How much will it Cost to Join the Club? The Extra Costs of Approximating Lithuanian Environmental Laws with those of the European Union1 Randall BLUFFSTONE Department of Economics University of Redlands 1200 E. Colton Avenue Redlands, California USA 92373
[email protected] Daiva Semeniene Center for Environmental Policy Vilnius, Lithuania
[email protected] Jochem Jantzen TME, b.v. The Hague, The Netherlands
[email protected] Key Words: Abatement, Central and Eastern Europe Compliance, Costs, European Union
JEL Categories: P3, Q28
Revised November 2002
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The authors thank Grzegorz Peszko and an anonymous reviewer for helpful comments on this paper. They also gratefully acknowledge financial support for this work from the European Commission and the Ministry of Environment of Lithuania under Phare services contract 96-1272-00 and Gretta Goldenman of Milieu Ltd., who directed the project. The Environmental Protection Agency of Denmark is also acknowledged for its support of analyses that were used in this paper. In addition to the three authors, Krzysztof Berbeka, Arunas Kundrotas and Grzegorz Peszko contributed substantively and significantly to analyses that underlie this paper. 6 This publication is available at http://europa.eu.int/en/comm/dg11/dg11home.html
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Abstract This paper presents estimates of costs associated with approximating Lithuanian environmental protection legislation with that of the European Union (EU). Lithuania is one of twelve EU associate members in Central and Eastern Europe that is currently preparing for accession by approximating their legislation with that of the EU. The costs of fifteen EU directives are considered and details are given on four directives. Necessary investments may total €1500 million by 2015 and the present value of all annualized costs is expected to be about €2200 million. In 2015, annualized costs are estimated to be approximately €500 million, but these costs are only part of the total costs of approximation. Non-environmental costs are not considered. Assuming a modestly ambitious average annual growth of GDP of 2.0% per year implies that approximation with the fifteen directives analyzed will cost roughly 3.5% of GDP in 2015. This level of additional commitment to environmental protection is itself much higher than the 2.0% of GDP being spent on average by OECD countries and suggests the possibility of a substantial economic burden on the Lithuanian economy. Public budgets and households are expected to carry a substantial portion of this cost, because many directives are the responsibility of national and local governments. Making the right choices that are expected to be part of approximation with the environmental acquis is likely to benefit from careful comparisons of costs and willingness to pay for the environmental benefits of approximation.
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1. Introduction This paper presents estimates of the costs of approximating Lithuanian environmental protection legislation with that of the European Union (EU).2 Lithuania is one of twelve Central and Eastern Europe EU associate members that is preparing for accession by approximating its legislation with that of the EU. Lithuania began its negotiations in 1999, following on the heels of the Czech Republic, Estonia, Hungary, Poland and Slovenia, and recently completed its negotiations with the EU on the environmental “chapter” of the overall acquis. This paper represents a selective summary and synthesis of results presented in Milieu Ltd. (1998), which was prepared as part of a major effort by the EU to assist associate members in their efforts to join the EU. These estimates are augmented by additional information from more recent project-level analyses. Costing studies have represented a first step toward prioritization of approximation measures, helping policy makers to identify where expenditures can have high environmental payoffs and where the environmental returns from some investments in Central and Eastern Europe (CEE) may not warrant the costs. 3 The costing studies are also directly useful to the EU as it defines its program of financial support for approximation. It is expected that more than one billion euros will be available from the EU during the period 2000 to 2006 to support approximation. Differences in levels of economic development between CEE countries and the EU are proving to be important. Gross national product (GNP) per capita in purchasing power parity terms in CEE countries averaged about $7500 in 1999, compared with $23,500 per person average in Western Europe. Low incomes combined with seemingly high cost estimates have resulted in what appear to be some very high compliance burdens. For example, Environmental Policy Europe (1997) estimated that that annualized costs of approximation over the whole region would be in the range of 4 – 6% of GDP. This result implies total annualized costs of € 10 – 15 billion per year. As will be discussed below, depending on economic growth, in Lithuania the annualized cost of approximating with the acquis may require 5-6% of GDP in some years, certainly suggesting a very high opportunity cost for the economy and therefore the need for judicious choices, creative policy making and innovative financing.
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Section 2 of this paper presents a review of the literature on the costs of approximation in the environmental sector and in Section 3 the methodology is discussed. Section 4 gives the results for the air protection directives, with an emphasis on the Directive on Limitation of Emissions of Certain Pollutants from Large Combustion Plants (88/609/EEC as amended in 1994). Section 5 discusses work on water pollution, particularly with regard to the Directive Concerning Urban Wastewater Treatment (91/271/EEC). Section 6 presents results on the Council Directive on the Landfilling of Waste (1999/31/EC). In the final section, summary results are discussed and it is found that cumulative investments in 2015 will probably reach €1500 million. Annualized costs of compliance in 2020 are expected to reach €570 million, generating costs per household of approximately €400, which will probably be 8% to 10% of total household income. It should be emphasized, though, that these costs are only additional environmental costs and therefore represent only a small portion of the total costs of approximation. 2. Literature Review As CEE countries move toward accession, a policy literature is emerging on the costs of approximation in the environment sector. Most notably, perhaps, is the general methodological framework that was presented in Anderson and Peszko (1997) and the preliminary cost figures from Environmental Policy Europe (1997), but other studies such as those done by Cofala et al (1997), World Bank (1998) and Jankowski et al (1997) have also evaluated the cost implications of approximation with the environmental acquis. Issues of cost have also been raised from time to time in the newsletter “Enlarging the Environment,” which is published by the Environment Directorate of the European Commission. Since the work summarized in Milieu Ltd. (1998) was completed, the body of directives studied has expanded and the estimates of Milieu Ltd. (1998) have been extended. For example, Soil and Water Ltd. and the Environmental Policy Center of Lithuania estimated the costs of 80/778/EEC (directive on drinking water quality) and, with support from the Dutch firm TME, the main directives and regulations on chemicals (Soil and Water Ltd. 1999a; 1999b). CowiConsult (1999a; 1999b) estimated costs as part of strategic plans for waste management in Lithuania. Paulsson (1998) projected the costs of
