My previous post criticised part of the recent Ellen MacArthur Foundation (EMF) report into the benefits of moving to a circular economy. In particular, I suggested that their estimates of the benefits of switching food waste processing to Anaerobic Digestion (AD) were overstated.
EMF has responded to the post and asked McKinsey, the original report authors, to set out how they reached their conclusions. This is reprinted with permission as follows:
AD and food waste: real savings
The model used for the food waste case is based on actual cost data from AD plants in the UK, interviews on waste handling and treatment costs in the UK (WRAP), and UK energy prices. The report looks at the situation as it is today as well as at an “advanced scenario” that takes into account some cost improvements that can be realized from larger operations, such as bulk order discounts of technology if several plants are built at once. These benefits are realized already today in bigger projects, as confirmed for example by Tamar Energy.
It seems that the main point of criticism made in the article is that the taxpayer loses out if food waste is put through AD instead of landfilling it - which needs to be examined in a bit of detail.
One can look at the profits of the food waste case from the point of view of different stakeholders with different “system boundaries”, starting from an entrepreneur and going all the way up to society as a whole. The case made in the report shows that there is an overall positive profit pool to be distributed, so that the profitability of the case does not depend on creating a loss elsewhere in the system. The problem can be seen from the point of view of four (successively larger) systems, including the public authorities' point of view which seems to be the focus of this blog entry.
- The “smallest system” is the entrepreneur: Today, the business case of putting a tonne of food waste with an initial value of 0 USD through AD would be slightly negative in the UK (-24.00 USD/tonne) if landfill was free and no energy subsidies existed. In an advanced scenario, the profit would already be USD 6, without considering energy subsidies or landfill cost and tax. This is still a very small profit but it could become easily higher with rising energy prices, sinking costs through further economies of scale, etc.
- Perspective of a municipality: Municipalities collect rubbish and have to pay landfill costs and tax. Alternatively they can use the food waste to generate energy and fertilizer and earn revenues from energy and energy subsidies. Both the cost and revenues are real costs and income, so the full profit of USD 142 today and USD 172 in an advanced scenario described in the report would be realized.
- Perspective of the "public authorities" (the combined system of the central government, responsible for setting landfill costs and tax and the municipalities). In this system, the municipality would bear the cost of AD, profit from selling energy and the energy subsidy and avoiding landfill cost and tax, while the central government would pay out the energy subsidy and miss out on landfill tax. The net effect can be found when comparing the cost of AD with the revenue from the sale of energy and cost of landfilling. If the cost of landfilling is more than the 24.00 USD/tonne - society has made a profit.
- Society as a whole: Subsidies on renewable energy and taxes on landfilling aim to internalize external costs that are otherwise indirectly and indiscriminately borne by society as a whole, e.g., through health care costs in the case of pollutants, the costs for the impact of climate change or the erosion of ecosystems services. Energy subsidies and landfill taxes thus reflect actual cost and benefit to society.
It seems that the main point of criticism made in the article is that the taxpayer loses out if food waste is put through AD instead of landfilling it - which needs to be examined in a bit of detail.
One can look at the profits of the food waste case from the point of view of different stakeholders with different “system boundaries”, starting from an entrepreneur and going all the way up to society as a whole. The case made in the report shows that there is an overall positive profit pool to be distributed, so that the profitability of the case does not depend on creating a loss elsewhere in the system. The problem can be seen from the point of view of four (successively larger) systems, including the public authorities' point of view which seems to be the focus of this blog entry.
- The “smallest system” is the entrepreneur: Today, the business case of putting a tonne of food waste with an initial value of 0 USD through AD would be slightly negative in the UK (-24.00 USD/tonne) if landfill was free and no energy subsidies existed. In an advanced scenario, the profit would already be USD 6, without considering energy subsidies or landfill cost and tax. This is still a very small profit but it could become easily higher with rising energy prices, sinking costs through further economies of scale, etc.
- Perspective of a municipality: Municipalities collect rubbish and have to pay landfill costs and tax. Alternatively they can use the food waste to generate energy and fertilizer and earn revenues from energy and energy subsidies. Both the cost and revenues are real costs and income, so the full profit of USD 142 today and USD 172 in an advanced scenario described in the report would be realized.
- Perspective of the "public authorities" (the combined system of the central government, responsible for setting landfill costs and tax and the municipalities). In this system, the municipality would bear the cost of AD, profit from selling energy and the energy subsidy and avoiding landfill cost and tax, while the central government would pay out the energy subsidy and miss out on landfill tax. The net effect can be found when comparing the cost of AD with the revenue from the sale of energy and cost of landfilling. If the cost of landfilling is more than the 24.00 USD/tonne - society has made a profit.
- Society as a whole: Subsidies on renewable energy and taxes on landfilling aim to internalize external costs that are otherwise indirectly and indiscriminately borne by society as a whole, e.g., through health care costs in the case of pollutants, the costs for the impact of climate change or the erosion of ecosystems services. Energy subsidies and landfill taxes thus reflect actual cost and benefit to society.
I personally remain in disagreement with McKinsey's analysis and will set out why in my next post.
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