Implications of a National Waste Levy for Product Stewardship Policies and Schemes

1 Introduction

2 Effects of a Waste Levy

3 Conclusions

2 Effects of a Waste Levy

This section analyses the beneficial and detrimental impacts of the proposed waste levy on product stewardship schemes. The issue of concern here is not whether a waste levy is a good instrument per se, but whether it is beneficial or detrimental to product stewardship.

To simplify the analysis of different types of product stewardship schemes across product life-cycles, we have categorised them as schemes that:

• redesign products to reduce waste or to ease reuse or recycling;
• provide information only;
• involve collection and recycling.

As discussed below, the greater effects are on schemes that involve collection and recycling. The discussion below is split into two. Firstly we assess the effects of product stewardship schemes that entail either product redesign or information provision. Secondly, we provide a more detailed discussion of the impacts on collection and recycling schemes.

2.1 Product Redesign and Information

2.1.1 Product Redesign

A waste levy that increases the costs of final disposal will provide some increased incentives for purchase of products that produce less waste or are designed for reuse or recycle. However, the extent of this effect may be small—one of the well-discussed barriers to waste minimisation is that the price incentives associated with disposal costs do not flow through to decision-makers at purchase, or do so in a very limited way.

There is no empirical evidence that we are aware of that suggests an impact of disposal charges on product redesign, either positive or negative so the analysis has to remain theoretical.

A simple analysis would suggest that, taking account of the limitations of effects discussed above, the only impact would be positive or, at worst, neutral. Increases in the costs of disposal would provide increased demand for redesigned products as part of product stewardship schemes or, if the barriers to consumer response were sufficiently strong, have no effect.

However, there are circumstances under which there could be an adverse effect. These are when the manufacture of a product that will produce less waste at the end of its life, creates more manufacturing waste than the manufacture of a product that has more end-of-life waste. Here the impacts are potentially perverse. Where there is no real consumer response to a waste levy, the levy might provide incentives solely on the manufacture to change its product to one that produced more consumer waste (and less manufacturing waste).

The lack of a consumer response can reflect the gap in time (and space) between the purchase decision and disposal, different decision-makers or the limited incentive of variable charging for waste collection and disposal from households—user charges apply in many parts of the country but in a way that has little impact on marginal decisions. [Chiefly because payments are per bag or bin and decisions related to individual items would not be expected to change the disposal outcome to one more (or one less) bag or bin.] Incentives relating to waste delivered directly to disposal facilities by households are also not charged for efficiency, eg charges generally apply per car or trailer load rather than on a weight basis. [This would be unlikely to change even if a tonnage based waste levy was introduced, simply because the costs of weighing waste deliveries mean that it will be most likely to be estimated based on approximate volume and composition. The Landfill Audit 2002 notes that it is expected that by 2010 around 50% of landfills will measure waste using weighbridges (MfE 2003 The 2002 Landfill Review and Audit Report).] Existing kerbside schemes that are not charged for by a user pays system, similarly reduce incentives to redesign products with less waste.

In the absence of a comprehensive survey of existing schemes, we are not able to quantify whether a waste levy would adversely affect manufacturers currently redesigning products. We simply note that this is a possible outcome where there is no obligation on manufacturers to design for waste minimisation.

2.1.2 Information Schemes

Where product stewardship simply involves the provision of information, it is likely that the waste levy can be used to reinforce the message of the scheme, providing further private financial incentive to minimise waste. It is not envisaged that there will be any circumstances under which a waste levy would be detrimental to information provision.

2.2 Beneficial Effects on Reuse and Recycling

What is beneficial for product stewardship schemes that include reuse and/or recycling can be defined in different ways. It might mean that:

• more material or products are diverted away from landfill and towards recycling or reuse, or are produced in a way that creates less waste, ie "more is better";
• an optimal amount is diverted. What is optimal depends on the perspective taken, and will differ from the perspective of society as a whole and that of the industry participants or government targets for waste minimisation as set out in the New Zealand Waste Strategy (NZWS 2002); or
• simply that existing schemes continue.

There are a number of strands of the argument to pull together. We start by setting the framework with a discussion of optimal interventions in which we briefly assess the theoretical understanding of the value of a disposal charge as a way of internalising external costs; we discuss whether product stewardship is doing the same thing and whether introducing a levy is "double dipping" on externalities. We then discuss the potential benefits as the provision of incentives for diversion of waste from landfill and as a revenue raising instrument.