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hazardous waste management and Danagro a/s (2000) conducted a similar analysis for 91/676/EEC (directive on management of nitrate emissions). These more recent estimates are cited in the paper and in the Appendix, which includes details on all directives. Within this literature, concerns have been raised about the ability of accession countries to use economic instruments to mitigate costs. Most associate member countries have extensive systems of pollution charges combined with permits as core components of their environmental policy systems, and Lithuania is no exception (Bluffstone and Larson, 1997). If economic theory is correct, these instruments are currently reducing compliance costs compared with more rigid mechanisms. The efficacy of economic instruments, and particularly pollution charges, in an EU approximation world is, however, unclear. The European Commission has emphasized that such instruments are allowed as long as they do not contravene free-trade elements of EU law,5 but limits to the use of taxes and charges have also been noted. As was explicitly stated on the cover of Enlarging the Environment in December, 1997, “Associated Countries should be aware that however useful taxes and charges can be as supplementary instruments for environmental policy, they cannot substitute for traditional measures as a means to achieve approximation.” 6 Concerns that approximation is incompatible with economic instruments like pollution charges have been raised by some economists (e.g. Zylicz, 1997; Bluffstone, 1998). As Zylicz (1997) discussed, for example, “… the evolution of EU legislation over the last decade has been heavily influenced by the technological approach. This culminated in the Directive on Integrated Pollution Prevention and Control in 1996. By emphasizing the key role of BAT … there will be a strong tendency in environmental protection to let technological considerations dominate over other aspects of managing space and natural resources.” 3. Methodology and Scope of the Analysis It is well known from previous work in CEE countries and from the experience of the so-called “cohesion” countries (Greece, Ireland, Portugal, and Spain) that compliance with three directives will be particularly costly compared with the rest of the acquis. These directives are the Directive Concerning Urban Wastewater Treatment (91/271/EEC), Directive on the Landfilling of Waste (99/31/EC) and the Directive on Limitation of
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Emissions of Certain Pollutants from Large Combustion Plants (88/609/EEC). The costs of these directives are therefore the focus of this paper. In addition to these three directives, cost estimates were made for the directives below, as well as for the non-attributable costs of increased monitoring and enforcement. • • • • • • • •
99/32/EC – Directive Relating to a Reduction in the Sulphur Content of Certain Liquid Fuels and amending Directive 93/12/EC; 96/61/EC – Directive on Integrated Pollution Prevention and Control (partial analysis for large combustion plants only). 94/63/EC - Directive on the Control of Volatile Organic Compound Emissions Resulting from the Storage of Petrol and its Distribution from Terminals to Service Stations; 94/62/EEC - Directive on Packaging and Packaging Waste; 93/12/EEC - Directive Relating to the Sulfur Content of Certain Liquid Fuels; 91/689/EEC - Hazardous Waste Framework Directive; 91/676/EEC – Directive on Protection of Waters Against Pollution Caused by Nitrates from Agricultural Sources; 85/210/EEC – Directive on Approximation of the Laws of the Member States Concerning the Lead Content of Petrol; A vigorous debate has been underway since 1997 regarding the best ways to conduct
such studies. After all, there are no data on past approximation efforts by associate members, and therefore responses to the approximation challenge must be predicted with rather limited country-specific empirical backing. The method followed in this paper was to use data from pollution sources and predictions about the future to construct a baseline emissions path that covered the period 2000 – 2020. We then defined a set of “approximation scena rios” that we thought were reasonable ways Lithuania could meet the requirements of EU membership.7 The Model on Sustainable Economic Systems (MOSES) developed by TME Ltd. was then used to apply a database of technological options (and associated unit costs) to closing the gaps.8 The operator of MOSES defines each source by industry and other key features. S/he also specifies the technologies that those plants would be expected to employ if faced with tightened pollution emission standards. The model then applies those “technologies” to the problem of closing any approximation gaps that exist between baseline emissions and required 7
The actual methods of approximation have been the subject of negotiations between the EU and Lithuania. 22 For example, feasible water supply and sewerage tariffs are generally supposed to be 3.0 – 4.0% of household income.
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emissions. In effect, we create surrogate data on how firms will respond to the requirements in directives, because we cannot construct source -specific cost functions . This paper concerns itself with four types of costs: investments (presented cumulatively), administrative costs, monitoring expenditures and annualized costs. Annualized costs include operational and maintenance costs and amortized capital costs net of any revenues due to sales of recycled or recovered materials. Because annualized costs encompass all costs, including the opportunity cost of capital, they are probably the best measure of the burden associated with approximation and are therefore the main focus of this paper. The time horizon used is the 20-year period between 2001 and 2020. Results are given in five-year increments, with costs assumed to accrue equally during each five-year period. Costs of compliance with individual directives are assumed to start being incurred either by 2005 or by the dates stated in directives. Costs are presented in millions of 2000 Euros (€ millions). The discount rate used for calculation of annualized costs and present values is 10%. The base year for analysis is 2000 in the sense that present values are calculated based on that year. Most data are from 1998.
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4. The Costs of Approximating with the Air Pollution Directives The Directive on Ambient Air Quality Assessment and Management (96/62/EC) is designed to provide a comprehensive strategy for air protection, but actual implementation of the directive relies on the instruments contained in other directives.
The costs of
approximation will therefore largely be due to those directives rather than the framework directive. The Directive on Large Combustion Plants (88/609/EEC) is one of the most important of these directives. The directive applies to facilities that have thermal input greater than 50 MW. The predominant fuel used in Lithuania is heavy fuel oil, though some facilities also use natural gas. The requirements of the directive are two-fold: •
New sources (those constructed after June 1987) must comply with concentration standards for SO2, NO x and particles;
•
Aggregate emissions of SO2 and NO x from existing sources must be reduced (compared to 1980 levels). As of 1996, there were 48 facilities in Lithuania that met the thermal input cut-off,
but no large combustion plants were considered “new,” because they were all constructed before July 1987. The only new sources subject to the concentration requirements will therefore be ones that are built in the future. For each EU member in 1988, there is also an aggregate reduction target for nitrogen and sulfur oxide emissions from existing sources. The year 1980 is the base year for calculating this reduction. In the text of the directive there is no guidance regarding how to treat future EU members. We have therefore assumed that the large combustion plants in Lithuania as a group meet the average percentage reduction that was applied to the EU-12, excluding the increases in emissions given to the cohesion countries when the directive was adopted. Table 1 shows the required reductions. Table 1 Target Reductions for Existing Large Combustion Plants Pollutant 1980 Emissions in Needed reduction by 2003 Lithuania (kilotons/year) (SO 2) and 1998 (NOx) SO 2 162.173 63% NO x 20.761 35% The costs that are incurred over the 20 year time horizon, of
Implied Limit (kilotons/year) 59.940 13.455 course, depend on
general economic conditions and sectoral policies.9 The development that is expected to
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most dramatically affect the time path of emissions from large combustion plants is the planned closure of the two units of the 3000 MW Ignalina Nuclear Power Plant. Lithuania recently committed to close Unit 1 by 2005 if international financial assistance is received to support that step. This loss of capacity will at least partly be replaced by thermal power, some of which is assumed to come from two new sources. Closure delays will reduce the costs of complying with 88/609/EEC.. Another potentially important influence on the time path of emissions is the use of orimulsion as a fuel in two units of the Lithuanian and Vilnius power plants (Lithuanian Energy Institute, 1996). This fuel is imported from Venezuela and has a high sulfur content.10 As it was introduced after 1987, we treat this development as being significant enough that it would fall under the new source requirements.
