Packaging recovery: a faltering UK experiment with market mechanisms

An experiment in market mechanisms for achieving environmental policy objectives began in January, when the environment agencies' regime of "packaging waste recovery notes" (PRNs) spluttered into life. Revenue from the sale of PRNs is intended to be invested in new waste collection, sorting and reprocessing capacity which is needed to ensure that the UK meets targets set by EC legislation. Early indications, however, are that a significant share of PRN funds will simply go towards bolstering profits for paper mills, waste-to-energy plants and other reprocessors, many of whom have no intention of increasing recycling or recovery levels.

The duty to "take reasonable steps" to recover and recycle packaging waste, set out in last year's packaging regulations, sounds straightforward enough. This year it will affect around 4,000 businesses manufacturing or using more than 50 tonnes of packaging and with sales above £5 million (ENDS Report 264, p 30-32 ). Smaller businesses will be dragged into the regime in 2000. The statutory targets are to recover 38% this year, rising to 52% in 2001.

But nowhere in the legislation is it explained how obligated businesses should go about taking their "reasonable steps" to meet the targets. The one thing that is clear is that, somehow, they need to encourage the waste management industry - and the reprocessors which use the materials the industry sources - to invest heavily in new infrastructure. Last year only around 28% of UK packaging waste was recovered.

The regime was the fruit of protracted negotiations between industry and the previous Government, in which Ministers were initially reluctant to sanction any regulation at all. But the need to prevent free-riders from ducking their responsibilities eventually persuaded them that legislation to impose "producer responsibility" for packaging waste would be required.

Nevertheless, the principle that market forces should prevail in the recovery of packaging waste remained intact. In other European countries, a single body has been made responsible for investment in recycling, funded by packaging levies. But in the UK it was decided that the Valpak "compliance scheme" should not be allowed to operate without competition - a decision which effectively prevented any notion of a simple packaging levy to raise funds and made it impossible to co-ordinate investment centrally. Instead, the Government advanced a non-statutory system of tradable certificates through which companies could purchase proof that they had arranged for packaging to be recovered.

What has since emerged is an extraordinarily complex mixture of legislation, official guidance and market forces through which businesses which make or use packaging - and those who recover and recycle it - must now pick their course.

The current Government announced its intention to review the regime soon after it came to power last year. Among the issues it will address is the effectiveness of the system of tradable PRN certificates (ENDS Report 275, p 33 ).

A PRN is a certificate showing that reprocessing of a certain tonnage of packaging waste has taken place. The PRN system is not mandated in the legislation, but was devised as a means for obligated businesses to show that they have taken "reasonable steps" to recover waste. It is administered by the Environment Agency and its Scottish counterpart.

A market in regulatory compliance

The idea is that obligated companies should buy sufficient PRNs to meet their recovery obligation for the year. However, since PRNs are tradable and can be purchased by anyone, their price is determined by market forces. Prices of around £30-£40 per tonne were being quoted as the system started up this year, reflecting the fact that reprocessors anticipate that insufficient capacity is in place and that PRNs will therefore be scarce.

Reprocessors - such as paper mills, glass bottle makers and incineration firms - can issue PRNs in exchange for cash but to do so they must be accredited by the agencies. Obligated companies or their compliance schemes must either obtain PRNs from accredited reprocessors or prove that they have recovered waste at non-accredited reprocessors.

Progress with accrediting reprocessors has been slow, with only 48 sites on board when the scheme started up on 1 January. By mid-February, the Environment Agency had accredited 104 reprocessors but still had 61 outstanding applications. The Scottish agency has accredited only six.

Meanwhile, nine compliance schemes have gained approval from the Office of Fair Trading (OFT) to compete with Valpak to arrange for packaging recovery on behalf of obligated businesses. Companies joining the schemes hand over their recovery obligation in exchange for a fee. The latest schemes to gain OFT approval were Cleanapack and Paperpack in February. A ruling on Glaspack is still awaited.

Valpak's secret contracts

Despite this competition, Valpak is by far the biggest scheme and is expected to face a recovery obligation of around two million tonnes for 1998 - some 70% of the UK total.

In February, Valpak announced that it had signed contracts to buy PRNs from reprocessors covering a "substantial" proportion of its obligation. One contract is with St Regis Paper which has ten mills producing mainly packaging grade materials. Valpak has contracts to purchase PRNs for glass from Berryman's, for plastics from Transform Plastics and British Polythene Industries, and for energy recovery from incinerators.

In all cases, the contract terms are confidential. Valpak will not reveal the tonnage of material or how the money will be spent. It simply says that there are "specific provisions in our PRN contracts to ensure that the funds are appropriately directed to achieve the required increases in recovery."

In the case of energy recovery, however, it is difficult to see how PRN revenue paid for burning mixed household refuse will be invested in new capacity. It is more likely that the funds will create a windfall profit for incineration firms (see box ). Similar arguments apply to other accredited reprocessors who sell PRNs but do not invest the funds in new capacity.

There are also concerns that reprocessors are holding on to some of their PRNs so as to create scarcity value. Similarly, it could be argued that the system provides an incentive for reprocessors to invest in less capacity than will be required so as to ensure that PRNs are always in short supply.

Retailers hit out
The big supermarkets have strong negotiating clout with reprocessors, and at one stage appeared set to meet their obligations under the regime quite painlessly - thanks to the commercial packaging waste they handle and already recycle, notably cardboard. They also hoped that household packaging waste dropped off at supermarket recycling banks would count towards their obligations - and have been locked in a row with local authorities who service the banks over who should gain the PRNs for this material (ENDS Report 272, p 18 ).

However, it seems that retailers' ambitions have been thwarted by the reprocessors' freedom to sell PRNs at a market price. Paper mills, for example, are reluctant to issue PRNs to companies who deliver waste paper to them. In part, this is because they may already have agreed to sell the PRNs to Valpak or another compliance scheme.

