Electronic Working Paper Series
Paper No. 61
THE MEANING OF BATNEEC: Interpreting excessive costs in UK industrial pollution regulation
Steve Sorrell (
[email protected]) February 2001 Paper submitted to the Journal of Environmental Policy & Planning
SPRU Science & Technology Policy Research Mantell Building University of Sussex, Falmer Brighton, East Sussex BNB 9RF Tel: 00 44 1273 877067 Fax: 00 44 1273 685865 http:www.sussex.ac.uk/spru/
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ABSTRACT This paper examines how the concept of ‘excessive costs’ has been interpreted in the implementation of industrial pollution control in the UK. Since 1984, industrial air pollution regulation in the EU has been guided by the framework concept of Best Available Technology Not Entailing Excessive Costs (BATNEEC). With the introduction of the Integrated Pollution Prevention & Control Directive in 1996, this has been replaced by the concept of Best Available Techniques (BAT). Despite the absence of the NEEC qualification, the concept of avoiding excessive costs is effectively absorbed in the IPPC definition of availability. Both concepts require interpretation and both devolve potentially controversial decisions to the level of the individual site regulator. A central issue in interpreting ‘excessive costs’ is the relative importance of environmental cost benefit analysis versus the ability of a sector to ‘afford’ environmental improvements. Also important is how such concepts can be operationalised by regulators who lack resources and depend upon industry for information. The paper provides a historical account of how these issues have been dealt with in the UK and argues that the key difficulties are far from being resolved. The paper concludes by assessing the implications for the future implementation of IPPC. INTRODUCTION Since 1984, industrial air pollution regulation in the EU has been guided by the framework concept of Best Available Technology Not Entailing Excessive Costs (BATNEEC). This was introduced by the 1984 Air Framework Directive (AFD) and applies to air pollution from large industrial installations (CEC, 1984). In 1996, the AFD was replaced by the Integrated Pollution Prevention & Control (IPPC) Directive, which applies the framework concept of Best Available Techniques (BAT) to the integrated control of pollution to all three media (CEC, 1996). Despite the absence of the NEEC qualification, the concept of avoiding excessive costs is effectively absorbed in the IPPC definition of availability (Skea & Smith, 1997).
Framework concepts such as BATNEEC require interpretation at the national, sector and site level. Member States may take different approaches to the interpretation of BATNEEC as a result of their varying regulatory traditions. Over the years, the UK government and regulatory authorities have paid particular attention to the meaning of ‘excessive costs’ in BATNEEC, and the introduction of IPPC has not significantly changed the issues involved. The UK debate on this topic is relevant for the implementation of IPPC in all Member States as well as for the development of sectoral
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guidance on BAT at the EU level (the BAT Reference Notes, or BREFs)1. This paper therefore provides a historical account of the interpretation of ‘excessive costs’ in the UK and examines the respective roles of environmental cost benefit analysis and assessments of ‘sectoral affordability’. The implications of this for the future implementation of IPPC are then assessed.
THE IPC REGIME The requirements of the AFD were transposed into UK law in 1990 by the Environmental Protection Act (EPA90). This introduced a new system of Integrated Pollution Control (IPC) to be administered by Her Majesty’s Inspectorate of Pollution (HMIP) (Jordan, 1993). In 1997, HMIP was combined with the National Rivers Authority and the Waste Regulation Authorities to form the UK Environment Agency (EA).
IPC is a cross-media approach to regulation, whereby releases to air, water and land are regulated together. IPC procedures are more formal and transparent than the regulations which IPC replaced, and include a statutory requirement for public information registers. Processes regulated under IPC must obtain an authorisation, which contains legally binding conditions to: • ensure that BATNEEC is used to prevent the release of prescribed substances or, where that is not practicable, to reduce releases to a minimum; • consider what is the best practicable environmental option (BPEO) to cause the least harm to the environment as a whole; and • ensure compliance with obligations under EU Directives and international law (DoE, 1997).
1 The European Commission is producing guidance on BAT for each industrial sector in the form of BAT Reference Documents (BREFs). These will not prescribe the technology to be used in specific cases since, in the final analysis, BAT must take into account ‘...the technical characteristics of the installation concerned, its geographical location and the local environmental conditions’ (CEC, 1996, Article 9(4)). Copies of the BREFs and related information are available on the website of the European IPCC Bureau at: http://eippcb.jrc.es.
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Authorisations contain release limits, monitoring requirements and (for existing plants) a timetabled improvement program. The last is a central feature of IPC and may either include emission limits to be achieved by a target date in the future, or a requirement for feasibility studies. Authorisation requirements are negotiated between the regulator and the regulated company at a site level, but may be guided by the non-prescriptive standards in the relevant sector Guidance Note. While the integrated approach is embodied in the BPEO concept, it is BATNEEC which has played the dominant role in practice.
WHAT IS BATNEEC? The effectiveness of IPC hinges on the interpretation of BATNEEC. Like comparable concepts such as Reasonably Achievable Control Technology (RACT)2, BATNEEC requires that technological and economic feasibility be taken into account when making regulatory decisions. Such framework concepts can be appropriate where the regulatory target is complex, but they also devolve potentially controversial decisions to the level of the individual site regulator (the ‘Inspector’ in the UK).
