Centre for Economic and Market Analyses recently published a study dealing with circular economy. The text “The Efficiency of the Waste Sorting System in the Czech Republic – International comparison” deals with collective system of extended producers’ responsibility for packaging waste. The analysis focuses on theoretical (economic) aspects of the problem, deals with organization and efficiency of the Czech system and compares it with chosen EU countries – Germany, Austria, Slovakia and Netherlands. Main findings are mentioned in the summary below:

Theoretical foundations:

• Waste management represents a unique regulation laboratory. That is no exaggeration. The common target of the collection, separation and recovery of packaging waste, which is set on EU level, is fulfilled by the individual member states by means of various regulation tools. Consequently, we can see in the member states different systems that achieve different results. This is the reason why this topic offers ample space for comparing the effectivity of different regulation tools in different countries.

• Negative externality is a result of such behaviour when subject A generates costs for subject B, but subject A does not bear any responsibility for it. Due to the nonexistence of compensation, negative externality is considered a market failure. Negative externalities can often be found in areas with an impact on the environment. The elimination of negative externalities by spontaneous negotiation (Coase theorem) rarely happens due to the unrealistic conditions; that is why political targets are set and fulfilled by state intervention.

• Human action is based on free will. If a political target is explicitly set down (e.g. in the very field of waste management), it falls within the area of secondbest solution, i.e. the area in which human action is influenced by regulation, which generates artificial (perverse) motivations for the individual actors.

• Regulation in the field of packaging waste management is most often based on an extended responsibility of the packaging producers (Extended Producer Responsibility – EPR). It is the producers who have to ensure control over the entire cycle of the packaging material used in their business activity, including the collection and recovery of packaging waste (this is the Polluter Pays Principle – PPP).

• Producers can choose whether to arrange the collection of “their” packaging waste themselves, or whether they use the option of sharing the costs of the collection network through a Producer Responsibility Organization (PRO). Managing packaging waste by means of PRO systems achieves very good results in terms of the set political targets.

The Czech Republic:

• The European Union sets binding targets in the area of packaging waste management (60% packaging recovery and 55-80% recycling, for specific materials: glass 60%, paper 60%, metals 50%, plastics 22.5% and wood 15%). The targets can be modified (tightened) by member states. The current recycling targets in the Czech Republic are set at 70% for glass, 70% for paper, 37% for plastics, 50% for metals and 15% for wood.

• Most packaging waste producers in the Czech Republic have joined the collective system of extended responsibility, whose PRO (EKO-KOM, a.s.) the packaging producers own as well as control. The system has been in operation in the Czech Republic since 1997. There are more than 20 thousand companies participating in it that provide packaging waste collection, using over 250 thousand containers for sorted waste.

• In terms of the officially reported recycling rates, the Czech Republic is among the most successful countries. Praised as the key attributes of the system are the transparent setting of the system, identical conditions for all partners in the system, sufficiently dense and accessible collection network for separating packaging waste, and an increasing willingness of consumers to separate waste.

  • Producers involved in the system of joint fulfilment EKO-KOM placed in the market in 2014 a total of 2,979,976 tons of packaging, out of which 921,799 tons were non-returnable and 2,058,177 tons were returnable packages (according to EKO-KOM records).

  • There was a total of 1,019,805 tons of non-returnable packaging waste reported in the Czech Republic (according to CENIA records – the number includes packaging wastes of companies that are part of the collective system as well as companies that deal with their responsibility individually).

  • 690,047 tons of non-returnable packaging was recycled or recovered within the collective system in 2014, which is equivalent to 75% recovery rate (and 40.5 kg recovered packaging wastes per citizen – 72% more than in 2005).

  • In total, 801,207 tons of non-returnable packaging was recovered or recycled, 744,280 tons of which was material recycling, 6,016 tons were used for energy and 50,911 tons were combusted in waste incineration plants with energy recovery.

  • The total packaging recycling rate in 2014 was 73% and the recovery rate was 78.6%, which – in comparison to the previous year – means an increase of recycling rate by 3.1 per cent (69.9% in 2013) and of recovery rate by 3.9 percent (74.7% in 2013).

  • There has been a long-term increase of the recycling rate of packaging wastes in the Czech Republic in all materials, with the exception of some year-on-year fluctuations.

