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Evaluation of the social optimum for the Landfill Levy in WA

CEED Project Number 09/002

Paul Schollum (20543665)

UWA Business School, University of Western Australia

Degree: Master of Economics

Due date: November 4, 2010

NOTE - This publication has been produced through a grant project funded by the WasteAuthority. The views expressed are those of the author and do not necessarily reflect theposition or policy of the Waste Authority, the Government of Western Australia, or theUniversity of Western Australia, which may not be held responsible for the accuracy ofinformation provided, nor are they liable for any and all outcomes from the use of thisinformation.

http://www.zerowastewa.com.au/

Paul Schollum Evaluating Optimum WA Landfill Levy

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ABSTRACT

The key purpose of the Landfill Levy in Western Australia is to set the price of landfill so that

alternatives such as recycling are more cost competitive. Ideally, the value of the Landfill Levy

should be equal to the environmental costs of landfill (otherwise known as landfill externalities).

This dissertation has estimated the value of landfill externalities in the Perth Metropolitan Region.

These were calculated using a technique known as ‘benefits transfer’, which was used to convert

externality values from previous studies to estimates for the Perth Metropolitan Region. The

externality valuation and policy analysis suggested a current Landfill Levy of approximately $32

per tonne should apply across all waste streams. This levy should increase over time to account for

inflation and projected growth in the externality costs. A number of complementary policy

measures that would enhance the application of the levy were also discussed, including encouraging

landfill electricity generation with subsidies, applying the levy to regional landfills and greater use

of pricing systems that provide an incentive for households to recycle more.


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ACKNOWLEDGEMENTS

I would like to thank Paul McLeod for his valuable advice and suggestions for this dissertation.

Thank you to Paul Hardisty for his guidance and enthusiasm for this project, and to the Waste

Authority of WA for partial funding of the research. I would also like to acknowledge the CEED

office for awarding and supporting this project. Finally, I would like to thank Tess Boyes, from the

Department of Environment and Conservation, for her prompt and thorough responses to my

various data requests.

DECLARATION

Unless otherwise acknowledged in the text or acknowledgements, the work presented in this

dissertation is my own original work.


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CONTENTS

LIST OF FIGURES .............................................................................................................................6

LIST OF TABLES...............................................................................................................................6

1. INTRODUCTION ...........................................................................................................................7

1.1 Background ................................................................................................................................7

1.2 Outline......................................................................................................................................10

2 THE ECONOMICS OF WASTE MANAGEMENT......................................................................11

2.1 Markets and externalities .........................................................................................................11

2.2 The externalities of landfill ......................................................................................................13

2.3 The waste management market................................................................................................15

2.4 Policy options to address externalities .....................................................................................18

2.5 Methods of estimating landfill externalities.............................................................................22

3 ESTIMATES OF LANDFILL EXTERNALITIES ........................................................................25

3.1 Estimates of the total externality cost of landfills....................................................................25

3.2 Greenhouse gas emission externalities ....................................................................................27

3.3 Non-greenhouse gas air emission externalities ........................................................................31

3.4 Leachate externalities...............................................................................................................31

3.5 Disamenity externalities...........................................................................................................32

3.6 Other externalities ....................................................................................................................34

3.7 External benefits of landfill......................................................................................................37

4 EXTERNALITY ESTIMATES FOR PERTH LANDFILLS.........................................................39

4.1 Estimates of the total externality cost of landfills....................................................................39

4.2 Greenhouse gas emission externalities ....................................................................................40

4.3 Non-greenhouse gas air emission externalities ........................................................................44


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4.4 Leachate externalities...............................................................................................................44

4.5 Disamenity externalities...........................................................................................................44

4.6 Other externalities ....................................................................................................................47

4.7 External benefits of landfill......................................................................................................47

5 APPLYING THE EXTERNALITY VALUES TO THE LANDFILL LEVY ...............................48

5.1 The size and coverage of the Landfill Levy.............................................................................48

5.2 Phasing in an increased levy ....................................................................................................49

5.3 Complementary policy measures .............................................................................................50

5.4 Public finance implications ......................................................................................................52

6 CONCLUSIONS.............................................................................................................................54

7 REFERENCES................................................................................................................................55


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LIST OF FIGURES

2.1 Household demand for waste disposal 16

2.2 Correcting an externality with taxation 19

5.1 Projected landfill externality costs and possible future landfill levies 50

LIST OF TABLES

3.1 International estimates of total externality cost per tonne of landfilled waste 25

3.2 Australian estimates of total externality cost per tonne of landfilled waste 26

3.3 Estimates of greenhouse gas externality costs per tonne of landfilled waste 28

3.4 Estimates of external benefits from electricity generation per tonne of landfilled

waste

37

4.1 Estimates of total externality costs per tonne of waste for Perth 39

4.2 Waste emission factors for total waste disposed to landfill by broad waste

stream category

40

4.3 Greenhouse gas emission externality costs for landfilled waste by broad waste

stream category

43

4.4 Range estimates for greenhouse gas emission externality costs by broad waste

stream category

43

4.5 Perth disamenity costs per tonne of waste 46


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1. INTRODUCTION

In Western Australia (WA), landfill is the most common method of waste disposal. But according

to WA state government policy, sending waste to landfill should be the least preferred option

because of the environmental effects this causes. Historically, households and businesses have only

paid the private costs of using landfill and there has been no consideration of the environmental

costs. However, in recent years the WA government introduced a levy which raises the price of

landfill and increases the incentive to use alternative waste disposal options (such as recycling).

When the price of landfill is set at a level that includes private and environmental costs, the waste

disposal market generates a quantity of landfill use that is optimal from society’s point of view.

This dissertation places a value on the environmental costs of landfill so that the appropriate level

for the Landfill Levy can be determined. The dissertation also discusses various government policy

initiatives that would enhance the efficiency of the levy.

1.1 Background

Population growth and rising affluence in an economy generally lead to an increase in the volume

of waste generated. The issue of how to deal with this waste has therefore become an increasingly

significant policy issue in industrialised countries. According to a 2008 report prepared by Cardno

(WA) Pty Ltd, the current waste infrastructure in the Perth region can accommodate the increased

levels of landfill and recycling material until about 2020. However, in the decade after 2020, the

waste infrastructure could potentially be strained unless there is a decrease in the proportion of

waste that ends up at landfill.

Aside from taking up scarce space in waste facilities, waste to landfill also causes a number of

environmental externalities. Externalities are defined as the unintended costs and benefits of an

activity that are experienced by people or organisations other than those directly involved in that

activity. An often used example of an externality is ‘when a firm pollutes a river but does not

compensate downstream river-users for this damage’ (Gorecki et al. 2010:106). Landfill

externalities include greenhouse gas emissions, emissions to water and soil, and disamenity effects

such as odours, wind-blown litter, vermin, visual intrusion, noise and traffic. These environmental

costs are ‘external’ because they are not covered by the market price for landfill.


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Furthermore, in many cases sending waste to landfill is undesirable as several items have the

potential to be reused or recycled. Re-using products prevents excessive consumption and waste

generation. Recycling materials so that they can be used to make new goods can offset energy

intensive mining and primary production processes (Government of Western Australia 2003:41).

The Department of Environment and Conservation (DEC) develops waste management strategy in

collaboration with the WA Waste Authority. The Waste Authority was established by the Waste

Avoidance and Resource Recovery Act 2007. The act requires that the Waste Authority develops a

long term waste strategy for Western Australia based on the following waste management

hierarchy:

a. avoidance of unnecessary consumption

b. resource recovery (including reuse, reprocessing, recycling and energy recovery)

c. disposal

Because disposal is the least preferred option for dealing with waste, the Waste Authority states that

‘prices for residual wastes should reflect the full social and environmental costs so that disposal

does not compete unfairly with resource recovery’ (Waste Authority 2009:18). A landfill levy is a

common method of ensuring the price of landfill includes social and environmental costs.

The WA Landfill Levy was introduced in 1998 and applies to wastes sent to landfill sites in

Metropolitan Perth. The Landfill Levy has two functions:

1. to increase the comparative price of landfill and make recycling more cost-

competitive

2. to provide resources for the state government to strategically invest in recycling

initiatives (Blyth 2007:9)

When introduced, the Landfill Levy was originally $3 a tonne for putrescible1 waste and $1 a tonne

for inert2 waste. In 2006 the Government of Western Australia announced a plan to progressively

raise the Landfill Levy to $9 a tonne for putrescible waste and $9 a cubic metre for inert waste.

1 This is waste that readily decomposes, e.g. food waste.2 Waste that does not break down, e.g. glass, concrete.


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However, these plans were not fully realised due to a change in government in 2008. From January

2010 the Landfill Levy increased to $28 a tonne for putrescible waste and $12 a cubic metre for

inert waste. The levy is paid by the licence holder of a landfill for all waste that is disposed of at the

site. Increases in the levy add to the operating costs of landfill owners, who then decide how much

of the increase to pass on to customers in the form of higher prices3.

The latest increase in the levy has been accompanied by a change in the approach towards the

revenue raised by the levy. Prior to 2010, the levy revenue was completely hypothecated for

spending on strategic waste management activities designed to help reduce the amount of waste

sent to landfill. This is no longer the case – only 25 percent of levy revenue is now directed to these

activities.

Landfill levies have been used in many countries and are used widely in Europe. The use of levies

in European countries has often coincided with an increase in the proportion of waste that is

recycled. It is difficult to determine how much of this effect was caused by landfill levies as the

levies usually operate in combination with other policy tools. However, there is also a tendency for

reductions in waste to landfill to be smaller when the Landfill Levy is set at relatively low levels

(Hyder Consulting 2007:21).

3 For households, the ‘price’ of landfill (and other waste services) is a fee that is included in local property rates.


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1.2 Outline

The dissertation addresses three main questions:

1. What are the externalities of landfill?

2. What is the value of these external costs?

3. How can the Landfill Levy best address these externalities?

In answering these questions, the dissertation firstly examines the economic theory that applies to

the waste management industry (Chapter 2). This includes the concept of externalities and why

governments intervene in the waste market. The ideal landfill tax is also discussed as well as other

policy options that can be used to address landfill externalities. Additionally, Chapter 2 presents

some of the economic valuation techniques that are used to estimate externality values. The benefits

transfer technique is discussed in some detail as it is used in Chapter 4 to derive externality

estimates for Perth landfills.

Chapter 3 reviews landfill externality values from a number of Australian and international studies.

Some of these estimates are selected and adapted to a Perth context to derive externality values in

Chapter 4. Chapter 5 discusses applying these values to the levy and various other policy factors

that should be considered. The final chapter of the dissertation presents conclusions based on the

analysis in the preceding chapters.


