THE BOTTOM LINE

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THE BOTTOM LINE

Industry and the Environment in South Africa

Edited by
Lael Bethlehem
and
Michael Goldblatt

UCT Press (Pty) Ltd
University of Cape Town
Private Bag, Rondebosch 7701
South Africa

International Development Research Centre
PO Box 8500, Ottawa, Ontario
Canada K1G3H9

© Industrial Strategy Project
First published 1997

ISBN 1919713 07 7 (UCT Press)
ISBN 0-88936-830-9 (IDRC)

All rights are reserved. No part of this publication maybe reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, phi rtocopying, recording or otherwise, without prior permission of the publisher.

Set in Zapf Calligraphic 801
DTP by Lomin Saayman and MANIK SOUTH
Cover by MANIK SOUTH
Printed and bound by Creda Press, Cape Town

Contents

Acknowledgements

This book is the product of the labour, industry and environment research programme of the Industrial Strategy Project. We are grateful to the staff of the ISP office at the University of Cape Town for administering the project and to David Lewis, director of the ISP, for his valuable guidance. The ISP research coordinator of this project was based at the National Labour and Economic Development Institute, the research centre serving the Congress of South African Trade Unions. NALEDl’s administrative and other assistance is gratefully acknowledged.

We were encouraged to conduct this research by Dr Tim Jackson and the Environmental Monitoring Group. Their earlier work showed that industrial strategy in South Africa had taken insufficient account of environmental issues, and this helped to catalyse our study.

The research process was informed by a trade union reference group. This group comprised Bhabhali Ka Maphikela Nhlapo (Construction and Allied Workers’ Union), Mike Serobo (Post and Telecommunications Workers’ Union), Sekoati Mokoena and Jerry Chiloane (South African Commercial Catering and Allied Workers’ Union), Albert Moshaoi (South African Railway and Harbours Workers’ Union), Paul Sehlabelo and Linda Mngadi (Paper Printing and Allied Workers’ Union), Paul Matekane (National Education Health and Allied Workers’ Union), Lance Veotte and Jerry Chaka (South African Municipal Workers’ Union), John Wilimiec (Underground Officials’ Association of South Africa) and Buti Msimang (National Council of Trade Unions). The reference group provided valuable insights derived from their daily experience.

We thank Pelelo Magane, who was seconded to the ISP from the Chemical Workers’ Industrial Union. He conducted research on health, safety and environment issues and also coordinated the trade union reference group. We thank the CWIU for making Pélelo available.

Two workshops were held in the course of the research and these gave us an opportunity to discuss our findings with environmentalists, academics, business managers and government officials. We are grateful to all those who attended the workshops for their valuable input and to the members of the Industrial Environmental Forum, a network of companies concerned with promoting industrial environmental management.

Our funders not only provided finance but also gave intellectual support and for this we are particularly grateful. Alistair Smith of the Friedrich Ebert Stiftung was directly involved in conceptualising the work, and his advice throughout the process was invaluable. The International Development Research Centre lent us much of their expertise and the IDRC-sponsored international network on trade and environment was especially helpful. The Humanistisch Instituut Voor Ontwikkelingssamenwerking arranged a useful study trip to the Netherlands. The Olof Palme International Centre introduced us to non-governmental organisations and researchers active in this field in Europe.

Reg Green, the health, safety and environment officer of the International Chemical and Mining Federation, made helpful suggestions and provided information. Thanks to Rose Meny-Gibert of UCT Press for her patience. Finally, our thanks to Emilia Potenza and Sarah Klipin for support and inspiration.

Preface

The first phase of the Industrial Strategy Project commenced in 1992. The project has its origins in the Congress of South African Trade Unions’ efforts to develop policy responses to the malaise afflicting South African manufacturing.

The final report on the first phase of the ISP was submitted in 1995. This comprised 11 sectoral studies and a synthesis volume that proposed an overall industrial strategy for South Africa.

The ISP is now in its second phase which comprises four research themes. One of these examines the relationship between industrial development and the environment, a second focuses on firm-level innovation, a third examines issues in human resource development, and a fourth is concerned with identifying mechanisms to strengthen manufacturing competitiveness at regional and local levels. The second phase of the ISP is funded by the Friedrich Ebert Stiftung, the Humanistisch Instituut Voor Ontwikkelingsamen-werking, the International Development Research Centre, and the Olof Palme International Centre.

This collection represents the fruits of our research on industry and environment. It examines environmental issues from an industrial policy perspective. The essays combine the insights of a multidisciplinary team, committed to the twin and intimately related imperatives of industrial development and environmental sustainability.

Our efforts represent a beginning and an important objective will have been served if this work is the catalyst for further research. Growing evidence of concern for these issues on the part of policymakers in the departments of Trade and Industry, Environmental Affairs and Tourism and Water Affairs and Forestry should act as a powerful incentive to the research community. The Congress of South African Trade Unions and several major corporations are also developing capacity in this area.

This work is intended to encourage policy debate. The chapters express the views of their respective authors and not necessarily those of the ISP.

David Lewis
Director: Industrial Strategy Project
Lael Bethlehem
Research coordinator: labour, industry and environment research programme

Foreword

The economic policies and strategies of the South African government are deeply rooted in explicit commitments to the attainment of high levels of economic growth and social justice. We have never accepted the argument—still espoused in some circles—that purports to find conflict between economic growth and democracy, between economic growth and respect for the basic rights and requirements of workers, communities and the environment. Just as it is impossible to imagine material prosperity in the absence of high rates of economic growth, so is it equally impossible to imagine sustaining the conditions for economic progress in the context of policies that threaten the underlying social and material conditions for that growth: a productive workforce, cohesive communities and a healthy, well-functioning environment.

The essays in this volume reinforce this general approach. Concerned to explore the relationship between industrial growth and the environment, the authors clearly establish compatibility between material progress, on the one hand, and respect for the physical environment, on the other. Indeed, the argument goes further: it establishes that industrial strategies that fail to respect the environment will, at best, generate short-term growth, but will guarantee long-term stagnation. Increasingly, even in the short-term, environmentally destructive strategies and methods of production will fall foul of the minimum requirements of many of our most important trading partners.

There is much work that remains to be done in this area. Policymakers, investors, managers and unions all need to factor these key variables into their decision-making. The Industrial Strategy Project has taken an important first step in providing the basis for informed approaches to this vital and complex area.

Alec Erwin
Minister of Trade and Industry

Acronyms and abbreviations

Contributors

Lael Bethlehem

Lael Bethlehem is the coordinator of research and policy development at the National Economic Development and Labour Council. She has an MA in Industrial Sociology from the University of the Witwatersrand. Lael has worked in labour and economic policy research work as a researcher for the Industrial Strategy Project and the National Labour and Economic Development Institute. She is currently the chairperson of the National Forestry Advisory Council.

Mark Butler

Mark Butler is a senior researcher at the Community Agency for Social Inquiry. He has worked in a wide range of research fields, including political violence, out-of-school youth, adult basic education, development and environment. Most recently, Mark represented the non-governmental sector on the drafting team of the Environment GreenPaper. Mark is active in the Environmental Justice Networking Forum.

Ann Coleman

Ann Coleman graduated in 1985 with a BSc in Chemical Engineering and in 1994 with an MSc, both from the University of Cape Town. She is currently engaged in environmental consultancy work, which includes projects on waste management, with an emphasis on waste minimisation and cleaner production strategies.

Iain Currie

Iain Currie BA Hons (Witwatersrand) MA LLB (Cape Town), Advocate of the Supreme Court of South Africa, is a lecturer at the Witwatersrand Law School. He acts as a part-time consultant to government departments, non-governmental organisations and the private sector on constitutional law, property and environmental law.

Bill Gibson

Bill Gibson is a professor of economics at the University of Vermont, USA. He was awarded a doctorate from the University of California at Berkeley, and he has specialised in macro-models for developing countries. Bill has published numerous academic articles, including macro-models for South Africa, Nicaragua, Mexico and Bolivia. He has been a visiting professor at Berkeley and Notre Dame, and visiting researcher at the University of Dur-ban-Westville and the Development Bank of Southern Africa.

Michael Goldblatt

Michael Goldblatt is Programme Manager of the Environment and Development Programme at the Graduate School of Public and Development Management at the University of the Witwatersrand. He is currently completing a Masters degree in Geography and Environmental Studies at the University of Witwaterstand, and is involved in a number of environmental research projects in the fields of environmental economics and water resource management. He is a member of the drafting committee of the Integrated Pollution Control Policy.

Peter Lazarus

Peter Lazarus BA LLB (Witwatersrand) is an advocate of the Supreme Court of South Africa, and specialises in environmental and water law. He is also a part-time lecturer in environmental law at the Wits Law School. During 1995 and 1996 he was a member of the Water Law Reform Monitoring Panel appointed by the Minister of Water Affairs and Forestry to oversee the water law reform process.

Pelelo Magane

Pelelo Magane is an organiser for the Chemical Workers’ Industrial Union, where he has worked since 1986. He is currently a branch health, safety and environment coordinator. Pelelo serves on the board of the Group for Environmental Monitoring, and takes a keen interest in community environmental issues.

Shirley Miller

Shirley Miller is the health, safety and environment coordinator of the Chemical Workers’ Industrial Union, where she has worked since 1985. She recently represented labour on the drafting committee of the Environment Green Paper. Shirley has a diploma in Occupational Health from the University of Cape Town where she is also completing a Masters degree.

Rob Short

Rob Short has undergraduate and postgraduate degrees in biology and environmental science. Rob was part of the team that drafted the background discussion document for Consultative National Environmental Policy Process and has been involved in several policy initiatives. He currently works for the consultance Environmental Risk Services, specialising in industrial environmental management.

Clive van Horen

Clive van Horen is an economist based at the Energy and Development Research Centre, University of Cape Town, where he is Deputy Director. He has worked on numerous projects related to energy policy in Southern Africa, focusing on economic aspects of energy and environmental policy issues. His formal training includes a Chartered Accountant (SA) qualification and a PhD in Economics. His publications include two books: Poverty and Power: energy and the South African state (with Anton Eberhard) published by Pluto Press and University of Cape Town Press in 1995, and Counting the social costs: electricity and externalities in South Africa published by Elan Press and University of Cape Town Press in 1996.

Dirk Ernst van Seventer

Dirk Ernst van Seventer works at the Development Bank of Southern Africa as a policy analyst. His work focuses on medium term macroeconomic and development issues using quantitative tools and techniques. He has an M. Econ from the University of Groningen, the Netherlands.

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INTRODUCTION
Issues and perspectives

Lael Bethlehem and Michael Goldblatt

South Africa in the mid-1990s faces urgent questions: How to address the severe inequalities that developed under apartheid? How to build a stable democracy in the face of enormous unemployment and widespread poverty? How to adjust to the new context of declining tariffs, increased competition and fiscal restraint? How to develop the manufacturing sector in the face of declining mineral wealth? And how—although this question is less often asked—to address the environmental degradation that resulted from apartheid and ensure that the path of development is sustainable from an environmental point of view?

This book sets out to explore the place of the environment in South Africa’s industrial development. The issues we confront are at the confluence of debates on industrial and environmental policy. In the South African context surprisingly little has been written on the environmental management of industry at a macro-level. Work has been done on the management of particular processes, on some of the legal issues, on pollution problems in certain sectors and on (real and imagined) conflicts between environment and development. But relatively little attention has been given to the environmental issues facing the industrial sector as a whole, and to the dilemmas facing policymakers in this regard. We set out to enrich this debate by focusing on the linkages between industry and environment.

In so doing we also want to address the linkages between trade unions and environmental issues. Some debate has taken place on the capacity of South African trade unions to engage in environmental struggles, and the appropriateness of them doing so. We explore this issue further and focus specifically on the linkages between environmental management and health and safety management, as well as the relationship between labour’s economic concerns and environmental development.

This book is the result of a study on labour, industry and environment which was conducted by the Industrial Strategy Project (ISP). The idea for the study arose from earlier work done by the ISP on South African industry. In the early 1990s, the ISP began research on South African industry which resulted in the publication of eight sectoral studies and a synthesis volume tackling the generic and macro-issues in industrial policy. Much was learned during that research, including a conception of how to characterise South Africa’s industrial development and how to begin to address problems, including the balance of payments constraint, low productivity growth, poor technological development and low levels of human resource development. But what became clear during the research is that an analysis of South African industry was incomplete without an understanding of the environmental possibilities and constraints facing it. We, therefore, embarked on this study.

One of our assumptions in this study is the idea that industry is dependent both on natural resources and on the capacity of the environment to accommodate the waste which it generates. The sustained development of industry is, therefore, dependent on the continued existence of these source and sink functions of the natural environment. This analysis was the starting point for considering how industrial strategy could incorporate these concerns into its hitherto narrower focus on economic and industrial growth and development.

Beyond the industrial sector our economy and society as a whole is merely a subset of the larger world ecosystem. The sustainable management, and protection where necessary, of natural resources is, therefore, not only about sustaining the basis for production but also about sustaining our place in the world. The question of the intrinsic value of the existence of environmental resources is an issue which needs to be considered alongside debates about future industrial strategy, and has begun to be raised in this research project.

An environmental characterisation of the economy

The South African economy has been analysed and critiqued in a number of ways: low productivity, poor international competitiveness, unequal distribution of income, overconcentration and other structural problems impeding sustained economic growth and human development. However, there has as yet been no overall analysis of the environmental sustainability of the economy. This is a source of concern—a rough and ready analysis of the economy points to some worrying structural problems in this regard.

From an environmental point of view one could say that three factors characterise the economy:

• it is highly reliant on a number of energy-intensive sectors dependent on low electricity prices;

• it has a set of old capital stock due to South Africa’s relative absence from the world economy and low levels of foreign investment in the 1980s; and

• primary non-renewable resource extraction and associated industries, essentially mining and minerals processing, provide a major, albeit declining in parts, proportion of gross domestic product (GDP), exports and employment.

This characterisation is one that has been included in earlier industrial policy analyses, but what does it mean from a sustainable development perspective? Firstly, South Africa’s coal-based electricity generation, in combination with high energy intensity, makes it the third-highest producer of greenhouse gases in the world relative to GDP (Worldwatch Institute 1996). South Africa’s power stations are not fitted with desulphurisation or denitri-fication equipment, leading to high levels of sulphur dioxide (SOj) and nitrogen oxides (NOx) emissions which contribute to acidic deposition and health risks. At the same time Eskom has committed itself to becoming the world’s lowest-cost electricity producer, with many large-scale industries dependent on a continued supply of cheap electricity.

Old capital stock means that clean technology innovations are not widespread throughout the industrial economy. Production processes with low pollution per output levels and high materials and energy efficiency are not widespread in the manufacturing sector, nor are facilities for waste exchange and recycling. Our levels of waste production are very high, particularly in those same primary and secondary sectors on which the economy is so dependent: gold and coalmining, and minerals and metals processing, as well as in certain other key manufacturing sectors such as chemicals production. Apart from waste production the mining sector generates enormous environmental impacts, particularly in certain regions of the country. Air pollution, destruction of arable land and natural areas, water pollution and huge health and safety impacts are all associated with this sector of the economy.

At the same time South Africa is dependent on renewable resource sector production for employment and subsistence farming. This makes the country dependent on soil and water quality and on sustainable natural resource management, and highly vulnerable to shocks to these resources or to declines in their quality.

Associated with these structural problems are a weak regulatory framework for environmental control and management, with inadequately resourced and empowered environmental regulatory institutions. There is also evidence of weak social and economic pressures for a greater emphasis on environmentally sustainable development. There seem to be weak market incentives for improved environmental performance, with relatively low levels of consumer awareness and activism. Civil society and trade union actions have had some significant impacts, but generally on a very localised scale. And during the apartheid years, South Africa’s relative isolation temporarily shielded the industrial sector from some of the international pressures for environmental improvement.

Although the details of South Africa’s environmental problems are specific to our country, the problems are not unique. The challenge of Agenda 21, the manifesto arising from the United Nations Conference on Environment and Development (1992), “to improve production systems through technologies and processes that utilize resources more efficiently and at the same time produce less wastes—achieving more with less...”, is a challenge facing the world’s developed and developing economies.

The challenge of sustainable development

For a number of decades there have been warnings that the scale of human activity could exceed the capacity of the earth’s natural systems to sustain them. These warnings initially came from academics and researchers, but now are being raised by far broader sectors of our society. As Postel (1994) points out, this may well be because signs of environmental constraints are now pervasive. In South Africa grasslands have been overgrazed and fisheries overexploited. Water resources are overstretched and polluted, and South Africans are having to extend further and further afield for future supplies. Similar problems apply to our soil resources and to atmospheric conditions.

It is, therefore, necessary to consider the changes needed to avoid crashing into these environmental barriers. Ultimately, our economy will have to fit within its natural limits and be constructed in such a way as to be automatically constrained by those limits. Given that this is a medium to long-term challenge to the world economy, more immediate ways need to be found to “lighten the load” (Postel 1994) on the earth so as to provide some time for this change, at the same time as paving the way for it. Postel refers to World Bank economist Herman Daly’s analogy of the Plimsoll line on a ship. As the ship is more and more heavily loaded it will settle lower into the water, which will eventually reach the level of this line. The Plimsoll line indicates the point at which the ship becomes dangerously overloaded. Indications are that the environmental resources of the world may be nearing this critical mark.

The South African playwright and comedian Pieter-Dirk Uys described the desperate manoeuvres of the government in the dying days of apartheid as “rearranging the deck-chairs on the Titanic”. The same can be said about Daly’s example—moving the items around on the ship will not help either; what needs to be found are strategies to lighten the burden. This “lightening of the load” is the broad immediate challenge to the global economy and is the context for our approach in this book. There are a number of major issues in this regard, including inequitable distribution of income, rapid population growth and resource-consuming economic expansion.

In the South African context, the first of these challenges is a cornerstone of the government’s economic and development policy, and the second is also receiving attention. It is the third challenge that is inadequately understood and to which we hope to direct economic and industrial policymakers’ attention.

The challenge of resource-consuming economic expansion cannot be met in South Africa by an opposition to economic growth per se. Growth is clearly a prerequisite for the reconstruction and development of post-apartheid South Africa. Rather, we need to focus attention on the nature of this economic expansion. We need to build an approach to human and economic development which includes a more deeply considered and appropriate use of technology, and which has environmental and natural resource issues as a cornerstone.

Such an approach must be supported by an improved system of environmental management—integrating company-level management, government regulation and new partnerships with labour and civil society into an effective system. As the chapters of this book show, changing the approach to economic development in South Africa, and the environmental management of it, will be a complex and difficult process. It is possibly a more manageable challenge if one sees it as a process with an end-point of sustainable development rather than an immediate and wholesale about-turn.

The broad medium-term elements of this process will probably include defining methods for internalising the environmental costs of production, building indicators of progress towards sustainable development into both firm-level and national-level accounts and developing new and innovative approaches to industrial production (such as closed-cycle processes). In the long-term, however, changed attitudes to consumption, consumerism and lifestyles must be seen as part of a longer-term reorientation of economic patterns.

A sustainable development path for South African industry?

The central issue that we confront in this volume is how to shift industry onto a more sustainable path of development. Such a path would take greater account of the use of natural resources which either serve as inputs to industry or receive its waste. The key question is what kinds of public policies would encourage industries to take greater account of their short and long-term effects on the environment and to constantly improve their environmental performance, and how to accomplish this in the context sketched above of relatively weak pressures from the local consumer market and public groups.

The approach we take is one of recognising that there are a number of important factors in industrial environmental management which need to be harmonised. The first set of questions this raises concerns the proper approach to regulation by public authorities. How do public authorities provide the right context for industry? How do they act in a determined yet innovative way? Can they cooperate with industry and take a partnership approach but still, where necessary, wield a big stick?

The second important question is the role of domestic and international markets in providing the incentives for environmental innovation and continuous upgrading. Linked to the market is the role of civil society, environmental groups, trade unions, political parties and consumer movements in shaping what the market demands. The third question concerns the critical role of industrial managers who control the very processes of industrial production. They make the key decisions on environmental investments, on techniques of production and on waste disposal. They know their workplaces better than anyone else and are the most likely source of innovation if they are sufficiently interested in their environmental impact. At stake for industrial managers as a group is the acceptability of their products to the market, their risk of liability, their public image, the long-term sustainability of the resources on which they depend and the quality of their environment. Linked to this is the role of workers and their trade unions. Workers are intimately involved in production, in the disposal of waste and in the transport of hazardous substances. At stake for them is their health, the security of their jobs, the environment in which their communities live and the development of the local economy.

How can these factors be knitted together by public policy? How can the law be laid down effectively to provide a baseline of protection for the environment, the public and the health of workers? How do we move beyond the legal and regulatory approach towards an effective partnership with industry? How do we inspire managers and provide incentives for them to continuously improve the environmental impact of the activities they control? How do we empower workers and their unions to protect their own health effectively and become “champions for the environment”? (Whyte 1995: 27)

How does this volume begin to answer these questions?

This book is an attempt to begin to answer these questions. It starts out by exploring macro-level issues that affect all industries and then moves on to case study material. The more generic issues covered are environmental legislation, energy supply, the environmental aspects of trade and environmental information systems. We then look at the role of organised labour in environmental management and at case studies in the chemical industry and the small and medium-sized sector. We conclude with a discussion of the implications of this work for environmental policy in South Africa.

Chapter 1 sets out the current legislative and regulatory framework which governs industry’s environmental impact. In this piece Lazarus, Currie and Short argue that there are a number of key problems with environmental legislation. The environmental legislation which governs industry should achieve two key outcomes: it should protect the environment in an ongoing manner and it should facilitate investment where that investment is environmentally appropriate. At present the lack of suitable legislation and regulatory capacity leads to the worst of both worlds—in many cases investment is impeded by uncertainty and conflict over environmental impact and, yet, in many others, the environment is inadequately protected. Legislative change is required, including a proper framework for incorporating environmental impact assessments into the process of industrial planning. Greater regulatory capacity is also needed, and this is addressed here and in a number of other chapters.

Chapter 2 is a condensed version of a longer study written for the ISP. In the study Van Horen argues that while South Africa’s extremely low electricity price is a key source of comparative advantage for sections of industry, the price does not accurately reflect the social and environmental costs that are incurred in its production. In the dominant, coal-fired segment of electricity supply, externalities include injuries and mortalities in coalmining, the local health effects of particulate and other emissions and the global effects of carbon and other greenhouse gases. Using an internationally established methodology, Van Horen estimates these costs and calculates their potential impact on the electricity price. In so doing, he argues that it may not be appropriate to try to realise all of these costs in the electricity price itself, but that the hidden costs need to be understood, calculated and, where possible, ameliorated.

Chapters 3 and 4 address aspects of trade and environment. In Chapter 3, Bethlehem argues that international environmental pressures are beginning to be felt by South African exporters. Most of these pressures are market-based and are ultimately driven by consumer concerns and activism in the North. Others arise from environmental regulations and international environmental agreements. So far, most exporters seem able to adapt to the new requirements but there are cases where companies lack the investment capital and/or the information required to respond appropriately to international pressures. In Chapter 4 Gibson and Van Seventer make a case for a locally led programme of environmental reform. Using a dynamic general equilibrium model they calculate the overall costs to the economy that would be incurred if South Africa were forced by outside pressure to suddenly reduce emissions of certain substances. The modelling exercise shows that if, in order to achieve these reductions, the economy would be forced to contract in key industries where such emissions were produced, there would be a strong negative impact on output, employment and exports. Although Bethlehem concludes that current international pressures are not likely to result in strong, sudden target-based pressures being applied to South Africa in the short-term, and although elements of their modelling exercise are hypothetical, the lessons of Gibson and Van Seventer’s modelling exercise are nevertheless profound. Variables, which can be adjusted in the model, cannot easily be adjusted in the real world. For example, an absolute reduction in carbon dioxide (CO2) emissions in the electricity sector would require a shift away from coal, which is unviable in the foreseeable future. Despite the hypothetical nature of the exercise, it is useful because it paints conceptual scenarios and begins to integrate environmental and economic data. In particular, the work underscores the need for locally led, long-term programmes of improvement in industry’s environmental performance and for macro-level tracking of the effects of environmental pressures on the economy.

Chapter 5 examines the question of environmental information. Goldblatt shows that a number of countries trace industrial emissions to the environment by establishing pollution registers or similar listings of emissions. Regulations require that companies submit information on their emissions of listed substances and these are recorded in a publicly available inventory. This information makes the management of pollution more manageable and empowers communities by allowing them to trace what substances are being released into their local environments. This allows for better interventions to planning, health care and a number of other public processes. Goldblatt explores the possibilities and implications of establishing such a system in South Africa and argues for its consideration by the environmental authorities.

Chapter 6 looks at the environmental management of small, medium and micro-sized enterprises (SMMEs). Coleman notes that South Africa’s new government is strongly encouraging the development of this sector and is providing various forms of support for emerging business. One problem with this is that SMMEs are generally poorly equipped to manage their environmental impact. They often lack the knowledge, skills, equipment and management systems that are required to control their environmental impact in general and their waste in particular. They are also, generally, under far less public pressure than the large companies, and they get less attention from regulatory authorities. Yet, the growth of this sector is critical to the expansion of employment and to considerations of equity and innovation. How, then, can the public authorities assist small businesses to upgrade their environmental capacities and to regulate their impact effectively? In considering these questions Coleman looks at SMMEs in the Western Cape that are involved in automotive servicing. She traces their difficulties with various environmental problems, including the disposal of hazardous waste and the protection of workers’ health. She concludes with a number of suggestions which can be taken up by government, including the provision of collective waste management facilities, improvements to regulatory frameworks and environmental capacity support for managers in small firms.

Chapters 7 and 8 deal with the process of environmental management at the workplace and, particularly, with the role of trade unions. Chapter 7 examines the role of trade unions directly. Magane, Miller, Goldblatt and Bethlehem start off by evaluating the role that progressive trade unions have played in influencing health and safety policy and practices and, more recently, environmental concerns. They argue that the unions have had an important influence on the direction of health and safety legislation and policy, but that their capacity to help implement better policies in the factories is uneven. Some unions have played a strong role in health and safety management, and this has been especially so in the mining and chemical sectors. Many other unions have, however, lacked this capacity and most unions are limited in their ability to make detailed, technical interventions on the factory floor. Where unions enjoy this capacity it is often strongest on the safety side rather than on the longer-term and less obvious health impacts. On the environmental side, unions’ involvement has grown in recent years. Various unions have played an important role in local struggles, as well as in the national policy debates. However, environmental issues are less squarely on union agendas than health and safety ones, and the links are not always obvious. While it is not appropriate for South African unions to try to make environmental issues their raison d’etre, there is important work to be done to strengthen their environmental capacity and, especially, to empower shop stewards to represent members’ health, safety and environmental rights.

Chapter 8 traces the history of the environmental conflict at Thor Chemicals, a company based in KwaZulu-Natal. This case study was chosen because of the high profile it has acquired in environmental debates and because of the lessons it can teach us about environmental regulation. Butler sets out to ask why such a dramatic violation of environmental and health and safety protection was able to occur. What is it about South Africa’s environmental regulatory system that allowed a situation to develop which ultimately resulted in workers losing their lives, and in severe damage to the water and soil resources in the area? And what about South Africa’s legislation resulted in such small fines being paid by the company once the case had been tried? The study also raises important questions about the place of trade unions in the management of health, safety and environment, and their role in environmental alliances. The lessons that Butler draws include the need to improve the role of regulatory officers in the civil service and to re-examine the judicial capacity to enforce environmental legislation.

In the Conclusion we focus on the policy changes that are suggested in this volume. We argue that there are indications that important aspects of South Africa’s industrial path are unsustainable and that our development imperatives call for a shift in the environmental management of industry. The important question is: what are the levers that can be used to shift industry and improve its performance? Here we focus on the question of appropriate forms of regulation as well as active environmental partnerships between business, government and trade unions. We look at various mechanisms including legislative change, sectoral target-setting, more integrated forms of environmental inspection, more proactive reporting requirements and ways of supporting environmental innovation. We conclude with some specific recommendations.

References

Postel, S., “Carrying capacity: earth’s bottom line”, in Brown, L. et al (eds), State of the World 1994, Worldwatch Institute, Earthscan, London, 1994.

Whyte, A. (ed.), The environment, reconstruction and development in South Africa, International Development Research Centre, Ottawa, 1995.

Worldwatch Institute, cited in The Sunday Independent, 14 January 1996.

United Nations Conference on Environment and Development, Agenda 21, United Nations, Rio de Janeiro, 1992.

chapter 1
THE LEGISLATIVE FRAMEWORK
Environmental law, investment and industrial practice

Peter Lazarus, Iain Currie and Rob Short

Introduction

Notwithstanding the efforts of environmental lawyers and legislators, current South African environmental law has little influence over long-term strategic industrial decision-making. The response of many South African industries to environmental law is reactive rather than proactive. South African environmental law is not designed to encourage long-term environmental planning by industry. This is largely due to problems of fragmentation and poor enforcement.

At the same time confusion over industry’s environmental responsibilities creates a difficult context for new industrial developments. The absence of clear legal guidelines for environmental impact assessments and other means of managing the environmental impacts of new investments, leads to conflict between communities and developers. The law is not helpful in resolving these conflicts. As a result, investments are sometimes unnecessarily delayed.

In South Africa today we have, in some sense, the worst of both worlds. Environmental laws fail to regulate industrial activities in a way that adequately protects the environment in the long-term. Yet, at the same time, in the short-term, environmental law fails to provide guidelines which would allow new investment decisions to be made in a rapid and environmentally responsible manner.

While South Africa is not short of environmental law, it is short of effective environmental law. In addition to certain gaps in the law itself, this ineffectiveness has two fundamental causes: the first is inadequate enforcement of environmental law and the second a lack of effective administration and management of environmental quality. With regards to enforcement, environmental law is ineffective, not only because the penalties for environmental damage are seldom severe enough to deter polluters but also because the existing body of environmental legislation is weakly wielded. Whatever deterrents or incentives there may be on the books, these all too often remain unregulated in practice. Effective administration, including development of the law and improvement in the quality of its enforcement, is hampered by a lack of clear policy direction by government.

The constitutional devolution of governmental power over the environment to the nine provinces has further complicated the administration of environmental quality control, exacerbating the problems created by the absence of a coordinated approach to environmental management. No matter how far-reaching and well-intentioned, environmental law cannot be effective without adequate enforcement, penalties for contravention and administration.

Recently, however, there have been some promising signs of change. The development of the consultative national environmental policy process and the integrated pollution control process, discussed in this chapter, herald a new era for environmental management in South Africa. As these processes take root, and especially if they impose stringent environmental management and pollution control requirements, industry will be forced to reconsider production processes. It is then that environmental law will begin to assume a significant role in influencing industrial strategy.

This chapter is an overview of the changing constitutional and institutional context of environmental law in South Africa. It provides a brief description of current environmental legislation and details recent developments and trends in environmental law and policy. Throughout the chapter, the often considerable gap between environmental law and the practices of enforcement agencies and of industry are noted. The chapter concludes with several suggestions for narrowing that gap, seeking a way to ensure that environmental considerations are incorporated into industrial planning decisions.

The impact of the Constitution on environmental law

The effect of the Constitution1 on environmental law and its administration can be divided into two categories:

• the Constitution contains a number of federal elements, dividing governmental powers between the national and provincial levels of government. The power to make and administer law in respect of the environment is placed in the hands of provincial governments. At the same time, national government retains the power to make and administer environmental law in certain circumstances; and

• the Constitution requires current and future legislation and the conduct of the government to conform to the provisions of the Bill of Rights. The Bill of Rights contains a specific right to a healthy environment as well as a number of rights pertaining to the conduct of the administrative powers of government that will affect the administration and enforcement of environmental law.

1 References in this chapter to the Constitution are to the Constitution of the Republic of South Africa, 1996, adopted by the Constitutional Assembly on 8 May 1996. References to the interim Constitution are to the Constitution of the Republic of South Africa, Act 200 of 1993. At the time of writing, the Constitution was not yet in operation, having been referred to the Constitutional Court for certification in terms of Chapter 5 of the interim Constitution. Once certified, the Constitution will come into operation on a date established by the President by proclamation, but no later than 1 January 1997 (section 244).

The constitutional distribution of powers over the environment

Under the pre-1994 constitutional dispensation, legislative authority over the environment was centralised, while responsibility for the administration of environmental law was fragmented (Loots 1996). While Parliament had the power to legislate over all aspects of environmental protection, the administration of parliamentary legislation was divided between a number of national government departments and provincial and local authorities. Under the 1996 Constitution, both legislative and administrative control over the environment is fragmented.

