POLICY APPROACHES TO PROMOTE CLEANER PRODUCTION IN ARGENTINA, BRAZIL AND CHILE

by

Joachim von Amsberg, Latin America and the Caribbean Region, The World Bank

(The findings, interpretations and conclusions of this paper represent the personal views of the author and should not be attributed to the World Bank, its Executive Board of Directors, its member countries, or any of the institutions which kindly provided information.)

1.0 Introduction

In the search for more cost-effective means of achieving tightening environmental objectives, companies and governments all over the world have come to realize that pollution control through end-of- pipe treatment is only one of several options for the reduction of pollution. The terms "cleaner production", "waste minimization", and "pollution prevention" are being used to describe those options for the reduction of negative environmental effects of production that go beyond the end-of-pipe treatment of wasteflows and increase production efficiency, reduce the generation of wastes, apply intrinsically cleaner technologies or recycle substances that were previously discarded as wastes.

Cleaner production (CP) refers to a very heterogeneous group of pollution reduction approaches. At the one extreme, CP includes many good housekeeping measures that reduce waste and can often be implemented with no or very little investment. At the other extreme, CP also includes highly capital intensive innovations in production technology that require the replacement of an entire production line or plant. Moreover, the boundary between pollution prevention and traditional end-of-pipe pollution control is sometimes blurred, for example when end-of treatment leads to the recovery of substances that have significant value or can be reused in the production process.

CP has recently received much attention because environmental audits in many different companies have shown the existence of ample opportunities to implement measures that, at the same time, reduce waste and generate positive financial returns (win-win solutions). However, it is important to emphasize that not all changes toward CP are financially profitable. Even though many examples show that CP approaches are more cost-effective than traditional approaches to pollution control, this does not need to be true in every sector and every individual case.

CP should be viewed as a welcome addition to the menu of options for pollution reduction from which the least-cost approach for a specific industry and a specific situation needs to be selected. A separate focus on CP appears justified since CP approaches have often been neglected in the past, and expensive end-of-pipe treatment solutions have been applied in situations where low-cost CP solutions for pollution prevention would have been available.

This paper discusses the experiences with, and the effects of, government policies in Argentina, Brazil and Chile that influence the adoption of CP. It addresses not only the direct policies that governments have adopted to advance the implementation of CP but also the indirect effects of environmental and other policies on the environmental technology choices by enterprises. The paper is based on the premise that the objective is the achievement of an agreed environmental objective at the least social cost, and not the adoption of CP for its own sake.

To understand the effects of government action on the choices of polluters, it is important to appreciate the alternative courses of action open to the polluters. Companies that are in non-compliance with environmental regulations will usually take one or more of the following actions:

-- they can adopt good housekeeping measures and implement changes that require little or no investment. These measures usually involve some operating costs, and they may or may not pay for themselves;

-- they can adopt process changes that often require major investments. These investments may or may not pay for themselves, often depending on the remaining economic lifetime of equipment to be replaced;

-- they can adopt end-of pipe treatment technologies that usually have a negative financial return since they don't have any financial benefits;

-- they can decide to do nothing if the risk of enforcement or the level of penalties imposed does not justify the cost of the least-cost pollution reduction measure; and

-- finally, they can close their business if none of the available alternative options allows continued profitable operation of the firm.

The choice that polluting firms make between these options will depend on the nature of the business, on available resources, and on government regulations. Relevant factors regarding the nature of the business include the profitability and size of enterprises, the position in the industry life-cycle, the rate of capital renewal, and the possible demand from customers for environmentally friendly production. Resources that are critical for company choices include the access to and the cost of capital for investment, managerial capacity and attention to pollution problems and the cost and availability of technical know- how. Finally, the nature of government regulations and their enforcement will determine the feasibility and desirability of different options.

In the case of major process changes, timing is an additional critical factor for the adoption of CP. While a change to a cleaner technology may have low costs or even significant benefits if it is introduced at the time when old equipment is to be retired, the same technology change would be associated with very large opportunity costs if it was forced on a company after it has just invested in "dirty" equipment with a long remaining lifetime. As a result, CP approaches are more easily adopted in industries with high growth rate and fast capital renewal. Since the age of equipment varies within any industry, regulatory flexibility is a key factor in the promotion of CP. A company that is allowed to wait, or pay for waiting, until its equipment is due for renewal is more likely to opt for a CP approach than a company that is forced to achieve a particular standard at a specified time.

A government that wants to promote the consideration of CP approaches for achieving the most- cost-effective path toward an environmental objective, can choose from two broad groups of instruments: those for the establishment and enforcement of an appropriate regulatory framework, and those for actively assisting industry in their efforts to reduce pollution. Governments have, among others, the following instruments at their disposal:

-- pricing policies for inputs associated with pollution are critical. Water and energy are two obvious examples of inputs whose appropriate pricing can create significant incentives for measures that increase energy and water use efficiency and at the same time reduce the associated pollution. In many cases, environmental taxes or charges applied to these inputs can be an indirect policy instrument that is effective and relatively simple to administer. On the contrary, subsidies on these inputs can seriously distort incentives against CP approaches;

-- environmental regulation can hinder or advance the introduction of CP. Flexible instruments that leave polluters freedom to choose between technologies and to choose the time of adoption will give polluters the option to apply CP. Rigid instruments, on the other hand, often bias choices in favour of end-of-pipe control technology. Economic instruments, such as charges or tradable permits, are by design flexible. Command-and- control instruments, such as emission standards, are by design more rigid but can be applied such that they provide some flexibility to polluters;

-- financing for the costs of pollution reduction can be offered to overcome limited access to capital markets, especially by smaller firms. If directed credit lines are targeted at the right firms and include the flexibility to finance CP investments, they can be important instruments in an environment of shallow or distorted capital markets. If not properly designed, however, they may bias companies toward capital intensive options and against more labour intensive housekeeping solutions;

-- technical assistance provided or financed by the government can assist companies through training, pilot projects for technology transfer, studies of life-cycle impacts, information dissemination, environmental audits, assistance in obtaining environmental certification, etc.;

-- information policy is proving to be an increasingly important instrument. Mandatory release of plant-level pollution data can generate market driven changes in the behavior of polluting firms. Similarly, the dissemination of information on CP options can build up market pressure on polluting companies.