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2 THE ECONOMICS OF WASTE MANAGEMENT

2.1 Markets and externalities

Markets are a ubiquitous feature of modern economies. Markets lead to socially efficient outcomes

because they operate to the mutual advantage of buyers and sellers. Households buy goods which

they believe will improve their personal situation. Firms in the market will sell a good if they

believe there are gains to be made. Therefore, given an allocation of goods among economic agents,

any exchanges that subsequently occur will be an improvement on the initial allocation – no-one

participates in the market unless it is in their interests to do so (Lofgren 2000:3).

In a market with many buyers and sellers, prices provide the mechanism that balances the demand

and supply of goods. If the quantity of a good demanded at a certain price exceeds the quantity that

can be supplied, then sellers in that market will raise the price. Conversely, if supply exceeds

demand, sellers will either lower their price, or if this is not an option, they will leave the market.

Competitive markets ensure that people get the goods they want, for a price they are willing to pay

and at the lowest cost that firms can profitably supply the good. The forces of self-interest and

competition ensure efficiency in exchange. This is the celebrated ‘invisible hand’ of Adam Smith –

‘the private interests and passions of men’ are led in a direction ‘which is most agreeable to the

interests of the whole society’ (quoted in Heilbroner 2000:54).

In addition to the condition that there is a large number of buyers and sellers, a market is said to be

‘perfectly’ competitive if the following conditions also hold:

1. the products of all firms in the market are homogeneous;

2. there is perfect mobility of resources; and

3. consumers, resource owners, and firms in the market have perfect knowledge of

present and future prices and costs.

If we assume an economy is made up of such competitive markets then it is possible to reach a

point where all mutually advantageous trades are realised and the situation of one individual cannot

be improved without worsening the situation of someone else. This scenario is known as a ‘Pareto

optimal’ outcome and means that there are no unexploited economic gains.


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In addition to the assumption of perfectly competitive markets, two further conditions must apply

for the economy to reach a Pareto optimal state: (1) the welfare of each consumer should depend

solely on his own consumption decisions; and (2) the production of each firm should depend only

on its own input and output choices.

In reality these assumptions are often violated due to the existence of externalities – effects that

exist outside the price system of the economy. Hindriks and Myles (2006:176) provide two

everyday examples of externalities: the pollution from a factory that harms a local fishery and the

feelings of envy that result when a neighbour displays a new car. These externalities cannot be

directly controlled by the choices of those affected. The fishery does not have the option of buying

less pollution. Similarly, the jealous neighbour cannot choose to buy her neighbour a worse car.

Externalities can also be positive. Consider an example where an individual spends money

landscaping their property to improve its appearance. The individual pays all the costs and receives

benefits from this activity, but neighbours and passers-by also benefit from the aesthetic

improvement to the neighbourhood.

A laissez-faire competitive economy with externalities cannot achieve a Pareto optimal state

because consumers and firms do not consider the external effects of their consumption and

production decisions. From society’s point of view, the economy will generate an excessive amount

of the ‘bad’ externalities and not enough of the ‘good’ externalities. The presence of externalities is

considered to be an example of market failure – a situation where the assumptions underlying a

competitive market economy are not met, resulting in an inefficient outcome.

In cases of market failure there may be justification for government intervention in the market to

increase efficiency. When externalities are present, the government often intervenes in an attempt to

ensure that the market considers private and social effects. Left alone, the market will only consider

private costs and benefits. Government intervention therefore aims to increase the consumption of

goods with positive externalities (such as education) and to reduce the consumption of goods with

negative externalities (such as tobacco).


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2.2 The externalities of landfill

The use of landfills for waste disposal results in a number of externalities. The anaerobic

degradation of organic material causes landfill gas which contributes to global warming. Landfills

also emit traces of other air pollutants. Leachate from landfills can contaminate soil, groundwater

and/or surface water. Additionally, landfills cause externalities related to the impact of noise and

odours on local amenity (also known as ‘disamenity’ impacts).

The above examples all consider the negative externalities of landfill. However, when a landfill

generates energy from the capture of methane, this can produce a positive externality. The value of

the energy produced is not an external benefit in itself because it is already accounted for in the

costs and revenues of the site owner. However, the energy recovered displaces the environmental

impact of energy produced from conventional sources (Turner 2000:707). The environmental costs

of conventional energy generation include emissions resulting from the use of fossil fuels and the

generation of residual waste (European Commission 2000:32). The reduction in these

environmental impacts is therefore regarded as the positive externality of landfill energy

production.

A number of factors influence the level of externality costs associated with a landfill, including:

the composition of the waste;

the characteristics of the landfill, such as location, age of the site, and the technology used;

the regulations imposed (Eshet, et al. 2005:488).

The waste composition can affect the nature and severity of the externalities that a landfill

produces. A landfill that only accepts inert materials will have fewer externality impacts than a

landfill that takes putrescible waste. This is because inert materials cause fewer greenhouse gas

emissions compared to the biodegradable waste of a putrescible landfill.

The characteristics of a landfill can affect the level of externalities in a number of ways. A site in an

urban area could be expected to cause greater decreases in amenity than a site located in a less

populated area. The age of a landfill site also influences amenity impacts. There is evidence to

suggest that community concern regarding landfills is at its highest during the landfill

‘commencement’ stage and gradually decreases over the operational life of the site (Cambridge


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Econometrics 2003:14). After the landfill closure there is the possibility of increased amenity for

the neighbouring residents as the land is often rehabilitated for use as a public park or sports ground

(Productivity Commission 2006:440).

The technology used at a landfill site can also influence the level of externalities. Most modern

urban putrescible landfills use gas capture technology to either flare methane gas or generate

electricity. Landfills which do not use this technology (typically older or remote sites) would have a

higher rate of greenhouse gas emissions per tonne of waste.

Regulations also impact the level of externalities that a landfill generates. For example, many

jurisdictions require landfill sites to install liners to prevent leachate from contaminating local soil

and water. Adherence to these regulations greatly diminishes the potential environmental impacts of

leachate.

Landfill externalities are often identified in the literature as either ‘fixed’ or ‘variable’ externalities

and the sum of both variables makes up the total externality cost of a site (Turner 2000:707):

Waste disposal externality = site/fixed externality + variable externality

The fixed externality is not directly related to the amount of waste going to the landfill site. Instead,

it is the mere existence of the landfill site that causes the fixed externality (Cambridge

Econometrics 2003:5). Landfill disamenity costs are usually considered to be fixed externalities.

The variable component of the externality cost increases as the landfill accepts more waste.

Therefore, these externalities are often expressed on a ‘per tonne of waste’ basis. Externalities such

as greenhouse gas emissions and leachate emissions are considered to be variable externalities.


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2.3 The waste management market

Governments have a long history of intervention in the waste disposal market. Population growth

and increased waste generation in England during the 18th and 19th centuries led to a significant

deterioration in the quality of urban life as refuse and sewerage was simply thrown into the streets

and waterways. This caused externality impacts such as odours, mess, vermin and the spread of

disease. By 1889 each municipal authority in London had assumed the task of waste removal and

disposal, mainly to lessen the severe health impacts associated with leaving waste in the street

(Gandy 1994:39).

To this day, the waste disposal industry in most developed countries has a significant degree of

government involvement. In some cases local governments still directly provide household waste

collection and disposal services. This approach means that a universal service is provided, but the

lack of competition may lead to high costs and provides no incentive for innovation.

Municipalities in some countries (e.g. Finland, the United States) have addressed these concerns by

fully privatising the household waste market. However, a competitive market for household waste

collection is often considered inefficient because more competitors in a small area lead to higher

costs per bin collected (OECD 2002, cited in Productivity Commission 2006:115). Waste collection

trucks only collect some bins from each street but still drive the same distance as a truck that would

have collected every bin. Additionally, the extra trucks on the road increase the level of externalities

such as noise and congestion. This is why waste collection is often considered to exhibit the

characteristics of a natural monopoly. A natural monopoly arises when one firm can produce the

entire market output with lower average costs than several firms each producing smaller quantities.

Most urban local governments in Australia manage the market in their area by using a competitive

tendering process to grant a local monopoly to a waste disposal firm. In other words, waste disposal

companies compete ‘for the market’ rather than ‘in the market’. Local governments take

responsibility for delivering the service, but do not provide it directly. This approach combines the

benefits of competition with the natural monopoly features of household waste collection.

Local governments typically provide waste collection services to small businesses as well as

households. The efficiency of the natural monopoly approach also applies to this sector. However,

larger businesses usually make their own arrangements for dealing with waste. This is because they


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often have their own specific requirements regarding the quantity of waste and frequency of

collection.

Landfills in WA are operated by the private sector and local government. Inert sites tend to be run

by the private sector and putrescible landfills are usually operated by local government

organisations. Local government provision of landfill services may have arisen due to concerns

over monopoly pricing (Productivity Commission 2006:116). A privately owned monopoly that is a

significant distance from other sites might charge excessive prices due to the lack of competition.

Another notable aspect of the waste market is the price paid for waste management services.

Households typically pay for waste services as a component of local property rates. The fee is often

a flat-rate payment which means a household faces a marginal cost of zero for generating additional

waste (until the bin is full). This scenario is represented by the diagram below:

Figure 2.1 Household demand for waste disposal

Source: Turner (2000:724), Fullerton (2005:167)

The demand for landfill is represented in the above diagram by the line D. This line also represents

the social marginal benefit (SMB) of using landfill. The social marginal costs (represented by the

line SMC) include all the private costs of collecting waste and operating a landfill, in addition to the

environmental costs caused by landfill disposal. But the price of generating another unit of waste is

effectively zero, so households ignore social marginal costs and generate a quantity of waste equal

to QF. The shaded area of the diagram represents the extent to which SMC exceeds SMB for each

extra unit of garbage and is a measure of the welfare loss resulting from a flat-rate payment scheme.

A more efficient outcome is for the price of waste disposal to reflect the full social cost of such


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services. Therefore, the efficient price is PE and results in the quantity of waste decreasing from QF

to QE.

It should be noted that the scenario depicted in figure 2.1 generally only applies to the collection of

municipal waste. The markets for commercial and industrial (C&I) and construction and demolition

(C&D) waste resemble competitive markets because disposal fees are usually based on the quantity

of waste generated. Therefore, waste generators in these markets will pay for any additional waste

they dispose of, rather than facing a marginal price of zero.

The above analysis indicates that ideally, households should have to pay the marginal cost of each

kilogram of waste they dispose of. The price should also vary according to the type of waste –

Fullerton (2005:168) points out that the social cost of disposing of batteries is likely to exceed that

of old newspapers. But such ‘unit based’ or ‘pay as you throw’ (PAYT) pricing systems have rarely

been implemented in practice due to the high transaction costs involved. These include the costs of

measuring waste precisely and billing households. Fullerton and Kinnaman (1996, cited in Fullerton

2005:168) investigated a PAYT scheme in the US and found the administrative costs exceeded the

benefits of introducing the system.

