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Possible Control of EU Priority Substances in Danish Waters

3 Economic analysis and assessment

• 3.1 Approach and methodology
• 3.2 Lessons from International economic assessments
  • 3.2.1 ECOLAS Study for the Commission
  • 3.2.2 British studies
  • 3.2.3 Assessment
  • 3.2.4 Benefits
  • 3.2.5 Summary of international studies
• 3.3 Scenarios
  • 3.3.1 Current State (Reference State)
  • 3.3.2 Scenario A - No common measures and no common EQS (as with Water Framework Directive only)
  • 3.3.3 Scenario B - Common EQS and common measures (the 2005 draft proposal for Daughter Directive)
  • 3.3.4 Scenario C - Common EQS and no common measures (the official Daughter Directive proposal)
  • 3.3.5 Summary of scenarios
• 3.4 Discussion of possible regulatory instruments
  • 3.4.1 Economic Instruments
  • 3.4.2 Administrative Regulation
  • 3.4.3 Voluntary Agreements
  • 3.4.4 Summary of Possible Regulatory Instruments
• 3.5 References

3.1 Approach and methodology

The aim of the economic assessment in this analysis is to give an indicative estimate of the total cost of complying with the proposed WFD Daughter Directive on priority substances. For the purpose of assessing the cost of implementing the Daughter Directive, a number of scenarios have been constructed (see section 3.3 below).

The total cost of compliance must be based on an estimation of the most cost-effective policy strategy or "policy package". Such a strategy is, in turn, based on the findings of the technical assessment of the need for action and relevant/possible measures for the individual substances. Also, the cost of a common measure directed at all substances is estimated by looking at the cost associated with detention of stormwater runoff. Due to the limited scope of this assessment and the gaps in data, the economic assessment is supplemented with some general recommendations based on previous experience with regulation of chemical use (se section 3.2 below).

The methodology used in this assessment is a welfare-economic cost assessment in accordance with the principles laid down by DEPA/the Ministry of the Environment in their guidelines (Møller, Andersen, Grau et al. 2000). Both financial cost to industry and consumers and economic cost to the society as a whole are presented where possible. This is also in accordance with the guidance document from WATECO, which focuses on providing the basis for both welfare economic cost-effectiveness and financing strategies (WATECO/European Communities, (2003).

Economic analyses can be made on different levels depending on the purpose of the analysis and the nature of the initiative to be assessed. Normally, economic analyses are divided into the following groups:

• Financial analyses assess the purely financial effects (that is, analysis of cash flows) of an initiative for one or more well-defined groups of the economy. It may be for a certain company, for a branch of industry, municipalities, households, the state, or any other group. The financial analysis assesses the cash flow effects from a certain agent or group of agent's point of view. Following this, it is not very often a sufficient tool for economic analysis, since the loss is often fully or partly a gain for another group in society. The financial analysis, however, has its advantages in its ability to assess implicitly income distribution consequences of an initiative at least for the group or groups in focus. Since income distribution is often an aspect of interest in connection with economic assessment, financial analysis is a useful element of the assessment. When assessing financial cost, we look at producers' prices without VAT or other taxes.
• Welfare economic analyses aim at assessing all the effects - monetary as well as non-monetary - of an initiative on society as a whole. In principle, this includes the sum of financial analyses for various groups of society plus non-monetary effects. This also includes the distortionary effects on the economy of collecting the tax that is necessary to finance the measure. By "society" is normally meant a certain region or country such as EU or Denmark. The aim is to compare all effects by converting the effects into one and same unit, normally monetary terms. In principle, all effects impacting society directly as well as indirectly should be taken into account. Since many of the indirect effects are interlinked and modelling is necessary to explore them fully, a partial approach is commonly applied, which is also the case in this analysis. That means that only the direct effects and the most important indirect effects are taken into account.

The partial welfare economic approach is very suitable to assess a number of political initiatives concerning certain groups in society. Among such initiatives are environmental initiatives such as prohibition against certain chemicals, initiatives to improve water quality etc. More extensive, structural initiatives which affect the whole structure of the economy, such as a substantial change in the tax system, will have many important indirect, interlinked effects through their effects on all sectors of the economy. to analyse such structural changes, general equilibrium analysis must be applied and mathematical models of the relevant economic system must be used. More information about and discussion of the advantages and disadvantages of partial and general equilibrium analyses can be found in Møller (2003).

When estimating the extra cost of a regulation (for instance the substitution of a hazardous substance with a better alternative in industrial production), the starting point is often the difference in price for producers. This is equivalent to the financial cost. In order to estimate the welfare-economic cost on this basis, two standard conversion factors are used: The net tax factor and the marginal cost of public funds^[3]. According to the Danish guidelines from DEPA/the Ministry of the Environment (Møller, Andersen, Grau et al. 2000), these increase the cost by 17 %^[4] and 20 % respectively.

