IDEAS FOR PACKAGING COVENANT II

1. INTRODUCTION

The PCA has invited Perchards to prepare a paper setting out some ideas on what a second National Packaging Covenant might contain. Our basic position is as follows:

· The first Covenant appears to have been an effective way of improving the environmental performance of the packaging and packaged goods sector without damaging Australia's competitiveness in this sector.

· This approach should therefore be allowed to evolve with the creation of a second Covenant to take effect once the original agreement expires. As Covenant I was based on the principle of continuous improvement, we would expect those who signed up to it to be ready to accept any new commitments negotiated within Covenant II. Thus, signatories of Covenant I should be given the opportunity to opt out of Covenant II rather than being invited to sign up again.

· Although it is useful at this stage to start collecting and debating ideas on the likely content of Covenant II, there needs to be an independent review of the results of the existing Covenant before new commitments can be formulated with any precision.

· In principle, we believe that the recycling of used packaging should only be encouraged up to the point where the resource demands of collection, sorting and reprocessing are no greater than the resource savings involved and where the recovered materials can be absorbed by end-use markets. Thus, we recommend that apart from eliminating any obvious barriers to recycling that could cost-effectively be overcome, Covenant II should aim at maintaining rather than expanding recycling levels.

· The main focus of Covenant II should be on realising the contribution that the packaging and packaged goods sector can make to sustainable development. That means minimising the resources used to manufacture and fill packaging and distribute empty packaging and full goods, as well as optimising packaging waste management operations.

· Because the packaged good and retailing sectors have such strong lines of communication with the consumer, they are well placed to run a consumer information programme which explains not only the objectives and achievements of the Covenant but also other ways in which householders can improve their environmental behaviour.

· Whilst it is desirable that the Covenant should continue to allow companies considerable freedom in how they devise their Action Plans, there should be more mandatory reporting in the second-generation plans. The Covenant could contain a series of Key Performance Indicators (KPIs) to facilitate this.

2. THE CONTEXT

2.1 The big picture - sustainable development

Austria, Canada, Japan, Sweden and the US have endorsed the Factor Ten principle. Developed countries can't go on consuming 10 times more per capita than the rest of the world - they say we must improve our resource-efficiency by a factor of 4 in the short term (i.e. a 75% cut in per capita consumption) and by a factor of 10 (a 90% cut) in the long term.

Whether or not cuts of this magnitude are achievable or desirable, there is no doubt that more efficient use of resources is top priority. That needs both new technology and lifestyle changes.

2.2 The role of packaging in sustainable development

Packaging is not a key driver of sustainability, and it would be wrong to exaggerate what could be done by focusing on packaging alone. Consumers don't buy packaging, they buy packaged goods. A shift to sustainable distribution and sustainable lifestyles will drag packaging along with it, and that is where to start.

A Dutch academic has researched the environmental impact of households in the UK. He found that a household which replaces a 4-wheel drive vehicle with fuel consumption of 20 miles to the gallon with a 40 mpg family car, will save more energy than it would save by four centuries of glass bottle recycling. Lowering the room temperature by 2ºC would save almost all the energy used for a year's supply of packaging for the average household. A 1999 MORI poll found that Britons' ideas of what they can do to help the environment were almost the opposite of the truth - recycling was first (46%), then avoiding dropping litter (32%); reusing packaging was 14%. But making fewer car journeys was only 11%, turning off electricity only 8% and using water wisely only 7%.

This is not to say that the packaging supply chain has no contribution to make to sustainable development. Innovations arising from the economic pressures of competition have already brought about significant progress:

· Using resources more efficiently to reduce depletion of resources, reduce pollution and lower costs - for economic reasons, packaging has been progressively lightweighted as technology has allowed, and new technologies and legal requirements have steadily reduced manufacturing pollution;

· The introduction of closed-loop industrial systems to reduce the throughput of material and eliminate waste - is already happening through the achievement of high recycling levels and reuse systems where appropriate.

Thus, while increasing prosperity and expanding technological possibilities result in a demand for more and more products, improved resource-efficiency is reducing the environmental burden per unit of output.

There is no reason to be complacent, though. Demographic trends, in particular the steady reduction in the average number of people per household, are generating a shift towards smaller, less resource-efficient pack sizes. Consumer demand for tamper-evidence and easy-openability may add weight to individual packaging items, while the replacement of fresh foods by ready-meals may add to the amount of packaging in the shopping basket. Lightweighting can only go so far, and we are now at the stage where most weight reductions are marginal rather than spectacular. Trends in packaging waste (in the EU at least) have been decoupled from growth in GDP, but we are a long way short of achieving Factor 4 in the packaging sector and it is hard to see how it could be achieved without a collapse in demand for packaged goods.

