IMPACT ASSESSMENT OF AIR POLLUTION CHARGES ON COMPANIES IN THE CZECH REPUBLIC

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IMPACT ASSESSMENT OF AIR POLLUTION CHARGES ON COMPANIES IN THE CZECH REPUBLIC

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IMPACT ASSESSMENT OF AIR POLLUTION CHARGES ON COMPANIES IN THE CZECH REPUBLIC Abstract: Air pollution charges have recently been introduced in the Czech Republic with the aim to keep emissions within the EU regulatory limits Charges are constructed as a fixed fee per emission unit The paper evaluates economic effectiveness of environmental charges highlighting the impact of administrative burdens and contribution to environmental efficiency The subsequent quantitative analysis shows that air pollution charges are in comparison with other taxes and charges less effective Administrative costs have been calculated at 100 - 140% of an overall collection for medium-sized stationary polluting sources and at 2.5 - 3% for large and extra-large stationary sources The assessment of environmental efficiency indicates that charges not meet their objectives as they have little impact on behaviour and actions of companies INTRODUCTION Nowadays it is already close to impossible to find an economic sphere that would not be either directly or indirectly influenced by state interventions The existence of any type of state intervention, however, should be justifiable from the perspective of its necessity for pursuing a specific governmental policy goal This in turn requires a consistent system of setting governmental goals and a regular ex ante and ex post evaluation of their meeting One of rather complex tools that aim at reaching this objective is a regular evaluation of governmental regulatory impacts (regulatory impact assessment) Another option is an ad hoc analysis of individual governmental measures' impacts One of the areas where relatively heavy state interventions take place is also that of environment There we may encounter two types of interventions The first one could be labelled as administrative - these are interventions with a character of restrictions and directives The second type of interventions is labelled as market interventions and it includes taxes, charges and public expenditure programmes The following text focuses on an impact analysis of one of a number of charges towards environmental protection - charges from medium-sized air polluting sources Rationality or effectiveness of this tool is analysed with the assistance of an advanced methodological OECD (1997) framework This framework is in its essence based on the 3E methodology and it analyses individual governmental interventions via selected criteria Within the presented paper, air pollution charges are analysed from the perspective of their (i) efficiency, (ii) economy and (iii) effectiveness In the first case it is carried assessment whether charges contribute towards behavioural changes of economic subjects in a desirable direction, i.e whether they motivate or force companies that pollute air to invest into new and environmentally friendly technologies In the case of economy there are studied collection costs of these charges At the same time into account is also taken the fact that secondary aim of the charges' existence is to generate public revenues that may subsequently be used for public expenditure programmes, e.g for environmental protection Finally, in the third case is followed a relationship between contributions from the implementation of the examined tool and the costs of its administration CHARGES FROM MEDIUM-SIZED SOURCES OF AIR POLLUTION AND THEIR ENVIRONMENTAL EFFICIENCY The general framework of the Czech system of charges is in the domain of air pollution set by the Act No 86/2002 Coll "On Air Protection" that splits polluting sources on stationary and mobile ones From a perspective of the pursued topic, relevant are sources of a stationary nature defined as facilities of combustion or other technological processes that pollute or may pollute air Stationary sources are divided according to their size or nominal heat output, respectively, into: * small (nominal heat output less than 0.2 MW), * medium (nominal heat output from 0.2 MW to MW inclusive), * large (nominal heat output from MW to 50 MW), and * extra- large (nominal heat output over 50 MW) Inclusion of a given source into a corresponding category is done by a ratepayer with an opportunity, in case of uncertainty, to turn to the Czech Environmental Inspectorate The category size influences both the charge rate and the relevant organization that administers the charge Administrative demandingness of the system of charges is negatively influenced by dilution of the charges' administration With the exception of charges from small polluting sources, individual activities - i.e assessment, collection and enforcement - were separated More detailed information is