A Deposit Return Scheme for Scotland: Final Business Regulatory Impact Assessment

4. Options

49. To ensure DRS is the correct delivery mechanism for Scotland, alternative delivery options have been considered in order to compare the benefits and costs of alternative interventions.

50. Firstly, the alternative options need to achieve the four strategic objectives:

• Increase the quantity of target materials collected for recycling
• Improve the quality of material collected, to allow for higher value recycling
• Encourage wider behaviour change around materials
• Deliver maximum economic and societal benefits for Scotland

51. These objectives are ambitious and will aid Scotland's transition to a circular economy. Any option considered as an alternative to a DRS would therefore need to deliver in equal measure on these strategic objectives.

Table 1A. Businesses Consulted for Views on Amending Regulations

Business	Type
AB InBev	Producer
Aldi	Retailer
Asda	Retailer
Association of Convenience Stores	Trade Body
British Beer and Pub Association	Trade Body
British Soft Drinks Association	Trade Body
C&C Group	Producer
Circularity Scotland Ltd	Scheme Administrator
Coca-Cola	Producer
Co-Op	Retailer
Food & Drink Federation Scotland	Trade Body
G101 Stores	Retailer
John Lewis	Retailer
Lidl	Retailer
Marks & Spencer	Retailer
Morrisons	Retailer
Sainsburys	Retailer
Scotmid	Retailer
Scottish Environmental Services Association	Trade Body
Scottish Food and Drink	Trade Body
Scottish Grocers' Federation	Trade Body
Scottish Retail Consortium	Trade Body
Scottish Wholesale Association	Trade Body
Society of Independent Brewers	Trade Body
Suez	Waste Management
Tesco	Retailer
Uber Eats	Retailer
Viridor	Waste Management

52. One alternative option to a DRS is a tax on the materials used in the production of drinks containers. Taxes or fiscal incentives could target the manufacture of specific packaging materials, which could result in greater use of recycled content or alternative materials. UK HMT have consulted on plans to introduce a plastic packaging tax from April 2022 which would provide a clear economic incentive for businesses to use recycled material in the production of plastic packaging.

53. Raising the cost of single-use drinks containers through such a tax would make these products more expensive and could therefore reduce total consumption. However, it would not influence consumer behaviour in the same way that DRS will because there is no additional incentive on the part of the consumers to recycle. Linked to this, a tax is unlikely to reduce the litter rate for those products which are consumed. That is why the proposed packaging tax is viewed by both the UK Government and the Scottish Government as one element of a cohesive package of measures designed to improve our use of resources. We also note that, with certain exceptions, tax is a reserved matter under the Scotland Act 1998, and although there might be scope to introduce an environmental tax in Scotland with consent of HMT, this would not be a straightforward process. It is for these reasons that this option has not been considered further.

54. A DRS that captures only on-the-go containers was considered as an alternative option but defining exactly which drinks containers should be treated as on-the-go is not straightforward. The on-the-go definition could be by point of sale type, item type or a combination of the two. These definitions are not self-evident: hospitality businesses with on-site consumption and/or off- site consumption, retail sites with a mix of sales or a supermarket chain with different outlet types and sales make it harder to distinguish between various products in practice. Customer behaviour could complicate this further.

55. An on-the-go DRS would also capture significantly lower container numbers than a comprehensive DRS. Scottish data^[16] shows that about 30% (0.65 billion) of total drinks containers are consumed out of home and this figure falls to 25% when consumption in restaurants, hotels, bars and cafes is accounted for. Fewer container numbers captured will push up the scheme's unit costs, reduce the number of return points and make it less convenient for consumers. An on-the-go DRS could also impact disproportionately on smaller stores where total turnover can rely on relatively high sales of takeaway drinks.

56. Overall, respondents to the consultation were strongly of the view that the DRS should not be limited to 'on-the-go' only – 88% answered 'no' in response to this question. Individuals were more likely than organisations to answer 'no' (90% vs 61%, respectively). There were substantial differences in the views expressed by different organisational types.

