Economic Instruments for Environmental Protection

Jaromír Kovář

Table of Contents

I. Introduction

II. Emission Charges in the Czech Republic

• A. System of Emission Taxes/Charges in the Czech Republic

B. Pollution Charges (The Czech Experiences)

C. Possible Functions of Emissions Charges

D. The Description of Specific Application of Emission Charges

III. Comments on new Types of Economic Instruments

• A. Tradeable Permits

B. Joint Implementation

IV. Approaches to Specific Problems

• A. Sustainable Development of the Private Sector and its Relationship to the Economy
(Based on the Example of the Czech Republic)

B. What Policy Should be Implemented with Respect to Controlling Air Pollution

Emissions from Motor Vehicles in the Czech Republic

Attachment

• A. Concrete Economic Tools in the Areas of Pollution of the Environment and the
Utilization of Natural Resources

B. The Taxation System and its Use for Protection of the Environment

C. Financial Support of the Environmental Measures

D. Further Tools of Economic Character

E. The Specific Economic Category Used in the Area of Environmental Protection

F. Environmental Protection and the Macroeconomic Structures

G. General Problems of the Environmental Economy

I. Introduction
This document contains a couple of selected discussion papers and short documents
concerning the topic of economic instruments for environmental protection.

All documents were written in the last two years and the reasons for their preparation were
different. Some documents were written as a presentation of our experiences, some as
proposals for future conceptions and some as reactions to actual problems. Most of these
papers arose during the course of the UNDP project "Economic Instruments for Sustainable
Development" and during the author’s stay in the United States.

The first block (Chapter II.) contains discussion papers about the Czech experiences with
emission charges. These charges have been in force in the Czech Republic since the mid-60`s.
- with modifications in the last few years. In principle these charges are based on the
abatement costs of pollution control and this is a rare experience with the practical application
of the principle from the theory. The description of both approaches to these charges and their
real life forms could be interesting for the assessment of our experiences and for an
assessment of the possible application in other countries with similar environmental and
economic conditions.

All four documents in the first block describe the same problems, but from different aspects.
The first paper is only a short summary of these problems, the second paper contains more
detailed description of the application of these principles in the case of charges for air
pollution and water pollution, the third paper contains parts with theoretical descriptions of
charges and possible types of charges, and the last paper contains a description of the practical
application of emission charges.

The second block contains papers about new types of economic instruments for
environmental protection. Tradeable permits are in force in the United States as the basic
economic instrument for air protection and this type of instrument is usually recommended for
application by American experts. The paper contains about 20 key questions which we must
consider and discuss before the application of tradeable permits under the different conditions
present in the transition countries.

Joint Implementation represents a new approach to "joint" solution of the air pollution
problems from both the developed and developing countries. We must solve many problems
for the development of this instrument and for the developing of mutual cooperation among
the polluters from different countries. This paper considers above all the problems concerning
conditions on the side of the host country and especially the possibilities for the direct or
indirect economic advantages for the investors.

The last part (Chapter IV.) contains specific approaches to solving two problems in a
transition country as a reaction to the author’s stay at the State University of New York at
Syracuse. The first paper is a very similar description of the environmentally-friendly
behavior of enterprises and the economic aspects of this behavior. The second paper shows
the possible approaches to the solution of emissions from mobile sources in the Czech
Republic. In spite of these problems` similarities in most countries, the solution could be
different according to the different conditions, such as the environmental situation and
priorities, environmental policies, regulations and instruments, economic situations, and
economic and social impacts.
The Attachment contains the "Program of Economic Instruments for Pollution Control and
Use of Natural Resources in the Czech Republic", with more than 30 fields of activities and
more than 150 partial steps and targets for their solution. In spite of the fact that this
document was published by the Ministry of the Environment of the Czech Republic in 1994,
most of these targets and steps are still not fulfilled and it is not necessary to make basic
corrections to this document.

New elements and the importance of these papers is possible to see in the views on the
specific environmental problems and options for their solution in the specific conditions of a
country in transition. In many cases there exist big differences not only between the situation
and solution to the problems, both in the developed and developing/transiting countries, but
also differences in the opinions on and assessing of the specific problems and instruments.

The majority of the papers were prepared as the author’s opinion on specific problems and as
topics for future discussion. These papers are not detailed analyses and descriptions of the
problems, but mostly only a short introduction to them. The scope of these papers is,
primarily, to initiate further discussion and possible cooperation towards solving the described
problems.

II. Emission Charges in the Czech Republic

A. System of Emission Taxes/Charges in the Czech
Republic
(Summary of the presentation)

1. Introduction to the Czech Republic and the Discussed Problem

The Environment

The present situation is worse than in developed (European) countries. The targets for
improvement are relatively high. Environmental regulation is based especially on
administrative instruments (limits and standards) and economic instruments have only a
supplementary role.

The Economy

The present economic system is in transition to a market economy, after the main steps, such
as the privatization of industry.

Charges for Pollution (Emissions)

Charges for air pollution and water pollution were introduced by government regulation in
1966. At the present time the basic principles of charges are based on the level of the
abatement costs of pollution, which generally correspond to basic theoretical approaches
(there is no other country implementing this principle).

Development of the Basic Principle of the Charges

The charges are considered not only as a responsibility of the polluters, but as one part of a
whole system of charges (a system of economic motivation for polluters). This system is
gradually being developed in the global system of charges.

Implementation of the Charges

All implementation of charges or their modification must be proclaimed by parliament and

law.

Differences Between Taxes and Charges

In the Czech Republic there exist strong distinctions between taxes and charges. These
distinctions are based on:

• their basic function (income for state expenditures or motivation of polluters),

• use of the revenue (state budget for all types of state expenditures or a special
environmental fund only for environmental protection),
• responsibility for regulation (Ministry of Finance or Ministry of the Environment).

2. General Description of the Approaches to the Taxes/Charges

The emission charges are based on the balancing of the economic condition between two
types of enterprises. This principle is close to the theoretical "optimal" level of pollution
based on the abatement costs, but it has many specific modifications. The basic principle is
illustrated below:

The first is an enterprise which operates utilizing environmental protection technologies. The
second is an enterprise without these technologies. Without the existence of charges
determined on the balancing principle, the situation arises where the environmentally-
friendly enterprise will be at a disadvantage and won’t have the ability to compete with the
enterprises which pollute the environment. In this case the incentive objective is based on the
following principles:

• charges should influence environmental quality through a change of behavior by the

polluters,
• the economic advantage of the polluters must be reduced and polluting must be more
expensive than environmentally-friendly behavior or activities - likewise
environmental protection must be cost-effective for the polluters.

The application of these principles in practice solves some basic problems - above all:

• ensuring the economic motivation of polluters to undertake measures for

environmental protection,
• reducing the current economic advantage of the polluters,
• balancing the economic condition between two types of enterprises (polluters and the
first, which operates environmental protection technologies),
• inclusion of environmental protection costs into the operational costs of polluters,
• taking into account important information about the significance of environmental
impacts and the costs of corrective measures taken by some enterprises or branches,
 • ensurance of financial revenue from charges which is possible to use for the support of
environmental protection measures,
• application of the "polluter pays principle" which has been accepted by all European
countries.

3. Determination of the Charge Rates

The first step is a decision about the targets. In many cases it is a political decision but it is
possible also to use the targets from official documents such as governmental environmental
policy. We must take into account the economic aspects of these targets (for example, a small
rise in pollution reduction above the limit of 90 % is several times more expensive).

By the calculation of the equivalency of the abatement costs we need to solve/decide:

• different equivalency of costs in relation

• to the utilization of cleaning technologies
• or to the scale (size) of the pollution source
• the type of abatement cost, which we will compare - the costs
• of existing technology
• of building (preparing) technology or
• of future technology
• the kind of calculation of the investment costs into the total abatement costs,
• the case when the abatement costs don’t exist.

4. Economic Impact of Charges

Macroeconomic impacts

Total revenue from the charges represent about 1 % of the total tax payments and the increase
in the next few years will be about 2 %. This amount is economically acceptable.

Microeconomic impacts

Impacts on polluters must be considered as a replacement of the abatement (or environmental)

costs, which must be spent in order to achieve the targets. The same reason is also in the case
of competition with export products.

Social impacts

In most cases, the payment of charges is transferred to consumer price increases. This
problem we must assess separately case by case and we must decide if it is acceptable. But
generally, the consumer price increases merely reflect the internalization of environmental
costs of production.

5. Developing of Charges into a Charges System

The system of charges must be based on the following principles:

 • specification of pollutants covered by charges (it must be the pollutants which are
important from an environmental protection standpoint and for which it is efficient to
apply an economic motivation of polluters),
• determination of the optimum function of the charges (see part 2.),
• determination of charge rates (see part 3.).

The next parts of the charges system contains the following main points:

• increasing charges in certain conditions,

• reduction of charges in specific conditions,
• exemptions from the payment of charges,
• altering economic impacts on the payers,
• main decisions about the fiscal side of the charges.

Besides the above mentioned modifications we have started to apply the following
modifications as well:

• gradual integration of joint elements of the charges (air, water, waste),

• creating a unified conception of charges,
• ensuring possibilities to actually modify charges (valorization, actualization, etc.),
• respecting the mutual relation and interdependencies of the charges and other
instruments (economic and administrative),
• establishing the charges as an integral part of environmental policy instruments,
• ensuring the acceptation of the charges by the European Union.

B. Pollution Charges (The Czech Experiences)

1. The Approaches to Emission Charges

We have found that the main condition of economic stimulation is the implementation of a
sufficient level of payments. These payments must, at least, compensate the enterprises for the
construction and operating costs of cleaner technology. If pollution charges will be the same
or higher than these environmental protection costs, the implementation of environmental
technologies can lead to a cancellation or large reduction of charges in the enterprises’
expenses. In this way, environmental protection becomes cost-effective for enterprises.

This principle of determining the level of environmental charges has in our experience
another important element - balancing the economic condition between two types of
enterprises. The first is the enterprise which operates environmental protection technologies.
The second is the enterprise without these technologies which must pay the charges for
pollution. Without the existence of charges determined on the aforementioned principle, the
situation arises that the environmentally-friendly enterprise will be at a disadvantage and
won’t have the ability to compete with the enterprises which pollute the environment. We can
follow this idea to its theoretical conclusion that the nonexistence of efficient environmental
charges will support environmental polluters and gradually bankrupt the environmentally-
friendly enterprises.

The above mentioned basic principle of emission charges has been gradually implemented
into Czech environmental policy and it is being further developed. The incentive function and
additional elements are creating a charges system which operates complexly to create an
intricate system of economic stimulation. Our charges system contains the following main
points:

- increasing charges in certain conditions

This means increasing the impact on polluters. We use exceedance of local environmental
objectives as the criteria for raising the basic level of the charges’ rates. These criteria differ
according to the different areas of the environment.

- reduction of charges in specific conditions

This means the reduction of the impact on the polluters. This problem especially concerns
charge reduction (temporary charge credit) if the polluter has started to invest in pollution
prevention. The polluter is committed to use the saved amount of charge to finance the
abatement technology. The second possibility is to reduce the charges in the case that the are
operating cleaning technology in accordance with acceptable standards.

- altering economic impacts on the payers

This means for example a decision about the method of paying - pre-tax costs, etc. If we
define the charges as being the equivalent of abatement costs or as being the balance of
economic conditions between enterprises, then the charges are paid from the usual operating
costs of the enterprises. However, additional charges mean additional impacts and are paid
from the profit margin of the payers.

- main decisions about the fiscal side of the charges

This means the distribution of the fiscal revenue. It is possible to determine the method of
using these sources at the time of their creation. There are three main alternatives in use for
charge reallocation:

1. transferring charge revenue to the central sources - to special funds, state budget, etc.
(centralization of charges)
1. retaining revenue from charges by the polluters in specific cases,
1. retaining revenues from charges at lower levels - in the municipalities, etc.
(decentralization of charges),

Our practice is to pursue the first option therefore most of the charge revenue goes to our
State Environmental Fund. At present we are also promoting the second alternative - retention
of charges revenue by the polluters if they have initiated activities aimed at reducing
pollution.

2. Problems with the Application of Emission Charges and their

Solution

The most efficient stimulation of polluters is in the case where the level of charges is
established at the same level as that of the costs for the reduction of pollution. These charges
and the charges system naturally entail some problems. In Practice these are fairly simple to
solve. We should mention some of these problems. Primarily they include:
a) decision about the targets (standards)

This problem involves determination of the standards and the necessary efficiency of the
technology which will be taken as the basis for the calculation of the equivalency of costs.
Above all, we must take into account the cases where a small rise in efficiency above the
border of 90 % efficiency is several times more expensive, and this problem is shown by a
significant raising of the charges. Thus, we must fix this efficiency of the technology by
considering not only the environment but also these economic relations and impacts.

b) accurate determination of equivalency costs

In practice there exist different equivalencies of costs, for example, in accordance with the
utilization of cleaning technologies or the vastness of the pollution source when the costs for
cleaning technologies are higher for smaller pollution sources than for the bigger. A possible
solution is to set more charges rates or to average the costs into one rate of charges (we prefer
the second option).

c) influence of the charges from inflation

It is possible that inflation can influence the charges and their impact on polluters. This
problem is very important if the charges play the role of an incentive instrument and present
equivalency of abatement costs and also if inflation is very high. A possible solution is the
regular modification of charges with an inflation coefficient or a regular amendment of the
law with charges (we prefer the second option).

3. Impact of Charges on Polluters

3.1. Concerns About the Impact

The main question which is discussed in the area of charges for environmental pollution is the
total impact of these charges on industry and households. Opponents of charges (and
economic instruments in general) argue that these impacts are too great and raise fears of
inflation.

The anxiety about the high impact of charges is unnecessary. If charges are based on the
principle of the equivalency of operational costs for environmental measures, then the charges
act to ensure the "environmental" costs to the economy are included in enterprises’ prices and
their profits. If we take as the long-term aim the gradual improvement of the environment,
then these charges contribute towards this aim and also compensate this aim. As long as the
charges are very high for some enterprises or branches, it will also be very high for the
realization of environmental measures now or in the future. The enterprises must incur these
costs in a specific period to promote real interest for solving environmental problems.