BATNEEC can be viewed as a convergence of two European regulatory traditions: • the emphasis on technical feasibility and ‘state of the art’ technology in German pollution regulation (BAT); and • the emphasis on economic feasibility and pragmatic, case by case decision-making in UK regulation (NEEC) (Boehmer-Christiansen & Skea, 1989). The UK tradition included considerations of affordability or excessive cost through its reliance on site level negotiation and decision-making (Vogel, 1986; Smith, 1997). Regulators were typically chemical engineers, sharing a similar background to industrial operators and ‘speaking the same language’. Regulation was based on mutual trust and respect, and flexibility was achieved through negotiation. The UK succeeded in
2 RACT was introduced into US pollution regulation by the 1977 amendments to the Clean Air Act.
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retaining this flexibility in the AFD by insisting that the German requirement for BAT be qualified by the addition of NEEC.
In the early stages of IPC, BATNEEC was an unfamiliar concept to both regulators and regulated. While Best Practicable Means (BPM) provided a precedent, BATNEEC appeared to require more formal and transparent justification of regulatory decisions, based on economic concepts and information. As a consequence, the meaning of BATNEEC became a focus of debate. Ten years later, the tensions inherent in the concept remain unresolved.
The debate over the meaning of BATNEEC has hinged around two key issues:
1. The meaning of excessive cost, and the relative importance of: • what gains in environmental quality can be achieved compared to the abatement costs - the environmental cost/benefit approach; or • what an average company within a sector can afford - the sectoral affordability approach. 2. The process of assessing excessive cost, and the extent to which this should use: • economic information and formal analytical techniques; or • expert judgement and negotiation with individual operators. The interpretation of these issues may differ between: • the development of new plant standards versus the upgrading requirements for existing plant; and • the development of IPC Guidance Notes versus the determination of individual site authorisations. The following sections summarise the evolution of this debate in the UK, including how BATNEEC has been characterised in various regulatory documents.
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BATNEEC IN OFFICIAL REGULATORY GUIDANCE
BATNEEC in the AFD The BATNEEC concept appears in three Articles of the AFD. There is a general requirement in Article 4 which states that an authorisation may only be issued when the competent authority is satisfied that: 'all preventative measures against air pollution have been taken, including the application of the best available technology, provided that the application of the such measures does not entail excessive costs'; (CEC, 1984)
This is amplified in Article 12 which states that: ‘The Member State shall follow development as regards the best available technology and the environmental situation. In the light of this examination they shall, if necessary, impose appropriate conditions ..... on the basis of developments as regards BAT, and of the desirability of avoiding excessive costs for the plants in question, having regard in particular to the economic situation of the plants belonging to the category concerned.’ (CEC, 1984)
The last sentence qualifies the Article 4 text with a somewhat ambiguous statement. E.g. Does ‘category’ mean the whole sector, or specific types of plant within the sector? What does ‘have regard to’ mean? The sentence is difficult to interpret and bears the hallmarks of a fudged compromise As such, it is typical of many international environmental agreements where an attempt is made to find a form of words that is acceptable to all parties.
Articles 4 and 12 apply equally to new and existing plant. Article 13 addresses the issue of upgrading existing plant and states that: ‘In the light of an examination of developments as regards the best available technology and the environmental situation, Member States shall implement policies and strategies....for the gradual adaptation of existing plant......to the best available technology, taking into account in particular: • the plant's technical characteristics,
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• its rate of utilisation and length of its remaining life; • the nature and volume of polluting emissions from it; and • the desirability of not entailing excessive costs for the plant concerned, having regard in particular to the economic situation of undertakings belonging to the category in question' (CEC, 1984)
This leaves wide scope for interpretation, but is intended to prevent uneconomic decisions such as the retrofitting of pollution abatement equipment to a plant which is due to close within a couple of years. Excessive cost is again required to be assessed for plants: ‘....belonging to the category in question’. BATNEEC in the 1990 Environmental Protection Act The text of EPA90 largely repeats the wording of the AFD, except that it refers to best available techniques, rather than technology, where techniques are interpreted to include staff training, staff supervision, plant maintenance and other factors. This gives greater flexibility to the plant operator and recognises the importance of the management and operation of plant in achieving improved environmental performance. This is borne out in the authorisations under IPC which give great emphasis to operational measures. BATNEEC in guidance to operators and Inspectors The generality and ambiguity of the BATNEEC concept made it necessary to provide additional guidance on its interpretation. This is contained in chapter 5 of IPC: A Practical Guide, which was first published in 1991 (DoE, 1997). BATNEEC for a particular process is to be interpreted from the broad statements in the Practical Guide and the more specific guidance on each sector contain in the relevant Guidance Note. Some key features of this guidance are summarised in Box 1.
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Box nn UK government guidance on the meaning of BATNEEC NEEC NEEC needs to be taken in two contexts, depending on whether it is applied to new processes or existing processes. Nevertheless, in all cases BAT can properly be modified by economic considerations where the costs of applying best available techniques would be excessive in relation to the nature of the industry and to the environmental protection to be achieved. New processes In many cases, for new processes it is expected that BAT and BATNEEC will be synonymous. However: • The cost of the best available techniques must be weighed against the environmental damage from the process. The greater the environmental damage, the greater the costs of BAT that can be required before costs are considered excessive. • An objective approach to the consideration of what is BATNEEC is required. The concern is with what costs in general are excessive; the lack of profitability of a particular business should not affect the determination. Existing processes • In relation to existing processes, the Environment Agency is concerned...with establishing timescales over which old processes will be upgraded to new standards, or as near to new standards as possible, or ultimately closed down. • ....the approach adopted in the EC AFD is helpful...[Articles 12 and 13 are quoted] Promulgation • It is the job of the individual Inspector to decide what is BATNEEC in a particular instance and to translate that decision into conditions to be included in the authorisation. However there must be broad consistency in these decisions.......It is important that BATNEEC is determined and applied in a transparent, consistent and rational way. Role of Guidance Notes • In the case of new processes, it is expected that plant will be designed to achieved the standards in the appropriate Guidance Note. • For existing processes, Inspectors will determine a timescale on which it will generally be appropriate to upgrade to new plant standards. Inspectors will determine what is appropriate in each individual case, paying attention to variable factors, any directions given by the Secretary of State, the sort of consideration listed in the AFD and the need to achieve BPEO. • The Guidance Notes have no statutory force. They do, however, represent the view of the Agency on best available techniques for particular types of processes and are therefore a material consideration to be taken into account in every case. Source: DoE, 1997
Box 1 highlights issues which have been central to the debate over BATNEEC, namely the role of environmental cost/benefit analysis, the interpretation of sectoral affordability, and the information required to determine affordability. These are discussed below.
