Additional information on identified market failures



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additional information on identified market failures


Split incentives problem: for packaging users to recycle rather than landfill or litter

Users of packaged products (businesses along the supply chain and individuals) have no strong financial incentive to recycle their residual packaging rather than to dispose of it in landfill or allow it to be littered. Faced with these issues, parties seeking to achieve more efficient recycling have tended to invest in infrastructure that makes the recycling choice as convenient as possible and in programs to educate and encourage users of packaged goods to make appropriate diversion choices. This has a number of dimensions, operating in both at-home and away-from-home settings.

For householders, this lack of a strong incentive has been addressed largely through the almost universal provision of convenient kerbside recycling services, paid for through general property taxes. Therefore, at the household level recycling does not involve additional costs other than some sorting of materials and hence the impact of this market failure in residential settings is reduced.

For businesses, by contrast, which use packaged goods in away-from-home settings such as commercial premises, there is a direct cost associated with providing recycling infrastructure in addition to their waste disposal arrangements. Because of the dispersed nature of arrangements in commercial settings the transaction costs are high relative to the market values that can be derived from recycling (net of transport, sorting etc). The impact of the split incentives problem is that without intervention diversion of recyclable material will not occur and recyclate value will not be captured.

In addition, there is a lack of knowledge and a level of apparent confusion amongst businesses and individuals who use/consume packaged products about what packaging can and cannot be recycled (known as information asymmetry). This is contributed to by the differing arrangements operating across Australia, so that although packaging products may be labelled as being recyclable or made of recyclable materials, they may actually not be recycled by every local council.

The lower non-paper recycling rates that are evident in commercial settings are an illustration of both these problems, as by contrast paper is more readily identifiable as recyclable and common infrastructure is widespread. Hence this market failure leads to increased cost of collection of non-paper materials for recycling, because ongoing consumer education/ encouragement and/or infrastructure investment is required. It also leads to unintended contamination of recycling systems when incorrect choices are made, which increases the costs of recycling.

This problem is unlikely to self-correct with current patterns of investment and may well grow because current packaging trends of producing lighter, more complex packaging types (such as soft pouches to replace rigid plastic bottles for detergent) are likely to continue, driven by consumer preferences, materials innovation and pressure to reduce the cost of transportation and handling. This ‘light weighting’ trend has been evident in reducing per capita consumption of packaging in Australia since 2003, and is predicted to continue with per capita rates forecast to fall further from 197 kilograms per person presently to around 174 kilograms per person in 2035.

In the longer term, however, waste sorting technology may evolve to the point where waste receivers can separate recyclable material out from mixed waste and deal with complex recyclables at lower net cost than current multiple-bin systems. Therefore policies to address this problem need to be flexible to future developments and not lock in current technologies and arrangements.



Split incentives problem: for the recyclable design of packaging

Not all packaging types are recyclable and there is huge variation in the value of different types of packaging as recyclate (see Attachment D, Table 2), depending on the material. ‘Recyclable’ as a concept is, itself, difficult: just because something is technically recyclable does not mean that it is cost effective to recycle it. For example, expanded polystyrene is recyclable, but in Australia rarely recycled1. This is because currently very few Australian local governments will accept it for recycling through kerbside collections, but drop-off locations are available2. While members of the APC are encouraged to implement Sustainable Packaging Guidelines which emphasise recyclability, these also acknowledge the tension between different environmental goals, such as the trade‑off between designing packaging for efficient transport and for improved recyclability.

The producer of packaged goods does not bear the costs of disposal of the packaging once the product has been consumed, nor do they capture any potential benefits from recycling as opposed to landfilling. This means that while there may be market incentives for businesses to reduce the overall volume or weight of their packaging (such as reduced transport and storage costs), businesses which manufacture packaging have no financial incentive to use packaging which either by nature of its design or its material composition optimises the potential to capture recyclate value, to drive recycling at end of life. In many cases there is a financial/business driver for the increasing use of non-recyclable materials such as multiple composite plastic layers which enhance attractiveness and presentation or the functionality of a product, however can render the whole package non-recyclable.

This split incentives problem for the recyclable manufacture and design of packaging is evident at each point along the supply chain where packaging is used and discarded.



