KEY CBA ASSUMPTIONS

The Packaging Impacts Consultation RIS presented an initial Cost Benefit Analysis (CBA) and questions for stakeholder consultation as a starting point for discussing the impacts of regulatory options. Feedback received has informed the Decision RIS.

MJA undertook a review of the data assumptions in the Consultation RIS, a review of relevant literature and attended stakeholder consultations. Some data assumptions for the Decision RIS were revised as a result. The Decision RIS uses revised assumptions only where a clear case has been established for doing so. Similarly, additional assumptions have been developed for issues that were not fully addressed in the Consultation RIS. The revisions of most impact to the analysis are highlighted here and are also presented in more detail in MJA’s Data Assumptions report (Attachment K). In particular a summary of key changes from the Consultation RIS is provided in Table 1 in that report.

1KEY CBA ASSUMPTIONS

The base year for analysis has moved forward two years from 2011 to 2013 as revenue and costs will not start to accrue until 2014 (depending on the option). A standard discount rate of 7 per cent has been used as approved by the Department of Finance. In addition, sensitivity analysis rates of 3 and 10 per cent have been used.

CONSUMPTION, RECYCLING, LITTER AND LANDFILL PROJECTIONS

CONSUMPTION

The total packaging consumption estimates for the base year and subsequent years have been retained from the Consultation RIS for the Decision RIS. For the first five years of analysis (2013–2015) packaging consumption is assumed to increase by 0.75 per cent per annum. This will gradually reduce throughout the assessment period to 0.54 per cent per annum in the final five years of analysis (2030–2035). This assumption reflects a rise in total packaging consumption in absolute terms (tonnes) during the assessment period and falling consumption per person,due to a higher rate of population growth and light weighting ofpackaging materials.

The consultants adjusted the material split for packaging consumption, drawing on recent packaging consumption and recycling data from primary sources which suggests that the beverage container component was likely understated in the Consultation RIS (Industry Edge, Equilibrium 2011). Accordingly, the proportion of beverage containers to other packaging has been increased by 5percentage points (30 per cent of packaging), and flexible packaging decreased by 5 percentage points (62 per cent of packaging). The increased estimate of the proportion of beverage containers consumed increases the cost of the CDS options as it will translate into increased units flowing through the CDS system, in which costs are unit based.

RECYCLING

The projected recycling performance of the base case and each policy option at maturity across both all packaging and beverage containers is detailed in Figures 1 and 2. These projections are based on a packaging material flows analysis (MFA) conducted by the consultants to understand the impacts on the recycling market of different policy options.

Under the base case, it is assumed that investments in recycling infrastructure are adopted where it is financially viable to do so. If recycling rates above the base case are desired, this requires an additional financial outlay from industry, which may be achieved through either financial incentives (such as grants or subsidies) or mandates (such as targets under the Product Stewardship Act 2011). Consistent with economic theory (the law of diminishing returns), the greater the volume of recycling recovered, the greater the marginal cost of achieving additional recycling. These marginal costs increase as the recycling target is approached, as the easiest and most costeffective options for increasing recycling are implemented first, followed by more costly options (see Attachment K, p. 69).

This is demonstrated in Figure1, where options requiring the most financial outlay (option 2c and option 3) achieve the greatest recycling rate. Options that focus on beverage containers (option 2d and options 4) achieve a higher beverage container recycling rate, but marginally lower total recycling overall (Figure 2). These options, as with all options, are additional to broader recycling activities undertaken by other parties as part of the base case. Option 4c has a lower recycling rate than other CDS options because the scope of liable products is narrower, based on the current coverage of the South Australian scheme.

