Agency publishes guide for local authorities exporting waste

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

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

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

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.

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.

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.

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.

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.

Base London: converting London's waste inputs into valuable outputs

The afternoon saw an interesting session for me, which might have been better attended. The main messages which grabbed my personal attention were that recyclates are traded on global markets and will go to the destination where they can command the highest price, and that the export of RDF is undermining the case for investment in UK infrastructure.


Recyclate markets which currently command the highest price are in Asia. For me, this is the fundamental issue around the recyclate quality debate. It shouldn't really be framed as a 'quality' issue at all but as a 'price' issue. The simple (and possibly sad) fact is that domestic reprocessors can't afford to pay the same prices for material of equivalent quality that their overseas competitors can. This can largely be attributed to the fact that domestic reprocessors have a much higher cost base, particularly for energy. Given that it is government policy to push up future energy prices, this is an issue which won't go away for reprocessors. Their best hope (in a competition for recyclate feedstock context) is to push an increasing proportion of recyclate sorting/processing costs back onto waste producers to offset their lack of international competitiveness in other areas. This is of course basically what their demands for material of higher 'quality' are all about.

The other concern which came across in the session was that the export of RDF is undermining investment in UK infrastructure. From a UK perspective, open markets and competition are generally always a good thing. For a waste producer, the presence of an export option will help to keep residual waste management costs down in a context where the landfill tax escalator is otherwise driving costs ever upwards.