[REVISED JULY 13, 4:45 PM]
Over the past week there’s been a great deal of media coverage of problems with Ontario’s stewardship programs for various materials. Most attention has been paid to the province’s program for household hazardous and special wastes (HHSW), approved by Waste Diversion Ontario (WDO), but by extension the program for waste electronics and electronics equipment (WEEE — also WDO approved) has come in for criticism.
Unlike some previous media coverage of these programs, the journalists are now picking up on some serious (perhaps fatal) flaws in the programs’ designs, including that the “eco fees” that pay for the programs may in fact be illegal, constituting a “tax” as defined by law. Legally, only government can tax directly, and the eco fees may be in for a legal challenge. As I said in an earlier blog, it’s time to reform Ontario’s Waste Diversion Act so that it compels true extended producer responsibility (EPR) rather than what we’ve ended up with: the formation of government-sanctioned cartels engaged in what has been called a form of price fixing.
In order to clarify all this for readers, I offer a few helpful documents below. The first is a fairly good overview of the issues from an article entitled “Eco fees’ part of province’s steward program” by Randall Denley, The Ottawa Citizen, July 10, 2010. (Some other excellent articles have appeared in other media outlets that I’ll post or link to in the days ahead.) The second (further down) are a couple of articles that appeared in our magazine Solid Waste & Recycling by waste consultant and contributing editor Usman Valiante. Valiante correctly predicted these problems years ago when the policies were being developed. Worse, much-needed reforms of Ontario’s Waste Diversion Act that were to be introduced in the legislature in June were pulled from the legislative agenda by Dalton McGuinty’s Liberal government partly because of industry lobbying but (increasingly it appears) from the fear (ironically) that the changes could be characterized by the opposition as a new tax grab, and used against the government in the run-up to the next election.
Before I direct you to the Ottawa Citizen article below, I want to offer a couple of bullet point-style comments that I think readers should keep in mind as they read these (and other) reports about product stewardship programs and how they operate and are funded. The whole subject of product stewardship is far more complex than traditional waste management, and the factors that separate a good program from a poor one are not as obvious as, say, contracting out garbage collection for the lowest price.
1. Before a policymaker is going to find the right answers, he or she needs to ask the right questions. If the goal is true extended producer responsibility in which producers not only take responsibility for the end-of-life management of their product and packaging wastes, but have an economic interest in fundamentally changing their business in order to achieve “cradle-to-cradle” reuse and recycling, and greater and greater eco-efficiency throughout the product’s lifecycle, then it’s “asking the wrong question” to approach the whole issue as merely “waste diversion” (i.e., diverting waste from landfill, incineration or other forms of disposal). Waste diversion is only one effect that flows from true EPR, and not nearly as important as changes that occur higher up in the production cycle.
2. In Ontario, the policymakers asked the wrong question and instead of designing EPR programs went for (mere) “product stewardship” which essentially only meant waste diversion. Insiders and various experts thought they could harness waste diversion (amid concern over declining landfill capacity and waste export to the USA) to set society on the track toward EPR, but they ended up creating a program mish-mash that fudges on potentially profound environmental goals and (now it may turn out) gives taxation-like powers to private interests.
3. Another problem has been that many of the same people who created the province’s original recycling program were put in charge of designing and approving the product stewardship programs. The blue box (until recently) operated on the “shared cost” model where industry and the public were supposed to split net recycling costs 50/50. It was also the “basket of goods” model where profits and efficiencies from one material subsidized losses and inefficiencies from another. This is the very opposite of EPR, which recognizes (and harnesses) the energy and dynamics of the market. With all due respect to its goals and success in making people aware of environmental issues, the blue box was always a system in which private consortia “gamed” the public and its representatives. Even its biggest fans among the municipal recycling coordinators eventually became beleaguered by the feeling that industry wasn’t really paying its fair share, and anyone who cared to look closely discovered that the blue box “topped out” at a diversion rate that remained dismal for certain materials (e.g., soft drink containers); meanwhile society’s consumption and waste generation grew and grew, with per capita and collective waste volume growing year over year.
