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Tradable Quotas for Waste for Incineration and Landfilling

2 Summary and conclusions

• 2.1 Introduction
  • 2.1.1 Negotiable/transferable/trading quotas as a resource
  • 2.1.2 Experience from other quota systems
  • 2.1.3 Possible quota systems
  • 2.1.4 Organisation/Preparation
  • 2.1.5 Interaction between existing legislation and organisation
  • 2.1.6 Import and export of waste
  • 2.1.7 Evaluation

2.1 Introduction

The establishment of a quota system makes it possible to directly regulate the amount of waste for incineration and land filling thereby ensuring that political goals are achieved. There is, at present, no Danish or foreign experience on the use of tradable quotas for waste for incineration or land filling. The aim of this project is to make an initial evaluation of the possibilities to introduce regulation in connection of tradable quotas.

The project identifies possible designs for quota systems including key elements in the design of a quota system, interaction with current organisation and legislation within the waste sector, and evaluation in relation to tax setting and administrative obligations.

This is the preliminary project, and the main focus has been placed on providing a broad description of possibilities of and limitations in a quota system. A more detailed description and evaluation of the individual elements of a quota system do not fall within the scope of the project.

Substantial information has been collected on experiences gained particularly on projects promoting waste recycling. The aim has been to provide an indication - although somewhat conservative - of the possibilities of stabilising the amount of waste for incineration and land filling, as well as an indication of possible price levels for the various quotas. These efforts were prioritised in order to obtain an initial evaluation of the options and costs in connection with stabilising the amounts of waste deposited and to assess the risk of exorbitant taxes/charges in a potential quota market. The estimate of the amounts and costs is a conservative one, as readily available information is limited.

2.1.1 Negotiable/transferable/trading quotas as a resource

Quotas aim directly at regulating the amount of waste for incineration or land filing. A set quota provides the holder with the right to incinerate or deposit a tonne of waste for a specific year, and the state issues, for example, on an annual basis, a number of quotas which correspond to political goals for the amount of waste for incineration and land filling.

In order to ensure flexibility, it is crucial that the quotas can be converted/traded. Those who have difficulty in reducing the amount of waste for land filling and incineration should be able to buy quotas from those who are better able to reduce waste amounts, thereby making the system flexible, when seen from the individual actors' viewpoint, without losing the primary objective.

Tradable quotas are economic instruments, equivalent to taxes, distinguishing themselves, however, by one marked feature. Quotas directly control the amount of waste deposited, while taxes indirectly control the amounts deposited through pricing. Tradable quotas also provide a price/cost indicator via the price/tax set for specific quotas, however, this price cannot be pre-determined as it is dependent on the number of quotas issued and the development of waste amounts. With quota regulation, the amount of waste for incineration and landfills is known beforehand, but not the cost/price to be paid by the individual actors. With taxes, the situation is reversed, the cost/price is known beforehand, but not the amount of waste for incineration and landfills.

Under optimal conditions, both ttaxes and tradable quotas would then provide the same result. With the price mechanism both instruments have similar effects, however a quota system could possibly focus more attention on waste production and its removal than would ttaxes. This is mainly due to the fact that the cost of waste disposal is often a relatively modest amount of a company's total production costs, and households and small waste production centres, in practice, are seldom directly confronted with the actual costs of waste disposal, as they are paid for through an annual fee. The process of evaluating the need to buy waste quotas could increase focus on waste disposal in companies and municipalities, referred to here as the "retina effect". If the quota system is flexible and quotas are easily accessible, it could alter focus on this particular area.

2.1.2 Experience from other quota systems

There is documented experience on quota systems in other areas, such as CO2 emissions in the USA. This experience cannot be directly transferred to the Danish waste sector, but can be used as an example showing that a well designed quota system demands flexibility, and the need to include trading companies and similar sectors, as well as clearly defined rules

In 2004, Great Britain plans to introduce quotas for organic waste collection and land filling in order to meet the requirements of the EC directive on land filling of waste. The responsible authorities (municipalities and counties) are to be allocated quotas which will allow them to deliver organic household waste to landfill sites. Waste for incineration will, however, not require quotas. There is a marked difference in the situation between Great Britain and Denmark with regard to organic waste disposal in that Denmark already meets the EC requirements and does not allow land filling of organic household waste. Furthermore, there are also fundamental differences between the existing waste legislation in the two countries, in that the Danish legislation covers both waste disposal and incineration.

