CSEC 402 Theorising Environment and Culture

Dave Haynes - January 2001

Producer Pays Principle: Can market forces be used to select less environmentally damaging technologies?

Table of Contents

Introduction

The Free Market Approach

- Eco-Labelling

The Reformist Approach

- Upstream Combined Tax and Subsidy

- Extended Product Responsibility

The Interventionist Approach

- Producer Take-Back Requirements

- Unit Based Pricing at the Consumer Stage

Radicalism

Conclusion

References

Producer Pays Principle: Can market forces be used to select less environmentally damaging technologies?

Introduction

It was recently said "Why aren’t we taking the stuff that comes out of the power station flue stacks, putting it in a pipe and sending it off to bury it in the hole in the ground where it came from?" (Bellamy, 2000). This view echoes that of many people, despite it being one of unrealistic frustration. What was expressed though is the essence of many of the mechanisms proposed to reduce the impact of commerce and industry on the environment. That is one of being responsible for a commodity throughout its life. A complex web of environmental issues has a direct and indirect bearing on human society. Most of the decline in environmental quality is as a result of anthropogenic activities in the developed societies directly, or indirectly by the export of environmentally maligned technology to developing societies. The ongoing detrimental effects, in the most part could be arrested, if not reversed, by actions of society. However the immediate monetary cost to adequately address these issues is exclusive and so best use must be made of those resources that are more readily available. Principally, public consensus is the source of change, magnified through government, non-government organisations, or in the market place itself. This document examines the central tools for reducing adverse anthropogenic effects on the environment. Particular examples given are of systems in the producer/retailer/consumer realm, although the principles reviewed can be equally applied in other polluting activities.

Various alternative approaches are available that may present means of reducing the impact placed by developed and, to a lesser extent, developing human societies on the natural environment. Three systems within the conventional market-state are presented here, Free Market, Reformist and Interventionist. A fourth, Radical, is so alien to the market principle that it is only mentioned very briefly for completeness. Any solution to the question raised above will implicate the three traditional systems to some degree, each of which admit to commonalties with each other.

The Free Market Approach

The process of trade consists of at least two parties, one offering something that the other wants, with some recompense being paid as a result. Both parties’ view of the arrangement is the same, that they receive most in return for giving least. On the face of it therefore, it would seem unlikely that using free market systems, with a purely selfish view, any positive environmental effects could possibly result. However consumers have more depth than this simple ‘take most, give least model’. Perhaps this became more so in the second half of the 20^th century when there was a shift from an all consuming work lifestyle for the masses, to an era of increased disposable income and associated leisure time. With this change comes an increase in broader environmental altruism.

The Free Market approach as a means to promote good environmental stewardship depends on consumers making environmentally responsible decisions, not only the most economic. Part of this process is that consumers have access to as near perfect information as possible, they must be offered access to perfect product or service information at the point of purchase. This would include knowledge of all alternatives and the environmental impacts. Likewise, for this approach to be environmentally responsible, producers of the products and services must have full and honest competitor information. To this end the European Environment Agency is well suited to the role of information gatherer. The EEA was established in 1993 with an initial remit limited to data collection and the collection and standardisation of monitoring.

Eco-Labelling

The eco-label is an indication to consumers that a product meets certain environmental criteria, whether in sourcing, manufacture, use or ultimate disposal. This has international support as a voluntary, that is to say, Free Market, method of encouraging production processes that have maximum ecological sustainability with minimum impact on biodiversity and the environment in general. The principle of eco-labelling relies on coincident decisions by consumers and producers. Supporters of the voluntary use of eco-labels argue that when consumers reveal a willingness to pay for products that have lower environmental impact than alternatives, a market will be generated. In turn, an increasing number of producers will naturally exploit this new market through environmentally responsible manufacturing with a view to attaining an eco-label. In order to administer the eco-label system, a fee must be levied for certification, producers adopting it purely for market reasons and not by regulation. It is therefore usual that certified goods carry a surcharge, in part due to the certification fee, making them more expensive than the alternative unlabelled items, and in part due to differences in production. This surcharge can be regarded as an acceptable premium attached to eco-labelled products.

