Deposit return scheme for Scotland: BRIA

4.0 Options

40. To ensure a Deposit Return Scheme is the correct delivery mechanism for Scotland, a number of alternative delivery options have been considered, in order to compare the benefits and costs of each option.

41. 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

42. 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.

43. 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.

44. Raising the cost of single-use drinks containers through a targeted on-the-go consumer tax would make these products more expensive and could therefore reduce total consumption, but it would not reduce the litter rate for those products which are consumed and may have other unintended consequences. Due to these limitations and tax remaining a reserved matter, this option was not considered further.

45. 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. Customer behaviour could complicate this further.

46. An on-the-go DRS would also capture significantly lower container numbers than a comprehensive DRS. Scottish data^[15] shows that about 30% (0.8 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.

47. 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.

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

49. 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 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.

50. Full cost recovery is included in all the options considered below. Under the “polluter pays” principle, producers are 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.

51. 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

52. 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 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.

53. 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%)^[16]. NPV is defined as the sum of a stream of future values that have been discounted to bring them to today’s value^[17]. 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 NPV’s calculated for each option represents the lower bound. Factors that are difficult to monetise include:

• 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 marine litter, the wider Scottish countryside, tourist locations and areas where people visit regularly. These particular benefits are likely to be higher for DRS^[18] when compared with 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.

4.2 Option 1. No policy change – business as usual

54. This option is the baseline against which the costs and benefits of the alternative DRS and household EPR policy options are compared. It assumes a small annual population increase which is one of the drivers of household packaging waste. It further assumes that there is no change in waste and recycling policy, resulting in a modest upward trend for household packaging waste. In effect this baseline is notional because commitments to meeting future recycling targets under the European Commission’s Circular Economy Package^[19] have been made.

4.3 Option 2. DRS preferred scheme design is implemented

55. 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 are 50ml and above and three litres and below, 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.

56. A Scheme Administrator will run the DRS, the costs of which are included in the model. This body will be industry-led and not-for-profit. 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, 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.

57. 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.

58. 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.

59. Producers are defined as those companies that put deposit bearing products 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.

60. 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.

61. 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.

62. 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.

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

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

Table 2. Key components, numbers and values used to model a Scottish DRS

Component	Description	Number	Value (NPV 25 yr)
Materials in scope	PET drinks, cans and glass containers	1.7 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 locations	Any place of purchase	17,407 return locations	N/A
Bulking and counting centres	Cost of constructing and running costs	N/A	£78.7 million
Re-labelling costs	Cost of designing, producing and applying DRS compliant labelling to containers (or otherwise paying a higher producer fee)	1.7 billion containers	£101.9 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
Manual take back	Manual deposit return location. Costs include value of storage space, consumables and labour requirements.	14,386 manual return points dealing with 15% of returned containers	£21.7 million
Handling fee	Reimbursement of all costs associated with operating a return point	N/A	£887 million
Producer fee	Paid by business to cover any shortfall in finances for the Scheme Administrator	N/A	£567 million
Fraud	Value of fraudulently redeemed containers	17.5-23.3 million drinks containers annually	£74.3 million
Scheme administration	Staff and equipment costs	N/A	£16.8 million
Communications	National stakeholder and consumer awareness raising	N/A	£7.6 million
Material revenue	Scheme income	N/A	£297.3 million
Carbon factors	Carbon factors are used to calculate the carbon benefits of recycling glass, plastic, aluminium and steel	See link	See link

65. 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. A net benefit of £81.6m is perceived under the modelled DRS policy.

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

Actor Name	Costs (£m)	Benefits (£m)	Net Benefit (£m)
Local Authorities	- 46.3	237.5	191.1
Business	-1,537.7	1,153.4	- 384.3
Regulator	-4.8	-	-4.8
Society	-821.9	1,101.3	279.4
Total	- 2,410.7	- 2,492.2	81.6

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

66. The above NPV is different from that set out through the Deposit Return Scheme Full Business Case Stage 1 due to the adoption of different baselines. In line with established practice, the baseline for the purposes of this BRIA assumes that commitments to achieve EU Circular Economy targets and Scotland’s own domestic recycling targets will not be achieved. The NPV calculated for the purposes of the Full Business Case Stage 1 takes account of the avoided compliance costs associated with meeting such targets as a result of the introduction of DRS.

