Autumn Statement - what did waste get out of it?

Most in the sector will be rightly disappointed with yesterday's Autumn Statement, which contained no new announcements on landfill tax, or indeed much else of direct interest to the industry.

It did however paint a much rosier economic outlook for the UK, based on the latest OBR projections which now anticipate higher growth, lower unemployment and a faster reduction in the deficit.

When combined with our cynical Chancellor, this to me suggests some pre-election tax giveaways and a looser fiscal position for the UK, which, ceteris paribus, will necessitate a faster monetary tightening. Given the ongoing funk in the Eurozone, I would expect diverging interest rates to help drive up Sterling relative to the Euro.

This to me gives some reason for cheer for the waste industry and development of domestic infrastructure. The economic recovery should boost commercial waste arisings, while a stronger pound will make imports of plant and machinery (for use in domestic facilities) cheaper. And European gate fees will go up, eroding some of the competitive advantage for RDF exports at the margin.

The waste industry is a cyclical sector. Let's hope the UK's economic recovery is genuinely sustained.

Eunomia's 60% recycling limit claim not true

Eunomia has today published the latest version of its residual waste review. This has generated headlines on the basis that England's local authorities are going to build so much capacity that they will effectively place an upper limit on their recycling rates of 60%.

Eunomia makes this claim on the basis that England will build roughly 5 million more tonnes of capacity on top of the current 5.5 million tonnes, thereby only leaving only 15.5 million tonnes available for recycling. But this is of course a partial analysis which is only looking at residual LA waste (taking their figures at face value). England also generates much larger quantities of residual commercial waste which also needs to find a home.

Eunomia's report/media line talks about local authorities tying themselves down with the minimum tonnages which they are committing to the facilities in the pipeline. But minimum tonnages in residual waste contracts consist not only of Contract Waste from the Authority, but Substitute Waste from commercial sources as well.

In other words, as levels of local authority residual waste fall during the life of a contract, the shortfall is made up using commercial sources, i.e. more and more residual commercial waste is used during the life of the contract so that the plant can keep running while the authority remains incentivised to meet its recycling commitments elsewhere.

To say that England's authorities are therefore constraining their recycling rates to 60% is nonsense.

Food waste benefits UK supply chain by up to £1.5 billion

There has been much recent coverage in the trade press about ReFood's 2020 vision campaign (see e.g. here). According to reports food waste is costing the UK £17 billion per annum. An extraordinary sum and at face value seems to offer the potential for vast savings. But is it accurate, or does it suffer from the common problem of failing fully to incorporate the opportunity costs involved in eliminating food waste?

ReFood/WRAP figures suggest that households waste 4.2m tonnes of food and 4.3m tonnes are lost in the supply chain. So roughly a 50/50 split. This means that the supply chain alone is wasting £8.5 billion every year. Wow.

But of course there is a reason that waste exists and that actors within supply chains "over-order". It is to reduce the risk of lost sales caused by having insufficient stock available. This risk is asymmetric as the value of a lost sale will outweigh the costs of material inputs, and this creates an incentive to over-order to guarantee stock availability. The lower the proportion of material input costs in output value, the greater the incentive to over-order.

For our food supply chain, I presume that the £8.5 billion figure is actually final sales equivalent. Assuming that retailers have a margin of around 15% and that the incentive is to over-order up to the point where the additional stock would outweigh the value of an additional sale foregone, this would mean that the £8.5 billion of food waste actually has a value to the supply chain of circa £10 billion. In other words, eliminating the food waste would provide £8.5 billion of savings but at the same time would lead to £10 billion of losses - an aggregate loss of around £1.5 billion.

We can therefore deduce that the presence of this food waste actually benefits the UK supply chain by up to £1.5 billion every year (given current policies and technologies) and as such is a good thing.

(This is a v simplistic approach and in reality the optimisation problem would be based on p(lost sale), which is influenced by a range of factors, including technology, logistics, timing, demand, etc and costs to consider would include waste management costs as well as input costs, etc.)

[Separately, I would argue that the £8.75 billion wasted by householders is caused by the incentive of avoiding unforeseen additional trips to the supermarket. £8.75 billion is the equivalent of 700m hours (based on median hourly wages of £12.50), or just under half an hour per week per household. If eliminating this household food waste raised time spent on food shopping by over half an hour per week then householders would lose out and the net benefits to the economy would be negative.]