An increasing trend in Australian municipalities is the use of variable charging based on bin size.

Instead of receiving a standard sized bin, households can opt to use a smaller bin and pay a lesser

fee for waste disposal. This is a relatively unsophisticated version of a PAYT scheme and falls short

of the theoretical ideal where all households pay a price that accurately reflects their own waste

disposal costs. However, it does avoid the high transaction costs of more complex PAYT systems

and ensures that there is at least some notion of increasing marginal cost as a household disposes of

more waste.


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2.4 Policy options to address externalities

Section 2.1 demonstrated that the existence of externalities in a market may warrant government

intervention to produce a more efficient outcome. Governments have a number of policy

instruments that can be used to address externalities.

One such policy option is the ‘command and control’ approach. This approach uses detailed

regulation to restrict and control the activities that produce externalities. For example, the

government could use regulation to make the use of gas capture systems mandatory at landfills and

could specify the required level of greenhouse gas abatement. The regulatory approach works

particularly well when a minimum standard can be applied to eliminate the externality at a

relatively low cost. This is demonstrated by the regulations requiring landfills to be lined, because

they virtually eliminate the risk of liquid escaping from the site and causing environmental damage.

The disadvantages of the command and control approach are that government needs to devote

resources to measuring environmental performance and enforcing the regulations. A regulatory

approach can also be inflexible in coping with different circumstances. For instance, mandatory

landfill gas capture may not be a cost effective option for a rural landfill accepting a low volume of

waste. A final disadvantage of this approach is that it can remove the incentive to innovate. Landfill

operators would reduce externalities to the level required by law, but may have little incentive to

reduce externalities further.

Another policy instrument is the assignment of property rights. Under this approach the source of

market failure is considered to be the lack of property rights over certain resources. For example,

people living next to a landfill do not have the right to clean air in their neighbourhood. As a result

the landfill owner has no incentive to minimise the odour caused by the waste. But if the neighbours

did own the right to clean air then the landfill operator would have to negotiate with the residents

and pay for the ability to pollute the air. In a different version of this scenario, the landfill operator

might possess the legal right to produce as much pollution as he wishes. In this case the residents

would have to negotiate with the landfill operator and pay to reduce the odour generation to an

acceptable level.

This kind of negotiation is an illustration of the Coase theorem, which states that ‘if private parties

can bargain without cost over the allocation of resources, they can solve the problem of externalities


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on their own’ (Mankiw 2001:213). But such Coasian bargaining may not occur in reality for a

number of reasons. In the landfill example, it would probably be very costly to establish ownership

of the ‘right to pollute’ through the legal system. Coasian bargaining might also fail due to ‘free-

rider’ behaviour. If the landfill operator reduces pollution it will benefit all households in the area.

Therefore, individual victims have less incentive to bargain directly with the landfill owner since

they cannot be excluded from the benefits of other households’ negotiations (Gravelle & Rees

2004:321).

Another way that governments can address externalities is to provide information. Producers and

consumers make decisions based on the information they possess. If economic agents are made

aware of all the costs of their actions then their behaviour may change. For instance, an awareness

campaign about the environmental costs of landfill may encourage consumers to make a greater

effort to separate recyclable material from general waste.

A commonly used policy option is the use of taxes (for goods with negative externalities) or

subsidies (for goods with positive externalities). A tax can be used to increase the price of a good so

that the price aligns with the full social cost of the good. The following diagram illustrates this

concept:

Figure 2.2 Correcting an externality with taxation

The above diagram depicts the market for a good which causes environmental damage when it is

consumed. This negative externality is shown by the line EMC, which represents the environmental

marginal cost of consuming the good. If we consider the diagram to represent the market for landfill

waste disposal, then the horizontal axis would represent tonnes of waste and EMC would be the


20

externality cost per tonne of waste. The line PMC represents the private marginal costs of providing

landfill services and is also the initial supply curve (S0) for the market. Social marginal costs are

shown by the line SMC – this is the total of private marginal costs and environmental marginal

costs. The line PMB shows the private marginal benefit for consumers and represents the demand

(D) for landfill. With no government intervention the market initially only considers private costs

and benefits (shown by the equilibrium point, E0, where PMC and PMB meet). If there were no

externalities in the production or consumption of this good, then this would be the socially optimal

equilibrium (because the social cost of providing the good would only consist of private costs; the

same applies to benefits too). Instead, this equilibrium results in a quantity of landfill that is ‘too

high’ (Q0), because there is no consideration of the costs inflicted on the economic agents outside

the market.

Government intervention, in the form of a tax, can increase efficiency in this market by raising the

price of landfill to align with the full social cost of providing this service. In diagram 2.2 the tax is

represented by T and is exactly equal to EMC. The tax raises the costs of providing landfill so that

the new supply curve, S1, now coincides with social marginal costs. The consumers who are using

landfill must pay a tax equal to the marginal damage they cause. This makes consumers consider

environmental costs when they decide what quantity of landfill services to use.

Section 2.1 stated that the economy can achieve a Pareto optimal (or ‘first best’) state if markets are

perfectly competitive and there are no externalities. Therefore, the presence of externalities suggests

that the first best solution is not possible in the market for waste disposal services. On the other

hand, the example provided here suggests that taxes provide an elegant solution to the problem of

externalities. In fact, it is still possible to achieve a first best solution if the externality tax is a

Pigouvian tax.

A Pigouvian tax means that each consumer pays a price that captures the externalities that they

generate (Hindriks & Myles 2006:190). This means the tax component of the price paid for waste

services should vary according to the quantity and type of waste that households dispose of.

Unfortunately, the discussion in section 2.3 indicated that the required degree of differentiation in

waste disposal prices would not be possible due to high transaction costs.

The presence of externalities and the inability to use a Pigouvian tax means that first best solutions

are not applicable to the waste disposal market. This means we must resort to a ‘second best’


21

solution, which can be described as an optimal departure from the first best situation. Even though a

Pigouvian tax cannot be used, good second best policy can still lead to an improvement in

efficiency. Landfill taxes are not flexible enough to reflect consumers’ individual circumstances,

but they can still be used to represent average externality costs, much the same way that uniform

excises on alcohol and tobacco are derived from the ‘pooled’ externality cost (Cnossen 2005:4).

However, the use of landfill taxes also creates distortions in the economy. For example, a landfill

tax increases the price of consumption, which reduces both real income and the opportunity cost of

leisure. This acts as a disincentive to provide labour, which could potentially be addressed through

lowering income taxes. This example shows that once the move is made from full efficiency (i.e. a

Pigouvian tax), other factors in the economy also need to be considered and ‘there is no clean and

general answer as to how taxes should be set’ (Hindriks & Myles 2006:191). This is why landfill

externalities need to be addressed by a variety of policy instruments – because we cannot

implement a Pigouvian tax to completely address the externality.

While the first best scenario may be unattainable in the real world, it can provide a model to guide

policy formulation in a second best context. In the case of a landfill tax, the greater use of variable

pricing regimes by local governments would mean that households would pay a price for waste

disposal that more closely resembled the full social cost of their actions. This policy would offer the

best possible approximation of a Pigouvian tax.

Despite being unable to implement optimal Pigouvian taxes, a number of countries and jurisdictions

have implemented landfill taxes. There are three main benefits to the use of landfill taxes. Firstly,

the taxes reflect external costs (albeit average, rather than marginal costs) and therefore account for

the costs that landfill use imposes on others. Secondly, landfill taxes are an efficient source of

revenue for the government because there are few suppliers in the market and few substitutes for

landfill. This means landfill use will remain relatively unchanged due to tax induced price increases

(in other words, demand is inelastic). Thirdly, landfill taxes encourage the market to find solutions

to the externality problem. The taxes discourage the use of landfill by raising its price. This also

promotes the development and increased supply of alternatives with smaller external costs (such as

recycling).


22

2.5 Methods of estimating landfill externalities

A review of the WA Landfill Levy (Blyth 2007:5) suggested that the levy is optimal when it is

based on ‘residual externalities’ – the externalities not already covered by existing regulations or

current landfill gate fees. Unfortunately, externality costs are difficult to estimate precisely because

of: (1) uncertainty in identifying the environmental and health impacts of landfill waste, and (2)

unresolved methodological issues in measuring these impacts (Gorecki et al. 2010:106). Despite

these difficulties, a number of techniques have been developed to estimate the value of externalities.

Assessing environmental externalities involves determining the values that individuals place on

goods that have no observable market price. This includes goods such as clean air, diverse wildlife

and scenic landscapes. The key principle is the estimation of prices that reflect individuals’

willingness to pay (WTP) for an environmental benefit or to avoid a cost, or conversely, their

willingness to accept (WTA) compensation for a given nuisance level or to lose a benefit. Values of

environmental goods are then derived from measuring individuals’ WTP or WTA.

Stated preference methods, such as the contingent valuation method and choice modelling, assume

that the consumer is the best judge of his interests and is able to make realistic choices based on his

preferences (Eshet et al. 2005:489). The contingent valuation method involves surveying people to

determine the monetary value of their WTP or WTA. Choice modelling also uses surveys, but asks

individuals to choose or rank alternatives, rather than explicitly stating their WTP or WTA. This

approach requires respondents to make trade-offs between different environmental outcomes and

the associated costs.

Revealed preference methods are based on the idea that the implicit values of externalities are

revealed when individuals purchase goods that are related to the environmental good being

considered (Eshet et al. 2005:490). One of these methods, the hedonic price method (HPM), is

commonly used to measure the disamenity effects of landfill sites. HPM assumes that the value of a

good is derived from the valued characteristics of that good. For example, the value of a residential

property is determined by the attributes of the house (such as the number of rooms) as well as

neighbourhood and environmental features. Econometric techniques can be used to estimate a

hedonic function that shows the marginal effect of each attribute on the house price. Estimation of

hedonic price functions has been widely used in the literature to derive the value individuals place


23

on environmental characteristics, such as air quality in the vicinity of a landfill, from differences in

house prices at various distances from the site.

Another technique used is the ‘benefits transfer’ (BT) method. BT is a tool for transferring existing

estimates of non-market values (benefits or costs) from one site (the study site) to a new different

study (the policy site).

There are three broad approaches in using BT: transferring mean unit values, transferring benefit

functions, and transferring meta-analysis functions. This dissertation uses the benefit function

transfer (BFT) approach to estimate the disamenity externalities of landfill. These externalities are

often expressed in terms of willingness to pay to avoid amenity loss.