2.2.1 Optimal Diversion

We discuss optimal diversion as a way of addressing whether a waste levy can assist in ensuring that product stewardship schemes that involve recycling and/or reuse, receive the optimal amount of used products.

Theory suggests that, to the extent that the waste problem is defined as the residual environmental effects of final disposal (see Box 1), a disposal charge is the optimal intervention mechanism. The theoretical position is that the best environmental policy instrument is a tax or charge equal to marginal damage costs. [Baumol WJ and Oates WE (1988) The theory of environmental policy. 2nd Ed. Cambridge.] In other words, if the environmental damage associated with one more unit (eg a tonne or a cubic metre) of waste can be estimated, the damage cost should be levied on each unit sent to disposal via landfill or another final disposal option (such as incineration). A disposal charge can be used as a means for ensuring that the full costs of waste disposal are paid.

The theory is that such a charge results in the optimal response, ie the right level of waste avoidance, reuse, recycling and final disposal—that which is most beneficial to society, weighing up the costs and benefits of each option. This occurs because each individual makes choices weighing up costs and benefits to them on the basis of market costs that equal the costs to society of providing those options.

In the context of product stewardship, to the extent that consumers faced the full costs of disposal, it would mean that consumers made the right choice in terms of how much was diverted. Where the size of the levy is not designed to reflect environmental damage—and there is no evidence that the current proposals are—then the levy may provide incentives for a "more optimal" level of diversion; this occurs if the levy makes disposal costs closer to the real social costs of disposal.

2.2.2 Perception of "Double Dipping"

Where a company, or group of companies, has established a product stewardship (recycling) scheme that is, at least in part, a response to the environmental externality problem, and under the encouragement of government, the question arises whether introducing a waste levy as well is double dipping to some extent, ie the externality is internalised twice. The potential problem is illustrated in Figure 2.

The market level of demand for recycling services is illustrated by the demand line D₀. This represents the quantity of materials that consumers (or local governments) are willing to deliver to collection companies and recycling schemes at different costs; it represents the amount that would be delivered under pure market conditions, with no waste levy, no government persuasion and no voluntary industry activity that went beyond profit maximisation. S₀ represents the market costs of supplying recycling services or the amount of recycling that industry is willing to supply at a given price. The intercept of these two lines is the amount of recycling that the market would provide (Q₀).

Figure 2: Recycling Supply and Demand

If we assume that industry is, to some extent, providing collection and recycling services that go beyond what a market would provide, then we can represent the industry activity as a new recycling supply curve (S₁). It suggests that, for a given cost, more recycling will be provided, increasing the quantity to Q₁, at the intercept of S₁ and D₀. In Figure 2 we also represent the introduction of a waste levy as a change in the demand curve, because if the price of disposal goes up, consumers and local government are willing to pay more for recycling. The new demand curve is pictured as D₁. For the illustration we have placed the intercept of D₁ and S₀ at Q₁ also, ie we assume that the industry is providing the quantity of recycling that would be achieved by an ideal waste levy.

However, if industry is already subsidising recycling and the waste levy is imposed on top, then the quantity recycled extends to the intercept of S₁ and D₁, resulting in recycling of Q₂. In other words, if the optimal amount of recycling is Q₁, and industry is voluntarily providing this at some voluntary cost, then introducing a levy is "double dipping" and can result in too much recycling. But a number of assumptions are made here, chiefly that industry is fully internalising external costs and that the levy is also equal to damage costs. We address these issues below.

Why Does Industry Voluntarily Introduce Product Stewardship Schemes?

The issue of why industry introduces product stewardship schemes, and specifically here, why it recycles, is an important consideration in assessing the appropriate response.

Our own, previously expressed view [Covec (2005) Economic instruments for waste management. Prepared for Parliamentary Commission for the Environment.] is that fundamentally companies are profit maximisers. While there is evidence of industry taking steps to reduce its environmental burden, in broad terms, where this is not in response to a regulatory requirement, it can be expected to be:

• in pursuit of longer run profit maximisation, eg part of a marketing strategy;
• because of a wider set of managerial objectives, eg personal beliefs of management which can not be expected to be broadly shared, certainly not by publicly listed firms with responsibilities to shareholders; and/or
• a short-run measure to avoid government regulation, ie just enough to stop government from regulating.

