From a resource management point of view, the second half of the 20th century will probably be seen as an anomaly. In this very short period of modern human history, unprecedented amounts of natural resources were extracted, used as energy or materials in manufactured goods and services, and ultimately transformed into piles of rubbish. This model is sometimes referred to as the “linear economy” to contrast with the “circular economy.” A direct result from the linear economy is that today, about 3 billion city dwellers generate on average 2.6 lbs. of solid municipal waste per person per day, according to the World Bank. In a business-as-usual scenario, by 2025 this is projected to increase to 4.3 billion urban residents, each discarding 3 lbs. of material daily
The word “waste” means “not use well”, “not making good use of something” (source: Oxford Dictionary). Before the industrial revolution, the reusing things was a skill, and a tradition. Natural resources and the products that were made of them were viewed as carrying value, from their acquisition, through different uses and reuses, until it was impossible to reuse them any longer. Since Antiquity, stones, metal, wood and glass all had many lives. Durability of manufactured objects allowed for their passing from one generation to the next.
The advent of the linear economy changed that. The tremendous increases in productivity, the commoditization of materials and mining, the plummeting costs of consumer goods and a stellar economic development reduced significantly the intrinsic value of materials and natural resources, and the word “waste” somehow lost its negative connotation. Over less than a century, the amount of discarded product generated has risen tenfold. But this relatively short period of time in human history may soon be over.
The Untapped Potential of Resource Recovery and Recycling
Consumers and companies alike have an interest to reduce wasting value by discarding objects that still have worth. The prefix “Re-” has gained notoriety in resource management, under many forms: reduce consumption and waste generation, reuse and share materials and objects, recycle any content of value, but also repair the damage: help both the economy and the environment by building regenerative business models that use truly renewable materials as inputs and produce naturally recyclable or biodegradable outputs. Provided appropriate business models and financing, these innovative strategies can break the vicious linear model of taking, making and disposing of things before using them fully and well.
Reintegrating the lost value back in the economic loop becomes material for many companies. Cornerstone’s Global Markets Strategist, Michael Geraghty, estimated in his report “The Economics of Environmental Issues in Sector Strategy” (Oct. 20, 2014) that the companies in the MSCI All Country World index produce 820 tons of waste for every $1 million in sales. At $54 per ton to treat that waste (based on an average of landfill prices in the U.S. and Europe with a very broad range from $10 to $100/t , those companies are spending around $1 trillion USD on waste already. Given that (i) landfill space has reached capacity in many geographies and (ii) there are increasing regulations around waste disposal (because of, for example, methane release at landfills), it is likely that the cost of waste disposal will rise.
There are significant opportunities in reducing that cost, and creating additional value. 75% of all waste is estimated to be recyclable, reusable or even avoided. The question is, why are we not seeing more successful commercial opportunities in the area of recycling, reusing and reducing waste?
Since the US passed in the first, and so far last, major Federal legislation – the 1976 Resource Conservation & Recovery Act – to create standards for landfills, incinerators and hazardous matter disposal, a patchwork of state and local legislation has emerged, covering minimum recycled content mandates, utilization rates, procurement policies, recycled product labeling, and mandatory diversion from landfills of certain materials. This helped spur supply. The commodity “super cycle” helped demand. And slowly and surely, recycling has developed from a fringe hippie voluntary movement of the 1960/70s to a growing business. Opportunities emerged along with the product and region-specific legislation, starting from glass bottles and cans, to paper and plastics, to e-waste, and most recently to organics, which may emerge as the biggest untapped opportunity yet.
Landfills are the great equalizer of waste, as landfill owners and operators charge a flat fee per ton, regardless of the material. And the waste business has historically been dominated by vertically integrated companies which own landfills (e.g., Waste Management (<WM>); Casella (<CWST>)). In addition to landfills, these companies own collection operations, transfer stations, waste-to-energy (WTE) and recycling facilities. Vertical integration provides the companies flexibility on pricing of their services, as well as on where to send the waste (landfill, WTE, or recycling).
Our waste stream, however, is very diverse in its components as well as in the collection and processing infrastructure, as we throw out pretty much everything, everywhere, and all the time. Moreover, the market values vary significantly: from virtually zero for film plastics, to PET bottles at $400/ton to more than $1000/ton for recycled aluminum.
