Tag: Environmental policy
Carbon Tax Regressivity and Income Inequality
A common presumption in economics is that a carbon tax is regressive – that the tax disproportionately burdens low-income households. However, this presumption originates from early research on carbon taxes that used US data, and little is known about the factors that determine the level of regressivity of carbon taxation across countries. In this policy brief, I explore how differences in income inequality may determine the distribution of carbon tax burden across households in Europe. The results indicate that carbon taxation will be regressive in high-income countries with relatively high levels of inequality, but closer to proportional in middle- and low-income countries and in countries with low levels of income inequality.
Introduction
Climate change is one of the main challenges facing us today. To reduce emissions of greenhouse gases, and thereby mitigate climate change, economists recommend the use of a carbon tax. The environmental and economic efficiency of carbon taxation is often highlighted, but the equity story is also of importance: who bears the burden of the tax?
How the burden from a carbon tax is shared across households is important since it affects the political acceptability of the tax. For instance, the “Yellow Vests” protests against the French carbon tax started due to concerns that the tax burden is disproportionately large on middle- and working-class households. Research in economics also shows that people prefer a progressive carbon tax (Brännlund and Persson, 2012).
In this brief, I explore what we know about the distributional effects of carbon taxes and analyze the link between carbon tax regressivity and levels of income inequality in theory and in application to Sweden as well as other European countries.
Carbon Tax Burden Across Households
It is a common finding in the economics literature that carbon taxes are, or would be, regressive (Hassett et al., 2008; Grainger and Kolstad, 2010). However, most of the earlier literature is based on US data, and the US is unrepresentative of an average high-income country in terms of variables that are arguably important for carbon tax incidence. Compared to most countries in Europe, income in the US is high but unequally distributed, carbon dioxide emissions per capita are high, the gasoline tax rate is low, and the access to public transport is poor. If we want to understand the likely distributional effects of carbon taxes across Europe, we thus need to look beyond the US studies.
A recent study by Feindt et al. (2020) examines the consumer tax burden from a hypothetical EU-wide carbon tax. They find that the distributional effect at the EU-level is regressive, driven by the high carbon intensity of energy consumption in relatively low-income countries in Eastern Europe. At the national level, however, carbon taxation in Eastern European countries is slightly progressive due to car ownership and transport fuel being luxuries. Conversely, in high-income countries – where transport fuel is a necessity – carbon taxation is slightly regressive.
That the incidence of carbon and gasoline taxation varies across countries with different levels of income, has been found in numerous studies (Sterner, 2012; Sager, 2019). To understand the source of this variation, we need to identify the determinants of the incidence of carbon taxes.
The Role of Income Inequality
In a recent paper, I, together with Giles Atkinson at the London School of Economics, present a simple model where the variation in the carbon tax burden across countries and time can be determined by two parameters: the level of income inequality and the income elasticity of demand for the taxed goods (Andersson and Atkinson, 2020). The income elasticity specifies how the demand for a good, such as gasoline, responds to a change in income. If the budget share decreases as income increase, we refer to gasoline as a necessity. If the budget share increases with income, we refer to gasoline as a luxury good. Our model predicts that rising inequality increases the regressivity of a carbon tax on necessities. Similarly, we will see a more progressive incidence if inequality increases and the taxed good is a luxury.
To mitigate climate change, a carbon tax should be applied to goods responsible for the majority of greenhouse gas emissions: transport fuel, electricity, heating, and food. To estimate the distribution of carbon tax burden, we must then first establish if these goods are necessities or luxuries, respectively. Gasoline is typically found to be a luxury good in low-income countries but a necessity in high-income countries (Dahl, 2012). Food, in the aggregate, is consistently found to be a necessity. A carbon tax on food would, however, mainly increase the price of red meat – beef has a magnitude larger carbon footprint than all other food groups – and red meat is generally a luxury good, even in high-income countries (Gallet, 2010). Lastly, electricity and heating are necessities, with little variation across countries in the level of income elasticities. A broad carbon tax would thus likely be regressive in high-income countries, but more proportional, maybe even progressive, in low-income countries. The overall effect in low-income countries depends on the relative budget shares of transport fuel and meat (luxuries) versus electricity and heating (necessities). A narrow carbon tax on transport fuel has a less ambiguous incidence: it will be regressive in high-income countries where the good is a necessity and proportional to progressive in low-income countries where the good is a luxury.
The income elasticities of demand, however, only provide half of the picture. To understand the degree of regressivity from carbon taxation, we also need to take into account the level of income inequality in a country. Our model predicts that a carbon tax on necessities will be more regressive in countries with relatively high levels of inequality. And increases in inequality over time may turn a proportional tax incidence into a regressive one.
To test our model’s prediction, we analyze the distributional effects of the Swedish carbon tax on transport fuel and examine previous studies of gasoline tax incidence across high-income countries.
Empirical Evidence from Sweden
The Swedish carbon tax was implemented in 1991 at $30 per ton of carbon dioxide and the rate was subsequently increased rather rapidly between 2000-2004. Today, in 2021, the rate is above $130 per ton; the world’s highest carbon tax rate imposed on households. The full tax rate is mainly applied to transport fuel, with around 90 percent of the revenue today coming from gasoline and diesel consumption.
Figure 1. Carbon tax incidence and income inequality in Sweden
Using household-level data on transport fuel expenditures and annual income between 1999-2012, we find that the Swedish carbon tax is increasingly regressive over time, which is highly correlated with an increase in income inequality. Figure 1 shows the strong linear correlation between the incidence of the tax and the level of inequality across our sample period. The progressivity of the tax is measured using the Suits index (Suits, 1977), a summary measure of tax incidence that spans from +1 to -1. Positive (negative) numbers indicate that the tax is overall progressive (regressive) and a proportional tax is given an index of zero. The level of income inequality, in turn, is summarized by the Gini coefficient (0-100), with higher numbers indicating higher levels of inequality.
In 1991, when the Swedish carbon tax was implemented, income inequality was relatively low, with a Gini of 20.8. If we extrapolate, the results presented in Figure 1 indicate that the tax incidence in 1991 was proportional to slightly progressive. Since the early 1990s, however, Sweden has experienced a rise in inequality. Today, the Gini is around 28 and the carbon tax incidence is rather regressive. This can be a potential concern if people start to perceive the distribution of the tax burden as unfair and call for reductions in the tax rate.
Empirical Evidence Across High-Income Countries
Figure 2 presents the results of our analysis of previous studies of gasoline tax incidence across high-income countries. Again, we find a strong correlation with inequality; the higher the level of inequality, the more regressive are gasoline taxes. In the bottom-right corner, we locate the results from studies on gasoline tax incidence that have used US data. The level of inequality in the US has been persistently high, and the widespread assumption that gasoline and carbon taxation is regressive is thus based to a large part on studies of one highly unequal country. Looking across Europe we find that the tax incidence is more varied, with close to a proportional outcome in the (relatively equal) Nordic countries of Denmark and Sweden.
Figure 2. Gasoline tax incidence and income inequality in OECD countries
Conclusion
A carbon tax is economists’ preferred instrument to tackle climate change, but its distributional effect may undermine the political acceptability of the tax. This brief shows that to understand the likely distributional effects of carbon taxation we need to take into account the type of goods that are taxed – necessities or luxuries – and the level and direction of income inequality. Carbon taxation will be closer to proportional in European countries with low levels of inequality, whereas in countries with relatively high levels of inequality the carbon tax incidence will be regressive on necessities and progressive for luxury goods.