Other methodological issues of importance for the interpretation of the analysis are discount rate^[5], time horizon, geographical delimitation. The discount rate varies depending on whether it is the financial or welfare-economic analysis in accordance with the DEPA guidelines (Møller, Andersen, Grau et al. 2000). For the financial calculation the discount rate used is 6 % per year as a proxy for the alternative return on publicly funded projects. In the welfare economic calculation the discount rate is 3 % per year, which is chosen as a representation of the time preference for the society. According to DEPA guidelines, the welfare economic analysis can take account of the alternative return on investment, by applying a return factor on capital based on the 6 % to the investment share of the cost of the regulation. Due to the uncertainty of the cost estimates at this stage, this principle is, however, not applied here, and 3 % is used for welfare-economic estimates.

The analysis has a 30 year time horizon starting from 2005. This approach is chosen in order to fit the scenarios for the situation with and without the directive as is described in chapter 3.3 below.

The geographical delimitation of the analysis is the Danish economy since the aim of the study is to identify the cost to Danish society. It could be argued that a European Community viewpoint should be adopted in the welfare economic analysis since the policy is EU-wide. This is particularly the case if EU-wide implementation is discussed. However, as the cost to the member states is highly relevant to the decision-makers, this national delimitation must be chosen here.

Finally, it should be emphasized that the economic cost estimates in this analysis are only rough estimates and that the results have a high degree of uncertainty stemming from uncertainties in the technical assessment and the limited number of sources for economic data. It is the premise of this study that only existing sources for economic and technical data are used. In some cases this is not sufficient to give an estimate of the cost of the measures needed to comply with the Directives.

A straightforward calculation of the extra cost per kg of an alternative substance or metal based on a price estimate can give an estimate of the total cost. However, there are several problems with this approach. In order to assess this cost, a number of detailed cost-benefit comparisons for specific product types should be made to consider the relative cost of the different substitutions. The comparisons must include the human safety aspects, effectiveness and availability. The cost of alternatives must be assessed to ensure that substitution is a practical option. It is also possible that some substitutions may be more effective than the priority substance in some applications and that they can be used at lower concentrations. Finally, there may well be a need for new investments in production machinery or packaging or there may be other costs related to the transfer from the use of one input substance to another. All in all, a basic cost comparison on an equal weight basis is a very rough estimation method, but for this overview study it is a feasible way of giving an impression of the proportion of the potential cost.

This introductory chapter starts with a review of the main international economic assessments of the Daughter Directive to assess if the results can be transferred to Denmark. As will be seen, this is not the case. Next, the chapter discusses and describes the scenarios needed to evaluate the situation with and without the Daughter Directive. The chapter concludes with a short, general discussion of the relative cost-effectiveness of possible regulatory instruments to implement the directives.

3.2 Lessons from international economic assessments

A possible source of information for cost estimation of the Daughter Directive is to look at international studies already conducted. The cost estimates from these studies could possibly be transferred to the situation in Denmark. This chapter gives an overview of the relevant findings of a number of British studies and the cost-benefit analysis of the Directive made for the Commission. These are considered the most comprehensive analyses of the cost of the proposed Daughter Directive that have been carried out so far.

3.2.1 ECOLAS Study for the Commission

The ECOLAS Study was carried out for the Commission with the objective of evaluating the additional cost of implementing the Daughter Directive in relation to environmental quality standards and pollution control of priority substances in the EU.

The study uses a case study approach to assess the cost to industry of reducing the use of the PS and PHS. The reason for using this approach is that there are limited data and resources available, and a lot more primary data would need to be collected if other approaches were to be applied (see section on quality of data page III in ECOLAS (2005)). The case studies analysed include (pollutant indicated in brackets):

• chlorine production [mercury],
• iron and steel production [polyaromatic hydrocarbons, metals],
• non-ferrous metals production [polyaromatic hydrocarbons, metals],
• PVC conversion [lead, di(2-ethylhexyl)phthalate],
• refineries [benzene],
• short chain chlorinated paraffins [C10-C12-chloroalkanes],
• production and formulation of pesticides [all pesticides], and
• use of plant protection products [all pesticides]

The last two case studies are references to previous studies.

The study establishes a baseline scenario (with no Daughter Directive, i.e. article 16.8 applies) and two additional scenarios with a more or less strict interpretation of the draft proposal for Daughter Directive. The quantitative goals are specified in the Table 3-1 while the findings of the case studies are presented in Table 3-2.

Table 3-1  Overview of quantitative goals in scenarios in ECOLAS study

Table 3-2 Overview of results in scenarios in ECOLAS study

Note: the range is established by using a 12% discount rate for the lower bound and a 4% discount rate for the upper bound.

None of these case studies turned out to be relevant for the assessment of the Danish cost of implementing the proposed Daughter Directive. The measures and substances that are investigated in the Commission's study are not the ones that constitute a  problem in the Danish context. The estimated unit cost and the total cost of reducing the emission of the substances can therefore not reasonably be transferred and used for estimating the Danish cost. However, the scenario approach with varied deadlines to illustrate the demands in the Directives is very useful, and we will transfer this practice to our assessment.

