Resource Association calls for increased costs to waste producers

I see the Resource Association has published a report looking at the costs to its Members of cleaning up contamination in recyclate under a range of different scenarios. To me this doesn't really tell us anything Earth shattering. Removing contamination incurs costs. The question is who should bear these costs and who is in the best position to do so.

I don't think their analysis supports the conclusion that pushing these costs from their Members to waste producers (which is in effect what they are suggesting) would lead to increased net benefits to the UK economy. On the contrary, the additional costs (in terms of both time and money) faced by waste producers means that other productive parts of the economy are less able to invest and create jobs (or alternatively it means that householders are less able to invest in leisure activities). This effect may be larger or smaller than the gross investment of Resource Association Members, meaning the net impact could be positive or negative.

Unfortunately this is the sort of ambiguous message which doesn't sit well with policy makers. Also, given that the impacts on waste producers are likely to be diffused across the wider economy, whilst the impacts on Resource Association Members are more concentrated, policy makers are more likely to be persuaded by the louder arguments put forward in reports like these.

Overcapacity concerns for AD?

I see via @ediewaste that there have been a few concerns about the state of the AD market voiced at the recent ADBA conference.

Basically this looks to me like an incumbent saying: look guys, this is a lot more difficult than you think; be careful as we don't want a situation where there are too many plants chasing too little feedstock (i.e. overcapacity). Overcapacity is of course an issue which tends to be associated in the trade press with efw (the recent Eunomia report being a key element stoking these concerns).

I suspect we're more likely to end up with overcapacity for a technology like AD where the plants are relatively smaller and less capital intensive to deliver than a large-scale residual waste plant. They are therefore less reliant on long-term debt funding which means operators may have greater flexibility to take a punt on a project without being constrained by having to satisfy risk-averse lenders.

AD is a technology which has explicit government backing and which enjoys some of the largest amounts of support under the Renewables Obligation. If operators can't get it to work under these circumstances then there really is something wrong.

Talking bout a revolution

I see that a new 'resource revolution' has started whilst my attentions have been turned elsewhere.

To me, it looks like the same old story around material scarcity and how this might drive an increasingly circular economy (which has certainly now taken hold as the concept du jour). Regular readers will know I don't find this story particularly compelling as the relative prices of resources remain low in historic terms. Stuff continues to become cheaper relative to people, a long term trend which I cannot see reversing.

Instead, I think that higher regulatory demands will continue to drive higher levels of material recovery and push increasing amounts of recyclate back towards the productive economy. On the demand side, the increasing repatriation of reprocessing and manufacturing is more likely to be driven by global factor price equalisation than anything else.

Having said that, there does seem to be a lot of interesting stuff (led by the Ellen MacArthur Foundation) going on around designing new products for a circular economy. I suspect that this could prove to be effective in the long term if waste disposal costs are driven sufficiently high (by government and regulator intervention) thereby driving extremely high material recycling rates.

One thing is for sure though, intervention which leads us increasingly towards a circular economy will involve higher costs to consumers and waste producers. For me it is questionable whether this is necessary. As I have said before, if material scarcity really is a major concern, then the simple market dynamics of demand and supply will address this issue without the need for government intervention.

Same tired old arguments from CPI

I was at an APSRG event yesterday afternoon which looked at the potential role of bioenergy in the UK's future energy mix.

Most of the discussion centred around the sustainability or otherwise of using whole trees (as opposed to residues) as a potential biomass feedstock. There was however also some mention of the potential role of energy from waste.

A representative of the Confederation of Paper Industries (CPI) got up and had a familiar tired old rant against the waste sector. The CPI has in the past spoken up at Westminster events and moaned about the supposed poor quality of materials from co-mingled collections which their Members have to deal with. I have previously argued that the real problem here is actually that the CPI's Members are struggling with high domestic energy costs which makes them uncompetitive with overseas reprocessors (who are able to pay a higher price for UK material). It's a price issue and not a quality one.

Yesterday the CPI tried to lever the usual quality rant into an argument about an apparent unconstrained energy from waste boom which is supposedly going to cannibalise recycling efforts and steal potential feedstock from CPI Members. What a load of balls. Leaving aside the reality that the UK has very low levels of installed energy from waste capacity and is also struggling in the current financing environment to develop any more beyond the current round of facilities (underpinned by local authority contracts), it is nonsense to suggest that material collected for recycling could end up in energy from waste facilities.

Material collected for recycling will command a positive value in the market. Even at low price levels this will be an unassailable advantage when competing against energy from waste facilities which charge a gate fee to receive material. The relative economics mean that efw will not be able to steal potential feedstock from paper mills once it has been collected for recycling.

The UK paper industry's real competitors are not the waste industry but are based overseas and have a lower cost base meaning they are able to pay a higher price for material of equivalent quality than the CPI's Members. This is the message which needs to be heard by policy makers. The current arguments are an attempt to gain a hidden subsidy to prop up an uncompetitive industry.