provided in the following table The aim of the system of air pollution charges is to motivate economic subjects towards reductions in emissions via use of a price mechanism.3 In case of its application it is according Jílková et al (2006) possible to exert two types of instruments: solution via price determination (in the form of tools associated with public budgets' revenues) where price (in the form of a payment size) is a arbitrarily determined and volume (quality of environment) is a result of a market operation, solution based on quantity determination, i.e sale of a predetermined volume of burden (pollution); volume (defined environmental standard) represents fixed parameter and price is generated by a market (sale of rights to pollute, permits or credits) Microeconomic aspects of price instruments' operation within environmental protection are shown in Figure MNZ1 and MNZ2 represent marginal costs of a reduction of pollution (prevention costs) With a gradual reduction ofpollution the prevention costs increase, i.e costs associated with a reduction by each additional ton of emissions are higher than the costs of a reduction of the previous ton of emissions For each firm there is usually typical a different curve of prevention costs In Figure the highest costs are carried by the firm Each polluting subject has two possibilities: to reduce pollution or to pay a charge (it will reduce pollution until marginal prevention costs are balanced with the charge's size) For the pollutant it is therefore worthwhile to reduce larger quantity of emissions Price mechanism thus works as a certain sieve under which the highest reduction of pollution is undertaken by those firms which have the lowest associated prevention costs In real politics, individual tools of the price type operate in a distinct regulatory framework However, the basic element of the ir operatio n from the pollutants' perspective is identical - for a unit of pollution (e.g ton of emissions of a given harmful substance) the pollutant has to pay a certain monetary amount Already since their introduction (i.e since the beginning of 1990s), air pollution charges have been in the Czech Republic combined with emissions limits These were to a considerable extent dominating since they obliged pollutants to reduce emissions substantially more compared to the value of the rates of charges The above mentioned issue is demonstrated by the following figure The curve MNZ represents the shape of prevention costs Air pollution charges were set at the level Pe per ton In case there would be left a room for price mechanisms, emissions would be reduced to the level E2 However, in case of the Czech Republic there were along charges implemented also emission limits Their setup has been very strict and led to a situation where firms were forced to carry out a substantially larger reduction down to the level of E2 In praxis, however, this means that the existence of charges does not have any impact on decision-making of firms and merely burdens them with by levies towards public budgets in the amount of Pe?E1 From the above it therefore unequivocally follows that environmental efficiency of air pollution charges depends on: size of prevention costs, and setup of emission limits The problem of an appropriate setup of air pollution charges has already been discussed at the time of their introducing Unfortunately, at that time there were not available any relevant estimates of prevention costs In expert literature from the beginning of 1990s there are available only infrequent publications that contain specific information on effects and impacts of air pollution charges (Cerná, Ritchelová and Tosovská, 1991; Spacek, 1991; Hruska and Dokoupil, 1991) Presently it is basically impossible to identify any publication in its original version that would present an analysis of marginal prevention costs for the Czech Republic For externalities related to transportation are carried by CO?P UK estimations of external costs for the Ministry of Transportation Nevertheless, the concrete results will be available only in 2010 Quality analysis of an operation of air pollution charges and their impacts has been compiled in the mid 1990s by Stepánek (1997) Further works, however, did not follow (neither were initiated within the programme of science and research of the Ministry of Environment) and the cited study remains a sole summary analysis of the sphere of the charges' operation In its critical assessment, Stepánek (1997) arrives at following conclusions with respect to the existing system of air protection (i.e the situation in the mid 1990s): * the system does not optimise costs of emissions' reductions carried by individual pollutants, * it is not sufficiently effective, * it does not create essential prerequisites towards pollutants' access to necessary financial resources at acceptable terms, * in certain cases it leads to