Closing the Materials Loop
While shopping for copy paper recently, I noticed that recycled multipurpose paper is often priced 50 percent higher than comparable virgin paper. A pack of mechanical pencils made with recycled plastic costs significantly more than the same brand made with virgin plastic. We have heard a lot over the years about the benefits of closing the materials loop. This means not just diverting waste from landfills but also producing and purchasing products with significant recycled content. But why do the price signals appear to be so skewed?
Let us first establish the environmental benefits of using recycled materials in new products. The chart below shows typical cradle-to-gate GHG emissions for the production of several common materials using both virgin and 100 percent recycled inputs. Using GHG emissions as a proxy for overall environmental footprint, the recycled materials clearly have a much lighter footprint. And this does not include the additional benefits of recycling such as avoided landfill emissions for decomposable materials.
In an ideal world, prices would follow the same trend as environmental impacts and recycled materials would offer a significant economic advantage. The real world is messier and prices have other strong drivers, which makes it a challenge to reduce the environmental footprints of the materials that we consume.
Why is recycled paper typically more expensive than virgin paper? An examination of the supply chain shows that there are several problems. The low price of waste paper often does not justify the labor-intensive collecting and sorting steps, limiting the supply of recycled fiber. Additional processing steps such as deinking add further to the cost. Paper recycling also has an intrinsic problem as the fibers become too short to be useful after about 4-6 cycles, and office shredders reduce recycling potential by cutting the lengths of individual fibers. The market is adjusting to some extent by diverting an increasing share of waste paper to China, where lower labor costs as well as government subsidies may be involved in cutting the cost of recycling.
While pre-consumer waste is typically homogenous, well-sorted and in high enough concentrations – and thus easier to recycle – post-consumer waste is heterogeneous, dispersed and subject to contamination. The cost differential between these two material paths explains why many manufacturers find it easier to incorporate pre-consumer waste in their upstream supply chains.
Plastic recycling faces some of the same challenges as paper recycling. Both paper and plastic waste command less than four percent of the market price for finished recycled materials (paper or resin) – much of the return goes to the value added after collecting and sorting. This minimizes the incentives for increasing the supply of post-consumer waste such as used PET bottles. In addition, most plastic recycling is actually a one-time downcycling for various reasons – including the fact that plastic resin can undergo thermal degradation during recycling.
Except in the case of certain plastics, virgin and recycled materials perform identical functions and are substitutable for each other. The supply of virgin material often far exceeds the supply of recycled material, and global demand is generally high enough to consume all available production. Since the materials are substitutable, at the margin, the recycled material should have the same price as virgin material. A case in point is the price of recycled PET resin, which appears to follow the price of virgin resin with a time lag of about two months.
Similarly, in the glass industry, prices for cullet (crushed glass) are set by the combined price of raw materials displaced in order to be competitive with readily available and inexpensive materials. Recycled metal costs less to produce, but can command higher prices when overall demand for the metal goes up. Secondary aluminum ingot was priced recently at seven percent below primary aluminum.
Since recyclables are used as a marginal supplement in material supply chains, any fluctuation in the overall market demand for a material will result in a much larger and amplified fluctuation in the demand – and therefore the price – for the recycled material. This lack of price stability could discourage companies from incorporating higher levels of recycled content in their products.
In theory, any increase in the demand for a recycled material will increase its market price and prompt some users to switch to the lower-cost virgin material until the two prices are nearly the same again. When prices for recycled materials are persistently higher than virgin materials, it is often due to specific demand for recyclables driven by corporate green initiatives. This, ironically, can sometimes have detrimental effects for closing the loop. Rising prices for recycled PET has prompted Coca-Cola to reduce the recycled content in its bottles to five percent, half of what it was five years ago.
A review of the literature on the economics of waste and recycling shows that there are two principal reasons why recycled materials are not sufficiently competitive. One is simply that the prices of virgin materials are often below the social costs of their production, which discourages socially profitable recycling and limits the supply of recycled materials. The other reason is that the scale economies for virgin production cannot be easily replicated or overcome in the more spatially diverse and labor-intensive recycling industries, even after taking into account the energy cost savings in the recycled path.
There are, in fact, striking similarities between the market struggles of recycled materials and renewable energy:
|Recycled Materials||Renewable Energy|
|Spatially diverse and dispersed material sources.||Spatially diverse and dispersed energy sources.|
|Supply subject to fluctuations due to reliance on secondary market for raw materials.||Supply subject to daily and seasonal fluctuations.|
|Currently a marginal, supplementary source.||Currently a marginal, supplementary source.|
|Competing with a large, reasonably stable supply of virgin materials.||Competing with a large, reasonably stable supply of fossil fuels.|
|Competing with the subsidies, tax preferences and externalized costs of virgin materials.||Competing with the subsidies, tax preferences and externalized costs of fossil fuels.|
|Often selling at a premium in order to satisfy the green market niche.||Often selling at a premium in order to satisfy the green market niche.|
|Price signals typically do not reflect the environmental benefits.||Price signals typically do not reflect the environmental benefits.|
|Further technological advances are still needed to make the collection and processing of recyclables more efficient.||Further technological advances are still needed to make the generation, storage and transmission of renewable energy more efficient.|
The solutions in the two markets are likely to be similar as well: Internalize more of the real costs, remove subsidies and tax preferences, fund the development of next-generation technologies, and ensure adequate incentives throughout the supply chain (for example, at the waste collection and sorting stages). Some combination of all of these will be needed to get the price signals right – which is key to letting the markets lead us to a more resource efficient economy.
Kumar Venkat is president and chief technologist at CleanMetrics Corp., a provider of analytical solutions for the sustainable economy.
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