5.5.2 Countries Undergoing Transition to a Market Economy in Central and Eastern
Europe and the New Independent States
The collapse of communism in Central and Eastern Europe and the subsequent
disintegration of the Soviet Union brought the regions serious environmental
problems to the attention of the international community. Although the countries
in this vast area of the world are remarkably diverse, central economic planning
had created a common pattern of environmental problems which included wastefulness,
pollution-intensive economic systems, ill-designed and resource heavy technologies,
and perverse incentives encouraging increase of output rather than enhancing
efficiency of resource use. A universal feature was also the worlds highest
energy and carbon intensity of economies.
A Soviet-type economy has left a legacy of acute health effects from local
pollution. Having very scarce resources, the transition economies have so far
focused mainly on mitigating local pollution rather than emissions of GHGs.
However, wherever environmental policies were successful in the region, they
have also brought important climate dividends. Some countries in the region
(e.g., Poland) have introduced specific climate change mitigation policy instruments,
such as charges on CO2 and CH4 emissions.
At the end of first decade of the transition to a market economy, contrasts
between different countries in the region have outstripped bygone relative homogeneity.
Central Europe and the Baltic countries have made a successful leap in economic
reforms and restructuring, while countries of the former Soviet Union (so called
New Independent States - NIS) continue to struggle with economic recession and
political instability (EBRD, 1999). Recent empirical studies on the interrelationship
between environmental improvement and economic development in transition economies
undertaken by the World Bank, EBRD, and OECD have demonstrated that countries
that were more successful in economic development and structural reforms have
generally also been more successful in curbing emissions through targeted environmental
policies. Aggregated GDP among advanced reforming countries has been gradually
increasing, while emissions of main air pollutants have continued to decrease.
Energy consumption has been stabilized and a switch away from coal has been
recorded mainly in Poland and the Czech Republic causing GHG-intensity of GDP
to decrease. In contrast, in the slower reforming countries in NIS, falling
output, rather than economic restructuring or environmental protection efforts,
appears to have been the main factor behind the decrease of energy use and emissions
of pollutants, including GHGs (OECD, 1999a).
In the more advanced economies of the region, economic reforms have helped
generate resources for investment in cleaner, more efficient technologies; reduced
the share of energy- and GHG-intensive heavy industries in economic activity;
and helped curb emissions as part of the shift towards more efficient production
methods (OECD, 2000). In some sectors, however, the transition has brought greater
climate pressures. For example, in those countries returning to economic growth,
the use of motor vehicles for both passenger and freight transport has increased
Energy Pricing and Subsidies
Virtually all countries in the region have embarked on the liberation of energy
prices and elimination of energy subsidies. Significant successes in this field
have been achieved in Central European and Baltic States. However, in NIS a
sharp reduction of explicit subsidies has resulted in an almost immediate build
up of hidden subsidies to energy producers and users, such as arrears and non-monetary
forms of payments for energy (EBRD, 1999).
Finance and Income
Lack of adequate access to capital for GHG emission reduction technologies is
perceived as a bottleneck in many countries in the region (World Bank, 1998).
However, in CEE financial and capital markets are becoming mature enough to
provide increasingly better access to credit for fuel switching or energy efficiency,
especially given stable macroeconomic conditions and relatively high energy
prices. In these countries the main bottleneck to environmental finance is not
the lack of finance, but rather the lack of a pull factor. Lack
of implementation of the Polluter Pays Principle, and weak enforcement of the
environmental and climate policy framework does not stimulate sufficient demand
for investments that would bring mainly GHG reduction benefits, with little
private financial return (OECD, 1999b). In NIS, however, the weak policy framework
is aggravated by the overwhelming lack of liquidity both in the public and private
sector. Limited financial resources, which are available to authorities have
not always been used in a cost-effective way. Opportunities to leverage additional
financing from public and private, domestic and foreign sources were also underutilized
The countries in the region have undergone a rapid deregulation and privatization
on a short time scale that has no precedence in the history of the world. This
process in the Baltic and Central European countries has generally led to increased
resource efficiency and replacement of obsolete and GHG intensive technologies.
However, in a number of countries of the former Soviet Union, particularly in
Russia and Ukraine, the rapid pace of liberalization and privatization has not
been matched by the development of institutions as well as a regulatory and
incentive framework necessary to support a well-functioning market economy.
Perverse incentives that had generated many of the environmental problems of
centrally planned economies, such as rent seeking and lack of incentives for
efficiency and restructuring, now undermine restructuring of already private
enterprises (EBRD, 1999). But successful economic policies have not been a panacea
for successful GHG-mitigation improvements. Targeted environmental policies
and institutions in Central Europe were required to harness the positive forces
of market reform, and ensure that enterprises and other economic actors improve
their environmental performance which are still weak in the NIS (World Bank,