A Case Study of the Kunda Cement Factory Public Disclosure Authorized
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. 1DF 30 SCpF.1996 Public Disclosure Authorized DISCUSSION PAPER Cost Benefit Analysis of Private Sector Public Disclosure Authorized Environmental Investments A Case Study of the Kunda Cement Factory Public Disclosure Authorized Yannis Karmokolias Public Disclosure Authorized INTERNATIONAL FINANCE CORPORATION IFC Discussion Papers No. I Private Business in Developing Countries: Improved Prospects. Guy P. Pfeffermnann No. 2 Debt-Equity Swaps an(d Foreign Direct Investment in Latin America. Joel Bergsman and Wayne Edisis No. 3 Prospects for the Business Sector in7Developing Countries. Economilics Departimient, IFC No. 4 Strengtheninig Healtlh Services in Developing Con ntries through the Private Sector. Charles C. Griffin No. 5 The Development Conthibution of IFC Operationis. Ecolnolmlics Departilmelit, IFC No. 6 Trena's in Private Investment in Thirty Developing Countries. Guy P. Pfeffermann and Andrea Madarassv No. 7 Automotive Industry Trends anid Prospectsfor Investment in Developing Countries. Yannis Karmokolias No. 8 Exparting to Industrial (Countries:Prospects far Businesses in Developinlg Countries. Economics Departmenit, IFC No. 9 African E ntrepreneuris-Pioneers of Development. Keith Marsden No. 10 Privatizing Telecommunicationis Systems: Business Oppartunities in Developinzg Countries. William W. Ambrose, Paul R. Heninemeyei-, andjeani-Paul Chapon No. 11 Trends in Private Inv7yestmentinz Develaping Countries, 1990-91 edition. Guy P. Pfeffermann and Andrea Madarassv No. 12 Financin,g Corporate Growth in the Developing World. Economics Departmiienit, IFC No. 13 Vlenture Ctpital: Lessonsfrom the Developed Warldfir the Developing Markets. Silvia B. Sagari wvithGabriela Guiicotti No. 14 Trends in Private Investment in Developing Countries, 1992 edition. Guy P. Pfeffermann and Andreat Madar-assv No. 15 Private Sectar Electricity in Developing Countries: Supply anid Demand. Jack D. Glen No. 16 Trends in Private IntVestment in Developing Countries 1993: Statistics far 1970-91. Guy P. Pfefferimianiniand Andci-eaMadarassy No. 17 HowvFi-ins in Develoiping Countries Manage Risk. Jack D. Glen No. 18 Coping With Capitalism: TheANew Polish Enti'preneurs. Bohdan Wyznikiewicz, Brian Pinto, and Maciej Grabowski No. 19 Intellectual Propert Pr-oteCtion,Foreignt Direct Investment, and Technolog Transfer. Edwin Mansfield No. 20 Trends in Private Investment in Developing Countries 1994: Statistics far 1970-92. Robert Miller and Mari-isz Sumlinski (Conttinuted on the inzside back cover.) INTERNATIONAL FINANCE CORPORATION DISCUSSION PAPER NUMBER 30 Cost Benefit Analysis of Private Sector Environmental Investments A Case Study of the Kunda CementFactory Yannis Karmokolias The World Bank Washington, D.C. Copyright ) 1996 The World Bank and International Finance Corporation 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing September 1996 The International Finance Corporation (IFC), an affiliate of the World Bank, promotes the economic development of its member countries through investment in the private sector. It is the world's largest multilateral organization providing financial assistance directly in the form of loan and equity to private enterprises in developing countries. To present the results of research with the least possible delay, the typescript of this paper has not been prepared in accordance with the procedures appropriate to formal printed texts, and the IFC and the World Bank accept no responsibility for errors. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author and should not be attributed in any manner to the IFC or the World Bank or to members of their Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. Some sources cited in this paper may be informal documents that are not readily available. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the Office of the Publisher, at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to copy portions for classroom use is granted through the Copyright Clearance Center, Inc., Suite 910, 222 Rosewood Drive, Danvers, Massachusetts 01923, U.S.A. The complete backlist of publications from the World Bank, including those of the IFC, is shown in the annual Index of Pul1ications,which contains an alphabetical title list (with full ordering information) and indexes of subjects, authors, and countries and regions. The latest edition is available free of charge from the Distribution Unit, Office of the Publisher, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66, avenue d'lena, 75116 Paris, France. ISSN (IFC Discussion Papers): 1012-8069 ISBN 0-8213-3738-6 YaannisKarmokolias is a senior economist in the Economics Department of IFC. Libraryof Congress Cataloging-in-Publication Data Karmokolias, Yannis, 1946- Cost benefit analysis of private sector environmental investments a case study of the Kunda Cement Factory / Yannis Karmokolias. p. cm. - (IFC discussion paper / no. 30) ISBN 0-8213-3738-6 1. Kunda Nordic Tsement, AS. 2. Cement industry-Waste disposal- Estonia-Kunda-Cost effectiveness-Case studies. 