House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for the Environment and Heritage, Senator the Hon Robert Murray Hill)

Regulation Impact Statement

Statement of the problem

Waste minimisation is a significant issue in Australia. Notwithstanding the independent waste minimisation arrangements of States, and Territories and the coordinated efforts of Australian jurisdiction's under the Australian and New Zealand Environment and Conservation Council (ANZECC) the National Waste Minimisation and Recycling Strategy (NWMRS), waste oil remains a difficult problem in Australia. The NWMRShas an objective to change Australian production, consumption and disposal activities through voluntary waste reduction arrangements with industry to:

•

achieve ecologically sustainable economic performance;

•

minimise the quantity and toxicity of waste and pollution; and

•

improve management and control of unavoidable wastes.

ANZECC has called for Commonwealth assistance in helping make the recovery and use of waste oil more financially and ecologically sustainable. Of all waste oil that is made for Australian consumption, some remains unrecycled, unconsumed, or is not accounted for in appropriate disposal arrangements. This missing oil is either being used inappropriately or is being inappropriately disposed off with adverse consequences to the environment.

Australian oil refineries currently produce around 800 ML (megalitres) of virgin base oil, from which lubricant is made, each year. Around 200 ML of base oil is exported. Domestic users consume some 520 ML per year. It is estimated that 150-165 ML of domestic consumption is currently recycled.

This leaves 355-370 ML, or 68-71%, of the annual domestic usage of virgin lubricant not recovered or reused. It is estimated that a maximum of 260 ML ^[F1] of this is lost to the system through combustion in engines, use as process and spray oils, and by spillage and leakage. Around 60 ML of this unrecovered oil is thought to be uneconomic to recycle for a variety of reasons (eg remote location of original use). While the ultimate fate of this used oil is not known, a portion will inevitably find its way into the environment, and that the storage of increasing quantities of waste oil in unknown locations and conditions presents a significant and growing environmental hazard.

Currently, a further 35-50 ML of used oil cannot be accounted for annually. Some of this oil is finding its way into the environment (ie catchments, waterways, storages and soils) causing environmental degradation. Diagram 1 provides a summary of the current lubricant cycle.

The oil and oil recycling industry is a diverse sector, with a wide range of stakeholders ranging from multi-national oil producers, through differing sized domestic re-refiners, to small 'backyard' family concerns. While the market for recycled products varies considerably, recycling operations tend to have tight margins and low levels of profitability. This, combined with the fragmented nature of the recycled oil markets and some consumer reluctance to purchase recycled lubricant for use in engines, acts as significant barriers to increasing the capture rate of the 70% of annual Australian lubricant use that is not currently recycled.

Diagram 1 Existing Flows & Volumes of Waste Oil

The problem being addressed

External Costs and Benefits: Significant quantities of used or waste oil are being lost from the oil product cycle thereby contributing to environmental degradation of Australia's natural and built environments. The ultimate negative environmental impacts from unaccounted or lost used oil has ramifications for biodiversity, environmental and human health, and Australia's Ecological Sustainable Development objectives. This imposes significant costs on the Australian economy arising from the need to redress the effects of waste oil pollution and reduces the benefit of public expenditure on environmental restoration.

1.

The Australian community expects that industries will operate according to Ecological Sustainable Development principles. Government and the oil industry cannot satisfy these principles while significant volumes of waste oil continue to enter the natural and built environments.

2.

Prevention of environmental damage is cheaper and less wasteful of scarce human and economic resources than subsequent remediation and restoration. The burden of remediation falls most heavily on public resources rather than on those responsible for the problem.

3.

Through Natural Heritage Trust programs Australia is investing significant resources in environmental management programs to redress degradation issues, while at the same time unknown but potentially significant volumes of oil are making their way into the environment inhibiting and eroding the benefit of such restoration efforts. The Australian community is contributing significant in-kind human resources to the efforts of the Natural Heritage Trust. The effect of this community contribution is also diminished by the inappropriate disposal of waste oil.

Market Failure: There are significant constraints on, and limited opportunities for, the expansion of the waste oil collection and recycling industries. The market for recycled oil products is small and fragmented. Profit margins in the oil recycling industry are low and thus incentives for the generation of new business to increase the capture of waste oil are not great.

1.

The collecting industry is fragmented, dispersed and has little economy of scale. There is robust competition for significant portions of the current pool of waste oil resulting in some market distortions.

2.

While the collection industry operates under existing State and Territory legislation, there is considerable variation between and within jurisdictions. Industry codes of practice and collection protocols are neither mandated nor widely observed.

3.

Most waste oil is collected free of charge, although charging for waste oil occurs in some markets. Anecdotal evidence suggests that waste oil generators are extremely price sensitive and the cost (to generators) of collecting oil acts as a disincentive for collection. Some generators (eg car dealerships) will in turn charge customers to dispose of oil but there is little evidence that any of the revenue raised in this way finds its way to collectors. Some agricultural users see waste oil as a potential resource and store it, expecting to be paid for its proper removal.

4.

It can be argued that waste oil generators are enjoying a 'free ride' by having hazardous waste removed at zero or nominal cost, or even charging the collector for the oil. This is perhaps the largest single reason for lack of value in the used oil market.

Value adding to products produced from waste oil has been proposed as a means of improving the market for, and profitability of, these products thus stimulating increased capture of waste oil. At the same time the costs to the Australian community for dealing with environmental degradation due to waste oil are reduced thus increasing the public benefit of initiatives such as the Natural Heritage Trust.

Why government action is needed to correct the problem

Without some form of regulation, incentives and transitional assistance expansion of Australia's capacity to re-refine and reuse oil will not occur, or occur very slowly. As a result, there is a potential for substantial quantities of waste lubricants to be discharged into the environment consequently causing significant environmental damage to natural and built environments, adversely affecting water, soil and productive capacity. In turn, the Australian economy could incur significant costs associated with environmental remediation.

Objectives

Objectives of proposed government action

The objectives of the proposed government action are to:

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ensure the environmentally sustainable management, re-refining and reuse of waste oil by supporting economic recycling options through product stewardship arrangements in partnership with oil producers, recyclers and the States;

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ensure that oil producers progressively assume the costs of product stewardship and environmentally sustainable practices for waste oil;

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increase the recovery rate of waste thus avoiding environmentally damaging disposal of waste oil;

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ensuring that products manufactured from waste oil meet the relevant Commonwealth environmental standards; and

•

allow for transitional assistance to introduce product stewardship arrangements.

