IV. MEASURES FOR INTEGRATING ENVIRONMENTAL CONSIDERATIONS INTO AGRICULTURE 

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C. Impact of environmental measures on Malaysian exports 

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2. Pollution control in key export sectors 

EQA authorized the Department of Environment to "prescribe" particular classes of industrial premises and to require licences. Thus, in order to control pollution, EQA inter alia makes it mandatory to obtain licences for the use and occupation of certain premises, and for pollution at levels that exceed acceptable conditions. Polluters are subject to prosecution and criminal sanction if emissions exceed levels corresponding to acceptable conditions.

EQA also authorizes the Department of Environment to attach licence conditions related to pollution control. In determining the conditions, EQA has directed the Department of Environment to consider factors related to the economic cost of pollution control. A novel feature of the licensing provisions has been the authorization to vary the size of the licence fee according to: (a) the class of premises; (b) the location of such premises; (c) the quantity of wastes discharged; (d) the pollutant or class of pollutants discharged; and (e) the existing level of pollution. An example for internalization of environmental externalities and its trade consequences is provided by the case of the palm oil industry which is presented below.

The case of palm oil industry

In the 1960s, when rubber prices began a prolonged decline, the Government of Malaysia began encouraging palm oil production. With very fast growth rates, Malaysia soon became the world’s largest producer of crude palm oil. By 1980 Malaysia accounted for half of the world production of crude palm oil and three-fourths of world exports of crude and refined palm oil. Palm oil played a key role in government policy aimed at reducing rural poverty as well as income disparities between ethnic groups. Oil palms are grown on technologically advanced estates (55 per cent of the total area dedicated to oil palms) or by smallholders (45 per cent), who have been assisted by government land development schemes (In general, yields per hectare are higher on estates).

However, by 1975, crude palm oil had become the country’s worst source of water pollution. Pollution caused by the organic wastes from crude palm oil mills was equivalent to the pollution generated by a population of more than 10 million (table 6). Production of crude palm oil increased three-fold between 1975 and 1985. Extrapolating from the 1975 pollution load, the population-equivalent of the industry’s pollution would thus have increased to 33 million if no policies had been implemented to abate pollution. The fact that the population-equivalent of the pollution actually fell to 0.08 million people by 1985 shows the success of Malaysian policies in that sector: high rates of growth were achieved simultaneously with significant environmental improvements. The case of palm oil in Malaysia has been cited as an example where a trade-dependent industrializing nation moved decisively against pollution in a key export industry. 

(i) The pollution problem

In the case of the crude palm oil industry, severe pollution was caused by the discharge of palm oil mill effluent (POME) into watercourses. POME mainly comprises organic compounds originating from vegetable materials. It is readily discomposed by anaerobic and aerobic bacteria. However, if it is discharged into water courses, the biological reaction will deplete the dissolved oxygen in the water. That will affect aquatic life, i.e., fish, prawn and other aquatic animals that provide a significant share of the diet of villagers. Water from polluted rivers and streams also becomes unsuitable for human consumption. Pollution problems thus became very serious. The POME problem was unique to Malaysia and no proven treatment technology existed. 

(ii) Pollution abatement

The government's first step was to pass EQA in 1974 As mentioned above, EQA authorized the Department of Environment to attach license conditions to pollution control and directed the Department of Environment to consider factors related to the economic cost of pollution control.

The Department of Environment began the process of formulating licence conditions by forming an expert committee with representatives from both the industry and government. The committee’s assignment was to investigate possible treatment technologies and to advise the Department of Environment on regulations that were "not only environmentally sound but also sensible within the framework of economic feasibility and available technology".

In July 1977, the Department of Environment announced the Environmental Quality (Prescribed Premises) (Crude Palm Oil) Regulations, imposing standards on eight parameters of POME. The regulations required crude palm oil mills to apply for an operating licence every year. The Department of Environment also announced that it would make the standards increasingly stringent over four years.

The Department of Environment used several provisions to alleviate the burden of compliance. First, by phasing in the standards over four years, the Department of Environment recognized that the industry needed time to construct treatment facilities and to gain experience in operating them. Informally, at least, the Department of Environment weighted the environmental benefits of a more rapid implementation of the standards against its costs to industry and it found that the latter exceeded the former. Second, the Department of Environment used the flexibility in the licensing provisions to relate the size of the annual licence fee to a mill’s POME discharge. Indeed, the licence fee consisted of two parts, a flat processing fee and a variable effluent-related fee. Third, mills could choose the least-cost option: either paying the cost of treating POME to meet the standard or paying the excess fee to discharge POME with a BOD concentration exceeding the standard. Fourth, the Department of Environment recognized the importance of research and development and included a provision authorizing the granting of waivers of fees to mills conducting research on POME treatment.

