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A National Approach to Waste Tyres

Commonwealth Department of Environment, 2001

5 Improved Value from Waste Tyres — Managing the Resource

5.1 The opportunity

The opportunity in this section and Part II.6 which follows is to extract the maximum value from the waste tyre resource, after allowing for the associated costs, both financial and non-financial. While the opportunity is much the same in the two sections, the impediments form two quite distinct groups and it is appropriate to discuss them separately.

5.2 Impediments

The impediments to be considered in this section relate in the main to the ‘supply’ side in relation to increasing the beneficial use of waste tyres. Waste tyres considered as a resource differ from many other resources that are used as inputs in the manufacture of other products or as an energy source.

The supply of waste tyres is largely fixed. Tyres are an essential part of a vehicle providing contact with the road surface and transmitting tractive, braking and steering forces. Vehicle owners are forced to buy tyres, but tyres constitute a fairly small proportion (of the order of 3-4%) of total vehicle costs. Thus the generation rate for waste tyres is insensitive to changes in consumer choice.

There are two ways that the supply (generation) of waste tyres may be modified. The purchase of replacement tyres may be deferred but, at most, for a short time. Also, a vehicle owner may choose to switch brands and this could affect average tyre life, but the effects will be essentially second order. The major determinant of the number of waste tyres generated is the aggregate distance travelled.

At the moment, waste tyres are seen as a ‘problem’: how do we manage waste tyres in a sustainable way? But even now there are concerns on resource security. In any commercial activity, investors will not commit substantial sums of money unless they have good market prospects for their products, but in the case of using waste tyres an equally important consideration is an assured access to inputs where the supply is largely fixed66. Investment is an inherently risky activity since funds have to be committed upfront, while the returns may not be received until some time later when conditions may have changed from those expected when the investment decision was made.

As new applications are developed, or excisting ones made more attractive, the demand for waste tyres will rise. Prices will also rise reflecting the increased value and the higher price will allow more waste tyres to enter the scheme (for example, it will be commercially viable to transport waste tyres a greater distance and this will increase the effective catchment for waste tyres). Also, some demand may be met by increased imports of used tyres, though this is a matter that is considered elsewhere (see Part II.2). Finally, tyres may be obtained from waste stockpiles and, to a lesser extent, tyres that have been dumped at different locations.

Not all waste tyres are available for high value uses, for example due to the costs and difficulty of collecting tyres from remote sites (see Part II.8).

Other than these possibilities, there is no way for the supply of waste tyres to adjust to the fluctuations in demand, or to keep up with the increasing demand if this exceeds the natural rate of increase which is largely proportional to aggregate vehicle kilometres. If one user manages to increase their share of waste tyres, this will be at the expense of another user.

In looking at options for managing the resource, it is essential to make an estimate of the ‘real’ value of a waste tyre. If waste tyres are intrinsically valuable, then this would suggest that there is a demand for the products that can be made from them or to use their energy content. Managing the resource is then a matter of putting in place a scheme that facilitates the establishment of effective links between ‘producers’ (waste tyre generators) and users (processors or other applications).

In addition to the long-term trends in demand and supply for waste tyres, there are other more pressing considerations. At present, the constraints arise not so much from a shortage of waste tyres in aggregate, but rather inefficiencies in the delivery to the end-user.

Collection of waste tyres is an activity that is characterised by low barriers to entry. Virtually anyone with a truck with a suitable tray can enter the industry, even if the truck may be used for transporting other items at different times. The only other requirements are access to some waste generators as customers and, for those who concern themselves with such matters, a licence or equivalent from the regulator.

The result has been that a considerable number of waste tyres is collected by small operators, many working for themselves, and in a less than orderly situation. There have been two consequences. The first is that the absence of proper controls has made the waste generator/collector point the most vulnerable link in the waste tyre chain in relation to inappropriate disposal (refer Section II.4).

The second consequence is that this can place at risk the operations at certain receival facilities. Commonly, there is little stockpiling of tyres at these facilities, for both commercial (just-in-time operation) and fire safety reasons. This means that the facility must receive a steady stream of waste tyres to meet the day-by-day demand for its operations, and in turn make the payments on the debt from the initial investment. The situation at the moment is that often the level of assurance of obtaining the required number of tyres places the commercial viability of the operation at risk. The perception of these risks will be an impediment to further investment.