  • In the long term, the most widely recycled material is paper/cardboard. In 2014, 88.6% of the produced paper wastes was materially recycled and a total of 93.2% was recovered (in the collective system EKO-KOM 89% paper packaging was recovered). In the collective system, the second most recovered material was glass (89%) and plastics were the third (67%).

  • But according to CENIA records, the second most recovered material in 2014 were plastics (72.9%, packaging waste recovery rate increased by 1.4 per cent from 2013) and the third was glass (71.6%, recovery rate decreased by 3.4 per cent compared to 2013). 71.6% of glass and 58.2% of plastics was materially recycled.

• The analysis suggests that a substantial advantage of the Czech collective system is that the motivations of the individual actors are considered in the setting of the system itself: the PRO is non-profit and is owned by the obligated industry, but at the same time the PRO itself does not manage the wastes and does not own them. That eliminates some potentially negative motivations on the side of the PRO (for a detailed discussion see chapter 4). On the other side is the centralized system of fund redistribution, which helps under the same conditions to restrict some negative motivations of municipalities and market operators (for a detailed discussion see chapter 5). Last but not least, the clear demarcation of responsibilities and regular audits and inspections of all parts of the system make it relatively transparent.

• There is a risk in every collective system; the number of free riders, i.e. actors that do not participate – financially or otherwise – on the working of the system. It is estimated that in the Czech system about 5% of companies avoid responsibility for consumer packaging, in the case of industrial packaging, it is 10% of companies. In the context of EU countries, this is an exceptionally good result, but the improvement (or not worsening) of this situation presents a major challenge to the Czech PRO system.

Abroad:

• In order to fulfil the set recycling targets, individual countries choose different forms and ways of organizing the system: a system with a producer responsibility organization (or state agency) and a system with competing organizations, different payment flows between actors (PROs – market operators – municipalities), different distributions of actors’ obligations, different system designs and degrees of competition on the level of collecting, separating and recycling.

• With regard to how the system of waste separation operates, EU countries can be divided into two groups:

  • Countries with a system operated by a single subject (16 countries): The Czech Republic, France, Belgium, the Netherlands, Ireland, Finland, Denmark, Norway, Sweden, Spain, Cyprus, Greece, Italy, Portugal, Hungary, Luxemburg

  • Countries with a system operated by competing subjects (12 countries): Austria, Germany, the United Kingdom, Poland, Estonia, Romania, Lithuania, Latvia, Slovakia, Slovenia, Bulgaria, Malta

• Suitable for a comparative analysis seem to be the countries with similar characteristic features (political goals, cultural environment, economy, settlement density, consumption, climatic conditions, etc.) but a different organization of the systems for collecting and recycling waste. That is why the countries selected for analysis in the study were Germany, Slovakia, the Netherlands and Austria.

• Germany:

  • The German system of packaging waste management based on the principle of EPR is among of the oldest. Several times changes in legislation radically altered the form of the systems – the German system has worked both monopolistically and competitively, both on the level of PROs and market operators.

  • There currently work two parallel systems of packaging waste collection. The first is a deposit system for drink containers, and the second is the Dual System that covers the remaining packaging waste.

  • The deposit system for drink containers was implemented in 2003 and it covers single-use drink containers of 0.1 to 3 litres for mineral water, beer, mixed alcoholic drinks and refreshment drinks. The consumer pays a deposit on purchasing the drink and is refunded this deposit on returning the container.

  • The Dual System was created in September 1990 as a parallel system to the existing system for collecting communal waste. DSD (Duales System Deutschland GmbH), the originally monopolistic PRO, was first created as a non-profit organization for negotiation between the producers of packaged goods and the government. But the short time horizon for ambitions targets, inexperience, insufficient capacities for processing of plastic packaging, the low quality of collected packaging waste and the free-rider problem soon brought the system to great financial difficulties and a deficit of 400 million DM was generated. Some collection companies agreed to provide financial assistance to the system in exchange for exclusive ten-year contracts and other benefits. That led to a rapid growth of the costs of the system in the following years.

  • The ten-year contracts of collection companies were released in 2003, which broke the monopoly of market operators and introduced competition among them – which had a positive impact in a significant drop of system costs. In 2006 the market opened to competition also on the level of PROs, but in terms of costs, it was competition among collection operators that had a major positive impact. Competition between PROs brought a number of problems in later years, including decreased transparency and increased transaction cost of all involved.

