The determination of a fully inclusive waste management cost formula and the compliance of financial indicators with the organizational levers and contractual instruments

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THE DETERMINATION OF A FULLY INCLUSIVE WASTE MANAGEMENT COST FORMULA AND THE COMPLIANCE OF FINANCIAL INDICATORS WITH THE ORGANIZATIONAL LEVERS AND CONTRACTUAL INSTRUMENTS

Abstract

Developing economies in the East Europe, like Ukraine, and Asia are alarmed with the continuous rise of the household waste going to landfills. The solution to this issue requires a comprehensive approach to tackle the organizational, awareness, business and financial aspects. Despite the increasing funding in many countries, the waste diversion and recycling rates, and landfill diversion indicators are not up to the desired levels. When exploring in depth the reason behind the impressive rates shown in many countries in West Europe, we conclude that they made a wonderful job to include all possible costs associated with waste and pollution neutralization, created an integrated system with hassle free collection and payment systems and finally, pushed to engage the private sector to invest in waste management with clear perspectives in terms of revenue generation and financing mechanisms.

Keywords: Waste management, Full cost accounting, Externalities, Total cost, Benefits.

Formulation of the problem

The developing countries put all efforts possible to create sustainable economies. Countless directives and ordinances are issued, and billions of dollars are invested by governments to collect and dispose wastes. Despite the tremendous efforts, these countries find themselves in a situation where they need to build more landfills. Waste generators in these countries find the fees very high and unjustified, private sector doesn't see a sense in investing in waste treatment and recycling and finally, governments and municipalities do not really picture the full life cycle of the waste to put a fully integrated system.

Analysis of recent research and publications. The research explored the history behind waste management fee determination during the 20th and 21st century in Europe and the USA, provided the core waste management fee calculation methods and different cost accounting approaches sourced from various academic research, legislation and other scientific work conducted in this field. The analyzed literature agrees that landfilling is a big challenge [1 ;2]. the author provided the literature that describes the shift from waste management to sustainable development as a major step to tackle the whole waste life cycle [3;4;5]. All researched evidence indicate that waste generation is increasing in direct correlation to the economic growth, few countries were able to demonstrate otherwise [6-10]. According to the sourced literature, the waste management drivers in developing countries were found to be profitability and benefits; healthcare and finally; environmental Protection [11 ;12]. The financial aspect was explored deeper to reveal that all the relevant literature [15-27] agree that external and hidden costs like landfills capping and remediation, emissions and carbon capture have to be accounted for in the waste management cost, the literature refer to this inclusive method as «full cost accounting».

Purpose of the article: This research expands the full cost accounting concept and concludes a simple set of formulas that summarize the interaction of waste management key financial indicators to form a simple and comprehensive calculation method to be used by municipalities and investors. The research also provides a set of organizational levers that can be implemented by municipalities and local authorities to address each financial indicator to improve the bankability of a waste management business models and help to engage private investors. Finally, transparent calculation method eliminates the objection to pay the full waste management cost from waste generators' side.

Exposition of the main material

By the end of the 20th century, the results of waste minimization and recycling were a complete disappointment. The land to accommodate the growing mountains of rubbish were scarce and unauthorized dumping became more popular. Incineration of pollutants gained increasing acceptance as the only logical alternative. In the northeastern United States, 40% of waste was incinerated, the same was also popular in Japan and several European countries with high population density and cost of land. By the 2000s, the prevailing opinion was that land scarcity was one of the main reasons for the prevalence of waste incineration, but studies, however, do not show a clear correlation between the density of population or cultivated land and the percentage of municipal waste incinerated [1].

