2. Developing Country Experience with Market Based Policies
2.1 Environmental Charges
As far back as 33 years ago, the MalaysianEnvironmental Quality Act of 1974 included provisions for using economic incentives and disincentives in the form of effluent charges in support, rather than replacement, of regulatory controls on discharges. The act requires that all dischargers pay a fee to obtain a license to discharge waste into public water bodies. Because the license fee varies with the level of waste discharged, it is effectively a discharge fee. The fee varies according to one or more of the following factors: (a) the class of the premises; (b) the location of such premises; (c) the quantity of wastes discharged; (d) the pollutant or class of pollutants discharged; and (e) the existing level of pollution.
In 1977, the discharge fees provided by the Act were combined with discharge standards into an incentive-supported regulatory regime for controlling pollution from palm oil mills. The first discharge fees were collected in 1978. With the standards becoming more stringent over time and the discharge fees becoming larger with the quantity of waste discharged, the results were dramatic. Despite a 50% increase in the number of palm oil mills between 1978 and 1982 and a steady increase in palm oil production, the total biochemical oxygen demand (BOD) load released in public water bodies dropped steadily from 222 tons per day in 1978 to 58 tons in 1980, 19 tons in 1982, and 5 tons in 1984.
The Malaysian combination of economic charges and standards worked as follows. In the first year (1978) of implementation of the system, the standard was set at 5000 mg/l of BOD and was not mandatory, in recognition of the initial difficulties that would be faced by the industry. The effluent related license fee was set at US $3 per ton of BOD discharged up to the standard. In the following year, the BOD standard was made stricter (2000 mg/l) and mandatory and progressive effluent charges were imposed to provide an incentive for the establishment of waste treatment facilities. If the BOD concentration exceeded the prescribed standard, a surcharge was imposed equal to $100 per ton above the standard. This was equivalent to a non-compliance fine or a compliance incentive. The rates were set such that the annual fees for untreated discharge exceeded at least the capital costs for building treatment facilities based on an anaerobic lagoon treatment facility. This already departed from the theoretically correct effluent charge which should equal the marginal environmental damage, not the costs of installing a discharge treatment facility. Nevertheless, the system performed fairly well in managing pollution problems in the palm oil industry as long as the charges maintained their real value and were fully collected. By 1984, when the effluent standard was tightened to 100 mg/l, the OD load discharge by the palm oil industry was down to only four tons per day out of 1640 tons of OD generated per day. A similar system, apparently with equal success, was adopted for the control of pollution by the rubber industry. By 1984, most rubber factories were discharging BOD under 100 mg/l and the total BOD load discharged was down to five tons per day out of a total load of 200 tons generated per day.