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ENVIRONMENTAL COST/BENEFIT ANALYSIS The guidance suggests that determination of BATNEEC requires both: • an environmental cost/benefit test: a judgement on the extent to which the benefits to the environment of using BAT outweigh the costs of doing; and • a sectoral affordability test: a judgement on the extent to which the cost of using BAT can be afforded without serious damage to the competitive position of a sector These tests are logically independent. There is no reason why the first should lead to the same result as the second. This raises the issue of how the tests interrelate. Pearce & Brisson have strongly argued that the first test should take priority (Pearce & Brisson, 1995). This is for three reasons: a) applying the sectoral affordability test3 involves the regulator in assessing socially acceptable rates of return for a sector which is extremely difficult to do; b) early legal opinion (Bigham, 1992) supports the priority of a cost/benefit interpretation (although other factors may still be relevant); and c) this approach is more consistent with economic efficiency (Pearce & Brisson, 1995, p 34). Pearce & Brisson advocate the use of cost/benefit analysis, based on the monetary valuation of environmental damage.
This recommendation has two major drawbacks. First, it takes little account of the practical realities of implementation and would require resources and skills which the regulator does not have and is unlikely to obtain for the foreseeable future. Second, the results obtained from valuation studies may lack political credibility. Not only are the results highly variable (frequently differing by several orders of magnitude) but the monetary valuation of environmental damage has been subject to a series of damaging philosophical critiques which are considered by many to have undermined its theoretical basis (Vatin & Bromley, 1994; Foster, 1997; Stirling, 1997a; Sagoff, 1998).
Pearce’s argument could be more persuasive were it not linked so closely to monetary valuation. Alternative decision-making techniques, such as multicriteria analysis, can overcome many of the limitations of valuation whilst still providing a robust basis for decisions (DETR, 2000). These techniques can acknowledge the essential subjectivity of 3 Pearce terms the sectoral affordability approach as ‘ corporate burden’, and the cost/benefit approach as ‘national economic burden’.
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environmental appraisal, while maximising the transparency and accountability of the decision-making process (Stirling, 1997b). Such techniques would still present a challenge to regulators as they require considerably more effort and resources than existing approaches, as well as wider participation. But the use of alternative techniques still leaves open the question of how cost benefit analysis and sectoral affordability should interrelate.
While both HMIP and the Department of the Environment (DoE)4 were interested in developing an intellectually robust approach to evaluating BATNEEC, they had to recognise the drawbacks of monetary valuation and the complex realities of policy implementation. The result was to advocate a ‘pragmatic’ approach, in which much reliance is placed on the professional judgement of the regulator and on comparisons with best practice in the UK and overseas. This is the traditional UK approach and continues to be applied by Inspectors today. But many within the DoE remained uncomfortable with the approach and desired a more formal approach to environmental assessment5. This was tied up with broader concerns about how to operationalise BPEO and thereby make the ‘integrated’ approach to pollution control more meaningful. This led ultimately to the BPEO methodology, described below. But this methodology is a complex procedure whose full application has been confined to a subset of new plants or major investments that have multi-media environmental impacts. It has not been regularly applied to BATNEEC assessments of the upgrading of existing plant. This means the pragmatic approach is still dominant in day-to-day Agency operations and is being carried over into the implementation of IPPC.
SECTORAL AFFORDABILITY From the beginning, DoE guidance has stressed that affordability should be assessed at the level of the sector, rather than the individual firm. Hence, the Practical Guide states: ‘....The concern is with what costs in general are excessive; the lack of profitability of a
4 The UK Department of the Environment (DoE) was reformed in 1997 to become the Department of the Environment, Transport & the Regions (DETR). 5 Personal communication with former DoE civil servants.
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particular business should not affect the determination.’ (DoE, 1997). The appropriate benchmark was therefore the average profitability of firms in the sector.
The notion of sectoral affordability has implications which undermine economic efficiency and which are of concern to some sections of government. In principle, it means that the stringency of regulation will depend upon the competitiveness of a sector. Thus, it is possible to envisage two similarly polluting industrial processes in different sectors where more demanding techniques are required for one than for the other, reflecting their differing competitive positions. This means that a higher level of environmental gain could be obtainable for the given level of total investment if that investment were to be differently distributed. As the UK Environment Minister, Michael Meacher, put it during preparation for the IPPC Directive: ‘Some sectors of industry make higher profits than others. Should those which make lower profits continue to be let off controls which apply in more profitable sectors of industry? And is it right to say to a sector of industry ‘you could save five pounds worth of environmental damage by spending four pounds, but we won’t make you do so because we think you are too poor?’ (Meacher, 1997)
The DoE saw the introduction of the IPPC Directive as an opportunity to weaken the public commitment to sectoral affordability in favour of environmental cost/benefit analysis. The DoE claimed that this was possible because the definition of BAT in the IPPC Directive had no equivalent to the AFD requirement to consider the ‘..economic situation of undertakings belonging to the category in question' (DETR, 1997, p16)6. As argued below, this interpretation of the intent of the Directive can be challenged, but the move reflects the long standing discomfort with sectoral affordability within the DoE. In the first consultation paper on IPPC, the DoE suggested that the requirement for sectoral affordability be dropped altogether, with decisions being made entirely on the basis of abatement costs and environmental benefits. Following industry opposition, the second consultation paper retreated somewhat:
