IMPACT ASSESSMENT OF AIR POLLUTION CHARGES ON COMPANIES IN THE CZECH REPUBLIC

IMPACT ASSESSMENT OF AIR POLLUTION CHARGES ON
COMPANIES IN THE CZECH REPUBLIC
Abstract:
Air pollution charges have recently been introduced in the Czech Republic with the aim to keep
emissions within the EU regulatory limits. Charges are constructed as a fixed fee per emission
unit. The paper evaluates economic effectiveness of environmental charges highlighting the
impact of administrative burdens and contribution to environmental efficiency. The subsequent
quantitative analysis shows that air pollution charges are in comparison with other taxes and
charges less effective. Administrative costs have been calculated at 100 - 140% of an overall
collection for medium-sized stationary polluting sources and at 2.5 - 3% for large and extra-large
stationary sources. The assessment of environmental efficiency indicates that charges do not
meet their objectives as they have little impact on behaviour and actions of companies.
INTRODUCTION
Nowadays it is already close to impossible to find an economic sphere that would not be either
directly or indirectly influenced by state interventions. The existence of any type of state
intervention, however, should be justifiable from the perspective of its necessity for pursuing a
specific governmental policy goal. This in turn requires a consistent system of setting
governmental goals and a regular ex ante and ex post evaluation of their meeting. One of rather
complex tools that aim at reaching this objective is a regular evaluation of governmental
regulatory impacts (regulatory impact assessment). Another option is an ad hoc analysis of
individual governmental measures' impacts.
One of the areas where relatively heavy state interventions take place is also that of environment.
There we may encounter two types of interventions. The first one could be labelled as
administrative - these are interventions with a character of restrictions and directives. The second
type of interventions is labelled as market interventions and it includes taxes, charges and public
expenditure programmes.
The following text focuses on an impact analysis of one of a number of charges towards
environmental protection - charges from medium-sized air polluting sources. Rationality or
effectiveness of this tool is analysed with the assistance of an advanced methodological OECD
(1997) framework. This framework is in its essence based on the 3E methodology and it analyses
individual governmental interventions via selected criteria.

Within the presented paper, air pollution charges are analysed from the perspective of their (i)
efficiency, (ii) economy and (iii) effectiveness. In the first case it is carried assessment whether
charges contribute towards behavioural changes of economic subjects in a desirable direction, i.e.
whether they motivate or force companies that pollute air to invest into new and environmentally
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friendly technologies. In the case of economy there are studied collection costs of these charges.
At the same time into account is also taken the fact that secondary aim of the charges' existence
is to generate public revenues that may subsequently be used for public expenditure programmes,
e.g. for environmental protection. Finally, in the third case is followed a relationship between
contributions from the implementation of the examined tool and the costs of its administration.
CHARGES FROM MEDIUM-SIZED SOURCES OF AIR POLLUTION AND THEIR
ENVIRONMENTAL EFFICIENCY
The general framework of the Czech system of charges is in the domain of air pollution set by
the Act No. 86/2002 Coll. "On Air Protection" that splits polluting sources on stationary and
mobile ones. From a perspective of the pursued topic, relevant are sources of a stationary nature
defined as facilities of combustion or other technological processes that pollute or may pollute
air.
Stationary sources are divided according to their size or nominal heat output, respectively, into:
* small (nominal heat output less than 0.2 MW),
* medium (nominal heat output from 0.2 MW to 5 MW inclusive),
* large (nominal heat output from 5 MW to 50 MW), and
* extra- large (nominal heat output over 50 MW).
Inclusion of a given source into a corresponding category is done by a ratepayer with an
opportunity, in case of uncertainty, to turn to the Czech Environmental Inspectorate. The
category size influences both the charge rate and the relevant organization that administers the
charge.
Administrative demandingness of the system of charges is negatively influenced by dilution of
the charges' administration. With the exception of charges from small polluting sources,

