Papers Delivered at International Conference on Cleaner Production
Beijing, China -- September 2001 -- Paper 5 of 30

The Need for Creating Framework Conditions for Cleaner Production

Casper van der Tak

Abstract This paper investigates policy instruments that are used in different countries for the promotion of Cleaner Production. The paper argues that many of the policy instruments used to promote Cleaner Production are in the long run counterproductive, and are also distortionary, hampering welfare. Instead I suggest an alternative approach, adjusting the framework conditions under which economic actors make their decisions whether or not to employ Cleaner Production techniques. This involves focusing on a small subset of all the instruments that have been suggested to promote CP. The paper ends with a few suggestions that might be directly relevant to China.

Introduction

I have a confession to make: I am not a CP specialist. Before you stop reading, I am a development economist as well as an environmental economist and as such, I might be able to give some relatively fresh inputs for discussion.

When I started to look into the CP concept and the policy instruments proposed to promote CP, I was astounded to find many recommendations that run counter to the basic tenets of the neoclassical theory of welfare economics and environmental economics. Now, there is nothing in principle against violating these tenets, provided a well-argumented case is made. After all, neoclassical economics certainly has its share of weaknesses. However, I did not find such a coherent case for deviating from these tenets, nor did I find much of the argument. This paper aims to refresh this discussion.

In order to do so, first I will look at why CP is worthwhile promoting. Second, I look at the reasons why policy intervention might be needed to promote CP, discussing market failure and policy failure arguments. Subsequently I will discuss in detail some of the policy instruments that are often proposed to support and promote CP. In particular, I will argue against subsidized credit and special CP funds, mandatory CP auditing, and subsidies for CP - all instruments that are often proposed, but miss the point that CP is supposedly worthwhile because it is (often) cheaper than end-of-pipe (EOP) abatement efforts. I then offer some suggestions in a general, abstract sense that would be applicable to many countries in the world, and end with some concrete proposals for China.

The paper's outline follows this logic. Section 1 discusses why CP is worthwhile promoting, whereas Section 2 discusses why policy intervention is needed. Section 3 discusses some frequently suggested and used CP policy instruments in detail; Section 4 offers some general advice, while Section 5 offers some China specific advice. Section 6 concludes.

1. Why promote CP?

First of all: why are we interested in promoting CP? This is hardly a question worth raising on its own, since the general idea of the answer is quite obvious to most of us (although the wording might be different), but the answer is key to some arguments below, and therefore it is worth going into the issue.

CP consists of a number of techniques that together reduce input use per unit of product, and/or increase the product recovery. Together, this means a reduction in raw input use and pollution per unit of production.

Based on these characteristics, the answer as to why promote CP is:

CP offers the potential to reduce the social unit costs of production.

Digressing for a moment or two, two words need emphasizing in this answer: potential and social.

The "potentiality" is worth emphasizing, because CP does not always reduce social unit production costs. This is partly because some CP options may just be too ambitious - the gain in environmental quality is not worth the cost, but also partly because in some cases an EOP option or a combination of EOP and CP options achieves the same environmental objective at lower (social) costs than a "pure CP" option.

The emphasis on "social" is also well founded, because from a policy perspective it is not the balance of private costs and benefits that should guide decisionmaking. Rather, it is the balance of social costs and benefits of different policy actions that should determine economic policymaking.

Whereas private costs only include the prices and taxes paid by an economic actor, and the private benefits only include the prices and subsidies received, social costs and benefits reflects the costs and benefits to society. For example, in absence of any air pollution regulation, the private costs of SO2 emission are 0, whereas the social costs (health problems costs by SO2, damaged caused by acid rain) may be considerable. Only when an SO2 emission trading is established, or a pollution charge on SO2 is levied, the private costs of SO2 emissions become non-zero, and may coincide with social costs if the charge rate (or the cap on total SO2 emissions in an emission trading scheme) is appropriately chosen - this is called internalization.

