Evaluation of waste oil management policies: the extended producer responsibility

Brazilian Journals of Business ISSN: 2596-1934 921 Braz. J. of Bus., Curitiba, v. 3, n. 1, p. 921-937 jan. /mar. 2021 Evaluación de las políticas de gestión de aceites usados: la responsabilidad ampliada del productor Evaluation of waste oil management policies: the extended producer responsibility DOI: 10.34140/bjbv3n1-052 Recebimento dos originais: 20/11//2020 Aceitação para publicação: 20/12/2020 Asunción Arner Güerre PhD in Economics (University of Zaragoza) Department of Applied Economics C/ Gran Vía 2, 50005 Zaragoza (Spain) Correo electrónico: [email protected] RESUMEN El Real Decreto 679, de 2 de junio de 2006, de gestión de los aceites industriales usados, establece la responsabilidad ampliada del productor (RAP). Para su aplicación se constituye el Sistema Integrado de Gestión de Aceites Usados en España (SIGAUS), sustituyéndose la financiación de la gestión de los aceites usados mediante subvenciones por los importes recaudados de la aportación del productor de aceites lubricantes. A su vez, el real decreto establece los objetivos medioambientales de recogida del 95% de aceites usados generados, valorización del 100% de aceites usados recogidos y regeneración del 55%, en 2007, y el 65%, desde 2008. La extensión de la RAP en 2015 a otros residuos, que contienen aceites usados, modifica la responsabilidad financiera de SIGAUS. Asimismo, en 2016, es necesario disponer de mecanismos de financiación adicionales, indexados a la cotización internacional de los lubricantes. Este trabajo tiene por objeto analizar la eficiencia de la RAP en la gestión de los aceites usados. La metodología consiste en la estimación de las elasticidades de oferta y demanda, así como el desarrollo de un modelo de equilibrio parcial, del mercado de aceites usados. De acuerdo con los resultados, la RAP constituye un estándar de material reciclado, basado en un sistema de permisos negociables, y es más eficiente que una subvención. El precio del permiso justifica la aportación del productor a SIGAUS de 60 € por tonelada. Finalmente, los resultados sugieren que la RAP garantiza la financiación de la gestión del aceite usado hasta 2015. Palabras clave: Aceites usados, Regulación medioambiental, Eficiencia, Responsabilidad ampliada del productor, Subvenciones. ABSTRACT Royal Decree 679/2006 of June 2 on the management of used industrial oils mandates the producer extended responsibility (EPR). For its implementation, the Integrated Waste Oil Management System (SIGAUS) is established, replacing the financing of the management of waste oils through subsidies for the amounts collected from the contribution of the producer of lubricating oils. In turn, the royal decree sets environmental targets for collecting 95% of waste oils generated, the recovery of 100% of waste oils collected, and regeneration of 55%, in 2007, and 65%, since 2008. The extension of EPR in 2015 to other waste, containing waste oils, modifies SIGAUS' financial responsibility. Additional financing mechanisms, indexed to the international quote of lubricants, are also needed in 2016. This work aims to analyze the efficiency of EPR in the management of Brazilian Journals of Business ISSN: 2596-1934 922 Braz. J. of Bus., Curitiba, v. 3, n. 1, p. 921-937 jan. /mar. 2021 waste oils. The methodology consists of estimating supply and demand elasticities and developing a partial equilibrium model of the waste oils market. According to the results, EPR is a recycled material standard (RMS), based on a negotiable permit system (NPS), and is more efficient than a subsidy. The price of the permit justifies the producer's contribution to SIGAUS of 60€ per ton. Finally, the results suggest that the EPR guarantees the financing of waste oil management until 2015. Keywords: Used oils, Environmental policy, Efficiency, Extended producer responsibility, Subsidies. 