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Recycling: Cost Benefit Analysis

Executive Summary

1 Introduction

2 Approach to Analysis

3 Waste Volumes

4 Benefits of Recycling

5 Markets and Value of Materials

6 Costs of Recycling

7 Net Benefits of Recycling

8 Conclusions

Annex 1: Landfill Assumptions

Annex 2: Willingness to Pay Survey

Annex 3: Analysis of Willingness to Pay Results

2 Approach to Analysis

2.1 Components of the cost benefit analysis

The components of the analysis are shown in Figure 1. The benefits of recycling are estimated from:

• savings in landfill costs which are made up of the financial costs of landfill and externalities (environmental costs);

• the saved costs of collection for disposal;

• possible other benefits – amongst other things, we examine possible direct consumer benefits that are expressed as the difference between a willingness to pay to recycle and the actual cost.

Costs of recycling are estimated from the costs of collection and sorting, less the value of material in end-use markets.

The data are analysed to build up cost and benefit curves for individual materials such as illustrated in Figure 2. The analysis takes a marginal perspective, ie, it measures the costs and benefits of additional levels of recycling; this allows an assessment of the optimal quantity of recycling. As is discussed in the following pages (Section 2.1.4), a key requirement for such an analysis is to build up a sloping “curve” rather than a horizontal line based on a single cost or benefit estimate. The slope or steps on the marginal cost and benefit curves are built up through assessing costs and benefits for separate geographical locations – territorial local authority (TA) areas.

2.1.1 Assumptions underlying cost benefit analysis

Cost benefit analysis brings a set of assumptions, some of which are usefully outlined in more detail.

The starting point for cost benefit analysis of government policies is the assumed objective: policy should result in an improvement in the overall welfare or well-being of society. To assess this, cost benefit analysis measures total costs and benefits wherever they fall in society and compares one with another; wellbeing-improving projects or policies are those for which the total benefits exceed the total costs. In doing this, analysis is not concerned with whether projects or policies have effects that differ across society, for example, if a decision has a net benefit for the nation but results in net negative impacts on some people and net positive impacts on others. The theory is that aggregate distributional effects of many individual policies (or the absence of policy) are addressed in aggregate, rather than for each individual policy.²

Cost benefit analysis uses money as a way of aggregating overall impacts on wellbeing. It assumes that the way that people spend their time and money reflects their underlying preferences and that all individuals are seeking to maximise their wellbeing. Thus decisions to recycle or not are based on a weighing up of the personal costs and benefits of those decisions. Within this, individuals will state their preferences for living in a less wasteful society or for other outcomes that might result in a willingness to recycle, for example, through their willingness to spend time on these activities. Firms are assumed to act consistently with maximising their wellbeing, expressed as profit.

The environment is treated in the same way as other resources, ie, no consideration is given to any differences between the impacts on natural and physical capital. Rather it is assumed that people’s preferences for attributes of the environment (including reduced impacts of waste) can be expressed in the same way as can their preferences for other items, like fast foods, time and fizzy drinks.

Cost benefit analysis assumes that people and firms act consistently and rationally with the objective of maximising wellbeing and that we can use money as a convenient way of measuring the aggregate effects on wellbeing.

2.1.2 Other potential benefits

In addition to the financial value of recovered materials and savings in environmental externalities, there are two other types of potential benefit that are considered: direct consumer benefits and the impacts on New Zealand’s image.

Direct consumer benefits

The motivation for individuals to recycle is not always clear. Where households or industry pay per unit output of waste, there is a financial incentive to recycle if this is a lower cost than the disposal alternative. However, many households recycle when there is no private financial incentive. This might be when they do not pay per unit of waste output or the amount they pay is sufficiently lumpy that it does not change with reduced volumes of waste output. For example, this might be households putting out one or two bags per week or who use a bin with excess capacity. In these circumstances, the motivation for recycling must be related to some other personal benefits or a sense of communal or personal responsibility.

