3.12 Economic instruments

3.12(1)
The Waste Act provides various legislative measures for the use of economic instruments. These will be applied within the context of the overall fiscal and taxation policy established by National Treasury, and the specific measures for environmental fiscal and taxation reform announced by the Minister of Finance in the annual budget tabled to Parliament. The selection and use of economic measure, including pricing, taxation, subsidies, incentives and  fiscal measures will also be aligned with the principles established by NEMA, including the ‘polluter pays’ principle.

3.12(2)
Economic instruments complement and support more traditional ‘command and control’ regulation. They can achieve behaviour changes indirectly by creating a set of incentives and / or disincentives through pricing and can offer a more cost-effective and dynamic form of regulation than the traditional command and control approach. However the introduction of economic instruments requires a number of factors to be in place prior to their widespread application.

3.12(3)
According to the “polluter pays’ principle all generators of waste (including businesses and households) are responsible for covering the costs of managing the waste generated. These include not only the direct financial costs associated with the safe collection, treatment and disposal of waste; but also the external costs (externalities) of waste generation and disposal, such as health and environmental impacts. 

3.12(4)
Full cost accounting of the delivery of waste services is essential in order to ensure that waste services are appropriately priced. Currently only a portion of these costs are being passed on to households and commercial enterprises, which creates the wrong set of incentives, undermines waste minimisation efforts and ultimately undermines the polluter pays principle.  A crucial component of this NWMS is ensuring that there is a proper understanding of costs in the sector and corresponding pricing of waste management services. Getting the prices right in the sector is not, strictly speaking, an ‘economic instrument’ but it lays the basis for more refined instruments to be introduced at a later stage.

3.12(5)
The following strategic approach will be followed as a general approach to the preparation for and consideration of economic instruments:

• Financial sustainability of the waste management system: Government will ensure that public sector waste management is managed as a financially sustainable service. Financial sustainability also includes the use of cross subsidies as appropriate for under-provided public goods and for addressing negative externalities of inadequate service provision.
• Full cost accounting and pricing of solid waste services. Government will ensure that the full financial costs are accounted for and considered in the process of tariff setting. This includes the full costs of service provision, monitoring and enforcement costs, airspace development, and landfill closure costs. In support of this DEA will provide:
  • Tariff setting guidelines and requirements for municipalities and other providers of waste disposal services including full cost accounting requirements in a simple format; and
  • Guidance on the need to separate collection charges from disposal charges – and for municipalities to have appropriate internal charge / cost allocation systems for the provision of the correct internal incentives in the system.
• Evaluation of the full social and environmental costs: Once the full financial costs of solid waste management are accounted for, a further evaluation of the external costs of resource degradation and external costs of inadequate service delivery will be undertaken. An essential component of this is the development of the waste information system and associated research.
• Establishment of administrative mechanisms: The establishment of the administrative mechanisms needed for effective management of the sector (primarily information, monitoring, compliance and enforcement, and pricing) are preconditions for effective economic instruments.
• Specific consideration of selected instruments: DEA will undertake a process of evaluation of specific economic instruments in the light of the strategic objectives established by the NWMS. 

3.12(6)
The following issues will be considered when selecting and introducing the most appropriate economic instruments:

• Environmental effectiveness: The tax instrument must be focused on a clear environmental objective and must be well targeted to that objective. To ensure that the tax is as effective as possible, the best design should be aimed for and the number of exemptions kept to a minimum.
• Tax Revenue: The level of tax revenues and the way in which they are used are important considerations. Certain environmentally-related taxes will be capable of raising significant amounts of revenue, particularly where the demand for the good or service being taxed is price inelastic. In other cases, tax revenues may be small and therefore of secondary importance.
• Support for the tax: Taxes are necessary to fund government activities and the provision of public goods and services. With every tax reform, there are likely to be winners and losers and these groups of stakeholders need to be clearly identified. All relevant stakeholders need to be engaged in the assessment process.
• Legislative aspects: The Minister of Finance is responsible for the imposition of taxes, duties and levies. Different environmentally-related tax instruments may require different legislative amendments (e.g. direct versus indirect taxation). With respect to international commitments, environmentally-related tax measures will need to be compatible with World Trade Organisation (WTO) rules and with on-going tax harmonisation efforts within the Southern African region through SADC.
• Technical and administrative issues: Technical and administrative issues are important considerations that can influence whether or not a tax instrument may be appropriate. Ideally, the tax base should be as close as possible to the environmental objective, and the tax rate should be set according to the level of the externality. Minimising the possibilities of tax avoidance, tax evasion, compliance and collection costs are other important design considerations.
• Competitiveness effects: The impact of environmentally-related taxes on domestic industries and other aspects of the economy such as employment and inflation need to be considered, and mitigation measures may be required. These may include, amongst other things, reduced tax rates, tax ceilings, tax refunds, appropriate mechanisms to recycle tax revenues, or tax shifting options.
• Distributional impacts: An understanding of the way in which environmentally-related taxes impact on different income groups is important. For every proposed tax reform, the likely tax burden on different income groups and the anticipated distribution of environmental benefits needs to be assessed. The possibility of making environmentally-related taxes progressive should be integral to the design of any proposed instrument.
• Adjoining policy areas: The extent to which environmentally-related taxes can assist in meeting other government policy objectives is an important consideration. From an environmental point of view, it is important therefore that any tax measure is aligned with other regulatory or voluntary approaches.

3.12(7)
A number of economic measures have been identified that merit further consideration and research, and will be considered for implementation once the above mentioned prerequisites are in place. These are:

• Deposit Refund Schemes:  These schemes are most suitable for products that are easy to identify and handle; feasible to use and/ or recycle; require careful disposal (e.g. batteries); and where co-operation is feasible between producers, retailers and consumers. Deposit refund schemes will be considered for specific waste streams where the private sector is not effectively addressing the issue.  Introduction of deposit refund schemes for specific waste streams will be done in close consultation with the industry concerned.
• Waste Disposal Taxes: Waste disposal taxes address the external social and environmental costs of waste disposal and provide pricing that takes into account the waste generation and disposal decision by private actors. These only impact on waste generation if the generators experience increases in costs. The risk of waste streams being diverted to incineration and illegal disposal are high. Waste disposal taxes require effective regulation and monitoring of landfill sites to be in place.  Where a specific waste disposal site is underpriced the capacity to tax a specific site will be considered. Consideration of alternate economic interventions will be compared to existing CDM incentives for methane recovery in landfill sites. 
• Product Taxes: Product taxes will be directed at products or materials for which there exists a policy intention to diminish the product or material over time or remove it from use or production. This instrument will be considered if other instruments are not better suited to manage a specific problem.
• Tax interventions for hazardous waste disposal: Tax interventions for hazardous waste disposal will be considered in instances where more effective management of hazardous waste generators is required. 

3.12(8)
A crucial consideration for economic instruments will be where these are proposed as appropriate supporting measures to complement IndWMPs.

3.12(9)
DEA and National Treasury will undertake a bilateral programme of research in order to develop and refine an appropriate set of economic instruments.