How can we realistically do more? The EU has introduced heavy regulatory requirements which are expensive to implement, monitor and enforce. More than half of Europe's packaging is recycled, but the legislators accept that recycling rates in the leading countries have reached a plateau and should not be pushed higher. Efforts are now focused on getting the other member states to catch up with the five with the highest recycling rates. By the end of 2008, the EU governments expect 12 of the 15 member states to achieve an overall 55%-80% recycling rate. This will have to be achieved whatever the level of demand for the collected material.

It appears that some 25%-30% of the packaging used in Australia is recycled from kerbside. Flexible plastics and laminates, which are expensive to recycle and have limited end-uses, are not collected, but this is also the case in most EU countries. Australia also recycles an unknown tonnage of commercial and industrial packaging waste, but the market takes care of that, and recycling data are not available. Nevertheless, it is probable that overall recycling rates are not much lower than those in many Western European countries.

Meanwhile in the US, it is estimated that more than 25% of packaging waste is recycled, including about 70% of corrugated board, 55% of cans, 30% of plastic beverage containers and 25% of glass containers are being recycled. A number of states have legislation promoting recycling, and in some places local authorities are required to operate separate collections for recyclables, but much is left to the market.

It is hard to avoid the conclusion that the rising cost of landfill disposal is as effective a driver for the achievement of high but sustainable levels of packaging recycling as the EU's requirements and controls, and that the EU's arrangements are only effective at the margin. The EU arrangements do however transfer the cost of collection and sorting from local authorities to the private sector, which means that the cost is internalised in the price of packaged goods, instead of being a visible waste management charge borne by householders. The latter is a much stronger incentive to minimise the amount of waste (not just packaging waste) householders generate, particularly if they are charged according to the amount of waste they generate ("pay-as-you-throw").*

In a paper written in 1997, Perchards said that although the economic and political pressure to relieve local authorities' rising waste management costs is the same in Australia, Europe and the US, Australia has no environmental reason to prescribe recycling targets which are as high as those in Europe. The European targets are driven by an urgent desire to minimise the quantities of material going to final disposal, rather than to maximise the efficient use of resources. If waste minimisation is the predominant aim, there is no limit on the demand for higher recycling rates, whereas resource-efficiency strikes a balance between the resources saved by recycling and those consumed in collecting, sorting and reprocessing material of marginal value. This predicates lower levels of recycling which can be achieved at lower cost.

For a number of years, packaging policy has been seen as a subset of waste policy. If packaging is reused or recycled, fewer raw materials will be consumed and the pressure on waste disposal facilities will be reduced. However, minimisation of packaging waste cannot do much to extend the life of landfill sites, as well over 90% of the waste that is landfilled is not packaging. In any case the increasing scarcity of landfill sites is largely self-correcting, as it means that landfill gate fees rise and the marginal cost of separate collection and sorting falls. The important thing is to concentrate on diverting from the waste stream those materials that have a value, whether they are packaging or not.

Collection, sorting and recycling are industrial processes with environmental impacts of their own, and there comes a point where the further expansion of recycling is sub-optimal. On the other hand, minimising overall consumption of resources always produces an environmental benefit. This includes the energy used to extract and convert packaging materials, ship the packaging to the packer/filler and on to the consumer, and retrieve it for cleaning and reuse, for reprocessing or for disposal. And we should not forget all the elements of "transport pollution" which the distribution of goods and the shipment of waste entail.

Sustainable development, rather than waste minimisation, should now be the main issue. Waste minimisation is a part of that, but only a part. For packaging and packaged goods, the questions to focus on now are

· where are the biggest environmental impacts? and
· what can we do to reduce them?

3. HOW THE PACKAGING SUPPLY CHAIN CAN HELP PROMOTE SUSTAINABLE DEVELOPMENT

3.1 Pollution avoidance

All industrial processes consume resources and generate pollution. The best way of minimising these adverse impacts is through an environmental management system aimed at keeping performance under continuous scrutiny and addressing any weak points found.

Depending on the size and type of company, this may not need to be as heavy as the full ISO 14001 procedures, but the ISO standard does make a useful statement of the issues involved.