A UK study of attitudes to recycling found that low or non-recyclers felt that recycling was not an important enough issue to most of them, but many of them thought of it as a ‘good thing’ to do, and hence felt guilty for not doing it. In contrast, medium/high recyclers were often motivated by a ‘feel good’ factor.³ It is likely that motivations are a mixture of intrinsic satisfaction and avoidance of guilt about not recycling. We do not attempt to analyse these motivations further, but simply to acknowledge that there is a consumer benefit associated with recycling and a disbenefit from not recycling. This study includes the results of a survey of households that has been used to place a value on these consumer benefits.

The effects of including these benefits are considerable and it raises the obvious question of whether these are additive. For instance, if households are willing to recycle because they perceive that this will reduce volumes going to landfill and improve resource efficiency, can their consumer surplus (the difference between their willingness to pay and current costs of recycling) be added to the other benefits of recycling which take account of the external costs of landfill and where steps are being taken in other markets, through other regulations, to tackle externalities of resource use? In other words, is there a benefit that households are receiving that is not accounted for elsewhere? Our view is that there is.

Regardless of the landfill charges that are paid (by someone) and the value of recycled materials, householders appear to be willing to spend time and money on recycling activity. A counter-argument might be raised if it is thought that households are unaware of the costs of landfill and the extent to which externalities are covered either for landfill or for other resources. The argument could be raised that if they were aware, the time (or money) they are willing to spend on recycling would reduce. This is uncertain – we have no way to test this in the absence of a more detailed survey that also ascertained the state of current knowledge of households. However, we suggest that this may not make a difference and that households are obtaining an intrinsic benefit from recycling that relates to factors not currently charged for and not accounted for in other elements of the benefit analysis.

Impacts on New Zealand’s image

The Ministry for the Environment has suggested that the existence of recycling schemes may be a contributing factor to the “clean green image” by which New Zealand seeks to portray itself. This objective was set out recently by the Prime Minister, in a statement that linked improved waste management with goals of environmental sustainability, in turn a part of sustaining New Zealand’s unique culture, values, and national identity in a world of globalised media and culture.⁴ In this context, the concern is that international perceptions of New Zealand will be affected by rates of recycling.

Research undertaken for MfE identified the impacts of worsened environmental perceptions on exports of dairy products, organics and on inbound tourism;⁵ it found significant value of protecting the image⁶ but the research cannot be used to identify the impacts of changes in individual components, eg, loss of recycling activity, let alone changes in volumes recycled.

For analysis here, the changes that need to be examined are marginal, ie, the analysis is of the impacts of changes in the total volume of material recycled rather than impacts of recycling per se. There are too many uncertainties to include these effects in analysis. These uncertainties include:

• whether national image is affected by changes at the margin, eg, additional tonnes of plastics recycled versus simply that plastic is recycled;

• what is the margin? It might be more tonnes collected in existing schemes or extension of collection to areas not currently covered.

We ignore these impacts in analysis, while recognising that there may be some additional value.

Employment impacts

Employment effects are sometimes discussed as benefits and sometimes as costs. In cost benefit analysis labour is treated as a cost. So if more recycling leads to more jobs this is measured as an increase in labour costs. This is an opportunity cost approach and is consistent with the treatment of all other costs in the analysis. It is assumed that wage rates reflect the value of this labour in other markets. In other words, by employing people in recycling, there is a lost opportunity for them to work in another industry in which they would be productive, add value and in which another employer would be willing to pay them.

When unemployment rates are high, the opportunity cost of labour will be low. This is because there is a large pool of labour that is not being used for other productive uses. In a completely unregulated market (eg, with no minimum wage legislation and no unemployment benefit), high unemployment would be reflected in low wage rates. New Zealand has a labour market with some regulation; it means that wage rates do not drop to very low levels in times of significant unemployment. However, analysis can take account of the low opportunity cost of labour by using ‘shadow’ labour costs that involve a reduction from market wage rates to low levels, or even zero. This tries to mimic what the market wage rate would be in the absence of regulation. Labour costs might be measured at less than zero (ie, a benefit of employment) if there were positive externalities from employment (or negative externalities of unemployment) which would mean that society was willing to pay to reduce unemployment. However, because unemployment rates are currently low⁷ it is reasonable to assume that wage rates are a good proxy for the opportunity cost of labour. Labour is treated as a cost equal to the appropriate wage rate in the analysis.