The opposite case - pollution without the existence of efficient charges - will represent the
situation when industrial production and profit will be to the detriment of the environment.
This situation will exist until the time of effective implementation of charges or
environmental technologies. The problem is solving the question of which level is it possible
to reckon these environmental costs or charges into the prices of products, and at which level
it is possible to eliminate these "environmentally expensive" products.
This charge would not be considered inappropriate. On the contrary, the level of charges
would be taken as important information about the significance of environmental impacts and
the very high costs of corrective measures taken by some enterprises or branches.

The actual impact on the polluters in our experience depends upon the following:

• the role of economic instruments as one of the influences on polluters - in this case we
have strong emission limits (especially in air protection regulation) and the pollution
charges play only a supplementary role in their impact on the polluter,
• the implementation of the incentive function at all levels - this principle is applied in
the case of water pollution charges, in the case of the air pollution charges it is only
partially applied,
• structure of the polluters - if we apply the incentive function at the level of the average
costs as the only charge rate, we must count upon different impacts - one section of the
polluters are above this level and the incentive is in force, the second section of the
polluters is under this level and the impact is small (we solve the second case by the
application of additional charges).

3.2. Impact of the Water Pollution Charges

Water pollution charges’ role is as a motivating economic instrument. The charges’ rates were
modified in the past in accordance to increases in the abatement costs and inflation, therefore
the impact of charges is relatively stable. Presently we are preparing a new amendment to the
water pollution charges law with more precise charges’ levels.

The affect of the charges is good above all in the case of polluters with smaller abatement
costs per person, due to the fact that they must pay the average charges rate which is greater
than their actual costs and so they are more likely to take the abatement measures. In our
experience this advantage comes into effect for municipalities which cleanse waste water
from the equivalent of 15 000 citizens. This impact is in accordance with our environmental
policy, where we want to solve above all the bigger polluters.

We also have favorable experiences with the impact of the other points of the charges
(charges system), especially with temporary charges credit. About 50 % polluters are using
this possibility and these sources can create about 20 - 50 % of the resources for the financing
of the measures. Because these resources originate in the enterprises from the costs before
taxation, they present for the polluters the cheapest sources of finance.

3.3. Impact of the Air Pollution Charges

In the case of air pollution charges we implement the incentive function only partially. The
reason being that our former air protection regulations were lax and the impact from the
implementation of the incentive function with a relative high level of the charges would be
too large, however it is planned to introduce the full role.

The incentive function and the necessary impact is applied for some pollutants (for example
solid emissions), but they don’t play the main role in our air pollution problems now. In the
case of our other pollutants (i.e. sulfur dioxide) we have charges rates only about 10 % of the
abatement cost and therefore the impact is only symbolic.
The next problem of the impact is that the law contains a stepwise curve for 5 years and not
until 1997 will polluters pay the full level of charges. This regulation presents another
reduction of the impact on polluters.

The other points of the charges system have only a partial effect. For example the temporary
charges credit is only 40 % (the least from all other charges) and if the total amount of
charges is relatively small, the positive impact for the polluters is minimal.

4. Recommendations for the Use of Emission Charges

Our experiences with emission charges produce the following recommendations concerning
the implementation of this economic instrument.

4.1. Conditions for the Implementation of Emission Charges

a) environmental conditions

The implementation of emission charges (especially with the incentive objective) is more
important in countries with poor environmental conditions. The implementation of charges
can contribute to the solution of these environmental problems.

b) economic conditions

The emission charges as a market oriented instrument is important both in market economy
countries and transiting countries. We have experience with the effects of charges in a non-
market system, but their role is substantially different.

c) political conditions

The negotiations concerning the implementation of emission charges seem to be easier than in
the case of environmental taxes. In our practice we have charges as a special instrument
covered by special environmental legislation and their implementation is the responsibility of
the Ministry of the Environment. In this case the implementation is relatively easier than in
the case of establishing environmental taxes, which is the responsibility of the Ministry of
Finance.

4.2. Steps for the Implementation of the Charges

a) specification of pollutants covered by charges

It is relatively easy to select the pollutants for which it is efficient to apply economic pressure.
They must be pollutants which are important both from an environmental protection
standpoint and for which it is efficient to apply an economic motivation to polluters.

b) determination of the optimum function of the charge

This means the principal objective of the charges. In the Czech Republic we prefer an
incentive objective.

c) determination of standards
We need information about the general environmental targets and then we must set the
standards and the required efficiency of the technology. To ensure the appropriate incentive
effect this information will be taken as the basis for calculations of the equivalency of costs.

d) determination of stimulative charge rates

The rates of the charges are set for specific pollutants and the minimum level is set at the level
of average abatement costs (operational costs plus dividing investment costs into a few years).

e) the potential for increased charge rates

It is possible to supplement the charge with an increased rate or additional charge which is set
in accordance with specified principles and conditions. For example, the charge can be raised
if we are interested in attaining a set target - reduction of the concentration of the pollutant
differentiated according to the region (areas with high environmental protection, drinking
water courses, etc..).

f) the potential for reducing charge rates

In many cases it is possible to create positive incentives for polluters. The charges can be
reduced in some cases, especially:

• if the polluter has started the construction of the necessary environmental measures
which will reduce pollution and we want to financially support this measure,
• if the polluter is operating a cleaning technology and the pollution covered by charges
represents only the residual pollution (the costs of reducing this pollution are high and
it is inefficient to take additional measures),
• if the polluter complies with the specific criteria which are set for this part of the
environment - i.e. specific limits, etc.

g) the potential for decentralizing charges

We can decentralize charges in an efficient way and in pre-determined conditions. For

example we can set aside a part of the charges to the jurisdiction of the lower authority of the
state administration or local authorities. The transfer of the jurisdiction also transfers the
responsibility to the lower administrative level. The decentralization of the charges concerns
not only their assessment and levying, but also the utilization of their fiscal income.
Decentralization is possible in the case of small sources of pollution, in the case of the part of
charges which are being increased (see above mentioned points), etc.

h) the potential for altering economic impacts on the payers

This means a possibility of determining from which sources enterprises can pay charges (from
operational costs or from profits, etc.).

i) the fiscal side of charges

This is the question of the fiscal income of the charges which is possible to use for financially
supporting environmental measures. The use of the income from charges is possible on a few
levels and in a few forms. From the standpoint of the level this is a question, for example, to
have polluters retain a part of the charge amount (see point c) in the region, or in central
government (state budget, State Environmental Fund, etc.). This fiscal income is important
and creates financial resources also, in cases when the fiscal function is not the principle aim.
In the case of returning charges to polluters in the form of financial help, we can also talk
about the redistributive function.

j) administrative elements of the charges

The charges also have an administrative aspect - primarily the legislation proclaiming the
selection, monitoring and levying of charges. These problems are subsequently solved in
many cases and not during the time of discussion and preparation of new charges.

k) relation of charges to other economic instruments

We must consider charges as components of the whole system of economic instruments. In

this area the charge solves one aspect from the sphere of economic stimulation and has its
place. This close relationship is essentially finances for the support of environmental
measures. It is not possible to substitute this instrument and its function with other economic
instruments (compensation for damages, penalties, etc.).

5. Conclusions

In the Czech Republic we consider charges for pollution the most important economic
instrument, and they have an important place among the instruments of environmental policy.
The charges have above all the function of an economic impact on polluters according to
determined rates. Charges are increased by additional rates to increasingly afflict polluters.
The revenue from charges also ensures resources for positive stimulation of polluters. With
regards to the possibilities of delays and reductions, charges can also be important positive
motivating instruments directly applied to polluters. All these functions can be considered as
parts of the charges system which can create the necessary economic conditions for meeting
environmental policy targets.

The existence of charges takes into account the economic concerns of the polluters and offers
the possibility of choice from the most effective alternatives. The existence of charges and
other economic instruments allows room for the application of other instruments - especially
administrative instruments. The opposite procedure is more complicated - the application of
administrative limits or prohibitions excludes or restricts the utilization of economic
instruments.

The authors opinion is, that the above mentioned approaches are not novel. However we have
no information about their practical implementation on this scale, as in our country.

Solving the problems in the above mentioned chapters will entail increasing the incentive
function of the charges. Charges based on these principles are the simplest way of including
external impacts into the operating costs of enterprises. These charges also enforce the
realization of the polluter pays principle which has become the standard in developed
countries.

C. Possible Functions of Emission Charges

1. Introduction

Pressure to enforce desirable behavior of environmental polluters is applied through different

means. This pressure may be exerted through specific limits for pollution, prohibitions or
other subjective and nonsystematic regulations. These centrally determined administrative
approaches meet resistance from enterprises which attempt to avoid or delay compliance. A
system of economic instruments is essential in stimulating and influencing the determination
of prices and profits for environmentally-friendly behavior. Administrative instruments can
serve a complementary function to economic instruments in this process.

The existence of charges takes into account economic concerns of the polluters and offers the
possibility of choice among the most effective alternatives. The existence of charges and other
economic instruments allows room for the application of other instruments - especially
administrative instruments. The opposite procedure is more complicated - the application of
administrative limits or prohibitions excludes or restricts the utilization of economic
instruments.

Charges are one of the environmental policy instruments which can influence environmental
quality. This is a question of economic instruments covered in the category of instruments of
negative stimulation which affect polluters of the environment. Fiscal income from charges
also enables the positive stimulation of polluters.

Charges are the simplest form of including external impacts into the operating costs of
enterprises. Charges also enforce realization of the polluter pays principle which has become
the standard in developed countries.

2. Possible Functions of Charges

Charges as payments for pollution may fulfill many functions. These include:

a) incentive function

effective stimulation of polluters for the realization of desirable measures which lead to the
reduction of pollution (it means that charges are higher than the costs of the necessary
measures),

b) fiscal function

ensuring the funds for the financing or partial financing of the determined targets for
environmental protection (charges are on a level so that their total amount ensures a desirable
amount of required finances),

c) harmful damage function

right of recovery from the polluter according to the level of harmful individual polluting
substances (charges are set according to subjective determinations of the estimate of harmful
damages),

d) compensation for damages function

compensation for damages rises in conjunction with concrete activities which are polluting
the environment (charges are set on a level of the estimation of damages caused by the
polluting substances),

e) regional function

general negative impact on the specific region (charges are differentiated according to the
regions or areas which are affected by the pollution),

f) compensation function

compensation for environmental impacts on the specific region (charges are set as
compensation for impacts),

g) recycling function

creating economic conditions for the recycling or collection of waste or harmful substances
(charges ensure economic conditions for recycling),

h) rate of deterioration function

the rate of deterioration of environmental quality (charges are set on the basis of criteria
which contain the "rate of deterioration" of the environment),

i) right of recovery function

continuing nonfulfillment of laws and other regulations (charges are set in consideration of
determined standards),

j) profitable impact function

profitable impacts from the point of view of the enterprises or macroeconomics (charges are
set in accordance with and cannot exceed a pre-determined level of economic impact),

k) combination function

combination of some of the above mentioned principles,

l) zero function

simple implementation of the charges as a resource from polluters without an explanation of

their basic function (in this case it takes into account none of the above mentioned criteria).

3. Assessment of the Separate Functions of Charges

It is possible to write many comments assessing all the functions mentioned in Chapter II.2.
For all, except for point (a), there is an absence of measures motivating polluters to alter their
behavior. These charges fail to achieve the purpose that it will be more economically
advantageous to engage in environmentally-friendly behavior rather than to continue
polluting. A detailed analysis of all the variants requires much space. Limited space allows
only a few comments:

(a) motivating function

positive: economically motivates the polluters to improve

environmental behavior
negative: small imperfections are discussed in other papers
conclusion: we consider this the most efficient function and this is the
reason for its detailed description in the following section

(b) fiscal function

positive: ensures the funds for the support of determined targets

negative: the problem is determining the needed amount of financial
sources
conclusion: this function is possible to use only in developed economies
with a stable environment where it is fairly simple to partially
solve problems for which it is necessary to ensure a
determined level of financial sources

(c) harmful damage function

positive: solves the level of the harmful damages of the polluting

substances, and this harmful damage level can be used in the
differentiation of the charge rates
negative: the setting of charge rates is very subjective because objective
bases for the foundation of the charges don’t exist
conclusion: we can use this function only for a few pollutants which we
need to cover by charges and which are also impossible to
liquidate - we don’t use the "motivating" function, but
according to the level of harmful damage we can compare and
determine rates of charges for other pollutants

(d) compensation for damages function

positive: solves environmental impacts according to damages

negative: it is impossible to determine objectively the environmental
impact of all pollutants covered by charges
conclusion: in practice this is unacceptable because, aside from problems
in determining charge levels, there are also problems with the
possibility of applying the compensations of an individual
damaging pollutant between two subjects (it is impossible to
apply the compensation twice)

(e) regional function

positive: differentially solves environmental impacts according to the
character of the region which is affected by the pollution
negative: it is impossible to determine an objective base for the charges
conclusion: it is possible to apply only as a complementary function

(f) compensation function

positive: creates the possibility for the financial compensation of

determined environmental impacts
negative: it is impossible to determine an objective base for the charges
conclusion: it is possible to use only as a complementary function

(g) recycling function

positive: creates the economic conditions for financing the recycling or

deposit-refund system jointly with the liquidation of the
pollutant or product with a negative impact on the
environment
negative: it is possible to use only in the case of pollutants or wastes for
which we can ensure recycling or collection and liquidation
conclusion: we can use this function only for solving partial problems or
as a component of deposit-refund systems

(h) rate of deterioration function

positive: takes into consideration the level of environmental

deterioration
negative: is impossible to determine an objective base for the level of
charges
conclusion: we can use only as a complementary function

(i) right of recovery function

positive: takes into account the fulfillment or nonfulfillment of

determined criteria which is crucial for the level of application
of charges
negative: it is impossible to determine an objective base for the level of
charges
conclusion: we can use only as a complementary function

(j) limited profitable impact function

positive: it is the most acceptable function from the point of view of the
enterprises’ concerns (but to the detriment of the environment)
negative: there is no motivation in relation to the environment and the
determination of the profitable level is very debatable
conclusion: from our point of view these variables are unacceptable
because it only economically afflicts and motivates polluting
enterprises symbolically

(k) combination function

positive: this function accomplishes more functions together at the same

time
negative: it is not possible to determine the basic function of the charges
conclusion: in the basic form this isn’t acceptable in practice because it
isn’t possible to determine the basic function and principle of
the charges

(l) zero function

positive:negative: the charges are set quite subjectively

conclusions: is not acceptable in practice because the charges don’t fulfill concrete
functions

The basic functions of the charges should be unambiguously set because of the necessity for
calculating the charges’ level and relationships to other environmental policy instruments. As
the most efficient variable it is possible to consider function (a), and that is why the majority
of this chapter will contain its detailed analysis.

