| United Nations | E/CN.17/1995/8 |
Economic and Social Council
Distr. GENERAL
24 March 1995
ORIGINAL: ENGLISH
COMMISSION ON SUSTAINABLE DEVELOPMENT
Third session
11-28 April 1995
Item 4 of the provisional agenda*
* E/CN.17/1995/1.
FINANCIAL RESOURCES AND MECHANISMS
Financial resources and mechanisms for sustainable development:
overview of current issues and developments
Report of the Secretary-General
CONTENTS
Paragraphs Page
INTRODUCTION ............................................... 1 - 12 4
I. INTERNATIONAL POLICY ENVIRONMENT AND FINANCIAL FLOWS . 13 - 76 5
A. Changes in the external environment .............. 13 - 24 5
B. Trends in resource flows and debt ................ 25 - 59 7
1. Overview ..................................... 25 - 29 7
2. Official development finance ................. 30 - 44 8
3. Debt and debt service ........................ 45 - 52 11
4. Outlook ...................................... 53 - 59 12
C. The Bretton Woods institutions and the financing
of sustainable development ....................... 60 - 76 13
1. Role of the International Monetary Fund ...... 61 - 63 13
2. Role of the World Bank ....................... 64 - 76 14
II. NATIONAL POLICIES AND RESOURCE MOBILIZATION .......... 77 - 212 16
A. Mobilizing public financing for sustainable
development ...................................... 77 - 184 16
1. Applying economic instruments ................ 77 - 168 16
2. Reviewing the usefulness of national
environmental funds ..........................169 - 184 29
B. Mobilizing private financing for sustainable
development ...................................... 185 - 202 32
1. Policy approach ..............................185 - 187 32
2. Access to credit .............................188 - 193 32
3. Financial incentives .........................194 - 197 33
4. Co-financing arrangements and venture capital
funds ........................................198 - 202 33
C. Cooperation on national sustainable development
policies ......................................... 203 - 212 34
III. INNOVATIVE INTERNATIONAL AND NATIONAL MECHANISMS FOR
RESOURCE MOBILIZATION ................................ 213 - 239 35
A. Internationally agreed tax on air transport ...... 213 - 229 35
1. Tax goals ....................................213 - 215 35
2. Tax design and expected revenues .............216 - 218 36
3. Tax administration ...........................219 - 222 36
4. Unresolved issues ............................223 - 228 36
5. Alternatives to the proposed IATT ............ 229 37
B. Tradeable CO2 permits ............................ 230 - 239 38
1. Policy options ...............................230 - 231 38
2. Technical aspects of trading .................232 - 234 38
3. Role of pilot schemes ........................ 235 39
4. Unresolved issues ............................236 - 239 39
IV. FINANCING FOR SECTORAL AND CROSS-SECTORAL ISSUES OF
AGENDA 21 ............................................ 240 - 281 40
A. Policy approach .................................. 240 - 243 40
B. Trends in sectoral finance ....................... 244 - 249 40
C. Financial resources for cross-sectoral issues .... 250 - 281 41
1. Financing the transfer of environmentally
sound technologies ...........................250 - 270 41
2. Financing biotechnology ......................271 - 281 44
V. MATRIX OF POLICY OPTIONS AND FINANCIAL INSTRUMENTS ... 282 - 290 45
VI. CONCLUSIONS AND RECOMMENDATIONS ...................... 291 - 310 46
A. International policy environment and financial
flows ............................................ 291 - 293 46
B. National policies and resource mobilization ...... 294 - 299 47
C. Innovative international and national mechanisms
for resource mobilization ........................ 300 - 301 47
D. Financing for sectoral and cross-sectoral issues
of Agenda 21 ..................................... 302 - 303 48
E. Matrix of policy options and instruments ......... 304 - 305 48
F. International cooperation in the application of
economic instruments and policy reforms .......... 306 - 310 48
INTRODUCTION
1. The present report describes progress made in the implementation of the
aims set out in chapter 33 of Agenda 21 (Financial resources and
mechanisms) 1/ since the United Nations Conference on Environment and
Development (UNCED) in June 1992, and provides a set of recommendations for
action. The report was prepared by the Department for Policy Coordination and
Sustainable Development of the United Nations Secretariat as task manager for
chapter 33 of Agenda 21, in accordance with arrangements agreed to by the
Inter-Agency Committee on Sustainable Development at its fourth session. It
is the result of consultations and information exchange between designated
focal points in 19 United Nations agencies, government officials and a number
of other institutions and individuals.
2. The report benefited greatly from meetings sponsored by Governments and
from inputs provided by the Food and Agriculture Organization of the United
Nations (FAO), the International Monetary Fund (IMF), the Organisation for
Economic Cooperation and Development (OECD), the United Nations Conference on
Trade and Development (UNCTAD), the Department for Economic and Social
Information and Policy Analysis of the United Nations Secretariat, the United
Nations Development Programme (UNDP), the United Nations Environment Programme
(UNEP), the United Nations Industrial Development Organization (UNIDO) and the
World Bank.
3. In the follow-up to UNCED the Commission on Sustainable Development
approached the issue of financing Agenda 21 at its first and second sessions
by focusing both on the monitoring of commitments made at the Conference and
on the development of policy options to overcome remaining funding problems.
4. In monitoring the commitments made at the Conference, the Commission has
paid particular attention to the goal of raising the level of official
development assistance (ODA) to 0.7 per cent of the gross national product
(GNP) of the developed countries.
5. Furthermore, the Commission has intensified its discussions on
mobilizing
external resources in addition to ODA and has addressed various policy options
with regard to access to international finance. Particular attention has been
given to private flows and the issue of external debt relief.
6. In addition, the Commission has explored innovative financial mechanisms
and stressed the need to make progress in this area with regard to tradeable
permits, a tax on air travel and other mechanisms.
7. Moreover, the Commission has addressed national policies for the
mobilization of resources and stressed the need to intensify the discussion
with regard to the use of economic instruments and a stronger involvement of
the private sector in the financing of sustainable development.
8. Finally, the Commission has successfully integrated the discussion on
the
financing of sectoral and cross-sectoral issues of Agenda 21 into the general
discussion of financial instruments and policy options.
9. In response to the Commission's recommendations on financial resources
and mechanisms made at its second session 2/ and to General Assembly
resolution 49/111, in which the Assembly took note of the report of the
Commission and endorsed the recommendations contained therein, the present
report will address various issues related to the financing of Agenda 21 in
order to make a contribution to the discussion of the Commission's Inter-
sessional Ad Hoc Open-ended Working Group on Finance (6-9 March 1995).
10. Various Governments provided generous financial and logistical support
for convening expert meetings on the financing of Agenda 21 as a contribution
to the preparation of the meeting of the Working Group.
11. The Government of the Czech Republic organized a workshop on Economic
Instruments for Sustainable Development at Pruhonice, near Prague from 12 to
14 January 1995; the Governments of Japan and Malaysia organized the First
Expert Group Meeting on Financial Issues of Agenda 21 at Kuala Lumpur from 2
to 4 February 1994; and the Governments of Japan and Malaysia, in
collaboration with the Department for Policy Coordination and Sustainable
Development of the United Nations Secretariat and UNDP, organized the Second
Expert Group Meeting on Financial Issues of Agenda 21 at Glen Cove, New York
from 15 to 17 February 1995.
12. The meetings at Pruhonice and Glen Cove succeeded in clarifying numerous
complex issues and policies related to the financing of sustainable
development and provided various substantive inputs in the form of papers
prepared by agencies and individual experts.
I. INTERNATIONAL POLICY ENVIRONMENT AND FINANCIAL FLOWS
A. Changes in the external environment
13. With industrialized countries either fully recovered or recovering from
the recession that stalled activity in the industrialized world since the
early 1990s, and many developing countries in Asia and Latin America
continuing to perform well, global output is expected to increase by 3 per
cent in 1994 and 3.5 per cent in 1995, twice the rate during the period
1990-1993. Increased activity in industrialized countries, rapid growth in
developing countries, stronger import demand from economies in transition, and
the successful completion of the Uruguay Round of multilateral trade
negotiations are expected to give world trade a strong boost. World trade is
projected to have increased by over 7 per cent in 1994 and 6 per cent in 1995,
well above the 5 per cent average growth rate of the past 20 years.
14. Economic growth is, however, uneven and has continued to decline in
Belarus, Russia, Ukraine and the Transcaucasian and central Asian countries in
transition. Although the outlook is beginning to improve in some African
countries as a result of stronger commodity prices and enhanced economic
reform efforts, economic conditions remain difficult in most of the continent.
15. The significant movements observed recently in long-term interest rates
are of relevance to economic policy, although they need to be interpreted with
caution, in view of the possible role of temporary factors. To some extent,
the rise in long-term interest rates since the end of 1993 appears to reflect
an increase in real interest rates that has been felt worldwide as a result of
the general strengthening of growth and the firming of expectations that the
recovery in industrialized countries is broadening and becoming
self-sustaining. Such a rise in world real interest rates is normal during an
economic upswing. However, high real long-term rates are indicative of a
renewed intensification of competition for financial resources, both among
private investors and between private and government borrowers. This
underscores the need for Governments to reduce their absorption of private
saving progressively in order to lower the path of real interest rates, allow
room for private investments that are essential for longer-term growth and
permit an adequate flow of financial resources to the developing countries and
economies in transition.
16. Increases in international interest rates may have consequences for
debt- servicing costs in heavily indebted developing countries, depending on
how rapidly or slowly changes in long-term rates are passed through to
debt-service payments. In addition, just as the period of low interest rates
in industrialized countries was associated with large portfolio shifts that
pushed emerging equity market prices up sharply, so this period of rising
long-term bond yields has been associated with a moderation of capital flows
to developing countries and a downward correction in many of the emerging
stock markets.
17. Recent trends in trade policy have focused on several key areas. First,
regional integration intensified, with a view to achieving various economic
and political objectives. Second, unilateral trade liberalization was limited
among industrialized countries, but was a fundamental aspect of reform efforts
of developing countries and economies in transition. Third, protectionist
pressures and trade frictions persisted. Finally, the linkages between trade
policy and domestic policy, such as competition policy and environmental and
labour standards, received increasing attention in national and international
forums.
18. The conclusion of the Uruguay Round was a major achievement in
international trade relations as a crucial element in promoting world trade
and growth. The Round produced positive outcomes in several areas, including
market liberalization, strengthening of rules and institutional structures,
and integration into the trading system of new and dynamic areas, such as
services and intellectual property, and traditional areas, such as agriculture
and textiles and clothing, previously exempted from rules under the General
Agreement on Tariffs and Trade (GATT). Global annual real income gains are
estimated at $510 billion by 2005, of which some $116 billion would accrue to
developing countries and transition economies.
19. Future multilateral trade policy will focus on many issues. These
include continuation of negotiations in key service sectors, notably financial
services, telecommunications and transportation. Furthermore, market
liberalization in specific areas, such as agriculture, steel and civil
aircraft, will be required because distortions will remain high despite the
achievements of the Uruguay Round. Other issues that are coming to the fore
include the interaction of trade and environment and/or labour policies; and
the trade effects of domestic policies, such as competition policy and
investment policy.
20. Stronger growth in industrialized countries will help to relieve some of
the downward pressures in commodity markets, but it appears unlikely that it
will be sufficient to reverse the decline of the past decade. Analysis of the
major factors behind the observed behaviour of commodity prices reveals that
conventional factors, such as the prevailing macroeconomic conditions in
industrialized countries, are estimated to have contributed in only a limited
way to the recent weakness in real commodity prices and that the expansion in
the supply of commodities played a fundamental role. In addition, while
output changes in Eastern Europe and the States of the former Soviet Union
traditionally played a relatively minor role in price developments, they
acquired an increasingly important role in the post-1988 period.
21. It is also useful to measure the combined changes of economic growth,
interest rates and terms of trade. For that purpose IMF has constructed a
composite "external conditions index" based on a weighted average of world
interest rates, industrialized country growth and the terms of trade. A rise
in the index indicates that changes in the external environment have
contributed positively to growth.
22. The weights for the index are based on the long-run elasticities of
output growth in the developing countries to each of the three factors, using
the IMF developing country model.
23. The developing country model suggests that changes in the terms of trade
have the greatest impact on developing country output growth, with long-run
elasticities of about 0.5 for both low- and high-growth countries. The
sensitivity of developing country growth to industrialized country growth is
0.4 for high-growth countries, four times as large as that for low-growth
countries. The impact of the world interest rate is small for all groups,
although it is large for some individual countries.
24. Using the elasticities underlying the external conditions index, the
total effect of changes in the terms of trade, industrialized country growth
and world interest rates on developing country growth can be estimated. The
analysis suggests that the external environment reduced the average growth
rate of low-growth countries by 3/4 of 1 percentage point during 1984-1993,
while the average growth rate of high-growth countries was boosted by about 1
percentage point.
B. Trends in resource flows and debt
1. Overview
25. The 1994 report of the Chairman of the Development Assistance Committee
(DAC) of OECD 3/ provides an update of recent trends in resource flows and
debt. The main findings of the report are summarized below.
26. In 1993, total resource flows to the developing countries increased by
over $14 billion to a record of $167 billion. Measured in terms of 1992
constant prices and exchange rates, this represents an increase of 12 per
cent. As was also the case in 1992, the major force underlying this expansion
was the strong performance of private flows, which increasingly account for
the largest share of resource flows, up from 53 per cent of total net flows in
1992 to 56 per cent in 1993.
27. Particularly noteworthy is the recent variation in the contribution of
different types of private flows within the overall trend. In 1992, the
striking growth in private flows was largely attributable to the strong surge
in international bank lending to $31 billion, 38 per cent of total net private
flows. In 1993, bank lending dropped back sharply to $9 billion, only
10 per cent of net private flows that year. In sharp contrast, bond lending
tripled to over $36 billion to account for 39 per cent of private flows in
1993. In addition, foreign direct investment, which had been falling from its
1989/90 peak, expanded by $10 billion to a level comparable with that of bond
lending.
