Municipal waste - I just love it

My affection for waste disposal economics stems from my interests in the environment rather than any bizarre fetishism. I have already discussed Productivity Commission proposals to abandon plans to eliminate plastic bags by 2008 and, in an earlier post, analysed the remarkable economics of sewage disposal at the Western Treatment plant.

According to the Draft Productivity Commission Report, Australians in 2002-03 produced 32.4 million tons of solid waste or about 1.7 tons per capita. Of this about one-third was municipal waste – the waste citizens dispose of in their rubbish bins and the main concern of this post. Australians throw only a little bit less than Americans and Australian waste generation has been growing over time – in Victoria, over the past decade, by 4% per year.

Australian households throw out a lot of organic wastes (food and garden products) that can be safely stored as landfill. They also dispose of many recyclables and, overall, 30% of municipal waste is recycled.

By the way, two facts about non-municipal waste interested me (i) That a higher fraction of it is recycled and (ii) That a significant fraction of recycled non-municipal wastes are exported to Asia – in 2004/05 $260 million worth of steel scrap and waste and $301 million worth of aluminium.

Returning to municipal waste. Municipal authorities rely overwhelmingly on landfill to accommodate wastes (2002/03 about 70%). Uses of landfill facilities face a gate fee (in Sydney around $50 per tonne) and a landfill levy imposed by state governments. Data on landfill disposal is poor but it seems to have been declining in use partly due to recycling which, in turn, is motivated by increasing levies.

There are costs of lost amenity in working or living near a landfill but these amount to only about 1 cent per tonne of waste. Overall externalities from modern, well-run landfills are low – probably around $5 per ton – and much lower than Alternative Waste Treatment (AWT) facilities which chemically treat wastes and which then recover biogas for electricity generation.

From a cost perspective landfill seems best.

Indeed, further tightening of regulations governing landfill should be carefully considered to avoid excessive charges on a cost-efficient treatment technology. Attention should however be directed towards better enforcement of existing landfill licensing regulations (p. 157-165).

There are 3 main policy reforms proposed by the PC on municipal waste disposal:

1. Correct pricing of access to landfill. Most Australian jurisdictions impose a levy on waste disposal to landfill in addition to gate fees. Many of these levies are designed as revenue sources or to divert waste from landfill irrespective of the costs of achieving this objective. Hence they are often much too high. Moreover such levies are often administered in a blunt way and do not distinguish between type of facility, location and type of waste. From an environmental perspective the correct charge on disposal should reflect externality costs not such issues. Excessive levies impose unnecessary costs on business and may encourage illegal dumping.

Indeed one paradoxical effect on setting high landfill levies may be to discourage recycling – such levies are a tax on the residual from recycling and hence may discourage it.

2. Regional administration of waste disposal to achieve scale economies. In large urban centres such centres should not be run by local government. Fewer larger facilities are required and the scale economies involved in waste treatment make regional provision of services (as occurs with water, sewage and electricity) more efficient. In addition, State and Territory Governments should ensure that local government operated landfills that do continue to operate comply with licence conditions and charge users the full costs of waste disposal.

3. Full cost pricing of waste services to households. The PC seek direct pricing of waste to households at the full social marginal cost of providing this service rather than an indirect annual charge to the local council in 'rates'. With direct full-cost pricing households who dispose more would pay more - an idea now partially captured by local government charging more for larger-sized rubbish bins.

Even more sophisticated 'pay as you throw' (PAYT) approaches could be adopted if costs of such things as weighing garbage fall. PAYT schemes could involve varying frequency of rubbish collection, bin volume, use of different sized garbage bag or even variable weight pricing (p. 188).

Such PAYT charging will reduce waste volumes – the figures the PC cite suggest by between 26-46% (p. 189). But such sophisticated schemes would involve considerably higher administrative costs.

I found this the PAYT idea the least satisfactory proposal in this report. The main difficulty with such pricing, even ignoring higher administrative costs, lies in the incentives it provides to illegally dump rubbish, as the PC itself notes (p. 188-192). PAYT pricing of legal disposal might induce illegal disposal of waste in areas, such as bushland, where it imposes costs that are perhaps more significant than the efficiency losses resulting from underpricing of legal-disposed waste. Indeed the PC's report suggests that littering and illegal dumping of waste are very significant issues in Australia (p. 32, p.74).

Evidence on illegal disposal is scant – data from the Netherlands suggests that PAYT led to a 4% increase in illegal disposal in a country where opportunities to illegally dispose of wastes are presumably much lower than in Australia (p. 192). Evidence in the US suggests a 5% diversion of waste to surrounding municipalities without PAYT. With volume-based PAYT there are also incentives to compactify waste although this is less socially-harmful.

In formulating its final report the PC need to seek better evidence on the effects of PAYT on illegal disposal and on the costs of such disposal. In bushland areas around Melbourne and Sydney one sees evidence of such waste everywhere and it is certainly inaesthetic. One would want to consider upgrading the scale of penalties and the costs of increased monitoring of illegal disposal - were PAYT to be seriously considered. A comprehensive cost-benefit case for PAYT should account for this.

There are many other interesting ideas in this report – for example the role of container deposit legislation (CDL) to improve recycling and to reduce littering of such things as soft drink and other beverage containers. These schemes are effective but often much more costly than curb-side recycling (p. 201-203) which the PC sees as a more effective alternative.

But this is the subject for another post - I recommend the PC Reprt itself if you have an interest in practically important Australian environmental issues. Its a particulartly good read if you are interested in environmental economics or are looking for a thesis topic.