Certification can provide strong incentives for environmental responsibility although there is a delicate balance between this and achievability. The requirements for the award of an EU eco-label for personal computers are one such example. The decision document (European Commission, 1999) includes criteria relating to energy efficiency, upgrading, recycling and environmentally sound disposal. Oddly, the manufacturer is only obliged to guarantee that the monitor will last one year.

Several European countries have their own national schemes such as Germany’s Blue Angel with 4000 product awards, the Scandinavian Nordic Swan, 3000 awards, and the Austrian scheme, with 440 products certified. The EU’s own eco-label, the Flower award, has not had the same success, with only 250 products gaining certification since the scheme was set up in 1992. This is in part due to the certification fees initially levied, set at 0.15% of the product retail price but without upper limit. The EU therefore revised the scheme at the end of 2000 such that a cap on registration fees now exists allied with the possibility of discounts for small businesses. Other particular problems discourage the adoption of eco-labelling schemes. Where the sector is dominated by a few large companies, the competitive advantage bestowed by certification is much reduced. Also, criteria attached to some eco-labels are so stringent that they are almost totally exclusive. Washing machines, for example, struggled for some time to gain certification and less than one percent of light bulbs qualify. The ability for a scheme to adapt to technical improvements and changes in the market is imperative for successful adoption. To this end, ecological criteria for EU awards are established for a period of three years thus allowing for revisions. The EU Flower eco-label scheme, although suffering from a slow start, will become the standard that member states work to. The German system, although successful, suffers by being tailored for that state, and politically, it is inevitable that EU states will prefer an EU-wide system. Having said that, the Deutsche Industrie Normen, DIN, standard for industry proved to be a very satisfactory international standard for several decades.

Various more specific eco-label schemes exist. In the United States, the Energy Star symbol is the established symbol for energy efficiency and is awarded by the U.S. Department of Energy and the U.S. Environmental Protection Agency to a wide variety of energy consuming appliances. Products qualify for the Energy Star label if they meet energy efficiency criteria, such as electricity consumption in stand by mode for video recorders or energy conversion efficiency of central heating boilers. The Energy Star system is promoted to the manufacturers on the basis of several points. By showing increased environmental leadership along with associated enhanced corporate image and differentiation from competitors, the manufacturer is given better opportunity for increased sales and profits. For retailers, publicity increases through access to a wider range of advertising campaigns. This is supplemented by the increasing brand awareness of Energy Star products and the increased profile that environmental responsibility can bring. Both manufactures and retailers have the additional benefit of training and additional support. For the consumer, care for the environment may be important but perhaps for most, the reduced energy use may be more important, especially with high consumption appliances. Currently over 7000 products carry the Energy Star label. A further strengthening of Energy Star as an eco-label has recently occurred following an agreement with the EU to enable Energy Star to appear on all new office computer equipment sold in the EU. Furthermore, as a the EU will therefore effectively be a new stakeholder in Energy Star, all future revisions will be jointly agreed by both USA and EU.

Timber should be the most environmentally responsible consumer product available. Growing trees provide a carbon sink, especially the more vigorous younger trees. The presence of forests combined with the flora and fauna that they attract, provide a valuable recreational resource whilst the finished product finds many uses from construction components to furniture. However conflicts often are inherent, with the environmentalists’ concerns of ecological damage contrasting strongly with image given by timber producers of responsibility through activities such as tree planting. Timber has long been labelled if only to show what its stress grade is. More recently, additional information has appeared which hints at environmental responsibility. This may be that the brand name incorporates the word ‘certified’ or the claim is made that more trees are planted than harvested. Whatever this information is, it is worthless unless it can be quantified subjectively. This is only made possible by an independent third-party verification. The Forest Stewardship Council (FSC) addresses this. The FSC is an example of a very specific eco-label, applying as it does to timber production and extraction. Formed in 1993, it represents a wide spectrum of interested parties, including indigenous populations, environmentalists, the timber industry and certification organisations. The FSC is a non-profit making, non-governmental organisation and as such can act in an independent and environmentally responsible manner. The FSC does not directly certify producers but it provides a means of evaluating and accrediting certifying agencies, thus giving an overview of international standards. This mechanism allows the particular interests of that region to be addressed, without losing touch with the overall picture. The FSC has ties with timber certification organisations in 25 countries, through which it also provides public information about the certification tool. Environmental groups and businesses share a consensus that certification of forest products has positive effects. For award of a certificate, the producer must demonstrate that environmentally appropriate, socially beneficial and economically viable management of forests has taken place, all of which encourage sound forest management and conservation. Producers agree that this is all ultimately good for business.