(iii) Environmental Quality (Prescribed Premises) (Crude Palm Oil) Regulations

Section 51 of EQA, 1974, confers power upon the Minister of Environment to make regulations for the purpose of putting into effect the provisions of EQA. The regulation-making power can be exercised after consultation with EQC. A number of committees comprising representatives from relevant government agencies and the industry were appointed to develop and recommend appropriate standards for the palm oil effluents. Those standards were "not only environmentally sound but also sensible within the framework of economic feasibility and available technology" (Ong, Maheswaran and Ma, 1987). The Department of Environment took almost two years of preparatory work and consultations before the standards were incorporated into the Environmental Quality (Prescribed Premises) (Crude Palm Oil) Regulations, 1977 (Amendment 1982), hereinafter referred to as EQR (CPO), which was announced on 7 July 1977.

Effluent control in the palm oil industry is effected through a system of licensing and the application of effluent discharge standards. Under the licensing procedure, conditions (mainly effluent standards) are attached to each licence. The regulation allowed one year for the mills to install treatment facilities and then to comply with the four stages of allowable discharge limits into a watercourse (table 8). The first stage of standards took effect on 1 July 1978. During the first year, palm oil mills were required to reduce the effluent characteristics, taking BOD concentration as the key parameter, from 25,000 mg/l untreated effluent to 5,000 mg/l in 1978/79 and to 500 mg/l by 1981. Those BOD limits were further reduced to 250 mg/l in 1982 and finally to 100 mg/l in 1984. In addition to the standards, effluent-related licence fees were levied on the BOD load discharged. Dischargers were required to pay M$ 100 per ton for BOD loads exceeding the legal standard and M$ 10 per ton of BOD for loads equal to, or less than, the standard. Each discharger also paid a non-refundable M$ 100 annual licence-processing fee.

The regulations leave the palm oil mills the option of discharging the effluents onto land subject to a fee of M$ 50 per 1,000 tons instead of into a watercourse. The amount of effluent-related fees computed for land disposal and watercourse discharge were equivalent to the standards set during the first generation. For example, a 100,000 ton BOD load with a concentration of 5,000 mg/l standard of the first generation discharged into a watercourse would require the mill to pay M$ 5,000 (0.005 x 100,000 x M$ 10) effluent-related fees. If the mill were to dispose the effluents onto land the effluent-related fees were also M$ 5,000 (100,000 x M$ 0.05) regardless of the BOD concentration.

During the later generations of standards, however, effluent-related fees for watercourse discharge were substantially lower than those for land disposal. For example, a 100,000 tons of BOD load with a concentration of 100 mg/l standard of 1984 discharged into a watercourse would require the mill to pay effluent-related fees of M$ 100 (0.0001 x 100,000 x M$ 10) subject to a minimum of M$ 150 specified in the regulation, compared with M$ 5,000 (100,000 x M$ 0.05) for land disposal. Thus, the regulation appeared to create an incentive for watercourse discharge over land disposal for palm oil mill effluents.

High effluent-related fees and the waiver of fees for research on effluent disposal or treatment as provided for in the regulation expedited research, and resulted in remarkable breakthroughs in the treatment technology. Mills which succeeded in developing technologies to reduce BOD were rewarded by being charged lower effluent-related licence fees. The legislation empowers the director-general to waive partially or completely effluent-related fees payable if he/she "is satisfied that research on effluent disposal or treatment, of a kind or scale that is likely to benefit the cause of environmental protection, is being or (is) to be carried out at any prescribed premises..." In determining the extent of the waiver the authority considers the quantity and quality characteristics of effluent discharged, or to be discharged, that is involved in the research. Palm oil mills are required to report the total effluent discharge, its composition and the method of disposal every three months, in addition to the annual application for an operating licence.

(iv) Performance of the regulations

The performance of the regulations during the first year was somewhat disappointing. The Department of Environment had expected that the average daily discharge of BOD per crude palm oil mill would go down from 220 to 25 tons. Although the average daily discharge was reduced significantly, it was still 125 tons. Many mills chose to pay the excess fee.

The Department of Environment could have responded by increasing the basic and excess licence fees, since those fees where apparently too low to induce companies to comply with the BOD standard. Instead, from the second year onwards, the Department of Environment made the standards not only more stringent, but also mandatory. The Department was then in a position to cancel the licence of any mill that violated the BOD standard. Indeed, the Department of Environment itself to be tough in enforcement. During the second year, the average mill reduced its daily discharge of BOD to 60 tons.

The BOD load continued to decrease in succeeding years. The industry’s efforts to develop better treatment technologies were given another boost in 1980 when the government established PORIM. The industry’s ability to reduce its BOD discharge was also facilitated by the development of various commercial by-products made from POME (e.g., in feed mixes for pig and poultry, as fertilizer or biogas). 

