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8/9/2019 Policy Interventions to Promote Energy Efficient and Environmentally Sound Technologies in SMI - AIT, Thailand

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Small and Medium scale Industries in Asia:Energy and Environment

Policy Interventions to Promote Energy Efficient andEnvironmentally Sound Technologies

Energy,

Environment,andClimateInter

relation


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Small and Medium scale Industries in Asia:Energy and Environment

Policy Interventions to Promote Energy Efficientand Environmentally Sound Technologies in SM I

PUBLISHED BY

Regional Energy Resources Information Center (RERIC)Asian Institute of Technology

P.O. Box 4, Pathumthani 12120ThailandFax: (66) 2 524 5439Email: [email protected] / [email protected]

NOTICE:

Neither the Swedish International Development Cooperation Agency (Sida) nor the AsianInstitute of Technology (AIT) makes any warranty, expressed or implied, or assumes anylegal liability for the accuracy or completeness of any information, apparatus, products,or represents that its use would not infringe privately-owned rights. Reference herein toany trademark or manufacturers or otherwise does not constitute or imply itsendorsement, recommendation, or favoring by Sida or AIT.

ISBN 974-8209-01-6

Asian Institute of Technology, 2002

Printed in Thailand


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The Asian Institute of Technology (AIT) is an autonomous international academicinstitution in Bangkok, Thailand. Its main mission is the promotion of technological

changes and their management for sustainable development in the Asia Pacific regionthrough high-level education, research and outreach activities which integratetechnology, planning and management.

AIT carried out the Asian Regional Research Programme in Energy, Environment andClimate (ARRPEEC) Phase-II, with the support of the Swedish International DevelopmentCooperation Agency (Sida). One of the projects under this programme is Small andMedium scale Industries in Asia: Energy, Environment and Climate Interrelations.

The SMI project was aimed at promoting activities to mitigate greenhouse gas (GHG)emissions and other pollutants in brick and ceramic, desiccated coconut, foundry, tea andtextile sectors in China, India, the Philippines, Sri Lanka and Viet Nam. The specificproject objectives were to:i) Review the operational practices and technological status of the selected sector;ii) Identify and study the factors for effective promotion of energy efficient and

environmentally sound technologies (E3ST);iii) Enhance capacity mobilization to promote E3ST; andiv) Review existing policies and develop a scenario for sustainable promotion of

E3ST.

Other related publications based on this research include:? SMI in Asia: Energy and Environment - Desiccated Coconut Sector? SMI in Asia: Energy and Environment - Tea Sector

? SMI in Asia: Energy and Environment - Brick Sector? SMI in Asia: Energy and Environment - Foundry Sector? Quarterly SMI Newsletter since March 1999? A Road Map on CD which contains details and videos of production processes

of the sectors considered in the study, all publications (newsletter, reports,articles) and other outputs from the project.


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Principal Investigators (Asian Institute of Technology School of Environment,Resources and Development)

1. Dr. C. Visvanathan, Professor, Urban Environmental Engineering andManagement Program

2. Dr. S. Kumar, Associate Professor, Energy Program

Research S taff (Asian Institute of Technology School of Environment, Resourcesand Development)

1. Ms. Architrandi Priambodo

2. Mr. R. Kannan

3. Mr. B. Basu

Research Fellows

1. Mr. M. Thiruchelvam, Environmental Consultant, Sri Lanka

2. Dr. D. Subhakar, Agency for Non-Conventional Energy and Rural Technology,Thiruvananthapuram, India

3. Ms. J.M.D.D. Jayasundara De Alwis, Ministry of Forestry and Environment,Sri Lanka

4. Ms. Anna Marie M. Hufemia, Environmental Science Program, Ateneo deManila University, Philippines

National Research Institutes (Contact Persons)

1. Center for Environmentally Sound Technology Transfer (CESTT), Beijing, China(Mr. Shi Han)

2. PSG College of Technology and Industrial Institute, Coimbatore, India

(Prof. P. Radhakrishnan and Prof. R. Rudramoorthy)

3. Industrial Technology Development Institute, Fuel and Energy Divison,Department of Science and Technology, Manila, Philippines(Dr. Alice B. Herrera)

4. Industrial Services Bureau of North Western Province, Kurunegala, Sri Lanka(Mr. Gamini Senanayake)

5. Non-State Economic Development Centre (NEDCEN), Hanoi, Vietnam(Mr. Ly Dinh Son)

Project Team

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Foreword

After the industrial revolution, anthropogenic greenhouse gas (GHG)

emissions have been increasing and a broad consensus has emerged that humanlife will be affected by earths climate change. The GHG emissions result frommany of the industrial, transportation, agricultural, and other activities throughpopulation growth, fossil fuel burning, and deforestation. The economic and socialconsequences of GHG emission imply that they should be addressed on a globalscale. In a joint action under the United Nations Framework Convention on ClimateChange (UNFCCC), developed countries committed themselves to reduce theiranthropogenic emissions of GHG. They are implementing many partnershipprograms with industry to reduce emissions of carbon dioxide (CO2) and othergreenhouse gases. To address these issues in developing countries, UNFCCC

established funds for their benefits in terms of capacity building and transfer ofenergy efficient and environmentally sound technological measures.

To enhance this global effort on protection of the environment, Sida initiatedthe Asian Regional Research Programme on Energy, Environment and Climate(ARRPEEC), a research programme aimed at producing policy-oriented researchfor mitigation of greenhouse gases and other hazardous emissions resulting fromfossil fuel use. In Phase-I of ARRPEEC, studies were carried out in the industrialsector for the promotion of energy efficient and environmentally soundtechnologies. This knowledge led to the study of Small and Medium scale

Industries (SMIs) in Asia.

In Asian manufacturing establishments, SMIs play a vital role by contributingsubstantially to its economic and industrial development. Many SMIs do notperceive their own environmental impacts as significant when set against those oflarge numbers. But collectively they could make a great impact. Therefore it isimportant that they encourage improving their efforts towards environmentalprotection for sustainable development. With this motivation, Sida supported theSMI project to mobilize and strengthen competence and capacity in nationalresearch institutions participating in the programme.

Dr. Gity BehravanSenior Research AdviserDepartment for Research Cooperation (SAREC)Swedish International Development Cooperation Agency

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The Asian Regional Research Programme on Energy, Environment and Climate(ARRPEEC) funded by the Swedish International Development Cooperation Agency

(Sida) was broadly aimed at studies to promote activities to mitigate greenhouse gas(GHG) emission and other pollutants in various sectors. One of the projects undertakenfor study in Phase-II of ARRPEEC was the Small and Medium scale Industries (SMI)sector considering its possible impacts to the environment. Five SMI sectors wereidentified for this study: brick and ceramic, desiccated coconut, foundry, tea and textile.The study was conducted in China, India, Philippines, Sri Lanka and Vietnam.

This report is based on the research done in view of growing significance of SMIin energy and environmental issues. Study was conducted to develop a framework ofpolicy instruments and strategies needed to promote energy efficient andenvironmentally sound technologies (E3ST) in China, India, Philippines, Sri Lanka andVietnam for the desiccated coconut, foundry, tea, textile, and brick and ceramic sectors.

It is believed that this report will be useful to policy personnel and governmentagencies involved in SMI, energy or environment, industrial organizations andresearchers. This report consists of chapters on overview of SMI sector in studiedcountries, national policies on economy, energy and environment, trends in energyconsumption and its environmental impacts in study countries and policy instrumentsto promote E3ST in the SMI sector.

We would like to thank the following experts for critically reviewing thisdocument and providing inputs:? Ms. Lisa C. Antonio, Director, Philippine Business for Environment,Philippines;? Ms. Jocelyn S. Esguerra, Project Manager, PRIME Project, Module 4 - Environmental

Entrepreneurship, Philippines;? Mr. P.K. Kotta, Project Coordinator, SENRIC, South Asia Co-operative Environment

Programme, Sri Lanka;? Mrs. Pham Thi Nga, Project Economist, Vietnam Energy Conservation Program Office,

Ministry of Science, Technology and Environment, Vietnam;? Mr. Mark Radka, Energy Programme Coordinator, Energy and Ozone Action Unit, UNEP

Industry and Environment, France;? Mr. T.L. Sankar, Former Principal, Administrative Staff College of India, Hyderabad, India;? Dr. M.T. Thiagarajan, Founder Dean, School of Management, Pondicherry Central University,

Pondicherry, India;? Mr. Le Nguyen Tuong,Chief of Planning and Finance Division, Institute of Meteorology

and Hydrology (IMH), Vietnam; and? Prof. Meng Zhaoli, Tsinghua University, Beijing, China.