The Constitution accords legislative powers to provincial legislatures and governments, concurrent with those of Parliament and the national government, over a list of functional areas. The list includes the areas of agriculture, administration of indigenous forests, nature and soil conservation, planning, pollution control, tourism and recreation, as well as the functional area of “environment” itself. Provincial legislation prevails over parliamentary legislation in the listed functional areas except in certain circumstances. According to section 146 of the Constitution, national legislation will prevail over provincial legislation if it deals with a matter that cannot be regulated effectively by legislation enacted by individual provinces; if it provides for national uniformity of norms, standards, frameworks or policies; if it is necessary for the maintenance of national security, economic unity, the protection and promotion of economic activity across provincial boundaries, the promotion of equal opportunity or equal access to government services or the protection of the environment; and if it is aimed at preventing unreasonable action by a province that is prejudicial to the economic, health or security interest of another province or the country as a whole or impedes the implementation of national economic policy.

Thus, for example, an Act of Parliament seeking to implement Republic-wide environmental standards in accordance with international legal obligations would prevail over a provincial law that failed to measure up to such norms and standards since it provides for national norms and standards and is aimed at the protection of the environment. In effect, then, responsibility for legislation and administration of environmental law is in the hands of the provinces, subject to the power of the national government to lay down national policy and to override provincial legislation in a number of circumstances.

Most environmental legislation endows government officials and bodies with the power to enforce and administer its provisions (Loots 1994:17-22). Administrative officials may, for example, be authorised by legislation to issue regulations or other forms of delegated legislation that supply the practical and technical detail of environmental management. Activities that may threaten the environment are usually controlled by issuing permits and licences and by monitoring or inspection by government officials. The constitutional division of administrative power, therefore, has crucial significance for environmental law.

In terms of the Constitution, the executive authority of the Republic vests in the President and Cabinet. Provincial executive authority vests in the premiers and executive councils of the provinces. Provinces have executive authority to administer provincial legislation, to administer national legislation falling within the functional areas listed in schedules 4 and 5 of the Constitution unless that national legislation provides otherwise, and to administer functions specifically delegated to the provinces by national legislation.

Currently, the Department of Environmental Affairs and Tourism plays the major role in the administration of environmental affairs at a national level in South Africa. The department is principally responsible for formulating general environmental policy and coordinating and monitoring the administration and application of this policy by the different national executive institutions. Several other central government departments are also involved in environmental management. The land-use planning function is the responsibility of the departments of Land and Agriculture Affairs. The conservation of soil and control of agricultural resources fall under the jurisdiction of the directorate of resource conservation of the Department of Agriculture.

The management of water resources falls under the Department of Water Affairs and Forestry. Certain health aspects of water quality, radiation and air pollution fall under the jurisdiction of the Department of Health. The responsibility for controlling oil pollution at sea is shared by the departments of Transport and of Environmental Affairs and Tourism. The Department of Education and the National Monuments Council are responsible for the preservation of certain cultural and historical assets. The Department of Mineral and Energy Affairs exercises control, through its mineral laws administration branch and the government mining engineer, over energy matters and the exploitation of minerals.

It is clear that a number of the powers currently administered by central government fall within the areas of executive competence of the provinces. This means that competence to administer existing powers delegated by parliamentary legislation and currently administered by central government will fall to the executive authorities of the provinces once powers of administration under that legislation are assigned by the President.2 In terms of the constitutional division of power, central government will retain administrative competence in respect of the formulation of general policy; the implementation of minimum, Republic-wide norms and standards; and executive functions in respect of environmental matters which have implications across both provincial and national boundaries (such as, for example, air pollution controls). Further, as outlined above, central government will retain responsibility for the implementation of policy, norms and standards that derive from South Africa’s international law obligations. Remaining delegated legislative powers and functions should then be assigned to the relevant provincial authority once the province has the administrative capacity to exercise and perform those powers and functions. This process commenced in 1995, under the interim Constitution, with the assignment to provinces of powers and functions contained in the Environment Conservation Act 73 of 1989, the Mountain Catchment Areas Act 63 of 1970, the Transvaal Nature Conservation Ordinance of 1983 and the Sea Shore Act 21 of 1935 (Loots 1996: 3).

The devolution of environmental management powers and functions to the provinces in terms of the interim and final constitutions runs counter to the idea that centralisation is essential for the formulation and implementation of an efficient and integrated environmental management policy. Instead, environmental management is placed in the hands of the executive authorities of nine provinces, with widely differing administrative capacities, resources and priorities. Provincial boundaries cut across

2In terms of Schedule 6 of the Constitution.

environmental boundaries, the effect of which is that bioregions such as catchments may become the administrative responsibility of a number of provinces. It is suggested that a single, strong government department or agency would be far more effective in forcing compliance with environmental legislation.3

Despite the devolution of environmental law powers to the provinces, the Constitution permits a measure of central control in the form of national powers of standard-setting and policy formulation. Proper use of these powers would allow some of the benefits of centralised administration of environmental law to be achieved within the limits imposed by the federal elements of the Constitution. A strong national department of the environment with responsibility for all aspects of environmental protection would be able to control and guide provincial law-making and administration of environmental matters by prescribing policy and national minimum standards (Loots 1996: 6).

Fundamental rights

Chapter 2 of the Constitution sets out a number of fundamental rights. A law or administrative action which violates any of these rights will be unlawful, unless the limitation of the right in question can be justified by the government.4

The inclusion of an environmental right in the Constitution is likely to influence judidal decision-making by requiring that due weight be given to environmental considerations, traditionally undervalued by the courts.5 For example, the Indian Supreme Court has used the environmental right provided for in the Indian Constitution to order the temporary closure of a limestone mine, the operation of which adversely affected life in a nearby

3 International experience suggests that the enforcement of environmental law is improved by the establishment of a central government organ to administer and enforce legislative requirements. In 1982 the United States Environmental Protection Agency established a federal programme to investigate and prosecute environmental crimes in conjunction with the land and natural resources division of the United States Department of Justice. The Environmental Protection Agency hired a group of special investigators, and the Department of Justice organised a special environmental crimes unit to prosecute the cases identified by Environmental Protection Agency investigators. Between 1983 and 1990 the environmental crimes unit indicted 761 individuals and corporations. In 1990 its rate of successful prosecution was as high as 85%. Similarly, the British Environment Protection Act 1990 establishes a single agency—Her Majesty’s Inspectorate of Pollution—to control industrial pollution.

4 Section 36 of the Constitution provides that fundamental rights may be limited only in terms of law of general application and only to the extent that the limitation is reasonable and justifiable in an open and democratic society based on human dignity, equality and freedom, having regard to all relevant factors, including:

(a) the nature of the right;

(b) the importance of the purpose of the limitation;

(c) the nature and extent of the limitation;

(d) the relation between the limitation and its purpose; and

(e) less restrictive means to achieve the purpose.

5 Section 24 of the Constitution provides that everyone has the right:

(a) to an environment that is not harmful to their health or well-being; and

(b) to have the environment protected, for the benefit of present and future generations, through reasonable legislative and other measures that:

(i) prevent pollution and ecological degradation;

(ii) promote conservation; and

(iii) secure ecologically sustainable development and use of natural resources while promoting justifiable economic and social development.

village. The mine was required to show how it could mitigate the harmful effects of its activities.6 Without the constitutional recognition of an environmental right, a South African court faced with the same case would in all likelihood consider the private law rights of the mine-owners to exploit their property to outweigh the public interest in a healthy environment.

The environmental right requires the government to take legislative steps to protect the environment and justifies such steps if they clash with other rights (such as, for example, the right to property). A significant implication of the environmental right is the result of the fact that it not only binds the state in its relations with individuals, but that individuals may assert their rights against the state and against other individuals.7 This means that where a person’s right to a healthy environment is violated by the actions of a private individual or company, that person may invoke the right and may seek the relief provided for in the Bill of Rights.

The availability of a constitutional right and a remedy for the breach of that right is of particular importance for the enforcement of environmental law. There are a number of non-governmental environmental and human rights organisations in South Africa which would be willing to initiate litigation on environmental issues against industries which cause environmental degradation and government agencies which fail to comply with their legal obligations. Without a constitutional right, two major obstacles stood in the way of such litigation: lack of locus standi and lack of funding. While the Constitution does not address the funding obstacle, the common law rule of standing that a plaintiff must be personally adversely affected by the wrong which gives rise to the action is considerably relaxed. Where a violation of fundamental rights is concerned, relief may be claimed by any person, including an organisation, acting in the interests of any other person or class of persons adversely affected by the infringement. As a result, an organisation may litigate in the public interest or claim relief in a representative capacity on behalf of persons adversely affected by illegal conduct.

Administrative law principles have made a significant contribution towards ensuring that environmental factors are taken into account in the exercise of administrative discretion. The aclministrative justice section of the Constitution guarantees lawful, reasonable and procedurally fair administrative action. The section grants a right to everyone adversely affected by administrative action to be given written reasons for that action.8

6 Kinkri Devi v. State of Himachal Pradesh 1988 AIR 4.

7 Section 8(1) of the final Constitution provides that the Bill of Rights applies to all law and binds the legislature, the executive, the judiciary and all other organs of state. Section 8(2) provides that a right in the Bill of Rights binds all natural and juristic persons if, and to the extent that, it is applicable, taking into account the nature of the right and of any duty imposed by the right. Activities that impact on the environment and which may affect environmental rights cannot conceivably be said to be restricted to public, state or government activities. The activities of private natural and juristic persons impact on the environment at least as much as those of the government. It follows that the environmental right in section 24(a) binds individuals as well as the state. The right in section 24(b), because of its reference to “legislative and other measures”, imposes duties solely on the state and, therefore, is binding only on the state.

8 Section 33 of the Constitution provides:

(1) Everyone has the right to administrative action that is lawful, reasonable and procedurally fair.

(2) Everyone whose rights have been adversely affected by administrative action has the right to be given written reasons.

A right closely related to the right to reasons for administrative decisions is the right of public access to information held by the state. The right granted in the Constitution is a blanket right of access to all state information.9 Taken together, these rights will alleviate the absence of information relating to state actions that has hitherto frustrated the conduct of environmentally based litigation.

Administrative justice rights will further affect current and future environmental legislation by prohibiting the granting of wide or unbounded discretionary powers to officials. The exercise of discretionary powers granted without an adequate legislative framework of standards constraining those powers may violate the right to lawful administrative action. The clauses may require that reasonable standards be set out in legislation against which the exercise of discretion may be measured. This may require considerable redrafting of environmental legislation.10

A constitutional right to property may place considerable limits on environmental law. Environmental laws and regulations will have to fall within the constitutionally permissible limits of state interference with property rights. The Constitution prohibits the expropriation by the state of “rights in property” without payment of just and equitable compensation. Since many environmental statutes may entail restrictions on the use of private property, the property clause may require payment of compensation if such restrictions are interpreted as expropriations of rights to property.

Strict liability

Strict liability clauses are a feature of environmental law in many countries. A strict liability clause in an environmental statute provides that fault in the sense of careless or intentional wrongdoing need not be established by the state (in the case of a criminal prosecution) or by a plaintiff (in the case of a civil action) in order to impose criminal or civil liability on the polluter. Ownership or control over the operations of a polluting facility would result in liability if it were established that pollution emanated from that facility. Strict liability provisions may impose liability to compensate authorities or individuals who have incurred clean-up costs, or may facilitate individual claims for damages brought by individuals injured by the pollution.

9 Section 32 of the Constitution provides that: (l)Everyone has the right of access to:

(a) any information held by the state; and

(b) any information that is held by another person and that is required for the exercise or protection of any rights. (2) National legislation must be enacted to give effect to this right, and may provide for reasonable measures to alleviate the administrative and financial burden on the state.

10 For example, the powers such as those granted to the Minister of Water Affairs by section 9A of the Water Act 54 of 1956 to “control, limit or prohibit” the use of public water “whenever in his opinion a shortage exists or is likely to arise” to the extent that “he in the public interest may deem expedient and in the manner and subject to such conditions as he may think fit “may be unconstitutional. In the absence of any statutory definition of the public interest, the minister’s powers amount to an unbounded or subjective discretion. Such a discretion may fail to meet the requirement of section 24(d) that administrative action is “justifiable in relation to the reasons given for it”. See Derek Spitz, “Water law and the Constitution” in “Submission to the Department of Water Affairs and Forestry by the L&PC water law legal grouping” (Land & Agriculture Policy Centre, August 1995: 91-95).

In South Africa a number of strict liability measures have been enacted.11 It is unclear, however, whether such measures are constitutional. Where a strict liability clause assists the imposition of criminal liability it will violate the right to be presumed innocent in terms of the Constitution. In the criminal field, at least, it is unlikely that strict liability clauses will survive constitutional challenge unless the state is able to satisfy the test for the limitation of fundamental rights. This will, at the minimum, require such provisions to be narrowly tailored to ensure that the risk of conviction of innocent people is minimised.

As for the imposition of civil liability, it is arguable that a strict liability measure may violate the right to non-discrimination, in so far as certain classes of persons (plaintiffs in environmental litigation) are unfairly favoured at the expense of another class of persons (defendants in environmental litigation). To withstand constitutional scrutiny, strict liability measures would have to be justified as a reasonable limitation of the right, rationally related to the goal of securing the protection of the environment.

Environmental legislation regulating industrial projects

Apart from controls exercised by land-use planning legislation, the most important body of environmental law affecting industry is pollution control legislation. Pollution control in South Africa is characterised by a number of problems. The principal obstacle to an effective pollution control regime is an uncoordinated approach by the various regulatory authorities recognised by the legislation. Moreover, the environmental objectives of much pollution legislation is not made clear and, in some cases, individual pieces of legislation conflict with others.

Enforcement of the pollution laws has clearly been inadequate, particularly when it has been delegated to local administrative structures. This is the result of a lack of clear direction and training from the central structures, which have not seen the development of capacity at the different levels of government as a strategic imperative that ensures the successful implementation of legislation. A prevailing perception of the system is that there is too cosy a relationship between industry and the regulatory authorities, as is evidenced by low prosecution levels. Certainly, the authorities are constrained by a lack of resources, a lack of qualified personnel and by the legislation itself.

Pollution control is administered by a number of national, provincial and local government departments. Responsibility for air quality was previously administered by the Department of Health but is now administered by the Department of Environmental Affairs and Tourism. Hazardous substances are regulated by the departments of Health and Labour. Freshwater pollution is controlled by the Department of Water Affairs and Forestry, sea-water pollution by the departments of Environmental Affairs and Tourism, Water Affairs and Forestry and Transport. The use of pesticides and fertilisers is controlled by the Department of Agriculture. The control of solid waste is particularly unsatisfactory, some aspects falling

11 Sections 22A and 22B of the Water Act 54 of 1956; section 31A of the Environment Conservation Act 73 of 1989; section 9 of the Combating of Pollution of the Sea by Oil Act 6 of 1981 and section 61 of the Nuclear Energy Act 131 of 1993.

under the Department of Environmental Affairs and Tourism, others under the Department of Water Affairs and Forestry and most aspects being taken care of by local authorities with little or no guidance from central government (Loots, unpublished note). As has been noted above, provincial legislatures now have the power to make law regarding pollution control and the provinces will either administer those laws themselves or delegate power to local authorities.

The integrated pollution control process aims to address the currently fragmented administration of pollution management. At present, however, a cross-media approach to pollution control is entirely absent in legislation.

Air pollution control

The control of air pollution in South Africa is effected by means of one comprehensive statute: the Atmospheric Pollution Prevention Act 45 of 1965. The only other legislation which deals with limited aspects of air pollution control are the Health Act 63 of 1977, regulations in terms of the Mines and Works Act 27 of 1956 (still applicable in terms of the Minerals Act 50 of 1991) and the Road Traffic Act 29 of 1989. The Atmospheric Pollution Prevention Act is administered by the Department of Environmental Affairs and Tourism.

The Atmospheric Pollution Prevention Act controls four types of atmospheric pollution: noxious and offensive gases, smoke, dust and vehicular emissions. Noxious and offensive gases, which are defined in the Act to include a large number of compounds caused by industrial pollution, are controlled by requiring operators of certain scheduled processes,12 within controlled areas, to obtain from the chief air pollution control officer a registration certificate authorising the continuation of that process. Since 1968 the whole of South Africa has been declared a controlled area.13

The chief air pollution control officer is authorised to grant such a certificate if satisfied that “the best practicable means” are being adopted for preventing or reducing to a minimum the escape into the atmosphere of noxious or offensive gases. “Best practicable means” is defined in the Act to include the provision and maintenance of the necessary appliances to prevent air pollution, the effective care and operation of such appliances and the adoption of any other methods which are practicable and cost-effective within the prevailing technical context. The chief air pollution control officer has interpreted this definition as the assessment of the problems of air cleaning associated with each type of process, of which there may be many examples in the country, and to decide what degree of air cleaning can be achieved, bearing in mind the different techniques available, the costs associated with their installation and operation and the effects which these costs will have on the ability of the firms concerned to operate without financial loss.

Application of “best practicable means” clearly involves a subjective evaluation on the part of the chief air pollution control officer and, in practice, is generally interpreted in collaboration with the industries concerned. As such, no national, or even regional, stan-

12 At present the second schedule to the Act has 69 scheduled processes listed which are generally considered to be the major causes of industrial air pollution in South Africa.

13 Government Notice R1776 of 4 October 1968.

dards for air cleanliness have been established, as the degree of industrial air pollution tolerated is largely at the discretion of the chief air pollution control officer. Guidelines for each process, based on concentrations of pollutants emitted, have, however, been laid down by the department and are generally incorporated into specific registration certificates. Once the guidelines form part of a certificate, they become legally binding on the industry concerned. Registration certificates operate as permits which allow the scheduled process to be carried on subject to certain conditions. At present there are approximately 2 000 certificates in operation for approximately 1200 industrial plans in South Africa.

Both smoke and dust pollution are controlled generally by the declaration of control areas in which certain prescribed steps are required to be taken by persons in control of such pollution-causing activities. Pollution by smoke is controlled by local authorities, whereas dust pollution is controlled at national level. Vehicular emissions, which are in practice inadequately enforced, are nonetheless provided for in the Act by allowing local authorities to conduct inspections of vehicles on public roads.

As is the case with much environmental legislation in South Africa, control over air pollution is highly fragmented, with overburdened air pollution officers appointed by local authorities being responsible to central government and monitoring air quality within their own municipal areas, despite the fact that air pollution does not confine itself to municipal boundaries.

Approximately 200 stations throughout the country monitor the levels of SO2 and particulate matter in the air, and 150 monitor smoke. About 41 local authorities are involved in this process. In addition, large companies such as Sasol and AECI have their own monitoring stations. A central database of information compiled over the last few years is now available. Monthly reports detailing emission levels are submitted to the department, which requires 90% compliance with the prescribed standard for the industry concerned. Written notice is given to the industry in the event of the acceptable level being exceeded, and non-compliance results in the threat of cancellation of the certificate. It is significant to note, however, that to date only 20 certificates have been cancelled (Petrie 1992).

It has been suggested that the legislative framework created by the Atmospheric Pollution Prevention Act has fragmented rather than consolidated administrative control over air quality. This fragmentation has prevented the existing pollution inspectorate, already inadequately staffed and insufficiently supported with scientific services, from monitoring air quality and compliance with guidelines set out in certificates. The scope of the administrative discretion given to the chief air pollution control officer and the local authorities must also be reviewed if South African air quality control is to match standards in Europe and the USA.

Clearly undermining the efficacy of current air quality control is the very low sanction attached to air pollution offences. In some states in the USA, for example, penalties for air pollution may be as high as $25 000 per day of the offence, compared to R500 in South Africa. Also of concern is the fact that emissions in South Africa are controlled by guidelines, which only become legally binding once incorporated into a certificate, as opposed to a system of uniformly applicable emission standards.

It is widely accepted that current air pollution legislation has done little to improve air quality in South Africa. Since the promulgation of the Atmospheric Pollution Prevention Act in 1965, air quality in South Africa has steadily declined. Although most industries that generate significant quantities of aerial emissions are scheduled processes in terms of the Act, the standards required by the Act are fairly open-ended and are dependent on the subjective judgement of the chief air pollution control officer. Air pollution control tends to be focused on the reduction of visible particles in aerial waste streams or waste streams that give rise to visible pollution, for example, NOx and its formation of photochemical smog.

Despite the absence of meaningful incentives and sanctions, a number of South African industries have installed air pollution control technology. However, this technology has often been in the form of electrostatic precipitation to remove particulate matter from aerial waste streams so that emissions from stacks become less visible. Furthermore, many industries have introduced air pollution reduction targets as part of their internal, self-regulatory process of environmental management. In the face of weak and poorly enforced air pollution legislation it is safe to conclude that industry will not develop air pollution reduction programmes in response to a fear of increased liability from air pollution prevention legislation. In the absence of legislative change, reductions in industrial air emissions would have to be fuelled by international pressures, demands from non-governmental organisations and the public or profit incentives.

Water pollution control

South African water law is currently in transition. A process aimed at redrafting the Water Act 54 of 1956 was initiated by the Department of Water Affairs and Forestry in March 1995. After extensive public consultation and the appointment of two panels consisting of experts from within and outside the department, a discussion document was released by the minister in April 1996, containing a set of principles on which the final legal structure of South African water law is to be based (Department of Water Affairs and Forestry 1996). After further public consultation relating to the principles, the final phase of the process will involve the drafting of new legislation in accordance with the principles under the supervision of a team of legal experts.

Many of the principles that have been developed are aimed at redressing historical inequalities in the allocation and distribution of water rights. Most fundamentally, the principles propose a uniform allocation system in terms of which all water has a similar legal status and over which the state has control. At this stage the details of the new allocation mechanism have not been finalised, but it is unlikely that it will significantly undermine the security of industry’s right to use water.

One of the principles regarding water resource management approaches, however, is of specific interest. The principle states that “water quality management options should include the use of economic incentives and penalties to reduce pollution; and the possibility of irretrievable environmental degradation as a result of pollution should be prevented” (Department of Water Affairs and Forestry 1996: Principle D5). The explanatory text accompanying this principle makes specific reference to a commitment to the “polluter pays” principle in the case of waste disposal and, furthermore, provides the way for a marketable system of water rights and, possibly, the trading of a form of pollution credits.

Unlike environment, water is an area of national competence in terms of the Constitution. The national Department of Water Affairs and Forestry is thus responsible for all water affairs in South Africa but is assisted by numerous regional offices throughout the country. Apart from the Water Act, there is a wide variety of legislation dealing with water pollution and a number of government departments are involved in its administration. This, together with the control exercised by individuals in terms of private rights to water, has fragmented the administrative control of water. It is the stated policy of the Department of Water Affairs and Forestry, reflected in the principles on water law reform, to manage the water resources of the country on a catchment basis. Catchment boundaries do not, however, generally coincide with political or provincial boundaries. The effect of this is that in one catchment more than one administrative body may have authority to manage the water resources in their respective areas of jurisdiction.

The Department of Water Affairs and Forestry accepts that the concept of zero pollution is not its goal. Water is a scarce resource in South Africa and reused effluents are considered vital supplements to fresh-water resources. Rather, the Department of Water Affairs and Forestry’s policy is embodied in the concept of “fitness for use”, which aims to ensure that water of acceptable quality continues to be available for recognised uses, such as urban, industrial, agricultural, recreation and conservation. The “fitness for use” concept is thus relative, recognising that different users require different qualities of water. A major problem with the application of the concept, however, is that users who fall outside the definition of “recognised users”, such as informal settlements or many rural communities, have no assurance that water which satisfies their needs will continue to be available.

From a pollution control perspective, in order to achieve “fitness for use”, the sources of the pollution need to be monitored. Thus far the pollution control strategies of the Department of Water Affairs and Forestry have focused on the control of point sources of pollution and have largely ignored the impact of diffuse pollution sources. Since 1991 the Department of Water Affairs and Forestry has begun shifting its control strategy from the uniform effluent standards approach to the receiving water quality objectives approach. The implementation of this approach is, however, proving more difficult than was originally anticipated. In practice, therefore, the uniform effluent standards approach remains the basis of the department’s practice and remains the approach provided for in legislation.

The uniform effluent standards approach aims to control the quality of effluents that enter the water environment by requiring that effluents conform with certain prescribed standards set at technologically and economically attainable levels. The relaxation of these standards is usually negotiated in individual cases on the basis of technological or economic considerations. The standards were initially aimed at limiting the rate of deterioration in water quality by focusing on pollution and promoting waste water treatment technology.

The receiving water quality objectives approach was adopted in view of the fact that, notwithstanding the uniform effluent standards approach, the quality of South African water resources was continuing to deteriorate. Part of the reason for this was that standards were frequently set and exemptions granted without knowledge of the impact that these may have had on the receiving waters. The receiving water quality objectives approach provides that in certain catchments, effluents should be discharged to the surface drainage system without the quality specifications of the receiving water (based on the needs of downstream users) being exceeded.

While the receiving water quality objectives approach is a major policy advance, it is proving to be difficult and time-consuming to implement. The primary reason for this is that it requires the determination of the water quality needs for each downstream user to calculate the quality and volume of the effluent that can be discharged upstream. As the long-term low-level impacts of marginally unsuitable water quality are largely unknown for many uses, it is difficult to calculate such values. This problem is compounded by the fact that there is no incentive for downstream water users to be more precise about their water quality requirements.

At present, however, the Water Act exercises control over the use of water by industry by regulating industrial water consumption and by regulating the discharge of effluents. To control consumption, section 11 of the Act requires anyone using public water for industrial purposes to obtain the permission of a water court, and in certain circumstances a permit from the minister. These permits essentially provide for a system of reporting back to the department on matters such as the water-saving technologies that industries are using and where and how effluent is being discharged.

To regulate the discharging of effluents, the Act places the onus on industrial water users to purify their effluent to certain standards and, once purified, to return purified or treated water to its origin. At present, uniform effluent standards are prescribed by the minister in consultation with the South African Bureau of Standards. The standards comprise a general standard applied to all catchments, a special standard for specific streams and a special phosphate standard for certain sensitive catchments. These effluent standards as well as the methods of testing waste water or effluents were last updated in 1984 and specify maximum permissible concentrations for a variety of compounds.

A problem with concentration-based standards is that with the increase in the use of water for industrial purposes, an increase in the total load of pollutants that enter the water environment will still result. The fact that single effluent standards do not take into account the total load per volume of the receiving water, means that the standards do not bear any real relation to the overall pollutant load of a river. A further negative side-effect of concentration-based standards is their tendency to encourage an increase in the use of water, since such standards can be complied with if pollutants are sufficiently diluted. Another problem with uniform effluent standards is that by requiring across-the-board compliance, they do not provide any incentive for industry to reduce pollution or to discharge it into the most environmentally advantageous place.

Of all legislation controlling environmental pollution in South Africa, water pollution legislation is arguably the most developed. Provided that the lack of a definition of pollution, the problems with the definition of effluent and the many problems stemming from the inappropriate distinction between public and private water are addressed, a legislative structure for adequate control of pollution is already in place. The solution to South African water pollution problems is, therefore, not principally to be found in legislative changes, but rather in administrative changes aimed at alleviating the fragmented control over water resources and ensuring compliance with legislation.

Land-based pollution control

Although more than 90% of the 330 million tonnes of waste produced annually in South Africa is disposed of on land, nowhere is the fragmented nature of environmental law more evident than in the area of solid waste management. Control is currently exercised through at least 37 Acts of Parliament, 16 provincial ordinances and numerous local authority by-laws. This body of legislation, administered by numerous government departments, encompasses a diversity of activities which generate waste as well as many different types of waste that are produced.

In the absence of a national waste management policy or a coherent and consolidated Act, solid waste is currently controlled in a haphazard and uncoordinated manner. Legislation concerning waste historically pertained mainly to the prohibition of littering and to refuse removal, and has been administered mostly at local authority level. Apart from the Environment Conservation Act 73 of 1989, the focus of most by-laws dealing with solid waste is on the protection of public health and the prevention of nuisances related to waste. Furthermore, although many of the acts empower administrative officials to make regulations concerning waste management, in practice very few regulations have been made.

It is widely recognised that most legislation dealing with waste management is ineffective because the departments responsible for enforcing the provisions have insufficient personnel to carry out these duties. Most of the departments, therefore, rely on cooperation and/or persuasion of waste generators or disposers, supported by the threat of cancellation or withdrawal of a permit. Prosecution is a far lesser threat, especially in view of the often minor penalties which maybe incurred on conviction. To date no convictions have been obtained in terms of the Environment Conservation Act, which is the Act most capable of regulating land pollution. Furthermore, much current legislation exempts government departments from complying with legislative provisions. The potential exists, therefore, for some of the worst polluters to escape regulation entirely.

Although there is no general policy on waste management, certain initiatives and policies emanating from the Department of Environmental Affairs and Tourism, including the integrated pollution control process mentioned above, indicate that there may be a national policy in the near future.

Some progress has, however, been made regarding the development of a hazardous waste management policy. In April 1994, South Africa became a signatory to the Basel Convention on the Transboundary Movement of Hazardous Waste, and in September 1994, the Department of Environmental Affairs and Tourism published a policy on hazardous waste management in the Government Gazette for comment.

The policy was widely criticised by various sectors of society, primarily for the lack of adequate consultation with affected parties in the drafting of the policy. It was further criticised for making provision for the importation, in certain circumstances, of toxic waste and for specifically excluding workers from the ambit of the policy. In March 1996 the department convened a workshop of “stakeholders” with a view to developing a way forward for the process. The workshop suggested the formation of a sectorally representative forum which will be charged with the management of the process towards the formulation of a policy on hazardous waste management. A proposal in this regard has been forwarded to the committee for environmental coordination for approval.

In the interim, the department intends producing regulations which will set out substances which may be imported or exported subject to controls and those substances in respect of which there will be a total import/export ban.

It seems evident from the above that South Africa will in all probability have a national policy on waste management in the near future. However, the danger exists that the problem of fragmented legislation may be overshadowed by vague and overly flexible policies.

The Environment Conservation Act governs the establishment and operation of waste disposal sites. Although the whole Act falls under the auspices of the Minister of Environmental Affairs and Tourism, section 20, which deals with waste disposal sites, is administered by the Minister of Water Affairs and Forestry. To establish, provide or operate a waste disposal site, one is required to obtain a permit from the Minister of Water Affairs.

Although the Act authorises the Minister of Environmental Affairs and Tourism to make extensive regulations with regard to waste management, no such regulations have yet been promulgated. Two sets of draft regulations dealing with waste disposal were, however, issued in terms of the 1982 Environment Conservation Act, but were never promulgated. Similarly, in June 1991, another set of draft regulations, dealing specifically with waste disposal site permits, was issued. These too, however, have not yet become law. In July 1994, the minister published regulations which contain the application form which must be completed by any person who wishes to apply for a permit. This form requires a substantial degree of detail pertaining to the position of the site, water levels, weather conditions, use of adjacent land and substances to be handled.

During the latter part of 1994, the Department of Water Affairs and Forestry produced a series of three documents dealing with the minimum requirements for the handling and disposal of hazardous waste, waste disposal by landfill and monitoring of hazardous waste which are intended to provide a framework within which to enforce the permits and the conditions attached to them. The document adopts the best practicable environmental option policy by means of a threefold process: waste avoidance, correct classification of waste and requirements for the safe handling and disposal of waste.

The document states that the department also envisages the future registration of waste generators and transporters in order to implement a comprehensive waste management system. Should the department formulate legislation in this regard, responsibility and accountability will inevitably be placed on waste generators in addition to waste disposers, which, in turn, will lead to safer environmental practices and, thus, a safer working environment.

In terms of the Environment Conservation Act, the Minister of Environmental Affairs and Tourism is empowered to declare certain activities, such as waste disposal, to be “identified activities”, which would necessitate that an impact assessment be completed before permits are issued. Although the minister submitted a list of proposed identified activities for comment in March 1994, at the time of writing the list had not yet been finalised.

In spite of the procedures laid down in the Environment Conservation Act, of the estimated 900 disposal sites that exist in the country, fewer than half have been issued permits from the Department of Water Affairs. In a study conducted for the President’s Council report in 1991 on a national environmental management system, it was found that the majority of local authorities had existing pollution problems and of the sites surveyed, 62% posed a water pollution problem, 65% contributed to air pollution and 71% caused a nuisance to the community.

Clearly, waste disposal control legislation in South Africa, although inadequate, appears to be in the process of being streamlined. In addition to the principles raised above, future policy and legislation must address the problem of the many disposal sites that are operating without permits and the widespread practice of illegal dumping. This can be achieved by the enactment of more stringent penalties and more effective monitoring of compliance.