Global outlook not great

I was at a conference on secondary commodity markets on Tuesday at which Ross Strachan from Capital Economics gave quite an interesting overview of their outlook for the global economy.

Essentially, things aren't looking particularly bright in their view. Europe is heading towards disaster and the ultimate break-up of the Euro, while China is slowing down too. There are some slightly better signs from the US (if policy makers there are able to agree a budget deal) but overall, it looks to them as though the global economy is at best heading sideways for a good while to come.

I tend to agree with their outlook (although I am not yet convinced that the Euro will break up). I would also add that forthcoming banking regulations are going to be an additional constraint on growth by restricting new investment.

What does this mean for the waste sector? Operators are already suffering extremely tough times, with waste volumes and recyclate prices down on previous highs. A faltering macroeconomic recovery will continue to squeeze the sector at both ends with operators potentially suffering lower gate fees at the front end as they chase lower volumes and lower offtake revenues for materials at the back.

In the medium term there may be some respite for integrated businesses as increasing moves into the waste-to-energy space coincide with policy designed to drive up energy prices, thereby helping to support offtake revenues in that area.

But in the meantime, its likely to remain tough going. MRF gate fees tend to be sticky relative to prices of secondary commodities and if some recyclers haven't properly managed their recyclate price risk then they could find themselves struggling in the near term.

CBI calls for industrial strategy

I see the CBI is calling for the government to introduce a stronger industrial policy. This is an area which is receiving increasing policy attention following the supposed breakdown of the market-based approach.

Regular readers will not be surprised to learn that I disagree with attempts at industrial strategy. I suspect that any strategy which was ultimately implemented by government would be based on quickly outdated assumptions and lead to an inefficient allocation of resources.

If the CBI wants to rebalance the UK economy away from consumption and towards investment (as stated in the report), then it should ask government to introduce incentives to encourage private savings and investment. It should not ask for sector-specific interventions, which for me are more likely to distort activity and crowd out fresh private sector innovation and investment. 

The CBI is calling for a strategy to help support incumbents, which is of course the CBI’s remit, but is not efficient or conducive to long term growth

Do we need policy for a circular economy?

I was at the WRAP annual conference on Tuesday at which there was much discussion about the circular economy. I have spoken on this before and remain of the view that macro-economic drivers (in the form of global factor price equalisation) will drive some repatriation of manufacturing activity to Europe, but that it will be ongoing waste regulation (and not economics) that will drive the supply of secondary resources to those manufacturers.

All of the speakers on Tuesday were keen to stress the economic advantages to business of switching to a circular economy mindset. Mike Barry of M&S insisted that it was vital for businesses to adapt to this new model or else they would be left with a significant competitive disadvantage to those who had moved first.

Matthew Spencer of the Green Alliance outlined three key factors which are required for successful circular economic activity: (i) new business models; (ii) collection infrastructure availability; and (iii) either market drivers or policy in the absence of such drivers.

For me though, there seems little logical basis for policy intervention in this area. If there are strong market drivers then obviously the market will deliver a circular economy without government help. If however there aren't market drivers, then presumably there are also no underlying resource pressures which desperately need to be addressed. In which case, the justification for policy intervention disappears.

I know that policy intervention supporters will suggest that the pace of market change is too slow and that informational market failures exist which need to be fixed through regulation. But I disagree and believe that market participants are likely to be quicker than bureaucrats at identifying resource constraints. In the context of a hugely complex dynamic global economy, my view is that the market will deliver a better allocation of resources than governments.

Hurrah for BIR

Finally, it has been reported that someone has come out and said something sensible about restrictions on recyclate exports, i.e. what a load of nonsense it all is.

I have repeatedly argued that export restrictions would be a bad thing, and Mr Borad of the Bureau of International Recycling has now come out in agreement. I hope that policy makers, both in Europe and here in the UK, take notice but won't be holding my breath to be honest.

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.

Growth is green

The New Statesman blog has an interesting article by Dimitri Zenghelis (who waste policy people may remember spoke at the CIWM/ESA conference back in June).

Mr Zenghelis correctly identifies that the economy is currently being held back by a lack of investment. However, he fails to recognise that investment is in turn being constrained by wrong-headed capital regulations placed on the banking sector (as I argue here). This regulatory distortion is a (the?) principal cause of the widespread retrenchment across the economy.

Investors are understandably worried about lending to a "policy-driven sector". Any investment which depends for its long term success on government whim rather than underlying economic fundamentals is bound to operate on shaky ground.

The long term future for the green economy though is bright. Resource efficiency is a widespread and ongoing phenomenon which is not going to go away. At the same time, consumers' preferences for environmental goods and services tend to increase over time as their incomes rise. This means that in the long run, improvements to the environment will lead to welfare gains and an underpinning economic case for them can be made.

