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by centralised authorities in any way which might be of practical benefit and not simply a snapshot in time which is outdated by the time it is published.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For me the government's resource security action plan is already out of date.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.

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.

A job is better than no job

On Monday evening I was at the launch of SITA's new report examining the potential creation of social value in the waste and resources industry. I haven't yet had a chance to read the report fully so will save that for another post.

At the event Caroline Jackson, the former MEP who was Rapporteur for the revised Waste Framework Directive, raised concerns that the sort of jobs being created at the low end of the industry (i.e. work on picking lines at recycling facilities) were essentially demeaning and that the unemployed should instead be given a 'hand up' (she was of course light on detail as to how this could be achieved).

I was pleasantly surprised by the robust response from Colin Crooks of the London Community Resource Network. He essentially made the extremely valid point that a job is better than no job. He has apparently worked with people in some of the most deprived and hard to reach communities in the UK and felt that they would be crying out for any kind of work which could help them reintegrate into society.

This reminded me of the sort of argument that used to be made by Paul Krugman when he was an economist (and not just a polemicist) when he pointed out that poor working conditions in the developing world may appear abhorrent compared to Western practices, but provided the workers with an important escape route from the far harsher conditions of rural poverty. I agree.

This topic is also becoming relevant in the ongoing debate about recylcate exports. There are increasing calls, both in the UK and at European level, for restrictions to be placed on recyclate exports (supposedly to protect European resources, I suspect though that that the same people would be against China restricting trade in rare earths). At a basic level, this is nonsense as the gains from trade benefit both the importing and exporting economies. Forcing European recyclate exporters to instead find domestic destinations for their material will only serve to raise costs to waste producers across the economy. (And would lead to less recycling overall if there is insufficient EU capacity to deal with all the material.)

The proponents of restrictions sometimes use examples of lower environmental and employment standards in the developing world as an unfair source of competitive advantage for overseas manufacturers and reprocessors. This  may seem reasonable at first glance, but (as above) the imposition of Western-style employment standards would perversely have the effect of reducing employment in those poorer economies and leave workers worse off by condemning them to a life of grinding rural poverty.

As workers in developing countries become richer, they will demand better working conditions and higher welfare standards. This may prove to be too slow a process for some commentators, but better times for the poor would take even longer to arrive if artificially high standards were imposed too soon.

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.

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.

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.

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.