B. Recycling: The Economics of Why It Works Sometimes and Not Other Times

These figures on what percentage of various materials are coming back into the product line from secondary materials sources are already dated. Moreover, what they do not reveal is the life of the products involved. Many long-lasting durable goods are made from plastics while aluminum and paper are generally used to make disposable goods; which is to say, some materials come back through the MSW stream rather quickly while others do not.

The current relative recycling success of some materials compared to others suggests this question: Why have some elements of MSW met with greater success in secondary materials markets while others, at least to this point, have not? The reason has to do with the economics of production costs and, following that, the price sensitivity of quantity demanded for materials in the production process as a function of their relative position in overall production costs. In the jargon of economics, it has to do with what economists call "The Cross-Price Elasticity of Derived Demand," or, in its shorthand version, "The importance of being unimportant." [71]

In the recycling industry, some materials are referred to as "Demand Limited" and others as "Supply Limited". To say that a material is demand limited says that there is more of it than is currently wanted given what it costs to collect, prepare, and present it to market. To say that a particular material is supply limited is to say that those who want to use it are anxious to get more than they are able to get.

But surely if there is any truth to the economists' old saying about prices falling when supply is abundant relative to demand, and prices rising when demand is strong relative to supply, the market price of a demand limited material should fall to a point that would eventually take it off the market and the price of a supply limited material should rise and induce more of it to be brought to market.

Does it actually work that way? Yes, it does. But, as those who like to make fun of economists should expect, there is the well-known "on the other hand" problem.

There is an economic rule so fundamental that it may be the only economic observation which deserves to be called a Law. That rule is: Other things the same, people will tend to do less of that which costs them more and more of that which costs them less. Translated into the economics of production it means that firms will try to use relatively more of that production input which costs them relatively less, and relatively less of that production input which costs them relatively more. If, for example, the price of labor rises relative to the price of capital, firms should attempt to use less labor and more capital. If the price of capital rises relative to the price of labor, firms should attempt to use less capital and more labor, etc., etc.

However, there's a little more to it than that. (This is the "on the other hand" issue) Even though firms will try to use less of that which costs them more and more of that which costs them less, the intensity of efforts to substitute away from the higher priced input and in favor of the lower priced input will depend on the relative importance of one input compared with another in the particular production technology being employed.

Strong substitution efforts in the face of a rise in the price of a particular production input will occur only if that particular input is one which represents a significant share of total production costs. Even then the substitution process will occur only over a period of time. [72]

Even if an particular input is a significant component of production cost, a change in the price of that input may or may not result in an immediate adjustment in the quantity of that input used. A lot depends on whether or not the current technology of production is one in which inputs can be easily substituted for one another.

Generally speaking, if a particular material is an important component of production costs, firms will be more responsive to lower priced substitutes. The less important an input is in calculating total production costs, the less sensitive the firm would be to a change in the relative price of that input.

The success of aluminum in secondary materials markets derives from the rigid production technology which characterizes that industry. Aluminum is an extremely energy intensive industry and no one has yet come up with a way to make aluminum without substantial amounts of electric energy. Turning aluminum cans into new ones takes 95% less energy than refining new metal from raw bauxite. Anything that can save 95% on an industry's single most important production cost is going to be an attractive input substitute. Therefore, it is not surprising that 50 percent of aluminum beverage cans are recycled.

Given that the market value of secondary material depends on the cost of source-separation, processing, and shipping relative to the importance of that material in the cost structure of the industries which use it, and given that most of the aluminum cans which come back as secondary material come from those states which have container deposit laws – thereby making source separation a relatively easy and simple process – and given that secondary aluminum saves the most important input in the aluminum industry, the continued strength of aluminum among recyclers is not surprising.

When U.S. Recycling Industries of Denver, Colorado, conducted a poll at the recent 8th National Recycling Congress in Charlotte, N.C., 85 percent of recyclers overwhelmingly felt that the markets for aluminum were the most secure and profitable. [73]

Recycled aluminum is clearly a supply limited secondary material. Even though the aluminum industry would gladly take all it could get from recycling centers, there is still more out there which doesn't get to them. While, theoretically, close to 100 percent of all aluminum available in forms which would allow it to move through the source-separation, collection, processing, and shipping network could be used to make more aluminum, it has been estimated Americans throw out enough every three months to rebuild the entire U.S. commercial airline fleet. [74]

The supply-limited character of aluminum derives from one fact: there will never be more put into secondary materials than there are people who are willing to source separate and present it for collection. The price of secondary aluminum simply does not get back to the source, which is not the recycling center but the kitchen.

