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Reducing Landfill: A Landfill Allowance Scheme Consultation

ANNEX E: PARTIAL Regulatory Impact Assessment 2003/51

This Regulatory Impact Assessment deals with forthcoming regulations (the Regulations) which will provide a landfill allowance scheme that places limits on the weight of biodegradable municipal waste (BMW) sent to landfill by local authorities, under the Waste and Emissions Trading (WET) Act.

1 PURPOSE AND INTENDED EFFECT OF THE MEASURE

(i) The Objective

1.1 The Regulations implement Sections 4—16, 18 and 26 of the WET Act in Scotland. The WET Act is a UK Act that extends to Scotland by agreement of the Scottish Parliament. The Act implements Articles 5 (1) and (2) of the EC Landfill Directive¹³ (the Directive).

1.2 The overall aim of the Regulations is to reduce the amount of BMW that is sent to landfill for final disposal in order to meet the Directive targets in a cost effective manner. The Regulations will set up a method of allocating allowances to local authorities for the quantity of BMW that can be disposed off to landfill, and introduce a monitoring regime and arrangements for banking, borrowing and (if appropriate) trading of those allowances. The Regulations introduce a means to achieve the Directive targets which have already been imposed by the Directive. This RIA limits itself, therefore, to costs and benefits linked to the introduction of a scheme and does not cover in any detail the costs and benefits of the targets themselves. The costs of meeting the targets for Scotland were considered in detail in the BPEO analysis behind each Area Waste Plan as integrated in the National Waste Plan (2003).

1.3 The BPEO results presented in the National Waste Plan estimate that the annual costs of collecting, treating and disposing of municipal waste in Scotland will rise from the current level of £220-240 million per year to £340-£370 million per year in 2010. This estimate includes measures necessary to meet the 2009/10 Directive target. Most of these costs will fall on local authorities. The Scottish Executive is making substantial additional funding available through the Strategic Waste Fund to allow local authorities to meet the Directive targets and its own national target for 2006.

(ii) Background

1.4 The Directive requires reductions in the landfill of BMW by certain years. It provides a derogation for member states which landfilled over 80% of their municipal waste in 1995 to postpone the targets by up to 4 years. The UK is qualified to take make use of the derogation and plans to do so. Therefore the Directive requires reductions in the landfill of BMW in the UK to 75% of the total amount of BMW produced in 1995 by 2009, to 50% of the 1995 figure by 2013 and to 35% of the 1995 figure by 2020.

1.5 Biodegradable waste is defined by the Directive as "any waste that is capable of undergoing anaerobic or aerobic decomposition, such as food and garden waste, and paper and paperboard". Municipal waste is defined as "waste from households, as well as other waste which, because of its nature or composition, is similar to waste from households".

1.6 Following a 1999 consultation on the Landfill Directive¹⁴, the Scottish Executive decided that there was merit in introducing a system of landfill allowance. The UK Government, the Welsh Assembly and the Northern Irish authorities also consulted and reached this conclusion. The UK’s Landfill Directive target will be divided between the constituent administrative territories, and each administration will divide its target between local authorities. A common system ensures consistency of approach, and facilitates trading between local authorities in territories where trading is allowed. To achieve this, primary legislation was required. The Scottish Parliament passed a Sewel motion to agree to Scotland’s inclusion in the UK WET Act, which received Royal Assent in November 2003.

1.7 The requirement to move away from landfill has been well known within the waste management industry and amongst waste producers for at least the last decade, although it has been appreciated by all that strategic change will take time to implement. The Scottish Executive has made clear its objectives through the National Waste Plan (2003), which was drawn up from the 11 Area Waste Plans. Each Area Waste Plan was drawn up by a group of local stakeholders and Councils in the Waste Area Group.

(iii) Risk assessment

1.8 In the process of anaerobic decomposition biodegradable waste produces methane which is a powerful greenhouse gas and is explosive. Methane’s global warming effect is over 20 times more powerful than carbon dioxide. In the UK about 2.4 million tonnes of methane are released every year. Emissions from BMW in landfill sites account for 0.7 million tonnes (27% of the national total).

1.9 Estimates for the total cost of global warming to the Scottish economy are not available. The Association of British Insurers has estimated that weather damage claims associated with the current climate cost the UK an average of £710 million per year over the period 1998—89 to 1998—99. The damage costs associated with extreme weather are likely to rise as such events become more frequent in future due to climate change.