Lietuvos Energija, the state power
company, used 32 tons of orimulsion in 1997, and at least to date there has been high-level support for its use as a way to reduce dependence on imports from Russia. Another future development is the predicted change in emissions from industrial sectors. Energy projections from Lithuanian Energy Institute (1996) indicate that the use of energy by industry should increase over time, mainly through the increased use of natural gas. This set of assumptions means there will be eleven new sources, five in the power sector. Table 2 shows the projected time path of emissions of NOx and SO2 from existing sources if no abatement takes place. Comparing the final row of this table with the ceilings in Table 1, we see that the SO 2 limit probably was violated in the year 2000.
The NO x
ceilings will be violated by the year 2010. For both pollutants, emissions are expected to rise particularly rapidly after 2008 when the nuclear power plant fully closes. Table 2 Baseline SO 2 and NOx Emissions from Existing Plants with Thermal Capacities over 50 MW if No Abatement is Introduced (in ‘000 tons/year) Sector/ Year: Refining Other Industries Power, oil District heating
NOx 2000 2005 2010 2015 2020
SO2 2000
2005 2010 2015 2020
1.3 1.0
1.6 1.1
1.9 1.5
6.4 2.7
8.1 2.5
8.1 2.4
8.1 2.3
6.5 1.4
7.8 1.5
13.4 12.6 12.6 1.5 1.5 1.5
51.1 12.5
48.2 12.8
94.2 13.0
102.6 102.6 13.2 13.2
2.2 1.6
2.2 1.6
8.1 2.3
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TOTAL
10.3 12.0 18.2 17.9 17.9
72.7
71.5 117.6 126.1 126.1
Based on Lithuanian Energy Institute (1996)
To keep within the existing source ceilings, some steps will have to be taken. Table 3 presents the estimated costs to comply with the SO2 emission limits between 2000 and 2020, assuming that each firm reduces emissions by 63%. No investment costs are incurred, because only fuel switching takes place (this is the lowest-cost SO 2 reduction measure in the MOSES database). We see that costs for these existing 48 plants are expected to be €45.92 million in 2010 and €48.57 million in 2015 and that virtually all the costs fall on the power sector. The power sector carries this burden, because it is the largest emitter of SO2 in Lithuania and its importance will only increase after Ignalina Nuclear Power Plant is closed. Perfectly calibrated pollution charges or tradable emissions rights systems are estimated to reduce annualized costs by 15- 20% in all years. Table 3 Annualized Costs of Meeting the Aggregate SO2 Emission Limit for Existing Sources (2000 € Millions ) Note: No Investments are made. Ceilings are Met Using Low Sulphur Fuels
Five Year Period Ending
Sector Refineries Other Industries Power, Oil-Fired District Heating TOTALS
2005 2.62 0.85 17.99 5.01 26.47
2010 2.62 0.76 37.50 5.05 45.92
2015 2.62 0.71 40.11 5.13 48.57
2020 2.62 0.71 40.11 5.13 48.57
With regard to new source requirements, by far the most important costs are associated with the use of orimulsion. Though the emissions associated with orimulsion are a small part of total emissions, by 2010 almost €40 million would have to be invested in the two plants to meet the limits. In 2010, annualized costs will be approximately €21 million. Table 4 Annualized Costs for Orimulsion-Fired Power Plants to Meet the SO2, NOx and Particulate Concentration Requirements in the Directive (2000 € millions)
SO2 NO x Particulates TOTALS
2005 13.0 1.32 0.09 14.41
2010 19.5 1.80 0.14 21.44
Five Year Period Ending 2015 25.9 4.07 0.19 30.16
2020 32.7 5.33 0.23 38.26
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Faced with these high costs, we believe that Lietuvos Energija will opt to use conventional fuels that would fall under existing source requirements. We therefore assume the use of orimulsion is discontinued. Even without costs associated with orimulsion, however, total costs of 88/609/EEC are expected to be substantial. By 2020, about €25 million will have been invested. Annualized costs are even higher, because the use of low sulfur fuel oil is such an important measure. In 2020, annualized costs are estimated to be approximately €53 million, which is about 0.5% of 1998 GDP.
Table 5 Total Costs of Approximating with 88/609/EEC, Excluding the Potential Costs of Orimulsion (2000 €Millions ) Year Cumulative Investment Annualized Costs
Five Year Period Ending 2005 2010 2015
2020
9.26 28.10
24.98 52.86
11.86 48.03
22.38 52.50
Present Value of 20-year Annualized Cost Stream 255.20 (2000 €Millions)
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5. Water Pollution The Directive Concerning Urban Wastewater Treatment (91/271/EEC) is – in terms of costs - the most important directive regulating water pollution.11 It applies to towns with populations (including industrial effluents expressed as population equivalents) of at least 2000 inhabitants. The directive specifies treatment standards and requires that sewage systems be installed as long as the costs are not “excessive.” The deadline for larger towns is the end of 2000 and smaller towns must comply by 2005.
