Recycling Rubbish

Why Germany's "market-oriented" recycling scheme can't transform trash into treasure

It looks like garbage: bits of torn paper, piles of plastic stuff, crumpled aluminum foil, squashed cans, broken glass. It even smells like garbage--not as bad as the odor at some landfills, but a detectable putrid aroma nonetheless. It is, however, not garbage. Not, at least, according to German law.

These mountains of miscellany, some stacked neatly in towering bales and some amassed in great heaps, have become "valuable materials" by edict of the German government. Now workers sort through the stuff as it pours down a conveyor belt; they separate the plastic from the glass, the aluminum from the paper waste. "For us," says a manager at a Berlin waste sorting facility, "the hard part is the 'light fraction'--the plastics and composite paper packaging. We basically have rows of workers separating different package types by hand."

In 1991, riding a wave of waste-avoidance sentiment, Klaus Topfer, Germany's minister of the environment, declared waste a useful resource. The German legislature then approved a law making whoever places a package into commerce responsible for taking it back. Passed on June 12, 1991, the Packaging Ordinance requires manufacturers or retailers to "take back" their packaging or ensure that 80 percent of it is collected rather than thrown out. Then 80 percent of what's collected has to be reused or recycled.

The ordinance covers all packaging, around 150 billion individual packages discarded each year in Germany, about 40 percent of the country's garbage. That translates into 12 million tons of material: yogurt containers, toothpaste tubes, detergent boxes, chip bags, bottles, boxes, pallets, wrappers.

The law would have required every supermarket, every drug store, every auto-parts retailer, every stationery shop to accept customers' garbage. Appalled at the prospect of transforming retailers into waste handlers, consumer-product manufacturers came up with an alternative way to satisfy the law's requirements. They established a consortium--Duales System Deutschland--to collect the packaging waste. To fund the DSD, manufacturers charge themselves for each package sold. Those who pay the fee put a special "green dot" logo on their packages, indicating that consumers should discard them in industry-sponsored collection bins.

The green-dot program costs more than $2.5 billion a year--more than $100 for a household of four, an amount that approaches the taxes or fees already paid for regular waste--collection service. And that money covers collection costs only. It does not include the cost of redesigning packages and changing production systems. Waste Environment Today, a British trade publication, reports that real consumer prices for some packaged products have jumped 13 percent since the take-back law took effect. And one consumer-products manufacturer suggests that set-up costs to meet the take-back requirements come to more than 1 percent of total revenue. Yet even though the DSD handles virtually all packaging waste, municipal waste collection costs have declined only slightly.

Germany's experiment has captured the imaginations of recycling advocates throughout the world. "The German concept," says one commentator in BioCycle magazine, "has totally swept Europe." The take-back idea has also gained favor in the United States. The Recycling Advisory Council, an arm of the National Recycling Coalition funded partly by the EPA, included the concept in a list of recommended recycling policies for the United States. And in 1992 Sen. Max Baucus (D-Mont.), chairman of the Environment and Public Works Committee, drafted a bill patterned after the German ordinance. Although the bill did not come to a vote that year, Baucus is likely to resurrect it in future legislation.

"If recycling is going to survive and even prosper, we will need to do more--much more," Baucus told a meeting of the U.S. Conference of Mayors and the National Association of Counties last year. "The cornerstone of my strategy rests on the principle that I call manufacturers' responsibility for the lifecycle of a product….Anyone who sells a product should also be responsible for the product when it becomes waste." President Clinton seems sympathetic to this argument. During his campaign he said, "I would support a market-based system to make manufacturers and importers pay more of the cost of disposing of the goods they produce."

The take-back idea has much popular appeal. Everyone is against waste. It seems so…well, wasteful. And pinning responsibility on manufacturers lets consumers off the hook. It makes consumers victims of packaging forced on them by capricious manufacturers--a view adopted by many U.S. environmentalists. "Packaging manufacturers unthinkingly foist millions of dollars of expenses onto us all every day," Allen Hershkowitz of the Natural Resources Defense Council recently told The New York Times.

