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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Much of the material listed on these archived web pages has been superseded, or served a particular purpose at a particular time.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.

A National Approach to Waste Tyres

Commonwealth Department of Environment, 2001


7 Funding

This section deals with the source of funds needed for the various options considered so far. The question of funding is separate from considerations on how the money is to be spent. For example, in the PSA for oil the funds collected by the excise are not hypothecated79 in a legal sense to fund the benefits paid to oil recyclers.

7.1 Options for funding

7.1.1 Option 1: Disbursements from Consolidated Fund

One option is for funding to be derived from Consolidated Fund and managed by standard government finance arrangements.

The management costs of such a scheme would be low. On the other hand, the scheme is at odds with various broad policies that have been adopted by Australian governments, such as the user pays principle.

The remainder of this section deals with the main option — different forms of a levy.

7.1.2 Option 2: Levy

A levy could be applied at a number of points in the life of a tyre:

A levy can play a number of roles:

The first two roles are linked. If the costs of the waste management of a tyre are paid at an earlier stage in its life, then there is no risk that the community at large will be required to fund waste tyres80.

Product stewardship argues that the producer (manufacturer or importer) of a good has a responsibility for that good over its entire life from production through use to eventual waste. Having benefited from the initial sale, producers also accept the costs of eventual waste management. There is also the concept that what is being sold is not a product (a tyre) but rather a service (provision of contact with the road and related services) which has an implication that the producer retains ownership of, and responsibility for, the tyre.

In the PSA for oil, this has been translated into a levy applied at the point of production or import of oils. Notwithstanding the product stewardship argument, this arrangement has very real advantages in terms of administrative ease in the case of tyres. It is much more convenient to apply the levy at the point of production since there are only two manufacturers in Australia and an estimated 50 importers. Other parts of the supply chain have considerably more business entities (for example it is estimated that the number of tyre dealers in Australia is 3,200).

7.2 Form of levy

As with some other examples of excise (including the PSA for oil), the amount of excise would be indexed to the cost of living index.

There are a number of questions in regard to the form of the levy.

7.2.1 Ad valorem versus unit/weight based levy

Current import duties are applied on an ad valorem basis, so that the duty for each import classification is a fixed percentage of the declared value of the imported item. Import duties commonly act as a tariff protecting Australian industry by raising the landed price of imported goods.

A levy to be imposed on tyres should be designed so as to promote the purpose of the levy. In the present study, the aim of the levy is to support other initiatives for the better management of the tyre once it becomes waste. The impacts of management of waste tyres (both positive and negative) are largely determined by the number of tyres, or possibly the weight of the tyres (see below), and so the levy should be structured on a per tyre (or per weight basis) rather than ad valorem.

Under the various international trade agreements to which Australia is a party, a waste tyre levy will need to treat imported tyres identically to tyres manufactured locally. What this means, in effect, is that the existing differential between imports and locally manufactured tyres as a result of the duty on imported tyres will remain unchanged. A levy would be applied after the import duty, so that the import duty will not change (either in percentage or dollar terms). It is understood that GST will be applied on top of both the levy and the import duty (the existing arrangement is that GST is applied to import duty), and in this way the GST will have the same effect in regard to the levy on imported and locally manufactured tyres.

The PSA for oils provides for a rebate of the levy on oil that is subsequently exported. Since exported tyres will not need to be managed as waste tyres in Australia, it seems logical and fair to provide for a similar rebate from the levy for tyre exports. The rebate would also apply to tyres fitted to exported vehicles.

There are also equity issues. An excise imposes the same increment on the price of a tyre (of a particular classification, say passenger tyre) regardless of whether the tyre is cheap or expensive. The proportional increase will be greater for lower price tyres, which are more commonly bought by the less affluent members of society.

7.2.2 Per tyre or per weight

In the case of oils, there is no debate as to what ‘unit’ the levy is to be applied to — the volume of oil (per litre) is the only logical choice. In the case of tyres, there is a choice between applying a levy to each tyre or on a weight basis (per kilogram).

Administratively, the simplest scheme would appear to be based on the number of tyres. Commercial transactions are carried out and recorded in numbers of tyres. From the industry point of view, a tyre-based levy would involve the least change to existing business ordering and accounting systems.