Returning to Defra's forecasts

Further to my previous post on this subject, I have subsequently realised that the updated waste arisings' forecasts published by Defra this month were in fact already out of date when Defra published them.

We now know that the 'revised February 2013' forecasts (published in October 2013) has been updated/superseded by this version, which has been produced to support the decision to remove central government support for Norfolk.

At first glance this seems slightly puzzling, as the forecasts for arisings in the new version are higher than the old numbers. Surely this (on it's own) would increase the case for supporting Norfolk? Apparently not.

My personal view remains that these forecasts are a bit on the low side, but at least they're moving in the right direction. My central forecast is towards the upper end of Defra's range, but at least they don't look completely out of kilter with one another.

WRAP once again ignores prices

I see via MRW that WRAP has published its latest report on consumer behaviour. In it we find the startling revelation that consumers may be willing to consider trade-in business models for their unwanted goods, i.e. they'd be happy if someone is willing to pay them for their old rubbish. And other similar insights.

The report seems bemused by the fact that people would be willing to consider some of these models (repair or rental also feature as alternatives to purchase) in theory but not in practice. To me this leads to the obvious questions, how much would people in reality be willing to pay for different (e.g. repair) models? Is this cheaper than buying new?

But this doesn't seem to be considered by the report. (I may have missed it whilst skimming.)

We know that people in the UK are expensive relative to stuff. This means that in the modern consumer world it is usually now cheaper to buy a replacement product than it is to hire someone to repair it. This is a good thing. It is a sign of progress and tells us that consumers are able to afford a huge range of luxuries denied to them in the past.

I have noted before that WRAP research often ignores the central role of prices in delivering market solutions. An extraordinary oversight.

I am reminded of Oscar Wilde's line that a cynic is "a man who knows the price of everything and the value of nothing". Although in this case WRAP knows the 'value' of everything and the price of nothing.

Maybe I'm just a cynic.

Defra arisings forecasts on the low side

I see via MRW that Defra has made the unfortunate decision to pull the plug on PFI credits for Norfolk in yet another tortuous twist for that particular project. (Credits having already been pulled once by a previous Secretary of State and then reinstated.)

Defra has published analysis underpinning this decision which includes forecasts for waste arisings through to 2020. At first glance these seem too optimistic in terms of the degree to which post-recession falls in arisings will persist going forward. My central estimate of future household arisings is above the upper limit to the range considered by Defra, while my central estimate for commercial and industrial streams is towards the upper end of Defra's range.

This would imply that Defra's assumptions are biased towards lower future arisings than I would expect. On the face of it, this could undermine the subsequent analysis which concludes that we will comfortably meet the targets without supporting the Norfolk facility. (It may of course go ahead even without the credits.)

In my mind, basing future forecasts on recent historic trends when we have just been through an exceptional period of recession-induced falls in arisings and have no way of separating cyclical and structural impacts is conceptually flawed at best and dangerously naive at worst.

New WRAP research exaggerates food waste value

I see via Edie that WRAP has published some new research examining the lost 'value' of food and packaging waste in UK supply chains (i.e. from the business sector as opposed to households). This comes to the staggering conclusion that around £7 billion is being lost to UK plc which, if addressed, could provide a significant injection to the economy through increased investment/exports/something else.

The first issue I have with the estimate is that they use average costs for estimating the 'value' of the lost food and packaging. It would be fairer and more accurate to use marginal cost data for ingredients and production costs, although I appreciate it would have been more difficult to get hold of this information.

Similarly they have included lost profit and capital expenditure in their estimates (12% of the total). This is a bit cheeky as capital spend is a fixed cost (and shouldn't be included in marginal cost estimates, as above) while absent profit is by definition not a cost (profit = revenues - costs).

So straight away we can see that their cost estimates are higher than they should be.

But the biggest issue I have with the associated headlines and rhetoric around lost opportunities for investment/the economy is that WRAP assumes that all of this 'value' can be captured at zero cost. This is utterly preposterous. The behaviour of the relevant economic agents tells us that this is not the case. Otherwise they would be doing it.

For WRAP to assume that all this waste is 'avoidable' and therefore able to be captured at zero cost is nonsense.

Chinese Green Fence helps UK paper mills

Via MRW I see that UK paper mills are finding it easier to acquire materials with fewer contaminants than previously, as a possible result of the introduction of China's green fence policy.

