Calculating the financial returns on the environmental and social impact of formal recycling businesses
In the conventional sense, it is relatively straightforward to evaluate the financial returns of any social enterprise – subtract investment from the revenue obtained by selling products and services. However, such business characteristically also improve social and environmental well-beings. As such, in order to capture the full impact of these businesses, one has to represent the non-tangible aspects with hard financial values.
But, how does one estimate the financial value of CO2 savings? Does contributing to keeping the environment clean have any tangible present of future financial value? This blog post draws on the scientific literature to propose a back-of-envelope framework for answering these questions with real numbers.
The intention of this article is to elaborate on a simplified estimation technique and highlight rough financial conversion factors for environmental and social impacts of recycling businesses, using the US as a case study. If your intention is to carry out an all-encompassing financial conversion of the environmental and social impact of recycling, please refer to the methodology outlined in the HBR article, calculating the value of impact investing .
Environmental impact of recycling
The most prominent environmental impact of the conventional recycling industry are its obvious effects on reducing solid (municipality) waste, and not-so-obvious aversion of gaseous (CO2) pollution. In essence, for every ton of material recycled, there is an equivalent ton of solid waste diverted from the landfill/ocean, and an equivalent amount of CO2 diverted from the atmosphere. Estimating the financial value of these diversions gives an estimate of the financial value of the environmental impact of recycling.
– Financial value of diverting materials from the landfill
It is easy to understand how recycling a piece of material diverts an equal amount from the landfill, or even polluting the ocean. As such, to estimate the financial value of that diversion, a direct correlation has to be drawn between the cost of having that material on a landfill or cleaning up the waterway, per unit quantity of material.
A research article published in the Waste Management and Research Journal described the true cost of landfill disposal as the sum of the tipping fees, the physical impact cost and the non-physical impact cost. The physical impact cost includes costs of treating contamination of groundwater and surface waters, and putting away potential fire out breaks etc., while the non-physical impact costs include implication from the decrease of surrounding property values and the cost associated with land utility effects (opportunity cost) etc. Based on the case study presented in the same research paper, the physical and non-physical impact costs account for about 51% of the total landfill disposal cost. As such, in the US where the average tipping fee is about $50/ton , the total landfill disposal cost will be about $102/ton. As a rule of thumb, to estimate the financial value of reducing solid pollution in your area, simply multiply the tipping fee at your nearest landfill by 2 – easy peasy!
– Financial value of CO2 savings
The correlation between recycling and CO2 savings is not so obvious and hence deserves an explanatory paragraph.
Taking plastic (PET) as an example, its production generally requires a facility that is typically being run by electricity derived from fossil fuels. According to several studies , from a purely energy perspective, recycling reduces the energy expenditure to only 1% of that required to make virgin plastic. Collection and sorting of recyclables add to the energy expenditure and brings this value to about 30-45% . This energy savings is directly proportional to the CO2 emission savings associated with recycling.
According to recent Deloitte report , the entire production process of a ton of virgin PET results in an emission of about 2150 kg CO2e. The complete recycling process on the other hand (collection, sorting, transportation and actual recycling) results in an emission of 574 kg of CO2e per ton of PET. As such, the CO2e savings associated with recycling a ton of PET is about 1576 kg (1.576 ton).
CO2 emissions has several linking negative effects. Health damages due to local and regional air pollution are by far the most telling of these effects – according to the latest available estimates, 1 in every 10 deaths worldwide is due to air pollution . Based on figures gathered from the WHO’s Global Burden of Disease and the report Multiple benefits from climate change mitigation published by the Grantham Research Institute, damages from exposure to ambient particles less than 2.5micron in size (PM2.5) cost China, India and US about 9%, 5% and 3% of their GDP respectively. This translates to a conservative estimate of over US$100/ton CO2e abated in high-income countries and US$50/ton CO2e abated in middle-income countries. Sticking with the US case model, the financial value of the CO2e savings from recycling PET is equivalent to $157/ton. In a middle-income country, the value will be about half of this – $78.5/ton.
As such, the total financial value of the environmental impact of recycling PET in the US is about $259/ton. For other materials, and recycling activities in different countries, a ballpark value can be estimated based on preceding analysis.
Social impact of recycling
Social impacts of recycling are simply the consequences the process has on enabling social interactions. In a very broad sense, for a formal recycling industry, these impacts can be categorized as employment, human rights (e.g. eradication of child labor) and socio-economic repercussions (e.g. lack of education).
Studies have shown that for every job in waste management there are four jobs in recycling , and for every job in collecting recyclables, they are eight jobs in creating new products from the recyclables. In total, recycling creates thirty-two new jobs per job in waste management. To put these numbers into more understandable perspectives, in the US, recycling accounts for wages of up to $120 per ton of recycled material .
– Human rights and its socio-economic repercussion
This category has several sub categories like no child labor, no discrimination, presence of collective bargaining etc. However, for the sake of succinctness, our analysis will be limited to the impact on child labor.
Informal workers typically carry out their activities under inappropriate conditions, and earn very little in the process. This forces them to introduce their children to working conditions at an early age. Children from such families contribute significantly to the family income (between 10-50% of an adult income) and this makes it difficult to convince their parents to enroll them in school . A very rough estimate of the financial repercussion of this is the cost of illiteracy to the economy. Based on the estimated cost of illiteracy to the US economy reported by the World Literacy Foundation, on average, an uneducated child will cost the economy about $897 per year ($69, 966 over an expected lifespan of 78years). Assuming that the employment rate of the US recycling industry (1000 tons per 1.57 jobs) also holds for child labor, the financial impact of this category is $98 per ton of material recycled.
Stitching the employment and human right aspects of the social impact of recycling, the overall financial value of the social impact of recycling can be estimated as $218 per ton of recycled material.
Overall, this translates to a total financial value of the environmental and social impact of recycling of about $477 per ton of material recycled. To put this into perspective, this is 60% higher than the average 2018 prices of post-consumer PET in the US.