed on current issues requiring urgent solutions for decades.

A new impulse was started in the mid-80s on both sides of the Atlantic, nurtured not only

by the surmounting of the crisis but, especially, by the expectations triggered by the reform of the European Union Structural Funds. The controversy adopted a new form of debate on whether the empirical evidence contributed data that allowed the conclusion on whether regional economies were evolving in a converging or diverging direction. The efforts towards a reform of the Structural Funds would be justified in the case of a diverging evolution. In any case, the efficiency of a reform that, in principle, seemed reasonable would have to be verified after some time. However, if the empirical evidence showed the spontaneous existence of converging trends (new neoclassicism), the reform of the Funds, as well as any other regional policy, would not be justified.

A wider and more explicative review of what has just been outlined will be made below.

This is supposed to be an exposition that goes beyond the academic field, in case the possibility arises to draw conclusions capable of influencing or directing the making of decisions.

From the point of view we are interested in, some of the theories have, in fact, ruled over

the applying of policies to strengthen European economic and social cohesion, in different proportions and with different intensities during the European Union history, from the creation of the Common Market until nowadays.

With this aim, we will analyse in what way some of the theories that are going to be shown

have explicitly or implicitly inspired the practice of regional and cohesion policy in the European Union. To this end three great phases will be differentiated using the advances attained in issues of integration, on the one hand, and cohesion policies, on the other, as orientation criteria.

On the other hand, there is a correspondence between the desired European Union type or

model, regional economic theories and the role that, in each case, corresponds to cohesion policy. Due to this, the characteristics of three possible models of economic integration: economicist, functionalist and solidarity or ‘of cohesion’ will be described. A certain regional policy fits in any of these models. The relevance that they attain can be taken as an indicator of the political content of the integrating project or of the intensity of integration. Clearly, cohesion policy will have a more important role in the solidarity model.


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FINAL REPORT 2. CONVERGENCE AND DIVERGENCE THEORIES

2.1. Old and new neoclassicists Although few authors state it clearly, the neoclassical theory arises on a value judgement

which is close to social philosophy. The neoclassical model, in its deeper approach, does not correspond only to an economical school of thought. It is part of a certain, somewhat mechanistic, conception not only of economy but of the running of society as a whole, in the way of a cosmogony. In a simple formulation it can be summarised in the following terms: if an imbalance occurs in a point of a system (economic, social, etc.), the system itself automatically develops neutralizing actions for the dynamics unleashed, starting a force generating mechanism that tends to restore equilibrium, an equilibrium that can be on a different point than that where it started. This can be expressed almost graphically with the phrase laissez faire, laissez passer, le monde va de lui même. It is the belief in the ability of the capitalist system to automatically correct the imbalances that occur within it on its own that gives rise to the theory. On the other hand, any exogenous interference or intervention on the market will, in all probability, increase the imbalancing trends instead of counteracting them. That is why there is nothing better than leaving the market forces to shorten and cancel regional imbalances, instead of applying policies and financial resources that could make the situation worse.

The close predecessor of the neoclassical approach on the evolution of regional imbalances

can be found in the application of the international trade theory in the interregional field. The fundamental supposition in a first formulation is that the goods produced move freely between regions whilst the productive factors remain still. The mobility of these factors is accepted in a reviewed version.

According to Ohlin (1933, 1961, 1967), each region specializes in the production of those

goods for which it is better suited as a consequence of the different distribution of factors, and therefore regional price differences arise for a given good, as a function of the particular combination and cost of factors in each case. It is natural for interregional trade to arise in these conditions, that under certain unrealistic suppositions, will lead to an interregional levelling of prices for each good and to certain regional specialization. What will happen is that a region will produce less amount of those products with a greater content of the factor which is scarce in its field and, on the contrary, it will be able to export intensive goods with the most abundant factor in it. However, the decreasing demand of the scarce factor will reduce the relative scarcity and will decrease prices; in the other hand, the greater demand of the relatively abundant factor will increase prices. An equilibrium situation will be reached in this way, with a levelling of product prices, by substituting interregional movement of productive factors with movement of goods by means of trade between regions.

The result will be the same under the mobility of factors hypothesis, with the only

difference that movement of productive factors between the regions of a nation finds more obstacles than exchange of goods. It is more plausible for a region to export goods than labour force, for example.

However, it must be noted that the equilibrium supposedly reached in this case refers to

levelling in the prices of goods and productive factors and not a levelling of incomes or development levels. Nevertheless, the neoclassical theory has also given steps in this direction. Let us consider the labour and capital productive factors. Let us convene that the roles of production for each good and region are identical, linear and homogeneous; that the participation of each factor in the product is constant, independent of price; that perfect competence exists; that transport costs are zero and that regions reach total productive specialization in the goods for which they


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have comparative advantages. Let us discard the possibility of increasing economies of scale, segmentation of the labour market, migration costs of labour force and capital transfer. Lastly, let us suppose that workers only move due to salary differences and that capital only seeks a greater profitability.

Under the previous hypotheses, workers will emigrate towards the more developed regions,

stopping the increasing salary trends and liberating the underdeveloped regions of invisible employment and underemployment. Capital will encounter increasing difficulties in urban and industrial areas due to the elevated labour force costs, labour disputes, the greater competition between businesses, the bottleneck produced by agglomeration diseconomies and the disappearance of investment opportunities. Capital will move towards the underdeveloped areas in view of the greater profits expected in them since they do not show the obstacles described. This capital will benefit, with new investments, from job creation and the consequent generation of income. As a consequence, according to the neoclassical model, the movement of productive factors leads, in time, to the convergence in income levels and in development of the different regions within a nation.

Reality, however, does not confirm the expectations that arise from the deductive model

described. It is true to say that some of the suppositions are less unacceptable on an interregional level than on an international level. Nonetheless, they still show weak points. As a general objection, a first group of criticisms states that this is a comparative statistical model that forgets the dynamic aspects of reality. Following Solow’s steps, who reviewed his first 1956 formulation (Solow 1956), Siebert’s exposition (1969) has meant an advance in this sense by including the role of technical progress. But the consequences of the following are not taken into account: depletion of resources, changes in the proportion of factors used, variations on the roles of production and demand, generation and dissemination processes of innovations that reinforce the existing territorial structure, demography dynamics, etc.

The second group of criticisms is centred around the lack of correspondence between the

starting suppositions and reality. Migration, for example, may have cumulative and not balancing effects; labour force is not homogeneous, but it has various degrees of specialization instead; information on working conditions is deficient or incorrect; salary differences are not the only inducing factor on labour force mobility, other variables have to be taken into account, levels of unemployment, distance covered, family circumstances or attachment to one’s place of origin; transfer costs, both for work and capital, are not zero; the less organized the capital market is, the less efficient it is; cumulative capital, equipment, infrastructures and allocation stocks condition and attract new investments; agglomeration economies and proximity to consumer markets are an incentive for entrepreneurs; entrepreneurial risk and uncertainty is higher in underdeveloped regions, etc.

Lastly, even when accepting the neoclassical theory and its effects on regional convergence

as a trend the system gets close to but never quite gets there, we must add that it does not imply levelling of incomes per person in the different regions. There are a number of factors relative to regional differences that oppose this: the relative weight of property income, the proportion of active and busy population relative to total population, degrees of specialization and professional qualifications, and others.

Richardson (1969) concludes after critically analysing the model that “structural

inflexibility, the strong tendency towards concentration and the appearance of sporadic imbalancing forces makes the supposed existence of automatically correcting factors of imbalances lead us to more than one mistake”. For some observers, the creation of the ERDF (1975) in the,


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then, European Economic Community and the reform of Structural Funds shows little faith in the market’s correcting abilities.

The neoclassical approach was reborn at the beginning of the nineties as an intellectual

reaction, in a way, towards the new views of endogenous growth and the rise of reinforcing policies of economic and social cohesion. One of the most conspicuous representatives of the counterattack defines it as a proper “neoclassical counterrevolution” (Sala-i-Martín, 1994).

Studies on the evolution of convergence and divergence, frequently taking the European

Union as comparison point have proliferated during the Nineties. Amongst them, we can differentiate between those with a predominantly empirical character with the aim of creating a school of thought. Some of them combine both longings (Cuadrado, dir., 1998; Esteban, Vives, de la Fuente and Caminal, 1994). Contributions from the other side of the Atlantic can not be forgotten (Barro and Sala-i-Martín, 1991).

The essential argument of the new approaches, based on empirical works, consists in

reasserting the hypothesis of diminishing returns extended now to technological accumulation. More developed regions, with a greater ability for innovation than the less developed ones, enjoy the benefits of technological progress but also run with the costs of such process, whereas less developed regions can practically benefit of the same advantages than the more developed ones, by means of technological dissemination mechanisms, with lower costs, those of absorption and adaptation. The system evolves towards convergence as a consequence of diminishing returns of all factors, including technological progress, and dissemination. What type of convergence is another issue, and one on which assigning or not a role to regional policy depends upon. Another issue is at what rate this happens, one which can sometimes seem too slow. More thorough and less traditional points of view of the model are not so unidirectional when predicting the results of territorial dynamics since they start off from more flexible hypotheses (De la Fuente 1999).

Statistical definitions can be translated to everyday language by disregarding references to

symbols used to designate the parameters used by the models to measure the degree of convergence. The new school coincides in differentiating between three types of convergence, although some authors describe some more. A first type of convergence of a variable (income per person, for example) can be talked about if dispersion of the sample values from the average, is reduced in time (sigma convergence, name given not due to a discovery but because it is calculated using standard deviation, usually represented with this letter of the Greek alphabet). In order to evaluate the extent of this measure, which can be acceptable for some objectives, it is necessary to consider that a possible cause for the reduction in dispersion can be that values closer to the average get closer while distances are kept at the extreme values, that is the variable range. Absolute beta convergence is talked of when all incomes per person tend towards the same equilibrium value, which is possible because regions with a lower level grow at a faster rate that the regions that are better situated, and they grow reaching the highest stationary equilibrium value which is common to all. This definition starts from the supposition that the regional economies have similar characteristics. In the case of conditional beta convergence, each regional economy converges towards the equilibrium value of its own particular stationary state, which can be estimated, but there is no tendency towards a common equilibrium. That is, it is a type of convergence compatible with the ongoing existence of divergences. That absolute convergence will be reached can not be guaranteed due to technological equipment, public capital, etc. acting as conditioning factors.

A relation exists between convergences although they are different. For example, there can

be a beta convergence and a sigma divergence, that is beta convergence is the necessary condition,


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but not sufficient, to reach sigma convergence, that is, weaker regions can grow faster that stronger regions and value dispersion be maintained.

Three interesting observations should be made on these notions. 1. Firstly, the significant convergence when determining if living and welfare standards

of inhabitants in less developed regions and countries evolves towards the higher levels is absolute convergence. Sigma convergence shows a reduction in dispersion from the average value, and can occur without growth as a whole. Conditional convergence seems more like statistical fireworks regarding convergence but the model that measures it is useful to identify structural obstacles that slow down growth in less developed territories.

2. Secondly, there is no unanimity on whether empirical evidence confirms the

convergence hypothesis. Some publications (Esteban and others, 1994; Moneda and Crédito, 1994) raise the reasonable doubt on whether models can “confirm” whatever is required by statistically “treating” data with enough ability, using the correct formulations, appropriate specifications, convenient suppositions, suitable fictitious variables, etc.

3. Thirdly, even amongst those who hold that the existence of convergence can be

considered true, there is an argument whether it is absolute or conditional convergence. Beyond technical arguments, political derivations are very important. The consequence of absolute convergence is typical of neoliberalism, which rejects public intervention, that is, regional policy, since the market is capable of correcting divergence even at a slow rate of approximately 2% yearly, this valued being discovered in most of the models applied. However, in the case of conditional convergence, regional policy would carry out an important role in order to remove the obstacles that stop a less developed region from carrying out all its growth potential to converge towards the highest equilibrium point.

A variation on the neoclassical approach is that which gives the market the virtue of

promoting redistribution automatically by means of unexplained mysterious mechanisms, of the invisible hand type. The condition for this is to previously attain significant economic growth levels. If the cake is bigger, sharing it is not a problem. The understanding that there is a relation between convergence and the economic cycle has a certain relationship with what we have been talking about. In the expansive phases of the cycle there would be a converging evolution of regional GDPs per person beyond explicit regional policies. On the contrary, convergence would stop in the recessive or declining phases. Consequently, expansive growth policies should be promoted to improve convergence conditions.

Now, in those cases where there is a converging trend in GDP per person that takes place

as consequence of migratory movement from less developed to more developed regions, we would be talking of convergence due to “migration effect”, and not due to “income effect”. On the other hand, if global growth is based on the more dynamic regions of a country, as is usually the case, there would be an advance in “convergence towards the outside”, that is, in relation with the average of a set of countries. But there would not be “convergence towards the inside”, that is, internal national convergence.

These are approaches which certain international organisms, such as the World Bank or the

International Monetary Fund, have been very inclined to in the past (and even now).


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FINAL REPORT The priority given to economic growth support policies, to the detriment of redistribution

and convergence policies, can be linked to certain recommendations in the face of the current situation of weak economic growth in the European Union. In truth, the growth rate of the European economy in the last decade is far from what was expected. The Sapir Report (Sapir, 2003) has made a proposal to re-examine various Community policies, amongst others, cohesion and convergence policies. The emphasis given on the need to promote growth, a requirement that no one questions, in the face of cohesion strengthening approaches could be interpreted by some interested readers as supporting the view that maintains that global growth automatically leads to redistribution, as it was formerly known, or convergence, as it is currently known.

Misinterpretation or interested interpretation of this report in order to make it mean what it

doesn’t can contribute, indirectly, to resurrect the old argument on incompatibility and , therefore, the need to choose between two apparently incompatible economic policy objectives: efficiency (maximize global GDP growth) and equity (growth redistribution or convergence).

2.2. Cumulative divergences The essence of the neoclassical model resides, as shown, on the supposition of the market

economy system’s ability to correct on its own imbalances that may appear. Myrdal (1957) is the author who most precisely argued for the opposite principle, developing the theory of circular cumulative causation, explaining the growing reproduction of social imbalances and, as a consequence, the trend towards diverging regional evolution. In the history of economic thought predecessors can be found such as the well-known working of the multiplier. On the other hand, Kapp (Kapp, 1963) claimed the original authorship of the notion of circular cumulative causation that Myrdal developed on Verblen (Verblen, 1899), on occasion of his study on social costs of private enterprise.

According to Myrdal, capitalism and the market institution are incapable of self-correcting

the imbalances that its running causes. After the action of an imbalancing force starts, the general dynamic does not reach a new equilibrium, but the imbalancing effects accumulate and feedback into the system instead. Myrdal states that “a trend towards an automatic self-balancing of the social system does not exist. Normally, a change does not give rise to compensating changes, but, on the contrary, gives rise to contributing changes that move the system in the same direction as the original change, taking it further away. This circular causation makes the social process tend to become cumulative and to gain speed at a fast rate”.

Applying this to the regional problem leads us to the conclusion that system forces tend to

generate territorial imbalances that, once started, will become deeper with no exogenous intervention. “Two of the most important laws of economic development and underdevelopment under laissez faire are that an inherent tendency exists in the free play of market forces to create regional imbalances and that this tendency is more dominant the poorer the country is.”

Myrdal’s analysis of circular cumulative causation takes a look at three imbalance feeding

mechanisms:

1. Migration flow from underdeveloped to developed regions. The selective character of migration regarding, at least, age and, probably, qualification and enterprising spirit, significantly harms the areas of origin. The negative effects on the population structure in age and depopulation, not uncommon, contrast with the positive consequences in the urban and industrial areas, whose competence and exporting capacity improve.


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FINAL REPORT 2. Capital also moves inter-regionally but not in the direction suggested by the

neoclassical model, in the opposite direction of labour force and towards underdevelopment. On the contrary, the analysis carried out by Myrdal shows that the banking system channels savings from poor regions to rich ones. The confluence of capital and labour factors in the same direction, benefiting developed regions, feeds imbalances instead of neutralizing them. Agglomeration economies enjoyed in large urban and industrial areas and the smaller risks that investments have in these areas can be the basis of the cumulative tendency of capital, apart from the attraction of private and social capital to the market and stock.

3. Interregional trade. We know that richer regions are more competitive than

underdeveloped regions. Furthermore, since the region is an open economic space it does not have the monetary and tariff barriers that a national economy can use. Also, specialization in primary production that usually accompanies underdevelopment implies a deterioration in trade relations in the face of industrial and tertiary production of more developed regions.

Combining migration movement, capital flows and inter-regional trade, guided by market

dynamics usually operates to deepen the rift that separates rich regions from poor, without managing to close it. These slowing-down effects of development weigh negatively on the balance, which does not have neutralizing counterweights for the dissemination effects.

However, we must not reach the pessimistic conclusion that there is nothing to be done.

The capitalist system itself has the instrument of regional policy that should compensate the slowing-down effects of development and promote the propelling effects. Nevertheless, egalitarian policies are easier to plan and execute in developed countries so, therefore, poor countries are more exposed to an increase in imbalances.

There have been criticisms to Myrdal’s approach. For example, the following has been

said: “it is a useful guide to help us understand certain aspects of the running of dynamic systems, but it does not allow its acknowledgement as truly valid in explaining global realities” (Tomás Carpi, 1978). Furthermore, this theory has been categorised as limited, mechanistic, linear, deterministic, superficial, simplistic and biased.

Cumulative circular causation proposes the use of regional policy to counteract the

imbalancing market dynamics without having to drop the capitalist framework. Cohesion strengthening policy, therefore, fits perfectly with the theory stated. On the one hand, that the market game is incapable of correcting regional imbalances is acknowledged. On the other, applying a correcting instrument is proposed within the respect for the system’s basic philosophy.

Kalder later formalized Myrdal’s views (Kaldor, 1970) in a model that comes to be the

analytical and graphical expression of cumulative circular causation. More recently, new approaches denying the tendency of regional economic systems

towards convergence and reinforcing the old divergence approach have become relevant. Furthermore, the new school of endogenous growth arose as a result of an investigation that denied the empirical evidence of convergence (Romer 1986). During the second half of the 1980s a series of researches were divulged trying to explain why developed regions could favour from a faster economic growth rate than underdeveloped regions from a new, non-radical, point of view. It tried to explain the evidence in development differences between countries and regions not shortening


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but becoming more patent. However, deep down, it questioned the fundamental theories of the neoclassical growth model and the political practice of neoliberalism.

As stated above, one of the basic suppositions of the neoclassical model is that marginal

returns of productive factors and, therefore, their remunerations, decrease. The incapability or failure to explain the reality of the neoclassical outline concisely led new critics of the model to review the basic supposition of diminishing returns. According to some authors, the reason for the maintaining, even increase, of divergence is that the supposition of diminishing returns is not true. More developed regions have a greater growth capacity due to increasing returns, in certain circumstances. This eventuality is possible with the joint action of various elements, not only due to the effects of agglomeration economies or public capital accumulation, but due to investment in training and human capital also, and, perhaps above all, due to the accumulation of technological capital that is incorporated into the model as a productive factor together with the traditional capital and labour. In these circumstances, due to the appearance of increasing returns, it is possible for marginal capital returns to be greater in more developed regions than in regions with a lower development level. Consequently, developed regions have an endogenous growth capacity that causes divergence not to disappear. This reasoning wasn’t drawn out of the blue but was made to explain situations that were being documented (Romer, 1986, 1990 and 1994).

2.3. Phases and the compensating power The creation of regional instruments is also coherent with Williamson’s propositions

(1965). He agrees with Myrdal in acknowledging an initial phase of the widening of regional differences. Nevertheless, he brands him as excessively pessimistic when not agreeing on there being a later phase that unleashes opposite forces leading to convergence.

Williams considers four factors: labour force migration, flow of capital, central

Government policies and inter-regional relations. In the first stages divergence between developed and underdeveloped regions would become greater due to:

1. Selective migration of the labour factor; 2. The tendency of savings to flow towards richer regions due to external

economies, market attraction, greater benefits and other causes; 3. The placing of public investments in developed areas to obtain a greater

national growth, without worrying about regional problems; 4. The rare positive inter-regional influences in the first stages of national

development due to the slowing-down of technological and social change dissemination.

There are several reasons to believe, according to Williamson, that the elements that tend to

cause divergence will decrease as time goes by. “Somewhere along the development process some or all imbalancing trends decrease, giving rise to a change in direction in the inter-regional inequality model. Convergence, instead of divergence, becomes the rule on an inter-regional level as the backward regions close the development gap existing between them and industrialised areas”.

How can this inflection be explained? Considering the role of the four factors mentioned,

what could happen is for migration to become less selective or even migration back to places of origin together with a reduction in wage differences. Benefit margins in urban and industrial areas could also decrease due to capital concentration, whilst inter-regional dissemination favours


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underdeveloped areas. However, perhaps the most important factor is that Governments are able to design a correcting regional policy for the former trend.

It could be said that in view of the direction that regional economic tensions take, forces

arise to counteract them. This is not an improved neoclassical theory, but a concept linked to Galbraith’s idea of “compensating power” (1952). The main difference with neoclassicism consists in that it was “on the same side as the market, and therefore, in the competition, where economists sought the economy’s automatic regulating mechanism”.

A form of active support to compensating power could be regional or cohesion

strengthening policy. In short, Williamson’s approach does not admit correction of regional imbalances in virtue of the market’s miraculous automatism, and so grows apart from purely neoclassical conceptions. However, he believes in applying institutional actions supported by Governments, thus getting closer to the compensating power doctrine that would take form under different formulae of regional policy.

It is convenient to make clear that the compensating power doctrine has been in existence

in economics for more than one hundred years, but receives its name from Galbraith onwards. Marx (1867) criticised James Mill, McCullough, Torrens, Señor and J. Stuart Mill, excluding Ricardo, as supporters of the “compensation theory”. In this case, it wasn’t about correcting regional imbalances but of the ability of the mechanized production system to compensate for jobs lost to machines with other jobs aimed at machinery and material production to cover the increase in production.

Williamson tried to empirically sustain his two-phase theory studying regional income

differences in a given moment (cross section) in countries with different development levels and in one same country, United States of America, in the period 1950-1960 (longitudinal section). His followers found his results unquestionable, though some detractors could justifiably note that “the famous Williamson study found that convergence was far from unanimous” (Richardson 1979). What must be said for the author is his ability to raise a broad argument with his work on the United States that his real predecessors Bort and Stein (1964) could not raise.

Some authors have admitted the possibility of convergence in that country and in Canada,

due to its wealth in raw materials and its lack of demographic surplus that would have given rise to interregional migrations. However, they reject it as a non-applicable general trend in, for example, Spain and Italy (Secchi, 1975).

Nonetheless, there are people who question the validity of the conclusions on which the

explanation of applying the two phases on the United States is based. For example, Fish (1981) proposed checking the dynamic association between inequality and development, paying attention to population distribution per income categories, in relation to the convergence hypothesis. He used census data from 1950, 1960 and 1970 (Williamson limited his study to one decade) applying a sectional analysis for 49 Federation States. His conclusion, however, is that a clear-cut empirical model on convergence or divergence can not be deduced when considering relations between economic development and regional inequality. “Consequently,” he adds “it isn’t possible to avoid asking oneself about the ideological content of the causality idea implied in this relation”.

Other criticisms point towards previous methodological issues. Gilbert and Goodman

(1976) point three elements out. Firstly, information on income levels is not homogeneous. Estimation methods vary from one country to another and the concepts used (income per person, average family income, personal income per family…) do not coincide. Secondly, the amount and size of administrational units which each country is divided into are not taken into account, but the


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truth is that the type of territorial disintegration used influences the results, since greater territorial disintegration shows greater imbalances. Lastly, the sample of Third World countries used by Williamson is not representative since its introduction seems to change the analysis results according to a cross section. Gilbert and Goodman, however, do admit that Williamson’s conclusions are valid for developed countries though not for underdeveloped ones where diverging trends are found even when there are no increases in income per person.

Getting deeper into Williamson’s line of analysis and trying to broaden it with explanations

on the role of increases in population and employment and in the direction of economic growth in the regions, Cuadrado Roura (1982) reached the conclusion that “the analysis of regional economic disparities in Spain (or any other country) can not be based, simply, on the study of the evolution of some relative indicators, such as production per person and/or per employment, that leads us to sustain the regional ‘convergence’ thesis put forward by Williamson some years ago. Apart from the fact that this thesis has already been discussed in length and that changes in the economic situation [...] lead to variations in the supposed “historic tendency” that this author and others put forward, what is clear is that treating this issue on this level is very superficial and it is indispensable to determine what the specific direction of each region has been and what variables have been involved in the process.”

Regarding the Spanish case, the available data seems to indicate that if regional differences

are measured in terms of income per person, certain shortenings in these distances correspond with greater growth rates. Nevertheless, labour force transfers from underdeveloped to developed regions have had a fundamental role in this phenomenon. Hence, the observations on regional convergence of income per person are due to the ‘migration effect’ and not the ‘income effect’.

Following a similar reasoning, it could be said that the distance shortening process that

separated values reached in regional incomes per person is due more to inter-sector labour force transfers and a decreasing growth rate in the developed regions than to ascending impulses in the underdeveloped areas.

Growth in Stages The image of development as the overcoming of stages has a long tradition in economic

thought. Rostow’s interpretation is well-known and can be taken as the most representative within this trend after the Second World War, although his outline is applied to nations rather than regions. In his first formulations (Rostow 1956) he spoke of three stages. “A long period (up to a century and even longer) in which the primary conditions for takeoff are established; the takeoff itself, which lasts between two and three decades, and a prolonged period in which growth is normal and relatively automatic”. Further on he extended the number of stages to five (Rostow 1960) and were set as traditional society, primary conditions for takeoff, the starting impulse, walk towards maturity and the age of large mass consumption. He later added a sixth stage, search for quality. Without getting deeper into it, it can be said that the third stage, the starting impulse, marks the dividing line between development and underdevelopment, between tradition and modernity. Growth would continue after surpassing this stage and would become self-sustained. “Growth becomes the normal condition”.

Transpositions to regional development can be found in formulations that claim investment

in infrastructures as essential to generate agglomeration economies that guarantee continuous growth (Rostow indicates investments in fixed social capital as a condition for takeoff). Experience shows, however, that there are cases in which investment efforts in infrastructure are not enough.


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FINAL REPORT Rostow’s points of view have been criticised from various different angles. Radical

criticism brands the Rostownian approach as essentially ideological. Economy historians have reproached him for the partiality of his interpretation, pretending to be a general view when only certain developed western countries were taken into account. Lastly, it can be said, thinking of regional economies, that if each part of the whole follows the evolution that corresponds to it, the distance between advanced and backward regions will never disappear and absolute regional convergence will never be reached.

It is at this point where conceptions of convergence as a succession of stages keeps certain

relation with the new neoclassical approach. Conditional beta convergence allows the existence of factors that prevent absolute convergence because technological, public capital assets, etc., act as conditioning factors. Structural obstacles slow down growth in less developed territories. In other words, distance of income to the border of development, that is, the difference in GDP per person between a given region and the region with the largest amount, is the deciding factor in regional growth. However there is no possibility of reaching the border, which would be an unattainable goal (Raymond 1995, 1999).

It is as if the economy was subject to a strict supposed border law since it tends to get

closer to a limit value at a decreasing rate, a limit which structural deficiencies prevent form surpassing, as if it were a biblical curse. Specific factors of each region’s economy, such as infrastructure assets, localization issues, productive factor assets, productive structure, etc., are taken into account in this interpretation as they are what maintain the differences.

In a way, in the conditional convergence interpretation, the question of regional imbalances

is half-way between the myth of Sisyphus, his continuous climbing and falling on the rocks, and the paradox of Achilles and the turtle. It could seem as if Sisyphus’ curse is going to reach (or has reached) the expectations on convergence, as if it were a fanciful objective which is out of reach despite of the efforts dedicated to strengthen economic and social cohesion. One could also think that there is no motive to abandon the option of applying policies that impulse convergence in order to get as close as possible to the development border, even if the asymptote is never reached, like Achilles never managing to catch the turtle.

2.4. From centre-periphery to dependence. Centre-periphery theories and the school of dependence are set on completely different

perspectives, at least in their most radical versions. An essential difference exists between the positions described earlier and this one according to the stance adopted regarding the market economy system. The schools described move from those that enthusiastically accept the system to those who do not doubt in finding certain, sometimes important, flaws but without rejecting its essential characteristics. Regional imbalances would be an example of the flaws in the market economy but capitalism would have the ability to react to correct them, either by automatic compensations or by government actions and regional policy.

The centre-periphery concept arose from the analysis of reality in Latin America carried

out by the Economic Commission for Latin America and Caribbean (ECLAC), depending on the United Nations, sponsored by R. Presbich at the end of the 40s and during the following decades. The start of it can be found in the publishing of the ECLAC report in 1949 (ECLAC 1951) and raises a criticism on the neoclassical approach to international trade. A fundamental argument of the analysis is the confirmation that real trade relations between Latin-American countries and the developed world deteriorates in time. Together with other study elements (economy, history, sociology and politics) the conclusion is reached that economic, political and social relations of


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domination, exerted by the developed areas, and dependence, withstood by underdeveloped areas, are established.

Agglomeration economies operate in the developed centre, investments in public and

private capital are concentrated, the centres of power and decision are found, the capacity for technological innovation is developed, in short, the growth in income and wealth is much greater than in the periphery. In this share of roles or functions, the poorer or less developed areas should:

1. Supply the urban and industrial areas with raw materials and energy, which would be

transformed outside their place of origin, with the consequent export of added value and benefits.

2. Supply abundant and cheap labour force to businesses established in the rich regions. 3. Finance the development processes of the more favoured areas, transferring savings

and resources of all types. The opportunity of development of some parts of the system would not exist without this

role share, as it occurs at the expense of others’ underdevelopment. What generates regional imbalances isn’t the different starting levels, or the comparative advantages, or the existence of productive factors but the system’s nature in itself.

Going further, the interpretation that the group of inhabitants of some regions improve

thanks to the exploitation of others wouldn’t be correct either. That is, we are not dealing with the confrontation of regions against regions. According to the dependence theory, the fact is that an exploiting class, living in developed or underdeveloped areas, benefits from the exploitation of workers, even those living in developed regions which are often immigrants from the poor regions.

In the more radical version, the dependence theory imputes the existence of inter-regional

differences to the nature of the capitalist system itself. They are not accidental and can not be corrected, but they are directly linked to the form of production. It isn’t about difference in levels or stages reached by some regions and that others will reach in time. It would be about the different roles and positions that each region occupies within the economic and social system as a whole in such a way that there would be no real opportunity for some areas to reach development if not at the expense and underdevelopment of others. Thus, regional underdevelopment would not be an accident but the other side of the same coin.

Regional policy would make little sense in this briefly described radical version. If regional

imbalances would only disappear when the system that generates them is surpassed, regional and cohesion policy would make little sense.

Not all centre-periphery theoreticians take their stance to the extremes described which are

closely defended by (Frank 1965) or (Amin 1973). A reaction has occurred that questions the validity of a theory that focuses its attention in the conditions imposed by exogenous determining powers, forgetting the conditions derived from internal structural defects. On a regional level, however, it does not explain, either, why so notorious imbalances exist in non-capitalist countries that have put a style of economic growth into practice which is limited in its potentials but with similar territorial effects, probably due to them being based on technological-territorial models with identical nature to those used in the capitalist West.

Other authors, sometimes inscribed in the field of dependence theory by scholars and by

themselves are, however, more moderate. Some, like the ex-President of Brazil, admit the possibility of an “associate dependent development” (Cardoso 1977) that allows certain industrialization of a periphery area but without reaching the capacity for autonomous growth.


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Capital located there would only seek raw materials or cheap labour force, obeying external decisions with a difficult or impossible control from within the region.

These ways of thinking weren’t reduced to Latin America or limited to the study of

underdevelopment on a national level. They were extended to other fields, in particular Western Europe, and were applied as a theoretical analysis of historical trends on various territorial levels, such as the world as a whole (international relations), inside a nation (intra-regional relations) and to cases of economic integration of various nations in a supranational community, as is the European Union (Seers 1979). More specifically, it was used academically during the entry negotiations of Spain and Portugal (Seers and Vaitsos 1980).

Use of the centre-periphery outline has continued and will probably continue. Krugman has

used it to explain the situation in the European regions. Even though he essentially distinguishes between centre and periphery, he has further qualified the classification of the European Union regions according to GNP per person relative to the average, differentiating centre (level 122), intermediate level (level 105), internal periphery (level 89) and external periphery (level 64) (Krugman 1992). Nucleus-periphery relations are also talked of, but in a slightly different sense to that described (Fujita and others 1999).

3. STAGES IN THE EUROPEAN UNION INTEGRATION AND COHESION REASONING Broadly speaking, “three great stages in the history of the EU” can be differentiated, “taking

the advances in economic integration and the measures to reinforce economic and social cohesion as directing criteria” (Lázaro 1999a). A relationship between the different expansion processes undertaken by the EU and the passing of measures tending to impulse cohesion is frequently established. Likewise, a reasoning between integration and cohesion can be appreciated.

There are theories that sustain that the benefits of integration are not shared out homogenously

amongst the productive sectors, States, regions and social groups taking part in the process. That the market is efficient as a mechanism of resource assignment is accepted, but it has only too well shown its limitations and defects as a distribution instrument. In order to correct the centripetal and concentrating tendencies that usually go together with the integration processes, a counterweight in the form of an active rebalancing policy is need, which in Community terminology has been called economic and social cohesion policy. The combining of integration and cohesion (balanced presence or predominance of one of the two) shows the European Union model aimed at in each circumstance.

a) The first phase in EU history referred to occurs between the Treaty of Rome and the

Single European Act (SEA) in 1986. Following a timeline criteria, we can not forget the first (1962) and most common policy, the

Common Agricultural Policy (CAP), as an integration factor. The three principles that inspired its establishment (single or common market, as it is called nowadays; overall common financing, or finance solidarity, in the current terminology, and Community preference), especially the first two, state clearly the integrating character of this policy.

From the trade point of view, the climax of this period is marked by the implementation of the

Customs Union (CU) in 1968, with the establishment of the common external tariff. So many things


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have happened in Europe and in the world since then that the perspective to value the significance of that integrating step in all its extent has almost been lost. Another milestone in this phase is the decision taken at the Paris European Council in 1979 to adopt the European Monetary System (EMS). However, the voluntary membership (the pound, already then, stayed outside the mechanism) as opposed to the obligatory nature of the common external tariff allows us to value the integrating significance of the CU more positively, even though the EMS can be pointed out as the distant precedent to the current Monetary Union.

From the cohesion point of view, few steps were taken in this typically functionalist stage. The

CAP can be taken as an ambivalent and ambiguous factor in the sense that it has integration factors, as described, and cohesion factors. In certain ways, it is the compensating accompaniment of integration, favouring cohesion, in this first period. It can be considered as such since it supports a weak economic sector (agriculture), social group (farmers) and territories ( the rural environment), even though the distribution of aids within the sector has always been in the critics’ sighting point.

CAP evaluations are frequently tinted with ideological connotations. However, differences in

evaluation of CAP impact can also be found in scientific analyses. European aids to agriculture could be, according to some, worsening regional imbalances (Arango 1995). A getting closer of agricultural regional incomes is happening, according to others, in which CAP influence has a relevant role, with nuances in the case of cattle regions (Castillo 1998). What hasn’t been questioned up until now is that 80 per cent of CAP aids are concentrated upon 20 per cent of farmers on a Community level, a concentration that is more significant in some countries, regions and products. Thus, speaking of ambiguity and ambivalence seems justified in the case of CAP, which could be said, and not without reason, neutralizes the cohesive effects of structural funds, in good measure (Lázaro and Cordero 1995).

That CAP does not strengthen social cohesion, due to a high concentration of aids in a reduced

number of farms, could be admitted. Nevertheless, judgement should be more cautious when referring to territorial cohesion. There are arguments that sustain that CAP has contributed to increasing living standards in the rural environment, both through the first milestone (price and market policies, direct aids) and the second (agricultural structure reform). Regarding the role of rural development, without entering into much detail here, it seems as if a branch of CAP should be considered apart from structure reforms, even though a tendency exists to levelling and confusing both concepts (rural development and agricultural structure reforms) as they are both found within the second milestone.

The creation of the European Regional Development Fund (ERDF) in 1975 corresponds to

this period, whose aim was and still is to aid regions with different structural problems (economic backwardness, industrial decline, urban deterioration, etc.). The initial economic allocation and its uncoordinated direction regarding the activities of other Structural Funds could not have foreseen the importance it would later have. It wasn’t then what it is now.

In short, it could be said that from the Treaty of Rome to the SEA, the implementation of CAP

and CU stand out on their own accord. Little else was done towards integration, except for adopting the EMS. The only compensating measures are those that could be indirectly derived from the policy that took up most of the Community Budget, CAP, and more directly from the ERDF regional policy, whose financial capacity was limited.

In this first stage the neoclassical approach, with all the nuances wanted, dominated the then

European Economic Community. It is important to remember that the Treaty of Rome has fundamental political importance within the context of international relations in that period. It is one of the instruments used to demonstrate in Cold War Europe the superiority of market economy in the face of the centralized planning directed economy of the Eastern European countries. There lies the


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importance given to the role of the market in the text, except for CAP, which was tightly taken control of in a situation in which self-sufficiency was almost an obsession. The creation of a regional financial fund was discarded in the Treaty, not without discussion. The Treaty clearly prohibits, in general, the granting of all types of aids, except in the part of the German Federal Republic affected by separation, precisely in the dividing line of not only the two Germanys but two confronted social and economic systems.

The creation of ERDF implies a slight change in direction. The need to support the member

States’ regional policies from the Community is recognised with its setting-up. We must not forget, at the same time, the scarce initial financial allocation and what the convenience of facilitating some of the countries that joined in 1973 with resources from the common budget to complement what would correspond them from the CAP represented in the decision of creating it.

b) The second stage of the integrating history starts with SEA and finishes with the Treaty of

Amsterdam (TA). The SEA gave place to two important transformations in EU history. On the one hand, the building of the single internal market (SIM) with freedom to circulate productive factors, goods and services. On the other hand, at the same time, the decision to apply measures directly aimed at reinforcing economic and social cohesion, implying a radical reform of the Structural Funds (passed in December 1988 and in effect since January 1st 1989) to finance the new policy.

The direction aimed with the SEA is followed with the European Union Treaty (EUT). As a

logical culmination of the SIM, the European Monetary Union (EMU) is prepared, and came into force in January 1st 1999. Economic and social cohesion policy continued with the Treaty of Maastricht, adding the Cohesion Fund to the Structural Funds, destined to aid the Union’s four less developed countries (Greece, Portugal, Spain and Ireland) in reaching the criteria of nominal convergence in order to join the EMU without breaking their tendency towards real convergence.

This decade will probably go down in history for the results of integration in the single market

and the euro than for advances in real convergence. However, the advance made has also been evident regarding cohesion policies, although some may judge it insufficient. Let us remember that structural actions represented 15.1 per cent of the Community budget in 1988, reaching 37.7 per cent in 1999.

Relating this to convergence and divergence theories, we must say the Structural Fund reforms

imply that the risks of the global advantages of market integration being distributed in an imbalanced way are recognised, almost explicitly, for the first time, favouring the more developed regions and States to the detriment of the backward ones, deepening the internal rift between rich and poor regions. Confronted with the perspective of disintegration, cohesion is decidedly opted for. Together with its unquestionable merits as a mechanism of resource assignation, the defects of the market to impulse redistribution of economic growth and development benefits, especially expected from an internal market, are admitted . The reform implies a significant change in direction. Its importance is greater considering that it coincides with the start of the process to establish the internal market, one of the milestones of territorial and economic integration in the European Union.

c) The third period starts with the Treaty of Amsterdam, taking financial shape in the

agreements of the Agenda 2000, an is still running. New steps in issues of integration and cohesion are not expected in this stage, once the Berlin Wall fell, The USSR dissolved, and global capitalism was confirmed. On the contrary, renationalising trends in common policies have appeared.

Up until now, every time that a significant political event has occurred, and each

integrating step is significant, economic and social cohesion policy experimented a significant


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qualitative and quantitative advance. In 1999, starting year of the EMU, this important tradition in the European Union was broken. Furthermore, a maximum value for Structural Funds granting per State is imposed under regulation for the first time as a consequence of Agenda 2000. This is established as 4 per cent of a benefiting country’s GDP (Regulation (CE) n. 1260/1999 of the Council, by which the general disposition on Structural Funds is established). Moreover, the introduction in the Regulation of semi-automatic debudgeting of commitments for resources not applied at the end of the second year since the commitment is a novelty. Reprogramming of the budget that was not applied was possible before. From now on, irrecoverable resource reductions can happen. By 2006, structural actions will be 32.3 per cent of the Community budget, less than when Agenda 2000 was passed.

When the monetary union came into force, there were proposals in favour of passing

measures to further reinforce economic and social cohesion, supported by economic theory. Conventional theory of optimal monetary areas recognises that only three solutions exist once the exchange rate is lost as an adjusting mechanism in the case of asymmetrical or unequal impacts:

i. Labour force mobility (scarce in European culture and discarded in practice),

ii. Flexibility in wages (neoclassical solution) iii. The creation of an aid fund for the affected regions (neokeynesian solution), with

possible formulae to avoid the rise in unemployment in areas affected by asymmetrical impacts.

However, instead of adopting the last alternative, solidarity spending has decreasing

importance in the new financial prospects. In this third phase, the former progresses made in Structural Fund budget allocation as a

percentage of the total budget are stopped. Beside political and financial motives of member States, stopping of the advances in cohesion policy occurs in particularly relevant circumstances. On the one hand, empirical evidence shows that real convergence in GDP per person is happening in the States, more than in the regions. On the other, we are in the eve of a great expansion of the European Union, with the incorporation of the greatest number of countries and population ever in EU history. However, the increase in Community population, almost a third, will be accompanied of a significant decrease in the Community GDP per person, around 10 points if considering the expansion of 10 countries, and 13 points considering 12 more States.

The Sapir report stresses the need to focus attention on driving economic growth. A biased

reading of the Report could reinforce the positions of those opposed to strengthening of economic, social and territorial cohesion policies. The false argument that the attention and effort dedicated to promote convergence since 1989 has been to the detriment of putting into action all the growth potential could be used. Up until now, however, applying more resources to Structural Funds has not been proved to harm growth. On the contrary, concentration of these resources in less developed countries and regions has served to maintain investment demand at a higher level than in the absence of Fund resources.


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FINAL REPORT 4. EMPIRICAL LITERATURE AND EVIDENCE 4.1. Empirical literature Most part of academic literature trying to explain the evolution of regional imbalances is

posterior to the Second World War, though some authors are from before that date. Various schools can be distinguished. As time has gone on, especially in the last three five-year periods of the 20th Century, the writings on convergence and divergence have shrunk. At present, the previous diversity in directions is reduced in practice to two schools: the neoclassical model and the endogenous growth model.

During the last two decades approximately, the so-called empirical literature (Sala-i-Martín

1994b chapter 10) has concentrated in verifying whether the data backed the hypothesis of convergence or the suppositions of divergence, be it generally or specifically, in the case of a specific country or the European Union. (Castell and Bosch 1999; Cuadrado-Roura and Parellada 2002). In general terms, it could be said that neoclassicists have given up on winning the battle of proving absolute convergence. If this is so, if the market and spontaneous economy dynamics aren’t capable of generating absolute convergence, which is the interesting one in strengthening social and economic cohesion in the European Union, then we must conclude that public powers should act in order to remove the obstacles that prevent reaching the highest stationary equilibrium level, reaching convergence and strengthening cohesion.

Baumol (1986) published a work that seemed to demonstrate the existence of convergence

amongst a number of countries. But the demonstration referred to countries that were developed in 1979, last year of the analysis. That is, the selection previously implied the attainment of convergence. In fact, when the study was repeated, not long after, including countries that at the beginning of the 20th Century were more or less on the same level of development expectations, it was found out that in 1979 they had diverged.

Romer’s contribution (1986) marks a turning point in empirical research of convergence.

His conclusions on the diverging evolution of the economies examined, which were later confirmed by Lucas (1988) and others, are placed at the origin of the school of endogenous growth. Summers and Heston (1991) created further expectation with a study of 130 countries, including 16 with central planning, taking data from 1960 to 1985. Starting from the relationship between annual growth rate and the logarithm of GDP per person, they found that evolution was diverging. Measuring dispersion of the logarithm of income per person every five years, again resulted in divergence.

However, the neoclassical school soon reacted. Admitting the absence of absolute

convergence, they tried to prove the existence of conditional or relative convergence. The two roads followed were, on the one hand, to study similar economies and, on the other, to carry out multiple regression analysis: partial correlation between starting growth and income per person, for various cases.

Nevertheless, the findings of relative convergence met with the objections of Levin and

Renelt, who submitted the new analyses to the variable credibility test or extreme limit test. The conclusion that the variables used were not robust made the neoclassicists defend themselves by arguing that the test in question was difficult if not impossible to pass.

Goerlich and Mas (1998) have noted the convenience of considering some precautions

before making a definite evaluation of results from empirical studies. The factors that influence this decision are many, such as:


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The choice of model: each model has implicit or explicit hypotheses; The selection of variables: results differ depending on which variables are

analysed; for example, a converging evolution can be found for work productivity with divergence or stagnating of income per person;

The process used to express variables in real terms (which is not always explained);

The statistical dispersion indicators used, simple or weighted (standard deviation of the logarithm of a variable, coefficient of variation, Gini index, Theil indexes, etc);

The geographical level of integration or disintegration in the territories subject to analysis. The choice can be relevant in deciding on applying regional and cohesion policy: on a national, regional and sub-regional level;

The chosen time period: starting and ending dates of the study. In short, empirical literature leads us to think that the neoclassical-type absolute

convergence hypothesis, lacking regional or cohesion policy, is beyond reality. A conditional or relative convergence is, in any case, to be expected. However, even under these circumstances, the existence of a rigid law to which relative convergence is submitted to can be talked of. Empirical studies show, as neoclassicists themselves recognise, that the rate of convergence is desperately low, at a rate of 2% yearly. Furthermore, it seem that this type of convergence is coming to a halt since 1979 according to some authors.

4.2. The European Union: diverging convergence The most sound information on convergence in the European Union can be found in the

Commission Reports on economic and social cohesion (1997, 2001 and Interim Reports 2002 and 2003). Each one of them adds new elements of judgement to better evaluate the situation. Those concerning factors that determine real convergence and the challenge arising with the great expansion must be highlighted. However, all of them have common factors from which a series of conclusions can be extracted.

State convergence relative to the Community average (what could be called convergence

towards the outside), convergence of less developed regions compared to the more developed ones, and internal regional convergence in each State (could be called convergence towards the inside) can be differentiated. Some of their most relevant conclusions are:

- Disparities amongst States in terms of income per person have decreased

considerably. Cohesion countries (benefiting from Cohesion Funds) have had a positive behaviour. The case of Ireland is remarkable, with its GDP per person being situated at 118% of the average in 2001.

- Disparities in income between the richer and poorer regions have hardly changed (First Report) or are insufficient, even though some advances are appreciated. “Tendencies in the past lead us to think that a new generation is still needed before regional differences disappear” (Second Report). That is without considering the impact of expansion.

- Signs of convergence towards the average can be found in all objective 1 regions. They had a level of 69% of Community average GDP per person in 1989 and this rose to 69.5% in 1995 and to 71% in 2000 (Second Interim Report).

- The employment rate (percentage of working age population who are employed) has been improving with time in the Union as a whole, although it is far from the 70%


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objective set by the Lisbon European Council for 2010. Differences persist in this field, although there is a tendency towards decreasing (Second Interim Report)

- Unemployment rates have decreased in general. The breaking down of the USSR caused an increase in Finland and Sweden which has been corrected. Differences are still high.

- Within the States, regional distances in income per person have not only not decreased but an increasing tendency is found. Internal regional differences in unemployment have not increased but are high in some States (Second Interim Report).

- In short, it could be said that convergence between States is advancing (relative beta convergence), but inside the States regions diverge (sigma divergence). This is the paradox of diverging convergence.

It is possible to ask oneself if this paradox is related to progress in the economic integration

processes. A direct connection between the intensity of integration and regional convergence/divergence inside a country probably exists. Everything indicates that there are grounds in the hypothesis of integration processes favouring economic growth in richer territories in great measure. This statement is true for all cases. Convergence in less developed countries relative to the Union is due to advances in their more developed regions. They concentrate benefits in greater measure and impulse the country’s average GDP per person. As a consequence of the relative concentration of growth in richer regions, regional divergence increases inside each member State. The more competitive centres of each country will work in a more integrated and competitive way, surrounded by a periphery which hardly has any integration or cohesion.

The Second Report pays attention to the excessive concentration of activity in the triangle

defined by the vertices North Yorkshire (United Kingdom), Franche-Comté (France) and Hamburg (Germany) – a pentagon is sometimes mentioned. 33% of population and almost half (47%) of generated incomes are concentrated in this triangle that hardly covers 15% of the Union’s territory. “In other comparable economies, such as the U.S.A., distribution of activity is more disperse”. We could add that North-American regional imbalances are far from those in the Community. If the European criteria to determine Objective 1 regions was applied in the federal states of U.S.A. only two states (Mississippi and East Virginia), with 2% of the total U.S.A. population (around 20% of the EU) have a GDP per person inferior to 70% of the average (Puga 2002).

4.3. Impact of Structural Funds The Second Interim Report reports on the economic impact expected from Structural Fund

interventions in the period 2000-2006 for Objective 1. It is based on the conclusions of a study. Portugal’s total GDP in this period will be 3.5% higher than it would have been without Community support; it will be 2.2% higher in Greece; it will be 1.7% higher in Mezzogiorno; it will be 1.6% higher in Eastern Germany; and it will be 1.1% higher in Spain. This rise will be insignificant in Ireland due to concentrating spending on intangible investments such as education.

Observe that we are not talking about the percentage of annual GDP increase due to Funds,

but the highest total GDP obtained with Fund contribution. Some partial estimates are available in Spain for the period and space referred to (De la Funete, Herce, Sosvilla-Rivero, Murillo and Sosvilla-Rivero). A study has also been carried out for Objective 1 as a whole, covering the period from the reform onwards, that is, 1989-2006, comprising Structural Funds and Cohesion Funds (Sosvilla-Rivero 2003). Its conclusions are that the successive investment programmes between 1989 and 2006 represent an average annual gain of 0.56 percentage points for the recipient Autonomous Communities compared to the absence of structural aids. This implies an increase of 425 euros in average income per person.


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if the Structural Funds reform hadn’t taken place (significant increase in resources to this aim and territorial concentration of interventions). However, this isn’t incompatible with appreciations that find it insufficient.

Various factors have to be considered when making a global evaluation: a) Timeline Horizon Remembering that the correction of regional imbalances requires intense action that is

lasting in time is almost commonplace. Results can not be expected in the short or even medium run if the policy is well designed. All scholars on territorial problems have said so for a long time. “Territorial distribution of productive activities can only be modified slowly” (Von Boventer 1964). There are many reasons for this: modifying of factors that have historically determined the localization of business investments, territorial structure of transport networks, delaying influence of historical structures, maturing period of certain investments such as infrastructure investments, etc.

We must take into account that the applying of the Structural Fund reform started in 1989.

A decade had gone by when the current programming period 2000-2006 was opened. Some opinions say that there is already enough time perspective. For other, it is still premature to intend making definite evaluation due to the insufficient time perspective.

b) Statistical Inconsistencies Statistics that cover large time periods and are coherent for the period studied are needed in

order to make evaluations with enough time perspective. This does not seem to be the cases for data supplied by Eurostat. The European Commission admits that the only homogenous series of GDP per person covers only the period 1995-2000 (SEC 95), in foot note number 5 of the Second Interim Report. Therefore, comparisons can not be made with 1988, the year before the Structural Fund reform. Foot note number 8 of the same report states that “it must be highlighted that some of the data on GDP per person published in the First Interim Report were, in some cases, updated by Eurostat. It is therefore impossible to make a direct comparison with the numbers appearing in both reports”. Attention is drawn on “inconsistencies which, obviously, decrease reliability to the figures shown” after making a specific analysis of some data on GDP per person from different professional fields. It seems that reliability on statistics would be of utmost importance when belonging or not to objective 1, that is having access or not to important Fund aids, depends upon it.

c) Resources assigned to structural actions The question of the financial resources that the European Union dedicates to strengthening

social and economic cohesion has been, is and will be object to discussion and controversy more than reflection. Many experts suggest that the resources necessary to reach the objective set out by the Treaty are not being granted.

The European Commission established in the “First Report on economic and social

cohesion 1996” (European Commission 1997) what could be understood as its official doctrine on the sharing of responsibilities between the European Union and the member States in issues of reinforcing cohesion. The main obligation would lie on the States. The EU’s role would be


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secondary. This is understood in the following paragraph: “the policies of member States are the main instruments with which the Union counts to reach the cohesion objectives. In this sense, Union solidarity ‘starts at home’. Besides, member States have the means at their disposal. Public spending represents between 40 and 50% of national GDP, in comparison with the Community budget which represents 1.2% of the Union’s GDP”.

The fundamental basis of the transcribed reasoning is the availability of resources of each

part, that is, a simply pragmatic argument. Nevertheless, according to some experts’ judgement, reading of various articles of the Treaties gives enough legal arguments to deduce that the Union should not avoid its own responsibilities by transferring them to the member States11.

We should remember, talking of the publishing of the Sapir Report, that twenty-five years

ago another experts’ report commissioned by the Commission recommended rising the topmost value of Community budget spending to 2%-2.5% of Community GDP (MacDougall 1977). At present, just over half of the minimum then recommended is spent. The European Parliament, in 1993, echoing the Commissions plan, recommended dedicating 0.97% of the common GDP to Community regional policy if differences between Community regions were to be radically shortened (Resolution A3-0279/93 of October 28th 1993). Another comparative element is found in the Marshall Plan. The United States annually granted more than 1% of its GDP during several years to the reconstruction of Western Europe after the Second World War. This percentage is more than double what the Union grants to internal solidarity. However, it its true that the duration of the Plan was for a limited period of time. Nevertheless, without going back to Rosenstein-Rodan, there are actions whose efficiency depends on accumulating a critical amount of resources. Reaching objectives may be impossible under the minimum threshold. The Marshall Plan was a success both for Western Europe and the United States.

d) Choice of priority axes Some opinions lay the blame of the scarce efficiency of Fund actions on less developed

regions on the defective assignment of resources available for Objective 1 regions in development axes; in particular, assignment to infrastructures has been considered excessive. Certainly, this is a minority criticism. Classic studies on the role of infrastructures in the economy in general and relative to regional development in particular, come from the 80s (Biehl 1982, 1986; Aschauer 1989). Infrastructures are not the sovereign remedy. The least that can be said is that they are a necessary but not sufficient condition to achieve regional development, more so the lower the starting point (Lázaro 1989). A number of empirical studies exist that show, with more or less nuances, the positive influence of infrastructures (Mans and others 1994; Argimón and others 2002ª, 2002b). Of course, other axes are important, but when allocation to infrastructures is notoriously deficient, other assignments can be little else but useless.

11 Amongst others, article 2 of the Union Treaty, consolidated version; Articles 158 and 159 of the

European Community Treaty.


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Analysis of the impact of Community Policies on regional cohesion


FINAL REPORT THE IMPACT OF CAP ON

REGIONAL COHESION

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Analysis of the impact of community policies on regional cohesion FINAL REPORT ON CAP. DG REGIO EC.

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TABLE OF CONTENTS

C. CONTRIBUTION OF THE AGRICULTURAL POLICY TO THE REGIONAL COHESION

EXECUTIVE SUMMARY PLAN OF WORK MOTIVATIONS AND APPROACH DEVELOPMENTS OF THE CAP IMPACT ON SOCIAL COHESION IMPACT ON TERRITORIAL COHESION IMPACT ON GLOBAL COHESION PERSPECTIVES AND “APPROPRIATE PROPOSALS” CONCLUDING REMARKS

1. MOTIVATIONS AND APPROACH

1.1. MOTIVATIONS OF THE STUDY 1.2. METHODOLOGICAL APPROACH

2. DEVELOPMENTS OF THE CAP 2.1. PAST DEVELOPMENTS 2.2. PRESENT MAIN FEATURES OF THE CAP 2.3. PRICE SUPPORT POLICY 2.4. RURAL DEVELOPMENT POLICY 2.5. REFORM PROPOSALS

3. IMPACT ON EU SOCIAL COHESION

3.1. IMPACT OF THE PRICE SUPPORT POLICY 3.2. IMPACT OF THE RURAL DEVELOPMENT POLICY+ 3.3. IMPACT OF A STRUCTURAL POLICY IN AGRICULTURE

4. IMPACT ON TERRITORIAL COHESION

4.1. CHANGES IN INCOME DISPARITIES 4.2. IMPACT OF THE PRICE SUPPORT POLICY 4.3. IMPACT OF RURAL DEVELOPMENT POLICIES 4.4. IMPACT OF A STRUCTURAL POLICY IN AGRICULTURE

5. IMPACT ON GLOBAL COHESION

5.1. EXPORT SUBSIDIES 5.2. TRADE-DISTORTING DOMESTIC POLICIES

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6. PERSPECTIVES AND PROPOSALS

6.1. PRICE POLICY 6.2. RURAL DEVELOPMENT 6.3. STRUCTURAL POLICY IN AGRICULTURE

7. C0NCLUDING REMARKS APPENDICES (tables & figures)

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EXECUTIVE SUMMARY

PLAN OF WORK This study analyses the consistency of the most important sectoral policy of the European

Union (EU), the Common Agricultural Policy (CAP), with the objectives of economic and social cohesion stated in the Treaty. After mentioning the motivations for a common agricultural policy and the analytical approach followed in this study (§2), we outline the main developments of the CAP and the recent provisions of Agenda 2000 followed by the June 2003 reform (§3). The impact of the CAP on social (§4) and on territorial (§5) cohesion within the EU will then be examined, together with the impact of the CAP on global cohesion (§5). A final chapter will outline the perspectives and the ‘appropriate proposals’ resulting from the analytical work performed in the study (§6) before some concluding remarks (§7).

MOTIVATIONS AND METHODOLOGICAL APPROACH After the failure of the attempts to create a European Defence Community in 1952 and a

European Policy Community in 1954, policymakers succeeded in the process of European integration by adopting a ‘sectoral’ approach. The European Coal and Steel Community in 1951 was a first success, followed by various other common sectoral policies instituted by the European Economic Community in 1957. Among them the Common Agricultural Policy has been the most important, reaching over 80% of EEC budgetary expenditure in 1970, when almost all the common commodity market regimes were enforced.

However, it was immediately apparent that such a ‘sectoral’ approach to European integration,

reflected in the decision-making process by ‘sectoral’ Councils of Ministers, was not the best way for attaining the common good of all European citizens. Sectoral Ministers, pressed by sectoral lobbies, were favouring more the interests of limited groups of producers rather than the overall interests of all European citizens. Actually, consumers and taxpayers are rarely explicitly represented in the various committees taking part in the decision making process of sectoral policies.

In order to correct such institutional bias, in the following years, the Treaty of the Community

was enriched by two “horizontal” clauses stating that all EU policies should be consistent with two main “horizontal” policies: ‘Economic and Social Cohesion’ and ‘Consumer Protection’. According to article 159 of the ‘Consolidated Version of the Treaty Establishing the European Communities’, “the Commission shall submit a report to the European Parliament, the Council, the Economic and Social Committee and the Committee of the Regions every three years on the progress made towards achieving economic and social cohesion and on the manner in which the various means provided for in this Article have contributed to it. This report shall, if necessary, be accompanied by appropriate proposals.”

This study will analyse the impact of the CAP on the cohesion of the European Union both by

confronting the implemented policy measures with the currently accepted principles of economic

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theory and by verifying the results in empirical and quantitative terms as far as possible. The consistency of the outcomes of the CAP with the objectives of the EU Cohesion Policy will be appraised and consequent policy recommendation will be formulated with reference to the three main groups of CAP policy measures, namely: price policy, rural development, and structural policy in agriculture.

DEVELOPMENTS OF THE CAP The CAP was formally instituted in 1962 under the constraint that at least 30% of the

Community financial expenditure in agriculture should have been oriented to structural policy measures in order to solve the problem of the low productivity of small farms and set most European farmers on an equal footing for competing in the common market. In practice the structural policy in agriculture was always neglected as compared to price policy. Its relative importance, broadly represented by the Guidance section of the European Agricultural Guarantee and Guidance Fund (FEOGA) rarely exceeded 6% of the total agricultural expenditure. Consequently the CAP has usually been identified by its largely prevalent price policy.

The 1969 ‘memorandum’ of the founding father of the CAP, Commissioner for Agriculture

Sicco Mansholt, advocated a substantial reduction in price support and an effective structural policy in agriculture in order to increase the competitiveness of regions where farms were too small and farm labour was redundant. However the structural policy reform implemented in the seventies did not succeed, mainly because the unbalanced support of domestic prices was not dismantled. Consequently, the improved farm efficiency, instead of creating wealth for all European citizens, was increasing unsold surpluses whose disposal represented a large liability for the common budget.

In the following years, instead of reducing domestic price support and expand structural

policies, the Council of Agricultural Ministers tried to attain equilibriums on commodity markets by developing ‘supply management’ policy measures, i.e. by administrative measures constraining domestic production, ranging from the farm quotas on produced quantities of milk, to limits on vine and olive tree plantings, to subsidizing the set-aside of arable land. In the last decade European citizens, as taxpayers, paid an annual average of € 1700 million to farmers as compensation for not cultivating arable land in order to restrict domestic supply and maintain high domestic market prices.

The recent Enlargement to 10 New Member States was taken as an opportunity for only a

moderate reduction in agricultural price support in the EU-15, while the Council of Ministers extended the EU common price policy to Central and part of Eastern Europe. As a consequence of this enlargement, farm incomes in New EU Members will on average double, creating alternatively, either extra agricultural surpluses to be disposed at high budgetary cost, or extra land set-aside, implying a manifest misuse of available economic resources. Both alternatives are damaging EU citizens.

The agricultural sector is closely dependent on a balanced development of rural areas, which

account for 80% of European territory. After the inclusion of the Guarantee section of FEOGA in the Structural funds, the attention of policymakers involved in agricultural policy shifted to the Rural

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development policy, qualified as the “second pillar” of the CAP. It should be based on transparency in drawing up and managing programmes, on a multisectoral and integrated approach to the rural economy, and on flexible aids for rural development. It should also be based on subsidiarity and on promoting decentralisation and consultation at regional, local and partnership level.

Reforms of the CAP Since its institution, the price policy of the CAP has been strongly criticised and subject to an

almost permanent process of reform. Already in the late Sixties the Mansholt Memorandum was complaining about the ‘mountains’ of butter and the ‘lakes’ of milk generated by the excessive price support. In the following years various reforms were tried and did not fully succeed: levies and super-levies on farm production, budget stabilisers, production quotas, and land set-aide, just to quote the most important. The main reason for which they largely failed was because they missed the real issue, i.e. substantially reducing the unbalanced price support at producer level.

Also as a consequence of external pressures received in the GATT Uruguay Round for

reducing the EU external protection, the 1992 MacSharry reform dismantled tariffs and export subsidies, leading to a cut of almost one third of the domestic price for cereals. In order to prevent a sudden disruption in farmers’ income, ‘compensatory’ payments per farm were instituted, roughly equivalent to the expected reduction in farm revenues. In order to allow a smooth structural adjustment of cereal and oilseeds production to more market oriented domestic prices, such payments should have been decreasing and limited in time. This was repeatedly told by Commissioners for Agriculture, but in practice such “compensatory” payments remained, and after some years their name was changed into “production aids”.

Substantial structural adjustments in production cannot take place if the support to producer

price (market price plus direct payments) is not lowered. Agenda 2000 and the following reforms tried to be more market oriented, but substantially maintained such payments justifying them in terms of environmental benefits generated by cereal and oilseed producers.

From a non-sectoral point of view it is apparent that the numerous tried or implemented

reforms performed good analyses and advocated good policy measures in theory, but in practice were generating mainly cosmetic changes in the core CAP policies. Notwithstanding the apparently large reduction in price support claimed by the 1992 MacSharry reform, by the 1994 Uruguay Agreement on Agriculture, and by the Agenda 2000 programme, annual transfers from consumers and taxpayers to farmers per Annual Work Unit (AWU) did not decrease, on the contrary they increased slightly, reaching on average € 17 thousand per AWU in year 2001.

The most recent reform decided by the Council of Agricultural Ministers in Luxembourg on

June 24, 2003, introduces a single farm payment for EU farmers, independent from production. This payment will be linked to the respect of environmental, food safety, plant health and animal welfare standards, as well as to the requirement to keep all farmland in good agricultural and environmental condition ("cross-compliance"). The revision of the market policy of the CAP introduces asymmetric price cuts in the milk sector and reforms in some commodity regimes: rice, durum wheat, nuts, starch potatoes and dried fodder.

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The Rural development policy will be strengthened with new measures to promote the environment, food quality and animal welfare and to help farmers meet EU production standards. A reduction in direct payments ("modulation") for bigger farms will take place in order to finance the new rural development policy.

If we take into account that in the coming years the CAP will be extended to the 10 New

Members, the modest steps of the June 2003 reform towards a more market oriented CAP will not avoid a substantial increase in the European level of agricultural support, together with all the related costs for consumers, taxpayers and for the environment.

IMPACT ON SOCIAL COHESION The overall impact of the common Price policy on the social cohesion of European citizens is

substantially negative. In the fifties, immediately after World War Two, in numerous regions more than half of the working population was engaged in agriculture. At the time, transferring resources from usually richer non-farm sectors towards a usually poorer farming sector could improve the income distribution in the EEC, by reducing income disparities. Now the situation has largely changed, farm households are richer than the rest of the population in most Member States. While economic policy is expected to transfer resources from the better-off to the worse-off, the present agricultural price support policy is now transferring income in the opposite direction.

Impact in the short term The impact of price support on households is equivalent to a regressive income tax, as poorer

households spend a larger share of their income in food and beverages than richer households. On the other hand, income transferred to farms is proportional to the size of production, consequently larger and better-off farms are benefiting much more than small farms from price support. Moreover, within larger farms extra profits benefit mainly landowners rather than employed people. Artificially increasing the income of the better-off people at the expense of worse-off deteriorates the social cohesion among European citizens. Their faith in the European Union as a just and useful supranational government is undermined.

A second issue worsening social cohesion is the misallocation of economic resources generated

by the CAP. The huge amounts of public money spent in the disposal of unsold surpluses by destroying them if perishable (e.g. fruit and vegetables) or denaturating them (e.g. compulsory distillation of wine) or subsidizing exports and dumping them on the world market (e.g. cereals, beef, milk) is rightly perceived by citizens as a waste of economic resources and a failure of the European supranational government.


which are apparent indicators of the existing misallocation of resources. However the damage for European citizens, although less visible, has probably increased. The large sum of money spent for sterilizing a basic economic resource as arable land and the financial resources spent in the inevitable bureaucratisation and monitoring of supply management policy measures are still visible. The

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constraints on the entrepreneurial activity of farmers, on the free intersectoral and interregional allocation of resources, and the increase of fraud, which is correlated to the diffusion of quantitative policy measures, have a negative impact on the citizens’ well-being which is much more difficult to quantify. However, such malfunctioning of the CAP is perceived by European citizens and is in contrast with social cohesion.

Impact in the long-term Economic policies are usually appraised on the base of their short-term effects. Structural,

longer term effects are often overlooked, also due to the fact that policymakers prefer to receive a return to their policies within the time-limit of their mandate. Nevertheless, the structural impact of economic policies is fundamental in solving existing problems and granting sustainability for good.

The highest cost of the present price support policy for European citizens has not been the

annual waste of money in surplus disposal, neither the administrative expenditure needed to maintain the present huge bureaucratic apparatus, nor the high annual budgetary expenditure compensating farmers for not cultivating part of their arable land. A large share of these resources are clearly wasted for society as a whole, but at least they are somehow visible, although usually the media do not provide European citizens with a correct picture of such public expenditures, income transfers and deadweight losses. The largest waste of economic resources generated by the CAP is likely to be the consequence of its impact in delaying and sometimes preventing structural adjustment towards a more efficient and competitive agricultural sector.


structure remains fragmented and largely inefficient, leading to high costs of production. As a consequence, the extra costs paid by consumers in terms of higher food prices, and by taxpayers in terms of higher taxes needed to finance producer subsidies for various commodities, do not fully benefit farmers in terms of increased incomes. A large share of such transfers are needed to pay the higher production costs due to the delay in structural adjustment.

For example, we may compare the efficient farm-size structure of the Netherlands whose

agricultural policy was liberal before entering the EEC, with the rest of EU-15. Both in the Netherlands and in the EU-15 the average gross productivity of labour (standard gross margin per annual work unit) is approximately four times larger in medium sized farms (from 16 to 250 ESU1) than in small farms (less than 250 ESU). But in the Netherlands only 8% of the labour force works in “small” farms, while such a share in the rest of the EU-15 is over 50% of the labour force. Mainly as a consequence of such different farm-size structure, the average productivity of labour in the Netherlands is more than twice the labour productivity in the rest of the EU-15.

When discriminating in favour of small inefficient farms, policymakers think to foster social

cohesion, as income transfers flow in a larger proportion to poorer farmers reducing the existing income disparities within the agricultural sector and within society. Unfortunately such impression is 1 ESU = European Size Unit. The average economic size of what we call “small size” and “average size” farms

in the EU-15 is respectively € 3919 and € 54670 standard gross margin. Farms larger than 250 ESU are not considered in our comparison, in order to deal with farms which could be managed as “family farms”. However in the EU-15 such large farms account only for 1% of farm and 7% of the labour force.

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short-sighted and defective in a longer term perspective. In order to truly increase European cohesion, the largest share of income transfers to poorer farmers should not be granted in terms of higher product prices or production-tied subsidies, but rather in terms of structural aids. The CAP would solve at best the problems of poor farmers, in their interest and in the interest of society as a whole, by helping them to increase the size and improve the management of their farms in order to lower production costs, or to find a better job outside agriculture.

The impact of a well targeted and managed Structural policy in agriculture could be much

more favourable to social cohesion than the present price policy. A better intersectoral and intra-sectoral allocation of the labour force would reduce income disparities both within the agricultural sector and within the European society as a whole.

The Rural development policy should be made of intersectoral policy measures that are better

targeted to specific objectives at local level. In this respect, as a general rule, it is more efficient and equitable than the price support policy. Public resources can be oriented to the poorer regions and can be targeted to the investments which are most productive for society as a whole. As a consequence its impact on European cohesion is likely to be, on the whole, positive.

Impact on environment The impact of the common price policy on the environment is mixed. On the one hand it is

undeniable that, although the income transfers generated by the price support policy are more concentrated on rich, intensive agricultural areas, a minor part of such transfers reach poor marginal areas. These income transfers contribute to the maintenance of positive externalities in terms of human settlements on otherwise abandoned territories, often contributing to better landscape and to improved rural development.

On the other hand, it is equally undeniable that in various instances price support contributes to

increasing pollution and other negative externalities on the territory. Probably the main negative externality of higher producer prices is the incentive to use more chemical fertilizers, especially nitrogen, which are polluting especially superficial waters and underground aquifers. If producer prices are maintained at high levels and arable land is withdrawn from cultivation, farmers tend to use extra fertilisers and other polluting inputs, such as pesticides, in order to increase output on the limited cultivated land.

Sometimes the price support of some commodities is directly damaging the environment. For

example, the high subsidies to durum wheat strongly contributed to maintain wheat cultivation in hilly areas, generating soil erosion and decreasing fertility in steep fields, while increasing the risk of flooding downhill, where the eroded soil sediments in riverbeds. Instead of present undifferentiated EU-wide price support, the local implementation of targeted agri-environmental subsidies would have favoured non-arable cultivations in steep cultivated areas, improving environment sustainability.

The large diffusion of supply management policies and the related bureaucratisation of the

agricultural economy, request from farmers extra time and work for red-tape administrative duties, foster political patronage, and create new opportunities for fraud. In order to improve social and

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interregional cohesion, the CAP should promote both a better ecological environment and better social environment in rural areas, where citizens should feel that their work is equitably remunerated and no-one is allowed to free-ride and benefit of special privileges.

IMPACT ON TERRITORIAL COHESION The impact of the Price policy on the territory has been analysed from different points of view

by the economic literature. The first approach has been to examine how the price support and the financial aids generated

by the CAP were distributed on the European territory and if better-off regions were receiving more income transfers to agriculture than poorer regions. Such analyses led to the conclusion that farmers in richer regions and in richer member states were benefiting more from CAP than farmers in worse-off regions. This was largely due to the fact that producer prices of commodities cultivated in continental Member Countries and regions (cereals, sugar, milk, beef) were more supported than producer prices of commodities cultivated in poorer Mediterranean Countries and regions (fruit, vegetables, olive oil, wine). According to such analyses the impact of the CAP on European cohesion was negative, as income disparities within agriculture were increased at Member State and at regional levels.

The work carried out in occasion of the first Cohesion Report of the Commission, followed by

the work carried out in the Second Cohesion Report, used a more complete approach to the analysis of the income redistribution generated by the CAP at regional level. All people affected by the CAP were taken into account, not only farmers. For every European region income transfers from consumers and taxpayers towards agricultural producers were also estimated. The result was in full contrast with the previously mentioned beliefs of the academic and expert community. The overall impact of the CAP on interregional income redistribution, and consequently on interregional cohesion, is clearly positive. On average richer regions are transferring substantial amounts of resources to poorer regions. Such a result is due to the fact that, as a general rule, poorer regions are less populated and agriculture accounts for a larger share of their GDP. On the contrary, consumers and taxpayers in urbanised regions, as a general rule, are more numerous and bear a large burden for transfers benefiting farmers who are more concentrated in less populated and often poorer rural regions. Consequently any policy transferring money to agriculture is likely to reduce income disparities between richer and poorer regions.


interregional cohesion cannot be taken as a strong motivation for maintaining the present features of the CAP price policy for at least two reasons. Firstly, the beneficial effect on interregional cohesion would be the same if transfers generated by the CAP were compensating farmers for positive externalities and for improving the structure of their farms, in other words, if such transfers could be better justified on sound economic and social grounds. Secondly, if such transfers from rich to poorer regions were allocated to the best social or economic uses, without sectoral constraints, in favour of poorer Member States and Regions, their impact on interregional cohesion would be much larger and transparent.

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The Rural development policy, by its nature, can be better oriented to poorer Member states,

regions and areas. Consequently its impact on interregional cohesion is generally positive although it could be largely improved.

The impact of a well targeted and managed Structural policy in agriculture could be much

more favourable to interregional cohesion. A better intersectoral allocation of the labour force would reduce income disparities between poor agricultural households and some of the richer households in non-agricultural sectors of production.

IMPACT ON GLOBAL COHESION The European Union is already the largest commodity market in the world for various

commodities, accounting for 376 million consumers (over 450 million if we include the New Member countries). EU-15 exports account for 20% of total world exports and 7% of exports in agricultural products. In some commodity markets the share of the EU on world trade is very high, e.g. over 30% of world oilseed imports, over 40% of pigmeat exports, 29% of milk powder and 26% of world eggs exports. Consequently agricultural policy measures implemented in the EU substantially influence world commodity markets.


predominant role of the EU in international politics and its efforts in international cooperation. EU-15 and its member countries are by far the largest contributors to international cooperation in favour of Less Developed Countries (LDCs), much larger than the US and Japan.

Export subsidies are a basic parameter for assessing the direct and indirect impact of domestic

policies in distorting international prices and trade flows. Actually, it is very hard to find a rationale, in the general interests, for producing at high marginal costs and then spend public money for subsidise exports and dumping surplus production on the world markets. Export subsidies are in fact banned, in principle, by the WTO. For agricultural products they are under reduction commitment and the majority of the WTO members would like to ban them in the current Doha Round of multilateral negotiations. According to the notifications by member states at the WTO, required after the GATT-WTO Marrakesh Agreement on Agriculture, the EU-15 is paying almost 90% of all world export subsidies.

The income transfers generated by the policy measures classified during the GATT

negotiations in the “amber” and “blue” boxes, are another parameter for assessing the impact of agricultural policies in directly or indirectly distorting international trade. The EU-15 is responsible for about three quarters of the “amber and blue box” income transfers to farmers generated in the world as a consequence of agricultural policies.

The global impact of the present price support policy of the CAP is substantial and is

damaging numerous less developed countries whose main resources for their economic development are agricultural. Access to the EU-15 market for agricultural commodities is prevented both by import

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levies and by domestic subsidies, while the access to Third country markets is also subject to indirect unfair competition by the EU, whose export subsidies depress world market prices.

It is apparent that the present price policy of the CAP is contrasting global cohesion.

International trade disputes on agricultural commodities in the WTO and in other forums are an indicator of how international cohesion is endangered by the price support policy of the CAP.

On the contrary structural and rural development policy measures, as a general rule, are fair

to international trade partners and allows for supporting our agriculture in a more efficient and equitable way, without seriously damaging world trade partners.

PERSPECTIVES AND “APPROPRIATE PROPOSALS” We will classify the proposals for CAP reform in three groups: price policy, structural policy,

and rural development policy. At present policymakers rarely mention the structural policy, the “second pillar” of the CAP is now rural development, including the residuals of the past, aborted structural policy. In our opinion the structural policy in agriculture is not only important, but necessary and strictly complementary to the reform of the price support policy.

Price policy The immediate opportunity for an effective and long lasting reform of the CAP are the current

multilateral negotiations on trade liberalisation in the Doha Round of the WTO. In order to foster the European social and interregional cohesion, while favouring global cohesion, the EU position at WTO should be less protectionist and more market oriented, reducing the divergence between the EU proposal and those of the United States and of the Cairns Group.

Producer support classified in the “blue box” should be included in the “amber box”, and all the

trade-distorting support classified in the “amber box” should be eliminated, possibly in five years. Criteria for including policy measures in the “green box” should be clarified in order to guarantee their positive contribution to increased social welfare, avoiding disguised protection and market distortions. De minimis payments should be reduced and eliminated, possibly in five years.

The June 2003 decisions of the Council of Agricultural Ministers approved some changes in the

price support policy, such as largely decoupled farm payments, which are very important in principle and in methodological terms. However, in practice the planned reduction of income transfers to farmers is very limited and slow-proceeding in time. In order to foster European Cohesion a much more effective approach in trade liberalisation should be decided.

Structural policy in agriculture The basic importance of a structural policy is apparent if we consider that in the EU-15 about

50% of the labour force employed in agriculture is working in undersized farms and the gross productivity of labour could be doubled or tripled just by providing such farmers with a better

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proportion of capital and land. As arable land cannot be expanded, it is important that in member countries and regions where the labour force is redundant and farms are too small and inefficient a direct structural policy is implemented in order to increase the local productivity of labour and agricultural incomes. If the productivity of labour is not increased, farm incomes will always be either unacceptably low or permanently supported by the government.

Unfortunately, structural policies are more difficult to implement than just providing farmers

with higher output prices and direct payments. On the other hand many farmers, especially the aged and inefficient ones, prefer to receive unconstrained price support and payments rather than financial support under constraints for improving their farm structure and management.

After the classification of the Guidance section of FEOGA in the structural funds, the

mainstream agricultural policy has been mainly dealing with market support and rural development, almost forgetting the urgent need for restructuring inefficient farms. On the contrary small and inefficient farms have been and are even more over-protected and provided with extra public aid. Such policy measures are contributing to worsen the already weak agricultural production structure in some regions. The share of the FEOGA Guidance section is still in the order of 6% of total agricultural expenditure, while the actual financial aid explicitly oriented to farm restructuring accounts for a much smaller share.

In order to promote social and interregional cohesion for good, the CAP should implement a

structural policy in agriculture complementing and reinforcing the reform of agricultural price support. Community, national and local governments should grant incentives for labour mobility especially within rural areas together with aids for restructuring farms, especially by increasing their economic size. Such structural policy should also be fully consistent and coordinated with the rural development policy.

Rural development The CAP has been traditionally oriented to support farmers and agriculture, without the due

concern to other economic activities developing in rural areas. The need to reduce he excess of resources employed in agriculture by shifting part of public aid to other economic activities in rural areas was already a main motivation of the Integrated Mediterranean Programmes in the Eighties, and became a major issue in the Rural development policy.

In order to maximise the well-being of all European citizens, public financial resources should

be invested in rural areas according to the existing needs, attaining the highest productivity of investments in social terms, i.e. for the whole rural society. In order to attain such a goal, financial funds should not be earmarked by Brussels to specific sectors of production and policy measures, but local administrators should be more responsible for the identification of local investment priorities.

Unfortunately as long as the rural development policy is managed at all decision-making levels

(Community, national, regional and local), by policymakers and civil servants which are working mainly on agricultural policy, the probability that financial resources could be efficiently and equitably distributed among different sectors of production is low. At present the rural development

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policy is orienting most available public resources to farmers and towards agricultural objectives, without a due concern for the efficient and balanced intersectoral development of rural areas.

In order to improve social and interregional cohesion in Europe, a more strict cooperation and a

better consistency between regional policy and rural development policy should be implemented, allocating available resources at best for society as a whole, without any bias towards sectoral or other particular interests.

CONCLUDING REMARKS This report tried to identify the impact of the present CAP on European Cohesion, as requested

by article 159 of the Treaty. The results of the analytical work carried out confirm the need of a permanent monitoring of “sectoral” policies in order to verify if they are consistent with the other EU policies and especially with two main “horizontal” policies, the “cohesion” policy and the “consumer” policy.

Within the CAP, the “price” policy has been by far dominating the “structural” policy in the

early decades and the “rural development policy” in most recent years. This is apparent in terms of the absorbed share of the common agricultural expenditure, of the income redistribution generated by the manipulation of agricultural market prices, and of the external effects on rural environment. Unfortunately the price support policy generated undisputable net negative effects on resource allocation, on income redistribution and on environmental protection. A limited number of relatively rich people have been granted with privileges at the expense of a large number of poorer people and at a high social cost in terms of deadweight losses.


especially in favour of a complementary structural policy able to reduce the number of small inefficient farms and solve the agricultural income problems for good. A large part of the excess of financial resources transferred to agriculture should be shifted to the most promising economic activities in rural areas by means of an effective and sustainable rural development policy.

Such important changes in the CAP will not be possible if institutional changes will not take

place in the agricultural policy decision-making process, where regional and consumer representatives should play a more important role in order to prevent sectoral bias and promote the interests of all European citizens.

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CONTRIBUTION OF THE CAP TO THE REGIONAL COHESION

Table of Contents

1 Motivations and approach..............................................................................................................88

1.1 Motivation of the study .............................................................................................................................. 88 1.2 Methodological approach........................................................................................................................... 89

2 Developments of the CAP...............................................................................................................89 2.1 Past developments...................................................................................................................................... 89 2.2 Present main features of the CAP .............................................................................................................. 91

2.2.1 EU budgetary expenditure...................................................................................................................................... 91 2.2.2 Income transfers generated by the CAP ................................................................................................................. 91 2.2.3 Income transfers generated by the CAP ................................................................................................................. 94 2.2.4 Budgetary expenditure in agriculture including national and regional levels......................................................... 96

2.3 Price support policy ................................................................................................................................... 97 2.4 Rural development Policy .......................................................................................................................... 99

2.4.1 Structural policy in Agriculture............................................................................................................................ 101 2.5 Reform proposals ..................................................................................................................................... 101

2.5.1 The June 2003 reform of the CAP........................................................................................................................ 102 3 Impact on EU social cohesion ......................................................................................................104

3.1 Impact of the price support policy............................................................................................................ 104 3.1.1 Cohesion within agriculture ................................................................................................................................. 104 3.1.2 Cohesion within EU society ................................................................................................................................. 105

3.2 Impact of the rural development policy ................................................................................................... 106 3.3 Impact of a structural policy in agriculture ............................................................................................. 106

4 Impact on EU territorial cohesion ............................................................................................... 111 4.1 Changes in income disparities...................................................................................................................111 4.2 Impact of the price support policy.............................................................................................................112

4.2.1 Cohesion within agriculture ................................................................................................................................. 112 4.2.2 Cohesion within society as a whole...................................................................................................................... 116 4.2.3 Impact on the environment................................................................................................................................... 121

4.3 Impact of rural development policies....................................................................................................... 122 4.4 Impact of a structural policy in agriculture ............................................................................................. 126

5 Impact on global cohesion ............................................................................................................127 5.1 Export subsidies ....................................................................................................................................... 128 5.2 Trade-distorting domestic policies ........................................................................................................... 128

6 Perspectives and Proposals...........................................................................................................132 6.1 Price policy .............................................................................................................................................. 134 6.2 Rural development ................................................................................................................................... 134 6.3 Structural policy in agriculture................................................................................................................. 135

7 Concluding remarks......................................................................................................................136 Appendices (tables & figures).................................................................................................................137

Developments of cohesion policies ..................................................................................................................... 149 Introduction ......................................................................................................................................................... 149 Social cohesion.................................................................................................................................................... 151

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List of frames

Frame 3-1 EU Budget, Appropriations for payments, year 2002, (€) ........................................................................ 92 Frame 3-2 Composition of EU expenditure in the CAP ............................................................................................. 93 Frame 3-3 Ancillary Expenditure (Appropriations, year 2003) .................................................................................. 94 Frame 3-4 Expenditure associated to the CAP, year 2002 (EU level)(€mn) .............................................................. 95 Frame 3-5 Components of agricultural support of the CAP ....................................................................................... 96 Frame 3-6 National expenditure for agriculture.......................................................................................................... 96 Frame 3-7 Composition of Structural Operations ..................................................................................................... 100 Frame 3-8 Modulation agreed in the Luxembourg Council of Agricultural Ministers (26-6-03) ............................. 103 Frame 4-1 Direct payments to producers by size class ............................................................................................ 105 Frame 4-2 Number of beneficiaries of direct payments to producers by size class (year 2000)............................. 105 Frame 4-3 Milk production - Standard Gross Margin per AWU vs. farm size ......................................................... 109 Frame 4-4 Distribution of Annual Work Units per farm size ................................................................................... 109 Frame 4-5 Wine production - Standard Gross Margin per AWU vs. farm size ........................................................ 110 Frame 4-6 Distribution of Annual Work Units per farm size ................................................................................... 110 Frame 5-1 Change in income disparities between years 1991 and 2000................................................................... 111 Frame 5-2 Change in regional dispersion of agricultural income per work unit (1990-97)...................................... 113 Frame 5-3 Level of support in Mediterranean regions vs. regional GDP per capita................................................ 114 Frame 5-4 Transfers per ha of AA in Mediterranean regions vs. regional GDP per capita .................................... 115 Frame 5-5 Transfers per AWU in Mediterranean regions vs. regional GDP per capita........................................... 116 Frame 5-6 Finland, Impact of CAP on interregional income redistribution in year 2000......................................... 118 Frame 5-7 Sweden, Impact of CAP on interregional income redistribution in year 2000 ........................................ 119 Frame 5-8 Frame 0-8 Belgium, Changes of CAP income redistribution in the Nineties………………… ................ 47 Frame 5-9 Changes in the Nineties of the CAP interregional income redistribution ................................................ 48 Frame 0-10 Expenditure of FEOGA-Guidance by objective ..................................................................................... 51 Frame 5-11 Expenditure of the Guidance section in 2001.......................................................................................... 52 Frame 5-12 Share of EU15 commitments of FEOGA -Guarantee.............................................................................. 52 Frame 0-13 Net EU15 commitments of FEOGA –Guarantee vs. GDP per capita (PPS) ........................................... 53 Frame 6-1 Export subsidies notified to WTO ........................................................................................................... 129 Frame 6-2 Components of agricultural support in 1998 ........................................................................................... 130 Frame 6-3 World shares of commodity-specific (amber+blue box) and green-box support..................................... 131 Frame 6-4 Index of fair support = share of green box on total (green+amber +blue boxes).................................... 132 Frame 7-1 Composition of the EU budgetary expenditure ....................................................................................... 133 Frame 9-1 Developments of the decision making process in the most recent CAP Reform¡Error! Marcador no definido. Frame 9-2 Share of producer payments and of beneficiaries by size class (year 2000)........................................... 151 Frame 9-3 Regional (NUTS 2) Cohesion within agriculture in Mediterranean Regions (F, I, E, Gr, P) ................ 152 Frame 9-4 Size and dispersion of agricultural structural indicators......................................................................... 154 Frame 9-5 Structural indicators in Central and North Europe ................................................................................ 155 Frame 9-6 Analysis of the structure of milk production ........................................................................................... 156 Frame 9-7 Analysis of the structure of wine production........................................................................................... 157

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1 MOTIVATIONS AND APPROACH

1.1 MOTIVATION OF THE STUDY The Treaty of Rome, instituting the European Economic Community (EEC) in 1957, was not

directly concerned with social and economic cohesion, or with consumer policy. It mainly focused on European economic integration by unifying national markets into a large “common market” in specific economic sectors: agriculture, energy, transports, manufacturing, etc. following the successful example of the European Coal and Steel Community instituted in 1951. Such limited “sectoral” approach to European integration probably became the only possible strategy after the failure of the attempts to create a European Defence Community (EDC) in 1952 and a European Policy Community (EPC) in 1994.

