Problem overview:

     In pursuing its objective to attain a developed country status, Malaysia embarked on rapid industralisation programmes. However, with industrialisation came the problem of pollution. In this regard, the effluent discharges from palm oil industry contributed to the pollution problem. To ensure that industrialisation process does not progress at the expense of the environment, Malaysia has put in place a fee structure to control the level of the palm oil industries effluent discharge and to enhance the development of environmentally sound technology in the disposal of the effluents discharge of the industry.

     Awareness and visions: The Environmental Quality Act, 1974 is the principal regulation in Malaysia to prevent, abate, and control pollution. Malaysia is aware from the onset that the command and control mechanism alone is insufficient to address pollution problem in the country. Hence, the Act incorporate provisions containing punitive as well as economic measures for the control of effluents discharge into the environment.

     Policies and Measures: The 3rd Malaysia Plan (1976-1980) within the chapter on development and environment has laid down the machinery for pollution control in order to achieve the environmental objectives. In the 6th Malaysia Plan, it was envisaged that the Department of Environment would examine the use of licenses, fines and charges for the control of effluent disposal.

     The policies and measures as laid down in he 3rd Malaysia Plan, continue to be reflected in the recent Malaysia Development Plan. One of the policy thrusts in the 8th Malaysia Plan (2001-2005) is to promote the use of market-based instruments and self-regulatory measures among industries.

Background in summary:

     Growth of palm oil industry: In the early 1970s, Malaysia's economic development was based on the agricultural sector. Large areas of forest were converted into oil palm estates. By end 1980s, the oil palm estate covered one third of the country's cultivated area. As a result of expansion in oil palm based industry, during 1975-1985, crude palm oil production rose from 1.3 million tones to 4.1 million tones making it the country second largest earner of foreign exchange by 1984.

     The effects of effluent discharge: With the growth of agro based industriesthe oil palm related industries become a major pollution problem for their By 1970s, 42 rivers in Malaysia were severely aerobically polluted by untreated effluents. Consequently, this situation led to significant impacts on coastal areas and coastal resources, which in turn affected the socio-economy of the local communities.

     The implemented measures: The government's efforts to alleviate poverty and at the same time to protect river systems for various beneficial uses saw the following measures being implemented towards the second half of the decade of 1970s:

1. License Fee: A licensing system was introduced to control the pollution load into rivers and onto land. Due to the lack of a proven technology for the treatment of effluents from agro-based industries, a progressive reduction programme was allowed under the regulation. Under this regulation, a license is necessary before effluents can be dumped into the water or land. The license to discharge effluents was given based on:
   
   
   1. Class of premises
      
      
   2. Location of premise
      
      
   3. Quality of waste discharged
      
      
   4. Pollutants or class of pollutants discharged
      
      
   5. The existing level of pollution
      
      
2. Phasing in the Standards: In order to give time to the industry to use technology to dispose off their effluents, a mechanism in the progressive phasing in the standards were adopted. The standards set by government have become increasingly stringent overtime.
   
   
3. Effluent-Related Fee: In this implementation, the "polluter pays principle" was adopted in the fee structure. The amount of effluent-related fee payable to the Government was linked to the BOD load of the effluent discharged either onto land, watercourse or both. The amount of fee collected dropped sharply in the first year and continuously dropped overtime. The amount collected dropped despite the increase in the number of oil palm mills operating in the country.
   
   
4. Research and Development: The government provided a provision in the regulations authorizing it to grant a partial or full waiver of effluent-related license fees to industries conducting research on effluent treatment as an incentive for the industries to use new technology in their effluents disposal.
   
   

     The result between 1979 and 1994: Between 1979 and 1994, the palm oil and rubber industries' contribution to organic pollution load into the rivers was reduced significantly by about 91 per cent although the total number of mills increased by 26 per cent during that period. Today, the Department Of Environment's monitoring results indicate that in terms of BOD, only 13 per cent of the 936 stations monitored at 116 river systems are categorised as 'very polluted' because of organic load from agro-based and other manufacturing industries. In comparison, 37 per cent are categorised as 'very polluted' due to organic loading from sewage and animal husbandry.

     Assessment of effluent fee instrument: The imposition of the effluents fee has in general reduced the discharge of effluents from the palm oil industry into the water system due to factors as follows:

1. progressive phasing out of standards has allowed the industries to adapt to the more stringent standards;
   
   
2. the reduction of effluence fees over time due to the more stringent standards has allowed the industries to invest into more technology improved treatment facility;
   
   
3. despite the increase in the number of Crude Palm Oil Mills, the level of pollution in the river system remain low;
   
   
4. the tremendous reduction in the amount of fees collected indicates compliance on the part of the industry;
   
   
5. the manner the effluence fee was structured serve as an incentive for the industry to improve their technological capability to reduce pollution arising from their production activities.
   
   

Peer Review Committee Good practice rating: (1 for the best, 5 for the lowest score)
Sustainability		Efficiency
3	Improvement in either the environment of economic condition with no harm to the other.	2	Cost efficient.
2	Sustainable over time (not one-off)	Process
Adaptability		3	Participation of the community
2	Location adaptability (can the project be done in other places?)	1	Participation of resource owners/users
2	Socio-cultural adaptability.	2	Partnerships between various actors (Governments, NGO, Academia, Private)
3	Level of development adaptability.	2	Degree of coordination and cooperation between government departments.
3	Style of government adaptability.	2	Ability to attract political interest/support
2	Degree of decentralization adaptability.	-	Procedures for feedback and review.
Comments on this example:      Policies and measure: One of the most important processes of effluent discharge fee system is how to determine the fee rate at what level of discharge. On one hand, the rate may have to be high enough to provide the industries with incentive to reduce pollution or invest on new technologies rather than to pay the penalty for non- compliance, while excessively high charges may adversely affect the competitiveness of the industries. On the other, there are uncertainties and difficulties in setting 'optimal standard' of pollution. Furthermore, social and environmental cost of pollution may not be fully reflected in the cost of pollution abatement (pollution charges).      This is a good example of implementing the combination of command & control and market based instrument. The firms are required to obtain a license in order to be allowed to dump effluents into the watercourse or land and authorities can use it as a threat (to cancel the license) in case of excessive violation of regulations by the firms (command and control component), while standard effluent charges are levied according to the BOD load discharged (market based component).      The scheme provides incentive for firms to reduce discharge as they are charged according to the BOD load discharged, it may also be also necessary to set a maximum level of pollution discharge beyond which any level of pollution is not allowed regardless of the payment. Sustainability of the project:   Adaptability of the project to other situations:      Style of government adaptability: In this particular example, change of the standard was within the framework of the law adopted regarding this scheme, thus each change of the level of standard did not have to go through the cabinet approval, while in many countries it is the often the obstacle. Process of decision making and implementation:      Monitoring system and enforcement of law are the factors of success of implementing effluent fee system. In this example, when the charge is based on the concentration rather than the total load of emission, the incentive to hide the discharge tends to occur. Cost efficiency:      The administrative cost of monitoring under this scheme may be relatively lower than other schemes in a sense that (i) monitoring the registration of license is easy, (ii) random sampling can be conducted at any time and provide sufficient warning for firms, and (iii) the monitoring may become gradually easy as the implementation of the scheme progresses. Nevertheless, experience in Malaysia shows that monitoring cost gradually increased as the number of firms increased.