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In neo-classical economic theory, international trade is one of the bases for economic welfare. The underlying idea of comparative advantage originally devised by David Ricardo is that countries specialise in producing those goods in which they have a comparative advantage given their the relative national abundance of resources. Given fixed input coefficients (i.e. one production technology for each good), an environment abundant country will specialise in environment intensive product(s) and a labour abundant country will specialise in the production of the labour intensive product(s). In the situation with more than one production technology, environment abundant countries will still produce the environment intensive products and the labour abundant countries will still produce the labour intensive products, but all goods will be produced more environment intensive in the environment abundant country and all goods will be produced more labour abundant in the labour abundant country. In conclusion, the production technologies chosen will differ between countries as a reflection of local factor abundance. Any effort to impose uniform environmental standards on Member States is in conflict with the Heckscher-Ohlin theorem in that it would restrict Member States in exploiting relative differences in environmental scarcity. A logical extension of this conclusion is that the Heckscher-Ohlin theorem provides the neo-classical economic argument for decentralisation of environmental policy in the European Community.

The emergence of the European Economic Community has resulted in various programmes to harmonise national legislation as the Community has been evolving towards a common market. One of the reasons for the creation of the common market was to achieve a higher level of prosperity for its participants than could be achieved without a certain degree of integration of national markets. In the 1957 Treaty of Rome, prosperity was conceived in the narrow sense of higher standards of living or higher real income per capita, but over the years the concept has been broadened and from the 1972 Paris Summit on, prosperity was meant to include environmental quality. One of the problems to be solved within the Community was and is how the different objectives, such as a high and increasing income per capita and a high quality of the natural environment, can be achieved simultaneously. Neo-classical economics offers a (basically) simple answer to this question: countries should be allowed to determine their own national environmental standards and be allowed to concentrate on the production of those kinds of products which require inputs that are relatively abundant in that country according to the Heckscher-Ohlin theorem.

Glancing at the actual development of environmental policy in the European Community over the past three decades, one sees a picture that seems to be very much in contradiction with the advise of neo-classical economics. With the support of the Council, the European Commission has been developing a Community environmental policy from 1972 on. Principal instruments of this Community environmental policy have been directives that require harmonisation of environmental standards for similar industries in the various Member States. In its most strict sense of full harmonisation, this policy would imply uniform environmental standards. Industry would then use the environment with the same intensity independent of where producers are situated in the European Community. The consequence of a harmonised approach would be that in countries where environmental quality is scarce, pollution per unit of output would be as high or low as it is in countries where environmental quality is relatively abundant.

This dissertation has been inspired by this apparent discrepancy between the advice from economic theory and the practice of the Community environmental policy. A first question, which is the main issue of this book, is whether the observation of a discrepancy is correct or perhaps a faulty perception. A next question is whether an explanation can be given for the discrepancy in so far as it turns out to exist. These questions are analysed on the bases of a selection of directives aimed at or having a strong impact on polluting emissions by stationary point sources.



Given the basic questions stated above, some issues have to be addressed. The first issue is to determine what economic theory says exactly about the international harmonisation of environmental standards. We present a survey of the economic arguments for and against international co-ordination of environmental policy and harmonisation of emission standards. Mainstream neo-classical economics investigates how welfare is affected by the economic arrangements in society and uses a efficiency criterion. The Heckscher-Ohlin theorem on international trade states that relative differences in factor endowments create the opportunity for mutually beneficial international trade and increases welfare in the States participating in such free international trade. Environmental quality is one of the factor endowments that determines comparative advantage of countries with respect to the production of goods that are relatively intensive respectively extensive in the environmental endowment. Harmonisation of the environmental standards of Member States would decrease income of the Community because it effectively prevents specialisation within the common market on the basis of relative abundance of the environmental endowment and also because it ignores the fact that differences in preferences for environmental quality exist between Member States. Economic theory therefore generally considers international harmonisation of environmental standards as a distortion of competition, resulting in a reduced welfare. In some circumstances, there is a need for international co-ordination. These situations arise (a) when the pollution crosses borders so that external effects occur and (b) when a Member State can increase its welfare to the detriment of other Member States by setting environmental standards strategically. The need for international co-ordination does not imply that the environmental standards should be harmonised. In conclusion, neo-classical theory accepts that there may be a need for co-ordination of environmental policies of Member States. This co-ordination in turn often implies centralisation, i.e. the transfer of powers of Member States to Commission, Council and European Parliament. Using environmental standards as the policy instrument will be a second best approach compared to economic instruments. Harmonisation of emission standards for stationary sources in the form of uniform environmental standards everywhere within the Community or even mandatory reduction of differences in standards between Member States is basically not an efficient approach.