28. The other main components of resource flows to the developing countries
have also been in a state of flux. Net disbursements of official development
finance (ODF) have been falling in real terms since 1991, standing at
$68 billion in 1993. Gross flows of export credits represent an important
source of export finance (1993 gross export credits are estimated at around
$30 billion), but as a result of high levels of repayment for past lending,
net resource flows are much smaller, representing only 3 per cent of total net
resource flows. Net flows of export credits did, however, show unusual growth
in 1993, increasing to $5 billion.
29. The debt situation of the developing countries as a group continues to
improve. In 1993, the total stock of external debt (measured at current
prices and exchange rates) rose by 5 per cent - much less than gross domestic
product (GDP) - to $1,630 billion, with much of this attributable to growth of
debt stocks in Asia as well as to valuation effects. While the growth of debt
stocks has been slowing down since the beginning of the 1990s, actual (as
distinct from scheduled) debt-service payments have remained relatively stable
at around $155 billion a year and have declined relative to total foreign
exchange receipts.
2. Official development finance
(a) Recent developments
30. At $68.5 billion in 1993, ODF had dropped by $2 billion from its 1992
level, a decline of nearly 1 per cent in constant terms. This fall had been
expected following cut-backs in the aid budgets of several donors as a result
of tight budget conditions, even although in many instances aid budgets fared
better than other sectors under general cuts. The 1993 ODF statistics also
reflect a number of special factors, including a reduction in capital
subscriptions to multilateral development banks due to the timing of
replenishment cycles and an easing in some parts of the world for emergency
relief.
31. The decline in ODF in 1993 was mainly attributable to a fall in
bilateral disbursements, particularly the more concessional (i.e., ODA) flows.
The two largest donors, Japan and the United States of America, both
registered sharp reductions in net bilateral ODA. Part of the fall in ODA
was, however, due to a change in the manner in which non-ODA debt forgiveness
is recorded. In consequence, nearly $1 billion of military debt forgiveness
by the United States was recorded as other official flows (OOF) rather than
ODA, as had been the case in 1992.
32. In contrast, multilateral disbursements increased to $24 billion, up by
$3 billion on 1992, although most of this was accounted for by the expansion
of multilateral OOF.
33. ODF now represents only 41 per cent of total resource flows to the
developing countries, although this reduced share is predominantly due to the
welcome expansion of private flows.
34. ODF also remains the backbone of external resource flows to the vast
majority of developing countries, especially the low-income and middle-income
groups of African countries and least developed countries elsewhere. However,
the recent shortfall in ODF is of increasing concern because it has had a
disproportionate impact on the more concessional flows to the low-income
countries and to areas such as sub-Saharan Africa.
(b) Official development assistance
35. Official development assistance from DAC members slumped from $60.8
billion in 1992 to $56.0 billion in 1993. The size of the fall was
unexpected. A reduction by 8 per cent in current dollars, equivalent to a 6
per cent decline in real terms reduced DAC members' ODA as a share of their
GNP from 0.33 per cent in 1992 to 0.30 per cent, the lowest level recorded for
two decades. Current information on DAC members' plans and programmes,
together with data on new commitments, suggests that this was a bout of
weakness, rather than an incipient collapse. Recovery in 1994/95 will be
possible for some DAC countries with the easing of budgetary pressures as they
emerge from recession.
36. In 1993, the ODA performance of DAC countries in terms of reaching the
United Nations target of 0.7 per cent of GNP for ODA was as follows: four
countries reached the target (Denmark, Netherlands, Norway, Sweden); six other
countries exceeded 0.35 per cent (Australia, Belgium, Canada, Finland, France
and Germany). Eleven countries were below 0.35 per cent (Austria, Ireland,
Italy, Japan, Luxembourg, New Zealand, Portugal, Spain, Switzerland, United
Kingdom of Great Britain and Northern Ireland, United States of America).
37. Grants on average account for over four fifths of net disbursements of
the ODA extended bilaterally by DAC members, a proportion which has been
rising slowly but steadily in recent years as more donors have successively
moved to a grant-only programme. The trend was reinforced in 1993; in
aggregate, the decrease in bilateral ODA was entirely due to the decline in
loans (-$2.5 billion or a fall of 30 per cent) whereas bilateral grants rose
by less than 1 per cent. This had an impact on the geographical distribution
of ODA.
38. DAC members' grant aid to the least developed countries declined by less
than 1 per cent. Net loans to these countries fell by a striking 83 per cent,
but this component ($0.1 billion in 1993) accounted for a mere 1.3 per cent of
DAC members' ODA to the group. The shift from loans to grants is revealed
more clearly by the fact that gross ODA lending fell from $1,225 million to
$976 million, a fall of 20.3 per cent.
39. Further interpretation involves allowance for the impact of debt
forgiveness on the figures. It is estimated that some $780 million of ODA and
non-ODA claims were cancelled in 1993, compared with $500 million in 1992.
The implication is that the transfer of new ODA resources in the form of
bilateral grants was of the order of $7.9 billion in 1992 and $7.6 billion in
1993. The remainder, recorded as debt forgiveness, represented an easing of
the debt burden of the least developed countries through cancellations of debt
obligations. To this should be added the disappearance of the corresponding
liability to make interest payments in the near future, which is not reflected
in the data.
40. Proportionately, donors' contributions to multilateral institutions fell
more sharply (13 per cent in real terms) than their bilateral programmes (down
6 per cent). Despite the cyclical fall in contributions to multilateral
institutions, developing countries' receipts from this source were cushioned
to some extent by the fact that the multilateral institutions, especially the
international financial institutions, can draw on income from previous years
to make their current disbursements. These fell by 6 per cent, from $17.5
billion in 1992 to $16.5 billion in 1993. Replenishments in 1994 should
refurbish multilateral commitment potential if the familiar cyclical pattern
holds up, but if adequate funds are not forthcoming from donors, the level of
the activities of the multilateral agencies could be impaired in later years.
41. Similar developments are seen in the statistics for sub-Saharan Africa.
Almost all of the countries in sub-Saharan Africa are low-income countries and
33 of them are classified as least developed. To this extent, the same
factors operated as those just described: a limited fall in grant volume
(-2.4 per cent) and a sharp fall in net loans (-37.3 per cent). In dollar
terms, net loans fell by $647 million, gross loans by $362 million
(-14.7 per cent). Here again, the impact of debt forgiveness is evident; the
greater fall in net lending reflects the effect of the removal of $730 million
of debt from the loan record.
42. Proportionately, the brunt of DAC members' reduction in their total
bilateral ODA flows was borne by the low-income countries other than least
developed countries: this group experienced a fall of 19.7 per cent in their
receipts of ODA, with a 24.8 per cent drop in grants and a 10.8 per cent
decline in net loan receipts.
43. As regards net ODA loans, the fall in flows to the group of low-income
countries other than least developed countries was a relatively modest
10.8 per cent, from $4.3 billion in 1992 to $3.8 billion in 1993. This does
not reflect a reduction in loan activity, since gross lending rose by a
significant 22.8 per cent to $8 billion.
44. For middle-income and high-income categories, the data show DAC members
increasing their grants by 5.6 per cent in 1993 but reducing their net ODA
lending by 45 per cent. Some of these countries received significant amounts
of debt forgiveness in 1993. Gross ODA lending to these countries fell by
7.7 per cent to $6.1 billion.
3. Debt and debt service
45. Financial market debt continues to be the largest single component of
the debt stock of the developing countries as a group, but its importance has
been falling steadily, although debt related to bond lending has begun to
assume significance. The other rapidly expanding elements have been
short-term debt and debt resulting from export credits.
46. Debt owed to bilateral creditors is much higher than multilateral debt
and has also grown much faster in recent years. For both groups of debt, the
greatest expansion has been in the concessional component. However,
multilateral non-concessional debt still accounts for 65 per cent of
multilateral debt stocks for the developing countries as a whole (and over
40 per cent for the multilateral debt stock of the low-income countries).
47. The proportion of debt contracted on concessional terms has been growing
steadily, now standing at over 25 per cent of the stock of total long-term
debt for the developing countries as a whole. While the trend towards
increasing concessionality is found throughout all of the main developing
country regions and income groups, it is especially pronounced in the least
developed countries, where it is approaching 60 per cent. This is
particularly welcome in the light of the need in these countries for highly
concessional resources.
48. The balance of debt-service payments has swung in favour of amortization
payments. Interest payments now account for 40 per cent of service payments,
as opposed to over 50 per cent in the mid-1980s, largely reflecting the
decline in short-term interest payments, which now stand at less than half
their level at the end of the 1980s.
49. Payments on export credit debt are not only the largest but also the
fastest growing component of debt service, up 40 per cent on their 1990 level.
The other main categories of debt responsible for important levels of debt-
service payments are financial market debt and multilateral debt
(respectively, 29 per cent and 22 per cent of total service payments in 1993).
50. By themselves, statistics on levels and trends in debt and debt service
say little about the severity of the debt burden and its sustainability. The
essential debt problem is that of solvency; taking the ratio of debt stocks to
exports of goods and services as a very rough measure of this shows
considerable improvement for the developing countries as a whole, with the
ratio now below 200 per cent, the threshold above which the solvency problem
can be regarded as critical for countries whose debt is essentially on
non-concessional terms. Nevertheless, the ratio increased between 1990 and
1993 before falling back in 1994 and is near the 200 mark.
51. A number of countries also continue to face liquidity or cash-flow
problems, but this aspect of the debt problem (as measured by the ratio of
debt service to exports) has generally improved throughout the developing
countries, especially in the poorest countries, including the least developed
countries. This improvement is due not only to significant debt
reorganization, major bilateral initiatives to cancel ODA debt and the growing
importance of concessional debt in overall debt stocks, but also to the
accumulation of arrears.
52. Additional information on the developing country debt situation and net
transfers of resources between developing and developed countries is contained
in the reports of the Secretary-General to the General Assembly at its forty-
ninth session (A/49/309 and Corr.1 and A/49/338).
4. Outlook
53. The fact that total net resource flows to the developing countries in
1993 maintained the record levels achieved in 1992 is most welcome and
reflects a growing recognition and endorsement of the reform and stabilization
efforts of a number of countries. Indeed, policy performance is rapidly
becoming the single most important determinant of country access to financing
from all sources. Closer links between the provision of financial assistance
and the economic and financial performance of recipient countries are
increasingly being forged for bilateral ODA flows and multilateral lending in
support of adjustment programmes. Some middle-income countries that have made
progress in resolving their debt problems, often in the context of
comprehensive macroeconomic adjustment and structural reform programmes, have
regained access to spontaneous private financing. Low-income rescheduling
countries that sustained their adjustment efforts and maintained broadly
satisfactory relations with creditors typically made significant debt
repayments. These countries found that the payments were more than offset by
inflows of new direct financial assistance. In contrast, low-income countries
with mixed records of performance, including the accumulation of external
arrears for prolonged periods, saw their access to new financing reduced.
54. Virtually all the expansion in resource flows to the developing
countries since the beginning of the 1990s is attributable to the growth of
private flows. To a considerable extent, these flows have gone to countries
which have undertaken reforms that enable them to regain access to
international capital markets. Nevertheless, this development is accompanied
by a number of concerns, including the sustainability of flows of this nature
and magnitude as well as their concentration in a relatively limited number of
countries.
55. Questions remain about the continued ability of countries to attract
private flows of the current magnitudes. In part this is because of the role
of external forces (e.g., economic growth and interest rates in the OECD area)
in "diverting" funds from OECD economies to the emerging markets and also
because other influences are of a transient or finite nature (e.g., resulting
from privatizations and returning flight capital). In addition, the growing
importance of short-term finance is seen by some observers as inherently
volatile.
56. The recent decline in total ODF has not been associated with any major
redirection of aid flows towards the poorer developing countries. The low-
income and the least developed countries are therefore increasingly dependent
on aid budgets that are under pressure and are unlikely to see any significant
expansion in real terms in the near future. These countries must therefore do
much more to increase their attractiveness to private flows, since only
private flows are expanding and have demonstrated that they can react
positively and rapidly to improved prospects.
57. Recent trends in ODF flows, particularly the fact that they are
adversely affecting the low-income countries and that the decline is largely
concentrated on ODA flows, are of particular concern in the light of the need
to maintain the flow of highly concessional resources and to ensure net
positive resource transfers to the poorest and most heavily indebted
countries. This is fundamental to the success of the overall debt strategy.
The continued flow of new and highly concessional finance, preferably in the
form of grants, is necessary to avoid future debt-servicing problems and in
the meantime to permit debtors to avoid cash-flow problems and meet their
remaining scheduled debt-service obligations. At the same time, bilateral
donors will also be expected to increase the amount of debt forgiveness.
58. Overall, the debt situation of the developing countries continues to
improve, but progress in placing the servicing of debt on a financially
sustainable basis and regaining access to capital markets has largely been
confined to the middle-income countries. Despite debt rescheduling and other
relief from the application of the enhanced Toronto terms, debt buy-back
schemes, bilateral debt forgiveness and new concessional money, a large number
of the poorest and most indebted countries are still unable to meet scheduled
debt-service payments. Arrears have accumulated and they have been locked
into a process of repeated rescheduling. Even the full application of the
enhanced Toronto terms by the Paris Club still leaves many countries with
unsustainable debt burdens.
59. The need for deeper and more definitive action to remove the debt
overhang and to permit a once-and-for-all exit from the rescheduling process
has been increasingly recognized, culminating in the recent initiative on debt
relief taken by the group of seven major industrialized countries at their
Summit Meeting at Naples, Italy in July 1994.
C. The Bretton Woods institutions and the
financing of sustainable development
60. Considering the important role that international financial institutions
play in international finance and development, it is legitimate to ask what
role they play in the financing of sustainable development.