1.10 In adopting the whole of the Landfill Directive (rather than just Article 5 (1) and (2) which is dealt with in the Act) all EU member states have agreed that landfill is not a sustainable way of disposing of waste and have committed their waste industries to reducing both the amount of waste that goes to landfill and the number of sites required to cater for this reduced usage. The restrictions on BMW will only have a limited effect as it is only a small proportion of the amount of waste landfilled (less than 5%) and no landfill site takes BMW alone.

1.11 The risks of not having a landfill allowance scheme for the implementation of the Directive are higher costs and missed targets. Missed targets will lead to greater green house gas emissions and hence potentially contributing to global warming. They could also lead to large fines from the EU if the UK misses its landfill reduction targets. The Scottish Executive would have to pay these fines if it was Scotland’s performance that caused the UK to miss a target.

2 OPTIONS

Option 1: Do nothing

2.1 The Executive could do nothing to transpose Article 5 (1) and (2) of the Landfill Directive.

Option 2: Limit the level of BMW local authorities may landfill in the target years

2.2 The Executive could try to meet the Landfill Directive targets without an allowance system. As the first target period under the Directive is 2009/10, there is no absolute need to introduce a scheme now. Since most BMW is under the control of local authorities, the Executive could either impose a direct statutory limit on the landfill of BMW in 2009/10, backed by a firm enforcement mechanism, or create an administrative target for each local authority.

Option 3: Limit the level of BMW local authorities may landfill 2004-2020

2.3 The Executive could, through either statutory or administrative targets, impose limits on the amount of BMW that could be landfilled for every year up to 2020.

Option 4: Introduce Landfill Allowance Scheme

2.4 The Executive could introduce a landfill allowance scheme that will give local authorities binding limits for the amount of BMW they can landfill for every year up to 2020. These limits would be backed by fines. This option is similar to option 3, but through allowing authorities to bank, borrow and possibly trade allowances, it will introduce flexibility to the way in which local authorities can meet their obligations.

2.5 The consultation paper seeks views on many different details of this option. Those with a significant affect on cost are:

• Whether allowances should be tradable by Scottish local authorities with other local authorities in Scotland or other parts of the UK with a trading scheme (this will be only England initially, although Wales and Northern Ireland might trade in the future).
• What year the scheme should start? It could be 2004/05 or 2005/06, with 2004/05 running as a pilot year if the later start is chosen.

2.6 Ministers will make final decisions on these issues following consultation. An important judgement will be the best way of designing the scheme to give the optimum balance between the costs imposed on local authorities and others, and the risks of failing to meet targets.

3 BENEFITS, RISKS AND COSTS OF THE OPTIONS

3.1 The National Waste Plan 2003 aims to minimise the impact of waste on the environment, to make the use of resources in Scotland more efficient and in particular to meet the Landfill Directive targets and the Executive’s own targets. The plan is backed by a £230 million grant scheme, the Strategic Waste Fund, which is available to local authorities. It is from this that a large proportion of the costs local authorities face in meeting the targets will come. The costs, benefits and risks of each option as discussed below are summarised in the table starting on page 39.

Option 1: Do nothing - Benefits

3.2 The main benefit would be that there would be no administrative costs of a scheme and there would be no inconvenience or cost to local authorities of diverting BMW from landfill sites if they chose not to.

3.3 Methane gas produced by landfill has the potential to be a source of energy generation. This source would decline if there was a reduction in the amount of BMW sent to landfill.

Option 1: Do nothing - Risks

3.4 The main drawback would be that Scotland would be in breach of the Landfill Directive. The Directive came into effect on 16 July 1999 and should have been transposed into UK law not later than two years after then: 16 July 2001. It could be argued that this is not strictly speaking an option as the whole of the UK has an obligation to transpose Article 5 (1) and (2) of the Landfill Directive.

3.5 This would in all probability mean that Scotland would breach its limits on the amount of BMW landfilled. If this lead to the UK breaching its limit in an EU target year the UK could be subject to significant fines (details below), that would be met from funds allocated to the Scottish Executive. This would clearly have a severe impact on the Scottish Executive’s resources and its ability to deliver public services.

3.6 This option does not support the objectives of the Executive’s National Waste Plan 2003, or its targets for 2006.

3.7 Not reducing the levels of BMW sent to landfill will mean not reducing the levels of methane gas produced by landfill sites. Methane gas is thought to be responsible for global warming. It would also result in a failure to reduce the other environment costs of landfilling biodegradable waste.

