The tax rates were increased by a factor of roughly three, as the old rates were far too low to give incentive for reduction in emissions and also they did not provide significant revenue. The only exception was made for heavy metals, for which the tax was lowered as the old tax rate was considered unrealistically high. Furthermore, taxes for chlorides and sulfates have been removed because the tax revenues generated from these two pollutants were not regarded sufficient to justify the associated costs of administration and enforcement. But being untaxed does not mean that they are unregulated: permits still contains limits on their emissions. The authors regret that Latvia did not take advantage of indexing the new taxes while extensively revising the law. Although inflation is currently low, an indexation would ensure that the taxes are not eroded over time and it would put enterprises in a better position to predict how rates will vary over time and would make it easier for them to make cost-effective and longer term decisions about investments into emission reduction measures.

While revising the law, special emphasis was given to create an instrument which helps encouraging investments in pollution reduction measures. An innovative element to reach this goal is the introduction of a emission tax waiver: Enterprises switching to measures such as cleaner production technologies, installing end-of-pipe treatment or modifying production processes are allowed to waive a part of their emissions tax liability during the period of implementing the measure. During this period, a qualifying enterprise can reduce its emissions tax payments by an amount up to the savings it would realize on its base rate tax burden once the measure is fully implemented. In essence, the tax waiver enables an enterprise to enjoy the benefits of reduced emission tax payments that will eventually be generated by the pollution-reducing measure while the measure is still being implemented.

However, an enterprise applying for a tax waiver has to comply with a number of requirements: Only enterprises, which have no outstanding tax debts are allowed for application; during implementation the enterprise has to remain free of tax debts and its emissions may not violate annual environmental quality standards. When applying for the tax waiver, the enterprise is obliged to provide a documentation of the effectiveness of the proposed measure. The application for the tax waiver has to be filed with the Ministry of Finance and with the respective regional and local authorities that receive a share of the emission tax revenues. Finally the enterprise has to obtain a certification by the Ministry of Environmental Protection and Regional Development on the effectiveness of the proposed measures as well as a certification of the state and local tax authorities. If proposed measures take longer than one year to implement, the enterprise is obliged to repeat the application every year.

At the time this study was written no tax waiver has been granted yet. Only a few enterprises have made inquiries about the procedures and the requirements. The authors find the idea of an emission tax waiver good, but they doubt, whether the goals can be achieved with the current form of the waiver. It can be argued that the requirements an enterprise has to fulfill are reasonable. However, for example, big polluters are excluded from benefiting from the tax waiver as most of them are indebted, despite the fact that in such firms major emission cuts could be achieved for low cost. Furthermore, the application procedure is very costly. The transaction costs can be relatively high compared to modest environmental tax savings enterprises can expect. The authors of the study suggest that options for improvement could include a simplification of the application process and an increase in allowed tax savings.

The authors suggest numerous recommendations to raise the efficiency of the current system of emission taxes and limits. Such recommendations include:

• To review air quality standards, and, in such a process consider:
  • to focus on those pollutants which are relevant to Latvia while dropping the others;
  • to decide on which criteria the standards are set;
  • to setting annual average standards (common in the West) instead of 20-minutes standards, which were used mostly in the former Soviet Union and which are very costly to comply with;
  • to introduce new standards for synthetic, toxic pollutants, which did not occur in the former Soviet Union and therefore were not regulated.
• To exempt the numerous small emitters from paying taxes at all in order to improve the cost-effectiveness of the system and to reduce the regulatory burden on both sides.
• To evaluate the most effective way of regulating highly toxic chemicals. There are at least three possibilities:
  • Setting very high tax rates. However, if the rates are too high, enterprises might just conceal emissions and not pay taxes.
  • Setting limits only. Such a solution needs effective enforcement with stiff, credible penalties.
  • Employing technology standards.
• To introduce the bubble principle, that means to specify a single limit for total emissions in an enterprise of a given pollutant instead of setting limits for each pipe.
• To charge a fee for processing pollution permits. This would increase the incentive for regional environmental authorities to ensure that emitters have valid permits. In addition, funds would be raised for the authorities (according to the authors, one reason for bad enforcement in Latvia are the limited resources of the regional environmental authorities).
• To link self-reporting on emissions of an enterprise and the frequency of inspection to the compliance history of the firm. The authors think, that this would improve compliance without an increase in enforcement expenditure.
• To establish a governmental clearinghouse for information on pollution reduction measures. It appears that a major obstacle for enterprises is a lack of knowledge on what measures are available. Technical literature from Western Europe and the US is of limited use as enterprises do not have the funds for translations of such material.

The study also provides extensive statistical information, including data on environmental pollution, tax rates and major polluting enterprises.

Ubelis, Arnolds/Seglins, Valdis and Malik, Arun; An Assessment of Selected Policies for Controlling Stationary and Point Source Pollution in Latvia, Environment Discussion Paper No.23, July 1997, Harvard Institute for International Development, p.48, price US$5. International Environment Program, Harvard Institute for International Development, One Eliot Street, Cambridge, MA 02138, USA. Tel: +1-617-4965176, Fax: +1-617-4968040, Internet: http://www.hiid.harvard.edu/pub/ddps90no.htm