Defining packaging as pollution generated by manufacturers makes the take-back idea seem compatible with the economically (and emotionally) satisfying "polluter-pays" principle. It appeals to the current rage for "market-oriented" environmental policies. If packaging is indeed pollution--if it is an externality, to borrow from economics lingo--Topfer's ordinance is a way of fixing a market failure. It forces manufacturers to take full account of the costs they are imposing on others. Writing in the June 1993 Atlantic, Hershkowitz explicitly applies this model to the take-back concept. The aim, he says, is "making the price of [waste] collection and utilization internal to each product," thereby giving manufacturers "an incentive to reduce the amount of garbage they build into their products."

By making consumer waste part of a manufacturer's cost calculations, its proponents argue, Germany's take-back law harnesses the innovation and efficiency of the private sector. "A positive aspect of the packaging ordinance is its aiming at free-market solutions," says Birgitta Grotemeyer of Interseroh, a German company that collects transport packaging. "It prescribes the objective, but not the way leading to the objective. Thus, companies are free to choose the best and cheapest way."

But a mandatory take-back program is anything but a free-market policy. Packaging is not a cost imposed on others, like toxic chemicals dumped into a river or vehicle exhaust released into the air. To the contrary, packaging is voluntarily owned at each step from production through consumption to disposal. Consumers are responsible for the costs associated with purchasing and discarding the packaging. If they litter, they are subject to penalties. If they throw out the packaging, they have to pay for waste collection. Local governments frequently undermine the incentive to avoid excessive packaging by subsidizing waste collection through taxes and failing to charge households according to how much trash they generate. But this is a public-policy failure, not a market failure.

In short, the take-back model is based on a fundamental misconception. It treats what should be a consumer cost as if it were an externality. The experience with Germany's green-dot program, the first comprehensive scheme of its kind, illustrates the problems that arise when people with a weak grasp of economics try to reorganize property rights in the name of the environment.

"Germans wanted waste avoidance," says Helmut Fischer of Procter & Gamble. "They wanted to achieve avoidance of landfills and incinerators at any cost. This is ideology, not science."

Making manufacturers responsible for taking back packaging has had some of the effects environmentalists wanted. A walk up the toiletry aisle of Tengelmann, a German grocery store, reveals some packages that are unfamiliar to most Americans. Gone are just about all toothpaste boxes. Instead, bare tubes stand on their caps in permanent display holders. The detergent aisle brings more surprises: no more sturdy, brightly colored plastic (high-density polyethylene) bottles. Instead, cardboard sleeves wrap very thin plastic containers of liquid detergent.

For consumer-products manufacturers, some of these changes mean real savings on materials. Procter & Gamble is buying 25 fewer tons of cardboard per year just because it has eliminated the outer carton around denture cleaner. P&G's newly packaged Fairy Ultra detergent will mean a 45-percent cut in raw material consumption. And refillable cartons sometimes result in a 90-percent reduction in packaging.

But for all the hoopla surrounding the program, its overall impact is modest. Up and down the Tengelmann aisles, most boxes, jars, cans, and bottles look like their counterparts in U.S. supermarkets. The numbers confirm this impression. In late 1993, the German environment ministry announced packaging waste reductions of 500,000 tons since passage of the packaging ordinance in 1991. That's a half million tons out of 12 million tons of packaging waste, or 4 percent. This amounts to a 1.7-percent reduction in Germany's total municipal waste. Take into account the 200 million tons of industrial waste generated in Germany each year, and the reduction comes to 0.22 percent. And even this reduction cannot be attributed solely to the packaging ordinance.

One reason for the unimpressive results is that secondary packages--allegedly unnecessary outer boxes or wrappers that are often targeted as evidence of excessive packaging--actually make up a tiny part of overall packaging. In Germany, these outer containers produce less than 0.5 percent of the 12 million tons generated annually. Of the rest, 9 million or so tons is sales packaging: the soda bottles, food cans, yogurt pots, and so on that preserve, protect, and contain the product. The balance is transport packaging.

Peter Hindel of Procter & Gamble questions whether the recent packaging changes seen in Germany can be entirely, or even primarily, attributed to the take-back law. "Packaging developments," he argues, "are driven by consumer demands--by our understanding of what consumers are looking for and the options available." He notes that much the same kind of packaging changes are occurring throughout Europe and the United States, even in the absence of take-back laws. "We are seeing a higher percentage of refillables in Holland--without a take-back system--than in Germany," he says. "Consumers are demanding less packaging. If there are consumer reasons to make a change, then we would do it."