On behalf of the national research institutes (NRIs) and on our behalf, we takethis opportunity to thank Sida for sponsoring this timely and important study and toAIT for providing an excellent atmosphere for carrying out this research.

S. KumarC. Visvanathan

Preface


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Executive Summary

In most developing countries in Asia, the Small and Medium scale Industries(SMIs) play an important role in both income and employment generation. SMIsconstitute a major portion of the industrial sector and generally use excessiveenergy and generate pollution, causing environmental degradation. In view ofthe growing significance of SMI in energy and environmental issues, a study wasconducted to develop a framework of policy instruments and strategies needed topromote energy efficient and environmentally sound technologies (E3ST) in China,India, Philippines, Sri Lanka and Vietnam for the desiccated coconut, foundry,tea, textile, and brick and ceramic sectors.

This report discusses the role of SMI in the economy, its employmentpotential, and the support given to the SMI sector by governments through theireconomic and industrial policies. A cross-country comparison of the existingnational policies on economy, energy and environment is highlighted. It wasrevealed that as far as the industrial sector is concerned, the study countriesadvocate foreign direct investment for industrial and infrastructure development,and provide incentives for modernisation of technologies. The study countrieshave also identified energy conservation and environment friendly technologiesas a means to reduce energy consumption and pollution of the industrial sector.Energy conservation policies and environment protection laws are already in-placein some countries and others are in the process of formulating one. However,most policies are merely focused towards high energy consuming industries andthere is little or no consideration given in energy conservation, pollution controlpolicies and programs specifically for the SMI sector.

The major environmental problems related to fuel use by the industrial sector,particularly the SMI in the study countries were analysed using published dataon energy and environment. Based on information on the types of fuel used, thefuel mix adopted and the change in fuel mix ratio over a ten-year period, thepotential contribution to the global and local pollution was estimated. AlthoughSMIs are not the major polluters in most sub-sectors, they often pollute more perunit compared to large-scale industries. Analysing the composition of criteriapollutants and its change over time showed the impacts on the environment byincreased fuel consumption in the study countries. With the revealed evidence ofincreasing energy consumption and consequent pollution, there is a need forgovernments to address environment protection and energy conservation as twoimportant and integrated areas. Hence, E3ST is identified as one of the suitableoptions, where both savings in energy input and reduction in emissions to theatmosphere are simultaneously achieved.

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Though E3ST is considered as a means of future energy conservation andindustrial pollution management, SMIs in the developing countries have notadopted E3ST readily due to some barriers. In fact, many E3ST methods can bereadily adopted by SMIs with little or no financial investments. However, lack of

awareness, education, and training on E3ST, lack of financing, lack of coordinationamong various government departments, lack of enforcement of regulations, lackof integration of energy and environment issues during policy formulation,unfavorable energy pricing, lack of research and development, and lack ofinfrastructures are the various factors that have slowed the implementation ofE3ST. Information and capacity building are likewise important issues that mostcountries have to address at the beginning of these conservation programs.

The existing policies do not target any particular sub-sector, location,pollutant or any particular energy segment for conservation and are not time

bound. Little is mentioned about direct interaction between energy conservationand environmental regulations. In this light, strategies that governments can adoptin promoting E3ST were analysed to be able to recommend policy options andinstruments that could be used for the promotion of E3ST in the study countries.This report does not intend to provide specific solutions to each country or a sub-sector but cites examples, experiences and success stories that could be adapted ina particular situation or country.

Primarily, governments and national bodies of the study countries shouldactively promote guidelines and formulate laws on preventive strategies as ameasure to maximize energy efficiency and thereby minimize emissions pertainingto SMIs. There is a need to improve enforcement of the existing environmentaland energy conservations laws. In many countries insufficient administrativecapacity is a limiting factor in policy enforcement. Other options to promote E3STinclude the encouragement of the use of cleaner production technologies, creationof incentives for economically efficient and environmentally sound fuel switching,intervention through pollution or fuel source-based policies, enforcement ofregulations through sanctions or incentives-based strategies, application of thepolluters pay principle, provision of financial incentives, subsidies, taxes andfavorable fuel pricing, and establishment of standards and labeling of productsand services to motivate energy conservation and pollution reduction.

Integration of environment and energy policies is also highly recommendedat policy level to minimize the cost of policy intervention on environmentalconservation and energy efficiency if implemented separately. Industry locationpolicies should be encouraged to provide infrastructures much needed by SMIs.Future SMIs should be located and linked to the large-scale industries to facilitateindustrial symbiosis and technology transfer. Local collaborative research anddevelopment with SMIs should also be promoted.

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There is a need to develop well-defined and time-bound action plans withclear and simple structures for planning, coordination and implementation andwith adequate budget allocation for the promotion of E3ST targeting specificindustrial sub-sectors and locations while assigning specific responsibilities to

stakeholders. The action plans should allow updating based on the lessons learnt.It should also be ensured that the private sector and end users be involved andcommitted to the action plans and policies and support from key decision makersare obtained. Plans and policies need to be communicated to the end users clearly.In this way, the promotion of E3ST through policy interventions will successfullyresult in energy conservation and environmental protection for the sustainabledevelopment of the SMI sector.

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Table of ContentsUnits and Abbreviations

CHAPTER 1: OVERVIEW OF THE SMI SECTOR 1

Background of the Study 1Characteristics of SMI 2

Sectoral Distribution of SMIs 3Importance of SMI in the Economy 3SMI as an Employer 4

Table of Contents

Project Team

ForewordPrefaceExecutive Summary

CHAPTER 2: NATIONAL POLICIES ON ECONOMY, ENERGY ANDENVIRONMENT 5

Economic and Industrialization Policies of the Study Countries 5Energy and Environmental Policies of the Study Countries 10

CHAPTER 3: TRENDS IN INDUSTRIAL ENERGY CONSUMPTIONAND ENVIRONMENTAL IMPACTS IN THESTUDY COUNTRIES 15

An Overview 15Industrial Sector Energy Consumption and Energy Mix 15Effects of Energy Consumption on Environment 17A Cross-country Comparison 20

CHAPTER 4: POLICY INSTRUMENTS TO PROMOTE E3ST IN THE

SMI SECTOR 27

E3ST in the SMI Sector 27Benefits of E3ST 27Energy and Environmental Efficiency Indicators 29Barriers in Promoting E3ST 29Policy Framework for E3ST 33Policy Options and Strategies to Promote E3ST in SMI 34Major Players in Energy and Environment Policies and Laws 45Policy Implementation and Responsibilities 46

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BIBLIOGRAPHY 49

APPENDICES 53

A: Conversion Factors and Exchange Rates used in the Study 53B: Salient Features of Energy and Environment Policies of Study Countries 54

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ADB Asian Development Bank

BEE Bureau of Energy Efficiency

CO2 Carbon Dioxide

CP Cleaner Production

DSM Demand-Side Management

EESCO Energy and Environmental Services Company

EIA Environmental Impact Assessment

EPL Environmental Protection Licensing

ESCO Energy Service Company

E3ST Energy Efficient and Environmentally Sound Technologies

FDI Foreign Direct Investment

GDP Gross Domestic Product

GEF Global Environmental Facility

GHG Greenhouse GasesGNP Gross National Product

GWh GigaWatt Hour

IPCC Intergovernmental Panel of Climate Change

kg kilograms

kWh kilowatt hour

MJ Mega Joule

MOI Ministry of Industries

Mt Million Tons

MWh MegaWatt hour

NA Not Available

NEAP National Environmental Action Plan

NOx Oxides of Nitrogen

Units and Abbreviations

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PCAF Pollution Control and Abatement Fund

PCB Pollution Control Board

PM Particulate Matter

PPP Polluter Pays Principle

PRC Peoples Republic of China

R&D Research and Development

SMI Small and Medium scale Industries

SO2 Sulfur Dioxide

SOE State-Owned Enterprises

TFS Technology Fact Sheets

TJ Terra Joules

UN United Nations

UNEP United Nations Environment Programme

WB World Bank

WTO World Trade Organization

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OVERVIEW OF THE SMI SECTOR

1E3ST

CHAPTER 1: OVERVIEW OF THE SMI SECTOR

This chapter outlines the background ofthis study and describes thecharacteristics of Small and Medium scaleIndustries (SMI) in selected countries in Asia in terms of their impact on theenvironment and importance to thenational economy.

Background of the Study

Over the past three decades theenvironmental impacts of human

activities have grown considerably due toincreasing economic activity, spiralingpopulation growth and greaterexploitation of resources. The state of theenvironment has now become a primaryissue worldwide.