57. Taking the above factors into account, this option was considered unsuitable against the objectives sought.

58. An extended producer responsibility scheme (EPR) for household packaging (including drinks containers) combined with a litter enforcement strategy was selected as the most comparable policy alternative to a Scottish DRS. The EPR scheme element of the alternative policy covers a broader range of packaging materials than DRS and the complementary litter enforcement strategy operates differently from DRS in the way that it influences littering behaviour. It should be recognised that these differences will have some impact on the four strategic objectives when comparing the various policy options. The alternative policy option is presented in detail below.

59. Full cost recovery is included in all the options considered below. Under the "polluter pays" principle, producers will be required to cover the costs of collecting household packaging and the costs associated with sorting and disposal. The value generated from sales of materials are counted as a positive income stream and disposal costs for packaging in the residual stream as a negative. Supporting measures that require improved data on packaging materials (e.g. tonnes collected and placed on the market) and that encourage better recycling and reduced littering are also covered under full cost recovery. Management and administration costs of any compliance scheme are met by obligated businesses.

60. The options considered are:

• Option 1. No policy change – business as usual
• Option 2. A Scottish DRS is implemented and return rates of 90% are achieved. Return to any place of purchase and a deposit level of 20p is assumed
• Option 3. An EPR scheme combined with a separate litter enforcement strategy is implemented. EU recycling targets are achieved and full cost recovery is assumed

4.1 Calculating the Costs and Benefits of Recycling

61. Each tonne of recycling diverted from landfill or energy from waste (EfW) has associated costs and benefits. Costs per tonne have been calculated for collecting, sorting and disposing of the recycled materials that fall within the scope of DRS and the EPR scheme. Benefits per tonne have been calculated for material revenue, carbon savings, residual collection, landfill savings and litter reduction benefits. Landfill tax is not included in this analysis as it is counted as a transfer payment.

62. Net Present Value (NPV) over 25 years has been used to place quantitative values against the baseline for the options under consideration (discounting value set at 3.5%).^[17] NPV is defined as the sum of a stream of future values that have been discounted to bring them to today's value.^[18] While the principles are measured by a value within the NPV, not all benefits and costs can be easily monetised and many of these tend to be associated with an increase in the benefits from recycling, suggesting that the NPVs calculated for each option represents the lower bound. Factors that are difficult to monetise include:

• Much improved material quality when the collection method almost eliminates the potential for contamination.
• Capturing wider litter benefits that include the value of litter reduction in a broader range of locations e.g. avoiding litter in the marine environment, the wider Scottish countryside, tourist locations and areas where people visit regularly. These benefits are likely to be higher for DRS^[19] than an EPR scheme.
• The disamenity impacts of activities at landfill sites will reduce when volume of waste being sent to landfill declines but the waste being diverted to recycling will also incur environmental impacts. There is insufficient evidence to accurately monetise these impacts.
• Savings in carbon resulting from recycling are monetised but the negative impact of the loss of scarce virgin materials for future generations are unlikely to be fully reflected in the current value of those materials.
• Benefits from higher recycling targets such as shifts in public attitudes towards recycling and the environment, which could reduce waste collection costs over time, are currently subject to too much uncertainty to be monetised.

63. The baseline used in the modelling for the final BRIA has been refined from the one presented in the full BRIA. In particular, it has been updated to more fully account for policies and regulation that are expected to come into force, impacting on the proposed policy options covered in this section.

64. The EU Circular Economy Package establishes minimum operating requirements applicable to any extended producer responsibility (EPR) scheme. Consequently, as outlined in the UK-wide consultation on packaging producer responsibility which concluded in May 2019, it has been the intention of the four UK administrations to make the necessary legislative changes for a reformed packaging producer responsibility system by 2021, with a new system to be operational from 2023.

65. While the response to the public consultation on reforms to packaging producer responsibility, published in July 2019, signalled a clear intention to progress with plans for such a scheme, work is ongoing to engage with stakeholders in order to develop detailed proposals. A final scheme design has not yet been agreed.

66. The necessary legislative provisions to enable the establishment of such a scheme were introduced through the UK Environment Bill in January 2020.

67. The Scottish Government considers deposit return a form of extended producer responsibility and our scheme has been designed on this basis. Further, Scottish Ministers have made clear that, because DRS is a form of extended producer responsibility, packaging being dealt with through this scheme should be exempt from alternative packaging producer responsibility obligations. This would prevent producers being charged twice in respect of their obligations.