Voluntary measures that go beyond what the market would provide will thus tend to be small in scale and/or low in cost, unless there is a view that the regulations that it holds off are sufficiently costly to justify greater costs. They will also tend to be applied inconsistently across industry—there will be free-riders that do not act and those that act to different degrees, eg reflecting different markets (and thus consumer interest in positive environmental image), different personal views and different expectations of government's likelihood of regulating (or its costs). This means the cost burden is spread inefficiently. Consistent with these views, the OECD in a review of voluntary approaches to environmental policy more generally, noted that there are few cases where voluntary approaches have improved the environment beyond what would have happened anyway. [OECD (2003) Voluntary Approaches for Environmental Policy: Effectiveness, Efficiency and Usage in Policy Mixes.]

This suggests two possible conclusions:

• that the extent of the "double dipping" problem would be small because industry is not doing much beyond business as usual; or
• that it will signal to industry that government is moving towards a regulated approach to waste management, thus reducing the perceived benefit of voluntary action. Note, this argument applies also to the issue of product redesign, discussed in Section 0 above.

This does not address explicitly whether industry is fully internalising the external costs of waste disposal, but simply that the additional costs that it is bearing may be small.

Levy and External Costs

The level of external costs of waste has not been examined in this study, and we are unaware of studies that have quantified these impacts in New Zealand. All that can be concluded is that the size of the levy has not been designed to equal external damage costs.

2.2.3 Least Cost Incentives

Another way, in which a waste levy can benefit product stewardship schemes that encourage reuse and/or recycling, is through diverting more material, regardless of whether the quantity is optimal.

A disposal charge increases the costs of final disposal and provides incentives for options in the form of:

• input substitution—providing incentives for substituting materials to more recyclable content. This would occur if those that faced the levy chose to purchase products and materials that would provide alternatives to disposal at the end of the product's life;
• output reduction—incentives for recycling/reuse or for less material in production thus producing less waste. This would occur if those facing the levy changed purchase decisions such that they handled less material or diverted their waste to recycling facilities to avoid the charge.

In theory, if markets operate efficiently, a landfill charge is the only instrument required. If the objective is economic efficiency, ie the ideal amount of landfill disposal taking account of costs and benefits, then the landfill charge will result in the right outcome. Alternatively, if the government is targeting certain rates of diversion from landfill (or recycling targets), the landfill charge can be levied at a level that will produce these outcomes at least cost.

Despite these potential effects, there are a number of barriers to the theoretical operation of a waste levy, and other impacts, that need to be borne in mind:

• information and other barriers mean that the costs of disposal generally are not seen by consumers at the time that they make purchase decisions; [Some consumers purchase specific goods because the packaging can be recycled, but this is unlikely to be a price response.]
• although increased disposal charges should mean that collectors require a reduced amount of payment by recyclers to deliver materials for recycling, [For example, a reduced amount paid for used aluminium cans.] this change in willingness to pay may not result, partly because of the arrangements for collection contracts with local government. This can be especially problematic when recycling schemes face increased landfill costs which are not compensated by reduced raw material costs.

These issues are examined in more detail in Section 0. The results of landfill levies working in practice are discussed in Section 0 below.

2.2.4 Revenue Raising Benefits

The waste levy will raise revenue; this is one of the design objectives introduced so that funds can be raised for product stewardship schemes. In this section we examine whether a shift to a waste levy to raise revenue for product stewardship will assist in promoting product stewardship.

We are not examining whether a waste levy is an ideal revenue raiser, ie whether it is compatible with optimal tax theory, but simply the effect on product stewardship.

The waste levy would be paid by all those taking waste to final disposal; this includes household waste paid for by local government (whether households are charged on a rates or user charge basis), or charges for delivery directly to disposal (community waste management facilities). Subsequently revenues would be returned to local government and others, directly tied to projects and plans. In addition there will be revenue raised from the waste levy on waste delivered to disposal by industry and commerce.

The revenue raised may add to that available to support product stewardship schemes (either directly or indirectly, depending on funding criteria). There may be some limits to this. This includes the degree to which the levy results in more diversion (and thus less waste to levy)—there will be some diversion, but unless waste is eliminated the waste levy will raise revenue—and the fact that waste levy revenues interact with revenues provided to product stewardship by other sources currently; this includes industry and local government funding. We explore these issues when we discuss detrimental effects of a waste levy below.

2.2.5 Experience with Waste Levies

There are a number of jurisdictions that have introduced waste levies or landfill taxes (Table 2).