The concept suggests that an estimated benefit function from a study site (WTPs) can be used to

predict WTP for a similar policy site (WTPp). This involves transferring the valuation function from

the study site to the policy site while allowing adjustment for the site differences. A single BFT

uses the estimated relationship from a selected study site combined with values of explanatory

variables of the policy site. In other words, the coefficients from the study site are combined with

the data from the policy site (Baron et al. 2006:5). The following linear model illustrates this

concept:

nn pspspspss

psp

XXXX

Xfwtp

3322110

),(

sitepolicythefromsy variableexplanator

sitestudythefromnts)(coefficieparameters

ofvaluepredictedwhere

1

1

n

n

pp

ss

pp

XX

WTPwtp

Another BT method used in this study is transferring mean unit values. This method was used to

value the externalities that relate to air, water and soil emissions. A recent Australian study

provided suitable estimates of these externalities, and these values were able to be applied without

any need to adjust for local conditions.


24

A recent review of landfill externalities (Eshet et al. 2005) indicated that BT was a widely used

valuation method. The main advantage of using BT is that it is cheaper and less time consuming

than conducting an original study. Using BT can provide a usable estimate of externalities without

the need to undertake comprehensive evaluation and measurement of environmental impacts.

Furthermore, BT can provide accurate estimates of externalities as long as the values that are being

transferred are applicable to – or can be realistically adjusted to reflect – the conditions at the policy

site.


25

3 ESTIMATES OF LANDFILL EXTERNALITIES

This chapter discusses landfill externality estimates from recent studies. Firstly, the estimates of

total externality costs from various studies will be presented. Then each of the following

components of total externality costs will be discussed individually: greenhouse gas emissions,

other air emissions, leachate and disamenity costs. Also, section 3.6 discusses a few other

externality costs that are sometimes linked to landfills. The final section in this chapter reviews

estimates of positive landfill externalities.

3.1 Estimates of the total externality cost of landfills

The following table presents estimates of the total externality costs of landfill from a number of

recent international studies:

Table 3.1 International estimates of total externality costs per tonne of landfilled waste (2010 A$4)

Study Location Range Best

estimate

Comments

Miranda and Hale(1999, cited inFullerton 2005)

United States 14.53 – 143.93 The range is 14.53 – 43.20 whenmethane flaring is used and is 26.73– 143.93 without flaring

EuropeanCommission (2000)

EuropeanUnion

12.80 – 93.84 23.46 The best estimate of $23.46 is for a‘modern’ landfill. The best estimatefor an ‘old’ landfill is $42.66

Dijkgraaf andVollebergh (2004)

Netherlands 43.15

Bartelings et al.(2005)

Netherlands 11.13 - 140.38 16.94

Covec (2007) New Zealand 9.83 – 56.99

Rabl et al. (2008) France 18.10 - 25.53 Estimate mostly made up of GHGemission costs. The study saidthere may also be amenity costs ofup to $1.81 per tonne of waste.

Eunomia (2009) Ireland 123.69 - 231.70

Gorecki et al.(2010)

Ireland 65.12 – 80.80

4Foreign currency values have been converted to Australian dollars using exchange rate data from the Reserve Bank of Australia

(www.rba.gov.au). Dollar values from years other than 2010 have been converted to 2010 dollars using Consumer Price Index datafrom the Australian Bureau of Statistics (www.abs.gov.au).


26

As the above table shows, estimates of externalities are usually presented as a range of possible

values rather than a single estimate. This is due to the uncertainty of determining the environmental

costs of landfill, particularly the value of the damage caused by greenhouse gas emissions.

The estimates of total landfill externality costs in table 3.1 range from $9.83 to $231.70 per tonne of

waste. The estimates vary because of the different characteristics of landfills in each country and

the use of different externality valuation methodologies. The various studies also make different

assumptions regarding which costs can be considered externalities. Table 3.2 presents externality

estimates from a number of Australian studies:

Table 3.2 Australian Estimates of total externality costs per tonne of landfilled waste (2010 A$)5


estimate

Comments

NSW EPA (1996,

cited in Productivity

Commission 2006)

New South

Wales

18.76 – 47.54 The higher figure applies to

metropolitan landfills, due to higher

amenity costs.

RPM Ltd et al.

(2001, cited in BDA

Group 2009)

Australian

Capital

Territory

12.54 – 19.07

BDA Group and

Econsearch (2004)

New South

Wales

1.42 – 19.02 These estimates are a review of the

NSW EPA (1996) estimates.

Nolan ITU (2004,

cited in Productivity

Commission 2006)

Australia 116.97 – 238.66 These externality estimates were

actually derived by the Productivity

Commission (2006:426).

Productivity

Commission (2006)

Australia 0 – 26.67 5.56 The best estimate is for a landfill that is

properly located, incorporates a liner

and an efficient gas management

system.

BDA Group and

MMA (2007)

South

Australia

6.84 – 11.30 The higher figure applies to rural

landfills, due to the assumption of no

gas capture technology.

BDA Group (2009) Australia 1.02 – 24.53 1.74 The best estimate was taken from the

report’s estimated total external costs

for a large urban landfill with ‘best

controls’ in a dry temperate climate

5 Dollar values have been converted to 2010 dollars using Consumer Price Index data from the Australian Bureau of Statistics

(abs.gov.au).


27

The above table indicates that, like the international studies, the Australian estimates of landfill

costs vary widely. The lowest single estimate was from a BDA Group report (2009:76) which

suggested that the total externality cost for a large urban landfill in a dry temperate climate was

$1.74 per tonne.

The highest estimates for Australian externality costs were derived from a Nolan-ITU study (2004)

that considered the costs and benefits of either sending municipal waste to landfill or to an Urban

Resource Reduction and Recycling (UR-3R) facility6. The study concluded that processing waste at

a UR-3R facility rather than at a landfill delivered environmental benefits of $230. This $230 figure

included the avoided costs of landfill, ‘upstream’ environmental benefits and the benefits of the

UR-3R process itself (such as the use of ‘organic growth media’ to improve soil quality). The

Productivity Commission (2006:426) determined that the avoided landfill cost component of Nolan

ITU’s original $230 figure was between $99 and $202, estimates which it considered to be

‘implausibly high’ (2006:425). Certainly, as table 3.2 shows, these are extreme estimates compared

to the other studies identified from the literature. BDA Group (2009:20) suggested that these

estimates were inaccurate because the potential, rather than expected, impacts of pollution were

used and all pollution was valued as if occurred in a large metropolitan area.

With the exception of the Nolan ITU study, there has been a tendency for the Australian estimates

of externality costs to decrease over time. For example, BDA Group and Econsearch (2004)

reviewed and applied the NSW EPA (1996) externality figures and derived lower estimates. This

was attributed to the ‘increasingly remote nature of landfills’ (2004:83) and the increasing incidence

and efficiency of methane recovery (2004:82).

3.2 Greenhouse gas emission externalities

Most studies of landfill costs find that greenhouse gas emissions are the largest and most variable

component of total externality costs. The following table presents the greenhouse gas externality

estimates from a number of recent studies. The table also includes the estimated damage cost of

carbon used in these studies, measured in units of ‘carbon dioxide equivalent’ (CO2-e).

6UR-3R is an alternative waste technology (AWT) process which applies mechanical and biological treatment to mixed municipal

waste (Productivity Commission 2006: 425).


28

Table 3.3 Estimates of greenhouse gas externality costs per tonne of landfilled waste (2010 A$)


estimate

Assumed damage cost of

carbon ($ per tonne of CO2-e)

European

Commission (2000)

European

Union

2.13 – 49.06 10.66 8.53

Dijkgraaf and

Vollebergh (2004)

Netherlands 11.67 67.92

Bartelings et al.

(2005)

Netherlands 2.74 – 102.12 7.89 9.37 – 149.90

Productivity

Commission (2006)

Australia 0 – 16.67 5.56 – 22.23

BDA Group and

MMA (2007)

South

Australia

6.52 – 10.86 21.72

Covec (2007) New Zealand 7.92 – 13.16 14.31 – 23.85

BDA Group (2009) Australia 4.09 – 13.29 40

Gorecki et al.

(2010)

Ireland 49.46 19.58 – 46.66

A number of factors influence the variation in the estimates of greenhouse gas externalities: the

composition of the waste, the quantity of emissions per tonne of waste and the rate of landfill gas

capture. But most of the variability is due to the difficulty in calculating the damage cost of

greenhouse gas emissions. Table 3.3 indicates that higher estimates of the assumed damage cost of

carbon tend to lead to higher estimates of greenhouse gas externality costs. Also, a wider range in

the assumed damage cost of carbon leads to greater variability in the externality estimates. For

example, Bartelings et al. (2005:93) state that 66 percent of the variation in their estimate of

greenhouse gas emission costs can be attributed to the ‘uncertainty over the damage costs of global

warming’.

The assumed damage cost of greenhouse gas emissions is usually derived from either a carbon price

in an emissions abatement scheme or an estimate of the social cost of carbon (SCC). The SCC is

defined as ‘the discounted value of damage associated with climate change impacts that would be

avoided by a marginal reduction in carbon emissions along an arbitrary trajectory’ (Anthoff et al.


29

2009:1). In other words, the SCC is the marginal cost of emitting one additional tonne of carbon

dioxide. Although there is now largely a consensus in the scientific community that human activity

influences climate change, there is still great uncertainty regarding the long-term impacts that

climate change will have on the environment and what these effects will cost. This means that

determining the marginal cost of carbon dioxide is an extremely complex task and estimates of the

SCC vary dramatically as a result.

Anthoff et al. (2009) show that determining the SCC is dependent on predictions of the following

variables: population growth, economic growth, greenhouse gas emissions, the extent of global

warming, and the impacts of climate change. The following normative variables must also be

considered: the value of climate change impacts, relative preferences between present and future

costs, attitudes towards risk, and equity considerations. All of the variables mentioned here have a

high degree of uncertainty, but the normative variables are further complicated by the ethical

judgements that must be included. For example, most people would agree that the loss of

endangered species and unique habitats is an undesirable outcome. However, attempting to assign a

monetary value to these losses would be a very subjective and contentious exercise. In another

example, some SCC models assume lives in poorer countries are worth less than lives in rich

nations due to lower per capita incomes — an assumption that some would find ‘morally offensive’

(Ackerman and Stanton 2010:1).

A number of the studies in table 3.3 do not use an estimate of the SCC for the assumed damage cost

of carbon. Instead they use the abatement cost of carbon suggested by emissions trading schemes.

Gorecki et al. (2010:108) used the market price of carbon from the European emissions trading

scheme because this ensures greenhouse gases are priced consistently across different sectors of the

economy, thereby avoiding distortion in policy making.

