OP-ED: Looking at the economics of recycling

It is entirely true that one man's trash is another man's treasure – in my native English colloquialism it is “where there's muck there's brass”, brass being a synonym for cash or profit. 

Which makes it interesting to see, as this newspaper reports, projects like Shalbrikhkho, an NGO working to aid people in reusing and recycling materials. 

Their idea of a paper embedded with seeds which, after use, is then put in a plant pot to flower is most fun.  

However, it is generally assumed these days that recycling is always an unalloyed good thing – saving resources is good, right? 

Which is not actually how it works out. So perhaps a little explanation of the economics of recycling.

When it makes a profit it is a good thing, when it needs subsidy it might well not be. For there are three different scenarios to be thought about here. 

The first is when we have something used – say, an aluminium can. We could throw this away, it is very difficult to reuse it. 

But we can make a profit by collecting them and feeding them back into the aluminium furnace. 

Actually, there is a whole range of what are called “secondary” alloys, which are specifically designed to be made from aluminium scrap. 

The secret here is that the raw material, aluminium oxide (alumina) is pretty cheap. $300 a tonne as a reasonable value. 

The material we make that from, bauxite, is probably the most common mineral on the planet. It is just not something we're going to run out of this side of the Sun itself going Red Nova. 

But to move from alumina, the oxide, to aluminium, the metal, costs us about $800 in electricity per tonne. 

When we recycle aluminium metal that is when we are saving electricity. 

We also make a profit when we do this – the cost of recycling is much less than that $800 per tonne of electricity. 

Profit is an important concept here – profit is the value added by the activity. Forget that bit about profit being what goes to the filthy capitalists for a moment and think a little deeper. 

The market price of everything is what is it worth when used to do everything else? So, if we reorganise matters so that we use those factors of production – land, labour, capital, mineral resources and so on – to do something else how do we know whether we are adding value relative to those other things we could be doing with those same resources? 

Well, if there is some money left over from what people will pay us for what we've just made after we deduct all the costs of having made it. 

That is what profit is too. So, if we make a profit we know we're adding value. 

If recycling is profitable then recycling is adding value. 

The entire scrap metal industry is based on this simple calculation.

Then there is the second scenario. Which is that we make a loss when doing our recycling. 

It is entirely possible to take concrete and turn it back into cement. 

It is very expensive to do so too. 

We would make a huge loss when we do so. So, logically, we do not, the usual thing to do is chop up the old concrete and use it as the addition to our new cement we have just made from raw materials. 

Use the old concrete as the aggregate in the new that is.   

But why wouldn't we make new cement out of old concrete? Because we are making a loss. But more than that, profit is, as we have said, value added. 

Loss is value subtraction. Or, as we should also think about it, a loss is us wasting resources. 

We have all those factors of production and when we combine them this way we are subtracting from the general wealth of the society. 

We are getting less value than if we did something else – we are wasting resources. 

The importance here being that “saving resources” is all very well but we do have to understand that everything is a resource. 

Labour, capital, minerals, time, land, they are all resources. 

We need to be optimizing for the best balance, the maximum gain for the minimal use of all resources. 

That is what prices and the pursuit, or at least measurement, of profit do for us. Tell us when we actually are saving resources rather than wasting them.

The third scenario is when we think we're making a loss, need subsidy, but we're really making a profit. 

For example, cleaning up pollution itself.

But what we're really saying here is that pollution itself is a loss and we profit from cleaning it up. 

It is just that pollution is not included in prices so it is not being included in our calculation of profit. 

This does often happen – but the answer is to get pollution into prices. Like, for the climate, with a carbon tax.

The result is something we've really got to understand when people come telling us that this or that is a super method of recycling. 

If it makes a profit then great, let us do it, it is obviously saving resources. 

If it is making a loss then, well, no, maybe not. Because that is destroying resources. Unless there is something you insist is not already in the price system and we should look very closely at such claims if they are made.  

The point being that recycling is often a good thing but it is not a good thing in and of itself – so we should not swallow it always being a good thing as a justification.

The author is a senior fellow at the Adam Smith Institute in London