Coming back to the mail line of the argument, CP options are only justified to the extent that the marginal environmental improvements and resource savings compensate for the marginal costs of the CP options. Furthermore, if the same environmental improvements may be achieved more cheaply by EOP (or by a combination of CP and EOP) than by CP alone, the former option is preferable. There is nothing inherently great about CP that makes it worthwhile to promote it over other options that achieve the same (environmental) objectives at lower costs.

This last point is worth remembering: any set of policy instrument that may result in the selection of CP options where the same objectives could more cheaply be achieved with EOP options is not socially optimal. The opposite is also true: any set of policy instrument that may result in the selection of EOP options where the same objectives could more cheaply be achieved with CP options is not socially optimal as well. What is needed is the creation of a level playing field for the different options for reducing pollution and raw material inputs, with the selection based on the merits of utilizing these different options alone.

2. Why policy intervention?

All fine, but we have not yet considered the question why government should be interested in initiating any policy to promote CP. After all, even if we have established that under some conditions CP options would increase welfare by lowering social unit production costs, there would be no need for any policy intervention if economic actors would already on their own account chose CP options precisely in these cases.

What we need to investigate is how economic actors make their decisions, and under what conditions these decisions coincide with the socially optimal, and under what conditions not. Based on that, we could argue for (or maybe against, but in this case for) policy intervention, and we would also have a good idea about the type of policy intervention needed.

Economic actors, according to neoclassical theory, base their decisions on their private interest, weighing private benefits and private costs against each other. Neoclassical welfare theory has established some concrete reasons why decentralized decision-making by individual economic actors based on private costs and benefits may lead to an outcome that is not socially optimal. Leaving aside the issues of distribution and equity, there are two important sets of reasons why: market failure and policy failure. Of necessity, my discussion can only be brief, and I will also make some shortcuts from the full theory.

2.1 Market failure

Market failures comprise the reasons why markets fail to generate prices that reflect marginal social costs and benefits. This discrepancy implies that the individual optimization by economic actors is based on private costs and benefits that do not coincide with social costs and benefits, and hence will, generally speaking, not lead to a socially optimal outcome. Under the heading of market failures, several reasons may be mentioned:

• Externalities - Actions with impacts on other people's welfare; impacts that are not subject to market transactions. An example is pollution generated by an industrial company. This affect welfare of others in a negative sense, but the action of polluting itself is not subject to any market transaction.[1] Hence the social production costs are higher than the private production costs (private representing the viewpoint of the decisionmaker, the company in this case). The answer that neoclassical theory provides to the issue of externalities is to internalize them in order to maximize social welfare - to create a market, either through establishing Pigovian taxation or through emission trading.
• Information sets - If private actors do not have full information on production technologies, or on the profitability and riskiness of these technologies, decentralized decisionmaking will not be socially optimal.
• Economies and diseconomies of scale - The fact that unit production costs might fall or increase with total production.
• Market power - The fact that monopolists and oligopolists will not set prices according to marginal production costs, but will equate marginal revenues with marginal costs instead.

Of these, the first two are the most important in the case of CP. The main externalities that are relevant are environmental pollution, and the main information barriers are knowledge about CP options and techniques and the ability to assess their profitability and riskiness.

2.2 Policy failure

Policy failures consist of differences between private cost and benefits and social cost and benefits that are actively brought about by government actions - by taxation, subsidies and regulation. Policy failures include:

• Pricing - prices of energy, water and raw materials often do not fully reflect marginal social costs of their production, due to various government subsidies;
• Pre-selection of technologies - often regulation forces enterprises to select specific (types of) technologies, either directly (e.g. by requiring treatment facilities to be built, forcing an EOP option) or indirectly (by requiring compliance with certain norms within a very specific time table, which is easier done through EOP than through process-integral CP options).

Both of these are relevant to CP. Subsidies for input lower the costs of these inputs, and reduce the attractiveness of options that save on them. On the regulation side, various wordings of rules and regulations force and EOP approach.

2.3 The implications for promoting CP

Both the market failures and policy failures described above as relevant for CP provide motives for policy intervention to promote CP. These policy interventions should be targeted towards the elimination of the market and policy failures that hinder CP:

• Assist and stimulate the development and dissemination of knowledge on CP;
• Internalize environmental externalities;
• Remove subsidies in pricing of energy, water and raw materials;
• Remove biases in environmental regulations.