This insight may explain why we first saw the introduction of carbon taxes in the Nordic countries. Finland, Sweden, Denmark, and Norway all implemented carbon taxes between 1990-1992, and income inequality was relatively, and historically, low in this region at the time. Policymakers in the Nordic countries thus didn’t need to worry about possibly regressive effects. Looking across Europe today, many of the countries that have relatively low levels of inequality have either already implemented carbon taxes or, due to the size of their economies, have a low share of global emissions. In countries that are responsible for a larger share of global emissions – such as, the UK, Germany, and France – inequality is relatively high, and they may find it to be politically more difficult to implement carbon pricing as the equity argument becomes more salient and provides opportunities for opponents to attack the tax.
To increase the political acceptability and perceived fairness of carbon pricing, policymakers in Europe should consider a policy design that offsets regressive effects by returning the revenue back to households, either by lump-sum transfers or by reducing tax rates on labor income.
References
- Andersson, Julius and Giles Atkinson. 2020. “The Distributional Effects of a Carbon Tax: The Role of Income Inequality.” Grantham Research Institute on Climate Change and the Environment Working Paper 349. London School of Economics.
- Brännlund, Runar and Lars Persson. 2012. “To tax, or not to tax: preferences for climate policy attributes.” Climate Policy 12 (6): 704-721.
- Dahl, Carol A. 2012. “Measuring global gasoline and diesel price and income elasticities.” Energy Policy 41: 2-13.
- Feindt, Simon, et al. 2020. “Understanding Regressivity: Challenges and Opportunities of European Carbon Pricing.” SSRN 3703833.
- Gallet, Craig A. 2010. “The income elasticity of meat: a meta-analysis.” Australian Journal of Agricultural and Resource Economics 54(4): 477-490.
- Grainger, Corbett A and Charles D Kolstad. 2010. “Who pays a price on carbon?” Environmental and Resource Economics 46(3): 359-376.
- Hassett, Kevin A, Aparna Mathur, and Gilbert E Metcalf. 2009. “The consumer burden of a carbon tax on gasoline.” American Enterprise Institute, Working Paper.
- Sager, Lutz. 2019. “The global consumer incidence of carbon pricing: evidence from trade.” Grantham Research Institute on Climate Change and the Environment Working Paper 320. London School of Economics.
- Thomas, Sterner. 2012. Fuel taxes and the poor: the distributional effects of gasoline taxation and their implications for climate policy. Routledge.
- Suits, Daniel B. 1977. “Measurement of tax progressivity.” American Economic Review 67(4): 747-752.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Energy Storage: Opportunities and Challenges
As the dramatic consequences of climate change are starting to unfold, addressing the intermittency of low-carbon energy sources, such as solar and wind, is crucial. The obvious solution to intermittency is energy storage. However, its constraints and implications are far from trivial. Developing and facilitating energy storage is associated with technological difficulties as well as economic and regulatory problems that need to be addressed to spur investments and foster competition. With these issues in mind, the annual Energy Talk, organized by the Stockholm Institute of Transition Economics, invited three experts to discuss the challenges and opportunities of energy storage.
Introduction
The intermittency of renewable energy sources poses one of the main challenges in the race against climate change. As the balance between electricity supply and demand must be maintained at all times, a critical step in decarbonizing the global energy sector is to enhance energy storage capacity to compensate for intermittent renewables.
Storage systems create opportunities for new entrants as well as established players in the wind and solar industry. But they also present challenges, particularly in terms of investment and economic impact.
Transitioning towards renewables, adopting green technologies, and developing energy storage can be particularly difficult for emerging economies. Some countries may be forced to clean a carbon-intensive power sector at the expense of economic progress.
The 2021 edition of Energy Talk – an annual seminar organized by the Stockholm Institute of Transition Economics – invited three international experts to discuss the challenges and opportunities of energy storage from a variety of academic and regulatory perspectives. This brief summarizes the main points of the discussion.
A TSO’s Perspective
Niclas Damsgaard, the Chief strategist at Svenska kraftnät, gave a brief overview of the situation from a transmission system operator’s (TSO’s) viewpoint. He highlighted several reasons for a faster, larger-scale, and more variable development of energy storage. For starters, the green transition implies that we are moving towards a power system that requires the supply of electricity to follow the demand to a much larger extent. The fact that the availability of renewable energy is not constant over time makes it crucial to save power when the need for electricity is low and discharge it when demand is high. However, the development and facilitation of energy storage will not happen overnight, and substantial measures on the demand side are also needed to ensure a more dynamic energy system. Indeed, Damsgaard emphasized that demand flexibility constitutes a necessary element in the current decarbonization process. However, with the long-run electrification of the economy (particularly driven by the transition of the transport industry), extensive energy storage will be a necessary complement to demand flexibility.
It is worth mentioning that such electrification is likely to create not only adaptation challenges but also opportunities for the energy systems. For example, the current dramatic decrease in battery costs (around 90% between 2010 and 2020) is, to a significant extent, associated with an increased adoption of electric vehicles.
However, even such a drastic decline in prices may still fall short of fully facilitating the new realities of the fast-changing energy sector. One of the new challenges is the possibility to store energy for extended periods of time, for example, to benefit from the differences in energy demand across months or seasons. Lithium-ion batteries, the dominant battery technology today, work well to store for a few hours or days, but not for longer storage, as such batteries self-discharge over time. Hence, to ensure sufficient long-term storage, more batteries would be needed and the associated cost would be too high, despite the above-mentioned price decrease. Alternative technological solutions may be necessary to resolve this problem.
Energy Storage and Market Structure
As emphasized above, energy storage facilitates the integration of renewables into the power market, reduces the overall cost of generating electricity, and limits carbon-based backup capacities required for the security of supply, creating massive gains for society. However, because the technological costs are still high, it is unclear whether the current economic environment will induce efficient storage. In particular, does the market provide optimal incentives for investment, or is there a need for regulations to ensure this?
Natalia Fabra, Professor of Economics and Head of EnergyEcoLab at Universidad Carlos III de Madrid, shared insights from her (and co-author’s) recent paper that addresses these questions. The paper studies how firms’ incentives to operate and invest in energy storage change when firms in storage and/or production have market power.
Fabra argued that storage pricing depends on how decisions about the storage investment and generation are allocated between the regulator and the firms operating in the storage and generation markets. Comparing different market structures, she showed as market power increases, the aggregate welfare and the consumer surplus decline. Still, even at the highest level of market concentration, an integrated storage-generation monopolist firm, society and consumers are better off than without energy storage.
Fabra’s model also predicts that market power is likely to result in inefficient storage investment.
If the storage market is competitive, firms maximize profits by storing energy when the prices are low and releasing when the prices are high. The free entry condition implies that there are investments in storage capacity as long as the marginal benefit of storage investment is higher than the marginal cost of adding an additional unit of storage. But this precisely reflects the societal gains from storage; so, the competitive market will replicate the regulator solution, and there are no investment distortions.
If there is market power in either generation or storage markets, or both, the investment is no longer efficient. Under market power in generation and perfectly competitive storage, power generating firms will have the incentive to supply less electricity when demand is high and thereby increase the price. As a result, the induced price volatility will inflate arbitrage profits for competitive storage firms, potentially leading to overinvestment.
If the model features a monopolist storage firm interacting with a perfectly competitive power generation market, the effect is reversed. The firm internalizes the price it either buys or sells energy, so profit maximization makes it buy and sell less energy than it would in a competitive market, in the exact same manner as the classical monopolist/monopsonist does. This underutilization of storage leads to underinvestment.
If the model considers a vertically integrated (VI) generation-storage firm with market power in both sectors, the incentives to invest are further weakened: the above-mentioned storage monopolist distortion is exacerbated as storage undermines profits from generation.
