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ECONOMIC MECHANISMS TO PROMOTE Presented by DAVID MCROBERT AND ELLEN SCHWARTZEL, Pollution Probe April 30, 1991. Air and Waste Management Assoc. Conference, Toronto, Ontario Introduction With the expansion of the Blue Box program throughout Ontario, funding of the 3Rs (reduction, re-use and recycling) has become a controversial issue. For example, the Ontario Ministry of the Environment has increased transfer payments to municipalities to $27 million for 1990-91 to fund 3Rs initiatives and the new Ontario government is considering doubling and even tripling this amount of annual transfer payments soon. Concerns have been raised about the viability of expanded recycling programs as long as markets for recycled materials are underdeveloped. It has become clear that other parallel policy mechanisms must be developed simultaneously by the federal and provincial governments to encourage the 3Rs. In this paper, historical advocacy by Pollution Probe on waste issues, the need for full-cost pricing of resource use and waste collection will be documented. In addition, it will outline several economic mechanisms available to promote the 3Rs and comments on their advantages and disadvantages. This paper does not discuss important implementation issues related to the various economic mechanisms which are reviewed. However, these have been recently been examined in a paper prepared by the Waste Reduction Advisory Committee for the Ontario Minister of the Environment (WRAC 1992). Moreover, it is clear that implementation and administration issues will have an important bearing on the system that is chosen. In this paper, we do not discuss important implementation issues related to the various economic mechanisms. Moreover, we believe that these will have crucial impacts on which system is chosen. A Survey of Pollution Probe's Advocacy Work on the 3Rs Before outlining Pollution Probe's position on economic mechanisms to promote reduction, reuse and recycling, I should outline our history of advocacy on waste issues in general and the 3Rs in particular. What such a survey suggests is that there has been a general trend towards a greater understanding of the role of economic mechanisms in the development of a long-term solution to our waste crisis. Admittedly, this kind of survey also reveals what most economists have long suspected about environmentalists - at best, many environmentalists have glossed over economic issues in their analysis and, at worst, they ignore them altogether. Pollution Probe's advocacy in the early 1970s on waste issues probably could be viewed as falling into the former category that is, economic considerations were not very prominent in the thinking of Probe's staff. One of the first 3Rs projects that Pollution Probe promoted aggressively was curbside collection of newspapers for recycling by municipalities in 1973. Thousands of hours of staff and volunteer time were devoted to establishing curbside newspaper pick-up programs in many cities in Ontario. This project was not a roaring success. Many of the problems that continue to plague recycling programs in North America were identified including: unstable prices for used materials and contamination of the materials. Other projects like depots for recycled materials were also started, but these faded quickly. Two years later, Pollution Probe researchers launched a socio-economic analysis of paper recycling to determine why the programs had not succeeded. The main findings of their research were reported in a document titled Recycling: Identifying the Barriers published in 1975. The report contended that the "major stumbling block seemed to be the belief on the part of key government and industry officials that recycling was simply not feasible." It challenged the view propounded by government and industry officials that adequate technology was unavailable and markets for reclaimed materials were non-existent. Among the key barriers to recycling identified in the report were the following: 1) lower transportation costs for virgin materials 2) taxation mechanisms favouring virgin materials 3) vertical integration of resource industries such as the pulp and paper industry 4) government subsidies for construction of new facilities to promote virgin material extraction. In this area, I would include government grants to municipal waste incinerators, which certainly virgin material extraction over recycling. These barriers were later explored more fully in a report prepared for Pollution Probe and the Canadian Environmental Law Research Foundation called Breaking the Barriers, released in 1984. This report proposed some specific reforms to existing laws including: ¨ amending the Excise Tax Act to exempt re-refined oil and other recycled goods ¨ amending the Income Tax Act to allow accelerated capital cost allowance for 3Rs investments By the early 1980s, it was apparent that Pollution Probe and other advocacy groups had recognized the significance of economic principles in the resolution of many environmental problems. With the publication of Profit from Pollution Prevention in 1982, Pollution Probe joined the chorus of experts who were saying that the 3Rs could not only help reduce municipal solid and hazardous waste generation rates, it also could save corporations millions of dollars in disposal and tipping fees costs. In 1988, Pollution Probe produced the Waste Less Now Report, which demonstrated that a 70% diversion from disposal could be achieved in residential neighbourhoods. This report also recommended higher tipping fees, and suggested that user pay systems be considered. Most recently, the It's Not Garbage Coalition (of which Pollution Probe is a member), recommended that the Ontario government consider a taxation mechanism encouraging the 3Rs. The coalition suggested a taxation regime which would exempt reduction and reuse initiatives, would tax recycling initiatives a certain percentage, and would tax disposal activities at the highest rate. In summary, Pollution Probe has advocated the use of various economic mechanisms to promote recycling and waste reduction for over ten years. Criteria for Evaluation One of the most consistent themes in all of the publications and advocacy by Pollution Probe for the 3Rs is that polluters should be required to pay for the waste they generate. There is also an implicit critique of the dominant economic theories that govern our economy. One of the main environmentalist critique of current economic theory and practices is the argument that resources (especially energy, air and water) are under-priced, which promotes excessive consumption, or inappropriate uses. The under-pricing of resources leads to unsustainable resource management practices. Our view is that the following criteria should be used in the evaluation of any waste management system: 1) polluters (including companies and consumers) should be made of their costs when possible; 2) the system should encourage product stewardship by manufacturers; 3) the system should be locally controlled and managed whenever possible; 4) the system should use economic incentives to encourage shifts towards the 3Rs by individuals and corporate entities; 5) the system should be simple and cost-effective to administrate, and ideally should be integrated with existing federal, provincial and municipal financial, regulatory and institutional structures; 6) revenues generated by any specific mechanism (e.g. unredeemed deposits collected in a deposit/refund system) should be retained by government and industry to support the overall waste management system. In our view, the biggest economic barrier to the success of the 3Rs is the entrenched, often invisible system of subsidies for virgin material extraction. Only when industries such as the forestry, mining and oil sectors begin to internalize the true costs of soil depletion and water and air pollution will secondary (recycled) materials be able to compete on the open market. Without this fundamental shift, economic mechanisms to encourage the 3Rs amount to tinkering on the back end of a skewed economic system. Nevertheless, in the balance of this paper, we will restrict ourselves to such tinkering mechanisms, because we believe that this is an area where improvements can be achieved in the shorter term. Economic Mechanisms to Promote and Fund the 3Rs Literature on economic mechanisms to promote the 3Rs suggest that there are at least nine different approaches to encouraging the 3Rs. 1. Use Consolidated Revenue Fund (i.e. status quo) 2. Tax on Waste Management Services 3. Tipping Fees and other Variable Fees 4. Generator Pay Charges 5. Virgin Material Levies 6. Gross Receipts Tax 7. Standard and Variable Unit Charges 8. Waste Taxes collected for the CRF 9. Deposit/Return Systems I would like to consider each option in turn, taking into account the criteria I mentioned earlier. Of course, there is no one economic mechanism that can be used to achieve all of the goals outlined above. Nevertheless, there are some approaches which are preferable to others. 1. Use General Revenue Funds The first option is based on the status quo. In other words, funds for waste management in the province would continue to be collected primarily through municipal and general revenues. Waste management services would also continue to be treated in a manner similar to police protection, libraries and other local or provincial services. In order to finance 3Rs programs, taxes would have to rise. One advantage of continuing this system is that no new legal and policy framework would be required, and this would reduce administrative costs. The main problem with this approach is that no direct economic incentive is provided to service user to minimize waste generation. An open question that should be examined in great detail is how much public money should be spent to kick-start markets for recycled goods. Some of this money could be spent on purchasing more durable goods, which would last longer and save taxpayers money in the long run. More money could also be spent on procurement of goods and services which maximize diversion from landfill and promote 3Rs activities. In addition, reliance on the CRF means that funding for 3Rs competes against other social and economic programs for allocations of scarce resources. Finally, continued reliance on the CRF and municipal taxes would mean that companies who produce wasteful goods and packages would not be directly penalized. Nevertheless, other financial incentives and penalties could compensate for this deficiency. For example, companies that fail to meet certain targets for packaging waste could be prosecuted and fined under provincial laws. This would generate negligible revenue for governments. Also, the cost of this system would be high and could amount to a job creation system for lawyers and other investigative staff in the MOE. For many reasons, governments may probably want to use the CRF to support composting programs. In the short term, it is clear that these types of programs will be difficult to find using other mechanisms. In sum, our view is that the status quo has not been successful in encouraging the 3Rs, and that better economic instruments are required. 