The share of waste that was landfilled in several European countries in the mid-1980s ranged from 22% in Switzerland to 100 in Greece and Ireland, and only Sweden and Switzerland disposed of less than 50% of their waste in landfills [2]. In the United States, there was a peculiar trend - while the number of landfills in the 1990s steadily decreased, the estimated capacity of the remaining landfills has steadily increased. Based on estimates provided by the government, the remaining landfill capacity has doubled from about 10 years of remaining capacity in 1988 to 20 years in 1997. The reason for these confusing trends was the replacement of small local urban landfills with large regional sanitary ones [2]. Developed and emerging economies had to solve the waste accumulation puzzle but, aligning the interests of all waste management stakeholders was seen as an impossible task due to the challenge to synchronize its driving forces. The raising concerns about environmental degradation after World War II forced the developed countries to switch to «sustainable development» concept, which assumed that «environmental and social setbacks had common reasons and demanded a common response» [3]. Sustainable development was redefined as a broad political vision in 1987 by the World Commission on Environment and Development, referring to «the resilience of natural resources and ecosystems over time, and the maintenance of human standards of living and economic growth» [4]. By 2010, it became apparent that countries with high gross national income per ca pita continued to generate huge amounts of waste [5], analyses carried out in 30 countries over 20 years revealed that an increase in national income by 1% would increase the amount of municipal solid waste by 0.69% [6]. Between 1980 and 2000, waste generation rates ca pita in the Organization for Economic Co-operation and Development (OECD) countries increased from 420 kg per year to 560 kg per year. In 2000, the USA continued to lead in terms of waste generation per ca pita, while Denmark had the highest domestic waste generation indicators [6]. However, most European countries continued to demonstrate increase in the generation of municipal waste (except for Belgium, Latvia and Hungary), they significantly reduced landfilling [7]. The World Bank published a pessimistic report, which argued that the upward trend in waste generation will continue and reach 3.4 billion ton by 2050, other reports emphasized that by 2050, daily waste generation per ca pita is projected to increase by 19% in high-income countries and 40% or more in middle-income countries. Per ca pita waste generation will, on average, increase by about 20% until 2100 [8]. The world concluded that waste accumulation challenge require more than just a restrictive or legislative effort to be overcome, detailed understanding of stakeholders' and participants' drivers and interests is vital to achieve desired results.

Waste management drivers in developed countries. The waste management driving forces until late 1970s were mostly intuitive. The waste generator and subsequent chain participates were able to cooperate with limited interference from the authorities. Waste collection and disposal legislations were developed and enforced by the authorities, only due to health and safety issues, closer to the end of the twentieth century, these drivers evolved to be as follows:

- profitability and benefits. The financial aspect would be the only criterion for the voluntary participation of the stakeholders. In the absence of profitability and benefits synchronization, the informal recycling sector has flourished in many urbanized but poor cities and has often achieved moderately high recycling rates. While developed countries were having sought to maximize the value of secondary raw material (SRM), the EU succeeded to export 36.8 million tons in 2018 [9] which is 69% more than SRM export at the end of 2004 and earn up to €14.0 billion. In 2020, the amount of SRM shipped out of the EU reached 38.4 million tons [10];

- healthcare. Public health continued to be one of the main driving forces during the 20th and the 21st centuries. As science and technology advanced, it became possible not only to identify more health threats posed by waste, but also to quantify their adverse effect on all living organisms. The more humanity learned, the more they demonstrated sense of understanding and became acceptive to bear the costs that are associated with the health threats elimination;

- environmental Protection. Air, soil, and water pollution, as well as pollution caused, in particular, by abandoned landfills that received hazardous waste led to numerous scandals in the industrialized countries. These dumpsites were perceived as time bombs that could detonate at any time unless urgent action was taken. Strict legislation and stringent goals for recycling, waste minimization, and neutralization were the response to such threats however, the implementation and enforcement often lagged behind especially in countries with limited financial resources.

It is believed that economic drivers would play the main role lift the whole waste management system up to the desired heights but, the implementation of well- designed and justified financial instruments might be even more important to achieve the desired target.

