International Institute For Caspian Studies
 

 

 

 


Environmental Protection in the Caspian Sea:
Policy Constraints and Prescriptions

By Rachel Neville

Introduction
The Caspian is an inland sea bordered by Azerbaijan, Kazakhstan, Turkmenistan, the Russian Federation and the Islamic Republic of Iran. After the fall of the Soviet Union the Caspianís potential oil reserves caught international attention and the new states surrounding the sea found themselves courted by multi-national oil companies and western diplomats. Estimates of the Caspianís oil wealth has varied, but the highest speculate that the region holds reserves second or third to that of the Persian Gulf, almost all of it located offshore[1].

Environmentalists fear the Caspianís ecosystem will be sacrificed in favor of politics and energy wealth. This paper will explore the constraints of environmental protection in the Caspian and suggest possible methods to achieve some measure of balance between oil production and the environment. This paper proposes that given the constraints inherent in setting effective environmental policy in the Caspian and the nature of the environmental impacts of the oil industry, a certain amount of command and control regulation is warranted. There is room for market-based environmental regulations in the Caspian, however non-governmental organizations would have to be an integral part of any market-based system due to their ability to use moral suasion to influence the behavior of firms.

Political Constraints to Environmental Protection

The Caspianís oil wealth has left lasting impressions on visitors and inhabitants since ancient times. Zoroastrians worshiped eternal flames that spouted from fissures in the earth, fueled by natural gas. In his description of the area, Marco Polo mentioned hearing of oil seepages when he passed through the region. In the late 1800's first the Tsar and then private entrepreneurs exploited the oil of Azerbaijan [2]. The Caspian Sea at this time was not a large part of the picture. Offshore drilling technology was a long way off and there was still much oil to be exploited under the earth. The Soviets nationalized the oil industry after the 1917 revolution and during the next seventy years oil continued to flow, both onshore and off. The Soviets in their industrialization campaign developed a natural gas industry in Turkmenistan and a few oilfields inland in the republic of Kazakhstan.

When the Soviet Union fell apart in 1992, suddenly five nations bordered the Caspian instead of two. Whereas before the Islamic Republic of Iran and the Soviet Union shared the seaís riches, three more nations now want their share. The new nations of Azerbaijan, Turkmenistan and Kazakhstan all eagerly eye the Caspian and its hydrocarbon riches as their ticket out of difficult economic times. These nations also see their possession of such a valuable export as insurance of independence from Russia [3]. Russia and Iran, also understanding the strategic and economic importance of petroleum look towards the Caspian as leverage against the West and a way to reassert influence in the Central Asian region [4]. The West believes the Caspianís oil reserves will release them from dependence on the Persian Gulf and hope a strong western influence will hinder Russia and Iran from controlling the regionís energy resources [5]. The politics of the region and the presence of so many players complicates collective policy-making, especially in the realm of the environment. In the Caspian as elsewhere, environmental quality questions conflict with economic development. However in the Caspian this conflict is intensified as economic development is also linked to sovereignty, independence and control over important energy resources.

Small Sea or Large Lake?

Another political aspect complicating environmental policy in the Caspian region is the disputed status of the Caspian Sea. The Caspian is saline and large; leading people to believe it could be classified as a sea and the international laws that affect seas would then also affect the Caspian. The environmental implications of this classification are that as a sea, the Caspian would be divided into separate territories for each country, making coordination difficult. However, because it is landlocked and there are no outlets to open water, the case could be made that the Caspian is a large and saline lake. As a lake, the five littoral states would have to share the lake as a common good [6]. This might eliminate free-rider problems, since all the nations would essentially own the lake. However, it is difficult to imagine that given the political climate in the region, classifying the Caspian as a Sea would eliminate territorial disputes. Whatever the outcome, the disputed status complicates any transboundary environmental actions and effective international environmental policy will depend upon the Caspianís disputed status [7].

Pipeline Politics

Potential reserves are not worth very much if the oil cannot get to market. Currently only one pipeline carries oil from the Caspian to the Black Sea. Oil companies have secured political support and financial backing for a new pipeline, however the pipelineís route is fraught with politics and these, in turn have environmental implications.

The United States has publicly stated that it will not provide any financial backing for any proposed pipeline routed south through Iran and is campaigning to convince private backers that alternate routes are more viable. One of these routes includes a pipeline that would run across the Caspian Sea itself. The large expanses of water a pipeline would have to cross, 310 kilometers, and the threat of earthquakes seem to create a recipe for an environmental disaster [8].