Regulation of new industrial projects by environmental law

The environmental media-based pollution legislation outlined above deals with general environmental pollution and its control. There is also a set of legal or administrative instruments designed to control the environmental impacts, in a more holistic sense, of new developments.

Environmental impact assessments

Environmental impact assessment involves the evaluation of the consequences of a proposed development for the environment. Developments may include the construction of roads, dams and factories and should also apply to the establishment of townships, industrial areas and recreation facilities. The environment to be considered is not only the natural environment but also the built environments in which people live and work. The purpose of an environmental impact assessment is to provide a methodology for the formal incorporation of environmental concerns into the decision-making process. It is, therefore, a decision-making tool but is not intended to make the decision and, therefore, has to be situated within a decision-making process.

Section 21 of the Environment Conservation Act of 1989 authorises the Minister of Environmental Affairs to identify activities which in his/her opinion may have a substantial detrimental effect on the environment. Section 22(1) of the Act prohibits the undertaking of an identified activity, except by virtue of a written authorisation issued by the minister, an administrator or a local authority or an officer designated by the minister. Section 22(2) provides that authorisation shall be issued only after consideration of reports concerning the impact of the proposed activity and of alternative proposed activities on the environments. Such report is to be submitted by such persons and in such a manner as may be prescribed.

On 4 March 1994 the minister published for comment proposed regulations concerning environmental impact assessment reports and a list of activities identified in terms of section 21. These regulations were, however, never promulgated, due to comments received and the lack of clarity regarding what the role of the national department and the provinces would be in managing the environmental impact assessment process.

At the time of writing the legal position, therefore, is that environmental impact assessments are not mandatory. It is, however, likely that provincial legislatures will introduce their own legislation in this regard in the near future. In the meantime some developers are already voluntarily undertaking the integrated environmental management procedure recommended by the Department of Environmental Affairs and Tourism.

The integrated environmental management procedure

In 1984 the Council for the Environment established a committee to investigate the desirability of introducing environmental impact assessment requirements in South Africa. In 1989 the committee published a proposal for the introduction of a procedure called integrated environmental management in terms of which an environmental impact assessment would be required for all developments which may have a significant impact of the environment. In 1992 the Department of Environmental Affairs published a revised guideline document on the integrated environmental management procedure.

The integrated environmental management procedure is intended to ensure that environmental concerns are taken into account in all developmental action, from the planning of a project through to the decommissioning. The integrated environmental management procedure is based on a broad definition of the term “environment” and encompasses social, economic, cultural and aesthetic issues as well as the ecological impacts of a development. The process is also designed to include public participation and to facilitate participation by the public in decision-making. The guidelines for the presentation of the final report also make it clear that the environmental assessment and its conclusions need to be presented in such a way as to be understandable by the people who are potentially affected by an action or development. Therefore, the principles of informed decision-making, access to information, accountability for decisions taken and the public monitoring of compliance are all embedded in the procedure.

The first step of an integrated environmental management procedure is taken at a proposal development stage where all interested and affected parties need to be notified, the relevant authorities consulted, and issues of concern and alternatives identified. The second step involves the classification of the proposal into either having no significant impact, or potentially having some environmental impact. If the project may have an impact an initial assessment is done to determine whether potential impacts are serious enough to be classified as significant impacts. It may be clear from the start that there will be significant impacts. In either event, the next step is a formal environmental impact assessment which involves an extensive scoping or public consultation process and an environmental investigation.

The scoping process is probably the most important, controversial and difficult part of the procedure as it involves thorough and sincere consultation with all interested and affected parties. For the environmental impact assessment to be adequate, the views of these parties and their inputs into the decision need to be considered. The developer is expected to bear the costs of such a process as well, which may be fairly substantial depending on the scope and nature of the development. Particular attention is paid in the integrated environmental management procedure to ensuring the participation of historically disadvantaged communities.

Following from the environmental impact assessment there is an “authority review” of the assessment. This review should satisfy the relevant authority that sufficient information is provided in order to make a decision, that sufficient consultation with interested and affected parties has taken place and that the proposal complies with official requirements. The authority may then set conditions of approval which stipulate certain mitigating measures or other conditions, such as continual monitoring of impacts. A record of decisions, which is available on request to interested parties, must then be made available, something which would also apply in the event of the project not being approved. There is allowance for an appeal procedure from both the proponent and opponents of the development; however, the precise nature of this procedure is not yet clear.

The implementation of a project which has gone through a thorough integrated environmental management procedure may well be different from that initially conceptualised. An environmental management plan will probably be drawn up which will describe the implementation of the proposal and the control over this implementation. This will include the methods of management and monitoring of impacts, rehabilitation, mitigation measures, the maximisation of positive impacts and other relevant issues. The document will be a comprehensive plan describing the environmental management of the project from the start, through the life of the project and, finally, through the decommissioning stage.

A monitoring programme should be set up in the case of all approved proposals. This should assess whether the project is going as intended, whether there is compliance with the conditions set down and whether predictions of impacts were accurate.

One omission from the procedure is that it allows the developer not to undertake the public scoping and consultation aspects of the project if the nature of the project is confidential. No definition of “confidential” is given, which provides a loophole for the avoidance of a major part of the process.

The integrated environmental management procedure merely provides a procedural method for developers to follow. It does not provide answers to the measure of what a “significant” impact is or how to reconcile differing views on “significance”. The procedure further does not provide a methodology of weighing up environmental costs and benefits against each other. Thus, integrated environmental management will not on its own, even if thoroughly implemented, resolve conflicts around environmental issues or provide insights into the “correct” environmental approach to a development.

Decision-making in a context of regulatory uncertainty

In the absence of clear policy directions and ad hoc enforcement strategies by government, the extent to which South African industry incorporates environmental considerations into decision-making is widely divergent. This is illustrated by the different approaches corporations have to undertaking environmental impact assessments. Although environmental impact assessments are not mandatory, numerous large corporations routinely undertake environmental impact assessment while others, particularly small and medium-sized enterprises do not perform environmental impact assessments unless it is a requirement of a permit application. Even within corporations themselves there are different approaches for different projects, notwithstanding a general commitment to undertake environmental impact assessments. For example, an internal environmental impact assessment may be done which does not involve any public participation. This may be done as one of the initial project appraisal activities or as part of the final decision before the development is commissioned. Other environmental impact assessments clearly may involve extensive public consultation.

The extent to which environmental considerations influence industrial decisions is further determined by whether the project is a new or “greenfield” project or an extension to an existing facility. There appears to be a perception among many industries that performing environmental impact assessments for extensions or changes to existing facilities is unnecessary. On the other hand, there also appears to be a general understanding in industry that “greenfield” projects require the undertaking of environmental impact assessments which involve the public. The issue is also directly related to the project’s visibility. A high-profile project on a new site is likely to get more public reaction than a project which involves changes to an existing facility. It appears that the more likelihood there is of public reaction, the more likely it is that an environmental impact assessment will be performed.

The lack of clear regulatory requirements makes it extremely difficult for industry to synchronise its industrial planning with a consistent environmental policy framework. The complexities involved in determining environmental requirements from disparate authorities often prompts industry, particularly small and medium-sized enterprises which do not have the resources to be proactive, to proceed with the development and to face any administrative or legal obstacles as and when they arise. This approach stems more often from a lack of knowledge of permitting or other administrative requirements than from deliberate attempts to evade environmental responsibility.

The importance of environmental factors in industrial decision-making

Risking allegations of reductionism, it is submitted that the relative importance of environmental considerations in industrial decision-making is determined primarily by considerations of potential liability or negative publicity that may result from environmentally detrimental activities. Environmental considerations are generally not so much a part of industry’s production strategy as of its risk strategy. The risk of legal liability and direct prosecution is, however, relatively insignificant. As discussed, South African environmental law has been inadequately enforced.

Those industries that have introduced environmental controls in their operations have generally done so because they envisage that, in addition to the avoidance of legal liability, other benefits will be derived through the incorporation of environmental factors into decision-making. Such benefits include avoiding potentially controversial projects, particularly in the light of South Africa’s increased exposure to international markets. As local industries began entering foreign markets, they have been under pressure to take a more proactive environmental approach (see Bethlehem in this volume). This is particularly evident in the operations of international subsidiaries based in South Africa. The increasing number of due diligence appraisals being performed by South African law firms and environmental consultants is testimony to the increasing awareness of the threat of potential liability in this regard.

The way forward

We suggest that the limited ability of South African environmental law to influence industrial decision-making is both the result of a lack of administrative or procedural certainty and the result of shortcomings in the body of environmental law itself. The law needs to be improved, as well as more decisively and effectively administered.

The finalisation of a clear environmental management policy, envisaged by the consultative national environmental policy process, will provide the framework within which consistent management practices and enforcement strategies can develop. It is only once these practices and strategies are in place that industry will be able to synchronise its strategies with broader environmental management goals.

To influence industrial decision-making, environmental management policy must provide certainty in two crucial areas. First, it must provide operational certainty. In embarking on a new project or extending an existing one, industry must be aware of the legal requirements it must fulfil and must be assured of efficient decision-making and implementation of the law by the authority concerned. Rationalisation of environmental law and administration and control of environmental decision-making by a central government department would significantly assist in achieving the goal of operational certainty. Second, strategic certainty must be assured. Industry must be able to make planning decisions in line with a stable environmental policy framework which lays the basis for consistent enforcement strategies in the future.

Perhaps the single most important prerequisite for effective environmental management is to integrate environmental considerations into industrial planning processes. To some extent this may be achieved by the Development Facilitation Act. Although the principal purpose of the Act is to provide a fast-track mechanism for the release of land for development (on the basis that land is a prerequisite for any development), the Act facilitates the inclusion of environmental considerations in development decisions by requiring that in certain circumstances environmental impact assessments are to be perfomed as part of the preparation of performance criteria (essentially business plans for development at local level).

Following the example of the Act, legislation should be put in place making environmental impact assessments mandatory in all development projects, involving a set of certain defined processes or activities, including both “greenfield” developments and expansions of existing operations. Integration may be further assisted by government by the merging of planning departments with environmental departments at provincial and local level. Environmental criteria may then be taken into account when considering zoning applications, planning requirements and permitting procedures — effectively requiring industry to integrate environmental consideration into their strategic decisions. Liability should be imposed on non-compliance with environmental management requirements, since experience shows that it is the threat of substantial liability that has the most influence on industrial strategy. It is only through the use of such measures that environmental law will require industrial strategy to operate in tandem with broader environmental management policy goals.

References

Loots, C., “Distribution of responsibility for environmental protection”, unpublished paper, 2 February 1996.

Loots, C., “Making environmental law effective”, South African Journal of Environmental Law and Policy, 1994.

Loots, C., “Pollution control in South Africa”, unpublished note.

Petrie, J.G., et al, “Air pollution” in Fuggle, R.F. and Rabie, M.A., Environmental Management in South Africa, Juta & Co. Ltd, Cape Town, 1992.

Department of Water Affairs and Forestry, “Water law principles: document for discussion”, 1996.

chapter 2
CHEAP ENERGY—AT WHAT COST?
Externalities in South Africa’s electricity sector

Clive van Horen

Introduction

The electricity sector plays a central role in the South African economy as the supplier of a key input to the industrial, mining and commercial sectors, as an employer and as a service provider for households.1 This role is likely to increase in the foreseeable future as the country’s growth and development objectives translate into greater economic output and improved service levels for low-income households. Cheap electricity is widely viewed as an important basis for achieving these objectives. In this context it is pertinent to ask: How serious are the negative environmental impacts caused by electricity generation? What is their significance in economic terms? And what would it mean if those impacts were to be accounted for in the regulatory and pricing regimes? These are some of the questions addressed in this chapter.

To begin with, a brief overview is provided of South Africa’s electricity supply industry. Next, reference is made briefly to the theory of externalities and methodologies for their valuation—some understanding of this is necessary for the subsequent analysis. The third section of this chapter summarises briefly the results of major international attempts to account for electricity sector externalities. In the fourth section, the main externalities in South Africa’s electricity sector are identified, focusing especially on the coal-based subsector, but including aspects of the nuclear-based electricity industry. Thereafter, economic valuations of key externalities are made, and these results are compared to current price levels. The chapter ends by considering the limitations of the analysis, as well as several important policy implications.

1 This chapter is based on a study undertaken as part of the Industrial Strategy Project, published as a book entitled Counting the social costs: electricity and externalities in South Africa (Van Horen 1996a).

An overview of South Africa’s electricity supply industry

South Africa’s electricity supply industry comprises three main subsectors, corresponding to their functional activities: the generation of electricity, its transmission from power stations through a high-voltage national network and the distribution of electricity from the transmission network to end-consumers. While the focus of this chapter is primarily on the generation sector, it should be noted that there is an important new stakeholder in the electricity supply industry, namely, the National Electricity Regulator, which was established by government in early-1995 on the recommendation of the National Electrification Forum.2 While the principal concern of the National Electricity Regulator is presently with matters related to the electrification programme, such as the issuing of licences to distributors and overseeing the rationalisation of the distribution industry, this is unlikely to be the case forever. As is the case in many countries with large electricity supply industries, it can be expected that the National Electricity Regulator’s mandate will be widened to include also the governance of the environmental performance of the industry.

The key player in the electricity generation sector is Eskom, the national electricity utility. In 1994, Eskom generated 96% of all electricity in South Africa, with the balance being produced by some local authorities with their own power stations (such as Johannesburg, Port Elizabeth and Cape Town) and by private concerns producing electricity for their own consumption (Eskom 1995a: 54). Most of the municipal power stations are used as a backup to the Eskom supply, and have not been fully operational for some time, with the exception of those in Johannesburg, which have ready access to cheap coal (Steyn 1994: 7).3 Given the dominance of Eskom in the electricity generation sector, therefore, the remainder of this chapter focuses on its own power stations. This is not to say that the environmental impacts of local authorities’ power stations are less significant than those of Eskom—if anything, the opposite is true given that their stations are generally older, less efficient and located in more densely populated areas. Nonetheless, their size in relation to Eskom’s capacity does not warrant further attention here.

As at the end of 1994, Eskom had a total of 19 power stations in commission, with a total nominal capacity of 37 840 megawatts (MW) (Eskom 1995a: 56). A breakdown of this capacity by fuel source is shown in Table 1.

It is evident from the table that 95% of total electricity capacity is based on nonrenewable resources: primarily coal, but including also nuclear and small amounts of gas. The coal and nuclear power stations provide the bulk of the base electricity load, while the pumped storage schemes and gas turbines are used to meet electricity demand during peak times and in cases of emergency. Pumped storage schemes are net consumers of electricity, which is used during off-peak hours to pump water to storage reservoirs, and then allowed to run down during peak hours when electricity demand is especially high.

2 The National Electrification Forum was a body representing all key stakeholders in the electricity industry, established in 1993 to formulate policies for an accelerated electrification programme for South Africa. It was disbanded in early 1995, having reached agreement on some issues, but since it could make decisions only by consensus, its ability to resolve important policy questions was constrained.

3 The Cape Town electricity department recommissioned its Athlone Power station in 1995 for the purpose of meeting peak demand.

TABLE 1 Breakdown of Eskom’s generation capacity as at 31 December 1994 (Eskom 1995a: 56)

Of the total capacity of 37 840 MW, some 4 531 MW, or 12%, was mothballed as at the end of 1994 (ibid: 56), because of the excess capacity of the Eskom system—these were generally the older and less efficient stations. Peak demand in 1994, which occurred on the night of 26 July, was 24 798 MW (ibid: 2), reflecting the large amount of excess capacity, even with the standard reserve margins commonly employed by utilities. In 1995, however, the peak demand on the system came much closer to supply capacity.

The dominance of coal in the production of electricity is even more significant, with coal-fired power stations accounting for 92% of all electricity generated in 1994—this higher percentage, relative to their share of total capacity, reflects the high level of utilisation of coal plants which are used for base-load. The Koeberg nuclear power station has supplied a relatively constant 5% to 6% of Eskom’s electricity. While the contribution of the two pumped storage schemes has been fairly constant at around only 1%, the amount of electricity generated by the hydroelectric schemes dropped considerably in 1992 and 1993; this was due to the drought which affected the flow rate of the Orange River.

Eskom operated nine of its coal power stations during 1994; their location and that of Koeberg nuclear power station is shown in Figure 1.

Eskom in an international context

Eskom is one of the largest electricity utilities in the world. As shown in Table 2, it ranks among the top five utilities, measured on the basis either of capacity or of sales. Interestingly, Eskom is one of only two utilities from non-Organisation for Economic Cooperation and Development countries, the other being South Korea’s Korea Electric Power Company. This makes South Africa the country with the lowest per capita GDP of the countries shown in the table (World Bank 1993). Eskom is, therefore, an unusually strong utility among developing countries.

Another important point of comparison between Eskom and international electricity utilities is their relative price levels. Here, Eskom ranks among the cheapest producers

FIGURE 1 Location of Eskom’s operational coal and nuclear power stations, 1994

in the world.4 At the end of 1993, its industrial electricity tariffs were the lowest of a basket of industrialised countries: Japan (whose average price was over three times higher than Eskom’s), Germany, the UK, the USA, France, Canada, New Zealand and Sweden (Eskom 1995a: 9). This comparison is all the more striking when the resource bases of some of those countries are taken into account: in particular, several of the listed countries are predominantly hydro-electricity based, which is generally regarded as one of the cheapest sources of electricity (when compared to coal, gas, nuclear, etc.). This comparison, therefore, begs the question: why is South Africa’s electricity so cheap in relative terms?

Trends in Eskom’s electricity prices

A notable development in relation to Eskom’s electricity prices is its ongoing commitment to reduce the real price of electricity on the back of internal efficiency gains. Eskom announced its “price compact” in 1991, in terms of which it undertook to decrease the real price of electricity by 20% over the five-year period 1992 to 1996. This came on top of a 14% reduction in real price which had already been achieved from 1987 to 1991 (Eskom 1992: 5). In 1994, it made a further commitment, in terms of its so-called “RDP commitments” to

4 This comparison excludes utilities whose tariffs are too low to recover their costs.

TABLE 2 The largest electricity utilities in the world in 1993 (Eskom 1995a: 59)5

reduce the real price by 15% over the period 1995 to 2000 (Eskom 1995a: 9). Until 1994, all of these targets had been met and, therefore, 1994 prices were approximately 76% of 1987 levels in real terms. There is little reason to believe that the utility will not meet its latest commitment and, if this is the case, the average electricity price in 2000 will be approximately 60%, in real terms, of the 1987 price level (Van Horen 1996b). This is a dramatic decrease by any standards.

Eskom suggests that these price reductions will be achieved through ongoing productivity improvements, reduced operating expenditure and cost containment. This commitment is linked to the goal of becoming “the world’s lowest-cost producer of electricity” (Eskom 1995a: 3). It is evident that other factors underlie this decrease in electricity prices, notably the decrease in the number of employees, from 66 000 in 1985 to 40 000 in 1994 (ibid: 55). In addition, its reduced exposure to finance charges has contributed significantly to its financial health, with the debt-equity ratio declining from 3,0:1 in 1985 to its 1994 level of 1,7:1 (ibid: 10). The utility’s stated intention is to reduce this ratio to parity by 1998. This is achievable given that its levels of capital expenditure have declined considerably in real terms since the mid-1980s because of the situation of over-capacity in which Eskom found itself (Van Horen 1996b).

It is in this context that the question again arises whether South Africa’s electricity prices, which are declining in real terms, adequately reflect environmental costs. Before investigating international and South African experience with external costs, the following section reviews briefly the economic theory of externalities.

5 All data as at 31 December 1993, except for TEPCO (31 March 1994), ENEL (31 December 1992), RWE (30 June 1993) and TVA (30 September 1993).

Theoretical and methodological issues

There is a large body of economic literature which deals with the theory of externalities and market failure. It is important to understand this theory because of the complex methodological questions which arise in attempts to apply it. This section therefore briefly reviews the theory of externalities.6

A central concept in the economic analysis of environmental impacts is that of an externality. An externality or, “external effect”, can be either positive or negative, although policy is most frequently concerned with the latter because of the implied welfare loss. In its earlier usage, the term was sometimes defined so broadly as to include most sources of market failure (Mishan 1971:6, Baumol and Oates 1975:16), although in its more contemporary usage it generally refers to a situation where two conditions are met:

• activity by one economic agent causes a change in the utility or welfare of another agent, (more formally, the first entity’s production function includes variables whose values are determined by the second entity); and

• this change in welfare is not compensated or appropriated (Baumol and Oates 1975: 17, Pearce and Turner 1990: 61).

An externality, therefore, arises in situations such as where a productive facility causes the emission of pollutants or waste products which, in turn, impact upon human health or environmental elements which have value for humans (such as agricultural crops), where the costs of those impacts are not captured in the market relationship between the producer and its customers, and those who bear the costs are not compensated in any way. It is apparent that this scenario applies to the production of electricity in so far as it results in environmental and health impacts, the costs of which are not accounted for in the utility’s costing or pricing structures.

Another way of explaining the idea of externalities is by reference to the divergence between private and social costs (Pearce and Turner 1990: 66). Private costs are those costs which are borne by the producer of the good—in Eskom’s case, these comprise the costs of the factors of production: coal, enriched uranium, labour, capital and so on. Social costs go further than this to include the full costs of producing or consuming a commodity, and may be borne not only by the producer but also by other groups in society at large. The difference between private and social costs, then, represents the external cost or the externality which is borne by society at large.

The principles of external costs are illustrated graphically in Figure 2. Any individual producer faces a horizontal marginal revenue curve (shown by MR) equivalent to the price of the commodity, and a marginal private cost curve (shown by MPC). If the producer seeks to maximise its surplus, it will clearly produce at the point where its marginal revenues and costs are equal—point B, that is, at a level of output equal to Q1. With the assumption that it seeks to maximise profits, it makes little sense to deviate to either side of that point. The marginal external cost at any given level of output is given by the vertical difference

6 One of the classic texts dealing with externalities is Baumol and Oates (1975). For a more accessible text see Pearce and Turner (1990).

between the marginal social cost (MSC) and MPC lines, and so the total external cost at the individual’s optimum (Q1) is equal to the triangle OBD.

While this may be optimal from the individual producer’s perspective, it is not ideal for society as a whole. The socially optimum level of output will be at a lower point, that is, point A, where the marginal benefit equals the marginal social cost, equivalent to a level of output of Q2. At this point, the benefits to society are exactly equal to the costs to society of producing the commodity, and so, if the objective is to maximise social welfare, rather than individuals’ surpluses, then it does not make sense to deviate to either side of Q2.

FIGURE 2 Illustrative marginal revenue (MR), marginal private cost (MPC) and marginal social cost (MSC) curves in a competitive market

It is worth noting that in terms of this formulation, which is derived from basic microeconomics, the economic optimum will still be associated with some level of pollution, the external costs of which are shown by the triangle OAC in the figure. This is an important point of departure in economic analysis, namely, that there is an optimal level of pollution, which is often above zero, and that this depends upon the interplay between costs and benefits. In an environmental analysis, by contrast, the optimum level of pollution is usually at or close to zero, corresponding to very low levels of economic activity, depending not on costs and benefits, but upon ecological processes. This highlights the frequently differing approaches of economists and environmentalists in analysing pollution and related issues.

The theory as outlined above, therefore, demonstrates that externalities constitute an important source of market failure. If the above conceptual representation bears any relation to reality, then it can be expected that the existence of externalities may lead to several outcomes which are less than ideal. Firstly, resources could be allocated inefficiently due to the decision of producers to produce a higher level of output than is economically ideal. Secondly, the burdens of the external costs are seldom spread equitably across society and often fall on social groups which are least able to afford them. Thirdly, a higher rate of productive activity usually translates into more rapid consumption of resources, including non-renewable ones, and this undermines goals of environmental sustainability. Collectively, the effect of externalities is, therefore, in conflict with the goals of economic efficiency, social equity and environmental sustainability—the three pillars upon which “sustainable development” is based.

Externality valuation: methodological issues

Two sets of methodological issues are relevant to the measurement of externalities in practice: the overall framework for identifying externalities, and the methods used to value them in economic terms.

Given that there is a wide range of environmental impacts arising from the generation of electricity, it is necessary to adopt a systematic approach to their identification and evaluation. The method used in this study, which has been used in the majority of international externalities studies, is the impact pathway or damage function approach. This approach is illustrated conceptually in Figure 3.

The damage function approach entails the identification and quantification of environmental and other damages arising at each stage in the fuel cycle: from the extraction of raw materials (such as coal or uranium), to their transport and processing, to their consumption in power stations, to the impacts of waste products arising in the electricity generation process, and their impacts on human health and amenity, and on the physical and natural environments.

This approach corresponds with the real-world steps in the fuel cycle. The damage function approach is generally regarded as the preferred approach to assessing environmental externalities in practice (Rowe et al 1995:2). It is important to note, however, that the damage function approach is also subject to several weaknesses and limitations:

• the approach is highly data-intensive, since information is required about each step in the impact pathway;

• professional judgements are required about the most appropriate data to use, since there are often conflicting views in the externalities literature, and the result can be sensitive to these judgements;

• if there are omissions, inaccuracies or biases in the data, these can be compounded throughout the assessment chain, thereby limiting the usefulness of the end results; and

• the damage function approach is fairly complex and draws upon a number of disciplines, which can render such studies inaccessible to the wider audience which may be interested in their results.

While the data requirements of a comprehensive impact pathway assessment are formidable, there is a relatively large body of relevant information which makes it possible to employ the approach in South Africa.

A further important characteristic of the damage function approach is that it allows for the analysis to proceed as far down the impact chain as the decision-maker chooses. Thus, for instance, if there is uncertainty or disagreement over the valuation of human health effects or crop damages from air pollution, it is possible to use the information about physical impacts as the basis for decision-making; in other words, it is entirely possible to stop short of the economic valuation of externalities if the decision-maker chooses. Moreover, provided these

FIGURE 3 The damage function approach for power station emissions (after Rowe et al 1995:3)

input assumptions are made explicit, it is possible for users to perform sensitivity analyses or enter alternative values for particular variables.

In order to make estimates of the value of the externalities identified in this chapter, it is important to describe briefly the valuation approach which has been used in respect of changes in human morbidity and mortality.

A number of valuation approaches exist to value morbidity and mortality. Dealing first with morbidity, two broad methods can be used: first, those based on individual preferences, that is, willingness to pay for environmental and health improvements, or willingness to accept compensation for deterioration and, second, those methods based on resource or opportunity costs (Freeman 1993:343). There is a considerable body of literature around these methods, which is summarised briefly in Van Horen (1996a). For present purposes, it can be noted that the second approach, sometimes also called the “cost of illness” approach is used in this study, for the main reasons that willingness to pay and willingness to accept compensation studies have not been undertaken yet in South Africa and, in any event, these approaches are more complex and controversial in the context of a developing country such as South Africa. Thus, the valuation of health effects generally includes actual expenditure on health care (both public and private), transport costs, medication and foregone income, such as lost time at work. This data has been derived from published medical data wherever possible, otherwise from estimates by public health practitioners.

Turning to the valuation of premature death, the complexities and controversies are significant. Not least of all is the ethical problem which arises in reducing human life to a finite monetary value, and the implications this holds for policy-making. The economics literature frequently makes a distinction between the valuation of an individual’s life and the value individuals or society place on the risk or probability of early mortality (Freeman 1993, Pearce et al 1991:5).

Another, perhaps more compelling, justification for undertaking valuation is that in many respects this is done already by individuals and society implicitly in many of their activities, but often without making the trade-offs explicit. This is acutely evident, for example, in the decision over the allocation of public resources to primary health care services versus high-level tertiary care such as heart transplants. To assign some monetary value to human life merely makes transparent or explicit whatever judgements are being made. Furthermore, provided the values are used in a decision-making context which seeks to balance the full range of interests as best as possible, the use of monetary values for early death can serve an important strategic purpose: for example, by highlighting the losses suffered by society due to inadequate supplies of potable water and sanitation services, a case can be made, perhaps more strongly, for investment in improved service levels.

As in the case of morbidity effects, there are a number of methods which may be adopted to value premature death. One is the “human capital” approach: essentially, this entails valuing a lost life at the discounted value of future income which that person might have been expected to generate. Most simply, average GDP would be used as a proxy for that person’s income: this was done, for instance, in a study by Dutkiewicz and de Villiers (1993). Problems soon arise, however, particularly if there is any differentiation between social classes, age groups, males and females, employed and unemployed, and so on—the implications of the differing values which result are especially problematic for policy and resource allocation decisions where “equity” is a goal: in most societies, adult males of about 25 years of age will have the highest “value” (Freeman 1993:324). Furthermore, this approach is highly sensitive to the choice of a discount rate: for example, for a male child between one and four years of age in the US in 1987, at a discount rate of 2,5%, its human capital value would have been $761 000, compared to only $60 000 at a discount rate of 10% (ibid: 325).

The valuation approach which is generally preferred in the literature entails the use of individual preference approaches: not so much a person’s willingness to pay to avoid death (which would probably be their entire wealth) or willingness to accept compensation for death (which would probably be an infinite amount), but the valuation of a changed probability of death. Such decisions are made on a daily basis: for example, in paying a higher price for a ticket with an airline or bus service which is considered safer than the alternatives.

The choice of values of premature death for South Africa is made difficult by two factors: first, there have been no studies of this nature in this country from which values can be derived; second, there are sharp inequalities in the distribution of income and wealth, which presents problems (from an equity perspective) if differential valuations are used for different income groups—as would apply if the human capital approach was adopted.

Taking both of these issues into account, this study uses a consistent valuation set for premature death across the entire population in the region. The valuation approach adopted here has drawn on international studies of revealed preference, adjusted to take account of differential levels of income. At least two major international externality valuation exercises have undertaken their own reviews of the literature and, on that basis, selected a range of values for premature deaths. These estimates, which are based on revealed preference approaches, are shown in Table 3. The study by Rowe et al (1993,1994) was undertaken for New York state, USA, and drew upon North American valuation studies; likewise, the study by ETSU (1995) estimated values for the European Union.

Simply applying these valuations to South African conditions would be problematic from a theoretical perspective, since individual valuations of the risk of death must, by definition, take some account of income levels. Assuming these valuations vary in direct proportion to income, an adjustment can be made to the North American and European values to reflect average South African income levels. These adjustment factors are also shown in Table 3.

The figures in the bottom right cell of Table 3 represent the average of the adjusted valuations for the American and European studies in the last row of the table. If these numbers are rounded to the nearest R100 000, the following valuations for premature deaths are derived:

• low estimate:R700 000;

• central estimate: Rl 000 000; and

• high estimate Rl 400 000.

These are the values which have been used in this study for purposes of attaching an economic value to premature mortality. The final consideration for present purposes concerns the possible differentiation of valuations depending on variables such as age, gender, race and location. While the use of different valuations might yield results which more accurately reflect the influence of these variables on the economic standing of individuals, this is not done in this study, for the following reasons:

• the empirical basis for introducing a wider range of valuations for different social groups, is weak. The only method would involve adjusting the above estimates for average incomes of each group being identified (in the same way as this was done in Table 3). However, this would introduce the same problems as are attributable to the human capital valuation approach—particularly the ethical and equity considerations arising in policy decisions encompassing different social groups;9

TABLE 3 Valuations of premature deaths used in international studies and in this study

• the modelling of health outcomes does not permit differentiation between, for example, employed and unemployed victims of pollution. Thus it would not be possible to apply differentiated valuation sets for the range of externalities being considered in this thesis; and

• the marginal increase in “accuracy” which might be achieved through further disaggregation of the above valuation sets, would require a disproportionately large increase in data collection and modelling sophistication.

Externality valuation: The international experience

Distinguishing features of the environmental costs produced by externality studies undertaken to date are the numerical discrepancies and lack of consistency in their results. This uncertainty is sometimes used by sceptics to discount altogether the validity of such attempts. This, however, is an unconstructive and uncritical response since many of the dif-

7 Calculated as follows: GDP for 1992 of R238 711 million (SAIRR 1995: 380), divided by population estimate for 1992 of 38,8 million (1994 estimate of 40,7 million, reduced by annual growth rate of 2,44%) (ibid: 5).

8 The US and EU valuations are divided by the income adjustment factor to give South African valuations. The following exchange rates are used: $1 = R3,66, ecu 1 = R4,78.