6 An earlier interpretation along these lines is given by Emmott and Haigh (1996), p306.
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‘ the Government proposes that sectoral affordability should be phased out relatively gradually, as Guidance Notes are developed containing clear indicative standards based on an underpinning analysis of the costs and benefits of different measures in different sectors.’ (DETR, 1998)
The rhetoric, therefore, is about a gradual movement towards stricter regulation based on environmental cost/benefit analysis. The results of this analysis are intended to be reflected in the Guidance Notes. However, this process seems to be largely an issue of public presentation. There is a large gulf between DoE pronouncements and the practical realities of implementing IPC at the site level.
IMPLEMENTATION REALITIES In principle, the application of either environmental cost/benefit analysis or sectoral affordability could lead to a plant being closed. For closure to happen as a result of sectoral affordability, it is necessary that: a) the plant is significantly less profitable than the average within the sector; b) the costs of the abatement measures required by the Agency are sufficient to put it out of business; and c) the Agency has sufficient political authority to carry this through. In practice this has never happened and there is little expectation that it will happen.
The problem is that individual Inspectors are unlikely to have sufficient authority to require the closure of a dirty but high profile industrial plant on the grounds of a contestable concept such as BATNEEC. While such an outcome could be envisaged if a plant was violating mandatory environmental quality standards, in the majority of cases there is no such constraint. Instead, the Inspector has to negotiate issues of costs, benefits and affordability at the site level, in the context of limited resources and information asymmetry.
The site level implementation of IPC is described in Smith (1997), Fineman (1998), Gouldson & Murphy (1998) and Sorrell (2001). This shows that while Inspectors need detailed technical and economic information to set authorisation requirements, they are largely dependent upon industry for this information. In this context, Inspectors typically
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try to build a relationship of trust and co-operation with industry, preferring this to the imposition of strict standards. The meaning of BATNEEC is determined locally on a site specific basis through a process of negotiation. The emphasis is on flexibility, discretion and a search for consensus. Trust is placed in the confidential information supplied by the company and there is a reluctance to use sanctions. Thus: ‘..regulation involves a mutual explanation of what is possible......it is a process of discussion and learning.’7 While this process can have several benefits, it clearly creates the risk that the stringency of regulation may be watered down (Gouldson & Murphy, 1998, chapter 5).
In practice, BATNEEC negotiations are dominated by debate on abatement costs and environmental benefits. Inspectors lack the competence and, more importantly, the information to explore questions of affordability in a formal way. But this does not mean that questions of affordability are ignored. Instead, affordability seems to be treated in a tacit and implicit way, with the profitability of the individual company defining the boundary of the possible. For example, in the refinery sector the difficult economic situation of individual refineries is acknowledged as a severe limitation on what can be achieved, but there is no explicit analysis of the potential impact of abatement measures on refinery profitability: ‘We don’t have detailed economic data. It’s only since the Foster Wheeler study came out ... and if [an Agency employee] has any more economic data that he’s putting in the new Guidance Note. They are the only official benchmarks that we have. In the absence of those, I’ve always looked at things like the cost per unit tonne of pollutant abated....I’ve never been able to argue about profit margin with the refineries because they say there isn’t a profit margin at the moment.’8
Refineries have resisted abatement measures by arguing that they are on the borderline of profitability and that abatement measures are merely a cost (Sorrell, 2001). Inspectors have used cost/benefit arguments to encourage low cost measures which are
7 Interview with Agency Inspector, November 1999. 8 Interview with Agency Inspector, November 1999.
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acknowledged to avoid to have substantial environmental benefits, but where the investment costs are high (such as with selective catalytic reduction for NOx) or where the environmental benefits are less apparent (such as with measurement of VOC emissions) the justification is very difficult. Operators acknowledge that this has been to their benefit: ‘If you take a societal view, you can truly recognise that over the long term 'grandfather-type' plants don't have the right to exist. That BATNEEC should be a sector thing - so you should be assessing all refineries equally. I fully recognise that. But I don't think, to date that has happened. I think all the discussions that we have had are about local BATNEEC - which has suited us very well, made my job easier and in terms of saving investment for this refinery, it probably has helped.’9
Not only is affordability inherently difficult to assess, but the process of regulatory decision-making is clouded by commercial confidentiality and the dominance of informal, un-minuted negotiations (Smith, 1996; Smith, 1997; Sorrell, 2001). This makes assessing the importance of affordability considerations in regulatory outcomes very difficult. But the strong impression from existing studies is that the context of site level negotiation, information asymmetry and a culture of co-operation all contribute to making the affordability of abatement by individual firms a more important criterion than abstract notions of sectoral affordability. As Fineman notes: ‘The public credibility of regulation hinges upon its impartiality and independence of the regulator. There is evidence that this is a wistful ideal ... The preferred collaborative style of many Inspectors lent itself to mutual capture.’ (Fineman, 1998)
DETERMINING AFFORDABILITY Whether determined at the sector or firm level, the concept of affordability implies analysis of abatement costs and financial performance. In early guidance to Inspectors, the DoE recommended that affordability be assessed in terms of the effect on the cost of a sectors’ products, taking this as a measure of competitiveness (HMIP, 1991a). But while the regulator may be able to estimate the impact on production costs, this is not
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the same as the impact on product prices. The extent to which costs can be passed on to product prices depends upon the market situation of the firm (Pearce & Brisson, 1995, p32). In competitive markets the firm may be a price taker and cost increases must either be passed to suppliers or absorbed by lower returns. Hence, in addition to determining abatement costs, the regulator must assess the economic situation of supply markets, the overall profitability of the sector and the extent to which costs can be passed on to product prices. This is a tall order, and requires both a high level of competence in economic analysis and comprehensive economic information about each regulated sector.