Concerns may be raised that eco-labelling may reduce profits if firms also serve a non-certified market with certified goods. This does not necessarily follow because, as the market share of eco-consumers increases, so to will the profits of producers, offsetting any losses in the non-certified sector. More than this, the model of Sedjo and Swallow (1999) suggests that even non-certified manufactures may benefit. This model also suggests that in the case where the demand for eco-labelled products is small in relation to the total demand, along with significant certification costs and low demand resulting from certification, then it is unlikely that a price premium will attach through certification. This situation changes if certification costs are reduced and raised demand is created by labelling, to the extent that two price bands can coexist, that is certified and non-certified. The two-price situation can in turn lead to over supply in the non-certified market and attendant losses to those producers without certification.

The use of eco-labelling may be a good incentive to persuade producers to adopt environmentally responsible processes. It is necessary however, to ensure that a correct balance exists between the certification costs of labelling, the ensuing price premium, and the consumers willingness to pay, which is directly influenced by the benefits that consumers perceive through buying certified products.

The Reformist Approach

On the premise that the free market left to its own devices will not satisfactorily follow the environmental path, reformists argue that financial measures are needed to change the route of commerce. These would be in the form of subsidies and taxes, depending on the environmental effects of the business. In the mid 1990’s, the European Commission proposed shifting the emphasis from personal taxation, such as Income Tax and National Insurance, to taxation on energy sources. However, this carbon tax proved unpopular because it caused a substantial increase in indirect taxation without any attendant benefits. The reformist view, taking the business as usual stance, is therefore proposing small changes in tax policy as a means to influence incremental improvements in the environment. Opponents of the reformist approach would argue that this tinkering is merely delaying the inevitable collapse of industry (Tokars,1987).

Charges are preferred by industry to ‘command and control’ legislative approaches as more flexibility is available. Low and high polluters are satisfied without lowering environmental quality standards. Where the cost of installing abatement equipment is more than the fines without installation, the high polluters have the option to pay the charges as a cost for their emissions. Conversely, lesser polluters avoid the charges by funding the lower cost of abatement technologies. However, there may be a tendency for the income from the pollution charges to be used as fund raising for governments rather than as a disincentive to pollute. This has been the case with the UK government in recent years, with the increased duty on fuel, labelled as an environmental tax with the goal of discouraging car use. Funds raised have simply been lost in the government’s coffers. funds such as these should be specifically ring-fenced for pollution reducing projects such as public transport initiatives.

The pollution taxing system has one disadvantage in that it can be bypassed completely in some cases, such as solid waste disposal. A producer of ‘bads’ such as an asbestos insulation removal contractor, is obliged to take the waste to approved disposal sites, paying premium fees per unit weight. Coupled to the charging, fines can be levied for illegal dumping. This is the weakness of the system as an unscrupulous company can completely bypass all charges if they use a third party to pass off the material as household waste at a ordinary municipal facility.

Upstream Combined Tax and Subsidy

Deposits on the product prior to purchase and subsequent refund is a long established method of encouraging correct disposal. Glass lemonade bottles are one such example of this, but this needs reusable bottles and also common return centres. Both of these are becoming rarer as plastic single use bottles predominate and supermarkets are unwilling to accept returns. The reformist ‘carrot and stick’ principle can be used to address this problem through ‘upstream combination tax/subsidy’ (UTS), (Palmer, Sigman & Walls, 1997). This combines a tax on the bulk intermediate products, such as paper bales, aluminium ingots and plastic precursors, with a subsidy for recycling of the final consumer products. As the tax component of UCTS is levied prior to final production and is based on the weight of throughput, it encourages a reduction in weight produced and a focus on designing for environment (DfE). The tax rate would increase with difficulty of post-use recovery and likewise, the recycling subsidy would be more lucrative for the harder to recycle materials. This should adequately deal with the argument for using lighter weight materials such as polystyrene in preference for more responsible ones such as cardboard. The recycling subsidy in UCTS encourages the replacement of virgin raw materials with recycled. However, this can make production costs lower thus actually producing more waste. The tax and subsidy components need careful adjusting to avoid this.