ISO 14001 is a voluntary environmental management standard aimed at promoting continuous improvement in environmental performance through the adoption of an environmental management system. The basic elements of ISO 14001 are

· establishment of an appropriate environmental policy that is documented and communicated to employees and made available to the public, and which includes a commitment to continuous improvement, pollution prevention and regulatory compliance, and a framework for setting objectives;

· a planning phase that covers identification of the organisation's activities, identification of and access to legal requirements, establishment and documentation of objectives and targets consistent with the policy, and establishment of a programme for achieving the objectives and targets, including the human and other resources needed;

· implementation and operation of the system, including the definition, documentation and communication of roles and responsibilities, provision of appropriate training, written management system documentation and control procedures, and documented and communicated emergency response procedures; and

· checking and corrective action procedures, including procedures for regular monitoring and measurement of key characteristics of the operations and activities, procedures for dealing with non-conformity, and auditing procedures; and

· periodic management reviews of the overall environmental management system to ensure its adequacy and effectiveness in the light of changing circumstances.

3.2 Minimising the use of packaging or packaging materials

A systematic approach to packaging minimisation is within the reach of every company. The European standard on prevention by source reduction (EN 13428:2000) specifies an assessment procedure so that companies can ensure that the weight and/or volume of the pack is at the minimum commensurate with the maintenance of functionality, safety and hygiene, and acceptability of the packed product to the user or consumer.

The standard is based on a self-assessment approach based on working through a checklist to identify the "critical area" which governs the achievable limit for source reduction. That is to say, if the packaging is reduced further, it will fail to meet the listed performance criteria - product protection; compatibility with the packaging manufacturing process; compatibility with the packing/filling process; logistics considerations (including transport, warehousing and handling); product presentation and marketing; user/consumer acceptance; space for information on use of the product, etc; safety issues; and legal requirements.

If no critical area is identified, the packaging does not comply with the standard and the potential for (further) source reduction is to be investigated. If on the other hand tests show that further source reduction will result in an unacceptable increase in the packaging failure rate, the critical point has already been reached. An "unacceptable" failure rate must be a matter of commercial judgment - it may be different for a high-value product than a low-value item, and for products where leakage could endanger people or property.

It may not be necessary for Australian companies to follow the standard in its entirety, but it does provide a sound basis for assessment and improvement and it goes a little further than the checklist in the Industry Strategy for Sustainable Recycling appended to the present Covenant. Additionally, adoption of this procedure would protect exporters to Europe from finding themselves at a competitive disadvantage should EU member states step up enforcement of the packaging minimisation requirement which is written into the EC Packaging and Packaging Waste Directive.

3.3 Minimising the environmental impacts of transportation

The main function of packaging is to get the product from the point of manufacture to the point of consumption in good condition. As such, it is part of the distribution system. There is a close interrelationship between choice of packaging system and choice of distribution system.

According to the Canadian Government, transportation in Canada in 1995 was responsible for 52% of all NOx emissions, 40% of carbon monoxide emissions, 20% of VOC emissions and 5% of particulates emissions. It is also the single largest source of greenhouse gas emissions in Canada, accounting for 25% of national emissions in 1997. In 1990, light trucks traveled 78 billion km in Canada, which represented 29% of all light-duty vehicle mileage; by 2000, they were traveling 115 billion km, 34% of all light-duty vehicle mileage.

In Canada, the growth in transportation activity kept pace with the growth of GDP between 1981 and 1998, but in the EU, the volume of freight moved (measured in tonnes per km) has been growing much faster than GDP and industrial output:

EU: AVERAGE ANNUAL INCREASE IN FREIGHT MOVED
VERSUS KEY ECONOMIC INDICATORS
1990-97 1998 1999
Freight tonnes per km 2.7% 3.5% 3.0%
GDP 1.6% 2.6% 2.1%
Industrial output 0.7% 3.4% 2.0%

We have no information on the trend in Australia, but inevitably there are big potential environmental savings to be made from more efficient distribution of packaged goods - using new information technology to improve routeing, share loads and increase backloading, and to improve the efficiency of central warehousing operations. Minimising empty running and other improvements in distribution efficiency could also generate big cost savings.

Empty running in the UK fell from 33% in 1980 to 27% in 1999. Published initiatives have included Tesco's "supplier collection" scheme, where a returning store delivery vehicle collects goods from a supplier's factory and takes them to the retailer's distribution centre. The same supermarket chain also operates "onward delivery", where a supplier's vehicle offloads goods at the retailer's distribution centre and backloads with supplies for one of the retailer's stores, delivered on the way back to the supplier's factory. Tesco has estimated that over five years these schemes cut vehicle distance traveled by 4.8 million km, saved $2 million in fuel expenditure and reduced CO2 emissions by 23,000 tonnes.

A confectionery manufacturer has estimated that abandoning the monthly payment cycle allowed it to reduce vehicle-km by 10%. If customers are invoiced at the end of the month, they have an incentive to order at the beginning of the month so as to maximise the interest-free credit period. By moving to a rolling credit system, they can even out freight traffic levels and increase vehicle loadings.