The Productivity Commission (2006:429) states that SCC estimates might not be an appropriate

measure of the costs of Australian carbon emissions (or benefits of abatement measures) because

they include the costs of global warming that are incurred across all countries. Furthermore, the

benefits of unilateral efforts to reduce emissions are likely to be small and may result in worse

global environmental outcomes if some production is transferred to other countries. Therefore,

instead of using SCC estimates, the Productivity Commission (2006:429) states:


30

... a better approach for the purposes of cost-benefit analysis may be to use the costs

of abatement under government programs as a proxy for the external costs of

emissions. Governments have decided that these costs are worth incurring,

presumably because they believe that the benefits to the community (from avoided

damage and any other factors) are at least as large.

The Productivity Commission (2006:430) used an estimate of between $5 and $20 per tonne of

CO2-e for the assumed external cost of greenhouse gas emissions partly because this range was

‘broadly consistent with the current costs of greenhouse gas abatement in Australia’. For similar

reasons, BDA Group (2009:25) used a value of $40 per tonne of CO2-e because this was the price

cap in the proposed Carbon Pollution Reduction Scheme (CPRS).

However, there are many reasons that an SCC estimate, rather than the carbon price from an

emissions trading scheme, should be used for the assumed external cost of greenhouse gas

emissions. It is quite possible that the price of carbon in government schemes is an underestimate of

the true marginal cost of emissions. This is because governments may use conservative estimates of

carbon abatement costs to minimise opposition to an emissions trading scheme and thereby ensure

the scheme has more chance of being implemented. Also, the price of carbon in a national emission

trading scheme may only reflect the externality costs (or benefits of abated emissions) to that

nation. Climate change is expected to cause less damage to richer, more developed countries.

Poorer countries will be impacted more because they have greater reliance on agricultural

production and less ability to cope with extreme weather events.

Part of the Productivity Commission’s argument for not using an SCC estimate was that unilateral

abatement measures would only have small benefits for Australia; SCC estimates would therefore

overstate these benefits. This may be true, but it would also mean the policy maker is making an

ethical judgement that only national interests should be considered and that global costs and

benefits of unilateral measures are not important. But many people would not share this view,

especially considering the lack of progress in international efforts to address climate change. The

Productivity Commission also argued that unilateral abatement measures could result in worse

global environmental outcomes if production is shifted to other countries. Although this may be true

of some activities, it is unlikely to apply to the landfill industry in this country due to the

combination of Australia’s relative isolation and the cost of transporting waste.


31

3.3 Non-greenhouse gas air emission externalities

In addition to emitting greenhouse gases, landfills also emit traces of other air pollutants such as

volatile organic compounds (VOCs), nitrogen dioxide, sulphur dioxide, benzene, hydrogen

sulphide, mercury and fine particles. These pollutants are potentially damaging to the environment

and human health.

These externalities are usually valued by estimating the quantity of emissions for each pollutant and

then using the benefits transfer technique to apply estimated marginal damage costs for each

pollutant. The extent of the air pollution impact depends on the type of pollutant, concentration of

emissions, the concentration threshold at which health or environmental risks emerge, and the

population density and environmental characteristics in the vicinity of the landfill (BDA Group

2009:26). How the emissions are managed also has an impact on the nature of the air emissions. For

example, there will be significant emissions of nitrogen oxides if the landfill gas is flared or used

for electricity generation. If the methane gas is not captured, VOC emissions may instead be high

(Gorecki et al. 2010:112).

Most estimates of these externalities are relatively small due to the low quantity of emissions and

the low population density near landfills. For example, the European Commission (2000) found that

air pollution externalities were €0.1 for landfills with gas capture technology and zero for sites

without gas capture. Similarly, a number of recent Australian studies have determined that air

emissions externality costs are below $1 per tonne of waste (Productivity Commission 2006, BDA

Group and Econsearch 2007, BDA Group 2009).

3.4 Leachate externalities

Leachate is liquid that occurs in landfills and results from precipitation and surface water

combining with the biochemical and physical breakdown of waste. Leachate may contain metals,

organic and inorganic compounds, including toxins.

Leachate can potentially cause adverse environmental and human health outcomes if it escapes

from the landfill into soil and groundwater, particularly if it enters the food chain or contaminates

drinking water. A number of studies state these environmental impacts are difficult to value due to


32

the lack of scientific research regarding the effects of leachate and its transmission from landfills to

the environment (European Commission 2000:47, Productivity Commission 2006:435, Covec

2007:25).

Despite the uncertainty regarding the effects and impact pathways of leachate, most studies are in

agreement that the externality values are generally small when landfills are appropriately designed

and managed. If a landfill is lined with clay and/or plastic, this can prevent or significantly reduce

the escape of leachate. Leachate can also be collected in sumps and then pumped out of the landfill

for treatment and discharge to sewers (Productivity Commission 2006:436). When such measures

are in place the Productivity Commission estimates that leachate externality costs per tonne of

waste are ‘less than $1’ (2006:441). BDA Group (2009) estimate that leachate externality costs

range from zero for a lined landfill in a dry climate, to $0.03 for an unlined landfill in a wet tropical

climate.

The European Commission (2000) estimated that leachate externality costs were zero for a modern

lined landfill and €1.5 for an unlined site. A number of more recent studies from Europe do not

place a value on leachate externality costs, mainly because they assume adherence to strict landfill

regulations (Dijkgraaf and Vollebergh 2004, Bartelings et al. 2005, Rabl et al. 2008, Gorecki et al.

2010).

3.5 Disamenity externalities

Disamenity costs are fixed externalities, which means they do not vary according to the amount of

waste landfilled. Instead, disamenity costs exist when a landfill is located in an area that is

populated or used for recreation. The magnitude of these costs is determined by the characteristics

of the site. According to Rabl et al (2008:2), these externalities could potentially be internalised by

negotiation with the local population before the landfill site is approved. In practice, the disamenity

externalities of landfill have been increasingly internalised through improving standards and placing

sites in less populated areas.

The hedonic price method (as described in section 2.5) is most commonly used to measure the

amenity impact of landfills. A few hedonic studies have been conducted in Europe, but most of the

landfill disamenity studies using this method are from the US. There are also a number of studies


33

that provide ‘secondary’ disamenity estimates that are derived from applying the functions or values

from an original hedonic study.

Brisson and Pearce (1995) reviewed a number of the US studies and derived the following linear

regression equation to demonstrate the effect that waste disposal facilities have on house prices:

DHP 34.28.12

sitedisposalwastethefrom)kilometres(indistancethe

pricehouseinchangepercentagethe

:Where

D

HP

The equation shows that the expected maximum house price depreciation is 12.8 percent (when D

equals zero). As households get further away from the site the house price increases by 2.34 percent

per kilometre until a distance of 5.5 kilometres. Beyond this point a waste disposal site has no effect

on house prices. Eshet et al. (2005:495-497) provide a more recent meta-analysis of hedonic

studies. They state that there is a 1.06 to 6.25 percent reduction in house price per kilometre of

proximity to a landfill, up to a distance of 4 to 6.4 kilometres.

A recent study from the UK (Cambridge Econometrics 2003) provides estimates of disamenity

effects that are somewhat lower than most of the previous hedonic studies in the literature. The key

result of the Cambridge Econometrics study was that, on average, house prices in the UK fell by 7%

within 0.4 kilometres of a landfill and by 2% at a distance of 0.4 to 0.8 kilometres. Beyond a

distance of 0.8 kilometres there was no evidence of a statistically significant disamenity impact.

There are a number of reasons why disamenity externalities may have decreased over time, as

suggested by the relatively low impacts demonstrated in the Cambridge Econometrics study.

Firstly, landfill regulations and practices have improved through measures such as capturing landfill

gas, regular covering of waste and lining the landfill with clay or plastic. Secondly, as older

landfills in urban areas are closing, they are increasingly being replaced by sites in less populated

areas. Often this is to overcome community resistance to new landfills being situated in densely

populated areas – otherwise known as the ‘not in my backyard’ (or NIMBY) effect. The increasing

remoteness of sites may also be a response to regulations in some jurisdictions that landfills

incorporate ‘buffer zones’ to protect the local population from the amenity impacts of the site.


34

Thirdly, the number of landfills has decreased, but the average size of landfills has increased. For

example, the number of operating landfills in the US decreased from about 8,000 to 3,000 in the

period from 1988 to 1997. During the same period, remaining landfill capacity doubled from ten to

twenty years (Glenn 1998 cited in Fullerton 2005:159). The trend towards larger landfills is

probably the result of more stringent environmental standards, such as the requirement to install

lining. The increased fixed costs involved in complying with these regulations means that there are

economies of scale resulting from the construction of larger landfills. The net effect of the

decreasing number of landfills and the increasing size of sites is probably a decrease in disamenity

effects. Although larger landfills cause greater disamenity costs than smaller ones, this is probably

more than offset by the effect of fewer households being located near a landfill.

There are a few estimates of disamenity externalities for Australian landfills. The NSW EPA (1996,

cited in Productivity Commission 2006:439) estimated that property prices would be between zero

and one percent lower for houses located within two kilometres of a landfill and that disamenity

costs would be up to $3.70 per tonne of waste. The Productivity Commission (2006:441) provides a

disamenity estimate of less than $1 per tonne of landfilled waste for a ‘properly-located, engineered

and managed landfill’, but does not present any information to explain how this figure was

determined. BDA Group (2009:41) applied this Productivity Commission figure in a recent report

on landfill costs in Australia and estimated that amenity costs were $1 per tonne of waste for a best

practice landfill. For landfills that are ‘not at best practice’ BDA Group estimates that disamenity

costs are $10 a tonne (2009:42).

3.6 Other externalities

3.6.1 Transport externalities

The trucks which collect waste cause noise, contribute to congestion and air pollution, and increase

the risk of accidents. A number of factors influence the size of these externality costs: truck size, the

fuel efficiency of the trucks, the distances travelled, the number of stops made and the population

density along the trucks’ routes (Productivity Commission 2006:423).


35

Most Australian studies exclude transport costs from their assessment of the external costs of

landfill. Similarly, most international studies also exclude transport externalities from their analysis.

In some of the studies that specifically mention but exclude transportation externalities, the

argument is made that these costs are mostly internalised through various measures. Eunomia

(2009:984) made the assumption that these externalities are largely internalised due to fuel and

other transport related taxes. Eunomia also suggested that waste disposal providers consider and

seek to avoid congestion to minimise their own costs: ‘service providers will be sensitive to

congestion related issues in terms of the timing of their collection rounds’. The Productivity

Commission (2006:423) states that insurance increases the cost of transport and therefore

internalises some of the property damage cost of accidents. The Productivity Commission also point

out regulations to reduce vehicle emissions have ‘increased the costs of transport and reduced the

damage done by pollution’.

