The Use of Economic Instruments in the

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402/94 - 6 e PVI

Division 402 Environmental Protection, Conservation of Natural Resources, Dissemination of Appropriate Technologies (GATE)

Volkmar Hartje, Karin Gauer, Alberto Urquiza

The Use of Economic Instruments in the Environmental Policy of Chile

Division 402 Environmental Protection, Conservation of Natural Resources, Dissemination of Appropriate Technologies (GATE) 402/94 - 6 e PVI

Volkmar Hartje, Karin Gauer, Alberto Urquiza

The Use of Economic Instruments in the Environmental Policy of Chile

Eschborn 1994

Published by: Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH Postfach 5180, 65726 Eschborn Division 402, Environment and Natural Resources Management/ Appropriate Technologies (GATE) Pilot Project Institutional Development in Environment Wachsbleiche 1, 53111 Bonn Tel.: (+49) 0228 98533-0 / Fax: (+49) 0228 98570-18 e-Mail: [email protected] Authors: V. Hartje, K. Gauer, A. Urquiza Responsible: W. Hamacher, S. Paulus, B. Winkler Layout: I. Borucki Printed by: Universum Verlagsanstalt, D-65175 Wiesbaden

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Preface The discussion on environmental policy in industrialised as well as in developing countries is increasingly acknowledging the importance of policy instruments relying on the economic self-interests of actors involved. These include market based incentives for pollution control and prevention (e.g. taxes, levies, tradable permits etc.), compensation mechanisms, deposit systems, liability regulations as well as questions related to resource pricing, subsidies and land tenure. The use of these instruments is tied to certain institutional and economic prerequisits. The choice of instruments depends to a large extend on the specific situation. Experience shows that economic instruments of environmental policy are usually applied in combination with regulatory instruments. There can be no doubt that - at least within the framework of the implementation of the UNCED results - the instrumentation of environmental policy in developing countries is under scrutiny. It is to be expected that this will result in new tasks for development cooperation. It is foreseeable that the need for technical assistance and training will increase in future with respect to the design, the implementation and development of appropriate institutional structures for market based incentives in environmental policy. However, the specific demand and scope for cooperation in this area is yet to be defined within a broad concept of capacity development and institutional development in the environment. The German Agency for Technical Cooperation (GTZ), through its Pilot Program on Institutional Development in Environment (PVI) has commissioned case studies on different aspects of economic instruments in environmental policy in Benin, Chile, Mexico and Thailand. They are meant to serve as an orientation towards defining the scope and practical approaches of technical cooperation in this field and adressed to practitioners in environmental as well as development cooperation agencies. However, they might be of interest to a wider audience working on related issues and are therefore published in this format. Dr. Stephan Paulus GTZ-Pilot Program on Institutional Development in Environment (PVI)

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Table of Contents:

Seite

Preface .......................................................................................................... 1 Executive Summary ..................................................................................... 9 I. II. 1. 2. 3. 4. 4.1. 4.1.1. 4.1.2. 4.1.3. 4.2. 4.2.1. 4.2.2. 4.2.3.

Introduction.............................................................................. ..... 27 The Chilean Situation.............................................................. ..... 28 Geography and Climate............................................................. ..... 28 Population ................................................................................. ..... 31 Recent Political Development.................................................... ..... 32 Institutional Structure of Environmental Management............... ..... 34 Legal Framework....................................................................... ..... 35 Existing Laws in Pollution Control.............................................. ..... 35 Formulation of the Basic Environmental Law ............................ ..... 37 Planned System of Environmental Impact Assessment ............ ..... 38 Institutional Responsibilities ...................................................... ..... 40 Main Ministries........................................................................... ..... 40 National Environment Commission ........................................... ..... 43 Special Commission for the Decontamination of the Metropolitan Region .................................................................. ..... 45

III. 1. 1.1. 1.2. 1.3. 1.3.1. 1.3.2. 1.3.3. 1.3.4. 1.4.

Problems and Policies in Pollution Control .......................... ..... 47 Air Pollution Control................................................................... ..... 47 Pollutants and their Sources...................................................... ..... 47 Ambient Air Quality Standards .................................................. ..... 49 Appproach to Air pollution Control in Metropolitan Santiago ..... ..... 51 Level of Pollution and the Emission Sources ............................ ..... 52 Control Approach of CEDRM: Regulating Priority Emissions .... ..... 53 Emergency Planning ................................................................. ..... 55 Air Quality Management Plan................................................... ..... 56 Air Pollution Control in the Other Saturated Areas: Cleaning Up the Copper Smelters ............................................................ ..... 61 Water Management: Supply, Pollution Control and Water Rights.............................................................................. ..... 65 Distribution of Water Resources in Chile................................... ..... 65 Institutional Framework for Water Management........................ ..... 66

2. 2.1. 2.2.

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2.2.1. 2.2.2. 2.3. 2.3.1. 2.3.2. 2.4. 3. 3.1. 3.1.1. 3.1.2. 3.1.3. 3.2. 3.3. 3.4.

IV. 1. 1.1. 1.2. 1.3. 1.3.1. 1.3.2. 2. 2.1. 2.2. 2.3. 2.4. 3. 3.1. 3.2. 3.3. 3.3.1. 3.3.2.

Authority for Regulating Water Quality and the Responsibilities for Water Supply and Sanitation ................................. ...... 66 Legal Basis of, Initial Distribution of and Trade in Water Rights............................................................................. ...... 69 Water Pollution Control: Ambient Quality and the Regulation of Discharges............................................................................ ...... 73 Level of Water Pollution and the Types of Sources.................. ...... 73 Existing and Planned Regulation of Water Quality ................... ...... 76 Drinking Water Supply, Sewage Collection and Treatment ...... ...... 83 Solid Waste Management ........................................................ ...... 85 Types and Volume of Solid Waste Generated ......................... ...... 85 Municipal Solid Waste .............................................................. ...... 85 Industrial and Hazardous Wastes............................................. ...... 86 Mining Wastes .......................................................................... ...... 86 Institutional Framework in Waste Management........................ ...... 88 Current Waste Collection, Treatment and Disposal Practices.. ...... 90 Current Efforts in Recycling and Plans for the Future Approach to Solid Waste Management .................................... ...... 92 Resource Intensive Sectors, Trade and their Policies ....... ...... 95 Environmental Consequences of the Change of the Trade Regime ........................................................................... ...... 95 Change of the Trade Regime and its Effects on Economic Growth ..................................................................... ...... 96 Overall Environmental Effects .................................................. ...... 98 Changes in Pollution Intensity .................................................. ...... 99 Changes in Manufacturing........................................................ .... 100 Changes Outside Manufacturing .............................................. .... 102 Agriculture and Agricultural Policies ......................................... .... 103 Agricultural Sector .................................................................... .... 103 Economic Agricultural Policies.................................................. .... 107 Environmental Problems: Agriculture as a Source and as a Victim109 Environmental Management within the Agricultural Sector....... .... 111 Forestry and Forestry Policies .................................................. .... 112 Forestry Sector ......................................................................... .... 113 Forestry Policies ....................................................................... .... 116 Environmental Issues in Chilean Forestry ................................ .... 120 Environmental Impacts of Monoculture, Planting and Harvesting . 120 Effects of Logging Natural Forests ........................................... .... 121

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3.4. 3.4.1. 3.4.2. 3.4.3. 4. 4.1. 4.2. 4.3.

Environmental Management within the Forestry Sector ............ ... 122 Pest Control and the Protection of Soil Quality in Plantations... ... 122 Protecting the Most Valuable Natural Forests .......................... ... 122 Balancing Protection and Production in the the Productive Natural Forests Energy Sector and Energy Policies ........................................... ... 127 Description of the Energy Sector............................................... ... 127 Energy Policies.......................................................................... ... 130 Environmental Issues and Management within the Energy Sector............................................................................ ... 133

V.

Economic Instruments Used in Chilean Environmental Policy........................................................................................ ... 135 Marginal Cost Pricing in Water Supply and Sewage Collection................................................................................... ... 136 Legal and Institutional Framework............................................. ... 137 Tariff System ............................................................................. ... 140 Water Rights and Markets......................................................... ... 140 Existing Water Rights ................................................................ ... 143 Proposed Amendments............................................................. ... 143 Trade of Water Rights: Potential Advantages and Current Practice......................................................................... ... 145 Tradeable Permits for Particles in Santiago .............................. ... 147 Regulatory Framework .............................................................. ... 147 Potential for Cost Reductions in Santiago ................................. ... 148 Expected Degree of Trading...................................................... ... 152 Current Status of the Permit System ......................................... ... 154 Auctioning of Street User Rights for Urban Buses .................... ... 155 Former Free Access System for Urban Buses .......................... ... 155 Restrictions of Streets for Buses by Auctioning User Rights ..... ... 156

1. 1.1. 1.2. 2. 2.1. 2.2. 2.3. 3. 3.1. 3.2. 3.3. 3.4. 4. 4.1. 4.2. VI. 1.

Reflections on the Role of Economic Instruments in Chile. ... 160 Degree of Internalizing Private Costs: Creating Property Rights and Introducing Cost Recovery ...................................... ... 161

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2.

3.

Internalizing External Costs with a Mixed Policy Approach: Combining Technology Specific Standards and Incentive Based Instruments.................................................................... .... 163 Political Economy of Using Economic Instruments................... .... 165

VII.

Role of Economic Instruments in Technical Cooperation .. .... 167

Bibliography.............................................................................................. 175 Annex I:

Political Administrative Units of Chile............................... 188

Annex II:

Maps of Chile:..................................................................... 189 1. Political Administrative Units ......................................... 190 2. River Basins and Irrigation Areas .................................. 190 3. Smelter Location and Sulphur Emissions, 1989 .......... 191

Annex III:

List of Copper Operations and their Environmental Situation ..................................................... 192 Annex IV: Environmental Action Plan for Mobile Sources in Santiago............................................................ 194 Annex V: International Cooperation in Environmental Policy ......... 195 The Authors199 Publications in this Series....................................................................... 201

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List of Tables: Table II.1. Table III.1 Table III.2. Table III.3. Table III.4. Table III.5. Table III.6. Table III.7. Table III.8. Table III.9. Table III.10 Table III.11. Table III.12. Table IV.1. Table IV.2. Table IV.3. Table IV.4. Table IV.5. Table IV.6. Table IV.7. Table IV.8. Table IV.9. Table V.1.

Economic-Geographic Zones of Chile .................................... 31 Chilean Ambient Air Quality Standards .................................. 49 Emergency Index of Air Quality............................................... 55 Emergency Programme of CEDRM ........................................ 56 Total Annual Emissions of Air Pollutants in Metropolitan Santiago, 1990........................................................................ 57 Emissions from Mobile Sources.............................................. 59 The Chilean Copper Smelting Industry and its Air Pollution, 1989................................................................... 63 Investments by the Ministry of Public Works, 1972-1993 ....... 68 Quality Standards for Drinking and Irrigation Water................ 78 Inventory of Direct and Indirect Discharges, Chile and Santiago, Industrial and Municipal Sources ..................... 80 Proposed Standards for Discharges into Rivers and Sewers .................................................................................... 81 Water and Sewage Tariffs in the Chilean Regions, 1992 ....... 84 Composition of Municipal Solid Waste, 1980.......................... 86 Indicators of the "Chilean Economic Miracle" ......................... 97 Land Use and Land Use Potential ........................................ 102 Land Used for Various Export Products, 1965-1988............. 106 Estimates of Forest Land Use, 1991..................................... 114 Production of Chips and Sawnwood, 1986-1991 .................. 115 Areas Planted and Planting Subsidies, 1974-1990............... 119 Surface Areas Covered with Native Forests according to Use Categories, 1991 ....................................................... 124 Energy Supply and Reserves................................................ 128 Energy Demand by User Sector ........................................... 130 The Water Companies and their Services, 1992 .................. 139

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List of Figures: Figure II.1. Institutions Involved in Environmental Management ............... 42 Figure III.1. Annual Mean of Respirable Particles in Santiago, 1989-1992 ............................................................................... 53 Figure III.2. Monthly Mean of Respirable Particles in Santiago, 1989-1992 ............................................................................... 53 Figure III.3. Annual Mean of SO2 in Santiago, 1989-1992......................... 54 Figure III.4. Map of Santiago Area, its Main Rivers and their Level of Contamination, 1985 ........................................................... 75 Figure III.5. Concentration of Total Coliforms in the Rio Mapocho, 1980-1992 ............................................................................... 76 Figure III.6. Wastes and Waste Management Practices in Mining............. 87 Figure IV.1 Carbon Dioxide Emissions, 1950-1986 ................................... 99 Figure IV.2 Value Added of Pollution-intensive Manufacturing/ VA of Total Manufacturing, Weighted Linearly, 1974-1989... 100 Figure IV.3 Value Added of Pollution-intensive Manufacturing/ VA of Total Manufacturing, Weighted Exponentially, 1974-1989 ............................................................................. 101 Figure IV.4 Commercial Energy Efficiency and Energy Prices, Various Countries, 1985........................................................ 129 Figure V.1 Water and Sewage Tariffs in the Chilean Regions, 1992...... 141 Figure V.2 Total Abatement Costs for Fixed Point Sources under Different Policies ......................................................... 151

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Executive Summary I.

The Economic Instruments Used in Chile

This report is based on the assessment of the existing Chilean and international documents, the description of the institutional set-up and the policy developed so far in pollution control and in three economic sectors with a major impact on the environment, agriculture, forestry and energy. Within this range of policies, the economic instruments that are currently applied have been identified, their operation is described and their effectiveness assessed to the extent to which the available information allowed such an evaluation. The definition of economic instruments is broader than in most economics textbooks as the definition of property rights to natural resources and the pricing of public services with an environmental dimension are included in addition to the economic instruments in pollution control. In Chile, for four instruments the documentation is adequate for a presentation in the report: The marginal cost pricing in water supply and sewage collection, the definition of private tradeable water rights, the tradeable permits for particles from stationary sources and the auctioning of road user rights for urban buses. This paper summarizes the presentation of these instruments and reflects on the role of these instruments in Chile and its implication for technical cooperation. Another instrument, the introduction of road pricing for private automobiles in downtown Santiago, has been proposed but it is not included here. In several documents, one can find references to a "Ley de Peajes" (Escudero 1993), but it has been impossible to locate a draft or any other document specifying it.

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1.

Marginal Cost Pricing in Water Supply and Sewage Collection

Chile is one of the few countries which applies the principles of marginal cost pricing and full cost recovery in those sectors of the economy in which the governmental provision of the services at subsidized prices is quite common in developing countries and a number of industrialized countries as well. In the water sector, the principles are applied in practice for the provision of water supply and sewage collection in urban areas. Until the late 1980’s, Chile’s water supply and sewage collection was operated by a national and by a metropolitan (Empresa Metropolitana de Obras Sanitarias, EMOS) authority under the supervision of the Ministry of Public Works. Both services were considered to be basic goods for the general public and the tariffs were set at a level of which the government thought the whole population could afford it. During the last decade, the tariffs covered on average 50% of the costs of these services and most of the investment funds came from tax income of the central government. As a consequence of the tight budgets in the 80’s, the investments remained below the level necessary to maintain the quality of the services and to expand according to the increase of the population (Blanlot 1993). Despite these shortcomings, over the previous decades the responsible institutions had built up an infrastructure which provided drinking water to about 97,6 % of the urban population and which connected 84,8% of the households to a sewage water collection system (SSS, 1993). Beginning in 1988, the water supply and sewage sector was reorganized, according to the following principles: Separation of supervisory and regulatory functions from actual supply services, privatization of supply services, creation of an supervisory authority (Superintendancy of Sanitary Services), marginal cost pricing and total cost recovery including a return on invested capital. Although the basic laws for this reorganization have been passed three to four years ago, the reorganization is far from complete. The Superintendancy is established and it performs its main functions: Supervising the supply companies, controlling the quality of the drinking water, administering the tariff adjustment process of the supply companies. It has proposed a set of discharge standards for industrial sources which

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have been stopped for the time being from becoming effective because they require uniform discharge standards from all sources independently from the quality status of the receiving river body. It is preparing the procedure for licensing private companies in the water sector. The privatization of the water sector stopped with the incoming of the democratic government at the end of 1989. Between 1983 and 1989, the national water service organization was decentralized corresponding to the Chilean regions and these decentralized units were transformed into private corporation with limited liability, but they remained under government ownership. The water company in Santiago was transformed in the same manner (Hachette, Lüders 1992). The tariffs are based on the marginal cost of additional supply if new investments are necessary and on the marginal cost of the optimized entire system based on replacement costs if the existing capacity is sufficient for the foreseeable demand. These costs are calculated separately for the production and distribution of drinking water and the collection and disposal of sewage water. The charges to the customers are divided into fixed charges and those based on the volume of water consumed and water collected. A differentation according to the pollution intensity of the collected water is not included (Blanlot 1993). The transformation from the old tariffs with its low cost recovery to the new tariffs which will cover the cost of investments was stretched over a four year period from 1990 - 1994. The tariffs which were in force in 1992, thus, are in the middle of this transformation process and will increase further until they reach the target level in 1994. As a result, the cost differences between the Chilean regions become visible: The costs in the three Northern Regions, particularly in the second Region, are considerably higher than those in the Metropolitan Region. In 1994, the tariffs in the North will be 400% and in the South 200% above the relatively low level of 95 to 116 Pesos/m3 (about 0.32 US $) in Santiago. To reduce the regressive distributional effects of the tariff changes, a personal subsidy system was established and became effective in 1991. A total of 441,000 families received subsidies out of the total number of water supply connections of 2.36 mio. When the target level of the tariffs will be reached, this number will increase to 722,000, according to the calculations of the Superintendancy (SSS 1993).

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The high density of water supply and sewage water collection does not exist with respect to wastewater treatment. In most cities, the wastewater is only collected and flows untreated directly into the ocean or into the rivers (BKH Consulting 1992). For Santiago, the first municipal treatment plant has been put into operation in 1993. This low level of municipal sewage treatment constitutes the major deficit in Chilean water quality management, but the high level of water supply and sewage collection already yields considerable health benefits. The direct use of contaminated surface water for human consumption remains relatively low compared to metropolitan areas in other developing countries. The tariff system does not have to be changed if municipal sewage treatment or the pre-treatment of industrial discharges into the sewer system will be required on a regional/ watershed or national level. Currently, a study is undertaken to develop a masterplan for sewage treatment for the Santiago area (CEDRM 1993). The expected treatment costs will lead to an increase in the tariffs in Santiago. There are currently no plans to introduce discharge fees or marketable permits for the residual water pollution.

2.

Water Rights and Markets

"Chile is unique among developing countries in that it has a system of transferable water use rights. Although water is considered a national resource, individuals can own perpetual and irreversible water use rights. These rights are independent of land use and land ownership, thus trade of water rights is fairly unrestricted" (Hearne 1993, p. 2). The water use rights are given for quantity per period of time, but water quality is not included in the definition of water rights. The law, however, distinguishes between consumptive and non-consumptive rights. With regard to the consumptive right, the right holder can consume the permitted quantity per period of time as he pleases. Irrigators own full consumptive rights to their water. The initial distribution of water rights is based on an application of a potential user which is examined by the General Water Directorate (DGA) with respect to the availability of excess water. For non-regulated rivers, the historical water flow is estimated, based on hydrological simulation models, for the month of the minimum flow which normally corresponds to the maximum agricultural water demand in Chile. The upper limit of the

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water rights to be distributed are the ecological minimum flow requirements. The legal responsibility of DGA to take them into account is rather weak and it is a recent development in DGA’s practice. All water rights are granted free of charge by DGA which operates a national register. During the application procedures, third parties have an opportunity to raise objections if the granting of the new water right impairs their own right. In times of water shortage, DGA declares the shortage with the consent of the water user associations which organize among themselves the necessary restriction of water rights, usually on a proportional basis. In 1992, an amendment of the Water Code has been proposed by the Chilean President which tried to deal with a number of water management issues. The most important is the creation of an institution to integrate the various uses within a watershed, called Watershed Management Corporation (corporaciones administradoras de cuencas hidrográficas). Its function will not be the substitution of the (agricultural) water user association, but the integration of water uses between sectors, water quality management and the protection of the watershed from erosion, sedimentation and floods. The 1992 law proposal was rather vague with respect to the organizational structures, tasks, goals, voting rights and financing of these watershed corporations, but it was specific about two aspects of water rights: One was the creation of the explicit responsibility of DGA to guarantee an ecological minimum flow. The other proposal consisted of the limitations of the water rights in time (5 years) if they were unused and a complete renewal of water rights in the dry Northern areas. The passage of the amendments has been postponed because of the open questions about the details of the proposed watershed management corporations. In the meantime, a major study has been contracted to evaluate the options to design these corporations. They will influence the operation of the water markets as they will be responsible for water use conflicts between sectors and in a second phase for the self-financing of the public works in the watersheds. In Chile, the trade of water rights is quite common, but the extent of this trade and the conditions are not well documented on a country-wide basis. It seems that most of the trades take place intrasectorally among irrigators, but the degree of intersectoral trade seems to be increasing. It is only known that intrasectoral trade takes place between farmers, particularly in terms of seasonal rentals. Intersectoral trade took place as well with water supply companies buying water rights from irrigators which saved them from building new supply infrastructure. The companies revealed that they

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did not have a fixed offer price, but instead final transaction prices were determined during individual negotiations. According to these representatives, the principle factors that determined these prices were distance from the company’s intake point, quantity of water use rights sold, and the information available to the seller (Hearne 1993). The functioning of the markets of water rights in Chile will be analyzed with respect to the market characteristics, price formation, the distribution of the gains from trade on the basis of three river basins for a World Bank study (Hearne 1993). Chile relied on organized water markets in the past which have to be regulated to deal with their externalities (return flows, quality changes, minimum flow requirements). It is not clear whether the proposed changes in the Chilean water law will result in an effective reform to deal with these externalities or whether it will introduce unnecessary trade restrictions.

3.

Tradeable Permits for Particles in Santiago

As an economic instrument used to internalize the external costs of pollution, the tradeable emission permits system in Santiago applies only to stationary sources for particulate matter. It is a mixed system of a uniform emission concentration standard combined with a tradeable emission permit. The starting point was the goal of 70% reduction of the emissions of the stationary sources which CEDRM asked for in its decontamination plan (CEDRM 1990) and which was proposed by a group of the University of Chile and of the consulting company INTEC in the same year (Intendencia 1990). This goal was translated into a concrete policy in 1992 when the Environmental Health Service of the Health Ministry passed the Decree No. 4 for the Metropolitan Region. It contains emission norms for existing and for new sources larger than 1000 m3/h. The emission standards for existing sources and their deadlines are as follows: 112 mg/m3 by Jan 1st, 1993 until Dec 31st, 1997 56 mg/m3 by Jan 1st, 1998. The above concentration values are transformed into quantity of emissions by applying current flows. The corresponding formula is Daily emission goal in kg/day = Flow (m3 N/hr) x 0,000056 (kg/m3 N) x 24 (hrs/ day).

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For the existing sources, these quantities will be the content of their emission permit by January 1st 1998. Thus, the initial distribution of permits is based on the grandfathering principle. New sources can enter the Metropolitan Region only if they find compensation for their additional emissions from reductions of the existing sources. The expansion of existing sources, which have to have a permit by December 31st, 1992 complying with the standard of 112 mg/m3, is legally treated equivalent to new sources. In a separate article, the decree regulates the transition between 1993 and 1997 by increasing the share of emissions 25% each year to be compensated by new sources until the 100% are reached. Emission sources smaller than 1,000m3/hr, called area sources (fuentes grupales), do not participate in the emission trading, but they have to comply with the same emission standards as the point sources with the exception of new sources for which the standards started in 1992 with a value of 56 mg/m3. The proponents of the use of tradeable permits in Chile were and are aware of the economic discussion of the advantages and limitations of this instrument in the industrialized countries. The theoretical advantages of a system of tradeable emission permits are the improved static efficiency by reducing the compliance costs and the improved dynamic efficiency properties. The cost reduction potential of market based instruments has been estimated empirically in a number of studies (Tietenberg 1985, 1992) in the industrialized countries. During the preparation of the system, an empirical study of the cost- savings potential of the two instruments was undertaken for particulates in Santiago (O’Ryan 1993). Similar to the above mentioned research in industrialized countries, this study estimated the compliance cost differentials between emission concentration standards, emission reduction rates, emission permits and ambient permits for those sources regulated under D.S. No. 4 of the Health Ministry. The study estimates that the ambient permit system could achieve the reduction of ambient concentrations at least cost over the whole range of reduction. Among the instruments enumerated above, the second best is the emission permit while the emission standard and the percentage reduction instruments are third and/or fourth best. The Chilean authorities, however, decided in favour of the simpler emission-based permit system at the expense of potential further cost reductions with a 1:1 exchange value without the use of a dispersion model.

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Based on the experiences in emission trading in the USA, one cannot be sure, however, that the least cost potential will be fully realized by establishing tradeable permits (Hahn 1989, Tietenberg 1992). The most prominent indicator is the low number of external transactions that have taken place under the various US-programmes. Despite these restrictions, a number of trades are likely to occur, but they will be limited to the larger, more sophisticated companies where the savings might reach an order of magnitude which is more likely to attract the attention of managers. A second category of firms with a higher chance of a response will consists of those firms with more than one source in the Metropolitan Region. O’Ryan identified 287 firms with two and more sources (1993). Since January 1st, 1993, exchanges have taken place, but there are no records yet. The best known example is a paper company which built a new tissue plant and complied with the 25% compensation rule with a trade with one of its own older plants. 4.

The Auctioning of Street User Rights for Urban Buses

The street rights licensing scheme is a reaction to the negative effects of the complete deregulation of the urban public transportation system in Santiago for road based vehicles (buses, maxibuses, taxis, asf.). Fifteen years ago, the Ministry of Transportation declared the urban public transport for buses to be a completely free access system. This meant that whoever owned a bus could participate in the public transport system of the city without having to comply with any regulations with respect to tariffs, passenger safety or quality of the services. The result was a considerable expansion of the bus fleet with no minimum standards of quality. The capacity (13,000 vehicles) was estimated to 40% above demand, the fleet was underutilized and maintenance was lacking for a large share of the fleet (Escudero 1993). This resulted in a considerable increase in diesel emissions, i.e. NOx and PM 10. In addition, the transportation situation in central Santiago was characterized by a high level of congestion and a very low average speed. The lack of restrictions for market entry made it easy for small operators to participate and as a result many owners/drivers were supplying their services. To coordinate scheduling, these operators formed line associations as cooperatives. These organizations on a line basis formed a general operators organization (Hohmann, Martin 1992). In addition, the

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operators formed a price cartel which seems to have been effective since the tariffs more than doubled between 1980 and 1990 while the prices for the major input, i.e. diesel, increased only by 25% in real terms. The structure of small owners and the high tariffs caused the excess supply of passenger transport, based on the entry of marginal operators who were scouting the city arteries for any additional passenger. Since the buses were mostly written off (48% of the buses were older than 12 years) and since little maintenance was performed the short run marginal costs were only the opportunity costs of time of the driver/ operator. As a result, the buses carried only 350-400 passengers per day, a fifth to a third of the occupancy rate of other metropolitan areas (World Bank 1986). In 1990, the Ministry of Transportation and Communications (MTC) changed this full open access policy into a regulated access policy. The regulation covered only one aspect of the public transport system, namely those roads that were congested because of the number of buses and taxis using them. All the other elements of the bus market, i.e. entry, selection of line and tariff, remained unregulated. The major aim was to relieve the congestion in the streets of central Santiago. The approach of auctioning rights for street use for public transport vehicles involves those streets in central Santiago which are congested due to these vehicles. To make the system operational, the following questions have to be answered: - To identify those pieces of roads considered to be congested, - to estimate the level of traffic considered to be uncongested, - to define the characteristics of operators allowed to bid, - to define the selection criteria for the winners, - to ensure compliance with the specification of the auction. Once these questions have been answered in an operational manner, their impact on the transport service has to be assessed. From the available documents, it seems that the first two questions were answered on the basis of the existing analysis of traffic counts and traffic-flow/ speed relationships. The result was the definition of the maximum frequencies of buses in these streets. In order to improve the potential for applying sanctions in case of noncompliance, only incorporated companies were allowed to bid and the legally unincorporated line associations had to establish themselves in

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such a manner. The selection is based on a number of criteria, including quality of service, i.e. frequencies, quality of the buses and air pollution characteristics (Escudero 1993). The questions of the impact of the auctions of licenses for street use is a bit more complicated. Depending on the distribution of the awarded licenses, the existing system of bus lines could be altered. To avoid such a change, the existing bus lines and the transport corridors they serve were modelled with a trip-specific transportation model of the Metropolitan Region. This modelling is important since 80% of the bus lines operating in Santiago use the licensed streets. When awarding the licenses, the MTC tries to ensure that the reduction of the supplied bus services comes from a reduced frequency of the existing lines and not from a change of the spatial structure of the lines. The desired result is that the reduced frequencies and increases in waiting time are made up by the savings because of the increased speed. A second problem is the reaction of the smaller operaters to use those streets adjacent to the licensed streets and thus diluting the effects of the auction. As a reaction, the government is proposing to repeat the auction with a larger area of streets where the use will be restricted as well (Figueroa 1993). This change improved the situation by reducing overcapacity, increasing the occupancy rate of the individual vehicles and by relieving congestion. But, there are some points debated from an environmental point of view. To the extent that bus trips are reduced and older buses are retired, the diesel emissions have been lowered. No specific figures are available. But if the capacity reduction amounts to 30%, then the emissions reductions by these sources should be slightly above 30%.

II.

Reflections on the Role of Economic Instruments in the Chilean Environmental Policy

The debate on economic instruments in environmental policy centers on the alternatives to internalize the external costs associated with environmental degradation. Implicitly, it is assumed that other distortions in a market economy do not exist or have not been introduced by governmental policies. The surveys on environmental policy-making in the developing countries have shown, however, that these distortions are quite abundant. From an environmental point of view and in the context of

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applying economic instruments to internalize external costs, these distortions are important since they often lower the degree of internalization of the private costs associated with the use of natural resources, with contaminating activities or with the supply of services under a natural monopoly.

1. The Degree of Internalizing Private Costs: Creating Property Rights and Introducing Cost Recovery

Chile is in an exceptional situation among the developing countries as its economic policy reform under the junta government has contributed considerably to a policy framework consistent with the above principles: Land ownership is well defined and protected by the Political Constitution, water rights are defined and tradeable. The subsidies in the agricultural sector for inputs have largely been abandoned, their prices are based on international competition. There are two major exceptions. One is the planting subsidy in plantation forestry and the other is the subsidy for the installation of irrigation investments. The other area where Chile is an exception among the developing countries is the pricing of electricity, water and sanitation services where it follows the principles of marginal cost pricing. The electricity and water supply are two sectors where the potential for economic waste is large due to subsidized services which deteriorate when the central government revenues are falling short. The question to what extent these pricing principles lead to an efficient water and energy use in the Chilean economy cannot be answered in the context of this report. As contrary evidence, the energy consumption per unit of GDP was higher in 1985, compared to other countries with a similar income level. This question needs to be pursued further. Chile uses a market oriented approach to a large extent to deal with the internalization of private costs in resource-using activities. It is therefore a good case to test whether the advantages associated with such an approach actually can be demonstrated empirically. The necessary empirical research is still missing.

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2. Internalizing External Costs with a Mixed Policy Approach: Com bining Technology Specific Standards and Incentive Based Instru ments

With respect to the internalization of external costs, the Chilean environmental policy developed a legal and institutional framework for air and water pollution control and for waste collection and disposal. This framework allowed the government to build the basis for an environmental policy by establishing monitoring capacity for ambient quality and by building source inventories. It started to implement effective source programmes to reduce emissions: -

in air pollution: for stationary sources: TSP, SO2, status: Operational since 1993, first effects visible or mobile sources: TSP, SO2, NOx, CO, lead status: Operational since 1992/93, first effects visible in water pollution: for industrial point sources: All relevant pollutants into sewers and waterbodies status: Proposal for discharge standards in review. for municipal sewage: Priority for Santiago status: Sewage collection rate high; sewage treatment in study phase. in waste management: for mining waste: Disposal requirements, status: Operational regulation since 1970, only 20% effective; municipal waste: Disposal requirements, status: Operational regulation since 1968, effectiveness not established.

These programmes are selective since they cover only a range of pollutants and since in some areas of contamination the control is still lacking, e.g. hazardous waste. Here, the policy is in a phase of analyzing the size of the problem and the range of possible solutions. The regulation of pesticides to protect the local environment, the workers and the Chilean consumers is largely missing. The stabilization of the vegetation and the control of soil erosion has to wait for the law to establish the watershed management corporations. The protection of the natural forest has to be made effective and a management system for the use of the remaining forests for fuelwood still has to be developed.

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If one looks at the total number of existing source specific reduction programmes in Chile, only two programmes use market based instruments: The tradeable permits for particulates in Santiago and the auction for street use rights for buses in downtown Santiago. The majority of instruments used in Chile are emission standards, usually in combination with a technology specification. In both cases, the economic instruments are used in combination with other instruments, usually labelled "command and control". The tradeable permits were introduced on top of a system of uniform emission standards with the maximum allowable emissions to be cut in half over a five year period. The street licensing scheme for urban buses was accompanied by a compulsory retirement regulation, by an opacity limit for diesel and by a prohibition to use used motor parts (BKH Consulting 1992). The administrative prerequisites for the economic instruments are not trivial: The compliance of the emission standards has to be achieved for 1,440 sources and registered 10,400 buses. The task of ensuring compliance has to be performed independently of the use of economic instruments, although the degree of effort differs between the two instruments. For tradeable permits, the emission monitoring effort will be higher probably since the transactions require additional administrative capacity. To manage both instruments effectively requires a certain level of sophistication among the regulators and the market participants. The full use of tradeable permits in air pollution (for non-uniformly mixing pollutants) requires the operation of a source diffusion model necessary and the street auctioning system a transportation simulation model. Thus, even for the relatively favorable conditions of Chile, the extent of the use of economic instruments is rather limited. In some cases, the conditions for applying them are simply missing, as in the reduction of SO2 from the copper smelters. In other cases, the conditions for a decision in favor of economic instruments may be not ready yet as in the case of controlling industrial water discharges.

III.

The Role of Economic Instruments in Technical Cooperation

If one defines economic instruments broadly and does not reduce them to the alternative of command and control versus charges/ tradeable permits

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in pollution control, then economic instruments can be used as an integrated element of environmental management in developing countries.

1.

The Areas of Cooperation in Environmental Management

Continuing with the above distinctions, three areas of possible cooperation stand out: - Assigning exclusive access to natural resources, - Pricing rules and regulation of utilities, - Economic instruments to internalize external damages. So far environmental management in technical cooperation was concentrated in the third area of pollution control, mostly in terms of technical support, and the other aspects of environmental management were placed into sectoral categories, i.e. agriculture, forestry, fisheries, energy, water management, transportation and sanitary services. The questions of property rights in these sectors were mostly raised in the context of individual projects in technical and/or financial cooperation which were usually concerned with raising or maintaining the productivity of the resources in these sectors. Increasingly, the importance of these property rights became clearer beyond the realm of individual, regionally specified projects. In general, the awareness about the importance has not led yet to the generation of projects specifically designed to deal with property rights on a country-wide basis or regionally beyond the "project" boundaries, at least in the context of the German technical cooperation. It seems to be the result of a lack of confidence in the understanding of mechanisms of the existing configurations of property rights and a lack of confidence in proposing alternative solutions. A potential starting point could be the country Environmental Action Plans, proposed and tested for a few countries with the support of the World Bank and bilateral donors, and supported in some cases by the German technical cooperation programme. Here, the description of the operation of the existing property rights and the dissemination of the concepts of analyzing them are the starting points. The understanding of the second area, the pricing of public or mixed public services (water supply, garbage collection, asf.), is generally very high. But a number of governments of the middle income developing countries (and a number of OECD countries) shy away from fully applying the pricing prin-

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ciples because the policy makers are reluctant in making the public/ electorate or important social groups pay for the full (private) costs of these services. The issues of pricing were quite often negotiated in the context of loan agreements between other donor agencies and finance ministries or the relevant sector ministries. There is a broad agreement among donor countries about the importance of recovering the costs of these investments, but in case of the reluctance of the recipient countries ministries, the verbal conditionality has usually not been met by donor practice.