1. Role of the International Monetary Fund
61. The primary mandate of IMF is to safeguard the stability of the
international financial system and to support the worldwide application of
sound and stable macroeconomic policies aimed at promoting high-quality
growth. IMF does this in two ways. First, its staff and management
periodically review the macroeconomic policies and conditions of member
countries and encourage them to adopt appropriate monetary and fiscal policies
as well as realistic exchange and interest rates. Second, IMF provides
financial resources in support of orderly stabilization and structural
adjustment efforts to member countries. IMF does not lend for specific
developmental projects nor does it advise on sectoral or microeconomic
policies.
62. The successful implementation of a strategy for sustainable development
greatly depends upon the existence of monetary stability and the availability
of adequate financial resources. IMF helps achieve these fundamental
conditions for sustainable development in its member countries by providing
advice on macroeconomic management and financial support for adjustment
efforts. Such programmes are also a condition for securing debt relief and
are often catalytic in encouraging substantial private capital flows.
63. IMF helps support sustainable development in two other ways as well.
First, together with the World Bank, it assists member countries in adopting
desirable structural policies, including subsidy and price reform, trade
liberalization and tax reform, which help mobilize budgetary and domestic
resources necessary for sustainable development. Second, IMF helps countries
in the design and implementation of social safety nets aimed at protecting the
poorest in society from the effects of adjustment. Failing these, the poor
would most likely be tempted to deplete natural resources and/or damage the
environment, thus undermining the country's efforts to achieve sustainable
development.
2. Role of the World Bank
64. World Bank support for borrower environmental stewardship centres on
(a) assisting countries to set priorities, strengthen institutions and
implement programmes for environmentally sustainable development; (b)
minimizing potential adverse environmental and social impacts of development
projects; (c) building on the positive linkages between poverty reduction,
economic efficiency and environmental protection; and (d) addressing global
environmental challenges.
65. The Bank helps its borrowers to improve their environmental management
by providing funding for environmental investments, supporting national and
regional environmental planning and enhancing the knowledge base about
environmentally sustainable development.
66. Twenty-five new, primarily environmental, projects were approved in
fiscal year 1994, involving total Bank and International Development
Association (IDA) commitments of more than US$ 2.4 billion. This brings
cumulative Bank lending over the past decade to roughly US$ 9 billion in some
120 primarily environmental projects. At least an equal number of projects
have had significant environmental components, including about 30 such
operations over the past 12 months.
67. The Bank has provided technical assistance to borrowers for the
preparation of national environmental action programmes or equivalent
documents since 1987. By the end of fiscal year 1994, most active IDA
countries and a number of Bank borrowers had completed such plans.
68. At the regional level, the Bank supports strategy papers such as those
completed in 1994 for Central and Eastern Europe and Asia, and has entered
into implementation focusing on the urban environment.
69. As part of its non-financial assistance to borrowing member countries,
the Bank is expanding its analytical work on economic valuation of
environmental resources and resource accounting and its work on environmental
indicators and information systems. It likewise continues to help borrowers
to improve their legal and institutional frameworks for environmental
management. Much of this work is geared towards encouraging borrowers to rely
increasingly on economic incentives and disincentives (such as pollution
charges) and other market-based instruments (such as "eco-labels"), in
addition to updating or improving more traditional "command and control"
measures.
70. All Bank projects are screened for their potential environmental impacts
and a full environmental assessment and detailed mitigation plans are required
for all investment projects proposed for Bank financing that are expected to
have significant adverse environmental effects. Recently, the focus of Bank
environmental assessment work has been expanding to include the enhancement of
environmental or socio-economic benefits, together with the minimization of
environmental or social costs.
71. A fundamental concept of environmentally sustainable development is that
the environment and development are closely linked and must be addressed
together. In consequence, the Bank's specific environmental interventions are
only one part of all Bank activities that contribute to sound environmental
management. Increasingly, the links between these activities and
environmental protection are being made more explicit.
72. Bank attention to regional and global environmental concerns has also
expanded. The Bank's work in protecting the regional commons focuses
primarily on regional seas and river basin programmes. Implementation of
existing environmental action programmes for the Mediterranean Sea, the Black
Sea, the Baltic Sea and the Danube River Basin accelerated over the past 12
months. The Bank also launched new regional initiatives for the Aral Sea in
Central Asia and Lake Victoria in East Africa.
73. In addition to these programmes, the Bank has dedicated increasing
effort to issues of soil degradation and desertification at the regional
level, as illustrated by its active role in the drafting of the International
Convention to Combat Desertification in Those Countries Experiencing Serious
Drought and/or Desertification, Particularly in Africa.
74. A variety of channels are used for the work of the Bank on global
environmental issues, but the largest is the Global Environment Facility
(GEF). As one of its three implementing agencies (together with UNDP and
UNEP), the Bank administered and chaired GEF during its pilot phase. The Bank
has helped GEF to emerge as an important catalyst for the integration of
global environmental concerns into national development goals. Through grants
and concessional funding, it enables developing country Governments to address
global environmental issues that they would otherwise be unable or unwilling
to address, in the process of demonstrating a new approach to global
cooperation.
75. Awareness is growing in the private, as well as the public sector,
regarding the high cost and potential liabilities of environmental cleanup.
Businesses are increasingly considering environmental factors in decisions
about production, investment and trade. By encouraging businesses to become
more energy efficient, minimize resource use, waste and pollution, improve the
workplace environment and identify new environmentally friendly products, the
International Finance Corporation (IFC) is helping firms to pursue
environmentally sound operations as they plan for expansion and new ventures.
IFC has developed an extensive environmental programme that addresses not only
the physical impact of economic development - the use of land, minerals, water
and air - but also socio-economic and cultural aspects.
76. Established in 1988, the Multilateral Investment Guarantee Agency (MIGA)
promotes foreign direct investment for economic and social development in
borrowing member countries by guaranteeing investments against political
risks, helping countries to create an attractive investment climate and
providing promotional and advisory services. Under an agreement, IFC acts as
Environmental Adviser for all MIGA projects and ensures that MIGA is aware of
all relevant environmental guidelines that may apply to any specific
operation.
II. NATIONAL POLICIES AND RESOURCE MOBILIZATION
A. Mobilizing public financing for sustainable development
1. Applying economic instruments
(a) Sustainable development policies and the use of economic instruments
77. The approach to economic policy in most developed and developing
countries and countries with economies in transition has changed in recent
years. More emphasis is being placed on the role of prices and market-based
mechanisms in allocating scarce resources. For example, many countries have
liberalized imports and capital flows, privatized public enterprises and
shifted government functions (including taxation) to the local level.
Furthermore, policies on subsidies are under review.
78. This change of approach to economic policy has begun to affect
sustainable development policies. This is manifested, for example, in the
complementary use of regulations and economic instruments intended to
internalize external environmental costs to economic agents.
79. In contrast to a command-and-control regulatory approach, which imposes
specific mandatory actions on economic agents, economic instruments use market
signals for influencing their behaviour and are often highly efficient in
achieving environmental targets chosen by regulators. Economic instruments
leave it to market participants to choose their own measures to reduce
external environmental effects and correct prices for negative external
effects of economic activities. In providing the signals that make economic
agents aware of resource scarcity and environmental damage, economic
instruments can mitigate such damage and thereby promote sustainable
development.
80. However, there are also economic instruments, such as subsidies, that
impose serious distortions and environmental damage. These policy-induced
distortions need to be eliminated in order to achieve environmental gains and
free more resources for productive purposes.
81. There are five categories of economic instruments: (a) charges and
taxes; (b) deposit-refund systems; (c) emission trading schemes; (d) financial
enforcement systems; and (e) public expenditures. It is assumed that these
instruments are well known, so that it will be sufficient to briefly recall
their basic features.
82. While taxes or charges on emissions (Pigouvian taxes) are paid on
discharges into the environment and are based in principle on quantity and/or
quality of discharged pollutants, product charges or taxes (indirect
environmental taxes) are charges or taxes on products that pollute in the
manufacturing or consumption phase or for which a disposal system has been
organized.
83. Environment-related provisions in other taxes are the most commonly used
instrument and have been introduced in personal income taxes, corporate income
taxes, general sales taxes, fuel taxes and motor vehicle taxes.
84. In deposit-refund systems a surcharge is levied on the price of
potentially polluting products. When pollution is avoided by returning these
products or any residual to a collection system, the surcharge is refunded.
85. Under emission trading schemes an emission limit is set by public
authorities for a certain area and individual emission rights are auctioned or
distributed to the dischargers located in the area. If a discharger releases
fewer emissions than his allowance, he can sell or trade the difference
between actual discharges and allowable discharges to another firm, which then
has the right to emit more than its initial allowance. Trades can take place
within a plant or a firm or among different firms.
86. Financial enforcement incentives tend to complement legal requirements
imposed on polluters by providing an economic rationale for compliance or
non-compliance with regulations.
87. As to public expenditures as an economic instrument, there are three
major categories of expenditures: subsidies, operations and maintenance
expenditures and capital expenditures.
88. Subsidies may be environmentally unfriendly or environmentally friendly.
Environmentally unfriendly subsidies are mainly found in the areas of
agriculture, energy and forestry.
89. Agricultural output subsidies are damaging because they increase the
derived demand for such agricultural inputs as pesticides, fertilizers and
irrigation (which are themselves associated with external environmental
costs). They also provide incentives for land clearance, which can result in
loss of wildlife, forests and public amenities and soil erosion. Agricultural
input subsidies are common for products such as pesticides, fertilizers and
irrigation water. Furthermore, most countries provide implicit or explicit
subsidies for energy use, in particular for coal, gas and nuclear power.
90. Moreover, Governments provide a range of direct and indirect subsidies
(or tax exemptions) for the forestry sector, which tend to have significant
environmental costs.
91. Environmentally friendly subsidies benefit the environment. They
include subsidies for reforestation projects, farming techniques or crops that
raise soil fertility and such environmentally sound technologies as solar
power plants, windmill farms, and building insulation.
92. Adequate operations and maintenance expenditures on public investment
projects are required to preserve the flow of benefits of the project.
Failure to provide adequate operations and maintenance expenditures not only
reduces the efficiency of the initial capital investment, but may also result
in adverse environmental consequences. For example, inadequate operations and
maintenance expenditures on surface irrigation canals can lead to waterlogging
and salinization of farmland because of excessive seepage from canals.
93. The effects of capital expenditures on the environment need to be
incorporated in the cost-benefit analysis of project decisions. However, the
monetary valuation of many environmental benefits and costs is difficult. For
example, it is difficult to assign a monetary loss caused by the extinction of
animal or bird species following deforestation. In view of the complexities
involved, the effects on the environment are often not fully incorporated in
project decisions, thereby leading to long-term environmental problems.
94. The experience with the application of this set of economic instruments
in OECD countries, economies in transition and developing countries is
discussed below, as well as ways and means of overcoming obstacles to their
greater use.
(b) Promoting the use of environmentally friendly economic instruments
(i) Experience in OECD countries
95. Since the use of economic instruments as a means of achieving the goal
of
sustainable development was initiated in the industrialized market economies,
it is useful to start with an overview of the OECD experience.
a. Policy context
96. The actual development of environmental policy instruments has followed
different courses in different parts of OECD because of the diversity of
policy contexts prevailing in OECD member States. For example, there may be
differences in general political outlooks concerning market intervention, the
political environments in which individual countries and groupings of
countries operate (e.g., European Union, North American Free Trade Agreement
or political structures (e.g., federal or centralized government structure)).
97. Furthermore, there may be differences in administrative cultures and
attitudes towards intervention, priorities attached to environmental problems
and distribution of responsibilities for economic sectors (and environmental
compartments) across ministries.
b. Current use of economic instruments
98. The use of economic instruments in developed countries is well
documented in numerous publications, in particular those of OECD. It will
therefore be sufficient to provide only a general overview, with a focus on
current trends.
99. There are at least three main reasons for the increasing interest in the
use of economic instruments for environmental management in OECD countries.
First, it is recognized that regulations are becoming more and more difficult
to implement, both because they are increasing in number and because of the
administrative costs associated with their implementation. Second, at a time
of sluggish economic growth rates and tight budgetary constraints, Governments
are seeking new sources of income for financing environmental policies.
Third, economic instruments are considered more and more a necessary condition
of sustainable development since they are often a more cost-effective means of
achieving regulatory objectives.
100. By the end of the 1980s, 150 cases of use of economic instruments in 14
OECD member countries were reported. Of these 150 cases, 80 were
environmental charges or taxes, 40 were subsidies and the remainder were other
types, such as deposit-refund systems and trading schemes. In the meantime
the number of cases has increased substantially.
101. For example, the increased use of deposit-refund systems, particularly
for packaging, reflects the growing concern among OECD countries about
packaging waste problems.
102. The effect of economic instruments applied in OECD countries on
behaviour has been modest to date owing to generally low levels of charge/tax
rates. Recently, however, the rate of some incentive charges has increased
substantially. Examples are the CO2 charges in Denmark, Norway and Sweden,
the NOx and SOx charge in Sweden, the waste disposal charge in Denmark and a
number of product charges. Furthermore, tax differentials on sales prices of
new cars with catalytic convertors and on unleaded petrol have been applied.
103. Various subsidy programmes support private pollution abatement
investments in most OECD countries. These programmes are generally aimed at
speeding up the implementation of environmental programmes and assist those
industries that face sudden cash flow problems owing to the abnormally high
costs entailed by new regulations. Assistance schemes are frequently
transitory and introduced to tackle specific environmental problems with a
pre-set time limit for operation.
104. The introduction of economic instruments in OECD countries is combined
more and more with the adoption of fiscal reforms, which provide a good
opportunity for "greening" the tax system. Increasing the total fiscal burden
is quite unpopular. However, consideration of a restructuring of the existing
tax system while keeping the total fiscal burden unchanged is attracting
increased interest in a number of OECD countries.