However it was apparent that the attainment of the common good for European citizens was not

served at best by such sectoral approach. Group interests were likely to prevail on the general interest if the policy decision-making process was based on sectoral institutions. If, for example, decisions on the Common Agricultural Policy were taken primarily by the Council of Agricultural Ministers, made of all agricultural ministers in Member Countries, without adequate countervailing political or institutional power acting on behalf of the rest of society (e.g. consumers and taxpayers), it was easily understandable that farmers’ and landowners’ interests could prevail on the general interests of EU citizens.

As a radical institutional reform was not possible in the following decades, European

policymakers tried to offset such a “sectoral bias” in the EU institutional structure by introducing in the “Consolidated Version of the Treaty Establishing the European Communities” two “horizontal” clauses stating that all EU policies should be consistent with two main policies operating in the general interests of all EU citizens: Consumer Protection (Title XIV)2 and Economic and Social Cohesion (Title XVIII).

For this latter policy, according to article 159 of the Treaty, “the Commission shall submit a

report to the European Parliament, the Council, the Economic and Social Committee and the Committee of the Regions every three years on the progress made towards achieving economic and social cohesion and on the manner in which the various means provided for in this Article have contributed to it. This report shall, if necessary, be accompanied by appropriate proposals.”

The main motivation of this report is to examine the progress made by the CAP towards

achieving economic and social cohesion.

2 Article 153 1. In order to promote the interests of consumers and to ensure a high level of consumer

protection, the Community shall contribute to protecting the health, safety and economic interests of consumers, as well as to promoting their right to information, education and to organise themselves in order to safeguard their interests. 2. Consumer protection requirements shall be taken into account in defining and implementing other Community policies and activities. …

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1.2 METHODOLOGICAL APPROACH We will follow a rather diffused methodological approach consisting in the identification of the

objectives to be achieved and in the analysis of the implemented (or proposed) policy measures in order to verify if they are likely to attain such objectives in the best way.

The objectives of the EU cohesion policy are clearly stated in Art. 158 of the Treaty

Establishing the European Communities. The main goal identified is the “overall harmonious development” of the European Union. In order to promote a “harmonious” development “the Community shall develop and pursue its actions of the leading to the strengthening of its economic and social cohesion. In particular, the Community shall aim at reducing disparities between the levels of development of the various regions and the backwardness of the least favoured regions or islands, including rural areas”.

We will distinguish two types of cohesion: social and territorial (or regional).3 Social cohesion

is improved if disparities within members of society are reduced, without explicit concern to their territorial or geographical dimension. Territorial cohesion is improved if “ disparities between the levels of development of the various regions and the backwardness of the least favoured regions or islands, including rural areas” are reduced. As a general rule, social and territorial cohesion are consistent and converging.4

This study will analyse the impact of the CAP on the cohesion of the European Union both by

confronting the implemented policy measures with the currently accepted principles of economic theory and by verifying the results in empirical, quantitative terms as far as possible. The consistency of the outcomes of the CAP with the objectives of the EU Cohesion Policy will be appraised and consequent policy recommendation will be formulated with reference to the three main groups of CAP policy measures, namely: price policy, rural development, and structural policy in agriculture.

2 DEVELOPMENTS OF THE CAP

2.1 PAST DEVELOPMENTS The CAP was formally instituted in 1962 under the constraint that at least 30% of the

Community financial expenditure in agriculture should have been oriented to structural policy measures in order to solve the problem of low productivity of small farms and put most European

3 The term “territorial” implies a wider concept of “geographical” cohesion, including cohesion among

member states and among local areas of a single region, although the term “regional” is often used almost as a synonym.

4 Full social convergence would coincide with full territorial convergence if all cohesion indicators were equal between social groups and between territorial areas. Obviously such an extreme theoretical scenario is not an objective of the cohesion policy. We all acknowledge the positive role of equitable differences in incomes and in other indicators of social well-being in attaining an “overall harmonious development” of the European Union.

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farmers on an equal footing. In practice the structural policy in agriculture was always neglected as compared to price policy. Its relative importance, broadly represented by the Guidance section of the FEOGA (European Agricultural Guarantee and Guidance Fund) rarely exceeded 6% of the total agricultural expenditure. The Council of Agricultural Ministers always preferred to annually guarantee agricultural prices and revenues rather than promote investments in restructuring inefficient small farms, whose positive effects would have taken some years before becoming apparent. Consequently the CAP has been usually identified by its largely prevalent price policy.

According to article 19 of the Treaty of Rome, duties in the Common Custom Tariff should

have been “at the level of the arithmetic average of the duties applied in the original four customs territories comprised in the Community”. Such a basic rule was not applied for agricultural commodities. In the Sixties, the Council of Agricultural Ministers decided to set the common custom tariffs for farm products much nearer to the higher German and Italian levels than to the levels of France and BENELUX. By preventing competitive imports the Council of Agricultural Ministers reduced supply in the domestic market and increased domestic prices, especially in Member States whose markets were previously more open to international trade.

Increasing domestic prices over the market equilibrium contributed to reduce domestic demand

and to increase domestic supply in the following years, consequently creating agricultural surpluses. Surplus disposal was already a large budgetary burden in the late sixties, even before the completion of all the common agricultural market regimes.

The 1968 ‘memorandum’ of the founding father of the CAP, Commissioner for Agriculture

Sicco Mansholt, advocating a reduction in price support and an effective structural policy in order to increase the competitiveness of agriculture in regions where farms were too small and farm labour redundant, was extensively discussed. However the structural policy reform implemented in the seventies could not succeed mainly because the unbalanced support of domestic prices was not dismantled. Consequently, the improved farm efficiency, instead of creating wealth for all European citizens, was increasing unsold surpluses whose disposal represented a large liability for the common budget.

In the following years, instead of reducing domestic price support and expanding structural

policies, the Council of Agricultural Ministers tried to attain equilibriums on commodity markets by increasing ‘supply management’ policy measures, i.e. by quantitative administrative measures, ranging from the farm quotas on produced quantities of milk, to limits on vine and olive tree plantings, to subsidizing the set-aside of arable land. In the last decade European citizens as taxpayers paid an annual average of € 1700 million to farmers as a compensation for not cultivating arable land in order to restrict domestic supply and maintain high domestic market prices.


moderate reduction in agricultural price support in the EU-15, while the Council of Ministers extended the EU common price policy to Central and part of Eastern Europe. As a consequence of this enlargement, farm incomes in New EU Members will on average double, creating alternatively, either extra agricultural surpluses to be disposed at high budgetary cost, or extra land set-aside, implying a manifest misuse of available economic resources. Both alternatives are highly damaging EU citizens.

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The agricultural sector is closely dependent on a balanced development of rural areas, which

account for 80% of European territory. After the inclusion of the Guarantee section of FEOGA in the Structural funds, the attention of policymakers involved in agricultural policy shifted to the Rural development policy, qualified as the “second pillar” of the CAP. It should be based on transparency in drawing up and managing programmes, on a multisectoral and integrated approach to the rural economy, on flexible aids for rural development. It should also be based on subsidiarity and on promoting decentralisation and consultation at regional, local and partnership level. The remaining policy measures concerning structural adjustment of farms are included in the Rural development policy.

2.2 PRESENT MAIN FEATURES OF THE CAP A basic indicator of the importance of the CAP and of its policy measures is the budgetary

expenditure both at community level and at national and regional level.

2.2.1 EU budgetary expenditure The EU budgetary appropriations associated to the CAP are mainly concentrated in the

Guarantee section of the European Agricultural Guarantee and Guidance Fund (EAGGF or FEOGA in the French acronym), accounting for €bn 44.5, the largest share (47%) of the EU budget in year 2002, as indicated in Frame 3-1.

A second part of public of public expenditure associated to the CAP is the Guidance section of

EAGGF, now included in the budgetary section concerning Structural Operations, accounting for 2% of total EU budget (table included in Frame 2-7). A third, minor part, accounting for 08% of the EU budget is related to the SAPARD pre-accession instrument for the New Member Countries.

Altogether the expenditure associated to the CAP accounts €bn 46.8, almost half (49%) of the

EU budget, as indicated in the table in Frame 2-4

2.2.2 Income transfers generated by the CAP The public expenditure of the EU budget is only a part of the total public expenditure

associated to the agricultural policy implemented in the European Union. The CAP generates large income transfers from EU consumers towards agricultural producers. Such transfers are annually estimated by the OECD. An estimate is presented in Frame 3-5. Components of agricultural support of the CAP.

Notwithstanding the various reforms of the CAP, from the 1992 MacSharry reform, to the 1994

GATT-WTO Agreement on Agriculture, to the 1997 Agenda 2000, the total amount of income transfers per Annual Work Unit (AWU), was not reduced, it actually increased from € 10.7 thousand in 1990 to € 17.2 2002.

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After the 1992 CAP reform transfers related to market price support did not increase, while “compensatory” payments to producers, instead of being phased off in time, contributed substantially to increase the amount of annual transfers per AWU.

Frame 2-1 EU Budget, Appropriations for payments, year 2002, (€)

The budgetary expenditure concerning the market and price support policy is mainly

concentrated in direct payments to arable crops (40%), beef and veal (18%), olive oil (5%), and milk (4%) as shown in Frame 2-2

C h a p te r H ea d in g P a ym en ts %B 1 1 A g r icu ltu r e (E A G G F , G u a r a n tee ) 4 4 4 8 0 1 8 0 0 0 0 4 6 .5 %B 2 2 S tr u c tu r a l O p er a tion s 3 2 2 8 7 1 0 0 0 0 0 3 3 .8 %B 3 3 T r a in in g , you th , cu ltu r e 8 8 8 2 2 0 0 0 0 0 .9 %B 4 4 E n er g y a n d en v ir on m en t 1 8 9 3 1 0 0 0 0 0 .2 %B 5 5 C on su m er s , in te r n a l m a r k e t 1 1 2 4 2 2 2 0 0 0 1 .2 %B 6 6 R esea r ch , tech n o log y 3 7 5 1 6 8 7 6 0 0 3 .9 %B 7 7 E x ter n a l A c tion 7 3 8 7 0 4 4 5 0 0 7 .7 %B 8 8 F or e ig n a n d S ecu r ity P o licy 3 5 0 0 0 0 0 0 0 .0 %B 9 9 R eser ves 3 3 5 1 6 2 0 0 0 0 .4 %

O th er ex p en d itu r e ( in s ti tu tion s) 5 1 7 8 4 6 1 1 3 8 5 .4 %T ota l ex p en d itu r e (= r even u e) 9 5 6 5 6 3 8 7 2 3 8 1 0 0 .0 %

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EU Budget, Expenditure in 2002

Structural Operations33.8%

External Action7.7%

Agriculture (EAGGF, Guarantee)

46.5%

Research, technology3.9%

Foreign and Security Policy0.0%

Reserves0.4%

Other expenditure (institutions)

5.4%

Energy and environment

0.2%Consumers, internal

market1.2%

Training, youth, culture0.9%

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Frame 2-2 Composition of EU expenditure in the CAP

Source: EU Commission, D.G. Budget

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Ancillary expenditure (Frame 2-3), concerning veterinary and plant-health measures (30%), refunds on processed products (22%) and food programmes (16%), altogether accounts for only 3% of the EAGGF expenditure.

Frame 2-3 Ancillary Expenditure (Appropriations, year 2003)

2.2.3 Income transfers generated by the CAP The public expenditure of the EU budget is only a part of the total public expenditure

associated to the agricultural policy implemented in the European Union. The CAP generates large income transfers from EU consumers towards agricultural producers. Such transfers are annually

Payments (€) % on Total % on FEOGA % on EU Budg

Refunds on processed products 415000000 21.5% 0.9% 0.4%Food Programmes 306000000 15.9% 0.7% 0.3%Programmes for Outermost Regions 239000000 12.4% 0.5% 0.2%Veterinary and plant-health measures 569500000 29.6% 1.2% 0.6%Monitoring and preventive measures 57300000 3.0% 0.1% 0.1%Promotion measures 78800000 4.1% 0.2% 0.1%Other measures 261000000 13.5% 0.6% 0.3%Total Ancillary Expenditure 1926600000 100.0% 3.1% 1.5%Clearence of previous years' accounts -500000000Net Ancillary expenditure 1426600000Total FEOGA expenditure 46410180000 100.0% 48.5%Total EU budget 95656387238 100.0%Source: EU Commission, EU Budget on line

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Components of expenditure in Ancilary expenditure, EU-15, 2002

Refunds on processed products

22%

Food Programmes16%

Programmes for Outermost Regions

12%

Veterinary and plant-health

measures29%

Other measures14%Promotion

measures4%

Monitoring and preventive measures

3%

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estimated by the OECD. An estimate5 is presented in Frame 3-5. Income transfers generated by market price support in year in the nineties and in 2002 are higher than direct budgetary payments to producers.

Notwithstanding the various reforms of the CAP, from the 1992 MacSharry reform, to the 1994

GATT-WTO Agreement on Agriculture, to the 1997 Agenda 2000, the total amount of income transfers per Annual Work Unit (AWU), was not reduced, it actually increased from € 10.7 thousand in 1990 to € 17.2 thousand in 2002.

After the 1992 CAP reform transfers related to market price support did not increase, while

“compensatory” payments to producers, instead of being phased off in time, contributed substantially to increase the amount of annual transfers per AWU.

Frame 2-4 Expenditure associated to the CAP, year 2002 (EU level)(€mn)

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Expenditure associated to the CAP in 2002 (EU level)

Plant products27%

Consumers' extra expenditure

54%

Animal products11%

Rural Development (EAGGF

Guarantee)5%

Rural Development (

EAAG Guidance)2%

Ancillary expenditure

1%

5 S. Tarditi (2003) Consumers…. Such estimate of Market Price Support (MPS) transfers to producers is slightly

lower than OECD estimates due to a more detailed estimate of MPS for Mediterranean commodities.

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Frame 2-5 Components of agricultural support of the CAP

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�� Payments to Producers 17604 21180 22211 29025 33728 36444 40890 41253 38886 38138 40030 43560 44699�� Market price support 62298 73953 62748 58033 53754 56631 49513 49038 58832 61304 49257 47734 54353�� Value Production (border p,) 163930 162670 167062 155293 164990 175470 192434 192881 177547 172602 190314 199413 192794

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Source: S.Tarditi, (2003) 2.2.4 Budgetary expenditure in agriculture including national and regional levels

The CAP is strictly related to national and regional agricultural policies. It is therefore

necessary to have a look at income transfers related to agricultural policy concerning national and regional governments. Unfortunately there is no good and comparable information on such income transfers. Statistical information published by the Commission is only partial and not comparable (Frame 3-1)

Frame 2-6 National expenditure for agriculture 1995 1996 1997 1998 1999 2000 2001(p) 2001-GVAbp 2001%

Belgique/België 241 245 254 211 276 374 374 2 864 13% Danmark 274 248 245 229 240 287 215 4 141 5% Deutschland 2 676 2 245 1 810 1 590 1 814 1 808 1 599 19 618 8% Elláda 201 214 214 217 203 212 253 8 768 3% España (1) 805 744 689 622 662 703 694 23 656 3% France 3 444 3 664 3 420 2 889 3 166 3 253 3 306 32 205 10% Ireland 94 102 78 79 353 397 508 2 823 18% Italia (1) 1 210 1 312 1 638 1 625 1 625 812 1 059 29 169 4% Luxembourg 28 32 32 32 34 35 35 131 27% Nederland 626 589 1 501 860 1 143 1 118 908 9 443 10% Österreich 1 359 1 241 1 073 997 919 902 869 2 657 33% Portugal 132 159 308 303 304 310 310 2 986 10% Suomi/Finland 2 248 1 547 1 515 1 522 1 341 1 347 1 465 1 289 114% Sverige 252 242 318 336 360 448 336 1 512 22% United Kingdom 701 1 611 1 600 1 235 1 149 1 154 1 036 10 117 10%EU15 14 290 14 195 14 695 12 747 13 589 13 161 12 967 151 380 9% (1) Data do not include all regional expenditures Source: European Commission, DG Agri, Agricultural statistics, t. 3.4.10, t. 2.0.1.2

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According to such information national and regional expenditure for agriculture on average accounts only for about 10% of the Gross Value-added of agricultural production, except for some countries such as Finland and Austria where it is much higher.

According to estimates carried out for Italy and including almost all income transfers

associated to agricultural policy, the national and regional policy account for a much larger share of total transfers to agriculture. Market transfers generated by the CAP account for 28% of total transfers, EAGGF (or FEOGA in the French acronym) budgetary transfers account for 23%, National and regional expenditure for 26% while national and regional rebates on taxes and social contributions are estimated to be equivalent to 21% of total transfers.

National transfers to agriculture account for over 40% of the Agricultural Value-added at basic

prices6, 23% in terms of budgetary expenditure and 18% in terms of fiscal and social security rebates. A more complete picture of the different income transfers generated by agricultural policy has

therefore to be framed to include national and regional policies. It is apparent how the largest share of income transfers to agriculture is made of annual transfers oriented to short-term objectives, mainly to support producer prices. Transfers directly oriented to improve farm investments account only for less than 4% of the total.

2.3 PRICE SUPPORT POLICY The price support policy generates transfers from consumers and taxpayers to agricultural

producers. By increasing the domestic market prices of some commodities (e.g. beef, milk, sugar, rice, as indicated in Frame 2-) consumers are compelled to pay higher food prices in order to increase producer revenues.

6 GVA at basic prices includes the subsidies to producers and excludes paid taxes.

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Frame 2-11 CAP agricultural support in year 2001: Nominal assistance coefficients

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250%

300%

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Frame 2-12 CAP agricultural support in year 2001: Composition of producer revenues

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Value Production (border p.)

For other commodities, producer revenues are increased by budgetary payments borne by

taxpayers, as indicated in Frame 2- in per cent share of the border prices of agricultural commodities and in Frame 2- in terms of income transfers in the EU15 (€mn).

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2.4 RURAL DEVELOPMENT POLICY The rural development policy is developing rapidly and its budgetary expenditure in 2002 was

€bn 6.52 , about 14% of total EU expenditure in the EAGGF, 7% of all EU budget (Frame 3-13)

Frame 2-13 Expenditure on Rural Development (Appropriations, year 2002)

EU expenditure in rural development is subdivided in two sections, one included in the Guarantee section, the other included in the Guidance section of EAGGF. For the former, information is available on its composition (Frame 3-13), for the latter the actual expenditure is decided at local level, in regions included in Objective 1 of the Structural Funds (Frame 2-7) and information on its composition is not available.

Commitments (€) % on Rur.Dev. % on FEOGA % on EU Budget

Investments in agr. holdings 164000000 3.6% 0.4% 0.2%Setting-up of young farmers 119000000 2.6% 0.3% 0.1%Training 31000000 0.7% 0.1% 0.0%Early retirement 184000000 4.0% 0.4% 0.2%Less-favoured areas 907000000 19.7% 2.0% 0.9%Agrienvironment 1995000000 43.4% 4.3% 2.1%Processing and marketing 210000000 4.6% 0.5% 0.2%Forestry 474000000 10.3% 1.0% 0.5%Development of rural areas 419000000 9.1% 0.9% 0.4%Other 92000000 2.0% 0.2% 0.1%Total FEOGA Guarantee 4595000000 100.0% 9.9% 4.8%FEOGA Guidance (Structural funds) 1930000000 4.2% 2.0%Total expend. Rural Development 6525000000 14.1% 6.8%Total FEOGA expenditure 46410180000 100.0% 48.5%Total EU budget 95656387238 100.0%Source: EU Commission, EU Budget on line

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Frame 2-7 Composition of Structural Operations

Source: EU Commission, D.G. Budget.

According to the Commission, one of the main innovations in this policy is the method used to

improve integration between the different types of intervention, to help ensure smooth and balanced development in all European rural areas. The main features of this development can be defined as strengthening the agricultural and forestry sector, improving the competitiveness of rural areas, preserving the environment and rural heritage.

The EU expenditure in Rural Development included in the Guarantee section of the EAAGF is

mainly spent in agri-environment policy measures (42%) Less-favoured areas (20%), Forestry (10%),

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101

Development of rural areas (9%). Only 4% of such expenditure is spent in investments in agricultural holdings, i.e. 0.5% of total EAGGF expenditure or 0.2% of total EU budget.

2.4.1 Structural policy in Agriculture It is apparent that the CAP structural policy does not exist in practice, if we make reference to

the Guarantee section of EAGGF The appropriations of the Guidance section of the EAAGF, mainly spend in regions under Objective 1 of the Structural Funds (Frame 2-7), could be more oriented to investments in agricultural holdings, however the CAP financial effort on the structural adjustment of European farms is definitely inadequate f compared to the existing need of reforming our agriculture.

2.5 REFORM PROPOSALS The CAP was formally instituted in 1962 under the constraint that at least 30% of the

Community financial expenditure in agriculture should have been oriented to structural policy measures in order to solve the problem of low productivity of small farms and put most European farmers on an equal footing. In practice the structural policy in agriculture was always neglected as compared to price policy. Its relative importance, broadly represented by the Guidance section of the FEOGA (European Agricultural Guarantee and Guidance Fund) rarely exceeded 6% of the total agricultural expenditure. The Council of Agricultural Ministers always preferred to annually guarantee agricultural prices and revenues rather than promote investments in restructuring the numerous small inefficient farms, whose positive effects would have taken some years before becoming apparent. Consequently the CAP has been usually identified by its largely prevalent price policy.

According to article 19 of the Treaty of Rome, duties in the Common Custom Tariff should

have been “at the level of the arithmetic average of the duties applied in the original four customs territories comprised in the Community”. Such a basic rule was not applied for agricultural commodities. In the Sixties, the Council of Agricultural Ministers decided to set the common custom tariffs for farm products much nearer to the higher German and Italian levels than to the levels of France and BENELUX. By preventing competitive imports the Council of Agricultural Ministers reduced domestic supply and increased domestic prices, especially in Member States whose markets were previously more open to international trade.

Increasing domestic prices over the market equilibrium contributed to reduce domestic demand

and to increase domestic supply in the following years, consequently creating agricultural surpluses. Surplus disposal was already a large budgetary burden in the late sixties, even before the completion of all the common agricultural market regimes.

The ‘memorandum’ of the founding father of the CAP, Commissioner for Agriculture Sicco

Mansholt, advocating a reduction in price support and an effective structural policy in order to increase the competitiveness of agriculture in regions where farms were too small and farm labour redundant, was extensively discussed. However the structural policy reform implemented in the seventies could not succeed mainly because the unbalanced support of domestic prices was not

FINAL REPORT


102

dismantled. Consequently, the improved farm efficiency, instead of creating wealth for all European citizens, was increasing unsold surpluses whose disposal represented a large liability for the common budget.

In the following years, instead of reducing domestic price support and expanding structural

policies, the Council of Agricultural Ministers tried to attain equilibriums on commodity markets by increasing ‘supply management’ policy measures, i.e. by quantitative administrative measures, ranging from the farm quotas on produced quantities of milk, to limits on vine and olive tree plantings, to subsidizing the set-aside of arable land. In the last decade, European citizens as taxpayers paid an annual average of € 1700 million to farmers as compensation for not cultivating arable land in order to restrict domestic supply and maintain high domestic market prices.


moderate reduction in agricultural price support in the EU-15, while the Council of Ministers extended the EU common price policy to Central and Eastern Europe. As a consequence of this enlargement, farm incomes in New EU Members will on average double, creating alternatively, either extra agricultural surpluses to be disposed at high budgetary cost, or extra land set-aside, implying a manifest misuse of available economic resources. Both alternatives are highly damaging EU citizens.

The agricultural sector is closely dependent from a balanced development of rural areas, which

account for 80% of European territory. After the inclusion of the Guarantee section of FEOGA in the Structural funds, the attention of policymakers involved in agricultural policy shifted to the Rural development policy, qualified as the “second pillar” of the CAP. It should be based on transparency in drawing up and managing programmes, on a multisectoral and integrated approach to the rural economy, on flexible aids for rural development, and it is based on subsidiarity and on promoting decentralisation and consultation at regional, local and partnership level.

2.5.1 The June 2003 reform of the CAP The key elements of the new, reformed CAP in a nutshell are the following.7 a) Direct payments: - a single farm payment for EU farmers, independent from production; limited coupled

elements may be maintained to avoid abandonment of production, - this payment will be linked to the respect of environmental, food safety, animal and plant

health and animal welfare standards, as well as the requirement to keep all farmland in good agricultural and environmental condition ("cross-compliance"),

- a strengthened rural development policy with more EU money, new measures to promote the environment, quality and animal welfare and to help farmers to meet EU production standards starting in 2005,

- a reduction in direct payments ("modulation") for bigger farms to finance the new rural development policy,

- a mechanism for financial discipline to ensure that the farm budget fixed until 2013 is not overshot. 7 Source: http://europa.eu.int/comm/agriculture/mtr/index_en.htm

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b) Revisions to the market policy of the CAP: - asymmetric price cuts in the milk sector: The intervention price for butter will be reduced by

25% over four years, which is an additional price cut of 10% compared to Agenda 2000, for skimmed milk powder a 15% reduction over three years, as agreed in Agenda 2000, is retained,

- reduction of the monthly increments in the cereals sector by half, the current intervention price will be maintained,

- reforms in the rice, durum wheat, nuts, starch potatoes and dried fodder sectors. Notwithstanding the single farm payment, in practice the bulk of income transfers to farmers

still reaches the same farms and the same people. The distortions in EU agricultural production cannot be rapidly corrected if the income flows reaching farmers are not substantially changed.

The “modulation” agreed in the Luxembourg Council of Agricultural Ministers in June 2003

should reduce the transfers of income to the former producers of highly supported commodities, however its practical impact in changing the budgetary transfers to farmers is very limited (Frame 2-8). Moreover it exempts from some reform constraints the small farms who are the least efficient, subject to permanent public aid, and should be the major target of a policy aiming to structural change.

Frame 2-8 Modulation agreed in the Luxembourg Council of Agricultural Ministers (26-6-03)

Source: EU Commissionf

In the numerous previous attempts for reforming the CAP, as a general rule, the proposal of the

Commission for reforming the CAP were more consistent with economic theory and the general objectives stated in the Treaties. The final decisions taken by the Council of Agricultural Ministers usually reduced the scope and the biting of reform proposal. Such process is rather apparent also in the decision-making steps taken for the Luxembourg June 2003 reform, as shown in ¡Error! No se encuentra el origen de la referencia. in the Appendices.

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3 IMPACT ON EU SOCIAL COHESION The impact of the present CAP on social cohesion, i.e. on the income redistribution among EU

citizens, or social groups, without a direct concern with EU territory (Member States, Regions, sub-regions) will be analysed first for the “price support” policy, then for “rural development” policy, and at last for the missing “structural policy” in agriculture.

3.1 IMPACT OF THE PRICE SUPPORT POLICY The impact of the “price policy” on social cohesion will be discussed with reference to the

income redistribution among EU citizens (consumers and taxpayers), then with reference to the agricultural sector, and finally with reference to EU society at large in terms of the impact on efficiency, i.e. on the allocation of available resources in producing income at best.

3.1.1 Cohesion within agriculture On the other hand, income transferred to farms is proportional to the size of production,

consequently larger and better-off farms are benefiting much more than small farms from price support.

Since the 1992 reform of the CAP, direct payments to producers are becoming a larger share of

total transfers to agriculture related to the producer price support policy. The distribution of such direct payments to producers per size classes in EU15 in year 2000 are indicated in Frame 3-1, Frame 3-2, and Frame 0-1 in the Appendices.

According to such data, 5% of beneficiaries receive 50% of all payments. This 5% of

beneficiaries are managing larger farms, moreover extra payments beyond market prices are likely to benefit much more landowners rather than employed people. The same effects on income distribution are generated by market price support, for commodities such as beef, milk, and sugar. On the whole we may conclude that the producer price support policy increases income disparities among farmers and worsens cohesion also within the agricultural sector.

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Frame 3-1 Direct payments to producers by size class8

��

��

��

��

��

��

��

��

��

��

��

D irect paym en ts to producers by size class (year 2000)

0

1 000 000

2 000 000

3 000 000

4 000 000

5 000 000

6 000 000

> 0 < 1. 25

> 1.25 < 2

> 2 < 5

> 5 < 10

> 10 < 20

> 20 < 50

> 50 < 100

> 100 < 200

> 200 < 300

> 300 < 500

> 500

€ 10 0 0

€ 10

00

Frame 3-2 Number of beneficiaries of direct payments to producers by size class (year 2000)

��

��

��

��

��

��

Number of beneficiaries of direct payments to producers by size class (year 2000)

0

500

1000

1500

2000

2500

3000

> 0 < 1. 25

> 1.25 < 2

> 2 < 5

> 5 < 10

> 10 < 20

> 20 < 50

> 50 < 100

> 100 < 200

> 200 < 300

> 300 < 500

> 500

€ 1000

x 1

000

3.1.2 Cohesion within EU society Artificially increasing the income of the better-off at the expense of worse-off people both

among consumers and among producers deteriorates the social cohesion among European citizens. Their faith in the European Union as a just and useful supranational government is undermined.

8 Source: D G Agri Database on line t. 3.6.1.10

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A second issue worsening social cohesion is the misallocation of economic resources generated by the CAP. The huge amounts of public money spent in the disposal of unsold surpluses by destroying them if perishable (e.g. fruit and vegetables) or denaturating them (e.g. compulsory distillation of wine) or subsidizing exports and dumping them on the world market (e.g. cereals, beef, milk) were rightly perceived by citizens as a waste of economic resources and a failure of the European supranational government.


which are apparent indicators of the existing misallocation of resources. However the damage for European citizens, although less visible, has probably increased. The large sum of money spent for sterilizing a basic economic resource as arable land and the financial resources spent in the inevitable bureaucratisation and monitoring of supply management policy measures are still visible. The constraints on the entrepreneurial activity of farmers, on the free intersectoral and interregional allocation of resources, and the increase of fraud, which is correlated to the diffusion of quantitative policy measures, have a negative impact on the citizens’ well-being which is much more difficult to quantify.

However such malfunctioning of the CAP is perceived by European citizens and contrasts with

social cohesion.

3.2 IMPACT OF THE RURAL DEVELOPMENT POLICY The Rural development policy is made of intersectoral policy measures which are better

targeted to specific objectives at the local level. In this respect, as a general rule, it is more efficient and equitable than the price support policy. Public resources can be oriented to the poorer regions and can be targeted to the investments which are most productive for society as a whole. As a consequence its impact on European cohesion is likely to be, on the whole, positive.

Transfers to producers attained via the Guarantee section of EAGGF are more earmarked from

Brussels towards agricultural targets, consequently worsening the imbalanced intersectoral allocation of resources in regions where agricultural labour is redundant. On the contrary transfers attained via the Guidance section of FEOGA are decided at local level, in formulating regional programmes. If the political power of sectoral lobbies in the policy-making process is not too strong, in principle the allocation of such funds should be better, i.e. financial resources should be oriented to sectors and activities contributing most to the social well-being of all citizens.

3.3 IMPACT OF A STRUCTURAL POLICY IN AGRICULTURE The impact of a well targeted and managed Structural policy in agriculture could be much

more favourable to social cohesion. A better intersectoral and intra-sectoral allocation of the labour force would reduce income disparities both within the agricultural sector and within the European society as a whole.

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Economic policies are usually appraised on the base of their short-term effects. Structural, longer term effects are often overlooked, also due to the fact that policymakers prefer to receive a return on their policies within the time-limit of their mandate. Nevertheless, the structural impact of economic policies is fundamental in solving existing problems and granting sustainability for good.


structure remains fragmented and largely inefficient, leading to high average costs of production. As a consequence, the extra costs paid by consumers in terms of higher food prices, and by taxpayers in terms of higher taxes needed to finance producer subsidies for various commodities, do not fully benefit farmers in terms of increased incomes. A large share of such transfers are needed to pay the higher production costs due to the delay in structural adjustment.

For example, we may compare the efficient farm-size structure of the Netherlands whose

agricultural policy was liberal before entering the EEC, with the rest of the EU-15. Both in the Netherlands and in the EU-15 the average gross productivity of labour (standard gross margin per annual work unit) is approximately four times larger in medium sized farms (from 16 to 250 ESU9) than in small farms (less than 250 ESU). In the Netherlands only 8% of the labour force works in “small” farms, while such a share in the rest of the EU-15 is over 50% of the labour force. Mainly as a consequence of such different farm-size structure, the average productivity of labour in the Netherlands is more than twice the labour productivity in the rest of the EU-15.

When discriminating in favour of small inefficient farms, policymakers think to foster social

cohesion, as income transfers flow in a larger proportion to poorer farmers reducing the existing income disparities within the agricultural sector and within society. Unfortunately such an impression is shortsighted and defective in a longer term perspective. In order to truly increase European cohesion, the largest share of income transfers to poorer farmers should not be granted in terms of higher product prices or production-tied subsidies, but rather in terms of structural aids. The CAP would solve at best the problems of poor farmers, in their interest and in the interest of society as a whole, by helping them to increase the size and improve the management of their farms in order to lower production costs, or to find a better job outside agriculture.

The wide differences existing within EU Member States in farm sizes may be perceived by

analysing two important farming activities: milk production, mainly diffused in Central and Northern Europe Member States and wine production, mainly diffuses in Mediterranean countries.

Milk production

The very large difference between the productivity of farmers working in small-sized farms and

farmers working in medium and large farms is common to all European countries. Some functions correlating the productivity of one annual work unit in agriculture to farm size classes are shown in Frame 3-3, Frame 3-4, and Frame 0-5 in the appendix.. While for small farms the very low productivity of labour is common to all countries, larger farms in The Netherlands, France and Italy 9 ESU = European Size Unit. The average economic size of what we call “small size” and “average size” farms

in EU-15 is respectively € 3919 and € 54670 standard gross margin. Farms larger than 250 ESU are not considered in our comparison, in order to deal with farms which could be managed as “family farms”. However in the EU-15 such large farms account only for 1% of farm and 7% of the labour force.

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show a higher productivity of labour, due to various reasons, climate, soil fertility, better technology, better farm organisation, etc.

However the main reason why average incomes are lower in some countries rather than in other

is the distribution of farms by size classes. Such distribution is shown in Frame 3-4 for some countries. While in the Netherlands small farms are almost inexistent, while the largest share of milk producers is included in the middle-sized farms (between € 50 and 250 thousand of standard gross margin per year), in the other countries and in the EU as a whole, the largest concentration of farms is located in very small size classes, where the productivity of labour is very low. In such small farms scale economies cannot be adequately exploited and the farm labour is largely under- or ill-utilised.

Also as a consequence of such better structure of farms, the average income per farmer in The

Netherlands is not only higher than in most other EU countries, but is also much higher than the average income of the non farming Dutch population.

Wine production

The same different farm sizes between countries and regions are apparent also in other farming

activities. Frame 3-5 and Frame 3-6, together with Frame 0-6 in the appendix, show the same labour productivity and labour distribution functions for the most important wine producing European countries.

In wine production France has the better productivity and farm-size distribution in Europe. As a

consequence, for example, the average standard gross margin for a full time worker in the wine sector in France is four times higher than the equivalent for an Italian worker.

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Frame 3-3 Milk production - Standard Gross Margin per AWU vs. farm size

0100002000030000400005000060000700008000090000

100000

0 100 200 300 400 500

Economic size classes in European Size Units (€ 1000 SGM)

Stan

dard

Gro

ss M

argi

n p

er A

WU

(€ 1

000)

Year 2000 Standard Gross Margin per Annual Work Unit vs. economic dimension of holdings

France

Italy

SpainPortugal

EU-15

Netherlands

Frame 3-4 Distribution of Annual Work Units per farm size

0%

10%

20%

30%

40%

50%

60%

0 50 100 150 200 250 300 350 400 450 500

Economic size classes in European Size Units ( € 1000 SGM)

Stan

dard

Gro

ss M

argi

n p

er A

WU

(€ 10

00)

Year 2000 Distribution of Annual Work Units vs. economic dimension of holdings

France

Italy

PortugalEU-15

Spain

Netherlands

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Frame 3-5 Wine production - Standard Gross Margin per AWU vs. farm size

0

10000

20000

30000

40000

50000

60000

0 50 100 150 200 250 300 350 400 450 500 550


Stan

dard

Gro

ss M

argi

n p

er A

WU

(€ 1

000)

Year 2000 Standard Gross Margin per Annual Work Unit vs. economic dimension of holdings

France

Italy

Spain

Portugal

Germany

EU-15

Frame 3-6 Distribution of Annual Work Units per farm size

0%

5%

10%

15%

20%

25%

30%

35%

0.0 100.0 200.0 300.0 400.0 500.0 600.0


Stan

dard

Gro

ss M

argi

n p

er A

WU

(€ 1

000)

Year 2000 Distribution of Annual Work Units vs. economic dimension of holdings

France

Italy

Germany

EU-15

Spain

Portugal

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4 IMPACT ON EU TERRITORIAL COHESION

4.1 CHANGES IN INCOME DISPARITIES In order to assess the impact of the CAP on income disparities at regional level we used a

quantitative model described in the Appendices paragraph 0. Quantitative estimates of the income redistribution generated by the CAP between consumers, taxpayers and producers in each EU region have been computed, quantifying the net income flows generated by the CAP in each region at a detailed aggregation level (NUTS 2).

Such estimates computed for year 2001 are compared to similar estimates computed for year

1991 in order to assess the changes in the income redistribution effects of the CAP as a consequence of the “1992 MacSharry Reform” of the “1994 WTO Marrakesh Agreement on Agriculture” and of the more recent changes in the CAP implemented in the late nineties.

Frame 5-1 indicates the changes in income disparities between years 1991 and 2000 in the EU-

15 countries where regions at NUTS 2 level are defined. Denmark, Ireland, Luxembourg and Austria are defined by Eurostat as a single region, consequently the income disparity among regions cannot be computed. The indicator used is the Coefficient of Variation (CV10)of the regional average GDP per capita. Frame 4-1 Change in income disparities between years 1991 and 2000

��

��

��

��

��

��

��

��

��

��

Change of income disparities in the Nineties (GDP per capita)

0%

10%

20%

30%

40%

50%

60%

EUR

15

BEL

GIQ

UE

DA

NM

AR

K

DEU

TSC

HLA

ND

ELLA

DA

ESPA

NA

FRA

NC

E

IREL

AN

D

ITA

LIA

LUX

EMB

OU

RG

NED

ERLA

ND

POR

TUG

AL

UN

ITED

KIN

GD

OM

AU

STR

IA

FIN

LAN

D

SWED

EN

Coe

ff. O

f Var

iatio

n - G

DP

per c

apita

��1991 2000

10 The Coefficient of Variation indicates the ratio between the standard deviation of a variable and its arithmetic

average.

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Between year 1991 and year 2000, the disparity among region at NUTS 2 level of the average

GDP per capita increased in Belgium, Greece, Italy, and UK, and decreased in Germany, Portugal, remaining almost unchanged in Spain, France and The Netherlands. The same indicator applied to the EU-15 with Reference to member States shows a substantial reduction in regional income disparities.

Obviously such changes in the regional GDP per capita are not a consequence of the CAP , but

rather of the general economic development, probably partially influenced by regional, national and EU economic policies.

4.2 IMPACT OF THE PRICE SUPPORT POLICY The impact of the Price support policy on the territory has been analysed from different

points of view by the economic literature. We will first analyse the impact within the agricultural sector, then the impact within society as a whole, including consumers and taxpayers together with farmers in the model. Then we will mention the impact of the price support policy on the environment of rural areas.

4.2.1 Cohesion within agriculture The first approach has been to examine how the price support and financial aids generated by

the CAP were distributed on the European territory and if better-off regions were receiving more income transfers to agriculture than poorer regions. The prevalent belief was that farmers in richer regions and in richer member states were benefiting more from CAP than farmers in worse-off regions. This was largely considered also a consequence of the fact that producer prices of commodities cultivated in continental Member Countries and regions (cereals, sugar, milk, beef) were more supported than producer prices of commodities cultivated in poorer Mediterranean Countries and regions (fruit, vegetables, olive oil, wine). According to such a belief the impact of the CAP on European cohesion was negative, as income disparities within agriculture were increased at Member State and at regional levels.

We can verify the impact of the CAP within agriculture by analysing the level and distribution

of regional agricultural incomes in terms of level of support, income per labour unit (AWU) and income per hectare of cultivated land. Moreover we will try to understand the dynamic of such parameters in the Nineties by comparing them in year 1991 and year 2000.

The highest levels of the average agricultural GDP per capita (current prices in the EU-15

Member States) are recorded in the BENELUX countries which have a better farm size structure, at least partly consequent to the liberal agricultural policy implemented prior to the institution of the CAP. Mediterranean countries record the lowest average per capita income largely consequent to the poor farm-size structure and excess of agricultural labour in many regions.

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Frame 4-2 Change in regional dispersion of agricultural income per work unit (1990-97)

��

��

��

��

��

Change in the regional dispersion of agricultural incomes (Coefficient of variation)

0%

10%

20%

30%

40%

50%

60%

70%

Portugal France Spain Italy Greece

Stan

dard

Gro

ss M

argi

n pe

r AW

U��

19901997

Frame 4-2 indicates the regional (NUTS 2) disparities of agricultural incomes within each member state. Unfortunately regional data on the farm structure (AWU, Agricultural area) are available only for five countries. According to this analysis in the Nineties (1990 – 1997) the regional income disparities in agriculture have been reduced in Portugal and did not change in Spain, while they have slightly increased in France Italy and Greece.

Contrary to largely prevailing beliefs, the level of support of agricultural production was not

significantly higher in better-off regions as compared to poorer regions, as indicated in Frame 4-3 The very low index of determination (R2) does not even allow to think that the overall relation between the level of support and the per capita GDP worsened between 1991 and 2000. Probably if such analysis were performed on all EU Member states the result would be different because rather different agricultural regions would be included such as the Northern European Regions.

Frame 5-4 indicates the average transfers per hectare of agricultural area (AA) related to the

average GDP per capita of each region. Also in this case the relationship, indicated by the interpolating line is not significantly positive and not sufficiently supported by the index of determination (R2) lower than 3%.

Frame 5-4 indicates the average transfers per labour unit (AWU) related to the average GDP

per capita of each region. In this case the relationship, indicated by the interpolating line is clearly positive and sufficiently supported by the index of determination (R2) over 25%.

From this analysis we may conclude that the reason why in better off regions also farm incomes

are higher is not due to a biased level of commodity support but is mainly due to a lower and more

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productive amount of farm labour benefiting of higher land and capital per unit and of better scale economies. Such a better structure of production is probably the consequence of higher regional development rates, allowing labour out-migration from agriculture to other economic activities. Frame 4-3 Level of support in Mediterranean regions vs. regional GDP per capita

Mediterranean Regions, 1991, Level of support vs.GDPpc y = -3E-06x + 0.4378R2 = 0.0316

0%

10%

20%

30%

40%

50%

60%

70%

80%

0 5000 10000 15000 20000 25000 30000

GDP per capita

Tota

l Tra

nsfe

rs/A

gr. F

inal

Pro

duct

ion

Mediteranean Regions, 2000, Level of support vs.GDPpc y = 3E-06x + 0.3988R2 = 0.0161

0%

10%20%

30%

40%

50%

60%

70%

80%

90%

0 5000 10000 15000 20000 25000 30000 35000 40000GDP per capita

Tota

l Tra

nsfe

rs/A

gr. F

inal

Pro

d.

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Frame 4-4 Transfers per ha of AA in Mediterranean regions vs. regional GDP per capita

Mediterranean Regions, 1991 Transfers per Agricultural Area (ha) vs. GDPpc y = 0.0092x + 666.09R2 = 0.0089

0

500

1000

1500

2000

2500

3000

0 5000 10000 15000 20000 25000 30000

GDP per capita (€/year)

Tota

l Tra

nsfe

rs/A

A (

€/

Mediterranean Regions, 2000 Transfers per ha of Agricultural Area vs. GDPpc y = 0.0144x + 626.64R2 = 0.0251

0

500

1000

1500

2000

2500

3000

3500

0 5000 10000 15000 20000 25000 30000 35000 40000


Tota

l Tra

nsfe

rs/A

A(

€

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Frame 4-5 Transfers per AWU in Mediterranean regions vs. regional GDP per capita

Mediterranean Regions, 1991 Transfers per AWU vs. GDPpc y = 0.6201x + 1403R2 = 0.2663

0

5000

10000

15000

20000

25000

30000

35000

0 5000 10000 15000 20000 25000 30000


Tota

l Tra

nsfe

rs/A

WU

(€/

ye

Mediterranean Regions, 2000 Transfers per AWU vs. GDPpc y = 1.0305x - 4354.9R2 = 0.2927

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

0 5000 10000 15000 20000 25000 30000 35000 40000


Tota

l Tra

nsfe

rs/A

WU

(€/

y

4.2.2 Cohesion within society as a whole The work carried out in occasion of the first Cohesion Report of the Commission, followed by

the work carried out in the Second Cohesion Report, used a more complete approach on the analysis of the income redistribution generated by the CAP at regional level. All people affected by the CAP

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were taken into account, not only farmers. For every European region income transfers from consumers and taxpayers towards agricultural producers were estimated. The result was in full contrast with the previously mentioned beliefs of the academic and expert community. The overall impact of the CAP on interregional income redistribution, and consequently on interregional cohesion was clearly positive. On average richer regions were transferring substantial amounts of resources to poorer regions. Such result was due to the fact that, as a general rule, poorer regions are less populated and agriculture accounts for a larger share of their GDP. On the contrary, consumers and taxpayers in urbanised regions, as a general rule, are more numerous and bear a large burden for transfers benefiting farmers who are more concentrated in less populated and often poorer rural regions. Consequently any policy transferring money to agriculture is likely to reduce income disparities between richer and poorer regions.

This analysis was updated to year 2000 using the “Regio” Database of the European

Commission. Two of the three new member states joining the Union in 1995 were examined for year 2000, as Austria is considered a single region. The results of the income transfers generated by the CAP are indicated for Finland in Frame 5-6 and for Sweden in Frame 5-7.

In the upper panel of both figures the net income transfers generated by the price policy of the CAP (producer benefits minus consumers and taxpayers losses) are indicated. Regions are ordered according to their average GDP per capita, taken as an indicator of their wealth, and recorded in the left-hand scale of the panel. In the lower panel a scatter diagram of the income transfers is shown, together with a linear interpolating line indicating the average impact in transferring income flows from richer regions (located in the right side of the diagram, with prevailing negative net transfers) towards poorer regions (in the left side of the diagram, with prevailing positive net transfers), or vice-versa.

The slope of the interpolating line is negative in both countries indicating a positive impact of

the agricultural price support policy in reducing interregional disparities. The index of determination (R2) is sufficiently high to confirm the statistical reliability of such conclusion.

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Frame 4-6 Finland, Impact of CAP on interregional income redistribution in year 2000

-300

-200

-100

0

100

200

300

400

500

FI13 FI14 FI15 FI17 FI2 FI16

Finlandia: regions NUTS 2

Net

reg

iona

l tra

nsfe

rs p

er c

apita

(EC

U /

year

)

0

5000

10000

15000

20000

25000

30000

35000

40000

GD

P pe

r ca

pita

200

0(E

cu/y

ear)

2000GDPpc

6

5

4

3

2

1

y = -0 .0207x + 603 .17R 2 = 0 .5331

-300

-200

-100

0

100

200

300

400

0 5000 10000 15000 20000 25000 30000 35000 40000

F inla nd: pe r c a pita G D P 2 0 0 0 (E C U /y e a r)

Per

capi

ta tr

ansf

ers (

EC

U/y

ear)

2000Lin e a r (2000)

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Frame 4-7 Sweden, Impact of CAP on interregional income redistribution in year 2000

-400

-300

-200

-100

0

100

200

300

SE06 SE08 SE02 SE07 SE09 SE04 SE0A SE01

Sweden: regions NUTS 2

Net

regi

onal

tran

sf. p

c (E

uro

/ yea

r)

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

GD

P pe

r cap

ita 2

000

(Eur

o/ye

ar)

2000GDPpc

1

7

2

3

4

5

6

8

y = -0.0192x + 546.29R2 = 0.4394

-300

-200

-100

0

100

200

300

400

0 5000 10000 15000 20000 25000 30000 35000 40000 45000

Sweden: per capita GDP 2000 (Euro/year)

Per c

apita

tran

sfer

s (EC

U/y

ear)

2000Linear (2000)

Frame 5-8 shows the Belgium scatter diagrams in 1991 and 2000, together with the interpolating lines showing an increase in the negative slope and in the R2. According to these results the positive impact of the CAP in reducing Belgian interregional income disparities looks like being increased.

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Frame 4-8 Belgium, Changes of CAP income redistribution in the Nineties

35

34

333225

232221

1

02

y = -0.032x + 479.11R2 = 0.6196

y = -0.0545x + 960.31R2 = 0.5884

-600

-400

-200

0

200

400

600

800

0 5000 10000 15000 20000 25000 30000

Per capita GDP 1991 (ECU/year)

Per c

apita

tran

sfer

s (EC

U/y

ear)

1991

2000

Linear

The analysis has been carried out for all the EU-15 countries together with a comparison

between year 1991 and year 2000 for the former EU-12 Member Countries. A synthesis of the results is presented in Frame 5-9. All frames referred to “Regional net income flows generated by the CAP” on the rest of the EU-15 countries are included in APPENDIX C.

The comments will concentrate on synoptic Frame 5-9. There is not a clear indication on the

increased or decreased impact on income redistribution of the CAP. In some countries the slope and/or the index of determination have increased, and in others they have decreased. From this analysis we cannot come to a clear conclusion.

However we must take into account that the slope of the interpolating line of the scatter

diagram is dependent both on the changes in net income transfers (vertical axis) and on the changes of the average per capita income of the region (horizontal axis). In order to isolate the impact of the net income transfers we computed the same diagrams and slope of the interpolating lines at unchanged “1991” regional incomes. Such diagrams show an increase of the (negative) slope of the interpolating line in all member countries (fifth column of Frame 5-9). These results would support the conclusion that the redistributive impact of the CAP improved between year 1991 and year 2000. This effect is likely to be the consequence of the 1992 Reform, shifting a large part of the burden of agricultural support from consumers to taxpayers. The income-regressive effect on consumers was reduced reducing one of the worse effects of the price support policy. This improvement is reflected by the empirical analysis.

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Frame 5-9 Changes in the Nineties of the CAP interregional income redistribution Difference Slope (PIL 1991)

1991 2000 2000/1991Other effectscome effect 1991 2000BELGIQUE -0.0320 -0.0211 0.0109 -0.0545 0.0654 0.6196 0.5434DANMARKDEUTSCHLAND -0.0120 -0.0182 -0.0062 -0.0159 0.0097 0.2915 0.3282ELLADA -0.0355 -0.0465 -0.0110 -0.0030 -0.0080 0.0173 0.1656ESPANA -0.0397 -0.0286 0.0111 -0.0429 0.0540 0.2241 0.1515FRANCE -0.0258 -0.0333 -0.0075 -0.0466 0.0391 0.0860 0.1720IRELANDITALIA -0.0146 -0.0068 0.0078 -0.0123 0.0201 0.3039 0.0990LUXEMBOURG NEDERLAND -0.0539 -0.0399 0.0140 -0.0514 0.0654 0.3938 0.7939PORTUGAL -0.0643 -0.0668 -0.0025 -0.0849 0.0824 0.5484 0.3654UNITED KINGDOM -0.0266 -0.0093 0.0173 -0.0312 0.0485 0.1851 0.2213BENELUX -0.3374 -0.0188 0.3186 -0.0483 0.3669 0.2591 0.4858AUSTRIAFINLAND -0.0207 0.5331SWEDEN -0.0192 0.4394EU12 / EU15 -0.2961 0.0014 0.2975 0.0306 0.2669 0.2278 0.0100Cohesion countries (Gr; Es -0.0046 -0.0795 -0.0749 -0.0230 -0.0519 0.0007 0.0795

Slope R2


interregional cohesion cannot be taken as a strong motivation for maintaining the present features of the CAP price policy for at least two reasons. First, the beneficial effect on interregional cohesion would be the same if transfers generated by the CAP were compensating farmers for positive externalities and for improving the structure of their farms, in other words, if such transfers could be better justified on sound economic and social grounds. Secondly, if such transfers from rich to poorer regions were allocated to the best social or economic uses in favour of poorer Member States and Regions, without sectoral constraints, their impact on interregional cohesion would be much larger and transparent.

The relatively low level of the indexes of determination indicate that only a share of the total

transfer is actually redistributing income in the way indicated by the interpolating line. A better targeted economic policy could improve substantially this feature of the transfers, by increasing the R2 to levels much more near to 1 (100%).

4.2.3 Impact on the environment The impact of the common price policy on the environment11 is mixed. On the one hand it is

undeniable that, although the income transfers generated by the price support policy are more

11 According to the Treaty establishing the European Commmunities, Article 174-2: Community policy on the

environment shall aim at a high level of protection taking into account the diversity of situations in the various regions of the Community. It shall be based on the precautionary principle and on the principles that preventive action should be taken, that environmental damage should as a priority be rectified at source and that the polluter should pay. In this context, harmonisation measures answering environmental protection requirements shall include, where appropriate, a safeguard clause allowing Member States to take provisional measures, for non-economic environmental reasons, subject to a Community inspection procedure.

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concentrated on rich, intensive agricultural areas, a minor part of such transfers reach poor marginal areas. They contribute to the maintenance of positive externalities in terms of human settlements on otherwise abandoned territories, often contributing to better landscape and to improved rural development.12

On the other hand, it is equally undeniable that in various instances price support contributes to

increasing pollution and other negative externalities on the territory. Probably the main negative externality of higher producer prices is the incentive to use more chemical fertilizers, especially nitrogen, which are polluting especially superficial waters and underground aquifers. If producer prices are maintained at high levels and arable land is withdrawn from cultivation, farmers tend to use extra fertilisers and other polluting inputs, such as pesticides, in order to increase output on the limited cultivated land.

Sometimes the price support of some commodities is directly damaging the environment. For

example, the high subsidies to durum wheat strongly contributed to maintain wheat cultivation in hilly areas, generating soil erosion and a decrease of fertility in steep fields, while increasing the risk of flooding downhill, where the eroded soil sediments in riverbeds. Instead of present undifferentiated EU-wide price support, the local implementation of targeted agri-environmental subsidies would have favoured non-arable cultivations in steep cultivated areas, improving environment sustainability.

The large diffusion of supply management policies and the related bureaucratisation of the

agricultural economy, request from farmers extra time and work for red-tape administrative duties, foster political patronage, and create new opportunities for fraud. In order to improve social and interregional cohesion, the CAP should promote both a better ecological environment and a better social environment in rural areas, where citizens should feel that their work is equitably remunerated and no-one is allowed to free-ride and benefit of special privileges.

4.3 IMPACT OF RURAL DEVELOPMENT POLICIES The Rural development policy, by its nature, can be better oriented to poorer Member states,

regions and areas. The share of funds managed by the Guarantee section of EAGGF is in part directly oriented to

less-favoured areas (20%) as indicated in Frame 3-13. Its overall impact could be positive. The Guidance section of EAGGF, for example, in the Nineties has been partly concentrated in

regions under the Objective 1 section of structural funds, i.e. in regions with an average GDP lower than 75% of EU average (Frame 4-10). It is likely to be even more concentrated in such regions in the future (table in Frame 2-7). Consequently its impact on interregional cohesion is likely to be positive.

12 According to Art. 174-3 In preparing its policy on the environment, the Community shall take account of: - available scientific and technical data; - environmental conditions in the various regions of the Community; - the potential benefits and costs of action or lack of action; - the economic and social development of the Community as a whole and the balanced development of its

regions.

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It is mainly based on local projects, consequently the interregional impact can be managed in a much better way than policies operating on the whole territory of the EU.

The distribution of the funds managed by the Guidance section of EAGGF among member

countries is indicated in Frame 5-11. Spain, Italy, Germany (former DDR regions) and Greece are favoured.

A more detailed analysis has been performed, by computing the net EAGGF Guarantee

transfers of each EU-15 member state13 (Frame 5-12, Frame 4-13), and plotting such net transfers against the GDP per capita as an indicator of the wealth of each country. The result of such analysis shows a tendence to transfer from richer EU countries towards poorer countries (Greece, Portugal Spain). Such transfers favouring territorial cohesion are reinforced by the transfers explicitly generated by the Cohesion fund in favour of such “cohesion” countries.

13 Actual transfers minus a share of total EAGGF Guarantee total budget similar to each state’s contribution to

the EU budget

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Frame 4-10 Expenditure of FEOGA-Guidance by objective

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Objectives (€ mn) 1991 1992 1993 1994 1995 1996 1997 1998 1999 % FEOGACommunity support 2332.3 2811.8 3031.8 3302.7 3348.3 3772 4026.2 4183.1 3774.04 9.5%Objective 1 (regions lagging behind)

1440.8 1634.7 1599.2 1905.3 2395.2 2416.5 2578.7 2502.8 2343.6 5.7%

Objective 5a (agric. structures) 631.3 701.3 923.9 1131.6 655.9 802.4 974.7 1066.3 830.8 2.4%Objectve 5b (rural areas) 260.2 475.8 508.7 265.8 249.5 508.4 421.5 562.8 544.7 1.3%

Objective 6 (Nordic regions) 47.7 44.7 51.3 51.2 54.9 0.1%Community initiatives 32.7 260.9 162.5 106.3 183.8 234.3 0.4%LEADER 0.3 235.9 83.1 65.4 116.4 160.3 0.3%INTERREG Included under other headings 12.8 31.3 17.6 44.7 35.2 0.1%REGIS 0.0 17.0 4.6 6.3 9.1 0.0%PEACE 1.3 8.1 13.0 7.9 13.9 0.0%Art.8 del reg 4256/88 5.2 0.6 15.4 5.3 1.0 15.6 0.0%

Transitional measures 75.9 63.0 61.6 27.2 10.3 7.6 0.4 7.5 0.1 0.0%TOTAL 2408.2 2874.8 3093.4 3335.4 3609.2 3934.5 4132.5 4366.9 4008.4 9.9%Community support 97% 98% 98% 99% 93% 96% 97% 96% 94%Objective 1 (regions lagging behind) 60% 57% 52% 57% 66% 61% 62% 57% 58%

Objective 5a (agric. structures) 26% 24% 30% 34% 18% 20% 24% 24% 21%Objectve 5b (rural areas) 11% 17% 16% 8% 7% 13% 10% 13% 14%Objective 6 (Nordic regions) 1% 1% 1% 1% 1%Community initiatives 1% 7% 4% 3% 4% 6%LEADER 0% 7% 2% 2% 3% 4%INTERREG 0% 1% 0% 1% 1%REGIS 0% 0% 0% 0% 0%PEACE 0% 0% 0% 0% 0%Art.8 reg. 4256/88 0% 0% 0% 0% 0% 0%

Transitional measures 3% 2% 2% 1% 0% 0% 0% 0% 0%TOTAL 100% 100% 100% 100% 100% 100% 100% 100% 100%Total FEOGA expenditure 44025.32Data source: European Commission DG Agriculture, ASIC (2000), 3.4.9

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Frame 5-11 Expenditure of the Guidance section in 2001

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Frame 4-13 Net EU15 commitments of FEOGA –Guarantee vs. GDP per capita (PPS)

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4.4 IMPACT OF A STRUCTURAL POLICY IN AGRICULTURE The impact of a well targeted and managed Structural policy in agriculture could be much

more favourable to interregional cohesion. A better intersectoral allocation of the labour force would reduce income disparities between poor agricultural households and some of the richer households in non-agricultural sectors of production. Successful structural reforms are incompatible with distorted prices.

The basic feature of a structural policy is to provide financial aid to farmers who can improve

the economic size of their farm and, by implementing the best technologies and choosing the most profitable crop-mix, become competitive in the future and manage economically viable farms, not in permanent need of aid from the rest of society. Obviously, in a market economy, the farmer decides the allocation of farm resources, no EU Commissioner or agricultural minister could choose better than the farmer himself how to use the available funds on his farm with its specific natural, economic and social environment.

The success of structural policies is rather easy if market prices are not distorted and the

benefits to the farmer coincide with the benefits to society as a whole. On the contrary, if market prices are distorted, an efficient farmer will however maximise his profits by investing in more profitable activities. Unfortunately such commendable private behaviour may be in opposition with the interests of society as a whole if highly priced commodities are already in surplus in the domestic

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market and extra production must be destroyed, if their domestic use must be subsidised by the government, or if such commodities must be dumped on the world market by paying export subsidies.

This is what happened in the seventies after the 1972 structural reform, subsidising farm

investments while maintaining the existing unbalanced market price support. In order to avoid further budgetary costs needed as a consequence of the increase in supply of highly price-supported commodities, a number of constraints to farmers’ decisions had to be instituted by the CAP, eventually increasing supply management measures such as milk production quotas and land set-aside.

Such “production limiting” measures in some sense are even worse than those implemented in

the centralised economies. In centrally planned economies the final objective was usually to increase the total amount of goods and services, even if the instruments used were usually not very efficient. It is hard to believe that central bureaucrats could deliberately aim at reducing available resources and overall production of goods and services. On the other hand it is also hard to believe that such policies could be implemented in an Economic Community instituted on the principles of free competition and free trade, based on market forces as the major means to improve resource allocation and the welfare of EU citizens.

In market-oriented economies successful structural reforms are not compatible with such highly distorted agricultural market prices still maintained in the EU. If they are however implemented, as in the case of the present CAP, their social cost is very high.

Another reason for the failure of an effective structural policy is related to the short political

mandate of policymakers. Structural policies involve costs in the early years while benefits are enjoyed some years later, consequently policymakers must ask their voters to pay the necessary costs now and wait for future benefits. This risks losing the favour of the electorate, of not being re-elected, and letting the candidate of the opposition reap the benefits of structural policies, even if such policies are very beneficial for society as a whole.

Another possible explanation for not implementing structural policies is the fact that a large

number of small, inefficient farms, and consequently a large number of low-income farmers, are a basic short-term political motivation for maintaining the present support for agriculture. Although a consistent share of income transfers to agriculture are lost in dead-weight losses, such transfers also contribute to maintaining the present income level of low income farmers, together with the rents which benefit especially better-off farmers and landowners.

5 IMPACT ON GLOBAL COHESION The European Union is already the largest commodity market in the world for various

commodities, accounting for 376 million consumers, over 450 million if we include the New Member countries. EU-15 exports account for 20% of total world exports and 7% of exports in agricultural products. In some commodity markets the share of the EU on world trade is very high, e.g. over 30% of world oilseed imports, over 40% of pigmeat exports, 29% of milk powder and 26% of world eggs

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exports. Consequently agricultural policy measures implemented in the EU substantially influence world commodity markets.


predominant role of the EU in international politics and its efforts in international cooperation. EU-15 and its member countries are by far the largest contributors to international cooperation in favour of Less Developed Countries, much larger than the US and Japan.

5.1 EXPORT SUBSIDIES Export subsidies are a basic parameter for assessing the direct and indirect impact of domestic

policies in distorting international prices and trade flows. Actually, it is very hard to find a rationale, in the general interests, for producing at high marginal costs and then spend public money for dumping surplus production on the world markets. Export subsidies are in fact banned by the WTO. For agricultural products they are under reduction commitment and the majority of WTO members would like to ban them in the current Doha Round of multilateral negotiations. According to the notifications by member states at WTO, required after the GATT-WTO Marrakesh Agreement on Agriculture, the EU-15 is paying almost 90% of all world export subsidies (Frame 5-1).

5.2 TRADE-DISTORTING DOMESTIC POLICIES The income transfers generated by the policy measures classified during the GATT

negotiations in the “amber” and “blue” boxes, are another parameter for assessing the impact of agricultural policies in directly or indirectly distorting international trade. The EU-15 is responsible for about three quarters of the “amber and blue box” income transfers to farmers generated in the world as a consequence of agricultural policies (Frame 6-2 and Frame 6-3). If we define a “Index of fair support” as the share of green box subsidies on total (green+amber +blue boxes) subsidies, the EU is by far the worst among the important international partners (Frame 6-4).

The global impact of the present price support policy of the CAP is substantial and is

damaging numerous less developed countries whose main resources for their economic development are agricultural. Access to the EU-15 market for agricultural commodities is prevented both by import levies and by domestic subsidies, while the access to Third country markets is also subject to indirect unfair competition by the EU, whose export subsidies depress world market prices.

It is apparent that the present price policy of the CAP is contrasting global cohesion.

International trade disputes on agricultural commodities in WTO and in other forums are an indicator of how international cohesion is endangered by the price support policy of the CAP.

On the contrary structural and rural development policy measures, as a general rule, are fair

to international trade partners and allow supporting our agriculture in a more efficient and equitable way, without seriously damaging world trade partners.

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Frame 5-1 Export subsidies notified to WTO14

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Total export subsidies in the world (1998) : US $mn 6641

14 Data source: WTO (2002-03) Member usage of domestic support categories. TN/AG/S/1

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Frame 5-2 Components of agricultural support in 199815

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15 Data source: WTO (2002-03) Member usage of domestic support categories. TN/AG/S/1

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Frame 5-3 World shares of commodity-specific (amber+blue box) and green-box support

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Frame 5-4 Index of fair support = share of green box on total (green+amber +blue boxes)

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According to Eurostat estimates, in 1998 in the EU-15, people with extra-community

citizenship were 13.1 million. In Italy people with extra-community citizenship increased from 508836 in 1994 to 11222047 in year 2000. Illegal immigration is becoming one of the hottest issues in various European countries

In order to improve global cohesion it would be much better to dismantle barriers to

commodity trade and help poorer countries to develop the economic activities where they have comparative advantages. Agriculture is often the case for countries where natural resources are an asset while high technology cannot be developed for lack of human capital and adequate investments.

6 PERSPECTIVES AND PROPOSALS We will classify the proposals for CAP reform in three groups: price policy, structural policy,

and rural development policy. At present policymakers rarely mention the structural policy, the “second pillar” of the CAP is now rural development. In our opinion the structural policy in agriculture is not only important, but necessary and strictly complementary to the reform of the price policy.

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Frame 6-1 Composition of the EU budgetary expenditure

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6.1 PRICE POLICY The immediate opportunity for an effective and long lasting reform of the CAP are the current

multilateral negotiations on trade liberalisation in the Doha Round of the WTO. In order to foster the European social and interregional cohesion, while favouring global cohesion, the EU position at WTO should be less protectionist and more market oriented, reducing the divergence between the EU proposal and those of the United States and of the Cairns Group.

The trade-distorting support classified in the “amber box” should be eliminated, possibly in five

years. Producer support classified in the “blue box” should be included in the “amber box”. Criteria for including policy measures in the “green box” should be clarified in order to guarantee their positive contribution to increased social welfare, avoiding disguised protection and market distortions. De minimis payments should be reduced and eliminated, possibly in five years.

The June 2003 decisions of the Council of Agricultural Ministers approved some changes in the

price support policy, such as largely decoupled farm payments, which are very important in principle and in methodological terms. However, in practice the planned reduction of income transfers to farmers is very limited and slow-proceeding in time. In order to foster European Cohesion a much more effective approach in trade liberalisation should be decided.

6.2 RURAL DEVELOPMENT The CAP has been traditionally oriented to support farmers and agriculture, without the due

concern to other economic activities developing in rural areas. The need to reduce he excess of resources employed in agriculture by shifting part of the public aid to other economic activities in rural areas was already a main motivation of the Integrated Mediterranean Programmes in the Eighties, and became a major issue in the Rural development policy.

In order to maximise the well-being of all European citizens, public financial resources should

be invested in rural areas according to the existing needs, attaining the highest productivity of investments in social terms, i.e. for the whole rural society. In order to attain such goal, financial funds should not be earmarked by Brussels to specific sectors of production, but local administrators should be more responsible for the identification of the local investment priorities.

Unfortunately, as long as the rural development policy is managed at all decision-making levels

(Community, national, regional and local), by policymakers and civil servants which are working mainly on agricultural policy, the probability that financial resources could be efficiently and equitably distributed among different sectors of production is low. At present the rural development policy is orienting most available public resources to farmers and towards agricultural objectives, without a due concern for the efficient and balanced intersectoral development of rural areas.

In order to improve social and interregional cohesion in Europe, a more strict cooperation and a

better consistency between regional policy and rural development policy should be implemented,

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allocating available resources at best for society as a whole, without any bias towards sectoral or other particular interests.

6.3 STRUCTURAL POLICY IN AGRICULTURE The basic importance of a structural policy is apparent if we consider that in the EU-15 about

50% of the labour force employed in agriculture is working in undersized farms and the gross productivity of labour could be doubled or tripled just by providing such farmers with a better proportion of capital and land. As arable land cannot be expanded, it is important that in some member countries and regions, where the labour force is redundant and farms are too small and inefficient, a direct structural policy is implemented in order to increase the local productivity of labour and agricultural incomes. If the productivity of labour is not increased, farm incomes will always be either unacceptably low or permanently supported by the government.

Unfortunately, structural policies are more difficult to implement than just providing farmers

with higher output prices and direct payments. On the other hand many farmers, especially the aged and inefficient ones, prefer to receive unconstrained price support and payments rather than financial support under constraints for improving their farm structure and management.

After the classification of the Guidance section of FEOGA in the structural funds, the

mainstream agricultural policy has been mainly dealing with market support and rural development, almost forgetting the urgent need for restructuring inefficient farms. On the contrary small and inefficient farms have been and are even more over-protected and provided with extra public aid. Such policy measures are contributing to worsen the already weak agricultural production structure in some regions. The share of the FEOGA Guidance section is still in the order of 6% of total agricultural expenditure, while the actual financial aid explicitly oriented to farm restructuring accounts for a much smaller share.

In order to promote social and interregional cohesion for good, the CAP should implement a

structural policy in agriculture complementing and reinforcing the reform of agricultural price support. Community, national and local governments should grant incentives to labour mobility especially within rural areas together with aids for restructuring farms, especially by increasing their economic size. Such structural policy should also be fully consistent and coordinated with the rural development policy.

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7 CONCLUDING REMARKS This report has tried to identify the impact of the present CAP on European Cohesion, as

requested by article 159 of the Treaty. The results of the analytical work carried out confirm the need of a permanent monitoring of “sectoral” policies in order to verify if they are consistent with the other EU policies and especially with two main “horizontal” policies, the “cohesion” policy and the “consumer” policy.

Within the CAP, the “price” policy has by far dominated the “structural” policy in the early

decades and the “rural development policy” in most recent years. This is apparent in terms of the absorbed share of the common agricultural expenditure, of the income redistribution generated by the manipulation of agricultural market prices, and of the external effects on the rural environment. Unfortunately the price support policy generated undisputable net negative effects on resource allocation, on income redistribution and on environmental protection. A limited number of relatively rich people have been granted with privileges at the expense of a large number of poorer people and at a high social cost in terms of deadweight losses.


especially in favour of a complementary structural policy able to reduce the number of small inefficient farms and solve the agricultural income problems for good. A large part of the excess of financial resources transferred to agriculture should be shifted to the most promising economic activities in rural areas by means of an effective and sustainable rural development policy.

Such important changes in the CAP will not be possible if a more complete and correct

information on the impact of the CAP on the well-being of EU citizens and substantial institutional changes will not take place in the agricultural policy decision-making process, where regional and consumer representatives should play a more important role in order to prevent sectoral bias and promote the interests of all European citizens.

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APPENDIX C: Tables, graphics, figures and frames on the Agricultural policy

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BELGIUM Frame Belgium-1 Regional net income flows generated by the CAP (year 2000 & 2000)

Frame Belgium-2. Regional net flows generated by the CAP vs. regional income (year 2002)

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��

��

��

-600

-400

-200

0

200

400

600

800

be32 be35 be34 be33 be22 be23 be25 be02_94 be21 be1

Be lgium: re gions N UTS 2

Net

reg

iona

l tra

nsfe

rs p

er c

apita

(EC

U-E

uro/

yea

r

0

10000

20000

30000

40000

50000

60000

GD

P pe

r ca

pita

200

0 (E

uro/

year

��1991

2000

GDPpc

y = -0,0211x + 574,82R2 = 0,5434

-600

-400

-200

0

200

400

600

800

0 10000 20000 30000 40000 50000 60000

Per capita GDP 2000 (Euro/year)

Per

capi

ta tr

ansf

ers (

Eur

o/ye

ar

2000

Lineare (2000)

FINAL REPORT


139

GERMANY

Frame Germany-1. Regional net income flows generated by the CAP (year 2000 & 2000)

Frame Germany-2.. Regional net flows generated by the CAP vs. regional income (year 2002)

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

-400

-300

-200

-100

0

100

200

300

400

500

600

dee

deg

ded

deb2

deb1

de72 de

fde

22de

73de

26de

13de

91de

23de

14de

a1de

25 de5

de21

Germany: regions NUTS 2

Net

reg

iona

l tra

nsfe

rs p

er c

apita

(EC

U-E

uro

/ yea

r

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

GD

P pe

r ca

pita

200

0 (E

CU

-Eur

o/ye

ar

�� 1991

2000GDPpc

y = -0,0182x + 450,47R 2 = 0,3282

-400

-300

-200

-100

0

100

200

300

400

500

600

0 5000 10000 15000 20000 25000 30000 35000 40000 45000

Per capita G D P 2000 (Euro/year)

Per

capi

ta tr

ansf

ers (

Eur

o/ye

ar)

2000Lineare (2000)

f

FINAL REPORT


140

GREECE

Frame Greece-1. Regional net income flows generated by the CAP (year 2000 & 2000)

Frame Greece-2. Regional net flows generated by the CAP vs. regional income (year 2002)

��

��

��

��

��

��

��

��

��

��

��

��

-800

-600

-400

-200

0

200

400

600

800

g r21 g r23 g r11 g r25 g r22 g r14 g r41 g r43 g r13 g r12 g r24 g r3 g r42

G re e ce : re g io ns N U T S 2

Net

reg

iona

l tra

nsfe

rs p

er c

apita

(Eur

o-E

CU

/ yea

r)

0

2000

4000

6000

8000

10000

12000

14000

16000

GD

P pe

r ca

pita

200

0 (E

cu/y

ear)

��1991

2000

GD Pp c

C

y = -0,0465x + 771,57R2 = 0,1656

-300

-200

-100

0

100

200

300

400

500

600

700

0 2000 4000 6000 8000 10000 12000 14000 16000

Greece: per capita GDP 2000 (Euro/year)

Per

capi

ta tr

ansf

ers (

Eur

o/ye

ar

2000Lineare (2000)

FINAL REPORT


141

SPAIN

Frame Spain-1. Regional net income flows generated by the CAP (year 2000 & 2000)

Frame Spain-2. Regional net flows generated by the CAP vs. regional income (year 2002)

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

-500

-400

-300

-200

-100

0

100

200

300

400

500

600

es43 es61 es11 es42 es62 es12 es41 es7 es52 es13 es24 es23 es53 es51 es21 es22 es3

Spain: regions NUTS 2

Net

reg

iona

l tra

nsfe

rs p

er c

apita

(EC

U /

year

0

5000

10000

15000

20000

25000

GD

P pe

r ca

pita

200

0 (E

cu/y

ear)

�� 1991

2000GDPpc

y = -0 ,0 2 8 6 x + 5 8 3 ,9 8R 2 = 0 ,1 5 1 5

- 3 0 0

- 2 0 0

- 1 0 0

0

1 0 0

2 0 0

3 0 0

4 0 0

5 0 0

6 0 0

0 5 0 0 0 1 0 0 0 0 1 5 0 0 0 2 0 0 0 0 2 5 0 0 0

S pa in: pe r c a pita G D P 2 0 0 0 (E uro /y e a r)

Per

capi

ta tr

ansf

ers (

Eur

o/ye

ar

2000

Lin e a re (2000)

FINAL REPORT


142

FRANCE

Frame France-1. Regional net income flows generated by the CAP (year 2000 & 2000)

Frame France-2. Regional net flows generated by the CAP vs. regional income (year 2002)

y = -0,0333x + 963,86R2 = 0,172

-400

-200

0

200

400

600

800

0 5000 10000 15000 20000 25000 30000 35000 40000

France: per capita GDP 2000 (ECU/year)

Per

capi

ta tr

ansf

ers (

EC

U/y

ear)

2000

Lineare (2000)

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

-400

-200

0

200

400

600

800

1000

fr83 fr81 fr3 fr63 fr22 fr53 fr41 fr25 fr52 fr72 fr43 fr62 fr51 fr61 fr24 fr82 fr26 fr21 fr23 fr42 fr71 fr1

France: regions NUTS 2

Net

reg

iona

l tra

nsfe

rs p

er c

apita

(EC

U-E

uro

/ yea

r

0

5000

10000

15000

20000

25000

30000

35000

40000

GD

P pe

r ca

pita

200

0 (E

uro/

year

��19912000GDPpc

FINAL REPORT


143

ITALY

Frame Italy-1. Regional net income flows generated by the CAP (year 2000 & 2000)

Frame Italy-2. Regional net flows generated by the CAP vs. regional income (year 2002)

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

-150

-100

-50

0

50

100

150

200

250

300

350

400

it93 ita it8 it91 it92 itb it72 it71 it52 it53 it13 it6 it51 it33 it11 it32 it12 it4 it2 it31

Italy: regions NUTS 2

Net

reg

iona

l tra

nsfe

rs p

er c

apita

(Eur

o / y

ear)

0

5000

10000

15000

20000

25000

30000

GD

P pe

r ca

pita

200

0 (E

uro/

year

)

��19912000GDPpc

y = -0,0068x + 211,19R2 = 0,099

-150

-100

-50

0

50

100

150

200

250

300

350

400

0 5000 10000 15000 20000 25000 30000

Italy: per capita GDP 2000 (Euro/year)

Per

capi

ta tr

ansf

ers (

Eur

o/ye

ar

2000Lineare (2000)

FINAL REPORT


144

NEDERLAND

Frame Nederland-1. Regional net income flows generated by the CAP (year 2000 & 2000)

Frame Nederland-2. Regional net flows generated by the CAP vs. regional income (year 2002)

��

��

��

��

��

��

��

��

��

��

-1000

-800

-600

-400

-200

0

200

400

600

800

nl23 nl13 nl12 nl21 nl22 nl42 nl34 nl41 nl33 nl11 nl32 nl31

Netherlands: regions NUTS 2

Net

reg

iona

l tra

nsfe

rs p

er c

apita

(EC

U-E

uro

year

)

0

5000

10000

15000

20000

25000

30000

35000

GD

P pe

r ca

pita

200

0 (E

cu/y

ear)

��19912000GDPpc

y = -0,0399x + 1121,6R2 = 0,7939

-300

-200

-100

0

100

200

300

400

500

0 5000 10000 15000 20000 25000 30000 35000

Nederland: per capita GDP 2000 (Euro/year)

Per

capi

ta tr

ansf

ers (

Eur

o/ye

ar

2000Lineare (2000)

FINAL REPORT


145

PORTUGAL

Frame Portugal-1. Regional net income flows generated by the CAP (year 2000 & 2000)

Frame Portugal-2. Regional net flows generated by the CAP vs. regional income (year 2002)

��

��

��

��

��

-8 0 0

-6 0 0

-4 0 0

-2 0 0

0

2 0 0

4 0 0

6 0 0

8 0 0

p t2 p t1 2 p t1 4 p t1 1 p t1 5 p t3 p t1 3

P o rtu g a l: re g io n s N U T S 2

Net

reg

iona

l tra

nsfe

rs p

er c

apita

(EC

U-E

uro

/ yea

r)

0

2 0 0 0

4 0 0 0

6 0 0 0

8 0 0 0

1 0 0 0 0

1 2 0 0 0

1 4 0 0 0

1 6 0 0 0

GD

P pe

r ca

pita

200

0 (E

uro/

year

)

��1 9 9 1

2 0 0 0G D P p c

y = -0,0668x + 836,82R2 = 0,3654

-300

-200

-100

0

100

200

300

400

500

600

0 2000 4000 6000 8000 10000 12000 14000 16000

Portugal: per capita GDP 2000 (Euro/year)

Per

capi

ta tr

ansf

ers (

Eur

o/ye

ar

2000

Lineare (2000)

FINAL REPORT


146

UNITED KINGDOM

Frame United Kingdom-1. Regional net income flows generated by the CAP (year 2000 & 2000

Frame United Kingdom-2. Regional net flows generated by the CAP vs. regional income (2002)

��

��

��

��

��

��

��

��

��

��

-200

-150

-100

-50

0

50

100

150

200

250

300

ukb uk1 uk9 uk8 uk2 uk6 uk7 uk3 uka uk4 uk5

United Kingdom: regions NUTS 2

Net

reg

iona

l tra

nsfe

rs p

er c

apita

(EC

U-E

uro

/ ye

ar)

0

5000

10000

15000

20000

25000

30000

35000

GD

P pe

r ca

pita

200

0 (E

uro/

year

)

��19912000GDPpc

y = -0,0093x + 226,69R 2 = 0,2213

-200

-150

-100

-50

0

50

100

150

200

250

300

0 5000 10000 15000 20000 25000 30000 35000

United K ingdom: per capita G DP 2000 (Euro/year)

Per

capi

ta tr

ansf

ers (

Eur

o/ye

ar)

2000Lineare (2000)

FINAL REPORT


147

FINLAND

Frame Finland-1. Regional net income flows generated by the CAP (year 2000 & 2000)

Frame Finland-2. Regional net flows generated by the CAP vs. regional income (year 2002)

-300

-200

-100

0

100

200

300

400

500

FI13 FI14 FI15 FI17 FI2 FI16

Finland: regions NUTS 2

Net

reg

iona

l tra

nsfe

rs p

er c

apita

(EC

U-E

uro

year

)

0

5000

10000

15000

20000

25000

30000

35000

40000

GD

P pe

r ca

pita

200

0(E

cu/y

ear

2000GDPpc

y = -0,0207x + 603,17R2 = 0,5331

-300

-200

-100

0

100

200

300

400

0 5000 10000 15000 20000 25000 30000 35000 40000

Finland: per capita GDP 2000 (Euro/year)

Per

capi

ta tr

ansf

ers (

Eur

o/ye

ar

2000Lineare (2000)

FINAL REPORT


148

SWEDEN

Frame Sweden-1. Regional net income flows generated by the CAP (year 2000 & 2000)

Frame Sweden-2. Regional net flows generated by the CAP vs. regional income (year 2002)

-400

-300

-200

-100

0

100

200

300

SE06 SE08 SE02 SE07 SE09 SE04 SE0A SE01

Sweden: regions NUTS 2

Net

reg

iona

l tra

nsfe

rs p

er c

apita

(EC

U-E

uro

year

)

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

GD

P pe

r ca

pita

200

0 (E

uro/

year

2000GDPpc

y = -0 ,0 1 9 2 x + 5 4 6 ,2 9R 2 = 0 ,4 3 9 4

-300

-200

-100

0

100

200

300

400

0 5000 10000 15000 20000 25000 30000 35000 40000 45000

Swe de n: pe r capita G D P 2000 (Euro/ye ar)

Per

capi

ta tr

ansf

ers (

Eur

o/ye

ar

2000Lin ea re (2000)

FINAL REPORT


149

DEVELOPMENTS OF COHESION POLICIES

Landmarks of the EU Cohesion Policy

1968 The Division of Regional Policy is created within the European Commission 1973 EU enlargement to Denmark, Ireland, and United Kingdom. 1975 the ERDF (European Regional Development Fund) was created. The objective was to

“reduce and correct at long term main regional existing unbalances in the Community”. 1981 and 1984 EU enlargement to Greece and Spain & Portugal 1986 Single European Act including a specific title about “Economic and Social Cohesion”

(recognizes the inadequacy of the market to correct regional unbalances). TheStructural Funds and the Cohesion Fund are the main instruments utilized.

1992 The Treaty of the European Union (Maastricht) was adopted, Economic and SocialCohesion becomes, along with National Markets and Economic and MonetaryUnion, one of the main three pillars of the European Union.

1995 EU enlargement to Austria Sweden and Finland. A new objective for the structuralfunds was established (objective 6), which aimed to the development and structuraladjustment of regions with low density of population.

