• Offer limited environmental benefits. Because these containers account for a small part of the solid waste stream and a small part of the litter problem, the incremental impact of additional container recovery brought about the deposit program is limited. For example a nationwide deposit program for beverage containers would likely raise the nation’s recycling rate by one percent or less.

• Hurt existing recycling programs. Creating a duplicate recycling infrastructure for selected containers draws valuable revenue away from existing programs. Equipment utilization rates and operating efficiencies also suffer as consumers pull materials out of the existing recycling system to put them into the new deposit system.

• Raise costs and consumer prices. Regardless of how it is constructed, a duplicate system to handle a limited set of containers would impose a high cost on consumers. Consumers would ultimately pay for the labor and equipment to operate the recovery system and lose billions in unclaimed deposits if they chose to continue using their local recycling programs for deposit containers.

• Are inconvenient for consumers and are increasingly unpopular. The performance of existing deposit programs is in decline. Return rates are at record low levels; research indicates that consumers prefer more convenient ways to recycle that a deposit system.

Background

Mandatory deposits on beverage containers are among the oldest “producer responsibility” programs in existence. The origins of the programs had little to do with many of the arguments made in their support today. In fact, mandatory deposits were a response to growing litter problems in the 1960s. Mandating deposits was also an attempt to force beverage companies to keep selling their products in refillable bottles, even though refillable packaging was becoming less popular with consumers. As consumer beverage demand has grown and evolved, the beverage industry has responded with new types of products and packaging. And now, 31 years after Oregon’s bottle bill, S.2220 would mandate that the deposit mechanism be imposed nationwide on virtually all liquids for human consumption.

Of course consumer preferences for certain beverages and packaging are not the only things that have changed since the 1970s. Many in state and local government as well as the private sector responded to concerns about litter by developing new programs for preventing and cleaning up litter of all types. Today states that adopted comprehensive litter control programs are demonstrably cleaner than those with no litter control programs and are, on average, cleaner than states with deposit programs. On the solid waste front, nothing short of a revolution in recycling has brought residential and commercial recycling to a prominence never before imagined. Recycling is taught in schools and has taken root with a new generation. At home, recycling is now viewed as a basic local service in most communities. Business and commercial recycling continues to grow and to account for most of the materials diverted from disposal.

Producer responsibility for beverage containers must be evaluated in the context of the changing consumer market and the alternative opportunities for waste management and diversion available. The issue is one of comparative costs and benefits: What does a producer responsibility system seek to accomplish and what benefits does it offer vs. the current system? What incremental cost and economic impact result from the proposed system?

I would like to provide the Committee and staff with answers to these questions, based on my experience conducting over 20 research projects and reviewing data on this issue over the past 16 years. During this time I have directed primary research into the operation and economics of deposit systems in each deposit state in the US as well as analysis of proposed programs in the US and abroad.

Summary of S.2220

The proposal would impose a federally-mandated fee on the sale of beverage containers. Beverage containers are any containers made of glass, metal, plastic, and/or paper that contain or may contain a beverage. All liquids for human consumption are included except milk and other dairy products. The primary impact of the bill would be the establishment of a new materials collection system to recover beverage containers from the waste stream. This system would substantially duplicate existing recycling infrastructure created through the investment of public and private funds over the past 15 years. Consumers would pay substantially higher prices for everyday products to support this system. And it is a system which many find cumbersome and inconvenient. Our summary of the bill and its key provisions is provided in Attachment 1.

In my testimony I would like to highlight three major issues:

• Focus on the potential benefits of this measure – What the bill seeks to accomplish and what incremental effect it would have

• Elaborate on the new materials recovery system that would be mandated as a result of the bill – How the system would operate, its costs, and the impact it would have on existing recycling efforts

• Discuss the economic impact of the measure in terms of costs to US consumers – The bill would have many direct and indirect effects costing consumers billions of dollars per year

A Producer Responsibility System Offers Limited Benefits

Beverage container materials are already among the most widely recycled materials in the country. Even as the beverage industry has responded to consumer demands and packaging innovations through the years, the new package types (aluminum cans in the ‘60s, PET in the ‘80s) have become accepted and widely recognized as recyclable and valuable. Undeniably, the rate of recovery for beverage container materials as well as other recyclables has been in decline for the past several years. While many theories have been advanced, it is clear that the novelty and high profile accorded to recycling programs in the late 1980s and early 1990s has worn off and the American public needs to be reminded of the value of recovering certain commodities from the waste stream.