1 INTRODUCTION Royal Decree 679/2006 of June 2 on used industrial oils establishes EPR for the management of industrial oils used in Spain. Waste oils are hazardous waste and include all mineral or synthetic oils, industrial or lubrication, which are no longer suitable for the intended initially use 1 . Waste oils affected by Royal Decree 679/2006 are used mineral oils from combustion engines and transmission systems, lubricants, turbines, and hydraulic systems, and mixtures and emulsions containing them and excluding marine and aviation, process, and grease oils. The EPR, in the management of waste oils, means that manufacturers of lubricating oils must ensure the correct management of the waste oils delivered to them, companies, or workshops, to comply with the obligation of delivery of waste oils to authorized managers, as well as to cover the total cost of the management operations 2 . Royal Decree sets the ecological targets for collecting 95% of waste oils produced and the recovery of 100% of the waste oils collected in 2006. Besides, the regeneration of 55% in 2007 and 65% in 2008 of the oils recovered 3 . Additionally, Royal Decree 679/2006 imposed on manufacturers the obligation to develop a BPP to establish measures to prevent the environmental impact of industrial oil waste, to reduce its generation and to facilitate its valorization, preferably through regeneration or other forms of recycling, and to incorporate regenerated base oils into its composition 4 . Manufacturers of industrial oils can ensure the collection and management of oils if, together with other economic operators, they organize integrated management systems (IMS) 1 B.O.E. of June 3, 2006, No. 132. 2 Law 22/2011 of July 28 on contaminated waste and soils transposes Directive 2008/98/EC, the Waste Framework Directive, establishes a common legal framework for the implementation of the EPR (B.O.E. of 29, July 2011, No. 181). 3 Regeneration consists of removing contaminants, oxidation products, and additives containing waste oils for obtaining base lubricating oil (Angulo et al.,1996; Gómez-Miñana, 1993; LLobet Díaz, 1995 and Ramsden, 1995). The base lubricating oils, first refined or regenerated, are mixed with additives to achieve the quality and performance levels required to manufacture lubricants according to their destination (automotive and industrial uses). In Spain, the performance of installed technologies, or obtaining regenerated oil from used oil, ranges from 60 to 75%. Combustion, or waste oils as fuel, constitutes another form of recovery of the used oil, following a decontamination process. 4 Currently, BPP for the period 2018-2021 is in force (SIGAUS, 2020). Brazilian Journals of Business ISSN: 2596-1934 923 Braz. J. of Bus., Curitiba, v. 3, n. 1, p. 921-937 jan. /mar. 2021 authorized and controlled by the Autonomous Communities 5 . In 2006, the leading manufacturers of lubricants in Spain constituted the Integrated Waste Oil Management System (SIGAUS), by which financing the management of waste oils is carried out by the lubricant oil manufacturing sector. The funding for managing waste oils through public subsidies is replaced by the amounts collected from the producer's contribution to SIGAUS of 0.06 € per kilogram of industrial oil placed on the market. Currently, EPR applies to other waste. Royal Decree 110/2015 of February 20 on waste electrical and electronic equipment (WEEE) has meant that the responsibility for the oils contained in the residues of those products is transferred from the lubricant manufacturer to the manufacturer of those products. Consequently, it supposed a further allocation of responsibilities for waste oils subject to Royal Decree 679/2006. According to the 2015 market study, with the entry into force of Royal Decree 110/2015, SIGAUS' market share increases from 87.13% to 87.15%, and the fraud bag it voluntarily assumes, as majority IMS, namely free riders, decreased from 2.89% to 1.41%, of waste oil affected by Royal Decree 679/2006 6 . Consequently, new regulations on waste oils in WEEE modified the financing responsibility of waste oils for the first ten years. Besides, in 2016 the context of low oil prices has highlighted the need for an additional financing mechanism to cover the intrinsic shortfall in waste oil collection and management activities, according to the Independent Commodity Information Services Index (ICIS) 7 . In 2017, by Royal Decree 20/2017, of January 20, on end-of-life vehicles (ELV) wherein responsibility for oils contained in such vehicles is transferred to the manufacturer of such vehicles 8 . Economic incentive policies' efficiency in promoting the collection and correct management of waste oils in Spain has previously been studied in Arner et al. (2005, 2006b). The main finding was that an RMS, applied through a SPN, is more efficient than a subsidy because the marginal private cost (MPC) of an RMS is lower than the MPC of a subsidy. Besides, the IMS for waste oil is an RMS (Arner, 2010). After ten years of EPR in the management of waste oils, the objective of this work is to analyze the efficiency of this policy to determine the price of the permit and the contribution of the lubricant producer to SIGAUS, and its MPC, to update the data series. 