In the short run, however, this will be subject to fluctuation and uncertainty. Such uncertainty is compounded when governments intervene by pushing favoured and currently expensive technologies. By trying to run before we can walk, government policy can lead to the early deployment of expensive solutions which crowds out resources from parts of the economy which are currently more productive.

On this basis, one could argue that Government intervention which distorts the market in the near-term may perversely delay the long-run transition to a green economy by slowing growth and delaying consumers' adoption of greener preferences. This is ultimately counterproductive but sadly all too common.

Commissioner calls for landfill bans

Via @APSRG I see that the EU's Environment Commissioner, Janez Potočnik, has apparently called for a complete ban on landfill across the EU.

As I have argued before here and here, I am instinctively against landfill bans. Such restrictions generally lead to sub-optimal outcomes as they impose blanket costs on waste producers which may in some cases outweigh the environmental benefits of restricting a particular material from going to landfill.

A complete ban on landfill would be an extremely short-sighted policy which failed to recognise that increased costs to waste producers (in excess of the environmental damages associated with the management of their wastes) would inevitably depress their ability to generate positive economic returns elsewhere.

During a time when Europe is facing a deep and ongoing economic crisis, introducing anti-growth policies seems particularly perverse.

CBI calls for more waste services outsourcing

The CBI has published a report on open access to public services, which has been produced by Oxford Economics. This includes estimates of the potential savings which the public sector could make from outsourcing those services which are currently conducted in-house by the public sector.

The report highlights the fact that just over half of waste (collection) services remain in-house. It then estimates that there is a minimum of £192 million savings which the public sector could make from a fully open waste services market.

This estimate is based on assumed producitivity improvements of 15% which are then applied to all authorities which currently retain their services in-house. That 15% figure seems to come from primary research with private sector providers.

As one might expect, I am a big fan of outsourcing waste services to the private sector but these suggested savings seem high to me. I feel that a lot of the efficiencies in the waste services market have already been driven through. Margins on waste collections are very tight and further improvements may be more difficult to achieve. I also don't believe that such large savings would be realisable without half of authorities spotting them. It just doesn't seem credible, although I could of course be wrong.

Some local authorities are also apparently in the naughty habit of calling their services to tender before withdrawing once they have received private sector bids. This allows them to pinch private sector method statements and apply them to in-house services, thereby undermining some of the practical case for large savings' estimates.

I also note that the case study cited in the report is from poor old May Gurney who have run into some recent difficulties on their recycling contracts. They appear to have been quite aggressive in their revenue assumptions from recyclate sales. Now that commodity prices are falling their contracts are running into difficulty. Recyclate prices follow those of primary commodities but tend to be even more volatile on a proportionate basis and this is now hurting the industry.

Contrary to the CBI/Oxford Economics proposals, there has been an increasing recent trend for local authorities to bring waste services back in-house. This has been driven by high recyclate revenues on the back of the recent biggest boom in commodities' history. Authorities have seen these high revenues as a potential cash cow in straightened times.

Falling prices mean that this model may be undermined going forward and more authorities will realise that competition between private sector providers does deliver decent potential savings to public sector budgets. But I suspect not as high as 15% for waste services.

Risk transfer - who benefits the most?

I was at the RWM exhibition last week, which apparently again attracted record visitor numbers. These large-scale events give the opportunity to hear some leading industry figures give their views on the big issues of the day, and while these are often banal you can find the occasional nugget of interesting information.

Wednesday's panel debate in the leaders' theatre was a case in point. Much of the discussion centred on concerns about access to finance coupled with falling material prices, both topics which I have covered before. What was interesting for me though was the disagreement between the participants regarding the exact nature of the risk transfer between the public and private sectors. Generally the operators/contractors felt (unsurprisingly) that the private sector had taken on too much risk in their municipal contracts, while an advisor was of the opposite view and suggested that local authorities had retained too much risk.

So, who is right?

In an ideal world different risks would be appropriately shared according to the principle of which party is better able to manage that risk. When discussing residual waste projects we might group the risks into: inputs; process; and outputs.

When it comes to input (feedstock/volume) risk we might think that authorities would be able to better manage that as they are the ones directing householders through collections. But contractors tend to take a view which they build into their assumptions. They then rely on being able to substitute commercial waste for municipal waste to be able to make up for any shortfall. (It is of course a shortfall we want as this would indicate that residual municipal waste has been minimised and is below expectations.)

Where there may be a potential antagonism is where authorities demand (rightly) priority access to a facility when volumes are high but do not give the contractor the freedom (perhaps through non-compete clauses for commercial waste) to be able to make up for a shortfall when volumes are low. In this way we may find that the contractor ends up being unable to manage their exposure to volume risk appropriately.

