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Independent Review of the Product Stewardship (Oil) Act 2000

Final report
Prepared for the Minister for the Environment and Heritage
by the Allen Consulting Group, May 2004

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Executive summary

• Rationale for the regulation of used oil
• Alternative regulatory approaches
• The Product Stewardship for Oil Program
• Program outcomes
• Looking forward
• Recommendations

Arrangements for the recycling, reuse and disposal of used lubricating oils were mandated under the Product Stewardship (Oil) Act 2000 (the PSO Act) and have been operational since January 2001. Section 36 of the Act requires an independent review, to be undertaken within four years after the Act's commencement, of the:

• operation of the Act;
• relevant provision of customs and excise legislation; and
• extent to which the objectives of the Act have been achieved.

Rationale for the regulation of used oil

Notwithstanding the independent waste minimisation arrangements of the States and Territories, and the coordinated efforts of Australian jurisdictions under the National Waste Minimisation and Recycling Strategy, significant quantities of lubricating oil remain unconsumed, unrecycled, or are not accounted for in appropriate disposal arrangements.¹

There are two standard tests of regulatory appropriateness that are commonly used by the Commonwealth, ² both of which are met with respect to the problems posed by used oil:

• the market for lubricating oil embodies at least two market failures:³



• negative externalities (i.e. spillovers) — oil that is not recycled or disposed of appropriately is considered problematic because it may contain hazardous materials (i.e. toxic and carcinogenic) and hence is harmful to the environment and human health (i.e. not just the generator of the used oil);
• severe information asymmetries - these are manifest in a number of different ways: producers of oil may not have a full understanding of consumers' willingness to use recycled oil (or a blend of virgin and recycled oil); and consumers of oil may not have a full understanding of the full range of potential costs associated with the improper disposal of used oil, the potential value of their used oil, and/or the location of sites and or organisations who can assist with the collection of used oil;

• self-regulation is inappropriate because:⁴
• 
  
  
  • the problem is high risk or of high impact/significance — the problem of used oil is seen as a significant problem for human and environmental health;
  • the government requires the certainty provided by legal sanctions — the high capital cost associated with recycling operations means that government support (i.e. a positive sanction) needs to be guaranteed, which is best done through legislation;
  • universal application is required — the universal problem of used oil is best addressed through a universal solution;
  • there is a systematic compliance problem with a history of intractable disputes and repeated or flagrant breaches of fair trading principles — that there is so
    much unaccounted-for oil demonstrates that there is a systematic compliance problem; and
  • existing industry bodies lack adequate coverage, are inadequately resourced or do not have a strong regulatory commitment
  • the fragmented and diverse group of stakeholders in the used oil industry makes effective industry self-regulation unfeasible.

Thus, it is appropriate for the Commonwealth to legislate to regulate the recycling, reuse and disposal of used oil.

Alternative regulatory approaches

In seeking to address problems about inappropriate oil disposal and reuse, any legislative response should seek to:

• reduce the demand for the product that generates the costs (i.e. virgin oil);
• provide incentives for producers to reduce their production of used oil;
• avoid creating incentives for the inappropriate use of the product; and
• have low administration and compliance costs.

A range of economic instruments were assessed against these characteristics: a per litre tax on virgin oil; a deposit refund scheme; an upstream combined tax-subsidy (i.e. like the PSO Act); and a tradeable certificate scheme. No individual scheme was found to perfectly embody all the characteristics.

The two approaches considered most appropriate are the status quo (i.e. an upstream combined tax subsidy) and the tradeable certificates scheme. A recent review of the merits of moving from the status quo to a tradeable used oil certificate scheme (UOCS) suggested that there was no compelling reason to change:

The Review Team supports this conclusion and so supports the PSO-style upstream combined tax subsidy over other legislative approaches at this time.

The Product Stewardship for Oil Program

The PSO Act and its related legislation (collectively called the PSO Program) established two interrelated mechanisms:

• the imposition of a levy on domestically produced and imported oils — this is now fixed at 5.449 cents per litre; and
• payment of a variable benefit (i.e. a subsidy) to oil recyclers.⁶

The PSO Program seeks to adjust consumer and business behaviour so that there is a reduced reliance on virgin oil and more used oil is recycled

The PSO Program seeks to provide economic incentives to increase the uptake and appropriate recycling and use of used oil by:

• making it more financially attractive for firms to invest in recycling facilities and activities — this is done directly through the benefit payment and indirectly through the provision of transitional assistance funding for local used oil collection facilities so as to reduce collection costs;
• adjusting relativities between virgin and recycled oil through the provision of benefit support; and
• correcting information asymmetries through targeted information programs funded through the transitional assistance arrangements.

