The collapse of communism in Central and Eastern Europe and the subsequent disintegration of the Soviet Union brought the region’s serious environmental problems to the attention of the international community. Although the countries in this vast area of the world are remarkably diverse, central economic planning had created a common pattern of environmental problems which included wastefulness, pollution-intensive economic systems, ill-designed and resource heavy technologies, and perverse incentives encouraging increase of output rather than enhancing efficiency of resource use. A universal feature was also the world’s highest energy and carbon intensity of economies.

A Soviet-type economy has left a legacy of acute health effects from local pollution. Having very scarce resources, the transition economies have so far focused mainly on mitigating local pollution rather than emissions of GHGs. However, wherever environmental policies were successful in the region, they have also brought important climate dividends. Some countries in the region (e.g., Poland) have introduced specific climate change mitigation policy instruments, such as charges on CO₂ and CH₄ emissions.

At the end of first decade of the transition to a market economy, contrasts between different countries in the region have outstripped bygone relative homogeneity. Central Europe and the Baltic countries have made a successful leap in economic reforms and restructuring, while countries of the former Soviet Union (so called New Independent States - NIS) continue to struggle with economic recession and political instability (EBRD, 1999). Recent empirical studies on the interrelationship between environmental improvement and economic development in transition economies undertaken by the World Bank, EBRD, and OECD have demonstrated that countries that were more successful in economic development and structural reforms have generally also been more successful in curbing emissions through targeted environmental policies. Aggregated GDP among advanced reforming countries has been gradually increasing, while emissions of main air pollutants have continued to decrease. Energy consumption has been stabilized and a switch away from coal has been recorded mainly in Poland and the Czech Republic causing GHG-intensity of GDP to decrease. In contrast, in the slower reforming countries in NIS, falling output, rather than economic restructuring or environmental protection efforts, appears to have been the main factor behind the decrease of energy use and emissions of pollutants, including GHGs (OECD, 1999a).

In the more advanced economies of the region, economic reforms have helped generate resources for investment in cleaner, more efficient technologies; reduced the share of energy- and GHG-intensive heavy industries in economic activity; and helped curb emissions as part of the shift towards more efficient production methods (OECD, 2000). In some sectors, however, the transition has brought greater climate pressures. For example, in those countries returning to economic growth, the use of motor vehicles for both passenger and freight transport has increased rapidly.

Energy Pricing and Subsidies
Virtually all countries in the region have embarked on the liberation of energy prices and elimination of energy subsidies. Significant successes in this field have been achieved in Central European and Baltic States. However, in NIS a sharp reduction of explicit subsidies has resulted in an almost immediate build up of hidden subsidies to energy producers and users, such as arrears and non-monetary forms of payments for energy (EBRD, 1999).

Finance and Income
Lack of adequate access to capital for GHG emission reduction technologies is perceived as a bottleneck in many countries in the region (World Bank, 1998). However, in CEE financial and capital markets are becoming mature enough to provide increasingly better access to credit for fuel switching or energy efficiency, especially given stable macroeconomic conditions and relatively high energy prices. In these countries the main bottleneck to environmental finance is not the lack of finance, but rather the lack of a “pull factor”. Lack of implementation of the Polluter Pays Principle, and weak enforcement of the environmental and climate policy framework does not stimulate sufficient demand for investments that would bring mainly GHG reduction benefits, with little private financial return (OECD, 1999b). In NIS, however, the weak policy framework is aggravated by the overwhelming lack of liquidity both in the public and private sector. Limited financial resources, which are available to authorities have not always been used in a cost-effective way. Opportunities to leverage additional financing from public and private, domestic and foreign sources were also underutilized (OECD, 2000).

Institutional Aspects
The countries in the region have undergone a rapid deregulation and privatization on a short time scale that has no precedence in the history of the world. This process in the Baltic and Central European countries has generally led to increased resource efficiency and replacement of obsolete and GHG intensive technologies. However, in a number of countries of the former Soviet Union, particularly in Russia and Ukraine, the rapid pace of liberalization and privatization has not been matched by the development of institutions as well as a regulatory and incentive framework necessary to support a well-functioning market economy. Perverse incentives that had generated many of the environmental problems of centrally planned economies, such as rent seeking and lack of incentives for efficiency and restructuring, now undermine restructuring of already private enterprises (EBRD, 1999). But successful economic policies have not been a panacea for successful GHG-mitigation improvements. Targeted environmental policies and institutions in Central Europe were required to harness the positive forces of market reform, and ensure that enterprises and other economic actors improve their environmental performance which are still weak in the NIS (World Bank, 1998).

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