The subsequent functions of the charges are inferior from the standpoint of having an
inefficient impact on the polluters. Some functions are possible to use in an acceptable way as
supplementary functions. For example, the "harmful damages" function (c) is possible to use
to set the type level of pollutants which need to be covered by charges and at the same time it
is possible to set the level in accordance to the criterion of (a). Another example is the
"regional" function (e) which is possible to use for increasing the level of the charges.

The "fiscal" function (b) is specific because it is also included in all the other functions. The
other functions include fiscal income of charges only as a secondary effect, whereas the
concrete function (b) means priorities from the fiscal standpoint. The level and rates of
charges are reckoned and set so that a predetermined fiscal amount will be acquired.

4. Conclusions

The previous review reveals that from the perspective of economic motivation of the polluter
the most efficient variable is (a) - it means that charges are at a minimum the same or higher
than the operational costs of cleaning. This variable is set so that the specific polluting
enterprise is economically stimulated to change its behavior in accordance with environmental
concerns.
D. Description of Specific Applications of Emission
Charges
1. Water Pollution Charges

The duty to pay the water pollution charges is set for all enterprises which release waste into
surface water. The pollutants covered by charges include: biological oxygen demand,
undissolved substances, crude-oil substances, undissolved inorganic salts, apparent acidity or
apparent alkalinity.

The charge for water pollution is created from a basic charge and an additional charge. The
principle mentioned in Chapter II.2. is used for setting the basic charge. The rates are
equivalent to the level of the costs of removing the specific pollutant and the payment
balanced with the economic advantage of the enterprises which pollute the water.

The additional rate for water pollution charges depends upon the extent of the deterioration of
water quality in the water course. The specific rate is set as a percentage increase in the basic
charge in accordance with the concentration of the pollutants in the water course. For the
payment of the additional charge there are many limitations and exceptions - especially the
exemption from payment for special non-profit state enterprises, for enterprises with a water
treatment plant which fulfill the limits for pollution and for subjects which do not pay the
basic charges. The highest level of the additional rate has a ceiling which is 100 % of the
basic charge. If however the pollution is released into a river which is a drinking water course,
the maximum level is raised to 200 % of the basic charge. In the case of pollution from
municipal sewage the additional charge is only 20 % of the calculated amount. If polluters
construct a sewage treatment plant or other technology with a specified efficiency, they pay
only 50 % of the calculated additional rate.

For polluters which start construction of water pollution control measures or related
investments for reducing water pollution, a 60 % reduction of the calculated charge is possible
(it means so called charges credit).

The basic charge is a pre-tax expense. The additional rate is paid out of post-tax profits.

The administrative work of monitoring water quality and collecting charge revenues is carried
out by the "River Basin" ("Podniky povodí") which turns over all revenues from charges to
the State Environmental Fund.

It is possible to assess the current charge system on the following points (most of them are
solved in a prepared amendment of the charges’ law):

• The choice of pollutants covered by charges is not suitable (primarily a criticism from
technical experts).

Solution: Assess proposals for alteration of the pollutants covered and an

increase in their number.
• Charges for some pollutants are not at an exact level corresponding to an incentive
function (especially due to inflation)
Solution: Make the rates of the charges more precise so that they are at a
level of the operational costs for the cleaning of the pollutants.
• Current additional charges are not effective.

Solution: Assess the current function and method of the calculation of the
additional charges and propose alternatives.
• Low reduction of the charges (temporary charges credit).

Solution: Assess the level of reduction of charges and assess the proposal
for raising the current 60 % reduction to 80 or 90 %.
• Non-existence of decentralized charges.

Solution: Assess the possibility of decentralizing charges, above all in the

area of additional charges.
• Different methods for the collection of charges in comparison to charges in other
environmental areas.

Solution: Assess changing the present methods of selecting the charge -

especially the system and the institution (e.g. from the "River
Basin" - "Podniky Povodí" to the Czech Environment
Inspectorate).

2. Air Pollution Charges

The charges are paid by the operators of large, middle and small sources of pollution. The
charges are paid by the operators of all sources of pollution except by operators of mobile
sources and citizens which operate small sources of pollution with a heating power up to
50 kW., if this source is not regularly used for an enterprise.

Five basic pollutants are covered by the charges which have different set rates (solid
emissions, sulfur dioxide, nitrogen oxides, carbon monoxide, hydrocarbons). Furthermore,
about 80 other pollutants are covered by charges which for these purposes are divided into
3 groups in accordance to their impacts on the environment. Each group has different rates of
charges.

These basic rates can be raised an additional 50 % if the source of pollution does not comply
with the fixed emission limit. The sum of the charges for the separate pollutants creates the
total charge for the pollutions’ source.

The law provides for a phase in of the charge system. This means that the charges, with
possible additional rates are paid in practice at a reduced level. This reduction means that the
payment of charges is 30 % of the total amount in 1992 and 1993, 60 % in 1994 and 1995,
80 % in 1996 and 100 % in 1997. From 1997 on, polluters will pay the full level of charges
according to the law.

For small sources of pollution the charges are calculated according to different rates from the
law, based on the usage of fuel.
The law contains a positive stimulus for the polluters (large and medium sources) which have
started work on the reduction of pollution - a 40 % reduction in the charges (temporary
charges credit) for the duration of the realization of these measures. The polluters use these
financial resources for financing these measures. The polluter must transfer these resources to
the specific account from which it will finance the measures. If the polluter finishes the works
in accordance with set conditions, it is possible to make a decision regarding the exemption of
returning to the reduced charges’ total. In the case where the polluter does not fulfill the
conditions for the reduction, the polluter must pay the total reduced amount.

The authorities which monitor and make decisions regarding the charges are:

• large sources - Czech Environmental Inspectorate

• medium sources - local district authorities
• small sources - local town authorities

Until the end of 1992 the polluter paid these charges from its profits. In 1992 the concept of
charges was changed - the base rate means the balance of conditions between two subjects
and thus it was also necessary to change the aforementioned impact on the economic indices.
The law about income taxes contains the following change from January1,1991: the base rate
is considered as the usual expense for tax duties and the impact from its payment is
transferred in a set ratio to the state budget. This method is not used in the case of the
additional rates of charges which must be paid from the profits of the polluter.

The main area of air pollution charges is their fiscal effect - the revenue of financial sources.
In 1992 a new system of charges with a change in their use was introduced. The most
important change was the implementation of a 40 % reduction in the charges at the initiation
of activities aimed at reducing pollution. Thus, part of the financial sources from the charges’
revenue stays directly with the polluters. The second main part of the charges is collected in
sources of the State Environmental Fund and in the municipal sources in towns.

Some rates of charges are considerably smaller than those corresponding to the "incentive"
function - it means the costs for the measures of pollution reduction (e.g. the rates for SO2 in
relation to the cost for the reduction of SO2). In addition, the law contains the stepwise curve
for 5 years and not until 1997 will polluters pay the full level of charges.

At present we must consider the following as the basic defects of the air pollution charges:

• Of the more than 90 pollutants covered by charges, the majority are unable to be
efficiently reduced and it is not possible to efficiently measure many of them.

Solution: Re-evaluate the number of pollutants covered by charges with the aim of reducing
them to an efficient number. As a criterion for inclusion or exclusion it is possible to use the
efficient stimulation of polluters, technical conditions for the payments (measures, etc.),
administrative claims which are simple for the implementation of charges, etc.

• Problems with unambiguously determining the function of air pollution charges

because up to now the principle of the balance of economic conditions (incentive
function) was not accepted in all cases.

Solution: Confirm the "incentive" function of the charges in all basic

 environmental or economic documents (e.g. Environmental
Policy).
• Low rates of charges for some basic pollutants.

Solution: Raise rates of charges with the aim of making them comparable
to the costs of implementing pollution abatement technology.
• Long phase in period for charges.

Solution: Assess the possibility of speeding up the current implementation

schedule.
• Unsuitability of the function for setting additional rates of the charges when this part
of the charges are joined with the fulfillment of the administrative regulation
(nonfulfillment of the emission limit).

Solution: Re-evaluate the function and level of the additional rates of the
charges and simultaneously assess the possibilities of creating,
from the additional rates, a regional economic instrument.
• Insufficient reduction of the charges (temporary charges credit) at the beginning of the
realization of specific measures for pollution abatement.

Solution: Raising of the charges’ reduction from the current 40 % up to a level of 80 or 90 %.

• Minimal decentralization of the charges (presently only in the case of small pollution
sources).

Solution: Assess extending decentralization, especially for medium-size

sources and additional rates.

III. Comments on new Types of Economic

Instruments
A. Tradeable Permits
(Topics for discussion before their implementation based on the example of a country in
transition)

1. Basic Principles of Tradeable Permits

a) philosophy of tradeable permits

This instrument is based on the issuing of "permits" for polluting. In principle it represents a
different approach from regulations based on the "limits". These limits represent the highest
possible amount of pollution, but all pollution levels are considered as non-environmentally-
friendly and it is covered usually by the payment of special taxes or charges.
As opposed to other economic instruments, such as emission taxes or charges, tradeable
permits allow a certain amount of pollution without payment. The possibility for additional
pollution is only through payment (purchase).

b) the principle of tradeable permits

The first step is a decision about the number of permits. This is an administrative decision,
which can influence the subsequent steps and other principles of tradeable permits (trades,
prices, strength of the supply and demand, etc.). The total amount of permits is more
important than the possibility of trading them. Therefore, we count tradeable permits as an
economic instrument, but the basic principles are set by an administrative decision, which
influences to a great degree the economic side of this instrument.

c) reduction of tradeable permits in the following years

A similar decision as above concerns the reduction of the permits in the following years - it
may be very rapid or quite slow. This is also an administrative (or political) decision, which
can influence the subsequent steps, especially the scope of their trade, prices, etc.

2. Environmental Aspects

a) structure of the polluters

It is impossible to implement tradeable permits if the polluters are the most important
infrastructure producers, i.e. water treatment plants dealing with pollution from
municipalities, heating and energy power plants, etc. It would be inappropriate if it was very
expensive to pay for the permits or if they don’t have the finances to pay for them.

b) increasing pollution for special cases

Tradeable permits prepare conditions for the initiation of activities by new polluters or raise
the present pollution level of polluters, however they account for this possibility, because they
also have a demand component. It is a question as to what level of purchase we can allow. In
contrast a regulation based on limits, in principle, doesn’t allow an increase in pollution.

c) rich (foreign) polluters

The above point concerning the activities of new polluters is especially valid in the case of the
existence of large foreign capital, which creates an imbalanced condition as they can buy up
most of the free permits on the market.

d) number of pollutants covered by tradeable permits

It is only possible to issue tradeable permits for a specific pollutant, such as CO. If we need to
solve more problems and pollutants, we must issue more kinds of tradeable permits and for
each we need a specific system. It is, however, impossible to solve all the problems of air
pollution, water pollution, etc. using only tradeable permits.

3. Economic Aspects
a) motivational (incentive) function of tradeable permits

Enterprises should be motivated to reduce pollution. In the economic branch it means that
payments or other additional expenses must be higher than the expenses incurred by reducing
the pollution (abatement costs). In the case of tradeable permits the enterprises must spend
additional (environmental) expenses in accordance with their permits, without direct
economic motivation - this is only an administrative pressure. They can also pay for
additional measures which reduce pollution more than the permits demand and it is this extra
pollution reduction which is possible to trade on the market. But during these expenditures it
is not possible to know the market prices of the permits after reducing the pollution, i.e. after
a few years. In this event the economic motivation is very debatable and must be assessed and
judged case by case.

b) relation to other economic instruments

We must assess the relation of tradeable permits to other instruments and possible joint
existence - for example tradeable permits and emission charges or a financial form of
compensation for damages done (it may also be possible to pay compensation even for
permitted pollution - see point 1.a), etc.).

c) necessity of funding the measures

The polluters need money to finance the reduction of pollution while carrying out these
measures. They must ask for loans from the banks etc. After finalizing the measures and
reducing the pollution they can receive the money (if the level of pollution is smaller than
their permits and if they sell this surplus of permits). But this can only be accomplished after
the measures have been put into effect and certainly not in advance in any unknown amount,
because the permits will be subject to trade in the future.

d) the level of the flow of money

As opposed to other economic instruments (taxes or charges) in the case of tradeable permits,
the money flows in a horizontal level among the polluters. This system doesn’t contain a
vertical flow of money (from polluters to special funds or the state budget) and doesn’t create
special sources of money at the governmental level for the financial support of specific
measures.

e) necessity of funding the system of tradeable permits

The preparation of a new system of tradeable permits requires financial funding from central
(government) sources. Also the operation of this system requires financial funding (which
could be covered only partially from the implementation of special fees for each trade).

f) implementation of tradeable permits in a market economy

It is a necessity of tradeable permits that they be implemented only in an open and developed
market economy system (it means for example with a developed private sector, free
competition, full deregulation of prices, etc.).