Policy Authority

On 28 May 1999, the Prime Minister announced the Government's Measures for a Better Environment - A New Tax System , following from discussions with Senator Meg Lees, Leader of the Australian Democrats. Included in these measures was a commitment to fund the development of product stewardship arrangements for waste oil and provide transitional assistance to address this issue.

Regulation/policy in place

There is no policy framework or regulatory system in place at present to encourage the recycling of waste oil.

National and Inter-Governmental

There are no existing arrangements, such as National Environment Protection Measures or inter-governmental agreements for example, in place for waste oil recycling under the auspices of the Australian and New Zealand Environment and Conservation Council (ANZECC) or any other Ministerial Council.

In 1998 ANZECC identified and agreed a strong need to encourage the recycling and reuse of waste oil. The mechanism proposed at that time was an excise exemption for waste oil. The Commonwealth did not adopt this proposal.

All States and Territories either have or are developing tracking arrangements for waste materials that cover or will cover waste oil.

States and Territories

While most States and Territories have some form of waste stream regulation, or waste tracking systems, in place for waste oil, none have implemented product stewardship arrangements to encourage recycling of waste oil. Product stewardship arrangements will require a move towards relatively uniform tracking arrangements within and between jurisdictions. This could be assisted and accelerated with some support from the transitional assistance funds.

Queensland did attempt to develop a levy-based arrangement for dealing with waste oil but was thwarted by the constitutional obstacles.

Table 1 briefly summarises the nature of State and Territory arrangements for handling waste oil. ^[F2]

Statement of the options

Regulatory and non-regulatory options (including quasi-regulation) that are being considered for dealing with the problem

The main options considered are:

A.

Do nothing at the national level

B.

National industry codes of practice endorsed by Government

C.

Separate national agreements between government and discrete industry sectors (eg, Oil Producers and Oil Recyclers)

D.

One national agreement ('Covenant') between all spheres of government and all relevant industry sectors, ie similar to the National Packaging Covenant

E.

'Command and Control' regulation or legislation compelling virgin oil producers to directly or indirectly recycle waste oil, ie a statutory form of option B

F.

Levy on wholesale output payable by oil producers and passed to waste oil recyclers based on their output of manufactured refined product, thus adding value to their product and providing an incentive for recycling

G.

Tradeable certificate system that involves the issuing of certificates by the Minister to waste oil recyclers and an obligation on oil producers, who purchase certificates from recyclers (through the Minister), to hold certificates for a set percentage of the their production of virgin oil by the end of an accounting period. That is, producers will be need to meet a recycling target, through a mechanism that also increases the value of the recycled product to recyclers

H.

A levy system with a trial of a tradeable certificate system, drawing together aspects of options F and G

Constraints which may make some options not viable

Constraints which may make Option A not viable

Without assistance, waste oil products do not attract sufficient return to enable waste oil recyclers/collectors to systematically gather all available waste oil. Uneconomic collection costs and commercial volatility would cause continued instability in the waste oil collection and recycling markets. That is, intense competition for the large key sources of waste oil resources (rather than a systematic acquisition of all available waste oil) means recyclers cannot obtain a reliable market share, making investment in production fraught for all players and the acquisition of all waste oil subject to the industry's volatility. This would risk improper disposal, consequential environmental impacts, and continued requests for subsidisation through excise relief.

The environmental and economic costs of waste oil management and environment protection would continue to be borne by Commonwealth, State and Local Government taxpayers and ratepayers.

Doing nothing is not possible for State and Territory governments, as all are either actively seeking or preparing to implement solutions to the problems of waste oil collection, transport and disposal or reuse.

Local governments are bearing costs of managing waste oil arising from the 'do-it yourself' (DIY) market and collection is patchy. Community and cost pressures could lead to increased State and Territory regulation without national consistency.

Doing nothing would be inconsistent with the Commonwealth Government's involvement and leadership on action to reduce the environmental consequences of waste oil as considered by the Australian and New Zealand Environment and Conservation Council (ANZECC). The industry and the ANZECC has called on the Commonwealth to address the issue of risks to the Australian environment from waste oil.

Insufficient controls on the coverage, participation, and commitment of stewards would not allow for the objectives of the product stewardship arrangements for waste oil to be met, namely:

•

the maximisation of waste oil appropriately recovered and utilised;

•

the constraining of the social, economic and environmental cost of waste oil into the markets originating the waste; and

•

the development of a diverse and sustainable market for the recovery and utilisation of waste oil.

While it is considered that these constraints make this "Option" unviable it will be included for reasons of completeness and equity under the Impact Analysis of Each Option .

Constraints which may make Option B not viable

Some industry members would not volunteer, making the 'playing field' inequitable for industry commitment, adoption of codes/standards for waste oil recovery and utilisation, and competition in markets.

In the current inefficient market for waste oil, an uneven playing field would lead to increased volatility.

Lack of harmonisation across levels of Government on waste management arrangements would inhibit target achievement. This is already problematic for other waste resource recovery and utilisation activities in Australia.

This is a limited mechanism to address the market problems - there will be continued instability and there are insufficient controls across the industry and market (as above, for Option A).

Because of the unviability of this option it is considered no further in this document.

Constraints which may make Options C and D not viable

Gaining inter and intra jurisdictional and industry commitment to a cooperative approach is problematic, costly, time-consuming and administratively cumbersome, particularly within the indicated time frame.

This approach leads to the negotiation of less compelling and less flexible arrangements for product stewards than those discussed below.

Industry are compelled to undertake some industrial and economic actions and responsibilities and are likely to pass the costs of these onto the end users in their markets in a non-transparent fashion.

This is a limited mechanism to address the market problems - there will be continued instability and there are insufficient controls (as above, for Option A).

Under this approach there are few incentives to innovate for the development of new sinks (waste oil products and markets).

Because of the unviability of this option it is considered no further in this document.

Impact analysis of each option

Impact Group Identification

The key groups that would be potentially affected by the proposed action are:

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Governments (Commonwealth, State, Territory and Local);

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Producers and importers of virgin lubricating oil;

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Recyclers and re-refiners of waste oil;

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Non-target businesses, including collectors of waste oil;

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Consumers of oil; and

•

The built and natural environment, including impacts on quality of air, soil and water, impact on wildlife, stock and fisheries, integrity of ecosystems and amenity of land near, and affected by, disposal sites and potential disposal sites.

