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Symposium 2015

Solution for Re-assessing Waste Management and the Circular Economy

The Challenge

Environmental degradation and resource depletion threaten the sustainability of economic growth in the developed world, and build enormous pressures in the developing world as it strives to match th ...

Environmental degradation and resource depletion threaten the sustainability of economic growth in the developed world, and build enormous pressures in the developing world as it strives to match the West’s prodigal lifestyle. Both issues can be addressed by the Circular Economy (CE): if we stop generating waste, and re-use and recycle resources, we avoid environmental degradation and stave off resource depletion. But, the financial realities of (mostly) capitalist societies make so many recycling initiatives unattractive.

Circular Economy: Moving from Why to How


The debate on the Circular Economy has moved on from Why to How. The basic facts of dwindling natural resources and growing demand are inescapable: it is only a matter of time—in some cases measured in just decades—before certain resources will no longer be available as virgin commodities. If we dither too long, we will be forced into a messy and inordinately expensive process of trying literally to mine landfills or to recover widely-dispersed discarded materials. Already, Veolia in Britain is recovering platinum group metals from Britain’s road dust: at present it is only viable due to the high costs of landfill, but in time it may well be a necessity.

Circular Economy thinking aims to move away from waste: prevent it rather than manage it, breaking the still prevalent linear make-use-dispose paradigm that still dominates our economies. The Ellen Macarthur Foundation/SUN/McKinsey report submitted to the EU in June 2015, “Growth Within: A Circular Economy Vision for a Competitive Europe,” estimated that in 2012 the average European used 16 tonnes of materials; that 60% of materials discarded were landfilled or incinerated; and in value terms, 95% of the material and energy value was lost.

Now, then, it is time to turn to addressing how to implement a widespread movement to Circular Economy principles.

Appealing to the better nature and common sense of people and organizations (especially for-profit organizations) can at best have limited efficacy. Voluntary schemes achieve limited support and create competitive imbalances: companies that do not participate, the free-riders, gain a competitive advantage. Further, partial support leads to partial solutions that address the lower-hanging fruit, gathering the more readily accessible material but leaving a substantial percentage of “leakage.”

The skeleton of the model we propose is as follows: an independent entity, funded by a regulation-backed fee charged to all producers of a designated class of products, is established. The entity, generally known as an Extended Producer Responsibility Organization (EPRO), takes on the responsibility of managing the end-of-life of the products, indemnifying the producer from further responsibility. This model creates a level playing-field (and through export credits can also protect international competitiveness), and addresses 100% of the end-of-life materials. The fee charged is calculated based on assessing all the social costs or externalities arising from the end-of-life product phase, and, thus, providing incentives from the earliest stages (selection of materials, product design) for producers to take the full life cycle into consideration, thereby, reducing the fees they pay. Consumer behavior is then influenced by product prices that take into account externalities—a far more positive and appropriately targeted driver of change than awareness campaigns.

Let us now put some flesh on the bones of this skeleton.

The biggest obstacle to achieving circularity in the economy is funding: if it were readily possible to recover and reuse materials profitably, then business would be doing so. It is our contention that at a macro level, it is not only a necessity, but also profitable once you take into account all the externalities that effectively subsidize widespread linear economy thinking. When we package water in plastic bottles that become waste, which “someone” has to pick up and manage, the utility of the plastic bottle is being subsidized by organizations—typically local or regional governments—which deal with waste collection. Worse still are the costs of dealing with uncollected waste that becomes environmental pollution with adverse health, aesthetic and amenity costs.

In the very long-term, we must also consider the costs of reckless consumption of nonrenewable resources: we are using resources that will in time approach exhaustion, becoming increasingly precious and arbitrarily expensive. Given this, we assert that the scheme should aim for nothing less than 100% recovery. Typical EPR schemes show a rapid initial increase in recovery as the low-hanging fruit (the material being discarded in high-density areas well served by collection and transport infrastructure) is captured, then struggle to progress. This improvement plateau varies by product class, but is seldom better than 70% and often much lower. The fact is that even a 75% recovery rate is, in terms of absolute volumes of waste, wiped out by 40 years of 3% growth in volumes.

Our model proposes that the cost of all the externalities be incorporated into the cost of production through a fee (typically mass-based) which is added to production costs and paid to the EPRO. Assessing all of these costs can be difficult and at times controversial, but the estimation can be greatly simplified by simply calculating what it costs to institute a reverse logistic network to gather all discarded material and to establish and support effective recycling and recovery. The inevitable exhaustion of nonrenewable resources in a linear economy justifies whatever costs are incurred in achieving circularity, just as when reclaiming water in the International Space Station cost is not a factor. The complexity of putting numbers to the avoided environmental, health and amenity costs can be dispensed with. However, there is strong evidence that even without invoking the spectre of resource exhaustion, achieving circularity in the economy generates economic activity, creates jobs, avoids negative externalities and is net positive to GDP.