Hindel concedes that Topfer's take-back ordinance may accelerate this process. "It may change purchasing patterns faster than might otherwise have occurred," he says. "But I think we have to ask whether the ordinance influenced manufacturers, or whether Topfer set the public-relations context so that consumers more readily accepted packaging changes."

This is not merely manufacturer hype. One need go no further than the aisles of a typical U.S. grocery store to see that consumer choices matter when it comes to packaging. Orange juice, for example, comes in concentrate form, recyclable glass bottles, coated cardboard refrigerated containers, plastic bottles, and little boxes. It comes in just about every imaginable size, including 8-, 10-, 16-, 64-, 96-, and 128-ounce containers. Even refill systems for some juices are beginning to appear.

If consumers pay trash-disposal charges, waste generation becomes one of several concerns that influence their purchasing choices. These choices, in turn, will influence manufacturing decisions. The German take-back system instead imposes the disposal costs on manufacturers, who pay an "advance disposal fee" or pay to take back packaging. Regardless of who is responsible--consumers or manufacturers--reduction of packaging becomes a design objective. But that does not mean that the two systems are equally efficient. By reassigning ownership of packaging from consumers to manufacturers, the take-back law has generated huge new costs.

Sitting in his ground-floor office overlooking walls of stacked garbage, Andreas Mönnig reflects on the changes the take-back law has brought. Now working for the DSD, he has been in the waste-management business for many years, collecting trash under contract with German cities and towns. "People put out their waste in trash bins; we picked it up," Mönnig says. "Then we disposed of it. Mostly in landfills--70 percent, in fact. About 25 percent was incinerated."

Even before the take-back law, this had been gradually changing. In most German towns and cities, residents could deposit in special drop-off bins glass containers and newsprint for recycling. But most packaging went into the standard trash bin. That has now changed dramatically.

Mönnig points out the window to a row of the DSD's yellow bins. One bin smiles back, a grin and eyes painted across its front. "Our recycling family," he says. "We have 120,000 to 130,000 bins out there serving Berlin's 2.5 million inhabitants." In 1992, before the take-back law took full effect, Mönnig's company collected some 257,000 tons of materials in the recycling bins; in 1993, it collected 358,000 tons.

Measured by the amount of material collected in the recycling bins, the DSD program is a resounding success. Germans shifted nearly 6 million tons of their trash from the municipal bins--destined for disposal--to the yellow DSD bins. In July 1993, Environment Minister Topfer proudly announced that Germans "are the trash collectors of the world."

But not all of that trash was usable. About 1.2 million tons of German sales packaging is made of plastics. When the DSD system got fully underway in 1993, Germans began tossing this plastic into the yellow containers beyond all expectations. By year's end, close to half of the plastic packaging had been collected--but not recycled. Germany had a manufacturing capacity to absorb less than 200,000 tons of this plastic detritus. Some of the stuff began showing up at landfills in neighboring France. Some even made its way to Bulgaria. The rest--some 100,000 tons--has piled up in warehouses.

Topfer, undeterred by this warehoused plastic, proclaimed to the German public: "Don't be led astray by these reports of mountains of waste. It's quite right and proper that there should be such a mountain, so carry on filling those yellow sacks."

The cost of recycling that plastic is exorbitant: about $1,700 per ton, and that's excluding some of the especially hard-to-handle plastic discards. By contrast, traditional disposal of plastics costs less than $500 per ton in Germany (and about $100 a ton, on average, in the United States). Furthermore, at 85 cents per pound, recycled plastic is not at all competitive with virgin plastic, which costs around 30 to 40 cents per pound. Allowing hydrogenation of plastics, which turns them back into a basic chemical feedstock, would make recycling much cheaper, but it would still require a subsidy of about $310 a ton.