9 Because such comparisons are not being made on an international scale in this study (for example, between South African externalities and those elsewhere), there is no contradiction in adjusting international valuations to reflect different income levels in South Africa, as per Table 3.

ferences can be accounted for by the varying technical and environmental conditions pertaining to the studies, as well as to methodological differences. The estimates of external environmental costs produced by nine significant studies are summarised in Table 4.10

For purposes of this study, the most important fuel cycles are coal and, secondarily, nuclear; nonetheless, it is interesting to compare the external costs of these cycles with others, which becomes especially relevant when making decisions about new investments with various resource options. As would be expected, renewable options fare much better than fossil fuel and nuclear fuel cycles, with large relative differences in external costs. Of all fuel cycles, coal had the consistently highest external cost, with the exception of nuclear in Hohmeyer’s study and oil in Pearce’s study.

Upon closer inspection of externalities in the coal cycle, it is apparent that the studies can be grouped into two categories, based on the order of magnitude of their results. The first group comprises the three earlier studies—Hohmeyer, Ottinger and Pearce—which produced external cost estimates in the range of 7,3 c/kWh to 33,1 c/kWh. The second group of studies, which were all conducted post-1992, produced lower estimates, in the range of 0,21 c/kWh to 9,52 c/kWh. In analysing the differences in these studies, the following main factors may be identified (partly drawn from Lee 1995:2-3):

• Methodology. While all the studies summarised in the table used the damage cost approach, they used different methods to obtain data on components in the impact pathway. The earlier studies generally used other studies’ estimates of pollution emissions and impacts, and multiplied these by economic values to calculate damage costs. The second group of studies, on the other hand, either used more complex and specific methods to collect data on pollution emissions, dispersion and impacts, such as atmospheric models and dose-response functions, or they used lower valuations. In practice, the effect has been that the earlier studies used higher estimates of emissions, concentrations and impacts.

• Emission factors. The earlier studies’ emissions factors (measured in tonnes of pollutant per gigawatt-hour of electricity generated) were considerably higher than in recent studies, sometimes by a factor of 10. This is partly due to technical differences in the plants which were addressed, in that more recent studies have selected newer plants which have better environmental performance in general and, in some specific cases, are fitted with desulphurisation and other control equipment.

• Sulphate and nitrate aerosols. The older studies contain different assumptions about emissions of SO2 (from which damaging sulphate aerosols are formed) and about their dispersion in the atmosphere, which lead to higher external cost valuations. SO2-related externalities accounted for 60% of total externalities in Ottinger et al’s work, and 75% in Hohmeyer’s study, both of which are considerably higher than the more recent studies.

• Climate change damages. In earlier studies, fairly high values were attributed to damages caused by climate change (impacts include, for example, sea level rise, increased drought and climatic extremes), whereas in more recent studies, analysts have argued

10For more details on each of these studies, see Van Horen (1996a).

TABLE 4 Fuel cycle external costs (in cents per kilowatt-hour—c/kWh) estimated by various studies (adapted from Lee 1995: 5; Friedrich and Voss 1993:121, Dutkiewicz and de Villiers 1993:41, Schleisner et al 1995)

Notes

1All amounts in 1994 SA c/kWh, converted from 1994 US cents at a rate of R3,66/$l, and from 1993 German mark at R1,98/DM1. Where relevant, amounts in rand have been adjusted using a 10% annual inflation factor.

2 + denotes an external benefit.

3Estimates for a “new” and “old” plant respectively.

4High estimate reflects risk averse valuation of health impacts of nuclear disaster.

5 Estimates are for 4 000 full load hours per year, and include external costs of back-up system.

6Estimates originally in 1989 rand; annual adjustment of 10% used.

7 Estimates for plants in the rural south-west and south-east USA respectively.

8Estimates for retrofit on existing dams in Kentucky, and diversion project in Washington State, respectively.

9All but 0,02 c/kWh was due to the aesthetic value of a waterfall, which was estimated in a contingent valuation study.

10Estimates using a 3% and 0% discount rate respectively.

11The first estimate was for a site at West Burton, UK; the second was for Laufen, Germany.

12Estimates for various sites in the UK.

13Estimates are for a rural site in New York State.

14For a boiling water reactor, rather than pressurised water reactor.

15Estimates are for a “conventional coal-fired plant” defined as a 350 MW plant with desulphurisation and de- NO equipment.

that there is too much scientific uncertainty about the impacts of climate change (without questioning its likelihood of occurring) to make meaningful estimates of damage costs. Recent studies have, in turn, been criticised for understating the likely scale of those impacts by avoiding their valuation (Ottinger 1995:4).

If any conclusions are to be drawn from these international studies, then the first would be that external costs can be significant in absolute terms, as well as in relative terms, when comparing alternative fuel cycles. International experience, therefore, points to the need to investigate externalities in South Africa’s power sector. Secondly, it is important not to take external costs simply at face value; rather, they need to be evaluated in the specific contexts insimply applied uncritically to the South African situation, but that local circumstances be texts in which they were calculated. Thus, it is important that the values summarised above are not simply applied uncritically to the South African situation, but that local circumstances be taken into account as far as possible. Finally, it is important that assumptions, methodologies and limitations are made explicit in order that the results of the valuation exercise can be appraised in the appropriate context.

Externalities in South Africa’s fuel cycle

Given time and information constraints, it was not possible in this study to evaluate externalities at every step in the chain; moreover, beyond a certain point, there are diminishing returns from widening the scope of the study to include less serious environmental and other impacts.

A degree of judgement is required in making decisions regarding which externalities are potentially significant and which are not. Consequently, a classification system has been used, which makes explicit the criteria used in determining the scope of the quantification exercise. Environmental impacts were classified according to the following three categories:

• Class One impacts. These are environmental impacts which are potentially serious, and for which sufficient information exists to permit an estimate of their economic value.

• Class Two impacts. These are impacts which are potentially serious, but for which there is insufficient data to permit an economic assessment of external costs within an acceptable range of certainty.

• Class Three impacts, these are impacts which, on balance of evidence and probability, are not likely to be highly material in relation to other impacts and, therefore, no attempt is made to quantify them in economic terms; alternatively, the environmental costs of these impacts have already been substantially internalised.

Environmental impacts arise at most stages in the fuel cycles. These impacts are subject to varying levels of management and attempts to ameliorate them; in other words, some of these impacts are already fully or partially internalised into the pricing structure of electricity. In considering the coal and nuclear fuel cycles, 10 potentially important impacts have been considered, of which five have been categorised as Class One impacts for present purposes. These are summarised in Table 5.

Numerous other impacts arise from coal-fired generation: for example, the health impacts of electromagnetic fields around high-voltage transmission lines, the loss of productive land above underground mines due to subsidence and the aesthetic impacts of large power stations and transmission lines in rural areas. While any number of such impacts may have significant environmental or social impacts in their specific or local contexts, they have not been considered in any detail in this study, either because they are not significant in aggregate on a national scale, or because the costs of those impacts have already been substantially internalised.

TABLE 5 Summary of potentially significant environmental impacts and their classification in this study

Space constraints preclude any discussion of impacts other than those in the Class One category. For information about the state of knowledge regarding Class Two and Class Three impacts, reference can be made to Van Horen (1996a). The sections which follow describe the nature and extent of externalities for the five Class One impacts noted above.

Occupational health effects in coalmining

Workers in coal mines are exposed to a number of risks. These include rockfalls, methane explosions, transport accidents and accidents in the handling of materials, which may result in immediate injury or death. A second category of occupational risks results from prolonged exposure of workers to air pollution resulting from mining activities: although the illnesses which occur are often significant, insufficient data exists regarding their scale and so this has been classified as a Class Two externality.

The Leon Commission of Enquiry reported in mid-1995 on the state of health and safety on South Africa’s gold and coalmines. The general tone of the commission’s report was sharply critical of the health and safety management in the country’s gold and coalmines, and highlighted the high morbidity and mortality rates compared to other major mining countries. This was more especially the case in the gold mines, which generally operate at much deeper levels than coal mines.11

Although there is no publicly available information on the rate of injury and death on coalmines supplying Eskom, this has been estimated with reference to data reported by the Leon Commission. The details of this calculation are described more fully in Van Horen (1996a), but the essence is that accident rates attributable to coalmines supplying Eskom are probably lower than industry averages, because the proportion of coal derived from open-cast mines (which have a lower accident rate than underground mines) is higher for Eskom than for the industry as a whole.

The calculated fatality and injury rates for coal mines serving Eskom’s power stations are that an average of 0,30 fatalities and 1,68 injuries occur for every million tonnes of coal mined for purposes of power generation. Based on average coal consumption (from Eskom 1995a:54), this translates into 0,156 fatalities and 0,874 injuries per thousand GWh of electricity produced. If this rate is appliced to 1994 electricity production of 149 443 GWh, then a total of 23 workers would have died in coalmines supplying Eskom in that year, and a further 131 would have been injured.

The nature of injuries sustained by coalminers varies widely, from relatively minor injuries to permanently disabling ones. Their costs include the costs of medical treatment and the opportunity costs of not working. These have been estimated based on discussions with the Government Mining Engineer.

Based on the above estimates and using the valuation data described earlier, the valuation estimates are shown in Table 6.

TABLE 6 Valuation estimates for mortality and morbidity on coal mines, 1994, in total and in c/kWh

As noted above, an important category of occupational morbidity has not been included in the above valuation estimates, namely, the occurrence of respiratory and other diseases resulting from prolonged exposure of coalminers to high levels of dust and other airborne particulate matter. The effect of this omission will be to understate actual externality values.

Water consumption in power generation

Coal-powered electricity generation accounts for about 3% of total water consumption in South Africa (Roome 1995). Water is an integral part of the thermal power generation proc-

11 Ironically, the release of the Leon Commission report coincided with a serious accident at the Vaal Reefs Gold Mine, in which 104 miners were killed when their lift-cage dropped hundreds of metres down a mine shaft.

ess, being used not only (as steam) to drive the turbines which generate electricity, but also to cool down the steam in large cooling towers. Most of Eskom’s power stations utilise conventional wet-cooling processes, although two—Kendal and Marimba—use dry-cooling processes which were pioneered by Eskom.12 Average (net) water consumption in 1994 for all of Eskom’s coal power stations was 1,43 litres per kWh generated; the two dry-cooled power stations consumed just over 10% of this (Fraser 1995). Although water prices varied widely from one power station to another, the average in 1994 was R0,66 per m3.

Water costs represent a small fraction of Eskom’s total operating costs: in the region of 1,8% of direct operating costs (excluding depreciation and finance charges) (calculated from Eskom 1995a:41). This, however, understates the importance of water as an input into the electricity generation process—it is an essential raw material, underlined by the fact that Eskom was directly involved in the construction or financing of several dams, long before other water consumers demanded water in those areas.

As in the case of coal, Eskom has benefited from water prices which have been low and stable over time. There is a wide range of pricing contracts in place with respect to Eskom’s water purchases, each dependent upon the specific source of supply. In general, Eskom purchases its water from the Department of Water Affairs and Forestry and pays on the basis of the historic costs of supplying that water, as distinct from the marginal cost of supplying water. Since the cost of supplying water is dependent primarily on the capital costs of constructing the necessary infrastructure, the use of historic costs for water pricing leads to low prices, especially where the capital infrastructure was constructed some time ago. Lethabo power station, for instance, draws its water from the Vaal River which, was dammed in the early 1900s, hence its water price (R0,12 per m3 in 1994) was very low.

A review of the national pricing policy for bulk water supply was commenced in 1995, with a view to developing a policy which provides adequate signals to water consumers regarding the economic cost of water (Department of Water Affairs and Forestry 1995). By the end of 1995, no firm estimates had been made regarding marginal costing scenarios for water supply, although several values have been presented. One benchmark which is informing the policy debate is the cost of supplying water to the Highveld from the Lesotho Highlands Water Scheme. Again, some uncertainty exists regarding the economic cost of that water, especially because the feasibility studies are several years old; however, a value of Rl,50 per m3 has commonly been quoted (Roome 1995). Some estimates of the economic cost of supplying additional water on the Highveld are higher, at about R3,00 per m3, although there has been little analysis to underpin those estimates (ibid).

For purposes of this study, the central estimate of the economic value of water supplies to the power stations is Rl,50 per m3, with low and high values of Rl,20 and Rl,80 respectively. The external costs implicit in these water prices, expressed in terms total rand and c/kWh of electricity generated, are shown in Table 7.

12 In these power stations, the cooling towers utilise massive fans to blow air onto hot water pipes to cool them down.

TABLE 7 Valuation estimates for water consumption external effects

Air pollution from power generation: health impacts

The evaluation of the health impacts from power station emissions is one of the more complex but important externalities to be considered. Quantification of health impacts requires information for four steps in the impact pathway:

• the quantities of pollution emitted by power stations;

• the dispersion and ultimate deposition of those pollutants;

• the responsiveness of human health to various exposures (doses) of pollution; and

• the valuation of increased morbidity and mortality.

Space limitations do not allow for data for each of these steps to be described in full here (refer to Van Horen 1996a for details); instead, only pertinent considerations are outlined.

For purpose of quantifying externalities in this study, a computer modelling tool called EXMOD was used. EXMOD follows the damage function approach as outlined above. Data regarding each of the above four categories was collected and used to model the actual damages from air pollution emissions. EXMOD was developed over the period 1993 to early-1995 for the New York State environmental externalities cost study, with support from the Empire State Electric Energy Research Corporation, the New York State Energy Research and Development Authority, the New York Department of Public Service and the Electric Power Research Institute. The aim of that study was to develop a user-friendly damage function tool with which impacts of new or relicensed electricity supply and demand management options could be evaluated. The work in the New York study was summarised in four comprehensive volumes (Rowe et al 1993,1994, Bernow et al 1995a, 1995b),13 as well as a shorter paper (Rowe et al 1995). Following a review of international externalities studies, and particularly of models which could be of potential use in the South African context, EXMOD was investigated and selected for use in this study.

With regard to the quantity of pollution emitted, data on actual emissions for 1994 was used for this study. It is worth noting briefly that the coal used in South Africa’s power stations is generally of poor quality, since the highest grade coals are exported. The average sulphur content of coals used by Eskom is relatively low at around 1 %, whereas ash content is high, ranging from 21% at Arnot power station to 39% at Lethabo. The latter also has the lowest calorific value (energy content), at 15,2 megajoules per kilogram of coal. It is significant to note that with such a low energy content, “coal” could not be used in any conventional commer-

13All of these reports will be published in a two volume book by Oceana Press, New York State in 1996.

cial or domestic process.14 Thus, electricity is being generated from a product which would otherwise have little or no economic value.

The negative side of this is that, all other things being equal, particulate emissions and ash production are relatively high. As a consequence, Eskom’s pollution control policy is focused mainly on the reduction of particulate emissions. All of its operational coal power stations utilise electrostatic precipitators, which operate with an efficiency of around 90 to 99,7% (Tilley and Keir 1994), although it should be noted that it is the finest particles (that is, with the smallest diameter) which present the greatest potential health hazard, since it is these which are small enough to be respirable.15 In addition to electrostatic precipitators, Eskom has installed bag filters on a trial basis at some of its power stations. Where these are used successfully in combination with electrostatic precipitators, efficiencies of 99,99% are possible (Hanson 1992).

Furthermore, Eskom’s newer power stations have tall chimney stacks so that emissions penetrate the inversion layer and are released into the upper atmosphere. This inversion layer is an important feature of atmospheric conditions in the Mpumalanga Highveld because it inhibits the dispersal of ground-level or low-level emissions, especially during winter months (Tyson et al 1988). All of Eskom’s power stations have relatively tall chimney stacks of 200 metres or more, except Arnot (193 metres) and Hendrina (110 metres).

A final point to note in relation to Eskom’s air pollution policy is that it has decided that desulphurisation and denitrification technologies are not warranted. Therefore, no active measures are taken to reduce the emissions of sulphur dioxide or nitrogen oxides. This is an issue which has received much attention in recent years, although there has been no systematic investigation of the costs and benefits of respective pollution control options.

Total emissions from the nine operational coal power stations in 1994 were as follows: total suspended particulates, 122,42 kilotonnes (equivalent to 0,84 kg/MWh); for sulphur dioxide, 1 166,7 kilotonnes (7,88 kg/MWh); and for nitrogen oxides, 960,9 kilotonnes (6,49 kg/MWh) (Eskom Generation Group 1995).

It is important to note that this data excludes pollution originating from the ash dumps at power stations. Although Eskom has an extensive programme of ash management, it produces an enormous quantity of ash: some 22 million tonnes in 1994, of which about 3% was reused for cement or brick-making (Eskom 1995b:23). This translates into a continuous production rate of 42 tonnes of ash per minute.

The second step in the damage function approach concerns what happens to those pollutants after they are emitted, that is, how they are dispersed in the atmosphere and where they are deposited. For this to be assessed, information was assembled regarding physical emission characteristics, such as the height of chimney stacks and the speed, volume and temperature of flue gas emissions, as well as atmospheric conditions, including wind patterns (derived from long-term data), mixing heights and atmospheric stability.

14 Indeed, this coal cannot even be ignited with a blowtorch!

15 Particulate matter with a diameter of 10 mm (microns) or less is usually regarded as being in the respirable range (hence the label PM10).

A reasonably significant amount of air quality research has been undertaken by Eskom in the Mpumalanga Highveld since the mid-1980s. This cannot be reviewed in detail here (refer to Van Horen 1996a for this), save to mention that the air quality data collected suggests that the pollutants which exceed or approach health guidelines most frequently are ozone and sulphur dioxide. Of less concern are concentrations of particulates and nitrogen oxides, which are reported to be well within government guidelines.

Dose-response relationships constitute the third step in the impact pathway, namely, the link between ambient pollution exposures and health outcomes: in this case, respiratory illnesses. The human health effects of pollution exposures have been widely studied in a number of countries in response to a range of environmental conditions. In South Africa, there have been relatively few studies of the health effects of air pollution, and although a handful of studies have attempted to find correlations between environmental quality—mainly particulate concentrations—and health outcomes—mainly respiratory illnesses (see, for example, Terblanche et al 1992,1993)—there have been no studies which have quantified the dose-response function for pollution exposures.16

Reference has, therefore, been made to the international literature to identify dose-response functions which might be applicable to South Africa. For purposes of the project in New York State, USA, which developed the EXMOD model, extensive reviews were undertaken of epidemiological and bio-medical literature in order to derive dose-response functions which could be used with a satisfactory degree of certainty (Rowe et al 1994: chapter V). A strict set of criteria were applied in the selection of epidemiological studies for that purpose.17 On the basis of a large number of studies which followed similar methodologies and were reasonably comparable, dose-response functions were derived for a range of air pollutants.

Again, space constraints do not allow for these relationships to be described in full here, but to illustrate the nature of these relationships it has been estimated from epidemiological studies that one in 3,3 million people will die for every 1mg per m3 increase in ozone concentrations. Put differently, if 40 million South Africans are exposed to an additional 1mg per m3 of ozone pollution, the central estimate implied by this risk factor is that 12 people will die prematurely each year. Dose-response functions were used for several health outcomes, such as asthma attacks, acute and chronic bronchitis, visits to doctors and hospitals for respiratory symptoms, mortality, hospital admissions for respiratory ailments and days away from work due to illness. In addition, for each dose-response function, low, central and high values have been used to reflect uncertainty.

There is an unavoidable measure of uncertainty in applying dose-response relationship data which was derived in North America to South Africa. Clearly, environmental and health characteristics differ in these two environments. At the most basic level, human physiology and responses to environmental conditions do not differ according to national bounda-

16 See Van Horen (1994) or Lerer (1995) for a review and analysis of South African and international studies at the energy-health interface.

17 These are described in detail in Rowe et al (1994: V-3 to V-4).

ries. A factor such as lower nutritional status, for instance, means that South Africans may have lower resistance to environmental hazards and, therefore, be more susceptible to illness (Terblanche 1995). The bias which this factor introduces means that the selected dose-response relationships would tend to understate the actual health outcomes in South Africa. Other factors would also affect these functions, and so the overall direction of bias is not clear.

Another, more technical, uncertainty concerns assumptions about threshold levels of pollution. Although environmental standards are traditionally based on an assumption that there is a level of pollution below which health effects can be safely assumed not to exist, recent epidemiological evidence suggests that such thresholds do not exist. Consequently, this study has used a zero threshold level.18

The valuation of health effects resulting from air pollution exposures is the final step in the impact pathway analysis. Valuation was undertaken using the EXMOD modelling tool, with data on the following items:

• Eskom’s nine coal power stations, including their fuel types and composition;

• demographic data for each magisterial district in South Africa from 1991 census data, including total population, age distribution, land area, geographical coordinates and the average altitude of the district;

• aggregated demographic data for the following neighbouring countries: Lesotho, Swaziland, Mozambique, Zimbabwe, Botswana and Namibia;

• long-term (10 to 20-year average) surface wind data for 15 monitoring stations in South Africa (and two in Namibia);

• emissions data for each of Eskom’s nine operational power stations for the main air pollutants: particulates, sulphur dioxide and nitrogen oxides;

• dose-response data for the health outcomes described earlier; and

• valuation data for health outcomes, based on opportunity costs of health effects.

The EXMOD model incorporates three air dispersion models, covering short-range, medium-range and long-range transport of pollutants.19 Consequently, the model was run nine times, corresponding to data sets for each of the nine operational coal power stations, and using the above data categories.

The results of the model computations include both the physical health outcomes (number of cases of asthma attack, chronic bronchitis, and so on) and the economic costs of those effects. The incidence of certain of these health outcomes is relatively high: notably, asthma attacks, respiratory symptom days and days of restricted activity. Also significant is the number of mortalities which are expected to occur each year: 174 in the central estimate (EXMOD computations). This is not insignificant, even in relation to the high population on the Highveld within a few hundred kilometres of the power stations.

18 See Van Horen (1996a) for a more detailed discussion of this assumption.

19 There is inherent uncertainty in using these dispersion models on the Highveld because of its particular atmospheric conditions, which differ from those elsewhere. However, there are no other models available specific to Highveld conditions.

The results of applying opportunity cost valuation data to the physical health outcomes are shown in Table 8. This table shows the range of estimates, in cents per kWh, of morbidity and mortality resulting from emissions of sulphur dioxide, nitrogen oxides and particulate matter.

The valuation results for the nine coal power stations are of a similar order of magnitude: the lowest damages arise from Matimba power station with a central estimate of 0,23 c/kWh, due to the fact that it is located in a less-densely populated area in Northern Province; the highest damages arise from Kriel and Hendrina, probably because their nitrogen oxide and particulate emission factors, respectively, were relatively high (based on 1994 emissions).20 Based on actual electricity generated during 1994, the weighted average cost of damages from air pollution was calculated as 0,54 c/kWh for the central estimate, with a low of 0,39 c/kWh and a high of 0,67 c/kWh. It should be noted, once again, that this excludes the Class Two damages which have not been quantified, such as damages resulting from acidic deposition or impaired visibility. Thus, there is certainty over the direction of at least one source of bias in these estimates, namely, that the estimates will understate some external effects.

TABLE 8 Valuation of morbidity and mortality from power station emissions in c/kWh, 1994 (EXMOD computations)

20 Nitrogen oxide emissions impact upon human health more particularly through the formation of ozone.

Greenhouse gas emissions from power generation

Electricity generation, where it is based on coal power, is unavoidably a significant source21 of greenhouse gas emissions. The principal greenhouse gas emissions are carbon dioxide (CO2), methane, chlorofluorocarbons and nitrous oxides, the first two of which are most significant in South Africa. South Africa was responsible for about 1,2% of global greenhouse gas emissions in 1988, making it the 18th largest source in the world, and one of the largest sources on a per capita basis (Van Horen and Simmonds 1995). It was also the largest source of greenhouse gases in Africa, accounting for 15% of the continent’s CO2 emissions.

Significant quantities of carbon dioxide are emitted by the electricity generation industry, and smaller amounts of methane during coalmining. Eskom is the single largest source of greenhouse gases in South Africa which, by its calculations, amounted to some 142,9 million tonnes of carbon dioxide in 1994 (Eskom 1995b).22

There is a vast body of international literature which has sprung up around the climate change phenomenon, addressing both its physical and political-economic dimensions. It is impossible to summarise all aspects of this issue here. For present purposes, it is important to note that there is considerable uncertainty around climate change in various of its dimensions. One of the key uncertainties is around the potential impacts of climate change on specific subregions, such as southern Africa. This uncertainty, exacerbated by the extremely long time periods over which it might occur,23 makes it extremely difficult to make assessments of the economic and social costs of possible climate change. These may include, for example, the costs of possible increased drought in the future, and more frequent occurrences of extreme weather events (storms, floods and droughts). Several attempts have been made internationally to estimate the range of damage costs which might result from climate change (for example, Cline 1992, Fankhauser 1992, Nordhaus 1993): not surprisingly, these have produced very different estimates and have attracted their share of criticism. This uncertainty presents special difficulties for the present study.

What is certain, however, is that the climate change issue will not disappear from the international political economy in the near future. Given the prominent role of South Africa among developing countries, it is essential that the issue is not ignored.

21 Briefly, greenhouse gases are relevant in so far as they are widely believed to enhance the naturally occurring greenhouse effect—in terms of which greenhouse gases increase the ability of the earth’s atmosphere to retain warmth. The balance of scientific opinion suggests that continued emission of greenhouse gases at present rates will lead to global climate change with variable, but often negative, consequences in many regions of the world. For more details on recent developments in the international climate change debate, see Rowlands (1995a), and on the South African energy sector’s contribution, see Van Horen and Simmonds (1995).

22 The power sector is also indirectly responsible for the emission of methane from coal mines; however, these are not included in the present analysis for lack of data.

23 With concomitant importance attached to the selection of a discount rate when economic effects are being considered.

One of the most recent economic studies of climate change damages has been done by working group III of the Intergovernmental Panel on Climate Change (IPCC), the body of leading social and natural scientists informing the international negotiation process. The analysis undertaken by this group has suggested that the annual costs of global warming will be in the region of 1,5% to 2% of gross world product by the time CO2 concentrations reach double their natural levels—somewhere around 2050 or 2060 on the basis of current trends.24

By relating global damage costs to current emissions of greenhouse gases, it is possible to estimate a cost per tonne of greenhouse gas or, more particularly, CO2 emissions. Corresponding with the high level of uncertainty over future damage costs, there is an equally wide range of “per ton” damage cost scenarios. The IPCC, in its 1995 second assessment report, “does not endorse any particular range of values for the marginal damage of CO2 emissions”, but instead referred to published estimates which fall in the range of $5 to $125 per tonne (IPCC 1995). One such estimate, by Fankhauser and Pearce (1993), both of whom were centrally involved in this aspect of the IPCC working group III’s work, amounted to 14 pound per tonne of CO2, equivalent to R80 or $22 per tonne (reported in Pearce 1995: 31).25 This value was used as the central estimate in this study. For the low estimate, the lowest value referred to in the IPCC report will be used: $5 per tonne, equivalent to R18 per tonne. The choice of a high value is made more complicated by the wide range of estimates which have been published. For present purposes, the high estimate of damages has been taken as being 50% higher than the central estimate, that is, R120 per tonne (or nearly $33 per tonne). On this basis, the estimates of damages from South African power station emissions of greenhouse gases are shown in Table 9.

TABLE 9 Valuation estimates for CO2 -induced climate change damages

Fiscal externalities in the nuclear industry

A final category of externalities which arises in the South African electricity generation industry are those subsidies which have flowed to the nuclear industry from public funds. This may be termed a “fiscal externality”—a fiscal transfer payment (for example, a sub-

24 Notably, this analysis has been criticised by some economists as being far too conservative, with alternative estimates of global costs being in the range of 12% to 130% of gross world product by the year 2050 (Meyer and Cooper 1995).

25 An exchange rate of R5,68 to the UK pound is used.

sidy) which is made to the nuclear industry and which is not reflected in the price of nuclear electricity (Lockwood 1992). While this is not an environmental externality per se, it is a potentially material externality in South Africa which could be significant in relation to the price of electricity, and so it is included in the scope of this study.

Unlike the coal-fired electricity sector, which has historically received little or no financial subsidy from public funds, the local nuclear industry has enjoyed a very privileged position in this respect. This is similar to the nuclear industry in the UK and elsewhere (Lockwood 1992).

The nuclear industry has received an average of 69,3% of the Department of Mineral and Energy Affairs annual parliamentary grant over the period 1971-72 to 1995-96 (calculated from Auf der Heyde 1993). The total allocation over this period was R8 528 million in nominal terms; when these amounts are adjusted to real 1995 rand by the producer price index (from Central Statistical Service 1995), the total allocation amounts to some R21 753 million.

Thus, considerable resources have been directed to the local nuclear industry. These have been directed to three main categories of expenditure: capital expenditure, operating expenditure and servicing and repayment of loans (ibid:7). Not all of these amounts should be attributed to the nuclear generation industry, since non-electricity aspects of the industry have also benefited from state subsidies: notably the nuclear bomb programme, research and development in non-electric areas, and the production of medical isotopes. Unfortunately there is no publicly available information on the allocation of the subsidy to these various sectors; consequently, calculations and assumptions have been made on the basis of available information. To be conservative, only those costs which are known to be related to electricity generation have been included in the analysis; thus these represent a minimum estimate of the fiscal subsidy to the industry and probably underestimate actual costs. The details of this calculation are provided in Van Horen (1996a). The estimated portion of the total allocation which can be attributed to the electricity industry is R12 298 million (in 1995 rand) for the period 1971-72 to 1995-96, or 57% of the total grant.

In order to calculate an average external cost, three scenarios have been used for purposes of spreading the fiscal subsidy over the lifetime of the assets to which it relates:

• low estimate: the subsidy ceases from 1996-97 onwards and the power station operates at current capacity until 2023;

• central estimate: the subsidy is phased out from its current level to zero by the year 2000,26 while operations remain at their current level; and

• high estimate: support for the industry terminates and production of electricity ceases at the end of 1996.

Table 10 summarises the external costs for each of these three scenarios. Electricity generation figures are based on actual production since the power station was commissioned, and assumed output for the remainder of its 40-year life at 1995 levels.

26 Thus, the allocation to the electricity component of the industry is assumed to be 57% of the annual allocations: R489,2 million for 1996-97, R366,9 million for 1997-98, R244,6 million for 1998-99, and R122,3 million in 1999-2000 (all in 1995 rand).

TABLE 10 Valuation of fiscal externalities in the nuclear industry

It should also be noted that the central scenario is consistent with the Atomic Energy Corporation’s so-called “2000 plus” business plan. However, the trend in the 1995-96 and 1996-97 budget allocations does not appear to be in line with this plan; in fact, the subsidy has not been reduced by as much as envisaged, which means the central estimate may understate the amount of the fiscal externality.

Summary of results and limitations

The values for the five Class One externalities are summarised in Table 11. It should be noted that the valuations in the table are not additive, since they do not have a common base: they are expressed in relation to the amount of coal and nuclear electricity generated, respectively.

TABLE 11 Summary of valuation results for Class One externalities in c/kWh, 1994

Notes

1The external costs of coalminers’ morbidity (chronic and acute illness) have not been quantified because insufficient information exists regarding their pollution exposures.

2The external costs of health impacts caused by pollution originating from ash dumps on the power stations have not been quantified because insufficient information exists regarding the quantity of emissions and their dispersal.

Summarising the Class One externalities in Table 11, totals can be derived for the coal and nuclear cycles, and for an average of both. These results are shown in Table 12. The weighted average external cost takes into account the relative proportions of coal and nuclear electricity generated by Eskom.

TABLE 12 Summary of externality valuations for coal and nuclear cycles in c/kWh, 1994

The central estimate for all Class One externalities included in this study is, therefore, 8,11 c/kWh, with a lower bound of 2,29 c/kWh and an upper estimate of 12,34 c/kWh. It is evident from the above tables that the external costs of the nuclear cycle are high on a per unit basis. Taking only the externalities in the coal fuel cycle, the resultant cost is 8,41 c/kWh for the central estimate, 2,23 c/kWh for the low estimate and 12,45 c/kWh for the high estimate. Furthermore, if damages attributable to greenhouse gas emissions are removed altogether, and fiscal externalities in the nuclear cycle are also ignored, the central estimate is 0,69 c/kWh, with low and high ranges of 0,49 c/kWh and 0,86 c/kWh respectively.

These results can be placed into context by comparing them with current electricity price levels. The relative significance of the externalities obviously varies depending on the choice of a benchmark tariff; for present purposes, Eskom’s weighted average tariff for all consumers is used. Table 13 makes this comparison, with a breakdown for each of the five Class One externalities.

TABLE 13 Average Class One externalities as a percent of Eskom’s average tariffs, 1994

Because nuclear electricity accounted for just over 6% of the coal-nuclear total, its relative impact on electricity prices becomes much smaller than when compared to nuclear-generated electricity alone. Much more significant in this comparison is the impact of assumed damage costs from climate change where these are anything other than negligible on a per tonne basis. Of the environmental externalities experienced within the country and its neighbours in the relatively short-term, health impacts of air emissions are most significant, representing between 3% and 5% of current electricity prices.