When it comes to process/technology risk, this is undoubtedly something which it seems to me should rest with the contractor. Some disagreement may however arise concerning the differing risk profiles of the construction and operational phases of a facility. The construction (and commissioning) phase is high risk and fraught with potential technical problems. The operational phase however tends to be relatively straightforward and lower risk.

Early PFI contracts saw some big gains to contractors who were able to refinance on favourable terms and make relatively large returns once projects were into the operational phase. This was seen by the public sector as unfair profiting at their expense. The contractors would probably argue that the rewards they gained were commensurate with the risks they took, but this is certainly a controversial area. It is also an area where the rules on refinancing were subsequently tightened so that any potential upside to the private sector is now effectively capped.

This has therefore now become another area where contractors feel that they are exposed to large potential downside losses while their upside is capped, i.e. the risk transfer has now swung in favour of the public sector.

The other area of risk is on outputs/offtake. This is again an area where the contractor is going to have to take a view and hope that they are able to manage resulting price volatility over the life of the contract. We may find increasingly that some contractors (perhaps more applicable for recycling contracts) have overestimated potential offtake revenues and run into trouble.

From the above, I find it difficult to conclude that local authorities are retaining too much risk and instead would agree with contractors who suggest that they offer good value for money to their local authority customers. This may not always have been the case and those who managed to secure favourable terms in the early days of PPP/PFI agreements may have done well out of them. But right now being a waste management contractor is a difficult place to be with both volumes and prices falling. These are conditions which could place severe pressure on some industry participants.

Shadow Minister claims reducing profits will create jobs

Labour's Shadow Minister for the Environment, Gavin Shuker, has apparently claimed that the UK is losing out on jobs and growth because reprocessors are importing material (while at the same time collectors are exporting).

On the contrary, it seems to me that the reprocessors are getting a better deal by importing material which presumably matches their requirements better than that which comes from domestic collectors. At the same time, the collectors are getting a better deal by exporting material to overseas reprocessors who are willing to pay a higher price for theirs.

In this way, both domestic reprocessors and collectors are exploiting overseas markets and everyone's a winner. Government intervention which eliminated the most profitable opportunities for domestic organisations and instead forced these two groups to exchange directly with one another would inevitably lead to lower aggregate benefits all round.

Lower benefits means lower growth and fewer jobs. Somehow the Shadow Minister manages to reach the opposite conclusion. I disagree and think that the Government should not meddle with these open markets.

Policy wonks vs operators

The big annual waste shindig has been taking place at the NEC for the past couple of days. I intend to post  on some of the conference later, but my first initial observation is that there seems to be a growing divergence  in views expressed by policy wonks and those by waste operators facing reality on the ground.

In particular, via @Greendipped I see that Gavin Shuker expressed ongoing concerns about scarcity (something regular readers would know I don't see as a problem), while at the same time Steve Lee gave a presentation on the first day titled "understanding the potential impact of resource scarcity and escalating commodity prices".

I have pointed out before that in reality (non-food) commodity prices are falling, and it was concern about these falling prices that was the main message to come from waste operators at the conference (see also e.g. this story). It is these operators who are facing the actual conditions at the coal face and I would certainly trust their experience more than the hypotheticals coming from others with less direct day to day experience of reality.

The waste industry is going through a very difficult period of transition. Waste volumes are down and recycling prices are falling. Policy and regulation are designed to drive the waste industry away from the traditional stable landfill based model with low capital outlay towards high up-front capital investment and large exposure to cyclical global commodity markets. Managing this transition will be difficult and there will likely be some who don't do it well.

As long as policy makers don't understand the reality of cyclical markets they are unlikely to be able to come up with a policy framework that will help the industry navigate its way in the world.

Labour suggests need for more HMG bureaucracy

I see Gavin Shuker is jumping upon suggestions to create an Office of Resource Efficiency. As I have previously said, I don't know what this office would be expected to do beyond working to keep global markets open. This is the best way of securing access to resources.

Mr Shuker also seems unaware that it isn't materials which facilitate growth but innovation. The total material requirement of the UK economy has actually fallen since peaking in 2001, a period during which the economy has grown by almost 50%.

As before, I am unable to conclude from the available evidence that we have a resource scarcity problem. Markets are the best method we have for allocating resources and should be allowed to do their job.

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.

Defra consults on wood waste landfill bans

Defra has issued a call for evidence asking for stakeholders' views on whether there should be a ban on wood waste sent to landfill.

As an economist I am instinctively against bans as these generally do not lead to efficient/least cost outcomes. In the case of wood waste, Defra's own analysis suggests that the net benefits of introducing a ban would be negative, i.e. the costs of introducing a ban would outweigh the benefits. Given that the amount of wood waste sent to landfill is expected to fall to only around 300,000 tonnes by circa 2020, it seems that this isn't a big issue which needs heavy handed intervention.