FIGURE 1: PROJECTED 2035 PACKAGING CONSUMPTION AND RECYCLING—ALL PACKAGING MATERIALS (CRIS AND DRIS)

Source:MJA 2013a (Attachment K)

Risk premium for options that do not involve a direct financial incentive:A risk premium has been applied to options 2 and 3 as these do not contain provisions to drive a direct financial incentive for consumers to recycle. There is a higher risk of options 2b, 2c, 2d and 3not achieving their recycling and litter outcomes as they entail high beverage container recycling rates that approach practical upper limits for co-mingled recycling systems and do not involve direct price incentives. To mitigate this risk and ensure it could be appropriately reflected in the CBA results, a higher ‘risk premium’ cost has been applied to these options than to Option 2a and 2e. The risk premium rate reflects the need for options to fund comprehensive, ongoing and well-targeted information and education programs to encourage businesses and households to participate in recycling initiatives and infrastructure at levels sufficient to support the projected outcomes. While this approach provides some balance to ensure relevant risks of not meeting recycling targets are considered, it is unclear to what extent it fully mirrors the impact of a direct incentive such as under a CDS.

FIGURE 2: PROJECTED 2035 BEVERAGE CONTAINER CONSUMPTION AND RECYCLING (CRIS AND DRIS)

Source:MJA 2013a (Attachment K)

LITTER

Litter incidence and distribution is difficult to quantify, although it was a key area of stakeholder concern in response to the Consultation RIS. The Decision RIS approach to analysing litter differs from that in the Consultation RIS. The Consultation RIS assumed a 6per cent litter rate from packaging available to be littered (calculated as packaging consumption minus packaging recycled and distribution packaging). The Consultation RIS assessed how each option reduced the 6 per cent litter rate.

The Decision RIS approach is based on feedback from stakeholders that litter is a function of public place consumption of packaging, rather than total packaging consumption minus recycling and distribution packaging. The total amount of public place packaging available to be littered is based on public place consumption, while also accounting for other sources of litter such as paper and cardboard from the C&I sector. This determines an overall propensity to litter of 27percent of public place consumption. Despite some gaps and inconsistencies in Australian litter data, thisnew methodology provides a robust assessment of current litter levels and the potential for litter reduction under the options.

LANDFILL

As in the Consultation RIS, MRF rejection rates and landfill residual costs have been factored into MRF processing costs. However, the consultants have reviewed jurisdictional evidence and utilised the material flows analysis to determine different rates for different regions in the Decision RIS CBA in more detail.

KEY COST ASSUMPTIONS

A number of cost assumptions have been revised in the Decision RIS following reviews of data and literature and stakeholder feedback. Key changes are summarised below.

Household participation costs have been revised as follows (all other Consultation RIS assumptions have been retained):

  • Accumulation time: The value of time for householders to transfer packaging to accumulation points such as kerbside recycling bins or container redemption points has been revised to be zero for all options. Substantial evidence was provided by stakeholders that the accumulation time associated with each option would be no greater than current recycling practices and it remains uncertain whether this participation results in a private cost to many community members given the offsetting use-value[1]or benefits of recycling (Attachment K, p.49).
  • Vehicle operating costs and travel time, which relate to the number of trips made to transport packaging to collection points and the proportion of those trips that are specific to the purpose of recycling packaging, have been revised for options 4a, 4b and 4c to reflect the different types of CDS collection infrastructure and household interactions with them. There is evidence that trips to automated reverse vending machines (RVMs) are much more frequent, but that the majority of such trips are not purpose specific to only recycling packaging. Conversely, most households visit non-RVM infrastructure such as depots more rarely, as is assumed in the Consultation RIS, but it is more likely that such trips will be purpose specific.
  • Container deposit/refund redemption time, which relates to walk time to redemption points and transaction time involved in redeeming beverage containers, has been revised to reflect the changes to the number of trips and proportion of purpose-specific trips above. Redemption time has also been reduced very slightly for RVMs and increased for depots to reflect recent data on depot queuing times (Harrison Research 2012).

Business participation costs have been benchmarked against standard cleaning costs and business accumulation time has also been costed at zero, on the same basis as for household accumulation time. All other business cost assumptions in the Consultation RIS (such as value of time) have been retained.

