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Electronic WorkingPaper Series

Paper No. 61

THE MEANING OF BATNEEC:

Interpreting excessive costs in UK industrial

pollution regulation

Steve Sorrell

(S.R.Sorrell@sussex.ac.uk)

February 2001

Paper submitted to the Journal of Environmental Policy & Planning

SPRUScience & Technology Policy Research

Mantell BuildingUniversity of Sussex, Falmer

Brighton, East Sussex BNB 9RF

Tel: 00 44 1273 877067Fax: 00 44 1273 685865

http:www.sussex.ac.uk/spru/

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ABSTRACT

This paper examines how the concept of ‘excessive costs’ has been interpreted in theimplementation of industrial pollution control in the UK. Since 1984, industrial airpollution regulation in the EU has been guided by the framework concept of BestAvailable Technology Not Entailing Excessive Costs (BATNEEC). With theintroduction of the Integrated Pollution Prevention & Control Directive in 1996, this hasbeen replaced by the concept of Best Available Techniques (BAT). Despite the absenceof the NEEC qualification, the concept of avoiding excessive costs is effectivelyabsorbed in the IPPC definition of availability. Both concepts require interpretation andboth devolve potentially controversial decisions to the level of the individual siteregulator. A central issue in interpreting ‘excessive costs’ is the relative importance ofenvironmental cost benefit analysis versus the ability of a sector to ‘afford’environmental improvements. Also important is how such concepts can beoperationalised by regulators who lack resources and depend upon industry forinformation. The paper provides a historical account of how these issues have been dealtwith in the UK and argues that the key difficulties are far from being resolved. Thepaper concludes by assessing the implications for the future implementation of IPPC.

INTRODUCTION

Since 1984, industrial air pollution regulation in the EU has been guided by the

framework concept of Best Available Technology Not Entailing Excessive Costs

(BATNEEC). This was introduced by the 1984 Air Framework Directive (AFD) and

applies to air pollution from large industrial installations (CEC, 1984). In 1996, the

AFD was replaced by the Integrated Pollution Prevention & Control (IPPC) Directive,

which applies the framework concept of Best Available Techniques (BAT) to the

integrated control of pollution to all three media (CEC, 1996). Despite the absence of

the NEEC qualification, the concept of avoiding excessive costs is effectively absorbed

in the IPPC definition of availability (Skea & Smith, 1997).

Framework concepts such as BATNEEC require interpretation at the national, sector

and site level. Member States may take different approaches to the interpretation of

BATNEEC as a result of their varying regulatory traditions. Over the years, the UK

government and regulatory authorities have paid particular attention to the meaning of

‘excessive costs’ in BATNEEC, and the introduction of IPPC has not significantly

changed the issues involved. The UK debate on this topic is relevant for the

implementation of IPPC in all Member States as well as for the development of sectoral

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guidance on BAT at the EU level (the BAT Reference Notes, or BREFs)1. This paper

therefore provides a historical account of the interpretation of ‘excessive costs’ in the

UK and examines the respective roles of environmental cost benefit analysis and

assessments of ‘sectoral affordability’. The implications of this for the future

implementation of IPPC are then assessed.

THE IPC REGIME

The requirements of the AFD were transposed into UK law in 1990 by the

Environmental Protection Act (EPA90). This introduced a new system of Integrated

Pollution Control (IPC) to be administered by Her Majesty’s Inspectorate of Pollution

(HMIP) (Jordan, 1993). In 1997, HMIP was combined with the National Rivers

Authority and the Waste Regulation Authorities to form the UK Environment Agency

(EA).

IPC is a cross-media approach to regulation, whereby releases to air, water and land are

regulated together. IPC procedures are more formal and transparent than the regulations

which IPC replaced, and include a statutory requirement for public information

registers. Processes regulated under IPC must obtain an authorisation, which contains

legally binding conditions to:

• ensure that BATNEEC is used to prevent the release of prescribed substances or,where that is not practicable, to reduce releases to a minimum;

• consider what is the best practicable environmental option (BPEO) to cause the leastharm to the environment as a whole; and

• ensure compliance with obligations under EU Directives and international law (DoE,1997).

1 The European Commission is producing guidance on BAT for each industrial sector inthe form of BAT Reference Documents (BREFs). These will not prescribe thetechnology to be used in specific cases since, in the final analysis, BAT must take intoaccount ‘...the technical characteristics of the installation concerned, its geographicallocation and the local environmental conditions’ (CEC, 1996, Article 9(4)). Copies ofthe BREFs and related information are available on the website of the European IPCCBureau at: http://eippcb.jrc.es.

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Authorisations contain release limits, monitoring requirements and (for existing plants)

a timetabled improvement program. The last is a central feature of IPC and may either

include emission limits to be achieved by a target date in the future, or a requirement for

feasibility studies. Authorisation requirements are negotiated between the regulator and

the regulated company at a site level, but may be guided by the non-prescriptive

standards in the relevant sector Guidance Note. While the integrated approach is

embodied in the BPEO concept, it is BATNEEC which has played the dominant role in

practice.

WHAT IS BATNEEC?

The effectiveness of IPC hinges on the interpretation of BATNEEC. Like comparable

concepts such as Reasonably Achievable Control Technology (RACT)2, BATNEEC

requires that technological and economic feasibility be taken into account when making

regulatory decisions. Such framework concepts can be appropriate where the regulatory

target is complex, but they also devolve potentially controversial decisions to the level

of the individual site regulator (the ‘Inspector’ in the UK).