105. Many OECD countries have been attempting to achieve a less distortionary
tax system by increasing environmental taxes to broaden the tax base while
simultaneously reducing the tax burden on labour. However, the role of
environmental taxes is likely to be small in this respect. First, the
environmental tax base is rather narrow. Second, it is likely to be less
stable than taxing labour incomes.
106. For maximum effect, economic instruments must be used in combination
with other policy instruments. For example, economic instruments can provide
an additional incentive to that set by direct regulations for achieving
performance over and above the minimum standard. Furthermore, combining
different types of economic instruments might create a powerful set of
instruments such as a combination of a deposit-refund system and a product
charge on non-returnable products. Their effect can be reinforced even
further by social instruments, such as eco-labelling schemes and
consumer-awareness campaigns. These are discussed at length in the
Secretary-General's report on changing patterns of production and consumption
(E/CN.17/1995/13).
c. Overcoming obstacles to increased use of economic instruments
107. In order to increase the role of economic instruments as a tool of
environmental policies, OECD countries need to overcome various obstacles that
are associated with the implementation of economic instruments, in particular
(a) insufficient political acceptability of economic instruments;
(b) difficulties in the design of economic instruments; (c) administrative
difficulties with economic instruments; (d) conflicts between environmental
and other policy objectives; (e) anxiety about repercussions on the
international competitiveness of the national economy; and (f) adverse
economic and structural conditions that may be encountered in the application
of economic instruments.
i. Insufficient political acceptability
108. Polluters are often small in number, with concentrated political power,
while "victims" are often large in number, with little political power. This
difference in political influence may mean that there is greater resistance in
law-making bodies for introducing environmental laws that increase the costs
of businesses that pollute.
109. Industry will often oppose environmental taxes because it suspects that
the Government will retain the tax over time, even if the environmental
objective has been reached.
110. Earmarking the revenues from taxes or charges for expenditures through
national environmental funds is one way of increasing the acceptance of
economic instruments by the business community. However, earmarking has also
some disadvantages, which are discussed below in the section on national
environmental funds (paras. 169-184).
ii. Difficulties in design
111. The determination of the charge or tax rate requires information that is
in many cases not available. For example, data on the marginal cost of damage
are very difficult to obtain and information on the marginal costs of
pollution abatement tends to be insufficient. As a result, public authorities
often consider adopting second-best approaches, such as setting the rate
according to a pre-determined target for the environment.
112. In addition, the definition of the tax base poses difficult problems.
The use of a proxy is a way of overcoming this difficulty. For instance,
instead of the tax base being determined by the emissions of sulphur or
carbon, it is determined by the sulphur or carbon content of the fuel.
113. To ensure that the incentive effort of a tax or charge is not eroded by
inflation, there is a need to readjust the rates periodically to reflect
changes in the general price index.
114. Finally, emission trading schemes pose significant design problems. For
example, the market needs to be sufficiently wide and expandable over time.
In addition, sophisticated monitoring and compliance control procedures are
required.
iii. Administrative difficulties
115. In the case of specific rate taxes on units of emissions or damage
(Pigouvian taxes), it may be technically or practically difficult to measure
and monitor physical quantities of pollution. For example, while it may be
relatively simple to measure pollution from a single emitting source, such as
a factory effluent pipe or smokestack, it is obviously quite difficult to
measure pollution when there are many sources - automobile exhaust pipes, for
example.
116. Moreover, in the case of Pigouvian taxes the incentive to effectively
administer efficient environment taxes will be reduced if revenue per unit of
administrative outlays is low. In addition, the fact that a great number of
environmental problems require many individual taxes, makes for administrative
difficulties.
117. Many administrative difficulties will not have to be dealt with if
indirect environment taxes are introduced because such taxes will be
calculated on the basis of market prices of productive inputs or finished
products.
iv. Conflicting policy objectives
118. The use of economic instruments for environmental purposes needs to be
balanced against other policy objectives, in particular income distribution
(equity) and international competitiveness.
119. The implementation of economic instruments can result in different cost
and distributional impacts for various firms, sectors, regions and income
groups. For example, discussions of a national carbon tax often focus on
whether the proposed tax would hurt the poor, put coal-miners out of work, or
derail export industries. These were key considerations in the adoption of
the carbon tax in Sweden and are still a central element of the energy-carbon
tax proposed by the Commission of the European Communities.
120. Distributive issues have also been a key element of emission trading
programmes in the United States. For example, the formula to allocate initial
allowances was one of the most contentious issues in the debate over the acid
rain provision of the 1990 Clear Air Act.
121. So far, relatively few empirical analyses have been done on the
distributive impacts of economic instruments. However, the results of such
studies suggest that environmental taxes tend to be regressive (particularly
in the case of a tax on energy) and that both environmental taxes and trading
programmes can lead to substantial wealth transfers. Therefore, offsetting or
compensatory measures may be needed to ensure the political acceptability of
economic instruments.
v. Anxiety about international competitiveness
122. The introduction of environmental charges and taxes is generally opposed
by industry for fear of a resultant loss in international competitiveness and
domestic employment. Moreover, it is feared that unilateral taxation may lead
to "pollution exports", that is the measure may be ineffective in global
terms. However, empirical analysis suggests that there is little systematic
relationship between higher environmental standards and international
competitiveness in environmentally sensitive goods. OECD countries with a
high level of environmental expenditures have both gained and lost
competitiveness in environmentally sensitive industries. Unfortunately, the
opposition of industry to environmental taxes, particularly in the energy
field, has led many Governments to introduce various exemptions or rebates
which in the end erode the incentive effect of the tax and undermine the
achievement of the environmental objectives.
123. In the case of deposit-refund schemes, the trade impact is mainly caused
by the additional requirements and costs of participating in the scheme.
Deposit-refund schemes can potentially act as non-tariff barriers to trade and
give a competitive advantage to domestic producers.
124. Subsidies are likely to cause distortions in international trade and run
counter to GATT/World Trade Organization rules. According to OECD rules
financial assistance is subject to special conditions because it is contrary
to the polluter-pays principle adopted in 1972 by OECD countries. The
granting of assistance is limited to the following conditions: (a) it should
be selective and restricted to those parts of the economy where severe
difficulties would otherwise occur; (b) it should be limited to well-defined
transitional periods laid down in advance and adapted to the specific
socio-economic problems associated with the implementation of a country's
environmental programme; and (c) it should not create significant distortions
in international trade and investment.
(ii) Experience in countries with economies in transition
a. Policy context
125. Countries with economies in transition are left with the environmental
legacy of the central planning era. High pollution and over-utilization of
natural resources in past decades has created a large gap between
environmental financing needs and available resources.
126. During transition, the development of an effective environmental
financing system has been negatively affected by the relatively slow pace of
privatization, inadequacies of the banking system, underdeveloped capital
markets and inadequate fiscal systems. However, in view of the economic
reform under way and gradual improvements in the environmental policy
framework, it is expected that countries in Central and Eastern Europe will
build on their existing system of emission taxes and charges to create a
strong incentive-based environmental policy regime.
127. The main challenges in the future include the definition of concrete and
feasible qualitative and quantitative objectives, as well as harmonizing the
aims of environmental policies with other policies.
b. Current use of economic instruments
128. As in OECD countries, there is an increased use of economic instruments
in countries with economies in transition. The experience of Central and
Eastern Europe is well documented and will therefore be the focus of the
present section. In Central and Eastern Europe charges on emissions are
widely used. The most important charges are those on air pollution, on waste
and on emissions to surface water. For example, in the Czech Republic and
Slovakia air pollution charges are levied on large and medium-sized industrial
point sources, with the intention, in both countries, of providing economic
incentives for pollution reduction measures and generating revenue. Estonia,
Hungary, Poland and Russia all impose taxes on air and power emissions that
take into account factors that affect the level of environmental damage, such
as quantity and toxicity of emissions.
129. Furthermore, examples for charges on waste can be found in a number of
countries. In Bulgaria, for example, a municipal waste user charge has been
in force since 1951. In the case of Czech waste charges, it is noteworthy
that municipal waste user charges were set up in many cases even before the
Second World War.
130. Moreover, charges on emissions to surface water can be found in various
countries. In Bulgaria, for example, user charges on waste water have been in
force since 1951. In the Czech Republic, user charges for sewerage and sewage
treatment have been in place for decades. The Hungarian charges for sewerage
and sewage treatment are so called "regulated" prices. Since the cost of
providing waste water treatment varies for different regions, charge levels
vary as well.
131. In addition, product charges are applied in a number of countries. The
Hungarian fuel charge has been in force since 1992. In Bulgaria, an
instrument is in place similar to a product charge. In both the Czech
Republic and Slovakia, charges on ozone-depleting substances are expected to
be introduced. Furthermore, in many countries in Central and Eastern Europe
there is tax differentiation between leaded and unleaded petrol.
132. Furthermore, deposit refunds are being used in various countries of
Central and Eastern Europe. In the Czech Republic, a packaging act is under
preparation that will also address complex problems in the current deposit-
refund system. In Poland, deposit rates depend on voluntary negotiations
between industry and retailers.
133. Finally, enforcement incentives are applied in a number of Central and
Eastern Europe countries. In Bulgaria, for example, fines are in place in the
areas of air, water, soil, noise, electromagnetic fields and mineral
extraction. In the Czech Republic, non-compliance fees are in place for both
air pollution and waste water, in addition to existing emission/effluent
charges.
c. Overcoming obstacles to increased use of economic
instruments
134. Countries with economies in transition are confronted with most of the
obstacles to an increased use of economic instruments that were discussed
above in the context of OECD and various additional ones. Overcoming these
obstacles is in general more difficult, as demonstrated by the examples given
below.
i. Insufficient political acceptability
135. As in OECD countries, political acceptability is a major obstacle to
increasing the role of economic instruments in countries with economies in
transition. The sometimes quick and dramatic changes in the political
landscape and government leadership adversely effect the continuity of ongoing
work. The political will and courage to deal seriously with the issue of
environmental protection need to be increased.
ii. Administrative difficulties
136. Major problems with the implementation of environmental policy in the
economies in transition are connected with enforcement. The concept of the
rule of law needs to be complemented by strong enforcement capabilities.
137. Local authorities are increasingly involved in the implementation of
economic instruments. In some cases there are several different government
levels and offices involved in the functioning of a single mechanism. The
instrument may be designed and established at the national level, specific
emission levels set by local authorities, with monitoring and money collecting
conducted by regional inspectorates. While there are clearly benefits to
involving local authorities who have direct stakes in the local conditions and
unique local knowledge, there are also added administrative expenses with each
level of government involvement.
iii. Conflicting policy objectives
138. The various economic instruments in use in countries with economies in
transition generally should serve both to raise revenue and to reduce
pollution. While their ability to raise money is demonstrated with some
clarity, their effectiveness as incentives to stop or alter polluting
practices is less clear.
139. Setting user charges and fines generally at relatively low levels,
however, does little to actually influence the behaviour of many polluters.
Indeed, funds now being routinely extracted from polluters are often
redistributed to the public sector to support such public service facilities
as water treatment plants and heating and power plants. The charges are too
low to encourage polluters to reduce emissions and at the same time they
deprive the polluters of funds which they might otherwise be encouraged or
required to invest in pollution reduction or prevention measures.
iv. Adverse economic and structural conditions
140. Even though the formerly centrally planned economies are transforming
themselves into market-based economies at different rates and along different
paths, they have characteristics in common that directly affect the efficiency
of economic instruments. For example, advancement in the privatization
process has a crucial influence on the practical effectiveness of economic
instruments. Privatization of large heavy industries (often
pollution-intensive), for example, has yet to take place on a large scale.
141. Furthermore, effective implementation of economic instruments is
hindered by insufficient profitability of enterprises. Data indicating the
differences between imposed charges and fines and amounts actually paid show a
widespread inability of enterprises to pay. Moreover, inflation - still
relatively high in all the countries with economies in transition - has the
effect of eroding the value of fixed charges and tax levels. In only a few
cases are there mechanisms in place to adjust for inflation.
(iii) Experience in developing countries
a. Policy context
142. The newly industrializing countries of South-East Asia and Latin America
have pollution problems similar to those of Eastern Europe (but not
necessarily the inefficiency). On the other hand, many countries, for
instance in Africa, have the inefficiency but relatively little industrial
pollution. Their environmental problems are more concerned with the basic
management of sensitive natural resources such as soil, water, forest cover
and biodiversity. Their top priorities focus on food, drinking water, energy,
sanitation and shelter.
143. In many cases, the economies of developing countries are organized
around raw material extraction or the export of agricultural products. These
sectors can be extremely disruptive for the environment. Even relatively
small industries can pose severe environmental threats because of the lack of
resources for abating, controlling or even monitoring pollution.
144. If industrial pollution in the classic sense is somewhat less prevalent
in most developing countries, natural resource problems related to food,
water, health and so forth are often more serious than in the economies in
transition.
b. Current use of economic instruments
145. It is not surprising that countries at a relatively high stage of
economic development, such as the newly industrialized countries of Asia, are
experimenting quite extensively with the use of economic instruments in their
environmental policies. The same applies to a number of countries in Latin
America. However, even in less developed regions and countries, policy makers
consider economic instruments an important tool complementary to regulations.
146. Many developing countries have provisions in their corporate tax systems
that are intended to reduce environmental damage. For example, Kenya and the
United Republic of Tanzania provide accelerated depreciation for investments
that are intended to prevent soil erosion and for planting permanent or
semi-permanent crops. In Latin America, incentives for reforestation are
provided by Brazil, Chile and Colombia.
147. A number of developing countries use motor fuel tax differentiation to
reduce environmental damage and have a higher excise tax rate on leaded fuels
than on unleaded fuels. Such rate differentiation is intended to discourage
consumption of fuels that are significant sources of heavy metal particulate
matter. In Thailand, for example, to encourage substitution, the Government
subsidizes the pump price of unleaded gasoline to make it slightly less
expensive than leaded, with the subsidy on the former financed from a surtax
on the latter. In Taiwan Province of China, unleaded gasoline also sells at a
slight discount.