Looking beyond direct government policies on environment and technology, broader government actions have important effects on the adoption of CP. Macroeconomics policies will determine the framework in which companies make their decisions. Policies that favor investments, for example through deepening of capital markets, will improve access to capital required for CP investments. Similarly, the trade regime will influence the extent of technology transfer and the effect of demand by external markets on domestic environmental performance.

2.0 Country Experiences

Over the last decade, Argentina, Brazil, and Chile have undergone a significant macro-economic transition that has profound implications for the structure of their industrial sectors, their choices of technologies and their behavior toward environmental regulations. Reforms aimed at increasing the role of the private sector, opening the economy to international competition, reducing the burden of government regulation and fighting inflation have been adopted in all three countries. While Chile adopted these measures in the mid-eighties, Argentina has implemented a radical reform program since only 1991. Brazil began some reforms in 1990 and implemented more fundamental measures in 1994. In general, these reforms are important since they set the economic framework within which companies make their technology choices. Moreover, macroeconomic stability appears to be a precondition for serious attention by policy makers to the implementation of environmental policies.

In all three countries, the orientation toward export markets and the degree of foreign participation has increased. Regional free trade agreements are likely to strengthen this trend. Chile is negotiating membership in NAFTA, a process which implies close scrutiny of Chile's environmental record and policies. Argentina, Brazil, Paraguay and Uruguay have joined in a free-trade agreement (MERCOSUR), with which Chile is also negotiating association. Harmonization of environmental policies is a continuing theme in the MERCOSUR discussions.

The three countries have established more or less comprehensive systems of environmental regulation. However, the effective implementation and enforcement of regulations is slow. Typical common problems include the focus on command-and-control type regulation, underfunding of environmental institutions, lack of basic information, overlap in institutional responsibility, insufficient enforcement and penalties, and contradictions and excessive complexity in environmental regulations (see Margulis, 1994). While Brazil and Argentina have highly decentralized public administrations, with resulting differences in the environmental policy of different provinces/states, Chile has a centralized government system with a higher degree of homogeneity within the country.

This section of the paper does not attempt to present a comprehensive survey of environmental policies in the three countries. Rather, some very selective experience with interesting implications for the adoption of CP is presented. For each country, the discussion begins with a broad introduction to the economic situation and the major pollution problems, followed by a review of environmental policies in general and experiences with government initiatives to promote cleaner production in particular. Unfortunately, the specific experience with cleaner production in the surveyed countries is not very extensive and not very well documented. In particular, reviews of government environmental programmes often do not explicitly distinguish between CP and more traditional pollution control approaches. The analysis of national policies is, thus, necessarily tentative and based on incomplete information.

2.1 Argentina

(This section draws from information kindly provided by the Instituto Nacional de Ciencia y Técnicas Hidricas (INCYTH) and from World Bank, 1995b: Argentina: Managing Environmental Pollution - Issues and Options. Washington D.C.)

2.1.1 The Macro-economic Framework

After a period of hyperinflation, macroeconomic instability, and inward looking economic management, Argentina has since 1991 implemented an economic reform program that has drastically changed the macroeconomic environment. Inflation has been reduced to less than 4% annually, trade has been liberalized, and output and productivity have increased remarkably. Also, recent growth and investment levels have been high. A stagnant, protected, and relatively old industrial sector is now rapidly modernizing.

Legislated Dollar-parity of the national currency eliminates the possibility of promoting exports through devaluation. Thus, increased focus is being placed on increasing the competitiveness of the industrial sector through innovation and cost-savings. At the same time, financial markets are still weak and thin and shaken by the recent financial crisis in Mexico. The weakness of financial markets and the heavy burden of economic adjustment on small and medium-sized enterprises (SMEs) often make it difficult for SMEs to obtain credit for investment from market sources.

Over 60% of Argentina's industrial production is concentrated in Gran Buenos Aires. Argentina's most important industries are agriculture based. Within these industries, tanning and meatprocessing are important sectors with significant pollution problems. Among other industrial activities, there are serious pollution problems in manufacturing (for example, in textiles, metalprocessing and electroplating) and petroleum (oil extraction and refineries).

2.1.2 Major Pollution Problems

As a result of low population density, favourable geographic conditions, and a well-educated population, overall pollution damages in Argentina are only modest. On the other hand, pollution problems are more serious than one would expect in a country of Argentina's upper-middle levels of income and economic development. Industrial activity is concentrated along the Paraná and Plate Rivers, generating pollution problems in Gran Buenos Aires, Rosario and Santa Fe, as well as some other urban centers such as Córdoba, Mendoza and Tucumán.

Industrial discharges are a major source of air, water and solid waste pollution in Argentina. Industrial sources account for nearly half of wastewater discharges which are responsible for the poor quality of rivers and groundwater in Gran Buenos Aires. In a few areas, industrial effluent is reported to be the dominant source of pollution. The Río Santiago in La Plata, Río Salí in Tucumán and some irrigation channels in Mendoza are seriously contaminated with industrial effluent. In Rosario, industrial effluent from the upstream suburbs on the Paraná River have adversely affected the operation of the main water treatment plant.

The heavy pollution of rivers and creeks as well as groundwater in Gran Buenos Aires is particularly serious since it affects about 4 million people, primarily in low-income neighborhoods, who are not connected to public water supply and receive their drinking water from individual wells. Not much is known about air pollution, but there appears to be no large-scale problem in Buenos Aires. The uncontrolled disposal of hazardous wastes is a potential problem of significant scale.

2.1.3 Environmental Policy

During the last decade, governments were predominantly occupied by macroeconomic concerns, and environmental management was not a high priority. Decades of neglect and lack of co-ordination have led to an inconsistent and confusing regulatory and institutional framework for environmental management. The most critical constraint for improving the management of pollution in Argentina is the absence of clear institutional responsibility for environmental management and the lack of effective enforcement. Some of the government institutions charged with administering environmental policies are still weak, their responsibilities are fragmented, and enforcement is inadequate in many areas. The institutional framework for environmental management involves a web of overlapping national, provincial and municipal agencies. The resulting unusually complex system of laws, regulations and authorities has led to unevenness and uncertainty in the enforcement of regulations, and opened many opportunities for polluters to evade compliance with environmental objectives.