Producers in this model are defined as the entities producing (i.e., manufacturing or importing) finished goods. This puts the onus of paying the EPRO fee on the smallest number of participants consistent with levying end-of-life management fees on the parties most able to control the characteristics of their products. Charging at retail level vastly complicates the process and introduces myriad opportunities for fraud. Charging suppliers of raw materials (e.g., resin manufacturers in the plastics industry) an EPRO fee is illogical as they are not the ones who determine the composition and weight of the products made with their raw material: it would be like charging oil companies CO2 emissions taxes instead of charging the motor manufacturers and industry generally, when it is the latter who are the ones able to design to minimize emissions.

An important aspect of the EPRO fee is that it should be related to the full lifetime cost of the products on the basis that the products need to be recycled or recovered, and to this end an independent body should be established to assess those costs and to revise them periodically as evolving technology changes the economics. In the early stages of a new EPRO, a simple scheme could be adopted, putting products into broad categories: for example, in packaging, the categories could start out as glass, plastics, metal, wood, paper and composite. Composite materials would be materials comprising multiple different components in a manner that renders them not readily separable, and would attract a higher fee. In this context it is interesting to note that India has recently banned multi-layer films: we would advocate that rather than banning them, they should simply carry a fee commensurate with the difficulty of recycling them. Simple economics would then dictate that they would be used where they are justified, and the funds to cover their high cost of recycling would then be available.

The structuring of the EPRO fees for differentiation within categories and to cater for varying forms of combinations would evolve over time and be adapted to new techniques, and would provide a steadily more sophisticated impetus to producers towards making their products simpler and cheaper to recycle. Producers adopting environmentally benign materials and methods would receive economic benefits in the form of reduced fees.

The scope of operations of the EPRO should be national or supranational:

  • A key feature is that all producers must pay equally (in proportion to production) so that the introduction of the EPRO fee does not create competitive unfairness. This requires regulations that cover all producers in a region with controlled boundaries.
  • Implementation on smaller scales, for example, municipal, invites arbitrage across the municipal boundaries, where customers could buy and sell across boundaries to avoid the EPRO fee.
  • On a national or supranational basis, credits for EPRO fees are paid for products exported. In South Africa, for example, motor manufacturers locally source tires on which a waste management fee has been paid by the producer. When these tires are exported, fitted to vehicles, the manufacturer claims a refund of the fees since the tires will not become waste in the country. This avoids prejudicing exporters by making them pay unfairly for a future service (end-of-life treatment) that their products will not require.
  • An independent, impartial facility for assessing fair waste management fees for products, and for driving R&D to help improve recyclability and assist producers in reducing their fees, should be established and enabled to set uniform fee scales for national or supranational application.

 

There are potential unwanted side effects of reflecting true, full life-cycle costs in all products. For example, increasing the costs of certain packaged foods to account for the end-of-life costs of their packaging could negatively affect the very poor; or for another example, making technologies such as mobile phones, which are providing amenities and opportunities for development in impoverished economies, could be seen as counterproductive. We would argue that this may well be true, but if subsidies in areas such as this are indeed desirable, they should be made visible and quantified. Hidden subsidies are by their nature arbitrary, since the quantum is undetermined. It is surely better to understand the full cost of everything that is produced, and where subsidies are deemed desirable for aiding the very poor or fostering development, those subsidies can be made explicit. Funding of explicit subsidies can come from the cost savings to society and government arising from obviating the externalities that the hidden subsidies comprise.

It is also instructive to examine the numbers on the basis of securing 100% participation through regulation. Getting all producers to contribute greatly reduces the burden on a per-product or per-kg basis. For example, research conducted by the Ocean Conservancy (lead analysts McKinsey & Company) estimates the cost of reducing waste plastic leakage into the oceans by 45% at US$5bn. This is a large sum of money, yet it would be funded by a fee of just US$0.02 per kg of global plastic production.

Implementing the model we propose can be seen as simple or complex. In principle it is simple, the complexities arise in the detail and in the political sphere.

The simple statement is: apply a fee to a product class that fairly represents its full cost when you build a system to ensure that the products or the materials they comprise are fully recovered, reused or recycled, and set up an independent body (EPRO) to manage the process.

The complexities in the detail arise from, amongst others:

  • The regulatory framework for the EPRO to ensure independence, good governance and effectiveness.
  • Pricing models to apply fairly to all producers and properly reflect end-of-life costs.
  • IT systems for fee collection and logistics management.

 

In the political sphere, the challenges are in overcoming resistance to regulation, managing vested interests (many sectors of industry are perfectly happy for externalities to remain external), and dealing with borders. The EU has particular challenges given the free movement of goods within the EU, so a regional, EU-wide solution would be needed. There is no doubt that a solution can be found, but getting agreement between the member states will require work.

We remain confident that solutions can be found, in part because we have experience on the ground with a working system in South Africa, and in part because in the long-run, it is not negotiable. As we stated in our opening paragraphs, achieving circularity is absolutely necessary, our only choices are in the route we follow to get there.

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