Among these activities, those associated with energy production and utilizationhave caused major changes in theenvironment. Consequently, this has ledto significant undesirable environmentalimpacts such as, groundwater and air

contamination; land degradation; marineand coastal pollution; ecosystemdestruction and loss of biodiversity;damage to health and natural ecosystemsfrom air pollutants; and increased levelsof greenhouse gas emissions (GHG)known to cause long term global climatechanges. However, energy services suchas heating, refrigeration, cooking, lightingcommunication, motive power andelectricity remain essential for economicgrowth and human well-being.

In the mature economies of industrializedcountries, it has been observed that theywere able to reduce energy wastage throughbetter energy management by restructuringand using energy efficient technologies.Unfortunately, such observations have notbeen noted in developing countriesalthough they are seen as the largest energyconsumers of the future due to theiranticipated direction towards rapideconomic growth.

In most of the developing countries in

Asia, the SMI play an important role inboth income and employment generation.SMI constitute a major portion of theindustrial sector and generally use excessiveenergy and generate pollution, causingenvironmental degradation. However, theseindustries often lack capital, skilledpersonnel and awareness about existingenergy efficient and environmentally soundtechnologies (E3ST).

In view of the growing importance ofenergy and environmental issues associatedwith SMI in developing countries in Asia, it

was deemed important to conduct a cross-country study involving China, India, ThePhilippines, Sri Lanka and Vietnam todevelop a framework of policy instrumentsthat could be used to encourage SMI toadapt E3ST as a means of energyconservation and pollution prevention. This report does not intend to providespecific solutions to each study country orSMI sub-sector but cites examples andexperiences of successful implementationof particular E3ST options. However, this


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policy report is complemented by in-depth studies conducted in some SMIsub-sectors including tea, desiccated

coconut, foundry, and brick thatdiscusses sector-specific productionprocesses, energy and environmentissues, and identify the barriers toadopting E3ST by the sector.

policy report is complemented by in-depth studies conducted in some SMIsub-sectors including tea, desiccated

coconut, foundry, and brick thatdiscusses sector-specific productionprocesses, energy and environmentissues, and identify the barriers toadopting E3ST by the sector.

Characteristics of SMICharacteristics of SMI

There is no universal definition for theSMI sector and countries use differentsets of criteria in categorizing theirindustries accordingly. Among the studycountries, the SMI sector is mainly

defined based on capital investment andnumber of employees; their commondistinguishing feature being their

importance and dynamism in the wholeindustrial sector.

There is no universal definition for theSMI sector and countries use differentsets of criteria in categorizing theirindustries accordingly. Among the studycountries, the SMI sector is mainly

defined based on capital investment andnumber of employees; their commondistinguishing feature being their

importance and dynamism in the wholeindustrial sector.

The SMI in developing countries mostlycater towards the domestic market and uselocal resources. They are usually located inthe sub-urban areas of the cities or close tothe main input needed. These enterprisesare mostly labor intensive and use unskilledlabor. Therefore, they have become asignificant employment provider to localmen and women, offering rareopportunities for the poor to secure someform of livelihood. The technology used is

The SMI in developing countries mostlycater towards the domestic market and uselocal resources. They are usually located inthe sub-urban areas of the cities or close tothe main input needed. These enterprisesare mostly labor intensive and use unskilledlabor. Therefore, they have become asignificant employment provider to localmen and women, offering rareopportunities for the poor to secure someform of livelihood. The technology used is

Country Capital Investment Number ofWorkers

Other Criteria

China Medium: 50 million - 5 billion RMBSmall: < 50 million RMB

Not Accounted N/A

India Small: < 30 million RupeesTiny: < 2.5 million Rupees

Not Accounted N/A

Indonesia Small: Maximum 200 million Rupiah Not Accounted Annual turn over:1 billion Rupiah (maximum)

Philippines Small: 1.5-15 million PesoMedium: > 15 million Peso

Small: 10-99Medium: 100199

N/A

Sri Lanka Small & Medium: < 16 million Rupees Small: < 49

Medium: 50-99

N/A

Thailand Less than 10 million Baht < 50 Peak power demand lessthan 1 MW

Vietnam1 Less than 5 billion Dong < 200 N/A

Source: (Hillary, 2000; UNESCAP, 1999; Williams, 1999;Priambdo, 1998); Note: For monetary conversions refer to Annex 1;1 Vietnam: Ministry of Planning and Investment Draft of Decree on Development of SMEs

Different countries have their own de initions of SMI mainly in termsf

of capital investment and number of workers.

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traditional, with very minimalmodernization over the years leading to wasted resources, high pollution levels,

and high occupational health and safetyrisks. They are individually owned or withtwo to three partners. There have limitedfinancial sources coming fromdevelopment or commercial banks forinvestments. Decision-making usuallyrelies on an individual, generally by theowner. Managerial and entrepreneurialskills and employee skills are less with thelimited access to information andfinancial resources. These limitationsmake it difficult for SMI to upgrade theirtechnologies and allocate their resourcesefficiently.

The 90s have brought globalization ofeconomies, and many countries haveremoved the protective tariff walls thatusually prevent the international playersfrom entering the domestic market.

Those SMI that are pragmatic would viewthis as an opportunity to upgrade theirtechnology, innovate their products, and

explore foreign markets. On the otherhand, SMI that will continue to usetraditional technologies would face highcompetition to their great disadvantage.

Sectoral Distribution of SMI

Generally SMI are found in all majormanufacturing sub-sectors. However, foreach country, there are characteristic sub-sectors that constitute the major part of theSMI sector. For example, in the Philippinesnearly 45% of the SMI sector is from the

food processing and desiccated coconutsub-sectors and in China 95% of foundryindustries and 80% of textile industriesbelong to the SMI. In India, textiles andfoundry are some of the important SMI

Industry China India Philippines Sri Lanka Vietnam

Food ProcessingTextile and ApparelWood and Wood ProductsPaper, printing & publishingChemicals

Basic MetalsLeather and Leather ProductsMachineryPottery, China & Earthenware

TeaRubber Based ProductsPlastic ProductsDesiccated CoconutBrick

Key: More than 80% More than 50% less than 80% Less than 50% Mostly Large Scale or not applicable

Sectoral distribution show that SMI forms a significant portion of the

overall manufacturing industry in all the study countries.

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sectors while in Sri Lanka textiles, brickand tea. Data show that textile and

apparel, tea, desiccated coconut, brick, wood and wood products constitutemore than 80% of SMI in each of thestudy countries

Importance of SMI Sector inthe Economy

Irrespective of the definition, bothdeveloping and developed countiesconsider the SMI sector as an engine fortheir economic growth and development. They account for 6070% of thedomestic industrial production. Theircontribution to export earnings is about7580%. Of this, about 3040% is fromdirect exports and the rest fromsubcontracts and ancillary supplies. Butonly 510% of SMI in all developingcountries are engaged in export relatedactivities. SMI in developing countriescater the domestic markets but a vastexport potential exists for those not yetengaged in it (Vepa, 1997).

Statistics show the importance of SMI inthe industrial sector in Asia. They account

for more than 50% of the total industrialsector output in China and India, and for1025% in most other Asian countries.Unfortunately, sufficient data to analyse theSMI contribution over the years do notreadily exist.

SMI as an Employer

In developing countries, the economic andsocial significance of small-scale enterprisesis well recognized. Enterprises of up to 50 workers are categorized in developing

countries as SMI. According to someestimates, 1727% of the labor force isemployed by SMI. In Asia, the majority ofpopulation lives in rural areas where SMIprovide 2045% of full time employmentand 3050% of household income. Indeveloping countries, a larger proportion ofSMI is employed in the manufacturingsector. For example, in India 27% of the12.6 million micro and small-scaleenterprises are in the manufacturing sector(Hillary, 2000).

Country Medium-scale

(%)

Small, Cottage, or Household

(%)

China (1989) 19 49.4Korea (1988) 17.2 (20-99 employees) 4.9 (5-19 employees)Indonesia (1986) 6.9 (20-150 employees) 11.1(


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5E3ST

The maximum number of employees perSMI does not in general exceed 250 workers. However, the mere number of

enterprises makes the total volume of workers considerably large within theoverall manufacturing sector. Forexample in 1998, China had 991 (0.21%)large, 9,186 (1.96%) medium and 458,329(97.83%) small scale industries (CEST,1999). Based on available literature, aconservative estimate of the total laborforce in the manufacturing sectoremployed by the SMI in the studycountries would be nearly 60-70%.