individual activities - i.e. assessment, collection and enforcement - were separated. More detailed
information is provided in the following table.
The aim of the system of air pollution charges is to motivate economic subjects towards
reductions in emissions via use of a price mechanism.3 In case of its application it is according
Jílková et al. (2006) possible to exert two types of instruments:
1. solution via price determination (in the form of tools associated with public budgets' revenues)
where price (in the form of a payment size) is a arbitrarily determined and volume (quality of
environment) is a result of a market operation,
2. solution based on quantity determination, i.e. sale of a predetermined volume of burden
(pollution); volume (defined environmental standard) represents fixed parameter and price is
generated by a market (sale of rights to pollute, permits or credits).
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Microeconomic aspects of price instruments' operation within environmental protection are
shown in Figure 1. MNZ1 and MNZ2 represent marginal costs of a reduction
of pollution (prevention costs). With a gradual reduction ofpollution the prevention costs
increase, i.e. costs associated with a reduction by each additional ton of emissions are higher than
the costs of a reduction of the previous ton of emissions. For each firm there is usually typical a
different curve of prevention costs. In Figure 1 the highest costs are carried by the firm 1. Each
polluting subject has two possibilities: to reduce pollution or to pay a charge (it will
reduce pollution until marginal prevention costs are balanced with the charge's size). For the
pollutant 2 it is therefore worthwhile to reduce larger quantity of emissions.
Price mechanism thus works as a certain sieve under which the highest reduction of pollution is
undertaken by those firms which have the lowest associated prevention costs.
In real politics, individual tools of the price type operate in a distinct regulatory framework.
However, the basic element of the ir operatio n from the pollutants' perspective is identical - for a
unit of pollution (e.g. 1 ton of emissions of a given harmful substance) the pollutant has to pay a
certain monetary amount.
Already since their introduction (i.e. since the beginning of 1990s), air pollution charges have

been in the Czech Republic combined with emissions limits. These were to a considerable extent
dominating since they obliged pollutants to reduce emissions substantially more compared to the
value of the rates of charges. The above mentioned issue is demonstrated by the following figure.
The curve MNZ represents the shape of prevention costs. Air pollution charges were set at the
level Pe per ton. In case there would be left a room for price mechanisms, emissions would be
reduced to the level E2 . However, in case of the Czech Republic there were along charges
implemented also emission limits. Their setup has been very strict and led to a situation where
firms were forced to carry out a substantially larger reduction down to the level of E2 . In praxis,
however, this means that the existence of charges does not have any impact on decision-making
of firms and merely burdens them with by levies towards public budgets in the amount of Pe?E1.
From the above it therefore unequivocally follows that environmental efficiency of
air pollution charges depends on:
1. size of prevention costs, and
2. setup of emission limits.
The problem of an appropriate setup of air pollution charges has already been discussed at the
time of their introducing. Unfortunately, at that time there were not available any relevant
estimates of prevention costs. In expert literature from the beginning of 1990s there are available
only infrequent publications that contain specific information on effects and impacts of
air pollution charges (Cerná, Ritchelová and Tosovská, 1991; Spacek, 1991; Hruska and
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Dokoupil, 1991). Presently it is basically impossible to identify any publication in its original
version that would present an analysis of marginal prevention costs for the Czech Republic. For
externalities related to transportation are carried by CO?P UK estimations of external costs for
the Ministry of Transportation. Nevertheless, the concrete results will be available only in 2010.
Quality analysis of an operation of air pollution charges and their impacts has been compiled in
the mid 1990s by Stepánek (1997). Further works, however, did not follow (neither were
initiated within the programme of science and research of the Ministry of Environment) and the
cited study remains a sole summary analysis of the sphere of the charges' operation. In its critical