In order to implement the EC packaging directive of 1994, Britain established a certification system which has evolved into a system of negotiable certificates for recycled packaging. The national environmental authority issues standard certificates which document that packaging waste has been recovered, so-called PRN's (Packaging Waste Recovery Notes). Companies which have to meet specific recycling requirements can choose to either re-use packaging material or purchase PRN's. Certificates are purchased from manufacturers or through an electronic stock exchange, and the scheme is assessed to have reduced costs substantially by encouraging generators to attain the goals set.

2.1.3 Possible quota systems

A quota system is defined by a number of factors, a major one of which is the actors affected by the system. The system should be designed so that it provides the key actors with a clear incentive to reduce the amount of waste for incineration or land filling. Three basic models, taking the key actors into account, have been considered:

1 A system based on municipalities and manufacturers with a large waste production

2 A system based on waste disposal sites and incineration plants

3 A system based on waste generators

Municipalities and waste generators have the largest possibility of reducing the amount of waste for incineration and land filling, while waste disposal sites and incineration plants have less influence on the waste flow. In the light of this, focus has been placed on a quota system based on the municipalities and manufacturers generating large amounts of waste.

2.1.4 Organisation/Preparation

Distribution of quotas: The desired number of quotas is issued for an appropriate period, e.g. one year at a time. The quotas are distributed among the municipalities or waste producers, either by sale or simply as a grant.

Several aspects are in favour of selling quotas, as opposed to grants If the quotas are given to municipalities and waste producers, waste ttaxes must be maintained, if the state is to retain its level of income. By selling quotas, the state will generate an income that replaces the current waste tax system. If the authorities sell quotas, detailed knowledge on waste production for the individual municipalities and waste producers is no longer necessary. If, on the other hand, the quotas are simply given away, the requirements to be met by the authorities with regard to knowledge on the waste production of the individual producer will be extremely high. If quotas are issued to existing producers, it could increase the risk of distorting competition and make it more difficult for new companies to establish themselves.

A precondition for the success of a quota market is that the possibility for individual actors to misuse the system and influence prices and/or quantity of quotas is removed. A well functioning market will involve a minimum of actors and rules which promote competition.

Electronic registration: In practice an electronic registration system where the individual actors' quota stocks are registered together with information on the purchase, sale and use of quotas can be established.

Quota market: Irrespective of whether quotas are granted or sold, actors should be able to trade with each other, e.g. directly with each other or through a stock market designed for this purpose. However, smaller companies could be at a disadvantage when dealing directly on a quota stock market, and it could be better or them to use the services of a transport or trading company. This will reduce the company's or municipality's administrative burden, but, in return, their own involvement in the transaction will be considerably reduced and their response towards the quota system will not differ much from the effect of e.g. an increase in waste ttaxes. The difficulty will be to ensure a flexible system with a limited administrative burden, whilst at the same time ensuring a high degree of commitment from the individual companies and municipalities.

Number of actors: It is not possible to predict the number of actors that will be seriously engaged in a quota market. Possible actors are municipalities and companies holding contracts with a haulage contractor or a trading company, haulage contractors and others dealing on behalf of their customers. In a rough estimate, 275 municipalities, 100 - 1000 companies with a large waste production and up to 500 haulage contractors and trading companies could participate in a quota stock market.

2.1.5 Interaction between existing legislation and organisation

Quotas in relation to assignment and utilisation: Waste quotas are "added2 to the existing waste system, so that actors are required not only to meet assignment requirements but must also to obtain a quota in order to have waste incinerated or landfilled. The quota is a preconditions for having waste incinerated or deposited at a landfill, but is not necessarily a guarantee. The guarantee for access to disposing waste will still be based on municipal waste allocation requirements, in other words, the municipality's obligation to secure sufficient waste incineration and/or landfill capacity.

Utilisation and generation of capacity at incineration plants and landfills: If waste quotas work according to plans, which is to stabilise or reduce the amount of waste generated, incineration plants and landfills will, both initially and over a longer period of time, either utilise present capacity or reduce capacity. Similarly, the amount of energy generated will correspond to the amount of waste disposed of. These consequences are related to political goals for stabilising or reducing waste production, or the amount of waste for incineration and landfills, and increasing the recycling of waste products.

