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.

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.

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.

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.

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.

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.