Publications archive - Waste and recycling
Key departmental publications, e.g. annual reports, budget papers and program guidelines are available in our online archive.
Much of the material listed on these archived web pages has been superseded, or served a particular purpose at a particular time. It may contain references to activities or policies that have no current application. Many archived documents may link to web pages that have moved or no longer exist, or may refer to other documents that are no longer available.
Commonwealth Department of Environment, 2001
The previous section dealt with options that are aimed at improvements in the supply side of beneficial use of waste tyres. This section deals with the demand side, assessing options that target market aspects of beneficial uses for waste tyres. The opportunities are the same in each case: to generate greater net value for the community from waste tyres.
By industry assistance, we mean certain activities that could be undertaken at an industry level that would result in community-wide (and even industry-wide) benefits, but which individual enterprises could not justify on a purely commercial basis.
Thus the justification for intervention derives from a different type of market failure from that associated with the generation of externalities (such as environmental or public health impacts) which are typically the focus of environmental regulation and are the main motivation for the options discussed in Part II.4. Market failure in this regard refers to situations where the operations of markets fail to deliver outcomes that are socially optimal as a result of the structure or operation of the market itself.
What are examples of this type of market failure? In some cases, firms that would be expected to be viable face great difficulties in attracting adequate finance to fund the investments needed during the starting up phase. Or entrepreneurs may opt not to pursue research and development (R&D) on new products because the R&D may have industry-wide applicability and the entrepreneurs cannot be confident that they will be able to capture a sufficient share of the resulting benefits. Or it may simply be that distortions in the market (or related markets for virgin materials, or landfill fees) suggest that a ‘second best’ outcome may be appropriate. One form of market imperfection arises from imperfect knowledge, perhaps as a result of preconceptions regarding the ability of a given product to meet specifications.
Where market failure of the kind referred to above occurs, some form of ‘industry assistance’ may be called for and justified, provided that appropriate conditions are met. The experience with industry assistance provided by governments in the past is littered with examples where the initial good intention has resulted in costs being imposed on the community at large without a corresponding contribution by the industry towards the welfare of the community. The costs of such programs are represented not just by the quantum of funding provided by the government, but also the resulting ‘hidden’ costs, such as the possibility that more efficient firms have been crowded out of the market as a result of a subsidised competitor.
There are certain criteria that desirable industry assistance programs should meet:
We include direct regulation as an option. Examples include relatively modest requirements in relation to producers making key information available, ranging through provisions for minimum standards, to absolute bans on certain products or processes.
In effect, these are production subsidies.
The discussion, here and in the corresponding part under assessment, will use as a model the payment of benefits to recyclers of waste oil under the PSA scheme introduced at the beginning of 2001.
In this scheme recyclers of waste oil who register as a manufacturer under the Excise Act 1921 and who meet relevant eligibility criteria are entitled to receive benefits under Part 2 of the Product Stewardship (Oil) Act 2000. The benefits are paid on the basis of each litre of oil recycled and the unit amount of benefit varies depending on the form of recycling. The amounts are prescribed in the Product Stewardship (Oil) Regulation 2000, and vary from 50 cents per litre in the case of re-refined oil (‘lube-to-lube’) to zero for certain reuse of used oil where there is minimal reprocessing and the activity is likely to be undertaken from purely commercial considerations. All benefits are treated as assessable income for the purposes of income tax.
There are also requirements that the recycling process and the products are to comply with environmental and other statutory requirements in the relevant State or Territory. To be considered for benefits, the recycler must undertake the final processing (recycling) stage prior to end use and the product must be used by that recycler or sold for end use (that is, not just processed and stockpiled).
The PSA for oil maintains a substantial degree of government control on the recycling process. The final requirement ensures that the benefits are not used merely to convert one mountain (or, more appropriately in the case of oil, lake) of waste into another. The payment is linked directly to the volume of oil recycled, and the government has made a judgement as to which recycling activities deserve the greatest level of assistance. The discussion below is based on material that has been prepared to explain the operation of the PSA for oil71.
The benefits paid for each use have been determined by weighing up environmental and economic considerations and the likely available revenue. The benefit levels also take account of current prices paid for these products in the marketplace, and attempt to provide an incentive to undertake more recycling, whilst avoiding windfall gains.