assessment, Stepánek (1997) arrives at following conclusions with respect to the existing system
of air protection (i.e. the situation in the mid 1990s):
* the system does not optimise costs of emissions' reductions carried by individual pollutants,
* it is not sufficiently effective,
* it does not create essential prerequisites towards pollutants' access to necessary financial
resources at acceptable terms,
* in certain cases it leads to inefficient outlays of pollutants' financial resources,
* it does not motivate pollutants towards most effective solutions,
* within the international context it discriminates Czech pollutants - producers,
* the existing system of charges until 1998 favours polluting against cleaning.
For supplementary information it is possible to cite informal text of one of the leading Czech
environmental economists, Kovár (1998): "during preparatory works has been calculated a
motivationally effective rate of airpollution charges, but very soon it had been evaluated as
politically totally inacceptable. The finally accepted rate was approximately 40times lower than
original results of a model analysis."
Towards similar results arrives also Kostoval (1995) who as a proof of his claim of
environmental ineffectiveness of charges from medium-sized polluting sources brings forward
the following three examples.
The first one is a municipal heating plant that combusts brown coal and has a total output of 350
MW. In 1995 it paid an average annual charge of CZK 4 million. Such figure may initially
appear to be relatively high, but only until the moment when calculations show that investment
costs of desulphurisation including related enforced investments reach CZK 1 billion. Annual
operating costs of desulphurisation thus amount to CZK 60.4 mil. of which depreciation
represents CZK 26.5 million. Comparing these costs with the annual charge of CZK 4 million in
turn clearly shows that such rates of charges have almost zero stimulating effect on a rationally
behaving economic subject to undertake such investments.
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Another example on which it is possible to illustrate a disproportion between charges and

prevention costs is that of a glass smelter with three smelting aggregates. Costs of installing an
electrostatic filter including continuous measurement of emissions required in 1995 investment
costs of CZK 40 million and annual operating costs of almost CZK 4 million. In case the firm
would undertake these investments, it would secure a reduction in charges from mediumsized pollution sources by CZK 30 thousand.
The last example, on which it is possible to demonstrate impossibility of the current charges to
influence behaviour of pollutants, is the case of a waste incinerator. In mid 1990s an average
incinerator with an annual output of 1,000 tons of waste paid a charge of CZK 10,000. However,
annual costs associated with monitoring of emissions alone reached on average CZK 60,000
(with a one-off investment cost of CZK 1 million) and a prospective equipment with effective
technology of flue- gasses' purification required additional CZK 20 million of investments and
CZK 4 million of additional annual costs. After all this, the ratepayer saves on charges mere
CZK 9,000.
Most of these conclusions remain valid also for the present situation and the problematic state is
possible to demonstrate on the comparison of rates of the charges with prevention costs. The size
of prevention costs has been estimated on the basis of costs that were incurred within subsidy air
protection programmes administered by the State Environmental Fund (SF?P) in 2001 - 2006.
Within following calculations has been assumed life expectancy of investments in technologies
reducing volume of released emissions of 20 years.
The following graph depicts the value of prevention costs for the levels of annual emission
volume between 740 and 820 thousand tons.4 In line with the theoretical assumption, reduction
of emissions ' volume is associated with an increase of prevention costs. While at the level of 820
thousand tons the cost of a one ton reduction ranges around CZK 3 thousand, at the level of 740
thousand tons it is almost CZK 13 thousand.
Also shown in the graph is an average charge's rate per ton of emissions. From the standpoint of
environmental effectiveness is important the fact that the curve of charges' rate does not intersect
at all with the curve of prevention costs. In praxis this means that in the examined period (2001 2006) the charges on average did not influence behaviour of economic subjects at all. In other
words, their environmental effectiveness was zero.
The problem of zero environmental effectiveness may also be demonstrated on an estimated
investment's payback period. In the case of firms, investments to environmentally friendly
technologies are associated with a reduction of burden from charges. The indicator of

investment's payback period shows over what period of time will the cumulative value of savings
from unpaid charges reach the investment's value.5
5


