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Comprehensive Product Stewardship System (CPSS) for Waste Oil -

Discussion paper
Environment Australia, 1999


Executive overview

Comments closed COB 15 November 1999.


I Industry Structure

(a) Producers & Importers

There are four Australian refineries that produce lubricants; BP at Kwinana (WA), Mobil at Port Stanvac (SA), Caltex at Kurnell (NSW) and Shell at Newport (Victoria). These refineries produce Group I (mineral) base oils and have a combined annual production capacity of about 800 ML (megalitres - one million litres).

Australian crude oils are not suitable for making base stock. Accordingly, lubricants are manufactured from crudes imported from the Middle East.

The capacity of Australian refineries runs far in excess of local demand, which is around 517 ML per annum. This situation of excess supply is a worldwide phenomenon. None of the Australian refineries are considered 'world scale', this would be, for example, three to four times the size of Kwinana. The Australian refineries are not considered to be 'new technology', and none of them can manufacture Group II or higher base oils.

A new refinery that included hydrocracking/hydroprocessing capability to produce Group II and III base oils would cost between $300-$500 million. Investment at this level in domestic refining appears highly unlikely. East Asia, in particular, is well supplied with modern refineries capable of Group II and III base oil production.

The lubricant market also includes a number of importers and blenders. These companies utilise Australian and/or imported base stock with customised additives, or import lubricants already fully formulated. Such companies include Castrol, Valvoline and Penrite. Local refiners of base oil, together with blenders and importers of lubricants are generically called Producers throughout this paper. These Producers are the 'product stewards' who will, in the Prime Minister's words, 'progressively assume greater share of these [CPSS] costs'.

About 48% of lubricating oils produced in Australia are engine, gear, or transmission oils (Table 1). Another 19% is used for industrial purposes. The remainder of the oil is used for base stock (12%), processing (9%), marine (5%), greases (3%), and railway and aviation (1%).

Table 1. Australian Virgin Lubricant Sales by End-Use (ML), 1998
Type of Lubricant Total %
Auto Petrol Engine Oils 95.7 18.8
Auto Diesel Engine Oils 103.3 20.3
Transmission Fluids 20.2 4.0
Gear Oils 23.6 4.6
Specialty Oils 11.7 2.3
Hydraulic Brake Fluids 1.5 0.3
Aviation Oils 1.2 0.2
Marine Oils 24.3 4.8
Railroad 6.1 1.2
Industrial Gear Oils 12.1 2.4
Industrial Hydraulic Oils 40.9 8.0
Industrial Metalworking Oils 6.0 1.2
Industrial Other 38.6 7.6
Greases 13.7 2.7
Process Oils 47.3 9.3
Basestocks 62.7 12.3
Total 508.8 100.0

Large industrial, agricultural, mining and service station users purchase oil in bulk, with households and the do-it-yourself (DIY) market taking most packaged oils. Packaged lubricating oil may be about 5% of the market, or around 25 ML.

Australia's annual consumption of virgin lubricant has been relatively stable at around 517 ML for the last 10 years. There is no expectation of substantial growth in this figure for the foreseeable future. Indeed, the trend by engine manufactures towards higher specification lubricating oils with longer service intervals may cause the consumption of virgin oil to shrink.

(b) Collectors

In this paper, Collectors refers to those who collect waste oil for recycling or reuse whilst complying with all relevant regulations and codes of practice.

Not all used oil can be collected. Some oils are lost to combustion (completely in the case of two stroke motors), others are lost during manufacturing processes. Other oils remain effectively 'locked up' for very long periods, for example, in transformers and shock absorbers.

Collection of waste oil is usually free to the waste oil generator. This is arguably the largest single cause of lack of value in the waste oil market.

The waste oil collection industry is complex, with a few large and many smaller players. Larger Collectors tend to have ties, or other relationships, with major refiners or re-refiners.

The net transfer of used oil in and out of Australia is assumed to be zero. That is, the amount of oil that leaves, being used in shipping and aviation, and that does not return is assumed to be balanced by maritime and aviation oil sourced from elsewhere, that ends up in Australia as waste oil.

