Evaluate methods of government intervention which could be used to reduce the market failure associated with single-use coffee pod waste. Use a market failure diagram to support your answer.

Figure 1: Trend in the disposal of non-recyclable coffee pods sent to landfill (in millions), UK, 2016 to 2023

Extract A: 15p environmental levy continues to discourage use of non-recyclable coffee pods

A statutory 5p charge on non-recyclable single-use coffee pods was first introduced in supermarkets and online retailers in 2018. The charge was subsequently increased to 15p in 2023 and extended to all commercial office suppliers.

The UK Environment Minister stated that the environmental levy has successfully disrupted the unthinking purchase and disposal of billions of plastic and aluminum pods, thereby reducing landfill volumes and generating millions of pounds in ring-fenced revenue to fund municipal recycling facilities. Without this policy, standard market mechanisms could not resolve the externality. Consumers have rapidly adjusted, with many switching to refillable stainless-steel coffee pods.

In tandem with the levy, major beverage manufacturers have introduced pod deposit-return schemes and bulk refill stations in stores, giving consumers clear financial incentives to return spent capsules.

However, trade associations report that cost-conscious consumers remain hesitant to pay a premium for eco-friendly refillable capsule kits. With real disposable household incomes falling by 3.8% in 2023, sales of premium compostable pods are projected to drop from 250,000 to 160,000 units this year.

Extract B: Aluminum and plastic packaging tax

Coffee manufacturers have voiced concerns over the implementation of a new environmental tax on packaging materials, warning it will drive up shelf prices for average consumers.

The packaging tax, introduced in 2022, is designed to incentivize firms to use recycled materials in their production lines. Under the regulations, any business importing or manufacturing 10 tonnes or more of coffee capsules containing less than 40% recycled plastic or aluminum faces a tax of £250 per tonne. Capsules exceeding this 40% threshold are completely exempt from the levy.

Helene Dupont, Chief Executive of the National Coffee Alliance, noted that passing the added tax burden onto consumers is an inevitable consequence of the legislation: "This creates cost-push pressures right through our complex roasting and packaging supply chains. Smaller coffee roasters will struggle to absorb these costs." A diverse group of importers and packaging firms are affected, particularly because pod-based systems represent approximately 35% of the total coffee packaging market in the UK.

Extract C: Workplace pod recycling and behavioral nudges

An estimated 3 billion single-use coffee pods are consumed in offices and homes across the country each year, generating nearly 30,000 tonnes of packaging waste. Academic research indicates that while a 20p surcharge on non-recyclable pods successfully drives commuters toward reusable alternatives, a corresponding 20p discount on eco-friendly pods has a negligible effect on consumer habits.

Specifically, a 20p surcharge on non-recyclable pods increases the utilization of reusable steel pods by 4.1%. Introducing simple environmental nudges in office kitchens—such as clear prompts, posters, and dedicated disposal racks—increases reusable pod adoption by 3.2%. Ensuring that reusable pods are easily purchasable at point-of-sale displays boosts adoption by 2.5%, whereas distributing free reusable pods to office staff results in a substantial 5.5% increase.

"While individual measures trigger relatively modest behavioral shifts, combining financial penalties with informational and physical changes yields the most significant reduction in single-use waste," concluded Wouter Poortinga, Professor of Environmental Psychology.