This producer responsibility measure focuses on a subset of consumer packaging that accounts for approximately 4% of all municipal solid waste generated each year. The identification of beverage packaging as the target for the bill is arbitrary as many other products are packaged in these same materials (metals, glass, paperboard, plastics), but are not singled out for punitive fees and special handling.

With a substantial fraction of these containers already recycled, what is the incremental benefit offered by the proposed deposit system? Based on current recycling rates and realistic levels of recovery under the proposed system, we believe that the recycling rate would probably increase by 1% or less. That is, the national average recycling rate computed by EPA each year would rise from approximately 28% to 29%. As we will see later, the economic impact for such a small move would be quite significant.

It is also important to highlight that recovery rates under existing deposit laws are at all-time lows. The few states that track and publish their return rates are all on the same downward trajectory (see Exhibit 1). These three states (California, Massachusetts, and New York) contain three-fourths of those who live with deposit systems in the US. In these states the reported return rate averages less than 65%.1

Given the broad scope of S.2220 (no existing deposit program affects as many types of beverages and containers), the expected return rate would be even lower than that experienced in deposit states today.

In short, mandating a deposit is no guarantee of achieving the 80% recovery goal in this proposal. In fact, through their lack of participation, consumers are sending a plain signal that these programs are inconvenient and unpopular.

Turning to litter control, the traditional rationale for imposing mandatory deposits on beverage containers, the data indicate limited potential benefit, especially given the costs required to achieve the results. Beverage containers consistently account for less than 9% of roadside litter, measured in visual litter surveys conducted over the past 25 years. Even if a deposit measure were capable of eliminating beverage container litter (which it would not), roadsides, parks, and beaches would still need to be cleaned periodically and anti-litter education would still be necessary to address the remaining 91+% of the litter problem.

Proponents of this measure point to a wealth of benefits ranging from reduced dependence on foreign oil to fewer blown tires on bicycles, but alternative forms of recycling and litter control achieve these same benefits (however they may be measured). The key point is that the forced deposit systems offer only marginal gains in these various categories. Further, the real impact of this proposed system cannot be accurately stated until the net effect of extra trips to redemption centers, new trucks and traffic, and other environmental consequences of the new redemption and collection system can be documented.

In sum, the rationale for special treatment for this small part of the country’s waste stream is questionable at best. Additional recovery of many other materials in the waste stream could offer equal or greater societal benefit and may very well be feasible at a substantially lower cost than the scheme envisioned in S.2220. Singling out beverage containers for management through a separate system also has significant economic consequences as we will describe below.

Establishing a Duplicative, Costly Redemption System

Today most Americans can recycle a wide range of materials right at the end of their driveways or in their apartment buildings. About 60% of us have access to curbside recycling and most of the rest can drop recyclables off where we dispose of trash or at other convenient locations in our communities. It is no coincidence that at the time the last forced deposit measure passed in California in 1986, none of us had ever even heard of curbside recycling.

As we walk through the practical implications of the new materials recovery system required by this bill, we will highlight the system’s expense, inconvenience, and adverse impact on the recycling programs already in place.

Redemption System Elements

All forced deposit programs (which are in place in 10 states containing 29% of the population) mandate the collection of a fee when the product is sold. The fee is refundable upon return of the container to a designated “redemption” site which may be at a retail facility or a separate redemption center. These systems contain myriad complications and hidden costs, but we will only focus on the major ones at this time.

Consumer Time

A forced deposit system requires consumers to segregate deposit containers from other recyclables or trash, store them, and return them to a designated location. Sometimes consumers return containers while on shopping trips, other times they make special trips, especially to separate redemption centers. For their effort, consumers earn a refund of the deposit they already paid – no compensation for their time, only the repayment of money they paid out weeks before when they purchased the beverage containers.

Consumer marketing and packaging have changed dramatically in the last 20 years and one of the driving forces behind these shifts is consumers’ demand for convenience in everyday products. Families with two wage-earners and day-care deadlines, seniors with limited resources and mobility, and young professionals are not looking for ways to spend more time managing their trash. The time and effort expended by consumers in deposit systems represents one of the great unquantified burdens of these systems. And, as documented earlier, deposit systems are increasingly unpopular and burdensome to consumers resulting in lower utilization of the systems and increased incidence of consumers forfeiting their deposits.

Redemption Sites

The costliest component of a forced deposit system is establishing a network of sites to accept returns from consumers. Traditionally, these sites have been co-located with product retailers forcing food stores into the recovered materials business, despite the obvious flaws (sanitary and otherwise) with such a system. Deposit programs have imposed high costs on stores with notoriously slim margins and particularly penalized the small and medium-sized stores where redemption costs are the highest.