BATNEEC can be viewed as a convergence of two European regulatory traditions:

• the emphasis on technical feasibility and ‘state of the art’ technology in German

pollution regulation (BAT); and

• the emphasis on economic feasibility and pragmatic, case by case decision-making in

UK regulation (NEEC) (Boehmer-Christiansen & Skea, 1989).

The UK tradition included considerations of affordability or excessive cost through its

reliance on site level negotiation and decision-making (Vogel, 1986; Smith, 1997).

Regulators were typically chemical engineers, sharing a similar background to industrial

operators and ‘speaking the same language’. Regulation was based on mutual trust and

respect, and flexibility was achieved through negotiation. The UK succeeded in

2 RACT was introduced into US pollution regulation by the 1977 amendments to theClean Air Act.

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retaining this flexibility in the AFD by insisting that the German requirement for BAT

be qualified by the addition of NEEC.

In the early stages of IPC, BATNEEC was an unfamiliar concept to both regulators and

regulated. While Best Practicable Means (BPM) provided a precedent, BATNEEC

appeared to require more formal and transparent justification of regulatory decisions,

based on economic concepts and information. As a consequence, the meaning of

BATNEEC became a focus of debate. Ten years later, the tensions inherent in the

concept remain unresolved.

The debate over the meaning of BATNEEC has hinged around two key issues:

1. The meaning of excessive cost, and the relative importance of:

• what gains in environmental quality can be achieved compared to the

abatement costs - the environmental cost/benefit approach; or

• what an average company within a sector can afford - the sectoral

affordability approach.

2. The process of assessing excessive cost, and the extent to which this should use:

• economic information and formal analytical techniques; or

• expert judgement and negotiation with individual operators.

The interpretation of these issues may differ between:

• the development of new plant standards versus the upgrading requirements forexisting plant; and

• the development of IPC Guidance Notes versus the determination of individual siteauthorisations.

The following sections summarise the evolution of this debate in the UK, including how

BATNEEC has been characterised in various regulatory documents.

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BATNEEC IN OFFICIAL REGULATORY GUIDANCE

BATNEEC in the AFD

The BATNEEC concept appears in three Articles of the AFD. There is a general

requirement in Article 4 which states that an authorisation may only be issued when the

competent authority is satisfied that:

'all preventative measures against air pollution have been taken, including the application of

the best available technology, provided that the application of the such measures does not

entail excessive costs'; (CEC, 1984)

This is amplified in Article 12 which states that:

‘The Member State shall follow development as regards the best available technology and the

environmental situation. In the light of this examination they shall, if necessary, impose

appropriate conditions ..... on the basis of developments as regards BAT, and of the

desirability of avoiding excessive costs for the plants in question, having regard in particular

to the economic situation of the plants belonging to the category concerned.’ (CEC, 1984)

The last sentence qualifies the Article 4 text with a somewhat ambiguous statement. E.g.

Does ‘category’ mean the whole sector, or specific types of plant within the sector?

What does ‘have regard to’ mean? The sentence is difficult to interpret and bears the

hallmarks of a fudged compromise As such, it is typical of many international

environmental agreements where an attempt is made to find a form of words that is

acceptable to all parties.

Articles 4 and 12 apply equally to new and existing plant. Article 13 addresses the issue

of upgrading existing plant and states that:

‘In the light of an examination of developments as regards the best available technology and

the environmental situation, Member States shall implement policies and strategies....for the

gradual adaptation of existing plant......to the best available technology, taking into account in

particular:

• the plant's technical characteristics,

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• its rate of utilisation and length of its remaining life;

• the nature and volume of polluting emissions from it; and

• the desirability of not entailing excessive costs for the plant concerned, having regard in

particular to the economic situation of undertakings belonging to the category in question'

(CEC, 1984)

This leaves wide scope for interpretation, but is intended to prevent uneconomic

decisions such as the retrofitting of pollution abatement equipment to a plant which is

due to close within a couple of years. Excessive cost is again required to be assessed for

plants: ‘....belonging to the category in question’.

BATNEEC in the 1990 Environmental Protection Act

The text of EPA90 largely repeats the wording of the AFD, except that it refers to best

available techniques, rather than technology, where techniques are interpreted to include

staff training, staff supervision, plant maintenance and other factors. This gives greater

flexibility to the plant operator and recognises the importance of the management and

operation of plant in achieving improved environmental performance. This is borne out

in the authorisations under IPC which give great emphasis to operational measures.

BATNEEC in guidance to operators and Inspectors

The generality and ambiguity of the BATNEEC concept made it necessary to provide

additional guidance on its interpretation. This is contained in chapter 5 of IPC: A

Practical Guide, which was first published in 1991 (DoE, 1997). BATNEEC for a

particular process is to be interpreted from the broad statements in the Practical Guide

and the more specific guidance on each sector contain in the relevant Guidance Note.

Some key features of this guidance are summarised in Box 1.

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Box nn UK government guidance on the meaning of BATNEECNEECNEEC needs to be taken in two contexts, depending on whether it is applied to new processesor existing processes. Nevertheless, in all cases BAT can properly be modified by economicconsiderations where the costs of applying best available techniques would be excessive inrelation to the nature of the industry and to the environmental protection to be achieved.

New processesIn many cases, for new processes it is expected that BAT and BATNEEC will be synonymous.However:

• The cost of the best available techniques must be weighed against the environmental damagefrom the process. The greater the environmental damage, the greater the costs of BAT thatcan be required before costs are considered excessive.

• An objective approach to the consideration of what is BATNEEC is required. The concernis with what costs in general are excessive; the lack of profitability of a particular businessshould not affect the determination.

Existing processes• In relation to existing processes, the Environment Agency is concerned...with establishing

timescales over which old processes will be upgraded to new standards, or as near to newstandards as possible, or ultimately closed down.