In principle, most environmental matters are the responsibility of the provinces, unless expressly delegated to the national government. Only under specific circumstances can the national government assume authority for particular environmental issues. At the provincial level, the capacity for the management of environmental problems differs widely. While several of the more industrialized provinces have rather advanced environmental management systems, others lag far behind.

Recently, the national government has taken important steps toward more active national environmental policy. The national organization of environment policy centers around the Secretaría de Recursos Naturales y Ambiente y Humano (SRNyAH: Secretariat for Natural Resources and the Human Environment) which was created in 1991 and will be soon be upgraded into a fully fledged environment ministry. SRNyAH is working on a reorganization of environmental policy-making in Argentina, but it has not yet had enough time to deliver in many areas. Environmental authority at the national level includes, among others, responsibility for inter-provincial waterways (i.e. the major rivers).

At the level of national-provincial relations, SRNyAH hosts the Consejo Federal de Medio Ambiente (COFEMA), the forum in which all provinces and the national government discuss common themes. In 1993, SRNyAH successfully negotiated an environmental pact ("Pacto Ambiental Federal") with all the provinces. This pact is a political instrument that signals the willingness to coordinate provincial and national efforts. After ratification by the provincial congresses, SRNyAH will have to design minimum environmental standards as a result of the latest constitutional changes.

Major federal policies include the passing of the Hazardous Waste Law 24.051 in 1992. This law covers the generation, use, transport, treatment and final disposal of hazardous wastes and establishes a registry for generators of such wastes. The implementation of the hazardous waste law, however, is constrained by the absence of any approved hazardous waste treatment facility in Gran Buenos Aires. Environmental Impact Assessment is mandated for new projects in several, but not all, provinces. Various emission standards exist at the federal and the provincial levels.

Government attention has focused on projects to cleanup some of the worst polluted surface waters in Gran Buenos Aires, which have effectively become open sewers. As one of the most polluted local streams, the Río Matanza-Riachuelo receives discharges from both domestic and industrial sources (some 20,000 plants, of which nearly 2/3 do not have treatment facilities, while only 3 percent of the remaining ones regularly operate them). Another stream, the Río Reconquista, runs through 14 municipalities, receiving direct discharges from 7,500 industrial plants, and indirect discharges (through sewers and drainage pipes) from an additional 12,000 plants. Domestic discharges are also an important source of pollution. The government is currently preparing a master plan for the cleanup of the Río Matanza-Riachuelo and implementing an IDB-supported project for the cleanup of the Rio Reconquista.

In 1980, an attempt was made to introduce discharge fees for industrial effluent (Decree 2125/1980: Cuotas de Resarcimiento por Contaminación). In practice, the fees were never applied on a wide basis and the system was modified in 1989 to lower the level of fees and to revise the penalties imposed on enterprises exceeding the maximum allowable discharge. Environmental groups sued the government on the grounds that the Cuota de Resarcimiento amounted to a license to pollute beyond legal limits. The court declared the decree unconstitutional on legal grounds.

The recent privatization of the water concession for Gran Buenos Aires is likely to significantly change the incentives faced by those polluters discharging into the sewage system. The new private concession ("Aguas Argentinas") has been taking seriously its obligation to monitor the quality of such discharges and to report violations of the sewer discharge regulations. The company also has an incentive to charge prices for water consumption and wastewater discharges by businesses which cover the marginal costs of supply and treatment.

2.1.4 Cleaner Production Developments

The effect that the opening of the economy and the modernization of industry is having on CP approaches in Argentina is particularly interesting. Among the usual heavily polluting industries, the paper and pulp industry provides an interesting example of the contrast in environmental performance within one sector -- see Text Box 1. The largest pulp mill in Argentina is equipped with modern technology and has been steadily improving its environmental performance in order to expand its position in environmentally-sensitive markets. Other pulp mills are older, less oriented to international markets and have a much worse environmental record. They are coming under increasing pressure to rationalize production and facilities. The result is likely to be the emergence of a more efficient, though perhaps smaller, industry with a much higher level of environmental performance. A similar process has been occurring in the steel industry with the additional element of privatization.

Another major problem area is the oil refining and petrochemical sector. While the recent privatization of the state petroleum company YPF (Yacimientos Petroliferos Fiscales) did not address the company's environmental problems, there are good reasons to expect that changes in incentives combined with improved access to capital markets following privatization should bring a gradual improvement in the company's environmental performance. A significant component of the environmental damage caused by refineries and petrochemical plants is the consequence of poor maintenance and management of equipment and operating processes, which represents a loss of valuable feedstocks or products. The economic payback to addressing these problems is large, so that well-managed private firms have a substantial incentive to reduce leaks, recycle water, recover materials and adopt other changes which will mitigate environmental damage. Initial attention, however, is likely to focus on reducing current levels of emissions rather than on cleaning up the legacy of damage caused by past emissions and waste disposal. In due course, a major clean-up effort will be required, but at present there is no satisfactory basis for establishing priorities or for allocating the liability for the costs involved.

With respect to explicit government incentives encouraging choice of cleaner technologies, vehicle fuel pricing represents an interesting example. In 1985, a program of tax exemptions was introduced to promote the replacement of petroleum fuels by compressed natural gas (CNG). The program was quickly adopted by mid-sized trucks and taxis. By the end of 1994, 210,000 vehicles in Gran Buenos Aires had been converted to CNG. To date, the CNG program has led to the substitution of about 12% of diesel use in Gran Buenos Aires, which should correspond to a 6% reduction in particulates emissions. While, under ideal operating conditions, CNG-fueled vehicles produce less NOx, CO, hydrocarbons, particulates and lead than gasoline-fueled vehicles, and less particulates than diesel-fueled vehicles, there is concern about possibly higher levels of NOx emissions compared to conventional fuels under real life operating conditions. On balance, however, based on the scant information, the program appears to have beneficial effects since there is likely to be a greater health cost attributable to lead and particulate pollution than to NOx.

