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Where do eco-fees come from? Why, from government, silly!


The political fixation on “doing something about” eco-fees is akin to fretting about a lingering cough while ignoring the underlying pneumonia that is its cause. If eco-fees are the symptomatic “cough” then government policies that restrict or lessen competition between producers in end-of-life product management are the causative “pneumonia.”

(We’re talking here about extended producer responsibility [EPR] programs that stick producers with the cost of managing their products and packaging, not municipal ratepayers, in hopes they’ll redesign them to eliminate waste or make them easier to recycle.)

Let’s consider two producers of widgets: Producer X and Producer Y.

In the free market Producer X can collect and recycle its recycling-friendly widgets for $3/unit while Producer Y spends $5/unit to collect and recycle its less eco-friendly widgets.

Along comes the helping hand of government, which sanctions the creation of the Widget Stewardship Agency (WSA). The government allows widget producers to sign up with the WSA collective, which then assumes the subscribing companies’ obligations and liabilities. The WSA sets a widget recycling eco-fee of $4/unit that each subscribing producer pays on each widget it supplies into the market.

Company X now has two options:

1. Go along with all other widget producers party to the WSA and transfer its legal liability for widget recycling to that agency, while passing on the $4 widget eco-fee (exclusive of the product price) down its supply chain via the retailer to the consumer; or

2. Forgo subscription to WSA, recycle its own widgets and have the $3/unit recycling cost eat into its profit margin (recognizing that no retailer is going to set their point-of-sale systems up to levy a special $3 eco-fee just for Producer X).

Simply stated, Producers X’s choices are to go along with other producers in passing on of a fixed $4/unit separate eco-fee or, alternatively, forgo $3/unit in profit margin. What choice do you suppose it will make?

Of course producer Y will be happy to pass along the $4/unit eco-fee: it’s less than the actual cost of processing Y’s harder-to-recycle widgets. Oh, and X’s competitive advantage is lost in the process.

This is an example of what is essentially stewardship agency based eco-fee “price-fixing” — the less recyclable widget is subsidized while the competitive advantage of the more recyclable widget is lost. Plus, the consumer loses because no producer has any incentive to compete and innovate in order to bring the costs of widget recycling down.

Of course, as the sole buyer of widget recycling (WSA is a buying monopoly or “monopsony”) the WSA can squeeze down recycling service provider prices at a whim.

Where the government allows the WSA to set and enforce environmental standards, WSA can cut costs by simply by ignoring the environmental standards and squeezing down what’s paid to recyclers.

There should be no surprise that under this “fox guarding the henhouse” approach widgets end up being processed in poor conditions in South Asia or that more sophisticated recycling service companies are unwilling to invest (because their less diligent counterparts become more competitive through WSA sanctioned corner-cutting).

Conversely, in a competitive producer market, with environmental standards set and maintained by an impartial third party, reduction in widget recycling costs is the result of innovation and not the crushing weight of a producer purchasing monopoly. In a free market, recyclers compete for producers’ widget recycling business by reducing costs through innovation in recycling practices and technologies. And companies like X and Y have an incentive to make their widgets longer lasting, reusable, or at least easily recycled. (Cuz they’re paying for it.)

So, if people are nonplussed or angered by eco-fees, there’s a simple solution: preserve competition between producers in how they discharge their end-of-life recycling obligations. Make each producer individually accountable for the environmental outcomes associated with their end-of-life widgets. This is referred to as individual producer responsibility (IPR). And don’t shield widget producers and widget recyclers from Canada’s competition laws.

After the eco-fee controversy in the summer of 2010 Professor Don Dewees and I called for such an approach.

Recently, the Environmental Commissioner of Ontario, Ontario’s New Democrats and, in the political lead on the issue of eco-fees, the Progressive Conservative Party of Ontario have all reached similar conclusions that environmental-outcomes-focused IPR is the right solution for increased, competitive and effective recycling in Ontario.

Ontario Bill 91: Waste Reduction Act (WRA) is supposedly directed at achieving this outcome. (The draft bill is out for 90-days of public comment.)

END NOTE: The proposed legislation continues existing stewardship agency-based programs for electronics and used tires until such time as the affected producers are transitioned to the new IPR framework. In the interim, the WRA will require “integrated pricing” (all-in pricing that prohibits separate display of “eco-fees”).

While the WRA’s integrated pricing requirement purports to, “…promote the reduction of environmental impacts by requiring the integration of the environmental protection costs of products …” existing eco-fees are not the product of a competitive producer market and, as such, the integrated pricing requirement amounts to little more than hiding a tax.

Whether the WRA as drafted can achieve the objectives of IPR remains the subject of my next blog.

 


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