2. in

Analyzing the Demand for and Supply of Technical Cooperation Using Economic Instruments

In the third area, the economic instruments can only be used in conjunction with the other tasks that have to be performed as well as can be seen from the example of the tradeable permits. The implementation of all these other tasks is the prerequisite for the use of economic instruments. The first step is the identification of the priority pollutants to be controlled first. The second step is the analysis of the pollutant in terms of its chemical, toxic and ecological characteristics as well as its diffusion paths and ambient concentrations. The third step is the analysis of the sources (to build a source registry), of the processes leading to emissions and of the technical options to mitigate or reduce them. The fourth step is the selection of the sources to be regulated, the decision about the degree of required action of these sources and the choice of type of instrument used. The fifth step is the organization of enforcement, the personnel build up, the establishment of laboratories for source control and the organization of sanctions. The sixth step consists of the management and the technical changes on the side of the emitters. Usually technical cooperation has been provided at steps two, three, five and six with technical and personnel support for the monitoring of ambient quality, of sources, laboratory equipment for testing and technologies for the sources (to a lessor degree) to reduce emissions. Unless there are

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projects with a central ministry/governmental agency policy orientation, technical assistance is usually not present in phase one and four. But only in phase four, a decision to use economic instruments can be made. At this point, the other decisions (identification of the sources to be regulated, degree of required reduction) are usually made which are the political core of the policy-making. Here already an economic analysis of these decisions in terms of the cost effectiveness of the available options can contribute towards a low cost pollution control. The second step could be the analysis whether the number of sources, their technical options and the price elasticities justify the application of economic instruments. The description of the use of the establishment of tradeable permits in Santiago has shown that all these tasks had to be performed before a law or a regulation could be presented to the policy-makers. In this case, all these task were performed by national specialists; the international cooperation took place in the past on an academic level by individuals, studying in US universities. Another point which has to be considered, before the use of economic instruments can be considered to be part of an environmental management option in technical assistance, is the judgement whether the political/ bureaucratic conditions in the country are favorable. The introduction of economic instruments will probably need a group of promotors to take up the idea and push it within the bureaucracy or in the environment of the policy-makers. A political consensus about the need to improve the environmental quality of the country and an awareness about the cost implications of the regulations is necessary as well. Such a judgement on the political conditions in a country can probably be labelled an assessment of the demand for economic instruments in technical cooperation. But before cooperation can take place, another evaluation has to be made, namely whether the supply of the support required is available in Germany (or any other cooperating country). The above demand for technical assistance in these circumstances can be met if there are specialists (in Germany/EC/any other country) who can perform the above tasks. Qualified for the first task to analyze the regulatory options for a specific pollutant in a developing country would be an academics/ consultant with training in applied environmental economics and experience in the consulting of governmental agencies in developing countries or industrialized in combination with a technical expert with experience in

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developing countries. The second task would be the support for the spread of the concept among the key players. This could be performed in advance/ in preparation for the supply of ministerial level consultancy. The second type of specialist are federal or state environmental agency personnel with experience in drafting legislation or administering laws with economic instruments. The recent survey of academic and consulting institutions in Germany (Horstmann 1994) revealed that the experience in both fields is limited to a few institutions. Here a first step could be to initiate a network which could accumulate the available experience which exists without a synergy effect. The German cooperation programme has already experience with networking and its pitfalls, but in agricultural research (ATSAF 1994).

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I. Introduction

This report contains a short presentation of the environmental problems of Chile, based on the assessment of the existing Chilean and international documents, the description of the institutional set-up and the policy developed so far in pollution control and in three economic sectors with a major impact on the environment, agriculture, forestry and energy. Within this range of policies, the economic instruments that are currently applied have been identified, their operation is described and their effectiveness assessed to the extent to which the available information allowed such an evaluation. The definition of economic instruments is broader than in most economics textbooks as the definition of property rights to natural resources and the pricing of public services with an environmental dimension are included in addition to the economic instruments in pollution control. In Chile, for four instruments the documentation is adequate for a presentation in this report: The marginal cost pricing in water supply and sewage collection, the definition of private tradeable water rights, the tradeable permits for particles from stationary sources and the auctioning of road user rights for urban buses. In addition to the analysis of pollution control, the report contains a short description of three sectors, their sectoral policies and the integration of environmental objectives into these policies. This presentation of sectoral policies is preceded by a summary of the studies available to assess the environmental implications of the change in the Chilean economic approach after the 1973 coup which opened the economy to the world market and changed the relative importance of these sectors. There are no separate chapters on the industrial and mining sector as they are the main targets of pollution control and, thus, their analysis is to be found under air and water pollution control and waste management.

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II. The Chilean Situation 1. Geography and Climate

Chile became an independent republic in 1818 from the Spanish colonial power which had conquered the territory in the 16th century. At the time of independence, the republic covered an area of what is today the central area of the country. In the 19th century, Chile expanded southward by conquering the Araucanian territories south of the BioBio and connecting it to the settler areas in the southern Regions and northward by conquering the two northern Regions from Peru and Bolivia in the Salpeter War of 1879-94, creating its unique geography. Chile is a country, located at the southwestern coast of South America which stretches as a ribbon of more than 4,200 km from Peru to the southern tip of the continent at Cape Horn, including the larger part of Tierra del Fuego, an archipelago separated from the mainland by the Strait of Magellan. It has an average width of 177 km. Outlying territories include the Easter Island, the Juan Fernandez Islands, and other islands in the Pacific. The total land area is 756,626 km2. The Andes Mountains, reaching to more than 6,700 m above sea level, separate the country from Argentina and Bolivia. The capital and largest city is Santiago, located in the central part of the country, where most of the population is concentrated. Three principal geologic regions run north and south through Chile: - the high mountains of Los Andes; - a series of fertile inland valleys, pampas, and forests in the Central Region, which is divided by mountain spurs and several rivers carrying runoff from the Andes; - and a coastal escarpment (762 m high), which ends in steep cliffs along the Pacific coast and includes many islands (the Archipelago) in the south. The best-known mountain ranges are in the Central Region and include volcanoes, such as Tupungato (6,800 m), Maipu (5,322 m), and Ojos del Salado (6,863 m), which is the second highest peak in the Western Hemisphere. Frequent destructive earthquakes have meant heavy expenditures for relief and reconstruction that might otherwise have gone to economic development.

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The climate ranges from subtropical in the north to subarctical in the south. Because Chile is located below the equator, seasons are reverse to those in the northern hemisphere. Chile’s great length and the cold waters of the Humboldt current offshore create three distinct latitudinal climatic regions. About 70% of all Chileans live in the center Regions, which comprises about 20% of the country’s total area. This region extends from La Serena to Osorno and includes the Central Valley and the harbor of Valparaíso. The region south of the industrial city of Concepción has stormy winters and cool summers. In Santiago temperatures average 21oC in summer (January) and 9 oC in winter (July). Annual rainfall averages 356 mm, most of which occurs between May and September. Evergreens grow in the drier coastal regions, and beeches, conifers, and laurels are found at altitudes of 900-2,150 m. Heavy persistent fog stabilizes temperatures in the northern desert coastal zone at 21 oC during the summer and 16 oC during the winter. In the south, average annual rainfall varies from 2,200 mm at Puerto Montt to only 500 mm at Punta Arenas and the Strait of Magellan. Winter and summer temperatures range between 8-16 oC at Puerto Montt and between 2-11 oC at Punta Arenas. In the far south, only grasses, mosses, and ferns are able to survive the persistent cold and windy weather. Only 7% of the land is arable, including 2% irrigated. On 3% of the area are permanent crops, on 16% are meadows and pastures and on 21% forest and woodland. The remaining 56% are without uses. Chile is the world's third largest producer of copper and the ninth largest producer of silver. Other important minerals are iron ore, nitrate, precious metals and molybdenum. The main mining centers are located in the north, away from the big cities and in the central region. Coal and oil are produced in the south, but they cover only a fifth of national consumption. The country is relatively well endowed with hydropower, located in the center and southern regions. The Chilean economic zone in the South Pacific contains sizable fish stock, sardines and anchoveta, mostly used for fishmeal, but also stocks of food fish. The fishing harbours are located in some bays highly polluted as Coronel, San Vicente and Concepción. The fishery policies in the past have not been able to prevent overfishing. Chile still has large forested areas in the south with a considerable volume of potentially productive native forests, but the bulk of logging comes from plantations.

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The main agriculture is concentrated in the valleys of Central Chile and its products include wheat, potatoes, corn, and sugar beets. In this part also grows a variety of fruits and vegetables and wine whose production moves Chile into the ninth place in the world. The special geography of the country creates additional communication problems, but the transportation network is relatively well developed, especially between La Serena and Puerto Montt. In this area, the transport network is dominated by roads (10,000 km asphalt) over the railroads (6,200 km) with a declining network. The road system is based on the Panamericana in the north-south direction and and est-west connection Valparaíso-Santiago and an international road to Mendoza in Argentina. The role of shipping is relatively high and it was elevated by the improvement of the harbours in the sixties. The Northern Region, about 1,127 km long, is a region of dry basins, broken only by a few rivers. It contains the Atacama desert, one of the world's driest region. Perched atop the coastal escarpment are the port cities of Antofagasta, Arica and Iquique. Some agriculture is carried out in this region, which occupies about 40% of the country's total area but has only 15% of the population. In a summary, the country can be divided in five economic geographic zones (Table II.1.).

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Table II.1. Economic-Geographic Zones in Chile: Zone/Region

Share of Climate, vegetation, economic structure area populat. -- % --

Large North/ I,II

24.0

5.7

Desert, semi-arid; mining (50% of national production); fishing (50% of national catch); tourism; 95% of population urbanized

Small North/ III, IV

16.0 5.2

subtropical, desert, shrub steppe; irrigation agriculture in river valleys (grapes); mining,

Central Chile/ V, IV, VII

12.5 61.5

subtropicala; agriculture on fertile soil, Mediterranean climate, fruits, wheat, sugar beets, copper mining; industry; urban centers Santiago (30% of GDP), Valaparaiso; services, transport, tourism,

Small South/ 13.6 25.8 VIII, IX, X

temperate zone; agriculture forestry, fisheries, coal mining, Indian population

Large XI, XII

subantarctic, forestry, livestock (sheep), fisheries, oil and gas.

South/ 33.0 1.8

Source: Nohlen, Nolte 1992 About 15% of the population lives in the southern one-third of Chile. This region is a narrow strip of forests, lakes, fjords, and islands that extend from south of Chiloe Island to Cape Horn, the southernmost point of South America. Almost 85% of the medium and small size industries are located in the big urban centers of Santiago, Concepción and Valparaíso. This concentration contributed to the degradation of the environment. The industry has been attracted to the urban poles by the size of the market, the linkages with other industries and the transport infrastructure.

2. Population

In 1992, the population of Chile reached approximately 13.2 mio and is growing at a rate of 1.7% annually (Eubel 1993). The population density rate for the whole country is low with only 35 persons per square mile. The population growth had peaked between 1955 and 1970 when the growth rate was 2.4%. This population growth has led to a quadrupling of the

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population since the beginning of the century when it had been at 3.2 mio. The population is expected to increase to 15 mio in the year 2000 and 20 mio in the year 2025 (Nohlen, Nolte 1992). The current population growth lies below the South American average of 2.1% as does the infant mortality rate of 18 per 1,000. The life expectancy increased from 55.5 in 1960 to 71,5 during 1985-1990. These population related indicators helped to move Chile up in the global ranking of countries according to the UNDP indicators of the quality of life above its rank according to its GDP per capita. Almost 80% of the people live in urban areas, with one-third of the population in the Santiago Region. Together with the 5th Region with Valparaíso as the seat of parliament, the urbanized center has 50% of the population. The current population of Santiago of 4.7 mio is expected to grow to 5.6 mio in the year 2000. The population of the next largest conurbanization Vina del Mar/Valparaíso reaches only 300,000. Only five other cities have more than 100,000 inhabitants. Ethnically, Chile is dominated by the 65% mestizo population which shares the language and culture of the 30% whites with Spanish- speaking ancestry. The Mapuche population numbers between 500,000 and 600,000 persons, about 4% of the total. Of the non-Spanish immigrants, 100,000 persons with German origin partially maintained a cultural identity.

3. Recent Political Development

With the presidential and parliamentary elections on December 6th, 1989 Chile formally returned to a democratic government and to a tradition which had lasted for hundred or at least 50 years, depending on the choice of the constitutional starting point one takes. The political modernization of Chile was accelerated with the elections in 1964 which brought the Christian-Democratic President Frei into power who tried to accomplish a political and social reform programme within the framework of a liberal democracy and of a capitalist economic system, but with an emphasis on import substitution and a strong governmental role in the economy. The 1969 election had the Unidad Popular as the winner with Allende as a marxist President. Its policies centered on a rapid transformation of the economy to gain political control over the economy by nationalizing the copper industry, accelerating the land reform, increasing governmental ownership in industry, nationalizing banking and foreign trade. But the left

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alliance lacked a concept of dealing with the various conflicting goals and an understanding of its impact on the national economy. Together with external pressure, these policies led to a rapid deterioration of the economic situation. The political style radicalized, led to an intensification of confrontations, which combined with the deterioration of the economic situation reduced the chances of Allende of staying in power beyond the next elections - a perspective which made a revolutionary takeover more attractive within and outside the left alliance (Nohlen, Nolte 1992). On Sept 11th 1973, the military under General Pinochet violently took over and established a junta with four members, abolished the Constitution and most democratic institutions and governed with military force and the well known political repression. In the late seventies, the junta had drafted a new constitution which confirmed the factual privileged position of the military and presented it to a plebiszite against the political opposition of the banned political parties which the junta won in 1980. In March of 1981, the new Constitution became legally effective until today although some transitory articles allowed the continuation of the emergency law until 1989 which was the legal basis for the suspension of the basic human rights. At the end of the eighties, Pinochet wanted to broaden the legitimacy of his Presidency by planning a presidential election with him as the only candidate which he was sure to win. However, the preceding plebiszite was won by the united political opposition with her "No" with 54% of the votes in Oct 1988. Afterwards, the process of negotiating the transition to a democratic election in 1989 began which consisted as a major compromise on behalf of the democratic opposition the acceptance of the 1981 Political Constitution and other elements keeping the military in a privileged position (Nolte 1994). The election was won by the candidate of the democratic opposition, Aylwin, with 55.1% of the vote and the Party Alliance for the Democracy, Concertación de los Partidos por la Democracia, with the Christian Democrats and the former left in the Party for Democracy (PPD) as the main groups, gained 72 of the 120 seats in the House of Representatives and 22 in the Senate against 16 of the elected opposition and 9 appointed by Pinochet. The change within the left towards the acceptance of the compromise of the transition was one of the key changes in the political ideology of the present situation. These parties operated between 1989 and 1993 as a coalition government under the presidential constitution (Nolte 1992).

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On the policy level, there was a broad consensus to continue with the economic policies, inherited from the 16 years junta government, but with a higher emphasis on social reform, but within the limits of available revenues and with a speed comfortable for the capital markets. The political style stayed technocratic which allowed the search for compromise with the political opposition. To a large extent, it is based on the experience of economic policy making under the junta and on a broader consensus in the change of the understanding of democracy as a model of competing elites with the voters in a choice position during elections. Industry associations and unions have shared this approach and developed with governmental support a growth oriented incomes policy. A similar development has taken place within the environmental arena where the dialogue between government, industry and environmentalists seems to be functioning despite all the conflicts on the policy level. The policymaking in environmental policy in general follows the structure of overall policy with a dominance of agencies and advisers. As will be seen in the report, environmental policies started in the late eighties, a number of regulations were issued in 1988 and 1989, but it became increasingly effective during the democratic government. The following description is mostly based on the situation at the end of 1993 with some changes included which occurred in early 1994. But in December the second democratic election took place and brought the Christian Democrat Frei into the President’s office which he assumed in March 1994. Currently, the cabinet is being formed.

4. Institutional Structure of Environmental Management

The institutional structure in environmental management is based on a number of laws and, important in Chile, decrees which were issued under junta rule, creating agencies, general directorates and substantive environmental regulations. The democratic government created coordinating agencies, passed a basic environmental law and started with a serious pollution reducing effort. But it did not create a completely new organizational structure, but it build on the fragmented structure it had inherited. The following description is restricted to those regulations and institutions involved in pollution control. The sectoral agencies involved in agriculture, forestry and energy and their role in integrating or

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environmental aspects (or lack of it) in their respective sectoral policies will be discussed in chapter IV.

4.1. Legal Framework 4.1.1. Existing Laws in Pollution Control

While there are already numerous references to environmental protection and resource conservation within Chilean laws and regulations, the primary legal mandate for environmental protection is based on the Chilean constitution of 1980. In Article 19 No. 8, it provides that all citizens have the right to live in an environment free of contamination, and it creates in Article 20 a special judicial mechanism to protect this right (Arensberg et al. 1989). It enables the government to establish specific restrictions with regard to the enforcement of determinated rights and liberties in order to protect the environment (Montenegro 1991). Beyond the constitution, the existing environmental regulations are widely scattered in a number of laws and decrees. If one restricts environmental management to pollution control and the provision of sanitary service to private households and to small business, the equivalent of the mediaoriented control laws of the industrialized countries, established in the 1970’s, does not exist yet. But, despite this lack of media specific basic environmental laws, regulation to control pollution takes place. In air and water pollution control and waste management, laws were passed, most of them created governmental agencies and empowered them to issue regulations. The most important laws are the Sanitary Code and the Water Code which could be considered the equivalent of basic pollution control laws. The major problem until the late eighties was their limited effectiveness. Besides the constitution that forms the fundamental norm in a hierarchical structure, the Chilean legal system distinguishes between laws (ley, L), decrees with legal power (Decreto con Fuerza de Ley, DFL), decrees-laws (Decreto Leyes, DL), decrees (Decreto, D), supreme decrees (Decreto Supremo, DS) and resolutions. The differentiation between the laws, the various types of decrees and resolutions results from their juridical status: The laws traditionally express the legislative power, and the various DFL and DL have the same juridical status. The difference with regard to the

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DL results from the fact, that the DL have exclusively been enacted by the executive power without being authorized by the legislative. Although these DL have been promulgated during the military regime, they still are in force. The DFL are legal norms issued by the executive with authorization of the legislative power. The supreme decrees are directly established by the President of the Republic. All laws pass into force after being published in the "Diario Oficial". The resolutions form the last category within the legislative structure. They are enacted by the respective public services, regional authorities etc. and define the functions and activities of the different public services (Montenegro 1991). Montenegro estimates more than 2.000 legal references to environmental issues that are still valid. Because of the relative frequent use of resolutions in the promulgation of some environmental standards they are considered legally unfounded by some authors (BKH Consulting 1992, p. 27). Despite these uncertainties, the competence to issue regulations is established for most pollutants and sources. But not all pollutants are covered, although most of the important sources have been addressed. The system is very complex because the source categories are usually regulated by sectoral ministries and their relevant services. The system becomes more complicated due to the fact that quite often the ministry in question does not have the authority to regulate all the steps in pollution control. In most cases, the authority for management, standard-setting, monitoring, enforcement and the application of sanctions is split among ministries, individual divisions (services) of ministries and the municipalities. This situation is considered to be inadequate as a basis for environmental management as it leads to: -

"Doubling of functions and overlapping of competencies among different public services. Lack of standardized criteria concerning environmental impact assessment and the required analytic method. Deficiency regarding a systematic and appropriate data collection system. Inadequate control mechanisms. Poor application of sanctions.

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-

Lack of continuous inter-institutional coordination" (Solari, Undurraga 1993, p. 36).

In order to overcome these weaknesses, there have been several attempts to elaborate a general environmental law.

4.1.2. Formulation of the Basic Environmental Law

In 1984, it was the task of the National Ecology Commission (NEC), which was subordinated to the Ministry of Interior, to work out a general environmental law to coordinate the scattered sectoral/ medial environmental functions and responsibilities between the different ministries. The "anteproyecto", elaborated by NEC, formed the basis for the actual draft "Basic Environmental Law" (Ley de Bases del Medio Ambiente). The change in government in 1990 finally gave place for a new and more decisive approach towards the formulation of the Basic Environmental Law. With the presidential decision of creating the National Environmental Commission (CONAMA) and thus replacing NEC in June 1990, the intended advisory, coordinating and inter-ministerial organization for the elaboration of the legal and regulatory framework was founded. The revised draft has finally been approved in February 1994 by the Senate and the Chamber of Deputies. It still has to pass the constitutional court and has to be published in the "Diario Oficial". It remains the responsibility of the newly elected government to implement the law. The law contains the definition of six major principles of environmental policy in Chile, defines the responsibility of CONAMA and establishes the authority to apply environmental policy instruments. The first principle underlines the "preventive measures", focussing on the implementation of the environmental impact assessment (EIA) for defined private and public projects; programmes for "environmental education", establishing of preventive management plans in order to avoid the degradation of natural resources and norms concerning the "responsibility with regard to environmental damages". The second principle establishes the "polluter pays principle" which compels the state to build up a monitoring and control system. This principle, expressed in the "presidential message", aims at the reduction of

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subsidies and emphasizes that the polluter has to find adequate solutions and cover their costs. The third principle is oriented towards "gradualism" with regard to all measures towards pollution control in a way not to retard the dynamic economic development process. The fourth principle refers to the responsibility of the polluter for the rehabilition of environmental damages, the restitution of deteriorated landscape and for civil liability. The fifth principle regulates the participation of citizens in decision making processes by incorporating non-governmental organizations in the advisory committee of CONAMA and by defining the participation in the procedure of EIA. The sixth principle is oriented towards efficiency, refering to the implementation of market-based instruments and giving priority to flexible instruments which allow a better allocation of resources. There is a widespread agreement that measures such as taxes, tariffs, tradeable emission rights should be implemented. Article 48 explicitly refers to the need of a law that will define the necessary regulatory structure and property rights as a condition for the implementation of tradeable emission permits (Villarroel 1993).

4.1.3. Planned System of Environmental Impact Assessment

With a few exceptions, it has not yet been mandatory in Chile to perform an EIA for development projects. However, precepts stated in the Political Constitution of 1980, requiring those projects that may affect the environment to assess the prospective impacts. This situation has led ODEPLAN, the predecessor of the Ministry of Planning and Cooperation (MIDEPLAN), to demand mining, hydro- and thermoelectric projects to carry out an EIA before starting new operations. Furthermore, projects financed by loans from World Bank and the Interamerican Development Bank required the investors to implement EIA (Jaksic 1989). In 1987, the Maritime Directorate was the first public sector agency that asked for the implementation of EIA on a legal basis. Moreover, the technical report, which is defined in Art. 24 of DS 185 of the Mining Ministry of 1992 already contains relevant components of an EIA report: Apart from the authorization by the Health Service (HS) or the Agricultural and Cattle

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Service (SAG) concerning the fulfillment of the respective technical standards, the Regional Commission of Environment, COREMA, as well as the "Sub-committee for Air Quality" are in charge of evaluating the data. The technical report to be presented by the applicant has to comprise details such as the operation process, description of the eco-system affected, monitoring measures, disposal of liquid and solid waste. The proposed procedure for the implementation of EIA, laid down in the Basic Environmental Law, is based on the requirements of DS 185 that are to be amplyfied with the following amendments: Detailled description of the project or intended activity, baseline studies, assessment of effects, prescriptions of the facts that make an EIA obligatory. A prognosis of the environmental impacts including possible risk situation has to be made. Recommendations of actions for the mitigation of impacts and measures are to be taken in order to minimize harm as well as proposals for the restauration of damages have to be made. An environmental management plan, indicating the compliance with the legal regulations, is required as well. The establishment of the technical criteria and the administrative procedure to be carried out by the investor have to be defined through DS by the President of CONAMA. After being approved by the sectoral ministries, CONAMA respectively COREMA will be the institution in overall charge of the final decision. COREMA’s responsibility refers to projects with regional effects only, while CONAMA decides on projects where the environmental impact goes beyond one region. The Terms of Reference for the EIA studies will be coordinated between the various ministers involved in order to avoid arbitrary requirements. The sectoral know-how will be integrated by using it as an input for the definition of the Terms of Reference and by evaluating the specific sectoral components in the study. The idea is not to overcharge CONAMA or their regional commissions with all the decisions concerning EIA, but particularly with the administrative control of projects requiring EIA only.

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4.2. Institutional Responsibilities

4.2.1 Main Ministries

The most important ministries with environmental responsibilites are: the Ministry of Health (Ministerio de Salud) and its regional Health Services (Servicio de Salud) and the Ministry of Public Works. The Health Services are in charge of setting standards, of enforcement and of control of compliance with ambient standards for air quality, water, waste, noise and food as far as they affect public health. Since 1978, the Health Ministry has set primary standards for particles, respirable suspended particles, CO, SO2, ozone and NO2. The Health Service grants permits for new plants and audits the compliance of existing plants with emission standards. In agricultural areas, the permits for new plants are issued together with the Agriculture and Cattle Service (SAG) of the Ministry of Agriculture. With respect to the ambient air quality standards, the Mining Ministry set the primary and secondary standard for respirable particulates and SO2 and for the procedure to reduce emissions at sites exceedings these standards (i.e. copper smelters). The emission standards for particulates of stationary sources were issued by the Health Ministry. The Health Services are responsible for pollution control measurements at stationary sources and they may close industrial plants temporarily in the case of a pre-emergency or emergency situation. The Ministry of Transport and Communications stipulates the limits for automobile emissions and the requirements for car licensing. They are implemented by the regional services of the Ministry. Based on the Sanitary Code of the Health Ministry, it is the duty of the Health Services to see that the waste disposal does not cause an environmental or a health hazard. The authority covers municipal and industrial solid wastes. Regarding water management, the Ministry for Public Works (Ministerio de Obras Públicas) and its Superintendancy of Sanitary Services (Superintendencía de Servicios Sanitarios, SSS) and its General Water Directorate (Dirección General de Aguas, DGA) carry out the central tasks. They are responsible for setting standards, monitoring, enforcement and sanctions concerning potable water, domestic and industrial discharges and sewage infrastucture. For water quality, the Ministry of Public Works

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and the Ministry of Health together have the authority over surface and groundwater. Based on the Sanitary Code, the Health Service is responsible for establishing the standards related to health and in charge of enforcing them. Water management, as far as the distribution and control of water quantities are concerned, is the main function of the DGA of the MPW. The Ministry of Defense legislates the protection of navigable, coastal and ocean waters and enforces these regulations. They cover discharges from industrial, mining activities and from maritime sources. The compliance is monitored by the General Directorate of the Maritime Territory and the Mercantile Marine (DGTM-MM), i.e. the Chilean Coast Guard (Cp. Figure II.1.). Because of this rather fragmented authority, attempts to improve coordination started early. The first step to provide a mechanism of coordination started with the establishment of the National Ecology Commission (NEC). The commission should advise the President, coordinate public sector work and formulate environmental policy. Due to the lack of technical and financial resources and uncertain political backing, NEC has acted more as a watchdog and monitor of public sector agencies than as a forceful supraministerial coordinating and advisory body (Arensberg et al. 1989).

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Figure II.1. Institutions Involved in Environmental Management

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4.2.2. National Environment Commission

The National Environment Commission (Comisión Nacional del Medio Ambiente, CONAMA) was created as a follow-up organization in June 1990 by DS No. 240, modified in 1992 by Decree 544, both promulgated by the Ministry of National Goods. CONAMA is a high level interministerial body in charge of studying, analyzing, evaluating and making recommendations to the Executive Branch on all matters related to environmental protection and natural resources management in the country. Its overall objective is to facilitate coordination, communication and strengthening of the public sector on environmental matters both across sectors and vertically, down to regional and provincial authorities and local organizations. CONAMA undertakes its work through a three-tiered organization structure. The policy making body is a directory council, consisting of the ministries of Economic Affairs, National Goods, Public Works, Agriculture, Health, Mining, Housing and Urbanism, Transport and Communication, Planning and Cooperation and the Secretary General of the Presidency. The policy making body of the Commission is a committee of ministers, charged with proposing the overall scope of work to the President. An operative committee serves as the ministerial technical advisory body. A technical and administrative general directorate undertakes the daily work of the Commission and is responsible for proposing general and specific workplans and required public sector activities. In all regions there are Regional Commissions of Environment (COREMA) the work of which is coordinated by the general directorate. In the Metropolitan Region of Santiago, this function is performed by the Special Commission for Decontamination of the Metropolitan Region (CEDRM). Every ministry is in the process of creating its own environmental unit. Furthermore, CONAMA has a consultative council, advising the directory council. In 1990, CONAMA started to systematize the existing information in order to get an overall view of the environmental status-quo in the whole country. For this purpose, CONAMA organized 13 regional seminars. The results have been published and constitute the basis for the setting of regional priorities in environmental management. Furthermore CONAMA initiated a compilation and analysis of all environmental related legal regulations that are still in force. The first results were published in 1992. The diagnosis

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made, both on the environmental situation and the legal structure, have been included in the elaboration of the draft for the Basic Environmental Law. In addition, CONAMA drafted the National Report for the UN Conference on Environment and Development in Rio 1992 and is currently developing a project for the adaptation of the Agenda 21. CONAMA recently received a loan from the World Bank of 32 mio US $ to support its planned activities from 1992-1997. This programme consists of the following components: - Improvement of the current environmental legislation; - Introduction of EIA for public and private sector projects; - Training of civil servants in environmental management; - Development of a national environmental information system; - Expansion of environmental (non-formal) education; - Promotion and introduction of economic concepts in the public sector decision-making related to the environment; - Strengthening of CONAMA. The second line of future activity focuses on the institutional development and enforcement of three selected sectors: Forestry, mining and manufacturing. The recently approved Basic Environmental Law defines the future role of CONAMA and specifies its organizational structure. The main objectives of CONAMA are formulated in article 71 of the Basic Environmental Law and they constitute a continuation of its previous multi-functional role as a coordinating and advisory body. The law emphasizes the need for an increasing competence of CONAMA regarding the implementation of the EIA-system on a national level, giving it responsibility for the final approval of the EIA studies, concerning private and public projects. In order to accomplish this task, CONAMA will train environmental consultants which will carry out the studies. According to the law, CONAMA is coordinating the definition of ambient quality and emission standards and is in charge of preparing programmes for their enforcement. Sub-committees in the relevant sectoral ministries are to be established. The first sub-committee to become effective was the Interministerial Sub-Committee for Air Quality, which prepared the DS 185. There is another sub-committee, responsible for the "Administrative Corporation for the Management of Water Basins", in which CONAMA is a member.

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4.2.3. Special Commission for Decontamination of the Metropolitan Region

To solve the critical pollution problems of Santiago, the Special Commission for Decontamination of the Metropolitan Region (Comisión Especial de Descontaminación Región Metropolitana, CEDRM) was created in April 1990. Its main task is to define immediate actions to reduce and control the serious environmental pollution in the Santiago Region. The Commission develops policies and undertakes studies required for effective environmental management, while the implementation of the respective projects remains within the authority of the sectoral ministries and their services. The special commission is undertaking its work through a committee of ministers, chaired by the Minister of Interior, an operative committee and a technical and administrative secretariat. The work of CEDRM is based on the existing legislation in consultation with the operative committee. Within the operative committee, the Ministry of Health is in charge of the control of noise, liquid waste discharges and air quality for stationary sources, whereas the Ministry of Transport and Communication controls mobile sources. CEDRM is empowered to decide about necessary emergency actions including temporarily closures of industries and the limitation (20 - 40 %) of the traffic. Within the framework of the definition of CONAMA's future functions, laid down in the Basic Environmental Law, CEDRM will be integrated to CONAMA as the regional environmental commission of CONAMA for the Metropolitan Area within the next two years. The National Institute of Norms (INN) is a technical institution charged with elaborating and actualizing standards and norms. The Institute also conducts studies on environmental standards proposed by ministries. The research projects are developed jointly with the sectoral institutions concerned. Many of the standards are adaptations of norms and standards elaborated by the Environmental Protection Agency from the USA. The National Production Development Corporation (CORFO) belongs to the Ministry of Economic Affairs. It is the main holding comapny for stateowned enterprises, founded in 1938. It became a key institution during the nationalization phase in the early seventies. It has lost importance due to the privatization, but some of its holdings are important, e.g. all the

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companies it owns in water supply. In addition, it has two specialized institutions to deal with research and information gathering: INFOR, the Forestry Institute, and IFOP, the Fisheries Development Institute. Each institution has the mandate to act in the environmental field. However, they have limited resources for the promotion of sound natural resource management.

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III. Problems and Policies in Pollution Control

This section will review the issues related to air pollution, water and solid waste management. It will identify the current level of control in terms of the legal basis and will try to assess its effectiveness. This summary of environmental policies serves as a background to identify and evaluate the use of market oriented instruments which will be described in more detail in section V. The three media-oriented elements of environmental policy are treated separately from the sectoral questions of agriculture, forestry and energy which have a high potential for the integration of environmental aspects in the sectoral policy-making.

1. Air Pollution Control

1.1. Pollutants and their Sources

The level of air pollution in Chile differs considerably on a regional basis, depending on the degree of urbanisation and the location of polluting industrial and mining facilities. With respect to air pollution, the most important location is the Metropolitan Region of the capital of Santiago which contains 37% of the country’s population and nearly half of its industrial activities. Of the other urban areas, only Valparaiso, Concepción and Antofagasta have populations above 100,000. The other most important sources of air pollution are the smelting facilities of the copper industry which are mostly located outside the urban areas, usually close to the ore bodies. Electricity generation is of lower importance with respect to air pollution since Chile has only two thermal (coal fired) power stations which supply only a small fraction of the total electricity. Since Chile is well endowed with sites for hydroelectricity, most of its demand is supplied by this source (Cp. ch. IV.3.). The copper industry in Chile is concentrated in the arid regions in the north of the country (2nd and 3rd Region) and in the center (5th and 6th Region). Air pollution is mainly the result of the smelting operations with a capacity of 3.6 mio tpy, which generate dust, SO2 and arsenic emissions. For dust emissions, the mining and concentration phases of the copper industry are additional sources, but here the main environmental problem

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are on the water side. The copper smelters are the most important source of SO2-emissions in the country, considerably above the emissions from thermal power plants which are the main concern in Europe and North America. The total emissions of SO2 have been estimated to be around 1.9 mio tpy in 1989 (Solari, Lagos 1991). (Cp. Map 3 in Annex II for location). Despite their location in mostly rural areas, these emissions cause damages to the health of the workforce and the population in the surrounding communities. In the case of Chuquicamata, the surrounding area is not used for agricultural purposes so that damages to crops could not develop. Damages to plants and wildlife in the desert environment have not been investigated. At the other smelter locations, damages to agricultural crops are expected, although the evidence is disputed. In one case, Ventanas, there has been a major conflict with farmers from the valley of Puchuncavi which subsequently led to emission control measures. The second important pollutants are arsenic compounds which originate in the ore bodies of northern Chile and which lead to a relatively high level of natural baseline contamination of soils and water with arsenic. The urban air pollution consists of the emissions from stationary sources, mostly industrial plants but residential heating as well as mobile sources and unpaved roads in the case of particulate matter. The urban air pollution of the other larger, albeit in comparison to Santiago smaller, urban areas is not referred to in the available references and does not seem to be the target of any regulations. A large share of the cities is located along the coastline, from Arica to Puerto Montt, where the climatic conditions are favorable towards dispersion and where the small size does not generate a high level of emissions. A question that could not be dealt with is the potential for air pollution in the area of Valparaiso/Vina del Mar and around Concepción. The other potential areas for air pollution, around the cities of the central valley, from San Felipe/ Los Andes to Temuco seem to be of lower importance as well. This assessment is not based on specific studies. In fact, the health of students in Los Andes serves as a reference for the damages to health of pollution level in Santiago (Belmar 1993). The compilation of emission sources has been completed only for Santiago (Sandoval 1993). The pollutants included are particulate matter (PM), SO2, NOx, lead, CO and volatile organic compounds (VOC). The distribution of the total emissions in Santiago reveals that for PM the

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unpaved roads, residential heating and mobile sources are most important. For SO2, the heating and industrial processes, while for NOx, VOC and CO mobile sources generate most of the emissions (Cp. Table III.4.).