A pipeline through Russia is also unacceptable because the US does not want Russia, a current but unpredictable ally, to control the Caspianís oil resources [9]. The other Caspian countries feel the same way; preferring to curry favor with the US in pipeline politics, rather than give Russia control over their prized export [10].

However the other alternatives are less than optimal. The route favored by the US would run through the Caucuses and Turkey, ending in Ceyhan on the Mediterranean coast. Turkey favors this option because the pipeline would bring them revenues and because oil in this pipeline would go straight to the Mediterranean and not be tankered through the Bosporus Straits [11]. Spills and accidents not only affect the environment, but the population of Turkeyís largest city. Several oil spills have already occurred in the Bosporus and one caught on fire and burned for five days [12].

The Baku-Ceyhan route has its problems because it runs through or near nature preserves. Additionally, any type of infrastructure could be a target for sabotage during the ethnic conflagrations that periodically arise in the area. The pipelines also suffer from illegal tapping, when residents poke holes in the pipelines to obtain free fuel [13]. All of the routes appear to be equal in their environmental degradation capacity. However, building a pipeline across the Caspian Sea due to politics and not environmental concerns, leaves questions about the Caspian nationsí commitment to fully assessing the environmental impacts of the oil industry in the Caspian and setting appropriate environmental policy in response.

Environmental Concerns

Offshore drilling impacts the environment at every stage of its production. Seismic testing, which involves large undersea explosions, can injure or kill marine life. Pollution from by-products of the drilling process and accidental oil spills can also hurt or kill marine life and introduce toxins into the food supply of animals and humans. Abandoned infrastructure and air pollution from gas flaring are other impacts of the drilling process. Environmental groups also point out that as more oil is extracted and used, the threats of global warming become more extreme [14].

Several features of the Caspian Sea make the sea especially sensitive to environmental impacts from oil drilling and further complicate environmental policy-making. The "other black gold"ócaviar bearing sturgeon, biodiversity issues and the peculiar natural characteristics of the sea all have an important implications for any regional environmental policies.

The Other Black Gold

Ninety percent of the worldís sturgeon catch, from which most of the worldís black caviar is produced, is from the Caspian [15]. Caviar was and continues to be a major export and source of domestic income for all the Caspian states. Poaching, over fishing and pollution are causing sturgeon populations to decline. Local environmental groups fear that expanding oil drilling activities in the area will only worsen the situation. They also point out that while sturgeon are a renewable resource that lasts forever if harvested properly, the oil field will eventually run dry [16].

Sturgeon health and survival are not just purely economic or aesthetic concerns; there are public health concerns as well. Residents who live along the shores of the Caspian regularly eat sturgeon and other fish from the sea. In the case of sturgeon, pollutants can be especially dangerous. Sturgeon can live to be up to 100 years old. They are also bottom feeders and the combination of these characteristics means that toxins can build up in their systems for years before humans eat them. All the toxins are then transferred to human bloodstreams after ingestion [17].

Confined Waters

Because the Caspian is non-tidal and confined, the seaís ability to absorb pollution is less than that of an open ocean. Additionally, oil spills can remain localized, becoming a greater threat to marine life than if they were broken up and dispersed by a rough sea. These make certain aspects of offshore drilling in the Caspian unique. Oil companies need to be careful about using data from the North Sea or other less-confined seas in environmental impact assessments. Environmental groups call for a lower level of pollution than in other offshore drilling areas in order to protect the seaís fish and marine life from what they believe will be higher concentrations of pollutants [18].

Biodiversity

The Caspian is home to a great variety of rare and unique species. A subspecies of seal found only in the Caspian and the largest bird of prey in Europe the rare white-tailed sea eagle, make the Caspian their home. The northern wetlands area is home to 256 bird species, 58 fish species and 33 mammal species. The sea also provides wintering grounds for rare visiting birds such as the flamingo and the purple swamp hen [19].

The Caspian Water Level Puzzle

An environmental concern peculiar to the Caspian is its mysterious rising and falling sea level. Between 1930 and 1977, the Caspianís water level fell by 2.5 to 3 meters. After 1977, the water level began to rise again and since then have risen by 2.5 meters [20]. Scientists have so far been unable to pinpoint the cause of the changing sea level. The ecological effects however are clear. The rising waters have flooded many industrial projects, sweeping their pollution into the sea. The sea level has also added stress to shorebird populations by submerging their shallow wetland habitat. Any new industrial project needs to take into account the rising sea level and possible reversal when designing infrastructure [21].