Landfill tax is the big driver of behaviour here and is already doing the work of diverting this material to other management routes. As more alternative infrastructure comes on stream, we will see less wood waste going to landfill, without requiring a ban, which might be costly and difficult to enforce.

There will be some who argue that the greenhouse gas emissions from landfill mean that we must ensure that this material is all kept out of landfill, but I would argue that landfill taxes already take more than full account of the environmental disbenefits of landfill (see e.g. here). We do not therefore need additional policy measures to tackle this particular problem.

EEF calls for coherence in environmental policy

The EEF has published a report which examines the current state of environmental legislation and its impact on the UK's manufacturing sector. In particular, it draws attention to the fact the manufacturers potentially have to report their carbon emisisons under four different schemes (EU ETS, CRC, CCAs, and GHG reporting) incurring four sets of administrative costs.

Overall I feel that the report is generally pretty sensible. We do need to consider least cost approaches to meeting our environmental objectives and it makes no sense to do things at higher cost than we need to (as I suspect we are with energy policy).

Of particular interest for me though, were some of the figures tucked away in annex 2 (focus on waste) on page 14. Here we find survey results that tell us that almost half of UK manufacturers have applied lean manufacturing processes and a further quarter intend to do so in the next year. On top of that, we find that over 40% of companies surveyed claim to have redesigned products to better manage materials and reduce waste.

This tells me that there is a lot of resource efficiency going on in the UK economy. As I noted previously, the material requirement of the UK economy (including from imported materials) is falling. This EEF survey gives us further evidence that markets, prices and competition will drive resource efficiency far more effectively than government intervention.

EIC calls for more resource efficiency

The Environmental Industries Commission has published a new report calling for the government to do more to improve resource efficiency.

Aside from the fact that this call is based on Defra's £23 billion estimate of potential resource efficiency savings - an estimate with which I disagree - it assumes that resource efficiency is something which will not happen without some form of regulatory intervention.

Personally, I feel that resource efficiency is something for which there are existing incentives in place for economic agents to act. There is a business imperative to improve efficiency over time. This is the basis of much economic growth and something which is likely to happen in the absence of government intervention.

The ONS publishes environmental accounts for the UK, which include official estimates of the total material requirement for the UK economy.

TMR peaked back in 2001 and has fallen by almost a quarter since. Not exactly the stuff of nightmares. In fact, the UK's TMR in 2010 was almost 10% lower than it was way back in 1970.

And when you consider resource productivity, by measuring the amount of materials required per unit of GDP/economic output, we find even more extraordinary gains made by the UK economy.

According to the World Bank, the UK's gross national income increased over 17 times during the period 1970-2010. This means that in 2010 the UK economy was using material resources more than 18 times more efficiently than it was back in 1970 (=TMR/GNI).

These achievements have been driven by markets, growth and technical progress, which will continue to work well into the future. I am therefore less convinced than ever that we need more government intervention to drive resource efficiency.

How to deliver a circular economy

The Dame Ellen MacArthur Foundation is leading the charge on how to move the economy from a linear to a circular model. They cite case studies to demonstrate how a more circular approach can be a reality for businesses now and suggest that price signals alone may not be sufficient to deliver a transition to the new approach.

The underpinning rationale for why we need a circular economy is, of course, the old environmentalists' fallacy about resource scarcity: the classic fear that we are going to run out of stuff. But, as I have argued before, we have more stuff now than at any time in history, despite increasing pressures.

How can this be so? The stuff of nightmares never materialises because people consistently underestimate the capacity of technological progress, coupled with the price mechanism, to increase the supply of recoverable resources. Scarcity just isn't an issue.

That doesn't necessarily mean that a movement towards a circular economy would be a bad thing. If cost savings and environmental benefits can be found then it could still be the right thing to do.

I am personally unconvinced by the large unrealised savings which the report estimates could result from a shift to a circular economy. I haven't gone through the analysis in detail but suspect that they fail properly to account for the opportunity costs involved in implementing resource efficiency/circular economy measures (as previously argued here). Let us assume however that there are large benefits to be found. Moving to a circular economy would be a good thing to do.

So how best could we get there? The answer, as you would expect from an economist, is markets. Markets allocate resources more efficiently than central planners. The EMF worries that prices won't respond quickly enough to effect the transition which they think is necessary. But you can rest assured that markets and prices will do a better job than policy makers and bureaucrats.

The existence of the EMF's case studies for me show that we don't need intervention. On the contrary, where there are opportunties to make a profit from the circular economy then economic actors step in and exploit them. The report claims that the concept is economically viable and scalable. In that case, I reckon that the authors should go out and make a pile from actually doing a circular economy, rather than talking about it.