Table 2: Landfill Tax Rates and Prices

Country	Tax rate (£/tonne)	Landfill prices (£/tonne)
Austria	18-54	36-82
Belgium	3-14	43-51
Denmark	28	13-21
Finland	9	-
France	4	-
Italy	0.6-16	-
Netherlands	8-40	47
Sweden	17	-
UK	2-13	13-23
Czech Republic	11	-
Norway	25-50	-
Switzerland	6-20	56-65

Source: Strategy Unit (2002) Waste Not, Want Not. A strategy for tackling the waste problem in England

The effectiveness of disposal charges in diverting waste from landfill has been varied. Denmark and the Netherlands introduced landfill charges earlier than other countries, have relatively high rates of tax, and have low dependencies on landfill for waste management. [Integrated Skill Limited (2004) An Assessment of Options for Recycling Landfill Tax Revenue. Final Report for HM Treasury.]

A study of the effects of the landfill tax in Denmark suggests that it has led to "a remarkable increase in the recycling of construction and demolition waste", [Jacobsen H and Kristofferson M (2002) Case Studies on Waste Minimisation Practices in Europe. European Environment Agency.] although the report notes that other measures were introduced alongside the tax including technological and institutional solutions. [These included subsidies for cleaner technology and recycling projects, establishment of local government sorting schemes, virgin material taxes, regulations on use of waste material in construction, rules on selective demolition so that waste materials (bricks, concrete) are not mixed at source.] Landfill of construction waste is now very expensive but recycling (especially of concrete, bricks and asphalt) is very low cost.

Figure 3 shows the Danish landfill tax rates (and the corresponding recycling rates). Whereas recycling rates have increased with tax rates, the introduction of a range of other measures alongside the landfill tax means that conclusions on effectiveness cannot be easily drawn.

The UK introduced a landfill tax in 1996 but has relatively low tax rates and underlying disposal costs. When the landfill tax was introduced the rates were based on estimates of the environmental externalities associated with disposing of waste at landfill. [Davies B and Doble M (2004) The Development and Implementation of a Landfill Tax in the UK. In: OECD. Addressing the Economics of Waste pp 63-80.] There are two tax rates: a standard rate, originally set at £7 per tonne, for "active" wastes; and a lower rate of £2/t for "inactive" wastes. While the lower rate has remained at £2/t since inception, the standard rate has increased to £21/t from 1 April 2006 and the intention is to raise it to £35/t by 2010. [http://www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=1074404201 (http://tinyurl.com/84m4b).] Through introducing an annual escalator, and breaking the link to measured damage costs, the landfill tax has shifted from its basis on estimates of damage costs to become more of an incentive-based or "behavioural" tax, designed to reduce landfill disposal. [Strategy Unit (2002) Waste Not, Want Not. A strategy for tackling the waste problem in England. www.number-10.gov.uk/su/waste/report/downloads/wastenot.pdf]

Figure 3: Landfill Tax and Recycling Rate for Construction and Demolition Waste in Denmark

View figure at full size with text description

Since the landfill tax was introduced, there has been a 60% reduction in the volumes of 'inactive' waste sent to landfill sites, whilst the volume of 'active' waste sent to landfill has remained broadly unchanged. The latter is explained by the fact that the costs of landfill, including landfill tax, remain low compared to alternative methods of treatment/disposal. Moreover, landfill disposal costs represent a relatively small proportion of business operating expenses.

As in Denmark, the impacts on construction and demolition waste in the UK have been particularly significant. [ECOTEC (2000) Effects of Landfill Tax—Reduced Disposal of Inert Waste to Landfill] There was an initial fall in quantities of active waste going to landfill, but it has not been sustained, despite the higher rate of tax and the introduction of the annual tax escalator. However, researchers note the difficulty of measuring the impact of the instrument, partly because of the paucity of data and the absence of a pre-tax baseline set of waste statistics. The landfill tax has been introduced alongside a number of other instruments, including local authority-led recycling schemes and the Government's producer responsibility regulations for packaging. [ECOTEC, CESAM, CLM, University of Gothenburg, UCD and IEEP(CR) Study on Environmental Taxes and Charges in the EU.]

2.2.6 Summary of Effects

Waste levies, as proposed for introduction in New Zealand, are consistent with the theoretically ideal policy instrument, if set at a level equal to the damage costs of waste sent to landfill.

Waste levies provide incentives consistent with the objectives of product stewardship schemes. This includes incentives for waste producers to divert material to recycling, and to purchase products and materials that could be recycled at the end of their lives. However, there are a number of barriers to their efficient operation, particularly for households, that mean that the incentives for input substitution and output reduction might not be effective.

The practical results of introducing waste levies (landfill taxes) have been mixed and the analysis of effectiveness is hampered by the fact that many have been introduced at the same time as introducing other waste policy instruments. Despite these cautions, the experience suggests significant effects associated with levies on inert material such as construction waste; in contrast, the UK experience suggests little effects on diversion of active waste including household waste.