Seismic Considerations

The area encompassing the Black Sea and the Caspian, from Turkeyís western shores to the Turkmen deserts, is an earthquake zone. Devastating earthquakes in Turkmenistan in the 1950s, Armenia and Iran in the 1980's and the most recent earthquake in Turkey in the August of 1999 prove how vulnerable the area is to earthquakes. Oil transferring stations, underwater and aboveground pipelines and drilling platforms themselves are all vulnerable to earthquake damage.

Comparative Advantage and International Finance Institutions

The comparative advantage arguments proposing that a country should exploit and export the goods that it is best at producing, may seem to apply to the Caspian states. However, the Caspian states are actually ill equipped for oil production. The Caspian states do not have the infrastructure to make oil profitable. As described above, few pipelines lead out of the Caspian and the few that exist do not have the carrying capacity for huge potential volumes of oil predicted to begin flowing out of the Caspian.

The US Agency for International Development has contributed to the Caspian oil industry with specific technical assistance directed to the oil industry and more general assistance aimed at commercial and governmental structures to entice foreign investment into the region. Other publicly funded international organizations working in the Caspian include the Overseas Private Investment Corps, the European Bank for Reconstruction and Development, the Export-Import Bank and the Trade Development Agency. All of these agencies, under the umbrella of the US State Department have actively lobbied firms and businesses to locate to the Caspian [22].

While a few companies may have ventured into the area, it is likely that there would not be as many companies as there are without the enticements of international finance institutions. Because the West has strategic interests in the area, a market is being created that might not otherwise be there. Some, if not all of the Caspian countries, may actually not have a comparative advantage in oil extraction. This has environmental policy setting implications because the true comparative advantages of these countries may be being ignored in favor of strategic interests. The true cost of externalities generated by the oil industry may be ignored, leading to ineffective environmental regulations.

International and Domestic Legacies of Environmental Degradation

Local and international environmental groups point out that the Caspianís ecosystem has already suffered decades of abuse from the Soviets and is fragile and in need of recovery; not additional stress [23]. Decades of lax environmental controls have dumped dangerous toxins into the Volga River, the main source of the Caspian and into the sea itself. Scientists estimate that each year an average of 60,000 metric tons of petroleum byproducts, 24,000 tons of sulfites, 400,000 tons of chlorine and 25,000 tons of chlorine are dumped into the sea. Concentrations of oil and phenols in the northern sea are four to six times higher than the maximum recommended standards. Around Baku, where oil drilling and industrialization have been happening for almost a century, these pollutants are ten to sixteen times higher [24].

Local environmental groups fear that domestically, the wanton destruction of the Caspianís natural treasures has already begun. They point to a deal signed between the Kazakhstani government and a major oil consortium to explore for oil in a nature preserve as evidence of the Caspian governmentsí environmental apathy [25].

Some analysts propose that environmentalists should welcome western oil companies to the Caspian. These companies with their environmentally safer technology will be an improvement over the Soviet oil industry [26]. This proposition however, is flawed for two reasons. The issue is that more of the Caspian is being opened up for oil exploration than ever before and the environmental impacts of new projects may irrevocably harm the regionís already damaged ecosystem.

Furthermore, the environmental records of western oil companies in other areas of the world give environmentalists good reason to be concerned that these new players will be no better than the Soviets. Examples of severe environmental degradation and human rights abuses from oil companies in league with powerful despots abound. In Nigeria and Columbia, Royal Dutch Shell and British Petroleum have been accused of actually hiring assassins to murder people opposed to their actions [27]. Indigenous groups from Ecuador and refugees from Myanmar are currently attempting to sue Texaco and Unocal in US courts for environmental neglect and human rights abuses [28]. These examples illustrate how oil companies have routinely ignored ecological and human concerns in their quest for oil.

Costs of Externalities in the Caspian

Peculiar environmental and political features of the Caspian region are not the only factors that make setting environmental policy difficult. Due to certain aspects of the oil industry and the Caspian nations, the cost of externalities borne by society have the potential to be artificially lowered, in other words ignored by policy-makers, in return for the economic benefits of oil. The central tenet of the theory behind market-based environmental policies is that once policy-makers have found an acceptable level of pollution, they can either employ taxes or tradable pollution permits so that firms can set their own abatement costs [29]. These strategies equalize abatement costs across firms, allowing each firm to choose the most cost-effective method of environmental protection. However, in a situation where oil companies are being encouraged to drill and pipelines are placed according to political concerns and not cost or environmental ones, it is doubtful that policy makers will choose an acceptable level of environmental quality that accurately reflects the costs of externalities.

