EMF report massively overstates the benefits of AD

I have just started leafing through the latest Ellen MacArthur Foundation report into the circular economy. The section on the potential benefits of Anaerobic Digestion in the UK is simply extraordinary. To be frank, I think it is dangerous nonsense to tell local authorities that they can make £112 profit per tonne of food waste processed by AD (based on an exchange rate of 64 pence to the dollar).

Almost all of their supposed profit comes from a combination of subsidies for renewable energy generation and avoided landfill costs (most of which is landfill tax). So, even if we accept their assumptions at face value (I personally think they both overstate the revenues and underestimate the costs), we find that all of the 'profit' to be made actually comes from government intervention. In the absence of this intervention, authorities would in fact be faced with higher costs (in the order of £33/tonne using their assumptions).

So, at an aggregate economy-wide level the real returns are actually negative.

Moving the management of the UK's wastes up the waste hierarchy will increase local authorities' waste management costs over time. To claim instead that they can make massive profits from it is simply not the reality of the situation. I really don't think this sort of report is helpful as it fuels misinformation and leads to poor options being pursued.

More evidence that energy costs are hurting UK manufacturing

Via BusinessGreen I see that there is fresh survey evidence that rising and uncertain energy costs are an increasing concern to UK manufacturers.

I have argued before that UK energy policy is placing UK manufacturers at a significant competitive disadvantage to overseas rivals. It is this impact on their cost base which means that they are unable to afford the same prices for secondary material inputs as reprocessors and manufacturers in other parts of the world.

I do wish that the UK reprocessing sector would recognise this as the principal cause of their relative difficulties, rather than consistently trying to push additional costs on to waste producers and harming other productive parts of the economy.

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.

What does 2013 hold for the waste industry?

Before the Christmas break the Environment Minister predicted waste sector growth of around 3% for 2013 in a response to a parliamentary question. This figure actually comes from a study looking at the wider environmental goods and services sector commissioned by BIS. On the face of it, with the wider economy expected to continue to struggle to deliver growth, this looks like good news for the waste industry. Is it accurate?

If we assume that volumes and prices remain flat next year then a circa 3% growth in sector turnover would look about right to me. The landfill tax escalator should force continued switching from landfill to recycling at the margin, while some new residual waste capacity will come on stream for the municipal sector.

These figures are of course heavily dependent on assumptions about volumes and prices. It would only take an across the board drop in volumes of a few percent for total sector turnover to be reversed in 2013. This is of course not the green growth message that the sector wants to portray but is an outside possibility if difficult trading conditions persist again in the forthcoming year. More realistically though we would expect recycling volumes to rise again and if global commodity markets can continue to demonstrate a reasonable resilience then 2013 should hopefully not be as tough for industry participants as 2012.

I am personally feeling mildly optimistic about 2013 (all these things are relative though I suppose). I think that we should see the Green Investment Bank starting to deliver on providing finance for large-scale residual waste projects (rather than the small AD deals we have seen so far), which should brighten the medium-term outlook for the industry. I also hope that we are through the worst of the wider macro-economic difficulties which should help to hold up recyclate prices after some of the falls earlier in 2011/2012.

The industry has been through a difficult period these past couple of years, and it is likely that conditions will remain extremely challenging. Hopefully, though, we are through the worst and by the end of 2013 will be looking forward to better times ahead.

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.