2.1.3 Elasticity of diversion/fly tipping

Fly tipping involves the unauthorised disposal of waste which may be on private or public land. It has costs because of the amenity impacts and/or the costs of removal to an authorised disposal facility. Recycling, or more specifically the policy instruments or other interventions used to achieve greater rates of recycling, can lead to increases or reductions in the level of fly tipping.

On the one hand, fly tipping occurs because it is lower cost than the alternative, ie, authorised disposal. Where there is the option of recycling waste this may be lower cost than landfill disposal and thus can result in reduced fly tipping activity.

On the other hand, the mechanisms used to encourage greater levels of recycling may lead to higher costs of disposal, eg, landfill levies that encourage recycling can result in increased levels of fly tipping. Although there is little empirical evidence of unauthorised tipping in response to increased landfill disposal prices or unit charging for collection and disposal, this does not suggest that it does not occur, just that it has been little studied. A recent OECD report had numerous references to the issue, for example, but these were largely theoretical and anecdotal.⁸

However, the issue and the direction of the effect apply to the policies used as opposed to the targets adopted or the level of recycling per se. In contrast, this report does not analyse the policies used to achieve higher rates of recycling, just the costs of the technical choice. In addition, there are few data that could be used, either on the costs or the elasticity of response to landfill changes. Fly tipping impacts are not included in the analysis in this study.

2.1.4 Marginal cost analysis

The study examines the marginal costs and benefits of recycling. That is, the analysis is focused on changes to quantities recycled – the costs and benefits associated with recycling one more tonne of a given material. This is the appropriate form of analysis when examining the appropriate level of recycling to achieve. In contrast, total or average costs of recycling would be examined if simply analysing whether a specific recycling project should go ahead.

Marginal analysis can be undertaken over the long or short run. In the short run, not all costs and benefits are relevant. For example, there will be a range of fixed costs associated with a Materials Recovery Facility (MRF) that will not change with quantities of throughput. This is not always straightforward, as it depends to an extent on scale. Thus a small change in volume recycled will not require a change in the number of collection trucks that will be associated with a more significant change in volume. It also depends on how the margin is defined – is more collected in an existing recycling scheme or is recycling extended to areas that do not currently have a recycling system?

We have used average costs of recycling, which is closest to a long run marginal cost (LRMC) estimate. This is consistent with an analysis concerned with significant changes in recycling volumes and/or marginal changes that are based on extending recycling to areas that currently are not covered by recycling schemes.

On the benefit side, savings in landfill costs are estimated using an LRMC approach. This measures the saved costs associated with future landfills on the basis that this is the opportunity cost of using up space in existing landfills.

2.2 Level of analysis

The variation in costs and benefits that allow optimal levels of recycling to be defined require that analysis is undertaken at a sufficiently disaggregated level so that differences in costs and benefits can be identified. Without disaggregation, analysis may simply provide information to address a binary decision: is recycling beneficial or not? This is because, for any given material, the analysis using existing data may provide a single point estimate of the costs and a single point estimate of benefits – this is of limited usefulness. However, costs and benefits are likely to vary geographically, eg, by individual landfills and collection/recycling schemes.

The approach adopted has been used to achieve sufficient disaggregation so that cost differences arise, but that makes the study manageable within the time and budget allowed. The analysis has used territorial local authority (TA) data on waste arisings and developed an assessment of costs and benefits at this level. This has included the identification of site specific costs based on population density and the location of markets so that transport costs to market can be calculated.

