The harmonization of domestic structures and legislation with those of the European Union is currently considered to be a high priority, with Estonia having already been invited to join the first wave of new members during the early part of the next decade. Both Latvia and Lithuania share similar goals, with more realistic targets for accession in the next 10 years. All three countries also intend to join the OECD in the coming years.
It is important to mention that although demand for environmental technologies and services in the Baltic countries is relatively high, the market itself is quite small. All three countries have a combined population of 7.7 million people, which represents a rather limited market.
As can be seen in Table 1.1, environmental expenditures in the Baltic States totaled over USD 130 million in 1996. Estonia accounts for over half of this figure, spending USD 77.7 million. This can be attributed to a number of factors, including the relatively strong economic situation, the financial support offered by Finland that allows the country to channel funds into environmental projects, and the high priority given to achieving EU accession and the accompanying environmental reform that is necessary prior to this. It is expected that in the next few years, the environmental technology market in the Baltic countries will grow at a rate of 4 to 8 percent annually.
| TABLE 1.1: TOTAL ENVIRONMENTAL EXPENDITURES IN 1996 | ||
|---|---|---|
| Country | Expenditures (USD mln) | Share of GDP |
| Estonia | 77.7 | 1.7% |
| Latvia | 27.6 | 0.5% |
| Lithuania | 31.1 | 0.4% |
| Total | 136.4 | |
A shift in the financing of environmental projects has been seen in recent years: The share of investments made by private enterprise has risen while the share allocated from state, regional and municipal budgets has declined. This trend is expected to continue in the coming years.
The majority of state financing in all three countries is allocated to the construction and maintenance of wastewater treatment facilities and public water supply projects. The remainder is spent on waste management and air protection. Industry and municipalities usually cover the costs of projects related to waste and air.
Based on a review of secondary sources, the market for environmental technologies in Estonia can be estimated at USD 45-55 million per year with an annual growth rate of approximately 6 percent. More than half of the market is based on domestic production, with the remainder based on imports. The Latvian pollution-control equipment market is estimated at around USD 18-22 million with an annual growth rate of 4 percent, while Lithuania's market for environmental technologies is estimated to be worth some USD 25-28 million with an annual growth rate of 4 percent. These figures should, however, be considered with care.
Generally speaking, the revenues of state environmental funds are not derived from the national budget, and therefore environmental protection is not competing with other social programs for limited state resources. The Estonian Fund for Nature Protection and Rational Use for Natural Resources was established in 1983 to collect revenues from fines and non-compliance fees for polluting natural water bodies. Under the Ministry of Environment, the Fund collects financial resources and provides support for environmental protection.
In Latvia, the Environmental Protection Fund was established in 1996 under the Ministry of Environmental Protection and Regional Development to support environmental projects. The Fund manages the state special budget for environmental protection and receives 40 percent of its revenues from nature taxes. The Latvian Environmental Investment Fund was established in November 1997 to pool certain earmarked domestic resources and foreign funds to support private and public environmental projects. A further source of funding is the Municipal Development Fund, created as a sub-project of the International Bank for Reconstruction and Development to mobilize financial resources for local governments where state funding was deemed insufficient.
The Lithuanian State Fund for Nature was created in 1993 to collect revenues from fines for the violation of environmental protection laws. In 1998, the Lithuanian Environmental Investment Fund is expected to become operational. It will provide soft loans and limited grant financing to the public and private sector for environmental projects.
Only in Estonia do state funds currently account for a significant amount of the country's spending on the environment. These resources are generally used to finance national and regional public infrastructure projects, municipal projects (such as the construction of new wastewater treatment plants) whose costs exceed their budget capability, and projects in other priority areas.
State environmental funds' main activities are to provide financial support for investments, usually through loans with preferential conditions. Alternative forms of support include grants, subsidies to bank credits, equity involvement and others. The form of funding available for any given project depends on the project itself, the investor and the financing institution.