We have also identified an alternative train of thought on international trade that may be called the fair trade doctrine. It aims at equal or equitable competitive positions for competing firms. If all producers have identical competitive positions, the goal of a level playing field is reached. From the fair trade point of view, international harmonisation of environmental standards will prevent 'unfair trade'. Competitive positions can be equalised by reducing or even eliminating those elements or conditions that create cost differences. Among those conditions are the cost differences due to differences in national environmental regulations. This is seen as a cause of unfair competition. Notice that the result of this alternative doctrine is opposite to the results from neo-classical economic theory. In the neo-classical theory differences in prices that are reflections of differences in e.g. relative abundance of inputs or preferences are an incentive for international trade that increases total welfare. The fair trade doctrine applied rigorously would imply that international trade would cease to exist.



A second question concerns the legal base for the environmental secondary legislation that was chosen by the European Institutions. At all times, various legal bases have been available to the Community. In the period up to the Single European Act, these have basically been the harmonisation article 100EEC and the reserve article 235EEC, in the period following the Single European Act this have basically been the harmonisation article 100aEEC and the environmental articles 130r-tEEC. A strong commitment to harmonisation would have resulted in reliance on the harmonisation article, stress on environmental protection would have resulted in use of predominantly the reserve and (later) the environmental article.

During the period before the Single European Act, directives were generally based on the double legal base composed of the harmonisation article and the reserve article. During the second period following the SEA, directives were predominantly based on the environmental article, with a small minority of the directives being based on the harmonisation article. The situation is different if we look at the legal base of the proposals for these directives submitted by the European Commission to the Council. Here we can distinguish three periods. In the first period, proposals were based on a single legal base, in most cases the reserve article. In the second period, proposals were based on the double legal base of both the reserve article and the harmonisation article. There is an overlap between these periods during 1978-1982, but the noted trend from a single legal base to a double legal base is beyond doubt. In the third period starting at the time of the Single European Act, the proposals reverted to a single legal base, in most cases the environmental article.

We can thus observe a temporary difference between the legal bases from the directives and those of the proposals. The Commission initially apparently made a judgement with respect to the most suitable legal base for a proposal on a case-by-case basis. Its criterion was whether the main objective was to harmonise national environmental standards or to protect the natural environment. The Council opted for a double legal base, thus underlining the two-fold objective of the directive protection of the natural environment and furthering of the common market. Given the resolution of the Council to use a double legal base, the Commission later adopted the reasoning of the Council.

A third question concerns the reasons for harmonisation of environmental standards that are used. The Spaak report outlining the European Economic Community does not allow firm conclusions on whether it adheres to the neo-classical economic view, which focuses on efficiency, or the fair trade view, which stresses equity when it comes to assessing cost differences due to differences in national regulations. The same ambiguities turn up in interpreting the relevant articles in the Treaty of Rome and its successors: From the Treaty itself it can not be read whether and when harmonisation is appropriate and whether divergences in environmental regulation of Member States are a good ground for harmonisation. Analysing the action programmes on the environment, we have concluded that the programmes contain both references concerning the need to counter distortion of competition by way of harmonisation of environmental standards and to the need to allow differences in standards due to local and regional variation. The action programmes therefore also did not allow us to draw firm conclusion on the theories underlying the Community environmental policy.

Looking at the environmental directives from the period up to the Single European Act, a standard phrase from the preambles used with some variation was: 'Whereas any disparities between the provisions on () already applicable or in preparation in the various Member States may create unequal conditions of competition and thus directly affect the functioning of the common market. Whereas it is therefore necessary to approximate laws in this field, as provided for in article 100 of the Treaty.' The reasoning is very clear - cost differences between national environmental legislation of Member States should be avoided. Legislation was needed in order to harmonise national legislation to prevent unequal conditions of competition. This strand of reasoning reflects the fair trade view that differences in production costs due to differences in national legislation result in an uneven playing field for competing firms which is seen as a competitive distortion. In conclusion, we can see from the wording of the preambles and the directives from the period up to the SEA that the reasoning underlying harmonised Community environmental standards is the fair trade theory that aims at a level playing field.

In the years following the Single European Act, references to the need to harmonise environmental standards in order to prevent distortions of competition were becoming less and less abundant over time. The increased recourse to the environmental article after it had become available as a legal base was matched by a parallel development to invoke environmental protection as the sole principal reason for the legislative activities and to refrain from references to prevention of distortion of competition. From a neo-classical economic point of view one welcomes the disappearance of flawed economic reasoning as an argument for harmonisation of environmental standards. However, neo-classical economics does not see a good reason why co-ordinated environmental policies of Member States should take the form of harmonised standards.