2. Waste Taxes collected for the CRF Another approach would be to impose waste taxes on every business operating and person living in the province. In theory, this system could be modelled on a variable tax rate to take into account waste generation differences in communities and businesses, analogous to that imposed by the Worker's Compensation Board on businesses. The WCB collects revenues in a dedicated fund to compensate and rehabilitate workers and the families of workers who are killed and injured at work. A similar approach for waste management would allow a government agency to establish a certain charge to be levied against classes of corporations based on their rates of waste generation, raw material use, etc. Presumably, the rates charged would decrease as performance within the class of users improved. There are some advantages to this system which deserve consideration. One is that this tax system could be integrated with the current municipal, provincial and federal tax system. In addition, the polluter-pay principle would be incorporated in the ranking of classes of waste generators. The second is that Workers' Compensation is a dedicated fund (i.e. Metro politicians can't get money of it). OTHER ADVANTAGES However, it might well prove difficult to create a workable classing system which would be so sensitive that companies could "graduate" from class to class and experience a financial benefit. The auditing and enforcement functions necessitated by such a tax would also likely be onerous to administer. People react violently to WCB because of history of WCB and cost of system. 3. Tipping Fees and other Variable Fees Increased tipping fees are another mechanism available to promote and fund the 3Rs. Pollution Probe and many other advocacy groups have argued that low tipping fees served to discourage more environmentally-sound waste management practices in Ontario in the 1970s and through the early 1980s. For example, until early 1988 the tipping fee at Metro Toronto dumps was only $18 tonne even though this rate vastly underestimated the cost of developing future landfill capacity. Thanks to the work of environmentalists, this rate was raised to $67/tonne in 1988 and then to $150/tonne in February 1991. In other Canadian municipalities, tipping fees are still quite low; for example, Montreal's Miron landfill charges only $36/tonne in 1991. One of the compelling arguments made in favour of higher tipping fees is that a strong financial incentive is provided to reduce waste if a substantial fee is charged. One advantage to raising tipping fees is that the administrative system is already well established and accepted. A second advantage is that funds can be retained at a local level to pay for 3Rs initiatives. One disadvantage is that adequate enforcement must be undertaken to ensure that illegal dumping and burning does not take place. These activities are presently thought to be occurring in the GTA because of high tipping fees at GTA landfills. Waste will also be transported longer distances to cheaper sites to circumvent charges, unless regulations are put in place to prevent this. Another problem is related to the fact that municipalities are not required to spend money raised through tipping fees on waste management and 3Rs activities. As a result, substantial tipping fee revenues in Reserve Funds are being spent on other services by Metro Toronto's municipal council. Another disadvantage is that the system does not distinguish between material or product types and this could lead to unfair results. Material bans can remedy this to some extent, but this mechanism has not really slowed the flow of some materials, like hazardous waste produced by householders and small generators, into Ontario landfills Concerns have also been raised by some that where landfill sites are municipally owned, municipalities will come to rely on the revenue from tipping fees to support social programs, and will be reluctant to encourage waste reduction. It is also conceivable that very high fees in some areas could spur capital flight to cheaper areas (i.e. from Metro Toronto to Eastern Ontario). In practice, though, many factors influence location of a business, and waste management costs are unlikely to be the determining factor. Eventually, user pay must be extended to blue boxes and to use of centralized composting facilities to support 3Rs. 4. Generator Pay Charges In Ontario, many industrial, commercial and institutional (ICI) waste generators are charged for waste services on the basis of the quantities that they produce. This principle has also been applied implemented or considered by several Ontario municipalities. Pollution Probe believes there are numerous advantages to generator pay charges. The main advantage is that generators are provided with a direct financial incentive to reduce their waste. Another advantage is that the charge is levied in proportion to the quantity of waste generated. Householders will become keenly aware of the major sources of residential waste, and will presumably adjust their purchasing habits accordingly. From an administrative viewpoint, funds raised by generator pay charges could be retained by municipalities or regions and then could be used to support development of local infrastructure. The charge can be administered on a per can or a per bag basis, or the generator can pre-arrange/pre-select a certain specified level of service on a weekly or monthly basis. Obviously, the more options householders have to reduce their costs, the more effective the system will be in reducing waste. Householders will need access to composting and recycling, and they should also have the opportunity to choose a reduced level of service. Eventually, it might be logical to require generators to pay nominal charges for recycling and