1.2. Ambient Air Quality Standards So far, ambient air quality standards have been defined in Chile as primary and secondary standards, similar to the approach in the United States where primary standards are used to protect human health. Primary standards have been promulgated in 1978 by the Health Ministry (by the former National Health Service) for total suspended particulates, SO2, CO, ozone and NO2 through the Resolution No. 1215 and by the Mining Ministry in 1992 by Decree No 185 for SO2 and the respiratory fraction of particulate matter (PM 10: below 10 ug). These standards are not complete since annual means are only available for three pollutants (Cp. Table III.1). Table III.1. Chilean Ambient Air Quality Standards (in ug/m3) ___________________________________________________________ 1 hr 8 hrs 24 hrs 1 year ___________________________________________________________ Total suspended particles 260 75 Respirable particles 150 50 Carbon Monoxide 40,000 10,000 Ozone 160 Nitrogendioxide 470 300 100 Sulfurdioxide 1,000 365 80 (North) Sulfurdioxide 700 260 60 (South) ___________________________________________________________ Source: CEDRM, 1992, Solari, 1993a. The standards for SO2 which were promulgated by the Mining Ministry in 1992 are not stricter than those defined by the Health Ministry in 1978 for the annual mean of 80 ug/m3 and the daily average of 365 ug/m3. They are legally stronger in the sense that they are based on a ministerial

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decree and not only on a resolution which has been considered as questionable in court (Valenzuela 1991). For a number of other pollutants, especially VOC and toxic substances as heavy metals, ambient primary standards have not been defined yet. Currently, the priority seems to be on assembling the necessary information for a standard for arsenic compounds as the Decree No. 185 of the Mining Ministry provides for a procedure to define such a standard through an interministerial commission for air quality which the decree sets up under its title VII. In addition, the decree by the Mining Ministry of 1992 contains provisions for secondary standards to protect agricultural production and ecosystems and sets stricter standards for SO2. For this purpose, the country is divided into two sections, the dividing line being drawn from the mouth of the Rio Maipo south of the Metropolitan Region to the Andean mountains. For the Northern Regions which contains the drier regions with most of the copper smelters, the above primary standards are only complemented by an hourly maximum of 1,000 ug/m3. For the Southern Region with its humid climate and the higher importance of agriculture and forestry, the annual standard has been lowered to 60 ug/m3, the daily value to 260 and the hourly value to 700 ug/m3. The other pollutant for which a secondary standard has been promulgated is iron which was set at 30 mg/m3 on an hourly basis for the blossoming period of olive trees from September to December by a decree of the Ministry of Agriculture (No. 4). This is particularly relevant for the valley of Huasco, 600 km north of Santiago, where a pellet plant is located. In addition, the SO2 ambient standards have been regionalized. The D.S. 185 of the Mining Ministry provides for the classification of the country into five categories: - saturated areas, - latent areas, - non-saturated areas, - naturally saturated areas, - non-classified areas. Areas are classified as saturated when the ambient standards for SO2 and TSP are exceeded, as latent where the level of pollution reaches 80-100% of these standards and as non- saturated where the concentration lies between 0 and 80% of the ambient standards. Furthermore, the decree

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allows for the possibility of air pollution from natural sources, defined as non-anthropogenic, exceeding the ambient quality standard to be classified as "naturally saturated areas". For those regions without relevant information, the category "non-classified area" is used. In the transitory articles of the decree, the following two regions are classified as saturated:

-

Metropolitan Santiago with respect to PM 10, the area of the Chuquicamata division of Codelco with respect to SO 2 and PM 10.

The community of Catemu where the Chagres smelter is located is classified as a latent area. The decree furthermore requires the owners of copper smelters at Chagres, Chuquicamata, Ventanas, Caletones, Potrerillos and Paipote, together with the owner of a coal fired power plant in Ventanas to establish permanent ambient monitoring networks. At two locations, Chagres and Chuquicamata, these monitoring stations exist since 1986 (Solari, Lagos 1991). Besides these locations and outside the Metropolitan Region of Santiago, air pollution monitoring does not exist in Chile.

1.3. Approach to Air Pollution Control in Metropolitan Santiago

Because of high concentration of population and economic activitity and its specific location, the Metropolitan Region of Santiago has the highest concentration of air pollution in the country. As a consequence, the activities in air pollution control in Chile focus to a large extent on the Santiago region. While air pollution control outside of Santiago means the reduction of emissions from one or two larger sources, the total emissions in Santiago are the result of a number of different types of sources and a relatively high number of individual sources from the same source category. After the establishment of CEDRM (Cp. section II.3.2.), the approach in Santiago has been to try to address these sources in a comprehensive, cost effective manner. For this purpose, a source-oriented management plan has been developed and to a large extent implemented.

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1.3.1. Level of Pollution and the Emission Sources

The level of pollution in Santiago and the surrounding communities in the Metropolitan Region is determined by the high concentration of polluting activities and the geographical/ climatic situation of the area. Santiago is located in the valley of the Rio Maipo, between 400 and 900 m above sealevel at the feet of the Andean cordillera. In the east, the pre-cordillera range reaches up to to 3,200 m while the coastal mountains in the west have heights around 1,500 m. The valley of Santiago, extending 70-80 km in the north-south and 30-40 km in the east-west direction, is a relatively flat area with minor peaks up to 1,000 m. It is closed from the central Chilean valley by two smaller mountain ranges in the north and south, except for two smaller openings in the south and southwest. In addition, the valley is characterized by a climatic situation which yields a high number of days in the winter with an inversion of cold air around 800 m a.s.l.(Ulriksen 1993). As a consequence, in the winter the concentration of the pollutants reaches its highest levels, with the exception of ozone, where the chemistry causes the concentration to reach its peaks during the summer. The ambient air quality standards for TSP, PM 10, CO are exceeded in the winter and for ozone (O3) in the summer. The sulfur dioxide concentrations do not exceed ambient air quality standards at the current monitoring stations. O’Ryan emphasizes, however, that these stations are not close to the major emitters and the standards are exceeded close to these sources (O’Ryan 1993). The existing system of monitoring stations consists of two types: one set of 7 stations operating since 1978 with manual reading (Red de Vigilancia) and an automated system with 5 stations, installed in 1988 (red MACAM) (Prendez 1993). Based on these monitoring stations, the following figures show the distribution of the monthly means for PM 10 and the annual means for PM 10, and SO2. The figures concerning PM 10 demonstrate that the annual ambient standard of EPA (50 ug/m3), which is used here as a basis for comparison since there is no Chilean standard, is amply surpassed. It shows as well the increase of concentration on a monthly basis during the winter: Then, the monthly averages exceed the existing Chilean 24 hours standard of 150 ug/m3.

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Figure III.1. Annual Mean of Respirable Particles in Santiago ug/m3

Figure III.2. Monthly Mean of Respirable Particles in Santiago ug/m3

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Figure III.3. Annual Mean of SO2 in Santiago ug/m3

Based on these monitoring results, Escudero and Cofré (1993) summarize the priorities that were developed for emissions reduction as follows: Respirable fraction of particulate matter (PM 10) because of its grave effects on health and its high level of concentration between April and September, CO in the same months, Photochemical oxidants forming ozone concentrations in the spring, SO2 only on a local level in association with clearly identified sources. 1.3.2. Control Approach of CEDRM: Regulating Priority Emissions

With the 1978 Resolution No. 1215 and its ambient air quality standards, the Health Ministry provided the starting point for pollution control in Santiago. Although a number of decrees and other activities were

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undertaken in the 1980’s, the policy to control air pollution was largely ineffective since it was not followed by emission reduction regulations. The prerequisites for an effective pollution control were fulfilled only in the nineties. In the 1980’s, the important activities were the creation of the Environmental Health Service of the Metropolitan Region in 1982, the establishment of the existing monitoring network after 1987, a decree of the Ministry of Transportation and Communication in 1983, setting maximum concentrations for CO and visible fumes for automobiles (Katz 1993). The above decree of the Ministry of Transportation and Communication of 1983 was accompanied only by a minor enforcement effort. In 1990, the CEDRM published its air quality management plan for the Metropolitan Region. It consists first of a medium term reduction plan, mostly directed at stationary sources for PM 10 and SO2 and at mobile sources for PM 10, CO and photochemical oxidants. The second part is an emergency planning procedure for those periods with particularly unfavorable meteorological conditions. It contains an air quality index and a set of actions to reduce emissions or minimize exposure (BKH Consulting 1992).

1.3.3. Emergency Planning

The Emergency Air Quality Index is a composite of the concentration of CO, SO2, NO2, O3 and PM 10 as measured where the level of 200 corresponds to the available short term air quality (between 1 and 24 hours) standards (Cp. Table III.2.).

Table III.2. Emergency Index of Air Quality Index

Co

0-100 101-200 201-300 301-400 401-500

0 9 23 36 50

SO2

NO2

03

PM 10

Quality

365 1,117 1,868 2,620

0 470 1,563 2,657 3,750

0 160 573 987 1,400

0 150 210 270 330

good regular bad critical dangerous

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all values in ug/m3, except CO in ppm; the CO concentrations for an 8 hrs, SO2 and PM 10 for 24 hrs, NO2 and O3 for 1 hr. Source: Resolución 369 of 12.4. 1988 of the Health Ministry.

Table III.3. Emergency Programme of CEDRM ___________________________________________________________ _______ Action Pre-emergency Emergency index above 300 index above 500 ___________________________________________________________ ______ Restriction of vehicles 20-40% up to 60% Restriction of industrial production 20% 40% Use of contaminating heating material restricted prohibited Limitation of physical activities recommended prescribed ___________________________________________________________ ______ Source: Escudero 1993 Tied to this index is a set of restrictions, e.g. for driving automobiles, reducing industrial production, restrictions of the use of certain heating materials and for physical activities (Cp. Table III.3.). However, the existing monitoring system allows realtime measurement only for PM 10 for downtown locations. Because of the limited number of personnel, the enforcement of the restrictions is not assured (BKH Consulting 1992).

1.3.4. Air Quality Management Plan

The first part of the Air Quality Management Plan is a medium term emission reduction plan which is based on an inventory of sources and their major pollutants, undertaken on behalf of the Intendencia in 1989 (Intendencia 1989). The following table shows the results of this inventory (Table III.4.).

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Table III.4.

Total Annual Emissions of Air Pollutants in Metropolitan Santiago, 1990 (in t)

Sources

TSP

SOx

NOx

CO

VOC

Aldehydes

External combstion: home heatings

7,030

45,748

5,334

10,569

3,114

331

Mobile sources

5,470

6,181

23,435

367,695

28,184

--

Industrial processes

4,510

13,885

64

1,650

7,890

--

Fires

440

26

160

2,380

850

--

Evaporation

0

0

0

0

6,566

--

Street dust

33,950

0

0

0

0

--

Total

51,400

65,840

28,993

382,294

46,604

331

Internal combustion:

Source: Sandoval 1993,

It reveals the importance of industrial sources, diesel engines and "natural" dust (from unpaved roads) as the main sources of PM 10, the main air pollution problem of the area. For TSP, natural dust and industry are the main sources while the industry accounts most of the SO2 emissions and a good quarter of the VOC. The gasoline automobiles generate most of the NOx and CO and the diesel vehicles, mostly buses and trucks, cause, in addition to PM 10, a third of the NO x emissions. In the decontamination plan for Santiago, CEDRM asked for a reduction of 70% of the emissions of the stationary sources (CEDRM 1990). In 1992, the Environmental Health Service of the Health Ministry passed the DS No.4 for the Metropolitan Region. It contains an action plan for the reduction of PM 10 emissions from stationary sources, based on emission norms for existing and for new sources larger than 1,000 m 3/h. The emission standards for existing sources are as follows: 112 mg/m3 by Jan 1st, 1993 56 mg/m3 by Jan 1st, 1998. New sources can enter the Metropolitan Region only if they find compensation for their additional emissions from reductions of the existing sources. For the period between the two dates above, new sources have to compensate:

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25% by Jan 1st, 1994, 50% by Jan 1st, 1995 75% by Jan 1st, 1996 100% by Jan 1st, 1997. Based on the above concentrations and current flows, the total quantity of emission for each source is calculated which will form the basis for the marketable permits. The details and the operations of the system are analysed further in Chapter V.3. The decree No. 185 by the Mining Ministry, already mentioned for the ambient quality standards, sets the requirement for a decontamination plan for all sources larger than 1 t/day for PM 10 and 3 t/day for SO2. These requirements affect four sources in the Metropolitan Region (Chilgener, Soprocal, Molymet and Cemento Polpaico). The enforcement of these emission standards will be undertaken by the Programme for Pollution Control of Stationary Sources (Programa de Control de Emisiones de Fuentes Fijas, PROCEFF) which operates on behalf of the Environmental Health Services of the Health Ministry. It is exploring opportunities and ways of trading pollution permits (Escudero 1993). The residential sector as a major source of emissions from heating and cooking combustion has not been addressed in the action plan. So far, the envisioned plans focus on introducing emission standards for ovens and quality standards for charcoal (Escudero 1993). There is, however, a new development of a project of importing natural gas from Argentina via a pipeline to be financed with private capital. While the project needs large customers such as the thermal power plants and large industrial plants to recover the initial investment outlay, this substitution will reduce TSP emissions. Once the long distance connection is in place, connecting private households to substitute their current high emissions energy sources will be a lower investment risk. The action plan for mobile sources has two major components: One addresses the emission by the buses in the public transportation sector and the other the reduction of emissions by private automobiles. Furthermore, the instruments deal with different components of emissions: The mileage driven, the composition of the fleets and the emissions per mile (Cp. Annex IV).

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The emissions inventory demonstrates the importance of buses for the high priority pollutant - respirable particles:

Table III.5. Emissions from Mobile Sources, in t Vehicle

TSP

Sox

NOx

VOC

CO

Automobiles 1,808 and Busses

2,136

15,193

25,993

356,403

Taxis

3,662

4,044

8,242

2,191

11,291

Total

5,470

6,180

23,435

28,184

367,694

Source: Escudero, Cofré 1993 The analysis of the sector by Escudero and Cofré (1993) shows that the relationships between the various components are well understood and that an integration of the instruments is necessary. For the public transportation sector, it has to be mentioned that Santiago relies on two publicly owned and operated subway lines and a private bus system with a large number of owners. Fifteen years ago, the Ministry of Transportation declared the urban public transport for buses to be a free access system. This meant that whoever owned a bus could participate in the public transport system of the city without having to comply with any regulations or without being compelled to coordinate with the other bus operators. The result was a considerable expansion of the bus fleet with no minimum standards of quality. The capacity was estimated to 40% above demand, the fleet was overutilized and maintenance was lacking for a large share of the fleet. This resulted in a considerable increase in diesel emissions, i.e. NOx and PM 10. In addition, the transportation situation was chaotic since scheduling and bus stop locations were uncoordinated, resulting in considerable delay. The operators formed a price cartel which seems to have operated but the cartel did not regulate the quality of the buses (Escudero 1993). In 1989, the Ministry of Transport and Communication changed this full open access policy into a regulated access policy, based on an auction system. In a pre-qualification screening, the oldest buses containing 20% of the fleet capacity was retired and bought from their owners for their scrap value. Then, based on a trip-specific transportation model of the Metropolitan Area, the total number of demanded trips were estimated. This estimate formed the basis for the capacity up to which the bidding for corridors from the bus operators were accepted. The bids were awarded to

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formal enterprises (i.e. the owners had to have more than one bus) and resulted in contracts with the government which specified the routes to be served, the frequencies, the types of buses and the tariffs (Escudero 1993). This change improved the situation considerably by reducing overcapacity, overutilization and congestion. It still has to deal with the emissions of buses remaining in the system. For the operating buses, emission standards have been established, differentiating between new and old buses. New buses have to comply with a standard equivalent to the standard set for 1984 by EPA. Old buses have to comply with stricter opacity measurements, set in two decrees by the Ministry of Transport and Communications, D.S. 69/89 and the revision in D.S. 149/91. The standards depend on the horsepower of the vehicle and became tighter between 1989 and 1993. The implementation of these standards seems to create a number of difficulties. The available technologies are considered to be beyond the reach of average carshops. The testing of the buses is undertaken in two private, publicly licensed stations which have a concession until 1995. It seems to be attractive for bus and truck owners to buy/rent engines to pass the test without planning to use them (Katz, Saez, Reinke 1993). The ability to control the bus operators to comply with these regulations is the biggest challenge to the government in this area. On the road testing requires opacity measuring instruments which are ineffective and the visual inspection is not permitted according to the existing law (BKH Consulting 1992). For automobile vehicles with Otto engines, the basic approach has been as envisioned by CEDRM - to combine the use of emission standards with a congestion pricing and full cost road financing (Escudero 1993). So far, the establishment of emission standards for new cars have come into effect while the other instruments are still in the planning stage. Since 1992, a decree by the Ministry of Transportation (D.S. 211/92) requires all new cars to be used in the Santiago Metropolitan Region and two of the surrounding regions to comply with a standard which effectively can only be met by installing 3-way catalytic converters. At the same time, the corresponding requirements for unleaded gasoline were introduced. The effect of this regulation will depend on the purchase rate of new cars in the area which has been relatively high due to the rise of income and

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the open economy. Thus, the share of cars with a better technology will increase, but at the same time the retirement rate of old cars is relatively low. The increase in car ownership will increase the total volume of mileage driven. To deal with this problem, a law proposal is in the Chilean parliament to allow for the introduction of of road pricing, but the legislators have not passed it yet. The use of gasoline or automobile purchase taxes which are relatively low for the purpose of reducing automobile air pollution is not a topic in the policy-making papers. Additional actions to reduce private automobile use are the current expansion of the subway system with 250 mio US $ investments and the plans of private investors for the operation of two trolley lines in Santiago’s downton area (BKH Consulting 1992).

1.4. Air Pollution Control in Other Saturated Areas: Cleaning Up Copper Smelters

The approach to air pollution control in the other saturated areas is not based on uniform emission concentrations, but ambient standard-oriented. Since these standards are exceeded because of one or a few sources, designing a system of tradeable permits would not make sense, especially when a large share of these sources are government-owned as in the case of Codelco and ENAMI. Here, the plausible assumption is that the cost minimization objective would not be so vigorously pursued as by private companies in a competitive situation. The solution taken instead by the Chilean government is to look for an administrative solution with the aim to find the cost minimal solution jointly between government and industry. This solution consists of decontamination plans which bring the concentration of pollutants in the area below the ambient quality standard. Such a plan is to be developed by every regulated emitter. It is to be evaluated and its approval recommended by the Interministrial Committee on Air Quality. The final approval is by the regional Intendency and if necessary by presidential decree. So far, decontamination plans have been developed by the copper smelters. The copper industry consists of two government-owned corporations and increasingly more foreign privately owned companies. Codelco operates the larger mines and 3 smelters (Chuquicamata, Potrerillos and Caletones). It is still the largest producer of ore concentrates and copper. The operator of the two other smelters at Ventanas and Paipote, ENAMI,

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which takes on the ore of smaller mines and Codelco surplus, is government owned as well while only the smelter at Chagres is privately owned by a subsidiary of the Exxon corporation (Disputada Las Condes). Codelco and ENAMI are operated as government-owned companies in the traditional manner of developing countries, i.e. all of their operating profits are at the disposal of the Treasury to be used for consumptive or social purposes and the level and purpose of investments of the companies are decided by the government on a cabinet level. The Chilean government was quite aware of the impact of the SO2 regulation in the United States on the cost structure of the US copper industry in the seventies (cp. OTA 1988). As a consequence of the regulation, a number of smelters in the United States were closed and this development opened the capacity for the Chilean expansion (Solari, Lagos 1991). Furthermore, the less stringent requirements in air pollution control added to the Chilean cost advantage in the early eighties, although the resulting level of pollution was unknown at the time. In the late eighties, the question of pollution control was taken more seriously by the Chilean government. One reason were the charges of ecological dumping, initiated by the US competitors in 1984, supported by the US International Trade Commission, but at the time not implemented by the US President (Solari, Lagos 1991). The other reason was the developing awareness about the negative environmental and health effects of the smelter operations in the country. The first plant to be effectively regulated was the Chagres smelter of the subsidiary of Exxon by a special decree (D.S. 4) in 1985, imposing "primary and secondary standards as established by EPA for non-ferrous smelters in the USA". To comply with the standard, the plant operates a sulphuric acid plant with a 75% recovery of SO2. The Chuquicamata smelter was regulated in 1986 by D.S. 196, but this regulation did not amount to a requirement for emission reduction. It asked the company to issue a general warning if the standards were exceeded and to decrease production. "The monitoring results showed later that the way of calculation (of concentrations, V.H.) made the warning arrangements completely useless" (Solari, Lagos 1991 p.10). Table III.6. shows the situation in 1989: Chuquicamata, Chagres and Paipote had sizable sulphur recovery, but Chuquicamata still was saturated with respect to SO2.

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Table III.6. Chilean Copper Smelting Industry and its Air Pollution, 1989 ___________________________________________________________ Smelter

Capacity Equipment

Sulphur

Sulphuric

Environmen-

fixation

acid pro-

tal situation

1,000t

duction

concentr.

(%)

1,000t/y

___________________________________________________________ _______ Chuqui-

1,379.0

4 RF; 1 TC;

camata

7 PS; 1 Fl.

Caletones 1,109.0

2 RF; 2 TC;

32.0

424.8

Saturated SO2, and PM 10

5.7

25.6

Saturated SO 2

2.8

0

Saturated SO2

N.A:

0

No Reliable

4 PS. Potrerillos- 451.0

1 RF; 1 TC; 4 PS.

Ventanas- 313.4

1 RF; 1 TC;

3 PS. Paipote

228.9

1 RF;

Data 31.7

47.3

Latent PM 10

74.9

63.2

Latent SO2

2 Hoboken. Chagres

22.9

1 RF; 3 PS.

___________________________________________________________ RF: Reverberatory Furnace; TC: Teniente Converter; PS: Pierce Smith converter, Fl: Flash. Source: Solari, Lagos 1991

The situation today as a consequence of the decree of the Mining Ministry looks as follows: - Chuquicamata: Two more reverbatory furnaces are to be shut down and to be replaced by a Teniente converter. The installation of an additional sulphuric acid plant is planned to increase the SO2 recovery to 75% by 1999 with a total investment of 265 mio US $. The acid can be marketed quite well for the leaching of the Radomiro Tomic mine. - Potrerillos: The smelter has no treatment so far, but there are favorable circumstances because of the desert location and wind conditions. A local monitoring system is in operation. The responsible division of Codelco prepared a decontamination plan which includes a sulphuric

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acid plant to be used for the "Quebrada M" mine next to the smelter. The investment cost are estimated to be around 90 mio US $. - Caletones: Here the public suspects a major impact on the Santiago air quality, but the company insists that despite of their proximity the emissions do not reach the capital. But the local emissions create major problems for the health of the population in the area and for agriculture. Thus, the smelter has a plan for decontamination with a sulphuric acid plant with an investment of 160 mio US $. Here, however, Codelco lacks a customer in the area who can use the H2SO4 (Munoz 1992). - Ventanas: Here, the ambient air quality is a major problem because the site is used by a power station as well and the concentrations have been subject to a long public debate. In 1990, Ventanas began the operations of a first sulphuric acid plant from its Teniente converter (Solari, Lagos 1991), but there are plans to modernize in cooperation with Codelco with an investment of 300 mio US $ (Munoz 1992). These adjustments are planned over a ten year period. Still, the investments for pollution control will be a major share of the total investment budget. The short term aim is to reduce the SO2 emissions by 30% until 1995 and to create the conditions for an effective enforcement. Thus, Chile will be one of the first countries of the developing world to reduce the emissions from its non-ferrous industry. The approach centers on identifying those technological solutions which minimize the cost impact on the firm. The strategies adopted consist of the modernization of the plants, which would have been necessary anyway because of the declining ore content of Chilean mines, and of selecting those plants where the sale/inhouse use of the sulphuric acid helps to minimize the net costs impacts. The major problem to be resolved is at the Caletones smelter where a customer for the byproduct is still missing.

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III. 2. Water Management: Supply, Pollution Control and Water Rights

2.1. Distribution of Water Resources in Chile

As a result of the geographical dimension and climatic variability of the country, the availablity of water resources differs significantly from region to region. The northern subtropical regions basically consist of arid zones, including the Atacama desert. Heavy persistent fogs stabilize temperatures at 21 o C during the summer months and 16 o C in wintertime. In the central area of the country, mediterranean climatic conditions are dominant. The average annual rainfall reaches 356 mm as a minimum and the temperature varies with the season from 21o C in the summer to 9o C in the winter months. In the southern part of the country, the rainfall ranges from 500 mm to 2,200 mm. The Chilean rivers spring in high altitude, have a relatively short length and, thus, decline rapidly towards the ocean. In the northern part, the water resources are scarce and land use is basically dependent on the supply of only one major river (Loa). For several hundred km further south only dry valleys exist. Permanent rivers reappear in the 3rd Region with the river Copiapó. Until now, the water quantity available through the numerous rivers that are crossing the central valleys of the country, still is sufficient for the different water uses and consumption of the highly populated region. In the South with its numerous fjords and lakes and the low degree of urbanisation, there is enough water for most uses and there are numerous potential sites for the generation of hydro-electricity. For the country as a whole, the annual water withdrawal amounts to 4% of the available freshwater resources which is a figure similar to Switzerland. In the North, however, the natural scarcity of the available water resources leads to increasing competition among the water consumers. Water conflicts arise due to the high volume of water used for mining processes, for drinking water and for intensive irrigated agriculture. These problems occur both due to the natural shortage of the resource itself and due to pollution of the water. The mediterranean climate in the central valley around Santiago makes this area attractive for irrigated agriculture (Cp. Map 2 in Annex II.).

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2.2.

Institutional Framework for Water Management

2.2.1 Authority for Regulating Water Quality and the Respon sibilities for Water Supply and Sanitation

The problem of split competence and overlapping administrative functions, mentioned in section II.4., becomes particularly clear when one looks at those institutions involved in various aspects of water management: Six different ministries and just as many implementing and monitoring authorities are in charge of the management and protection of water resources. Water resources are divided into groundwater, surface water and marine water resources. The Ministry of Health and the Ministry of Public Works (MPW) have legislative power for surface and groundwater, the Ministry of Defense for coastal and ocean water. Based on the Sanitary Code (DFL No. 725, January 1968), the Health Service of the Ministry of Health has the responsibility of establishing and approving the standards related to health and the authority to take the actions that are required to enforce them. On the basis of decree (D.S.) 867 of 1978, the MPW sets the quality standards for five categories of water use: human drinking water, animal drinking water, irrigation, recreation and aesthetics and water for aquatic life. The official quality standards for Chile are defined in the NCH 1333 of the National Norming Institute (INN) (Instituto Nacional de Normalización, 1978). The Ministry of Defense legislates the protection of the marine resources as well as the discharges of industrial wastewater and wastewater from mining activities into ports, rivers and lakes. The Ministry of Defense also limits the discharge of waste into the Sea, based on the London Dumping Convention (Lagos, Noder, Solari 1991). The General Directorate which is in charge of the Maritime Territory and Merchant Marine (Dirección General de Territorio Marítimo-Marina Mercante, DGTM-MM) monitors the compliance with these regulations. The Fisheries Subsecretariat of the Ministry of Economic Affairs sets ambient quality norms for aquaculture in lakes and coastal areas and undertakes actions to control its implementation. Based on DL 3.557 of 1980, the Ministry of Agriculture with its Agricultural and Cattle Service (SAG) regulates the impacts of agricultural activities on

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water courses. "SAG can prohibit discharges, specially when they affect animals and crops" (BKH Consulting 1992, p.33). Until 1990, the National Service for Sanitary Works (Servicios Nacionales de Obras Sanitarias, SENDOS) in the Ministry of Public Works had been in charge of the supply of drinking water and of wastewater collection and treatment. SENDOS proposed water charges to the Ministry of Public Works and the Ministry of Economic Affairs which had to confirm them with a governmental decision. Greater Santiago still is mainly supplied with drinking water by the Metropolitan Water Works Company (EMOS), 98% of which is nationally owned (administrated by CORFO). Some communities were already supplied with drinking water by some small private waterworks. In general, water charges in the eighties covered only about 50% of their costs and the difference was paid by the Treasury. The investments for water supply have been rather low during the seventies and eighties and increased considerably in 1991 (Cp. Table III.7.).

In 1990, Chile started a reform of its system of the water supply and wastewater treatment. An organizational restructuring within the Ministry of Public Works is expected to lead to increased efficiency and started the privatization of the water sector. In 1990, on the basis of the law No. 18.502, the Ministry of Public Works founded its Superintendancy of Sanitary Services (SSS) and restructured the drinking water supply and waste water treatment sector. The Superintendancy of Sanitary Services is also in charge of granting licenses for and the control of discharges of industrial wastewater. The technical norms for discharge standards elaborated by this Superintendancy are uniform across industries and locations. At the moment, they are subject to a controversial discussion. With the foundation of this Superintendance, the institutional and organizational framework for the implementation of the 1916 law No.3.133 on the "Treatment and Purification of Industrial Wastewater" in practice was created.

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Table III.7. Investments by the Ministry of Public Works, 1972-1993 ___________________________________________________________ Year Total investment Investment in sanitary installations 1000 Mio. Pesos

1000 Mio. Pesos

% of total

___________________________________________________________ 1972 234.8 7.0 3.0 1973 232.3 24.4 11.0 1974 250.9 23.0 9.0 1975 156.6 19.0 12.0 1976 90.0 17.1 19.0 1977 88.4 13.8 16.0 1978 117.2 22.5 19.0 1979 121.2 11.7 10.0 1980 95.6 13.1 14.0 1981 116.8 16.8 14.0 1982 128.9 28.0 22.0 1983 105.8 25.3 24.0 1984 118.5 29.9 25.0 1985 117.3 26.0 22.0 1986 133.1 27.0 20.0 1987 125.8 24.6 20.0 1988 141.6 28.4 20.0 1989 138.2 33.0 24.0 1990 111.1 21.4 19.0 1991 139.6 35.1 25.0 1992 146.5 47.3 32.0 1993 159.9 58.7 37.0 ___________________________________________________________ Average 156.9 25.0 16.0 _____ _____________________________________________________ Source: SSS 1993

However, solving the critical pollution problems caused by untreated sewage water and liquid industrial residuals (LIR) on surface water and the threat of these discharges to groundwater quality, will require many years. A first step in terms of coordination for the treatment of sewage waters was taken in 1991 with the creation of the Technical Unit for the Treatment of Sewage Waters, dependent of the Sub-committee for Infrastructure. This

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Sub-committee coordinates the activities of the Ministries of Public Works, of Urban Affairs and Housing, and CORFO as the main owner of EMOS (BKH Consulting 1992). Legislation on water management is based on the Water Code, DFL No. 1.122, October 1981 of the Ministry of Justice. According to the Water Code, it is the duty of the General Directorate of Water (Dirección General de Aguas, DGA) of the Ministry of Public Works to coordinate and to control the management of surface water resources. The DGA is in charge of implementing the policies to protect water quality and coordinating the work of other public institutions. The General Directorate has the responsibility to plan, develop, administer, monitor and coordinate all actions, and is in charge of quality control, monitoring as well as planning permissions. This agency grants licenses related to private water use rights for consumptive and non-consumptive use. The DGA registers the existing property rights, controls the distribution of water according to the respective water use rights with the help of the private water organizations. Through the planned amendment of the Water Code, the DGA will be given the responsibility to elaborate water management plans for all water basins in the country. Watersheds will then serve as reference area for all water planning (Lobos 1993). At the moment, under the guidance of DGA an Interministerial Advisory Committee for the Management of Water Resources is compiling the terms of references for a first study which will elaborate the watershed management concept in six central water basins. For this purpose, the proposed amendment of the Water Code will provide the legal foundation of "Administrative Corporation for Watershed Management" with a 40 % share of public representatives and 60 % from private user organizations. In this context, DGA will fulfill the role of a Superintendancy, in charge of controlling the functioning of the "Administrative Corporations" as well as strengthening the public administrative capacity and initiating public investigation programmes.

2.2.2. The Legal Basis of, Initial Distribution of and Trade in Water Rights

"Chile is unique among developing countries in that it has a system of transferable water use rights. Although water is considered a national

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resource, individuals can own perpetual and irreversible water use rights. These rights are independent of land use and land ownership, thus trade of water rights is fairly unrestricted" (Hearns 1993, p. 2). According to Article 7 of the Water Code, the water use rights are given for quantity per period of time, but water quality is not included in the definition of water rights. The law, however, distinguishes between consumptive and non-consumptive rights. With regard to the consumptive right, the right holder can consume the permitted quantity per period of time as he pleases. Irrigators own full consumptive rights to their water. The initial distribution of water rights is based on an application of a potential user which is examined by the DGA with respect to the availability of excess waters. During the application procedures, third parties have an opportunity to raise objections if the granting of the new water right impairs their own right. The upper limit of the water rights to be distributed are the ecological requirements of the minimum flow. All water use rights are granted free of charge by DGA. In times of water shortage, DGA is allowed to restrict the consumption of water. The water rights are compiled in a national register, operated by DGA. Downstream users, however, do not have rights to return flows generated by an upstream user. This aspect is important because "not less than 70% of the water quantity is flowing back to the river via surface or underground water and thus is determining the water use of the downstream holder" (Pena/Retamal n.d., p. 4). This is significant, given that water users in downstream sections of a river divide water that enters the river through springs, rainfall, and return flows. These rights are not legally protected from any change in upstream water use that significantly reduces return flows. The owners of water rights downstream have a right to a certain percentage of river flow, but do not have an assurance that their section of the river will receive any water. In a recent court decision, EMOS was granted full rights to its treated sewerage effluent, despite the fact that farmers have traditionally irrigated with this water. Concerning non-consumptive rights, Article 14 of the Water Code regulates the users obligation to return the water in the same quantity, quality, substances and potential of use. DGA controls the water user’s organizations. They are private cooperatives, organizing the distribution of water according to their property rights, and they maintain the infrastructure of the irrigation system.

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Currently, an amendment of the Water Code is planned, proposing a regulation and the limitation of property rights related to the national water resources. In a Presidential Message, a change of Article 26 of the Water Code is planned, empowering the authority to withdraw water use rights in case that the water has not been used for productive purposes during the last five years (República de Chile 1992). It will be the responsibility of the DAG to take measures against an accumulation of water use rights as an object of speculation. DGA suggests a temporary limitation of water use rights to about five years, allowing a prolongation. In the future, water rights free of charge should be excluded (Dourejeanni 1993). In case the water is not used for productive activities an annual charge is considered. This fee will differ from region to region according to the water condition of the area in question (República de Chile 1993a). The proposed amendment emphasizes a more restrictive administration of private water use rights and will give DGA extended planning, managing and preventive authority. In the future, an "Administrative Corporation for Watershed Management" will be in charge of a better coordinating of water use rights. At present, no precise estimate can be made concerning the political and legal possibilities of the "Administrative Corporation" to restrict property rights in order to facilitate the implementation of watershed management. Chile is one of the few countries in world where water rights can be freely traded and where such a trade is quite common. The extent of this trade and the conditions are not well documented on a country wide basis. It is known that intrasectoral trade takes place between farmers, particularly in terms of seasonal rentals. Intersectoral trade takes place as well with water supply companies buying water rights from irrigators which saves them to build new supply infrastructure. The companies revealed that they did not have a fixed offer price, but instead final transaction prices were determined during individual negotiations. According to these representatives, the principle factors that determined these prices were distance from the company's intake point, quantity of water use rights sold, and the information available to the seller (Hearne 1993). The functioning of the markets of water rights in Chile will be analyzed with respect to the market characteristics, price formation, the distribution of the gains from trade on the basis of three river basins for a World Bank study (Hearns 1993).

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"The Elqui River services a productive agricultural zone as well as a growing port, service and tourist community of 150,000 population. The municipal water supply company has chosen not to invest in a dam project and instead is purchasing water use rights from irrigators in order to meet its growing demand. The Limari basin has a well regulated irrigation system with three dams, including a large reservoir for interseasonal storage. In this area agriculture is well developed and trade between farmers is common, although little intersectoral trading occurs. Also, seasonal rentals of water rights have occured in this area, specially in drought years. The Maipo river supplies water to EMOS and irrigates a well developed agricultural area. Both EMOS and Lo Castillo, another water company, are currently buying water use rights in this basin" (Hearne 1993, p. 9). The current assessment of water markets is based to a large extent on the research on water in the western United States which has a similar climate regime, but a fundamentally different regime of water rights (prior appropriation) and a relatively restricted set of trading rules. Most economists are convinced that the water rights in the western states of the USA are unnecessarily restrictive and prevent some transfers that could very well be considered efficient. But at the same time it is clear that water markets operate with a considerable level of externalities (return flows, quality changes, minimum flow requirements) and that they can be characterized as thin markets with high transaction costs (Saliba, Bush 1987). But, it is clear that, whatever the imperfections of water markets are, the need increases to ration water use, to reallocate water use from lower to higher values and to manage water not only from the potential of increasing supply but from the demand side as well the more intensive the use of existing sources of water becomes. Chile relied on organized water markets in the past which have to be regulated to deal with the above externalities. It is not clear whether the proposed changes in the Chilean water law will result in an effective reform to deal with these externalities or whether it will introduce unnecessary trade restrictions. It is to be expected that the suggested restrictions, as described above, will be subject to a political controversy in future which, hopefully, might generate research to provide the debate with a reasonable basis.