3.2.2 British studies

In the UK, two relevant analyses have been published: DEFRA (2002), Regulatory Impact Assessment of a Priority List of Substances under Article 16 of the Water Framework Directive, and RPA (2000), Socio-Economic Impacts of the Identification of Priority Hazardous Substances under the Water Framework Directive. These studies were conducted before the current proposal for the Daughter Directive was finalised, but they look at the list of priority substances and the hazardous substances under the Water Framework Directive.

Some preliminary cost estimates for achieving the environmental quality standards (EQS) for point sources, pesticides, monitoring and historic pollution are provided. Table 3-3 below summarises the preliminary cost estimates for point sources, pesticides, monitoring and historic information. The costs presented are based on the costs attributable to compliance with EQSs only and do not include specific controls.

Table 3-3 Preliminary cost estimates for point sources, pesticides, monitoring and historic information, DEFRA

Source: Henton, Water Quality Division, DEFRA. Preliminary Provisional Cost estimates from our consultants. Summary of DEFRA(2002) and RPA(2000)

The costs provided for point source dischargers only include major industrial sources (IPPC sources). The annual cost from SMEs and diffuse sources, e.g. runoff from roads etc., is not included and, hence, the actual cost is underestimated. Furthermore, the figures do not cover all priority substances, such as e.g. PAHs, anthracene, flouranthene, and pentachlorobenzene.

IPPC sources

The purpose of this section is to describe briefly how the annual costs of the point dischargers presented above were calculated. Based on the current permitted annual loads (kg/year) and the receiving waters an assessment was made of the number of industrial point dischargers that were unlikely to meet the Environmental Quality Standards (EQS).

The estimate of the cost is arrived at in four steps. Firstly, for each site a reduction in discharges is calculated so that the EQS are met. Secondly, the treatment technology required to remove the substances of concern is chosen. Thirdly, the sector-specific unit costs of treatment technology are applied, and finally the annual treatment cost by sector is calculated.

In DEFRA (1999), the sector specific treatment costs are calculated for the following sectors: wastewater treatment plants used in metal finishing, textiles, chemicals and pharmaceuticals, pulp and paper, food and drink, and urban wastewater treatment plants. The costs are grouped in costs for organic substances and metals respectively.

The marginal costs (£/kg of pollutant removed) for the different treatment technologies are arrived at by annualising the capital costs of establishing a treatment facility and calculating the annual treatment costs for the technology being analysed, see calculation example in annex B of DEFRA (1999).

The technology specific marginal costs assume that facilities already have some sort of primary treatment technology in place, such as screening, gravity settling or mechanical filtration. The marginal costs therefore assume a more effective secondary or tertiary abatement technology e.g. aerobic biological filtration, nutrient removal, flocculation and coagulation, dissolved air flotation, membrane technology etc. (see chapter 3 table 3.1 DEFRA (1999).

Applying the marginal costs from the UK study to Denmark will result in an underestimation of the actual marginal costs for Danish facilities. This is because most treatment plants of significance in Denmark have already installed both secondary and tertiary treatment technology. Therefore, the marginal cost of removing an additional kg of substance is much higher as a quaternary level of technology will be required.

It should further be noted that the British study assume that emissions and discharges are spread out evenly throughout a year. This may not be the case as some industries may emit substances in pulses thereby exceeding EQS and/or MAC values, in turn leading to an underestimation of the actual costs.

Wastewater Treatment Plants

The costs of wastewater treatment plants (WWTP) have also been estimated. The number of WWTPs distributed on level of technology and facility size form the basis for the calculation. The cost calculation assumes i) that all facilities with only primary technology installed are upgraded to secondary technology, and ii) 50% of facilities using secondary treatment technology are upgraded to a higher level of treatment technology (higher secondary or tertiary). Also, a number of the treatment options studied in this report relate to standards in other directives such as the Urban Wastewater Treatment Directive, and the estimated costs are therefore higher than those that will accrue due to the Daughter Directive.

Sludge Disposal

With the additional treatment at WWTPs, the loadings (metals and organics) in sludge will increase. This will imply that some of the sludge that was previously applied to agricultural land no longer can be used for this purpose. It will therefore be necessary to dispose of sludge through incineration or landfilling. It is estimated that 300,000 tonnes per year (dry weight) of additional sludge will arise. At a cost of approx. £240 per tonne the total additional cost will be around £70 million.

3.2.3 Assessment

The British studies cannot be directly transferred to a Danish context. This relates primarily to the fact that many WWTPs in the UK operate at a lower level of technology than in Denmark. This implies that the marginal cost of removing an additional amount of a substance in the UK will be lower than the marginal cost in Denmark, since an even higher level of technology would be required.

