Trade secrets: EPR implications for commercial waste

The commercial waste system in the UK, already struggling as work has dried up during the current COVID-19 lockdown, is facing a still-greater shake-up.

The implications of the Resources and Waste Strategy and Environment Bill for local authority collections of household waste have been discussed relatively widely; but the effects on commercial waste collections are much less well understood. We might not yet know exactly what will happen, but it is important that commercial waste isn’t left out of the conversation, as the impacts could be even more profound.

Business plans

The Government released four consultations in 2019, whose main implications for commercial waste were:

• Increased source separation. The Environment Bill has confirmed that businesses will have to separate dry and organic recycling from residual waste, and separate different types of recycling from one another where practicable. Most businesses could recycle more than they do, and co-mingled collections are predominant, so this implies major operational changes.
• Franchising or zoning of commercial waste collections. The government proposed options to reduce the costs to business of more source separation. One proposal was “zoning”, where all businesses in a particular area to be serviced by one waste collection provider, replacing the current competitive market.
• Extended Producer Responsibility (EPR). The government proposed a system in which companies that place packaging on the market meet the full costs of managing the resulting municipal waste, whether from businesses or households.

This article focuses on the far-reaching implications of EPR. The EPR consultation splits commercial packaging waste into two types – “household-like” waste generated by businesses, and “commercial and industrial waste”, which comprises transport packaging used in the supply chain, rather than material that reaches an end consumer.

The focus here is on “household-like” waste. It’s an important challenge – millions of tonnes of such material is generated, and the overall recycling rate for non-household municipal waste is low (estimated at ~30% in the consultation).

Late model

The consultation proposes four models for EPR, but models 1 and 3 have practically identical implications for household-like packaging waste – they differ only in the number of producer responsibility schemes that are envisaged.

Three models (1, 3 and 4) would replicate many of the problems of the current packaging recovery note (PRN) system. Indeed, in model 3, the PRN system would be retained for transport packaging.

At present, reprocessors and exporters generate PRNs, which provide evidence that a certain tonnage of material has been recycled. Producers of the relevant recyclable material are required to buy PRNs to cover a percentage of the material they place on the market, and thereby take financial responsibility for it being reprocessed. The price of PRNs is set by market forces: if a low percentage of material X is being recycled, fewer PRNs will be generated and their price will increase. More money then flows from producers to reprocessors, effectively increasing the value of a tonne of material X – in theory, incentivising more recycling of that material. On the other hand, if PRNs are plentiful, their price will be low.

A market-based PRN is not, therefore, able to meet the aim of EPR, which is to ensure that the full net costs of packaging waste management are met by packaging producers. The market-based system therefore largely falls away in the proposed new models.

False notes

In models 1 and 3, producer responsibility schemes would contract directly with local authorities to support their household collections; but a separate, PRN-like system is retained for household-like waste, but with the value of “evidence” set at the level necessary to deliver full cost recovery:

“For household-like packaging not collected by local authorities, [compliance] schemes would enter into agreements with sorting facilities / transfer stations that receive packaging waste from commercial collectors. Payments would need to be based on meeting acceptability criteria related to tonnage and quality and the presentation of supporting evidence that the packaging had been recycled.” (p73)

As with the current PRN system, the reprocessors and exporters would generate evidence of recycling, and sell this to producers. This effectively increases the value of each tonne of recycling – to a considerably greater extent than at present, since PRNs meet only a small share of the costs of waste management. Then…

“Having received payment the sorting facility or transfer station would be required to pass the benefit back to collectors who in turn would pass this on to business customers by way of a discount on recycling collection charges. The discount applied could be shown on invoices to enable it to be transparent to the (waste producing) businesses and provide an audit trail.” (p48)

So, money gets passed on up the chain, accounted for throughout. This is puzzling, though: if the aim is to achieve full cost recovery, the “discount” to waste producers should, on average, result in collections of recycling being free of charge. However, that will only be an average. If your business is in a remote location, and costs more than average to collect from, perhaps your costs won’t be covered by the discount; but if you are in a convenient location, the discount might exceed the collection cost. Similarly, since the cost of driving to a particular location is the same regardless of the size of the bin collected, a weight-based discount would mean you might make an income from a large recycling bin, while bearing a cost for having a small bin collected. This could disrupt the current charging system quite significantly!

This approach also seems to open up new opportunities for fraud. If non-household recycling attracts a weight-based subsidy, while household waste is covered by a separate system of direct support, not dependent on tonnage, this would incentivise reprocessors and exporters to mislabel household waste as household-like so that evidence-based payments can be accessed. It will always be difficult to trace material back to its origins, especially if it has been through a MRF that receives recycling from multiple sources.

Alternative business models

What are the alternatives? Model 4 would replace the PRN system with a deposit-based approach, where producers pay into the system at the point when they place material on the market, and then reclaim (part of) their deposit when they obtain evidence that material has been recycled. It is envisaged that the value of evidence would be market-based, which replicates some of the problems of the PRN system. No specific mention is made of non-household waste, so we assume it is treated in the same way as household. But while local authorities would receive direct payments in accordance with “agreed funding formulae” to ensure full cost recovery, no such payments are mentioned for collections of household-like waste. Nor Is it explained how fees would be set at a level that recognised the different collection costs of household and household-like waste.

Finally, model 2 would see obligated producers make direct payments to

“local authorities and waste management companies/sorters in accordance with priorities and agreed funding formulae”

to ensure full cost recovery in respect of the material they place on the market.

This seems the most promising way to ensure full cost recovery, but would lay bare the inefficiency and relatively high costs of the current, competitive commercial waste system. Producers would argue that requiring them to fund an inefficient system is unreasonable – it doesn’t appear consistent with Article 8a of the revised waste framework directive, which says that producers financial contributions should not “exceed the costs that are necessary to provide waste management services in a cost-efficient way”.

Further, if producers are to meet the costs of packaging collections, it makes it rather tricky to continue to have waste collectors compete for work from individual waste-producing businesses. How will customers choose which collector to opt for? On what basis would collectors compete?

Zone alarm

If producers must cover all and only the costs of an efficient system, then the introduction of EPR may necessitate franchising or zoning, where all businesses in an area would be serviced more efficiently by one waste collector. It may even imply co-collecting household-like waste with household waste, under local authority control.

A move to zoning would lead to a huge upheaval within the commercial waste market – one in which smaller commercial waste collectors will fear losing out, although this need not be the case in a well-designed franchise system.

We don’t yet know which option the government will choose. The direct payment option seems the most consistent with the principles of EPR, provided that funding formulae can be worked out. However, it will either lead to producers bearing unnecessary costs (if the current system is maintained) or a huge shake-up with the introduction of zoning and (close to) free recycling collections.

It is not quite clear whether the implications of EPR on the commercial waste market have been fully thought through. Nor is it clear that the interactions of the different changes proposed in the various consultations have been bottomed out. However, it seems that by 2023 the commercial waste sector could start to look very different from today.

Featured image: Chris Hill (CC BY-NC-ND 2.0), via Flickr