4.2 Option 1. No policy change – business as usual

68. This option is the baseline against which the costs and benefits of the alternative DRS and household EPR scheme policy options are compared.

69. The current packaging waste regulations require businesses that handle over 50 tonnes of packaging annually and have an annual turnover over £2 million to meet a share of the annual UK packaging waste recycling targets. Rather than comply directly, an obligated producer can join an approved (by a regulator) compliance scheme that will take on all its legal obligations.

70. The regulations require obligated producers to acquire evidence in the form of Packaging Recovery Notes to demonstrate that tonnages equivalent to their individual targets have been recovered and recycled during the year. Packaging Recovery Notes fluctuate in price in response to a range of factors, such as: the supply of recyclables; the price of raw materials; the price of secondary materials; the availability of evidence; and the level at which the targets have been set.

71. Estimates vary on the proportion of packaging waste management costs that producers fund through the current system. On average, it is believed 10% of costs are covered by producers, with the majority of costs funded by local authorities, other public authorities and businesses who consume packaged goods. As a result, producers have been able to put packaging on to the market without taking account of the true cost of managing it at the end of life.

72. With reference to the requirements of the EU Circular Economy Package, in order for full net cost recovery to be delivered through the current packaging producer responsibility arrangements, a 10-fold increase in Packaging Recovery Notes revenue generated from obligated producers would need to be realised. It is unlikely that such a shift, including the need for producers to finance costs of collection and sorting of the packaging, would be driven by the market alone and some Government intervention would be necessary.

4.3 Option 2. DRS final scheme design is implemented

73. The DRS outlined in this option features return to any place of purchase, with in-scope materials being PET, metal cans and glass bottles. The deposit level is 20p and the target capture rate is 90%. The range of containers in scope is between 50ml and 3L, representing 98% of all drinks containers and being consistent with the size of containers that most RVMs can accommodate. Producers are responsible for the full cost of implementing and operating the DRS.

74. It is anticipated that an industry-led and not-for-profit scheme administrator will run DRS. Costs of scheme administration include operating/refunding return locations, haulage/logistics, material processing, payments, fraud, communications and staff. Unredeemed deposits and material value are retained by the scheme administrator and supplemented by a producer fee, to cover running costs of the DRS and to provide an incentive to maximise the quality of materials collected by the scheme.

75. The costs of operating the return points include staff time, the value of any lost retail space, miscellaneous supplies and maintaining and operating RVMs. As the operator of these return locations will be fully reimbursed, no overall net benefit or loss is anticipated.

76. The value of unredeemed deposits, based on the assumption of a 90% capture rate, represents a cost to consumers and a source of revenue to the scheme administrator.

77. Producers are defined as those companies that put deposit bearing drinks containers onto the market. Producers contribute to the scheme administrator's operating costs and will incur capital and operating costs associated with labelling and distribution changes.

78. Local authority costs include reduced revenue from sale of materials in scope and increased sorting costs per tonne as a consequence of valuable materials being removed. Benefits include handling reduced tonnage, lower disposal costs and waste and litter collection efficiencies. An overall net benefit to local authorities is predicted.

79. Commercial premises which currently pay for waste collection services will experience a reduction in waste volume as a consequence of consumers returning drinks containers to return points to redeem their deposit.

80. Participation in a DRS requires effort on the part of consumers, who need to collect and return containers. Under the return-to-retail model, it is assumed that almost all returns will be part of existing shopping trips. While there is little stakeholder consensus on the costs to consumers of participation, they are expected to be modest.

81. The benefit to society from the introduction of a DRS is considerable, with the majority being derived from the reduced disadvantage to local neighbourhoods as a result of targeting a highly visible component of the litter stream and the value of avoided carbon emissions.

82. Table 2 below provides a summary of the key components, numbers and values used to calculate the costs and benefits of a Scottish DRS.