148. Motor vehicle taxes have been used with varying degrees of
sophistication to discourage motor vehicle use and fuel consumption. Some
countries, including Argentina and Co^te d'Ivoire apply annual taxes on
automobiles but vary the tax rates according to a measure of fuel consumption,
such as engine horsepower, fuel consumption rate, vehicle weight or engine
size. In other cases, vehicle taxes are designed to encourage the use of
vehicles with lower emissions. For example, in Kenya the tax on vehicles with
diesel engines is twice the tax on vehicles with non-diesel engines.
149. A number of Governments in Asia have begun to experiment with mixed tax-
subsidy schemes. These schemes have the advantage of being largely self-
financing. They balance the disincentive effect (the "stick") with a positive
incentive to pollution control (the "carrot"). They may be more politically
acceptable than straight taxes or charges in so far as they are perceived to
be more equitable.
150. Deposit-refund systems can, for example, be found in Taiwan Province of
China. With the 1988 revision of the Waste Disposal Act, Taiwan Province of
China has begun to implement a recovery/recycling system for solid waste,
including bottles, aluminium cans and waste paper.
151. Public expenditures in the form of subsidies frequently supplement
environmental regulations and charges that are typically not effective enough
to induce the level of private pollution abatement investments necessary to
achieve the required environmental quality. In India, for example, tax and
interest rate incentives are used. In Malaysia, subsidies are provided for
companies that establish facilities to store, treat and dispose of their
wastes and import duty and sales tax exemptions have been extended for
technology used for the storage, treatment and disposal of hazardous wastes.
152. In Thailand, import duties on pollution control and treatment equipment
have been reduced to less than 10 per cent. A law enacted in 1977 in the
Philippines allowed the waiver of the import tariff on pollution control
equipment for a period of 10 years and rebates for domestically produced
equipment were introduced.
c. Overcoming obstacles to increased use of economic
instruments
153. Developing countries are faced with even greater difficulties than
countries with economies in transition with regard to overcoming the set of
obstacles to increasing the use of economic instruments discussed above in the
context of OECD. This is demonstrated by the examples set out below, which
focus on political acceptability of economic instruments, administrative
difficulties and conflicting policy objectives.
i. Insufficient political acceptability
154. As in developed countries and countries with economies in transition,
industry and other polluters in developing countries have resisted the
introduction of economic instruments because they believe they have a greater
influence over the design and implementation of regulations than they would
have with economic instruments. Moreover, the perception of local industry is
that it is easier to avoid compliance with a standard, assuming poor
monitoring and enforcement capacity, than with fiscal and incentive
mechanisms, where little flexibility exists. Furthermore, with economic
instruments it is more difficult to appeal to the courts than it is with
regulations. Finally, some economic instruments (especially charges) may
impose a financial burden beyond the cost of complying with a regulation.
155. In many countries, there is a perception on the part of the private
sector that laws are not applied evenly to all economic agents: State
companies often do not pay fines, particularly for pollution, because they are
either too poor or politically too powerful.
156. More important, there is a widespread belief among politicians and
senior government officials that the adoption of sound environmental practices
would result in lower rates of economic growth in the short run, that
pollution control would divert scarce resources from more relevant social
areas and that it would lead to price increases.
ii. Administrative difficulties
157. In order to administer the use of economic instruments in developing
countries, institution-building needs to be accelerated and administrative
skills developed. Initially, the best use should be made of existing
structures. It has been argued for some time that as the introduction of
environmental taxes may require new structures and mechanisms, it may be more
efficient to introduce environmental incentives into taxes which have to be
levied anyway (e.g., taxes on goods and services), while introducing
environmental taxes progressively, as the administrative and technical
capacity develops. It appears, however, that using existing tax structures to
provide incentives for environmental protection has not met with much
enthusiasm, especially if it implies restructuring the rates or bases of
broad-based income and consumption taxes.
158. In many developing countries, environmental government institutions are
underbudgeted and have therefore poor administrative and enforcement capacity
in terms of equipment and staff. Moreover, in many cases there is a lack of
policy coordination and institutional overlaps exist between and across
different levels of government.
159. Furthermore, there is a general perception in environmental agencies
that the use of economic instruments will not only result in their losing
direct control over polluters, but that they will also have to cooperate more
closely with economic finance ministries since their support is usually
required for the creation of any new taxes or charges.
160. Coordination between environmental and economic ministries is in general
weak and environmental agencies do not consider their policies and actions in
broader economic terms. Conversely, economic ministries do not sufficiently
take environmental effects into consideration when formulating sectoral or
macroeconomic policies.
iii. Conflicting policy objectives
161. Like countries with economies in transition, many developing economies
have inherited a large public sector which is being progressively privatized.
Public and private sector industries should be treated equally. Soft budget
constraints for public enterprises, as well as exemptions and waivers
perpetuate distortions and block a wider role for economic instruments.
(c) Phasing out the use of environmentally unfriendly economic instruments
162. The above discussion of public expenditures as an economic instrument
has shown that subsidization of inputs such as pesticides, chemical
fertilizers and energy, as well as output subsidies and the underpricing of
resources, can have adverse environmental implications. Furthermore,
insufficient provision of operations and maintenance expenditures and improper
valuation of environmental costs and benefits in different investment projects
can have a negative impact on the environment.
163. Thus, one plausible way of addressing environmental concerns is to seek
the removal of distortions in public expenditure policy. Besides improving
economic welfare, this can have a favourable impact on the financial
requirements for sustainable development.
164. Various steps can be initiated by policy makers to implement an
environment-friendly expenditure policy. For example, on the output side,
subsidies that encourage more than socially desirable production or
consumption can be phased out.
165. Moreover, experience has shown that the nature and extent of input
subsidies has been varied, ranging from the provision of below market exchange
rates for imports, to subsidized credit and to keeping market prices for
inputs below market clearing levels. Many of these subsidies cannot be
justified on economic grounds, particularly over longer periods of time. In
view of their environmental implications as well as the fiscal (or
quasi-fiscal) burden that they impose, it is necessary to examine afresh the
underlying rationale for them. A careful analysis may suggest that these
subsidies can be eliminated.
166. Possible expenditure savings arising from subsidy reduction would create
potential resources for the financing of sustainable development.
167. With regard to improving other public expenditure policies, it needs to
be emphasized that the provision of adequate operations and maintenance
expenditures is required not only to sustain the productivity of existing
projects, but also to avoid adverse effects on the environment.
168. When choosing among projects and their scale of operation, environmental
aspects - quantitatively or at least qualitatively - should be taken into
consideration. This is necessary because of the irreversibility of capital
expenditures and the potentially high cost of mitigating environmental damage
once the project comes on stream.
2. Reviewing the usefulness of national environmental funds
169. National environmental funds (NEFs) are, to a large extent, an envelope
within the expenditure budget or a segregated government fund dedicated to
environmental expenditures. Sources of funds can be earmarked taxes, foreign
grants on transfers from or allocation within the general budget. The funds
can be used for a variety of environmental projects and various levels of
government can be involved.
170. Many experts consider the earmarking that is implicit in NEFs a mixed
blessing, at best, because there are strong arguments against it on efficiency
grounds.
171. Broadly speaking, there are some very well-defined rationales for having
a largely non-specific system of tax revenues, which are widely documented in
the literature on optimal taxation. A system of earmarked revenues tends to
be pro-cyclical because the spending follows the variation of revenues.
Furthermore, given the narrow tax base of environmental earmarking, revenues
and therefore spending can fluctuate considerably and may therefore be at
times insufficient to finance environmentally targeted programmes.
172. The following discussion of NEFs in OECD countries, economies in
transition and developing countries analyses why, in spite of the misgivings,
these funds have maintained some attraction as a source of environmental
finance.
(a) Environmental funds in OECD countries
173. In a number of OECD countries earmarked financing mechanisms are used to
secure a steady flow of revenues for certain environmental protection
objectives. Typically, they have been used to finance investments in public
environmental services to achieve compliance with regulations. The more
direct the connection between the revenue source and its use, the more
politically acceptable the earmarking system becomes.
174. Various examples of NEFs can be found in OECD countries. For example,
earmarking budgetary revenues provided a stable source of financing for public
wastewater treatment facilities in the United States in the framework of the
Construction Grants programme during the period 1979-1989 and the State
Revolving Fund programme from 1989. Frequently, "sin-taxes" levied on
tobacco and alcohol appear to be the least difficult way politically to raise
funds for environmental protection programmes. Washington State in the United
States, for example, levies a cigarette tax earmarked for financing water
quality programmes.
175. Among the best known local systems in Europe are those of the French
river basin management agencies, which levy effluent charges in order to cover
the costs of water supply and water quality management in the river basin.
Similar mechanisms operate in Germany and the Netherlands.
176. Earmarked mechanisms established from environmental charges for air
quality control exist, for example, in Canada, France, Portugal and the United
States. Aircraft noise charges are earmarked to cover noise abatement costs
in Belgium, France, Germany and Switzerland and waste disposal taxes are
directed towards treatment and recycling expenditures in a number of
countries.
177. The experience of OECD countries has shown that benefits of earmarking
are more pronounced when direct environmental charges are earmarked in
decentralized programmes. The main advantages of that scheme in OECD
countries have been the incentive effect of charges, and the increased
transparency and political acceptability of the system due to the close
relationship between revenue sources and the spending of the revenues.
(b) Environmental funds in countries with economies in transition
178. In the countries with economies in transition, environmental financing
through private sources and normal budgetary allocations is insufficient.
Therefore these funds have played a significant role as sources of
environmental financing.
179. The importance of NEFs in environmental expenditures appears to be
growing in most countries. In Russia, for example, the share of NEFs in
capital investments for pollution abatement increased from 6.6 per cent in
1990 to 29.6 per cent in 1991. In Poland, the share of NEFs in total
environmental expenditures increased from 2 per cent in 1990 to 22.3 per cent
in 1993.
180. The experience of countries with economies in transition has shown that
NEFs are financing instruments that play a significant role in redistributing
and allocating revenues to investments in priority areas that reduce
environmental damage in a cost-effective way.
(c) Environmental funds in developing countries
181. In the past five years, more than 20 NEFs have been established in
developing countries, mainly where economic growth was accompanied by serious
environmental degradation that led to government intervention, and where
outlays from the general budget for the environment sector were inadequate.
Since emission charges and other environmental taxes do not play an important
role in most developing countries, the revenue sources of NEFs are usually
derived from or supplemented by (a) designated levies that are not directly
environment-related (the National Environmental Fund in Algeria, for example,
raises its revenues from a tax on international airline tickets); or
(b) external sources (the Pollution Abatement Fund in Sri Lanka was created
with the help of donor contributions). An exception is Costa Rica, which
allocates two thirds of a tax on petrol to a fund for financing infrastructure
projects to reduce CO2 emissions.
182. In addition to NEFs funded by earmarked revenue sources, in a number of
countries externally funded NEFs have been established. Although the majority
of externally funded NEFs tackle nature and biodiversity conservation issues,
several NEFs were established with pollution abatement objectives. In Sri
Lanka, for example, a revolving pollution abatement fund was established by a
contribution from the Government of the Netherlands. Similarly, OECD funding
and budget allocations capitalized NEFs in Thailand. NEFs also received
financial support from other donors, such as Canada, Norway, the United States
and the Global Environment Facility. In addition, financial support has been
provided through debt-for-nature swaps and debt conversions.
183. Externally funded NEFs are typically established through multilateral or
bilateral grant contributions or debt-for-nature swaps. NEFs that are created
as trust funds are most typical for nature conservation funds.
184. The experience of developing countries with NEFs has shown that the use
of these funds is often based on ad hoc decisions, emergencies or political
priorities. Although NEFs may function as catalysts to mobilize private
enterprise resources, without significantly increasing the level of
environmental charges the role of these financing mechanisms remains marginal.
B. Mobilizing private financing for sustainable development
1. Policy approach
185. As a result of strict environmental regulations, private expenditures on
pollution abatement control exhibited a steady increase in several OECD
countries during the past decade, both in absolute terms and as a percentage
of GDP.
186. In developing countries, private expenditures on pollution abatement
control have also risen in the past decade, in particular in the newly
industrialized countries of Asia. Private expenditures in economies in
transition are expected to increase in line with the pace of privatization.
187. To support private pollution abatement investment, Governments in OECD
countries, economies in transition and developing countries have used a wide
range of policy instruments, which may be divided into three main categories:
directed credit programmes, financial incentives, co-financing arrangements
and venture capital funds.
2. Access to credit
188. Well functioning financial and capital markets are necessary for an
effective mechanism of raising and allocating financial resources for the
prevention and control of negative effects of pollution of the environment.
Under well functioning financial markets, investors have unrestricted access
to various financing sources. Their choice of financing is mainly determined
by their preferred capital structure.
189. In developing countries the menu of financing options available for
industries is typically severely limited because financial and capital markets
are underdeveloped and dysfunctional.
190. Although several countries experimented with financial liberalization by
rapidly (e.g., Argentina and Chile) or gradually (e.g., Indonesia and Republic
of Korea) abolishing interest rate ceilings, central credit allocation and
market entry barriers in the late 1970s and early 1980s, financial markets
have not yet been sufficiently liberalized.
191. Institutional financing is especially constrained for small-scale
enterprises, which are frequently forced to turn to more costly, informal
credit sources. Because of their high cost, such sources are not suitable for
financing investments with relatively low returns and are therefore not
adequate for the financing of investment in pollution abatement. To make up
for inadequate formal and informal sources of finance, directed credit
programmes have been established in several countries in order to support
pollution abatement financing.
192. Typically, directed lending for pollution abatement has been carried out
by financial institutions responsible for directed industrial lending. For
example, in Mexico the earmarked environmental lending mechanism of the
Industrial Equipment Fund (FONEI) was capitalized by the Government. In
India, development banks with majority state ownership provide directed credit
to industries for various priority projects, including pollution control.