4. Because their expertise was forged in the creation of the blue box, some of the policymakers tended to be preoccupied with waste diversion and seemed to have very little interest in the waste management hierarchy in which waste elimination is the priority. They also ignored competition and the potential for product stewardship schemes to become, in fact, very anti-competitive. It’s telling that the organization created to oversee these programs is named “Waste Diversion Ontario” and not something like “Producer Responsibility Ontario.” Instead of harnessing the maximum power of the market and the innovation and creativity of private companies operating in a competitive environment, the exercise succumbed to a managerial and central-planner’s mentality. A great illustration is Ontario’s WEEE program operated by Ontario Electronics Stewardship (OES) that has effectively hijacked the collection of WEEE materials and allocated processing among a small group of approved companies using a quota system. The quotas have killed the incentive for WEEE processors to pursue new customers (within the program) and have in fact caused much material to flow outside the program (and indeed outside the province). The problem is neatly outlined in a letter to Ontario Premiere Dalton McGuinty from the presidents Sims Recycling and GEEP (both major WEEE processors in Ontario whose businesses are suffering because of the WEEE program) that I will post here in a few days. The collectivist approach is failing to create effective markets for diverse waste materials for the very same reasons that communism failed to create effective markets in places as diverse as Cuba and North Korea. Worse, the large fees being charged on the sale of new electronic devices are not yielding value-for-money and (beyond writing scolding letters) the province’s environment minister is relatively powerless to force OES to improve its performance.
5. In revamping the individual programs and the Waste Diversion Act (which I’m told will occur in the fall) one core concept must be kept front and centre, and that is “subsidies.” Robert Kennedy once famously remarked, “Show me a polluter and I’ll show you a subsidy.” Leading-edge thinkers in the environmental movement, the kind of people associated with (for instance) the Product Policy Institute, remind us again and again that most pollution results from direct and indirect subsidies that private interests manage to acquire from the public purse. The blue box was (and is), from this perspective, a subsidy program to the soft drink industry (among others) that allowed it to get out of refillable containers. EPR is not so much an environmental concept as it is an economic one. The goal is to force industry to internalize its costs. Externalization can manifest itself in a number of ways: there’s public subsidies, pollution (that ultimately costs the public in the form of health costs or environmental cleanup costs), and waste (which shows up as a cost in the form of our society’s huge environmental footprint and the depletion of natural resources, not to mention the cost of building and maintaining landfills and other disposal facilities). The problem with designing product stewardship as merely a waste diversion program is that it doesn’t go far enough in ending the subsidy, and fails to achieve upstream eco-efficiencies.
In Ontario, what used to be a direct municipal subsidy (i.e., we’ll cart off and dispose industry’s crap at public expense) was simply hived off to collectives (i.e., we’ll form an industry funding organization that will charge consumers a visible fee to recycle or safely dispose of industry’s crap, and wash our hands of further involvement – prices will go up for consumers, but little will chance in the way that cleaning products or TVs or computers are manufactured). In place of subsidy programs, or illegal tax schemes, what’s needed is true EPR that forces industry to internalize costs. The best programs are referred to as “Individual Product Stewardship” in which individual companies are accountable for their liabilities, which is what’s specified in the proposed revisions to the legislation that got put on hold.
Now, here are the articles, starting with the new one from the Ottawa Citizen, and then the old ones by Usman Valiante (where we can chirp “We told you so!”).
Hidden cost, obvious flaw
‘Eco fees’ part of province’s steward program
By Randall Denley, The Ottawa CitizenJuly 10, 2010
The Ontario government has so many ways to siphon money out of our pockets that it’s difficult to keep track of them all. It’s safe to say that most people would have been only dimly aware of Ontario’s “eco fees” until they were applied to thousands of additional consumer products July 1.
The fees support a program to keep hazardous household wastes out of municipal landfills. That’s a worthy goal, but the program is poorly designed, expensive and has no public profile at all. It was launched two years ago to collect and recycle items such as paints, batteries, oil filters, pesticides and pressurized containers. Now it will be applied to anything that might be remotely considered hazardous and some things that aren’t, such as compost and sheep manure.