Payment for the first category (lube-to-lube) is significantly higher than for others in order to encourage full re-refining of waste oil and thereby more sustainable management of the resource. The higher benefit reflects both the environmental and sustainability benefits that accrue, and the very substantial industrial and marketing investment that is needed to make lube-to-lube viable.
The level of benefits has been set by the Minister for the Environment, but the ongoing administration of the scheme is the responsibility of the Australian Tax Office (ATO), who will make rulings on the interpretation of the definitions of the benefit categories.
A PSA for waste tyres could look rather similar to the newly implemented waste oil scheme. One design issue that would need resolution is whether benefit payments are to be paid on a per tyre or per unit weight basis. We would favour a per weight basis consistent with the discussion on levies in Part II.7.
Other forms of assistance
Other forms of assistance would be on a more or less case by case basis in response to submissions by parties seeking funding. One area where many firms experience difficulty is in raising capital in the start-up phase.
One means of diverting tyres from landfill to more highly valued uses is to make disposal to landfill more expensive, or to ban tyres from landfill altogether. In this regard, there would presumably be some level of landfill gate fee that would make disposal of waste tyres so prohibitively expensive that it would act effectively as a ban. This option entails setting landfill gate fees at or above true costs (including externalities such as impacts on the environment and local amenity) of waste tyre disposal to landfill. This option can operate in conjunction with other options discussed here.
There are a number of different forms that industry assistance could take. The NSW Tyre Industry Waste Reduction Plan72 provides for a number of activities by the Tyre Industry Waste Management Council (TIWMC) (numbers in the box below refer to paragraphs in the Plan) in regard to promoting markets for waste tyres and their products.
NSW Tyre Industry Waste Reduction Plan
9.5 Demonstration sites
The Tyre Industry Waste Management Council (TIWMC) will develop and construct a series of tyre-derived product demonstration sites with the objective of encouraging architects, engineers, designers and other professional people involved in project specification and construction to use and specify tyre-derived products.
9.6 Market research report
The TIWMC will commission a market research report... The objective of the report will be to determine untapped or under-utilised markets for new and excisting tyre-derived materials and products and to assist NSW manufacturers of these materials to capture these products.
9.10 Market development
The TIWMC will develop a market development program to assist tyre recyclers and tyre-derived product manufacturers to expand their markets.
The Queensland waste tyre strategy also nominates a number of actions to assist industry:
Queensland Waste Tyre Strategy
Develop new markets for tyre-derived products through commissioning a market research report to determine under-realised markets for new and excisting tyre derived materials.
Develop and construct a series of tyre-derived product demonstration sites with the objective of encouraging engineers, designers, and architects to specify tyre-derived products in project specification and construction activities.
Encourage the road construction and civil engineering industries to revisit the use of crumb rubber in road and highway applications.
Produce a folder containing flyers of all tyre-derived products and materials manufactured in Queensland or from Queensland waste tyre materials, case studies, tyre industry contact directory, and other relevant information.
Review the extent to which State and Local Government purchasing policies can be used to specify the use of waste tyre-derived products where these products are available and competitive.
These are the sorts of activities that could be considered in this option. They are by no means mutually exclusive and in fact could reinforce each other. These actions could also operate in conjunction with other options.
Most governments have developed acquisition policies whereby they give favourable consideration to certain suppliers or products. Local government associations have also been active in this field in relation to council purchasing. Option 5 would involve development and implementation of specific programs in relation to used tyres, such as requiring Governments to give specific attention to purchasing goods made from recycled tyres or fitting retreads to their vehicle fleets.
By its very nature, research and development is a high risk activity, in terms of timing, technological expectations and market penetration of the product. Consequently, funding for R&D may be very difficult to source through traditional financing channels that tend, at times, to follow inflexible approval guidelines.
The other major justification for assistance in this area is where the R&D will generate benefits for the industry as a whole at a level to make it worthwhile in aggregate, but where no individual player would reap sufficient benefits to pay for the R&D.
Option 6 envisages a role for funding to be provided for R&D in cases where the R&D will result in welfare gains for the community as a whole but where purely commercial considerations acting by themselves will not deliver the required outcomes. Decisions on funding would be made by an appropriately constituted council or board established for this purpose.