However, the provision of directed credit at subsidized rates has favoured
large companies, which can comply with bureaucratic conditions more easily
than small enterprises.
193. Most Governments are aware that directed credit programmes are generally
not well targeted and can cause substantial distortions.
3. Financial incentives
194. In OECD countries, private expenditures for pollution abatement control
have been supported not only by the various subsidy programmes discussed
above, but also by direct soft loans and temporary direct tax incentive
schemes.
195. For example, investment tax credits that provide an outright tax
reduction by subsidizing the purchase price of an asset have been widely used
in Canada, the Netherlands and Norway. Other tax incentives have allowed the
depreciation of certain assets at higher than normal rates or over shorter
periods (or both), postponing tax liabilities in the early years of the life
of the asset and reducing the net present value of future tax liabilities.
196. Germany, for example, allowed the accelerated depreciation of water, air
and soil pollution abatement technology. In the United States, the Tax Reform
Act of 1969 provided rapid amortization of eligible pollution control
facilities over a five-year period for the first 15 years of depreciable life
of the pollution control equipment at old industrial facilities for a limited
time. In Canada, water and air pollution control investments at sites that
started operation before 1974 and energy-saving equipment can qualify for
accelerated depreciation or "capital cost allowance". In Japan, tax
authorities similarly allow investors in pollution abatement, recycling, solar
and energy-saving equipment to use accelerated depreciation of such assets.
197. Tax deductible funds (used, for example, in Japan) have effects similar
to accelerated depreciation: when company income is set aside for
environmental investment, such funds become tax exempt. Once the funds are
withdrawn for environmental investments, they are subject to taxation. The
main advantage of the system is derived from the deferral of taxes. In other
cases (for example, in the United States), large industrial corporations could
often save 1.5 to 2.0 percentage points on the cost of borrowing to cover
pollution abatement investments by issuing tax-free industrial development
bonds. In yet other examples, business property tax rates have been linked to
the environmental records of enterprises.
4. Co-financing arrangements and venture capital funds
198. Governments, bilateral donors and such international institutions as the
World Bank and GEF are experimenting with a variety of schemes aimed at
leveraging significant private funds for investments in the environment.
199. There are financial (grants, co-financing), strategic (new business
opportunities) and public relations reasons for private investors working with
Governments, bilateral donors and international institutions. The latter can
offer financial incentives to undertake projects that might not otherwise be
attractive for private investors because of financial and technological risks.
200. Private investors can, for example, obtain GEF funds for projects
co-financed by one of the international financial institutions that
participate in GEF. GEF funds allow these agencies to finance GEF-type
projects that they might not otherwise consider. In addition, GEF and the
co-financing institutions may lend credibility to a project, making it easier
to attract additional co-financing.
201. In addition to co-financing, publicly sponsored venture capital funds
are a promising model of public-private partnerships. The three most
prominent examples are the Global Environment Emerging Markets Fund (sponsored
by the United States Government), the Nordic Environmental Finance Corporation
(sponsored by the five Nordic countries) and the North American Environmental
Fund (partly sponsored by the Japanese Overseas Economic Cooperation Fund).
202. Furthermore, the World Bank and the International Finance Corporation
have begun to explore the establishment of venture capital funds for
biodiversity and greenhouse gas mitigation in developing countries.
C. Cooperation on national sustainable development policies
203. Agenda 21 calls for a wide range of domestic policy reforms, referring
to the application of the polluter-pays principle and the important role of
regulations and economic instruments.
204. In some cases, the implementation of reforms may require only a cost-
benefit analysis of domestic factors, so that the reforming country has no
hesitation in acting unilaterally. However, since in most cases both domestic
and international factors need to be taken into account, countries that
consider reforms may wish to seek regional or multilateral cooperation to
avoid negative consequences for their international competitiveness, should
there be no parallel reforms on the part of their trading partners.
205. Cooperation on sustainable development policy reforms could take place
at the regional or global level. While first attempts at cooperation at the
regional level have already been made in Europe, no attempt at multilateral
cooperation on national policies has yet been made.
206. It may be useful to briefly outline the European model of cooperation
and then explore some options for multilateral cooperation on national policy
reforms related to Agenda 21.
207. The need for a pan-European approach to environmental policies has been
widely recognized. Efforts are under way to make national environmental
policies and instruments compatible, and it is hoped that they will contribute
to the goal of achieving convergence of the countries in the region.
208. The Environment for Europe process launched in 1991 plays an important
role in that regard. The Ministerial Declaration adopted at the Conference on
Environment for Europe held at Lucerne in April 1993 outlined the political
dimension of that process and addressed major aspects of a convergence of
environmental policies in Europe.
209. The Environmental Action Programme for Central and Eastern Europe, also
adopted at the Conference, is an important step in promoting environmental
convergence in Europe. The Conference endorsed the contribution of the United
Nations Economic Commission for Europe on elements for a long-term
Environmental Programme for Europe (EPE). These elements represent tools and
mechanisms for the promotion of pan-European cooperation and convergence.
Further development of EPE is under way in preparation for the Ministerial
Conference on Environment for Europe to be held at Sofia in October 1995.
210. In 1994 OECD prepared a paper on the use of economic instruments in
resolving global and transboundary environmental problems. The approaches
proposed for consideration at the regional level included, for example, an
internationally harmonized system of national taxes and regionally accepted
tradeable permit systems.
211. In summary, despite the progress made so far, there are many unresolved
issues, including problems related to the application of economic instruments.
The resolution of these problems will require strong political impetus, which
the Ministerial Conference at Sofia in October 1995 may provide.
212. In order to enhance cooperation in the design and implementation of
sustainable development policies internationally, a multilateral consultation
process would seem to be the logical next step.
III. INNOVATIVE INTERNATIONAL AND NATIONAL
MECHANISMS FOR RESOURCE MOBILIZATION
A. Internationally agreed tax on air transport
1. Tax goals
213. It is argued that air transport, like other energy uses, contributes to
global warming and may also contribute to stratospheric ozone depletion, in
addition to a plethora of other environmental concerns.
214. As a result, an international air transportation tax (IATT) has been
discussed at various international forums. The principles and details of such
a tax (a more appropriate term may be "environmental user charge for air
transport") are issues that require further clarification and discussion.
215. The underlying idea of an IATT is the application of the polluter-pays
principle in order to internalize the cost of environmental pollution
attributable to air transportation. It is hoped that such a tax levied, for
example, on fuel will provide an incentive for accelerating the further
development of environmentally sound technology for aircraft engines.
Furthermore, such a tax aims at raising revenues for the financing of
sustainable development.
2. Tax design and expected revenues
216. Ideally, the tax base for an IATT should be the quantity of pollution
emissions. Other alternatives for the tax base are the source of energy used
(i.e., fuel) and the volume of air transport (i.e., passengers and freight).
Finally, it has been proposed to levy a tax on every air ticket, starting with
tickets for international transport.
217. Using the consumption of fuel as a tax base would contribute to
internalization of the cost of air pollution and thereby provide an incentive
for accelerating the development and installation of less polluting aircraft
engines.
218. Estimates have been made of the potential revenues of a tax based on air
transport volume, which range between US$ 0.8 billion a year (tax of
1 per cent of the price of all passenger tickets on scheduled international
routes throughout the world) and US$ 2.2 billion a year (tax of 1 per cent of
the price of all passenger tickets and freight on scheduled routes throughout
the world).
3. Tax administration
219. If an IATT were introduced, a number of general principles could be
applied, for instance, the establishment of new institutions should be avoided
and a transparent governance structure should be created.
220. It would be desirable to explore the possibility of involving existing
institutions in the collection of nationally levied taxes that could be
transferred to an appropriate international authority.
221. There are various ways of distributing the collected revenues towards
sustainable development. On the assumption that the political will exists to
channel a certain percentage of the collected revenues to an appropriate
international authority, a number of potential uses could be agreed upon.
222. For example, part of the revenues could be channelled to a "multilateral
fund", whose goal would be to contribute to the development of less polluting
engines and fuels. The balance of the tax revenues could be allocated to a
newly established "grants window" at GEF.
4. Unresolved issues
(a) Issues related to the goals of the tax
223. Could an IATT be successful in internalizing the cost of pollution from
air transportation? A choice has to be made between a tax based on fuel use
and a tax related to the volume of air traffic. Indeed, there is no a priori
reason to expect that the volume of air transport is directly or
proportionally related to greenhouse gas emissions or ozone depletion.
224. Could an IATT be successful in curbing emissions? Some experts argue
that even a fuel-based IATT is unlikely to have a major effect on emissions
because there are few, if any, abatement margins currently envisioned that the
airline industry could exploit in order to reduce pollution.
(b) Issues related to the design of the tax
225. Is it fair to target the airline industry by imposing a tax aimed at
internalizing the costs associated with environmental pollutants? Some
experts argue that the proposed tax is inappropriate because air
transportation makes only a small contribution to ozone depletion and to
levels of greenhouse gases. Ideally, a tax that is intended to internalize
the costs associated with greenhouse gas emissions and ozone depletion should
be levied on all sources of emissions.
226. An alternative to levying an IATT on the volume of air travel, is to
levy it on products that are closely linked to emissions such as jet fuels,
motor fuels and other petroleum products. However, some experts argue that
the feasibility of such a tax does not seem to exist at present because most
countries already levy excises and sales taxes (value added taxes) on these
products.
227. Would the introduction of an IATT affect the viability of airline
companies? If the new tax is borne by the travelling public so as not to
affect the financial situation of the airline industry, the elasticity of
demand to price (which is assumed to be high) might have a negative effect on
air transportation, particularly for charter flights.
(c) Issues related to the political acceptability and administration of the
tax
228. How high is the political acceptability of an IATT? Some experts argue
that an IATT would require international cooperation and agreement for
implementation. This would be a significant precedent, given that there are
currently no global taxes. Such a tax would require national authorities to
agree to a harmonized taxation scheme and possibly to cede sovereign taxation
powers to some international institution. It is not clear if national
authorities would be willing to cede domestic taxation powers or if there is
an international institution with the competence to administer a global tax
such as an IATT. In any event air transport organizations such as the
International Civil Aviation Organization and the International Air
Transportation Association might have a role to play in administering an
internationally agreed IATT system.
5. Alternatives to the proposed IATT
229. Considering the goals of the proposed IATT, what would be pragmatic
alternatives? Some experts argue that if collecting revenue for some well-
intentioned international environmental cause is the main objective of the
proposed IATT, it may be more pragmatic to pursue harmonization of domestic
environment taxes, with an agreement for national Governments to contribute
part of the revenue from these taxes to a common fund for addressing global
environmental problems. The fund could, for example, be disbursed by GEF.
B. Tradeable CO2 permits
1. Policy options
230. In 1992, the UNCTAD secretariat issued a report on how to design a
global system of tradeable carbon emission entitlement (UNCTAD/RDP/DFP/1). It
was argued that tradeable permits were both an efficient means of controlling
man-made carbon dioxide emissions at minimum cost and an effective mechanism
for transferring resources to developing countries and countries with
economies in transition to help them contribute to the international effort to
abate emissions of greenhouse gases. Since the signing of the United Nations
Framework Convention on Climate Change in 1992 and its entry into force in
March 1994, new studies on this subject by the UNCTAD secretariat have been
completed. These studies focus on the themes of feasibility and
implementation of a tradeable CO2 permit scheme at the international level.
231. Among the policy options available for coping with climate change, a
tradeable permit system is considered by many to be a cost-effective way of
limiting CO2 emissions. The Response Strategies Working Group of the
Intergovernmental Panel on Climate Change has discussed various systems of
tradeable emission rights. Those discussions raised concerns about global
equity, which may be a serious impediment to the application of a tradeable
permit system at the global level.
2. Technical aspects of trading
232. An international system of tradeable CO2 permits need not begin with a
comprehensive arrangement for trading in all greenhouse gases. Neither might
it be necessary to negotiate from the outset a binding international agreement
on emission targets and the allocation of emission allowances among all
parties to the agreement. Rather, commitments by a number of countries to
limit their greenhouse gas emissions might provide the basis for the adoption
of an evolutionary process where it would be possible to begin with a simple
scheme (e.g., a CO2 emissions trading scheme among a small number of
countries) and evolve gradually towards a more complete system.
233. A tradeable permit system might be introduced on a pilot basis among a
small number of countries on the basis of a common goal. Each participating
country could be allocated tradeable permits on the basis of its emission
target. The system could be allowed to expand gradually. The pilot scheme
could be voluntary, its main purpose being to collect information, carry out
research and gain experience in this area.
234. It is appropriate to inquire into the minimum number of signatories and
their assigned allowances that would be required for an efficient market.
Indeed, a market must be broad enough to ultimately attract other signatories.
There is no scientific formula for determining these numbers. The lesson from
other successful markets, ranging from Eurodollars to wheat, suggests a
minimum of different trading blocs emitting altogether at least 20 per cent of
the world's output. Thus, an emissions permit market between the United
States, the European Union and Japan (accounting for roughly 40 per cent of
world CO2) based on the stabilization of CO2 emissions at 1990 levels in the
year 2000, could possibly generate more than US$ 8 billion annually at US$ 10
per ton.
3. Role of pilot schemes
235. Pilot schemes may be now the key to further progress. A tradeable CO2
permits pilot scheme could be launched among the major emitters. Participants
in the scheme would develop and test certain mechanisms that would be
essential to the long-term viability of a fully-fledged system of tradeable
permits such as certification, monitoring, trading, clearing, accounting, and
dispute resolution. Since the use of markets can significantly lower the cost
of controlling greenhouse gas emissions, it seems that it would be in the
interest of the major emitters to act as "market leaders" willing to pioneer.
Provided that equity concerns can be addressed in a satisfactory way, the
participation of some developing countries would also be important, both for
the credibility of the scheme and because appropriate mechanisms for the
transfer of funds and technical assistance could be tested.
