Chapter 2: Czech Republic

(continued)

2.3 Overview of the Market

Environmental policy is well developed in the Czech Republic. The ambitious 1993 national environmental policy was one of most advanced and comprehensive in Central Europe. However, some of the targets set under current legislation are too ambitious, and contain major inconsistencies. As a result, much of the legislation is being revised. Also, a 20 percent decline in GDP in recent years has pushed the environment lower on the political agenda.

Significant environmental damage was sustained in the past, especially in the mining districts of northern Bohemia and the industrial areas of northern Moravia. The construction of a nuclear power plant at Temelin, and severe air pollution in industrial and urban areas are the most frequently cited environmental problems. A major source of air pollution is the energy and power generation sector, (currently, 60 percent of energy generation is based on coal-fired plants). The treatment of wastewater, and water supply are also problems that need to be addressed.

Policy coordination, refinement of legislation and better enforcement, education and institutional strengthening, the development of clean technologies, and priority capital investments for air and water quality are the likely focal points for future environmental actions.

Total Country Spending on Environmental Technology

Two major environmental priorities include air pollution control projects, accounting for more than a half of environmental expenditures, and water management projects, which account for more than a third of total environmental spending. Table 2.2 shows the breakdown of total spending on the environment for 1994 and 1995.

The large share of water and wastewater treatment and air pollution control in environmental expenditures during the last several years is the result of two main factors:

• New water protection regulations have forced municipalities to invest in water and wastewater treatment, and the sector has become the main recipient of municipal money invested in the environment. The trend is expected to continue in the near future (see Chapter 2.5 for more details). The construction of large wastewater treatment plants for cities takes several years to complete, and some of the largest projects were initiated before 1989, when the state began allocating money for such projects through direct grants or via municipalities. Even though state support has significantly decreased recently, investments started several years ago still receive state money necessary for project completion. Additionally, the construction of scores of new smaller wastewater treatment plants has been started recently.

• Air pollution from large stationary sources is still considered the most important cause of environmental damage, and money is continuously allocated for air protection projects in the energy and power generation sector. Between 50 and 60 percent of electricity generation in the Czech Republic is still based on burning coal or lignite. The installation of desulfurization units and other equipment in the largest coal-burning power plants is under way, and this accounts for a major portion of investments in air pollution control. The state company CEZ, which still owns and operates all of the largest power plants in the Czech Republic, is planning to reduce solid particle emissions by a factor of ten by the year 2000 (compared with 1992 levels). Emissions of NOx are to be reduced by half, and for carbon monoxide, by a quarter. The estimated cost of the program to the year 2000 stands at about 126 billion crowns (USD 4.4 billion).

In 1994, environmental expenditures accounted for 2.73 percent of the GDP (USD 993 million), while in 1995, they amounted to USD 1.185 billion, or 2.6 percent of the GDP. Note that the difference between the above total and the total figure in Table 2.2 is caused by differences in the data collection method used by the Czech Statistics Board. /52, 72/

Table 2.3 shows how the major environmental investments during 1994 (projects above 5 million crowns, or approximately USD 175,000) were distributed and the sources of funding. Investors' own funds covered about half the investments made, with state funding accounting for about a third of the total. The share of foreign financing was low, at about 4 percent. Table 2.4 gives further detail on the breakdown of environmental expenditures from the state budget during 1994. /52, 65/

Table 2.5 provides additional information on the market for pollution control equipment in the Czech Republic. The market is estimated at between 600 and 700 million USD per year, with an annual growth rate of some 6 percent. Two-thirds of the market is based on domestic production, and one-third on imports.

Priority Areas for Environmental Protection

State Environmental Fund

As shown in Table 2.6, more than half of the Fund's expenditure during the period 1992-1994 was allocated to water protection projects, and about a third to air quality projects. Interestingly, the share of the two major groups in the Fund's expenditures is exactly the reverse of their share in national environmental expenditures. As discussed in Section 3.1, air protection activities account for more than a half of national environmental expenditures, while water and wastewater projects account for about a third.