It is worth making a brief comparison of the results of this analysis with the results of externality studies undertaken elsewhere—as summarised in Table 3. The valuations in this study fall somewhere between the two main sets of externality values derived internationally—perhaps closer to the lower, more recent bottom-up studies in the second half of Table 3. This is consistent with expectations: on the one hand, it would be expected that the external costs in South Africa might be higher than those in Europe or North America where emissions standards and environmental controls are generally much stricter; on the other hand, this study excluded many externalities for which there was insufficient data, which would be expected to result in lower valuation results here. In conclusion, the results of the present study, albeit subject to a number of limitations which are outlined below, appear plausible on the basis of international experience.

Limitations and weaknesses of the study

It is important in a quantitative analysis such as this to stress that the calculated figures are as good only as the input assumptions and information from which they are derived. By its nature, any externalities study is subject to a number of limitations and weaknesses, which means that the economic values should not be taken simply at face value. Rather, they should be analysed in full awareness of the limitations of the study, of which there are three main categories: omissions, uncertainties and biases.

Firstly, in the case of omissions, Class Two and Class Three impacts were not quantified in the present study. Class Two impacts included the following:

• chronic and acute illnesses experienced by workers on coalmines supplying Eskom;

• impacts of air and water pollution emitted by coalmines supplying the power stations;

• impacts on human health of air pollution originating from coal power stations’ ash dumps;

• impacts of coal power station emissions and resultant acidic deposition, in terms of human health, damages to crops, forests, water supplies and other physical assets in the Mpumalanga Highveld and neighbouring regions;

• impacts of coal power station emissions on visibility conditions, particularly in the Mpumalanga Highveld;

• impacts of coal power station emissions into watercourses; and

• impacts of nuclear power stations on environmental quality and human health.

It is possible that the economic value of some of these externalities will be significant and they, therefore, warrant further investigation. In addition to these issues, it is possible that some of the externalities which were accorded a Class Three rating in this study could have significant economic values. Ideally, all of these effects should be subjected to a more comprehensive analysis.

With respect to uncertainties in the present analysis, Table 11 summarised the level of uncertainty for each of the Class One impacts, at a very broad level. The most significant areas of uncertainty include the following:

• in the case of injuries and deaths occurring in the coalmining sector, data for the coalmining industry as a whole had to be apportioned between the main consumers, since data was not available specifically for the coalmines supplying Eskom. The effect of this may have been either to understate or overstate the results;

• there is uncertainty over the applicability of dose-response functions derived in North America to South African populations. No epidemiological studies have yet derived these relationships for South Africa;

• with regard to the valuation of health impacts of air pollution, there is a moderate level of uncertainty regarding the atmospheric modelling approach used. The EXMOD model used a Gaussian plume type of dispersion model to approximate the dispersion of emissions from power station chimneys, whereas actual conditions on the Highveld are not especially well-represented by this kind of model (Turner 1995). In the absence of any atmospheric model designed specifically for South African conditions, however, this level of uncertainty is unavoidable;

• there is a high level of uncertainty regarding the future global impacts of anthropogenic greenhouse gas emissions in the economic, social and environmental spheres; and

• there has been very little previous analysis of the economic value of environmental and health issues, from the pricing of water to the value of human health and mortality and, consequently, there is a high level of uncertainty in this respect.

These uncertainties have been accommodated, to an extent, by utilising a range of estimates rather than a single one so as to reflect the inherent uncertainty. In most of the cases above, there would be benefits to undertaking further investigation to narrow the range of uncertainty.

It is important to be explicit about the effect of these omissions and uncertainties on the economic valuations which have been reported in this study, that is, whether the direction of the resultant bias will be to understate or overstate the externality valuations. A summary of these potential biases is shown in Table 14.

TABLE 14 Summary of potential biases in this study due to omissions and uncertainties

The overall effect of these biases is difficult to assess since any one of them (for example, greenhouse gas impacts) could be large enough to more than offset all others. Nonetheless, it is important to note that there is one definite source of bias, namely, the omission of Class Two and Class Three impacts, which would cause estimates to understate actual impacts. In all cases in this study the chosen route has been to err on the side of understating external effects rather than the opposite. Thus, there is a fairly high level of confidence that the range of quantified externalities does not overstate the minimum value of externalities in the South African power sector.

Implications for South Africa’s development policy

In effect, the analysis in this chapter represents a first (and by no means a conclusive) attempt to value the external costs of electricity generation. This is useful for several purposes. Firstly, it represents a baseline against which comparisons can be made in future. If, for instance, environmental policies are introduced with a view to reducing air pollution concentrations, progress can be evaluated in the future in economic terms by comparing them with the 1994 baseline described here.

Secondly, the valuation of external costs is a necessary component of any cost-benefit analyses of abatement options which may be considered. Thus, for instance, an assessment of the relative costs and benefits of utilising technologies with lower sulphur emissions (such as scrubbers or fluidised bed combustion), should include, on the one hand, the costs of those technologies and, on the other hand, the benefits which they will bring about. Their environmental benefits will, simplistically, be equal to the avoided external costs. To the extent that this study estimated the value of these externalities, it provides one of the basic building blocks for such a cost-benefit analysis.

Thirdly, quantification of external costs is an essential component of integrated resource planning. Integrated resource planning is a planning approach in which all energy supply and demand options are evaluated with a view to making the resource choice which is optimal from the view of society as a whole.27 Typically, integrated resource planning assessments compare energy supply investments (such as building another coal power station, or importing hydroelectricity) with demand-side management options and seek to make the comparison on an equal footing. Since the private costs and external costs of these options vary widely, it is important to include all costs in such comparisons. Therefore, when Eskom makes its next decision about how to satisfy the country’s electricity needs, it should do this on the basis of full cost comparisons, using a comparable methodology to that in this study.

27 Integrated resource planning is widely used in North America, where electricity regulators stipulate that utilities have to undertake an integrated resource planning assessment of all the options they face for meeting demand. These assessments typically include quantification of external costs.

28The philosophy of China and certain newly industrialised countries in South-East Asia is sometimes characterised in this way.

Eskom’s vision is to “provide the world’s lowest-cost electricity for growth and prosperity” (Eskom 1995: i). The results of this study suggest that this vision, by itself, might not best serve the country’s interests. To illustrate, it would be quite possible for South Africa to be the world’s cheapest electricity producer if it paid no regard whatsoever to environmental conditions and polluted the environment freely.28 In essence, such a situation would amount to a subsidy being granted to the industry by the environment—in both its natural and social dimensions. This kind of subsidy is just as unsustainable as the large fiscal subsidies which many utilities in Latin America and Africa received from their governments, notably during the 1970s and 1980s.

It is obvious that Eskom does not act in single-minded pursuit of low-cost electricity, without regard for the environmental consequences of its actions. It has invested in technologies to reduce its impact on its surroundings (for example, electrostatic precipitators), and it incurs ongoing expenditure on the management of its impacts. It reported in its first environmental report that approximately R135 million had been spent on environmental management and research during 1994 (Eskom 1995b: 35). Over half of this was on air quality management in the generation division (Roos 1995).

The relevant question, therefore, relates to the degree to which environmental considerations are taken on board in the pursuit of cheap electricity. Clearly, there are external costs associated with producing electricity, and “artificially” low prices provide a powerful but dangerous signal to electricity consumers. It is not difficult to imagine a scenario in which major electricity-intensive industries establish themselves in South Africa on the basis of low electricity prices (all other things being equal), but that some years down the line the environmental costs become too large to ignore. At that point, the clean-up costs and control costs could be significant and would probably translate into an unavoidable price shock. Thus, Eskom’s original vision—to be the lowest-cost producer in the world—would be severely compromised, with potentially adverse economic effects. It is important, therefore, that Eskom’s vision be tempered by its stewardship responsibilities to the natural and social environments.

This study has focused almost exclusively on the supply-side—in other words, on the generation of electricity. While this focus has been deliberate, it is important to flag the demand-side of the industry and, in particular, the possible benefits from implementing energy efficiency and demand-side management policies. Clearly, policy responses aimed at internalising or managing externalities will bring about upward pressure on electricity prices. If, however, energy efficiency interventions are adopted at the same time, the potential exists to offset any such price increases and, indeed, sustain current downward trends.

Internationally, electricity utilities have invested in energy efficiency and demand-side management programmes over the past decade or more, partly in response to public and regulatory pressures to reduce the environmental costs of generating electricity from coal and other fossil fuels. In South Africa, there has been relatively little attention paid to the demand side of the equation, partly as a result of the overcapacity situation in Eskom’s coal power stations. Eskom has recently established a residential demand-side management programme, although it remains a relatively low investment priority for the organisation. Nonetheless, indications are that considerable energy savings can be achieved, at low or negative cost, through the adoption of well-proven technologies and practices. For example, considerable savings can be made in the household sector by improving the thermal performance of low-cost houses which are being connected to the electricity grid. While this is not the place to discuss the large number of energy efficiency and demand-side management options which can be readily implemented, it is important that policy interventions dealing with externalities are part of an integrated approach which balances cost pressures on the supply-side with potential gains on the demand-side.

Policy implications related to specific external effects

This chapter has included quantification of five external effects, and policy responses related to each are outlined briefly below.

Injuries and mortalities in the coalmines

The safety performance of South African mines in general, including coalmines, was heavily criticised by the Leon Commission. It was the commission’s view that the number of injuries and fatalities was “unacceptably high” (1995:16).

It is not necessary to repeat here the range of recommendations made by the Leon Commission, nor to describe actions taken recently by government. The relevant point for present purposes is to note that more attention to worker health and safety in the coalmines, whether this is driven by stricter regulations, union demands or management initiatives, should have the effect of reducing accident rates. To the extent that this results in incremental costs being incurred by the industry, it is likely that these will be passed on to consumers, meaning ultimately that there would be upward pressure on coal and electricity prices. In economic terms, this is entirely correct: consumers should be aware of, and should pay for, the full implications of their consumption behaviour.

The pricing of water consumed in power stations

The country’s bulk water pricing policy is currently under review (Department of Water Affairs and Forestry 1995), and it is not the intention of this study to pre-empt the results of that process. Nonetheless, it is incontrovertible that the historical cost of supplying water to the power stations bears little relation to the current economic value of that water. As such, Eskom is not being given the correct price signals regarding its consumption patterns and, as a result, its technology choices do not necessarily take account of water scarcity. Only two of its coal power stations, Kendal and Matimba, employ dry cooling technologies.

The appropriate policy is for bulk water supply authorities—generally the Department of Water Affairs and Forestry—to move away from historic cost pricing towards economic pricing of water. This applies both to new supply facilities and to ongoing water consumption in existing power stations. With respect to the former, marginal cost pricing should be implicit in the planning and feasibility studies for any new power stations which are under consideration. In the case of existing facilities, a phased introduction of economic prices should be agreed upon in advance, so that unexpected price effects can be minimised as far as possible. The increase of estimated economic water prices over current prices amounts to about 127% in the central estimate: the doubling of water prices would have a noticeable effect on electricity prices, and so it is important that new pricing policies are introduced in a well-planned and phased manner. It is important to note, however, that the main objective, ultimately, is for prices to be set at a sufficiently high level to reflect the scarcity of water, and so there is a limit to the concessions which can or should be made for water consumers. As a consumer which is guaranteed the most secure water supplies, even in times of drought, it is correct that Eskom (and its customers) should pay for that privilege.

Health effects of air pollution emissions

The analysis of the external costs of air pollution emissions on human health suggested that these costs are in the region of 0,54 c/kWh (range: 0,39 to 0,67 c/kWh). The central estimate represents approximately 4% of average electricity tariffs in 1994. Significantly, this estimate excludes a large number of externalities which may have significant costs, notably, the long-term effects of acidification on buildings, crops, forests and other objects at ground level.

There are numerous strategies which can be employed to address these external effects, including the setting of emissions limits, the specification of control technologies to be used, the introduction of pollution taxes or tradable emissions permits and self-regulation by polluters. It is beyond the scope of this study to analyse all these options and to propose suitable policies. Nonetheless, it is possible to make explicit some key implications of the analysis.

First, the order of magnitude of the health costs which currently occur are not insignificant and may merit consideration of abatement measures. Taking as a point of departure the current stock of coal power stations, the range of technical options for reducing gaseous and particulate emissions is relatively narrow. Commonly discussed in this regard are flue gas scrubbers, which could be retrofitted to existing power stations. There has not been any thorough public investigation to date of the economics of this technology option. Eskom’s position on this has been that the costs of retrofitting its power stations with scrubbers are prohibitively high, at anything from 33% to 49% of prices (King and Rodseth 1993: 20), and that with costs of this order of magnitude, it is more effective to invest in electrification in highly polluted townships (Lennon and Turner 1992:5).

Clearly, there are constraints on capital and investment resources which mean that investment decisions need to weigh up all alternatives, but it may be misleading to present air pollution abatement options as a direct trade-off between power station controls and electrification. Experience in recent years has shown that urban electrification does not lead to significant pollution reduction, and much less rural electrification (Eberhard and Van Horen 1995:166). The national electrification programme is certainly not motivated by environmental concerns.

In assessing whether pollution abatement technologies are justifiable in economic terms, two sides of the equation need to be considered. The first is the cost of abatement: Eskom’s analysis suggests that this would lead to increases in electricity prices in the region of 30% to 50%. This estimate is somewhat higher than experience elsewhere suggests: for example, Petrie et al (1992: 434) reported international experience of this cost penalty was in the region of 10 to 15%—therefore, taking this wider range, the cost penalty will be in the region of 10 to 50%.29 The second part of the equation is the benefit of abatement: this will consist primarily of the avoided environmental costs. The health costs quantified in this study represent 3% to 5% of electricity prices but, as noted several times already, this excludes several other impacts of air pollution. It could be expected that these costs would be reduced by up to 90% depending on the abatement technologies adopted; in addition, abatement benefits would also be felt in other areas not quantified here, such as reduced costs of acidification. It appears, therefore, from the orders of magnitude mentioned here, that the costs of abatement options do not necessarily outweigh the benefits by a large margin.

A range of technological options exist to reduce air pollution emissions: flue gas scrubbers are the most well-known of these, but are not necessarily the best option from an economic or environmental perspective. A more promising option is fluidised bed combustion: although this is a relatively young technology, life cycle cost analyses suggest that its performance is better than flue gas desulphurisation in most respects (Diekmann and Notten 1995). Possibly of great significance in South Africa’s dry conditions is that scrubbers require large quantities of water for ongoing operations, and in the context of increasing water scarcity and higher water prices this represents a serious constraint.

With regard to fiscal instruments such as pollution taxes or tradable emissions permits, it would make little sense from an economic or environmental perspective to impose such instruments only on Eskom’s power stations, without including other major sources of pollution. For such instruments to be adopted, an integrated policy is required in which all major pollution sources are included. Thus, in the absence of such a framework, this is not a feasible policy option at present.

Emission of greenhouse gases

The international governance of greenhouse gas emissions and mitigation of their effects is a rapidly evolving arena. The current situation is that South Africa, if and when it ratifies the Framework Convention on Climate Change, will not face any specific emission reduction targets or obligations.30 Thus, there is no immediate necessity for South Africa to introduce greenhouse gas mitigation measures at its own expense. A range of international funding sources—for example, the Global Environment Facility—exist to assist developing countries achieve reductions in their greenhouse gas emissions.

While it is clear from the international climate change debate that there is no question, for the present, of introducing a carbon tax or similar externality “adder” on South Africa’s carbon dioxide emissions, this does not mean, however, that South Africa can afford to ignore the climate change issue. South Africa was the 18th largest source of greenhouse gas emissions in 1988, and one of the largest on a per

29Clearly, variations in the base cost of electricity (the denominator) will influence the amount of the percentage increase.

30The future tense is used because, as at the beginning of 1996, South Africa had signed, but not yet ratified the FCCC.

capita basis (Van Horen and Simmonds 1995). The energy sector is the single largest source of greenhouse gas in South Africa; therefore, it has some responsibility to consider the effect of emissions. Also, it is possible that middle-income developing countries such as South Africa will face stricter commitments at some point in the not too distant future (Rowlands 1995b). If this is the case, it would be imprudent to ignore the relative impacts of different electricity supply options in terms of their climate change implications.

The quantification of externalities made it abundantly clear that the potential scale of damages is very large, and so the relative cost of more COz-intensive energy sources will be considerably higher than other alternatives. This factor could be highly consequential when planning and investment decisions are taken around the country’s next bulk supply option, given that coal is much more carbon-intensive than hydroelectricity or gas.

Subsidies to the nuclear industry

The analysis of the fiscal subsidy to the nuclear industry showed that this amount averaged from 3,3 to 11,3 c/kWh, depending on the assumptions made about the future of the industry. Even in the most optimistic scenario, the subsidy represents about one-third of the current average price of electricity. On this basis, it is clear that nuclear electricity has historically been heavily subsidised, and will continue to be until the end of the life of Koeberg power station.

The externality calculations in this study reflect average external costs. From an economic point of view, an analysis of future policy options should be concerned with the marginal costs of various alternatives. Thus, the subsidy to the industry over the past 25 years is a “sunk cost”: it has been expended and cannot be recovered. Policy analyses regarding the nuclear industry should, therefore, concern themselves with the cost-effectiveness of future investments and expenditure from public resources, and with the marginal environmental impact of future operations.

Thus the central question for policy-making purposes is whether the advantages of continuing to operate the country’s nuclear facilities outweigh their disadvantages. Recent investigations of Koeberg’s operating performance have raised serious questions about the reliability and effectiveness of its operations, thus underlining the need for a systematic and comprehensive investigation into the economics of the facility (Thomas 1996). An analysis of this question should be comprehensive and take into account all the future economic, environmental, social and other impacts related to the various options. In economic terms, all of the private and external costs should be included in the calculation: the latter include, for instance, society’s valuation of risks of environmental hazards, catastrophes and so on. The absolute scale of subsidies which have historically been granted to the industry appear to be so large as to make it highly unlikely that they can be justified on economic grounds, especially when there are so many other sources of cheap electricity in the region. Of course, factors other than economically quantifiable ones will also enter the decision.

Conclusion

Electricity prices play an important role in a resource-intensive economy such as South Africa’s. Equally, any increase in prices which may come about as a result of shifting the burden of environmental costs from society at large to electricity producers and consumers, could have significant economic effects. At a microeconomic level, the price elasticity of demand (responsiveness to price changes) is relatively low in the short-term, for the principal reason that it is usually not easy to switch from electricity to an alternative energy source, particularly for large consumers.

In the longer-term, however, price levels may play a more significant role at the microeconomic level. This probably depends largely on the nature of the consumer, since electricity is a small input cost for most commercial, industrial and high-income domestic consumers and, so, they are more likely to absorb (and, where possible, pass on) price increases. For large consumers, however, even small price changes can have a major effect on their competitiveness: for example, gold mines and aluminium producers.

At a macroeconomic level, electricity prices have an important effect on GDP, inflation and employment, since electricity is an intermediate good which affects most sectors of the economy. In the short-term, any price increases can be expected to have a negative effect on these variables (Gibson and Van Seventer 1995).

In the longer-term, however, it is less clear what the effects of higher electricity prices are on macroeconomic performance. Two of the most successful economies in the world, those of Japan and Germany, were built up after the devastation of World War II, with energy prices among the highest in the world. This is not to suggest that their successful economic performance was a result simply of high energy prices—clearly it was not—but to point out that cheap energy prices will not necessarily be in South Africa’s best interests in the long-term, especially if these lock the country into a capital-intensive and resource-intensive development path as opposed to a higher value-added route.

References

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chapter 3
CATALYSING CHANGE
International environmental pressures on South African exporters

Lael Bethlehem

Introduction

Environmental concerns have become an established feature of international trade. Consumers around the world (but especially in Europe and North America) are increasingly making choices on the basis of the environmental impact of products. Governments are imposing restrictions on what can be brought into their countries, and multilateral bodies, ranging from the World Trade Organisation to the United Nations and the International Standards Organisation (ISO), are making agreements that regulate the environmental aspects of trade.

At the centre of the trade and environment debate is a problem about how to regulate environmental impact. Each country imposes different environmental laws on its own producers, and environmental standards differ radically between countries. But when countries trade with each other they import not only a product or service, but the embodiment of a production process. The product produced in the exporting country may have very different impacts on the environment—either on the local environment in which it is made, or on the environment of the country into which it is imported and eventually disposed. Given that the actual harmonisation of environmental standards between countries is very difficult, countries have found other ways to influence the environmental performance of companies from which they import. Sometimes this is done through international agreements such as the Convention on International Trade in Endangered Species, which controls trade in wildlife products, or the Basel Convention, which regulates trade in hazardous waste. Domestic regulations represent another mechanism which has been used particularly successfully by the European Union to control the entry of products which may be environmentally damaging. Eco-labels influence companies to modify their production by providing market incentives for producers to meet certain environmental requirements. International management standards are another way to get producers internationally to meet certain environmental requirements.

But what impact does this have on exporters, especially those in developing countries? Are these international pressures helpful ways to nudge exporters towards higher environmental standards? Or are they ways of excluding exporters and providing protection for more sophisticated northern producers? Indeed, do exporters in developing countries have the financial, human and technological resources to meet the new environmental requirements? Will the international environmental agenda prove to be a catalyst that raises standards in the South, or a constraint to developing country exporters?

This study attempts to explore these questions in the context of South Africa. For a country like South Africa, environmental trade measures are fraught with dangers. The country’s balance of payments constraint is a key factor in determining its development potential. South Africa’s export patterns are currently undergoing a major change stemming from the long-term decline in gold exports, and there is pressure to increase semi-processed, agricultural and manufactured exports. If major constraints are placed on South Africa’s ability to export such goods as a result of environmental trade measures, this could have a serious impact on the country’s economy.

There are certain specific features of the South African economy which could make the country vulnerable to environmental measures. Firstly, it has a high concentration of energy-intensive industries and many of these are active in export markets. These industries draw their energy from coal-fired power stations and enjoy the lowest electricity prices in the world. Any action against coal-fired energy (for example, as a result of greenhouse gas emissions,) could have a significant effect on exports. Secondly, due to the low levels of investment in the South African economy (and particularly in manufacturing) from the mid-1980s to the early 1990s, capital stock in industry tends to be old. As a result, environmental protection technologies that have been built into newer capital equipment are often missing. The investment required to install these in some sectors is considerable and may place a large burden on companies in certain industries. Thirdly, the environmental regulatory system is weak and environmental standards in many sectors are lower than they might be with better enforcement of environmental regulation. South Africa may be particularly vulnerable, then, to trade-based environmental measures.

But international environmental pressures may also benefit South Africa by raising the environmental performance of South African exporters. Although environmental pressures are growing in South Africa, the levels of regulatory, consumer and civic pressures on industry are still much lower than they are in developed countries. Processes are currently under way to re-examine environmental legislation and to find ways of redesigning regulatory institutions. But this will take time to implement and will always be subject to resource constraints. In the face of regulatory weaknesses, perhaps environmental trade measures will be helpful because they will exert pressure on export companies to ensure that they raise their environmental standards more quickly and decisively than they would otherwise. In theory, then, environmental trade measures may be seen as a double-edged sword which is as capable of damaging South Africa’s process of development as it is of improving exporters’ environmental performance.

But what is the reality faced by South African exporters? Given the international debate and the potential impacts that we have identified in theory, what are the experienees and expectations of companies active in the export market? This study set out to explore these experiences by interviewing 20 export companies in 12 sectors. The companies were interviewed not only about strictly defined trade measures, but about the effects of all forms of international environmental pressure. These include international labels and management standards, consumer preferences, eco-labels and the effects of international environmental agreements.

The 12 sectors selected for this study represent a sample of South Africa’s largest exporters and include energy-intensive exports, commodities, agricultural and manufactured exports. Some sectors were chosen because their products, such as timber, are especially sensitive to environmental pressures. Others, such as packaging and energy generation, were included because of the critical role they play in servicing exports. Data from the South African Foreign Trade Organisation was used to select large exporting companies in each of the sectors. In most cases two companies were interviewed per sector. While this does not provide a comprehensive look at each sector, it does give us some idea of the dynamics relating to international environmental pressures. The sectors selected were:

• aluminium;

• coal;

• chemicals;

• electricity generation;

• fruit;

• minerals processing;

• packaging;

• pulp and paper;

• steel;

• soaps and detergents;

• textiles; and

• timber.

In each case a face-to-face in-depth interview was conducted. In most cases the export manager of the company was interviewed and where this was not appropriate—for example, packaging and electricity generation—the environmental manager was approached instead. In some cases both the export and environmental managers were interviewed.

Sectoral experiences

This section presents a summary of the main issues in each sector as they were revealed in the interviews. The discussion focuses on the environmental pressures reported by the exporters in the sample and on their expectations of how these measures are likely to develop in their sectors. For the most part, the sectors are presented in alphabetical order. However, the discussion of the electricity generation sector is presented first because the issues raised with regard to electricity generation provide important background information for a number of other sectors. For the same reason, the discussion of the electricity sector is longer and more complex than the others.

Electricity generation

Eskom, the public utility responsible for generating and distributing electricity, was the company interviewed in this sector. Eskom1 provides over 95% of the electricity consumed in South Africa, the bulk of which (about 90%) is supplied from coal-fired power stations mostly located on the Mpumalanga (formerly the Eastern Transvaal) Highveld. There is also one nuclear power station and two hydroelectric stations but the latter are only used for peak demand purposes. The nuclear and hydroelectric stations will not be dealt with in this chapter since they contribute such a small percentage of electricity supply.

Electricity provision in South Africa is unusual for two reasons. Firstly, a very high proportion of our energy is provided by coal-fired electricity as opposed to a greater mix of supply. Secondly, our electricity is very cheap. At present Eskom supplies the world’s cheapest electricity to high-load users and has committed itself to lowering the real cost by a further 15% by the year 2000. In addition, Eskom currently has an over-supply of generating capacity. These factors make South Africa an attractive place in which to establish energy-intensive industries. South Africa’s large and fairly easily accessible coal reserves will ensure that cheap, coal-fired electricity is available for many years to come.

But coal-fired generation has an important impact on the environment, especially in terms of air quality, water quality and consumption and waste. Coal-powered stations use large quantities of water and impact on water quality. The stations also generate large quantities of ash (22 million tonnes in 1994) and small quantities of hazardous waste.

All of these clearly impact on the environment and on human health in South and southern Africa. But for the purposes of this chapter we will concentrate on those that are of global concern, since they are most likely to affect trade issues. This means focusing largely on air emissions. The concerns that are currently most strongly on the international agenda are the emission of greenhouse gases (especially CO2), substances contributing to ozone depletion (chloro-fluorocarbons—CFCs) and substances contributing to acid rain (SOx, NOx). Greenhouse gases, in particular, have come under the international spotlight because of concerns about the potential effects of global warming. In 1990 South Africa emitted 1,4% of global CO2 emissions and Eskom was the single largest contributor to this. In 1994 Eskom power stations emitted 143 million tonnes of CO2 (Eskom 1994).

Within the context of continued use of coal-fired stations, Eskom has limited options for abatement of CO2. It is impossible to prevent the emission of CO2 from a coal-fired station altogether, although it is possible to become more efficient so that less CO2 is emitted per unit of electricity generated. Even with improvements in efficiency, however, CO2and other gaseous emissions will continue to rise in absolute terms as the demand for electricity rises.

With regard to the emission of SOx and NOx (which may contribute to acid rain and respiratory illness), Eskom has taken a decision not to install equipment to remove these substances. Although such technologies are available, they are extremely expensive and

1 Although company names are generally not mentioned in this chapter, Eskom’s name is mentioned as it is the only company in the sector. It is, therefore, not subject to the same competitive concerns as companies in other sectors.

they are especially expensive to retrofit to existing stations as opposed to including them in new stations. Eskom argues that:

In the Eastern Transvaal Highveld, the main power generating region of South Africa, concentrations of ground level pollutants (sulphur oxides, nitrogen oxides and particulates2) are lower than the air quality guidelines recommended by the Department of Health. Whilst the situation will continue to be monitored, Eskom believes that, given the declining concentrations of the pollutants in the general atmosphere, the cost of installing equipment to remove sulphur and nitrogen oxides is not justified (1994:17).

The introduction of environmental abatement technologies is, of course, related to the price of electricity. Cheap electricity is an important comparative advantage for South African industry and, indeed, Eskom is actively promoting the establishment of energy-intensive sectors (such as aluminium) in South Africa. However, as Van Horen has argued, the low electricity price may reflect inadequate environmental investment (see Chapter 2).

Eskom has a clear programme to manage its environmental impact and has identified environmental management as a priority issue at a senior management level. The Eskom environmental report was first published in 1994 and was an important step forward in establishing transparency and providing information on the company’s environmental impact. However, this does not necessarily mean that the environmental impact of electricity supply is being adequately addressed, or that trade pressures will not come to bear as a result.

Eskom’s environmental impact, and the concentration of electricity intensive industries in South Africa, make our electricity-intensive sectors potentially vulnerable to international trade pressures. Eskom has recognised this issue and Eskom chairman John Maree has noted that:

Trading partners are increasingly asking about the environmental credentials of South African products. We must therefore ensure that electrical energy is generated, supplied and used in an environmentally responsible way (Eskom 1994:3).

In our interview, however, Eskom said it had not been under any pressure from its electricity intensive export customers with regard to its environmental performance but that international environmental pressures were reaching the company in other ways. Eskom is acutely aware that greenhouse gas emissions are firmly on the international agenda and have the potential to impact on South Africa’s trade relationships. But so far Eskom seems to be adopting a wait-and-see attitude, arguing that:

Current scientific evidence regarding global warming is inconclusive. However, the changing international position and research on issues such as global warm-

2 Particulate emissions are not discussed in detail in this chapter because particulates do not fall within the current international agenda. However, it should be noted that particulate emissions are an important contributor to respiratory illness and may, therefore, be seen as a major externality. Some methods are available to reduce emission of fine particulate matter and Escom is experimenting with the introduction of such technologies, including bag filters. A recent failure of bag filters at the Duvha power station has, however, led to concern about the prospects of addressing particulate emissions in this manner (Allen 1995:13). For a fuller discussion, see Van Horen in this volume.

ing are being monitored. Eskom also contributes to the development of the South African strategy on the Framework Convention on Climate Change (ibid:16).

The Framework Convention on Climate Change (FCCC) sets out a programme to limit greenhouse gas (and, in particular, CO2) emissions internationally. At present, a small number of mostly developed countries contribute the lion’s share of CO2 emissions. In 1990, for example, the USA alone contributed 23% of global CO2 emissions. There is, however, no clear relationship between a country’s level of development and its emissions. For example, in 1990 Japan and Germany each contributed 5% of global CO2 emissions compared with the USA’s 23%. China and Russia each contributed 11% and the UK contributed 3%. South Africa’s emissions were about one-third higher than those of Brazil, which is a much bigger country at a similar level of development.3

The FCCC distinguishes between developed and developing economies and assigns different responsibilities to the two groups. South Africa is now a signatory to the convention and is classified as a developing country.4 As such, our immediate responsibilities do not involve setting targets for reductions in emissions but rather commits the country to:

• sharing of information on emissions;

• tracking carbon sources and sinks; and

• developing a strategy to reduce emissions.

There is, therefore, no immediate pressure to substantially reduce our greenhouse gas emissions. Instead, we need to establish information systems and develop a strategy for the future. In the medium-term, however, South Africa is likely to come under some pressure to limit greenhouse gas emissions since targets and other commitments may be set for middle-income developing countries.

South Africa remains vulnerable, then, to potential international action on CO and other greenhouse gas emissions and to potential action on other issues. Already, international development aid is being linked to environmental—and, especially, climate change— issues, and they also have a high profile on the agenda of the multilateral organisations. For these reasons the environmental impacts of South Africa’s energy generation remain on the agenda.

Aluminium

Two companies were interviewed in this sector. The first manufactures primary aluminium and exports about 50% of its product, mainly to Japan, Korea, Malaysia, the Middle East and Africa. The second produces rolled aluminium products and extrusions and exports about one-third of its production, mainly to North America and East Asia.

