BILL ANALYSIS                                                                                                                                                                                                    



          SENATE COMMITTEE ON ENVIRONMENTAL QUALITY
                            Senator Bob Wieckowski, Chair
                                2015 - 2016  Regular 

          Bill No:          SB 732            Hearing Date:     4/15/2015
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          |Author:   |Pan                                                   |
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          |Version:  |4/6/2015                                              |
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          |Urgency:  |No                     |Fiscal:      |Yes             |
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          |Consultant|Rebecca Newhouse                                      |
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          Subject:  Beverage container recycling

            ANALYSIS:                                                     
          
          Existing law, under the California Beverage Container Recycling  
          and Litter
          Reduction Act (Act):

          1. Requires the Department of Resources, Recovery and Recycling  
             (CalRecycle) to establish a processing payment for a beverage  
             container covered under the program that has a scrap value  
             less than the cost of recycling, to be determined as  
             specified, that is at least equal to the difference between  
             the cost of recycling and the scrap value of the material.

          2. Requires CalRecycle to establish a processing fee to be paid  
             by beverage manufacturers set at specified percentages of the  
             processing payment which are reduced as the container type  
             recycling rate increases.  This percentage ranges from 65% of  
             the processing payment for a container type with a recycling  
             rate of 30% or less to 10% of the processing payment for a  
             container type with a recycling rate of greater than 75%. 

          3. Prohibits CalRecycle from imposing a processing fee on  
             polyethylene terephthalate (PET) beverage containers if a  
             willing purchaser offers to purchase empty PET containers at a  
             voluntary artificial scrap value that is equal to the  
             processing fee. 

          4. Requires every glass manufacturer in the state to use at least  
             35% of postfilled glass in the manufacturing of their glass  







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             food, drink or beverage containers, as specified. 

          This bill:  

          1. Deletes the provisions prohibiting CalRecyle from imposing a  
             processing fee on PET beverage containers for which there is a  
             willing purchaser. 

          2. Requires every manufacturer of a beverage sold in any plastic  
             container to demonstrate to CalRecycle that each type of a  
             plastic beverage container sold in this state contains, on  
             average, not less than 10% postfilled material on and after  
             January 1, 2017.

          3. Prohibits CalRecycle from reducing the processing fee  
             requirements for any beverage manufacturer for any beverage  
             sold in the state unless the manufacturer demonstrates to  
             CalRecycle that the container is manufactured at a facility  
             that meets or exceeds a specified percentage of recycled  
             content, regardless of whether the container is manufactured  
             in this state.  

          Background

          1.Background on the Bottle Bill Program.  

            The Bottle Bill program is designed to provide consumers with a  
            financial incentive for recycling and to make recycling  
            convenient to consumers.  The centerpiece of the Act is the  
            California Redemption Value (CRV).  Consumers pay a deposit,  
            the CRV, on each beverage container they purchase.  Retailers  
            collect the CRV from consumers when they buy beverages.  The  
            dealer retains a small percentage of the deposit for  
            administration and remits the remainder to the distributor, who  
            also retains a small portion for administration before  
            remitting the balance to CalRecycle.  When consumers return  
            their empty beverage containers to a recycler (or donate them  
            to a curbside or other program), the deposit is paid back as a  
            refund.  

          2.Processing Fees, Payments and Offsets. 

            The Program requires container manufacturers to internalize the  
            cost of recycling the empty beverage containers they  
            manufacture.  If the cost of recycling these materials exceeds  







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            the fair market value of the materials (or scrap value), the  
            Department assesses a processing fee on beverage manufacturers  
            that is in turn distributed to recyclers to cover their costs  
            for recycling that material (termed a processing payment).   
            Processing fees are currently assessed on glass, plastic and  
            bimetal beverage containers because their scrap value is not  
            sufficient to cover their recycling costs.  Aluminum beverage  
            containers are not assessed a processing fee because the scrap  
            value of aluminum exceeds its recycling costs.
              