How each proposed option affects existing regulations (and quasi-regulatory measures) and the roles of existing regulatory authorities

Effects on existing Commonwealth regulations and authorities

As there are currently no Commonwealth arrangements or regulatory bodies in place for the recycling of waste oil it is expected that there would be virtually no effects for existing Commonwealth regulations and authorities.

However, options F and H propose that the largely excise arrangements (managed by the Australian Tax Office) would be used to collect a levy on virgin lubricant oil, as an excise. However, some amendments would be needed to the Customs and Excise Tariff legislation to make this possible.

Recycler output volumes would be determined, and the consequent amount of levy to be disbursed to recyclers, from information gathered from recyclers through the excise system. The disbursement is to be done using the administrative system established by the ATO to administer the Diesel and Alternative Fuels Grants Scheme. The one off incremental set-up costs associated with adding an oil recycling levy to these ATO systems can be accommodated within the terms of the existing resource agreement between the ATO and the Department of Finance and Administration. With regard to the disbursement of the levy, the ATO has advised that it may need to seek specific funding - these costs could be met from the $60M transitional assistance funds. The incremental operating costs associated with an oil levy are expected to be minimal.

Effects on existing State/Territory and Local Government regulations and authorities

As there are no product stewardship arrangements in place for waste oil in the States and Territories there would be no negative impacts for these jurisdictions.

However, all the options considered present significant opportunities to support existing hazardous and other waste management regulations in States and Territories or regulations that they might develop in the future. It is envisaged that benefits to recyclers from the proposed product stewardship arrangements would be dependent on recyclers complying with relevant State and Territory regulations.

A significant number of local government and regional waste management bodies are actively encouraging the local recovery of hazardous and other wastes including waste oil. The proposed product stewardship arrangements would not adversely affect or interfere with these initiatives and might provide some small positive benefits by reinforcing the community culture of recycling and appropriate handling of waste materials.

The options for the system would not draw on State and Territory resources. The system would not duplicate State and Territory waste management or environment protection arrangements. In any option seeking to have support paid to appropriate recyclers, a requirement for recyclers to be able to show that they are licensed by State and Territories would not imply any requirement for jurisdictions to harmonise licence arrangements. Any mandated codes of practice for waste oil collection and use or product standards for waste oil would enhance State and Territory outcomes for waste management and environment protection. However these arrangements in any option would only be for validating any support for recycling is based on appropriate collection, recycling and use.

The expected impacts of the proposed options; the groups experiencing likely benefits or likely costs; and distributional effects

Further details are given here and in the previous Section (above).

While the following impact analysis does include quantitative analysis, eg the impacts of a levy, economic modelling and life cycle analysis ^[F3] , there is a substantial emphasis on qualitative assessment. This is because many of the benefits that the proposed option would provide are intangible and difficult to measure.

The impact of Option A - Do Nothing

Under the "Do Nothing Option" insufficient controls on the coverage, participation, and commitment of stewards would not allow for the objectives of the product stewardship arrangements for waste oil to be met, namely:

•

the maximisation of waste oil appropriately recovered and utilised;

•

the constraining of the social, economic and environmental cost of waste oil into the markets originating the waste; and

•

the development of a diverse and sustainable market for the recovery and utilisation of waste oil.

This "Option" saves the implementation costs to government and industry of any resultant policy on waste oil product stewardship. That is, the $60M transitional assistance would not be necessary, the costs of any levy to producers/importers would be saved, and the compliance costs of adherence to codes of practice and product standards to recyclers and collectors would be saved (although the latter would have been offset by any product stewardship benefit paid to such recyclers).

Under this "Option", waste oil products would not attract sufficient return to enable waste oil recyclers/collectors to systematically gather all available waste oil. Uneconomic collection costs and commercial volatility would cause continued instability in the waste oil collection and recycling markets. That is, intense competition for the large key sources of waste oil resources (rather than a systematic acquisition of all available waste oil) means recyclers cannot obtain a reliable market share, making investment in production fraught for all players and the acquisition of all waste oil subject to the industry's volatility. This would risk improper disposal, consequential environmental impacts, and continued requests for subsidisation through excise relief.

Under a "Do Nothing Option", the costs of appropriate waste oil recovery and use would continue to be met outside the oil importing/production/use markets and will be passed onto other markets or public moneys. Other markets (waste oil recovery and use markets) and ANZECC, and State jurisdictions have already approach the Commonwealth to address this problem. The cost to public moneys (Commonwealth or other jurisdictions) of appropriately improving the value of waste oil (so it can be collected and utilised) is estimated as being in excess of $100M per year to account for 200ML of recoverable waste oil per year.

The recycling industry has informed State, Territory and the Commonwealth Government that under a "Do Nothing Option" the industry will fail with consequential loss of employment and a contributing component of our economy. States and Territories have already asked the Commonwealth to intervene due to concerns for these economic matters and more importantly from concern that stored massive volumes of waste oil is nearing maximum storage capacity and an increasing human and environmental hazard. As storage reaches saturation waste oil collectors are collecting less from their "service catchments" leaving little infrastructure or services for the community and businesses to dispose of waste oil appropriately. This increases the risks of hazards to the environment and human health.

No environmental benefits from "the Do Nothing Option" are perceived. To the contrary, waste oil is harmful to the environment and to human health. It contains carcinogens, and chemical toxins. It contaminates on entry to the soil and water and transmits these toxic substances plus dangerous particulates through the air on burning. Its contaminants are toxic to humans, animals and plants on exposure through breathing emissions, or consuming contaminated food, or on contact with skin. The cost to our health, natural heritage and resources and urban environment of exposure of up to 200 million litres of waste oil per annum cannot be estimated due to:

•

The absence of data on illegal dumping or use practices (though all jurisdictions have evidence of the existence of this practice);

•

The inadequate levels of information on waste oil in Australia; and

•

The disparate nature of the oil dispersal into our air, water and soil.

However the risks of taking no action on the continued transmission of such a toxic substance into our environment and communities should not be underestimated.

Impact of Option E - 'Command and Control' regulation or legislation

If this option was implemented the Commonwealth would need to take on a much stronger and more expensive compliance and enforcement role or seek to devolve this to the States and Territories. If the former this may duplicate existing State and Territory arrangements and if latter it would impose increased compliance and enforcement costs on the States and Territories, for which they would seek assistance.