Option 1: Do nothing - Costs

3.8 Although there would be no administrative costs, continued failure to transpose Article 5 (1) and (2) into UK law to the Commission’s satisfaction could mean that the UK Government would incur infraction fines in the region of £65,000 per day. In addition the UK could be fined up to ¤500,000 per day - ¤180 million per year - for not meeting the BMW reduction targets. Scotland would have to meet the cost of these fines.

Option 2: Limit level of BMW local authorities may landfill in target years - Benefits

3.9 Having administrative or statutory targets for EU target years only would have lower administrative costs than options 3 and 4, and would allow each local authority to chose its own pace of adjustment to the 2009/010 target, potentially saving significant costs in the early years in comparison with the proposed allowance scheme.

Option 2: Limit level of BMW local authorities may landfill in EU target years - Risks

3.10 Like option 1, this option could result in long term risks to the environment from a build up of BMW at landfill sites.

3.11 Experience of other environmental policy areas has shown that, in order to meet challenging targets efficiently and effectively, it is necessary to make steady progress over a number of years. Having targets only in target years would greatly increase the risk of Scotland failing to make its contribution to the UK’s Directive targets. We would thereby fail to make our contribution to reducing climate change, and face the prospect of significant fines.

3.12 Local authorities face many competing pressures for expenditure and may delay investing in the necessary infrastructure if the first target they faced was 2009/10. In such situations, construction costs in the relevant sectors can rise significantly in advance of Directive deadlines, as has been seen in other environmental policy areas.

3.13 This option does not support the objectives of the Executive’s National Waste Plan 2003, or its targets for 2006.

3.14 A system of hard statutory targets for individual local authorities in 2009/10 might lead to some authorities making disproportionately expensive decisions in that year, depending on the enforcement mechanism.

3.15 An administrative target would not be appropriate because experience has shown that administrative targets without enforcement are unlikely to be sufficient to achieve a firm external target.

Option 2: Limit the level of BMW local authorities may landfill in target years - Costs

3.16 There would be small administrative costs and there is the possibility of costs of up to €500,000 a day if Scotland causes the UK to breach the Landfill Directive targets. There would also be cost to local authorities of diverting BMW from landfill in target years, and of maintaining this level of diversion.

Option 3: Limit the level of BMW local authorities may landfill 2004-2020 - Benefits

3.17 This option provides a gradual reduction in the amount of biodegradable municipal waste going to landfill. This means that waste producers and waste management companies would have more time to adapt and find lower cost means of waste reduction and diversion. Steady progress towards a target leads to it being achieved in the most effective and efficient manner.

3.18 This option should result in Scotland (and the UK) meeting its Landfill Directive targets. Meeting the targets would result in a lowering of methane production from landfills (methane comprises 20% of the gas that causes global warming and a quarter of all UK emissions of methane come from landfill).

Option 3: Limit the level of BMW local authorities may landfill 2004-2020 - Risks

3.19 The lack of support or flexibility in this option makes it inefficient. Local authorities face different diversion costs according to their particular circumstances, those with high diversion costs will have no choice but to pay them. Equally, those with lower costs may not need to landfill all the BMW they are permitted to and without any trading, banking or borrowing, this surplus capacity would be lost to the system. Local authorities that have already worked to reduce the level of BMW they landfill would not be able to benefit from the efforts they have made.

Option 3: Limit the level of BMW local authorities may landfill 2004-2020 — Costs

3.20 There would be costs in monitoring the level of landfilling by local authorities against the targets. These are estimated at some £150,000 per year in Scotland. There are also one-off set up costs for the administrative scheme.

3.21 Compared with options 1 and 2, imposing a series of reducing targets from 2004 entails additional costs of diversion for local authorities in earlier years. However, these additional costs have to be judged against the experience in other environmental policy areas, where leaving the action towards the achievement of a target to the last possible moment has greatly inflated costs, and led to targets being missed.

Option 4: Introduce Landfill Allowance Scheme - Benefits

3.22 Like option 3, with this option there can be a gradual reduction in the amount of biodegradable municipal waste going to landfill over time. This means that waste producers and waste management companies would have more time to adapt and find lower cost means of waste reduction and diversion. Steady progress towards a target leads to it being achieved in the most effective and efficient manner.

3.23 Allowing banking and borrowing in the scheme would make the scheme more flexible, so that authorities can have more control over the timing of the introduction of diversion. Local authorities can choose to use banking or borrowing and we would expect that they would only choose to do so if it benefited them. Making allowance tradable would provide even greater flexibility. Trading is also optional and we would expect local authorities to trade only when it is in their interest to do so.

