5:57 AM Nov 2, 1995
INTERNALIZING ENVIRONMENTAL COSTS ISN'T COSTLESS
Geneva 1 Nov (Chakravarthi Raghavan) -- Internalization of environmental costs in commodities sector of developing countries would require international commodity cooperation to enable the increased costs to be reflected in prices and assistance to compensate the exporting countries if price increases results in reduced consumption and thus export earnings, according to UNCTAD. In a report to its Committee on Commodities, the UNCTAD secretariat says that international cooperation needed to achieve the objective of internationalization of environmental costs would require cooperation among producers of same or substitute commodities as well as between producers and consumers to enable reflection of the costs in commodity prices as well as aid if the increased prices result in reduced earnings. The report notes that in principle, measures to internalize environmental costs -- aimed at altering behaviour of producers and consumers for a socially optimal production/consumption mix -- should not be constrained by inability to reflect them in prices. However, in developing countries where poverty alleviation and development in general have an important role in the social welfare function defining such an optimum mix, and foreign exchange earnings is an essential factor in this. As a result,development objectives and priorities -- economic growth, foreign exchange generation, equitable income distribution, employment creation and increasing competitiveness -- have a bearing on the weight given to the overall policy mix to environmental issues, industrialization policies and choice f internalization instruments. No doubt some environmental measures, including variation of subsidies or input aids, in the production process fetch benefits to the producers. The Integrated Pest Management in Indonesia -- reduced application of pesticides, use of pest-resistant varieties of crops, supplemented by crop rotation with leguminous plants and nitrogen-fixing algae in paddies -- resulted in decline by 90% of pesticide use but a 10% increase in yields. But for developing exporting countries dependent on one or a few commodities for bulk of export earnings means that any reduction in export earnings due to internalization policies would be a severe blow to their development. The very low levels of income of commodity producers in developing countries also preclude any reduction in income-levels due to internalization. Unlike developed countries who could compensate producers for incomes lost by transfers from the state budget, this will be not be possible for developing countries. If internalization leads to increased poverty, income-elastic environmental activities like soil or water conservation would be cut back. In mid-1980s, falling cocoa prices and incomes led Brazilian producers to replace cocoa plantings by other land use, like pasture for grazing threatening the Atlantic forest ecosystem, or with growers selling timber from forest reserves to pay off debts. Internalization in developed countries may be a matter of "getting the prices right", but in developing countries the income effects may be as significant as price correction. In theory, to enable internalized environmental costs to be reflected fully in commodity prices, producer-exporting countries could conclude an agreement among themselves without agreement of consumer-countries. But practice showed that such agreements would be fragile, and any event need a critical mass of market power and the internalization of costs would be similar across countries. Product differentiation by commodity producers, through labelling schemes, could also enable them to charge increased prices for commodities reflecting internalized costs. Consumers in the North seem willing to pay a 5-10 percent increased price for such products. But if the prices of products fail to reflect internalized costs or such reflection leads to a decline in foreign exchange earnings of developing countries, arrangements to support the producers including through finance would be called for. Mechanisms to subsidize development of and access to environmentally friendly methods of product would also help in preventing under-cutting of prices between producing countries continuing to use cheaper, but environmentally damaging production methods. Such subsidization and provision of finance could be viewed as compensatory finance for damage inflicted by environmentally unsound methods of production which made possible the low costs of primary commodities -- a form of subsidy by the South for the North. The UNCTAD report refers in this connection to proposals for additional finance and technology transfer by the North -- such in the joint letter to the Dutch Parliament from the Dutch Ministers of Housing, Spatial Planning and Environment and Development Cooperation, in the context of demands by industrialized countries for changes in the way goods are produced by developing countries to ensure restraint in their use of environmental utilization space to a level lower than that in the Western world. UNCTAD argues says that there is no difference in principle between compensation for restraint in use of environmental space when it is the outcome of requests from developed countries and when it is the outcome of voluntary decision by developing countries as would be the case if the later decided to implement internalization measures and use of environmentally preferable production methods. Finance for environmentally sound processing methods of products, the secretariat adds, would be the most promising avenue of international cooperation in this context, citing the example of the Multilateral Fund under the Montreal Protocol on ozone layer protection. Financial aid to preserve tropical forests could be seen as a financial payment for environmental services rendered by countries preserving the tropical forests, and corresponding to the payments consumers would have had to make if exporters had successfully internalized environmental costs and part of its is reflected in the prices. But such international cooperation would need institutional arrangements: * involving commitments within the context of informal, but regular, round tables involving commodity producers, processors and consuming countries with the latter providing finance, technology and necessary information to producers; and * formal agreements for a compensation fund by financial contributions from the commodity-importing countries. In either case international cooperation would require transparency and exchange of information for selection of environmentally sound technologies and verification of their adoption and use. Irrespective of the channel through which costs could be internalized and environmentally preferable methods adopted, and regardless of the international cooperation envisaged, there was need for a number of steps before such action: * identification of environmental costs that producers would internalize; * cataloguing of available options, including potential technologies; * assessment of effects of internalization on production costs and volumes, as well as on other socio-economic variables; and * estimation of international trade effects under different international cooperation scenarios.