A. A Hypothetical Case

For the sake of argument, assume it costs $35 a ton to dump waste into a state-of-the-art landfill (a figure higher than the current state-wide average) and every day a typical mid-sized Michigan city sends 500 tons of waste to a landfill. (Marquette County, Michigan, with a population of 70,000, will be paying $27 per-ton to dump 300 tons a day in its recently completed high-tech landfill.) Assuming waste is dumped 260 days a year, 130,000 tons per-year would be landfilled at an annual dumping cost of $4,550,000. (For those who like to read tables, everything which follows can be found in Appendix I and II.)

At present use rates, the landfill used by the city has an expected life of five years, i.e., 650,000 tons capacity remaining. After that time the landfill will have to be expanded and tipping fees raised to $40 per ton.

Assume further that by spending $5 million over a three-year period (the cost Royal Oak, Michigan, will be paying to expand its recycling program to accept recyclable material beyond just newspapers) 25% of this waste could be diverted to a recycling center at a daily cost of, say, $20 a ton – including the net effect of receipts from the sale of recyclable materials, but not including the cost of collection.

To the charge that this net-cost estimate is too high, recall that SOCRRA's operations manager Michael Czuprenski reported that the Authority's cost just for hauling plastics was twice what it would cost to landfill the material, and Ann Arbor pays $85 a ton to have its recyclables hauled away, net of what it receives from sales. Moreover, Seattle, Washington, which has the most extensive curbside recycling program in America has net costs $7 million per year. Seattle's two private contractors charge the city nearly $50 per ton for handling secondary materials and are losing money at that price – money which the city's contract requires the municipality to cover. [129]

By diverting 25% of its MSW from the landfill, this city reduces the volume of waste landfilled by 32,500 tons per year. Instead of paying $4,550,000 to some landfill operator (which may be either a private firm or some other branch of government) to dump 130,000 tons a year, the city now pays only $3,412,500 for 97,500 tons per year at $35 per ton. Landfilling costs have been reduced by $1,137,500 per year.

Many advocates of recycling see the amount of tipping fees avoided as the correct measure of recycling's economic advantage. However, this hypothetical city will, at $20 per ton, have to pay $650,000 per year to "sell" recyclable materials. Therefore, even though it spends $1,137,500 less per year on landfilling costs, its net "saving" is less than that. By diverting 25% of its waste stream from the landfill, this hypothetical city "saves" $487,500 ($1,137,500 minus the $650,000 spent to market recyclables).

The $5 million which it cost to develop the program will be spread over three years. The first year the city directly pays 1/3 of that figure – $1,666,667. At the same time, it sets aside enough money at, say, 8% interest, to pay the second and third installments only when those installments are due.

To pay the second year's obligation, the city only needs to set aside $1,543,210 in the first year. To pay the third year's installment, the city only needs to set an additional $1,428,898 aside in the first year. The law of compound interest will do the rest.

The $5,000,000 it costs the city to develop the recycling program – special trucks, recycling containers for different types of recyclable materials, storage and processing facilities, marketing costs, professional staff and drivers, etc – really only costs $4,638,775. At 8% interest on funds held through years one and two, the law of compound interest has become the city's friend. (We intend to use the favorable assumption that the city does not have to borrow, and pay interest, on the money needed to start the program. We are trying to make the very best case we can for what it may cost to divert waste from a landfill through a carefully developed curbside recycling program.)

In the first year, the city experiences net savings of $487,500 in tipping fees (taking account of the cost of marketing recyclables) and spends, i.e., pulls from current city revenues, $4,638,775. Net? First year recycling costs come to $4,151,275.

But recycling has lengthened the life of the landfill from five years to six years and eight months and pushed back the onset of higher tipping fees. Therefore rather than having to pay $5,200,000 per year beginning in year six had there been no diversion of waste through a recycling program (130,000 tons at $40 per-ton), the city has preserved the $35 per ton price through the eighth month of year seven. Moreover, the city has ceased to dump 130,000 tons per year. It now will be dumping only 97,500 tons per year. Money which would have been spent without recycling, will now be saved through recycling.