Global MSW to double by 2025

Edie news reports that the Worldwatch Institute is predicting (with horror) that MSW will double by 2025.

I must confess that I haven't read the original report, but from the article I am unable to conclude whether this is terrible or not.

Waste is not produced as an end in itself. Like other forms of pollution, it is a by-product of useful economic activity. If the benefits of that economic activity outweigh the costs, including those of managing the associated waste appropriately, then on balance the state of the world has improved.

I cannot infer from the article whether the benefits of higher economic output outweigh the costs of higher MSW generation.

HMT projects landfill tax revenues to reach £1.6 billion

The Treasury has published projections for landfill tax revenues through to 2015/16. They expect these to remain fairly flat for the next couple of years before rebounding strongly. This is presumably as they expect a strong post-recession rebound in output as the economy tries to catch up back to its long run trend rate of growth, and expect this to lead to an increase in total volumes of waste.

Notwithstanding the fact that any form of economic forecasting is essentially complete guesswork, I personally don't think we will see this strong rebound effect in output in the next few years. I think that through the boom we experienced an overallocation of resoures towards certain sectors, such as housing, and that the current correction will lead to a permanent loss of output. This is because I tend to think that the economy will follow a "random walk with drift" model, rather than a "trend growth" model.

The implications for the economy are that we are unlikely to witness a strong period of catch-up growth as we come out of the recession, and the implications for landfill tax revenues are that they probably won't reach the peaks predicted by the Treasury.

WRAP calls for longer lived clothes

WRAP has published new research into the environmental impacts of clothing and expressed concerns that people are purchasing too many items which are too short lived. They lament the fact that people's wardrobes contain garments which haven't been worn for at least a year and suggest that people should try to extend the lives of their clothing.

Their research tells them that consumers would be willing to explore new options for repair, buying pre-owned clothes, and other ways of extending their clothing lives. This same research though tells them that the main reason people stop wearing clothes is that they no longer fit. Presumably WRAP believes that these clothes should be altered, rather than replacements purchased.

This however runs into the modern resource conundrum: while resources are supposedly running out and are apparently incredibly expensive/valuable, in reality their relative prices are low (despite the biggest commodity boom in history), particularly when compared to labour. Clothes are cheap and so the average person can afford plenty of them.

WRAP estimates that the global carbon footprint of UK clothing consumption is 1.5 tonnes per household per year. Even if we make consumers pay these carbon costs, that would only amount to around £45/household/year (using government assumptions). This is around 2.5% of what WRAP suggests UK households spend on clothing. Not enough in my view to make much of a difference to consumption patterns, even if fully internalised.

WRAP seems to think that if consumers are given better information about the environmental footprint of their clothing, their consumption patterns could change. I am not convinced. WRAP's research may indicate that people aren't interested in fashion and updating their wardrobes constantly, but consumers' revealed preferences - from their actual consumption behaviour - tell us a different story.

It is likely that the costs of clothing as a proportion of consumer expenditure will remain small over time, which in turn means that we are unlikely to see a dramatic reduction in consumption. Unless WRAP advocates punitive taxes on clothes or wardrobe rationing, I think this is unlikely to change much and WRAP's focus should instead be on production processes (which to be fair are also examined in the report).

Defra updates on AD strategy

Defra has published its latest progress report on the AD strategy and action plan: http://www.defra.gov.uk/publications/files/pb13788-ad-2012-progress.pdf

The conclusion I can't help drawing from this is that AD is not a terribly efficient way to do things. It needs double ROC subsidies to help projects get off the ground and yet banks still don't want to go anywhere near it. So instead the government ploughs in yet more money through a loan fun (admittedly for fairly trivial amounts).

Welsh plan unveiled

The Welsh Government has unveiled its 'Collections, infrastructure and markets sector plan', which sets out its vision for waste and recycling in Wales: http://wales.gov.uk/topics/environmentcountryside/epq/waste_recycling/publication/cimsectorplan/?lang=en&status=closed.


Aside from the usual rhetoric about one planet living and living within the Earth's capacity, whatever that might be (now or in the future), there seems to be a focus in this report on developing Welsh markets for recyclate and supporting a Welsh reprocessing sector. This may sound laudable, but will only actually benefit Wales if the additional economic resources, which are devoted to reprocessing under such a scenario, would not have been better employed elsewhere in the economy.

It isn't apparent to me that Wales has a particularly strong comparative advantage in reprocessing and Welsh Government attempts to 'serve local markets' through the development of 'appropriate specifications' seem only likely to push up costs for Welsh waste producers.

The evidence we have is that MRF economics are driven by throughput as opposed to material quality, i.e. when recyclate prices are high, MRFs send material through more quickly, and slow this down (perhaps by putting up gate fees) when prices are lower. This tells us that the costs of additional processing to raise quality (by lowering contamination levels) are in fact greater than any price premium which might be gained by higher quality material. Imposing arbitrary standards on recyclers will therefore raise their costs by more than any additional revenues they might be able to make by selling their material on world markets. These additional costs will be passed on to waste producers.