In each of these cases, theory suggests to directly attack these problems as close as possible at the source of the distortion, in order to prevent that elimination of one type of policy or market failure immediately introduces another.

These market and policy failures lower both the supply of, and the demand for, CP services by either internal sources within the enterprise or outside CP service providers. Lack of knowledge of CP techniques and their impact on costs hinders supply, whereas the other market failure and the policy failures lower demand.

A balanced development of CP should focus on both eliminating the failures that cause supply of and demand for CP techniques and services to fall below the socially optimal. Eliminating failures operating on the demand side is not effective if supply restrictions determine the level of CP activities, and vv.

Since there is latent demand for CP in most countries, based on the desire to reduce input costs and maximize product recovery, a coherent strategy should in its initial stage focus mostly on elimination of the lack of knowledge on CP, and building a basic capacity level to conduct CP. Simultaneously, work can start to create the appropriate framework conditions for CP, by gradually eliminating subsidies on raw materials, water and energy, and by adjusting and sharpening environmental regulation. In the later stages, work should concentrate on the latter aspects.

This strategy entails a focus on adjusting the framework conditions in such a way, that CP becomes increasingly profitable for private actors if CP is in the interest of the society at large. The overriding message to economic actors should hence be that using CP techniques might often increase profits. And hence, that developing in-house CP capacity or hiring outside CP capacity makes sound business sense for enterprises. I can see a large potential role for performance contracting in this strategy.

This suggested strategy is in sharp contrast with the various subsidies etc. that are often proposed - these send the message that CP is not profitable, does not make business sense, and need be supported by external funds provided by the government or be mandated by the government. I will use this simple policy intervention framework as a point of departure for the discussion of CP instruments that have been proposed and used in different locations of the world.

3. A review of instruments to promote CP

Below I provide a summary of which CP instruments are used in selected countries.

Table 1. Cleaner production policy instruments in the European Union & United States

Y - Yes   U - Under preparation   N - No activities or no information

NL - Netherlands DK - Denmark SP - Spain UK - United Kingdom FR - France
B - Belgium GR - Greece IT - Italy EI - Ireland USA - United States of America

This summary is taken from ANZECC (1998:93), and gives an idea about the wide variety of CP policy instruments used in many countries. To some extent, this in my opinion at least also shows a "splintering of efforts" – it would be preferable if instead of formulating specific CP promoting instruments, other instruments, notably environmental regulation and resource pricing, would be made more CP conducive.

UNEP (2000) provides the following examples of policy instruments that are specifically designed for promoting and encouraging CP. In some cases I have added my own comments; in other cases I have left out comments due to space limitations.

Cleaner Production Strategies and Programmes

National and local governments may establish formal cleaner production strategies or programmes, the main aim of which is to serve as a framework for the coordinated implementation of subsequent, more specific policy instruments. These Cleaner production strategies and programmes often analyze the experience so far with initiatives to encourage cleaner production, the successes and the failures. The CP strategies and programmes analyze the barriers towards the implementation and wider adoption of CP, and contain a number of actions to eliminate barriers or prevent additional incentives for the implementation of CP. Cleaner production strategies and programmes are instruments that help in the mainstreaming of CP, so that CP is integrated in the decisionmaking of other ministries.

For example, the four major themes in the Australian national strategy for cleaner production are:[2]

• Provision of information to enable industry, governments and the community to make appropriate decisions. Information recipients need data from diverse and credible sources. Data sources are the local and national governments, industry associations and environmental organizations.
• Supply of adequate management and analysis tools and systems to enable industry to be able to adopt cleaner production. Effective cleaner production adoption requires integration of management information systems, technologies and comparative environmental data. Many of these tools and systems are still in their infancy or, if developed, are not available in an appropriate format to those implementing cleaner production. Governments and industry associations, as well as community groups, have clear responsibilities to develop and encourage their broader use, and train staff and management in their use.
• The design of regulatory systems to provide incentive structures for the adoption of cleaner production. To be truly effective, they should also acknowledge the role of industry self-regulation, as well as government enforcement. This corresponds with the major theme that in order to stimulate CP, not so much additional CP-specific measures are needed, but EOP biases in existing regulation needs to be removed.
• Strengthening of the market for goods and services by eliminating market-distorting practices, or where this is not possible, compensating for them. This includes most importantly the removal of subsidies on energy, water and raw materials, a common theme.

