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Scottish Economy

The Deposit Return Scheme – a window into what’s to come?

The Scottish Government is introducing a new scheme aimed at improving recycling rates and reducing emissions associated with bottled and canned drinks. The Deposit Return Scheme (DRS) will charge consumers an additional 20p per unit that can be reclaimed when the empty bottles or cans are returned to designated return points.

On the face of it, many would assume that the DRS is simply about encouraging consumers to recycle more by giving them a financial incentive to do so. But in practice, it sets up a whole new system for managing bottles and cans, with associated costs.

The DRS may have only recently become headline news, but it has been years in the planning. The process for designing and monitoring the implementation the DRS has fairly rigorous (not always the case as our recent article discussed). Additional costs for producers have always been there.

The implementation of the scheme has been on the go for a couple of years now, and there have been a fair few issues that have come up a long the way which have been summarised in a series of Gateway Reviews.

There are still a number of issues to address that the last Gateway Review laid out in December 2022, but an additional layer of uncertainty now pervades as a result of comments made by the Scottish Secretary Alastair Jack about whether the UK Government will make necessary exclusions to the UK Internal Market Act.

The three leadership candidates have also all made comments which suggest that the DRS may be reformed of delayed.

This article does not go into all of the controversies with the DRS that may or may not affect its launch in August 2023 (these are well summarised in a recent blog from the SPICe available here).

Instead, we look in detail at one of the issues raised: the cost to business. We look at the intentions set out in the policy design and where particular issues lie for producers, retailers and hospitality businesses.

Figure 1: Timeline of the Deposit Return Scheme in Scotland and key documents

September 2017: Programme for Government committed to a DRS scheme for Scotland

May 2018: Outline Business Case published, available here

May 2019: Full Business Case Stage 1 here

July 2019: Business and Regulatory Impact Assessment available here and December 2021: Amended Business and Regulatory Impact Assessment, available here

September 2019: Draft regulations for scheme laid before parliament

March 2020: Final regulations laid before parliament: Full Business Case Stage 1 Addendum published: here

May 2020: The Deposit Return Scheme for Scotland Regulations 2020 is passed into law, available here and policy note available here

1. Financial implications for producers are part of the policy design

One thing has always been clear: the DRS will have a financial impact on producers – indeed that is partly the point of the scheme. Similar schemes around the world are designed to push the financial cost of recycling from consumers and public authorities onto producers, in line with the ‘polluter pays’ principle.

The DRS will present a financial cost to some firms, raise the price point of drinks in shops and create different trading conditions in Scotland versus rUK. These are not unintended consequences of the scheme or evidence of poor implementation. They are part of the policy design.

The 2019 Business and Regulatory Impact Assessment states:

“As a form of producer responsibility, it will require those businesses to take responsibility for the environmental impact of their products and for the costs of managing products at end of life.”

The costs include the set-up costs for separate labelling (or face an additional fee), increased inefficiencies due to the ‘production, logistics and storage due to creation of a new market’, and the fees charged to Circularity Scotland. All these feature in the Full Business Case, produced back in 2019 (see link in timeline).

How much the handling fee will be (the amount each producer will have to pay to help fund the scheme) have already been amended and may change again before launch, but as of December 2022 they were expected to be around 2p for plastic bottles and cans, and 4p for glass bottles[i].

Uncertainty in these costs is not ideal, but this will continue, with the fee reviewed regularly. The producer fee is a balancing item that makes up the shortfall between operating costs and income from the sale of recyclable items. As costs and income change over time, so will the producer fee[ii].

Table 1: Producer fee (pence charged per scheme item)

  Updated Value (December 2022) Previous Value (August 2022)
Plastic 2.21p 3.17p
Aluminium / Steel 2.03p 3.42p
Glass 4.10p 4.45p

Producers who import into Scotland are under the same obligations as Scottish producers. This may change the extent to which these importers decide to sell in Scotland but clearly is an important principle to ensure a level playing field.

Although there will be producers who are against the scheme in principal, the biggest concern voiced at the moment appears to be timing. Coming so soon after Covid-19 and at the same time as producers are struggling with high input costs. The government has already exempted ‘small’ producers from paying the upfront flat registration fee, but the other costs will remain.

However, it is unlikely that the costs associated with the DRS for small producers could ever be eliminated. Concerns over whether the costs are enough to lead to Scottish producers to limit or stop production completely are legitimate, but permanently exempting small producers from the scheme would seriously undermine the aims of the policy as well as providing a hefty distortion of incentives for business who would otherwise expand production.

2. Work appears to be ongoing to keep to principle of no financial cost or benefit for retailers

Retailers are seen as the public face of the Deposit Return Scheme in Scotland, given that they will likely both sell products, hence charging deposits, and act as return points. But in theory, the scheme is not designed to create a significant financial cost or benefit to retailers.

Return points will receive a handling fee designed to cover the cost of managing the collection and storage of items to be returned. These will be fixed amounts as opposed to being based of the actual costs incurred. Table 2 shows the current amounts (as of 28th February 2023). These could change, and according to a recent letter from the Minister responsible on the 9th February have been increased by 19% from their original levels[iii].

Table 2 :Return Handling Fee (pence per returned Scheme Article) [iv]

Manual Takeback 2.69p
Reverse Vending Machine…  
… up to 8,000 Scheme Articles per week 3.70p
… per Scheme Articles thereafter 1.60p

Retailers can opt out of the scheme under certain circumstances, although these are quite limited. Exemptions can be granted for environmental health reasons or if there is another return point within close proximity that has agreed to take your returns.