5 Integrated waste oil management systems are the set of relationships, procedures, mechanisms, and actions which, subject to authorization and supervision by the autonomous communities in whose territorial area they are implemented, are performed by the economic operators concerned through voluntary agreements approved or authorized by or through collaboration agreements with the competent public administrations. 6 Independent market study conducted by the consultant independent PwC (SIGAUS, 2016,a). 7 SIGAUS (2016b). 8 In 2018, the market affected by different EPR regulations accounts for 83% of the total lubricant market of 462,573 tons. The remaining 17% correspond to greases, process oil, or marine oils subject to the Marpol Convention. The market share subject to EPR, excluding oil exported (in electrical and electronic equipment, components, and vehicles), corresponds to SIGAUS at 86.48% (including unidentified oils, 2.19%, and a margin of error of 0.1%); WEEE at 0.60%; ELV at 5.38%; IMS independent producers (SIGPI) at 6.56%, and Automotive imports at 0.99% (SIGAUS, 2020). Brazilian Journals of Business ISSN: 2596-1934 924 Braz. J. of Bus., Curitiba, v. 3, n. 1, p. 921-937 jan. /mar. 2021 The methodology for assessing the efficiency of the EPR consists of developing a partial equilibrium model of the waste oils market and calculating the incidence and MPC of this policy. The empirical application to IMS of waste oils in Spain consists of estimating a cointegration equation between the variable amount of waste oils intended for regeneration, WOR, and the first refining base lubricating oils price, in nominal terms FRP, using Dynamic Ordinary Minimum Squares (DOLS). According to the results, the EPR is more efficient than a subsidy being, respectively, the MPC of these policies -1.25 and -1.55. In turn, the price of the permit, equal to 0.86 euros per ton, allows obtaining the value of the lubricant manufacturer's contribution to SIGAUS, of 60 euros per kilogram. The work has the following sections. Subsequently, the economic literature review on the efficiency of economic incentive policies in waste management. The next section presents the analysis of the efficiency of EPR in waste oil IMS. Section four and five are referring to the empirical application to the Spanish waste oil market and results. The last section summarizes the main conclusions. 2 REVIEW OF ECONOMIC LITERATURE From an economic perspective, waste generation is conceptualized as a negative externality derived from production and consumption activities. The payment systems for waste generated allow internalizing these costs and generating the optimal amount of waste. However, this policy creates a clear incentive for illegal dumping and incineration (Jenkins, 1993). Alternatively, to reduce the amount of waste to be disposed of, economic analysis considers policies that promote recycling. The main incentives are deposit-refund systems (DRS), taxes on natural raw materials, recycling subsidies, and RMS. The DRS is defined as the combination of a product tax and a recycling subsidy. Various authors (Dinan, 1993; Fullerton and Kinnaman, 1995; Sigman, 1995; Palmer and Walls, 1997 and 1999) point out that the SDR is an efficient policy to reduce the amount of waste to be disposed of because they combine the two effects that characterize a Pigouvian tax: reducing the product and replacing natural inputs with recycled ones 9 . If applied individually, product taxes influence only the reduction in origin and recycling subsidies, and consequently, they miss the possibility of reducing the amount of waste to be disposed of by combining the two policies (Palmer and Others, 1997). However, the high costs of implementing the DRS harm the relative efficiency of this policy. 