Landfill taxes have been used successfully to raise revenues.

2.3 Detrimental Effects

We have identified three potentially detrimental effects associated with the introduction of a waste levy alongside existing product stewardship schemes:

• the introduction of a cost to recycling schemes (to dispose of waste from the recycling process), potentially without the corresponding increase in revenues;
• potential for adding costs to local government in the cost of paying the levy for the waste they collect and dispose of on behalf of the community;
• the potential revenue problems associated with multiple funders.

In addition, there are some disadvantages of landfill levies independent of their association with product stewardship. These include the failure to deal with market barriers, such as the gap between purchase and disposal decisions, and the potential incentives for unauthorised tipping. [There is little empirical evidence of unauthorised tipping in response to increased landfill disposal prices or unit charging for collection and disposal; this does not suggest that it does not occur, just that it has been little studied. A recent OECD report had numerous references to the issue, for example, but these were largely theoretical and anecdotal (OECD (2004) Addressing the Economics of Waste).] We note that there are other instruments that can be used that have the same desired effects as landfill levies—incentives for input substitution and output reduction—that do not have these disadvantages. [Where there is a possibility of unauthorised tipping, or barriers to optimal outcomes exist, analysts have suggested that the ideal instrument is a combination of a product tax and a recycling subsidy (see, eg Walls M (2003) The role of economics in extended producer responsibility: making policy choices and setting policy goals. Resources for the Future Discussion Paper 03-11). This combination can provide the desired incentives for input substitution and output reduction that a disposal charge might only produce in theory.] These effects, and these alternative instruments, are not the subject of this report.

2.3.1 Costs to Recycling Schemes

An issue that has arisen in discussions with industry for this study is the potential costs of the waste levy for voluntary industry-funded recycling schemes, without a corresponding increase in revenues.

In theory, as a result of introducing a waste levy, the supply costs of materials for recycling fall such that more is recycled or the same amount for a lower cost. This occurs because firms, individuals or local authorities are more willing to divert waste to recycling because the benefits of doing so (avoided disposal costs) have risen. However, this is not always the case. For example, if a system is currently operating on the basis of voluntary drop-off of materials, as occurs for the current Paintwise scheme, a shift in supply costs would need to result in people paying to drop off used materials. This might be impractical or might be thought to be too great a disincentive. Although there may be increased demand for using the Paintwise scheme, it would not be expected to result in reduced costs of supply (to the recipient of the used paint containers)—seeking payment might be seen as too great a change to the system. And, because there is inevitably some waste from the recycling process or safe waste management, the unit costs of processing will rise because of the waste levy.

The Paintwise scheme is currently funded by Resene using a recovery fee of 15c per litre on retail purchases and a fee on returns of non-Resene branded paint and trade returns. The retail fee might be raised, however the competitive paint market in which it operates limits the extent to which total prices (product price and fee combined) can be raised—in a competitive market all firms are price takers and if only one faces a price increase (the firm that is operating the recycling scheme), it will not be able to pass these prices on. We might assume that Resene has decided that by being explicit about the reasons for the levy allows it to add the 15c levy because of a consumer willingness to pay for the recycling activity—but consumer willingness to pay for its paint is unlikely to change as a result of the levy being imposed.

We use this illustration in some detail to illustrate the point that there are some legitimate concerns that costs for recycling schemes will increase and will not be compensated. The extent of these additional costs are uncertain and will vary across product stewardship schemes.

For some voluntary schemes, the benefits for industry are fixed and do not change with quantities supplied. For example, a company might benefit through being seen to be exercising corporate responsibility because of the provision of a recycling scheme, and this public perception and the advantages it provides does not alter with the quantity processed. The introduction of the waste levy and any additional diversion of materials may increase costs for the company both in the form of increased total processing costs (assuming that this is a net cost) and the costs of disposal (as for the example above). In some instances the additional costs may tip the balance away from continuing to operate such a scheme. [This is a theoretically possible outcome and not one that we have any evidence for.]

In other instances, there is no change in diversion rates or supply costs. Many households pay currently for waste management at least partly through their rates, [For example, in Christchurch city.] rather than facing a per unit charge. For these people there is no increased incentive to divert waste to recycling and certainly no incentive to pay to drop materials off. Where there is a current volume-based payment, the incentive is likely to be limited because of the lumpiness of payment mechanisms, ie per bag or per bin rather than on a weight or actual volume basis.