Using data on the Spanish electricity market, the study also demonstrated that investments in renewables and storage have a complementary relationship. While storage increases renewables’ profitability by reducing the energy wasted when the availability is excess, renewables increase arbitrage profits due to increased volatility in the price.
In summary, Fabra’s presentation highlighted that the benefits of storage depend significantly on the market power and the ownership structure of storage. Typically, market power in production leads to higher volatility in prices across demand levels; in turn, storage monopolist creates productive inefficiencies, two situations that ultimately translate into higher prices for consumers and a sub-optimal level of investment.
Governments aiming to facilitate the incentives to invest in the energy storage sector should therefore carefully consider the economic and regulatory context of their respective countries, while keeping in mind that an imperfect storage market is better than none at all.
The Russian Context
The last part of the event was devoted to the green transition and the energy storage issue in Eastern Europe, with a specific focus on Russia.
Alexey Khokhlov, Head of the Electric Power Sector at the Energy Center of Moscow School of Management, SKOLKOVO, gave context to Russia’s energy storage issues and prospects. While making up for 3% of global GDP, Russia stands for 10% of the worldwide energy production, which arguably makes it one of the major actors in the global power sector (Global and Russian Energy Outlook, 2016). The country has a unified power system (UPS) interconnected by seven regional facilities constituting 880 powerplants. The system is highly centralized and covers nearly the whole country except for more remote regions in the northeast of Russia, which rely on independent energy systems. The energy production of the UPS is strongly dominated by thermal (59.27%) followed by nuclear (20.60%), hydro (19.81%), wind (0.19%), and solar energy (0.13%). The corresponding ranking in capacity is similar to that of production, except the share of hydro-storage is almost twice as high as nuclear. The percentage of solar and wind of the total energy balance is insignificant
Despite the deterring factors mentioned above, Khokhlov described how the Russian energy sector is transitioning, though at a slow pace, from the traditional centralized carbon-based system towards renewables and distributed energy resources (DER). Specifically, the production of renewables has increased 12-fold over the last five years. The government is exploring the possibilities of expanding as well as integrating already existing (originally industrial) microgrids that generate, store, and load energy, independent from the main grid. These types of small-scaled facilities typically employ a mix of energy sources, although the ones currently installed in Russia are dominated by natural gas. A primary reason for utilizing such localized systems would be for Russia to improve the energy system efficiency. Conventional power systems require extra energy to transmit power across distances. Microgrids, along with other DER’s, do not only offer better opportunities to expand the production of renewables, but their ability to operate autonomously can also help mitigate the pressure on the main grid, reducing the risk for black-outs and raising the feasibility to meet large-scale electrification in the future.
Although decarbonization does not currently seem to be on the top of Russia’s priority list, their plans to decentralize the energy sector on top of the changes in global demand for fossil fuels opens up possibilities to establish a low-carbon energy sector with storage technologies. Russia is currently exploring different technological solutions to the latter. In particular, in 2021, Russia plans to unveil a state-of-the-art solid-mass gravity storage system in Novosibirisk. Other recently commissioned solutions include photovoltaic and hybrid powerplants with integrated energy storage.
Conclusion
There is no doubt that decarbonization of the global energy system, and the role of energy storage, are key in mitigating climate change. However, the webinar highlighted that the challenges of implementing and investing in storage are both vast and heterogenous. Adequate regulation and, potentially, further government involvement is needed to correctly shape incentives for the market participants and get the industry going.
On behalf of the Stockholm Institute of Transition Economics, we would like to thank Niclas Damsgaard, Natalia Fabra, and Alexey Khokhlov for participating in this year’s Energy Talk. The material presented at the webinar can be found here.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Pollution and the COVID-19 Pandemic: Air Quality in Eastern Europe
The COVID-19 pandemic has drawn attention to a pre-existing threat to global health: the quality of air in cities around the world. Prolonged exposure to air pollution has been found to increase the mortality rate of COVID-19. This is a particular concern for much of Eastern Europe, where emissions regularly exceed safe levels. This policy brief analyses recent data on air quality in the region and the factors that explain a persistent East-West divide in pollution in Europe. It concludes by evaluating to what extent lockdowns in 2020 provided a temporary respite from pollution in the region.
Introduction
The WHO estimates that air pollution causes seven million premature deaths every year (WHO 2018). COVID-19 has further amplified these health risks, as air pollution can increase both the chance of catching respiratory diseases and their severity. At the same time, the pandemic has resulted in lockdowns and a general slowdown in economic activity which are widely perceived as having led to a temporary improvement in air quality.
This brief provides an overview of recent trends in air quality in Eastern European cities using data from the World Air Quality Index. It addresses three questions:
- How did air pollution in Eastern Europe compare to Western Europe prior to the pandemic?
- What are the main sources of air pollution in Eastern European cities and can they be addressed by policymakers?
- Was there a significant improvement in air quality in 2020 as a result of COVID-19?
Air Pollution in Eastern Europe
Most measures of air quality in Europe show a stark East-West divide. Map 1 plots the share of days in 2019 where air pollution, as measured by PM 2.5 (fine particulate matter), exceeded levels classified as unhealthy for the general population. On average, cities to the east of the former Iron Curtain experienced over 100 such days, compared to an average of 20 days in Western Europe. These averages mask significant variation within both regions; Tallinn was among the best performing cities while Naples was among the worst.
Map 1
The gap in air quality between Eastern and Western Europe has been linked to differences in health outcomes for decades. Shortly after the fall of the Soviet Union, Bobak and Feachem (1995) found that air pollution accounted for a significant share of the Czech Republic and Poland’s mortality gap with respect to Western Europe. The European Environment Agency’s 2020 report provides estimates for ‘years of life lost’ attributable to different pollutants. Figure 1, which plots these estimates for PM 2.5, highlights the fact that Eastern European countries, in particular those in the Balkans, continue to experience significantly higher mortality related to pollution, as compared to their Western European counterparts.
Figure 1
Sources of Air Pollution
A number of factors contribute to the pattern of pollution shown on Map 1, not all of which are under policymakers’ direct control. For example, two of the cities on the map with the unhealthiest air – Sarajevo and Skopje – are surrounded by mountains that prevent emissions from dissipating.
In addition to immutable geographic factors, policies elsewhere may also be contributing to pollution in the region. Stricter regulations in Western Europe can have adverse effects if they result in polluting industries migrating eastwards. Bagayev and Lochard (2017) show that as EU countries adopt new air pollution regulations, the share of their imports from Eastern Europe and Central Asia in pollution-intensive sectors increases. Stricter rules can also result in outdated technology being exported to other countries. A Transport & Environment report found that over 30,000 high-emission diesel cars were exported from Western Europe to Bulgaria in 2017 and argued that such flows will continue as Western European cities impose Low Emission Zones and diesel bans (Transport & Environment 2018).
Power generation, and in particular coal power, is likely to be the single most important determinant of the gap in air quality between Eastern and Western European cities. Coal power accounts for over 60% of electricity production in Poland, Serbia, Bosnia Herzegovina, and North Macedonia, and remains an important energy source in the majority of Eastern European countries (BP 2020). Many of the coal power plants in the region have been operating for decades and are not equipped with modern desulphurisation technology that would help to reduce their emissions. A report by the Health and Environment Alliance found that 16 coal power plants in the Western Balkans collectively produce more emissions than the 250 power plants in the European Union, while only being able to generate 6% of the power (Matkovic Puljic et al. 2019).