When IPC began, the 400 strong staff of HMIP did not include a single economist. The dominant professional culture was chemical engineering, reflecting the industrial background of the majority of Inspectors. The level of competence in economic analysis was consequently very limited. It was obvious, therefore, that HMIP lacked the capacity to evaluate BATNEEC in the manner recommended by the DoE. This led to the appointment of an economist, Tom Gameson, in 1993 who was given the task of providing guidance on the economic assessment of BATNEEC.
Gameson produced a draft report on economic evaluation in 1993, although this was never officially published (Gameson, 1993). The report describes an elaborate and sophisticated approach to evaluating excessive costs that was intended to be employed during the development of the Guidance Notes. The analysis splits into two elements: estimating abatement costs at the plant and sector level; and estimating the economic impact of those costs.
The first stage is a straightforward application of engineering cost analysis - which is not to say that it is easy to do, owing to major difficulties associated with obtaining accurate data and allowing for site specific factors (van Seters, 2000) . Gameson recommends evaluating at least four levels of emission abatement. Estimates are required for capital costs, O&M costs, installation costs and operating life, together with private benefits
9 Interview with refinery environmental manager, December 1999.
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such as reduced energy use. Annualised cost curves for a single plant can be derived and then aggregated to the sector level. These can be expected to show major breakpoints, where large increases in costs yield little improvement.
The second stage is more elaborate, more difficult and unlikely to be familiar to regulators. It attempts to estimate how increases in production costs will be distributed between increases in product prices, passed back to suppliers or absorbed as lower profits. This requires an analysis of the structure of product markets, including competitiveness, demand elasticity and the import/export balance. Gameson develops a model to project possible plant closures, and recommends the use of financial ratios to assess the impact on the viability of the firm. He also describes a much simpler approach, which does not attempt to determine the impact of pollution control costs, but merely provides benchmarks of a sector/company/plant’s ability to afford pollution control costs. This uses standard data from company reports to produce ratios that are familiar measures of financial performance, including liquidity, solvency and leverage.
Soon after the report was completed, HMIP were caught up in the preparations for the Agency, which may be one reason why it had little impact. But more importantly, the recommendations were over-ambitious and proved impossible to implement given the limited information and resources available to either HMIP or the consultants employed in developing the Guidance Notes. A consultants report on the refinery sector from 1994 is a good example (ERM, 1994). This was intended to feed into the second series Guidance Note and to use the Gameson methodology to assess affordability. But the report employs a much simpler methodology, confined largely to annualised cost estimates for individual abatement options. Even the simple financial ratio test was eschewed because: ‘....(ratios) will be specific to the individual company and, since refineries are often part of larger operations, they are not necessarily applicable.’ (ERM, 1994, p3).
The refinery sector is not unique in the difficulty of obtaining financial ratios for the relevant regulatory unit. Furthermore, sectors may pose additional problems in the form
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of multiple product markets. For example, in the Chemicals sector one process may be part of another process, or it may produce multiple products in different markets. Some of these markets may be competitive, others monopolistic. It would be practically impossible to explore the implications of abatement costs for product prices in such a situation.
The Gameson report clearly demonstrated the difficulties inherent in assessing sectoral affordability and the inadequacy of earlier injunctions to use a ‘cost of products’ test. It seemed that a robust methodology for assessing affordability at would require a highly detailed assessment of the economics of each sector, based on information that was either difficult or impossible to obtain. But, despite these difficulties, HMIP and the DoE still wanted to establish some economic guidance for Inspectors, since the first round of Guidance Notes contained no economic information at all. This was subsequently given in the BPEO methodology and the second series Guidance Notes.
EXCESSIVE COSTS IN THE BPEO METHODOLOGY BPEO is a framework concept which aims at an optimum solution for the environment as a whole. For processes which are likely to release substances to more than one medium, EPA90 states that: ‘...BATNEEC should be used for minimising the pollution which may be caused to the environment taken as a whole, having regard to the BPEO’ (HMG, 1990).
The apparent absence of an integrated approach in the early authorisations led to criticism of IPC, and HMIP spent much effort attempting to operationalise the BPEO concept through the development of formal techniques. In April 1994, it published a consultation document outlining a proposed methodology for assessing the overall environmental impact of abatement options, together with their annualised costs (ENDS Report, 1995a).