inefficient outlays of pollutants' financial resources, * it does not motivate pollutants towards most effective solutions, * within the international context it discriminates Czech pollutants - producers, * the existing system of charges until 1998 favours polluting against cleaning For supplementary information it is possible to cite informal text of one of the leading Czech environmental economists, Kovár (1998): "during preparatory works has been calculated a motivationally effective rate of airpollution charges, but very soon it had been evaluated as politically totally inacceptable The finally accepted rate was approximately 40times lower than original results of a model analysis." Towards similar results arrives also Kostoval (1995) who as a proof of his claim of environmental ineffectiveness of charges from medium-sized polluting sources brings forward the following three examples The first one is a municipal heating plant that combusts brown coal and has a total output of 350 MW In 1995 it paid an average annual charge of CZK million Such figure may initially appear to be relatively high, but only until the moment when calculations show that investment costs of desulphurisation including related enforced investments reach CZK billion Annual operating costs of desulphurisation thus amount to CZK 60.4 mil of which depreciation represents CZK 26.5 million Comparing these costs with the annual charge of CZK million in turn clearly shows that such rates of charges have almost zero stimulating effect on a rationally behaving economic subject to undertake such investments Another example on which it is possible to illustrate a disproportion between charges and prevention costs is that of a glass smelter with three smelting aggregates Costs of installing an electrostatic filter including continuous measurement of emissions required in 1995 investment costs of CZK 40 million and annual operating costs of almost CZK million In case the firm would undertake these investments, it would secure a reduction in charges from mediumsized pollution sources by CZK 30 thousand The last example, on which it is possible to demonstrate impossibility of the current charges to influence behaviour of pollutants, is the case of a waste incinerator In mid 1990s an average incinerator with an annual output of 1,000 tons of waste paid a charge of CZK 10,000 However, annual costs associated with monitoring of emissions alone reached on average CZK 60,000 (with a one-off investment cost of CZK million) and a prospective equipment with effective technology of flue- gasses' purification required additional CZK 20 million of investments and CZK million of additional annual costs After all this, the ratepayer saves on charges mere CZK 9,000 Most of these conclusions remain valid also for the present situation and the problematic state is possible to demonstrate on the comparison of rates of the charges with prevention costs The size of prevention costs has been estimated on the basis of costs that were incurred within subsidy air protection programmes administered by the State Environmental Fund (SF?P) in 2001 - 2006 Within following calculations has been assumed life expectancy of investments in technologies reducing volume of released emissions of 20 years The following graph depicts the value of prevention costs for the levels of annual emission volume between 740 and 820 thousand tons.4 In line with the theoretical assumption, reduction of emissions ' volume is associated with an increase of prevention costs While at the level of 820 thousand tons the cost of a one ton reduction ranges around CZK thousand, at the level of 740 thousand tons it is almost CZK 13 thousand Also shown in the graph is an average charge's rate per ton of emissions From the standpoint of environmental effectiveness is important the fact that the curve of charges' rate does not intersect at all with the curve of prevention costs In praxis this means that in the examined period (2001 2006) the charges on average did not influence behaviour of economic subjects at all In other words, their environmental effectiveness was zero The problem of zero environmental effectiveness may also be demonstrated on an estimated investment's payback period In the case of firms, investments to environmentally friendly technologies are associated with a reduction of burden from charges The indicator of investment's payback period shows over what period of time will the cumulative value of savings from unpaid charges reach the investment's value.5 From the presented data is clearly evident a sharp increase in the payback period While in 2001 the investment had paid itself back from charges' savings in 34 years, in 2006 this period has increased to 221 years At the same time it is necessary remind that the period of economic lifespan (depreciation period) of these investments ranges around 20 years Stimulating effects thus cannot