4. Unresolved issues
236. What are the major options concerning the allocation of initial
quantities of "emission rights"? Schemes based on equity considerations, such
as equal per capita emissions, are not likely to be accepted by developed
countries. Schemes based on historical emission levels would favour countries
with mature industrialized economies and would be difficult to accept by
countries with growing economies. Trading schemes therefore seem to be most
practicable when cooperative solutions such as a multi-tiered allocation
formula can be found.
237. Would a number of detailed provisions of a potential global permit
trading regime be unfavourable for developing countries? Oil-exporting
developing countries fear, for example, that their commodity terms of trade
will fall as a consequence of actions to limit carbon emissions, thus draining
resources away from their more immediate development needs.
238. Would it be likely that trading of rights and credits would take place
before carbon allocations become legally binding and enforceable? The
launching of a global permit trading regime is complicated by the fact that
there are no rules at all for setting the initial allocation of rights to
emit.
239. What should be the lifetime of carbon credits? Participating countries
potentially face a situation of changing "rules of the game". Parties facing
future emissions limitations may find that they have already used the cheapest
sources of carbon emission abatement. This would have to be taken into
account in allocating rights, and it suggests the need for some kind of expiry
or controlled lifetime of carbon credits in order to avoid unfavourable
baseline shifts and accommodate newcomers.
IV. FINANCING FOR SECTORAL AND CROSS-SECTORAL ISSUES OF AGENDA 21
A. Policy approach
240. Sections I to III of the present report dealt with macroeconomic and
microeconomic policies aimed at mobilizing new and additional resources for
the financing of Agenda 21, focusing on the major determinants of the
availability of financial resources: first, the external environment, in
particular the level of ODA, foreign direct and portfolio investment and the
volume of lending by international financial institutions; second, national
policies, in particular the role of the policy environment, the use of
economic instruments complementary to regulations and the role of national
environmental funds and private sector investment in sustainable development;
third, the application of innovative financial instruments for increasing the
pool of available resources for sustainable development.
241. Positive and negative developments in the external and national policy
environments as well as successful and unsuccessful macroeconomic and
microeconomic policies are reflected in the amount of resources available for
the financing of cross-sectoral issues and sectoral finance.
242. As a result, the following discussion of financing cross-sectoral issues
(financing the transfer of environmentally sound technologies and
biotechnology) and mobilizing financial resources for the six sectors defined
in chapters 10 to 15 of Agenda 21 is to a large extent a discussion of how to
apply the policies and instruments discussed in sections I to III above to
cross-sectoral and sectoral finance.
243. The same holds true for the cross-sectoral issues of poverty and
demography, whose financial aspects are discussed in the report of the
Secretary-General on poverty eradication and sustainable development
(E/CN.17/1995/14) and the report of the International Conference on Population
and Development (A/CONF.171/13 and Add.1).
B. Trends in sectoral finance
244. Current developments and trends in the financing of the six sectors
defined in chapters 10 to 15 of Agenda 21 are described in reports of the
Secretary-General that are before the Commission at its present session. 4/
245. The reports discuss finance in reference to the major determinants of
the availability of financial resources for sustainable development and
highlight specific sectoral problems in the mobilization of resources.
246. With regard to ODA, for example, the reports focus on its composition
and refer to conflicts between donor and national priorities. Similarly,
there is a critical examination of the lending priorities of international
financial institutions and GEF.
247. In discussing the national policy environment and its impact on sectoral
finance, the reports focus on the role of economic instruments (including
subsidies) and ways and means of increasing the share of private finance for
sustainable development.
248. Furthermore, the reports address the potential role of innovative
financial mechanisms and refer to a number of sector-specific mechanisms.
249. Finally, the reports discuss the importance of global conventions with
binding financial provisions.
C. Financial resources for cross-sectoral issues
1. Financing the transfer of environmentally sound technologies
250. The debate on technology transfer is not new. However, it gained
renewed international policy attention at the United Nations Conference on
Environment and Development, where access to environmentally sound
technologies (ESTs) was high on the political agenda.
251. Nearly three years after the Conference, it appears that a pragmatic
approach is emerging, suggesting that the concept of "transfer" implied too
narrow an understanding of the challenge and may even have led to some of the
difficulties that plagued past transfer efforts.
252. The "new" approach to the issue of transferring ESTs underlines the need
to look for cooperation in the form of technology partnerships rather than
looking for "transfer" or hardware trade. Another feature of the new approach
is the shift from "end of pipe" solutions to "reduction at source".
253. In view of these changes, the issue of financing the transfer of ESTs
has changed, too; it is now primarily discussed in the policy framework
suggested in sections I to III above.
(a) Role of external flows
254. Section I discussed the marked increase in foreign direct investment as
a result of an improvement in the external environment and domestic policy
reforms in recipient countries.
255. In general, most foreign direct investment is not directly oriented to
transferring ESTs to developing countries. In fact, many experts worry that
foreign direct investment serves to transfer environmentally inferior
technologies to developing countries, as companies in more heavily regulated
developed countries seek either to sell-off outmoded capital equipment and/or
to shift production to jurisdictions with lower environmental standards.
256. Over the past decade, however, these fears have become less justifiable
for a number of reasons. First, many developing countries are raising their
environmental standards and hence are less willing to be a "dumping ground"
for older, more polluting technologies. Second, larger foreign investors can
no longer afford the risk of the bad publicity that comes from poor
environmental performance at any of their operations. Third, technological
innovations are making ESTs more economically attractive and hence there are
few, or fewer, advantages to be gained from using older, typically more
polluting, technologies.
257. As discussed in section I, there is also strong growth in portfolio
investment, which has been stimulated by domestic policy reforms and the
promotion of securities markets in the recipient countries. However, little
research has been undertaken on the role of portfolio investment in
transferring ESTs to developing countries. It appears, however, that its
impact on the transfer of ESTs is less direct than that of foreign direct
investment.
258. Developing country enterprises have raised funds on the global capital
markets to finance modernization and efficiency, improvements that typically
involve capital expenditure on ESTs.
259. As to the contribution of international financial institutions to the
financing of ESTs, it appears that these institutions have devoted a
relatively small amount of their total lending to that purpose. They
recognize, however, that there is a need for a more targeted approach to
financing ESTs. As a result, the World Bank, for example, will establish new
programmes focusing on such financing.
260. The percentage of ODA projects that contributes directly to the
financing of ESTs appears to be low, although some countries have explored
supporting the transfer of ESTs as part of their trade promotion activities.
(b) Role of national policies
261. National policies for promoting the financing of ESTs are to create an
adequate policy environment, put in place regulations, apply economic
instruments, build institutions and provide direct incentives for private
investment in ESTs.
262. Promoting the use of economic instruments will help to implement the
polluter-pays principle and thereby create an incentive for exploring
alternative sources of financing for ESTs. Accelerating appropriate
institution-building, in particular in the financial sector, will improve
firms' access to bank and capital market financing. Incentives for private
investment in ESTs, in particular fiscal incentives (accelerated depreciation
of assets etc.), may significantly reduce the financial burden of investing in
ESTs.
(c) Role of innovative mechanisms
263. Major innovative mechanisms for the funding of ESTs include venture
capital funds, publicly funded intermediaries for the transfer of ESTs and
build-operate-transfer (BOT) schemes. Recently, the establishment of
environmentally sound technology rights banks (ESTRBs) has been considered.
264. Venture capital funds with a focus on ESTs are still relatively rare and
the financial resources of existing funds are small. However, they have
significant growth prospects and their effectiveness in transferring ESTs is
substantial.
265. Among the more prominent funds are the Global Environment Emerging
Markets Fund, the Nordic Environmental Finance Corporation and the North
American Environmental Fund. Fund initiatives at an advanced stage of
development are the Asia Sustainable Growth Fund (initiated by the Asian
Development Bank), the Calvert Emerging Europe Fund for Sustainable
Development and a southern Africa sustainable investment fund.
266. Publicly funded intermediaries for the transfer of ESTs assist in the
development of projects that aim at transferring ESTs through pre-investment
support. The support consists, among other things, in the preparation of
proposals that meet the criteria of potential creditors. Among the important
intermediaries are Sustainable Project Management, which is an autonomous,
not-for-profit association registered in Switzerland, and the United
States-Asia Environmental Partnership, which receives support from the United
States Agency for International Development.
267. BOT and similar mechanisms are innovative financing techniques,
particularly suitable to infrastructure investments, which have been
successfully implemented. They encourage the use of ESTs and good
environmental management. However, technologies are usually a fairly small
component of such mechanisms. Furthermore, BOTs are usually applicable only
to certain large- scale projects. The availability of capital for BOTs and
skills to finance such projects are not fundamental problems. The chief
obstacle is the provision of the necessary regulatory framework to allow such
private sector participation. In certain markets, concerns over
regulation change may inhibit access to finance.
268. ESTRBs have been suggested as mechanisms for accelerating the transfer
of ESTs, through acquiring rights to ESTs and making them available to
developing countries on favourable terms. At present, most development and
ownership of ESTs is occurring in the private sector, and private companies
are actively involved in marketing and disseminating such technologies.
ESTRBs may therefore have difficulty in accessing the best technologies. It
is also unclear whether ESTRBs would be more effective in actively marketing
the technologies than the private sector. If it is felt necessary to support
the transfer of ESTs, it can probably be more effectively done through direct
assistance, either from bilateral assistance or through tax concessions in
developing countries.
269. Further research is needed to investigate how ESTRBs can best combine a
public sector technology ownership role with the commercial effectiveness of
private sector companies.
270. Despite the innovative mechanisms outlined above, problems in financing
ESTs may remain, especially for small and medium-sized enterprises requiring
relatively small amounts of capital for EST acquisition. Particular attention
needs to be given to the encouragement and development of technology leasing.
2. Financing biotechnology
271. In addition to discussing the transfer of environmentally sound
technology, Agenda 21 discusses the environmentally sound management of
biotechnology, in chapter 16.
(a) Role of external flows
272. There is no comprehensive international survey of financial expenditure
for biotechnology programmes. However, a 1993 survey on international
initiatives in agricultural biotechnology conducted by Intermediary
Biotechnology Services provides some useful indications. The survey states,
for example, that bilateral and multilateral aid agencies, international
organizations, private foundations, universities and commercial companies and
national Governments are involved in the financing of international
biotechnology initiatives for developing countries. Furthermore, the survey
emphasizes that compared with biotechnology research and development in
industrialized countries, the total financial efforts devoted to international
biotechnology initiatives are far from sufficient.
273. Furthermore, the survey provides an interesting profile of financial
sources. It appears that the bulk of financing is provided by foundations and
bilateral and multilateral donors. Only a small fraction seems to be financed
by national institutions (mostly in the form of "matching funds"), grants and
national private firms.
274. In addition to the Rockefeller Foundation, there are a number of
non-profit organizations and foundations in both developed and developing
countries which have provided a small amount of financial and technical
support to encourage local and community participation on the environmentally
sound management of biotechnology, for example, A.T. International, M.S.
Swaminathan Foundation and Biofocus Foundation.
275. The World Bank and other United Nations entities, such as UNDP, UNEP,
FAO, the World Health Organization and UNIDO have been and continue to be a
significant, although relatively small, source of funding and/or technical
assistance for biotechnology development in developing countries. Examples
include support for the various international agricultural resource centres
and, more recently, the International Centre for Genetic Engineering and
Biotechnology.
(b) Role of national policies
276. In general, financial support for biotechnology by Governments of
developing countries is far below what is required to provide an adequate
scientific and technical infrastructure for biotechnology development. There
are encouraging trends, however. For example, the Governments of Thailand and
Viet Nam have stepped up their efforts in supporting biotechnology
development, including a marked increase in financial support.
277. In developing countries, the financial contribution from the private
sector for commercial biotechnology development is still low, mainly because
of the high risk of investing in biotechnology but partly because of an
unfavourable investment climate. This is unfortunate because the experience
in developed countries demonstrates the importance of private sector
involvement in the development of biotechnology.
(c) Role of innovative mechanisms
278. It appears that to some extent developing countries have been successful
in promoting partnerships between the private sector and government agencies
aimed at financing the development of biotechnology.
279. In developing countries and in developed countries in particular,
venture capital funds, such as the Transtech Venture Fund in Singapore, can
serve as a model for the mobilization of funds from banking institutions and
industrial resources.
280. In view of the relatively high risk associated with biotechnology
development and commercialization, more innovative mechanisms need to be
developed. Cross-country strategic alliances have been particularly
successful between companies in developed countries, and it may be just a
matter of time until alliances between companies in developed and developing
countries become viable.
281. In addition, a number of other innovative financial resources and
mechanisms have been proposed, including the establishment of an international
biosafety trust fund and an international venture capital fund for
biotechnology.
V. MATRIX OF POLICY OPTIONS AND FINANCIAL INSTRUMENTS
282. It is evident from the discussion in sections I to IV of the present
report that both international and national policy reforms offer the
possibility of providing substantial new and additional financial resources
for the financing of Agenda 21.
283. Given the broad scope of Agenda 21, there is need for a transparent
conceptual framework for structuring discussions on international and national
financial aspects of Agenda 21. The matrix in the annex below attempts to
present such a framework.
284. The matrix shows most Agenda 21 issues and the principal financial
resources and policy instruments related to them.
285. In the matrix, each row represents an individual sector or
cross-sectoral issue and each column represents a particular instrument or
policy instrument related to it.
286. By looking across any row, it can be seen that there are several
financing options for individual sectors and cross-sectoral activities. These
options are often complementary. By looking down any column, it can be seen
that individual financing options are typically applicable to more than one
sector.
287. The matrix is filled in in detail only for the issues that are on the
agenda of the present session of the Commission.
288. It would be desirable to assess the effectiveness of the policy
instruments listed in the matrix.