The annual volume of potentially recoverable oil in Australia is estimated to be about 200 ML, and perhaps even as high as 260-280 ML. Collection figures tend to cluster around 150-165 ML, or around 75% of potentially recoverable volumes. This figure, if accurate, is very respectable when measured against the performance of other Organisation for Economic Cooperation and Development (OECD) countries, but data in this area must be treated cautiously.

Waste oil obtained by Collectors is stored at facilities owned by used oil recyclers or, in a small number of cases, at facilities owned by the oil majors. Waste oil companies are required to license their storage facilities under relevant State and Territory legislation. Some collection activities and facilities of smaller collectors are not licensed.

Around 30-40 ML of waste oil is stockpiled across Australia. There is both considerable spatial and temporal variation in the stockpiles. The NT and WA have the largest waste oil stockpiles at 15 ML and 16 ML, respectively. In NSW, about 2 ML of waste oil and 6 ML of reprocessed oil are kept in storage. In Queensland, about 2 ML of waste oil is kept in storage. In both Victoria and SA there is negligible storage of waste oil.

A product stewardship system will need to account for the issue of stored supply already in the system at start up.

(c) Recyclers

In this paper Recyclers refers to those who treat waste oil in such a manner that the recycling processes, the recycled products, and the waste and emissions from recycling or reuse, are considered acceptable under relevant environmental legislation.

Recovery and recycling processes range from simple collection and delivery for use as burner fuel to more technologically advanced processes, such as re-refining to lubricant.

The main processes, from the least to the most sophisticated, are:

Affiliations with major oil companies appear to be important to the capabilities of oil Recyclers. Nationwide Oil is part owned by Mobil and Shell. Australian Waste Oil Refiners (AWOR) is affiliated with Caltex. Environmental Filters and Disposals have a relationship with Castrol, one of the companies that specialises in lubricants produced with basestock obtained from the major refiners. The technology used and the waste oil products produced by the major Australian Recyclers are listed in Table 2.

Table 2. The Location, Technology & Main Products of Major Oil Recyclers

 

State

Company

Technology type

Main Products

NSW

Nationwide Oil

Interline (PDA)

Diesel extender

AWOR

TFE

Diesel extender

Coast and Valley

Limited distillation

Not known

Kendel

Nil

Burner fuel

Southern Waste Oil

TFE proposed

Diesel extender when TFE installed

Victoria

Nationwide Oil

Demineralisation

Burner fuel

Environmental Oil

Thermal cracking

Diesel/Diesel extender

Velvet Oil

Nil

Burner Fuel

Queensland

Nationwide Oil

Demineralisation

Burner Fuel

Bateman Oil

Nil

Burner Fuel

Environmental Filter Disposals

Nil

Burner Fuel

Oil and Fuel

Unknown

Burner Fuel?

Oilaway

Nil

Burner Fuel

Queensland Filter Recyclers

Nil

Burner Fuel

NQRR

Demineralisation

Burner Fuel

SA

Mulhern's

TFE proposed

Diesel extender

WA

Nationwide Oil

Acid surfactant process

Diesel extender

Wren Oil

TFE

Diesel extender


II Secondary Users

In this paper, secondary users refers to those who use recycled waste oil.

Oil industry data suggest that in Australia around 75% of collected waste oil, about 120 ML, is reused as a burner fuel, for example, in cement and lime kilns, furnaces and industrial burners. As with all secondary users this percentage varies considerably with changing market conditions.

Burner fuel is the lowest value added use of waste oil, and has the highest level of tolerance for contaminants. Use as a burner fuel is a disposal option rather than a reprocessing option, as only the thermal (calorific) value of the oil is captured. Burning waste oil in cement and lime kilns would seem to impose low environmental costs because the very high combustion temperatures and long retention times in the burning zone ensures the destruction of toxic compounds.

There is an expectation that the amount of waste oil used as burner fuel will decline in the future due to more strict environmental regulations governing air emissions, and increased competition from natural gas. Some burners however, particularly in Queensland, state that they prefer waste oil as a fuel or fuel supplement and, subject to commercial considerations, have a virtually unlimited capacity to utilise waste oil.

Used oil is also sprayed on coal to improve coking qualities. The closure of the Newcastle steelworks, and mooted changes to practices at Port Kembla, may result in an additional 25 ML of waste oil in NSW needing to find an alternative use.

