The Waste Tax 1987-1996

3. Purpose and design of the waste tax

3.1 Introduction
3.2 Design of the waste tax
3.3 Regulations of different waste fractions
3.4 The waste sector - institutional framework

3.1 Introduction

Understanding the context of the waste tax

This chapter summarises the considerations of legislators on the introduction of the waste tax as well as on subsequent increases in the rate and adjustments of the taxable base. Furthermore, an outline is given of the area of application of the tax, and separate regulation of various waste fractions is presented. Also, the waste sector is analysed in order to clarify price transparency and response options for the different players. This analysis, in conjunction with the two first items, will bring about a precise description of the purpose of the motivational analysis of waste management and recycling practices in enterprises and waste companies.

Figure 3.1. Development in tax rates for the waste tax 1987-1997

Step 1: Introduction of the waste tax

Need for prevention

The situation in waste management in the mid 1980s was that there were considerable problems in siting new landfills. Furthermore, the dioxin debate had put focus on waste incineration plants as the source of diffuse dioxin pollution. The need for new and more preventive ways in waste regulation was recognised. Conceptually, the background of the interest in economic instruments can be found in an OECD conference held in 1984 and a subsequent study carried out by the Danish Environmental Protection Agency (OECD, 1984; Miljøstyrelsen, 1985). A tax on waste was mentioned and discussed in detail in a report from the Danish Environmental Protection Agency on possible use of economic instruments in environmental policy, published in 1985. At the Budget negotiations in 1985, political agreement was obtained on the introduction of a waste tax, and the tax was included in the Bill to reform the Danish Environmental Protection Act, which was presented in February 1986 and adopted with broad political agreement the same year. (L176, 1986).

The purpose of introducing a waste tax, originally of DKK 40/tonne, was described as follows:

"The purpose of the proposed tax is to reduce the amount of waste going to incineration or landfills. The tax will promote recycling and incite companies to apply low waste technologies" (Lovforslag nr. L176, sp. 4425).

Ensure profitability of recycling

The chosen rate of the tax reflected the need to ensure the profitability of recycling plants for construction and demolition waste and collection schemes for glass. Calculations on C&D waste indicated at that time a need for a tax of at least DKK 30/tonne in order to allow collection and crushing without public subsidies. (Miljøstyrelsen, 1985:25-26).

The Act introduced a possibility of refund, granting a refund for waste subsequently removed from registered plants. One argument for the refund option was:

"It will be an incentive for companies (landfills and incineration plants) to separate waste with the purpose of recycling" (Lovforslag nr. L176, sp. 4450).

Furthermore, the objective was to avoid double taxation of waste which after treatment in an incineration plant is disposed of at another registered plant.

Yield included in the Finance Act

The yield of the tax, estimated at DKK 120 million annually, was included in the Finance Act as a revenue for the Ministry of the Environment, and part of the yield was used to finance subsidy schemes for recycling and clean technology projects (Betænkning 16.5.1986, sp. 1779). Part of the reasoning behind the subsidy scheme was that the tax level of DKK 40/tonne was relatively low, and subsidies for recycling measures financed by the tax would contribute to reducing waste amounts.

Limited to certain plants

At that time, the tax was limited to waste going to plants receiving waste from municipal collection schemes, whereas waste going to private landfills for inert waste or other private landfills was not included. Industrial and commercial waste delivered directly to municipal plants was covered by the tax. The reason for the limitation to such plants was especially the need for simple administration of the system.

Step 2: Increase in waste tax rate adopted in 1989

Plan of action

In 1989, the Minister for the Environment presented to the Folketing a comprehensive plan of action for increased recycling, prepared by the Danish Environmental Protection Agency (Miljøstyrelsen, 1989). The plan of action predicted an increase in waste amounts of 50 per cent if no measures were taken, and increased efforts in recycling were proposed. The main objective was a recycling rate of 54 per cent in 1996.