            However, the processing fees actually paid by beverage  
            manufacturers are reduced pursuant to a statutory formula that  
            depends, in part, on the recycling rate for that material type.  
             If the recycling rate for a particular material is greater  
            than 75%, the processing fee is reduced to 10% of the  
            processing payment.  For recycling rates less than 35%, the  
            processing fee is 65% of the processing payment.  Beverage  
            manufacturers pay the processing fees to the Department.  The  
            Department distributes the processing payments to processors  
            who, in turn, pass them on in their entirety to recyclers.

            The Department offsets the difference between what the beverage  
            manufacturers pay in processing fees and what is paid out to  
            recyclers in processing payment.  This subsidy is termed  
            processing fee offsets and comes from unredeemed CRV payments  
            from the fund. 

            The statute regarding processing fees allows manufacturers to  
            artificially increase the scrap value of polyethylene  
            terephthalate (PET) plastic which would subsequently reduce the  
            total amount of the processing fees they eventually paid.   
            However, processing fee offsets (enacted subsequently)  
            subsidizes the processing fees manufactures pay to a degree  
            that negates the need for manufacturers to artificially prop up  
            scrap prices.  SB 732 repeals the provisions from the Act  
            allowing manufacturers to artificially increase the scap value  
            of PET. 

          3.Structural Deficit and Department and Auditor's  
            Recommendations.

            Deposits on covered beverage containers are remit to CalRecycle  
            and deposited into the Beverage Container Recycling Fund  
            (Fund).  The Fund's expenditures fit into two primary  
            categories: 1) CRV reimbursements to recyclers and 2) program  







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            expenses, including administration, statutorily mandated grant  
            programs, education and outreach, as well as processing fee  
            offsets, are all funded by unredeemed CRV.  Higher recycling  
            rates reduce the amount of unredeemed CRV to fund program  
            expenses.  With the current structure of the program's  
            statutory expenditures, the "breakeven" recycling rate where  
            expenditures equal revenues is about 72%. LAO, in their  
            Overview of the Beverage Container Recycling Program from March  
            12, 2015, reports the recycling rate for the program at 85% and  
            the projected structural deficit for 2015-16 fiscal year at $72  
            million. 

            The single largest expenditure category from the fund, after  
            CRV payments, is processing fee offsets, paid to recyclers from  
            unredeemed CRV as processing fee offsets.  The LAO projects  
            these payments will exceed $80 million in the next fiscal year.  


            In early 2014, the Department submitted a budget change  
            proposal for what they termed "phase II" reforms to restructure  
            the program and eliminate the structural deficit.  Their  
            proposal eliminated the processing fee offsets, requiring  
            beverage manufacturers to pay fees equal to the processing  
            payment (which, as noted above, is the difference in cost  
            between the cost of recycling and the scrap value of the  
            material).  This, in combination with other Fund expenditure  
            reduction measures was projected to have resulted in  
            elimination of the structural deficit.  According to the  
            Department in this proposal: 

               "Processing fees were imposed in California in order to send  
               accurate price signals to consumers and beverage  
               manufacturers regarding the "true" ("internalized") costs of  
               reusing/recycling a container ("net of the used container's  
               scrap value").  Without the Processing Fees, beverage  
               dealers and manufacturers would be completely isolated from  
               the costs of recycling since, under the California's  
               Beverage Container Recycling law, beverage dealers and  
               manufacturers otherwise bear no responsibility for the costs  
               of recycling containers.  The advent of the Processing Fee  
               Offsets (paid from unredeemed CRV), which reduce the amount  
               paid by beverage manufacturers, weakened or eliminated the  
               price signals intended by the original Processing Fee.  In  
               addition, funds used for the Offsets are not available for  
               other uses.  As a result, CalRecycle believes that  







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               expenditures for Offsets are both unsustainable and  
               undesirable and proposes a phased elimination of the use of  
               unredeemed CRV to pay for those Offsets."

            Additionally, last year the Joint Legislative Budget Committee  
            requested the State Auditor conduct an audit of the Bottle Bill  
            program.  Their audit report, released in November 2014, noted  
            the following:

          "A variety of revenue enhancements and expenditure reductions are  
          available that we believe the Legislature may want to consider.   
          For example, the most financially significant proposal is  
          reducing or eliminating the State's subsidies to beverage  
          manufacturers and requiring them to pay the full cost of  
          processing fees.  State law requires beverage manufacturers to  
          pay a processing fee, which the State then uses to make  
          processing payments to recycling centers (and other entities) to  
          encourage them to recycle certain beverage containers, such as  
          glass and plastic; however, the beverage program currently  
          subsidizes more than half of these processing fees.  By requiring  
          beverage manufactures to pay the full cost of the processing fee,  
          the beverage program could collect additional revenue ranging  
          between $60 million and $80 million annually."

