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.

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.

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.

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.

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.

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.

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.

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.

Benefits of resource efficiency

Also at the APSRG debate, the £23 billion Oakdene-Hollins estimates of the benefits of resource efficiency were raised again. (http://randd.defra.gov.uk/Document.aspx?Document=EV0441_10072_FRP.pdf)


These often seem to be used as justification for forcing businesses to do something different, as they are clearly failing to spot money saving opportunities which have instead been grasped by policymakers in Whitehall.

But the report itself recognised that businesses face opportunity costs (referred to in the report as "hidden costs" I think) when implementing resource efficiency measures, in terms of productive investment opportunities foregone. These were not estimated in the report, due to methodological difficulties, but could significantly reduce the actual net benefits realisable to firms.

My personal starting point for an estimate of these hidden costs would be £23 billion. I am sceptical of the superior ability of civil servants to identify savings to businesses and think that if there were significant savings to be found, then they would be realised long before being spotted by bureaucrats.