Glass fares well, but not as well as aluminum. Recyclers polled in Charlotte felt that the market for recycled glass was "secure" with 58 percent rating it "excellent." [75]

For every 10 percent of crushed glass added to a glass plant's furnace, energy costs drop as much as 5 percent; and for every ton of crushed glass used, up to 1.2 tons of raw materials is saved. [76] This would suggest that demand should be strong. However, only 10% to 15% of glass soft drink bottles are being recycled into secondary materials markets and the bulk of that is coming from states which have deposit laws. [77]

While glass, like aluminum, has all the characteristics of being a supply limited secondary material, it also has demand-limited qualities.

Not all glass is created equal. There is brown glass, clear glass, and green glass. A recycling operation must incur the costs of collecting and separating the different kinds; crushing each into separate bundles; and shipping each bundle to the places where it's wanted. The cost of bringing it to the point where it can actually be sold and shipped – cost incurred by the community which operates its own source-separation and processing facility, or the private firm which engages in such operations – may sometimes be high relative to the price which would induce glass manufacturers to use it. These costs are part of the "supply-limited" equation and explain why so much of the glass which is recycled comes from states which have bottle-deposit laws which, effectively, relieve processors of some of the cost of collection.

Glass firms are willing to buy it provided it comes to them in a form which they can use. But they are willing to use it in place of virgin materials only if its price is low enough to overcome its "importance of being unimportant" character. That's the demand-limited part of the glass equation. Nevertheless, markets for secondary glass are growing steadily and when the collection and the sorting process improves, more and more old glass may be expected to come back as new product.

Newsprint is clearly a demand-limited secondary material. Those who might use it find more coming to them than they want. Therefore, the prospects for newsprint were ranked "poor" by 67 percent of professional recyclers polled in Charlotte. [78]

The fact that the amount of energy used in processing old newsprint is less than the amount used in manufacturing newsprint from virgin material, doesn't have the same impact as is the case with energy-saving secondary aluminum. Again the issue is the relative importance of one input compared to another. Unless and until the technology of newsprint paper-making changes, the relative unimportance of secondary material in the total cost of newsprint manufacturing will continue to be a problem for newspaper recycling.

That doesn't mean that secondary paper has no market. Recall that at 23 percent, paper is the second most widely recycled secondary material. The problem is that 23 percent of the largest single component of MSW still leaves 77 percent to be dumped or burned. (Currently that's more than 70 million tons.)

Consequently, when Minneapolis residents began to respond to that city's recycling ordinance by turning in vast quantities of old newspapers, dealers who used to pay $12 a ton began to charge $20 a ton just to haul it away. Reluctantly, some newspapers have to be hauled to landfills. In Washington, D.C., following that city's recycling push, papers quickly began to pile up in a big storage bin. [79]

Moreover, newsprint is a homogenous product. Therefore, its market price will tend to be the same everywhere. For example, when the market collapsed in early 1989 and forced many communities heavily dependent on newsprint to close their recycling operations, the first phase of the price drop was greater on the East Coast where more urban population densities and community recycling mandates had brought more paper to market; and in the Mid-west where distance from markets made transportation costs higher relative to final materials price (recall the comment above about why it is not the price level which matters but, rather, the relative price). The less-glutted West Coast market was also hit. Bargain-hunting South Korea and other foreign buyers of American paper abandoned West Coast brokers and started dealing with oversupplied East coast materials brokers. As a result, West Coast prices fell and many schools and church recycling programs found it uneconomic to continue their paper drives. [80]

Are there real prospects for recycling newsprint? Not really. While there is much that does move through the market, the realistic prospect is that the portion truly recycled will always be less than, at most, half the total. Indeed with only eight mills equipped to process secondary newsprint and with their capacity more in tune with Boy Scout paper drives than with the gush of paper flowing from mandatory recycling ordinances, where we are right now is where we will likely be for several more years.