As an indication of the consequences of mismatches between supply and demand, industry representatives have reported that a proposal for a cogeneration plant using waste tyres as fuel did not proceed largely due to concerns regarding the security of supply.

5.3 Options for managing the resource

Options proposed to overcome the impediments are required to be assessed against certain considerations or criteria. These criteria may be mutually contradictory, and include:

5.3.1 Option 1: Legislative support for tied agreements

To meet the concerns regarding resource security, the most direct approach is to guarantee supply explicitly. Under option 1, legislation would be enacted that provided for the conditions of supply of waste tyres to specified end-users. Conditions covered in the legislation might include the number of tyres, the sizes or quality of the tyres, and certain delivery requirements such as timeliness.

5.3.2 Option 2: Centralised market scheme

This option would involve two infrastructure components.

Holding facilities

Firstly there is a need for a physical facility that would assemble and sort waste tyres, and make them available for ‘sale’ on some basis.

Administration scheme

In addition to the physical infrastructure, it will also be necessary to establish administrative infrastructure. While the two types of infrastructure are not completely independent, they will be dealt with separately. The administrative schemes to be considered are those for managing the flow of tyres in an orderly fashion: a discussion of options for providing assistance to specific high value practices for waste tyres is located in Part II.6 below.

Underlying the success of a centralised administration scheme is a requirement that the ‘manager’ of the scheme be independent of both the waste tyre collection and transport operators, and the waste tyre processors and downstream users. This is naturally the case in those options characterised by a more or less free market, but is also an important consideration for options where the manager has the power to exercise considerable control. Similar considerations regarding independence, accountability and transparency apply in the discussion on industry organisations (PROs) in take back schemes under the extended producer responsibility concept (refer Part II.2).

A range of suboptions (or details of design) could be considered and evaluated in regard to the form that the administration scheme might take. The choices are driven largely by the degree of central control that is seen as optimal for the management of flows of waste tyres.

In addition, there is the question of the degree of involvement of the tyre industry in managing such schemes. Regardless of the answer to this question, it is likely that the Government67 will have some role as a midwife at the birth of such a scheme. In particular, the establishment of such a scheme would need ‘seed funding’ or at least a loan from the Government. Thereafter, the scheme should be at least partly self-funding, and the question of ongoing funding is discussed separately under each suboption.

Under all suboptions, individual recyclers are assumed to obtain sufficient financial benefit needed to pay for waste tyres at either the market price (suboptions 2.1 and 2.3) or the price set by the manager in option 2.2. The level of the benefit will vary across recyclers to reflect the differing values placed on certain waste tyre practices.

Suboption 2.1: Free market operation

At one extreme are schemes that allow free operation of the ‘market’ in waste tyres. In such an approach, the administration scheme would act rather in the way of a stock exchange for waste tyres. It would provide a system whereby bids for buying and selling waste tyres could be lodged, and the means for documenting any contracts that are reached. The only controls would be to ensure the integrity of the buy-sell process in terms of recording details of contracts and dealing with disputes related to market transactions. The responsibilities of the manager of such a scheme would be restricted to administration matters and, for example, there would be no vetting of possible trades.

Other design details concern whether the use of the central exchange facility should be compulsory for all trades in waste tyres. The alternative is to give individual buyers and sellers discretion whether to opt to take advantage of the convenience and security afforded by a central exchange, or to undertake off-market deals.

The costs of operating a central exchange facility could be met on a cost-recovery basis by means of transfer charges on individual trades. The costs of the physical facility could be met by those who make use of the facility. While the physical facility would assist in materials management, it is not an essential feature of suboption 2.1 since there is no need for either a physical or ‘virtual’ pool of tyres.

Suboption 2.2: Manager retains strict control

At the other extreme, the manager of the scheme would have the power to ‘approve’ or vet all potential trades in waste tyres. Or, possibly, the powers of the manager could be extended to directing that certain waste tyres as defined by the manager will be sent to a specified destination. In such a scheme, the function of the manager clearly is no longer restricted to administrative and recording activities, but involves questions of policy and the exercise of judgement. Thus, the manager will influence in a very direct way the structure of the waste tyre industry and the applications that will be adopted.

In considering funding for the ongoing costs there seems little to be gained by ‘charging’ one or other player in view of the controlled nature of the scheme if, as is likely, many of the waste tyre applications will need some assistance. The funding will come out of some reserve that has been set aside (perhaps from levy receipts) for the purpose of managing the scheme, and individual recyclers will not ‘see’ the monetary benefits that they enjoy.