Where eutrophication is
expected, sewerage was required to be in place by the end of 1998. In most cases biological treatment must be used, and nitrogen and phosphorus removal are also required for discharges flowing into water bodies subject to eutrophication. In the directive, such water bodies are called “sensitive,” but the definition of sensitive is left to member states. As of 2000, Lithuanian waterways had not been classified, but all rivers in Lithuania drain into the Baltic Sea, which is subject to significant eutrophication during warm periods. It is therefore lik ely that most or all receiving waters will need to be classified as sensitive. The directive requires that towns above 100,000 population equivalents remove 90% of the influent BOD during treatment, but for smaller towns the requirement is only 70%. Alternatively, towns can comply with an effluent concentration requirement of 25 mg of BOD per liter of effluent. When receiving waters are sensitive, the limits are 10 or 15 mg/liter of nitrogen and 1 or 2 mg/liter of phosphorus (depending on population equivalents). Alternatively, 80% of nitrogen and 70 – 80% of phosphorus (depending on influent concentration) must be removed. In our analysis, it was assumed that municipalities could meet the BOD reduction target or the effluent concentration requirement, depending on which was cheaper.12 There are 85 towns in Lithuania that will be subject to the directive. Servicing these towns in 1997 were 77 wastewater treatment plants. Some towns had no treatment facilities. In the towns subject to the directive it is believed that over 90% of households are connected to sewage systems.13 The average influent concentrations of pollutants subject to the directive are given in Table 6. Table 6 Estimated Average Influent Concentrations (grams/m3) Source : Ministry of Environment
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Pollutant BOD Nitrogen Phosphorus
Population > 100,000 10,000 < Population < 100,000 292.6 257.8 75.2 41.8 6.2 6.2
2000 < Population < 10,000 296.8 54.6 9.9
To capture the effect of scale economies in wastewater treatment, the 85 towns were divided into five population categories. In cases where treatment facilities were in place, but were inadequate to meet requirements, only the marginal costs of upgrading were included. Table 7 presents the estimated costs of construction or upgrading wastewater treatment plants to meet the cheaper of the concentration or BOD removal standards. Two assumptions about the sensitivity of receiving waters are given.14 Table 7 Costs of Upgrading Wastewater Treatment Plants (2000 € millions ) Sensitivity of Receiving 2005 2010 2015 2020 Waters/Year Cumulative Investment Costs Half of Receiving Waters Sensitive 109.22 182.03 182.03 182.03 All Receiving Waters Sensitive 120.66 201.21 201.21 201.21 Annualized Costs Half of Receiving Waters Sensitive 22.67 37.82 37.82 37.82 Present Value of 20-year Annualized Cost Stream 192.69 (2000 €Millions)
All Receiving Waters Sensitive
27.14
45.24
45.24
45.24
Present Value of 20-year Annualized Cost Stream 230.51 (2000 €Millions)
From Table 7 we see that the costs of upgrading treatment plants to comply with the directive are expected to be quite significant, on an annualized basis reaching 0.4% of 1998 GDP in the year 2010 if all waters are considered sensitive. Connecting the remaining households to sewerage systems may, however, imply even higher costs. It is estimated that Lithuania will need to construct as many as 590 kilometers of sewerage and increase its pumping capacity by 54,400 cubic meters per day if all households in communities subject to the directive are to be connected. Table 8 gives estimated cumulative investment and annualized costs of expanding the sewer network. Assumptions about the sensitivity of receiving waters are not relevant. Table 8
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Costs of Sewage System Upgrading by Year (2000 € millions) 2005 2010
2015
Cumulative Investment Costs 81.53 163.06 271.74 Annualized Costs 12.75 25.51 42.51 Present Value of 20-year Annualized Cost Stream (2000 168.67 €Millions)
2020 271.74 42.51
The costs of raising the connection rate to comply with the directive are expected to be very large, and perhaps will even be considered "excessive." By 2010, perhaps 2.5% of 1998 GDP will have been invested, and in that same year annualized costs associated with connection may reach 0.3% of 1998 GDP. 15 In total, therefore, in 2010 approximately 0.7% of GDP will be spent to comply with the directive. It is arguable, though, that the environmental benefits of expanding sewerage will be negligible.
Virtually all unconnected homes utilize septic systems that are subject to
inspection by Ministry of Environment local agencies.
Given the high costs, serious
questions arise about the efficiency of expanded sewerage. Work reported in Bluffstone and DeShazo (forthcoming) also suggests that willingness to pay si only a fraction of the estimated costs of sewerage extension.
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6. Solid Waste Management The Directive on the Landfilling of Waste (99/31/EC) and the Directive on Packaging and Packaging Waste (94/62/EEC) are the most important directives governing waste management in the European Union.16 Due to the existence of substantial joint costs, these two directives are taken together. In addition to work presented in Milieu Ltd. (1998), two very detailed studies (CowiConsult, 1999a; 1999b) have looked at approximation in the waste sector. Their approach had some advantages over our method that applied MOSES to existing disposal sites. We therefore also report their estimates even when costs were very similar. 99/31/EC requires that all landfills meet a series of technological standards. New landfills must comply immediately and existing landfills must be upgraded within five years after the directive comes into force. The measures applying to new and upgraded landfills include fencing of the perimeter, bottom sealing and leachate collection, surface sealing, pretreatment and compacting of wastes, groundwater monitoring and control, gas extraction and a gradual reduction in the landfilling of biodegradable wastes. Landfills that are closed also must meet certain standards. These requirements include capping and creation of top cover, fencing, gas extraction and leachate control. There are approximately 261 landfills of significant size in Lithuania.17 None of these sites meet the requirements of the directive and few are even in partial compliance. As shown in Table 9, most landfills are in small rural towns. Many of these are uneconomical and closure is therefore expected to be a major and even primary issue. CowiConsult (1999a), for example, recommended completely replacing the existing system with fourteen regional landfills. Table 9 Landfills in Lithuania by Size of Town Size Number of Landfills Major Towns 11 District Towns 70 Rural Landfills 180
Area (m2) 1,042,000 2,400,000 1,500,000