Countries in the region are taking steps to reduce their dependence on coal power. In September 2020, the Polish government struck an agreement with labour unions that would see coal phased out by 2049. Coal accounts for 75% of Poland’s current electricity and Map 1 shows that air in the Upper Silesian Coal Basin, in the south of the country, is particularly polluted. Despite such commitments, Western European countries have in recent years been faster at transitioning away from coal. If this trend continues, the gap in air quality may even increase in the short run.
Did COVID-19 Improve Air Quality?
Last spring, a number of headlines from around the world featured the phrase “A breath of fresh air” (e.g. Reuters, The Economic Times, EUIdeas). These articles described measurable improvements in air quality in cities with government-mandated lockdowns. Recent academic publications have confirmed these reports in a variety of settings including the US (Berman and Ebisu 2020), China (Chen et al. 2020), and Korea (Ju et al. 2020).
While Eastern Europe was less affected by the initial wave of COVID-19 than Western Europe, most countries imposed lockdowns and social distancing measures that can be expected to have affected air quality. Figure 2 uses daily data from the World Air Quality Index for 221 European cities to compare average air pollution in 2020 to 2019. Overall, these plots suggest that air quality did improve in Eastern European cities relative to the previous year. However, not all types of pollutants declined and the declines are slightly smaller on average than in Western European cities. Panels A, B, and C plot air quality indices for fine particulate matter (PM 2.5), nitrogen dioxide (NO2), and sulfur dioxide (SO2) respectively. Dots below the line represent cities where the average air quality index was lower (indicating less pollution) in 2020 than in 2019. The declines are largest for NO2 – a gas that is formed when fuel is burned. The reduction in traffic and transportation in all European cities is likely to have contributed to this drop. By contrast, there were no statistically significant declines in SO2. This may be due to the fact that power generation, which is the source of most SO2 emissions, was less affected by lockdowns than transportation.
Figure 2
Panel A
Panel B
Panel C
Source: Author’s calculations based on the World Air Quality Index COVID-19 dataset. Each marker represents a city. Markers below the 45-degree line represent cities where emissions for the respective category of pollutant were lower in 2020 than in 2019. For reasons of presentation, outliers were excluded from panels B and C.
The variation in COVID-19 prevalence over the course of 2020 is visible when tracking pollution over time. Figure 3 shows that average daily NO2 emissions in Western European cities dropped most from March to June of 2020, during the first wave of the pandemic. NO2 levels were comparable to the previous year in July and August when case numbers fell and restrictions were lifted. In the last months of the year, as the second wave hit, NO2 emissions once more dropped below the previous year’s average. This pattern is similar for Eastern European cities but the decline in NO2 in the first half of the year is less pronounced.
Figure 3
Conclusion
The COVID-19 epidemic has highlighted the health costs of air pollution. The preliminary evidence suggests that long-term exposure to pollution increased COVID-19 mortality rates (Cole et al. 2020, Wu et al. 2020). This is a particular concern for countries across Eastern Europe which – at the time of writing – are still grappling with the second wave of the pandemic in Europe. Many people in this region have been exposed to polluted air for decades.
The pandemic has also demonstrated that air quality can improve relatively quickly when human behaviour changes. The data described in this brief suggest that Eastern Europe was no exception in this regard, although the declines were confined to some categories of pollutants. Achieving a more general, and sustained improvement in air quality will require a shift from coal power towards cleaner forms of energy.
Stimulus packages aimed at a post-pandemic economic recovery can provide an opportunity for policy to reorient the economy and accelerate such a shift. The consultancy Vivid Economics, which rated G20 member countries’ proposed stimulus packages in terms of their environmental impact, found that the ‘greenest’ stimulus proposals are those of the European Commission, France, UK, and Germany. Russia is one of the worst performers on this index (Vivid Economics 2020). Whether governments in Eastern Europe are able to take advantage of this opportunity will depend on their respective fiscal space and whether they make improving air quality a priority.
References
- Bagayev, Igor, and Julie Lochard, 2017. “EU air pollution regulation: A breath of fresh air for Eastern European polluting industries?.” Journal of Environmental Economics and Management 83: 145-163.
- Berman, Jesse D., and Keita Ebisu. 2020 “Changes in US air pollution during the COVID-19 pandemic.” Science of the Total Environment 739: 139864.
- BP 2020 “Statistical Review of World Energy – all data, 1965-2019“
- Bobak, Martin, and Richard GA Feachem. 1995. “Air pollution and mortality in central and eastern Europe: an estimate of the impact.” The European Journal of Public Health , no. 2: 82-86.
- Cole, Matthew, Ceren Ozgen, and Eric Strobl, 2020. “Air pollution exposure and COVID-19.”.
- Chen, Kai, Meng Wang, Conghong Huang, Patrick L. Kinney, and Paul T. Anastas, 2020. “Air pollution reduction and mortality benefit during the COVID-19 outbreak in China.” The Lancet Planetary Health 4, no. 6: e210-e212.
- European Environment Agency 2020. “Air Quality in Europe – 2020 report“, EEA Report No 9/2020
- Matkovic Puljic, V., D. Jones, C. Moore, L. Myllyvirta, R. Gierens, I. Kalaba, I. Ciuta, P. Gallop, and S. Risteska. 2019. “Chronic coal pollution–EU action on the Western Balkans will improve health and economies across Europe.” HEAL, CAN Europe, Sandbag, CEE Bankwatch Network and Europe Beyond Coal, Brussels.
- Ju, Min Jae, Jaehyun Oh, and Yoon-Hyeong Choi. 2020. “Changes in air pollution levels after COVID-19 outbreak in Korea.” Science of The Total Environment 750: 141521.
- Transport & Environment, 2018. “Briefing: Dirty diesels heading east”
- Vivid Economics, 2020. “Greenness of Stimulus Index” December 2020 update
- World Air Quality Index, 2021. “Worldwide COVID-19 dataset“
- World Health Organization, 2018. “WHO Global Ambient Air Quality Database (update May 2018)”
- Wu, Xiao, Rachel C. Nethery, Benjamin M. Sabath, Danielle Braun, and Francesca Dominici, 2020. “Exposure to air pollution and COVID-19 mortality in the United States.” medRxiv
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Circular Economy in Belarus: What Hinders the Transformation?
The transition towards a circular economy has accelerated in response to increasing environmental challenges and the need for more sustainable and cleaner production. Many countries are mainstreaming a circular economy into their policy agenda. In particular, the European Commission’s new Circular Economy Action Plan, adopted in March 2020, will be a key element of the EU Industrial strategy. In Belarus, similar policy agendas that promote circular economy have not been developed yet, however, this concept is now attracting increasingly more attention. Therefore, it is essential to identify barriers that hamper the implementation of circular economy business practices in the country. This policy brief presents the results of a survey that studied 452 Belarusian companies and their prospects and opportunities of circular transformation both within enterprises and at the national level. The findings show that high levels of capital and technology spending and lack of state-provided economic incentives are the most pressing barriers to circular economy development in Belarus. When it comes to enterprises’ own prospects for circular transformation, lack of funding is ranked as the main impediment.
Barriers to Circular Economy Development in Belarus
Despite the fact that there has been an increased interest in the circular economy, evidence suggests that its implementation has been hampered by a variety of barriers. Based on academic literature and business case studies, these barriers can be categorized into several groups (Rizos, et al., 2015; Rizos, et al., 2016; Kirchherr et al., 2018; Ritzén and Sandström, 2017):
- Cultural barriers (e.g. social, behavioral, and managerial) – a lack of interest, environmental awareness, and/or existing differences in personal values, which hinder the development of a circular economy.