This is consistent with my views of the outlook for dry recyclabes markets overall. I think we are going to witness a combination of: lower primary commodity prices; higher consumer consumption in overseas markets (thereby reducing their demand for imports); and continuing upward supply of domestic recyclate supplies (driven by regulation and landfill tax). These will combine to put downward pressure on prices for secondary resources and to shift the bargaining power along the UK supply chain in favour of domestic reprocessors.

The MRF Code of Practice should soon be with us and I believe will ultimately be lauded as a great success in helping to drive up the quality of UK recyclate. But at the same time I suspect that wider market dynamics would have led to reduced contamination and more consistent material quality in any event.

Gate fee survey indicates lower commodity prices

Via Lets Recycle, I see that WRAP's latest gate fee survey suggests that Local Authorities (and others) are receiving lower income for recyclate (notwithstanding the misleading headline).

Regular readers will know my view that we're heading for a sustained period of lower prices for both primary and secondary commodities and that this will inevitably lead to higher charges for waste producers.

This tells me that the principal driver for the currently in vogue 'circular economy' will continue to be regulation and government intervention rather than market dynamics. And waste producers will just have to get used to higher bills for their waste.

ONS estimates waste sector growth of 9%

I see CIWM has spotted some positive government figures for output from the waste industry. The ONS estimates that in the 12 months to June, waste sector output rose by 9%.

CIWM then boldly claims that "the waste management industry fared especially well during the recession and continues to show strong signs of continued growth".

What CIWM has failed to appreciate is (i) this figure is a snapshot in time and (ii) the ONS estimates of waste sector output tend to be very volatile. It was only back in January that a 9% fall was published. If we turn the clock back to June 2012 (the starting point for this period), then output at that time had fallen 6% in the previous 12 months.

The ONS does indeed estimate that the waste sector's output has been "broadly flat since 2005" (i.e. zero growth during a period when landfill taxes have increased 300% driving up charges to customers). This however misses the trend of growth followed by recession and, hopefully now, recovery from recession. Far from faring "especially well", the waste industry has been hit in recent years by a double whammy of falling volumes and prices.

The ONS figures suggest to me that recyclate prices have recovered some of previously lost ground during the first half of the year. The industry is now much more exposed to these hugely volatile prices than ever before and these are driving large swings in ONS estimates. There is little doubt though that the recession has significantly impacted the waste industry, both in the UK (see the large amounts of landfill void space being written off by some of the large operators) and in Europe (opening up capacity for RDF exports).

I am amazed that the huge impacts of the recession seem to have completely passed by the sector's professional body.

No central data - no central planning?

I see, via edie, that people are concerned about the lack of centralised data which might enable better (central) planning to address resource risks.

The issue for me is that knowledge of resource flows and potential risks is widely dispersed among market participants. It is very difficult, if not impossible, for such information to be collated by centralised authorities in any way which might be of practical benefit and not simply a snapshot in time which is outdated by the time it is published.

Markets are the most efficient means we have for allocating resources. The government really needs to recognise that it can't do this better than the market or try to anticipate future resource flows or how to address them.

When the EEF surveyed its Members in 2012, resource risks featured prominently (first? second?) among their concerns. I suspect that if this survey was repeated today then those concerns would be somewhat diminished.

A real issue though may be the fact that for some materials, total volumes produced and traded are relatively low, which can lead to large swings in prices. Rather than Canute-like trying to stop the inevitable, the government could instead consider how to minimise its impact. This could potentially be done by working with the financial industry to develop hedging instruments which are more widely available (particularly for SMEs).

For me the government's resource security action plan is already out of date. Defra is trying to find a way in which it is relevant to the government's overall economic agenda. This isn't it.

ADEPT warns on infrastructure

I see via Lets Recycle that ADEPT is warning that Defra shouldn't have cut waste infrastructure credits at some local authority projects.

Coincidentally I am sure, ADEPT's current President also happens to be strategic advisor to Cheshire West and Chester which was of course one of the projects to have its funding removed.

My personal view is that if ONS projections for population growth are correct, then it is likely that this factor will dominate a continuing fall in arisings per head in forthcoming years (second half of this decade) leading to a (relatively small) rise in total household arisings by 2020.