The opportunity to institute a potentially world's best practice product stewardship arrangement would be lost. Instead a trenchant, administratively problematic arrangement would be likely to result. Oil producers would likely not have the viability of the oil recycling and collection industry foremost in their minds while they seek to comply. It is difficult to see the viability of the 'oil recycling and collection industry' being maintained under such an arrangement. Without a competitive and diverse oil recycling industry, innovation in recycling is unlikely and emerging environmental requirements for waste oil products could mean that this waste resource is only used in increasingly less sustainable ways.

Oil producers would also be disappointed if the Government moved away from its stated intention to pursue the proper handling of waste oil through the use of product stewardship arrangements. 'Command and control' legislation would be intrusive and onerous upon producers.

The strength of reaction of oil producers to the imposition of 'command and control' legislation is likely to lead to future instability in collection and recycling markets. Without a market mechanism giving an incentive to bring more waste oil to account, it is possible that more waste oil will be dealt with inappropriately.

Impact of Option F - Levy System

Institution of a levy on its own would meet the government's commitment to introduce product stewardship arrangements by 1 January 2001. With some minor amendments to the current Customs and Excise Tariff legislation, the levy could be collected as an excise by the Australian Taxation Office under a single administrative regime (see Effects on existing Commonwealth regulations and Authorities above).

Oil producers, although they may not favour the levy, face a known and manageable impost collected through a system that is unlikely to add to their administrative costs. The levy system is conceptually simple. The setting of it would occur (after the initial determination by the Minister) in a transparent process to which the producers would have access.

The recycling industry, or those segments of it that operate in an environmentally sustainable manner, would receive the levy proceeds, paid by the ATO (see Effects on existing Commonwealth regulations and Authorities above). The advantage of the levy over a 'pure' tradeable certificate system is that levy proceeds would flow virtually immediately to recyclers. Only recyclers who are appropriately accredited or recognised as operating in full accordance with regulations in their jurisdictions would receive the levy. The Minister could suspend or remove recyclers from receipt of the levy at his discretion if they breach environmental regulations in their jurisdiction. Levy-derived income would be part of the recycler's income stream for taxation purposes.

While collectors are not primary beneficiaries of the product stewardship arrangements they should receive increased financing from recyclers to collect more waste oil products enabling growth in their businesses. Although it is not anticipated that they would receive levy funds directly, collectors should be advantaged as recyclers step up production and seek more and better sources of waste oil as feedstock. This would in turn make more oil available to secondary users.

The levy system would place no additional reporting or compliance obligations upon small business, other than businesses importing or producing virgin lubricants.

Producers would almost certainly pass on the levy to consumers. However the timing of the introduction of product stewardship to coincide with the introduction of the GST will mean that consumers, even after the levy, should pay less for lubricants. This price fall, resulting from the move from a wholesale sales tax of 22% to a GST of 10%, would certainly cushion users from the actual price rise from the levy. Any transfer of the cost of the levy from producers to users is likely to be 'masked' at this time by the effect of the change to the GST.

Diagrams 2 and 3 (following) compare the impact on oil prices of current wholesale sales tax regime with that of the GST and the proposed levy.

The increased value of waste oil is expected to result in less oil being dumped or used inappropriately.

Impact of Option G - Tradeable Certificate System

The certificates would have the advantage that they could both accurately 'set the bar' and measure recycling performance against it.

The certificates are also a mechanism by which producers are seen as directly meeting some of the costs of product stewardship, rather than the immediate passing on of the costs to consumers, as would likely occur under the levy. Although the costs of purchasing certificates may, in fact, eventually find their way through to the consumer, the certificates oblige the producers to take a more involved stance with the stewardship arrangements.

For oil producers, the certificate system is conceptually more complex than a volume based levy and potentially involves a greater degree of commercial uncertainty and risk. Although Environment Australia is convinced the system is conceptually sound it proposes to introduce certificates to trade initially at zero cost to allow full market testing in a 'no fault' environment. This would enable a trial with the participants identifying the barriers to a best practice trading in a certificate market for waste oil. It would identify the sources of market distortion and develop mechanisms to remove or mitigate them. The trial would model starting values for exchanges on the market. It would identify mechanisms to mitigate or manage risks associated with the confidence of traders in the certificates market. Participants would be able to use the trial to build confidence in the trading market without being exposed to financial risk from errors of judgement or market distortions. Like any trading market confidence is critical. For example in the first period of such a market, the possibility that the timing of entry into the certificates market of both recyclers and producers (to minimise costs and maximise gain), might bring about distortions in price and/or distortions in supply.

For recyclers, the certificates are a value-adding element. However, unlike the levy this value adding would not be 'immediate'. Certificate-derived income would be part of the recycler's income stream for taxation purposes.

Collectors and secondary users (unless they are also recyclers) would not have the capacity to access certificates directly. However this group should be, at worst, unaffected by the certificate trading which would, over time, gradually 'raise the bar' and bring more waste oil to account.

The certificates would involve no additional compliance, administrative or other reporting requirements on other businesses. Consumers are also likely to be unaffected by the certificate system, although they would notice a price drop because of the wholesale sales tax to GST change as discussed above. If the certificates were to be traded at a high price, producers would be likely to pass on the increased cost to consumers.

Impact of Option H - Levy System with a Trial of a Tradeable Certificate System

The above discussion of impacts under 'levy' and 'tradeable certificates' is generally applicable here.

The levy functions by passing funds quickly to recyclers, who do not need to negotiate with the oil producers to access these funds. The levy system can treat all recycling options as equal for levy receipt purposes, or differential pricing based on environmental criteria can be applied. The certificates may have two functions. Like the levy they add value to the system, but more slowly as certificates are purchased by producers. Their chief value, at least initially, would be to set a target for recycling and measure the performance of recyclers in meeting that target. Certificates appear to have considerable potential to be used as incentive measures and as trading develops and matures the relative importance of the levy may drop.

A system with the inherent flexibility of both elements (levy and certificate) can operate within a range of values and trading conditions that gives the system inherent resilience to meet variable market conditions. It is anticipated that the waste oil market would take several years to work through its present volatility, and the issue of large storages of oil in some jurisdictions.

It is expected that as the value of certificates rises during the transitional period, ie the first four years, that there would be a commensurate drop in the levy rate so that the price to consumers should not be impacted on by certificate values.

