Protectionism on the march across Europe

I see the Bureau of International Recycling (BIR) conference is currently taking place in Barcelona. According to this letsrecycle report the usual complaints about quality are being made. But delegates also heard  increasing references to stricter quality controls being put in place by Chinese and other Asian authorities. This is obviously a good thing and we will see to what degree this helps European reprocessors compete with overseas markets.

At the same time, @Hermanvdmeij reported that the conference heard (yet more) calls for retention of European resources within Europe. Protectionism really does seem to be on the march across the continent at the moment. Restriction of free trade is something which I have argued against before.

There is a logical inconsistency at the heart of these calls. I suspect that the same people who suggest that recyclates should be kept in Europe wouldn't be so supportive of calls for rare earths to be kept in China (or any manufactured product for that matter). Trade is mutually beneficial to both importers and exporters and its gains make us all richer.

Recent years have seen much talk of the waste industry becoming a resource industry. But if recyclate truly is being turned into a commodity then it should be traded as such: freely in open international markets. In this way we will all be made better off.

A job is better than no job

On Monday evening I was at the launch of SITA's new report examining the potential creation of social value in the waste and resources industry. I haven't yet had a chance to read the report fully so will save that for another post.

At the event Caroline Jackson, the former MEP who was Rapporteur for the revised Waste Framework Directive, raised concerns that the sort of jobs being created at the low end of the industry (i.e. work on picking lines at recycling facilities) were essentially demeaning and that the unemployed should instead be given a 'hand up' (she was of course light on detail as to how this could be achieved).

I was pleasantly surprised by the robust response from Colin Crooks of the London Community Resource Network. He essentially made the extremely valid point that a job is better than no job. He has apparently worked with people in some of the most deprived and hard to reach communities in the UK and felt that they would be crying out for any kind of work which could help them reintegrate into society.

This reminded me of the sort of argument that used to be made by Paul Krugman when he was an economist (and not just a polemicist) when he pointed out that poor working conditions in the developing world may appear abhorrent compared to Western practices, but provided the workers with an important escape route from the far harsher conditions of rural poverty. I agree.

This topic is also becoming relevant in the ongoing debate about recylcate exports. There are increasing calls, both in the UK and at European level, for restrictions to be placed on recyclate exports (supposedly to protect European resources, I suspect though that that the same people would be against China restricting trade in rare earths). At a basic level, this is nonsense as the gains from trade benefit both the importing and exporting economies. Forcing European recyclate exporters to instead find domestic destinations for their material will only serve to raise costs to waste producers across the economy. (And would lead to less recycling overall if there is insufficient EU capacity to deal with all the material.)

The proponents of restrictions sometimes use examples of lower environmental and employment standards in the developing world as an unfair source of competitive advantage for overseas manufacturers and reprocessors. This  may seem reasonable at first glance, but (as above) the imposition of Western-style employment standards would perversely have the effect of reducing employment in those poorer economies and leave workers worse off by condemning them to a life of grinding rural poverty.

As workers in developing countries become richer, they will demand better working conditions and higher welfare standards. This may prove to be too slow a process for some commentators, but better times for the poor would take even longer to arrive if artificially high standards were imposed too soon.

On the go recycling: is it such a good idea?

Via @Recycle4Wales, I see that grants are being offered in Wales to increase recycling on the go facilities. Sounds reasonable enough in theory but is it actually a good idea in practice?

My understanding from local authority recycling officers is that they are nervous of recycling on the go activities/facilities as these tend to contain much higher levels of contaminants than household collections. If these two recyclate streams are then mixed together it can have a detrimental impact to the overall recycling performance of the authority.

In this way, we may once again have a policy which on the face of it looks quite attractive and sensible but which may in reality be counterproductive.

How big is the efw sector?

Steve Lee has apparently claimed that the efw sector is worth £6bn now and will be worth an extraordinary £30bn in 10 years. Where on Earth does he get these figures from?

I think there is about 5m tonnes of material which goes to efw currently. It is preposterous to suggest that this is worth £6 billion under any definition. If that were so, then there would be £1,200 turnover/value/whatever per tonne of material processed. Nonsense.

Maybe he means the whole of the waste market is worth £6 billion. In which case I have no idea as to how he defines the sector. I reckon it's worth almost double that when you include the collection, sorting, treatment, energy recovery and disposal of municipal, commercial and industrial wastes.

He then claims that the market will grow fivefold in 10 years. That is pure fantasy and I don't think it helps anyone to bandy these kinds of figures around. I suspect that if absolutely everything went right for the development of new UK waste infrastructure we could add a maximum of about 1m tonnes of capacity per year. That is an extremely optimistic scenario which will probably never materialise. Even then we would be in a position of "only" doubling our total residual waste capacity during that timeframe.

I would love to know what assumptions Steve Lee has used to reach his predictions of 'meteoric' growth. I personally think that they must be ambitious to say the least.

Is anything else wrong with efw?

Further to my previous post, the anti-incineration brigade seem to have two further arguments against efw. Firstly that it is not very green and secondly that we are heading to a catastrophic level of overcapacity and so should reign in our efforts.

Taking these in turn, I think we find that NGOs reach their conclusion on efw's environmental credentials by comparing its carbon performance with that of combined cycle gas plants. These are very efficient at generating power and when you put a heterogeneous waste fuel through a steam cycle plant it inevitably converts energy at lower efficiencies. This, they claim, means that gas fired power is preferable to efw (and of course other forms of renewables are preferable to both).

