Mandating Source Reduction

Perhaps the most troublesome solid waste management issue currently moving through the State Capitol is the proposal being made by Senator William Faust (D., Westland). Sen. Faust is circulating draft legislation that would severely restrict packaging, including food service disposable packaging. Although not yet given a legislative number or assigned to Committee, this proposal reveals a certain mind-set. It is that mind set which will be discussed in this section.

Specifically, Sen. Faust's proposal would require:

  1. All packaging must be reusable or recyclable.

  2. A two-cent fee would be placed on packaging that does not meet the following criteria:

    • Free of heavy metals or dioxin at more than trace levels.

    • Reusable.

    • Recycled at a 50% recycling rate.

    • Made with significantly less raw material than the year before or made with certain levels of recycled material. (Emphasis added.)

    • Packages meeting these criteria would be granted a "PACSAFE" logo as established by the Council of Environmental Quality which Michigan's Governor appoints. PACSAFE goods would be those goods the Council considers "environmentally acceptable."

    • New products for which a recycling infrastructure does not currently exist would pay a 5/100 cent for a period to be determined by the Council. Some packaging added at the point of retail purchase – giftwrap boxes, for example – would be exempted from the two-cent fee, while others, bags used for transporting purchases, would not.

Assume, just for the sake of argument, that all the criteria contained in this legislative proposal could be met – i.e., recycling content, reduced raw material usage, etc. Imposing a two-cent fee on consumer goods which fail to meet PACSAFE standards is clearly an economic incentive aimed at forcing manufacturers who want to sell goods in Michigan – and that means virtually every consumer goods manufacturer in America and not a few in foreign countries – to attempt to attain the PACSAFE logo. After all, Michigan is neither a small state nor a poor state and the sheer size of its market would force manufacturers who do not want their products to be perceived as "environmentally" unsound to do what has to be done. Furthermore, one may assume, having sent the right signal to manufacturers, some time will be granted for compliance.

Not all manufacturers will be able to meet these standards. To assume otherwise would be to assume that simply passing a law automatically creates a recycling market which draws secondary materials from MSW and returns it to consumers in another form. Indeed, by allowing for only a 5/100 cent fee on those goods containing materials for which a recycling infrastructure has not yet been developed, Sen. Faust's proposal essentially admits that such may not always be the case. But even here there is a "time period to be determined by the Council" for that smaller fee. [162]

Certainly there will be a period of time during which many goods will not be able to meet the standards. During that time, retailers, or some unit of state government, will have to create and staff a system for imposing and collecting the fee. What about goods purchased through catalogs rather than across Michigan retail counters? How would the two cent tax on non-PACSAFE be collected? In all these cases, scarce resources would have to be allocated to collect the fee. This will impose costs which must be paid by consumers or by taxpayers. Indeed it could be the case that the cost of assigning and collecting the fee would be greater than the amount collected.

Manufacturers who are unable to meet the standards face the prospect of losing sales because the tax causes their product to cost more, or experiencing a lower net return per unit sold (excise taxes – and this is a form of excise tax – will either be shifted forward to consumers in the form of higher final price, or backward to producers in the form of lower net returns). These manufacturers will be compelled to seek ways to reduce their overall production cost. In many ways, that's not a bad outcome.

But it all depends. It all depends on whether the Faust proposal would actually work. This is clearly a proposal aimed at accomplishing two things: first, source reduction through the use of fewer raw materials and, second, by requiring the product to be made with certain levels of recycled materials and to be capable of being recycled at a 50% rate, stronger markets for secondary materials.

What is it that now causes manufacturers to use more raw materials than they need to use? The answer is, nothing. Is there anyone who could seriously believe that manufacturers use more raw materials than they need to use? To believe that is to believe that producers are indifferent to their rate of return on investment. It is markets – especially competitive capital markets – which force producers to economize on materials. Indeed, if that were not the case, plastics – the target of many who want to get "source reduction" – would not now enjoy the place they do in manufactured consumer goods products. There is no need for a law to encourage producers to use fewer raw materials because producers are always looking for ways to reduce their production costs.

But when the Faust proposal says "fewer raw materials", what is really meant is fewer virgin materials. Indeed, when this portion of the Faust proposal is seen in context with the requirement that the product be reusable, made with certain levels of recycled materials, and be capable of being recycled at a 50% rate, it is clear that "fewer raw materials than the year before" means more and more secondary materials derived from recycling programs.

The Faust proposal is a complicated, scarce resource-absorbing, legally contentious effort to stimulate both the supply and demand side of markets for secondary materials.

To the extent that Sen. Faust's proposal increased the supply of secondary materials from MSW, the prices of many of these materials could collapse to the point that revenues from recycling programs would never come close to covering the costs of operating the program. Compared with landfilling or incineration, the effect could be solid waste management costs so high as to amount to an additional tax on every family in the state.

To the extent that the Senator's proposal would induce goods producers to increase their demand for secondary materials derived from MSW, it would not automatically follow that this increase in demand would induce a strong enough increase in the quantity of MSW-derived secondary materials supplied to avoid non-competitive increases in the prices of some or many of these materials. When some Michigan firms are willing to pay up to $180 a ton for secondary plastics and recycling officials find this price too low relative to the cost of supplying the materials, passing laws will not undo this supply problem.

Economic rule number one: when and if ever it is economically feasible to make goods from secondary materials derived from municipal solid waste, and make these goods at costs equal to or less than what it cost to make them from virgin materials, goods will begin to be made from such materials. Markets will yield that in their own time, but not before. Laws pretending to be able to produce outcomes which go against market forces are not just economic nonsense, they are mischievous nonsense.

Once again, hard cases make bad law.