The crucial factor though will be whether we are able to deliver the PPP/PFI projects which are yet to be built. Progress is painfully slow in closing remaining projects and ADEPT is right to flag up that if the pace doesn't quicken then there really is a possibility that we could miss the targets.

Do falling commodity prices undermine case for resource policy?

I see, via @MRWMagazine, that after two years of falling commodity prices people are starting to cotton on to the fact.

As it says in the article, falling prices for secondary materials will put upward pressure on gate fees which will, in turn, raise costs for waste producers. The commodity boom of the past decade has, to a degree, masked the extent to which higher regulatory requirements and targets in waste management have increased the (potential) burden on councils and businesses. A sustained period of lower prices will expose just how much it costs to deliver higher environmental standards.

I have never been convinced by those who have argued that competition for global resources means that the UK needs a resources policy, mirroring its carbon policy. Where is the market failure? At least for CO2, the environmental externality is clear, and along with it the justification for intervention. But resource markets are well established and function as markets should with price signals indicating relative scarcity.

Higher prices induce changes in behaviour. Demand shrinks as people find substitutes, while supply increases as higher prices incentivise new investment. Lower demand and higher supply lead to lower prices. Commodity markets have always been cyclical. This is always likely to remain the case.

I have long believed that we were heading for a period of lower prices. (I also believe that this will be followed by a period of higher prices, during which commentators will again panic and will tell policy makers that they must do something to secure resources for the UK.)

Where does this leave UK and European policy for resource security? A little redundant I suspect.

Government assumes businesses don't know what they're doing

I see that the government has set up a commission to investigate how businesses can improve their productivity and raise the efficiency with which they use their inputs.

No doubt the talking heads on the commission will be able to spot savings from afar which cannot be identified from up close by those mere mortals working on the front-line of business activity.

I struggle to see the point of this really.

(As an aside, I of course disagree with the estimates of potential savings which businesses could make through resource efficiency and think that the original remit for this committee was probably drawn up back in the days before prices for rare earth metals (among other commodities) started to fall.)

This looks like a classic case of policy makers catching on to an issue which has already been addressed by the market.

The resource efficiency of the UK economy

I was just glancing at WRAP's 2010 report on the resource efficiency of the UK economy and was surprised to see the claim that the UK's Total Material Requirement (TMR) has been broadly flat since 1990. I thought it had decreased somewhat.

And I was right. WRAP reaches its conclusion by only looking at the data up to 2008 (despite the 2010 publication date), which show that TMR was broadly flat during that period (although down 5%). Since then however, it has fallen off a cliff and in 2010 was down over 20% on 2008 and 27% on 1990.

Of course a large portion of these falls has been induced by the recession and could prove to be cyclical in nature. But at the same time, we may be witnessing large-scale structural changes and just don't yet know it.

Either way, the UK economy is using far fewer resources now than it was in 1990 despite intervening GDP growth and indeed is lower than at any point since records began in 1970. To me, this doesn't currently justify widespread concerns about the UK economy's use of natural resources.

Ellen MacArthur's boat as a small, zero production economy

Ellen MacArthur (EM) is doing a great job as the poster girl for the circular economy and is clearly very passionate about the subject. Where does that passion come from?

I think I've seen references to her comparing the enclosed nature of her round the world voyages to the planet in general and how this awakened her realisation of the finite nature of resources and the need to change global production and consumption patterns. But how realistic is this comparison?

At its simplest level we might think of EM's boat as a small, zero production economy. In this economy EM is given an initial endowment of resources which she manages/depletes during the course of her voyage.

An alternative model of an economy would add production, which would enable the economy to apply different combinations of capital and labour to its initial endowment thereby producing new goods/resources. In this way, the supply of resources available to the economy is no longer fixed but can be grown through production. Productivity improvements over time enable the economy to grow (ad infinitum).

Which of these two models is more appropriate for the global economy? This question really boils down to whether or not resource scarcity is actually a problem at the global level.

Environmentalists say of course resources are finite. But this isn't really true in any practical sense (known commodity reserves are at all time highs as is commodity production). The US shale gas boom and the recent news that Japan has found a new way to extract energy from methane hydrate are examples of how the supply of resources isn't fixed but can be grown through new production methods (a new application of labour and capital to our initial endowment).