Societal Benefits

The benefits of oil exploration for the host country are difficult to ascertain. Patterns of corruption are common in states largely dependent on oil revenues. An economy too dependent on oil can stagger according to price shifts in oil and other more sustainable sectors of economic development are often largely ignored in favor of oil exports [30]. Oil profits seem to stay in the hands of the leaders. Despite continuing oil production, areas outside the capitals go without heat in the winter and without hot water all year round.

Coastal communities, with the exception of Baku which is a capital city, are generally poorer than the capitals inland [31]. This is disturbing since it is these communities who will be bearing the greatest cost of the externality. Furthermore, it is the coastal communities who depend on sturgeon for their livelihoods, a livelihood that could be diminished by the negative effects of the oil industry.

Oil revenues in some countries have been spent on extravagant projects that paid out few economic benefits for citizens. For instance, the president of Kazakhstan spent enormous sums of hard currency building a new capital, while the elderly went without their pensions for months. The president for life in Turkmenistan has squandered much of the countryís treasury on extravagant monuments to himself. The latest bears an image of him in gold that slowly rotates so that he always faces the sun. Meanwhile his country is still desperately poor [32].

These examples show that NGOs, as representatives of these coastal communities will be essential in creating environmental policy and ensuring that all players understand the full impact of externalities.

 

Environmental Effects of International Finance Institutions.

Although the international finance institutions that are currently financing projects in the Caspian have all publicly pledged themselves to adhering to environmental standards and all have environmental standards written into their codes of conduct, the performance of these institutions has been mixed. A critique of an environmental impact assessment on oil exploration activities in the Azeri portion of the sea challenges the European Bank of Reconstruction and Development, a major funder of the project, to up its environmental standards to those of the US and higher, considering the unique environmental demands of a confined sea [33].

Another publicly funded project; an oil transfer station where oil is transferred from pipeline to tanker is also under fire from international environmental groups. According to local environmental groups, several oil spills occurred at the facility only a few days before celebrations marking its official opening. Local environmental groups also contend that the EBRD has violated its own rules in allowing the facility to open without an approved Oil Spill Response Plan [34].

Public Opinion and Environmental Protection

Despite their sketchy environmental record, it is possible for local communities to change the behavior of these institutions, and it may be advantageous for NGOs that these organizations are present. The financial backing of public institutions is often accompanied by requirements for environmental impact assessments and adherence to international environmental standards. NGOs can then hold these institutions accountable to their own policies. Environmental decisions and documents, such as environmental impact assessments and emergency response plans are often made more transparent with these public organizations that with private companies.

NGOs are also finding success in using moral suasion to pressure oil companies into following proper environmental procedures. In 1995, Pressure from environmental NGOs forced Shell UK Exploration and Production to change its plans to abandon an old North Sea oil rig at sea and spend a considerable sum disassembling it and disposing of it elsewhere [35]. Companies are also realizing that a bad image can cost them money. After Shellís abuses in Nigeria came to light, a group of its stockholders adopted a special resolution calling for an improvement in environmental accountability and business ethics. These stockholders argued that a bad public image was bad for business [36]. Public opinion is a powerful weapon to use against oil companies and as a tool to monitor international finance institutions and it is crucial that local environmental NGOs exploit this advantage they have if any sort of environmental regulation is to work in the Caspian.

It can be argued that NGOs in fact have more leverage with multi-national corporations and international finance institutions than with their own governments. The Caspian governments all have less than stellar democracies, and although the idea of NGOs is beginning to take root in the Caspian states, NGOs still have some way to go before they are a full player in the environmental policy-making process[37]. However, because NGOs can embarrass multi-national corporations into changing policies it almost makes more sense for them to work directly with multi-nationals than depend on their governments for enforcement.

There are currently fifty NGOs active in the five Caspian countries [38]. Trans-Caspian NGO activity in the Caspian so far has been limited, but it promises to increase. A recent conference in Baku sponsored by the Caspian Environment Program, the US Agency for International Development and the Institute for Sustainable Action and Renewal in Eurasia, brought together NGOs from all over the region. NGO representatives met together to discuss the impacts of transnational corporations and strategies to work with them.