Text Box 1: The Case of Argentina's Pulp and Paper Industry

Argentina's pulp and paper industry provides a classic example of the challenge and opportunities associated with the liberalization of trade. From one perspective it is an industry in deep crisis with too many inefficient, uncompetitive plants which have an extremely poor environmental record. On the other hand, there are a number of firms which are able to compete successfully on local and world markets and whose environmental performance is exemplary.

The industry's basic problem is that its plants are old and too small - the average capacity of both pulp and paper plants is less than 30% of the equivalent averages for Brazil and Chile. Throughout the 1970s and 1980s the industry enjoyed a protected market, so that few firms invested to adopt modern pulp and paper technologies. The leading firms in 1970 - Celulosa Argentina, Ledesma, Papel Misionera - have been largely displaced by new entrants - Alto Parana, Papel Prensa, and Papel Tucuman. It is these new firms that have been responsible for the substantial growth in production and decline in imports from 1970 to 1990. Subsequent trade liberalization has put extreme pressure on most of the older plants - especially those producing paper - as a result of competition from Brazilian imports and the depressed state of the world pulp and paper market during the early 1990s. Paper imports increased from 5% of the domestic market in 1990 to 33% in 1993. Only Alto Parana, which only produces kraft pulp and much of whose output is exported, has a plant of sufficient capacity to gain the full benefits of economies of scale and modern technology, though Papel Prensa and Papel Tucuman are reasonably placed, especially as paper producers.

The environmental performance of the older plants is largely deplorable. Many of the older paper plants are based in Gran Buenos Aires and discharge wastewater with only limited treatment. Their reliance upon outdated technology also means that they produce much greater volumes of wastes than do more modern plants. In 1992, the average level of BOD discharges was 24 kg/ton for paper and 32 kg/ton for pulp, very similar to the averages for 1975 despite the much better performance of Alto Parana and the other new entrants. The industry association AFCP has agreed a target average of 12-16 kg of BOD per ton to be achieved within 10 years. This will still be much higher than current standards for new plants in the US and Canada of 5.5-7.5 kg/ton. By closing down old, uncompetitive, and heavily polluting plants - especially in the paper sector - it should be possible to reduce average emission of BOD per ton much more rapidly.

Alto Parana stands out for its environmental performance. At the beginning of the 1990s its emissions were as good or better than those from Scandinavian kraft pulp producers. Since then, it has invested to change its production process to rely more upon chlorine free bleaching, to reduce its wastewater discharges to match best practice in the industry, and to obtain ISO 14000 certification. The purpose of these changes has been to take advantage of the demand for "environmentally friendly" pulp in Germany and other North European markets. This is a clear case in which industrial restructuring brought about by trade liberalization should bring large environmental benefits.

Source: Bercovichand and Chidiak, 1994.

Argentina has a complex system of government-run and government-supported science and technology institutions. While a large share of these efforts are directed at basic research, there are also significant efforts in applied technology, of which some are directed at CP approaches. Some of these efforts have been criticized as not sufficiently integrated with applications in the private sector. Projects with important environmental implications have been undertaken by INTI, the national industrial technology institute, and INTA, the agricultural technology agency (e.g. concerning less polluting technologies in meatprocessing). INTI belongs to the Industry Secretariat and provides assistance for product certification, technology transfer, and training. INTI operates sectoral research centers for those industrial sectors that are of most importance for the Argentine economy.

INCYTH, the national institute for water science and technology, is part of the national environment secretariat and is engaged in several projects aimed at promoting CP. These initiatives include the optimization of water use and wastewater reuse in manufacturing, waste minimization in manufacturing, and non-conventional wastewater treatment. Among the specific projects that have been undertaken are: wastewater reuse in tanneries; reuse and treatment of winery wastewater; and waste minimization in the metalfinishing industry. Together with the Pan-American Center for Health Engineering and Environmental Sciences, INCYTH has recently published handbooks for waste minimization in hospitals as well as the metal finishing, the tanning and the textile industries.

The Industry Secretariat of the Economics Ministry offers technical assistance and lines of credit directed at SMEs for investment and technology innovation. In fact, these credit lines constitute one of the few financing sources available to SMEs in Argentina, and the government is currently the major domestic source of term credit for SMEs. While these programs are primarily directed at the competitiveness and the export-orientation of SMEs, some of them are directed specifically at technology transfer and available for investments in cleaner technologies. The Technological Upgrading Program (FONTAR) makes a total of $80 million available for technology upgrading in the manufacturing sector. Projects that are being proposed for support under this program include those for recycling of effluents from the tanneries industry.

2.2 Brazil

(This section draws from comprehensive information kindly provided by the Companhia de Tecnologia de Saneamento Ambiental (CETESB), the Federação das Indústrias do Estado de São Paulo (FIESP), the Fundação Estadual de Engenharia do Meio Ambiente (FEEMA), and the Brazilian Federal Ministries of Environment and Foreign Relations.)

2.2.1 The Macro Framework

Following the debt-crisis of the 1980s, Brazil suffered a period of economic stagnation and high inflation. Investment was reduced and per-capita output stagnated during the 1985-93 period. Since early 1994, the government has implemented a carefully designed stabilization program leading to drastically lower inflation and the first signs of increased economic activity, including higher investment.

Brazil has a large and mature industrial sector that, over a long period, has been promoted through an inward looking industrialization policy including protection from external competition and state-led investment. Subsidies for energy and resource intensive industries (aluminum, steel, pulp and paper and petrochemicals) contributed to the rapid development of heavy, but also dirty, industries.

As a result of pervasive regulation of business activities the cost of doing in business in Brazil was high and many businesses were not internationally competitive. Since 1990, a program of deregulation and significant trade liberalization has been introduced leading to increasing international integration of the Brazilian economy. Subsidies and other government interventions have been phased- out. Together with recent macroeconomic adjustments, these reforms are now rapidly transforming and modernizing the Brazilian economy toward more openness and competitiveness.