More generally, the PSO Program mainly uses existing administrative structures for its ongoing operation:

• The collection of the levy occurs through the customs and excise system. The Australian Taxation Office (ATO) and the Australian Customs Service (ACS) collect the levy on domestic and imported oil products, respectively, through amendments to the customs and excise tariffs legislation.
• The product stewardship levy rate is set by the Treasurer; the ATO pays the product stewardship benefits in accordance with the provisions of the Product Stewardship (Oil) Act and the Product Grants and Benefits Administration Act.
• The Department of the Environment and Heritage has responsibility for ongoing monitoring and review of the product stewardship arrangements, and for administration and management of the transitional assistance funds.

In addition, the Act provides for the establishment of a joint industry/government advisory council — the Oil Stewardship Advisory Council (OSAC) — whose task it is to advise the Minister for the Environment and Heritage on the operation of the PSO Program.

Program outcomes

• Effectiveness
• Efficiency
• Achievement of the legislative objectives

Effectiveness

A concern regarding the development of the PSO Program, and the ongoing monitoring of the Program's effectiveness, is the continuing differences in oil-related data collected by Commonwealth agencies, particularly when compared to commonly understood industry experiences. ⁷ Such data inconsistencies make it difficult to definitively comment on changed outcomes in the production, importation and recycling levels attributable to the PSO Program.

The PSO Program appears to have had some success in encouraging more sustainable management, re-refining and reuse of used oil. This is demonstrated by:

• the strong local government support for the development of centralised used oil collection facilities. ⁸ This support appears to be particularly strong in rural and remote communities. Continued transitional assistance for the provision of such collection facilities will enhance the Program's effectiveness;

• the majority of recyclers in the Australian industry are involved in the Program, which is conducive to maximising the Program's effectiveness and efficiency;

• investment has been made in lube-to-lube recycling equipment that would not otherwise have been made;

• the finding that the Program is stimulating recycling from the annual flow of oil entering the market and/or from stockpiled used oil. The volume of recycled oil recorded under the Program remained almost constant from 2001 02 and 2002 03. However, these levels represents 47.9 and 41.9 per cent respectively of the total volume of virgin oil entering the market in those years. This performance looks particularly impressive when set against the proportion of recycled oil relative to total domestic sales in 1999 (33 per cent), the year immediately prior to the Program's implementation; and
• as shown in the figure below, Australia is now achieving oil recycling rates comparable to, but slightly below, those of the leading European countries.

While these developments are positive, there remains continued scope for improvement:

• the stockpile of used oil sitting in storage is not thought to have been appreciably eroded over the Program's first few years. However, this is expected to change somewhat as the existing lube-to-lube recycling facility in Wagga Wagga (and possibly future facilities) come fully on stream;
• only about 40 per cent of households that have not used safe disposal facilities for hazardous wastes (including used oil) are aware of the location of such safe facilities. ⁹ This suggests that there continues to be a role for all governments to seek to better educate the community. In this regard, a closer working relationship between the Commonwealth and the State and Territory Governments would be advantageous.

Efficiency

Administrative costs have been constrained by using, where possible, existing agencies (e.g. the ATO and the ACS) and systems (e.g. the excise system).

While the scheme is reasonably flexible for operators, there remains some concern about the paperwork burden, particularly for those firms that fall within category 8 (i.e. the category for which the benefit paid exactly offsets the levy).

Clarification of a number of legislative definitions would:

• reduce the administrative difficulties for the ATO, improve transparency and clarify the broader policy environment; and
• reduce uncertainty for industry participants.

OSAC and its role has evolved over the life of the PSO Program, and will continue to do so. The Review Team considers that OSAC's usefulness would be enhanced if:

• the Minister has greater flexibility in determining OSAC's membership — this will better enable OSAC to evolve to address changing market circumstances; and
• clearer conflict of interest guidelines are in place — although only an advisory body, OSAC's legislative basis means that it should be held to a higher standard of transparency and accountability than would otherwise be the case.