There is a lot of money involved. Last year, Stewardship Ontario took in $25.8 million in fees to cover the cost of recycling the hazardous stuff. The expanded program now in effect will boost the annual take to $63.6 million. These are not taxes, but fees paid by industry. Some companies pass the fees on visibly, others bury them in the price of the product, but you can be sure that consumers are paying one way or another.
You do get something for your money, but Stewardship Ontario’s performance on the things it collects now is decidedly mixed. It is doing a good job of collecting old paints, pesticides and fertilizers. Collection and recycling rates are low for oil containers, antifreeze, non-refillable pressurized containers, solvents and batteries. Stewardship Ontario only got back 5.4 per cent of used batteries last year.
And what is Stewardship Ontario, you might ask? It’s a non-profit company created by Waste Diversion Ontario at the request of the provincial government. Waste Diversion Ontario is a quasi-governmental organization also created by the government to be in charge of recycling. Stewardship Ontario’s main job is collecting industry money to help pay the cost of the municipal blue-box program.
Waste Diversion Ontario also begat Ontario Tire Stewardship and Ontario Electronic Stewardship, which covers TVs, computers and electronic gadgets. The tire group is getting the job done, but the electronics outfit is a mystery. The stewardship group is releasing no financial information.
We do know from media reports that it will meet only about one-third of its recycling target. An Environment Ministry spokesman says the group will fall about $20 million short of its revenue target due to weak electronics sales.
Lack of accountability is the real problem with these “stewardship” organizations. The flim-flam starts with the name. The concept is that the industries producing the hard-to-dispose-of waste are “stewards.” While that sounds better than “hazardous-waste producers,” the industries aren’t really responsible. Neither is government. That’s the beauty of the system for both the parties who ought to be responsible.
If things don’t work out, government and industry can point to the stewardship groups and shake their heads in disappointment. A Stewardship Ontario spokesman says the government could wind down the company if it fails to meet targets, but that seems rather unlikely. It would be admitting and highlighting failure.
That’s not exactly the McGuinty government’s style.
The first line of defence against scrutiny is public ignorance and the stewardship groups have a low profile. The electronics people are less open than CSIS and the Stewardship Ontario bunch have simply failed to register with the public. Only the controversy over the new wave of fees is finally making us aware. And yet, Stewardship Ontario claims that “public education” is a high priority.
Asked to justify the eco fees this week, the McGuinty government said they were not a tax. Technically, it’s true. Too bad, because if it were a tax we might have some accountability for the spending.
The disposal of the mountains of useless junk generated by our consumer society could be the job of government or it could be the responsibility of industry. Either way, we’d know who to look to for results. Instead, a third-party fall guy has been created and the public has little or no idea where its money is going and if it is being effectively spent.
The program design has a critical flaw because there is no incentive for industry to recycle more. There is neither a reward nor a punishment. They merely pass through costs. There is not much incentive for the consumer, either, if consumers don’t even know the program exists.
The correct role for government is to set enforceable recycling targets and make sure companies do the recycling. Instead, they have created stewardship groups that run monopolies and face no real consequences for failure.
The environment ministry spokesman says that new rules coming this fall will create enforceable targets and put more onus on industry to manage the recycling themselves. The government has been hamstrung by legislation passed by the Progressive Conservatives in 2002, apparently.
That all sounds good, although it’s a little late in the Liberal mandate to be blaming the PCs.
Recycling this waste is an important job, but Ontario’s approach lacks accountability, transparency and results. The Liberals are moving in the right direction, but they have a long way to go.
Contact Randall Denley at 613-596-3756 or firstname.lastname@example.org
Fees or Taxes?
Understanding “eco-fees” on consumer products
By: Usman Valiante
Canadian waste diversion schemes for various wastes — old televisions, for instance — are almost invariably accompanied by a consumer surcharge levied on the sale of new televisions. Classified as “advance disposal fees” (ADFs), and more commonly referred to as “eco fees”, they are applied in order to generate revenues to cover the specific costs of a given waste diversion program.