With the exception of Kaunas, the second largest city in Lithuania, there has been virtually no investment in landfills during the period 1991 - 2000 (Ministry of Environment et al, 1998). As shown in Table 10, most wastes are domestic wastes. Two-thirds of this
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category is made up of organic wastes and paper, with glass, metal and plastics, mainly from packaging, making up 14%. The composition is important because of recycling requirements in the directive on landfills, as well as in the Directive on Packaging and Packaging Waste (94/62/EEC). Table 10 Disposal of Wastes in Municipal landfills in Lithuania (‘000 tons per year) Source: Ministry of Environmental Protection (1997)
Waste type
1992
1993
1995
1996
Domestic wastes Street sweepings Garden refuse Food waste Wood waste Manure Demolition waste Wastewater treatment sludge Other waste TOTAL:
1,388 219 35 31 48 120 72
1,846 180 29 42 28 55 56
1,513 153 25
74 1,987
87 2,323
1,419 105 12 34 22 44 25 20 59 1,740
44 44 27 36 95 1,937
Landfills will be closed over time and therefore will require investments and other expenditures associated with closure. It is assumed that all these costs are attributable to approximation and that none would have been incurred otherwise. It is also assumed that 25% are closed by the end of 2005, 60% by 2011, and 15% are upgraded by 2010 and closed by 2015. The entire stock of landfill capacity will therefore have turned over by 2015 and only new landfills will operate. Approximately five square kilometers of landfill area must be closed. Table 11 Costs of Landfill Closures (2000 € millions) Five Year Period Ending 2005 2010
2015
2020
Cumulative Investments Gas Extraction Capping Fencing
1.64 23.11 0.98
6.76 95.16 3.92
6.76 116.74 3.92
6.76 116.74 3.92
Total Cumulative Investment Annualized Capital Cost
25.72 3.49
105.84 14.39
127.42 17.33
127.42 17.33
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As shown in Table 11, the costs of landfill closures are expected to be considerable. By the time full compliance is achieved in 2015, well over €100 million will have been invested. For new landfill construction, CowiConsult (1999a) based its cost estimates on the development of a system of regional landfills rather than replacing local landfills. This approach is probably more realistic and also resulted in lower cost estimates. We therefore report their results in Table 12. Table 12 Total Costs of Compliance with the Landfill Construction (including aftercare, operations and maintenance costs) and Existing Landfill Closure Components of the Landfill Directive (2000 € millions) 18 Source: CowiConsult (1999b)
Five Year Period Ending 2005 2010 2015 2020
Cumulative Investments
Annualized Investment, Operation and Maintenance Costs
56.42 108.07 118.64 118.64
12.08 16.04 16.12 16.16
* New landfill operation and maintenance expenses based on averages, with expenditures starting in 2002
Though the costs of landfill construction and closure under the Directive are estimated to be considerable, contingent valuation results reported by Bluffstone and DeShazo (forthcoming) suggest that the expenditures may be justified. Indeed, they found that in the town of Ukmerge estimated benefits and costs were approximately equal. An important component of the Directive is a set of targets for diversion of biodegradable waste from landfills. Countries that landfilled more than 80% of municipal wastes in 1995 (like Lithuania) are expected to reduce the weight of biodegradable municipal waste by 25% in 2010 compared with 1995. This goal increases to 50% in 2013 and 65% in 2020. Our annualized cost results for organic waste recovery and recycling are rather similar to those reported in CowiConsult (1999b), but are based on very different assumptions. Our analysis supposes that organic wastes are handled through a drop off composting program that is independent of packaging waste recycling, while CowiConsult (1999b) utilizes incineration as the main tool and links organic waste management with packaging waste recycling.19
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Table 13 Costs of Organic Waste Recovery and Composting (2000 € millions)
Cumulative Investment Annualized Costs
Year 2005 72.59 26.81
2010 132.44 48.40
2015 164.05 60.28
2020 164.05 60.28
As shown in Table 13, our results suggest that organic waste recovery and recycling will require that approximately €164 million be invested by 2015 and annualized costs in that year will be about €60 million. CowiConsult (1999b) predicts that cumulative investments will be €183 million in 2010 and will reach €300 million by 2020. As shown in Table 14, annualized costs are expected to be in the €30 – 50 million range depending on the year, and most costs are attributable to incineration. Table 14 Annualized Costs for Biodegradable and Other Recyclable Waste Recovery and Recycling Net of Revenues (2000 € millions) Source: CowiConsult (1999b) 2005 2010 2015 2020 Containers 3.34 5.49 7.88 8.42 Trucks 1.99 2.72 4.13 4.28 Sorting 2.85 3.73 4.92 4.98 Incineration 5.95 27.55 39.96 39.96 Composting 0.51 2.37 6.50 7.88 Revenues from sold secondary -5.08 -6.34 -7.64 -7.71 materials (negative cost) Revenues from sold energy 0 -7.16 -8.15 -8.15 (negative cost) Revenues from sold compost 0 -0.14 -0.57 -0.72 (negative cost) Net Annualized Costs 9.56 28.22 47.03 48.94
In terms of overall costs, our annualized cost estimates are rather higher and cumulative investments lower than those of CowiConsult (1999a; 1999b), particularly after 2010. 20 Because the results are more conservative and recent policy developments suggest that incineration may indeed be preferred by policy makers, we report the CowiConsult estimates.
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Table 15 Total Costs to Comply with the Landfill and Packaging Waste Directives Net of Revenues Received (2000 € millions) Source: CowiConsult (1999a; 1999b) Five Year Period Ending 2005 2010 2015 Cumulative Investment 111.90 290.28 408.08 Total Annualized Costs 21.64 44.27 63.17 Present Value of 20-year Annualized Cost Stream (2000 €Millions)
2020 420.79 65.12 269.06
As shown in Table 15, the costs to fully comply with the directive will be very high. In 2010, for example, €44.3 million will need to be spent, which is equivalent to 0.43% of 1998 GDP. Whether incineration or composting is used to meet the biodegradable waste recovery/recycling requirements in 99/31/EC, it is clear that those costs will be a very significant part of this total. Lithuania is a land-rich, sparsely populated country. Even using the somewhat lower CowiConsult (1999b) figures, it is certainly less than clear that by 2010 it should invest a total of €183 million (1.7% of 1998 GDP) and incur an annualized cost net of revenues of €28 million to drastically reduce the landfilling of biodegradable wastes. Environmental benefits appear modest at best and policy makers should question the efficacy of using such a huge amount of resources for such an effort. 7. Summary Results and Conclusions The results presented in this paper represent a modest step toward estimating the costs for Lithuania to approximate with the EU environmental acquis.
