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.

Ellen MacArthur's boat as a small, zero production economy

Ellen MacArthur (EM) is doing a great job as the poster girl for the circular economy and is clearly very passionate about the subject. Where does that passion come from?

I think I've seen references to her comparing the enclosed nature of her round the world voyages to the planet in general and how this awakened her realisation of the finite nature of resources and the need to change global production and consumption patterns. But how realistic is this comparison?

At its simplest level we might think of EM's boat as a small, zero production economy. In this economy EM is given an initial endowment of resources which she manages/depletes during the course of her voyage.

An alternative model of an economy would add production, which would enable the economy to apply different combinations of capital and labour to its initial endowment thereby producing new goods/resources. In this way, the supply of resources available to the economy is no longer fixed but can be grown through production. Productivity improvements over time enable the economy to grow (ad infinitum).

Which of these two models is more appropriate for the global economy? This question really boils down to whether or not resource scarcity is actually a problem at the global level.

Environmentalists say of course resources are finite. But this isn't really true in any practical sense (known commodity reserves are at all time highs as is commodity production). The US shale gas boom and the recent news that Japan has found a new way to extract energy from methane hydrate are examples of how the supply of resources isn't fixed but can be grown through new production methods (a new application of labour and capital to our initial endowment).

Does this really matter for the circular economy? Not if it has an alternative justification, such as minimising environmental impacts or reducing business costs, but it is not necessarily as straightforward as some might expect.

Market failures in waste prevention

Defra has today published a call for evidence for its waste prevention programme. I haven't yet read the whole document but one thing which immediately raised my hackles was spotting a section on "market failures". I personally think that policy makers are all too quick to refer to market failure when actually these either don't exist or are preferable to the far more prevalent alternative of government failure.

The first one Defra refers to is the case of "environmental externalities" - fair enough at first glance. It then says this is manifested through the full cost of waste not being paid by producers. On the contrary, businesses do pay for the waste they produce (and pay prices which are higher than the externalities would actually suggest). In the household sector this incentive is of course missing but I don't suppose for one minute Defra is proposing the politically unpalatable introduction of pay-as-you-throw.

"Split incentives" are another policy makers' favourite. The example used here is of a manufacturer designing out waste to the benefit of consumers or local authorities (presumably packaging). But the manufacturer benefits from not having to pay for avoided material inputs. The landfill tax escalator and the commodity boom of the past decade have both shown that manufacturers respond to price signals and reduce waste.

"Information failures". This is where policy makers expose their belief that they are better placed to spot bottom-line savings than actual businesses themselves. Not true in my book.

"Behavioural barriers". Here Defra seems to think that firms/individuals discount the future too heavily and so are unwilling to take longer term actions. However, individuals must take decisions under conditions of extreme uncertainty and their choice of discount rate may actually lead to far more rational choices than Defra officials could come up with.

"Financial barriers". Businesses/individuals may be credit constrained. For me, this is just the real world where financial choices have to be made between competing priorities and, to the horror of Defra officials, waste prevention may not be at the top of the list.

Overall, I think that Defra (and its various consultants) tend to underestimate the opportunity costs associated with waste prevention measures. Implementing waste prevention often has a positive financial return. But so does investment in productive business activity/output. It is not necessarily irrational for businesses to choose to invest in production rather than waste prevention, but policy makers often seem to miss this point.

Should one size EU policy fit all?

Further to yesterday's post, it occurs to me that in the area of global climate change policy we recognise that poorer developing countries have lower per capita greenhouse gas impacts and so should be allowed to develop without binding carbon constraints, while at the same time developed countries with higher per capita emissions should cut back stringently.

In the case of EU waste policy however, we find that the poorer Eastern European States have lower environmental impacts from their waste management systems but must have high cost Northern European-style systems imposed on them straight away (perhaps before they can afford them?).

Would it not be fairer to allow the Eastern States only to introduce recycling and recovery infrastructure as their waste generation increases, while at the same time placing stronger waste reduction requirements on northern Member States?

Romanian municipal waste performance better than Germany

Via @Defrawaste I see that Eurostat has published the latest EU figures for municipal waste management.

Poor old Romania (as well as other Eastern Member States) often gets singled out for its poor performance as it landfills 99% of its municipal waste. Terrible, I'm sure we'd all agree. But another, often overlooked factor, is that waste generation per person is much lower there than in some of the richer Member States with more sophisticated approaches to waste management.

In fact, if we were to include the avoided production emissions from lower waste generation in Romania we would find that net emissions from its municipal waste would be lower than for Germany, which only sends 1% of its municipal waste to landfill. (I have cheekily used Defra emission assumptions for the UK when checking these figures, which would lead to the assumption that Romanian landfills are managed in accordance with Landfill Directive requirements for capping/gas management which may or may not be accurate.)

As anyone au fait with the waste hierarchy knows this is because the environmental gains from waste minimisation dwarf any emission savings from switching between different forms of waste management once that waste has been generated. The sector awaits Defra's National Waste Prevention Plan due in December with interest.

MRF CoP - do we need it?

My previous post suggested that economic theory doesn't necessarily support the case for a mandatory MRF code of practice (CoP). While I believe that this is the case, and would maintain that - contrary to Defra's stated belief - current market signals do work (just not necessarily in domestic reprocessors' favour), I might still support the introduction of a CoP in practical terms.

My reason being that we have an obligation to meet European legislative requirements, in that we must demonstrate that a co-mingled approach to recycling can meet Waste Framework Directive objectives. In this context, the introduction of a mandatory code may be a necessary evil.

Is the CoP really necessary to guarantee high quality recycling? I don't think so, but I do think it may be necessary to placate a noisy domestic reprocessing sector, and also to offset the objections of an equally vocal wider set of campaigners for "real recycling".

I also think that the end result will be to push costs from (both domestic and overseas) reprocessors on to waste producers (local authorities and householders). Where these costs were previously borne by overseas reprocessors, the net effect will be negative for the UK economy.

Whether the implementation of a mandatory CoP will be sufficient to offset other macro-economic issues affecting the domestic reprocessing sector remains doubtful to me.

Recycling markets as a model of asymmetric information and quality uncertainty

George Akerlof wrote a famous economics paper on the "market for lemons", which took the used car market as an example of where asymmetric information coupled with quality uncertainty leads to market failure and the need for government intervention.

In the paper, used car customers are only willing to pay for average quality, which results in high quality vehicles being unable to attract a sufficiently good price to enter the market. The end result is a race to the bottom in terms of quality with the market ultimately delivering a 'no-trade equilibrium'. The way to avoid this is of course through government regulation that helps to ensure customers of the quality of the vehicle they are purchasing.

This is exactly the rationale behind Defra's proposals to introduce a mandatory MRF code of practice. The recycling industry is an apparently perfect example of where there is asymmetric information between different parts of the supply chain and there is quality uncertainty at point of purchase (beyond crude visual inspection). Good performing MRFs are unable to differentiate themselves from poor ones, and reprocessors are incentivised to pay a price that perversely only attracts lower quality material.

Defra's case for intervention seems compelling. But is that actually the case in the real world?

No prizes for guessing that my personal view is that there isn't in fact a strong case of market failure in recycling markets. Instead I think we are in a game theory world of repeated games and repeated bargaining. In this reality MRFs have a strong incentive to meet customers' quality specifications in order to secure repeat business. This results over time in a market equilibrium where quality is differentiated according to price and there is no need for government intervention. I wonder whether Prof Akerlof would agree.