83. Table 3 below utilises the components, numbers and values from Table 2 to calculate the costs, benefits and net benefit of a Scottish DRS on the below actors. The new full implementation date of 16 August 2023 (first full year 2024, with a return rate of 80%) has been modelled. As a result, the costs and benefits are slightly different from those set out in the Deposit Return Scheme Full Business Case Stage 1 Addendum and the previous Final BRIA where a net benefit of £589.6m was calculated under the modelled DRS policy. The new higher net benefit of £615m is due to:

• A higher expected DRS return rate in year one of operation.
• Higher numbers of containers available for the system, due to higher population in the 25-year period analysed from a delayed start year.

Table 2. Key components, numbers and values used to model a Scottish DRS ^[20]

Component	Description	Number	Value (NPV 25 yr)
Materials in scope	PET drinks, cans and glass containers	2.2 billion drinks containers (150,500 tonnes)	N/A
Materials out of scope	HDPE containers, cups and cartons and wider household food containers	0.8 billion drinks containers (17,500 tonnes)	N/A
System performance	Return rate of in-scope material	Target 90%	N/A
Return points	Manual (including hospitality) and RVM return points	14,386 manual return points (15% of returns), 3,021 automatic return points (85% of returns).	£888 million
Bulking and counting centres	Cost of constructing and running costs	N/A	£106.7 million
Re-labelling costs	Cost of designing, producing and applying DRS compliant labelling to containers (or otherwise paying a higher producer fee). This figure includes impacts across the supply chain (producers, wholesalers and retailers).	2.2 billion containers	£118.8 million
Reverse Vending Machines (RVM)	Automated machine that returns the container deposit and is capable of counting and verifying the container is scheme compliant	3,021 RVMs dealing with 85% of returned containers	£819.2 million Includes value of lost floorspace
Handling fee	Reimbursement of all costs associated with operating a return point	N/A	£937 million
Producer fee	Paid by business to cover any shortfall in finances for the scheme administrator	N/A	£471 million
Fraud	Value of fraudulently redeemed containers	17.5-23.3 million drinks containers annually	£108 million
Scheme administration	Staff and equipment costs	N/A	£19.2 million
Communications	National stakeholder and consumer awareness raising	N/A	£8.7 million
Material revenue	Scheme income	N/A	£278.3 million
Carbon factors	Carbon factors are used to calculate the carbon benefits of recycling glass, plastic, aluminium and Steel	See link	See link

Table 3. NPV Costs and Benefits of a DRS for Scotland

Actor Name	Costs(£m)	Benefits(£m)	NetBenefit(£m)
Local Authorities	- 46	219	173
Business	- 1,237	920	-317
Regulator	-17	-	-17
System Operator	-577	1,077	500
Society	- 930	1,205	275
Total	- 2,807	3,421	615

Note. The DRS for Scotland is designed to optimise delivery against the four strategic outcomes and to be complementary to any future packaging EPR scheme.

Figures may not sum due to rounding

4.4 Option 3. An EPR scheme for household packaging waste combined with a separate litter enforcement strategy are implemented.

84. The EPR scheme outlined in this option covers household packaging waste including glass, paper, card, steel, aluminium and plastics. Drinks containers captured under DRS (Option 2) are also collected under this broader EPR scheme, accounting for 32.7% of the overall tonnage collected. Kerbside collections from households, and recycling collected from bring sites such as household waste recycling centres, are included. All additional costs of collection, sorting and disposal under this EPR scheme are considered.

85. The EPR scheme would operate under a single national collection service for three household packaging streams; (1) glass, (2) paper/board, (3) mixed plastics, metal containers and packaging (dry mixed recycling). These collection streams are consistently colour coded across local authorities. Infrastructure investment costs for the altered and expanded collection and sorting are included.

86. The roll-out and operation of the services are underpinned by a national programme of communications and householder engagement. Participation in the EPR scheme requires no significant additional effort on the part of consumers compared to business as usual.

87. Two new bodies would be set up, the costs of which are included. The first, a single accredited organisation, acts as the scheme administrator and runs on a not-for-profit basis. The second, a regulatory body, has oversight of the scheme and its administration. It monitors and reports collection, sorting and other scheme costs, audits member declarations to prevent free-riding and checks that legal obligations are being met.