A more fundamental puzzle is how to avoid a cluster of free-rider problems caused by the take-back scheme. Consumers, who pay a direct fee for regular trash pickup but not for what they discard in the DSD's yellow bins, find them a convenient place to put waste, whether it carries the required green dot or not. "The results of our waste-sorting test were disappointing," Mönnig admits. "About 40 percent of what we have been collecting in the yellow bins is not green-dot material." Some of what's collected is packaging that doesn't carry the green dot. Some of it is non-packaging paper. But some of it, says one DSD official, "is just garbage: dead dogs, shoes, rubbish."

Manufacturers, too, abuse the program. Some companies underreport how much packaging they actually sell, so they pay lower fees. Others display the green dot on their products without paying the DSD at all. DSD officials estimate that 90 percent of all packaging sold now carries the green-dot logo. Yet the DSD is collecting fees for only 50 percent to 60 percent of packaging. By August 1993, just eight months after full implementation of the DSD system, it was nearly bankrupt. The industry-created DSD company was getting only 60 cents in packaging fees for every dollar it paid haulers to collect waste from the yellow bins. Collection programs to take back transport packaging--the boxes, pallets, and crates used to deliver products to retailers--faced the same free-rider problems.

For waste haulers, DSD contracts were a bonanza. Initially, they were paid by the total tonnage they collected. They had no incentive to monitor the contents of the yellow bins, taking only appropriately labeled green-dot material. In any event, they had no feasible way of knowing which manufacturers had actually paid the appropriate fees. "We have a lot of cheating," Mönnig concedes. Haulers sometimes bill the DSD for two to three times what they actually collect, sort, and market. "It's a problem with paper, glass, and especially the 'light fraction'--plastics, laminated packages, and so on," he says.

Procter & Gamble's Hindel calls this a "critical design flaw of DSD." The program produces the "slush fund syndrome," he says. "If you have a pot of money available, people will find ways of getting as much of it as possible."

For proponents of the DSD, all these difficulties are simply the inevitable costs of translating a radical new theory into practice. "We had so little time to get the system up and running," says the DSD's Dieter Uhlig. "We had to start the whole country all at once. We had no time to get experience by testing different programs." His colleague, Ursula Denison, concurs. "Because of the tight deadlines, we were under pressure to reach any agreement possible with waste managers," she says. "We got blackmailed in 1992."

In truth, these problems are a predictable result of severing ownership from possession for billions of items that change hands daily. Justified as a way of eliminating externalities, the German program actually creates them. Consumers do not pay to dispose of the trash they improperly put in the DSD's bins. Free-riding manufacturers do not pay for the packaging they now, by law, "own." In effect, the yellow bins are a modern-day commons; everyone has an incentive to use them without restraint.

Manufacturers have scrambled to patch the take-back system. Interseroh, which collects transport packaging for the furniture, electronics, and plumbing industries, is requiring that a contract number be printed on each transport carton. This attempt to cut down on free-riders will further raise collection costs, since more time will be spent checking the contract numbers.

Facing near-bankruptcy last summer, the DSD introduced additional enforcement measures and revised its contracts with haulers. The DSD will pay haulers a maximum of 40 marks (about $25) per capita a year, rather than a fee based on tonnage collected. This change will reduce cheating by haulers, but it won't address free-riding by consumers. That would require haulers to check the yellow bins more carefully before carting away their contents, which would raise collection costs.

The DSD is also collaborating with retailers to collect money from packagers who have failed to pay their green-dot fees. Worried that a DSD failure will put them in the waste-collection business, retailers have agreed to deduct the green-dot fees from invoices and pass the money on to the DSD. Again, collecting and managing the information to make this work will generate new costs.

Even more alarming than these costs is the intellectual laxity of the take-back scheme--the misapplication of concepts such as pollution, externalities, and free markets. Just about everyone--retailers, consumers, politicians, even many manufacturers--now embraces the concept of "manufacturer responsibility." "The law is OK," says Interseroh's Grotemeyer. "We just have to work out better how to implement it."

But the law isn't OK. It isn't OK because it rests on the mistaken ideas that packaging is pollution and consumers are victims. If market institutions and economic concepts are to have any useful application in mitigating environmental problems, we are going to need more clarity of thought about how and why property rights function, the relationship of those rights to externality problems, how prices emerge, and the connection between prices and resource use. The law cannot turn bad theory into good practice, any more than it can transform trash into treasure.

Lynn Scarlett is vice president for research at the Reason Foundation.