Effects of Global Competition & Environmental Legislation on Retreads

5.1 Effect of Long-term production cost trends.

5.1.1 It was stated in the previous section that the low cost of overseas labour is one of the key factors which has led to a drop in new tyres prices and consequently removed the immediate economic advantage of retreaded tyres. If this trend continues then it will be important for retread manufacturers to promote the other benefits of their product. Increasing the visibility of the environmental savings of retreads is one way to do this.

5.1.2 The low labour costs present in many major tyre-producing countries pose a continued risk to tyre manufacture and retreading in the UK. Low transport costs mean that these low labour costs bring in extremely competitive products which are not necessarily of inferior quality. Overall economic development within these countries is not likely to be rapid enough to raise import prices within the foreseeable future. While this affects retreading by giving price parity to new products, it also opens up a possible alternative end of life disposal route.
Return container prices to the Far East are extremely low, sometimes down as far as £50 per tonne, reducing the price that a Far Eastern retreader would pay for raw material. These markets may be able to generate premium exported products for first world, and retreaded export products for developing countries.

5.1.3 Although this view could be alarmist, a precedent exists in the packaging market, where case law has established a legal equivalence for export for recycling in terms of qualification for tradable Packaging Recovery Notes (PRNs). The low processing costs of Far Eastern operations have allowed baling and export operations in the UK to pay higher prices for good quality recovered plastic films, denuding the market of raw material for UK recyclers. Several have closed as a result.

5.1.4 The sustainability arguments against this export-based end of life route lie mainly in the energy costs to move the product (back) to the Far East for retreading, but are summarised as:

· Moving a product several thousand miles for recycling may be economically sound but emits unnecessary transport carbon
· UK recyclers operate more efficiently in terms of carbon and resource use
· UK retreaders will maintain higher standards of safety than Far Eastern retreaders, lowering the population of unsafe tyres as a whole on the world's roads

5.1.5 Some of these arguments will not stand up against the fact that the UK already accepts the business case for importing products despite these environmental disbenefits. There will certainly be no way of discriminating against any geographical retreading market en masse. However there may be duty of care and Corporate Social Responsibility arguments against export which can be made on a qualitative marketing front.

5.2 Effect of energy taxation and exemptions.

5.2.1 Business use of energy in the UK is taxed by application of the climate change levy (CCL), which adds a fixed amount per kilowatt hour to use of non-renewable energy. As the levy is fixed it represents a differing percentage depending upon the absolute price of the energy. On average it was designed to be about 10% when introduced in 2001, however energy price reductions since then have meant that certain companies pay a significantly higher percentage than the target.

5.2.2 Certain manufacturing sectors come under IPPC part A regulations, which places a statutory duty on them to manage their energy more efficiently. In view of this compulsion, a decision was taken to allow such qualifying sectors to negotiate fixed energy reduction targets with DEFRA in return for a rebate of 80% in the CCL. The rebate is dependant upon the sectors achieving their targets, and demonstrating that the data and systems they are using to show achievement comply with agreed standards of quality. The targets for sectors are usually of the order of reducing their energy consumption by 10% by 2010 compared with year 2000 levels.

5.2.3 Few recycling sectors fall under the umbrella of IPPC Part A, and are therefore not allowed to enter into a Climate Change Agreement (CCA) with Government. While this has caused aggravation amongst these companies there are several points worth noting:

· The sectors which have already entered CCAs have done so at considerable expense in time, due to the lack of understanding of the processes required for compliance and energy management.
· Many sectors now run climate change agreements which are more complex and therefore costly than necessary.
· Many companies are sufficiently small users of energy that even a low cost system will cost more to run than the reduction in levy.
· Companies covered by IPPC Part A will have to pay considerable registration fees for each IPPC process, which will further erode the cash benefits from membership of a CCA.

5.2.4 A reasonable conclusion from this may be that if a firm is covered by IPPC part A, then a CCA will allow it to recover some of the costs of administering IPPC (and climate change) data systems. However if a firm is not covered by IPPC Part A, then it should be relieved. For recycling firms, cash will have to be spent on the levy, but management time will be free to directly address energy efficiency. Standard rules of thumb for UK manufacturing industries, evident from the Action Energy Programme, indicate that attention to energy efficiency can accrue savings of around 10% within one year for low or zero investment.

5.2.5 There may be an opportunity for recyclers to lobby for a special inclusion of their processes as being eligible for Climate Change Agreements outside of IPPC. Currently recyclers can enter an agreement for energy which is embodied within the product in an analogous fashion to the energy embodied in the virgin raw material stage. This does not apply to mechanical recycling processes, as they do not directly embody energy into the product. As tyre retreading is predominantly a mechanical process, it likewise will not qualify under this extension.

5.2.6 This discussion can be concluded by summing up a general problem which is faced by many recyclers. Most basic raw materials manufacturing processes do by nature qualify for climate change tax rebates in the UK. In addition, these basic raw materials processes tend to use energy in an intrinsically cheaper bulk, unconverted, form. Mechanical recycling is usually performed on a smaller scale, reducing discounts for bulk energy purchase, and in addition employs larger quantities of more highly refined fuels such as electricity or mains gas. There is therefore a general competition issue between new and recycled in terms of energy cost content, and the different bases from which they are derived.