• ....the approach adopted in the EC AFD is helpful...[Articles 12 and 13 are quoted]

Promulgation• It is the job of the individual Inspector to decide what is BATNEEC in a particular instance

and to translate that decision into conditions to be included in the authorisation. Howeverthere must be broad consistency in these decisions.......It is important that BATNEEC isdetermined and applied in a transparent, consistent and rational way.

Role of Guidance Notes• In the case of new processes, it is expected that plant will be designed to achieved the

standards in the appropriate Guidance Note.• For existing processes, Inspectors will determine a timescale on which it will generally be

appropriate to upgrade to new plant standards. Inspectors will determine what is appropriatein each individual case, paying attention to variable factors, any directions given by theSecretary of State, the sort of consideration listed in the AFD and the need to achieveBPEO.

• The Guidance Notes have no statutory force. They do, however, represent the view of theAgency on best available techniques for particular types of processes and are therefore amaterial consideration to be taken into account in every case.

Source: DoE, 1997

Box 1 highlights issues which have been central to the debate over BATNEEC, namelythe role of environmental cost/benefit analysis, the interpretation of sectoralaffordability, and the information required to determine affordability. These arediscussed below.

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ENVIRONMENTAL COST/BENEFIT ANALYSIS

The guidance suggests that determination of BATNEEC requires both:• an environmental cost/benefit test: a judgement on the extent to which the benefits to

the environment of using BAT outweigh the costs of doing; and• a sectoral affordability test: a judgement on the extent to which the cost of using

BAT can be afforded without serious damage to the competitive position of a sector

These tests are logically independent. There is no reason why the first should lead to the

same result as the second. This raises the issue of how the tests interrelate. Pearce &

Brisson have strongly argued that the first test should take priority (Pearce & Brisson,

1995). This is for three reasons: a) applying the sectoral affordability test3 involves the

regulator in assessing socially acceptable rates of return for a sector which is extremely

difficult to do; b) early legal opinion (Bigham, 1992) supports the priority of a

cost/benefit interpretation (although other factors may still be relevant); and c) this

approach is more consistent with economic efficiency (Pearce & Brisson, 1995, p 34).

Pearce & Brisson advocate the use of cost/benefit analysis, based on the monetary

valuation of environmental damage.

This recommendation has two major drawbacks. First, it takes little account of the

practical realities of implementation and would require resources and skills which the

regulator does not have and is unlikely to obtain for the foreseeable future. Second, the

results obtained from valuation studies may lack political credibility. Not only are the

results highly variable (frequently differing by several orders of magnitude) but the

monetary valuation of environmental damage has been subject to a series of damaging

philosophical critiques which are considered by many to have undermined its theoretical

basis (Vatin & Bromley, 1994; Foster, 1997; Stirling, 1997a; Sagoff, 1998).

Pearce’s argument could be more persuasive were it not linked so closely to monetary

valuation. Alternative decision-making techniques, such as multicriteria analysis, can

overcome many of the limitations of valuation whilst still providing a robust basis for

decisions (DETR, 2000). These techniques can acknowledge the essential subjectivity of

3 Pearce terms the sectoral affordability approach as ‘ corporate burden’, and thecost/benefit approach as ‘national economic burden’.

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environmental appraisal, while maximising the transparency and accountability of the

decision-making process (Stirling, 1997b). Such techniques would still present a

challenge to regulators as they require considerably more effort and resources than

existing approaches, as well as wider participation. But the use of alternative techniques

still leaves open the question of how cost benefit analysis and sectoral affordability

should interrelate.

While both HMIP and the Department of the Environment (DoE)4 were interested in

developing an intellectually robust approach to evaluating BATNEEC, they had to

recognise the drawbacks of monetary valuation and the complex realities of policy

implementation. The result was to advocate a ‘pragmatic’ approach, in which much

reliance is placed on the professional judgement of the regulator and on comparisons

with best practice in the UK and overseas. This is the traditional UK approach and

continues to be applied by Inspectors today. But many within the DoE remained

uncomfortable with the approach and desired a more formal approach to environmental

assessment5. This was tied up with broader concerns about how to operationalise BPEO

and thereby make the ‘integrated’ approach to pollution control more meaningful. This

led ultimately to the BPEO methodology, described below. But this methodology is a

complex procedure whose full application has been confined to a subset of new plants or

major investments that have multi-media environmental impacts. It has not been

regularly applied to BATNEEC assessments of the upgrading of existing plant. This

means the pragmatic approach is still dominant in day-to-day Agency operations and is

being carried over into the implementation of IPPC.

SECTORAL AFFORDABILITY

From the beginning, DoE guidance has stressed that affordability should be assessed at

the level of the sector, rather than the individual firm. Hence, the Practical Guide states:

‘....The concern is with what costs in general are excessive; the lack of profitability of a

4 The UK Department of the Environment (DoE) was reformed in 1997 to become theDepartment of the Environment, Transport & the Regions (DETR).5 Personal communication with former DoE civil servants.

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particular business should not affect the determination.’ (DoE, 1997). The appropriate

benchmark was therefore the average profitability of firms in the sector.