centralized composting services to ensure that source reduction is maximized. The most frequently raised issue with respect to generator pay charges is equity. For example, it is argued that large families may be less able to cope with the additional cost of a generator pay system. Undoubtedly there is some truth to this argument; however, inequities that might arise could be addressed through appropriate rebates to large or low-income families. Municipalities often raise the concern that user pay schemes will result in illegal dumping. The fact that a few individuals will break the law should not stop us from putting good laws into place. Some people cheat on their taxes, and still benefit from all the services which taxes provide. Municipalities aren't recommending that we do away with taxes because of this inequity. Public education will help control illegal dumping. Taxpayers will have to be convinced that user pay schemes don't amount to "double dipping". It will be important to show that the previously hidden costs of garbage collection will be eliminated from property taxes, and will be replaced by an upfront charge based on the volume of waste. In communities with a generator pay system in place, residents have found that they pay less for the collection and disposal of their refuse than before. In some cases, the municipalities themselves have saved money. (RAC paper, 1990). Another argument that is made against user pay systems is that there is no direct pressure on the manufacturers of certain products to change their packaging. Many individuals feel trapped by a lack of choice with respect to packaging; they want to purchase a certain good or service but they cannot buy the product inn a reusable container at supermarkets. This would result in the indirect pressure of consumers on manufacturers, which can be a powerful force. Market adjustments would certainly occur because supermarkets would begin to provide more bulk foods and reusable packages (smaller health food stores would pick up the slack if they did not) as cost conscious consumers began to demand them to reduce their generator pay charges. In sum, user pay systems have good potential to improve recovery rates of recycling programs; thus, diverting waste from disposal, and deserve consideration by more municipalities. However, we may not want to charge for use of centralized composting for a while to encourage development of this service in Ontario. 5. Virgin Material Levies The idea behind virgin material taxes is that rates of raw material extraction are excessive and environmentally destructive. The thinking that has informed this approach to waste reduction has been heavily influenced by steady-stable economists like Herman Daly and Hazel Henderson. As indicated above, there are dozens of explicit and hidden subsidies to forestry, oil and gas and mining companies which continue to encourage development of new resources rather than conservation. A virgin material charge could be imposed at the first level of processing to encourage appropriate behaviour on the part of corporations. For example, newspaper companies could be charged $X/tonne for every tonne of virgin newsprint they use. Rebates could be provided for use of recycled newsprint. Part of the logic would be to address historical patterns of subsidies used to support high rates of virgin material extraction. The system could be established so that the tax was only levied on primary materials produced and used in the province as well as imported materials. Some industries, like the forest products sector, would be severely affected by such a levy. This would mean that exporters of goods and services using the virgin materials would argue they should be exempt from paying the tax. Some people will see that it would devastate exporters. NB might not impose virgin material tax on wood used to build new buildings and houses. Funds from the tax could go into the CRF to be allocated by the province or into a special trust fund to be used by industry, government, ENGOs and communities to support the 3Rs. Critics of such a scheme may point out that such a tax may not be very effective in reducing waste because companies can continue to buy virgin materials and pass the tax costs on to consumers. Clearly, such virgin material taxes would have to be high enough to make the costs of switching to recycled materials look good in comparison. This measure would probably require federal intervention and international action to successfully implement. It would also require a fairly sophisticated administrative system, as well as consultative mechanisms to determine which materials would be so taxed. These features tend to make this a difficult option to implement on a provincial basis. 6. Gross Receipts Tax Under this kind of system, a tax could be applied against the price paid for goods and services, most typically at the point of purchase. For example, a charge of 1 cent could be levied on every dollar of fast food purchased by an individual. The system would obviously not reconcile the fact that certain companies like MacDonald's are reducing their fast food packaging more than others. Funds could flow into the CRF, or could be dedicated by the province to the 3Rs. The advantage of this system is that the system would be relatively simple to administer; a tax would be applied to all sales in a jurisdiction. The main problem is that there would be no direct relationship between the dollar sales and the amount of waste generated. In fact, to the extent that durable, reusable items are more expensive than disposable items, they would be more heavily taxed. Given "tax fatigue" after the GST was announced, this would be a very difficult tax to develop and implement. 