3. Cement industry-Capital investments-Estonia-Kunda-Cost effectiveness- Case studies. 4. Environmental policy-Estonia-Cost effectiveness. 5. Air pollution-Economic aspects-Estonia. 1. Title. II. Series: Discussion paper (International Finance Corporation) ; no. 30. HD9622.E754K865 1996 363.72'88-dc2O 96-34236 CIP Contents I Abbreviations............................................ iv Foreword ............................................ v Acknowledgments ............................................ vii I. Executive Summary.............................................. 1 II. Introduction .............................................. 3 Statement of the Problem ...... 3......................................3 Objectives of the Study ............................................ 4 Methodology ............................................. 4 III. Description of the Region and of the Kunda Cement Plant ............................................. 8 Characteristics of the Region ............................................. 8 Plant Description and Process ....... 8.....................................8 Pollution from the Kunda Plant ....... 8.....................................8 IV. Investment Program ............................................ 11 New Company Environmental Policy............................................ 11 Environmental Investment Program.............................................. 11 V. Impacts of the Environmental Investments ............................................ 13 Description of Impacts ............................................ 13 Quantifiable and Non-Quantifiable Impacts ............................................. 14 VI. Economic Quantification of Environmental Impacts............................................ 16 Raw Materials and Operating Benefits and Costs ............................................ 16 Soiling and Material Effects............................................ 17 Real Estate ............................................ 18 Health ............................................ 18 Forestry ............................................ 20 Agriculture.............................. 21 Tourism and Recreation ........................... 21 S02 and NOx Reduction Impacts.22., , .................................... 22 VII. Cost-Benefit Analysis................................ 25 Return on Investment..................................,,,,,,,,,,,,,,,,,,,,,,,,,,,,, 25 Beneficiaries........................................................... 27 VIII. Major Findings.......................................................................... ,.,................................... 29 Bibliography............................................................................................................................... 31 iii Abbreviations CIF Cost, insurance, freight COI Cost of illness CVM Contingent valuation method EEK Estonian kroon ERR Economic rate of return ESP Electrostatic precipitator FIM Finnish mark FOB Free on board IFC International Finance Corporation IRR Intemal rate of return KNC Kunda Nordic Cement Corporation NEFCO Nordic Environment Finance Corporation NO, Nitrogen Oxides; mainly NO2 NPV Net present value PM10 Particulate matter below 10 microns in diameter PV Present value SO2 Sulfur dioxide TSP Total suspended particles (concentration in ambient air) US$ United States dollars WTP Willingness to pay Note: Exchange rates used in this study (prevailing in 1993): US$1 =FIM5,2= EEK13 iv Foreword This DiscussionPaper breaks new ground for IFC. It considersthe case of a cement plant in Estonia and tries to answer the question: how do the (private) costs of curbing pollution compare to the (social) benefitsto the population? While it is often easy to estimate costs, it is exceedinglydifficult to capture the benefits, especially in developingand transition countries. This pioneeringempirical study concludesthat in the case of Kunda Cement,