          Comments
          
          1. Purpose of Bill.  

             According to the author, "This measure is aimed at updating  
             and creating a dual purpose of the Bottle Bill's existing  
             collection incentives to support increased utilization of  
             recycled materials in manufacturing.  The bill requires  
             manufacturers of specified beverage containers to demonstrate  
             their containers meet or exceed the recycled content  
             provisions specified in Public Resources Code Section 14549,  
             as a condition of qualifying for a reduction in recycling fees  
             mandated under the Bottle Bill.

             "Drastic drops in oil prices have had the effect of  
             undermining the demand and price for California-generated  
             recycled materials-California recycled material processors and  
             recycled product makers are starting to lose market share to  
             out of state/country 'virgin' producers, especially in the PET  
             plastic market.








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             "As for glass, there is an environmental benefit for increased  
             use of recycled content.  For every 1% increase in recycled  
             content, there is a 1% decrease in GHG emissions at factories,  
             as well as reductions in mining and processing virgin inputs.

             "California glass container manufacturing facilities produce  
             1.2 million tons of glass bottles and employ about 2600  
             workers, down from more than 3,000 workers in 2001.   
             Californians consume about 1.6 billion tons of glass  
             containers.  Many of California's former glass container  
             manufacturing jobs have moved to Mexico and overseas. 

             "This bill is needed because it will help incentivize  
             increased utilization of recycled materials in manufacturing  
             and protect California's 125,000 recycling-related jobs during  
             a time of market instability."

          2. Recycled Content of 10, 25, or 35%?

             The bill requires beverage manufacturers to demonstrate to  
             CalRecycle that the beverage container is manufactured at a  
             facility that meets or exceeds the percentage of recycled  
             content specified in another section of the code.  The section  
             that is referenced requires a recycled content in glass  
             beverage containers manufactured in the state to have at least  
             a 35% recycled content, or 25% if they are using mixed-color  
             cullet.  

             It is unclear whether SB 732 is referring to the 35%, or the  
             25% value, both referenced in the section.

             Additionally, it is unclear whether the bill also requires  
             plastic beverage containers to meet the 35 or 25% value to  
             qualify for reduced processing fees, since the bill's language  
             refers to "any beverage manufacturer for any beverage  
             container sold in this state."  This is further confused by  
             the requirement in a separate section of the bill that  
             manufactures of beverages in plastic containers demonstrate  
             that their plastic beverage containers have no less than 10%  
             recycled content. 

             According to the author, and the sponsor, the intent of the  
             bill is to require 10% recycled content for plastic beverage  
             containers, in order for beverage manufacturers of plastic  
             beverage containers to qualify for reduced processing fees.







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             If the committee feels this bill is necessary, these  
             percentage requirements should be clarified as the bill moves  
             forward.

          3. Policy Considerations.

             A.    Where to set the threshold? CalRecycle estimates the  
                average recycled content for glass beverage containers is  
                about 50%.  Current law requires in-state glass  
                manufacturers to achieve a 35% recycled content level for  
                glass packaging.  SB 732 requires that all beverages sold  
                in the state, whether or not manufactured in California,  
                meet that 35% (or 25%) value in order to qualify for  
                reduced processing fees.  The author notes that some  
                companies import beverage containers that have  
                substantially less recycled content.  However, it is  
                unclear what the average recycled content is for glass  
                beverage containers manufactured out of state.

                For plastic containers, it is not clear what the average  
                recycled content is for plastic containers manufactured in  
                state and out of state.  Depending on the beverage  
                manufacturer, there is a range of recycled content for PET  
                packaging.  For example, Coca Cola uses on average 6%  
                recycled content for their PET packaging, Pepsi Co reports  
                they are at 10% for beverage containers, and Nestle states  
                that five of their brands use anywhere from 50 to 100%  
                recycled PET content in their packaging.  