2.2.2 Major Pollution Problems

Serious industrial pollution problems exist in many Brazilian states. In some areas, contamination levels are serious enough to affect major portions of the population, either through unhealthy air quality, contaminated drinking water, or exposure to hazardous waste. In addition, untreated industrial discharges affect the health and safety of workers (e.g. in the mining industry) as well as causing destruction of aquatic and terrestrial habitats. The specific nature of each state's industrial pollution profile varies with the composition of its industry. Overall, the full range of industrial pollution sources are present: from heavy industries, such as steel, petroleum, petrochemicals, fertilizers, and coal mining, to production of intermediate and consumer goods, such as food, textiles, leather and metal finishing.

The highly urbanized South and Southeast of Brazil occupy only 19 percent of the territory but contain about 60% of the population. With São Paulo and Rio de Janeiro, Brazil has also two of the world's largest "megacities", with a concentration of serious pollution problems. São Paulo contains the largest industrial aggregation within South America including a large automotive industry. In São Paulo and other major cities, industrial growth has led to severe air and water pollution levels that, in São Paulo, required health warnings on most days. Some significant improvements have, however, taken place in recent years. The high income disparity and lack of urban services, such as water supply, sewage collection and sewage treatment, aggravate urban environmental problems and their effects, in particular on the poor population.

2.2.3 Environmental Policy

Comprehensive environmental policy has a longer history in Brazil than in the other surveyed countries, starting in 1973 with the establishment of a national secretariat for environment in the Ministry of the Interior. In 1981, a federal framework law established the National Environment System (SISNAMA), which includes the agencies and regulations at the national and sub-national level. The Brazilian Institute of the Environment and Renewable Natural Resources (IBAMA) was created in 1989. In 1994, a national Ministry of Environment, Water Resources and Legal Amazon was established. The national environmental agencies have mostly focused on "green" environmental issues of land use and natural resource protection. Some ambient quality guidelines and emission standards have also been established at the federal level.

During the 1970s, several state environmental agencies were established. Some of them quickly acquired significant capacity and experience, such as CETESB in São Paulo and FEEMA in Rio de Janeiro. Notably, the effectiveness of the state environmental agencies reflects the degree of industrialization in the various states, and in many states actual capacity is still very limited. Unfortunately, even some of the better state agencies experienced a decline during the macroeconomic crises of the 1980s and early 1990s as budgets were cut and government attention focused on macro- economic management. Today, most of the legislation for environmental management and pollution control as well as the day-to-day aspects of environmental policy fall under the responsibility of the states.

The more industrialized states of Brazil have acquired considerable experience in the management of pollution policies. Most policy instruments are based on command-and control regulation supplemented by a variety of credit lines and tax incentives for pollution control investments. The main instruments of pollution control policies are zoning, emission standards, and a licensing process, which in turn is based on a variety of industry-specific emission standards. Environmental Impact Assessment was introduced at the national level in 1986. Responsibility for the implementation of the Environmental Impact Assessment process is mainly delegated to the states. However, the federal government -- through IBAMA -- is in charge of licensing and supervising the Environmental Impact Assessment process for particular projects and activities.

More recently, broader discussions on the use of economic instruments in environmental policy have begun. Early examples of the use of economic instruments include the industrial sewage fees based on pollution load that have been, or are being, implemented in some states. In São Paulo, a sewage fee has been in effect since 1983 and was revised in 1990. These charges have led to a very significant drop in pollution loads in several sectors. A similar pollution charge is in effect in Rio de Janeiro and has been proposed in Minas Gerais and Paraná states.

2.2.4 Cleaner Production Developments

The transition of the Brazilian economy to more private-sector involvement, deregulation, and openness has had important consequences for environmental management. Several government-owned companies used to be some of the largest sources of industrial pollution (for example, PETROBRAS, CVRD, and CSN, the largest steelmill in South America), and state environmental agencies had very limited enforcement authority over them. In some cases privatization has led to significantly better environmental performance due to more effective enforcement of environmental regulations and mobilization of private capital for environmental improvements.

One of the main channels for government promotion of CP is directed credit. BNDES is the development bank of the national government and used to be the main source of long-term credit in Brazil. Since 1986, BNDES has offered credit lines for industrial pollution control. Environmental lending of BNDES, under a variety of programs, increased from $202 million in 1990 to $304 million in 1994. Projects eligible for financing include end-of pipe controls, process changes, and recycling/waste recovery projects. Financing of investments is complemented by financing of EIA's and staff training. Beyond its strictly environmental programs, BNDES finances industrial investment in areas such as energy efficiency. Environmental projects constituted 6% of BNDES lending in 1993 with the expectation of reaching 20% in ten years.

The government is supporting quality management through information dissemination and a large-scale training program. A government finance agency, FINEP, offers financing through its Linhea de Apoio a Gestão de Qualidade to assist companies to set up a quality management program. Lending under this financing facility increased from $6 million in 1992 to $16 million in 1993 and reached $62 million in 1994. Together with other FINEP programs that support technological innovation, total FINEP lending in 1994 was $285 million. FINEP is currently creating a new financing line that would support environmental audits, environmental life cycle analysis, environmental management systems, environmental certification and evaluation of environmental performance. One of the key objectives of this financing line is to support SMEs in obtaining ISO certification.

A wide range of other government institutions is involved in promoting cleaner production in Brazil. For example, the Instituto de Pesquisas Tecnológicas (IPT, a technological research institute of the São Paulo state government) has a variety of research activities with the objective of encouraging pollution control and integrated pollution management. IPT has its own laboratory for the treatment of industrial effluents, a research project for environmentally friendly materials such as biodegradable plastics and analysis of recycling projects. IPT is increasingly directing its activities at SMEs.

The first National Center for Clean Technologies in Latin America will be established in the south of Brazil in Porto Alegre (Rio Grande do Sul). The center, which is a joint initiative of UNEP, UNIDO and the state industry federation, will have an initial investment of $440,000. This center will promote technology transfer through pilot and demonstration projects, environmental audits, training and information dissemination. A particular focus will be to assist companies in receiving ISO 14000 certification. After three years, the objective is that the centre will self-financing through charging consultant fees.