Achievement of the legislative objectives

While this review is supportive of the ongoing operation of the PSO Program (i.e. its efficiency and effectiveness), it is necessary to provide some overall sense as to the degree to which the three objectives set out in the Act have been achieved:

• 'development of a product stewardship arrangement for waste oils' — it is arguable that this objective has not been achieved. Product stewardship 'calls on those in the product life cycle (i.e. manufacturers, retailers, users, and disposers) to share responsibility for reducing the environmental impacts of products'. ¹⁰ While the producers of virgin oil all have various levels of involvement in addressing the problem of used oil, the Review Team considers that the oil producers have not become seriously engaged (eg blending used oil with virgin oil), suggesting that the current arrangements fall short of what could reasonably be called a complete product stewardship arrangement. That is, the burden of dealing with used oil is not shared appropriately amongst stakeholders. If Australia is to have real product stewardship in relation to used oil, the major oil companies need to be more engaged in the process. This should be a clear objective for the Minister, the Department and OSAC;
• 'ensuring the environmentally sustainable management, re-refining and reuse of waste oil' — as noted above, the PSO Program appears to have had some success in encouraging the collection of used oil and its recycling and reuse. However, recent life-cycle analysis suggests that the strong emphasis on lube-to-lube recycling in preference to high grade burning is not justified; ¹¹ and
• 'support for economic recycling options for waste oil' — with a 50 cents per litre subsidy, the PSO Program has clearly provided significant support to lube-to-lube recycling. With significantly lower benefit rates, support for other forms of recycling and reuse has been less pronounced. The Review Team considers that the overwhelming emphasis on the support of lube-to-lube recycling is misplaced given the marginal financial viability of high grade burning oil recycling and its comparable environmental benefits.

Given the observations with respect to the second and third objectives above, the Review Team has reached the view that:

• the benefit paid for lube-to-lube recycling is not as significant as was originally envisaged when the PSO Program was introduced, but is sufficient given current market circumstances (particularly as stakeholders with an interest in lube-to-lube recycling are not calling for an increase, and acknowledge that the benefit may be reduced over time); and
• the benefit available for high grade burning oil is too low relative to the benefits available for lube-to-lube oil recycling.

Looking forward

Going forward, the major longer term problem that the Review Team sees for the PSO Act is its interaction with the customs and excise system:

• the customs and excise system is complex, and was designed for purposes other than environmental regulation;
• the product stewardship levy rate is set by the Treasurer rather than the Minister for the Environment and Heritage; and
• the Commonwealth Treasury has a vision for the excise system that is likely to make the maintenance of a comprehensive environmental benefit system for used oil more complex and potentially unmanageable.

In effect, the future of the PSO Program as an effective and comprehensive environmental response is outside the control of both the Minister for the Environment and Heritage and the industry itself. Thus, it is necessary for the Minister, with the support of OSAC and the industry more broadly, to prepare for the further unwinding of the benefits payable to processors and users of used oil.

The Review Team considers that, unless there is a real change in the major oil companies' involvement in product stewardship for used oil, a tradeable certificate scheme may be the only comprehensive model that is sustainable into the longer term. Thus, the next independent legislative review should include a study of the issues that need to be addressed to move to a tradeable certificates model as described by McLennan Magasanik Associates and BDA Group. ¹²

Recommendations

Given the observations above, the following recommendations are provided:

Recommendation 1
Greater efforts by Commonwealth departments and agencies need to be made to ensure that statistics on the volumes of oil produced, imported and sold are consistent and are universally accepted as accurate.

Recommendation 2
The benefit rate for high grade burning oil should be increased relative to the benefit rate for lube-to-lube oil.

Recommendation 3
The PSO Act should be amended to clearly provide that it does not apply to vegetable oils.

Recommendation 4
The PSO legislation should be amended to require that the processes used by claimants of Category 1 benefits must include either thin film evaporation or vacuum distillation, followed by either solvent extraction or hydrofinishing. There should also be a provision to allow the Minister to approve the substitution of other processes that are able to produce comparable outcomes.

Recommendation 5
Subsection 14(2) of the PSO Act should be amended to provide the Minister with greater flexibility as to the size and representative mix of the Oil Stewardship Advisory Council.

Recommendation 6
The PSO Act should provide a formal mechanism for an alternative representative, at a member's request, to temporarily deputise for that member.