                As plastic recycled content values for PET containers vary  
                significantly, and the level of recycled content in other  
                types of plastic beverage containers is unknown, it is  
                unclear whether 10% recycled content for plastic beverage  
                containers is an appropriate value to make significant  
                gains from the status quo of recycled content in plastics.   
                Will this level of recycled content help bolster in-state  
                recycling markets? 

             B.    Enforcement is Costly.  The bill ties reduced processing  
                fees for beverage manufacturers to recycled minimum content  
                requirements for any beverage container sold in the state.   
                Beverage containers sold in the state may be manufactured  
                all over the world.  It is likely that ensuring the  
                requirements of SB 732 are met will involve significant  







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                administrative costs.  These potential costs are especially  
                salient in light of the program's structural deficit  
                projected at $72 million for the next fiscal year.  

             C.    Processing Fee Offsets Concerns.  As noted in the  
                background, both CalRecycle and BSA have proposed  
                eliminating the processing fee offset to increase  
                sustainability of the Fund.  CalRecycle also believes the  
                offsets weakens price signals intended to encourage  
                beverage manufacturers to use materials that are more  
                readily recyclable. 

                Is it appropriate to set up a structure reinforcing  
                processing fee offsets when it is likely that the program,  
                and processing fee offsets, as one of the largest Fund  
                expenditures, will likely undergo some large-scale  
                restructuring to address the Fund's structural deficit?

          SB 732 would require significantly increased administrative and  
          enforcement burden, for a program that already has a structural  
          deficit, to ensure a level of recycled content in beverage  
          containers that may or may not significantly encourage in-state  
          recycling markets or provide real benefits in recycling beyond  
          the status quo.  Additionally, by linking minimum recycled  
          content to processing fee offsets, SB 732 bolsters the current  
          structure of the program, considered by many to be untenable,  
          where unredeemed CRV offsets shield the full cost of recycling  
          from beverage manufacturers. 

          The Committee may wish to consider whether the bill is structured  
          to achieve the author's goals and therefore warrants (1) the  
          significant expense and (2) the use processing fee offsets as  
          incentives to achieve those goals. 
            
          SOURCE:               Californians Against Waste  

           SUPPORT:               
          California Association of Local Conservation Corps
          California League of Conservation Voters
          CR&R
          Environment California
          Inland Empire Disposal Association
          Los Angeles County Waste Management Association
          Napa Recycling & Waste Services
          Recology







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          Solid Waste Association of North America
          Solid Waste Association of Orange County
          Strategic Materials, Inc.
          Verdeco Recycling, Inc.
          Waste Management
          Zanker Recycling  

           OPPOSITION: 
          California Nevada Beverage Association   
          Glass Packaging Institute
           
           ARGUMENTS IN SUPPORT:    
           
           Supporters notes that the bill would ensure more used glass and  
          plastic beverage containers are recycled into new containers in a  
          closed-loop system, instead of ending up in domestic landfills or  
          being exported with unknown outcomes. Supporters also note that  
          the bill would lead to significant reductions in greenhouse gas  
          emissions, energy use and pollution associated with the mining  
          and processing of virgin materials, and that while incentives in  
          the bottle bill program have succeeded in achieving a 75%  
          collection rate of used beverage containers, there are no  
          effective incentives encouraging the actual recycling and  
          utilization of those beverage containers. 

          ARGUMENTS IN OPPOSITION:    

          The Glass Packaging Institute states, among other opposition  
          arguments, that the current processing fee relief was carefully  
          negotiated and has helped lead to high recycling rates and that  
          minimum recycled content is a separate issue . They also state  
          that California glass container manufacturers are already using  
          as much quality cullet as possible. 

          Among other concerns, the California Nevada Beverage Association  
          states that the bill's recycled content mandates raises serious  
          logistical questions and federal commerce clause questions, and  
          that ensuring compliance is incredibly complex for multi-facility  
          in-state beverage manufactures.  They also note significant  
          health and safety issues regarding the use of recycled content in  
          food grade containers.

                                      -- END --
          








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