4.9 Economic Instruments

Economic instruments provide a potentially important influence on the effective and efficient regulation of the solid waste sector. Economic instruments achieve behaviour changes indirectly by creating a set of incentives and/or disincentives through pricing. Economic instruments can offer a more cost-effective and dynamic form of regulation than the traditional command and control approach. It has been argued that the main benefit of economic instruments is that they may allow for the meeting of a target at a lower overall cost than traditional command mechanisms.

In addition to the mainstream taxation system, the Waste Act provides certain additional legislative measures for the use of such economic instruments.

A key economic principle in terms of waste management is that ‘the polluter pays’. According to this principle all generators of waste (including businesses and households) are responsible for covering the costs of waste generated. Government can make use of a number of options to ensure that both private and social costs are covered. However the lack of full cost accounting of the costs of service delivery and tariff policies prevent full costs from being passed on to households and commercial enterprises, which undermines the polluter pays principle.

It should be noted that application of these economic instruments are not seen as an alternative to regulatory measures, but rather as further mechanisms to support “command and control” regulation. A specific area of concern for the application of economic instruments is a precondition for a well functioning market and governance institutions with sufficient capacity to ensure implementation.

Pricing is a significant concern within the waste sector, where there is a tendency to under price for the waste service in terms of collection and disposal. There is a clear need for price increases in order to redress this, however the economic downtown has spurred a drive to keep prices low, and it is important to acknowledge the economic context in which the NWMS must operate. The risks of over-inflation may include an increase in illegal dumping for example. While a general adjustment in pricing is necessary, it should be appropriately phased in so as to avoid over-inflating costs. Opportunities for efficiency gains should be explored to off-set price increases where possible.

Full cost accounting for waste services is necessary in order to ensure that waste services are appropriately priced. This includes taking account of the full capital replacement, operating and environmental costs of delivering the waste service. It is important to drive efficiency improvements in service delivery. A fundamental step is therefore to understand the true costs of the waste service. Municipalities especially need assistance in this regard and the NWMS should aim to provide guidance to municipalities in addressing the need for full cost accounting.

Pricing adjustments should start with larger municipalities and be based on 80/20 principle. A ‘one-size fits all’ approach will not be appropriate and there needs to be consideration given to the differential contexts of municipalities.

The NWMS should steer away from artificially influencing pricing to support recycling and other objectives.

In examining economic instruments, it is important to avoid unintended consequences (for example an increase in illegal dumping as a result of increased disposal tariffs). It is therefore essential therefore to have a suite of mechanisms in place, for example increasing enforcement capacity and establishing community based initiatives to curb illegal dumping which is at risk of increasing in response to fee increases.

Possible economic instruments include Deposit Refund Schemes, Minerals extraction taxes, Waste disposal taxes, Enforcement fines, Product Taxes and Local government incentives. The research has not supported any broad application of economic instruments at this stage, since it is important to get the fundamentals right first. Specific instruments may be warranted for consideration in relation to specific waste streams. However any economic instruments to be considered should be carefully evaluated against a set of criteria. In this regard it is proposed that National Treasury’s Environmental Fiscal Reform criteria should be used in evaluating use of economic instruments.

Within the context of the NWMS, economic instruments are seen as part of a multi-pronged strategy to achieve the objectives of waste reduction, re-use and recycling. It is envisaged that once enforcement capacity of current laws and regulations is improved, the use of economic instruments will be phased in gradually, starting with simpler mechanisms and moving towards more complex ones as the institutional capacity grows over time.

Particular caution should be taken to ensure that only the real costs of any economic instruments (for example a levy) should be internalized so as to ensure protection of the consumer. In addition, while industries may be best placed to implement certain economic instruments there should be oversight by government to ensure appropriate and fair practices.