9 Fullerton and Wolverton (2000) generalize the SDR and assimilate it to a product tax and a subsidy to clean activity (emission control, recycling, or disposal in a controlled landfill). Brazilian Journals of Business ISSN: 2596-1934 925 Braz. J. of Bus., Curitiba, v. 3, n. 1, p. 921-937 jan. /mar. 2021 If a DRS is applied to producers rather than consumers, the cost decreases because the number of agents and products concerned is lower 10 . In turn, the DRS is consistent with the principle of producer responsibility and EPR 11 . The tax holds producers accountable for disposal costs and encourages the reduction of waste and the weight of products - if established on intermediate products - and the recycling subsidy promotes the use of recycled materials (Palmer and Walls, 1999). Reducing the weight of products is part of a company's strategy for the design and characteristics of its product, particularly, its recyclability 12 . Calcott and Walls (2005) point out that, in the absence of efficient market operation, an DRS, join with a final elimination tax, encourages a design that promotes a sufficient level of recycling 13 . Taxes on natural raw materials reduce the amount of final product and the use of natural resources and recycling if the marginal productivity of natural and recycled inputs differs and, therefore, the optimal solution involves subsidizing the final product (Palmer and Walls, 1994). Only if the marginal productivity of natural and recycled inputs is constant and equal to unity is this policy efficient (Miedema, 1983; Sigman, 1995). Recycling subsidies encourage recycling, but also consumption and the amount of waste generated (Miedema, 1983; Palmer and Walls, 1994; Sigman, 1995; Palmer and others, 1997). In this case, the optimal solution requires a product tax to be applied. The RMS in production, or obligation to contain a percentage of recycled inputs in their composition, encourages recycled materials. However, if the marginal productivity of these materials is relatively high, they increase the amount of product and waste and the product must be taxed; otherwise, the product must be subsidized (Palmer and Walls, 1997). RMS can be established individually for each company or industry, through an NPS, which provides greater flexibility and reduces its cost (Dinan, 1992; Palmer et al., 1995). This system involves the exchange of permits between those companies that use over-recycled inputs relative to the standard and those that do not comply. The latter must acquire permits to comply with the obligation imposed by the standard. The cost of RMS depends on the characteristics with which the permissions system is defined. If the number of permissions is set relative to the standard, RMS will be efficient. Otherwise, the result 10 The current integrated management systems for which the producer is responsible for the waste generated by its products - such as packaging management systems - charge a fee for collecting and separating waste. This rate is a product tax and therefore does not encourage recycling (Palmer and Walls, 1999). 11 The principle of producer responsibility implies some form of financial responsibility of the manufacturer managing the waste that will generate his product. 12 The design of the products currently acquires great relevance in waste management. The facility of managing a product to be recycled is alternatively defined as a product’s characteristic (Fullerton and Wu, 1998). Besides, it is defined as the company’s cost (Calcott and Walls, 2000) or the content of specific material in the product (Eichner and Pethig, 2001). 13 The tax, lower than the Pigou tax that would correct externality in the spill, would incentivize the reduction of waste by families without generating serious illegal disposal problems. The optimal design that maximizes recycling could only obtained through the efficient functioning of the market. Brazilian Journals of Business ISSN: 2596-1934 926 Braz. J. of Bus., Curitiba, v. 3, n. 1, p. 921-937 jan. /mar. 2021 will be undefined, and the cost will be greater than the cost of a product tax (Sigman, 1995). In general, even establishing the negotiable permit system, RMS influences recycling, but not prevention in waste generation, and the product should be taxed (Walls and Palmer, 2001; Walls, 2003). 