Negative externalities associated with landfilling of certain materials

When used packaging is disposed of in landfill it may have consequences beyond the immediate land-use and management costs of the landfill. Given the absence of hazardous materials in packaging, the main concern relates to greenhouse gas emissions (methane), which arise when paper and cardboard packaging eventually breaks down in landfill. Other packaging materials (for example, glass) have minimal landfill externalities.

The volume of paper/cardboard going to landfill in 2009-10 was 656,071 tonnes. Recycling paper and cardboard reduces the volume of these materials in landfill, reducing their emissions.

While a direct consequence of landfilling waste is that the value of that material is lost (not captured as a resource) and that landfill space is used up sooner, these effects have not been described as an externality market failure since their costs are borne by the packaging industry and waste managers in the form of commodity prices (which reflect scarcity) and landfill management costs respectively.



natural monopolies in recycling infrastructure risk perverse outcomes

The collection and recycling of packaging waste is a sector that is characterized by a significant reliance on infrastructure. To the extent that it is not efficient to duplicate this infrastructure, the recycling industry may exhibit declining marginal costs, or increasing returns to scale. To the extent that these are present in the collection and recycling sectors, these aspects of the packaging supply chain may exhibit natural monopoly characteristics.

For example, the longstanding and widespread implementation of kerbside recycling services to households has general acceptance and high participation. This means that the marginal costs of providing this service are minimised for the incumbent provider and that the barriers to entry for new collection services are high.

Policy options that rely on the development of new collection services, therefore face high marginal costs and are unlikely to be efficient. Efficient policy would therefore need to recognise the risk that new policy initiatives aimed at enhancing recycling outcomes in one area could raise costs or ‘cannibalise’ existing efforts in some other area.



Negative externalities associated with litter

Littered packaging harms community amenity and negatively impacts on human health (for example, broken glass) and on marine wildlife and ecosystems (for example, ingestion of plastics). Part of the cost of this harm is revealed by expenditure on public place litter clean-up activities, mostly by local government (a problem of negative externalities associated with litter).

Although national litter rates measured by the National Litter Index (NLI) show a gradual decrease, packaging remains prominent in the litter stream, particularly by volume. Beverage containers are a highly visible component of packaging litter, making up approximately 89 per cent of total litter by volume and 31 per cent of all litter by item count3. Most littered packaging arises as a result of the actions of individuals following public place consumption of food and beverage products4. In terms of environmental impacts, packaging litter pollutes both land and marine ecosystems. In particular, plastic litter entering the marine environment is known to harm marine ecosystems and wildlife, including protected species of birds, sharks, turtles and mammals, through entanglement, ingestion or carriage of contaminants (DEWHA 2009, UNEP 2011, Hardesty and Wilcox 2011).

The cost of cleaning up litter is mostly borne by governments, particularly local government, and volunteer community groups. The costs are not borne by producers of packaged goods, except to a limited extent, and producers of packaged goods do not have a direct incentive to design their packaging to minimise its impact when littered.The economic cost of litter is estimated at $501 per tonne, based on a range of observed clean-up cost estimates. The estimated total cost of litter to the Australian economy is therefore currently $38 million per annum5.



Incentives facing consumers are mixed: with both regulatory and social sanctions operating to greater or lesser extents. Successful public litter programs tend to focus on a combination of education, infrastructure and enforcement (Attachment K, p. 34). The problem of littering is unlikely to self-correct. The trend of increasing take-away consumption of food and beverages will provide greater opportunities for littering to occur. In addition, while the trend of lighter-weighted packaging is projected to continue to reduce the weight of packaging (and hence the amount going to landfill) it will not necessarily have a similar effect on the volume of packaging, which largely drives the visual and environmental impacts of litter. Indeed, lighter packaging may be more mobile (wind and water), leading to a wider dispersion of litter beyond the points where it is initially littered.

1 See http://www.epsa.org.au/about-eps/eps-recycling

2 See http://recyclingnearyou.com.au/search.cfm

3 Based on NLI 2011–12 data. Calculated from McGregor Tan Research 2012 pp. 160–162, PwC, WCS 2011 p. 14

4 See MJA 2013b, Attachment K, section 3.3.3.

5 Calculated from MJA 2013a, Attachment K, pp. 39, 93.



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