Though still
incomplete, they are based on one of the most ambitious investigations of the environmental costs of approximation that has been done to date and are complemented by the subsequent work of other researchers. The paper therefore offers some of the best estimates available of the costs that any country will incur to approximate with the environmental acquis. It is again emphasized that only a small portion of the total costs of approximation are captured here, because non-environmental costs are ignored. Tables in the appendix present the annualized and cumulative investment costs of complying with each of the directives that were studied in Lithuania. Where estimates are not our own, sources have been noted. Table 16 presents the summary numbers. During 19
the next five years, annualized costs are predicted to be €200 million, which is about 2.0% of 1998 GDP. This figure is then expected to essentially double every five years until 2015, ending in 2020 with an annualized cost of €571 million. It is predicted that by the year 2020, €1502 million will have been invested, with most of the investment occurring after 2010. Table 16 Estimated Total Costs for Lithuania to Approximate with the Environmental Acquis Net of Any Revenues Received (2000 € millions) Five Year Period Ending 2005 2010 2015
2020
Cumulative Investment 377.59 728.90 1485.61 1502.78 Annualized Cost 203.69 339.15 516.99 571.15 Present Value of 20-year Annualized Cost Stream (2000 €Millions)
2198.66
The degree to which the annualized costs in a particular year will burden the Lithuanian people and economy will, of course, depend on future levels of population, economic activity and incomes. We therefore conclude the paper with some measures of burdens that incorporate output and income growth. For simplicity, population is assumed to be constant at 3.7 million, with 1.37 million households. Key baseline economic data are given in Table 17. Table 17 Baseline Economic Data Measure used GDP (€ millions) National Budget Expenditures (€ millions) Per Capita GDP (€) Average Household Income with 2.7 Members (€)
1998 Value 10,431.20 2418.44 2816.10 3338.80
20
Table 18 Total Annualized Costs Net of Revenues Generated as a Percentage of Current Year GDP under Various Growth Assumptions. Growth Assumption -1.00% 0% 2.00% 3.50% 5.00%
2005 2.10% 1.95% 1.70% 1.53% 1.39%
For Five year period ending 2010 2015 3.67% 5.88% 3.25% 4.96% 2.56% 3.54% 2.15% 2.76% 1.81% 2.16%
2020 6.83% 5.48% 3.54% 2.57% 1.87%
Table 18 presents annualized costs of approximating with all directives as a percentage of GDP, assuming various average annual rates of growth starting in 1998. Two percent average annual growth is considered reasonable, but not an overly ambitious assumption.21 We see from the table tha t at this rate of economic growth costs are expected to be 1.7% to 3.5% of GDP. These costs are ambitious given that OECD countries’ expenditures on environmental protection are typically about 2.0% of GDP. These costs are also in addition to environmental protection costs already being incurred in Lithuania . As shown in Table 19, per capita and per hous ehold approximation costs are also highly significant. Table 19 Total Annualized Approximation Costs Per Capita and Per Household Net of Any Revenues Generated (€ per year) For Five year period ending 2005 Cost Per Household Cost Per Capita
148.59 55.03
2010 247.40 91.63
2015 377.13 139.68
2020 416.64 154.31
A potential measure of overall burden on households is cost as a percentage of household income. Of particular interest are the costs of directives that primarily affect local, regional and national budgets, as well as public enterprises, because these costs are likely to be fully passed on to households. Table 20 presents primarily public sector annualized costs as a percentage of total household income under various growth assumptions.
21
Table 20 Primarily Public Sector Annualized Costs Net of Revenues Generated as a Percentage of Forecasted Household Income (Water and Waste-Related) Growth Assumption -1.00% 1.55% 0% 1.44% 1.26% 2.00% 3.50% 1.13% 5.00% 1.03%
For Five Year Period Ending 2005 2010 2015 2.95% 4.94% 2.61% 4.17% 2.06% 2.97% 1.73% 2.32% 1.45% 1.82%
2020 5.25% 4.21% 2.72% 1.97% 1.44%
We see in Table 20 that funding the public sector activities associated with approximation using taxes and municipal tariffs will be a challenge, but perhaps not unmanageable. With 2.0% average annual growth in household incomes, during the period 2011 – 2015 public sector approximation costs are forecasted to make up about 2.0% to 3.0% percent of households’ incomes. These costs are probably within household burden limits using standard rules-of-thumb for project appraisal,22 however it should also be noted that local politicians could run into political problems unless households perceive sufficient direct environmental benefits. Table 21 Total Annualized Costs (Both Public and Private Se ctors) Net of Revenues Generated as a Percentage of Forecasted Annual Household Income Growth Assumption -1.00% 4.77% 0% 4.45% 3.87% 2.00% 3.50% 3.50% 5.00% 3.16%
2005
For Five Year Period Ending 2010 2015 8.36% 13.40% 7.41% 11.30% 5.84% 8.07% 4.90% 6.29% 4.13% 4.93%
2020 15.57% 12.48% 8.16% 5.85% 4.27%
Much of the primarily private sector costs will also be passed on to households in the form of increased prices. Table 21 shows that if ALL costs are ultimately passed on, approximation will represent an important burden on households. In fact, starting in 2011 annualized costs are expected to make up 8.0% to 10% of household income, a cost that many would think unreasonable unless significant benefits are perceived.
22
Table 22 Annualized Costs of Directives Mainly Affecting the Public Sector Net of Revenues Generated as a Percentage of Predicted Government Expenditures Growth Assumption -1.00% 0% 2.00% 3.50% 5.00%
For Five Year Period Ending 2005 2010 2015 2020 2.93% 5.58% 9.35% 9.93% 2.73% 4.94% 7.88% 7.96% 2.38% 3.90% 5.63% 5.15% 2.15% 3.27% 4.39% 3.74% 1.94% 2.75% 3.44% 2.72%
Another potential point of strain will be the public budget. The table above shows the costs of the directives that will mainly be the responsibility of the public sector as a percentage of projected government expenditures. Municipalities in Lithuania do not have the power of taxation, and therefore with minor exceptions all public costs ultimately fall on the national government. We see from Table 22 that approximation will probably have important fiscal implications. With baseline growth of 2.0% per year starting in 1998, it is expected that by 2011 approximation with the environmental acquis will make up approximately 5.6% of the national budget. At least in principle, there might be ways these costs could be managed or mitigated. Though we are not optimistic given the heavy reliance of the acquis on technology standards, economic instruments should be allowed to augment performance standards. Estimated cost savings are in the 15 – 20% range and emerge purely from allowing polluters the flexibility to respond to environmental requirements as they see fit. The existing system of pollution charges in Lithuania could, for example, potentially be calibrated to achieve some approximation objectives. Second, the analysis predic ts that parts of the three key directives will be particularly costly, and eliminating or delaying these costs is estimated to reduce costs by approximately 20%. Full extension of sewerage and introduction of organic waste incineration are examples of policies that probably should not be implemented, because social costs are likely to be greater than the environmental benefits. The use of orimulsion was introduced before Lithuania became an associate member of the EU and decisions are also likely to have been made without considering the environmental costs. To be sure that irreversible commitments to orimulsion are not made, Lietuvos Energija should be reminded of impending environmental requirements associated with approximation in the hope that they
23
will switch fuels. It should also be noted that part of the reason costs are so high is the existence of new source requirements in the Directive on Large Combustion Plants. Treating the use of orimulsion as an existing source would generate much lower costs. The analysis presented is limited for a number of reasons we would like to mention. First, the cost estimates are based on an attempt to predict behavior using unit costs from a database of technologies. This approach is expected to result in higher estimates than an ex post analysis (Bluffstone, 1999a). Another important limitation is that price effects are omitted. Prices in polluting sectors will increase if large environmental expenditures are necessary, but a priori we are unable to identify the direction of the bias resulting from this omission. Indeed, total compliance costs could be biased downward (because general equilibrium effects are left out) or upward (because adjustments by firms to price changes are omitted). Finally, the environmental benefits of approximation are not considered. Knowing more about how Lithuanians value the environmental benefits of approximation could help inform policy and negotiating choices, as well as provide useful information for financing decisions.