Local government kerbside collection costs have been revised to break down the costs ofcollecting recyclablesand garbage in metro and non-metro areas, based on the Sustainability Victoria Annual Local Government Survey 2011. The truck capacity for kerbside collection has been revised downwards after consultation with the waste disposal industry. The average return trip (1.5hours) and vehicle operating costs ($120/hour) have been retained from the Consultation RIS.

Recycling infrastructure costs of CDS options have been revised based on changes made by the Boomerang Alliance to their option (4a). The Consultation RIS assumed that option 4a would have a mix of hubs, collection depots, RVMs and rural collection points. Option 4a is nowbased on the use of RVMs by most consumers (1400) with some hubs for the C&I sector (165) and remote collection centres (100). Consequently, the collection structure of Option 4b has also changed to reflect the likely role of RVMs where cost-effective and to achieve redemption rates equal to Option 4a, as these options have the same scope of liable products. Option 4b retains a mix of depots (600), RVMs (800) and remote collection points (100) for consumer use and consolidation depots (165) for the C&I sector. Option 4c anticipates rolling out the existing SouthAustralian scheme nationally, which predominantly uses depots (1200) with a small amount of RVMs (365) and remote depots (100).

Comparing the same number oftotal collection points allows a standardisedcomparison of the impacts of different infrastructure configurations on operating and household participation costs. The differing costs of CDS infrastructure in metro and non-metro locations have also been factored in. A summary of the infrastructure cost assumptions used for all CDS options is detailed in Table 1.

TABLE 1: DECISION RIS CDS INFRASTRUCTURE COST ASSUMPTIONS (CENTS PER CONTAINER)

Infrastructure Type / Capital and Operating Infrastructure Cost / Transport Cost / Baling Cost / Total
RVM (metro) / 3.9 / 0.5 / 0.3 / 4.7
RVM (non-metro) / 4.5 / 0.7 / 0.3 / 5.5
Depot (metro) / 4.5 / 0.5 / 0.3 / 5.3
Depot (non-metro) / 5 / 0.7 / 0.3 / 6
Depot (remote) / 6 / 0.9 / 0.3 / 7.2
Hubs (metro) / 4 / n/a / n/a / 4
Hubs (non-metro) / 4.2 / n/a / n/a / 4.2
Super Collector / 0.5 / n/a / n/a / 0.5

Source:Derived from MJA 2013a (Attachment K), p. 72

Industry costs: The Decision RIS estimates the potential impact on packaged goods industry sectors from lower consumer sales associated with the price impacts of the options. This has been assessed as an estimated loss of producer surplus (See Box A) in both the CBA and distributional impact analysis, which is able to be most precisely calculated for the CDS options due to the specific product categories affected but has also been applied to all options.

BOX A: LOSS OF PRODUCER SURPLUS

Loss of producer surplus for beverage container manufacturers is assumed to result from the price impacts of implementing a national CDS, which involves direct price incentives in the form of a deposit and refund on beverage containers. The consultants assessed the proportion of containers subject to a container deposit/refund that will not be redeemed by the purchasing consumer and estimated the price impact of the unredeemed deposit/refund relative to the average price of each product category.

The demand/supply response based on the change in price and resulting loss of profit was then assessed for the following industry sectors: beer, bottled water, milk, soft drink, spirits, fruit juice (options 4a and 4b only), and wine (options 4a and 4b only). This analysis does not estimate possible changes in levels of beverage industry investment and employment as this is beyond the scope of this RIS.

Additional recycling costs:The total cost of meeting a given recycling target has been estimated using a marginal cost curve reflecting the rising costs of additional recycling (see Box B). This contrasts with the approach used in the Consultation RIS, which assumed a flat rate for the cost of additional recycling.

BOX B: MARGINAL COST CURVE FOR ADDITIONAL RECYCLING

To estimate the costs of additional recycling under each option, the consultants developed a marginal recycling cost curve (MRCC). This was based on analysing data on costs and recycling outcomes from projects conducted by the APC and Packaging Stewardship Forum.