An undeclared consent was achieved, confirming that achieving waste prevention, minimization and recycling goals set out in the directives and regulations will depend, inter alia, on the quality of the economic instruments used to harmonize the interests of the participants. Governments and local authorities encouraged experts and academics to offer the best combination of these instruments that would balance the economic interests with minimum or no harm to the economic growth and prosperity, as a result, scientific reports, and articles on this issue appeared on a regular basis after 1988, and increased to 75 articles in 2019, the growth rate over 10 years was 294.74% [11]. All studies have come to an agreement that economic instruments are used in waste management to accomplish specific goals: reducing the amount of waste generated; reducing the proportion of hazardous substances in the generated waste; separate collection of hazardous waste for special treatment and disposal; encouraging the recovery, reuse and recycling of waste; maintaining the profitability of the collection, transportation, recycling and disposal of solid waste and finally; and minimizing their adverse environmental impacts [12]. The main obstacle to the implementation of these tools was the inability to justify the costs incurred by the waste generators and polluters. The costs of all waste management methods, including legal disposal that were used until the end of the 1980s ware not only seen expensive, but also illogical. The cost to dump one ton of waste, calculated by using the traditional cost accounting methods, is so low that all tariff system could looked inflated from consumers and industries perspective thus, unauthorized disposal maintained its position as waste management method of choice.

The «full cost accounting» (FCA) method for calculating the cost of waste management was proposed in the 1990s, this method combined direct financial costs and other indirect environmental and social ones. The new waste disposal financial reporting models were modified to ensure including not only investment and operating costs, but also closure and post-closure costs [13]. The new methodology was pivotal to help governments and local authorities account for some additional waste management costs that might have been hidden or simply not recognized because no costs have been incurred yet [14]. A working group of experts from the European Commission (EC), Eurostat and the Organization for Economic Cooperation and Development (OECD) recommended clubbing these hidden expenses, along with others, in a so called «environmental tax» which was defined as «a tax whose base is a physical unit (or a proxy of it) that has a proven specific negative impact on the environment». Economists have termed this type of hidden costs «external costs» or «externalities», and this definition began to appear in all business models and investment plans related to waste collection, recovery, recycling, and disposal. The US Environmental Protection Agency (EPA) has characterized this non-financial information as «the costs of activities or resources that appear to be free (no outlays are recorded or anticipated)» [14]. One of the clearest examples of the externalities is the opportunity cost arising from the fact that lands dedicated for a dumpsite cannot be otherwise used throughout its lifetime [15].

Towards the end of the 20th century, the «Environmental costs» terminology was proposed to describe environmental externalities and «Social costs» to describe social ones [14]. Social costs were associated with public perception, noise pollution and other similar negativities caused by all types of activities associated with waste management. Finally, environmental economists agreed that the total cost of economic activity can be defined as the sum of the net operating costs (private costs) and the net external costs associated with the activity [16].

The last quarter of the 20th century witnessed the quantification the economic impact of the CO2 emissions and formalizing their costs. This cost added up to the externalities of waste generation and disposal. Sweden, for example, imposed a Carbon tax of $30 per ton back in 1991, which increased to reach $132 by 2019, and became the highest Carbon tax in the world [17] despite the views insisting that a mean value to social Carbon cost of $14 per ton in business-as-usual scenario is the optimal option for both, economy, and environment [18]. Recent studies have made it possible to use waste morphology to determine the amount of biodegradable organic Carbon and thus the potential amount of CO2 emissions and, ultimately, the tax that the waste producer must pay for each type of waste depending on the percentage of biodegradable organic carbon in each type [19]. Some studies conducted in the first quarter of the 21st century began to include the cost of CO2 emissions as an expense in the financial models [20]. This new economic instrument led to the creation of a new reality in the UK where organizations that introduced new recovery and processing technologies to reduce emissions could sell their unused quotas to others thus, huge private investments in processing various types of waste became economically justified. The «cap and trade» schemes allowed banking and borrowing of allowances, as firms might emit more this year using borrowed allowance to emit from next year, it then would have a reduced number of allowances to emit next year and so, might choose to implement abatement equipment. The credit-based scheme was also implemented for packaging waste to cover their CO2 emission cost, targets were allocated for recycling to industry and required evidence for target achievement through holding of tradable certificates that are produced when a ton of waste is recycled [21]. A game changer in the CO2 emission cost was the concept of its removal from large point-sources using carbon capture and storage (CCS), and also from the atmosphere (carbon dioxide removal, or CDR). This disruptive technology was able to achieve two main goals: internalizing the CO2 emissions by building a touch and feel process that captures the pollutant where accountants can accurately calculate the process cost; and secondly finding more applied justification to impose sizable environmental taxes on products, the production of which cause carbon emissions. Of course, capturing, transporting, and storing CO2 is always more expensive than simply venting it to the atmosphere, exceptions include applications where the CO2 has economic value as a product (e.g., for use in carbonated beverages) or is used to support another economic activity (e.g., enhanced oil recovery) [22].