Does this really matter for the circular economy? Not if it has an alternative justification, such as minimising environmental impacts or reducing business costs, but it is not necessarily as straightforward as some might expect.

Market failures in waste prevention

Defra has today published a call for evidence for its waste prevention programme. I haven't yet read the whole document but one thing which immediately raised my hackles was spotting a section on "market failures". I personally think that policy makers are all too quick to refer to market failure when actually these either don't exist or are preferable to the far more prevalent alternative of government failure.

The first one Defra refers to is the case of "environmental externalities" - fair enough at first glance. It then says this is manifested through the full cost of waste not being paid by producers. On the contrary, businesses do pay for the waste they produce (and pay prices which are higher than the externalities would actually suggest). In the household sector this incentive is of course missing but I don't suppose for one minute Defra is proposing the politically unpalatable introduction of pay-as-you-throw.

"Split incentives" are another policy makers' favourite. The example used here is of a manufacturer designing out waste to the benefit of consumers or local authorities (presumably packaging). But the manufacturer benefits from not having to pay for avoided material inputs. The landfill tax escalator and the commodity boom of the past decade have both shown that manufacturers respond to price signals and reduce waste.

"Information failures". This is where policy makers expose their belief that they are better placed to spot bottom-line savings than actual businesses themselves. Not true in my book.

"Behavioural barriers". Here Defra seems to think that firms/individuals discount the future too heavily and so are unwilling to take longer term actions. However, individuals must take decisions under conditions of extreme uncertainty and their choice of discount rate may actually lead to far more rational choices than Defra officials could come up with.

"Financial barriers". Businesses/individuals may be credit constrained. For me, this is just the real world where financial choices have to be made between competing priorities and, to the horror of Defra officials, waste prevention may not be at the top of the list.

Overall, I think that Defra (and its various consultants) tend to underestimate the opportunity costs associated with waste prevention measures. Implementing waste prevention often has a positive financial return. But so does investment in productive business activity/output. It is not necessarily irrational for businesses to choose to invest in production rather than waste prevention, but policy makers often seem to miss this point.

Should one size EU policy fit all?

Further to yesterday's post, it occurs to me that in the area of global climate change policy we recognise that poorer developing countries have lower per capita greenhouse gas impacts and so should be allowed to develop without binding carbon constraints, while at the same time developed countries with higher per capita emissions should cut back stringently.

In the case of EU waste policy however, we find that the poorer Eastern European States have lower environmental impacts from their waste management systems but must have high cost Northern European-style systems imposed on them straight away (perhaps before they can afford them?).

Would it not be fairer to allow the Eastern States only to introduce recycling and recovery infrastructure as their waste generation increases, while at the same time placing stronger waste reduction requirements on northern Member States?

Romanian municipal waste performance better than Germany

Via @Defrawaste I see that Eurostat has published the latest EU figures for municipal waste management.

Poor old Romania (as well as other Eastern Member States) often gets singled out for its poor performance as it landfills 99% of its municipal waste. Terrible, I'm sure we'd all agree. But another, often overlooked factor, is that waste generation per person is much lower there than in some of the richer Member States with more sophisticated approaches to waste management.

In fact, if we were to include the avoided production emissions from lower waste generation in Romania we would find that net emissions from its municipal waste would be lower than for Germany, which only sends 1% of its municipal waste to landfill. (I have cheekily used Defra emission assumptions for the UK when checking these figures, which would lead to the assumption that Romanian landfills are managed in accordance with Landfill Directive requirements for capping/gas management which may or may not be accurate.)

As anyone au fait with the waste hierarchy knows this is because the environmental gains from waste minimisation dwarf any emission savings from switching between different forms of waste management once that waste has been generated. The sector awaits Defra's National Waste Prevention Plan due in December with interest.

MRF CoP - do we need it?

My previous post suggested that economic theory doesn't necessarily support the case for a mandatory MRF code of practice (CoP). While I believe that this is the case, and would maintain that - contrary to Defra's stated belief - current market signals do work (just not necessarily in domestic reprocessors' favour), I might still support the introduction of a CoP in practical terms.

My reason being that we have an obligation to meet European legislative requirements, in that we must demonstrate that a co-mingled approach to recycling can meet Waste Framework Directive objectives. In this context, the introduction of a mandatory code may be a necessary evil.

