The Role of EPR in the Used Oil Value Chain

The Role of EPR in the Used Oil Value Chain

To date ‘Extended Producer Responsibility’ (EPR) schemes relating to lubricants and waste oil have been introduced in more than 60 countries, including a dozen in Europe formed under the auspices of EU Waste Directives, starting with Italy in 1982. But relatively few of the current used oil EPR schemes have caused material improvements in waste oil regeneration. There is no standard EPR model; each is different. But they adhere to one of four fundamental principles:

– Ban the burning of used oil, indirectly to facilitate re-refining 

– Incentivize the collection of used oil 

– Incentivize the regeneration (re-refining to base oils) of used oils 

– Impose mandatory quotas on the re-refined base oil content of lubricant sales 

Each of these principles has its own characteristics, strengths and weaknesses. But as more countries experiment with EPR schemes, some truths are becoming self-evident. Incentive schemes, by their very nature, involve transfers of economic rent from producers (marketers of finished lubricants) to downstream players in the used oil supply chain. These transfers are typically funded through a tax on the sale of “qualifying lubricants” usually deemed as an Environmental Handling Charge, or EPR Fee. 

To Burn or Not to Burn? 

To paraphrase Hamlet, the burning of used oil which is capable of being regenerated poses a challenge to policymakers. Around the world, by Kline’s assessment, of the 40 million tons/year of lubricants consumed, only 13 million tons of used oil is collected, due to losses-in-use and internal deployment of waste oil by consumers. Of that 13 million tons of used oil collection, nearly 60% is burned. Only 2.5 million tons of re-refined base oil is returned to the lubricants market for blending with conventional “virgin” base oils. That figure could be doubled, or more, if legal or regulatory systems were put in place more generally around the world to discourage the burning of used oil and/or to incent its regeneration. 

Where public policy clashes with economics, burning of used oil can at times destroy less value than collecting it, particularly when oil prices are low, or in regions of low population density where collection costs outweigh the value of waste oil. Used oil generators are often unwilling to pay collectors to haul away their used oil, and so environmentally undesirable consequences ensue. The proliferation of sales of used oil burners in the U.S. from 2015 to 2021, when oil prices dropped below $100/barrel, is evidence of this economic cause and effect. 

Direct intervention by governments to ban the burning of used oil has, to-date, only been practiced in one country, Brazil. The outcome has been to produce a two-tier collection system. Roughly 90% of Brazilian used oil is collected by licensed collectors, who channel that legal collection into re-refining (save for used oils which cannot technically be regenerated; the other 10% consists of unlicensed black-market operators who sell illegally collected used oil almost exclusively into applications where it’s burned.  

In Europe, the European Commission and lubricants industry bodies, such as the Union of European Lubricants Industries (UEIL), and its re-refining industry section, GEIR, have co-operated on the development of used oil policy options since the introduction of the original EU Waste Directive in 1975. Through subsequent modifications to the Waste Directive (in 2008, and with a new policy expected later this year), the imposition of a ban on used oil burning has always been practically unenforceable. The EU, and its member states, prefer alternative approaches. 

Incentivize the Collection of Used Oil 

The administered EPR schemes which exist in Southern Europe (Portugal, Spain, Italy and Greece) stipulate that the generator at worst is held harmless from used oil collection fees, but in some cases may receive payments from collectors when market conditions support it. In essence generators are provided no incentive to illegally dispose of used oil and may benefit when base oil market prices support regenerators and collectors sharing some portion of their windfall profits backwards along the used oil supply chain. EPR schemes in these same countries provide subsidies to collectors, though the systems differ, as does the magnitude of remuneration over time. 

Provincial used oil management associations (UOMAs) exist in all Canadian provinces but Ontario, Yukon, NWT and Nunavut. Each UOMA provides used oil collection incentives. The incentives differ not only between provinces, but also contain a transportation cost equalization system (Regional Incentives, or RI’s) which are designed to encourage used oil collection in more remote areas by offering higher RI’s. The focus of the Canadian scheme is to maximize used oil collection. No specific incentives are provided for used oil regeneration; however, a market-adjusted Processing Incentive system exists in Quebec only (akin to the Italian Corrispetivo alla Rigenerazione) which is payable to any qualified processing application, including burning in furnaces rated at 3 MW or greater.  

A system similar to the Canadian example is operated in Spain, where collectors are compensated not only for regional differences in transportation costs, but also for volumetric differences (where payments to collect used oil from smaller generators exceed those for larger generators). 

Though it has been proven to be largely ineffective, the State of California administers an EPR scheme under CA S.B. 546 of 2009 through CalRecycle, whose primary focus is on payments to generators. In principle, it pays consumers who return used oil to CCC’s (Certified Collection Centers) a sum of 40 cents/gallon, a sum often lower than the cost of gasoline to drive to the drop-off point. And once they drop off their used oil at the CCC, they only receive payment if they ask for it! CCC’s themselves, such as quick lubes and auto dealers, receive a more appropriate payment of 16 cents/gallon on self-generated used oil. Collectors in California receive no incentive payment, which does nothing to assure that used oil collected by the CCCs enters the downstream value chain. 

Incentivize the Regeneration of Used Oil to Produce Re-refined Base Oils 

To-date, few countries with EPR schemes have instituted programs that specifically favor regeneration of used oil. The primary intent of most EPR schemes has been to encourage the legal collection of used oil, to reduce the propensity of lubricant consumers to dispose of their waste oil into the environment. Education, rather than incentives, has arguably been just as effective in reducing illegal disposition. 

Increasingly, regulators are coming to realize that collection incentives alone are an inadequate solution to the objectives of EPR. If collected used oil is simply burned sustainability is not addressed. And in the few countries when EPR schemes focus on regeneration, benefits trickle down to collectors and generators in any event. In the end regeneration incentives can satisfy the twin objectives of circularity and of collection efficiency. 

This article was recently published by ILMA (International Lubricant Manufacturers Association) in their November issue of Compoundings magazine. For more information about the used oil re-refining market, please refer to our upcoming Global Used Oil and Re-Refined Lubricants report. This report specifically examines the efforts of governments and corporations worldwide to enhance sustainability in light of the declining demand for basestocks. The study will highlight key trends, developments, changes, challenges, and business opportunities in the industry. For further details and to access the full report, please contact us.

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