The proposed methodology came under some criticism for being overly mechanistic, for trying to reduce multifaceted environmental impacts to a single index, and for excluding
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numerous off site and indirect impacts (ENDS, 1995a; Hartnell et al, 1994). The revised version, published in 1995, went to some lengths to emphasise that it was not prescriptive (EA, 1998). Instead, the methodology was merely an aid in the process of determining the BPEO and was not meant to replace expert judgement. The methodology contains guidance on assessing the costs of abatement options, which resemble the procedures in the first half of the BATNEEC report. However, there is no reference to economic impact, affordability or cost of products tests. Instead, the aim is to compare abatement options in terms of: a) total annualised costs; b) incremental costs compared to incremental environmental effects; and c) incremental costs compared to the option with the greatest environmental effects. The BPEO is then: ‘.... the option which provides the most benefit for least damage to the environment as a whole, in the long term as who well as the short term, at a cost that is not excessive.... In a practical sense the option which is the BPEO could be regarded as the “break point” where the marginal costs of further reductions in pollution potential start to rise significantly....... By reference to this methodology and by the application of professional judgement, the Agency beliefs that operators should be able to identify and justify the BPEO....’ (EA, 1998, p32).
Hence, the document concerns itself solely with comparing environmental impacts in different media and assessing abatement cost curves. The BPEO is determined by combining the results with professional judgement, focusing in particular on breakpoints in the cost curve. But despite the reference to excessive costs, BPEO is not synonymous with BATNEEC. While the BPEO methodology provides important guidance on the cross-media comparison of environmental impacts and on the evaluation of abatement costs, it has nothing to say on affordability. To the extent that BATNEEC requires consideration of affordability in addition to consideration of cost/benefits, the BPEO methodology only addresses a portion of the problem. In support of this, document states that the methodology is to be complemented by other work, including the provision of economic information on industry sectors in the revised Guidance Notes.
The BPEO methodology now sits alongside the Practical Guide and the relevant Guidance Note as being important reference sources for individual authorisation
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decisions. However, the methodology is complex10 and it’s use has largely been confined to new plant, or major modifications to existing plant, and to those processes which have multi-media impacts. It is not used for the majority of authorisation decisions, where negotiation and expert judgement continue to play a more important role. Also, while the guidance on assessing abatement costs is undoubtedly useful, there is still a gap on assessing affordability.
BATNEEC IN THE REVISED IPC GUIDANCE NOTES The IPC Guidance Notes provide guidance to field Inspectors on the processes used in different sectors and the emission standards and abatement techniques which should be taken into account when assessing individual applications. The Notes carry no statutory authority and are merely a ‘...material consideration to be taken into account’ in determining individual authorisations (DoE, 1997).
The first series of Guidance Notes were published six months prior to the beginning of the application period for each process type and were based on consultants’ studies of each sector, known as BAT reviews (Smith, 1997, p140-146). The original intention was to revise the Guidance Notes every four years, although this timetable has frequently slipped. The ‘second series’ notes began appearing in 1995. Future Notes will be linked to the BREFs being developed under IPPC11.
As Smith has demonstrated, the consultants conducting the original BAT reviews lacked detailed information on industrial processes, environmental emissions and abatement options (Smith, 1997, p140-146). While they were reliant on industry to supply that information, they lacked the legal resources to obtain it. Furthermore, industry itself frequently lacked the required information owing to inadequate monitoring of environmental emissions. The result was that the first Notes did not contain the simple
10 The revisions currently underway to the methodology should reduce this problem (Maleham et al, 2000). 11 Full details on the guidance being produced by the Agency is available on the Agency website at: http://www.environment-agency.gov.uk/epns/package.html.
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presentation of abatement options, environmental performance and costs that HMIP desired (Smith, 1997, p145). Instead, they contained qualitative descriptions of process operations and abatement techniques, with relatively few quantitative standards. Those few standards that were included were based on previous regulations, individual Inspector experience or similar sources. Economic information on abatement costs or the ability of the sector to afford those costs was entirely absent.
The wording of the first few Notes implied that quantitative standards and upgrading timetables were mandatory (HMIP, 1991b). This prescriptiveness was heavily criticised by industry and was difficult to defend given the wording of EPA90 (Smith, 1997, p146-7). The subsequent history of the Guidance Notes has been one of retreating from such prescriptiveness and increasing the emphasis on site level negotiation of standards. This applies as much to new plant as to the upgrading of existing plant. Thus, second series Notes contain the following caveats: [New plant]
‘....The concepts of BATNEEC and BPEO expressed in the EPA90 and
associated Regulations are site specific. This Note cannot take into account such sitespecific considerations. Thus,.....the benchmarks should not be applied as uniform release limits. They are indicative, but not prescriptive, for new processes.’ (EA, 1996a) [Existing plant] ‘....Whilst it may be possible to make improvements to existing processes using techniques..... the state and design of some existing plant may prevent operators from achieving the release levels given in this Note, even with improvements......Improvement plans are a site specific issue therefore no target dates are included in this Note.’ (EA, 1996a) [Quantitative standards] ‘..The levels given are achievable release levels and are not emission limits’ (EA, 1996a)
While the second series Notes emphasised the importance of site-level negotiation, they also began to include economic information to assist Inspectors in determining excessive costs. The Petroleum Process Guidance Note was one of the first to be revised and HMIP employed consultants to evaluate the economic implications of various abatement options (ERM, 1994). It was expected that this would lead to guidance on affordability in the Note, or that the study would be published as an annex
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to the Note (ENDS, 1995b). In the event neither occurred, due to dissatisfaction within HMIP over the contents of the study and concern about the reaction of the petroleum industry12. As a consequence, the Note was published without any reference to economics.