Extended Product Responsibility

This is a general principle applying to life-cycle responsibility all along the product chain, in particular, relating to environmental impacts. Extended Producer Responsibility (EPrR ) however is more focussed, applying only to post-consumer waste disposal and producer responsibility. EPrR can be used as a means of adjusting waste management responsibilities towards the original producer, thus taking some load off local councils. Furthermore, DfE can be encouraged, resulting in, for instance, redesign of products to use less raw materials, packaging reduction and increasing product recyclability. A workable reformist goal may be to address both ends of the product life cycle. Taxation at the input should discourage use of virgin materials and replacement of ‘dirty’ processes by cleaner ones, whilst subsidy at the output should encourage recycling and waste reduction.

The Interventionist Approach

Although the interventionist view is also dependent upon the pure free market, unlike the reformist position, the use primarily of sticks is suggested as being the way forward. Here, no trust is given in the ability of the market mechanism to be environmentally responsible. Using the brute force of legislation, the market is directly controlled and regulated, and thus damage caused by production and consumption is reduced.

Producer Take-Back Requirements

With incentive for environmental responsibility, the producer take-back mechanism bears many similarities with the reformist UCTS. Legislation stipulates that producers take back products at at the end of a products life. An extension of this is for the state to set recycling targets for producers, thus ensuring that take-back is able to achieve goals of reducing actual waste production.

It is in the commercial interest of producers that they choose the most cost effective material process for products, without necessarily designing with consideration to the post-consumer stage. This can make recycling difficult, as materials may be difficult to handle or products hard to disassemble. An example of this is the electrical industry where heavy metals such as cadmium play important roles but are later considered as toxic waste. Likewise, use of different plastics processes throughout production of consumer goods can make recovery difficult. Take-back systems can therefore encourage DfE which manufacturers would otherwise have little incentive for.

In practice, it may be unworkable for a producer to respond individually to end of use recovery and disposal and therefore an agent, or ‘producer responsibility organisation’ (PRO), is appointed by the industry. This agent will employ local contractors for collection, sorting and recycling. The packaging industry in Germany is one example of this, with producers being charged by the PRO for take-back services, with charges varying with material type. On the basis that waste is hence an internal cost throughout the product life, a strong incentive for DfE is attached. It is thus possible to not only force producer take-back, but also by stipulating recycling targets, to encourage waste reduction. Some form of take back requirement now regulates various sectors of consumer industry. The car, electrical/electronic and packaging industries are just three examples of take back and these are outlined below.

Automobiles are one of the greatest sources of pollution in the industrialised world, but paradoxically, the automobile manufacturing industry has the potential to reach some of the highest recycling rates. In 1997 the Swedish government became the country to implement legislation forcing its car manufacturers and importers to take back their own cars for scrapping. Cars sold before the law was enacted may have a nominal charge made for this service however scrapping of any car sold after the law came into force will be entirely at the manufacturers cost. The automobile recovery rate for Sweden in 1997 was 75% rising to 95% in 2015. Recovery includes re-use, recycling or energy recovery incineration. These figures are similar to the EU scheme, although with a shorter timescale. With this kind of legislation, onus is strongly on the manufacturers to produce environmentally responsible cars, including post-consumer fate.

One of the major obstacles in take back is the electrical and electronic (EE) equipment industry. The increasingly throw away nature of these goods makes them an important waste problem, not so much because of volume, but because of the high energy input into production, persistence and in some cases, toxicity of some components. In 1998, Norway introduced take back legislation for waste EE equipment, known as ‘electroscrap’. By 2003, producers and importers will be compelled to take back 80% of electroscrap such as personal computers and white goods, for recycling or safe disposal, with consumers taking discarded items to dealers or local authority collection points from where transport will be to regional depots. The service is managed by importers and producers who will also arrange final treatment. A tax levied at point of sale, specifically identified as a recycling charge, pays for the service.

