The Malaysian combination of econom

The Malaysian combination of economic charges and standards worked as follows. In the first year
(1978) of implementation of the system, the standard was set at 5000 mg/l of BOD and was not
mandatory, in recognition of the initial difficulties that would be faced by the industry. The effluent related license fee was set at US $3 per ton of BOD discharged up to the standard. In the following year, the BOD standard was made stricter (2000 mg/l) and mandatory and progressive effluent charges were imposed to provide an incentive for the establishment of waste treatment facilities. If the BOD concentration exceeded the prescribed standard, a surcharge was imposed equal to $100 per ton above the standard. This is equivalent to a non-compliance fine or a compliance incentive. The rates were set such that the annual fees for untreated discharge exceeded at least the capital costs for building treatment facilities based on the anaerobic lagoon treatment facility. This already departs from the theoretically correct effluent charge which should equal the marginal environmental damage, not the costs of installing a discharge treatment facility. Nevertheless, the system performed fairly well in managing pollution problems in the palm oil industry as long as the charges maintained their real value and were fully collected. By 1984, when the effluent standard was tightened to 100 mg/l, the BOD load discharge by the palm oil industry was down to only four tons per day out of 1640 tons of BOD generated per day. A similar system, apparently with equal success, was adopted for the control
of pollution by the rubber industry. By 1984, most rubber factories were discharging BOD under 100 mg/l and the total BOD load discharged was down to five tons per day out of a total load of 200 tons generated per day.
The combined effluent, standard-charge system, however, was more effective than efficient. First, the charge was not set on the basis of marginal environmental damage costs, as the economic theory of externalities requires for optimal pollution control, but based on the cost of capital investment in treatment facilities with the apparent objective being the construction of waste treatment facilities rather than the control of pollution to optimal levels. This is also supported by the fact that the basic effluent charge is no longer enforced, but the surcharge for effluents above the standard is enforced. A second problem with the Malaysian effluent standard-charge system, with regard to efficiency, is the imposition of the charge on BOD load rather than volume of discharge. This would clearly provide an incentive for some firms to dilute their effluent to avoid the charge, without actually reducing the total BOD load entering the river. Evidence for this is lacking but some developed countries, such as the
Netherlands, base their effluent charges on a combination of effluent volume and BOD concentration that discourages dilution.
A third problem with the Malaysian system is the implicit incentive for intermedia substitution. While both a basic charge and a surcharge are also levied on discharges on land, the basis for the charge is volume, not concentration, while the basis for the surcharge is BOD load above the standard. While this is an effort to address the weakness with the BOD-only-based charge system for disposal in water bodies (identified above), it results in a higher discharge level for land disposal and encourages a shift of disposal from land to water. Again, the fee structure did not reflect marginal environmental damage from disposal in different media, but rather an attempt to offset the higher cost of waste treatment for charge into water courses.
Vincent (1993) analyzes in detail the economic efficiency (cost-effectiveness) of the Malaysian
effluent standard and charge system, using an economic model of cost-minimizing abatement and
disposal behavior by palm oil mills, and compares it with alternatives, such as command-and-control only (aggregate BOD standard allocated among mills according to output) and emissions trading among mills. While the results of this exercise are not yet available, it is clear that despite its effectiveness in controlling palm oil pollution, the Malaysian mixed regulation-incentive system was not economically efficient. Yet it was a pioneer system for a developing country, and despite its inefficiencies, it did not result in loss of competitiveness for the Malay palm oil industry. According to Rahim (1991), Malaysia's palm oil export sector “lost only 5% of the value of output as a result of environmental regulations from 1982-1986 that reduced allowable BOD discharges by 90%. The CPO [crude palm oil] sector lost even less—only about 1% of the value of production … despite the highly competitive nature of world oil markets (Vincent, 1993; p.24).” In contrast, Rahim found large losses among the primary input producers, the oil palm plantation sector, which bears over two-thirds of the total welfare losses of the industry.
The Malaysian combined effluent standard-charge system is still in effect but has apparently lost part of its original rationale (to promote waste treatment facilities) and its potency. With treatment facilities becoming a licensing requirement and standard feature of palm oil mills, the basic charge is no longer enforced. The surcharge for effluents above the standard is still enforced but it is so low (having lost much of its real value to inflation) that it no longer acts as a compliance incentive: some mills find it more advantageous to pay the surcharge rather than treat their effluent sufficiently to meet the standard.
In conclusion, despite its weaknesses—and to some extent because of them—the Malaysian mixed
regulation-incentive system holds valuable lessons for developing countries that are contemplating the introduction of economic instruments in support of their environmental regulations. Neighboring Indonesia has recently been considering the introduction of economic incentives to increase compliance to its industrial environmental standards. The Malaysian experience should be helpful both in this general context as well as in the specific case of pollution from the palm oil industry.
Sections of rivers in north Sumatra are reported to be anaerobic because of heavy BOD loads from
palm oil mills (some of the them state owned) despite stringent discharge standards. An effluent
charge system with improvements drawn from the experience of Malaysia is certain to increase
compliance of privately owned palm oil mills. As for state-owned firms, the Polish experience
discussed below indicates that economic charges have little impact on the behavior of state
enterprises because: (a) the profit motive does not operate to minimize costs; and (b) the soft budget constraint of such enterprises allows the shift of charge payments to the state budget. Under these circumstances, privatization may be necessary for economic charges to work.