However, the size of the waste management task is related more to the weight of tyres rather than the number of tyres, and so is the value of waste tyres. For example, for shredded tyres the space taken up in landfill is approximately proportional to the weight (ignoring second order effects due to the geometries of different sized tyres).

The question is further complicated when the question of benefit payments is raised. Certain end uses are essentially weight based (production of rubber crumb and tyre derived fuel) while others are based on the number of tyres (civil engineering applications) though commonly certain tyre sizes will be of greater value.

A weight-based scheme could operate with the levy computed strictly on the weight of a tyre (so many dollars per kilogram). Alternatively, each tyre model could be allocated to one of a fixed set of weight grades, with a preset levy for each grade. At its simplest, the grades could correspond to broad tyre classifications — such as passenger vehicle, light commercial and truck. A possible drawback here is that tyre manufacturers might respond by modifying tyre designs to fit in a grade with a lower levy, sacrificing particular performance or safety characteristics or compromising consumer value in other ways.

An average family passenger vehicle tyre weighs some 10 kg whereas tyres for smaller passenger vehicles may weigh only 6 kg. Truck tyres can weigh 50 kg. Large earth moving tyres, such as those used in mines, can weigh 5 tonnes or more. For the purpose of comparison, if a weight-based levy on a passenger tyre was set at $1, the levy would be $5 on a truck tyre and $500 on an earth-moving tyre. On a pro rata basis, the levy on a passenger tyre is less than that on a large earth-moving tyre. In the example given above the passenger tyre attracts a levy of $1 in a retail price of $80 to $100 or approximately 1.0% to 1.2%, compared with a levy of $500 for an earth-moving tyre in a price of $30,000 or approximately 1.7%.

Equity issues also need to be considered. A fixed levy imposed on each tyre will be a larger proportion for low cost tyres than for high cost tyres. This is not only a function of passenger tyres versus truck tyres but also an issue for imports of used tyres.

7.2.3 Should the levy be applied to retreads?

In the case of the PSA for oils, oil that is produced from recycled waste oil attracts the oil levy. The supporting documentation argues that the recycled oil will need to be managed when it becomes waste in the same way as oil produced from virgin sources. If the justification for the oil levy is to address the problems associated with waste oil, then the levy should apply to all oils regardless of how they are made. In the case of oil, there is also a more practical reason that arises from the difficulties due to the widespread practice of blending oils, and the associated complexities of distinguishing between recycled and virgin oil.

This second problem is not an issue with tyres, which are discrete and identifiable. If the tyre levy is interpreted as a levy on the tyre casing, then the levy should not apply to retreads since the casing has already been levied at the point of production or import.

It would be possible to design a scheme where retreads are levied at the point of production and take this levy into account in the benefits paid to retreaders (this is similar to the approach adopted in the PSA for oil). But perhaps, from an administrative point of view, retreading should be kept separate from other practices for managing waste tyres. Retreaders have much stricter and more specialised requirements for waste tyres than do other recyclers, and a broad-based benefits scheme might not provide the outcomes that are optimal for retreads. In such options, exemption from the levy would confer a direct pricing advantage on retreads relative to new tyres equal to the amount of the levy.

Used tyres and tyre casings imported into Australia for the purpose of retreading (or any other purpose) would be subject to the levy, since the casings eventually will become waste. In this regard, products made from tyres (end-products as well as intermediate products such as rubber crumb) would be exempt from a tyre levy. These items would be managed in accordance with the waste management framework for non-tyre rubber products and this subject lies beyond the scope of this report.

Conceptually, the application of a levy (as well as exemptions and rebates) is based on a boundary system. One part of the boundary is the Australian coastline (pay for imports and rebate for exports). The other part is at the point of manufacture (pay). Once a waste tyre arrives at an approved receival facility, it drops out of the system, and is no longer treated as a tyre. Australia's trade obligations will need to be considered in any decision on different treatment of new, used and retreaded tyres.