Both companies were aware of a range of general environmental pressures, including local regulation of emissions and effluent. However, neither company had experienced significant pressures in the export market. Both companies were aware of the discussions

3 Figures cited in Escom 1994:16.

4 South Africa has signed, but not yet ratified, the convention and, as such, is not yet a member of the Conference of Parties. Government expects to ratify the convention early in 1997.

on the development of an environmental standard under the ISO5 and both expected to apply for accreditation once the standard is in place. One of the companies had been asked to provide information on its environmental management system to one of its customers as part of the customer’s own efforts to qualify for the British environmental standard (BS 7750). The company was able to provide the information required and did not suffer any loss of business, but acknowledged that it may need to re-examine its processes to ensure that this kind of customer requirement can be met. Both companies were aware of a general increase in environmental pressures and perceived the international industry to be increasingly concerned about environmental issues. One of the companies was, for example, in the process of developing a comprehensive environmental policy, partly to prepare for a major new investment. The company felt anxious to “cover our environmental bases” before the investment could be finalised because “we can’t afford to trip up on the environmental question”. Both companies had also experienced pressure from export customers to reduce and redesign their packaging.

The aluminium sector is vulnerable to international environmental pressures because it is extremely energy intensive. In the production of primary aluminium, energy costs account for some 35% of unit production costs. This is especially important for one of the companies, since the price it pays for electricity is pegged to the international aluminium price. In this way, its electricity costs remain stable relative to the price of its product, and this is a major advantage. Any attempt to restrict trade access on the basis of “dirty” energy would have a major impact on the aluminium sector. However, neither company seemed to be aware of this possibility and there have been no threats of action or even queries regarding the environmental performance of their electricity suppliers so far. While both companies acknowledged the potential dangers, they argued that the issue had not arisen for them so far and had not been identified as a strategic issue at senior management level.

Chemicals

Two companies were interviewed in this sector. One is a producer of a wide range of chemicals and chemical products. Its exports are concentrated in particular product markets, some of which are exported in large quantities—up to 40% of production—mainly to the EU,North America, Latin America and Australia. The other is a producer of petrochemicals and general chemicals. It is currently attempting to raise export levels and is especially active in the EU, North America, Latin America and East Asia.

Neither company has experienced strong pressures or restrictions to market access. However, both companies have received queries about potential hazards involved in the use and degradation of their products. Both have been asked to fulfil special protection and labelling requirements for the transport of their products, and this has required specialised

5 The ISO, which manages the ISO 9000 quality series and other standards, has recently established a standard for environmental management systems called ISO 14001. When these interviews were conducted, ISO 14001 was not yet in place. Other environmental standards will be formulated as part of the ISO 14000 series.

packaging. Both are aware of or involved in the discussions on the ISO 14000 series and both expect to apply for accreditation. Both companies see environmental issues as increasingly important to their ability to capture and maintain export markets in the long-term. For example, one company said:

We are looking to cleaner technologies, waste minimisation and utilisation of byproducts. We don’t want to be at a disadvantage in the international market as a result of environmental issues. We are also trying to identify products which may be able to capture markets as a result of special environmental features such as biodegradability. We are also concerned to avoid accidents or other problems which, aside from anything else, would be a major problem in international markets. We don’t want to be seen as irresponsible.

One area where the sector has made a major adjustment is in the process of removing CFCs from their production. Action was taken in the wake of the Montreal Protocol—and in line with national policy—to phase out CFC production. This involved making changes to a variety of processes.

Both companies believe that there will be increasing environmental pressures in the sector and that, internationally, companies will assume more and more responsibility for their products, from cradle to grave. The companies pointed to various environmental initiatives in the sector internationally and argued that South African companies are keeping pace with world trends. One example of this is the trend towards more transparent environmental reporting. New forms of environmental reporting are being considered in the industry, with one of the companies considering producing an annual environmental report in addition to the usual annual report.

But keeping pace with international trends can involve large investments. One of the companies has decided that all new plants in the group will be built to international environmental standards, partly to ensure that products are able to meet the requirements of the export markets. But older plants present more of a problem because of the cost of retrofitting. One of the companies is considering retrofitting electrostatic precipitators and bag filters on some of its older plants in order to control sulphur and particulate emissions. This is, however, “tremendously expensive. The question is whether it will become a cost of staying in business.” Since there are a significant number of old plants in the industry we can assume that the investment requirement for environmental upgrading in this sector will be large. It is by no means clear, however, that in the short-term (and in the absence of stronger local or international pressures) the companies will choose to make these investments. As one environmental manger in the industry put it:

It is difficult to justify environmental projects because they don’t generate any extra income. The accountants just see them as raising our fixed and operating costs without providing any real benefit to the company. We have been most successful in convincing senior management to make an investment when we have been able to recover a by-product which can then be sold. But otherwise it is difficult to make these investments.

The chemical sector, more than most, faces environmental problems both here and internationally and is affected by international conventions and environmental campaigns. Both companies pointed to international conventions and campaigns that affect them, including the Basel and Bamako conventions (which regulate the transport of hazardous waste), the FCCC (which regulate the emission of greenhouse gases) and the Biodiversity Convention. One of the companies is particularly concerned about the potential impact of the FCCC since it produces and emits large quantities of CO2 and other greenhouse gases. Indeed, the sector as a whole is a major contributor to such emissions. The chemicals industry would have to be integrally involved in any plan to reduce greenhouse gas emissions under the FCCC or any other plan.

The industry is also affected by the international Greenpeace campaign to ban the use of persistent chemicals such as DDT, PCBs and chlorine. According to the companies, the dangers of DDT and PCBs have been widely recognised and their business would not be severely affected by an international ban or restriction on their use. Other persistent chemicals like chlorine and polyvinyl chloride, however, are much more integral to the business of the chemical industry as it is currently structured and severe restriction would have “a major impact on our business”.

According to the interviews, the South African chemical industry, and the large companies in particular, are following international trends and are in no immediate danger of losing export markets as a result of environmental measures. The industry is experiencing a combination of pressures from local sources—regulations, environmental action groups and potential liability—and international sources—export customers, international environmental campaigns and international conventions. These are driving the sector to be increasingly aware of environmental concerns. However, if companies are not able to meet environmental concerns and keep up with international trends, they may face difficulties in export markets in the long-term. This will be especially true of newer or smaller exporters who may have greater difficulties in meeting the investment and administrative requirements that often accompany effective environmental management systems.

Parts of the industry also face particular challenges with regard to greenhouse gas emissions and attention will need to be given to this in the future.

Coal

One company was interviewed in this sector. It is a major coal producer and exports 30% of its production to a variety of markets in the EU, East Asia, North America, Latin America, the Middle East and Africa. The company is aware of growing environmental concerns in the industry:

There is no real pressure at this stage, but from time to time we are asked about our environmental policy. Some customers are beginning to look at our performance in more detail, such as looking at trace elements in our product. There is general desire among companies internationally to demonstrate that their suppliers act responsibly in relation to the environment and this is affecting us. Most of the queries we receive are informal but we have recently received some formal enquiries about our environmental impact.

The company is involved in various task groups looking at the development of the ISO 14000 series of environmental standards and is likely to apply for accreditation under ISO 14001. Internationally, coal is largely used as an input to the electricity sector and coal-fired power has come under some pressure with regard to its environmental impact and, especially, its contribution to greenhouse gas emissions and acid rain. This pressure may, in the long-term, affect international coal consumption. At present, however, international coal consumption is not being negatively affected. The world market for coal is expected to grow by about 30% by the end of the century and South Africa’s coal exports are likely to follow the trend. The world coal market is, however, increasingly demanding low-sulphur coal because of concerns about sulphur emissions and because of regulations such as the USA’s Clean Air Act. South African coal deposits are low in sulphur and this places South Africa at an advantage relative to many competitors. In time, the company expects to earn a premium on the world price because of the low sulphur content.

The coal sector is potentially vulnerable to environmental trade measures, especially in the form of a carbon tax. The company does not, however, expect carbon taxes to be widely introduced in the foreseeable future. It argues that:

The talk of a carbon tax is really more of a stick to beat coal suppliers than a serious environmental initiative. Of course we need to be concerned about carbon levels, but we also have to ask: what real alternatives are there to coal-fired energy, given installed international capacity and price? If you take these factors into account, it seems very unlikely that the use of coal will decline significantly. This is borne out by the fact that international demand for coal is still increasing and there are robust plans for coal-fired plants in East Asia and China in particular. So we are not expecting a decline in demand.

If international coal consumption does decline in the long-term, South Africa could be badly affected since coal is a major export and, indeed, a major employer. However, we would be in a slightly better position than many other coal exporters due to the relatively lower sulphur levels in our coal.

Minerals processing

Two companies were interviewed in this sector. Once produces manganese and exports 85% of its product. The other produces platinum and related products and exports over 90% of its product. Both export to a wide range of markets including the EU, North America and East Asia.

Both companies have received some queries about the environmental performance of their products and processes and both believe that the issue is becoming increasingly important in international markets. Neither company has, however, faced environmentally related market barriers so far. One of the companies was aware of ISO 14000 and expected to apply for ISO 14001 accreditation. This company argued that although there is no significant pressure in export markets so far, it is likely to increase:

We are trying to be proactive. We hope to achieve what we need to long before the pressure becomes visible and certainly before it becomes unbearable. We know that it makes sense for our competitors to jump on the environmental bandwagon and the Greens are also becoming aggressive. Just look at the campaign against Shell in the North Sea. We are, therefore, trying to make sure we have our house in order.

One of the companies has experienced a particular problem with exporting one of its concentrates which contains recycled materials. There has been difficulty in passing through European borders because of intricate regulations relating to this product and its environmental implications. According to the company:

There are lengthy forms for concentrates containing recycled materials and this has led to cost and time delays as well as some consignments not being accepted. We believe that the bureaucratic hurdles are not just for environmental reasons but that our competitors assisted in putting them in place. Also, the forms we have to complete require signatures from officials in government departments and our cause has certainly not been helped by the inexperience and confusion in some of the departments. While these problems are being sorted out here our competitors are outflanking us in this particular market.

Companies in this sector also point to the cost implications of investing in technologies necessary for environmental protection. One of the companies, for example, recently decided to upgrade its effluent systems in order to deal effectively with environmental concerns. This will cost R60 million—R70 million over three years for one plant alone. The investment does, however, allow the company to recover some materials and this will offset the costs to some extent. The company pointed out that if environmental costs “hit all international producers simultaneously, it will just be added to the cost of the product”. If, however, some producers have fallen behind or have special environmental problems, they may be at a disadvantage in international markets. Given the generally old capital stock in South Africa, this could become a major burden.

Environmental issues are becoming more prominent in the industry and, as with the chemical sector, this seems to stem from a combination of local and international pressures. One of the companies pointed out that until two years ago it dealt with environmental issues fairly informally but now it has been identified as a major strategic issue for the next decade, especially with regard to exports. The company has established an inventory of environmental issues and created an action plan to address them.

Perhaps the biggest danger for the industry relates to the energy issue. Like aluminium, energy costs are a large proportion of the cost of minerals processing (around 30%). South Africa’s cheap electricity is currently a major advantage but may also become a disadvantage if there is international action against greenhouse emissions. Only one of the companies was aware of the issue. It felt that there is no immediate danger.

We think that the West is quite embarrassed about its own emissions and is unlikely to push the CO2 issue too hard. CO2 is related to a country’s level of industrialisation and ours is much lower per capita than the developed countries. So we are not too concerned. For us, SOx and NOx emissions seem much more important but they are not really being driven by an international agenda.

Citrus fruit

One company was interviewed in this sector. It is an export agent that markets South African citrus fruit on behalf of farmers and sells to a wide rage of countries including the EU and North America. According to the company, environmental issues are coming up strongly in the international fruit trade and the company has identified environment as a major issue over the next five years. Fruit is subject to specific sensitivities and to special provisions applicable to food. The major issue in the industry is the use and control of chemicals that are used in growing and transporting the fruit. The regulation of chemicals has become a major issue in the industry internationally and this has had an immediate impact on South Africa since exports constitute some 60% of the crop. South African exports, particularly to Europe, must meet with strict specifications on chemical residues in fruit entering the market. This has meant that South African farmers have had to alter their methods of protecting the fruit both during growing and distribution. This has involved reducing chemical controls:

There have been a number of factors encouraging a move away from certain chemicals and towards more natural controls such as introducing beneficial insects. We are now on the path towards integrated pest management which involves a combination of chemical and biological controls. The issue of chemical residues in fruit entering the export market has probably been the most important factor pushing us in this direction.

Indeed, the company has been key in conducting research and introducing new management techniques to the individual growers. The company assists farmers with introducing these techniques and with managing pesticides and other chemicals. This is especially important since farmers who abide by South African law may still be unable to export their product. According to the company, “you can meet all the requirements of South African law and still not be able to export your fruit”. Part of the difficulty has been that local standards for chemical use do not necessarily take account of maximum residue levels applicable in export markets. In response to this problem, the company issues publications for farmers which specifies restrictions on chemical use for export markets. Since exports are a high percentage of local production, most farmers have introduced these new methods for all their produce and not only for their export fruit. This is an example, then, of international trade driving improvements in local management practices.

In addition to regulations in other countries there are now certain customers who demand standards that are higher than their domestic regulations. For example, there is now a niche market in Japan for fruit which is totally free of chemicals and this has encouraged some South African producers to experiment in this area.

Packaging

Two companies were interviewed in this sector. Both are large packaging groups which provide packaging services to a wide range of exporters in various international markets. Both companies also export some empty packaging, mostly to Latin America and the EU. Both companies have been highly involved in meeting the packaging requirements of their customers in export markets. In particular, they have had to respond to EU packaging regulations and the effects of the German Packaging Ordinance have been especially strong.

The issue of packaging South African exports has been well-documented and will not be covered in detail here. What is important to note, however, is that international (and especially European) packaging legislation has driven significant changes in the local packaging market and has encouraged a trend towards lighter and more easily recycled materials. According to the companies, this trend is now not only evident in packages for export products but also for locally used packaging.

The packaging experience also illustrates the importance of services to exporters. One of the companies gave the example of an exporter who received a 14 - page questionnaire on the environmental consequences of his export packaging.

They got the fright of their life but because we had developed an expertise in the area we were able to assist them. If South African packaging companies had been unable to meet the new packaging requirements, all our exports would have been threatened. But we have been able to meet the challenges and expect to continue to do so. In export markets you have to do as you’re told.

Similarly, the packaging experience illustrates the way in which environmental trade measures can drive company behaviour all the way down the line. “Companies have become more and more demanding of the environmental performance of their suppliers and packaging is certainly part of this trend.”

Pulp and paper

Two companies were interviewed in this sector. They are large producers of pulp and paper and export some 35% of their production. Exports are concentrated in particular product markets and are sent to a wide range of markets including those in the EU, North America, Africa and East Asia. Environmental pressures have been particularly strong in this industry and it serves as an interesting case study of the capacity of international market trends to change the environmental behaviour of South African companies.

There have been two main concerns about the environmental impact of the pulp and paper industry in recent years. The first is the impact of wood demand on world forest resources. Here the concerns have mostly been about logging of old-growth forests and the contribution of the paper-related wood industries to deforestation. The source of pulp producers’ timber supplies and the management of forests have, therefore, come under the international spotlight. The second main concern has been about the use of chlorine—particularly elemental chlorine—for the bleaching of pulp and the subsequent release of organochlorine effluent into inland and marine waterways. As a result, there has been an international campaign to remove chlorine from the paper-making process. In a number of countries, most notably Germany, consumer markets have demanded chlorine-free paper, and certain German retailers have refused to sell paper which contains chlorine. This has had a major impact on pulp and paper production internationally.

The forestry and chlorine campaigns have both affected South African companies. Both companies have had enquiries about their timber sources, with some customers asking for written certification that the wood used in their paper production is not logged from old-growth forests. This has, in fact, been an advantage for South Africa since all pulp wood is drawn from human-planted, managed forests rather than indigenous areas. There are a number of environmental problems associated with plantation forests of this kind— particularly their impact on water supply and biodiversity—but these have not yet come under international scrutiny. The chlorine issue has been more difficult for South African producers. Although a South African paper company invented a technique to remove elemental chlorine from the bleaching process some 20 years ago, elemental chlorine is still being used in some South African plants. The international market is, however, increasingly demanding elemental chlorine-free pulp and, as a result, both companies are moving in this direction. One of the companies commented:

By the end of 1996 all our plants will be elemental chlorine-free and this has been driven entirely by exports. In one case we wanted to delay the transition to elemental chlorine-free by two years but we were forced to move more quickly. Of course, it is incredibly expensive. We have spent R65 million on this already and there is still more to go as we still have to adapt our largest mill. There is no added value as such—in fact, it creates additional operating expenses as well as capital costs. But in this case it is a cost of staying in business.

In fact, some markets are now demanding pulp that is not only free of elemental chlorine but totally chlorine-free. The totally chlorine-free movement is gaining strength in Europe and particularly in Germany and Scandinavia. The USA has, however, strongly resisted this trend and there seems to be little pressure from East Asia. However, since Europe is a large destination for South African pulp exports there is some prospect that South African producers will need to move in this direction.

The chlorine issue is an interesting example of market-based pressure. According to the companies there is no agreement among scientists internationally that chlorine is, in fact, harmful in the quantities in which it is released. However, the market has made a judgement that it is harmful and this has been impossible for pulp producers to ignore. It is also an interesting example of the way in which companies can use environmental performance as a source of competitive advantage and perhaps as a source of protection. One of the companies cited an example of a Scandinavian pulp company which is seeking to push environmental standards as high as possible:

All their pulp is totally chlorine-free and they are trying to make this the standard for the European market. But the truth is that the Scandinavians are high-cost producers and the only way that they can differentiate themselves in the market is through environmental factors. They could end up using this as a trade barrier. For example, some of the companies are moving towards becoming altogether effluent-free, so the goalposts keep moving.

The chlorine case also demonstrates the limited impact of international market-based pressures. There are two reasons for this. Firstly, environmental pressures rise and fall to some extent with supply and demand in the market, especially in relation to commodities. At times of international oversupply, customers are able to exert more pressure on suppliers and can be more insistent about environmental issues. When the market is tighter, customers tend to ask fewer questions about environmental performance as they are under more pressure to assure their supply. Secondly, the international market is concerned only about certain issues, usually those involving global commons. While other, more local, environmental issues may be more urgent, they are unlikely to receive international attention. International pressures must, therefore, be combined with effective local regulation. For example, one of the companies has recently been under pressure to reduce its marine effluent, but his has come from local rather than international sources.

The pulp and paper industry has certainly been targeted internationally and it seems that the pressure will continue. The companies both perceive various forms of environmental certification to be critical to their ability to export in future. These include ISO 14001 and EMAS (a European standard). There is also a strong possibility that a European eco-label on paper will be developed. Long-term issues for the industry include the possibility of effluent-free production as well as alternative (non-wood) sources for paper-making fibre. Said one of the companies: “Given the way that the international market has gone, I wouldn’t discount either of these as possibilities in the long-term.” If either of these materialised, new costs would be imposed on producers and some of South Africa’s comparative advantage—for example, from fast-growing wood—may be eroded. This suggests a need for South African producers to maintain a competitive advantage in all aspects of their production, including the environmental aspect, rather than simply relying on raw material advantages.

Steel

In this sector an interview was conducted with an environmental representative, who is also a manager at a large steel company, of the industry body.

The steel industry exports some 30% of its production to a range of markets including Latin America, the EU, East Asia and the USA. Exports include mild steel, flat products, profile products and stainless steel. The industry is experiencing increasing environmental pressures from local sources and from the international market. The pressures from the international market, in particular, are expected to grow in coming years. “We have had no formal enquiries so far but we are expecting them any day. We have received some international visitors who have asked questions about our environmental performance and we have also been asked to fill in various forms for some of our customers.”

Recently, representatives of one of the major companies in the industry visited European customers and competitors and gained a clear impression that environmental pressures are growing in the international market. They also concluded that South African companies are largely behind other international producers on the environmental front although some local mills perform better than others on this score. The international industry has already been through major environmental changes but these are still fairly new for South African companies.

It is difficult to generalise about the environmental profile of the industry. Much depends on the age of the mills and the degree to which they have invested in capital equipment which limits their environmental impact. One recently constructed plant is seen as state-of-the-art in all aspects including environmental performance, but many other plants are very old and lack environmental protection technologies. Two of the country’s largest plants are also its oldest. It is these plants that are most vulnerable to environmental pressures. One plant, for example, was built 51 years ago and although it has been upgraded it still lacks sufficient environmental protections. “When this place was built, there was very little concern about pollution and many of our batteries are simply not up to today’s standards.” But the investments required to upgrade these old plants are very costly. At one plant alone, an investment of Rl,5 billion is being considered, largely for environmental reasons although it would also have benefits in terms of efficiency. “We tend to find that the senior management are reluctant to make investments that are purely environmental and have no economic benefits.”

If this and similar investments are not made, it seems that some of South Africa’s mills may face real threats in the export market. In the industry as a whole, environmental investment levels are low at about 5% of operating budget compared with an international average of about 15%.

In the older mills we will probably have to spend something like 30% of our budget for a few years in order to catch up. The way I see it, there is a race against time. Its all right now when there is an international shortage of steel but when the market turns everyone will be trying to sell their steel and then environmental pressures will pop out like soetkoek.6 If we can’t improve I think we will probably lose some export markets.

The company is working towards ISO 14001 and believes that accreditation will help in the international market. Although the ISO standard will not necessarily ensure that all environmental problems are addressed, it will impose some pressures. “The ISO 14001 standard is likely to be based on action plans, so in order to qualify you have to be doing something to solve your problems.”

The steel industry is also under some pressure from local sources. This includes pressure from surrounding communities to do something about air emissions. There is also government pressure as a result of the presence of chemicals and heavy metals in plant effluent as well as concern about particulate and sulphur emissions. The international pressure may, however, be more difficult to resist:

The truth is that you can always pay a fine and carry on, especially since our fines are very small. But if your customers are complaining there is nothing you can do. You can survive anything else but you can’t survive without customers.

The steel industry, therefore, faces major environmental challenges and without substantial action and investment may well face constraints in the export market in the coming years. There may be some value in developing an industry-level approach to this problem and some assistance from government may be required. In particular, it may be useful for an organisation like the Industrial Development Corporation to make preferential finance available for exporters who are struggling to make the necessary environmental investments.

Soaps and detergents

Two companies were interviewed in this sector. Both are subsidiaries of major international companies. Each company exports less than 10% of its production, mostly to other African countries and to the Indian Ocean islands. What is interesting about this sector for our purposes is the effect of the policies of the head offices of these multinational companies on the manufacture of products in South Africa. Both companies must abide by the

6Sweet cakes.

policies set by their mother companies and the environmental performance of their products must match the same standards as a product manufactured in a company plant in another country. One example of this is in packaging. At one of the companies, the international head office set packaging policy guidelines which exceeded local regulation or practice in the South African market. The local subsidiary then had to ensure that its packaging suppliers were able to meet these standards and that its packaging for local and international markets was in line with the company’s international policy.

Both companies pointed to a relative lack of environmental pressures in the local market or through local regulations. “Internationally, environment is a big issue but here there is very little pressure. For us it is more of an issue coming from the global company policies than from the local situation.”

However, the policies of multinationals do not necessarily ensure that environmental standards are equivalent in all cases. One of the companies, for example, displayed a product from a sister company in Europe. Information written on the pack provided a substantial amount of environmental data including information on the biodegradability of the product and on the recycled content of the package. Similar information is not available here although the product itself is almost identical. The companies also have some experience of direct pressure from customers. One of the companies won a United Nations tender to supply products for an aid organisation working in central Africa. The customer required substantial information about the product, including its environmental performance, in order for the tender to be awarded.

In summary, companies in this sector are probably achieving higher environmental standards than they would in the absence of pressures from their multinational head offices and face no immediate threats on the export front.

Textiles

Two companies were interviewed in this sector. One is a large producer of a range of textiles and exports 10% of its product mostly to the EU and Australia. It has only been in the export market for two years and hopes to grow its exports to 20% over the next five years. The second company produces technical and engineering fabrics and exports 70% of its product to the EU, the USA and Australia.

Neither company reports significant environmental pressures on its exports. According to one of the companies, the major effect that environmental issues have had on its exports is the increased demand for niche “environmental fabrics” such as “natural look” unbleached textiles and all natural fibres. Environmental issues do not, however, seem to have affected demand for the traditional textiles which it supplies. The company said, for example:

We use loads of chlorine in our bleaching process but we’ve never had any problem with that from our local or international customers. They are really interested in price, quality and styling. The only ones who worry about our environmental side are the local authorities who set standards for our water effluent and so forth.

This is in stark contrast to the pulp industry where, as we have seen, chlorine has become a major issue. Neither company has experienced pressure to achieve environmental accreditation and neither was aware of the possible introduction of eco-labels on any textiles that would affect its product range. However, one of the companies pointed out that its process involves very little chemical use and that this makes it much less vulnerable to international concerns.

One of the companies argued that the international textile industry is much more involved in a debate about human rights or social clauses in trade agreements than environmental ones. Some countries which have large textile industries have come under fire for their human rights records or for the use of child labour. Trade measures have been threatened against some of these countries and the social clause issue seems set to dominate the debate in the textile industry in the foreseeable future.

There is some danger, however, that local producers may have insufficient access to information about environmental requirements in export markets, especially in light of the current discussions on establishing a European eco-label for textiles. There are already draft criteria for a European eco-label on T-shirts and bedlinen. These criteria indicate the adoption of a life-cycle approach and, therefore, take account of the use of pesticides on the growing of cotton as well as elements of the textile production process such as energy and water use, chemical use and noise (United Nations Conference on Trade and Development—UNCTAD 1995:27). There are also a number of privately issued textile eco-labels that are already in place, including labels in the Netherlands and Germany. Some of these labels relate to the process of production and others relate to the presence of substances in the product itself.

It is imperative that South African companies have access to proper information about these developments and that they are involved in discussions about the criteria for such schemes. If the companies and/or the industry federation fail to remain informed and involved in these discussions, there could be negative consequences for South African exports in the longer-term.

Timber

Two companies were interviewed in this sector. Between them they export some 1,3 million tonnes of logs and wood chips mostly to the Japanese market. One of the companies also exports sawn timber products. Both companies have experienced some environmental enquiries from customers, including being asked to submit verification—and in one case independent accreditation—that the wood is all sourced from plantation rather than old-growth forests. Like in the pulp industry, this has been a source of advantage for South Africa since all forests are managed plantations. Companies which are unable to provide assurances about the source of their timber are apparently being forced out of certain markets, particularly in Europe.

One of the companies is exploring an accreditation system for its timber and timber products which involves applying for the right to use a privately issued eco-label which assures the customer that the product has been produced in an environmentally responsible manner. These labels are issued by environmental groups such as the World Wide Fund for Nature and Friends of the Earth. In order to win approval from these groupings— and attach their label to the product—certain environmental requirements must be met. These labels are particular to the wood industry and are mostly aimed at tropical hardwoods since these are most important with regard to deforestation. Nevertheless, the labels would be available to South African exporters and are being explored.

However, environmental issues which are specific to forestry in South Africa—such as the water-supply and biodiversity issues mentioned above—have not come under international pressure. While there is now some attention being given to these issues locally, it seems that they are currently of limited relevance to the international debate. This may change, however, especially with the increasing market share of other plantation-based timber industries such as Brazil and Argentina (UNCTAD 1995:25).

Understanding the trends

As we have seen, South African exporters have experienced international environmental pressures of different kinds. These pressures may be classified as follows:

• direct customer pressure;

• standards, accreditation and eco-labels;

• domestic regulations;

• multilateral environmental agreements;

• campaigns against particular products or substances; and

• multinational company policies.

Direct customer pressure

This already quite widespread and companies in many sectors are expecting this to grow. In various forms it has been evident in the following sectors:

- coal (sulphur content);

- chemicals (potential hazards);

- fruit (chemical residues);

- packaging (recycled content and weight);

- pulp and paper (chlorine bleaching);

- steel (overall environmental policy); and

- timber (wood sources).

In some cases, international customers’ interests reflect domestic regulations—for example, packaging—or the requirements of a management standard. In other cases, however, queries reflect the environmental policies of the consumers themselves.

Standards, accreditation and environmental labels

These are also growing as a form of pressure on exporters. The majority of companies interviewed in this study were aware of the development of management standards such as the ISO 14001 standard and most expect to apply for accreditation. A number of companies had been involved in the discussions about the development of the standard. Companies in the following sectors are considering applying for the standard:

- aluminium;

- coal;

- chemicals;

- minerals processing;

- packaging;

- pulp and paper;

- steel;

- soaps and detergents; and

- timber.

Fewer companies were aware of eco-labels—as opposed to management standards—although it is clear that there is increasing discussion of these in the international debate. At present they are concentrated in sectors such as pulp and paper, textiles, footwear and timber, but they may well spread to other sectors (UNCTAD 1995). In some sectors such as textiles and pulp, eco-labels have the potential to affect upstream suppliers such as cotton or timber farmers and cooperation is, therefore, needed across the pipeline.7

It is imperative that South African companies and industry organisations involve themselves in these discussions and remain informed. There may also be a role for government and government-supported organisations to provide the necessary information to companies.

Domestic regulations

The enforcement of domestic environmental regulations has affected companies in a number of sectors. In most cases exporters must provide documentation proving their adherence to these regulations. In the experience of the companies the regulations tend to relate to the following issues:

- potential hazards(chemicals and minerals processing);

- chemical residues (fruit); and

- packaging (range of sectors).

South African government departments have a key role to play in servicing exporters who are attempting to meet other countries’ regulations. Exporters frequently require documentation from government departments and it is important that they are able to provide these competently and timeously.

Multinational environmental agreements

The provisions of multinational environmental agreements have affected some sectors and have the potential to affect many others. So far, the chemical industry has been most affected—mostly by the provisions of the Basel Convention (trade in hazardous waste) and the Montreal Protocol (CFCs). The FCCC has the potential to affect a number of sectors including electricity generation, aluminium, chemicals, coal, minerals processing, paper and steel.

It is important that the government departments that negotiate South Africa’s participation in these conventions are in touch with the needs of companies and other interested parties such as trade unions. It is also important that, in addition to the role played by government departments such as Foreign Affairs and Environmental Affairs, the Department of Trade and Industry also participates in such discussions.

7For a full discussion of the developmental implications of eco-labels see UNCTAD 1995.

Campaigns against the use of particular products or substances

The pulp and paper industry is the clearest example of an international campaign targeting a particular product or process—in this case chlorine-bleached pulp. The chemical industry may face similar campaigns with the Greenpeace campaign against persistent chemicals including chlorine. This campaign has not mustered the strength of the pulp campaign but may do so in future. It is likely that publicly driven campaigns will continue to play a vital role in setting the international environmental agenda.

Multinational company policies

The soaps and detergents sector is an example of the power of multinational companies to spread their environmental policies worldwide. As we have seen, South African subsidiaries of companies in that sector have adopted the environmental policies of their mother companies in ways which may well ensure that they have better environmental policies than they would otherwise. Multinationals do, of course, impose limits on their subsidiaries and there is a substantial international literature on the restrictive developmental effects of multinationals. Restrictions include limits on potential exports since subsidiaries are restricted to limited geographical areas. This is an example, however, of a more positive outcome of multinationals’ global reach.

The impact of international environmental pressures

At the beginning of this chapter we noted that international environmental pressures may be a double-edged sword. On the one hand, they may constrain companies’ ability to export and may act as a form of protection for more developed economies; on the other hand, they may serve as a source of pressure for companies to raise their levels of environmental performance. Having presented the evidence from the study, what conclusions can we draw about these two possibilities?

The discussion of the sectors has revealed a number of trends regarding the environmental pressures on South African exporters. The experience of most sectors is that environmental pressures are building up in export markets but that there are no experiences of actual trade restrictions or barriers to foreign markets. There are a number of examples of sectors which have had to adapt to meet the environmental requirements of the market and this is especially the case in the pulp and paper, packaging, fruit and, to a lesser extent, chemical sectors. A number of sectors expect to make major adjustments in the near future, especially the steel and chemical sectors.

In some sectors, companies have found that they have a competitive advantage as a result of international environmental concerns. This is the case in the coal, timber and pulp industries. In all of these industries the advantage is based more on natural endowments than on a conscious environmental policy. Nevertheless, South Africa’s low-sulphur coal and plantation forests—which were established as a result of a lack of natural forests—give our exporters some advantages.

This evidence creates a clear impression that international environmental pressures are having a positive impact on the environmental performance of South African exporters. Although this pressure is difficult to quantify, all the companies interviewed listed international pressures as an important influence on their environmental performance. In many cases it was seen as the key influence. It is clear that in sectors like pulp and paper, chemicals and fruit, international pressures have had a decisive influence. As we have seen above, these pressures are sometimes based on international agreements or on foreign regulations, but often they are based on the demands of the market.

