WORK STREAM IV.5: Overcoming the obstacles for internalisation of externalities under extended geographical coverage

Stream Leader: CUEC

This work stream will focus on the obstacles for efficient internalisation of externalities within the region of new Member States (NMSs) and newly associated countries (NACs). The objectives of this stream are: i) build up the scientific capacity within the region of associated candidate countries; ii) coordinate activities, flow of results and experience sharing within the EU in particular involving NAC region; iii) make an assessment of the externalities associated with changes in macro-economic structure within the NAC region; iv) assess the influence of macroeconomic and fiscal changes on a possible efficient internalisation of externalities within NAC as well as EU. Following the objectives the activities of the work stream will be carried out in two Work Packages.

WP IV.5.a: Externalities associated with changes in macro-economic structure
Workpackage Leader: CUEC; Partners: UW-WEEC
Duration in months: 6-18

The objective of this sub-work-package is to analyze selected external costs related to environmental burden in transition countries. Since these countries have experienced substantial changes in the economy activity level and structure, the methodological approach used is based on the decomposition analysis. The investigated variables would be decomposed with respect to their relation to the output of a national economy, to the structure of the national economy and to the environmental intensity of activities in selected sectors. This statistical decomposition is a way of obtaining the insight on the relative importance of economic growth, economic structure and technological improvements on observed changes in selected indicators. Based on the results of the statistical decomposition, an econometric approach to explain the change in environmental intensities in selected sectors will be used. The econometric analysis is necessary to assess importance of driving forces (such as environmental investments or permanent changes in relative prices) behind trends in environmental intensities. The driving-forces understanding is very valuable as the long-run sustainable growth can be achieved by a permanent decrease in environmental intensity only, Brock, and Taylor (2004). The proposed methodology extends the results in Bruha, and Scasny (2005), who combine virtues of the both approaches: statistical decomposition by Grossman (1995) or de Bruyn, (1997) and econometric decomposition by Stern (2002). The proposed methodology will be applied for selected transition countries (most likely the Czech Republic, Slovakia, Hungary and Poland) and for selected indicators of the environmental burden causing the externalities (SOx, NOx, PM and GHG).

WP IV.5.b: Factors of efficient internalization and policy recommendation
Workpackage Leader: UW-WEEC; Partners: CUEC; UBATH
Duration in months: 12-36

This work package will focus on the analysis of main macroeconomic and fiscal problems common for the NAC countries relevant for the efficient internalisation of environmental externalities (Task 1); ii) the discussion of a policy/instrument-mix and positive synergies that could be involved by introduction of instruments internalising the externalities (Task 2). Then, it will provide the recommendations for efficient internalisation of externalities in the sectors under examination and sustainable policy and decision-making (Task 3). The very first approximation (partial-equilibrium analysis) of the problem – as envisaged in Task 1 – suggests that introducing pollution charges and equivalent instruments internalises externalities thus eliminating any market failures. However, more careful analyses (general-equilibrium modelling) demonstrate that pollution-charge approach cannot be de-coupled from macroeconomic and fiscal issues, such as revenue recirculation. In the presence of many other regulatory instruments – each of which distorts the economy in various ways – the occurrence of the so-called double dividend (i.e. environmental and economic benefits) is unlikely [Bovenberg and Goulder 2001]. Therefore large data sets necessary to assess macroeconomic effects of internalisation instruments need to be collected. In addition, several characteristics of New Member States of the EU make pollution charges and equivalent instruments play somewhat different roles than in EU-15 [Zylicz 1998]. Consequently not all conclusions identified in the internalisation literature as policy relevant can be replicated in the wider Union. This task will critically assess our economics knowledge and extend it to address new issues that are pertinent to countries which underwent a transition after the 1989.