The same year, a first evaluation of the waste tax was carried out. The evaluation was made by GENDAN and revealed that the rate of DKK 40/tonne was too low to have a general effect on waste management, but that for construction and demolition waste, and heavy industrial and commercial waste, an effect could be seen, as waste amounts fell from 1987 to 1988 by some 200,000 tonnes (Holmstrand m.fl., 1989). In connection with this evaluation, an assessment was made among experts in the waste sector indicating that a rate of DKK 100/tonne would be necessary to obtain a significant effect.

"Locomotive" for the plan

In the Finance Act of 1990, the waste tax rate was increased to DKK 130/tonne. The Minister for the Environment commented on the purpose of this increase in relation to the plan of action for increased recycling:

"A significant increase in the waste tax rate will be a locomotive for the initiatives included in the plan " (Folketingstidende, 89/90, del F, sp. 3056).

Extension of taxable base

At the same time an extension of the taxable base of the waste tax was made, so that private landfills for inert waste etc. were also covered. According to the presentation speech of the Minister for the Environment, the main purpose was to increase recycling of construction and demolition waste which had previously been landfilled at such sites. In 1986, no estimates of the environmental effects of the waste tax were given, but this time the Minister stated that the tax increase was estimated to divert around 1 million tonnes of construction and demolition waste from landfilling to recycling, and that this corresponded to a decrease of 15 per cent in total waste amounts. As a supplement to the mitigating effect on consumption at the start of the material flow, a raw materials tax was introduced, amounting to DKK 5/cu.m.[note 3] With this proposal, the waste tax was transferred from the Danish Environmental Protection Act to a stand-alone Act on taxes on waste and raw materials. (L100, 1989). The increase in the waste tax was estimated to produce an additional yield in 1990 of DKK 340 million.

The change in the taxable base took place with the Danish Statutory Order on Waste which was presented in early 1989. The Statutory Order replaced the provisions of environmental regulation and partly imposed an assignment obligation on local councils, partly extended the concept of municipal waste collection schemes. (Bek. nr. 188 af 23.2.1989 om affaldsbortskaffelse).

Step 3: Increase and tax differentiation adopted in 1992

External evaluation

In late 1991, an external evaluation of the waste tax was commissioned to the Institute of Local Government Studies - Denmark. Completed in November 1992, this report concluded "that the waste tax in its present form has an impact on waste streams in significant areas", but also that due to data problems (and lack of time in connection with the evaluation) it was not possible to give a statement of the precise effects of the tax (Christoffersen, m.fl., 1992). Furthermore, the evaluation noted that a number of players in the waste field had limited possibilities of action and avoidance in relation to the waste tax, especially householders whose fees to municipal waste companies were not based on the weight of their waste. Also, it was proposed to extend the taxable base of the waste tax so that, for example, waste from energy generation and oil and chemical waste were covered.

In 1992, an inter-ministerial committee was established with the purpose of extending the market orientation of waste and recycling efforts. The committee was to investigate the possibilities of abolishing the special recycling subsidy scheme, which had been established parallel to the introduction of the waste tax. The committee was also to investigate increasing and differentiating the waste tax and increasing the raw materials tax (Finansministeriet, m.fl., 1992).

Need for tax differentiation

The reasoning behind differentiation of the tax was that differences between municipal fees for landfilling and incineration led to an economic favouring of landfilling. Whereas fees for landfilling on average amounted to DKK 170-220/tonne (excluding state waste tax), fees for incineration amounted to DKK 320-420/tonne, i.e. an average difference of some DKK 150-200/tonne, though with large local variations (Finansministeriet m.fl., 1992: 13). The committee proposed three models for increasing and differentiating of the waste tax. The most extensive model proposed to differentiate by only DKK 65/tonne between incineration and landfilling. The committee also proposed to abolish the subsidy scheme for recycling projects and to aim at more producer responsibility and take-back agreements.

