REFORM OF POLLUTION CHARGES IN THE RUSSIAN FEDERATION: Assessment of Progress and Opportunities and Constraints for Further Improvement OECD ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT The OECD is a unique forum where the governments of 30 democracies work together to address the economic, social and environmental challenges of globalisation. The OECD is also at the forefront of efforts to understand and to help governments respond to new developments and concerns, such as corporate governance, the information economy, and the challenges of an ageing population. The Organisation provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice, and work to co-ordinate domestic and international policies. The OECD Member countries are: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States. The Commission of the European Communities takes part in the work of the OECD. OECD Publishing disseminates widely the results of the statistics gathered by the Organisation and its research on economic, social, and environmental issues, as well as the conventions, guidelines, and standards agreed by its Members. This work is published on the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the Organisation or of the governments of its Member countries. © OECD (2004) No reproduction, copy, transmission or translation of this publication may be made without written permission. Applications should be sent to OECD Publishing: [email protected] or by fax (+33-1) 45 24 13 91. Permission to photocopy a portion of this work should be addressed to the Centre Français d’exploitation du droit de Copie, 20 rue des Grands-Augustins, 75006 Paris, France ([email protected]). 2 FOREWORD The OECD has been working on environmental taxation in the Russian Federation since 2001 as part of its programme of support for Russia’s ongoing tax reform process. The recommendations of the OECD Economic Survey of the Russian Federation and the OECD Environmental Performance Review of Russia were important contributions to this work. This report focuses on reforming pollution charges, which are the main and most comprehensive type of economic instrument used for environmental protection in Russia since 1992. The document aims at influencing the ongoing discussion in the Russian government on the preparation of the new federal law “On Payments for Negative Impact on the Environment.” The report analyses several proposed drafts of the law and provides recommendations for a far-reaching reform of the pollution charge system in Russia based on the broader OECD work on economic instruments for environmental protection. The report was prepared by Eugene Mazur and Alexander Martoussevitch of the Non-Member Countries Division of the OECD Environment Directorate. The authors are grateful to Dr. Jochem Jantzen and Dr. Stefan Speck for contributing to key parts of this document. Also acknowledged is the important role of the Russian Regional Environmental Centre and Russia’s Higher School of Economics in co- organising the expert workshop in Moscow on 11 March, 2004, where the report was presented and discussed. This report has been prepared within the framework of the OECD-Russia environmental cooperation carried out by the OECD’s Centre for Co-operation with Non-Members (CCNM). 3 TABLE OF CONTENTS ACRONYMS...........................................................................................................................................5 1. INTRODUCTION ...........................................................................................................................6 2. ANALYSIS OF RUSSIA’S POLLUTION CHARGE SYSTEM ...................................................8 2.1. Key Features of the Pollution Charges System........................................................................8 2.2. Evaluation of the Pollution Charge System (before 2002) ....................................................11 2.3. Assessment of the Proposed Changes to the Pollution Charge System.................................16 3. RECOMMENDATIONS FOR REFORMING RUSSIA’S POLLUTION CHARGE SYSTEM BASED ON INTERNATIONAL BEST PRACTICES ................................................19 3.1. Reduction of the Number of Chargeable Pollutants ..............................................................20 3.2. Coverage of Mobile Sources..................................................................................................21 3.3. Increasing Pollution Charge Rates.........................................................................................22 3.4. Reduction of Discretionary Powers of Implementing Agencies............................................22 4. OPPORTUNITIES AND CONSTRAINTS FOR FURTHER IMPROVEMENTS......................24 4.1. Streamlining the Pollution Charge System............................................................................24 4.2. Introducing a Motor Fuel Tax................................................................................................26 4.3. Conclusions............................................................................................................................29 ANNEX A. CASE STUDY ON THE POTENTIAL DESIGN OF AN SO2 EMISSION CHARGE IN THE RUSSIAN FEDERATION ......................................................................................................30 Summary ............................................................................................................................................30 A.1. Introduction............................................................................................................................31 A.2. Russia’s SO2 Emissions and the Case Study Sample ............................................................31 A.3. Methodology: the MOSES Model .........................................................................................34 A.4. Marginal Cost Function of SO2 Abatement in Russia ...........................................................36 A.5. Gradual Increase of the SO2 Charge and Its Impact ..............................................................38 A.6. Economic Efficiency of the Simulated SO2 Emission Charge ..............................................40 ANNEX B. LIST OF PARTICIPANTS OF THE EXPERT WORKSHOP..........................................43 REFERENCES ......................................................................................................................................45 4 ACRONYMS EECCA Eastern Europe, Caucasus and Central Asia ELV Emission (Effluent) Limit Value EU European Union MAC Maximum Allowable Concentration MOSES “Model on Sustainable Environmental Scenarios” OECD Organisation for Economic Cooperation and Development RUR Russian rouble TELV Temporary Emission (Effluent) Limit Value 5 1. INTRODUCTION During the last two decades, the use of environmentally-related taxes and charges, including pollution charges, increased in countries all over the world, particularly in many European OECD countries. It became increasingly recognised that environmental policy based on regulatory instruments, despite some successes, has in some cases failed to address new environmental pressures and prevent further environmental damage. Moreover, such instruments impose potentially high costs to achieve environmental quality objectives. In recent years, economic instruments have been recognised for their flexibility, cost-effectiveness in attaining environmental objectives, and the incentives they provide for introducing innovative technical solutions to environmental problems. The increased interest in market-based instruments in OECD countries has been analysed in various reports published by the OECD and other international organisations. Examples of their successful implementation are significant reductions in water pollution since the 1970s in France, Germany and the Netherlands as a result of the combined use of effluent charges and command-and-control requirements (OECD, 1999b). Economic instruments have become an essential part of policies to combat regional (e.g., sulphur dioxide) and global (carbon dioxide) pollution in many OECD countries, as well as in many countries in transition to a market economy and developing nations. Russia, similarly to other countries of Eastern Europe, Caucasus and Central Asia (EECCA), introduced economic instruments for environmental policy in the early 1990s, at the time that they were still part of the Soviet Union. However, there is a major difference in the systems of economic instruments implemented in Western Europe compared to those introduced in EECCA. The former include mainly product taxes, such as energy taxes, as well as targeted emission taxes on selected pollutants, while the latter constitute a comprehensive and complex system of pollution charges1 covering a very large number of air and water pollutants, plus solid waste generation. Other economic instruments for environmental protection, such as product taxes and deposit-refund systems are not commonly used in Russia.2 In 2002,