An alternative route to a circular economy?

Much is often made of the continuing rise of the Chinese and Indian middle classes.

As their incomes rise, they are anticipated to demand Western-style standards of living, competing for resources and pushing up prices. Higher resource prices will drive businesses to adapt business models and take greater ownership of these resources. In this way, so it is argued, a circular economy will be developed.

(If these global mega-trends really do come to pass though, then there seems to me little need for policy intervention. Economic forces alone will drive us to a circular economy. This though is not the message that seems to come from those who have seen the future.)

I have an alternative view. I agree that rising incomes in the developing world will be a significant driver of change and will help develop a more circular economy here in the West. I however think that the principal driver for this will be a process known as factor price equalisation, rather than higher resource prices.

I have argued before that, while real resource prices have indeed risen considerably in the past decade, this has been slower than rises in incomes. This means that the prices of resources relative to labour have actually continued to decline over time. Globally, people today can afford to buy a (two and half times) bigger basket of resources with their labour than they could 30 years ago. We are already witnessing a weakening of global commodity markets and I expect the overall trend of falling relative prices to continue into the future.

What will change though is that China's cheap labour advantage will be eroded. Some analysts believe that this source of competitive advantage could disappear as soon as 2015. If other elements of Western manufacturers' cost base (to which I will return later) are also competitive then we could expect a repatriation of manufacturing activity as businesses seek to get closer to large, fast moving consumer markets.

In this way, domestic demand for resources, which is currently low, may be expected to rise in the future. But if the relative prices of resources continue to fall as I expect, then by what process could recyclate supplies increase to meet this demand?

I think that the principal driver in this instance will be regulation, not economics. Waste policy (particularly in Europe) will continue to drive up waste management costs. This will in turn drive the supply of recyclates at increasingly competitive prices and specifications. Increasing producer responsibility will incentivise firms to design products which are easier to dissassemble and recycle. The supply of secondary resources will rise and become an important feedstock to the increasing levels of domestic manufacturing activity.

We currently recycle more material than our domestic industries can use. I believe that factor price equalisation could lead to the increasing repatriation of industry which would change this dynamic and close the material loop more locally. But what could undermine this process? I have focused above on labour costs, which will be eroded as developing world incomes rise. Energy costs, however, are increasingly influenced by domestic policies and are likely to be a persistent source of competitive disadvantage to UK manufacturers.

Decc's own analysis suggests that energy policies could increase some manufacturers' bills by up to 20% by 2020. This will continue to make the UK a difficult destination for manufacturers. Unless this is resolved, we will not close the material loop in the UK but will continue to rely on overseas demand for our discarded materials. It is in this area that the proponents of a domestic circular economy should focus their attention.

Green Investment Bank needed for waste infrastructure

The UK's environmental sector has been waiting a long time for the government to establish a Green Investment Bank (GIB). This wait has seemed like an eternity but hopefully State Aid clearance will soon be granted from Brussels and the GIB can properly open its doors for business. And there could well be a lot of business when it comes to waste infrastructure (waste of course being one of the bank's priority sectors).

There is a dominant media narrative that in the last decade unregulated banks took excessive risks and caused the recent great financial crisis. Risky mortgage lending on both sides of the Atlantic inflated huge housing bubbles which have popped and depressed the real economy by reducing household wealth.

There is however an alternative narrative (see e.g. Friedman and Kraus), which contends that, on the contrary, misguided regulation was the proximate cause of the financial crisis and subsequent recession.

Regulation tends to homogenise behaviour. Organisations subject to a fixed and rigid regulatory framework will have an optimal strategic response to that framework. When everyone is subject to the same regime, they will likely adopt the same (or similar) responses to that regime. In the case of the banking industry, regulations rewarded banks for holding mortgage based securities. This led to an overallocation of resources into the housing sector. Across the US and Europe, housing bubbles have now burst. The alternative view of events contends that regulation was central to the inflation of these bubbles.

The bubbles have burst and values have fallen, but the impact may have remained largely a financial crisis with little knock on effect to the real economy. Accounting rules though mean that banks have to reduce the values of the assets on their books as these fall in the market. Regulations stipulate (rightly) that banks must hold capital to cover their obligations. If the values of their portfolios are falling then they must increase their capital cushions to cover these losses. This has constrained banks' ability to lend to the real economy.

Banks play an important role in financing new investment. A lack of investment is now holding back the real economy and contributing to the ongoing economic slump. New capital regulations are being introduced in response to the dominant media narrative. These may peversely prolong the slump by continuing to dampen banks' ability to finance new investment.