4. Legislation and Organization

a) present regulations

It is necessary to implement tradeable permits in accordance with the present regulations. This
means with the present environmental policy, declared targets and steps, etc. Tradeable
permits are a brand new instrument which should not endanger the adopted regulations (based
for example on the meeting of special limits from all polluters).

b) the legislation involving tradeable permits

It is necessary to prepare special laws or other regulations for the implementation of tradeable
permits.

c) the organization of tradeable permits in force

It is necessary to prepare both a special framework and institutions for the management of
tradeable permits (i.e. for the preparation of the system, for the regulation of the permits’
issue, for the trading of the permits, etc.).

d) monitoring of the pollution

The monitoring of pollution in the case of the implementation of tradeable permits is more
important than in the case of other instruments such as taxes or charges. The taxes/charges are
based on different functions. For example the fiscal function is focused on the total amount of
fiscal revenue, the incentive/motivating function is based on average costs and it allows small
differences. On the other side the system of tradeable permits is based on meeting
(nonviolation) the specific permitted amount of pollution. In this case it is necessary to know
precisely the level of pollution which is the base of this instrument and could be traded. This
monitoring requires special measures by both the polluter and the state authorities or special
institutions.

e) penalties or other fines for non-permitted pollution

It is necessary to prepare not only a system of pollution monitoring and checking, but also a
system of fines for polluters which have exceeded the permitable levels (this means penalties,
possibilities for the cessation of production, etc.). In the case of penalties it is also necessary
to solve problems such as their level (this level must be both effective and adequate to prevent
the exceedence of permitted pollution). The problem of permanently exceeding the limits
must be solved, too. Without this system of fines, tradeable permits are only a symbolic
instrument.

f) reduction of possible speculation with tradeable permits

We must take into account the possible speculation with tradeable permits, but this
speculation can not have the same character as speculation on the stock exchange with shares.
Here it is possible to recognize two basic types: speculation from the polluters (for example at
the end of a specific period) and from the other subjects with access to the market (not all
their speculation could have environmentally-friendly aims). It is therefore necessary to
reduce all kinds of possible speculation.

g) the kind of tradeable permits

The system of tradeable permits has many kinds of options and modifications. If we discuss
tradeable permits, it is better to have a discussion about definite kinds of possible application
for a specific pollutant, in a specific territory, for specific polluters, by the specific issue of
permits, etc. Then it is necessary to asses all the possible kinds of tradeable permits and
prepare the implementation of the best one. These kinds could be, for example, in different:

• areas (air, water, waste, land, etc.),

• territories (one country, small or large regions, etc.),
• types of polluters (all polluters, special branches, infrastructure polluters, etc.)
• levels for the first permits (in accordance with present pollution levels, smaller than
present pollution),
• types of permit issue (free issuing, paying either the market or a nominal price),
• kinds of reduction on the number of permits issued the next time (slowly or quickly),
• regulations concerning the system of trading (specific types of restriction, etc.)
• types of markets with these permits in relation to their reduction of pollution.

B. Joint Implementation
(Opinions about some aspects especially from the point of view of a transition/developing
country)

1. Brief Description of Joint Implementation

Joint implementation is a specific approach to the reduction of greenhouse gas emissions.

This solution is based on international cooperation and financial assistance. The polluters
from developed countries could solve the reduction of pollution by investing in measures in
developing countries. This type of joint implementation is still based on the voluntary
activities from the side of the polluters.

For the future there exists an idea on the specific conditions in the investors domestic country.
New regulation will contain exemptions from having to meet new limits (standards) for
pollution if polluters invest in developing countries for specific measures and these measures
will reduce the same or a higher amount of pollution than is the polluters domestic obligation.

This type of economic instrument is a more effective approach to the solution of global
warming. The basis for this type of international cooperation was established in Article 4.2 of
the United Nations Framework Convention on Climate Change and was discussed at the Earth
Summit in Rio de Janeiro in June 1992.

2. Side of Developed Countries

In the developed countries there usually exists a program for the control of the emission of
greenhouse gases. This program is based especially on command and control regulation, it
means there are specific limits for the emission of specific pollutants (particularly CO2).
Economic incentives such as specific taxes or charges are used on a very small scale or not at
all. In the United States the possibility exists to trade with these limits.

Joint Implementation exists only on a voluntary basis. The investors can only obtain "credits"
for the possible violation of limits in the future.
3. Side of Developing Countries/Countries in Transition

The solution of environmental problems, including air pollution problems, are very different.
These differences arise above all from their environmental problems, economic problems,
approaches to the solution, etc.

One of the main problems are the financial resources for the solution. These countries
welcome any kind of assistance from abroad, which can help with their environmental
situation. In these cases they only follow the donators’ conditions and don’t make big
differences between these sources. Also financial assistance in the framework of Joint
Implementation is mostly considered as "foreign sources" for environmental protection
without further specification.

Management of all these "foreign sources" is usually administered at the governmental level.

4. Developing Cooperation in the Framework of Joint Implementation

The idea of Joint Implementation creates a larger opportunity for financial assistance in the
side of developed countries. Previous financial assistance only represents voluntary activities
from the side of industry in the developed countries, without direct advantages for it. Fully
developed Joint Implementation represents specific advantages for the industry in relation to
previous general assistance, because at the same time as giving financial assistance to
developing countries it can save financial resources to be spent on pollution reduction in the
domestic country.

From the side of the investor the amount of financial resources for the solution in the resident
country is, in general, the same (or similar) as its assistance to the host country. This means it
can decide upon the localization of its sources between two similar options.

At present we prefer the idea of Joint Implementation, it means giving financial assistance to
a developing country. The reason for this is, above all, that it is a cheaper solution for the
developing world or higher reduction there for the same money. The question which arises is,
how can we support the ideas of Joint Implementation and especially the investors in the
developed countries.

The developed country will provide investors with exemptions for meeting their targets
(limits) in the future. For this approach it is necessary to prepare special regulation and
systems of administration. This part seems to be the basic and the main step for the solution.
The next steps must be provided from the developing countries side.

5. The Options for Higher Usage of Joint Implementation on the Side

of Developing Countries

The investments in developing countries create some advantages for the investors, such as:

• creating contacts with the developing country and its representatives,

• publicity from the nontraditional approach,
• cheaper solution (in relation to reducing to the same level of pollution in the domestic
country),
• the promise of "credits" for future limits in the domestic country.
These advantages are more formal and not directly economic. From this point of view we can
assess the kinds of further advantages for the foreign investors, especially in the field of the
economy.

In general it is very difficult to apply different approaches to foreigner investors, for example
in the case of taxation, such as tax exemptions or tax reduction. These approaches will be
refused by governments in relatively stable economic conditions and in this field there exist
very little chances of possible activities. Therefore it is necessary to discuss and assess other
and not so usual possibilities.

Privatization is one of the main opportunities for the solution of this problem in transition
countries. The government can apply many kinds of nontraditional approaches and
advantages, during this process, for foreign investors in the event of their financial assistance.
The specific possibilities will depend on the kinds of privatization in each country.

Novel and very different possibilities can be found at the regional level, i.e. at the level of
district offices and municipal authorities. They have many jurisdictions, they can decide about
many things and problems in their regions, they are owners of property, etc. These authorities
can offer many advantages for investors which can improve their environment.

For the solution of these problems we need to assess the mutual conditions between foreign
investors and the host country. We must know, above all, which condition will these investors
prefer. They are mostly big polluters with a specific position in their country and with a
specific production such as energy, etc. They will probably prefer specific options of
advantages, such as access to a market, participation in the property or in the profit,
developing specific activities in the host country, etc.

6. Results

It is necessary to prepare the following steps for the development of Joint Implementation:

A. In the developed countries assessment of the:

• possible financial sources for the investments abroad,

• specification of the possible investors,
• level of the financial sources,
• conditions of the investors (expected advantages),
• conditions in the domestic country.

B. In the developing country/country in transition preparing

• general conditions for this type of assistance,

• direct economic advantages for the investors,
• indirect advantages for the investors,
• specific approaches to this problem during privatization,
• advantages at the non-governmental level.

Developing Joint Implementation is possible especially by creating specific conditions for the
investors from developed countries. This problem must be solved by both sides together, it
means not only the possible advantages for investors in the host country, but also the expected
advantages from the side of potential foreign investors. Then we can compare both sides and
we can use the best options for our solution.

All these possibilities must be resolved, prepared and implemented as a system, which is
uniform with other conditions and instruments in each country.

IV. Approaches to Specific Problems

A. Sustainable Development of the Private Sector
and its Relationship to the Economy (Based on the
Example of the Czech Republic)
1. Introduction

This problem concerns some of the economic aspects of the behavior of the private sector
(enterprises, firms, corporations) to sustainable development. This economic aspect should be
considered as very important, because all activities and changes pass through some economic
conditions and we must take them into account.

For our problem we need to discuss some basic points, specifically:

• what we mean by sustainable development behavior and what it means in relation to

the private sector in general and in specific cases,
• how private sector behavior can be influenced or how it can modify its behavior itself,
• which economic conditions exist in the private sector and how these economic
conditions relate to it,
• what are the expected reactions of the private sector.

Sustainable development approaches in the private sector must be considered in two separate
areas:

a) All agents exist under the same conditions, this however is the more theoretical example.

b) All agents exist under different conditions in the sphere of:

• the economy - both the economic conditions in their area (state, region) and their own
economic conditions,
• production process - including products, applicable technology, etc.,
• relation to the environment such as pollution and other types of impacts on their
neighbors (it can be different according to the location of the agent, etc.).

In this paper we skip most of these problems or we will simplify them and we will mention
only some economic aspects of the economic relationships.

2. Possible Options for Relationships

There are three basic relationships between the sustainable development of the private sector
and the environment:
1. the private sector must meet basic environmental regulations such as acts, limits for
pollution, etc.,

2. the private sector could be influenced especially through incentive instruments,

3. the private sector can develop sustainable (environmental-friendly) behavior itself.

In practice all of these options don’t exist separately, but in mutual combination. For example
in the Czech Republic:

• the legal regulation is developed,

• economic instruments are partially developed and they play a supplementary role,
• environmentally-friendly behavior of the private sector is in the initial stages.

All these points have differing relationships to the economy and we must consider them
separately.

2.1. Basic Environmental Regulation

These regulations are set by either: the Parliament, the Government, the Ministry of the
Environment or other authorities. In this case, the private sector must adhere to these types of
regulation at all events. The regulation is in the form of:

• basic norms and standards for behavior in general, or

• specific norms of behavior such as limits for pollution.

This part represents the basic environmental regulation of the country or region and this is the
reason for its importance. This part must also set other basic environmental relations such as
the responsibility to the environment, the institutional base, etc. It is the responsibility of the
Parliament or other authorities to achieve these goals through the creation of inspections,
agencies and penalties.

The regulations have an extensive economic impact on the private sector. The regulations are,
generally, strict and leave the private sector with a small amount of options for their own
solutions.

The relationship to the economy has the following specific elements:

a) a direct economic impact on the private sector which must adhere to the regulation, and

b) global economic impacts on the macroeconomy with:

• an indirect relationship to the private sector (the possibility of related problems from
the macroeconomy to the private sector), and
• the relationship on citizens, the social sphere, etc. (for example the rise in prices as a
result of industries adhering to the regulation).

The author of the act or regulation must evaluate the economic impact. He must consider
various aspects such as: global economic impact, cost benefit analysis, etc. This assessment is
very important because the regulation must be followed.
2.2. Incentive Regulation for Influencing the Behavior of the Private Sector

In this case the regulation is also set by either: the Parliament, the Government, the Ministry
of the Environment or other authorities. In contrast to the first case, this regulation contains
only basic incentive instruments such as: taxes, tax allowances, pollution charges or fees,
grants or soft loans. These instruments can influence the private sector if they are used at a
level which corresponds to the problems and actual situation.

The basic difference between the first and second option is that in the second option the
private sector has the possibility of choosing solutions which are in accordance to their
economic or other priorities. The responsibility of achieving the goals is divided between:

• the Parliament or other authorities (the responsibility for the effectiveness of the
instruments), and
• the private sector (realization of the measures).

Incentive regulation has a negative and positive side. The negative side means, generally, that
the private sector must pay. For example, it must pay for its pollution, but it can avoid or
reduce this payment, if it pollutes less. In the case of the positive side, the private sector has
the chance to receive the specific economic advantages for environmentally-friendly behavior.
In practice, the positive side exists, but to a lesser extent.

Both these possibilities create more opportunity for decisions at the level of the private sector
than in the first option and the private sector has the possibility to choose the most effective
solution.

2.3. The Private Sector Develops its own Sustainable Behavior

The last option, self regulation by the private sector, is set by the owners or management of
the private sector. In this case, the private sector is soley responsible for sustainability. This
option does not guarantee that the main targets in the environmental policy will be achieved.
This is the main reason why this option can not be implemented independently (not only in
the Czech Republic, but in countries all over the world).

In practice this option has the following limitations: the private sector must adhere to the first
option (legal framework), and must work within the second option (incentive instruments).
The question then arises, "how much space will remain for the private sector’s decision
making and strategies which relate to the environment?". This is the first basic problem.

The second problem is the economic aspects of sustainable development behavior. In the real
conditions of the Czech Republic, the private sector is mainly concerned with the economic
advantages of this behavior. Environmentally-friendly behavior would not be efficient in most
cases, and the private sector would simply refuse to do more.

As an example, we can use the additional costs for cleaning technology. If these costs aren’t
required by the regulation or if there are no economic advantages in the incentive instruments,
the enterprises will not expend these costs. These costs either create higher prices for the
products and a disadvantage in the market or a lower level of profit.
Practical experience shows that environmentally friendly behavior is not advantageous in
difficult market conditions and free competition. Therefore, the private sector will assess its
activities for all of these proposals from the standpoint of the economic aspects above all. The
enterprises will refuse all proposals with high economic impacts and with the risk of a loss.

Since the third option is the most difficult, we can examine its result from an economic
standpoint. Environmentally-friendly behavior based on the sustainable development of the
private sector is possible only in relation to:

• the basic environmental regulation,

• economic conditions (both in the country or region and in the real enterprise),
• economic advantages or minimization of the economic risks,
• other aspects of the production process.