Despite this experience, the newly formed Agency persisted in seeking improved economic information, and the November 1996 Guidance Note on Incineration was the first to include a section on financial implications (EA, 1996b). This was based on BAT study of the sector (EA, 1995) and included guidance on the state of the industry and the cost of different abatement options. The financial section takes up only two pages of a 70 page document and provides relatively little numerical guidance. But it reiterates commitments to both environmental cost/benefit analysis and sectoral affordability, and indicates that an assessment of product markets is a necessary part of a BATNEEC judgement: ..... there are two elements to the ability of a representative operator in any industry to bear extra abatement costs. One relates to the financial resources typically available for capital expenditure..... The other depends on the extent to which costs can be passed on to customers, passed back to suppliers, or absorbed by lower returns within the industry.’ (EA, 1996b)
The reaction of industry to these first tentative attempts at financial guidance was hostile. The Energy from Waste Association (EWA) said the assessment was complacent, simplistic and incomplete (ENDS, 1996a). EWA disputed HMIP’s conclusion that, because environmental controls amount to only 15% of capital costs, regulation was unlikely to inhibit incineration in favour of landfill. EWA argued that this did not take into account plant size, type of ownership and operating costs. This was one of a number of comments that appeared to misunderstand the meaning of sectoral affordability. For example, the Water Services Association (WSA) argued that:
12 Interview with Agency employee, November 1999.
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‘...BATNEEC should be about value for money in terms of environmental improvement - not whether a particular industry can afford to pay.....The issue as to whether the water industry is excessively profitable is one for OFWAT13, not HMIP’ (quoted in ENDS, 1996a).
The WSA represented a profitable industry that was trying to avoid extensive environmental regulation ‘just because it could afford it’. The WSA preferred a sole reliance on environmental cost/benefit analysis, in contrast to the EWA who wanted individual firm affordability to be considered. The scope for confusion was considerable given that, on the one hand, the Note stated that BATNEEC was site specific, while on the other hand it asserted the importance of sectoral affordability. The same pattern of hostile industry reaction to relatively limited guidance on affordability was repeated for subsequent Notes. Also apparent was the difficulty of obtaining sufficient information with which to evaluate affordability. For example, the Guidance Note on lime kilns described problems of overcapacity and threats from imports in the industry, but was unable to put a figure on the level of investment which a typical operator could afford. Instead, it concluded that: ‘in general.....the industry should be able to afford to improve its overall environmental performance’ (EA, 1996a).
The most recent updates to Guidance Notes were in 1999, before UK guidance became explicitly linked to the BREFs under IPPC. The 1999 Notes include more coverage of economic issues, but this is still patchy and largely non-quantitative. For example, the Guidance Note on Large-volume organic chemicals emphasises that, owing to site specific factors and the ‘variation in the business background to different production processes’, it is not possible to provide quantitative guidance on excessive costs (EA, 1999). Similarly, the first Note to be linked to the BREFs contains only one page of economic information, confined to rough estimates of abatement costs for a subset of techniques (EA, 2000)
The conclusion we can draw is that the evolution of the Guidance Notes reflects two, partially contradictory trends. The first is a retreat away from prescriptiveness and an 13 OFWAT is the economic regulator for the privatised water industry in the UK.
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emphasis on site-level negotiation of standards. The second is an attempt to introduce more economic information, both to inform Inspectors about the economics of abatement options and to encourage the use of sectoral affordability as a benchmark. Economic information is still very limited in the majority of Notes and is very much secondary to the technical description of industry processes and abatement equipment. While the text of the Notes acknowledges that the determination of affordability implies assessing the ability to of a sector to pass on costs, the information provided is never sufficient to achieve this. While this is largely due to the inherent difficulties of economic analysis and of obtaining economic information, it also reflects a continuing bias within the Agency towards expert judgement by technologists rather than formal methods of economic analysis. This in turn has influenced the Agency’s spending priorities in commissioning BAT studies and consequently the content of the subsequent Notes.
IPPC: FROM BATNEEC TO BAT IPPC is likely to have less impact in the UK than in other Member States due to the similarities between IPPC requirements and the existing regime (Skea & Smith, 1997). Nevertheless, the introduction of IPPC has required new legislation and stimulated a variety of initiatives.
The definition of BAT under IPPC effectively subsumes both BATNEEC and BPEO. Instead of the NEEC qualification, BAT includes economic considerations in it’s definition of ‘available’: ‘... developed on a scale which allows implementation in the relevant industrial sector, under economically and technically viable conditions, taking into consideration the costs and advantages, whether or not the techniques are used or produced inside the Member State in question, as long as they are reasonably accessible to the operator’ (CEC, 1996)
Here, ‘costs and advantages’ can be related to what we have termed environmental costbenefit analysis, while ‘economically and technically viable conditions’ can be related to
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sectoral affordability (Gislev, 2000). The following quote from the Head of the European IPPC Bureau confirms this interpretation: ‘Implementation under economically viable conditions seems to imply, amongst other things, some sort of ability of the operator to afford the technique......For the former, we may want a cost per unit of product.....However, the Directive definition of “available” does not seem to require that the technique has to be economically and technically viable for every installation in order to be economically and technically viable for the sector.’ (Litten, 2000)
Hence, contrary to the statements made by the DETR during consultation on implementing the Directive, IPPC does not imply the abandonment of sectoral affordability. This is acknowledged in the first UK Guidance Note under IPPC, which makes reference to affordability: ‘At this national level, techniques which are considered to be BAT..... should normally be affordable without making the sector as a whole uncompetitive either on a European basis or world-wide’ (EA, 2000)
While this seems reasonable, it means that the practical difficulties of assessing affordability are carried over into the implementation of IPPC. As with IPC, the guidance to date has been dominated by discussion of abatement techniques. The first Guidance Note under IPPC relies heavily on the corresponding BREF and neither document gives any useful guidance on determining affordability (EA, 2000; CEC, 2000). Also, the reliance on expert judgement seems to be given even greater emphasis than before. Thus, in a paper describing proposed revisions to the BPEO methodology, Maleham et al note: ‘...the variability between one situation and another and the uncertainties involved led us to consider replacing (the Integrated Environmental Index) with a final step of “expert judgement” to decide how to balance the various, individually quantified impacts and costs’ (Maleham et al, 2000, p8).