3.2.4 Benefits

The RPA (2000) report also includes an assessment of expected benefits from introducing the Daughter Directive as implied by article 16 in the WFD. This is interesting from a cost-benefit viewpoint even though such an analysis is not the purpose of this study. The primarily benefits are listed below:

i)            Improved water quality;

ii)          Protection and enhancement of the quality of aquatic and marine ecosystems, and of wildlife and their predators up the food chain;

iii)        Priority substances that are persistent, bioaccumulative and toxic may accumulate in the environment and in biota, leading to future problems. These problems include effects on the reproductive systems in biota. Reducing the amount of these substances in the environment should lead to future benefits as the risk of exceeding the critical levels in biota will then become less likely;

iv)        Some substances, such as individual PAHs, generally occur with other substances and may act as an indicator of other non-identified substances. A reduction in or cessation of emissions of such substances will lower the level of potentially harmful unidentified substances in the environment;

v)          The development of new safe substitutes for priority substances and priority hazardous substances may potentially create new business opportunities, particularly for the chemical industry.

These benefits cannot directly be transferred to a Danish context as the starting point before the implementation of the proposed Daughter Directive is different from that of the UK as has already been discussed. The chemical industry in Denmark is comparably small, to give one example. That means that the magnitude of the benefits will probably be smaller in Denmark, but the type of benefits will be similar.

3.2.5 Summary of international studies

In conclusion, the studies mentioned in this chapter are all interesting as background information, but the cost-estimates cannot be transferred directly to Denmark, since the need for action is not the same. In Denmark, the number of substances for which action is needed is limited compared to many other countries, and wastewater treatment is more developed and efficient at the onset. To estimate the cost of a Daughter Directive on priority substances in Denmark, it is therefore necessary to look at particular possibilities of substance substitution. We will also consider the combined effect and cost of a general abatement measure for all substances; detention of substances in stormwater runoff.

3.3 Scenarios

The three main scenarios considered relevant for analysis in relation to the regulation of priority substances and priority hazardous substances to surface waters are established and described below:

• Scenario A represents a situation where the EU Member States do not reach an agreement on a Daughter Directive, thus leaving it up to each Member State, in this case Denmark, to establish its own EQS values and adopt a national strategy for the protection of surface waters based on the existing requirements in the Water Framework Directive (i.e. in reality a sort of  "zero" scenario).
• Scenario B is the situation where a Daughter Directive is agreed on at EU level establishing not only EQS values but also requirements to community strategies against pollution of surface waters in the EU Member States (this scenario represents the EC Commission's 2005 draft proposal for a Daughter Directive). Scenario B entails binding requirements to meet the environmental quality objectives (represented by Environmental Quality Standards, EQS) for surface waters as well as to ensure progressive reduction of emissions, discharges and losses of priority substances as well as cessation of emissions, discharges or losses of priority hazardous substances within 20 years. This implies that Member States will have to take action on an equal basis, affecting the private and public sectors in similar ways and with the same timeframe.
• Scenario C represents the situation where a Daughter Directive does not imply common control measures, but only the establishment of common EQS values. This scenario represents the final Daughter Directive proposal (Com(2006) 397 final)^[6] put forward by the Commission in July 2006. This scenario (Scenario C) will in reality be almost identical with Scenario A as the EQS values to be established nationally in Scenario A would probably not differ significantly from those established at Community level in the Directive proposal. Therefore, the assessments in this report of the implications of the Daughter Directive do not distinguish between A and C in the presentation of the technical and economic issues.

In sum, the relevant scenarios can briefly be described as follows:

• Scenario A: Scenario for the situation without common EQS or common measures (as with Water Framework Directive only);
• Scenario B: Scenario for the situation with common EQS and common measures (as draft proposal for daughter directive);
• Scenario C: Scenario for the situation with common EQS only (as final, proposed daughter directive).

In the following reporting of the findings of the assessment, Scenarios A and C will be presented together (as "Scenario A").

It is common to the three scenarios that Member States must apply the combined approach (WFD article 10) when controlling discharges into surface waters. Following this approach Member States must ensure the establishment of emission controls based on the best available technology (BAT) or community emission limit values (the stricter of the two) for all discharges from point sources (WFD article 10.2). To control and reduce pollution from diffuse sources the best environmental practice must be applied. In addition, according to WFD article 10.,3 Member States may be required to apply even stricter controls to meet EQS.

In Denmark, the application of BAT is already required by national legislation and by regulation of discharges into the aquatic environment.

The scenarios will define the overall state as regards environmental objectives that are to be implemented during the coming years as well as briefly discuss the expected impacts on the private sector, consumers and the public authorities. The selected scenarios will be detailed and quantified for each of the selected priority substances with the purpose of carrying out an economic assessment of implementing the respective policies. The overall economic effects that result from the implementation of scenarios are described in Chapter 14.

3.3.1 Current State (Reference State)

The reference state takes into account the current Danish legislation that is in force as of October 1, 2005. This legislation may be fully or only partly implemented today. If the regulation is only partly implemented or have not yet shown its full effect, the reference state will make assessments of the likely effects from the parts that are not yet implemented or that are anticipated to appear, however, with some delay.