Sending a product to be recycled doesn’t guarantee a straight road to a ‘green heaven’ – there may be hidden environmental and social costs, depending on the product being processed. For example, e-waste recycling can expose a person handling it (a child, in some countries) to mercury and other toxins. Standards and laws vary by country and state, and often the responsibility for ensuring that product is recycled responsibly falls on the entity discarding the product – they can choose a responsible recycler (e-Steward) or not. This situation also leads to an unequal playing field, as with inconsistent regulations, responsible recyclers carry higher costs.
In recycling, to realize the top market prices while also acting responsibly, companies need to invest in technologies that are able to efficiently sort and process the collected materials. But the financing of investment depends on assurance of scale in terms of the collection of materials and of the demand side.
In many markets, the higher value materials by-pass existing waste & recycling infrastructure due to the informal system of scavengers who literally pick out the aluminum cans and PET bottles, and sell that into trading networks, who find the end market. This is why a major component of any successful program is around a comprehensive and efficient collection mechanism that relies on the cooperation of the local government and relevant legislation ¾ without a sufficient amount of higher value material, pure-play recyclers cannot sustain their businesses.
On the demand side, China had been providing a healthy market for recyclable materials. But now that it is producing its own recycled product and has gotten increasingly concerned about its environment, it has erected the “Green Fence:” Only the highest quality, cleanest product can enter the country. Combined with an overall damp global commodity picture, this has been a tough environment for recyclers selling into commodities markets.
The waste stream’s natural fragmentation has led to business specialization. Below is a sampling of commercial enterprises and start-ups, participating in the value chain:
The Organic Element: Will French Fries Power Our Cars?
Organics (food, yard waste, trees etc.) deserve special attention, as the newest area for legislation as well as investment. Organics are in large part responsible for landfills being the third largest source of methane emissions in the US, after industry and agriculture. Legislation around diverting residential and commercial waste from landfills has already passed in Europe through the EU Landfill Directive and in several states (CA, CT, MA, and RI).
Recycling organics is not a new phenomenon. “Aerobic digestion” is a process in which organic matter decomposes to create natural compost or fertilizer. “Anaerobic digestion” of organics produces energy, in addition to compost. Both processed have been used especially in the farming community for decades. When Rudolf Diesel invented the Diesel engine in 1890s, it ran on vegetable oil. And “veggie cars” are still in use today.
With the rising public awareness around finding alternatives to landfilling, the opportunity is ripe for new technologies and business models to provide more advanced solutions to organics recycling. No dominant technology or business model has yet emerged. Given the diversity of regional needs and markets, we will likely see many different solutions but they will all require not only legislation around diversion, but also efficient collection at scale which minimizes contamination that would cause harmful emissions and reduce the value of the end products.
To encourage a steady stream of organics supply, several cities, including NYC, have launched organics collection programs for schools, residential and commercial, working with recycling partners who use both aerobic and anaerobic methods (NB. One of the co-authors of this piece convinced her Manhattan co-op to join the organics pilot.)
The good news is that there is now broad recognition that we have a global waste and resource efficiency problem. Regulations are moving toward diverting waste from landfills ¾ but slowly and inconsistently across regions/states/countries. In parallel, landfill prices are likely to increase — but are still relatively low, especially in some regions, reducing the incentives to divert. Technological innovation is giving new lives to products no longer wanted by their owners — but the business models around these technologies are challenging, given the issues around collection at scale and resource intensity in the asset-heavy recycling businesses. And even if they’re commercially viable, these technologies still have to pass the environmental sniff test: that they can reduce the use of energy and carbon/methane emissions during their recycling process to below the next best available process, and that they don’t harm people handling the material.
Truly regenerative business models will be built with a holistic approach, taking into account the economic opportunities of resource efficiency, the social added value of the sharing economy, and the true costs of the environmental externalities. They may also come from unexpected sectors and technologies. But the complexities of this new, multidimensional context will require increased collaboration between entrepreneurs, scientists, customers and regulators to align the incentives, the capital and the demand for the new products.
Tanya Khotin is the Head of Institutional Business Development at Cornerstone Capital Inc.
Margarita Pirovska, PhD is the Policy & Sustainability Analyst at Cornerstone Capital Inc.