Each year in Australia, around 20% of recovered waste oil (about 35 ML) is processed into diesel extender. Around 4% of recovered waste oil (7-8 ML) is processed into a product that is within the current diesel specifications. At present only one company, Environmental Oil Australia in Victoria , converts waste oil into diesel extender that meets the current specifications for diesel.

Less than 3% of recovered waste oil is re-refined to base lubricating oil. This is the highest value-added recycling process and is the ultimate recycling option to the extent that it restores full, or close to full, functionality. Each year in Australia, less than 0.1 ML of packaged lubricating oil and less than 1 ML of bulk lubricating oil is produced from waste oil.

III Constraints & Opportunities of the Existing Market

The collecting industry is fragmented, dispersed and has little economy of scale. There is robust competition for significant sources of waste oil, resulting in some distortions of the market.

The collected waste oil can be highly variable in quality and contain additional contaminants (solvents, brake fluids, coolants) that significantly reduce its value for higher levels of reuse. These contaminants also increase adverse environmental impacts when the waste oil is burnt at low temperatures.

Whilst the collection industry operates under existing State and Territory legislation, there is considerable variation between and within some jurisdictions. Industry Codes of Practice and collection protocols are neither mandated nor widely observed.

Most waste oil is collected free of charge, although charging for waste oil also occurs in some markets. Anecdotal evidence suggests that waste oil generators are extremely price-sensitive, and even long standing arrangements between Collectors and waste oil suppliers will change on the basis of a few cents per litre in the collection cost. Some waste oil generators (for example, large car dealerships) are reportedly charging the customer up to $1 per litre to 'deal with' waste oil. There is little evidence that any of this levy is finding its way to collectors.

A similar phenomenon exists with respect to many rural and agricultural users. They often store waste oil, seeing it as a potential resource, rather than a waste for which it is reasonable to pay a charge for proper removal.

It can be argued that generators of waste oil are thus enjoying a 'free ride', by having a hazardous waste removed at zero or nominal cost, or even charging the collector for the oil. This is perhaps the largest single reason for the lack of value in the used oil market.

The market for diesel will remain strong. However, the waste oil market's longer term access to diesel will be limited by the mandated stricter fuel standards under the activities associated with the Commonwealth Government's 'Measures for a Better Environment'.

The outlook for the burner market is mixed. States without significant coal deposits are moving away from waste oil as a power station fuel. Natural gas is a significant competitor in some areas, its higher cost being balanced against its reliability of supply and convenience. Some industries in Queensland indicate they are capable of accepting every available litre of waste oil.

The market for virgin lubricants is flat, or even declining, and industry margins are very tight. Refining waste oil to a level where it meets specifications set by engine manufacturers would require major capital investment, for example a PDA plant with 'added-on' hydroprocessing/hydrocracking capability.

The use of waste oil as a Heavy Fuel Oil (HFO) for marine use warrants further investigation. The use of waste oil heavy ends (asphaltic products) in road making may also warrant further investigation.

IV Future of Lubricants & Fuels

The Euro 2, 3 and 4 diesel standards, require the reduction of the sulphur content of diesel from its present level of around 1300 ppm to 50 ppm by 2006. These standards will drive diesel and diesel extender makers to invest in newer technology and/or utilise progressively lower percentages of extender in fuel, in order to stay in business.

The move to higher grade (Groups II and III) and synthetic oils is not expected to significantly impact the waste oil market in the short to medium term. In the longer term, however, it will reduce the amount of oil available for collection. This may impact waste oil recyclers targeting high-throughput, low margin re-refinery.

All products from recycled oil must compete with virgin products and/or natural gas. The waste oil market is characterised by low margins, and in most cases virgin product is available at a minimal cost differential.

V Comprehensive Product Stewardship System

The Prime Minister announced the policy setting for Comprehensive Product Stewardship on 31 May 1999 as part of the Measures for a Better Environment package. The initiative is a strikingly original one. Although there are some overseas precedents available, Australia's preferred approach of a largely market-based system, that still achieves firm and mandated recycling targets, appears unique.

