Improvement of environmental liability regime: introduction of methodology for valuation of environmental damage

March 30, 2012
Improvement of environmental liability regime: introduction of methodology for valuation of environmental damage

Project Title – Improvement of environmental liability regime: introduction of methodology for valuation of environmental damage

Armenia and Georgia, two South Caucasus countries, determined to establish a sovereign, democratic, social state governed by rule of law, have adopted a policy to shift toward market relations in the economy. In order to implement this policy, a process of economic reforms based on liberal values has been initiated. In the current social and economic situation, all countries have overcome a period of drastic collapse and for more than five-seven year almost two-digit economic growth rate is registered in the countries. It has become of utmost importance to ensure sound bases for long-term economic development, which becomes increasingly urgent in a situation when there is an issue of maintaining growth rates, on the one hand, and increasing its effectiveness, on the other. In this context, economic progress requires mainly qualitative improvements, which ultimately leads to the necessity to ensure qualitative economic development along with quantitative growth. Qualitative improvements are those factors that will ensure a general increase in the level of life quality by utilizing economic growth results for the improvement of the public life standards in the country.

The overall objective of the project is to improve environmental management system in the countries through enhancement of the environmental liability regimes.

The specific objectives of the project are:

1. To develop modern methodology for estimation of the monetary value of damage caused as a result of environmental pollution and exploitation of natural resources at the national level.

2. To design and implement pilots in selected sectors to illustrate how the elaborated methodology would work in practice and explore replication opportunity at country level.

Project Duration: 15 months

Donor: Government of Netherlands

 Concept Note


Notwithstanding the fact that two countries have  adopted the main principles of sustainable development (economic, social, environmental) and will pursue the following principle – “economic development and the environmental system are not ends but means to ensure normal conditions for and satisfactory level of the process of sustainable development of a person,” the economic development in Armenia and Georgia in the upcoming years will continue to be of a man-caused nature and in this regard the solution of existing environmental problems (issues) in the Republics will become more complicated and more expensive. Even for the maintenance of the current state of the natural environment in the countries the society, the state, local self-governance bodies and business entities will need to carry out additional environmental activities and make additional expenses.

Underestimation of the damage caused to natural resources and the environment in general results in a forged presentation of economic development and progress figures. Today, traditional macroeconomic indicators accepted in this field /gross domestic product, income per capita and others/ overlook environmental degradation, ignore the decrease in natural resources. Thus, exploitation of resources, i.e. loss of natural resources often is regarded as a net income. In this way a possibility to deteriorate natural resources and to pollute the environment emerges.

Underestimation of damage caused to the environment or failure to record such damage in expenses, in its turn, brings about distortions of major macroeconomic figures, such as, for example, gross domestic product (GDP) or net domestic product (NDP).

When the mechanism for compensation of environmental and economic damage (based on “The polluter pays” principle) does not work effectively, then this results in corresponding real losses for business entities or the population. According to estimations made by Western scientists, this kind of damage in developed countries comprises 3-5% of GDP. No such calculations or relevant assessments were carried out in South Caucasus states. The absence of above-mentioned studies does not allow assessing the real picture of the country’s economic development in terms of sustainable development, that is, real gains and losses in the economy become non-comparable.

On the other hand, in a situation when relevant studies were not conducted and (or) were absent, real scopes of the damage already caused and being caused as a result of the pollution of environment are not assessed. This is the reason why economic mechanisms aimed at the reduction of the scope of environmental damage (the system of environmental fees and fees for the use of natural resources) operate less effectively, because the tariffs do not correspond to/are not equivalent to the real scopes of damage already caused or being caused as a result of pollution of environment. Moreover, there is a clear tendency observed in the countries that pollution taxes did not provided any significant incentive for pollution abatement measures; rather, they mainly served to generate revenues for the Government budget.

The system remains underdeveloped in EECCA, where it is still based on the Soviet concept of “compensation for damages” and is seldom put into practice. The existing state-approved methodologies for environmental damage assessment are speculative, inaccurate, and often too complex to present to courts that are supposed to adjudicate on these issues.