- Information constraints – a lack of consumer and producer awareness about the key principles and best practices of circular economy implementation;
- Inadequate regulatory environment – a lack of consistent legal framework, policy support, and incentives for circular economy transition (e.g., through tax relief, fiscal measures, or public procurement);
- Technological barriers – an absence of a well-managed logistic infrastructure for the collection, extraction, and processing of secondary raw materials (SRM); the lack of standardization and, as a result, lower quality of goods produced from SRM; the absence of knowledge on how circularity can be implemented in a particular industry;
- Economic impediments – barriers to circular economy transition that are due to low prices for primary raw materials and high investment costs for the implementation of circular business models, as well as lack of funding and restricted access to finance.
This categorization served as the basis for the development of our questionnaire. We surveyed enterprises on the prospects and opportunities relating to their own circular transformation as well as factors constraining the more general development of a circular economy in Belarus. The survey was conducted in 2020 by BEROC and IBB Dortmund and included 452 companies from the Belarusian regions of Brest and Mogilev. The results show that businesses view economic, regulatory, and informational barriers as the most hindering to a circular transformation of Belarus. In particular, the respondents stated that the main impediments are high levels of capital and technology spending (62.8% of respondents), as well as lack of state-provided economic incentives (50.4%). Information constraints are also important as enterprises are not aware of circular technologies and believe that they do not exist (50.4%). Furthermore, there is a lack of knowledge on how to implement circularity in their industry (33.8%) (see Figure 1).
Figure 1. Barriers to circular economy development in Belarus, % of respondents
Respondents also identified barriers that hamper a shift of their own enterprise – rather than that of the entire Belarusian economy – from a linear to a circular business model. According to the survey, the lack of funding is considered as the main barrier to circular transformation among Belarusian companies, as 83.5% of respondents characterized its impact as high or medium. This impediment is followed by the absence of circular technologies that can be applied at the surveyed enterprise (64.9%) and the lack of information and best practice examples with regard to the implementation of circular business models (62.4%). Half of the respondents also indicated that the shift from a linear economy is hampered by the lack of consulting on how to implement circularity (see Figure 2).
Figure 2. Barriers to the circular transformation of the Belarusian enterprises, % respondents
Enterprises identified specific technical challenges associated with possible supply chain constraints. In particular, 40% of respondents raised concerns about the absence of an online database on waste and secondary raw materials, and 39.3% of them worried about possible interruptions in the supply of secondary raw materials.
Stimulus for Circular Transformation in Belarus
Respondents also expressed their views on potential stimulus measures that could be implemented to encourage a transition towards a circular economy in Belarus. Tailored support programs (83.9%), tax incentives (78.5%), and development of infrastructure for the processing of secondary raw materials (76.4%) were identified as the strongest motivators for enterprises’ decision to opt for a circular business model. Other important measures listed by the respondents were revisions of the legislative framework to prioritize the use of secondary raw materials, prevent waste generation, etc. (67.4%) as well as access to consulting on how to implement circularity in a business (62.8%) (Figure 3).
Figure 3. Stimulus for the circular economy development in Belarus, % of respondents
Surveyed enterprises stated that they had already incorporated some circular economy elements in their business model. More than 35% of respondents have used recycled materials in the production process, 19% have recycled products in the production of new materials or products, and around 19% have reused products or embedded raw materials. Moreover, more than 35% of enterprises would be ready to introduce reusage and recycling in their business within the next three years. However, they emphasized that existing regulations should be revised, and economic incentives provided in order to encourage these efforts.
Conclusion
The results confirm that Belarus has potential for circular economy development. Yet, its implementation might be hampered by economic, regulatory, informational, and technological barriers. In particular, the surveyed enterprises stated that high upfront costs, e.g., for technology and equipment, as well as the lack of state economic incentives, are the most pressing impediments to the circular transformation of Belarus. At the company level, lack of funding is seen as the main obstacle in shifting from a linear to a circular business model. Another important barrier is lack of information, as enterprises are not aware of circular technologies and best practice examples.
The results of our survey suggest that, in order to encourage a transition towards a circular economy in Belarus, a tailored support program should be developed, existing regulations revised, and economic incentives provided. The transition will not be possible without mainstreaming a circular economy into Belarus’ policy agenda.
References
- European Commission, 2020. “Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the regions, A New Circular Economy Action Plan for Cleaner and More Competitive Europe”, Brussels, COM/2020/98 final.
- Rizos, Vasileios, et.al., 2015. “The Circular Economy: Barriers and Opportunities for SMEs”,CEPS Working Document, No. 412.
- Kirchherr, Julian, et al., 2018. “Barriers to the Circular Economy: Evidence from the European Union (EU)”, Ecological Economics, V. 150, pp. 264-272.
- Rizos, V. et al., 2016. “Implementation of Circular Economy Business Models by Small and Medium-Sized Enterprises (SMEs): Barriers and Enablers”, Sustainability, No. 8 (11), 1212.
- Ritzén, Sofia; and Gunilla Ölundh, Sandström, 2017. “Barriers to the Circular Economy – integration of perspectives and domains”, Procedia Cirp, No. 64, pp. 7-12.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Towards a More Circular Economy: A Progress Assessment of Belarus
This policy brief summarizes the results of our study, Shershunovich and Tochitskaya (2018), on the circular economy development in Belarus. The aim of the work was to measure the circularity of the Belarusian economy using European Commission indicators. The analysis reveals that the circular economy in Belarus is still in the initial stage of its development. In 2016, the employment in circular economy sectors in Belarus accounted for 0.49% of total employment, and the investment amounted to only 0.27% of total gross investment. Belarus is also falling behind many European countries in waste recycling.
Introduction
The circular economy represents an economic system based on a business model of reduction, reuse, recirculation and extraction of materials in production, distribution and consumption of goods and services (Batova et al., 2018).
Transition to it offers great opportunities to transform the Belarusian economy and make it more sustainable and environmentally friendly, while preserving primary resources, creating new jobs and increasing competitiveness of enterprises.
In order to encourage the transition to a circular economy, it is important to have a proper monitoring system based on reliable and internationally comparable data. It helps to track progress towards a circular economy, conduct policy impact assessment, and analyze whether measures being taken are sufficient to promote an economy that reduces the generation of waste.
To assess the development of a circular economy in Belarus, a set of the European Commission (EC) indicators was used to capture the evolution of the main elements of closing the materials and products loop. The EC monitoring system comprises 10 indicators which are part of 4 pillars: production and consumption; waste management; secondary raw materials; competitiveness and innovation.
The reasons to use this system for Belarus are as follows: first, there is no set of indicators that provide a comprehensive overview of a circular economy in Belarus, while the EC monitoring framework allows us to capture its main elements, stages, and aspects; second, Eurostat calculates circular economy indicators for the European Union (EU) countries on a regular basis, which proves the high level of their practical application, relevance and robustness; third, the EC is constantly working on their improvement. Thus, the EC set of indicators can be a tool to monitor trends in transition to a circular economy in Belarus.
Tight spots of waste statistics in Belarus
While calculating the circular economy indicators for Belarus the following problems with data affecting the quality of statistics have been identified:
- methodological issues;
- challenges with recording and coverage;
- insufficient degree of international comparability of data, in particular woth the EU countries.
Such methodological problems as the blurred boundaries between the definitions of ‘waste’ and ‘raw materials’, and the lack of criteria for categorizing substances or objects as waste allow enterprises to classify certain substances or objects not as waste and therefore not to file information on them. As a result, less than half of the enterprises which might generate industrial waste, report it. Therefore, the question arises whether the statistical data reflect the real level of waste generation, recycling, and disposal in Belarus.