Suboption 2.3: Sale of waste tyres from a managed pool

An intermediate position would be for the manager to administer the collection of waste tyres, and thus control the supply side by creating a ‘pool’ of waste tyres. The physical collection and transport of waste tyres could be contracted to individual operators by means of commercial arrangements, but the operators would not be linked directly to downstream parts of the waste tyre industry. Such an arrangement should mesh smoothly with proposals for a fee paid at point of receival of a waste tyre that were assessed earlier as a means to reduce inappropriate disposal. Alternatively the collection of tyres could be subject to tender by the manager.

The manager of the scheme could then arrange for the sale of waste tyres from the pool to the highest bidder. This could be done either on a ‘spot’ basis or through bids for longer term contracts. The expected shortfall, when the sale price fails to cover the receival payments, could be met by disbursements from the levy fund. As in suboption 2.1, market forces would determine the destination of waste tyres with the manager having a purely administrative role.

5.4 Assessment

Overall, the benefit of these options is that end uses will have access to the resource (waste tyres) in an orderly marketplace, which facilitates access to the resource for high value applications. The resulting increase in confidence in relation to security of supply will encourage investment in new plant that will increase the value from waste tyres.

The central facility scheme would simplify the administration of the point of delivery payment option discussed above in Part II.4 which is assessed as being an effective weapon in reducing the extent of inappropriate disposal.

5.4.1 Option 1: Legislative support for tied agreements

The advantage of option 1 is that it provides the ultimate in assurance for the investor in a facility that waste tyres will be available for the life of the facility. Moreover, no further involvement is required by industry or government in regard to the allocation of tyres to specific applications. The alternative is to have the flexibility of many agreements with room to tender competitively within a legislative framework as discussed under option 2 (centralised market scheme).

On the other hand there are a number of downsides. In practice, an agreement tying the supply of waste tyres to a single industry or firm means that other possibilities are closed out and this raises serious competition issues. The legislation supporting such an agreement may be deemed to be anti-competitive, in which case the relevant jurisdictions would need, under the conditions of the Competition Principles Agreement, to demonstrate that the public benefit criterion applies. The difficulty in such an argument is that waste tyres are not viewed as a major risk to the community on environmental grounds.

Tyre derived fuel

In general, this study is not about detailed evaluation of different practices available for the management of waste tyres. Nevertheless, a special case needs to be made in this instance for consideration of the use of waste tyres for energy. The reason for this is that tyre derived fuel (TDF) currently constitutes the only beneficial application for waste tyres that is taking a significant number of waste tyres (3 million EPU annually), and has the proven potential to absorb more tyres in the future.

The consultancy team agrees that providing guaranteed access to the waste tyre resource for the cement industry can be expected to be the most effective approach in reducing the number of waste tyres going to landfill at least in the short term. However, there are a number of drawbacks:

It is the view of the consultancy team that these represent drawbacks to this proposal, and that trade-off between short-term gains and the prospects for long-terms improvements is not favourable.

5.4.2 Option 2: Centralised market scheme

The assessment is at two levels: physical management of waste tyres; and administrative arrangements for distributing the tyres to the end user.

Holding facilities

A centralised location for assembling tyres is seen as necessary in view of the general lack of stockpile capacity at receival facilities. The centralised facility could buffer day-to-day fluctuations in supply and demand. The aim would be to have the capacity to accept additional tyres, while maintaining sufficient tyres in stock to meet the demand from contract agreements or ‘spot’ sales.

Past experience indicates that the presence of a large number of tyres in one location runs a significant risk of accidental or purposely lit fires. On the other hand, such a facility could afford to invest in appropriate fire fighting and hazard reduction measures. In fact, since tyres are not overly easy to ignite, the major requirements relate to good access for fire fighting equipment and security measures to protect against wilful starting of fires and other damage. Queensland has developed environmental policy in regard to conditions of storage for tyres and Western Australia has statutory requirements for how waste tyres are to be buried in landfills. Whether these sorts of conditions would be appropriate for larger central facilities is unclear. The development of clear guidelines (perhaps at a national level) regarding best practice would be particularly useful.

In view of fire safety considerations as well as requirements for materials handling and sorting of tyres, a large area of land would be needed. Careful selection of the location and appropriate landscaping or similar measures would minimise the visual impacts. Another requirement is to protect the stored tyres from contamination. Ideally, this would take the form of a bunded and sealed hardstand area, though lower cost alternatives may be adequate. Measures would also be needed to minimise breeding potential for mosquitoes.

