Kateřina Kodadová in an interview with Aleš Rod, Director of Research at the Centre for Economic and Market Analysis (CETA).
The next episode of PODCAST21 answers the question of how far the producer's responsibility for the product extends. What are EPR or Extended Producer Responsibility schemes? If you've listened to previous episodes of PODCAST21, you know that we've focused on packaging, and we're continuing that this time. We break down from all sides and from the perspective of all the players in the entire process, from production to disposal of whatever we purchase as consumers, how to ensure that the result is as little waste as possible. Whether we buy yoghurt or a television. To explain what the EPR system entails and how it works in the Czech Republic and how it works elsewhere, we were joined by Aleš Rod, Research Director at the Centre for Economic and Market Analysis, CETA for short.
What does the acronym and system EPR actually stand for? The voluntary responsibility of producers and their various obligations, for example, regarding the recyclability of packaging, has been discussed in previous podcasts, but EPR is an obligation, right?
The EPR is a specific regulatory tool. EPR (Extended Producer Responsibility) is the English term for extended producer responsibility. Under EPR, the producer is responsible not only for the process of manufacturing, distribution and sale of the product, but for the entire life cycle of the product and/or its packaging so that it is environmentally disposed of at the end of its life cycle. Yes, it is an obligation, it is an artificial mechanism. From an economist's point of view, the nature of the system is determined by the answer to the basic question: Are we willing to pay for it? Are we willing to pay extra for a product just because it will be ecologically disposed of at the end of its life? Even if the situation is relatively "evangelized" today, the system would not work because the willingness to pay extra is very low for most people...
..so it was decided that if the consumer is not willing, the responsibility must be transferred to the manufacturer. When was it and where did the EPR system originate?
The EPR concept was first defined in Sweden in 1990. Thomas Lindqhvist is credited as its author. It was based on the idea that producers should be physically or financially responsible for the environmental impacts of their products at the end of their life, when the economic value of the item in question to the consumer is close to zero. Systematic thinking on the role of the EPR has been confirmed by the dual role that has been placed on it :
- easing the financial burden of municipalities related to waste management
- Motivating manufacturers to reduce resource use, use secondary materials and innovate product design to reduce overall waste
However, the concept of extended producer responsibility is a very broad concept from which a number of different instruments are based - take-back requirements, deposit system, advance payment for disposal, material taxes, a combination of tax and downstream subsidy (sometimes this is also referred to as an alternative to the EPR concept, but in principle it is in line with the EPR), setting standards for packaging and packaging materials and others (OECD, 2001; Walls, 2003).
So that answers the question of how a manufacturer can reach and be responsible for its product to the point where it is no longer in contact with it at all.
Yes, the Authorised Packaging Company (AOS), as it is called in the Czech Republic, is a company licensed to act as a collective system operator. By participating in it, obliged entities fulfil their legal obligation of extended liability, while the AOS manages the fees collected and distributes them to the individual entities.
The whole thing is based on basic theses, from which we need to work:
- It is a "third sector", it is not a market, but it is not pure regulation. It is "best solution for 2nd best world" => in an optimal world there would be no EPR, nobody would want it
- Hence, regulation enters the picture, using targets to internalise negative externalities by taking the best of private sector cost-effectiveness
- This puts us in a specific space in which the conclusions of neoclassical theory may not apply, for example that competition is better than monopoly. Because we are not in the market, but in a "pen" next to the market
The first task of EPR regulation is to ensure that the AOS has no undesirable incentives in the waste or cash year of EPR activity that would lead to discrimination and restriction of competition, maximization of turnover (influence), profit[1] or business interests in other, associated areas.
The basic conditions for effective EPR regulation materialize this requirement. These are related to the work of the AOS and can be defined by the following seven points:
1. The AOS must not own the collection network in the sense of owning and operating waste containers on the territory of municipalities or other entities, e.g. deciding on the number of containers, their location or who and how often these containers are taken and to where. The collection network (waste receptacles located on the land of municipalities or other owners and their operation) is entirely within the decision-making competence of municipalities[2].
2. AOS may not own collection companies (companies that provide collection of recycled waste from waste containers).
3. AOS shall not own sorting lines (equipment for sorting separated waste, equipment for sorting mixed waste, etc.).
4. AOS must not own recycling lines (facilities where recyclate is produced from separated waste (plastic, paper, glass, aluminium, etc.) as an input for further production).
5. AOS may not own production line intermediates or end-use products (companies or ownership stakes in companies that use recyclate for production and commercial activities).
6. AOS shall not trade in waste, or engage in active commercial activities based on the storage, sale or exchange of waste as a commodity with positive economic value, other than by means of a public tender that is transparent and does not discriminate in price, information or location against any potential buyers[3].
