Excessive producer responsibility

Extended Producer Responsibility is a boring name for a boring regulation, but it is worth understanding if you want to see how the government squeezes the life out of British industry and contributes to the cost of living “crisis”. 

The story begins, as such stories often do, with Theresa May and Michael Gove. After watching too many David Attenborough documentaries, Gove became obsessed with recycling. His first idea was to introduce a bottle deposit return scheme, which would have had huge operational costs and been largely pointless since everybody has a recycling bin at home. His second idea was Extended Producer Responsibility (EPR), which he said would “cement our place as a world leader in resource efficiency” by taxing businesses for every tonne of packaging they produce, on the basis that “the polluter pays”. Seven years and four Prime Ministers later, EPR came into force last April.

The logic of EPR is not entirely without merit. A company that produces packaging is not actually a “polluter” — although the end user might be — but there is an argument for making companies internalise the costs of recycling the packaging they produce. In effect, the policy takes billions of pounds from manufacturing firms and gives it to local authorities to spend on recycling and landfill.

The problem is one that is often overlooked by politicians. Since businesses get their money from consumers, an increase in costs to business is bound to lead to an increase in prices. Since it is consumers who pay the higher prices, the real question is whether it is better for recycling of widely used packaging to be paid for by individuals as taxpayers or by individuals as shoppers. 

All things being equal, most economists would favour putting the cost on shoppers, but all things are not equal. EPR requires significant administrative costs from both the government and industry. The last of a series of Impact Assessments, which rested  heavily on information provided by WRAP, an environmental NGO which received over £15 million from the UK government last year, projected that the first ten years of EPR would require £143 million to be spent on the Scheme Administrator, £157 million on registration fees and £114 million on a communications campaign, plus various other familiarisation and compliance costs. Overall, the cost-benefit analysis found that the scheme would incur a net cost of £152 million. That may well be an underestimate. The government has already stepped in with a “one-off intervention” to make up for a £63 million funding shortfall in the first year.

Despite flunking its Impact Assessment, the policy was given the green light on the basis that it would provide “non-monetised benefits” such as “a more vibrant domestic reprocessing market” and “increased transparency”. This all sounds jolly nice, but the reality has been market distortion, inflation, borderline fraud and a further signal that Britain is not a good place to invest. 

The most predictable impact has been on food prices. Last August, the Bank of England estimated that EPR would lead to a 0.5 per cent increase in food inflation. In a tragic-comic example of the government chasing its own tail, it was reported last month that Rachel Reeves was offering supermarkets a reprieve from EPR if they agreed to put price caps on essential foods. 

Inflation is not the only unintended consequence of the government’s attempt to be a “world leader in resource efficiency”. For decades, producers of glass bottles have operated a circular economy that would make Greta Thunberg proud. Beer companies deliver full bottles to pubs, customers drain them and the publican puts them back in a crate for the brewer to collect, wash and reuse. But under EPR, glass bottles are defined as “waste packaging materials” and taxed at £192 a tonne. As the Sunday Times recently reported, this has led to companies using thinner and more fragile glass in their bottles, switching to (non-reusable) cans and Tetra-Paks, and shifting production offshore. 

In February, the Grocer revealed that a suspiciously large number of small packaging firms were registered at Companies House shortly before EPR came into effect because companies with a turnover below £1 million are exempt from the charges. This ruse may be effective, but it adds further efficiencies to the system and undermines the purpose of the policy.

Extended Producer Responsibility is costing the tonic water company Fever Tree £500,000 a year. It is costing Heck sausages £135,000 a year. Companies like this cannot avoid the tax by using less packaging because drinks have to be sold in containers and meat has to be sold in wrapping. EPR is not acting as an inducement to recycle. It is simply transferring money from consumers to local authorities while creating unnecessary costs and market distortions along the way. 

And this is just one in a long, long line of ill-considered, virtue-signalling policies that spew forth from the Houses of Parliaments every year. Taken individually, they are a nuisance. Taken together, they are shattering.