Product stewardship embraces the concept that the producers of a good have a degree of 'cradle to grave' responsibility for their product. As far as possible the cost of this should be born within the producer's markets, and not passed onto other markets, or subsidised by public moneys. Where the secondary product is contaminated in use, as is oil, the quality of the secondary or waste product is usually such that market mechanisms alone are not sufficient to ensure efficient recycling and reuse. As with other waste streams, used oil recycling is made more complex by Australia's small population base and large geographic area. The industry is characterised by small operators, low-end technology and a waste stream that is variable in quantity and quality.

In Australia, as in other OECD countries, most oil is reused by capturing its thermal value, that is, by burning. This method also usually results in the capture of heavy metals and other contaminants in a way which appears to minimise their escape to the environment.

Higher level uses, particularly recycling of lubricant-to-lubricant, involve considerable investments in technology and infrastructure. Such investments cannot be justified in the present global economic settings in the oil industry. Nevertheless, the lubricant-to-lubricant option carries a strong emotive and sustainability argument. Environment Australia (EA) has commissioned consultants to carry out a full lifecycle analysis (LCA) of each of the major end-uses for recycled oil. This LCA will quantify the environmental costs and benefits associated with each major reuse option. This information will be useful in structuring industry transitional assistance.

A robust and resilient market for waste and used oil should encompass a variety of end uses - there is no one 'best' sink for used oils.

VI Options for Implementing the Comprehensive Product Stewardship System

CPSS options that emphasise a market based approach, in particular, require reuse and recycling markets that are robust, dynamic and flexible. This predicates that a variety of end-uses is preferable, and that consideration needs to be given to the geographic location of these recycling facilities.

The European Union (EU) offers the longest standing attempt to enforce a degree of product stewardship for oil. Many, although not all, EU countries impose a levy on virgin product to fund recycling with joint industry Government boards overseeing day to day operations.

South Africa offers an interesting variation on this with a totally voluntary set-up (the Rose Foundation) being initiated and organised by the 17 major lubricant marketeers in that country. The Rose Foundation approach as practiced in South Africa is not felt to be the most appropriate and effective manner to address waste oil issues in Australia. The EU approach of underpinning legislation is seen as preferable.

With underpinning Commonwealth legislation three main options exist: specific performance ('command and control'), a levy system, or a tradeable certificate system. A hybrid system incorporating the better qualities of each is also worth investigation.

A product stewardship system is most effective when added value, for example, through a levy on virgin lubricating products, is captured and held within the system. Additionally, product stewardship principles would dictate that the product stewards (in this case lubricant Producers) should put in that added value.

Each model assumes the existence of a Regulator. This is a mechanism to set, audit, adjust and monitor prices of the levy, certificates, determine standards, and promote and foster the achievement of the CPSS for waste oil.

A specific performance arrangement, often called 'command and control', is a purely legislative response to the challenge of instituting a CPSS. The Government has already indicated that a degree of underpinning specific purpose legislation will be required with whatever CPSS option is ultimately adopted. However, legislation on its own, with no link to economic instruments or market forces, is felt to be an ineffective and inefficient method to achieve product stewardship. It would be very cumbersome to enforce compliance, difficult to assess performance, and virtually impossible to require Producers to assume the costs (environmental and economic) of proper reuse or recycling of waste oil.

A levy system would entail Producers placing a price levy of 'X' cents per litre on new lubrication products. As the amount of product placed on the market by each Producer is known, the total levy payable by each Producer is also known and could be utilised by a Regulator in a number of ways. The levy could be paid to Collectors, to Recyclers, to secondary users, or to combinations of the three. Payments would be conditional upon meeting environmental and other standards. Each combination of payments would have differing effects on the market. The strengths of a levy system include transparency and simplicity. The disadvantages include the potential to foster anti-competitive behaviour and lowest common denominator reuse options, and the difficulty of setting and measuring a recycling target.

Under a tradeable certificate system, Producers are required to hold certificates that they have achieved, either directly or through a third party, by recycling a certain percentage of their new product. The Regulator issues the certificates to Recyclers who are undertaking appropriate and approved reuse activities. The Producers then need to purchase certificates from the Recycler to satisfy their product stewardship obligations. This adds value to the market which is captured internal to it. The disadvantages of a tradeable certificate system include its apparent complexity and a greater exposure to commercial risk by Producers. There may also be cash flow difficulties for a Recycler, based on the long accounting period needed to determine the certificate debt of the Producer. Advantages include a light legislative hand on the market, the capturing of greater value within the market, and the potential for new markets to arise. One of the more significant advantages is the ease and flexibility of setting and measuring recycling targets.