7.2.4 Tyres fitted to vehicles

A substantial number of tyres enter Australia already fitted to imported vehicles. It would seem inequitable if these tyres were to escape the levy, and the costs associated with these tyres had to be met by the rest of the tyre industry. Attempts to take advantage of the exemption could lead to distortions in the market. Accordingly, it is logical that tyres entering Australia on vehicles be subject to the levy. Mirroring these arrangements, rebates or exemptions could be claimed for tyres fitted to vehicles for export. Special consideration may be needed where international agreements exist (eg diplomatic vehicles, vehicles for the disabled and rally or racing cars).

7.3 Operation of the levy

7.3.1 Product stewardship based scheme

In the base scheme, the levy would be in the form of an excise. The levy would be collected by the ATO and managed under the Australian Government finance and accounting systems. The funds would be deposited in Consolidated Fund and would not be hypothecated. However, as with the PSA for oil, the underlying aim would be to achieve a balance between funds collected under the levy and disbursements towards measures to improve the management of waste tyres.

The legal changes to implement the scheme could be modelled on the PSA for oil. Consequential amendments would be needed in customs and excise legislation.

The Product Stewardship (Oil) Act 2000 also provides for an Oil Stewardship Advisory Council to be established and a similar council could also be considered in the case of a levy on tyres. The PSA for oil is to be reviewed within the first four years of operation.

The Australian Government has made available a sum of $60 million over the next four years to fund transitional arrangements for the PSA on oil.

7.3.2 State operated scheme

A state operated scheme as envisaged here is not possible. Under section 90 of the Constitution, only the Australian Government may impose an excise, although the States could distribute benefits linked to a Commonwealth collected levy.

7.3.3 Industry-operated scheme

There is in-principle support for a levy on tyres from the manufacturers and major importers, who are likely to be the entities that would manage the collection of the levy. Given their role in a levy scheme, the manufacturers and importers consider that they are entitled to a bigger say in how the scheme operates than is the case with the PSA for oil which is operated in practice by the ATO. In fact, industry sources refer to manufacturers and importers paying the levy. While this is correct to the extent that they would be responsible for remitting levy funds to the government under a PSA scheme, it is anticipated that the tyre levy would, in practice, be largely passed onto the consumers in the way of higher tyre prices. In view of the inelastic nature of demand for tyres, the actual financial cost to industry may well be minimal.

Nevertheless, industry's role in a levy scheme will be pivotal. The issues have been discussed earlier in regard to decisions on the disbursement of funds collected to promote waste tyre programs (refer Part II.6). At core, for industry to have greater control on spending probably implies that the levy scheme should be operated by industry in total, including management of the collected funds.

Thus, a sub-option is for the tyre industry to operate a scheme that collects money and allocates the collected funds towards waste tyre management. As early as 1994 the Australian Scrap Tyre Management Council made a number of proposals in a submission to ANZECC81. These proposals involved payments per tyre which would go into a fund.

The support by industry for a levy is, however, conditional on the levy being applied to all tyres, so that no firm can escape paying the levy. Otherwise, the scheme would be vulnerable to ‘free riders’ within the industry who elect not to contribute. In the case of tyres, there is a relatively large number of small importers (in excess of 50 including importers of used tyres) and it would be difficult to maintain controls or impose sanctions (such as publicising the details of non-contributors).

Various arrangements for ‘waste tyre levies’ charged to consumers by tyre dealers have been put in place in Australia in the past. In some examples, the cost of waste tyre disposal is a separate item in the account given to the consumer for the purchase of new tyres (and the dealer accepting the waste tyre). In other cases, the cost of disposal may be passed onto the consumer but not made explicit. In some cases, the tyre industry working with the support of the government, as in the case of Queensland and the scheme in Tasmania, has attempted to systematise the practice on a voluntary basis, though there have been problems with dealers who stay outside the scheme. One major failing with a number of these schemes is that there has been no mechanism to ensure that the money paid ostensibly for appropriate management of the waste tyre has found its way to this end.

The difficulty then is how to make an industry-run scheme mandatory. ATMA are currently investigating the legal and constitutional implications and possibilities for a statutory levy scheme operated by industry. Until such time as the position is clarified, it is difficult to conduct a realistic assessment of such a scheme.

