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.

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.

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.

EMF report assumes policy is optimal

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

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

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

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

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

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.

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.

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.

APSRG debate: the waste sector and the green economy

The Associate Parliamentary Sustainable Resource Group (APSRG) held a debate in Portcullis House on Wednesday on the role of the waste sector in the green economy.


There was the usual mix of unsubstantiated assertion about resource scarcity and the imperative of changing our profligate ways, interspersed with some genuinely interesting examples of resource efficiency in practice. One of the main messages from the panel seemed to be that higher resource prices were changing business models. The waste sector is already being driven by recyclate markets/prices and as these increase over time we will see this effect rise higher up the hierarchy into the delivery of goods as services

I just can't help thinking though that it isn't economics that will determine the waste sector's role in the green economy in the medium term but legislation. We have just been through the biggest commodity boom in history (notwithstanding the fact that the relative prices of resources are still low by historic standards), and although this has undoubtedly driven some resource efficiency measures throughout the economy, it is the landfill tax escalator which has actually delivered the large increases in domestic recycling rates over the past decade.

Economic fundamentals are likely to continue to lead to lower resource costs relative to labour costs throughout the global economy. Resource prices on their own are never likely to drive the sorts of fundamental shift in consumption and production patterns which environmental policy protagonists think will be necessary.

Instead, a more interesting question for the long term might be whether global factor price equalisation will lead to the future repatriation of more manufacturing activity. If so, then we may in the future find that domestic industry is able to provide output destinations for the recyclate which currently has to be exported overseas.

I find this a more likely route to a circular economy than the more commonly presented alternative, but it is one which is likely to be quite a few decades away, which no doubt is not the sort of pace of change felt necessary in environmental circles.

Report from Base London: the need for a circular economy

I was at the Base London sustainability event yesterday (http://www.basecities.com/london/the-event/programme), at which The Aldersgate Group launched its new "Resilience in the Round" report on the need for a circular economy: http://www.aldersgategroup.org.uk/reports. 

At the conference there was some attempt to describe what this is and why we need it. Apparently a circular economy is where the value of resources is retained and not lost as those resources are transformed through different applications/uses throughout their lifecycle. But the value of a resource is not a static and invariate characteristic but changes according to how (and when and why) it is being used. When left out with the rubbish these materials have a negative value as waste managers must be paid to take them away. After being sorted/processed at cost, some residual value may be recovered. But this is not the same as retaining the value of the material throughout its lifecycle.

Where I really fell down though was on the justification for this new "paradigm". According to the report, we need to move to a circular economy due to scarcity and to higher resource costs. I however don't find the evidence for this particularly compelling.

Real input prices (according to the IMF's index for industrial inputs) have indeed doubled since 1980, which at first glance appears significant, and we are reminded that  the commodity price savings of the 20th century have been eroded in recent years. But this should be taken in a context where real global GDP has increased  by almost six times during the same period (1980-2010). This suggests that currently (i.e. in 2010) material costs as a proportion of output were actually less than 40% of what they were in 1980. So while the prices of material resources are close to all time highs in absolute terms, relative to other resources (in particular labour), they are actually not particularly high in historic terms.

This, to me, challenges the assumption that we should be worried about costs. We have just been through the biggest commodity boom in history and it is likely that this has incentivised improved resource efficiency in the economy. It has not however delivered the significant cultural and economic shift perceived as necessary by the proponents of a new circular economy. Given that commodity prices are now falling, it seems to me that in reality the costs of resources do not justify a significant shift in economic activity away from primary commodity extraction and usage.


This still leaves however the question of scarcity. Notwithstanding the fact that prices are an indicator of relative scarcity, perhaps there is a case for worrying about running out of stuff. But known reserves of commodities are at all times highs (in the case of oil: http://en.wikipedia.org/wiki/Oil_reserves#OPEC_countries) and commodity production is also at all time highs (in the case of copper: http://en.wikipedia.org/wiki/Copper#Production). So, on the face of it, it doesn't look as though we are running out of stuff. On the contrary, we have more stuff than ever, despite the demand for it.

Defra recently looked at this issue in its Resource Security Action Plan (http://www.defra.gov.uk/publications/2012/03/16/pb13719-resource-security-action-plan/). This explicitly stated that "supplies of most resources are not expected to run out". This is why the report focused on resource "security" rather than scarcity. This newly invented resource security problem essentially boils down to concerns about potentially unfriendly regimes having dominant market positions in certain commodities. Some might say this is a slightly static and short-termist view as it doesn't recognise the dynamic market response to resource supply issues, in terms of both finding new sources of supply (see e.g. Vietnamese and Japan working together now to open up new supplies of rare earth metals: http://www.theregister.co.uk/2012/06/18/japan_vietnam_rare_earth_minerals/) and also of finding substitutes to the use of particular materials.

The concept of a circular economy could be potentially interesting. But not in this guise. It seems like the latest fad for those who would like to see a return to local production, but aren't quite willing to shout explicitly for the protection of domestic industries. And when it focuses its attention on the pretend issues of scarcity and resource crunches, it fails to address more fundamental problems associated with a lack of domestic competitiveness: high costs, particularly for energy. When government policy is deliberately driving energy costs up, this seems a particularly glaring omission.