With regard to what is called "white paper" (i.e., paper from offices, including computer print-out paper) markets look better. Though there has been some price softening of late, white paper still sells for $60 to $100 a ton. [81] This market, unlike newsprint, has supply-limited qualities; the stuff is there, but getting to it has its costs.

If the development of new technologies is all that matters with regard to recycling plastics, research and demonstration projects have already shown that many of the more common forms of plastics can by recycled. Though not as easy as recycling aluminum, there are already a number of new products made from old plastic products extracted from secondary materials sources to prove that plastics recycling has potential. (Approximately 130 million pounds of PET is already recycled into new product each year.) But even though 57 percent of the Charlotte recycling brokers indicated that they would like to include PET in their recycling programs, and 43 percent said that they wanted more HDPE in their secondary materials stock, they were not aggressively moving to bring these materials through the stream because of what they called "low" prices. Consequently, 45 percent called the market for HDPE "poor" and 39 percent gave PET the same rating. [82]

Plastic is not a homogenous product – despite the fact that the CONEG list of "recommendations" noted above implies that making plastic goods from simple and easily separable resins should not be a problem. The many plastic products in MSW include not only goods made from a single resin, but an increasing number which include a blend of resins. This does not eliminate the possibility of plastics recycling, it only circumscribes it – not only at the point where new resins can be made from old plastics, (some resins must be separated from others) – but also at the point where the recycling process begins: household source separation.

Plastics have a high ratio of volume to weight compared to other recyclable elements in MSW. This poses cost problems for collection and transportation to processing establishments. Shredding or crushing at the processing point may help relieve part of this problem, but these actions may reduce the practicality of separating mixed plastics into individual resins. Moreover, the sheer volume of plastics adds to problems of collection and storage at all stages of collection. [83]

According to a report in Fortune magazine, August 28, 1989, the plastics for which recycling markets have developed were then selling at $75 to $200 a ton, making these plastics the second-most-valuable material in MSW. Nevertheless, the Charlotte recyclers who said that they wanted more PET and HDPE in their stock still rated its prospect as poor due to low price.

Low price? Again the issue is not absolute price, but relative price. The costs of collection, storage, processing, and shipping to the point where the real recycling process may begin are too high relative to the costs of virgin resin.

According to General Electric Corporation's Uwe Wascher, head of GE's plastics division, high-density polyethylene (HDPE) used in milk jugs and the polyethylene terephthalate (PET) used in pop bottles, sells for 50% less per pound than virgin resins. But when the costs of collecting and separating the wastes are taken into account, the total cost of producing from these secondary materials is 20% higher than virgin resins. [84]

Plastic, still in its recycling infancy, is currently a demand-limited secondary material relative to the sheer volume currently in consumers' hands. But at the same time, it has supply-limited characteristics. The volume/weight ratio of those plastic products which current technology can recycle will continue to make the cost of supplying it a problem. Absent a solution to that problem, secondary plastics extracted from MSW will not likely compete with virgin resins.

Any rush to mandate recycling as a way of reducing the amount of material going to landfills should first consider what it is that makes some secondary materials "demand-limited" and others not. Put simply but forcefully, it would be a grave mistake to assume that government has the power to increase producers' demand for specific secondary materials independently of the relative importance of specific materials in each and every producer's production process. The demand for production inputs is derived from consumers' demand for final product. To minimize the cost of production in light of the quantity of final product consumers will take at any given price, specific production technologies have been developed for every final good sold in America. Certainly the relative price of one input compared to another signals opportunities for input substitution, but to think that such substitution will necessarily be in favor of one or more of the goods government would like so see recycled so that landfill costs can be avoided is to forget the "importance of being unimportant." When that is the case, as it appears to be in, say, secondary glass; and significantly so in secondary newsprint, passing laws will simply not have much effect.

When the issue is plastics, failure to understand that the high volume/weight ratio which makes it so attractive for so many consumer products (i.e., the supply-limited quality); and the high-tech chemistry which is its reason for being (i.e., the demand-limited quality); also makes it more difficult to recycle. Simply demanding that it be recycled will not do.