This however fails to take account of wider waste management issues. Even at the very highest recycling rates, there will still be some amount of residual waste. This can either be buried or burned. There is not much else you can do with it. In very simple terms, the carbon performance of an economy with gas fired power generation and landfill residual waste disposal will be worse than an alternative scenario with energy recovered from waste dealing with both issues simultaneously. It is simply not possible to live in a world of gas fired (or wind) power generation + zero residual waste, which is what they appear to be asking for.

The other concern seems to be that we are going to end up in a situation similar to some Northern European countries, such as the Netherlands, with overcapacity at our energy from waste facilities. Presumably NGOs worry about this as there would be an incentive to feed the efw plant rather than recycle, but I have already addressed those concerns in my previous post. The fact that RDF is being imported into those other European markets, rather than using domestic recyclate to feed their plants, may also be de facto evidence that such a scenario is unlikely to occur in reality.

If instead they are simply worrying that building too many plants would be a waste of money, then perhaps they could have a point. We currently have around 9m tonnes of residual waste treatment capacity. I think there is around a further 25m tonnes of proposals, of which around 15m tonnes has planning permission in place. (My personal view is that we could need anything from 20m-30m tonnes in total, depending on future waste arisings and recycling levels). If all of this was to be built then we would undoubtedly end up with too much residual waste infrastructure.

But is this likely? I think the short answer is no. Many of these proposals are for facilities to be developed on a merchant basis. At the moment we are seeing that even projects with a long term local authority anchor contract are struggling to raise finance. For merchant facilities it will be even harder. I have said before that finance is likely to be the principal constraint on waste infrastructure development and have not yet seen anything to change my mind.

Contrary to currently popular perceptions, banks tend to be very risk averse. Even in an easier lending climate, I think it would still be unlikely that banks would be willing to lend to a marginal project which could tip us into overcapacity (and them into loss making territory on their capital). The difference with the continental market is that the infrastructure over there is (I believe) financed and built purely by the public sector, which is also risk averse but in the opposite direction. I.e. municipalities would rather build too much than too little and are willing to pay for this. Banks are not.

Does energy from waste cannibalise recycling?

In waste policy circles, anti-incinerator campaigners sometimes claim that building new energy from waste facilities will cannibalise future recycling efforts. The principal argument being that, once constructed, such facilities need to be fed material which would otherwise be recycled by local authorities for their full (contractual) lifetime.

The UK still landfills over 40 million tonnes of material each year. A decent proportion of this will be recyclable, but certainly not all, which will require the development of new alternative treatment capacity. It is a fact that not all waste can be recycled economically and effectively so we will need solutions for that which can not.

So, would the development of a new energy from waste facility bind an authority into a situation where it was unable to raise its recycling rate because it must instead feed its waste plant?

The short answer is no. Mandated separate collections transform the economics of recycling by moving a significant proportion of recycling's costs into a fixed sunk element and leaving recycling with low marginal costs. Once material has been collected for recycling, the potential revenues (even at low commodity prices) will make recycling the more attractive option relative to paying the gate fee at an efw plant. We can see that this is the case by comparing the lower gate fees at MRFs (median of £9/t in 2012, ranging from -£66 to £73) with those at efw (median of £64-£82/t in 2012, ranging from £32 to £101).

The economics therefore make it extremely unlikely that an operator would divert material from recycling towards efw. But do their contracts mandate them to do so?

Again, I think we find that the answer is no. Every authority has a recycling contract (whether with a private contractor or an in-house entity). These contracts are deliberately structured so as to incentivise higher recycling performance. It is only the residual waste left over which is then covered by the (usually) separate contract for residual waste treatment.

Up until 2009 (I think) residual waste contracts were indeed structured so that the authority provided a 'guaranteed minimum tonnage' on a 'put or pay' basis. I.e. the authority would guarantee to pay the gate fee for its minimum capacity even under circumstances where it could not provide that level of material. We can therefore see that there was the possibility of efw cannibalising recycling under circumstances where MRF gate fees were positive. In this case, material below the minimum tonnage sent for recycling could incur a double gate fee at both the efw and at the MRF.  For much of the recent boom in recyclate revenues, however, as well as currently at some facilities, we have had negative gate fees at MRFs which shows that this scenario is by no means certain.

Since then however, newer residual waste contracts no longer contain guaranteed tonnages but instead merely provide the contractor with exclusivity over an authority's residual waste. The contractor must then make up any shortfall using third party waste.

So, in reality we find that new energy from waste facilities will not tend to cannibalise local authorities' recycling efforts, either in theory or in practice. But this message doesn't seem to hit home with the campaigners who continue to peddle mistruths.

Yet another politician misunderstands role of exports

Via @letsrecycle I see that Mary Creagh is, like her colleague Gavin Shuker, claiming that 'exporting waste is exporting jobs'.

As I argued previously here, this view is completely back to front. Recyclers benefit from exporting waste as it enables them to gain a higher price for their material than domestic reprocessors are able to pay. By exploiting overseas markets they are able to keep costs down for waste producers (households and businesses). These waste producers, in turn, are then able to maximise their contribution to UK growth and jobs.

As ESA argued in their recent briefing on the benefits of exports to recycling markets, we currently collect far more material for recycling than domestic reprocessing capacity is able to absorb. Until that situation changes there is little point trying to claim that this material should be kept in the country.

Creagh is essentially calling for a form of protectionism. Economists have known for centuries that this harms consumers more than it helps producers and leads to lower living standards for all. But politicians still haven't caught on, or at least pretend not to. It is a sorry state of affairs.