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Recycling Economics: Learning The Basics

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By Jim Morris

II What do recycling coordinators need to know? Learning the basics of economics can help solve the problems these professionals face.

Understanding the economic prin- cipks behind recy- cling is crucial to the success of any recycling program. Recycling in the ‘90s must be a cost-effective solid was te manage- ment option.

In this first arti- cle in a three-part series, Jim Morris, an associate direc- tor of continuing education at Rut- gers University’s Cook College, de- scribes the key concepts of the col- lege’s voluntary certification pro- gram for recycling Coordinators. In&- ture issues, the series will focus on calculating costs and savings and on monitoring recycling programs.

s government budgets tighten and the cost of being “green” rubs against the reality of rising A taxes, recycling coordinators increasingly are un-

der fire to justify their programs as cost-effective altema- tives to waste disposal methods such as landfilling, incin- eration and composting.

Recycling, in general, has been criticized by free-mar- ket advocates and think tanks. To understand and re- spond to these critics, recycling coordinators need to be- come familiar with accounting, marketing and economics as well as special topics such as break-even analysis, sales forecasting and even negotiating skills.

Examining how markets determine prices and quanti- ties is important. Business booms and recessions, chang- ing consumer tastes, new entrants into the market and

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changes in tech- nology can affect recycling supply and demand.

For example, a hypothetical sup- ply and demand curve (see chart) shows how the intersection can determine market price and the quantity sold for a hypothetical mar- ket.

In this case, supply and de- mand intersect at a price of $25 per ton, which clears the market be- cause total quan- tity demanded by all buyers equals the total quantity

supplied by all sellers. Here, 50 tons per year would be sold.

This simplified model was based on a market of three buyers and two sellers. In a real market, these total quantities may be the result of individual decisions made by millions of buyers and sellers whose preferences are difficult to quantify or estimate.

Marginal Cost Analysis Marginal costs, the additional costs incurred when

pursuing a new project or policy, can be described as “the mother of all economic concepts.”

For example, consider the following scenario: A New Jersey recycling coordinator is under pressure from the public works committee to cut plastics recycling, which costs the town more than it spends to landfill the materi- al. The committee chairman cites the coordinator’s own statistics to prove his point.

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With curbside, commingled collec- tion of five commodities (newspaper, glass, aluminum cans, steel cans and plastics), the town recorded $156,240 in costs - or an average of $3 1,258 per commodity. Since only 90 tons of plastics were collected, the cost per ton is almost $350 to collect. The town sends commingled recyclables to a material recovery facility, which neither pays for nor charges the town for the material.

Even with a typical New Jersey garbage tipping fee of $100 per ton, plastics recycling is not cost-effec- tive, according to this method of av- erage cost accounting.

But using marginal cost account- ing, a different picture and a differ- ent policy recommendation emerge. Marginal cost analysis a s k s the question, What costs will decrease if plastics recycling is eliminated?"

In this scenario, the town recorded the following costs:

Coordinator salary: $36,000 P a r t - h e secretary: $14,000 Hourly labor: $4O,OOO Equipment: $4O,OOO Operation: $6,240 Administrative overhead: $lO,OOO Total: $156,240 If plastic materials were cut from

the program, fixed salary costs would not change: equipment costs would stay the same because the same trucks would be used: over- head would not decrease: and opera-

tion and maintenance would not change noticeably since the trucks would have to cover the same routes.

Decreasing hourly labor can save money. Eliminating plastics could make collection times shorter. Fewer households would set out more than one container, and some might set out every other collection. Using this scenario and a local community's numbers, the yearly labor savings can be estimated at $3,120.

wit33 90 tens Cdlef2ted. ttlb me&- od produced a savings of $35 per ton, which is an attractive altema- tive to paying a disposal fee of $100 per ton to throw it all away.

This case illustrates two equally honest ways to determine the cost effectiveness of one policy option as well as two entirely different policy recommendations.

Break-Even Analysis In the marketplace, businesses

live and die by their ability to play the risk-retum game of break-even analysis. Costs may be easy to quan- tify, but revenue forecasts are sel- dom a sure thing.

Recycling coordinators often go through a similar analysis, except their retum is usually measured in avoided costs rather than sales rev- enue.

See "Recycling" on page 57

rce For Geotextile Solutio

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4 7 m a y 1 9 9 4

Some innovative public-private pairings include a composting operation in Spokane, Wash. (left), a W E facili (center) and the ARTS recycling prog am in Union County, N.J. (right).

in Hillsborough County, Fla. t Partnership Profiles:‘ Public And \ Private Unite

5

! \ By Susan DeGrane

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Public-private partnerships can offer many benefits to the cities and counties who contract with private companies, but is privatization the right move for your community?

private firm designed, built., and now manages a waste/+ At o-energy (WTE) facility,rln

Hillsborough County, Fla. A prjdate

J

ance companies are aware of t h fact, they often give better deals to\

contractor also operates the cs)liinty’s landfill. i

Maintaining control ove$hese op- erations is no problem, wcording to Thomas Smith, manage* of the Man- agement and Envirphmental Ser- vices Department of Solid Waste for Hillsborough County.

Since Hillsborough County owns the waste-to-energy facility, it has leverage in determining rates, said Smith. Tb6 county also staffs the scale house where tipping fees are collected.