Proponents of extended producer responsibility (EPR) — such as the new Ontario Zero Waste Coalition — claim that the “…’eco fee’ becomes analogous to a green tax that [consumers] have no choice but to pay, with only a vague idea that some good will come from the program.” They further argue that for EPR to be a meaningful policy approach to waste minimization the end-of-life costs of managing products need to be “internalized” to producers such that they become another cost of doing business. Once internalized, these costs become subject to market forces arising through competition between various producers of like goods. This, they posit, will drive firms to lower those costs by designing products “for the environment” more efficiently.
But competitive environments are not the initial conditions in which Canadian waste diversion programs are established. Almost singularly, Canadian waste diversion programs operate as combines of producers that coalesce to develop and implement one common program.
To fund the program, these combines don’t assess the individual costs of recovering and recycling one another’s old TVs to then invoice them for their “individual total” television recycling costs. Rather, they take the overall net waste diversion program costs for all televisions and then prorate those costs over the entire combine’s aggregate unit sales to establish a common or “fixed” sales unit fee.
While jurisdictions might hold product producers (i. e., brand-owners and first importers) to be the “responsible” party, in a common fee system these producers “pass on” their common financial obligations to retailers who collect the unit sales fees from consumers (as visible “eco fees”) and then remit those eco fees to the stewardship organization.
Thus, under these programs, producers have no financial responsibility for the program and do not compete on financial efficiency or environmental performance as they would were they to run individual waste diversion programs for themselves.
Whether fees levied under these systems amount to “taxes” really requires asking the question in the two separate (though as we shall see, related) areas of law and economics.
Canadian common law has established a number of filters to distinguish a fee from a tax.
Firstly, to be a fee, the charge must be part of a valid regulatory program. Accordingly it must be the product of a, “… complete and detailed code of regulation …” which in the case of a waste diversion program is the laws under which the program is developed and the resulting waste diversion or stewardship program plan itself.
Furthermore, the regulatory program in question must have a specific purpose which, “… seeks to affect the behavior of individuals…” In the case of waste diversion, the behavior in question might be to induce producers to establish and fund the waste diversion program and perhaps to design more easily recovered and recycled products.
Another consideration is whether there is an assessment of the “… actual or estimated costs of the regulation” which, in this case, is an estimate of the costs of the waste diversion program. Tied to this is the concept that a “… reasonable connection is shown between the cost of the service provided and the amount charged.”
Finally, a legitimate fee-based regulation should establish “… a relationship between the regulation and the person being regulated, where the person causes the need for the regulation, or benefits from it.”
Thus “fees” are more than simple revenue generating mechanisms. They are at their best economic instruments designed to modify the behavior (verily, the essential purpose of all economic regulation) of “regulated” parties that have caused the need for regulation.
In waste diversion programs that claim the mantle of EPR, it is self-evident that the producer — not the consumer — is the regulated party and by virtue of the waste associated with its products is the “person” that causes the need for regulation. Furthermore, under a program consistent with EPR principles, the behavioral objective is to have producers take responsibility for implementing, operating and bearing the cost of waste diversion as a part of their ongoing competitive marketplace activities.
As discussed above, while many Canadian jurisdictions ostensibly regulate producers in order to establish waste diversion programs, consumers typically foot the bill of regulation. Producers only experience the modest inconvenience of having to convene and administer a common waste diversion program (often run by a third party, all at a cost to the consumer) with no competitive implications whatsoever.
The legality or illegality of various ADF schemes is moot. However, the economic outcome on producers and consumers is not.
In its economic effect on television producers an ADF levied on the sale of televisions is indistinguishable from an equivalent “TV tax” implemented through a provincial tax statute specifically for the purpose of generating revenues for a government run provincial television recycling program.
ADF systems are not EPR. They are in essence and effect publicly sanctioned and privately levied taxes.
