The changing economics of waste

Waste has classically been an industry where labour is minimised at the cost of more landfill. This made sense when landfill was cheap. This dynamic is changing.

The graph below shows the cost at a Perth landfill, and the minimum wage per hour.

Landfill and labour costs - Perth, Western Australia

The graph shows a jump in landfill costs for 2010 coinciding with a jump in the landfill fee per how of labour. In 2000, each tonne of waste was equivalent to three hours of minimum wage labour. In 2012 it has jumped to over 6.5 hours on a landfill fee of about $110/tonne.

In Sydney, the Eastern Creek landfill charges twice this gate fee, making a tonne of waste equivalent to over 13 hours of labour. And trends around Australia (except, perhaps, Queensland) are for landfill costs to increase much faster than the cost of labour.

What does this mean?

In short, it means that the innovators in waste management can afford to invest labour to reduce waste to landfill. This will be difficult for established operators to acknowledge, as they are hamstrung by their existing operations.

As discussed in my post marginal thinking and waste, existing operators are all but forced to frame the problem in terms of how to marginally improve on what they have. Which is bulk handling systems that minimise labour at the expense of waste to landfill.

The field is wide open for new players to enter this market.

Marginal decision making in electronic waste

Yesterday's blog marginal thinking and waste referred to the lost opportunity in e-waste, with billions of dollars worth of precious metals going to landfill each year. That seems a bit flippant on reflection, and I'd like to explore a bit more on the cascading decisions that bring this to pass.

The first decision maker is the consumer who has a dead piece of electronics. There is simply not enough precious metal in the unit for it to be financially worthwhile to recycle themselves, through e-scrap is certainly valuable. They can decide to throw it in their bin, take it to the nearby waste facility, or take it to an e-waste recycler.

Marginal thinking and waste

You would think that finance and economics were a little distant from waste management. Or at least, any theory beyond "get rid of this rubbish at the lowest cost".

You'd be wrong. Reading a summary of Clayton M. Christensen's book How Will You Measure Your Life, you might get some sparks of new perspectives.

Christensen looks at how marginal cost theory is misapplied - a series of incremental decisions based on marginal costs leads to a bad overall outcome. It inevitably leads to the status quo being maintained, even in the face of fatal changes in circumstances. The example used is nimble Netflix devouring the Blockbuster behemoth.

In private lives, according to Christensen, a similar "marginal cost" slippage in values can be catastrophic.

If the principle can be transferred out of economics and into private life, it can also be transferred to waste management. Indeed, on reflection, it transfers very well.

After all, what is waste other than a long series of marginal cost decision that lead to an outcome that is illogical and undesirable, even for the decision maker? 

Only in a marginal cost world can it make sense to recover only 15% of the estimated $21 billion of gold and silver incorporated in electronic goods, leaving the remaining 85% to go to landfill in concentrations 40 to 50 times the concentration of the ore originally mined for the metals.

It is a world where each decision is a little disaster, where the benefits are small and barely realisable by the decision maker, but the path embarked upon is stupid for society. 

It is a world that suggests the standard economic theory unravels, where even if people did make individual decisions in perfect knowledge (which they don't), the aggregated decision would still be dumb because each self-optimised marginal cost decision slips further and further from a sensible outcome.

Christensen suggests that the way to overcome the outcomes that arise from marginal cost theory is to look at things from a sort of "Ground Zero". Consider the world as if you were a disruptor. Ignore your "assets" on the ground. What would the decision be then? If it would be different to what you are doing, change what you are doing.

This has powerful resonances with waste management, and reinforces why entrepreneurs (and perhaps intrapreneurs if they can find the necessary internal support) are so important to overthrow the status quo.