II. MECHANISMS FOR INTEGRATING ENVIRONMENTAL CONSIDERATIONS INTO SECTOR POLICIES AND FOR MONITORING ENFORCEMENT

[ A | B | C | D ]

C. Mechanisms to reflect the impact of trade problems on environmental policy

It is now widely accepted that economy-wide policies (i.e., macroeconomic and sectoral) have a significant influence on the rate of environmental degradation. Fiscal and monetary policies, the structural adjustment programme, and the stabilization measures have all had impacts on the natural resource base and the quality of the environmental capital stock. Unfortunately, the interactions between the economy and the environment are complex and difficult to understand. Since 1990, as a result of the Bougainville crisis and poor agricultural commodity prices, Papua New Guinea has sustained substantial budget and trade deficits. Consequently, it has been compelled to finance those deficits by increasing external (and internal) borrowing and introducing stabilization measures. Unfortunately, those measures have had unforeseen environmental impacts. In addition, the dire economic circumstances forced the government to accelerate certain mineral projects in order to ameliorate the cash flow situation. Such actions have had adverse environmental implications in the sense that stringent environmental requirements for some of the projects may have been overlooked.

Although macroeconomic, structural adjustment and stabilization policies have impacts on resource use and the environment, it is often difficult to generalize about the direction of the impacts. Some impacts can be negative and others positive. For example, the devaluation of the kina increased Papua New Guineas international competitiveness which has resulted in increases in the production of tradable goods such as minerals and agricultural and forest products. In the case of agricultural products, the environmental impact depends on the degree to which the crop produced is environmentally benign (e.g., tea, cocoa and rubber) or environmentally damaging (e.g., tobacco or sugar cane). The environmental impacts also depend on whether new land is brought under cultivation, in which case deforestation occurs, or existing land is utilized more efficiently.

In a recent review of the links between economic growth, trade policy and the environment, Lopez (1991) argued that in cases where exploitation of a natural resource depended critically on available stock (e.g., agriculture or forestry), the output would be affected by factors such as property rights. Thus, for example, if the trade policy of a government increases the value of output of timber, the degree of ownership will influence how production and resource stocks are managed. The outcomes might range from more investment in, and maintenance of, the asset to a more rapid depletion of the resource. The former would be the result in cases where the environmental costs are internalized by the landowners, while the latter would be the result if the users had no stake in the resource.

Capistrano and Kiker (1990) argued that increasing international competitiveness in the forest sector also increased the opportunity cost of keeping timber unharvested. Such a situation could lead to increased logging, which would eventually result in deforestation in the absence of a replanting programme. In another empirical study, Kahn and McDonald (1991) suggested that there was a correlation between debt and deforestation. They argued that debt burdens caused myopic behaviour which resulted in the over-depletion of forest resources. Such over-depletion is brought about by deforestation rates that may not be optimal in the long term, but are necessary to meet the short-term economic needs.

It is only in recent times that studies have begun to quantify the impacts of macroeconomic policies on the environment. For example, Hyde and others (1991) cited studies in Brazil and the Philippines which showed how economic policy spillovers constituted a significant cause of deforestation. Agricultural subsidies in Brazil have been estimated to have contributed to half of the destruction that has occurred in the Amazon rain forest (Maher, 1988; and Binswanger, 1989). A recent analysis, using an economy-wide model of the Philippines, suggested that the foreign exchange rate policy, although motivated by general balance of payments concerns, has had a major influence on the rate of logging (Boyd and others, 1990).

In recent years, the World Bank and IMF have been criticized for designing structural adjustment lending programmes that ignore the environmental implications. In the early to mid-1980s, environmental aspects were, relatively speaking, neglected in the adjustment lending operations of the World Bank. Typically, there were no explicit loan components or conditionalities that were "environmental". Sebastian and Alicbusan (1989) undertook an assessment of the environmental relevance of structural adjustment programmes and examined how those programmes may have affected the environmental factors. The specific reforms they looked at included: (a) relative price changes in agricultural outputs, inputs, energy, export taxes etc.; (b) trade and industry policy reform; (c) changes in public expenditure programmes; and (d) institutional reforms by sector. The study concluded that there were potential complementarities between the adjustment reform components and the environmental objectives. For example, they found that trade liberalization was environmentally beneficial, and that increased agricultural export prices would lead to higher land values and, therefore, more investment in the land.