Packaging represents the major part of total consumer solid waste and when no further use is presented, landfill becomes the final destination for much of the material. Increasing pressure on landfill led Germany, in 1991, to become the first country to implement producer pays legislation specific to packaging. The Packaging Ordnance obliges manufacturers and retailers to take responsibility for recovery of this waste. The packaging industry therefore established a PRO, the Duales System Deutschland (DSD), which is a non-profit making waste management organisation. The duality stems from the division of collection between waste for recovery and waste for disposal, these being the responsibility of DSD and local councils respectively. By funding DSD to organise the collection, sorting and recycling of sales packaging, producers are eligible to display a Green Dot on their products. A variation on the free market eco-label, the Green Dot is a direct result of reformist legislation. Initially, some abuse occurred, with either non-subscribing producers using the Green Dot or the collection by DSD of unmarked products.

DSD proved to more successful than anticipated and by early 1993, up to 70% of products in German shops displayed the Green Dot. The unexpected enthusiasm of the German consumers, pushed sales packaging recycling past 50% within 18 months of the start of DSD. Plastic packaging exceeded capacity by four times and waste had to be exported abroad, to countries in eastern Europe and Asia, sometimes, as Greenpeace claimed, being dumped at sea. Even completed journeys did not always fulfil recycling expectations, with much being incinerated. Once teething problems were addressed however, the scheme became a model for others. German consumers now have the highest collection and sorting rates in the world . Since the mid 1990’s, the Green Dot spread to other countries, who established their own PROs under the guidance of an international licensing body, Packaging Recovery Organisation Europe (ironically, this PRO is known as Pro Europe). Eleven European states now use the symbol. With packaging recycling increasing, the associated consumption of associated raw materials declines, a drop of 10% in Germany. With the growth of the PRO membership symbol, DSD now embraces wider producer issues. Further to the legislation driven recycling rates, DSD is voluntarily expanding its remit to include ecological and economic resources management.

Take back requirements with recycling standards are theoretically not as efficient as UCTS for waste reduction (Palmer & Walls, 1997) and several other features show it to be weaker than the former. Setting up PROs can be expensive to establish, complicated to run, especially when many producers and disposal contractors are involved. Potential exists for a PRO to be misused as DSD experienced. Furthermore, the nature of the relationship between the PRO and its producers may be a monopoly, which is unacceptable. UCTS however has less costs and loopholes, primarily because it is using the current infrastructure, the only real new component is administrative. Oddly however, the very nature of subcontracting in business may however make it possible for a PRO to act within the UCTS system if financial gain exists.

Unit Based Pricing at the Consumer Stage

Part of the waste production problem in consumer societies is based on the lack of public interest in cause and effect. When people buy eggs at a supermarket, for example, they may have several criteria that influence their purchase. Retail price is important for many people as is egg grade although animal welfare and contamination are becoming increasingly relevant. Less consideration however is given to disposal of the packaging. Retailers use plastic egg cartons because they are cheaper than pulp based. The application of a suitable surcharge on these products can discourage their use. Taking this argument to the end of the consumer stage, Kinnaman and Fullerton (1998) propose that if a $1 surcharge were placed on the removal of each 145 litre refuse bag, domestic solid waste would drop by over 40%. This may instigate illegal tipping however this should be minimal and more than balanced by reduction, recovery and recycling that would be encouraged. Ultimately though, unit based pricing (UBP) should also encourage DfE as producers realise the ultimate economic sense of this. At the early stages of UBP, consumers’ disaffection with higher cost of waste processes would not necessarily feedback quickly upstream but this should change as the momentum of the system increases as more consumers are affected.

In closing this résumé of the interventionist approach, it can be seen, as hinted at the start of the essay, that a mix of the three main systems is likely. This is well illustrated with the German Green Dot scheme. To the consumer it is a free market eco-label of sorts but driven however by interventionist legislation. Producers in the USA are very worried that the Green Dot should cross the Atlantic and therefore, like the US coal industry’s protest against CO₂ reductions, have placed extreme pressure on government such that any form of EPR is unlikely to become law. Non government organisations in the US however present a free market method of instigating environmental responsibility. Environmental responsibility by stealth from the bottom up.