Choices of Environmental Regulations: Command and Control vs. Market Based Incentives

Command and Control; Efficiency, Effectiveness and Fairness

Economists generally perceive command and control techniques as inefficient. Low levels of pollution are achieved, but at a very high cost. For this reason, they are regarded to be inefficient in some cases. Efficiency in this case is defined as achieving the greatest level of pollution abatement at the lowest cost to firms and society. Additionally, regulations do not provide any incentive to reduce pollution levels beyond what the levels set by the government [39]. Other regulations such as complete bans on a substance can have the opposite effect of the intended ban. Sharp reductions in supply force the price higher, encouraging a black market to develop.

Despite these complications however, there are some places where command and control policies are the best option. During emergencies or accidents when abatement costs become clean-up costs and pollution thresholds are exceeded many times over, norms of efficiency do not apply [40]. An example of a situation that applies to the Caspian Sea would be an accidental oil spill. Oil spills would be particularly dangerous in the Caspian because it is an enclosed sea. They are in fact, so destructive in any body of water that an argument could be made for command and control regulations to guard against them. An aspect of command and control techniques, namely technology standards should be employed in order to prevent against accidents. However, they should be employed in the most efficient manner possible.

Examples of technology specifications range from requiring certain scrubbers on smokestacks to requiring that shrimp harvesters use turtle-safe shrimp traps. In the oil industry there are a few environmental "best practices" that environmental groups contend should be required in the Caspian Sea. One of these is a method known as "downhole disposal" to dispose of produced waters; a byproduct of oil drilling that is a mixture of crude oil and water. It is certainly easier and cheaper for oil companies to jettison this water out to sea. However environmentalists and the US Environmental Protection Agency consider re-injecting this mixture back underneath the earth as a more environmentally safe disposal method [41].

Another method recommended by environmentalists is the use of water-based drilling muds that are less toxic than synthetic based drilling muds. Another related pollution threat comes from the use of refined oil as a lubricant during drilling. Environmentalists encourage the use of non-toxic vegetable oil, although vegetable oil does not work as well or last as long [42]. A last technological specification would require double-hulled tankers in the Black and Caspian [43].

Technological requirements are attractive environmental protection methods because they force firms to prevent pollution before damage occurs instead of paying fines after the fact. From an economic viewpoint, however, because the costs of installing and using such technologies vary among firms, this solution does not provide the most environmental protection at the least abatement cost. In most cases in the Caspian, the infrastructure will be entirely new and will have to be built anew, allowing firms the benefit of not having to retrofit existing infrastructure with new technology. Nevertheless, such requirements could be considered economically inefficient because they do not provide any incentive to develop new and cleaner technology [44].

There are several arguments for requiring that oil companies jettison less produced water or re-inject it, use vegetable based oils and water-based drilling muds and build infrastructure to withstand earthquakes and flooding. Societyís cost of bearing the externalities associated with the higher concentrations of pollutants due to the confined nature of the sea are quite high in the Caspian. The necessity of protecting the seaís other natural resource, sturgeon make strong pollution prevention policy favorable.

A solution to the seemingly adversarial goals of ensuring a certain amount of environmental protection while still providing incentives for firms to develop new technologies, is to require that firms reach a certain level of pollution prevention, but allow them the freedom of using their own technologies. For instance, a firm could re-inject produced waters back into the seabed or recycle the waters. The law would specify that produced waters could not be disposed into spawning grounds, and the firm would be responsible for deciding how to achieve this goal at the least cost to them.

It is likely that new and innovative technologies would need to be reviewed by a committee and gain approval before a project began. However, this would imply relatively few transaction costs since firms are usually required to submit environmental impact reports and emergency response projects begin [45].

A similar idea also applies to oil spill prevention. Firms are required to submit emergency response plans to host countries detailing how they will respond to possible accidents and prevent them from happening in the first place. Firms could be allowed to devise their own prevention technology, however the firm would need substantial evidence that the new prevention technology would work.

Political Feasibility

Avoiding accidents and oil spills are profit-maximizing for firms as well as best practices for the environment. Accidents and spills can injure a firmís employees, cause the firm to forego profit, cost a firm money in lawsuits and clean-up and can permanently harm a firmís public image and harm relations with the host government. Proper emergency response plans that require technical details for pollution and accident prevention can meet the needs of both oil companies and environmentalists.