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2.3. Water Pollution Control: Ambient Quality and Regulation of Discharges 2.3.1. Level of Water Pollution and Types of Sources

One of the major sources of water pollution in Chile is the discharge of untreated sewage into water courses that are often used for irrigation further downstream. In Santiago, the health risks "are mainly associated with the use of contaminated river water for irrigation purposes which ultimately leads to contaminated food. Surface water upstream from the city is used as a major source for drinking water. In 1989, it was indicated that 0.6 % of the urban population in Santiago was at risk because the bacteriological standards were not met and 5.5 % was at risk because iron levels were found to exceed the norm" (BKH Consulting 1992, p. 10). In 1991/ 92, the outbreak of the cholera epidemic in Peru and a number of cases in Chile served to emphasize the importance of drinking water quality on the political level. As a second major source, untreated industrial wastewater is discharged directly or indirectly via the sewerage system into surface water. A first study on the sources of liquid industrial residuals was undertaken in 19871988 by the Intendancy of Santiago (BKH Consulting 1992). This study identified the main sources of industrial discharges that could affect the operation of conventional treatment plants for sewage. Samples were taken and analyzed for 85 representative industries. "The industrial sectors with highest and most diverse metallic content from their liquid discharges in Santiago are textiles, paper and cardboard, chemical products, tanneries, metallurgy, metal-mechanic, graphics, copper mining and galvanoplasty. Of the five elements that exceed the standard (Al, Cu, Fe, Cr and Mn) the main sources are: for Al, paper and cardboard (90%); for Cu, copper mining (86%), for Fe, copper mining (29%), metal-mechanics (26%) and paper and cardboard (16%); for Cr, tanneries (48%) and metal-mechanics (40%) and Mn, copper mining (96%)" (BKH Consulting 1992, p.45). Major water pollution results also from agricultural activities. In irrigated areas agrochemical substances, i.e. pesticides and fertilizers are discharged into the irrigation canals and flow into the water courses. Due to the lack in systematic data gathering, detailed information regarding the

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extent of the water contamination are not yet available (Cipma 1990). Additionally, intensive agriculture, based on irrigation, leads to salinization of the water resources and the high rate of evaporation of the irrigation water increases the loss of water. Furthermore, the various mining processes require a considerable quantity of water and contamination of waterstretches or the ocean is caused by the discharge of untreated effluents resulting from the copper concentration and flotation processes. For about 50 years, the water contamination resulting from copper processing, was considered to be the country’s major environmental problem. During this period, the mining waste of about 32-35,000 tons per day have been discharged along the coastline of Chanaral, destroying the marine flora and fauna (Duran 1990). Major water contamination occurs from the operations of the mines El Salvador, El Indio, La Cocinera de Ovalle. Here, there are phyical limits for drinking water supply and the quality became a major problem due to high concentrations of compounds of arsenic which exist from natural sources and are due to the mining activities. Marine resources are affected by the fishmeal and fishoil industries, located along the coastline. Organic, bloody and oily residues from the processing as well as organically loaded washing water has been pumped into the sea without treatment. In the Southern Regions effluents of the timber processing industries flow directly into the river BioBio, the Bahia Coliumo and the Golf of Arauco. However, during the last years, the larger plants have already installed their own treatment facilities or plan to do so. In the Central Regions, the major water pollution problems result from the discharge of untreated municipal and industrial wastewater into the rivers and ocean. In irrigated areas water contamination is caused by inappropriate drainage systems, deficiencies concerning maintenance and the extensive uses of agrochemicals.

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Figure III.4. Map of the Santiago Area, its Main Rivers and their Level of Contamination, 1985.

In the Metropolitan Area, the sewage is discharged into three receptor courses: approximately 65% to the Zanjon de la Aguada, 32% to the Mapocho river and nearly 3% to the Maipo river. Only the water of the latter one is not used for irrigation, while the downstream water of the Mapocho river and the Zanjon de la Aguada serve for irrigation. A study carried out in 1980 showed that the level of contamination by faeces in different zone of the Mapocho river fluctuated between (10)5 and (10)6 coliform groups per 100 ml of water. As points of reference 5x(10)7 of coliform groups per 100 ml is the average of undiluted sewage in Chile and the irrigation water standard is (10)3 coliform groups per 100 ml (BKH Consulting 1992).

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Figure III.5. Concentrations of Total Coliforms in the Rio Mapocho

How much the coliform standards are exceeded at the same water stretch could be demonstrated once more in 1986 on the basis of a study supported by the Japanese International Cooperation Agency. Furthermore, measurements in March 1992 showed that faecal coliforms surpassed 6 million/100 ml in some points (Cp. Figure III.5.) Significant hourly variations were registered of total coliform (from 2 to 9 million) and feacal coliforms (from 1 to 6 million).

2.3.2 Existing and Planned Regulation of Water Quality

Legislation for the protection of water quality has a long history in Chile. It started with the Law No. 3.133, promulgated by the Ministry of Public Works in 1916. It established indirectly the polluter-pays-principle and defined two criteria for the protection of water quality: one preventive (before pollution occurs) and another of enforcement (when the polluting activity is being undertaken). In the preventive phase, authorization must be requested from different control institutions before a polluting firm can

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operate. In the enforcement phase, it establishes the institutions responsible for this activity. To complement this law, a host of other laws has been put into place, in particular in the last twenty years and the corresponding institutions have been assigned specific responsibilities. The water quality has been defined in 1978 in terms of water use, i.e. drinking water (human and animal consumption), irrigation water, industrial use, recreation and instream use (Cp. Table III.8. for drinking and irrigation water.). The relevant decree is No. 867 of the Ministry of Public Works which establishes the official standard of the National Norming Institute, NCh 1333, as the national standard. For these uses the standards cover physical requirements, maximum concentrations for chemicals, radioactive and bacteriological requirements, but there is no general standard for biological oxygen demand. Separate water quality objectives for all rivers or according to the major use of rivers do not exist. Neither are different stretches of water designated for specific water uses. The monitoring of water quality is the resposibility of the DGA. The department of hydrology of DGA has installed 286 stations country-wide for monitoring the water quality and at 51 check-points sediments are examined. At 10 monitoring stations the water quality of lakes is tested. (Lagos et al 1991, p. 30). Annually about 3.600 samples are examined in the DGA’s own laboratory and stored in the National Water Data Bank. The laboratory is capable of analyzing chemical pollutants, but not bacteria.

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Table III.8. Quality Standards for Drinking and Irrigation Water ___________________________________________________________ Characteristics Unit Standard Drinking Irrigation water water ___________________________________________________________ ph 5.5-9.0 Electric conductivity ms/cm 750 Suspended Solids ppm 500 Filtrable solids mg/l 1,000 Coliform Groups pcs/100ml 5 1,000 Nitrate mg/l 10 Nitrite mg/l 1 Sulfates mg/l SO450 Ammonia mg/l N 0.25 Arsenic mg/l As 0.05 Cadmium mg/l Cd 0.01 0.01 Chlorine mg/l Cl250 200 Chrome mg/l Cr 0.05 Copper mg/l Cu 1.0 0.2 Cyanide mg/l CN 0.2 Fluorine mg/l Fl 1.5 Iron mg/l Fe 0.3 Lead mg/l Pb 0.05 Magnesium mg/l Mg 25 Manganese mg/l Mn 0.1 Mercury mg/l Hg 0.001 Nickel mg/l Ni 0,2 Selenium mg/l Se 0.01 Zinc mg/l Zn 5.0 2.0 ___________________________________________________________ Source: (NCh 1.333 and NCH 409/410) "Furthermore, DGA has undertaken monitoring of twenty points in the Maipo Basin on a regular basis for the last 35 years, taking samples manually at a minimum of four times a year. However regular monitoring with the aim to detect violations is not performed. The current system is clearly insufficient for this purpose. The absence of a calibrated model hampers the possibility of evaluating the effects of

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wastewater discharges, treated and untreated, on river quality" (BKH Consulting 1992, p.vi). In case of violations the respective services (HS, SAG, SSS, DGTM-MM) are informed. However, it has been estimated that due to the lack of personnel and the deficiency in monitoring equipment, only 20% of the contaminations occuring will be detected and sanctioned. DGA also undertakes tests to examine the levels of other pollutants like BOD and microbiological pollutants. However, this is done only sporadically because DGA must pay outside laboratories to do the analysis. To manage quality control efforts more effectively the DGA has recently created the Conservation and Protection Department for Water Resources. An important activity of this Department has been to begin processing the available information (BKH Consulting 1992). In 1993, the Superintendancy of Sanitary Services contracted the consultant group CADE-IDEPE to establish a country-wide inventory of 2.827 industries and 43 water treatment companies. The study had the following objectives: - to survey all sewage after collection services and industries that discharge into the collection system or directly into the rivers and oceans. - to identify the services and industries responsible for most of the polluting discharges, - to identify the main uses of the receiving water bodies and to gather information regarding the degree of contamination of the receiving water bodies, - to classify polluters according to their contribution to total pollution, - to define action plans to deal with the water pollution problem. The information obtained from the study formed the basis for the proposal of "technical norms" for emission standards of industrial discharges. Table III.9. shows that 2/3 of the industrial plants in Chile discharge into the public sewage systems, only 6 % discharge into the ocean and 15% percolate in the soil. In Santiago, the percentage of indirect discharges is much higher, namely 82%.

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Table III.9.

Inventory of Direct and Indirect Discharges, Chile and Santiago, Industrial and Municipal Sources

___________________________________________________________ Discharge Industrial Sources Municipal Sources destina(%) (%) tion Santiago Chile Santiago Chile ___________________________________________________________ Sewers 82.0 65.4 ** ** Rivers 1.1 6.3 65.2 67.2 Lakes -0.3 -1.5 Ocean -5.8 -23.2 Canals 3.5 3.6 3.0 1.8 Soil 8.4 15.4 1.5 1.3 Other 2.0 3.3 30.3 4.5 ___________________________________________________________ Total 100.0 100.0 100.0 100.0 ___________________________________________________________ Source: Sepúlveda 1993

Based on the above inventory of dischargers and the available information about treatment technologies, the Superintendancy of Sanitary Services proposed discharge standards (Cp. Table III.10.). These standards are to be applied at the national level and uniformly across industries and their locations. They distinguish between industrial discharges into the municipal wastewater collection system and industrial effluents that directly flow into the water courses. The respective parameters differ in the parameters included (indirect discharges have a maximum for BOD5; direct discharges have a value for faeces) and for some parameters in the value of emission standards to be complied. The standards for indirect discharges are lighter for suspended solids, fats, cadmium, phosphor, nickel, nitrogen and sulfur and they are tighter for hydrocarbons and sulfates.

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Table III.10. Proposed Standards for Discharges into Rivers and Sewers ___________________________________________________________ Characteristics Unit Expressed Sewers Rivers as ___________________________________________________________ pH 1 unit 5.5-9.0 5.5-9.0 oC Temperature 35 35 Suspended Solids mg/l S.S. 300 100 Sediments ml/l/hr. 20 20 Oils/fats mg/l 150 50 Hydrocarbons mg/l 20 50 BSB5 mg/l BSB5 300 -Phosphorus mg/l P 10 1 Nitrogen mg/l N 80 10 Sulfates mg/l SO4 600 1,000 Sulphur mg/l S 5 3 Coliform feaces NMP/100ml 1,000 Arsenic mg/l As 0.5 0.5 Cadmium mg/l Cd 0.5 0.3 Chrome mg/l Cr 0.5 0.5 Copper mg/l Cu 3 3 Cyanide mg/l CN 1 1 Iron mg/l Fe 10 10 Lead mg/l Pb 1 1 Mercury mg/l Hg 0.02 0.02 Nickel mg/l Ni 4 3 Zinc mg/l Zn 5 5 Detergents mg/l 2 2 Clorinated mg/l 0.5 0.5 Methane Phenols mg/l Phenols 0.5 0.5 ___________________________________________________________ Source: Superintendencia de Servicios Sanitarios 1993 The standards related to indirect industrial discharges require that the quality of the industrial liquids should not substantially differ from the quality of the municipal wastewater in order to avoid damages to the sewer

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system and the wastewater treatment plants. The uniformity across industries and locations shows that economic reasoning was not decisive in influencing this approach to water quality control. However, due to a lack of the definition of water quality standards for the receiving water bodies, the specific water quality standards to be reached as a result of this discharge restrictions are not clearly defined yet. Furthermore, no restrictions have been established on the number of firms, their locations or the total quantities of each pollutant to be accepted. The intention of the Superintendancy of Sanitary Services in defining these technical norms was to guarantee that the quality of the receiving water body will allow the five water uses, described in the NcH 1.333 (SSS 1992). Result of this uncertainty concerning the specific water quality to be met is that water supply companies define the water quality criteria themselves. EMOS has decided that the water leaving its own treatment plants are usable for irrigation. The proposal of nationally uniform emission standards to be complied with by the industry is subject to a controversy discussion between the industry, represented by the Environmental Commission of Chilean Industry Association (Sociedad de Fomento Fabril, SOFOFA), and the water authorities. SOFOFA opposes the uniformity of emission standards independently from the existing load of the water course and its prospective use. SOFOFA also argues that this restrictive regulation contradicts the central principle of "gradualism" guaranteed in the Basic Environmental Law (Cp. ch. II.3.1.2). Furthermore, SOFOFA is calling for consideration of the possibility to what extent the compensation model adapted in the air pollution control could be transferred to the water sector. This would enable the industry to decide about the cost-effective solution as well as the technology to be applied. First, an attempt should be made to distinguish between "saturated" and "latent" water stretches. Based on this distinction, different emission standards should be stipulated. In the view of SOFOFA, the existence of property rights of users of water are a precondition for the implementation of market based instruments. For this purpose the water use rights, that only refer to a defined quantity of water should be expanded by a determination of ambient quality standards (Mege, Rivera 1993).

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2.4. Drinking Water Supply, Sewage Collection and Treatment

In 1992, drinking water supply was provided for about 97.6 % of the population and 84.8% of the households are connected to a sewage water collection system (SSS 1993). Here, Chile is leading of all Latin American countries. A comparative study of the World Bank on management and operational practices of municipal and regional water and sewerage companies in Latin America and the Caribbean highlighted, that "EMOS has the highest staff productivity ....This is due to EMOS’ s successful use of private contractors in areas like meter reading and system maintenance, areas that are usually handled in other companies by their own staff" (Yepes 1990, p. 9). In addition, public investments in the sanitary sector have been increased significantly during the last years and in 1992, about 32 % of public expenditures were used for the expansion and development of the sanitary infrastructure. The restructuring of the water sector is based on the following main principles: The separation of the government’s controlling function from the functions of water companies. This allows the government to become shareholder. Also, it stimulates private investment in the water sector. Therefore it was necessary to introduce new water charges for private and public companies aiming at full cost recovery, to change the policy of subsidies in favour of direct financial support for water consumers with low incomes, and to reach more transparency in terms of concessions to operators of water supply and waste water treatment plants. Favorable new opportunities for private capital result from the restructuring of the water sector that started in 1990. The determination of the water charges, which differ considerably from region to region, is based on costrecovery.

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Table III.11. Water and Sewage Tariffs in the Chilean Regions, 1992 ___________________________________________________________ Company/Region Average Rate, Target RateTarget Rate Effective 92 94 above Effective Pesos/m3 Rate (%) ___________________________________________________________ ESSAT S.A. I 230.4 303.7 31.8 ESSAN S.A. II 236.6 420.7 77.8 EMSSAT S.A. III 163.1 230.1 41.1 ESSCO S.A. IV 160.4. 177.1 10.4 ESVAL S.A. V 131.8 173.9 31.9 ESSEL S.A. VI 110.5 119.9 8.5 ESSAM S.A. VII 120.7 132.7 9.9 ESSBIO S.A. VIII 111.6 134.1 20.2 ESSAR S.A. IX 130.7 184.4 13.5 ESSAL S.A. X 114.7 137.9 20.2 EMSSA S.A. XI 154.2 194.4 26.1 ESSMAG S.A XII 157.9 204.9 29.8 EMOS S.A. M 90.9 103.6 14.0 MAIPU M 88.9 116.1 30.6 L.DOMENICOS M 89.2 108.0 21.1

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MANQUEHUE S.A. M 15.6 SERVICOM. S.A. M 12.4 L.CASTILLO S.A. M 16.0

99.2

114.6

84.7

95.2

92.5

107.4

___________________________________________________________ Average rates include water supply, sewage collection charges and fixed charges according to consumption; 1 US $ = 402.5 Pesos. Source: Superintendencia de Servicios Sanitarios 1993

The calculation of the water charges covers the entire system: production costs, distribution, collection and treatment of wastewater. According to a "calculatory formula" defined by SSS the respective water prices that are suggested by the operator of each plant, will be verified by independent consultants before being approved by SSS (Camara Chilena de la Construcción 1991). Every five years the "calculatory formula" is to be revised. A pre-financing of investment costs for expansion is possible through consumer's grants, refunded via water supply or stock shares. The density of the water supply and sewage water collection system does not lead to a high coverage of wastewater treatment. In most cases, the wastewater is only collected and flows untreated directly into the ocean or into the rivers (CONAMA 1992). For Santiago, in 1993 the first municipal treatment plant has been put into operation. Owned by EMOS, the plant in Santiago Poniente is a pilot non-conventional treatment plant based on a pond system. It treats wastewater for 120,000 of persons, i.e. about 4 % of the municipal effluents of Santiago.

3. Solid Waste Mangement

The Ministry of Health defines the various types of wastes. In Decree No. 78 a list of compounds is used to define hazardous waste as a separate category.

3.1. Types and Volume of Solid Waste Generated

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3.1.1. Municipal Solid Waste

Currently, there are no statistics available on the type and volume of waste generated in Chile. The National Environmental Comission (CONAMA) is developing partial statistics on domestic waste in Santiago and an inventory of hazardous waste. According to the Metropolitan Environmental Health Service, urban inhabitants generate in average in Santiago 0.6 kg of solid waste per capita per day (about 220 kg per capita annually), between 0.05 to 0.1 kg per capita per day in rural areas and 0.2 kg per capita per day in cities between 10,000 to 20,000 inhabitants. In 1992, Santiago’s population of 4.2 million generated 1.6 million tons a year, 380 kg per capita annually (GESAT 1992). An estimate by BKH Consulting (1992) for 1990 shows an average for high-income communities in Santiago of 560 kg and of 11 lower income areas of 250 kg. The domestic solid waste in Chile on average has a humidity of 65% with a density between 0.33 to 0.35 kg per liter. Table III.12. shows the composition of the domestic solid waste in 1980, the latest year for which there are data:

Table III.12. Composition of Municipal Solid Waste, 1980 __________________________________________________________ Compounds % in weight ___________________________________________________________ Organic matter 72 Paper and carbons 14 Metals 3 Textiles and leather 3 Glass 1 Plastics 1 Unclassified 6 ___________________________________________________________ Source: OPS/ OMS 1980 The composition reflects the importance of organic matter which is common to most developing countries. This points to a potential of recycling the waste as compost.

3.1.2. Industrial and Hazardous Wastes

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The sectors with the highest level of waste generation are mining (tailing waste, cyanide-leach waste and mercury from micro gold ore operations), paper-mills (polychlorinated compounds including dioxines) and agriculture (organo-chlorinated and organophosphated compounds). Small and medium size entreprises are an important source of solid and hazardous waste as well. There are no available statistics about the type and amount of waste generated. In four different regions of the country (Santiago, Antofagasta, ValparaisoVina del Mar, Concepción-Talcuhuano-Penco and Puerto Montt), investigations will be carried out by the Health Services in order to obtain an overview of the arising and transport/ disposal of industrial waste.

3.1.3. Mining Wastes

There are no complete statistics on the generation of waste in the Chilean mining sector. The various types of sources of waste from mining can be seen from Figure III.6. Figure III.6. Wastes and Waste Management Practices in Mining

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Source: OTA 1988, p. 176

But it is very likely the sector with the highest waste generation rate. If one takes the total production volume of 1.8 mio tpy of copper in 1992 and assumes the average copper concentration to be 1% in the same year, the production of copper alone - without the production of ore concentrates to be exported - generated 180 mio t of mining wastes a year. Since a large share of these wastes is generated in the concentration phases which use considerable quantities of water to be piped and settled in these ponds, this solid waste problem is tightly connected to water quality aspects. The level of waste in the mining sector will certainly increase as the concentrations of the Chilean ore bodies are expected to decline.

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3.2. Institutional Framework in Waste Management

The above distinction between the various types of wastes is reflected in the institutional framework as well. Thus, the following description of the institutional framework has separate paragraphs on the various types of wastes. Since municipal and industrial solid waste management has been perceived as a problem only of waste collection until recently the questions of safe disposal and potential pretreatment are new for the environmental policy in the country and are addressed at this stage by surveys and studies. The problems of mining waste are quite old and have been dealt with in a conventional manner within the mining sector. This conventional approach turns out to be inadequate and is under review. The legislation on municipal waste management is based on the Sanitary Code DFL No. 725/11 1968 of the Health Ministry. According to this legislation, it is the duty of the regional Health Services to guarantee that the methods of waste disposal applied in their region do not cause health or environmental damages. With the law No. 18.695/ 1988, local governments were given the responsibility to guarantee technical safety of their landfills during the constructional and operational phase. The Health Service monitors the safety of landfills with regard to health impacts and to protect against water pollution. The law does not make a clear distinction between domestic refuse and industrial waste. The tariffs for domestic collection service are established by the municipalities, based on a complete cost recovery since there are no central government subsidies for this municipal service. The municipalities try to recover all the cost of the solid waste service through mandatory user charges. Commercial and industrial waste generators are charged according to the size of their installations. The households , however, pay according to the value of their property. Big cities of more than 300,000 inhabitants have financial problems in operating the complete service based on the tariffs established. Small cities have strong financial problems to operate the systems and their installations lack basic underwater protection and elementary leachate control systems. There are nonsanitary landfills in very small rural towns.

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Waste collection and disposal can be carried out by either public or private companies under municipal contracts. The quality of the waste collection is controlled by the land inspectors of the Health Services. Until very recently, Chile lacked any policy for industrial and hazardous solid wastes. The key legislation for solid industrial waste is Decree No. 78 of the Sanitary Code, which compels every waste generator to declare the volume and composition of their waste to the Health Services. It was only in 1993 when the Health Services introduced the system of the "Declaration and Control of Industrial Solid Waste" with Regulation No. 5081. It places the duty to declare and register industrial waste on the producers of waste, on the transport and on the disposal firms. When this procedure will become effective the Health Service will be able to know the exact volume and composition of solid industrial waste produced, transported and disposed of. At the moment, this information is being completed by the Health Services. In addition, the requirements for the treatment and disposal of industrial (other than municipal solid waste) and hazardous solid waste have not been defined yet. "For solid waste, a study is being undertaken to classify waste at the origin and examine alternatives for recycling. For hazardous waste, a study is being undertaken to propose policies and examine alternatives for the disposal of waste from hospitals and construction activities (as well as other industries). Another study will be initiated soon to examine management and final disposal of non-hazardous waste from these sources. The institutional set-up is not fully in place yet for hazardous solid waste management. Approvals for solid industrial sites and hazardous waste treatment/ disposal facilities are prepared by the Metropolitan Environmental Health Service, the Regional Governments where facilities would be installed. But the disposal of sludge that will result from the treatment plants has not been examined. Standards for the toxic content have not been established. The current toxic content of wastewater will also make the sludge toxic and potentially inadequate for use in agriculture. Today it is common practice that the sludge taken out of industrial water treatment plants is discharged directly into surface waters" (BKH Consulting 1992, p.xi). The General Directorate of the Maritime Territory (DGTM-MM) is the relevant authority when disposal takes place at seas, at the mouth of rivers and/or in lakes according to the international conventions, Chile has joined,

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and according to the national navigation law. The key legal instruments are the Supreme Decree No. 1/ 1992 of the Ministry of Defense. It establishes the regulation of aquatic pollution control in the sea, lakes and navigable rivers. This decree contains a ban to discharge noxious or harmful matter into the Sea which may involve damage or impairment to waters under national jurisdiction. The wastes from the various stages of mining including the smelting phase, however, have been subject to regulations for quite some time. It has been the responsibility of the Mining Ministry, supported by the National Service of Geology and Mines (Servicio Nacional de Geología y Minería, SERNAGEOMIN) to regulate the waste disposal of the sector. It has been common practice in the industry to dispose of the waste in tailings/ leachate ponds. The principles and criteria for the construction and operation of these ponds are specified in a decree of the Mining Ministry (No. 86/ 1970). The licensing of these waste disposal sites is the resposibility of the National Mining Service (Lagos, Noder, Solari 1991). 3.3. Current Waste Collection, Treatment and Disposal Practices

The municipal waste collection in medium size and large urban areas is considered to be adequate by the Chilean government. The typical problems of unsanitary accumulation of domestic waste of a number of other developing countries hardly exist in Chile. Waste disposal takes place only in sanitary landfills. Underground water contamination from landfills begins to be recognized as a serious problem in main urban areas, mainly in Santiago. In Santiago, with 4.2 mio inhabitants, there are three sanitary landfills in Lo Errazuriz, Cerros de Renca and Lepanto, operated by private companies. The landfills have no special chemical or mechanical pretreatment and lack stormwater and leachate control systems. There have been some hazards due to gas generation in one of the landfills close to populated areas next to Lo Errazuriz. According to the Sanitary Code ond the Organic Law of the Municipalities, the municipalities are in charge of the organization of domestic waste collection and disposal. In the Metropolitan Region, a company was constituted by the municipalities involved (EMERES 1993) to manage the landfills and to call for an international bid to install and operate the new, technically adequate landfill. Several proposals have been presented, including gas collection and leachate

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control (EMERES 1993). There are neither composting nor incineration facilities. The three landfills are approaching their capacity limits (BKH Consulting 1992). In medium and small cities, municipal landfills are used for the disposal of hazardous and infectious waste as well. The workers in these landfills and scavenger groups are exposed to serious health hazards. Clinical waste from hospitals is normally disposed of in municipal landfills or in some cases is incinerated in inadequate facilities at the hospitals. CEDRM has initiated a study, financed by the Interamerican Development Bank, to propose solutions for hospital waste treatment. As a general rule, industrial and hazardous wastes are collected and disposed of together with domestic waste, in illegal sites or in the sewage system. There is no specialized public hazardous waste treatment plant. Some of the larger companies in the chemical, metallurgical and pulp and paper industry operate private facilities. In a selected group of medium size, technologically advanced industries, only small quantities of their wastes are treated and safely disposed of on their own sites. Construction and demolition waste are disposed in specialized landfills, controlled by the municipalities. They exist practically in every Chilean city. The two oil refineries, Concon near Valparaiso and Petrox near Concepción, operate installations for treating oily waters and dispose hazardous waste in appropriate sites with neutralization chambers. The collection of used oils is based solely on commercial recycling considerations because of the attractive price of the recycled fuel. The petrochemical industry has an advanced control and monitoring system for hazardous waste. They operate facilities for mechanical and chemical neutralization and sites for disposal of their waste. These practices are mainly due to the fact that most of these companies are subsidiaries of multinational companies with internal environmental management practices. Some of the larger companies in the agroindustry, e.g. big slaughter houses, food and beverages companies in Santiago are beginning studies to treat solid and liquid waste in biological treatment plants, including production of biogas and fertilizers. The paper mills operate chemical treatment facilities. Volume, size and life expectancy of their hazardous wastes are unknown.

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In most of the mining facilities of the "Gran Minería" (Chuqica-mata, El Salvador, El Teniente, La Escondida), the disposal of mine waste, flotation tailings, and leach waste from hydrometallurgical processes in special landfills/ tailing ponds is a common practice. The National Mining Service keeps an inventory which shows that there are more than 800 tailing ponds. Most of them are localized in desert areas in the north of the country, except the mines of the El Teniente division and Las Bronces, El Soldado and Los Andes (Exxon) near Santiago. These dams create the hazard of a dam failure and they cause dust emissions if they are not replanted with forests. According to an internal study of the National Mining Service, only 17.5% of the existing dams could be considered in good condition (BGR/SERNAGEOMIN 1993). The source does not provide further information about the distribution, location and characteristics of the dams considered as a safety hazard. Here, the question of the small and medium size mines has to be raised and, if rehabilitation is necessary, the question of financing as well. Despite of the size of some of the larger operations, the environmental impact does not need to be of major importance. In the case of the Escondida Mine, the daily production of 2,000 t of concentrates generates 33,000 t of waste. These wastes are disposed of in a closed salt valley in the desert 170 km east of Antofagasta (Ojeda 1990). In other cases, the disposal of these wastes forces the mining companies to make considerable investment. For its El Teniente division, Codelco needed a new site for a tailings dam, but it could not find a suitable location close to the mine in the Andean mountains which would have been approved by SERNAGEOMIN and SAG for its impact on landuse. It had to move the tailings via a pipeline 85 km west into the coastal cordillera to a newly constructed tailing dam. This method of waste disposal required an investment of 130 mio US $ (Duran 1990).

3.4. to

Current Efforts in Recycling and Plans for the Future Approach Solid Waste Management

The municipalities in the Metropolitan Region (La Reina, Puente Alto, Nunoa) started programmes to recycle domestic waste. Most of these programmes have been unsuccesfull mainly due to weak management capabilities of the small companies in charge. The collection of glass has been been organized by some municipalities. The main recycling

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programme covers used paper. In Chile approximately 45% of cardboard is made from recycled materials. This high level of recycling is a consequence of the strategy for survival of urban poors who collect paper waste from the streets and houses and sell it to the established paper industries. During the last two years, some municipalities began programmes to organize these scavengers providing tools and training to create small stable companies. In Santiago local scavengers organized themselves in a recycling cooperative and have contracts with paper mill and glass industries to sell their products. Some of the larger companies have begun to introduce recycling practices, but there are no available data. Some private companies recycle used oil and plastic, mainly to produce plastic bags. Glass companies began with success to recycle glass. The only incentives for waste recycling are the economic opportunities for recycled products. As mentioned before, the municipalities of the Metropolitan Region of Santiago created a company to operate and manage a centralized landfill in 1986. An international auction has been organized to develop a concept for a location at the periphery of the city. The new facility will be a landfill with all the technical systems to control the seepage of water into underground aquifers, but without incineration. Operations will begin in January 1995. Some municipalities have initiated programmes to create incentives for waste reduction, resource recovery and recycling. But still, there is not enough experience to point towards positive results. But there are no plans by the government to increase recycling, e.g. in organics. However, some projects for composting have been presented to some of the municipalities of the Metropolitan Region by non-governmental organizations and small companies. A hazardous waste policy and an action plan are being developed by CEDRM and its goal is to establish an environmentally sound system for the management of hazardous waste and to promote the installation of long term facilities for hazardous waste treatment and disposal by private operators. This facility will be central element in hazardous waste management since the government cannot implement and enforce comprehensive controls over waste producers if they cannot comply in the absence of adequate facilities. A research study was started by CONAMA in December 1992 to design a system that could monitor solid industrial waste in Santiago. It is expected

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to start operations by the beginning of 1994. Once applied it would provide complete statistics and a procedure to classify hazardous waste.

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IV. Resource Intensive Sectors, Trade and their Policies

Of the resource intensive sectors, three contributed considerably to the improvement of the external trade position of Chile in the last fifteen years: Agriculture, forestry and fisheries. Two of these sectors, agriculture and forestry, will be discussed in more detail in this chapter; the available documents do not suffice for an analysis of fisheries. But before these sectors will be presented, the knowledge about the relationship trade and the environment in Chile will be summarized.

1. Environmental Consequences of the Change of the Trade Regime

The changes in the trade regime and in the internal development policy in Chile over the last twenty years - liberalization and full integration into the world economy - caused changes in the growth process and in the economic structure and these factors had environmental consequences. This change and its economic and social impacts have been discussed elsewhere and do not have to be repeated here (cp. Meller 1992). The discussion of the impact of growth and structural change on the environment, and the general economic policies influencing them including the effects of trade policy, usually separates the effects in three categories: - economic growth and its impact, - the effects of sectoral change and - the changes on the process level (Halstrick, Löbbe 1987, Paulus 1993, Lucas et al. 1992). The change in the trade regime is considered desirable, as a means in economic policy, because of its positive effects on economic growth. For most analysts, this leads to the conclusion that the major effect with respect to the environment will be an increase in pollution and other forms of environmental degradation. The question that was raised in the industrialized countries under the theme of structural change was whether the change accompanying economic growth would lead to a reduction in pollution intensity, i.e. whether economic growth would lead to an increase of pollution at a lower rate than the economic growth rate. The change in pollution intensity is composed of the changes in the sectoral composition of an economy, i.e. the share of "dirty" sectors, and of changes in the

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technologies used in these sectors, i.e. the share of "dirty" technologies. Here, the dirtiness is considered to be dependent on the pollution intensity and the material/energy intensity of the existing capital stock and the size and effectiveness of the pollution abatement capital stock. For developing countries, there are two schools about the effects of structural change and its effect on the environment. The first, which can be labelled environmentalist, emphasizes an increase in the share of pollution intensive sectors and technologies, mainly due to the displacement of these sectors and plants in the industrialized countries as a result of relatively effective environmental policies. The relocation is undertaken mostly by multinational enterprises. The second school, strongly represented in the World Bank, which could be called modernist, sees a decline in the polluting sectors in the open economies and better access to new capital equipment which provides a better situation than in a growing but closed economy (Low 1992).

1.1. The Change in the Trade Regime and its Effect on Economic Growth

Chile opened its economy in the early seventies after the military coup of the Pinochet regime. Previously, it had an overvalued currency, accompanied by high tariffs and various forms of non-tariff protection. Beginning in 1973, a transformation was initiated by the new government towards a free market, unregulated prices, fully liberated and integrated into the world economy. In a first round of privatisation 1974-79, land from the land reform was resold (or given back to the previous owners) and a number of state owned companies in manufacturing and banking were sold. In 1979, Chile had a single exchange rate and a flat tariff of 10 percent (with the exception of cars) on imports. A fiscal reform in 1974/ 75 reduced expenditures, introduced a value-added tax, reduced business related taxes and eliminated the budget deficit.

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Table IV.1. Indicators of the "Chilean Economic Miracle" ___________________________________________________________ Indicator 1973 1980 1981 ___________________________________________________________ Rate of inflation (CPI) (%) 606.1 31.2 9.5 Economic growth rate (%) - 5.6 7.8 5.5 Exports (mio US $): Total 1,309 4,705 3,836 Non-traditional 104 1,821 1,411 Budget deficit (% of GDP) 24.5 4,3 - 2.5 Annual increase in real wages (%) -8.6 9.0 ___________________________________________________________ Source: Meller 1992. These policies produced a change in the economic situation until 1981 which was called the "Chilean economic miracle", culminating in a reduction of inflation and economic growth rates around 8% (see Table IV.1.). In 1981/82, a crisis followed, considered to be the worst over a fifty year period, which caused a fall in the GDP for two years, an increase in bankrupcies, a jump in the unemployment rate of 30% and an increase in inflation to over 20%. The crisis was caused by a mixture of internal policy failures and the emergence of external shocks. From 1983 to 1987 Chile adjusted with the support of IMF programmes and World Bank Structural Adjustment loans which put the economy back on a growth path, but at considerable costs: The 1981 level of private consumption was reached again only in 1989. The income losses fell disproportionately on lower income groups (Meller 1992). Nearly over a twenty year period, the GNP per capita increased from 1,050 US $ in 1976 to 2,947 in 1993; its GDP almost quadrupled from 11.02 bio to 39.8 bio US Dollars. This growth was characterized by an increase of the share of production for foreign markets; the share of exports increased from 15% in 1976 to 29% in 1991. This increase in exports was one of the major changes in the Chilean economy. The overall sectoral structure of the Chilean economy did not change that much: The shares of agriculture and mining in the GDP accounts remained roughly the same with manufacturing losing two percent between 1970 and 1991 - down to 22.8% while the service sectors have gained. As the shares of these broad sec-

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tors remain relatively constant over this twenty year period, the change took place within these sectors on two levels: First, an increase in the international division of labour took place with a considerable export expansion in mining, agriculture, forestry and fishery and an increase in imported manufacturing products. On a second level, there was a change within the manufacturing sector: Leather, textile products and machinery experienced an absolute decline, while chemicals, wood processing and furniture-making, and ceramics and clay products showed above average growth rates (Gomez-Lobo 1992).

1.2. Overall Environmental Effects

The overall level of environmental degradation very likely increased over the period as the country nearly quadrupled its economic activity. To the extent that this growth was the result of the change in the trade regime, this trade policy change contributed to an increase in pollution and other forms of environmental degradation. There are no environmental indicators covering the whole period which could back this assumption. One can only operate with indicators of the use of natural resources, such as the area used for export agriculture, fisheries catch and level of forest production, and the index of industrial production and energy consumption. The only indicator with a time series available over 20 years are the emissions of CO2 (Figure IV.1.) which contradicts the above assessment since the peak level of 1971 of 6.7 mio t of carbon has not been reached again. The above assessment about the plausible increase of pollution rests on the assumption that the pollution intensity of the Chilean economy remained the same over the last twenty years. This is the next question to be pursued.

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Figure IV.1. Carbon Dioxide Emissions, 1950-1986 in mio t carbon

Source: Oak Ridge National Laboratory, 1989.

1.3. Changes in Pollution Intensity

The changes in pollution intensity have been analyzed mostly with respect to changes due to the change in the sectoral composition of an economy because of restrictions of data availability about technological changes. The data for sectoral change, however, are available for most economies and data exist which can be used to describe the pollution intensity of specific industrial sectors. One set of these data are the sector-specific pollution control investments which can be used to identify the pollution intensity of individual sectors (Hartje 1991) and the second, more detailed are the data from EPA’s Toxic Release Inventory which records 320 toxic substances into the air, water and solid waste stream (Lucas et al. 1992). The other dimension of pollution intensity, changes in technology, is more difficult to test since the data about the technologies are missing. This

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approach causes an additional difficulty since there are no operational categories to describe the technological change across industrial sectors. These two approaches are limited to the analysis of the manufacturing sector.

