Removing subsidies and recovering costs

Much discussion revolved around identifying the polluter and who should pay at a public awareness conference on the Polluter Pays Principle held earlier this month. MEPA organised the event, which touched on ensuring criteria were respected in the design of taxes, charges and subsidies with an effect on the environment.

The time has come for a discussion on the real economic figure of what it is costing us to produce water, dispose of our sewage and generate energy. It is increasingly clear that perverse subsidies on the price of water, drainage and fuel/electricity must go.

Despite a strong drive at policy level for the use of economic instruments to steer environmental behaviour, the introduction of economic instruments has been haphazard in the absence of a strategy.

Opening the seminar, MEPA's EU and Multilateral Affairs Unit manager Marie Briguglio said a number of EU directives no longer leave it up to the member state to see how to implement the polluter pays principle but squarely recommend the use of economic instruments.

A decision on a European level is expected towards the end of this month in the Council of Ministers on ambitious proposals for economic instruments. Prudence is advised, yet the need for a strategic response is unavoidable.

Revenue that is generated by economic instruments designed to encourage best environmental practices does not have to be redirected. Putting it towards environmental gains could provide a double dividend but it might be preferable (and more popular) to reduce income tax.

Economic instruments can also take the form of subsidies, or removal of subsidies. There is no need to create fiscal measures to reward behaviour that should be done anyway.

Economic instruments should give consumers a choice. Unless there is an alternative product or activity, then revenue generated under eco-contributions is merely a tax, even if it serves the purpose of reducing polluting behaviour. MEPA economist Gordon Cordina said existing instruments may need further rethinking.

Consultants had been engaged to look at the results of a three-year plan, begun in 2005, for the introduction of a package of instruments with varying degrees of success. Grace Camilleri, representing Ernst and Young, stressed that there needed to be effective involvement by both political and executive authorities at the highest level.

By-laws enacted by local councils on, for example, waste collection could bring about lack of consistency since the households of a locality perceive waste collection as free with no impetus to reduce waste.

While the legislative framework is largely in place, the approach has so far been fragmented with isolated implementation instead of a coherent approach with enforcement lacking effectiveness. Lessons learnt from other countries can be applied but care has to be taken that these are applicable to the local scene.

We cannot compete on an economic front or achieve environmental objectives while prices are still distorted. The use of economic instruments in Eastern European states is already quite high but we are not far behind.

Malta is building the capacity to introduce PPP through economic instruments, such as charges, taxes or the removal of perverse subsidies that are taking us in the wrong direction.

Failures in the market need to be corrected so that there is a shift from environmentally harmful activities to less harmful ones.

Patrick ten Brink, head of the Brussels office of the Institute for European Environmental Policy, noted that the system would be more efficient if the burdens were in the right place. "At the moment they are in the wrong place."

Climate change had brought about a clear growth in the need for action. A new momentum to change the economy, where things were not working, is developing in Europe. The EU Commission is keen to see instruments develop further, especially in the area of energy.

The point of fiscal reform is to look at who pollutes and who pays. Social pricing and affordability for low income households can be addressed through how the measures are designed.

In a comment from an Enemalta official, the danger was expressed that end users could end up paying for bad practices adopted by industry. An engineer from the Water Services Corporation observed that promotion of organic farming through higher rates paid for fertiliser, which was polluting the water table with nitrates, could prevent the pollution penalties falling on the consumer.

The taxes or charges, designed to steer behaviour towards less-polluting practices, must be fair. Keith Cappello of MEPA acknowledged the concern of the unions that these instruments might be regressive, with unacceptable social impacts, if not carefully thought out and applied.

Among the set criteria for economic instruments is a requirement for predictability. They must not be subject to sudden starts and stops, and fairness can be achieved through good design and adequate enforcement.

Marco Cremona, speaking for Friends of the Earth, noted that various EU directives were pushing for full cost recovery on services such as water. The eco-contribution had been introduced without much public consultation.

Bowsers charge 50c per cubic centimetre for water regardless of whether it is seawater or extracted from the aquifer, with or without a licence. This is only enough to cover the transport, while water is valued at zero cost.

