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Environmental Laws are Tough. Enforcement is Another Matter

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It's been 10 years since Andrey Peshkov took over as director of the All-Russian Environmental Institute, a flagship R&D institution of Russia's Natural Resources Ministry. In more than half a century of its history (it all started back in 1952 when the institute's first precursor, the Commission on Reserves, was set up by the Presidium of the Soviet Academy of Science), the last decade has been particularly eventful. Peshkov's directoral tenure coincided with Russia's oil boom of the 1990s. In a recent interview, we asked Peshkov to comment on Russia's current environmental problems and relations between ecologists and big business.

Oil Gas Eurasia: How would you rate the situation with environmental pollution by oil companies - are things improving? What are the major shortcomings?

Andrey Peshkov: To begin with, it's evident that the policy of most companies is to use modern technology to protect the environment. On the other hand, another trend, which causes the situation to deteriorate, and has the lessees quite concerned, is the chaos within the environmental authorities. It is common knowledge that the presence of an environmental agency is a sign of that country's maturity. In the modern world there are only two countries of which I am aware that don't have such an agency - Uganda and Russia. In other countries, be they poor or not, these agencies do operate. They aim to protect the interests of society and domestic markets from businessmen who are unconscientious. That's why executives working in a highly developed branch of the economy, such as our oil industry, are interested in order, stability, and having a clear picture of what awaits them. They need to know what they will have to pay and what they need to do to minimize expenses on environmental protection. At the same time, they need to understand how they can minimize both financial and nonfinancial risks.

OGE: Isn't the Natural Resources Ministry the kind of agency you're talking about?

Peshkov: Logically, the ministry should be such an agency, but the ministry is primarily involved in the development of natural resources. All recoverable natural resources, forests and bodies of water are under the ministry's jurisdiction. Within the ministry are separate bodies, the Environmental Control Service and the Ecological Service, and these need to be taken out from the ministry because the ministry is involved in developing the resources. Surely there is a potential conflict of interest when those responsible for monitoring any negative effects of developing natural resources report to those tasked with encouraging development. It would be funny, wouldn't it, if the Audit Chamber were subordinate to an association of commercial banks? That's basically the same case we have here.

As a result, we have the following situation: over 10 to 12 years a system of environmental protection, environmental control and expertise existed that wasn't bad at all, and was being improved. These were separate agencies, but today that initiative is gone because in the last two or three years these agencies haven't been able to work properly. This is because the ministry, for practical reasons, has not been interested in their activity. The results are starting to show. That's why our government seems likely to change the existing structure of management. Before such a change takes place, we'll continue to work under conditions that make it very difficult to enforce a consistent policy aimed at improving the environment.

OGE: Does this mean that while the oil companies are willing to invest money in protecting the environment and in reducing pollution, the situation is complicated by the absence of a working system overseeing enforcement of environmental law?

Peshkov: Here's an important point - on the one hand, it might seem that oilmen aren't interested in a powerful enforcement authority. But that seems so only at first sight. In fact, sooner or later, this issue will evolve into an array of problems that will be difficult to solve retrospectively. Far-sighted managers are interested in having the rules of the game set from the very beginning. This supports the idea that the controlling authority should be independent from the very start, and should have a strategy of its own that will voice the interests of society and the state, and will balance that strategy with the interests of the lessees. Therefore, regardless of whether oilmen want this or not, it is in their own interests that there is a stable, properly operating ecological service.

OGE: Oil companies complain about the cumbersome and incomprehensible system of checkups, as well as about the large number of different authorities that are empowered to perform checks. Do you share this opinion?

Peshkov: Absolutely. It's a consequence of the imperfection of the management structure. Environmental control is split between different services. There is state control, then there is local control, and this skeleton of controlling authorities is growing both horizontally and vertically. With no clear unified chain of command, environmental control lacks clarity and enforcement abilities.

Expert studies show that the most successful model of environmental control was created in Soviet times. It was the State Committee for the Environment. Of course, that committee used all the authoritarian might of that era, but it bore fruit. Within a short period of time, they managed to create an efficient enforcement agency and launched a bid to create an appropriate legislative framework which, today, has been largely completed. Today, we have brilliant environmental laws that are as good as any developed country. However, we also have a completely ineffective system of enforcing those laws. In order to change this, we need to restructure the system that manages environmental issues. Summing it all up, from my point of view, there can be no talk of improving environmental protection, because there are no economic and administrative stimuli to improve the situation.

OGE: Are there double standards in interpreting the legislation? If yes, what are the ways to get rid of them?

Peshkov: The world's largest oil majors, such as ExxonMobil and BP, are conducting PR campaigns on a regular basis, and are succeeding in showing the public how they are able to minimize the damage to the environment. They are doing this not because they are environmentally conscious, though that is a factor. They've been doing this mostly because they have felt pressured by the local population in regions where they work, and by environmental authorities. They also feel economic pressure in the form of penalties for polluting the environment. A tarnished image, coupled with economic losses, motivates companies to structure their operating policies to comply with environmental law and avoid conflicts with the local population.