These results means that the private sector can use the principles of its own sustainability
especially in the following cases:

a) if general environmental regulations allow flexibility for the economy and technology in
the private sector, and/or

b) if the approach to sustainable behavior includes all aspects of the production process,
because this is the most economically efficient approach.

3. Conclusions

If we consider the three main options of the approaches to sustainable (environmentally-

friendly) behavior and their relationship to the economy, we can see that:

• The first option, legal and administrative, is set by the authorities, therefore the private
sector has only a small space for their own initiatives. The economic impact is large
and it is set beforehand during the preparation of the regulation.
• The second option, incentive instruments, is also set by the authorities, but the space
for the private sector is higher. The economic impact could be more flexible and
include active participation from the private sector.
• The third option, one’s own activities, depends only on the activities of the private
sector. It must follow the basic legal regulation and work with incentive instruments.
The rest of the activities it will consider, above all, from the economic aspects and
advantages.

In the field of the economic aspects of the practical application of private sector sustainability
we need to solve, above all:

• An adequate proportion between all three options of the possible relationships between
the private sector and the environment. They can vary among countries according to
their conditions (environmental, economic, etc.).
• Improvements in the economic conditions of the private sector, especially the
problems associated with the economic disadvantages of sustainable behavior.
B. What Policy Should be Implemented with Respect
to Controlling Air Pollution Emissions from Motor
Vehicles in the Czech Republic
1. General Problems of Air Pollution from Motor Vehicles

The combustion of gasoline or diesel oil gives rise to more than 165 kinds of harmful
(injurious) and poisonous substances, which pollute in the form of exhaust gases in the air.
Many of these substances are very dangerous, because:

• they have a direct impact on the health of the citizens,

• they have negative influence of the food chain,
• of the effects of acid rain,
• of the direct damages to forests, and
• other kinds of damages.

2. The Specific Problems of Air Pollution from Motor Vehicles in the

Czech Republic

The Czech Republic is a typical country with declining urban air quality levels. The situation
is worse than in developed countries and the effects are delayed for about 5-10 years. The
share of the main pollutants by the citizens and area are provided in the following table:

solid SO2 NOx CO CxHy

1980 - kg/cap.1) 123 208 71 87 13
1992 - kg/cap.1) 48 147 67 101 20
1980 - t/km2 2) 16 27 9 11 2
1992 - t/km2 2) 8 24 9 11 3

1)
kg/cap = kilogram per capita
2)
t/km2 = ton per square kilometer

The main pollution arises from the combustion of bad quality coal and from motor vehicles.
They cause most of the problems especially in the cities’ centers, residential areas and
protected natural areas. The contribution of motor vehicles’ pollution can be seen in the
following table:

Nox CO CxHy
1980 total 731 895 135
1980 mobile 39 375 18
% m/t 5,3 41,9 13,3
1992 total 698 1045 205
1992 mobile 211 210 73
% m/t 30,2 20,1 35,6

The main reasons for these problems above are:

• the increasing number of cars,

• bad technical conditions of the cars,
• small quantities of nonleaded gasoline,
• big interstate transport using trucks,
• small number of road systems through or around the cities and for long-distance
transport.

3. The Present Regulation in the Field of Motor Vehicles

3.1. Basic Administrative Regulation

The basic rules are set by the General Environmental Act and The Act on the Protection of the
Air Against Pollutants (The Clean Air Act). These regulations set, above all, the basic
principles of behavior and basic principles of regulation, such as:

• the rights and obligations of citizens to protect the atmosphere from polluting
substances, and to restrict the causes and mitigating consequences of air emissions,
• types of pollutants (more then 80), definition of pollution sources (small, medium,
large, and mobile), and pollution limits (these specific limits are given in further
regulations and measures),
• basic enforcement criteria and penalties for polluting the atmosphere.

The specific limits for mobile sources are set by other regulations. Newly produced cars must
meet EEC emission limits for pollution. All cars in operation must follow a strict inspection
of emission limits, introducing regular obligatory engine tuning for all motor vehicles.

3.2. Economic Regulation

The economic instruments commonly used to regulate mobile sources of pollution are the tax
system (the basic tax system is comparable to the system used in the European Union). In the
area of motor vehicles we can specify:

• Road tax, which is imposed on business vehicles registered in the Czech Republic
(private vehicles are exempted from the payment) in accordance to their size. This tax
contains other exemptions from paying for:
• vehicles with efficient catalyzers,
• electrically powered vehicles,
• vehicles regularly used for public transportation in the urban transportation system,
• combined transportation.
 • Some other measures in the tax system which are formulated, above all, as tax
allowances:
• 5 % of the value added tax (standard rate is 22 %) for the purchase of:
• automobile catalyzers,
• equipment with electric motors, passenger cars and other motor vehicles constructed
primarily for the transportation of passengers, including passenger vans and racing
cars,
• producers of electromobiles are exempt from income tax,
• the consumer tax is set at different rates according to the types of:
• automobile gasoline (level of lead),
• automobile oil.
• Express highway fees - as annual payment for all vehicles which use the express
highways (the level of fee is in accordance to the vehicle type and weight).
• Financial support of some measures, such as:
• the maintenance of the roads with funding from the "road fund" which is created from
the road tax,
• support for the building of the new highway network from the revenue of the express
highway fees,
• support of specific measures from the State Environmental Fund (the sources are from
the pollution charges).

4. Targets of the Present Environmental Policy for Motor Vehicles

The reduction of emissions from mobile sources of pollution, caused mainly by automobile
traffic, will issue from a combination of the following basic approaches:

• The reduction of emissions from automobiles by the application of technical measures.

• The reorganization of the traffic route system with respect to atmospheric protection.
• The reduction of excess traffic in the centers of towns and recreational areas through
technical and organizational measures.
• The giving of preferential treatment to mass transport ahead of individual means of
transport.
• The increase of combined freight traffic.

While technical and economic solutions are being implemented, radical steps leading to a
faster renewal of the automobile fleet are also necessary.

Heavy trucks and buses should be equipped with separators for soot. In the next stage, we will
concentrate on the construction of an engine that reduces the emission of NOx. A gradually
stricter emission limit is prepared for mobile vehicles using compression ignition engines.

A significant step towards reducing atmospheric pollution caused by buses in towns, is the re-
orientation of mass transportation systems towards electric traction. In towns where trolley
buses stopped being used years ago, modern trolley buses will probably be used again.

5. The Reasons for the New Approaches in Environmental Policy

We need to solve the problem of air pollution from motor vehicles through environmental
policy because this problem:
 • is very important and the damages are extensive,
• concerns not only specific areas (many of the problems are global),
• has many factors which we need to incorporate into the solution,
• concerns many other fields such as transportation,
• demands a complex solution.

Although the present environmental policy has some approaches for the solution of this
problem, we need to increase the effectiveness of environmental policy in the area of mobile
sources. We need above all:

• to assess the present problems from all possible aspects,

• to clarify the basic targets,
• to determine the optimal steps and the instruments for achieving the goals.

6. Attributes which Can Influence the Solution

We can establish the following attributes, which can influence the reduction of pollution from
motor vehicles:

a) The number of the motor vehicles.

b) The technical standard (level) of motor vehicles, such as the type of engine, combustion
system, etc.

c) The environmental standards of the automobile fuel.

d) The age of the motor vehicles.

e) The type of driving, such as:

• speed (higher speed = more emissions),

• continuity (less continuity = more emissions),
• load of the vehicle (higher load = more emissions),
• gear level (first level = no efficiency),
• choke (ride with choke = more emissions),
• engine running while standing,
• pressure in the tyres (bad pressure = more emissions).

f) The level of demand for motor vehicle transportation including:

• total level of demand,

• relations with other types of transport (railways, public transport, combined transport,
etc.),
• efficient use of transportation capacity,
• the coordination of other aspects, such as working hours, etc.

g) The types and extent of the roads, especially the express highways.

h) Management of transport, such as:

 • condition for continuous driving,
• effective use of traffic lights,
• prohibition of trucks in specific parts (in the residential areas, protected natural areas,
etc.)
• conditions for the reorganization of the traffic route system in the centers of towns and
recreational areas.

i) Services and repairs of motor vehicles.

j) Regular inspection of motor vehicles and especially their emissions.

k) Pumping of the gasoline fuels at service station.

l) Alternative fuels for vehicles.

7. Instruments for the Solution

In this part a list of environmental policy instruments, used by the OECD, is provided:

A. Administrative Instruments

a) order (regulation, command)

b) limit

c) technical and hygienic norms

B. Economic Instruments

a) charges

•
o aa) emissions

ab) noise

ac) user

ad) product

ae) administrative

b) support

•
o ba) grants

bb) soft loans

bc) tax measures - allowances

 




 - differentations

c) refund systems

d) creation of markets with environmental estates

•
o da) tradeable permits

db) market intervention

dc) environmental insurance

e) legal financial incentive - penalties

C. Voluntary actions, information.

In the case of economic instruments we can use a more detailed list of the possible
implementation of these instruments in the Czech Republic (most of them are, at least
partially, in force):

A. Taxes and Charges:

1. Value added tax from cars

2. Value added tax from spare parts

3. Value added tax from fuels and oils (one or more rates)

4. Consumption taxes from cars

5. Consumption taxes from fuels and oils

6. Taxes from the operation of motor vehicles

7. Road taxes

8. Custom duties or import sur charge

9. Charge for the registration of the car

10. Charge for the issue of the license plate for the car
11. Charge for the technical inspection

12. Charge for the using of the route/bridge/tunnel (Toll)

13. Charge for access to the area

14. Charge for parking

B. Tax Allowances and Differentiation

1. Value added tax - reduction for specific products and services

2. Consumption tax - reduction for special types of fuel

3. Income tax - reduction in the case of using business cars with less pollution

4. Road tax - without payments in some cases

•
o 5. Tax differentiation - especially consumption tax for different types of fuel
(leaded versus unleaded)

C. Financial Incentives

1. Financial incentives for the purchase and/or installation of a catalyzor

2. Financial incentives for the purchase of a motor vehicle with a catalyzor

3. Subsidies for the construction of selected roads

4. Direct support of public transport

5. Grants for the research and development of alternative mobile sources

6. Subsidies for tickets in public transport

7. Subsidies for selected operators of environmentally-friendly motor vehicles

D. Deposit Refund Systems

1. Deposits for the scrapping of old cars

E. Market Creation

1. Obligatory insurance

2. Tradeable permits

F. Legal Financial Incentive (enforcement)

1. Penalties for operation without inspection

2. Penalties for excessive pollution

3. Penalties for exceeding the speed limit

4. Penalties for illicit parking

5. Penalties for illicit access

8. Steps for the Solution

The solution must be based on gradual steps, which we can describe as follows:

a) decisions about the targets

Present targets in environmental policy are very general (see Chapter 4.). We need to know
more detailed information about the future level of pollution, different approaches in specific
areas, etc.

b) decisions about the measures for achieving the targets

We can use many possible measures for the reduction of pollution. The list of possible
measures can be seen in Chapter 6. The best solution for the Czech Republic must be based
on a combination of most of them.

c) decisions about the priorities and relations among the measures

In this part we need to use some of the criteria for the best solution (see Chapter 9.). These
decisions are mostly simplified and any detailed assessment of this part is usually substituted
by political decisions.

d) decisions about the instruments for achieving the targets

If we know the measures, we can assess the possible achievement of targets with the
application of some kinds of instruments. We can use many types of these instruments
separately or in mutual combination. The list of potential instruments is described in more
detail in Chapter 7. The present policy prefers administrative instruments.

e) evaluation of all possible limits and barriers which could be influenced by the solution

Here we must take into account all aspects which represent the limits (barriers) to the
solution. Some of them are described in Chapter 10.

f) assessment of the expected impacts and efficiency from the solution (application of the
instruments)

This part is very important, but most of the time it is overlooked. We need to know the
expected economic impacts (macroeconomic, microeconomic and social) for the preparation,
discussion and implementation of new measures and for their acceptability and feasibility.
We must also know the efficiency of the measures and guarantee the achievement of the
goals.

g) preparation and implementation of the instruments

This part is the sphere of state administration. Most of the proposals with solutions must be
passed by parliament and law (especially duties for industry and citizens). For the preparation
expert groups must be created - especially from the technical, legal, economic and practical
sphere (i.e. inspection).

h) continuous evaluation of the efficiency with a contingency for modification of the

former steps

We need to know information about the efficiency of our measures and we also need to
modify some previous measures.

9. Criteria for the Selection

We must decide about the priorities and relations between the measures for achieving the
goals of reducing emissions from motor vehicles. Here we need to use some of the criteria
such as cost-benefit analysis, cost-effectiveness analysis, etc.

All these results must be compared with the effects of the solution. It means, the less costly
measures are, on the whole, not the main measures for achieving the targets.

We must also solve all types of acceptability and feasibility of our solution. These feasibilities
are above all:

• political (the general possibility to implement specific measures, form of their

announcement and presentation, etc.),
• economic (impact on the macroeconomy, microeconomy, state budget, etc.),
• social (impact on the citizens),
• administrative (possible declaration, inspection, etc.).

10. Specific Approaches to the Solution in the Czech Republic

The solution for controlling air pollution emissions from motor vehicles in the Czech
Republic must take into account these problems:

- environmental problems as the priority for the solution

The environment and its problems are at a low level in public opinion now (five years ago the
environment was the 3rd priority, now it is about 12th). People have many other problems (such
as social, employment, criminal) and their interest in other priorities reflects the lesser
importance for the solution of the environment for the state authorities. This problem
concerns not only the solution of emissions from motor vehicles, but also other environmental
problems.

- environmental priorities
The emissions from motor vehicles are only one of the big problems of the environment in the
Czech Republic. It means, that the priorities for the importance, solution, funding (support),
etc. could be in other areas.

- relation to other spheres

The solution of emissions from motor vehicles is very difficult, because most of the options
for this solution concern many other spheres, such as industry, transportation, foreign trade,
infrastructure, municipalities and citizens. All these spheres have their own problems and
environmental problems must be solved in relation to them.

