An Invisible Hand for Poland's Environment

By Daniel H. Cole, for the Wall Street Journal-Europe, Wednesday, September 27, 1995

When communism died in Poland, it left a legacy of economic decay and environmental ruin. Today, a half-decade into the transition to market democracy, Poland's economy has the highest growth rate in Europe, and environmental protection is vastly improved.

Between 1990 and 1993, air pollution in Poland fell by 40%. Some analysts discounted these improvements, claiming that they were merely transitory symptoms of the economic recession that accompanied Poland's jump to the market. They predicted a return to economic growth would quickly reverse the pollution trends.

They were wrong. Poland's economic recession ended in 1992, when the economy grew by 2% and industrial output rose by 4%. Air pollution that year fell 15% from 1991 levels. In 1993, economic growth doubled to 4% and industrial output was up 7%. But air pollution continued to decline by 9%. So recession could not have been the predominant cause of environmental improvements in Poland. Improved environmental policies, strengthened law enforcement and the systemic reforms themselves have played central, if underappreciated, roles.

Although more regulation isn't always the answer, compliance with sensible rules is a critical part of environmental protection. Under socialism, however, the Polish government had an unavoidable conflict of interest as both environmental regulator and owner of regulated enterprises. In most cases, the government as owner prevailed over the government as regulator. Consequently, environmental controls were hardly enforced at all.

But in the last five years, the Polish government's conflict of interest as environmental regulator and owner of regulated industries has been substantially reduced by privatization and market reforms. Private firms now contribute more than half of Poland's GNP; they produce 38% of industrial output and account for 60% of national employment. And most firms, whether private or state-owned, must operate in competitive markets, so they are naturally motivated to control costs, including costs arising from inefficient production and the pollution it produces.

Polish firms are finding that it is cheaper to reduce pollution emissions than pay environmental fees. In other words, environmental investments can increase net profits. Examples abound of Polish companies that have voluntarily undertaken process changes or installed pollution-control technologies in order to increase net profits by reducing their exposure to environmental charges. Even Poland's largest and dirtiest state-owned enterprises have become increasingly sensitive to environmental costs. Between 1989 and 1991, state-owned electric power plants cut pollution emissions per unit of electricity generated by an average of 20%. According to economists from the Wroclaw Academy of Economics, these reductions were due to higher marginal energy costs, pollution charges and the increased cost consciousness of power-plant managers.

Poland's environmental laws are also more stringently enforced today, thanks to a 1991 law that greatly expanded the power and independence of Poland's chief environmental law enforcement agency, the State Environmental Protection Inspectorate. In the 1980s the inspectorate was a small and weak agency. Its 400 poorly-paid, -trained and -equipped inspectors were responsible for investigating and monitoring compliance at some 43,000 polluting enterprises nationwide, but they had no power to actually enforce the laws and penalize violators. Today, under the 1991 law, inspectors can shut down polluters, order installation of pollution-control equipment and impose noncompliance fines. The agency now employs 3,000 environmental inspectors operating out of 50 offices throughout Poland.

The increased power and staffing of the State Environmental Protection Inspectorate has led directly to improved monitoring, compliance and enforcement. The agency has issued thousands of orders to install emissions-control equipment at polluting factories. It has completely shut down seven plants, closed parts of 25 plants and temporarily halted production at 22 others. These enforcement actions have been a major source of pollution reductions. And they have been facilitated by systemic reforms, most notably the institution of the rule of law in Poland.

The law in post-Communist Poland now has real authority, and can no longer be ignored by politicians, administrators and plant managers. This is clear from the fight that took place in 1992 over pollution-control equipment at Warsaw's new Okecie II airport. The airport was planned in the mid-1980s, when the Communists still held power. Even at that time, the law required installation of all environmental-protection equipment specified by environmental inspectors. But Warsaw city officials summarily waived the legal rules, and construction proceeded without any environmental controls. However, by the time the airport was ready to open in 1992, the system had changed. The law was no longer subordinate to politics, and the airport's noncompliance with environmental regulations was headline news all over Poland. The regional environmental-protection inspector from Warsaw threatened to close the airport. And though the main administrative court later ruled that the airport could remain open, it ultimately was forced to retrofit all of the originally required equipment. Simply put, the law was enforced.

Poland is backing up its improved environmental law enforcement programs with increased environmental investments. In 1991, for the first time ever, Poland reached a level of environmental spending commensurate with the OECD countries. This money is being used to fund badly needed public environmental improvements. In 1989, almost half of Poland's cities -- including its two largest, Warsaw and Lodz, with a combined population of 2.5 million -- were without operational sewagetreatment plants. All of their municipal wastes were dumped, completely untreated, into surface waters. Since then, more than 1,200 new sewage-treatment plants have been built all over Poland and hundreds more are currently under construction. In addition, the Polish government has funded several independent and innovative institutions for environmental protection, including the National Fund for Environmental Protection, the Eco-Fund and the Environmental Protection Bank.

While political-economic transformation has brought structural improvements for environmental protection, Poland's ecological problems are far from over. It is still home to some of Europe's most polluted places. Many Polish rivers and lakes are still so polluted that they cannot be used even for industrial purposes -- let alone for drinking water -- and Poland remains among Europe's largest waste generators both in absolute terms and per unit of economic production.

Meanwhile, this environmental degradation continues to take a toll on the Polish economy and the health and well-being of Polish citizens, especially the young. In the heavily polluted region of Upper Silesia, infant mortality in 1993 was twice the Polish national average and five times the average of the OECD countries.

But all this simply confirms what most observers understood quite well in 1989: Cleaning up the environmental mess created during more than 40 years of totalitarian socialism would not be quick, easy or cheap. In 1991, the Ministry of Environmental Protection predicted that complete reversal of Poland's ecological crisis would take 30 years and cost a quarter of a trillion dollars. Poland still has a long road ahead to environmental health and safety. But acknowledging this obvious fact should not blind us to the very real progress that already has been made."

Mr. Cole is associate professor of law at Indiana University in Indianapolis.