7. Standard and Variable Unit Charges A standard unit charge can also be imposed as a mechanism to encourage the 3Rs. Often called an "advanced disposal fee" (ADF), these charges are now being collected on some products in Florida and an ADF system is being considered in California. One advantage to this system is that the added disposal charge would be visible to consumers and companies using selected goods and services. The tax could be levied by product size if landfill was used as the basis for assessing the ADF. A slightly different approach would be to use a variable unit charge. The charges would vary from product to product depending on some established ranking. In Ontario, one example of a standard unit charge is the environmental levy of about five cents on every non-refillable container sold in the province. Another example is the $5 levy charged on each new tire sold in the province. These revenues flow into the CRF, and they are "nationally" dedicated to support of environmental activities. In November of 1990, a coalition of Ontario environmental groups advocated that variable unit charges be imposed on non-refillables to encourage greater use of refillable drink containers. An example of how it could work is provided by reference to diapering options. For example, every disposable diaper sold in Ontario could have a unit charge of 3-5 cents which would be collected at the retail, wholesale and production levels. The money generated could then be used to fund programs to encourage use of cloth diapers by new parents, or fund disposal of disposable diapers. A similar unit charge could also be applied to disposable razors. One advantage to this system is that it has appearance of fairness. The idea that certain useless packages (e.g. boxes around toothpaste) should be taxed has great intuitive appeal to many people. The flip side of this is that it could prove an administrative nightmare to implement. Moreover, it is difficult, in the absence of life cycle analyses of different products which provides a clear scientific basis for comparing disposal costs associated with them, to establish a ranking system. Without this basis, any ranking system would be subject to legal challenge. More importantly, any ranking of the products tends to mobilize interest who may be economically disadvantaged by a variable tax. As a result, there have been more than twenty efforts to establish this type of system in the U.S. and all have failed. Pollution Probe feels that, in view of the experience in the U.S. neither system could be implemented right now, but we should try to implement variable unit charges in the next few years, on some products. 8. Tax on Waste Management Services This approach to funding the 3Rs has been implemented by the state governments of Washington and Minnesota. In summary, a tax is charged against waste management services purchased by a service user. Theoretically, the charge could be imposed in both the public and ICI sectors. One advantage of this system is that it is based on a polluter-pay approach and a high tax would discourage use of disposal services. This system could also be characterized by the equity problems that relate to a generator pay system as described above. From an administrative viewpoint, the approach may have certain advantages. In effect, waste haulers become a kind of tax collector because the added charges are collected from the service user. How this would work in Ontario is unclear because of the current range of private/public sector involvement in waste collection practices. Another concern is that remittances by haulers to the state might not reflect the true amounts of tax paid based on the waste collected. The main disadvantage of this system would be that there would be no direct impact on product design. Another disadvantage is that most consumers would not see the tax and would not be directly encouraged to reduce waste and change their behaviour. 9. Deposit/Return Systems Deposit/return systems have been in place for a long time in numerous jurisdictions for beverage containers. In Norway and Sweden, deposit/returns have also been employed for car hulks. Their application has also been considered/return systems can demonstrate high rates of returned materials - usually around 80%. Another advantage is that they follow the principle of generator pay, thus alleviating the burden on the taxpayer. Some municipalities have recommended deposit systems for this reason. In Ontario, the soft drink industry is opposed to strengthening of the deposit regulations, arguing that deposits will be incompatible with the Blue Box program. However, evidence from jurisdictions such as Oregon indicate that recycling programs and deposit/return systems can work well together, and can in tandem achieve a greater diversion of materials from disposal. Pollution Probe recently produced a brief entitled "Doing More for Less" which advocates a deposit/return system for beverage containers in Ontario. Deposits may also become the instrument of choice as a mechanism for managing house hazardous wastes, (including batteries) and other used products because of the ability to increase recovery rates by increasing deposit levels. However, it will be essential to resolve several implementation issues before the instrument could be developed, including whether the used household hazardous waste products and containers should be returned to retailers, depots or should be recovered some other way (ie. using Denmark's "yellow box" program). 10. Diversion Credits Diversion credits represent
the amount of money saved by diverting a given amount of waste from landfill.