88. The accredited organisation for the EPR scheme has two main sources of funding; producer fees and the revenues from the sales of sorted recyclate. The costs to local authorities and commercial waste management companies of collecting and sorting household packing and disposing of any packaging in the residual waste stream are billed to the accredited organisation. If these activities are compliant with the scheme requirements e.g. collection method, frequency of collection, levels of permitted contamination, and fall within a specified price range,^[21] collectors and sorters of household packaging have their costs fully reimbursed by the scheme administrator.

89. Packaging producers are obligated to comply if they package or allow household products to be packaged in Scotland or import household products onto the Scottish market.

90. The de-minimis for the current Packaging Recovery Note (PRN) system obligates producers that place more than 50 tonnes of packaging on the market and have a turnover of more than £2 million per year to register for the scheme. This threshold could potentially be lowered to more evenly spread the costs of the new EPR scheme (this alternative has not been modelled).

91. The total amount of packaging placed on the UK market in 2017 was around 11.5 million tonnes.^[22] According to the National Packaging Waste Database (NPWD), compliant companies declared 9.8 million tonnes over the same comparison. The 15% difference is accounted for by exempt producers or free- riders who do not comply with the regulations. Not enough is known about this segment of the market for Scotland to model the full distributional effects of lowering de-minimis but this does not alter the overall producer costs of the EPR scheme presented here.

92. Obligated producers can create their own system for collecting and recycling packaging and supply the required evidence to the regulatory body with oversight of the scheme. Alternatively, they can join the accredited scheme and meet its producer fees according to the amount and type of household packaging placed on the market. A requirement exists for producers to label packaging as being scheme compliant. One example of this is the Green Dot symbol22. This cost to business has been included in the analysis.

93. The litter enforcement strategy costed in this option reflects that an EPR scheme has significantly lower impact on littering behaviour (but on a wider range of packaging materials) than the impact achieved by a DRS. Obligated producers are required to contribute to the national litter enforcement strategy as part of their producer fee. Benefits of the litter enforcement strategy are captured as part of the societal benefits in Table 5.

94. Table 4 below provides a summary of the key components, numbers and values used to calculate the costs and benefits of a Scottish EPR scheme.

95. Table 5 below utilises the components, numbers and values from Table 4 to calculate the costs, benefits and net benefit of a Scottish EPR scheme. The figures presented reflect only the costs and benefits associated with the 32.7% of DRS household drinks containers that are captured by the broader EPR scheme. For DRS household drinks containers, the average capture rate for the three collection streams is modelled to reach a maximum of 54% of which the household plastics packaging capture reaches a maximum of 55%

Table 4. Key components and values used to model a Scottish EPR scheme (all house hold packaging)

Component	Description	Number	Value
Materials in scope	Household packaging: glass, paper/board, mixed plastics and metal containers	548,000 tonnes of household packaging (collected from kerbside and bring sites) of which 254,000 tonnes (46%) currently recycled in base year. Of total household packaging arisings, DRS tonnes account for 179,000 tonnes (32.7%).	N/A
System performance	Recycling rates of in-scope materials	EU Circular Economy Package targets for 2030; glass 75%, paper/card 85%, plastics 55% aluminium 60% steel 80%	N/A
Infrastructure costs	Costs of upgrading and expanding sorting facilities to handle additional recycling. Costs associated with collection service change	Additional 126,000 tonnes recycled annually compared with the baseline option	£116 million
Re-labelling costs	Costs to businesses of modifying existing labels to mark EPR scheme compliant packaging. This figure includes broader impacts across the supply chain such as changeovers and logistics. Costs adjusted upwards to reflect higher number of Stock Keeping Units (SKU) in household packaging versus SKUs covered by DRS.	N/A	£415.8 million
Producer fee	Fee charged by EPR scheme to packaging producers either for the number of items or the tonnage of household packaging placed on the market	N/A	Subject to overall scheme costs and material price development
Scheme administration and regulation	Two new bodies set up to fulfil these functions. Assumed that bodies are integrated into existing regulatory structures to save overhead costs	N/A	£47.3 million
Communications	National campaign prior to EPR launch and on-going door-to-door engagement with householders to reinforce new recycling methods.	2.48 million Scottish households in 2018	£63.8 million
Litter enforcement strategy	A summary of the costs of the litter reduction strategy are given in Annex B	N/A	£115.4 million
Material revenue	Various publicly available sources. Adjusted to reflect changes in Full Business Case Addendum.	N/A	£334.6 million
Carbon factors	Carbon factors used to calculate the carbon benefits of recycling glass, paper, cardboard, plastic, aluminium steel and residual waste. Higher traded carbon values updated in line with BEIS guidelines.	See link	See link See BEIS