The notion of sectoral affordability has implications which undermine economic

efficiency and which are of concern to some sections of government. In principle, it

means that the stringency of regulation will depend upon the competitiveness of a

sector. Thus, it is possible to envisage two similarly polluting industrial processes in

different sectors where more demanding techniques are required for one than for the

other, reflecting their differing competitive positions. This means that a higher level of

environmental gain could be obtainable for the given level of total investment if that

investment were to be differently distributed. As the UK Environment Minister,

Michael Meacher, put it during preparation for the IPPC Directive:

‘Some sectors of industry make higher profits than others. Should those which make lower

profits continue to be let off controls which apply in more profitable sectors of industry? And

is it right to say to a sector of industry ‘you could save five pounds worth of environmental

damage by spending four pounds, but we won’t make you do so because we think you are too

poor?’ (Meacher, 1997)

The DoE saw the introduction of the IPPC Directive as an opportunity to weaken the

public commitment to sectoral affordability in favour of environmental cost/benefit

analysis. The DoE claimed that this was possible because the definition of BAT in the

IPPC Directive had no equivalent to the AFD requirement to consider the ‘..economic

situation of undertakings belonging to the category in question' (DETR, 1997, p16)6. As

argued below, this interpretation of the intent of the Directive can be challenged, but the

move reflects the long standing discomfort with sectoral affordability within the DoE.

In the first consultation paper on IPPC, the DoE suggested that the requirement for

sectoral affordability be dropped altogether, with decisions being made entirely on the

basis of abatement costs and environmental benefits. Following industry opposition, the

second consultation paper retreated somewhat:

6 An earlier interpretation along these lines is given by Emmott and Haigh (1996), p306.

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‘ the Government proposes that sectoral affordability should be phased out relatively

gradually, as Guidance Notes are developed containing clear indicative standards based on an

underpinning analysis of the costs and benefits of different measures in different sectors.’

(DETR, 1998)

The rhetoric, therefore, is about a gradual movement towards stricter regulation based

on environmental cost/benefit analysis. The results of this analysis are intended to be

reflected in the Guidance Notes. However, this process seems to be largely an issue of

public presentation. There is a large gulf between DoE pronouncements and the

practical realities of implementing IPC at the site level.

IMPLEMENTATION REALITIES

In principle, the application of either environmental cost/benefit analysis or sectoral

affordability could lead to a plant being closed. For closure to happen as a result of

sectoral affordability, it is necessary that: a) the plant is significantly less profitable than

the average within the sector; b) the costs of the abatement measures required by the

Agency are sufficient to put it out of business; and c) the Agency has sufficient political

authority to carry this through. In practice this has never happened and there is little

expectation that it will happen.

The problem is that individual Inspectors are unlikely to have sufficient authority to

require the closure of a dirty but high profile industrial plant on the grounds of a

contestable concept such as BATNEEC. While such an outcome could be envisaged if a

plant was violating mandatory environmental quality standards, in the majority of cases

there is no such constraint. Instead, the Inspector has to negotiate issues of costs,

benefits and affordability at the site level, in the context of limited resources and

information asymmetry.

The site level implementation of IPC is described in Smith (1997), Fineman (1998),

Gouldson & Murphy (1998) and Sorrell (2001). This shows that while Inspectors need

detailed technical and economic information to set authorisation requirements, they are

largely dependent upon industry for this information. In this context, Inspectors typically

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try to build a relationship of trust and co-operation with industry, preferring this to the

imposition of strict standards. The meaning of BATNEEC is determined locally on a

site specific basis through a process of negotiation. The emphasis is on flexibility,

discretion and a search for consensus. Trust is placed in the confidential information

supplied by the company and there is a reluctance to use sanctions. Thus: ‘..regulation

involves a mutual explanation of what is possible......it is a process of discussion and

learning.’7 While this process can have several benefits, it clearly creates the risk that

the stringency of regulation may be watered down (Gouldson & Murphy, 1998, chapter

5).

In practice, BATNEEC negotiations are dominated by debate on abatement costs and

environmental benefits. Inspectors lack the competence and, more importantly, the

information to explore questions of affordability in a formal way. But this does not

mean that questions of affordability are ignored. Instead, affordability seems to be

treated in a tacit and implicit way, with the profitability of the individual company

defining the boundary of the possible. For example, in the refinery sector the difficult

economic situation of individual refineries is acknowledged as a severe limitation on

what can be achieved, but there is no explicit analysis of the potential impact of

abatement measures on refinery profitability:

‘We don’t have detailed economic data. It’s only since the Foster Wheeler study came out ...

and if [an Agency employee] has any more economic data that he’s putting in the new

Guidance Note. They are the only official benchmarks that we have. In the absence of those,

I’ve always looked at things like the cost per unit tonne of pollutant abated....I’ve never been

able to argue about profit margin with the refineries because they say there isn’t a profit

margin at the moment.’8

Refineries have resisted abatement measures by arguing that they are on the borderline

of profitability and that abatement measures are merely a cost (Sorrell, 2001). Inspectors

have used cost/benefit arguments to encourage low cost measures which are

7 Interview with Agency Inspector, November 1999.8 Interview with Agency Inspector, November 1999.

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acknowledged to avoid to have substantial environmental benefits, but where the

investment costs are high (such as with selective catalytic reduction for NOx) or where

the environmental benefits are less apparent (such as with measurement of VOC

emissions) the justification is very difficult. Operators acknowledge that this has been to

their benefit:

‘If you take a societal view, you can truly recognise that over the long term 'grandfather-type'

plants don't have the right to exist. That BATNEEC should be a sector thing - so you should

be assessing all refineries equally. I fully recognise that. But I don't think, to date that has

happened. I think all the discussions that we have had are about local BATNEEC - which

has suited us very well, made my job easier and in terms of saving investment for this

refinery, it probably has helped.’9

Not only is affordability inherently difficult to assess, but the process of regulatory

decision-making is clouded by commercial confidentiality and the dominance of

informal, un-minuted negotiations (Smith, 1996; Smith, 1997; Sorrell, 2001). This

makes assessing the importance of affordability considerations in regulatory outcomes

very difficult. But the strong impression from existing studies is that the context of site

level negotiation, information asymmetry and a culture of co-operation all contribute to

making the affordability of abatement by individual firms a more important criterion

than abstract notions of sectoral affordability. As Fineman notes:

‘The public credibility of regulation hinges upon its impartiality and independence of the

regulator. There is evidence that this is a wistful ideal ... The preferred collaborative style of

many Inspectors lent itself to mutual capture.’ (Fineman, 1998)

DETERMINING AFFORDABILITY

Whether determined at the sector or firm level, the concept of affordability implies

analysis of abatement costs and financial performance. In early guidance to Inspectors,

the DoE recommended that affordability be assessed in terms of the effect on the cost of

a sectors’ products, taking this as a measure of competitiveness (HMIP, 1991a). But

while the regulator may be able to estimate the impact on production costs, this is not

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the same as the impact on product prices. The extent to which costs can be passed on to

product prices depends upon the market situation of the firm (Pearce & Brisson, 1995,

p32). In competitive markets the firm may be a price taker and cost increases must either

be passed to suppliers or absorbed by lower returns. Hence, in addition to determining

abatement costs, the regulator must assess the economic situation of supply markets, the

overall profitability of the sector and the extent to which costs can be passed on to

product prices. This is a tall order, and requires both a high level of competence in

economic analysis and comprehensive economic information about each regulated

sector.

When IPC began, the 400 strong staff of HMIP did not include a single economist. The

dominant professional culture was chemical engineering, reflecting the industrial

background of the majority of Inspectors. The level of competence in economic analysis

was consequently very limited. It was obvious, therefore, that HMIP lacked the capacity

to evaluate BATNEEC in the manner recommended by the DoE. This led to the

appointment of an economist, Tom Gameson, in 1993 who was given the task of

providing guidance on the economic assessment of BATNEEC.

Gameson produced a draft report on economic evaluation in 1993, although this was

never officially published (Gameson, 1993). The report describes an elaborate and

sophisticated approach to evaluating excessive costs that was intended to be employed

during the development of the Guidance Notes. The analysis splits into two elements:

estimating abatement costs at the plant and sector level; and estimating the economic

impact of those costs.

The first stage is a straightforward application of engineering cost analysis - which is not

to say that it is easy to do, owing to major difficulties associated with obtaining accurate

data and allowing for site specific factors (van Seters, 2000) . Gameson recommends

evaluating at least four levels of emission abatement. Estimates are required for capital

costs, O&M costs, installation costs and operating life, together with private benefits

9 Interview with refinery environmental manager, December 1999.

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such as reduced energy use. Annualised cost curves for a single plant can be derived and

then aggregated to the sector level. These can be expected to show major breakpoints,

where large increases in costs yield little improvement.

The second stage is more elaborate, more difficult and unlikely to be familiar to

regulators. It attempts to estimate how increases in production costs will be distributed

between increases in product prices, passed back to suppliers or absorbed as lower

profits. This requires an analysis of the structure of product markets, including

competitiveness, demand elasticity and the import/export balance. Gameson develops a

model to project possible plant closures, and recommends the use of financial ratios to

assess the impact on the viability of the firm. He also describes a much simpler

approach, which does not attempt to determine the impact of pollution control costs, but

merely provides benchmarks of a sector/company/plant’s ability to afford pollution

control costs. This uses standard data from company reports to produce ratios that are

familiar measures of financial performance, including liquidity, solvency and leverage.

Soon after the report was completed, HMIP were caught up in the preparations for the

Agency, which may be one reason why it had little impact. But more importantly, the

recommendations were over-ambitious and proved impossible to implement given the

limited information and resources available to either HMIP or the consultants employed

in developing the Guidance Notes. A consultants report on the refinery sector from

1994 is a good example (ERM, 1994). This was intended to feed into the second series

Guidance Note and to use the Gameson methodology to assess affordability. But the

report employs a much simpler methodology, confined largely to annualised cost

estimates for individual abatement options. Even the simple financial ratio test was

eschewed because: ‘....(ratios) will be specific to the individual company and, since

refineries are often part of larger operations, they are not necessarily applicable.’ (ERM,

1994, p3).

The refinery sector is not unique in the difficulty of obtaining financial ratios for the

relevant regulatory unit. Furthermore, sectors may pose additional problems in the form

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of multiple product markets. For example, in the Chemicals sector one process may be

part of another process, or it may produce multiple products in different markets. Some

of these markets may be competitive, others monopolistic. It would be practically

impossible to explore the implications of abatement costs for product prices in such a

situation.

The Gameson report clearly demonstrated the difficulties inherent in assessing sectoral

affordability and the inadequacy of earlier injunctions to use a ‘cost of products’ test. It

seemed that a robust methodology for assessing affordability at would require a highly

detailed assessment of the economics of each sector, based on information that was

either difficult or impossible to obtain. But, despite these difficulties, HMIP and the

DoE still wanted to establish some economic guidance for Inspectors, since the first

round of Guidance Notes contained no economic information at all. This was

subsequently given in the BPEO methodology and the second series Guidance Notes.

EXCESSIVE COSTS IN THE BPEO METHODOLOGY

BPEO is a framework concept which aims at an optimum solution for the environment

as a whole. For processes which are likely to release substances to more than one

medium, EPA90 states that: ‘...BATNEEC should be used for minimising the pollution

which may be caused to the environment taken as a whole, having regard to the BPEO’

(HMG, 1990).