The range of R&D activities that might be eligible for funding is quite extensive. At one end of the scale is relatively fundamental research into, for example, material properties that could be of very broad application though possibly requiring further work (perhaps by individual firms) to bring the results into practical use. At the other end of the scale, there could be fine-tuning of relatively well-established processes to improve the ability of the products to compete in terms of price and quality.
A requirement common to a number of these options is a source of funding and, more importantly, a framework for making decisions on assistance. Decisions would be needed on a range of matters including:
The PSA for oil is administered by the Australian Government, and it could be argued that the Government would also control a similar scheme for waste tyres.
The ATMA73 has argued that the tyre industry should have a greater role in the operation of the provision of assistance. It is the manufacturers and importers who will be most directly affected by a levy scheme if, as proposed, a levy is exacted at the point of manufacture or import into Australia. Their preferred approach involves a number of elements that go well past what is entailed in the PSA for oil, and includes infrastructure for managing waste tyre flows in a more orderly manner (see Part II.5). On the administrative side, they envisage a secretariat together with a statutory body providing oversight and audit functions.
The ATMA proposals in regard to administration can be expected to be considerably more costly than the PSA for oil which, once established, is largely restricted to clerical functions and interpretation. However, the ATMA scheme is considerably more flexible in terms of the types of assistance that could be provided, and the associated infrastructure would deliver substantial benefits in other facets of waste tyre management.
The advantage of direct regulation is that it delivers relatively high levels of assurance regarding certain activities. This can be valuable, or even essential, where there are major risks to human health, but is of little application when the goals are to do with improving the management of a resource.
The downside to regulation is that it imposes costs. Some costs are direct costs (represented by actual expenditures by the regulated community) while others are the costs of foregone opportunities (where certain prescribed activities, which would otherwise generate value for the community, are not allowed). Regulatory reforms by Australian governments have changed the emphasis in regulation to a focus on outcomes rather than prescribing the means to achieve these outcomes. Even regulation that is outcomes based will in many cases impose additional costs because of difficulties in accurately targeting regulation.
Not only is regulation a blunt instrument, it is also unwieldy and inflexible. What is desirable today may not be so a few years hence, and this is particularly so in the case of the waste tyre industry which is characterised by aggressive development of new and excisting technologies and rapid changes in market demand. One effect of regulation is to stifle innovation, a major example of lost opportunities. And once it is recognised that current regulation is no longer desirable, the processes required to make amendments are generally costly and time consuming.
Even in cases of identified market failure, it is still generally preferable to allow market forces the greatest leeway possible. Regulation may be justified if the intervention in the market takes the form of addressing market failure but exploiting the powers of the market. For example, regulation in regard to provision of information may have a place in our toolbox (refer to the discussion in Part II.2 on tread wear information moulded on tyres). Even in the case of information, there needs to be careful evaluation of all the consequences of any proposed regulation. It would appear that stronger product-related regulation would be difficult to justify given the availability of market mechanisms that are likely to be not only much more effective, but also not cause the distortions and associated costs of heavy-handed regulation.
Implementation of product-related regulation would need to take into account the implications of mutual recognition agreements.
One form of industry assistance is the provision of subsidies to those waste management activities that occupy the higher levels in the waste management hierarchy or activities that are assessed as valuable on some other basis, such as life cycle assessment. The effect of the subsidies is to modify the economics of supply and demand in favour of the activities that are to be encouraged.
Production subsidies of one form or another have been used extensively in Australia and other countries to support certain industries. They have been criticised by certain economists and others on a number of grounds:
To meet these criticisms, subsidies are often targeted at industries that operate in seriously failed markets. Even in many such cases, other antidotes to market failure may be preferable (including the imposition of levies on competing activities). One area where some justification can be found for subsidies is the ‘infant industry’, where the subsidy provides the means to hurdle barriers in the early stages. For example, it takes time for markets, or market acceptance, to develop for certain products.
In view of the preceding discussion, it would appear that if production subsidies are to be considered as a form of industry assistance, then there should be a ‘sunset’ arrangement whereby after, say, five years the subsidy would cease. One effect of this may be to discourage some firms from investing in the industry, but it would avoid the ongoing effects of some of the criticisms indicated above.
