July 16, 2007

Study examines "free-rider" issue

As part of its work, the Task Group commissioned a study on the "free-rider" issue, one of the leading problems associated with EPR and product stewardship programs. The analysis was carried out by Ottawa-based Marbek Resource Consultants.

Free-riding occurs when one company or individual benefits from the actions and efforts of another without paying their fair share of the costs. A more detailed definition from Environment Canada notes that free-riders can include all types of participants-consumers, producers, importers, retailers, collectors and recyclers, who may free ride in one way or another. The free-riding issue becomes larger and more complex when numerous producers (i.e. packaging material manufacturers, brand owners, wholesalers, retailers, etc) are part of a long production chain.

In Canada, free-rider terminology usually refers to a non-compliant producer who is aware of his/her responsibilities but chooses not to comply. The report notes, however, that new players are often not aware of the EPR program but once made aware, are willing to comply. For the purposes of the analysis, free riders are also defined as producers who are not obliged to comply with an EPR program due to the design of the program, but reap benefits from the program by having their products recycled at the end of life.

The consultants examined 15 Canadian EPR programs affected to varying degrees by the free-rider issue. Ten programs relate to packaging or electronics, while the remainder involve other sectors (e.g. used oil, paint and batteries). All but two of the programs are mandatory.

In almost all cases, free-riding was found to be a minor issue, the scale of the problem rated as low to medium; where it was high, the analysis found that the free-riding aspect was part of the program design. Cases in point include Manitoba's product stewardship program and Ontario's Blue Box program. Although there is the potential for free-riding to jeopardize the financial viability of an EPR program, the study concluded that this is not the case in most Canadian programs.

The consultants pinpointed several causes of free-riding, including: jurisdictional authority limitations; lack of regulatory backdrop and/or enforcement; failure to determine the brand owner; problems relating to multiple players, data availability or program design; and systems based solely on fees at point of sale.

Mechanisms exist to address free-riding, however, and these are outlined as well in the report. With regard to packaging, addressing free-riding is easier in programs that target single-category packages and feature incentives (e.g. beverage container deposit-return programs), compared to programs dealing with several types of packaging.

In the latter case, says the report, strategies to minimize free-riding can include designing programs to levy producer fees based on sales volumes; removing stewardship exemptions; and ensuring appropriate incentive structures.

EPR programs targeting electronic waste (e-waste) were found to have a very low incidence of free-riding from Internet sales, even though the potential is high. This is attributed to the design of e-waste programs, which require producers to remit fees based on market sales volume (both retail and Internet); strong regulatory frameworks that specify the first importer as the responsible party; and the delegation of enforcement authority to a third-party administrative organization.

Another important factor in minimizing e-waste program free-riding is the involvement of industry-led partnerships in program design, implementation and operation. This, says the report, is crucial to gaining buy-in from large players.

The Canada-wide Principles for Extended Producer Responsibility and the study report, "Analysis of the Free-Rider Issue in Extended Producer Responsibility Programs," may be viewed on the CCME Web site, www.ccme.ca.

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