Table 1.2 presents the breakdown of expenditures from state environmental funds for 1996. As illustrated in Table 1.2, the majority of expenditures were allocated to water-related projects. This emphasizes the current priorities of the Baltic States and the high investment costs. As previously mentioned, the funds spent on wastewater treatment, ensurance of water quality, and water supply are generally spent by municipalities. On the other hand, air pollution control projects (caused by stationary industrial sources) are usually covered by investors' own funds.
| TABLE 1.2: BREAKDOWN OF 1996 EXPENDITURES OF STATE ENVIRONMENTAL FUNDS | |||
|---|---|---|---|
| Country | 1996 Expenditures (mln USD) |
Year of establishment | Expenditures by Sector** |
| Estonia | 6.6 | 1983 | Water-related projects (42%), Waste (14%), Air protection (4%) |
| Latvia* | 3.7 | 1996 | Water protection (64%), Waste (25%), Air protection (11%) |
| Lithuania | 1.1 | 1993 | Water-related projects (90%), Waste Management & Air Protection (10%) |
| * Data is for 1997 ** Totals may not amount to 100 percent Source: State environmental protection funds of the surveyed countries, 1998 |
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State environmental funds generate their revenue mainly from economic instruments for environmental protection, such as user fees, disposal charges and noncompliance fines. Estonia collects most of its fines from violations of water and air protection regulations. The levels of income from fines in each sector continue to grow each year. In Latvia, natural resource taxes generate the most revenue, followed by fees collected from penalties and licences. In Lithuania, 1.3 percent of the state environmental budget constitutes revenues from taxes, fines and fees. This source of income is expected to grow in the future.
Since the early 1980s, Estonia's environmental legislation has included various acts concerning water, waste and air pollution. The National Environmental Strategy was adopted in 1997, and the drafting of the National Environmental Action Plan will be completed in 1998.
Latvia introduced its new framework law, the Environmental Protection Act, in 1991. This legislation was followed by the National Environmental Policy Plan, the Environmental Health Plan and the Environmental Action Plan, which were adopted between 1994 and 1995.
In Lithuania, the Environmental Protection Act was adopted in 1992, and together with the National Environmental Strategy, which was adopted in 1996, constitutes the main environmental framework.
All countries have ratified the 1992 Helsinki Convention on the protection of the Baltic Sea.
Nevertheless, enforcement and implementation of these regulations still need to be improved. Although certain levels of enforcement exist in each country, it is by no means comprehensive and consistent. Enforcement of legislation tends to revolve around monetary penalties but also includes environmental standards, restrictions and permitting systems. These policies are often implemented at the local level, without coordination at the national level. Therefore, requirements and levels of enforcement vary greatly within any given country. Another factor contributing to the problems associated with the meeting of standards and regulations is the rate at which small and medium-sized enterprises are growing, leading to difficulties in the tracking and collection of fines.
The system for assessing environmental fees and fines is complex, and the degree of responsibility among authorities varies. In general:
The effectiveness of monetary penalties to increase compliance is limited. The "polluter-pays" principle applies, but levels of charges are not high enough to act as a serious deterrent. Furthermore, the collection rate is well below 100 percent.
Policy coordination, modification of legislation, increased enforcement of regulations, education and institutional strengthening, besides major investments in water and air protection are all likely to be part of future environmental actions aimed at ensuring compliance.
Ministries of Environment generally manage and implement national environmental policy, coordinate national environmental projects and maintain international cooperation. Environmental monitoring and enforcement is normally carried out by regional authorities and inspectorates as is the issuing of environmental permits, collection of charges and imposition of penalties. Physical planning and construction permits, and utility contracts are administered at the municipal level. Municipalities are increasingly responsible for waste management and wastewater treatment including operation of facilities and the calculation and collection of fees and fines.
Governments collect environmental information, such as records of compliance and discharge monitoring for processing, storage and distribution, but they often do not provide timely access to the public. National statistical offices are mainly responsible for processing and disseminating environmental information. Annual environmental reports are published by each Ministry of Environment.
Estonia has a well-developed body of legislation that reflects most key areas of environmental protection. The National Environmental Strategy (NES), adopted in March 1997, is the primary policy document on the environment. It has set out short-term and long-term goals for the state of the environment to be achieved by 2000 and 2010 respectively. The National Environmental Action Plan for Estonia is currently under development.
Latvia established a state agency known as "Vides projekti" (Environmental Projects) in July 1997 to provide services such as project preparation and prioritization, feasibility studies and bidding documents. The operation of this agency is funded by the Latvian Environmental Protection Fund, the Latvian Environmental Investment Fund and the Municipal Development Fund. Latvia has also adopted a National Environmental Action Plan.
Lithuania has 56 Municipal Nature Protection Funds that collect revenue from pollution charges. Seventy percent of these revenues are directed to the municipalities while the remaining 30 percent are channeled into the state budget. The Ministry of Environmental Protection handles most of the environment-related issues and projects in Lithuania.