Pollution Charges in a Transition Economy: The Case of Russia

By Soderholm, Patrik | Journal of Economic Issues, June 1999 | Go to article overview

Pollution Charges in a Transition Economy: The Case of Russia


Soderholm, Patrik, Journal of Economic Issues


After the collapse of the Soviet Union in 1991, its legal successor, the Russian Federation, initiated a transformation from a command-based to a market-oriented economy. As part of this process, the government liberalized prices and initiated the breakup and privatization of state-owned enterprises. However, as the country struggles to address its economic problems, environmental problems must also be recognized. The typical advice from economists and policy analysts has been to use economic incentives, such as pollution charges, more extensively to control pollution [e.g., Bluffstone and Larson 1997; Klarer 1994]. Essentially this paper challenges this widespread view and argues that the proposed policy presumes the existence of an already functioning institutional framework.(1)

The advice to introduce pollution charges as an important part of environmental policy in Russia builds on the observation that economic instruments, under the right conditions, have a number of advantages over so-called command-and-control regulations. First, there is strong evidence (both theoretical and empirical) that the former can obtain set standards of environmental quality at significantly lower costs than a regulatory regime. Further, if firms are made to pay a charge equal to the marginal environmental damage of their emissions, a socially efficient level of pollution will be achieved. Finally, pollution charges also provide continuing incentives to invest in cheaper pollution abatement technologies, rather than simply encouraging minimum compliance. However, in transition economies in general and in Russia in particular, the "right conditions" for this to work are most likely not present.

In other words, the principal theme of my analysis is that pollution charges probably will produce relatively few to no incentive effects in Russia until there is progress toward a fundamental change in economic and legal institutions. Although the transition to a market economy cannot be achieved without the creation of a sustaining legal foundation, the economic literature on environmental policy does little to fully address these issues. In this paper, I identify some important institutional impediments to the introduction of pollution charges in Russian environmental policy both at the enterprise level as well as within the environmental authorities. It should be noted that institutions consist not only of formal rules (laws, regulations), but also of informal constraints on human behavior such as conventions and norms [North 1990]. The impacts of these latter institutions are also discussed in this paper.

Since the historical heritage of the old socialist system plays an important role in determining present behavior, the next section discusses the role of prices and taxes in the Former Soviet Union (FSU). The subsequent section assesses the institutional obstacles to introducing pollution charges in Russia, while the last section provides some concluding remarks and policy implications.

The Role of Prices and Taxes in the Former Soviet Union

In the administrative-command system of the FSU, practically no attention was given to the efficiency implications of pricing and taxation, and accordingly these had very little effect on economic outcomes [Gregory 1993]. Even if the socialist planners had wished to be able to use prices in order to affect enterprise behavior, this effort would have been doomed to fail in an economy where all essential inputs were allocated administratively. Plant managers were constrained not by financial, but by physical flows or administratively allocated resources, and they accordingly faced so-called soft budget constraints [Kornai 1986]. In other words, the budget constraint of the socialist enterprise was not an effective behavioral constraint on the demand for inputs, but existed only as "an accounting relationship."

Although the price system had very few incentive effects in the socialist economy, it did however play an integral role in the rapid expansion of industrial output, as the planners set minimal (or no) prices on inputs in order to stimulate the production of heavy industrial goods.

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