On the other hand, a limited duration subsidy could be viewed as assistance to industry in the form of raising capital to start-up or enlarge their business (in effect, overcoming other hurdles in the establishment phase).
Payment of unit benefits
This scheme is conceptually straightforward to implement. Much of the necessary legislative changes to support the scheme, as well as the establishment of administrative arrangements, could take advantage of the work done in developing the PSA scheme for waste oil.
Once in operation, costs to industry would be low — at specified intervals a recycler would make a claim for benefits based on the quantity (number or mass) of waste tyres used within the accounting period. The handling of payments on claims by the ATO would be largely automated. Only matters of interpretation and audits would require specific attention. Another advantage is that benefits are received in a timely manner, reducing cash flow problems for recyclers.
The Government has committed $60 million over four years from 1 July 2000 during the transitional phase of the PSA. The funding is for strategic initiatives to increase high value oil recycling and ensure a sustainable oil recycling industry. Transitional assistance is an interim mechanism to engender change that will underpin the long-term viability of the oil recycling industry.
The funds will be used to74:
The transitional assistance will also be used to fund stewardship benefits, in the event that benefit payments exceed levy income (see next section).
The incentives in a scheme for waste tyres would work as follows. In the hands of the recycler, the benefit would make the recycling operation financially less problematic. Recyclers would be able to afford to pay more for waste tyres of a type suitable for their application or they may be able to drop the price of their products and thereby achieve greater market penetration. In many cases it can be anticipated that recyclers will do some combination of both. The outcome will be that the demand for and the price of waste tyres will rise. In response to the higher price, a greater number of tyres will be diverted from landfill and, more particularly, from inappropriate disposal.
The scheme has a number of drawbacks. The Government has to make decisions as to which types of recyclers to register and the unit level of benefits recyclers of different types should receive. This process is unlikely to be based entirely on objective criteria and depends on the Government making judgements as to the real financial value of the products and on the environmental and sustainability considerations, as well as the ‘need’ for assistance. In effect, it overrides the normal market mechanisms which allow values to be placed on goods by observing the prices of transactions, and where the flow of goods is a consequence of the prices.
To achieve a desired level of activity (either in aggregate or for a specific recycled product), the Government may need to adjust the unit benefit, possibly requiring incremental trial and error changes. The consequent uncertainty for industry would result in difficulties in decision-making.
Also, the excisting waste oil scheme is rather inflexible, in that the benefits are defined in regulations. As new technologies appear, or markets develop, the setting of unit benefit levels may need to be reviewed which will involve a somewhat cumbersome process.
In view of these matters, consideration has also been given in the PSA for oil to a certificate based system that is similar in concept to trading schemes for pollutant emissions. Under this scheme, the Minister issues certificates to each recycler based on the number of tyres recycled. Any firm that wishes to manufacture or import tyres would be required to hold certificates covering the required number of new tyres. Tyre producers would make bids for certificates with sufficient merit points in terms of various waste practices75.
The major advantage of the scheme is that the level of recycling (the number of tyres to be recycled) is set by the Government, rather than the amount of the payment to recyclers. Within the target level of recycling, market forces would operate to set the value of the certificates, and consequently the amount of assistance received by individual recyclers. The Government would retain some controls, particularly to prevent large firms from cornering the market in certificates which would otherwise be an effective practice to exclude competition from other potential industry entrants.
Notwithstanding the advantages, the certificate scheme is rather more complex than the current PSA scheme with direct payments to recyclers. It is not clear at this stage how a certificate scheme would operate in practice. The Government has foreshadowed a trial of the certificate scheme for waste oil, and it is considered that further consideration of a certificate scheme for waste tyres be deferred until some lessons can be extracted from the experience with the trial.
Other direct assistance
More direct assistance in raising investment capital could also be considered through, for example, capital grants or low interest loans. The advantages of such assistance are that it could be closely targeted in response to individual proposals. However, it would raise even greater fairness questions than would a subsidy based on unit benefits because the assistance would be provided on an individual firm basis, rather than to an entire industry sector such as retreading.
In addition, providing assistance for specific firms or products presupposes substantial expertise and understanding in regard to waste tyre technologies and markets. It is also very much a matter of trying to pick winners, with all the issues that that practice would bring into question.