- location of the Czech Republic

The location of the Czech Republic concerns two basic problems for the solution:

• as a country in the middle of Europe is it ideal for the transport of products and it is a
problem to reduce or limit these types of activities,
• the border with "rich" western countries (Germany, Austria) results in the fact that
many of the economic approaches will motivate only "domestic" vehicles,

- financial support of measures

The state budget refuses to give financial support to the industrial and business sphere and
reduce financial support to other spheres. It means, now there is a small chance to get special
kinds of grants, soft loans, etc. for funding new measures for the reduction of emissions from
motor vehicles.

- social impact

Transition of the economy causes many new social impacts on citizens. The possible social
impact from the solution of emissions from motor vehicles will be considered also from this
standpoint and measures with higher impacts will be refused.

ATTACHMENT
Program of Economic Instruments for Pollution Control and Use of Natural Resources
in the Czech Republic

(The Conception of Economic Tools in the Care of the Environment in the Czech
Republic)

Introduction
Economic tools used in the care of the environment are some of the instruments of the state’s
environmental policy that serve to enforce the concern of environmental protection. The
importance of these tools increases step-wise in the period of transition to a market economy,
and these tools are essentially irreplaceable. These tools, in contradistinction to prescriptive
and administrative tools, function systematically and objectively for the welfare of the
environment. Without an understanding of the function, position and importance of these
economic tools, there can be no possibility of effectiveness and efficiency in ensuring the
objectives of the environmental policy.

A. Concrete Economic Tools in the Areas of

Pollution of the Environment and the Utilization of
Natural Resources
A.1. Air Pollution Charges

Charges economically afflict and so motivate air polluters to take measures which ensure
pollution reduction. Charges also remove economic advantages from the subjects who
generate air pollution, and thus presents one way of including in the production costs and
prices of products the outer (external) negative impacts of pollution. Another function of the
charges is to provide fiscal income and to enable financial support of actions and measures
which improve cleanliness. In 1992 these charges added approximately 800 million crowns to
the resources of the State Environmental Fund.

The charges are set forth in law No. 389/91 Sb., on the State Administration of Air Protection
and the Charges for Its Pollution. Since the law has been implemented, studies have verified
the effect of the charges. They acknowledge that some levels of charges are low and do not
correspond to the operational costs of environmentally-friendly technology, especially the
charges for SO2. Consequently, in order for the charges to fulfill their purpose and to
stimulate the implementation of desirable measures, it will be necessary to re-evaluate the
current level of charges. If the current level of charges continues, the air polluters will not
involve themselves in air protection. In the end, the industries with environmentally-friendly
technology will have higher operational costs and will be at an economic disadvantage.

In the future it will be necessary to:

• ensure the continuation of studies on the function of the charges and their impact on
air polluters,
• to develop the appropriate bases and proposals for modification of the contemporary
law on air charges,
• prepare an amendment of law No. 389/1991 Sb. by:

a. preparing new, higher rates in the schedule of charges for air pollution,
b. re-evaluating the number of pollutants which the charges cover, reducing the list of
pollutants from the present 90,
c. making a decision among the possibilities for a specific approach to the economic
stimulation of the big sources of air pollution in the power supply branch,
d. assessing the current method of determining the charges on the small sources of air
pollution, and determining whether the charges should be a single sum across the
board,
e. assessing the function and level of additional charges over the basic charges, (today
the additional charge is 50 % of the basic charge, and additional charges are incurred
if the limit given an enterprise is exceeded), and assessing the possibility of including
in the regional offices’ authority decisions regarding the amounts of additional charges
in individual cases,
 f. assessing the serviceability, and especially the level, of the 40 % delay (deduction)
from the charge for air pollution upon the beginning of the construction of cleaning
technology,
g. evaluating the administrative burden of collecting the charges which are presently
collected by the Czech Environmental Inspection Agency (the system of collection is
different in comparison with other environmental areas),
h. making a decision regarding the possibility of further decentralization of certain
charges (charges for medium sources of air pollution, additional charges, etc.),

• propose and decide on methods of economic stimulation regarding family and

recreational housing, and mobile sources of air pollution, which are not covered by the
current charges for air pollution.

A.2. Waste - Water Charges

In the past, the legislature drafted the charges so that they corresponded to the costs which are
necessary for the removal of the pertinent polluting matter. Structured in this way, the charges
stimulate water polluters to construct technology for cleaning water (waste-water treatment
plants), and at the same time also create well-balanced economic conditions between subjects
with waste water treatment plants and those without plants. A second function of the charges
is fiscal income which is turned over to the State Fund of the Environment and totaled
approximately 1000 million crowns in 1992.

In 1992, ČNR (Czech National Council) law No. 281/1992 Sb. doubled the charges for
discharge of waste water, and modified the rates to roughly the level of the operational costs
necessary to treat waste-water. The basic function of the rates, to stimulate construction
technologies for cleaning water and waste water treatment plants, could be effective in
principle. Nevertheless, it will not be difficult to carry out particular modifications which
would solve some existing problems connected with the operation of this economic tool.
These smaller modifications will be taken up again in the preparation of the amendment to the
Water Law.

In the future it will be necessary to prepare an amendment to government statute

No. 35/1979 Sb. on the Charges in the Water Economy Branch. An independent law will
regulate the charges for discharge of waste-water (until this time, government statutes
regulated the charges). In light of current conditions, the amendment is being formulated with
particular emphasis on the following areas:

• recalculating and defining with more precision the current rates of the charges so that
they will have a minimum effect on the level of operational costs which are not related
to clearing the polluting matter,
• judging the proposals for modification of the polluting matter which the charges will
cover by changing and extending the list,
• evaluating the current method of calculating the additional charges to the basic
charges,
• assessing the level of the delay of charges, especially the possibility and efficiency of
an increase of the current 60 % level,
• assessing the proposal for changing the system of levying charges - the "Povodí"
("River Basin") levies the charges, and another variant is to transfer the work to the
 Czech Environmental Inspection Agency with the possible cooperation of the State
Financial Offices (Income-Tax Offices).

A.3. Solid Waste Disposal Charges

Currently, charges exist that have two basic functions. The objective of the first part (rate I of
the charges) is financial compensation to the community in whose district the dump is located.
The second part (rate II of the charges) stimulates disposal of the solid waste in the dumps
which correspond to the required criteria. The level of the costs necessary to build (secure) the
dumps for the respective categories of waste determines the second part of the charges. The
rate II revenue can be used to financially support actions and measures in the waste area
through the State Environmental Fund. In 1993 the presumed revenue should be about
500 mil. crowns.

Law No. 62/1992 Sb. established the charges, which became operative from the 1st of April
1992. The charges, as a new economic tool, need a detailed analysis of their function.

In the future it will be necessary to:

• continually interpret the new law including, for example, the solving of problems with
the usage of this new economic tool,
• ensure that the function and impact of the charges are based on the economics of waste
creators,
• assess the charge rates from the standpoint of their effectiveness in stimulating better
environmental action,
• judge the possibility of increasing the delay (alleviation) of the total charges in order
to encourage installation of reinforcement layers in dumps (at this time the delay is
60 %),
• assess the current system of billing and collecting of the charges, which is
administered in municipalities by the State Financial Offices (Income-Tax Offices).

A.4.Charges for Dispossession of Agricultural Land

The aim of the charges is to economically compensate the use of agricultural land for other
purposes. Differentiations in charges correlate to the quality of the dispossessed land. A part
of the revenue of the charges can possibly be used for financial support through the State
Environmental Fund. In 1992 the revenue was about 200 mil. crowns.

A new system of Agriculture Land Charges came into force in July, 1992 through law
No. 334/1992 Sb. Charges were introduced for using land which is officially designated as
agricultural land for uses other than agriculture. These new charges contain environmental
standards which can raise or lower basic rates of the charges through coefficients.

In the future it will be necessary to assess:

• the impact and effectiveness of the new form of the charges,

• the expense of the new form for the calculation of the charges (calculate, audit, etc.),
with respect to the prescribed levels of charges,
• the current values of the coefficients which contain environmental standards from the
point of view of their function,
 • the new system of distributing revenues from charges which has a ratio of 40 % for the
community whose agricultural land has been dispossessed, and 60 % for the State
Environmental Fund.

A.5. Charges for Dispossession of Forest Land

As with the charges for dispossession of agricultural land, the aim is to economically fine the
exploitation of forest land and to stimulate reduction of its exploitation, especially concerning
the land which is environmentally important. Financial support for the measures, which would
strengthen the environmental functions of the forest, could come from the revenue of these
charges.

Charges for dispossession of forest land have not been enforced in our country up to this time.
Within the framework of the amendment Forest Law No. 61/1977 Sb. there is a proposal of
such charges.

In the future it will be necessary to:

• determine the principles by which new charges will be established,

• calculate the rates of the new charges,
• solve problems with implementing the charges as a new economic tool, especially in
regard to the administration of the charges, the use of the revenue, etc.

A.6. Charges for the Withdrawal of Water from the Water - courses

The charges as a centrally-determined economic tool would economically stimulate managing

water on the basis of established standards. The revenue from the charges would possibly be
used for financial support of measures and actions to protect water sources.

Until now, these charges were determined in harmony with the Water Law and by regulations
in the form of price assessments (price list). Until 1992 this was a question of officially
determined maximum limited prices - in the Czech Republic this was about 1000 million
crowns toward the income of the "Povodí" ("River Basin") enterprises. Since 1993 the pricing
system is by "material regulation", meaning differentiation of prices with the possibility of
including only the self-calculated costs and rightful profits. In spite of this change, the charges
continue for the consumption of water from water-courses only in the form of prices for the
supply of this water, the charges going to the "Povodí" enterprises to compensate for their
costs. Consequently, the charges do not operate in the most effective way possible for this tool
which would include the desirable stimulation of rational water management.

In the future it will be necessary to:

• assess the division of charges into two components:

a. the costs component, which will be henceforth the source of income of the water-
courses enterprises, and the charges will compensate their expenses,
b. the environmental component, which will be calculated according to specific criteria,
such as the quality of the water taken and the water balance in the region from which
the water is withdrawn,
 • define the basis for determining the criteria for the environmental component of the
charges,
• process the proposal for the rates of the environmental component of the charges,
• assess the possibility and objectives for the introduction of the starting curve for the
new charges,
• assess the forms of the charges for specific kinds of withdrawal of water (for example,
consumption of cooling water for of thermal power plants),
• discuss problems with the administration of billing and collecting the new charges,
• determine how the revenue from the new charges will be used, - determine the method
of legislative regulation of the new charges (the proposal presupposes an independent
law which is fastened to the amendment of the Water Law),
• assess the possible ways to stimulate rational management of water sources,
• cooperate on the problems with the cost component of the charges - primarily a
methodical regulation for the determination of these prices.

A.7. Charges for the Withdrawal of Underground Water

The charges would be, in the same way as those for water-courses, structured to economically
motivate the saving of water, and they would be differentiated according to determined
criteria. The revenue from the charges will possibly be used to financially support protection
of underground water reserves.

At the present time the charges are paid in accordance with the Water Law and its regulations.
The rate of the charges is uniform and since 1989 has been at a level of 2 crowns per 1 m3. At
the same time there are a great number of exceptions allowed, the most important of which is
a total exemption for consumption by the public water supply. These exceptions constitute
about 90 % of all consumption. These charges do not fulfill the function of an effective
economic tool, and it will be necessary that they more expressively include the stimulation of
rational water management by removing the discrepancy between the rate of charges and
useful value, etc.

In the future it will be necessary to take analogous approaches to those for the consumption of
the water-courses. This means above all:

• compiling new charge rates,

• assessing the criteria for differentiating the charge rates, most importantly setting them
in accordance with the quality of underground water reserves and with the
environmental water balance in the region from which the water is withdrawn,
• reappraising the current extent of exceptions to paying the charges, with the aim of
reducing these exceptions to a minimum,
• assessing the effectiveness of introducing the starting curve for the charges, most
importantly in the cases of consuming parties who are not paying at the present time,
• assessing the possibility of changing the administration of collection of the charges
levied by the "Povodí" enterprises,
• determining new legal regulations for the charges (presupposing an independent law
which is linked to the amendment of the Water Law).

A.8. Charges (Payments) for the Exploitation of Deposits of Raw

Materials
The charges would affect the prices of selected raw materials whose exploitation, processing,
or consumption presents significant impacts on the environment. This would provide
economic stimulation of the authorized subjects by encouraging them to find ways to lower
environmental impacts. The revenue will possibly be used to financially support measures
which reduce negative environmental impacts.

The partial amendment of the Mining Law which came into effect in 1993 established the
payment of charges for extraction space and for extracted minerals. While the former
payments of charges provide some definite partial compensation for the community in the
place of the exploitation, latter payment of charges mainly provides a drain on the part of the
differentiated annuity. Neither charge, as written by the authors of the amendment of the
Mining Law, cover any environmental criteria. These charges, therefore, cannot possibly be
unambiguously included among economic tools for environmental protection.

In the future it will be necessary to:

• continually assess the function of current payments of charges from the standpoint of
concern for protection of the environment,
• assess the possibilities of modifying the charges, including an initiative for an
amendment proposal,
• assess the possibilities of using other forms of economic stimulation of ecological
interests, joined with the exploitation, processing or consumption of the raw materials.

A.9. Charges for the Felling of Trees

The charges would economically fine felling of trees and so reduce its extent. At the same
time, the charges would generate some financial revenue for the community or for the State
Environmental Fund.

The Law on Nature and Landscape Protection No. 114/1992 Sb. introduces liability for the
payment of charges for felling trees for the purpose of construction. A special law will
determine the amount of the charges, criteria for assessing charges, and the appropriate
exemptions. A draft of this law is not prepared at this time.

In the future it will be necessary to:

• determine the principles on which this new economic tool will be established,
• propose and calculate the charge rates,
• solve additional problems with the implementation of these charges (the process of
levying the charges, etc.).