Where recycling operates through collection schemes operated by, or contracted out by councils, the imposition of a levy provides greater incentives on councils to operate recycling schemes, because it reduces the charge liability. At the margin this will have some incentive to include additional materials in existing kerbside schemes or to introduce new schemes where they do not already exist. However, it will provide no additional incentive for participation by households, unless it leads to a shift towards unit-based charging.

From the recycler's perspective, the voluntary systems might currently operate at a net loss with a deliberate decision having been made to accept materials at no charge, despite there being a cost involved in management and/or processing of the waste materials. The introduction of the waste levy introduces costs for these operators because of the inevitability of some waste production from the recycling process (not everything can be recycled).

There appears to be a legitimate industry concern that occurs from a combination of factors:

• the potential mixing of voluntary and regulated components of waste management policy;
• the absence of effective volumetric charging for waste, even where households pay per bag or bin.

The problem is likely to be limited to the household waste streams for which voluntary producer responsibility systems have been established and involve some financial responsibility by industry for downstream waste management.

2.3.2 Revenue Issues

The main issue of concern with respect to revenues from a waste levy and the funding of recycling schemes, is the way in which revenues from several potential funding schemes interact. There are a number of possible interactions with other funding sources; Figure 4 shows the different monetary flows.

The current funding arrangements for recycling from the household waste stream are described by the right-hand side of the figure. There are two sources of funding: territorial authorities (TLAs) and industry. TLA funding is via rates or direct charges for waste disposal. This is used to part fund the collection of some recyclable materials that subsequently are forwarded to material end-users (recyclers).

Figure 4: Components of the Instruments

For materials collected from the household waste stream, industry provides collection services under contract to local government. Such arrangements exist for recyclable materials that include packaging and paper. The contracted amount paid to the collectors represents the difference between the (expected) revenues from selling the materials to recyclers and the costs of collection. Introducing levy funding can have effects in different directions; the diagram below illustrates.

Collectors currently deliver materials to a recycler (processor). The collector is paid a subsidy by local government and an amount by the recycler that reflects the value of the material. If levy revenue is added to this scheme, it can result in:

• additional collection, eg through extension to other materials—additional collection and processing would occur if the funding was used to support new initiatives. This would leave the local authority with additional costs because of the costs of levy payment on the residual amount sent to disposal, depending on the relationship between levy rate and quantity diverted; [Depending on the distribution of revenues amongst local authorities, this might result in some TLAs gaining and others losing from the distribution.]
• reduced payments made by local government—for existing schemes, assuming that the revenues from the recycler (processor) stayed the same, reducing the current direct subsidy by local government would ensure that revenues stayed the same. The reduced subsidy payment could offset the additional costs that the local authority (or households directly) faced for waste disposal; or
• reduced payments made by the recycler—an alternative outcome is that the additional revenue from the waste levy is met by an associated reduction in the amount paid by the recycler.

The latter outcome is clearly the least desirable. The extent to which recyclers can reduce the amount paid in this way will change over time. For example, if an existing processor pays $20/tonne for materials currently and there was the potential for payment of $5/tonne from waste levy revenue, it could reduce the amount it paid to $15/tonne. Initially after the waste levy is introduced, it is obvious if prices are reduced like this in response, but over time, the way in which a market develops will be uncertain to central and local government, and a product that previously did not require funding might be priced in a way that now does require funding. It will be unclear whether this is a legitimate response to underlying prices in the market for that commodity, or a response to the existence of the waste levy.

The revenue from the waste levy has the potential to add to the level of recycling activity in New Zealand. The extent to which this is additional is uncertain, and this is complicated by the fact that the levy will be paid by local authorities that become beneficiaries of the funding also. To some extent, it will lead to local government paying for recycling activity through a different route: via waste levy payments and redistributions rather than directly to collectors, recycling schemes and other waste management practices. It introduces additional total funding for local government (the revenues raised from industrial waste redistributed to TLAs) but reduces an individual local authority's control over use of the revenue because the funding to an individual TLA is unrelated to the levy amount paid by that TLA.

2.4 Arguments for Different Levies or Exemptions for Different Waste Streams

This section addresses whether a waste levy should be differentiated by waste stream because of the effects on product stewardship. The key effects of interest here are:

• the incentive effects—whether it would need to be differentiated by waste type to ensure greater diversion;
• the impacts on the costs of recycling and design for waste minimisation—whether certain waste streams should be exempt because of these potentially adverse effects.