Increase to DKK 160/tonne and DKK 195/tonne respectively

The Minister for the Environment presented a proposal in late 1992 on an increase and differentiation of the waste tax. This led to an increase in the waste tax to DKK 195/tonne for waste to landfills and DKK 160/tonne for waste to incineration. These rates took effect on 1.1.1993. At the same time, the subsidy scheme for recycling projects was abolished with the adoption of the 1993 Finance Act. The purpose of the increase was partly to compensate for the abolition of the subsidy scheme, and partly to increase the incentive to incinerate instead of to landfill. It is evident that the chosen differentiation could not fully outweigh the differences in municipal fee rates. However, the Government's Plan of Action for Waste and Recycling for 1993-1997 proposed to ban the landfilling of waste suitable for incineration. In practice, also the loss of yield due to the parallel abolition of the tax on milk cartons played a certain role for the tax rate. The yield from the tax increase was stated at some DKK 122 million, so that the total yield from the tax now came close to DKK 600 million.

Refund scheme

With the amendment of the Act, the refund scheme for recycling companies was embraced in statute. This scheme had been introduced in connection with the waste tax increase in 1990. The background of the refund scheme is that the activities of recycling companies often generate a certain amount of residual waste which has to be landfilled or incinerated. According to the scheme, these companies were granted a refund on their waste tax of DKK 90/tonne, a rate which was increased with effect from 1993 to DKK 120/tonne and DKK 155/tonne for incineration and landfilling respectively. By not granting full refund for the waste tax, the incentive to prevent residual waste was maintained. The refund scheme does not cover construction and demolition waste, slag, and compost, and it is a prerequisite that industrial reprocessing of materials takes place (Bemærkning to L70; sp. 1826).

Waste imports from Germany

Also waste imports from Germany played a certain role at the 1992 amendments. This was evident as the Act stated that plants only receiving imported waste must be registered. The Act also stated that an increase in the tax rate was supported by the argument that total disposal costs in Germany (around DKK 7-800/tonne) would increase interest in exporting to Denmark. With the tax increase, total disposal costs in Denmark (municipal fees and state tax) remained, however, below the German level.

Step 4: Tax reform in 1993

Green tax reform

In connection with the conversion from personal taxes to green taxes, which was part of the tax reform, a further increase in the waste tax rate took place, however not taking effect until 1.1.1997. In connection with this increase, a further differentiation of the tax was made, so that from 1997 a distinction is made between incineration plants with and without energy recovery in the form of power or combined power and heating generation. In December 1996, the waste tax was further increased by DKK 50/tonne for all three categories.

1997: DKK 335/tonne for landfilling

Since 1.1.1997 the tax has amounted to DKK 335/tonne waste going to landfill, whereas the rate for incineration with heating generation and a minimum of 10 per cent power generation has been DKK 210/tonne. For other incineration the tax is DKK 260/tonne. As the major part of Danish incineration plants have combined power and heating generation, the latest changes mean in practice an enhanced differentiation by DKK 75/tonne and DKK 125/tonne respectively, where the differentiation between landfilling and incineration used to be DKK 35. The increases in 1997 represent a significant increase especially for landfilled waste, from 195 DKK to DKK 335/tonne, corresponding to an increase of 72 per cent.

Summary

Mix of environmental and fiscal motivations

The waste tax is meant to serve environmental purposes, but more exact environmental effects of the waste tax were only estimated for the increase that took effect in 1990. For the other increases, reference has been made to action plans for waste and recycling. Especially the increase in 1993 clearly seems to be marked by fiscal considerations, as the objectives stated for tax differentiation (balancing of costs of landfilling and incineration) and for the increase (limiting the import of German waste for incineration) are not followed consistently at the design of the tax. With the increase and enhanced differentiation that came into effect in 1997, however, this situation was remedied.

Legislation and rules

Waste and waste streams are carefully regulated through legislation and plans, and the waste tax is far from the only instrument affecting different waste fractions. At the increase in the waste tax rate in 1990, the Minister for the Environment called the tax a locomotive for the effort, and this illustrates the perception that the waste tax does give a general economic incentive to reduce waste amounts and increase recycling, but at the same time there are a number of other rules regulating waste streams. These regulations are briefly described below. It is not intended to give a comprehensive outline of legislation in the waste area (can be found in Basse, 1995), but to clarify which waste types are covered by special regulations influencing the management and choice of waste treatment method. Some regulations were introduced parallel to the waste tax, while others have been introduced later. As the outline shows, most regulations are related to special and, by weight, mostly less important waste streams.