7. AOS must not handle waste in the sense of disposal (waste-to-energy facilities, incineration, landfilling).
In the Czech Republic, these conditions for the operation of WEEE are underpinned by a simple provision in the legislation which states that "WEEE must not be handled or traded" (see below).
How is this handled elsewhere in Europe, are the systems uniform across the EU? Comparison. Is competition beneficial in this respect? Which models are working well?
In order to meet the set recycling targets, different countries choose different forms and ways of organising the system: a system with one operator (state agency / collective PRO system) and a system with competing operators, different payment flows between the actors (operators - market providers - municipalities), different distribution of the actors' responsibilities, different organisation of the system and the degree of competition at collection, sorting and recycling level.
From a competitive perspective, we can see two systems:
- System with 1 AOS
- Competitive system
There is a single operator in 15 countries: the Czech Republic, Belgium, France, the Netherlands, Ireland, Finland, Spain, Cyprus, Italy, Luxembourg. These countries cover 47.8% of the EU's land area, or 50.27% of the EU's population.
The system with competing AOS (multi-operator) operates in 15 countries: Austria, Germany, Norway, Poland, Estonia, Sweden, Romania, Lithuania, Latvia, Slovakia, Greece, Slovenia, Portugal, Bulgaria, Malta. These countries cover 49.04% of the EU area and represent 46.26% of the EU population in terms of waste management.
In three countries (Denmark, Hungary, Croatia) the EPR system is not implemented. The countries are benefiting from a transitional period, but the implementation of a standard EPR system will take place. In Denmark, the packaging tax is used, which is a revenue of the state budget, the implementation of the standard EPR should take place by 2025, also with regard to the CEP.
The initial consideration in the search for an answer to the question One or more?[4] is relatively trivial and is based on neoclassical economic theory, which attributes positive effects to the presence of market competition, whether price (competition reduces profit margins), quality (competition motivates the development of better quality products and services) or quantity (multiple suppliers increase product availability, allow choice, etc.).
However, to evaluate the EPR through this prism is a fundamental error. Why? Because the waste management system organised through the EPR is not a market, and therefore positive competitive effects cannot be implied. This is for the following reasons:
1. There is no clearly identifiable demand. In a normal market, there is a willingness to pay, which is based on the individual utility we derive from consumption.5 However, for the demand side (in this case the distributor of the packaged goods), there is no willingness to pay for something like extended producer responsibility, so it is forced to do so by regulation. If we were to talk about a "demanded service" by the customer (the distributor of the goods in packaging), it is only and only the fulfilment of regulation[6]. This is offered by all potential competitors alike, and therefore there is effectively no price interaction or positive effects of competition on service quality. The customer is not interested in actual performance, he is not interested in evaluating the quality of the service demanded, because the service purchased does not enter into his own production or business activities. Nor does he have a direct interest in voluntarily increasing the performance of the system in the form of (voluntary) maximisation of the recycling rate, because I) this is determined by the state's policy objectives, and II) the more of the service the customer buys, the more he would pay for it above the minimum necessary level[7].
2. There is no clearly identifiable offer. The provision of waste treatment is not a standard market activity where supply responds to existing demand[8]. What is on offer is the performance of the entire collection network in the municipalities and the willingness of households to use it. The AOS has no influence on the specific costs because it does not collect the waste itself and the service providers are chosen by the municipalities. The AOS only influences the efficiency of the network as a whole by the conditions it sets for municipalities, sorters and recyclers and by the incentives it gives to consumers. Efficiency is then the sum of the activities of all AOS and is reflected in the price of their offer equally. From this perspective, it is not possible to draw standard conclusions based on economic theory that work with production costs and productivity or the effect of competition on productivity, quality and price. In a market environment, waste separation and recycling would never occur because there would be no demand for it. This is also why extended producer responsibility has been implemented in waste management and why the objectives of the system are determined by political decision and regulation in the form of law.
3. There is no simple pricing mechanism. Price is formed in the market by the interaction between the bidder and the buyer. In simple terms, the market price is set by the last buyer, whose utility from the good (service) being bought is equal in money to the price (cost + accounting profit) at which the bidder sells. Points 1 and 2 tell us that this mechanism does not work in waste management. Here the price (if we call it that) is formed administratively (backwards), i.e.:
(i) Regulation shall determine the objective. ii) Estimate how much it will cost to meet it. iii) Stakeholders will pay for it. iv) Stakeholders have an incentive to pay just enough to meet the current target.
This is reflected in the results:
Sorted waste collection rate (kg/ob.)
Volume of waste generated (kg/pp.)
Source.
From my point of view, monopoly systems work better because they achieve better results (they don't achieve worse results) and they are also easier for stakeholders (example of a municipality). They don't have problems like freeriding cherry picking or the problem of asymmetric information.