In these conditions, it has become necessary to examine the actual scope of damage caused to the environment in the GDP structure and its influence on GDP, which, in its turn, will enable to calculate the real scope (volume) of damage caused by environmental pollution and exploitation of natural resources.


Country’s Situation



The development of Armenian economy in the coming years will continue to have a technological nature and as a result, solutions to environmental problems in the country will become more complicated and more costly. Even in the current conditions, the preservation of Armenia’s environment requires additional environmental measures and expenditures on the side of the public, the state, local governments and enterprises. Following traditional economic indicators might lead to negative consequences for Armenia in the near future.  Those indicators can be rapidly improved (and thus formally achieve economic stability and end the economic crisis) through accelerated logging in forests, relentless use of all mines, using cheap “unclean” technologies, etc., which, unfortunately, is currently taking place in the country to some extent. However, the extremely negative ecological consequences of this state of the affairs for many regions of the country are obvious.

In order to reduce harmful influence on the environment and to maintain efficient (sustainable) use of natural resources in Armenia (regulatory role), as well as to generate financial resources (increase cash flows) to make environmental investment and to fill the budget (fiscal role), the  Law on Environmental and Nature Use Charges and pertinent bylaws have been adopted and introduced a certain set of economic tools (environmental and nature use charges) in 1998-2000 (charges are paid for water use, mining of useful underground resources, use of biological resources, disposal of hazardous substances into the environment, placing industrial and municipal waste in the environment, and production and import of environmentally hazardous commodities).

Moreover, following the objective of “improving environmental economic tools” stated in the Poverty Reduction Strategy Paper, the following legislative acts were adopted in 2004-2005:

– A number of changes and amendments to the law “On environmental and nature use charges” have made the charge system more effective and efficient, in its both fiscal and regulatory (reduction of the volume of hazardous discharges into the environment) aspects.

– Adoption of the law “On tariffs for compensation of damages caused to fauna and flora as a result of environmental violations” (2005) and approval of assessment procedures for impact of economic activities on water and land resources and the atmosphere by the Government of Armenia allow environmental inspection bodies to ensure a more effective and efficient process of recording environmental damages and their compensation/transfer to state budget.

It should be stated that the state budget allocation for the environmental action programme is not significant, therefore all types of environmental charges, fees and compensations for environmental damage are accumulated in the state budget and disbursed in a highly centralized manner. The main shortcoming of the current system is that the charges collected for the purposes of funding environmental protection measures and programmes are only partially used for this purpose. For instance, according to some expert estimations, Armenia’s economic growth causes environmental damage commensurate with 8-10% of the country’s annual GDP. The current budget revenues from environmental charge collection do not exceed 0.25 -0.27% of GDP, i.e. are 20 to 40 times less than the damage caused.  According to latest analysis, more than half of major resources collected for environmental protection purposes is used to finance other priorities.

Currently for more targeted use of environmental charges the Law “On the Budget System” stipulates the sum total of budget earmarked for environmental programmes shall be no less than the sum total of environmental charges actually collected in the preceding budget year.

With regard to environmental liability it should be mentioned that although OECD study has been conducted in Armenia, and based on results of the study an assessment procedures for impact of economic activities on water and land resources and the atmosphere were elaborated and approved by the Government of Armenia that allow environmental inspection bodies to ensure a more effective and efficient process of recording environmental damages, the methodology for assessment of environmental damage is not yet precise and comprehensive.


Georgia is a lower middle income country that has as its legitimate major policy priority to achieve sustained economic growth and, related to this, to substantially reduce poverty. The Government’s strategy is largely based on establishing a liberal and largely deregulated market economy and introducing stringent measures designed to minimize corruption and rent-seeking. However, in this context the role of environmental policy was neglected, moreover the role of environment in dealing with the external effects of economic activity in the form of pollution has effectively been ignored.