Is the CoP really necessary to guarantee high quality recycling? I don't think so, but I do think it may be necessary to placate a noisy domestic reprocessing sector, and also to offset the objections of an equally vocal wider set of campaigners for "real recycling".

I also think that the end result will be to push costs from (both domestic and overseas) reprocessors on to waste producers (local authorities and householders). Where these costs were previously borne by overseas reprocessors, the net effect will be negative for the UK economy.

Whether the implementation of a mandatory CoP will be sufficient to offset other macro-economic issues affecting the domestic reprocessing sector remains doubtful to me.

Recycling markets as a model of asymmetric information and quality uncertainty

George Akerlof wrote a famous economics paper on the "market for lemons", which took the used car market as an example of where asymmetric information coupled with quality uncertainty leads to market failure and the need for government intervention.

In the paper, used car customers are only willing to pay for average quality, which results in high quality vehicles being unable to attract a sufficiently good price to enter the market. The end result is a race to the bottom in terms of quality with the market ultimately delivering a 'no-trade equilibrium'. The way to avoid this is of course through government regulation that helps to ensure customers of the quality of the vehicle they are purchasing.

This is exactly the rationale behind Defra's proposals to introduce a mandatory MRF code of practice. The recycling industry is an apparently perfect example of where there is asymmetric information between different parts of the supply chain and there is quality uncertainty at point of purchase (beyond crude visual inspection). Good performing MRFs are unable to differentiate themselves from poor ones, and reprocessors are incentivised to pay a price that perversely only attracts lower quality material.

Defra's case for intervention seems compelling. But is that actually the case in the real world?

No prizes for guessing that my personal view is that there isn't in fact a strong case of market failure in recycling markets. Instead I think we are in a game theory world of repeated games and repeated bargaining. In this reality MRFs have a strong incentive to meet customers' quality specifications in order to secure repeat business. This results over time in a market equilibrium where quality is differentiated according to price and there is no need for government intervention. I wonder whether Prof Akerlof would agree.

FOE calls for even more difficult targets

I see via Lets Recycle that FOE Europe has published a new report claiming that Europe is wasting its resources.

I can't actually seem to download the report itself as their web site is struggling for me at the moment, but apparently FOE is complaining that  - across Europe as a whole - we are well short of the current recycling targets.

Their brilliant solution to this predicament is apparently to increase the targets even more, which to me doesn't seem to address how we might improve the worst performers in practice.

EP0W conference highlights industry contradictions

I was at the European pathway to zero waste conference on Monday, which again highlighted the increasingly common divergence between policy wonks - who believe that the UK's waste and resources sector is on the verge of unlocking hiterto unrealised huge potential value from discarded materials (i.e. rubbish) - and those who have to deliver new projects in the sector in practice.

Lower than previously anticipated waste volumes are putting downward pressure on gate fees at the front end of the industry, while falling commodity prices are also hurting revenues at the back end. This reality is a far cry from the fantastic figures bandied around for the supposed billions of dollars of opportunities to be made from secondary resources.

To an outsider, waste projects must look like a high risk, low return proposition. It's no wonder we need the Green Investment Bank's support in the debt market, and the help of public grants for many smaller-scale projects.

WRAP finds that deliverable business models are deliverable

I see that WRAP has published another relatively lengthy report looking at textiles.

Sure enough, it shows that business models which already exist in the marketplace (one-off hire for formal and evening wear, and second-hand clothing) can generate a return under certain scenarios, while others which have not been delivered by the market don't offer returns. Stunning insight there.

At least this research did consider consumer demand for these alternative business models. To me, WRAP sometimes seems to forget that there is no point supplying materials/goods/whatever if there is no end market for it.

WRAP's original remit was to support end markets for recyclates and I personally don't think they do anywhere near enough on this front. Almost all the policy levers are driving up supplies of secondary resources with little helping on the demand-side.

EMF report assumes policy is optimal

Further to the discussion in the previous two posts, I am sorry to say that I still disagree with McKinsey's analysis, in that the whole purpose of the circular economy is to realise real benefits to society as a whole. The McKinsey riposte on this scale seems to be based on an assumption that landfill taxes and renewable subsidies are 'optimal' in that they internalise environmental costs. I couldn't disagree more. In reality the taxes and subsidies are far from optimal levels and are instead set with the explicit intention of meeting (arbitrary) government targets for landfill diversion and renewable energy penetration.