Brazil takes an unusually active interest in the development of international standards such as ISO 9000 and now ISO 14000. The adoption of ISO 9000 certification for total quality management is proceeding very rapidly in Brazil. While about 600 organizations (about 90% of which are in industry) met ISO 9000 standards in March 1995, it was expected that 1,300 organizations will have been certified by the end of 1995. At the end of 1994, 80% of all certified firms in Latin America were located in Brazil. Industrial sectors with the highest participation are the electric, chemical and metal industries. Clearly, the recent opening of the Brazilian economy has provided the major push for companies to adopt international quality standards. While large export-oriented firms have been the first to seek certification, these companies are now requiring the same of their suppliers, thus pushing smaller companies to raise their performance.

Through the Grupo de Apoio a Normalizacão Ambiental (GANA) Brazil has been actively participating in the development of the ISO 14000 standards for environmental management. GANA is mainly composed of industry representatives but also supported by government environmental agencies. Already, interest by Brazilian industry in ISO 14000 certification is high and rapid dissemination of the standards is expected.

In some states, there is active collaboration between government agency and industry representatives in CP initiatives. The industry federation of São Paulo (FIESP) awards an environmental prize to companies with particular achievements in environmental management. In São Paulo, the state environment secretary and the state environment agency (CETESB) are working together with the FIESP in a project for reducing industrial solid waste. CETESB is also establishing sectoral councils for 26 different industries with the objective of developing and defining new instruments for achieving sustainable development. A particular emphasis will be placed on the role of cleaner production. These councils include representatives from industry, unions, research institutes, and the occupational health and safety field.

The Brazilian national industry federation is assisting companies through seminars and training programs in environmental management. The industry federation is also undertaking various initiatives to explicitly promote CP. It operates 30 technology centers, each of which have an environment group to support industry in environmental management. In Curitiba, Paraná, a national center for environmental technology was established by SENAI, an organization associated with the national industry federation.

Large companies with an orientation towards international markets have taken the initiative by voluntarily adopting measures to introduce cleaner production. Nine out of 23 Brazilian firms with sales above $200 million have adopted environmental auditing as part of their management routine (Survey by Boucinhas e Campos Consultores, reported in Serôa da Motta and Reis, 1994). A recent survey shows that the principal reasons for undertaking environmental audits in these firms were improved image of the enterprise (43.5%), differentiation from competitors (30.4%), improved relations with enforcement agencies (26%) and greater access to external markets (21.7%) (Veiga, P.M., 1994: Evidências sobre as relações entre comércio e meio ambiente no Brasil. Revista Brasileira de Comércio Exterior, 41, 1994). Not surprisingly, those companies that are focused on exports to Europe, such as in the steel and cellulose branches, are leading many of these activities.

2.3 Chile

(This section draws from comprehensive information kindly provided by the Comisión Nacional de Medio Ambiente (CONAMA) and from World Bank, 1994: Chile - Managing Environmental Problems. Washington D.C.)

2.3.1 The Macro Framework

After profound economic, political, and social changes, it is widely recognized that Chile has today the most stable and liberalized economy in Latin America. Sound macroeconomic policies and declining inflation have attracted domestic and foreign investment and led to high and sustained economic growth over several years. There is broad-based national support for a market-based economic system. Importantly, much of the economic growth is generated by expansion of the mining, forestry, and fishing sectors whose operations have often been linked to serious environmental problems. Interestingly, Chile's desire to enter into free trade arrangements with OECD countries, such as the North American Free Trade Agreement (NAFTA), has been an important driving force in the domestic discussion for improved environmental management.

Chile's capital markets are deeper than those of several Latin American countries making the mobilization of financial resources for domestic investments easier. Price controls, subsidies, and other distortions of the economy have been removed earlier than in many other Latin American countries. In general, there are no subsidies, for example, on energy or water, but also no mechanisms to fully internalize environmental costs, for example the costs of inadequate wastewater treatment.

2.3.2 Major Pollution Problems

Chile's major pollution problems are concentrated in the Santiago Metropolitan Region (SMR). Santiago's serious air pollution problems are caused by emission from industry and transport and aggravated by the city's location in an enclosed valley with limited winds, little rain and thermal inversion throughout a large part of the year. Water pollution is caused by industrial effluent and the virtual absence of domestic wastewater treatment. Chile also has pollution problems in secondary cities with industrial centers, such as Concepción-Talcahuano.

There are other serious but more localized environmental problems surrounding major industrial sites, primarily in the mining but also the fish processing and pulp and paper industries. In the case of the mining industry, the main problems relate to the older operations of the government-owned CODELCO and ENAMI companies, while more recent mining sites, usually operated by private investors, follow much stricter environmental standards. The problems are, thus, more closely associated with the stock of old investments rather than new incoming investments.

2.3.3 Environmental Policy

Fragmented sectoral environmental regulations, which were rarely enforced, have existed for some time in Chile. The establishment of a more systematic environmental policy in Chile began with the transition to a democratic government in 1989/1990: in 1989, the government created a special commission for the decontamination of Santiago (CEDRM) and in 1990, a national environmental commission (CONAMA) was set up. In 1994, an environmental framework law was passed by Congress which has created the basic pillars of a national environmental policy. This law establishes a permanent structure for CONAMA and thirteen regional environment commissions (COREMAs). CONAMA has a co-ordinating function for national environmental policy while most regulatory and enforcement functions rest with the sectoral agencies, such as the Ministries of Transport, Health, and Mining. In reflecting the political constitution of the country, environmental management is highly centralized.

To mitigate potential pollution problems from new investments a comprehensive requirement for environmental impact assessment (EIA) of all new private and public sector industrial projects is applied. To address pollution problems from existing facilities, the main instrument is the development of pollution prevention and decontamination plans in areas where ambient environmental standards are either being approached or exceeded. These plans create the framework for implementing pollution control and prevention measures, including emission standards and tradable emission permits.

Many of the regulations and corresponding policy instruments under the new framework law are still under preparation or early implementation. Therefore, experience with these instruments is limited so far. However, significant experience already exists with the use of decontamination plans for some areas heavily polluted by mining operations. In these cases, the one (or two) operators of emission sources in an area that has been declared saturated for specific air pollutants (in general fine particulate matter and/or sulfur dioxide) have prepared and negotiated with the government a timetable for emission reductions. The agreed decontamination plans have then been decreed by the government. The pollution control investments in the public mining sector corresponding to these decontamination plans are estimated to reach $1 billion for the years 1992-2000, mostly for the construction of sulfuric acid plants.