4. HOW THE COVENANT CAN BE USED TO GENERATE CONTINUOUS IMPROVEMENT

4.1 The present Covenant

4.1.1 Support for Recycling

The present Covenant commits signatories to financial support for kerbside and other recycling systems, including the development of infrastructure for reprocessing of secondary materials, research into environmental and lifecycle issues, particularly to identify new end-uses for secondary materials, and establishment of an education programme on the role of packaging and the best way(s) of handling packaging waste. The packaging supply chain promised to seek to raise up to $17.45 million over three years for "transitional tasks", on condition that relevant jurisdictions provided a matching contribution. The funds were to be used to develop a sustainable market-based kerbside collection system, and would not be used to subsidise prices or collection costs.

4.1.2 Best practice commitments

The Covenant also involves a number of "best practice" commitments - for instance those relating to design for the environment, collection of data and provision of appropriate labelling and consumer information.

4.1.3 Action plans

All signatories to the Covenant are required to prepare Action Plans setting out the specific measures and activities that they will undertake to give effect to the Covenant. Signatories submitting a one-year plan must, in their subsequent Action Plans, detail how they performed in meeting their obligations and objectives in their preceding plan. Signatories lodging Action Plans of a duration longer than one year must submit annual progress/ performance reports. Signatories have the option of submitting joint Action Plans, produced by, for example, a trade association, a group of companies, or a group of local governments.

The content of the Action Plans is flexible. The following list of options is not exhaustive, and signatories may address any other issues that are relevant:

· design packaging to minimise the use of materials;

· undertake and/or promote research to identify new uses for secondary materials, etc;

· reduce production, printing, transport and waste disposal;

· support kerbside or other collection programmes;

· support market development for secondary packaging materials;

· promote education and community awareness on packaging waste management issues;

· support litter reduction;

· establish logistics systems to reduce environmental impact.

This is a sound framework which allows companies to concentrate on the issues important to themselves, or those where they can make a real difference.

4.2 Covenant II

4.2.1 General principles

The essence of good regulation is that compliance or non-compliance should be transparent, and the requirements should be enforceable. Jurisdictions that have opted for legislation as the main instrument to drive improved environmental performance in the packaging sector, have therefore concentrated on the issues that are easiest to regulate on rather than those that might matter most.

Up to now, Australia has avoided this. The National Packaging Covenant sets a framework for the effective lifecycle management of packaging through collaboration and a free choice of those measures that would yield the most cost-effective results. The Covenant is policed through the requirement to publish Action Plans and report on how they have been implemented. Formal enforcement is through the legislative backstop of the NEPM, which is designed to catch non-signatories of the Covenant and companies which have signed up but done nothing.

The emphasis has been on qualitative rather than quantitative improvement. The task of compiling an Action Plan is valuable as an awareness-raiser, and the requirement to report back on what has been achieved should ensure that it is not just a paper exercise. The evidence available to us suggests that this flexible and pragmatic approach is right for Australia and has been implemented successfully, and we believe that the Covenant should be renewed and strengthened when the original agreement expires.

Before a new Covenant is agreed, there needs to be an independent review of the effects of the present Covenant to inform a decision on how any new commitments should be structured. Whilst recognising that there is no point collecting data for its own sake, we would suggest that as much quantitative information is compiled as possible.

Now that signatories have gained experience in preparing and implementing Action Plans, they should expect a higher level of scrutiny next time. Plans must be realistic, but also relevant and ambitious. Where possible, they should include Key Performance Indicators (KPIs) so that signatories - and the Covenant Council - can measure performance against objectives.

4.2.2 Support for Recycling

The financial commitments industry has made to support recycling cannot be updated until it has been agreed how well recycling is working, what impediments to further recycling exist, and whether these can be cost-effectively overcome. Schedule 3 to the current Covenant set out some options for mitigating the effects of commodity price fluctuations, and these should be revisited.

The questions that need to be asked, include the following:

· How far has the infrastructure for reprocessing of secondary materials been expanded during the period of the Covenant, with and without Covenant money? How much more infrastructure is needed? - bearing in mind that there is no point producing output that will not find a market.

· How much new research into environmental and lifecycle issues has taken place? Have new end-uses for secondary materials been identified and developed?

· Has an education programme on the role of packaging and the best way(s) of handling packaging waste been established, and if so, to what effect?

· Has the Covenant commitment to collect data and key indicators on the quantities of packaging produced, the source and generation of packaging materials, the utilisation of recovered material by secondary markets and the disposal of packaging waste to landfill resulted in the assembly of meaningful information sufficient to guide future policy and to benchmark Australia's progress in this field?

