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.

Overcapacity concerns for AD?

I see via @ediewaste that there have been a few concerns about the state of the AD market voiced at the recent ADBA conference.

Basically this looks to me like an incumbent saying: look guys, this is a lot more difficult than you think; be careful as we don't want a situation where there are too many plants chasing too little feedstock (i.e. overcapacity). Overcapacity is of course an issue which tends to be associated in the trade press with efw (the recent Eunomia report being a key element stoking these concerns).

I suspect we're more likely to end up with overcapacity for a technology like AD where the plants are relatively smaller and less capital intensive to deliver than a large-scale residual waste plant. They are therefore less reliant on long-term debt funding which means operators may have greater flexibility to take a punt on a project without being constrained by having to satisfy risk-averse lenders.

AD is a technology which has explicit government backing and which enjoys some of the largest amounts of support under the Renewables Obligation. If operators can't get it to work under these circumstances then there really is something wrong.

Talking bout a revolution

I see that a new 'resource revolution' has started whilst my attentions have been turned elsewhere.

To me, it looks like the same old story around material scarcity and how this might drive an increasingly circular economy (which has certainly now taken hold as the concept du jour). Regular readers will know I don't find this story particularly compelling as the relative prices of resources remain low in historic terms. Stuff continues to become cheaper relative to people, a long term trend which I cannot see reversing.

Instead, I think that higher regulatory demands will continue to drive higher levels of material recovery and push increasing amounts of recyclate back towards the productive economy. On the demand side, the increasing repatriation of reprocessing and manufacturing is more likely to be driven by global factor price equalisation than anything else.

Having said that, there does seem to be a lot of interesting stuff (led by the Ellen MacArthur Foundation) going on around designing new products for a circular economy. I suspect that this could prove to be effective in the long term if waste disposal costs are driven sufficiently high (by government and regulator intervention) thereby driving extremely high material recycling rates.

One thing is for sure though, intervention which leads us increasingly towards a circular economy will involve higher costs to consumers and waste producers. For me it is questionable whether this is necessary. As I have said before, if material scarcity really is a major concern, then the simple market dynamics of demand and supply will address this issue without the need for government intervention.

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.

Global outlook not great

I was at a conference on secondary commodity markets on Tuesday at which Ross Strachan from Capital Economics gave quite an interesting overview of their outlook for the global economy.

Essentially, things aren't looking particularly bright in their view. Europe is heading towards disaster and the ultimate break-up of the Euro, while China is slowing down too. There are some slightly better signs from the US (if policy makers there are able to agree a budget deal) but overall, it looks to them as though the global economy is at best heading sideways for a good while to come.

I tend to agree with their outlook (although I am not yet convinced that the Euro will break up). I would also add that forthcoming banking regulations are going to be an additional constraint on growth by restricting new investment.

What does this mean for the waste sector? Operators are already suffering extremely tough times, with waste volumes and recyclate prices down on previous highs. A faltering macroeconomic recovery will continue to squeeze the sector at both ends with operators potentially suffering lower gate fees at the front end as they chase lower volumes and lower offtake revenues for materials at the back.

In the medium term there may be some respite for integrated businesses as increasing moves into the waste-to-energy space coincide with policy designed to drive up energy prices, thereby helping to support offtake revenues in that area.

But in the meantime, its likely to remain tough going. MRF gate fees tend to be sticky relative to prices of secondary commodities and if some recyclers haven't properly managed their recyclate price risk then they could find themselves struggling in the near term.

CBI calls for industrial strategy

I see the CBI is calling for the government to introduce a stronger industrial policy. This is an area which is receiving increasing policy attention following the supposed breakdown of the market-based approach.

Regular readers will not be surprised to learn that I disagree with attempts at industrial strategy. I suspect that any strategy which was ultimately implemented by government would be based on quickly outdated assumptions and lead to an inefficient allocation of resources.

If the CBI wants to rebalance the UK economy away from consumption and towards investment (as stated in the report), then it should ask government to introduce incentives to encourage private savings and investment. It should not ask for sector-specific interventions, which for me are more likely to distort activity and crowd out fresh private sector innovation and investment. 

The CBI is calling for a strategy to help support incumbents, which is of course the CBI’s remit, but is not efficient or conducive to long term growth

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.