Retailers will have to reimburse deposits to consumers out of their own funds and claim these back from Circularity Scotland. This may not be an issue for large retailers but could create cash flow problems for small retailers. They will receive the handling fee at the same time as they have the 20p returned.

One change that has been made is to online takeback services. Rather than all online sellers being required to offer a service to collect and return drink containers, in December 2022, the Minister proposed amendments to only large supermarkets will be obliged to do this, and only from 2025. This does leave open questions over how those who rely on home delivery, for example for accessibility reasons, will be able to recoup their 20p deposit.

The other issue that will need to be under review Is the handling fee. Although there does not appear to be an expectation of regular review as with the Producer Fee, if the costs in Table 2 turn out to be wholly out of line with costs faced by businesses once the scheme is up and running, there will be pressure to review these in order to ensure that retailers are not bearing additional costs (and vice versa – it may transpire that these fees may overcompensate retailers).

3. More thought required for hospitality?

The same principle over there being no additional costs or benefits also applies to hospitality. They do not need to pass on the deposit charge to customers but they will need to store DRS eligible items for return into the scheme to recover the cost of the deposit that they will pay when buying the produce themselves. There is a small handling fee of 0.13p in place according to recent documents[v]. There is no way for hospitality venues to exempt themselves, even for environmental health reasons.

On the one hand, hospitality already have systems in place to manage goods for recycling. They might even save money as they will have these goods picked up for free rather than having to pay for waste management services.

However, in reality there are likely to be additional costs for hospitality to deal with. For example, at present, glass can be put in a bin, with no consideration required over whether it remains intact or whether it is in a secure location. Under the DRS, glass bottles will need to be stored securely, with the bottle and the label intact if the business is able to receive back the 20p they pay to buy the product. This likely means storing the bottles and cans inside, which does raise questions over whether businesses have the space to do this fairly.

Natural wastage is mentioned in the Business Regulatory Impact Assessment, whereby it is acknowledged that there may be some breakages that mean the item will be ineligible for return and/or customers may abscond with packaging to claim the 20p themselves. However Scottish Government analysis ‘suggests that the financial loss would not be significant’. This area clearly needs more consideration of how it will work in reality.

Out of all of the sectors, hospitality seems to have had the least attention in terms of a pragmatic approach to deal with the concerns of businesses, and monitoring of how the DRS works in practice for hospitality businesses will be vital to avoid unintended consequences.

4. What does this say about the Scottish Government’s policy making process?

The key objectives of the scheme are around improving rates of recycling and improving the quality of goods for recycling. Other benefits include a hoped for reduction in littering as public behaviours are incentivised to change.

Overall, the benefits of the scheme are predicted to outweigh the costs but of course much of this will depend on whether consumers react as hoped (a whole article could be written on this alone!).

It is worth bearing in mind that in all the consultations and reports, even the most critical, the consensus from business has been that the DRS is the right approach. There are those who do not believe that is the case, but based on the available evidence, that appears to be a minority view.

As this article has set out, there will need to be careful monitoring of costs to business if and when the DRS is up and running.

This note does not touch on all of the issues raised with respect to the DRS, and although the policy design is fairly robust, there have been a lot of issues with implementation. The December 2022 Gateway Review had a “amber/red” rating meaning that successful delivery was feasible, albeit with a number of significant issues remaining.

It is not ideal that there are so many issues so late in the day when the scheme has been in the pipeline for close to 6 years.

Conclusion

The aim of the DRS is to improve recycling rates and reduce emissions. The transition to net zero and a more circular economy (that most agree is a good thing) will involve disruptive change, tougher environmental regulations, and ultimately changing behaviours (for consumers and firms).

All of this will raise the cost of doing business for some firms, create uncertainty (in the short term at least), and require changes to business practice. It also poses challenges to governments that want to balance incentivising environmentally friendly behaviours with supporting small businesses. Some trade-off is unfortunately inevitable.

The issues raised in recent coverage of the DRS could in many ways be a window into what’s to come as Scotland seeks to make progress towards meeting its net zero ambitions. However, there are also lessons to be learnt in terms of taking the legitimate concerns of businesses into account as schemes like these are developed and implemented and having clear plans to review these – especially where there are unintended consequences emerge.

There is clearly more to do here before the scheme begins. However, some of the issues raised recently in the media around the impact of the cost to producers are baked into the policy design. No one said it was easy being green.

[i] https://circularityscotland.com/documents/producer-fee-faqs.pdf

[ii] https://circularityscotland.com/documents/producer-fee-faqs.pdf

[iii] https://www.gov.scot/publications/deposit-return-scheme-letter-to-msps-9-february-2023/

[iv] https://circularityscotland.com/documents/deposit-return-blueprint-for-retailers-and-hospitality.pdf

[v] https://circularityscotland.com/documents/deposit-return-blueprint-for-retailers-and-hospitality.pdf

Authors

Knowledge Exchange Associate at the Fraser of Allander Institute

Emma Congreve is a Principal Knowledge Exchange Fellow and Deputy Director at the Fraser of Allander Institute. Emma's work at the Institute is focussed on policy analysis, covering a wide range of areas of social and economic policy.  Emma is an experienced economist and has previously held roles as a senior economist at the Joseph Rowntree Foundation and as an economic adviser within the Scottish Government.

Ben is an economist at the Fraser of Allander Institute working across a number of projects areas. He has a Masters in Economics from the University of Edinburgh, and a degree in Economics from the University of Strathclyde.

His main areas of focus are economic policy, social care and criminal justice in Scotland. Ben also co-edits the quarter Economic Commentary and has experience in business survey design and dissemination.

Chirsty is a Knowledge Exchange Associate at the Fraser of Allander Institute where she primarily works on projects related to employment and inequality.