Transaction costs

In cases where projects were still in the planning stages, transaction costs for this policy would be fairly low. Negotiating oil contracts takes several years of hard work and environmental impact statements and emergency response plans are already a component of these negotiations [46]. In cases where projects are already underway, transaction costs could be high. In this case, the government and the international institutions that are financing these projects could contract out to the NGOs to review revised plans and make recommendations. Firms could then install technologies that were the most cost-effective for them. Enforcement would entail ensuring that the oil companies were true to their word and that they were utilizing the technologies promised.

Free-Rider Problem

Because each country is responsible for negotiating oil contracts on its part of the Caspian, there is the possibility that some countries may not require firms to avoid certain levels of pollution or not give emergency response plans the proper scrutiny. Countries may be so eager for foreign investment that they will require little of oil companies. The lack of evidence for environmental measures in firm location notwithstanding, it is unlikely that environmental concerns would drive oil companies away [47]. The location and size of hydrocarbon resources are a much more important factor in oil company location decisions.

Certain characteristics of the Caspian situation could be utilized to combat the free-rider problem. Many oil companies working in the Caspian have activities in more than one country. NGOs working together internationally on behalf of the sea instead of on behalf of their countries could use their power with the public to embarrass companies that are using a better environmental method in one country to apply the same technology in the second countr[48]. International finance institutions, who also require environmental impact reports and emergency response plans could also insist on the same environmental standards everywhere (for example that no project backed by the EBRD would spew effluent into sturgeon spawning grounds anywhere in the Caspian). This would somewhat alleviate the free-rider problem.

Taxes and Marketable Pollution Permits

Many economists view polluter taxes and marketable pollution permits as the most economically efficient method of environmental protection. Pollution taxes, where polluters pay taxes equal to the amount of additional pollution they produce, have an important drawback. Governments must also decide what level of pollution is tolerable and affix taxes so that firms are provided an incentive to not pollute above that level [49]. This can be a tricky business, especially when dealing with oil pollution in the Caspian.

Oil exploration and drilling is such a capital intensive industry, especially in the initial stages, that setting an appropriate tax level would be difficult. Firms often lose money in the initial stages of exploration and drilling so they might attempt to avoid pollution, but as profits increase they would have less incentive to avoid pollution. A government would subsequently have to adjust the level of pollution after the oil began to flow and the companyís costs decreased.

Marketable pollution permits establish a system whereby a controlled number of permits to pollute are released onto the open market, either by auction or lottery. Firms then buy and trade the permits according to their needs. The idea is that those firms whose abatement costs are high can buy more permits and continue their current emission output while firms for whom it will cost relatively little to further cut back emissions can sell their permits. Both types of firms benefit. High abatement cost firms save money because buying permits is less than their pollution costs. Low abatement cost firms save money because reducing emissions costs less than buying the permits. Society also benefits because despite the trading aspects, there are only enough permits to allow a previously designated amount of pollution into the air. In other words, although different firms release different amounts of pollutants, the total amount of pollutants released is the same as if every firm was regulated through the command and control technique [50].

Although marketable pollution permits are efficient, equalize abatement costs with firms and are easier for firms to swallow than traditional command and control techniques, there are still significant transaction costs. Determining the level of pollution to control for is a crucial component of the system that involves science and politics. This is especially true in transboundary situations where countries must voluntarily agree to limit emissions and there is no overarching enforcement authority to impose a program on regulated industries. Obviously, the target level of pollution will affect the overall effectiveness of the program. The level of pollution is only one important component of the initial design. Others include distributing permits and the geography of the system.

The geography of a firmís externalities is difficult to control for in a system that depends on a firmís ability to choose its own best level of abatement. People living next to a firm that pollutes as much as possible will be worse off than the people living next to a firm that sold its permits and pollutes as little as possible. Unfortunately, methods to limit the social costs require restricting the amount of permits that can be traded, decreasing the efficiency and effectiveness of the system[51]. Geography would be a problem in the Caspian. A portion of the Caspian is a national park and sturgeon are more likely to breed in some parts of the Caspian than others [52]. Firms that bought all their permits could wreak considerable damage on the ecosystem depending on where they were located.

Permits can be distributed by auction, lottery or some other scheme. Fairness and equity are important considerations at this stage so that firms begin on a level playing field [53]. Additionally, establishing baselines can be difficult. For instance in the Kyoto protocols, Russiaís baseline was established in 1990, before its entire industrial complex collapsed. By the time the treaty is ratified. Russia will have appeared to reduce emissions and reached its target. It will then have a surplus of pollution permits to trade. This establishment angered other countries, assuming that high emitting countries would then meet their targets by buying permits instead of implementing sensible policies that would actually reduce greenhouse gases [54].