Some form of financial assurance could be specified to cover the cost of site remediation in the event of owners not fulfilling their responsibilities. The Queensland waste tyre strategy suggests remediation costs may be of the order of $30 per square metre, though this seems rather high and presumably refers to cases where the ground has become contaminated as a consequence of fire in the stored tyres.

Some waste tyres need not physically come to the central facility, but could be taken directly from waste generator to receival facility.

While the discussion above has been in terms of a single centralised holding facility, in practice there would be a collection of such facilities. The optimum size and location would be determined on the basis of the geographic distribution of the generation of waste tyres and the siting of receival facilities, as well as operational considerations for material handling. Analysis of such schemes is conducted routinely using operations research techniques.

Large concentrations of populations, such as found in the capital cities and surrounding areas, may each be able to support more than one holding facility. On the other hand, such facilities in smaller settlements may take the form of transfer stations. Waste tyres would be accumulated up to the stage where the number of tyres supports movement by large line-haul vehicles, which would then transport the waste tyres to a larger holding facility or directly to the end user69. For remote settlements, subsequent transport may not be feasible and the value of holding facilities may need to be evaluated on a case by case basis.

Administration of the scheme

The benefits of having a physical facility (or a number of facilities strategically located) is that it forms the necessary first step in developing an orderly distribution system for waste tyres to bring together buyers and sellers. In particular, it facilitates the operation of a ‘pool’ of waste tyres under suboptions 2.2 and 2.3, some of which would be represented physically by the tyres at the holding facilities. Unlike the physical premises to hold tyres, which may be replicated even within one region, it is not feasible to have more than one administrator within a jurisdiction. The question of whether the jurisdiction is interpreted to be national or at the State/Territory level is taken up in Part II.5.5.

Suboption 2.1: Free market operation

Suboption 2.1 provides a formal mechanism for buyers and sellers to make deals. The proposals associated with physical infrastructure and the establishment of a waste tyre exchange remove the worst of the excisting factors that stand in the way of an orderly market in waste tyres.

Under idealised conditions, free markets are predicted to lead to socially optimal outcomes. In the case of waste tyres, certain market ‘defects’ remain under this suboption. The most important of these arise from the relatively fixed supply of waste tyres, and the potential for one or a small number of agents to corner the market and exclude other (possibly more valuable) practices for dealing with waste tyres.

There may also be other causes for market instability resulting in wildly fluctuating prices and low confidence on the part of potential investors in waste tyre recycling facilities that they will be able to secure access to the required number of tyres.

Suboption 2.2: Manager retains strict control

The outcomes from this suboption would be similar to option 1 where access to the waste tyres stream is guaranteed. The difference is that here the contracts will be specified by the manager of the scheme rather than written into legislation. This reduces the resources needed in the cumbersome process of legislative amendment, but it leaves the problems associated with trying to pick winners.

Decisions made by the manager are going to have major financial consequences, and in some cases would result in firms going out of business. Without the scrutiny of Parliament in enacting legislation, careful attention would need to be paid to the selection of the manager and the decision-making process.

Suboption 2.3: Sale of waste tyres from a managed pool

In comparison with the free market scheme (suboption 2.1), this suboption would involve the establishment of a pool of waste tyres from which sales are made. Greater controls on the supply side (which traditionally has been the source of many of the difficulties) is expected to result in a greater level of stability in prices. However, in the absence of an approval role for the manager, there remains the potential for the market to be dominated by one or two players, at the detriment of the remainder of the industry and the community as a whole.

Discussion on administration

Proposals for a central administration scheme would appear to have considerable worth in view of the expected benefits from a more orderly market in waste tyres. The major difficulty is that reaping the benefits of market forces runs the risks of market domination. The trick in the balancing act is to determine the optimum triggers for, and the form of, intervention by a body that is external to the market.

A key question is whether the manager of the scheme should be Government or an industry body. Government fills the role of ‘fair broker’ but suffers from not having the detailed industry understanding needed to optimise the system. The ATMA70 has proposed a scheme where direct industry involvement would be through a secretariat which administers the scheme. Oversight of the secretariat and a monitoring and auditing function would be provided by a statutory body, with a broader representation extending to Government and private sector representatives not connected to the tyre industry. The need for oversight of decisions made by the secretariat is viewed as critical in the light of the issues associated with obtaining secure access to an adequate waste tyre supply for certain enterprises, and this is discussed below.