2.3 Limitations

2.3.1 Data

The analysis is limited by the data available. The time for this study has not allowed for much collection of primary data. Rather it has used existing data sets in the main, including those available to the Ministry for the Environment (MfE), the consultants and published reports. In parallel with the cost benefit work, a willingness to pay survey was conducted amongst households to identify direct consumer benefits of recycling and additional information on costs and revenues for collected materials were obtained from meetings and phone interviews with relevant industries.

Covec was assisted in its estimation of costs and revenues by Morrison Low & Associates (MLA); it provided data and reviewed collected data and assumptions made.

2.3.2 Full lifecycle benefits

The study is not able, in the time available, to examine the full lifecycle benefits of recycling options. The analysis includes the external costs of landfill on the basis that this is a major element of missing costs. This is compared to the financial costs and benefits of recycling. It is frequently argued that recycling has wider benefits associated with reduced use of raw materials and energy, and that these are currently under-priced in the market. For example, if recycling involves reduced use of energy compared to use of virgin raw materials and energy prices do not include the costs of emissions (which they do not currently), then there is some additional value associated with recycling. However, this involves a life cycle analysis that is specific to the manufacture of individual products; this is beyond the potential scope of this study in the time and budget constraints. Rather the assumption will be made that market prices reflect the full social value of these alternatives to manufacture from virgin raw materials.

There is an additional consideration here which is that many of these potential additional market failures are being tackled through other policy interventions and that these are likely to be more appropriate. For example, if there are benefits from energy savings associated with glass recycling and that these are greater than the market value of energy savings, eg, because of underpricing of energy and/or associated greenhouse gas emissions, then these should best be tackled through energy and climate change policies rather than via waste policy.

The Australian Productivity Commission states that “Any case for using waste policy to address upstream externalities would have to be very carefully evaluated and be based on an inability to effectively use more direct policies. It should not be presumed that governments do not intervene upstream ... The Commission considers that ... it is highly unlikely that a waste management policy would be the best way of tackling an upstream environmental externality”.⁹

This statement makes sense as a driver for policy intervention and suggests that these benefits not be taken into account in justifying waste management policy.

However, not taking them into account might suggest a lower total level of recycling because the market would achieve a higher amount than it does currently if these upstream costs and benefits were internalised in market prices. For analysis we need to be clear on the implications. If the externalities of manufacture (of glass, steel, etc) were included in market prices, market-driven recycling rates would be likely to be greater, as would the estimated optimal levels of recycling. However, without including them it is still possible to address the question of whether waste management policy should be used to encourage greater rates of recycling than occurs currently.

2.4 Discount rates

One of the key assumptions for the analysis of costs is the discount rate.

Private sector investors use discount rates as rationing devices for scarce capital and other resources. Discount rates are an opportunity cost concept; they are used to measure the implications of diverting resources into one set of activities (eg, building a landfill, running a recycling centre) at the expense of another. The same approach is required for public sector decisions; introducing policy to ensure that certain outcomes are achieved diverts resources to where otherwise they would not be used. This has costs that are equal to the value of the resources if used elsewhere. Private sector decision makers measure a risk-weighted opportunity cost of capital. This takes account of rates of return in other investments but weights the investment for risk; these risks are associated with a range of factors that include movements in market prices.

Private and public sector discount rates are different because of differences in levels of risk and scarcity levels. Many of the risks that apply to private sector investors do not apply to the government as risks are spread across all members of society. And capital scarcity is less of an issue at the level of the nation. The approach taken is often to measure an opportunity cost of consumption – the effect of policy is to shift consumption levels over time, eg, by spending time recycling we have to shift time spent on other activities into the future.

In the context of energy policy, the MED has recently undertaken an analysis of a discount rate for New Zealand based on an assessment of the opportunity cost of consumption; it estimated a rate of 4.4 per cent but believed that 5 per cent was sufficiently close to be a useful rate for analysis.¹⁰ However, the Treasury suggests that a 10 per cent discount rate should be used in analysis in the absence of a rate developed for a specific sector.¹¹

For analysis in this report, a 10 per cent rate is used as the default value, but a 5 per cent rate is used in sensitivity analysis.

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