Both a levy system, a tradeable certificate system, or any hybrid thereof, would require supporting special purpose Commonwealth legislation.

Most of the disadvantages of a tradeable certificate system can be overcome by including components of the levy system. Such a hybrid system would function by setting a levy on new lubricant product put onto the domestic market. This levy, which could be paid by Producers to the Regulator on a regular basis, for example bi-monthly, would be available for distribution to different players in the industry according to market circumstances. The levy would thus be the primary short term mechanism for ensuring effective market operations. Value is added to the waste oil market quickly and does not need to wait until certificates are purchased, that is, near the end of an accounting period. The Regulator would also issue tradeable certificates to Recyclers undertaking acceptable activities (as defined by the Regulator in conjunction with State and Territory Environment Protection Authorities or Agencies (EPAs) with the waste oil (the CPSS would leave environmental protection arrangements, laws and measures to the States and Territories). As with a 'pure' tradeable certificate system, the Producers would be required to hold a known quantity of certificates at the end of the accounting period. The certificates would thus be the primary mechanism for ensuring that product stewardship by the Producers achieved the level set for them in that accounting period. A specific recycling target can be set, measured, audited and adjusted by the Regulator. The hybrid system can be viewed as the levy adding value to the oil in the system, and the tradeable certificates adding value to the system overall.

In order to ascertain likely consumer responses, pricing effects, and other sensitivities, any form of market-based product stewardship will require extensive economic modelling before its introduction. Such modelling could establish ranges for a levy, pricing parameters for tradeable certificates and identify other market constraints. EA intends to undertake intensive economic modelling of market-based CPSS options over the next few months.

Any recycling target set by the Regulator would be as a result of detailed industry consultation and advice. It is likely that the initial target would be set at about current levels and progressively raised.

Differential pricing, that is, providing support at different levels to different recycling or reuse options, is possible under the tradeable certificate, levy or hybrid systems. Any differential pricing should be founded on environmental costs and benefits. Research to quantify these costs and benefits has been commissioned by EA.

Table 3 summarises the barriers to effectiveness of a CPSS for waste oil arising from options implemented alone.

Table 3 Barriers to Effectiveness of a CPSS for Waste Oil Arising from Options Implemented .Alone

 

Approach

Barriers

Voluntary approach

Strong performance by best practice leaders only. Lacks uniform strong controls and standards. Free riders can inhibit market sustainability through contributing variable quality of recovered waste oil or derived products. Coverage of responsibility and costs is restricted -only industry leaders and public moneys contribute financially.

NEPM

As above where not implemented evenly across all industry players or where jurisdictional variations in standards and controls are encompassed in cooperative arrangements.

Specific performance legislation

This approach has no mechanisms to regulate and provide for a sustainable market with all waste oil appropriately 'valued' by the product stewards. The costs would not be as fully restricted to within the appropriate markets. Recycling targets difficult to measure.

Levy

It lacks a mechanism to ensure uniform strong controls and standards for quality of the waste oil and derived products. A 'discharge fee' for product stewards is set without necessarily raising the value of all recoverable waste oil and ensuring environmental objectives. Recycling target can only be set iteratively through adjusting the levy.

Tradeable Certificates

It lacks a mechanism to ensure uniform strong controls and standards for quality of the waste oil and derived products. Without these, the sustainability of the market and industry is at risk. There would be no additional value put into the market during the accounting period.

VII Options for the Industry Transitional Assistance

Industry transitional assistance is scheduled to commence from 1 July 2000. Prior to this, LCA of the oil industry, and research into the economic and environmental impacts of the chosen mechanism for the CPSS for waste oil must be completed. Potential areas for utilising this assistance include various combinations of an industry transitional (structural adjustment) package, investment in infrastructure at various levels, research and development of waste oil markets and technologies, education and awareness programs, underwriting market start-up cost and costs of the Regulator

VIII What's Next

This discussion paper is open for comment from interested individuals, organisations and companies until 15 November 1999 (Table 4).