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NATIONAL POLICIES ON ECONOMY, ENERGY AND ENVIRONMENT

6E3ST

CHAPTER 2: NATIONAL POLICIES ON ECONOMY,

ENERGY AND ENVIRONMENT

Given the significant contribution of SMIto the national economy, this chapterpresents the economic performance ofthe study countries and their respectiveeconomic and industrial policies in orderto examine the importance they give tothe SMI. It also discusses the policies ofthe study countries on energy andenvironment. The salient features of thepolicies (see Appendix C for theoutline of existing policies) aredescribed and analyzed through cross-country compa-risons.

Economic andIndustrialization Policies ofStudy Countries

Economic Performance

The economy of the Peoples Republic ofChina (PRC) grew at the rate of 10.1%during the period of 198090 and at

11.2% during 199098. The economyrebounded in 1999 and 2000 after a deeprecession in 1998 in the wake of the Asian financial crisis, with real GDPgrowth reaching 10.9% in 1999 and 8.8%in 2000 (ADB, 2000). The manufacturingsector contributes 40% of the GDP andemploys more than 15% of the totalindustrial labor force (UN, 1999).

The Indian economy has been growing atthe rate of 5.8% per annum during 1980

90 and at 6.1% during 199098. Themanufacturing sector contributes 16% ofthe GDP and employs more than 24% ofthe total industrial labor force (UN,1999). During the past decade, themanufacturing sector has shown a growthof 8% compared to the 7.4% during198090.

The Philippine economy has grown at therate of 1% per annum over 198090 and3.3% over 199098. The manufacturingsector contributes 23% of GDP andemploys 10% of the total industriallabour force (UN, 1999). During the pastdecade, the manufacturing sector hasshown an average growth of 3.1%compared to 0.1% during 198090,indicating the increasing importance ofthe sector within the economy. Theeconomy registered a GDP growth of3.9% in 2000, continuing the recoverystage in 1999. The agriculture sector grewby 3.4%, the service sector by 4.4% andthe industry sector by 3.6% (ADB, 2000).

An economic growth rate of 4% perannum over 198090 and 5.3% over199098 in Sri Lanka has been reported. The manufacturing sector contributes17% of the GDP and employs 15% ofthe total industrial labour force (UN,1999). During the past decade themanufacturing sector has shown a growthrate of 8.5% compared to the 6.3%during 198090, indicating the increasedimportance of the sector within the


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economy. Sri Lanka recorded an annualgrowth rate of 6.0% in 2000 compared with 4.3% in1999. The industry sector

has out performed other sectors during1999 (ADB 2000).

economy. Sri Lanka recorded an annualgrowth rate of 6.0% in 2000 compared with 4.3% in1999. The industry sector

has out performed other sectors during1999 (ADB 2000).

7E3ST

Vietnams economy has been growing atthe rate of 4.6% per annum over theperiod 198090 and at 8.4% over theperiod 199098. The manufacturingsector contributes 22% of the GDP andemploys 10% of the total industrial laborforce (UN, 1999). During the past decadethe manufacturing sector has shown anaverage growth of 5% compared to 4%during 198090. Vietnams real GDPgrowth was estimated at 6.8%, an

increase from 4.8% in 1999. The mainsource of this growth has been the strongperformance in export and industry andthe reported growth rate of 9.7% in theindustrial sector (ADB, 2000)

Vietnams economy has been growing atthe rate of 4.6% per annum over theperiod 198090 and at 8.4% over theperiod 199098. The manufacturingsector contributes 22% of the GDP andemploys 10% of the total industrial laborforce (UN, 1999). During the past decadethe manufacturing sector has shown anaverage growth of 5% compared to 4%during 198090. Vietnams real GDPgrowth was estimated at 6.8%, an

increase from 4.8% in 1999. The mainsource of this growth has been the strongperformance in export and industry andthe reported growth rate of 9.7% in theindustrial sector (ADB, 2000)

These data show that the Asian economyhas changed considerably during 1999experiencing a recession. In early 1999,an average annual growth of 4.4% wasexpected for the region (ADB, 2000).However, the recovery has been unevenacross developing Asia. It was forecastedthat growth would be particularly strongboth in PRC and India. The fast recoveryin the first half of 1999 in most of theeconomies affected by recession, viz.Korea, Malaysia, Philippines, and Thailand, is due to simulative monetaryand fiscal policy. This turn-around wasbrought about by increased exports,especially in the high-tech industries. Theup-turn in the economy resulted in inflowof foreign and private capital to Asia. Thedip in economic growth stimulated someof the countries to rethink about changes

in economic policy resulting inliberalisation for foreign capital andinvestments in infrastructure

development.

These data show that the Asian economyhas changed considerably during 1999experiencing a recession. In early 1999,an average annual growth of 4.4% wasexpected for the region (ADB, 2000).However, the recovery has been unevenacross developing Asia. It was forecastedthat growth would be particularly strongboth in PRC and India. The fast recoveryin the first half of 1999 in most of theeconomies affected by recession, viz.Korea, Malaysia, Philippines, and Thailand, is due to simulative monetaryand fiscal policy. This turn-around wasbrought about by increased exports,especially in the high-tech industries. Theup-turn in the economy resulted in inflowof foreign and private capital to Asia. Thedip in economic growth stimulated someof the countries to rethink about changes

in economic policy resulting inliberalisation for foreign capital andinvestments in infrastructure

development.

0 2 4 6 8 10 12

China

India

Indonesia

Philippines

Sri Lanka

Thailand

Vietnam

Average Annual %

GDP 1980- GDP 1990- GDP 2000-

Source: UN, 1998; ADB, 2000

Real GDP Growth Rates varied among theStudy Countries in the last three decades.

Domestic Economic PolicyInitiativesDomestic Economic PolicyInitiatives

In China, building on a constitutionalamendment giving greater constitutionalstatus to the private sector, severaleconomic laws have been enacted todevelop a better legal and regulatoryframework for the market economy tofunction efficiently. The government alsosought to improve private firms access tocredit by setting up credit guaranteescheme for SMI in 70 cities. PRCsaccession to WTO and the commitmentsto cut tariff, liberalized trade andinvestment, and open up domesticsectors for foreign participation areexpected to bring sufficient efficiencygains.

In China, building on a constitutionalamendment giving greater constitutionalstatus to the private sector, severaleconomic laws have been enacted todevelop a better legal and regulatoryframework for the market economy tofunction efficiently. The government alsosought to improve private firms access tocredit by setting up credit guaranteescheme for SMI in 70 cities. PRCsaccession to WTO and the commitmentsto cut tariff, liberalized trade andinvestment, and open up domesticsectors for foreign participation areexpected to bring sufficient efficiencygains.


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8E3ST

In recent years India has maintained lowinterest rates to support industry sectorrecovery. In Sri Lanka, the policy

dialogues focus on improving publicsector governance and efficiency,promoting private sector growth andreducing poverty. Industrial policyfocuses on export oriented industrypromotion with special consideration ofSMI as an important segment inproviding employment and domesticproducer.

The domestic policies of the Philippinesfocus mainly on improving macroeconomic stability, privatisation process,accelerating structural reforms and rural

development, enhancing competition andprivate sector participation. The Vietnamgovernment continued with reforms in2000 in private sector development, stateowned enterprises (SOE) and banking.The government has formulated an SOEreform plan (ADB, 2000).

A Cross-Country Comparison

There are two distinct pathways foreconomic development observed aroundthe world, namely through openeconomic policies or inward-looking,centrally- planned economic policies. Incentrally-planned economies, a centralbody makes the decisions. In openeconomies, the individual decisions areconsidered in the economy-wide policydecisions. In all the study countries,governments have accepted in general anopen economic policy as a means ofachieving their economic growth. Underthis framework, the economies areopened for global markets through the

removal of tariff barriers and capitalinflows from foreign investments. Allthese countries have gradually

deregulated most of their activities withthe commencement of the liberalizationprocess. Competitiveness and efficienteconomic management have becomeimportant considerations. In thiseconomic environment, the private sectoris regarded as the engine of growth.

As far as the industrial sector isconcerned, these countries advocateforeign direct investment for industrialand infrastructure developmentconsidering it a means for attractingmuch needed capital. Privatisation of

state run industries is one of theindustrial reforms except in India wheresome sectors are listed only for the state.Countries provide incentives formodernisation of technologies.

The economic indicators of thesecountries during the past two decadesreveal that: The economic growth was highest in

China (11.2%) during 19901998followed by India (6.1%) Vietnam(8.4%), Sri Lanka (5.3%), andPhilippines (3.3%).

The manufacturing sector contri-bution to GDP is highly significantin China (40%), followed byPhilippines (23%), Vietnam (22%),Sri Lanka (17%), and India (16%).