In my view, this provides the basis for a coherent approach to CP, by solving knowledge constraints and providing correct framework conditions. In a certain sense, Section 4 is a further interpretation of the ideas expressed in the Australian national strategy above.

Product Bans

An authoritarian means of promoting cleaner production practices may be through the imposition of a ban – or a defined phase-out schedule – for a particular product or substance.

Extended Producer Responsibility

EPR aims for environmental improvements throughout the life-cycle of product systems by making the manufacturer responsible for various parts of the product's life cycle, including in particular for the take-back, recycling and final disposal of the product.

Requiring Cleaner Production Audits

As part of their permitting requirements, firms may be mandated to undertake cleaner production audits of their plants and to implement some of the audit findings. CP audits are a structured means of identifying cost effective waste minimization / cleaner production improvements within a particular company.

While the implementation of such audits is often entirely voluntary these audits may also be stimulated by appropriate government policies. An example of a government policy relating to CP audits is the inclusion of major recommendations of the audits as compliance conditions in the permits. The next section contains an example of such an approach. Another approach – which has been employed in the UK for energy efficiency audits – is that the government subsidizes the cost of energy audits to firms (in the UK, the subsidy was 50%).

In my opinion, the main drawback of this approach is that it sends the wrong message: that CP audits (or energy efficiency audits) need to be subsidized or required to make them attractive to enterprises. In my view, the whole process of CP (or energy efficiency audits) followed by implementation of the commercially most attractive recommendations either is expected to be profitable for the company, in which case no subsidy nor government mandate is needed, or it is not expected to be commercially attractive at all, in which case the whole process should not be initiated.

Mandatory EMS & Reporting

In terms of integrated permit conditions, firms may be required to implement a structured environmental management system and to make public information on their environmental performance.

Financial and Technical Incentives

Governments may stimulate cleaner production measures by providing grants, loans and favorable tax regimes, and by supplying targeted technical assistance to relevant industrial enterprises. This is actually a family of instruments – subsidies, favorable tax regimes to make CP investments more attractive, special loan funds for CP projects, and targeted technical assistance.

Subsidies and favorable tax regimes

To start with the first: CP subsidies and tax regimes favorable to CP. To what purpose? Do they aim to eliminate a barrier or build capacity? I though the idea behind CP is that it allows enterprises to save costs in their production process and in their compliance with environmental regulation – but if that is the case, do we need subsidies? I think not. There are occasions where shifts in tax regimes are warranted – for example, the elimination of subsidies for energy, water and raw materials, and the introduction of environmental taxes (greening of the taxation system). These changes eliminate distortionary fiscal systems, and make sense outside their contribution to the uptake of CP by expanding the opportunities for CP. Introduction of environmental taxes is to be encouraged.

However, the lack of profitability of CP is not what is hindering the uptake of CP (at least that is the claim – we are interested in CP because it is (often) cheaper than EOP) – so increasing the incentives (for example, allowing accelerated depreciation of "environmental" or CP investments) to engage in CP does not seem a logical approach. Basically it provides the wrong message: that special treatment and government intervention is necessary to make CP attractive.

CP funds

UNEP (2000) has the following to say on CP loan funds:

"Financing cleaner production investments has been a problem in many of the economies in transition and in developing countries. The undeveloped credit market has not been able to provide loans with reasonable interest rates, and the existing credits have often been closed to many of the CP investments because of the small or moderate size of the investment.