It is important to note, however, that international pressures are almost always combined with local pressures, whether these are in the form of regulations or community and other initiatives. At present local environmental pressures in South Africa are relatively weak although environmental lobby groups are certainly growing in strength. Environmental regulatory authorities are generally weak and under-resourced and this makes it difficult for the government to monitor individual plants’ compliance with environmental regulations. International pressures may, therefore, play an important complementary role in encouraging companies to raise their environmental performance.

We have seen, however, that international pressures largely relate to global issues such as ozone depletion, global warming, deforestation and chemical build-up in marine waterways. Local environmental issues such as waste management, particulate emissions and local water quality are generally not addressed by international measures.8 It should also be remembered that international measures are often subject to the ups and downs of the market and to changes in international sentiment. They should, therefore, not be seen in any way as a substitute for proper national environmental policies.

It is also worth remembering that international environmental movements are largely publicly driven. The pressure that has built up in international markets is mostly due to strong public and political support for environmental causes. The role played by non-governmental environmental groupings has been important. Continued pressure from these groupings will continue to help shape the international agenda.

Management and policy implications

The experience of exporters reflected in this study raises a number of important issues for environmental management and policy in South Africa. Some relate to the actions of specific firms or industrial sectors whereas others require action from government. Specific policy issues are discussed below.

Energy supply

Many of the exports discussed above are energy intensive. This is particularly true of the aluminium and minerals-processing sectors as well as certain types of steel and paper. Other sectors related to the energy debates are electricity generation, chemicals and coal. As noted above, low electricity prices are a major source of comparative advantage for South African exporters, but also makes them vulnerable to international trade measures. If significant action were to be taken against energy-intensive exports because of the envi-

8Eco-labels may be an exception. Current draft criteria on textile eco-labels, for example, give attention to local issues including factory conditions such as control of cotton dust.

ronmental impact of our electricity generation, exports from a number of sectors would be affected. Similarly, if energy prices were to rise considerably as a result of investments in environmental abatement technologies, the comparative advantage of a number of exports could be affected. Of course, the energy generation sector is not the only contributor to co2 and other greenhouse gas emissions. The chemical sector is also key and should be taken into consideration in the debate. But the management of the energy sector’s environmental impact is key to the trade and environment debate. It is possible that trade pressures could be applied to South Africa if we do not comply with environmental targets. South Africa is particularly vulnerable in this regard because of our very high proportion of coal-fired generation and because of the low cost of electricity. The market may apply direct pressures to our energy intensive exports by fostering an image of South Africa as a dirty energy producer. It is also possible that trade measures may be applied in the longer-term if South Africa is unable to fulfil its obligations under the FCCC. While the convention does not involve any trade measures at present, it is conceivable that these may be introduced in future.

However, there does not seem to be major concern about this among the companies interviewed. Eskom is keeping a close watch on the issue but so far has not committed itself to major initiatives regarding greenhouse gas emissions. Similarly, the minerals processing companies do not believe that strong action will be taken. Companies in a number of other industries, such as aluminium, did not seem aware of the issue and have certainly not identified it as a strategic issue.

It may be that the companies are well in touch with international trends and with their markets and that the energy greenhouse gas issue is unlikely to become a threat to our exports. Given the magnitude of the danger, however, perhaps more attention needs to be given to this issue. There is a clear need for coordination between Eskom, the energy intensive exporters and government on this issue. There is also a need to ensure that South Africa’s position is well-represented at international negotiations on trade and environment in general and at the FCCC in particular. It will be important to include a range of government departments in these discussions including Foreign Affairs, Mineral and Energy Affairs and Trade and Industry.

Investment

A second major issue arising from the interviews is the importance of investments in environmental abatement technologies. In a number of sectors—notably pulp and paper—very large environmental investments have already been made and managers interviewed in the electricity, chemicals, minerals processing, steel and paper industries pointed to the need for further environmental investments. In some cases these investments have economic benefits as well as environmental ones, but in others the investments would be purely environmental. In some industries—notably electricity, steel and chemicals—the required investments would be very large and the companies have not yet committed themselves to spending the necessary resources.

The problem is especially severe in old plants and in industries where the capital stock is generally old. The costs of reinvesting are already high and the need for environmental investments adds to the cost.

A failure to make the appropriate investments in clean technology may constrain the ability of companies to export in the long-term—to say nothing of the environmental consequences. A number of environmental managers interviewed for this study expressed frustration with senior management who they perceived as unwilling to make investments for purely environmental reasons. In certain sectors, however, such investments clearly are being made. In many cases major environmental investments are driven by the requirements of the international market rather than by local pressures or regulations. It seems, however, that such investments are made only when international pressures are very strong and quite unambiguous.

The steel industry is a case where large investments have to be made in a number of plants if environmental performance is to be raised to international levels. It seems that although environmental issues are not posing a danger to exports at present, they may well in the future. There is no guarantee, however, that the companies concerned will make the investments in good time. In the context of relatively old capital stock in much of the industry, companies may also have real difficulty in committing the required funds over the next few years. There may, therefore, be a role for government in helping to finance such investments where necessary. One possibility would be to make finance available through an institution such as the Industrial Development Corporation, or possibly through taking advantage of concessionary global finance for the environment. Government and private sector organisations also need to explore the possibility of getting finance through the Global Environmental Facility9 and other finance schemes specific to the environment.

Access to information

A third area arising from the interviews is the importance of information on environmental trends. Information on issues such as the FCCC and the potential development of eco-labels on particular products should be easily available to exporters. In this study we have seen a number of cases where companies seem unaware of initiatives that could affect their ability to export in the long-term. This includes textile companies which are unaware of the possible development of an eco-label on textiles and energy intensive companies which seemed unaware of the potential affects of global action against co2 emissions. There is a clear role for government here—as well as for private sector organisations such as the Industrial Environmental Forum—to provide information to companies. UNCTAD could also play a useful role in this regard. However, attempts to ensure proper access to information are only likely to succeed if there is proper coordination between various government departments and between government, the private sector and non-governmental organisations.

9The Global Environmental Facility funds abatement of global environmental externalities.

In addition to the three priorities outlined above, there are a number of other policy issues arising from this study, namely:

International management standards

One of the strongest trends to emerge in the interviews was the intention of a wide range of companies to apply for accreditation under the iso 14000 environmental series. The iso 9000 series of standards already have a strong following in South Africa and iso 14000 is likely to become well-established among South African producers. A standard like iso could play an important role in complementing regulatory work and in supporting national environmental and economic objectives.

ISO 14001 measures conformity to an environmental management system rather than the actual environmental performance of an organisation or its products.

The standard requires an organisation to identify its environmental policy and objectives and then build a system to ensure that it is able to meet those objectives. However, companies must meet certain minimum standards such as identifying and meeting its legal obligations, providing appropriate training for employees, maintaining proper environmental information systems and creating a procedure to deal with environmental emergencies.

Given this model, it is clear that the standard establishes a process for environmental management rather than measuring actual environmental performance. Accordingly, the ISO states:

It should be noted that this standard does not establish absolute requirements for environmental performance beyond commitment, in the policy, to compliance with applicable legislation and regulations, and to continual improvement. Thus, two organisations carrying out similar activities but having different environmental performance may both comply with its requirements... [AJdoption of this specification will not in itself guarantee optimal environmental outcomes (ISO 1995:5).

The ISO 14001 standard could be very useful, however, in ensuring that companies have environmental policies and action plans in place. The standard may also ensure that companies are more aware of and responsive to their legal obligations. This may help with the problem of enforcing regulations described above. This may provide more of an incentive to abide by environmental laws than the current system which relies on under-resourced government departments wielding very small sticks. While management standards cannot and should not substitute proper monitoring of the law, they may play a useful complementary role given our current regulatory weaknesses. Care should be taken, however, not to use market-based instruments such as ISO 14000 as an excuse to avoid beefing up our regulatory systems.

Institutions

There may be certain institutional arrangements within the private sector and between the private sector, government and other organisations that foster more successful approaches to international environmental pressures.

The first of these is a set of institutions within sectors which provide environmental information, services and research for companies in the sector as a whole. The citrus fruit sector is a good example of how a central organisation can assist individual producers by gathering information on environmental requirements in export markets and conducting research to assist producers in meeting these requirements. Similarly, companies in the steel sector have established an industry environmental committee to cooperate on developing an environmental strategy for the sector as a whole. There may be economies of scale which make it easier to gather information or conduct research jointly. In this way, positive elements of competition can be introduced into an otherwise competitive environment.

It may also be helpful to establish some joint structures between government and business on issues such as the FCCC. Joint committees may also be useful in looking at issues like investment in environmental abatement technologies or in establishing a set of environmental targets for a sector as a whole. Such structures may also facilitate improvements in the services offered by government departments by providing clear information to government on the kind of assistance required by exporters.

Small, medium and micro-sized exporters

The sample for this study did not include any small, medium or micro-sized companies and it is, therefore, impossible to comment in detail on the issues that may face such companies. However, it is clear from the experience of the large companies and from international literature (UNCTAD1995) that successful management of international environmental pressures requires skills, information, systems and resources. It is reasonable to assume that all of these are in shorter supply in small firms than they are in large ones. There may be a special role, therefore, for government or for sectoral organisations to assist small and medium-sized exporters to manage their environmental performance.10

Government-level negotiations

We have seen that the South African exporters interviewed for this study have not yet been subject to formal trade restrictions. South Africa has also not been involved in any environment-related trade dispute with other countries. However, given the potential that exists for environment-related trade disputes, it is likely that South Africa will be involved in such disputes in future. The international rules of the trade and environment game are currently being debated in World Trade Organisation committees, UNCTAD seminars and academic articles. It is imperative that South Africa is active in this debate and that government participates in negotiations over trade measures. This will require an acute understanding of the debates as well as a strong link with business and other interested parties such as trade unions.

10 For a full discussion of the environmental issues faring small, medium and micro-sized enterprises, see Coleman in this volume.

Conclusion

This study was based on a small but significant sample of exporters. The experience of the companies shows that while exporters are not facing environment-related trade restrictions, they are more and more affected by international environmental pressures. These pressures are largely market-based. Companies are increasingly having to show that their products are produced in an environmentally responsible way and that their use will not cause environmental damage in their final destination. Some companies are also affected by environmental regulations in other countries and by international environmental agreements.

In most sectors, companies have been able to meet the new environmental requirements and expect to continue to do so. In other sectors, however, compliance will be more difficult and will require very substantial investments. The study also demonstrates that many companies are raising their environmental performance in response to international pressures and that this is helping to raise environmental standards in South Africa. The road ahead, however, is long and will require significant adjustments from companies. Government will also have to play a strong role in negotiating the conditions under which environment-based trade measures may be applied. Much will be required in the way of investment, information and skills if the potential benefits of environmental pressures can be realised while the dangers of protectionism are avoided.

References

Allen, A., “They all say Eskom you’re a star”, The Star, 2 November 1995.

Beghin, J., Roland-Hoist, D., and van der Mensbrugghe, D., A survey of the trade and environment nexus: global dimensions, Organisation for Economic Cooperation and Development Development Centre, Paris, 1994.

Eskom, Eskom Environmental Report 1994, Eskom, Sandton, 1995.

Eskom, Eskom Environmental Report 1995, Eskom, Sandton, 1996.

General Agreement on Tariffs and Trade (GATT), Trade and the environment: papers presented at the GATT Symposium on Trade, Environment and Sustainable Development, GATT Secretariat, Geneva, 1994.

International Standards Organisation, Environmental management systems— specification with guidance for use, 1995.

Markandya, A., Reconciliation of environmental and trade policies: synthesis of country case studies, UNCTAD, Geneva, 1994.

McKenzie, C., and Foster, S., International trade and the environment: a South African perspective, Development Bank of Southern Africa, Midrand, 1995.

Tussie, D., and Vasquez, P, Towards a new green round: a survey of issues and questions for research, Facultad Latinoamericana de Ciencias Sociales, Buenos Aires, 1994.

United Nations Conference on Trade and Development, Trade, environment and development aspects of establishing and operating eco-labeling programs, Geneva, 1995.

United Nations Conference on Trade and Development, Environmental policies, trade and competitiveness: conceptual and empirical issues, Geneva, 1995a.

World Trade Organisation, Trade and the environment, various issues, 1995.

Zarsky, L., Borders and the biosphere: environment, development and global trade, Island Press, Washington, 1994.

chapter 4
GREEN TRADE RESTRICTIONS?
Some macroeconomic and environmental consequences

Bill Gibson and Dirk Ernst van Seventer

Introduction

Green or environmental-based trade restrictions are, in principle, imposed by importing countries to deprive an exporting country of any competitive advantage based on environmental destruction.1 In practice, green trade restrictions effectively amount to non-tariff barriers to trade which have the effect of limiting access to foreign markets by countries in which the gap between marginal private and marginal social costs has a significant bearing on international competitiveness. Some, but by no means all, green trade restrictions are GATT-compatible. In particular, those which seek to limit access based purely on process and production method externalities are inadmissible under GATT rules (Deloitte & Touche 1994: 23). While green trade restrictions have not yet had a significant impact on trade flows, they may be present in many forms such as eco-labelling, deposit refunds, environmental taxes and others.

Little is known about the precise relationship between growth, distribution and the environment, except that it is exceedingly complex and necessitates a structural analysis (Pezzey 1992, Karshenas 1993 and Taylor 1996). Few general analytical results are available, but it is seems clear that, firstly, macro and environmental impacts cannot be separately analysed since growth and environmental deterioration often go hand in hand and, secondly, if green trade restrictions retard export growth and, therefore, GDP per capita, environmental degradation may follow. Gibson (1996) distinguishes extensive from intensive environmental degradation. The former refers to damage associated with

1 All views expressed in this chapter are those of the authors and not the Development Bank of Southern Africa (DBSA). The authors are grateful to Craig Mackenzie and Andre Roux for their valuable criticism. Lance Taylor and Stephen Gelb collaborated on an earlier version of the model. Projections in this paper were originally made in July 1995.

distributively neutral output growth, while the latter comes about as a result of deterioration in the distribution of income which leads to environmental “mining”. Hence, green trade restrictions may inhibit extensive but advance intensive environmental decay.

This paper investigates numerically the relationship between green trade restrictions, macroeconomic performance and environmental quality in South Africa using a multisectoral, dynamic computable general equilibrium model with both real and financial sectors. Three simulations are considered which attempt to capture some of the complex interactions of growth and distribution with key environmental indicators. For each simulation, a quadratic extensive environmental loss function is evaluated that assigns given weights to the emissions of greenhouse gases and water contaminants. The first addresses the effects of responding to green trade restrictions by internalising the local and global externalities of the South African energy sector. A second examines the issue of restrictions on foreign imports of South African mining products, in particular coal. A final simulation assesses the effects of restrictions on non-primary or manufactured exports due to consumption externalities generated by the energy-intensive methods by which they are produced. It is seen that the first option is macroeconomically superior to simply bearing the brunt of the green trade restrictions assumed in their second and third simulations.

The paper is organised as follows: the first section summarises the approach with a discussion of the relevant features of the computable general equilibrium model, key parameter settings and the base run; the second section discusses the environmental block and provides some estimates of emission levels; the third section presents the simulation results both with respect to their macroeconomic and environmental impact; and the fourth section concludes.

The model and the base run

The model employed for the simulations is a nine-sector, two-class structuralist computable general equilibrium system with both real and financial sectors. See Gibson and Van Seventer (1996) for full details of the model specification. Its heritage is Keynesian in that an independent investment function is specified so that output adjusts to bring savings into balance with investment. The investment function depends upon an accelerator, the cost of capital and a “crowding in” term which captures the positive effect of public sector investment on private sector accumulation. For each period, aggregate demand determines the level of output. Across periods, however, supply-side factors are considered. Accumulated past investment determines the capital stock which, in turn, sets the level of capacity output according to productivity parameters. With capacity determined in the previous period, and output in the current period, the level of capacity utilisation is known.

Private consumption is determined by disposable income according to a linear expenditure system. Current government expenditure, including employment, rises with fixed growth rates over the 1994 levels while investment is a residual determined by an exogenous budget deficit to GDP ratio and an endogenous level of government savings. Exports are determined in two ways. As seen in Figure 1, primary exports, which include agriculture and mining, are determined as a residual once output,X, and domestic demand, Dd, are known. Supply is set at full capacity utilisation, u, defined as the ratio of output to capacity output, Xc. The world price, P*, converted at the endogenous exchange rate, e, is taken as an exogenous parameter.

FIGURE 1 Market structure and sectors in the computable general equilibrium model

The market structure for non-primary goods is shown in the second panel of Figure 1. Demand, D, is determined as the sum of consumption, C., investment, I, including private and public and government expenditure, G; plus net exports, E. The price in the non-primary markets is determined as a mark-up, t, on costs, B. Exports in the non-primary sector are tied to capacity growth in those sectors. There is some switching built into the model in that non-primary exports rise as a proportion of output with the real exchange rate.

Wages adjust to inflation incompletely with endogenous labour productivity that depends upon various measures of labour market tightness. Public sector wages match those of the private sector. The exchange and interest rates are managed by the South African Reserve Bank (SARB) and are described in the model with a reaction function based on capacity utilisation, inflation and the state of the reserves. Firms and households allocate their portfolios of wealth in proportion to relative rates of return on equity, bonds, capital flight and money. The government borrows from the central bank and foreigners and the rest of the debt is placed with the public investment commissioner and the domestic financial sector. The latter create loans to themselves sufficient to absorb the residual public sector debt. The money creation that results is, therefore, “indirect monetisation”.

The base run is our best guess for the trajectory of the South African economy over the next five years. The assumptions underpinning the base run are that restrictive monetary and fiscal policy will continue to dominate with the ratio of the public sector borrowing requirement to GDP falling from its current level of about 6% to 4,5% by 1999, the end of the forecast period. The nominal wage and SARB reaction functions will continue to behave as they have in the recent past, and private investment recovers to allow for a 3,3% rate of growth in 1995. Good rainfall is assumed to boost capacity growth in agriculture and capital inflows will prevent a severe depreciation of the rand.

TABLE 1 Macro-data for the base run

Source: model calculations

11990 = 100

Table 1 shows how the model behaves in the base run. The slight dip in GDP growth for 1997 is characteristic of the model in that it reflects the interaction of the multiplier and accelerator. A burst of investment causes capacity to rise and if growth in demand does not validate that capacity growth, investment will turn down again in the next period. Thus, the model will not predict smooth growth unless both capacity and demand grow at precisely the same rate. Since there is no mechanism to bring this about, the model typically produces some mild fluctuations in output.

Observe that GDP growth averages 3,3% over the period while inflation decreases to below 10%. The latter is the result of trade liberalisation and strict monetary policy which combine to slow the rate of depreciation of the rand. In the fifth column it can be seen that the real interest rate has increased significantly compared to the 1990-94 period, the result of the aggressive posture of the SARB as modelled in their reaction function. Note further that nevertheless the second-last column shows a slight increase in the real wage as a result of declining inflation. In this model, as in reality, restrictive monetary and fiscal policies are consistent with higher real wages for the employed and slower job growth for the unemployed. Consequently, the distribution of household income worsens during the forecast period, as confirmed by a rise in the Gini coefficient in the last column. Skilled labour benefits from the modest growth, but the latter is far from sufficient to compensate unskilled labour with higher employment.

The environmental block

In the simulations to follow, we track the output of a number of different environmental hazards. These are roughly grouped according to whether the externality is predominantly local or global. The electricity sector is a key contributor to South Africa’s industrial emissions (Booth 1994: 227). South Africa’s electrical power has been historically structured around coal-based stations burning low-quality bituminous coal. Given that electricity is an important input to many exports, particularly energy-intensive products, the global environmental externalities of the electricity sector may put a range of exports at risk from green trade restrictions. In order to evaluate the macroeconomic costs of green trade restrictions in an appropriate context it is necessary to examine the impact of reducing pollution generated by the electricity sector. The production externalities are clearly not limited to South African residents. The World Resources Institute places South Africa 17th on the list of its greenhouse index ranking (1991), contributing more than 1% of world greenhouse gas, while Eskom’s Annual Environmental Report 1995 claims that South Africa is the 12th largest producer of CO2. Its per capita ranking for CO2 is much lower, however, at 42nd. (World Resources Institute 1995: 201).

On the basis of a survey of 12 sectors of the South African economy, Bethlehem in this volume suggests that international environmental concerns are building up. While there is as yet no evidence of actual trade restrictions or barriers to foreign markets, the expectation is that international pressures are likely to become an important factor. Columbus and Alusaf, two primary processing operations, are installing state-of-the-art pollution control technology, anticipating that they will be forced to meet international standards (Finance Week, August, 17-23,1995: 6). Other, more local producers are following the lead (Deloitte & Touche 1994).

To quantify the interaction of macro and environmental variables, the database of the model is expanded to include emissions coefficients which are available for the year

TABLE 2 Estimated total emissions for all production activities as well as unit abatement costs in the electricity sector

Source: DBSA unpublished data and DBSA model calculations

1992. Table 2 shows harmful emissions identified in the model2 with their respective total emissions3 and unit abatement costs in the electricity sector4 for 1992.

Suspended solids can be found in the waste product that remains after the screening and maceration of the sewage of domestic and industrial sources. As part of sewage sludge it would, in principle, be possible to undertake recycling were it not for the high concentration of harmful substances, such as heavy metals. Nevertheless, sewage sludge is increasingly being dumped. Suspended solids contained in sewage sludge that is used as fertiliser end up polluting vast tracks of agricultural land, gardens and parks (Booth

2Emissions not reported are hazardous waste, solid waste, nuclear waste and waste produced by households. Environmental emissions data is drawn from an unpublished DBSA database. This database is new and will need to be refined over time. Data parameters have, however, been confirmed by follow-up interviews.

3Total emissions are calculated by multiplying sectoral emission coefficients (per unit of gross value of production) from DBSA unpublished data with 1992 sectoral gross value of production from the DBSA model.

4 No published information was available for CO2 abatement costs in South Africa. Abatement costs for CO2 in China (World Bank 1994) appears to be around R200 per tonne. For our purposes it was decided to take the average of the abatement costs of CO2 in China and as reported in the DBSA unpublished data.

1994: 233). Suspended solids can be removed by means of sedimentation, flocculation and rapid sand filtration.

Reducing the emission of suspended solids would reduce the quantity of contaminated sludge that must be absorbed into the environment thereby benefiting South Africans. Suspended solids are, therefore, exclusively local process and production method externalities and, under current standards and practice, should not induce green trade restrictions. But since the energy sector is responsible for a significant amount of sludge contamination, suspended solids are included in our list of negative local externalities.

Total dissolved salts contamination is the result of return flows polluted by industrialisation, urbanisation, irrigation and use of artificial pesticides and fertilisers in agriculture (Booth 1994: 239). The problem is worst in the arid and semi-arid regions of South Africa with its Karoo shales that are particularly vulnerable to groundwater seepage. A total dissolved salts concentration of more than 1000 mg per litre is regarded as a health risk (President’s Council 1991:41). However, lesser concentrations could still be detrimental to health if large doses of minerals such as sodium, chloride or magnesium are present. Crop yields may also decline as a result of high salinity (Booth 1994: 244). Apart from the unpleasant taste, high concentrations of sulphates can lead to gastro-intestinal and other long-term complications. Desalination using membrane technologies can be used to reduce total dissolved salts, but the costs are high.

Oxygen-demanding products and industrial and municipal wastewater (including township wastewater) also constitute a serious environmental problem. Aquatic life is severely restricted by organic waste which contains oxygen-demanding products since the growth of decomposer populations is accelerated. Emissions of oxygen-demanding products must be controlled with biofilters, trickle filters, oxygen dosing and maturation, that is, the biodegradation of waste that takes place naturally. Particulate matter—the result of solid fuel combustion and emission of industrial processes—is a highly visible type of air pollution and can lead to respiratory disease. Burning low-grade coal in township stoves also contributes to particulate contamination. This is, in part, the product of the lack of other energy options, but the use of coal stoves has also remained resistant to government efforts to promote the use of electricity for heating (Eberhard and van Horen 1995:166). The industrial areas on the Mpumalanga highveld, with its coal-fired electricity power stations, are main industrial contributors. Total dissolved salts, oxygen-demanding products and particulate matter are, clearly, local externalities.

There are a number of externalities which could trigger green trade restrictions due to their combined local and global character. Carbon monoxide is an example. Although co is poisonous its dispersal range is very limited and its major environmental significance is linked to the breakdown of hydroxyl, an atmospheric cleansing agent which is believed to contribute to the geographic spread of acid rain. Similarly, SO2 and NO2 contribute to acid rain. The Mpumalanga power stations are a main source of this type of pollution. Sulphur dioxide causes irritations of the respiratory passages and vulnerability to infections, and exacerbates asthma, emphysema and bronchitis. Acid rain reduces the biological productivity of waterways and dams as well as soil, affecting yields in timber and agriculture (Booth 1994: 230). Dry and wet scrubbers are used to trap acid-forming pollutants, such as SO2

The emissions most likely to trigger green trade restrictions are CO2 and CH4. These greenhouse gases lead to an increase in tropospheric temperatures which may result in global climate changes. There is a range of greenhouse gases, but it is widely accepted that CO2, especially from fossil fuels, and CH4 are major causes of concern. Not only industrialisation should be blamed; deforestation for household fuel has also played an important part in upsetting the global carbon balance. Methane emissions, caused by feedlots, rubbish dumps and coalmining activities, also contribute to creating a global thermal blanket.

Since it is extremely difficult to know how to weigh these various measures of environmental quality, we assume that each pollutant will be equally harmful. This option gives equal priority to the clean-up of local and global emissions. The obvious disadvantage of this strategy is that green trade restrictions are more likely to be imposed due to global rather than local environmental damage. From a domestic perspective, however, it would be somewhat unreasonable to select environmental policy strictly on the basis of its global impact. In what follows, we examine the local/global mix of environmental improvement in each simulation as a rough measure of the distribution of environmental benefits.

In the computable general equilibrium model, we use a quadratic extensive damage function which sums with equal weights all damage due to emissions. This function rises with output and decreases as firms clean up. Abatement costs for the electricity sector are shown in the last column of Table 2. These costs are assumed to be linear functions of output, simplifying the more likely underlying non-linear relationship. Table 3 provides some information on the pattern of emissions associated with the growth path of the base run. Significant environmental deterioration is clearly observable in the table, with all contaminants seen to rise in absolute value over the forecast period.

TABLE 3 Emissions by type for the base run (tonnes x 10-6)

Source: model calculations

Note, finally, that the information of Tables 2 allows us to measure the change in extensive damage only. No attempt is made to estimate the additional decay which would be provoked by deterioration in the distribution of income. Clearly, if a given policy package registers the same value of the extensive damage function, but implies a deterioration in the distribution of income, there will be some collateral intensive damage. If properly measured, intensive environmental decay in South Africa would unquestionably increase the emissions of oxygen-demanding products and particulate matter through, for example, increased informal settlements with inadequate sanitation and energy services. It is less clear that emissions of suspended solids would increase, although it is likely. These intensive contaminants are strictly local and would affect local air and water quality. It is difficult to conceive of intensive decay contributing to significant global environmental risks in South Africa, such as CO2 emissions, since it would most likely be the result of deforestation, which has largely already taken place. As noted, the principal cooking and heating fuel is coal rather than wood. There could conceivably be some small increase in the emissions of CH4 due to intensive deterioration, but it is difficult to know how important this effect would be.

Simulations

Green trade restrictions will affect the economy by restricting export markets for both traditional and non-traditional exports, and the result will be a contraction in output and employment. To pre-empt the green trade restrictions, South Africa could clean up its coal-fired energy sector, which is an important input into both classes of exports. In the first of the simulations to follow, we ask what the impact on the macroeconomy would be if emissions by the electricity sector were significantly reduced.4 Clean-up costs, both foreign and domestic, will be seen to have a contractionary effect on output, due in part to the tightening of credit by the SARB as a reaction to the cost-push inflation. The benefit, of course, is a cleaner environment and the assumption is that the effort is sufficient to avoid restrictions on South African exports.

In two subsequent simulations, we quantify the costs of the alternative strategy, which is to say, avoiding the clean-up and then suffering from green trade restrictions. The first assumes that the green trade restrictions will be aimed exclusively at primary exports. In the last simulation, the green trade restrictions are imposed on non-traditional exports. As noted above, environmental decay as measured by an extensive damage function, declines with the clean-up of the energy sector. Green trade restrictions also reduce the value of the extensive environmental damage function. To compare the macroeconomic effects, we set the value of the damage function in the second and third simulations equal

4 It should be noted, however, that the nature of the international requirements to reduce emissions is not known. We, therefore, model a hypothetical example based on a reduction of various emissions, including greenhouse gases. We acknowledge that some of the adjustments made in the model (such as a reduction in CO>2, are not easy to implement in the real world.

to its value in the first. We then backsolve for the level of green trade restrictions on traditional and non-traditional exports consistent with the level of environmental damage in the first simulation. In other words, given a target level of environmental quality, is it better to clean up or simply restrict traditional and non-traditional exports to meet the same target?

Cleaner electricity

The first experiment reduces all emissions per unit of output generated by the electricity sector by 35%, phased in an accelerated way over the five-year forecasting period. Given the abatement costs of Table 1, this will lead to higher energy costs and, with a fixed markup, higher prices. These higher costs are reflected in higher intermediate demand by the electricity sector for goods supplied by the manufacturing sector and imported goods due to higher maintenance of existing equipment. Similarly, new clean-up equipment purchases shift up investment demand by the electricity sector. It is further assumed that the composition of new investment goods reflects a higher proportion of imported versus locally supplied investment goods, as firms install state-of-the-art scrubbers, monitoring devices and other equipment not locally available.

Of course, if the mark-up rate in the energy sector remains constant, firm income increases with costs for the same level of output. Since the elasticity of demand for electricity is low, the mark-up was exogenously reduced by 7,5%, phased in over the period, to force this sector to internalise rather than pass through some of the costs of abatement. As a result, firm income in the electricity sector is more or less the same as in the base run. As a consequence, the price of electricity will still rise by more than 7% compared to the base run by the end of the period. Note that this conflicts with Eskom’s intention to lower the price of electricity to the municipal retailers (Eberhard and van Horen 1995). The macroeconomic impact of this experiment is evaluated in Table 4.

It can be seen in Table 4 that internalising environmental costs by the electricity sector is expected to have a slight contractionary impact on the South African economy. Gross domestic product is almost 2% lower compared to the base run at the end of the period. As just noted, rising costs are only partially passed on, and in the third column it can be seen that inflation is slightly higher than in the base run (0,1% on average). In spite of the slowdown in the economy, the reaction by the SARB is to tighten credit. Together with the drop in capacity utilisation, this will lead to lower investment.

In the fifth column it can be seen that public investment decreases slightly. As explained previously, government investment is assumed to be the residual of the public accounts. With constant growth rates assumed for government current expenditure and a contracting economy, the budget deficit will decline to respect the public sector borrowing requirement to income constraint. Consequently, less is available for government investment. In addition, tax revenues decline with the slowdown in economic activity, although this is to some degree counterbalanced by bracket creep due to the additional inflation.

The impact on the overall—that is, primary plus non-primary—export performance is approximately neutral. As a result of the export-clearing nature of the primary sectors

TABLE 4 Macro-data with cleaner electricity (ratios to base run)

Source: model computations

1 Absolute differences from the base run (in percentage points).

and a slight contractionary impact on the macroeconomy, exports of the primary sector will increase as seen in Figure 1 and confirmed by Table 4. With a contraction in economic activity, agriculture and mining can export more. Exports of the non-traditional sectors, on the other hand, are linked to capacity and will, therefore, drop with GDP which, from data not shown, slows more rapidly than in traditional sectors. One of the reasons is that heavy manufacturing is more electricity-intensive than mining when backward linkages of the input-output submatrix of the model database are taken into account. A policy to penalise electricity intensive production activities will have a more negative impact on non-traditional sectors than on traditional sectors. Finally, it can be seen that imports contract so that foreign savings decline while exports remain roughly constant.

The impact on employment in shown in Table 5. It can be seen that employment in the primary sector is better protected during the contraction due to the export clearing nature of these sectors. Non-primary sectors show more of a decline, also due to their energy intensity, as discussed above. Higher inflation leads to a drop in real wages. Both skill categories appear to suffer a similar decline.

Note that virtually all the environmental improvement can be classified as extensive rather than intensive, due to the very small change in the distribution of income. The last column of Table 5 suggests only a microscopic improvement in the overall distribution of household income. The reason is that the economic contraction causes income from profits to fall and its distribution favours high-income households. The decline in the extensive damage function is probably a fairly accurate measure of the decline in the rate of

TABLE 5 Employment and wages with cleaner electricity (ratios to base run)

Source: model computations

1Absolute differences from the base run.

environmental deterioration. The details of the change in the environmental measures are shown in the next two tables.

