6.1 Introduction
In this section we apply the economic approach to waste management policy. In Section 6.2 we detail some general principles that should govern waste management polices. Since this draws extensively on earlier parts of the report our discussion here is brief. However, we employ these principles in Sections 7 and 8 in respect of the Section 60 Policy Direction to cap incineration and other matters and the international review, respectively. For example, although we only outline the principle that should be employed in organising the market for household waste in this section, in discussing the international review’s recommendations in this area we explore the practical implications in some depth.
Section 6.2 and Section 6.3 deal with two practical matters about which there has been much discussion. The former section addresses the question of appropriate mechanisms for meeting the targets set out in the Landfill Directive, while the latter sections deals with two interrelated issues - the appropriate mix of waste technologies and the principles involved in setting residual waste levies.
6.2 General Principles
At the outset it is important to stress that the objective of policy to maximise social welfare. Building on this government intervention in the waste management sector should aim to address market failures, in particular externalities and market power.
Economic instruments such as the landfill levy and plastic bag tax should be applied where possible, and command and control measures should be used only as a last resort. Externalities of waste management activities can be efficiently addressed by applying levies that increase the private costs of those choosing the disposition of waste equal to the social costs that their choices entail. We have noted that all of the activities in the waste management service value chain, including all options for final disposition of waste, generate some externalities. This implies that levies or equivalent economic instruments should be applied to all options in proportion to the marginal societal harm they inflict.
It may be proportional to address market power problems by reserving exclusive rights for waste authorities and encouraging them to keep costs low by permitting competition
for the market, rather than in the market. Thus further use of franchising and contracting- out of services should be considered. However, in administering these policies a potential conflict of interest may arise as the local authority is not only a provider of such services but also the purchaser. Mechanisms can be put in place whereby the public operations are separated from the local authority so as to create a level playing field between public and private bidders for any tender.
Policymaking should apply a high degree of “subsidiarity”, since the bulk of service costs and externalities are local or regional in their causation and incidence. Most of the relevant economic markets are also local or regional. Too much centralisation of policy will leads to a substantial risk of regulation being applied that is inappropriate for many areas. In particular, centralised command and control measures such as blanket rules on what practices and technologies may be used, to what extent, and in what places, are
regional authorities should not take place concerning issues that have impacts across local or regional boundaries.
Nevertheless, we recognise that very challenging national targets have already been entered into under the Landfill Directive. Because they are challenging, they are likely to be costly to meet. At a time of national economic crisis, this makes it all the more important that measures to meet the targets be as cost-effective as possible. Any restrictions that are placed on service provision should pass a cost-benefit test. Regulatory Impact Analysis of new significant regulatory restrictions should be applied in line with published guidance.
Finally, management of policy and demand risk is key in this sector. To restate our earlier point: given the prevalence of asset specificity, long-lived infrastructures and sunk costs in waste processing, all levels of government should aim to avoid creating unnecessary policy and regulatory risk. Regional administrations should consider using contractual arrangements that situate regulatory and demand risks with the parties that can most efficiently bear them and should be free to avoid hold-up problems by credibly committing to contractual conditions in advance.
6.3 Meeting the Landfill Targets: Cap & Trade
The Landfill Directive targets are binding constraints. The levels of waste that can be sent to landfill are fixed for 2010, 2013 and 2016. Failure to meet these targets is likely to lead to large EU fines. There are currently a number of programmes in place which are designed to meet those targets. There is some uncertainty around both the volume of waste that will be generated and the success of various recycling and waste diversion schemes which are designed to reduce the flow of waste to landfill. While the landfill levy raises the price of using landfill and hence discourages its use, the levy is set based on the level of externalities not the price that will result in Ireland meeting the Landfill Directive targets. Hence the landfill levy might result in too much, or too little or just the ‘right’ amount of waste to meet the Landfill Directive target.