In addition to the formidable health and environmental concerns with handling returned containers in food stores, retailers face logistical problems finding space for storage, coordinating the sorting and removal of containers from stores from the many product distributors involved (especially since S.2220 would include an unprecedented range of products and containers), and managing containers that would be impractical to redeem through reverse vending machines (because of their size or material composition).

Either as a complement or alternative to retail redemption, some forced deposit programs rely on separate redemption centers where redemption is the sole or primary business. In order for this model to operate, beverage distributors must subsidize the operation of these facilities through the payment of fees for each container handled. Not surprisingly, states with high handling fee subsidies have the most redemption centers; those with no subsidies have virtually none. (Interestingly, the presence or absence of stand-alone redemption centers does not appear to affect return rates.)

The cost elements at all redemption sites are similar: labor to accept containers from the public or to service machines that accept returns; capital for constructing new space to accept, sort, and store containers; operating expenses for leasing and operating machines, increased sanitation, cleaning, and supplies.

Collection System

Finally, a system is required to collect returned containers from all redemption sites, transport them to central locations, and process the materials into market-ready commodities. The costs include vehicles, drivers, warehouses, processing equipment, accounting, and administration to track funds including deposits and refunds. Revenues from the sale of materials are used to defray collection and processing expenses.

System Cost Estimates

A redemption and collection system in the 40 states without deposit laws currently would cost about $4 billion annually. This estimate was derived from our 1991 analysis of a national deposit law and was scaled to reflect the number of containers subject to deposits under S.2220.

Several factors would tend to inflate the cost further. Two of the most significant are:

• We did not account for the substantially higher costs associated with collecting plastics, steel, paper, and composite material packages that were not part of the 1991 analysis

• Some incremental costs would be incurred in the 10 states that already have deposits. The first reason for this is that even for products already covered by the deposit, the return rates are less than 80%: at least three-fourths of the population living with deposits have redemption rates below 70%. Therefore the existing deposit system would not be sufficient to avoid the imposition of the federal system. Second, we know that many products regulated under S.2220 are outside the existing deposit systems, so manufacturers of these products would face new requirements in all 50 states.

The bill’s proponents argue that the flexibility provided to industry in S.2220 should result in operating efficiencies which would reduce costs below those associated with existing deposit programs. We will address that theory next.

Impact of a “Performance Standard”

One unique feature of S.2220 is the establishment of a “performance standard” of an 80% recovery rate for each beverage manufacturer’s products. Note that this is no assurance that the rate would be achieved, it is simply a target like a state recycling goal. This contrasts with the traditional approach of US forced deposit laws which mandate how the redemption and collection infrastructure is to operate.

In theory, this approach is intended to provide flexibility to the beverage industry to develop a redemption and collection system that is as efficient as possible, thereby reducing costs compared to traditional deposit systems. In practice, this deceptively simply standard masks a number of hidden problems.

First, the system design, even for an individual manufacturer, would be extremely complex. The bill would require that within six months of passage, each manufacturer would have established recovery systems covering all states including commitments from all entities who are to provide both redemption and collection services. This task would be daunting for the largest and most sophisticated beverage companies, but may be nearly impossible for smaller firms in the market. Such a plan would require detailed agreements with hundreds of retail and other entities within the companies’ marketing areas. The administrative expense of establishing and maintaining these systems would at least partially offset any operating efficiencies they might offer.

Another factor that would reduce the hoped-for cost reductions is the difficulty of cooperation across different beverage companies and sectors. Literally thousands of manufacturers sell products that would be subject to this proposal, creating a patchwork of sales and distribution territories in which their products are available. The complexity comes in trying to allocate financial responsibility for a recovery system in which the portfolio of products available for sale varies literally from store to store. Making the problem worse is the fact that beverage manufacturers who sell through distributors may not know where their products are offered for sale. Integrating sales and market territory information across hundreds or even thousands of manufacturers would be costly and time-consuming. The obvious alternative is to leave smaller and regional companies to establish their own systems which would drive up their cost of recovery substantially.

Third, it is unclear how the federal and existing state deposit laws could co-exist. For example, one manufacturer in Oregon may comply with the 80% standard and be exempt from the federal law. Yet the redemption system and 5¢ deposit value would conflict with the systems and deposit value established for other products. It is likely that the federal system would, in fact, supersede all existing state programs.

