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The potential of Market Based Instruments to better manage Australia's waste streams

BDA Group Economics and Environment
McLennan Magasanik Associates Pty Ltd
Environment Australia, June 2003

Contents

Executive Summary

Waste policy continues to evolve from a focus on minimising harm to the environment through improper disposal of wastes to diverting waste from landfills to be recycled or reused. As part of this shift in focus, two principles have now been adopted by most State and Territory Governments, namely:

A range of landfill levies, recycling and product stewardship programs have been adopted to reduce waste. Despite this, targets for the level of waste diverted from landfills have generally not been achieved.

The objective of this study is to assess the potential of market instruments to better achieve the goals of waste policy. Market instruments are policy mechanisms that provide direct or indirect monetary incentives to reduce waste or increase the level of recycling. Under certain circumstances, they may deliver outcomes faster and at lower cost than more prescriptive measures.

Policy objectives

From an economic viewpoint, the objective of waste policy should be to overcome failures in the market that leads to harmful impacts to the environment and local community, the cost of which are not borne directly by producers and consumers of goods. Harmful impacts may include:

In Australia, the key waste management consideration for government has historically been disposal. Government has primarily provided waste collection and disposal, with costs met through broader revenue collections. In addition, landfills often had poor environmental controls that resulted in a range of harmful impacts. The combination of budgetary pressures and harmful impacts at landfills led to a policy focus on reducing volumes disposed to landfill.

Reforms of landfill regulation, technology and management practices have significantly reduced harmful impacts associated with landfilling. These improvements and cost-economies have also seen a dramatic reduction in the number of landfills, reducing local amenity impacts. By increasing the size of new landfills, the available capacity has in many instances increased despite the fall in landfill numbers. This has allayed fears of a scarcity of landfill space that some proponents have postulated to support the case for continued reductions in waste disposal volumes. Governments have also acted to improve budget positions through either the privatisation of major parts of the waste collection and disposal system or through the introduction of full cost pricing.

While these reforms have lessened the urgency of reigning back waste disposal volumes, communities have continued to express their desire for further improvements. This has prompted governments to broaden waste policy goals to include upstream life-cycle impacts associated with waste materials. Most waste policy objectives now include goals such as conserving resources, reducing the environmental impacts arising from the use of virgin materials and reducing the toxicity of products.

However the policies adopted still focus on reducing the volume of waste disposed to landfills, rather than seeking to directly reduce the environmental impacts during extraction, production and consumption. Numerous studies have shown that the bulk of the social costs from harmful impacts occur upstream of waste generation. The most comprehensive study undertaken indicates that the social costs of landfilling waste is less than 5% of the total social cost of production and consumption of goods. This is due to the fact that a large proportion by volume of the waste stream comprises inert or non harmful materials.

The low social cost of landfilling suggests the focus of policy should be designing market instruments that directly impact on upstream activities. Policies designed to lower the volume of waste to landfills will indirectly impact on upstream activities, but several studies have pointed to the difficulty of using one policy instrument to handle a variety of social externalities throughout supply chains.

Of course, disposal at landfills or illegally of some material such as batteries and electronic goods can have significant impacts on the environment. In these cases, policy should be focussed on managing these disposal impacts.

In this study, various market instruments have been assessed on the basis of their ability to achieve either of two policy objectives:

Comparative analysis of alternative market based instruments

The first report in this study – Identifying instruments for investigation – examined waste policy goals in Australia, canvassed the range of market instruments available and provided a broad comparative analysis of potential instruments for application in Australia. Based on that assessment and feedback from stakeholders, four market instruments were considered in more detail in our Part 2 report.

Two of the instruments were designed principally to address upstream impacts via reducing the volume of waste disposed to landfills. The second two instruments were designed principally to reduce downstream post-consumer impacts associated with waste disposal. In all cases, broader benefits that may arise throughout supply chains were also considered. Stakeholder comments on these assessments were sought and have been considered in finalising our assessments.

Notwithstanding the preliminary and illustrative nature of the assessments undertaken, some broad conclusions on the attractiveness of the instruments can be made. That is;

Conclusions and recommendations

This study has demonstrated that market instruments can play an important role in waste management in Australia. While such instruments will not always be the best tool available to government, in many instances they can offer an effective means to realize policy goals at lower cost. Stakeholders have been supportive of the wider use of market instruments, and have encouraged further investigation.

The success of market instruments will depend on attention to design features and their close targeting to policy objectives. On this latter point, the study has highlighted the need for governments to clarify policy goals for waste management.

Government waste management goals are moving away from a central focus on managing ‘downstream’ waste disposal impacts to minimizing ‘upstream’ impacts associated with resource exploitation and production processes.

The main market instrument currently being used is the landfill levy. The levy does not fit well with either upstream or downstream policy goals. Linkages between upstream environmental impacts and volumes disposed to landfill are too indirect. In addition, levies have not distinguished between waste streams despite the significant variation in associated upstream and downstream environmental impacts. Current levies also provide no incentive for improved management practices at landfills and undoubtedly have contributed to the increased illegal disposal of wastes with attendant environmental impacts.

In considering policy objectives for waste management, pursuit of upstream environmental goals requires careful attention. The rationale to pursue resource conservation through waste management instruments applied late in supply chains is at best tenuous and a poor surrogate for effective resources policy. Similarly, stakeholders have provided few insights into why industry policy (addressing principally emission practices) should discriminate between the environmental performances of production processes drawing on used materials compared to virgin materials.

We strongly recommend that governments review the merits of pursuing resources and industry objectives through waste management policy. Dogmatic adherence to the ‘waste hierarchy’ or the setting of arbitrary waste reduction goals not supported with clear assessments of likely costs and benefits may not be in the nation’s best interests.

Governments of course will be mindful that community demands to promote resource conservation through waste minimization will not be easily shifted. Consequently, waste programs are likely to maintain this focus at least over the medium term. Whether or not market instruments are chosen for this purpose, investigation into which resources are of greatest concern and most directly influenced through waste management would seem a priority. Employing market instruments such as tradeable landfill quota schemes or recycling certificate schemes in the absence of such information cannot guarantee net social gains will be realized.

The application of market instruments to directly target downstream post-consumer waste impacts can be employed with greater confidence. Performance bonds are already being used, and moving landfill fees onto an emissions basis could be pursued in some jurisdictions with little regulatory or administrative changes needed. The development of market instruments to target problematic wastes is also promising and the subject of current investigations at national and state levels.

While this study has explored the potential application for market instruments to address an upstream or downstream policy goal, it would be possible to craft instruments that provided incentives for both. For example, landfill levies applied on tonnes of waste disposed could be differentiated by waste streams to reflect relative disposal impacts. However as canvassed in Section 4.2, it is generally more efficient to apply different instruments to achieve different goals. Hence rather than pursuing instruments that meet multiple goals, we recommend governments pursue a mix of instruments.

Finally, the success of any market instrument will be reflective of the design effort applied. Market instruments need to consider a range of institutional, technical, market and community issues and be crafted accordingly. Stakeholders hold much of the necessary information and effective consultation in the design stages will be required.


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