The great attraction of using landfill fees to encourage diversion of waste tyres from landfills is that it is easy and quick to implement once agreement is reached on the level at which the fees are to be set. The problem to be addressed is that waste tyres do not recognise boundaries that define the limits of responsibility for government at either the State or local level. If landfill gate fees are not set consistently, then there will be leakage of tyres to low fee landfills, and this is clearly undesirable in terms of meeting the objective of raising fees in the first place and of the impacts on local communities. The arguments for and against setting common gate fees mirror in part the discussion on uniform national regulation (refer Part II.4).
The major drawback in making landfill disposal of waste tyres more expensive or difficult is that it will provide increased incentives for illegal disposal. The reduction in the number of tyres in landfills will be made up of the sum of the increase in tyres used beneficially and the increase in the number of illegally dumped tyres. There will be positive benefits from the higher value uses (net of any additional costs incurred in realising these higher values) and there will be the avoided costs of the tyres no longer destined for landfills. From this will need to be subtracted the costs of additional illegal disposal.
A number of stakeholders have argued that increased controls or bans on waste tyres to landfill should be introduced only after alternative fates have been developed to the stage that they are viable. This suggests that the best approach, if this option were adopted, would be to progressively raise the landfill gate fee over time. As the gate fee for any particular use or practice is reached, then this would divert sufficient waste tyres that would meet the demand for the products from that technology. This leads us to a more careful evaluation of the financial incentives provided by more expensive disposal to landfill.
It is illuminating for the purpose of this study to couch the problem of management of waste tyres in a marginal cost framework. The marginal cost of a product is defined as the cost of generating the next item of the product. Commonly, the marginal cost curve decreases initially due to the effects of economies of scale. Thereafter, it is assumed that supply is made up initially from the lowest cost producers, and that as these sources are exhausted, the next least cost producer is included. However, as the quantity to be produced increases, more and more expensive sources for the product must be tapped and the marginal cost rises. Thus the curve is U-shaped though commonly only the increasing section is considered, and this is the case for the present study.
In this study, some adjustments need to be made to definitions in the base model. The ‘product’ will be taken to denote management of waste tyres. The ‘price’ in conventional cost curves is interpreted as the gate fee needed to make an individual management practice commercially viable76. In other words, it is the costs of the management practice less the return from the produce generated. Thus the marginal cost as defined is a form of subsidy — costs net of returns.
In the case of some practices for waste tyres, the gate fee will be negative (the tyres have a genuine commercial value) or at least they are below the current gate fee for landfill. Allowing for imperfections in supply, the markets for the products from these practices are assumed here to be saturated. This is the point denoted by current level in Figure 6.1. Note that the values in the figure are purely illustrative.
The diagram also shows the gate fee and expected market size (in percent of waste tyres) for other practices at the present moment. For gate fees above the disposal charge, the tyres to the right of any given point represent the number of tyres going to landfill or illegally disposed. By increasing the landfill gate fee, progressively more practices will be able to attract waste tyres away from landfills, precisely as the landfill gate fee exceeds the gate fee for the next most expensive practice (application 1, 2, ... in the diagram). By setting the gate fee at or above the highest beneficial use gate fee theoretically no more waste tyres could be diverted from landfill. This is similar to the situation under a ban on disposing waste tyres to landfill.
Of course the process is not static. If the price elasticity77 in the end-product market is non-zero, then producers can use the higher gate fee to reduce the price of the product (while maintaining profit margins) and so sell more product and consume more tyres. Thus the vertical segments actually slope to the right (dotted line in Figure 6.1). In the case of a total ban, the ability to charge higher and higher gate fees would eventually consume all waste tyres, or new technologies would be introduced.
There is a cost associated with this. The beneficial uses with the highest gate fee will always be crowded out of the market (regardless of where the landfill fee is set) because they can always be outbid by uses with lower gate fees. However, these low cost uses will receive substantial windfall gains (a form of producer surplus). The windfall gain is the difference between the amount they receive for accepting a waste tyre and the amount they would need to receive to make their operation viable (for the currently viable applications, the windfall gain is represented by the shaded area in Figure 6.1).