Throughout this paper, highlighted areas direct your attention to aspects of the industry on which EA is seeking further input and assistance. Input on Sections V to VII, the ways in which a CPSS can be instituted and implemented in a way to benefit both the industry and the environment, would be particularly welcome.

Table 4. Timetable for the Development of the CPSS for Waste Oil

 

September 1999

  • Draft Discussion Paper presented to Minister for endorsement.

October 1999

  • Discussion Paper published and distributed for responses from industry and key stakeholders.

November 1999

  • Government chooses implementation option for the CPSS for waste oil. Industry advised.
  • Existing Regulatory and Compliance Study - Analysis of extent of existing legislation, environment protection and waste management arrangements and voluntary institutions codes and standards.
  • Life cycle analysis (LCA) of the industry for use by EA in developing and implementing the preferred CPSS for waste oil options.

December 1999

  • Modelling of economic impacts on the industry of the CPSS for waste oil and the development of impact mitigation strategies where appropriate. Study to focus on:
  • Impacts on product stewards, waste oil generators, Collectors and Recyclers; and
  • Implementation of transitional assistance.
  • Modelling of the CPSS for waste oil implementation mechanism to:
  • Examine its functions and flexibility;
  • Validate that the mechanism can deliver the appropriate level of product stewardship; and
  • identify any features of the mechanism which need refining during the 4 year implementation phase.

January 2000

  • Development of Industry Transitional Assistance Options paper, based on above impact assessments.
  • Possible seminar series.

February 2000

  • Options paper published and distributed for responses from industry and key stakeholders.

March 2000

  • Institutional arrangements for CPSS for waste oil prepared. Representatives canvassed for Ministerial endorsement.
  • Drafting of legislative instrument or other arrangement to deliver the CPSS for waste oil and transitional assistance measures.

April 2000

  • Public comment on instrument or arrangements.
  • Institutional arrangements, (including proposed appointments) as defined under the legislative instrument or other arrangement, endorsed by Minister.
  • Legislative or other arrangements refined and presented to Parliament or Government for final establishment.
  • Public and Industry Awareness information prepared.

May 2000

  • Institutional arrangements implemented, appointments, delegations and determinations (where necessary) made;
  • Public and Industry Awareness information endorsed by Minister.
  • Applications for industry transitional assistance to the Minister or the institutional mechanism identified under the legislative or other implementation arrangements. Transitional assistance is considered for implementation for example infrastructure, research and development or to 'cushion' implementation impacts.

June 2000

  • Industry and public CPSS for waste oil Awareness Information, including performance indicators for product stewards, published and distributed.
  • First tranche of Industry Transitional Assistance is evaluated.

July 2000

  • CPSS for waste oil commences with product stewards having a clear understanding of the expectations of the Commonwealth Government of their performance.
  • Industry Transitional Assistance can be provided.
IX Recommendations for a CPSS for Waste Oil

At this preliminary stage Environment Australia is of the view that the CPSS for waste oil can best be instituted within the time frame established by the Prime Minister's statement by utilising a market-based hybrid system. This would utilise supporting Commonwealth legislation to institute a levy on new lubrication products, together with a tradeable certificate system. The levy would provide the immediate cash flow to support appropriate collection and recycling activities. The tradeable certificates would provide a mechanism whereby recycling targets could be set, measured and reviewed, with responsibility for meeting those targets resting with Producers. The balance between the levy system and the tradeable certificate system would need to be a flexible and responsive one. All aspects of the process should be thoroughly reviewed after no more than four years. Under such a system the Regulator would play a key role, which would be statutorily defined.

As the CPSS for waste oil 'beds-in' and certificates are actively traded, the role of the levy in providing a cash flow to Recyclers and Collectors could become progressively less important. At this point, the levy could be progressively reduced, or even abolished. Alternatively levy proceeds could foster relevant R&D initiatives and/or underwrite the costs of the Regulator.


Contacting Us

Comments on any aspect of this report are welcome, and will be received by EA up to COB on 15 November 1999.

Contact details are:

Environment Australia
GPO Box 787
CANBERRA ACT 2601
oil.recycling@deh.gov.au