3 EFFICIENCY OF THE EPR IN WASTE OILS IMS Since 2007, SIGAUS has met the collection and regeneration objectives set by the Royal Decree 679/2006 (Table1). Also, the percentage of waste oil generation of lubricant consumption has been higher than the initial estimate of the Ministry of the Environment, of 40%. In IMS, the ratio of used oil produced, and lubricant consumption is changed in each fiscal year, with a variation in 2006-2015, between 41.68% and 49.5%. As a result, the share of waste oil generation in IMS is 45%, for the entire period, while the share of waste oils intended for regeneration is 69%. In turn, the average consumption of lubricants and the amount of waste oils generated for that period are equal, respectively, to 280,000 tons and 126,000 tons. Table 1. Consumption of lubricating oils (LC), waste oils collected and intended for burning (WOB), regeneration (WOR), and consumption of regenerated base oil (RBO) Year LC t (1) Waste oil generated % Waste oil collected t Collection rate WOB % WOR % RBO t (2) (2)/(1) % 2005 515.600 40,00 206.240 100,00 33,72 65,53 84,050 16,30 2006 507.000 40,00 202.800 100,00 34,61 64,66 86,241 17,00 2007 415.421 41,68 173.151 100,00 26,40 73,60 82,434 20,00 2008 373.461 48,22 180.070 100,00 30,40 69,60 80,065 21,00 2009 312.662 49,50 154.775 100,00 33,20 66,80 65,193 20,00 2010 321.304 44,27 142.237 100,00 33,70 66,30 60,741 19,00 2011 302.265 44,48 134.452 100,00 30,97 69,02 60,695 20,08 2012 276.025 46,98 129.663 100,00 34,50 65,50 54,090 20,00 2013 268.589 47,21 126.796 100,00 35,00 65,02 53,388 19,80 2014 278.341 45,3 126.089 100,00 30,08 69,92 56,900 20,44 2015 291.670 41,39 120.715 100,00 21,23 78,77 61,537 21,00 Note: since 2006, lubricating oil affected by Royal Decree 679/2006 of June 2 and the used oil collected by SIGAUS Own source This section presents a partial equilibrium model of the waste oils market to assess the efficiency of different economic incentive policies proposed in the management of waste oils 14 . In the market for lubricating oils, the production and consumption of the refined and regenerated base oils (BO) is added with the percentage, ɣ, of additives incorporated for the manufacture of lubricants, to determine the production of lubricating oils (LO). The share of additives in lubricants’ composition has evolved with the differentiation of lubricants and their practical application 14 A more detailed analytical development of the partial equilibrium model of the waste oil market was in Arner et al. (2005, 2006b). Brazilian Journals of Business ISSN: 2596-1934 927 Braz. J. of Bus., Curitiba, v. 3, n. 1, p. 921-937 jan. /mar. 2021 currently around 20%. If EPR is applied in the management of waste oils, the percentage of waste oil generation from the consumption of lubricating oils, α, is modified each year according to the waste oils collected by the IMS (Figure 1). In 2006-2015, the α coefficient is between 41.4% and 49.5% (Table 1). In turn, waste oils are intended for regeneration in a variable percentage, μ, which in IMS is at least 65%. Figure 1. Produced Used Oil (WOP) and Regenerated Base Oil (RBO) in IMS Source: own source Consequently, as base oils are the fundamental component of lubricating oils, the equilibrium price of base oils determines the equilibrium price in the lubricant oil market. If P is the price of base oils, the supply function of waste oils intended for regeneration is, =()aurS f P (1) In turn, if δ is the performance of the regeneration process or percentage of the generation of regenerated oils from waste oils, the supply function of regenerated base oils is 15 , ()abr aurS S P= (2) Therefore, the equilibrium condition in the market for regenerated base oils, if Dabr (P) is the demand function of regenerated base oils is, ( ) ( )aur abrS P D P= (3) From equation (3), the ratio of the elasticities of the supply function of regenerated base oils, Es, and the demand function of regenerated base oils, Ed, is obtained (4) s s d dE dP E dP= Where Ps is the supply price and Pd the demand price. 