5.3 Effects of end of life disposal legislation. Landfill directive

5.3.1 The landfill directive banned the disposal of whole tyres in July 2003 and the disposal of shredded tyres by 2006. As such it has forced the government, regulatory bodies and everybody in the tyre supply chain to consider ways to reduce the UK's dependence on landfill. Retreading is seen as one of the major ways of achieving this since, although the tyres must still be ultimately disposed of, it reduces the number of tyres being produced and therefore the numbers that need to be disposed. Potential producer responsibility leg

5.3.2 To date, there have been no formal mechanisms put in place to make companies divert used tyres away from landfill. Instead the government has considered it preferable that industry is allowed to voluntarily look into alternatives. There has been some consultation on the possibility of introducing producer responsibility regulations for tyres in case the voluntary approach is not sufficient.1, 2, 3, 4 If this legislation came into force it would mean that tyre manufacturers would be forced to ensure that the proportion of the tyres they put on the market are recovered. The proposed system could work in a similar way to the existing packaging producer responsibility regulations in that it would involve the use of recovery notes to prove how many tyres had been recovered1.

5.3.3 Although retreading would not count as a permanent diversion from landfill it is specifically mentioned in the DTI's first consultation document as a possible mechanism for deferring the obligations1.

Landfill Tax

5.3.4 Landfill tax was introduced in the UK in 1996 under the 1996 Finance Act. There are two rates of tax. These are currently set at £2 per tonne for inert waste and £14 per tonne for all other waste (as at July 2003), and are being increased with an annual escalator. Tyres are not counted as inert waste and so require the higher rate to be paid. The tax is paid by the landfill operators who then pass on the extra cost through the supply chain. The aim of the tax is to increase the cost of sending waste to landfill and thus encourage people to seek alternative options.
In theory this should work in favour of the retreading market since it acts as an alternative market. There have been concerns however that the tax is not high enough to make a real difference and that landfill remains one of the cheapest options.5
In response to these concerns the current landfill tax escalator will be increased by at least £3 per year from April 2005 with the aim of reaching a rate of £35/tonne in the medium to longer term. This is unlikely to have a serious differential effects on the waste arisings for manufacturers in the tyre and retreading sectors, which have established routes for rubber-related waste arisings, and similar levels of general waste.

Duty of Care

5.3.5 The Environmental Protection Act 1990 implemented a Duty of Care for waste. The Duty of Care requires everybody in the waste supply chain to ensure that their waste is properly dealt with. There are still however many companies who will take waste and dump it illegally. This illegal dumping has a negative effect on the legitimate tyre recovery market since the illegal operators usually undercut those sticking to the law. It is currently felt that better enforcement of the duty of care regulations is needed to help reduce this problem.6

5.3.6 Although there is resistance amongst some new tyre manufacturers, new electronic tagging processes offer the capability for tyres to be tracked to their last registered user. This would allow duty of care legislation to be better enforced, and faults in the used tyre market to be tracked down more easily. Resistance by manufacturers to this procedure can be overcome when cost benefit is proven, (eg some earthmover tyres).

End of Life Vehicles Directive

5.3.7 The end of life vehicles directive (ELV) requires manufacturers to recover 85% by weight of an average ELV. Although tyres are not specifically mentioned in the directive, it is currently felt that manufacturers will look towards tyre recovery to meet their target.6 As such, they are likely to take a close interest in the tyre recovery market. In meeting the 85% recovery target the ELV Directive encourages recycling over energy recovery.

Incineration

5.3.8 The Waste Incineration Directive (2000/76/EC implemented in England and Wales on the 28th of December 2002 by the Waste Incineration (England and Wales regulations 2002) sets stricter emission limits for the co-incineration of waste. This includes the burning of tyres in cement kilns. It is not thought however that this will have a very significant impact on the use of tyres in cement kilns.6

5.3.9 The directive also sets limits on the minimum temperature for incineration which could impact on recovery processes such as pyrolysis which aim to recover materials rather than break them down completely. This could make it harder for these options but there is flexibility in the directive for competent authorities to set different levels for certain thermal processes.

5.4 Conclusions:

5.5 Recommendations:

5.6 References:

1. Department of Trade and Industry (2002) Discussion paper on a possible producer responsibility model for used tyres. [http://www.dti.gov.uk/environment/consultations/usedtyres.pdf]
2. DTI (2003) Results from producer responsibility discussion paper.
3. DoENI 2002. Possible Producer responsibility model for used tyres. Department of the Environment for Northern Ireland. Environmental Policy Division.
4. Scottish Executive (2002) Council Directive 1999/31/EC on the Landfill of waste. Consultation paper on a possible producer responsibility model for used tyres Scotland. Scottish Executive. Rural Affairs Department. Environment Group.
5. ENDS Report, March 2003.
6. Used Tyre Working Group 2001, Fifth Annual Report of the UTWG. UTWG