In the reference state the existing regulatory measures may for some substances (but not all) lead to reduced concentrations in surface waters over a shorter or longer period of time. However, these possible reductions in concentrations may not be enough to satisfy the EQS established in Scenario A (national) or Scenario B (common EU) below. This would then imply a need for further action by the national authorities for the particular substances not satisfying the EQS.

It should be noted that there may be other external (non-regulatory) factors that influence the use of substances which are not taken into account in the analysis. These factors include among other things new inventions and technology that change the substance amounts consumed, changes in consumer and/or producer behaviour affecting the levels of substances in production as well as socio-economic developments that influence substances consumed. These factors contribute to the possible uncertainty about establishing the "actual" reference state.

The reference state is interpreted as a hypothetical state that will not be reached in practice as either Scenario B or Scenario A must be implemented to fulfil Danish regulatory obligations to protect the aquatic environment against priority substances and priority hazardous substances.

Figure 3-1 Fulfilment of EQS for priority substances. Source: COWI.

In Figure 3-1 above, the main dynamic states for priority substances are either scenario A or scenario B. In this analysis, the reference state is only used to measure the additional effects and economic costs that are incurred in order to move from the reference state to Scenario A (0A) and from the reference state to Scenario B (0B) as described below. A main point is the additional costs of moving from A to B.

As can be seen from figure 3-1, there will be no difference between the reference state and scenarios A and B until after 2012. This conclusion is based on DEPA's interpretation of the Water Framework Directive article 4(1)(a)(iv)^[7]. The article says that the programmes implementing the directives need not be operationalised until 2012. Further, it should be noted that the two scenarios share the environmental objective of meeting the EQS in 2015 as indicated in the figure above.

Figure 3-2 illustrates the dynamic state for priority hazardous substances. In scenario B, it is required that controls are established for cessation or phasing out of discharges, emissions and losses of priority hazardous substances within a timeframe of 20 years. The aim in scenario A is in principle the same, but this scenario is less rigid with regard to requirements to enforcement and does not include a specific timeframe.^[8] As in Figure 3-1, there is no difference between the reference state and scenarios A and B until after 2012, based on the same interpretation of the Water Framework Directive as above, i.e. that the programmes implementing the directives need not be operationalised until 2012.

Figure 3-2 Cessation or phasing out of priority hazardous substances. Source: COWI.

3.3.2 Scenario A - No common measures and no common EQS (as with Water Framework Directive only)

This scenario assumes that a Daughter Directive on Priority Substances is not agreed on at Community level. In essence, this means that in addition to the regulations governing the reference state this scenario will include actions that must be taken by Member States according to the WFD article 16.8 and 4.1.a.iv. These actions essentially require member states to

article 16.8:… establish environmental quality standards for these (first list of Priority Substances [Annex X] of WFD) substances for all surface waters affected by discharges of those substances, and controls on the principal sources of discharges, based on inter alia, on consideration of all technical reduction options

article 4.1.a.iv:… implement the necessary measures in accordance with article 16.1 and 16.8 with the aim of progressively reducing pollution from priority substances and ceasing or phasing out emissions, discharges and losses of priority hazardous substances.

In this scenario, Danish authorities are assumed to adopt similar or close to similar environmental quality standards as those that have been proposed for the Daughter Directive. The reason for this is that Danish authorities will establish EQS based on the same detailed technical guidelines as those Commission experts will use, and they have access to the same environmental data as Commission experts. However, in certain cases Danish authorities may attach different weights on the environment data than the Commission experts, thus there may be slight differences in the EQS established by Denmark and the Commission, respectively.

With the aim of progressively reducing aquatic pollution from priority substances and of ceasing or phasing out emissions, discharges and losses of priority hazardous substances Member States must establish controls on the principal sources of discharges based on, inter alia, considerations of all technical reduction options.

Pollution is defined in the WFD (article 2, def. 33) as

"the direct or indirect introduction, as a result of human activity, of substances or heat into the air, water or land which may be harmful to human health or the quality of aquatic ecosystems or terrestrial ecosystems directly depending on aquatic ecosystems, which result in damage to material property, or which impair or interfere with amenities and other legitimate uses of the environment".

In practice, the introduction of a substance into the environment is considered to be harmful only if the resulting concentration level is anticipated to exceed the relevant EQS values.

Therefore, DEPA's interpretation of the obligations pursuant to the WFD in Scenario A, is that progressive reduction of pollution by priority substances only implies consideration of "all technical reduction options" (WFD article 16.8) and only down to the level where compliance with the EQS is achieved. And, correspondingly, that the aim to eventually cease/phase out emissions, discharges and losses of priority hazardous substances must only be pursued as far as practically possible by consideration of all technical reduction options.