The apparent absence of an integrated approach in the early authorisations led to

criticism of IPC, and HMIP spent much effort attempting to operationalise the BPEO

concept through the development of formal techniques. In April 1994, it published a

consultation document outlining a proposed methodology for assessing the overall

environmental impact of abatement options, together with their annualised costs (ENDS

Report, 1995a).

The proposed methodology came under some criticism for being overly mechanistic, for

trying to reduce multifaceted environmental impacts to a single index, and for excluding

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numerous off site and indirect impacts (ENDS, 1995a; Hartnell et al, 1994). The

revised version, published in 1995, went to some lengths to emphasise that it was not

prescriptive (EA, 1998). Instead, the methodology was merely an aid in the process of

determining the BPEO and was not meant to replace expert judgement. The

methodology contains guidance on assessing the costs of abatement options, which

resemble the procedures in the first half of the BATNEEC report. However, there is no

reference to economic impact, affordability or cost of products tests. Instead, the aim is

to compare abatement options in terms of: a) total annualised costs; b) incremental costs

compared to incremental environmental effects; and c) incremental costs compared to

the option with the greatest environmental effects. The BPEO is then:

‘.... the option which provides the most benefit for least damage to the environment as a

whole, in the long term as who well as the short term, at a cost that is not excessive.... In a

practical sense the option which is the BPEO could be regarded as the “break point” where

the marginal costs of further reductions in pollution potential start to rise significantly.......

By reference to this methodology and by the application of professional judgement, the

Agency beliefs that operators should be able to identify and justify the BPEO....’ (EA, 1998,

p32).

Hence, the document concerns itself solely with comparing environmental impacts in

different media and assessing abatement cost curves. The BPEO is determined by

combining the results with professional judgement, focusing in particular on breakpoints

in the cost curve. But despite the reference to excessive costs, BPEO is not synonymous

with BATNEEC. While the BPEO methodology provides important guidance on the

cross-media comparison of environmental impacts and on the evaluation of abatement

costs, it has nothing to say on affordability. To the extent that BATNEEC requires

consideration of affordability in addition to consideration of cost/benefits, the BPEO

methodology only addresses a portion of the problem. In support of this, document

states that the methodology is to be complemented by other work, including the

provision of economic information on industry sectors in the revised Guidance Notes.

The BPEO methodology now sits alongside the Practical Guide and the relevant

Guidance Note as being important reference sources for individual authorisation

19

decisions. However, the methodology is complex10 and it’s use has largely been

confined to new plant, or major modifications to existing plant, and to those processes

which have multi-media impacts. It is not used for the majority of authorisation

decisions, where negotiation and expert judgement continue to play a more important

role. Also, while the guidance on assessing abatement costs is undoubtedly useful, there

is still a gap on assessing affordability.

BATNEEC IN THE REVISED IPC GUIDANCE NOTES

The IPC Guidance Notes provide guidance to field Inspectors on the processes used in

different sectors and the emission standards and abatement techniques which should be

taken into account when assessing individual applications. The Notes carry no statutory

authority and are merely a ‘...material consideration to be taken into account’ in

determining individual authorisations (DoE, 1997).

The first series of Guidance Notes were published six months prior to the beginning of

the application period for each process type and were based on consultants’ studies of

each sector, known as BAT reviews (Smith, 1997, p140-146). The original intention

was to revise the Guidance Notes every four years, although this timetable has

frequently slipped. The ‘second series’ notes began appearing in 1995. Future Notes

will be linked to the BREFs being developed under IPPC11.

As Smith has demonstrated, the consultants conducting the original BAT reviews lacked

detailed information on industrial processes, environmental emissions and abatement

options (Smith, 1997, p140-146). While they were reliant on industry to supply that

information, they lacked the legal resources to obtain it. Furthermore, industry itself

frequently lacked the required information owing to inadequate monitoring of

environmental emissions. The result was that the first Notes did not contain the simple

10 The revisions currently underway to the methodology should reduce this problem(Maleham et al, 2000).11 Full details on the guidance being produced by the Agency is available on theAgency website at: http://www.environment-agency.gov.uk/epns/package.html.

20

presentation of abatement options, environmental performance and costs that HMIP

desired (Smith, 1997, p145). Instead, they contained qualitative descriptions of process

operations and abatement techniques, with relatively few quantitative standards. Those

few standards that were included were based on previous regulations, individual

Inspector experience or similar sources. Economic information on abatement costs or

the ability of the sector to afford those costs was entirely absent.

The wording of the first few Notes implied that quantitative standards and upgrading

timetables were mandatory (HMIP, 1991b). This prescriptiveness was heavily criticised

by industry and was difficult to defend given the wording of EPA90 (Smith, 1997,

p146-7). The subsequent history of the Guidance Notes has been one of retreating from

such prescriptiveness and increasing the emphasis on site level negotiation of standards.

This applies as much to new plant as to the upgrading of existing plant. Thus, second

series Notes contain the following caveats:

[New plant] ‘....The concepts of BATNEEC and BPEO expressed in the EPA90 and

associated Regulations are site specific. This Note cannot take into account such site-

specific considerations. Thus,.....the benchmarks should not be applied as uniform release

limits. They are indicative, but not prescriptive, for new processes.’ (EA, 1996a)

[Existing plant] ‘....Whilst it may be possible to make improvements to existing processes

using techniques..... the state and design of some existing plant may prevent operators from

achieving the release levels given in this Note, even with improvements......Improvement

plans are a site specific issue therefore no target dates are included in this Note.’ (EA, 1996a)

[Quantitative standards] ‘..The levels given are achievable release levels and are not emission

limits’ (EA, 1996a)

While the second series Notes emphasised the importance of site-level negotiation, they

also began to include economic information to assist Inspectors in determining

excessive costs. The Petroleum Process Guidance Note was one of the first to be

revised and HMIP employed consultants to evaluate the economic implications of

various abatement options (ERM, 1994). It was expected that this would lead to

guidance on affordability in the Note, or that the study would be published as an annex

21

to the Note (ENDS, 1995b). In the event neither occurred, due to dissatisfaction within

HMIP over the contents of the study and concern about the reaction of the petroleum

industry12. As a consequence, the Note was published without any reference to

economics.

