The sudden collapse of the centrally planned economies of Central and Eastern Europe (CEE) and the former Soviet Union (FSU), has created economic and environmental disequilibria of historically unprecedented dimensions throughout the region, as well as a process of gradual transition from plan to market. This historical ‘experiment’ provides a unique opportunity to study economyÐenvironment interactions and the adjustment process towards a new equilibrium, as well as the implications for conventional and novel policy instruments under transitional conditions. The changes that have taken place have been so many and so large that they defy many of the tools of marginal analysis. Privatization, industrial restructuring, market competition, price reform, and trade liberalization among others have suddenly been introduced where none existed and have so radically altered the fundamentals of these economies that they could be considered as new economies rather than simply reformed economies. However, underlying these radical changes, are many legacies of the centrally planned economy that persist or change only gradually. Furthermore, not all countries in CEE and the FSU have reformed their economies at the same pace. The northern tier countries of CEE moved faster than the southern tier and the latter faster than most FSU republics.

In many countries, and particularly in the economies in transition in Central and Eastern Europe, public environmental funds play an important role in financing environmental investments. These funds provide subsidized financing through grants and soft loans in response to market failures that limit environmental investors' access to capital markets or poorly account for the benefits of environmental improvements. The principal question explored in the paper is whether environmental funds are too generous or too selective in co-financing environmental projects. The authors conducted a survey of applicants whose applications to Polish environmental funds were rejected following appraisal by the funds in 1994. Applicants were contacted to determine whether they had been able to close the financing 'gap' by the end of 1995 that had resulted from the rejection of their application by the Fund. Survey results indicate that a large majority of respondents have secured substitute gap financing and proceeded with their planned investments, suggesting that the fund's assistance was not essential for these projects to be implemented. Generally, the financing gap had been closed by financing from another environmental fund, from own resources, and less frequently from the same fund (after resubmitting a modified proposal). Only in few instances have proposed projects been abandoned.

It is often claimed that pollution reductions can be achieved at lower cost in Central and Eastern Europe and the former Soviet Union, because more possibilities exist to update production processes and reduce waste. To date, however, there has been little or no systematic evaluation of what the costs actually are in these countries. The main purpose of this paper is to partially fill this research gap using firm-level data from Lithuania. Abatement cost estimates for key air pollutants are presented based on investments made in Lithuania during 1993–4. The paper also attempts to estimate the demand for pollution directly using data on pollution charges from 1994. Using both methods, it is shown that for at least some key pollutants marginal and average abatement costs are probably substantially lower in Lithuania than in western countries.

For local public goods, supply or demand shocks may create periods during which it is welfare enhancing for households to undertake spatial arbitrage by relocating residentially. We point out that the magnitude and direction of the average benefit estimate obtained during such a transition period is likely to vary systematically depending upon the magnitude of the shock, the level of transaction costs and the extent to which other affected goods are substitutes or complements. We test a subset of our model's predictions using cross-sectional data on household demand for improved municipal services in post-socialist Romania. Our preliminary empirical analysis suggests that there have been substantial gains in welfare resulting from spatial adjustment following the opening up of housing markets. Furthermore, our results indicate that benefit estimates for improved water services during the transition may be substantially higher than long-run estimates. This limited evidence supports our concern that economists may recommend non-optimal levels of long-run investment, regulation, or user fees if they are unaware of the implications of future readjustment to supply or demand shocks.

We examine the use of carbon taxes to reduce emissions of CO2 in China. To do so, we develop a dynamic computable general equilibrium (CGE) model of the Chinese economy. In addition to accounting for the effects of population growth, capital accumulation, technological change, and changing patterns of demand, we also incorporate into our model elements of the dual nature of China's economy where both plan and market institutions exist side by side. We conduct simulations in which carbon emissions are reduced by 5, 10, and 15 per cent from our baseline. After initial declines, in all of our simulations GDP and consumption rapidly exceed baseline levels as the revenue neutral carbon tax serves to transfer income from consumers to producers and then into increased investment. Although subject to a number of caveats, we find potential for what is in some sense a 'double dividend', a decrease in emissions of CO2 and a long run increase in GDP and consumption.

Economic instruments such as taxes and tradable permits have been promoted as efficiency improving policies in the transition economies of Central and Eastern Europe and elsewhere. The little noticed potential for a symmetric equity impact from the two instruments in a world without distortions is first discussed. A specific policy option is suggested in which existing environmental taxes in Central and Eastern Europe can be increased without imposing additional financial burdens in industry if appropriate tax credits are provided. Second, conditions in Central and Eastern Europe are identified that reduce the change of efficiency losses in a general equilibrium setting when distortions exist. The trade-off between efficiency and equity in such a setting is found to depend on country-specific parameters and to be reduced if: (1) a cost-effective policy is implemented, (2) environmental assets can be distributed prior to privatization, and (3) government expenditures can decline.

This paper describes the Fiscal Environmental Integration Model (FEIM) and its use to examine the merits of introducing a set of air pollutant emission taxes and stringent abatement requirements based on best commonly available control technology. These environmental protection strategies are examined both independently and in combination. In addition, Hungary has very high VAT, employment, and income tax rates and therefore might receive more than the usual advantage from using environmental tax revenues to reduce other taxes. We therefore also examine the economic and environmental implications of different uses of the revenues generated by the air pollutant emission taxes. FEIM is a CGE model of the Hungarian economy that includes sectoral air pollution control costs functions and execution options that allow examination of the key policy choices involved. We developed and ran a baseline and seven scenarios with FEIM. The scenarios centered on introduction of environmental load fees (ELF) on emissions of SO2, NOx, and particulates and emission abatement requirements (EAR) for these pollutants.

Casual observation suggests that many households in Moscow boil water, settle water in pans for some periods (e.g., overnight) before consuming, filter water, and buy bottled water. To date, there has been little empirical analysis of such avoidance behavior. Based on a recently completed survey of 615 households in Moscow, this paper investigates the types and amounts of avoidance measures that are used by households in Moscow to adjust drinking water quality. Survey results show that this is clearly the case: over 88 per cent of the sample boil water regularly due to concerns about water quality; 23 per cent filter water regularly; over 30 per cent settle water regularly; and about 13 per cent buy bottled water regularly. On the other hand, residents are generally content with their cold water supply and quality of delivery. Based on a microeconomic model of household avoidance behavior, logit regression results show how avoidance decisions relate to income, opinions of water quality, and location in the city. It is expected that this analysis from Moscow can also be used as a guide for future studies in other cities in Russia to evaluate opinions of quality, avoidance measures, and citizens' willingness to support public infrastructure projects designed to improve water supply.

The paper measures the changes in environmental quality that occurred in the early years of economic transition for 12 former centrally planned economies using the information on 13 pollution effluents in the manufacturing sector and the energy intensity of the value added. For the manufacturing sector, the change in the pollution is separated into scale and composition effects. Pollution decreases substantially in most countries because of large decreases in aggregate manufacturing activity. The composition effect is more diverse depending on the effluent type and country. We examine the reduced form relationship between composition effects coupled with the energy intensity rate of change and the extent of policy reforms. The results indicate a strong relationship between environmental improvement and price liberalization, trade and foreign exchange reforms, enterprise restructuring, and privatization reforms. In addition, the amplification of the environmental regulatory regime causes a shift towards a less-polluting allocation of resources.