Manufacturing sector employmentgeneration is significantly high inIndia (24% of total labor force).Manufacturing sector contribution tototal labor employment is more than10% in all other countries.


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9

Salient features of economic and industrial policies of the study countries

THRUST AREAS

Open economic policy

Foreign Direct Investment (FDI)

Industrial modernization & useof advanced technology

Industrial pollution

Importance of SMI sector

Vietnam

Open Economic Policy with Governmentcontrol

Industrial policy aims at FDI

Focused towards modernisation in multi-sector industries and encouragesimprovement, modernisation and use ofadvanced technologies

SMIs are important due to employmentgeneration

Equity in state-run institutions

Source: Communiqu from the NRI

Philippines

Open economic policy is accepted

FDI is permitted

Focused towards high tech and agricultural basedindustries with incentives for modernization andprivatisation of state run industries

Environmental Clearance required for industries

SMI sector is recognized by the policy due topotential for employment generation

Source: NEDA, 2000

Sri Lanka

Open economic policy is ac

FDI is permitted

Encouraging private sector ncentives for modernizatiotechnologies, privatisation o

Environmental Clearance foscale industries is needed be

SMI sector is recognized byemployment generation is c

Source: Central Bank of Sri Lanka, 19

China

Open economic policy with governmentcontrol

FDI is permitted

Focused towards high tech andagricultural based industries withincentives for modernization andprivatization of state run industries.

Follows an industrial location policy(western region) and closure of all old

and polluting industries Employment generation is considered to

be from SMI sector

Source: CEST,1999

India

Open economic policy accepted

FDI is permitted

Privatisation of state run institutionmodernization, focused towards all industries reserved for State

Environmental Clearance required scale industries before start-up and policy for all medium and large scalaway from the Standard Urban Are

SMI sector is recognized by the polreserved list for small industries) dugeneration potential

Source: Secretariat for Industrial Assistance, 1999


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The manufacturing sectors contributionto the added economic value is still very

high in the phase of their economicdevelopment. Furthermore, the manu-facturing sector has become important asan employment provider. Considering thefact that SMI account for a largerproportion of the manufacturing sector,

domestic policies have focused on SMIconsidering their importance in the

economy. Domestic policies have givenpriority for the location of medium andlarge-scale industries, and are alsoproviding some protectionism andincentives for SMI.

The manufacturing sectors contributionto the added economic value is still very

high in the phase of their economicdevelopment. Furthermore, the manu-facturing sector has become important asan employment provider. Considering thefact that SMI account for a largerproportion of the manufacturing sector,

domestic policies have focused on SMIconsidering their importance in the

economy. Domestic policies have givenpriority for the location of medium andlarge-scale industries, and are alsoproviding some protectionism andincentives for SMI.

Issue China India Indonesia PhilippinesSri

Lanka Thailand Vietnam

1. EconomicPolicy

Open(with

control)Open Open Open Open Open

Open (withcontrol)

2. Foreign DirectInvestment

3. High TechIndustries

NotMentioned

4. Creation ofEmployment

(SMI)

(SMI)

(SMI)

(SMI)

(SMI)

(SMI)

(SMI)

5. LocationalPolicy

(exceptSMI)

Not

mentioned

6. Incentives formodernization

7. Private sectorparticipation

(except the

reservedlist)

8. Privatisation ofSate run

industries

9. EnvironmentalClearance

Partly

Key: () implies,1 - Open economic policy is accepted; 2 - Foreign direct Investment accepted; 3 - High tech industries promoted4 - SMI are important as source of employment; 5 - Advocate industry location policies;6 - Incentives available for industry modernization; 7 - Private sector participation considered in economic development;8 - Have started to privatise state run industries; 9 - Environmental clearance is required for new industries

Cross-country comparision of economic and industrialisation policies

10E3ST


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11E3ST

Energy and EnvironmentalPolicies of Study Countries

An Overview

With the creation of the World TradeOrganization (WTO) and ongoing multi-national trade negotiations, the world hasentered into a new trading environment.Most of the countries opened theireconomies, eliminating tariff barriers andplacing emphasis on more outward-lookingand liberal economic policies instead of thecontrol-oriented economic policies.

As pointed out, all the countries under

study advocate open economic policy, buthave differences with regard to the manner,sequencing and the speed of implementingthe necessary policy reforms. For example,Sri Lanka had come to accept the virtues ofmarket-oriented policies in 1997. Indiaopened their economy in the 1990s andChina and India had a slow movementtowards open economic regimes. However,all these countries have identified openeconomic policy as a means of achievingeconomic growth.

Due to anticipated consequences of higher

energy requirement to cater the expectedeconomic growth, and the adverseenvironmental effects, energy andenvironment conservation policies andother domestic policies are important tocreate a level paying ground in achievingnot only material development, but thesocial welfare of the countries.

Salient Features of Policies

Legislative approaches such as Acts and

Laws, national policies and regulationsare considered as broader policies inaddressing the energy and environmentalissues. These issues are dealt with inofficial endorsements such asdepartmental or sectoral strategies,action plans and programs. Therefore inthese countries, provisions are given forenergy and environmental issues either inlegislations or any of the othergovernmental documents, which havewider national acceptance.

Energy conservation has already been

declared in China in 1997, and hasprovisions for both regulatory andincentive measures in achieving industryenergy efficiency. China has focused onlarger higher-energy consumingindustries while small industries arerelatively neglected. China is particularlyaware of the pollution potential ofstewardship and village industrialenterprises (mainly consists of SMI). Their serious contribution toenvironmental problems has promptedthe municipal and provincial

governments to pursue detailedspecialized strategies for relocation orclosing of industries, encouragingchanges in the production line or rawmaterials, establishing pre-treatment andcommon treatment facilities for wasteand giving different kinds of incentivesto industries. China has succeeded in itsdevelopment of regulatory measures where comprehensive administrationsystem prevails compared to othercountries. Market based approaches have


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not been widely incorporated in promotingE3ST in China.not been widely incorporated in promotingE3ST in China.

At present, China has recognized the openeconomic policy as a means of theireconomic growth, has recognized need toimprove the industry efficiency. Chinasapproach to day is to promote SMIs with

incentives for technological improve-ments enabling them to achieveproduction efficiency. This kind of

environment is very much favorable foraddressing energy efficiency issuesthrough technology improvements.

At present, China has recognized the openeconomic policy as a means of theireconomic growth, has recognized need toimprove the industry efficiency. Chinasapproach to day is to promote SMIs with

incentives for technological improve-ments enabling them to achieveproduction efficiency. This kind of

environment is very much favorable foraddressing energy efficiency issuesthrough technology improvements.

Policy Interventions for Energy Efficiency Improvement The China Experience

China has notable progress in reducing unit energy consumption levels over the decade. Progress hasbeen made through widespread promotion of rudimentary energy management practices, energyhousekeeping measures, and a variety of retrofitting projects. Government units in all provinces havebeen established to enforce energy consumption standards.

The institutional system which China has developed has succeeded in prodding a wide array of

enterprises to undertake technical and managerial measures to improve energy efficiency. Unlike theU.S. approach, in which utility companies are instrumental, in China (as in Japan and Korea), thegovernment works directly with industrial enterprises. Chinas program is now strong in its broadcoverage of enterprises, monitoring of consumption practices, promotion of energy efficiency goals,and information dissemination. Efforts to improve energy efficiency have become a more integralaspect of the energy planning process than in most developing countries. The system seems to work

well for disseminating information on consumption norms between provinces, and promoting genericenergy conservation investments.

On a technical level, Chinas energy conservation strategies revolve around two basic themes: (a) linkingenergy efficiency with the broader process of industrial growth, and (b) upgrading the efficiency ofexisting equipment. The first theme was based on the opportunity presented by new investments takingplace in the industrial sector. Much industrial capacity installed in 1980 were below internationalstandards, but the focus then was long-term penalties in terms of high recurring costs and energyconsumption rates.

The second theme upgrading the efficiency of existing equipment had many components. Thisincludes promotion of industrial co-generation facilities, reduction of power transmission anddistribution losses, improvements in coal quality, andaggressive replacement of inefficient boilers andmotors.

(Source: World Bank Discussion Papers, 1994)

12E3ST


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Policy Features China India Philippines Sri LanEnergy Policy formulated bythe Government

Yes (Energy ConservationLaw)

Yes (Mega Power Policy); EnergySource-specific policies alsodeclared.

Yes (EnergyDevelopment Plan2001-2004)

No

Implementation of DemandSide Management

Only for high energyconsuming industries.