The WFD (and thus Scenario A) also dictates that the economic analysis should make a decision about the potentially most cost-effective combination of measures (WFD Article 5, Annex II).

3.3.3 Scenario B - Common EQS and common measures (the 2005 draft proposal for Daughter Directive)

Scenario B, on the other hand, assumes that a Daughter Directive establishes the environmental quality standards for priority substances and priority hazardous substances. The environmental quality standards that are to be adhered to are expressed as annual averages and/or maximum allowable concentrations.

This implies that the Commission will establish community environmental quality standards for surface waters for Priority Substances to be met by 2015. Each Member State must identify and subsequently implement controls to meet the community EQS. In addition, Member States must identify and implement controls for the progressive reduction of discharges, emissions and losses of these substances - irrespective of any compliance with EQS. For the Priority Hazardous Substances it is a requirement that the discharges, emissions and losses to surface waters must have ceased or be phased out in the Member States within 20 years after adoption of the Daughter Directive.

Scenarios A and B for priority substances and priority hazardous substances do not differ with regard to the economic guidelines, as the Daughter Directive also stipulates that the combination of measures must be cost-effective.

Thus, the main differences between Scenario B and Scenario A are that:

• with regard to priority substances continued progressive reduction is required in scenario B even after compliance with the EQS has been achieved while in Scenario A the efforts need only to be continued until the EQS is complied with;
• with regard to priority hazardous substances there is a well-defined time-frame (20 years) in Scenario B within which the emissions, discharges and losses must cease/be phased out while in Scenario A no time limit is specified;
• according to DEPA's interpretation scenario B imposes an obligation on Denmark to meet the aim of progressively reducing discharges, emission and losses of priority substances while Scenario A only obliges Denmark to establish controls based on “consideration of all technical reduction options" that target this goal. The two scenarios differ in the same manner with regard to requirements to cessation or phase-out of priority hazardous substances.

3.3.4 Scenario C - Common EQS and no common measures (the official Daughter Directive proposal)

The final proposal for a Daughter Directive (com(2006) 397 final)^[9] was put forward by the Commission in July 2006. The assessment presented in this report was started before the final proposal, and therefore Scenarios A and B are based on the unofficial draft proposal from 2005. The final proposal can be interpreted as a "Scenario C" in this assessment. In effect however, this scenario corresponds to Scenario A.

The final Daughter Directive proposal follows the demands in Scenario A with regard to measures, but with a deadline in 2025 when the Commission will evaluate whether the member states, in accordance with the Water Framework Directive, have fulfilled the obligation of initiating the necessary measures with the aim of ensuring progressive reduction of the PS and cessation/phase-out of the PHS. The 2025 deadline is not interpreted by DEPA to have any influence on the timeframe for the implementation of the Directive. There is no specific deadline in Scenario A. In other words, the 2025 deadline is not a deadline for the initiation of the measures or the fulfilment of the environmental quality targets.

It should be noted that in Scenario C the objective of aiming at progressive reduction of priority substances and cessation/phasing out of priority hazardous substances is a requirement according to the existing Water Framework Directive, not explicitly stated in the final Directive proposal.

Regarding the environmental quality targets (The EQS values), the proposed directive is in line with Scenario B, where targets are set at Community level. However, as mentioned above, in practice the difference between national, Danish target levels and community target levels is anticipated to be insignificant. Scenarios A and B - and "Scenario C" - are therefore considered to be identical with regard to the quality targets.

3.3.5 Summary of scenarios

Table 3-4 below provides a summary of the similarities and dissimilarities between the reference state and Scenarios A/C and B.

Table 3-4 Summary of the Reference State and scenarios A /C and B.

Notes: ¹⁾ A number of "obsolete" directives will be repealed and replaced by the WFD (Directive 2000/60/EC) and the current Daughter Directive.

Source: Danish Environmental Protection Agency and COWI.

Specifically with regard to possible control measures to be implemented, the differences between Scenario A/C and Scenario B can be summarised as follows (Table 3-5).

Table 3-5 Summary of difference between Scenarios A/C and B with regard to measures required against priority substances and priority hazardous substances, respectively.

*  Pollution here defined as environmental concentrations of PS/PHS above the relevant EQS.

3.4 Discussion of possible regulatory instruments

The Water Framework Directive and the proposed Daughter Directive include the demand that the goals are achieved using the most cost-effective combination of measures possible in order to minimise the adverse cost to society. This means that all possible measures should be investigated and ranked according to cost effectiveness.

This section will give a short introduction to the available regulatory instruments that may be considered in the process of selecting the most cost-effective "policy package" that will lead to fulfilment of the requirements of the proposed Daughter Directive with regard to Priority Substances and Priority Hazardous Substances.

The types of instruments most often used in Denmark to protect the environment and human health are:

• Economic instruments
• Administrative measures
• Voluntary Environmental Agreements
• Information (for example the List of unwanted substances)

Examples of Danish experiences with some of these instruments in the regulation of chemicals are briefly discussed below. This section also serves as a short, practical policy-related discussion of regulatory instruments. In the substance-specific analyses, we do not distinguish between specific types of instruments. Instead, the distinction will be made between "abatement measures" and "clean-up measures". Both types of measures can be put into action through all three regulatory instruments described in this chapter.

