Pass the parcel obligations

As we approach the end of the first full year in which companies obligated under the Packaging Waste Regulations have been responsible for the physical recovery of packaging waste, Nick Turner of consultants Ernst & Young summarises progress and asks - what next?

Few would disagree that over the last few years, the packaging waste regulations have been at the forefront of every boardroom environmental agenda. With several thousand obligated companies, little guidance for industry and regulatory uncertainty, companies have struggled to come to terms with their responsibilities. The fear of non-compliance, escalated by imminent deadlines and the requirement for technical information, has driven obligated companies into making all sorts of impromptu decisions. As we approach the end of the first full year of implementation, Ernst & Young have taken a short break to look back at developments and to try and answer three key questions challenging industry:

Even between compliance schemes, PRN prices for plastics vary by as much as £100/tonne

What are the business implications of proposed changes to the Regulations?

Are we demonstrating compliance at least cost?

How can we integrate compliance into routine operations and yield value?

Earlier in August the DETR published its review of the Producer Responsibility Obligations (Pack-aging Waste) Regulations 1997, which invited consultation on a number of proposed alterations designed to increase the environmental and cost effectiveness of the Regulations. As yet the results of the consultation process are unknown, although we understand that the interest from industry has not mirrored the 400-strong responses received back in 1996.

It is clear that progress made to date has been difficult to track, and although industry has a clearer understanding of its responsibilities, the way in which companies can effectively manage this issue is still ill-defined. Proposed changes to the Regulations will only further complicate this process.

This poses a number of problems. Firstly, the Regulations require the collection, exchange and submission of extensive technical documentation on packaging specifications. This exercise must once again be completed in early 1999. Not only is this time consuming, but costly, estimated by the Compliance Cost Assessment (CCA) to cost UK industry in the region of œ80 million per annum. This will rise significantly as more companies become obligated in 2000.

Proposed changes to the Regulations presented in the consultation paper hope to reduce the administrative costs by facilitating simpler data presentation and exchange formats, largely through a revised Schedule 4. However, should some or all of the proposals be adopted, this will have significant implications for obligated companies, directly affecting their existing data management systems.

Administration costs

If we take for example the proposal to encourage co-operation between sectors of the supply chain and in particular the provision for exchanging data on third-party exports, companies will quite simply have to track the sales channel for each and every packaged product. In practice, it will no longer be acceptable to group similar packaging materials or products, thus reducing and easing data collection, or assume that your buyer is in fact the consumer. In regulatory terms, each identical packaged product is in essence a unique item and to ensure data accuracy obligated companies will need to identify the source and destination of the packaging, and calculate the recovery obligations for each stock keeping unit (SKU). For our clients, including those handling several thousand product lines, the process of data collection is complex enough. By placing an obligation to collect information on each SKU, even the smallest operator will encounter disproportionately high administration costs.

Of course, data collection is only one issue on the agenda of our clients; more important is how best, and at what cost, can recycling and recovery targets be discharged. Perhaps the most significant proposal presented in the recent consultation paper is the suggestion of introducing separate recycling targets for household and commercial waste. Although the reasoning is clear, Ernst & Young have found that this alone will strongly influence the ability of our clients to discharge their obligations.

With an estimated 40% of all packaging waste ending up in the household waste stream, the UK recovery targets, focusing on commercial waste only, will need to recover 80% of all commercial packaging waste to meet the regulatory targets. Thus, household packaging waste recycling is critical to achieving compliance. However, only 7.5% of all types of household waste is currently recycled and the cost of household waste recycling is significantly greater than commercial recovery, largely due to the diversity of the source, the lower volumes generated per source and the higher impurities/contamination than commercial waste.

Household contributions

Current proposals suggest that in order to increase and finance household recycling, companies will need to discharge their obligations by contributing to the recycling of household waste, equivalent to 25% of their overall recovery target. If introduced, businesses will be unable to fully discharge their recovery obligations through back door recycling alone. In practice, all companies will need to source household recycling Packaging Recovery Notes (PRNs) and purchase these at a cost likely to be at least twice that of commercial waste PRNs.

This brings into question the whole subject of compliance routes, for example, should an obligated company register individually with the Environment Agency and commit to recycling waste and/or purchasing PRNs themselves, or register with a compliance scheme? Earlier this year, many companies assumed that for waste collected, sorted and delivered to a reprocessor, a PRN would be returned free of charge and that PRNs would only need to be purchased for the shortfall between tonnage recycled and the company’s obligation.

Working with our clients, we have found this is not the case. In many circumstances the PRN will only be issued after payment. For those companies who have recycled packaging waste for a number of years, often receiving payment based on the raw material value, the swiftness of the change is alarming.

PRNs have begun to function as tradable permits and until supply meets demand (recovery levels meet EU targets), obligated companies will try and purchase PRNs at least cost, reprocessors will try to sell at maximum price, and in theory both will settle at a price which is economic and sustainable.

The challenge to business is clear – to demonstrate compliance at least cost in an environment where the targets continue to move. So just how close are we to the targets?

