The economics of waste
Setting levies, allowing councils to choose their preferred technology and competitive tendering for household collection are the way forward for waste, the ESRI’s Paul Gorecki tells Peter Cheney.
Amid the dispute over the Poolbeg incinerator, the ESRI report commissioned by Dublin City Council is one of the most substantial contributions. ‘An Economic Approach to Municipal Waste Management Policy in Ireland’ was published in February and its lead author is research professor Paul Gorecki.
The objective of public policy using the economic approach is to maximise the welfare of society, it states.
“Markets normally are the way in which we organise economic activity but markets work well when prices reflect costs,” Gorecki told eolas at the Environment Ireland conference. “Not just the cost of production, the cost of labour, the cost of capital but other costs such as the cost of environmental damage or the cost of climate change.”
The latter costs are “typically not included” with the result that “too much of the good [waste in this case] is produced because the price is too low.” Alternatively, a high price could result in a monopoly.
Market failure merits government intervention. For waste, a regional or local approach is seen as best as the sector’s markets are normally organised at those levels.
Externalities (i.e. costs created by an activity that do not fall on the person or firm carrying it out) are the main source of market failure in waste, and can be dealt with through levies or taxes.
Most externalities are local, reflecting the noise, traffic congestion and dirt affecting local houses and local residents. Those costs can be calculated by using property prices e.g. the impact on existing incinerators on nearby house values. Externalities also cover greenhouse gases, whose prices are set by the emission trading system.
Market power of a dominant provider is a second source of failure. This can be overcome by reserving exclusive rights for waste authorities and permitting competition for the market e.g. franchising and contracting-out of services.
The chosen instrument or instruments must minimise the net costs to society, and cost-benefit analysis is suggested as the most appropriate assessment tool. Strategic environmental assessment would not consider the full costs.
It is put to him that given waste management’s importance as a public service, it should be directly provided by the state or through a semi-state organisation.
“It [the state] doesn’t have the expertise to run an incineration so it’s going to buy in the expertise from somewhere,” he replies. Instead, its role is as a procurer and regulator.
Local authorities can purchase the services, but contracts must share the risk between themselves and providers. Regulation could then be provided by a separate organisation e.g. supervising gas emissions, imposing penalties and posting bonds which can be taken away if the provider does not reach targets.
Proposals
The report contains two main proposals: a mechanism to meet forthcoming Landfill Directive targets and a methodology for setting waste levies for landfill, incineration and MBT (mechanical biological treatment).
On the first point, the authors suggest a cap-and-trade system. The total amount that can be put into landfill is already fixed by the Landfill Directive and can then be auctioned off. Permits are awarded to existing users of landfill based on 2009 data, with 100 per cent of auctions auctioned off by 2016.
The report is neutral on the choice of technology but Gorecki emphasises the need to work out the costs per tonne of the waste going into the treatment process, which can then be used to set levies. When methane and disamenities were considered, the authors’ results were as follows:
| Type | € per tonne |
| Landfill | 44.24 to 54.89 |
| Incineration (urban) | 9.80 to 10. 7 |
| Incineration (rural) | 0.42 to 0.5 |
| MBT | 0.92 to 1.45 |
Differences between urban and rural incineration levies are explained by the lower population densities in the countryside.
The Government has proposed the following waste levies, which reflect the impact on carbon emissions:
| Type | € per tonne |
| Landfill | 30 (2010) |
| 50 (2011) | |
| 75 (2012) | |
| Incineration | Less than 120* |
| MBT | 0.42 to 0.50 |
“Landfill, in our estimates, causes quite a lot of environmental damage which is, of course, why you have the Landfill Directive; the levy was quite high. The incineration was much lower and mechanical and biological treatment was even lower.”
Introducing levies, in his view, would help policy-makers choose the most cost effective form of disposal and also create incentives for recycling. Once levies are set, the waste management authority can then choose technology.
“Which one you employ or which mix you employ, you leave to the market and you leave to regional waste management people, who are responsible for working out what the optimal configuration of what any particular waste disposal system is.”
Research by ESRI found that among the EU-15 states (those which joined before 2004), every country except Greece or Ireland has a mix of incineration, landfill and MBT. However, in Gorecki’s view, the Government’s waste strategy seeks a “truce of technologies” with incineration discouraged and MBT preferred.
It is “not clear” to him what the economic rationale is for such a policy or how this will maximise societal welfare. Indeed, he predicts it could encourage “small and less efficient incinerators” which generate “greater externalities”.
Collection
As for market power, the report recommends a tendering system for household waste collection rather than the current competition in the market.
This approach is already taken in the UK, including the North. All the tenders were won by councils in the last round but the process forced them to “reconfigure and to work efficiently on producing, so absenteeism went down and lots of other things really improved once they realised that they could lose their positions.”
Northern councils are organised into three waste management groups, which co-ordinate disposal and planning ahead. The South’s situation, whereby “three or four different firms can collect on a street”, does not lead to “sensible efficiency gains” and can create monopolies.
The tender would go to the lowest priced bi
dder, who would then have the exclusive right to collect waste in a specific area. This is standard practice in most EU countries, Canada and the USA, and the department concurs.
Reaction was critical but the authors did include a correction as incinerators are exempted from the emissions trading system, included in the table above. The central conclusions, though, still stand.
An Economic Approach to Municipal Waste Management Policy in Ireland is available at www.esri.ie/publications