Various academic institutions and NGOs have also conducted studies on the environmental impacts of structural adjustment programmes. The World Wildlife Fund commissioned a case study in three countries: C^ te dIvoire, Mexico and Thailand (Reed, 1992). In the C^ te dIvoire study, no direct linkages were found between macroeconomic policies and the environment. It was found that institutional factors, and market and policy failure at the sector level, had a greater impact on the environment than did the macroeconomic policy. Similar results were found during the Mexican study. However, in Thailand, it was found that an increase in total output in the economy led to a decline in environmental quality. In that particular case, the trade-off between economic growth and environmental quality was neither economically efficient nor environmentally sustainable.

The World Resources Institute conducted a study on the environmental impacts of structural adjustment and stabilization programmes in the Philippines (Cruz and Repetto, 1992). The study found that structural adjustment policies had not adequately addressed the issue of environmental impacts of macroeconomic policies. Consequently, those policies led to increased emissions, pollution, congestion and increased pressure on open-access resources, all of which had resulted in the over-exploitation of non-renewable resources. The authors proposed policies that could limit environmental damage while at the same time pursuing economic objectives such as fiscal balance, poverty alleviation and economic efficiency.

At present, there are no established mechanisms within the Papua New Guinea government agencies (e.g., the Department of Finance and Planning, the Department of Environment and Conservation and the Department of Mining and Petroleum) by which planners can assess the impact of trade problems on environmental policy or vice versa. It is very important for policy makers to know the likely impacts of a specific policy or group of policies on a range of environmental issues. Examples of such policies could include the effects of currency devaluation, price liberalization or the removal of government subsidies. The government agencies lack the skilled manpower (that is, environmental economists) to develop models or mechanisms for incorporating environmental and social concerns into the decision-making process. At the sectoral level, potential mineral developers are required under EPA to submit EIAs as part of the approval process. However, the type of information currently required for EIAs is not sufficient for planners to properly assess the social costs and benefits of a proposed development. Ideally, EIAs should incorporate environmental costs. When environmental costs are included, an otherwise viable project can turn out to be financially unfeasible, which will compel the decision makers to think seriously about the trade-offs involved.

The use of environmental economic techniques can allow planners to trace the impact of projects at the various levels; that is, project, sectoral, macroeconomic and international. At the project level, valuation problems are likely to be encountered since some inputs and outputs are not correctly priced by the market. A good example of such outputs are externalities; that is, effects (often harmful) that are imposed on others but whose costs are not borne by the developer. The value of an externality cannot be easily measured in physical and monetary terms. However, recent developments in environmental economics enable such effects to be valued. One example is to use the shadow price or economic opportunity cost. Where the use of such direct methods is not possible, indirect approaches may be used to derive implicit values.

Examples of indirect approaches to valuation include: (a) the contingent valuation method (CVM); (b) contingent ranking and choice modelling; (c) the travel cost method; (d) the hedonic price method; (e) benefit transfer method; (f) defensive expenditures; and (g) cost savings approach. CVM, which is the most popular and straightforward non-market valuation method, is briefly discussed below.

Since non-market goods are not traded, CVM uses hypothetical scenarios in a survey setting to simulate a market for those goods. Individuals are then asked how much they would be willing to pay (WTP) for an environmental asset or how much they are willing to accept in compensation for its loss (WTA).

Assuming perfect markets, WTP or WTA reflects an individual's valuation of the benefits of the goods or service. When summed over the population, society's valuation of  the  benefits of the goods or service is obtained. Theoretically, that is a better method of obtaining an estimate of the economic benefits as it is assumed that people will take into account important factors, such as their income and expenditures, the potential effects of ill-health etc., on when reporting their WTP or WTA. Although CVM is subject to a number of potential biases, because of its hypothetical nature, it has been shown that careful questionnaire design and well-planned survey techniques can minimize most of those biases.

Under the current Papua New Guinean environmental regulations, there is a provision for mineral developers to compensate landowners and settlers for any adverse impacts resulting from mining operations. However, the basis for making the compensatory payments is not completely clear. Following the Exxon Valdez oil spill, the United States Congress passed a law in 1990 which, inter alia, makes provision for damage recovery. An expert panel was nominated to write the regulations for the damage assessment. In its review of CVM as a tool for measuring environmental values, the panel concluded that "....CVM studies can produce estimates reliable enough to be the starting point of a judicial process of damage assessment, including lost passive use values".

Top