1997 The Amsterdam Treaty. The most significant change is the integration ofemployment policy.

2003 EU enlargement to 10 new Member States.

INTRODUCTION

Quantitative model used for appraising the impact of the CAP on regional income redistribution (NUTS 0, 1, 2)

General features

Commodities (i = 1, ... , 20) (Frame 10-1) Member Countries (NUTS 0) (j = 1,...., 15) Regions (NUTS 2) (k = 1,....,R) (Total number of regions 186) >2000< = average 1999, 2000, 2001 ‘2002’ = year 2002 xxx Underlined variables are ‘per cent’ (%) coefficients on Final Agricultural Production, when not specified differently

FINAL REPORT


150

Regional (national) inflow: market transfers to producers

Fiscal outflow: market transfers from taxpayers

Invisible outflow: market transfers from consumers

Net regional transfers

Legend APL = Agricultural Producer Levies CAE = Consumer’s Agricultural Expenditure CMT = Consumers Market Transfers to producers DSP = Direct Payments to Producers FAP = Final Agricultural Production FGE = FEOGA Guidance Expenditure NT = Net trade in value MPS = Market price support MTP = Market Transfer to Producers NAE = National Agricultural Expenditure NCOj = National share of Contributions to EU budget POPj,k = Regional share of POPulation PSE = net Producer Subsidy Equivalents TMT = Taxpayers Market Transfers to producers VAFj,k = Regional share of Value Added at Factor cost Data sources PSEi ; FOEi ; NAEi ; DSPi ; APL = OECD, Tables on Produer Subsidy Equivalents FAP ij,k ; VAFj,k ; POPj,k = EC, REGIO Database ASS = EC, Agricultural Situation in the Community NCO j = Eurostat

MTPi = PSEi -FGEi -NAEi = MPSi + (DSPi - APLi) MTPij,k = MTPi * FAP ij,k MTPj,k = Σi MTPij,k

TMTj = TMT * NCO j TMT j,k = TMTj * VAFj,k

CAEij = FAPij +NT ij CMTij = CAE ij * MPSi CMTj = Σi CMTij

CMTjik = CMTj * POPj,k

RNTj,k = MTPj,k - TMTj,k - CMTj,k

FINAL REPORT


151

SOCIAL COHESION

Frame 0-1 Share of producer payments and of beneficiaries by size class (year 2000)

Share of producer payments and of beneficiaries by size class (year 2000)

0%

20%

40%

60%

80%

100%

120%

Cum

ulat

ed p

erce

ntag

es

Payments 4% 7% 18% 31% 50% 75% 87% 93% 96% 98% 100%

Beneficiaries 54% 62% 79% 88% 95% 99% 100% 100% 100% 100% 100%

> 0 < 1. 25

> 1.25 < 2 > 2 < 5 > 5 < 10 > 10 <

20> 20 <

50> 50 <

100> 100 <

200> 200 <

300> 300 <

500 > 500

FINAL REPORT


152

Frame 0-2 Regional (NUTS 2) Cohesion within agriculture in Mediterranean Regions (F, I, E, Gr, P) Regions NUTS 2 Tranf. to ProducFinal ProductionTotal SGM (ESU) Total labour AWU Total AA GDPpc Transfers/VoP Transfers/SGMTransfers/AWUTransfers/AA

1991 2000 1991 2000 1990a00 1997a00 1990a00 1997a00 1990a00 1997a00 1991 2000 1991 2000 1991 2000 1991 2000 1991 2000gr11 Anatoliki Makedonia, Thra 421 342 1038 711 309240 430570 63170 56530 360400 363490 6386 9415 41% 48% 136% 79% 6672 6049 1170 941gr12 Kentriki Makedonia 880 675 2339 1578 662090 841180 115660 104320 612640 614150 6645 11680 38% 43% 133% 80% 7609 6466 1437 1098gr13 Dytiki Makedonia 165 243 356 484 106700 131700 21990 19590 200530 208920 6732 11573 47% 50% 155% 184% 7522 12396 825 1162gr14 Thessalia 685 375 1659 809 505830 718640 73090 65750 420190 436920 6236 10591 41% 46% 135% 52% 9374 5701 1631 858gr21 Ipeiros 184 162 458 392 167130 199000 38700 32740 128000 115310 5251 8091 40% 41% 110% 81% 4754 4948 1437 1405gr22 Ionia Nisia 73 95 108 183 102720 123080 18870 16530 81670 81290 6104 10143 68% 52% 71% 77% 3889 5731 899 1165gr23 Dytiki Ellada 421 359 962 927 385130 457870 77780 67590 288900 324500 5870 8793 44% 39% 109% 78% 5418 5306 1459 1105gr24 Sterea Ellada 412 377 979 909 351610 393780 60960 53400 388860 349720 8316 13188 42% 41% 117% 96% 6750 7063 1058 1078gr25 Peloponnisos 414 325 863 858 603370 724310 92520 75380 423830 376540 6837 9948 48% 38% 69% 45% 4480 4313 978 863gr3 Attiki 84 64 283 187 72310 82960 13980 11530 52480 56840 7646 13306 30% 34% 117% 77% 6033 5575 1607 1131gr41 Voreio Aigaio 75 58 119 115 102000 120340 19960 19320 165090 123210 5222 11337 63% 51% 74% 49% 3772 3024 456 474gr42 Notio Aigaio 71 62 164 128 77880 100590 15570 14250 135200 103300 6850 13703 43% 49% 91% 62% 4547 4351 524 600gr43 Kriti 325 355 525 749 319560 415180 68080 60340 403400 344460 6170 11385 62% 47% 102% 85% 4768 5880 805 1030es11 Galicia 622 754 1719 1719 594840 486210 198960 165710 621780 621550 8301 12045 36% 44% 105% 155% 3128 4553 1001 1214es12 Principado de Asturias 187 241 407 407 231500 180290 54330 53650 387210 401310 10056 13152 46% 59% 81% 133% 3436 4485 482 600es13 Cantabria 135 172 283 283 154060 109300 24610 22470 233460 229320 10438 14919 48% 61% 88% 158% 5492 7669 579 751es21 Pais Vasco 158 181 427 427 175240 150390 26430 24120 223680 238780 12806 18861 37% 42% 90% 121% 5961 7515 704 759es22 Comunidad Foral de Navar 182 242 565 565 230690 334980 18050 17860 616710 579240 13516 19607 32% 43% 79% 72% 10063 13549 295 418es23 La Rioja 121 128 395 395 100120 174070 12990 13340 187450 220300 12525 17012 31% 32% 121% 74% 9292 9603 644 582es24 Aragón 578 846 1802 1802 566530 890350 51190 47870 2455430 2537580 12193 16310 32% 47% 102% 95% 11291 17680 235 334es3 Comunidad de Madrid 91 117 289 289 90170 106800 8960 8520 380760 319230 13774 20566 32% 40% 101% 109% 10200 13679 240 365es41 Castilla y León 1207 1683 3024 3024 1404030 1797480 122640 101090 4917140 5333470 9534 14078 40% 56% 86% 94% 9843 16649 246 316es42 Castilla-la Mancha 1079 1128 2447 2447 811130 1390320 83390 77370 4412070 4716070 9127 12427 44% 46% 133% 81% 12941 14581 245 239es43 Extremadura 506 556 1162 1162 484550 775620 57900 58020 2935360 2885300 7206 9860 44% 48% 104% 72% 8739 9591 172 193es51 Cataluña 745 1175 3166 3166 893200 1050580 84780 79420 1101420 1140480 13398 18556 24% 37% 83% 112% 8792 14792 677 1030es52 Comunidad Valenciana 428 301 2269 2269 741700 1038650 78010 74590 724450 700800 11065 14819 19% 13% 58% 29% 5490 4031 591 429es53 Illes Balears 78 80 255 255 70090 92810 12430 14450 217280 234490 14432 18508 31% 32% 112% 87% 6294 5562 360 343es61 Andalucia 1965 1938 4756 4756 1744950 3451120 238430 267110 4494820 4911020 8447 11400 41% 41% 113% 56% 8242 7257 437 395es62 Murcia 267 303 1391 1391 435650 624080 38330 42560 528810 511250 10230 12846 19% 22% 61% 49% 6974 7118 505 593es7 Canarias (ES) 169 150 698 698 160450 183900 31920 30840 93220 49930 10491 14624 24% 21% 105% 81% 5280 4858 1808 3000

FINAL REPORT


153

Regions NUTS 2 Tranf. to ProducFinal ProductionTotal SGM (ESU) Total labour AWU Total AA GDPpc Transfers/VoP Transfers/SGM Transfers/AWUTransfers/AA1991 2000 1991 2000 1990a00 1997a00 1990a00 1997a00 1990a00 1997a00 1991 2000 1991 2000 1991 2000 1991 2000 1991 2000

fr1 Île de France 405 413 1079 832 539160 568100 16810 12270 584740 588910 25712 36691 38% 50% 75% 73% 24073 33628 692 701fr21 Champagne-Ardenne 1422 1296 3143 2966 1586320 1866960 47280 38790 1548720 1601100 17166 21874 45% 44% 90% 69% 30072 33398 918 809fr22 Picardie 914 1160 2364 2232 1195660 1365730 38740 29060 1350670 1357410 14534 19065 39% 52% 76% 85% 23591 39915 677 855fr23 Haute-Normandie 510 690 1169 1193 608070 645060 27840 18990 817560 799850 16260 22056 44% 58% 84% 107% 18325 36324 624 862fr24 Centre 1377 1492 3007 2808 1706090 1750280 64450 48140 2431770 2398880 15537 21036 46% 53% 81% 85% 21371 31003 566 622fr25 Basse-Normandie 851 1263 1961 2240 842870 936540 61790 43310 1310780 1279710 14897 19768 43% 56% 101% 135% 13769 29157 649 987fr26 Bourgogne 965 1476 1959 2769 1017030 1176970 50460 39010 1780700 1795460 14965 21450 49% 53% 95% 125% 19117 37826 542 822fr3 Nord - Pas-de-Calais 668 1016 1867 2092 851420 942900 42980 32040 863300 848630 13487 18671 36% 49% 78% 108% 15543 31713 774 1197fr41 Lorraine 621 762 1105 1255 557600 624170 29160 21700 1113540 1130710 14553 19319 56% 61% 111% 122% 21281 35125 557 674fr42 Alsace 319 387 790 1032 378900 445090 23790 20270 327510 347780 17080 23889 40% 38% 84% 87% 13412 19090 974 1113fr43 Franche-Comté 366 524 725 948 330880 367700 23490 17220 671460 672010 15696 20295 50% 55% 111% 142% 15565 30404 545 779fr51 Pays de la Loire 1649 2738 4392 5328 1861000 1962700 111980 86310 2240650 2190860 14544 20906 38% 51% 89% 140% 14729 31723 736 1250fr52 Bretagne 1622 2870 5854 6673 1976530 2023180 113470 81790 1735770 1783960 14015 19995 28% 43% 82% 142% 14296 35093 935 1609fr53 Poitou-Charentes 1074 1160 2101 2124 1182350 1339970 66740 48490 1791250 1803720 13490 19226 51% 55% 91% 87% 16093 23929 600 643fr61 Aquitaine 1147 1661 2998 4502 1525340 1731020 106690 89670 1503550 1515410 14961 20965 38% 37% 75% 96% 10752 18522 763 1096fr62 Midi-Pyrénées 1252 1712 2662 3098 1337530 1422010 105880 82560 2322960 2361750 14639 20549 47% 55% 94% 120% 11828 20740 539 725fr63 Limousin 274 624 592 748 372470 446810 37110 27710 884980 891860 13300 18959 46% 83% 73% 140% 7370 22511 309 699fr71 Rhône-Alpes 1040 1237 2637 2910 1219810 1367050 96930 72210 1619970 1601030 16842 23937 39% 42% 85% 90% 10728 17127 642 772fr72 Auvergne 543 1012 1171 1556 618340 719970 50870 40630 1524210 1547600 13576 20010 46% 65% 88% 141% 10680 24913 356 654fr81 Languedoc-Roussillon 645 695 1826 2288 1149580 1183980 72040 54030 1021860 1031860 13398 18053 35% 30% 56% 59% 8958 12869 632 674fr82 Provence-Alpes-Côte d'Azu 617 704 2002 2605 991410 1043550 63040 50150 617830 672200 15378 21081 31% 27% 62% 67% 9780 14039 998 1047fr83 Corse 42 48 140 166 67520 62090 5000 3750 122420 110640 12025 17610 30% 29% 62% 78% 8412 12914 344 438it11 Piemonte 997 1334 2788 2794 1585720 1377900 148620 126840 1115170 1169600 18502 23613 36% 48% 63% 97% 6712 10519 894 1141it12 Valle d'Aosta 20 32 46 54 29280 30130 6860 6370 96190 87120 20406 24365 44% 59% 68% 105% 2912 4952 208 362it13 Liguria 221 241 626 605 276750 540820 37450 49880 84430 80870 18718 21266 35% 40% 80% 44% 5913 4823 2623 2975it2 Lombardia 1858 2320 4941 4839 2013040 1923570 121920 107400 1099930 1111150 20972 26716 38% 48% 92% 121% 15240 21601 1689 2088it31 Trentino-Alto Adige 328 265 980 838 523730 569760 52460 54990 419940 409870 19516 27099 34% 32% 63% 47% 6259 4824 782 647it32 Veneto 1521 1514 3973 3796 1983920 1532950 156370 127930 878500 868490 18355 23645 38% 40% 77% 99% 9727 11834 1731 1743it33 Friuli-Venezia Giulia 346 293 720 718 395410 374600 33950 33710 255480 260200 19054 22592 48% 41% 88% 78% 10197 8690 1355 1126it4 Emilia-Romagna 1476 1590 4802 4356 2458770 1831850 154770 122250 1231110 1192650 20044 25663 31% 36% 60% 87% 9537 13003 1199 1333it51 Toscana 617 677 1603 1514 981380 1124420 96080 92780 917850 902110 17397 22481 38% 45% 63% 60% 6418 7295 672 750it52 Umbria 237 308 673 672 345310 327200 34400 32540 394260 391840 16076 19973 35% 46% 69% 94% 6883 9460 601 786it53 Marche 398 509 1115 966 568820 582330 57250 51630 547800 588620 16363 20258 36% 53% 70% 87% 6953 9858 727 865it6 Lazio 753 778 2124 1921 1166350 921670 116610 112650 820100 821250 18794 22442 35% 41% 65% 84% 6455 6910 918 948it71 Abruzzo 398 372 1140 986 526040 450060 69230 68370 518450 502980 14672 16549 35% 38% 76% 83% 5743 5445 767 740it72 Molise 132 177 303 277 178230 166790 25810 21030 249810 243190 12751 15513 44% 64% 74% 106% 5130 8404 530 727it8 Campania 976 827 3055 2349 1265730 1272170 194680 182820 656780 632750 11397 12892 32% 35% 77% 65% 5012 4522 1486 1306it91 Puglia 1693 1205 3908 2927 1936630 1748740 192330 188500 1444220 1431100 12010 13256 43% 41% 87% 69% 8803 6394 1172 842it92 Basilicata 226 297 519 554 373530 375440 43840 43090 621220 597030 10388 14457 44% 54% 60% 79% 5153 6903 364 498it93 Calabria 762 578 1614 1413 943340 810760 115120 125560 653440 649870 9767 12225 47% 41% 81% 71% 6623 4602 1167 889ita Sicilia 1488 1091 4000 2894 1915050 1819470 187810 185460 1587390 1564800 11352 12889 37% 38% 78% 60% 7921 5882 937 697itb Sardegna 448 526 1073 1127 605220 761530 78400 64290 1354660 1327620 12363 14870 42% 47% 74% 69% 5709 8182 330 396pt11 Norte 384 468 896 1265 587020 743580 316420 198940 778760 705680 5760 9306 43% 37% 65% 63% 1215 2352 494 663pt12 Centro (PT) 343 416 951 1159 484440 461410 272770 150560 665400 614950 4573 8987 36% 36% 71% 90% 1258 2766 516 677pt13 Lisboa e Vale do Tejo 276 456 1098 1548 575610 774210 126400 83350 456540 494430 8946 15051 25% 29% 48% 59% 2183 5476 604 923pt14 Alentejo 261 373 637 722 384330 417340 61440 42680 1842090 1757360 3862 9021 41% 52% 68% 89% 4242 8734 141 212pt15 Algarve 46 49 154 201 142060 126320 29950 13850 136780 127750 5545 10933 30% 25% 32% 39% 1541 3571 337 387

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154

Frame 0-3 Size and dispersion of agricultural structural indicators

Average size (ha) Coefficient of variation(1)1990 1997 97-90 % 1990 1997 97-90

Agricultural Area per holding (AA/n. holdings)Greece 4.3 4.3 0.0 -1% 25% 26% 2%Spain 15.4 21.2 5.8 38% 62% 66% 4%France 30.5 41.7 11.2 37% 44% 43% -1%Italy 5.6 6.4 0.8 14% 49% 49% 0%Portugal 6.7 9.2 2.5 37% 187% 175% -12%Standard Gross Margin per holding (SGM/n. holdings)Greece 4.4 5.8 1.3 30% 20% 26% 6%Spain 5.6 10.6 5.0 90% 29% 36% 8%France 23.7 35.3 11.6 49% 50% 48% -1%Italy 7.5 8.0 0.5 6% 46% 50% 4%Portugal 3.9 6.5 2.6 69% 53% 50% -4%Standard Gross Margin per Annual Work Unit (SGM/AWU)Greece 5.5 7.9 2.4 43% 12% 16% 4%Spain 7.8 11.7 3.9 50% 36% 36% 0%France 17.4 25.0 7.6 44% 36% 37% 2%Italy 10.4 10.3 -0.1 -1% 26% 27% 2%Portugal 2.7 5.2 2.5 91% 61% 53% -8%(1) Standard Deviation/Average

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155

Frame 0-4 Structural indicators in Central and North Europe Average size (ha)

1990 1997 97-90 %Agricultural Area per holding (AA/n. holdings)Belgium 15.8 20.6 4.8 30%Denmark 34.2 42.6 8.4 25%Germany 26.1 32.1 6.0 23%Ireland 26.0 29.4 3.3 13%Luxembourg 32.0 42.5 10.5 33%Netherlands 16.1 18.6 2.5 16%Austria 16.6Finland 23.7Sweden 34.7UK 67.9 69.3 1.5 2%EU15 18.4Standard Gross Margin per holding (SGM/n. holdings)Belgium 28.2 47.0 18.7 66%Denmark 37.3 57.2 19.9 53%Germany 18.4 32.3 13.9 76%Ireland 11.6 18.7 7.1 61%Luxembourg 22.9 35.2 12.3 54%Netherlands 51.6 84.1 32.5 63%Austria 15.2Finland 23.5Sweden 22.8UK 35.4 47.7 12.3 35%EU15 16.7Standard Gross Margin per Annual Work Unit (SGM/AWU)Belgium 25.7 39.9 14.2 55%Denmark 31.9 36.9 5.0 16%Germany 11.7 26.3 14.6 125%Ireland 7.9 13.6 5.7 72%Luxembourg 14.4 20.8 6.4 45%Netherlands 28.6 43.5 14.9 52%Austria 16.6Finland 17.1Sweden 25.0UK 18.2 26.8 8.6 47%EU15 16.6

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156

Frame 0-5 Analysis of the structure of milk production Milk production 0 -<2 ESU 2 -<4 ESU 4 -<8 ESU 8 -<16 ESU16 -<40 ES40 -<100 E100-<250 E>250 ESU TotalStandard Gross Margin (SGM) per holdingbe Belgium 2 2.875 5.529412 12.04762 28.99448 65.80934 128.6207 261.5 62.38235dk Denmark 2 8 12.125 30.4 71.11085 141.0682 326.05 100.3961de Germany 1.5 3.1 6.1 12.0 27.3 60.6 129.0 567.8 40.1gr Greece 1.2 2.9 5.9 11.6 24.6 53.6 14.2es Spain 1.2 3.0 6.0 11.5 23.3 57.7 138.8 467.2 13.8fr France 1.4 2.9 6.0 12.3 29.3 60.7 125.4 309.0 49.5ie Ireland 1.3 3.0 6.1 12.3 28.6 59.6 130.8 302.8 45.8it Italy 1.6 3.1 6.0 11.7 26.2 63.2 150.2 415.6 50.4lu Luxembourg 15.0 31.5 59.2 55.9nl Netherlands 0.0 0.0 5.8 12.3 29.6 73.9 139.6 326.1 105.4at Austria 1.5 3.0 5.9 11.6 22.8 50.2 117.0 11.7pt Portugal 1.3 3.0 5.8 11.6 25.2 56.9 145.3 451.0 18.9fi Finland 1.8 3.066667 6.147059 12.65193 28.4778 56.19185 123.5405 38.90913se Sweden 2.0 2.857143 5.857143 12.7907 29.39711 65.25608 137.115 358.4118 71.25545Total EU-15 1.4 3.0 6.0 11.8 27.1 62.3 137.3 401.9 43.12447Standard Gross Margin (SGM) per Annual Work Unitbe Belgium 6000 7666.667 11750 15812.5 25980.2 47508.43 73861.39 104600 47335.62dk Denmark 8000 16166.67 26702.7 47516.98 64504.75 83602.56 56273.79de Germany 2577 4285 6892 10879 17981 32684 49961 36163 25051gr Greece 2500 3476 4556 7165 11361 17861 9107es Spain 1411 2396 3920 6418 11502 22639 33581 35394 8155fr France 4760 5635 6843 10126 19202 31481 42804 49440 28056ie Ireland 1933 3810 6204 9736 19333 34738 49971 71235 28543it Italy 1712 2714 4396 7379 14513 28477 49127 77710 25834lu Luxembourg 15000 20323 29600 28909nl Netherlands 0 0 7667 12286 22370 43812 65361 94837 55668at Austria 2923 4542 6593 9652 15029 25470 58500 10616pt Portugal 1143 1986 3701 6809 11427 18689 31143 41000 9855fi Finland 8000 4600 5971 8945 15718 25497 41555 20227se Sweden 5000 8200 11957 22008 37573 51906 63469 39149Total EU-15 1784 3150 5040 8383 16752 32972 54612 65807 25713Annual Work Units (AWU)be Belgium 0% 0% 1% 3% 17% 61% 17% 0% 100%dk Denmark 0% 0% 0% 5% 42% 48% 5% 100%de Germany 0% 1% 3% 10% 38% 37% 7% 3% 100%gr Greece 3% 7% 17% 25% 37% 11% 0% 0% 100%es Spain 5% 8% 21% 35% 24% 6% 2% 1% 100%fr France 0% 0% 1% 4% 28% 56% 10% 0% 100%ie Ireland 0% 0% 1% 6% 35% 48% 8% 0% 100%it Italy 1% 4% 9% 14% 23% 24% 16% 8% 100%lu Luxembourg 0% 0% 1% 18% 74% 8% 100%nl Netherlands 0% 0% 0% 1% 5% 39% 52% 4% 100%at Austria 2% 9% 20% 34% 32% 3% 0% 100%pt Portugal 5% 10% 14% 19% 32% 15% 3% 1% 100%fi Finland 0% 0% 1% 6% 45% 45% 3% 0% 100%se Sweden 0% 0% 0% 2% 16% 52% 26% 4% 100%Total EU-15 1% 3% 7% 13% 28% 34% 12% 2% 100%Data source: Eurostat New Cronos

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157

Frame 0-6 Analysis of the structure of wine production Wine production 0 -<2 ESU 2 -<4 ESU 4 -<8 ESU 8 -<16 ESU16 -<40 ES40 -<100 E100-<250 E>250 ESU TotaleStandard Gross Margin (SGM) per holdingbe Belgiumdk Denmarkde Germany 1.8 3.0 5.7 11.4 26.0 61.6 133.0 410.4 21.2gr Greece 0.8 3.0 5.8 11.2 21.1 56.7 5.3es Spain 1.2 2.9 5.7 11.2 24.0 56.9 142.7 438.8 7.0fr France 1.1 2.9 5.8 11.6 27.2 64.8 152.9 447.8 58.6ie Irelandit Italy 0.9 2.9 5.7 11.2 24.0 58.5 146.8 446.6 5.6lu Luxembourg 1.3 2.7 6.1 12.2 28.5 54.0 19.2nl Netherlandsat Austria 1.3 2.8 5.7 11.4 24.7 53.0 178.0 8.3pt Portugal 1.0 2.8 5.6 11.0 24.3 58.8 142.1 476.7 5.0fi Finlandse SwedenTotal EU-15 0.9 2.9 5.7 11.3 25.4 63.1 151.5 447.1 16.6873Standard Gross Margin (SGM) per Annual Work Unitbe Belgiumdk Denmarkde Germany 5931 9370 12653 14721 20186 27442 35494 30892 21808gr Greece 3745 5693 6708 8123 10752 17000 7471es Spain 5224 7257 9088 10831 14762 18110 18133 14960 11030fr France 5115 10224 15077 20149 25237 33094 43513 49867 37112ie Irelandit Italy 2920 5978 7651 9536 12882 17045 19525 13636 8712lu Luxembourg 8000 6333 8600 10429 14250 17182 13919nl Netherlandsat Austria 6604 7848 9218 11774 16890 23432 12276 13037pt Portugal 1279 2722 4085 5691 7112 8696 10580 11260 4114fi Finlandse SwedenTotal EU-15 2889 5918 8119 10630 16657 27485 39155 42940 18750Annual Work Units (AWU)be Belgiumdk Denmarkde Germany 1% 8% 10% 12% 25% 31% 10% 4% 100%gr Greece 11% 12% 25% 37% 15% 1% 0% 0% 100%es Spain 13% 15% 19% 20% 19% 8% 3% 3% 100%fr France 2% 2% 2% 4% 12% 27% 31% 21% 100%ie Irelandit Italy 24% 13% 16% 17% 16% 7% 3% 3% 100%lu Luxembourg 2% 5% 8% 11% 39% 35% 0% 100%nl Netherlandsat Austria 11% 12% 15% 20% 29% 10% 3% 100%pt Portugal 33% 18% 15% 11% 11% 7% 3% 2% 100%fi Finlandse SwedenTotal EU-15 14% 10% 12% 13% 15% 15% 13% 9% 100%

Analysis of the impact of Community LA

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Policies on regional cohesion


FINAL REPORT THE IMPACT OF STATE AID ON

REGIONAL COHESION

VOLUME III


October, 2003

FINAL REPORT

TABLE OF CONTENTS D. CONTRIBUTION OF THE STATE AID AND SERVICES OF GENERAL INTEREST ON THE REGIONAL COHESION I.- STATE AID 1. ANALYSIS OF STATE AIDS SINCE THE II COHESION REPORT

1.1. INTRODUCTION: STATE AIDS AND COHESION. A PRESENTATION AND APPROXIMATION TO THE DEBATE OF STATE AID CONTRIBUTION TO ECONOMIC AND SOCIAL COHESION. 1.2. FINAL REGULATION ASPECTS IN STATE AIDS ISSUES 1.3.CHARACTERIZATION OF PUBLIC AIDS 1.4. QUANTITATIVE ANALYSIS 1.5. RESULTS: OBSERVED TRENDS

Directions

II.- SERVICES OF GENERAL INTEREST 1.- INTRODUCTION 2.- STATE AIDS AND SGI 3. THE GREEN BOOK ON SGI 4.- DIRECTING PRINCIPLES AND SGI CHARACTERIZATION 5.- SOCIAL AND TERRITORIAL COHESION AND THE SGI 6.- CASE ANALYSES ON COJEC RESOLUTIONS

6.1. POSTAL SERVICES 6.2. CABOTAGE SEA TRANSPORT 6.3. AIR TRANSPORT 6.4. TELECOMMUNICATIONS

7.- CONCLUSIONS Y OBSERVED TRENDS

Analysis of the impact of community policies on regional cohesion FINAL REPORT ON STATE AID. DG REGIO EC.

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FINAL REPORT I. STATE AID 1. ANALYSIS OF STATE AIDS SINCE THE II COHESION REPORT

1.1. INTRODUCTION: STATE AIDS AND COHESION. A PRESENTATION AND

APPROXIMATION TO THE DEBATE OF STATE AID CONTRIBUTION TO ECONOMIC AND SOCIAL COHESION.

1.1.1. The economic and social cohesion policy

The interrelation between economic and social cohesion policy and competence policy

raises questions of special significance, since the Commission has made an effort to apply this cohesion policy in a compatible and consistent way with Rights of competence in the last few years, especially regarding the practical effects of concentrating Structural Funds in the areas and regions that need them most. This insistence on coherence between Funds and Aids is one of the facts that characterizes best the reform process of Structural Funds passed in 19911.

The desired coherence between cohesion and competence policies is important not only to

overcome the problem that can arise from an incoherent application of regional Funds and Aids – for example, how to fully and convincingly justify that Structural Funds can be granted in those cases were Regional Aids are not allowed – a problem or conflict that has recently reached the Court of Justice.2

Economic and social cohesion policy is clearly recognised in the EC Treaty, as the

Community’s mission in to promote a harmonious and complementary development of economic activities in the Community as a whole, by means of establishing a common market. This economical aspect, which is predominant in the Community environment, means a restriction in the field of actions from member States towards benefits, as the well-known process of opening up the markets corresponding to general interest services or, also, the limitations implied by articles 87 and 88 of the European Community Treaty itself, which deal with aids granted to States that falsify competence, clearly show.

Regional cohesion policy, by means of the Structural Funds, supports the harmonious

development of the Community as a whole by allowing it to develop in this way, an action aimed at reinforcing its economic and social cohesion. One of the main characteristics of these Funds is its complementarity with respect to national and regional measures. Although Community intervention does exist regarding the choice of actions that deserve encouragement, according to the principles of subordination and proportionality, it is the member States themselves that are responsible both of the basic economic contribution and the selection of projects and responsibilities over their management.

1 Especially by the passing of Regulation 1260/1999, by the Council on June 21st 1999, by which

the Structural Funds are established. 2 Ruling of European Community Court of First Instance, June 17th 1999, case T-82/96.


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1.1.2. State Aids

When tackling the deficiencies in how the market works, especially caused by changing

economic and social environments, the possibility of State or Community intervention being justified is recognised. This intervention can be used to alleviate the consequences derived from undesired market results regarding resource allocation or income distribution. On the other hand, the possibility exists when it would be necessary to intervene in order to reinforce policies that would not stand on the action of market forces exclusively or to render services that contribute external benefits beyond their market value. However, if these interventions take the form of State Aids, the control of this type of aids will try to guarantee that the distorting effects of each individual aid proposal are minimised. Year after year, control of state aids has played an essential role in lessening their worst consequences.

The aim of public intervention, and intervention that takes the form of State aid especially,

is to neutralize the undesired effects of the market’s running. Granting of aids must keep a balance with the limits set by national public finances, apart from minimizing the falsifying of competence, whilst granting of aids in the European context must be coherent within the frame of the economic and monetary union and the stability and growth pact, as public resources must be used in a restrictive and efficient way.

Articles 87-89 of the Treaty were conceived to promote the integration of domestic markets

in a regime of non-falsified competition. However, the authors of the Treaty took into consideration the fact that State aids constitute a useful and important instrument to promote general interest objectives. Thus, they established that though some aids could have an adverse effect towards commerce and competition, they may be permitted under certain conditions, for example, when they promote objectives which are worth protecting, such as regional or sector developments.

Thus, the general incompatibility rule expressed in article 87(1) was accompanied by a

number of exceptions which are listed in sections 2 and 3 within the same article, by which the categories of support listed here can benefit from an exception to the general incompatibility rule established in article 87(1). Contrary to those categories of support listed in article 87(2), the Commission has a valuation margin to declare those categories of support listed in article 87(3) as compatible with the common market.

The Treaty does not explicitly establish the standards by which the Commission must

exercise its discretion margin. Thus, what limits it is subject to in this Decision-making process is not clear. Neither are the interests that the Commission must consider when authorising an aid (integration, competition, common interests, other national/community interests, either regional, sector or horizontal…) nor how to achieve a balance between these interests.

For a measure to be in the scope of implementing sub-section 1 of article 87 of the EC

Treaty it must not only be a State measure, but it must also be selective, that is, it must have an effect on the balance between the appointed firm and its competitors. This selective character differentiates state aids from general economic support measures that are applied without distinction in all businesses in all activity sectors of a member State. The EC Treaty starts from the general incompatibility principle of some aids with the Treaty itself. However, it foresees certain cases in which these aids are declared compatible with the common market, as well as certain hypotheses in which State aids can be declared compatible.


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FINAL REPORT Article 87(3)3 of the Treaty establishes that the listed categories of support in sub-sections

a)-d) may be declared compatible with the common market. These categories are referred to as being destined to favour the areas which have serious development problems (art. 87(3)(a)), destined to alleviate serious economic problems in a member State, or to promote a common European interest project (art. 87(3)(b)), sectorial or regional aids (art. 87(3)(c)), aids for the promotion of culture (art. 87(3)(d)) and other types of support specified by the Council (87(3)(e)).

The Treaty gives the Community an important valuation margin when applying these

exceptions. However, it does not explicitly indicate what the configuring limits are to this frame in which the Community exercises its valuation margin, nor the criteria that will guide the Community in the implementation of article 87(3).

It follows from the cases studied that when the Community Institutions must promote

objectives established by the Treaty which are in conflict when adopting specific measures, they have an ample valuation margin to consider the different objectives and interests at play and to give priority to one or other objective when this priority is not specifically established by the Treaty. To this respect, the Court has declared that the defence of competition, though an important objective, is not the only thing, and must be promoted in a manner compatible with the achievement of other actions foreseen by the Treaty.

The Court has also expressed that the restrictive measures towards competence taken in

order to promote a community objective must be proportional4 to the aims to be achieved, a requisite which implies that both the measures are necessary to obtain the desired result and the restrictive effects must be avoided in the greatest possible way.

Regarding the effects of regional State aids, the Treaty distinguishes, in article 87-3, those

relative to:

• Aids aimed at favouring economic development of regions where the standard of living is abnormally low or where a serious unemployment situation exists.

• Aids aimed at favouring the development of certain activities or certain economic regions, as long as they do not alter trade conditions in a way contrary to the common interest.

3 Article 87(3) of the Treaty establishes: “(3). - Can be considered compatible with the common market:

a) Aids destined to favour the economic development of regions whose standard of living is abnormally low or those in which a serious sub-employment situation exists.

c) Aids destined to facilitate the development of certain activities or of certain economic regions, when they do not alter the conditions for exchange in a way contrary to the common interest”.

4 Case T-380/94, AIUFFASS y AKT, c. Commission, whose paragraph 54 states: “ In exercising its ability of valuation, it is the Council’s duty to conciliate the objectives of freedom

of trade and community solidarity, abiding with the principle of proportionality. The weight of community solidarity may vary according to each case, being greater than that of competition in the crisis situations described in sub-section a) of section (3) than in those cases considered in sub-section c) of section (3)”.


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FINAL REPORT Sections a) and c) of article 87(3) refer to aids destined to remedy problems of regional

development. The difference between both sections lies in that, as opposed to the aids comprised in section c), the aids in section a) are aimed towards solving regional problems which are especially serious. The Council and the Commission have adopted regulations applicable to regional aids that develop both sections jointly5.

These aids with a regional objective differ from other categories of State aids (basically,

aids for Research and Development activities (R+D), for environmental protection and for failing firms) in that they are reserved to certain or specific regions and have their development as their aim..

In turn, the difference between both types of regional aids is stated by jurisprudence of the

Court of Justice of the European Communities.6 In the Court’s opinion, whilst the first case (“Aids destined to favour economic development in regions where the standard of living is abnormally low or in which a serious unemployment situation exists”) refers to those aids which have an effect on regions in which “the economic situation is unfavourable in relation to the Community as a whole”, the second case (“Aids destined to favour the development of certain activities or certain regions, as long as they do not alter trade conditions in a way contrary to the common interest”) “they have a wider reach in the sense that it allows the development of certain regions, without being limited to economic circumstances foreseen in sub-section a), as long as the aids destined to them do not alter trade condition in a way contrary to common interest”. This provision awards the Commission with the authority to grant aids destined to promote economic development in those regions of a member State which are at a disadvantage with respect to the national average.

The criteria followed by the Commission to evaluate the compatibility of regional State

Aids with the common market are especially regulated in the “Guidelines of State aids for regional purposes” 7. The general principle on which these guidelines are based is the exceptionality of these regional aids “as if these Aids were made general they would lose their motivating character and their economic effects would disappear. In turn, they would falsify the basic market rules and they would weaken the effectiveness of the Community economy as a whole”.

In order to attain a greater efficiency in public resource distribution, the Commission8

states the need to apply Community funds and Aids with regional purposes in a coherent way between them. By means of a coordinated implementation of both instruments a concentration of Funds and Aids in the areas that most need them can be expected, as well as the desired compatibility, on a legal level, between interventions of the Structural Funds and Competence regulations, from the moment that the Fund parameters can meet those which are applied to justify

5 Guidelines of State aids for regional purposes (DO series C num. 74 of 10.03.1998, p.9), and

Modifications of Guidelines of State aids for regional purposes (DO series C num. 258 of 9.09.2000, p. 5). 6 case C-248/84, Germany versus Commission. 7 OJ series C, num. 74, page 4 and following, of March 10th 1998. 8 Communication of the Commission to the member States regarding regional policy and

competition policy titled “Increase of its concentration and coherence” . OJ, C n. 90, p. 3, of March 26th 1998.


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regional aids. The legitimacy of structural Funds would be reinforced in this way, beyond the fact of the Treaty’s due recognition to economic and social cohesion policy.

The territorial range of the regions referred to in article 87(3)(a) must correspond to a

NUTS level II geographical unit, although, exceptionally, the Commission has declared the general rule non-applicable when particular circumstances have justified it so.

At present, the regions referred to in article 87(3)(a), are the following: Member state Regions -Greece all of its territory -Ireland all of its territory -Portugal all of its territory -Austria Burgenland -Germany Berlin(east zone) Brandenburg Mecklenburg-Vorpommern Sachsen Sachsen-Anhalt Thüringen -Spain Galicia Asturias Cantabria Castilla y León Castilla-La Mancha Extremadura Comunidad Valenciana Andalucía Murcia Ceuta and Melilla Canarias -France Overseas Territories -Italy Campania Sud Sicilia Sardinia -United Kingdom Northern Ireland. For an aid to be authorized by applying this section, it is important that its purpose

remedies one of the situations described in article 87(3)(a). The Commission usually requests the member States to grant these aids, devoted to the purpose of increasing the standard of living of certain regions or to overcome employment problems, by means of regional aids, plurisectorial and


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open, conceived specifically to promote regional development and which have been previously approved by the Commission9,.

Regarding the second type of regional aids “destined to favour the development of certain

activities or certain economic regions, as long as they do not alter trade conditions in a way contrary to common interest”, their validity or compatibility with the Treaty does not obey criteria so precise or formal as those for the previous case (as the relevant indicators are not necessarily reduced to standard of living or underemployment), and thus, the member States can determine which regions can receive aid with a greater flexibility, even though member States still have a duty to notify the Commission about the list of regions proposed to claim this type of regional aids and the criteria used.

The exception foreseen in article 87(3)(c) is one which offers greatest possibilities for its

implementation, and, in this sense, is the most important exception. It is applicable to regional, sector and horizontal aids.

Furthermore, certain principles must be followed in any case. Some of them have a general

character, “geographic concentration” and “coherence” of aids with the member State’s regional policy and with the Community’s interests.

Regional aids considered within article 87(3)(c) are aimed towards solving development

problems of a less serious nature than those mentioned in article 87(3)(a). For this reason, and taking into account that this exception to the general rule must be interpreted stringently, the Commission understands that the range of population in the regions considered in sub-section c) must not exceed 50% of the national population that is not comprised in the regions referred to in article 87(3)(a)10. Furthermore, the Commission has limited the percentage of Community population that inhabit areas that can benefit from regional aid to 42.7%, and has developed a calculation method to distribute, amongst member states, the proportion of population that can benefit from regional aid.11 In virtue of this, the percentage of population that can enter the regions specified in sub-sections a) and c) of article 87(3), between the years 2000 and 2006 for each member state, is the following12:

Belgium 30,9% Denmark 17,1% Germany 34,9% Greece 100% Spain 79,2% France 36,7% Ireland 100%

9 Section 2 of the Guidelines on State aids for regional purposes. 10 Section 3,7 of the Guidelines for State aids for regional purposes. 11 The method is shown in Annexe III of the Guidelines for State aids for regional purposes. 12 Communication of the Commission relative to the national thresholds of coverage of regional aids

comprised in article 92(3), a) and c) (nowadays, article 87) of the Treaty between 2000 and 2006, published in OJ series C, num. 16, of 21.01.1999, p. 5.


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FINAL REPORT Italy 43,6% Luxemburg 32% Netherlands 15% Austria 27,5% Portugal 100% Finland 42,2% Sweden 15,9% United Kingdom 28,7%

Therefore, we can infer from this that the percentage of population in the regions that can benefit from the exception established in article 87(3) will be the result of subtracting the percentage of population that benefit from sub-section a) in the same article13 from these total domestic thresholds.

The member States have a valuation margin to limit the regions subject to grants applying

article 87(3)(c). However, they must respect the limits and Guidelines established by the Commission in the rules applicable to State aids with regional purposes14. Generally, regions must correspond with NUTS Level III, compact regions with at least 100,000 inhabitants, and have social and economic problems according to objective and relevant indicators established by the member States. Regions with a density of population of less than 12.5 persons per km2 can automatically benefit from the exception to article 87(3)(c).

The regional aids authorized under sub-section c) must be designed to promote the carrying

out of a starting investment or to create employment. Aids to running are, in principle, forbidden. However, the Commission authorizes, exceptionally and under certain circumstances, aids aimed towards compensating part of the additional transport costs in outermost regions and in regions which can benefit from the population density criterion15.

It is necessary to start from the fact that the Commission determines a maximum global

coverage limit of regional aids in terms of population for the Community as a whole, which includes al regions eligible for aids, that is, both those corresponding to article 87,3,a) and article 87,3,c) of the EC Treaty. The European Commission then determines the regions that are eligible for aids according to sub-section a) and their coverage on a Community level. This figure is obtained automatically by applying the criterion of 75% of GDP/Purchasing Power Parities (PPP) per person, thus obtaining the population affected by aids corresponding to sub-section a) of article 87,3 on a Community level.

On the other hand, the limit for sub-section c) is obtained specifically by subtracting the

population of regions eligible for aids according to the sub-section a) exception from the global limit.

13 Section 3,9 of the Guidelines for State aids for regional purposes. 14 Especially, sections 3,8 a 3,10 of the aforementioned Guidelines. 15 Guidelines for State aids with regional purposes, section 4,16.


165

FINAL REPORT Once this limit has been obtained, on a Community level, distribution among member

States is carried out by the Commission, based on a distribution method that allows the examination of the economic and social situation of each region in both its national and Community contexts. Essentially, the criterion to determine the validity of aids in these cases is mathematically interpreted: the existence of a “minimum difference in GDP/PPP per person and unemployment”. Thus, this minimum disparity will occur when in the corresponding region (NUTS Level II) the average income in GDP/PPP per person is at least 15% under the national average and structural unemployment is at least 15% over the average of the member State in question.

Following this, these basic thresholds are adjusted to consider the relative situation of each

member State with respect to The European Union average by means of a formula determined in the “Guidelines on State aids for regional purposes” quoted above. Logically, the sum of the individual maximum levels for each member State must be equal to the maximum level established for sub-section c) of section 3 of article 87 in the Union as a whole.

1.2. FINAL REGULATION ASPECTS IN STATE AIDS ISSUES The Commission has started an exercise on long-term reform since publishing the second

Report on social and economic cohesion, trying to simplify state aid procedures in unambiguous cases and to concentrate Commission resources on the most serious falsifications of competence.

The main objectives of this reform consist of speeding up procedures and alleviating the

state aids examination process of unnecessary procedural burdens, and to considerably improve cooperation with member States by increasing awareness in regional, local and national authorities, which should give rise to swift, predictable and transparent procedures.

The Commission’s action is based on a increase of transparency and the adoption of certain

legal instruments. On the one hand, the new state aids public register was presented in March 2001,

containing details on cases of state aids negotiated by the Commission and which has a periodical update16. The register contains links to press releases and Commission decisions published in the Official Journal or aimed directly to member States.

Furthermore, the first edition of “State Aids Scoreboards” was published in July 2001. It

will be published twice a year and will evolve with respect to the needs of future user groups. One of the main objectives is to verify the progress of member States with the aim of fulfilling the commitments adopted by the different European Councils to reduce state aids globally and redirect them towards horizontal, common-interest objectives such as research and development and small and medium enterprises.

16 It can be found in web page http:// europa.eu.int/comm/competition/index_en.html


166

FINAL REPORT The legal instruments passed are the following:

o Regulations on “de minimis” aids17, by which aids to a business that do not exceed 100,000 euros during the three year period is not considered state aid in Community Law terms.

o Two Regulations that introduce exemptions per categories for aids to small and

medium enterprises and aids to training. These exemptions per categories allow member States to grant aids immediately, without previous notification or authorization from the Commission as long as they comply with the conditions set in the aforementioned Regulations.

o The Commission decided, on November 13th 2001, to extend the validity of multi-

sector Community Guidelines on regional aids to large investment projects, of Guidelines applicable to aids for the synthetic fibres sector and of Community Guidelines for State aids to the motor vehicle sector until December 31st 200218, expecting – as has happened – that if the new multi-sector Guidelines come into force before December 31st 2002 they would substitute the three extended Guidelines from the day they come into force.

o A new Communication on state aids and venture capital was adopted19 with the

aim of promoting venture capital markets in the Community in view of the difficulty in evaluating certain measures proposed by the member States that are aimed at this objective, particularly when no direct relation exists between the granting of aids and a specific group of costs eligible for aids destined towards investment of research and development. In terms of the design of venture capital measures, they can grant aids to economic operators on one or more different levels, favouring investors and/or the businesses invested in.

- The Commission adopted, in July 2001, an analysis Methodology of State aids linked to stranded costs20 that establish the criteria to be used in order to examine whether a compensation mechanism for stranded costs constituting a State aid can be authorized according to the EC Treaty. The basic principle of the methodology lies in limiting compensations in level and duration. They should not exceed the costs really incurred by the firms and which are a direct consequence of liberalization and which incur a loss. Compensations must be previously limited and must also predict a future adaptation mechanism that takes into account the market’s real evolution after liberalization and, especially, the real evolution of electricity market prices.

- The Commission adopted, in October 17th 2001, a Communication explaining how the regulations on state aids to the financing of public broadcasting services are applied21. The

17 OJ, L n. 10, of 13.01.2001 18 OJ C 368, 22.12.2001, p.10. 19 OJ C 235, of 21.08.2001, p.3 20 Available in the DG COMP page of the EUROPA internet site. 21 OJ, C 320 of 15.11.2001, p.5.


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Communication states that, in principle, member States have the freedom to define the contents and extent of the public service and the way in which it is financed and organized. However, the Commission demands transparency in these aspects in order to evaluate the proportionality of State financing and to control unfair practices. Member States must establish a precise definition of the public service task, formally entrust it to one or more operators by means of an official act and create a competent authority that supervises its fulfilment. The Commission will intervene when the aid gives rise to a falsifying of competence that can not be justified by the need of keeping the duty of public service.

- The new Community Guidelines on State aids towards environment were passed on December 200022, as various member States have reduced greenhouse effect gases by taxing the less ecological forms of energy under the Kyoto Protocol of the United Nations Framework Convention on climatic change adopted in December 1997.

- The Commission adopted, by a Decision of July 25th 2001, a Council Regulation proposal on State aids towards the coal industry23 that will be applied to public aids granted from July 23rd 2002 onwards. These aids must cover the difference between production costs and the internationally negotiated price of coal, as well as the cost of social burden.

- The Commission adopted, on June 6th 2001, new Guidelines on State aids towards advertising of products included in annex I of the EC Treaty and certain products not included in the Annex24. The new text states the policy followed by the Commission regarding the advertising of agricultural quality products with a regional origin and of traceability systems. They revoke two existing texts from 1986 and 1987. This new, clearer version should contribute to simplify and improve the transparency of Community regulations on State aids.

- The new Guidelines to examine State aids in the fishing and aquaculture sector25 published in January 2001 establish that Community Guidelines on aids with regional purposes will not be applied to the fishing sector and that the ruling elements of state aids which can be applied in the fishing sector will be examined on the basis of the existing Guidelines for this sector. On the other hand, more details are given on the evaluation of aids to training and consulting services and experimental fishing, and granting conditions for rescue operations and restructuring of failing firms are better defined, by means of presenting the Commission with a plan destined to reduce fleet capacity. Likewise, more details and conditions are included regarding aids destined to improve management and control of fishing activities and when buying second-hand ships. More detailed elements are established for specific cases regarding income aids, eliminating the section relative to management loans and adding specific sections referred to aids destined to remedy damages caused by natural disasters or other extraordinary events, to insurance premiums, to outermost regions and aids to employment.

22 OJ, C 37 of 03.02.2001, p. 3. 23 OJ, C 304 E/2002 of 30.10.2001. 24 OJ C 252 of 12.09.2001, p.5 25 OJ, C 19 of 20.01.2001


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FINAL REPORT Novelties occurred during 2002 in issues of state aids are the following:

- New multi-sectorial Community Guidelines were adopted on regional aids for large investment projects26. However, the coming into force of most guidelines has been postponed until January 1st 2004. The new guidelines constitute a set of clearer regulations for evaluating State aids to large investments projects as long as these are granted within the framework of authorised regional aids. At the same time, the guidelines bring together and consolidate the different texts that were formerly applied to the iron and steel industry, synthetic fibres and motor vehicle sectors into one text.

Its aim is to establish a faster, simpler and more transparent control system for

State aids to large investments in the European Union. The new framework includes a limited notification requisite for large projects that is counteracted by a significant reduction in the admissible level of aids. The new regulations will also be applied to the synthetic fibres and motor vehicle sectors, which were regulated by specific regulations, adopting a more restrictive focus regarding regional aids to large investment mobile projects.

A “cohesion bonus” may be granted to large projects that are co-financed by the

Community Structural Funds. The amount of admissible aid for these projects, calculated according to the reduction scale, will be multiplied by a factor of 1.15. Thus, the new system will take into consideration the added value of large co-financed projects towards economic and social cohesion.

- A review of the Community framework on State aids for research and development has been started recently. The Commission has reached the conclusion, after a public enquiry, that the present regulations do not involve an obstacle towards obtaining the objective of increasing the Union’s global spending in R+D and innovation established in the Barcelona European Council in order to reach 3% of GDP by 2010. Two thirds of this new investment should come from the private sector. Thus, the Commission decide to extend the existing frame until the end of 2005, when it will be review depending on the advances made.

- The Council adopted Regulations on State aids to employment in November27 aimed at

facilitating employment creation initiatives of the member States. This Regulation offers the member States the chance of granting aids towards the creation of new jobs and for the hiring of disadvantaged or disabled workers without having to previously ask the Commission for authorization. For long-term unemployed people and other disadvantaged people, member States will be able to take on up to 50% of the yearly wage costs and of compulsory social contributions. Member States will be able to take on up to 60% of these costs when dealing with disabled people.

- The Commission adopted a Communication for the coal and steel sectors in which certain aspects of the proceedings in issues of competence were made clearer, including the

26 OJ, C 70 of 19.03.2002, p.8 27 OJ L 37, of 13.12.2002,p. 3


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FINAL REPORT applying of State aid procedures after the expiry of the ECSC Treaty28. The Commission decided, on steel issues, to maintain a strict policy regarding aids to this sector, maintaining the prohibition of regional investment aid29 and rescue and restructuring aids30. Lastly, the Council adopted Regulation(CE) n. 1407/200231 in July 2002 on State aids to the coal industry after the expiry of the ECSC Treaty. In the meantime it exhorted to continue restructuring and modernizing European coal manufacture with the aim of guaranteeing basic energy supply in the European Union.

- New multi-sector Community Guidelines on regional aids to large investment projects were adopted in 2002, postponing their coming in force until January 1st 2004.

- The Commission adopted a Regulation on State aids for employment in member States, on

November 6th32. The new Regulation offers member States the possibility of granting aids for new job creation and for the hiring of disadvantaged or disabled workers without having to previously ask the Commission for authorization. For long-term unemployed people and other disadvantaged people, member States will be able to take on up to 50% of yearly wage costs and compulsory social contributions. Member States will be able to take on up to 60% in the case of disabled people.

- The Commission framework on State aids to businesses in disadvantaged urban zones was repealed. Cases corresponding to this situation and to regeneration problems in other areas are, at present, examined according to their own characteristics, in view of a possible authorization according to sub-section c) of section 3 of article 87 of the Treaty, without prejudice to other regulations on State aids.

- The Council passed the Commission’s strategy against Korea’s disloyal practices in the ship building sector, adopting, on the one hand, the temporary defensive mechanism33, and, on the other, accepting the start of actions against Korea in the WTO.

- The Commission adopted on November 27th the new Community Guidelines on granting of State aids regarding the test for TSE detection, dead cattle and abattoir refuse34. These new Guidelines specify and modify the Community policy in issues of State aids to these sectors. This was a necessary measure because the diversity of national policies implied an important risk in falsifying of competence.

28 OJ C 152, of 26.06.2002, p.5 29 OJ C 70, 19.03.20002, p.8 30 OJ C 70, 19.03.2002, p. 21 31 OJ L 205, of 02.08.2002 32 OJ L 10 of 13.01.2001, p.32-42. 33 Council Regulation n. 1177/2002 of 27.06.2002. 34 OJ, C 324, of 24.12.2002.


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FINAL REPORT 1.3. CHARACTERIZATION OF PUBLIC AIDS

1.3.1. Characterization of aids:

State aid control is centred around the effects on competence of State aids granted to

businesses by member States. Its aim is to guarantee that State interventions do not interfere with the good running of the internal market and they do not harm competitivity in Community businesses, and to improve its structural reform.

The EC Treaty does not contain a definition of State aids, but the Court of Justice has

prepared a broad concept for this term, including any advantage that is a burden on public finances, either as a cost or as a reduction in income35 or as a contribution from public funds or as a reduction in the charges which are normally taxed on a business36.

The Court of Justice’s doctrine is constant in the sense that the notion of aid is wider than

that of subsidy37 as it comprises not only positive benefits like subsidies, but also interventions that, in different ways, alleviate the charges that are normally taxed on the business budget and thus, although they are not subsidies in the strict sense of the word, they have the same nature and have identical effects.

Finally, Aid is “all measure that meets the requisites established in section 1 of article 92

(now 87) of the Treaty” in the definition found in article 1,a) of Council Regulation(CE) n. 659/1999 of March 22nd 199938 which establishes the regulations for applying article 93 of the EC Treaty. These requisites are:

- Affecting of trade with member States.

- Granting by the States or by means of State funds.

- Falsifying or threat to falsifying of competence.

- Favouring certain businesses or productions.

State aids can be classified according to the following criteria:

1. according to the shape that these aids can take, they can be subsidies (exploitation or capital)39, financial measures (soft loans, interest allowance, state guarantees)40, capital contribution41 and tax relief.

35 conclusions of General Attorney Capotorti in case 82/77, case van Tiggele, Rec. P.25 36 conclusions of General Attorney Roemer in case 9/70, case bFranz Grad, Rec.p. 825 37 Sentence of March 15th 1994, case C-387/92, Rec. Y, p.887, section 13. 38 OJ, L n. 83 of 27.03.1999, p. 1. 39 In the Commission’s Communication on cooperation between national jurisdictional bodies and

the Commission in issues of State aids (95/C 312/07, OJ C, n. 312, of 23.11.1995) the following is stated:


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2. depending on their aim they can be aids towards services or aids towards industry. The latter can also be classified as follows, according to the objectives they seek or the sector they are destined to:

a) Horizontal Objectives:

- Research and development, - Environment, - Small and Medium Enterprises, - Trade regime, - Energy Saving, - Rescue and restructuring; - Other objectives.

b) Specific sectors:

- Ship building. - Iron and Steel industry. - Other industry sectors.

c) Regional objectives:

- Regions contemplated in article 87,3,a); - Regions contemplated in article 87,3,c).

In the Lisbon and, later, Stockholm European Summits, the political impulse needed to

tackle the cause from its roots was given. They recognised that in order for Europe to be able to register a sustainable economic growth, creating more and better jobs and greater social cohesion it was necessary to improve its competitivity, trying not only for the European society to be dynamic and knowledge-based, but also to reduce the level of State aid.

Specifically, the Stockholm European Council indicated, in its conclusions on March 2001,

that the level of State aids in the European Union must be reduced and the system made more

“the concept of State aid must be interpreted in a way that it comprises not only subsidies, but also fiscal incentives and public fund investments carried out in circumstances where a private investor would have withdrawn his support”. It can be concluded that subsidies are the clearest form of State aid.

40 Specifically, these financial measures would consist of granting of loans with interest rates lower than on the market (soft loans, especially, loans towards export with a reduced interest rate), state guarantees and taking over of debts.

41 4 ways of public authority participation in business capital are differentiated: creation of a business; total or partial transfer of ownership from the private to the public sector; contribution of capital to an existing public enterprise or transformation of allowance funds into capital.


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transparent: “Towards this, member States should show a downward trend of public aids relative to GDP in 2003, considering the need to direct aids towards common interest horizontal objectives, included those of cohesion”.

The European Council held in December 2001 adopted conclusions on State aids inviting

member States to reflect upon how to:

- continue their efforts to reduce aid levels in terms of GDP percentage;

- reduce, as a priority and with the aim of eliminating it, that which has greater distorting effects;

The greatest headroom that member States have could be in aids destined to certain sectors

of industry and services, and in that part of regional aids, reduced in cohesion countries but more important in the more prosperous member States.

- To redirect aids towards common interest horizontal objectives, such as

strengthening of economic and social cohesion, employment, environmental protection, promotion of R+D, and, in this case, small and medium enterprises (SMEs);

- To further develop the use of previous and posterior evaluation of aid regimes in

order to rebalance them in a more efficient way; these evaluations should centre around the quality of aid packages, their effects on competence and their impact;

- To improve transparency and quality of the information handed to the Commission,

particularly by means of national control and monitoring procedures as well as showing the relevant statistics, whenever possible;

The objectives of transparency mechanisms are the three following: To facilitate comprehension of the State aids system;

To favour awareness on the need of the existence of a centralised control of these aids;

To contribute to the availability of information on the Commission’s decision-making

processes. Furthermore, the Council invites the Commission:

- to develop, together with the member States, statistical tools that permit the monitoring of conclusions and to draw-up efficiency indicators that should


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complement the scoreboards. This scoreboard should evaluate whether the State aid is the most appropriate instrument to correct certain market deficiencies always.

- to intensify the evaluation of aid impact on competition, on the basis of economic

criteria. We would be trying to draw-up a methodology to evaluate the contribution of the different forms of State aid to the attainment of different clearly-defined political objectives, and to develop general indicators that can be used by the member States to facilitate the evaluation of State aid efficiency.

- to favour exchange of experiences and systematic evaluation exercises in order to

analyse the efficiency of instruments on a European scale;

- to continue its efforts to simplify European State aid regulations, to modernize them and make them clearer in order to make them more efficient, particularly in terms of duration of procedures. We would be trying to speed up procedures and to alleviate the State aid examination process of unnecessary procedural burdens.

The Council held in March 2002 renewed its call on member States to reduce the global

levels of State aids in terms of GDP for 2003 and successive years, to direct the aid towards common interest horizontal objectives, including economic and social cohesion, and to direct it to failures found in the market. Less State aids which are aimed better constitute a key element in an efficient competition.

In the Second Report on Economic and Social Cohesion42, the Commission indicated that

competence and cohesion policies are complementary, since the limitation imposed on regional State aids benefits, above all, the less prosperous countries, considering it necessary to “promote this direction in order to establish fairer conditions of competence, considering also the role that general interest services have in territorial cohesion”.

1.4. QUANTITATIVE ANALYSIS

1.4.1. Amount of aids:

The global level of national state aids in the European Union has decreased from a annual

average of 102,000 million euros during 1995-1997 to 90,000 million euros in the period 1997-1999. Although this decrease in aids comes from the industrial, transport and agriculture sectors, it was the latter that contributed the most to this 12,000 million euros reduction. A decrease in the amount of aids given to the coal sector has also been found.

42 Report of the Commission to the Council, European Parliament, Economic and Social Council,

and the Regions Committee. Second Report on Economic and Social Cohesion. COM(2001) 24 final.


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FINAL REPORT The yearly average in the period 1997/1999 reached 28,000 million euros, whereas the

yearly average in the 1995/1997 period was 36,000 million euros. Although this is a considerable amount, it is almost a 12% reduction compared to the previous period 1995-1997. During this period, State aids with regional purposes increased to 17% of total aids and aids aimed at horizontal objectives increased to 10% of total aids.

On the other hand, the total amount of aids for industry decreased approximately 23%

whilst there has been an increase in aids for the fishing and services sectors. The level of state aids has decreased in all member States except in Denmark, Ireland,

Luxemburg and the Netherlands. Graphic 1: Total National Aid per person (1997-2001)

0

100

200

300

400

500

600

EU B DK D EL E F IRL I L NL A P FIN S UK

1997-19991999-2001

Source: Own preparation on State aid Scoreboard (2002-2003); Reports on Competition policy (2002-2003) and the Commission’s ninth report on State aid. The arrangement of state aids determines the repercussions on the competence within the

common market. In the 1997/1999 period aids to specific sectors has been relatively high in Belgium (trains), Germany (coal and trains, with a reduction in absolute terms), Spain (trains, coal and ship yards) and France (trains and financial services).

Relatively high values in total national aids per capita are found for Finland and

Luxemburg whilst the United Kingdom and Greece have the lowest value of national state aids per capita. Out of the four cohesion countries, only Ireland is above the Union average.

Aids for specific sectors (iron and steel industry, ship building and others) are usually

granted to the regions that comply with the requisites to obtain regional aids. Aids for the iron and steel industry decreased approximately 84% in the 1997/1999 period with respect to the 1995/1997 period, whilst in ship building, restructuring aids reached a yearly average of 622 million euros, which is a decrease on the 752 million euros average granted in the 1995-1997 period..


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FINAL REPORT Graphic 2: Regional aid.

0

100

200

300

400

500

600

Austria

Belgiun

Denmark

German

y

Greece

Spain

Finlan

d

France

Irelan

dIta

ly

Luxe

mburg

Netherl

ands

Portug

al

Sweden

United

Kingdo

mEU-15

Regional Aids as a percentage of Total GDP 1997-199

Regional Aids as a percentage of Total GDP 1995-1997

Eligible population in millions 1998

Eligible population in millions 1996

Regional Aids per eligible head in euros 1997-1999

Regional Aids per eligible head in euros 1995-1997

Source: Own preparation on State aid Scoreboard (2002-2003); Reports on Competition policy (2002-2003) and the Commission’s ninth report on State aid. During the 1995/1999 period, 56% of aids to industry in the Union were destined to

regional objectives, most of them in the less prosperous areas, that is, regions under sub-section a) of section 3 of article 87.

The highest level of aids per eligible capita are found in Germany, Italy, Luxemburg and

Sweden when regional aids per eligible capita in the aided regions (in euros) is compared to regional aids as a percentage of the total national GDP, whilst Portugal (without calculating fiscal exemptions granted to Madeira) has the lowest amount of regional aids for industry followed by Spain and Denmark.

In virtue of article 299 of the EC Treaty, peripheral Union regions enjoy a special situation

that reflects their structural social and economic situation which is worsened by their distance. The respective intensities of aids in these regions can be higher than those authorised in other cases and functioning aids that are not progressively reduced or limited in time are allowed, as long as they compensate for additional transport costs.

The situation in these peripheral regions was further reinforced after the Amsterdam Treaty

and the new article 229-2 came into force. These regions now benefit automatically of the exception in sub-section c) of section 3 of article 87 of the Treaty. Secondly, for outermost regions that meet the conditions for the exceptions in sub-sections a) and c) of section 3 of article 87 of the Treaty, running aids that are not progressively reduced nor are limited in time, these can be granted not only to cover additional transport costs, but to compensate other costs appearing in the development of economic activity for factors identified in section 2 of article 29943

43 Section 2 of Article 299 mentions the “structural and economic situation...characterized by their

great distance, insularity, reduced area, adverse climate and surface, and economic dependence on a reduced number of products, factors whose persistence and combination seriously harm their development...”


176

FINAL REPORT According to the State aid scoreboard44, State aids granted specifically to regional

development in the European Union rose to 8,000 million euros in the year 2000. More than half of these regional aids are destined to less developed regions, that is, areas under sub-section a) of section 3 of article 87 of the EC Treaty. The amount remaining consists of aids defined under sub-section c) of section 3 of article 87 “destined to facilitate the development of certain activities or certain economic regions, as long as they do not alter trade conditions in a way contrary to common interest”.

Aids granted specifically towards regional development represent 10% of all State aids

granted in the Union during 2000. In other terms, regional aids, in contrast to those destined to sector or horizontal objectives, represent 22% of aids to industry, coal and services (total aid minus agriculture, fisheries and transport). There are significant disparities between member States, although this is, in part, due to the different ways of classifying aid regimes.

Between 1996-1998 and 1998-2000, regional aids decreased, as a yearly average, from

19,000 million euros to 12,000 million euros. The ratio of regional aids to total aids for the industry, coal and services sectors fell in 7 percentage points, from 37% to 30%. In most member States, this ratio fell from 48% to 32% due to the gradual movement of State aids towards the new affiliated States.

The European Council in Barcelona also made a call to member States to redirect their

State aids towards the objective of economic and social cohesion. Due to data restrictions, state aids destined towards economic and social cohesion are not evaluated on a regional scale but on a national scale.

Considering the global differences that exist in the Community regarding cohesion, the

amount of aids in the four cohesion countries has hardly increased. This amount has gone from 12% of total aids to the industry, coal and services sectors in 1996-1998 to almost 14% in 1998-2000.

1.4.2. Trends in aid typologies:

The European Union is an economy dominated by the services sector. The commercial

services sector constitutes a great proportion of the total GDP and this proportion is even greater if social and public services are included.

Disparities between member States as regards aids granted to the industry sector still exist.

The amount of aids to the industry sector in the four cohesion countries (Greece, Ireland, Portugal and Spain) has only increased approximately 9% of the total aids.

44 State aid Scoreboard. Spring 2002 update.COM(2002) 242 final.


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0

1999-2001UE B DK D EL E F IRL I L NL A P FIN S UK

Horizontal Objectives 69 98 91 61 99 56 52 74 92 90 91 91 39 91 79 90Research and Development 12 18 10 11 1 9 12 1 14 19 25 35 2 37 16 8Environmental protection 10 2 33 21 1 1 1 0 3 11 13 1 30 4SMEs 14 23 1 7 4 8 19 0 44 28 8 16 7 12 9 9Trade 1 0 1 0 0 2 0 0 1 4 0 6 0Energy saving 2 0 12 1 1 1 0 0 17 1 0 15 10 0Employment 3 16 18 1 6 0 6 5 0 4 8 7Training 6 4 16 0 19 0 2 0 12 0 3 45Other Objectives 21 34 1 20 93 14 15 64 28 40 25 22 9 14 10 24

Specific sectors 31 2 9 39 1 44 48 26 8 10 9 9 61 9 21 10Shipbuilding 2 6 2 1 3 2 4 5Other manufacturing sectors 2 0 0 3 4 3 1 1 0 3 5 1 0Other non-manufacturing sectors 0 0 1 0 2 0 0Coal Industry 18 33 37 15 3Tourism 1 1 0 1 0 0 1 3 6 4 0Financial Services 5 0 24 18 2 1Media, cultural sectors and services 3 1 2 0 1 1 3 4 0 10 5 51 3 21 6Total aids excluding agriculture, fisheries and transports, in millions of euros 36903 818 1218 13473 496 2967 6835 744 4268 39 689 504 979 436 531 2904

Horizontal Objectives

Source: Our elaboration on State aid Scoreboard (2002-2003); Reports on Competition policy (2002-2003) and the Commission’s ninth report on State aid.

FINAL REPORT

1997-1999

1999-2001

1997-1999

1999-2001

1997-1999

1999-2001

1997-1999

1999-2001

1997-1999

1999-2001

1997-1999

1999-2001

UE 31 27 6 4 36 41 15 16 8 8 4 4B 21 19 0 0 66 65 8 10 4 5

DK 36 33 1 1 34 37 14 11 15 18D 38 35 1 0 37 39 6 7 18 18 1 1EL 39 39 0 0 43 41 18 19E 28 22 1 1 24 26 13 15 20 21 14 15F 25 24 20 12 32 39 17 20 5 6 0 0

IRL 49 38 16 13 14 23 15 19 5 6I 41 33 3 2 42 53 11 11 2 2L 23 13 1 1 60 73 16 13

NL 20 17 1 1 40 55 39 27 0 0A 22 22 2 1 30 32 46 44 1 1P 13 18 52 42 5 1 19 24 11 15

FIN 18 18 1 1 18 18 62 62 2 1S 21 22 5 6 53 50 19 22 2 1

UK 19 17 3 2 34 48 19 15 9 1 17 17

STATE AIDS PER SECTOR IN THE MEMBER STATES FROM 1997 TO 2001

Source: Our elaboration on State aid Scoreboard (2002-2003); Reports on Competition policy (2002-2003) and the Commission’s ninth report on State aid.

Coal IndustryTransport

Services (including tourism,

finanacial, media and

culture services)

Manufacturing Sector

The following trends can be found regarding to the objectives pursued:

- The change in percentage of aids granted to horizontal objectives, especially to the industry sector and aided regions, has been relatively small, since variations have been kept under 9% in most member States. However, there is a trend to designate industry aids to the completion of horizontal objectives. This trend seems to confirm the gradual fulfilment of the objectives set by the European Council.

- The greater part of industry aids in the Union, 56%, are used in regional objectives,

most of them in less developed regions, that is, those that can opt to regional aids in conformity to sub-section a) of section 3 of article 87 of the Treaty.

- It seems that regional aids do no prevent the existence of divergences in economic

development with a centrifugal rate.


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FINAL REPORT As regards the instruments used in granting aids to the industry sector on a Community

level, budget spending is used the most, with a percentage close to 75%, although it is distributed unequally amongst member States since some member States grant part of industry aids as tax relief, as an alternative to budget spending.

The total amount of regional aids in the EU is still decreasing slightly. None of the member

States that grant part of the regional aids to the industry sector above the EU average are cohesion countries, except for Greece.

1.4.3. Other analyses

The total national aids in the member States are analysed according to the following

indicators:

- G.D.P. percentage: a gradual decrease in total aids granted has occurred in the European Union in relation to G.D.P. percentage.

- Percentage per employed person: has decreased in the European Union as a whole.

It decreases in most of the cohesion countries, except for Ireland, whilst this percentage increases in Denmark, Luxemburg and the Netherlands.

- Percentage of public spending: has decreased in the European Union as a whole.

This decrease is also significant in most cohesion countries (Greece, Spain, Portugal) except for Ireland where it increases. On the other hand, a slight increase in percentage of public spending exists in Denmark, Luxemburg and the Netherlands due to aids designated to environmental protection, training and employment.

- State regional aids in each member State as a percentage of total national GDP: has

maintained a fairly constant level in the 1995/1999 period. However, a significant decrease can be found in Germany, Greece, Ireland, Italy and Luxemburg, whilst a slighter decrease can be found in Belgium, Sweden and the United Kingdom.


180

FINAL REPORT Graphic 3: Total National Aid per member State

0

200

400

600

800

1000

1200

Austria

Belgium

Denmark

German

y

Greece

Spain

Finlan

d

France

Irelan

dIta

ly

Luxe

mburg

Netherl

ands

Portug

al

Sweden

United

Kingdo

mEU-15

Total National Aid per member State

Total National Aid per member State

Total National Aid per member State As a percentage of GDP 1995-1997Total National Aid per member State As a percentage of GDP 1997-199Total National Aid per member StateEuros per employed person 1995-1997Total National Aid per member StateEuros per employed person 1997-199

Source: Own preparation on State aid Scoreboard (2002-2003); Reports on Competition policy (2002-2003) and the Commission’s ninth report on State aid.

1.5. RESULTS: OBSERVED TRENDS Both economic and social cohesion policies and state aid policies are Community policies

conceived to alleviate the defects in the working of the internal market, on the one hand to promote actions that strengthen economic, social and territorial cohesion, and on the other to take measures in order to avoid competence counterfeits by means of aids granted by the member States.

The following can be stated by observing the previous data and trends:

1. The global levels of state aids in the European Union have continued to decrease. This gradual and slow decrease implies a progressive fulfilling of the political objectives to reduce aids set by the European Councils.

2. Disparities existing between member States regarding resources assigned to national

state aids are, on the other hand, also decreasing.

3. The difference in the levels of State aids granted to the richer member States and the four cohesion countries has hardly decreased.

Thus, 2,443.5 million euros were granted in the Netherlands in 1995 whereas 3,488.7

million euros were granted in 1999. In France, 15,581.7 million euros were granted in 1995, whereas 15,310.9 million euros were granted in 1999; 1,536.8 million euros were granted in 1995 as state aids in Denmark, rising to 1,974.8 million euros in 1999.

On the other hand, in the cohesion countries, a total of 1,620 million euros were granted as

state aids in Greece in 1995, whilst 1,096.5 million euros were granted in 1999; 7,441.1 million


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euros were granted in Spain in 1995, whilst 5,733.7 million euros were granted in 1999; in Ireland, 656.1 million euros were granted in 1995 and 1,339 million euros were granted in 1999; 1,125.7 million euros were granted in Portugal in 1995 and 1,219.1 million euros were granted in 1999.

4. Regional aids are decreasing gradually. Thus, total regional aids in 1999 rose to 10,784.9 million euros, of which 3,701.2 million euros belong to regions in article 87, 3-c) and 7,083.7 million euros belong to regions in article 87, 3-a).

The total amount of regional aids, granted by the member States in 1995 rose to 23,589

million euros, whilst in 1999 this amount was 10,784.9 million euros. Thus, the total amount of regional aids has decreased to under a half in this period.

The decrease in amount and level of aids has been especially significant in those regions

where the economic situation is very unfavourable in relation to the Union as a whole (art.87, 3, a). Here, the amount of aids granted in 1995 was 20,505.9 million euros, whereas this figure dropped to almost a third in 1999, reaching 7,083.7 million euros.

However, regional aids that allow the development of certain regions as long as the

designated aids do not alter the exchange conditions in ways contrary to the common interest (article 87, 3, c) have not decreased but increased, since in 1995, 3,083.1 million euros were granted whilst in 1999 these state aids rose up to an amount of 3,701.2 million euros.

Global trends in the cohesion member States are the following: A. Regarding the global level of regional state aids: - Regional aids in Greece have decreased, since 721.8 million euros were granted in

1995 and 378.8 million euros were granted in 1999. This trend is reverted in 2001 when 419.2 million euros are granted.

- The global amount of regional state aids increases in Spain, rising from 284.8 million

euros in 1995 to 382 million euros in 1999. This trend continues in 2001 when aids amounting to 408.2 million euros are granted.

- The amount of regional aids in Ireland decreased from 158.5 million euros in 1995 to

109.9 million euros in 1999. This trend was changed in 2001 when the amount of regional aids granted was 429.9 million euros, a significant increase.

- The amount of regional state aids has increased considerably in Portugal, rising from

186.9 million euros granted in 1995 to 516.8 million euros in 1999. This trend is reverted in 2001 when 64.3 million euros were granted.

B. The following trends have been observed regarding regional aids granted on the basis

of the Treaty’s article 87,3,a):


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FINAL REPORT - In Portugal, the amount granted in 1999 was 516.8 million euros, more that double

the figure for 1995, 186.9 million euros. - In Ireland, the amount of regional aids granted for article 87,3,a) decreased from

158.5 million euros in 1995 to 109.9 million euros. - In Spain, this type of regional aids increased from 73.9 million euros granted in 1995

to 92.7 million euros granted in 1999. - In Greece, the amount for this type of aids decreased to almost a half, from 721.8

million euros granted in 1995 to 378.8 million euros granted in 1999. C. The following trends have been observed regarding regional aids on the basis of the

Treaty’s article 87,3,c): - This type of aids has gradually increased in Spain, where 210.9 million euros were

granted in 1995 and 289.3 million euros were granted in 1999. - This type of state aids do no exist in Ireland, Greece and Portugal.

- Thus, it can be established that a coherent action with respect to regional state aids in

the so-called “cohesion countries” does not exist, as these increase in some countries (Portugal/Spain) and decrease in others (Ireland/Greece).

D. As regards regional aids granted to member States that do not belong to the

“cohesion countries” we have the following: - Austria: Has gradually increased the amount of regional state aids, granting 98.1

million euros in 1995, whilst in 1999 an amount of 169.4 million euros was granted. This trend has not been confirmed in 2001 when 108.2 million euros were granted to regional state aids.

- Belgium: The amount of regional state aids has gradually decreased, granting 240.9

million euros in 1995 and 219.8 million euros in 1999. This trend has changed in 2001 when this amount increased to 273.8 million euros.

- Denmark: The amount of regional state aids has gradually decreased, from 17.0

million euros to 12.8 million euros. This trend has been confirmed in 2001 when the amount of aids granted has been 9.1 million euros.

- Germany: The amount of regional state aids has decreased from 10,348.5 million

euros in 1995 to 4,598.3 million euros in 1999. This trend is confirmed in 2001 when the amount of granted regional state aids was 2,107.4 million euros.


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FINAL REPORT - Finland: the amount of regional state aids has gradually decreased from 105.3 million

euros granted in 1995 to 72.4 million euros in 1999. This trend is confirmed in 2001 when 47.6 million euros were granted in regional state aids.

- France: the amount of regional aids granted has increased from 1,086.7 million euros

granted in 1995 to 1,759.3 million euros in 1999. However, the tendency was reversed in 2001 when 704.7 million euros were granted.

- Italy: the amount of regional aids has decreased significantly from 9,247.4 million

euros granted in 1995 to 2,052.1 million euros in 1999. This trend continues as 684.8 million euros were granted in 2001.

- Luxemburg: the amount of aids has decreased from 33.9 million euros in 1995 to 17

million euros in 1999. This trend is observed for 2001 when an amount of 10.1 million euros was granted in state aids in 2001.

- Netherlands: the amount decreases gradually from 119.2 million euros in 1995 to 85.2

million euros in 1999. This trend is found in 2001 when 48 million euros were granted in aids.

- Sweden: the amount of regional state aids has decreased gradually from 210.5 million

euros in 1995 to 147.5 million euros in 1999. This trend continues in 2001 when 19.1 million euros were granted in state aids.

- United Kingdom: regional state aids have decreased gradually from 893.9 million

euros in 1995 to 743.2 million euros in 1999. The same trend has been found for 2001 with 526.4 million euros being granted in state aids.

In short, the amount of regional state aids has significantly decreased in all member States

that are not “cohesion countries”, except in France and Austria where an increase in these types of regional aids was found in the period 1995-1999. However, the trend in 2001 has been a decrease in regional state aids in all member States that are not “cohesion countries”.

5. Analysing the global differences in the Community under the lens of cohesion, the amount of state aids in the four cohesion countries has hardly increased, as it has decreased in Greece and Spain, and increased in a limited way in Portugal and significantly in Ireland.

- Greece: a total amount of 1,620 million euros was granted in aids in 1995 and

1,096.5 million euros were granted in 1999.

- Spain: a total amount of 7,441.1 million euros were granted in aids in 1995, whilst 5,733.7 million euros were granted in 1999.


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- Ireland: 656.1 million euros were granted in 1995 and 1339 million euros were granted in 1999.

- Portugal: 1,125.7 million euros were granted in 1995 and 1,219.1 million euros

were granted in 1999.

6. As regards to regional aids, these can be represented as a percentage of all aids granted by the cohesion States in the period 1997-1999, as follows:

Cohesion Countries Regional aids: % of total

aids 97-99

Spain 5,54%.

Greece 38,39%.

Ireland 15,10%.

Portugal 2,18% On the other hand, the percentage of regional state aids with respect to total state aids for

the other member States is as follows::

• Austria: 7,72% • Belgium: 7,01% • Denmark: 14,39% • Germany: 24,45 % • Finland: 3,41% • France: 11,03% • Italy: 30,64% • Luxemburg: 12,93%. • Netherlands: 2,46% • Sweden: 9,47% • United Kingdom: 11,31 %

The trends observed are the following: a. The more prosperous member States (Denmark/Germany/Italy/Luxemburg) grant a

high percentage of regional state aids. b. In the “cohesion” States, behaviour is unequal. Whilst in some member States

(Ireland/Greece) the percentage is significant with respect to the total amount, in other member States (Portugal/Spain) this levels of State aids remain low.


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FINAL REPORT c. In the cohesion member States that keep lower levels of regional state aids, these

percentages are lower than those granted to regional state aids by “non-cohesion” member States, except only for the Netherlands.

Directions In view of the trends observed, the following is postulated: in the future, public authority

actions could be directed towards attaining a greater efficiency in the distribution of public resources. A coherent application between Community Funds and Aids for regional purposes, by means of a coordinated application, is necessary for this.

An imbalance between the actions of Structural Funds and Aids for regional purposes

could exist at present. It would be desirable – in the interest of a greater coherence – to change the map of aids set out in article 87,3,a) and article 87,3,c), maintaining positive discrimination of State aids for less-favoured regions. It would be desirable that a total correspondence between objectives and the types of regional aids existed.

The trend to reduce the total amount of aids is consolidated, concentrating these aids within

horizontal frameworks, developing the European Union’s political objectives, especially, those relative to environmental protection by means of a sustainable development, promoting of R+D policies and business competitivity in order to increase regional development.

Consequently, and in view of the above, the existing differences between development

levels in the different regions in the Union are not totally reduced with the present policy of regional State aids.


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II.- SERVICES OF GENERAL INTEREST 1.- INTRODUCTION The principle of solidarity is one of the fundamental principles in the political and

constitutional tradition of the European Union member States and constitutes the essence of most member States’ constitutional models being defined as social and democracy States. Article 1 of the Union Treaty itself defines the coherent and common organization of relations between member States and their people as one of the Union objectives, and Article 2 defines the strengthening of economic and social cohesion as on of the Union objectives. Article 2 of the European Community Treaty also defines economic and social cohesion and solidarity as the Community’s mission, and Article 3 defines the strengthening of economic and social cohesion as one of the Community’s activities (section k).

The principle of solidarity is specified in, at least, three great Community policies:

a) The economic, social and territorial cohesion policy,, expressed in Title XVII of the EC Treaty,

b) The Trans-European network policy, found in Title XV of the EC Treaty, to start up the internal market and to promote social and territorial cohesion. Its aim is to design the principles and requirements of the Community in order to be able to contribute to the establishment and development of Trans-European networks in the infrastructure sectors of transport, telecommunications and energy.45

c) Services of General Interest (SGI) policy, to which article 16 of the EC Treaty attributes the role of “common value” and the promotion of social and territorial cohesion.

The concept of services of general interest is understood in different ways within the European Union environment. The different concepts that exist (Germanic, Nordic, Latin and Anglo-Saxon) are not identical, but constitute the common value that lays the foundations of the intervention of public authorities in order to guarantee the rendering of certain services considered to be essential.

Internal market and competence policies have demonstrated their usefulness,

especially to satisfy the needs of citizens as costumers, that is, to improve both the choice on offer and prices, and quality. But these policies, in some cases, do not supply enough incentives to operators in order to cover the needs of citizens. The intervention of public authorities to see to the

45 The principles that define this policy seek the establishment of infrastructures that allow the

running of the internal market, surpassing the reality of isolated networks established from the isolated point of view of each member State and which are not interconnected; however, that these infrastructures facilitate social and territorial cohesion and economic convergence between less developed areas is also an objective, allowing the Community’s economic contribution to projects which have a common interest and a social and economic interest, thus articulating the financing of projects in which both the Community and the member States’ different levels of public authorities, either national, regional or local, take part.


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needs of citizens in the rendering of certain services which are considered essential or basic can be found in all European Union member States. This intervention covers aspects such as guaranteeing universal access to certain essential services, that these services have a high quality and affordable prices.

Public action is also taken on other needs and concerns of public interest such as

environmental protection, taking care of specific needs of certain population categories – low incomes or the disabled – or even the supply of essential services with complete geographical or territorial coverage covering areas which are far away or which have difficult access.

These actions are not only collective services such as energy, transport or

communications. They are also actions and facilities carried out with an objective different to the seeking of a benefit: carrying out of a general good in the different fields of life in society, covering varied aspects such as creation of businesses and employment, city management, access to housing, education, etc.

Nowadays, with the internal market being a reality, the construction of Europe goes

forth in a balanced way on two pillars: free competition and social, economic and territorial cohesion. Expressions such as “European social model” and “controlled competence” respond to the search of this equilibrium within the great dimensions of the European project.46

The characters and concepts of SGI have been object to definition in various

Community institutional acts:

- Services of General Interest covers market and non-market services that public authorities consider of general interest, imposing on them certain public service obligations.

- Services of General Economic Interest refers to market services on which the

member States impose certain public service obligations in virtue of general interest criteria.

The Commission has highlighted the importance of these services that are the basis

of the European society model in the 199647 and 200048 Communications on SGI in Europe. The definition of “universal service” is especially important and designates “a set of general interest requisites that guarantee that certain services are made available, with a specified quality, to all consumers and users in the whole of a member State’s territory independent of geographic situation and, according to specific national circumstance, at an affordable price”, thus making SGI an element that reinforces social and territorial cohesion in the European Union.

46 The concept “controlled competence” appears for the first time in a legal Community text in the

European Parliament and Council Regulation Proposal on intervention of member States in matters of requirements and allocation of public service contracts in train, road and water passenger transport (COM(2000) 7 end). “Controlled competence” is fundamentally based in the regular renewal of current exclusive rights for determined period of time and are allocated by means of a public request for tenders.

47 OJ C 281 of 26.09.1996. 48 OJ C 17 of 19.01.2001.


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FINAL REPORT In these Communications, the Commission has essentially considered four

objectives: - to guarantee the efficient working of services of general economic interest; - to ensure that the qualification of services of general economic interest is

correct; - to ensure that negative interferences do not happen in markets open to

competence regardless of public service; and, - to safeguard the citizens’ access to services

The Union Treaty, passed in Amsterdam, introduced a new article 16 to the

European Community Treaty recognising both the fundamental character of the values underlining SGI and the obligation to facilitate the function role they perform.

“Without prejudice to articles 73, 86 and 87, and in view of the role

services of general economic interest occupy within the common values of the Union, as well as their role in the promotion of social and territorial cohesion, the Community and member States, in accordance to their respective competences and in the field of application of the current Treaty, will ensure that these services act according to principles and conditions that allow them to serve their purpose”

On the other hand, Article 36 of the Charter of Fundamental Rights49, establishes

that the Union recognises and respects the access to services of general economic interest in order to promote social and territorial cohesion in the Union.