Pollution control in the palm oil industry has been considered far from satisfactory in terms of compliance. The problems are attributed to improper management of treatment systems and the use of undersized systems while expanding milling capacity. In 1991, out of 112 mills monitored, 75 per cent were found to comply with the discharge standards for BOD of 100 mg/l (table 9). The implementation of the regulations to control pollution from the palm oil mills is encouraging, as those mills have been constructively receptive to the regulations and have progressed satisfactorily towards meeting the desirable target of 100 mg/l BOD.

The industry did incur additional costs as a result of the implementation of the regulation. Capital costs accounted for most of the costs associated with treatment systems. However, relative to the industry’s total production costs, treatment costs were low: only 0.2 per cent in 1983 (Chooi, 1984). As a result of the nature of the world market structure for fats and oils, it was not possible to shift the increased costs of production onto the consumers. Instead, two-thirds to three-fourths of the costs were shifted upstream and ultimately borne by oil palm growers, who had no outlet for palm oil fruits aside from sales to the palm oil mills (Khalid, 1991; Khalid and Braden 1993). The regulations caused prices of fresh fruit bunches (FFB) to be much lower than they would otherwise have been due to the oligopsonistic nature of the market. Thus, environmental protection did not necessarily impair the overall competitiveness of the industry in the open economy, and the industry continued to expand even when the regulations were more stringent.

(v) Enforcement of the regulation

During the initial years of enforcement of the regulation, the palm oil industry regarded effluent treatment as an additional cost of production. Compliance with the discharge standard of 5,000 mg/l BOD was not mandatory during the first year of implementation, both to allow sufficient lead time for the building and commissioning of treatment systems and for further development of relevant treatment technology. Many mills chose to pay the fees rather than treat their effluent to meet the standard. Of 130 mills, 46 per cent paid licence fees of more than M$ 10,000; 7 per cent paid more than M$ 100,000 and a total of M$ 3.5 million were collected (table 10). A 67.8 per cent reduction in BOD load discharged was recorded.

During the second year of enforcement it was mandatory for mills to reduce their BOD discharge to 2,000 mg/l and the licence fee was levied at the rate of M$ 10 per ton of BOD. None of the mills paid more than M$ 10,000 in effluent-related fees during the year and a percentage reduction of BOD load discharged was recorded at 84.7 per cent. A progressive reduction in the total BOD load discharged was recorded as more stringent BOD standards were implemented. In just two years of mandatory enforcement the total BOD load discharged had achieved a 94.2 per cent reduction despite increases in the number of crude palm oil mills from 131 to 147, and in the amount of crude palm oil output from 1.8 to 2.6 million tons (table 11). It appeared, then, that the motivation to comply with the standard was not the fee, but rather the risk of being shut down for violating the mandatory standard. The standard deserved most of the credit for the industry’s rapid reduction in the aggregate BOD load discharged.

The industry’s efforts to develop even better treatment technologies were given a boost with the establishment of PORIM. A survey conducted by PORIM and RRIM in 1980-1981 found that 90 per cent of the 40 mills surveyed were discharging POME with a BOD concentration below the fourth-generation standard (500 mg/l), and that 40 per cent were discharging POME with a BOD concentration below 100 mg/l. Those findings and other evidence of ongoing improvements in treatment technology led the Department of Environment to announce the fifth- and sixth-generation BOD standards that called for even lower BOD levels (table 8). In concession to the industry, the Department of Environment eliminated the standards on COD, total solids and organic nitrogen, which the survey revealed had proved difficult for the industry to meet. By the end of 1982, 80 per cent of the 185 palm oil mills were complying with the fifth-generation standard (250 mg/l).

(vi) Resource recovery

The industry's ability to reduce its BOD discharge has been facilitated not only by improvements in treatment technology, but also by the development of various commercial by-products made from POME (Khalid and Wan Mustaffa, 1992). As early as 1977, a Danish company saw a market opportunity and began marketing a process to mills for converting separator sludge into animal feed (E. V. Jorgenson Inc., 1977). By 1982, 10 large pig and poultry farms were using palm oil meal in their feed mixes. Mills that discharged POME on to land found that it had a fertilizing effect. That enabled many plantations to eliminate their purchases of fertilizers, which saved one company an estimated M$ 390,000 per year. In 1982, three mills with tank digesters were recovering methane, 60-70 per cent of the gases generated during anaerobic digestion, and using it to generate electricity for mill use. One analysis found that the payback period for the investment required to construct an integrated fertilizer/biogas recovery system was 3.1 years (Quah and others, 1982). In 1984, four mills found uses for all their POME and consequently had zero discharge (Maheswaran, 1984).