1.3.1. Changes in Manufacturing

The above approach of analyzing the composition effect of the pollution intensity, using EPA’s TRI data, has been applied to the Chilean manufacturing sector between 1974 and 1989 (Gomez-Lobo 1992). Here, the TRI data about releases are converted into intensity indices by dividing them by the production value. Using this index, the various industries can be ranked according their pollution intensity. Gomez-Lobo aggregates the different substances linearly by adding the weight and exponentially by weighing according to their toxicity on an exponential scale. Selecting those industrial sectors which represents 50% of industrial value added and the highest values on the linear and exponential pollution intensity index gives an indicator for the pollution intensity of a manufacturing sector of an economy. The development of the share of these sectors over time can be taken as an indicator of the composition effect. Figure IV.2. Value Added of Pollution Intensive Manufacturing / VA of Total Manufacturing, weighted linearly, 1974- 1989

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Figure IV.3. Value Added of Pollution-Intensive Manufacturing / VA of Total Manufacturing, weighted exponentially, 1974-1989

Source: Gomez-Lobo 1992 Figures IV.2. and IV.3. demonstrate that the changes in the Chilean manufacturing sector did not favor or, if one uses the exponential index, reduce the share of the polluting industries. This effect for the Chilean economy can be contrasted with other economies which have experienced similar growth at a comparable income level, but have had a closed trade regime. Birdsall and Wheeler (1992) have tried to extract this type of cross-country evidence by using a pooled cross section of time-series from 25 Latin American countries for a regression analysis between changes of pollution intensity and the income level, income growth and a measure of openness. They found that the toxic/ or pollution- intensity was growing in Latin America as it had been in the OECD countries, but at a higher rate. This rate was higher for slow growing economies and for closed economies. In the fast growing, open economies the pollution intensity was declining (p. 166). The above assessment was based on pollution intensity coefficients which were assumed to be constant across countries for a given three digit manufacturing sector. These coefficients can change over time as cleaner (i.e. less polluting) technologies are developed and adopted and they can vary between countries. The conventional assumption has been in the past

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that the investors in developing countries adopt cheaper and more polluting technologies, in the extreme case rebuild environmentally obsolete plants from the industrialized countries. Wheeler and Martin now argue the case that investors in developing countries are more likely to adopt the newer technologies with better pollution coefficients when an open economy creates more competitive pressure. This explanation rests on the observation that these new efficient technologies that were developed for markets in industrialized countries are cleaner and that there is no choice for the ldc investor. Their analysis of the pulp and paper sector, using the adoption of thermomechanical pulping, tends to confirm this assessment. Here, again the argument in favor of open economies is that international competition helps national firms to gain access to newer and cleaner technologies and that multinational enterprises bring their new technologies with them. A systematic analysis has not yet been undertaken on the technological choices that have been made in Chile with respect to their pollution intensity, but the country’s business papers are filled with stories describing new investments with better/ greener technology. The authors found references in the mining sector, pulp and paper and fish processing.

1.3.2. Changes Outside Manufacturing

The above analysis of the changes in pollution intensity in open economies in general probably applies to Chile as well, but a major element of the change in trade policy was the expansion of exports based on natural resources. Although the dominant position of mining in export (85.5% of total exports in 1970) has been reduced to 55.3% in 1990; the sector increased its export value from 950 mio US $ in 1970 to 4,747 mio US $ in 1990. The resulting air and water pollution and waste volume increased correspondingly, particularly as the average copper content declined down to about 1%. There have been efforts since the mid-eighties to reduce the pollution, especially in air pollution in the smelter and in dust collection, that are the result of an deliberate pollution control effort which accelerated the modernisation of the plants (Cp. ch. III 1.4.). The increase of exports occurred as well in the agricultural, forestry and fishing sector of the Chilean economy. Combined with the mining sector, these sectors accounted for 90% of the export earnings and caused the share of the primary sector to remain constant over the 20 year growth

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period. All sectors face severe environmental problems: in fisheries overfishing (IFOP 1991), in the forestry sector the substitution of natural forests with plantations of fast growing species and in agriculture the intensification with fertilizers, pesticides and use of irrigation water. The degree of overuse is very difficult to establish because of the data limitations and the lack of existing systematic studies. As summarized in chapter IV.2., the level of contamination in agriculture increased although the level of pesticide and fertilizer use per hectare has not reached European proportions. There are a number of cases of workers contamination, but the level of residues in the products seems to be controlled effectively to maintain the export markets. In forestry, there is considerable dispute about the area of natural forests that have been converted as an up to date forest inventory is still lacking. One study for Region VII and VIII estimates that about 11% of the planted area has been explicitly converted from a natural forest while the remainder was planted on degraded forests and agricultural lands (Lara, Veblen 1993). As these effects, which are due to the change in trade policy, are difficult to aggregate it is even more difficult to weigh these affects against the potential relatively beneficial effects the trade policy had in terms of pollution intensity.

2. Agriculture and Agricultural Policies

2.1. Agricultural Sector

Despite its large territory and its low population density, Chile is not well endowed with agricultural land. Only 5.7% of its territory is arable land: 5.3 mio ha or 0.39 ha per inhabitant (Cp. Table IV.2.). Because of the arid and semiarid conditions in a large share of the country, irrigated agriculture is very important: With 29% of arable land irrigated Chile has the highest share in Southern America. Due to the climatic variation there is considerable variation in the regional distribution of the agriculture as well. In the northern part of the country, agriculture is limited to the irrigated valleys of the lowlands, subsistence agriculture and grazing camelids in the

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highlands. The main areas for the cultivation of fruits are the Metropolitan Region as well as the Southern Region VI. Here about 54% of the national production area is located. In the northern Regions III and IV, grapes are growing whereas apples and kiwis are cultivated further to the south. The contribution of agriculture to the gross national product had been falling steadily since 1940, resulting in a contribution of only 9.2% in 1970. It declined further, but only slightly, to 7.9% in 1991. The share of persons employed in the agricultural sector declined from 22.0 % in 1970 to 17.4% in 1985 (Mellor 1992). Chile was dependent on cereal imports in the earlier 70s, but became self-sufficient later on.

Table IV.2. Land Use and Land Use Potential ___________________________________________________________ Land use Actual use Potential use category mio ha % mio ha % _________ _________________________________________________ Agriculture 10.5 13.8 13.7 17.5 - arable 5.3 - grazing 5.2 Productive forests 11.1 14.7 11.8 15.6 - native forests 4.1 - plantation 1.5 - degraded 5.5 Protected forests 10.1 13.3 22.9 29.1 Occasional grazing 15.8 20.9 Unproductive 28.2 37.3 28.2 37.3 ___________________________________________________________ Total 75.7 100 75.7 100 ___________________________________________________________ Source : CIPMA 1990 A major distinction has to be made between the modern, commercial part of the sector producing non-traditional agricultural products, destinated for export and the traditional part serving mostly the domestic market. The latter mainly consists of small sized farms. They represent "approximately 80% of the rural population and more than 50% of the arable land, and 30% of the irrigated land (Arensberg et al. 1989, p. 18).

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Medium-size and large enterprises supply the export market as agroindustrial producers. They use modern farming techniques, improved irrigation systems as well as agro-chemicals. Seventy percent of the production is based on irrigated land. The seasonal differences in terms of ripening times between Chile and its main export markets in Europe, the USA, Canada and Japan constitute the comparative advantage of the Chilean export agriculture, mainly horticultural products. To secure this advantage, the production strategy of these commercial exporters aims at a high quality of products, at the compliance with the product standards of the importing countries, at a diversification of markets as well as at a quick response to changes on the consumption side. The export-oriented horticultural production increased by 21% annually from 1977 to 1988. Most of this export (92%) consists of fresh fruit. Its contribution to the whole agricultural production went up from 5.4% in 1965 to 23.5% in the year 1988 (CEPAL 1990, p.1). In 1988/89 the production of apples came first with 680,000 tonnes followed by grapes with 525,000 tonnes, i.e. production had increased ten-fold since 1973. Pears came third, far behind apples and grapes, with 115,000 tonnes. It was only in 1980 when kiwis were produced for the first time on an industrial scale (CEPAL 1990). Depending on the region, Chile produces a wide range of other fruits from cherries to berries as well as many different types of vegetables. The land used for export products increased from 52,920 ha in 1965 to 165,105 ha in 1988, covers only 3.8% of the total arable land of 5.3 mio ha (Cp. Table IV.3.). The value of the agricultural exports increased as well as its share of total export earnings. In 1970, agricultural exports receipts amounted to 36.1 mio US $, equivalent to 3.2% of exports. By 1990, these figures had jumped to 1,276.3 mio US $ or 14.9% of export earnings (Gomez-Lobo 1992). These increases were only possible due to an intensification of production. In addition to the expansion of land, the use of irrigation water, fertilizer and pesticides grew considerably. Pesticides had to be imported to a large extent. Pesticide imports increased 8 to 9 times from 1978 to 1989. "Forty percent of this current use is herbicides. In economic terms, between 1984 and 1988, pesticides imports increased 184% from US $ 28.3 million to US $ 52.1 million. Fertilizer use and imports show similar rates of increases. From 1985 to 1988, imports of nitrogen, phosphate and potash increased 179%, 143% and 400 %, respectively. The cost of pesticide imports has

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represented for 5-10% of total export earnings during that period. Fertilizer import costs from 1983-86 accounted for 25% of the total agricultural export earnings during the same period" (Arensberg et al. 1989, p. 15).

Table IV.3. Land Used for Various Export Products, 1965-1988, in 1000 ha ___________________________________________________________ Product 1965 1974 1980 1985 1988 ___________________________________________________________ Grapes 5.5. 4.3 13.5 43.4 46.4 Apples 8.5 11.4 15.5 19.8 24.9 Pears 2.8 2.6 3.3 6.7 12.8 Plums 3.7 3.3 5.2 9.5 11.6 Peaches 9.7 10.9 7.2 7.0 9.3 Kiwis --0.0 2.0 9.0 Avocados 3.4 4.5 61.2 7.6 8.2 Nectarines -4.0 6.1 7.6 7.7 Nuts 2.6 4.2 6.4 7.3 7.2 Oranges 4.2 4.5 5.3 6.3 6.4 Lemons 3.9 7.6 6.0 5.3 5.4 Cherries 1.6 1.0 1.8 2.8 3.4 Almonds 2.4 1.6 2.4 3.1 3.3 Olives 3.2 3.2 3.1 3.0 3.0 Other 1.4 2.8 3.5 4.5 6.6 ___________________________________________________________ Total 52.9 65.7 85.4 126.9 165.1 _________________________ _________________________________ Source: Gomez-Lobo 1992

The change in the Chilean agriculture did not only affect the export oriented commercial sector, but the more traditional part of it as well. "Total agricultural production nearly doubled since 1980, per hectare production in basic grains (wheat, corn and rice) doubled from 1980-88, and the country is now virtually self sufficient in wheat and rice. At the same time, the actual area planted in basic grains has declined, and thus much of increase in basic grains has enabled through intensified production practices. Yield gains on a per hectare basis are not as dramatic as in

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other crops and production gains have been realized through a combination of intensification and expanded areas" (Arensberg et al. 1989, p. 15).

2.2. Economic Agricultural Policies

The aims of agricultural policies had changed considerably over the last thirty years. The emphasis on equity of the late sixties and early seventies under the Frei and Allende Government was completed reversed under the Pinochet Junta after 1973. More emphasis was put on the increase in production as the constellations on the world market provided Chile with a comparative advantage in horticulture. One of the principal aims of the Frei Government (1964-1970) was the reform of the economically less developed agriculture. With the Land Reform Act of 1967, the Government created an instrument for dispossessing landowners of estates larger than 80 hectares. Between 1964 and 1969 three times as much areas have been distributed than in the past fourty years. Just in September 1969 8% of the whole agriculturally used land was affected by a change of ownership: 14.3% of all irrigated land, 3.8% of the cultivated land, and 6.32% of the fallow land as well as almost 6% of the forests (Spielmann 1992). The government of the Unidad Popular, however, accelerated the process of expropriating landowners drastically. Under the government of Allende, further 5.5 mio ha land were expropriated in addition to the 3.5 mio ha which changed owners under the Frei Government. It was estimated that nearly 10 mio ha land, almost half of the area usable for agriculture and productive forests, and 60% of the irrigated land belonged to the state in 1973 (Spielmann 1992). This redistribution of land was partially reversed after 1973, when "30 percent of the expropriated land was returned to its former owners and 20 percent was auctioned off among non-rural dwellers. Around 30 percent of the remaining expropriated land was allocated to peasants, but state programmes that supported peasants through special credit lines and technical assistance were curtailed; as a result, since the end of the 1970s about one-third of these peasants have had to sell their land and work as farmers for the new owners" (Mellor 1992, p.27). Little support of the public

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sector is given to small farmers in order to improve farming techniques, appropriate for specific ecological conditions of the farms. The support for the export oriented horticulture started in the sixties. With the National Development Plan for the Horticultural Sector, CORFO and the Agricultural Ministry initiated the development of the export-oriented agriculture (fruits, vegetables, flowers) in 1966. From 1982 onward the Chilean Government supported this growing sector considerably, in technical and financial terms (Spielmann 1992). In general, Chile pursued a liberal economic policy for the export oriented agriculture, which was consistent with the overall trade regime. In combination with the depreciation of the Peso, the price policy (i.e. the liberal approach of not intervening in the prices of horticultural products) helped the export sector to continue to grow. The traditional agriculture, i.e. grain products and sugar, serving the national market has been supported with price guarantees, subsidized credits and technological support which was more successfull for the larger farms/estates (Eubel 1993). The 198586 Structural Adjustment Loan of the World Bank included a recommendation on the reduction of cereal and sugar support prices and tariffs (Mellor 1992). On the input side, the prices were liberalized as well and subsidies for pestizides, fertilizers and machinery are abolished. But there was a change in 1985 when the "Law for private investment in irrigation and drainage infrastructure" was promulgated by the Ministry of Agriculture and administered by the National Irrigation Commission, providing a 75% subsidy for the improvement and expansion of the irrigation system, specially in the arid areas (Dourojeanni 1993). This financial support was limited to 215,000 US $ and was awarded to a project of a landowner, based on a competition of the applicants. The financial contribution of the landowner was mandatory and the grant was only paid after the total construction was completed. By 1989, 34 rounds of competition have been carried out and 401 projects have been accepted. On average, the landowner covered 47.5% of the investment.

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2.3. Environmental Problems: Agriculture as a Source and as a Victim

"Chile has very scarce arable land resources and little attention is paid to economic costs of land degradation, losses to future agricultural production and economic incentives and policies to promote improved resource management" (Arensberg et al. 1989, p. 18). Soil degradation appears to be a major problem in agriculture, but it has not been addressed seriously. Up to now, there are only few inventories undertaken in order to get information on the arable soil and its appropriate use, management and protection measures. In 1985, the Information Center on Natural Resources, CIREN, carried out a survey on agricultural land uses in Region VI, distinguishing between 8 different categories for soil quality according to their distinctive characteristics for use. The results of this study can be considered representative for the whole country. CIREN demonstrated that only 32.8% of the area in question has no erosion problems while 37.3% shows high rates of erosion (CEPAL 1992, p. 9). Generally, "erosion may be proceeding at an average rate of 40,000 ha/year, according to some estimates. Another study, carried out by CIREN-CORFO, indicates that in total 34.5 million ha are affected by erosion processes and 11.6 million ha have severely high rates" (Nazif 1990, p. 19). According to a research study realized by CIPMA (1990), 6,000 ha are annually affected by desertification. The definition of the categories "affected by erosion" and "affected by desertification" are not clear in the source to clarify the difference. The absence of effective soil management and conservation practices is resulting in high rates of declining soil fertility, desertification and flooding. "One study estimates that 50% of Chile’s land is already affected by desertification processes. In the Norte Chico, the rate of desertification is estimated to be 300,000 ha/year. The implications of these trends have not been systematically verified nor quantities in terms of loss of arable land, loss in production and yields, increasing costs for rehabilitation. But it is generally agreed that land use practices including plantation forestry are leading to serious rates of soil losses that could threaten future agricultural productivity" (Arensberg et al. 1989, p. 17). Another major problem is the salinization in irrigation agriculture. Its severity results from the use of increasingly saline waters for irrigation, from intensified land use and from water use inefficiencies. A study carried out in the 3rd Region demonstrated that the specific climatic conditions,

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the vicinity to the coast and the application of drip irrigation system caused that 65% of the area cultivated with grapes is already severely affected by salinization. As a result, the growth rate of the young grapes is decreasing considerably. The flushing of the salty soil would cause annual costs of about 15 to 40 US $ per hectare (Gurocich 1990). In the Norte Chico, approximately 100 % of the irrigated land is affected by salinization and the decline of yields is estimated to be about 25% (Berdigui 1990). In the central and southern area of the country, inefficient irrigation systems and inadequate maintenance has led to an increase of the sedimentation in the drainage canals. The use of pesticides and fertilizers has expanded considerably. The specific impacts of pesticide use in Chile are unclear. No detailed study on soil/groundwater pollution has been performed nor do studies on workers exposure exist. More and more pests are getting resistent to the use of agro-chemicals. Diseases are widespread causing a decline in the rentability of the respective agricultural crops. Agricultural soils of high quality are threatened by urban expansion. Although this problem is highly significant in the Metropolitan Region, where 40% of the arable land of quality I and II are already lost, increasing demand is recorded in the Regions III, IV, VI, VII and X (CIPMA 1990). In addition to the creation of environmental problems by its own activities, agriculture in Chile is severely affected by the impacts of external factors. The most prominent are: - Agricultural areas have been contaminated with heavy metals from water pollution from mining and leaching operations. "In the irrigated zone of the river Aconcagua, Chachpoal, Mapocho, Maipo and BioBio, the levels of copper, mercury, cadmium, arsenic, molybdenum and chrome give high cause of concern" (CIPMA 1990, p.45). - Air pollution resulting from the copper smelters and a pellet plant affects both the rural population as well as plants and animals. Acid rain is a major problem in Chile (id.). - Irrigated water is contaminated with untreated domestic and industrial effluents. The health effects of untreated sewage are mainly associated with the use of contaminated river water for irrigation purposes which in this way leads to contaminated food, particularly consumption of raw vegetables (BKH Consulting 1992).

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- In the Central Regions contamination of irrigation water with urban wastewater has led to outbreaks of typhoid and hepatitis.

2.4. Environmental Management within the Agricultural Sector

So far, the environmental management within the agricultural sector has been developed only with respect to pesticide control and to the protection of agriculture from the environmental impacts of other sectors. An explicit policy to reduce the soil degradation is still missing and an effective policy to reduce salinization still has to be put in place. The DL No. 3.557 about "Agricultural Protection", promulgated in 1981 by the Ministry of Agriculture, constitutes the basic law for pesticide control. The enforcement of the law is carried out by SAG. It regulates steps to be taken for "prevention, control and combate of plagues", and sets rules for the "fabrication, commerce and application of pesticides and fertilizers". It also determines the "procedures for sanctions". A joint commission of SAG and Health Service is in charge of a pesticide registration system that requires the pesticide’s name, its chemical composition, its use instructions, health and environmental safety studies and information about residues. The international maximum residue limits (tolerances), developed by the UN Codex Alimentarius, are applied. Chile requests the registrants to submit a certificate of free sale from the country of origin (US- GAO/RCED 1990). The study by the United States General Acoounting Office (GAO) in 1990 quoted above identified 110 pesticides which have been registered in Chile, 24 of which do not meet the tolerances established by EPA. GAO assumes that these pesticides are mainly used for domestic crops. The control and monitoring of actual pesticide management practices of domestically sold crops differs from the control of those applied to products destined for export. Little residue testing is performed for domestically sold crops whereas the control system for export products is well developed. To assist its export growers in meeting the Unites States’ and other countries’ import requirements (52% of the fruits are exported to the USA), SAG and the Chilean exporter’s association, which handles 95% of all Chilean fruit and vegetable exports, provide information about major export markets’ pesticide requirements and ensure that Chilean growers use management practices that help them to meet their export markets’s re-

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quirements (GAO/RECD 1990). Representatives of Chiles’s Chemical Producers Associations stressed the fact that 75% of all agricultural pesticides used in Chile are supplied to growers by exporters. They ensure that only approved pesticides are used. Since 1982, the residue control for exported fruits and crops and their certification is undertaken in the laboratories of the Fundación Chile (Meyer 1990). They perform quality control inspections on 10 to 12 percent of all Chilean export products. However, the standards applied here are stricter than Chile's domestic quality standards. By now, very little specific information on environmental impacts of pesticides is available. Recently a more systematic monitoring of organophosphates in fruits and vegetables destined for internal consumption was initiated by the Chilean Association for Safety (AChS) which requested the authorities to place more emphasis on medical and environmental impacts while authorizing the use of pesticides. Furthermore, a better information of agricultural workers exposed to agrochemical substances is requested. For a period of several years, AChS has organized information campaigns, which resulted in a small decline of the intoxication of workers on a country-wide basis (La Epoca 1993). However, a concentration of cases of workers contaminated with agro- chemicals has been recorded around Santiago, Valparaiso and the Vth Region, where the production for the domestic market is of major importance (AChS 1993). While the production increase of horticultural products took place on a relatively small area of 165,000 ha, it contributed significantly to the intensification of the Chilean agriculture. So far, there has been little systematic effort to protect the environment and the workers from the negative consequences of this intensification. The only exceptions are the consumers in the export markets who benefit from what seems to be an effective pesticide control programme by the standard of the importing countries.

3. Forestry and Forestry Policies

Chile was relatively well endowed with forests until the middle of the 19th century when settlers cleared large tracts of forests in the Southern Regions for agriculture. Forestry started in the 1940s when plantations

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were established on a larger scale. But the forestry sector remained of lower importance until the military government took over in 1973. The export of wood based products started to rise rapidly and the areas planted with fast growing species were enlarged continuously. This expansion was the result of a liberal policy towards the forest sector in terms of price policy and protection against expropriation, governmental financial support for planting, investments in infrastructure, research and training institutions. Because of favorable natural conditions (climate and soils) for fast growing species (pine and eucalyptus), Chile became a supplier of low cost sawn- and pulpwood. Since 1989 the production of wood chips from natural forests started to gain economic importance. The cutting of native forests for wood chips contributed to an intense public debate on the desirable future of these forests, resulting in a law proposal which is to reconcile forest preservation with its potential for economic use.

3.1. Forestry Sector

The climate variation in Chile determines broadly the regional distribution of forests: The native forests are mainly located in the south (Region IX through XII) where a wet temperate oceanic climate dominates and where population pressure is still low. The native forest can be classified in four broad categories: - Valdivian forests of heterogenous mixed hardwood between Puerto Montt and the Magallanes, - homogenous hardwood forests (coigue and lenga) in the Magallanes - Auraucaria softwood forests in the central Andean foothills, - dry northern forests (World Bank 1992).

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Table IV.4. Estimates of Forest Land Use ___________________________________________________________ Source of estimate Land use Cipma INFOR World Bank category mio ha % mio ha mio ha ___________________________________________________________ Productive forests 11.1 14.7 9.01 11.8 - Native forests 4.1 7.62 1.1 - Degraded 5.5. n.a. 4.4 - Cleared forest land 4.8 - Plantations 1.5 1.5 1.4 Preserved forests 10.1 13.3 13.8 22.0 ___________________________________________________________ Total forest area 21.2 28.0 22.8 33.8 ___________________________________________________________ Total land 75.7 100 ___________________________________________________________ Source : CIPMA 1990, Instituto Forestal (INFOR) 1991, World Bank 1992

The plantations are concentrated in Regions VII to IX with a more Mediterranean climate, better topographical conditions and better access. There has not been a recent forest inventory and most of the figures about forests stands are, thus, rough estimates (Cp. Table IV.4.) The difference between the estimates of the existing natural forests stands and of the degree to which they are already degraded is a key topic in the debate about the protection of the native forests. A study contracted by the Chilean nature protection organization CODEFF and the WWF resulted in an estimate of 7.4 mio ha of native forest, but it was unable to distinguish between the area with primary forests, degraded forests and second growth stands as the World Bank Paper did (Lara et al. 1987). INFOR estimated 1991 that the total standing timber volume of potentially productive native forests is at 915 mio m3 and that of the plantations is at 175 mio m3. But the bulk of commercial production, 14.2 mio m3 in 1990, comes from the plantations. Commercial production includes roundwood, sawnwood, wood chips, pulpwood and wood for veneer production. Since 1990 the production of chips, however, is derived to a large extent from the

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natural forest (55% in 1991) while for another important product, sawnwood, the natural forests play a minor role (12% of the total cut in 1991) (Cp. Table IV.5.):

Table IV.5. Production of Sawnwood and Chips, 1986-1991 ___________________________________________________________ Year Production of chips Production of sawnwood (1,000 t) (1,000 m3) ___________________________________________________________ Planted Native Total Planted Native Total ___________________________________________________________ 1986 110.3 13.9 124.2 1,765.7 260.2 2,025.9 1987 452.5 -454.5 2,338.1 339.0 2,677.1 1988 832.4 74.4 906.8 2,433.2 277.1 2,710.3 1989 1,075.0 739.7 1,814.7 2,377.1 303.7 2,680.8 1990 1,065.9 1,162.5 2,228.4 2,930.6 397.4 3,327.4 1991 1,363.0 1,702.9 3,065.9 2,811.2 406.3 3,217.5 ___________________________________________________________ Source: Instituto Forestal (INFOR) 1991

Additionally, the natural forests are used for woodfuel and charcoal production, often on a subsistence basis by smaller landowners and sharecroppers. The annual cut has been estimated to be between 8 and 10 mio m3 (Lara, Veblen 1993). The World Bank forestry mission (1990) classified the annual cut into 6 mio m3 for local people for commercial and non-commercial purposes and 2 mio m3 of industrial wood. The industrial wood is mostly used for chipping, in 1991 more than 80% (Cp. Table IV.5.). The forest industry is interested in harvesting the remaining commercial natural forests, but only for chipping since only a small proportion is suitable for sawnwood according to the industry view. This interest is likely to last the next 8-10 years until a number of larger eucalyptus plantations will mature and their harvest will provide low cost wood for the chipping plants. Since the condition of cutting the remaining natural forest is a major political issue, it will be analyzed further in section 3.4.3. The production increase in the commercial forestry since 1975 was the basis of its growth to the third largest contributor to GNP at about 2 bio US $ annually and to its contribution of about 1 bio US $ to the balance of

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trade (World Bank 1992). The export share of the forest-based sectors (sawnwood, chips, pulpwood, newsprint, furniture) amounts to 30% of production. These products and their export markets are widely diversified and the sector cannot be characterized as a traditonal raw material export sector with a low technological level. The industry is in a phase of transforming itself into a growth sector which could provide forward and backward linkages to the other sectors of the economy, but the process is not without problems and some bottlenecks still exist (Messner et al. 1991). The plantations were started in the 1940’s when the pine was already adjusted to the conditions of central Chile, but forestry received major governmental support only after 1965 when the planted areas increased to over 30,000 ha per year. During the early seventies, the planting was organized by afforestation partnerships between small and medium size landowners and the National Forestry Corporation (CONAF, Corporación Nacional Forestal) which was responsible for 90 % of the planting (Lara, Veblen 1993). After 1975, the annual planting rate increased to over 80,000 ha until 1991 when it reached 107,000 ha, but with a changed institutional arrangement. The landowners which are involved now have larger tracts or the land is the equity investment of corporations which own processing facilities as well. The sector is relatively highly concentrated, with four of these companies owning 40% of the plantations and accounting for 70% of the forestry exports. Since 1974, the total planted area accumulated to 1.3 mio, bringing the overall total to 1.4 mio ha. The planted land is usually flat and it has been estimated that an additional area of suitable land of 2.5 mio ha under private ownership is available for future planting (World Bank 1992). The establishment of the plantations required the purchase of the land by the timber companies from landowners who were using the land themselves for livestock raising or who let the land being used by sharecroppers for agriculture, livestock and small scale logging. These sharecroppers had no legal basis to continue once the landowner decided to sell or invest himself into a plantation. 3.2. Forestry Policies

The success of the plantation activities as the basis for the export increase is based on a deliberate policy. There are a number of policy elements responsible for this success:

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- Governmental subsidies for planting: The Decree Law DL 701 was passed in 1974 which provided the major financial incentive. "It originally provided a 75% rebate on planting and management costs for commercial forestry activity on land which had previously not been forested. Today these incentives are not often taken up by the industry, since they only cover 35% of the current costs and are not applicable to ex-agricultural land on which the majority of the plantations are being established" (World Bank 1992, p.4). - Security of land tenure: The land outside the protected forest areas is privately owned and is accessible for private purchase and investment. Land is protected against expropriation by the Political Constitution. - Privatization of the industrial processing plants and of large tracts of plantations under favorable conditions. - The retreat of governmental organizations from the operation in the sector and the reliance and support for foreign private capital: The role of the major governmental agency CONAF has been reduced to a general oversight function. It is mainly responsible for overseeing management and harvesting plans which the private operators must submit for every activity in plantations and natural forests and for administering the funds under DL 701. Table IV.6. shows that the phaseout of CONAF from planting was not completed until 1986. - Generous control of management plans of plantations and natural forests: To obtain the subsidy under D.L. 701, the private timber companies had to present a forest management plan to be approved by CONAF. In 1980, a Supreme Decree of the Department of Agriculture (D.S. 259) specified the restrictions to be imposed on the logging of various forests types and slope classes. "Since 1990, the logging of plantation may begin as soon as the owner presents a management plan to CONAF" (Lara, Veblen 1993, p.126). In addition, the enforcement capacities of CONAF are rather limited and an effective control of the adherence of operators to their plans does not take place (Bitterlich 1993). - Removal of export restrictions on unprocessed timber/products which had been prohibited before. - Financial support for export by providing a 15% bonus on the value of a new export product up to the limit of 5 mio US $. - Changes in the labour law to allow the use of contract labour for the timber companies.

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- Provision of educational and technological support by establishing the Colegio de Ingenieros Forestales and two forestry departments at the university level, by providing information for the industry through the Instituto Forestales (INFOR), a branch of the Corporation for Promotion of Production (CORFO), and by providing technical support through the Fundación Chile. Despite the general liberal orientation of economic, the approach towards the promotion of forest exports was quite targeted by providing supportive services and by subsidizing the plantation phase. The subsidy programme, however, was probably not a fiscal loss since the 71 mio US $ subsidies spent over 15 years now yield VAT taxes on forest products of 60 mio and corporate income tax of nearly 100 mio US $ annually (World Bank 1992). The importance of the planting subsidies should not be overrated since the plantation costs are only a share of the total costs for delivered wood and since a number of corporations did not use the subsidies when they considered agricultural land as the best location (see percentage of subsidized area in Table IV.6.). The Chilean forest policy has been selective by neglecting the small scale forestry and by accepting the population displacement that resulted of the plantation development.

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Table IV.6. Areas Planted and Planting Subsidies, 1974-1990 ___________________________________________________________ Area planted (1000 ha) Subsidies Subsidized area Year Private Public Total US $ US $/ha as % of (CONAF) (mio) (1,000) total area ________________________________ __________________________ 1974 21.0 35.1 56.2 1975 38.5 44.0 82.5 1976 55.6 54.2 109.8 .02 0.0 11.5 1977 48.5 44.6 93.1 4.6 97.9 84.8 1978 52.5 24.9 77.4 4.3 127.2 69.4 1979 51.7 .5 52.2 5.2 137.1 73.0 1980 72.1 .1 72.2 6.9 151.5 88.6 1981 92.7 .0 92.8 7.6 189.5 56.2 1982 68.5 .1 68.6 8.7 146.3 64.7 1983 54.5 21.8 76.3 6.9 108.7 93.4 1984 53.3 40.3 93.6 3.9 102.0 69.7 1985 72.1 24.2 96.3 4.2 86.1 91.2 1986 66.2 66.2 5.2 104.7 69.1 1987 65.4 65.4 4.0 97.5 61.9 1988 72.5 72,5 3.5 94.4 56.9 1989 86.7 86.7 2.7 91.4 41.5 1990 94.1 94.1 2.9 109.0 30.8 ___________________________________________________________ Total 1,066.1 289.8 1,355.9 71.2 ___________________________________________________________ Source: Lara, Veblen 1993. The success of the promotion of export forestry was only possible because of the favorable economic conditions for Chile which the governmental policy identified and supported. The major advantages are the high productivity, i.e. fast growth of the planted species, the availability of land at low prices (in the earlier periods) and the low labour costs.

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3.3. Environmental Issues in Chilean Forestry 3.3.1. Environmental Impact of Monoculture, Planting and Harvesting

The expansion of the plantation has raised concern over the problems of a monoculture development. The major issue is the higher vulnerability to diseases. In Chile, some diseases and pests have been identified 1. There have been efforts to deal with them by applying herbicides (Lara, Veblen 1993) and by improving the silvicultural management. The second issue concerns the environmental effects of harvesting, which are the increase in soil erosion, the disruption of the hydrology and the contamination of downstream water quality. Here, the harvesting equipment and the practice of their use play an important role. Based on its visits, the World Bank forestry mission (1992) rated these practices as relatively good. This might be due to the interest of the owners to protect their asset for the next rotation. Lara and Veblen (1993), however, report of annual soil losses between 35 and 566 t/ha after logging and burning in Radiata pine plantations in Region VIII which could be detrimental for the productivity of the second rotation. A higher impact, environmentally and politically, is caused by the transformation of land for plantations. The degree of this impact depends on the previous use and the location of the individual parcels. The impact is the highest if natural forest stands are converted into plantations, which involves clearcutting, root clearing, planting of younger plants with little vegetative soil cover in the first three years. Here the various noncommercial benefits of the standing forests are sacrificed: Protection of endangered species and ecosystems, stabilization of water cycles and erosion prevention. The impacts are less significant if the area has been degraded or converted for livestock use and lies in a flat terrain. But even under these conditions, the removal of a less diversified vegetation will cause damages in terms of flood protection, soil erosion and species protection.

1

They are the European pine shoot moth, three species of bark beetle and a foliar fungus.

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The political debate centers on the degree to which the plantation are based on the conversion of natural stands as opposed to the conversion of degraded stands or of agricultural land. So far, two figures are available: One is the conversion of a total area of 48,600 ha of native forests, mostly second growth, converted in the Regions VII and VIII between 1978 and 1987 and the other figure is the 31 % of the native forests of the coastal range of Region VIII which was destroyed for planting (Lara, Veblen 1993). Compared to the total planted area of 1.5 mio ha, this seems a rather small area, but the environmentalists fear that this is only the beginning of higher rates in the future. The industry argues that most of the land will come, as it has been in the past, from agricultural land and extremely degraded forest land which is available, which is in private ownership and which will require lower cost for conversion. The environmentalists are suspicious that the export of chips will turn the conversion into a profitable alternative and do not believe the additional cost argument.

3.3.2. Effects of Logging Natural Forests

The other politically important issue is the use of natural forest, especially the degree of allowed logging and the attached conditions. Currently, the economic most attractive use for logging is the selective cutting for woodchips and this use has expanded over the last five years (Cp. Table IV.5.) to supply three large facilities. Since two more plants have been proposed, it is feared that this product will lead to the end the remaining natural stands: "In 1987, CODEFF realized an investigation which showed that if the current rate of destruction of the natural forests in the Coastal Range of Region VIII is maintained these forests will have disappeared within 30 years" (CODEFF 1992, p.38). The reasons for protecting these natural stands have already been mentioned: Their function as genetic reserves and their protection value for soils, water and nutrients. The protection of natural forests, however, is not a completely new phenomenon to Chile. The country already has a system of preserved forests, the debate is only about the extent of protection and the extent of allowable use in the areas classified as productive forests.

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3.4. Environmental Management within the Forestry Sector

The debate in Chile on the integration of environmental policy goals into forest policy culminated in a law proposal on "the recuperation of the native forests and the support of the forest industry" (CONAF 1991). Two other environmental aspects in forest policy received less attention, the pest control and maintenance of soil productivity in the plantations and the existing system of protected forests.

3.4.1. Pest Control and the Protection of Soil Quality in Plantations

Epidemic spread of pests and/or diseases has not occurred yet in the plantations and as a result the spraying of pesticide seems to be the exception. The World Bank in its analysis of the costs, revenues and profits of the Chilean plantation forestry does not mention pesticide costs. The level of pesticide use in plantation forestry tends to be considerably below those levels of agriculture. The risk of epidemic damage due to pests is known and CONAF and the Agriculture and Livestock Service (SAG) established an early warning programme in cooperation with the larger timber companies (Lara, Veblen 1993). The second alternative of planting a broader variety and mixed stands which has been proposed by researchers, has not been adopted by the industry, and there does not seem to be any governmental support except for research which took place in the late fifties with southern beech (Nothofagus; Lara, Veblen 1993). The issue of soil erosion due to harvesting does not seem to receive higher levels of attention. There is no reference to a governmental support programme to deal with the question.