Recommendation 7
The Oil Stewardship Advisory Council should adopt clearer and more stringent conflict of interest procedures.

Recommendation 8
The Department of the Environment and Heritage, the Department of Industry, Tourism and Resources and the Oil Stewardship Advisory Council should work with the oil companies to identify cost-effective ways in which they can become more involved in the product stewardship of oil in Australia.

Recommendation 9
There is a continuing need for the Department of the Environment and Heritage and the Oil Stewardship Advisory Council to raise the community awareness of the problem of used oil and the PSO Program in order to further increase recycling.

Recommendation 10
The Department of the Environment and Heritage and the Oil Stewardship Advisory Council should work better engage State and Territory environment agencies as part of the PSO Program. Progress in enhancing this engagement should be reported through the Environment Protection and Heritage Council.

Recommendation 11
Given the need for the PSO Program to move away from reliance on the excise system, unless a comprehensive self-regulatory product stewardship model for used oil develops over the next four years, the next independent review should include a further examination of the use of a tradeable certificate scheme for used oil.

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Footnotes

¹ At the time the Act was first introduced, some 355 to 370 ML (i.e. 68 to 71 per cent of the annual domestic usage of virgin lubricant) was not recovered or reused according to Meinhardt Infrastructure & Environment Group 2002, 'Used Oil in Australia'.

² These tests are consistent with the approach adopted in Office of Regulation Review 1998, A Guide to Regulation, 2nd edn, Canberra.

³ Council of Australian Governments 1991, Report of Task Force on Other Issues in the Reform of Government Trading Enterprises, Released as Part of the First CoAG Communique, Canberra, p. 22.

⁴ Commonwealth Interdepartmental Committee on Quasi-regulation 1997, Grey-Letter Law, Canberra, p. xxii. A similar approach is endorsed to in Task-Force on Industry Self-Regulation 2000, Industry Self-Regulation in Consumer Markets, Canberra, pp. 21-2.

⁵ McLennan Magasanik Associates and BDA Group 2003, A Tradeable Certificate System for Used Oils: Report to the Department of the Environment and Heritage.

⁶ This mechanism is supported by 'transitional assistance' funding to stimulate the uptake and environmentally sustainable management and re-refining of used oil and its use. The transitional assistance provisions of the Act have been subject to a separate review — Australian Academy of Technological Sciences & Engineering 2004, Independent Review of the Transitional Assistance Element of the Product Stewardship for Oil (PSO) Program: Public Consultation Draft, Department of the Environment and Heritage, Canberra. Some stakeholders raised issues and offered reform opinions that might have better been addressed in this earlier review. Such issues and possible reforms have been passed on directly to the Department for the Environment and Heritage

⁷ Ibid; Meinhardt Infrastructure & Environment Group 2002, 'Used Oil in Australia'.

⁸ See Australian Academy of Technological Sciences & Engineering 2004, Independent Review of the Transitional Assistance Element of the Product Stewardship for Oil (PSO) Program: Public Consultation Draft, Department of the Environment and Heritage, Canberra. This is also evident in Australian Bureau of Statistics 2003, Environmental Issues: People's Views and Practices, Cat.No. 4602.0, Canberra, p. 39.

⁹ Australian Bureau of Statistics 2003, Environmental Issues: People's Views and Practices, Cat.No. 4602.0, Canberra, p. 60.

¹⁰ United States Environmental Protection Authority 2003, What Is Product Stewardship, viewed 30 April 2004, http://www.epa.gov/epr/about/index.html. See also Organisation for Economic Co-operation and Development 1998, Extended and Shared Producer Responsibility: Phase 2 - Framework Report, Env/Epoc/Ppc(97)20/Rev2, OECD, Paris, p. 10; Palmer and Walls 2002, The Product Stewardship Movement: Understanding Costs, Effectiveness, and the Role for Policy, Resources for the Future, Washington D.C., p. 10.

¹¹ See Australian Academy of Technological Sciences & Engineering 2004, Independent Review of the Transitional Assistance Element of the Product Stewardship for Oil (PSO) Program: Public Consultation Draft, Department of the Environment and Heritage, Canberra.

¹² See McLennan Magasanik Associates and BDA Group 2003, A Tradeable Certificate System for Used Oils: Report to the Department of the Environment and Heritage.

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