Indicator 5.1 Innovations in the green economy/environment

Key message
Environmental and green economy innovations depend on both the overall national research and development (R&D) system and economic operators. Both dimensions require considerable financial resources for long-term results. However, such resources remain out of reach for both the state and the vast majority of economic operators. As a result, the number of innovations applied in practice, including on the environmental dimension, remains low, without any clear prospects for the next period.

Indicator trend
The Republic of Moldova (hereafter “Moldova”) considers innovations as “the introduction in the enterprise of a product, process, method of organisation or marketing method, new or significantly improved” (NBS, 2018). This definition largely coincides with the international approach promoted by the OECD (OECD, n.d.b) that goes beyond R&D systems. In this approach, innovations are based on companies that implement production processes, place goods or services on the market, or apply methods or marketing concepts that are new or significantly improved. Such research was conducted first in 2017, identifying 673 innovative enterprises during 2015/16, or about 21% of the total in the research. These figures are relatively modest compared with other countries due both to the situation of local entrepreneurs and national infrastructure in the R&D field. Research results were confirmed by the 2021 Global Innovation Index, where Moldova ranks 64th of 132 (or 37th among European states) (GII, 2020).
Environmental innovations can be assessed based on the number of environment-related technologies in the total number of technologies (Figure 48). Thus, on average, about one-fifth of new technologies applied by local enterprises can be considered environmental or address the green economy in some way. Most are related to environmental management procedures and climate change mitigation in the energy sector or the production of goods.

Figure 48. Share of environmental technologies in all technologies developed (percentage)

Indicator 5.2 Public expenditures on environmental protection

Key message
Environmental protection priorities continue to be underfunded. Both budgetary programmes and money allocation instruments have several deficiencies that limit the execution of expenditures. Moreover, the correlation of public expenditures with environmental tax revenues compares poorly to European countries, regardless of Moldova’s priorities in this area. Still, the recent creation of a dedicated Ministry of Environment lays the groundwork for improvement.

Indicator trend
For a long time, the Environmental Funds (National Environmental Fund – NEF and Local Environmental Funds) were the main state instruments for environmental protection based on accumulations from environmental taxes. In 2017, this mechanism was changed by eliminating local ecological funds and providing an annual allocation to NEF from general revenues of the state budget. State expenditures in the field are also provided as part of the “Environmental Protection” budget programme. This programme attempts to transpose key elements of various strategic planning documents, including sectoral strategies, governmental action plans and other policy documents.
In recent years, an average of MDL 240 million has been allocated annually for the Environmental Protection Programme, or less than 0.1% of gross domestic product (GDP). On the one hand, this amount represents the capacity of the budget. On the other, it reflects Moldova’s failure to fully correlate environmental expenditures with environmental tax revenues. Moreover, analysis of approved and executed expenditures indicates an average discrepancy of almost MDL 100 million annually. There are multiple causes of this discrepancy – from the sacrifice of the environment for other government priorities to the inability of responsible institutions to implement the assumed expenditure programmes.

Figure 49. State budget allocations for environmental protection (million MDL)

The state allocated other financial resources towards environment protection beyond the Environmental Protection Programme. Certain environmental expenditures (related to wastewater disposal and treatment) are included in Programme 75 “Development of housing and public utility services” sub-programme ‘7503’ – water supply and sewerage”. NEF allocates this money based on projects submitted by various authorities. Obviously, not all these expenses refer to the environment (e.g. construction of water pipes), only those related to wastewater collection and treatment (e.g. construction and improvement of wastewater treatment stations and sewage systems). Analysis of projects financed through NEF shows limited resources (20%) for wastewater collection and treatment; the rest are allocated to construction and management of water supply systems (Expert-Grup, 2020b).

Figure 50. National Environmental Fund allocations (million MDL)

Moldova ranks near the bottom in environmental protection in relation to European countries. In 2019, reported to the economic level, government expenditures in the EU-28 on environmental protection reached 0.5% of GDP, while Moldova remained at 0.1% of GDP. Basically, even if environmental priorities differ according to country, most states allocate at least twice as much as Moldova for the prevention, reduction and elimination of pollution or any other actions to prevent deterioration of the environment.