We do not address issues that relate purely to the waste levy independent of product stewardship, eg whether it should be differentiated by damage costs or whether an alternative specification would be best as a revenue raising mechanism.

2.4.1 Incentive Effects

The international experience suggests that levies on inert industrial waste, particularly construction waste, have had the greatest impact on recycling rates. This might suggest that, as an incentive instrument, the levy is focussed on those waste streams, ie inert industrial waste, or that higher levy rates might be applied to other waste streams to raise the likelihood of diversion. This would include rates applying to mixed household wastes and to special industrial wastes.

However, improved diversion might not result.

Householders generally do not face an effective variable cost of waste disposal, either because there is no direct user charging or because of the lumpiness of the mechanism—per bag, per bin or per trailer. The introduction of a waste levy may therefore provide little additional incentive for diversion or for the purchase of products designed for waste minimisation.

An alternative approach is to view the objectives of the instrument as applying separately to the different waste streams—an incentive effect to inert industrial waste and revenue raising for other wastes. This might be consistent with a uniform levy, as proposed.

2.4.2 Limiting Adverse Impacts

The potential for uncompensated additional costs for existing recycling operations cannot easily be tackled. One option might be to exempt this waste from the levy or to set a low levy rate. However, there are a number of problems.

• In purely practical terms, waste that arose from recycling schemes could not be easily differentiated at the landfill from waste collected from source.
• Also a rule that provided low or no levy for waste that came from a recycling scheme might provide perverse incentives for establishing new and ineffective recycling schemes to ensure a levy-free route for waste disposal.

An alternative approach to differentiate these waste streams might be to treat differently waste that had been sorted, eg a lower levy might apply to sorted packaging waste. This ensures that it would not apply to waste that came from a recycling scheme but would apply to mixed household wastes.

Such an approach might be possible but it does have potentially perverse incentives to sort waste, so long as the costs of doing so are less than the levy, rather than to attempt to recycle it.

There are thus a number of potential practical problems and the potential for perverse outcomes. Set against this, it is unclear whether the problem is significant or systematic. More likely there are isolated cases for which it might be an issue. An alternative approach is simply to accept that some waste levy revenue might be used to ensure that existing product stewardship schemes are kept whole, ie are not disadvantaged by the levy.

2.5 Where Do Both Instruments Exist Together?

Producer responsibility systems operate alongside waste levies in some other countries. However, in general these are regulated producer responsibility systems rather than voluntary, as operating in New Zealand.

The discussion below is not a comprehensive assessment of schemes operating in other countries. Rather a few targeted examples are used to illustrate specific issues.

2.5.1 UK

The UK has a landfill tax and a formal product stewardship scheme. Initially the landfill tax was introduced to ensure that waste producers paid the full costs of disposal and to provide incentives for diversion. The amount diverted was less than desired by government leading both to increases in the rate of the landfill tax and to additional policy measures to sit alongside the tax. The two issues of interest in this discussion are:

• the revenue raising aspects;
• the interaction with the more formal producer responsibility system.

Revenue from the Landfill Tax

The Landfill Tax was introduced to be substantially revenue neutral. Thus when it was introduced in the UK, there was a corresponding reduction in National Insurance Contributions, a tax on income used to raise revenue for health and social security purposes. This tax offset is consistent with using revenues to reduce distortions—the Landfill Tax was regarded as correcting two distortions:

• the under-pricing of disposal because environmental externalities were not paid for; and
• reducing other distortionary taxes levied by government—a tax on income.

A small proportion of the collected revenues can be allocated to specific purposes rather than contributing to the consolidated fund. Landfill operators can obtain up to a 6.8% credit against their Landfill Tax liabilities for funding of environmental bodies for projects that will reduce the impacts of landfill on local communities.

Interaction with the Producer Responsibility System

National targets for recovery and recycling of packaging waste have been established and, in turn, distributed as obligations to individual companies in the packaging chain. Compliance with these obligations was initially achieved either internally within firms or through membership of compliance organisations; but more recently markets in compliance certificates have developed enabling firms to comply without joining a compliance scheme. There is an overall obligation for recovery (70% in 2008) [This is the target for business and is greater than the national target (60%). The difference is because the business target does not cover small and medium-sized businesses.] and, to achieve this, obligations for individual materials are allocated to those who:

1. manufacture raw materials for packaging (6%);
2. convert raw materials into packaging (9%);
3. pack and fill packaging, or use packaging to wrap goods (37%);
4. sell packaging to the final user (48%).