Not Mentioned(Proposed under EnergyConservation Bill 2000)

Yes CarrieindependenProgram

Conduction of EnergyAudit

Yes, but compulsory only forhigh energy consumingindustries

Not Mentioned(Proposed under EnergyConservation Bill 2000)

Yes

Promotion of RenewableEnergy Sources

Yes Yes Yes

Financial instruments forEnergy Conservation

Yes, for conservation underEnergy Conservation Fund

Yes but only on power generationside

Yes but only on powergeneration side

Financial incentives toindustries foruse/generation ofRenewable Energy

Yes Yes (Provided by the Ministry ofNon-conventional EnergySources and Indian RenewableEnergy Development Agency)

Not mentioned Not mentio

Standards and Labels forEnergy Conservationdevices

Formulation of NationalStandards and Introduction ofCertification and Labeling

Voluntary Labeling applicableonly to a few consumer products

Yes

Information disseminationon Energy Conservation &efficiency

Yes Yes Yes

Promotion of R&D ondevelopment of indigenoustechnologies

Yes Not mentioned Yes EnergyConservatioFund 1985

Target industry of the Policy Large Not mentioned Large Not m

Private sector participationin power generation(including renewable power)

Not mentioned Yes Yes Yes

Provision ofPenalties/prosecution fornon-compliance of rules

Yes Not Mentioned(Proposed under EnergyConservation Bill 2000)

Yes but targeted toLarge Scale industries

Not mentio

Policy on Energy use and

Efficiency for SMI

No. More focused on large

industries.

No. More focused on large

industries.

No. More focused on

large industries.

No. More fo

on large ind13 Comparison of energy policies of the study countries


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14E3ST

Despite the absence of an energy policy inSri Lanka, energy issues are addressed indepartmental strategies and plans, but the

recognition of energy conservation andenvironmental issues is inadequate.However, the state owned authority forelectricity supply in Sri Lanka, CeylonElectricity Board (CEB) conducts demandside management programs providingenergy audit services for industries, pre-construction consultancy services forconstruction industries (technical drawingsand recommendations based on energyefficiency), power quality analysis andlighting design for buildings for a fee. Inaddition, programs for energy efficientlighting and customer education are carried

out for the domestic and small commercialsector. There are many other organizations with diverse authorities and functionsinvolved in energy conservation programshowever a cohesive attempt is non-prevalent in policy formulation.

National standards for air emissions, noisepollution and industrial effluents have beenset under the National Environmental Actof Sri Lanka (NEAP, 1998-2001). Underthis policy, Environmental Impact Assess-ment (EIA) and Environmental ProtectionLicensing (EPL) are the administrativeprocedures that industries should undergofor environmental clearance. EPL is mainlyapplicable for new SMI. The SMI sector isdealt with extensively in the industrialpolicies of Sri Lanka and is encouraged toparticipate in technology transfers with thelarger industries. Cleaner production isanother initiative that incorporatesprograms to improve energy efficiency andminimize environmental pollution for newindustries. A Pollution Control andAbatement Fund has been set up to provide

interest free loans for industries(National Industrial PollutionManagement Policy, 1996).

A Cross-country Comparison

Generally the existing energyconservation and environmental laws,plans and regulations aim at reducingenergy consumption and pollutionprevention in industries. Most of theexisting energy policies focus on supplyside management. So far the laws andplans do not especially target SMI butalso cover them under the generalcategory of industries. The plans also

include conservation of energy resourcesand encourage the use of renewableenergy sources. However, provision ismade for continued renewal of the plansin order for it to be more responsive tothe changing needs of society. Researchand development to introduce devicesfor energy conservation and pollutionmitigation is included in most policies. Inmost countries, different ministries ordepartments handle the energy andenvironment areas and also implementthe laws independently. The only pointof integration of both issues is in thedevelopment plans or project level.

There are three main approaches forpolicy intervention namely, regulatory,market, and integrated approach whereboth regulatory and market instrumentsare used in a complementary manner. Inthe regulatory approach, monitoring andenforcement cost is high and it needshigher administrative capacity and is ahigh cost to the country. But the marketapproach brings about a voluntary


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15E3ST

behavioral change, which is less of a burdento the government. The integratedapproach is common in transition

economies including the study countriesand countries use each of the instrumentsaccording to their capacities and objectives.

The various examples illustrated earliershows that, regulatory approach has beensuccessful where considerable control andcloser contacts with grassroots industrieshave been made.


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Policy Features China India Philippines Sri Lanka Formulation ofEnvironmentalPolicy

No (Decision of theState Council onEnvironmentalProtection 1996/31)

Yes, (Abatement of PollutionPolicy,National ConservationStrategyStatement of Conservationand Development; EcomarkPolicy); National EnvironmentPolicy under preparation

Yes, (PD 1151:PhilippineEnvironmental Policy)

Yes, (National Policyon IndustrialPollutionManagement, 1996)

YesPro

Adoption of PPP No Yes Yes Yes

Encouragement ofCP

Yes Yes (CP Technology Policy) Yes Yes

Creation ofIndustrial Estates

Yes Yes Yes Yes

Financial incentivesfor pollutionprevention

Yes Yes Yes Yes

Formulation ofEnviron-mentalProtection Laws

Yes (EnvironmentProtection Law 1979,Revision 1989)

Yes (Environment(Protection) Act, 1986)

Yes (PhilippineEnvironmental Code)

Yes (NationalEnvironmental ActNo.47, 1980)

YesEnvStan

Declaration of AirEmission Standards

Yes (EnvironmentProtection Law)


Yes (PhilippineEnvironmental Code)

Yes (NationalEnvironmental Act)

YesEnvStan

Declaration ofWastewaterdischarge Standards

Yes (EnvironmentProtection Law)


Yes (PhilippineEnvironmental Code

Yes (NationalEnvironmental Act)

YesViePol

Requirement ofEPL for Industries

Yes Yes Yes Yes

Requirement ofEIA for newindustries

Yes Yes Yes Yes

Policy coverage forPollution mitigationin SMI

No No No No No

LEGEND: CP Cleaner Production; EIA Environmental Impact Assessment; EPL Environmental Protection Licensing;

PPP Polluter Pays Principle; SMI Small and Medium scale Industries

16

Comparison of environmental policies of the study countries


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TRENDS IN ENERGY CONSUMPTION AND ITS ENVIRONMENTAL IMPACTS

17E3ST

CHAPTER 3: TRENDS IN INDUSTRIAL ENERGYCONSUMPTION AND ITS

ENVIRONMENTAL IMPACTS IN STUDYCOUNTRIES

This chapter describes the general trendsof energy consumption and consequentenvironmental implications of theindustrial sector (giving emphasis onSMI) in relation to the economic growthof each study country. The potentialfactors that could enable SMI to adoptE3ST are identified. An analysis is furthermade on selected SMI sub-sectors to

determine its role within the wholeindustrial sector.

An Overview

The economic development of nationsresults in increased demand for energyresources. Shifts in the structure ofconsumption and production, howeveralter the impact that changes in outputhave on changes in energy consumption.At present developing countries comprise

more than 75% of the world populationbut utilize only a quarter of the worldsenergy. Their per capita energyconsumption a mere one-tenth of what itis in the rich countries. However it isdoubling every 15 years and is expectedto increase fivefold over the next threedecades or so in the course of economicgrowth (Anderson, 1996).

The state of the environment is a major worldwide concern today. Pollution in

particular is perceived as a serious threatboth in the developed and developingcountries, where quality of life hashitherto been measured in terms ofmaterial output. Meanwhile, environ-mental degradation has become a seriousimpediment to economic developmentespecially in developing countries today,and environmental conservation is of a

considerable cost to them.

The growing evidence of environmentalproblems is due to a combination offactors. Energy production, conversion,transportation and utilization have beenand continue to be a primary source oflocal, transnational, and global pollution.Energy efficiency is one of the widelyadvocated methods of reducing pollutionin both developed and developingcountries. During the past two centuries,the efficiency of energy use, as measured

by the amount of energy needed toprovide a given output or service, hasimproved by factors ranging between 50and 100 times more (Anderson, 1993).Finding energy efficient and environ-mentally sound technologies (E3ST) isone of the more important quests oftoday because the adoption of suchprovides many opportunities fordeveloping nations to achieveconsiderable economic and environment-al gains.


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Industrial Sector Energy

Consumption and EnergyMix

Data Source: (IEA, 1999)

China

Vietnam

0 5 10 15 20 25

%

India

Philippines

Sri LankaTrends in Total Industrial EnergyConsumption

The average annual increase in totalenergy consumption by the manufac-turing sector is increasing based on thefigures from 19871997. Except China(1.3%), countries like India (5.8%),Indonesia (17.2%), Philippines (14%), SriLanka (11.0%), Vietnam (19.9%), and

Thailand (20%) have recorded asignificant growth.