2.- STATE AIDS AND SGI In response to a petition of the Nice European Council in December 200050, the

Commission presented a report on SGI to the Laeken European Council in December 200151. The report indicates that in order to improve legal security in the field of public service compensations, it has the intention of establishing a Community support frame for state aids granted to firms in charge of managing services of general economic interest. Several conclusions have later been

49 In the Cologne European Council, held on the 3rd and 4th of June 1999, the conclusions of the

Presidency (items 44 and 45) noted that the fundamental rights prevailing on a Union level would have to be summarised and highlighted in a Charter, including “the rights of freedom and equality and fundamental procedural principles included in the European Conventions for the Protection of Human Rights and Fundamental Freedoms and resulting of the common constitutional traditions of the member States, as general principles of Community Law. The charter must, likewise, include the basic rights uniquely corresponding to citizens of the Union. On writing the Charter, economic and social rights will also be considered”.

50 Item 47 of the conclusions of the Presidency of the Nice European Council held on the 7th, 8th and 9th of December 2000.

51 COM(2001) 598 final, and item 26 of the conclusions of the Presidency of the Laeken European Council, held on the 14th and 15th of December 2001.


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adopted in subsequent European Council meetings. The Commission has, equally, carried out several reports on this matter52.

The Commission has traditionally considered that compensations paid by a State to

the firms in charge of managing services of general economic interest do not constitute State aids in as much as they are limited to compensate the effective cost that the fulfilment of public service obligations carries.

The Court of First Instance, in its FFSA judgement53 of February 27th 1997, and

Portuguese Television judgement of May 10th 200054, considered that compensations to the effective costs of public service obligations constitute State aids for the purposes of what is arranged in section 1 of Article 87 of the Treaty, even when the amount does not exceed what is necessary to carry out public service obligations.

Now, despite these resolutions, procedure obligations did not refer to all State

measures but considered to be applicable to measures with the requirements established in article 87-1 of the Treaty. This means that, in practice, in certain essential sectors, state financing of public services was not subject to these procedure obligations. We are dealing, particularly with the following measures:

- measures that finance activities that do not have an economic character: this

happens in activities framed within the public authority prerogatives of the State (such as security, justice, foreign affairs), the compulsory social security scheme, the field of compulsory education, and others that are part of the essential State functions.

- Measures that can not affect exchange between member States: this occurs

with the financing of certain local or regional public services such as swimming pools, leisure centres, nursery schools, arts centres or hospitals.

- This is also the case for aids whose amount is less than 100.000 euros, set by

the Commission in its Regulation on de minimis aids. However, the Court of Justice in the Ferring55 judgement of November 22nd 2001,

considered that compensations granted by the States, whose amount does not exceed what is

52 The conclusions of the Presidency of the Barcelona European Council, held in the 15th and 16th

of March 2002, item 42; the conclusions of the Presidency of the Seville European Council, held on the 21st and 22nd of June 2002, item 54; the Commission communication on SGI in Europe (OJ 2001, C 17, p.4); the Commission communication on the applying of regulations in matters of State aids to public broadcasting services (OJ 2001, C 320, p.5); the Commission report of June 16th 2001 on the state of tasks regarding the guidelines on State aids related to services of general economic interest (COM(2002) 280 final); and the Commission report of November 27th 2002, on the state of tasks regarding guidelines on State aids related with services of general economic interest (COM(2002) 636 final).

53 Case T-106/95; judgement confirmed in Court of Justice resolution of March 25th 1998 (case C-174/97).

54 Case T-46/97 55 Case C-53/00.


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necessary for the carrying out of public service, does not represent an advantage to the appointed firm and, therefore, does not constitute a State aid. The Court highlights that the amount of compensation surpassing that which is needed to carry out the obligations of public service can constitute State aid that can not be authorized according to article 86 of the Treaty.

In the Ferring case the question dealt with was, fundamentally whether tax relief is

comprised within the field of application of Law in matters of aids when its object is to compensate specific burdens imposed on a firm in handing them services of general economic interest.

The starting point of the Court of Justice’s considerations in the Ferring

case was the statement by which the existence of an advantage in the meaning of article 92, section 1 (currently article 87 section 1) can not be automatically deduced from the difference in treatment which some firms are object to56. We can gather from this that this advantage does not exist if the difference in treatment quoted is justified with reasons relative to the system’s logic.57

The fact that certain firms have tax exemptions as those contemplated can be

considered, in the Court of Justice’s opinion, as a compensation for the services rendered in fulfilling its public service obligations and do not constitute State aids, in as much as the additional costs derived by the firm due to these public service functions are covered with this exemption58.

Thus, according to the Ferring judgement, in the case of compensation of costs

derived from the fulfilment of public service obligations on behalf of the State, the typical characteristic of an aid is not present if the compensation does not exceed the costs supported since in this measure there is no economic advantage.

At present, the Court of Justice still has to pronounce itself in two issues – having

the respective attorney generals, Mr. Jacobs and Mr. Leger reached different conclusions – that deal with the legal qualification on public service compensations regarding the regulations on State aids59.

Thus, at the moment, two positions exist: a) the so-called “compensation solution” prepared in the Ferring judgement, by which state

financing of public services only constitutes aid in the meaning of article 81, section 1 of the Treaty, in so much as the advantages granted by the public authorities exceed the cost generated for rendering public service obligations.

Three types of arguments exist supporting this thesis which can be summarised as

follows60:

56 Case C-41/90, Judgement of April 23rd 1991, Höfner y Elser, Rec. p.I-1979. 57 Case C-134/99, Judgement of November 8th 2001, Adria-Wien Pipeline and others, Rec. p.I- 8365. 58 Case C-475/99, Judgement of October 25th 2001 Ambulanz Glöckner, Rec. p. I-8089. 59 Case C-126/01, GEMO,SA ; and Case C-280/00 Altmark Trans GMBH. 60 These arguments were already summarised by Attorney General Mr. Jacobs in his conclusion on

the GEMO case.


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- When a State acquires goods, an aid will exist only when the amount paid by the State is higher than the market value. The same principle must be applied when a State acquires services that are directly made available to the citizens, that is, public services.

- The concept of aid, found in article 87-1 of the Treaty, is only applied in

measures that provide a financial advantage to certain businesses. Now, a State measure that limits itself to compensate the cost derived from the rendering of public service obligations does not provide real advantages to the recipient business. Therefore, it does not constitute an aid.

- In virtue of article 88, section 3, of the EC Treaty, member States have the

obligation to notify its aid projects and to stop the granting of aids until the Commission has authorized them. These obligations could stop the working of SGI in member States.

b) the so-called “quid pro quo solution” postulates that the Court of Justice must

distinguish between two categories of situations:

- When a direct and clear relationship exits between State financing and clearly defined public service obligations, the amounts paid by the State will not constitute aids in the meaning of article 87 section 1 of the Treaty.

- On the contrary, when this relationship does not exist or when public service

obligations are not clearly defined, the amounts paid by public authorities will constitute aids under this disposition.

3. THE GREEN BOOK ON SGI

Recently,61 the Commission has passed the Green Book on SGI62. The SGI, that include services of both economic and non-economic natures,

constitute a complex and constantly evolving reality. They cover a wide spectrum of different types of activities, with different dimensions and different nature. The way in which these services are organised differs according to each member State’s traditional cultures, history and geographical conditions, as well as the specific characteristics of each activity in question, above all its technological development.

According to the Green Book, the Union respects this diversity and the roles

corresponding to national, regional and local authorities when guaranteeing the welfare of its citizens and democratic options regarding, amongst other aspects, the quality of services. This diversity explains the different degrees of Community intervention and the use of different

61 May 21st 2003. 62 COM(2003) 270 final.


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instruments. The European Union also has to play a role appropriate to the frame of its exclusive competences. On the other hand, SGI raise a number of questions that are common to different services and competent authorities in the Union as a whole.


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FINAL REPORT The debate that the Green Book proposed is centred, especially, on the following

aspects:

- The extent of a possible Community action, according to the Treaty and with complete respect for the principle of subordination, in order to give the Community additional legal competence in this field, if required.

- The principles that could be included in a possible framework Directive or in another general instrument regarding SGI and the added value of an instrument of this nature;

- The definition of good governance in matters of organization, regulation, financing, and evaluation of these services, in order to ensure a more competitive economy and an efficient and egalitarian access of all citizens to quality services that satisfy their needs;

- Any measure that could contribute to reinforce legal security and to guarantee a coherent and harmonious articulation between the objective of keeping quality SGI and the rigorous application of regulation on competence and internal market.

The Green Book highlights, in matters concerning territorial cohesion that SGI are

a part of the values shared by all European societies, constituting an essential element of the European society model. It highlights its importance in improving the quality of life, the fight against social exclusion and isolation. They constitute a “cohesion factor”, especially, regarding the rendering of universal service to all citizens independent of their economic, social or geographic situation.

The way these services are organised differs according to the traditions, history, and

geographical conditions of each member State, and so the Union respects this diversity and the roles corresponding the national, regional and local authorities when guaranteeing the welfare of its citizens.

4.- DIRECTING PRINCIPLES AND SGI CHARACTERIZATION The interrelation between competition regulations – especially in matters of State

aids – and SGI must be balanced. Article 86-2 is written in a “negative” fashion: it allows the non-applying of Treaty regulations when their applying makes the fulfilling of missions given to services of general economic interest (SGEI) impossible.

However, article 16 of the Treaty imposes a “positive” obligation, both on the

Community as on member States, each one within its own competences, so that they ensure that these services work on the basis of principles and conditions that permit the fulfilling of the missions they were given.

On the other hand, services of general economic interest, apart from constituting a

“fundamental right” per se, are often characterized by serving as basis and/or protection or reinforcing of other fundamental rights. Thus, for example, secrecy of communication and right of


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privacy are guaranteed by the postal services, or transport services guarantee the movement of people, which forms part of the circulation of people at the same time.

From derived Community Law, institutional documents63 and the doctrine, the following

directing principles of SGI can be stated:

i. Equality: All citizens are equal in accessing SGI. The term equality must be understood as a prohibition to all discrimination, either on the social or personal status in matters of rendering of services.

ii. Universality: Amongst the services supplied, basic services must be supplied

universally.

iii. Reliability: The rendering of SGI will be continuous, regular and uninterrupted. The cases of irregular working or service suspension will be limited to cases established specifically in the regulations that govern the sector.

iv. Participation: Users must have an active participation in the development of SGI. The

aim of this participation is to protect citizen rights regarding the correct rendering of services and favouring the cooperation of those who render the service. This “active” participation must be fulfilled, at least, in the definition of services and the choice of methods of payment.

v. Transparency: The suppliers of services will guarantee that the users have complete

information on the rendering of services, especially on public service obligations, tariffs and other contractual conditions. To this end, suppliers of services must notify the users of financial and technical conditions of the rendering of the services publishing the text containing service regulations.

vi. Simplification of procedures: The suppliers of services must reduce, as much as

possible, the complexity of the procedures to be followed by users, using uniform models, and making an effort to simplify and notify service payment systems. In any case, suppliers will set up internal procedures to solve claims made by users. These procedures64 will be available, easy to understand and apply, guaranteeing that suppliers will take user or consumer association claims into account, facilitating the possibilities of claims with “rated or automatic compensation”65, the right to make a claim with the controller and, generally speaking, access to justice.

63 Especially, the Economic and Social Committee statement on “The SGI”, passed in the Plenary

Session held on the 20th and 21st of October 1999. 64 The Commission has adopted a Recommendation regarding the principles applicable to the bodies

responsible of out of court settlements of litigations in consumer issues (98/257/CE, OJ, L 115 of 17.04.1998, p.31) and a Recommendation regarding principles applicable to extra-judicial bodies of agreed resolutions of litigations in consumer issues (2001/310/CE, OJ, L 109 of 19.04.2001, p.56).

65 Similar to “charged” compensations foreseen in air transport regulations in matters of “overbooking”. The Commission itself in its “Communication to the European Parliament, the Council, the Economic and Social Committee, and the Committee of the Regions on “Strategy in matters of consumer


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vii. Efficiency: SGI will be supplied efficiently, suppliers adopting the necessary measures to carry out these objectives.

viii. Service quality: Suppliers will define the factors determining the quality of services and, on this basis, will publish quality and quantity regulations which they will commit to. Keeping of these regulations will not be subject to any condition. All revocation of these regulations will not be authorized unless it constitutes an advantage to users and will be submitted to user control within the framework of periodic meetings. We must take into account that –as the Green Book indicates66- although, in general terms, it is the member States duty to define quality levels of SGI, Community legislation defines, in some cases, conditions in issues of quality, for example, aspects related to safety, exactness, transparency of payment, territorial coverage and protection against service interruptions.

ix. Service Adaptability or evolution: Services will be adapted to the development of

collective needs and results of technical and economic progress.

x. Evaluation of results: Rendering conditions of SGI must be evaluated by the supplier. To this end, they will gather, amongst other information, information on user satisfaction67. On a Community level68, evaluation of services of general economic interest is essential in order to guarantee the attainment of objectives in matters of “social and territorial cohesion”.

xi. Affordable Cost: Conditions of access to these services must be carried out at an

affordable cost for citizens. They must be aimed towards a concept of “affordable cost”. Applying the principle of reasonability contributes to economic and social cohesion in the member States in that it pays special attention to the needs and capacities of the more vulnerable groups, and price control mechanisms therefore exist to comply with this principle, or subsidies are granted to the people affected.

xii. Environmental protection: SGI definition and running must consider the exigencies of sustainable development and environmental protection as determining elements in social an territorial cohesion.

policies 2002-2006” COM(2002) 208 final, p. 17, postulates the possibility to extending “measures of consumer protection in air transport to other forms of transport”.

66 Section 3.1.3. item 58.of the Green Book on SGI. COM(2003) 270 final. 67 Commission Communication – Methodological note for the horizontal evaluation of services of

general economic interest (COM(2002) 331 final of 18.06.2002). 68 Section 4,3, item 94 of the aforementioned Green Book on SGI.


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FINAL REPORT 5.- SOCIAL AND TERRITORIAL COHESION AND THE SGI Economic growth tends to benefit more developed territories, better trained people,

as well as areas that have more adequate infrastructures. A policy tending to correct these negative effects is necessary on behalf of the public authorities. In the market economy, concentration of wealth happens in areas that have operational infrastructures as well as high level of qualification.

It is convenient to tackle a concentration of wealth, infrastructures and people close

to 80% in 20% of the land. This situation does not represent a sustainable development for the European Union from the point of view of social and territorial and social cohesion, since economic prosperity can translate into a worsening of social and geographical differences on a local, regional, member State or Union level. It is therefore necessary, on the one hand, to try to improve the running of SGI as well as their quality, and on the other, ensure that cost for the population is kept affordable and discrimination doesn’t exist.

To recognise SGI on a Community level and to improve their running on the local

or regional plan must constitute fundamental Union objectives. Market mechanisms, with the efficiency and dynamics that usually characterizes them, must be combined with rising and modern SGI, which strongly contribute to social and territorial cohesion of the Union, to have a balanced European construction.

Social and territorial cohesion covers several fields in the life of society that have

SGI rendered to them: access to education, employment, housing, ordering of territory, access to financial services for disadvantaged people, amongst others. These services must be conceived as services identified on an adequate territorial level to ensure a high quality of rendering.

A true territorial cohesion must allow the recognition of a person’s choice to live

where they wish, including isolated or insular regions, benefiting of equivalent services than other people. Thus, SGI contribute to structure the territories as they should not leave any part of them out of the rendering of essential services.

The contribution of SGI to promote social and territorial cohesion can be seen in:

a) They constitute an essential element in the cohesion of society. Territory is a very important dimension in sustainable development and SGI are structuring elements in matters of town and country planning, above all, for the rendering of regular and continuous services in rural, isolated, peripheral and insular areas.

b) They allow to guarantee quality of life to each individual. In the framework of

sustainable development, every society must have its members’ welfare as its aim, led by solidarity and preserving natural resources for future generations. All political powers must guarantee, effectively, each person’s enjoyment of one’s own fundamental rights. The prohibition of all discrimination must have more importance over other rights, and constitutes the most important right in matters of social cohesion.

c) They ensure solidarity between regions, because by means of subsidies, or any formulae

of “péréquation tariffaire” (single unitary tariff) that take into account the service’s financial equilibrium, they allow the rendering of the service at an affordable cost for those users situated in those regions further away, peripheral or scarcely populated.


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Specifically, the existence of a hospital, school, post office and good transport services in a territory is an indispensable factor for the territory’s development in order to avoid depopulation or marginalization and to face the problems of hypermetropoli. Thus, they are a supplementary factor in social cohesion on a local, national or European level.

Taking into account the contribution of SGI in town and country planning and in

the economic and social fields we can conclude that by being part of solidarity policies, the recipients of these services can all be citizens with a guaranteed access to these services rendered. Universality and equality characterize the services rendered.

The above, in consonance with the acknowledgement of the role of services of general

economic interest in the Charter for Fundamental Rights and in article 16 of the EC Treaty, is formulated in a positive way, implying a modification of recipient status so, instead of user or consumer, they would go on to have civic or citizen rights.69 The social or territorial rift can be reduced given access to these services, which not only fight against exclusion (social cohesion) but consider the citizen’s identity in the place where they live (territorial cohesion), giving them the possibility of enjoying the same rights as those enjoyed by another individual in another region.70

6.- CASE ANALYSES ON COJEC RESOLUTIONS We shall now examine several resolution of the Court of Justice of the European

Communities (COJEC) dealing with services of general economic interest (SGEI), examining their future contribution to social and territorial cohesion. Cases belonging to sensitive and strategic sectors are analysed by means of verifying four hypotheses:

a) The existence or not of guaranteed access to services, b) Equality in universal rendering, c) The regularity and continuity of the service, d) The protection of fundamental rights, were applicable.

6.1. POSTAL SERVICES

The postal services market has a significant size in the EU71. Income derived from postal

services in the EU, in 2000, reached approximately 85,000 million euros, which is close to 1% of the EU GDP. Direct employment in postal services is considerable, with more than 1.6 million people been directly hired and at least another million jobs are indirectly related to postal

69 In the aforementioned Commission Communication of September 20th 2000, the Commission had

noted the existing relationship between access to SGI and European citizenship. See item 64 to this respect. 70 “L‘accès aux services d’interêt general et la cohesión territoriale et sociale. Hélène Pauliat. In the

Collective Book L’accès aux services d’intêret économique general.Ed. ASPE Europe,2003. 71 Commission Report to the European Parliament and Council on the applying of the Postal

Directive (Directive 97/67/CE). COM(“002) 632 final.


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services72. Direct employment is fundamentally found in the providers of the universal service (approximately 1.2 million), whilst almost 500,000 people work in courier service and express post. Pls-Ramboll calculates that, in total, 5 million jobs depend directly on the postal sector, are intimately related to it or induced by it.

Furthermore, postal services are important from the strategic point of view, since

they are part of wider communications and distribution sectors. A large number of essential sectors, such as e-commerce, publishers, mail shopping, insurance, banks and publicity depend largely on the postal infrastructure and the universal postal service is a fundamental element in social cohesion.

Postal service regulations are contained in Directive 97/67/CE73, modified by

Directive 2002/39/CE74, which has the improvement of the service and the development of a single postal services market as objectives. With these objectives in mind and in accordance with the principle of solidarity, the Directive established a minimum harmonization of EU postal services. It established regulatory dispositions amongst which the definition of a minimum universal service is included75, the limitation on services that can be part of the reserved sector, the conditions ruling the rendering of non-reserved services and network access, principles of pricing and accounting transparency, service quality regulations and technical harmonization.

The Commission states, in Item 2 of Directive 97/67/CE, that “...the establishment of the

internal market in the postal sector is of proven importance for the economic and social cohesion of the Community, in that postal services are an essential instrument of communication and trade;”

Access conditions to universal postal services and networks were object of a

Commission study76 concluding that it is possible that the infrastructure of postal services access is excessive. Post is collected daily in more than 750,000 access points, and there are 165 million distribution points rendering services daily in the European Union. Europe has 40% more access points per person than the United States of America and five times more access points per km2. However, this use of the postal network reveals a possible paradigm of access:

-most access points are designed to suit the costumers and have a wide

geographical coverage. -most volumes in post are generated by business clients who are

geographically concentrated (0.1% of access points collect 68% of postal delivery).

72 According to the report prepared by Pls-Ramboll for the Commission. 73 European Parliament and Council Directive of December 15th 1997, relative to common

regulations for the development of the Community postal services internal market and the improvement of service quality OJEC L 105, of 21.01.1998.

74 European Parliament and Council Directive 2002/39/CE of June 10th 2002 by which Directive 97/67/CE was modified in order to open Community postal services to competence, OJEC L 176 of 05.07..2002.

75 Article 3 of Directive 97/67/CE contemplates the right to a universal service “that corresponds to an offer of a certain quality postal services rendered permanently in all the territory at an affordable price for all users”.

76 Study carried out by Ctcom, commissioned by the Commission.


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FINAL REPORT The CoJEC Judgement of July 3rd 200377, resolves on an Appeal on cassation78

regarding “normal market condition” in postal services. It tried to determine in what cases the rendering of logistics and trade support on behalf of a public firm to its subsidiaries, who carry out an activity in a sector open to free competence, can give rise to State aids.

SFEI (Syndicat français de l’express international) is a professional association that groups

together societies of express postal services and which sued La Poste for the logistical and commercial assistance it rendered to a subsidiary society SMFI. The structure of express post was modified in 1992 and the society “Chronopost, SA” was created, taking charge of national express post.

In 1997, the Commission adopted a Decision concluding the logistical and commercial

support rendered by La Poste to its subsidiary SMFI-Chronopost and Radio France, the applicable customs regime [...], the tax systems on salaries and stamp rights [...] and its investments […] in courier platforms does not constitute State aids favouring SFMI Chronopost.

The CoJEC values that La Poste is in charge of a service of general economic

interest and that this service consists, in essence, in the obligation of carrying out the collection, transport and distribution of post, in the benefit of all users in all the interested member State’s territory, with uniform fees and in similar quality conditions. Given the service characteristics that the La Poste network must guarantee, the creation and maintenance of this network does not respond to a purely commercial logic. Ufex and other societies admitted that it is not a market network and therefore would never have been created by a private enterprise.

The CoJEC cancels the judgement and understands that the CFI made a Law error

by understanding article 87, section 1 of the Treaty in the meaning that the Commission could not appreciate, taking the costs supported by La Poste as reference, the existence of an aid towards SMFI-Chronopost, but it should have checked if the counterpart obtained by it could be compared to that which is called for by a private financial society or private business group that, without acting in a reserved sector, seeks a structural, global or sector policy and is guided by perspectives in the long run.

According to the parameters set beforehand, the analysis of the judgement states that:

a) The maintenance of a public postal network is not justified in a simple market logic, as this network is clearly destined to rendering a universal service, guaranteeing access and equality to all citizens.

b) The public postal network guarantees the continuity and regularity of the postal service.

77 Cumulative cases C-83/01 P, C-93/01 P y C-94/01 P. 78 Lodged against Judgement dictated by Court of First Instance on December 14th 2000 “Ufex and

others/Commission” (T-613/97).


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c) The public postal network contributes to social and territorial cohesion, since it has access points covering all the geography of the member States and furthermore, it covers certain services, apart from rendering a universal postal service, that guarantee territorial cohesion.

d) The public postal network guarantees the communication secrecy and the rights of

privacy of service users.

6.2. CABOTAGE SEA TRANSPORT

On February 20th 2001, the CoJEC passed a judgement79, by which the principle of free

rendering of services is applied to sea transport within the member States.

The questions subject to interpretation arose within the framework of litigations in the Spanish Supreme Court between ANALIR and others, and the General State Administration, by which it intended the suspension of a Spanish national regulation80.

Article 4 of Regulation EEC 3577/92 states: “1. A Member State may conclude public service contracts with or impose public service

obligations as a condition for the provision of cabotage services, on shipping companies participating in regular services to, from and between islands.

Whenever a Member State concludes public service contracts or imposes public service obligations, it shall do so on a non-discriminatory basis in respect of all Community shipowners.

2. In imposing public service obligations, Member States shall be limited to requirements concerning ports to be served, regularity, continuity, frequency, capacity to provide the service, rates to be charged and manning of the vessel.

Where applicable, any compensation for public service obligations must be available to all Community shipowners.

3. Existing public service contracts may remain in force up to the expiry date of the relevant contract.”

The issue which was open to debate concerned whether the holding of a

public service contract or the possibility of public service obligations on economic operators is something that can be chosen or not and if it can be accumulated or not.

The CoJEC considers that, in some circumstances, accumulation of

impositions of public service obligations on certain operators and the holding of a public service

79 Case C-205/99 in virtue of a petition aimed at the Court of Justice, aimed at obtaining a preliminary decision on the interpretation of articles 1,2 and 4 of Council Regulation (EEC) n.3577/92 of September 7th 1992.

80 Royal Decree 1466/1997, of September 19th, by which the legal regime of regular cabotage routes and public interest navigations are determined.


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contract with another operator for the same route or journey is possible. The court resolution was as follows:

“3. Article 4(1) of Regulation No 3577/92 is to be interpreted as permitting

a Member State to impose public service obligations on some shipping companies and, at the same time, to conclude public service contracts within the meaning of Article 2(3) of the regulation with others for the same line or route in order to ensure the same regular traffic to, from or between islands, provided that a real public service need can be demonstrated and in so far as that application of the two methods concurrently is on a non-discriminatory basis and is justified in relation to the public-interest objective pursued.”

According to the parameters fixed above, the judgement analysis states

that:

a) Public authorities, either by imposition of public service obligations or holding of a public service contract, must demonstrate that a real need for the public service exists, that is, that insufficiency of regular transport services has been verified, on specific routes, when their rendering is left solely in the hands of market forces.

b) No rendering of universal service exits, although the service must be rendered by the shipowners without discrimination to users.

c) The aim is to guarantee a sufficient level of regular sea transport services to, from or between islands.

d) Considering the high level of dependence on sea transport in the islands, social and territorial cohesion are contributed to as, on the one hand, freight transport ensures supply of goods, and, on the other, passenger transport guarantees movement of people.

e) The fundamental right of free circulation of people is especially reinforced with the possibility of movement to, from or between islands.

6.3. AIR TRANSPORT The Judgement of July 9th 200281, had as objective a petition by the Supreme

administrative Court of Portugal directed towards the Court of Justice, aimed at obtaining a preliminary ruling on the interpretation of article 3, sections 2 and 4, section 1, items a) and d) of Council Regulation (EEC) 2408/92 of June 23rd, regarding Community airlines’ access to intra-Community air routes, and of article 1, item e) of the Commission Decision 94/698/CE, of July 6th 1994 regarding the enlargement of capital, loan guarantees and tax exemptions existing for TAP.

These issues arose within the framework of a litigation on behalf of the Secretario

de Estado dos Transportes e Comunicaçoes and Transportes Aéreos Portugueses (TAP) on the application of Flightline, based in the UK, to exploit certain air routes in Portugal.

Article 4-1, item a) of Regulation 2408/92 aforementioned states:

81 For Case C-181/00


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and after having informed the Commission and air carriers operating on the route, may impose a public service obligation in respect of scheduled air services to an airport serving a peripheral or development region in its territory or on a thin route to any regional airport in its territory, any such route being considered vital for the economic development of the region in which the airport is located, to the extent necessary to ensure on that route the adequate provision of scheduled air services satisfying fixed standards of continuity, regularity, capacity and pricing, which standards air carriers would not assume if they were solely considering their commercial interest. The Commission shall publish the existence of this public service obligation in the Official Journal of the European Communities.”

Item d) of the same article states: “d) If no air carrier has commenced or is about the commence scheduled air services on a

route in accordance with the public service obligation which has been imposed on that route, then the Member State may limit access to that route to only one air carrier for a period of up to three years, after which the situation shall be reviewed. The right to operate such services shall be offered by public tender either singly or for a group of such routes to any Community air carrier entitled to operate such air services…”

Commission Decision 94/666, regarding compensation of the deficit registered by TAP in

routes to the autonomous regions of Azores and Madeira, establishes in article 1 that aid programmes aimed, in particular, at compensating TAP’s accumulated deficit in complying with its public service obligations in routes to the autonomous regions of Azores and Madeira, are compatible with the common market.

Furthermore, on the basis of Decision 94/698, the Portuguese government decided to

impose public service obligations, starting on January 1st 1996, on nine connections between the Portuguese continental territory and the autonomous regions of Azores and Madeira, as well as between these regions.

The litigation started because “Flightline”, abiding with a public tender, applied for the

authorization to exploit, without economic compensation, eight of the nine routes mentioned in the public tender, as well as an additional route. This offer referred to an activity based entirely in Portugal. The application was denied, as the Portuguese Administration considered that “Flightline” was not a holder of a licence issued in the Republic of Portugal and could only carry out domestic flights that were an extension or preliminary service of main services between the member State which had issued the licence and Portugal.

We must highlight, to the effects that are of interest to us in the current analysis, that the

Community establishes – Regulation 2408/92 – that any member State can guarantee the rendering of adequate air services in certain low density routes or that link periphery regions or regions in development, abiding to requirements regarding, in particular, frequency, timetables, the capacity offered or the price required.

According to the parameters set earlier, the analysis of the judgement on the air

transport sector states that:


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a) Access to the market is guaranteed for all Community operators, including cabotage, since 1997 and without any discrimination.

b) Obligations of public service imposed by public authorities affect frequency, timetables, and the capacity offered, including price, which can be subject to certain public interventions.

c) Obligations of public service imposed on operators contribute to social and territorial cohesion in that they guarantee freight and passenger transport to, from and between the islands.

d) In facilitating movement of people, the right of free movement is guaranteed.

6.4. TELECOMMUNICATIONS

The Court of Justice pronounced itself by means of a judgement on December 6th 200182,

in a litigation between the Commission and the Republic of France, regarding universal service financing. The Commission considered that the Republic of France had breached its obligations in not having observed Community dispositions, article 4 quater of Directive 90/388/CEE83 in particular, regarding competence in telecommunications services, and article 5, sections 1, 3 and 5 of the European Parliament and Council Directive 97/33/CE84, related to interconnection in telecommunications, regarding the guarantee of universal service.

The obligation of rendering universal voice telephony services resulted from the European

Parliament and Council Directive 95/62/CE of December 13th 1995, regarding the application of the open network provision (ONP) to voice telephony services, and substituted by European Parliament and Council Directive 98/10/CE of February 26th 1998 on the offering of the open network (ONP) to voice telephony services and on the universal service on telecommunications in a competitive environment.

To this effect, article 2, section 2, item f) of Directive 98/10/CE defines universal service as

“a defined minimum set of services of specified quality which is available to all users independent of their geographical location and, in the light of specific national conditions, at an affordable price”. The services comprised in the universal service of telecommunications, particularly, were connection of land telephones to the public network, phonebook services and public pay phones.

Furthermore, article 5 of Directive 97/33, completed the dispositions related to universal

service, in the following way in item 1: “1. Where a Member State determines, in accordance with the provisions of this Article, that universal service obligations represent an unfair burden on an organization, it shall establish a mechanism for sharing the net cost of the universal service obligations with other organizations operating public telecommunications networks and/or publicly available voice telephony services. Member States shall take due account of the principles of transparency, non-discrimination and proportionality in setting the contributions to be made.

82 Case C-146/00 83 Commission on June 28th 1990 84 of June 30th 1997


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Only public telecommunications networks and publicly available telecommunications services as set out in Part 1 of Annex I may be financed in this way.” Annex III of the Directive indicates the way to calculate the cost of universal service of land telephone in the following way: “The cost of universal service obligations shall be calculated as the difference between the net cost for an organization of operating with the universal service obligations and operating without the universal service obligations”.

Differences arise when the Republic of France passes a fund regulation by which all

telephone operators, including mobile phone operators, must share the financing of the universal service.

To the effects of the current analysis it is interesting to highlight that the Court noted that in

order to calculate the cost of universal service, only the costs derived directly from the rendering of the service can be considered, and that the method applied to determine non-profitable areas did not take into account certain incomes, amongst others those costs derived from inscribing in the red list and of so-called “comfort” services that include services such as no-answer transfer call, calling signal and calling number indication.

The Court basically considered that it is important that the reference values for the amounts

of imposed contributions of new operators are determined according to objective criteria, considering elements that can be compared, and are thus transparent, to permit the operators to calculate their estimated costs and incomes, since any element that makes the calculation difficult, makes the entry of these operators into the market more difficult. It also noted that the obligation of publishing an annual report indicating the calculated cost of universal service obligations and detailing the contributions carried out by all interested parties had not been fulfilled.

In conformation with the parameters set out earlier, the analysis of the judgement states:

a) The Commission’s will to guarantee access to the universal service of land telephones, covering the connection to the land telephone public network, phonebook services and public pay phones.

b) The maintenance of universal service implies that the minimum specified set of quality

services is accessible to all users independent of their geographical situation and at an affordable price, and so the judgement takes into account that to the effects of calculating – determining the cost of universal service – only the costs that are a direct consequence of rendering the service mentioned can be considered.

c) It highlights the need for transparency as one of the inspirational principles of universal

service in declaring the relative failure to comply to obligations in not publishing the contributions carried out by the operators.

d) Social and Territorial cohesion are contributed to as both the Court and the Commission

took into account the rights of non-profitable users and the rights of those in non-profitable areas, even though being in a competitive environment it was noted that only costs which are a direct consequence of the rendering of the service mentioned could be considered.


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206

FINAL REPORT 7.- CONCLUSIONS AND OBSERVED TRENDS Social and territorial cohesion covers several fields of life in society that are rendered by

SGI: access to education, employment, housing, town and country planning, access to financial services for disadvantaged people or isolated territories amongst others. These services must be conceived as services identified at an adequate territorial level to ensure high quality of its rendering.

True territorial cohesion must allow the acknowledgement of people living where they

wish, including isolated or insular regions, benefiting of equivalent services than other people, since SGI contribute to structuring territories, without leaving any of its parts outside the environment of essential service rendering.

The contribution of SGI to promote social and territorial cohesion can be seen in that

fighting all exclusions constitutes an essential element towards the cohesion of society, based on equality and the search of a balanced territorial development; they can guarantee people a standard of living and solidarity between regions.

A trend can be observed consisting in a gradual modification of the recipients’ status in the

rendering of services, from users, or consumers to holders of civil rights. This is important because from demanding the defence of rights as participants in the market, there is an evolution towards taking part in the inherent rights of citizens and so an increase in the scope of the legal position of recipients, who increase their “status civitatis”.


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APPENDIX D: Tables, graphics, figures and frames on the Agricultural policy


208

Analysis of the impact of Community Policies on regional cohesion


FINAL REPORT THE IMPACT OF THE

ENVIRONMENTAL POLICY ON REGIONAL COHESION

VOLUME IV

European Commission

DG Regional Policy

October, 2003

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Analysis of the impact of community policies on regional cohesion FINAL REPORT ON ENVIRONMENT. DG REGIO EC.

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TABLE OF CONTENTS

E.- CONTRIBUTION OF THE ENVIRONMENTAL POLICY ON THE REGIONAL COHESION

EXECUTIVE SUMMARY 1. INTRODUCTION 2. BACKGROUND: THE SECOND REPORT ON ECONOMIC AND

SOCIAL COHESION 2.1. EU WASTE POLICY 2.2. EU WATER POLICY 2.3. OVERALL POLICY EFFECTS

3. EU ENVIRONMENTAL POLICY1

3.1. FIFTH ENVIRONMENT ACTION PROGRAMME (1992-2000): “TOWARDS SUSTAINABILITY” 3.2. STRATEGY FOR SUSTAINABLE DEVELOPMENTSIXTH ENVIRONMENT ACTION PROGRAMME: “ENVIRONMENT 2010: OUR FUTURE, OUR CHOICE” 3.3. ENVIRONMENTAL TAXES AND CHARGES 3.4. WASTE MANAGEMENT 3.5. WASTE MANAGEMENT 3.6. WATER 3.7. AIR POLLUTION 3.8. KYOTO PROTOCOL ON CLIMATE CHANGE 3.9. INTEGRATION OF ENVIRONMENTAL POLICY INTO ALL EU POLICIES: THE CASE OF THE COMMON AGRICULTURAL POLICY (CAP)

4. COST AND EMPLOYMENT EFFECTS OF EU ENVIRONMENTAL

POLICY 4.1. WASTE POLICY 4.2. WATER POLICY 4.3. AIR POLLUTION POLICY 4.4. ANALYSIS OF AGGREGATE RESULTS


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5.1. STRUCTURAL FUNDS 5.2. COHESION FUND 5.3. SECTOR-SPECIFIC FINANCIAL INSTRUMENTS 5.4. EUROPEAN INVESTMENT BANK: EIB PROJECT FUNDING

6. FINANCIAL CONTRIBUTION OF THE EU TO THE

IMPLEMENTATION OF ENVIRONMENTAL POLICY 6.1. STRUCTURAL FUNDS 6.2. CONCLUSIONS 6.3. COHESION FUND 6.4. STRUCTURAL AND COHESION FUNDS: MAGNITUDE AND EFFECT ON COHESION 6.5. CONCLUSIONS

7. THE EFFECTS OF CLIMATE CHANGE POLICY ON COHESION

7.1. CURRENT EMISSIONS, KYOTO PROTOCOL TARGETS AND REQUIRED REDUCTION EFFORT 7.2. MEASURES OF DIFFICULTY TO REDUCE EMISSIONS 7.3. THE RELATIONSHIP BETWEEN THE DIFFICULTY TO REDUCE EMISSIONS AND THE REQUIRED REDUCTION EFFORT: EFFECTS ON ECONOMIC AND SOCIAL COHESION 7.4. CONCLUSIONS

8. THE EFFECTS OF ENVIRONMENTAL TAXATION ON COHESION

8.1. INTRODUCTION 8.2. THE EFFECT OF ENVIRONMENTAL TAXATION ON INCOME DISTRIBUTION 8.3. THE EFFECT OF ECOLOGICAL TAX REFORMS ON EMPLOYMENT 8.4. CONCLUSIONS


9.1. COSTS AND EMPLOYMENT EFFECTS OF EU ENVIRONMENTAL POLICY 9.2. FINANCIAL CONTRIBUTION OF THE EU TO THE IMPLEMENTATION OF ENVIRONMENTAL POLICY 9.3. THE EFFECTS OF CLIMATE CHANGE POLICY ON COHESION 9.4. THE EFFECTS OF ENVIRONMENTAL TAXATION ON COHESION

BIBLIOGRAPHY


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E. CONTRIBUTION OF THE ENVIRONMENTAL POLICY TO THE REGIONAL COHESION EXECUTIVE SUMMARY

INTRODUCTION Environmental policy is essential for EU social cohesion in the sense that there cannot exist

social cohesion if environmental quality disparities, and hence quality-of-life differences, are large across Member States. EU environmental policy is also crucial for economic cohesion in the Common Market, since lacking a common environmental policy could lead to environmental dumping, resulting in lower environmental quality and market distortions. However, these are not the meanings usually attributed to economic and social cohesion in the EU vocabulary; economic and social cohesion is usually interpreted in terms of closing regional disparities as indicated by measures such as GDP per capita or unemployment rate. In this restricted sense, economic and social cohesion presents a very important common feature with environmental policy: both are a component of all EU policies, since the Community’s institutions are obliged to take into account both the closing of regional disparities and environmental considerations in all other policies. Moreover, together with economic development, the social and environmental dimensions are the three pillars of sustainable development. Therefore, it is obvious that EU environmental policy and economic and social cohesion must be closely related.

In this study, we try to provide some evidence to give approximate answers to two of the

questions posed by the Second Report on Economic and Social Cohesion in relation to the effect of EU environmental policy on economic and social cohesion: who pays the costs of implementation?, and are there gains to employment? Unfortunately, there is little available evidence to provide a good answer to the third question: who enjoys the benefits? Nevertheless, we should expect that EU environmental policy has a positive impact on cohesion by benefiting lower-income social groups the most, especially through its direct impact on human health. This result is expected to be brought by the effect of air and water directives on increasing the quality of the air we breath and the water we drink, which is likely to disproportionately benefit low-income groups, usually the most exposed to polluted air and water.

In order to provide approximate answers to those two questions, we explore the available

evidence on costs and employment effects of EU air, water and waste policies; the financial contribution of the EU to the implementation of environmental policy in the Member States; the likely direction of the effects of climate change policy on cohesion; and the likely direction of the effects of environmental taxation on cohesion.

COSTS AND EMPLOYMENT EFFECTS OF EU ENVIRONMENTAL POLICY Achieving the objectives of EU environmental policy is costly, but at the same time it creates

important income and employment opportunities. Taking a sample of ten EU environmental directives (Hazardous Waste Incineration Directive, Packaging and Packaging Waste Directive,

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End-of-Life Vehicles Directive, Urban Waste Water Treatment Directive, Drinking Water Directive, Nitrates Directive, Sulphur in Liquid Fuels Directives, National Emissions Ceiling Directive, Large Combustion Plants Directive, and Directive on Volatile Organic Compounds resulting from certain industrial activities), total investments for the EU associated with these directives amount to more than 257 billion Euros (in 1995 price levels) between 1990 and 2010. At the height of implementation of the directives, additional operating expenditures of almost 14.5 billion Euros per annum are also estimated. The annualised total costs for the EU are close to 42 billion Euros.

In terms of costs per capita, the highest costs tend to be experienced by the most developed

Member States, since they suffer the highest pressures on the environment, have lower assimilative capacity of the receiving environment, present higher opportunity (especially labour) costs, and have higher demand for environmental quality. However, the same cost per capita in two countries with different levels of development does not reflect the same level of effort. Therefore, in terms of the effects of environmental policy on economic and social cohesion, we should look at costs as a percentage of GDP, which tend to decrease as GDP per capita grows, indicating that the effort implied by the implementation of environmental policy tends to be higher in less rich Member States. Netherlands, Belgium, Austria and Germany somehow break the general trend, being the countries with the highest costs per capita and still having the highest cost per unit of GDP (except Germany, surpassed by Greece and Portugal in this respect). The particular position of these four countries, as well as other effects that determine the particular position of each Member State, depend on country-specific factors, such as the differences in the relative importance of affected economic sectors, like the highly developed oil refining and agricultural sectors in Netherlands and Belgium, which make them have high costs of compliance in relation to the air sector directives.


(FTE) job opportunities created by these directives is more than 435,000 FTE jobs per annum for the whole EU. There exists a clear negative relationship between the employment opportunities created by environmental expenditure, measured as a percentage of the number of unemployed workers, and current levels of unemployment, which could lead to the conclusion that employment opportunities linked to environmental policy are mostly created where they are less needed. However, the number of job opportunities created per unit of expenditure provides a better sense of the effect of environmental expenditure on cohesion, and this variable is inversely related with GDP per capita, which demonstrates that the less rich Member States benefit more from environmental expenditure than richer countries, in the sense that more jobs are created per unit of expenditure. This fact can be explained through labour cost differences between Member States, since these costs tend to be higher in richer countries, which leads to lower job creation per unit of environmental expenditure.


the sector that determines most of the cost and employment effects of environmental investments after 2000 is the air sector, while the water sector was the most important in the previous decade. However, given its high costs, the remaining expenditure associates with the Urban Waste Water Treatment Directive makes it the single most important directive also after 2000, followed by the National Emissions Ceiling Directive. The importance of the air sector in the following years will be even greater than what these estimates indicate, since large investments in this sector will be required in relation to the Integrated Pollution Prevention and Control (IPPC) Directive and the climate change compromises under the Kyoto Protocol.

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Finally, we should check if Member State’s eco-industries are sufficiently developed; otherwise, environmental goods and services will need to be imported, and income and employment opportunities will benefit the exporting countries. The annualised costs at the height of implementation as a percentage of the turnover of each Member State’s eco-industries in 1999 shows large differences across environmental sectors. In the case of waste, this index is 17 per cent for the whole EU, varying across Member States from 7 per cent in Austria to 40 per cent in Sweden. Although the percentages are significant, they are rather reduced in comparison with the other sectors, indicating that the waste sector has already a long tradition, and waste management is a mature eco-industry. The annualised expenditure required to achieve the targets of the water directives is 43 per cent of the 1999 turnover of the EU eco-industries. Also in this case, we can find large differences across countries: from 20 per cent in France to 128 per cent in Ireland (the only country where the size of its water eco-industry in 1999 was smaller than the annualised expenditure required by the water directives at the height of implementation). The air eco-industry is the smallest one in comparison to the volume of expenditure required to meet the objectives of the directives. For the fifteen Member States combined, the annualised cost at the height of implementation amounts to 90 per cent of the size of the air eco-industry in 1999, with country variations from 9 per cent in Denmark to 1,133 per cent in Greece. Besides Greece, we find several Member States where the 1999 size of their air eco-industries is smaller than the expenditure required to achieve the targets of the air directives at the height of implementation: Belgium (230%), Ireland (180%), Luxembourg (214%), Netherlands (266%) and Portugal (137%).

The EU eco-industries have grown significantly from 1994 to 1999, especially in Greece,

Portugal and Spain. This makes us confident that cohesion countries are growing their eco-industries in response to the implementation of EU policy, and hence the positive cohesion impact of environmental expenditure is not under risk. Moreover, considering each sector individually, there exists a clear link between the size of the eco-industries and the percentage of investment linked to EU policy already undertaken, which indicates that EU policy is a crucial factor fostering the growth of eco-industries. This evidence also shows that we are likely to see an important growth of the air eco-industry that will meet the requirements imposed by the investments linked to the air directives that must be undertaken during the present decade.

FINANCIAL CONTRIBUTION OF THE EU TO THE IMPLEMENTATION OF ENVIRONMENTAL POLICY Of all the financial instruments for the environment in place in the EU, the European

Regional Development Fund and the Cohesion Fund are the most significant because of their quantitative volume. LIFE is significant because it is the only financial instrument specifically tailored to the environment, but it is quantitatively minor in comparison with the Structural and Cohesion Funds.

Looking at the programming period 2000-2006, the European Regional Development Fund

is the main driver of environmental expenditure from EU sources. It represents 79 per cent of all environmental Structural Funds for the EU as a whole. The European Agricultural Guidance and Guarantee Fund is the second most important financial instrument for the environment, with 19 per cent of all funds allocated for environmental expenditure. The Financial Instrument of Fisheries Guidance and the European Social Fund are insignificant, although the European Social Fund is clearly underestimated, since there are sizeable funds allocated for environmental education of employed and unemployed workers that are not included in our information. These funds are also an important driver for the allocation of national funds for environmental expenditure: 72 per cent

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of the size of the Structural Funds. Private funds accompanying the Structural Funds for environmental expenditure add 29 per cent more to these funds.

The European Regional Development Fund also finances other environmentally beneficial

expenditure (environmentally-friendly transport infrastructure, and planning and rehabilitation of industrial and military sites and urban areas), which makes it even more important as the main driver of environmentally related expenditure. The importance of these funds as drivers for the allocation of national funds is even more important than in the case of environmental expenditure: 96 per cent of the size of the Structural Funds. Private funds add 21 per cent more to Structural Funds.


environmental projects from 1993 to 2002 have grown steadily from 279 million Euros in 1993 to 1.3 billion Euros in 2002. The average yearly total amount paid for the ten year period is 838 million Euros. This figures underestimate the environmental impact of the Cohesion Fund, since the rest of funds, which finance transport projects, should be considered as environmentally beneficial expenditure when financing environmentally-friendly transport infrastructure.

If we aggregate the annualised budgeted environmental expenditure from the Structural

Funds for the programming period 2000-2006 with the 2000-2002 average payments made through the Cohesion Fund for environmental projects, we see that the total annualised Structural and Cohesion Funds for environmental expenditure in 1995 price levels represent more than 3 billion Euros; two thirds coming from the Structural Funds and one third from the Cohesion Fund. Spain is the largest beneficiary in absolute terms, with 1.4 billion Euros, which signify 44 per cent of all funds. In this respect, Spain is followed by Italy (14%), Greece (11%), Germany (9%) and Portugal (8%), the only countries receiving more than 5 per cent of the total funds. In relation to GDP, these funds represent a small 0.04 per cent for the whole EU. This percentage is surpassed only by Greece (0.31%), Portugal (0.26%), Spain (0.25%), Ireland (0.17%) and Italy (0.05%). In per capita terms, the EU average of 8.16 Euros per capita is only exceeded by Ireland (37.35 € per capita), Spain (34.59 € per capita), Greece (31.18 € per capita) and Portugal (25.92 € per capita).

In relation to the total 1999 estimate of environmental expenditure in each country, these

funds represent in average a small 2 per cent. However, this percentage is very significant for the four cohesion countries: 20 per cent in Greece, 19 per cent in Ireland, 17 per cent in Spain, and 15 per cent in Portugal. Italy, with 3 per cent, is also above the EU average, but far from the cohesion countries. More important it is the size of EU funds in relation to the best estimate of the annualised costs of the ten directives studied, which is greatest for Spain, with 48 per cent, followed by Greece and Portugal, with 39 per cent, and Ireland, with 32 per cent. Besides these four countries, Italy (9%) is again the only Member State surpassing the EU average of 7 per cent. This sizeable percentages imply that the burden of EU policy for the less rich Member States is greatly softened by the Structural and Cohesion Funds, which in turn makes easier that the expenditure associated to these directives is additional, in the sense of not replacing other productive expenditure.


brings the total annualised environmental Structural and Cohesion Funds from 3 to 5.2 billion Euros. Again, Spain is the largest beneficiary in absolute terms, with 1.8 billion Euros (36% of all funds), followed by Italy (14%), Greece (13%), Germany (12%), Portugal (11%) and France (5%), the only countries above 5 per cent of the total funds. The funds for the whole EU represent 0.07%

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of EU GDP. The same as when not including environmentally beneficial expenditure, this percentage is exceeded only by Greece (0.61%), Portugal (0.55%), Spain (0.34%), Ireland (0.21%) and Italy (0.08%). In per capita terms, the EU average of 13.73 Euros per capita is only surpassed by Greece (61.35 € per capita), Portugal (55.15 € per capita), Spain (46.71 € per capita) and Ireland (44.68 € per capita).

We can conclude that the distribution of Structural and Cohesion Funds for environmental

and environmentally beneficial expenditure certainly contributes to economic and social cohesion, since the countries with lower GDP per capita receive more funds per capita than the Member States with higher GDP per capita. The cohesive impact is especially strong with regard to the three poorest Member States, Portugal, Greece and Spain, which represent 16 per cent of the EU population and 10 per cent of the EU GDP, but receive 59 per cent of environmentally related Structural and Cohesion Funds. If we add the other two Member States below the EU average GDP per capita, Italy and UK, we see that the poorest five countries represent 47 per cent of the EU population and 35 per cent of GDP, but obtain 78 per cent of the funds.

Only the funds received by Ireland do not favour cohesion, since the enormous growth of

this country in the last years has brought it above the average GDP per capita, while still being formally a cohesion country. As a result, the Cohesion Funds received by this Member State have a negative cohesion impact, although scarcely significant overall, given the relatively small size of Ireland.



THE EFFECTS OF CLIMATE CHANGE POLICY ON COHESION Under the Kyoto Protocol, the EU assumed the commitment of reducing its emissions of

green-house gases (GHGs) by 8 per cent relative to 1990 levels by 2008-2012. This global EU commitment was redistributed among Member States by the Council of Ministers through the “burden sharing” agreement. Above all, this agreement means that richer Member States must reduce their emissions more than the agreed 8 per cent, while cohesions countries are allowed to increase their emissions. Therefore, EU cohesion objectives were taken into account in the redistribution of the Kyoto Protocol commitment. However, the usual indicators show that cohesion countries are currently the Member States farthest away from complying with the burden sharing agreement.

From 1990 to 2001, the EU has reduced its GHG emissions by 2 per cent, still far from the 8

per cent compromise for the period 2008-2012. Looking at what percentage of Member States’ current GHG emissions must be reduced to comply with the burden sharing agreement, the largest reduction effort must be undertaken by Denmark and Austria, which need to decrease their 2001 emissions by 21 per cent, followed by Ireland and Spain (14%), Belgium and Italy (13%),

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Netherlands (10%) and Portugal (7%). Relatively low reductions from current emission levels are required for Finland (5%), Germany (4%), and Greece and UK (1%). France is exactly in its compliance level, while Luxembourg and Sweden could increase their emissions by 28 and 7 per cent, respectively, and still be in compliance.

The percentage of required reduction does not measure effort in terms of how costly or

difficult the required changes in emissions may be. As a first approximation to a measure of the difficulty for each country of reducing its emissions, we could look at GDP emission efficiency. In principle, the more efficient a country already is, the more difficult (expensive) will be for it to increase its efficiency even more. Hence it will be cheaper to decrease emissions for inefficient countries than for the most efficient ones. A second approximation to measuring the difficulty of GHG emission abatement is given by emissions per capita. In this case, we should expect that it becomes more costly to reduce emissions as emissions per capita decrease, since it will be more difficult to reduce them and maintain or increase the standard of living of population.

The Member States with both emissions per unit of GDP and per capita above the EU

average are Ireland, Greece, Finland, Belgium, Netherlands and UK, which, according to the previous discussion, should have the lowest difficulties reducing their GHG emissions. On the contrary, Sweden, France and Austria, being below the EU average both in per unit of GDP and per capita terms, should have the strongest difficulties reducing their emissions. Three of the four richest Member States, Luxembourg, Denmark and Germany, emit GHGs above the average in per capita terms, but below the average in relation to GDP. The opposite is true of Portugal, Spain and Italy, which are three of the four poorest EU Member States, whose emissions exceed the average in relation to GDP but are below the average in per capita terms. The situation of the latter six countries is less clear.

In order to determine what is the final effect on cohesion of the EU burden sharing

agreement, we hypothesize that the financial flows produced between countries as a result of the exchanges of allowances in the market for GHGs that will be established in the EU is a good proxy for the direction of that effect. If the Emission Trading Directive is approved as scheduled, the EU will have the first trans-national GHG emission trading scheme in the world as soon as of 2005. Cohesion will be increased if this market leads to financial flows from more to less developed Member States. However, if the result is that poorer countries must buy permits from richer Member States, the indication is that climate change policy will contribute negatively to cohesion in terms of its implementation costs.

The likely position of a country as a buyer or seller in the allowances market may depend on

the relationship between the reduction effort from current emission levels that each Member State needs to exercise to meet its Kyoto Protocol target, and the average of the difficulties to reduce emissions arising from already low values of emissions per unit of GDP and from already low per capita values. The Member States with both above average difficulties to reduce their emissions and strong reduction efforts required to comply with their obligations under the burden sharing agreement should be expected to be net buyers in the EU emission trading market. The clearest of these cases is Austria, which needs to reduce its emissions by 21 per cent to comply with its target, and at the same time suffers strong difficulties to reduce emissions. Italy could also be a net buyer, since it needs to reduce emissions by 13 per cent and presents above average difficulties to reduce emissions. On the contrary, any country with low difficulties and low required effort should be expected to be a net seller of emission allowances, but there is no Member State in such a situation.

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Nevertheless, Greece and UK’s required efforts, although positive, are small, while their difficulty is well below the average, and hence we would expect them to be net sellers.




required to reduce their emissions, but their difficulty of doing it is lower than the EU average. Among these countries there exist very different situations. Denmark and Germany are almost on the average difficulty. Given that Denmark is the country that needs to undertake the largest reductions (21%) and presents an average difficulty to reduce emissions, we should expect that it joins Austria as a clear net buyer of allowances. The case of Germany is less clear, since its required reduction effort is moderate and its difficulty is average; it could be a seller or a buyer. For the rest of countries, Ireland, Belgium, Finland, Netherlands, Portugal and Spain, required efforts to reduce emissions are significant, but at the same time it should be less difficult for them than for the rest of Member States to reduce their emissions. Hence it is unclear if they will be able to sell allowances, if they will have to use them all or even be net buyers. If any of them becomes a buyer, Spain is the most likely to be one of them, since this country presents the highest difficulty (although below the EU average) among these six Member States and the highest required reduction together with Ireland (14%).



Another way of looking at the effects on economic and social cohesion is comparing both the

difficulty to reduce emissions and the required reduction effort with GDP per capita. The first of these comparisons indicates that there exists a positive relationship between difficulty and wealth. In this sense, cohesion seems reinforced by climate change policy, since the highest effort in terms of overcoming difficulties will be exercised by the richest Member States. However, this general trend is not extremely significant, and we see Italy, below the average GDP per capita, with a difficulty above the average, while Ireland, Netherlands, Belgium and Finland, all above average GDP per capita, have the lowest difficulty but for Greece’s. However, the situation of Belgium and Netherlands is the consequence of them having highly developed oil refining sectors, which make both countries high in both emissions per capita and per unit of GDP, but not necessarily less difficult to reduce emissions. Ireland is also an unusual case, given its tremendous growth in recent years, which has brought this formally still a cohesion country above average GDP per capita. With

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regard to the relationship between the required reduction effort and GDP per capita, and if we ignore the peculiar position of Luxembourg, which is an outlier, there exists a positive trend too, which also suggests that cohesion is reinforced by climate change policy. However, Spain and Italy, both significantly below the average GDP per capita, must exercise a large reduction effort, well above most richer Member States’.



THE EFFECTS OF ENVIRONMENTAL TAXATION ON COHESION Environmental taxation may affect cohesion through its possible impact on income

distribution (through taxation of mass-consumption goods) and employment creation (through the use of the revenue raised by environmental levies to decrease taxes on labour). Concerning income distribution, the international evidence is scant, but some conclusions may be derived. Obviously, a negative impact on income distribution is more likely if products consumed by low-income people are taxed. Hence taxes on energy probably produce a slight negative impact on income distribution, as evidence indicates in Sweden. However, some empirical results show that while energy taxation affects negatively income distribution in Denmark, Ireland and UK, that impact is slightly positive in Italy and Spain. In aggregate, it can be concluded that the overall impact would be slightly negative on income distribution. Of course, that impact would vary across countries, expecting it to be more negative where transport distances are larger and the weather colder, since these factors make harder to reduce energy consumption for low-income people. In any case, well designed compensation measures would contribute to erase any negative effect on income distribution.

Relating to the possible effect on employment creation, there exists limited but increasing

empirical evidence on the likely effects of revenue neutral ecological tax reforms, that is, fiscal reforms that tax environmental damaging activities or products, and use the resulting revenues to decrease taxation on productive factors. The theory of the “double dividend” suggests that this kind of reform could generate a double benefit: reduced environmental damages (first dividend) in response to increased costs of causing those damages, and increased growth and employment (second dividend) by reducing the economic distortions caused by the taxes that are lowered. In particular, reducing taxes on labour is expected to generate a clear incentive to increase employment. The available empirical evidence suggests that the hypothesis of the double dividend is actually supported, and positive effects on employment are more likely if the revenue raised by environmental taxes is recycled to reduce employers’ social security contributions rather than other taxes. However, it also seems that the positive effects on employment are rather moderate.

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TABLE OF CONTENTS

EXECUTIVE SUMMARY........................................................................................................... 211 INTRODUCTION .................................................................................................................... 211 COSTS AND EMPLOYMENT EFFECTS OF EU ENVIRONMENTAL POLICY ........................211 FINANCIAL CONTRIBUTION OF THE EU TO THE IMPLEMENTATION OF

ENVIRONMENTAL POLICY .................................................................................................213 THE EFFECTS OF CLIMATE CHANGE POLICY ON COHESION............................................215 THE EFFECTS OF ENVIRONMENTAL TAXATION ON COHESION .......................................218

TABLE OF CONTENTS.............................................................................................................. 219 LIST OF TABLES ....................................................................................................................... 225 LIST OF FIGURES ..................................................................................................................... 228 1 INTRODUCTION............................................................................................................ 229 2 BACKGROUND: THE SECOND REPORT ON ECONOMIC AND SOCIAL

COHESION ..................................................................................................................... 232 2.1 INTRODUCTION....................................................................................................................232 2.2 EU WASTE POLICY ..............................................................................................................232 2.3 EU WATER POLICY ..............................................................................................................233 2.4 OVERALL POLICY EFFECTS ............................................................................................234

2.4.1 NATIONAL LEVEL.................................................................................................................234 2.4.2 REGIONAL LEVEL ................................................................................................................234 2.4.3 SECTOR LEVEL.....................................................................................................................234 2.4.4 SOCIAL LEVEL .....................................................................................................................234 2.4.5 EMPLOYMENT LEVEL..........................................................................................................234

3 EU ENVIRONMENTAL POLICY................................................................................... 235 3.1 INTRODUCTION....................................................................................................................235 3.2 FIFTH ENVIRONMENT ACTION PROGRAMME (1992-2000):

“TOWARDS SUSTAINABILITY”.........................................................................................236 3.3 STRATEGY FOR SUSTAINABLE DEVELOPMENT .......................................................238 3.4 SIXTH ENVIRONMENT ACTION PROGRAMME: “ENVIRONMENT

2010: OUR FUTURE, OUR CHOICE”.................................................................................240 3.5 ENVIRONMENTAL TAXES AND CHARGES ...................................................................242 3.6 WASTE MANAGEMENT ......................................................................................................243

3.6.1 WASTE DISPOSAL .................................................................................................................243 3.6.1.1 GENERAL ................................................................................................................243 3.6.1.2 PACKAGING AND PACKAGING WASTE .........................................................245 3.6.1.3 END-OF-LIFE VEHICLES.....................................................................................245 3.6.1.4 POLYCHLORINATED BIPHENYLS AND POLYCHLORINATED

TERPHENYLS ..............................................................................................................246 3.6.1.5 SPENT BATTERIES AND ACCUMULATORS...................................................247 3.6.1.6 WASTE OIL..............................................................................................................247 3.6.1.7 TITANIUM DIOXIDE INDUSTRIAL WASTE ....................................................248 3.6.1.8 SEWAGE SLUDGE (USED IN AGRICULTURE) ...............................................249

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3.6.2 LANDFILL OF WASTE ...........................................................................................................249 3.6.3 INCINERATION .....................................................................................................................250

3.6.3.1 WASTE INCINERATION.......................................................................................250 3.6.3.2 INCINERATION OF HAZARDOUS WASTE......................................................252 3.6.3.3 EXISTING WASTE-INCINERATION PLANTS .................................................252 3.6.3.4 NEW INCINERATION PLANTS...........................................................................253

3.6.4 CONTROLLED MANAGEMENT OF HAZARDOUS WASTE......................................................253 3.7 WATER.....................................................................................................................................254

3.7.1 WATER PROTECTION AND MANAGEMENT..........................................................................254 3.7.1.1 GENERAL PROVISIONS ON THE QUALITY OF DRINKING

WATER...........................................................................................................................254 3.7.1.2 NEW REQUIREMENTS ON THE QUALITY OF DRINKING

WATER...........................................................................................................................255 3.7.1.3 URBAN WASTE WATER TREATMENT .............................................................255

3.7.2 DISCHARGES OF SUBSTANCES.............................................................................................256 3.7.2.1 POLLUTION CAUSED BY NITRATES FROM AGRICULTURAL

SOURCES ......................................................................................................................256 3.8 AIR POLLUTION ...................................................................................................................258

3.8.1 MOTOR VEHICLES ...............................................................................................................258 3.8.1.1 SULPHUR CONTENT OF CERTAIN LIQUID FUELS .....................................258 3.8.1.2 QUALITY OF PETROL AND DIESEL FUELS ..................................................259

3.8.2 INDUSTRY .............................................................................................................................259 3.8.2.1 POLLUTION FROM LARGE COMBUSTION PLANTS ..................................259 3.8.2.2 VOLATILE ORGANIC COMPOUNDS RESULTING FROM THE

STORAGE OF PETROL..............................................................................................259 3.8.2.3 VOLATILE ORGANIC COMPOUNDS RESULTING FROM

CERTAIN INDUSTRIAL ACTIVITIES.....................................................................260 3.8.2.4 INTEGRATED POLLUTION PREVENTION AND CONTROL

(IPPC) .............................................................................................................................261 3.8.3 BIOSPHERE...........................................................................................................................261

3.8.3.1 NATIONAL EMISSION CEILINGS FOR CERTAIN ATMOSPHERIC POLLUTANTS ...............................................................................261

3.9 CLIMATE CHANGE ..............................................................................................................262 3.9.1 KYOTO PROTOCOL ON CLIMATE CHANGE.........................................................................262

3.10 INTEGRATION OF ENVIRONMENTAL POLICY INTO ALL EU POLICIES: THE CASE OF THE COMMON AGRICULTURAL POLICY (CAP) ........................................................................................................................................263

3.10.1 INTRODUCTION....................................................................................................................263 3.10.2 INTEGRATION OF ENVIRONMENTAL POLICY INTO THE CAP............................................264

4 COSTS AND EMPLOYMENT EFFECTS OF EU ENVIRONMENTAL POLICY ...........................................................................................................................266

4.1 INTRODUCTION ...................................................................................................................266 4.2 METHODOLOGICAL ISSUES ............................................................................................266 4.3 WASTE POLICY.....................................................................................................................268

4.3.1 HAZARDOUS WASTE INCINERATION DIRECTIVE ..............................................................268 4.3.1.1 BENEFITS ................................................................................................................268 4.3.1.2 COSTS.......................................................................................................................268

4.3.1.2.1 INTRODUCTION ..................................................................................................268 4.3.1.2.2 BEST ESTIMATE OF THE COSTS OF THE DIRECTIVE ........................................268

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4.3.1.3 EMPLOYMENT EFFECTS....................................................................................269 4.3.2 PACKAGING AND PACKAGING WASTE DIRECTIVE ............................................................270

4.3.2.1 BENEFITS ................................................................................................................270 4.3.2.2 COSTS.......................................................................................................................270


4.3.2.3 EMPLOYMENT EFFECTS....................................................................................271 4.3.3 END-OF-LIFE VEHICLES DIRECTIVE..................................................................................272

4.3.3.1 BENEFITS ................................................................................................................272 4.3.3.2 COSTS.......................................................................................................................272


4.3.3.3 EMPLOYMENT EFFECTS....................................................................................273 4.4 WATER POLICY.....................................................................................................................274

4.4.1 URBAN WASTE WATER TREATMENT DIRECTIVE ..............................................................274 4.4.1.1 BENEFITS ................................................................................................................274 4.4.1.2 COSTS.......................................................................................................................274


4.4.1.3 EMPLOYMENT EFFECTS....................................................................................277 4.4.2 AMENDED DRINKING WATER DIRECTIVE..........................................................................277

4.4.2.1 BENEFITS ................................................................................................................277 4.4.2.2 COSTS.......................................................................................................................277


4.4.2.3 EMPLOYMENT EFFECTS....................................................................................279 4.4.3 NITRATES DIRECTIVE..........................................................................................................280

4.4.3.1 BENEFITS ................................................................................................................280 4.4.3.2 COSTS.......................................................................................................................280


4.4.3.3 EMPLOYMENT EFFECTS....................................................................................282 4.5 AIR POLLUTION POLICY...................................................................................................283

4.5.1 SULPHUR IN LIQUID FUELS DIRECTIVES ...........................................................................283 4.5.1.1 BENEFITS ................................................................................................................283 4.5.1.2 COSTS.......................................................................................................................283

4.5.1.2.1 INTRODUCTION ..................................................................................................283 4.5.1.2.2 BEST ESTIMATE OF THE COSTS OF THE DIRECTIVES.......................................284

4.5.1.3 EMPLOYMENT EFFECTS....................................................................................285 4.5.2 NATIONAL EMISSIONS CEILING DIRECTIVE......................................................................286

4.5.2.1 BENEFITS ................................................................................................................286 4.5.2.2 COSTS.......................................................................................................................287


4.5.2.3 EMPLOYMENT EFFECTS....................................................................................289 4.5.3 LARGE COMBUSTION PLANTS DIRECTIVES ......................................................................290

4.5.3.1 BENEFITS ................................................................................................................290 4.5.3.2 COSTS.......................................................................................................................290

4.5.3.2.1 INTRODUCTION ..................................................................................................290 4.5.3.2.2 BEST ESTIMATE OF THE COSTS OF THE DIRECTIVES.......................................291

4.5.3.3 EMPLOYMENT EFFECTS....................................................................................292

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4.5.4 DIRECTIVE ON VOLATILE ORGANIC COMPOUNDS (VOC) RESULTING FROM CERTAIN INDUSTRIAL ACTIVITIES ......................................................................................293

4.5.4.1 BENEFITS ................................................................................................................293 4.5.4.2 COSTS.......................................................................................................................293

4.5.4.2.1 INTRODUCTION ..................................................................................................293 4.5.4.2.2 BEST ESTIMATE OF THE COSTS OF THE DIRECTIVES ......................................294

4.5.4.3 EMPLOYMENT EFFECTS ...................................................................................295 4.6 ANALYSIS OF AGGREGATE RESULTS............................................................................296

4.6.1 INTRODUCTION....................................................................................................................296 4.6.2 AGGREGATE RESULTS BY ENVIRONMENTAL DOMAIN.......................................................297

4.6.2.1 WASTE POLICY .....................................................................................................297 4.6.2.2 WATER POLICY .....................................................................................................298 4.6.2.3 AIR POLLUTION POLICY ...................................................................................300 4.6.2.4 TIME DISTRIBUTION OF INVESTMENT COST AND

EMPLOYMENT EFFECTS.........................................................................................302 4.6.2.5 MAGNITUDE OF COSTS BY ENVIRONMENTAL DOMAIN IN

RELATION TO THE SIZE OF THE ECO-INDUSTRIES.......................................304 4.6.3 AGGREGATE TOTAL COSTS .................................................................................................307

4.6.3.1 RESULTS ..................................................................................................................307 4.6.3.2 MAGNITUDE OF ENVIRONMENTAL COSTS IN RELATION TO

GDP 308 4.6.4 AGGREGATE TOTAL LINKED EMPLOYMENT ...................................................................... 311

4.6.4.1 RESULTS .................................................................................................................. 311 4.6.4.2 MAGNITUDE OF LINKED EMPLOYMENT IN RELATION TO

UNEMPLOYMENT AND ENVIRONMENTAL COSTS .........................................312 4.7 CONCLUSIONS ......................................................................................................................314

5 EU FINANCIAL INSTRUMENTS FOR THE ENVIRONMENT: DESCRIPTION................................................................................................................318

5.1 STRUCTURAL FUNDS..........................................................................................................318 5.1.1 GENERALITIES.....................................................................................................................318

5.1.1.1 OBJECTIVES...........................................................................................................318 5.1.1.2 THE ENVIRONMENTAL DIMENSION..............................................................319 5.1.1.3 COMMUNITY SUPPORT FRAMEWORK (CSF) ..............................................320 5.1.1.4 COMMUNITY INITIATIVES................................................................................320

5.1.1.4.1 URBAN ................................................................................................................320 5.1.1.4.2 LEADER ..............................................................................................................321 5.1.1.4.3 INTERREG...........................................................................................................321

5.1.2 EUROPEAN SOCIAL FUND (ESF).........................................................................................322 5.1.3 EUROPEAN REGIONAL DEVELOPMENT FUND (ERDF).....................................................322 5.1.4 EUROPEAN AGRICULTURAL GUIDANCE AND GUARANTEE FUND (EAGGF) ..................323

5.1.4.1 INTRODUCTION....................................................................................................323 5.1.4.2 EAGGF-GUIDANCE SECTION............................................................................323 5.1.4.3 EAGGF-GUARANTEE SECTION: AGRI-ENVIRONMENT

REGULATION ..............................................................................................................323 5.1.5 FINANCIAL INSTRUMENT OF FISHERIES GUIDANCE (FIFG)............................................324

5.2 COHESION FUND..................................................................................................................324 5.3 SECTOR-SPECIFIC FINANCIAL INSTRUMENTS .........................................................324

5.3.1 ENVIRONMENT: LIFE .........................................................................................................324 5.3.2 ENERGY................................................................................................................................325

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5.3.2.1 ALTENER .................................................................................................................325 5.3.2.2 SAVE..........................................................................................................................326

5.4 EUROPEAN INVESTMENT BANK: EIB PROJECT FUNDING ....................................326 6 FINANCIAL CONTRIBUTION OF THE EU TO THE IMPLEMENTATION

OF ENVIRONMENTAL POLICY................................................................................... 328 6.1 INTRODUCTION....................................................................................................................328 6.2 STRUCTURAL FUNDS..........................................................................................................328

6.2.1 INTRODUCTION....................................................................................................................328 6.2.2 METHODOLOGICAL ISSUES AND KEYS TO INTERPRET TABLES ........................................328

6.2.2.1 INTRODUCTION ....................................................................................................328 6.2.2.2 FIELDS OF INTERVENTION (ROWS) ...............................................................329

6.2.2.2.1 ENVIRONMENTAL EXPENDITURE......................................................................329 6.2.2.2.1.1 Code 1: Productive environment.............................................................329 6.2.2.2.1.2 Code 3: Basic infrastructure....................................................................330 6.2.2.2.1.3 Code 4: Miscellaneous..............................................................................330

6.2.2.2.2 ENVIRONMENTALLY BENEFICIAL EXPENDITURE ............................................331 6.2.2.2.2.1 Code 3: Basic infrastructure....................................................................331

6.2.2.3 SOURCE OF FUNDS (COLUMNS).......................................................................331 6.2.3 DATA TABLES BY MEMBER STATE ......................................................................................332

6.2.3.1 ENVIRONMENTAL EXPENDITURE..................................................................332 6.2.3.2 ENVIRONMENTALLY BENEFICIAL EXPENDITURE ...................................349

6.2.4 AGGREGATE ANNUALISED DATA.........................................................................................357 6.2.4.1 ENVIRONMENTAL EXPENDITURE..................................................................357 6.2.4.2 ENVIRONMENTALLY BENEFICIAL EXPENDITURE ...................................359

6.3 COHESION FUND..................................................................................................................360 6.3.1 INTRODUCTION: METHODOLOGICAL ISSUES ....................................................................360 6.3.2 ENVIRONMENTAL EXPENDITURE BY MEMBER STATE ......................................................360 6.3.3 IMPACT ON COHESION AMONG COHESION MEMBER STATES ...........................................363

6.4 STRUCTURAL AND COHESION FUNDS: MAGNITUDE AND EFFECT ON COHESION.......................................................................................................................366

6.4.1 AGGREGATION AND MAGNITUDE OF STRUCTURAL AND COHESION FUNDS ...................366 6.4.1.1 ENVIRONMENTAL EXPENDITURE..................................................................366 6.4.1.2 ENVIRONMENTAL AND ENVIRONMENTALLY BENEFICIAL

EXPENDITURE ............................................................................................................368 6.4.2 IMPACT ON COHESION.........................................................................................................369

6.5 CONCLUSIONS ......................................................................................................................371 7 THE EFFECTS OF CLIMATE CHANGE POLICY ON COHESION ............................ 375

7.1 INTRODUCTION....................................................................................................................375 7.2 CURRENT EMISSIONS, KYOTO PROTOCOL TARGETS AND

REQUIRED REDUCTION EFFORT....................................................................................376 7.3 MEASURES OF DIFFICULTY TO REDUCE EMISSIONS..............................................378 7.4 THE RELATIONSHIP BETWEEN THE DIFFICULTY TO REDUCE

EMISSIONS AND THE REQUIRED REDUCTION EFFORT: EFFECTS ON ECONOMIC AND SOCIAL COHESION ............................................................................383

7.5 CONCLUSIONS ......................................................................................................................388 8 THE EFFECTS OF ENVIRONMENTAL TAXATION ON COHESION......................... 392

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8.1 INTRODUCTION ...................................................................................................................392 8.2 THE EFFECT OF ENVIRONMENTAL TAXATION ON INCOME

DISTRIBUTION......................................................................................................................393 8.3 THE EFFECT OF ECOLOGICAL TAX REFORMS ON EMPLOYMENT....................394 8.4 CONCLUSIONS ......................................................................................................................394

9 SUMMARY AND CONCLUSIONS .................................................................................396 9.1 COSTS AND EMPLOYMENT EFFECTS OF EU ENVIRONMENTAL

POLICY....................................................................................................................................396 9.2 FINANCIAL CONTRIBUTION OF THE EU TO THE IMPLEMENTATION

OF ENVIRONMENTAL POLICY ........................................................................................399 9.3 THE EFFECTS OF CLIMATE CHANGE POLICY ON COHESION .............................402 9.4 THE EFFECTS OF ENVIRONMENTAL TAXATION ON COHESION .........................406

BIBLIOGRAPHY ........................................................................................................................408

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LIST OF TABLES

Table 1: Best estimates of costs for the Hazardous Waste Incineration Directive 94/67/EEC based on the amount of hazardous waste incinerated in the last available year.................................269

Table 2: Best estimates of linked employment for the Hazardous Waste Incineration Directive 94/67/EEC based on the amount of hazardous waste incinerated in the last available year ..............269

Table 3: Best estimates of costs for the Packaging and Packaging Waste Directive 94/62/EEC .......271 Table 4: Best estimates of linked employment for the Packaging and Packaging Waste

Directive 94/62/EEC ..........................................................................................................................272 Table 5: Best estimates of costs for the End-of-Life Vehicles Directive 2000/53/EC (1994 price

level) ..............................................................................................................................................273 Table 6: Best estimates of linked employment for the End-of-Life Vehicles Directive

2000/53/EC ........................................................................................................................................274 Table 7: Best estimates of costs for the Urban Waste Water Treatment Directive 91/271/EEC

(1994/1995 price level) ......................................................................................................................275 Table 8: Best estimates of linked employment for the Urban Waste Water Treatment Directive

91/271/EEC........................................................................................................................................277 Table 9: Best estimates of costs for the Quality of Water Intended for Human Consumption

Directive 98/83/EC (1995 price level) ...............................................................................................279 Table 10: Best estimates of linked employment for the Quality of Water Intended for Human

Consumption Directive 98/83/EC......................................................................................................280 Table 11: Best estimates of costs of some measures associated with Council Directive

91/676/EEC concerning the protection of waters against pollution caused by nitrates from agricultural sources (1997/1998 price level)......................................................................................282

Table 12: Best estimates of linked employment for measures associated with Council Directive 91/676/EEC concerning the protection of waters against pollution caused by nitrates from agricultural sources....................................................................................................................283

Table 13: Best estimates of costs for the Sulphur in Liquid Fuels Directives 98/70/EEC and 99/32/EEC (1995 price level).............................................................................................................285

Table 14: Best estimates of linked employment for the Sulphur in Liquid Fuels Directives 98/70/EEC and 99/32/EEC ................................................................................................................286

Table 15: Best estimates of costs for the National Emissions Ceiling Directive 2001/81/EC (1995 price level) ...............................................................................................................................289

Table 16: Best estimates of linked employment for the National Emissions Ceiling Directive 2001/81/EC ........................................................................................................................................290

Table 17: Best estimates of costs for the Large Combustion Plants Directives 88/609/EEC and 2001/80/EC (1995 price level) ....................................................................................................292

Table 18: Best estimates of linked employment for the Large Combustion Plants Directives 88/609/EEC and 2001/80/EC.............................................................................................................293

Table 19: Best estimates of costs for Directive 1999/13/EC on the limitation of emissions of volatile organic compounds due to the use of organic solvents in certain activities and installations (1994 price level) ...........................................................................................................295

Table 20: Best estimates of linked employment for Directive 1999/13/EC on the limitation of emissions of volatile organic compounds due to the use of organic solvents in certain activities and installations..................................................................................................................................296

Table 21: Best estimates of aggregate costs for the waste policy directives (1995 price level) ......297 Table 22: Best estimates of aggregate linked employment for the waste policy directives ............298 Table 23: Best estimates of aggregate costs for the water policy directives (1995 price level) ......299 Table 24: Best estimates of aggregate linked employment for the water policy directives.............300 Table 25: Best estimates of aggregate costs for the air pollution policy directives (1995 price

level) .........................................................................................................................................301

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Table 26: Best estimates of aggregate linked employment for the air pollution policy directives .........................................................................................................................................302

Table 27: Temporal distribution of investment cost and employment effects (1995 price level)....303 Table 28: Turnover of the EU eco-industries by selected environmental domains (M €) in

1999 .........................................................................................................................................304 Table 29: Best estimates of aggregate costs for all directives (1995 price level)............................307 Table 30: Best estimates of aggregate linked employment for all directives ..................................311 Table 31: Budgeted environmental expenditure for Austria from the Structural Funds for the

programming period 2000-2006 (€)...................................................................................................333 Table 32: Budgeted environmental expenditure for Belgium from the Structural Funds for the

programming period 2000-2006 (€)...................................................................................................334 Table 33: Budgeted environmental expenditure for Denmark from the Structural Funds for

the programming period 2000-2006 (€).............................................................................................335 Table 34: Budgeted environmental expenditure for Finland from the Structural Funds for the

programming period 2000-2006 (€)...................................................................................................336 Table 35: Budgeted environmental expenditure for France from the Structural Funds for the

programming period 2000-2006 (€)...................................................................................................337 Table 36: Budgeted environmental expenditure for Germany from the Structural Funds for

the programming period 2000-2006 (€).............................................................................................338 Table 37: Budgeted environmental expenditure for Greece from the Structural Funds for the

programming period 2000-2006 (€)...................................................................................................339 Table 38: Budgeted environmental expenditure for Ireland from the Structural Funds for the

programming period 2000-2006 (€)...................................................................................................340 Table 39: Budgeted environmental expenditure for Italy from the Structural Funds for the

programming period 2000-2006 (€)...................................................................................................341 Table 40: Budgeted environmental expenditure for Luxembourg from the Structural Funds

for the programming period 2000-2006 (€) .......................................................................................342 Table 41: Budgeted environmental expenditure for Netherlands from the Structural Funds for

the programming period 2000-2006 (€).............................................................................................343 Table 42: Budgeted environmental expenditure for Portugal from the Structural Funds for the

programming period 2000-2006 (€)...................................................................................................344 Table 43: Budgeted environmental expenditure for Spain from the Structural Funds for the

programming period 2000-2006 (€)...................................................................................................345 Table 44: Budgeted environmental expenditure for Sweden from the Structural Funds for the

programming period 2000-2006 (€)...................................................................................................346 Table 45: Budgeted environmental expenditure for UK from the Structural Funds for the

programming period 2000-2006 (€)...................................................................................................347 Table 46: Budgeted environmental expenditure for EU interregional cooperation from the

Structural Funds for the programming period 2000-2006 (€)............................................................348 Table 47: Budgeted environmentally beneficial expenditure for Austria from the Structural

Funds for the programming period 2000-2006 (€) ............................................................................349 Table 48: Budgeted environmentally beneficial expenditure for Belgium from the Structural

Funds for the programming period 2000-2006 (€) ............................................................................350 Table 49: Budgeted environmentally beneficial expenditure for Denmark from the Structural

Funds for the programming period 2000-2006 (€) ............................................................................350 Table 50: Budgeted environmentally beneficial expenditure for Finland from the Structural

Funds for the programming period 2000-2006 (€) ............................................................................351 Table 51: Budgeted environmentally beneficial expenditure for France from the Structural

Funds for the programming period 2000-2006 (€) ............................................................................351 Table 52: Budgeted environmentally beneficial expenditure for Germany from the Structural

Funds for the programming period 2000-2006 (€) ............................................................................352 Table 53: Budgeted environmentally beneficial expenditure for Greece from the Structural

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Funds for the programming period 2000-2006 (€).............................................................................352 Table 54: Budgeted environmentally beneficial expenditure for Ireland from the Structural

Funds for the programming period 2000-2006 (€).............................................................................353 Table 55: Budgeted environmentally beneficial expenditure for Italy from the Structural

Funds for the programming period 2000-2006 (€).............................................................................353 Table 56: Budgeted environmentally beneficial expenditure for Luxembourg from the

Structural Funds for the programming period 2000-2006 (€)............................................................354 Table 57: Budgeted environmentally beneficial expenditure for Netherlands from the

Structural Funds for the programming period 2000-2006 (€)............................................................354 Table 58: Budgeted environmentally beneficial expenditure for Portugal from the Structural

Funds for the programming period 2000-2006 (€).............................................................................355 Table 59: Budgeted environmentally beneficial expenditure for Spain from the Structural

Funds for the programming period 2000-2006 (€).............................................................................355 Table 60: Budgeted environmentally beneficial expenditure for Sweden from the Structural

Funds for the programming period 2000-2006 (€).............................................................................356 Table 61: Budgeted environmentally beneficial expenditure for UK from the Structural Funds

for the programming period 2000-2006 (€) .......................................................................................356 Table 62: Budgeted environmentally beneficial expenditure for EU interregional cooperation

from the Structural Funds for the programming period 2000-2006 (€) .............................................357 Table 63: Annualised budgeted environmental expenditure from the Structural Funds for the

programming period 2000-2006 (€)...................................................................................................358 Table 64: Annualised budgeted environmentally beneficial expenditure from the Structural

Funds for the programming period 2000-2006 (€).............................................................................359 Table 65: Cohesion Fund payments for environmental projects in Greece (€) ...............................361 Table 66: Cohesion Fund payments for environmental projects in Ireland (€) ...............................362 Table 67: Cohesion Fund payments for environmental projects in Portugal (€) .............................362 Table 68: Cohesion Fund payments for environmental projects in Spain (€)..................................363 Table 69: Annualised Structural and Cohesion Funds for environmental expenditure (1995

price levels, 2000 values)...................................................................................................................367 Table 70: Annualised Structural and Cohesion Funds for environmental and environmentally

beneficial expenditure (1995 price levels, 2000 values) ....................................................................368 Table 71: GHG emissions excluding land-use change and forestry in CO2 equivalents (Gg).........376

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LIST OF FIGURES

Figure 1: Annualised costs at the height of implementation as percentage of the turnover of each Member State’s eco-industries in 1999 by environmental domain (1995 prices)......................305

Figure 2: Annualised costs per capita at the height of implementation in relation to GDP per capita in 2001 (1995 prices, 2001 population)...................................................................................308

Figure 3: Relationship between annualised costs at the height of implementation as percentage of GDP in 2001, and GDP per capita in 2001 (1995 prices, 2001 population) ...............309

Figure 4: Indices as deviation from the EU average of GDP per capita in 2001, annualised costs at the height of implementation as percentage of GDP in 2001, and annualised costs per capita at the height of implementation (1995 prices, 2001 population, EU-15 = 100) ......................310

Figure 5: Annualised employment at the height of implementation as a percentage of the number of unemployed workers in relation to unemployment rate (2001 population)......................312

Figure 6: Annualised employment (FTE jobs) per million Euros of annualised cost at the height of implementation in relation to unemployment rate (1995 prices, 2001 population)............313

Figure 7: Annualised employment (FTE jobs) per million Euros of annualised cost at the height of implementation in relation to GDP per capita in 2001 (1995 prices, 2001 population) .....314

Figure 8: Lorenz curve of average GDP and average cohesion funds paid for environmental projects (1993-2002)..........................................................................................................................365

Figure 9: Lorenz curve of real GDP in 2000 and annualised Structural (2000-2006) and Cohesion Funds (2000-2002) for environmental and environmentally beneficial expenditure (1995 price levels)..............................................................................................................................370

Figure 10: Actual change of GHG emissions excluding land-use change and forestry in CO2 equivalents in 1990-2001 and targets set by the Kyoto Protocol (in percentages) ............................377

Figure 11: Index of required effort (percentage of GHG emission reduction required to attain the Kyoto Protocol target)..................................................................................................................378

Figure 12: GHG emissions excluding land-use change and forestry in CO2 equivalents in 2001 per unit of real GDP (Gg/B € in 1995 prices) ....................................................................................379

Figure 13: GHG emissions excluding land-use change and forestry in CO2 equivalents in 2001 per capita (Gg/1,000 persons) ............................................................................................................381

Figure 14: Relationship between the index of emissions per capita and the index of emissions per GDP .........................................................................................................................................382

Figure 15: Relationship between the index of difficulty to reduce emissions and the index of required effort ....................................................................................................................................383

Figure 16: Relationship between the index of difficulty to reduce emissions and the index of GDP per capita...................................................................................................................................385

Figure 17: Relationship between the index of difficulty to reduce emissions and the index of GDP per capita without Luxembourg ................................................................................................386

Figure 18: Relationship between the index of required effort and the index of GDP per capita ......387 Figure 19: Relationship between the index of required effort and the index of GDP per capita

without Luxembourg..........................................................................................................................388

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INTRODUCTION Environmental policy is essential for EU social cohesion in the sense that there cannot exist

social cohesion if environmental quality disparities, and hence quality-of-life differences, are large across Member States. EU environmental policy is also crucial for economic cohesion in the Common Market, since lacking a common environmental policy could lead to environmental dumping, resulting in lower environmental quality and market distortions. However, these are not the meanings usually attributed to economic and social cohesion in the EU vocabulary; economic and social cohesion is usually interpreted in terms of closing regional disparities as indicated by measures such as GDP per capita or unemployment rate. In this restricted sense, economic and social cohesion presents a very important common feature with environmental policy: both are a component of all EU policies, since the Community’s institutions are obliged to take into account both the closing of regional disparities and environmental considerations in all other policies. Moreover, together with economic development, the social and environmental dimensions are the three pillars of sustainable development. Therefore, it is obvious that EU environmental policy and economic and social cohesion must be closely related.