Table 6 reveals that the contraction brings about a significant decline in levels of liquid emissions. Significant reduction in gaseous emission is shown in Table 7. Both toxic as well as greenhouse gases are about 10% lower at the end of the period compared to the base run. The main contribution to the lower emissions are made by SOz, NO2 and CO2. Harmful particulates and CO report less substantial reductions, whereas the reduction in CH4 is negligible.

We conclude that while environmental clean-up will trade off with output and employment, the results of this computable general equilibrium study suggest that the cost is not excessively high. For average loss of about 1% of GDP, locally harmful emissions can be reduced by an average of 6% and greenhouse gasses by 4%, where the implied elasticities refer to extensive deterioration. Moreover, the composition of the improvement favours domestic versus global residents. The latter benefit, of course, but the close link between domestic costs and domestic benefit would unquestionably enhance the political feasibility of the policy.

TABLE 6 Liquid contaminants with cleaner electricity (ratios to base run)

Source: model calculations

Green trade restrictions on traditional exports

Mining is the sector most vulnerable to trade restrictions based on environmental destruction, at least on a process and production method basis. Coal is also a major export commodity for South Africa and might incur green trade restrictions on the basis of consumption externalities. Direct regulation of mining to meet an environmental goal will be costly to the economy in foregone output, employment and foreign exchange earnings. As noted above, to measure the effects of green trade restrictions on the macro-performance of the economy, we reduce the output of mining to the point that the value of the damage function is the same as in the first experiment. The impact on the export sector of the South African economy is shown in Table 8, measured in terms of deviations from the base run.

Primary exports fall substantially, dropping to only 90,3% of its base run value by 1999. Surprisingly, non-traditional exports are also lower. As will be seen in the next table, the decline is attributable to lower economic activity and, through the accelerator, lower capacity growth. Since non-traditional exports are linked to capacity output, slower growth translates into lower non-traditional exports. The combined result is that total exports are about 7,5% lower compared to the base run at the end of the period. In the last column it can be seen that after the second year imports decline more rapidly. As a result, foreign savings are lower compared to the base run at the end of the period.

TABLE 7 Gaseous emissions with cleaner electricity (ratios to base run)

Source: model calculations

A decline in output of the primary goods sector sufficient to improve the environment to the level of the first simulation would be clearly harmful to the economy. As seen in the Table 8, GDP falls to 92,4% of the base run versus 98,1% in the first simulation. On average GDP falls by 4% rather than 0,9% with the electricity clean-up. With lower output, inflation also falls since the cost push is absent here and labour market pressures are reduced. Note further the dramatic drop in the rate of investment. This is in part a response to the decline in the level of activity, acting through the accelerator. The fall in investment would be worse were it not for lower interest rates.

The decline in economic activity has a dramatic impact on public finance. Public investment, which adjusts to the given public sector borrowing requirement to GDP ratio, falls to only 30,6% of the base run. One reason is the loss in mining output which causes a precipitous decline in tax revenues along similar lines discussed by Makgetla (1995). Lower inflation also reduces the indirect tax take. Furthermore, with constant government expenditure in real terms—despite lower real wages for government employees—there is less left over for public sector investment. The drop in GDP aggravates the decline since the public sector borrowing requirement must maintain the constant ratio to GDP. Moreover, since government investment crowds in private investment in the model, the latter collapses.

TABLE 8 Green trade restrictions on traditional exports (ratios to base run)

Source: model computations

1 Absolute differences from the base run (in percentage points).

Table 9 shows that the blow to the mining sector causes economy-wide employment levels to suffer. Primary employment is hit worse than non-primary, but only marginally. Both skilled and unskilled labour share the pain of rising unemployment but, for those who keep their jobs, lower inflation results in a small increase in real wages. The real wages of skilled labour are more sensitive to excess capacity and, therefore, fall faster. The final column of the table shows a decline in the Gini coefficient which suggests that income is more equally distributed, albeit with a smaller pie. Thus, any intensive gains will add to the extensive improvement made here.

The general conclusion of Table 9 is that green trade restrictions on the primary sector must be avoided. To achieve a significant improvement in environmental quality by direct restrictions on mining exports would be very costly to South Africa. While the impact of green trade restrictions on primary exports would be far more contractionary than the electricity clean-up studied above, it remains to be seen whether some significant gains in local environmental quality would accompany the restrictions.6

Table 10 suggests that cutting back on mining production will not reduce total liquid contaminants production as much as in the electricity experiment. Although the production of total dissolved salts is lower, suspended solids and oxygen-demanding products are higher, affecting local water quality. Thus, on the one hand, emissions of total dissolved

6As noted, the overall impact is the same as in the first simulation.

TABLE 9 Employment and wages with green trade restrictions on traditional exports (ratios to base run)

Source: model computations

1 Absolute differences form the base run.

salts are much higher in mining than in electricity; on the other hand, the emissions of suspended solids and oxygen-demanding products are higher for electricity.7

Table 11 shows that restricting mining output fails to improve toxic gas emissions as much as with the clean-up of the electricity sector. Greenhouse effects are about the same. The emission of particulates, NO2 and CO, are reduced to a larger degree compared to the first simulation. However, emissions of SO2 and CO2 are not reduced as much. On the other hand, primary sectors are major producers of CH4, as is seen in the table. Given equal weights in the damage function, this results in the same reduction of overall environmental damage, with the ratio of benefits slightly more in favour of global versus local residents. The more rapid improvement in the Gini coefficient suggests that extensive and intensive environmental decay do not trade off in South Africa, but rather work in the same direction. Some minor improvement could then be expected in intensive deterioration.

These caveats aside, we conclude that green trade restrictions show no significant special advantages over the cleaner energy option with respect to the environment. While overall contamination remains constant by assumption, the benefit from the change in composition hardly seems worth the increased sacrifice required to achieve green trade.

7 This suggests that first-round or direct effects are dominating the final outcome with indirect emission effects playing a secondary role.

TABLE 10 Liquid contaminants with green trade restrictions on traditional exports (ratios to base run)

Source: model calculations

Green trade restrictions on non-traditional exports

As a non-tariff barrier, green trade restrictions might well target manufactured goods rather than raw materials. Primary exports could escape restrictions, while the more competitive goods are excluded. The previous section clearly shows that if green trade restrictions are imposed on primary goods, the effect on the economy would be contractionary. In this section we measure the impact of green trade restrictions on manufactured or non-traditional exports.

An average reduction of 12% of non-traditional exports is necessary to achieve the target value of the environmental damage function, as seen in Table 12. Note that the effect on GDP is slightly less contractionary than for traditional exports. This is due to the small rise in primary exports observed in the second column of the table. With the general contraction of the economy, intermediate demand for primary goods falls. Since the primary sectors always operate at full capacity, the backward linkage from the non-primary to the primary sector leaves a higher fraction of output available for primary exports. In the previous simulation, the restriction on primary output was not offset by a higher level of output in the non-primary sector since the loss of purchasing power in the former reduced demand for the latter. Green trade restrictions on the primary sector spilled over to the non-primary sector. Here the effect of the green trade restrictions is entirely borne by non-traditional exports, and this is the reason why the impact is not as contractionary. The

TABLE 11 Gaseous emissions with green trade restrictions on traditional exports (ratios to base run)

Source: model calculations

structural character of the economy, with strong forward linkage running from the primary to the non-primary sector, but no linkage in the opposite direction, is principally responsible for this result.

The data of Table 12 indicate that the macroeconomy responds in much the same way as seen in the prior simulation. Inflation slows, but not by as much and the same for interest rates. The accelerator insures that investment will not fall by as much in the less contractionary environment. The public sector accounts behave in the same way as above. Public investment contracts with loss of tax revenue, but the effect is not quite as severe.

Table 13 shows that the strength of the forward linkages in that employment falls in the non-primary sectors by about the same amount as with green trade restrictions on traditional exports. The primary sectors, agriculture and mining, are less affected as they mainly have a powerful, unidirectional impact on the rest of the economy.8 As in the previous experiment, real wages rise. Again, unskilled workers benefit the most since their wages are more responsive to inflation and less to labour market conditions than skilled workers’. The last column of Table 13 shows that the income distribution has improved somewhat relative to the two previous simulations, further reducing the rate of intensive

8 For additional computable general equilibrium evidence of the power of the mining sector on the South African economy, see Gibson and van Seventer (1996a).

TABLE 12 Green trade restrictions on non-traditional exports (ratios to base run)

Source: model computations

1 Absolute differences from the base run (in percentage points).

decay. This result is consistent with the rise in real wages for unskilled labour, which is not accompanied by a steep drop in unskilled employment.

Again we ask if the composition of environmental damage is significantly altered by the green trade restrictions on non-traditional versus traditional exports. Non-traditional sectors clearly produce more liquid contaminants than their traditional counterparts. As can be seen in Table 14, the production of suspended solids and total dissolved salts is higher than in scenario 2, although it is counterbalanced by slightly lower oxygen-demanding products.

Compared to mining, non-traditional sectors produce on average more toxic gaseous emission when their exports are reduced. The reduction in greenhouse gases, on the other hand, is slightly lower but the CO2 level is exactly the same. Methane production is higher compared to the mining simulation. Both mining and agriculture are significant CH4producers, and when output is reduced, levels fall more dramatically.

Non-traditional exports are dirtier locally and cleaner globally than traditional exports and it is, therefore, clearly in the interests of South Africans that they should be cleaned up. Green trade restrictions on non-traditional exports will have less of an impact on the macroeconomy and will still reduce globally damaging emissions. Since they will inhibit competition in manufactured goods but not threaten the flow of raw materials, green trade restrictions are much more likely to be imposed on non-traditional exports (McKenzie and Foster 1995: 2). While green trade restrictions on non-traditional exports would clearly be less damaging than on traditional exports, the cost to South Africa is still high compared to the costs of cleaning up the energy sector.

TABLE 13 Employment and wages with green trade restrictions on non-traditional exports (ratios to base run)

Source: model computations

1 Absolute differences from the base run.

Conclusions

This paper shows that the interaction of the macroeconomy and the environment is a complex and subtle process that is only barely within the grasp of analysts. We call it complex because the macro-environmental interface is wide-ranging, highly diverse and uncertain.

Aggregating a fraction of environmental effects in a damage function, as done here, is clearly limited in its ability to convey the nature of environmental problems confronting South Africa. While the weights of the damage function appear to be in need of adjustment, few guidelines are available; it is not even clear how to weight local versus global environmental threats. We call it subtle because conventional analytical approaches seem inadequate to the task of properly evaluating the trade-offs involved. The relevant model must blend short and long-run considerations appropriately. An exclusively short-run framework will over-emphasise the macroeconomic costs of environmental preservation, while the traditional neo-classical analysis of the long-run places undue emphasis on individual utility maximisation, usually in a sterile informational and institutional setting (Heal 1984). The model of this paper tries to strike a balance between the short-run, in which the environment is “held constant”, and a long-run in which environmental destruction is fully anticipated and properly discounted.

TABLE 14 Liquid contaminants with green trade restrictions on non-traditional exports (ratios to base run)

Source: model calculations

Nonetheless, there are some serious shortcomings that must be acknowledged. Firstly, there is little feedback from environmental variables to macro-variables in the base run. Pollution matters, but the model never “sees” the effects on productivity, health, biodiversity or anything else. In this way it may be argued that the model is biased towards the short-run. Secondly, the model avoids the highly unrealistic assumption that all resources are fully utilised and, therefore, environmental protection bears a heavy opportunity cost. There is excess capacity and unemployment so that the principal constraints come from the institutional environment in which the economy functions. The paper shows that it is impossible to evaluate the effects of green trade restrictions on the economy independently of assumptions about the macroeconomic environment. Given the complexity of the institutional and associated policy-making framework currently governing South Africa, it should not be surprising that the opportunity cost of environmental protection is less than in the conventional neo-classical analysis.

These caveats aside, the message of the simulations in this paper is that the threat of green trade restrictions on the macroeconomy cannot be taken lightly. If green trade restrictions are imposed either on mining or non-traditional exports, the consequences for macroeconomic performance will be significant. It makes some, but not much, difference if the green trade restrictions are levied against raw materials versus manufactured goods. The message of this paper is that the cost of green trade restrictions to South Africa will be very high when compared to the costs of clean up. The simulations show that the differences

TABLE 15 Gaseous emissions for green trade restrictions on non-traditional exports (ratios to base run)

Source: model calculations

in the production of greenhouse gases and, thus global warming, will be almost negligible, nor is there much to be gained in changing the composition of local versus global externalities.

While the macroeconomic effects of green trade restrictions are striking, it should be noted that only extensive environmental decay is measured here. Moreover, intensive degradation in South Africa is unquestionably local in its impact. Thus, to the extent that policies raise the Gini coefficient, the burden of environmental decay is not measured properly by the damage function. Typically, a deterioration in the distribution of income forces the poor and unemployed to increase the rate at which the environment is exploited. A contraction in output substitutes intensive for extensive environmental assault, and the environmental protection inherent in lower levels of economic activity is undermined. In the simulations above, changes in real wages overpowered the effects of unemployment and the distribution of income improved. It is unlikely, however, that this effect would persist if output were further reduced. Eventually, green trade restrictions would reduce employment to the point that intensive degradation, most likely of soil and water supplies, would increase dramatically. This observation further strengthens the general conclusion that South Africa must do everything within its power to minimise the risk of green trade restrictions being implemented, including cleaning up, before they become a real threat.

References

Booth, A., “State of the environment in southern Africa”, report by the Southern African Research and Documentation Centre, Zimbabwe, 1994.

Deloitte & Touche Consortium, “Environmental constraint scenarios for world trade”, Research Report 7, Project: The Use of Environmental Resource Economics in Environmental Impact Management, Department of Environmental Affairs and Tourism, Pretoria, 1994.

Eberhard, A. and van Horen, C., Poverty and power: energy and the South African state, Pluto Press, London, and UCT Press, Cape Town, 1995.

Gibson, B., and Van Seventer, D.E.N., “The DBSA macromodel”, DBSA Occasional Paper No. 120, Halfway House, Development Bank of Southern Africa, 1996.

Gibson B., and Van Seventer, D.E.N., “Trade, growth and distribution in the South African economy”, Development Southern Africa, Vol. 13 No. 4,1996.

Gibson, B., “The environmental consequences of stagnation in Nicaragua”, World Development, Vol. 24 No. 2,1996.

Heal, G.M., “Interaction between economy and climate: a framework for policy design under uncertainty”, in Smith, V K. and White, A.D. (eds), Advances in applied microeconomics, Greenwich, J.A.I. Press, 1984, pp. 151-158.

Karshenas, M., “Environment, employment and technology: towards a new definition of sustainable development”, Department of Economics, School of Oriental and African Studies, London, 1992.

McKenzie, C. and Foster, S., “International trade and the environment”, research report compiled for the Development Bank of Southern Africa, Halfway House, 1995.

Pezzey, J., “Sustainable development concepts: an economic analysis”, Mimeo (Washington, D.C.: World Bank, 1992.

President’s Council, “Report of three committees of the President’s Council on a national environmental management system”, Government Printers, Cape Town, 1991.

Seidman Makgetla, N., “Reconciling fiscal discipline with a Utopian vision”, Business Day, 28 April 1995.

Taylor, L., “Sustainable development: an Introduction”, World Development, Vol. 24, No. 2., 1996.

World Bank, “China: issues and options in greenhouse gas emissions control”, summary report prepared by a joint study team from the National Environmental Protection Agency of China, the State Planning Commission of China, the United Nations Development Programme and the World Bank, 1994.

World Resources Institute, World Resources: A Guide to the Global Economy, New York, Oxford University Press, 1995.

chapter 5
REGISTERING POLLUTION
The prospects for a pollution information system

Michael Goldblatt

Introduction

All economic activity is derived from a set of environmental resources and services.1 Simultaneously, however, the current functioning of economic systems depletes and degrades these resources and services in a variety of ways. Modern industrial economies are pulling the environmental rug from under their own feet. The degradation of environmental support systems occurs by two routes: a depletion of resources necessary for the continued viability of the biosphere (such as water resources) and pollution of the biosphere such that its functioning and its continued ability to assimilate waste materials from economic processes (such as ozone-layer destruction) are impaired.

The primary unsustainable activity of economies was previously thought to be the depletion of non-renewable natural resources—the running down of stocks of minerals and metals to construct, and fuels to power, the economy. However, it has become clear that pollution caused in the extraction and use of these resources is going to constrain their current methods of use well before they are in danger of depletion (Jacobs 1992). Waste products from industrial societies are entering the environment at a rate far greater than the rate of natural absorption and breakdown of these substances. Furthermore, much of the waste from industrial processes is in the form of substances which are either toxic or extremely resistant to natural degradation.

The environmental effects of pollution are myriad and occur at all levels—from the key global problems of ozone depletion and global warming, to local and regional problems of acid precipitation from sulphur and nitrogen oxide emissions. Pollution also directly endangers human health. According to Jacobs (1992), a study by the United States Environmental Protection Agency of toxic air emissions in the USA has directly linked

1I would like to thank Iain McGlinchy of the Ministry of the Environment, New Zealand, and Achim Halpap, of the United Nations Institute for Training and Research, for their help in providing me with access to information on pollution release registers from around the world.

2 000 cancer deaths each year to a mere third of these emissions. The World Commission on Environment and Development concluded that “the sources and causes of pollution are far more diffuse, complex and interrelated—and the effects of pollution more widespread, cumulative and chronic—than hitherto believed” (1987: 211).

South Africa is not immune to these problems and, in fact, is less prepared than most industrialised countries to control industrial pollution. This chapter evaluates South Africa’s hazardous waste production and management situation. It considers the need for an integrated pollution control system in South Africa and the central role that reliable information will play in the effective operation of such a system. In particular the paper evaluates the use of pollution release inventories, how they have been used in other countries, how an inventory would relate to current pollution control processes and what the needs of a process of implementation are.

Pollution control: A new industrial sector

Internationally, governments and industries have rapidly responded to the growing problems of pollution control through legislation, new technology, changed industrial processes and large expenditures on pollution control equipment. The control of pollution to air, water and land media constitutes the largest area of environment protective expenditure in developed countries. During the last decade public and private expenditure on pollution abatement in Organisation for Economic Cooperation and Development (OECD) countries ranged from 1-2% of GDP, with expectations of steep rises. By the year 2000 the USA expects to raise its pollution abatement expenditure from $115 billion to $171 billion in real terms, equivalent to about 2,8% of GDP (Doeleman 1992).

Certain industrial sectors have expenditures far higher than the national averages for pollution control. It is estimated that between 10-20% of Western Europe’s chemical industry capital expenditure in 1989 was channelled towards environmental spending. This was of a total of about $25 billion and was expected to rise to about 25% of total capital expenditure in the 1990s. Most of this was from waste elimination (International Labour Organisation 1994).

There are no comparative figures for South Africa, but in all likelihood expenditure in South Africa makes up a lesser, but growing, percentage of GDP than in the OECD nations. As the World Commission on Environment and Development report pointed out, “pollution control of industry has become a thriving branch of industry in its own right in several industrialised countries. …looking to the future, a growing market for pollution control systems, equipment and services is expected in practically all industrialised countries, including newly industrialised countries” (World Commission on Environment and Development 1987).

It is evident that pollution control is internationally becoming a significant industrial sector and is absorbing a significant percentage of industrial investment and expenditure. Pollution control is a growth area driven largely by legislation, public pressure and corporate risk aversion. However, for a sector so dependent on public policy there is surprisingly little information publicly available in South Africa. The size, geographical extent, projected growth and other essential data for this aspect of industry are little known.

As Rogerson points out, “environmental scientists in South Africa largely have eschewed research which identifies clearly the geographical sources of pollutants or hazardous industrial waste” (Rogerson 1990). There is scant data on the actual levels of industrial releases of pollutants, of their composition, of projected releases or of acceptable levels of releases. Furthermore, of the existing data only a small part is held by the state or publicly available.

The waste legacy and its costs

The history of solid waste management in South Africa also provides some compelling reasons to review the management and control of pollution. South Africa has a legacy of poor management of solid waste in general and toxic substances in particular, and as yet no significant policy to either remedy past failings or to ensure that releases of hazardous chemicals to the environment are properly monitored, controlled and limited to acceptable levels. According to waste management company Waste-Tech, South Africa is “saddled with a waste management problem of historic proportions” (Waste-Tech, undated).

Even if improved management is instituted in the near future, there are significant costs that will probably have to be borne in order to remedy the poor practices of the past. There are between 1200 (Moon 1995) and 1 600 landfill sites in South Africa (Noble 1995). A survey of 541 of these sites (Department of Environmental Affairs and Tourism 1992) found that only 92, or 17%, were licensed. Furthermore, although most of these were not hazardous waste sites, nor designed as such, many of them had accepted some industrial waste at some stage. Conditions that could lead to contamination of water resources existed at over half of the landfills, and many accepted waste for which they were not designed. The same study found that almost no landfill sites have records of substances accepted which go back more than ten years. Even recent information is scanty, as only the sites run by the larger organisations keep waste-acceptance databases.

The economic, social and environmental implications of this are enormous. It is very difficult to ascertain the clean-up costs associated with the remediation of unsuitable sites contaminated with hazardous wastes. However, some ballpark figures can be provided to show the expenses generated by a inadequate waste management system.

The USA has the longest and most comprehensive experience of environmental cleanup. Following the passage of the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, the Environmental Protection Agency was tasked with the enormous job of cleaning up over 2 000 priority contaminated sites (Davis and Hyfantis 1993). The experience gained thus far in this process will prove very useful in providing data on the use of technical, legal and economic instruments in the remediation of toxic waste contamination in South Africa.

Davis and Hyfantis (1993) have estimated the average clean-up costs thus far under Superfund, and have also estimated the costs for less stringent remediation scenarios:

• scenario 1 is the actual documented cost estimates for the remedial programmes currently proposed ($32 million per site);

• scenario 2 involves merely fencing off sites and monitoring contaminated groundwater to ensure that contamination does not migrate ($2,1 million per site);

• scenario 3 adds certain technologies which further reduce toxin mobility such as capping, vertical barriers and surface water diversion ($6,6 million per site).

To determine South Africa’s clean-up costs the number of sites requiring remediation needs to be estimated. As indicated, lack of information means that any figure will be associated with a high degree of uncertainty. Nevertheless, going on the available information we can derive some ballpark figures. Using only the information from the sites actually covered by the Department of Environmental Affairs survey—a very conservative estimate—we can see that of the Class I (containment) and Class II (attenuation) sites surveyed, 105 admitted to having control problems. If we use the study’s assumption that over half of these were accepting hazardous industrial waste, then there are at least 52 sites with potential contamination problems. This is probably a highly conservative estimate, noting that only 16% of Class I sites even had leachate monitoring, and only 4,6% of Class II sites had monitoring.

Based on a rough figure of 52 sites requiring clean-up and based on the USA costings, possible costs for South Africa are:

• $1,664 billion (R6,074 billion) for scenario 1;

• $109 million (R398 million) for scenario 2, and;

• $343 million (Rl,252 billion) for scenario 3.

Even the smallest amount is a substantial cost for a new waste management system to deal with. In addition to this cost of remediation there are other significant backlogs of hazardous waste already within the system. These include asbestos-mining overburden, buried under soil, and other mining backlogs in the form of semi-purified concentrates containing zinc, copper, cadmium or cobalt. A variety of industries have privately managed on-site solid waste backlogs from evaporation or gravitation ponds (Department of Environmental Affairs and Tourism 1992).

Also significant are those hazardous materials still in circulation in the economy. About 228 000 tonnes of asbestos have been used since 1960 to manufacture numerous products—many of which are still in use. Thus, a large flow of asbestos-containing material will still be entering the hazardous waste stream for many years to come. A similar situation exists with respect to polychlorinated biphenyls (PCBs). Although PCBs are not used for new equipment anymore, it is estimated that about 2 000 tonnes of PCBS are still in use in existing equipment. Most users have been storing old contaminated equipment until there are adequate sites or technology able to deal with it. As with asbestos there is, therefore, an annual estimated waste stream of PCBs of about 300 tonnes despite them having been phased out of production. The cost implication of just this backlog is an estimated R350 — 400 million cost for the replacement of PCB-containing equipment (Department of Environmental Affairs and Tourism 1992).

These estimated costs may seem alarming but they are not unrealistically high. Other countries with far better histories of waste management than South Africa, albeit in the context of greater industrialisation, have arrived at similarly high figures in estimating their cleanup costs. Estimates include $10 billion for the Federal Republic of Germany, more than $1,5 billion for the Netherlands and at least $60 million for Denmark.2 Calculations in the UK have

2 These estimates are from an OECD secretariat paper, Paris, 1986, and are cited in World Commission on Environment and Development 1987.

suggested that $11 billion-$50 billion will be needed to clean up an estimated 50 000 to 100 000 polluted industrial sites (International Labour Organisation 1994).

What has become clear through the experience of Superfund in the USA and cleanup efforts in other countries, is that remediation is costly (Davis and Hyfantis 1993). It is undoubtedly preferable, and more cost-effective, to take a preventative approach to hazardous waste management. South Africa’s potential remediation costs, although probably still at a manageable level, will use up resources that could be far better used to generate economic development. The country cannot afford to continue to bear the costs of environmental neglect. At the same time, we have the opportunity to move onto an industrial development pathway which includes as one of its integral aims, along with job creation and economic growth, a preventative hazardous waste management strategy. This needs to be built on the basis of minimising or eliminating the production and release of toxic materials into the environment.

The need for integrated pollution control

Environmentally sustainable development depends on the protection of a country’s natural resource base and on ensuring that the assimilative capacity of the environment is not exceeded. An effective pollution reduction, control and monitoring system is, therefore, vital for the future sustainable development of the country. Increasingly world attention is focusing on regulatory frameworks in which the minimisation or prevention of toxic wastes is prioritised—rather than merely the management of their disposal (Hirschborn, Jackson and Baas 1993). Even more fundamentally it is increasingly accepted that in the long-term it is necessary to reduce and eventually remove the production and use of hazardous substances in industrial systems.

One of the ultimate goals of industrial pollution control should be to change our industrial systems to one which does not depend upon hazardous materials. The emerging approach to industrial environmental management is a preventive one which focuses not on the so-called ‘end-of-pipe’ control of pollution, but on the introduction of clean technology and on changes in the processes of production.

Given current production methods and consumer demands, however, in the short-term there is still a need for mechanisms of control over the volumes and types of substances entering the environment. As outlined in Agenda 21 (Chapter 19),3 which deals with the sound management of toxic chemicals, these mechanisms include (United Nations Institute for Training and Research 1995):

• adequate legislation;

• information gathering and dissemination;

• capacity for risk assessment;

• establishment of risk assessment policy;

• capacity for implementation and enforcement;

• capacity for rehabilitation and remediation;

3United Nations Conference for Environment and Development, 1992

• effective education programmes; and

• capacity to respond to emergencies.

To this list we could add the need for integration of control across environmental media.

South Africa does not have these basic hazardous substances control elements in place. In fact, according to the Department of Environment Affairs and Tourism (1992) South Africa “does not possess a coherent, effective system for regulating hazardous waste”—let alone a strategy to begin minimising hazardous waste production. In the light of this 1992 report and other indications of serious flaws in the South African pollution control system, a process to develop an integrated pollution control system has been launched. The ultimate aims of this are, firstly, “holistic pollution control which should be comprehensive enough to cover all activities that impact significantly on the water, air or land environmental media, over the full-time scale of the effects of these activities” and, secondly, “integration of pollution control, which should be so organised as to consider discharges and emissions to all environmental media in the context of the effect on the environment as a whole” (Department of Environmental Affairs and Tourism 1994).

Although serious problems have been raised with the process of establishing South Africa’s integrated pollution control system (Lukey 1995), there is general support for an integrated approach to pollution control. A key problem in South African environmental control, and one which is well-recognised, is the uncoordinated fragmentation of environmental legislation and regulation between government departments and between levels of government. This situation has been recently exacerbated by the Constitution’s delegation of environmental protection to the provincial governments. There are now nine new government structures, each with some responsibility for environmental protection but each with different structures, policy responses and capacities. The potential for coordinated responses are slim without an integrated system incorporating a central role for the national government.

Apart from the integrated pollution control process there are other policy initiatives and imperatives that are having an impact on pollution control. These include South Africa’s obligations under the Basel Convention, new guidelines from the Department of Water Affairs and Forestry on the management, handling and disposal of hazardous waste (Department of Water Affairs and Forestry 1994), the environmentally sound management of dangerous materials programme of the Department of Environmental Affairs and Tourism (1995), and a range of policy initiatives being considered by the new provincial environment departments. Although some progress is being made in developing more effective approaches to the control of hazardous and non-hazardous pollutants, little attention has been paid to the question of whether there is sufficient information of a sufficiently reliable quality on which to base informed policy decisions.

The role of information in pollution control

A major impediment to environmental management in South Africa is a shortage of accessible information. Sometimes access to information is restricted, sometimes it is difficult to locate and sometimes it is in a format hard to use—but more often than not it simply does not exist. The absence of reliable environmental information has been highlighted by many of the chapters of this volume and poses a serious obstacle to effective environmental management.

Any management system of the complexity of an integrated pollution control system must be based on one that is a reliable, consistent, easily retrievable and usable. Pollution cannot be effectively controlled unless its sources are known. Future planning and resource allocation cannot take place without knowing the extent of the problem; nor can goals be set or success measured without having a system which allows progress to be monitored from year to year. South Africa lacks such an information system.

The current information situation

Nobody knows how much hazardous waste is produced in South Africa annually. There is no central database on the quantities or types of hazardous pollutants released into the environment. No government department has been tasked with providing such an overview. Furthermore, the information which is available does not provide a breakdown of who releases hazardous wastes, where it is released and its final destination.

In the public sector the two authorities responsible for pollution control are the departments of Environmental Affairs and Tourism and Water Affairs and Forestry. The Department of Environmental Affairs and Tourism and its chief air pollution control officer, in particular, are the principal authorities charged with the management of air pollution (Petrie, Burns and Bray 1992). The Department of Water Affairs and Forestry has principal responsibility for the management of water pollution (Lusher and Ramsden 1992). Furthermore, the Department of Water Affairs and Forestry is responsible for the licensing of landfill sites and, hence, has a large role to play in the control of landfilled waste—including hazardous waste. These two authorities also are the main repositories of available information on hazardous pollutant releases. In both cases the information comes primarily from their permit procedures.

According to Noble (1995), due to the method of collection, this pollutant release information is neither complete, nor in a very useful format. The air pollution data is only for so-called ‘scheduled processes’ under the Atmospheric Pollution Prevention Act 45 of 1965 and, thus, covers only permitted establishments and those substances permitted. At present there are about 2 000 permits in operation, covering about 1 200 industrial sites (Petrie, Burns and Bray 1992). Similarly, only effluent from releasers subject to a permit, and only those substances or parameters listed in that permit, are recorded by the Department of Water Affairs and Forestry. Furthermore, the format of this data is inconsistent and is not suitable for year-to-year monitoring of nationwide pollution releases, nor for analysing pollution data geographically.

In general, therefore, there is little knowledge of types, quantities or locations of a wide range of hazardous substances released into the environment. This applies to the generators of the waste as much as it does to the regulators. The 1992 Department of Environmental Affairs and Tourism study (1992b) found that in the private sector “very few industries have waste management strategies or plan their waste management before starting up”. Further, neither government authorities, nor waste facility managers have “annual statistics or databases available. Only a few operators of waste facilities and transporters of waste have detailed knowledge of the waste they handle. …Further shortcomings revealed include a…lack of information reaching decision-makers, operators and others either responsible for hazardous waste management or affected by it”.

Availability of information

Information which is held by government authorities is also not readily available to the public or even to academic researchers. Under the Atmospheric Pollution Prevention Act there is a blanket secrecy provision (section 41) which provides that no information can be disclosed without the consent of the person carrying out the undertaking unless it is for the purposes of legal proceedings arising out of the Act. The Water Act 54 of 1956 has no direct statements of confidentiality but it is the general practice of the Department of Water Affairs and Forestry not to release permit details without the consent of the pollution discharger. There are currently no general rights of public access to information on pollutant releases.

A culture of secrecy has developed among South African industries, with many loathe to divulge environmental information—especially that information which may reflect badly upon the company. This is partly due to the legal protection they enjoy, partly due to mindsets developed during the apartheid era, especially in the parastatals, and partly due to inexperience with public interaction. The Department of Environmental Affairs and Tourism survey (1992) said that a “severe limitation on the interpretation and presentation of the findings was the requirement of major generators for confidentiality”.

The fears encountered during the survey