3.4.2. Protecting the Most Valuable Natural Forests

Chile has a national forest protection system, Sistema Nacional de Areas Silvestres Protegidas (SNASPE), which covers about 13.8 mio ha as state property. There are three categories, National Parks (8.4 mio ha), National Reserves (5.5. mio ha) and Natural Monuments (0.01 mio ha), which are

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managed by a department of CONAF. Of these preserved areas under SNASPE, only a small proportion is actually covered with forests, namely 770,000 ha in the National Parks and 650,000 ha in the National Reserves. The remaining area of 12.4 mio ha has other types of vegetation or it is covered with ice, rocks and water (CODEFF 1992a). This system is incomplete as only 51 of the 83 types of vegetation identified in Chile are represented in SNASPE. But other vegetation types are overrepresented or are inadequately represented (Burschel et al. 1991; CODEFF 1992a). The need to expand the system is well accepted by CONAF, but it requires the purchase of the property by the state. Burschel and his coauthors (1991) propose the establishment of a special fund, but this has not been taken up by the Chilean government. There does not seem to be an increase in the land acquisition budget. The restrictions legally applied within these categories differ considerably as logging is allowed in the National Reserves while it is not in the National Parks. For this reason, the above 650,000 ha in this category are often classified as productive forests. The protection of the National Parks from logging and agricultural uses is not always effective since these uses can take place without sanctions being applied. They are often preceded by forest fires which reduce their environmental value. This problem is intensified because private land and the land used by squatters are intertwined with the land under state ownership. About 690,000 ha of the SNASPE area fall in this category and they are most likely used in a manner which is inconsistent with the objectives of the system. Although the agency operating SNASPE is considered highly qualified and motivated (Arensberg et al. 1989), it lacks the resources to police effectively illegal activities and to provide assistance to legal users to change their use to a less destructive manner (Burschel et al. 1991).

3.4.3. Balancing Protection and Production in the Productive Natural Forests

A larger share of the natural forests lies outside the National Parks which provide the highest (relatively speaking) level of protection. In addition to the "Areas of Preservation" which include as described the National Parks and National Reserves, Chile has a forest category of "Areas of Protection" which serves to protect against erosion and water contamination by restricting the use of these forests adjacent to water courses (up 50 m

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from permanent water bodies). Here logging is allowed, but subject to a CONAF-permit, based on a management plan developed by the owner/user and approved by CONAF.

Table IV.7. Surface Areas Covered with Native Forests According to Use Categories (in mio ha) ___________________________________________________________ Areas With forests Without forests Total of SNASPE other SNASPE other SNASPE other ___________________________________________________________ Preservation 0.77 --12.4** --13.2 --Protection --9.7 --2.5 12.2 Production 0.65* 3.5 --3.1 0.65 7.2 ___________________________________________________________ Total 1.42 13.2 12.4 5.6 13.8 19.4 * This figure refers to forests of protection in National Reserves; ** This figure includes areas covered with ice and water in National Reserves. Source: CONAF 1991 The third category, "Areas of Production", does not restrict logging. The 1980 D.S. 259 of the Ministry of Agriculture places restrictions on the use of Areas of Production, but only in combination of the Law No. 701 of 1974 which established the subsidy programme for plantations. Using these categories, CONAF summarized the use of forest categories (Table IV.7.). To improve the protection of native forests, a law has been proposed, based on an outline by CONAF in 1991, which became subject to an intense public debate (República de Chile 1992a). The main approach, however, has not been by enlarging the National Parks, but by expanding the area in the category "Areas of Production" for which the owner needs a permit of CONAF based on a management plan and by introducing a subsidy programme, similar to the support of plantations, for natural forest management.

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The management plans have to comply with a set of restrictions which differ according to the location of the forest site and the type of logging /forestry operations allowed: 1.

A logging ban is planned for native forests in the proximity of springs, adjacent to water bodies and on slopes steeper than 45%.

2.

Logging rights with a responsibility to reforest with identical species (i.e. a ban on substitution with exotic species) are foreseen for:

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the following Chilean species: Araucaria, Alerce, Lenga, Ciprés de las Guytecas, Ciprés de la Cordillera, Palma Chilena;

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native forests which constitute a habitat for endangered species;

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native forests in Protected Areas (Lugares de protección);

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native forests with a higher quality for management. In addition, a 75% subsidy for the cost of plantation, enrichment, trimming will be granted.

3.

Logging rights and the right to substitute 25% of the lot with exotic species are proposed. If the 25% are substituted, then the same area has to be managed with native species for:

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all forests other than 1., 2., 4. and 5. The 75% subsidy for the cost of plantation, enrichment, trimming will be available as well.

4.

Logging rights and the right to substitute 50% of the lot are planned for sites with degraded natural forests; in this case, the 75% subsidy for cost of plantation, enrichment, trimming can be used as well.

5

A 75% (85% for small owners) subsidy will be available for land without forests but soil that is classified as potential forest use (Villarroel 1992).

These instruments listed in the "Proyecto de Ley del Bosque Nativo" demonstrate that the proposal deals mainly with the problems of commercial logging and the substitution of native forests with plantations of exotic species. This problem has been perceived as most important, understandably if one sees the capacity of modern chip-making plants. However, the growth of this use of the native forests will be limited because the plantations of eucalyptus will be mature after the year 2000 to

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be harvested and these trees provide the same short fiber that the chips are currently supplying, but at lower costs. There are some alternative management methods for native forests (nothofagus /lenga forest close to Tierra del Fuego) which yield higher wood increments per year and hectare, but according to the World Bank (1992) the financial viability of the system is not yet proven. The environmental groups are not satisfied with the law proposal as it allows for the transformation of "degraded forest lands" into plantations and as the legal definition is rather vague which could, given the low level of staffing of CONAF, result in the substitution of up to 4 mio ha. Such a result is unacceptable to these organizations (CODEFF 1992b). The industry opposes the restrictions of the law proposal because it is unclear how much land can be used, whether the remaining forestry options will be profitable and whether the procedures to be established will leave enough time to take advantage of the market as long as it lasts. Other critics have raised the questions whether CONAF will be able to perform all the functions envisioned in the law proposal, given it current level of staffing and budget (Schmidt 1992; Jiles 1992). The third point is that besides a higher subsidy for smaller owners for reforesting the proposal does not deal with the cutting for woodfuel and charcoal which accounts for an annual volume of 6 mio m3. The subsidy will not be effective unless these owners can be confident of finding a market for their logs over the next 20 years. At this point, it is unclear whether the law will be passed in this form and if so what kind of an effect it will have on the degree and type of use of the remaining productive natural forests. Probably the most critical point will be the reaction of the forest industry in building new plants for chipmaking and thus creating a demand for the cutting of these forests. It seems that a country-wide coverage of permit granting and enforcement by CONAF will exceed its present capacities and the effectiveness of the law with the present approach will depend mostly on the budget increases for personnel.

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4. Energy Sector and Energy Policies

4.1. Description of the Energy Sector

Although Chile has its own energy resources, mainly coal and a large number of hydropower sites, energy imports in 1993 made up for 42% of total energy consumption, mainly oil and coal. Oil imports are 86% of total consumption. There is neither nuclear power nor are there development plans and the renewable sources are almost insignificant except small wind power systems in isolated rural areas. Investments for energy production are about 12 to 15% of the total national investment (US$ 400 millions). The economy spends annually about 15% of GNP for energy consumption. Energy consumption is expected to continue to grow at a rate of at least 4 percent a year due to population growth, per capita income growth, industrial growth and shift from traditional to commercial fuels. Chile has its own coal reserves and production in the South, around the Gulf of Arauco, south of Concepción, with some of reserves underneath the ocean. Here, the production is declining to 1.9 mio t per year in 1992. The estimated coal reserves are relatively high in relation to current production, but Chilean coal has a high content of sulphur and relatively low calorific value. Since 1980 coal consumption has increased due to the shift from fuel to coal in boilers and furnaces and the construction of new thermal power plants in Northern Chile. Coal consumption grew from 1.35 millions tons in 1975 to 2 millions tons in 1992. It is expected to reach 4 millions tons at the end of the century, according to the forecast of the National Energy Commission (Comi-sión Nacional Energia 1993). The production of crude oil in Magallanes decreased from 1.4 mio m3 in 1988 to 0.86 mio m3 in 1992. At the actual exploitation rate and without discovering new productive wells, the oil production will cease in five years.

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Table IV.8. Energy Supply and Reserves (% of total) Energy source Hydrocarbons Electricity Fire wood Coal Natural gas

Current supply 39% 21% 17% 13% 10%

Reserves 2.4 25.3 38.5 31.7 2.1

Source: National Energy Commission 1993

In the 1980s. two thirds of electricity were generated based on hydropower, but its contribution varies due its sensitivity to preciption: In 1987 hydropower represented 77% of total power generated but only 49% in the dry year of 1990. The hydropower potential has been estimated to be about 20,000 MW. There is a major project to increase hydropower capacity, the Pangue Hydroelectrical power plant (600 MW) in the upper BioBio river, 500 km south of Santiago. But the World Bank and UNDP estimate that the favorable hydropower sites are used up and that the marginal cost of generating capacity will be rising (UNDP, World Bank 1992). As a consequence, the share of fossil-fuel generated electricity is expected to rise in the future. One major contributor will be the natural gas piped from Argentina (Neuquen). This project will probably be ready within the next three years, depending on the definition of the regulatory frame. To utilize the full capacity of the pipeline, it will be necessary to supply at least one three hundred mega-watt gas generator in the central electrical grid. If one compares the supply situation with the availability of energy reserves in the country it becomes evident what kind of energy will continue to be imported. The total commercial energy demand has grown by 2.9% in the 1980s, electricity demand 4.5% per year despite the major recession after the 1982/83 economic crisis. This is a slow down compared to the growth rate of 6.1% between 1960 and 1974. The energy consumption per capita rose by 36% from 652 kg of oil equivalent in 1965 to 887 kg in 1990. Chile consumes a relatively high level of energy in relation to its GNP.

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Figure IV.4. Commercial Energy Efficiency and Energy Prices, 1985

Source: Lohani Azimi 1992

An analysis of the energy consumption of a number of developing countries per unit of GNP revealed that Chile is relatively energy intensive despite its high retail/ border energy price ratio. Comparing energy exporters, importers and OECD countries, Lohani and Azimi (1992) found that the higher the above price ratio the lower tends to be the energy intensity of an economy. In 1985, Chile, however, stood out as a country with a high retail/ border price ratio of 1.7, but with an energy intensity similar to the figures of Mexico or Egypt, countries with a low (below 1) retail/ border price ratio (Cp. Figure IV.4.). The sectoral energy demand is slightly dominated by industry and mining, but transportation and commerce and building are second in their share of energy consumption (Cp. Table IV.9.).

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Table IV.9. Energy Demand by User Sector (% of total) _______________________________________________________ Mining and industry 30% Commerce, public buildings, residences 26% Transportation 25% Transformation 19% _______________________________________________________ Source: National Energy Commission, 1993. The relatively high energy consumption has been found in mining and industry, although the energy prices in Chile are at or above long-run marginal costs. So far, the explanations summarize the experiences from other countries. The companies have been reluctant to use the investment opportunities that energy savings provide as the energy costs are not a sufficiently large fraction of total costs - on average they constitute 3% of the production costs of the industrial sector. The information and analytical capabilities are incomplete within the firms and the required pay back period is too short compared to other investments. 4.2. Energy Policies The energy policy is market based in its basic approach, consistent with the whole economic policy. The prices, market entry for tradeable energy sources are unregulated and the system for electricity generation and distribution is based on a mixture of privatized and of state-owned generation companies with the privatized companies supplying the larger market share. The water rights for the non-consumptive use of hydropower electricity generation are private rights in the hands of the generating utilities. The tariff system is based on marginal cost pricing. There is limited private interest in demand-side management and few governmental initiatives to promote efficient energy use. The regulation of the electricity sector was established in the Decree DFL No. 1 which includes specifications for the technical control of the production, transmission, and distribution installations. The decree establishes areas of concession for distribution and tariffs. The key concept of the DFL 1 is to support competition among the generators and to accept the existence of monopoly in the distribution to small consumers.

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The role of the state in the energy sector is based on the importance of the energy sector and the slow maturity of the investments which gives the state the ultimate responsibility to guarantee the adequate supply of energy. The government promotes the investments and prepares strategic planning. The National Energy Commission (CNE) serves as an advisory body and provides the basis for national strategies and plans. Eventually, they become mandatory for the state-owned companies. The Ministry of Planning and Cooperation, however, evaluates the investments of state owned energy companies. If the private sector does not act, then the state will invest directly, according to the energy programme presented by the Minister of Energy in 1990. The division between the government and private companies passes as follows: The government is the ultimate owner of the energy resources, but grants concessions for use to private companies. The Superintendancy of Electricity and Fuels of the Ministry of Economic Affairs has the technical responsibility for monitoring the concessions for distribution, for ensuring the effective application of tariffs and the quality of the service. The state is the owner of all water streams. According to the Water Code, private users can apply for water rights to the General Directorate of Waters (DGA). The right for the non-consumptive use of hydropower is granted for free and has the legal quality similar to private property. Concerning hydrocarbons, the Political Constitution of 1980 establishes that the State has the absolute and exclusive control over all types of hydrocarbons and minerals and "may not be an object of concession, exploration or exploitation". Furthermore, "the exploration, exploitation or benefits from oil and gas should be handled directly by the state through its companies or partly through administrated concessions or under special contracts". For coal, oil and natural gas, nationally owned private-law companies own the mining rights for these fossil fuels. The National Coal Company (ENACAR) owns the main Chilean coal mines. Because of the liberal market entry and the high import share, this distribution of ownership does not have negative consequences for competition. The biggest electricity company (ENDESA), privatized five years ago, owns all the water rights for sites where low cost hydroelectrical power plants could be located and, thus, controls the major resource of

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hydroelectrical development. As a consequence, a law has been proposed in the Parliament to change the Water Code to cancel the rights if they are not used for the original declared purpose. -

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The ownership of fuelwood is based on the private ownership of land. Chile has large tracts of governmentally owned forest land, but they are used for forest preservation and not to grant logging rights. The government sets the pricing rule for electricity generation and controls its application to protect consumers from monopoly practices: Marginal cost pricing principle for electricity production. The electricity prices are calculated to cover the real costs plus a reasonable profit under the authority of the Superintendancy of Electricity and Fuels. The transmission of electricity is priced according to the marginal short term cost principle. The "Centro de Despacho Económico de Carga" (CDEC), an association of generation companies, prepares medium and long term plans to operate the grids and establishes prices and tolls for transmission. The electric utilities were transformed into private law companies and the majority was sold to private investors. By 1980, 100% of generation and transmission of energy were operated by state owned corporations. In 1985, the second round of the privatization process began and today 95% of distribution and 86% of generation are in private hands. The National Holding Company (CORFO) still owns three electrical companies COLBUN, EDELNOR and EDELAYSEN (Hachette, Lüders 1992). The concession for electricity distribution commits the companies to invest into the supply structure according to the increase of demand. The regressive distributional effects of the introduction of the marginal cost pricing has not been compensated by subsidies built into the price structure, but for low income consumers, subsidies are distributed directly as a contribution to their income. This subsidy scheme is supervised by the central government and the benefits are distributed directly by the municipalities. For the tradeable energy sources, hydrocarbons and coal, world market prices prevail among producers and retailers. Fuel prices for ultimate consumers are set by the distributors according to market conditions and include taxes and distribution costs. The distribution of liquid hydrocarbons is left to the market without price regulations or market entry control. The market is highly concentrated and

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dominated by four large companies COPEC (42%), ESSO (26%), SHELL (21%), COMAR (11%). The National Petroleum Company (ENAP) is the owner of a holding with the only two refineries existing in Chile. The use of Chilean high sulphur coal is based on international price competition. The coal prices depend strongly on heavy heating fuel and firewood prices, the major substitutes of coal in Chile. -

The development of renewable resources is very limited. Some possible projects in geothermal energy will be developed in Northern Chile once the Law of Geothermy (Ley Geotérmica), prepared by the National Energy Commission in 1992, is approved in Congress. This law will allow private companies to develop this potential which is actually owned by the state. The main geothermal area of El Tatio in Northern Chile belongs to the state holding CORFO which has not been able to use it commercially. Renewable energy projects are in a pilot phase. Wind energy projects are being studied by private operators. One wind power project is planned by EDELAYSEN, a state owned electricity company, which will install the first wind mill farm of 1.2 MW in Southern Chile. Solar and biomass energy has been developed by NGO programmes, mainly in poor rural and semi-arid areas of Northern Chile. Governmental institutions have no programmes to update the inventories of natural resources. 4.3. Environmental Issues and Management within the Energy Sector The rapid economic development of the last 10 years is associated with growth in energy consumption due to increased utilization of motor vehicles, mechanization of industrial processes and increasing energy consumption in households which in most cases is very inefficient. The main environmental impacts of energy sector on the supply side are: Transformation of watersheds for hydropower development. The most prominent case is the Pangue Hydroelectrical project in the BioBio river, already under construction. According to most ecological groups and university research centers, e.g. University of Concepción, the Pangue project will cause major environmental problems in a very sensitive natural area as soil erosion, sedimentation, interference with fish population and dislocation of the local population. Air pollution (CO2, particulates, SO2 and NOx) from fossil energy consumption. Thermal power plants, industrial boilers, space heaters

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and ovens are the major sources (Cp. section III.1.). The Renca thermal power plant in the Santiago Metropolitan Area was closed down due to its air pollution impact. In Coronel Bay, 500 km south of Santiago, the Bocamina coal power plant generates major air pollution problems as well as Laguna Verde thermal plant near Valparaiso. For years, solid waste from the coal mines has been dumped at sea and caused major sea water pollution in Lota, the main coal center, 500 km south of Santiago. Similar problems have been detected in almost all of the small and medium size mines in this area. Sea water pollution from thermal power plants mainly due to bad management of stock piles and lack of adequate landfills can be found in every plant. Severe deforestation of native forests mainly in the semi-arid regions of Northern Chile (IVth Region) and the coastal dry zones of Central Chile (Region V, VI and VII) due to excessive firewood harvesting and production of charcoal for urban areas. A number of the above mentioned environmental problems are dealt with explicitly in the media-oriented pollution control efforts. As chapter III has shown, the pollution control efforts are quite selective in their pursuit to reduce pollution from energy related sources. Within the energy sector, the major environmental policy that can be effectively pursued is demand-side management to promote energy savings. As described above, the Chilean energy policy has undertaken one major step by adopting a price policy based on long run marginal costs. But the remaining inefficiencies, causing a high energy intensity have not been systematically addressed: High thermal losses in buildings and houses. In Chile there are no norms in housing and construction to control losses and to improve thermal conditioning of houses. Specific loan programmes are missing. The domestic energy use in houses and by household appliances is inefficient. Here, public information campaigns are lacking. The energy efficiency of vehicles is rather low. The public transportation vehicles have no preventive maintenance. Bad driving practices, use of old vehicles and the lack of clear incentives to promote car pooling and the use of public transportation increase air pollution problems. Some progress has been made in traffic management in Santiago with exclusive lines for buses, staggered bus

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-

-

-

-

stops, coordination of traffic lights in some main streets in the business district. Programmes for reducing the energy use have been developed in some high intensity energy use sectors as chemical, metallurgical and services in cooperation with international development agencies. There are educational campaigns and training programmes for managers and operators in the industrial and transportation sector. Environmental impact assessment studies for constructing dams will be performed. These studies were not mandatory, but since the Basic Environmental Law has been passed by both Chambers all power plants above 3 MW are subject to the EIA process (Art 10c). The National Energy Commission (CNE) will be the contributor to this procedure from the energy sector. The introduction or additional provision of cleaner energy has been supported by the government: for natural gas by promoting and participating through the National Oil Company in a major project to pipe 5 mio m3 per day from Argentina to Chile, for solar power with the support of international development agencies by a project to spread the use of solar water heating in rural areas.

The energy sector has expanded considerably in Chile after the 1982 economic crisis due to an increase in energy consumption which was accompanied by an institutional transformation towards a liberal market economy with a high share of private sector in the electricity market. The change to a concession system with regulated marginal cost pricing constitutes a first adequate step in terms of the environmental management of the energy sector. But the second step is still lacking: Energy consumption per unit of GDP is relatively high, demand side management activities are largely missing. The share of natural gas doubled between 1973 and 1992, but the use of charcoal and coal increased as well while the share of of hydropower remained stable. The air pollution effects of energy consumption are being addressed and the environmental effects of hydropower will be subject to an environmental impact assessment.

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V. Economic Instruments Used in Chile The economic instruments used in environmental policy are usually defined as those used to internalize the external cost of environmental degradation, often restricted to the avoidance or mitigation costs. The discussion among economists mostly assumes that the private costs of using the environment are part of the cost calculation of the individual user and that the rights to use are adequately defined. Quite often this is not the case for developing countries. Thus, this chapter makes a distinction between the two aspects. First, the measures to internalize private costs and the creation of private property rights in Chile are presented and then the instruments used in the country to internalize the external costs. In Chile, the first group of measures consists of the marginal cost pricing and full cost recovery in water supply and sewage collection, in electricity generation and garbage collection and the protection of private property in land and in water and the auctioning of fishing quotas for two smaller fish stocks. Of these measures, the marginal cost pricing in water supply and sewage collection and the operation and the regulation of the water markets will be discussed in some detail. The second set of instruments used in Chile are the tradeable permits for particulates in Santiago, the auction system for street rights for buses, which are both included in the following presentation. A third instrument, the introduction of road pricing for downtown Santiago, has been proposed but it is not included here. In several documents, one can find references to a "Ley de Peajes" (Escudero 1993), but it has been impossible to locate a draft or any other document specifying it. 1. Marginal Cost Pricing in Water Supply and Sewage Collection Chile is one of the few countries which applies the principles of marginal cost pricing and full cost recovery in those sectors of the economy where governmental provision of the services at subsidized prices is quite common in developing countries and a number of industrialized countries as well. In the water sector, the principles are applied in practice for the provision of water supply and sewage collection in urban areas. The tariffs used are based on the principles of marginal cost pricing, but they have not reached the ultimate level. There is a transition programme to end in 1994. These principles do not apply to sewage treatment and not to rural areas.

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Until the late 1980’s, Chile’s water supply and sewage collection was operated by a national (Servicios Nacionales de Obras Sanitarias, SENDOS) and by a metropolitan (Empresa Metropolitana de Obras Sanitarias, EMOS) authority under the supervision of the Ministry of Public Works. Both services were considered to be basic goods for the general public and the tariffs were set at a level of which the government thought the whole population could afford it. During the last decade, the tariffs covered on average 50% of the costs of these services and most of the investment funds came from tax income of the central government. As a consequence of the tight budgets in the 80’s, the investments remained below the level necessary to maintain the quality of the services and to expand according to the increase of the population. These restrictions became visible in terms of higher water losses in the distribution and collection network, in the reduced quality of the services and the increase in time lag in the provision of services for newly built urban areas (Blanlot 1993). Despite these shortcomings, over the previous decades the responsible institutions had built up an infrastructure which provided drinking water to about 97,6 % of the urban population and which connected 84,8% of the households to a sewage water collection system (SSS, 1993). Here, Chile is leading of all Latin American countries.

1.1. Legal and Institutional Framework

Beginning in 1988, the water supply and sewage sector was reorganized, according to the following principles: Separation into supervisory and regulatory functions from actual supply services, privatization of supply services, creation of an supervisory authority, marginal cost pricing and total cost recovery including a return on invested capital. This reorganization is based on the following laws and decrees: Decree with legal status (DFL) No. 70 of 1988, establishing the marginal cost pricing system, Decree No. 453 of the Ministry of Economic Affairs which specifies DFL No. 70,

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-

Law No. 18 778 of 1989 establishing the system of personal subsidies to low-income consumers, Decree with legal status (DFL) No. 382 of 1989, the law on the Sanitary Services, Law No. 18 902 of 1990 which creates the Superintendancy of Sanitary Services (SSS) and regulates its functioning, Law No. 18 777 of 1989 and law No. 18 885 of 1990 which allows the government to establish private law enterprises with limited liability.

Although the basic laws for this reorganization have been passed three to four years ago, the reorganization is far from complete. The Superintendancy is established and it performs its main functions: Supervising the supply companies, controlling the quality of the drinking water, administering the tariff adjustment process of the supply companies. It has proposed a set of discharge standards for industrial sources which have been stopped for the time being from becoming effective because they require uniform discharge standards from all sources independently from the quality status of the receiving river body (cp. ch. III.2.3.2.). It is preparing the procedure for licensing private companies in the water sector. The privatization of the water sector stopped with the incoming of the democratic government at the end of 1989. Between 1983 and 1989, the national water service organization (SENDOS) was decentralized corresponding to the Chilean regions and these decentralized units were transformed into private corporation with limited liability, but they remained under government ownership. The water company in Santiago was transformed in the same manner2. All the water companies are managed by a national holding company (CORFO, Corporación de Fomento de la Producción), which continues to manage all companies not privatized yet and/or likely to remain under governmental control in the foreseeable future (Hacchette, Lüders 1992). In addition to the formation of EMOS as a private law corporation, the Santiago Metropolitan Region is served by six other companies of which only one is under private control (Cp. Table V.1.)

Table V.1. Water Companies and their Services, 1992

2

The larger electrical utilities including the largest (ENDESA) were sold to private shareholders completely or with a controlling majority (Cp. Hachette, Lüders 1992).

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___________________________________________________________ Re-

Company

gion

Popu-

Drinking

water

Sewage

collec-

lation

Connec-

Cover-

Connec-

tion

tions

age

tions

Cover-

(1,000)

(1,000)

(1,000)

age %

________________________________________________________________ I

ESSAT S.A.

337.2

74.2

98.4

70.7

92.7

II

ESSAN S.A.

364.1

82.5

99.7

64.7

92.7

III

EMSSAT S.A.

190.9

49.0

98.0

38.9

77.7

IV

ESSCO S.A.

354.9

85.8

97.7

67.2

80.2

V

ESVAL S.A.

1,219.5

293.2

96.1

232.7

82.1

VI

ESSEL S.A.

447.9

95.6

96.0

69.0

68.7

VII

ESSAM S.A.

486.3

105.2

98.5

87.1

87.5

VIII

ESSBIO S.A.

1,306.4

255.5

95.0

180.3

64.6

IX

ESSAR S.A.

448.2

102.5

98.1

78.6

73.3

X

ESSAL S.A.

545.1

107.6

96.0

77.0

68.0

XI

EMSSA S.A.

59.7

13.2

99.5

8.2

59.5

XII

ESMAG S.A.

132.1

33.2

98.0

31.2

89.1

M

EMOS S.A.

4,265.9

905.2

98.4

868.3

94.2

M

Lo Castillo S.A

301.9

50.6

100.0

48.8

95.1

M

Manquehue S.A.

7.7

1.3

100.0

1.3

100.0

M

L.Dominicos S.A. 11.8

1.8

100.0

1.5

82.3

M

Serv. Mun.Maipu 414.8

93.5

99.5

82.1

97.2

M

ServiComunal S.A.35.7

8.3

97.0

5.7

90.0

M

COSSBO

3.0

100.0

3.0

100.0

16.1

________________________________________________________________ Total urban10,956.1 2,363.9

97.6

-

-

2,400.4

153.1

34.7

-

-

13,356.5

2,516.9

86.3

-

-

Total rural Total

________________________________________________________________

Source: SSS 1993

The privatization of the water sector as opposed to the electric utilities, however, has come to a stop for a number of reasons:

-

The new government, formed after the elections in 1989, was less committed to privatization than the military regime.

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-

-

The return for private investors are below the average in most economies unless the government is generous in its tariff supervisory policy (see for a comparison the privatization in the UK). In Chile, only the Metropolitan Region seems to be attractive for investors. The investments are risky in the sense that the requirements for sewage treatment are not predictable at the moment. This is relevant for the own costs of private investors, but also for the operational risks due to industrial discharges.

One major condition for a privatization, the introduction of tariffs with full cost recovery including a return on investment, has progressed considerably, but the targeted tariffs will be achieved in 1994.

1.2. Tariff System

Article 4 of the DFL No 70. sets the principles of tariff calculation and the Decree No. 453 of the Ministry of Economic Affairs specifies the calculation. The tariffs are based on the marginal cost of additional supply if new investments are necessary and on the marginal cost of the optimized entire system based on replacement costs if the existing capacity is sufficient for the foreseeable demand. These costs are calculated separately for the production and distribution of drinking water and the collection and disposal of sewage water. The charges to the customers are divided into fixed charges and those based on the volume of water consumed and water collected. A differentation according to the pollution intensity of the collected water is not included. A pre-financing of investment costs for expansion is possible through consumer’s grants, refunded via water supply or stock shares. But it is expected that this financing method will loose its importance once the tariffs are high enough to cover the capital cost of expansion. A similar development took place in the electric utility sector (Blanlot 1993). The transformation from the old tariffs with its low cost recovery to the new tariffs which will cover the cost of investments was stretched over a four year period from 1990 - 1994. The tariffs which were in force in 1992, thus, are in the middle of this transformation process and will increase further until they reach the target level in 1994 (Cp. Figure V.1.). As a result, the cost differences between the Chilean regions become visible: The costs in the three Northern Regions, particularly in the second Region, are

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considerably higher than those in the Metropolitan Region. In 1994, the tariffs in the North will be 400% and in the South 200% above the relatively low level of 95 to 116 Pesos/m3 (about 0.32 US $) in Santiago.

Figure V.1. Water and Sewage Tariffs in the Chilean Regions, 1992

Source: SSS 1993

Already at the end of 1990, when the first adjustments became effective, the increases of the tariff level reached up to 100% in some regions. The increases will continue and the resulting burden for low income households will grow. To reduce the regressive distributional effects of the tariff changes the personal subsidy system was established by Law No. 18 779 of 1989. It became effective in 1991. A total of 441,000 families received subsidies out of the total number of water supply connections of 2.36 mio. When the target level of the tariffs will be reached, this number will increase to 722,000, according to the calculations of the Superintendancy of Sanitary Services (SSS 1993). The total amount of subsidies reached

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2.2 bio Pesos in 1992, equivalent to 2.3% of total revenues of the water supply companies. The procedure for calculating the water charges starts with a study by independent consultants contracted by the Superintendancy of Sanitary Services. If the calculations of the water company yield different figures which cannot be reconciled by comparing the calculations, a commission of three specialists is used as a mediator. The decision of this commission is final. Public investments in the sanitary sector have increased significantly since 1990 and they will reach 37 % of public expenditures in 1993, compared to the average 16% of the last 28 years (Cp. Table III.7). The funding sources of these investments are not yet the new tariffs, but an increased investment budget of the Ministry of Public Works. The high density of water supply and sewage water collection does not exist with respect to wastewater treatment. In most cities, the wastewater is only collected and flows untreated directly into the ocean or into the rivers (CONAMA 1992). In 1992, the Superintendancy of Sanitary Services controlled only 24 treatment plants in the whole country (SSS 1993). For Santiago, the first municipal treatment plant has been put into operation in 1993. EMOS as the operator of the plant has set its own discharge standards for those industrial plants connecting to the Poniente sewage collector. This low level of municipal sewage treatment constitutes the major deficit in Chilean water quality management, but the high level of water supply and sewage collection already yields considerable health benefits. The direct use of contaminated surface water for human consumption remains relatively low compared to metropolitan areas in other developing countries. The major damages occur due to the use of the water from the rivers for irrigation of vegetables and their consumption without appropriate protection. As a result there is a high number of patients suffering from water-borne diseases (typhus, hepatitis): almost 16,000 cases in 1990 (BKH-Consulting 1992). Still the public health situation seems to be relatively good. The number of cholera cases in 1991 and 1992 was significantly below the level in the neighboring countries Peru, Bolivia and Brasil (SSS 1992). The tariff system does not have to be changed if municipal sewage treatment or the pre-treatment of industrial discharges into the sewer system will be required on a regional/ watershed or national level. Currently, a

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study is undertaken to develop a masterplan for sewage treatment for the Santiago area (CEDRM 1993). The expected treatment costs will lead to an increase in the tariffs in Santiago. This increase will probably prevent the use of discharge fees in the foreseeable future. There are currently no governmental plans or other considerations to deal with the discharge load remaining after treatment with such an instrument.

2. Water Rights and Markets

"Chile is unique among developing countries in that it has a system of transferable water use rights. Although water is considered a national resource, individuals can own perpetual and irreversible water use rights. These rights are independent of land use and land ownership, thus trade of water rights is fairly unrestricted" (Hearns 1993, p. 2).

2.1. Existing Water Rights

According to Article 7 of the Water Code, the water use rights are given for quantity per period of time, but water quality is not included in the definition of water rights. The law, however, distinguishes between consumptive and non-consumptive rights. With regard to the consumptive right, the right holder can consume the permitted quantity per period of time as he pleases. Irrigators own full consumptive rights to their water. The initial distribution of water rights is based on an application of a potential user which is examined by the DGA with respect to the availability of excess water. For non-regulated rivers, the historical water flow is estimated, based on hydrological simulation models, for the month of the minimum flow which normally corresponds to the maximum agricultural water demand in Chile. The upper limit of the water rights to be distributed are the ecological minimum flow requirements. The legal responsibility of DGA to take them into account is rather weak and it is a recent development in DGA’s practice. All water rights are granted free of charge by DGA which operates a national register. During the application procedures, third parties have an opportunity to raise objections if the granting of the new water right impairs their own right. In times of water shortage, DGA declares the shortage with the consent of the water user associations which organize among themselves the necessary restriction of water

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rights, usually on a proportional basis. There are four types of water user associations, one which organizes the distribution of water and the compliance in unregulated watersheds(juntas de vigilancia) and others which organize in addition the maintenance of the distribution channels or drainage works (comunidades de agua, asociaciones de canalistas, comunidades de obras de drenaje; Title III of the Water Code). Downstream users, however, do not have rights to return flows generated by an upstream user. This aspect is important because "not less than 70% of the water quantity is flowing back to the river via surface or underground water and thus is determining the water use of the downstream holder" (Pena/Retamal n.d., p. 4). These rights are not legally protected from any change in upstream water use that significantly reduces return flows. In case of drought, the owners of water rights downstream have a right to a certain percentage of river flow, but do not have an assurance that their section of the river will receive any water. In a recent court decision, EMOS was granted full rights to its treated sewerage effluent, despite the fact that farmers have traditionally irrigated with this water. Concerning non-consumptive rights, Article 14 of the Water Code regulates the user’s obligation to return the water in the same quantity, quality, substances and potential of use. These water rights can be traded as well, but they are only of value for hydropower generation. Their value is site-specific due to the gradient and the topography of the river valley. A large number of the low cost sites were granted to the state-owned electric utilities and the rights are now part of the assets of the privatized coporations. They own more rights than they will need for the foreseeable future.

2.2. Proposed Amendments In 1992 an amendment of the Water Code has been proposed by the Chilean President which tried to deal with a number of water management issues (República de Chile 1992). The most important is the creation of an institution to integrate the various uses within a watershed, called Watershed Management Corporation (corporaciones administradoras de cuencas hidrográficas). Its function will not be the substitution of the (agricultural) water user association, but the integration of water uses between sectors, water quality management and the protection of the watershed from erosion, sedimentation and flooding. They will be modelled after the French and Spanish watershed authorities. The 1992 law

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proposal was rather vague with respect to the organizational structures, tasks, goals, voting rights and financing of these watershed corporations, but it was specific about two aspects of water rights: One was the creation of the explicit responsibility of DGA to guarantee an ecological minimum flow. The other proposal consisted of the limitations of the water rights in time (5 years) if they were unused and a complete renewal of water rights in the dry Northern areas. The reasoning behind the second set of proposals was the accumulation of unused water rights which the President considered to be excessive with only speculative purposes. This proposal of limiting unused water rights must have been withdrawn. There are proposals to grant water rights only with charges in the future (Dourejeanni 1993). In a second law proposal in 1993, the President favored the payment of annual charges for unused water rights for consumptive and non-consumptive uses. This fee will differ from region to region according to the water condition of the area in question (República de Chile 1993a). The passage of the amendments has been postponed because of the open questions about the details of the proposed watershed management corporations. In the meantime, a major study has been contracted to evaluate the options to design these corporations. They will influence the operation of the water markets as they will be responsible for water use conflicts between sectors and in a second phase for the self-financing of the public works in watershed (Lobos 1993).