It is clear that this kind of producer responsibility system would discriminate against small and mid-sized beverage companies who would lack the resources and volumes to command the attention of larger service providers (or “agents” as they are called in the bill). The cost and scale disadvantages faced by these beverage companies would put them at a distinct disadvantage to their larger competitors. This would be a particularly acute problem for small regional companies such as dairies (who produce much more than just milk products), water, and juice manufacturers.

In sum, the argument that a performance standard will reduce costs needs to be carefully evaluated in light of the realities of the product manufacturing and distribution system in place for beverages, the complex and unprecedented range of products subject to deposits in S.2220, and the potential for anti-competitive outcomes that disadvantage small and mid-sized producers. As we can observe from the unique California deposit program, administrative complexity can impose significant costs that defeat the hoped-for operating efficiencies of a centralized system.

Impact on Existing Recyclers

The imposition of a national deposit system for beverage containers cannot be evaluated without considering the implications for the vast recycling infrastructure that has been developed over the past 15 years. State and local governments have invested billions of dollars to build recycling collection and processing capacity for household and commercial recyclables. A deposit system would seek to pull commodities out of that existing system and transfer them to a new handling system, outlined above. Much of the material that would be recovered under the system proposed by S.2220 is material that is already being recovered through taxpayer-funded programs in communities all over the US. While we would argue that there is no economic rationale for that shift, there is also a question of whether there is any justification for the federal government to mandate that policy.

Beverage container material, especially aluminum and the most common plastics, provide significant value to recycling programs. Research has indicated that beverage container material accounts for between 40% and 70% of revenues earned from the sale of residential recyclables. Of course scrap revenue does not fund the cost of recycling programs, but it does offset operating costs significantly.

Individual communities and states have examined the implications of container deposit programs on their recycling economics and documented the harmful effect of a deposit system. The adverse impact of deposits was a critical factor in the repeal of the Columbia, Missouri municipal deposit ordinance in early April of this year. The City’s Public Works Department computed positive benefits from eliminating deposits and has already seen historically high recovery levels through the City’s curbside program since repeal. For states without deposits, adding them would pull revenue and material out of the existing programs. In Pennsylvania, for example, recyclers would lose over $30 million in annual revenue if a deposit system were implemented. A similar analysis in New Hampshire estimated the loss to community recycling programs at $3 million per year.

In addition to the adverse impact on revenue, deposits would decrease the utilization of existing recycling infrastructure and could jeopardize the viability of programs to recycle other containers not subject to deposits. Pulling deposit material out of existing recycling programs would do little or nothing to reduce costs of providing recycling in those communities. The same equipment would still be required, the same trucks and drivers following the same routes – they simply would be collecting fewer containers than they do now. (Of course many consumers would continue to recycle deposit containers through curbside bins as they do now, so some deposit material would remain in the system.)

There is, however, a risk that removing the beverage containers from the system could irreparably damage the viability of container recycling. Communities may find that the remaining containers are simply too expensive to collect for recycling, especially given the greatly reduced revenue. Though the container recycling issue in New York City is complex and politically charged, it is clear that one factor in the high cost of container recycling there is the lack of valuable beverage containers in the stream: containers that are diverted to the deposit system instead.

The relationship between state and local governments on solid waste issues has always been tense because of the difficulty of crafting state-wide or regional policies that reflect the diverse local circumstances faced by towns and cities. Strong justification is therefore required to shift that policy-making role up to the federal level and to mandate a new system to overlay the recycling systems built with taxpayer and ratepayer funds over the last 15 years. In our view, this shift is ill-advised and certainly not justified by the limited, potential benefits offered by S.2220.

Economic Impact on Consumers and Businesses

Whether it is called a producer responsibility measure, an anti-litter policy, or a bottle tax, mandatory deposit programs impose a substantial cost on consumers. Under this proposal, the range of products and consumers affected would be unprecedented. More beverages and types of beverage containers would be included in this program than in any other deposit program. That means that the economic impact of the measure would affect every US consumer – the effects would not be limited to those who consume only certain products.

• Consumers pay with their time. We have already described how time-consuming a deposit system is for consumers. Separating containers from other recyclables; making a trip to a designated location to redeem bottles, cans, and cartons; and waiting in line for workers or machines to accept containers takes time that consumers just don’t have. It is hard enough to get most consumers to recycle at all let alone recycle one set of materials at home and haul another set to a redemption center.

Consumers who live with both systems prefer comprehensive recycling. While deposit law proponents cite high popularity for deposits in the ten states (e.g., “Do you like the deposit law?”), when asked if they prefer recycling at the curb or through the deposit system, consumers prefer the comprehensive option 2:1.