It is hoped that the real costs to the nation of water, energy and waste disposal would finally become known as a result of the polluter pays exercise.

Low flyers

The private sector, especially small and medium enterprises (SMEs), wants legislation that is conducive to business promotion rather than suffocating it. Legislation supporting the Polluter Pays Principle by means of fiscal measures is rarely enforced.

National Affairs Executive at the Chamber of Commerce, Andre Fenech, pointed out that it was the law abiding companies that were taking the brunt while those companies "flying low under national authority radar" continue to evade the system.

Vince Farrugia of the GRTU backed up this claim, saying that calculations had revealed a 58 per cent rate of evasion of the eco-tax on computer monitors. A scheme to help importers and retailers recycle waste electrical and electronic equipment was not easy to maintain as no licensed facilities are in place and there are problems finding shipping.

Once economic instruments were firmly established, then facilities would come about proposed Mr Cremona. "The private sector will fill the vacuum if the incentives are there."

The GWU takes a cautious stance in applying the polluter pays principle, fearing job losses as a possible ripple effect. The union's president, Saviour Sammut, warned of the danger that consumers could pay for the polluters if the system were not done properly.

Dr Romina Bartolo, representing UHM, noted that while the system of parking fines had resulted in a clear effect on illegal parking, taking ownership of environmental responsibilities still had to be achieved.

FOI president Martin Galea aired concern that certain leakages, such as evasion, failure to register and non-compliant imports, were putting local manufacturers at a disadvantage. These were serious issues that called for a strong approach.

The Malta Transport Authority, although not a generator of revenue, is trying to implement the Polluter Pays Principle by getting vehicle owners to be socially responsible for excess fumes by means of the SMS emissions alert.

A number of other environmental initiatives undertaken by the ADT were mentioned by CEO Gianfranco Selvaggi, including the surfacing of the Park and Ride area with bitmac containing recycled glass powder.

The Malta Resources Authority was pleased to note that an economic instrument introduced in the last Budget had led to a transformation in the market. Classifying the more energy efficient fridge freezers had brought about a shift to higher sales of A+ and A++ labelled brands and, to a lesser extent, washing machines, dishwashers and air-conditioners.

A suggestion that the less energy efficient models should be phased out led to compelling objections from an importer of refrigerators on the grounds that Malta's geographical position was on a par with that of Southern Spain.

Tropical compressors are required for this temperature zone, putting the island's particular requirements for refrigerant cooling in a higher category from the rest of Europe. This showed how important it was for stakeholders in individual sectors to be consulted.

Any scheme involving the use of economic instruments would have to remain flexible to adapt to changes in the market. Speaking for the MRA Energy Directorate, George Cassar added that such a scheme should be simple to administer from the retailers' point of view.

Something is wrong

Environment Ministry director Chris Ciantar observed that there was still lack of ownership within different departments and ministries. While discussions were under way on separation of materials at demolition sites at a cost to the building industry, none of these materials could be processed locally.

An economic instrument that had been applied in the form of a subsidy for disposal of inert material from demolition sites had the opposite effect from a desired reduction in waste since stone waste was still on the rise.

Admittedly, something is economically wrong when stone, the scarce resource that gives most character to these islands, is the same material which makes up over 90 per cent of our waste.

Ms Briguglio noted that the absence of a tax on virgin stone material may have lessened this economic instrument's capability to reduce stone waste from building sites and encourage reuse of recycled stone.

Getting the price right for everyone is important so that fiscal measures reflect externalities without distorting competition. The instruments must be designed to deliver the message that polluting less means paying less.

There is a need to start doing things more strategically and create a more level playing field while determining who is bearing the brunt of eco-taxes. The Ministry of Finance is to screen and evaluate economic instruments with MEPA to make sure that future fiscal instruments will respect criteria. A standing committee will provide overall direction of the strategy and make specific recommendations for the annual Budget.

Winding up the conference, Finance Minister Tonio Fenech said economic growth could not be called progress if it damaged the environment. While care had to be taken not to create market uncertainty, some recommendations on economic instruments would be included in the pre-Budget document.