Data sources and assumptions used in making these assessments

Environment Australia has examined information available on waste oil management, recovery and use from the following.

•

Consideration of national concerns raised by State and Territory environment agencies, the Chair of ANZECC, Mobil and Shell, and leading oil recyclers.

•

A study of the situation in the waste oil market and industry titled Oil Recycling and Excises (Burnbank Consulting and Tasman Asia Pacific April 1999).

•

Information on excises and industry activity supplied by the Excise Business Line of the Australian Taxation Office.

•

Information on recyclers operations and related environment protection action provided by State and Territory agencies.

•

Information from a project funded by the Natural Heritage Trust Waste Minimisation Awareness Program on waste oil in northern and remote Australia and carried out by the Northern Territory Government.

•

Direct consultation with and input from key oil producers (eg Shell (Australia) Pty Ltd, BP (Australia) Pty Ltd, Caltex Pty Ltd), importers (eg Castrol), waste oil recovery and utilisation companies (eg Wren Oil, Nationwide Oil, Southern Oil Refineries, Mulhern Waste Oil Removal Pty Ltd), industry associations (eg Oil Recyclers Association of Australia, the Independent Oil Recyclers Association of Australia, the Australian Institute of Petroleum), all State and Territory governments and Commonwealth Departments (eg Department of Industry Science and Resources, Australian Taxation Office).

•

Reviews of overseas documentation on waste oil management and recycling, and product stewardship systems.

In addition there are two studies building technical and economic understanding for the refinement of the product stewardship system over the four year implementation period. An economic study by ABARE on the basic level of support to be provided to waste oil collectors and users/recyclers from product stewards, and of any macroeconomic issues to be considered in the implementation of the system. A life cycle assessment study would compare the ecological sustainability of the different uses for waste oil to examine the case, if any, for differentiated levels of support for uses that have better environmental performance.

Data and positions on the problem of waste oil in Australia vary enormously across State and Territory agencies and between parts of the industry. There is considerable disagreement in these parties over the nature of the problem and how to measure and handle it. The Government's foreshadowed four year implementation phase for the product stewardship arrangements for waste oil would enable consolidation of the data on the extent of the problem and a refinement of the approach to its solution by the Minister. In this context, the flexibility in the solution proposed for waste oil in Australia is critical.

The data problem is very significant to the decision for any option on waste oil in Australia. This is why Environment Australia proposes that the arrangement chosen by decision makers:

•

has alternative market mechanisms at its disposal;

•

undertakes routine monitoring, review and performance evaluation; and

•

has the ability to support standards that would ensure the quality of collected waste oil and the derived products.

Such an approach would need significant monitoring and performance evaluation to:

•

enable a credible 'arms' length assessment of the market for waste oil recovery and use; by the Minister

•

provide incentives to improve the technology and methods for the recovery and use of waste oil irrespective of the current varied views as to the extent of the problem; and

•

underpin a positive framework for cooperation between industry and government enabling an improvement in the capacity to manage, recover or utilise waste oil in Australia.

Some of this information already exists in the form of excise and tax information on virgin and recycled finished products (ie lubricants, diesel made from waste oil). Data would need to be developed from this information and from monitoring industry action under the 4-year implementation phase for any selected option. As market stability and innovation provided for by the product stewardship arrangements improves the information base would be strengthened. At that time it is expected that the role of the Commonwealth would shift from the implementation and refinement of the system to monitoring and maintenance.

Summary of outcomes for each option examined and reason why a particular option is preferred

Summary of Outcomes

Option A, 'Do Nothing' would leave unaddressed the significant concerns of industry, the community and State and Territory governments evident in their related considerations and decisions. The waste oil collection and recycling industries will fail with consequential losses to the economy and employment leaving serious threats to human health and the environment without appropriate mitigation and service infrastructure.

Because of the unviability of this option, it is considered no further in this document.

Option E, 'command and control' regulation , would be an intrusive and expensive option requiring considerable compliance and enforcement administration. It is likely to impinge on State and Territory jurisdictional matters or at least require considerable investment in an administrative structure by either the Commonwealth or the States and Territories.

While Option F, a levy system , is sound, workable, meets policy outcomes and does protect smaller recycling businesses from existing and potential market distortions, it offers less market flexibility than is optimal.

Option G, a tradeable certificate system , offers considerable market flexibility but initially may disadvantage smaller recyclers and perpetuate some existing market distortions. Initial lack of understanding of such a system and associated distrust from some sectors may inhibit its operation and restrict the realisation of the desired policy objectives and outcomes.

Option H, a levy system with a trial of a tradeable certificate system , offers the certainty, transparency and simplicity of the levy, particularly during the start up and bedding in of product stewardship, but allows for greater market-based flexibility through the progressive introduction of tradeable certificates over time. It also allows greater industry and other consultation to be carried out during the development of the certificate system and prior to its introduction.

The Preferred Option

The preferred option is Option H, a levy system with a trial of a tradeable certificate system . Table 2 (following) summarises the advantages and disadvantages of this option.

In comparison with other approaches considered, the proposed option provides the following important features:

National focus and legislative framework - allowing the coordination and clear delineation of roles and responsibilities of parties involved in the lubricant lifecycle in all jurisdictions

Appropriate sharing of responsibilities and costs with oil producers internalising the externality costs of proper lubricant reuse and recycling.

National consistency - allowing ease of compliance, the uniform application of transparent and fair performance measures, the uniform application of any relevant Commonwealth and ANZECC environmental standards, and providing a single point of entry and contact for the product stewardship arrangements.

Efficiency - the proposed system for collecting from producers and disbursing it to recyclers will use the existing ATO arrangements and systems (see 4.2.1 above) at no or minimal incremental cost. The proposed levy is low relative to the cost of the product and will not substantially impact on the price reductions to consumers arising from the abolition of wholesale sales tax and introduction of the GST.

A market for certificates would automatically be formed by the need for producers to have purchased certificates to a set percentage of their production by the end of the accounting period. As certificates would be a tradeable commodity, it is expected that the market in them would operate in a way that minimises the costs. Producers would seek to pay the minimum amount for certificates but must purchase a set minimum amount as determined by their production output.

Effectiveness - the disbursement of all the levy (collected from producers) to recyclers is considered to be a most effective way of adding value to the recyclers' products and ensures that producers assume greater responsibility for the costs of a waste generated from their products.