What does all this mean for the waste sector? We are on the cusp of a major boom in residual waste infrastructure to meet Landfill Directive requirements. There is around 12 million tonnes of residual waste infrastructure in the UK which has secured planning permission but is yet to be developed. The key constraint preventing the uptake of this development is likely to be finance. With the banking sector being forced into retreat by financial regulators, it is going to be crucial for the GIB to step up to the plate and help bring forward the infrastructure investment we need.

FOE demands more on resource efficiency

The EEF, Friends of the Earth, and others, have published the paper behind yesterday's call for government to do more on resource efficiency, in which they make a list of various recommendations.

Overall, this paper feels to me a bit like they are fighting the last war. We have been through the biggest commodity boom in history and the global economy is now slowing. Resource prices are falling and, as they note themselves, Asian demand for materials is weakening. Known supplies and production of commodities are at all time highs and weakening prices should help domestic manufacturers whose lack of competitiveness means they struggle to pay the same prices for recyclates as overseas competitors.

The EEF really should know better on this score as they recently surveyed their members and found that three quarters of them had either implemented or were about to implement resource efficiency measures. They call for more incentives, but yet fail to note that the resource productivity of the UK economy has increased eighteen fold in the last 30 years and its total material requirement has been in decline since 2001.

They propose to extend the scope of the government's Resource Security Action Plan as it is currently too narrowly focused on resources which are currently in demand. This though highlights one of the key problems with central planning of a complex economy. We have no idea what the resource requirements of the future will be and so cannot plan for their security. The best way we know to allocate resources in an economy is through open markets and the price mechanism. Focusing on global trade and keeping international markets open is the best thing that government could do to help ensure as diverse a supply of resources as possible, and therefore the security of those resources.

There is also the ongoing call for improved quality of UK recyclate. But the key issue for me in this debate is domestic manufacturers' lack of competitiveness, which means they are unable to match the prices paid by overseas reprocessors for material of equivalent quality. It would be nonsensical for domestic collectors to accept a lower price for their material.

If overseas demand does indeed weaken as predicted in the paper, then domestic manufacturers will be in a strong position and there is no need for intervention in the market. At the end of the day, markets are already driving up quality standards. What needs to be considered is who will pay for that quality. It will either be the reprocessor in the form of higher recyclate prices or it will be the waste producer in the form of higher gate fees at MRFs.

There are some good proposals in the paper, such as looking at improving data and re-examining the PRN//PERN distinction (so long as this is not merely a ploy to place additional burdens on exporters). But there are wrong-headed ones too, such as restricting materials from energy from waste plants, which would merely serve to kill off investment in much needed residual waste infrastructure.

Overall though, there are too many calls for government intervention. Global commodity/resource markets are the best methods we have for allocating resources and should be allowed to continue to do their job.

New calls for government to improve resource efficiency

EEF and Friends of the Earth are calling for a new Office for Resource Management in government to co-ordinate the UK's resource strategy (via @James_BG).

I have no idea what such an office would be expected to do. Commodity prices are set by global markets. Businesses have an in-built commercial imperative to respond to these prices. The EEF's own survey recently told us that 75% of UK manufacturing businesses have already implemented resource efficiency measures or are in the process of doing so. Why do we need a new Government department to tell these businesses what they need to do?

Their submission includes the increasingly common reference to a decade of price rises wiping out a century of declines. But as I have previously argued here, the relative prices of commodities are in fact still low in historic terms. I can buy a (two and half times) bigger basket of commodities with my labour now than I would have been able to 30 years ago.

The timing of this call to arms is also strange to me. The EEF is quoted as saying 'prices are on an upward trend'. This is not in fact based in reality where prices are down in the past year.

Of course there is yet another call to ban recyclable material being sent to landfill. In my mind, the landfill tax escalator is already driving recyclable material out of landfill. If there really is going to be a resource crunch and prices really are going to rise then there will be no need for a ban as simple economics will lead to this material being recycled.

China's demand for higher quality

There seems to be more in the media recently about China's increasing demand for higher quality recyclate and how the UK will have to respond by improving the quality of material it collects/processes.

For me this is a classic example of the market determining its own specification. This obviates any need for government intervention in the form of 'quality standards'. As I have argued before here, the implementation of arbitrary standards in any part of the UK would be liable to drive up costs to waste producers and leave the country as a whole worse off.

There is no need for heavy handed intervention at home as the market will drive up standards by itself. This still won't address the real problem for UK-based reprocessors, namely that their cost base is higher than that of their overseas competitors.

Green Alliance argues for landfill bans

The Green Alliance is leading a push for banning the disposal of waste wood to landfill.

As I've previously argued here, I think that the costs of a potential ban would outweigh the benefits and that it should therefore be resisted.