be talked about neither in 2006, but nor in 2001 as well Increase in environmental effectiveness of charges that would safeguard their environmental effectiveness would in 2001 imply their doubling and five years later (i.e in 2006) even their boosting 11times From what has been demonstrated above we may subsequently unambiguously summarize that dysfunctional motivating impact of charges arises mainly from the concurrence of normative tools (emission limits) and charges If we expect from the charges stimulation of a cost effective achievement of the priorities in the sphere of air protection, improvement in functioning of the system of charges does not rest in a simple charge rates' increase, but rather in the elimination of concurring effects within the tool-mix Rigidity of the existing system of air protection tools may be also documented on a development of emissions of major polluting substances and a development of revenue from the associated charges Efforts to reduce emissions of major polluting substances have not been noticeably successful over the recent years.6 Established normative tools and charges in principle secure stabilisation of the overall emissions of main polluting substances but they not motivate polluters to further reduce emissions From the examples mentioned above it unequivocally follows that the charges alone neither influenced behaviour of economic subjects in 1995 nor are they able to influence it at present The reason rests primarily in the fact that unlike the value of charges which have not been increased (average levy from medium sources is CZK 1,000), prevention costs have substantially increased, by the rate of inflation at the very minimum The second reason is a concurrence of charging tools with emission limits that were relatively strict and have been the reason behind a significant reduction of emissions at the turn of the century A secondary effect of this process, however, has been also a decrease in revenue from charges from medium-sized sources of pollution AIR POLLUTION CHARGES AND EFFECTIVENESS OF THEIR COLLECTION The methodology chosen for a measurement of the size of administrative costs of selected environmental charges is that of a so-called recalculated worker This methodology has already been successfully applied for the purposes of quantification of administrative demandingness of the Czech tax system (see Pudil et al., 2004) The advantage of using this method rests in its simplicity and a subsequent possibility to compare results with the data measured for other taxes/charges At the root of the method of a recalculated worker is a split up of employees of a studied institution on the basis of their relationship towards the charges' agenda into: * related with charges, * unrelated with charges, and * impossible to determine The third class relates to so-called overhead workers that cannot be directly linked to any of the agendas These are for example cleaning staff, IT administrators, etc On the basis of the above defined procedure it is in turn possible to calculate a coefficient which quantifies how many percents of an activity of the given organisation represents the agenda associated with charges towards environmental protection By this coefficient is in the next step multiplied the size of annual expenditures of the given organisatio n and determined absolute value of administrative costs After its dividing by the revenue from charges it is possible to arrive at the value of relative administrative costs More detailed discussion on this methodology is given in Jílková et al (2006), who has used it for a measurement of administrative costs associated with several types of charges towards environmental protection The following table summarises the results of measurements of the costs from medium-sized sources of pollution and from la rge and extra- large sources of air pollution in 2003 - 2005 From the presented data it becomes clear that in case of medium- sized sources the value of administrative costs considerably exceeds the revenue generated by the associated charges In 2005 relative administrative costs attacked the level of 150% The situation is significantly better in case of large and extra-large sources where the value of relative administrative costs ranges around 2.6% of revenues When compared to the average of the overall Czech tax system, this according results of Pudil et al (2004) represents approximately the double of administrative demandingness EFFECTIVENESS OF AIR POLLUTION CHARGES The third criterion of assessment of the system of air pollution charges represents its effectiveness From the viewpoint of the evaluation framework's logic this relates to a relationship between benefits from the use of a given tool and its costs In case of the examined charges this translates into expressing the costliness (from the perspective of administrative costs) of emissions' reduction by a