Currently, the global waste management market is estimated to be valued at $330 billion and is expected to reach $530 billion by 2025, growing at a CAGR of 6% from 2018 to 2025. Industry growth is largely fueled by new environmental regulation, as well as increases in industrialization, urbanization and population. Europe currently leads the charge in global waste management due to a number of environmentally sustainable projects and policy initiatives that spur investment in high-end technologies.
Within the EU, The Netherlands is the long-established leader in environmental policy and sustainable business solutions. Looking ahead, the “Netherlands as a Circular Hotspot” initiative aims to position the Dutch economy as the world leader in circular economies by 2050. An unwavering commitment to the planet ensures The Netherlands addresses a number of UN Sustainable Development Goals, including: Responsible Consumption and Production, Affordable & Clean Energy, Sustainable Cities & Communities, Climate Action, Industry, Innovation & Infrastructure.
In terms of waste management, the Netherlands exceeded EU and country-specific targets, recycling 78% of waste materials (paper, cardboard, glass, plastic, metal, wood) in 2017 (Exhibit A). Although this marks tremendous progress, plastic lags behind other materials with only 50% of plastic waste recycled. Plastic is much more difficult to recycle because there are thousands of different types, each with their own recycling properties and respective melting points. In order to be made into another product, plastic must be carefully sorted by type. In the absence of sorting, plastic is rendered useless.
Exhibit A
Plastic recycling governance in NL
Companies that produce plastic packaging materials in the Netherlands are legally obligated to contribute to the collection and recycling of plastic packaging waste, which is reflected in a payment for the amount of plastic packaging produced. The packaging industry herewith contributes to increasing the circularity of the Dutch waste sector. The “Packaging waste fund” is an entity that was created by packaging producers to manage the funds and manage the players involved into achieving the plastic recycling targets as stated in the Packaging Decree and Agreement. It is a non-profit organisation that has the responsibility to develop and maintain the governance structure of Dutch packaging waste management, collect production fees from producers, report in realised recycling rates in the Netherlands, redistribute funds to recyclers and direct the sector towards a more circular economy.
One of the examples of how packaging waste fund incentivises is to let consumers of plastic bottle pay a small deposit of €0,25 when purchasing a bottle. The €0.25 is returned to the customer when the customers returns the plastic bottle during the next visit at on the of the recycling points (almost all supermarkets in the Netherlands). Through this mechanism about 95% of all plastic bottles are return and subsequently recycled, a very successful measure that saves litter and emissions from incineration.
Plastic recycling does not provide a stand alone business case (yet). Some of the specific plastics are valuable, some not, but on average the business case for recycling plastic is negative. However, given that the producers of plastic waste pay a contribution for collection and recycling, this contribution can be used to support other players in supporting their business case. Municipalities for example can get a per ton refund for (part) of their cost, if they can show that they indeed recycled some of the plastic. However, for a municipality full cost coverage is not the main goal and there is no guarantee that the refund will cover the full costs. From a for-profit perspective, a self-supporting business case was still lacking.
The main question is how to introduce incentives in the waste sector that introduce viable business models and competition to recycle plastic waste as effectively and economically as possible. Resulting form the discussion, was a plan to involve large waste treatment facilities in creating a business case together. A huge step in creating the right incentives through business model innovation.
Business model innovation in the plastic recycling sector
In the current system, the “Packaging waste fund” reimburses municipalities for the number of tons of plastics recycled if they can prove that the plastic has ended up at an actual recycling facility. Municipalities can decide themselves how they collect waste and apply for reimbursement accordingly. A municipality for example invests in collection infrastructure that allows citizens to separate plastics. For individuals, the environmental thought is the main driver for recycling, no financial incentive is given. However, because the infrastructure is in place and awareness is increasing, municipalities succeed in separating a fair amount of plastic waste at the source (households). Municipalities transport the collected plastic packaging waste and organise further treatment at plastic recycling facilities.
The main downside of the current system is that the “Packaging waste fund” has little control over municipalities’ actions. They are dependent on individuals and municipalities doing a good job in collecting and processing plastics. Although there are qualitative standards are in place, it is still a fairly quantitative driven market. From a societal perspective, quality of the plastic recycled might be even more important, but there is little control to actually achieve this target.
In 2017-2018 “Packaging waste fund” started to alter its approach to plastic recycling to introduce more innovation in the sector. Rather than relying on individuals and municipalities, the “Packaging waste fund” started to collaborate with (for profit) Waste Incineration companies in order to come up with more innovative and cheaper ways of recycling plastics. The basic idea is to enter into a long term collaboration in which the “Packaging waste fund” funds a industrial Incinerator directly rather than reimbursing municipalities. This allows the Incineration company to invest in an innovative “waste separation facility” that can filter plastics directly from garbage bags.
Several BMI tools have been applied in order to make this collaboration successful:
Focus: One of the BMI tools that “waste separation facility” leveraged was focus. By focusing on the separation of recycled materials, they were able to identify an efficient method to separate plastics. As a result, they were able to become the target recipient of government partnerships.