While there is no direct precedent for the proposed type of tradeable certificate system, tradeable permit systems are being more widely adopted in Australia and overseas. They are expected to be an effective market-based commodity directly linked to production of products manufactured and re-refined from waste oil and providing a highly effective incentive for oil recycling.

Improved environmental performance - the South Australian container deposit legislation clearly demonstrates that levy system can deliver an improvement in environmental performance.

The tradeable certificate system would provide for improved environmental performance by allowing for the establishment of recycling targets that can be used to measure performance and progressively raise the 'high bar'.

Cost burden - initially the levy costs are to be borne by oil producers and it is presumed that these would be passed on to consumers, although the increased cost to the consumer would be more than handsomely offset by changes associated with the new tax system. The incremental cost of collecting the levy is expected to be very small through the extensive use of existing arrangements and infrastructure (see Effects on existing Commonwealth regulations and Authorities above).

The costs of operating the product stewardship arrangements are expected to be low and to be met from the transitional assistance funding during the first four years of the product stewardship arrangements. Thereafter, they are to be met from brokerage fees on certificate transactions.

Equity - the application of a uniform levy based on production output volume and returned to recyclers at a uniform rate based on their manufactured/re-refined volume is transparent and equitable. The levy would not substantially diminish the retail price reductions that consumers would receive due to changes associated with the new tax system.

The role of the Minister as a third party broker in the transaction of certificates can ensure that neither the purchasers of the certificates nor the sellers are aware of the others' identity. This eliminates the possibility of market distortion by an oil producer with an equity interest in a particular recycler acting together to depress the value of certificates held by other recyclers.

Compatibility with existing institutions - the levy collection and disbursement is compatible with existing and developing arrangements being managed by the Australian Tax Office. It requires no other mechanisms except those managed by the ATO and does not impinge on any other institutions (see Effects on existing Commonwealth regulations and Authorities above).

The proposed tradeable certificate arrangements are not incompatible with any existing institutions but would require the establishment of a Minister.

Compliance with appropriate State and Territory environmental standards remains with State and Territory agencies. Compliance with any relevant Commonwealth standards for recycled products, eg the various Euro fuel standards could be contracted to State and Territory agencies thus avoiding the need for additional Commonwealth administrative infrastructure.

Acceptable administrative costs - the low initial set up costs for the levy system would be met from the transitional assistance funding. There are minimal operating costs associated with the levy as it largely utilises existing and much larger systems managed by the Australian Taxation Office.

The transitional assistance funding would cover the initial administrative costs of the tradeable certificate system, but this could rapidly evolve into a cost recovery system based on brokerage fees on certificate transactions.

Community acceptance - environmental awareness and concern has maintained a high importance to the community in recent decades. The public is likely to react favourably to the fact that the Government is acting to minimise the environmental impacts associated with the generation of waste oil. The mechanisms proposed ensure that this is done with in a market framework at minimal cost to the taxpayer with the oil industry (and consumers) progressively assuming the responsibility for product stewardship at a relatively low cost. The community has become increasingly aware of the 'user pays' principle and economic instruments in recent years. As the retail price of oil is expected to fall by more than five times the level of the levy there is likely to be little if any resistance from consumers.

With regard to the collection and disbursement of the levy, the operation of the excise and diesel and alternative fuels grants systems are understood by all sectors of the oil industry. The ATO is in process of advising all oil recyclers of the recent changes to excise arrangements for products produced from waste oil these changes were introduced for ATO excise auditing and accounting purposes rather than to meet product stewardship needs.

The concept of tradeable certificates, user/polluter pays and product stewardship principles are not new to industry and business. Providing that the imposts of such approaches are not excessive and fit within a market framework designed to deliver the Government's desired outcomes efficiently, it is expected the industry would accept the proposed product stewardship arrangements.

Diagram 2 Impact on customers who currently pay sales tax

Diagram 3 Impact on customers who currently are sales tax exempt

Consultation

The main affected parties

The main affected parties are the Impact Groups set out previously. The following parties have been consulted, to date, regarding the proposed product stewardship arrangements for waste oil:

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Governments: Commonwealth, State, Territory and Local

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Major oil companies with Australian refining capacity

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Relevant industry associations

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All of the larger, and many of the smaller, collectors and recyclers

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State and Territory Environment Protection Authorities

Consultation arrangements

Discussion paper on the policy options for product stewardship

Consultations were bi-lateral, at meetings and conferences and through telephone conversations and exchanges of correspondence. Following these consultations, Environment Australia prepared a Discussion Paper and released it for public comment on 26 October 1999. The closing date for submissions was 15 November 1999. The existence of the Paper and the call for submissions was advertised in national newspapers. A targeted mail-out of the document ensured that the paper was sent directly to over 350 businesses, government agencies, association and individuals, many of which had been engaged in the earlier bilateral consultations. More than 500 copies of the Discussion Paper were distributed and the document was also available to down load from the Environment Australia internet site.

The Discussion Paper and the policy framework announced by the Prime Minister continue to be available to the public on the internet ( .

Consultation on the implementation of the product stewardship system

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An expert focus group met on 11 February 2000 to validate the efficiency and equity of the draft Bills for the product stewardship system and to consider the implementation issues; and

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Two seminars were held (ie one in Adelaide and one in Brisbane) in February 2000 to consult with the industry about the government's decision and implementation arrangements and to discuss elements of any new mandated codes of practice).

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A set of answers to 'frequently asked questions' has been prepared and is being distributed to affected parties.

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Consultation and negotiation on the arrangements for product stewardship would be expected to be ongoing over the four year implementation phase.

Conclusion and recommended option

Brief summary of the assessment of each option

See Data sources and assumptions used in making these assessments and Summary of outcomes for each option examined and reasons why a particular option is preferred for a summary of all the options.

The preferred option(s)

The preferred option is Option H, Levy system with a trial of a tradeable certificate system . That is, to implement product stewardship for waste oil through the establishment of a regulatory framework that, through Ministerial decision, allows:

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the collection of a volume-based levy from oil producers;

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the payment of the proceeds of that levy to waste oil recyclers; and

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the trial of trading of certificates that measure, and attest to, the actual amount of oil recycled or reused.