From the presented data is clearly evident a sharp increase in the payback period. While in 2001
the investment had paid itself back from charges' savings in 34 years, in 2006 this period has
increased to 221 years. At the same time it is necessary remind that the period of economic
lifespan (depreciation period) of these investments ranges around 20 years. Stimulating effects
thus cannot be talked about neither in 2006, but nor in 2001 as well. Increase in environmental
effectiveness of charges that would safeguard their environmental effectiveness would in 2001
imply their doubling and five years later (i.e. in 2006) even their boosting 11times.
From what has been demonstrated above we may subsequently unambiguously summarize that
dysfunctional motivating impact of charges arises mainly from the concurrence of normative
tools (emission limits) and charges. If we expect from the charges stimulation of a cost effective
achievement of the priorities in the sphere of air protection, improvement in functioning of the
system of charges does not rest in a simple charge rates' increase, but rather in the elimination of
concurring effects within the tool-mix.
Rigidity of the existing system of air protection tools may be also documented on a development
of emissions of major polluting substances and a development of revenue from the associated
charges. Efforts to reduce emissions of major polluting substances have not been noticeably
successful over the recent years.6 Established normative tools and charges in principle secure
stabilisation of the overall emissions of main polluting substances but they do not motivate
polluters to further reduce emissions.
From the examples mentioned above it unequivocally follows that the charges alone neither
influenced behaviour of economic subjects in 1995 nor are they able to influence it at present.
The reason rests primarily in the fact that unlike the value of charges which have not been
increased (average levy from medium sources is CZK 1,000), prevention costs have substantially
increased, by the rate of inflation at the very minimum. The second reason is a concurrence of
charging tools with emission limits that were relatively strict and have been the reason behind a

significant reduction of emissions at the turn of the century. A secondary effect of this process,
however, has been also a decrease in revenue from charges from medium-sized sources
of pollution.
AIR POLLUTION CHARGES AND EFFECTIVENESS OF THEIR COLLECTION
The methodology chosen for a measurement of the size of administrative costs of selected
environmental charges is that of a so-called recalculated worker. This methodology has already
been successfully applied for the purposes of quantification of administrative demandingness of
the Czech tax system (see Pudil et al., 2004). The advantage of using this method rests in its
simplicity and a subsequent possibility to compare results with the data measured for other

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taxes/charges. At the root of the method of a recalculated worker is a split up of employees of a
studied institution on the basis of their relationship towards the charges' agenda into:
* related with charges,
* unrelated with charges, and
* impossible to determine.
The third class relates to so-called overhead workers that cannot be directly linked to any of the
agendas. These are for example cleaning staff, IT administrators, etc.
On the basis of the above defined procedure it is in turn possible to calculate a coefficient which
quantifies how many percents of an activity of the given organisation represents the agenda
associated with charges towards environmental protection. By this coefficient is in the next step
multiplied the size of annual expenditures of the given organisatio n and determined absolute
value of administrative costs. After its dividing by the revenue from charges it is possible to
arrive at the value of relative administrative costs. More detailed discussion on this methodology
is given in Jílková et al. (2006), who has used it for a measurement of administrative costs
associated with several types of charges towards environmental protection.
The following table summarises the results of measurements of the costs from medium-sized
sources of pollution and from la rge and extra- large sources of air pollution in 2003 - 2005.

From the presented data it becomes clear that in case of medium- sized sources the value of
administrative costs considerably exceeds the revenue generated by the associated charges. In
2005 relative administrative costs attacked the level of 150%. The situation is significantly better
in case of large and extra-large sources where the value of relative administrative costs ranges
around 2.6% of revenues. When compared to the average of the overall Czech tax system, this
according results of Pudil et al (2004) represents approximately the double of administrative
demandingness.
EFFECTIVENESS OF AIR POLLUTION CHARGES
The third criterion of assessment of the system of air pollution charges represents its
effectiveness. From the viewpoint of the evaluation framework's logic this relates to a
relationship between benefits from the use of a given tool and its costs. In case of the examined
charges this translates into expressing the costliness (from the perspective of administrative
costs) of emissions' reduction by a unit.
In case of charges towards air protection, however, it is not possible to express the ratio between
benefits and costs. The reason is their zero environmental efficiency that leads to zero benefits
from their implementation. Based on the above, it is therefore possible to conclude that
effectiveness of charges towards air protection is also zero.

