Achieving a Reduction in Plastics: A Role for Allowance Trading?
There’s considerable interest in ensuring that the international legally binding instrument on plastic pollution (henceforth, the Instrument), currently being developed by the Intergovernmental Negotiating Committee (INC), should make a significant dent in the production and use of plastics. The INC Secretariat’s Zero Draft text of September 2023 included, as one of the control measures in Part II, ‘Reducing Plastic Polymers’. The measure actually seems focused on production of primary plastics, suggesting that authors had in mind the associated environmental problems caused by that activity.
In the same Zero Draft, in Part III, which includes ‘Financing’, a global plastic pollution fee is considered, principally as a means of financing the implementation of the Instrument. No explicit link is made between Control Measure 1, under which, Parties would be expected to implement their own measures to achieve reduction in primary plastic production, and the fee. Evidently, such a fee – were it to find its way into the final instrument- might have a role to play in this regard.
Credit to Derrick Milimo
In a recent paper, Minderoo indicates its plans to examine a fee with a view to a) revenue raising and b) reducing plastic use, the suggestion being that the required level of fee would be lower in the former case than the latter. But that pre-empts at least two critical questions: how much revenue is needed? And how much reduction is being sought? Where a fee is concerned, the second of these might not necessarily need an answer if the intent is to reflect the externalities bein targeted, though these are unlikely to be known with great certainty.
It remains the case, though, that the ‘reduce (primary) plastics production’ objective would need there to be some notion of acceptable levels (in future) of production / reduction in production in mind. This would need to take into account the likely effect of the other measures which may find their way into the final version of the Instrument.
In a separate blog, I considered the relative merits of an ‘Option 1’ or ‘Option 2 / 3’ Instrument. The latter risks undermining the credibility of the Instrument and failure to meet its Objective. I argued for an Option 1 formulation, which could, in principle (and as the Zero Draft is currently written), establish a list of problematic plastic products, packages, polymers, and chemicals to be banned, targets for reuse and refill, targets for (collection and) recycling, targets for recycled content, and a set of design criteria, amongst other things. These measures would, relative to a counterfactual world with no Instrument, reduce plastic use. The argument for targeting further reduction in plastic use would likely rest on whether these targets, in combination, ‘went far enough’: this question – about whether a set of measures ‘go far enough’ – takes us back to the question of a notional target level of reduction, or alternatively, a maximum level of production. What is that level? Can it be defined relative to impacts / outcomes (calling to mind the 2 degrees, preferably no more than 1.5 degrees, of warming which is supposed to guide actions under the Paris Agreement)? The basis for setting such a target looks shaky at present: after all, nothing we consume is without impact, and a 1.5 degree equivalent would need to be set relative to some threshold point, or stabilisation in some impact (‘no net addition to plastic into oceans’ would be difficult to monitor). More generally, though, the impact of plastics varies depending on how they are produced, what they contain, what they are used for, and the context for their use. Agreeing a target level of reduction over and beyond what is implied by the rest of the instrument might not be straightforward, and – unless complete phase-out is on the cards, which seems unlikely - would demand a pragmatic approach to understanding what is reasonable, over and above the impact of the instrument, and relative to business as usual.
If the Instrument looks more like an Option 2/3 instrument, then the above questions likely become more, not less, pertinent. Targets for reduction might be more relevant if few, if any, binding measures in place that clearly lead to a known reduction in plastic use. In particular, as regards waste management, if there is no commitment to expand provision of waste management services rapidly to those who do not have them, then all plastics are problematic in such places. Reduction in use becomes the main lever for reducing the flow of plastics onto land, and into rivers and seas.
These questions strike to the heart of what the Instrument should be seeking to achieve, and which measures should be used to achieve the objective: ‘plastic pollution’ remains to be defined, but many clearly see the term applying to pollutants that are emitted by many activities that have nothing to do with ‘plastic’.
Classically, the literature on the right choice of policy instruments for environmental policy pays attention to what we do or don’t know, whether in terms of private costs of reducing pollution, or as regards the social (including environmental) costs of pollution (see here for an example). Whether there is a clearly agreed target in mind may also be relevant. In the case of plastics, the cost of reducing production / use can be expected to vary across applications: think ease of scaling back use / using substitutes. A purely regulatory approach – e.g, every producer has to reduce use by the same amount – will likely be inefficient in these circumstances There’s also no scope for generating revenue: those continuing to pollute don’t pay. So, a market-based approach could be relevant.
We might not understand too well, however, how the costs of reducing production by an additional unit would vary as reduction targets are made more ambitious – the same applies to the social costs. So, the disarmingly neat theory of marginalist equilibrium economics, where we identify an optimal level of production as the point where the loss in private benefit, and the increase in social benefit are in balance, is not known.
So, we’re probably in a situation where we don’t really have a very certain view as to how what a target level of reduction should be, but we probably don’t have certain knowledge of the environmental costs of plastic production (and use) either.
In these circumstances, setting a global plastic pollution fee is only one option for addressing plastic production. The reduction achieved would reflect the size of the fee, but that level of reduction would be uncertain. Note also that it assumes no country undermines the impact of the fee by offering / continuing to offer subsidies – whether direct or indirect (e.g. to oil or shale gas exploration / extraction), and whether explicit or implicit (tax breaks / exemptions - if the instrument does nothing other than stripping away such subsidies, it will have achieved something of significance).