The implementation of waste management charges. To inclusion all the external costs, the EC was able to conduct a detailed assessment of each type of pollutants that damages the atmosphere, water, and soil [23], economists and environmentalists continued extensive research to identify all possible damage from any waste management facility. The researchers were able to quantify social cost based on factors like distance from residential areas, Proximity to service users, Risk perception and stakeholder approval, and visual effect [24]. This social cost was quantified by either directly by using «stated preference» methods or indirectly by assuming that the value of ecological use is disclosed in the corresponding costs of goods in the market, such as transportation costs to a specific destination or prices paid for living in a specific location using the method of "Hedonic pricing" [25]. In a relatively recent study, three main methods of estimating external costs have been proposed: Avoidance costs; Cost of damages and; Collective consent to pay [26].

Now that the adverse consequences of ignorant production and consumption on the environment was converted into values, the next logical step was to systematize the appropriate costs and incentives, to push the entire chain towards minimizing waste and recycling and finance the remediation of the consequences of early violations and unauthorized practices, inclusive waste management tariffs and taxes to achieve this objective. These tariffs and taxes were classified, according to the different functions they can perform, into the following types [27]:

- tariffs and taxes to cover the costs of monitoring or controlling environmental issues;

- incentive taxes which are levied solely with the intention of changing environmentally damaging behavior and without any intention to increase income;

- taxes to increase income which can influence behavior but, still generate significant income in excess of those required for appropriate environmental regulation.

The combined implementation of the economic instruments allowed those who choose to recycle to use some financial advantage, which economists have defined as «benefit» to counterbalance waste generation costs, benefits are the direct or hidden positive economic and environmental effects of waste reduction and recycling. The positive and negative side effects of a specific waste management activity and grouped in a financial statement were called «externality» and defined as «the revenues and expenses that are not incurred by those with a direct financial stake in the activity but are instead borne by other groups in society and/or by future generations; or are dispersed throughout society as a whole» [28]. waste management municipality investor

The practical implementation of FCA helped identifying key waste generation charging methods, they can be summarized as follows [7]:

- charges for waste disposal and treatment, like landfill and incineration taxes and fees;

- pay-as-you-throw (PAYT) schemes;

- producer responsibility schemes for specific waste streams (notably packaging, waste electronics, end of life vehicles and batteries).

As the understanding of FCA matured, governments and local authorities put tremendous efforts to engage the private sector to actively invest and force the waste generators to pay the cost of waste management, to do that, economists and legislators worked together to impose tariffs that address each waste management stage.

Landfill gate fee. The system, whereby the party delivering the waste to the landfill pays a fee, took on a massive scale. As landfill economic model matured, the cost of landfill has become more inclusive and therefore steadily increased. The comprehensiveness of the disposal cost calculation system went further to include a «landfill license fee» in some US states, such as Pennsylvania, which levied a fee of $4.05 per ton of waste disposed. This fee had to be equal to or greater than the expected external costs of waste disposal [29]. Eventually, gate fees in a country like the United States, in average, jumped from about $7.50 per ton in 1990 to about $27.50, as of 1997, it was around $30. A comparison of municipal waste gate fee in key European Union countries demonstrated a similar trend, gate fee in some cases increasing by more than 5 times (Table 1).

Table 1. Landfill gate fees in 2002 and 2020 in key European countries