Usman Valiante is principal of Corporate Policy Group in Orangeville, Ontario. Contact Usman at email@example.com
Competition versus Ontario WEEE recycling
By: Usman Valiante
With the Ontario Bill of Rights public comment period having ended on May 9, 2008, the waste electronics and electrical equipment (WEEE) recycling program proposed by Ontario Electronic Stewardship (OES) is now subject to ministerial approval or rejection.
OES is an industry funding organization convened under the provincial Waste Diversion Act. It’s comprised of major electronics product producers as well as “first importers” of electronic products.
While a number of producer/stewards coalescing to develop a collective program for the recovery and recycling of WEEE is not in itself problematic, it does raise serious competition law and policy issues if the collective market power of the group is used in a manner to unduly lessen competition (i. e., set prices, control the flow and allocation of materials, etc.). This is especially true if the lessening of competition is unnecessary in meeting the environmental objectives.
Unfortunately, this seems to be the case with the WEEE program plan proposed by OES.
The existing WEEE processing sector in Ontario is characterized by as many as 50 businesses ranging from small five-person integrated collection and primary processing operations (that refurbish/reuse, dismantle and sell recyclable materials to “downstream” processors) to the largest four Ontario processors with anywhere from $3 million to over $15 million in capital investments in sophisticated “downstream” WEEE processing technologies. OES reports that, in concert, this sector recovers, reuses and recycles 27 per cent of the WEEE generated in Ontario annually.
Notwithstanding this economic reality, OES has proposed what is in essence a “flow control” model for the collection and processing of WEEE in Ontario.
The OES program is to be funded by a series of consumer point-of-sale levies on the sale of designated consumer electronics and information technology products.
Revenue from these levies — estimated at $62 million in year one — is to be used largely to pay fixed collection prices that (while insufficient to support existing integrated private sector proactive collection-processing operations) are just sufficient enough to induce municipalities to recover WEEE as an incremental service to their hazardous waste depot system.
Existing WEEE collector-processors report that the effect of the program will be to redirect WEEE from their businesses to the municipal hazardous waste depot collection system as well as to general waste haulers; the latter will collect and deliver WEEE to OES consolidation points as an additional service to their existing IC&I waste disposal services.
Under OES’ tendering scheme only a small subset of the existing Ontario processors currently operating in Ontario would be selected to receive preset volumes of WEEE allocated to them by OES from its regional consolidation points.
OES’ rationale for its preferred model is perfectly rational in the context of its own interests; the model allows it to contain program costs by being a collection and processor price setter and by restricting the overall number of market players it has to administer.
Not surprisingly, virtually all Ontario collector-processors are opposed to implementation of the OES plan as drafted. Where smaller collector-processors fear marginalization by the OES program (and thus elimination from the WEEE market) larger processors note that the program will position OES as the sole consumer of waste electronics recycling services, with complete market-power to set prices. With OES fixing processing prices and controlling the flow of WEEE feedstock, several larger processors have stated they will not invest further in Ontario WEEE processing capacity.
The Competition Bureau
In its May 5, 2008, comments to Ontario’s environmental minister regarding the proposed WEEE program, the Competition Bureau stated that, “…we are unable address the potential impact on competition without a great deal of further analysis. We do, however, encourage you to take whatever steps you feel are necessary to ensure that competition issues are considered when evaluating the fairness of the plan.” Adding, “We hope the result will be a program that promotes competition …”
It’s clear from the Bureau’s statement that undertaking a rigorous competition policy analysis is not a trivial matter. Furthermore, it stands in sharp contrast to the fact that the proposed WEEE program contains no such analysis whatsoever.
In his magnum opus An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith stated, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices,” adding, “But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.”
In the case of Ontario’s Waste Diversion Act, the law renders it necessary — actually demands — that “people of the same trade” work together. Where the drafters of the WDA eschewed Adam Smith it now behooves the Ontario government at the very least to undertake, “…a great deal of further analysis…”of what OES has proposed.
Usman Valiante is principal of Corporate Policy Group in Orangeville, Ontario. Contact Usman at firstname.lastname@example.org