B. The Taxation System and its Use for Protection of

the Environment
B.1. Environmental Elements in the Taxation System

The taxation system contains relatively broad possibilities for tax differentiations, relief or
reductions, and exemptions. These possibilities could be used for the application of particular
environmental elements which give preferential treatment to subjects, activities, or products
having a positive relationship with the environment.

The new tax system in force since 1993 contains 7 kinds of taxes, and in each of them certain
environmental elements were successfully included. The environmental elements consisted of
particular reductions of the rate or other relief available for products or services with a
significant impact on the environment. Currently it is necessary to state that in terms of
practical impacts, some of these forms of relief do not have a great deal of influence as
stimulators of better environmental behavior. In addition, many significant proposals of
requirements by the Ministry of the Environment were not written into the current tax laws.

In the future it will be necessary to ensure:

• an interpretation and method of administering the current tax reliefs and exemptions,
primarily for taxes which have the largest extent of these reliefs (especially real estate
taxes),
• assessment of the new tax system from the standpoint of its relationship to the
environment, and how it employs both Czech and foreign experience. Following the
assessment, proposals should be drafted for partial modifications and changes,
• individual assessment of the administrative requirements for the new tax reliefs and
exemptions for business enterprises (within the framework of the Ministry of the
Environment or with the use of external cooperation),
• preparation of the background information and analysis to form a basis for the new
statement of requirements by the Ministry of the Environment regarding the tax reliefs
for cases of exceptionally environmentally-friendly products and activities (these
requirements will be proposed to be included in the new tax law to be written by the
Ministry of Finance),
• establishment of a relationship of lasting cooperation with pertinent sections of the
Ministry of Finance which are responsible for each category of taxes, with the aim of
actively solving prospective problems with the new proposals.

B.2. The Environmental Taxes (Green Taxes)

While the environmental elements in the tax system enable a preference for environmentally
positive actions, it will be possible to fine negative environmental impacts through the
establishment of special environmental taxes. At the same time, the covering of entities,
products or activities by environmental taxes will possibly help to solve the most urgent, high
priority environmental problems. Revenues from this tax will provide new financial sources to
the state budget, with which it will be possible to lower the tax rates in other areas such as
income tax and value added tax.

The Law on the Tax System determines that the environmental taxes are an integral part of
our new tax system. The preparatory work in designing this tax so far has been done mostly
by the Ministry of the Environment.

In order to make further progress in the preparation of environmental taxes, it will be

necessary to:

• discuss with the Ministry of Finance how the following high-priority problems will be
solved:
 a. the jurisdiction of submission of the law on environmental taxes (meaning who will
submit the law),
b. the joint procedure in the preparation of these taxes,
c. the setting of a tentative deadline for when the environmental taxes should come into
force,

• create a working group within the Ministry of Environment for the preparation and
finalization of the environmental taxes, which would include the participation of the
representatives from all involved departments,
• discuss in detail the current working proposal for the environmental taxes and what
modifications may be appropriate,
• hold discussions on the proposal for the environmental taxes with external institutions
and institutes,
• create a common working group with the Ministry of Finance and discuss the proposal
for environmental taxes, including the carrying out of appropriate modifications and
the finalization of the proposal by the Ministry of the Environment,
• prepare a draft of the law for interdepartmental reminder proceedings, for discussion
with the most concerned state authority, or for discussion with the leading decision-
making authority for the particular proposal of the state managing agency (Ministries
of the Economy, Transport, Industry and Trade, the Central Public Hygiene Officer,
etc.),
• proceed with the necessary steps for the approval of the law on environmental taxes
(reminder proceedings and submission of the proposal to the government and Czech
National Council),
• solve the problems of the introduction of new taxes - to compile in particular a
detailed quantification of tax revenues, a plan for the billing and collecting of the new
taxes, the use of revenues, etc.

B.3. Preparation for Ecological Tax Reform

The so-called, "Ecological Tax Reform," means that instead of the hitherto "surface" taxation
(across the board enterprise taxes and VAT) the fiscal revenue of the state will gradually be
replaced by differentiated taxation according to the presence of negative environmental
impacts. The importance of this process for the environment is indisputable, because it will be
possible to impose a greater economic impact on those responsible for unfavorable
environmental impacts. The Environmental Tax Reform will take a long time to prepare. At
the present time it is being prepared in several countries whose legal and tax systems are more
developed, and therefore have enabled its introduction.

The Ecological Tax Reform has not been proposed administratively or legally in our country
at this time, because all activity until now has been devoted to the preparation, establishment
and modification of the new general tax system. The first partial element of the Ecological
Tax System would be the preparation of environmental ("green") taxes. The activity in this
area, however, must be developed primarily by the Ministry of the Environment.

In the future the most necessary steps are to:

• obtain continual information about the preparation for Ecological Tax Reform in
foreign countries,
 • prepare the first concrete proposals for the possibilities of applying such Ecological
Tax Reform in our country,
• discuss concrete proposals of Ecological Tax Reform with the Ministry of Finance and
agree on how to proceed in their development and formal introduction.

C. Financial Support of Environmental Measures

C.1. Expenditures for Environmental Areas in General

The review of the expenditures for the environment gives a perspective about their level and
about their part in the macroeconomy. The review enables the regulation to reach the
optimum level for these expenses in the separate years and in the long-term period. The
review also serves for international comparison. Within the framework of these surveys we
can also file separate sources which are used for financing of environmental measures.

The review of the expenses for the environment is made in the determined categories in the
area of investments. In our country there is not a complex system of filing and statistics.

For the future it will be necessary to:

• define unambiguously the categories "environmental investment", "environmental

measure", "environmental expense",
• prepare proposals for the introductory statistics and the review of the expenses for the
environment in the new structure and its extension,
• negotiate the proposals with a concerned state authority and apply the proposals in the
practice,
• ensure the optimum use of these data for environmental and macroeconomic
conceptions, decisions and application of environmental concerns.

C.2. Environmental Financial Policy

Financial policy must determine the basic approaches to the financial support of
environmental measures on the basis of the purposes and aims of the environmental policy
and in harmony with state financial policy. Environmental financial policy should remain as
the basis for concrete instruments and measures in the whole area of positive economic
stimulation.

Financial policy in the care of the environment is not yet prepared and approved as a finished
and official document.

For the future it will be necessary to:

• prepare the proposal for the financial policy, which will, above all, solve these
problems:

a. real level of the expenses for the environment,

b. possibilities for ensuring sources for the financing of environmental measures at the
pollution source (meaning subjects which take these measures) - for example own
financial sources, credit from banks, delays from the charges for pollution, etc.,
 c. ensuring and condition of using sources for financial support from governments and
other sources - state budget, National Possession Fund, regional sources, foreign
support, etc.,
d. the place and targets of the State Environmental Fund in the area of positive
stimulation,
e. the question of centralization and decentralization of the sources for the financial
support of the environmental measures,
f. efficient coordination of the separate financial sources,

• negotiate the proposal of the environmental financial policy with the Ministry of
Finance and the next concerned state authority and prepare the proposal for
governmental negotiation and approvement.

C.3. The State Environmental Fund

The aim of the special state funds is to join the financing of the specific society’s needs with
the incomes which are logically and economically connected with these needs. The funds also
lower the dependence on the state’s total economic and financial position for amounts of
readily available financial resources for a specific purpose. The department or the ministry
which is responsible for the specific area has, through the fund, an instrument for solving the
needs in this area.

Law No. 388/1991 Sb. established the State Environmental Fund, which is the only special
state fund for the financial support of the environment. Activities of the fund are often
criticized. The criticism primarily concerns the criteria for the distribution of the scanty
financial sources in the Fund and the general position of the Fund in the system of economic
instruments.

In the future it will be necessary to:

• define unambiguously the place, function and objectives of the Fund in the system of
economic instruments,
• ensure the stability and optimum level of the financial sources of the Fund,
• assess the extent of centralization of the financial sources in the Fund,
• solve the relationship between sources of the Fund and the state budget,
• assess the separate forms of financial supports (grants, soft loans, usual loans, etc.),
• assess the criteria for the distribution of the Fund’s sources.

C.4. Other Sources of Financial Support

For the financing of environmental measures it is possible to use, with the exception of
polluters own sources and the State Environmental Fund, other sources. This is a question,
above all, regarding the state budget, the National Possession Fund, the sources in the regional
and the municipal budgets, banks’ loans, various kinds of foreign assistance, etc. The
existence of these sources and the possibility of their use for financial support constitutes an
important positive stimuli for the subjects which take the environmental measures.

In our country, there is not yet a completed survey about financial sources. This situation
makes it impossible to ensure effective coordination and regulation of these sources.
Therefore, these financial sources in the environmental area are not used on a desirable level
and in an optimal structure.

In the future it will be necessary to:

• ensure the completion of a detailed survey about the separate sources of financial
support and conditions for their use,
• assess the separate sources of support from the standpoint of environmental protection
interests,
• ensure continual cooperation with the subjects, whose sources are employed for
supporting environmental measures,
• prepare a proposal for the gradual coordination of these sources and cooperate on the
methodical regulation of these sources for the welfare of the environment.

D. Further Tools of an Economic Character

D.1. Customs Duties and their Relationship to the Environment

Differentiated rates of custom duties take into account environmental concerns. The issue is
whether to apply higher rates to environmentally unfriendly kinds of goods, and on the
contrary, lower rates to environmentally friendly kinds. In spite of the gradual lowering and
cancellation of custom duties in this time, it still remains an area to enforce some of our most
meaningful requirements. Except no-rate tools (meaning limits, etc.), they would also fulfill
their purpose in the area of economic stimulation, which can markedly influence the final
price for the consumer and so benefit environmentally-friendly products.

In 1991 and 1992, the former Federal Ministry of Foreign Trade applied for requirements
which included environmental elements in the customs tariff and the import and export policy
through the mediation of the former Federal Committee for the Environment. At present,
within the framework of the new structure of the ministries, no new action has been realized.

In the future it will therefore be necessary to:

• assess today’s customs duty rates from the point of view of whether or not they are at
variance with the concerns of the environment,
• compile a list of the products and raw materials that would be acceptable with the
form through raising or reducing custom duties to stimulate negatively or positively
their export or import,
• prepare a regulatory basis which will make possible exemptions from custom duties
for imports in advance to determine environmental investment action for the relevant
year,
• evoke an agenda with the involvement of relevant ministries and authorities and apply
our requirements inclusive of appropriate discussion.

D.2. Penalties

The penalty can possibly take the form of sanctions for infringementing the determined
regulations, considering that it is a question of classifying the financial recourse with
immediate impacts on the economy and the income situation of the subject. It is necessary to
place penalties among the other economic tools. The importance of penalties for the
environment is indisputable, but largely it depends on the possibilities of the effectiveness of
inspection and on the proportional impacts on the subjects.

At present in our country there are a large number of penalties for the infringement of
obligations in the protection of the environment. As for the existence of the penalties, it is not
necessary to receive special targets or measures. There would be, however, an assessment of
the possibility of the coordination of the penalties in the separate components of the
environment, and also strong emphasis on the economic aspect of this tool.

In the future it will be necessary to:

• lead the analysis and assessment of the contemporary legislative regulations with
relevant questions of the penalties for the infringement of the obligations in the
separate parts of the environment, inclusive of the proposals for their appropriate
modification,
• assess the level of the determined contemporary rates of the penalties in the separate
laws, from the standpoint of the impacts of the penalties to the payers, and also from
the point of view of the relation of the level of the penalty to the relevant weight of the
reason for which the penalties would be assessed,
• assess contemporary qualifications for the assessment of the penalties,
• assess the possibilities for the gradual unification of some elements of the penalties in
the separate components of the environment with the objective to create a consistent
system of penalties in the area of environmental protection,
• consider the penalties also as some of the other economic tools and cooperate with the
economic sphere in the case of the appropriate establishment of additional penalties or
modifications to the existing penalties.

D.3. The Financial Form of Compensation for Damages which Affect

the Environment

Valuation of the damages to the environment in the Czech Republic is a question involving
tens of billions of crowns. If the subjects which make the damages do not participate in the
larger extent of the settlement for compensating the damages, it will be necessary to settle
losses with them. This settlement, for the greater part, will have an impact on the state budget,
and will act as a detriment from its sources for other expenditures. The importance for the
environment is that the compensation for damages can be increased to put economic pressure
on the polluters of the environment.

In harmony with common legislative regulations it is possible to apply to the damage causing
subjects a compensation for the effect of the damage. In spite of this, even now in the new
Commercial Code there are not specifications for the environmental area, henceforth the
possibility remains for the application of compensation for damages. Up until now in our
country, compensation for damages were applied on a small scale in the case of damages to
forests and applied to an even smaller degree in agricultural vegetable production. It was not
possible to apply them on a higher scale because of the absence of methods for calculation,
the study of the appropriate enforcement, etc. The next problem with compensation for
damages is due to the preceding economic system, which made it possible to cover damages
compensation in the planned costs and settled them to the detriment of the lower plan of the
profit margin.
In the future it will be necessary to:

• assess contemporary forms, methods and levels of the application of damages,

including specification of the subjects which cause damages and payers of the
damages,
• assess foreign experiences from this area,
• ensure preparation of the methods which are necessary for the higher application of
the damages (including a basis for the calculation of the damages, application forms
for damages compensation, etc.).

D.4. Environmental Insurance

Environmental insurance ensures the transmission of the risk for accident damages which
affect the environment from the particular subjects to insurance institutions. It means, above
all, economic involvement and stimulation of the potential authors of the damages through the
individual rates of insurance, and, on the other hand, it means ensuring the financial sources
for the cleaning of the effects of the damages.

The Ministry of the Environment has prepared a law about compulsory insurance against
environmental hazards. The proposal, however, has not been completed and submitted for
approval.

In the future it will be necessary to:

• complete the proposal of the law about the compulsory insurance against
environmental hazards,
• assess the foreign experiences from this area,
• solve with the cooperation of the insurance institutes the further economic connections
of the establishment of this environmental insurance (for example, the levels of the
insurance rates and their impacts on the economy of the pertinent subjects, the
possibilities of the partial use of insurance for prevention, etc.).