It is commonly accepted that the establishment of special purpose funds for cleaner production investments is of utmost importance in economies in transition and developing countries. Although this is commonly accepted, the effectiveness of such funds generally needs to be improved, in particular on the basis of evaluation of their practical application in various projects indifferent developing countries. A major problem has been the inability of many companies, especially SMEs, to prepare acceptable loan applications." (UNEP 2000:40)

Hamner (2001) provides the following summary of findings of an OECD study, which expresses a similar sentiment:

"A major obstacle to trade in clean technology was the lack of access to financing. In some cases, although stronger environmental regulations required firms to obtain clean technology, they were unable to import them due to insufficient funds or credit. Even when the clean technology offered lower operating costs and were economical in the long term, companies lacked adequate cash flow to make a significant capital investment in the technology. This problem was most acute in the high-debt countries of Latin America and Central and Eastern Europe, and in those countries with limited reserves of foreign exchange. The problem of financing appeared to be at times linked with low environmental standards. In some countries, governments seemed to be reluctant to strengthen or enforce environmental regulations fully because of the realization that companies would find it financially impossible to comply with them. This finding suggests, then, that strengthening environmental standards alone in non-OECD countries will not be sufficient to encourage an expansion in trade in clean technologies." Hamner (2001:29)

I am certainly not convinced about the need for specific CP funds in developing and transition economies. The reason is that the absence of credit affects all sectors of the economy, and not only CP. For example, farmers lack absence to suitable credit, SMEs lack access to suitable credit, all industrial sectors lack access to suitable credit – and following the logic outlined above, this would justify the establishment of thousands of specified credit funds?! This would hardly be conducive to successful financial reform.

The recommendation for the establishment of specific CP funds ignores considerable evidence that show the general lack of successes of various types of specialized credit funds, which makes one wonder why CP funds are so much advocated – apparently this recommendation is made without reference to the ample evidence in development economics literature that such credit funds are difficult to establish successfully, difficult to manage and sustain, and involve high transaction costs, for example to check the eligibility of a proposal (in the case of CP funds: is the proposal indeed a CP project?).

Lastly, absence of credit should not really hinder CP projects in early stages of CP development: the most attractive CP options are often housekeeping options that require little investment (if any at all).

4. A coherent CP strategy and its policy implications

On the basis of the analysis in Section 2 of the reasons that explain the lack in take-off of CP, it is possible to derive a coherent CP strategy, based on the evolutionary stages of the development of environmental policies. Although I describe these as separate stages, the distinction between the different stages is quite gradual, and the strategy should be modified in accordance with this gradual transition.

4.1 First stage – no environmental regulation or EOP focused regulation

Even in absence of environmental regulation, or in presence of environmental regulation that forces enterprises to use EOP measures to reduce pollution, there will be demand for CP options and CP services driven by the desire to reduce input costs (energy, water, raw materials) and to increase product recovery. These are the drivers for the first batch of CP projects.

Therefore, in this stage the focus should be on developing what has been called the basic capacity level for cleaner production (OECD, cited in Hamner 2001). According to the OECD, BCL is achieved when a country has:

• An active core of CP advisors and trainers;
• A set of demonstration projects;
• One or more functioning CP centers;
• Training materials available in the local language;
• CP principles included in university curricula.

The demonstration projects are very important, and should concentrate on the information that will influence enterprise decisions: profitability, Internal Rate of Return, and most powerfully, simple payback periods. A good example of what I have in mind (though admittedly this example is for a subset of CP, energy efficiency) is the information on energy options generated by the State Energy Conservation Information Dissemination Center in China. This information focuses on the profitability for the enterprises, which is their driver for change, and not the implications of these projects for energy efficiency (enhancing energy efficiency is not an enterprise objective in itself).

In assessing the impact of CP projects on enterprise profitability, it is important to take all cost factors into account. In my own experience (analyzing different options to increase energy efficiency in the Netherlands), I found that it is easy to underestimate hidden costs, like management time, resistance to change within organizations, training time, realistic costs of capital,[3] etc. Some CP literature contains claims that are hard to believe (e.g. a yearly return of 100,000 US$ on an one-time investment of 10,000 US$) at least in absence of any indication what cost factors have been assessed, and how.

During this stage, the groundwork should be laid for the next batch of CP projects, through a gradual phase-out of subsidies on water, energy and raw materials, and the introduction of environmental regulations that are conducive to CP.