My personal view is that optimal landfill tax levels should be in the order of £30/t. I haven't done a similar analysis for renewable subsidies but Decc's stated policy is to levelise costs between different technologies, rather than set an optimal support regime for low carbon generation. It is widely acknowledged that meeting EU carbon reduction targets through very high renewable generation is in fact an expensive way of meeting our environmental goals and is therefore sub-optimal policy.

Going back to my original post: This was a brief attempt to look at the issue from the perspective of the 'public authorities' (using the boundary set out below). McKinsey suggest that if the cost of landfilling in this scenario is $24/t or more then society has made a profit. My post looked at the figures in the report which showed landfill costs of $105/t (including taxes). I took away the taxes (currently $100/t) and came to the conclusion from their numbers that society was making a loss, based on landfill costs of $5/t. (I am of course willing to be corrected if I have misread their figures.)

In reality (non-tax) landfill costs may be closer to $30/t (but could easily be not be far off, or below, $24/t in various regions). This to me doesn't lead to the conclusion that large benefits are realisable from the switch to AD at a wider level (and not just from landfill but from energy from waste too - another point would be whether their analysis includes consideration of energy revenues from efw or landfill gas). And this is before my challenge to their assumption that government intervention is optimal.

I would also note that McKinsey refer to an 'advanced scenario' which is presumably based on improved AD efficiency. As efficiency improves over time though, Decc policy will be to correspondingly reduce renewable support. Scope for additional 'benefits' here may therefore be constrained.

AD: response from the Ellen MacArthur Foundation

My previous post criticised part of the recent Ellen MacArthur Foundation (EMF) report into the benefits of moving to a circular economy. In particular, I suggested that their estimates of the benefits of switching food waste processing to Anaerobic Digestion (AD) were overstated.

EMF has responded to the post and asked McKinsey, the original report authors, to set out how they reached their conclusions. This is reprinted with permission as follows:

AD and food waste: real savings

The model used for the food waste case is based on actual cost data from AD plants in the UK, interviews on waste handling and treatment costs in the UK (WRAP), and UK energy prices. The report looks at the situation as it is today as well as at an “advanced scenario” that takes into account some cost improvements that can be realized from larger operations, such as bulk order discounts of technology if several plants are built at once. These benefits are realized already today in bigger projects, as confirmed for example by Tamar Energy. 

It seems that the main point of criticism made in the article is that the taxpayer loses out if food waste is put through AD instead of landfilling it - which needs to be examined in a bit of detail. 

One can look at the profits of the food waste case from the point of view of different stakeholders with different “system boundaries”, starting from an entrepreneur and going all the way up to society as a whole. The case made in the report shows that there is an overall positive profit pool to be distributed, so that the profitability of the case does not depend on creating a loss elsewhere in the system. The problem can be seen from the point of view of four (successively larger) systems, including the public authorities' point of view which seems to be the focus of this blog entry.

- The “smallest system” is the entrepreneur: Today, the business case of putting a tonne of food waste with an initial value of 0 USD through AD would be slightly negative in the UK (-24.00 USD/tonne) if landfill was free and no energy subsidies existed. In an advanced scenario, the profit would already be USD 6, without considering energy subsidies or landfill cost and tax. This is still a very small profit but it could become easily higher with rising energy prices, sinking costs through further economies of scale, etc.

- Perspective of a municipality: Municipalities collect rubbish and have to pay landfill costs and tax. Alternatively they can use the food waste to generate energy and fertilizer and earn revenues from energy and energy subsidies. Both the cost and revenues are real costs and income, so the full profit of USD 142 today and USD 172 in an advanced scenario described in the report would be realized. 

- Perspective of the "public authorities" (the combined system of the central government, responsible for setting landfill costs and tax and the municipalities). In this system, the municipality would bear the cost of AD, profit from selling energy and the energy subsidy and avoiding landfill cost and tax, while the central government would pay out the energy subsidy and miss out on landfill tax. The net effect can be found when comparing the cost of AD with the revenue from the sale of energy and cost of landfilling. If the cost of landfilling is more than the 24.00 USD/tonne - society has made a profit. 

- Society as a whole: Subsidies on renewable energy and taxes on landfilling aim to internalize external costs that are otherwise indirectly and indiscriminately borne by society as a whole, e.g., through health care costs in the case of pollutants, the costs for the impact of climate change or the erosion of ecosystems services. Energy subsidies and landfill taxes thus reflect actual cost and benefit to society.