This apparent contradiction can be explained by the fact that the proportion of state funding is much larger in water related projects, where the most frequent investors are municipalities. In contrast, in air pollution control projects (mainly those undertaken for stationary industrial sources) a high percentage of the project costs are covered by investors' own funds. For instance, in 1995, three quarters of the Fund's resources were allocated to municipal projects, about a fourth to businesses, and between 1 and 2 percent to state institutions. As for disbursement policy, allocations (grants and subsidies) covering up to 40 percent of the project cost are available to non-profit applicants and municipalities. Loans, covering up to 50 percent of the expected project cost, are an option for commercial projects. /3/

As regards geographic distribution of funds, large sums are invested in air protection projects in north Bohemia, north Moravia, and in the Greater Prague area. Air pollution control programs in the three regions include several very large projects, followed by a high number of small and medium-sized ones. The Environmental Fund usually supports only the latter category, as large air pollution projects demand considerable investments, and are often funded or co-funded from multilateral sources. In contrast, the number of supported water management projects is much higher, and projects tend to be spread throughout the country rather than concentrated in a specific area. /3/

Even though the Environmental Fund will remain the major source of state financing in the near future, it is worth noting that, in 1996, loans accounted for 45 percent of disbursements, while grants accounted for 55 percent. There are strong indications that the proportion will be moving towards a higher level of loans, so as to enable the Fund to reinvest money in other environmental projects. As explained by Mr. Kuzel, an official at the Fund, the key reason behind this approach is to increase the amount of money available for environmental protection. It is also expected that the Funds' activities will be more oriented towards the industrial sector. /3/

Table 2.7 presents the income structure of the State Environmental Fund. Environmental fees and non-compliance fines constitute a substantial revenue source for the Fund, accounting for about two-thirds of total revenues. In 1994, the ratio between fees and fines collected was approximately 9-to-1, but, according to recent information, fines now account for only between 1 and 2 percent of Fund's revenues. /3/

It is worth noting here that the US EXIM Bank offered the Czech Environmental Fund a loan for local environmental projects. The offer was declined because ..."it was similar to other offers the Fund had received" and because "low-interest loans... are usually declined in the end as they are not as advantageous as they previously appeared." (This information was obtained from an official at the Fund who wished to remain anonymous.) Generally, the Czech government is against foreign loans, so as to avoid being forced to meet the conditions set by a foreign party. This position has been consistent for the last five years, and the Czech government has reiterated this policy clearly during several international political and economic summits.

Specific Priorities

Water management, and particularly wastewater treatment, are likely to remain priority areas in the coming years. Municipalities, as well as industrial wastewater producers must meet new wastewater discharge standards which will become stricter on Jan. 1, 2005. It is important to note that, even though many municipalities do not have sufficient funding to invest in wastewater treatment, in the last five years, construction of some 150 wastewater treatment plants was completed, including 20 new plants during 1994. Overall, wastewater treatment is one of the most dynamically developing sectors of the environmental market in the Czech Republic. /64, 65/

Currently, about 186 million tons of waste are produced annually in the Czech Republic; 11 percent of this amount is hazardous waste, 40.5 percent special waste, and 48.5 percent is classified as other waste /52/. During the past four years, many waste management and disposal facilities have been constructed throughout the country. Projects have tended to focus on landfill construction, production of waste containers, and on incinerators. The current level of recycling is low, with only a few firms active in the field. The use of economic instruments (tax breaks, subsidies, other incentives) in the sector is limited, although the situation is expected to improve with stricter environmental enforcement and new legislation, currently under preparation. Potential future priorities include package reuse/recycling, waste minimization processes, effective technologies for waste separation, and environment-friendly technologies for waste disposal. /3, 69/

Waste incineration is no longer considered a preferred option in the Czech Republic. With very few exceptions, the Environmental Fund has stopped support for incineration facilities. The government is planning to build an incinerator for PCB disposal (see Section 2.5 for more details), but the project is to be financed from the state budget, not from the Fund.

Interestingly, the Environmental Fund has also stopped support for landfill construction, and for environment-friendly conversion of vehicles from diesel to hydrocarbon gas (e.g. buses for public transport in the heavily polluted town of Usti nad Labem in north Bohemia). The rationale behind discontinuing the support was that the activities are already market-driven, and state support is no longer required. /3/

A significant number of projects relating to site remediation and decontamination (connected with liability issues) are under way, although currently large expenditures are expected to decline around the year 2000. /74/

In 1995, as an exception, the Environmental Fund provided support for a one-time study of alternative energy sources such as small water turbines, windmills, energy recovery units, and heat pumps. This shows the importance placed upon alternative energy programs, as the Fund generally does not support project studies.