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

67. 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 captured under this broader EPR scheme. 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.

68. 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. A small number of service variations are allowed under the scheme to account for collections in urban areas, for example covering flats and tenements.

69. 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.

70. 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.

71. 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^[20], collectors and sorters of household packaging have their costs fully reimbursed by the scheme administrator.

72. 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.

73. The de-minimis for the current Packaging Recovery Note (PRN) system obligates producers that place more than 50 tonnes of packaging 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).

74. The total amount of packaging placed on the UK market in 2017 was around 11.5 million tonnes^[21]. 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.

75. 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 symbol^[22]. This cost to business has been included in the analysis.

76. 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.

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

Table 4. Key components and values used to model a Scottish EPR scheme

Component	Description	Number	Value
Materials in scope	Household packaging: glass, paper/board, mixed plastics and metal containers	545,000 tonnes of household packaging (collected from kerbside and bring sites) of which 245,000 tonnes (46%) currently recycled	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 135,000 tonnes recycled annually compared with the baseline option	£179.7 million
Re-labelling costs	Costs to businesses of modifying existing labels to mark EPR scheme compliant packaging	N/A	£149.4 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	£49.1 million
Communications	National campaign prior to EPR launch. On-going campaigns to reinforce new recycling methods and door-to-door engagement with householders	2.46 million Scottish households in 2017	Pre-launch national campaign £73.5 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	N/A	£189.9 million
Carbon factors	Carbon factors used to calculate the carbon benefits of recycling glass, paper, cardboard, plastic, aluminium and steel	See link	See link

78. Table 5 below utilises the components, numbers and values from Table 4 to calculate the costs, benefits and net benefit of a Scottish EPR on the below actors. A net benefit of £50.7m is presented under the modelled EPR policy.

Table 5. Costs and Benefits of an EPR for Scotland - NPV

Actor Name	Costs (£m)	Benefits (£m)	Net Benefit (£m)
Local Authorities	0	284.3	284.3
Business	- 669.7	189.8	- 479.9
Regulator	- 5.3	0	- 5.3
Society	0	251.7	251.7
Total	- 675.1	725.8	50.7

Note. The average capture rate for the three collection streams is modelled to reach a maximum of 71% of which the household plastics packaging capture reaches a maximum of 55%. The EU Plastics Directive requiring a 90% separate collection target for plastic bottles by 2029 is unlikely to be reached under this packaging EPR. The four strategic outcomes are not optimised under this packaging EPR.

4.5 Comparison of Options

79. The above economic analysis of a Scottish DRS (option 2) and a Scottish EPR (option 3) provides a comparable NPV for each option. The NPV output for a Scottish DRS is £81.6m, compared to an NPV output for an EPR scheme of £50.7m. From an economic perspective, a Scottish DRS is therefore the favourable option. However, it is difficult to directly compare these options like-for-like, because the in-scope materials differ (DRS is drinks containers only whereas EPR is drinks containers and wider household packaging). It is not possible to isolate the costs and benefits of DRS containers within the EPR output, so the NPV analysis provided includes wider household packaging material as well. As a result, total additional tonnage recycled via DRS is 2.18 million, whereas total additional tonnage recycled via EPR is 2.98 million.

80. Despite the higher tonnages achieved by the EPR scheme, it is anticipated that the quality of the recyclate will be significantly higher via DRS. 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 scheme because it separates material at the point of collection, which will return high value material into the reprocessing cycle. This is one of the strategic objectives of the policy intervention.

81. EPR also falls short against a DRS on some of the other strategic objectives, such as encouraging wider behaviour change around materials. While an EPR 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, however these have not been modelled.

82. 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 of 90% in year three and the EPR scheme reaches its target capture 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.

83. In addition, the target capture rate for a DRS is 90%. This capture is not anticipated to be achievable under the EPR where a rate of 71% is modelled. As a result, a smaller percentage of drinks containers will end up in landfill under the DRS option.

84. 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 policy.