Data on municipal solid waste (MSW) have proved to be one of the areas of most serious concern. Absence of direct MSW weighing makes the data on it very sensitive to the conversion factor from volume to mass units. The differences between the Belarusian and European waste classifiers and definitions of key concepts (‘waste’, ‘recycling rate’) complicate the data analysis.
In addition, since Belarus is the 3rd world potash fertilizers producer, the share of potash waste in the total volume of waste generation is very high (63-68%). Only a small portion of this type of waste stream is recycled in Belarus (no more than 4%) due to lack of appropriate technologies of potash waste utilization used internationally. As only Germany counting as one of the world’s largest producers of potash fertilizers within the EU, to increase the comparability of data between the EU countries and Belarus, potash waste hasn’t been considered when calculating the circular economy indicators. Given all the above mentioned problems, some of the EU indicators have been adapted to the existing Belarusian statistical data.
Illustration of waste statistics problems
Waste statistics problems result in overestimation or underestimation of some circular economy indicators. A good example is the recycling rate of all waste, excluding major mineral wastes. Belarus, which is a country without a proper legal framework for the circular economy or a well-established secondary raw materials market, had one of the best performances in terms of the recycling rate (72-80%) among the EU countries in 2010-2016. This fact reflects the problems with waste statistics rather than success in waste recycling in Belarus.
Table 1. Recycling rate of all waste excluding major mineral wastes, %, in 2010-2016
Source: for the EU countries and Norway – Eurostat. For Belarus – own calculations based on the data from the RUE “Bel RC «Ecology».
Actual picture of the circular economy development in Belarus
The indicators with minimum distortions in waste statistics show that some elements of the circular economy in Belarus are still in the initial stage of their development (tables 2, 3, 4, 5). Our study reveals that the recycling rate of MSW amounted to 15.4 % in 2014-2016, which is much lower than the EU average in 2014 and 2016. Thus, Belarus has a considerable potential to increase the recycling rate of MSW. The experience of Czechia and Lithuania shows that the MSW recycling rate can be increased relatively fast if efforts are made and resources permit.
Table 2. Recycling rate of MSW, %, in 2010-2016
Source: for the EU countries and Norway – Eurostat. For Belarus – own calculations based on the data from the SE “Operator of SMRs” and Belstat.
In 2016, the recovery rate of construction and demolition waste in Belarus reached 81%, though this indicator fluctuated between 59% and 79% in previous years. However, it can be further improved as in some European countries (Denmark, the Netherlands, Germany, Czechia, Poland and Lithuania) the recovery rate of this type of waste stream exceeds 90%.
Table 3. Recovery rate of construction and demolition waste, %, in 2010-2016
Source: for the EU countries and Norway – Eurostat. For Belarus – own calculations based of the data from the RUE “Bel RC «Ecology».
Despite the fact that the decoupling of economic growth from an increase in waste volumes is an important issue on the international agenda, trends in waste generation in many countries follow a development of GDP. In 2010-2012, the generation of waste excluding major mineral wastes per GDP unit (42-46 kg/thsd of $, PPP) in Belarus (table 4) was comparable with countries such as Czechia, Lithuania, Germany, Denmark, Sweden. However, in 2014 due to waste generation growth, this indicator in Belarus exceeded above-mentioned EU countries and approached the level of Hungary and the Netherlands. It was far above Norway that was the best performer among the European countries and a good example of how a country could really decrease waste generation.
Table 4. Generation of waste excluding major mineral wastes per GDP unit (kg per thsd constant 2011 international $) in 2010-2016
Source: for the EU countries and Norway the data on generation of waste excl. major mineral wastes – Eurostat. For Belarus – own calculations based on the data from the RUE “Bel RC «Ecology». For the EU countries, Norway and Belarus the data on GDP, PPP in constant 2011 international $ – The World Bank.
In 2012, the share of gross investment in the circular economy sectors in Belarus (table 5) decreased in comparison with 2010, however, since 2014 it have shown an upward trend. For the EU countries and Norway this indicator also includes investment in the repair and reuse sector. For Belarus this sector has not been taken into account in calculation due to lack of data. In addition, the gross investment in tangible goods is a bit different from the gross investment in fixed assets used for Belarus as the latter doesn’t include non-produced tangible goods such as land. Yet, even bearing in mind these differences in calculation, the circular economy appeared to be underinvested in Belarus compared to the EU countries and Norway.
Table 5. Gross investment in tangible goods (% of total gross investment) in circular economy sectors in 2010-2016
Source: for the EU countries and Norway – Eurostat. For Belarus – Belstat.
The employment in the circular economy in Belarus accounted for only 0.49% of total employment in 2016, while in the EU countries and Norway this indicator was approaching 3%. This again proves the fact that Belarus has a long way to go towards the creation of a circular economy.
Conclusion
The analysis revealed contradictory results of the circular economy development in Belarus. While the country scores highly across some indicators compared to the EU countries and Norway, this to a large extent reflects the problems with waste statistics, rather than success in waste management. The indicators with minimum distortions in waste statistics show that Belarus is falling behind leading countries in circular economy development. However, in the transition to a circular economy, the monitoring framework is an important component of this process, which permits to track a progress using the system of indicators. In order to ensure that these indicators accurately capture the key trends in the circular economy in Belarus it would seem useful to:
- align the definition of ’waste’, ‘recycling rate’ with the international one, identify clear criteria for classifying substances or products as waste and secondary raw materials;
- strengthen the accountability of entities for filing reports on waste;
- improve the system of MSW and SMRs reporting and recording, and introduce MSW recording based on weighing wherever possible;
- consider the option of improving the comparability of Belarus’ waste classifier with the European waste statistical nomenclature.¨
References
- Batova, N. et al., 2018. “On the Way to Green Growth: Window Opportunities of Circular Economy”, PP GE no.1.
- Belstat. http://www.belstat.gov.by/
- Eurostat / Circular economy / Indicators / Main tables. http://ec.europa.eu/eurostat/web/circular-economy/indicators/main-tables
- RUE “Bel SRC “Ecology”. http://www.ecoinfo.by
- Shershunovich, Y. and I. Tochitskaya, 2018. “Waste Statistics in Belarus: Tight Spots and Broad Scope for Work”, PP GE no.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Environmental Implications of Russia’s Accession to the WTO
Authors: David G. Tarr, NES and Natalia Turdyeva, CEFIR.
We investigate the environmental impacts of Russia’s World Trade Organization (WTO) accession with a computable general equilibrium model incorporating imperfectly competitive firms, foreign direct investment and endogenous productivity. The WTO accession affects CO2 emissions through technique (−), composition (+) and scale (+) effects. We consider three complementary policies to limit CO2 emissions: cap and trade, emission intensity standards, and energy efficiency standards. With imperfectly competitive firms, gains from WTO accession result with any of these policies.
Tax Meat to Save the Baltic Sea
In a world of perfect markets, where prices are “right”, consumers’ choice should, with few exceptions, be limited only by their budget constraints. But in the case of agricultural products, the “right” prices are not in place. One reason is that producers in this sector do not bear the costs for the externalities they generate. Focusing on the case of the Baltic Sea, this brief provides some insights into why livestock producers are, by and large, exempted from environmental policies, and raises the question whether something should be done about it.
An Italian expression describes the attempt to juggle too many projects or attain too many goals at once, with the tacit implication that something is bound to fail. “Avere troppa carne al fuoco“: literally, to have too much meat on the grill. This, in a metaphorical but also quite literal sense, is the dominant impression left by some summer reading about the situation of the Baltic Sea.