Using these numerical obligations, for a packer/filler, for every tonne of packaging that it uses, the obligation is to recover 70% x 37% = 25.9%. To demonstrate compliance with these obligations companies must hold evidence in the form of Packaging Waste Recovery Notes (PRNs). The most common way to comply with these requirements is for firms to pay a compliance organisation to coordinate the achievement of the obligations and to provide PRNs. Currently there are 19 compliance organisations. [http://www.defra.gov.uk/environment/waste/topics/packaging/pdf/compliance-schemes.pdf] They charge a management fee and invoice separately for PRNs. The prices of PRNs are set in the market and represent the difference between the costs of recycling, including the purchase of materials from collectors, and the value of the processed materials.

Registered recyclers (processors of materials) can produce PRNs when they process a tonne of material, eg recycle a tonne of glass cullet. Although it was not the original intention of the regulations, PRNs have become tradable commodities. Rather than becoming directly involved in recycling or joining a coordinated compliance scheme, PRNs can now be purchased online. [See for example, www.t2e.co.uk/]

One of the issues that is present with the UK PRN system that is relevant to New Zealand is the difficulty of multiple funding sources. In the UK, for a recycling scheme covered by the PRN system, there may be a combination of funding from local government, receipts from end users of materials and PRNs. The equilibrium price for PRNs depends on the amounts paid by the other players. However, the same applies to the other funders also, ie the equilibrium amount that the local authority must pay to ensure recycling depends in turn on the amounts provided by PRNs and end user revenue. PRN prices have established building on a background in which there was some price information from existing recycling activity, but this may break down over time such that the contribution of individual sources may change, possibly not to a new equilibrium. Rather it may continue to change. New Zealand faces the same potential difficulty going forward from several funders of recycling—there is value in analysis of the whole waste management funding system and the appropriate roles of the different participants.

2.5.2 Victoria, Australia

A landfill levy applies in Victoria, Australia and, as for the New Zealand proposal, has the twin objectives of revenue raising and providing incentives for diversion.

Levies are paid on municipal, commercial and industrial wastes disposed to licensed landfills. The landfill levy rates reflect differences in the environmental damages of the different waste streams and include regional differentials—rates are lower in rural areas. Revenues raised are distributed to the Victoria EPA, EcoRecycle Victoria (now Sustainability Victoria) and the 16 regional waste management groups (RWMGs).

The revenues raised are tied to specific uses; they fund environment protection, encouragement of sustainable use of resources and best practice in waste management, including product stewardship schemes. This includes assisting in the establishment of waste management infrastructure, industry waste reduction programmes, education programmes, regulatory controls and enforcement regimes.

A review of the operation of the system found that both the amount of revenue and the amount of diversion from landfill was lower than desired by the Government. Landfill levy rates were raised as a consequence and now rise progressively over time (Table 3), as does the UK rate for active wastes.

The Victorian example is one that appears similar to the proposed design for a waste levy in New Zealand. It raises issues relating to the way in which the need for revenue can determine the size of the levy imposed which then becomes unrelated to any notion of damage cost or, potentially, incentive effect. In any New Zealand system, this needs to be kept carefully under review. If the levy rate becomes significantly different from the damage costs, other revenue raising options should be considered also.

The Victorian example also demonstrates the way in which product stewardship and a waste levy can coexist.

Table 3: Landfill Levy Rates - Victoria, Australia

Non-Hazardous Waste					Prescribed Waste1
	Rural		Metro & Provincial
Year	Municipal	Industrial	Municipal	Industrial
2001-2	2	2	4	4	10
2002-3	2	3	4	5	10
2003-4	3	5	5	7	14
2004-5	4	7	6	9	18
2005-6	5	9	7	11	22
2006-7	6	11	8	13	26
2007-8	7	13	9	15	30

1 Prescribed wastes include potentially hazardous wastes, but also wastes that may affect amenity (for example via odour impacts).

Source: www.epa.vic.gov.au/Waste/landfill_levy.asp

2.5.3 New South Wales

A waste levy in New South Wales has been introduced largely with an incentive objective: discouraging waste disposal and encouraging resource recovery. As for the UK system, the revenues are absorbed into central funds—those of the state government. This clarifies the objectives as being simply associated with the incentive effects and ensures that decisions on the correct levy rate to obtain an incentive effect are different from decisions regarding revenue requirements. If the two are combined there is a risk that too much or too little revenue is raised. In contrast funding any additional waste management activity from central funds means the decision on how much to spend is based on assessing the value of that expenditure rather than arbitrarily based on the amount of revenue that results from a levy.