Annual Industrial Energy Consumption

Growth Rate 1987 1997 (Base Year 1987)

Taking into account how each countrysindustrial sector performed in relation totheir energy consumption reveals anotable trend. In spite of the rise in totalmanufacturing sector energy consump-tion over the years, China, Vietnam and

Sri Lanka showed a downward trend inyearly energy consumption by themanufacturing sector during 1987-1997based on the sectors contribution to GDP. This resulting indicative trend may be areflection of energy efficiency measuresadopted by each country in the past.

Vietnam

Sri Lanka

-10 -8 -6 -4 -2 0 2 4 6Percentage

China

India

Philippines

Data Source: (IEA, 1999;UN, 1998)

Annual Change in the manufacturing sector Energy Consumption based on GDP Contribution bymanufacturin Sector in Bil ionl $ shows a downward trend for Vietnam Sri Lanka and China.

18E3ST


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19E3ST

Primary Energy Share inIndustrial Energy Consumption

When considering the following data onthe rate of industrial energy consumption,it should be noted that these figuresalready include the consumption of theSMI sector, which as mentioned earlier,forms a significant portion of the wholeindustrial sector in the respective studycountries.

In China, composition of energy sourcesfor industrial production had changedonly marginally over the last decade. In1987, coal accounted for nearly 80% ofthe total energy consumption followed by

oil (9%), electricity (9%), natural gas (2%)and biomass (negligible). In 1997, coalconsumption had reduced to 71%, andthere was an increase in oil (12%),electricity (9%), and natural gas (3%)consumption.

In India, composition of energy mix inindustrial production has changedtowards use of more electricity andnatural gas during the last decade. In1987, coal accounted for nearly 45% ofthe total energy consumption followed by

biomass (25%), oil (15%), electricity(10%), and natural gas (5%). In 1997,coal and biomass share had reduced to39% and 21% respectively butconsumption of oil (17%), electricity(13%), and natural gas (10%) hadincreased. Figure 4.4 shows thecomposition of energy mix during 1987-97. It is interesting to find that in Chinaand India, being two of the largest worldcoal producers, the consumption of coalin their industrial sector had a decreasingtrend.

The primary sources of energy forindustries in the Philippines are electricityand biomass. There was an increase in

the use of natural gas during 1992-97, apositive trend towards the use of cleanerfuels. In 1987, biomass accounted fornearly 44% of the total energyconsumption followed by oil (32%),electricity (12%), and coal (11%). In1997, the share of oil (22%), electricity(8%), coal (11%) and biomass 27% hadreduced and natural gas accounted for26% of total energy consumption.

Sri Lankas primary energy sources forindustry are biomass, oil and electricity.In 1987, biomass accounted for 73% of

the total energy consumption followed byoil (14%) and electricity (12%). Biomassand electricity consumption have reducedto 57% and 11% respectively, while sharein 1997 of oil had increased to 32%. Thereduction in biomass use is due to itsnon-availability and consequent increasein price. Hence, large biomass consumerslike SMI have shifted to fossil fuels, which are easy to use and have higherheating value.

Vietnams primary energy sources ofindustry are coal, electricity and oil. Useof biomass in industry is less. In 1987,coal accounted for nearly 77% of thetotal energy consumption followed by oil(16%), and electricity (8%). In 1997, theuse of coal (38%), oil (12%), andelectricity (7%) had reduced but naturalgas (43%) consumption has increased.Hence, the industrial sector coalconsumption has reduced in Vietnam.The trend for cleaner fuel such as naturalgas is an encouraging signal in theenvironmental perspective.


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India

1992

Year

0%

20%

40%

60%

80%

100%

1987 1997

Percentage


0%

1987 19

Ye


China

20%

40%

60%

80%

100%

92 1997

ar

Percentage

60

80

100

age

Philippines

0%

20%

40%

%

%

%

1987 1992 1997

Year

Percent


Sri Lanka

0%

20%

40%

60%

80%

100%

1987 1992 1997

Year

Percentage

Data Source: (IEA, 1999; ECF, 1999)

0%

20%

40%

60%

80%

100%

1987

Percentage

Data Source: (IEA, 1999; Institute of Energy,

Legend:BiomasCoal Electric

E3S

T

20

Composition of Industrial Energy Consumption (TJ) in 1987, 1992 and 1997 varied in eac


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TRENDS IN ENERGY CONSUMPTION AND ENVIRONMENTAL IMPACTS

Effects of Energy Consumptionon Environment

PM

The major environmental problems relatedto fuels are local air pollution, acid rain, andglobal climate change, which is of majorconcern today. Isolated responses to oneenvironmental problem may in fact worsenanother. For example, catalytic converterson cars decrease nitric oxide emissions andhelp to reduce acid rain and urban smog butthey release higher levels of nitrous oxide, which is a potent greenhouse gas andcontributor to stratospheric ozonedepletion. Therefore the environmentalissues relating to fuel use need to beaddressed comprehensively.

NOx

(1987-

1997)

Pollutants

SO2

CO2

21E3ST

Comparing data obtained between 1987 and1997, it was observed that the average airpollution output in terms of particulatematter (PM), nitrogen oxides (NOx ), sulfurdioxide (SO2 ), and carbon dioxide (CO2)has generally increased in the studycountries. Over this period, increase in PMNOx and SO2 emissions were highest in SriLanka at about 8%, 14% and 6% respect-ively while increase in CO2 emissions washighest in Vietnam at about 11%. These arethe criteria pollutants used for analysis

because of their serious implications to theenvironment: CO2 is an indicator forgreenhouse gases, SO2 is a source for acidrain, NOx is a source for creating smog,and PM (


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global and local environmental pressures.Prioritising the objectives and streamliningthe sectors, sub-sectors and grassroots level

should be a major concern of policyformulation in these individual countries.

Different fuels pollute at different levels.Hence any change in energy mix has adirect impact on the pollution levels.Projection of emission scenarios for criteriapollutants used in this report is based onemission factors developed by IPCC andUSEPA using the energy consumptionpatterns and compositional changesdiscussed earlier. Indirect emissions fromelectricity generation are also included inthe inventory.

Based on the consumption data andprojected emissions from each energysource, compositional changes in 1987 and1997 for criteria pollutants were quantifiedfor each study country. In China andVietnam, highest contribution to all criteriapollutant comes from coal although therewas a decreasing trend over the decade. InIndia, biomass and coal both account for amajor portion of all pollutants. In Sri Lanka,industrial sector pollution is mainly due tobiomass and oil consumption. In the

Philippines, most of the criteria pollutantswere contributed from biomass.

Data shows that a larger portion of theenergy requirement of these countries stillcomes from coal and that has a potentialfor causing acid rains. Biomass alsoaccounts for a large portion of particulatematter and sulfur dioxide. Considering thenon-commercial use of biomass in othersectors, the effect could be much higher.High particulate matter and NOx can causedetrimental health effects locally.

Renewable energy use is less in allcountries. Therefore, promotion ofrenewable energy should be a major

focus in formulating national policies.

A Cross-Country Comparison

Economic Growth, IndustrialGrowth and Energy Use

The relationship between economicgrowth and commercial energy demandis quite complex and is beyond the scopeof this report. However, this sectionattempts to relate the three components,GDP growth, manufacturing sectorgrowth and manufacturing sector energydemand based on available data.

The study countries are at varyingdegrees and stages in the developmentprocess. Industrial sector dominance inthe economy compared to other sectorsis what is common to all. The per capitaGDP is highest in China at US$ 780 thenIndia at US$ 450. Sri Lanka and Vietnamhas US$ 820 and US$ 370 per capitaGNP respectively (ADB, 2000). Inaccordance with the per capita GNP, all

these countries are in the category of lowto lower middle-income countries.