However, there are some studies that have included and estimated the externality costs of

transporting waste. Bartelings et al. (2005) estimated that transport externalities amounted to €1.25

per tonne of waste. NSW EPA (1996 cited in Productivity Commission 2006:423) estimated that

the external cost of landfill waste transportation was between $1.20 and $2.90 per tonne. BDA

Group and Econsearch reviewed the NSW EPA estimates in a later study (2004) and made

estimates of $2.30 - $2.90 per tonne for metropolitan Sydney and $1.20 - $1.50 for rural New South

Wales.

3.6.2 Estimates of land use and related externalities

A few studies have included land use costs as externalities of landfill. Dijkgraaf and Vollebergh

(2004:240) and Bartelings et al. (2005:95) include an estimate of land use externalities, though the

Bartelings study only includes this externality in their ‘high’ estimate of landfill costs and not in

their ‘low’ or ‘best’ estimate. These externalities are the ‘shadow cost’ of land use by landfills and

represent the ‘land rent that would be offered by the next best alternative land use’ (Bartelings et al.

2005:94). Dijkgraaf and Vollebergh derive this shadow cost by using the difference between the

land rent for residential development and the land rent for landfill.

However, most studies exclude land use externalities mainly because these costs relate to the

scarcity of land. Therefore, land use costs are not externalities; instead they are captured by the land

acquisition costs paid by landfill operators. Increasing scarcity of land does increase costs for


36

landfill operators, but if this land is acquired in competitive markets and if landfill services are

provided in a competitive market, then there are no land use externalities that need to be accounted

for (Enviros Consulting & EFTEC 2004:7, BDA Group 2009:43).

BDA Group (2009:42) point out two other costs that are sometimes considered externalities: post-

closure environmental effects and costs due to sterilisation of land. However, these costs are also

unlikely to be externalities. The costs of future environmental damage are addressed through post-

closure guarantees included in landfill licensing requirements. The costs of sterilisation are also

borne by the landfill operator, as their land will progressively lose value during the life of the

landfill (BDA Group 2009:43).

3.6.3 ‘Upstream’ externalities

A final set of externalities that are sometimes associated with landfill are the non-market costs that

result from using virgin materials instead of recycling. When waste is sent to landfill rather than

recycled it means that more virgin materials need to used, which results in mining externalities

(such as land degradation and deforestation) and materials processing externalities (such as

greenhouse gas, air and water emissions). In the context of waste management, these costs are

considered to be ‘upstream’ externalities because they occur prior to the point where waste is

generated.

Most of the landfill externality literature does not consider these costs in their estimates because

they result from mining and processing activities. This means the most appropriate policy response

is to tax or regulate the environmental impacts of these activities directly. Using direct policy, rather

than waste management policy, is important because the externality costs of mining vary between

sites and practices (Productivity Commission 2006:xxxi). Direct policy measures can be designed to

handle these different circumstances with more flexibility than waste management policy.

Intervention in ‘downstream’ activities such as landfill will be inappropriate and is an inefficient

way of minimising the environmental costs of using virgin materials.


37

3.7 External benefits of landfill

Landfills which generate electricity through methane capture deliver external benefits due to the

displacement of emissions from other sources of energy production. In some cases these external

benefits can significantly offset the external costs of a landfill’s greenhouse gas emissions. The

following table indicates the value of the external benefit compared to the cost of greenhouse

emissions for a number of studies:

Table 3.4 Estimates of external benefits from electricity generation per tonne of landfilled waste (2010 A$)

Study Location Greenhouse

gas

externality

External

benefit

Net

externality

Comments

European

Commission

(2000)

European

Union

10.66 -8.53 2.13

Dijkgraaf and

Vollebergh (2004)

Netherlands 11.67 -8.41 3.26

Bartelings et al.

(2005)

Netherlands 7.89 -2.14 5.75

Productivity

Commission

(2006)

Australia 4.17 -2.83 1.33 This figure is the maximum of

the estimated range for a

municipal landfill.

BDA Group (2009) Australia 9.20 -10.22 -1.02 This is the estimate for a

landfill in a ‘dry temperate’

climate.

The size of the external benefit can vary according to the rate of methane gas capture and the

efficiency of the energy generation technology. Estimates of the rate of methane capture can vary,

though rates of between 60 and 80 percent are often used in the externality literature. The

Productivity Commission (2006:428) assumed a gas capture rate of 75 percent, but conceded this

was ‘at the upper end of performance estimates for Australian landfills’.

The external benefit also varies according to the externalities associated with conventional

electricity generation. For example, if the electricity generated by a landfill is replacing electricity


38

that is mainly generated from coal fired power stations then the external benefit will be substantial

due to the displacement of significant greenhouse gas emissions. In estimating the external benefit

for Australian landfills, the Productivity Commission (2006:428) used an estimate by the US

Environmental Protection Agency that if a landfill captured 75 percent of the methane gas, and if

this gas replaced fossils fuels in electricity generation, the net greenhouse gas impact of the landfill

would be reduced by 92 percent.


39

4 EXTERNALITY ESTIMATES FOR PERTH LANDFILLS

This chapter discusses the landfill externality estimates that were derived for metropolitan Perth

landfills. The total externality costs are presented first, followed by discussions of how each

component of the externality cost was estimated.

4.1 Estimates of the total externality cost of landfills

The following table presents the estimated total externality costs for Metropolitan Perth landfills.

The externality costs of greenhouse gas emissions are the largest component of the total. The

estimated range of the greenhouse gas emission externality indicates they are subject to the most

uncertainty. The table also indicates that C&D waste causes the lowest externality costs of the three

waste streams. This is because C&D waste is mostly comprised of materials that do not decompose

(such as concrete and bricks), resulting in less greenhouse gas emissions.

Table 4.1 Estimates of total externality costs per tonne of waste for Perth (low and high estimates indicated

in brackets, where applicable)

Externality Municipal waste Commercial and

Industrial waste

Construction and

Demolition waste

Greenhouse gas emissions29.79

(16.37 - 47.19)

32.77

(18.01 – 51.50)

22.34

(16.37 – 28.31)

Other air emissions 0.98 0.98 0.68

Leachate 0.00 0.00 0.01

Disamenity4.09

(3.22 - 5.63)

4.09

(3.22 - 5.63)

4.09

(3.22 - 5.63)

Total externality cost$34.86

(20.57 - 53.80)

$37.84

(22.21 - 58.11)

$27.12

(20.28 – 34.63)


40

4.2 Greenhouse gas emission externalities

Although landfills produce carbon dioxide and methane emissions, both of which contribute to

global warming, only the emissions of methane are considered here. This is because the carbon

dioxide emissions are from biomass sources and are therefore considered to be part of the natural

carbon cycle (Covec 2007:23, DCCEE 2010:67).

Estimating the externality cost of greenhouse gas emissions per tonne of waste involves

determining three key elements: (1) the methane emissions per tonne of waste, (2) the amount of

greenhouse gases that are recovered by the waste facility through either flaring or electricity

generation, and (3) the value of the damage caused by the emissions.

4.2.1 Methane emissions per tonne of waste

Department of Climate Change and Energy Efficiency estimates were used to determine the

quantity of methane emissions for each major category of waste. These estimates are presented in

the table below and are measured in units of carbon dioxide equivalent (CO2-e) per tonne of waste7:

Table 4.2 Waste emission factors for total waste disposed to landfill by broad waste stream category

Type of waste

Municipal Solid

Waste

Commercial and

Industrial Waste

Construction and

Demolition Waste

Emission factor (tonnes of CO2-e

per tonne of waste)

1.0 1.1 0.3

Source: DCCEE (2010:69)

7 Methane emissions per tonne of waste are multiplied by 21 to calculate the CO2-e emissions, because methane has a‘global warming potential’ (GWP) of 21 (DCCEE 2010:67). This GWP of 21 means that a tonne of methane gas isconsidered 21 times more damaging than a tonne of carbon dioxide over a one hundred year period from the date ofemission (Gorecki et al. 2010:108).


41

4.2.2 Methane recovery rates

Once the quantity of methane emissions is known, the next step is to determine the proportion of

emissions that escape from the landfill and into the atmosphere. This proportion can vary depending

on the existence of landfill gas management systems and the efficiency of these systems. Most

modern metropolitan putrescible landfills in Australia use gas capture technology. In the case of

landfill sites where no gas management system is used, it can be assumed that virtually all of the

methane gas will escape into the atmosphere. This scenario often applies at old or small putrescible

landfill sites. Gas capture systems are also rarely used at inert landfill sites.

As stated earlier, methane capture rates of between 60 and 80 percent are often used in the

externality literature. BDA Group (2009:49) argued that 60 percent was a more realistic value for

Australian landfills. A recent study on waste emissions in Australia by McLennan Magasanik

Associates Pty Ltd (MMA) indicated that net emissions from WA landfills in 2006/07 were

1,094,000 tonnes and abated emissions were 945,000 tonnes; a gas capture rate of 46 per cent

(MMA 2010:28). The gas capture rate by state was highest for WA and the national rate was 29

percent. The estimates from the MMA study suggest that the gas capture rates used in previous

studies were unrealistically high, especially in cases where they were applied equally to all waste

streams (most C&D waste goes to inert landfills, which usually do not have gas capture

technology). Taking the abated quantities of emissions from the MMA study and only applying

them to the emissions from municipal and C&I waste results in a methane capture rate of close to

60 percent. Therefore, the 60 percent estimate will be used in the externality calculations below, but

is only applied to municipal and C&I waste.

4.2.3 The damage cost of emissions

The final element of calculating the greenhouse gas emissions externality is the SCC. As discussed

in section 3.2, there is a great deal of variability in estimates of the SCC due to the uncertainty

involved in predicting the impacts of climate change and the value judgements that must be used.

Tol’s (2008) review of 47 studies on the marginal damage costs of carbon dioxide demonstrates the

extent of the variation in SCC estimates. Tol found that the mean of the 211 estimates in these


42

studies was US$127 per tonne of CO2-e with a standard deviation of US$2438 (all of these figures

from the Tol review are measured in 1995 US$). Tol also found the mean of the estimates that were

published in peer reviewed journals was $71 per tonne of CO2-e with a standard deviation of $98.

The median estimate for peer reviewed studies was $48. A final characteristic of the SCC estimates

that is worth noting is that the population is skewed to the right due to a few extreme estimates. For

example, the 99th percentile estimate for peer reviewed studies was $524; the same statistic for all

studies was $1,655.

Choosing an SCC for determining the greenhouse gas externality cost of landfill is challenging due

to the wide range of estimates. Therefore, a range of values can be presented to capture the inherent

uncertainty involved in estimating the SCC. However, the externality cost as a component of the

Landfill Levy must be based on a single point estimate of the SCC, so it is still necessary to derive a

figure that is a ‘best estimate’ of greenhouse gas externality costs.