3.24 Trading should reduce the costs of meeting the Directive targets because tradable allowances would allow the greatest amount of waste diversion or reduction to occur in areas where recycling, composting, incineration, and waste minimisation are cheapest and most practicable. Local authorities with the lowest diversion costs should be able to sell surplus allowances profitably to local authorities which face a higher cost of diversion. Local authorities with higher costs of diversion will prefer to buy allowances to achieve their target at a lower cost than actually undertaking the diversion themselves. Landfill allowance trading will enable Scotland to meet its targets in a much more cost effective way.

3.25 The flexibility in this option result in Scotland meeting its targets, which would result in a reduction in the level of methane produced at landfill sites (methane comprises 20% of the gas that causes global warming and a quarter of all UK emissions of methane come from landfill).

Having a Pilot Year

3.26 Having the first year as a pilot year will ensure that:

• local authorities have the time to make the significant changes needed to their work practices;
• people in local authorities and the waste industry are fully informed about the scheme;
• the scheme works well right from the first full year without any teething problems; and,
• it will allow full development and testing of monitoring arrangements.

3.27 The pilot year will reduce the overall cost of the scheme as there would be no administrative costs or enforced diversion costs in the first year. As the Executive is considering allowing a discretionary level of banking from surplus allowances accrued in this year, any local authorities that perform well during the pilot might be able to profit either from selling or banking allowances in the future. There will be no financial penalties in this year.

Option 4: Introduce Landfill Allowance Scheme - Risks

3.28 Although this option has the lowest risk (and trading reduces this risk) of not meeting the Directive targets, there is still a small chance that this might happen. However, the inbuilt penalty system should address these risks (penalties which could be considered a financial risk to local authorities).

Having a Pilot Year

3.29 Having a pilot year might make the tight target in 2006/07 difficult to meet. This means that Scotland might fail to meet its target for this year and it might mean financial penalties will be imposed on some local authorities.

3.30 It is unlikely that the pilot would have an effect by 2010, the first EU target year. Therefore the pilot should not increase the risk of Scotland being subject to fines from the EU. The risks of not having a pilot are the opposite of the benefits of having one as discussed above, i.e. failing to ensure that the scheme will work properly.

Option 4: Introduce Landfill Allowance Scheme — Costs

3.31 The costs of option 4 are similar to those for option 3, as they will represent the same balance of requiring early action towards the target in order to avoid expensive actions in latter years. Like option 3, compared with options 1 and 2, imposing targets from 2004 entails additional costs of diversion for local authorities in earlier years. However these additional costs have to be judged against the experience in other environmental policy areas, where leaving the action towards the achievement of a target to the last possible moment has greatly inflated costs, and led to targets being missed.

3.32 Banking, borrowing and trading will all make the scheme more efficient. Local authorities can choose to take part in these activities or not and we would expect that they would only do so when it is in their interests, i.e. when it will save them money. These activities will, by design, reduce costs for those that carry them out.

3.33 SEPA will incur some additional costs associated with setting up and running the monitoring system. The addition of a trading mechanism adds only marginally to the administrative costs of a scheme. There will be minor costs to local authorities for reporting monitoring information to SEPA on a quarterly basis.

Allowing Trading

3.34 Allowing local authorities to trade their allowances will enable Scotland to meet the Article 5 (1) and (2) diversion targets for the least overall cost. The very purpose of trading is to reduce costs where possible for local authorities, and therefore for Scotland. This is why trading has been proposed. Trading would allow the greatest amount of waste diversion or reduction to occur in areas where recycling, composting, incineration and waste minimisation are cheapest and most practicable.

3.35 Trading of landfill allowances may require some marginal additional administrative expenditure (to meet the costs of reporting information about trading) for local authorities that participate, particularly if the local authority chooses to use brokers.

3.36 SEPA will incur some additional costs from running the registers associated with trading. These costs are currently being estimated but are expected to be low, with Scotland able be added to a UK trading registration system at minimal additional cost.

Having a Pilot Year

3.37 Introducing the landfill allowance scheme in 2004/05 without a pilot would impose the full costs of diversion on local authorities one year earlier. There is also a chance that the scheme will not work well from the start without a pilot so that some authorities breach their targets in the first few years of the scheme and are subject to fines.

4 BUSINESS SECTORS AFFECTED

4.1 It is clear that meeting the targets set out in Articles 5 (1) and (2) of the Directive will have implications for the waste industry. There will be changes in existing procedures and new opportunities for commercial activity.