CETA aims to analyse market, socio-economic and political phenomena in the Czech Republic and to highlight their impact. In previous podcasts, we have come across several times the proposed compulsory deposit of PET bottles, which at first glance looks like an ecological solution, but a closer look usually shows the opposite. Have you studied the impact of this proposal? What do you think mandatory backup would bring?
We have dealt with advances twice. The first time was in the opposing opinion of the original proposal, where we logically looked rather for places that may cause inefficiencies in implementation. The second time was in this year's calculations of the impacts on municipalities - we calculated these using available data for the 2020 model year, concluding that the economics of municipalities are not a critical barrier to implementing the system.
But the debate about backup is a very difficult one, there are many questions to answer or to seek answers to. Few people realise it, but backups are also EPR, just a different form - and however the debate turns out, EPR and AOS and backups will have to work side by side, because the objectives of waste management go beyond the debate on backups, and quite fundamentally.
The debate is ongoing, what are the specific figures from the study?
We modelled the impact of mandatory deposit on municipalities and assumed that the efficiency of the system would be 100%, i.e. that all PET bottles and cans would disappear from sorted collection, and we divided the impact into two time scenarios. This will amount to CZK 324, i.e. approx. CZK 30 per inhabitant per year. In the medium-term scenario, there would be cost optimisation (reduced collection frequency, etc.) and this would lead to even lower costs for the municipalities of approx. CZK 163 per year, i.e. about CZK 15 per person per year. In other words, when we look at the calculation of the impact on municipalities, according to our study, which we will publish shortly, it is not critical. However, it is important to note that the introduction of mandatory backup would also have impacts on other entities (retailers, collection companies and sorting lines, packaging manufacturers themselves, households or even the state), so similar studies should be available for a comprehensive debate for other stakeholders so that everyone knows where they stand and so that the possible introduction does not cause the so-called Peltzmann side effects of regulation, where we introduce something with good intentions and then find that it has turned out differently. Peltzmann, the famous economist, proved this with the introduction of seat belts in cars: after their introduction, the accident rate on the roads went up and the number of deaths went up, and that is why it is called the Peltzmann effect of regulation.
During our conversation, Zbyněk Kozel, the chief of EKO-KOM, complained that the impacts of quite fundamental European measures, such as recycling targets, climate change measures, etc., are not analysed in advance, that they often go against each other. What is your opinion? Have you been approached for a similar analysis?
We haven't been approached, but you know we'd like to be. And not only because it's prestigious, lucrative, but more importantly, some of the publicly available analyses show - how to put it in a roundabout way - methodological gaps. I have long said that every law should have five lines right at the beginning:
- What we do
- Why are we doing this
- What do we want to achieve and when
- How do we measure it and when
- What happens if we don't measure it
That would be very helpful. It would show that we are often chasing meaningless goals that can be achieved in other ways. Typical examples are the trivial solutions, such as substituting all the costs of eco-modulation and emission-free shampoo production by showering with water half a degree colder, or the Peltzman effect => microplastics from recycling.
This thinking has completely disappeared from the legislation - at least it seems to me and insiders confirm it.
[1] In the context of a not-for-profit organisation, let us understand profit as the difference between revenues and costs, which can be further dissolved in the AOS for the benefits of stakeholders associated with the management of the system.
[2] To make the sorting and recycling process more efficient, the AOS may provide containers free of charge to municipalities to help build network capacity, but may not participate in any way in
[3] In the Czech Republic, AOS avoids commercial activities. In many EU countries, however, it sells outputs from sorting lines through open public offerings. Since buyers are aware that AOS is interested in making a transaction, not maximising profit, because of the need to meet waste targets, pricing in these transactions is significantly distorted. This activity also carries an increased risk of undesirable phenomena such as clientelism, cartel agreements or other forms of anti-competitive behaviour. A strict barrier to commercial activity is therefore generally preferable.
[4] http://eceta.cz/en/extended-producer-responsibility-myths-and-facts-about-competition-among-producer-responsibility-organizations/
[5] If I am thirsty, I buy water. If I am very thirsty, I am willing to spend more money. If I am not thirsty, I will not buy water.
[6] Certificate that he has fulfilled the statutory obligation.
[7] This is, by the way, important to note in the discussion on PET bottle backup. It explains why the EPR has not yet met the target of 90% collection of PET beverage bottles in the area of packaging waste. This target is effectively set for 2029. It is therefore not in the economic interest of packaging waste producers to meet the target now, as this would impose higher than necessary costs to comply with the law. On this basis, it is therefore not possible to conclude that the EPR will never be able to meet this target because it is not meeting it now.
[8] When an entrepreneur identifies a willingness to pay, for example thirsty cyclists on a cycle path willing to buy water, he starts selling it to them.
You can find the podcast on the usual podcast apps, such as Spotify or Google Podcasts.