Tax exempt plants

Certain waste treatment plants are not covered by the obligation to register, and as a consequence waste going to these plants is not taxable:

Plants for destruction of oil and chemical waste (hazardous waste): Since 1972, a collection scheme for oil and chemical waste has been in effect.

Plants for the incineration of hospital waste (clinical risk waste).

Incineration plants for sewage sludge: The exemption for sludge incineration plants was abolished with effect from 1.1.1997.

Sewage sludge can be applied to farmland if it complies with specified limit values. In this case, sludge is tax exempt.

Plants for the disposal of power plant residues: Special plants for the disposal of residues from power plants based on fossil fuel, i.e. slag/bottom ash, fly ash, TASP and gypsum are tax exempt. As from 1.1.1997 the exemption has been extended to also comprise power plants based on biomass. Under the terms of a Statutory Order of 1983, slag and fly ash may also be used in building and construction works and thereby be exempt from the waste tax. Also slag from incineration plants used for building and construction works is tax exempt.

It is possible to deliver sewage sludge and residues from power plants and incineration plants to registered plants, but in this case the waste is taxable.

Contaminated soil: Special plants for the disposal of contaminated soil are exempt from the waste tax.

Tax exempt waste types

The following waste types are not covered by the waste tax:

Straw, which is transported to incineration plants in clean, separate loads.

Clean wood waste and wood chips from wood-processing industry transported to incineration plants in clean, separate loads.

Clean soil filling and clean soil used for covering at registered landfills.

Hazardous waste and hospital waste in special loads to conventional incineration plants.

Waste covered by other regulations

Special collection requirements

Under the terms of the Danish Statutory Order on Waste and one special Statutory Order (Statutory Order on food waste from catering centres) local councils must assign or collect the following waste fractions for recycling:

	paper, cardboard, carton and cardboard materials and products made of cardboard materials from enterprises and public and private institutions,
	waste transport packaging in the form of plastic from enterprises,
	steel drums from industrial and commercial enterprises,
	newspapers, magazines and similar as well as glass packaging from private households,
	food waste from catering centres.

For the following products, deposit and return systems, charges or taxes have been introduced to ensure separate collection:

packaging for beer and soft drinks. A separate Statutory Order requires the establishment of a deposit and return scheme for such packaging.

rechargeable NiCd accumulators. A former voluntary agreement on collection, financed by a small fee, did not show satisfactory results and was replaced in 1996 by a tax financing a reimbursement scheme directed towards collectors.

a fee on lead accumulators finances a subsidy for collection.

a fee on tyres for motorbikes, private cars, vans and small trucks finances a subsidy for collection.

Furthermore, agreements have been made on recycling the following products:

PVC is covered by an agreement with the plastics industry which includes the establishment of a private recycling scheme for PVC construction materials.

Construction and demolition waste - an agreement has been made between the Minister for Environment and Energy and local councils that they must issue regulations on recycling construction and demolition waste (detailed requirements for regulations are given in circular no. 94 of 21^st June 1995).

Circular no. 132 of 13^th June 1996 on municipal regulations on disposal of CFC-bearing refrigeration equipment stipulates that local councils must establish assignment or collection schemes for CFC-bearing refrigerators to ensure environmentally acceptable disposal and recycling.

Also, environmental taxes exist with the purpose of regulating the consumption of products:

Packaging tax is a specific tax on refillable bottles and single-use bottles, differentiated according to material and volume. The tax supports the use of recyclable packaging.

Disposable tableware; the tax amounts to 50 per cent of the gross price before VAT.

Raw materials tax was introduced in 1989 and amounts to DKK 5/cu.m. The purpose of the tax was to supplement the waste tax incentive to recycle construction and demolition waste.

Energy taxes are not directly related to the waste area. Waste incineration is exempt from energy and CO2 taxes, but SO2 taxes are charged.

Regional and local monopolies

The waste tax gives a price signal to players in the waste sector concerning society's assessment of waste as an economic externality. However, the waste sector is a complex network of players who have a relatively well defined inter-relationship. Transactions among them are institutionalised through regulation of the waste area. As a result, the waste management market is not a free market with complete competition and full transparency, but a market characterised by regional and local monopolies, with complex control and planning instruments resulting in difficulties for players to act with economic rationality. One feature worth mentioning is the very different conditions of waste disposal for households and enterprises.