At the same time, the Agency has begun some much needed initiatives to improve the level of economic information available to Inspectors. For example, a pilot cost database is being developed for use in benchmarking, which includes a full breakdown of cost
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components, together with qualitative contextual information to ensure its effective use (Pollard, 2000).
SUMMARY AND CONCLUSIONS Framework concepts such as BATNEEC cannot be reduced to simple rules. Instead, their meaning must be interpreted by the regulator at a sector or site level in the context of severe resource constraints and endemic information asymmetry. The ten year history of applying BATNEEC in the UK has generated valuable experience but some key questions remain unresolved. These include: • how can both environmental cost benefit analysis and sectoral affordability be operationalised in an effective manner? • what should be the balance between these approaches in regulatory decision-making? • what should be the role of formal analytical techniques, as compared to expert judgement? A tension is apparent between public pronouncements, such as the proposed ‘abandonment’ of sectoral affordability under IPPC, and the realities of site level implementation. Inspectors are not trained in economic analysis and are severely lacking in suitable guidance on both the cost of abatement options and the economic situation of industrial sectors. Most regulatory decision-making pays little attention to sectoral affordability and assesses abatement costs and environmental benefits in a relatively informal manner. While the rationale for decisions is often hard to assess, it seems likely that an implicit criteria of individual firm affordability has frequently played a decisive role. The introduction of IPPC does not substantially alter the nature of these problems. However, the activities associated with implementing IPCC offer an opportunity to address the issues in a more robust way. Recent developments that may assist in this include: • the process of developing the BAT Reference Notes at an EU level (Emmott et al, 2000); • the proposed revisions to the BPEO methodology, which aim to make it more accessible and ensure it’s more widespread use (Maleham et al, 2000); • the increasing inclusion of economic information in the UK Guidance Notes;
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• the recent attempts at economic training for Inspectors; • the moves to strengthen the role of individual sector groups within the Agency (Sorrell, 2001); and • the development of a database on abatement technologies and costs (Pollard, 2000). While there is no space here to provide detailed recommendations on the way forward, three broad principles may be suggested.
First, since the process of environmental appraisal is inherently subjective, decisionmaking procedures must be transparent and, where possible, open to participation. At present, too much reliance is placed on ‘expert judgement’, which is simply shorthand for the exercise of value judgement by a professional (Hartnell, 1994). Alternative decision-making procedures are available which include subjective weighting scales for different types of environmental impact, together with the use of sensitivity analyses (Stirling, 1997b). These should be considered in any further development of the BPEO (now BAT) methodology. Similarly, experience has shown that the public information registers are a passive and ineffective means of encouraging participation. While extensive public consultation is clearly inappropriate for the minutiae of site-level decision-making, there should be scope for more active participation in the development of assessment tools, guidance notes or major process applications. Second, there should be provision of more extensive information to Inspectors on economic assessments, abatement costs and affordability. While acknowledging the inherent difficulties of economic appraisal, the total absence of such information from much regulatory guidance does not seem defensible. Information asymmetry cannot be avoided, but it’s consequences can be ameliorated by the provision of independent information where possible. Finally, a serious attempt should be made to improve the consistency of regulation, both within sectors and between sectors. Empirical studies suggest that the present context of site specific determinations leads to considerable inconsistency in regulatory requirements between plants in the same sector (Sorrell, 2001). Furthermore, the absence of centralised records, the lack of publicly available cost information and the
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diversity of means by which regulatory requirements are expressed14, all make the comparative evaluation of the stringency and cost effectiveness of regulation very difficult. While site specific considerations will always lead to differences in requirements, efforts to achieve consistency will help counter the suspicion that individual firm affordability continues to play the dominant role.
ACKNOWLEDGEMENTS Research used in this paper formed part of the ‘Technology & Environmental Policy (TEP)’ project (PL 970779), funded by DGXII of the European Commission under the Framework IV Environment and Climate Program15. The author would like to thank the many individuals from the Environment Agency and regulated companies who gave up valuable time to be interviewed for this project. Thanks also to Ronan Palmer and Tom Gameson for comments on an earlier version of this paper. The usual disclaimers apply.
REFERENCES Bingham, A. 1992. ‘Excessive’ in BATNEEC. Integrated Environmental Management 7: 4-7. Boehmer-Christiansen S, Skea J. 1991. Acid politics: environmental and energy policies in Britain and Germany. Belhaven Press: London. 14 For example, regulations on sulphur emissions from the ‘sulphur recovery unit’ at oil refineries are variously expressed as a concentration limit (mg/m3), a short-term mass limit (kg/hr), a required sulphur recovery rate (%) or as part on an overall annual emission limit (tonnes/year) for the whole refinery (Sorrell, 2001). In addition, the proportion of sulphur containing streams that are actually fed to the unit is not specified, and crucial requirements on reliability are frequently omitted. The fact that authorisations undergo ‘variations’ at different points in time further complicates analysis, as does the practical difficulties of obtaining the relevant paperwork, which is only available in the public register nearest to the refinery site. In sum, the available information makes it virtually impossible to compare the stringency of regulation between refineries. Similar conclusions apply to other process types. 15 Full results from the TEP project are available on the MERIT website at: http://meritbbs.unimaas.nl/tep/.
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