This is a transfer from those who provide the funding to the low cost users. The amount of this transfer is the area between the cost curve and the landfill gate fee. If the cost curve is fairly flat, then this amount is relatively small. However, if the landfill fee is set to exceed the gate fee for a single use at the right side of the graph and this gate fee is substantially above the general run of gate fees then the amount can be substantial.
From a cost benefit analysis (CBA) perspective, this amount represents a transfer between market players rather than a resource cost. From a community viewpoint, there is no loss in welfare. However, the dynamics of the situation are quite different, since the option fails to encourage the very waste tyre management practices (at the high end of the range) to which it was directed.
Undoubtedly, well-prepared and targeted marketing programs will assist in selling more products made from reprocessed tyres and thus increase the number of waste tyres diverted from landfill.
The difficulty is how product-specific should the marketing be? The effects of general exhortations to buy recycled products are unlikely to add significantly to the outcomes from programs already in place. At the other end of the spectrum, programs that promote individual products raise questions of unfairness. In the case of such assistance, it might be more effective to make the costs of the program available in cash, thus allowing the recipient to make the decisions on how to spend the money so as to maximise the benefits. At an intermediate or sector level some gains may be available, for example in the case of retreads, to redress conceptions based on incomplete information.
Other activities such as market analysis, demonstration sites and preparation of product lists may have more potential, though questions in regard to scope need to be resolved in these cases.
The option of government purchasing policies to favour recycled goods was criticised by the Office of Regulation Review78 in regard to recommendations made by the ANZECC report. The gist of the criticisms was that it would be more efficient to provide the assistance in the form of direct funding leaving it to the recipient to decide how best to use the money, and on distortions caused by different decision criteria between the public and private sectors.
We agree with much of the arguments put forward in by the Office of Regulation Review. However, their analysis fails in our view to take into account certain dynamics in relation to ‘infant industry’. Purchase of a new product by the government can set a powerful example that the product is suitable and cost-effective for the application, and this can overcome reluctance on the part of buyers due to suspicions regarding the performance of a new product. Furthermore, decisions by Government should take into account distortions in prices due, for example, to externalities associated with the extraction of virgin materials used in the manufacture of competing products.
Some funding for R&D would come under option 2 (direct financial assistance) regardless of whether the R&D was conducted in-house or contracted out.
The main justification for assistance with R&D is where the expected outcomes are in the nature of a ‘public good’, where the industry as a whole (or a sector within the industry) will enjoy the benefits.
A national approach would be implicit in the introduction of regulatory controls on products in view of agreements on mutual recognition between States and Territories.
To be effective, controls on landfill disposal of tyres or increased landfill fees, would need to be applied nationally to avoid interstate transfers of tyres searching for the cheapest disposal route.
Administration of direct assistance would need to be on a national basis to be consistent with the preferred funding mechanism. It should be noted though that while the PSA for oil is a national scheme, there do not seem to be overriding reasons for uniformity in the unit benefits paid for waste tyres used in specific practices across States and Territories.
It should be possible to make savings by sharing promotional material. Other activities such as demonstration sites would be organised locally. Similarly, purchasing decisions and acquisition policies would normally be developed by individual governments.
Research and development is effectively a global matter. Conducting R&D nationally avoids duplication, makes best use of available information and maximises the firms that will use the findings.
Two final points are worth making. Firstly, funds will always be limited and decisions on where funds are to be spent must be based on sound evaluation of options to determine which provides the greatest benefits. Secondly, there is broad support for the position that industry assistance should be viewed as being interim in nature. Society will find unacceptable the provisions of assistance without a sunset clause, and activities that require ongoing support are not viable in the long term.
71Environment Australia (2000b).
72NSW EPA (1998)
74Refer Environment Australia (2000a).
75Similar to some air pollution emission trading schemes in the US, new certificates have to be acquired for each lot of tyres produced in other words, the certificates are not perpetual entitlements.
76In this report, the term gate fee is meant in the sense of payments made to recyclers to take waste tyres so that their operation is commercially viable; in other words the gate fee represents the shortfall of revenues to cover costs. The gate fee for landfill under this definition accords with the conventional interpretation of a landfill gate fee.
77Price elasticity is a measure of the sensitivity of demand for a good to changes in its price. If demand for a good is inelastic (zero or, in the real world, very low price elasticity) then the volume of sales of the good is not affected by the price.