Issue: Aug 2005

Producers required to take responsibility for entire life-cycle of vehicle

Companies throughout the European auto supply chain have to take a fresh look at their supplier and distribution agreements because of �cradle to grave� legislation already in force, having late side effects from which the industry will suffer in less than two years.

by Michael Stewart

Companies throughout the European auto supply chain have to take a fresh look at their supplier and distribution agreements because of - cradle to grave - legislation already in force, having late side effects from which the industry will suffer in less than two years. From January 1, 2007, OEMs, professional importers and in Germany even spare parts manufacturers and importers will be held responsible for the safe disposal of all vehicles and their components at the end of their life, irrespective of when they were first placed on the market, according to Dr Julia Schoenbohm, a legal specialist with Clifford Chance in Frankfurt.

In terms of Directive 2000/53/EC of the European Parliament on end-of-life vehicles (ELVD), member states of the European Union were required to establish an extended producer responsibility for end-of-life vehicle management by 21 April 2002. Not all member states met this deadline but by now, all of them including those that joined the European Union on 1 May 2004, enacted end-of-life vehicle legislation. Violations can be expensive. In Germany, fines for failure to comply with the requirements can reach 25 000 euros for each negligent violation and 50 000 euros for an intentional breach.

The ELVD has several aspects, the two most important ones being the disposal of end-of-life vehicles at no costs for the last owner and the ban on certain substances. "This leads to numerous legal issues that OEMs, component manufacturers and importers should address", emphasizes Schoenbohm. These include the allocation of costs for disposing of end-of-life vehicles between those entities subject to the extended producer responsibility, and other risks in case of non-compliance, such as fines being imposed and customers seeking damages or reduction of the purchase price if a car contains forbidden substances.
Free take back principle

The ELVD required the member states to take the necessary measures to ensure that economic operators set up a system for the collection, treatment and recovery of all end-of-life vehicles, which must occur at no costs for the last holder or the owner as a result of the vehicle having no or a negative market value, she says. The ELVD defines producer as the vehicle manufacturer and the professional importer of a vehicle into a member state. This means that the member states are required to ensure that either the vehicle manufacturer or the professional importer - or both will meet all or a significant part of the costs for the transfer of an end-of-life vehicle to a collection system. "Considering that European directives are not directly applicable and leave the member states a certain scope of discretion as to the implementation, the laws in the member states vary. In Germany, the definition of producer even extends to spare parts manufacturers and importers, requiring them, too, to be informed about the law and to consider the impact in their agreements. This might come as a surprise to a parts manufacturer located in a country where no such obligation exists," she says.

This obligation to take back end-of-life vehicles at no costs to the holder is reality, for it already applies to vehicles put on the market from July 1, 2002. Until now, the impact has been negligible because most vehicles placed on the market since then are still on the road. From January 1, 2007, however, the free take back obligation will apply to all vehicles currently on the roads of the member states and many companies will face potential financial losses, she says. Here one of the main challenges is that most manufacturers would not have factored in the cost of the recovery of the waste materials for vehicles sold before end-of-life vehicle legislation could be expected.
Prevention of waste

Waste prevention is another aspect the ELVD introduced. The concept requires vehicle, material and equipment manufacturers to reduce the use of certain hazardous substances already when designing vehicles. Components of vehicles placed on the market after July 1, 2003, were supposed not to contain mercury, hexavalent chromium, cadmium or lead unless exempted. Batteries, vibration dampers, bulbs and instrumental displays are, for example, exempted, according to Schoenbohm but the Commission may change this, requiring the member states to adopt their national laws. One example is the ban on the use of cadmium in batteries for electrical vehicles after December 31, 2005. "This possibility to withdraw the exemption requires to closely observe legislative changes and to quickly react by adopting the production process", advises Schoenbohm.

Collection and storage
The ELVD sets requirements for the collection and storage of both, vehicles and waste parts from the repair of passenger vehicles. This responsibility extends to producers, distributors, collectors, motor vehicle insurance companies, dismantlers, shredders, recoverers, recyclers and other treatment operators of end-of-life vehicles. 'As part of the undertaking regarding the collection of end-of-life vehicles, member states had to ensure that all end-of-life vehicles are transferred to authorized treatment facilities that must be registered with the competent authorities. These treatment facilities will issue a certificate of destruction to the holder, the presentation of which shall be a condition for deregistering end-of-life vehicles' she says. End-of-life vehicles must also be stored and treated without endangering human health and without harming the environment.

