2020 Tories call for tiny council tax rebates

The '2020' group of Conservatives has published a report examining resource efficiency issues and looking at ways waste policy might be amended to improve the quality of recyclates which might then be used as manufacturing inputs.

Most of the report is fairly underwhelming but there is an interesting proposal that Local Authorities should be allowed to offer residents council tax rebates to reward them for reducing contamination in the recyclate they put out.

This policy would be well targeted, as the best way to improve quality of material along the supply chain is to reduce the contaminants/non-target materials entering the recyclate stream in the first place. Unfortunately I am not convinced that this policy would work in practice, not least due to the inherent low value of recyclates collected from households.

There are around 23 million households in England, which put out around 10.5 million tonnes of material for recycling and composting. These materials could probably generate revenues in the region of £700m at current prices, which equates to around £30/household. Not much scope for cutting bills which are £100 per month on average in England. I doubt a 2.5% cut would have much of an influence on behaviour at all.

Chinese green fence lauded as great success: 0.1% of shipments rejected

Via Letsrecycle I see that the Chinese green fence policy has been doing a great job at keeping out all of those terrible low quality contaminated shipments of recyclate.

The article states that 3,508 tonnes of material imported into Hangzou province was seized for being overly contaminated. Out of a total of 6.54 million tonnes. That is 0.05% of total shipments: a vanishingly small amount.

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?