  • The major problem of the German system arises from the fact that the costs of the collection network are shared by the PROs. They have to contribute to the system proportionally to their market share, which is determined by the licenced packaging quantity. This naturally creates motivations for fraud in the licensed quantity and for decreasing the cost burden. It is made easier by the complexity and opacity of the whole system. The non-transparency of the system also helps the free-riders among obligated producers. The problem culminated in 2014 when, according to some estimates, the difference between the licenced and the real quantity of produced packaging reached up to 60%. The German government had to react by tightening a number of regulatory conditions.

• Austria:

  • Like the one in Germany, Austrian system of packaging waste collection has a long history. The first PRO – Altstoff Recycling Austria (ARA) was established in 1993. Its activities cover packaging waste produced by both the industry sector and households. Originally, ARA had monopoly in both sectors. Its monopoly in the industrial sector was broken in 1996. Following the changes in the packaging act, Austrian market with household packaging waste was also opened to competition in 2015.

  • There are currently 7 PROs in Austria. All of them are active in the industrial sector and 6 are active in the household sector as well. Nevertheless, ARA is still dominant in both sectors – it covers approximately 80 % of the market, the rest is shared between other competitors. Since ARA is a non-profit organization, all its profits are used to lower the costs of obliged companies through lower tariffs. Other PROs are profit oriented.

  • Austrian Waste Management Act prohibits duplication of collection infrastructure. Incumbent PROs are required to make an agreement with a PRO already operating in the area. Together, they share the costs according to their market share. If the owners of the collection infrastructure are municipalities, PRO deals with them directly. Current division of collection infrastructure will be in effect until the end of 2017. During 2016, areas of operations (within regions) will be split among PROs with the use of lottery based on their current market share. Thus, a new division of the market among PROs will be in effect since 2018.

  • While municipalities are responsible for household waste collection, collection of sorted packaging waste is not among their responsibilities. Nevertheless, they are still an integral part of the system because PROs use their collection infrastructure or the services of municipal waste collection operators. Austrian municipalities are organized in the so-called waste management associations on several administration levels, among other things with the purpose of coordination of activities in handling of waste and gaining stronger position in negotiations with PROs and the Ministry of Environment. Organization of municipalities in the waste management associations (there are 220 of them) is one of the good aspects of the system. It decreases bureaucratic and administrative burden and also improves position of smaller municipalities in negotiations.

  • ARA tariffs for plastic packaging have increased since shortly before the introduction of PRO competition in the sector of sorted household packaging waste. This phenomenon can be explained by the increased costs due to the necessary collection infrastructure innovations following the new challenges and stricter conditions set by the changes in the Waste Management Act.

  • The impact of competition has been negative so far, since the system costs have increased by approx. 6 % (8 % for plastics). Only the clearing house alone, which administers all contract documents and reporting among all market actors, employs 55 people. A big challenge for the Austrian system, especially with respect to costs, will be the year 2017 – the contracts will be auctioned to municipal and private waste collection operators.

• Slovakia:

  • The European Packaging Waste Directive (94/62/EC) was implemented in the Slovakian system in 2003 through the packaging and packaging waste law (n. 529/2002). This act also introduced the principle of extended producer responsibility.

  • Since its inception, Slovakian system has been set as competitive at the level of PROs. There are currently 12 active PROs. Their services are used by obliged companies, whose packaging output on the market exceeds 200 kg per year. The collection of sorted packaging waste is also supported by the Recycling Fund, which is a non-governmental organization existing parallel with the PROs. The fund is financed by contributions from some of the obliged producers, nevertheless, unlike the PROs it does not guarantee fulfillment of the set recycling and recovery rates.

  • Since 1. 1. 2016, a new version of packaging law is in effect that will dissolve the Recycling Fund by the end of the year. At the same time, it creates stricter conditions for the operation of PROs. The major reason for the restrictions have been non-transparent transactions with certificated amounts of recycled waste. Furthermore, all PROs have to be now non-profit and will have to finance 100 % of the system costs. All the financial flows will flow at the level of PROs and waste management firms.