Reuse and Recovery
The ELVD introduced certain reuse and recovery thresholds. By January 1, 2006, the reuse and recovery rate must amount to a minimum of 85 % by weight on average and the reuse and recycling rate to a minimum of 80 % by weight on average. By 1 January 2015, these rates will have to be increased up to 95 % for reuse and recovery and 85 % for reuse and recycling. Only for vehicles produced before January 1, 1980, may member states set lower targets.

Providing Codes and Information
Producers together with material and equipment manufacturers are to use component and material coding standards to facilitate the identification of the components and materials suitable for reuse and recovery. The European Commission adopted a decision, whereby the member states must ensure that producers and material and equipment manufacturer use the nomenclature of ISO component and material coding standards for labelling and identification of components and materials of vehicles. Given that for example the widely used IMDS (International Material Data System) is not a compulsory system, any costs arising out of the implementation of such system will have to be borne by the implementing entity, according to Schoenbohm. Producers also have to provide dismantling information for each type of new vehicle within six months after the vehicle is put on the market. This must identify the different vehicle components and materials and the location of hazardous substances in the vehicles. What are termed 'conomic operators'even have to publish information on the design of vehicles and components with a view to their recoverability and recyclability. On the basis of this information, member states have to report to the European Commission every three years on the implementation of the directive. The European Commission must consequently publish a report on the implementation of the directive.

Major Challenges for OEMs
Neither the directive nor the laws applicable in the member states address how the costs for taking back vehicles are to be allocated between the "producers". This creates legal uncertainty, in particular for those cars distributed in the past, where this issue could not be anticipated and was thus not considered in the contracts. For OEMs, defining who is responsible for the costs of disposing of ten-year-old cars can become clouded as the company responsible for importing the cars may have changed or no longer exist. In most member states, the authorities can decide which "producer" to hold responsible. In Germany, they usually fine those "producers" that are ready at hand. This will most likely be the producer that is based in the country and thus the importer, considering also that the importer places the vehicles on the national market. "At least for the future, each distribution agreement should contain a provision that clearly allocates the responsibilities," recommends Schoenbohm. "Parts manufacturers and importers should be aware that in Germany, they are subject to the extended producer responsibility," she emphasizes. "Every agreement on the allocation of costs will, however, not exclude each producer's external responsibility for the costs but enable it to enforce a contractual obligation imposed on a third party to cover the costs. Only to the extent the third party does not fulfill its contractual obligation, may the owner of an end-of-life vehicle or the respective member state take recourse against each producer and require it to comply with its legal obligations."

The ban on certain substances also comes with certain risks. Most OEMs source parts from various suppliers and supply chains can be long. According to Schoenbohm, requesting a statement from each supplier that a component does not contain forbidden substances can help proving that an offence was neither committed intentionally not negligently, reducing the risk that fines be imposed. These risks have to be considered by suppliers based in Europe and outside of the union. 'here is no such thing as a local market for vehicles,'she says.
The ELVD allowed the member states to enact stricter legislation and the laws are thus not uniform.

Theortically, it is possible that a particular material not allowed in one country is legal in all others. This could lead to a harmonization on the highest level as manufacturers strive for efficiencies by being able to supply the whole of the European Union with more or less the same product. Countries that attempt to use the legislation as a barrier to entry for competitors to their own auto industries should realise that the cost of compliance by local manufacturers would probably negate any advantages they enjoyed over imports, she adds.

The laws outside Europe
The increase of the responsibilities of car manufacturers and professional importers for waste prevention and disposal is not a purely European phenomenon. An increased responsibility of OEMs and importers regarding the disposal of end-of-life vehicles does also exist in Japan, where the "End-of-Life Vehicle Recycling Law" entered into force on 1 January 2005. This law contains provisions comparable to those of the ELVD. In the US, however, scrap vehicle recycling has received much less regulatory interest than in Europe. End-of-life vehicle management was only addressed once in 1991 but a law was never enacted. At the moment, the disposal of end-of-life vehicles is governed by national legislation addressing solid and hazardous waste disposal practices such as banning the disposal of free liquids and lead-acid batteries in landfills. Stricter provisions can be found in certain states, of which California is the only one where automobile shredder residue is governed by the laws on hazardous waste. An extended producer responsibility of car manufacturers and importers is yet unknown in the U.S. On a short-term basis, the focus will likely be on management/disposal of mercury-containing devices, for several public interest groups actively pursue this issue, she says.

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