It should be noted that while largely existing ATO administrative systems are to be used for the management of the levy (see Effects on existing Commonwealth regulations and Authorities ), some amendments to the Customs and Excise Tariff legislation will be needed together with enabling legislation to:

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empower the Minister to advise the Treasurer of the appropriate levy rate;

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allow for levy disbursement to recyclers;

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establish the Minister, an advisory board and define their roles and functions;

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establish a tradeable certificate system;

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empower the Minister to set recycling targets;

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empower the Minister to set appropriate standards for receiving benefits from the arrangements;

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establish appropriate compliance measures; and

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provide for appropriate monitoring.

Brief outline of main assumptions upon which the conclusion rests

Key assumptions:

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The Government is committed to meeting the 1 July 2000 ^[F4] deadline for the introduction of product stewardship arrangements for waste oil as defined in the Prime Minister's announcement of 28 May 1999.

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Product stewardship arrangements can only to be effective if all new oil producers and importers participate in the arrangements.

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The available data are accurate, given that they are 'best estimates', based on information provided by the sources.

With regard to the last point it should be noted that economic modelling and life cycle analysis studies are under way. The proposed system is designed to be flexible and responsive to take account of changes that might be needed as better information becomes available. Flexibility is provided by 4 key mechanisms:

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The ability of the Minister, following consultation with industry, to adjust the product stewardship levy or benefits;

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The ability to differentiate between oil recycling products for the level of benefit paid (where the case for differentiation of a particular use for waste oil can be justified on the basis of scientifically credible life cycle assessment information);

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Development, and review and revision of mandated industry codes of practice; and

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Development, review and revision of waste oil product standards to determine which uses of waste oil are appropriate for support under the system and to consider the case for differentiation where supported by appropriate evidence.

It is expected that Environment Australia and other agencies, such as the ATO, will continue to monitor the implementation of the arrangements throughout the transitional period and make recommendations to the Minister for adjustments as appropriate. It is envisaged that these arrangements will be needed beyond the transitional 4-year implementation period as the industry continues to adjusts to new technologies, or emerging environment protection requirements

Reasons why this option is preferred and others rejected

The proposed option provides the most flexible, effective and responsive market-driven arrangements that will meet the Government's desired policy outcomes.

The proposed product stewardship arrangements will establish a regulatory framework, based on the principle of extended producer responsibility, for the effective lifecycle management of lubricant products, including their recovery and utilisation, and ensure that products manufactured and re-refined from waste oil met any relevant Commonwealth and ANZECC environmental standards.

The implementation of product stewardship through the proposed arrangements will help to prevent inequities, such as a disproportionate spread of cost burdens and competitive advantage that may accrue to individual producers by avoiding responsibility for lubricant products.

Option E, 'command and control' regulation or legislation, was rejected as being intrusive, complex, potentially expensive and at divergence with the Government's policy as outlined in the Prime Minister's announcement of 28 May 1999.

Options F, a levy system, and G, a tradeable certificate system, while workable, in isolation do not provide sufficient flexibility to allow the product stewardship arrangements to be adjusted to meet changing market circumstances and increased understanding and acceptance by industry.

See also The Preferred Option above.

Implementation and review

How the preferred option will be implemented

The preferred option will implement a product stewardship system with the following key features.

A volume-based levy on new lubricant

With some minor amendments to the current Customs and Excise Tariff legislation, a levy will be collected from oil producers and importers, as an excise on oil as it leaves the producer. This will be done utilising largely extant administrative systems managed by the Australian Taxation Office (ATO). The ATO (based on advice from the Minister for the Environment and Heritage), will distribute this levy to oil recyclers based on their product output volume (data gathered from recyclers by the ATO under the excise systems). The levy will only be placed once on finished products, ie the last producer in the production chain. This that all producers of oils, blenders, importers and domestic refiners, shall be treated in the same manner and share the same responsibility for product stewardship, ie no producer of oil will be exempt from meeting targets set through the tradeable certificate system.

A trial of a tradeable certificate system

The Minister would trial the certificates by issuing certificates to recyclers based on their product output volume. The Minister would set a target recycling percentage for virgin oil producers and importers to achieve in an accounting period. At the end of the accounting period producers and importers/blenders would be required to hold certificates to the volume that represents this percentage of their production. Producers and importers would be able to purchase certificates through the Minister or authorised third party broker. Due to the relatively new nature of tradeable certificates in environmental policy, it is proposed to trade the certificates initially at a zero or nominal value until there is less volatility in the market and storage issue have been resolved. The tradeable certificate trial results would be presented to government prior to implementation.

The system will entail outsourcing appropriate components to independent third parties, eg the management of the tradeable certificates system could be administered by a broking firm. Diagram 4 (below) outlines a possible model.

An Advisory Board to the Minister

The Board will have representatives drawn from oil producers, recyclers, industry organisations, an environment group and the Commonwealth ( ex-officio ). Its role will be to advise the Minister on aspects of the product stewardship arrangements including the setting of the levy and certificate pricing, industry issues and priorities for transitional funding. It is expected that the Board would have a wide range of industry experience and expertise. The secretariat to the Board will be the responsibility of Environment Australia.

Administration and Policy Advice

The administration of the stewardship arrangements is to be carried out jointly by Environment Australia and the Australian Taxation Office. Environment Australia will provide policy advice and recommendations on the arrangements to Minister for the Environment and Heritage.

Diagram 4 The Model for the System

How the preferred option is clear, consistent, comprehensible and accessible to users

The use of a levy for adding value to the waste oil stream is conceptually simple and has been supported by many segments of industry including the Australian Institute of Petroleum (representing the major oil producers).

The required legislation will be relatively straightforward and will receive industry and public scrutiny through an exposure draft.

The collection of the levy utilises the existing legislation, expertise and databases of the ATO. This agency has a considerable background in excise collection from the petroleum industry, and industry is likewise familiar with excise and related compliance and payment measures.

The collection of the levy by the ATO will mean that the full quantum of levy collected goes to Consolidated Revenue, ie none of it is 'sidelined' for running the regulatory systems.

The use of the ATO for levy payments to recyclers is an efficient use of existing and developing databases within that agency.

Environment Australia operates within its core competency areas by providing advice to the Minister on the environmental performance of the product stewardship system.

Several of the submissions made in response to the discussion paper supported the system being managed by a government agency. This provides excellent transparency and accountability through measures already in place. These are particularly important during the four years of initial operation when transitional assistance funding is to be disbursed.