The waste tax is calculated and levied by plants receiving the waste, i.e. incineration plants, landfills, landfills for inert waste etc. Most such plants are municipal, but there are also many small private plants (landfills for inert waste). In addition, some enterprises have their own landfills or incineration plants.

Collection or assignment

Waste producers are either covered by a collection scheme or an assignment scheme. The definition of a collection scheme is a scheme where the local council is responsible for collecting waste. An assignment scheme is a scheme where the local council assigns treatment plants, but the waste producer is in charge of transport to the plant.

.....but professional carriers

Both for municipal collection schemes and assignment schemes, it is rarely the case that each waste producer brings their own waste directly to the treatment plant. If a producer is not covered by a collection scheme, it will often choose to contract with a waste carrier. In this way, most waste producers will pay a total sum for waste disposal, comprising both direct disposal costs (rent of containers, collection, transportation and treatment fee) as well as the state waste tax.

By law, local councils are under an obligation to establish a collection scheme in areas with more than 1,000 inhabitants. This obligation derives from the historic responsibility of local authorities to take care of waste disposal, and it also serves the environmental purpose of ensuring citizens economically efficient collection and disposal, with prices based purely on costs. Often, several local councils operate joint intermunicipal waste companies, but both in the case of municipal and intermunicipal waste disposal, these companies normally use private waste carriers and collectors.

Horizontal and vertical integration

The need for collection and transportation of waste has brought about an independent market for purchase and sale of services. Whereas operators used to be mainly carriers, in recent years we have seen more private waste companies operating as "turnkey" contractors. Through EU tenders, these companies compete with traditional municipal companies on delivering services in the waste market. The market is characterised by both horizontal and vertical integration. The largest of these enterprises also operates its own plant for the disposal and treatment of waste, but in general, such plants are operated by the local council.

The principles underlying transactions in the "waste service market" have a big impact on internalisation of the incentives from the waste tax in these transactions.

Collected waste

Waste collection fees

For the collection of waste (domestic waste and some recyclable waste fractions) from households and enterprises, the local council normally fixes a waste collection fee. This fee must be fixed according to the non-profit cost-coverage principle, on the basis of total disposal costs, i.e. initial and operating costs of collection, transportation, treatment and taxes (state waste tax and VAT). The waste collection fee may be fixed as a total fee covering several different schemes. The local council may also, in part or totally, finance waste expenses via taxes on real estate (see also Basse, 1995: 399-412).

It is important to bear in mind in this context that the fee is rarely fixed on the basis of weight, but more often on the basis of volume, e.g. per unit of collection. This means that the waste tax - which is calculated per tonne - is often integrated in a fee calculated on the basis of units of collection according to volume.

Formally speaking, the fee is payable by owners of real estate. For tenants, the cost is integrated in the rent. Legislation on cost-based rents regulates the calculation principles for tenancy and means that the full waste collection expense may be passed on to the tenant (often with a delay). For owner-occupied flats the fee will often be integrated in the contribution to the residents' association.

Waste tax = 13-16% of fee

The tax only makes up part of total disposal expenses. In the comments to the Act from 1986 on the implementation of the waste tax, it is stated that annual waste collection expenses per household are estimated at some DKK 500, whereas the tax (at that time DKK 40/tonne) was estimated at some DKK 35 annually (Lovforslag nr. L176, sp. 4433). With today's prices - around DKK 1,200 in waste collection fees for a one-family house, and a considerably higher waste tax - the waste tax is estimated at a somewhat higher share. With an annual waste generation of some 1 tonne/household and depending on residual waste amounts per capita in the municipality and on the treatment form, it will amount to DKK 160 to 195 or 13 to 16 per cent of the waste bill. With the 1997 increase, the share will increase to 18 to 28 per cent.

Tax payable by companies

However, the waste tax aims rather at waste companies. This view is also reflected by the comments to the Act on the implementation of the waste tax:

"For household waste, a tax on final disposal will make it more profitable for the waste collection services in each municipality to establish recycling and separation systems. For each tonne of waste delivered for recycling, the waste collection services will save the corresponding fee". (L176, sp. 4426; italics by author)."