289. It would also be desirable to explore the most promising policy options
and instruments for particular countries or regions. For this purpose,
countries or groups of countries could launch pilot projects.
290. Finally, it would be useful to consider additional policy-relevant
dimensions of the matrix, such as the public and private parties involved in
decisions on and implementation of policy reforms, and the impact of different
policy options on social groups.
VI. CONCLUSIONS AND RECOMMENDATIONS
A. International policy environment and financial flows
291. The external policy environment has an impact on economic growth and
hence on the availability of financial resources for sustainable development.
Uneven economic growth, uncertainties about interest rate developments and
continuation of the unsatisfactory terms of trade and the external debt
situation will have adverse effects on the availability of resources for the
financing of sustainable development, in particular in the poorest and highly
indebted developing countries.
292. Trends in resource flows and debt are characterized by an average
decline in ODA as a percentage of GNP, a concentration of private capital
flows in countries that are less dependent on ODA and continued problems of
debt servicing on the part of the poorest and highly indebted developing
countries. Therefore, the Development Assistance Committee of OECD and other
appropriate bodies should intensify their discussion on issues such as ODA
fatigue, concentration and sustainability of private flows and the need to
permit a once-and-for-all resolution of the debt crisis for the poorest, most
indebted developing countries.
293. The discussion of the future role of the Bretton Woods institutions and
other international financial institutions should provide an answer to the
question of what can be done to increase their contribution to the promotion
and financing of sustainable development.
B. National policies and resource mobilization
294. In future discussions on the role of economic instruments for
sustainable development, the Commission could concentrate on offering
solutions to overcoming obstacles to their implementation. In this regard,
the Commission may address the insufficient political acceptability of
economic instruments; difficulties in the design of economic instruments;
administrative difficulties with economic instruments; conflicts between
environmental and other policy objectives; anxiety about repercussions on the
international competitiveness of the national economy; and adverse economic
and structural conditions that the application of economic instruments may
encounter.
295. In addition, the Commission could consider conducting a more concrete
discussion on the specific problems of implementing economic instruments in
economies at different stages of development - that is, OECD countries,
countries with economies in transition and developing countries.
296. In view of the interest of many countries in switching from taxes on
labour, for example, to environmental taxes in a thoroughgoing fiscal reform,
more information is needed on the potential size of the tax base, how stable
such a tax base would be over the business cycle and how it would behave over
the long term. Regional international organizations might be encouraged to
conduct national studies along those lines.
297. The phasing-out of environmentally unfriendly economic instruments,
especially input subsidies, needs careful examination and the Commission
should focus its discussions on the environmental impact of applying those
instruments and the size of budgetary resources which could be redeployed.
298. Considering that in various regions there is continued interest in using
national environmental funds for the financing of sustainable development,
while at the same time there are serious misgivings about these funds on
efficiency grounds, the Commission may further explore their benefits.
299. Considering the unsatisfactory mobilization of financial resources for
sustainable development, in particular ODA resources, promoting the
mobilization of private financing for sustainable development has become very
important. It would be desirable for the Commission to discuss more deeply
the current and prospective role of the private sector in this regard, develop
policy options for enlarging its role and explore the potential of related
innovative mechanisms such as co-financing and venture capital funds, in
particular for leveraging ODA and public expenditures on sustainable
development.
C. Innovative international and national
mechanisms for resource mobilization
300. The discussion on levying an internationally agreed tax on air transport
is to be seen as a step in the right direction, which could be followed by
taxing other environmentally harmful activities with global effects. More
studies need to be undertaken to prepare the ground for an international
dialogue on such a tax.
301. The launching of a pilot project on tradeable CO2 permits such as the
one
currently proposed by UNCTAD should be encouraged. The results of such a
pilot project can be expected to increase the knowledge base for the further
evaluation of such schemes.
D. Financing for sectoral and cross-sectoral issues of Agenda 21
302. The discussion of financing sectors and cross-sectoral activities is to
a large extent a discussion of how to apply economic policies and instruments
in a given international policy environment. Additional factors need to be
taken into account, such as donor priorities, lending policies of
international financial institutions, the availability of specific innovative
mechanisms and the existence of international conventions.
303. As a result, future discussions of the cross-sectoral issues of
financing environmentally sound technology transfer and biotechnology should
focus on the availability of external financial resources, the adequacy of
national policies with regard to creating an appropriate financial
infrastructure and fiscal incentives and the availability of resources from
innovative mechanisms such as co-financing and venture capital funds.
E. Matrix of policy options and instruments
304. Given the broad scope of Agenda 21, there is a need for a transparent,
conceptual framework for structuring discussions on international and national
financial aspects of Agenda 21. This is best provided in the form of a
matrix.
305. It would be desirable for the Commission to consider a multi-year work
programme to assess the effectiveness of the instruments and policy options
listed in the matrix and to explore the most promising policy options and
financial instruments for particular countries or regions for the
implementation of Agenda 21.
F. International cooperation in the application
of economic instruments and policy reforms
306. The Commission should encourage the development of mechanisms to enable
developing countries to exchange experience among themselves and with
developed countries and countries with economies in transition on the use of
economic instruments. It should also encourage programmes intended to
strengthen the capacity of developing countries to implement them.
307. The Commission should also begin a process of consensus-building
regarding the need for harmonization in the application of economic
instruments likely to have significant effects on competitiveness. This could
take the form of a multilateral consultation process.
308. The consultations should be flexible and proceed in stages. They should
address selectively sectors and policies that offer particularly promising
opportunities for environmental, social and economic gains. Moreover, they
should be demand-driven and voluntary, country involvement being determined by
interest in the specific matters under discussion. They could be organized at
a subregional, regional or global level, as appropriate.
309. The consultations should respect the right of the countries to set the
level of environmental standards. They should also allow countries at
different stages of development to proceed at different speeds in implementing
agreed-upon policy changes.
310. The Commission, supported by other organizations and financial
institutions, should provide leadership in advancing such a process by
developing a concrete proposal for further consideration. The Commission's
growing efforts to encourage the voluntary presentation and examination of
national experiences in developing and applying national sustainable
development strategies can make an important contribution to the
identification of, and agreement on, shared national goals that could form the
basis for eventually implementing such a process.
Notes
1/ Report of the United Nations Conference on Environment and
Development, Rio de Janeiro, 3-14 June 1992, vol. I, Resolutions Adopted by
the Conference (United Nations publication, Sales No. E.93.I.8 and
corrigendum), resolution 1, annex II.
2/ See the report of the Commission on Sustainable Development on its
second session (E/1994/33), chap. I, sect. B.
3/ Organisation for Economic Cooperation and Development, Development
Cooperation (Paris, 1995).
4/ Reports of the Secretary-General on an integrated approach to the
planning and management of land resources (E/CN.17/1995/2), "combating
deforestation" and the Non-legally Binding Authoritative Statement of
Principles for a Global Consensus on the Management, Conservation and
Sustainable Development of All Types of Forests (E/CN.17/1995/3), managing
fragile ecosystems: combating desertification and drought (E/CN.17/1995/4),
managing fragile ecosystems: sustainable mountain development
(E/CN.17/1995/5), promoting sustainable agriculture and rural development
(E/CN.17/1995/6) and conservation of biological diversity (E/CN.17/1995/7).
Annex
MATRIX OF POLICY OPTIONS AND FINANCIAL INSTRUMENTS
==============================================================================
International Policy Environment
---------------------------------------------------
Sectors ODA GEF Debt relief
==============================================================================
Sustainable development X -rescheduling
-debt for sustainable
develop. swaps
---------------------------------------------------
Biodiversity X debt for nature swaps
---------------------------------------------------
Forest resources X X debt for nature swaps
---------------------------------------------------
Fragile ecosystems X X debt swaps
---------------------------------------------------
Fresh water resources X X
---------------------------------------------------
Land resources X debt for equity swaps
---------------------------------------------------
Sustainable agriculture X debt for sustainable agric.
swaps
---------------------------------------------------
Atmosphere X debt relief for energy
efficiency improvements
---------------------------------------------------
Oceans X
---------------------------------------------------
Hazardous waste
---------------------------------------------------
Toxic chemicals
---------------------------------------------------
Solid waste
---------------------------------------------------
Radioactive effects
---------------------------------------------------
Health X
---------------------------------------------------
Urban environment X
---------------------------------------------------
Biotechnology
---------------------------------------------------
==============================================================================
International Policy Environment (cont'd)
---------------------------------------------------
Sectors Trade flows Private financial flows
==============================================================================
Sustainable development X BOT
--------------------------------------------------
Biodiversity -biodiversity -green funds
-patent rights -venture capital
--------------------------------------------------
Forest resources terms of trade green funds
--------------------------------------------------
Fragile ecosystems non-resource based green funds
employment
--------------------------------------------------
Fresh water resources more efficienct foreign direct
water use investment
--------------------------------------------------
Land resources
--------------------------------------------------
Sustainable agriculture -market access foreign direct
-terms of trade investment
--------------------------------------------------
Atmosphere more efficient foreign direct
energy use investment in
the energy sector
--------------------------------------------------
Oceans
--------------------------------------------------
Hazardous waste
--------------------------------------------------
Toxic chemicals
--------------------------------------------------
Solid waste
--------------------------------------------------
Radioactive effects
--------------------------------------------------
Health
--------------------------------------------------
Urban environment
--------------------------------------------------
Biotechnology -market access venture capital
-profit sharing
-technology transfers
---------------------------------------------------
==============================================================================
National Policy Reforms
---------------------------------------------------
Sectors Econ & Property Resource
financial rights pricing
reforms
==============================================================================
Sustainable development competitive secure property full-cost
capital rights pricing
markets
---------------------------------------------------
Biodiversity environ. funds biodiversity prospecting
patents fees
---------------------------------------------------
Forest resources environ. funds -long term forest product
concessions pricing
-bidding
---------------------------------------------------
Fragile ecosystems environ. funds communal
property rights
---------------------------------------------------
Fresh water resources municipal bonds water rights user charges
---------------------------------------------------
Resources X -no titles for
land clearing
-secure land
ownership
---------------------------------------------------
Sustainable agriculture removal of secure land water pricing
interest rate ownership
ceilings
---------------------------------------------------
Atmosphere energy
pricing
---------------------------------------------------
Oceans 200 mile EEZ
---------------------------------------------------
Hazardous waste
---------------------------------------------------
Toxic chemicals X
---------------------------------------------------
Solid waste X
---------------------------------------------------
Radioactive effects
---------------------------------------------------
Health X
---------------------------------------------------
Urban environment X
---------------------------------------------------
Biotechnology X
---------------------------------------------------
==============================================================================
National Policy Reforms (cont'd)
---------------------------------------------------
Sectors Subsidy Taxation Environmental
reduction charges
==============================================================================
Sustainable development reduce energy green taxes depletion +
& capital pollution
subsidies charges
---------------------------------------------------
Biodiversity reduce land deforestation
conversion charge
subsidies
---------------------------------------------------
Forest resources -below cost habitat deforestation
timber sales protection charge
-conversion subsidy
subsidies
---------------------------------------------------
Fragile ecosystems X differential deforential
land use charges
charges
---------------------------------------------------
Fresh water resources subsidies to sewage &
water cons. & effluent
irrigation charges
---------------------------------------------------
Resources -agricul -property -impact fees
subsidies -land use taxes -waste
-below-cost -transfer taxes disposal
public land charges
sale/lease
---------------------------------------------------
Sustainable agriculture -water agrichemical
-subsidies taxes; IPM
-agro-chemical subsidies
subsidies
---------------------------------------------------
Atmosphere energy subsidies energy taxes emission
charges
---------------------------------------------------
Oceans effluent
charges
---------------------------------------------------
Hazardous waste presumptive
charges
---------------------------------------------------
Toxic chemicals X taxes on feedstock
chemicals charges
---------------------------------------------------
Solid waste X collection &
disposal
charges
---------------------------------------------------
Radioactive effects
---------------------------------------------------
Health
---------------------------------------------------
Urban environment -property taxes pollution
-relocation
-incentives for
industry
---------------------------------------------------
Biotechnology
______________________________________________________________________________
==============================================================================
Innovative Instruments
---------------------------------------------------
Sectors Domestic innovative Global innovative
mechanisms mechanisms
==============================================================================
Sustainable development -ecolabelling joint implementation
-ecofunds
---------------------------------------------------
Biodiversity -bioprospecting fees -patents
-ecotourism fees -intellectual property
-scientific tourism fees rights
-TCCs
---------------------------------------------------
Forest resources -watershed charges -tradeable forest
-tradeable reforest credit -carbon offsets
---------------------------------------------------
Fragile ecosystems -relocation incentives TCCs
---------------------------------------------------
Fresh water resources tradeable water shares water trading
across borders
---------------------------------------------------
Land resources -betterment charges
-differential land use
charges
---------------------------------------------------
Sustainable agriculture -differential land use -international
charge sustainability
-ecolabelling standards/price
premia
-carbon offsets
---------------------------------------------------
Atmosphere tradeable SO2 emission -tradeable CO2 permits
emission permits -carbon offsets
-carbon taxes
-air travel tax
---------------------------------------------------
Oceans ITQs oil spill bonds
---------------------------------------------------
Hazardous waste
---------------------------------------------------
Toxic chemicals
---------------------------------------------------
Solid waste
---------------------------------------------------
Radioactive effects
---------------------------------------------------
Health
---------------------------------------------------
Urban environment -betterment charges;
-TDRs
-tradeable emission permits,
TDQs
---------------------------------------------------
Biotechnology -bio-prospecting
-profit sharing
______________________________________________________________________________
X: Important and self-explanatory contribution.
BOT: Build-operate-transfer.
IPM: Integrated pest management.
EEZs: Exclusive economic zones.
TCCs: Tradeable conservation credits.
TDQs: Transferable development quotas.
TDRs: Transferable development rights.
ITQs: Individual tradeable fishing quotas.
-----
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Date last posted: 2 December 1999 13:24:30
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