At a lunchtime meeting on 26 November, Gordon Hughes presented his recent research on the effects of the current economic reform in Eastern Europe on the environment. Hughes is Professor of Political Economy at the University of Edinburgh and a Research Fellow in CEPR's International Trade programme. He has participated in an advisory group to the European Commission's PHARE programme (Poland and Hungary: Aid for Economic Restructuring). His talk was based on CEPR Discussion Paper No. 482, `Are the Costs of Cleaning up Eastern Europe Exaggerated? Economic Reform and the Environment', parts of which arise out of work originally carried out for the World Bank. The meeting took place as part of the Centre's research programme on `The Economic Transformation of Eastern Europe', for which financial support is provided by the Commission of the European Communities under its SPES programme. The views expressed by Professor Hughes were his own, however, and not those of the World Bank, the Commission of the European Communities nor CEPR.

Hughes first noted the widespread consensus that serious damage is being inflicted on the health of the population of Eastern Europe and on the ecological balance of its natural resources. According to this view, the new East European governments will require substantial foreign assistance to repair the environmental damage created by the former regimes, principally by reducing their current levels of emissions.

Hughes maintained, however, that this widespread view is mistaken. Levels of exposure to the major pollutants exceed the legal standards in most East European countries, but these standards are much stricter than those in force in OECD member countries. `Black spots' certainly exist, but localized problems still exist in all industrial economies. The air quality in Kraków and Katowice can be very bad, but it is no worse than that 20 years ago in the Ruhr, Port Talbot or Pittsburgh.

Environmental legislation and other measures to reduce sulphur dioxide emissions or phase out the dumping of sewage sludge have attracted considerable attention, and the UK government points to the `success' of the Clean Air Acts in reducing smoke emissions. Hughes argued, however, that most of the improvement in Western environmental standards over the last 20 years should be attributed to underlying economic changes, and not to regulation by governments. These included a reduction in the share of coal in total energy consumption, improvements in energy efficiency, and a decline in the importance of heavy industry.

Hughes maintained that Eastern Europe had failed to adapt to the changes brought about in the 1970s and 1980s by high energy prices, industrial restructuring and the shift from industry to services. As East European industrial structures and efficiency levels converge to Western levels following the success of their current programmes of economic reform, a `natural' improvement in their environmental performance will follow.
Hughes then presented the results of his detailed empirical work on the probable impact of economic reform on emissions of major pollutants in Poland. The 25% decline in total industrial output in the first half of 1990 that has resulted from the current stabilization programme should have had a substantial impact on total emissions, especially of air pollutants such as dust and sulphur dioxide. Raising domestic energy prices to match the ruling levels in international markets will lead to an overall reduction in emissions of 40-50% from their pre-reform levels.

Although the combined effects of industrial restructuring and increased energy prices should largely eliminate air pollution from existing sources, the anticipated growth of car ownership in the 1990s may increase emissions of nitrogen oxides, ozone and photochemical smog. The effective adoption of the vehicle emission standards of the European Community as the current fleet of vehicles is replaced should ensure, however, that these problems do not become too severe.

Hughes argued that industrial change will have a smaller effect on levels of water pollution, since the worst problems result from saline water discharges from coal mines and from poor sewage treatment in urban areas. Nevertheless, this does not justify an immediate investment programme, since reductions may be effected more efficiently by reforming the structure of discharge fees to reflect more accurately the economic costs of the resulting damage. Reducing water pollution will require both a rise in the overall level of fees and an adjustment of their relative levels to reflect the relative costs of damage caused by different forms of pollution. In addition, the current exemptions of local authorities and mines from water pollution charges should be abolished.

Hughes suggested that the adoption of transferable discharge permits may also help to reduce the cost of bringing discharges into inland waters and the sea under control. While the initial allocation of such permits will always be controversial, unless the authorities follow the weakest option of allocating permits on the basis of existing discharge levels, the technical problems involved in defining the `terms of trade' for emissions at different points on a river system are much easier to solve than the corresponding problems in monitoring air quality. Experience in the US suggests that a combination of effluent charges and transferable permits could alleviate present water pollution at a much lower total cost than regulatory control mechanisms alone.

Finally, Hughes noted that East European legal systems already recognize the concept of compensation for damage caused by pollution. For example, Poland's Forestry Department extracted significant compensation for the loss of trees resulting from acid rain produced by the electricity industry. He argued that East European governments' environment policies should be designed to reinforce their present reliance upon decentralized, market instruments, such as taxes on energy, effluent charges and transferable permits. They should not move towards the `command-and-control' mechanisms based on the centralized systems of regulation that have characterized environmental policy in many OECD countries: indeed, this is the type of centralized control that their current programmes of economic reform are intended to eliminate.