I personally remain in disagreement with McKinsey's analysis and will set out why in my next post.

EMF report massively overstates the benefits of AD

I have just started leafing through the latest Ellen MacArthur Foundation report into the circular economy. The section on the potential benefits of Anaerobic Digestion in the UK is simply extraordinary. To be frank, I think it is dangerous nonsense to tell local authorities that they can make £112 profit per tonne of food waste processed by AD (based on an exchange rate of 64 pence to the dollar).

Almost all of their supposed profit comes from a combination of subsidies for renewable energy generation and avoided landfill costs (most of which is landfill tax). So, even if we accept their assumptions at face value (I personally think they both overstate the revenues and underestimate the costs), we find that all of the 'profit' to be made actually comes from government intervention. In the absence of this intervention, authorities would in fact be faced with higher costs (in the order of £33/tonne using their assumptions).

So, at an aggregate economy-wide level the real returns are actually negative.

Moving the management of the UK's wastes up the waste hierarchy will increase local authorities' waste management costs over time. To claim instead that they can make massive profits from it is simply not the reality of the situation. I really don't think this sort of report is helpful as it fuels misinformation and leads to poor options being pursued.

More evidence that energy costs are hurting UK manufacturing

Via BusinessGreen I see that there is fresh survey evidence that rising and uncertain energy costs are an increasing concern to UK manufacturers.

I have argued before that UK energy policy is placing UK manufacturers at a significant competitive disadvantage to overseas rivals. It is this impact on their cost base which means that they are unable to afford the same prices for secondary material inputs as reprocessors and manufacturers in other parts of the world.

I do wish that the UK reprocessing sector would recognise this as the principal cause of their relative difficulties, rather than consistently trying to push additional costs on to waste producers and harming other productive parts of the economy.

Agency publishes guide for local authorities exporting waste

I see that the Environment Agency has published a guide for local authorities which may be the source of exported waste. It suggests that the export of poor quality materials is threatening UK suppliers' competitiveness in international commodity markets, and also states that the UK could become a more marginal supplier to China as its demand for commodities increases. A key point raised in the document is that 'quality is essential to maintain markets'.

Quality is of course important, but so is price and there is a trade-off between the two. Meeting the right specification at the right price is actually the key to maintaining the UK's competitiveness in international recyclate markets. Ignoring prices will only serve to miss a vital aspect of this dynamic.

My fear is that the ever increasing policy drive to improve quality at any price will only serve to drive up costs to waste producers across the economy. This will in turn reduce their ability to generate positive economic returns elsewhere and ultimately will make us all worse off.

What does 2013 hold for the waste industry?

Before the Christmas break the Environment Minister predicted waste sector growth of around 3% for 2013 in a response to a parliamentary question. This figure actually comes from a study looking at the wider environmental goods and services sector commissioned by BIS. On the face of it, with the wider economy expected to continue to struggle to deliver growth, this looks like good news for the waste industry. Is it accurate?

If we assume that volumes and prices remain flat next year then a circa 3% growth in sector turnover would look about right to me. The landfill tax escalator should force continued switching from landfill to recycling at the margin, while some new residual waste capacity will come on stream for the municipal sector.

These figures are of course heavily dependent on assumptions about volumes and prices. It would only take an across the board drop in volumes of a few percent for total sector turnover to be reversed in 2013. This is of course not the green growth message that the sector wants to portray but is an outside possibility if difficult trading conditions persist again in the forthcoming year. More realistically though we would expect recycling volumes to rise again and if global commodity markets can continue to demonstrate a reasonable resilience then 2013 should hopefully not be as tough for industry participants as 2012.

I am personally feeling mildly optimistic about 2013 (all these things are relative though I suppose). I think that we should see the Green Investment Bank starting to deliver on providing finance for large-scale residual waste projects (rather than the small AD deals we have seen so far), which should brighten the medium-term outlook for the industry. I also hope that we are through the worst of the wider macro-economic difficulties which should help to hold up recyclate prices after some of the falls earlier in 2011/2012.

The industry has been through a difficult period these past couple of years, and it is likely that conditions will remain extremely challenging. Hopefully, though, we are through the worst and by the end of 2013 will be looking forward to better times ahead.