The Baltic Sea is home to the world’s largest anthropogenic “dead zone”. The main culprit is the unsustainable livestock production in the region, generating externalities (i.e., costs that economic actors impose on others without paying a price for it) that short-circuit the functioning of the markets, creating a case for regulatory intervention. The concept of externalities is today most famously related to the issue of carbon dioxide emissions and climate change, felt by many as the most pressing challenge mankind has to deal with at present. In recent years, a lot of brain power has been spent on this, but there is more to environmental degradation and climate change than just CO2 and rising temperatures. A very conspicuous example is literally under our eyes, in the water body that lies between our lands. What should we do about it?
A Layman Understanding of the Background
For at least three decades, eutrophication (i.e., nutrient accumulation) and hypoxia (i.e., oxygen depletion) in the Baltic Sea has triggered and boosted each other in a vicious cycle. The nutrients discharged in the water fertilize the ocean floor resulting in an excess algal bloom. This underwater forest consumes oxygen, thus altering the balance between chemical elements in the water, so that even more nutrients are released and the cycle continues (for further references, see [16, 19, 21]). Beyond the algae and the decreased transparency of the water, these deep changes in the sea environment start to make them noticed in fish stocks depletion, but can more generally become devastating to both the marine and terrestrial ecosystems. Moreover, according to researchers, these conditions are going to increase the sensitivity of the area to the global climatic changes expected in the near future. This is seriously threatening a large part of economic activities in the whole catchment of the sea, an area of 22,500,000 km2 over nine countries with 85 million inhabitants.
Since 1974, all sources of pollution around the sea have been subject to a single convention, the Helsinki Convention, signed by the then seven Baltic coastal states. The Helsinki Commission, or HELCOM, is the governing body of the Convention, whose present Contracting Parties are Denmark, Estonia, the European Community, Finland, Germany, Latvia, Lithuania, Poland, Russia and Sweden. For over three decades, HELCOM has monitored the situation. Alarming reports have followed one upon the other, together with policy recommendations to the contracting parties.
As stated on its website, “the work of HELCOM has led to improvements in various fields, but further work is still needed [… and] the remaining challenges are more difficult than earlier obstacles”. Reductions in emissions achieved so far are low hanging fruits, concerning major point sources, such as larger cities’ sewage treatment plants and industrial wastewater outlets. Due to both technical and socio-economic obstacles, achieving further reductions will be a tougher task. This is because it is now time to address diffuse sources of nutrients such as run-off from over-fertilized agricultural lands. Nevertheless, according to numerous studies (among others, [19, 23]), a substantial reduction of the nutrient load discharged into the sea appears necessary in order to reduce further damage; all the more, so given that it takes many decades for the sea to recover. The question is hence whether more stringent policy instruments might be needed.
According to researchers at HELCOM, eutrophication of the Baltic Sea is due to the excess of nitrogen and phosphorus loads coming from land-based sources. About 75% of nitrogen and 52% of phosphorus come from agriculture and the livestock sector. In particular, the main reason for the sharp increase in nutrient loads during the last 50 years is the intensification and rationalization process. This was partly stimulated by the EU Common Agricultural Policy in its early phase, with a geographic separation between crop and animal production [6, 9, 10]. On the one hand, animal farms grew ever bigger, in the order of tens of thousands of animals for cattle, hundreds of thousands for swine and millions for chicken farms. These giant facilities produce way more manure than what could be absorbed by crop production in their vicinity. Cheap fodder to these extremely dense animal populations is produced on large scale crop fields elsewhere, too far away for transport of manure to be feasible and instead using high-yield chemical fertilizers. This way, the nutrient surplus is multiplied at both locations; it leaks through the ground or in the waterways from the big heaps of manure that cannot be properly stored or disposed of, and it leaks from the over-fertilized fields (shocking case studies are reported by HELCOM [11]).
However, a different type of agriculture exists in the area known as Ecological Recycling Agriculture (ERA). This is based on more traditional methods and means that farms have a lower animal density and use the manure as fertilizer in an integrated production of crop to be used for animal feed. In this way, ERA manages to better close the cycle of nutrients with very little dispersion to the environment. Scenarios simulations [12] show that, expanding the presence of ERA from the negligible shares it currently accounts for (between zero and a few percentage points, varying by sector and country) would contribute considerably to solving the problem. The nitrogen surplus discharged into the sea yearly could decrease by as much as 61% if all agricultural production in Poland and the Baltic states were converted to the standard of the best ERA facilities currently operating (the Swedish ones), without affecting the current volumes of crop and animal products. However, this is not likely to happen spontaneously, precisely because of the externalities discussed above. As long as the external costs are unaccounted for and ignored, scale economies push in the direction of concentration and intensification, which is the current development path of the sector.
A Difficult Question
Zooming out from the Baltic Sea and looking at the bigger picture, one starts to wonder why the agricultural sector is so seldom a part of environmental policy or even the debate. Recent research has raised awareness about the contribution of the agriculture and livestock sector to climate change [5, 8, 14, 17]. Beyond nitrogen and phosphorus, the expansion of livestock farming is behind the rising emissions of methane. It is the next most common greenhouse gas after CO2 and responsible for 19% of global warming from human activities. This is more than the share of all transportation in the world combined [18].
A new American Economic Review paper [13] provides a broad picture of the sources of air pollution in the American economy, for the first time computed separately by sector and industry, and with the purpose of incorporating externalities into national accounts. Crop production and livestock production stand out among the five industries with the largest gross external damage (GED), defined as the dollar value of emissions from sources within the industry. In fact, the agricultural sector has the highest GED to value added ratio.
However, greenhouse gases are not the only externality generated by livestock production. The animals’ living conditions under modern farming methods favor the emergence of infections and new diseases that reach much further than through direct consumption of related products, as the recent E. coli episode in Europe brought to attention. The generalized use of antibiotics in animal feed, legal and widespread in some countries [3], constitutes an even bigger health threat. This is because it has the potential of generating antibiotic-resistant mutations of bacteria against which we would be completely defenseless should they pass to humans.
Moreover, the public has from an animal-rights and ethics perspective become increasingly concerned about the animals’ living conditions. 77% of respondents to the Eurobarometer 2005 believe that the welfare-protection of farm animals in their country needs to be improved. 96% of American respondents to the Gallup 2003 survey say that animals deserve legal protection, and 76% say that animal welfare is more important than low meat prices. Additionally, a comparable share advocates passing strict laws concerning the treatment of farmed animals.
In rich countries, the increased share of meat in the diet, which has been stimulated by decreasing relative prices, constitutes according to some medical research a health hazard in itself. In developing countries, raising livestock is an inefficient and expensive converter of fossil fuels into calories for human consumption. In addition, fodder production often displaces other important land uses such as forests.
It is easy to rationalize the absence of these issues from the policy agenda. It is not just a matter of powerful lobbies. The ownership structure and size composition make the agricultural sector so heterogeneous that the challenges in regulating it can easily be imagined. Adding to this, is the special role of food in culture, the “local” products so often linked to national identity, the romantic idea of the land nourishing its people, and of course the strategic role of being food self-sufficient [7]. In the past, the latter was linked to wars and famines. Perhaps, even in our projections about the future, self-reliance in food production still plays an important role in the perspective of global climate changes and accordingly limited or modified trade flows. However, we cannot afford to grant this sector a special status and ignore all the social costs it generates. Can we learn anything from current research on how all these externalities should be addressed?