The original aim of the packaging supply chain funding programme was to provide transitional support for the creation of a sustainable market-based kerbside collection system. We were always sceptical as to whether such a system could ever be self-sustaining, and this will need review, as will the decision that the existing Covenant should not subsidise prices or collection costs.

That said, we think the main focus of the new Covenant should be prevention rather than recycling. The recycling rates being achieved in Australia appear to be comparable to those achieved by rather more dirigistic means in other parts of the world, and it is questionable whether higher rates would produce a significant net environmental gain.

The key question, therefore, is what commitments need to be made in Covenant II to ensure that kerbside collection systems and consumer motivation are maintained.

Possible KPIs -

Proportion of households covered by kerbside collection systems;

Amount of packaging for which a kerbside system exists, which is nevertheless sent for disposal.

4.2.3 Product stewardship

The "product stewardship" commitments in the present Covenant need to be maintained, but they could usefully be tightened up and made more specific. For example:

a) Whereas the present Covenant says that packaging will be manufactured so as to minimise the amount of material essential to guarantee the protection, safety and hygiene of the product, Covenant II might call for a systematic approach to packaging minimisation such as that outlined in section 3.2 above.

Possible KPI - proportion of packer/fillers above a certain size threshold which operate an environmental management system for packaging minimisation

b) Whereas the present Covenant says that logistics will be designed so as to reduce material and energy consumption to optimal level while maintaining product quality, Covenant II might involve a specific commitment to maximise truck movement efficiencies as discussed in section 3.3 above.

Possible KPI - reduce freight km traveled per tonne of packaged goods delivered

c) The action points on design for disposal, research, market development and education should be developed on the basis of the findings of the review discussed in section 4.2.1 above.

d) In any case, more needs to be done on consumer information. We recommend that the packaging supply chain partially fund a consumer information programme - perhaps run by the Covenant Council - which explains the objectives and achievements of the Covenant but also explains other ways in which householders can improve their environmental behaviour. It is important that people realise that making used packaging material available for recycling is only one of the things they can be doing, and that while this is worthwhile, there are other actions that would generate a bigger environmental gain.

e) The Environmental Code of Practice for Packaging which is appended to the present Covenant includes a complaints procedure. Consumer complaints are a useful way for manufacturers and retailers to get feedback from consumers, and any formal complaints body should not interfere with that process. Rather, it should be the next port of call (rather than writing to the newspapers) if the consumer is not satisfied with the response he has received from the company he complained to.

The complaints body should investigate the complaints received, report its findings to the complainant, and if necessary recommend changes to the packaging. It should also publish an annual report. In this way, industry at large can distance itself from poor performers who would be "named and shamed" - and where complaints are judged unfounded, there is a mechanism to explain to the public and the press the technical reasons why things are done the way they are. The credibility of any such complaints body would be enhanced if it were run by the Covenant Council rather than by a Management Committee drawn exclusively from industry.

However, before any changes are made to the present arrangements it is important to establish the facts. Is this complaints facility widely known among consumers and consumer bodies? How many complaints have been received, how were they dealt with and were the complainants satisfied with the outcome?

f) The present Covenant covers labelling to encourage appropriate recycling and/or disposal. This can only be generic information, and it is important that householders understand the facilities available locally and co-operate accordingly. We do not know whether this is a problem in Australia, but adequate provision of information on local arrangements should be covered by the review on the operation of the Covenant.

4.2.4 Action plans

The Action Plans should remain fairly flexible, but could be tightened up in certain respects. In particular, it should be mandatory for companies to report on the systems they have in place for reviewing packaging minimisation, and the results achieved. This requirement should apply both to companies submitting their own Action Plans and to companies signing up to a collective Action Plan. The Covenant could contain guidelines setting out a methodology analogous to the CEN prevention standard, and tailored to the capabilities of companies of various sizes.

Possible KPI - avoid any increase in the weight of packaging placed on the market in relation to the volume of output, and if possible reduce it.

There should also be a mandatory report on how companies keep their distribution arrangements under review, and the results achieved.

Litter reduction should remain a discretionary part of company Action Plans, as it is not relevant to all Covenant signatories, but it should be upgraded in respect of those companies whose products do have litter-generating potential. These companies should fund regular surveys on the extent and composition of litter, and should report in their Action Plans on what is to be or has been done in response.

Possible KPI - reduction in the measured amount of packaging material found in litter, according to surveys conducted in the same places at the same time of year at the beginning and the end of the period when Covenant II is in force

DAVID PERCHARD
20 January 2003