Although a pollution permit system would conceivably reduce pollution at the lowest cost to firms, thereby not hindering development in the Caspian, the high transaction cost of establishing a workable pollution permit trading system is a formidable barrier. The politics of the region and the Caspianís disputed status would make it difficult to hammer out a treaty that actually kept pollution levels low.

For this reason, a pollution permit trading system would have to be established between firms and not countries. As previously stated, many companies working in the Caspian have projects in more than one country. Additionally, because NGOs have a greater ability to use moral suasion with oil companies and international finance institutions, a system where companies traded permits and NGOs monitored them would be more effective than if the Caspian nations themselves traded permits.

While representatives of the Caspian nations would most certainly have to be on such a committee, NGOs would be essential, since their interests in the Caspian are not territorial, but ecosystem wide. The presence of NGO representatives would be essential to supercede the obstacles facing environmental policy-making and to ensure that equilibrium between societyís costs of bearing the externality and abatement costs are the true equilibrium as it relates to the people living near the Caspian, not the higher echelons of power in capital cities.

Conclusion:

The oil industry is a messy business, but it provides an essential ingredient to our daily lives, and until viable energy alternatives are widely used, oil will continue to be a strategic commodity for many countries and oil companies and environmentalists will continue to clash. In the Caspian, it has become clear that oil production will take place. However, the degree to which the environment is harmed due to the oil industry may be under the control of governments and coastal communities. Despite distortions in the region's ability to produce oil, such as lack of access to markets and enticements from international finance organizations, there is hope that a balance between oil and the environment can be achieved.

Non-governmental organizations are an essential part of this balance for three reasons. First, they have the best possibility of helping government understand the true costs of bearing the externalities produced by the oil industry. Second, they are also not bound by the political constraints that bind governments. Therefore there is a better chance that NGOs can work together in a Trans-Caspian environmental program than the Caspian governments can. Third, they have considerable power in using public opinion to change the behavior of oil companies.

An accident or oil spill in the Caspian would severely harm an economic resource of the coastal communities and as an inland sea, the Caspian is more vulnerable to oil spills and pollution. There are also many dangers of the Caspian such as its seismicity and extreme variations in water levels that make the chances of accidents more likely. Therefore, command and control techniques, in the guise of technology specifications, are a valid tool in setting environmental policy. An important aspect of these specifications however, is to provide incentives for firms to develop better technologies. This can be done by setting pollution thresholds and allowing firms to devise their own methods for controlling pollution.

Market-based incentives could also work in the Caspian, however the forces driving policy in the region today make agreement among the Caspian states difficult. Taxes are unadvisable due to the complicated nature of finding an appropriate tax that provides incentives for companies not to pollute. A permit trading system, whereby companies traded permits instead of the Caspian states, would be more feasible. However, in order to ensure success NGOs must be a part of the process.

Endnotes

[1]"Details of the Caspian Sea" Focus Central Asia, Caspian Sea: Review of Oil and People Published with the help of DOEN Dutch Fund: Amsterdam.

[2]Yergin, Daniel The Prize: the Epic Quest for Oil, Money and Power. New York:1992 Touchstone/Simon & Schuster p. 57-59.

[3]Blum, Douglas "The Russian Trade-off: Environment and Development in the Caspian Sea" Journal of Environment and Development Sept 1998 v.7n3 p248-278.

[4]"US Economic and Strategic Interests in the Caspian Sea Region, Policies and Implications". Hearing before the Subcommittee on International Relations U.S. Senate 105th Congress 1st Session Oct 23rd, 1997.

[5] "US Economic and Strategic Interests in the Caspian Sea Region, Policies and Implications".ibid.

[6]Blum, Douglas ibid.

[7] "Memorandum: Perspectives on the Development of the Caspian Region: The NGO Position" Results from the Conference "Strengthening Partnership Among NGOs Working on Environmental Problems of the Caspian Basin" Baku, April 20-23 1999. www.isar.org/isar/caspian/casposition.html

[8] Focus Central Asia: ibid.

[9]"US Economic and Strategic Interests in the Caspian Sea Region, Policies and Implications" ibid.

[10] Blum, Douglas ibid.

[11] Blum, Douglas ibid.

[12] Cox Rory, Norlen, Doug "The Great Ecological Game: Will Caspian Sea Oil Lead to Environmental Disaster? January 1999: The Pacific Environmental Resources Center; www.pacificenvironment.org

[13] Cox, Rory and Norlen, Doug ibid.