This data was then extrapolated to provide a list of potential projects nationwide, including C&I, public place (LGA or commercial), kerbside and mixed projects. The results stemming from the MRCC have elements of uncertainty, as they are based on existing patterns of investment and there are limitations to forecasting investment activity into the future. However to mitigate this uncertainty,the recycling project infrastructure costs for all options 2 and option 3 have undergone sensitivity analysis to test the impact of assumptions on the outcomes of the analysis. For more details see Attachment K, p. 69.

Option 2e investment profiles: Option 2e envisages a substantial increase in industry funding through an agreement in the style of the APC for projects to increase recycling and reduce litter. In the Decision RIS the increased industry contribution has been modelled at lower, middle and upper values, which were expressed in the option description (Attachment I) as $20 million, $35 million and $50 million per annum (in 2011 dollars).

The actual levels of industry contribution were modelled under three variants of option 2e:

  • Option 2e ($20 million) was designed as a commitment of $20 million per year for 5years which, over the full 20 years of the analysis, results in an average industry investment of $14.1 million annually (in 2011 dollars, excluding administration costs). This represents a total APC infrastructure investment in real terms of PV$115million (or an undiscounted sum of $281 million).
  • Option 2e ($35 million) was designed as a commitment of $35 million per year for 5years which, over the full 20 years of the analysis, results in an average industry investment of $21.5 million annually (in 2011 dollars, excluding administration costs). This represents a total APC infrastructure investment in real terms of PV$174million (or an undiscounted sum of $431 million).
  • Option 2e ($50 million) was designed as a commitment of $50 million per year for 5years which, over the full 20 years of the analysis, results in an average industry investment of $27.7 million annually (in 2011 dollars, excluding administration costs). This represents a total APC infrastructure and education investment in real terms of PV$222million (or an undiscounted sum of $554 million).

For modelling purposes the Decision RIS assumes that the amount invested by industry will gradually ramp up as appropriate capital investment opportunities are identified and to address increasing marginal costs of recycling as tonnages increase (Attachment M, p.15 and p.71-77, Attachment K, pp.63–65). However, a different profile of investment would also achieve the packaging recycling outcomes of 76.7 per cent, 77.7 per cent and 78.5 per cent in 2035 respectively, as long as the investment levels and timing have an equivalent present value to the profile modelled.

KEY BENEFIT ASSUMPTIONS

Material values: A key benefit assumption, particularly for CDS options, is the market value of the material collected for recycling. Better quality material streams (for example, as a result of CDS sorting) can attract a higher value in material markets. This is represented by the CDS Premium column in Table 2. Conversely, materials with specific requirements affecting reprocessing (such as glass fragment sizes and colours) can attract a range of values. The market values for materials have been revised for the Decision RIS based on research and information on current market values provided by stakeholders. The consultants have adopted glass values based on recycling industry sources, specifically relating to material not yet pre-processed, which represents a large proportion of the market. These figures have been verified against prices received by suppliers of that material.

TABLE 2: MATERIAL VALUE ASSUMPTIONS (CRIS AND DRIS)

Material Type / CRIS Assumption ($/tonne) / DRIS Assumption ($/tonne)
Market Value / CDS Premium / Market Value / CDS Premium
Glass / 30 / 100 / 0 / 40
Aluminium / 1,560 / 0 / 1,418 / 142
Paper/Cardboard / 181 / 0 / 181 / 0
Plastics (Beverage) / 560 / 100 for PET and HDPE / 676 / 100
Plastics (Non-beverage) / 560 / 100 for PET and HDPE / 349 / n/a
Steel cans / 280 / 0 / 280 / 0
Liquid Paperboard / 150 / 0 / 150 / 70

Source:MJA 2013a (Attachment K)

Avoided landfill costs in the Consultation RIS were cited from the 2010 BDA/WCS report, which estimated operating costs for small, medium, and large landfills based on best practice controls and poor controls. For the Decision RIS, the average cost of landfill is provided by state/territory and by metro/nonmetro areas.