In conclusion, we can see that the design of environmental policy with respect to stationary sources - as shown by the preambles and the legal bases - moved towards stronger application of the efficiency criterion as advocated by economic theory. The consequence is that even an economic assessment of the arguments for harmonisation given in the more recent directives has to be rather negative. The later environmental legislation emphasizes the importance of having at least a minimum uniform environmental quality throughout the Community, whereas economic theory sees no necessity for such a uniform minimum environmental quality as this depends on preferences among other things, which will differ between Member States.



A fourth question concerns the actual level of harmonisation of environmental standards in the European Community? In order to distinguish between several levels of harmonisation, we have created the following categories: 'full harmonisation', 'less than full harmonisation', 'minimum harmonisation' and 'less than minimum harmonisation'. Full harmonisation and minimum harmonisation apply to the situation where some uniform standard on producers is set on Community level. Full harmonisation is defined as the situation where the Community sets uniform environmental standards without the possibility for a Member State to set either stricter or less strict emission standards for its industry. In other words, similar technical installations throughout the Community face identical emission standards. Minimum harmonisation allows Member States to set national environmental standards that are more stringent than the environmental standard required by the Community. As we have seen harmonisation can also pertain to environmental quality.

In practice, the arche-typical categories of full harmonisation and minimum harmonisation are not very common. In most cases, the directives allow some deviation from these respective points of departure that allow a Member State to set less strict environmental standards on its industry. These options for derogation, explicitly mentioned in the directive, result in the categories 'less than full harmonisation' and 'less that minimum harmonisation'. We have concluded from the directives analysed that full harmonisation of environmental standards for stationary sources is extremely rare. Basically, the point of departure for all directives is minimum harmonisation. But even minimum harmonisation in its strictest form is practically non-existed. Generally there are exceptions that allow a less stringent standard. These exceptions include e.g. minimum standards that are differentiated to reflect specific local aspects, directives that require Member States themselves to indicate areas and regions that are covered by the directive or that require specific treatment, numerous directives that allow Member States to chose whether to apply environmental quality standards or emission standards (alternative harmonisation) and special clauses with respect to specific countries. The overall conclusion must be that the level of harmonisation defined as approximation of emission standards set in the directives has been very low. This conclusion applies to all periods, as there are no discernible differences between directives from several periods on the basis of the table above. For the later period, this conclusion is not remarkable given the fact that these directives were often based on the environmental articles and that there were few references to a need for harmonisation of standards in order to prevent distortion of competition. For the first period, this conclusion is more remarkable, given the fact that harmonisation was stressed and that many of the directives were based on the double legal base including the harmonisation article.



Given these conclusions we can address the basic question whether the level harmonisation in EU environmental legislation is in correspondence with the conclusions of neo-classical economic theory. The answer is that we conclude that our investigation has shown that the perception that the environmental policy in the European Community over the past three decades is very much in contradiction with the advise of neo-classical economics is not completely correct. In the initial years, especially before the Single European Act, most of the directives containing rules to restrict emissions from stationary sources were adopted on a double legal base. The use of the harmonisation article and the reasoning underlying it implies a fair trade or equity view on distortion of competition and is incompatible with the neo-classical efficiency view. Therefore, on the level of choice of legal base there certainly was a wide gap between European environmental policy with regard to stationary sources and the policy advise from welfare economics in the period running from 1972 till the adoption of the Single European Act in 1987. However, actual emission standards did leave scope for considerable differentiation by Member States. Therefore the discrepancy between emission standards actually set in the European Union and emission standards that would have been chosen in the absence of a common policy might be modest. A priori one would expect that it has helped to speed up the process of setting emission standards in the economically least developed Member States. For the environmentally most progressive Member States European harmonisation of emission harmonisation of emission standards never has been a restriction keeping them from setting more stringent emission standards.

From the Single European Act on, environmental articles were available that did not force Commission and Council to shape a more stringent environmental policy into the form of harmonised emission standards. As we have seen, the environmental articles have been the favourite legal base for directives geared to emissions of stationary sources during the past fifteen years. Consequently the discrepancy between legal base and the policy advice from neo-classical economics has disappeared and the conflict between the fair trade view that was expressed in the preambles and the efficiency view of neo-classical economic theory has been terminated. Yet the form of environmental policy remained harmonisation, thereby maintaining the potential conflict between policy advise from economic theory and actual environmental policy. As we have seen the approach in harmonisation continued to boil down to less than minimum harmonisation. Next to that the idea that (cost) conditions of competition have to be equalised was slackened further by focussing more on equal environmental quality standards, which imply differentiated emission standards. As a result the conflict between neo-classical economic ideas on co-ordination of national environmental standards and the actual practice of Community environmental legislation with respect to stationary sources has scaled down to a state of peaceful co-existence.