The SCC figure used here is from a recent study by Anthoff, Yohe and Tol (2009) where they

estimate the SCC to be $44 (the original estimate was in 1995 US$, which equates to $74.47 in

2010 $A – this is the figure used in this dissertation for the SCC). This estimate was chosen for a

number of reasons, including its proximity to the median estimate for peer reviewed studies

(US$48) from the Tol review (2008) mentioned above (the median from this review was considered

a better guide than the mean due to the skewed nature of the SCC estimates). The Anthoff et al.

estimate also methodically considers each aspect of the discount rate and uses values for each of

these elements that ‘reflect actual practice across decision-makers’ (2009:15) rather than the

normative judgements of the authors. The recentness of this estimate could also be considered

important, because the variation in SCC estimates has lessened in recent years.

4.2.4 Determining the greenhouse gas externality cost

Once the elements of greenhouse gas emissions are known, they can be combined in the following

equation to determine the value of the externality for each waste stream:

SCCREFGHGext iii )1(

8 The statistics cited from Tol (2008) are from the Fisher-Tippett kernel density estimates in table 1 of the article. Table1 also includes Gausian probability density estimates, but the Fisher-Tippett estimates have been cited because they aremore appropriate considering, as Tol says, ‘the uncertainty in the sample is right-skewed and fat-tailed’ (2008:4).


43

carbonofcostsocialthe

recoverymethaneofratethe

factoremissionsthe

streamwastethe

:Where

SCC

R

EF

i

Calculations of the externality costs of greenhouse gas emissions for each waste stream are shown

in the following table:

Table 4.3 Greenhouse gas emission externality costs for landfilled waste by broad waste stream category

Waste category Emissions

factor

Rate of

methane

escape (1-R)

SCC GHG

externality

cost

Municipal Solid Waste 1.0 0.4 $74.47 $29.79

Commercial and Industrial Waste 1.1 0.4 $74.47 $32.77

Construction and Demolition Waste 0.3 1 $74.47 $22.34

Alternative methane capture rates (50 and 70 percent) were applied to the model to provide a

potential range of values for greenhouse gas externality costs. Different estimates of the SCC were

also used ($54.57 and $94.37). These values were derived using the estimated standard deviation

provided in the Anthoff et al. (2009) study. The minimum, maximum and best estimates of the

greenhouse gas externality cost are presented in table 4.4:

Table 4.4 Range estimates for greenhouse gas emission externality costs by broad waste stream category

Waste category Low estimate Best estimate High estimate

Municipal Solid Waste $16.37 $29.79 $47.19

Commercial and Industrial Waste $18.01 $32.77 $51.90

Construction and Demolition Waste $16.37 $22.34 $28.31


44

4.3 Non-greenhouse gas air emission externalities

The externality cost of other air emissions for municipal and C&I Waste was estimated to be $0.98

a tonne. This estimate was derived from the BDA Group estimate of $0.96 (2009:59). The BDA

Group estimate was for a landfill in a ‘dry temperate’ climate that used ‘energy recovery’.

The estimated other air emissions externality cost for C&D waste was $0.68 a tonne. Again, this

estimate was derived from the BDA Group’s 2009 study. The initial estimate was $0.67 for a dry

temperate landfill that did not use energy recovery (2009:59).

4.4 Leachate externalities

The externality costs of leachate were also derived using estimates from the BDA Group study

(2009:60). Externality costs for Perth Metropolitan landfills were estimated to be zero for municipal

and C&I Waste and $0.01 for C&D waste.

In deriving these estimates, the assumption was made that putrescible landfills in Perth are usually

lined and that inert landfills are unlined. In any case, estimates of leachate costs from putrescible

landfills should not be included in the externalities considered for the Landfill Levy. This is because

regulations or an approval process requiring liners almost completely eliminate the risk of leachate

escaping from the landfill. It is highly likely that any future putrescible sites would need to include

lining to be approved.

4.5 Disamenity externalities

The disamenity costs of Metropolitan Perth landfills were estimated by transferring values from the

Cambridge Econometrics (2003) study of landfill sites in Britain9. The methodology used was

similar to that used by Gorecki et al. (2010) when they performed a similar benefits transfer

9 Landgate, the WA government agency responsible for property and land information, was approached for the housingsales data required for hedonic estimates of landfill disamenity impacts. Unfortunately, the price of the data wasconsidered too expensive, especially considering that most studies have found that disamenity effects are a relativelysmall proportion of total externality costs.


45

exercise in using the Cambridge Econometrics estimates to determine disamenity costs for Irish

landfills.

Although some Australian disamenity estimates have been presented in the literature, none were as

suitable as the Cambridge Econometrics study. The estimates from the NSW EPA 1996 study are

relatively outdated so they are ‘unlikely to be accurate given the increasingly remote nature of

landfills’ (BDA Group and Econsearch 2004:83). The other Australian estimates mentioned in

section 3.5 appear to be mainly based on the assumption that the disamenity costs are small due to

improved environmental controls. Furthermore, it is not clear how these estimates were derived. In

contrast, the Cambridge Econometrics study has the advantages of being relatively recent, using a

sound and transparent methodology, and being very comprehensive – the study used data on 11,300

landfill sites and 592,000 housing transactions.

Estimating disamenity costs for Perth involved applying the key findings of the Cambridge

Econometrics study: house prices in the UK decreased by 7% within 0.4 kilometres of a landfill and

by 2% at a distance of 0.4 to 0.8 kilometres. However, the estimated impacts for some regions

differed considerably from this result. For example, the results for Scotland indicated that house

prices decreased by 40% within a 0.4 kilometre radius of a landfill site. The Scottish results were

attributed to the high housing density in landfill areas compared to England and Wales. Housing

density is relatively low near most landfills in Perth so the results for the UK as a whole were

considered more applicable than the results for Scotland.

Four steps were involved in calculating the disamenity costs for Perth:

1. Centroid coordinates for the eighteen metropolitan landfills listed in a recent report on Perth’s

waste infrastructure (Cardno [WA] Pty Ltd 2008) were used to determine the suburbs where

housing prices would potentially be affected by disamenity costs.

2. Census 2006 statistics from the ABS website were then used to estimate the housing density for

the areas within 0.4 kilometres and 0.4 to 0.8 kilometres of the centroid coordinate for each landfill.

3. Median house price data for each of the affected areas was multiplied by the housing density

estimated in step 2 and the relevant percentage value from the Cambridge Econometrics study

(7.06% for the houses within 0.4 kilometres of a landfill and 2% for the houses at a distance of 0.4


46

to 0.8 kilometres). The disamenity value for each area was then summed to get the total fixed

disamenity cost of $82,293,561.

4. The total fixed disamenity value was then converted to a measure of disamenity per tonnes of

waste using a similar method to the Cambridge Econometrics study. This involved summing the

projected waste flow over the expected remaining capacity of the eighteen landfill sites. According

to a report on Australian landfill capacity by Hyder Consulting (2009:14), the capacity for the

existing Perth metropolitan sites is projected to run out in seven to ten years. The amount of waste

to landfill in Perth was 3,000,254 tonnes for the financial year 2008/09. Therefore, the flow of

waste to be valued was assumed to last for ten years with a constant amount of 3,000,254 tonnes a

year. The flows over the ten year period were then discounted using a discount rate of 8% to get a

net present value of the expected waste over the lifetime of the current landfill sites10. Discount

rates of 3% and 10% and a period of seven years were also used to provide a range of values and to

assess the sensitivity of the estimates to changes in these variables. Using the assumed three million

tonnes of waste per year and the 8% discount rate over a ten year period resulted in a net present

value of 20,131,949 tonnes of waste. This gives a disamenity cost per tonne of waste of $4.09.

The following table provides the various combinations of discount rate and time period used to get

a best estimate and a range of disamenity estimates:

Table 4.5 Perth disamenity costs per tonne of waste

Discount rate Disamenity cost per tonne

(assuming 10 years of landfill

capacity)

Disamenity cost per tonne

(assuming 7 years of landfill

capacity)

3% 3.22 4.40

8% 4.09 5.27

10% 4.46 5.63

10 This is the default discount rate for policy analysis recommended by Harrison (2010:xv). Harrison also recommendsusing 3% and 10% for sensitivity testing.


47

4.6 Other externalities

None of the externality costs discussed in section 3.6 were estimated for Perth. Transportation

externalities are not unique to waste management. Using heavy vehicles to transport any

commodity creates externalities. Furthermore, these externalities are often partly internalised

already. Any remaining transportation externality costs should be addressed by a combination of

specific transport policies and economy wide measures. For example, where significant congestion

exists, road user charges should be used. In the case of vehicle emissions, national economic

policies such as a carbon tax or an emissions trading scheme will lessen the greenhouse gas effects

of transporting waste.

Externalities relating to land use and land scarcity were also omitted as they result in higher costs

for landfill operators and are therefore internalised. Finally, externalities relating to the extraction

and processing of virgin materials were not included as they should be addressed by upstream

policy measures.

4.7 External benefits of landfill

A number of Metropolitan Perth landfills (including currently operating and closed sites) capture

landfill gas for electricity production, reducing the need to generate electricity from fossil fuels. The

net improvement in environmental outcomes is considered an external benefit and partly offsets the

externality costs of landfill. However, these external benefits were not subtracted from the total

externality costs in section 4.1 because they are more relevant to energy policy than waste policy.

Consequently, there are better policy instruments than the Landfill Levy for promoting electricity

generation from waste. The appropriate policy response is discussed further in section 5.3.


48

5 APPLYING THE EXTERNALITY VALUES TO THE LANDFILL LEVY

5.1 The size and coverage of the Landfill Levy

The current Landfill Levy differs according to the type of waste sent to landfill. The argument for a

differentiated levy by waste stream is that inert waste causes less environmental impact than

putrescible waste. The externality estimates for C&D waste in table 4.1 suggest that this argument

is correct. However, the externality costs for putrescible and inert waste are more similar than the

current landfill levies suggest. Furthermore, there are sound arguments for having the same levy

across all waste streams: the system would be simpler with lower administrative costs and there

would be less incentive to dispose of waste at unsuitable landfills (Hyder Consulting 2007:55). The

current differentiated levy means there is an incentive to dispose of putrescible waste at inert

landfills, which would cause greater environmental damage due to the less stringent regulations at

these sites.

Therefore, the estimated externalities for each waste stream need to be converted to a single

estimate per tonne of waste. An average externality cost per tonne was calculated by weighting each

waste stream according to its proportional contribution to the total quantity of waste11. This resulted

in an estimate of $31.73 per tonne. This suggested level of the levy is similar to the current landfill

levies in Melbourne ($30) and Adelaide ($26), but well below the levy in Sydney ($70.30).