15 In the IMS, the performance of the regeneration process is 65%. - Base oil (BO) % additives: ɣ (20%) •Lubricating oils (LO) % WOP: α (41,4 % - 49,5%) •Waste oil produced (WOP) % WOR: µ (≥ 65% in IMS) •Waste oil to regeneration (WOR) Regeneration yield: δ (65%) •Regenerated base oils (RBO) % RBO/LO (≥ 20% in IMS) Brazilian Journals of Business ISSN: 2596-1934 928 Braz. J. of Bus., Curitiba, v. 3, n. 1, p. 921-937 jan. /mar. 2021 Equation (4) allows analyzing the efficiency of the economic incentive policies proposed for managing waste oils -a subsidy s and an RMS based on an NPSto promote the collection and regeneration of waste oils, by calculating the marginal incidence and MPC of these policies. If s is a subsidy per unit of regenerated base oil, Ps and Pd differ by the equation, (1 )dsP P s=− (5) Therefore, the ratio of supply and demand elasticities in equation (5) is, ()s s d d sE dP E dP d−= (6) Consequently, the marginal incidence of a subsidy, s, on Ps is, sd s d s dP E d E E =− (7) Finally, being the marginal incidence of a subsidy, s, on Pd, ds s d s dP E d E E =− (8) The MPC of this policy, defined as market price reduction, Pd, because of a subsidy, is obtained by replacing the level of intervention corresponding to dPs in equation (8), s ss d E CPM dP E = (9) Therefore, if supply elasticity, Es, is positive and demand elasticity, Ed, negative, the subsidy implies the supply price, Ps, increasing, and the reduction of the demand price, Pd. The RMS in the manufacture of lubricating oils (LO) is the obligation for the producers of lubricating oils to incorporate a certain percentage of regenerated base oils r* (RMS = r* LO). If set for the industry, RMS is based on an NPS. In the application of EPR, the manufacturer of lubricating oils finances the management of waste oils generated by lubricants placed on the market, refined, and regenerated oils. Consequently, the lubricant producer replaces refined base oils with regenerated ones. Therefore, each unit of regenerated base oil results in 1/r* negotiable permits. If the permit price is  , the regenerator obtains a subsidy equal to *r  . Subsequently, the marginal incidence of the permit price,  , on Ps is, 1*d s ds E dP r d E E  =− (10) In turn, equilibrium requires a second condition regarding the market for negotiable permits (NPS). In that market, the supply function SNP(  ) is given by the ratio between the quantity of regenerated oils produced, if the regenerator receives a subsidy, *r  , and r*. The demand function, Brazilian Journals of Business ISSN: 2596-1934 929 Braz. J. of Bus., Curitiba, v. 3, n. 1, p. 921-937 jan. /mar. 2021 DNP(  ), is determined by the amount of lubricating oils put on the market (LO). Therefore, the equilibrium condition in the market is, 1[ (1 )] * * * aur s RMS SP r r r   += (11) If =()aurS f P is a linear function of the price, from equation (11) it can be obtained that *dr d  = . Equation (11) indeterminacy resolves if the regulator sets r*. The marginal incidence of r* on Ps and Pd is presented, respectively, in equations (12) and (13). 1d si ds E dP r dr E E =− (12) 1s di ds E dP r dr E E =− (13) Where ri constitutes the initial share of regenerated oils in the consumption of first refining lubricants. Finally, the MPC of this policy is that of a subsidy, *r  , * is RMS s d rE CPM dP rE = (14) Therefore, the comparison between the MPC of a subsidy and an RMS, applied through an NPS, is equivalent to comparing a subsidy equal to the permit price,  , and a subsidy equal to *r  . Being *irr less than 1, the MPC of an RMS, applied using an SPN, is lower than that of a subsidy. As a result, EPR is a more efficient policy than a subsidy to promote the collection and regeneration of waste oils. 4 ESTIMATING A SUPPLY AND DEMAND FUNCTION FOR WASTE OILS INTENDED FOR REGENERATION An empirical analysis of the regenerated oil market has previously been carried out (Arner et al., 2003) by estimating a supply and demand function, using Ordinary Least Squares (OLS). That work got the supply elasticity for regenerated oils of 1.33 and the demand elasticity for regenerated oils of 0.39. In turn, the market for waste oils has been characterized (Arner et al., 2006a) through a supply function of waste oils, defined as collected waste oils, and a demand function regarding the main valorization operations of waste oils (regeneration and combustion). 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