4.2 Second stage – Emerging CP-friendly environmental regulation

In the second stage, CP would still be partly driven by the wish to reduce on costs for raw materials, water and energy, and the wish to have a higher product recovery. However, CP is now also driven by the need to comply with environmental regulation that is CP-friendly.

CP-friendly environmental regulation has a number of characteristics. First is that it leaves enterprises free how to address environmental targets set for them – so the environmental regulation would need to include no biases towards certain types of technologies (EOP) at the expense of others (CP).

Second is to provide enterprises some freedom in their decisionmaking on the amount of pollution, but with clear penalties for polluting activities. Both emission trading and pollution charge systems[4] have the potential of providing companies with a large degree of freedom. Negotiated agreements, as a particular form of agreements between industry and government, may also be successful, provided they contain a clear "threat" as to what would happen in absence of such an agreement, and a clear penalty on free-riders and non-complying enterprises.

In support, it is possible to stimulate environmental labeling initiatives that will possibly provide marketing advantages to environmentally responsible companies.

4.3 Third stage – Environmental regulation driven CP project

In the third stage, it is environmental regulation only that drives CP. CP projects are initiated in response to ever-tightening environmental regulation. In this stage, the emphasis should be on maintaining a flexible environmental regulation framework, providing enterprises with freedom in how to achieve environmental objectives and in their level of emissions, as discussed above.

However, to allow enterprises to respond efficiently to ever-tightening environmental regulation, several conditions need be satisfied. One is that the tightening of environmental regulation should be pre-announced[5] and credible – enterprises should be satisfied that the decision to tighten the regulation would not be reversed. In general, such a reversal happens when too tight environmental regulation has been proposed after an insufficient consultation with the enterprise sector. A second factor that contributes to uncertainty about possible reversals of environmental regulation is the lack of power of the environmental authorities.

Indeed, a high quality dialogue and a powerful environmental authority seem pre-conditions for credible environmental targets. Wallace (1995) uses these criteria in an insightful discussion of how different country stimulate environmental innovation with more or less success. The more successful cases are in alphabetical order Denmark, Japan and the Netherlands – all cases in which there is powerful support for improving environmental quality, a high-quality dialogue between enterprises and government,[6] and a flexible environmental regulation system involving negotiated agreements.

This is not to say that these countries are already in the third stage. I believe they are in the second stage, but that in these countries the groundwork has already been laid for the successful entry into the third stage.

4.4 Summarizing conclusions

For convenience I have included a table that summarized the discussion above.

Table 2. Summary of the CP strategy suggested  

5. Improving CP framework conditions in China – some suggestions

I thought it might be a nice idea to provide some more concrete examples of what I have in mind. For these examples, I have chosen China. In the evolutionary stages described above, China is – like most other countries – in the second stage. Considerable investments have been made by the Chinese government and various donor organizations like UNIDO and UNEP in the development of the basic capacity level for CP, and subsidies on for example energy are gradually being phased out. Other inputs might be underpriced; for example, water still seems to be underpriced, but plans are underway to address this issue. The most important task now seems to be to address two issues:

• Demonstrating more clearly the potential profitability of CP for enterprises, along the lines discussed in Section 4.1;
• Making environmental regulation more conducive to CP

I will focus my comments on the last issue, and provide some examples of how the system of environmental regulation in China might provide better framework conditions for CP.[7]

In Wang (2001), an English translation is provided of key texts of the EIA and so-called 3 synchronizations regulations.

According to Article 13 of the Law of Environmental Protection, “Environmental impact assessment report of construction project should make assessment on the pollution caused by the construction project and on its environmental impact. It should specify pollution control measures. The design program of the construction project may be approved by the responsible environmental protection department after the report on environmental impact is examined by the responsible project department and approved by the responsible environmental protection department through official procedures."