There is substantial ongoing industry involvement in the product stewardship arrangements through the advisory Board. Additionally the proposed structure is sufficiently flexible to allow increasing industry involvement and other out-sourcing arrangements as the product stewardship concept matures.

The proposed mechanism is sufficiently adaptable to be used for product stewardship concepts to be applied to other waste streams should the government so decide.

How the preferred option is sufficiently flexible to adapt to various situations and circumstances

The legislation will give the Minister a considerable degree of flexibility in making decisions relevant to the operation of the product stewardship arrangements. Such flexibility is essential because of the complex, volatile and highly competitive nature of the waste oil collection, recycling and reuse sector and a degree of uncertainty surrounding key data (particularly over volumes treated and in storage). The industry is driven by technological change and increasing environmental performance expectations. The system is expected to provide flexibility beyond the 4-year transitional implementation period to and to continue to meet the needs of an evolving industry. Ministerial discretion extends to:

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Board composition;

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advising the Treasurer of the levy rate to be set for each accounting period;

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setting the recycling target for waste oil for each accounting period;

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setting the trading parameters of the tradeable certificates; and

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determining the disbursement of transitional assistance funds.

The impact of the preferred option on businesses, including small businesses, and how compliance and paper burden costs will be minimised

The impact is best considered under the categories of virgin oil producers, waste oil collectors, waste oil recyclers, secondary users and other, unrelated businesses such as virgin oil consumers.

Impact on Oil Producers and Importers

There are two impacts here. Producers will be required by the proposed legislation to pay a volume-based levy on all oils. This will be collected by the ATO. The present sales tax on oils of 22% will be replaced by a 10% GST on July 1, 2000. Even with a levy producers will pay less in taxes and charges than they do at present. As producers are accurately aware of their production for any period they will accurately know the impact of the product stewardship arrangements on their operations as soon as the levy is determined. Provisions within the stewardship arrangements will ensure that the levy is only collected once on each litre of oil as it leaves the producer.

Additionally, should the certificate system be supported beyond its trial, producers will be required to purchase certificates that will be used to satisfy the requirement of the Minister that a specified quantity of waste oil has been recycled within the accounting period. The parameters under which these certificates will trade have not yet been determined; economic modelling underway by ABARE, and the outcomes of the trial of the certificate system, will assist in this determination. However, it is very likely that certificates will 'trade', through the broker, at a zero or nominal value initially whilst the system comes into greater equilibrium. Environment Australia recognises that tradeable certificates of this nature are a new concept and could open producers, especially small blenders, to an unacceptable degree of commercial risk. Hence, the initial approach will be a cautious one. It is also anticipated that, should the price of certificates rise over time, that there would be an approximately commensurate fall in the levy to offset this.

In summary the impact of the product stewardship arrangements on oil producers will be the application of a volume-based levy, collected through a largely in-situ and familiar system, plus possibly the requirement to purchase certificates from a broking agency attesting to the quantity of oil recycled or reused. The impact of the product stewardship system falling entirely on producers is seen as consistent with the policy statement made by the Prime Minister, as well as offering administrative efficiencies. All businesses in the oil supply chain are expected to pass on the levy to consumers.

Impact on Waste Oil Collectors

Although it is not intended that collectors will be direct recipients of a levy, or directly participate in any trading of certificates, they should nevertheless benefit from the product stewardship system proposed. The increased value given to waste oil through the product stewardship system levy will flow, virtually immediately, to approved recyclers. This should have the effect of improving the operating margins of recyclers, and causing them to require greater quantities of oil. With recyclers competitively seeking more oil, the collectors in turn should be better placed commercially to achieve better margins on existing quantities, or go further afield in search of new sources of waste oil.

Overall, the impact is assessed as beneficial but relatively minor.

Impact on Waste Oil Recyclers

This group is seen as the major beneficiaries of the product stewardship arrangements. Approved recyclers will receive the levy (paid by producers) from the ATO for each litre of product produced from waste oil. This will greatly assist margins in a traditionally low margin, volatile industry. The levy should remove any grounds for recyclers to seek a subsidy through the excise exemptions. There will be no additional administrative load on recyclers beyond that that is already occurring under revised ATO excise arrangements, and that required to certifying that the recycling is environmentally acceptable and waste streams are appropriately dealt with.

Impact on Secondary users

This grouping comprises those customers of products downstream from recyclers, ie those who use products manufactured from waste oil, such as diesel extender, burner fuel and the like. The increased margin under which the recyclers will be operating may mean that this group of users may receive some small commercial benefit from product stewardship. Overall product stewardship is seen as neutral for this group of users.

Impact on Consumers of oils

These fall into two groups. The first is retail customers, such as the 'do-it-yourself' market that purchases much of the 4 and 5 litre oil packs sold in Australia - up to 100 ML annually. Currently this group pays 22% sales tax on their purchases; this will drop to 10% under the GST. Even with the inclusion of a levy (should producers decide to pass it on), this group will be paying less for their oils.

The other grouping, predominantly miners and primary producers, currently access sales tax rebates on lubricants used in the course of their businesses. The change from a wholesale sales tax to a GST will have a similar effect as above, ie lubricants will cost less to purchase. The GST component will be rebateable for business uses as the wholesale sales tax is now. The levy will not be rebateable as it is a hypothecated against a defined environmental goal of bringing more waste oil to account. Farmers and miners are not exempt from paying for the environmental impacts of their businesses a parallel top this situation exists with the small excise on avgas which is hypothecated towards the CASA's running costs.

Diagrams 2 and 3 (above) compare the impact on oil prices of current wholesale sales tax regime with that of the GST and the proposed levy.

How the effectiveness of the preferred option will be assessed, and how frequently

The most direct measure of the effectiveness of the product stewardship arrangements will be the measurement of the amount of waste oil that is bought to account in environmentally acceptable ways through the product stewardship arrangements. A target for recycling will be set annually by the Minister on advice from EA and the industry Board. It is intended that this 'bar' be progressively raised, until every litre of economically recoverable waste oil is, in fact, recovered. The extra value that the product stewardship system gives to the waste oil will provide the commercial incentive to seek out and reuse or recycle oil that may have otherwise gone to environmentally inappropriate uses or disposal.

If the preferred option takes the form of regulation, is there a built-in provision to review or revoke the Act after it has been in place for a certain length of time

It is intended that the legislation would included a provision that provides for an independent review to be conducted four years after commencement of the product stewardship arrangements, and at intervals not greater than four years thereafter.