Aligning incentives and objectives: a commercial waste incinerator is looking for stable and predictable revenues over a long time-span in order to reduce the risk of making an initial large investment in a waste separation facility. On the other hand, “Packaging waste fund” wants stable recycling rates, at lower costs that can be achieved through the large scale of the waste Incinerator company. By entering into multi-year contracts both sides can be satisfied, and because of the long-term character of the deal Incinerators are willing to accept lower rates for their plastic recycling activities.
Pooling resources: rather than collecting plastic from individual municipalities, plastic is separated in one place, similar to pooling resources. The large scale of operations reduces the per unit costs of separation.
Resequencing: An additional BMI that the “waste separation facility” utilized was resequencing. By removing the timing of when the materials needed to be recycled, it allows that the decision-making process does not fall onto the consumers. This way system is resequenced from “dealing with what you get” to “control over what you want to sort”. This way the machinery can be optimized to fully utilize the unique technology processes to sort the palstics that contribute most prominently to environmental damage. An additional benefit is that the decision which plastic to sort can be altered at any time without having a delay in the entire process.
Reducing information risk: by making clear upfront long-term arrangements about the conditions of the collaboration, both parties reduce their information risk. From the perspective of the “Packaging waste fund” recycling rates become relatively predictable. Furthermore, having only one party to collaborate with gives “Packaging waste fund” more opportunity to actively steer on quality of output as well as adjust the importance of a particular plastic stream along the way in collaboration with the Waste Incinerator (e.g. do not recycle useless plastic stream anymore). From the perspective of a Waste Incinerator, revenues become relatively predictable which makes it easier to justify a large upfront investors.
Risks associated with new plastic recycling business model
The associated risks that come with this business model involve the following items:
Awareness of environmental impact of palstics: The entire business case innovation builds upon the assumption that for the foreseable future plastics levels in household waste will remain at roughly the same level. In other words, the smaller the fraction of plastics in household waste, the less attractive the business case. If people become more aware of the environmental impact of plastics, the fraction within household waste will drop. This will most likely destroy the value and profit potential for commercial parties that invested in this new technology.
Long-term contracts: By engaging in long-term contracts, there is an early investment that is needed with the “waste separation facility” partners. This requires that there is a certain level of production that is necessary until the operations are profitable. In addition, the long-term contracts may require the facility to deploy older technologies rather than the most innovative ones.
Behavioural change: An additional possible risk is that the populations reduce the amount of plastic consumption. This could be due to rising awareness of the harmful environmental effects of plastic, however with this behavioural change the “waste separation facility” would have to identify alternative recyclable materials.
Cost of energy: A cost associated with the “waste separation facility” is the continuous amount of energy that is needed to run the machines. This could be mitigated from subsidies from the Dutch government or using renewable energies.
Agency risk – operations versus financing: The “waste package fund” finances the innovation but has no control over direct operations. They are highly dependent on the performance of an external party. It might happen that the terms of the contract are being gamed, or that the opportunity costs for the external party to pursue other activities might be higher than continuing current plastic recycling operations. Furthermore, future market circumstances might change incentives over time. Through contractual agreements this can be mitigated, but never fully stopped.
Impact on environment
A negative impact of this business model is reduced awareness from the public and individual households of their overall daily plastic consumption, and therefore their eco-footprint, because sorting in households is no longer needed. Because individuals and local governments no longer need to handle plastic sorting and recycling themselves, they may become less conscientious about how much plastic they consume, and potentially less educated about the impact of plastic waste on the environment.
Another caveat of this business model is that it does not address the root problem of the overwhelming amount of plastic waste produced. This model may even reduce the incentive of manufacturers and end-consumers to use less plastic because these players now understand that their plastic will be recycled. SDG #12 aims to reduce the overall consumption and production of plastic (and to ensure the amount produced and consumed come from responsible and sustainable sources); although this business model overcomes sorting challenges and ensures that a larger amount of plastics are recycled, it ultimately does not improve the public’s dependency on plastic, nor does it lessen the ubiquity of plastic products in consumer goods.
Lastly, if the company does not negotiate the right contracts that align incentives, then the end result of the business model could stray from the SDG. For example, if the PWF reimburses parties that recycle waste based on weight (tonnage) versus the quality of the materials recycled, then it would incentivize the former where parties simply produce a large amount of waste, but the majority of which may be non-reusable or of low quality.
Interesting read. Good to know that the country is so advanced in this field. I completely agree with the first risk identified, since most of the plastic problems can be solved at the root basically developing new materials (for me moment not recyclable) or changing the behaviors of the consumers (avoid plastic).
Very interesting concept! In many states of the US we also use the reimbursement method to varying degrees of success, but shifting the responsibility from the individual to the technology itself seems like a much more reliable method.
Good article! My main question is how awareness in this area can be rolled-out further globally. The very advanced economies such as the Netherlands are in the lead but I would hope that business models also target for example Asian countries where the problem seems to be very drastic. Population is less aware but also some developed countries seem to sell their waste to other countries to get rid of the problem.