Table 5. NPV Costs and Benefits of an EPR for Scotland – DRS Household Tonnes Only

ActorName	Costs(£m)	Benefits(£m)	NetBenefit(£m)
Local Authorities	0	138	138
Business	- 473	669	196
Regulator	- 5	0	- 5
Society	0	74	74
Total	- 478	880	402

Figures may not sum due to rounding

96. The EU Plastics Directive requiring a 90% separate collection target for plastic bottles by 2029 is unlikely to be reached under this packaging EPR scheme. The four strategic DRS outcomes are not optimised under this packaging EPR scheme.

4.5 Comparison of Options

97. The above economic analysis of a Scottish DRS (option 2) and a Scottish EPR scheme (option 3) provides a comparable NPV for each option. The NPV output for a Scottish DRS is £615m, compared to an NPV output for the household drinks component of an EPR scheme of £402m. DRS is the preferred option.

98. Calculating the net benefits of a DRS and an EPR scheme and selecting the preferred option on the basis of this comparison is the standard approach in a BRIA. The choice of the preferred option is not however a simple binary one because it is most likely that a new EPR scheme(s) will be introduced in Scotland and the rest of the UK in the near future. As outlined at paragraph 58, work is underway to reform the current packaging producer responsibility system. The modelling work undertaken here acknowledges this future policy development and recognises that the remaining packaging waste stream in Scotland will be net of DRS drinks containers.

99. The two policy options are considered complementary with DRS initially bringing the benefits of four strategic outcomes:

• Increase the quantity of target materials collected for recycling
• Improve the quality of material collected, to allow for higher value recycling
• Encourage wider behaviour change around materials
• Deliver maximum economic and societal benefits for Scotland

Based on these outcomes the comparison between the two options are considered in more detail below.

100. Labelling of EPR material and a single collection system across Scotland are expected to address householder's uncertainty around which material can currently be recycled and will therefore reduce contamination within the recycling streams. However, the quality of recycled material from mixed collections at kerbside will be lower than that of a DRS which separates material at the point of collection, returning high value material into the reprocessing cycle.

101. The EPR scheme falls short against a DRS in its capacity to encourage wider behaviour change around materials. While an EPR scheme will facilitate recycling efforts by consumers already engaged, it does not incentivise behaviour change in the same way that a DRS will. As a result, there is likely to be limited impact on littering behaviour and it will take longer for recycling rates to increase significantly. In comparison, a DRS will have significant impact very quickly. Loss aversion is likely to act as a powerful motivator to incentivise behaviour change, both in terms of littering fewer drinks containers (which make up a considerable share of the litter stream) and returning drinks containers for recycling in order to redeem the deposit. It is possible that the DRS incentive might lead to a change in behaviour regarding other items typically littered, and general recycling behaviour. These have not been modelled.

102. Since a DRS has a strong behaviour change incentive, recycling rates of material in scope are expected to increase within a short timeframe (DRS achieves its target capture rate in year two, and the EPR scheme reaches its target capture rate in year nine). For DRS, the attributed environmental and societal benefits are accrued almost immediately, positively impacting the overall performance of the scheme in terms of NPV.

103. In addition, the target capture rate for a DRS is 90%. This capture is not anticipated to be achievable under the EPR scheme where a rate of 71% (all packaging) is modelled. As a result, a smaller percentage of drinks containers will end up in landfill/energy from waste under the DRS option.

104. As a result of these wider benefits, a DRS for Scotland is more closely aligned to the strategic objectives of the policy. By delivering impact in a shorter timeframe, by providing wider litter benefits via behaviour change and by increasing the quality of the collected materials, it offers key benefits that are not directly fulfilled by the introduction of an EPR scheme policy.