D.5. Economic Elements of the Deposit Refund System

Currently in foreign countries the different forms of the deposit refund systems are part of
economic stimulation. The deposit refund system through legislation and economic means
attempts to solve the collection (purchase) and clearance of environmentally harmful wastes.

Presently this system has not been introduced in our country and it is only partially applied in
the case of some glass bottles. The Ministry of the Environment in 1992 initiated preparation
of this deposit refund system with the objective of its establishment on a broader scale.

In the future the work will continue in this area and attention will be directed above all to:

• ensuring materials and studies as the basis for compiling the proposal for the deposit
refund system, including economic stimulation,
• collecting the accessible foreign experiences with use of deposit refund systems,
• determining and giving with more precision the list of the products (wastes) which
would apply to the deposit refund system,
 • proposing economic stimulation which is necessary for effective functioning of the
system,
• proposing a way for a legislative amendment of the deposit refund system.

D.6. Regional Economic Tools

Economic tools have mostly been nation-wide activities and have not solved specific
problems of specific regions or localities. Regional economic tools of environmental
protection would transfer particular jurisdiction to a lower level in harmony with the new state
territorial organization, and enable selected regional problems of the environment to be
solved. In this case it would be possible to use economic stimulation for the most relevant
problems in the particular territory. It is possible to use the form of negative or positive
stimulation, contingent with the form of tools of a compensating nature. These tools can also
mean definite fiscal revenue for these regions.

Up until this time, regional economic tools of environmental protection were not
systematically introduced in our country, and so far, they have not been prepared. The
problems were solved in some cases with prescriptive tools (prohibitions or limits for the
particular territory) for the most part, however, they don’t take into account local problems.
The Ministry of the Environment so far has not been systematically engaged in these
problems. At this time there are only some small elements in the contemporary tools which
can also have a positive impact on the environment (for example, some of the local charges,
etc.).

In the future it will be necessary to:

• verify contemporary possibilities for the application of regional economic tools for
environmental protection (legislative, jurisdiction, economic, etc.),
• consult foreign experience with the use of regional economic tools,
• determine the most pressing problems which would be best solved through forms of
regional economic stimulation,
• prepare concrete proposals for regional economic tools which would include proposals
for their practical application (for example, modifications of existing laws, new laws,
public notices, etc.),
• actively cooperate on the preparation of conceptions for developments in the specific
regions with the possibility of also applying economic tools of environmental
protection.

D.7. Specific Economic Tools

Abroad there has been introduced, or prepared for introduction, a number of economic tools
for environmental protection, which are, in principle, different from the tools applied in our
country. It is a question, for example, of the sale of emission permits, energy taxes, different
kinds of user fees, etc. The importance of these tools for the environment is indisputable. The
tools, however, correspond to the specific conditions of the countries from the standpoint of
their actual environmental problems and economic situation.

It is a question of tools, which in our country cannot possibly be instantly introduced at this
time. The main reason is our contemporary environmental problems and economic conditions,
which are different from those in countries where these tools exist.
In the future it will be necessary to:

• continue to compile a precise list of these principle economic tools which are applied
abroad,
• ensure analysis of these tools from the point of view of their possible introduction in
our country,
• gradually determine tools which will be suitable for introduction in our country on the
long-term horizon.

E. The Specific Economic Category Used in the Area

of Environmental Protection
E.1. Appraisal of Natural Sources

The appraisal of natural sources which include numerical expressions is one of the most
important categories in the environmental area. It constitutes a basis for the appropriate
introduction of payments for these sources and especially a basis for the most important
decisions and positions in the environmental area - for example, the choice from the several
variants of the annexation of the territory, etc.

A few institutions have been engaged with the relevant questions of appraising natural
resources in our country, and partial conclusions were compiled. However, until this time, the
works have not been coordinated and the results are not possible in most cases to be used for
practical application.

In the future it will be necessary to:

• prepare methods for an approach to the appraisal of the natural resources, above all
from the point of view of the complexity of the appraisal of natural resources, and that
will take into account the diverse methods of the renewable and non-renewable
resources,
• employ the maximum amount of foreign experience in this area,
• ensure the coordination of the works together with an appraisal of natural resources,
• require also the quantification in materials with the subject of appraisal of natural
resources,
• prepare the establishment of satellite accounts for the monitoring and assessing of
natural resources use,
• gradually ensure the practical use of the results namely by:

a. introducing payments for selected natural resources,

b. applying the economic views in the basic environmental requirements and standpoints,
c. compiling the methods for the inventory of the natural resources of the territory and
their complex appraisal, - analyzing the macroeconomic coefficients of the
development of the economy.

E.2. Damages which Affect the Environment and Their Quantification

Production and other activities create negative consequences which in turn cause
environmental damages. The damages can arise through negative long-term impacts or
sudden accidents. The information about damages to the environment include the compilation
of the quantifications and the next basis from this area would be the basis for greater numbers
of environmental requirements and positions, including such areas as privatization,
international settlement of accounts for damages, conceptions for selected branches and
spheres, macroeconomic conceptions, etc.

As in the case of the appraisal of natural resources, there are in the area of environmental
damages, some partial theoretical materials and studies. These works, however, do not
coordinate, and for the most part, do not ensure corresponding use of the results in practice.

For the future it will be necessary to:

• collect the methods for the specification of these damages to particular components
and areas,
• collect the methods for the calculation of damages,
• employ the maximum foreign experience from this area,
• compile the basis for the possibility of applying for damages compensation,
• carry out numerical expressions in numbers of the damages to the environment owing
to economic activity,
• compile, on the basis of the analysis of damages, the methods and economic basis for
the determination of environmental insurance,
• ensure the concrete use of the quantification of the damages and the next basis for the
application and enforcement of the environmental concerns and requirements.

F. Environmental Protection and the Macroeconomic

Structures
F.1. Macroeconomics and the Environment in General

The mutual relationship of the economy and the environment does not only include the
narrow objective of economic tools for environmental protection. This area also pertains to
the next category including the bilateral relationship of the environment with macroeconomic
structures. In practice it means that the environment would be an area which actively shares in
principle macroeconomic changes, and at the same time all these changes would also take into
account the concerns of the environment.

In our country no one has systematically paid attention to this area. The Ministry of the
Environment only sporadically participates in solving some problems.

In the future it will be necessary to ensure:

• the commitment of the Ministry of the Environment in the large scale preparation of
the basic macroeconomic conceptions and changes (transformation of the economy,
privatization, new rules of the state budget, etc.) with the aim of ensuring the bilateral
structures on the requirements of the environment,
• the employment of positive elements in the arising capital market to support solutions
for environmental problems,
 • the employment of foreign experience with the practical use of the bilateral
relationship of the economy and the environment (for example, green accounting,
etc.),
• the application of macroeconomic coefficients by solving environmental conceptions
and requirements (GDP, etc.).

F.2. The Price Policy in Relationship to the Interests of Environmental

Protection

Prices are an important tool with which it is possible to stimulate consumption. In relation to
the interest of the environment, higher prices of environmentally-unfriendly products or
services would reduce their consumption and, vice versa, lower prices would support
environmentally- friendly activities.

At present, in our country there are only a few products and services to which apply so-called
regulated prices. The immediate influence of the prices is consequently possible within a very
small range of products and services. The prices, however, can have an indirect influence
through prior economic tools, especially through taxes and charges.

In the future it will be necessary to:

• assess the function of economic tools of environmental protection from the standpoint
of their impact on the prices of products and services,
• ensure the work of the survey of negative impacts on the prices, from the point of view
of the concerns of the environment (lower prices in the case of environmentally-
unfriendly products and services) and propose forms and methods for their
modification,
• assess foreign experience with the use of indirectly influencing prices and price policy
in environmental welfare protection,
• join actively in the price conceptions with the select branches and enforce the concerns
of the environment.

F.3.Application of Economic Tools and Criteria for Environmental

Protection in Conceptions of Development in Particular Branches

At present, materials are being prepared which solve the conception of development in certain
branches or spheres. These would be applied to the interests of environmental protection,
especially through the form, given the required training, of economic tools of negative and
positive stimulation. Presently, we can use feedback on pieces of information from the
preparation of these conceptions for the modification of economic tools.

The Ministry of the Environment, in the majority of cases, does not have the possibility to
influence these conceptions or to join in their preparation. The exceptions are the materials
which solve to a large extent the environmentalization of the branches or involve the
environmentally-friendly branches, and for this reason different forms of support are required.
The cooperation of the Ministry of the Environment in this case rests, above all, on the special
technical part of the conception, and only the exceptional concerns are in the area of the
economy and economic tools.

In the future it will be necessary to:

 • apply to a larger extent economic points of view and employ economic categories and
tools of environmental protection in the case of cooperation on the development of
conceptions for particular branches,
• ensure to a greater extent the cooperation in the case of conceptions for branches with
expressive negative influences on the environment, and again with the possibility of
applying economic tools and criteria,
• employ feedback of information, which is obtained by cooperation on conceptions, for
the modifications and changes of the contemporary economic tools,
• enforce the economic stimulation of the spheres with the most significant
contributions for the environment within the framework of cooperation on the
conceptions for development.

F.4. Impacts of the Environmental Costs on the Economy of Subjects

The environmental costs on the economics of enterprises can have two forms: partly direct
costs which are exerted on the clearance of pollution, and partly indirect impacts in the form
of economic tools of environmental protection. Both kinds of costs constitute impacts on the
economics of the enterprises and branches or spheres, which then can expressively influence
the overall economic situation of these subjects and in some cases also their further existence.

The Ministry of the Environment engages these impacts, above all, by changing or preparing
new economic tools. However, these problems are not solved systematically.

In the future it will be necessary to:

• continually engage the impacts of the environmental costs on the economic situation
of the enterprises and spheres,
• ensure the rate of the ecological costs and give the signal information,
• ensure information flow about the conceptions and the assumed modifications of the
economic tools from the standpoint of the timely preparation of the enterprises’
sphere.

G. General Problems of the Environmental Economy

G.1. The Conception of the Environmental Economy

The environmental economy is a new area and engages the mutual relationship of the
economy and environment. It is a question, for example, of a definition of basic terms
(charges, sanctions, etc.), theoretical solutions with economic tools, effectiveness of
environmental measures, etc. This area solves, above all, the theoretical aspects of these
relationships, but it will be one of the special-interest areas of the Ministry of the
Environment.

The environmental economy as a complex area is not solved, at present in our country.

In the future it will be necessary to:

• ensure the use of foreign information in this area,

 • consider the possibilities of our external institutions from the point of view of possibly
systematically solving these problems,
• specify the work of the Ministry of the Environment in this area (coordination of
work, employment of the results in the practice, etc.),

G.2. Coordinating Economic Tools of Environmental Protection with

Foreign Countries

In each country there exists particular economic tools of environmental protection. This
entails the possibility of mutually employing the experiences with their application and
function. At the same time it is also necessary to ensure the gradual coordination of our
economic tools with the countries of the European Community. In this context it is also
possible to employ particular recommendations which have been afforded to these countries.
We can use different possibilities and forms employed through methodological assistance.

In the present time there exists in the area of economic tools only partial and casual
international contacts without permanent and long-term cooperation.

In the future it will be necessary to:

• continue to compile lists of economic tools which are applied abroad,

• employ to the fullest extent the foreign experiences with the application of economic
tools - employing the different forms, two and more contacts, and other forms of
cooperation,
• join gradually in the international working groups which solve the problems of the
economy and environment,
• create the conditions for ensuring the coordination of our economic tools with the
countries of the European Community.

G.3. Creating Economic Tools of Environmental Protection as a United

System

The economic tools aforementioned, especially in chapters A., B. and C. will be gradually
unified in one system with which it will be possible to complexly affect the most important
problems of the environment. Constituent components of this complex approach would be the
possibilities of continuous modernization of the tools, including the level of their rates,
valorization, etc.

Economic tools used for environmental protection in our country until the present time were
introduced and applied individually, without ensuring their higher reciprocal coordination.

In the future it will be necessary to:

• gradually integrate the tools which have similar functions (for example, charges of air,
water, wastes),
• ensure complex functioning of the tools for solving the most significant problems with
the use of the most efficient forms of economic stimulation,
• gradually ensure the mutual relationship of the economic tools of negative and
positive stimulation,
 • ensure the system of continual modernization of the tools (for example, for the reason
of valorization, actualization, partial modifications, etc.),
• consider all economic tools which negatively or positively influence the environment
as constituent parts of a specific system, whose changes and adaptions must be
coordinated and methodically operated,
• assure the harmony of the system of economic tools with the state financial policy
inclusive of the relationship with other economic tools.

G.4. The Mutual Structure of Economic Tools of Environmental

Protection and Environmental Policy

Economic tools of environmental protection and environmental policy have a common aim
from which arise the conditions for improving the environment. Even though their approaches
to achieving this aim are not the same, they have a great number of shared elements and
mutual structures. For the efficient implementation of the targets it is therefore desirable to
associate more closely both these areas.

Thus far, the mutual cooperation and association in the spheres of environmental policy and
economic tools is in its initial stage.

Environmental policy in relation to economic tools must especially ensure:

• the determination of the place and importance of the economic tools within the
framework of all tools of environmental policy,
• the working of the meaningful elements from the conception of the economic tools to
environmental policy, and so acknowledge their importance,
• the definition of mutual structures of economic tools with other tools of environmental
policy,
• the determination of the most important points of the environmental policy which will
be necessary to solve as soon as possible with the use of economic tools.

Economic tools of environmental protection in respect to environmental policy must

especially ensure:

• the gradual application of the designs and aims of the environmental policy to
economic tools and other economic elements,
• the employment of priorities of the environmental policy within the framework of the
modification of concrete areas of the economic tools,
• the acceptance of the purposes of the environmental policy from the point of view of
the mutual structure of the separate tools,
• the creation of the basis for environmental policy through the form of preparation of
basic conceptual approaches to the economy and economic tools of environmental
protection.