The geographical coverage of the levy also needs to be considered. Currently, the levy only applies

to waste that is sent to metropolitan landfills. This aspect of the levy creates perverse incentives,

with some metropolitan waste being transported to regional landfills that are not subject to the levy.

This causes an increase in the environmental impacts the levy is intended to lessen – for example,

the transportation of waste over long distances results in considerable greenhouse gas emissions.

Furthermore, the environmental controls at regional landfills are usually not as effective as those at

metropolitan landfills. If the levy applied to all metropolitan waste, no matter where it was disposed

of, then this would remove the incentive to use regional sites.

11 For 2008/09, the proportions were as follows: municipal waste 25.5%; C&I 24.6%; C&D 49.9%.


49

Another option would be to apply the levy to sites in regional WA. Although the disamenity impact

of these landfills is smaller than metropolitan landfills due to lower population densities, the

greenhouse gas impact of regional landfills is higher due to the low incidence of landfill gas capture

systems. But while there is a need to account for the environmental impact of these sites, this should

be balanced against the capacity of regional communities to pay an increased price for waste

services and also the greater opportunities to dispose of waste illegally in rural locations. In South

Australia, the levy for non-metropolitan sites is set at 50 percent of the metropolitan levy. Such a

compromise might be effective in WA, where it would at least capture some of the environmental

externalities from regional landfills while still providing a disincentive to dispose of metropolitan

waste at these sites.

5.2 Phasing in an increased levy

The externality cost per tonne of $31.73 determined in the previous section indicates that the

current levies do not cover the full cost of externalities, particularly in the case of C&D waste.

However, it is also important that any increases to the levy are ‘phased in’ slowly. This phased

approach has been used in a number of Australian and international jurisdictions and has the

advantage of giving households and businesses time to adjust to the increased expense and the

opportunity to use other waste options as they gradually become available. Alternatively, if large

increases in the levy are introduced too quickly, and viable alternatives to landfill are not available,

this increases the risk of waste being dumped illegally.

If the levy is to be increased slowly until it reaches the appropriate level, it is necessary to project

the suggested level of the levy into the future because the externality costs of landfill are expected

to increase over time. Each component of the total externality was forecast for the next ten years

based on assumptions about the factors that drive each individual cost. Disamenity externalities

were assumed to increase by 1.83 percent a year, due to increases in housing density (ABS Census

data indicates this was the average annual increase in housing density in Metropolitan Perth

between 2001 and 2006). Greenhouse gas emission externalities were assumed to grow by about 2.5

percent a year due to global economic growth12 – as global income grows, there is more to be

damaged and this means the cost of climate change increases. These two components of the total

12 This was the average annual rate of global economic growth in the last ten years. Source: World Bank, WorldDevelopment Indicators (retrived from data.worldbank.org)


50

externality cost were also increased by an estimated rate of inflation (2.5 percent)13. This

inflationary increase was also applied to the remaining externality costs.

Figure 5.1 belows shows the projected externality cost over the next ten years along with two

possible options for gradually increasing the Landfill Levy until it coincides with the full externality

cost.

Figure 5.1 Projected landfill externality costs and possible future landfill levies

(a) (b)

In scenario a (the left graph in figure 5.1), the levies for putrescible waste and inert waste are

increased to the appropriate level in five years. After this five year transitional period, they should

be increased in line with the growing externality cost. In scenario b, the levies are transitioned over

a ten year period until they reach the level where the full externality cost is being met. This

approach may be more appropriate if it was felt that industry needed more time to adjust to the new

levy.

5.3 Complementary policy measures

An important policy consideration is the extent to which increases in the levy are passed on to waste

producers. As discussed in Chapter 2, the price signal to households is often weak, with a flat waste

disposal fee providing little incentive to decrease waste volumes or make greater use of recycling.

13 This is the mid-point of the Reserve Bank of Australia’s inflation target (2-3 percent).


51

Some local governments in WA have responded to the increasing costs of landfill by providing

households with a choice of collection bin sizes at different prices. Greater use of this system would

motivate households to change their behaviour. When the marginal cost of generating more waste is

not zero, consumers have an incentive to reuse goods or spend time separating waste for recycling.

Variable pricing regimes also ensure that most of the increasing cost of landfill is appropriately

passed on to the households that generate the most waste.

In determining the appropriate level of the Landfill Levy, no allowance was made for the fact that

electricity generation from landfills diminishes the total externality cost. This could potentially be

addressed by varying the levy according to each site’s electricity generation performance. But the

purpose of the levy is to capture the costs of landfill that are not reflected in the market.

Recognition of the use of landfill gas for electricity generation relates to a different policy area –

encouraging alternatives to fossil fuels. Attempting to adjust a landfill tax for different levels of

electricity generation performance would be complicated and mean that one policy instrument was

trying to achieve two objectives. Instead, a subsidy to landfills according the amount of electricity

they generate would be an appropriate policy response. This would encourage landfills to install

modern systems and to generate electricity efficiently. Furthermore, the subsidy would be a more

precise measure and would provide a clear incentive for high methane capture rates (Martinsen &

Vassnes 2004:83).

Another policy option to complement the landfill levy is the use of awareness campaigns that

ensure the community is well informed about the costs and benefits of various waste management

options (Productivity Commission 2006:xxxix). Providing such information would help to ensure

that households and firms consider the full social costs when assessing waste disposal options.

Awareness campaigns may also help to educate the public about the need for increased waste

disposal costs and promote acceptance of policies such as variable pricing systems.

Finally, the state government could consider devoting increased resources to the monitoring of

illegal dumping and littering. Illegal dumping results in substantial externality costs due to ‘adverse

impacts on health and safety, wildlife and visual amenity’ (Productivity Commission 2006:201).

Rises in the levy increase the incentive to dispose of waste illegally to avoid the higher costs of

legal waste disposal. Conversely, greater efforts to detect these activities and to enforce

environmental regulations reduces the motivation for illegal dumping and helps to ensure waste is

either recycled or at least sent to a landfill, where the environmental impacts can be managed.


52

5.4 Public finance implications

The use of an environmental tax, such as the Landfill Levy, may have implications for other taxes.

Increases in the Landfill Levy may provide an opportunity to decrease less efficient state taxes such

as payroll tax and stamp duty. This effect is known as a ‘double dividend’ because the

environmental tax addresses existing inefficiencies in the market (externalities), while the reduction

in other taxes removes distortions elsewhere in the economy.

Fullerton et al. (2009:443) point out that there is little empirical evidence of the double dividend

occurring in practice, because environmental taxes often have distorting effects of their own. This

would be the case for the WA Landfill Levy because it is not a Pigouvian tax. Even so, there is still

an argument to reduce other taxes when environmental taxes are introduced. But rather than seeking

a double dividend, these tax reductions should be done simply to offset the distortions created by

the environmental tax.

The Landfill Levy also has implications for public spending. All of the Australian jurisdictions that

use landfill levies hypothecate at least some of the levy revenue for spending on waste disposal

activities. For example, 50 percent of the South Australian levy revenue goes to a ‘Waste to

Resources Fund’ which is administered by Zero Waste SA. Hypothecation tends to be popular with

local governments because levy revenue often funds initiatives that promote and develop increased

recycling activities. This helps local government to mitigate the cost of the levy. Hypothecating

revenue for recycling initiatives may also ensure public acceptance of the levy. A recent Senate

enquiry into waste management (2008:38) found that hypothecation was effective in raising

community awareness of waste issues and funding resource recovery infrastructure.

On the other hand, there are many critics of hypothecation. For example, the Productivity

Commission (2006:xxxv) states that ‘hypothecation introduces rigidities into public sector

financing and is rarely warranted’. The Treasury (2010:355) points out that hypothecation

constrains governments’ ability to allocate limited revenue between competing priorities. The

OECD (1997) expresses similar sentiments and says that if hypothecation is used, it should only be

a transitory approach. Freebairn (2010:169) states that environmental taxes should correct the

market failure completely, so there is no need for expenditures on the environment. Freebairn

recommends using the revenue to address equity issues or other distortions in the economy.


53

Although the Landfill Levy was introduced in 1998, in some ways it could still be regarded as a

new tax, because it has only recently been set at levels that approximate the externality cost of

landfill. Therefore, hypothecation may be appropriate for a time to ensure local government and

community support for the levy. Nonetheless, hypothecation should eventually be phased out due to

the constraints it places on government spending. That is not to say that the initiatives that have

previously been funded by the levy were an inefficient use of tax revenue. But, as Freebairn

(2010:169) says, government expenditure on the environment ‘should be justified with an explicit

and transparent social benefit cost assessment, and this assessment should be independent of the

revenue source’. If there are environmental market failures that the levy does not address, then

there may be an argument for public spending in this area. But it is appropriate that, given limited

government funds, the merits of this spending be measured against other priorities.


54

6 CONCLUSIONS

The external costs of landfill include greenhouse gas emissions, air pollution, damage caused by

leachate and disamenity impacts. The value of these externalities is uncertain – table 4.1 shows that

the estimates range from about $20 to at least $58 per tonne of waste. The best estimate of external

costs per tonne of waste by waste stream was $34.86 for municipal waste, $37.84 for C&I waste

and $27.12 for C&D waste.

These estimates suggest the current levies are not fully capturing the external costs, particularly in

the case of C&D waste. The policy discussion in Chapter 5 stated that the levy should be raised

until it equals the relevant externality cost. Incremental increases to the levy would give households

and firms time to adjust to the increased price of landfill. The discussion also argued that the same

levy should apply across all waste streams to remove the incentive to dispose of waste at unsuitable

landfill sites. An appropriate levy rate to apply to all waste is $32 per tonne (in 2010 A$). This is

the weighted average externality cost across all waste categories.

A number of complementary policy measures that could enhance the application of the levy were

also discussed in Chapter 5. This included: encouraging electricity generation with subsidies,

applying the levy to regional landfills, using awareness campaigns to help consumers make

informed choices and devoting resources to discouraging illegal waste and dumping. Additionally,

greater use of variable pricing for municipal waste would help improve efficiency in this sector as it

would better reflect the social marginal costs of generating more waste.

The levy should capture the full externality cost of landfills and completely address the market

failure in the waste market. However, this is not possible due to various real world imperfections.

This means that levy revenue could be considered an effective source of funds to spend on other

government interventions in the waste market. In the short term (for example, during the

convergence periods shown in figure 5.1), some hypothecation could be justified as a transitory

measure to help gain community acceptance of the levy. But given limited government funds, the

merits of any spending after this period should be assessed against other priorities, including

reducing taxes in other sectors. Therefore, there is little justification for the hypothecation of the

Landfill Levy in the long term due to the constraints it places on government expenditure.


55

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