There doesn’t seem to have been a serious discussion regarding a global system of tradable allowances as a means to achieve a reduction target. This is not to be confused with ‘plastic credits’, for which voluntary markets are developing, and where businesses are choosing to pay to demonstrate support for collection or recycling of plastics (and where we can expect different variants and verification schemes to emerge, potentially with questionable outcomes). I have in mind a scheme where producers have to purchase allowances under a single (or more than one linked) cap-and-trade system. There would be no ‘grandfathering’, or issuing of free allowances, but all producers would be required to buy sufficient allowances to ‘cover’ their production. This would generally be the market mechanism of choice where we were clear about the nature of the constraint, but in circumstances where we are somewhat less clear as to an objective target, and also unclear regarding the relevant environmental costs, such a scheme could usefully be deployed where it incorporated a floor for the traded price of allowances. This design would have the merit of ensuring (more or less) a level of revenue generation which could support the instrument’s implementation. It should also allay concerns from those who prefer a fee-based approach on the basis that it does not give ‘a right’ to pollute. In principle, this hybrid scheme can be designed so that the overall effect is never less than that of a fee set at the level of the price floor.
The zero draft’s first control measure actually focuses on reducing primary polymer production. Yet both primary and secondary plastic production will have environmental costs: the costs for the latter may be lower than for the former, but they are not zero. Could an allowance trading system be used for both? In principle, the argument is ‘yes’, but if – given uncertainty as to exact outcomes – a price floor is set at a level linked to tolerably well-known externalities, then given that the floor would ideally be linked to externalities, it might be preferable to make production of secondary plastics subject only to a global fee (possibly reducing the administrative burden to what may be smaller producers). (Another method would be to apply a scaling factor to secondary production so that fewer allowances were required per tonne of secondary plastics than for primary ones.) Production of secondary plastics would, then, not be capped, and the fee differential between the price for allowances for primary production and the fee for secondary production would drive overall use towards secondary production. As secondary production increased, so the cap could be further tightened on primary production, ideally allowing the traded price to be maintained above the floor price level. It may also make sense – given uncertainties around both target levels of production and externalities – to set a price ceiling for primary production, not least to give the scheme administrator confidence to tighten the overall cap without fear of significant price spikes, and excessive price volatility.
Neither the allowance scheme nor the global plastic polution fee is ideal when applied only to plastics: the level of consumption of all materials is inefficient, and ideally, all relevant externalities would be taxed. We are, though, not living in a world of first-best solutions: the pace at which ‘full carbon pricing’ (without issuing of free alowances) has spread to material producing sectors has been far too slow. Although we should should learn from experience with climate negotiations and associated measures, it will complicate matters if climate change related externalities are covered by more than one instrument. In this regard, it might be helpful if the administrator of an allowance scheme shifted, over time, to an instrument where the cap drove price formation, so that the price floor (and ceiling) might become redundant. That would allow for a gap to emerge between the target-based allowance scheme, and the trading in relation to GHG reductions. Indeed, the state of knowledge may evolve to the point where an objective basis for a reduction target could be set. Note, though, that as long as plastics is the sole target, some inefficient substitution could be expected: this would be mitigated, partially. by moving swiftly to applying full carbon pricing to other materials.
In summary, as an alternative to a global plastic pollution fee, and with the aim of securing additional reductions in production beyond what is already implied by the instrument, we suggest an approach that combines:
A tradable allowance scheme for primary producers, including a price floor and a price ceiling for traded allowances, but based on a cap-and-trade approach.
o The traded allowance would represent a tonne of plastic polymers.
o In any given trading period, each producer of primary polymers would need to purchase a quantity of allowances equal to the quantity of primary polymers it produced (an allowance would represent one tonne of primary polymer).
o The administrator would set floor and ceiling prices, reflecting ranges of externalities, with the objective of seeking to ensure traded prices were broadly within that range. That would be achieved through periodic adjustment of the cap;
A global fee for secondary producers, set at a level linked to externalities of secondary production, and likely lower than the price floor for primary producers. The differential between the traded price for primary polymers and the secondary fee would be expected to incentivise a shift to secondary material production and use, consistent with a circular economy.
It might be considered that a global allowance trading scheme would be too complicated to implement. It is worth considering, however, whether it is more complicated than a global fee. In principle, requiring Parties to set requirements to participate in a global trading system might not be significantly more difficult than setting modalities for a global plastic pollution fee. Indeed, it might be argued that an allowance scheme - pertaining, as it would, to all producers - might impinge to a lesser extent on sovereignty than a scheme that effectively requires Parties to implement a tax, and then surrender some or all of the revenue collected to a global fund. What could be more complex is agreeing the rules at a global level. Agreeing global reduction targets would not be straightforward, as discussed, that are used to inform the cap, but this is already implicit under Options 1 and 2 for Control Measure 1 in the Zero Draft. Equally, the description in the Zero Draft of the modalities which may be developed for the global plastic pollution fee anticipates identifying externalities. A footnote states:
This Fee could hold polymer producers accountable for the pollution costs of all of their plastics, irrespective of the country in which the plastics end their useful life, and of whether the plastics are ultimately destined for recycling or disposal.
If the Zero Draft already anticipates understanding the nature of reduction targets and externalities, then some key parameters are already in play. The question is whether a tradable allowance scheme, operated at a global level (or as linked schemes), might be feasible.
If the global plastic pollution fee is considered a relevant measure for consideration in the Zero Draft, the potential for a global allowance trading scheme, and hybrid schemes, should also be explored. If it is not deemed appropriate, then if a global plastic pollution fee is considered feasible, the way that levy is set should be considered in the light of a notional reduction target, reflecting also the content of the Instrument as a whole.
Read the Summary PDF on the Reloop Website here