The most obvious interaction between EU environmental and cohesion policies comes

through the Structural and Cohesion Funds, which are EU central instrument for closing regional disparities and, at the same time, a very important instrument to achieve environmental objectives. Agenda 2000 produced further integration of environmental concerns into cohesion policy through the reform of the latter in the form of a series of measures such as:

1. the introduction of systematic scrutiny of the environmental impact of projects over 50 million ECU;

2. the adoption of a degraded environment as one of the criteria for defining eligible urban areas within the new Objective 2 regions;

3. the integration of the environment as an objective for assistance from the Structural Funds in the framework of proposed new Structural Funds regulations;

4. the appraisal by the Commission of regional development plans as regards environmental protection;

5. the introduction of a partnership involving environmental bodies and non-governmental environmental organisations for the preparation of Cohesion Policy intervention programmes.

Agenda 2000 meant also the integration of environmental concerns into the common

agricultural policy (CAP), whose reform is of particular environmental importance as it will: 1. reduce price support in favour of direct payments, which will enhance the economic

performance of producers and lead to more balanced use of polluting inputs; 2. enable Member States to ensure that direct payments are conditional on compliance

with environmental requirements; 3. lead to a rural development programme and access to environmental protection.

Another important interaction between EU environmental policy and cohesion policy comes

through the impact of the former on investment and employment. If EU environmental policy generates “additional” expenditure in Member States (that is, not just a mere redistribution of current productive expenditures), it will be contributing to growth, and hence employment. As the European Commission (1997a) has pointed out, the EU suffers simultaneously from under use of human resources (high unemployment rates) and over use of natural resources (environmental degradation and continued pressure on environmental resources). In the framework of its integration in all other policies, EU environmental policy must play an important role in solving

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that dual problem, by creating job opportunities at the same time than reducing environmental impacts and natural resource use. As the Commission stated, a sustainable EU implies “achieving a competitive economy combined with less environmental pollution, improved resource efficiency of energy and raw materials and higher employment rates” (1997a).

Differences in the environmental pressures faced by Member States may also lead to

cohesion impacts. For example, as Andrews (2001) points out in the case of the Nitrate Directive, the imposition of a standard for nitrogen from animal manures is likely to increase costs and reduce agricultural incomes in countries with highly intensive livestock enterprises. On the contrary, cohesion countries are much less affected because of their relatively more extensive agricultural systems. Hence the nitrogen standard may reduce agricultural incomes in northern regions leading to a “negative” or “non-sustainable” form of cohesion, as incomes are reduced closer to those in the Mediterranean regions. Andrews (2001) also observes that there is evidence that the codes of good agricultural practice (which are part of the directive) can produce substantial cost savings on farms where environmental pressures are less intense through better nitrogen management. Although nitrogen use efficiency could be improved throughout the EU, this evidence suggests that the largest gap is in the Mediterranean agricultural systems. Therefore, it is likely that the Nitrate Directive has a positive impact on cohesion by improving the efficiency of European farming in general and making it more competitive on world markets, and by enhancing efficiency most in the less developed regions.

EU environmental policy is also likely to have positive impacts on cohesion objectives by

benefiting lower-income social groups the most, especially through its direct impact on human health. The lower exposures to pollutants brought by EU policy is likely to disproportionately benefit less advantaged groups because of prevailing inequalities in the exposure to pollution. As Andrews et al. (2000) suggest, the Drinking Water Directive provides an example where a reduction in contamination from lead has a number of important effects on social and economic opportunity. Reduced exposure to lead improves the cognitive development of children, which in turn increases IQ, years of schooling, working wages and workforce participation, leading to higher lifetime earnings from a more productive population. While these impacts are likely to be beneficial in terms of general social and economic cohesion, a further positive impact arises because of the inequitable pattern of exposure to other sources of lead and health inequalities generally. Since high exposure tends to be associated with low incomes, disadvantaged social classes and poor living conditions, a reduction in the exposure from drinking water is likely to have a disproportionate and positive effect on these cohesion groups.

In this study, we try to provide some evidence to give approximate answers to some of the

questions posed by the European Commission (2001) on the Second Report on Economic and Social Cohesion in relation to the effect of EU environmental policy on economic and social cohesion: who pays the costs of implementation?, who enjoys the benefits?, and are there gains to employment? Unfortunately, there is little available evidence to provide a good answer to the second of these questions. Therefore, we concentrate on the other two questions, and explore the following issues:

1. Available evidence on costs and employment effects of EU air, water and waste

policies. 2. The financial contribution of the EU to the implementation of environmental policy in

the Member States. The magnitude of this contribution is essential to determine if environmental expenditure is additional.

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3. Likely direction of the effects of climate change policy on cohesion. 4. Likely direction of the effects of environmental taxation on cohesion.

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BACKGROUND: THE SECOND REPORT ON ECONOMIC AND SOCIAL COHESION

1.1 INTRODUCTION In the Second Report on Economic and Social Cohesion, the European Commission (2001)

identified EU environmental policy as one of the policies that could contribute to economic and social cohesion. In particular, the Commission considered that there exist three main questions to ask in relation to the cohesion impact of EU environmental policy:

1. do the costs of implementation fall disproportionately on less prosperous Member States, regions or social groups?;

2. do the benefits, for instance in terms of increased quality of life, accrue disproportionately to these?; and

3. are there gains to employment? In particular, the Commission looked at the effects on cohesion of two environmental

policies: the European waste and water policies.

1.2 EU WASTE POLICY The main conclusions of the Second Report on Economic and Social Cohesion (European

Commission, 2001) on this subject are the following: 1. The production of waste is less in the cohesion countries than in the EU as a whole,

ranging from 90% of the average (Ireland) to only 65% (Greece). Accordingly, the potential implementation cost of waste policy is proportionately lower in cohesion countries although, as GDP per head in these countries continues to converge to the EU average, they may produce more waste.3

2. The Cohesion Countries lag behind in the treatment of waste. This is true both for the most virtuous form of treatment, recycling (Portugal, in particular, recycles only 4% of total waste as opposed to an EU average of 9%) and for the worst form of disposal, landfill (93% of Greek waste ends here, as opposed to an EU average of 66%). Only in Spain is the disposal profile similar to that in the EU as a whole, and even here, this applies much less to the lagging regions. Therefore, the cost of meeting the waste management targets is likely to fall just as (or even more) heavily on these countries (except Spain) as it does on the EU as whole, despite their lower waste production. All of them, except Spain, have, accordingly, been given an extension until 2006 to meet the first set of targets.

3 Of course, this is an accurate conclusion, but we believe that the Commission is mistaken, since the important indicator is not “production of waste”, but “production of waste per unit of GDP”. Hence, even if the cost of waste policy is proportionally lower in cohesion countries, the effort in GDP (or per capita) terms does not need to be necessarily lower in these countries.

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3. The Cohesion Fund is making a major contribution to costs: over 200 million Euros annually, covering up to 75% of costs, which means the costs falling on these countries will be much less than elsewhere.

4. In terms of benefits, the cohesion countries are likely to see a relatively large reduction in landfill waste disposal and up to 46,000 new jobs created in managing such programmes (4,000 in Ireland, 9,000 in Portugal, 10,000 in Greece and 23,000 in Spain).

1.3 EU WATER POLICY There are four main water directives that could have effects on cohesion: 1. The Water Framework Directive: A key point for cohesion is the requirement, in line

with the polluter-pays principle, for increasing the extent to which the costs of water services are recovered from users. At present, cost recovery is low, especially in the cohesion countries and especially as regards agricultural producers. Eliminating the cross-subsidy which now exists might have a negative effect on cohesion. The use of the Cohesion Fund can reduce some of the adverse effects.

2. The Drinking Water Directive: The main effect of the revision of this directive is to reduce the permissible levels of lead. It is generally impossible to meet the new standard if water is delivered through lead pipes. These, however, are not common in the three least prosperous Member States, so the implementation costs are lower there than elsewhere. Within Member States, on the other hand, lead pollution seems to be relatively high in less favoured regions. If improvements are paid for at national level, there is, therefore, a positive effect on regional cohesion. Moreover, there is also a positive effect on social cohesion, since health problems from lead disproportionately affect poorer people.

3. The Urban Waste Water Treatment Directive: This is by far the most expensive of the directives to implement. The main effect on cohesion results from the substantial investment required in construction and maintenance of the waste water treatment system. Since around a quarter of the necessary investment in the cohesion countries is being financed by the Cohesion Fund (and the Structural Funds are making a similar contribution in Eastern Germany), the cost burden on cohesion countries will be limited. The large-scale investment required is likely to boost employment, particularly in construction, where the direct effect is to add 2% to output, implying increased employment of up to 200,000. For most of the cohesion countries, however, there is likely to be substantial “leakage” of such benefits abroad because of the small scale of their waste water and eco-industries, so much of the benefit is likely to accrue to firms in the more prosperous Member States. In sum, the effect of expenditure on cohesion is likely to be positive, but it would be larger if eco-industries were to expand in the cohesion countries.

4. The Nitrate Directive: This directive affects cohesion in at least two major ways. First, the imposition of standards, notably for nitrogen from animal manure, affects livestock producers, particularly high-intensity ones. In Ireland and Greece, where nitrogen is close to the EU average, the increased cost implied by the directive is likely to be modest. In Spain and Portugal, where farming is less intensive, the effects could even be positive, with anecdotal evidence of such activities as pig farming being transferred there from the most intensive-producing countries, like the Netherlands. Second, the codes of good agricultural practice, which are part of the directive, can lead to substantial cost

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savings through better nitrogen management. Although the efficiency of nitrogen use could be improved throughout the EU, the largest potential gains appear to be in the Mediterranean, where there are wide variations in nitrogen use between farms even of similar types.

1.4 OVERALL POLICY EFFECTS

1.4.1 National level The cohesion countries are likely to share significantly in the benefits of environmental improvements (including the quality of life which might attract business investment) and, though the costs of implementing legislation might in a number of cases be higher than elsewhere, these will be met to a large extent by the Cohesion Fund. 1.4.2 Regional level

Some less prosperous areas benefit most from environmental improvements, for example

those in inner cities from waste water treatment, and often have the cost of these paid by central government or the Cohesion Fund.

1.4.3 Sector level

There will be cost increases for some sectors, though in most cases limited in relation to

production costs. In a few cases, these will fall disproportionately on the less prosperous regions, rural areas being a notable example. A move towards full recovery of costs of water supply is likely to fall heavily on agricultural users and on households in remote communities, although again because they will start to pay the true cost of their activities.

1.4.4 Social level

Costs in a number of cases may, initially at least, fall disproportionately on poorer people

and those living in remote areas, the shift from taxpayers to households in respect of the Water Framework Directive being a notable instance.

1.4.5 Employment level

The gains are significant, even if they are modest in relation to the overall need for jobs in the EU. For example, implementing EU waste legislation is likely to boost employment in the cohesion countries by up to 35,000 from 2000 to 2005, and the Urban and Waste Water Treatment Directive may create up to 200,000 jobs in construction and some in manufacturing, though to the extent that more prosperous regions tend to have bigger eco-industries, they are likely to gain most.

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EU ENVIRONMENTAL POLICY4 1.5 INTRODUCTION

Faced with strong criticism for putting trade and economic development before natural resource preservation and environmental protection, the European Community began its environmental action in 1972 with the first of four successive action programmes, based on a sector-specific and vertical approach. During the following twenty years, the European Community adopted about 200 pieces of legislation, which were mostly concerned with limiting pollution by introducing minimum standards for waste management, water pollution, and air pollution. A turning point during this period was the entry into force of the Single European Act in 1987, which added a title specifically on the environment to the Treaty of the European Community. From then on, the Community measures had a legal basis explicitly defining the objectives and guiding principles for action by the European Community relating to the environment. And provision was made for environmental protection requirements to become a component of the Community’s other policies.

The European Community environmental action became a policy with the Treaty of the

European Union. A further step was taken with the Treaty of Amsterdam, which enshrines the principle of sustainable development as one of the EU aims and makes a high degree of environmental protection one of its absolute priorities. To achieve this as effectively as possible, the Fifth Community Action Programme on the Environment “Towards Sustainability” established the principles of a European strategy of voluntary action for the period 1992-2000 and marked the beginning of a “horizontal” Community approach which would take account of all the causes of pollution (industry, energy, tourism, transport, agriculture, etc.). This across-the-board approach to environmental policy was confirmed by the Commission in the wake of its 1998 Communication “A strategy for integrating the environment into EU policies” and by the Vienna European Council (11 and 12 December 1998). The Community institutions are now obliged to take account of environmental considerations in all their other policies. Since then, this obligation has been taken into account in various Community acts, particularly in the fields of employment, energy, agriculture, development cooperation, single market, industry, fisheries, economic policy and transport.

A EU strategy for sustainable development was approved in May 2001. It sets out the long-term objectives for sustainable development and essentially concerns climate change, transport, health and natural resources. The Sixth Community Action Programme on the Environment sets out the priorities for the European Community up to 2010. Four areas are highlighted: climate change, nature and biodiversity, environment and health and the management of natural resources and waste. Measures to achieve these priorities are outlined: improving the application of environmental legislation, working together with the market and citizens and ensuring that other Community policies take greater account of environmental considerations. An innovation that is worth mentioning is the integrated product policy. This aims to develop a more ecological product market by making products more environmentally sustainable throughout their life cycle.


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1.6 FIFTH ENVIRONMENT ACTION PROGRAMME (1992-2000): “TOWARDS SUSTAINABILITY”

The objective of the fifth environmental programme of action (Resolution of the Council and

the Representatives of the Governments of the Member States, meeting within the Council of 1 February 1993 on a Community programme of policy and action in relation to the environment and sustainable development) is to transform patterns of growth in the Community in such a way as to promote sustainable development. The programme continues to tackle environmental problems (such as climate change, aquatic pollution and waste management), but also aims to establish new relations between the actors in the environmental sector.

The programme sets out a new approach to Community environment policy based on the following principles:

1. the adoption of a global, proactive approach aimed at the different actors and activities which affect natural resources or pollute the environment;

2. the will to change current trends and practices which harm the environment for current and future generations;

3. encouraging changes in social behaviour by engaging all the actors concerned (public authorities, citizens, consumers, enterprises, etc.);

4. establishing the concept of shared responsibility; 5. using new environmental instruments.

For each of the areas it covers, the programme establishes long-term objectives, sets performance targets to be met by the year 2000, and prescribes a set of actions with a view to achieving the specified objectives. These objectives do not constitute legal commitments but, rather, performance levels to be aimed at now in the interests of attaining sustainable development.

In accordance with the principle of subsidiarity, the programme tackles environmental problems that require action at Community level due to their impact on the operation of the internal market, cross-border relations, sharing of resources and cohesion. The Community is limiting its action to the following priority areas:

1. long-term management of natural resources: soil, water, countryside and coasts; 2. an integrated approach to combating pollution, and acting to prevent waste; 3. reducing the consumption of energy from non-renewable sources; 4. improving the management of mobility by developing efficient and clean modes of

transport; 5. drawing up a coherent package of measures to improve the quality of the urban

environment; 6. improving health and safety, in particular in relation to the management of industrial

hazards, nuclear safety and radiation protection.

The programme underlines the importance of Community intervention in selected target sectors. This approach is the most effective means of tackling the problems facing the Community. The target sectors are as follows:

1. industry: the Community wants to step up the dialogue with industry, encourage voluntary agreements, develop rational resource-management, improve the information available to consumers, adopt Community standards for manufacturing processes and products whilst avoiding distorting competition, preserving the integrity of the internal market and maintaining European competitiveness;

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2. energy: action in this field is indispensable if sustainable development is to be achieved; this will require an improvement in energy efficiency, a reduction in the consumption of fossil fuels and the promotion of renewable energy sources;

3. transport: transport demand and traffic have increased with the completion of the internal market. Measures must be taken rapidly to improve the management of infrastructure and vehicles, develop public transport and improve the quality of fuels;

4. agriculture also contributes to the deterioration of the environment through the increase in intensive farming, the use of fertiliser and the accumulation of surpluses. A reform of the Common Agricultural Policy and forestry development, taking into account environmental requirements, is indispensable;

5. tourism is expanding rapidly and leading to a deterioration of mountain and coastal regions. The measures proposed include improving the management of mass tourism and the quality of tourism services, promoting alternative forms of tourism and information and awareness campaigns.

Four major environmental problems call for international action: climate change, ozone layer

depletion, biodiversity loss and deforestation. The cooperation can be multilateral, in the framework of different international institutions (UNEP, OECD, the Council of Europe), or bilateral, in the framework of aid to developing countries and combating trans-border pollution.

In addition to the regulatory instruments that have generally been used with regard to the environment, the programme provides for the development of a broader mix of instruments:

1. regulatory instruments: fixing new minimum levels of protection, implementing international agreements and establishing rules and standards with a view to the internal market;

2. financial instruments: incentives for producers and consumers to protect the environment and use natural resources in a responsible manner (economic, fiscal and civil responsibility measures) and “price corrections” to ensure that products and services which respect the environment are not penalised in terms of cost;

3. horizontal measures: improving information and environmental statistics (need for comparable nomenclature, standards, criteria and methodologies), promoting scientific research and technological development, improving sector and spatial planning, public information (development of databases) and professional training;

4. financial support mechanisms: LIFE programme, Structural Funds, Cohesion Fund, EIB loans.

Following the evaluation of the initial programme in 1995, the Community decided to step

up its efforts in certain priority areas to give new impetus to the campaign to achieve sustainability (Decision No 2179/98/EC of the European Parliament and of the Council of 24 September 1998 on the review of the European Community programme of policy and action in relation to the environment and sustainable development “Towards sustainability”):

1. integrating the environment into other policy areas: improving methods and stepping up the coherence of actions;

2. concentrating on the intervention areas (agriculture, industry, transport, energy and tourism) and laying down an action programme containing the priority objectives;

3. broadening the range of environmental instruments with a view to greater efficiency: examining the obstacles to the introduction of financial instruments and identifying any solutions, using environmental taxes, environmental accountability, voluntary agreements (in compliance with competition law), identifying aid schemes which prejudice sustainable development, promoting environmental liability at Member State level, developing standardisation, improving training methods and tools, evaluating plans and programmes;

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4. better implementation and enforcement of environmental legislation: adopting integrated strategies; simplifying the legislation and administrative procedures, using framework directives, monitoring application, developing cooperation between competent authorities, transparency of measures, dealing with infringements which come to light;

5. increasing public awareness of environmental problems: improving access to information, integrating the concept of sustainable development in Community education and training programmes, evaluating and disseminating the results of Community policy;

6. stepping up international cooperation: developing Community initiatives, intensifying cooperation (climate change, aquatic pollution, management of industrial risks, biodiversity, etc.);

7. improving environmental information: comparable and reliable statistics and indicators, cost/benefit analysis of measures and their impact on enterprises, setting up auxiliary or satellite accounts in relation to national accounts with a view to establishing a national system of green accounting;

8. developing the use of sustainable methods of production and consumption; 9. encouraging practical methods of shared responsibility and partnership: reinforcing the

dialogue between all the actors; 10. promoting regional and local initiatives: sector and spatial planning, exchanges of

experience, encouraging local initiatives.

The progress report from the Commission (COM(95) 624 final) on the implementation of the programme contains an evaluation of it three years after its entry into force, and underlines the need for modifications to improve efficiency. The Commission also highlights the lack of progress regarding the integration of environmental requirements into the agricultural and tourism sectors. With regard to transport, the increase in the number of vehicles has completely negated improvements attributable to fuel quality and the development of cleaner technologies.

The communication from the Commission (COM(1999) 543 final) concerning the global assessment of the programme provides a global assessment of the implementation and achievements of it, which ended in 1999. The Communication launches a debate with the other Institutions, stakeholders and citizens regarding the priorities for a sixth programme, to be put forward in 2000. Environmental protection has moved forward in the Community, and Community policies have brought about a reduction in trans-boundary air pollution, better water quality and the phasing-out of substances that deplete the ozone layer. This progress has been somewhat modest because the Member States and the various sectors covered by the programme have not really managed to take proper account of environmental concerns or to integrate them into their policies. The Union is still far from having achieved the broader objective of sustainable development laid down in the Treaty of Amsterdam.

1.7 STRATEGY FOR SUSTAINABLE DEVELOPMENT

The strategy was laid down by the Communication from the Commission of 15 May 2001 – “A sustainable Europe for a better world: a European Union strategy for sustainable development” (Commission’s proposal to the Gothenburg European Council). Its objective is to establish a long-term strategy combining policies for economically, socially and environmentally sustainable development. It is designed to be a catalyst for policy makers and public opinion, and to change society’s behaviour.

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The strategy is built around crosscutting proposals, measures to attain long-term objectives and progress reviews:

1. Cross-cutting proposals: a. The communication indicates that policies need to be made more consistent and

that all of them should give priority to sustainable development. The Commission is preparing mechanisms to ensure that all major legislative proposals include an assessment of the potential economic, environmental and social benefits and costs.

b. Prices need to reflect environmental and social costs. This will result in a market with less polluting products and services and will change consumer behaviour.

c. We need to invest in scientific and technical innovation. The Community’s framework programmes of research and development should focus more on sustainable development.

d. Better communication will help involve businesses and the public. The communication underlines the importance of systematic dialogue with consumers and of consulting other countries.

e. The strategy needs to look beyond the borders of the European Union and contribute towards sustainable development in the rest of the world. Community policies must support efforts by other countries to achieve sustainable development.

2. Measures to attain long-term objectives:

a. The first long-term objective of the strategy is to limit climate change, firstly by meeting the commitments under the Kyoto Protocol and then by reducing greenhouse gas emissions by an average of 1% per year over 1990 levels up to 2020. The Union will put pressure on the major industrialised countries to meet their Kyoto commitments.

b. Limiting major threats to public health is another objective of the strategy. Food safety and quality will be ensured throughout the food chain. Threats to health and the environment posed by chemicals should be removed by 2020. Issues relating to epidemics and resistance to antibiotics will be tackled.

c. More responsible management of natural resources is also an objective. We need to break the link between economic growth and use of resources and halt the loss of biodiversity by 2010.

d. Limiting the adverse effects of transport and reducing regional disparities is another long-term objective, for which we need to break the link between economic growth and transport growth and do more to develop environmentally friendly transport. The share represented by road transport in 2010 should not be higher than in 1998.

e. The strategy lists a whole series of practical measures at EU level for attaining these objectives.

3. Progress reviews:

a. The communication indicates that a review will be carried out at each spring European Council to check on progress with implementing the strategy. The strategy will be comprehensively reviewed at the beginning of each Commission’s term of office.

b. The Commission will give stakeholders a chance to have their say, by organising a forum every two years to assess the strategy.

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1.8 SIXTH ENVIRONMENT ACTION PROGRAMME: “ENVIRONMENT 2010: OUR FUTURE, OUR CHOICE”

The Decision 1600/2002/EC of the European Parliament and of the Council of 22 July 2002

laying down the Sixth Community Environment Action Programme lays down the objectives, timetables and priorities, the main avenues of the strategic approach and the four areas of action as described by the Communication from the Commission to the Council, the European Parliament, the Economic and Social Committee and the Committee of the Regions of 24 January 2001 (COM(2001) 31 final) on the Sixth Environment Action Programme of the European Community “Environment 2010: Our future, our choice”. No more than four years after the adoption of the Decision, initiatives must be taken in each area of action. During the fourth year of operation of the Programme and upon its completion, the Commission is to submit assessment reports to the European Parliament and the Council.

The objective of the programme is to define the priorities and objectives of Community environmental policy up to 2010 and beyond and to describe the measures to be taken to help implement the European Union’s sustainable development strategy. It proposes five priority avenues of strategic action:

1. Improving the implementation of existing legislation: the following specific actions are outlined: a. support for the Implementation and Enforcement of Environmental Law (IMPEL)

network and its extension to the candidate countries; b. reporting on the implementation of environmental law; c. a “name, shame and fame” strategy on the implementation of environmental law; d. the improvement of environmental standards of inspection; e. initiatives to combat environmental crimes; f. pursuing action in the European Court to ensure implementation.

2. Integrating environmental concerns into other policies: the Communication proposes: a. establishing additional integration mechanisms; b. implementing the Treaty requirements on integration; c. the further development of indicators to monitor the integration process.

3. Working closer with the market: the following actions are proposed: a. encouraging a wider uptake of the Community’s Eco-Management and Audit

Scheme (EMAS); b. encouraging companies to publish their performance and to comply with

environmental requirements; c. introducing company environmental performance reward schemes; d. encouraging voluntary commitments; e. establishing an integrated product policy; f. promoting the use and evaluating the effectiveness of the eco-label scheme; g. the promotion of green procurement; h. the adoption of legislation on environmental liability.

4. Empowering people as private citizens and helping them to change behaviour: the following actions are suggested: a. helping citizens to benchmark and to improve their environmental performance; b. improving the quality of information on the environment.

5. Taking account of the environment in land-use planning and management decisions: the following actions are proposed:

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a. publishing a communication on the importance of integrating the environment into land-use planning and management;

b. improving the implementation of the Environmental Impact Assessment Directive; c. spreading best practice and fostering the exchange of experience on sustainable

development, including urban development; d. including sustainable development in Community regional policy; e. boosting agri-environmental measures within the Common Agricultural Policy; f. developing active partnership for sustainable tourism.

The Sixth Environment Action Programme focuses on four priority areas for action: 1. Climate change: the objective in this area is to reduce greenhouse gases to a level that

will not cause unnatural variations of the earth’s climate. In the short term, the European Union’s aim is to achieve the objectives of the Kyoto Protocol, i.e. to reduce greenhouse gas emissions by 8% by 2008-2012 compared to 1990 levels. In the longer term, by 2020 it will be necessary to reduce these emissions by 20 to 40% by means of an effective international agreement. Community efforts to meet the challenges of climate change will be varied: a. the integration of climate change objectives into various Community policies, in

particular energy policy and transport policy; b. the reduction of greenhouse gases by means of specific measures to improve

energy efficiency, to make increased use of renewable energy sources, to promote agreements with industry and to make energy savings;

c. the establishment of an EU-wide emissions trading scheme; d. improved research on climate change; e. the improvement of information given to citizens on climate change; f. a review of energy subsidies and their compatibility with climate change

objectives; preparing society for the impact of climate change.

2. Nature and biodiversity: the objective given in the Communication in this area is to protect and restore the structure and functioning of natural systems and halt the loss of biodiversity both in the European Union and on a global scale. The actions proposed to achieve this objective are as follows: a. the implementation of environmental legislation, in particular in the areas of water

and air; b. extension of the scope of the Sevesso II Directive; c. coordination of Community Member States’ action on accidents and natural

disasters; d. examination of the need to protect plants and animals from ionising radiation; e. protection, conservation and restoration of landscapes; f. protection and promotion of the sustainable development of forests; g. establishment of a Community strategy for the protection of the soil; h. the protection and restoration of marine habitats and the coast and extension of the

Natura 2000 network to include them; i. reinforcement of controls on labelling, monitoring and traceability of GMOs; j. the integration of nature conservation and biodiversity into commercial and

development cooperation policies; k. the creation of programmes for gathering information on nature conservation and

biodiversity; l. support for research in the field of nature conservation.

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3. Environment and health: the objective described in the Communication in this field is to achieve a quality of the environment which does not give rise to significant impacts on, or risks to, human health. The Communication proposes: a. identifying the risks to human health, including children and the elderly, and

setting standards accordingly; b. introducing environment and health priorities into other policies and standards on

water, air, waste and soil; c. strengthening research on health and the environment; d. developing a new system for the evaluation and the risk management of new

chemicals; e. banning or limiting the use of the most hazardous pesticides and ensuring that best

practice is applied; f. ensuring the implementation of legislation on water; g. ensuring the application of air quality standards and defining a strategy on air

pollution; h. adopting and implementing the Directive on noise.

4. Management of natural resources and waste: the objective is to ensure that the consumption of renewable and non-renewable resources does not exceed the carrying capacity of the environment and to achieve a decoupling of resource use from economic growth through significantly improved resource efficiency and the reduction of waste. With regard to waste, the specific target is to reduce the quantity going to final disposal by 20% by 2010 and 50% by 2050. The actions to be undertaken are as follows: a. the development of a strategy for the sustainable management of resources by

laying down priorities and reducing consumption; b. the taxation of resource use; c. the removal of subsidies that encourage the overuse of resources; d. the integration of resource efficiency considerations into integrated product policy,

eco-labelling schemes, environmental assessment schemes, etc.; e. establishing a strategy for the recycling of waste; f. the improvement of existing waste management schemes and investment in

quantitative and qualitative prevention; g. the integration of waste prevention into the integrated product policy and the

Community strategy on chemicals. 1.9 ENVIRONMENTAL TAXES AND CHARGES

The Commission Communication of 26 March 1997 on environmental taxes and charges in the Single Market promotes the use of fiscal instruments by Member States to increase the efficiency of environmental policy and ensure that environmental taxes and charges are used in accordance with Community legislation. This Communication fit in the spirit of the Fifth Environmental Action Programme, which included the broadening of the range of environmental policy instruments as one of its key priorities. Environmental taxes and charges can be a way of implementing the “polluter pays” principle by inducing consumers and producers to adopt more environmentally compatible behaviour. The Commission has frequently encouraged the use of fiscal instruments by Member States. In this Communication, the Commission presents the applicable legal framework and sets out Member States’ options and obligations in accordance with the rules of the Single Market.

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The Commission defines taxes and charges as covering all compulsory unrequited payments, whether the revenue accrues directly to the Government budget or is earmarked for particular purposes. The word “levy” is used to cover taxes and charges. A levy is considered as environmental if the taxable base of the levy has a negative effect on the environment. There are two categories of environmental levies:

1. charged on pollutant emissions; 2. charged on polluting products.

Member States have considerable room for manoeuvre in fiscal matters. The revenue may be

used to finance environmental protection activities, but also to decrease other taxes that are perceived as distorting the economy (such as labour taxes). However, it is important to fix the level of environmental taxes and charges at an appropriate level to ensure that they have a real effect on the market.

Member States must take into account the following provisions of the Treaty when adopting

environmental instruments of a fiscal nature: 1. customs duties levied on intra-Community trade, or charges having equivalent effect

(Articles 9 to 12); 2. quantitative restrictions on imports and exports of goods between the Member States, or

measures having equivalent effect (Articles 30 to 36); 3. provisions on transport policy, that are less favourable in their effect on carriers of other

Member States (Article 76); 4. State aid creating distortions of competition affecting intra-Community trade (Articles

92 to 93); 5. internal taxation discriminating against products of other Member States or otherwise

protecting national production (Article 95) if it results from the application of objective and non-discriminatory criteria, and if the system is transparent;

6. legislation concerning excise duties and other forms of indirect taxation based on Article 99;

7. Article 130r stating the objectives of Community environmental policy: Member States must establish the need for a levy to solve environmental problems.

Member States must also ensure that environmental taxes and charges are compatible with

their Community obligations (competition, Single Market and fiscal policy) and with their obligations towards third countries (WTO rules). 1.10 WASTE MANAGEMENT

1.10.1 Waste disposal 1.10.1.1 General

Council Directive 75/442/EEC of 15 July 1975 on waste. Date of entry into force: 18 July 1977. Final date for implementation in Member States: 18 July 1977. Amended by the following measures:

1. Council Directive 91/156/EEC of 18 March 1991. Date of entry into force: 1 April 1993. Final date for implementation in Member States: 1 April 1993.

2. Council Directive 91/692/EEC of 23 December 1991. Date of entry into force: 1 January 1995. Final date for implementation in Member States: 1 January 1995.

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3. Commission Decision 96/350/EC of 24 May 1996. Date of entry into force: 28 May 1996.

4. Council Directive 96/59/EC of 16 September 1996. Date of entry into force: 16 September 1996. Final date for implementation in Member States: 16 March 1998.

The objective of this directive is to set up a system for the coordinated management of waste

within the Community in order to limit waste production. These measures apply to all substances or objects that the holder disposes of or is obliged to dispose of in pursuance of the national provisions in force in the Member States. They do not apply to radioactive waste, mineral waste, animal carcasses, agricultural waste, waste water, gaseous effluents and wastes that are subject to specific Community Regulations.

Member States must prohibit the uncontrolled discarding, discharge and disposal of waste.

They shall promote: 1. the prevention, 2. recycling and 3. conversion of wastes with a view to their reuse. The measures provide for cooperation between the Member States with a view to setting up

an integrated, adequate network of disposal installations (taking account of the best technologies available) that would enable the Community itself to dispose of its wastes and the Member States individually to work towards that aim. That network would have to enable waste to be disposed of in one of the closest installations that guaranteed a high level of environmental protection.

Member States shall ensure that all holders of wastes shall hand them over to a private or

public collection agency or to a disposal company, or else shall themselves conduct the disposal in compliance with the requirements of the current measures.

Companies or establishments treating, storing or dumping waste for another party must

obtain an authorization from the competent authority. Upgrading centres and companies disposing of their own wastes have to get an authorization.

The cost of disposal of waste must be borne by its holder, who will hand over his waste to a

collector or company and/or else by earlier holders or by the producer who has generated the waste in accordance with the “polluter pays” principle.

The competent authorities appointed by the Member States in order to implement the current

measures shall draw up at least one management plan governing, in particular, the types, quantities and origins of the wastes to be upgraded or disposed of, the general technical requirements, all of the special arrangements concerning specific wastes, and the appropriate locations and installations for the disposal.

Notes on implementation: 1. In the Commission communication to the Council and Parliament of 27 February 1997

(COM(97) 23 final) concerning the application of Directives 75/439/EEC, 75/442/EEC, 78/319/EEC and 86/278/EEC on waste management, the Commission notes a certain reticence on the part of the Member States to implement the provisions of Directive 75/442/EEC. Some Member States have not even transposed the Directive and most have failed to communicate their national transposition measures to the Commission.

2. In the Commission report of 10 January 2000 to the Council and the European Parliament (COM(99) 752 final) on the implementation of Community waste legislation for the period 1995-1997 (Directives 75/442/EEC, 91/689/EEC, 75/439/EEC and 86/278/EEC), the

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Commission notes that the implementation of Directive 75/442/EEC is not satisfactory. The majority of Member States have not correctly transposed the Directive, while others (Greece and Spain) have failed to communicate their national transposition measures to the Commission.

1.10.1.2 Packaging and packaging waste

Council Directive 94/62/EC of 15 December 1994 on packaging and packaging waste. Date of entry into force: 31 December 1994. Final date for implementation in Member States: 30 June 1996.

The objective of this directive is to harmonise national measures concerning the management of packaging and packaging waste to provide a high level of environmental protection and to ensure the functioning of the internal market. The Member States must introduce systems for the return and/or collection of used packaging to attain the following targets:

1. recovery: 50% to 60%; 2. recycling: 25% to 45%, with a minimum of 15% by weight for each packaging material.

On 7 December 2001, the Commission presented a proposal for a directive of the European

Parliament and of the Council, amending Directive 94/62/EC [COM (2001) 729 final - Official Journal C 103, 30.04.2002]. This proposal lays down new, more ambitious targets for recovery and recycling, to be met by 30 June 2006:

1. recovery: 60% to 75%; 2. recycling: 55% to 70%, with a minimum of 60% for glass, 55% for paper and

cardboard, 50% for metals and 20% for plastics (mechanical and chemical recycling only).

Greece, Ireland and Portugal were given until 30 June 2009 to meet these targets. On 29 May 2002, the Economic and Social Committee delivered its opinion. On 3 September 2002, Parliament approved the Commission proposal subject to certain amendments. 1.10.1.3 End-of-life vehicles

Directive 2000/53/EC of the European Parliament and of the Council of 18 September 2000 on end-of-life vehicles. Date of entry into force: 21 October 2000. Final date for implementation in Member States: 21 April 2002.

The objective of this directive is to prevent waste from end-of-life vehicles and promote the collection, re-use and recycling of their components to protect the environment. The Directive defines an end-of-life vehicle as any type of vehicle that is waste within the meaning of Directive 75/442/EEC.

Waste prevention is the priority objective of the Directive. To this end, it stipulates that

vehicle manufacturers and material and equipment manufacturers must: 1. endeavour to reduce the use of hazardous substances when designing vehicles; 2. design and produce vehicles which facilitate the dismantling, re-use, recovery and

recycling of end-of-life vehicles; 3. increase the use of recycled materials in vehicle manufacture; 4. ensure that components of vehicles placed on the market after 1 July 2003 do not

contain mercury, hexavalent chromium, cadmium or lead, except in the cases listed in Annex II. The Commission must amend the Annex in the light of scientific and technical progress.

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Member States must set up collection systems for end-of-life vehicles and for waste used

parts. They must also ensure that all vehicles are transferred to authorised treatment facilities, and must set up a system of deregistration upon presentation of a certificate of destruction. Such certificates are to be issued when the vehicle is transferred, free of charge, to a treatment facility.

The last holder of an end-of-life vehicle will be able to dispose it free of charge (“free take-

back” principle). Producers must meet all, or a significant part of, the cost of applying this measure. Establishments or undertakings carrying out treatment operations must strip end-of-life

vehicles before treatment and recover all environmentally hazardous components. Priority must be given to the re-use and recycling of vehicle components (batteries, tyres, oil).

At the moment the directive was approved, 75% of end-of-life vehicles were recycled (metal content). The aim of this Directive is to increase the rate of re-use and recovery to 85% by average weight per vehicle and year by 2006, and to 95% by 2015, and to increase the rate of re-use and recycling over the same period to at least 80% and 85% respectively by average weight per vehicle and year. Less stringent objectives may be set for vehicles produced before 1980.

Member States must ensure that producers use material coding standards that allow

identification of the various materials during dismantling. The Commission must establish European standards on material coding and identification.

Member States may transpose certain of the Directive’s provisions by means of agreements with the economic sectors concerned. 1.10.1.4 Polychlorinated biphenyls and polychlorinated terphenyls

Council Directive 96/59/EC of 16 September 1996 on the disposal of polychlorinated biphenyls and polychlorinated terphenyls (PCBs/PCTs). Date of entry into force: 16 September 1996. Final date for implementation in Member States: 16 March 1998.

The objective of this directive is to approximate the laws of the Member States on the controlled disposal of PCBs, the decontamination or disposal of equipment containing PCBs and/or the disposal of used PCBs in order to eliminate them completely. Inventories must be compiled of equipment with PCB volumes of more than 5 dm3, which Member States should have sent to the Commission by September 1999 at the latest. The equipment and PCBs contained in the inventories must be decontaminated or disposed of by 2010 at the latest. Member States must prohibit:

1. the separation of PCBs from other substances for the purpose of reusing the PCBs; 2. the topping-up of transformers with PCBs.

Member States must take the necessary measures to ensure that: 1. PCBs, used PCBs and equipment containing PCBs which is subject to inventory are

transferred to licensed undertakings, at the same time ensuring that all necessary precautions are taken to avoid the risk of fire;

2. any incineration of PCBs or used PCBs on ships is prohibited; 3. all undertakings engaged in the decontamination and/or the disposal of PCBs, used

PCBs and/or equipment containing PCBs obtain permits; 4. transformers containing more than 0.05% by weight of PCBs are decontaminated under

the conditions specified by the Directive.

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1.10.1.5 Spent batteries and accumulators

Council Directive 91/157/EEC of 18 March 1991 on batteries and accumulators containing certain dangerous substances. Date of entry into force: 18 September 1992. Final date for implementation in Member States: 18 September 1992. Amended by the following measures:

1. Commission Directive 93/86/EEC of 4 October 1993. Date of entry into force: 31 December 1993. Final date for implementation in Member States: 31 December 1993.

2. Commission Directive 98/101/EC of 22 December 1998. Date of entry into force: 25 January 1999. Final date for implementation in Member States: 1 January 2000.

The objective of this directive is to introduce measures for the upgrading and controlled

disposal of spent batteries and accumulators containing dangerous materials in the Community. Directive 91/157/EEC prohibited, with effect from 1 January 1993, the placing on the market of:

1. manganese alkaline batteries designed for prolonged use in extreme conditions and containing more than 0.05% by weight of mercury;

2. any other alkaline battery with a mercury content of more than 0.025% by weight.

Directive 98/101/EC tightens up these standards sharply as from 1 January 2000. From then on, Member States must prohibit the marketing of batteries and accumulators containing more than 0.0005 % of mercury by weight. The same also applies to appliances incorporating such batteries and accumulators.

Batteries of the “button” type or those composed of elements of the “button” type are excluded from the scope of these Directives.

The Member States will draw up programmes aimed primarily at reducing the heavy-metal content of batteries and accumulators. Under these programmes, the Member States must encourage the separate collection of batteries and accumulators with a view to their upgrading or ultimate disposal. The batteries and accumulators, or the appliances in which they are incorporated, must be marked in such a way as to indicate separate collection and recycling requirements and heavy-metal content. 1.10.1.6 Waste oil

Council Directive 75/439/EEC of 16 June 1975 on the disposal of waste oil. Date of entry into force: 18 June 1977. Final date for implementation in Member States: 18 June 1977. Amended by the following measures:



The objective of these directives is to promote the safe collection and disposal of waste oils.

They apply to any mineral-based lubrication or industrial oils which have become unfit for the use for which they were originally intended.

Member States must ensure that waste oils are collected and disposed of (by processing,

destruction, storage or tipping above or under ground). They must give priority to the processing of waste oils by regeneration, i.e. by refining. Where this process is not used, other methods may be considered: combustion, destruction, storage or tipping.

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The following are prohibited: 1. any discharge into inland surface water, ground water, territorial sea water and drainage

systems; 2. any deposit and/or discharge harmful to the soil and any uncontrolled discharge of

residues resulting from the processing of waste oils; 3. any processing causing air pollution which exceeds the level prescribed by existing

provisions.

Any oil containing PCBs or PCTs must, without exception, be destroyed; as well as any oil containing toxic or dangerous products.

Notes on implementation: 1. In the Commission communication of 23 February 1997 to the Council and the

European Parliament (COM(97) 23 final) concerning the application of Directives 75/439/EEC, 75/442/EEC, 78/319/EEC and 86/278/EEC on waste management, the Commission notes that Directive 75/439/EEC has only been partly applied in the Member States, and that the latter have not wished to give priority to regenerating waste oils rather than burning them.

2. In the Commission Report of 10 January 2000 to the Council and the European Parliament (COM(1999) 752 final) on the implementation of Community waste legislation for the period 1995-1997 (Directives 75/442/EEC, 91/689/EEC, 75/439/EEC and 86/278/EEC), the Commission notes that the hierarchy of principles for waste oil management (regeneration, combustion and safe destruction/tipping) has not been respected. Of the eleven countries which submitted a report, only Germany, Luxembourg and France are complying with the principle of regeneration. Generally speaking, there has been an increase in the use of regeneration.

1.10.1.7 Titanium dioxide industrial waste

Council Directive 78/176/EEC of 20 February 1978 on titanium dioxide industrial waste. Date of entry into force: 21 February 1979. Final date for implementation in Member States: 21 February 1979. Amended by the following measures:

1. Council Directive 82/883/EEC of 3 December 1982. Date of entry into force: 9 December 1984. Final date for implementation in Member States: 9 December 1984.

2. Council Directive 83/29/EEC of 24 January 1983. Date of entry into force: 28 January 1983. Final date for implementation in Member States: 28 January 1983.


The objective of this directive is to prevent, gradually reduce and ultimately eliminate

pollution from titanium dioxide industrial waste. The Member States will take steps to ensure that waste-disposal procedures take due account of human-health and environmental considerations. They will actively encourage waste prevention and recycling and the re-use of waste as raw materials.

Any discharge, dumping, storage, accumulation or injection of waste will require prior authorization, for a limited but renewable period, by the competent Member State authority on whose territory the waste is produced, on whose territory the waste is discharged or dumped, and from whose territory the waste is discharged or dumped. Periodical checks will be carried out on the waste, and on the ambient environment in question, by bodies designated by the Member

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State responsible for issuing the licence, with a view to assessing the physical, chemical, biological and ecological aspects.

The Member States will draw up programmes for the gradual reduction, and ultimate elimination, of pollution caused by waste from old manufacturing facilities. In the case of new manufacturing facilities, prior authorization must be obtained from the competent authorities in the Member State on whose territory it is planned to construct them. The issuing of any such authorization will be preceded by environmental impact studies and will be conditional on an undertaking by the companies concerned to use only those materials, procedures and technology that are least damaging to the environment. 1.10.1.8 Sewage sludge (used in agriculture)

Council Directive 86/278/EEC of 12 June 1986 on the protection of the environment, and in particular of the soil, when sewage sludge is used in agriculture. Date of entry into force: 18 June 1986. Final date for implementation in Member States: 18 June 1989.

This directive regulates the use of sewage sludge in agriculture in such a way as to prevent

harmful effects on soil, vegetation, animals and man. Sewage sludge has valuable agronomic properties in agriculture. In using the sludge account must be taken of the nutrient needs of plants, without however impairing the quality of the soil and of surface and ground water. Some heavy metals present in sewage sludge may be toxic to plants and man. Sewage sludge may be used in agriculture, provided that the Member State concerned regulates its use.

The Directive lays down limit values for concentrations of heavy metals in the soil, in sludge

and for the maximum annual quantities of heavy metals which may be introduced into the soil. The use of sewage sludge is prohibited if the concentration of one or more heavy metals in the soil exceeds the limit values laid down in the directive. The Member States must take the measures necessary to ensure that these limit values are not exceeded through the use of sludge.

Sludge must be treated before being used in agriculture but the Member States may authorise the use of untreated sludge if it is injected or worked into the soil. The use of sludge is prohibited:

1. on grassland or forage crops if the grassland is to be grazed or the forage crops to be harvested before a certain period has elapsed (this period, fixed by the Member States, may not be less than three weeks);

2. soil in which fruit and vegetable crops are growing, with the exception of fruit trees; 3. ground intended for the cultivation of fruit and vegetable crops which are normally in

direct contact with the soil and normally eaten raw, for a period of ten months preceding the harvest of the crops and during the harvest itself.

1.10.2 Landfill of waste

Council Directive 99/31/EC of 26 April 1999 on the landfill of waste. Date of entry into force: 16 July 1999. Final date for implementation in Member States: 16 July 2001.

The objective of this directive is to prevent or reduce as far as possible negative effects on the environment (in particular on surface water, groundwater, soil, air and human health) from the landfilling of waste, by introducing stringent technical requirements for waste and landfills.

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It defines the different categories of waste (municipal waste, hazardous waste, non-hazardous waste and inert waste) and applies to all landfills, defined as waste disposal sites for the deposit of waste onto or into land. Landfills are divided into three classes:

1. landfills for hazardous waste; 2. landfills for non-hazardous waste; 3. landfills for inert waste.

On the other hand, the Directive does not apply to: 1. the spreading on the soil of sludge (including sewage sludge and sludge resulting from

dredging operations); 2. the use in landfills of inert waste for redevelopment or restoration work; 3. the deposit of unpolluted soil or of non-hazardous inert waste resulting from

prospecting and extraction, treatment and storage of mineral resources as well as from the operation of quarries;

4. the deposit of non-hazardous dredging sludge alongside small waterways from which they have been dredged and of non-hazardous sludge in surface water, including the bed and its subsoil.

A standard waste acceptance procedure is laid down so as to avoid any risks: 1. waste must be treated before being landfilled; 2. hazardous waste within the meaning of the Directive must be assigned to a hazardous

waste landfill; 3. landfills for non-hazardous waste must be used for municipal waste and for non-

hazardous waste; 4. landfill sites for inert waste must be used only for inert waste.

The following wastes may not be accepted in a landfill: 1. liquid waste; 2. flammable waste; 3. explosive or oxidising waste; 4. hospital and other clinical waste which is infectious; 5. used tyres, with certain exceptions; 6. any other type of waste that does not meet the acceptance criteria laid down in Annex II.

1.10.3 Incineration 1.10.3.1 Waste incineration

Directive 2000/76/EC of the European Parliament and of the Council of 4 December 2000 on the incineration of waste. Date of entry into force: 28 December 2000. Final date for implementation in Member States: 28 December 2002. The Directive will apply to existing plants as from 28 December 2005 and to new plants as from 28 December 2002. This Directive will repeal, as from 28 December 2005, Article 8(1) and the Annex to Directive 75/439/EEC, Directive 89/369/EEC, Directive 89/429/EEC and Directive 94/67/EC.

The objective of this directive is to prevent or reduce, as far as possible, air, water and soil pollution caused by the incineration or co-incineration of waste, as well as the resulting risk to human health. When the proposal for this Directive was introduced the Community’s waste incineration system was covered by Directives 89/369/EEC and 89/429/EEC (new and existing municipal waste-incineration plants) and 94/67/EC (incineration of hazardous waste). This Directive is intended to fill the gaps existing in that legislation. Apart from the incineration of non-toxic municipal waste its scope extends to the incineration of non-toxic non-municipal waste (such

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as sewage sludge, tyres and hospital waste) and toxic wastes not covered by Directive 94/67/EC (such as waste oils and solvents). At the same time it is intended to incorporate the technical progress made on monitoring incineration-process emissions into the existing legislation, and to ensure that the international commitments entered into by the Community are met in terms of pollution reduction, and more particularly those laying down limit values for the emissions of dioxins, mercury and dusts arising from waste incineration (protocols signed in 1998 under the aegis of the United Nations’ Economic Commission Convention on long-distance cross-border atmospheric pollution). The proposal is based on an integrated approach: limits for discharges into water are added to the updated limits for emissions to atmosphere.

Unlike Directives 89/369/EEC and 89/429/EEC referred to above, this Directive applies not

only to facilities intended for waste incineration (“dedicated incineration plants”) but also to “co-incineration” plants (facilities whose main purpose is to produce energy or material products and which use waste as a regular or additional fuel, this waste being thermally treated for the purpose of disposal). The Directive does not cover experimental plants for improving the incineration process and which treat less than 50 tonnes of waste per year. Nor does it cover plants treating only:

1. vegetable waste from agriculture and forestry, the food processing industry or the production of paper;

2. wood waste; 3. cork waste; 4. radioactive waste; 5. animal carcasses; 6. waste resulting from the exploitation of oil and gas and incinerated on board offshore

installations.

All incineration or co-incineration plants must be authorised. Permits will be issued by the competent authority and will list the categories and quantities of hazardous and non-hazardous waste that may be treated, the plant’s incineration or co-incineration capacity and the sampling and measurement procedures that are to be used. Before accepting hazardous waste, operators of incineration or co-incineration plants must have available the prescribed administrative information on the generating processes, information on the physical and chemical composition of hazardous waste, and information on the hazardous characteristics of the waste.

In order to guarantee complete waste combustion, the Directive requires all plants to keep the incineration or co-incineration gases at a temperature of at least 850°C for at least two seconds. If hazardous wastes with a content of more than 1 % of halogenated organic substances, expressed as chlorine, are incinerated, the temperature has to be raised to 1,100°C for at least two seconds. The heat generated by the incineration process has to be put to good use as far as possible.

The limit values for incineration plant emissions to atmosphere are set out in Annex V to the Directive. They concern heavy metals, dioxins and furans, carbon monoxide (CO), dust, total organic carbon (TOC), hydrogen chloride (HCl), hydrogen fluoride (HF), sulphur dioxide (SO2), nitrogen monoxide (No) and nitrogen dioxide (NO2). The limit values for co-incineration plant emissions to atmosphere are set out in Annex II. In addition, special provisions are laid down relating to cement kilns, other industrial sectors and combustion plants which co-incinerate waste.

All discharges of effluents caused by exhaust-gas clean up must be authorised. This will guarantee that the emission limit values set out in Annex IV to the Directive are not exceeded. Rain or fire-fighting water will be collected and analysed before being discharged.

The quantity and harmfulness of incineration residues must be reduced to a minimum and residues must, as far as possible, be recycled. When dry residues are transported, precautions must

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be taken to prevent their dispersal in the environment. Tests must be carried out to establish the physical and chemical characteristics, and polluting potential, of residues. 1.10.3.2 Incineration of hazardous waste

Council Directive 94/67/CE of 16 December 1994 on the incineration of hazardous waste. Date of entry into force: 31 December 1994. Final date for implementation in Member States: 31 December 1996. This Directive will be repealed on 28 December 2005 by Directive 200/76/EC, relating to the incineration of waste.

The objective of this directive is to prevent or reduce the effects of hazardous waste

incineration on the environment and the ensuing risks for public health. Before an incineration plant can become operational, a licence must be obtained from the competent authorities designated by each Member State. Steps must be taken as swiftly as possible to employ the best available technologies in both the new and the existing plants. A licence is also required for the discharge of waste water from an incineration plant. Licences will be reviewed every five years.

The Directive lays down general and specific conditions governing the design and operation of incineration plants. Annex TN III gives details of the technologies currently available. Fuelling the furnace with dangerous waste will be permitted only if the main operating parameters fall within the prescribed limits.

The Directive lays down emission threshold values comparable to those obtainable with the best available technologies. Emissions of dioxins and furans must be reduced to a minimum by means of the most advanced technologies. A guideline value of 0.1 ng TE/m3 is laid down in respect of these emissions.

Measuring equipment and techniques must meet high technological standards in order to ensure that compliance with the threshold values and operating conditions can be effectively monitored. Measurements must be taken on an ongoing basis in respect of the quantitatively significant emissions, and the results set against standard operating conditions. Emissions that cannot at present be measured on an ongoing basis (dioxins, furans, heavy metals) must be checked once a month. In the event of the threshold values being exceeded, the plant must cease operation until the situation has been rectified and the plant complies once more with the requirements laid down in the Directive.

Operators of existing plants must either take steps to comply with the provisions of the

Directive before 30 June 2000, and inform the Commission accordingly or must notify the competent authority, by 30 June 1997 at the latest, that the existing plant will not be operated for more than 20,000 hrs during the five-year period allowed at maximum between the date of the operator’s notification and final shut down. 1.10.3.3 Existing waste-incineration plants

Council Directive 89/429/EEC of 21 June 1989 on the reduction of pollution from existing municipal waste-incineration plants. Date of entry into force: 4 August 1990. Final date for implementation in Member States: 30 November 1990.

The objective of this directive is to reduce the emissions of certain pollutants from existing municipal waste-incineration plants. The Directive lays down requirements for the operation of municipal waste-incineration plants for which the first authorisation to operate was granted before

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1 December 1990. Plants with a nominal capacity of at least 6 tonnes per hour must, as from 1 December 1996, comply with the same requirements as new incineration plants with the same capacity. Other incineration plants must, no later than 1 December 1995, comply with the emission limit values for certain pollutants and the combustion requirements given in the Directive. Under certain conditions, the Member States are authorised to adopt limit values for other pollutants, in particular dioxins and furans. Furthermore, all existing installation must:

1. comply with the requirements for the design, fitting-out and operation of incineration plants;

2. be periodically monitored to measure the concentration of certain substances in the combustion gases.

Where the limit values are exceeded in an incineration plant, the Member State concerned

must ensure that the plant concerned stops operating until the necessary changes have been made or a decision to close the plant down has been taken. 1.10.3.4 New incineration plants

Council Directive 89/369/EEC of 8 June 1989 on the prevention of air pollution from new municipal waste incineration plants. Date of entry into force: 26 June 1990. Final date for implementation in Member States: 30 November 1990.

The objective of the directive is to reduce emissions of certain pollutants from new municipal waste incineration plants. The Directive lay down conditions for the granting by the Member States of authorisation to operate new municipal waste incineration plants (domestic, commercial and business refuse, and other waste which, because of its nature or composition, is similar to domestic refuse):

1. compliance with the emission limit values for the pollutants mentioned in the Directive; 2. compliance with criteria on the design, equipment and operation of the incineration

plants; 3. periodic checks on the concentration of certain substances in the combustion gases and

of operating parameters.

Where the limit values are exceeded in an incineration plant, the Member State concerned must prohibit that plant's operation until the necessary adjustments have been made or a decision is taken to close the plant. 1.10.4 Controlled management of hazardous waste

Council Directive 91/689/EEC of 12 December 1991 on hazardous waste. Date of entry into force: 20 January 1992. Final date for implementation in Member States: 27 June 1995. Amended by the following measure: Commission Directive 94/31/EC of 27 July 1994. Date of entry into force: 22 July 1994. Final date for implementation in Member States: 22 July 1994.

The objective of this directive is the controlled management, recovery and correct disposal of hazardous waste. Member States ensure that hazardous waste is recorded and identified; they also ensure that different categories of hazardous waste are not mixed and that hazardous waste is not mixed with non-hazardous waste, save where the necessary measures have been taken to safeguard human health and the environment.

Any establishment or undertaking which carries out disposal operations must obtain a permit. This applies also in the case of operations which may lead to recovery. However, the permit

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requirement may be waived in the latter case if the method of recovery is such that there is no danger to human health or the environment, or if the Member State has adopted general measures laying down conditions for various methods of recovery, provided the conditions have been communicated to the Commission.

Establishments or undertakings which carry out disposal operations or operations which may lead to recovery and producers of hazardous waste are subject to periodic inspections covering in particular the origin and destination of the waste.

The competent authorities publish plans for the management of hazardous waste and the Commission evaluates these plans.

Note on implementation: In the Commission Report of 10 January 2000 to the Council and the European Parliament (COM(1999) 752 final) on the implementation of Community waste legislation for the period 1995-1997 (Directives 75/442/EEC, 91/689/EEC, 75/439/EEC and 86/278/EEC), the Commission notes that most of the Member States have not correctly transposed the Directive on hazardous waste, while others have not drawn up a list to supplement the one already established by the Commission detailing hazardous wastes. 1.11 WATER 1.11.1 Water protection and management 1.11.1.1 General provisions on the quality of drinking water

Council Directive 80/778/EEC of 15 July 1980 relating to the quality of water intended

for human consumption. Date of entry into force: 17 July 1980. Final date for implementation in Member States: 17 July 1982. This Directive will be repealed by Council Directive 98/83/EC as from 25 December 2003. Amended by the following measures:

1. Council Directive 81/858/EEC of 19 October 1981. Valid until 1 January 1996. 2. Council Directive 90/656/EEC of 4 December 1990. Date of entry into force: 13

December 1990. Final date for implementation in Member States: 31 December 1991 in principle, or 31 December 1995 at the latest. Valid until 31 December 1995.

3. Council Directive 91/692/EEC of 23 December 1991. Date of entry into force: 23 December 1991. Final date for implementation in Member States: 1 January 1993 for Articles 2 and 3, 1 January 1994 for Article 4, and 1 January 1995 for Article 5.

4. Council Directive 98/83/EC of 3 November 1998. Date of entry into force: 25 December 1998. Final date for implementation in Member States: 25 December 2000.

The objective of these Directives is to lay down at Community level minimum quality and

control standards for water intended for human consumption (all water except natural mineral water and water as medicinal product). Directive 80/778/EEC lays down the requirements to be met by the quality of water by defining the organoleptic, physical and chemical, undesirable substances, toxic and microbiological parameters applicable to water; and by setting imperative standards for such parameters.

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1.11.1.2 New requirements on the quality of drinking water Council Directive 98/83/EC of 3 November 1998 on the quality of water intended for

human consumption. Date of entry into force: 25 December 1998. Final date for implementation in Member States: 25 December 2000. This Directive will repeal Council Directive 80/778/EEC as from 25 December 2003.

The objective of this directive is to protect human health by laying down healthiness and

purity requirements which must be met by drinking water within the Community. It applies to all water intended for human consumption apart from natural mineral waters and waters which are medicinal products. Member States shall ensure that such drinking water does not contain any concentration of micro-organisms, parasites or any other substance which constitutes a potential human health risk; and meets the minimum requirements (microbiological and chemical parameters and those relating to radioactivity) laid down by the Directive.

The Directive requires Member States to regularly monitor the quality of water intended for

human consumption by using the methods of analysis specified in the Directive, or equivalent methods. For this purpose they shall determine the sampling points and draw up monitoring programmes. Where the parametric values are not attained, the Member States concerned shall ensure that the corrective action needed is taken as quickly as possible in order to restore water quality. Regardless of compliance, or otherwise, with the parametric values, Member States shall prohibit the distribution of drinking water or shall restrict its use and shall take any action needed where that water constitutes a potential human health hazard. Consumers shall be informed of any such action.

The Directive shall provide the Member States with scope to provide for exemptions from

the parametric values up to a maximum value, provided that the exemption does not constitute a human health hazard, there is no other reasonable means of maintaining the distribution of drinking water in the area concerned, and the exemption is as restricted in time as possible and does not exceed three years (it being possible to renew the exemption for two further three-year periods).

1.11.1.3 Urban waste water treatment

Council Directive 91/271/EEC of 21 May 1991 concerning urban waste water

treatment. Date of entry into force: 19 June 1991. Final date for implementation in Member States: 30 June 1993. Amended by Commission Directive 98/15/EC of 27 February 1998. Date of entry into force: 27 March 1998. Final date for implementation in Member States: 30 September 1998.

The objectives of these Directives is to harmonise measures on urban waste water treatment

throughout the Community. Directive 91/271/EEC concerns the collection, treatment and discharge of urban waste water and the treatment and discharge of waste water from certain industrial sectors. Its aim is to protect the environment from any adverse effects due to discharge of such waters. The Directive establishes a time-table, which Member States must adhere to, for the provision of collecting and treatment systems for urban waste water in agglomerations which meet the criteria laid down in the Directive. The treatment of urban water is to be varied according to the sensitivity of the receiving waters. Specific requirements apply to discharges from certain industrial sectors of biodegradable industrial waste water not entering urban waste water treatment plants before discharge to receiving waters. Member States will be responsible for monitoring both discharges

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from treatment plants and the receiving waters. They will ensure that the competent national authorities publish a situation report every two years. This report must also be sent to the Commission.

Directive 98/15/EC clarifies the rules relating to discharges from urban waste water

treatment plants in order to put an end to differences in interpretation by the Member States. It specifies, inter alia, that:

1. the option of using daily averages for the total nitrogen concentration applies both to agglomerations of 10,000-100,000 population equivalent and to those of more than 100,000 population equivalent;

2. the condition concerning the temperature of the effluent in the biological reactor and the limitation on the time of operation to take account of regional climatic conditions only apply to the “alternative” method using daily averages;

3. use of the “alternative” method must ensure the same level of environmental protection as the annual mean technique.

Notes on implementation: 1. In the Commission report of 21 November 2001 [COM (2001) 685 final] on the

implementation of Council Directive 91/271/EEC of 21 May 1991 concerning urban waste water treatment, as amended by Commission Directive 98/15/EC of 27 February 1998, the Commission describes the situation with application of the Directive on 31 December 1998. It concludes that the considerable efforts being made by the Member States to comply with the Directive are bringing significant improvements in water quality in Europe. However, there are still problems in most Member States: a. Many conurbations have underestimated the level of treatment required for waste

water. Waste water which has not been properly treated is flowing into the sea and, in some cases, polluting it.

b. Most Member States have failed to keep to the deadlines for implementing the Directive, although considerable progress has been made since December 1998.

2. On 31 December 1998, a total of 37 European cities with a population of more than 150,000 were discharging their waste water untreated into the natural environment. Another 57 were also discharging a large proportion of their effluent either untreated or without proper treatment. Significant progress has been made since then.

1.11.2 Discharges of substances 1.11.2.1 Pollution caused by nitrates from agricultural sources

Council Directive 91/676/EEC of 12 December 1991 concerning the protection of waters

against pollution caused by nitrates from agricultural sources. Date of entry into force: 19 December 1991. Final date for implementation in Member States: 20 December 1993.

The objective of this Directive is to reduce or prevent water pollution caused or induced by

nitrates from agricultural sources. Water pollution by nitrates has been worsened by the introduction of intensive farming methods, with increased use of chemical fertilisers and higher concentrations of animals in smaller areas. Water pollution by nitrates is causing problems in all the Member States. The sources of nitrate pollution are diffuse (multiple discharges, difficult to locate),

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and the main polluters (farms) are sensitive to anything which affects the economic viability of their activity. The 1980s saw a progressive worsening of the situation (nitrate concentrations in water rose by an average of 1 mg/l per year) owing to the growth of intensive livestock farming (chickens, pigs) in areas already saturated, and of intensive crop-growing involving chemical weedkillers and overfertilisation.

Under this Directive, Member States must: 1. Identify on their territory surface waters and groundwater affected or that could be

affected by pollution, in accordance with the procedure and criteria set out in the Directive; and the vulnerable zones which contribute to pollution.

2. Establish codes of good agricultural practice to be implemented by farmers on a voluntary basis.

3. Establish and implement action programmes in respect of vulnerable zones. These must include the measures prescribed in the codes of good agricultural practice to limit the spreading on land of any fertiliser containing nitrogen and to set limits for the spreading of livestock effluent.

4. Monitor water quality, applying standardised reference methods to measure the nitrogen compound content.

Notes on implementation: 1. In the Commission report to the Council and Parliament [COM (97) 473 final] on the

implementation of Council Directive 91/676/EEC concerning the protection of waters against pollution caused by nitrates from agricultural sources, the Commission notes that: a. Only four Member States met their transposition obligations by the set deadline

(20 December 1993): Denmark, Spain, France and Luxembourg. b. Most of the Member States have introduced codes of good agricultural practice,

though the Commission feels it is important to examine their content once again and to assess the consistency of codes applying to regions with similar features.

c. The Nitrates Directive allows Member States to be exempted from the obligation to designate specific vulnerable zones where action programmes are set up at national level. Some Member States have made use of this exemption (Denmark, Germany, Luxembourg, Netherlands and Austria). At the time of the report, most Member States had yet to designate vulnerable zones in accordance with the Directive (Belgium, Greece, Spain, Portugal, Finland and the United Kingdom).

d. The introduction of action programmes to help vulnerable zones is the key element of the Nitrates Directive, as the programmes should impose compulsory restrictions on farming activity. They should have commenced on 20 December 1995. In fact, only Denmark, Germany, Luxembourg, Austria and Sweden notified their action programmes to the Commission on 30 July 1997.

e. The Commission believes it is too early to determine the real impact of the Directive on nitrate pollution on account of its delayed and sometimes incomplete transposition. Accordingly, no revision of the Directive is planned following the presentation of the report.

2. In the Commission report to the Council and Parliament of 17 July 2002 [COM (2002) 407 final] on implementation of Council Directive 91/676/EEC concerning the protection of waters against pollution caused by nitrates from agricultural sources, the Commission reports that all the Member States have transposed the Directive, set up a

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monitoring network, drawn up a code of good practice and designated vulnerable zones (apart from Ireland). The monitoring networks indicate that over 20% of groundwater in the EU and between 30 and 40% of lakes and rivers are showing excessive nitrate concentrations. Nitrogen from agricultural sources accounts for between 50 and 80% of the nitrates entering Europe’s water. The impact of the Directive implementation will only be felt in a few years time, though positive results are already starting to be seen in some regions.

1.12 AIR POLLUTION 1.12.1 Motor vehicles

1.12.1.1 Sulphur content of certain liquid fuels

Council Directive 93/12/EEC of 22 March 1993 relating to the sulphur content of gasoil. Date of entry into force: 1 October 1994. Final date for implementation in Member States: 1 October 1994. Amended by the following measures:

1. Directive 98/70/EC of the European Parliament and of the Council of 13 October 1998. Date of entry into force: 28 December 1998. Final date for implementation in Member States: 1 July 1999.

2. Council Directive 99/32/EC of 26 April 1999. Date of entry into force: 11 May 1999. Final date for implementation in Member States: 1 July 2000.

The objective of this directive is to reduce emissions of sulphur dioxide (a major cause of the

“acid rain” problem, which damages ecosystems and reduces biodiversity, and air pollution that affects urban and industrial areas), resulting from the combustion of certain types of liquid fuels, hence limiting the harmful effects of such pollution on human beings and the environment. The substances affected by the reduction in sulphur dioxide emissions are heavy fuel oils (liquid fuels derived from petroleum) and gasoil. This Directive does not apply to liquid fuels derived from petroleum used by sea-going ships, gasoil for maritime use used by ships crossing a border between a third country and a Member State, fuels which will be treated before their final use, fuels which will be treated in refineries.

Member States are obligated to stop using heavy fuel oils whose sulphur content exceeds 1%

by mass as from 1 January 2003. However, a Member State may permit the use of heavy fuel oils with a sulphur content between 1% and 3% by mass if the emissions do not cause the critical levels in a Member State to be exceeded and if the air quality standards laid down in Directive 80/779/EEC and by all other legislation repealing and replacing those standards are respected.

Member States must ensure that gasoil, including gasoil for maritime use, whose sulphur

content is more than 0.2% by mass is not used on their territory as of 1 July 2000. This maximum sulphur content will be 0.1% by mass as from 1 January 2008.

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1.12.1.2 Quality of petrol and diesel fuels European Parliament and Council Directive 98/70/EC of 13 October 1998 relating to

the quality of petrol and diesel fuels and amending Council Directive 93/12/EEC. Date of entry into force: 28 December 1998. Final date for implementation in Member States: 1 July 1999. This Directive repeals Directives 85/210/EEC, 85/536/EEC and 87/441/EEC as from 1 January 2000.

The objective of this directive is to reduce pollution from car emissions by introducing new

environmental specifications applicable to petrol and diesel fuels, and to ban leaded petrol from the market from the year 2000. The Directive also provides for progressive improvements in the environmental quality of unleaded petrol and diesel fuel. The environmental requirements laid down by the Directive will be mandatory with effect from the years 2000 and 2005 successively and will cover:

1. in the case of unleaded petrol: octane level, vapour pressure, distillation by evaporation, and the content of aromatics, benzene, olefins, oxygen, oxygenates, sulphur and lead;

2. in the case of diesel fuel: cetane level, density, distillation, polycyclic aromatic hydrocarbons and sulphur content.

1.12.2 Industry

1.12.2.1 Pollution from large combustion plants

Council Directive 88/609/EEC of 24 November 1988 on the limitation of emissions of

certain pollutants into the air from large combustion plants. Date of entry into force: 30 June 1990. Final date for implementation in Member States: 30 June 1990. This Directive was repealed with effect from 27 November 2002. Amended and repealed, respectively, by the following measures:

1. Council Directive 94/66/EC of 15 December 1994. Date of entry into force: 24 December 1994. Final date for implementation in Member States: 24 June 1995.

2. Directive 2001/80/EC of the European Parliament and of the Council of 23 October 2001. Date of entry into force: 27 November 2001. Final date for implementation in Member States: 27 November 2002.

The objective of these Directives is to reduce gradually the annual emissions of sulphur

dioxide and oxides of nitrogen from existing large combustion plants and to lay down emission limit values for sulphur dioxide, nitrogen oxides and dust in the case of new plants. A large combustion plant is defined as a combustion plant with a rated thermal input equal to or greater than 50 MW, irrespective of the type of fuel used. Member States must ensure that waste gases from combustion plants are discharged by means of stacks high enough to safeguard human health and the environment.

1.12.2.2 Volatile organic compounds resulting from the storage of petrol

European Parliament and Council Directive 94/63/EC of 20 December 1994 on the

control of volatile organic compound emissions resulting from the storage of petrol and its

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distribution from terminals to service stations. Date of entry into force: 20 January 1995. Final date for implementation in Member States: 31 December 1995.

The objective of this Directive is to reduce losses due to evaporation of the petrol at all

stages of the fuel storage and distribution chain. The Directive lays down harmonised technical specifications for the design and use of storage installations at terminals, equipment for loading and unloading mobile containers at terminals, mobile containers and equipment for loading into storage installations at service stations. 1.12.2.3 Volatile organic compounds resulting from certain industrial activities

Council Directive 1999/13/EC of 11 March 1999 on the limitation of emissions of volatile organic compounds due to the use of organic solvents in certain activities and installations. Date of entry into force: 29 March 1999. Final date for implementation in Member States: 30 March 2001.

The objective of this Directive is to prevent or reduce the direct and indirect effects of

emissions of volatile organic compounds (VOCs) in the environment and on human health, by setting emission limits for such compounds and laying down operating conditions for industrial installations using volatile organic solvents. The Directive is part of the global strategy to reduce pollution due to tropospheric ozone. It complements the Auto-oil programme by combating emissions of organic solvents from stationary commercial and industrial sources, and the 1994 Directive on VOC emissions resulting from the storage of petrol and its distribution from terminals to service stations.

Member States must take the necessary measures to ensure that all new installations comply

with the provisions of the Directive. Moreover, all new installations not already covered by Directive 96/61/EC concerning integrated pollution prevention and control must be registered or authorised before being put into service. Existing installations must be registered or their activities authorised if they have not yet been authorised under Council Directive 96/61/EC. They must comply with the same requirements as for new installations no later than 30 October 2007. Where part of an existing installation undergoes a substantial change, it must comply with the requirements applicable to new installations.

The industrial operators concerned can conform with the specified emission limits in either

of the following ways: 1. by installing equipment to reduce emissions to comply with the emission limit values

and the fugitive emission values, or total emission limit values; 2. by introducing a reduction scheme to arrive at an equivalent emission level, in particular

by replacing conventional products which are high in solvents with low-solvent or solvent-free products.

Solvents containing substances likely to have a serious effect on human health (carcinogens,

mutagens, or toxic to reproduction), must be replaced, as far as possible, by less harmful substances within the shortest possible time. Stricter emission values are specified for harmful substances.

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1.12.2.4 Integrated pollution prevention and control (IPPC)

Council Directive 96/61/EC of 24 September 1996 concerning integrated pollution

prevention and control. Date of entry into force: 30 October 1996. Final date for implementation in Member States: 30 October 1999.

The objective of this Directive is to prevent or minimise air, water and soil pollution by

emissions from industrial installations in the Community, with a view to achieving a high level of environmental protection. Integrated pollution prevention and control concerns highly polluting industrial activities: energy industries, production and processing of metals, mineral industry, chemical industry, and waste management.

The Directive defines the basic obligations to be met by all the industrial installations

concerned, whether new or existing. These basic obligations cover a list of measures for preventing the pollution of water, air and soil by industrial effluent and other waste. They serve as the basis for drawing up operating licences or permits for industrial installations. Accordingly, this Directive lays down a procedure for applying for, issuing and amending operating permits for industrial installations; and lays down the minimum requirements to be included in any such permit (compliance with the basic obligations, emission limit values for pollutants, monitoring discharges, minimisation of long-distance or transboundary pollution). A transitional period from 30 October 1999 to 30 October 2007 is established for existing installations to be brought into conformity with the requirements of the Directive.

1.12.3 Biosphere

1.12.3.1 National emission ceilings for certain atmospheric pollutants

Directive 2001/81/EC of the European Parliament and of the Council of 23 October 2001 on national emission ceilings for certain atmospheric pollutants. Date of entry into force: 27 November 2001. Final date for implementation in Member States: 27 November 2002.

The objective of this Directive is to set national emission ceilings for pollutants causing

acidification and eutrophication and for ozone precursors in order to provide fuller protection for the environment and human health against their adverse effects. This Directive is part of the follow-up to the Commission’s communication on a strategy to combat acidification [COM(97) 88 final], which sought to establish, for the first time and regardless of the sources of pollution, national emission ceilings for four pollutants: sulphur dioxide (SO2), nitrogen oxides (NOX), volatile organic compounds (VOCs) and ammonia (NH3), which cause acidification, eutrophication and tropospheric ozone formation (also referred to as “bad ozone,” present at low altitudes, as contrasted with stratospheric ozone).

This Directive provides for introduction, by the end of 2010 at the latest, of national

emission ceilings for SO2, NOX, VOCs and NH3. The purpose of the emission ceilings is broadly to meet the following interim environmental objectives:

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1. The areas with critical loads of acid depositions will be reduced by at least 50% compared with 1990.

2. Ground-level ozone loads above the critical level for human health will be reduced by two-thirds compared with the 1990 situation. An absolute limit is also set. The guide value set by the World Health Organisation may not be exceeded on more than 20 days a year.

3. Ground-level ozone loads above the critical level for crops and semi-natural vegetation will be reduced by one-third compared with 1990. An absolute limit is also set.

Member States are required to draw up programmes, by 1 October 2002, for the progressive

reduction of their annual national emissions. The programmes must be updated and revised as necessary in 2006. They must be made available to the public and to appropriate organisations and submitted to the Commission. Moreover, Member States must prepare and annually update national emission inventories and emission projections for SO2, NOX, VOCs and NH3. These inventories and projections must be reported to the Commission and the European Environment Agency each year by 31 December at the latest. 1.13 CLIMATE CHANGE 1.13.1 Kyoto Protocol on climate change

Council Decision 2002/358/EC of 25 April 2002 concerning the approval, on behalf of

the European Community, of the Kyoto Protocol to the United Nations Framework Convention on Climate Change and the joint fulfilment of commitments thereunder.

On 4 February 1991, the Council authorised the Commission to participate on behalf of the

European Community in the negotiation of a UN framework convention on climate change, which was adopted in New York on 9 May 1992. The Community ratified the Framework Convention by Decision of 94/69/EC of 15 December 1993, which entered into force on 21 March 1994. At the fourth meeting of the Conference of the Parties in Berlin in March 1995, the Parties of the Convention decided to negotiate a Protocol containing measures to reduce emissions in the industrialised countries. After much work, the Kyoto Protocol was adopted on 10 December 1997 in Kyoto. The European Community signed the Protocol on 29 April 1998. In December 2001, the Laeken European Council confirmed that the Union wanted to see the Kyoto Protocol enter into force ahead of the Johannesburg world summit on sustainable development (26 August - 4 September 2002). To that end, this Decision approved the Protocol on behalf of the Community. The Member States were to coordinate their action to deposit their instruments of ratification at the same time as the Community, and as far as possible by June 1, 2002.

The Kyoto Protocol tackles emissions of six greenhouse gases: carbon dioxide (CO2),

methane (CH3), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6). It represents an important step forward in the effort to tackle global warming as it includes binding, quantified objectives for limiting and reducing greenhouse gases (GHGs). Overall, the Parties of Annex I (developed countries and countries with economies in transition) to the Framework Convention undertake to reduce their GHG emissions by at least 5% below 1990 levels during the period 2008 to 2012 (Parties that so wish may make 2005 a reference

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year for emissions of HFCs, PFCs and SF6). Annex B to the Protocol contains the quantified commitments given by the Parties. The EU Member States collectively must reduce their greenhouse gas emissions by 8% between 2008 and 2012. Commitments will be reviewed by 2005 at the latest, for the second commitment period.

The Protocol suggests various means of attaining these objectives: 1. Stepping up or introducing national policies to reduce emissions: greater energy

efficiency, promotion of sustainable forms of agriculture, development of renewable energy sources, etc.

2. Cooperation with the other Contracting Parties: exchanges of experience or information, coordination of national policies in a bid to work effectively through cooperation mechanisms, namely emission permits, joint implementation and a clean development mechanism.

1.14 INTEGRATION OF ENVIRONMENTAL POLICY INTO ALL EU POLICIES: THE CASE OF THE COMMON AGRICULTURAL POLICY (CAP)

1.14.1 Introduction

The principle of integration of the environment into all EU policies is one of the foundations of the action taken by the Community on the environment, with the ultimate goal of sustainable development. The principle of integrating the environment into Community policies was confirmed by the Treaty on European Union, which stipulated that “environmental protection requirements must be integrated into the definition and implementation of other Community policies.”

With a view to stronger application of the Community’s environmental legislation, the Community has stepped up its strategy for integrating it into the policies on the sectors causing the greatest damage to the environment. The first step was taken at the Cardiff summit (15 and 16 June 1998), where the European Council initiated the “Cardiff process” by inviting the Transport, Energy and Agriculture Councils to define strategies of their own for coordinated Community action to integrate environmental concerns into EU policy. The results of the Cardiff process are the following:

1. On 14 October 1998, the Commission submitted a communication on strengthening environmental integration within EU energy policy. The Commission proposes specific measures to this end and reviews the progress made with integrating environmental requirements in the energy sector.

2. In the case of transport, on 31 March 1998, the Commission adopted a communication on developing a Community approach on transport and CO2. This communication assesses the impact of the measures taken to reduce CO2 emissions and proposes establishing a comprehensive, coordinated policy covering all modes of transport. A communication specifically addressing the integration of environmental concerns into the air transport sector was adopted in December 1999.

3. The common agricultural policy (CAP) has modernised European agriculture but also led to serious deterioration of the environment. Real changes came with the 1992 CAP reform: encouragement of less intensive production, reduction of surpluses and agri-environment and afforestation programmes. Continuing the same approach, on 27 January 1999 the Commission submitted a communication entitled “Directions towards sustainable agriculture,” which stressed the need for better integration of

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environmental requirements in agriculture, particularly in the context of the 1999 reform of the CAP.

4. Environmental considerations form an important element in the reforms of the structural policy adopted as part of the Agenda 2000 package.

At the Vienna summit (11 and 12 December 1998) the European Council welcomed the

initial reports from the Transport, Energy and Agriculture Councils and called on three further formations (the Development, Internal Market and Industry Councils) to define strategies of their own. The results of the Vienna process are the following:

1. On 8 June 1999 the Commission submitted a communication on the single market and the environment, which stressed the need to reinforce the synergies between the single market and environment policies and proposed measures conducive to closer integration.

2. Industry has been taking account of environmental considerations for many years. In its conclusions of 29 April 1999 the Council advocated the introduction of sustainable patterns of production and consumption.

3. On 28 January 1999 the Commission submitted a proposal for a regulation on measures to promote full, effective integration of the environmental dimension in the development process of the developing countries, to enable the integration process to be effectively put in place.

New steps were taken by the Cologne European Council (3 and 4 June 1999): 1. It considered necessary to define an appropriate framework for energy taxation and

called on the Economic and Financial Affairs (ECOFIN) Council to reach decisions on this subject.

2. It also called on the General Affairs, ECOFIN, and Fisheries Councils to report back to it in 2000 on integration of environmental issues and sustainable development in each of their policy areas. In response to this request from the European Council, on 14 July 1999 the Commission submitted a communication on fisheries management and nature conservation in the marine environment with the objective of ensuring closer coordination and coherence between environment policy and the common fisheries policy.

1.14.2 Integration of environmental policy into the CAP

The Communication from the Commission to the Council, the European Parliament, the Economic and Social Committee and the Committee of the Regions of 27 January 1999 (COM(1999) 22 final), Directions towards sustainable agriculture, established the approach adopted by the Commission to the integration of the environmental aspects of agriculture into the reform of the CAP under Agenda 2000.

Technological developments and commercial criteria intended to increase yields and reduce costs have greatly increased the intensification of agriculture over the last forty years. The CAP is largely responsible for this intensification. The high level of support for agricultural prices has encouraged intensive agriculture and greater use of fertilisers and pesticides. This has resulted in polluted water and land, and the destruction of some important ecosystems. The impact of the intensification of agriculture on the landscape can be included among the other changes in the environment having been speeded up by the price policy of the CAP. The removal of hedges, stone walls and ditches and the drainage of wet lands have contributed to the loss of natural habitats for a large number of birds, plants and other forms of wild life. In some regions, intensification has resulted in the consumption of more water than resources can provide and has speeded up soil

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erosion. The abandonment of land use for agricultural purposes, mainly for economic reasons, also exerts pressure on the landscape and biodiversity.

The Cardiff European Council in June 1998 took note of the efforts made by the

Commission to include the environment in all Community policies and of the need to assess the impact on the environment in each decision. In December 1998 the Vienna European Council acknowledged the importance of ensuring that environmental factors were appropriately integrated into the Agenda 2000 decisions to be taken under the CAP. The EU environmental strategy under the CAP is based on targeted agri-environmental measures that, particularly in rural areas, go beyond sound agricultural practice and environmental legislation. These measures form an integral part of the rural development programmes. When the CAP was reformed in 1999, it was decided that agri-environmental measures should be stronger. Accordingly, farmers who voluntarily undertook environmental work (protection of the environment, preservation of the countryside) would be paid. However, payments would be made only for measures going beyond good agricultural practices, which implies that the farmer is already observing basic environmental standards.

The environmental implications of the 1999 reform of the CAP are not, however, restricted

to agri-environmental measures. The basic environmental rules form an integral part of the support systems for agriculture. In addition, the Member States may link direct payments to compliance with environmental requirements. These new rules will reduce payments to farmers who do not make the efforts needed to comply with European legislation on the environment. Specific environmental measures were also introduced into the CAP (further financial incentives for more extensive production of beef, voluntary set-aside of up to 10% of the base area in the arable crops sector). The Member States may designate up to 10% of their territory as areas suffering from particular handicaps where the continuation of agricultural activity should receive aid in order to protect the environment or retain population in the countryside.