• Consumers pay for the system. Earlier we provided a rough estimate of $4 billion as the cost of a national system to redeem and collect beverage containers captured by S.2220. This system must be developed by the companies that manufacture and distribute these products. Ultimately, it is the consumers of these and other food products that will bear the cost of the system. (The beverage industry will suffer its own setbacks in the form of lower sales resulting from higher prices charged for its products.) But in the long-run, consumers will pay billions of dollars in higher prices for these and other products.

• Consumers pay the unclaimed deposit tax. The decline in return rates in deposit states is proof that for many consumers their time is worth more to them than the value of the refund. These consumers are making a rational trade-off between the refund and the time it takes to obtain it. For them, the deposit simply functions as a tax on the price of these products.

Consumers who choose to support their local recycling programs or simply prefer the convenience of curbside recycling also forfeit their deposits, even though they are still recycling the containers.

For at least one-third of consumers in deposit states2 the deposit functions like a tax. We estimate that the unclaimed deposit tax would equal at least $4.8 billion per year, just in the 40 states without deposits now. As noted earlier, the federal program would likely be in force in several if not all of the existing deposit states as well since they are not achieving the target 80% recovery rate.

We have only estimated the 40-state cost of the redemption system and the unclaimed deposit, but the combined annual cost to consumers from these two elements of the proposal is $8.8 billion. If we factored in the value of consumers’ time to redeem containers, the cost would be substantially higher.

Beyond the direct impact on consumers, the affected businesses also suffer from being singled out in this legislation. Higher actual and perceived prices would reduce sales of soft drinks, juice, water, beer, tea, and other products. This not only affects manufacturers, but their suppliers and retailers as well. In the soft drink industry, for example, each dollar of output by bottlers produces another $2.70 in economic activity elsewhere in the economy.

The bill would also have an adverse effect on tax collections at all levels of government. The soft drink industry pays $17 billion dollars in federal and state taxes each year; tax payments would drop as a result of lower sales and profits. The tax implications of this bill would be particularly pronounced on alcoholic beverages, where excise taxes represent a much higher share of product price than for soft drinks.

Beverage companies, retailers, and their suppliers would also experience job losses as a result of the higher prices and lower sales. A University of Kentucky analysis, for example, projected 1,200 lost jobs in Kentucky alone as a result of a more limited deposit proposal considered in that state.

Alternatives

Building separate recycling systems for not just certain types of materials, but for selected products packaged in those materials is not a rational direction for US solid waste policy. Labor and equipment for handling waste are costly; industry professionals have long recognized that efficiency results from minimal handling of materials and from large scale operations. Recycling is no different, especially for commodities that are widely recycled, have existing markets, and pose no special environmental hazards. Recycling programs that target multiple materials, minimize handling, and maximize volume are likely to be the most successful and efficient way to keep waste out of landfills and incinerators. Providing disincentives to disposal such as pay-as-you-throw trash programs is a useful supplement – in fact it is the single most effective policy instrument to increase waste diversion.

Decision making on appropriate waste management systems is best kept at the local and regional levels where demographics, market conditions, and the wishes of taxpayers and voters can dictate policy. Imposing a costly new system on top of existing recycling infrastructure means higher costs for US consumers. Enhancing the systems in place to make better use of existing infrastructure is a far better use of time and resources directed at recycling.

Recovery rates for many materials have slipped, largely as a function of decreased education and promotion about the value of recycling. On the litter front, consumers, especially those most prone to littering, could use more frequent and directed reminders to obey the law and not litter.

The soft drink industry has long advocated and supported comprehensive and sustainable programs to recycle and reduce litter. Spending consumers’ money to build a massive new beverage container recycling system is simply wasteful. To provide perspective on the magnitude of the new costs, the $8.8 billion in new consumer costs would be sufficient to fund the curbside collection of nearly 60 million tons of material – about 25% of the entire municipal solid waste stream.

Thank you for the opportunity to appear before you today and present this testimony.

Attachment 1

Summary of National Beverage Producer Responsibility Act of 2002

Reference: S. 2220 (Jeffords); April 22, 2002

Provisions

1 The 60% rate in California also includes containers returned through curbside programs (for which consumers do not get a refund). Without these curbside bottles and cans, only about half of deposit containers sold in California are actually returned for refunds.

2 The rate of consumers who do not earn refunds from deposits they pay is probably much higher because many donate their containers to charity or leave them for scavengers or others to redeem.