2.3. Trade of Water Rights: Potential Advantages and Current Practice

Chile is one of the few countries in world where water rights can be freely traded and where such a trade is quite common. The extent of this trade and the conditions are not well documented on a country-wide basis. It seems that most of the trades take place intrasectorally among irrigators, but the degree of intersectoral trade seems to be increasing. The major advantage of water markets from an environmental point of view is that they allow the restriction of water consumption based on market incentives. The prices of traded water are signals of the opportunity cost of using water. In the absence of water markets, these signals are missing and water shortages are usually dealt with an expansion on the water supply side. The prices for traded waters allow a better evaluation of various water conservation options by water users and create an incentive

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to realize these water savings and thereby reducing the need for new water supply investments. In irrigation agriculture, the saving of water can result in the reduction of a major source of salinization. These advantages of water markets materialize only if these real world markets are efficient markets. The current assessment of water markets is based to a large extent on the research on water in the western United States which has a similar climate regime, but a fundamentally different regime of water rights (prior appropriation) and a relatively restricted set of trading rules. Most economists are convinced that the water rights in the western states of the USA are unnecessarily restrictive and prevent some transfers that could very well be considered efficient. But at the same time it is clear that water markets operate with a considerable level of externalities (return flows, quality changes, minimum flow requirements) and that they can be characterized as thin markets with high transaction costs (Saliba, Bush 1987). But, at the same time there seems to be a consensus that, whatever the imperfections of water markets are, the need increases to ration water use, to reallocate water use from lower to higher values and to manage water not only from the potential of increasing supply but from the demand side as well the more intensive the use of existing sources of water becomes. It is known that intrasectoral trade takes place between farmers, particularly in terms of seasonal rentals. Intersectoral trade took place as well with water supply companies buying water rights from irrigators which saved them from building new supply infrastructure. The companies revealed that they did not have a fixed offer price, but instead final transaction prices were determined during individual negotiations. According to these representatives, the principle factors that determined these prices were distance from the company’s intake point, quantity of water use rights sold, and the information available to the seller (Hearne 1993). The functioning of the markets of water rights in Chile will be analyzed with respect to the market characteristics, price formation, the distribution of the gains from trade on the basis of three river basins for a World Bank study (Hearns 1993). "The Elqui River services a productive agricultural zone as well as a growing port, service and tourist community of 150,000 population. The municipal water supply company has chosen not to invest in a dam project and instead is purchasing water use rights from irrigators in

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order to meet its growing demand. The Limari basin has a well regulated irrigation system with three dams, including a large reservoir for interseasonal storage. In this area agriculture is well developed and trade between farmers is common, although little intersectoral trading occurs. Also, seasonal rentals of water rights have occured in this area, specially in drought years. The Maipo river supplies water to EMOS and irrigates a well developed agricultural area. Both EMOS and Lo Castillo, another water company, are currently buying water use rights in this basin" (Hearne 1993, p. 9). Chile relied on organized water markets in the past which have to be regulated to deal with the above externalities. It is not clear whether the proposed changes in the Chilean water law will result in an effective reform to deal with these externalities or whether it will introduce unnecessary trade restrictions. It is to be expected that the suggested restrictions, as described above, will be subject to a political controversy in future which, hopefully, might generate research to provide the debate with a reasonable basis.

3. Tradeable Permits for Particles in Santiago

Tradeable permits are an economic instrument used to internalize the external costs of pollution. The tradeable emission permits system in Santiago applies to stationary sources for particulate matter. It is a mixed system of a uniform emission concentration standard combined with a tradeable emission permit.

3.1. Regulatory Framework

The starting point was the goal of 70% reduction of the emissions of the stationary sources which CEDRM asked for in its decontamination plan (CEDRM 1990) and which was proposed by a group of the University of Chile and of the consulting company INTEC in the same year (Intendencia 1990). This goal was translated into a concrete policy in 1992 when the Environmental Health Service of the Health Ministry passed the DS No. 4 for the Metropolitan Region. It contains emission norms for existing and for new sources larger than 1000 m3/h. The emission standards for existing sources and their deadlines are as follows:

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12 mg/m3 by Jan 1st, 1993 until Dec 31st, 1997 56 mg/m3 by Jan 1st, 1998. The above concentration values are transformed into quantity of emissions by applying current flows. The corresponding formula is Daily emission goal in kg/day = Flow (m3 N/hr) x 0,000056 (kg/m3 N) x 24 (hrs/ day). For the existing sources, these quantities will be their emission permit by January 1st 1998. Thus, the initial distribution of permits is based on the grandfathering principle. New sources can enter the Metropolitan Region only if they find compensation for their additional emissions from reductions of the existing sources. The expansion of existing sources, which have to have a permit by December 31st, 1992 complying with the standard of 112 mg/m3, is legally treated equivalent to new sources. In a separate article, the decree regulates the transition between 1993 and 1997 by increasing the share of emissions to be compensated by new sources until the 100% are reached: 25% by Jan 1st, 1994, 50% by Jan 1st, 1995 75% by Jan 1st, 1996 100% by Jan 1st, 1997. Emission sources smaller than 1,000m3/hr, called area sources (fuentes grupales), do not participate in the emission trading, but they have to comply with the same emission standards as the point sources with the exception of new sources for which the standards started in 1992 with a value of 56 mg/m3.

3.2. Potential for Cost Reduction in Santiago

The proponents of the use of tradeable permits were and are aware of the economic discussion of the advantages and limitations of this instrument in the industrialized countries. The theoretical advantages of a system of tradeable emission permits can be summarized as follows: -

mproved static efficiency by reducing the compliance costs, i.e.

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-

allowing all abatement options of the participating sources to be used,

-

equalizing marginal abatement costs between the sources, participating in the system,

-

allowing a lower level of required reduction to comply with the ambient standard as measured.

-

Improved dynamic efficiency by creating additional incentives for the polluting firm to reduce emissions below comparable concentration values by adopting innovative technological solutions.

The cost reduction potential of market based instruments has been estimated empirically in a number of studies (Tietenberg 1985, 1992) in the industrialized countries. These estimates identified the abatement options of the regulated sources and their costs in relation to the degree of abatement, used linear programming models to find the cost-minimal solution for a given quantity of total emissions and compared this least cost solution with the actual costs of policies with emission standards or uniform emission reduction rates. In general, the costs of the actual policies are higher than the least cost solution: The range of the ratio between these two cost figures is from 1.07 to 22.0 (Tietenberg 1985) while the average values lie around 3 to 4. These estimates very often include two effects, particularly if the conventional emission standards are compared to the least cost solution. Here, the cost reduction potential depends on (a) the ability to equalize marginal abatement costs and (b) the lower level of required reduction to remain below the ambient concentration value at all receptor points. For those pollutants, called non-uniformly mixing, their ambient concentration tends to vary in an airshed according to their proximity to major emission sources. In order to comply with ambient standards, emission standards and uniform emission reduction rates reduce the level of pollution at a number of measuring points - in some cases considerably - below the required level of ambient concentration. This level of reduction raises the abatement costs above those costs when the level of reduction is specified in a way that it just reaches below the ambient maximum at each measuring point. This result develops for tradeable permits for nonuniformly mixing pollutants as well if the permits are defined solely in terms of emission quantities. In order to realize this cost saving potential, the tradeable permits need to be modified by spatial differentiation. These

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permits are called ambient (as opposed to emission) permits (for details cp. Tietenberg 1985). Since particulate matter are non-uniformly mixing, the policy of a tradeable permit system in Santiago has to face this problem. In the preparation of the system, an empirical study of the cost- savings potential of the two instruments was undertaken for particulates in Santiago (O’Ryan 1993). Similar to the above mentioned research in industrialized countries, this study estimated the compliance cost differentials between emission concentration standards, emission reduction rates, emission permits and ambient permits for those sources regulated under D.S. No. 4 of the Health Ministry. Stationary industrial sources cause 17% (i.e. 7,950 t/y) of the total emissions of particulate matter, while natural dust as the major source accounts for 72%. The other sources are of lower importance: Automobiles and Diesel vehicles emit 9% together and households 5%. There are a total of 1,440 regulated stationary sources in the Metropolitan Region, consisting of 563 industrial boilers for steam production, 122 industrial furnaces in the foundry industries, production of construction material, food and chemical industries, 616 heaters for space heating, 70 industrial processes (grain crushing, asphalt plants asf.) and 69 bakeries. To reduce their emissions, the options of these sources are various dust collection devices and the substitution between the fuel types used. As the use of fuelwood, charcoal, coal and the lower quality heating oil generates higher emission concentrations than higher quality oil and kerosene, the switch of fuel used helps to reduce particulate emissions. O’Ryan estimated the costs for these abatement options and used them in a simulation model to identify the least cost solution complying with the ambient standard in each cell of the Santiago monitoring grid. The result of the model is that the ambient permit system could achieve the reduction of ambient concentrations at least cost over the whole range of reduction. Among the instruments enumerated above, the second best is the emission permit while the emission standard and the percentage reduction instruments are third and/or fourth best. The relative position of emission standards vs. reduction rate varies over the range of reduction required: The percentage reduction rate (as an instrument (PER)) achieves the goal at lower costs if the desired reduction is between 60 and 80%. (Cp. Figure V.2.)

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Figure V.2. Total Abatement Costs for Fixed Point Sources under Different Policies

Source: O’Ryan 1993

The figure shows that at the desired reduction rate of the total emission of 70% the total cost difference between the ambient permit system (APS) and the emission concentration system (STD) is about 32 mio US $ (10 mio for the APS and 42 for the STD). The difference falls to 12 mio US $ between emission permits (EPS) and an emission concentration system (30 mio US $ for the EPS, 42 mio for the STD). The difference narrows further if the desired total reduction rate is increased to 90% when the total costs of EPS is estimated to be 62 mio $ while the STD would cause costs of about 71 mio $. O’Ryan clearly prefers the ambient permit system as the most cost effective solution (p. 188), but admits that it requires a relatively high level of sophistication from both the governmental operators and the participants in the ambient permit market to move it to the least cost curve. The

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Chilean authorities decided in favour of the simpler emission-based permit system at the expense of potential further cost reductions. These further cost reductions due to the ambient permit system have opportunity costs in terms of higher ambient concentrations which are the additional health benefits below the ambient standard. Since the ambient concentration standard is not a physical threshold below which there are no health effects, the lower concentration of particulate matter yields additional health benefits which might be considerable. O’Ryan does not estimate these additional benefits and, thus, cannot subtract them from the costs. Research at another location in industrialized countries, e.g. in Baltimore, Md., has shown that these benefits might be quite substantial (Oates, Portney, McGartland 1989).

3.3. Expected Degree of Trading

The estimated degree of potential of cost savings is still attractive enough to pursue a market-based approach further. Based on the experiences in emission trading in the USA, one cannot be sure, however, that the least cost potential will be fully realized by establishing tradeable permits (Hahn 1989, Tietenberg 1992). The most prominent indicator is the low number of external transactions that have taken place under the various US-programmes. There is a number of factors which might reduce the number of actual trades and thus contribute to a suboptimal realization of the potential cost savings. They are: the transactions costs involved, The incomplete information available about possible trades, the sequential, bilateral nature of trading as opposed to a simultaneous, multilateral trading, the existence of technological indivisibilities for the abatement technology, the existence of market imperfections, i.e. monopolistic competition and price-regulated markets, the incentive for non-compliance. Of the above factors, it seems to be that the sequential, bilateral nature of trading with incomplete information is one of the more important factors reducing the extent of trading. Based on the analysis of the US-experience, Atkinson and Tietenberg simulated the trades that would take place for particulate matter in the St. Louis, Miss. area if they were restricted to

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sequential, bilateral trading (1991). Under such a trading regime, trades are consumed when they offer an advantage to both sides of this exchange, but this bilateral trade might not be the one that is most beneficial of all potential trades. If the consumed trade is no more available for further trade then only a fraction of the full cost savings potential is realized. Depending on the sequence of trading, the costs situation of the initiating firm and the degree of information available, both authors estimated the achieved cost savings to be between 7 and 43% of its potential. The question of available information among firms about trading possibilities will very likely be a problem. O’Ryan notes in his report that a number of firms in the area were unaware of the programme and the cost savings available which was confirmed in our interviews. A further empirical sign of a lack of awareness among the firms owning the sources is the broad range of abatement measures with negative costs. These measures consist mostly of fuel switching which has been profitable for quite a while, but these firms failed to use this opportunity. A third indicator is the lack of use of consultants which might provide the owners with a broader range of solutions than the suppliers of control equipment which were usually contacted. Despite these restrictions, a number of trades are likely to occur, but they will be limited to the larger, more sophisticated companies where the savings might reach an order of magnitude which is more likely to attract the attention of managers. A second category of firms with a higher chance of a response will consists of those firms with more than one source in the Metropolitan Region. O’Ryan identified 287 firms with two and more sources (1993). Since January 1st, 1993, exchanges have taken place, but there are no records yet. During our interviews, we encountered one paper company which built a new tissue plant and complied with the 25% compensation rule with a trade with one of its own older plants. As an additional instrument, the agencies involved developed the project to establish an Environmental Project Fund which would collect information about abatement measures among those sources smaller than 1,000m3/hr which currently cannot participate independently in the licence market. This Fund could be expanded to serve as a brokering institution, but the concept has not been developed any further. The question of monopolistic power in the permit market can probably be denied, given the relative large size of the market and the small shares of the individual companies. Similarly, the problem of technological

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indivisibilities is unlikely to occur. The alternatives in fuel-switching and the various collection devices can be combined to approximate a continuous cost function. There is no empirical research on the validity of this assumption in the Santiago area.

3.4. Current Status of the Permit System

So far, the responsible agencies, CEDRM and the Metropolitan Environmental Health Service, have addressed the following questions (CEDRM 1993): The first step of ensuring compliance with the emission concentration standards seems to be accomplished. By mid 1993, the sources exceeding the standard of 112 mg/m3 was reduced to 4.6% with the number of sources controlled reaching 3,100. With the passage of D.S. No. 4 of the Health Ministry and the above licensing of the sources, the initial distribution of pollution permits has been allocated. The trading rule of 1:1 emissions trading without the use of a dispersion model allows trades to take place. With the requirement for the 25% compensation, an additional incentive to reduce below the emission standard has become effective. The plan to put the system on a sounder legal basis has been implemented to the extent that tradeable permits are included as an instrument in principle in the Ley de Bases del Medio Ambiente (Art 47, 48). To improve the ex ante information situation with respect to feasible exchanges, the concept of an Environmental Project Fund has been developed. The following tasks remain to be done: The specific law to establish the procedure for creating the emission reduction credit, including the definition of the trading rules, is still missing. The concept to establish an Environmental Project Fund to identify potential emission reduction projects among the smaller sources and to compensate via paving dirt roads still lacks a legal foundation.

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-

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There is an awareness about the problem of the emergence of a price structure for the permits, but there are no plans for creating/fostering a brokering institution. The treatment of the permits from an accounting and tax point of view is still missing.

The answers which can be given, although tentatively, at this moment are: Conceptually, an emission permit system in a developing country is conceivable and it has the potential for cost savings. The administrative and technical requirements (source inventory, local dispersion model, source monitoring capacity, technical capacity of sources to reduce emissions) can be installed. It requires a certain minimum level of sophistication among the regulators, a favorable political/academic environment and adequate financing. The initial distribution of permits is administratively at least equivalent to the administration of an emission concentration standard, probably requires more resources in terms of transaction costs. The realization of the cost savings potential, particularly among the existing sources, will demand a number of years, but the most visible benefit will be the cap on additional emissions. This restriction in a growing metropolitan area makes it probably attractive for a number of other countries. 4. Auctioning of Street User Rights for Urban Buses

The street rights licensing scheme is a reaction on the negative effects of the complete deregulation of the urban public transportation system in Chile as far as road based vehicles (buses, maxibuses, taxis, asf.) are concerned. Thus, the deregulation and its effects will be described first.

4.1. Former Free Market Access System for Urban Buses

Fifteen years ago, the Ministry of Transportation declared the urban public transport for buses to be a completely free access system (Art. 3 in Ley 18.696). This meant that whoever owned a bus could participate in the public transport system of the city without having to comply with any

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regulations with respect to tariffs, passenger safety or quality of the services. The result was a considerable expansion of the bus fleet with no minimum standards of quality. The capacity (13,000 vehicles) was estimated to 40% above demand, the fleet was underutilized and maintenance was lacking for a large share of the fleet (Escudero 1993). This resulted in a considerable increase in diesel emissions, i.e. NOx and PM 10. In addition, the transportation situation in central Santiago was characterized by a high level of congestion and, since bus stop locations were uncoordinated, the average speed was very low. The lack of restrictions for market entry made it easy for small operators to participate and as a result many owners/drivers were supplying their services. To coordinate scheduling, these operators formed line associations as cooperatives. These organizations on a line basis formed a general operators organization, the "Consejo Superior del Transporte" which represents the operators in front of the government (Hohmann, Martin 1992). In addition, the operators formed a price cartel which seems to have been effective since the tariffs more than doubled between 1980 and 1990 while the prices for the major input, i.e. diesel, increased only by 25% in real terms. The structure of small owners and the high tariffs caused the excess supply of passenger transport, based on the entry of marginal operators who were scouting the city arteries for any additional passenger. Since the buses were mostly written off (48% of the buses were older than 12 years) and since little maintenance was performed the short run marginal costs were only the opportunity costs of time of the driver/ operator. As a result, the buses carried only 350-400 passengers per day, a fifth to a third of the occupancy rate of other metropolitan areas (World Bank 1986).

4.2. Restrictions of Streets for Buses by Auctioning User Rights

In 1990, the Ministry of Transportation and Communications (MTC) changed this full open access policy into a regulated access policy by changing Art. 3 of Law No. 18.696. The regulation covered only one aspect of the public transport system, namely those roads that were congested because of the number of buses and taxis using them. All the other elements of the bus market, i.e. entry, selection of line and tariff, remained unregulated. The major aim was to relieve the congestion in the streets of

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central Santiago. There were plans to devise a similar system for private vehicles for which a road pricing system has been proposed. The existing system is quite unique since the comparable cases dealing with congestion address the private automobile and the comparable cases dealing with bus deregulation focus on complete bus lines, not on the streets which these bus lines use. In addition, the passage of Law No. 19.040 in 1991 allowed the Ministry of Transportation o retire the oldest (older than 18 years) 2,600 buses and taxibuses out the existing 13,000 and to buy them from their owners for their scrap value. Over the next three years, another 1,800 vehicles will have to retire as they exceed the age limit. to create a registry of vehicles in public transport and to limit new entries only for new vehicles. to establish regulations concerning air pollution, minimum services and the location and operation of terminals, to improve the process of technical control of the buses. In addition, the MTC could restrict the number of buses in an emergency air pollution situation down to 60% of the capacity which it did in the winter (August) 1991 based on its Decree No. 145. The approach of auctioning rights for street use for public transport vehicles involves those streets in central Santiago which are congested due to these vehicles. To make the system operational, the following questions have to be answered: -

to identify those pieces of roads considered to be congested,

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to estimate the level of traffic considered to be uncongested,

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to define the characteristics of operators allowed to bid,

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to define the selection criteria for the winners,

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to ensure compliance with the specification of the auction.

Once these questions have been answered in an operational manner, their impact on the transport service has to be assessed. From the available documents, it seems that the first two questions were answered on the basis of the existing analysis of traffic counts and traffic-flow/ speed relationships. The result was the definition of the maximum frequencies of buses in these streets.

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In order to improve the potential for applying sanctions in case of noncompliance only incorporated companies were allowed to bid and the legally unincorporated line associations had to establish themselves in such a manner. The selection is based on a number of criteria, including quality of service, i.e. frequencies, quality of the buses and air pollution characteristics (Escudero 1993). The compliance is based on a system of private law contracts between the MTC and the bus operators and differs from the public law concession which allows the governments to cancel the license in case of violations (Hohmann, San Martin 1992). The questions of the impact of the auctions of licenses for street use is a bit more complicated. Depending on the distribution of the awarded licenses, the existing system of bus lines could be altered. To avoid such a change, the existing bus lines and the transport corridors they serve were modelled with a trip-specific transportation model of the Metropolitan Region. This modelling is important since 80% of the bus lines operating in Santiago use the licensed streets. When awarding the licenses, the MTC tries to ensure that the reduction of the supplied bus services comes from a reduced frequency of the existing lines and not from a change of the spatial structure of the lines. Thus, the adjustment was only based on frequencies not on line coverage. Hohmann and San Martin admit that these restrictions of the license award come close to a line auction instead of a street user right auctioning system (p. 141). The desired result is that the reduced frequencies and increases in waiting time are made up by the savings because of the increased speed. A second problem is the reaction of the smaller operaters to use those streets adjacent to the licensed streets and thus diluting the effects of the auction. As a reaction, the government is proposing to repeat the auction with a larger area of streets where the use will be restricted as well (Figueroa 1993). This change improved the situation by reducing overcapacity, increasing the occupancy rate of the individual vehicles and by relieving congestion. But, there are some points debated from an environmental point of view. To the extent that bus trips are reduced and older buses are retired, the diesel emissions have been lowered. No specific figures are available. But if the capacity reduction amounts to 30%, then the emissions reductions by these sources should be slightly above 30%. But for the first round of auctions, a number of smaller operators moved their lines to adjacent

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residential areas, lowering the effectiveness of the system (Figueroa 1993).

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VI.

Reflections on the Role of Economic Instruments in the Chilean Environmental Policy

The debate on economic instruments in environmental policy centers on the alternatives to internalize the external costs associated with environmental degradation. Implicitly, it is assumed that other distortions in a market economy do not exist or have not been introduced by governmental policies. The surveys on environmental policy-making in the developing countries have shown, however, that these distortions are quite abundant (World Bank 1992a). From an environmental point of view and in the context of applying economic instruments to internalize external costs, these distortions are important since they often lower the degree of internalization of the private costs associated with the use of natural resources, with contaminating activities or with the supply of services under a natural monopoly. The private costs of resource use are not reflected in the resource prices when property rights are inadequately defined, not well enforced, insecure or when trading is impeded and thus opportunity uses are not included in the calculations of opportunity costs. Additionally, private costs of contaminating activities are not fully internalized when they are subsidized. The private costs of resource using or polluting services are not fully internalized when the prices for these services deviate from marginal cost pricing or when they do not cover the average private supply costs, as is often the case in water-, gas-, electricity-supply, sanitation, waste collection and sewerage services. The application of economic instruments to internalize the external costs can in most cases yield their advantages when the internalization of the respective private costs has largely been achieved. Furthermore, if the political conditions in a country block the complete internalization of private costs associated with resource use, the chances to internalize external costs are low as well.

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1. The Degree of Internalizing Private Costs: Creating Property Rights and Introducing Cost Recovery

Chile is in an exceptional situation among the developing countries as its economic policy reform under the junta government has contributed considerably to a policy framework consistent with the above principles: Land ownership is well defined and protected by the Political Constitution, water rights are defined and tradeable. The subsidies in the agricultural sector for inputs have largely been abandoned, their prices are based on international competition. There are two major exceptions. One is the planting subsidy in plantation forestry and the other is the subsidy for the installation of irrigation investments. These planting subsidies are acceptable as long as the planting generates environmental benefits of a public good type such as soil and watershed protection. The Chilean subsidy programme achieved these benefits to the extent to which the restriction of using degraded land as a prerequisite for the subsidy was complied with. There is a dispute on the exact degree to which the requirement of not using forested areas was complied with between the environmentalists and the forest industry, but the fact that the majority of the land planted was not forested before seems to be a consensus. The irrigation subsidy is a deviation from the above principles since it subsidizes irrigation water without any environmental benefits. Since there are water markets in irrigation, it remains an open question to what extent the construction subsidy leads to an overuse of water and thus contributes to well known environmental problems of irrigation agriculture. The administration of the subsidy avoided some of the problems associated with subsidy programmes as the grants were paid out after the construction was completed and the projects were selected on the basis of a competition of the applicants. The third area where Chile is an exception is the pricing of electricity, water and sanitation services where it follows the principles of marginal cost pricing. The electricity and water supply are two sectors where the potential for economic waste is large due to subsidized services which deteriorate when the central government revenues are falling short. Electricity generation with a low load factor, low efficiency plants, high transmission losses and unreliable services are still quite common to a

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number of developing countries. The low and unreliable service is often supplied at a high environmental costs per Kwh. In water supply, the problems of a service with little cost coverage and inadequate subsidies are unreliable services, water losses and contamination of the water by inadequate pressure and pipe maintenance. These problems are to a large extent absent in the Chilean sectors. The water supply company of Santiago has been mentioned by the World Bank as a model for Latin America (Yepes 1990). The question whether these pricing principles lead to an efficient water and energy use in the Chilean economy cannot be answered in the context of this report. The energy consumption per unit of GDP is higher compared to other countries with a similar income level; this question could not be pursued any further. There are two developments in the Chilean environmental policy which could be interpreted as signs of deviation from the above principles. One is the restriction in the holding of water rights and the other are the restrictions on the rights of landowners to convert their forests to plantations. The restrictions on the use of native forests on privately owned land serve to mitigate the negative environmental effects of the use of these forests for chip production (clearcutting) and the subsequent transformation into plantations. The environmental effects are soil erosion, destabilization of water courses and species extinction. Since these effects lead to external costs, the restrictions combined with subsidies are adequate instruments in principle within a market oriented approach to mitigate these effects. In this case, there has not been a proposal to introduce an incentive based instrument similar to the control of particulate matter in Santiago. The restrictions on water rights concern first the development of monopolistic situations among those companies holding non-consumptive water rights. This is a serious concern as one of the larger electricity supplier ENDESA, holds the majority of these water rights at low cost sites for hydropower stations, preventing the market entry of new competitors or reducing the potential for expansion of existing competitors. In the second case, consumptive water rights are obviously being held without being used. Without a clearer picture about the conditions under which these water rights became or remained unused, an adequate assessment of the effect of the holding of these is not possible. But, the taxing of holding the rights is preferable to the threat of withdrawal.

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Chile is in a unique position with respect to the degree to which a developing country used a market oriented approach to deal with the internalization of private costs in resource-using activities. It is therefore in an exceptional situation to test whether the advantages associated with such an approach actually can be demonstrated empirically. The necessary empirical research is still missing.

2. Internalizing External Costs with a Mixed Policy Approach: Com- bining Technology Specific Standards and Incentive Based Instruments With respect to the internalization of external costs, the Chilean environmental policy developed a legal and institutional framework for air and water pollution control and for waste collection and disposal. This framework allowed the government to build the basis for an environmental policy by establishing monitoring capacity for ambient quality and by building source inventories. It started to implement effective source programmes to reduce emissions: in air pollution: - for stationary sources: TSP, SO2, status: Operational since 1993, first effects visible - for mobile sources: TSP, SO 2, NOx, CO, lead status: Operational since 1992/93, first effects visible in water pollution: - for industrial point sources: All relevant pollutants into sewers and waterbodies status: Proposal for discharge standards in review. - for municipal sewage: Priority for Santiago status: Sewage collection rate high; sewage treatment in study phase. in waste management: - for mining waste: Disposal requirements, status: Operational regulation since 1970, only 20% effective; - municipal waste: Disposal requirements, status: Operational regulation since 1968, effectiveness not established. These programmes are selective since they cover only a range of pollutants and since in some areas of contamination the control is still lacking, e.g. hazardous waste. Here, the policy is in a phase of analyzing the size

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of the problem and the range of possible solutions. The regulation of pesticides to protect the local environment, the workers and the Chilean consumers is largely missing. The stabilization of the vegetation and the control of soil erosion has to wait for the law to establish the watershed management corporations. The protection of the natural forest in the SNASPE system has to be made effective and a management system for the use of the remaining forests for fuelwood still has to be developed. A demand side management approach for energy consumption has to be put in place. If one looks at the total number of existing source specific reduction programmes in Chile, only two programmes use market based instruments: The tradeable permits for particulates in Santiago and the auction for street use rights for buses in downtown Santiago. The majority of instruments used in Chile are emission standards, usually in combination with a technology specification. In both cases, the economic instruments are used in combination with other instruments, usually labelled "command and control". The tradeable permits were introduced on top of a system of uniform emission standards with the maximum allowable emissions to be cut in half over a five year period. The street licensing scheme for urban buses was accompanied by a compulsory retirement regulation, by an opacity limit for diesel and by a prohibition to use used motor parts (BKH Consulting 1992). The administrative prerequisites for the economic instruments are not trivial: The compliance of the emission standards has to be achieved for 1,440 sources and registered 10,400 buses. The task of ensuring compliance has to be performed independently of the use of economic instruments, although the degree of effort differs between the two instruments. For tradeable permits, the emission monitoring effort will be higher probably since the transactions require additional administrative capacity. To manage both instruments effectively requires a certain level of sophistication among the regulators and the market participants. The tradeable permits in air pollution (for non-uniformly mixing pollutants) make the operation of a source diffusion model necessary and the street auctioning system requires a transportation simulation model. Thus, even for the relatively favorable conditions of Chile, the extent of the use of economic instruments is rather limited. In some cases, the conditions for applying them are simply missing, as in the reduction of SO2

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from the copper smelters. In other cases, the conditions for a decision in favor of economic instruments may be not ready yet as in the instrumental choice for controlling industrial water discharges. As in the industrialized countries, the decision to use will not depend on the rationality of these instruments, but on the political economy of policy-making.

3. Political Economy of Using Economic Instruments

The political economy of the instruments to internalize external costs is to a large extent influenced by the political economy, which exists at the time of dealing with private cost and pricing in the relevant sectors. The economic policy change after the junta takeover in 1973 included the deregulation not only of the international trade regime but of the internal market as well. For those sectors, usually classified as containing/consisting of natural monopolies, a structural change was introduced from state ownership to private ownership with a publicly supervised concession system. This transformation started with the electricity and telephone companies and was expanded into water supply and sanitation services. In order to be able to privatize these companies their profitability had to be established which required a change in the pricing policies. This transition took place to a full extent for electricity and telephone. It was not completed for water supply and sanitation: Here, the marginal cost pricing principles were established and the governmental agencies were transformed into private law corporations but remained in government ownership, but their degree of autonomy and accountability increased. This change was supported by the economic policy approach of establishing a market economy with a low governmental role pursued under the junta which was developed and implemented by a group of technocrats (the famous Chicago boys) who had a relatively high degree of autonomy from the military. The second round of privatization which took place in the late 80’s was consistent with the political goals of the military government, i.e. establishing a firm root of the market economy by creating a broad distribution of shareholders (popular capitalism) and trying to gain support for the referendum in 1988. But there was political opposition from the political groups supporting the junta to the privatization of the national services/ infrastructure enterprises. The scheduled privatization

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programme, as announced in 1985, was stopped as described above (Hachette, Lüders 1992). This configuration of sold shares and autonomous government-owned companies was inherited by the government elected in 1989 and it decided not to change it, but to continue, e.g. with the planned tariff increases until 1994. There seems to be a broad consensus concerning the broad approach towards economic policy which includes the approach towards the public sector services. Opposition to these price increases has not materialized to the degree that might have been expected, probably due to the subsidies to the low income households. Watching the debate about environmental policy in Chile as a foreigners for a short period, one finds that the policy-making is a small circle affair for some topics where the economic instruments are located and that there are other topics which enjoy a high level of general public attention. The second category encompasses the air pollution problem in Santiago, the automobile and the copper smelters to the south, the clearcutting of the natural forests and individual investment projects such as the Pangue hydropower plant on the BioBio and foreign owned mining projects. For the two economic instruments actually applied, a relatively high involvement of academics and consultants, operating in a surrounding of free exchange with governmental experts stand out. Particularly for the tradeable permits, an incubation period dates back to the late junta government. There are no signs of a political opposition after the installation of a democratically elected parliament. But, without a more intensive discussion with a large number of participants, a more confident assessment is not possible.

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VI

Role of Economic Instruments in Technical Cooperation

If one defines economic instruments as broad as in the above chapter and does not reduce them to the alternative of command and control versus charges/tradeable permits in pollution control, then economic instruments can be used as an integrated element of environmental management in developing countries. Continuing with the above distinctions, three areas of possible cooperation stand out: 1. Assigning exclusive access to natural resources, usually by assigning property rights or making the existing set of property/user rights consistent with the sustainable use of these resources. They are to be distinguished for land, (for agricultural and urban uses), forests, (managed and natural stands), water, (ground- and surface water), minerals, stocks of animals (fish, wildlife).

This is not restricted to the definition of property rights in a narrow sense but includes the mechanism for registration, the trading rules in case of transferability, the taxation of ownership and of transfers and the concession system in case of a public primary ownership as well. 2. Pricing rules and regulation of utilities for water supply, sewage collection and treatment, waste collection, electricity generation and distribution, use of transport infrastructure. 3. Economic instruments to internalize external damages due to air pollution, water pollution, waste disposal and to provide nature protection services. So far environmental management in technical cooperation was concentrated in the third area of pollution control, mostly in terms of technical support, and the other aspects of environmental management were placed

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into sectoral categories, i.e. agriculture, forestry, fisheries, energy, water management, transportation and sanitary services. 1.

2.

The questions of property rights in these sectors were mostly raised in the context of individual projects in technical and/or financial cooperation which were usually concerned with raising or maintaining the productivity of the resources in these sectors. Increasingly, the importance of these property rights became clearer beyond the realm of individual, regionally specified projects. In general, the awareness about the importance has not led yet to the generation of projects specifically designed to deal with property rights on a country-wide basis or regionally beyond the "project" boundaries, at least in the context of the German technical cooperation. It seems to be the result of a lack of confidence in the understanding of mechanisms of the existing configurations of property rights and a lack of confidence in proposing alternative solutions. A potential starting point could be the country Environmental Action Plans, proposed and tested for a few countries with the support of the World Bank and bilateral donors, and supported in some cases by the German technical cooperation programme. Here, the description of the operation of the existing property rights and the dissemination of the concepts of analyzing them are the starting points. For the Chilean situation, the general unawareness about the water rights and the trades in water rights and about the auctioning of the catch quota for two species of fish illustrate the generally poor level of understanding. The understanding of the second area, the pricing of public or mixed public services (water supply, garbage collection, asf.), is generally very high, although for the applicability a distinction has to be made for low and medium income countries. But a number of governments of the middle income developing countries (and a number of OECD countries) shy away from fully applying the pricing principles because the policy makers are reluctant in making the public/ electorate or important social groups pay for the full (private) costs of these services. These questions were one of the key messages of the 1992 World Development Report of the World Bank, but they were already included in Structural and Sectoral Adjustment Loans agreements of the World Bank, at least for energy pricing in the early eighties (Mosley et al.1991). But the problem here is no more on

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understanding the issue, but on negotiating the level and sequence of adjusting which is based on the distribution of adjustment costs. The issues of pricing were quite often negotiated in the context of loan agreements between other donor agencies and finance ministries or the relevant sector ministries. There is a broad agreement among donor countries about the importance of recovering the costs of these investments, but in case of the reluctance of the recipient countries ministries, the verbal conditionality has usually not been met by donor practice. Chile is on of the countries where these changes in pricing took place on the basis of policy changes, developed by the national economic policy makers in the context of the privatization programme, to a large extent autonomously and not as a result of loan negotiations. 3.

Economic instruments in pollution control and nature protection. In the third area, the economic instruments can only be used in conjunction with the other tasks that have to be performed as well as can be seen from the example of the tradeable permits. The implementation of all these other tasks is the prerequisite for the use of economic instruments.

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The first step is the identification of the priority pollutants to be controlled first. The second step is the analysis of the pollutant in terms of its chemical, toxic and ecological characteristics as well as its diffusion paths and ambient concentrations. The third step is the analysis of the sources (to build a source registry), of the processes leading to emissions and of the technical options to mitigate or reduce them. The fourth step is the selection of the sources to be regulated, the decision about the degree of required action of these sources and the choice of type of instrument used. The fifth step is the organization of enforcement, the personnel build up, the establishment of laboratories for source control and the organization of sanctions. The sixth step consists of the management and the technical changes on the side of the emitters.

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-

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Usually technical cooperation has been provided at steps two, three, five and six with technical and personnel support for the monitoring of ambient quality, of sources, laboratory equipment for testing and technologies for the sources (to a lessor degree) to reduce emissions. Unless there are projects with a central ministry/governmental agency policy orientation, technical assistance is usually not present in phase one and four. But only in phase four, a decision to use economic instruments can be made. At this point, the other decisions (identification of the sources to be regulated, degree of required reduction) are usually made which are the political core of the policy-making. Here already an economic analysis of these decisions in terms of the cost effectiveness of the available options can contribute towards a low cost pollution control. The second step could be the analysis whether the number of sources, their technical options and the price elasticities justify the application of economic instruments. The description of the use of the establishment of tradeable permits in Santiago (Ch. V.3) has shown that all these tasks had to be performed before a law or a regulation could be presented to the policy-makers. In this case, all these task were performed by national specialists; the international cooperation that took place was on an academic level by individuals studying in US universities. Another point which has to be considered, before the use of economic instruments can be considered to be part of an environmental management option in technical assistance, is the judgement whether the political/ bureaucratic conditions in the country are favorable. The first point is the political connotation/ symbolic value of market based instruments: In Chile, it seems to have been positive while the tradeable permits created images of immoral activities in some industrialized countries, at least in the early eighties which took a while to overcome. The second point is that the use of the instruments will probably need a group of administrators to take up the idea and promote it within the bureaucracy or in the environment of the policymakers. The third point is a political consensus about the need to improve the environmental quality of the country and an awareness about the cost implications of the necessary regulations. Such a judgement on the political conditions in a country can probably be

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labelled an assessment of the demand for technical cooperation in environmental management. 3.1. Demand for technical cooperation in environmental management; The demand situation in the various countries will vary according to these points mentioned above, but for analytical purposes one can construct two ideal types as extremes on a scale: a.