Perhaps the Welsh Government thinks this is a good thing. After all, they want Wales to live within its ecological limits and raising waste costs could be part of their strategy (although this was not the central message from the accompanying WRAP analysis). Certainly using this hidden subsidy to prop up a Welsh reprocessing sector does seem to be part of their strategy. It is one though which is wrong-headed from an economic perspective as it effectively amounts to a form of protectionism which reduces gains from trade and thereby makes the Welsh worse off.

The report recognises that economies of scale mean that it may not be appropriate for all of Wales's recyclate to be reprocessed within Wales's boundaries and it may therefore make sense for it to travel across the border into England. But why don't they extend that logic to further afield?

MRF gate fees down in latest survey

WRAP has published its latest annual survey of gate fees: http://www.wrap.org.uk/content/wrap-gate-fees-report-2012

The main message being picked up is that gate fees at MRFs are down 40% (£15/tonne down to £9/tonne). This of course reflects the fact that the survey was conducted towards the back end of 2011 after a strong period for recyclate prices, which were up on the previous year.

Recycling is a cyclical industry. Recyclate prices are taken from world markets and when these are high, recycling firms can in the short run enjoy what economists refer to as 'super-normal profits'. In competitive recycling markets, entry and exit lead to these super-normal profits being competed away. After a commodity boom though, a higher proportion of recycling firms' total revenues are drawn from recyclate sales than from gate fees at MRFs.

If prices subsequently fall, then some firms may get caught out if they find themselves in a position where their gate fees are 'sticky' relative to recyclate prices. In other words, they are unable to adjust their gate fees (possibly due to contractual arrangements) as rapidly as they need to in order to offset falls in recyclate prices. This could lead to losses and exit from the industry for those firms which haven't managed their price risk as effectively as others.

PwC revisits sustainable packaging

PwC recently published a report looking at 'sustainable packaging': http://www.pwc.co.uk/forest-paper-packaging/publications/sustainable-packaging-myth-or-reality.jhtml.

I personally struggle to get too excited about packaging. It is obviously a high profile issue for consumers but the Packaging Regulations have made a huge difference to the managing of packaging in the UK. The UK generates around 11m tonnes of packaging waste (out of circa 80m tonnes of municipal, commercial and industrial waste), of which around 2/3 is recycled. New targets will push these recycling rates even higher.

One surprise in the report for me is that they don't identify regulation as a principal driver of improved packaging 'sustainability'. Lightweighting to reduce tonnages to landfill and also improved recyclability of packaging are both driven by waste legislation and this, for me, seems a bit of an omission.

Global growth is (weakly) sustainable

An interesting piece in The Economist (http://www.economist.com/blogs/freeexchange/2012/07/national-balance-sheets) last week about research into global wealth:  ihdp.unu.edu/article/iwr

This looked at all types of wealth (or capital) in different countries: environmental/natural capital; human capital; man-made capital; and social capital and estimated that the stock of capital had increased in all countries except Russia.

Environmental economists define sustainable growth using a 'constant capital rule'. This states that if the total stock of capital is non-declining then growth is sustainable. What this latest research tells us is that the current growth models around the world are indeed sustainable (except in Russia) according to this definition. We are not therefore destroying our kids' inheritance and we can sleep easily at night.

This approach is, needless to say, not without its controversy. My hazy memory of studying this subject is that 'ecological economists' offer an alternative definition whereby the stock of natural capital must be non-declining as well as that of total capital for growth to be sustainable. They call this strong sustainability, as opposed to weak sustainability, and argue that natural capital is non-substitutable with other types of capital.

There are criticisms of both approaches and it seems inherently difficult if not impossible to measure the exact nature of substitutability between different forms of capital. I instinctively come down on the side of weak sustainability as a theoretical approach to sustainable development. Converting natural capital into man-made capital seems to me to be a fundamental pillar for development of any kind, particularly at lower income levels.

CBI proposes help for infrastructure investment

The CBI seems to have been very active lately and has published a report on what needs to be done to attract investment in infrastructure. (http://www.cbi.org.uk/media/1507874/cbi_-_an_offer_they_shouldn_t_refuse_-_attracting_investment_to_uk_infrastructure.pdf).

For me, this is all very sensible, and much of it has already been recognised in the waste sector judging by some of the noises coming out of UK Green Investments, the precursor to the Green Investment Bank.

The CBI recommends a split finance model which might take the form of some sort of post-construction refinancing guarantees that would enable banks to finance the construction phase and institutional investors to then come in on the (lower risk) operational phase. Personally I think this sort of approach seems quite sensible but some infrastructure operators who corporately finance their projects might consider this an unfair intervention in financial markets if done using government backing.