Policy Tools
In the terminology of Baumol and Oates’ classic book on environmental policy, instruments can be categorized as “command and control”. For example, explicit regulation of standards and technologies with associated prohibitions and sanctions; information provision, that then lets the power in the hands of the consumers; and price-based instruments, in the form of taxes, subsidies or trading schemes. These can be imposed on inputs or output, with different implications [4].
The relatively high-level standards of EU environmental legislation (legally stipulated maximum livestock density per hectare, requirements of minimum manure storage capacity, ban on winter manure spreading) is effectively enforced in some countries. In the newer members states, on the other hand, issues have been reported [15] in the form of incomplete translation of EU legislation into the national regulations and ineffective enforcing, significant examples of unlawful practices by foreign companies (e.g. Danish companies in Poland and Lithuania) and limited public access to environmental information. When it comes to non-EU members in the Baltic Sea area, these problems are scaled up, with very large animal farms, lack of many important environmental regulations (no limits on livestock density, capacity of manure storage or ammonia emissions from stored and utilized manure, too generous limits for amount of manure allowed, etc.) and an insufficient environmental information system.
Information undoubtedly plays an important role, but to rely on consumers’ pressure might not be sufficient to solve this type of issues. Consumers are not famously a very effective pressure group, because of organizational issues and the classic collective action problems. Direct regulation of activities is certainly necessary, especially when it comes to the most important rules of the game for producers. However, the heterogeneity of the sector creates a trade-off between environmental precision and transaction costs of implementation and control in practice. For example, the damage of nitrate leaching depends on the type of soil; the policy measure is precise when it restricts leaching losses on sites that have specific characteristics. However, the costs of enforcing measures only at these sites are high. Alternatively, curbing nitrate use in general has low transaction cost, but because it will also affect sites without problems of nitrate in the groundwater, it also has low precision. This may be considered unfair or illegitimate [24].
Another limit of this approach is the lack of flexibility: once a particular practice becomes forbidden, it is likely that some other behavior emerges from the creativity of the actors involved that was not foreseen by the norm but could potentially present the same problems as the forbidden one. This will happen as long as the private incentives of the actors are not aligned with the policy goal.
Often the best way to curb a particular activity that, as in this case, has a number of unwanted side effects, is not to ban it but to put a price on it. As in the case made for CO2, a market based approach could also in this area offer the advantage of being cost-effective and at the same time stimulate creative new solutions, e.g. new technologies for manure processing. Therefore, one immediate questions concerns why the agriculture sector is not included in the European emission trading scheme (ETS)?
The European Union launched already in 2005 its version of a cap and trade scheme, covering some 11,000 power stations and industrial plants in 30 countries. As from 2013, the scope of the European ETS will be extended to include more sectors such as aviation, but not agriculture or livestock. The main limitation of ETS is that it does not address spatial concentration problems. When emissions have an immediate effect on the local environment, permit trading does not guarantee the achievement of targets at each location. On the contrary, the possibility of trading emission permits combined with economies of scale might lead to the emergence of emission hotspots, sites with highly concentrated amounts of pollutants locally affecting the environment and the population. A proposed variation is a scheme for tradable concentration permits, either for manure [20] or for animal production [2]. A concentration permit is defined as the permission to deposit a quantity of pollutants at a specific location. The permits can then enter a trading system, but the use of the right remains linked to the site. Some authors believe that in practice, such systems generate high transaction costs and cannot achieve cost-effectiveness.
An input tax, for example on chemical fertilizers or imported fodder, or a direct tax on emissions would only affect the balance between domestic production and imports from countries that do not have the same regulation. Moreover, as discussed above, emissions are far from being the only problem. An alternative, as argued by Wirsenius, Hedenus and Mohlin at the Chalmers University of Technology and University of Gothenburg [22] is an output tax, i.e. a tax on meat consumption, on the grounds that costs of monitoring emissions are high, there are limited options for reducing emissions apart from output reduction, and the possibility for output substitution in the consumption basket are substantial. Moreover, a tax on consumption would avoid international competition from products that are not produced with the same standards.
A meat tax has shortly appeared in the public debate, for example in the Netherlands and in Sweden, but it has failed to gain much popularity so far. Meat consumption in the area has increased considerably in recent years –between 30% in Germany and 160% in Denmark since 1960 – and relative prices have fallen. By a combination of price and income effects, it has become a norm to eat meat every day, or even at every meal. It must be recognized, though, that while each single policy instrument discussed above has its shortcomings, because of the many interrelated aspects of the problem, a reduction in output, perhaps through a consumption tax, would address in a more comprehensive way all the different externalities related to meat production. After all, maybe there is just too much meat on our grills.
Recommended Further Readings
- [1] ”Slaktkropparnas kvalitet i ekologisk uppfödning”. Technical report, Ekokött, 2006.
- [2] J. Alkan-Olsson. Sustainable Water Management: Organization, Participation, Influence, Economy., volume 5, chapter Alternative economic instruments of control. VASTRA, Gothenburg University, 2004.
- [3] Mary D. Barton. “Antibiotic use in animal feed and its impact on human health”. Nutrition Research Reviews, 13:279–299, 2000.
- [4] W.J. Baumol and W.E. Oates. The theory of environmental policy. Cambridge Univ Pr, 1988.
- [5] J. Bellarby, B. Foereid, and A. Hastings. Cool Farming: Climate impacts of agriculture and mitigation potential. Greenpeace International, 2008.
- [6] M. Brandt and H. Ejhed. Trk transport-retention-källfördelning. Belastning på havet. Naturvårdsverket Rapport, 5247, 2002.
- [7] F. Braudel, S. Reynolds, and S. Reynolds. The structures of everyday life: The limits of the possible. Harper & Row, Publ., 1981.
- [8] A. Golub, B. Henderson, and T. Hertel. Ghg mitigation policies in livestock sectors: Competitiveness, emission leakage and food security. In Agricultural and Applied Economics Association 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania. Agricultural and Applied Economics Association, 2011.
- [9] A. Granstedt. Increasing the efficiency of plant nutrient recycling within the agricultural system as a way of reducing the load to the environment–experience from Sweden and Finland. Agriculture, ecosystems & environment, 80(1-2):169–185, 2000.
- [10] A. Granstedt and M. Larsson. “Sustainable governance of the agriculture and the Baltic Sea – agricultural reforms”, food production and curbed eutrophication. Ecological Economics, 69:1943–1951, 2010.
- [11] HELCOM. “Balthazar project 2009-2010: Reducing nutrient loading from large scale animal farming in Russia”. Technical report, 2010.
- [12] M. Larsson and A. Granstedt. “Sustainable governance of the agriculture and the Baltic Sea–agricultural reforms, food production and curbed eutrophication”. Ecological Economics, 69(10):1943–1951, 2010.
- [13] Nicholas Z. Muller, Robert Mendelsohn, and William Nordhaus. “Environmental accounting for pollution in the United States economy”. American Economic Review, 101:1649–1675, 2011.
- [14] T. Nauclér and P.A. Enkvist. “Pathways to a low-carbon economy: Version 2 of the global greenhouse gas abatement cost curve”. McKinsey & Company, pages 26–31, 2009.
- [15] J. Skorupski. “Report on industrial swine and cattle farming in the Baltic Sea catchment area”. Technical report, Coalition Clean Baltic, 2006.
- [16] B. Smith, A. Aasa, R. Ahas, T. Blenckner, T.V. Callaghan, J. Chazal, C. Humborg, A.M. Jönsson, S. Kellomäki, A. Kull, et al. “Climate-related change in terrestrial and freshwater ecosystems”. Assessment of Climate Change for the Baltic Sea Basin, pages 221–308, 2008.
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