unit In case of charges towards air protection, however, it is not possible to express the ratio between benefits and costs The reason is their zero environmental efficiency that leads to zero benefits from their implementation Based on the above, it is therefore possible to conclude that effectiveness of charges towards air protection is also zero IMPACT OF AN INSTITUTIONAL SETUP ON SYSTEM SETUP RATIONALITY AND CONCLUSIONS Analysis of air pollution charges points not only towards their absolute inefficiency in a sense of influencing behaviour of economic subjects towards reduction of polluting, but also at the wastefulness of their very existence Management of the charges is for the public sector unambiguously inefficient From the perspective of economic efficiency it would be rational to abolish charges at least from medium-sized pollution sources since this would not have any negative impacts on behaviour of economic subjects and the public sector wo uld save CZK million In addition, the burden of private subjects would also decrease along with a cut down of induced costs that are inseparably associated with charges (for more details on their size see Jílková et al., 2006) Even though the logic of economic efficiency unequivocally recommends abolishing of this charging title, in the praxis this does not happen The reason is fragmentation of the budgetary framework, respectively separation of the subjects that administer the charges from recipients of the charges' revenue Costs associated with assessment and collection of the charges are carried by financial, regional and municipal offices, i.e organisations financed from the chapters of the state budget and municipal budgets On the other hand, revenues represent an income of the State Environmental Fund In case these charges are cancelled, the Fund would lose on revenues approximately CZK 450 million while savings on costs would be cashed by another part of the public administration Despite the fact that revenue generated by this charge is from the perspective of overall public revenues entirely negligible and even in case of the Fund it does not reach even 16% of SF?P's revenues, support for a change towards cancelation of this charge cannot be found This position is from the side of respective institutions rational since their position (a sort of free-riding black passenger - they carry only benefits, not costs) directly forces them toward such an attitude The situation around charges towards air protection represents an interesting case study which unequivocally points at negative impacts of fragmentation of a budgetary framework into different extra-budgetary funds and other institutions As a consequence, there increases a number of interest groups that in turn not judge rationality of individual governmental interventions by a global view on the total efficiency, but only from the standpoint of their organisations, respectively their partial interests That way the probability of prolonging the existence of an inefficient element in the system increases and leads to deformations in the economic system, incorrect calculations and consequently to the waste of scarce resources The state thus does not contribute towards elimination of market failures, but quite the opposite - it creates new, this time governmental failures Secondary impacts are represented by unnecessary increases in administrative and charge-related burden of private subjects It is therefore possible to conclude that the carried analysis of environmental efficiency and fiscal effectiveness of charges towards air protection imply: * their environmental efficiency is zero; the main reason is a concurrence of impacts of emission limits and charges and their low rate, * this problematic environmental (in)efficiency cannot be solved simply by a mere increase in the rate of charges since such move would not remove the nature of the problem, * administrative costs of charges from medium-sized sources are very high and therefore it is compromised also their fiscal function, * from the perspective of environmental department there exists a certain reason for an existence of air pollutioncharges because of their fiscal function owing to the dedication of their revenue as an income of the State Environmental Fund; on the other hand this fragmentation of public finances leads towards generally inefficient behaviour of individual subjects Footnote This contribution originated within a research supported by the grant of MSMT 2D06029 ? Analysis of Distribution and Social Impacts of Sector Politics" Footnote Since January 2007 this agenda has been delegated on customs offices Among key studies that theoretically deal with the issue of so-called market air protection instruments rank Pigou (1932) and Oates and Strassmann (1984) Footnote Cumulative sum of weights of released solid polluting substances, sulphur dioxide, nitrogen oxides, volatile organic