Significance of liberalising the waste sector: The quota system is, in principle, not related to a possible liberalisation of the waste incineration and landfill system. If the municipal waste assignment requirements are retained at a level which allows the municipality to dictate waste treatment forms but not the location at which the waste is to be treated, the decision on whether a specific waste type is to be incinerated, landfilled or recycled will still be made by the responsible authority. The authorities will, however, not decide which treatment plant is to be used.

2.1.6 Import and export of waste

Waste imported for incineration and landfilling will be subject to quotas just as imported waste is subject to waste taxes. If waste for incineration can legally be exported to other countries at a lower cost (including the purchase of quotas for incineration and disposal) it will be a more attractive economic alternative to disposing of waste in Denmark.

New EC directives indicate whether or not waste incineration is regarded as recovery. According to these directives, incineration of waste at industrial production plants, where waste is used as an energy source, is considered as recovery of waste, such as combined incineration, i.e. the use of waste as an energy source together with other fuels. However, incineration at a treatment plant is considered to be disposal, irrespective of whether the plant produces heat or energy. The EC has, however, recently proposed a supplement to the packaging and waste packaging directive, which recognises that waste incinerated at waste treatment plants which generate heat or electricity is considered to be recovery. It is not fully clear how EC regulation and interpretation thereof, together with the general Danish ban on import and export of waste for disposal, will affect the import and export of waste for incineration.

Available information on the import and export of green waste (i.e. waste which according to transport regulations is not subject to registration prior to export) is limited. It is therefore difficult to evaluate whether the administrative changes will lead to an increase or decease in the amount of green waste treated in Denmark.

A possible liberalisation of waste incineration and landfilling system might lead to a discussion whether the Danish ban on import and export of waste for disposal should be lifted.

2.1.7 Evaluation

Quota prices: Waste producers will have to decide between procuring a quota allowing them to incinerate or landfill waste, or alternatively, to reduce their waste production. If the waste producer focuses on costs, he will choose to buy additional quotas if it is cheaper than reducing waste production for incineration and or landfills, and, alternatively, to reduce waste production if it is cheaper than buying additional quotas. In this way the price of quotas is expected to reflect the marginal costs of reducing waste for incineration and landfilling.

The costs of increasing recycling and of reducing waste generation are not immediately clear. An important activity in this project was therefore to collect existing information on costs in connection with activities/measures to reduce the generation of waste for incineration and landfilling, for instance through increased waste recycling.

The evaluation shows that the amount of waste can be stabilised at its present level by setting quota prices at the same level as waste taxes. There is however a great deal of uncertainty with regard to assessing the potential for reducing the amount of waste and the related costs. The evaluation is based on (some) of the present options, and much care is needed in the assessment of the long-term price. On one hand, continued requrements to maintain or reduce waste amounts would require increased quota prices, on the other hand the possibility of reducing or limiting waste generation could, over a period of time, generate interaction between quota prices.

Prices on a future quota market will vary over time and among actors. Major actors with greater insight into the waste sector will have better opportunity to buy and sell quotas at favourable prices and at favourable times than those who do not follow the market closely. The cost of transactions to purchase and sell quotas can also vary between large and small actors. A distribution effect between actors with regard to the quota system can also be expected, but the extent is not known at present.

Administrative responsibility: Substantial administrative and transaction tasks can be anticipated in relation to the introduction of the quota system contra the existing tax system. The exact extent depends on the design of the quota system, which is not yet known. Certain tasks will be a direct result of the quota system, while others will be related to the additional work needed to reduce waste amounts for incineration and landfilling and fulfilment of political goals.

Administrative tasks to be performed by environmental authorities will mainly relate to the development and maintenance of the quota system, including electronic registration, processing of complaints and supervision and sanctioning of infringements. The administrative tasks will be greatest if the environmental authorities issue the quotas themselves, but a marked increase in administration tasks in initiating the system can be anticipated, even if an external party is ultimately responsible.

Municipalities and companies with a large waste production will have to bear additional administrative tasks in evaluating the need for and actual purchase of quotas. Furthermore, expenses connected to the transaction should be expected, e.g. payment of commision in connection with the auction or use of broker.

Haulage contractors or trading companies who buy quotas for their customers undertake an additional task which entails expenses in connection with the purchase of quotas as well as internal costs for identifying the need for permits. On the other hand, the administrative tasks for their clients will be reduced.

Landfills and incineration plants must be involved in the control of the amounts of waste received and in the registration of quotas. The need for a more systematic registration form than at the present system must be expected, and the exact administrative needs will depend on the design of the registration system.

