In our opinion: how the design of the EPR program impacts costs
The question of money is never far from the debate on producer responsibility policies. For many, their understanding of politics begins and ends with the annual bill they receive. It is simple to characterize these costs as a government tax and not pay more attention to them than that; however, as discussed in our previous article, not all producer responsibility models are the same. How policies are set affects costs and how they are allocated.
What determines the costs
The costs of producer responsibility are generally determined by the following factors:
- Whether politics is a shared responsibility or a full producer model (as discussed in our last article). In the shared responsibility model, producers generally have no control over operational decisions (e.g. collection, processing) that generate costs. Instead, they pay a percentage of the costs incurred by local governments. In a total producer responsibility model, producers have the direct ability to influence operational decisions – especially if this model of producer responsibility allows for competition.
- What and who is obligated. The costs are also influenced by the designated products and / or packaging and the exemptions that may be granted. Many producer responsibility regulations exempt companies of a certain size or that supply the market with less weight than the material. This often makes sense because it reduces administrative costs; however, obligated producers must potentially pay more for the management of these stranded materials. Failed materials issues can also arise if the mandatory products are not inclusive. In many Canadian provinces, packaging is included (for example, aluminum plates sold with a store-bought pie) but products are not (for example, aluminum plates purchased as a product). Both contribute to curbside recycling programs, but only one producer group is required to ensure they are properly managed. Similar problems can also be created when indiscriminate lines are drawn when only residential material is captured (i.e.
- How rigorous are the collection and management objectives. The stringency of collection and management objectives (eg reuse, recycling, recovery) and the responsibility associated with achieving them correlate directly with the effort and resources required to achieve them.
- The degree of prescription of results established by the government. The way the results are set in the policy has a direct impact on the costs of the system. Some producer responsibility policies have more specific requirements on how results are to be achieved (eg collection, R&D, waste management, education). These requirements will be discussed in more detail in the next article.
- The monitoring and enforcement structure. Some regulatory systems, like the one in British Columbia, use taxpayer funds for oversight. Others, like Ontario and Quebec, allocate a royalty to producers. More details about the app will be explored in the last article in the series.
How the costs are distributed
Regardless of the policy structure, producers generally tend to organize themselves into one or more producer responsibility organizations (PROs). The PRO or PROs must then find a way to meet the requirements established by the policy and allocate the costs of the systems to their members.
From collecting to selling the material, recovery involves many different activities. The cost varies from one material or type of product / packaging to another because:
- The volumes differ. For example, there are many more cartons than PET trays in terms of weight;
- The equipment is designed for specific materials and the capital cost can be allocated specifically to these materials (eg eddy currents for aluminum);
- The characteristics of the product can be more or less detrimental or costly (for example, for the same weight, plastic bales require more space than paper bales);
- The income is different (a ton of paper is worth less than a ton of PET).
A PRO or PROs typically allocate costs based on three main methodologies. The figure below gives a fictitious example of the impact of each methodology on the contributions by material.
A fixed fee structure is one where the fees are applied broadly and are not substantially differentiated based on the actual cost of handling various product or packaging formats. An example could be to treat all plastic packaging under the same pricing structure, even though some plastics are easier to collect and sort and have a higher market value.
Fee modulation is where fee determination is more granular in nature, with different categories for different formats and materials. In Canada, most Extended Producer Responsibility (EPR) programs modulate fees based on Activity Based Costing (ABC) to determine the financial impact of each material on the system, although other financial methods are currently being explored. ABC is to break down each activity and assign a general cost based on capital and operating expenses.
Price adjustment is representative of the costs associated with the objectives set. If the targets are low and wide (for example, a target for all plastic packaging), then efforts are not needed to deal with the more difficult to recycle materials. This is currently the case for all packaging producer responsibility policies in Canada. PROs charge a slightly higher fee for these materials but they are basically allowed to go into hiding – less attention is paid to collecting them and finding solutions to ensure that they are properly recycled, as with products. in polystyrene or multi-laminated packaging.
If the targets were more specific and set higher, producers would need to improve collection and stimulate markets for these materials, and the charges would better reflect the real costs. As Usman Valiante noted in a recent paper for the Recycling Council of Alberta, in programs where targets are low and lack specificity, these fees essentially become a marginal tax on packaging.
Eco-modulation is where fees are adjusted to further incentivize design changes, such as those to improve recyclability, promote recycled content, or encourage reuse. Eco-modulation is based on a reward and / or penalty approach.
Eco-modulated royalties are increasingly popular, as they attempt to directly improve the sustainability of packaging through financial measures. Usually, the eco-modulated fees are calculated in addition to the modulated fees.
France has probably the most ambitious system that includes benefits for efforts related to recyclability labeling on packaging (similar to the How2Recycle label), material reduction and the use of recycled content.
Policies may also include penalties associated with the use of problematic components or additives that interfere with product recycling. For example, in order to discourage the use of opaque PET and PVC packaging, the penalty is a 100% increase in fees.
The implementation of eco-modulated fees requires a high level of understanding of the current recovery and recycling value chain, as well as a great mastery of the way in which materials are collected, sorted and recycled. Factors such as the following should be taken into consideration:
- Is the amplitude of the modulation high enough to influence producer or consumer decisions (eg, relative scale based on product cost)?
- Is the magnitude of the fee so high that it discourages innovation or system changes that might fix the problem (e.g. artificial intelligence and automation)?
- If there are competing PROs, how to apply a coherent eco-modulation?
Some critics, however, argue that eco-modulation is not necessary if specific high goals were set correctly and companies were likely to meet them. There may also be concerns about competition / fairness issues depending on how the fees are eco-modulated.
It is an interesting question whether advocacy against high goals and full producer responsibility can directly lead to higher costs for producers by forcing them to pay costs which they have little ability to influence in the future. models of shared responsibility and forcing governments to intervene in other ways of generating results. In addition, they may be forced to pay higher costs due to other additional requirements (e.g. promotion and education, research and development, collection requirements) and due to the establishment of eco-modulated fees and development programs. parallel recovery, such as deposit systems.
Again, how policies are set impacts costs and how they are allocated. However, the overall objective of such policies should remain to ensure that products and packaging are properly collected and managed. How targets are set and evaluated will be the subject of the next article.