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COSTS AND EMPLOYMENT EFFECTS OF EU ENVIRONMENTAL POLICY

1.15 INTRODUCTION We provide estimates of likely costs and employment effects of achieving the objectives of

selected pieces of EU environmental legislation on three environmental domains (waste, water, and air), based on Andrews et al. (2000) and ECOTEC (2002), as they are the most complete available studies. These estimates concentrate on first-round effects, that is, the employment in the industries undertaking the expenditure (capital and operating) and in the industries supplying the goods and services to the industries undertaking the expenditure. However, environmental expenditure in many sectors continues circulating throughout the economy, as it is in turn received and spent by many different economic agents. Therefore, employment effects may be underestimated.

The analysis is limited to the costs and effects on employment of the ten directives studied

by Andrews et al. (2000): 1. Air pollution policy:

a. Sulphur in Liquid Fuels Directives. b. National Emissions Ceiling Directive. c. Large Combustion Plants Directive. d. Directive on Volatile Organic Compounds (VOC) resulting from certain industrial

activities. 2. Water pollution policy:

a. Urban Waste Water Treatment Directive. b. Drinking Water Directive. c. Nitrates Directive.

3. Waste policy: a. Hazardous Waste Incineration Directive. b. Packaging and Packaging Waste Directive. c. End-of-Life Vehicles Directive.

1.16 METHODOLOGICAL ISSUES The methodology employed by Andrews et al. (2000) consists of breaking down

expenditures into receiving sectors, and establishing the labour market response to those expenditures. The latter depends on two country specific factors: the share of labour in total expenditure in the sectors undertaking and receiving expenditure, and the unit labour costs in the sectors undertaking expenditure. These factors work in opposite directions: the higher the share of labour in the sectors the higher will be the employment effect, and the higher the unit labour cost the lower will be the resulting employment impact.

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Differently from other approaches, which usually try to identify the marginal or incremental impacts of policies (the additional activity by Member Sates, which they would otherwise not have undertaken, that is required to comply with EU Directives), Andrews et al. (2000), recognising the overlapping nature of polices and objectives, take a baseline (1990 or the date at which the directives are required to be implemented) and look at the costs of achieving the targets set by the directives independently of other initiatives.

In what follows, the cost information for each directive is presented in the price bases

reported by Andrews et al. (2000). For the aggregation of the results of each directive, and the construction of indicators, prices are in 1995 levels. We have used the following indices to change price bases, all taken from Eurostat (2002):

1. Industrial producer price index - Total industry (excluding construction): used for operating expenditures and turnover of the EU eco-industries from ECOTEC (2002).

2. Industrial producer price index - Capital goods: used for capital expenditures. 3. Implicit deflator of gross domestic product (SEC95): used for GDP.

Following Andrews et al. (2000), cost and employment results have been annualised

deriving equivalent annual values for capital and operating expenditure streams, assuming that all capital items are amortised over a 20-year period. Assuming a 10 per cent discount rate, capital expenditure is annualised by dividing it by a factor of 9.4. The annualised data corresponds to the height of implementation of the directives; hence the annual operating expenditures taken into account are those at the height of implementation. The annualised cost and employment effects can then be compared for directives that have a different phasing of expenditure.

The available studies used as a basis by Andrews et al. (2000) present major limitations and

problems. Hence the results derived from them must be taken cautiously. Among those limitations and problems, Andrews et al. (2000) consider the following as the most relevant ones:

1. As previously advanced, the estimates concentrate on first-round effects. Therefore, employment effects may be underestimated, and a macroeconomic analysis of the economy wide implications of expenditures would be required.

2. The availability of cost data for the ten directives varies significantly because of the following reasons:

a. few country studies have been reported estimating the costs of the different directives;

b. although it is required that the EU produces cost estimates of its directives, these are not available for all of them, since for some it was considered too difficult to produce cost estimates;

c. some pan-EU studies are not reliable because their estimates are based on the extrapolation from national estimates.

3. The availability and reliability of the cost data is low for those directives where many different approaches can be applied to implement it. Such is the case, for instance, of the Nitrate Directive, for which the implementation is farm specific.

4. The reliability of the cost data is also influenced by the objective for producing the cost information. For instance, when countries want to negotiate an extended period for the implementation of a directive, they may try to overestimate the costs. Similarly, industrial sectors estimates of costs may be inflated to negotiate less stringent requirements.

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1.17 WASTE POLICY

1.17.1 Hazardous Waste Incineration Directive 1.17.1.1 Benefits

The objective of Directive 94/67/EEC is to prevent or reduce as far as possible negative

effects on human health and the environment from the incineration of hazardous waste.

1.17.1.2 Costs

1.17.1.2.1 Introduction According to the Directive, new hazardous waste incineration plants must be designed to

meet its provisions. Incineration plants that existed before the Directive should have been partly or totally renewed (depending on how well the incineration process can be controlled and on the degree of cleaning in the flue gas cleaning facilities) before the middle of 2000 to fulfil the requirements of the Directive.

1.17.1.2.2 Best estimate of the costs of the Directive

Andrews et al. (2000) provide the best estimate of costs of Directive 94/67/EEC based on

studies by ERL España (1991), the European Commission (1992, 1996b), and personal communications with experts. This estimate is based on a scenario in which the amount of incinerated hazardous waste remains constant from the moment the estimate was produced,5 and the only investments needed are for a total renewal of all flue gas cleaning facilities on existing incineration plants. Taking Andrews et al. (2000)’s estimates as a basis, we update them by considering more recent and accurate data on waste incineration (Eurostat, 2003). Our updated estimate is summarised in Table 1. As a result of our update, total estimated investment cost is 920 million Euros, rather than 697 million Euros in Andrews et al. (2000), and operating cost is 53 million Euros per annum instead of 40 million Euros per annum.

5 Andrews et al. (2000) take Eurostat (1999) as their source of information on waste incineration.

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Table 1: Best estimates of costs for the Hazardous Waste Incineration Directive 94/67/EEC based on the amount of hazardous waste incinerated in the last available yeara

Year

Hazardous waste incinerated

(1,000 t)

Investment cost (M €)

Operating cost (M €/year)

Austria 1996 106 17.17 0.99 Belgium 1999 129 20.90 1.20 Denmark 1998 156 25.27 1.45 Finland 1997 101 16.36 0.94 France 1998 1,361 220.48 12.66 Germany 1993 2,034 329.51 18.92 Greece 1997 1 0.16 0.01 Ireland 1998 71 11.50 0.66 Italy 1997 374 60.59 3.48 Luxembourg 1998 0 0.00 0.00 Netherlands 1998 244 39.53 2.27 Portugal N/A N/A N/A N/A Spain 1996 918 148.72 8.54 Sweden N/A N/A N/A N/A UK 1993 185 29.97 1.72 EU-15 920.16 52.82

a Andrews et al. (2000) do not indicate the price-level year used. Source: own calculations based on Andrews et al. (2000) and Eurostat (2003).

1.17.1.3 Employment effects

Based on their cost estimates, Andrews et al. (2000) calculate the best estimates of linked employment. Given that we have updated their cost estimates, their employment estimates are accordingly recalculated, arriving to the estimates shown in Table 2. Our estimate of total EU employment linked to investment expenditure is 7,979 full-time equivalent (FTE) jobs, while Andrews et al.’s is 5,804; and our estimate of total EU employment linked to operating expenditure is 666 FTE jobs per annum, and Andrews et al.’s is 508.

Table

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2: Best estimates of linked employment for the Hazardous Waste Incineration Directive 94/67/EEC based on the amount of hazardous waste incinerated in the last available year

Year Hazardous waste

incinerated (1,000 t)

Employment linked to

investment expenditure (FTE jobs)

Employment linked to operating

expenditure (FTE jobs/year)

Austria 1996 106 140 12 Belgium 1999 129 151 14 Denmark 1998 156 240 19 Finland 1997 101 126 11 France 1998 1,361 1,812 160 Germany 1993 2,034 3,054 230 Greece 1997 1 2 0 Ireland 1998 71 89 9 Italy 1997 374 466 35 Luxembourg 1998 0 0 0 Netherlands 1998 244 240 27 Portugal N/A N/A 333 39 Spain 1996 918 1,144 87 Sweden N/A N/A 20 2 UK 1993 185 162 21 EU-15 7,979 666

Source: own calculations based on Andrews et al. (2000) and Eurostat (2003).

1.17.2 Packaging and Packaging Waste Directive 1.17.2.1 Benefits

The goals are to provide a high level of environmental protection as well as to ensure the

functioning of the internal market.

1.17.2.2 Costs

1.17.2.2.1 Introduction The main requirements introduced by the Directive relate to the recycling and recovery

objectives. Nevertheless, the Directive introduces other obligations, such as limiting the heavy metal content of packaging material and the mandate to establish a database on the packaging materials and packaging waste. Although these other obligations will generate some expenditures, they are likely to be negligible as regards the overall costs of the Directive, so that the main cost drivers are the measures required to comply with the recycling and recovery targets.

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1.17.2.2.2 Best estimate of the costs of the Directive By the time the Directive entered into force, some countries already exceeded the targets

imposed by the Directive and most of the calculated investments were already completed. However, to calculate consistent costs between countries, Andrews et al. (2000) assume that all countries start with zero recycling. They also assume the minimum costs for the simplest and cheapest collection system for the cleanest materials with the amounts necessary to meet the minimum requirements of the Directive. As a result, Andrews et al. (2000)’ costs estimates are abstract or theoretical, but have been contrasted with empirical data from the different Member States where available. Their best estimate of costs of Directive 94/62/EEC is summarised in Table 3, and it is based on Coopers & Lybrandt (1997), European Commission (1997b) and European Topic Centre for Waste (1999).

Table 3: Best estimates of costs for the Packaging and Packaging Waste Directive

94/62/EECa Investment cost (M €) Operating cost (M €/year) Austria 903 115 Belgium 731 102 Denmark 541 73 Finland 524 68 France 4,949 606 Germany 9,061 1,178 Greece 424 53 Ireland 148 21 Italy 3,230 473 Luxembourg 42 4 Netherlands 1,898 204 Portugal 437 56 Spain 1,897 245 Sweden 885 114 UK 3,029 411 EU-15 28,698 3,725

a Andrews et al. (2000) do not indicate the price-level year used. Source: Andrews et al. (2000).


Based on their cost estimates and engineering analysis, Andrews et al. (2000) calculate the best estimates of linked employment as shown in Table 4.

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Table 4: Best estimates of linked employment for the Packaging and Packaging Waste Directive 94/62/EEC

Employment linked to investment expenditure (FTE jobs)

Employment linked to operating expenditure (FTE jobs/year)

Austria 9,546 2,220 Belgium 5,942 1,759 Denmark 6,025 1,373 Finland 5,022 1,340 France 49,887 11,554 Germany 92,687 19,150 Greece 5,322 2,270 Ireland 1,318 487 Italy 13,389 7,884 Luxembourg 0 0 Netherlands 15,621 3,597 Portugal 6,769 3,195 Spain 13,700 5,225 Sweden 6,412 2,256 UK 24,649 9,005 EU-15 256,290 71,315

Source: Andrews et al. (2000).

1.17.3 End-of-Life Vehicles Directive 1.17.3.1 Benefits

The objective of the Directive is that end-of-life vehicles are treated without endangering the

environment. This implies setting up adequate collection systems, the removal of toxic components and setting goals for the weight percentage of the car reused, recycled and recovered.

1.17.3.2 Costs

1.17.3.2.1 Introduction

The Directive requires setting up adequate collection systems for end-of-life vehicles, the

removal of toxic components and setting 2005 and 2015 goals for the weight percentage of the car reused, recycled and recovered. According to Andrews et al. (2000), the measures required to achieve these objectives are the following:

1. licensing of dismantlers and development of a system that ensures that end-of-life vehicles are treated by authorised facilities;

2. environment-friendly design of new vehicles and development of dismantling manuals; 3. removal and specific treatment of toxic components: batteries and fluids; 4. dismantling and further treatment of some parts of plastic, textiles and glass.

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1.17.3.2.2 Best estimate of the costs of the Directive Based on BMU (1998), Department of Trade and Industry (1998), ECOTEC (1997),

European Commission Joint Research Centre (1998), European Environmental Agency (1997), European Topic Centre for Waste (1998), Foundation Auto and Recycling and Auto Recycling Nederland BV (1996), General Workers Union (1995), Glachant (1996) and Whitson (1995), Andrews et al. (2000) provide the best estimate of costs of Directive 2000/53/EC, which is summarized in Table 5.

Table 5: Best estimates of costs for the End-of-Life Vehicles Directive 2000/53/EC (1994

price level) Investment cost (M €) Operating cost in

2005 (M €/year) Operating cost in 2015 (M €/year)

Austria 12 7.6 23 Belgium 5 3.6 11 Denmark 6 4.0 12 Finland 3 2.1 6 France 92 66.0 199 Germany 139 102.4 309 Greece 5 1.5 5 Ireland 3 1.2 4 Italy 65 40.2 121 Luxembourg - - - Netherlands 21 13.8 42 Portugal 8 2.0 6 Spain 23 13.5 41 Sweden 5 3.2 10 UK 74 42.7 129 EU-15 461 303.8 917



Andrews et al. (2000) calculate the best estimates of linked employment based on their cost estimates and engineering analysis, as shown in Table 6.

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Table 6: Best estimates of linked employment for the End-of-Life Vehicles Directive 2000/53/EC



Austria 115 507 Belgium 43 209 Denmark 57 246 Finland 28 137 France 798 3,710 Germany 1,218 5,643 Greece 76 202 Ireland 31 105 Italy 472 2,564 Luxembourg 0 0 Netherlands 160 820 Portugal 132 304 Spain 233 933 Sweden 44 209 UK 548 2,925 EU-15 3,955 18,514


1.18 WATER POLICY 1.18.1 Urban Waste Water Treatment Directive 1.18.1.1 Benefits

The objective of this Directive is to protect the environment from the adverse effects of

discharges of urban waste water from agglomerations and biodegradable industrial waste water from the agri-foodstuffs sector by requiring Member States to ensure that such water is collected and treated.

1.18.1.2 Costs


The costs associated with the Directive are those of the investments in collection and sewage

and sludge treatment infrastructure necessary to meet the requirements imposed by the Directive. According to Andrews et al. (2000), these investments may involve the following:

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1. upgrading existing capacity to a new level of performance (e.g. to achieve nutrient removal),

2. investing in new capacity where it previously did not exist (for example providing treatment facilities for the discharges which previously received no treatment),

3. investing in collection infrastructure in order to connect previously unconnected properties to the sewage treatment network,

4. improving the collection system efficiency: leakage reduction, storm water overflow management, etc.


Following Andrews et al. (2000), and based on studies by EDC and EPE AbSL (1997), the

European Commission (1999), European Waste Water Group (1995), Simonsen (1995) and WRc (1995a), the best estimate of costs of Directive 91/271/EEC is summarised in Table 7. Germany, with 64 billion Euros, represents over 40% of the total investment costs for the EU, but it is surpassed by Austria in per population equivalent (p.e.) terms. However, Germany accounts for a smaller fraction of total operating expenditures, mainly because it relies more than other countries on upgraded rather than new infrastructure. In the case of Denmark and Luxembourg no new collection infrastructure is required; hence treatment accounts for all of these countries’ expenditure.

Table 7:

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Best estimates of costs for the Urban Waste Water Treatment Directive 91/271/EEC (1994/1995 price levela)

Investment cost 1990-2010 Operating cost in 2010 Collection

(M €) Treatment

(M €) Total (M

€) € per p.e.

Collection (M €/year)

Treatment (M €/year)

Total (M €/year)

€/year per p.e.

Austria 7,670 2,120 9,790 503 10 40 50 2.78

Belgium 1,760 2,140 3,900 393 0 70 70 7.03

Denmark - 1,300 1,300 141 - 40 40 3.91

Finland 1,000 550 1,550 394 0 10 10 2.19

France 8,020 4,020 12,040 174 60 110 180 2.56

Germany 35,300 28,870 64,170 446 60 590 640 4.48

Greece 620 880 1,500 174 10 40 50 5.29

Ireland 490 1,140 1,630 428 10 60 70 18.47

Italy 12,000 5,900 17,900 177 50 270 320 3.16

Luxem-bourg

- 270 270 279 0 10 10 5.79

Nether-lands

4,100 4,200 8,300 376 - 50 50 2.19

Portugal 1,450 940 2,390 146 30 40 70 4.10

Spain 4,710 6,160 10,870 147 170 240 410 5.60

Sweden 1,400 1,500 2,900 222 - 10 10 1.15

UK 2,780 9,750 12,530 166 - 360 360 4.78

EU-15 81,300 69,740 151,040 274 400 1,940 2,340 4.23 a Except UK (1996/1997 price level), Italy (1996 price level) and Netherlands (1998 price level). Source: Andrews et al. (2000).

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On the basis of their cost estimates and engineering analysis, Andrews et al. (2000) report the best estimates of linked employment shown in Table 8. Table 8: Best estimates of linked employment for the Urban Waste Water Treatment

Directive 91/271/EEC Employment linked to investment

expenditure (FTE jobs) Employment linked to operating

expenditure (FTE jobs/year) Austria 93,248 758 Belgium 33,465 854 Denmark 12,253 511 Finland 14,820 123 France 104,606 2,226 Germany 509,696 7,079 Greece 18,835 1,073 Ireland 14,804 1,104 Italy 102,542 3,796 Luxembourg 3,222 81 Netherlands 58,118 556 Portugal 36,494 2,638 Spain 143,997 7,267 Sweden 24,696 218 UK 113,884 4,821 EU-15 1,284,680 33,105


1.18.2 Amended Drinking Water Directive 1.18.2.1 Benefits

The objective of the Directive is to protect human health from the effects of pollution of public drinking water supplies.

1.18.2.2 Costs 1.18.2.2.1 Introduction

The cost drivers of the Directive are the measures required to comply with the standards set

out for quality of drinking water, which will depend upon the nature of the problem causing non-compliance: problems of the quality of the source water, problems of the adequacy of the water

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treatment options, and problems of the state of the distribution system. Hence, the measures required to meet the targets set by the Directive may involve changes in the management of source water (e.g. designating water protection zones), treatment (e.g. investing in new treatment capacity to remove particular contaminants) and/or improvements in the distribution system. According to Andrews et al. (2000), the range of available measures and problems imply that there exists a large potential for overlap and spill-over, and therefore it is likely to incur in double counting and to ignore positive or negative feedback impacts associated with different control strategies.


Andrews et al. (2000) develop best order of magnitude costs for only three cost drivers of the

Directive: 1. pesticides, based on estimates by Heinz et al. (1995); 2. lead, on the basis of WRc (1995b); and 3. monitoring costs, using LNEC, WRc and CRECEP (1995).

These best estimate of costs of Directive 98/83/EC is summarised in Table 9. This estimate must be regarded as a significant underestimate, since only three of many cost drivers are evaluated. For instance, Andrews et al. (2000) report that these costs represent in the UK about one quarter of the total expenditure linked to the Directive.

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Table 9: Best estimates of costs for the Quality of Water Intended for Human Consumption Directive 98/83/EC (1995 price levela)

Pesticides Lead Monitoring Investment

cost Operating cost Investment cost Operating cost Operating cost

Total (M €) € per

capita

Total (M

€/year)

€/year per

capita

Total (M €)

€ per capita

Total (M

€/year)

€/year per

capita

Total (M

€/year)

€/year per

capita Austria 35 5 10 1 44 6 - - 1.09 0.14

Belgium 124 16 9 1 392 51 11 1.48 0.65 0.08

Denmark 4 1 7 1 - - - - 0.41 0.05

Finland 124 16 9 1 N/A N/A N/A N/A 0.64 0.08

France 46 6 117 15 3,300 428 1 0.13 4.88 0.63

Germany 61 8 102 13 583 76 1 0.13 6.00 0.78

Greece 34 4 9 1 30 - - - 1.05 0.14

Ireland 188 24 5 1 193 25 0 0.06 7.20 0.07

Italy 1,586 206 72 9 332 43 2 0.26 0.54 0.93

Luxem-bourg

7 1 1 0 5 - - - 0.04 0.01

Nether-lands

272 35 20 3 73 9 3 0.36 1.43 0.18

Portugal 94 12 4 1 5 1 2 0.26 0.43 0.06

Spain 583 76 27 3 175 23 2 0.26 2.65 0.34

Sweden 27 4 8 1 N/A N/A N/A N/A 0.84 0.11

UK 1,648 214 44 6 2,068 268 6 0.76 4.74 0.61

EU-15 4,843 460 443 67 7,200 930 28 3.7 32.59 4.21 a Except for lead (1993 price level). Source: Andrews et al. (2000).


Andrews et al. (2000) provide the best estimates of linked employment shown in Table 10,

based on their cost estimates and engineering analysis.

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Table 10: Best estimates of linked employment for the Quality of Water Intended for Human Consumption Directive 98/83/EC

Pesticides Lead Monitoring Employment

linked to investment expenditure (FTE jobs)









Austria 321 91 372 - 26

Belgium 1,018 71 3,600 173 13

Denmark 717 56 - - 10

Finland 1,117 87 N/A N/A 16

France 385 1,026 28,300 16 103

Germany 477 766 4,412 13 106

Greece 2,566 230 380 - 41

Ireland 946 78 3,094 - 204

Italy 469 1,143 1,241 31 13

Luxem-bourg

88 9 67 - 1

Nether-lands

1,808 145 518 45 30

Portugal 1,187 141 82 103 35

Spain 5,938 443 2,822 48 74

Sweden 1,334 110 N/A N/A 21

UK 14,950 429 21,419 99 118

EU-15 33,321 4,825 66,307 528 811


1.18.3 Nitrates Directive

1.18.3.1 Benefits

The origin of the Directive was the concern over the frequent occurrence of algal blooms in

the coastal regions during spring and summer, and an increase in nitrate concentrations in many surface and ground waters used for abstraction for potable supply, in intensive agricultural areas.

1.18.3.2 Costs 1.18.3.2.1 Introduction

The costs of the Directive are influenced by the different nature of the measures implied. As

Andrews et al. (2000) point out, the Directive combines:

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1. Voluntary measures, backed up by promotion and education campaigns: outside designated areas, the code of good agricultural practice is voluntary and hence will be cost neutral to farmers or it could even result in cost savings. Therefore, these measures can be ignored for our purposes.

2. Mandatory measures: the measures introduced in vulnerable zones are mandatory and are expected to increase costs for farmers. Hence, the key cost driver is the designation of vulnerable zones. The aspect of the mandatory action programmes which has received the greatest attention in this regard is the application standard for livestock manure set in terms of kilograms of nitrogen per hectare (it can be applied in terms of equivalent animal numbers).


On the basis of limited information from Berentsen and Giesen (1998), Brouwer and

Klienhanss (1997), Brouwer et al. (1995), Hellegers (1997) and MAFF (1998), and using a bottom-up approach, Andrews et al. (2000) develop best estimates of the costs of specific measures to implement the Directive. These estimates are summarised in Table 11. The majority of costs are seen in the Netherlands (179 million Euros per annum), UK (114 million Euros per annum) and France and Spain (70 million Euros per annum).

Andrews et al. (2000) point out that these estimates are based on very limited information

and are in general lower than estimates available elsewhere. Therefore, they should be treated with caution.

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Table 11: Best estimates of costs of some measures associated with Council Directive 91/676/EEC concerning the protection of waters against pollution caused by nitrates from agricultural sources (1997/1998 price level)

Cereal (M

€/year)

General crops (M €/year)

Dairy (M €/year)

Dry-stock (M

€/year)

Granivore (M €/year)

Mixed (M €/year)

Total (M €/year)

Austria N/A N/A N/A N/A N/A N/A N/A Belgium - - 19 20 4 19 62

Denmark - - 25 - 30 - 55

Finland N/A N/A N/A N/A N/A N/A N/A France - - - - 46 24 70

Germany - - - - 5 - 5

Greece - - 1 24 0 - 25

Ireland - - - - - - 0

Italy - - 18 21 11 - 49

Luxembourg - - - - - - 0

Netherlands - - 135 9 28 7 179

Portugal - - - - 4 - 4

Spain - - 38 - 32 - 70

Sweden N/A N/A N/A N/A N/A N/A N/A UK - - 113 - 2 - 114

EU-15 0 0 348 74 163 50 635



On the basis of their cost estimates and engineering analysis, Andrews et al. (2000) provide the best estimates of linked employment shown in Table 12.

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Table 12: Best estimates of linked employment for measures associated with Council Directive 91/676/EEC concerning the protection of waters against pollution caused by nitrates from agricultural sources

Employment linked to operating expenditure (FTE jobs/year) Austria N/A Belgium 704 Denmark 725 Finland N/A France 404 Germany 26 Greece 436 Ireland - Italy 757 Luxembourg - Netherlands 1,807 Portugal 163 Spain 905 Sweden N/A UK 2,602 EU-15 8,529


1.19 AIR POLLUTION POLICY 1.19.1 Sulphur in Liquid Fuels Directives 1.19.1.1 Benefits

Sulphur is naturally occurring both in coal and liquid petroleum products. When coal and

liquid petroleum products are burned, the sulphur is oxidised to sulphur dioxide, and, in the absence of suitable abatement measures, released to the atmosphere. Sulphur dioxide is directly toxic to humans and plants, and is one of the main pollutants causing acidification. Sulphur also contributes to airborne particulate matter, through chemical reactions in the atmosphere that lead to the formation of sulphate aerosols.

1.19.1.2 Costs


The costs associated with the Directives are: 1. costs of desulphurisation of liquid fuels as specified in 93/12/EEC,

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2. costs of petrol and diesel quality as specified in 98/70/EEC, and 3. costs associated with desulphurisation of liquid fuels as specified in 99/32/EEC. Since the latter two Directives take over the requirements of Directive 93/12/EEC (for gas

oils in the case of 99/32 and diesel fuels in relation to 98/70), we will focus on the costs of petrol and diesel quality as specified in 98/70/EEC, and the costs associated with desulphurisation of liquid fuels as specified in 99/32/EEC.

1.19.1.2.2 Best estimate of the costs of the Directives

Following Andrews et al. (2000), and based on estimations by the European Commission

(COM (96)248), Cofala (1999), CONCAWE (1999), ERM (1996a), and Oudart (1997), the best estimate of costs of Directives 98/70/EEC and 99/32/EEC is summarised in Table 13, assuming in both cases 15 years duration. The largest capital expenditure (more than 1 billion Euros) occurs in France, Germany, Italy, Spain, and the UK, which have the largest EU refinery capacities (greater than 10% in all cases).

In per capita terms, the average EU investment costs are 27 Euros, with significant

differences across countries. The Netherlands and Belgium show the highest per capita costs (60 and 48 Euros respectively), and Austria, Finland, Ireland, Luxembourg and Sweden show the lowest (less than 10 Euros). In the case of Austria, Finland and Sweden this is partly because of the absence of estimates for Directive 98/70, which are based on an evaluation prior to the accession of these countries to the EU. However, refinery capacity in the late entry countries is small, so it should make little difference. The estimated variation between countries is a function of their refinery capacity, hence that per capita costs are highest in countries such as the Netherlands, which act as major international centres for oil import, processing and distribution.

Andrews et al. (2000) point out that uncertainties are significant in relation to these

estimates. Extrapolation on the basis of refinery capacity implicitly assumes that all refineries are similar, which is not the case, given variation in the technologies used, plant age profile and the technological standards of the refinery stock in different countries. Some newer plant may be able to adapt with few problems and hence very low costs, other older plant may require very substantial retro-fitting. The approach followed consists of basing the analysis around the more conservative results of past analyses, bearing in mind the tendency for ex-ante estimates of the costs of legislation to exceed the true costs, sometimes by a considerable margin.

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Table 13: Best estimates of costs for the Sulphur in Liquid Fuels Directives 98/70/EEC and 99/32/EEC (1995 price level) Directive 98/70/EEC Directive 99/32/EEC Total Investment

cost (M €)






Austria N/A N/A 43 1.0 43 1.0 Belgium 362 22 128 3.1 490 25.1 Denmark 111 7 39 0.9 150 7.9 Finland N/A N/A 43 1.0 43 1.0 France 1,036 63 365 8.8 1,401 71.8 Germany 1,363 82 481 11.5 1,844 93.5 Greece 237 14 84 2.0 321 16.0 Ireland 24 1 9 0.2 33 1.2 Italy 1,321 80 466 11.2 1,787 91.2 Luxembourg N/A N/A N/A N/A N/A N/A Netherlands 694 42 245 5.9 939 47.9 Portugal 237 14 84 2.0 321 16.0 Spain 746 45 263 6.3 1,009 51.3 Sweden N/A N/A 87 2.1 87 2.1 UK 1,092 66 385 9.2 1,477 75.2 EU-15 7,223 437 2,719 65.2 9,942 502.2



Based on their cost estimates and engineering analysis, Andrews et al. (2000) calculate the best estimates of linked employment as shown in Table 14.

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Table 14: Best estimates of linked employment for the Sulphur in Liquid Fuels Directives 98/70/EEC and 99/32/EEC



Austria 402 12 Belgium 4,007 272 Denmark 1,561 89 Finland 384 12 France 12,398 840 Germany 17,583 986 Greece 4,259 412 Ireland 302 16 Italy 10,574 1,028 Luxembourg 0 0 Netherlands 6,400 541 Portugal 4,150 523 Spain 9,291 720 Sweden 691 26 UK 10,437 1,020 EU-15 82,439 6,497


1.19.2 National Emissions Ceiling Directive 1.19.2.1 Benefits

The deposition of acidifying pollutants (SO2, NOX and NH3) onto vegetation, surface waters,

soils, buildings and monuments reduces the alkalinity of lakes and rivers and has serious effects on biological life. For instance, acidification has destroyed fish populations in thousands of lakes and streams in Scandinavia. Acidification also makes many forests vulnerable to drought, disease and harmful insects.

Nitrogen supply to the soil is critical for plant nutrition. However, plants vary in their need

for nitrogen. The deposition of nitrogen compounds (NOX and NH3) from the atmosphere leads to changes in terrestrial and water ecosystems, thereby altering vegetation and biodiversity.

The aim of the Directive is to limit emissions of acidifying and eutrophying pollutants and

ozone precursors, in order to improve the protection of the environment and human health against risks of adverse effects from acidification, soil eutrophication and tropospheric ozone. The Directive aims at long-term objective of no exceedence of critical levels and loads and at effective protection of all people against recognised health risks from air pollution.

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1.19.2.2 Costs

1.19.2.2.1 Introduction The Directive requires reduction of sulphur dioxide (SO2), nitrogen oxides (NOX), ammonia

(NH3) and non-methane volatile organic compounds (VOC). Therefore, the cost drivers are the measures that may be required to reduce these four pollutants (Andrews et al., 2000):

1. Available measures to reduce SO2 emissions: a. Energy management: improve energy efficiency, co-generation, demand-side

management, increase the proportion of non-combustion energy. b. Fuel switching: from high- to low-sulphur coals and/or liquid fuels or from coal

to gas. c. Fuel cleaning: cleaning of natural gas, cleaning of process gas, desulphurization

of liquid fuels, desulphurization of heavy fractions, hydro-cracking and full conversion technology, cleaning of hard coal.

d. Advanced combustion technologies: fluidized-bed combustion (FBC), integrated gasification combined-cycle (IGCC), and combined-cycle gas turbines (CCGT).

e. Process and combustion modifications. f. Flue gas desulphurization (FGD) processes: lime/limestone wet scrubbing

(LWS), spray dry absorption (SDA), Wellman Lord process (WL), ammonia scrubbing (AS), and combined NOX /SOX removal proceses.

2. Available measures to reduce NOX emissions: a. Energy management: improve energy efficiency, co-generation, demand-side

management, increase the proportion of non-combustion energy. b. Fuel substitution. c. In-furnace control of NOX emissions for stationary sources (combustion

modifications): low-NOX burners, burners with flue gas re-circulation, fuel-staged burners, fuel injection or re-burning, fluidized bed combustion.

d. Secondary measures depending on the treatment of flue gasses: selective catalytic reduction (SCR) and selective non-catalytic reduction (SNCR).

e. Measures to control process emissions (not linked to energy use), depending on the raw material and processes involved.

f. Measures in the transport sector: changes in engine design, changes in fuel quality, after treatment of the exhaust gas by catalytic converters, better inspection and maintenance.

3. Available measures to reduce NH3 emissions: 4. Available measures to reduce VOC emissions:

a. Substitution of VOCs: use of water-based degreasing baths, paints, inks, glues or adhesives which are low in or do not contain VOCs.

b. Reduction by best management practices: good housekeeping, preventive maintenance programmes, or by changes in processes such as closed systems during utilisation, storage and distribution of low-boiling organic liquids.

c. Recycling and/or recovery of efficiently collected VOCs by control techniques: adsorption, absorption, condensation and membrane processes.

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d. Destruction of efficiently collected VOCs by control techniques: thermal or catalytic incineration or biological treatment.

e. Reduction of emissions from on-road vehicles: engine modifications (design, carburation and ignition systems, air injection), open-loop catalyst, closed-loop three-way catalyst, advanced closed-loop three-way catalysts, control of evaporative emissions (control of petrol volatility, adjustment to climatic conditions).


Andrews et al. (2000), based on estimations by Amann et al. (1999), provide the best

estimate of costs of Directive 2001/81/EC, which is summarised in Table 15. These estimates are based on the measures required to comply with the Directive from a base scenario that relates to the expected energy development in the EU countries and takes into account all other requirements imposed by environmental legislation. Although these are the best estimates, Andrews et al. (2000) consider that they may overestimate real costs significantly (even by a factor of two or more) for a number of reasons, such as:

1. The RAINS model used by Amann et al. (1999) contains a limited set of abatement options, which potentially omits some other cheaper options.

2. National emission projections are often too high because they exclude industrial responses to factors such as market liberalisation or the emergence of new technologies.

3. The actions taken to meet the objectives set by the Kyoto Protocol and the IPPC Directive may imply a move to fundamentally cleaner production and more efficient use of resources.

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Table 15: Best estimates of costs for the National Emissions Ceiling Directive 2001/81/EC (1995 price level)

NOX/VOC mobile

NOX/VOC stationary

SO2 NH3 Total

Invest-ment cost

(M €)

Operat-ing cost

(M €/year)

Invest-ment cost

(M €)

Operat-ing cost

(M €/year)

Invest-ment cost

(M €)

Operat-ing cost

(M €/year)

Invest-ment cost

(M €)

Operat-ing cost

(M €/year)

Invest-ment cost

(M €)

Operat-ing cost

(M €/year)

Austria 508 15 192 21 0 0 0 0 700 36

Belgium 1,588 101 741 80 453 38 1,898 334 4,680 553

Denmark 0 0 0 0 18 1 0 3 18 4

Finland 0 0 0 0 0 0 0 0 0 0

France 2,557 162 1,193 128 485 40 27 48 4,262 378

Germany 3,626 230 1,692 182 871 72 1,940 818 8,129 1,302

Greece 1,170 74 546 59 0 0 0 0 1,716 133

Ireland 14 1 6 1 71 6 25 32 116 40

Italy 1,394 89 651 70 0 0 0 0 2,045 159

Luxem-bourg

14 1 6 1 4 0 27 14 51 16

Nether-lands

730 46 341 37 68 6 3,709 685 4,848 774

Portugal 197 13 92 10 0 0 0 0 289 23

Spain 45 3 21 2 32 3 0 34 98 42

Sweden 301 19 140 15 0 0 446 81 887 115

UK 3,550 225 1,657 178 1,067 89 36 24 6,310 516

EU-15 15,695 980 7,279 781 3,068 255 8,017 2,073 34,149 4,089


In per capita terms, the average EU costs are about 91 Euros per capita in investment

expenditures, and 10 Euros per capita in annual operating expenditures. Looking at individual countries, we find per capita investment costs over 100 Euros in Belgium, Greece, Luxembourg, Netherlands, Sweden and the UK, being especially high those of Belgium and the Netherlands. The lowest investment expenditures (less than 50 Euros per capita) are found in Denmark, Finland, Ireland, Italy, Portugal and Spain.


On the basis of engineering analysis and their cost estimates, Andrews et al. (2000) provide the best estimates of linked employment shown in Table 16.

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Table 16: Best estimates of linked employment for the National Emissions Ceiling Directive 2001/81/EC



Austria 6,544 451 Belgium 38,273 5,989 Denmark 186 46 Finland 0 0 France 37,716 4,431 Germany 77,514 13,730 Greece 22,762 3,429 Ireland 1,060 546 Italy 12,104 1,786 Luxembourg 574 199 Netherlands 33,038 8,745 Portugal 3,739 736 Spain 903 582 Sweden 7,049 1,427 UK 44,586 7,004 EU-15 286,048 49,101


1.19.3 Large Combustion Plants Directives 1.19.3.1 Benefits

The objective of these Directives is to reduce gradually the annual emissions of sulphur

dioxide and oxides of nitrogen from existing large combustion plants and to lay down emission limit values for sulphur dioxide, nitrogen oxides and dust in the case of new plants. A large combustion plant is defined as a combustion plant with a rated thermal input equal to or greater than 50 MW, irrespective of the type of fuel used. Member States must ensure that waste gases from combustion plants are discharged by means of stacks high enough to safeguard human health and the environment.

1.19.3.2 Costs


The objective of Directives 88/609/EEC, 94/66/EC and 2001/80/EC is to reduce gradually

the annual emissions of sulphur dioxide (SO2) and oxides of nitrogen (NOX) from existing large combustion plants and to lay down emission limit values for sulphur dioxide, nitrogen oxides and dust in the case of new plants. The Directive 94/66/EC concerns sulphur emissions from plants

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between 50 and 100 MWth, and the Commission assumed that it could be met by using low sulphur coal, without any additional control measures, and that sufficient amounts of such coal are available at an acceptable price (COM(92)563 final). Therefore, the relevant cost drivers are those associated with Directive 88/609/EEC and Directive 2001/80/EC. According to Andrews et al. (2000), the necessary measures considered to control SO2 emissions are sorbent injection and, most importantly, flue gas desulphurisation. For plants with thermal input below 300 MWth, the Directives can often be achieved by using low sulphur coal or oil, without further flue gas desulphurisation. In the case of NOX, an important strategy to control emissions is fuel switching (using low nitrogen fuel such as some types of fuel oils or natural gas, that is essentially nitrogen free). Emissions can also be reduced by flue gas re-circulation, retrofitting with low-NOX burners and flue gas denitrification using selective catalytic reduction. For a smaller section of installations, a more effective but also more expensive strategy of flue-gas denitrification using selective non-catalytic reduction has to be used. Dust control will partly be achieved by the flue gas desulphurisation; additional necessary measures include use of fabric filters and electro-static precipitators.


Based on studies by Amann et al. (1998), Amann et al. (1999), Cesar and Klaassen (1990),

ERM (1996b), ERM (1997) and Rentz (1996), Andrews et al. (2000) provide the best estimate of costs of Directives 88/609/EEC and 2001/80/EC summarised in Table 17, assuming 20-years lifetime of installations. Germany experiences the largest costs (more than 7 billion Euros), followed by Austria, Finland, Italy, the Netherlands and Sweden, whose capital expenditures exceeds 1 billion Euros. In per capita terms, Austria, Finland, the Netherlands and Sweden show investment expenditures in excess of 100 Euros per capita, almost doubling the EU average of 52 Euros per capita. France, UK, Spain and Ireland present the lowest per capita investment costs (less than 30 Euros per capita).

According to Andrews et al. (2000), it is likely that these cost estimates overstate the true

figures, perhaps by a large amount, due to the following reasons: 1. reduction in costs of pollution abatement equipment as technologies become more

widely applied, and as experience in design and building plant spreads, 2. market response to new drivers from environmental legislation, 3. market response to new drivers from other legislation (e.g. market liberalisation, carbon

taxes, withdrawal of fuel subsidies and other national support mechanisms), 4. lack of models to take these issues into account when estimating the cost of pollution

abatement.

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Table 17: Best estimates of costs for the Large Combustion Plants Directives 88/609/EEC and 2001/80/EC (1995 price level) Directive 88/609/EEC (1990-2010) Directive 2001/80/EC (2001-2010)

SO2 NOX SO2 NOX Total

Invest-ment cost

(M €)

Opera-ting cost

(M €/year)

Invest-ment cost

(M €)

Opera-ting cost

(M €/year)

Invest-ment cost

(M €)

Opera-ting cost

(M €/year)

Invest-ment cost

(M €)

Opera-ting cost

(M €/year)

Invest-ment cost

(M €)

Opera-ting cost

(M €/year)

Austria 608 24 518 31 0 0 0 0 1,126 55

Belgium 167 7 155 9 15 5 36 16 373 37

Denmark 289 12 186 11 6 2 39 17 520 42

Finland 743 30 361 22 0 0 2 1 1,106 53

France 134 5 94 6 9 3 92 42 329 56

Germany 2,667 107 4,556 273 46 16 56 25 7,325 421

Greece 57 2 279 17 27 9 85 38 448 66

Ireland 1 0 19 1 0 0 77 34 97 35

Italy 709 28 1,402 84 40 14 224 101 2,375 227

Luxem-bourg

0 0 0 0 0 0 0 0 0 0

Nether-lands

377 15 2,107 126 0 0 0 0 2,484 141

Portugal 217 9 131 8 39 14 55 25 442 56

Spain 177 7 70 4 389 137 228 102 864 250

Sweden 639 26 843 51 0 0 1 0 1,483 77

UK 285 11 91 5 74 26 32 14 482 56

EU-15 7,069 283 10,813 649 645 227 927 416 19,454 1,575



Andrews et al. (2000) calculate the best estimates of linked employment based on their cost estimates, as shown in Table 18.

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Table 18: Best estimates of linked employment for the Large Combustion Plants Directives 88/609/EEC and 2001/80/EC



Austria 10,526 302 Belgium 3,050 128 Denmark 5,412 154 Finland 9,882 368 France 2,914 98 Germany 69,854 1,296 Greece 5,947 301 Ireland 886 0 Italy 14,054 479 Luxembourg 4 0 Netherlands 16,929 171 Portugal 5,701 732 Spain 7,952 2,025 Sweden 11,775 316 UK 3,403 509 EU-15 168,289 6,879


1.19.4 Directive on Volatile Organic Compounds (VOC) resulting from certain

industrial activities 1.19.4.1 Benefits

The objective of this Directive is to prevent or reduce the direct and indirect effects of

emissions of volatile organic compounds (VOCs) in the environment and on human health, by setting emission limits for such compounds and laying down operating conditions for industrial installations using volatile organic solvents. The Directive is part of the global strategy to reduce pollution due to tropospheric ozone. It complements the Auto-oil programme by combating emissions of organic solvents from stationary commercial and industrial sources, and the 1994 Directive on VOC emissions resulting from the storage of petrol and its distribution from terminals to service stations.

1.19.4.2 Costs


The Directive sets emission limits for VOCs and lays down operating conditions for

industrial installations using volatile organic solvents. Solvents are major contributors to emissions

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from stationary sources of anthropogenic non-methane VOCs. According to Andrews et al. (2000), their estimated potential for emission reduction is up to 60%, which may be reached through the following measures (hence the relevant cost drivers):

1. Substitution of VOCs: use of water-based degreasing baths, paints, inks, glues or adhesives which are low in or do not contain VOCs.

2. Reduction by best management practices: good housekeeping, preventive maintenance programs, or by changes in processes such as closed systems during utilisation, storage and distribution of low-boiling organic liquids.

3. Recycling and/or recovery of efficiently collected VOCs by control techniques: adsorption, absorption, condensation and membrane processes.

4. Destruction of efficiently collected VOCs by control techniques: thermal or catalytic incineration or biological treatment.


Based on studies by ENTEC (1997, 1998), DFIU/IFARE (1997) and ERM (1998), Andrews

et al. (2000) provide the best estimate of costs of Directive 99/13/EC summarised in Table 19, assuming:

1. the size of the sectors covered by the Directive is proportional to population, 2. annual operating costs are 15% of total capital costs, and 3. 8-years average lifetime of installations.

Given the first assumption, the largest costs are seen in the most populated Member States: France, Germany, Italy, Spain and the UK.

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Table 19: Best estimates of costs for Directive 1999/13/EC on the limitation of emissions of volatile organic compounds due to the use of organic solvents in certain activities and installations (1994 price level)

Investment cost (M €), lead period (1999-2001)

Operating cost (M €/year),

lead period (1999-2001)

Investment cost (M €), post-

implementation (2001-2010)

Operating cost (M €/year),

post-implementation

(2001-2010)

Total investment cost (M €)

Austria 4.2 0.6 12.1 1.8 16.3 Belgium 5.3 0.8 15.3 2.3 20.6 Denmark 2.7 0.4 7.9 1.2 10.6 Finland 2.7 0.4 7.7 1.2 10.4 France 30.2 4.5 87.9 13.2 118.2 Germany 42.4 6.4 123.4 18.5 165.9 Greece 5.4 0.8 15.8 2.4 21.3 Ireland 1.8 0.3 5.4 0.8 7.2 Italy 29.9 4.5 86.9 13.0 116.8 Luxembourg 0.2 0.0 0.6 0.1 0.8 Netherlands 8.0 1.2 23.4 3.5 31.4 Portugal 5.1 0.8 14.9 2.2 20.1 Spain 20.7 3.1 60.2 9.0 80.9 Sweden 4.6 0.7 13.3 2.0 17.9 UK 30.3 4.5 88.2 13.2 118.5 EU-15 193.7 29.0 563.2 84.5 756.9



Based on engineering analysis and their cost estimates, Andrews et al. (2000) provide the best estimates of linked employment shown in Table 20.

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Table 20: Best estimates of linked employment for Directive 1999/13/EC on the limitation of emissions of volatile organic compounds due to the use of organic solvents in certain activities and installations



Austria 152 22 Belgium 168 25 Denmark 110 13 Finland 93 15 France 1,045 154 Germany 1,581 195 Greece 281 62 Ireland 66 11 Italy 691 146 Luxembourg 9 1 Netherlands 214 40 Portugal 259 72 Spain 745 126 Sweden 142 25 UK 837 179 EU-15 6,393 1,086

Source: Andrews et al. (2000). 1.20 ANALYSIS OF AGGREGATE RESULTS

1.20.1 Introduction

In the following sections, the best estimates of costs (in 1995 price levels) and employment

for the directives are aggregated by the three environmental domains considered (waste, water and air), and for all of them altogether. Cost and employment results are annualised deriving equivalent annual values for capital and operating expenditure streams, assuming that all capital items are amortised over a 20-year period and a 10 per cent discount rate. The annualised data corresponds to the height of implementation of the directives.

Annualised costs are also presented as a percentage of GDP (in 1995 price levels) and in per

capita terms. Annualised employment is also calculated as a percentage of the total number of unemployed persons and in terms of annualised costs. The year taken for all of these comparisons is 2001.

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1.20.2 Aggregate results by environmental domain

1.20.2.1 Waste policy Table 21 summarises the cost results for the Hazardous Waste Incineration Directive, the

Packaging and Packaging Waste Directive, and the End-of-Life Vehicles Directive. The estimated capital expenditure of 30 billion Euros between 1990 and 2010 is mostly attributable to the Packaging and Packaging Waste Directive. Adding operating expenditures of 4.7 billion Euros, the aggregate annualised cost for the EU is close to 8 billion Euros, half of which corresponds to Germany and France. In terms of costs per capita, Germany is, as in absolute values, the leading country, with 30.63 Euros per capita. Between 25 and 30 Euros, we find Austria, Denmark, Finland and Netherlands. France and Sweden are also above the EU average of 20.9 Euros per capita. Above 15 Euros, we see Belgium, Italy, Luxembourg. Finally, Greece, Ireland, Portugal, Spain and UK are below 15 Euros per capita. Therefore, we can see a clear positive relationship between per capita income and expenditure in waste management. This relationship fades away if we look at waste expenditure as percentage of GDP. In this case, Austria, Germany, Netherlands and Portugal are above the EU average of 0.10 per cent of GDP; Finland, France, Italy and Sweden are at the average; Belgium, Denmark, Greece, Spain and UK lightly below 0.10 per cent; and Ireland and Luxembourg very much below it, with 0.05 and 0.04 per cent, respectively. Table 21: Best estimates of aggregate costs for the waste policy directives (1995 price level)



Annualised cost (M €/year)

Annualised cost/GDP 2001

(%)

Annualised cost/ Population 2001

(€ per capita and year)

Austria 932.17 138.99 238.16 0.12 29.34 Belgium 756.90 114.20 194.72 0.08 18.97 Denmark 572.27 86.45 147.33 0.09 27.54 Finland 543.36 74.94 132.74 0.10 25.62 France 5,261.48 817.66 1,377.39 0.10 23.14 Germany 9,529.51 1,505.92 2,519.70 0.12 30.63 Greece 429.16 58.01 103.67 0.09 9.81 Ireland 162.50 25.66 42.95 0.05 11.22 Italy 3,355.59 597.48 954.46 0.10 16.49 Luxembourg 42.00 4.00 8.47 0.04 19.13 Netherlands 1,958.53 248.27 456.62 0.12 28.57 Portugal 445.00 62.00 109.34 0.11 10.92 Spain 2,068.72 294.54 514.62 0.09 13.03 Sweden 890.00 124.00 218.68 0.10 24.63 UK 3,132.97 541.72 875.01 0.09 14.63 EU-15 30,080.16 4,693.84 7,893.86 0.10 20.90

Source: own calculations based on Andrews et al. (2000) and Eurostat (2002 and 2003).

Table 22 presents the employment results for the three waste directives. The annualised full-

time equivalent (FTE) jobs created by these directives are estimated to be almost 120,000 for the whole EU. The employment opportunities created as a percentage of the number of unemployed workers are greater in Austria (2.76%), Netherlands (3.10%) and Portugal (2.04%), and lower in Greece (0.67%), Italy (0.53%) and Spain (0.41%). However, this picture changes significantly if

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we examine the number of FTE job opportunities per million Euros of expenditure. In this respect, the Member States that benefit the most from waste expenditure are Greece (29.39 jobs/M €), Ireland (17.56 jobs/M €) and Portugal (39.40 jobs/M €), and the ones that benefit the least are Belgium (13.53 jobs/M €), Italy (12.58 jobs/M €) and Netherlands (13.46 jobs/M €). We should notice that the waste sector presents the highest employment impact among the three sectors studied, given the relative employment intensity of this sector expenditure. Table 22: Best estimates of aggregate linked employment for the waste policy directives





Annualised employment

(FTE jobs/year)

Annualised employment/ unemployed

workers 2001 (%)

Annualised employment/

Annualised cost (1995 price level) (FTE

jobs/ M €)

Austria 9,801 2,739 3,782 2.76 15.88 Belgium 6,136 1,982 2,635 0.92 13.53 Denmark 6,322 1,638 2,311 1.88 15.68 Finland 5,176 1,488 2,039 0.86 15.36 France 52,497 15,424 21,009 0.94 15.25 Germany 96,959 25,023 35,338 1.15 14.02 Greece 5,400 2,472 3,046 0.67 29.39 Ireland 1,438 601 754 1.10 17.56 Italy 14,327 10,483 12,007 0.53 12.58 Luxembourg 0 0 0 0.00 0.00 Netherlands 16,021 4,444 6,148 3.10 13.46 Portugal 7,234 3,538 4,308 2.04 39.40 Spain 15,077 6,245 7,849 0.41 15.25 Sweden 6,476 2,467 3,156 1.38 14.43 UK 25,359 11,951 14,649 0.99 16.74 EU-15 268,223 90,495 119,029 0.92 15.08


1.20.2.2 Water policy

The cost results for the Urban Waste Water Treatment Directive, the Drinking Water

Directive and the Nitrates Directive are presented in Table 23. These three water sector directives involve capital expenditures of 163 billion Euros between 1990 and 2010. Most of this expenditure (151 billion Euros) is the result of applying the Urban Waste Water Treatment Directive. We should notice that these investment costs are underestimated, since the costs for the Drinking Water Directive include only a subset of the relevant parameters. Adding operating expenditures of almost 3.5 billion Euros at the height of implementation for the EU as a whole, the aggregate annualised cost is almost 21 billion Euros, with Germany (7.6 B €), Italy (2.6 B €), UK (2.3 B €), France (2.0 B €), Spain (1.7 B €), Netherlands (1.2 B €) and Austria (1.1 B €) over a billion Euros. In per capita terms, the highest figures are seen in Austria (136.89 €), Germany (92.98 €) and Luxembourg (92.70 €), and the lowest in Greece (23.79 €), France (33.77 €) and Portugal (34.47 €). As percentage of GDP, Austria is also the leader (0.54%), followed by Germany (0.37%). The lowest percentages can be seen in Denmark, France and Sweden (all with 0.15%).

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Table 23: Best estimates of aggregate costs for the water policy directives (1995 price level)





(%)



Austria 9,869 61.09 1,110.98 0.54 136.89 Belgium 4,416 152.65 622.44 0.25 60.63 Denmark 1,304 102.41 241.13 0.15 45.08 Finland 1,674 19.64 197.73 0.16 38.16 France 15,386 372.88 2,009.69 0.15 33.77 Germany 64,814 754.00 7,649.11 0.37 92.98 Greece 1,564 85.05 251.43 0.23 23.79 Ireland 2,011 82.20 296.14 0.34 77.39 Italy 19,818 443.54 2,551.84 0.27 44.09 Luxembourg 282 11.04 41.04 0.21 92.70 Netherlands 8,645 253.43 1,173.11 0.31 73.40 Portugal 2,489 80.43 345.22 0.34 34.47 Spain 11,628 511.65 1,748.67 0.32 44.26 Sweden 2,927 18.84 330.22 0.15 37.19 UK 16,246 528.74 2,257.04 0.22 37.73 EU-15 163,073 3,477.59 20,825.78 0.27 55.15


The employment effects of the three water directives are shown in Table 24. The best

estimate is that 195,000 FTE jobs may be created by these directives in annualised terms for the whole EU, most of them in relation to the Urban Waste Water Treatment Directive. As a percentage of the number of unemployed workers, employment opportunities are greater in Luxembourg (11.85%) and Austria (7.92%), and lower in Italy (0.75%), France (0.80%) and Finland (0.81%). In terms of the number of FTE job opportunities per million Euros of water expenditure, the most benefited countries are Portugal (20.56 jobs/M €), Greece (16.30 jobs/M €) and Spain (14.29 jobs/M €), and the ones that benefit the least are Italy (6.60 jobs/M €) and Netherlands (7.68 jobs/M €).

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Table 24: Best estimates of aggregate linked employment for the water policy directives






(FTE jobs/year)


workers 2001 (%)



jobs/ M €)

Austria 93,941 875 10,869 7.92 9.78 Belgium 38,083 1,815 5,866 2.05 9.42 Denmark 12,970 1,302 2,682 2.19 11.12 Finland 15,937 226 1,921 0.81 9.72 France 133,291 3,775 17,955 0.80 8.93 Germany 514,585 7,990 62,733 2.04 8.20 Greece 21,781 1,780 4,097 0.90 16.30 Ireland 18,844 1,386 3,391 4.96 11.45 Italy 104,252 5,740 16,831 0.75 6.60 Luxembourg 3,377 91 450 11.85 10.97 Netherlands 60,444 2,583 9,013 4.55 7.68 Portugal 37,763 3,080 7,097 3.35 20.56 Spain 152,757 8,737 24,988 1.32 14.29 Sweden 26,030 349 3,118 1.36 9.44 UK 150,253 8,069 24,053 1.62 10.66 EU-15 1,384,308 47,798 195,065 1.51 9.37


1.20.2.3 Air pollution policy

The best estimates of the costs for the Sulphur in Liquid Fuels Directives, the National Emissions Ceiling Directive, the Large Combustion Plants Directive and the Directive on Volatile Organic Compounds resulting from certain industrial activities are presented in Table 25. These air sector directives are associated with capital expenditures of more than 64 billion Euros, with the National Emissions Ceiling Directive being responsible for more than half of this total. Adding operating expenditures of more than 6 billion Euros, the aggregate annualised cost for the whole EU is more than 13 billion Euros, with Germany (3.7 B €), Netherlands (1.8 B €), UK (1.6 B €), Belgium (1,2 B €), France (1.2 B €) and Italy (1.2 B €) over a billion Euros. Belgium (117.79 €) and Netherlands (115.74 €) present the highest costs per capita, due to their relatively high refinery capacity, and Spain (14.44 €) and France (19.64 €) the lowest. As percentage of GDP, Belgium (0.49%) and Netherlands (0.48%) are also ahead, followed by Greece (0.44%), while the lowest percentages are those of France (0.08%), Denmark (0.08%) and Spain (0.10%).

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Table 25: Best estimates of aggregate costs for the air pollution policy directives (1995 price level)





(%)



Austria 1,885.30 93.80 294.36 0.14 36.27 Belgium 5,563.60 617.40 1,209.27 0.49 117.79 Denmark 698.60 55.10 129.42 0.08 24.20 Finland 1,159.40 55.20 178.54 0.14 34.46 France 6,110.20 519.00 1,169.02 0.08 19.64 Germany 17,463.90 1,835.00 3,692.86 0.18 44.89 Greece 2,506.30 217.40 484.03 0.44 45.79 Ireland 253.20 77.00 103.94 0.12 27.16 Italy 6,323.80 490.20 1,162.94 0.12 20.09 Luxembourg 51.80 16.10 21.61 0.11 48.82 Netherlands 8,302.40 966.40 1,849.63 0.48 115.74 Portugal 1,072.10 97.20 211.25 0.21 21.09 Spain 2,051.90 352.30 570.59 0.10 14.44 Sweden 2,474.90 196.10 459.39 0.21 51.73 UK 8,387.50 660.40 1,552.69 0.15 25.96 EU-15 64,304.90 6,248.60 13,089.55 0.17 34.66


Table 26 shows the employment effects of the four air pollution directives. In annualised

terms, more than 120,000 FTE jobs are the estimated result of these directives for the whole EU. Netherlands (7.83%) and Luxembourg (6.91%) present the greatest employment opportunities as a percentage of the number of unemployed workers, and Spain (0.29%) and Italy (0.33%) show the lowest. Considering the number of FTE job opportunities per million Euros of air pollution expenditure, the most benefited countries are Portugal (16.74 jobs/M €), Greece (15.99 jobs/M €) and Luxembourg (12.14 jobs/M €), and the ones that benefit the least are Italy (6.38 jobs/M €) and Ireland (7.88 jobs/M €).

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Table 26: Best estimates of aggregate linked employment for the air pollution policy directives






(FTE jobs/year)


workers 2001 (%)



jobs/ M €)

Austria 17,624 787 2,662 1.94 9.04 Belgium 45,498 6,414 11,254 3.94 9.31 Denmark 7,269 302 1,075 0.88 8.31 Finland 10,359 395 1,497 0.63 8.38 France 54,073 5,523 11,275 0.50 9.65 Germany 166,532 16,207 33,923 1.10 9.19 Greece 33,249 4,204 7,741 1.70 15.99 Ireland 2,314 573 819 1.20 7.88 Italy 37,423 3,439 7,420 0.33 6.38 Luxembourg 587 200 262 6.91 12.14 Netherlands 56,581 9,497 15,516 7.83 8.39 Portugal 13,849 2,063 3,536 1.67 16.74 Spain 18,891 3,453 5,463 0.29 9.57 Sweden 19,657 1,794 3,885 1.70 8.46 UK 59,263 8,712 15,017 1.01 9.67 EU-15 543,169 63,563 121,347 0.94 9.27


1.20.2.4 Time distribution of investment cost and employment effects

Given the different time frame of the directives considered, it is obvious that some of the

cost and employment effects previously presented have already materialized and others are expected to do so in the future. Andrews et al. (2000) provide the percentages of the investment cost and employment effects that are estimated to occur before and after 2000. Based on these percentages, Table 27 shows the estimated time distribution of these effects for each directive. We can see that 63 per cent of the investments associated with the directives took place before 2001, but this result is not homogeneous if we look at each environmental domain individually.

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Table 27: Temporal distribution of investment cost and employment effects (1995 price level)

Before or in 2000 After 2000 Directive Effect Total

% M € and FTE jobs % M € and FTE

jobs Investment (M €) 920 920 0 Hazardous Waste

Incineration Employment (FTE jobs) 7,979 100

7,979 0

0 Investment (M €) 28,699 28,699 0 Packaging and

Packaging Waste Employment (FTE jobs) 256,289 100

256,289 0

0 Investment (M €) 461 0 461 End-of-Life Vehicles Employment (FTE jobs) 3,955

0 0

100 3,955

Investment (M €) 30,080 29,619 461 Waste Employment (FTE jobs) 268,223

99 264,268

1 3,955

Investment (M €) 151,040 113,280 37,760 Urban Waste Water Treatment Directive Employment (FTE jobs) 1,284,680

75 963,510

25 321,170

Investment (M €) 12,033 3,971 8,062 Drinking Water Employment (FTE jobs) 99,628

33 32,877

67 66,751

Investment (M €) N/A N/A N/A Nitrates Employment (FTE jobs) N/A

N/A N/A

N/A N/A

Investment (M €) 163,073 117,251 45,822 Water Employment (FTE jobs) 1,384,308

72 996,387

28 387,921

Investment (M €) 9,945 2,486 7,459 Sulphur in Liquid Fuels Employment (FTE jobs) 82,439

25 20,610

75 61,829

Investment (M €) 34,149 0 34,149 National Emissions Ceiling Employment (FTE jobs) 286,048

0 0

100 286,048

Investment (M €) 19,454 12,061 7,393 Large Combustion Plants Employment (FTE jobs) 168,289

62 104,339

38 63,950

Investment (M €) 757 0 757 VOCs Employment (FTE jobs) 6,393

0 0

100 6,393

Investment (M €) 64,305 14,548 49,757 Air Employment (FTE jobs) 543,169

23 124,949

77 418,220

Investment (M €) 257,458 161,418 96,040 TOTAL Employment (FTE jobs) 2,195,700

63 1,385,604

37 810,096


In the waste sector, almost all the investments have been undertaken already (99%), since

only the End-of-Life Vehicles Directive (entry into force: 21 October 2000, final date for implementation in Member States: 21 April 2002) produces effects after 2000, but it only accounts for 1 per cent of the investments associated with the waste directives. Most of the cost and employment effects of investment in the water sector also occurred before 2001 (72%), since most expenditures associated with the Urban Waste Water Treatment Directive were planned before 2001, and this directive is the most costly of all. The only sector with most of its investments occurring after 2000 is the air sector, with only 23 per cent taking place before 2001. Hence the

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sector that determines most of the cost and employment effects of environmental investments after 2000 is the air sector, while the water sector was the most important in the previous decade. However, given its high costs, the Urban Waste Water Treatment Directive (for its remaining expenditures) is still the single most important directive also after 2000, followed by the National Emissions Ceiling Directive.

1.20.2.5 Magnitude of costs by environmental domain in relation to the size of the eco-

industries The implementation of the directives requires that the eco-industries of Member States are

sufficiently developed to supply the needed goods and services. Moreover, if a country’s eco-industries are not able to supply all of those goods and services, the income and job opportunities created by the required expenditure will not materialize in the Member State incurring in the costs of meeting the targets set by the directives; goods and services will need to be imported, and those income and employment opportunities will benefit the exporting countries. Therefore, it is very important to determine the magnitude of environmental expenditure linked to EU policy in relation to the size of each Member State’s eco-industries by environmental domain. For this purpose, data on the turnover of the EU eco-industries in 1999 is obtained from ECOTEC (2002), as shown in Table 28. Table 28: Turnover of the EU eco-industries by selected environmental domains (M €) in

1999 Air pollution

control Wastewater treatment

Solid waste management

Austria 500 2,670 3,450 Belgium 530 700 900 Denmark 1,470 1,090 1,800 Finland 190 490 770 France 1,570 9,710 8,340 Germany 3,670 17,510 15,450 Greece 50 510 420 Ireland 60 240 170 Italy 1,460 4,200 3,780 Luxembourg 10 70 70 Netherlands 710 2,060 2,550 Portugal 160 450 300 Spain 1,010 1,830 2,130 Sweden 470 930 540 UK 2,760 5,710 6,880 EU-15 14,640 48,190 47,560

Source: ECOTEC (2002).

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With ECOTEC’s information, we can calculate the annualised costs at the height of implementation as a percentage of the turnover of each Member State’s eco-industries by environmental domain, as presented in Figure 1. This figure shows large differences across environmental sectors. In the case of waste, the annualised expenditure caused by the implementation of EU environmental policy at the height of implementation represents 17 per cent of the whole EU’s eco-industries in 1999, with large differences across Member States: from 7 per cent in Austria to 40 per cent in Sweden. Although the percentages are significant, they are rather reduced in comparison with the other sectors, indicating that the waste sector has already a long tradition, and waste management is a mature eco-industry.

Figure 1: Annualised costs at the height of implementation as percentage of the turnover of

each Member State’s eco-industries in 1999 by environmental domain (1995 prices)

Source: own calculations based on Andrews et al. (2000), ECOTEC (2002) and Eurostat (2002 and 2003).

0% 100% 200% 300% 400%

Austria

Belgium

Denmark

Finland

France

Germany

Greece

Ireland

Italy

Luxembourg

Netherlands

Portugal

Spain

Sweden

UK

EU-15

Waste Water Air Total

1,133%

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The annualised expenditure required to achieve the targets of the water directives is 43 per

cent of the 1999 turnover of the EU eco-industries. Also in this case, we can find large differences across countries, which vary from 20 per cent in France to 128 per cent in Ireland (the only country where the 1999 size of its water eco-industry is smaller than the annualised expenditure required by the water directives at the height of implementation).

The air eco-industry is the smallest one in comparison to the required volume of expenditure

to meet the objectives of the directives. For the fifteen Member States combined, the annualised cost amounts to 90 per cent of the air eco-industry, with country variations from 9 per cent in Denmark to 1,133 per cent in Greece. Besides Greece, we find several Member States where the 1999 size of their air eco-industries is smaller than the expenditure required to achieve the targets of the air directives at the height of implementation: Belgium (230%), Ireland (180%), Luxembourg (214%), Netherlands (266%) and Portugal (137%).

The data represented in Figure 1 contrasts significantly with the percentages reported by

Andrews et al. (2000), which were based in the estimates by ECOTEC of the size of EU eco-industries in 1994. Based on that information, Andrews et al. (2000) calculated percentages much higher than the ones that correspond to the size of the eco-industries in 1999, which led them to believe “that the inability of some countries to grow their eco-industries in response to the effects of implementing EU policy will inevitably cause the leakage of income and employment effects both to other Member States and to non-EU foreign markets. This may be particularly true of some Cohesion countries, given the presently small scale of some of their eco-industries. Therefore, although the cohesion impact of the environmental expenditures is likely to be strongly positive, it could be improved further by encouraging import substitution for the main eco-industries goods and services.” However, ECOTEC (2002)’s new information shows that EU eco-industries have grown significantly from 1994 to 1999. This is especially true of Greece, Portugal and Spain, which rest importance to Andrews et al.’s warning about the cohesion impact of environmental expenditures.

It is not surprising that the percentages depicted in Figure 1 are correlated with the temporal

distribution of investment cost and employment effects of Table 27. The waste sector, where the investments linked to EU policy took place almost totally before 2001, presents the largest eco-industry in relation to the cost of the directives. The water sector, where most of the investment has taken place already but there is still a significant portion that needs to be undertaken, is larger than the volume of the directives costs, but the percentage represented by these costs is significantly larger than in the case of waste. Finally, the air sector must grow further in order to meet the requirements set by the directives, being the sector where more of the investment associated to EU policy still needs to take place after 2000.

In conclusion, the growth experienced by the eco-industries between 1994 and 1999, and the

obvious link between the size of the eco-industries and the percentage of investment linked to EU policy already undertaken, indicate that EU policy is a crucial factor fostering the growth of eco-industries. This evidence also shows that we are likely to see an important growth of the air eco-industry that will meet the requirements imposed by the investments linked to the air directives that must be undertaken in the present decade.

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1.20.3 Aggregate total costs

1.20.3.1 Results Table 29 presents the best estimates of the costs associated with the Sulphur in Liquid Fuels

Directives, the National Emissions Ceiling Directive, the Large Combustion Plants Directive, the Directive on Volatile Organic Compounds (VOCs) resulting from certain industrial activities, the Urban Waste Water Treatment Directive, the Drinking Water Directive, the Nitrates Directive, the Hazardous Waste Incineration Directive, the Packaging and Packaging Waste Directive, and the End-of-Life Vehicles Directive. The total investments for the EU associated with these directives amount to more than 257 billion Euros between 1990 and 2010. The largest investment costs are seen in Germany, with 92 billion Euros, followed by France, Italy and UK, all of them over 25 billion Euros. At the height of implementation of the directives, additional operating expenditures of almost 14.5 billion Euros per annum are also estimated. The annualised total costs for the EU are close to 42 billion Euros, being Germany the country with the highest costs, with almost 14 billion Euros per annum.

Table 29: Best estimates of aggregate costs for all directives (1995 price level)





(%)



Austria 12,686.47 293.88 1,643.50 0.80 202.50 Belgium 10,736.50 884.25 2,026.43 0.83 197.38 Denmark 2,574.87 243.96 517.88 0.33 96.82 Finland 3,376.76 149.78 509.01 0.40 98.24 France 26,757.68 1,709.54 4,556.10 0.33 76.55 Germany 91,807.41 4,094.92 13,861.67 0.67 168.50 Greece 4,499.46 360.46 839.13 0.76 79.39 Ireland 2,426.70 184.86 443.02 0.51 115.78 Italy 29,497.39 1,531.22 4,669.24 0.50 80.68 Luxembourg 375.80 31.14 71.12 0.37 160.65 Netherlands 18,905.93 1,468.10 3,479.37 0.91 217.71 Portugal 4,006.10 239.63 665.81 0.66 66.47 Spain 15,748.62 1,158.49 2,833.88 0.51 71.73 Sweden 6,291.90 338.94 1,008.29 0.47 113.55 UK 27,766.47 1,730.86 4,684.74 0.46 78.32 EU-15 257,458.06 14,420.03 41,809.19 0.55 110.72


In terms of costs per capita, the highest costs are experienced by Netherlands (218 €),

Austria (202 €) and Belgium (197 €). Also above the EU average of 111 Euros per capita, we find Germany (168 €), Luxembourg (161 €), Ireland (116 €) and Sweden (114 €). Below the EU average but above 80 Euros per capita, we see Finland (98 €), Denmark (97 €) and Italy (81 €). Finally, Greece (79 €), UK (78 €), France (77 €), Spain (72 €) and Portugal (66 €) present the lowest per capita costs. Therefore, there is some positive relationship between per capita environmental expenditure and per capita income. If we look at environmental expenditure as a percentage of GDP, the highest costs are experienced by Netherlands (0.91%), Belgium (0.83%), Austria

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(0.80%), and Greece (0.76%). Also above the EU average (0.55%), we find Germany (0.67%) and Portugal (0.66%). Below the average but above 0.40% we see Ireland (0.51%), Spain (0.51%), Italy (0.50%), Sweden (0.47%) and UK (0.46%). Finally, Finland (0.40%), Luxembourg (0.37%), France (0.33%) and Denmark (0.33%) experience the lowest costs as percentage of their GDP.

1.20.3.2 Magnitude of environmental costs in relation to GDP

As seen in the previous section, there exists some positive relationship between per capita

environmental expenditure and per capita GDP. Figure 2 shows this relationship very clearly. From this observed relationship, Andrews et al. (2000) conclude that implementation costs of environmental policy tend to be higher in the most developed Member States, which can be attributed to the following reasons:

1. The highest the level of economic development, the highest are the pressures on the environment. Hence, remediation costs must be larger in richer countries.

2. Similarly, the assimilative capacity of the receiving environment is larger in the less developed countries, being less damaged. Contrarily, that capacity is lower in richer countries, where the environment is more damaged. As a result, stricter standards are required in the latter than in the former to meet the same environmental objectives. For example, in the Urban Waste Water Treatment Directive the different assimilative capacity of the receiving waters leads to differences in the applicable standards, reducing the costs in those Member States where discharges do less damage.

3. The richer countries present higher opportunity costs, especially higher labour costs, which increase implementation costs.

4. Assuming that environmental quality is a normal good (that is, its demand increases as income increases), higher standards of living mean higher demand for environmental quality, which leads to stricter implementation of environmental legislation in the richer countries.

Figure 2: Annualised costs per capita at the height of implementation in relation to GDP

per capita in 2001 (1995 prices, 2001 population) Source: own calculations based on Andrews et al. (2000) and Eurostat (2002 and 2003).

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There is only one factor that could puss implementation costs in poorer countries higher than

in the most developed: the former have less environmental infrastructures than the latter. This would tend to increase the scale of the investments required in the less developed countries to meet the environmental goals of EU directives. Although this reason cannot compensate for all of the previous factors, and hence implementation costs tend to be higher in most developed countries, the lack of many environmental infrastructures in less developed regions of the EU highlights the need for inter-regional transfers such as the European Regional Development Fund and the Cohesion Fund for implementing EU environmental policy.

However, in terms of the effects of environmental policy on economic and social cohesion,

the conclusion that implementation costs tend to be higher in the most developed countries may be misleading, since the same cost per capita in two countries with different levels of development does not reflect the same level of effort. Hence, we consider more relevant to look at the relationship between costs as percentage of GDP and GDP per capita, which is shown in Figure 3. This relationship offers a rather opposite picture, indicating that the effort in terms of GDP implied by the implementation of environmental policy tends to be higher in less rich Member States.

Figure 3: Relationship between annualised costs at the height of implementation as

percentage of GDP in 2001, and GDP per capita in 2001 (1995 prices, 2001 population)


Figure 4 provides a clear common representation of the relationships shown in Figure 2 and Figure 3. It can be seen that, as GDP per capita grows, the index of annualised costs as a percentage of GDP tends to decrease, while the index of annualised costs per capita tends to grow. As indicated also by Figure 2 and Figure 3, Netherlands, Belgium, Austria and Germany somehow break the general trend, being the countries with the highest costs per capita and still having the highest cost per unit of GDP (except Germany, surpassed by Greece and Portugal in this respect).

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The particular position of these four countries, as well as other effects that determine the particular position of each Member State, depend on country-specific factors, such as the following:

1. The energy strategies of the Member States play a very important role in the case of air pollution policy, reducing costs in some countries because of the relatively high reliance on low emission fuels. This is, for instance, the case of nuclear fuels in France, which shows low costs both in per capita terms and as a percentage of GDP.

2. Differences in the relative importance of affected economic sectors are a very relevant factor in a number of directives. For instance, in the case of the Sulphur in Liquid Fuels and National Emissions Ceilings Directives, high costs are seen in the Netherlands and Belgium because of their highly developed oil refining and agricultural sectors.

3. Differences in the compliance strategies adopted by Member States can be important, for example in the Drinking Water Directive, where the importance given to prevention versus remediation reduces costs in a number of countries.

Figure 4: Indices as deviation from the EU average of GDP per capita in 2001, annualised costs at the height of implementation as percentage of GDP in 2001, and annualised costs per capita at the height of implementation (1995 prices, 2001 population, EU-15 = 100)


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1.20.4 Aggregate total linked employment

1.20.4.1 Results Table 30 presents the best order of magnitude estimate of linked employment for the ten

directives studied. The best estimate of the annualised full-time equivalent (FTE) job opportunities created by these directives is more than 435,000 FTE jobs per annum for the whole EU, with Germany having 132,000 of these jobs. The employment opportunities created as a percentage of the number of unemployed workers are greater in Luxembourg (18.76%), Netherlands (15.48%) and Austria (12.62%). Also greater than the EU average of 3.38 per cent, we find the opportunities of Ireland (7.27%), Portugal (7.06%), Belgium (6.92%), Denmark (4.95%), Germany (4.29%), Sweden (4.44%) and UK (3.62%). Below the average, we see Greece (3.26%), Finland (2.30%), France (2.24%), Spain (2.02%) and Italy (1.61%). If we examine the number of FTE job opportunities per million Euros of expenditure, the Member States that benefit the most from environmental expenditure are Portugal (22.44 jobs/M €), Greece (17.74 jobs/M €) and Spain (13.51 jobs/M €). Slightly above the EU average of 10.41 FTE jobs per million Euros, we find Denmark (11.72 jobs/M €), UK (11.47 jobs/M €), Ireland (11.20%), France (11.03 jobs/M €), Finland (10.72 jobs/M €) and Austria (10.53 jobs/M €). Below the average, hence benefiting the least from environmental expenditure, we see Sweden (10.08 jobs/M €), Luxembourg (10.02 jobs/M €), Belgium (9.75 jobs/M €), Germany (9.52 jobs/M €), Netherlands (8.82 jobs/M €) and Italy (7.77 jobs/M €).

Table 30: Best estimates of aggregate linked employment for all directives






(FTE jobs/year)


workers 2001 (%)


annualised cost (1995 price level) (FTE

jobs/ M €)

Austria 121,366 4,401 17,312 12.62 10.53 Belgium 89,717 10,211 19,755 6.92 9.75 Denmark 26,561 3,242 6,068 4.95 11.72 Finland 31,472 2,109 5,457 2.30 10.72 France 239,861 24,722 50,239 2.24 11.03 Germany 778,076 49,220 131,994 4.29 9.52 Greece 60,430 8,456 14,885 3.26 17.74 Ireland 22,596 2,560 4,964 7.27 11.20 Italy 156,002 19,662 36,258 1.61 7.77 Luxembourg 3,964 291 713 18.76 10.02 Netherlands 133,046 16,524 30,678 15.48 8.82 Portugal 58,846 8,681 14,941 7.06 22.44 Spain 186,725 18,435 38,299 2.02 13.51 Sweden 52,163 4,610 10,159 4.44 10.08 UK 234,875 28,732 53,719 3.62 11.47 EU-15 2,195,700 201,856 435,441 3.38 10.41


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1.20.4.2 Magnitude of linked employment in relation to unemployment and environmental costs

From the data presented in the previous section, we can see that there exists a clear negative

relationship between the employment opportunities created by environmental expenditure, measured as a percentage of the number of unemployed workers, and current levels of unemployment. This relationship is shown in Figure 5, and it leads us apparently to the conclusion that employment opportunities linked to environmental policy are mostly created where they are less needed. However, this is only the natural result of measuring employment opportunities against two measures of unemployment both on the vertical axis (total numbers) and on the horizontal axis (rates). Since unemployment on the vertical axis is in the denominator of a fraction, it is obvious that the relationship between the variables on the vertical and horizontal axes must be negative. We also saw in Figure 2 that countries with a higher GDP per capita, which tend to have a lower unemployment rate, incur in higher costs per capita. Therefore, it is obvious that countries that spend more per capita and simultaneously have less unemployed workers must generate more job opportunities per capita.

Figure 5: Annualised employment at the height of implementation as a percentage of the

number of unemployed workers in relation to unemployment rate (2001 population)


However, from the point of view of the effects of environmental policy on cohesion, we

already said that the conclusion that environmental expenditure tends to be higher in the most developed countries (and with the lower unemployment rates) may be misleading, since the same expenditure per capita in two countries with different levels of development does not reflect the same level of effort. In the case of employment, we consider that the most relevant variable is the number of job opportunities created per unit of expenditure, which gives a better sense of the effect

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of environmental expenditure on cohesion. If we look at this variable in relation to unemployment rate, as shown in Figure 6, the relationship between linked employment and unemployment rates changes dramatically. What before was a clear negative relationship becomes now a slightly positive relationship.

Figure 6: Annualised employment (FTE jobs) per million Euros of annualised cost at the

height of implementation in relation to unemployment rate (1995 prices, 2001 population)

Source: own calculations based on Andrews et al. (2000) and Eurostat (2002 and 2003). Also more significant in terms of cohesion, the relationship between the number of job

opportunities created per unit of expenditure and GDP per capita, depicted in Figure 7, shows a quite clear inverse relationship, which demonstrates that the less rich Member States benefit more from environmental expenditure than richer countries, in the sense that more jobs are created per unit of expenditure. This fact can be explained through labour cost differences between Member States, since these costs tend to be higher in richer countries, which leads to lower job creation per unit of environmental expenditure. Hence lower labour costs in the cohesion countries tend to increase employment creation.

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Figure 7: Annualised employment (FTE jobs) per million Euros of annualised cost at the

height of implementation in relation to GDP per capita in 2001 (1995 prices, 2001 population)


1.21 CONCLUSIONS

We have provided estimates of likely costs and employment effects of achieving the

objectives of selected pieces of EU environmental legislation on three environmental domains: waste (Hazardous Waste Incineration Directive, Packaging and Packaging Waste Directive and End-of-Life Vehicles Directive), water (Urban Waste Water Treatment Directive, Drinking Water Directive and Nitrates Directive) and air (Sulphur in Liquid Fuels Directives, National Emissions Ceiling Directive, Large Combustion Plants Directive and Directive on Volatile Organic Compounds resulting from certain industrial activities). The total investments for the EU associated with these directives amount to more than 257 billion Euros between 1990 and 2010. The largest investment costs are seen in Germany, with 92 billion Euros, followed by France, Italy and UK, all of them over 25 billion Euros. At the height of implementation of the directives, additional operating expenditures of almost 14.5 billion Euros per annum are also estimated. The annualised total costs for the EU are close to 42 billion Euros, being Germany the country with the highest costs, with almost 14 billion Euros per annum.


Austria (202 €) and Belgium (197 €). Also above the EU average of 111 Euros per capita, we find Germany (168 €), Luxembourg (161 €), Ireland (116 €) and Sweden (114 €). Below the EU average but above 80 Euros per capita, we see Finland (98 €), Denmark (97 €) and Italy (81 €). Finally, Greece (79 €), UK (78 €), France (77 €), Spain (72 €) and Portugal (66 €) present the lowest per

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capita costs. Therefore, implementation costs of environmental policy tend to be higher in the most developed Member States, which can be attributed to the following reasons:


2. Similarly, the assimilative capacity of the receiving environment is larger in the less developed countries, being less damaged. Contrarily, that capacity is lower in richer countries, where the environment is more damaged. As a result, stricter standards are required in the latter than in the former to meet the same environmental objectives.






the conclusion that implementation costs tend to be higher in the most developed countries may be misleading, since the same cost per capita in two countries with different levels of development does not reflect the same level of effort, which can be better captured by GDP percentages. If we look at environmental expenditure as a percentage of GDP, the highest costs are experienced by Netherlands (0.91%), Belgium (0.83%), Austria (0.80%), and Greece (0.76%). Also above the EU average (0.55%), we find Germany (0.67%) and Portugal (0.66%). Below the average but above 0.40% we see Ireland (0.51%), Spain (0.51%), Italy (0.50%), Sweden (0.47%) and UK (0.46%). Finally, Finland (0.40%), Luxembourg (0.37%), France (0.33%) and Denmark (0.33%) experience the lowest costs as a percentage of their GDP.

As GDP per capita grows, annualised costs per capita tend to grow too, but annualised costs

as a percentage of GDP tend to decrease, indicating that the effort in terms of GDP implied by the implementation of environmental policy tends to be higher in less rich Member States. Netherlands, Belgium, Austria and Germany somehow break the general trend, being the countries with the highest costs per capita and still having the highest cost per unit of GDP (except Germany, surpassed by Greece and Portugal in this respect). The particular position of these four countries, as well as other effects that determine the particular position of each Member State, depend on country-specific factors, such as the following:


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(FTE) job opportunities created by these directives is more than 435,000 FTE jobs per annum for the whole EU, with Germany having 132,000 of these jobs. The employment opportunities created as a percentage of the number of unemployed workers are greater in Luxembourg (18.76%), Netherlands (15.48%) and Austria (12.62%). Also greater than the EU average of 3.38 per cent, we find the opportunities of Ireland (7.27%), Portugal (7.06%), Belgium (6.92%), Denmark (4.95%), Germany (4.29%), Sweden (4.44%) and UK (3.62%). Below the average, we see Greece (3.26%), Finland (2.30%), France (2.24%), Spain (2.02%) and Italy (1.61%). Therefore, there exists a clear negative relationship between the employment opportunities created by environmental expenditure, measured as a percentage of the number of unemployed workers, and current levels of unemployment, which leads us apparently to the conclusion that employment opportunities linked to environmental policy are mostly created where they are less needed. Since we have also seen that countries with a higher GDP per capita, which tend to have a lower unemployment rate, incur in higher costs per capita, it is obvious that countries that spend more per capita and simultaneously have less unemployed workers must generate more job opportunities per capita.

However, from the point of view of the effects of environmental policy on cohesion, it seems

that the most relevant variable is the number of job opportunities created per unit of expenditure, which provides a better sense of the effect of environmental expenditure on cohesion. If we examine the number of FTE job opportunities per million Euros of expenditure, the Member States that benefit the most are Portugal (22.44 jobs/M €), Greece (17.74 jobs/M €) and Spain (13.51 jobs/M €). Slightly above the EU average of 10.41 FTE jobs per million Euros, we find Denmark (11.72 jobs/M €), UK (11.47 jobs/M €), Ireland (11.20%), France (11.03 jobs/M €), Finland (10.72 jobs/M €) and Austria (10.53 jobs/M €). Below the average, hence benefiting the least from environmental expenditure, we see Sweden (10.08 jobs/M €), Luxembourg (10.02 jobs/M €), Belgium (9.75 jobs/M €), Germany (9.52 jobs/M €), Netherlands (8.82 jobs/M €) and Italy (7.77 jobs/M €). Therefore, the relationship between the number of job opportunities created per unit of expenditure and GDP per capita shows a quite clear inverse relationship, which demonstrates that the less rich Member States benefit more from environmental expenditure than richer countries, in the sense that more jobs are created per unit of expenditure. This fact can be explained through labour cost differences between Member States, since these costs tend to be higher in richer countries, which leads to lower job creation per unit of environmental expenditure. Hence lower labour costs in the cohesion countries tend to increase employment creation.


we see that 63 per cent of the investments associated with the directives took place before 2001, but this result is not homogeneous across environmental domains. In the waste sector, almost all the investments have been undertaken already (99%). Most of the cost and employment effects of investments in the water sector also occurred before 2001 (72%). The only sector with most of its investments occurring after 2000 is the air sector, with only 23 per cent taking place before 2001. Hence the sector that determines most of the cost and employment effects of environmental investments after 2000 is the air sector, while the water sector was the most important in the

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previous decade. However, given its high costs, the Urban Waste Water Treatment Directive (for its remaining expenditures) is still the single most important directive also after 2000, followed by the National Emissions Ceiling Directive. The importance of the air sector in the following years will be even greater than what these estimates indicate, since large investments in this sector will be required in relation to the Integrated Pollution Prevention and Control (IPPC) Directive and the climate change compromises under the Kyoto Protocol.

Finally, it is also important to look at the magnitude of costs by environmental domain in

relation to the size of each Member State’s eco-industries, since the implementation of the directives requires that these eco-industries are sufficiently developed to supply the needed goods and services. Moreover, if a country’s eco-industries are not able to supply all of those goods and services, the income and job opportunities created by the required expenditure will not materialize in the Member State incurring in the costs of meeting the targets set by the directives; goods and services will need to be imported, and those income and employment opportunities will benefit the exporting countries.