The other issue for waste infrastructure assets is that, in the greater scheme of things, they aren't very big. For institutional investors they just don't have the scale to be attractive and would therefore have to be packaged up and aggregated in some way.

The other big issue for me in the report is 'credit enhancing', i.e. some form of government first-loss guarantee/debt. But the government (in the form of the GIB) doesn't want to be idiot in the room taking more of the risk without a commensurate reward.

Overall, there are big macroeconomic problems coming from the capital adequacy regulations being placed on the banking sector. These are forcing it to retrench and are a significant cause of ongoing depressed economic conditions. In this context, I can't see a simple solution which the government could take without putting public funds at risk and losing the advantages of privately financing new infrastructure projects.

CBI supports landfill tax escalator

The CBI recently published a report looking at the case for environmental taxes (http://www.cbi.org.uk/media/1529404/cbi_-_solving_a_taxing_puzzle.pdf), which sets out some principles which it feels environmental taxes should follow.

The report rightly suggests that the landfill tax escalator is an example of an environmental tax which has been implemented well, but it doesn't delve into some of the more interesting questions I would have about whether the tax is set at the right levels.

Landfill tax was originally conceived as a 'pigouvian' tax which corrected for the environmental damage caused by landfill and was set at a rate of £7/tonne back in 1995. It now stands at £64/tonne and will rise to £80/t in 2014.

My personal back of an envelope estimate of an optimal landfill tax would be in the range of £30/tonne. This is based on CO2 emissions from mixed waste at landfill of less than 500g CO2e/tonne processed combined with a carbon price of around £30/tonne (I can't remember the exact government policy assumptions but they are in this sort of range) + disamenity impacts, for which I have taken the original HM Treasury estimate of £7/tonne and inflated it based on a doubling of property prices in real terms since 1995.

We are obviously in a world which has moved well away from these sorts of optimal figures. This is because we must conform to European waste legislation, which doesn't recognise the low cost advantages of landfill in the UK. An optimal waste management portfolio for the UK would have higher levels of landfill than in other EU Member States, but this is not allowed under the command and control target-driven approach to reducing landfill in Europe.

Should we have a big push on AD?

The CentreForum think tank has published a report entitled 'Hit the gas', which argues for greater support for anaerobic digestion.http://www.centreforum.org/index.php/mainpublications/370-hit-the-gas

It's interesting that this study - which is funded by the Anaerobic Digestion and Biogas Association (ADBA) - makes little reference to the potential costs of developing such a huge increase in AD. They are keen for more government support, but AD already receives double ROCs which is quite a substantial subsidy to make them viable.

The report notes that AD is a risky and difficult to finance process, particularly for waste feedstocks where pre-treatment will often be required. Intuitively, there seems less scope for driving efficiencies out of the process (I could of course be wrong) and they will always tend to be small-scale and localised, which seems to conflict with the needs of a financially constrained world.

AD will continue to be pushed as the government has committed to it. This report does raise some interesting questions. It notes that if an AD plant is located too far from its feedstock then the transport emissions can outweigh the carbon benefits of using AD. I wonder what assumptions the Committee on Climate Change made about transport distances when it recently recommended again that the government look into expanding opportunities for food waste AD.

CCC finds good progress from waste sector

The Committee on Climate Change (CCC) published its latest progress report at the end of last week: http://hmccc.s3.amazonaws.com/2012%20Progress/CCC_Progress%20Rep%202012_Chapter-7-Waste.pdf

The huge (and hugely expensive) government commitments to de-carbonise the economy mean that every last drop of emission savings have to be squeezed out of every sector. The waste sector has already done a tremendous job at reducing its emissions and will continue to do so as more material is diverted from landfill. The focus should be on ensuring high levels of effective front-end recycling coupled with incentives to drive improved efficiency for energy recovery processes for that residual waste which cannot be recycled.

The CCC recognises the good work of the waste sector, and I think tries to draw attention to some of the (significant) uncertainties around emission savings from waste. As you'd expect, they call for more to be done and think that there is scope for further cost-effective savings to be made from sending increased amounts of food waste to anaerobic digestion.

I personally don't find the analysis on AD costs to be credible. These plants are generally small-scale and localised and rely on double ROC subsidies to make a return. Digestate markets continue to be limited, and large increases in quantities of this material could end up with nowhere to go.

The government however has clearly picked AD as a winning technology and is probably unlikely to deviate from its course.


It is never completely clear to me what role the CCC envisages energy from waste playing in the de-carbonised power sector of the future. Efw may have high emissions relative to the proposed grid average of the future (the CCC reckons it will have to be 50g/kWh by 2050 I think), but of course has a significant carbon benefit relative to landfill. Does this count as part of the power sector, or the waste sector?