3.4.1 Economic Instruments

Economic instruments can be subdivided into tariffs and taxes, charges (user fees – e.g. water charges or wastewater treatment charges), subsidies and tradable permits. The experiences with the application of tariffs in Denmark are limited as the time period in which they have been applied is short. However, the initial evaluation of tariffs indicates that they are effective and that they have contributed to the reduction of taxable goods and products having undesirable effects on the environment (DEPA 2003).

An example of a tax is the tariff on NiCd batteries. The assessment is that the tariff seems to have had the desired effect on reducing the use of NiCd batteries and to have entailed substitution of more environmentally friendly batteries for those previously used. Before the tariff was introduced, 30-35 tonnes of NiCd batteries were collected. After implementation of the scheme the amount rose to 95 tonnes (DEPA/COWI 2001). Other experiences with tariffs can be found in Skatteministeriet et.al (2000). These include: tariffs on chlorinated solvents, pesticides, PVC and phthalates.

Wastewater treatment plants (WWTPs) must have a discharge permit that sets the conditions to be met by the plant. This permit also establishes the level of substances that are allowed to be discharged into the water environment. These substance levels are based on the current legislation and the state of the environment in the considered water environment. Excess discharges of certain substances^[10] from WWTPs are taxed. The extra expenditures are recovered through user fees, which are collected on a self-sustaining basis (neutrality principle) and will be regulated up or down depending on the profits made by the WWTP (DEPA/COWI 2001).

In general, a tariff imposed on a good (substance) is often a more effective way of reducing environmentally damaging emissions than by implementing standards. This argument relates to there being a risk of over-regulating by standards, which would not be the case for a tax (Hanley, Shogren & White1997).^[11]

3.4.2 Administrative Regulation

A number of administrative instruments are available, including complete bans on substances, restrictions on the use of substances, promotion of cleaner technology and environmental responsibility. Complete bans  or restrictions on the use of substances have been imposed in Denmark on substances that are considered to be highly hazardous to the environment and human health. An example is the restrictions on mercury which prohibit importing, selling or exporting mercury or products with mercury as defined by Statutory Order no. 627 of 2003^[12] (DEPA/COWI 2001).

Environmental responsibility is different from traditional instruments as this is defined as an obligation on companies to restore the environment if environmental damage has been caused and to compensate for the damage if the damage cannot be undone. Environmental responsibility is therefore very close to the polluter-pays principle (for environmental damage). Companies thus have an incentive to prevent environmental damage.

The experiences in Denmark are related to the "Contaminated Soil Act" (Jordforureningsloven) of January 2000 which implies that house owners are liable to pay for damage inflicted by leaking oil tanks used for central heating systems. House owners are covered by a statutory insurance scheme set up by the oil industry together with an insurance company. The experience to date shows that the scheme works as planned and that polluted sites are cleaned without imposing considerable economic burdens on houseowners (DEPA/COWI 2001).

3.4.3 Voluntary Agreements

A voluntary agreement is an agreement between a company (typically an industrial organisation) on the one side and the state on the other side. Companies normally commit themselves to reducing a certain effluent or achieving certain recycling goals during a specified period of time. The advantage of voluntary agreements is that they give companies flexibility to decide how to meet the terms of the agreement in the best and most effective way. One of the drawbacks is that monitoring of the agreement may cause heavy expenses for public authorities.

In Denmark, voluntary agreements have been made for the last 10 to 15 years. Energy intensive companies have for example concluded agreements with public authorities ensuring considerable reductions in costs related to CO₂ tariffs. According to the agreements, companies have to invest in energy-efficient technology with a payback time of maximum four years, and an energy management must be implemented  and "special assessments" must be made. There are approx. 100 individual agreements with companies and industry which cover about half of   the total energy consumption of the industrial sector (DEPA/COWI 2001).

3.4.4 Summary of Possible Regulatory Instruments

In order to comply with the guidelines of the Water Framework Directive and the proposed Daughter Directive stipulating that goals are to be met in the most cost-effective manner, many possible measures should be considered. In general, the instruments will vary in terms of cost-effectiveness depending on the technology applied and the historic use of the substance. The instruments cannot be ranked in order of priority, but must be evaluated on a case-to-case basis. The short section above, however,   made some general recommendations for formulating a cost-effective policy strategy.

Firstly, there are previous, positive Danish experience with both economic instruments, administrative measures and voluntary environmental agreements. If some types of regulation had proven ineffective in the past, it would be an argument for not including them in a future policy. If an instrument is not effective, it is not likely to be cost-effective either. Secondly, economic instrument are generally perceived to be more cost-effective instruments than regulatory instruments such as bans or limit values. This is due to the fact that there is less risk of over-regulation.