A very interesting experience with the use of economic instruments in pollution control predates the environmental framework law. In 1992, the government began implementation of an innovative compensation system for the control of particulate emissions from fixed sources in the Santiago Metropolitan Region. An emission standard for existing fixed pollution sources was combined with a credit trading scheme that required the acquisition of compensating credits for any new emission sources. Actual trading, so far, has been very limited, and the government has decided to improve the legal foundation for the compensation system, leading to further delays. Even though lack of enforcement and uncertainty about the initial endowment of pollution credits have hampered the system, it is an important experience that has increased the acceptability of economic instruments for pollution policies and will be further pursued.

2.3.4 Cleaner Production Developments

Overall, Chilean environmental regulations and policies are neutral toward technology choices. There is no explicit policy requiring best available technology, nor are their sectoral or technology specific standards. Emission standards are generally defined as uniform concentration standards. With its inclination to use economic instruments in environmental policy (another example is the Chilean system of tradable water rights), Chile leaves more technology choices to the polluters and thus avoids a bias in its policy against the use of CP approaches.

There is no explicit government policy aimed at promoting cleaner technologies, for example through credit lines or grants directed exclusively at CP approaches. However, a range of government programs is directed at industrial development or technological innovation in general. Some of these programs include environmental improvements and pollution reduction in their objectives or require minimum environmental performance by supported projects. Thus, some of these programs are supporting initiatives that will lead to the adoption of cleaner production.

The "Fondo Nacional de Desarrollo Tecnológico y Productivo" (FONTEC) is a public fund created in 1991 and aimed at promoting, guiding, financing, and subsidizing the development of projects that incorporate innovative technologies in the private sector. Although this program is not explicitly directed at clean technologies, such projects are eligible within the program. FONTEC provides financing for projects proposed by the private sector. Financing consists of credit and subsidies of up to $100,000 for individual enterprises or groups of enterprises and up to $300,000 for technology infrastructure and centers for technology transfer.

The "Fondo de Fomento al Desarrollo Cientifico y Tecnológico" (FONDEFF) is administered by the National Council for Science and Technology within the Education Ministry. FONDEFF financially supports projects that increase competitiveness in sectors such as mining, forestry and fisheries. Out of 99 projects approved so far, 61 are classified as having neutral or acceptable environmental impact and 38 are identified as having positive environmental impact. Approved projects receiving FONDEFF funding amount to $61 million and total investments are $134 million. FONDEFF contributes to both the development of clean technologies and the strengthening and consolidation of environmental research and development capabilities.

INTEC, a government technology research agency, is currently developing a specific project that aims at strengthening national technological capacities for the treatment of liquid industrial effluents. This project assists SMEs in pollution reduction through either end-of-pipe or cleaner production solutions. In its current first phase, information on the characteristics of selected industries -- tanning, painting, textile, and agroindustries -- is gathered. This phase will be followed by concrete assistance programs for the application of clean technologies.

INTEC itself does not provide financing for enterprises. However, together with the implementing enterprises, INTEC seeks funding for individual projects through government funds, such as FONTEC. An interesting case of INTEC's experience in CP approaches was an investigation of wood- burning bakeries in the Santiago Metropolitan Region (SMR). Following the introduction of tighter emission regulations, INTEC worked with bakeries in the measurement of their emissions and experiments on oven design and combustion. This work led to a project proposal to convert the bakeries from wood burning to gas stoves. The conversion is now being implemented by about 700 bakeries. Moreover, participant bakeries have realized that, due to rising fuelwood prices, the conversion to gas generates not only environmental but also financial benefits.

A technical assistance project between Chile and the Hesse State of Germany explicitly seeks to establish the permanent transfer of clean technologies to Chile. The project is financed by the Hesse State of Germany through the Carl Duisberg Foundation and co-ordinated in Chile by the industry federation, SOFOFA. The Chilean government is represented on the consultative council of the project through CONAMA and the Economics Ministry. During the first phase, environmental audits will be conducted in several enterprises of the metal and metal processing industry. During the second phase of the project (1996-1998), implementation of projects resulting from the environmental audits and a training program for cleaner production is foreseen.

The "Propel Chile" initiative is aimed at assisting SMEs in the development and implementation of projects that enhance the competitiveness and environmental management of these enterprises. The program assists SMEs through seminars, training, consultancies and also in seeking financing for projects from government programs or the private capital market. Initiatives are aimed at, inter alia, increased energy efficiency and the minimization of emissions.

The EP3 Chile technical assistance program of USAID provides assistance to SMEs with the objective of introducing cleaner production approaches. So far, environmental audits have been conducted in 20 enterprises of the tanning, painting, textile, and meatprocessing industries. During the next phase, the project will support the establishment of an information center for clean technologies in a well- established Chilean NGO.

Finally, there are a number of cleaner production initiatives by universities and industry. These include the Program for Sustainable Development at the Universidad de Chile, the Industrial Corporation for Regional Development of the Bío-Bío (CIDERE BIOBIO), and the Unit for Technical Development at the Universidad de Concepción.

Currently, a major private sector project with significant implications for the use of cleaner fuels and the air pollution problem of the SMRis being discussed. Also, the government is creating the legal and regulatory framework for the import, transport and distribution of natural gas through one or several gas pipelines from Argentina to Chile. This project is mainly driven by commercial interests in capturing a cheaper source of energy. However, the tightening air emission regulations in the SMR contribute to the attractiveness of the project. While natural gas will likely be used first in large industrial operations, discussions on converting vehicles to compressed natural gas (CNG) are underway.

3.0 Lessons and Conclusions

The practical experience with CP approaches in Argentina, Chile, and Brazil is still quite limited, and its systematic assessment is hindered by incomplete documentation of their impacts. While an overall evaluation of the effect of government policies on CP is, therefore hardly possible, some interesting conclusions can nevertheless be drawn from the experience. Specifically, the limited experience with government approaches toward CP in these three countries suggests there is a hierarchy of policies that should begin with reforms toward a sound macro-economic framework, then the development of a systematic environmental regulatory framework, and finally targeted measures to promote CP (see Figure 1). This approach does not suggest that CP would not be suitable in countries that still have macro- economic distortions or lack a systematic environmental management framework. However, in that situation, policies to address the more fundamental deficiencies would be expected to have higher returns in terms of achieving low-cost pollution reduction through CP approaches.