These savings are often substantial, and can include avoided costs of tipping
fees, avoided transportation costs, and perhaps even avoided costs of siting
a new landfill. Municipalities which operate both collection and disposal services
incur these savings directly, but are often not able to reflect them in their
accounting processes. Where municipalities have contracts with waste haulers,
the municipality may be able to negotiate diversion credits based on the savings
accrued to the waste hauler. Such an arrangement will assist in financing 3Rs
activities. (Resource Recycling, April 1990). Recently, some industries have
argued that they should get "diversion credits" when programs they
support result in diversion from landfills. It is important that any calculations
of diversion credits are based on standards devised by governments.
CONCLUSION In our view, the most promising economic instruments will be - increased tipping fees - generator pay systems - deposit/return systems - virgin material taxes In the next few years, we will be seeing applications of most, if not all of these mechanisms at various levels of government. Many will meet with stiff opposition and controversy, as cost burdens shift from the general taxpayer to the more specific consumer, manufacturer and waste generator. Strong political will and a good deal of public pressure will be needed to put in place some of these mechanisms. Groups like Pollution Probe will be supplying the public pressure. We hope we will see the political will. D:\DSM Papers 90-94\Econ Mech on 3Rs 1991 OVERHEADS 1) STATUS QUO: 3RS FUNDED THROUGH CONSOLIDATED REVENUE PROS: - no new legal or policy framework required - low administrative costs CONS: - no economic incentive to reduce waste COMMENTS: - could be combined with legislated penalties for wasteful practices (e.g. packaging law) 2) WASTE TAXES PAID TO CONSOLIDATED REVENUE FUND (CHARGES BASED ON RATES OF WASTE GENERATION) PROS: - administration possible through current tax systems - generator pay principle could apply CONS: - classing system would be complex to design - auditing and enforcement could be difficult 3) TIPPING FEES PROS: - increased tipping fees good incentive to reduce waste - administrative system well established - proceeds can pay for 3Rs initiatives - local control possible CONS: - enforcement required - municipalities may come to depend on tipping revenues - doesn't distinguish between materials or product types - high fees may encourage industry to relocate elsewhere 4) GENERATOR PAY (RESIDENTIAL) PROS: - direct incentive to reduce waste - householders will avoid most wasteful materials first - proceeds retained locally; available for 3Rs - can reduce municipal costs CONS: - illegal dumping may be encouraged - harder on low-income or large families - no direct pressure on product manufacturers 5) VIRGIN MATERIAL TAXES ON MANUFACTURERS PROS: - will encourage use of recycled materials - can be selective to deal with major waste components (e.g. paper, plastics) - administration possible through current tax systems CONS: - high taxes would be required to be effective - politically difficult COMMENTS: - may have to be applied at the federal level 6) GROSS RECEIPTS TAX AT POINT OF PURCHASE PROS: - simple administration CONS: - no direct incentive to reduce waste - no direct relationship between dollars sales and amount of waste generated 7) STANDARD AND VARIABLE UNIT CHARGES PROS: - visible to consumers; incentive to reduce waste - could concentrate on problem products CONS: - where alternative products not available, limited effectiveness in reducing waste - where alternative products are available, politically difficult to penalize certain problem products 8) TAX ON WASTE MANAGEMENT SERVICES PROS: - if visible to consumers, incentive to reduce waste
CONS: - where alternative products not available, limited effectiveness in reducing waste - politically difficult to implement new taxes
- won’t concentrate on problem products 9)
DEPOSIT/RETURN SYSTEMS
PROS: -
faces a degree of cost internalization by industry and consumer
- very successful in diverting materials from disposal
- high level of public acceptance for certain deposit/return
systems
CONS: -
retail outlets not set up for returns
- politically difficult
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