Green Alliance points to a research study it conducted on behalf of Defra which GA believes demonstrates that landfill bans are effective in practice. I personally don't see how their case studies are relevant in this case.

Their research looked at general bans on unsorted waste being sent to landfill, as well as bans on separately collected recyclables being sent to landfill. European Directives mean that both of these are in fact already in place here in the UK. The other case they look at is on various forms of restrictions on sending residual waste to landfill, e.g. for combustible waste which might instead be sent for energy recovery.

This is not the same as a ban/restriction imposed on a specific material stream, which I think is likely to be much more costly to enforce. As before, the landfill tax is doing the heavy lifting in terms of driving material out of landfill. Let it do its work.

ACP advises local authorities on procurement

Via @APSRG I see that the Advisory Committee on Packaging (ACP) has published its latest annual report.

While most of this is fairly technical stuff on how to link collections with supply chains and maximise recovery of packaging (particularly of plastics), one of the key recommendations (recommendation 2) advises local authorities to be given a statutory role as a supplier of materials to markets and also for them to participate in the contract framework for collection services developed by iESE.

I can't help thinking that by making this recommendation, the ACP is stepping outside of its remit.

On the first point, there is already a financial/business imperative for recycling to be completed in the most efficient manner so as to maximise revenues from recyclate sales and minimise landfill costs of rejected material.

On the second point, there has been a certain deal of controversy relating to the proposed iESE framework (see e.g. here or here), with some private contractors arguing that the framework will not deliver the promised cost savings, but will instead constrain innovation and end up being more expensive for participating authorities.

I personally can't see that the ACP has any role in advising local authorities on the most appropriate procurement methods for their collection services.

Guardian gets it wrong on scarcity again

There is the usual nonsense in the Guardian again moaning about resource scarcity without any reference to actual facts.

Known reserves of resources are at all time highs, as is commodity production (see e.g. here and here). Stuff is abundant. And we are using it ever more efficiently. As I've noted before, the total material requirement for the UK economy is actually in decline. 

Environmentalists often worry that we will eventually run up against scarcity constraints as they think that the global economy may be able to deliver relative decoupling of resource use from economic growth, but not absolute decoupling.

I disagree with them. We are already seeing absolute decoupling in the UK (as well as some other rich economies I believe). For the world as a whole, growth in resource use seems to be fairly closely linked to population growth (source for graph). The world population is expected to stabilise around the middle of the century, at which time I suspect we'll see stabilisation in resource extraction. 

I could of course be wrong but I believe that there is also likely to be an environmental kuznets curve effect, which will mean that a richer global economy will enter a phase of falling material requirements - and absolute decoupling - as we have already witnessed in the UK.

Ecosystem payments for ex-landfills?

Monbiot today rages in the Guardian about the commodification of nature as represented by the Government's approach to payments for ecosystem services, put forward in the Natural Environment White Paper.

I support the principles behind the Government's approach to valuing nature/natural capital. For something to possess value it must be valued in some way by a valuer. A market-based approach to determining prices/values is the best approach we have and should be commended.

For the waste industry, I wonder whether there is a potential opportunity to tap into the market for natural capital offsets/payments for ecosystem services through landfill restoration.

A quick search for the term landfill over the White Paper suggests this is not an option which has been considered by the Government. I assume that permit requirements to restore landfills mean that any contribution towards natural capital will be deemed to be part of a business as usual scenario and not therefore eligible for an additional revenue stream for ecosystem payments. But maybe it is something which could be considered in the future?

London debates the environmental imperative

Matt Ridley, the rational optimist, was the keynote speaker at yesterday's London debate on the environmental imperative. It was generally an interesting discussion, and in contrast to the vast majority of policy 'debates' actually contained some divergent views. I have become thoroughly bored with the type of occasion where six panellists all stand up one after the other and agree on absolutely every point.

There was of course disagreement from many in the audience about Ridley's sunny prognosis for the state of the planet and several people accused him of cherry picking his statistics, but I don't recall anyone actually being able to catch him out on a specific point.

I was surprised however by the general level of agreement with some of Ridley's views. In particular, there seemed to be recognition that innovation and new technology will likely be required to offset growing environmental pressures, and that economic growth will be required to generate the capital to fund these new technologies.

When it came to resources, Ridley made the point I would agree with that scarcity is not an issue. I was then disappointed that Ben Goldsmith, billed as an expert in green finance, chose to raise the issue of recent resource price rises and how these have wiped out a century of declines (previously argued by McKinsey in the circular economy report for the Dame Ellen MacArthur Foundation). I of course think that the real issue is the relative price of resources which are still at historically low levels. Commodity markets are in any case cyclical and prices will likely come down again.

Stuff is cheap and will continue to be cheap for a long wile yet.