Research completed by PIMO, the Paper Industry Material Organisation, which has collated the most recent data on packaging arisings and recovery, for all materials, suggests that the UK will fall short of the minimum 50% recovery levels by 2001. The extent of the shortfall is thought to be in the region of 6%, which equates to more than 500,000 tonnes of packaging waste. To further complicate matters, it is thought that the UK has also underestimated the total weight of packaging handled in the UK. Over the last 12 months, estimates of the annual packaging waste arisings have increased from 8.6 million tonnes per annum to a high of over 14 million tonnes, before settling at an estimated 11.7 million tonnes (most recently reported in the DETR consultation paper). Although the accuracy of this information must be questionable, as it is based largely on the data submissions from obligated companies following guidance simply defined as “reasonable estimates”, the increase has very real and costly implications for obligated companies.

Least-cost compliance

For example, if we assume that in the year 2001 the UK handles 11.7 million tonnes of packaging, the estimated shortfall will increase from the PIMO estimates to 14 percentage points or 1.3 million tonnes. However, if we take into consideration minimum recycling targets, the shortfall may appear as soon as 1999. So what does this mean for industry?

Logic would suggest that a shortfall in packaging recovery will lead to a surge in demand for PRNs, the main form of evidence of compliance, which will inevitably increase PRN prices, and of course as obligated companies frantically source PRNs, many will be left short and unable to demonstrate compliance.

Although this scenario is a real risk, many obligated companies will be unphased by such a suggestion. Why?

With almost 80% of obligated companies choosing to register with compliance schemes earlier this year, largely to eliminate any risk of non-compliance and remove the administrative burden of sourcing PRNs, their expectations of least cost compliance have not been met. In fact, by assisting clients to develop compliance strategies we have found that not only are PRNs freely available and tradable, but that their cost varies significantly. Even between compliance schemes, PRN prices for plastic vary by as much as œ100 per tonne. Put into perspective, obligated companies, unaware of fluctuating market prices, or indeed those which have put their faith in compliance schemes, may be contracted to purchase PRNs at inflated prices, potentially costing a company several hundreds of thousands of pounds.

This of course suggests that supply is greater than demand, that more packaging waste is being recovered than the UK is obligated for, and that we are exceeding the recovery targets.

This somewhat contradicts earlier calculations and future predictions of recycling rates, although some suggest that the apparent availability of PRNs is a result of fewer purchasers, indicating that perhaps 1,000 obligated companies are yet to source PRNs to meet their 1998 recovery obligations. A suggestion which will only be substantiated later this year.

With all this uncertainty, obligated companies will soon enter a new regulatory cycle, and of course have to re-visit and evaluate many of the decisions taken earlier this year. We believe that it is now time for companies to strategically assess their options, both by taking time to critically evaluate their existing compliance procedures (improvements can always be made), and through forward thinking. We are convinced that the real challenge is to dovetail packaging waste management into other environmental management practices and broader business processes, goals and objectives.

We remain confident that there is considerable scope for obligated companies to champion this subject and respond in a manner which not only demonstrates legal compliance but adds significant value to their business. But how?

In all this confusion, most have lost sight of the real focus for packaging waste management, being drawn into reactive management procedures whilst not addressing the benefits of effective management for all of their resources. Using packaging is a cost. Inefficiently managing waste packaging is a cost. Demonstrating legal compliance is a cost.

Packaging waste has become an environmental indicator linking the environment with financial performance. By applying this rigour to other environmental issues we can establish further links and move a step closer to meeting the challenge of integrating the environment into the business agenda.1

Essential requirements

On 31 May 1998, regulations providing provisions for Essential Requirements for packaging, including heavy metal content, came into force. Their introduction helps fulfil the requirements of the EU Packaging and Packaging Waste Directive introduced in 1994. The Packaging (Essential Requirements) Regulations, to become active as of the 1st January 1999, specify four main requirements:

Packaging must be limited to the minimum amount of material required to maintain the necessary level of safety, hygiene and consumer acceptance without damaging the functionality of the product. Those which satisfy the requirements must meet harmonised European standards (being drafted), or where these do not exist, national standards.

Packaging must be manufactured so that the presence of noxious and other hazardous substances is minimised in emissions, ash or leachate from waste management operations.

Packaging must be designed, produced and commercialised in such a way as to permit its recovery through at least one of the following methods:

material recycling

incineration with energy recovery

composting or biodegradation

Packaging may be designed, produced and commercialised for re-use.

In addition, the combined concentrations of heavy metals in packaging including lead, mercury, cadmium and hexavalent chromium are to be reduced in a phased programme, as follows:

600 ppm after 30 June 1998

250 ppm after 30 June 1999

100 ppm after 30 June 2001

The Regulations will be enforced by Trading Standards Officers, following guidance set down by the Department of Trade and Industry. Those obligated will largely include packer/fillers, brand owners and product importers, all of whom will be required to submit technical documentation demonstrating compliance with the Regulations should they be challenged by Trading Standards.

Further information can be obtained by contacting Richard O’Neil at the DTI.

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