24
Bibliography Anderson, Glen and Grzegorz Peszko, 1997, “Assessing the Costs of Complying with European Union Directives: Methodological and Empirical Issues,” background paper prepared for European Commission/OECD Experts’ Workshop on Assessing the Costs of CEE Approximation with EU Environmental Directives,” Paris. Bergman, Hans, 1999, “Opportunities for Increased Use of Environmental Taxes and Charges in EU Member States and CEECs,” in Green Budget Reform in Europe: Countries at the Forefront, Kai Schlegelmilch, editor, Springer Press, Heidelberg. Bluffstone, Randall, 1999, "Are the Costs of Pollution Abatement Lower in Central and Eastern Europe? Evidence from1 Lithuania,” Environment and Development Economics. ________________, 1998, "The Use of Economic Instruments in European Transition Economies: Past Trends and Prospects for the Future." Published in Role of Economic Instruments in Integrating Environmental Policy with Sectoral Policies J. Becvar and M. Kokine, eds. United Nations, New York and Geneva. Bluffstone, Randall and J. R. DeShazo, “Are Households in Eastern Europe Willing to Pay to Upgrade Municipal Environmental Services to European Union Levels?” forthcoming, Environment and Development Economics. Bluffstone, Randall and Bruce Larson, 1997, “An Introduction to Theories and Methods,” in Controlling Pollution in Transition Economies: Theories and Methods, Randall Bluffstone and Bruce Larson ed., Edward Elgar Press, London. Cofala et al, 1997, “Application of the Current EU Air Emission Standards to the Central and Eastern European Countries – An Integrated Assessment of Environmental Effects,” Final Report to the European Environment Agency by IIASA, Laxenburg. Coopers and Lybrand, 1996, “Cost-Benefit Analysis of the Different Municipal Waste Management Systems: Objectives and Instruments for the Year 2000,” Final Report Prepared for the European Commission, DG XI. CowiConsult, 1999a, “Draft strategic pla n for a network of future municipal landfills in Lithuania”, prepared for the Ministry of Environment of Lithuania and Danish Environmental Protection Agency CowiConsult, 1999b, “Draft strategic plan for the waste recycling in Lithuania”, prepared for the Ministry of Environment of Lithuania and Danish Environmental Protection Agency Danagro a/s in association with Carl Bro a/s and Center for Environmental Policy, 2000, “The implementation of the Council Directive 91/676/EEC (Nitrate directive) and its impact to the Lithuanian Agriculture”
25
DHV Consultants, (1997), “Panavezys Solid Waste Project Final Report,“ Ministry of Public Administration Reforms and Local Authorities and the World Bank, Vilnius. EDC – EPE, (Leo DeNocker, Jochem Janzen, Anil Markandya), 1997a “Compliance Costing for Approximation of EU Environmental Legislation in the CEEC,” prepared for European Commission/OECD Experts’ Workshop on Assessing the Costs of CEE Approximation with EU Environmental Directives,” Paris. EDC – EPE, 1997b, “Estimation of Compliance Costs for the Approximation of EU Environmental Legislation in CEE States: Guidelines for Country Studies,” prepared for European Commission. ESC (Energy Study Centre), 1990, “Emission factors SO2, NO x and particles for various processes in industry, the power sector and other applications,” Petten, The Netherlands IIASA, 1997, “Cost Data on Environmental Technologies in the RAINS Model”, Laxenburg, Austria. Jankowski et al (1997), “Poland: Compliance with the European Union Air Pollution Emission Standards. Cost of Alternative Strategies for Reducing Sulfur Emissions, Warsaw. Lithuanian Energy Institute,1996, “Least Cost Power Sector Development Programme,” Final Report for the Lithuanian State Power System and the European Bank for Reconstruction and Development, Vilnius. Milieu Ltd. (Randall Bluffstone, Jochem Jantzen, Arunas Kundrotas, Grzegorz Peszko, Daiva Semeniene), 1998, “Costs of Approximating Lithuanian Environmental Legislation with the European Union,” Prepared for the Ministry of Environment and the European Commission. Ministry of Environment, 1998, “Valsybine Aplinkos Monitoringo Programa,” (National Environmental Monitoring Program), Vilnius. ________________, 1997, “Aplinkos Apsauga Lietuvoje,” (Annual Report), Vilnius. Ministry of Environment, OECD and the Harvard Institute for International Development, 1998, “Lithuanian Environmental Finance Strategy,” Vilnius. North Carolina, Department of Health and Natural Resources, Office of Waste Reduction, 1993, Waste Minimization, Issue No. 14, Spring. O’Leary P. and P. Walsh, 1995, “Landfill Closure and Long Term Aftercare,” From Web Page of the University of Wisconsin, Originally Published in Waste Age, 1992. Paulsson, Bertil, 1998, “Hazardous Waste Management in Lithuania,” Prepared Under the Phare Program of the European Union, Vilnius.