7.4 Costs and benefits

From a resource perspective, the payment of the levy does not constitute a cost since it is regarded as a transfer payment. The loss to the economic agent paying the levy (the tyre manufacturer or importer) is offset by the gain to the agent who receives it (the government in the first instance). However, there are distributional effects and these are discussed below. Of course, the costs of the activities or assistance funded by the levy are, in part, the resources paid for by the funds collected under the levy. This is a separate matter and is discussed in earlier sections.

The direct resource costs of a levy are the administrative costs of the scheme. Costs will be incurred both by Government and by industry.

The costs to industry are the establishment of the mechanisms for making the levy payments. If a tyre-based scheme is adopted, then the costs for importers would be minimal, since they already have to collect the information on tyres for their import duty payments. Some adjustment would be needed to recording systems in a weight-based scheme to account for the numbers of tyres in each classification or to compute the weight of tyres over each accounting period.

The tyre manufacturers pay no duty at the moment and would need to establish systems for the payment of the levy. As part of their commercial operations, the manufacturers would already have in place records of tyres sold which would be adequate for a tyre based scheme. As with importers, modifications would be needed for a weight-based scheme.

There would also be ongoing costs incurred by manufacturers and importers (above what is needed for the current import duty payments) for a weight-based scheme. These costs are assumed to be relatively low, since the information on tyre size and model (and hence the weight factor if needed) would already be available electronically, and subsequent processing would be largely automated.

The costs to Government include one-off costs for changes to the legislation and other matters needed to introduce the scheme including the preparation of an impact statement. These changes would be modelled on the oil scheme and this would reduce some of the costs (and time).

In the PSA for oil, the Government has set aside $60 million over 4 years to cover the costs for transitional arrangements. One lesson from the oil scheme is the need for a longer lead time to conduct education and training for those industry participants who are unfamiliar with the payments of excise and customs duties.

7.4.1 Distribution of costs

The tyre manufacturers and importers will incur the administrative costs to industry in the first instance but this will be small in comparison to the levy itself. It is important to evaluate how the industry might react to this increase.

Tyres are an essential part of a vehicle but represent a relatively small component of the cost of running a vehicle (around 3–4% in the case of passenger vehicles). A rise in the price of a tyre due to say a $3 levy will have an almost unnoticeable effect on the aggregate number of tyres sold, after a possible small effect at the time of implementation. Consumer choice may however change between tyre brands or models.

All new tyres that will be made available for sale in Australia would be treated uniformly in terms of the levy. It might be supposed that all tyre importers and manufacturers would pass on the levy in full (as well as transaction costs) to the customer (via the dealer) since their relative market position will remain unchanged. There are two considerations in relation to substitutes for individual new tyre models that may cloud this conclusion.

Firstly, if retreads are exempt from the levy, then an increase in the price of new tyres will make retreads more attractive. It has not been possible to derive quantitative estimates of the elasticity of demand for retreads based on the price differential with new tyres. In view of the consumer groups that are presumed to be the major buyers of retreads (fleet owners and vehicle owners from lower socio-economic groups) it seems reasonable that a levy set at a notional $3 might be sufficient to induce some consumers at the margin to purchase retreads over new tyres.

The second consideration is that for most vehicles there is a considerable variety of tyre models that can be fitted. These tyre models are differentiated in the minds of many consumers by little more than price (particularly where the price difference is less than say $5). Vehicle owners may choose to maintain their current level of spending on tyres by choosing another tyre model at the same price as the pre-levy price of their existing tyre. Where there is such a competing brand available, tyre producers and/or tyre dealers may choose to absorb some, or all, of the levy.

The conclusion is that on the evidence available from the introduction of the GST, it would be reasonable to expect much of the levy to be passed on to consumers though perhaps not immediately. It is only in some parts of the tyre market, determined by the pricing structure and the characteristics of demand, that less than the full levy would be passed on.

 


79Funds collected by government are hypothecated if they may only be spent in specified ways and are not available for general government use.

80Of course, the costs in part at least are likely to be passed onto the consumer as the effective waste generator, which means that the costs remain internalised as far as the life cycle of the tyre is concerned.

81See ASTMC (1994) in the bibliography.