Since the Landfill Directive targets are known and fixing a landfill levy to meet those targets is a difficult task, while at the same time the conventional wisdom is that Ireland is going to have difficulty meeting the targets, then some thought needs to be given to use of an additional policy instrument to ensure compliance. We suggest that serious consideration be given to a cap and trade system that is currently employed in the ETS and similar environmental arrangements in the US.
Under this system the cap is set by the Landfill Directive for 2010, 2013 and 2016. Intervening year targets could be interpolated. Permits would be issued to use landfill for waste denominated in tonnes, perhaps by the EPA. These could be traded in order to ensure that they are used in the most efficient use is made of the permits. As with all such schemes a thorny issue concerns the allocation of the permits since these may become valuable property rights. Economists often argue that the permits should be auctioned off and the funds accruing to the State. This is not just on equity grounds, but also - at least under the ETS36 - free allocation of permits based on existing levels of CO2
has lead to inefficiencies. However, in practice permits are usually initially at least distributed free based on existing patterns of usage with the proportion that is auctioned
36
off gradually increasing over time to reach 100%. We suggest a similar approach be adopted for waste permits for landfill.
Initial allocation would be pro-rated based on 2009 levels of waste disposal, so that firms could not engage in any strategic behaviour to effect the allocation. Subsequently the proportion of the permits that would be auctioned off would increase so that by 2016 it would reach 100%. There would, of course, have to be an allocation held back in the case of entry. Permits would be issued on a use it or lose it basis.
We also suggest this approach for another reason. Gaining acceptance of the use of waste permits for landfill is likely to be resisted. If the various programmes that are designed to meet the Landfill Directive by prevention, diversion and recycling combined with the impact of the landfill levy are effective then the Landfill Directive targets may be met and the permits will be of little value. It seems better to introduce such permits in the manner suggested above than risk considerable resistance to the idea by moving to 100% much sooner.
6.4 Residual Waste Levy & Technology Mix
Externalities are defined as the costs and benefits that arise when the social or economic activities of firms or consumers affect another group and these effects are not captured in the pricing, transfer and regulatory systems– i.e. they are external. For example, a farmer pollutes a river but does not compensate a downstream fish farm that is adversely affected. The issue thus becomes how to internalise or take into account these externalities such that societal welfare is maximised. We consider different instruments that might achieve this task, before deciding on the methodology for estimating residual waste levies. Attention is then devoted to the issue of technology mix.
Two Solutions: Levies or Command and Control Regulation
The problem of externalities is commonly addressed by bringing the private costs in line with the social costs. Levies or taxes can be imposed on the externality-generating activity, set at a rate reflecting the damage caused. In the above example, a levy would be placed on the farmer equal to the damage caused on the fish farm. A common alternative is to set permissible levels of emissions or discharges, often tied to a particular technology. The permissible level set by command-and-control regulation may be chosen to ensure that the externality-generating activity does not cause significant adverse environmental damage. In the above example, the amount of fertiliser that the farmer could apply might be limited. While there are pros and cons to each approach they are usually considered substitutes, not complements. Policy makers should select either levies or direct regulation to attain a given objective, but not both since they are both trying to set the same objective but by different means.
Consistency of Approach Across Different Sources of Externalities
It is important that there is consistency across the policies used to address different sources of externalities (e.g. MBT, cement kilns, and so on). In other words, two sources of externalities in a similar situation should be treated in a similar manner; and, any given source of externality should not be subject to several forms of instruments of intervention all designed to achieve the same objective. If there is not such consistency then there is a danger that government intervention may not only prove to be needlessly expensive, but it may also not achieve its objective. Furthermore, this would violate the basic principle
Command and Control Regulation: Integrated Pollution Prevention Control and Waste Licences
Licensing is the main instrument used to regulate externalities of the kind generated by waste treatment facilities (but also from manufacturing activities). This involves specifying allowable levels of emissions and monitoring compliance. For pollution from large scale production operations such as pharmaceutical facilities, cement kilns and power plants an Integrated Pollution Prevention Control (“IPPC”) licence is issued by the EPA which is “designed to [ensure] … that emissions from the activity do not cause a significant adverse environmental impact.”37 Waste operations are also subject to EPA licensing to ensure that the operation “will not cause environmental pollution.”38 Each Waste Licence the EPA issues contains emission limits that the waste facility must adhere to. This type of command and control regulation sets the level of pollution that is designed, implicitly at least, to be the right or correct or socially acceptable level. It has been selected instead of imposing a levy or tax reflecting the level of externality. There is often a considerable range of values for a given externality, so it is understandable why command and control regulation is preferred.