Responding to increased govern- ment regulations and fear of greater risks. several communities and com-

communities who privatize, thus e- liminating many of the risks they once assumed.

Regardless of what seems to be a wave of privatization, the transition has had some rough spots. “Some communities have gotten into trou- ble with some bad deals,” said Paul Stoller, project manager for Camp Dresser and McKee Inc., consulting engineers in the solid waste manage- ment field. “Also, in certain areas, the selection process has become less than competitive.”

“It is a concern when you end up with three or four companies nation- wide that provide the services you

need,” said Phil Williams, executive director, city of Spokane, Wash. “The trend is to deal with bigger and big- ger companies.”

Establishing waste handling oper- ations such as WTE facilities, trans- fer stations and landfills is extremely capital intensive, which explains why few companies can afford to be in the industry.

Yet privatization can have definite advantages, and without it many communities say that they could not have achieved recycling goals, con- verted waste into energy and collect- ed trash more efficiently. As a rule, however, these communities and

nity agencies have found maintain control over the provided to their residents. llowing profiles explore pri-

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mple Terrace, Plant City and someunincorporated areas, but Tampa has its own 1,000-ton- per-day WTE facility. For the other two communities and unincorporat- ed areas, a 1,200-ton-per-day W E was built in the mid-1980s.

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Recycling from page 47

To illustrate the point, consider the following example. A New Jersey town was considering buying a grass mulching machine for $50,000, and they estimated that another $4,000 would be needed to explain the pro- gram to residents. Without a grass mulching project, the town would continue to pay $100 per ton to landfill. The project would allow the town to compost its grass at a near- by facility charging $40 per ton.

To calculate break-even levels: Divide the total fixed costs by rev-

enue per unit; Then subtract the variable cost per

unit. In this case, while the project pro-

duces no revenue, it avoids the land- fill cost of $100 per ton. Therefore, to determine the break-even level for

Business booms and recessions, changing

consumer tastes, new entrants into the market and

changes in technology can affect recycling

supply and demand.

this project, divide the total fixed costs ($54,000) by the avoided land- fill cost per ton ($100) minus the cost per ton to compost ($40). This figure equals the number of tons re- quired to break even, which in this scenario is 900 tons.

These simplified examples are de- signed to illustrate powerful tools that form the basis of good policy analysis - and of good business.

In recycling commodity markets, it is important to be an informed buyer or seller. Gather pricing information and learn how to use it to negotiate. Recycling economics courses are a- vailable to help coordinators master the business skills they need to make recycling a cost-effective op- tion for handling waste in their com- munities.

Jim Morris is an associate director of continuing education at Rutgers University’s Cook College in New Brunswick, N.J., and a freelance writer on environmental issues.

Privatization from page 50

through their own personnel and equipment or private contractors. But all have derived the benefits of these other operations. Electricity sold to the local utility company from the WTE facility has cut tipping fees.

Bristol, which is the host commu- nity for the waste-to-energy facility, receives tax revenues that pale in comparison to what Bilmes points out as the real advantage. “I don’t think that private sector ownership is necessarily an issue. The best real advantage is having them design, build and operate it.”

Bristol town manager John Weich- sel disagrees, however, that what h a s happened in Bristol can be called privatization. “It‘s not privati- zation. The town’s merely contract- ing with a private company to build, own and operate this facility with the promise that the company meet all government regulations. And we’ve agreed to bring that facility a quota of waste. ”

Bristol and the other communities have signed 25-year contracts with the private owner. They’ve also worked hard to hammer out a suit- able rate structure - a formula that Weichsel describes as “fair.” There have been three amendments to the contract since 1988, he said, but the fact that more towns have joined the operating committee attests to its success.

‘This works the way the telephone company once did,” Weichsel said. “It used to be monopolistic, but there was control on both sides. It’s very efficient. I just wish everything in my life worked as well as that garbage

To maintain control in public-pri- vate partnership situations, some communities assign a great deal of importance to the contract negotia- tions. Some seem to be on red alert in the project procurement stages and have been intent on weeding out inexperienced contractors. Some community agencies like the one in Hillsborough even staff employees at landfill scales and actually collect tipping fees for the private contrac- tor.

Communities that have success- fully embraced privatization in many instances also have discovered that a great deal of strength can be found in numbers. Co-op arrangements form and grow, and later more com- munities reap the benefits of public-

plant.”

private agreements.

Susan DeGrane is a freelance writ- er in Chicago.

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U P D A T E

Pa. School District Implements Refillable Plastic Bottle Program

Perkasie, Pa. - Refillable plastic milk bottles rep or t edly have saved the Penn- ridge School District, Bucks County, Pa., $5,200 in collection fees while cutt ing lunchroom trash by 60 percent.

In September 1992, the school district re- placed its lunchroom milk cartons with re- fillable eight-ounce plastic milk bottles. All 11 schools in the district use the bot- tles.

Students help sort plastic milk bottles for refilling.

Rosenberger's Dair- ies, Haffield, Pa., sup- plies the bottles made of GE Plastics' Lexan resin. "We are con- verting schools from cartons to bottles everyday," sq4d com- pany spokgsperson John Pieqce. Each

program now 90,000 milk

At the outset of the program, bot- tle loss was the big concern, said

With a less t han 1 percent loss, Slattery concluded that it was not a

the dairy and ignated for

Superintendent John E. Slattery.

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