As waste companies calculate fees for their services according to a cost principle and also have a monopoly on local collection, it has been questioned (in economic literature on public service companies) whether they have an economic interest in minimising costs. However, waste companies' fees must be approved by the local council; there have been examples of direct delegation of pricing to the companies in municipal regulations on waste (which is hardly in compliance with legislation, cf. Basse, 1995), but considerable increases in costs of waste disposal, water supply, wastewater treatment etc. have led local councils to also see these expenses as part of the municipal tax burden, which means that councils try to find ways of lowering such costs.

Assigned waste

Assigned waste = freedom of choice

When it comes to assigned (non-collected) industrial and commercial waste, enterprises have a certain freedom of choice between plants and disposal forms.

Waste which can be used directly by other enterprises, for example so-called homogeneous by-products, may be delivered directly to other enterprises.

For other industrial and commercial waste types, enterprises must comply with assignments in the municipal waste regulation. It depends on local conditions whether separate waste fractions are assigned to one or more named plants, or whether certain types of plants are assigned. The Guidelines from the Danish Environmental Protection Agency on disposal, planning and registration of waste state that according to the Danish Statutory Order on Waste, enterprises have freedom of choice for recyclable materials (Miljøstyrelsen, 1994). Enterprises may, however, be ordered by regulations to deliver certain waste fractions for recycling.

Competition influences prices and fees

Often, enterprises will use one or more carriers, and the interest shown in industrial and commercial waste has meant that municipal and private waste companies compete to a certain extent in the waste-service market with regard to helping enterprises dispose of their waste. In cases of vertical integration between carriers and treatment or recycling plants, there will hardly be transparency in the relationship between actual cost components and prices offered. If carriers or treatment plants can find a market for recyclable waste fractions, this will have an impact on the price offered to the enterprise. Actual waste disposal costs, also for recyclable materials, will consequently be determined to a certain degree by the competition in the local waste service market.

The result is that for assigned industrial and commercial waste, the waste tax will be internalised to a certain degree - and thereby become invisible - in transactions between the players in the waste service market. If the enterprise uses only external carriers, the waste tax will, however, normally be specified separately on the invoice.

Analytical description

Analytical description of waste market

Transactions in the waste market are determined to a certain degree by the institutional framework shown in figure 3.2.

There are three options for waste disposal: landfilling (L), incineration (I) and recycling (R). The waste producer (P) is limited by rules and agreements on collection and fees, and it cannot estimate the price relationship between the three options. The transaction is arranged through the institutional structure illustrated in the centre of the diagram. The local council (LC) plays a central role. Firstly, it decides the design of the local disposal structure, i.e. treatment by incineration or landfilling, and waste fractions to be collected separately. Secondly, the local council decides in its waste regulation (WR) the relation between collected and assigned waste. Thirdly, the local council establishes a waste company or contracts with such a company (CO), and determines the market for private operators (PO) or carriers (CA). Finally, the local council fixes waste collection fees. Waste producers' situation depends on the form of payment of waste disposal which may be made via the owner (OW).

Choice of waste management is made within a given framework

Waste producers must make their choices within the framework given for waste disposal. Here, a number of other cost components will play an important role for both waste producers and professional players in the waste sector. How much does it cost to operate a recycling plant and what is the sales price of collected and processed material? How expensive is it to operate an incineration plant compared to a landfill, and what are the revenues from the sale of power and heating from such a plant? How much does it cost for the waste company to collect waste and can this task be subcontracted totally or in part? What are the possibilities of minimising waste amounts through in-plant recycling or sale of by-products? What are the transport costs related to recycling compared to transport costs of landfilling or incineration, for example if the recycling plant is located in another region? Which system has the local council chosen for levying fees for collected waste, and how is the tax reflected in this fee? It is not surprising that the waste tax is only one of may components of the price of waste disposal. And it is difficult to determine the share of the tax component in relation to other elements, as this will depend to a large extent on the different waste fractions.

See figure 3.2 Look here

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