• The Netherlands:

  • The principle of extended producer responsibility was introduced in the Netherlands in 2006. Originally, producers’ obligations were fulfilled via tax on packaging materials. It obligated producers with the packaging material output exceeding 15 000 kg per year. Given the excessive administrative burden for smaller companies, the limit was later increased to 50 000 kg per year. Raised contributions were then used to finance 100% of the system costs while also providing significant revenue to state treasury. In 2011 the revenue from the tax was 21.8 EUR per capita. However, only 6.9 EUR per capita was needed and used to cover the costs of the recycling system.

  • Since 1. 1. 2013, the tax has been replaced by direct contributions to the monopolistic PRO (Packaging Waste Fund). The obliged industry contributions to the fund are based on clearly defined tariffs for respective material types. Only producers with the packaging output above 50 000 kg per year are obligated to pay. By paying the fund, obliged producers delegate their responsibility for fulfillment of set recycling and recovery rates on the PRO.

  • In the Netherlands, municipalities are responsible for collection of sorted waste. The PRO covers their costs according to the amount of recycled packaging waste and standardized costs. Therefore, municipalities are motivated to enter into economically beneficial contracts with waste market operators. Since 2015, municipalities also take over the responsibility for collection and separation of plastic packaging waste, which was originally in competency of the PRO.

Conclusions:

• The choice between competition and monopoly on the PRO level does not seem to have a significant impact in terms of costs (from the point of view of obliged producers). Among the compared countries, the highest costs are in Austria (20.5 EUR PPP per capita). The lowest costs are in the Czech Republic (7.3 EUR PPP per capita) and the Netherlands (7.5 EUR PPP per capita). Relatively high and low costs can be found both in the competitive and monopolistic systems – there does not seem to be a significant noticeable difference between the two. The majority of costs is actually concentrated in the collection, transport and also sorting and recycling – in areas, that are usually shared by PROs and thus individual competing PROs cannot significantly influence them. Therefore, there does not seem to be space for price differentiation.

• Among the potential risks accompanying a move towards a system with more competitive PROs are additive regulation that sets new system conditions, increased costs in the context of intensified bureaucracy among actors (contracts, invoices, financial flows among all PROs and municipalities) and also increased motivation of actors towards unproductive spending in order to secure better position (rent-seeking). The notion that the competitors will cooperate but at the same time act like nonprofit organizations is not rational. Therefore, deterioration of conditions for small and medium firms and municipalities are a real possibility. Experience shows that market mechanism are not, quite logically, working in regulated markets – for example, lottery is often used to simulate objective division of the market.

• There does not appear to be a significant difference between monopolistic and competitive PROs even with respect to the officially reported recycling and recovery rates. Contrary to the usual expectations, competition among PROs does not bring significant advantages in comparison with a monopolistic system. Moreover, the developments in Germany show that competition among PROs brings many potential disadvantages – higher transaction costs, lower transparency and thus more opportunities for free-riding (of both the obliged producers and PROs) and discrimination of smaller producers in case of improperly set rules.

• Rather than competition at the PRO level, the degree of competition among waste collection operators and the overall design of the system with respect to potential negative motivations of all actors seem to be more important. In this context, the Czech system seems to be especially well designed – it is transparent and it incorporates a system of financial transfers that are designed to decrease the negative motivations as much as possible.

• Even though the competition among waste collection operators seems to be crucial for effectivity of the system, as indicates the analysis of the Czech system, it does not always work universally. Despite being open to competition, some areas may be able to accommodate (keep profitable) only limited number of competing operators. Furthermore, while sometimes appearing highly competitive, some markets can be in fact deformed by cartel agreements. Moreover, the situation in Germany and Austria also demonstrates that a change from monopoly to competition at the level of PRO requires a well-designed regulation in order to limit the negative impacts, especially the negative motivations, free-riding and transfer of costs on public budgets (municipalities).

• The above arguments imply a conclusion that cooperation of municipalities with providers of communal waste management services can be sometimes a more cost-effective solution.

General comparison of collective systems with monopolistic and competitive PROs

International comparison: Analyzed countries and criteria of their recycling systems of sorted packaging waste

Note: Rating on scale +++, ++, +, -, –, —, n/a. +++ signifies that with respect to the particular criteria the system works well in comparison with the systems in other states. — signifies major deficiencies in the system. n/a signifies a lack of reliable sources for qualified assessment.