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IMPACT OF AN INSTITUTIONAL SETUP ON SYSTEM SETUP RATIONALITY AND
CONCLUSIONS
Analysis of air pollution charges points not only towards their absolute inefficiency in a sense of
influencing behaviour of economic subjects towards reduction of polluting, but also at the
wastefulness of their very existence. Management of the charges is for the public sector
unambiguously inefficient. From the perspective of economic efficiency it would be rational to
abolish charges at least from medium-sized pollution sources since this would not have any
negative impacts on behaviour of economic subjects and the public sector wo uld save CZK 5
million. In addition, the burden of private subjects would also decrease along with a cut down of

induced costs that are inseparably associated with charges (for more details on their size see
Jílková et al., 2006).
Even though the logic of economic efficiency unequivocally recommends abolishing of this
charging title, in the praxis this does not happen. The reason is fragmentation of the budgetary
framework, respectively separation of the subjects that administer the charges from recipients of
the charges' revenue.
Costs associated with assessment and collection of the charges are carried by financial, regional
and municipal offices, i.e. organisations financed from the chapters of the state budget and
municipal budgets. On the other hand, revenues represent an income of the State Environmental
Fund. In case these charges are cancelled, the Fund would lose on revenues approximately CZK
450 million while savings on costs would be cashed by another part of the public administration.
Despite the fact that revenue generated by this charge is from the perspective of overall public
revenues entirely negligible and even in case of the Fund it does not reach even 16% of SF?P's
revenues, support for a change towards cancelation of this charge cannot be found. This position
is from the side of respective institutions rational since their position (a sort of free-riding black
passenger - they carry only benefits, not costs) directly forces them toward such an attitude.
The situation around charges towards air protection represents an interesting case study which
unequivocally points at negative impacts of fragmentation of a budgetary framework into
different extra-budgetary funds and other institutions. As a consequence, there increases a
number of interest groups that in turn do not judge rationality of individual governmental
interventions by a global view on the total efficiency, but only from the standpoint of their
organisations, respectively their partial interests. That way the probability of prolonging the
existence of an inefficient element in the system increases and leads to deformations in the
economic system, incorrect calculations and consequently to the waste of scarce resources. The
state thus does not contribute towards elimination of market failures, but quite the opposite - it

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creates new, this time governmental failures. Secondary impacts are represented by unnecessary

increases in administrative and charge-related burden of private subjects.
It is therefore possible to conclude that the carried analysis of environmental efficiency and fiscal
effectiveness of charges towards air protection imply:
* their environmental efficiency is zero; the main reason is a concurrence of impacts of emission
limits and charges and their low rate,
* this problematic environmental (in)efficiency cannot be solved simply by a mere increase in
the rate of charges since such move would not remove the nature of the problem,
* administrative costs of charges from medium-sized sources are very high and therefore it is
compromised also their fiscal function,
* from the perspective of environmental department there exists a certain reason for an existence
of air pollutioncharges because of their fiscal function owing to the dedication of their revenue as
an income of the State Environmental Fund; on the other hand this fragmentation of public
finances leads towards generally inefficient behaviour of individual subjects.
Footnote
1 This contribution originated within a research supported by the grant of MSMT 2D06029 ?
Analysis of Distribution and Social Impacts of Sector Politics" .
Footnote
2 Since 1 January 2007 this agenda has been delegated on customs offices.
3 Among key studies that theoretically deal with the issue of so-called market air protection
instruments rank Pigou (1932) and Oates and Strassmann (1984).
Footnote
4 Cumulative sum of weights of released solid polluting substances, sulphur dioxide, nitrogen
oxides, volatile organic substances and carbon monoxide per calendar year from all stationary
polluting sources within the region of the Czech Republic.
5 The chosen indicator, however, does not take into account the time value of money.
Footnote
6 The likely reason is enter of new operating capacities in the context of accelerating economic
growth.
References
REFERENCES