How much money will be saved? Money saved in years two through, say, year eight, is not money saved now. Money to be received (i.e., "saved") later does not have a value in the first year equal to what it would have in the year the saving is actually realized. Therefore, what money expected to be saved in later years is worth now, is the summed present discounted value of that future dollar figure.

The operation which must be performed to calculate the present discounted value of future savings is one every government or private sector financial officer understands. The expected future dollar figure must be divided by 1/(1 + r), where "r" is the discount rate. Following that, each future year's expected savings must then be summed to provide a cumulative current dollar figure.

In this exercise, the discount rate is the same rate of interest this hypothetical city is to earn on the funds it sets aside in the first to amortize its three-year $5 million obligation for starting the recycling program. We have assumed 8% and will use that as the appropriate rate of discount in calculating the present discounted value of all savings to be realized from year one through, say, year eight.

In the first year, the city incurs a net cost of $4,155,275. In year two, the city begins to see net savings of $487,500 from reduced tipping fees minus the cost of marketing recyclables. But the present discounted value of money saved in year two is not $487,500, but only $451,389. In years three through five, the city continues to experience net waste disposal savings of $487,500 each year. But the present discounted value of these savings is not $487,500 times three, i.e., $1,462,500. It is only $1,163,273. Indeed, the present discounted value of all the savings our hypothetical recycling program can yield from years two through eight will total $3,382,509.

Net of first year savings on net tipping fees, it will cost this hypothetical city $4,151,275 to put the recycling program in place. Looking forward to the end of the eighth year, discounted and summed savings total $3,382,509. The recycling program shows a net cost of $768,766. This amounts to an annual surcharge of almost $1.00 on each ton of waste landfilled after 25% of the waste stream has been collected and dispersed into secondary materials markets. Recycling is not really saving money, even when the extended life of the landfill is taken into account.

Perhaps it would pay to take a look over a longer time horizon, say, ten years. After the tenth year, the summed present discounted value of savings will total $4,058,845. There is still a net cost – $92,430. In terms of an annual surcharge on each ton of non-recycled waste landfilled, while this cost is not much – less than 10 cents a ton – it's still a net cost.

Actual savings will emerge only after the tenth year. In year eleven, savings – discounted to year one – will equal $208,646. After that, the present discounted value of savings realized from the community's investment in a recycling program will continue to grow, but at a decreasing rate of increase. While 12th year savings will exceed 11th year savings by a whopping 133.9%, the rate of improvement will drop to 52.9% and 32.1 % in years thirteen and fourteen, respectively.

As Royal Oak, Michigan's Mr. Tom Tryce noted, recycling is a "very, very expensive business; it's not a cost-saving measure." It can, as he indicated he hoped would be true for Royal Oak's program, delay the onset of higher tipping fees by extending the life of a community's landfill. But even with that, it is not clear that genuine savings can be expected for quite a long time – unless the gap between current and expected future landfill costs are great and the expected life of the current landfill is short; and the market for secondary materials becomes strong enough to reduce the direct cost of handling secondary materials. Absent these elements, it is not automatically true that "avoided" landfill costs will actually result in money saved.

If secondary materials markets weaken as more and more communities attempt to supply raw materials – as many experts fear – the net per ton cost of handling diverted materials could rise overtime. Moreover, given that a very large proportion of the cost of operating a landfill are fixed costs – costs which do not vary with the amount dumped on any given day – a reduction in the volume of waste presented to a landfill will reduce revenues more than it will reduce costs. In this situation, the landfill operator (whether private or governmental) would have an incentive to reduce the per ton tipping fee to attract additional customers.

Surely a landfill operator would not reduce tipping fees in the face of reduced tonnage coming into the landfill. That is exactly what has happened in New York City's government-owned landfill where loss of customers forced a 37.5% tipping fee cut. The possibility of that happening suggests that the costs "avoided" may not be as great as initially assumed and, consequently, the real costs of the "cost-avoidance" program could rise.

Taking these very real possibilities together, efforts to divert waste from landfills through recycling might never pay, no matter how long the time horizon. Clear analysis is required before the first step is taken. This does not mean that there is no reason to incur the costs of starting a community recycling program. It just means that it ought to be done on the basis of sound analysis, not emotion.