The selection of tyre industry members to be appointed to a secretariat may not be straightforward. The secretariat will make decisions that have significant commercial consequences and it will be necessary to find appointees who have the standing and trust to act in the best interests of the tyre industry as a whole, not to mention the community at large. Given the low level of cohesion observed in the waste tyre industry and the absence of an overall industry body, the consultancy team is of the view that there are substantial practical problems facing an industry based secretariat whose responsibilities extend beyond mere clerical activities.

Refer Part II.2.2 for an overview of actions in Europe in comparable situations in regard to government control.

Any scheme that is adopted will need to deal with the excisting arrangements between waste tyre generators, collectors and recyclers. As an interim measure, it may be necessary to take a light-handed approach in relation to excisting arrangements. As a result of vertical integration or legal contracts, significant numbers of waste tyres are currently locked into specific destinations. It is not intended that these arrangements necessarily be overturned. However, as the scheme matures it is expected that more tyres will ‘appear’ and overall the number of tyres in the pool available for further distribution will increase (particularly if financial incentives are made available for tyres to enter the pool). It is our view that the scheme administrator should have considerable say in how to allocate those tyres which are not tied to current agreements.

The exact forms of these controls and powers will depend on how tight the supply of waste tyres becomes in the future. At the moment, there are many tyres going to landfill, but part of the reason for this is inadequate collection infrastructure inhibiting more valued uses. If markets for recycled tyres can be augmented by various forms of assistance, then it seems possible that demand could exceed the increased supply. In that case, the administrator may need to act to ensure that selected end users have access to long term supply guaranteed by legal contract.

It would appear impractical to allocate the entire expected supply of waste tyres to applications that depended on a fixed number of tyres. Either some applications would need to be sufficiently flexible that they could vary their requirement from day to day, or there would need to be some ‘slack’ in the system. Arrangements would be needed to deal with the slack in times of oversupply, such as spot sales, transport to another centre, or disposal to landfill.

5.4.3 Retreads

Retreads require separate consideration. The specifications for casings to be used for retreads are much tighter than for other end uses. The current collection arrangements for retread casings are dominated by single operators in at least two States. At the other end of the scale, it is understood that individual retreaders who collect casings indulge in wasteful practices to ensure a supply of the casings that they need.

The availability of holding facilities will certainly assist the management of casings, providing retreaders with a more efficient means of selecting casings in sizes that they need and avoiding certain wasteful collection practices that occur now. The considerations specific to casings for retreads arise from their positive value without government assistance. Current arrangements exhibit a range of beneficiaries of this market value:

If all tyres received at the central holding facility attract the same payment, then those operators who currently get the value of the casings will miss out. There would be no incentive to bring retreadable casings to the central facility and it can be anticipated that some operators would baulk at joining the scheme thereby reducing its effectiveness. The alternative of paying a premium for retreadable casings requires casings to be screened by the facility operator prior to, or at, receival and this is complicated by the uncertainties in assessing casings.

Retreading has distinct features and requirements and tends to be regarded by the other parts of the waste tyre industry as separate. In view of the above difficulties, it may be better, in the initial phases, to exclude retreads from the options considered in this section, until such time as detailed discussions with key stakeholders can resolve the issues that have been identified.

5.5 A national approach?

It would appear that legislative support for tied agreements to supply waste tyres would become prohibitively complex if applied at a national level, in view of the requirements for consistency between the amendments needed and other parts of the legal framework in individual States and Territories.

A national approach would almost certainly be required for the central administration scheme, in view of the need for a capability to handle interstate movements of waste tyres. In addition, the preferred option for funding the operation of the scheme as well as payments at point of receival (if this option is adopted) would be nationally based and this would add weight in favour of a national administration of the spending of the funds.

 


66In supply-side analysis, as the demand for an input rises the price will increase and it is often valid to assume that more of the input will be produced, perhaps at progressively higher price. In the case of inelastic supply, there is no scope to increase the level of production of the input.

67The term Government as used here could refer to the Australian Government in the case of a national scheme or the relevant State or Territory Government otherwise.

68Since the technology of TDF is well developed, it is unlikely that innovation will bring this subsidy down, unless the price of the displaced fuel rises in the future.

69Refer Part I 6.6 for estimates of the financial gains and the reductions in emissions from using large capacity vehicles for the transport of waste tyres.

70ATMA (2001)