According to Article 26, "Pollution control facilities of the construction project should be designed, constructed, and run together with the main body project on a synchronous basis. The construction project may be put into production or use only after the pollution control facilities are examined and accepted by the responsible environmental protection administrative department, which has examined the original environmental impact assessment report." (Wang 2001:17)

Wang argues that these wordings imply an EOP bias, and I agree. A slight rewording of the relevant regulations, and an accompanying change in the implementation of these regulations, could help to make the investment approval system more conducive to CP. A possible rewording could be respectively:

"Environmental impact assessment report of construction project should make assessment on the pollution caused by the construction project and on its environmental impact. It should specify for each of the pollutants listed in Appendix A[8], the maximum amount that each year will be emitted into the environment, and the maximum amount that will be emitted in a 24-hours period.[9] The design program of the construction project may be approved by the responsible environmental protection department after the report on environmental impact is examined by the responsible project department and approved by the responsible environmental protection department through official procedures."

and

"Pollution control facilities of the construction project and pollution prevention measures integral to the production process should be designed, constructed, and run together with the main body project on a synchronous basis. The construction project may be put into production or use only after the pollution control facilities and pollution prevention measures are examined and accepted by the responsible environmental protection administrative department, which has examined the original environmental impact assessment report."

These wordings might help to remove some of the biases in the Chinese environmental regulations that seem to hinder the uptake of CP.

6. General conclusions

In this paper I have investigated the content of the policy instruments that are often suggested to promote CP. I have argued against some of the more distortionary instruments that are often proposed, such as specialized CP funds, and argued for a strategy that focuses on elimination of market and policy failures.

This strategy is based on the notion to shape the framework condition in such a way that individual economic actors, acting in their self-interest, will produce an outcome that increasingly utilizes CP techniques when the CP techniques indeed enhance social welfare. Following this strategy means that profit maximizing enterprises will increasingly use CP when that is socially optimal – when CP lower social unit production costs.

A corollary of this strategy is that CP should be positioned as a profitable business opportunity rather than an activity that should be subsidized or required by environmental regulations.

The strategy is well summarized in Table 2 which I have copied here for the convenience of the reader.

References

ANZECC (1998), Towards sustainability: Achieving Cleaner Production in Australia. Australia and New Zealand Environment and Conservation Council.

Hamner, B. (2001) Financing Cleaner Production, final draft. Seattle, Washington, January 2001. Prepared for ADB.

UNEP (2000), Government Strategies and Policies for Cleaner Production, Draft. Paris, France

Van der Tak, C.M. (2001), International Policy Study: Draft final report. Prepared for the RNE funded project "Promotion of Cleaner Production and Environmental Management in China Through Market Forces", under a subcontract from IVAM Environmental Research BV.

Wallace, D. (1995), Environmental policy and Industrial innovation: Strategies in Europe, the US and Japan, Earthscan.

Wang, H.C. (2001), A Framework Proposal for Adjusting Policies and Rules Concerning Cleaner Production. Prepared for the RNE funded project "Promotion of Cleaner Production and Environmental Management in China Through Market Forces"

Dr. Casper Meeuwis van der Tak, General Director NCC Consultancy BV, 5/F, Office Building B, East Gate Plaza, Dong Cheng, Beijing, China, Telp: +86-10-6418-1888, Fax: +86-10-6418-2246, Mobile: +86-1300 129 4612, E-mail: njzh@mx.cei.gov.cn 

The contents of this paper are partly based on a report I prepared under a subcontract of IVAM Environmental Research BV, as part of a project "Promotion of Cleaner Production and Environmental Management in China Through Market Forces". See Van der Tak (2001)

[1] Not subject to any market transaction in the sense that the victims of pollution have not sold the right to pollute to the factory.

[2] See ANZECC (1998).

[3] For example, the market interest rate is not appropriate for enterprises that have a fixed credit line; in that case the appropriate cost of capital is either the IRR on the marginal project that is replaced, or should include the cost of negotiating an expanded credit line.

[4] Especially one that charges all emissions, and not only "above-standard" emissions of pollutants.

[5] So as to provide enterprises a clear picture what the environmental requirements imposed on them will look like 10 years or so from now.

[6] And hence, a set of credible long-term environmental targets.

[7] I have been selective; for example, I have not commented on the pollution levy system, which could also be improved, as is often mentioned by various commentators. In that particular case I have refrained from commenting, because the various improvements suggested might also require institutional changes.

[8] A list of important pollutants, which could be regularly updated

[9] Or another short time period.