Among the major policy measures introduced by the government was a Tax reform, enshrined in a new Tax Code entered into force in 2005. Its main objectives was the reduction of the tax burden and elimination of administrative barriers to doing business. After approval of Tax Code there has been a significant change in the mix of instruments for environmental protection. The new Tax Code abolished taxes on emissions of air and water pollutants alongside a tax on the use of natural resources dating from 2005, all of which had been introduced in the 1990s. Also were eliminated a road transit fee on foreign motor vehicles and a tax on fuel imports.

Among the legal reforms the new Law on Licenses and Permits being endorsed in 2005 introduced mandatory auction-based allocation of licenses for the use of natural resources. Few changes have been made to existing product taxes on motor fuels and vehicles, but there have been some improvements in the application of user charges for utility services. The auctioning of licenses has become an important source of revenue for the central Government. The level of fees rates for each of the natural resources is defined in the Law on Fees for the use natural Resources (2004) amended later by Law on Introduction of Changes and Amendments to the  Law on Fees for the Use of Natural Resources.

Another set of instrument is fines for environmental offences. As with pollution taxes, fines per ton of excess emissions have not been altered since 90th. Collection rates of fines for administrative violation were very low in the early 2000s  (around 5%), but have increased significantly since the Environmental Inspectorate was established in 2005. For instance fines imposed in 2008 were almost collected.

However, it should be mentioned that the current system of calculation of fines is regulated by the order of the Minister of Environment and Natural Resources and based on methodology that is not accurate, does not consider any externalities. It can be stated that the methodology for calculation was put in place by chance.

Goals and Objectives 

The overall objective of the project is to improve environmental management system in the countries through enhancement of the environmental liability regimes.

The specific objectives of the project are:

1. To develop modern methodology for estimation of the monetary value of damage caused as a result of environmental pollution and exploitation of natural resources at the national level.


2. To design and implement pilots in selected sectors to illustrate how the elaborated methodology would work in practice and explore replication opportunity at country level.



There are following major activities will be implemented:


Activity 1. Inception activities

During the inception phase the following preparatory activities will be accomplished:

– Formation of the Project team – TORs for major staff and experts will be developed and selection conducted in accordance to REC rules and procedures. In addition leading governmental entities will be requested to provide nominate project contact point for further collaboration and coordination of activities in each of the countries.

– Identification of stakeholders and formation of the project inter-agency National Steering Committee (NSC) – based on consultations at national level the project steering committees will be formulated in each beneficiary country at the beginning stage. It is very important to ensure involvement into the process since the beginning of all related stakeholders. Apart of leading agency, that will be Ministries of Environment in two countries, would be necessary to involve into the process Ministries of Finance, Economy, Justice and Tax authorities.

– Preparation and conduction of the inception workshops – Inception meeting in each country will be organized with participation of selected stakeholders from public sector and Civil Society Organisations from Armenia and Georgia. Goals and objectives of the project will be presented, general approach toward implementation and major outputs will be discussed, recommendation for detailed work plan will be elaborated. Based on result of national workshops, regional meetings will be organize to discuss project approach and methodology, come up with consolidated project work plan, to setup major milestones.


Activity 2. Identification of key sectors of the economy (economic activities) in each country mostly causing damage to the environment   (in the result of overexploitation or pollution).

Based on key sectors of economy that cause damage to environment are already indicated in national policies (NEAPs, EPR, Sustainable development strategy, etc.), as well as in the result of discussions to be held in the framework of a workshop organized with the participation of stakeholders, determine the key sectors of the economy in each country that are increasingly vulnerable toward overexploitation of natural resources and damage caused to the environment as a consequence of carrying out economic activities and their further development (expansion).


Activity 3. Support in revision and analysis of the system of economic instrument applied in all two countries of the region

Analysis of the existing system of economic instruments used in the countries will be conducted as well as liability regimes with regard to environmental damage will be reviewed. Institutional analysis will be updated, legislative requirements and existing gaps in the system will be revealed. It is important to consider experience of OECD EAP TF activities in the countries in the area of introduction of economic instruments and environmental liability.


Activity 4. Identification and Assessment of the best available practice in introduction of the system (methodology) of valuation of damage into environment.