The annualised expenditure required to achieve the targets of the water directives is 43 per

cent of the 1999 turnover of the EU eco-industries. Also in this case, we can find large differences across countries: from 20 per cent in France to 128 per cent in Ireland (the only country where the size of its water eco-industry in 1999 was smaller than the annualised expenditure required by the water directives at the height of implementation).

The air eco-industry is the smallest one in comparison to the volume of expenditure required

to meet the objectives of the directives. For the fifteen Member States combined, the annualised cost at the height of implementation amounts to 90 per cent of the size of the air eco-industry in 1999, with country variations from 9 per cent in Denmark to 1,133 per cent in Greece. Besides Greece, we find several Member States where the 1999 size of their air eco-industries is smaller than the expenditure required to achieve the targets of the air directives at the height of implementation: Belgium (230%), Ireland (180%), Luxembourg (214%), Netherlands (266%) and Portugal (137%).



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EU FINANCIAL INSTRUMENTS FOR THE ENVIRONMENT: DESCRIPTION6

1.22 STRUCTURAL FUNDS

1.22.1 Generalities

1.22.1.1 Objectives These Funds finance most of the EU structural action aimed to strengthening cohesion within

the EU by encouraging more balanced economic and social development. In the period 1994-1999, the Structural Funds contributed to achieving six priority objectives:

Objective 1: Economic adjustment of regions whose development is lagging behind. Objective 2: Economic conversion of declining industrial areas. Objective 3: Combating long-term unemployment and facilitating the integration into

working life of young people and of persons exposed to exclusion from the labour market.

Objective 4: Facilitating the adaptation of workers to industrial changes in production systems.

Objective 5(a): Adjustment of the processing and marketing structures for agricultural and fisheries products.

Objective 5(b): Economic diversification of rural areas. Objective 6: Development of sparsely populated areas.

The 1999 reform has increased the concentration of assistance by reducing the number of

objectives from 7 to 3 priority objectives: Objective 1: Promoting the development and structural adjustment of regions whose

development is lagging behind, i.e. whose average per capita GDP is below 75% of the EU average. The new Objective also covers the most remote regions (the French overseas départements, the Azores, Madeira and the Canary Islands) as well as the areas eligible under the former Objective 6 created pursuant to the Act of Accession of Austria, Finland and Sweden. As was previously the case, two thirds of the Structural Fund operations come under Objective 1.

Objective 2: Contributing to the economic and social conversion of regions in structural difficulties other than those eligible for the new Objective 1. This Objective brings together the former Objectives 2 and 5(b) and other areas facing the need for economic diversification: overall it will cover areas undergoing economic change, declining rural areas, depressed areas dependent on fisheries and urban areas in difficulty.

Objective 3: Gathering together all the measures for human resource development outside the regions eligible for Objective 1. This Objective carries over


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the former Objectives 3 and 4. It is the reference framework for all the measures taken under the new Title on employment in the Treaty of Amsterdam and under the European Employment Strategy.

1.22.1.2 The environmental dimension

The Regulations adopted by the Council on 20 July 1993 (Council Regulations 2081/93 and

2082/93 of 31 July 1993) governing the Structural Funds for the period 1994-1999 provided a basis for integration of the environmental dimension within the programming process of the Funds and resulted in better structured programmes with environmental objectives and safeguards. Four aspects of the integration of environmental issues into cohesion policy illustrate practical ways in which sustainable development is being supported and promoted:

1. Improvement of the environment by direct investment in environmental projects: The Structural Funds (and the Cohesion Fund) directly support environmental infrastructure within the eligible Member States or regions. Measures include the protection and management of water resources, the collection, treatment and recycling of waste as well as actions to clean up coastal areas and river basins. Activities also comprise the treatment and rehabilitation of industrial sites (particularly in 1994-1999 Objective 2 areas) as well as the upgrading of deprived urban areas. Moreover, various measures under the FIFG contribute to the reduction of negative effects of the fishery sectors on the environment in general and on fishery resources in particular. All these investments are mainly oriented towards curative actions.

2. Investment in projects with a positive impact on the environment: Besides the financial aid directly addressed towards the environment, support of productive investment can also have significant indirect positive effects on the environment. These measures by their distinct preventive nature are particularly valuable in terms of sustainability. The Structural Funds incentives for the promotion of environmentally friendly products and technology illustrate an approach to economic development that is sustainable. The same is true for the promotion of renewable energy and the use of energy and water-saving technologies. The aid to investment in public transport via the Structural Funds (and the Cohesion Fund) strengthens the basis for indigenous regional development and at the same time improves the competitive situation of public transport against other less environmentally friendly transport systems. The promotion of productive activities relying directly on a high quality of environment such as services relating to R&D, health and “green tourism,” as well as organic farming and nature conservation by the Structural Funds gives rural areas especially the opportunity to capitalise on their natural assets while at the same time protecting them. The pursuit of an environmentally oriented human resources policy by the Structural Funds (for example environmental training courses) increases public and business awareness of environmental issues while at the same time improving the quality of workers’ skills and hence their capacity to adapt to changed labour demands. Finally, all technical rules for the protection of fish resources and of the marine ecosystem in general under the Common Fisheries Policy as well as measures for the adjustment of agricultural structures under 1994-1999 Objective 5a and the accompanying measures for the CAP (i.e. the agri-environmental measures) can contribute in effect to the protection of the environment.

3. Intensified environmental monitoring and evaluation: A major impact of the 1993 revised Structural Funds regulations is the increased consideration of environmental

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aspects on all levels of programming and implementation of cohesion policy. The intensification of ex-ante and ex-post evaluation with special regard to environmental impact is central in this new approach. The consideration of environmental objectives in the programming documents (i.e. within the Community support frameworks and Single Programming documents) is compulsory. Moreover the definition of certain environmental impact indicators has been improved. Environmental authorities have to be involved in the development and monitoring of the programmes as required by the revised regulations.

4. Environmental concerns within project selection and implementation: Improvement in terms of the environmental quality of projects will greatly contribute to sustainability and cohesion. There is a need to develop project eligibility and selection criteria that go beyond the basic environmental compliance dimension to reflect both economic and environmental sustainability. In line with the principle of subsidiarity both monitoring and evaluation, as well as project selection and implementation, are the remit of the monitoring committees. The monitoring committees have a central role to playas the forum for developing and improving environmental impact assessment and selection criteria to promote sustainable development. However, these committees do not always have the necessary means and capacity to influence the implementing authorities (national and regional) towards an increased consideration of environmental concerns within project selection.

1.22.1.3 Community Support Framework (CSF)

CSF are plans elaborated between the Commission, the Member States and the Regions concerned, identifying the priorities for Community funding and defining the level and duration of Community support. They are initiated by the Member States and represent most of the Structural Funds. 1.22.1.4 Community Initiatives

The Community Initiatives are invitations from the Commission to the Member States to submit programmes for co-financing in areas that are of significant interest to the Union as a whole. The underlying idea is to provide added-value to the CSF by favouring innovation, cooperation, exchange of information between regions, development of know-how and the economic restructuring of regions that are especially badly hit by a specific economic problem.

Community Initiatives with an environmental component are the following:7

1.22.1.4.1 Urban

Urban is intended to help find solutions to the serious problems in many depressed urban areas by supporting schemes for economic and social revitalisation, the renovation of infrastructures and facilities and environmental improvement. Target areas are principally urban neighbourhoods in cities with populations of over 100,000 people, with high unemployment, decayed urban fabric, bad housing conditions and lack of social amenities.

7 The new Regulations provide for a reduction in the number of Community Initiatives from 13 to 4

(INTERREG, LEADER, EQUAL, and URBAN). In the period 1994-1999, environmental components could also be found in REGIS, ADAPT, RECHAR, RESIDER, RETEX, KONVER, and SMEs.

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Eligible environmental measures include: 1. improvement of infrastructure and environmental conditions; 2. rehabilitation of public spaces including green areas; 3. improved energy efficiency; 4. reclamation of derelict sites; 5. provision of cultural amenities.

1.22.1.4.2 Leader

As part of a policy to stimulate rural development, Leader is designed to help rural associations and local authorities in rural areas to exploit their potential. Emphasis is on the innovative and demonstrative nature of projects, the exchanging of experience and trans-national cooperation.

Eligible environmental measures include: 1. promotion of environmental measures including waste management, small scale habitat

conservation and river management; 2. promotion of renewable energy production and agri-forestry measures.

1.22.1.4.3 Interreg

Interreg, first adopted in 1990, was intended to prepare border areas for a Community without frontiers. Since 1996, three distinct strands can be identified in Interreg, two of which have a certain importance for environmental measures:

1. To develop cross-border cooperation and help areas on the EU internal and external borders to overcome the specific problems arising from their comparatively isolated position vis-à-vis other national economies and the Union as a whole. Eligible environmental measures include: a. development and management for tourism of cross-border natural parks; b. provision of local water supplies and development of renewable energy resources; c. pollution prevention and control, waste disposal, environment conservation

programmes, monitoring of environmental standards of new industries locating in border areas;

d. agricultural waste disposal; e. administrative procedures and legal systems, measures to support preparation and

implementation of cross-border spatial planning. 2. To support trans-national cooperation on spatial planning with a view to restore the

balance between different areas of the EU, to seek an ordered and optimum allocation of activities in spatial terms in a strategy for the sustainable development of the EU territory, to improve the impact of Community policies on spatial development and to help Member States and their regions take a preventive and co-operative approach to the problems of water resources management. Eligible environmental measures include: a. actions to improve the territorial management of the main areas at the periphery of

the Union from the point of view of environmental protection and improvement; b. integrated coastal development; c. prevention and control of sea pollution; d. protection of the environment of coastal areas; e. measures for sustainable development of the mountainous regions of the Union as

living areas, economic areas and natural areas; f. measures to manage the countryside;

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g. integrated measures preparing, promoting or accompanying sustainable economic development and the integrated management of resources in given categories of zones (e.g. wetlands, coastal areas, tourist areas) belonging to the same transnational geographical area;

h. measures concerning sustainable hydrological management and sustainable use of water resources;

i. measures concerning a coherent set of environmentally-friendly measures for undyked river systems;

j. protection and preparation of the sustainable restoration of areas sensitive from the point of view of hydrological resources and their management.

1.22.2 European Social Fund (ESF)

The ESF is the EU main tool for the development of human resources and improvement of the workings of the labour market throughout the Union. ESF resources are allocated in the broad context of the objectives of Structural Fund action. The 1993 Regulation stated that with regard to Objective 4 there should be a concentration on “training related to the introduction, use and development of new or improved production methods, in particular new organisational techniques and new technologies and on changes in markets and in society, particularly with regard to the protection of the environment.” The current Regulation establishes that the ESF’s remit is to support measures which aim to prevent and combat unemployment, develop human resources and foster social integration in the labour market, so as to promote a high level of employment, equal opportunities for men and women, sustainable development and economic and social cohesion.

1.22.3 European Regional Development Fund (ERDF)

The ERDF has been in existence since 1975 and since 1988 forms part of the Structural Funds. It is intended to reduce the regional imbalances in the Community. The Fund grants financial assistance for the development of the less-favoured regions. To this end, it contributes to the new Objectives 1 and 2 and to the Interreg and Urban Community Initiatives. In terms of financial resources, the ERDF is by far the most important Structural Fund.

Among others, one of ERDF general objectives is fostering productive investment and investment in infrastructure aimed at environmental protection, in accordance with the principles of sustainable development, where such investment is linked to regional development. Examples of typical environmental protection projects would include:

1. protection and management of water resources; 2. collection, treatment and recycling of waste; 3. actions to clean up coastal areas and river basins; 4. rehabilitation of derelict and contaminated sites; 5. environmentally friendly production and technology especially in SME; 6. renewable energy; 7. “green tourism.”

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1.22.4 European Agricultural Guidance and Guarantee Fund (EAGGF)

1.22.4.1 Introduction

The EAGGF is divided into two Sections: 1. the Guarantee Section’s main purpose is to fund expenditure arising from the common

organisation of the markets and agricultural prices, rural development measures accompanying market support and rural measures outside Objective 1 regions, expenditure on certain veterinary measures and information measures relating to the CAP;

2. the Guidance Section funds other rural development expenditure not funded by the Guarantee Section, including the Leader Initiative.

1.22.4.2 EAGGF-Guidance Section

In the 1994-1999 period, the Fund had as its principle objectives: 1. promoting rural development and the structural adjustment of regions whose

development is lagging behind (Objectives 1 & 6); 2. speeding up the adjustment of agriculture structures in the framework of the reform of

the CAP (Objective 5a) including measures to preserve and improve the natural environment;

3. promoting rural development in the areas covered by Objective 5b. In the 1994-1999 period, rural development measures in the Objectives 1, 5b and 6 regions

included “protection of the environment, maintenance of the countryside and restoration of landscapes” where such measures were not already financed under accompanying measures adopted under the reform of the CAP. Development of agricultural structures under objective 5a programmes included environmental investments.

1.22.4.3 EAGGF-Guarantee Section: Agri-Environment Regulation

The Agri-Environment Regulation is an accompanying measure to the reform of the CAP. Its broad aims are to protect and enhance the environment, maintain the countryside, contribute to the Community’s environmental policy as well as providing an extra income for farmers in exchange for a service. Specific measures include:

1. reducing the use of fertilizers or pesticides; 2. introducing (or continuing) organic farming; 3. extensifying crop production; 4. reducing the density of cattle or sheep; 5. using other farming practices compatible with the requirement of protection of the

environment and natural resources as well as maintenance of the countryside and the landscape;

6. rearing animals of local endangered breeds; 7. up-keeping abandoned land; 8. long-term set-aside (20 years); 9. managing land for public access; 10. training and demonstration projects.

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The Regulation concerns all agricultural land and implementation is compulsory for Member States. The scheme works by Member States presenting programmes to the Commission, which, once agreed, become the basis for the payment of premiums. It is voluntary for farmers and it is also available to assist Member States to fulfil the obligations under such legislation as the Birds, Habitats and Nitrates directives. 1.22.5 Financial Instrument of Fisheries Guidance (FIFG)

The FIFG is a financial instrument in support of the Common Fisheries Policy to ensure a rational and responsible exploitation of aquatic marine resources on a sustainable basis. In large part, the instrument is directed at the restructuring of the fisheries sector and includes actions such as:

1. restructuring, renewal and modernization of the fishing fleet; 2. aquaculture and structural works in coastal waters; 3. improved processing and marketing; 4. development of new markets; 5. socio-economic measures.

In terms of direct environmental actions, investment in equipment aimed at reducing

environmental damage is eligible with regard to aquaculture, facilities at fishing ports and the transformation and commercialisation of the products of fisheries and aquaculture. Structural investments related to the production of juveniles for restocking purpose can be granted.

1.23 COHESION FUND

The objective of the Cohesion Fund is to contribute to the strengthening of the economic and social cohesion of the Union. Defined in the Maastricht Treaty, it finances investment projects in the fields of transport infrastructure and the environment. The Fund applies to those Member States with GDP lower than 90 per cent of the Community average, namely, Greece, Spain, Ireland and Portugal. Halfway through this period (2003) eligibility will be rechecked against the 90 per cent of GNP criterion. Should a Member State no longer be eligible, the funds allocated to the Cohesion Fund will be reduced accordingly.

The aim is to spend 50 per cent of the available resources to finance transport infrastructures

and 50 per cent to finance environment projects. Typical environmental projects include: water supply infrastructure, waste water treatment, urban waste treatment and nature conservation.

1.24 SECTOR-SPECIFIC FINANCIAL INSTRUMENTS

1.24.1 Environment: LIFE

LIFE is currently regulated through Regulation (EEC) No. 1655/2000 of the European Parliament and of the Council of 17 July 2000 concerning the financial instrument for the environment (LIFE). This Regulation repeals Regulation (EEC) No. 1973/1992 establishing the LIFE financial instrument. The objective of this financial instrument is to contribute to the development, implementation and updating of Community environment policy and environmental

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legislation, especially as regards the integration of the environment into other policies, and to sustainable development in the Community.

LIFE cofinances environmental activities in the Community and in certain non-Community countries. LIFE is implemented in phases:

1. First phase (23 July 1992 - 31 December 1995): it was granted 400 million Euros. 2. Second phase (1 January 1996 - 31 December 1999): it was granted approximately 450

million Euros. 3. Third phase: 1 January 2000 - 31 December 2004: it has a budget of 640 million Euros.

Projects financed by LIFE must meet the following general criteria: 1. They must be of Community interest and contribute to LIFE objectives. 2. They must be carried out by technically and financially sound participants. 3. They must be feasible in terms of technical proposals, timetable, budget and value for

money.

LIFE consists of three thematic components: 1. Life-Nature (47% of the total budget): its objective is to contribute to the

implementation of the Community Directive on the conservation of wild birds and the Directive on the conservation of natural habitats, in particular the “Natura 2000” network. The following are eligible for financing: a. nature conservation projects and b. accompanying measures required to exchange experiences or prepare, monitor or

evaluate projects. Financial support is always provided by cofinancing. The maximum rate is 50% of eligible costs for nature conservation projects and 100% for accompanying measures. By way of exception, for projects concerning the protection of priority habitats or priority species the Commission may finance up to 75% of eligible costs.

2. Life-Environment (47% of the total budget): its objective is to contribute to the development of innovative methods and techniques and to the further development of Community environment policy. Projects financed by Life-Environment must be : a. demonstration projects which integrate considerations relating to the environment

and to sustainable development in land-use development and planning, promote the sustainable management of water or minimise the environmental impact of economic activities;

b. projects which prepare new Community initiatives, instruments or legislation relating to the environment;

c. accompanying measures. The maximum rate of Community cofinancing is 30% for projects generating substantial revenue, 50% in other cases and 100% for accompanying measures.

3. Life-Third countries (6% of the total budget).

1.24.2 Energy

1.24.2.1 ALTENER

ALTENER supports specific actions that promote the establishment of renewable energy: 1. Technical studies and evaluations intended to define norms and technical specifications; 2. support measures for the creation or enlargement of renewable energy infrastructures; 3. measures to encourage the creation of information networks with a view to promoting

better coordination between national, international and Community activities;

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4. studies, evaluations and actions focused on the technical, economic and environmental possibilities afforded by the industrial development of biomass energy.

1.24.2.2 SAVE

The aim of SAVE is the promotion of energy efficiency throughout the EU thus contributing to a better use of resources as well as assisting in the realisation of the Community’s environmental objectives. Four categories of action are financed:

1. Technical evaluations intended to define norms and technical specifications; 2. support measures at the initiative of the Member States for the creation or enlargement

of energy efficiency infrastructures; 3. measures to encourage the creation of information networks with a view to promoting

better coordination between national, international and Community activities; 4. measures to improve the efficiency of electricity use.

1.25 EUROPEAN INVESTMENT BANK: EIB PROJECT FUNDING

The EIB is the EU financing institution, established in 1958 under the Treaty of Rome. The Bank’s main objective is to support the Union’s economic and social cohesion, primarily by fostering investment in the less-favoured regions but also by providing finance for environmental projects throughout the Union. Equally, the EIB finances capital investment that helps EU policies to improve trans-European networks of transport, telecommunications and energy transfer, to strengthen the international competitiveness and integration of European industry, support the activities of small and medium-sized enterprises (SMEs) and ensure secure energy supplies. Outside the EU, the Bank helps implement the Union’s development aid policies.

The EIB, an autonomous public body within the EU institutional set-up, is self-financing. It borrows its resources on the capital markets, mainly through public bond issues that have consistently been given the highest credit rating (triple A). Since the Bank is non-profit making, it passes on the benefits of its market standing to project promoters by making its funds available at close to the cost of borrowing. In terms of volume of borrowing and lending, the EIB is the largest of the international financing institutions.

The two key components of the EIB’s environmental policy are the financing of investment projects specifically oriented towards protecting the environment and improving the quality of life, and the systematic screening of the environmental impact of all investment projects submitted to it for financing, protection of the environment being a specific eligibility criterion for the Bank’s lending.

Its loans encompass a broad spectrum of operations: schemes improving the quality of

drinking or bathing water, including waste river systems, wastewater collection and treatment schemes, of which many municipal sewerage and sewage treatment works, effluent treatment from industrial plants (chemical and petrochemical complexes, vehicle body paint shops, steelworks, papermills, etc.), equipment designed to reduce atmospheric pollution from coal-fired power stations, incineration plants, refineries and industrial factories, domestic and industrial solid waste collection and processing, and reforestation projects and other schemes combating soil erosion and flooding. A key area of environmental lending is the urban environment, to which the Bank contributes either through investment aimed at relieving traffic congestion or through urban renewal, including renovation schemes of urban centres and buildings of historical or architectural

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interest. The focus of financing is on public urban transport schemes, in particular rail, but also projects to develop road tunnels, bypasses and car parks. Small or medium-scale ventures promoted by local authorities or private enterprises are financed through global loans.

The majority of EIB loans for safeguarding and enhancing the environment and quality of life are located in the assisted areas. When operating in assisted areas, the Bank closely co-operates with the European Commission to dovetail its loans with the grant aid from EU funds. Loans from the EIB may be used in association with national or EU grant aid.

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FINANCIAL CONTRIBUTION OF THE EU TO THE IMPLEMENTATION OF ENVIRONMENTAL POLICY

1.26 INTRODUCTION Of all the financial instruments for the environment in place in the EU, the European


In the following sections, we report available data on the distribution of structural and

cohesion funds for the environment by country, and provide indications of their magnitude and effect on cohesion through indicators of their scale in relation to total environmental expenditure and the expenditure related to the directives examined in section 4, their scale in relation to GDP, their per capita volume, and through Lorenz curves.

1.27 STRUCTURAL FUNDS

1.27.1 Introduction Unfortunately, there is no readily available information that allows to identify the

environmentally related expenditure from Structural Funds during the programming period 1993-1999. For the programming period 2000-2006, the European Commission8 has provided information by Member State and field of intervention, that allows us to identify and aggregate the environmentally related funds allocated for the whole period. No information has been provided on actual payments made for the years already passed of these programming period.

Eurostat (2003) provides information on environmental protection expenditures by EU

institutions by Member State for 1994 to 1997. However, this limited information does not seem accurate, since the expenditures by all EU institutions reported for some cohesion countries (Greece and Spain) are smaller for 1994 than the actual payments made to these countries only trough the Cohesion Fund, and for the other years they seem too small if compared with the actual size of Cohesion Fund payments.

1.27.2 Methodological issues and keys to interpret tables

1.27.2.1 Introduction

8 The author wish to thank Ms. Luisa Sanches, from the Directorate-General for Regional Policy and Cohesion, for kindly providing raw data on Structural Funds and discussing some methodological issues.

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The raw data provided by the European Commission on funds allocated by Member State, field of intervention and particular fund have been studied to determine which fields of intervention can be considered as environmental expenditure or environmentally beneficial expenditure. Based on this study, we have constructed tables for each country that show the funds budgeted for the programming period 2000-2006 for each field of intervention and particular fund, as well as the accompanying national and private funds. The following sections provide the necessary information to interpret these tables, and state the underlying assumptions on what percentages of some fields of intervention can be considered as environmental expenditure.9

1.27.2.2 Fields of intervention (rows)

The relevant fields of intervention have been grouped in two categories: 1. Environmental expenditure: categories of expenditure that are commonly considered as

environmental. 2. Environmentally beneficial expenditure: categories of expenditure that are clearly

beneficial for the environment and whose primary categorization would commonly be different from environmental.

1.27.2.2.1 Environmental expenditure

1.27.2.2.1.1 Code 1: Productive environment In the field of intervention of productive environment, we identify the following environmental expenditure fields: Code 12: Forestry: Code 125: Restoring forestry production potential damaged by natural disasters and fire

and introducing appropriate prevention instruments. Code 127: Improving/maintaining the ecological stability of protective forests. Code 13: Promotion of rural areas adaptation and development: Code 1308: Agricultural water resources management. Code 1312: Preservation of the environment in connection with land, forestry and landscape

conservation as well as with the improvement of animal welfare. Code 1313: Restoring agricultural production potential damaged by natural disasters and

introducing appropriate prevention instruments. Code 14: Fishing: Code 145: Equipment of the fishing ports and protection of the coastal marine zones: given

that only protection of the coastal marine zones should be considered as

9 When no percentage is stated, 100 per cent of the field is considered as environmental expenditure. In the case of environmentally beneficial expenditure fields, 100 per cent of the expenditure under these fields is considered as such.

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environmental expenditure, only 50 per cent of the expenditure under this code has been categorized as such.

Code 15: Grants to large business: Code 152: Environment-friendly technologies, clean and economical energy technologies. Code 153: Business advisory services (including internationalisation, exporting,

environmental management, purchase of technology): given that only environmental management advisory services should be considered as environmental expenditure, only 25 per cent of the expenditure under this code has been categorized as such.

Code 16: Grants to small and medium business: Code 162: Environment-friendly technologies, clean and economical energy technologies. Code 163: Business advisory services (information, business planning, consultancy

services, marketing, management, design, internationalisation, exporting, environmental management, purchase of technology): given that only environmental management advisory services should be considered as environmental expenditure, only 10 per cent of the expenditure under this code has been categorized as such.

1.27.2.2.1.2 Code 3: Basic infrastructure In this field of intervention, the following environmental expenditure fields are identified: Code 33: Energy infrastructure (production and distribution): Code 332: Renewable sources of energy (solar power, wind power, hydro-electricity,

biomass). Code 333: Energy efficiency, cogeneration, energy control. Code 34: Environmental infrastructure (including water): Code 341: Air. Code 342: Noise. Code 343: Urban and industrial waste (including hospital and dangerous waste). Code 344: Drinking water (collection, storage, treatment and distribution). Code 345: Sewerage and purification.

1.27.2.2.1.3 Code 4: Miscellaneous This field of intervention applies to expenditures related to all kind of interventions. Given the relative size of environmental expenditure, only 20 per cent of the expenditure under the following codes has been considered as such:

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Code 41: Technical assistance and innovative actions (ERDF, ESF, EAGGF, FIFG): Code 411: Preparation, implementation, monitoring, publicity. Code 412: Evaluation. Code 413: Studies. Code 414: Innovative actions. Code 415: Information to the public.

1.27.2.2.2 Environmentally beneficial expenditure

1.27.2.2.2.1 Code 3: Basic infrastructure The following environmentally beneficial expenditure fields are identified under the field of basic infrastructure: Code 31: Transport infrastructure: Code 311: Rail. Code 3123: Cycle tracks. Code 316: Waterways. Code 317: Urban transport. Code 318: Multimodal transport. Code 319: Intelligent Transport Systems. Code 35: Planning and rehabilitation: Code 351: Upgrading and rehabilitation of industrial and military sites. Code 352: Rehabilitation of urban areas.

1.27.2.3 Source of funds (columns)

The following sources of funds are considered in the tables: 1. ERDF: European Regional Development Fund. 2. ESF: European Social Fund. 3. EAGGF: European Agricultural Guidance and Guarantee Fund. 4. FIFG: Financial Instrument of Fisheries Guidance. 5. Total SF: ERDF + ESF + EAGGF + FIFG. 6. National: cofinancing by national authorities. 7. Private: cofinancing by private agents.

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1.27.3 Data tables by Member State 1.27.3.1 Environmental expenditure Table 31 through Table 45 present the Structural Funds for the programming period 2000-2006 allocated for environmental expenditure, by the fields of intervention mentioned in section 6.2.2.2, for each of the fifteen Member States. The same information is provided in Table 46 for EU interregional cooperation. This information will be aggregated and analysed in following sections.

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Table 31: Budgeted environmental expenditure for Austria from the Structural Funds for the programming period 2000-2006 (€)

FIELDS OF INTERVENTION Code Namea ERDF ESF EAGGF FIFG TOTAL SF NATIONAL PRIVATE

1 Productive environment 12 Forestry

125 Restoring forestry 0 0 262,989 0 262,989 87,720 350,709 127 Ecological stability 0 0 0 0 0 0 0

13 Rural areas 1308 Agricultural water 0 0 1,213,796 0 1,213,796 404,861 3,049,723 1312 Environmental preservation 0 0 4,045,987 0 4,045,987 1,349,535 10,165,741 1313 Restoration 0 0 0 0 0 0 0

14 Fishing 145 Coast protection 0 0 0 0 0 0 0

15 Grants to large business 152 Environmental technologies 1,830,411 0 0 0 1,830,411 1,113,302 9,258,873 153 Advisory services 658,371 0 0 0 658,371 859,544 1,466,223

16 Grants to small and medium business

162 Environmental technologies 35,257,724 0 0 0 35,257,724 18,468,800 156,011,302 163 Advisory services 1,989,688 0 0 0 1,989,688 1,133,039 4,851,840

3 Basic infrastructure 33 Energy infrastructure

332 Renewable energy 11,983,487 0 0 0 11,983,487 5,711,442 41,849,078 333 Energy efficiency 2,384,647 0 0 0 2,384,647 1,709,558 9,697,804

34 Environmental infrastructure 0 0 0 0 0 0 0

341 Air 0 0 0 0 0 0 0 342 Noise 676,779 0 0 0 676,779 571,779 105,000 343 Waste 0 0 0 0 0 0 0 344 Drinking water 4,847,278 0 0 0 4,847,278 1,588,992 6,421,232 345 Sewerage and purification 4,731,965 0 0 0 4,731,965 4,556,965 175,000

4 Miscellaneous 0 0 0 0 0 0 0 41 Technical assistance 0 4,634,760 0 0 4,634,760 4,872,499 0

411 Preparation, etc, 1,672,831 175,796 126,974 0 1,975,600 1,659,385 0 412 Evaluation 266,655 22,216 0 0 288,871 237,182 0 413 Studies 171,185 56,740 0 0 227,925 189,023 0 414 Innovative actions 635,185 12,797 0 0 647,982 274,530 556,154 415 Information to the public 594,221 32,673 31,743 0 658,638 477,185 0

TOTAL 67,700,427 4,934,982 5,681,489 0 78,316,898 45,265,342 243,958,678 a See section 6.2.2.2 for full descriptive name. Source: Directorate-General for Regional Policy and Cohesion (European Commission).

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Table 32: Budgeted environmental expenditure for Belgium from the Structural Funds for the programming period 2000-2006 (€)



125 Restoring forestry 0 0 0 0 0 0 0 127 Ecological stability 0 0 65,072 0 65,072 130,144 163,610

13 Rural areas 1308 Agricultural water 0 0 0 0 0 0 0 1312 Environmental preservation 1,417,340 0 1,227,073 0 2,644,413 3,167,474 373,082 1313 Restoration 0 0 0 0 0 0 0


15 Grants to large business 152 Environmental technologies 0 0 0 0 0 0 0 153 Advisory services 0 2,176,867 0 0 2,176,867 2,408,112 524,066


162 Environmental technologies 998,961 0 0 0 998,961 1,057,801 203,623 163 Advisory services 2,507,306 752,609 0 0 3,259,914 3,485,598 1,197,488


332 Renewable energy 3,450,129 0 0 0 3,450,129 3,356,066 559,358 333 Energy efficiency 5,243,686 0 0 0 5,243,686 5,727,496 433,309

34 Environmental infrastructure 6,197,338 0 0 0 6,197,338 6,197,338 0

341 Air 0 0 0 0 0 0 0 342 Noise 0 0 0 0 0 0 0 343 Waste 8,253,192 0 0 0 8,253,192 8,367,978 1,668,444 344 Drinking water 7,714,200 0 0 0 7,714,200 7,816,830 965,560 345 Sewerage and purification 7,913,025 0 0 0 7,913,025 8,355,057 989,085

4 Miscellaneous 443,729 0 0 0 443,729 443,729 0 41 Technical assistance 1,606,215 2,040,635 0 0 3,646,850 3,697,790 0

411 Preparation, etc, 887,847 2,102,155 0 0 2,990,003 3,617,624 0 412 Evaluation 90,784 776,027 0 0 866,811 992,936 57,192 413 Studies 75,632 750,590 0 0 826,222 949,695 57,192 414 Innovative actions 28,722 1,872,791 0 0 1,901,513 2,290,309 57,192 415 Information to the public 40,753 758,639 0 0 799,392 943,943 57,467

TOTAL 46,868,860 11,230,313 1,292,145 0 59,391,317 63,005,920 7,306,668 a See section 6.2.2.2 for full descriptive name.

Source: Directorate-General for Regional Policy and Cohesion (European Commission).

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Table 33: Budgeted environmental expenditure for Denmark from the Structural Funds for the programming period 2000-2006 (€)

FIELDS OF INTERVENTION Code Namea ERDF ESF EAGGF FIFG TOTAL

SF NATIONAL PRIVATE


125 Restoring forestry 0 0 0 0 0 0 0 127 Ecological stability 0 0 0 0 0 0 0

13 Rural areas 1308 Agricultural water 0 0 0 0 0 0 0 1312 Environmental preservation 0 0 0 0 0 0 0 1313 Restoration 0 0 0 0 0 0 0


15 Grants to large business 152 Environmental technologies 0 0 0 0 0 0 0 153 Advisory services 0 0 0 0 0 0 0


162 Environmental technologies 0 0 0 0 0 0 0 163 Advisory services 0 0 0 0 0 0 0


332 Renewable energy 0 0 0 0 0 0 0 333 Energy efficiency 0 0 0 0 0 0 0

34 Environmental infrastructure 4,537,300 0 0 0 4,537,300 6,440,630 0 341 Air 0 0 0 0 0 0 0 342 Noise 0 0 0 0 0 0 0 343 Waste 0 0 0 0 0 0 0 344 Drinking water 0 0 0 0 0 0 0 345 Sewerage and purification 0 0 0 0 0 0 0

4 Miscellaneous 0 0 0 0 0 0 0 41 Technical assistance 1,496,893 3,306,477 0 0 4,803,370 4,856,312 24,932

411 Preparation, etc, 0 0 0 0 0 0 0 412 Evaluation 0 0 0 0 0 0 0 413 Studies 0 0 0 0 0 0 0 414 Innovative actions 0 0 0 0 0 0 0 415 Information to the public 0 0 0 0 0 0 0

TOTAL 6,034,193 3,306,477 0 0 9,340,670 11,296,942 24,932 a See section 6.2.2.2 for full descriptive name. Source: Directorate-General for Regional Policy and Cohesion (European Commission).

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Table 34: Budgeted environmental expenditure for Finland from the Structural Funds for the programming period 2000-2006 (€)




13 Rural areas 1308 Agricultural water 0 0 0 0 0 0 0

1312 Environmental preservation 0 0 0 0 0 0 0

1313 Restoration 0 0 0 0 0 0 0 14 Fishing

145 Coast protection 0 0 0 1,685,250 1,685,250 1,685,250 1,685,250 15 Grants to large business

152 Environmental technologies 0 0 0 0 0 0 0

153 Advisory services 3,655,100 0 0 0 3,655,100 3,655,123 10,161,100


162 Environmental technologies 47,020,157 0 0 0 47,020,157 67,222,254 183,772,900

163 Advisory services 5,908,369 0 0 0 5,908,369 8,513,659 24,259,268 3 Basic infrastructure

33 Energy infrastructure 332 Renewable energy 7,186,157 0 0 0 7,186,157 7,364,304 2,610,200 333 Energy efficiency 373,646 0 0 0 373,646 557,192 931,600

34 Environmental infrastructure 11,436,500 0 0 0 11,436,500 17,167,000 2,495,500

341 Air 0 0 0 0 0 0 0 342 Noise 0 0 0 0 0 0 0 343 Waste 6,952,400 0 0 0 6,952,400 11,828,250 7,802,550 344 Drinking water 0 0 0 0 0 0 0

345 Sewerage and purification 6,823,500 0 0 0 6,823,500 6,823,500 1,706,000


411 Preparation, etc, 1,716,554 2,966,033 297,500 11,200 4,991,287 6,177,994 93,100 412 Evaluation 850,979 609,728 148,750 5,600 1,615,057 1,766,577 46,550 413 Studies 10,600 341,269 0 0 351,869 543,695 0 414 Innovative actions 10,600 227,513 0 0 238,113 373,063 0 415 Information to the public 858,399 969,957 148,750 5,600 1,982,706 2,329,171 46,550

TOTAL 92,802,961 6,126,700 595,000 1,707,650 101,232,311 137,019,233 235,610,568 a See section 6.2.2.2 for full descriptive name.


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Table 35: Budgeted environmental expenditure for France from the Structural Funds for the programming period 2000-2006 (€)

FIELDS OF INTERVENTION

Code Namea ERDF ESF EAGGF FIFG TOTAL SF NATIONAL PRIVATE


125 Restoring forestry 0 0 0 0 0 0 0

127 Ecological stability 2,763,758 0 6,443,449 0 9,207,207 7,400,487 1,036,623

13 Rural areas

1308 Agricultural water 15,985,589 0 9,632,725 0 25,618,314 27,456,083 15,515,405

1312 Environmental preservation 43,883,461 0 18,911,000 0 62,794,461 99,600,910 15,402,200

1313 Restoration 7,660,500 0 4,392,625 0 12,053,125 12,562,625 2,951,125 14 Fishing

145 Coast protection 2,308,188 0 0 7,107,464 9,415,651 10,315,804 2,585,904 15 Grants to large business

152 Environmental technologies 16,112,490 0 4,051,350 0 20,163,840 25,192,972 27,433,454




163 Advisory services 18,804,674 464,513 0 0 19,269,187 22,759,594 36,935,358


332 Renewable energy 40,770,644 0 0 0 40,770,644 45,629,053 46,931,817

333 Energy efficiency 23,912,664 0 0 0 23,912,664 41,508,807 34,508,459


341 Air 47,650,141 0 0 0 47,650,141 38,220,541 12,525,444 342 Noise 30,445,478 0 0 0 30,445,478 21,948,383 247,500 343 Waste 108,858,154 0 0 0 108,858,154 140,082,925 49,112,944

344 Drinking water 95,406,435 0 8,477,386 0 103,883,821 100,438,258 13,251,123 345 Sewerage and purification 52,568,344 0 2,194,047 0 54,762,391 76,217,409 14,511,240

4 Miscellaneous 6,974,783 304,993 0 0 7,279,776 11,922,032 441,168 41 Technical assistance 29,341,285 29,792,322 364,697 120,496 59,618,800 54,953,622 11,318

411 Preparation, etc, 9,366,013 954,802 41,240 20,130 10,382,185 9,962,121 11,318 412 Evaluation 1,521,900 123,055 46,575 20,740 1,712,270 1,303,731 24,749 413 Studies 4,124,825 408,652 45,361 20,130 4,598,968 5,614,958 3,939,136 414 Innovative actions 2,623,902 330,000 810,270 0 3,764,172 4,068,846 3,641,421 415 Information to the public 1,520,849 1,480,644 0 0 3,001,493 3,496,710 554,898

TOTAL 873,696,730 33,858,981 55,410,725 7,288,959 970,255,395 1,269,528,821 741,069,170 a See section 6.2.2.2 for full descriptive name.


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Table 36: Budgeted environmental expenditure for Germany from the Structural Funds for the programming period 2000-2006 (€)




125 Restoring forestry 0 0 6,005,073 0 6,005,073 2,001,746 0

127 Ecological stability 0 0 5,836,300 0 5,836,300 1,945,490 0

13 Rural areas

1308 Agricultural water 0 0 295,809,409 0 295,809,409 174,389,803 0

1312 Environmental preservation 23,048,007 0 119,155,075 0 142,203,082 77,396,082 313,934

1313 Restoration 0 0 14,694,636 0 14,694,636 4,898,212 0 14 Fishing

145 Coast protection 0 0 0 0 0 0 0 15 Grants to large business

152 Environmental technologies 5,317,262 0 0 0 5,317,262 5,317,262 0

153 Advisory services 0 0 0 0 0 0 0






333 Energy efficiency 10,180,602 0 0 0 10,180,602 12,969,172 0


341 Air 38,306,992 0 0 0 38,306,992 30,177,267 0 342 Noise 1,898,355 0 0 0 1,898,355 1,587,955 0 343 Waste 237,395,259 0 0 0 237,395,259 127,025,538 0

344 Drinking water 258,691,841 0 0 0 258,691,841 170,256,861 1,450,255 345 Sewerage and purification 748,331,491 0 0 0 748,331,491 342,675,358 1,670,255

4 Miscellaneous 0 0 0 0 0 0 0 41 Technical assistance 3,383,520 63,435,280 1,452,160 0 68,270,960 49,736,720 1,200,000

411 Preparation, etc, 20,298,714 19,798,576 3,966,669 0 44,063,959 22,643,332 2,454 412 Evaluation 2,925,855 3,656,299 420,979 0 7,003,133 4,108,533 338 413 Studies 7,581,835 2,913,973 51,185 0 10,546,993 7,762,017 22,674 414 Innovative actions 1,731,792 1,240,258 38,900 0 3,010,949 1,804,605 0 415 Information to the public 1,855,321 2,504,625 45,374 0 4,405,321 2,681,900 20,394

TOTAL 1,531,922,837 93,549,012 447,475,760 0 2,072,947,609 1,169,451,138 60,905,800 a See section 6.2.2.2 for full descriptive name.


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Table 37: Budgeted environmental expenditure for Greece from the Structural Funds for the programming period 2000-2006 (€)




125 Restoring forestry 0 0 104,218,159 0 104,218,159 34,739,385 3,757,642

127 Ecological stability 0 0 1,482,348 0 1,482,348 494,116 0

13 Rural areas


1312 Environmental preservation 0 0 84,638,313 0 84,638,313 31,820,758 42,751,987


145 Coast protection 10,098,994 0 0 4,140,699 14,239,693 4,775,356 413,698 15 Grants to large business


153 Advisory services 165,075 0 0 0 165,075 55,025 37,500


162 Environmental technologies 156,356,948 0 4,761,025 0 161,117,973 127,838,100 480,765,261

163 Advisory services 8,379,344 0 860,073 0 9,239,417 3,882,245 7,356,698


332 Renewable energy 37,487,101 0 3,808,820 0 41,295,921 35,218,065 69,993,747


34 Environmental infrastructure 1,800,000 0 0 0 1,800,000 600,000 0

341 Air 24,608,978 0 0 0 24,608,978 8,781,478 104,340 342 Noise 4,856,250 0 0 0 4,856,250 1,618,750 0 343 Waste 295,436,007 0 0 0 295,436,007 110,882,673 1,413,197

344 Drinking water 237,440,298 0 0 0 237,440,298 104,761,852 2,171,178


4 Miscellaneous 0 0 0 0 0 0 0 41 Technical assistance 2,460,000 0 0 0 2,460,000 820,000 0

411 Preparation, etc, 44,884,121 10,495,994 3,935,221 589,773 59,905,110 37,859,516 4,983,469 412 Evaluation 2,296,979 1,123,815 395,812 389,970 4,206,575 1,673,054 0 413 Studies 22,204,747 5,797,344 2,260,874 225,053 30,488,018 19,170,066 7,629,602 414 Innovative actions 5,063,292 478,344 423,135 965,820 6,930,591 2,607,468 3,520,972 415 Information to the public 8,723,389 4,167,910 419,554 15,004 13,325,856 5,889,954 471,918

TOTAL 1,228,825,518 22,063,406 635,111,208 6,326,319 1,892,326,451 917,196,259 982,383,594 a See section 6.2.2.2 for full descriptive name.


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Table 38: Budgeted environmental expenditure for Ireland from the Structural Funds for the programming period 2000-2006 (€)




13 Rural areas 1308 Agricultural water 0 0 0 0 0 0 0 1312 Environmental preservation 0 0 0 0 0 0 0 1313 Restoration 0 0 0 0 0 0 0

14 Fishing 145 Coast protection 14,500,000 0 0 0 14,500,000 10,415,000 1,910,000

15 Grants to large business 152 Environmental technologies 0 0 0 0 0 0 0 153 Advisory services 0 0 0 0 0 0 0


162 Environmental technologies 0 0 0 0 0 0 0 163 Advisory services 2,600,200 0 0 0 2,600,200 1,953,600 0


332 Renewable energy 0 0 0 0 0 0 0 333 Energy efficiency 43,418,140 0 0 0 43,418,140 24,856,788 0


341 Air 43,814 0 0 0 43,814 51,079 0 342 Noise 0 0 0 0 0 0 0 343 Waste 83,435,000 0 0 0 83,435,000 60,145,500 0 344 Drinking water 57,985,000 0 0 0 57,985,000 34,778,000 0 345 Sewerage and purification 71,101,000 0 0 0 71,101,000 54,051,000 0

4 Miscellaneous 0 0 0 0 0 0 0 41 Technical assistance 429,400 0 0 0 429,400 429,400 0

411 Preparation, etc, 1,130,794 939,000 0 0 2,069,794 1,785,394 0 412 Evaluation 339,092 75,258 0 0 414,350 414,350 0 413 Studies 4,996 312,752 0 0 317,748 239,548 0 414 Innovative actions 217,138 0 0 0 217,138 217,138 0 415 Information to the public 0 71,190 0 0 71,190 71,190 0

TOTAL 275,204,574 1,398,200 0 0 276,602,774 189,407,987 1,910,000 a See section 6.2.2.2 for full descriptive name.


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Table 39: Budgeted environmental expenditure for Italy from the Structural Funds for the programming period 2000-2006 (€)




125 Restoring forestry 0 0 126,177,421 0 126,177,421 102,708,418 10,696,904

127 Ecological stability 1,521,596 0 9,531,440 0 11,053,036 14,032,586 1,762,200

13 Rural areas

1308 Agricultural water 0 0 334,363,471 0 334,363,471 190,179,157 47,728,000


1313 Restoration 0 0 21,875,850 0 21,875,850 12,986,768 109,742 14 Fishing


152 Environmental technologies 22,412,447 675,000 0 0 23,087,447 24,581,852 6,500,000

153 Advisory services 7,188,876 168,750 0 0 7,357,626 7,261,198 0


162 Environmental technologies 123,499,238 675,000 26,649 0 124,200,887 169,268,968 186,531,095

163 Advisory services 50,570,956 67,500 4,411 0 50,642,867 58,726,062 26,287,366


332 Renewable energy 157,882,019 0 42,688 0 157,924,707 172,119,662 222,255,707



341 Air 90,542,800 0 0 0 90,542,800 92,580,300 30,875,000 342 Noise 20,345,200 0 0 0 20,345,200 22,382,700 0 343 Waste 253,689,120 0 0 0 253,689,120 349,622,245 337,799,862

344 Drinking water 503,879,864 0 0 0 503,879,864 528,863,369 483,406,575


4 Miscellaneous 58,526,800 0 0 0 58,526,800 71,532,756 2,140,000 41 Technical assistance 8,941,766 26,957,033 16,950 0 35,915,748 39,115,355 110,340

411 Preparation, etc, 39,586,374 3,944,000 948,290 111,630 44,590,294 31,088,971 350,573 412 Evaluation 6,490,250 0 581,540 0 7,071,790 6,387,390 4,620 413 Studies 44,092,949 1,115,000 659,748 0 45,867,697 41,769,558 1,646,241 414 Innovative actions 2,977,046 1,115,000 315,767 111,630 4,519,443 3,226,645 112,608 415 Information to the public 10,900,110 0 323,350 0 11,223,460 9,246,585 8,086,471

TOTAL 2,470,033,979 34,717,283 715,091,165 23,282,411 3,243,124,838 3,184,532,204 1,955,202,479 a See section 6.2.2.2 for full descriptive name.


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Table 40: Budgeted environmental expenditure for Luxembourg from the Structural Funds for the programming period 2000-2006 (€)

FIELDS OF INTERVENTION Code Namea ERDF ESF EAGGF FIFG TOTAL

SF NATIONAL PRIVATE











163 Advisory services 0 0 0 0 0 0 0 3 Basic infrastructure

33 Energy infrastructure 332 Renewable energy 0 0 0 0 0 0 0 333 Energy efficiency 0 0 0 0 0 0 0


341 Air 0 0 0 0 0 0 0 342 Noise 0 0 0 0 0 0 0 343 Waste 0 0 0 0 0 0 0 344 Drinking water 0 0 0 0 0 0 0

345 Sewerage and purification 0 0 0 0 0 0 0

4 Miscellaneous 0 44,000 0 0 44,000 44,000 0 41 Technical assistance 0 157,820 0 0 157,820 192,860 0

411 Preparation, etc, 157,440 0 0 0 157,440 157,440 0 412 Evaluation 39,360 0 0 0 39,360 39,360 0 413 Studies 39,360 0 0 0 39,360 39,360 0 414 Innovative actions 9,840 0 0 0 9,840 9,840 0 415 Information to the public 0 0 0 0 0 0 0

TOTAL 8,487,000 201,820 0 0 8,688,820 19,711,860 7,747,951 a See section 6.2.2.2 for full descriptive name.


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Table 41: Budgeted environmental expenditure for Netherlands from the Structural Funds for the programming period 2000-2006 (€)




13 Rural areas 1308 Agricultural water 375,000 0 212,500 0 587,500 837,500 0

1312 Environmental preservation 28,365,000 0 1,137,500 0 29,502,500 36,396,500 0


145 Coast protection 0 0 0 150,000 150,000 150,000 200,000 15 Grants to large business

152 Environmental technologies 477,556 0 0 0 477,556 1,497,401 0

153 Advisory services 22,870 0 0 0 22,870 28,791 0



163 Advisory services 5,964,793 0 10,750 0 5,975,543 8,355,428 5,825,710 3 Basic infrastructure

33 Energy infrastructure 332 Renewable energy 294,596 0 0 0 294,596 1,267,073 0 333 Energy efficiency 544,596 0 0 0 544,596 1,567,073 500,000


341 Air 54,596 0 0 0 54,596 67,073 0 342 Noise 54,596 0 0 0 54,596 67,073 0 343 Waste 7,012,374 0 0 0 7,012,374 10,212,881 87,350 344 Drinking water 163,788 0 0 0 163,788 201,219 0

345 Sewerage and purification 781,630 0 0 0 781,630 2,289,138 0


411 Preparation, etc, 3,966,389 184,000 56,000 0 4,206,389 4,793,769 0 412 Evaluation 746,609 0 0 0 746,609 778,212 0 413 Studies 413,065 0 0 0 413,065 443,603 0 414 Innovative actions 82,232 0 0 0 82,232 93,352 0 415 Information to the public 41,348 0 0 0 41,348 62,054 0

TOTAL 73,643,828 2,309,680 1,416,750 150,000 77,520,258 105,344,559 35,828,251 a See section 6.2.2.2 for full descriptive name.


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Table 42: Budgeted environmental expenditure for Portugal from the Structural Funds for the programming period 2000-2006 (€)




125 Restoring forestry 0 0 0 0 0 0 0

127 Ecological stability 0 0 0 0 0 0 0

13 Rural areas


1312 Environmental preservation 5,537,140 0 3,138,241 0 8,675,381 3,419,109 211,129

1313 Restoration 0 0 27,704,921 0 27,704,921 9,234,974 13,955,958 14 Fishing






163 Advisory services 4,018,550 0 0 0 4,018,550 1,918,806 125,052



333 Energy efficiency 0 0 0 0 0 0 0


341 Air 8,023,845 0 0 0 8,023,845 4,630,311 639,382 342 Noise 8,023,845 0 0 0 8,023,845 4,630,311 639,382 343 Waste 47,679,242 0 0 0 47,679,242 19,927,518 420,052

344 Drinking water 209,689,231 0 0 0 209,689,231 90,448,232 0 345 Sewerage and purification 369,323,779 0 0 0 369,323,779 152,311,444 0

4 Miscellaneous 0 0 0 0 0 0 0 41 Technical assistance 12,233,750 7,149,813 4,362,824 1,067,000 24,813,387 9,248,327 0

411 Preparation, etc, 20,509,759 9,967,820 2,017,911 15,900 32,511,390 13,824,811 0 412 Evaluation 3,624,543 2,459,672 354,412 18,750 6,457,378 2,548,663 0 413 Studies 2,551,542 2,272,778 279,294 0 5,103,614 2,082,411 0 414 Innovative actions 1,261,224 136,321 158,320 0 1,555,864 618,873 0 415 Information to the public 2,231,934 1,409,144 317,326 11,250 3,969,654 1,427,356 0

TOTAL 866,037,051 23,395,547 119,956,599 16,531,773 1,025,920,971 451,574,062 40,920,652 a See section 6.2.2.2 for full descriptive name.


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Table 43: Budgeted environmental expenditure for Spain from the Structural Funds for the programming period 2000-2006 (€)




125 Restoring forestry 0 0 163,270,821 0 163,270,821 77,758,181 0

127 Ecological stability 0 0 59,628,055 0 59,628,055 29,994,761 0

13 Rural areas

1308 Agricultural water 0 0 534,898,750 0 534,898,750 1,029,932,080 34,213,850

1312 Environmental preservation 0 0 206,517,894 0 206,517,894 99,718,864 0



152 Environmental technologies 1,711,840 0 0 0 1,711,840 733,646 0

153 Advisory services 24,940,625 0 0 0 24,940,625 9,567,161 0


162 Environmental technologies 23,794,322 0 0 0 23,794,322 15,545,040 0

163 Advisory services 51,873,240 0 0 0 51,873,240 34,484,652 0


332 Renewable energy 88,577,216 0 0 0 88,577,216 71,654,635 0

333 Energy efficiency 48,367,067 0 0 0 48,367,067 34,314,072 0

34 Environmental infrastructure 1,891,522,678 0 0 0 1,891,522,678 829,569,161 0

341 Air 27,980,996 0 0 0 27,980,996 19,086,905 0 342 Noise 2,571,343 0 0 0 2,571,343 1,209,163 0 343 Waste 243,815,714 0 0 0 243,815,714 109,100,183 0

344 Drinking water 1,214,866,277 0 0 0 1,214,866,277 625,104,767 0 345 Sewerage and purification 874,118,221 0 0 0 874,118,221 353,482,196 0

4 Miscellaneous 522,745 384,592 236,200 0 1,143,537 312,780 0 41 Technical assistance 6,371,629 16,835,081 5,374,601 0 28,581,312 13,135,399 156,316

411 Preparation, etc, 5,650,555 2,732,277 574,851 0 8,957,683 3,094,072 0 412 Evaluation 976,299 457,553 185,012 0 1,618,863 625,705 0 413 Studies 2,439,866 1,118,224 2,298,643 0 5,856,733 2,487,240 0 414 Innovative actions 113,212 89,303 75,437 0 277,952 75,443 0 415 Information to the public 838,453 244,662 94,944 0 1,178,060 627,205 0

TOTAL 4,511,052,298 21,861,692 995,379,854 0 5,528,293,845 3,369,442,668 34,370,166 a See section 6.2.2.2 for full descriptive name.


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Table 44: Budgeted environmental expenditure for Sweden from the Structural Funds for the programming period 2000-2006 (€)











162 Environmental technologies 81,550 0 0 0 81,550 393,550 106,650

163 Advisory services 8,155 0 0 0 8,155 39,355 10,665 3 Basic infrastructure

33 Energy infrastructure 332 Renewable energy 1,290,000 0 0 0 1,290,000 1,935,000 1,382,143 333 Energy efficiency 0 0 0 0 0 0 0


341 Air 0 0 0 0 0 0 0 342 Noise 0 0 0 0 0 0 0 343 Waste 0 0 0 0 0 0 0 344 Drinking water 0 0 0 0 0 0 0

345 Sewerage and purification 0 0 0 0 0 0 0

4 Miscellaneous 0 0 0 0 0 0 0 41 Technical assistance 4,203,259 1,947,013 425,752 45,076 6,621,100 6,386,500 0

411 Preparation, etc, 0 2,573,720 0 0 2,573,720 2,573,720 0 412 Evaluation 0 0 0 0 0 0 0 413 Studies 0 0 0 0 0 0 0 414 Innovative actions 0 0 0 0 0 0 0 415 Information to the public 0 1,911,420 0 0 1,911,420 1,911,420 0

TOTAL 10,089,646 6,432,153 425,752 45,076 16,992,627 18,463,459 5,957,657 a See section 6.2.2.2 for full descriptive name.


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Table 45: Budgeted environmental expenditure for UK from the Structural Funds for the programming period 2000-2006 (€)



125 Restoring forestry 3,944,500 0 2,268,090 0 6,212,590 6,204,340 983,875 127 Ecological stability 0 0 3,084,640 0 3,084,640 3,084,640 1,158,875

13 Rural areas 1308 Agricultural water 0 0 13,428,500 0 13,428,500 13,428,500 0


1313 Restoration 0 0 4,060,160 0 4,060,160 4,060,160 406,600 14 Fishing

145 Coast protection 6,824,280 0 0 8,085,500 14,909,780 9,005,068 7,335,835 15 Grants to large business





163 Advisory services 112,623,469 4,189,466 628,100 0 117,441,035 119,789,576 45,332,165 3 Basic infrastructure

33 Energy infrastructure 332 Renewable energy 27,466,750 0 0 0 27,466,750 11,493,250 34,960,500 333 Energy efficiency 30,895,400 0 0 0 30,895,400 34,840,200 11,508,050


341 Air 0 0 0 0 0 0 0 342 Noise 0 0 0 0 0 0 0 343 Waste 18,093,288 0 0 0 18,093,288 25,161,714 3,325,569 344 Drinking water 58,423,300 0 0 0 58,423,300 56,499,800 20,696,000


4 Miscellaneous 0 0 0 0 0 0 0 41 Technical assistance 2,366,559 17,474,098 0 0 19,840,657 22,842,883 753,120

411 Preparation, etc, 14,775,034 5,090,987 39,800 39,800 19,945,621 19,651,601 1,909,130 412 Evaluation 6,095,805 1,990,317 27,860 27,860 8,141,842 8,164,329 1,448,130 413 Studies 6,975,002 1,756,011 0 0 8,731,013 8,772,275 2,523,280 414 Innovative actions 2,096,781 610,515 0 0 2,707,296 2,693,544 0 415 Information to the public 293,642 989,390 11,940 11,940 1,306,912 1,206,992 0

TOTAL 511,873,780 32,100,784 47,652,290 8,165,100 599,791,954 582,143,889 210,454,673 a See section 6.2.2.2 for full descriptive name. Source: Directorate-General for Regional Policy and Cohesion (European Commission).

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Table 46: Budgeted environmental expenditure for EU interregional cooperation from the Structural Funds for the programming period 2000-2006 (€)



125 Restoring forestry 498,097 0 0 0 498,097 450,145 47,952 127 Ecological stability 1,854,550 0 0 0 1,854,550 2,095,837 110,707

13 Rural areas 1308 Agricultural water 1,391,937 0 0 0 1,391,937 1,225,344 342,757

1312 Environmental preservation 31,230,782 0 0 0 31,230,782 22,739,580 1,218,156

1313 Restoration 1,702,690 0 0 0 1,702,690 1,473,439 229,251 14 Fishing



153 Advisory services 1,473,919 0 0 0 1,473,919 504,221 25,298



163 Advisory services 3,235,305 0 0 0 3,235,305 1,882,529 332,843 3 Basic infrastructure

33 Energy infrastructure 332 Renewable energy 7,490,519 0 0 0 7,490,519 7,139,316 243,703 333 Energy efficiency 1,059,139 0 0 0 1,059,139 1,000,760 58,378

34 Environmental infrastructure 1,541,450 0 0 0 1,541,450 1,526,594 49,160

341 Air 1,866,961 0 0 0 1,866,961 1,687,314 355,810 342 Noise 475,024 0 0 0 475,024 461,971 13,053 343 Waste 2,387,512 0 0 0 2,387,512 2,194,118 281,475 344 Drinking water 8,824,788 0 0 0 8,824,788 8,648,357 352,595

345 Sewerage and purification 3,243,365 0 0 0 3,243,365 2,976,284 443,245

4 Miscellaneous 0 0 0 0 0 0 0 41 Technical assistance 5,744,911 0 0 0 5,744,911 3,530,911 0

411 Preparation, etc, 10,007,546 0 0 0 10,007,546 8,058,954 0 412 Evaluation 2,593,553 0 0 0 2,593,553 1,623,945 0 413 Studies 24,425,316 0 0 0 24,425,316 18,254,940 392,378 414 Innovative actions 26,535,438 0 0 0 26,535,438 19,480,530 853,974 415 Information to the public 9,595,097 0 0 0 9,595,097 7,885,487 258,056

TOTAL 165,912,932 0 0 0 165,912,932 124,404,607 6,791,061 a See section 6.2.2.2 for full descriptive name. Source: Directorate-General for Regional Policy and Cohesion (European Commission).

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1.27.3.2 Environmentally beneficial expenditure The Structural Funds for the programming period 2000-2006 allocated for environmentally beneficial expenditure, by the fields of intervention mentioned in section 6.2.2.2, are presented in Table 47 through Table 61 for all Member States. The same information is provided in Table 62 for EU interregional cooperation. This information will be aggregated and analysed in following sections. Table 47: Budgeted environmentally beneficial expenditure for Austria from the Structural

Funds for the programming period 2000-2006 (€) FIELDS OF INTERVENTION


3 Basic infrastructure 31 Transport infrastructure

311 Rail 1,654,417 0 0 0 1,654,417 1,305,617 348,800 3123 Cycle tracks 0 0 0 0 0 0 0

316 Waterways 0 0 0 0 0 0 0 317 Urban Transport 700,000 0 0 0 700,000 3,780,000 0 318 Multimodal Transport 3,053,050 0 0 0 3,053,050 1,832,250 1,220,800

319 Intelligent Transport Systems 0 0 0 0 0 0 0

35 Planning and rehabilitation 0 0 0 0 0 0 0

351 Industrial and military sites 1,394,700 0 0 0 1,394,700 3,846,600 945,000 352 Urban areas 13,044,568 0 0 0 13,044,568 24,103,468 1,686,200

TOTAL 19,846,735 0 0 0 19,846,735 34,867,935 4,200,800 a See section 6.2.2.2 for full descriptive name.


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Table 48: Budgeted environmentally beneficial expenditure for Belgium from the Structural Funds for the programming period 2000-2006 (€)


3 Basic infrastructure

31 Transport infrastructure

311 Rail 882,303 0 0 0 882,303 3,518,301 1,195,324 3123 Cycle tracks 158,070 0 0 0 158,070 351,930 0

316 Waterways 0 0 0 0 0 0 0 317 Urban Transport 247,894 0 0 0 247,894 223,104 24,789 318 Multimodal Transport 1,479,744 0 0 0 1,479,744 3,574,001 0

319 Intelligent Transport Systems 30,870 0 0 0 30,870 68,730 0

35 Planning and rehabilitation 261,591 0 0 0 261,591 582,409 0

351 Industrial and military sites 46,635,924 0 0 0 46,635,924 56,783,265 11,387,766

352 Urban areas 30,962,538 0 0 0 30,962,538 44,328,690 267,623 TOTAL 80,658,934 0 0 0 80,658,934 109,430,430 12,875,502

a See section 6.2.2.2 for full descriptive name. Source: Directorate-General for Regional Policy and Cohesion (European Commission).

Table 49: Budgeted environmentally beneficial expenditure for Denmark from the

Structural Funds for the programming period 2000-2006 (€) FIELDS OF INTERVENTION



311 Rail 0 0 0 0 0 0 0 3123 Cycle tracks 0 0 0 0 0 0 0

316 Waterways 0 0 0 0 0 0 0 317 Urban Transport 0 0 0 0 0 0 0 318 Multimodal Transport 0 0 0 0 0 0 0


35 Planning and rehabilitation 3,008,185 0 0 0 3,008,185 4,163,997 124,660

351 Industrial and military sites 0 0 0 0 0 0 0 352 Urban areas 0 0 0 0 0 0 0

TOTAL 3,008,185 0 0 0 3,008,185 4,163,997 124,660 a See section 6.2.2.2 for full descriptive name.


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Table 50: Budgeted environmentally beneficial expenditure for Finland from the Structural Funds for the programming period 2000-2006 (€)




316 Waterways 0 0 0 0 0 0 0 317 Urban Transport 0 0 0 0 0 0 0 318 Multimodal Transport 9,235,450 0 0 0 9,235,450 21,600,250 5,081,650




352 Urban areas 20,912,900 0 0 0 20,912,900 40,322,250 13,017,300 TOTAL 49,905,900 0 0 0 49,905,900 95,073,450 31,820,250


Table 51: Budgeted environmentally beneficial expenditure for France from the Structural Funds for the programming period 2000-2006 (€)




311 Rail 45,283,336 0 0 0 45,283,336 112,439,277 10,880,247 3123 Cycle tracks 11,314,562 0 0 0 11,314,562 29,127,484 10,792,797

316 Waterways 14,772,673 0 0 0 14,772,673 35,490,236 209,450 317 Urban Transport 24,892,567 0 0 0 24,892,567 45,050,632 3,285,482 318 Multimodal Transport 159,465,002 0 0 0 159,465,002 261,215,011 7,439,303

319 Intelligent Transport Systems 1,909,623 0 0 0 1,909,623 2,408,236 128,032

35 Planning and rehabilitation 145,289,269 0 0 0 145,289,269 262,373,482 60,348,236


352 Urban areas 428,241,785 0 0 0 428,241,785 633,626,678 130,201,968 TOTAL 1,053,857,551 0 0 0 1,053,857,551 1,705,154,786 297,248,258


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Table 52: Budgeted environmentally beneficial expenditure for Germany from the Structural Funds for the programming period 2000-2006 (€)




311 Rail 719,274,638 0 0 0 719,274,638 395,925,629 316,360,000 3123 Cycle tracks 15,473,985 0 0 0 15,473,985 14,600,614 0

316 Waterways 19,356,350 0 0 0 19,356,350 9,733,900 0 317 Urban Transport 2,051,250 0 0 0 2,051,250 10,690,350 280,000

318 Multimodal Transport 14,796,022 0 0 0 14,796,022 9,266,022 1,534,000

319 Intelligent Transport Systems 8,295,267 0 0 0 8,295,267 5,631,267 0





Table 53: Budgeted environmentally beneficial expenditure for Greece from the Structural

Funds for the programming period 2000-2006 (€) FIELDS OF INTERVENTION Code Namea ERDF ESF EAGGF FIFG TOTAL SF NATIONAL PRIVATE



311 Rail 1,810,570,104 0 0 0 1,810,570,104 1,587,165,216 638,190,399 3123 Cycle tracks 1,972,500 0 0 0 1,972,500 657,500 0

316 Waterways 0 0 0 0 0 0 0 317 Urban Transport 317,089,009 0 0 0 317,089,009 136,561,450 174,730,000


319 Intelligent Transport Systems 47,507,053 0 0 0 47,507,053 22,645,012 4,351,103

35 Planning and rehabilitation 4,296,405 0 0 0 4,296,405 1,432,135 0




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Table 54: Budgeted environmentally beneficial expenditure for Ireland from the Structural Funds for the programming period 2000-2006 (€)





316 Waterways 0 0 0 0 0 0 0 317 Urban Transport 209,083,000 0 0 0 209,083,000 205,388,723 0

318 Multimodal Transport 0 0 0 0 0 0 0



351 Industrial and military sites 0 0 0 0 0 0 0

352 Urban areas 2,116,636 0 0 0 2,116,636 2,467,621 0 TOTAL 211,199,636 0 0 0 211,199,636 207,856,344 0


Table 55: Budgeted environmentally beneficial expenditure for Italy from the Structural




311 Rail 1,184,647,525 0 0 0 1,184,647,525 1,595,618,388 134,787,930 3123 Cycle tracks 8,471,857 0 0 0 8,471,857 12,899,112 0








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Table 56: Budgeted environmentally beneficial expenditure for Luxembourg from the Structural Funds for the programming period 2000-2006 (€)





316 Waterways 0 0 0 0 0 0 0 317 Urban Transport 0 0 0 0 0 0 0

318 Multimodal Transport

0 0 0 0 0 0 0

319 Intelligent Transport Systems

0 0 0 0 0 0 0

35 Planning and rehabilitation

0 0 0 0 0 0 0

351 Industrial and military sites

5,535,000 0 0 0 5,535,000 12,915,000 5,203,846



Table 57: Budgeted environmentally beneficial expenditure for Netherlands from the

Structural Funds for the programming period 2000-2006 (€) FIELDS OF INTERVENTION Code Namea ERDF ESF EAGGF FIFG TOTAL SF NATIONAL PRIVATE



311 Rail 2,259,705 0 0 0 2,259,705 5,727,834 0 3123 Cycle tracks 4,536,591 0 0 0 4,536,591 7,126,419 0

316 Waterways 4,042,039 0 0 0 4,042,039 5,869,391 600,000 317 Urban Transport 13,396,656 0 0 0 13,396,656 23,893,336 356,440

318 Multimodal Transport 3,934,153 0 0 0 3,934,153 9,590,075 0

319 Intelligent Transport Systems 615,151 0 0 0 615,151 2,017,159 0





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Table 58: Budgeted environmentally beneficial expenditure for Portugal from the Structural Funds for the programming period 2000-2006 (€)




311 Rail 164,603,448 0 0 0 164,603,448 272,162,424 102,934,000 3123 Cycle tracks 0 0 0 0 0 0 0

316 Waterways 17,966,813 0 0 0 17,966,813 18,985,576 2,841,756 317 Urban Transport 498,292,621 0 0 0 498,292,621 505,831,489 70,004,598







Table 59: Budgeted environmentally beneficial expenditure for Spain from the Structural




311 Rail 2,935,237,342 0 0 0 2,935,237,342 2,665,186,167 0 3123 Cycle tracks 5,656,407 0 0 0 5,656,407 2,962,236 0

316 Waterways 0 0 0 0 0 0 0 317 Urban Transport 66,968,093 0 0 0 66,968,093 26,097,038 0

318 Multimodal Transport 120,491,110 0 0 0 120,491,110 109,398,775 0



351 Industrial and military sites 52,826,747 0 0 0 52,826,747 30,199,919 0

352 Urban areas 434,672,363 0 0 0 434,672,363 264,592,911 0 TOTAL 3,623,425,312 0 0 0 3,623,425,312 3,101,682,724 0


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Table 60: Budgeted environmentally beneficial expenditure for Sweden from the Structural Funds for the programming period 2000-2006 (€)





316 Waterways 0 0 0 0 0 0 0 317 Urban Transport 0 0 0 0 0 0 0

318 Multimodal Transport 0 0 0 0 0 0 0



351 Industrial and military sites 0 0 0 0 0 0 0

352 Urban areas 0 0 0 0 0 0 0 TOTAL 31,766,679 0 0 0 31,766,679 52,215,432 33,778,788


Table 61: Budgeted environmentally beneficial expenditure for UK from the Structural




311 Rail 56,126,990 0 0 0 56,126,990 51,658,950 53,987,850 3123 Cycle tracks 755,157 0 0 0 755,157 755,157 0








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Table 62: Budgeted environmentally beneficial expenditure for EU interregional cooperation from the Structural Funds for the programming period 2000-2006 (€)




311 Rail 2,550,177 0 0 0 2,550,177 3,328,297 242,446 3123 Cycle tracks 316,700 0 0 0 316,700 533,866 54,292

316 Waterways 2,667,417 0 0 0 2,667,417 3,153,349 368,129 317 Urban Transport 13,912,600 0 0 0 13,912,600 8,319,548 929,551


319 Intelligent Transport Systems 9,549,603 0 0 0 9,549,603 5,895,799 823,936



352 Urban areas 37,304,339 0 0 0 37,304,339 12,463,200 0 TOTAL 164,675,359 0 0 0 164,675,359 126,207,021 5,227,758


1.27.4 Aggregate annualised data

1.27.4.1 Environmental expenditure

Table 63 aggregates the information provided in Table 31 through Table 45 in annual terms. Since no information has been provided on the annual distribution of the budgeted funds for the programming period 2000-2006, we assume equal allocation of funds through the seven years of the programming period. EU interregional cooperation (Table 46) could be distributed by Member State applying the percentages that the funds allocated to each country represent over the EU total. Given that this would not alter the relative position of each Member State, which is what concerns us from the point of view of cohesion, and the relatively small amounts assigned to interregional cooperation, this information is excluded from the aggregates in Table 63.

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Table 63: Annualised budgeted environmental expenditure from the Structural Funds for the programming period 2000-2006 (€)

ERDF ESF EAGGF FIFG TOTAL SF NATIONAL PRIVATE

Austria 9,671,490 704,997 811,641 0 11,188,128 6,466,477 34,851,240 Belgium 6,695,551 1,604,330 184,592 0 8,484,474 9,000,846 1,043,810 Denmark 862,028 472,354 0 0 1,334,381 1,613,849 3,562 Finland 13,257,566 875,243 85,000 243,950 14,461,759 19,574,176 33,658,653 France 124,813,819 4,836,997 7,915,818 1,041,280 138,607,914 181,361,260 105,867,024 Germany 218,846,120 13,364,145 63,925,109 0 296,135,373 167,064,448 8,700,829 Greece 175,546,503 3,151,915 90,730,173 903,760 270,332,350 131,028,037 140,340,513 Ireland 39,314,939 199,743 0 0 39,514,682 27,058,284 272,857 Italy 352,861,997 4,959,612 102,155,881 3,326,059 463,303,548 454,933,172 279,314,640 Luxembourg 1,212,429 28,831 0 0 1,241,260 2,815,980 1,106,850 Netherlands 10,520,547 329,954 202,393 21,429 11,074,323 15,049,223 5,118,322 Portugal 123,719,579 3,342,221 17,136,657 2,361,682 146,560,139 64,510,580 5,845,807 Spain 644,436,043 3,123,099 142,197,122 0 789,756,264 481,348,953 4,910,024 Sweden 1,441,378 918,879 60,822 6,439 2,427,518 2,637,637 851,094 UK 73,124,826 4,585,826 6,807,470 1,166,443 85,684,565 83,163,413 30,064,953 EU-15 1,796,324,812 42,498,147 432,212,677 9,071,041 2,280,106,677 1,647,626,335 651,950,177

Source: own calculations based on Directorate-General for Regional Policy and Cohesion (European Commission).

This table shows very clearly that the European Regional Development Fund is the main

driver of environmental expenditure from EU sources. It represents 79 per cent of all Structural Funds for the EU as a whole. The European Agricultural Guidance and Guarantee Fund is the second most important financial instrument, with 19 per cent of all funds allocated for environmental expenditure. The Financial Instrument of Fisheries Guidance and the European Social Fund are insignificant, although the European Social Fund is clearly underestimated, since there are sizeable funds allocated for environmental education of employed and unemployed workers that have not been identified.

By country, the largest share of Structural Funds is for Spain, which receives 35 per cent.

Spain is followed by Italy (20%), Germany (13%), Greece (12%), Portugal (6%) and France (6%). These six Member States combined represent 92 per cent of all Structural Funds. These funds are also an important driver for the allocation of national funds for environmental expenditure: 1,6 billion Euros per annum, which represent 72 per cent of the size of the Structural Funds. In the case of private funds, 652 million Euros accompany the Structural Funds for environmental expenditure, adding 29 per cent more to these funds. Private funds are especially important in Italy (279 M €), Greece (140 M €) and France (106 M €).

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1.27.4.2 Environmentally beneficial expenditure The information presented in Table 47 through Table 61 is summarized in annual terms in Table 64. As with environmental expenditure, data is annualised assuming equal allocation of funds through the seven years of the programming period, and EU interregional cooperation data (Table 62) is excluded from the aggregates. Table 64: Annualised budgeted environmentally beneficial expenditure from the Structural

Funds for the programming period 2000-2006 (€)

ERDF ESF EAGGF FIFG TOTAL SF NATIONAL PRIVATE

Austria 2,835,248 0 0 0 2,835,248 4,981,134 600,114 Belgium 11,522,705 0 0 0 11,522,705 15,632,919 1,839,357 Denmark 429,741 0 0 0 429,741 594,857 17,809 Finland 7,129,414 0 0 0 7,129,414 13,581,921 4,545,750 France 150,551,079 0 0 0 150,551,079 243,593,541 42,464,037 Germany 310,419,972 0 0 0 310,419,972 221,446,593 46,717,115 Greece 401,028,213 0 0 0 401,028,213 278,211,095 139,381,694 Ireland 30,171,377 0 0 0 30,171,377 29,693,763 0 Italy 343,272,950 0 0 0 343,272,950 435,157,230 53,824,268 Luxembourg 1,581,429 0 0 0 1,581,429 3,690,000 1,486,813 Netherlands 34,962,060 0 0 0 34,962,060 73,870,785 3,210,661 Portugal 351,596,545 0 0 0 351,596,545 316,973,559 110,514,596 Spain 517,632,187 0 0 0 517,632,187 443,097,532 0 Sweden 4,538,097 0 0 0 4,538,097 7,459,347 4,825,541 UK 162,022,521 0 0 0 162,022,521 154,439,152 81,556,309 EU-15 2,329,693,537 0 0 0 2,329,693,537 2,242,423,427 490,984,064

Source: own calculations based on Directorate-General for Regional Policy and Cohesion (European Commission).

Given the nature of these expenditures (transport infrastructure, and planning and

rehabilitation of industrial and military sites and urban areas), all the funds come from the European Regional Development Fund, what makes it even more important as the main driver of environmental expenditure when we add environmental and environmentally beneficial expenditure. By Member State, Spain receives also in this case the largest share of Structural Funds (22%), followed by Greece (17%), Portugal (15%), Italy (15%), Germany (13%), UK (7%) and France (6%). These seven countries represent 96 per cent of all Structural Funds. The importance of these funds as drivers for the allocation of national funds is even more important here than in the case of environmental expenditure: 2,2 billion Euros per annum, which represent 96 per cent of the size of the Structural Funds. Private funds are 491 million Euros, which add 21 per cent more to Structural Funds. Private funds are largest in Greece (139 M €), Portugal (111 M €) and UK (82 M €).

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1.28 COHESION FUND

1.28.1 Introduction: Methodological issues The European Commission10 has provided information on the actual payments made to the

four cohesion countries from 1993 to the present, both from programming periods 1993-1999 and 2000-2006. The data consist of the actual payments made for each project by year. This information was not enough to aggregate expenditure by environmental domain, since the file titles of the projects were not always sufficiently descriptive to allow identification of the type of expenditure.

The raw data provided by the European Commission on actual payments from the Cohesion

Fund divides projects in the following categories: environmental projects, transport projects, mixed projects and technical assistance. Obviously, environmental projects have been considered as environmental expenditure.

In the case of transport projects, it is clear that some of them should be considered as

environmentally beneficial expenditure, as some transport infrastructures were considered in the case of the European Regional Development Fund: rail, cycle tracks, waterways, urban transport, multimodal transport and intelligent transport systems. In fact, the conclusions of the European Council meeting held in Gothenburg on 15 and 16 June 2001 stated that “action is needed to bring about a significant decoupling of transport growth and GDP growth, in particular by a shift from road to rail, water and public passenger transport […] giving priority, where appropriate, to infrastructure investment for public transport and for railways, inland waterways, short sea shipping, inter-modal operations and effective interconnection.” Unfortunately, the non-descriptive file titles of the projects prevented us again from identifying the type of transport expenditure. Hence no transport expenditure has been considered neither environmental nor environmentally beneficial expenditure, which means that we are underestimating the environmental impact of Cohesion Funds.

Finally, with regard to mixed projects and technical assistance, the following criterion has

been followed: the percentage of environmental projects over the sum of environmental and transport projects in each particular year is applied to mixed projects and technical assistance to determine what fraction of them should be considered as environmental expenditure (in any case, it is a negligible amount).

1.28.2 Environmental expenditure by Member State

Table 65 through Table 68 report the payments made through the Cohesion Fund to Greece,

Ireland, Portugal and Spain for environmental projects from 1993 to 2002. The total payments made for environmental projects have grown steadily from 279 million Euros in 1993 to 1,3 billion Euros in 2002. The average yearly total amount paid for the ten year period is 838 million Euros, with Spain being the main recipient of funds in average (53%), followed by Portugal (20%), Greece (16%) and Ireland (11%). However, Spain is the country that benefits the less of cohesion

10 The author wish to thank Ms. Luisa Sanches, from the Directorate-General for Regional Policy and Cohesion, for kindly providing raw data on the Cohesion Fund.

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funds for environmental projects in terms of average GDP percentages (0.08%), and Portugal the most benefited Member State (0.17%), followed by Greece (0.12%) and Ireland (0.12%). Also in average per capita terms, Spain is the least benefited country (11.38 € per capita), and Ireland is the Member State that benefits the most (24.54 € per capita), followed by Portugal (17.09 € per capita) and Greece (12.49 € per capita). Table 65: Cohesion Fund payments for environmental projects in Greece (€)

Payment Year

Amounts paid (€)

Percentage over all

cohesion countries’ environmental projects (%)

Percentage over

Greece’s total cohesion

funds (%)

Percentage Over GDP

(%)

Amounts per capita

(€)

1993 99,067,294 36 67 0.12 9.57 1994 141,687,620 40 90 0.17 13.61 1995 76,977,597 13 85 0.09 7.37 1996 123,220,822 19 50 0.13 11.77 1997 159,072,521 19 28 0.15 15.17 1998 152,847,373 13 32 0.14 14.54 1999 112,112,440 11 45 0.10 10.66 2000 154,913,435 18 51 0.13 14.69 2001 162,713,264 14 63 0.12 15.39 2002 125,620,657 9 26 0.09 11.86

Average 130,823,302 16 44 0.12 12.49 Percentage over total environmental expenditure (1999 data) (%) 6

Percentage over annualised cost of EU directives from Table 29 (%) 16 Source: own calculations based on Andrews et al. (2000), Directorate-General for Regional Policy and

Cohesion (European Commission), ECOTEC (2002) and Eurostat (2002 and 2003).

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Table 66: Cohesion Fund payments for environmental projects in Ireland (€)

Payment Year

Amounts paid (€)

Percentage over all cohesion

countries’ environmental projects (%)

Percentage over

Ireland’s total cohesion

funds (%)

Percentage over GDP

(%)

Amounts per capita

(€)

1993 28,845,009,00 10 43 0.07 8.08 1994 24,853,596,00 7 29 0.05 6.94 1995 53,993,215,00 9 40 0.11 15.01 1996 97,081,483,00 15 47 0.17 26.82 1997 64,353,898,00 8 30 0.09 17.62 1998 139,261,365,28 12 59 0.18 37.70 1999 138,700,175,00 13 73 0.16 37.14 2000 52,352,074,90 6 41 0.05 13.86 2001 203,841,708,59 17 65 0.18 53.27 2002 98,074,303,62 7 51 0.08 25.30




Table 67: Cohesion Fund payments for environmental projects in Portugal (€)

Payment Year

Amounts paid (€)



Percentage over

Portugal’s total cohesion

funds (%)

Percentage over GDP

(%)

Amounts per capita

(€)

1993 31,513,629 11 34 0.04 3.19 1994 54,527,570 15 22 0.07 5.51 1995 97,052,060 17 26 0.12 9.79 1996 124,128,046 19 38 0.14 12.51 1997 296,413,027 35 57 0.32 29.84 1998 448,300,972 37 67 0.45 45.02 1999 148,680,989 14 45 0.14 14.90 2000 108,569,263 13 93 0.09 10.86 2001 202,215,792 17 46 0.16 20.19 2002 187,660,533 14 46 0.15 18.70




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Table 68: Cohesion Fund payments for environmental projects in Spain (€)

Payment Year

Amounts paid (€)



Percentage over

Spain’s total cohesion

funds (%)

Percentage over GDP

(%)

Amounts per capita

(€)

1993 119,120,124 43 28 0.03 3.05 1994 136,688,294 38 32 0.03 3.49 1995 359,900,803 61 33 0.08 9.19 1996 296,992,139 46 27 0.06 7.57 1997 331,909,950 39 33 0.07 8.45 1998 466,669,817 39 44 0.09 11.86 1999 661,018,573 62 70 0.12 16.78 2000 547,361,595 63 48 0.09 13.88 2001 631,664,305 53 66 0.10 15.99 2002 920,093,597 69 45 0.13 23.25




As seen in section 5.2, the aim of the Cohesion Fund is to spend 50 per cent of the available

resources to finance transport infrastructures and 50 per cent to finance environmental projects. We can see that, although with large variations from one year to another, the average percentages represented by environmental projects in each Member State approach 50 per cent of total payments from the Cohesion Fund.

Finally, we can look into the importance of these funds in relation to the total environmental

expenditure in each country, according to ECOTEC (2002)’s estimate for 1999, and in relation to the best estimate of the annualised costs of the directives examined in section 4. With regard to total environmental expenditure, Cohesion Fund payments represent a significant percentage for all Member States: 18 per cent in Ireland, 8 per cent in Portugal and Spain, and 6 per cent in Greece. More important it is the size of these payments in relation to the costs of EU directives: 26 per cent in Portugal, 20 per cent in Ireland, and 16 per cent in Spain and Greece. This sizeable percentages imply that the burden of EU policy for the less rich Member States is greatly softened by the Cohesion Fund, which in turn makes easier that the expenditure associated to these directives is additional, in the sense of not replacing other productive expenditure.

1.28.3 Impact on cohesion among cohesion Member States

We will study in the following section the combined impact on cohesion of the Structural

and Cohesion Funds. But before we do so, we can ask if the Cohesion Fund is also “cohesive” among the cohesion countries. For this purpose, we may use the Lorenz curve, a graphical representation of the magnitude of inequalities, as our frame of analysis. Figure 8 represents the Lorenz curve of the four cohesion countries’ average GDP and average cohesion funds paid for environmental projects during the period 1993-2002. The horizontal axis indicates the cumulative

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population from low to high GDP per capita in percentages; that is, Member States are arranged in ascending order according to their GDP per capita (poorer countries on the left side and richer countries on the right side).

On the vertical axis, we have the two variables measured against cumulative population:

cumulative average GDP (in percentages) and cumulative average cohesion funds paid for environmental projects (in percentages). Therefore, Figure 8 represents countries in two ways:

1. By relating their cumulative share of total GDP to their cumulative share of total population. Since countries are arranged in ascending order according to their GDP per capita, the line representing GDP will always be confined into the lower triangle formed by the 45 degrees line, the low horizontal axis and the right vertical axis. Hence, for each point (x, y) in this line, x is always greater or equal than y, and we can state that the poorest x% of the population earns y% of GDP. Therefore, an unequal income distribution is represented by a GDP line that is far beneath the 45 degrees line. This line represents a situation of total equalitarianism, that is, every country has the same GDP per capita. Therefore, the aim of economic and social cohesion should be to bring the line representing GDP as close as possible to the 45 degrees line or equity line.

2. By relating their cumulative share of Cohesion Fund payments to their cumulative share of total population. In this case, the cohesion funds line indicates the percentage of total funds (y%) received by the poorest x% of the population.