At the same time, the attitude of our controlling authorities and society at large varies according to whether the company is Russian or foreign. Bigger demands are put on western oil companies and, in fact, they are more ready and willing to more fully comply with environmental laws. Russian companies tend to be bigger polluters and want to do less about it. So it turns out that the attitude towards western companies is biased. Of course, you always demand more from visitors. But, all things being equal, there should not be such a difference in attitude. It is true today that our companies are buying and applying new, more environmentally-friendly equipment. But, let's draw their attention to the fact that there is a long record of past sins - polluted waters, oil-soaked soil, and leaking and bursting pipelines.

OGE: Why has it been so difficult for the draft of the law on fees for polluting the environment to pass through the State Duma? What are the advantages and drawbacks of the law proposed by the Natural Resources Ministry, Chamber of Trade and Industry and the deputies' bill?

Peshkov: The law on pollution fees is only an integral part of the whole system of creating a legislative framework in the area of environmental law. This is a new, dynamically-growing branch of environmental law with which neither our lawyers, nor our businessmen and managers are acquainted. Moreover, even courts and fiscal authorities aren't acquainted with it.

We have cases when judges who consider lawsuits filed by companies or against companies don't have any idea about what laws and legal documents are in effect in Russia today. Legal illiteracy is rife. A swift passage of the law on fees for polluting the environment is what everybody is interested in, especially lessees.

The payment of pollution fees today is still regulated by governmental resolution No. 632. Only 20 to 30 percent of fees have been calculated in compliance with this resolution. However, should oil prices plunge, and troubles with budget receipts arise, the authorities could apply another method of calculation, invoicing 100 percent of the fines, retroactively. Many companies have currently completely suspended their payment of pollution fees [the OGE cover story explains how this situation has come about]. Such a turnaround may come as an unpleasant surprise because companies have gotten used to paying lower fees than the law would require.

The new law is intended to set normal, comprehensible and transparent rules of the game. It's not true that payments will simply double - or worse. The new method of assessing environmental impact will take into account a variety of scenarios - there's no reason to continue calculating the impact on forests using rules designed to calculate the impact on the human body.

That's what we're getting away from in the new law. There have been three bills. The first was proposed by the Natural Resources Ministry. It changed nothing and seemed intended to legalize what had already existed in Resolution No. 632. It practically reinstated the old scheme of payments. The second bill, apparently resulting from lobbying by large companies, desired to reduce payments practically to zero. The latest version offers a compromise which more or less adequately reflects the relationship between the level of pollution and the fees charged. There aren't any over-the-top figures. In addition to this, the new bill envisages varying the fee according to the environmental record of the company. It's close to an ideal where, indeed, a polluter pays a lot if the pollution is large and dangerous, and pays little when it's not as significant and isn't dangerous.

OGE: Nonetheless, one of the chief objections to the Natural Resources Ministry bill is that the list of pollutants for which companies would be fined numbers over 200. The Chamber of Trade and Industry suggested that the list be reduced to just a little over 30 of the most common pollutants. This idea could slash the unnecessary load of payments, couldn't it?

Peshkov: On the one hand, yes, but let us imagine a hypothetical situation. As a consequence of reducing the list, some dangerous substance gets dropped, but businesses continue to emit or discharge it into the environment. This substance may be, for example, organic mercury - a substance 1,000 times more toxic than inorganic mercury. Fees for discharging inorganic mercury are calculated on the basis of a lump sum. So what are we are supposed to do? Calculate organic mercury discharges the same way, or drop it altogether? I am deeply convinced that the list needs to factor in the peculiarities of production cycles in separate branches of industry, and highlight key pollutants in each of them. And the list needs to remain open so that additions can be made as new pollutants are identified.

OGE: The passage of the law on pollution fees implies that they would be charged in the form of a new tax. At the same time, companies oppose taxation and think it's more expedient to transfer such fees to environmental funds (which, by the way, were disbanded a couple of years ago). What form of payment do you think most suitable?

Peshkov: These are unnecessary concerns. This was a hot issue a year ago when nothing was clear, but now it's obsolete. Pollution fees are certainly not tax. Russia's new tax code refers to 'environmental tax' - but no one is clear what environmental tax is. Nevertheless, qualified experts who have tackled the subject agree that there should be a both pollution fees and taxes on environmentally dangerous products. For instance, there's biodegradable packing, and there's practically undegradable packing. It would be logical from an environmental protection point of view to introduce a tax on those types of products that aren't degradable. In the oil industry, along the same lines, such a tax could apply to environmentally unfriendly oil refining products - for instance, leaded petrol.

OGE: What brought about the dismantling of non-budgetary eco-funds?

Peshkov: Actually, a rather smart environmental fund had been built and developed - a wonderful idea - and in my opinion the incorporation of pollution fees into the budget was a stupid thing to do. As a consequence, this reduced the incentive for lessees to pay pollution fees. Why? Because directing funds from the budget for environmental issues can be a problem.

Though environmental funds did violate their remit, the principle on which they operated was clear and the system did work to address environmental issues. Lessees were able to direct the money paid through fees to environmental funds to solve the problems that had caused the fine. Without this economic incentive, the system has an interest in keeping the environment in a poor condition to maximize the amount of fees collected.

Experience in other countries has shown that a good compromise between the demands of society, law, and business is to deduct investments in environmental protection from pollution fees. It seems to me that this is economically justified, politically advantageous, and attractive to investors and the public. It has a quick and positive effect on the environment and doesn't require funding from the budget.

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