4.2 However, it is not envisaged that any of the options will place a great burden on landfill operators or small businesses. Landfill operators, and possibly other waste management companies, will be required to submit information to SEPA. Landfill operators will have to record the amount of municipal waste they accept, and from whom, and SEPA will be able to inspect these records. These will not be onerous new duties as general records are already kept and are subject to inspection.

4.3 The Landfill Directive as a whole will impact on small waste management businesses as requirements and restrictions on landfill site operators will increase, and demand for their services may fall in the medium to longer term. In addition small businesses are less able to offer alternative forms of treatment and disposal. But the restrictions on BMW will only have a limited effect as it is only a small proportion of the amount of waste landfilled (less than 5%) and no landfill site takes BMW alone. Moreover, the costs of the specific scheme that will implement the provisions of the WET Act impact chiefly on local authorities and restrictions on landfilling biodegradable municipal waste will be their responsibility.

5 EQUITY AND FAIRNESS

5.1 The costs of any option will not fall unfairly on different parts of the country or on rural areas compared to urban ones. The local authorities who will benefit from the landfill allowance scheme are spread around the country in both rural and urban areas.

5.2 Under options 2 and 3 local authorities would be allocated allowances for certain years and be expected to adhere to them. Those local authorities who face higher diversion costs because of their particular circumstances will find these options unfair as the costs to them of complying will be higher that for other local authorities. As option 1 will not help Scotland meet the targets set in the Landfill Directive, option 4 is preferred.

6 REVIEW REGULATORY IMPACT ASSESSMENT

6.1 There will be a review of the scheme ahead of the first EC target year (2009/10) and at this time the Executive will carry out a review Regulatory Impact Assessment.

7 SUMMARY AND RECOMMENDATIONS

7.1 The WET Act 2003 implements Articles 5(1) and (2) of the Landfill Directive. The Act provides for an allowances scheme that will enable the UK to make use of the most cost effective and economically sound way to reduce the amount of BMW that is sent to landfill for final disposal and so meet the Directive targets.

7.2 This RIA identifies three options that should achieve this aim plus a business as usual base position:

Option 1: Do nothing

Option 2: Limit the level of BMW local authorities may landfill in the target years

Option 3: Limit the level of BMW local authorities may landfill 2004-2020

Option 4: Introduce Landfill Allowance Scheme

Section 3 above considers the costs, benefits and risks of each option. These are summarised below:

7.3 Option 1 should be ruled out as failing to transpose the Landfill Directive is not really a viable option. Non-transposition is likely to lead to infraction fines in the region of £65,000 a day and not meeting the BMW reduction targets could lead to fines of up to €500,000 a day. Scotland would have to meet the cost of these fines. Doing nothing would also subject Scotland’s environment to the potential long term risks attached to landfilling biodegradable waste.

7.4 On balance, the risk of failing to meet the Directive targets weigh against only placing targets on local authorities in target years as in option 2. Failing to meet the targets would lead to fines from the EC. Even if the targets were met, this option could lead to greater costs if work to meet the targets was carried out in a final rush.

7.5 Option 3 is likely to meet the Landfill Directive targets, but it would offer no help to local authorities to achieve the targets. Local authorities would be allocated their allowances for each year and be expected to adhere to them. Without banking, borrowing and trading local authorities that face very high diversion costs will have no choice but to pay them.

7.6 Option 4 is slightly more costly in terms of administrative effort for both local authorities and SEPA. However, those costs will be marginal and this option is more flexible than option 3. It allows Scotland to meet its targets in a cost effective way, particularly with trading. Trading overcomes the fact that the diversion costs that each local authority face will differ according to their particular circumstances. Trading would encourage local authorities with the lowest diversion costs to landfill less than the allowances allocated to them and sell their extra allowances profitably to local authorities which face a higher cost of diversion. Local authorities with higher costs of diversion will prefer to buy allowances to achieve their target at a lower cost than actually undertaking the diversion themselves.

7.7 Delaying the formal start of the scheme by one year, with a pilot in 2004/05, will lead to some cost savings to local authorities, and will ensure that the scheme works well right from the first full year without any teething problems. This should ensure the credibility of the scheme, and that no actions are taken on the basis of incomplete understanding of the system.

7.8 Given these considerations, the Executive considers that introducing a landfill allowance scheme which allows trading after a pilot year is likely to be the most cost effective option.

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