Hasil (Bahasa Indonesia) 1:

Kombinasi Malaysia biaya ekonomi dan standar bekerja sebagai berikut. Pada tahun pertama(1978) pelaksanaan sistem, standar ditetapkan sebesar 5000 mg/l dari Direksi dan tidakwajib, atas kesulitan-kesulitan awal yang akan dihadapi oleh industri. Biaya lisensi terkait limbah ditetapkan sebesar US $3 per ton Direksi yang diberhentikan sampai ke standar. Tahun berikutnya, standar BOD dibuat lebih ketat (2000 mg/l) dan wajib dan progresif limbah biaya yang dikenakan untuk memberikan insentif untuk pembentukan fasilitas pengolahan limbah. Jika konsentrasi BOD melebihi standar yang ditentukan, biaya tambahan dikenakan setara dengan $100 per ton di atas standar. Ini setara dengan denda ketidakpatuhan atau insentif kepatuhan. Harga yang diatur sedemikian rupa sehingga biaya tahunan untuk tidak diobati discharge melebihi setidaknya biaya modal untuk membangun fasilitas pengolahan berdasarkan fasilitas pengobatan anaerobik laguna. Ini sudah berangkat dari muatan limbah yang secara teoritis benar yang harus sama dengan kerusakan lingkungan marjinal, tidak biaya instalasi fasilitas pengobatan debit. Namun demikian, sistem dilakukan cukup baik dalam mengelola masalah pencemaran dalam industri minyak sawit selama tuduhan dipelihara mereka nilai riil dan dikumpulkan sepenuhnya. Tahun 1984, ketika standar limbah diperketat untuk 100 mg/l, Direksi beban pelepasan oleh industri minyak sawit adalah ke hanya empat ton per hari dari 1640 ton Direksi yang dihasilkan per hari. Sistem serupa, tampaknya setara kesuksesannya, diadopsi untuk kontrolof pollution by the rubber industry. By 1984, most rubber factories were discharging BOD under 100 mg/l and the total BOD load discharged was down to five tons per day out of a total load of 200 tons generated per day.The combined effluent, standard-charge system, however, was more effective than efficient. First, the charge was not set on the basis of marginal environmental damage costs, as the economic theory of externalities requires for optimal pollution control, but based on the cost of capital investment in treatment facilities with the apparent objective being the construction of waste treatment facilities rather than the control of pollution to optimal levels. This is also supported by the fact that the basic effluent charge is no longer enforced, but the surcharge for effluents above the standard is enforced. A second problem with the Malaysian effluent standard-charge system, with regard to efficiency, is the imposition of the charge on BOD load rather than volume of discharge. This would clearly provide an incentive for some firms to dilute their effluent to avoid the charge, without actually reducing the total BOD load entering the river. Evidence for this is lacking but some developed countries, such as theNetherlands, base their effluent charges on a combination of effluent volume and BOD concentration that discourages dilution.A third problem with the Malaysian system is the implicit incentive for intermedia substitution. While both a basic charge and a surcharge are also levied on discharges on land, the basis for the charge is volume, not concentration, while the basis for the surcharge is BOD load above the standard. While this is an effort to address the weakness with the BOD-only-based charge system for disposal in water bodies (identified above), it results in a higher discharge level for land disposal and encourages a shift of disposal from land to water. Again, the fee structure did not reflect marginal environmental damage from disposal in different media, but rather an attempt to offset the higher cost of waste treatment for charge into water courses.Vincent (1993) analyzes in detail the economic efficiency (cost-effectiveness) of the Malaysianeffluent standard and charge system, using an economic model of cost-minimizing abatement anddisposal behavior by palm oil mills, and compares it with alternatives, such as command-and-control only (aggregate BOD standard allocated among mills according to output) and emissions trading among mills. While the results of this exercise are not yet available, it is clear that despite its effectiveness in controlling palm oil pollution, the Malaysian mixed regulation-incentive system was not economically efficient. Yet it was a pioneer system for a developing country, and despite its inefficiencies, it did not result in loss of competitiveness for the Malay palm oil industry. According to Rahim (1991), Malaysia's palm oil export sector “lost only 5% of the value of output as a result of environmental regulations from 1982-1986 that reduced allowable BOD discharges by 90%. The CPO [crude palm oil] sector lost even less—only about 1% of the value of production … despite the highly competitive nature of world oil markets (Vincent, 1993; p.24).” In contrast, Rahim found large losses among the primary input producers, the oil palm plantation sector, which bears over two-thirds of the total welfare losses of the industry.The Malaysian combined effluent standard-charge system is still in effect but has apparently lost part of its original rationale (to promote waste treatment facilities) and its potency. With treatment facilities becoming a licensing requirement and standard feature of palm oil mills, the basic charge is no longer enforced. The surcharge for effluents above the standard is still enforced but it is so low (having lost much of its real value to inflation) that it no longer acts as a compliance incentive: some mills find it more advantageous to pay the surcharge rather than treat their effluent sufficiently to meet the standard.In conclusion, despite its weaknesses—and to some extent because of them—the Malaysian mixed
regulation-incentive system holds valuable lessons for developing countries that are contemplating the introduction of economic instruments in support of their environmental regulations. Neighboring Indonesia has recently been considering the introduction of economic incentives to increase compliance to its industrial environmental standards. The Malaysian experience should be helpful both in this general context as well as in the specific case of pollution from the palm oil industry.
Sections of rivers in north Sumatra are reported to be anaerobic because of heavy BOD loads from
palm oil mills (some of the them state owned) despite stringent discharge standards. An effluent
charge system with improvements drawn from the experience of Malaysia is certain to increase
compliance of privately owned palm oil mills. As for state-owned firms, the Polish experience
discussed below indicates that economic charges have little impact on the behavior of state
enterprises because: (a) the profit motive does not operate to minimize costs; and (b) the soft budget constraint of such enterprises allows the shift of charge payments to the state budget. Under these circumstances, privatization may be necessary for economic charges to work.