The country asking for cooperation has an advanced understanding of its pollution control problems and knows quite well what the next steps will be. It needs support for technical detail questions for which the technical know how is not available locally or for which the relevant institutions lack financial resources. In these cases, the delivery of the equipment, training and consulting activities are isolated elements in the project context of the development agency, but they are integrated into the environmental management strategy of the receiving agency. The analysis of the condition for the application of economic instruments by economists could play a similar role. In Chile, for the preparation of the clean up strategy for air pollution from mobile sources in Santiago (Cp. Annex IV) little outside assistance for policy analysis was required once the professionals had finished their degrees abroad, but the purchase of the monitoring equipment was supported by Italy and Sweden.

b.

The country has a rather vague understanding of its priorities, needs support on a broad level, possibly with a ministry level consultant. Here, the potential for assistance in step four, including the analysis of the applicability of economic instruments, exists. But the questions of step four are highly political since here the decision is made who will pay for pollution control. The chances are that a non-member of the political establishment with outside loyalties will be excluded from this decision. The role of the consultant might then be reduced to answer selective technical questions of detail if there is a political opening for the use of economic instruments. The provision of the know-how of designing and operating economic instruments could be part of the terms of references of a policy making consultant. If there is no concrete demand for the use of economic instruments on a broad level yet, another important task could be the spread of the concept among key players, e.g. politicians, environmental agency personnel, industrialists, environmentalists and academic/

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economic advisory institutions to provide them with a basis of understanding. If these activities help to establish the understanding that this type of know how is available in technical cooperation it might be demanded later on. But before cooperation can take place, an evaluation has to be made whether the supply of the support required is available in Germany (or the European neighbours) 3.2. Supply of specialists The above demand for technical assistance in these circumstances can be met if there are specialists (in Germany/EU) who can perform the above tasks. The first tasks would be to analyze the regulatory options for a specific pollutant in a developing country. Qualified would be academics/consultants with training in applied environmental economics and experience in the consulting of governmental agencies in developing countries or industrialized in combination with a technical expert with experience in developing countries. The second task would be the support for the spread of the concept among the key players. This could be performed in advance/ in preparation for the supply of ministerial level consultancy. The second type of specialist are federal or state environmental agency personnel with experience in drafting legislation or administering laws with economic instruments. The recent survey of academic and consulting institutions in Germany (Horstmann 1994) revealed that the experience in both fields is limited to a few institutions. Here a first step could be to initiate a network which could accumulate the available experience which exists without a synergy effect. The German cooperation programme has already experience with networking which has its own pitfalls, but in agricultural research (ATSAF 1994). In Chile, the situation can probably be characterised as one with a high consensus on the need for further improvement of environmental quality and an awareness about the cost implications on the international competitiveness. As the description of the media core of pollution control has shown, a number of the remaining pollution problems, which are without an effective programme for emissions reduction, are subject to a study of policy proposals (Cp. Annex V for a summary of cooperation projects).

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Areas of concern where the country probably will have to start with a programme are: -

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demand side management in electricity sector; a proposal of the GEF in 1992 has not been implemented; control of pesticides in export agriculture to protect worker’s health and groundwater and in the agriculture supplying the domestic market; analysis of the level of contamination of non-conventional pollutants in air pollution. There are two areas where there are already activities to prepare a policy, but where experience in Germany might be of interest:

-

supervision and control of hazardous wastes; source control and application of economic instruments for discharges into sewers.

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Ambiente), Serie Documento del Seminario Agrícola, Santiago, p. 1115, - Burschel P., Edens J., Morello J., 1991, Politica de manejo del bosque nativo en Chile, Informe tecnico preparada para el Gobierno de Chile por la Organización de las Naciones Unidas para la Agricultura y la Alimentación, Santiago, - CIREN (Centro de Información sobre Recursos Naturales), 1992, Zonas homogeneas segun aptitud productiva - comunas la Estrel-la, Litueche y Navidad de la VI Region de Chile, in: CEPAL (Eds): Documentos sobre Seminario "Gestión del desarrollo agrícola ambientalmente sustentable en áreas marginales", LC/R 1149 Santiago, June 1992, - CEDRM, 1990, Comisión Especial de Descontaminación de la Región Metropolitana, Programa de Descontaminación Ambiental del Area Metropolitana de Santiago, Santiago, - CEDRM, 1993, Comisión Especial de Descontaminación de la Región Metropolitana, Balance 1992 - Programa 1993, Santiago, - CIPMA (Centro de Investigación y de Planificación del Medio Ambiente), 1990, Propuesta de acción ambiental en cinco sectores productivos, Santiago, - Comisión Nacional de Energia, (CNE), 1993, Balance de Energia, Santiago, - CODEFF (Comité Nacional pro Defensa de la Fauna y la Flora), 1992a, El futuro del bosque nativo Chileno: Un desafio de hoy, Serie Documentos, Santiago, - CODEFF (Comité Nacional pro Defensa de la Fauna y la Flora), 1992b, Dudas frente a un proyecto contradictorio, in: Ambiente y Desarollo, Vol. 7(3), p. 24-26, - CONAF (Comisión Nacional Forestal) 1991, Consideraciones en relacion a una legislacion destinada a la recuperacion del bosque nativo, Subcomisión Bosque Nativo de la Comisión Nacional Forestal, Santiago,

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- Halstrick M., Löbbe K., 1987, Strukturwandel und Umweltschutz, Essen, Schriften des RWI, - Hartje V., 1991, Industrialization and the Environment, in: Borrmann A., Wolff H.U., (Eds.) Industrialization in Developing Countries, Hamburger Weltwirtschaftsarchiv, Hamburg, p.187-221, - Hearne R., 1993, Chile. A Study of the Market Allocation of Water, unpublished paper, Santiago, - Herrera V., 1993, Asociación Chilean de Seguridad, personal fax, Santiago, 19.10.1993, - Hohmann C., San Martin J., 1992, La licitacion de vias para servicios de locomocion colectiva: Aplicacion al Caso de Santiago, Santiago, p. 127-142, - Horstmann, K., 1994, Ökonomische Instrumente der Umweltpolitik, Eine systematische Kurzdarstellung der in der Bundesrepublik Deutschland angewandten Instrumente and relevanter Institutionen, Report for GTZ, Pilotvorhaben Institutionenentwicklung im Umweltbereich, Bonn, - Instituto de Fomento Pesquero (IFOP), 1991, Resumen Estado de las Principales Pesquerias Nacionales 1990, Santiago, - INFOR (Instituto Forestal)/ CORFO (Corporación de Fomento de la Producción), 1991, Boletin Estadistico No 21, Estadisticas Forestales 1990, - Intendencia Region Metropolitana, 1989, Universo de fuentes emisoras de contaminantes atmosfericos e inventario real de emisiones para Santiago, Executive Summary, Santiago, - Intendencia Region Metropolitana, 1990, Sistema de derechos de emision de contaminates atmosfericos, Resumen ejecutivo, Santiago, - Jänicke M., Mönch H., Binder M., 1992, Umweltentlastung durch industriellen Strukturwandel? Eine explorative Studie über 32 Industrieländer, Berlin,

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- Jaksic F., 1989, Los inventarios de recursos naturales y su uso en las evaluaciones de impacto ambiental: el caso chileno, in: Ambiente y Desarrollo, Vol. V (2), Santiago, August, p. 13-24, - Jiles J.M., 1992, Análisis económico: Valoración social vs. valoración privada, dilema clave para una regulación efectiva del bosque nativo, in: Ambiente y Desarollo, Vol. 7 (3), p. 27-31, - Katz R., 1993, Institucionalidad y marco legal vigente, in: Sandoval H., Prendez M., Ulriksen P. (Eds.), Contaminación atmosférica de Santiago, estado actual y soluciones, Santiago, p. 261-286, - Katz R., Saez A., Reinke G., 1993, Emisiones vehiculares y politicas normativas, in: Sandoval H., Prendez M., Ulriksen P. (Eds.), Contaminación atmosférica de Santiago, estado actual y soluciones, Santiago, p.213-235, - "La Epoca", Santiago, 1. 10.1993, p. 15, - Lagos G., Noder C., Solari J., 1991, La situación jurídica-institucional en el area minéría y medio ambiente, Documentos de Trabajo No 1, Ministerio de Minería, Santiago, - Lara A., Araya L., Capella J., Fierro M., 1987, Evaluation of the Destruction of Native Forests in South-Central Chile, Final Report Project # 3181, WWF International / CODEFF, Santiago, - Lara A., Veblen T., 1993, Forest Plantations in Chile: A Successfull Model?, in: Mather A. (Ed.), Afforestation, Policies, Planning and Progress, London, p. 118-139, - Lobos G., 1993, Administración integrada de cuenca hidrografícas, unpublished paper, for DGA, Santiago, - Lohani B.N., Azimi A.M., 1992, Barriers to Energy End-use Efficiency, in: Energy Policy, Vol. 20 (6), p. 533-545, - Low P., 1992, International Trade and the Environment, (Ed.) World Bank Discussion Paper No 159, Washington, D.C., - Lucas R.E.B., Wheeler D., Hettige H., 1993, Economic Development, Environmental regulation and the International Migration of Toxic Industrial Pollution: 1960-88, in: Low P.,(Ed.), International Trade and

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the Environment, World Bank Discussion Paper No 159, Washington, D.C., p. 67-88, - Mege A., 1993, Legislación e institucionalidad sobre contaminación de agua y su relación con el sector industrial, unpublished paper, Santiago, - Mellor P., 1992, Adjustment and Equity in Chile, Development Centre, OECD, Paris, - Messner D. et al., 1991, Weltmarktorientierung und Aufbau von Wettbewerbsvorteilen in Chile, Das Beispiel der Holzwirtschaft, Deutsches Institut für Entwicklungspolitik, Berlin, - Meyer M., 1990, "El programa de la Fundación Chile para la certificación de productos con residuos no detectables", in: Cipma (Centro de Investigación y Planificación del Medio Ambiente), Serie Documento de Seminario, Sector Agrícola, Santiago, p. 55-60, - Montenegro S., 1991, Politica ambiental del Gobierno de Chile, aspectos legales, unpublished paper, Santiago, - Mosley P., Harrigan J., Toye J., 1991, Aid and Power - The World Bank & Policy-Based Lending, Vol.1., London -New York, - Munoz G.S., 1992, Problematica y acciones ambientales de CodelcoChile, Paper presented at Seminario "Aeronautica Industrial y Medio Ambiemnte" Academia Politecnica Aeronautica, Santiago, - Nohlen D., Nolte D., 1992, Chile, in: Nohlen D., Nolte D. (Hrsg.), Handbuch der Dritten Welt, Bd. 2, Südamerika, Bonn, p. 277-337, - Nolte D., 1992, Modellfall Chile? Die Bilanz nach einem Regierungsjahr, in: Ensignia J., Nolte D. (Hrsg.) Modellfall Chile? Ein Jahr nach dem demokratischen Neuanfang, Schriften des Institutes für Iberoamerikakunde, No. 34, Muenster - Hamburg, p. 15-42, - Oates W. E., Portney P.R., McGartland A.M., 1989, The Net Benefits of Incentive-Based Regulation: A Case Study of Environmental Standard Setting, in: American Economic Review, Vol. 79 (5), p. 1233-1242,

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- Ojeda J. M., 1990, La empresa y el medio ambiente: El caso de Minera Escondida Limitada, in: Cipma (Centro de Investigacion y Planificacion del Medio Ambiente), Serie Documentos de Seminario, Sector Minero, Santiago, p. 146-178, - OTA (US Congress Office of Technology Assessment), 1988, Copper Technology & Competitiveness, Washington, D.C. - O’Ryan R.E., 1993, Cost Effective Policies to Improve Urban Air Quality in Developing Countries: The Case for Santiago, Chile, Ph. D., University of California, Berkeley, - Palma C., 1990, Análisis prospectivo de las agroexportaciones, in: CEPAL, Seminario sobre "La articulación de la agricultura tradicional con las cadenas agroexportadoras", LC/R.915 (Sem. 58/7), Santiago, August, - Paulus S., 1993, Umweltpolitik und wirtschaftlicher Strukurwandel in Indien, Frankfurt/M, - Pena H., Retamal U., n.d., Ventajas y limitaciones del mercado en la asignación de derechos de agua, unpublished paper, Santiago, - Prendez M., 1993, Caracteristicas de los contaminantes atmosféricos, in: Sandoval H., Prendez M., Ulriksen P. (Eds.) Contaminación atmosférica de Santiago, estado actual y soluciones, Santiago, p. 110-186, - Rivera, J., 1993, Contaminación de aguas, in: Industria, Santiago, 3, - Saliba B.C., Bush D.B., 1987, Water Markets in Theory and Practice; Market Transfers, Water Values and Public Policy, Boulder, Col., - Schmidt H., 1992, La necesidad de una ley general para el sector forestal, in: Ambiente y Desarollo, Vol.7 (3), p. 35-37, - Sepúlveda, F., 1993, Generación, manejo y eliminación de residuos peligrosos en Chile, unpublished paper, Santiago, - Solari, J., 1993a, Normas de emisión y de calidad ambiental y su influencia en el comercio internacional. El caso de México y Estados Unidos, in: Katz, R., Del Favero, G. (Eds.) Medio Ambiente en Desarrollo, Centro de Estudios Publicos, Santiago, p. 183-221,

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- Solari, J., 1993b, Paternidad responsable, in: Induambiente, No. 4, Sept/Oct., p. 15-17, - Solari, J., Lagos, G.E., 1991, Strategy for the Reduction of Pollutant Emissions from the Chilean Copper Smelters, Paper for 1991 Copper Conference, - Solari, J., Undurraga, J., 1993, La Institucionalidad ambiental, in: Cipma (Centro de Investigacion y Planificacion del Medio Ambiente) (Eds.), Bases para una ley general del medio ambiente in Chile, Santiago, p. 31-49, - Spielmann, L., 1992, Staatsinterventionismus oder ökonomischer Liberalismus? Hamburg, - Superintendencia de Servicios Sanitarios, (Eds.) 1992, Norma tecnica relativa a decargas de residuos industriales liquidos - RIL, Santiago, - Superintenencia de Servicios Sanitarios, 1993, Memoria Anual 1992, Santiago, - Tietenberg, T.H., 1985, Emissions Trading: An Exercise in Reforming Pollution Policy, Washington, D.C., Resources for the Future, - Tietenberg, T., 1992, Relevant Experience with Tradeable Entitlements, in: UNCTAD (Ed.), Combating Global Warming, Study on a Global System of Tradeable Carbon Emission Entitlements, New York, p. 37- 54, - Ulriksen P., 1993, Factores meteorologicos de la contaminación atmosférica de Santiago, in: Sandoval H., Prendez, M., Ulriksen P. (Eds.), Contaminación atmosférica de Santiago, estado actual y soluciones, Santiago, p. 37-61, - UNDP, World Bank, UNEP, 1992, Global Environmental Facility, Work Program, Fiscal Year 1993 - Fourth Tranche, Washington, D.C., - United States General Accounting Office, 1990, Report to Congressional Request, Food Safety and Quality. Five Countries' Efforts to Meet U.S. Requirements on Imported Produce, GAO/ RCED-90-55, Washington, D.C.,

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- Valenzuela R., 1991, Aspectos juridicos e institucionales de la politica de control y fiscalizacion de fuentes fijas, El caso de Chile, in: CEPAL, Seminario regional sobre "Politicas para la gestion de los residuos urbanos e industriales" Santiago, LC/R.984 (Sem.61/6). - Villarroel P., 1992, Proyecto de "Ley de Recuperación del Bosque Nativo y Fomento Forestal": La ley que todos esperaban? in: Ambiente y Desarollo, Vol.7 (3), p. 7-13, - Villarroel P., 1993, Un 'sello verde' para el modelo chileno, in: Ambiente y Desarrollo, Vol. 9, Santiago, p. 7-13, - Wheeler D., Martin P., 1992, Prices, Policies and the International Diffusion of Clean Technology: The Case of Wood Pulp Production, in: Low P.,(Ed.), International Trade and the Environment, World Bank Discussion Paper No 159, Washington, D.C., p. 197-226, - World Bank, 1986, Urban Transport: A World Bank Policy Study, Washington, D.C., - World Bank, 1992, The Forest Sector of Chile, ASTAG/LATAG Technical Paper, Washington, D.C., - World Bank, 1992a, World Development Report 1992, Development and the Environment, Washington, D.C., - Yepes G., 1990, Management and Operational Practices of Municipal and Regional Water and Sewerage Companies in Latin America and the Caribbean. Discussion paper, World Bank, Report INU 61, Washington, D.C.

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B. Laws and Decrees:

- CONAF (Corporación Nacional Forestal), 1991, Proyecto de ley sobre recuperación del bosque nativo y fomento forestal, Santiago, - CONAMA (Comisión Nacional del Medio Ambiente), 1994, Ley de Bases del Medio Ambiente, Santiago, published 26.01.1994, - Instituto Nacional de Normalización (INN), 1978, Requisitos de calidad del agua para diferentes usos, NCh 1333, Santiago, - Instituto Nacional de Normalización (INN), 1984, Agua potable Requisitos, NCh 409/1, Santiago - Instituto Nacional de Normalización (INN), 1964, Agua para fines industriales - Terminología, NCh 410, Santiago - Ministerio de Bienes Nacionales, 1990 , Decreto Supremo No. 240, crea la Comisión del Medio Ambiente y regula sus funciones, modificado por Decreto Supremo No. 544 de 1991, Santiago - Ministerio de Economía, Fomento y Reconstrucción, 1989, Ley No. 18.885, autoriza al Estado para desarrollar actividades empresariales en materia de agua potable y alcantarillado, y dispone la constitución de sociedades anonimas para tal efecto, Santiago - Ministerio de Economía, Fomento y Reconstrucción, 1990, Decreto Supremo No. 453, Aprueba el Reglamento del Decreto con Fuerza de Ley No. 70 de 1988, del Ministerio de Obras Públicas, que establece, la fijación de tarifas de servicios de agua potable y alcantarillado, Santiago - Ministerio de Hacienda, 1989, Ley No. 18.778, Establece subsidio al pago de consumo de agua potable y servicio de alcantarillado de aguas servidas, Santiago - Ministerio del Interior, 1990, Decreto 449, crea la Comisión Especial de Descontaminación de la Región Metropolitana, Santiago - Minsterio de Minería, 1991, Decreto Supremo No 185, Reglamenta funcionamiento de establecimientos emisores de anhidrido sulfuroso,

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material particulado y arsenico en todo el territorio de la República, Santiago - Ministerio de Obras Públicas, 1916, Ley No. 3.133, Neutralización de residuos provenientes de establicimientos industriales, Santiago - Ministerio de Salud, 1992, Decreto Supremo, No.4: Establece norma de emisión de material particulado a fuentes estacionarias puntuales y grupales, Santiago, - República de Chile, 1980, Decreto Ley No. 3.557, Protección Agrícola, Santiago, - Republica de Chile, 1981, Decreto con Fuerza de Ley No. 1.122, Codigo de Agua, Santiago, - República de Chile, 1981, Decreto Ley No. 3.557, Normas sobre protección de aguas en pro de la agricultura y la salud de los habitantes, Santiago, - República de Chile, 1988, Decreto von Fuerza de Ley No. 70, Sobre tarifas y aportes reembolsables de financiamiento, Santiago, - República de Chile, 1990, Ley No 18.902, Crea la Superintendencia de Servicios Sanitarios, Santiago, - República de Chile, 1992a, Ministerio Secretaria General de la Presidencia, Formula Indicaciones al Proyecto de Ley sobre Recuperación del Bosque Nativo y Fomento Forestal, Santiago, 9.11. 1992, - República de Chile, 1992b, Ministerio Secretaria General de la Presidencia, Mensaje No. 283-325 de S.E.el Presidente de la República con el, que indica un proyecto de ley que modifica el codigo de Aguas, Santiago, 2.12.1992, - República de Chile, 1993a, Mensaje No. 79-327, Formula indicaciones al proyecto de ley que modifica el Codigo de Aguas, Santiago 30.09. 1993, - República de Chile, 1993b, Codigo de Aguas, Santiago,

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- Servicio de Salud, 1978, Resolución 1215, Normas sanitarios mínimas destinadas a prevenir y controlar la contaminación atmosférica, Santiago.

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List of Organizations Spanish Names,

Translations and

Abbreviations:

___________________________________________________________ Ministerio de Agricultura Ministry of Agriculture Ministerio de Bienes Ministry of National Nacionales Goods Ministerio de Defensa Ministry of Defense Ministerio de Economía, Ministry of Economic Fomento y Reconstrucción Affairs Ministerio de Educación Ministry of Education Ministerio de Energía Ministry of Energy Ministerio de Hacienda Ministry of Finance Ministerio del Interior Ministry of the Interior Ministerio de Minería Mining Ministry Ministerio de Obras Ministry of Public MPW Públicas Works Ministerio de PlanifiMinistry of Planning MIDEPLAN cacíon y Cooperación, and Cooperation Ministerio de Salud Health Ministry Ministerio de Transportes Ministry of Transportion MTC y Telecomunicaciones and Communication Ministerio de Vivienda Ministry of Housing and Urbanism

Dirección General de Agua, General Water Directorate, DGA Dirección General de General Directorate of the Territorio Marítimo y Maritime Territory and Marina Mercante, Merchant Marine, DGTM-MM Servicio Agrícola Agricultural and Cattle Ganadero, Service, SAG Superintendencia de Superintendancy of Servicios Sanitarios, Sanitary Services. SSS ___________________________________________________________

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Annex I: Political Administrative Units of Chile

___________________________________________________________ Region Surface Population Capital 1000 km2 1000 (1989) ___________________________________________________________ I Tarapacá 58.8 347.2 Iquique II Antofagasta 125.3 382.3 Antofagasta III Atacama 74.7 196.8 Copiapo IV Coquimbo 40.6 477.7 La Serena V Valparaiso 16.4 1,367.3 Valparaiso VI Libertador Gen. Bernado O'Higgins 16.5 641.1 Rancagua VII Maule 30.6 827.1 Talca VIII Bio-Bio 36.9 1,656.8 Concepcion IX Araucania 31.9 782.6 Temuco X Los Lagos 68.2 914.3 Puerto Montt XI Aisèn del Gen. Carlos Ibanez del Campo 109.0 78.5 Coihaique XII Magallanes y de la Antárctica Chilena 1,382.0 155.3 Punta Arenas RM Región Metropolitana de Santiago 15.5 5,133.7 -___________________________________________________________

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Annex II: Maps of Chile 1. Political Administrative Units

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2. River Basins and Irrigated Areas

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3. Smelter Location and Sulphur Emissions, 1989

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Annex III: Situation:

List of Copper Operations and their Environmental

1.

Chuquicamata, mine and smelter, cap. 1.37 mio t, located 200 km northeast to Antafogasta (2nd Region), no agriculture around the plant, exceeds air standards, monitoring stations in place, H2SO4 plant planned (acc. to 2nd. ref. cap. installed 424,000 t), Codelcoowned, SO2 emissions from 397 to 364 tpd,

2.

El Salvador (Potrerillos ), mine and smelter, cap. 451,000 t, located northeast of Copiapó (3rd region), exports of concentrates via port of Chanaral (water pollution), no monitoring, no investments in Sulfuric acid, Codelco-owned,

3.

Paipote, smelter serves small/medium mines, owned by ENAMI, close to Copiapó (3rd region), cap. 229,000 t, no compliance, (acc. 2nd. ref. cap for H2SO4 7,000 t),

4.

La Escondida, mine only, located 150 km southeast of Antofagasta (2nd Region), owned by consortium Broken Hill Proprietary (BHP) 57,5%, Rio Tinto Zinc (RTZ 30%), produces concentrates, pumped via pipeline to Puerto de Coloso, EIA for pipeline and coastal discharge operations, minimal air pollution,

4a. Candeleria, mine planned, concentrates by leaching, located southeast of Copiapó (3rd region), owned by Phelps Dodge (80%), Sumitomo (20%),

5.

Ventanas, smelter for small/medium mines, located at the coast north of Valparaíso,(5th region), cap. 313,000 t, owned by ENAMI, exceeds air quality standards, has problems with farmers in valley of Puchuncavi, plans for sulphuric acid plant, not installed yet,

6.

Chagres, smelter for La Disputada de las Condes mining Co, owned by EXXON, ownes several mines, e.g. Los Bronces (located northeast of Santiago), smelter located in Catemu, west of Los Andes

- 194 -

(5th region), cap. 123,000 t, complies with standard, has monitoring net, produces 63,000 t of sulfuric acid,

7.

El Teniente, smelter Caletones, underground mine in high Andes altitude, owned by Codelco, cap. 1,1 mio t, located southeast of Santiago, northeast of Rancagua (6th region), sulphuric acid plant planned (installed 25,000 t), no compliance with ambient air quality, several studies whether it has impact on air pollution in Santiago basin, acc. to Codelco none/little; plans for a 85 km mine tailings pipeline to the coastal cordillera to Caren into a dam, settlement pond in which the water will be cleaned; debate about effect on Lago Rapel, further downstream where fish has been dying with unknown causes.

Sources: Solari Lagos 1991; Munoz 1992

- 195 -

Annex IV: Environmental Action Plan for Mobile Sources in Santiago

- 196 -

- 197 -

Annex V: International Cooperation Activities in Environmental Policy.

As a result of the specific Chilean geographical and economic conditions, the government puts an emphasis on the following topics and research activities with regard to the international environmental discussions and convention: - Protection of the ozone Layer - Management of hazardous waste - Climatic changes - Loss of biodiversity - Desertification and - marine pollution. In this context, Chile has ratified the Vienna Convention, the Montreal Protocol and the Convention of Basel. Furthermore, the Chilean Government participates in the "US-Initiative for America", which resulted in a reduction of 40% of its foreign debts. A share of this debt reduction, 700,000 US $ yearly, will be spent for the financing of environmentally related projects. With reference to the major environmental programmes carried out with international assistance or financed by grants or loans, the following projects should be mentioned:

a) Broader Environmental Institution Building and Environmental Management Projects: -

-

The most important programme consists of a project financed by the World Bank of about 32 mio US $, lasting several years to strengthen CONAMA’s institutional capabilities. The GTZ-CONAMA programme (1992-1994; 3.5 mio US $) serves as an example for the formulation and adaption of integrated

- 198 -

-

-

-

-

-

environmental management instruments to solve selected regional environmental problems and conflicts. The Programme MIDEPLAN-Interamerican Development Bank (IDB) about "Integrated Management of Water Basins" (1992-1994; 2.49 mio US $) consists of different studies based on six river basins with the aim of strengthening and promoting the institutional planning capabilities of the public authorities (Ministry of Public Works, DGA, CONAF) and the aim of defining priorities for future public investments and activitities to reduce environmental conflicts in these areas. A programme with Great Britain’s Overseas Development Agency, (ODA), is carried out in the locality of Ventanas in order to support the environmental planning competencies for a better management of the natural resources in the respective area (arable land and forestry). Since 1987, the Japanese International Cooperation Agency (JICA) is supporting a 6-years-lasting programme with the Centro de Investigaciones Minero-Metalúrgico (CIMM), focussing on the improvement of the monitoring systems for water and air pollution caused by mining processes. The programme of about 2.5 mio US $ includes the exchange of experts as well as the maintenance of the monitoring equipment. In July 1993, a three-year cooperation programme between GTZ and the Bundesanstalt fuer Geowissenschaften und Rohstoffe (BGR) with the Servicio Nacional de Geología y Minería (SERNAGEOMIN) started with the aim of strengthening the institutional and technical competence of the Service, including the elaboration of EIA for this sector. The FAO of the United Nations is assisting the Ministry of Agriculture in the development of agricultural techniques for the rehabilitation of degraded land. The four-year programme includes financial support of 0.4 mio US $ per year.

b) Sector/ Enviornmental Media Based Cooperation Projects:

1. Solid waste: Studies are conducted to get further information concerning the identification and management of solid waste. The programme is financed by IDB and carried out by MIDEPLAN.

- 199 -

2. -

-

Air pollution control: Main emphasis is put on the air pollution control of the Metropolitan Region. Financial suppport is granted by the Dutch Government (1.2 mio US $) consisting of three projects related to the improvement of the monitoring systems. In addition, expertise is offered via GTZ (TÜV Rheinland), focussing on the control of mobile sources. Italian and Swedish financial and technical support is provided for monitoring equipment in Santiago.

- 200 -

- 201 -

The Authors: Professor Volkmar Hartje, Technical University of Berlin Dr. Karin Gauer, Carl Duisberg Gesellschaft, Berlin Dr. Alberto Urqiza, Santiago Chile, Chile

- 202 -

- 203 -

Publications on the work of Division 402

July 1997

Publication-No.

Titel

Order-No.

402/93 - 1 d PVI

Ökonomische Instrumente der Umweltpolitik: Bedeutung für die Entwicklung von umweltrelevanten Institutionen im Rahmen der praktischen EZ

P3-001-d out of print

402/93 - 2 d PVI

Institutionenentwicklung im Umweltbereich - Ergebnisse eines GTZ-Mitarbeiter-Workshops

P3-002-d out of print

402/94 - 3 d PVI

Ökonomische Instrumente der Umweltpolitik als Beratungsfeld im Rahmen der TZ - Systematische Kurzdarstellung der in der Bundesrepublik Deutschland angewandten Instrumente und relevanter Institutionen

P3-003-d

402/94 - 4 d PVI

Der Runde Tisch als Programm? Möglichkeiten und Grenzen der Institutionenförderung im Spannungsfeld von Umwelt und Entwicklung

P3-004-d

402/94 - 4 e PVI

The round table as a Programme? Institutional Development caught between the Environment and Development - Options and Limitations

P3-004-e

402/94 - 5 e PVI

Pollution Prevention Through Market-Based Incentives Two Case Studies on Thailand

P3-005-e

402/94 - 6 e PVI

The Use of Economic Instruments in the Environmental Policy of Chile

P3-006-e

402/94 - 7 e PVI

The Role of Land Tenure and Property Rights in Sustainable Resource Use: The Case of Benin

P3-007-e

402/94 - 7 f PVI

Le rôle des systèmes fonciers et des droits de disposition pour la gestion durable des ressources naturelles: Le cas du Bénin

P3-007-f out of print

402/94 - 8 d RMSH

Dokumentation zum Consulting Workshop - Anwendung von Beteiligungs- und Selbsthilfeansätzen in Vorhaben zum Ressourcenmanagement

P3-008-d

402/94 - 9 d PVI

Information, Bildung und Kommunikation im Umweltbereich

P3-009-d

402/94 - 10 d RMSH

Hinweise auf Schlüsseldokumente für die Anwendung von Beteiligungs- und Selbsthilfeansätzen im Ressourcenmanagement

P3-010-d out of print

402/94 - 11 d RMSH

Beteiligungs- und Selbsthilfeansätze im Ressourcenmanagement - Ein Positionspapier

P3-011-d

402/94 - 11 e RMSH

Participatory and self-help approaches in natural resource management - A position paper

P3-011-e

402/95 - 11 f RMSH

Participation et auto-promotion dans la gestion des ressources P3-011-f naturelles - Document de base

402/95 - 11 s RMSH

Participación y auto-ayuda en el manejo de recursos naturales - Documento básico

P3-011-s

- 204 402/95 - 12 d PVI

Marktwirtschaftliche Instrumente der Umweltpolitik in Entwicklungs-ländern - Beiträge zur Institutionenentwicklung und Politikberatung im Umweltbereich

P3-012-d

402/95 - 12 e PVI

Market-Based Instruments in Environmental Policy in Developing Countries - Framework for Policy Planning and Institutional Development in the Environment

P3-012-e

402/95 - 12 f PVI

Instruments économiques applicables aux politiques de l’environne-ment dans les pays en développement Contributions au développement institutionnel et à l’assistance technique en matière de politique de l’environnement

P3-012-f

402/95 - 12 s PVI

Instrumentos económicos y política ambiental en los paises en P3-012-s desarrollo - Desarrollo institucional y asesoramiento politico en materia de protección ambiental

402/95 - 13 d RMSH

Die Rolle von Anreizen bei der Anwendung von RMSH als Vorgehensweise

P3-013-d

402/95 - 13 e RMSH

Incentives and the NARMS Approach - A hand-out for project desk officers, consultants and onside project staff

P3-013-e

402/95 - 13 f RMSH

Le rôle des mesures d'incitation dans l'application de la stratégie GERNAP - Outil de travail à l’intention des chargés de projets, des consultants et des collaborateurs de projet

P3-013-f

402/95 AMREN

13

s El papel de los incentivos en la aplicación del enfoque AMREN P3-013-s out of print - Folleto de información para encargados de proyectos, consultores y colaboradores de proyectos

402/95 - 14 d PVI

Umweltinformation und ihr Management

P3-014-d

402/95 - 14 e PVI

Environmental information and its management

P3-014-e

402/95 - 15 d Biodiv

Biologische Vielfalt erhalten! Eine Aufgabe der Entwicklungszusammenarbeit

P3-015-d

402/95 - 16 d

Lösungsansätze für den technischen Umweltschutz in kleinen und mittleren Unternehmen in Entwicklungsländern

P3-016-d

402/96 - 16 e

Approaches to cleaner production in small and medium-sized enterprises

P3-016-e

402/95 - 17 d PVI

Mediation / Konfliktmanagement im Umweltbereich und seine Bedeutung im Rahmen der TZ Dokumentation eines Fachgesprächs in der GTZ

P3-017-d

402/95 - 18 e RMSH

Creating Local Agendas (A) Participatory Appraisal Methods for Interinstitutional collaboration in Integrated Watershed Management - Lessons from a Colombian Experience (B) Participatory Planning and Evaluation Methods: Suggestions for complementary methodologies

P3-018-e out of print

402/96 - 19 d PVI

Konfliktmanagement im Umweltbereich Instrument der Umweltpolitik in Entwicklungsländern

P3-019-d

402/96 - 19 e PVI

Environmental Conflict Management An environmental policy instrument in developing countries

P3-019-e

402/96 - 19 f PVI

La gestion des conflits dans le domaine de l'environnement Instrument de la politique de l'environnement dans les pays en développement

P3-019-f

402/96 - 19 s PVI

Manejo de conflictos en el área de medio ambiente Instrumento de política ambiental en los países en desarrollo

P3-019-s

- 205 402/96 - 20 e

Environmental Protection in Small and Medium Enterprises in Developing Countries - Proceedings of the GTZ-workshop

P3-020-e

402/96 - 21 d PVI

Methodenkompaß - Eine praktische Orientierungshilfe für Planungs- und Managementaufgaben im Umweltbereich

P3-021-d

402/96 - 22 d RMSH

Prozeßmonitoring - Eine Arbeitshilfe für Projektmitarbeiter/innen

P3-022-d

402/96 - 22 e RMSH

Process Monitoring (ProM) - Work Document for project staff

P3-022-e

402/96 - 22 f RMSH

Suivi des processus - Un outil de travail pour des collaborateurs de projet

P3-022-f

402/96 - 22 s RMSH

Seguimiento de procesos - Una auyuda para personal de proyectos

P3-022-s

402/96 - 23 d PVI

Indikatoren der Institutionenentwicklung im Umweltbereich Anregungen und Beispiele für Projektplanung und management

P3-023-d

402/96 - PVI

Umweltprojekte durch Kommunikation verbessern

P3-901-d

402/96 - PVI

Erfahrungen und Ansätze der TZ bei der Unterstützung von Umweltaktionsplänen - Dokumentation eines Erfahrungsaustausches in der GTZ

P3-902-d

402/96 - RMSH

Prozeßbegleitende Beratung - Eine Arbeitshilfe für Berater/innen im Ressourcenmanagement

P3-903-d

402/96 - RMSH

In Process Consultancy - A Work Document for Consultants to Natural Resource Management Projects

P3-903-e

402/96 - RMSH

Consultation interne

P3-903-f

402/96 - RMSH

Asesoramiento a procesos

P3-903-s

402/96 - RMSH

Toward decentralised Natural Resource Management Case study: The village of Balingnar in Burkina Faso

P3-904-e

402/96 - PVI

Vers une Gestion Decentralisee des Ressources Naturelles Cas du village de Balingnar au Burkina Faso

P3-904-f

402/96 - PVI

Umweltkommunikation in der TZ Dokumentation eines Fachgespräches in der GTZ

P3-905-d

402/96 - PVI

Bibliographie Umweltkommunikation

P3-906-d

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