The circular economy: policy gaps and solutions

However, Extended Producer Responsibility could provide us with a policy framework to help grow and support the infrastructure required. How? By incentivising a range of activities including:

• consumers to collect materials at source
• local and national authorities to direct materials to recycling and reuse facilities
• recycling and reuse facilities to increase recycling and reuse
• producers to use the recycled and reused materials

The incentive for facilities that carry out recycling and reuse lies within the revenue they can achieve for their raw materials and any evidence they can generate and sell from their activities, if they are registered to do so with the Environment Agency. This process is left open to global economic conditions however.

Exposed to market forces

Over the last 18 months we’ve seen how plastic recyclers in the UK have been badly impacted by the fall in the price of oil. This caused the price of virgin plastic to fall well below the price of recycled, forcing plastic recyclers to slash their prices, lose money and sadly for some to go out of business.

This vulnerability makes the supply of these recycled materials volatile and uncertain, which is clearly unacceptable for the supply chains that are reliant on them.

The principal incentive for producers to use the recycled or reused material is price. If it is less expensive to use a secondary material and it’s of good enough quality, then of course manufacturers will use it.

If prices fluctuate the costs of production fluctuate, resulting in unstable and unpredictable profit generation. This makes it difficult for companies to plan investment in new or existing product lines reliant on recycled materials.

Gaps in the UK’s current Producer Responsibility regime

Although the current Producer Responsibility framework provides a direct price incentive to recyclers to increase the amount recycled, and an indirect incentive to producers to use these recycled products, there are several gaps that need to be overcome to help the country move towards a circular economy.

These fall into two categories - policies to stabilise the price and policies to secure the supply of the secondary raw materials. Let's consider first of all how legislative and industry led change could achieve a stabilisation of price.

Stabilising the price of raw materials

When attempting to stabilise the price of the raw materials for manufactures, we have to address the problems that cause it to fluctuate.

When the incentives to use recycled materials are based around price and virgin material becomes cheaper, manufacturers no longer use the recycled material. The major problem with a price incentive is that it’s not always there. If we take plastic as an example, the driving force behind the price of virgin material is the price of oil, whereas the driving factors behind the price of recycled material are around collection, transportation and contamination etc.

In this instance, one solution would be to legislate for a specific amount of recycled material to appear in certain goods. This idea has been floated before to support the rHDPE industry, supplying milk producers with recycled plastic.

Another solution would be to fix the price of recycled materials against the prices of their virgin counterparts or vice versa. This would ensure the price of recycled materials are always lower than virgin materials. However, some level of subsidy would be required to cover the losses caused by low virgin prices.

If the price of virgin was fixed to that of recycled, it would require serious government commitment to ensure the maintenance of supply. Without this the tariffs could cause prices for manufactures and consumers to rise.

The latter option, although more interventionist, in theory would maintain a price point that gives recycled plastic a competitive advantage and government could choose to use the revenues raised by tariffs to provide more infrastructure for the recycling industry. Over the long run this would allow government to reduce the tariffs as the recycling industry naturally becomes more and more competitive. It’s important to note that this is a direct intervention in the price.

Next week: Securing the supply of evidence

In my blog next week we consider indirect interventions that could attempt to secure the supply in the markets, which in theory should lead to stable prices. If there is no scarcity in supply, there is no reason for prices to spike.

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