Economic growth and energyconsumption have direct and indirectrelationships but that cannot be deducedeasily. However some empiricalestimates permit further analysis of theissue relating economic development,energy consumption and environment.Several studies have attempted todetermine the changes in the structure of

22E3ST


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23

E3

ST

Philippines

0%

20%

40%

60%

80%

100%

1987 1997 1987 1997 1987 1997 1987 1997

CO2 CO2 SO2 SO2 NOx NOx PM PM

Percentage

Year - Pollutant

Sri Lanka

0%

20%

40%

60%

80%

100%

1987 1997 1987 1997 1987 1997 1987 1997


Year - Pollutant

Percentage

0%

20%

40%

60%

80%

100%

1987 199

CO2 CO2

Vie

7 1987

SO2

Yea

Percentage

0%

20%

40%

1987 1997

CO2 CO2

Percen

India

60%

80%

100%

1987 1997 1987 1997 1987 1997

SO2 SO2 NOx NOx PM PM

China

100%

Year-Pollutant

tage

0%

20%

40%

60%

80%

1987 1997 1987 1997 1987 1997 1987 1997


Year - Pollutant

Percentage

Legend:BiomaCoal Electr

Compositional Change for Criteria Pollutants from Industrial Energy Consumption by Source


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production and consumption that occuras economic development progresses indetermining growth of energy demand. It

was found that at the early stages of acountrys development, there is a highimportance given to industry and there ishigh energy consumption by the indust-rial sector. Therefore developing countryenergy consumption is expected toincrease at a higher rate with increase ofper capita income irrespective of tech-nological improvements (Kuznets, 1971;Chnery and Syrqin, 1975; Kenneth et al,2001). This implies that China and India will become increasingly important in world energy markets since they areexpected to be higher energy consumers.

Nevertheless, in all the study countriesthere will be an increasing domestic needfor energy resources.

China and India are large coal producersin the world. Since coal is considered anenvironmentally undesirable fuel, it isforeseen that international pressure willbe exerted on these countries as they usecoal to meet increasing domestic energydemand. Substitution of coal by oil willalso be a crucial issue because even oil isconsidered environmentally undesirable

and subjected to price instabilities.Therefore domestic policies will becomeincreasingly important in determining

future energy demand from conventionalsources. Accordingly, in most countriesthere may be increasing pressure toinstitute policies to secure stable flow ofcleaner energy resources, such as naturalgas (Kenneth et al, 2001).

In this context, the trends andachievements of each study country maybe assessed. Comparison of manufac-turing sector contribution to economicgrowth, and energy consumption withrespect to sector contribution toeconomy shows that:

China has the highest annual GDPgrowth compared to other studycountries and the contribution by themanufacturing sector is significantly high(14.7%). The manufacturing sectorannual energy consumption growth rate(1.3%) is very much less as compared tothe contribution to economic growth.

In India, the manufacturing sectorcontribution is significantly high wheremanufacturing sector contributes by 8%,

StudyCountry

Economic growthrate

Manufacturing sectorgrowth rate

Manufacturing sectorenergy consumption

China 11.2% 14.7% 1.3%India 6.1% 8% 5.8%

Philippines 3.3% 3.1% 14%Sri Lanka 5.3% 8.5% 11% Vietnam 8.4% 5% 19.9%

Annual economic growth rate, manufacturing sector growth rate, and manufac uring sector energyconsumption of study countries may be related to indicate level of efficiency in industrial energy use.

t

24E3ST


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while economy is growing at 6.1%annually. There has been a high annual

increase in energy consumption (5.8%) inthe manufacturing sector, almost equal tothe annual economic growth (6%).

In Vietnam, Philippines, and SriLanka the manufacturing sector annualenergy consumption is almost double theannual economic growth. In Sri Lanka,the manufacturing sector contribution issignificantly high (8.5%) compared to theannual growth of the economy (5.3%)and, the energy consumption by themanufacturing sector has also grownannually by 11%.

Considering the manufacturing sectorperformance compared to the economicgrowth, China seems to have madesignificant improvements inmanufacturing sector energy efficiency. This could be a reflection of the natureof related policies and effectiveimplementation of such.

25E3ST

As observed in the previous sectionChina, India and Vietnam have reducedtheir coal use during 1987-1997, a trend which is more desirable in theenvironmental perspective. Yetsubstitution of coal by renewable sourceshas not been dealt with adequately. Theadoption of conservation policies andencouragement of technologicalinnovations for energy efficiency hasconsiderable gains to all these countriesin fulfilling future energy demand. TheSMI sector should especially beencouraged to use renewable sources ofenergy.

Specific Impacts of the SMI Sectoron Energy and Environment

As far as the SMI sector is concerned, itsenvironmental impact on the local level ismuch higher, held responsible forsignificant levels of air, water and toxicpollutants, solid waste generation anddamage to local ecosystems. Althoughthey are not the major polluters in mostsub-sectors, the specific pollution loadsare often higher than large firmsoperating in the same sub-sector.

Both resource use efficiency (includingenergy) and local pollution have to be

simultaneously factored in whenformulating policies for the SMI sector. The percentage change of criteriapollutants compared to the industry

CO2 SO2 NOx PM

Percentage

-15 -10 -5 0 5

Vietnam

Sri Lanka

Philippines

India

China

lAnnual change in total emissions per bil ion US$GDP contribution by industrial sector (1987-1997)


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sector GDP contribution during 19871997 shows that among the studycountries, Vietnam, Sri Lanka and China

had negative values, implying thatemissions per GDP contribution by theindustrial sector have decreased over thisdecade. Such improvements could againbe indicative of the nature of the policiesadopted by these countries.

Energy use pattern and potentialenvironmental impacts due to variouspollutants in selected SMI sub-sectorshave been studied and cross-countrycomparisons were made on them. Sub-sectors like textile, tea, foundry and brickindustries have been targeted here since

they generally dominate the whole SMIsector.

From the following tables, it can beconcluded that the emission from theSMI sector cannot be neglected at all.

Though emissions from individual SMIare small, the fact that collectivecontribution is significant only meansthat the SMI sector could have apredominant effect in modifying the localenvironment and its micro-climaticcondition. Hence any energy andenvironment policy or plan should alsoaddress SMI specifically and SMI sub-sectors should be addressed according totheir importance in the economy, energyconsumption, and contribution to localpollution.

CountryTotal EnergyConsumption

Energy Source EmissionsSpecific EnergyConsumption*

China

2.1 106TJ(14% of total

industrialconsumption)

Coal 36%Fuel Oil 4%Electricity 60%

332 Mt of CO2(22% of industrial emissions)

4.4 Mt of SOX(


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27E3ST


Energy Source Emissions

SpecificEnergy

Consumption

India

5.6TWh(6% of agricultural

sector;


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28E3ST


EnergySource

EmissionsSpecific EnergyConsumption

China

20.5 106TJ(44% of total


NA

Dust: 0.55 Mt

Waste gases: 11 billion m3

CO2 : 19.8 Mt(1% of total industrial emissions)

Backward :0.76 tce/t of casting

General:0.56 tce/t of casting

Advanced:0.49 tce/t of casting

India

88.1 104TJ(20% of total


Dust: 0.06 Mt

Waste gases: 11 billion m3

CO2 : 1 Mt(


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POLICY INSTRUMENTS TO PROMOTE E3ST

E3ST29

Chapter 4: POLICY INSTRUMENTS TO PROMOTE

E3ST IN THE SMI SECTOR

This chapter identifies the barriers thatindustries face in adopting E3ST,suggests strategies and policy instrumentsgovernments can implement to promotesuch technologies especially in the SMIsector, and describes some success storiesof E3ST adoption in the study countries.

Rationale for PolicyIntervention

Management of energy and environmentby the governments are carried outthrough policies or regulations. But inmost countries, the issues of energy andenvironment are dealt with separately andby different departments of thegovernment. Some national energypolicies predominantly deal with thesupply side management rather thanconservation at the end-user level. Foreach country, the ultimate objective of anintegrated energy and environmentalplanning is to arrive at a set of agreed

feasible and consistent targets for policyintervention.

To support the growth of the SMI sector,governments need to provide reliable andcost effective energy. Opportunities existfor governments to link the economicpolicies with the energy andenvironmental policies among industriesto reduce or minimize the burden ofdeveloping new infrastructure. One suchemerging area for sustainable

development is through the adoption ofenergy efficient and environmentallysound technological options. Thoughlarge industries have readily shifted tomodern technologies for energyefficiency and pollution prevention, andhave benefited financially fromconserving energy and minimizing waste,the SMI for some reasons, is stillreluctant to follow suit. Therefore, thereis a need to address this gap at the policylevel by formulating strategies and

instruments to promote E3ST in the SMIsector.

Benefits of E3ST

There are many ways by which energycan be conserved and adopting E3ST isone strategic way of achieving the dualgoal of energy conservation and emissionprevention. While obtaining the desiredoutput, the use of E3ST facilitates moreefficient use of energy resources,

improves eco-efficiency, and preservesthe environment as a whole. In other words, by opting to implement E3STover traditional technologies, industriesachieve a net saving in the energy input,and also a reduction of greenhouse gasemissions. It is not only beneficial toindividual end users but the positiveimpacts could be translated to a biggerscale as savings in the production ofenergy and reduction in emissions on thenational and even the global level.


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POLICY INSTRUMENTS TO PROMOTE E3ST

E3ST30

E3ST SUCCESS STORY IN AN INDIANTEAFACTORY

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