3.1 Important Non-Environmental Policies

The rapid diffusion of CP approaches after economic reforms that led to increased investment and orientation toward export markets is the most notable feature of the experience presented here. From a country-wide perspective, the influence that general economic policies have on the adoption of cleaner production, and thus pollution reduction, seems to clearly dominate the effect of specific initiatives that encourage the adoption of CP. There are some stylized facts that describe the experience:

-- macroeconomic stability is a precondition for governments and enterprises to take environmental policy seriously;

-- measures that lead to increased investment will speed up the diffusion of cleaner technologies;

-- the privatization of state enterprises often increases the ability to raise capital required for investment and to improve the environmental performance of the enterprise;

-- trade liberalization and increased openness of the economy facilitate faster diffusion of foreign technologies and increase the demand for environmentally benign production from international markets;

-- liberalization of capital markets and other measures to deepen financial markets will improve enterprises' access to commercial credit and thus improve their ability to adopt environmental innovations;

-- the removal of subsidies on, and possibly taxation of, inputs that are associated with pollution, such as energy, water and some raw materials, creates powerful incentives for energy and materials efficiency and cleaner production.

3.2 A Predictable and Flexible Regulatory Framework

Improved general economic policies allow polluters to adopt measures that pay for themselves (win-win options) and respond efficiently to regulatory incentives from environmental agencies. However, good environmental regulation is the critical contribution that governments need to make to improve environmental performance. An effective environmental regulatory system that is not biased against CP would include the following important considerations:

-- at the low levels of current pollution control in most developing countries, the clarity and predictability of the environmental regulations is more important than the absolute level of environmental quality desired. Many companies are bothered more by inconsistent application of existing regulation and regulatory uncertainty than by the specific level of pollution reduction required. In an uncertain regulatory environment, polluters are unlikely to commit their resources to long-term investments, such as those required for many CP approaches;

-- flexibility in environmental regulation is critical for the adoption of CP approaches. Polluters should be left free choice of technology and only be regulated with respect to their final emissions. Flexibility in the timing of pollution reduction is critical for the adoption of new processes that are connected with major investments. Economic instruments, such as pollution charges and marketable permits, will usually best allow this flexibility, but the application of other instruments such as standards and licenses can also be made more flexible;

-- environmental regulation cannot be effective without enforcement. Polluters will not adopt costly CP measures without facing a credible enforcement system that is linked to the threat of sufficiently high fines or closure. Self-reporting systems can reduce administrative costs and have proven to be effective where they are linked to spot-checks and high fines for misreporting.

3.3 Differentiated Approaches to Cleaner Production

Cleaner production and pollution prevention should be seen as integral additions to the menu of pollution reduction options that are available for selecting the most cost-effective pollution reduction strategy. CP options have often been neglected in the past and, therefore, deserve particular attention by governments. However, it would be erroneous to make the opposite mistake and bias policies artificially in favor of CP options, which in some cases may not be cost-effective.

Targeted measures to aid enterprises in the adoption of CP approaches have to address the different constraints that different types of enterprises face. Clearly, a broad distinction needs to be made between large and efficiently managed firms in dynamic sectors with access to capital and know-how and small firms in mature sectors with limited access to these resources see (Hanrahan, 1995). A more detailed differentiation of groups of enterprises may later evolve and would allow more precise targeting of policy approaches.

For larger enterprises with an international orientation, good macro-economic policies and a reliable environmental regulatory framework are a necessary and usually also sufficient condition to stimulate interest in CP. The environmental decision-making by these companies is often influenced by developments in international markets and in the countries of their headquarters. Companies are sensitive to their environmental image and the demand from international markets for environmentally sound production practices. These enterprises usually have the financial and technical resources to adopt financially beneficial solutions on their own. Given a clear regulatory framework they will also adopt the socially efficient approach for pollution reduction.

The situation is entirely different in the case of SMEs. In small enterprises, good housekeeping measures often have high theoretical financial payoffs as well. However, the constraint often lies in the lack of managerial attention to pollution problems. Managerial attention is a scarce resource that is undervalued in a typical environmental audit. In the case where these enterprises operate in mature industries with low capital renewal and in countries in which SMEs have limited access to capital, a sound regulatory framework may be insufficient for the implementation of a low-cost pollution reduction strategy.

To overcome their lack of know-how, technical assistance in the form of environmental audits and training can be critical for implementing low-cost CP approaches in SMEs. In addition, assistance in obtaining environmental certification can be important to offset the advantage that large firms would otherwise have in international and other image sensitive markets. In the case of capital intensive process changes, credit facilities that are carefully designed and closely targeted would be an important transition measure until capital markets have developed such that SMEs have sufficient access to funds provided by the financial markets.

REFERENCES

Bercovichand N. and M. Chidiak, 1994: Reestructuración industrial y gestión ambiental en el sector de celulosa y papel en Argentina. Centro de investigación para la transformación. Buenos Aires.

Hanrahan, D., 1995: Putting Cleaner Production to Work. Environment Department Discussion Draft Paper. The World Bank. Washington D.C.

Margulis, S., 1994: "The Use of Economic Instruments in Environmental Policies: The Experiences of Brazil, Mexico, Chile and Argentina" in OECD (1994): Applying Economic Instruments to Environmental Policies in OECD and Dynamic Non-Member Economies. Paris.

Serôa da Motta, R. and E. Reis, 1994: Uso de Instrumentos Economicos para Gestão Ambiental: Teoria e Práctica no Brasil. Mimeograph. Instituto De Pesquisa Economica Aplicada. Rio de Janeiro.

World Bank, 1994: Chile: Managing Environmental Problems - Economic Analysis of Selected Issues. Report No. 13061-CH. Washington D.C.

World Bank, 1995a: World Development Report 1995. World Development Indicators. Washington D.C.

World Bank, 1995b: Argentina: Managing Environmental Pollution - Issues and Options. Report No. 14070-AR. Washington D.C.

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