Radicalism

The dominant ideology of the free market and its underlying capitalist roots need, in the opinion of radicals, to be completely reassessed if any significant reduction in environmental damage is to be achieved. In keeping with the spirit of socialism, the radical approach espouses a move from competitive society, the source of most eco-damage, to a co-operative society based on partnerships. Radicals argue that the contemporary capitalist state is foreign to sustainability and that the establishment cannot be relied to bring about any change as it has not a record of doing so up to now.

Conclusion

The notion that those who originate industrial pollution can be not only called to account for it but also be encouraged to avoid it is relatively new. Legislation in California in the early 1970’s controlling car emissions may have sown seeds in the design for environment arena however the USA has not been the optimum place for their propagation. Europe is the key player in this issue with some potentially effective mechanisms in various stages of development. The highly successful Green Dot, spawned by Interventionist measures, has siblings which may represent future routes. From early 2001, Denmark will become the first country to introduce a tax on packaging that is directly related to the environmental impact of the material used. Based on experience gained in Europe, the PPP issues that have been dealt with under the packaging remit may be applied with equal success to consumer goods in general, subject to the correct infrastructure, state and public support.

The North – South disparity for global population and consumption is well documented, however a less obvious dichotomy is the Trans-Atlantic one that exists at the interface of rank consumerism and environment. Contrasting with a general acceptance in Europe, the USA, as the worlds largest single consumer, is to date unsympathetic to EPR. The reticence of the US to being tied to global controls on carbon emissions reflects its strong history of not being dictated to from outside the Union. This is further tempered by the strong political leverage that industry exerts on the government. The dwindling number of landfill sites that initiated the German EPR programme for packaging is a problem experienced to some degree throughout Europe, creating a state and public atmosphere that is amenable to environmentally responsible initiatives. The USA does not have the same restriction on land availability and therefore waste reduction is not an issue. Furthermore, the American consumer, places much less importance on environmental responsibility than a European would, instead considering price and function to be paramount. The USA, although spurning EPR, has some cases of voluntary measures, albeit with an eye to consumer appeal. Xerox, aware of public concern of the waste caused from used reprographic consumables, has set up a recovery and recycling programme which is to all extents EPR, and it makes the firm money. Likewise Duracell supply postage paid envelopes to return NiCd batteries. An example of stronger US consumer pressure is that of McDonald’s polystyrene food containers. Various environmental groups, including Friends of The Earth, lobbied the fast food giant throughout the late 1980’s until in 1990 the firm changed the packaging to paper wraps. On the wave thus created, the firm then went on to introduce other environmental initiatives including the use of unbleached brown paper carrier bags. An ironic twist to the strong opposition to EPR in the US is that its greatest opponents, such as Colgate and Coca-Cola are actively involved in running EPR in Germany through their subsidiaries.

In this current political socio-political climate, it can be seen that the Free Market system left to its own devices will make few moves in selecting less environmentally damaging technologies. Certainly, positive steps can be achieved, however they remain fundamentally piecemeal increments. Whether or not the Producer Pays Principle can be a market tool to select less environmentally damaging technologies fundamentally depends on the market in which its use is proposed. As has been demonstrated, free market methods such as eco-labelling are gaining some support throughout the developed world although the effect is relatively small, dependant as it is on the perceptions and ethics that consumers have. Reformism, using financial levers, has a higher profile, such as in the global carbon emissions field, however the seemingly non-sensical way in which big polluters can shirk their responsibilities by buying pollution credits, defeats the major goal of environmental benefits. This is especially so when the trading of these credits is on the one hand, potentially encouraging industrial growth in the ‘clean’ vendor country, whilst on the other hand, is not necessarily discouraging the ‘dirty’ purchaser country from producing excess emissions. The general success of Interventionist methods in the EU, notably Germany, suggests that use of legislation alone may be sufficient to achieve DfE and the attendant environmental benefits. PPP however can be initiated through either Reformist or Interventionist measures and will therefore be an important part, certainly in European initiatives. In the US, the stakes must reach a higher threshold before the hard legislation of Interventionism is applied. Prior to this, the softer options of tax and subsidy or the free market must be the tools of environmental responsibility.

References