(vii) Distribution of compliance costs

With regard to the competitiveness effects of those regulations, a key question was who actually paid the compliance costs. Both crude and refined palm oil were being sold in an extremely competitive world market for oils and fats. That prevented the industry from passing the costs of treating POME onto the consumers in importing countries. Instead, crude palm oil mills lowered the prices that they paid farmers for FFBs. Thus, most of the costs are ultimately borne by palm oil growers, who have no other outlet for their FFBs. One study estimates that while the competitiveness effects on the refined palm oil and crude palm oil sectors were very small, the FFB growing sector (both smallholders and plantation owners) suffered significant losses in revenues (Khalid, 1991). Thus, while environmental protection did not impair the competitiveness of the exporting sector, it significantly changed the distribution of returns to trade, affecting in particular producers of primary inputs.

(viii) Research and development

Malaysia has been successful in overcoming the pollution problems related to the palm oil industry. The control of effluent discharge by the palm oil industry is important to the minimization of pollution. In that connection, research activities have centred on the treatment of POME. Consequently, POME, both raw and treated, as well as empty fruit bunches containing high plant nutrients are being recycled for use as a fertilizer; that has resulted in significant savings in fertilizer cost. For that purpose, a guideline for effluent application has been drawn up, including the use of heat and electricity generated from biogas as an energy source in several palm oil mills.

Research and development efforts on utilizing oil palm byproducts have proven successful. Intensive research on the full utilization of byproducts from the mills and plantations continue in line with the zero waste concept promulgated by the industry. Production of pulp and paper from oil palm fronds, the pulping of oil palm trunk, the production of blackboard from oil palm lumber, the utilization of oil palm empty fruit bunches in the production of roof tiles and the conversion of oil palm trunks into furniture have been shown to be feasible. Some of those processes are being commercialized through pilot plant studies and small-scale production evaluations with the help of private sector companies.

(ix) Lessons from Malaysia's palm oil pollution control experience

Malaysia’s Crude Palm Oil Regulations were similar to effluent charge systems implemented in other countries, with respect to those being linked to standards and motivated by objectives other than cost-effective pollution control. They are not equivalent to a pure effluent charge system. The closest they resembled a pure charge system was in the first year, when the BOD standard was not mandatory. After the first year, the motivation to comply with the standard was not the excess charge, but rather the risk of being shut down for violating the mandatory standard. It follows that the standard, not the excess charge, deserves most of the credit for the rapid reduction in the aggregate BOD load discharged.

Malaysia's experience with the regulation of the palm oil industry offers several lessons for pollution control efforts:

• Pollution reduction and industrial expansion can occur simultaneously. The fact that an industry is economically important is not grounds for being reluctant to address its pollution problems. One reason for success in merging environmental and industry objectives was the development of effective and relatively inexpensive technology. Industry was able to develop numerous byproducts from the effluent. Another reason was the industry’s ability to shift the costs associated with pollution control onto the suppliers of raw materials;
• Effluent charges were not responsible for most of the reduction in BOD discharge. During the first year of implementation, standards were not mandatory and firms chose to pay effluent charges. After the first year of implementation, the motivation to comply with the standard was not the effluent charge, but rather the risk of being shut down for violating the mandatory standard. The effluent charges were seen as a means of reinforcing a system of uniform standards;
• Effluent charges offer abatement cost savings compared with uniform standards, but the savings can be small (Khalid, 1994). The magnitude of potential savings depends on the degree of variation in the marginal abatement costs across pollution sources. The greater the variation, the greater the scope for efficiency gains through a reallocation of resources for abatement;
• The industry can be worse off under an effluent charge than a uniform standard. The sum of effluent charges and abatement costs under the former can exceed the abatement costs under the latter. From a social perspective, effluent charges are still better: the objective is not to minimize the industry’s costs, but to minimize the costs to society. The effluent charges can be interpreted as potential compensation to the victims of pollution. Even if such compensation is not directly paid out, the revenue from effluent charges benefits society if it is used to fund monitoring, enforcement and clean-up activities. The higher costs understandably make effluent charges less attractive to the industry;
• Effluent charges can result in local pollution problems. The simulation results indicate that some mills would discharge effluent with a BOD concentration well above historical standards if faced with only an effluent charge. Although it is possible to design a cost-effective system of "ambient charges", which vary across pollution sources and are linked to local ambient conditions, such a system is information-intensive and difficult to administer. In addition, it is in essence not much different from a system of firm-specific effluent standards, which offers an environmental agency greater certainty about pollution abatement;
• Malaysia’s experience with environmental regulation in the crude palm oil industry offers no lessons about the determination of optimal pollution levels. The effluent charges and standards were not chosen by comparing marginal abatement costs and marginal abatement benefits. Information on the value of environmental benefits is limited in Malaysia.

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