Figure 51. Government expenditures for environmental protection at European level (percentage of GDP in 2019)

Indicator 5.3 Energy subsidies

Key message
In Moldova, energy subsidies largely take the form of tax relief on gas and electricity for households. This is due to total dependence on imported energy and the low standard of living of a large part of the population. Thus, tariffs for energy resources are a topic of ongoing debate, and are often political. Unless the country has significant economic progress, any elimination of subsidies, resulting in increase of tariffs is immediately attacked by the population, businesses or political opponents.

Indicator trend
Moldova depends almost totally on imported energy, averaging at 6-7% of GDP in recent years. The annual cost borne by the population and local companies in recent years has averaged MDL 14 billion. These costs fluctuate significantly from year to year depending on international market prices and the exchange rate of the national currency. With a relatively low standard of living and large groups of vulnerable people, the state continues to apply tax relief to different categories of energy resources; these are effectively energy subsidies. Thus, most governmental support for the energy sector is intended for consumers rather than producers; this is true of other developing countries as well.
In monetary terms, the largest volume of subsidies comes in the form of tax reduction, i.e. zero-rate value added tax for electricity and 8% for natural gas. This generates subsidies of about MDL 350 million for electricity and about MDL 500 million for natural gas for own consumption or heating (Figure 52). At the same time, the total volume of subsidies remains relatively constant in relation to GDP, certain fluctuations being determined by prices and the exchange rate.

Figure 52. Estimates of consumer energy subsidies in Moldova (MDL million)

Indicator 5.4 Private expenditures for environmental protection

Key message
Information on private sector investments in environmental protection is limited. Even so, the volume of financial resources allocated by the private sector is about the same as that of public environmental expenditures. This leads to a volume of total environmental expenditures well below that achieved in European countries – only 0.2% of GDP compared with the EU average of about 1.9% in 2020.

Indicator trend
In addition to public environmental expenditures, the private sector makes a number of current expenditures or investments. Certain data on private environmental expenditures refer to current expenditure and expenditure on capital repairs of fixed assets. During 2019/20, these expenditures remained about equal (around MDL 250 million) to public environmental expenditures. Most are directed to wastewater collection and treatment (66%) and waste management (23%) with the remainder to other areas. This allocation is mainly due to increased regulation of entrepreneurial activity on water use, as well as rules for management of production waste. Even so, this volume of financial resources allocated by the private sector is much lower than that allocated in European countries. On average (EUROSTAT, n.d.) in the European Union, private environmental expenditures more than double public expenditures, reaching 1.9% of GDP (2020). By comparison, Moldova managed to secure total environmental protection expenditures of only around 0.5% of GDP in that year.

Figure 53. Current expenditures and expenditures for capital repairs of fixed assets for environmental protection (MDL million)

In addition to government and private expenditures, external support programmes can be mentioned for a broader assessment of environmental expenditures. Moldova is part of the “EU4Environment” Project together with other Eastern Partnership countries. As such, it benefits from support in ensuring the sustainable use of natural capital, improving the quality of the environment and well-being of the population, and stimulating economic growth.

Indicator 5.5 Subsidies for organic agriculture

Key message
Organic agriculture is too underdeveloped to be considered a distinct branch of agriculture. With a small number of operators and land involved in organic agriculture, there can be no question of massive investments. In fact, without a well-defined group, subsidies for organic agriculture in Moldova cannot reach a level comparable to those in other countries, even with specific programmes. Thus, this sector is tiny, driven by a few enthusiastic farmers.

Indicator trend
Moldova continues to support local agriculture through direct payments to economic operators, widely known as subsidies in agriculture. The National Fund for the Development of Agriculture and Rural Environment is the main instrument for allocating financial resources. In 2020, the Fund reached a volume of about 0.6% of GDP. The regulations include a specific programme to promote and develop organic agriculture. Moreover, to encourage organic agri-food production, subsidies are provided in amounts up to 20%. However, Figure 54 shows that financial resources directed to farmers engaged in organic agriculture are extremely small, averaging only MDL 2 million per year or less than 0.2% of the total subsidy fund.
Even if the Fund is authorised to support organic agriculture, the share of grants allocated to this sector is rather small. It denotes the modest development of this sector and the challenges farmers face in complying to the generic requirements of organic agriculture. Moreover, the small number of operators and small area of organically cultivated land (only 1% of total agricultural land) also speak to the lack of interest of most farmers about such activity. There are multiple causes related both to demand (i.e. little interest within the domestic market) and to supply (i.e. increased certification requirements and the need for massive investments).

Figure 54. Volume of subsidies in organic agriculture (million MDL)