Even where a mill agrees to issue PRNs to the company delivering waste paper, it pays a lower rate for the material - in effect making the depositor pay the market rate for the PRN even though they have sourced and collected the waste.

"Reprocessors have been provided with the ability to charge waste depositors for the provision of PRNs...[and] the opportunity to seize financial benefits," the British Retail Consortium says in written evidence to the current House of Commons Environment Committee's inquiry into sustainable waste management. "Local authorities have similarly been affected by the non-availability of PRNs, putting them into potential conflict with retailers' recycling schemes, which are dependent on PRNs supplied by the local authorities."

For the waste industry, the packaging regime offers valuable new business opportunities in collecting and sorting both household and commercial waste. Unfortunately, however, the landfill-dominated industry was very slow to wake up to the business potential. It languished in the sidelines while the former Producer Responsibility Group worked out how the scheme should operate in 1994 (ENDS Report 229, pp 18-21 ).

Waste industry demands a voice
The industry is belatedly demanding a seat on the Advisory Committee on Packaging (ACP), which is helping with the policy review and will report to Ministers in May. Indeed, given the industry's role in sourcing packaging waste - and the need to encourage its move away from traditional waste management methods - its omission from the ACP is surprising.

"It is almost inconceivable that this expert group can advise Government on the strategy...without having upon it someone to represent the vital role that waste management companies play," according to UK Waste.

The waste industry's principal beef with the packaging regime is the same as the retailers': it wants reprocessors to hand over PRNs in exchange for waste deliveries.

The complaints echo comments by the OFT. "I believe that the lack of an obligation on reprocessors to issue a PRN on demand may have anti-competitive effects," the OFT Director General concluded last summer. Such an obligation "would limit the ability of compliance schemes or others to tie up all or a significant proportion of the available reprocessing capacity."

However, the environment agencies have not acted on the OFT's recommendations. And Valpak objects strongly to them, arguing that handing over PRNs free of charge to companies delivering waste would mean that reprocessors would have no funds to increase reprocessing capacity. PRNs would also pass into the hands of third parties, such as waste firms, leading to speculation "which would remove funds from the recovery industry," Valpak says.

Valpak's competitors undermined
What Valpak omits to point out, however, is that by refusing to issue PRNs to waste firms, reprocessors are seriously undermining Valpak's competitors - the compliance schemes run by waste management companies including Biffa, UK Waste, Cleanaway and Onyx and waste broker Wastelink (ENDS Report 268, p 18 ). The original idea of these schemes was that waste firms would collect PRNs for the packaging waste they deliver to reprocessors on behalf of their customers.

One attraction of such schemes is that the waste firms running them would have had a direct incentive to invest in packaging waste collection and sorting operations. However, since waste firms are in general having to purchase PRNs like anyone else, this link has been severed.

"By taking away a direct link between inputs and PRNs you're taking away any incentive to recycle," commented Biffa's Phil Conran. "You don't need to recycle to get the PRNs."

If waste firms cannot get their hands on PRNs, and Valpak will not sign contracts directly to arrange for waste collection and sorting, the only mechanism left that will stimulate the industry's investment in recycling infrastructure is an increase in prices paid by reprocessors for waste materials. But this requires sufficient PRN revenue to trickle through to elevate waste paper, plastics and metals prices. It also requires confidence that the market prices will remain sufficiently stable to give a return on investment.

The industry's trade body, the Environmental Services Association (ESA), has submitted evidence to the ACP claiming that very little PRN revenue is filtering through to waste collection businesses - only £5-10 per tonne compared with PRN prices of around £30-£40 per tonne. "This means investment in collection and sorting is unlikely to be forthcoming," the ESA says.

Waste industry's demands
The ESA has proposed two key changes to the regime. First, where reprocessors sell PRNs they should have to justify the cost and be accountable for the investment they are to finance. Second, a company delivering its own waste, or representing the producer, should not be denied access to the PRNs.

The association also called for the speculative market in PRNs to be discouraged. "A free market in PRNs will drive down the price of collected materials to the point where recycling isn't economic," said ESA Chief Executive Peter Neill.

Mr Neill added that reprocessors have an incentive to inflate PRN prices by storing them up. "If you give somebody the opportunity to hold on to a big bag of money why should they prove to be altruistic?"

Meanwhile, some in the waste industry are questioning whether the PRN system will even be enforceable. David Boyd, Government Affairs Manager at UK Waste, which runs the Recycle UK compliance scheme, argues that if PRNs prove unavailable at reasonable cost the whole regime will collapse.

"How can you be prosecuted when you can show that the available capacity has already been bought up by Valpak?" he asks. Furthermore, a compliance scheme could argue that it has taken "reasonable steps" to recover packaging waste - the only requirement in the legislation - if it can show that it has delivered a sufficient tonnage to reprocessors, Mr Boyd argues.

By the agencies' rules, Recycle UK and its customers might have arranged for packaging waste to be separated from the waste stream, sorted and delivered to reprocessors - yet none of this work would count towards its statutory obligation to take "reasonable steps" to recover materials. Meanwhile, the reprocessor could sell PRNs for this material without having to demonstrate that any of the revenue is used to fund recovery. In such circumstances it is difficult to see how the trade in PRNs can qualify as taking "reasonable steps" to recover waste.

But Jeff Cooper of the Environment Agency's producer responsibility unit insisted that Recycle UK would have to obtain PRNs for any packaging waste it delivers to accredited reprocessors if it wishes to count the material towards its packaging obligation. Otherwise it would lead to double counting, since the reprocessor will have sold PRNs to a third party covering the same waste. But he admitted that ultimately it would be a matter for the courts to decide.

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