[14] Rowell, Andrew "Crude Operators: The Future of the Oil Industry" The Ecologist Vol. 27,NO.3 May/June 1997.

[15] ibid

[16] Zilanov, Vyacheslav K. "Will Oil Destroy Caspianís Unique Ecosystem?" The Current Digest of the Post-Soviet Press Vol.XLIX No.35 (1997) p.8-9

[17] Zilanov, Vyacheslav ibid.

[18] Cox, Rory and Norlen, Doug ibid.

[19] Cox, Rory and Norlen, Doug ibid.

[20] Espenov, P and Mamedov, E Problems of Degradation of the Ecosystem of the Eastern Shore of the Caspian Sea Connected to Oil and Natural Gas Extraction. Conference Papers "Strengthening Partnership Among NGOs Working on Environmental Problems of the Caspian Basin" (Baku, April 20-23 1999) www.isar.org/isar/caspian

[21] Cox, Rory and Norlen, Doug ibid

[22] Cox, Rory and Norlen, Doug ibid

[23] Motavelli, Jim "Black Gold (Caspian Sea Oil Development) E, Nov 1999 v10 i6 p14. and "Memorandum: Perspectives on the Development of the Caspian Region: the NGO Position" Results from the Conference "Strengthening Partnership Among NGOs Working on Environmental Problems of the Caspian Basin" (Baku, April 20-23) www.isar.org/caspian/casposition.html.

[24] Focus Central Asia: ibid

[25] Kushenov, Ibrahim "Kazakhoil Echoes OKIOC" 21st Century August 12, 1999 V.31 No.73

[26] Motavelli, Jim ibid

[27] Rowell, Andrew ibid

[28] "The Oil Flows and the Forest Bleeds" UNESCO Courier April 1999 p12-14 and All Things Considered; National Public Radio Broadcast March 11th, 2,000.

[29] Kahn, James R. The Economic Approach to Environment and Natural Resources, FL: Harcourt Brace and Co, 1995 p.61

[30] Garcelon, Mark ed., Conference Papers "The Geopolitics of Oil, Gas, and Ecology in the Caucasus and Caspian Basin." On Saturday, May 16, 1998: Berkeley Program in Soviet and Post-Soviet Studies. Presentation by Professor Terry Karl .

[31] Motavelli, Jim ibid

[32] Turkmenistanís GDP per capita was $1,630 in 1998. www.odci.gov/cia/publications/factbook/tx.html#econ

[33] Cox Rory and Norlen, Doug ibid.

[34] "Strengthening Partnerships", Conference on the Caspian NGO Letter to the EBRD www.isar.org/isar/caspian/letterEBRD.html

[35] Knott, David "How to Deal with Greens" The Oil and Gas Journal August 18, 1997 v95 n33 p.27

[36] Gao, Zhigou "Environmental Regulation of the Oil and Gas Industries" 1999; The Centre for Energy, Petroleum and Mineral Law and Policy. www.dundee.ac.uk/cepmlp/journal/htmlvol2-11html

[37] Topoleva, Elena"Russian Public Warms to Non-Profits" Give and Take No.4 April 1999 www.isar.org/isar/archive/GT/GT4Topoleva.html

[38] "List of Conference Participants" Strengthening Partnerships among NGOs Working on Environmental Problems in the Caspian Basin www.isar.org/isar/caspian/participants.html

[39] Kahn, James R.ibid.

[40] Kahn, James R. ibid.

[41] Gao, Zhigou ibid

[42] Gao, Zhigou ibid

[43] Cox, Rory and Norlen, Doug ibid

[44] Kahn, James R. ibid.p.64

[45] Gao, Zhigou ibid.

[46] Gao, Zhigou ibid.

[47] Levinson, Arik "Environmental Regulations and Industry Location: International and Domestic Evidence" Freed Trade and Harmonization: Prerequisites to Free Trade? Vol 1. Economic Analysis. Jagdish Baghwati and Robert E. Hudec (eds) MIT Press: 1996

[48] www.mobil.exxon.com www.chevron.com, www.shell.com,www.bpamoco.com

[49] Kahn, James R. ibid. p.72-73

[50] Kahn, James R. ibid. p.73-74

[51] Kahn, James R. ibid. p.76-77

[52] Cox, Rory and Norlen, Doug ibid

[53] Kahn, James R. ibid. p.76

[54] "A Brief Analysis of the Kyoto Protocol" Global Environmental Change Report vol.IX, No. 24 p.3

 

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