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Cerná, A., Ritschelová, I., Tosovská, E. (1991), Dopad emisních poplatku na ekonomiku
podniku, Výzkumný a vývojový ústav stavební, st. pod., Praha.
Hruska, J., Dokoupil, V. (1991), Platby ze zdroju paliv ve vztahu k ekonomické reforme v CSFR,
VÚPEK, Praha.
Jílková, J. (2003), Dane, dotace a obchodovatelná povolení jako nástroje ochrany ovzdusí a
klimatu. IREAS, Praha.
Jílková, J., Pavel, J., Vítek, L., Slavík, J. (2006), Poplatky k ochrane Zivotního prostredí a jejich
efektivnost, Eurolex Bohemia, Praha.
Kostoval, V. (1995), Zhodnocení agendy poplatku za znecistování ovzdusí, Ceské Budejovice.
Oates, W. E., Strassmann, D. L. (1984), Effluent Fees and Market Structure, Journal of Public
Economics, Volume 24, Issue 1, June 1984, Pages 29-46.
OECD (2003), Good Practices of Public Environmental Expenditure Management in Transition
Economies , OECD, Paris.
OECD (1997), Evaluating the Efficiency and Effectiveness of Economic Instruments in
Environmental Policy , OECD, Paris.
OECD (1994), Economic Instruments in Environmental Policy: Lessons from OECD Experience
and their relevance to Developing Economies, OECD, Paris.
Pavel, J., Vítek, L. (2007), Administrative Costs of the Czech System of Environmental Charges,
In: The Eighth Global Conference on Environmental Taxation. GBS, Munich.
Pigou, A. C. (1932), The Economics of Welfare, Macmillan and Co, London.
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Praha.
Statistické rocenky Zivotního prostredí z let 2003-2005.
Spacek, J. et al. (1991), Analýza úcinnosti poplatku za znecistování ovzdusí v odvetví energetiky
a podniku hutnictví Zeleza. Praha.
Stepánek, Z. (1997), Zhodnocení ekonomických souvislostí pusobení zákona o ochrane ovzdusí

a souvisejících právních norem a doporucení pro jejich novelizaci. Centrum Univerzity Karlovy
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AuthorAffiliation
Jan PAVEL
University of Economics, Prague, W. Churchill Sq. 4, 130 67 Prague 3, Czech Republic

Leos VÍTEK
University of Economics, Prague, W. Churchill Sq. 4, 130 67 Prague 3, Czech Republic
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Pavel STRACH
SKODA AUTO University, Tr. V. Klementa 869, 293 60 Mladá Boleslav, Czech Republic

Word count: 4191
Copyright University of Zagreb Jun 11-Jun 14, 2008
Indexing (details)
Cite
Subject
Air pollution;
Fees & charges;
Emissions control;
Effectiveness studies;
Impact analysis
Location
Czech Republic
Classification
9176: Eastern Europe
1540: Pollution control

9130: Experiment/theoretical treatment
Title
IMPACT ASSESSMENT OF AIR POLLUTION CHARGES ON COMPANIES IN THE
CZECH REPUBLIC1
Author
Pavel, Jan; Vítek, Leos; Strach, Pavel
Publication title
An Enterprise Odyssey. International Conference Proceedings
Pages
216-227
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Number of pages
12
Publication year
2008
Publication date
Jun 11-Jun 14, 2008
Publisher
University of Zagreb, Faculty of Economics and Business
Place of publication
Zagreb
Country of publication
Croatia
Publication subject
Business And Economics
Source type
Conference Papers & Proceedings
Language of publication

English
Document type
Feature
ProQuest document ID
217741556
Document URL
/>Copyright
12


Copyright University of Zagreb Jun 11-Jun 14, 2008
Last updated
2013-09-21
Database
ProQuest Centra

13