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PROEKO 1995, 1998, "Guidelines for the Preparation of Environmental Investments," Prepared for the Polish National Fund of Environmental Protection , Warsaw. Soil and Water Ltd. and Environmental Policy Center, 1999a, “Programme for Approximation and implementation of EU Water Quality Legislation in Lithuania,” prepared for the Ministry of Environment and the EU Phare Programme DISAE Facility. Soil and Water Ltd., Environmental Policy Center and TME, 1999b, “Action Programme for the Implementation of EU Legislation on Chemicals in Lithuania ,” prepared for the Ministry of Environment and the EU Phare Programme DISAE Facility. Soil and Water Ltd. and Environmental Policy Center, 1999c, “Development of an Approximation Programme for EU Legislation Concerning Emissions from Mobile Sources,” prepared for the Ministry of Environment and the EU Phare Programme. State of Maryland, Department of Environment, 1997, “Estimated Costs of Landfill Closure,” From Web Page. TME, 1996, “Kosten van Afvalbeheer,” (Costs of Waste Management), for the National Institute for Health and Environmental Protection (RIVM) of the Netherlands. TME, 1997, “MOSES Database,” The Hague, The Netherlands. World Bank, 1998, “Poland: Complying with EU Environmental Legislation” Final Report for the World Bank Europe and Central Asia Environment Unit, Washington. Zylicz, Tomasz, 1997, “Social and Economic Consequences of Approximation with the European Union (EU) in the Environmental Field,” Mimeo, Warsaw.
27
Appendix Summary of the Annualized Costs of Approximation with the Environmental Acquis (2000 € millions) For Five Year Period Ending Directive 2005 2010 2015 2020 Directives in which costs primarily are public sector costs 91/271/EEC – Urban wastewater 39.89 21.64
70.75 44.27
87.75 63.17
87.75 65.12
80/778/EEC – Drinking water directive
0
0
33.0
33.0
91/689/EEC – Hazardous waste
0
0
2.20
2.20
Administrative costs
4.52
4.52
4.52
4.52
52.50
52.86
99/31/EEC – Landfill and 94/62/EEC – Packaging waste
Directives in which costs primarily are private sector costs 88/609/EEC – Large 28.10 48.03 combustion plants
99/32/EC – Sulfur content in heavy fuel oil
13.66
0
0
0
98/70/EC- Quality of petrol and diesel 94/63/EC – VOC directive
0
0
10.24
10.24
3.17
3.74
4.04
4.39
93/12/EEC – Sulfur content in middle distillates Chemicals directives and regulations
74.2
133.4
209.7
261.2
5.54
6.21
6.89
6.89
70/220/EEC – Motor Vehicles
0
0
0
0
85/210/EEC – Lead in petrol
0
0
0
0
91/676/EEC – Nitrates
0
0
5.37
5.37
96/61/EC - IPPC
12.97
28.23
37.61
37.61
Key Notes / Sources
All waters sensitive; sewerage extended to all households. Source: Soil and Water Ltd. (1999a) Includes incineration in Vilnius, Kaunas and Klaipeda Source: CowiConsult (1999a; 1999b) Assumes that expenditures are all made by 2015 Source: Soil and Water Ltd. (1999a) Assumes that all expenditures are made by 2015 Source: Paulsson (1998) Assumes that all expenditures are made by 2005 Source: Authors’ estimates
Ignalina NPP closes unit 1 in 2005; orimulsion use is discontinued once the costs of approximation are included into calculations by Lietuvos Energijia Source: Authors’ estimates Directive overlaps with 88/609/EEC Source: Authors’ estimates Source: Authors’ estimates Source: Authors’ estimates and Soil and Water Ltd. (1999c) Source: Authors’ estimates Includes both public and private expenditures. Source: Soil and Water Ltd. (1999b) Lithuania probably already in compliance Lithuania probably already in compliance Assumes that all expenditures are made by 2015 Source: Dnagro a/s et al (2000) Only applied to SO 2 reductions in the 48 existing large combustion plants Source: Authors’ estimates
28
Totals
203.69
339.15
516.99
571.15
29
Summary of the Cumulative Investment Costs of Approximation with the Environmental Acquis (2000 € millions) For Five Year Period Ending Directive 2005 2010 2015 2020 Directives in which costs primarily are public sector costs 91/271/EEC – Urban 202.19 345.09 453.77 453.77 wastewater
99/31/EEC – Landfill and 94/62/EEC – Packaging waste
111.90
290.28
408.08
420.79
80/778/EEC – Drinking water directive
0
0
169
169
91/689/EEC – Hazardous waste
0
0
10.14
10.14
Administrative costs
3.83
3.83
3.83
3.83
Directives in which costs primarily are private sector costs 88/609/EEC – Large combustion plants
9.26 0
11.86 0
22.38 0
24.98
98/70/EC- Quality of petrol and diesel 94/63/EC – VOC directive
0
0
195.12
195.12
17.91
21.78
23.48
25.34
93/12/EEC – Sulfur content in middle distillates Chemicals directives and regulations
0
0
0
0
4.157
8.315
12.46
12.46
70/220/EEC – Motor Vehicles
0
0
0
0
85/210/EEC – Lead in petrol
0
0
0
0
91/676/EEC - Nitrates
0
0
121.95
121.95
96/61/EC – IPPC
28.34
47.74
65.40
65.40
99/32/EC – Sulfur content in heavy fuel oil
Key Notes
All waters sensitive; sewerage extended to all households. Source: Soil and Water Ltd. (1999a) Includes incineration in Vilnius, Kaunas and Klaipeda Source: CowiConsult (1999a; 1999b) Assumes that expenditures are all made by 2015 Source: Soil and Water Ltd. (1999a) Assumes that all expenditures are made by 2015 Source: Paulsson (1998) Assumes that all expenditures are made by 2005 Source: Authors’ estimates
Ignalina NPP closes unit 1 in 2005; orimulsion use is discontinued once the costs of approximation are included into calculations by Lietuvos Energijia Source: Authors’ estimates Directive overlaps with 88/609/EEC Source: Authors’ estimates Source: Authors’ estimates Source: Authors’ estimates and Soil and Water Ltd. (1999c) Source: Authors’ estimates Includes both public and private expenditures. Source: Soil and Water Ltd. (1999b) Lithuania probably already in compliance Lithuania probably already in compliance Assumes that all expenditures are made by 2015 Source: Dnagro a/s et al (2000) Only ap plied to SO 2 reductions in the 48 existing large combustion plants Source: Authors’ estimates
30
Totals
377.59
728.90
1485.61
1502.78
31