The project needs to analyze and categories the different methods for valuing natural resources, mostly used in OECD countries and relevant EECCA countries, that can be used for the application of liability regimes. The advantages and disadvantages of using different methodologies in Caucasus countries should be well documented, recommendations as to the best method or combination of methods to be applied under national liability regimes will be elaborated.


Activity 5. Development of relevant methodology(ies) for monetary assessment of depreciation of natural resources and indicators for calculation of the damage.

A framework approach will be developed for different sectors for identification of methods for monetary assessment of depreciation of natural resources and calculation of the damage caused as a consequence of environmental pollution and exploitation of natural resources. It is important to identify clear links between environmental losses and country’s development trends while evaluating macroeconomic parameters. It is also very important to understand how to define “significant damage” to environment and a level of restoration, therefore criteria to define the scope of damage for the application of liability regime will be elaborated. Relevant recommendations will be developed and submitted to the government for approval.




In the framework of Project results, in the long run, the suggested Project activities will contribute to the achievement of the following major results:

  • Developed methodology(ies) for valuation of actual damage caused to the environment by economic activities and recommendations to the government provided
  • Benefits of using elaborated methodology demonstrated through pilot activities and best practices are disseminated

More generally, areas or spheres of the economy which are more vulnerable for environment in terms of damage and exploitation of natural resources will be identified, modern methodology for an assessment applied and valuation exercise in pilot sector conducted.


The following risks/obstacles have to be addressed in the process of Project implementation,:

Political factors:

Speculations regarding assessments elaborated as a result of the Project implementation beyond the framework of sustainable development principles;

Lack of political will for the acceptance of recommendations due to the fact the project objective may be seen as an attempt to somehow put in limitation into economic development.

Anticipated conflicts among the Project team, the group of stakeholders, enterprises and organizations operating in the sectors and areas of the economy that are increasingly vulnerable toward overexploitation of natural resources and damage caused to the environment, populations in the territories where these enterprises are located and local self-governance bodies.

Institutional and human factor:

Institutional restructuring of government bodies may lead to significant changes in priorities and lack of interest towards the project objectives.

Lack of knowledge, experience and skills to initiate new approaches among local specialists or experts; Lack of professionals and relevant staff at a corresponding level who would perform assessments of environmental issues taking into account links with economic, health care and social issues.


The Project’s Approach

Activities planned in the Project will be guided by and based on the following principles:

Cooperation and Participatory principle

Project development requires close operational relations among the state stakeholders, enterprises and organizations operating in the economic areas and sectors mostly vulnerable in terms of overexploitation of natural resources and damage being caused to the environment, populations living in corresponding territories and local self-governance bodies. This principle of cooperation can be successful only if it is based on a common goal and mutual trust among parties.

The Project implementation and recommendations accepted in the process of implementation require an active public involvement during the whole process, while successful public relations require a two-way communication. Firstly, public participation means raising the level of awareness through informing all stakeholders about the scale and aims of their own efforts, environmental issues and priorities, and possible actions to address the most pressing issues. Active involvement of non-environmental government regulatory bodies (Ministry of Economy, Ministry of Finances, Tax Authorities, etc.) into the project since the beginning will be ensured.

Principle of using best international practices

In order for the project to achieve multiple results and be successful, the experience of realization of similar projects in other countries (preferably, eastern European) implemented by international environmental or financial organizations can have essential importance. OECD experience, and, particularly, activities conducted under the framework of EAP TF in the field of assessment and introduction of economic instruments in the EECCA region  will be used. The EAP Task Force has done extensive work on helping environmental regulatory agencies in EECCA countries to modernize their systems of economic instruments for environmental protection, particularly pollution and product charges.  The project should also use an accumulated experience and materials from “Monetary Penalties and Liability” EECCA RECs Joint Projects.

Principle of integrity

The procedure for classification of issues related to environment should make it possible to monitor environmental issues from various viewpoints and integrate health care, environmental, economic and social aspects of environmental degradation, which, ultimately, comprise the context for sustainability.

Project Duration and Budget

Project Duration: 15 months