Despite this experience, the newly formed Agency persisted in seeking improved

economic information, and the November 1996 Guidance Note on Incineration was the

first to include a section on financial implications (EA, 1996b). This was based on BAT

study of the sector (EA, 1995) and included guidance on the state of the industry and the

cost of different abatement options. The financial section takes up only two pages of a

70 page document and provides relatively little numerical guidance. But it reiterates

commitments to both environmental cost/benefit analysis and sectoral affordability, and

indicates that an assessment of product markets is a necessary part of a BATNEEC

judgement:

..... there are two elements to the ability of a representative operator in any industry to bear

extra abatement costs. One relates to the financial resources typically available for capital

expenditure..... The other depends on the extent to which costs can be passed on to

customers, passed back to suppliers, or absorbed by lower returns within the industry.’ (EA,

1996b)

The reaction of industry to these first tentative attempts at financial guidance was

hostile. The Energy from Waste Association (EWA) said the assessment was

complacent, simplistic and incomplete (ENDS, 1996a). EWA disputed HMIP’s

conclusion that, because environmental controls amount to only 15% of capital costs,

regulation was unlikely to inhibit incineration in favour of landfill. EWA argued that

this did not take into account plant size, type of ownership and operating costs. This

was one of a number of comments that appeared to misunderstand the meaning of

sectoral affordability. For example, the Water Services Association (WSA) argued that:

12 Interview with Agency employee, November 1999.

22

‘...BATNEEC should be about value for money in terms of environmental improvement - not

whether a particular industry can afford to pay.....The issue as to whether the water industry

is excessively profitable is one for OFWAT13, not HMIP’ (quoted in ENDS, 1996a).

The WSA represented a profitable industry that was trying to avoid extensive

environmental regulation ‘just because it could afford it’. The WSA preferred a sole

reliance on environmental cost/benefit analysis, in contrast to the EWA who wanted

individual firm affordability to be considered. The scope for confusion was considerable

given that, on the one hand, the Note stated that BATNEEC was site specific, while on

the other hand it asserted the importance of sectoral affordability.

The same pattern of hostile industry reaction to relatively limited guidance on

affordability was repeated for subsequent Notes. Also apparent was the difficulty of

obtaining sufficient information with which to evaluate affordability. For example, the

Guidance Note on lime kilns described problems of overcapacity and threats from

imports in the industry, but was unable to put a figure on the level of investment which a

typical operator could afford. Instead, it concluded that: ‘in general.....the industry

should be able to afford to improve its overall environmental performance’ (EA, 1996a).

The most recent updates to Guidance Notes were in 1999, before UK guidance became

explicitly linked to the BREFs under IPPC. The 1999 Notes include more coverage of

economic issues, but this is still patchy and largely non-quantitative. For example, the

Guidance Note on Large-volume organic chemicals emphasises that, owing to site

specific factors and the ‘variation in the business background to different production

processes’, it is not possible to provide quantitative guidance on excessive costs (EA,

1999). Similarly, the first Note to be linked to the BREFs contains only one page of

economic information, confined to rough estimates of abatement costs for a subset of

techniques (EA, 2000)

The conclusion we can draw is that the evolution of the Guidance Notes reflects two,

partially contradictory trends. The first is a retreat away from prescriptiveness and an

13 OFWAT is the economic regulator for the privatised water industry in the UK.

23

emphasis on site-level negotiation of standards. The second is an attempt to introduce

more economic information, both to inform Inspectors about the economics of

abatement options and to encourage the use of sectoral affordability as a benchmark.

Economic information is still very limited in the majority of Notes and is very much

secondary to the technical description of industry processes and abatement equipment.

While the text of the Notes acknowledges that the determination of affordability implies

assessing the ability to of a sector to pass on costs, the information provided is never

sufficient to achieve this. While this is largely due to the inherent difficulties of

economic analysis and of obtaining economic information, it also reflects a continuing

bias within the Agency towards expert judgement by technologists rather than formal

methods of economic analysis. This in turn has influenced the Agency’s spending

priorities in commissioning BAT studies and consequently the content of the subsequent

Notes.

IPPC: FROM BATNEEC TO BAT

IPPC is likely to have less impact in the UK than in other Member States due to the

similarities between IPPC requirements and the existing regime (Skea & Smith, 1997).

Nevertheless, the introduction of IPPC has required new legislation and stimulated a

variety of initiatives.

The definition of BAT under IPPC effectively subsumes both BATNEEC and BPEO.