In the substance-specific chapters, distinction will only be made between "abatement measures" and "clean-up measures". As mentioned above, both types of measures can be implemented either by economic instruments, administrative measures, or by voluntary environmental agreements.

"Abatement" means to avoid pollution or loss of the substance to the environment in the first place. This means that substitution/phase-out of a substance in its uses or avoiding the loss of the substance from a use is abatement. Clean-up measures concern the cases when the substance has already been lost to the environment and the pollution is being cleaned up. As a rule of thumb in environmental economics, abatement is cheaper than cleaning-up the same substance once it has become an unwanted presence in the environment. This is only a general rule, and it must be subject to evaluation in each particular case. That is the aim of the assessment of the individual substances in the following chapters.

Generally, the regulatory options open to Member States are limited. It is possible to provide incentives for substitution through programmes, information on alternatives and by influencing EU legislation. On the contrary, direct regulation is often not possible due to the rules of the common market. Further, for a number of the priority (hazardous) substances action needs to be taken at transnational level to be effective. This is the case for e.g. regulation of imported products and regulation of ships.

3.5 References

DEFRA (2002), Regulatory Impact Assessment of a Priority List of

Substances under Article 16 of the Water Framework Directive. Including: Note from Graeme Henton, Water Quality Division, DEFRA. Preliminary Provisional Cost estimates from our consultants. Summary of DEFRA(2002)

DEFRA (1999), Economic Instruments for Water Pollution Discharges

www.defra.gov.uk/environment/water/quality/econinst2/execsumm.htm

DEPA: www.mst.dk

DEPA (2003), Making Markets Work for Environmental Policies

Achieving Cost-effective Solutions, The Danish Government, Ministry of the Environment; Ministry of Finance; Ministry of Economic and Business Affairs; Ministry of Science, Technology and Innovation; Ministry of Food, Agriculture and Fisheries; Ministry of Taxation; Ministry of Transport

http://www.mst.dk/udgiv/Publikationer/2003/87-7972-852-9/html/

DEPA/COWI (2001), Samfundsøkonomiske omkostningsvurderinger ved anvendelsesregulering på kemikalieområdet (Welfare economic cost assessment of regulation of chemicals), Project No.: 587

DEPA (1999), Economic Instruments in Environmental Protection in Denmark. Ministry of Environment and Energy, Danish Environmental Protection Agency, Copenhagen.

ECOLAS (2005), Assessing economic impact of the specific control measures for priority substances and priority hazardous substances regulated under Article 16 of the Water Framework Directive, DG ENV 03/07767/DL.

Flemming Møller, Stig Per Andersen, Peter Grau, Henrik Huusom, Troels Madsen, Jørgen Nielsen og Lisbeth Strandmark (2000). Samfundsøkonomisk vurdering af miljøprojekter (Economic analysis of environmental projects). DMU, DEFRA and Skov- og Naturstyrelsen. Februar 2000.

Flemming Møller (2003) Metoder til miljøkonsekvensvurdering af økonomisk politik (Methods for environmental assessment of economic policy), Faglig rapport DMU, No. 432

RPA (2000), Socio-Economic Impacts of the Identification of Priority Hazardous Substances under the Water Framework Directive

WATECO, European Communities (2003), Economics and the Environment. The Implementation Challenge of the Water Framework Directive. A Guidance Document. http://forum.europa.eu.int/Public/irc/env/wfd/library.

Footnotes

^[3] The net tax factor is used to convert factor prices to market prices. The marginal cost of ublic funds is used when the instrument is financed using mandatory taxes, e.g. taxes (and in some cases also user charges).

^[4] 25 % for internationally traded goods.

^[5] Discount rates are used to estiatme the net present value (NPV) of a project or policy. The NPV can be used to compare projects with different timehorizons. The NPV is found by discounting the flows of cost and benefits over the presumed lifespan of the project.

^[6] Proposal for a Directive of the European Parliament and of the council on environmental quality standards in the field of water policy and amending directive. 2000/60/ec (presented by the commission) {Com(2006) 397 final}

^[7] And the chapeau to this article.

^[8] In the economic analysis, it will be assumed that the timeframe is 10 years longer in scenario A. In reality, it could be either longer or shorter  and vary between the different substances. 10 years are selected a reasonable representation of the member states' possibility of pushing the deadline in the situation without the Daughter Directive.

^[9] Proposal for a Directive of the European Parliament and of the Council on environmental quality standards in the field of water policy and amending directive. 2000/60/ec (presented by the Commission) {com(2006) 397 final}

^[10] The sewage tax was introduced in 1994 and was particularly aimed at excess emissions of nitrogen, phosphorous and organic substances (NPO).

^[11] Over regulation would also lead to higher environmental benefits. These benefits should be evaluated in relation to the marginal costs that are implied by over regulation.

^[12] There are certain uses that are exempt from this regulation, e.g. research, training, special light sources, etc.

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