substances and carbon monoxide per calendar year from all stationary polluting sources within the region of the Czech Republic The chosen indicator, however, does not take into account the time value of money Footnote The likely reason is enter of new operating capacities in the context of accelerating economic growth References REFERENCES Cerná, A., Ritschelová, I., Tosovská, E (1991), Dopad emisních poplatku na ekonomiku podniku, Výzkumný a vývojový ústav stavební, st pod., Praha Hruska, J., Dokoupil, V (1991), Platby ze zdroju paliv ve vztahu k ekonomické reforme v CSFR, VÚPEK, Praha Jílková, J (2003), Dane, dotace a obchodovatelná povolení jako nástroje ochrany ovzdusí a klimatu IREAS, Praha Jílková, J., Pavel, J., Vítek, L., Slavík, J (2006), Poplatky k ochrane Zivotního prostredí a jejich efektivnost, Eurolex Bohemia, Praha Kostoval, V (1995), Zhodnocení agendy poplatku za znecistování ovzdusí, Ceské Budejovice Oates, W E., Strassmann, D L (1984), Effluent Fees and Market Structure, Journal of Public Economics, Volume 24, Issue 1, June 1984, Pages 29-46 OECD (2003), Good Practices of Public Environmental Expenditure Management in Transition Economies , OECD, Paris OECD (1997), Evaluating the Efficiency and Effectiveness of Economic Instruments in Environmental Policy , OECD, Paris OECD (1994), Economic Instruments in Environmental Policy: Lessons from OECD Experience and their relevance to Developing Economies, OECD, Paris Pavel, J., Vítek, L (2007), Administrative Costs of the Czech System of Environmental Charges, In: The Eighth Global Conference on Environmental Taxation GBS, Munich Pigou, A C (1932), The Economics of Welfare, Macmillan and Co, London Pudil, P., Vybíhal, V., Vítek, L., Pavel, J et al (2004), Zdanení a efektivnost Eurolex Bohemia, Praha Statistické rocenky Zivotního prostredí z let 2003-2005 Spacek, J et al (1991), Analýza úcinnosti poplatku za znecistování ovzdusí v odvetví energetiky a podniku hutnictví Zeleza Praha Stepánek, Z (1997), Zhodnocení ekonomických souvislostí pusobení zákona o ochrane ovzdusí a souvisejících právních norem a doporucení pro jejich novelizaci Centrum Univerzity Karlovy pro otázky Zivotního prostredí, Praha AuthorAffiliation Jan PAVEL University of Economics, Prague, W Churchill Sq 4, 130 67 Prague 3, Czech Republic pavelj@vse.cz Leos VÍTEK University of Economics, Prague, W Churchill Sq 4, 130 67 Prague 3, Czech Republic 10 vitek@vse.cz Pavel STRACH SKODA AUTO University, Tr V Klementa 869, 293 60 Mladá Boleslav, Czech Republic pavel.strach@skoda-auto.cz Word count: 4191 Copyright University of Zagreb Jun 11-Jun 14, 2008 Indexing (details) Cite Subject Air pollution; Fees & charges; Emissions control; Effectiveness studies; Impact analysis Location Czech Republic Classification 9176: Eastern Europe 1540: Pollution control 9130: Experiment/theoretical treatment Title IMPACT ASSESSMENT OF AIR POLLUTION CHARGES ON COMPANIES IN THE CZECH REPUBLIC1 Author Pavel, Jan; Vítek, Leos; Strach, Pavel Publication title An Enterprise Odyssey International Conference Proceedings Pages 216-227 11 Number of pages 12 Publication year 2008 Publication date Jun 11-Jun 14, 2008 Publisher University of Zagreb, Faculty of Economics and Business Place of publication Zagreb Country of publication Croatia Publication subject Business And Economics Source type Conference Papers & Proceedings Language of publication English Document type Feature ProQuest document ID 217741556 Document URL http://search.proquest.com/docview/217741556?accountid=63189 Copyright 12 Copyright University of Zagreb Jun 11-Jun 14, 2008 Last updated 2013-09-21 Database ProQuest Centra 13 [...]... Boleslav, Czech Republic pavel.strach@skoda-auto.cz Word count: 4191 Copyright University of Zagreb Jun 11-Jun 14, 2008 Indexing (details) Cite Subject Air pollution; Fees & charges; Emissions control; Effectiveness studies; Impact analysis Location Czech Republic Classification 9176: Eastern Europe 1540: Pollution control 9130: Experiment/theoretical treatment Title IMPACT ASSESSMENT OF AIR POLLUTION CHARGES. .. CHARGES ON COMPANIES IN THE CZECH REPUBLIC1 Author Pavel, Jan; Vítek, Leos; Strach, Pavel Publication title An Enterprise Odyssey International Conference Proceedings Pages 216-227 11 Number of pages 12 Publication year 2008 Publication date Jun 11-Jun 14, 2008 Publisher University of Zagreb, Faculty of Economics and Business Place of publication Zagreb Country of publication Croatia Publication subject... publication Zagreb Country of publication Croatia Publication subject Business And Economics Source type Conference Papers & Proceedings Language of publication English Document type Feature ProQuest document ID 217741556 Document URL http://search.proquest.com/docview/217741556?accountid=63189 Copyright 12 Copyright University of Zagreb Jun 11-Jun 14, 2008 Last updated 2013-09-21 Database ProQuest

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