From the point of view of economic and social cohesion, the following cases are possible: 1. The cohesion funds line lies below the GDP line: the existing inequalities in terms of

GDP per capita are increased by the distribution of cohesion funds payments. 2. The cohesion funds line is situated between the GDP and equity lines: the Member

States with lower GDP per capita receive less payments per capita than the countries with higher GDP per capita. However, the former receive more payments as a percentage of GDP than the latter. Hence the implications for cohesion of this situation are ambiguous.

3. The cohesion funds line is placed above the equity line: the distribution of cohesion fund payments certainly contributes to economic and social cohesion also among the four recipient countries, since the countries with lower GDP per capita receive more funds per capita than the Member States with higher GDP per capita.

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Figure 8: Lorenz curve of average GDP and average cohesion funds paid for

environmental projects (1993-2002) Source: own calculations based on Andrews et al. (2000), Directorate-General for Regional Policy and


Figure 8 indicates that the distribution of Cohesion Fund payments for environmental

projects contributes to further cohesion also among the four cohesion countries only for the lower income countries. This is explained because the country with the lowest GDP per capita, Portugal, represents 15.7 per cent of the four cohesion countries’ population and 12.1 per cent of their combined GDP, but receives 20.1 per cent of Cohesion Fund payments. The second lowest GDP per capita belongs to Greece, which receives more payments (15.6%) than its share of GDP (13.2%), but less than its share of population (16.5%). The cohesive impact of the distribution of the Cohesion Fund among these four countries disappears as we move into percentages of population with highest GDP per capita, with a clear effect against cohesion from the allocation of funds to the richest of the four countries, Ireland. This result is due to Ireland obtaining 10.8 per cent of Cohesion Fund payments when it only represents 5.8 per cent of population and 9.5 per cent

0%

20%

40%

60%

80%

100%

0% 20% 40% 60% 80% 100%

Cumulative population from low to high GDP per capita (%)

Cum

ulat

ive

GD

P an

d co

hesio

n fu

nds (

%)

GDP Cohesion funds paid for environmental projects 45º

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of combined GDP. On the contrary, Spain, the second country in GDP per capita terms, receives much less payments (53.4%) than its share of population (62.0%) and GDP (65.1%).

1.29 STRUCTURAL AND COHESION FUNDS: MAGNITUDE AND EFFECT ON COHESION

1.29.1 Aggregation and magnitude of Structural and Cohesion Funds

1.29.1.1 Environmental expenditure The annualised budgeted environmental expenditure from the Structural Funds for the

programming period 2000-2006 from Table 63 is combined in Table 69 with the 2000-2002 average payments made through the Cohesion Fund to Greece, Ireland, Portugal and Spain for environmental projects from Table 65 through Table 68. The aggregated EU funds for environmental expenditure are put in relation to several other variables to provide an idea of their magnitude and importance. All the information in Table 69 refers to 2000 values when nothing else is indicated. All monetary amounts have been brought to 1995 price levels using the following indices to change price bases, all taken from Eurostat (2002):

1. Industrial producer price index - Total industry (excluding construction): used for funds for environmental expenditure and for ECOTEC (2002)’s estimated total environmental expenditure.

2. Implicit deflator of gross domestic product (SEC95): used for GDP.

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Table 69: Annualised Structural and Cohesion Funds for environmental expenditure (1995 price levels, 2000 values)

Annualised budgeted SF

(programming period 2000-2006) (M €)

Annual CF

payments (average

2000-2002) (M

€)

SF+CF (M €)

Percentage of SF+CF over EU

total SF+CF

(%)

Percentage of SF+CF over GDP

(%)

SF+CF per

capita (€)

Percentage of SF+CF over

total environmental

expenditure (1999 data)

(%)

Percentage of SF+CF

over annualised cost of EU directives

from Table 29 (%)

Austria 10.89 10.89 0.35 0.005 1.34 0.12 0.66 Belgium 7.76 7.76 0.25 0.003 0.76 0.16 0.38 Denmark 1.22 1.22 0.04 0.001 0.23 0.02 0.24 Finland 13.76 13.76 0.45 0.011 2.66 0.64 2.70 France 133.52 133.52 4.35 0.010 2.25 0.35 2.93 Germany 290.98 290.98 9.47 0.014 3.54 0.51 2.10 Greece 214.48 114.35 328.83 10.70 0.309 31.18 20.26 39.19 Ireland 36.26 104.78 141.04 4.59 0.173 37.35 18.53 31.84 Italy 424.04 424.04 13.80 0.046 7.35 2.73 9.08 Luxembourg 1.18 1.18 0.04 0.006 2.71 0.42 1.66 Netherlands 9.69 9.69 0.32 0.003 0.61 0.10 0.28 Portugal 121.81 137.32 259.13 8.43 0.260 25.92 15.35 38.92 Spain 729.10 635.17 1,364.27 44.40 0.253 34.59 17.45 48.14 Sweden 2.36 2.36 0.08 0.001 0.27 0.07 0.23 UK 84.02 84.02 2.73 0.008 1.41 0.34 1.79 EU-15 2,081.08 991.63 3,072.71 100 0.041 8.16 1.68 7.35

Source: own calculations based on Andrews et al. (2000), Directorate-General for Regional Policy and Cohesion (European Commission), ECOTEC (2002) and Eurostat (2002 and 2003).

The total annualised Structural and Cohesion Funds for environmental expenditure in 1995

price levels represent more than 3 billion Euros; two thirds coming from the Structural Funds and one third from the Cohesion Fund. Spain is the largest beneficiary in absolute terms, with 1.4 billion Euros, which signify 44 per cent of all funds. In this respect, Spain is followed by Italy (14%), Greece (11%), Germany (9%) and Portugal (8%), the only countries receiving more than 5 per cent of the total funds. In relation to GDP, these funds represent a small 0.04 per cent for the whole EU. This percentage is surpassed only by Greece (0.31%), Portugal (0.26%), Spain (0.25%), Ireland (0.17%) and Italy (0.05%). In per capita terms, the EU average of 8.16 Euros per capita is only exceeded by Ireland (37.35 € per capita), Spain (34.59 € per capita), Greece (31.18 € per capita) and Portugal (25.92 € per capita).

In relation to the total environmental expenditure in each country, according to ECOTEC

(2002)’s estimate for 1999, EU funds represent in average a small 2 per cent. However, this percentage is very significant for the four cohesion countries: 20 per cent in Greece, 19 per cent in Ireland, 17 per cent in Spain, and 15 per cent in Portugal. Italy, with 3 per cent, is also above the EU average, but far from the cohesion countries. Finally, with regard to the best estimate of the annualised costs of the directives studied in section 4, a similar pattern arises. The size of EU funds in relation to the costs of EU directives is greatest for Spain, with 48 per cent, followed by Greece and Portugal, with 39 per cent, and Ireland, with 32 per cent. Besides these four countries, Italy (9%) is again the only Member State surpassing the EU average of 7 per cent.

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1.29.1.2 Environmental and environmentally beneficial expenditure The information provided in Table 69 is completed in Table 70 by adding the annualised

budgeted environmentally beneficial expenditure from the Structural Funds for the programming period 2000-2006 from Table 64, which is added to the environmental expenditure from Structural Funds in the same column. The information in Table 70 is treated in the same way than the information in Table 69. Also, identical comparisons are established in both tables, with the exception that the relationships to the total environmental expenditure in each country and to the best estimate of the annualised costs of EU directives makes sense only with regard to environmental expenditure, and hence are not established for environmental and environmentally beneficial expenditure combined.

Table 70: Annualised Structural and Cohesion Funds for environmental and

environmentally beneficial expenditure (1995 price levels, 2000 values)

Annualised budgeted SF

(programming period 2000-2006)

(M €)

Annual CF payments (average

2000-2002) (M €)

SF+CF (M €)

Percentage of SF+CF over

EU total SF+CF (%)

Percentage of SF+CF

over GDP (%)

SF+CF per

capita (€)

Austria 13.65 13.65 0.26 0.007 1.69 Belgium 18.31 18.31 0.35 0.008 1.79 Denmark 1.62 1.62 0.03 0.001 0.30 Finland 20.54 20.54 0.40 0.016 3.97 France 278.55 278.55 5.39 0.021 4.70 Germany 596.01 596.01 11.53 0.029 7.25 Greece 532.66 114.35 647.00 12.52 0.609 61.35 Ireland 63.95 104.78 168.73 3.26 0.207 44.68 Italy 738.22 738.22 14.28 0.080 12.80 Luxembourg 2.68 2.68 0.05 0.014 6.16 Netherlands 40.28 40.28 0.78 0.011 2.54 Portugal 414.03 137.32 551.35 10.67 0.554 55.15 Spain 1,206.97 635.17 1,842.14 35.64 0.342 46.71 Sweden 6.78 6.78 0.13 0.003 0.76 UK 242.90 242.90 4.70 0.024 4.07 EU-15 4,177.13 991.63 5,168.75 100 0.069 13.73

Source: own calculations based on Andrews et al. (2000), Directorate-General for Regional Policy and Cohesion (European Commission), ECOTEC (2002) and Eurostat (2002 and 2003).


brings the total annualised environmental Structural and Cohesion Funds from 3 to 5,2 billion Euros. Again, Spain is the largest beneficiary in absolute terms, with 1.8 billion Euros (36% of all funds), followed by Italy (14%), Greece (13%), Germany (12%), Portugal (11%) and France (5%), the only countries above 5 per cent of the total funds. The funds for the whole EU represent 0.07% of EU GDP. The same as when not including environmentally beneficial expenditure, this percentage is exceeded only by Greece (0.61%), Portugal (0.55%), Spain (0.34%), Ireland (0.21%) and Italy (0.08%). In per capita terms, the EU average of 13.73 Euros per capita is also surpassed by the same countries than when we considered only environmental expenditure, but in different

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order: Greece (61.35 € per capita), Portugal (55.15 € per capita), Spain (46.71 € per capita) and Ireland (44.68 € per capita).

1.29.2 Impact on cohesion

To study the combined impact on economic and social cohesion of the Structural and

Cohesion Funds for environmental and environmentally beneficial expenditure we can use, like in section 6.3.3, the Lorenz curve as our main analytical tool. Figure 9 represents the Lorenz curve of real GDP in 2000 and the sum of the annualised budgeted Structural Funds for environmental and environmentally beneficial expenditure for the programming period 2000-2006 and the 2000-2002 average Cohesion Funds paid for environmental projects, all of them in 1995 price levels. The horizontal axis indicates the cumulative population from low to high GDP per capita in percentages.

As explained in section 6.3.3, the vertical axis of Figure 9 represents the two variables

measured against cumulative population: 1. Cumulative GDP (in percentages): the relationship between this variable and cumulative

population produces a line that will always be confined into the lower triangle formed by the 45 degrees line, the low horizontal axis and the right vertical axis, since countries are arranged in ascending order according to their GDP per capita. Hence, each point (x, y) in the GDP line allows making the following statement: the poorest x% of the population earns y% of GDP. This line will be farther beneath the 45 degrees line as income distribution grows unequal. Therefore, the 45 degrees line represents a situation of total equalitarianism, and hence it can be called the equity line.

2. Cumulative Structural and Cohesion Funds (in percentages): the relationship between this variable and cumulative population creates the Structural and Cohesion Funds line, which indicates the percentage of total funds (y%) received by the poorest x% of the population.

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Figure 9: Lorenz curve of real GDP in 2000 and annualised Structural (2000-2006) and Cohesion Funds (2000-2002) for environmental and environmentally beneficial

expenditure (1995 price levels) Source: own calculations based on Andrews et al. (2000), Directorate-General for Regional Policy and


Figure 9 shows that the Structural and Cohesion Funds line is placed well above the equity

line, and hence the distribution of Structural and Cohesion Funds for environmental and environmentally beneficial expenditure certainly contributes to economic and social cohesion, since the countries with lower GDP per capita receive more funds per capita than the Member States with higher GDP per capita. The cohesive impact is especially strong with regard to the three poorest Member States, Portugal, Greece and Spain, which represent 16 per cent of the EU population and 10 per cent of the EU GDP, but receive 59 per cent of environmentally related Structural and Cohesion Funds. If we add the other two Member States below the EU average GDP per capita, Italy and UK, we see that the poorest five countries represent 47 per cent of the EU population and 35 per cent of GDP, but obtain 78 per cent of the funds. Precisely after the representation of the five poorest countries, there is a kink on the Structural and Cohesion Funds

0%

20%

40%

60%

80%

100%

0% 20% 40% 60% 80% 100%

Cumulative population from low to high GDP per capita (%)

Cum

ulat

ive

GD

P an

d SF

+CF

(%)

GDP SF+CF 45º

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line due to Ireland, which, although now is above the average GDP per capita, is still a recipient of Cohesion Funds. As a result, the funds received by this country have a negative cohesion impact, although scarcely significant overall, given the relatively small size of Ireland.

1.30 CONCLUSIONS Of all the financial instruments for the environment in place in the EU, the European


Unfortunately, there is no readily available information that allows to identify the

environmentally related expenditure from the Structural Funds during the programming period 1993-1999. For the programming period 2000-2006, the European Commission has provided information by Member State and field of intervention, that allows us to identify and aggregate the environmentally related funds allocated for the whole period. The raw data provided by the European Commission on funds allocated by Member State, field of intervention and particular fund have been studied to determine which fields of intervention can be considered as environmental expenditure or environmentally beneficial expenditure. Based on this study, we have identified two categories of relevant fields of intervention:

1. Environmental expenditure: categories of expenditure that are commonly considered as environmental. The European Regional Development Fund is the main driver of environmental expenditure from EU sources. It represents 79 per cent of all environmental Structural Funds for the EU as a whole. The European Agricultural Guidance and Guarantee Fund is the second most important financial instrument for the environment, with 19 per cent of all funds allocated for environmental expenditure. The Financial Instrument of Fisheries Guidance and the European Social Fund are insignificant, although the European Social Fund is clearly underestimated, since there are sizeable funds allocated for environmental education of employed and unemployed workers that are not included in the information supplied by the European Commission. By country, the largest share of the Structural Funds is for Spain, which receives 35 per cent. Spain is followed by Italy (20%), Germany (13%), Greece (12%), Portugal (6%) and France (6%). These six Member States combined represent 92 per cent of all Structural Funds. These funds are also an important driver for the allocation of national funds for environmental expenditure: 1,6 billion Euros per annum, which represent 72 per cent of the size of the Structural Funds. In the case of private funds, 652 million Euros accompany the Structural Funds for environmental expenditure, adding 29 per cent more to these funds. Private funds are especially important in Italy (279 M €), Greece (140 M €) and France (106 M €).

2. Environmentally beneficial expenditure: categories of expenditure that are clearly beneficial for the environment and whose primary categorization would commonly be different from environmental. Given the nature of these expenditures (transport infrastructure, and planning and rehabilitation of industrial and military sites and urban areas), all the funds come from the European Regional Development Fund, what makes it even more important as the main driver of environmental expenditure when we add together environmental and environmentally beneficial expenditure. By Member State, Spain receives also in this case the largest share of the Structural Funds (22%), followed

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by Greece (17%), Portugal (15%), Italy (15%), Germany (13%), UK (7%) and France (6%). These seven countries represent 96 per cent of all Structural Funds. The importance of these funds as drivers for the allocation of national funds is even more important here than in the case of environmental expenditure: 2,2 billion Euros per annum, which represent 96 per cent of the size of the Structural Funds. Private funds are 491 million Euros, which add 21 per cent more to Structural Funds. Private funds are largest in Greece (139 M €), Portugal (111 M €) and UK (82 M €).

With regard to the Cohesion Fund, this is allocated to environmental and transport projects.

Obviously, environmental projects have been considered as environmental expenditure. In the case of transport projects, it is clear that some of them should be considered as environmentally beneficial expenditure, as some transport infrastructures were considered in the case of the European Regional Development Fund: rail, cycle tracks, waterways, urban transport, multimodal transport and intelligent transport systems. Unfortunately, the non-descriptive file titles of the projects prevented us from identifying the type of transport expenditure. Hence no transport expenditure has been considered neither environmental nor environmentally beneficial expenditure, which means that we are underestimating the environmental impact of Cohesion Funds.


environmental projects from 1993 to 2002 have grown steadily from 279 million Euros in 1993 to 1.3 billion Euros in 2002. The average yearly total amount paid for the ten year period is 838 million Euros, with Spain being the main recipient of funds in average (53%), followed by Portugal (20%), Greece (16%) and Ireland (11%). However, Spain is the country that benefits the less of cohesion funds for environmental projects in terms of average GDP percentages (0.08%), and Portugal the most benefited Member State (0.17%), followed by Greece (0.12%) and Ireland (0.12%). Also in average per capita terms, Spain is the least benefited country (11.38 € per capita), and Ireland is the Member State that benefits the most (24.54 € per capita), followed by Portugal (17.09 € per capita) and Greece (12.49 € per capita).


Funds for the programming period 2000-2006 with the 2000-2002 average payments made through the Cohesion Fund to Greece, Ireland, Portugal and Spain for environmental projects, we see that the total annualised Structural and Cohesion Funds for environmental expenditure in 1995 price levels represent more than 3 billion Euros; two thirds coming from the Structural Funds and one third from the Cohesion Fund. Spain is the largest beneficiary in absolute terms, with 1.4 billion Euros, which signify 44 per cent of all funds. In this respect, Spain is followed by Italy (14%), Greece (11%), Germany (9%) and Portugal (8%), the only countries receiving more than 5 per cent of the total funds. In relation to GDP, these funds represent a small 0.04 per cent for the whole EU. This percentage is surpassed only by Greece (0.31%), Portugal (0.26%), Spain (0.25%), Ireland (0.17%) and Italy (0.05%). In per capita terms, the EU average of 8.16 Euros per capita is only exceeded by Ireland (37.35 € per capita), Spain (34.59 € per capita), Greece (31.18 € per capita) and Portugal (25.92 € per capita).

In relation to the total 1999 estimate of environmental expenditure in each country, EU funds

represent in average a small 2 per cent. However, this percentage is very significant for the four cohesion countries: 20 per cent in Greece, 19 per cent in Ireland, 17 per cent in Spain, and 15 per cent in Portugal. Italy, with 3 per cent, is also above the EU average, but far from the cohesion countries. More important it is the size of these payments in relation to the best estimate of the annualised costs of the directives studied in section 4. The size of EU funds in relation to the costs

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of EU directives is greatest for Spain, with 48 per cent, followed by Greece and Portugal, with 39 per cent, and Ireland, with 32 per cent. Besides these four countries, Italy (9%) is again the only Member State surpassing the EU average of 7 per cent. This sizeable percentages imply that the burden of EU policy for the less rich Member States is greatly softened by the Structural and Cohesion Funds, which in turn makes easier that the expenditure associated to these directives is additional, in the sense of not replacing other productive expenditure.


brings the total annualised environmental Structural and Cohesion Funds from 3 to 5.2 billion Euros. Again, Spain is the largest beneficiary in absolute terms, with 1.8 billion Euros (36% of all funds), followed by Italy (14%), Greece (13%), Germany (12%), Portugal (11%) and France (5%), the only countries above 5 per cent of the total funds. The funds for the whole EU represent 0.07% of EU GDP. The same as when not including environmentally beneficial expenditure, this percentage is exceeded only by Greece (0.61%), Portugal (0.55%), Spain (0.34%), Ireland (0.21%) and Italy (0.08%). In per capita terms, the EU average of 13.73 Euros per capita is also surpassed by the same countries than when we considered only environmental expenditure, but in different order: Greece (61.35 € per capita), Portugal (55.15 € per capita), Spain (46.71 € per capita) and Ireland (44.68 € per capita).

With regard to the impact of Structural and Cohesion Funds on economic and social

cohesion, the Lorenz curve of real GDP in 2000 and the sum of the annualised budgeted Structural Funds for environmental and environmentally beneficial expenditure for the programming period 2000-2006 and the 2000-2002 average Cohesion Funds paid for environmental projects is very illustrative. It shows that the Structural and Cohesion Funds line is placed well above the equity line, and hence the distribution of Structural and Cohesion Funds for environmental and environmentally beneficial expenditure certainly contributes to economic and social cohesion, since the countries with lower GDP per capita receive more funds per capita than the Member States with higher GDP per capita. The cohesive impact is especially strong with regard to the three poorest Member States, Portugal, Greece and Spain, which represent 16 per cent of the EU population and 10 per cent of the EU GDP, but receive 59 per cent of environmentally related Structural and Cohesion Funds. If we add the other two Member States below the EU average GDP per capita, Italy and UK, we see that the poorest five countries represent 47 per cent of the EU population and 35 per cent of GDP, but obtain 78 per cent of the funds. Precisely after the representation of the five poorest countries, there is a kink on the Structural and Cohesion Funds line due to Ireland, which, although now is above the average GDP per capita, is still a recipient of Cohesion Funds. As a result, the funds received by this country have a negative cohesion impact, although scarcely significant overall, given the relatively small size of Ireland.

We can also ask if the Cohesion Fund is also “cohesive” among the cohesion countries. The

Lorenz curve of average GDP and average Cohesion Fund payments for environmental projects in 1993-2002 indicates that the distribution of these payments contributes to further cohesion also among the four cohesion countries only for the lower income countries. This is explained because the country with the lowest GDP per capita, Portugal, represents 15.7 per cent of the four cohesion countries’ population and 12.1 per cent of their combined GDP, but receives 20.1 per cent of Cohesion Fund payments. The second lowest GDP per capita belongs to Greece, which receives more payments (15.6%) than its share of GDP (13.2%), but less than its share of population (16.5%). The cohesive impact of the distribution of the Cohesion Fund among these four countries disappears as we move into percentages of population with highest GDP per capita, with a clear effect against cohesion from the allocation of funds to the richest of the four countries, Ireland. This result is due to Ireland obtaining 10.8 per cent of Cohesion Fund payments when it only

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represents 5.8 per cent of population and 9.5 per cent of combined GDP. On the contrary, Spain, the second country in GDP per capita, receives a much lower percentage of payments (53.4%) than its share of population (62.0%) and GDP (65.1%).



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THE EFFECTS OF CLIMATE CHANGE POLICY ON COHESION

1.31 INTRODUCTION One of the main environmental challenges faced by the world is climate change, and the EU

plays a leading role in the adoption of an internationally coordinated policy against this phenomenon. As the first tangible result of the UN Framework Convention on Climate Change (UNFCCC), the Kyoto Protocol (December 1997) imposed on developed nations actual commitments for limiting their emissions of green-house gases (GHGs). The concrete commitment assumed by the EU consisted of a reduction of 8 per cent of its GHG emissions relative to 1990 levels by 2008-2012 (first commitment period).

Taking into account the particular economic conditions of each Member State, the Council of

Ministers agreed in June 1998 on different emission limitation and/or reduction targets for each Member State, called the “burden sharing” agreement or the “European bubble” (see the fifth column in Table 71). This agreement, allowed by the UNFCCC, means that not all Member States will have to reduce their GHG emissions by 8 per cent, as long as the EU as a whole meets the 8 per cent target. The targets of the burden sharing agreement were reaffirmed in Council Decision 2002/358/CE, and the European Community and its Member States notified the United Nations their joint fulfilment of commitments under the Kyoto Protocol.

Above all, the burden sharing agreement means that richer Member States must reduce their

emissions more than the agreed 8 per cent, while cohesions countries are allowed to increase their emissions. Therefore, it could be concluded that EU cohesion objectives were taken into account in the redistribution of the EU Kyoto Protocol commitment. However, if we look at the current situation of each Member State with regard to the fulfilment of the burden sharing agreement, we can see that the usual indicators (Gugele, Ritter and Marečková, 2002) show that cohesion countries are the Member States farthest away from complying with their compromises.

Climate change policy is a very broad and multi-sector policy, and therefore one whose

effects are very difficult to isolate and evaluate. In order to determine what is the final effect on cohesion of the EU burden sharing agreement, we hypothesize that the financial flows produced between countries as a result of the exchanges of allowances in the market for GHGs that will be established in the EU is a good proxy for the direction of that effect. If the European Union Emission Trading Directive is approved as scheduled, the EU will have the first trans-national GHG emission trading scheme in the world as soon as of 2005. Cohesion will be increased if this market leads to financial flows from more to less developed Member States. However, if the result is that poorer countries must buy permits from richer Member States, the indication is that climate change policy will contribute negatively to cohesion in terms of its implementation costs.

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1.32 CURRENT EMISSIONS, KYOTO PROTOCOL TARGETS AND REQUIRED REDUCTION EFFORT

The commitments assumed under the Kyoto Protocol refer to GHG emission changes

relative to 1990. Table 71 shows the volume of GHG emissions in 1990, the reference year, and 2001, the last year with official inventories. The Kyoto Protocol tackles emissions of six greenhouse gases: carbon dioxide (CO2), methane (CH3), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6). The emissions of these six gases are converted into CO2 equivalents according to their global warming potential, and are expressed in gigagrams (Gg). CO2 emissions are gross emissions, that is, excluding CO2 removals from land-use change and forestry. We can see that the only countries that have attained GHG emission reductions from 1990 to 2001 are Luxembourg (−44%), Germany (−18%), UK (−12%) and Sweden (−3%). Given that Germany and UK are the largest emitters, the reductions by only these four Member States translate into a 2 per cent reduction for the whole EU, still far from the 8 per cent compromise for the period 2008-2012. In the opposite side, we find large GHG emission increases from 1990 to 2001 by the four cohesion countries: Portugal (36%), Spain (33%), Ireland (31%) and Greece (26%).

Table 71: GHG emissions excluding land-use change and forestry in CO2 equivalents (Gg)

1990 2001 Variation

1990−2001 (%)

Kyoto Protocol

target (%)

Kyoto Protocol

target (Gg)

Actual emissions

(Gg)−Kyoto Protocol

target (Gg)

Index of required effort:

Reduction required to target (%)

Austria 78,073 85,880 10.00 −13.00 67,924 17,956 20.91 Belgium 141,216 150,169 6.34 −7.50 130,625 19,544 13.01 Denmark 69,217 69,410 0.28 −21.00 54,681 14,729 21.22 Finland 77,233 80,888 4.73 0.00 77,233 3,655 4.52 France 560,775 560,757 0.00 0.00 560,775 −18 0.00 Germany 1,211,579 993,505 −18.00 −21.00 957,147 36,358 3.66 Greece 104,755 132,176 26.18 25.00 130,944 1,232 0.93 Ireland 53,420 70,018 31.07 13.00 60,365 9,653 13.79 Italy 508,629 545,355 7.22 −6.50 475,568 69,787 12.80 Luxembourg 10,883 6,077 −44.16 −28.00 7,836 −1,759 −28.94 Netherlands 210,004 219,694 4.61 −6.00 197,404 22,290 10.15 Portugal 61,441 83,823 36.43 27.00 78,030 5,793 6.91 Spain 287,609 382,789 33.09 15.00 330,750 52,039 13.59 Sweden 72,756 70,485 −3.12 4.00 75,666 −5,181 −7.35 UK 744,139 657,232 −11.68 −12.50 651,122 6,110 0.93 EU-15 4,191,729 4,108,258 −1.99 −8.00 3,856,391 251,867 6.13

Source: own calculations based on Gugele, Huttunen and Ritter (2003) and Gugele, Ritter and Marečková (2002).

The comparison between actual emissions and the targets set by the Kyoto Protocol under

the burden sharing agreement is graphically represented in Figure 10. We can see, as Table 71 also indicates, that the only Member States that are already in compliance with their commitments are Luxembourg, Sweden and France. With the information provided in Table 71 we can construct an “index of required effort,” defined for each country as the percentage of GHG emission reduction

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from current levels required to meet its Kyoto Protocol target. This index is represented in Figure 11. According to this index, the largest effort corresponds to Denmark and Austria, which need to decrease their 2001 emissions by 21 per cent to attain their Kyoto Protocol targets of reducing emissions by 21 and 13 per cent, respectively. In terms of required effort, Denmark and Austria are followed by Ireland and Spain (14%), Belgium and Italy (13%), Netherlands (10%) and Portugal (7%). Relatively low reduction effort levels from current emissions are required for Finland (5%), Germany (4%), and Greece and UK (1%). France is exactly in its compliance level, while Luxembourg and Sweden could increase their emissions by 28 and 7 per cent, respectively, and still be in compliance.

Figure 10: Actual change of GHG emissions excluding land-use change and forestry in CO2

equivalents in 1990-2001 and targets set by the Kyoto Protocol (in percentages)


-50 -40 -30 -20 -10 0 10 20 30 40

Austria

Belgium

Denmark

Finland

France

Germany

Greece

Ireland

Italy

Luxembourg

Netherlands

Portugal

Spain

Sweden

UK

EU-15

Variation 1990-2001 (%) Kyoto target (%)

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Figure 11: Index of required effort (percentage of GHG emission reduction required to attain the Kyoto Protocol target)


1.33 MEASURES OF DIFFICULTY TO REDUCE EMISSIONS The index of required effort only tells us how emissions must change to comply with the

commitments assumed under the burden sharing agreement, but it does not measure effort in terms of how costly or difficult the required changes in emissions may be. As a first approximation to an index that measures the difficulty for each country of reducing its emissions, we should look at its GDP efficiency in terms of emissions, which is represented for 2001 in Figure 12. In principle, the more efficient a country already is, the more difficult will be for it to increase its efficiency even

-40 -30 -20 -10 0 10 20 30

Luxembourg

Sweden

France

UK

Greece

Germany

Finland

Portugal

Netherlands

Italy

Belgium

Spain

Ireland

Austria

Denmark

EU-15

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more. Since efficiency is mostly a technological dependent variable, any country faced with the need to increase its efficiency will adopt first the cheapest efficiency-enhancing technologies. But as a country grows more efficient, the only way of still increasing its efficiency consists of implementing increasingly expensive technologies. Hence it will be cheaper to decrease emissions for inefficient countries than for the most efficient ones.

Figure 12: GHG emissions excluding land-use change and forestry in CO2 equivalents in

2001 per unit of real GDP (Gg/B € in 1995 prices)

Source: own calculations based on Gugele, Huttunen and Ritter (2003) and Eurostat (2002). Figure 12 shows that the four cohesion countries are the most inefficient in terms of GHG

emissions, in the sense that they emit more GHG to produce a unit of GDP. Greece is particularly inefficient, with 1,195 Gg of GHG in CO2 equivalents per billion Euros of real GDP in 1995 prices. Above the average of 540 Gg per billion Euros, we find Portugal (828 Gg/B €), Ireland (807 Gg/B €), Spain (692 Gg/B €), UK (643 Gg/B €), Finland (636 Gg/B €), Belgium (612 Gg/B €), Italy (582 Gg/B €) and Netherlands (571 Gg/B €). The most efficient Member States are Luxembourg (312 Gg/B €), Sweden (328 Gg/B €), France (406 Gg/B €), Austria (416 Gg/B €), Denmark (438 Gg/B

0 200 400 600 800 1000 1200

Luxembourg

Sweden

France

Austria

Denmark

Germany

Netherlands

Italy

Belgium

Finland

UK

Spain

Ireland

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EU-15

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€) and Germany (481 Gg/B €). Therefore, we find a first indication of costs of GHG reduction being inversely related to income per capita.

A second approximation to measuring the difficulty of GHG emission abatement consists of

emissions per capita, which are represented for 2001 in Figure 13. In this case, we should expect that it becomes more costly to reduce emissions as emissions per capita decrease, since it will be more difficult to reduce them and maintain or increase the standard of living of population. The average EU emissions per capita are 11 Gg of GHG in CO2 equivalents per 1,000 people. This average figure is exceeded by Ireland (18 Gg/1,000 people), Finland (16 Gg/1,000 people), Belgium (15 Gg/1,000 people), Netherlands and Luxembourg (14 Gg/1,000 people), Denmark and Greece (13 Gg/1,000 people), (12 Gg/1,000 people) and UK (11 Gg/1,000 people). Below the average, we find Austria (11 Gg/1,000 people), Spain (10 Gg/1,000 people), Italy and France (9 Gg/1,000 people), and Portugal and Sweden (8 Gg/1,000 people).

We can examine both measures combined in Figure 14, where both GHG emissions per unit

of GDP and emissions per capita are expressed as indices of percentage deviation from the EU average (EU-15=0). Therefore, the upper-right quadrant represents Member States with both emissions per unit of GDP and per capita above the EU average. These countries are Ireland, Greece, Finland, Belgium, Netherlands and UK, which, according to the previous discussion, should have the lowest difficulties reducing their GHG emissions. On the contrary, the countries in the lower-left quadrant square, Sweden, France and Austria, being below the EU average both in per unit of GDP and per capita terms, should have the strongest difficulties reducing their emissions. In the upper-left quadrant we have three of the four richest Member States, Luxembourg, Denmark and Germany, whose emissions are above the average in per capita terms, but below the average in relation to GDP. The opposite is true of the three countries in the lower-right quadrant, Portugal, Spain and Italy, which are three of the four poorest EU Member States and whose emissions exceed the average in relation to GDP but are below the average in per capita terms.

The situation of the latter six countries is less clear, as it is the interaction between the two

gross measures of difficulty to reduce emissions under scrutiny. For instance, an increase of emissions per unit of GDP in one of the poorest Member States, which could be interpreted as a decrease in efficiency, may be due to an increase in quality-of-life enhancing equipment, such as air conditioning, while actual production efficiency increases. Observations like this suggest the need to undertake a study where emissions and GDP are disaggregated by sector (at least, industrial, residential and commercial, agricultural, transportation, waste management, and energy and mining). However, without further disaggregation, we can only construct an “index of difficulty to reduce emissions,” based on the indices of GHG emissions per unit of GDP and per capita:

,100

21

21

100−

+=

EU

i

EU

ii

EPCEPC

EPGDPEPGDP

IDRE

where IDREi is the index of difficulty to reduce emissions of Member State i, EPGDPi are gigagrams of GHG emissions excluding land-use change and forestry in CO2 equivalents in 2001 per billion Euros of real 2001 GDP in 1995 prices of Member State i, EPCi are gigagrams of GHG emissions excluding land-use change and forestry in CO2 equivalents in 2001 per capita of Member State i, and i=EU indicates the values for the EU as a whole. Therefore, the index is expressed in terms of percentage deviation from the EU average (EU-15=0). The index gives equal importance to the difficulties to reduce emissions arising from already low values of emissions per unit of GDP

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and from already low per capita values. Given its definition, the higher the value of the index, the more difficult it will be for a Member State to reduce its emissions. Figure 13: GHG emissions excluding land-use change and forestry in CO2 equivalents in

2001 per capita (Gg/1,000 persons)

Source: own calculations based on Gugele, Huttunen and Ritter (2003) and Eurostat (2002).

0 4 8 12 16 20

Sweden

Portugal

France

Italy

Spain

Austria

UK

Germany

Greece

Denmark

Luxembourg

Netherlands

Belgium

Finland

Ireland

EU-15

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Figure 14: Relationship between the index of emissions per capita and the index of emissions per GDP


Of course, the index of difficulty to reduce emissions presents the highest values for the Member States in the lower-left quadrant square of Figure 14: Sweden (50%), France (24%) and Austria (15%), which we already identified as the countries with more difficulties to reduce their emissions. In fact, their difficulties were already taken into account when setting the burden sharing agreement: Sweden is the only Member State among the richest that can increase its emissions from 1990 (4%); France only needs to stabilise them; and Austria has to reduce them significantly (−13%), but much less than the other three countries in the top 4 according to income per capita: Luxembourg (−28%), and Denmark and Germany (−21%). Obviously, the Member States in the upper-right quadrant of Figure 14 show the lowest values for the index: Greece (−41%), Ireland (−37%), Finland (−23%), Belgium (−19%) and Netherlands (−14%), and they should have less difficulties reducing their GHG emissions. UK (−9%) was also in that quadrant, but almost on the EU average of emissions per capita, what makes that Portugal (−13%) exceeds its index value, given Portugal’s extremely high emissions per unit of GDP. The rest of the countries in the upper-left and lower-right quadrants follow in this order: Luxembourg (9%) and Italy (3%) with positive index values; and Germany and Denmark (0%), and Spain (−8%) with negative values.

DKL NLB

FIN

IRL

D

EL

AF

SEIT

PES

UK

-130

0

130

-130 -80 -30 20 70 120

Index of emissions per GDP (EU-15=0)

Inde

x of

em

issi

ons

per

capi

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U-1

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1.34 THE RELATIONSHIP BETWEEN THE DIFFICULTY TO REDUCE EMISSIONS AND THE REQUIRED REDUCTION EFFORT: EFFECTS ON ECONOMIC AND SOCIAL COHESION

Our following step must be to establish the relationship between the index of difficulty to

reduce emissions and the index of required effort, as shown in Figure 15. The upper-right quadrant of this figure shows the Member States with both above average difficulties to reduce their emissions and strong reduction efforts required to comply with their obligations under the burden sharing agreement. Therefore, the countries in this quadrant should be expected to be net buyers in the EU emission trading market. The clearest of these cases is Austria, which needs to reduce its emissions by 21 per cent to comply with its target, and at the same time suffers strong difficulties to reduce emissions. Italy could also be a net buyer, since it needs to reduce emissions by 13 per cent and presents a positive index of difficulty to reduce emissions. On the contrary, any country in the lower-left quadrant should be expected to be a net seller of emission allowances, but there is no Member State in this situation of low difficulties and low required effort. Nevertheless, close to the borderline of this quadrant we find Greece and UK, which we would expect to be net sellers, since their required efforts, although positive, are small, while their indices of difficulty are very negative. Figure 15: Relationship between the index of difficulty to reduce emissions and the index of

required effort

Source: own calculations based on Gugele, Huttunen and Ritter (2003), Gugele, Ritter and Marečková (2002) and Eurostat (2002).

UK ES

P

IT

SE

F

A

EL

D

IRL

FINB

NL

LDK

-50

0

50

-50 0 50

Index of required effort

Inde

x of

diff

icul

ty to

red

uce

emis

sion

s (E

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The Member States in the upper-left quadrant would find difficult to reduce their emissions further, but they are not required to make any reduction effort, since they are the only countries already in compliance. Given that Luxembourg could even increase its emissions by 29 per cent and remain in compliance, it could be a net seller of allowances. More difficult it is that France and Sweden become net sellers. France is just in compliance and it would find difficult to obtain further reductions. Reductions would be even more difficult for Sweden, especially given its political decision of phasing out nuclear power; hence it is unclear if Sweden may become a net seller or increase its emissions. Most Member States are situated, including UK and Greece, whose case we have already considered, in the lower-right quadrant, but in very different situations. Denmark and Germany are almost in the borderline of the upper-right quadrant. Given that Denmark is the country that needs to undertake the largest reductions (21%) and presents an average difficulty to reduce emissions, we should expect that it joins Austria as a clear net buyer of allowances. The case of Germany is less clear, since its required reduction effort is moderate and its difficulty is average; it could be a seller or a buyer. The rest of countries, Ireland, Belgium, Finland, Netherlands, Portugal and Spain, are well inside the quadrant, indicating that their required efforts to reduce emissions are significant, but at the same time it should be less difficult for them than for the rest of Member States to reduce their emissions. Hence it is unclear if they will be able to sell allowances, if they will have to use them all or even be net buyers. If any of them becomes a buyer, Spain is the most likely to be one of them, since this country presents the highest index of difficulty (although negative) among these six Member States and the highest index of required effort together with Ireland (14%).

An approximation to the effects on economic and social cohesion can be better achieved by

comparing both the index of difficulty to reduce emissions and the index of required effort with the index of GDP per capita. The first of these comparisons is established in Figure 16. This figure also depicts the trend line, which indicates a positive relationship between the difficulty to reduce emissions and wealth. In this sense, it could be concluded that cohesion is reinforced by climate change policy, since the highest effort will be exercised by the richest Member States. However, this general trend is not extremely significant, and we see Italy, below the average GDP per capita, with a positive index of difficulty, while Ireland, Netherlands, Belgium and Finland, all above average GDP per capita, have the lowest indices of difficulty but for Greece’s. However, the situation of Belgium and Netherlands is the consequence of them having highly developed oil refining sectors, which make both countries high in both emissions per capita and per unit of GDP, but not necessarily less difficult to reduce emissions. This is another instance that underlies the need of expanding this kind of study to distinguish emissions and GDP by sector. Ireland is also an unusual case, given its tremendous growth in recent years, which has brought this formally still a cohesion country above average GDP per capita. In any case, if we remove Luxembourg from the analysis (given its reduced size, and extremely high GDP per capita and emission reductions, Luxembourg can be considered as an outlier), as shown in Figure 17, the positive trend is even reinforced.

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Figure 16: Relationship between the index of difficulty to reduce emissions and the index of GDP per capita


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Figure 17: Relationship between the index of difficulty to reduce emissions and the index of GDP per capita without Luxembourg

Source: own calculations based on Gugele, Huttunen and Ritter (2003) and Eurostat (2002). Finally, Figure 18 represents the relationship between the index of required effort and the

index of GDP per capita. In this case, the trend line is negative. However, the negative slope is driven by Luxembourg, which is an outlier. If we remove this country from the analysis, as shown in Figure 19, the trend line is also positive in this case, which suggests also from the point of view of the required effort that cohesion is reinforced by climate change policy. However, Spain and Italy, both significantly below the average GDP per capita, must exercise a large reduction effort, well above the one required by most richer Member States.

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Figure 18: Relationship between the index of required effort and the index of GDP per capita


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Figure 19: Relationship between the index of required effort and the index of GDP per capita without Luxembourg


1.35 CONCLUSIONS Above all, the burden sharing agreement means that richer Member States must reduce their

emissions more than the Kyoto Protocol target of 8 per cent for the EU, while cohesions countries are allowed to increase their emissions. Therefore, it could be concluded that EU cohesion objectives were taken into account in the redistribution of the EU Kyoto Protocol commitment. However, if we look at the current situation of each Member State with regard to the fulfilment of the burden sharing agreement, we can see that the usual indicators show that cohesion countries are the Member States farthest away from complying with their compromises.

The only countries that have attained GHG emission reductions from 1990 to 2001 are

Luxembourg (−44%), Germany (−18%), UK (−12%) and Sweden (−3%). Given that Germany and UK are the largest emitters, the reductions by only these four Member States translate into a 2 per cent reduction for the whole EU, still far from the 8 per cent compromise for the period 2008-2012. In the opposite side, we find large GHG emission increases from 1990 to 2001 by the four cohesion

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countries: Portugal (36%), Spain (33%), Ireland (31%) and Greece (26%). The only Member States that are already in compliance with their commitments are Luxembourg, Sweden and France.

If we construct an “index of required effort,” defined for each country as the percentage of GHG emission reduction from current levels required to meet its Kyoto Protocol target, the largest effort corresponds to Denmark and Austria, which need to decrease their 2001 emissions by 21 per cent to attain their Kyoto Protocol targets of reducing emissions by 21 and 13 per cent, respectively. In terms of required effort, Denmark and Austria are followed by Ireland and Spain (14%), Belgium and Italy (13%), Netherlands (10%) and Portugal (7%). Relatively low reduction effort levels from current emissions are required for Finland (5%), Germany (4%), and Greece and UK (1%). France is exactly in its compliance level, while Luxembourg and Sweden could increase their emissions by 28 and 7 per cent, respectively, and still be in compliance.

The index of required effort only tells us how emissions must change to comply with the

commitments assumed under the burden sharing agreement, but it does not measure effort in terms of how costly or difficult the required changes in emissions may be. As a first approximation to a measure of the difficulty for each country of reducing its emissions, we should look at GDP efficiency in terms of emissions. In principle, the more efficient a country already is, the more difficult will be for it to increase its efficiency even more. Since efficiency is mostly a technological dependent variable, any country faced with the need to increase its efficiency will adopt first the cheapest efficiency-enhancing technologies. But as a country grows more efficient, the only way of still increasing its efficiency consists of implementing increasingly expensive technologies. Hence it will be cheaper to decrease emissions for inefficient countries than for the most efficient ones.

The four cohesion countries are the most inefficient in terms of GHG emissions, in the sense

that they emit more GHG to produce a unit of GDP. Greece is particularly inefficient, with 1,195 gigagrams of GHG in CO2 equivalents per billion Euros of real GDP in 1995 prices. Above the average of 540 gigagrams per billion Euros, we find Portugal (828 Gg/B €), Ireland (807 Gg/B €), Spain (692 Gg/B €), UK (643 Gg/B €), Finland (636 Gg/B €), Belgium (612 Gg/B €), Italy (582 Gg/B €) and Netherlands (571 Gg/B €). The most efficient Member States are Luxembourg (312 Gg/B €), Sweden (328 Gg/B €), France (406 Gg/B €), Austria (416 Gg/B €), Denmark (438 Gg/B €) and Germany (481 Gg/B €). Therefore, we find a first indication of costs of GHG reduction being inversely related to income per capita.


emissions per capita. In this case, we should expect that it becomes more costly to reduce emissions as emissions per capita decrease, since it will be more difficult to reduce them and maintain or increase the standard of living of population. The average EU emissions per capita are 11 gigagrams of GHG in CO2 equivalents per 1,000 people. This average figure is exceeded by Ireland (18 Gg/1,000 people), Finland (16 Gg/1,000 people), Belgium (15 Gg/1,000 people), Netherlands and Luxembourg (14 Gg/1,000 people), Denmark and Greece (13 Gg/1,000 people), (12 Gg/1,000 people) and UK (11 Gg/1,000 people). Below the average, we find Austria (11 Gg/1,000 people), Spain (10 Gg/1,000 people), Italy and France (9 Gg/1,000 people), and Portugal and Sweden (8 Gg/1,000 people).

The Member States with both emissions per unit of GDP and per capita above the EU

average are Ireland, Greece, Finland, Belgium, Netherlands and UK, which, according to the previous discussion, should have the lowest difficulties reducing their GHG emissions. On the contrary, Sweden, France and Austria, being below the EU average both in per unit of GDP and per

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capita terms, should have the strongest difficulties reducing their emissions. Three of the four richest Member States, Luxembourg, Denmark and Germany, emit GHGs above the average in per capita terms, but below the average in relation to GDP. The opposite is true of Portugal, Spain and Italy, which are three of the four poorest EU Member States, whose emissions exceed the average in relation to GDP but are below the average in per capita terms. The situation of the latter six countries is less clear.


agreement, we hypothesize that the financial flows produced between countries as a result of the exchanges of allowances in the market for GHGs that will be established in the EU is a good proxy for the direction of that effect. If the European Union Emission Trading Directive is approved as scheduled, the EU will have the first trans-national GHG emission trading scheme in the world as soon as of 2005. Cohesion will be increased if this market leads to financial flows from more to less developed Member States. However, if the result is that poorer countries must buy permits from richer Member States, the indication is that climate change policy will contribute negatively to cohesion in terms of its implementation costs.

To determine the likely position of a country as a buyer or seller in the allowances market,

we should look at the relationship between the index of required effort and the average of the difficulties to reduce emissions arising from already low values of emissions per unit of GDP and from already low per capita values. The Member States with both above average difficulties to reduce their emissions and strong reduction efforts required to comply with their obligations under the burden sharing agreement should be expected to be net buyers in the EU emission trading market. The clearest of these cases is Austria, which needs to reduce its emissions by 21 per cent to comply with its target, and at the same time suffers strong difficulties to reduce emissions. Italy could also be a net buyer, since it needs to reduce emissions by 13 per cent and presents above average difficulties to reduce emissions. On the contrary, any country with low difficulties and low required effort should be expected to be a net seller of emission allowances, but there is no Member State in such a situation. Nevertheless, Greece and UK’s required efforts, although positive, are small, while their difficulty is well below the average, and hence we would expect them to be net sellers.




required to reduce their emissions, but their difficulty of doing it is lower than the EU average. Among these countries there exist very different situations. Denmark and Germany are almost on the average difficulty. Given that Denmark is the country that needs to undertake the largest reductions (21%) and presents an average difficulty to reduce emissions, we should expect that it joins Austria as a clear net buyer of allowances. The case of Germany is less clear, since its required reduction effort is moderate and its difficulty is average; it could be a seller or a buyer. For the rest of countries, Ireland, Belgium, Finland, Netherlands, Portugal and Spain, required efforts to

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reduce emissions are significant, but at the same time it should be less difficult for them than for the rest of Member States to reduce their emissions. Hence it is unclear if they will be able to sell allowances, if they will have to use them all or even be net buyers. If any of them becomes a buyer, Spain is the most likely to be one of them, since this country presents the highest difficulty (although below the EU average) among these six Member States and the highest index of required effort together with Ireland (14%).




difficulty to reduce emissions and the index of required effort with GDP per capita. The first of these comparisons indicates that there exists a positive relationship between the difficulty to reduce emissions and wealth. In this sense, it could be concluded that cohesion is reinforced by climate change policy, since the highest effort in terms of overcoming difficulties will be exercised by the richest Member States. However, this general trend is not extremely significant, and we see Italy, below the average GDP per capita, with a difficulty above the average, while Ireland, Netherlands, Belgium and Finland, all above average GDP per capita, have the lowest difficulty but for Greece’s. However, the situation of Belgium and Netherlands is the consequence of them having highly developed oil refining sectors, which make both countries high in both emissions per capita and per unit of GDP, but not necessarily less difficult to reduce emissions. Ireland is also an unusual case, given its tremendous growth in recent years, which has brought this formally still a cohesion country above average GDP per capita. With regard to the relationship between the index of required effort and GDP per capita, and if we ignore the peculiar position of Luxembourg, which is an outlier, there exists a positive trend too, which suggests also from the point of view of the required effort that cohesion is reinforced by climate change policy. However, Spain and Italy, both significantly below the average GDP per capita, must exercise a large reduction effort, well above most richer Member States’ required effort.



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THE EFFECTS OF ENVIRONMENTAL TAXATION ON COHESION

1.36 INTRODUCTION Although there do not exist EU environmental taxes or charges, the European Commission

has long advocated in favour of the use of taxation as an environmental policy instrument. In fact, most EU countries are using environmental levies extensively, and some of them are implementing comprehensive ecological tax reforms. Therefore, it seems reasonable to look at the impact on cohesion of this policy option.

The main advantage of environmental taxation is its cost effectiveness; taxes and charges

should minimize the costs of attaining any environmental standard by equalizing marginal abatement costs across emission sources (Buñuel, 2003). This advantage is shared with a system of tradable emission permits, and it applies to any other similar use of taxation and tradable permits.11 Moreover, environmental taxation is the clearest way of implementing the polluter pays principle, and it provides greater incentives to technological innovation than usual regulatory approaches.

Although these advantages are common to tradable emission permits, there are many factors

that suggest that taxes can be a preferable instrument in many instances (Buñuel, 1999). For instance, the application of Weitzman theorem as the criterion to choose among taxes and permits in the presence of uncertainty indicates that taxes may be better instruments in the case of climate change (Buñuel, 2000 and 2002b), although tradable permits have been chosen as the preferred economic instrument at the international level. In another example, Buñuel (2001) has recently proven that tradable permits may have undesirable effects on market structure, even monopolization of an otherwise perfectly competitive polluting industry, which would make taxes a better regulatory option.

There is another important advantage of environmental taxation, and the most important for

our purposes. The revenue raised by environmental taxes and charges may be earmarked for environmental uses, may increase general public revenue, may be returned to tax payers through lump-sum transfers or, more importantly, may be used to reduce other distorting taxes in an ecological tax reform. The double dividend theory suggests that, if revenue is used to reduce the taxes that distort economic incentives (such as taxes on labour) or the equally distorting social security contributions, we could improve simultaneously the environment (first dividend) and the economy (second dividend). The empirical evidence on the existence of the double dividend varies largely (Buñuel, 2002a): a double dividend has been found in some instances, and not found in other cases; but, wherever it may exist, the double dividend is a strong argument in favour of an ecological tax reform.

The impact on cohesion of environmental taxation may be two fold. First, it may affect

income distribution negatively through taxation of mass-consumption goods. Second, it may cause a positive impact on employment creation through the use of the revenue raised by environmental levies to decrease taxes on labour (ecological tax reform). Although incomplete and preliminary,

11 See, for instance, Buñuel and Henar (2003) for an application in the context of fiscal discipline in

the EMU.

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there exists some evidence on the impact of taxation as an instrument for the implementation of environmental objectives on these two variables affecting cohesion, which will be examined in the following sections.

1.37 THE EFFECT OF ENVIRONMENTAL TAXATION ON INCOME DISTRIBUTION

Environmental taxes may produce a negative impact on income distribution in two ways.

First, they may cause a direct negative effect as a result of the expenditure structure of households. In particular, the expenditure on energy and transport (two of the main tax bases for environmental taxes) represents a larger percentage of expenditure for low-income households than for richer households. Hence environmental taxes should tend to be regressive. The second negative impact of environmental taxes and charges on income distribution is indirect: by taxing some productive factors, the prices of consumption goods may rise, which again would affect strongly to low-income groups, which devote larger percentages of their income to consumption.

However, a complete survey of income effects must take into account, besides the mentioned

direct and indirect negative effects, the following factors: 1. the secondary impact of any compensation or mitigation measure that may be adopted, 2. the effects that environmental taxes (or the ecological tax reform if that is the case) may

produce on employment, and 3. the distribution of the environmental benefits attained through taxation, which in many

instances may affect more to low-income population, given that this population usually lives in areas where environmental degradation is greater than average.

Available evidence is scant, but some observations can be made. Obviously, regressive

taxation is more likely if taxes and charges fall on products consumed by low-income people. In this sense, taxes on energy are probably slightly regressive, as the Swedish case indicates: doubling of Sweden’s tax on carbon dioxide would require for the lowest-income households a compensation of 1.24 per cent of their consumption expenditure in order to maintain the same level of consumption, while this compensation would only need to be of 0.78 per cent for highest-income households (Swedish Government Green Tax Commission, 1997). However, some empirical findings show that energy taxes, although regressive in Denmark, Ireland and UK, are progressive in Italy and Spain (OECD, 2001).

In aggregate, it can be concluded that the overall impact would be slightly negative on

income distribution (Barde, 1997), although that impact would be clearly negative if, for instance, the objectives of the Kyoto Protocol were to be achieved exclusively through taxation. Of course, that impact would vary across countries, expecting it to be more negative where transport distances are larger and the weather colder, since these factors make harder to reduce energy consumption for low-income people.

In any case, well designed measures can contribute to erase any negative effect on income

distribution. Available policies are the following: 1. Mitigation (ex ante measures): tax exemptions or deductions may be granted for low-

income people. This policy is justified on equity grounds, but it contradicts the objective of environmental taxation.

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2. Compensation (ex post measures): low-income households may receive compensatory lump-sum transfers. This policy is better from an environmental point of view, since it keeps the incentives introduced by environmental taxes.

1.38 THE EFFECT OF ECOLOGICAL TAX REFORMS ON EMPLOYMENT Gago, Labandeira and Rodríguez (2003) review 207 simulations of the effects on

employment, GDP and/or welfare of implementing ecological tax reforms. This review indicates that the available empirical evidence supports the double dividend hypothesis. In relation to employment, out of 130 studies, 115 indicate positive or null effects on employment and only 15 report negative consequences. 53 per cent of these estimations indicate that the growth on employment would be between 0.5 and 1.5 per cent, and 31 per cent suggest effects between –0.5 and 0.5 per cent.

Available studies also provide indications on the best way of recycling the revenue from

environmental taxes in the framework of an ecological tax reform. 95 simulations study the case when this revenue is used to reduce employers’ social security contributions, and 93 of them estimate positive or null effects on employment. 5 simulations study the effects of recycling revenue through lump-sum transfers. In this case, 4 of the simulations estimate positive or null effects on employment. Out of 19 studies considering the effects of using environmental taxes to reduce public deficit, 11 conclude that it would produce positive or null effects on employment. Finally, 7 studies consider reducing personal income taxation, and 4 of them suggest that the effects on employment would be positive or null. Hence reducing employers’ social security contributions seems the best option to obtain the maximum positive effect on employment. Moreover, although we have just seen that all of these recycling options seem favourable for employment in most cases, only reducing employers’ social security contributions produces positive or null effects on GDP in most simulations, while the other recycling options produce negative impacts on GDP in the majority of studies.

1.39 CONCLUSIONS Environmental taxation may affect cohesion through its possible impact on income

distribution (through taxation of mass-consumption goods) and employment creation (through the use of the revenue raised by environmental levies to decrease taxes on labour). Concerning income distribution, the international evidence is scant, but some conclusions may be derived. Obviously, a negative impact on income distribution is more likely if products consumed by low income people are taxed. Hence taxes on energy probably produce a slight negative impact on income distribution. Evidence in this direction can be found in Sweden, where doubling the tax on carbon dioxide would require a compensation to keep the same level of consumption for low income people of 1.24 per cent of their consumption expenditure, while that compensation for high income people would be only of 0.78 per cent. However, some empirical results show that while energy taxation affects negatively income distribution in Denmark, Ireland and UK, that impact is slightly positive in Italy and Spain. In aggregate, it can be concluded that the overall impact would be slightly negative on income distribution, although that impact would be clearly negative if, for instance, the objectives of the Kyoto Protocol were to be achieved exclusively through taxation. Of course, that impact would vary across countries, expecting it to be more negative where transport distances are

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larger and the weather colder, since these factors make harder to reduce energy consumption for low income people. In any case, well designed compensation measures would contribute to erase any negative effect on income distribution.


empirical evidence on the likely effects of revenue neutral ecological tax reforms, that is, fiscal reforms that tax environmental damaging activities or products, and use the resulting revenues to decrease taxation on productive factors. The theory of the “double dividend” suggests that this kind of reform could generate a double benefit: the reduction of environmental damages (first dividend) in response to increased costs of causing those damages, and an increase of growth and employment (second dividend) by reducing the economic distortions caused by the taxes that are reduced. In particular, reducing taxes on labour is expected to generate a clear incentive to increase employment. The available empirical evidence suggests that the hypothesis of the double dividend is actually supported, and positive effects on employment are more likely if the revenue raised by environmental taxes is recycled to reduce employers’ social security contributions rather than other taxes. However, it also seems that the positive effects on employment are rather moderate.

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SUMMARY AND CONCLUSIONS

1.40 COSTS AND EMPLOYMENT EFFECTS OF EU ENVIRONMENTAL POLICY Achieving the objectives of EU environmental policy is costly, but at the same time it creates

important income and employment opportunities. Taking a sample of ten EU environmental directives (Hazardous Waste Incineration Directive, Packaging and Packaging Waste Directive, End-of-Life Vehicles Directive, Urban Waste Water Treatment Directive, Drinking Water Directive, Nitrates Directive, Sulphur in Liquid Fuels Directives, National Emissions Ceiling Directive, Large Combustion Plants Directive, and Directive on Volatile Organic Compounds resulting from certain industrial activities), total investments for the EU associated with these directives amount to more than 257 billion Euros (in 1995 price levels) between 1990 and 2010. The largest investment costs are seen in Germany, with 92 billion Euros, followed by France, Italy and UK, all of them over 25 billion Euros. At the height of implementation of the directives, additional operating expenditures of almost 14.5 billion Euros per annum are also estimated. The annualised total costs for the EU are close to 42 billion Euros, being Germany the country with the highest costs, with almost 14 billion Euros per annum.


Austria (202 €) and Belgium (197 €). Also above the EU average of 111 Euros per capita, we find Germany (168 €), Luxembourg (161 €), Ireland (116 €) and Sweden (114 €). Below the EU average but above 80 Euros per capita, we see Finland (98 €), Denmark (97 €) and Italy (81 €). Finally, Greece (79 €), UK (78 €), France (77 €), Spain (72 €) and Portugal (66 €) present the lowest per capita costs. Therefore, implementation costs of environmental policy tend to be higher in the most developed Member States, which can be attributed to the following reasons:


2. Similarly, the assimilative capacity of the receiving environment is larger in the less developed countries, being less damaged. Contrarily, that capacity is lower in richer countries, where the environment is more damaged. As a result, stricter standards are required in the latter than in the former to meet the same environmental objectives.





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the conclusion that implementation costs tend to be higher in the most developed countries may be misleading, since the same cost per capita in two countries with different levels of development does not reflect the same level of effort, which can be better captured by GDP percentages. If we look at environmental expenditure as a percentage of GDP, the highest costs are experienced by Netherlands (0.91%), Belgium (0.83%), Austria (0.80%), and Greece (0.76%). Also above the EU average (0.55%), we find Germany (0.67%) and Portugal (0.66%). Below the average but above 0.40% we see Ireland (0.51%), Spain (0.51%), Italy (0.50%), Sweden (0.47%) and UK (0.46%). Finally, Finland (0.40%), Luxembourg (0.37%), France (0.33%) and Denmark (0.33%) experience the lowest costs as a percentage of their GDP.

As GDP per capita grows, annualised costs per capita tend to grow too, but annualised costs

as a percentage of GDP tend to decrease, indicating that the effort in terms of GDP implied by the implementation of environmental policy tends to be higher in less rich Member States. Netherlands, Belgium, Austria and Germany somehow break the general trend, being the countries with the highest costs per capita and still having the highest cost per unit of GDP (except Germany, surpassed by Greece and Portugal in this respect). The particular position of these four countries, as well as other effects that determine the particular position of each Member State, depend on country-specific factors, such as the following:





(FTE) job opportunities created by these directives is more than 435,000 FTE jobs per annum for the whole EU, with Germany having 132,000 of these jobs. The employment opportunities created as a percentage of the number of unemployed workers are greater in Luxembourg (18.76%), Netherlands (15.48%) and Austria (12.62%). Also greater than the EU average of 3.38 per cent, we find the opportunities of Ireland (7.27%), Portugal (7.06%), Belgium (6.92%), Denmark (4.95%), Germany (4.29%), Sweden (4.44%) and UK (3.62%). Below the average, we see Greece (3.26%), Finland (2.30%), France (2.24%), Spain (2.02%) and Italy (1.61%). Therefore, there exists a clear negative relationship between the employment opportunities created by environmental expenditure, measured as a percentage of the number of unemployed workers, and current levels of unemployment, which leads us apparently to the conclusion that employment opportunities linked to environmental policy are mostly created where they are less needed. Since we have also seen that countries with a higher GDP per capita, which tend to have a lower unemployment rate, incur in higher costs per capita, it is obvious that countries that spend more per capita and simultaneously have less unemployed workers must generate more job opportunities per capita.

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However, from the point of view of the effects of environmental policy on cohesion, it seems that the most relevant variable is the number of job opportunities created per unit of expenditure, which provides a better sense of the effect of environmental expenditure on cohesion. If we examine the number of FTE job opportunities per million Euros of expenditure, the Member States that benefit the most are Portugal (22.44 jobs/M €), Greece (17.74 jobs/M €) and Spain (13.51 jobs/M €). Slightly above the EU average of 10.41 FTE jobs per million Euros, we find Denmark (11.72 jobs/M €), UK (11.47 jobs/M €), Ireland (11.20%), France (11.03 jobs/M €), Finland (10.72 jobs/M €) and Austria (10.53 jobs/M €). Below the average, hence benefiting the least from environmental expenditure, we see Sweden (10.08 jobs/M €), Luxembourg (10.02 jobs/M €), Belgium (9.75 jobs/M €), Germany (9.52 jobs/M €), Netherlands (8.82 jobs/M €) and Italy (7.77 jobs/M €). Therefore, the relationship between the number of job opportunities created per unit of expenditure and GDP per capita shows a quite clear inverse relationship, which demonstrates that the less rich Member States benefit more from environmental expenditure than richer countries, in the sense that more jobs are created per unit of expenditure. This fact can be explained through labour cost differences between Member States, since these costs tend to be higher in richer countries, which leads to lower job creation per unit of environmental expenditure. Hence lower labour costs in the cohesion countries tend to increase employment creation.


we see that 63 per cent of the investments associated with the directives took place before 2001, but this result is not homogeneous across environmental domains. In the waste sector, almost all the investments have been undertaken already (99%). Most of the cost and employment effects of investments in the water sector also occurred before 2001 (72%). The only sector with most of its investments occurring after 2000 is the air sector, with only 23 per cent taking place before 2001. Hence the sector that determines most of the cost and employment effects of environmental investments after 2000 is the air sector, while the water sector was the most important in the previous decade. However, given its high costs, the Urban Waste Water Treatment Directive (for its remaining expenditures) is still the single most important directive also after 2000, followed by the National Emissions Ceiling Directive. The importance of the air sector in the following years will be even greater than what these estimates indicate, since large investments in this sector will be required in relation to the Integrated Pollution Prevention and Control (IPPC) Directive and the climate change compromises under the Kyoto Protocol.

Finally, it is also important to look at the magnitude of costs by environmental domain in

relation to the size of each Member State’s eco-industries, since the implementation of the directives requires that these eco-industries are sufficiently developed to supply the needed goods and services. Moreover, if a country’s eco-industries are not able to supply all of those goods and services, the income and job opportunities created by the required expenditure will not materialize in the Member State incurring in the costs of meeting the targets set by the directives; goods and services will need to be imported, and those income and employment opportunities will benefit the exporting countries.



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The annualised expenditure required to achieve the targets of the water directives is 43 per cent of the 1999 turnover of the EU eco-industries. Also in this case, we can find large differences across countries: from 20 per cent in France to 128 per cent in Ireland (the only country where the size of its water eco-industry in 1999 was smaller than the annualised expenditure required by the water directives at the height of implementation).

The air eco-industry is the smallest one in comparison to the volume of expenditure required

to meet the objectives of the directives. For the fifteen Member States combined, the annualised cost at the height of implementation amounts to 90 per cent of the size of the air eco-industry in 1999, with country variations from 9 per cent in Denmark to 1,133 per cent in Greece. Besides Greece, we find several Member States where the 1999 size of their air eco-industries is smaller than the expenditure required to achieve the targets of the air directives at the height of implementation: Belgium (230%), Ireland (180%), Luxembourg (214%), Netherlands (266%) and Portugal (137%).



1.41 FINANCIAL CONTRIBUTION OF THE EU TO THE IMPLEMENTATION OF ENVIRONMENTAL POLICY

Of all the financial instruments for the environment in place in the EU, the European


Unfortunately, there is no readily available information to identify the environmentally

related expenditure from the Structural Funds during the programming period 1993-1999. For the programming period 2000-2006, we can identify and aggregate the environmentally related funds allocated for the whole period by Member State. These funds have been grouped in two categories of environmentally related fields of intervention:

1. Environmental expenditure: categories of expenditure that are commonly considered as environmental. The European Regional Development Fund is the main driver of environmental expenditure from EU sources. It represents 79 per cent of all environmental Structural Funds for the EU as a whole. The European Agricultural Guidance and Guarantee Fund is the second most important financial instrument for the environment, with 19 per cent of all funds allocated for environmental expenditure. The Financial Instrument of Fisheries Guidance and the European Social Fund are insignificant, although the European Social Fund is clearly underestimated, since there are sizeable funds allocated for environmental education of employed and unemployed

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workers that are not included in our information. By country, the largest share of the Structural Funds is for Spain, which receives 35 per cent. Spain is followed by Italy (20%), Germany (13%), Greece (12%), Portugal (6%) and France (6%). These six Member States combined represent 92 per cent of all Structural Funds. These funds are also an important driver for the allocation of national funds for environmental expenditure: 1,6 billion Euros per annum, which represent 72 per cent of the size of the Structural Funds. In the case of private funds, 652 million Euros accompany the Structural Funds for environmental expenditure, adding 29 per cent more to these funds. Private funds are especially important in Italy (279 M €), Greece (140 M €) and France (106 M €).

2. Environmentally beneficial expenditure: categories of expenditure that are clearly beneficial for the environment and whose primary categorization would commonly be different from environmental. Given the nature of these expenditures (transport infrastructure, and planning and rehabilitation of industrial and military sites and urban areas), all the funds come from the European Regional Development Fund, what makes it even more important as the main driver of environmental expenditure when we add together environmental and environmentally beneficial expenditure. By Member State, Spain receives also in this case the largest share of the Structural Funds (22%), followed by Greece (17%), Portugal (15%), Italy (15%), Germany (13%), UK (7%) and France (6%). These seven countries represent 96 per cent of all Structural Funds. The importance of these funds as drivers for the allocation of national funds is even more important here than in the case of environmental expenditure: 2,2 billion Euros per annum, which represent 96 per cent of the size of the Structural Funds. Private funds are 491 million Euros, which add 21 per cent more to Structural Funds. Private funds are largest in Greece (139 M €), Portugal (111 M €) and UK (82 M €).

With regard to the Cohesion Fund, this is allocated to environmental and transport projects.

Obviously, environmental projects have been considered as environmental expenditure. In the case of transport projects, it is clear that some of them should be considered as environmentally beneficial expenditure, as some transport infrastructures were considered in the case of the European Regional Development Fund: rail, cycle tracks, waterways, urban transport, multimodal transport and intelligent transport systems. Unfortunately, the non-descriptive file titles of the projects prevented us from identifying the type of transport expenditure. Hence no transport expenditure has been considered neither environmental nor environmentally beneficial expenditure, which means that we are underestimating the environmental impact of Cohesion Funds.


environmental projects from 1993 to 2002 have grown steadily from 279 million Euros in 1993 to 1.3 billion Euros in 2002. The average yearly total amount paid for the ten year period is 838 million Euros, with Spain being the main recipient of funds in average (53%), followed by Portugal (20%), Greece (16%) and Ireland (11%). However, Spain is the country that benefits the less of cohesion funds for environmental projects in terms of average GDP percentages (0.08%), and Portugal the most benefited Member State (0.17%), followed by Greece (0.12%) and Ireland (0.12%). Also in average per capita terms, Spain is the least benefited country (11.38 € per capita), and Ireland is the Member State that benefits the most (24.54 € per capita), followed by Portugal (17.09 € per capita) and Greece (12.49 € per capita).


Funds for the programming period 2000-2006 with the 2000-2002 average payments made through the Cohesion Fund to Greece, Ireland, Portugal and Spain for environmental projects, we see that

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the total annualised Structural and Cohesion Funds for environmental expenditure in 1995 price levels represent more than 3 billion Euros; two thirds coming from the Structural Funds and one third from the Cohesion Fund. Spain is the largest beneficiary in absolute terms, with 1.4 billion Euros, which signify 44 per cent of all funds. In this respect, Spain is followed by Italy (14%), Greece (11%), Germany (9%) and Portugal (8%), the only countries receiving more than 5 per cent of the total funds. In relation to GDP, these funds represent a small 0.04 per cent for the whole EU. This percentage is surpassed only by Greece (0.31%), Portugal (0.26%), Spain (0.25%), Ireland (0.17%) and Italy (0.05%). In per capita terms, the EU average of 8.16 Euros per capita is only exceeded by Ireland (37.35 € per capita), Spain (34.59 € per capita), Greece (31.18 € per capita) and Portugal (25.92 € per capita).

In relation to the total 1999 estimate of environmental expenditure in each country, EU funds

represent in average a small 2 per cent. However, this percentage is very significant for the four cohesion countries: 20 per cent in Greece, 19 per cent in Ireland, 17 per cent in Spain, and 15 per cent in Portugal. Italy, with 3 per cent, is also above the EU average, but far from the cohesion countries. More important it is the size of these payments in relation to the best estimate of the annualised costs of the directives studied in section 4. The size of EU funds in relation to the costs of EU directives is greatest for Spain, with 48 per cent, followed by Greece and Portugal, with 39 per cent, and Ireland, with 32 per cent. Besides these four countries, Italy (9%) is again the only Member State surpassing the EU average of 7 per cent. This sizeable percentages imply that the burden of EU policy for the less rich Member States is greatly softened by the Structural and Cohesion Funds, which in turn makes easier that the expenditure associated to these directives is additional, in the sense of not replacing other productive expenditure.


brings the total annualised environmental Structural and Cohesion Funds from 3 to 5.2 billion Euros. Again, Spain is the largest beneficiary in absolute terms, with 1.8 billion Euros (36% of all funds), followed by Italy (14%), Greece (13%), Germany (12%), Portugal (11%) and France (5%), the only countries above 5 per cent of the total funds. The funds for the whole EU represent 0.07% of EU GDP. The same as when not including environmentally beneficial expenditure, this percentage is exceeded only by Greece (0.61%), Portugal (0.55%), Spain (0.34%), Ireland (0.21%) and Italy (0.08%). In per capita terms, the EU average of 13.73 Euros per capita is also surpassed by the same countries than when we considered only environmental expenditure, but in different order: Greece (61.35 € per capita), Portugal (55.15 € per capita), Spain (46.71 € per capita) and Ireland (44.68 € per capita).

With regard to the impact of Structural and Cohesion Funds on economic and social

cohesion, and considering real GDP in 2000 and the sum of the annualised budgeted Structural Funds for environmental and environmentally beneficial expenditure for the programming period 2000-2006 and the 2000-2002 average Cohesion Funds paid for environmental projects, we can conclude that the distribution of Structural and Cohesion Funds for environmental and environmentally beneficial expenditure certainly contributes to economic and social cohesion, since the countries with lower GDP per capita receive more funds per capita than the Member States with higher GDP per capita. The cohesive impact is especially strong with regard to the three poorest Member States, Portugal, Greece and Spain, which represent 16 per cent of the EU population and 10 per cent of the EU GDP, but receive 59 per cent of environmentally related Structural and Cohesion Funds. If we add the other two Member States below the EU average GDP per capita, Italy and UK, we see that the poorest five countries represent 47 per cent of the EU population and 35 per cent of GDP, but obtain 78 per cent of the funds. Only the funds received by Ireland do not favour cohesion, since the enormous growth of this country in the last years has

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brought it above the average GDP per capita, while still being formally a cohesion country. As a result, the Cohesion Funds received by this Member State have a negative cohesion impact, although scarcely significant overall, given the relatively small size of Ireland.

We can also ask if the Cohesion Fund is also “cohesive” among the cohesion countries.

Looking at average GDP and average Cohesion Fund payments for environmental projects in 1993-2002, we see that the distribution of these payments contributes to further cohesion also among the four cohesion countries only for the lower income countries. This is explained because the country with the lowest GDP per capita, Portugal, represents 15.7 per cent of the four cohesion countries’ population and 12.1 per cent of their combined GDP, but receives 20.1 per cent of Cohesion Fund payments. The second lowest GDP per capita belongs to Greece, which receives more payments (15.6%) than its share of GDP (13.2%), but less than its share of population (16.5%). The cohesive impact of the distribution of the Cohesion Fund among these four countries disappears as we move into percentages of population with highest GDP per capita, with a clear effect against cohesion from the allocation of funds to the richest of the four countries, Ireland. This result is due to Ireland obtaining 10.8 per cent of Cohesion Fund payments when it only represents 5.8 per cent of population and 9.5 per cent of combined GDP. On the contrary, Spain, the second country in GDP per capita, receives a much lower percentage of payments (53.4%) than its share of population (62.0%) and GDP (65.1%).



1.42 THE EFFECTS OF CLIMATE CHANGE POLICY ON COHESION As the first tangible result of the UN Framework Convention on Climate Change, the Kyoto

Protocol imposed on developed nations actual commitments for limiting their emissions of green-house gases (GHGs). The concrete commitment assumed by the EU consisted of a reduction of 8 per cent of its GHG emissions relative to 1990 levels by 2008-2012. Taking into account the particular economic conditions of each Member State, the Council of Ministers agreed on different emission limitation and/or reduction targets for each Member State, called the “burden sharing” agreement or the “European bubble.” This agreement means that not all Member States will have to reduce their GHG emissions by 8 per cent, as long as the EU as a whole meets the 8 per cent target.

Above all, the burden sharing agreement means that richer Member States must reduce their

emissions more than the agreed 8 per cent, while cohesions countries are allowed to increase their emissions. Therefore, it could be concluded that EU cohesion objectives were taken into account in the redistribution of the EU Kyoto Protocol commitment. However, if we look at the current situation of each Member State with regard to the fulfilment of the burden sharing agreement, we can see that the usual indicators show that cohesion countries are the Member States farthest away from complying with their compromises.

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The only countries that have attained GHG emission reductions from 1990 to 2001 are Luxembourg (−44%), Germany (−18%), UK (−12%) and Sweden (−3%). Given that Germany and UK are the largest emitters, the reductions by only these four Member States translate into a 2 per cent reduction for the whole EU, still far from the 8 per cent compromise for the period 2008-2012. In the opposite side, we find large GHG emission increases from 1990 to 2001 by the four cohesion countries: Portugal (36%), Spain (33%), Ireland (31%) and Greece (26%). The only Member States that are already in compliance with their commitments are Luxembourg, Sweden and France.

If we look at the percentages of GHG emission reduction from current levels that each

Member State must attain to meet its Kyoto Protocol target, the largest effort corresponds to Denmark and Austria, which need to decrease their 2001 emissions by 21 per cent to reach their Kyoto Protocol targets. In terms of required reduction effort, Denmark and Austria are followed by Ireland and Spain (14%), Belgium and Italy (13%), Netherlands (10%) and Portugal (7%). Relatively low reduction effort levels from current emissions are required for Finland (5%), Germany (4%), and Greece and UK (1%). France is exactly in its compliance level, while Luxembourg and Sweden could increase their emissions by 28 and 7 per cent, respectively, and still be in compliance.

The percentage of required reduction does not measure effort in terms of how costly or

difficult the required changes in emissions may be. As a first approximation to a measure of the difficulty for each country of reducing its emissions, we should look at GDP efficiency in terms of emissions. In principle, the more efficient a country already is, the more difficult will be for it to increase its efficiency even more. Since efficiency is mostly a technological dependent variable, any country faced with the need to increase its efficiency will adopt first the cheapest efficiency-enhancing technologies. But as a country grows more efficient, the only way of still increasing its efficiency consists of implementing increasingly expensive technologies. Hence it will be cheaper to decrease emissions for inefficient countries than for the most efficient ones.

The four cohesion countries are the most inefficient Member States in terms of GHG

emissions, in the sense that they emit more GHG to produce a unit of GDP. Greece is particularly inefficient, with 1,195 gigagrams of GHG in CO2 equivalents per billion Euros of real GDP in 1995 prices. Above the average of 540 gigagrams per billion Euros, we find Portugal (828 Gg/B €), Ireland (807 Gg/B €), Spain (692 Gg/B €), UK (643 Gg/B €), Finland (636 Gg/B €), Belgium (612 Gg/B €), Italy (582 Gg/B €) and Netherlands (571 Gg/B €). The most efficient Member States are Luxembourg (312 Gg/B €), Sweden (328 Gg/B €), France (406 Gg/B €), Austria (416 Gg/B €), Denmark (438 Gg/B €) and Germany (481 Gg/B €). Therefore, we find a first indication of costs of GHG reduction being inversely related to income per capita.


emissions per capita. In this case, we should expect that it becomes more costly to reduce emissions as emissions per capita decrease, since it will be more difficult to reduce them and maintain or increase the standard of living of population. The average EU emissions per capita are 11 gigagrams of GHG in CO2 equivalents per 1,000 people. This average figure is exceeded by Ireland (18 Gg/1,000 people), Finland (16 Gg/1,000 people), Belgium (15 Gg/1,000 people), Netherlands and Luxembourg (14 Gg/1,000 people), Denmark and Greece (13 Gg/1,000 people), (12 Gg/1,000 people) and UK (11 Gg/1,000 people). Below the average, we find Austria (11 Gg/1,000 people), Spain (10 Gg/1,000 people), Italy and France (9 Gg/1,000 people), and Portugal and Sweden (8 Gg/1,000 people).

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The Member States with both emissions per unit of GDP and per capita above the EU average are Ireland, Greece, Finland, Belgium, Netherlands and UK, which, according to the previous discussion, should have the lowest difficulties reducing their GHG emissions. On the contrary, Sweden, France and Austria, being below the EU average both in per unit of GDP and per capita terms, should have the strongest difficulties reducing their emissions. Three of the four richest Member States, Luxembourg, Denmark and Germany, emit GHGs above the average in per capita terms, but below the average in relation to GDP. The opposite is true of Portugal, Spain and Italy, which are three of the four poorest EU Member States, whose emissions exceed the average in relation to GDP but are below the average in per capita terms. The situation of the latter six countries is less clear.


agreement, we hypothesize that the financial flows produced between countries as a result of the exchanges of allowances in the market for GHGs that will be established in the EU is a good proxy for the direction of that effect. If the European Union Emission Trading Directive is approved as scheduled, the EU will have the first trans-national GHG emission trading scheme in the world as soon as of 2005. Cohesion will be increased if this market leads to financial flows from more to less developed Member States. However, if the result is that poorer countries must buy permits from richer Member States, the indication is that climate change policy will contribute negatively to cohesion in terms of its implementation costs.

To determine the likely position of a country as a buyer or seller in the allowances market,

we should look at the relationship between the index of required effort and the average of the difficulties to reduce emissions arising from already low values of emissions per unit of GDP and from already low per capita values. The Member States with both above average difficulties to reduce their emissions and strong reduction efforts required to comply with their obligations under the burden sharing agreement should be expected to be net buyers in the EU emission trading market. The clearest of these cases is Austria, which needs to reduce its emissions by 21 per cent to comply with its target, and at the same time suffers strong difficulties to reduce emissions. Italy could also be a net buyer, since it needs to reduce emissions by 13 per cent and presents above average difficulties to reduce emissions. On the contrary, any country with low difficulties and low required effort should be expected to be a net seller of emission allowances, but there is no Member State in such a situation. Nevertheless, Greece and UK’s required efforts, although positive, are small, while their difficulty is well below the average, and hence we would expect them to be net sellers.




required to reduce their emissions, but their difficulty of doing it is lower than the EU average. Among these countries there exist very different situations. Denmark and Germany are almost on the average difficulty. Given that Denmark is the country that needs to undertake the largest

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reductions (21%) and presents an average difficulty to reduce emissions, we should expect that it joins Austria as a clear net buyer of allowances. The case of Germany is less clear, since its required reduction effort is moderate and its difficulty is average; it could be a seller or a buyer. For the rest of countries, Ireland, Belgium, Finland, Netherlands, Portugal and Spain, required efforts to reduce emissions are significant, but at the same time it should be less difficult for them than for the rest of Member States to reduce their emissions. Hence it is unclear if they will be able to sell allowances, if they will have to use them all or even be net buyers. If any of them becomes a buyer, Spain is the most likely to be one of them, since this country presents the highest difficulty (although below the EU average) among these six Member States and the highest index of required effort together with Ireland (14%).




difficulty to reduce emissions and the index of required effort with GDP per capita. The first of these comparisons indicates that there exists a positive relationship between the difficulty to reduce emissions and wealth. In this sense, it could be concluded that cohesion is reinforced by climate change policy, since the highest effort in terms of overcoming difficulties will be exercised by the richest Member States. However, this general trend is not extremely significant, and we see Italy, below the average GDP per capita, with a difficulty above the average, while Ireland, Netherlands, Belgium and Finland, all above average GDP per capita, have the lowest difficulty but for Greece’s. However, the situation of Belgium and Netherlands is the consequence of them having highly developed oil refining sectors, which make both countries high in both emissions per capita and per unit of GDP, but not necessarily less difficult to reduce emissions. Ireland is also an unusual case, given its tremendous growth in recent years, which has brought this formally still a cohesion country above average GDP per capita. With regard to the relationship between the index of required effort and GDP per capita, and if we ignore the peculiar position of Luxembourg, which is an outlier, there exists a positive trend too, which suggests also from the point of view of the required effort that cohesion is reinforced by climate change policy. However, Spain and Italy, both significantly below the average GDP per capita, must exercise a large reduction effort, well above most richer Member States’ required effort.



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1.43 THE EFFECTS OF ENVIRONMENTAL TAXATION ON COHESION Environmental taxation may affect cohesion through its possible impact on income

distribution (through taxation of mass-consumption goods) and employment creation (through the use of the revenue raised by environmental levies to decrease taxes on labour). Concerning income distribution, the international evidence is scant, but some conclusions may be derived. Obviously, a negative impact on income distribution is more likely if products consumed by low income people are taxed. Hence taxes on energy probably produce a slight negative impact on income distribution. Evidence in this direction can be found in Sweden, where doubling the tax on carbon dioxide would require a compensation to keep the same level of consumption for low income people of 1.24 per cent of their consumption expenditure, while that compensation for high income people would be only of 0.78 per cent. However, some empirical results show that while energy taxation affects negatively income distribution in Denmark, Ireland and UK, that impact is slightly positive in Italy and Spain. In aggregate, it can be concluded that the overall impact would be slightly negative on income distribution, although that impact would be clearly negative if, for instance, the objectives of the Kyoto Protocol were to be achieved exclusively through taxation. Of course, that impact would vary across countries, expecting it to be more negative where transport distances are larger and the weather colder, since these factors make harder to reduce energy consumption for low income people. In any case, well designed compensation measures would contribute to erase any negative effect on income distribution.


empirical evidence on the likely effects of revenue neutral ecological tax reforms, that is, fiscal reforms that tax environmental damaging activities or products, and use the resulting revenues to decrease taxation on productive factors. The theory of the “double dividend” suggests that this kind of reform could generate a double benefit: the reduction of environmental damages (first dividend) in response to increased costs of causing those damages, and an increase of growth and employment (second dividend) by reducing the economic distortions caused by the taxes that are reduced. In particular, reducing taxes on labour is expected to generate a clear incentive to increase employment. The available empirical evidence suggests that the hypothesis of the double dividend is actually supported, and positive effects on employment are more likely if the revenue raised by environmental taxes is recycled to reduce employers’ social security contributions rather than other taxes. However, it also seems that the positive effects on employment are rather moderate.

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RECOMMENDATIONS The effort implied by the implementation of EU environmental policy tends to be higher in

less rich Member States, as shown by its costs as a percentage of GDP. But this burden is greatly softened by the Structural and Cohesion Funds, which in turn make easier that the expenditure associated to EU environmental policy is additional, in the sense of not replacing other productive expenditure. Therefore, it is recommended that Structural and Cohesion Funds remain in place and associated to the implementation of EU environmental policy to guarantee that this policy is compatible with fostering cohesion.

In order to evaluate more accurately the effects of these funds on cohesion, it is necessary

that the European Commission establishes better information systems that allow to retrieve the actual payments from each fund to each country and region, and that all fund payments are identified according to their environmental, environmentally beneficial or environmentally neutral nature.

The financial flows produced between countries as a result of the exchanges of allowances in

the market for green house gases that will be established in the EU as early as of 2005 should be closely monitored to check that the “burden sharing” agreement for the redistribution of the EU commitments under the Kyoto Protocol is actually compatible with increased cohesion. If the result is that poorer countries must buy permits from richer Member States, the indication is that climate change policy will contribute negatively to cohesion in terms of its implementation costs. The outcome should be taken into account to redesign, if necessary, the institutional setting of the market, and mostly to redistribute the commitments assumed by the EU in following commitment periods.

The EU should keep favouring the use of environmental taxation. To erase any negative

effect of this kind of taxation on income distribution, well designed compensation measures for low-income people should be implemented. Revenue neutral ecological tax reforms should recycle the revenue raised by environmental taxes to reduce employers’ social security contributions rather than other taxes, which seems to maximise the positive effects on employment of this kind of reform.

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APPENDIX E: Tables, graphics, figures and frames on the Environmental policy

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