What Role Levies?
This does not mean, however, that there is no role for levies in relation to waste treatment facilities. For example, the EU Emission Trading Scheme (ETS) sets a price for
emissions of CO2 via a cap and trade system. We recommend levies that reflect two
sources of externalities from waste management. First, methane. Although waste licenses set permissible levels for licensed facilities, via landfill gas concentration limits, this gas is such an important contributor to global warming that a differentiated levy should be imposed across all the waste treatment options that are considered here. Second, the disamenity impact of each waste treatment option is likely to vary depending on the nature of the activity and other factors such as the housing density in the immediate vicinity of the waste treatment. As a result disamenity costs for each waste treatment type should be estimated so that an appropriate levy may be applied. Note, however, that if facility operators pay direct compensation to local residents in some form, this may address the disamenity externality without a need for a separate levy. It could be argued that if a levy is to be imposed on methane that one should also be imposed on CO2. However, CO2 from paper, textiles, wood etc. is, firstly, largely carbon
neutral and, secondly, accounted for at source. Hence it is not appropriate that CO2 from
these sources should be subject to a levy. However, what about CO2 from fossil fuels?
Incinerators are subject to the ETS and hence any CO2 emissions from the fossil fuel
component of their inputs will be taken into account, while for landfill non-biodegradable materials such as many plastics do not give off CO2. For MBT, fossil fuel use will be
captured under the forthcoming carbon tax, plastics are either recycled or sent to landfill and CO2 from plant materials is largely carbon neutral, so again no process CO2 is
emitted. Hence we suggest there is no need to include CO2 emissions in waste
management levies.
37
As set out on the EPA website: http://www.epa.ie/whatwedo/licensing/ippc/. Accessed 5 October 2009. 38
Recommended Levies for Landfill, Incineration and MBT.
The difference in the optimal levies for MBT, incineration and landfill revolves around
methane emissions and disamenities. We have assumed that CO2 emissions and other
emissions to air will continue to be regulated through other instruments, the ETS and the emission limits already specified in each Waste Licence. The levy rates per tonne of waste implied by the analysis are summarised below and their derivation presented in Annex A below.
Landfill €44.24 to €54.89 (Table A.10 below)
Urban Incineration €4.22 to €5.07 (Table A.17 below)
Rural Incineration €0.42 to €0.50 (Table A.17 below)
MBT €0.92 to €1.45 (Table A.23 below)
It should be noted, however, that these levy rates may underestimate the total costs of using incineration and MBT, since use of these options is likely to involve additional externality-related levy payments due to the production of outputs from incineration and MBT that are sent to landfill. However, a countervailing factor is that we have not taken into account any direct payments by facility operators to local residents in compensation for disamenities. Landfill externalities not already regulated elsewhere give rise to an implied levy over double the current (2009) landfill levy rates. Both the methane and disamenity components are higher for landfill than those for the other technologies we have examined due to the high levels of biodegradable waste currently landfilled in Ireland and the impact of housing densities on disamenity calculations.
Technology Mix
We are neutral concerning the technological mix for dealing with residual waste management in terms of an a priori preference for landfill, incineration and/or MBT. There is no reason to prefer one technology over another, except on the basis of the private costs and benefits and the proposed residual waste levy that is set out above.