Instead of the NEEC qualification, BAT includes economic considerations in it’s

definition of ‘available’:

‘... developed on a scale which allows implementation in the relevant industrial sector, under

economically and technically viable conditions, taking into consideration the costs and

advantages, whether or not the techniques are used or produced inside the Member State in

question, as long as they are reasonably accessible to the operator’ (CEC, 1996)

Here, ‘costs and advantages’ can be related to what we have termed environmental cost-

benefit analysis, while ‘economically and technically viable conditions’ can be related to

24

sectoral affordability (Gislev, 2000). The following quote from the Head of the

European IPPC Bureau confirms this interpretation:

‘Implementation under economically viable conditions seems to imply, amongst other things,

some sort of ability of the operator to afford the technique......For the former, we may want a

cost per unit of product.....However, the Directive definition of “available” does not seem to

require that the technique has to be economically and technically viable for every installation

in order to be economically and technically viable for the sector.’ (Litten, 2000)

Hence, contrary to the statements made by the DETR during consultation on

implementing the Directive, IPPC does not imply the abandonment of sectoral

affordability. This is acknowledged in the first UK Guidance Note under IPPC, which

makes reference to affordability:

‘At this national level, techniques which are considered to be BAT..... should normally be

affordable without making the sector as a whole uncompetitive either on a European basis or

world-wide’ (EA, 2000)

While this seems reasonable, it means that the practical difficulties of assessing

affordability are carried over into the implementation of IPPC. As with IPC, the

guidance to date has been dominated by discussion of abatement techniques. The first

Guidance Note under IPPC relies heavily on the corresponding BREF and neither

document gives any useful guidance on determining affordability (EA, 2000; CEC,

2000). Also, the reliance on expert judgement seems to be given even greater emphasis

than before. Thus, in a paper describing proposed revisions to the BPEO methodology,

Maleham et al note:

‘...the variability between one situation and another and the uncertainties involved led us to

consider replacing (the Integrated Environmental Index) with a final step of “expert

judgement” to decide how to balance the various, individually quantified impacts and costs’

(Maleham et al, 2000, p8).

At the same time, the Agency has begun some much needed initiatives to improve the

level of economic information available to Inspectors. For example, a pilot cost database

is being developed for use in benchmarking, which includes a full breakdown of cost

25

components, together with qualitative contextual information to ensure its effective use

(Pollard, 2000).

SUMMARY AND CONCLUSIONS

Framework concepts such as BATNEEC cannot be reduced to simple rules. Instead,

their meaning must be interpreted by the regulator at a sector or site level in the context

of severe resource constraints and endemic information asymmetry. The ten year history

of applying BATNEEC in the UK has generated valuable experience but some key

questions remain unresolved. These include:

• how can both environmental cost benefit analysis and sectoral affordability beoperationalised in an effective manner?

• what should be the balance between these approaches in regulatory decision-making?• what should be the role of formal analytical techniques, as compared to expert

judgement?

A tension is apparent between public pronouncements, such as the proposed

‘abandonment’ of sectoral affordability under IPPC, and the realities of site level

implementation. Inspectors are not trained in economic analysis and are severely lacking

in suitable guidance on both the cost of abatement options and the economic situation of

industrial sectors. Most regulatory decision-making pays little attention to sectoral

affordability and assesses abatement costs and environmental benefits in a relatively

informal manner. While the rationale for decisions is often hard to assess, it seems likely

that an implicit criteria of individual firm affordability has frequently played a decisive

role.

The introduction of IPPC does not substantially alter the nature of these problems.

However, the activities associated with implementing IPCC offer an opportunity to

address the issues in a more robust way. Recent developments that may assist in this

include:

• the process of developing the BAT Reference Notes at an EU level (Emmott et al,2000);

• the proposed revisions to the BPEO methodology, which aim to make it moreaccessible and ensure it’s more widespread use (Maleham et al, 2000);

• the increasing inclusion of economic information in the UK Guidance Notes;

26

• the recent attempts at economic training for Inspectors;• the moves to strengthen the role of individual sector groups within the Agency

(Sorrell, 2001); and• the development of a database on abatement technologies and costs (Pollard, 2000).

While there is no space here to provide detailed recommendations on the way forward,

three broad principles may be suggested.

First, since the process of environmental appraisal is inherently subjective, decision-

making procedures must be transparent and, where possible, open to participation. At

present, too much reliance is placed on ‘expert judgement’, which is simply shorthand

for the exercise of value judgement by a professional (Hartnell, 1994). Alternative

decision-making procedures are available which include subjective weighting scales for

different types of environmental impact, together with the use of sensitivity analyses

(Stirling, 1997b). These should be considered in any further development of the BPEO

(now BAT) methodology. Similarly, experience has shown that the public information

registers are a passive and ineffective means of encouraging participation. While

extensive public consultation is clearly inappropriate for the minutiae of site-level

decision-making, there should be scope for more active participation in the development

of assessment tools, guidance notes or major process applications.

Second, there should be provision of more extensive information to Inspectors on

economic assessments, abatement costs and affordability. While acknowledging the

inherent difficulties of economic appraisal, the total absence of such information from

much regulatory guidance does not seem defensible. Information asymmetry cannot be

avoided, but it’s consequences can be ameliorated by the provision of independent

information where possible.

Finally, a serious attempt should be made to improve the consistency of regulation, both

within sectors and between sectors. Empirical studies suggest that the present context of

site specific determinations leads to considerable inconsistency in regulatory

requirements between plants in the same sector (Sorrell, 2001). Furthermore, the

absence of centralised records, the lack of publicly available cost information and the

27

diversity of means by which regulatory requirements are expressed14, all make the

comparative evaluation of the stringency and cost effectiveness of regulation very

difficult. While site specific considerations will always lead to differences in

requirements, efforts to achieve consistency will help counter the suspicion that

individual firm affordability continues to play the dominant role.

ACKNOWLEDGEMENTS

Research used in this paper formed part of the ‘Technology & Environmental Policy

(TEP)’ project (PL 970779), funded by DGXII of the European Commission under the

Framework IV Environment and Climate Program15. The author would like to thank

the many individuals from the Environment Agency and regulated companies who gave

up valuable time to be interviewed for this project. Thanks also to Ronan Palmer and

Tom Gameson for comments on an earlier version of this paper. The usual disclaimers

apply.

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