On the whole, a marked increase in administrative and transaction costs in connection with the quota system, for both authorities and other actors in the waste sector, must be anticipated. The extent of these costs will be greatest in the initial phases of the quota system.

Unintentional environmental consequences: The aim of a quota system is to stabilise or reduce waste for incineration and landfilling. The increased pressure on the individual waste generators to reduce the amount of waste collected could induce uncontrolled waste disposal. Experience from municipalities relating to weight based taxes shows a reduction in the amount of waste collected, but an increase in the amount of uncontrolled waste deposited at lay-byes, on roads, in recreational areas as well as illicit incineration of waste in solid fuel kilns and furnaces. Some larger waste producers could react to the more stringent regulations by exporting waste or by relocating waste generating production outside Denmark..

Conclusions:

• Taxes and the quota system are both economic instruments with many similar qualities. There are two reasons to consider the quota system:
  1. Authorities will know future waste amounts for incineration and landfilling. However, there will be some uncertainty with regard to quota prices. With taxes they will know the cost, but there will be uncertainty with regard to its effect on the amount of waste for incineration and landfilling.
  2. The quota system could focus attention on waste production and removal for larger actors because the system requires that they consider the purchase and sale of quotas, the so-called retina effect. This retina effect provides an incentive to reducing waste amounts through quota prices, similarly to that of taxes.
• The retina effect is dependent on the active participation of municipalities and companies in the quota system. Those who leave the purchasing of quotas to e.g. haulage contractors and trading companies will focus less on the quota system, and the retina effect will be reduced, however the regulatory effect will be achieved via the price mechanism.
• The state can issue quotas free of charge or sell them. If, in order to minimise competition, the authority's administrative tasks can be reduced and state proceeds can be kept at a level corresponding to existing taxes, the sale of quotas e.g. via auction will be favourable.
• A system of tradable quotas for incineration and landfilling will cover the same actors as the existing waste tax and will in many instances have the same function. Therefore it appears to be more beneficial to replace the tax system with a quota system than to supplement it, even if it is possible to maintain both simultaneously.
• A quota system should be designed so that it includes those actors that can reduce waste amounts, so that it limits distortion of competition and possible misuse of power, and so that the administrative burden is minimised. Therefore, focus has been placed on a system that includes municipalities and companies with a large waste production and which, with consideration to administration, allows the participation of trading companies, haulage contractors and others to buy and sell quotas.
• A quota system supplements existing organisation and regulation. Presuming that the quota market is competitive and that monopolies are prevented, the quota system will not affect existing requirements on allocation and use and will only affect production and treatment capacity via the reduction of waste amounts in accordance with political goals dictated by the system.
• A quota system may include imported waste, corresponding to other waste types. A recent EC decision of the court probably indicates that the export and import of waste for incineration and incineration plants will be restricted or stopped while the export or import of waste for combined incineration in industrial production plants will be retained. This has, however, not been clarified and depends on ongoing work within the EC.
• A possible liberalisation of treatment plants will not be dependent on the quota system as long as municipalities dictate the treatment form, but not the treatment plant.
• An evaluation of quota prices is subject to great uncertainty, as information on the possibility of reducing waste amounts for incineration and depositing is limited, and information on the costs of these disposal forms is modest. An evaluation based on existing treatment systems indicates, however, that waste amounts may remain stable if quota prices are the same as present taxes. There is, however, a risk of high marginal prices on quotas. This risk can be limited by establishing a price ceiling.
  The quota price will develop over time, on one hand quotas will increase, on the other new technology and focus on waste reduction will reduce waste production. Advantages may initially be uncertain, but the proceeds will probably not be lower than with the present tax system.
• A quota system will increase administrative costs as well as trading costs, compared to waste taxes. The additional tasks will effect environmental authorities, municipalities, companies, waste treatment plants and other actors within the waste sector. The extent of this effect will depend on the design of the system.
• There is a risk that more stringent monitoring will increase uncontrolled disposal of waste, such as illicit incineration and depositing of waste at lay-byes, recreational areas, etc. The introduction of the quota system must therefore be accompanied by corresponding measures in municipalities, so that the individual households and other waste generators have an incentive and the possibility of reducing waste generation, and are,, thus, not induced to use illicit means of disposal. Furthermore, there is a need for increased supervision in order to reduce uncontrolled disposal or illegal export of waste.

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Version 1.0 Januar 2005, © Miljøstyrelsen.