Document type Date CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited The Economics of Harnessing Waste Discussion with delegation from South Africa July 2011 CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited
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The Economics of Harnessing Waste – Executive Summary
Why harnessing waste? About 10 mio tons of waste are generated per day. 70% of the waste exit the economy intolandfill, leading to leakage of energy, mass and labor out of our economic system. In addition solid waste managementconsumes up to 50% of the budget of municipalities. At the same time resource prices are souring, while improvements intechnology, consumer preferences and public awareness improve the economics of collecting, sorting and recycling.
Why this initiative? Therefore we are convinced that we are at the verge of a fundamental shift in the way that economieswill treat waste and resource productivity. Together with a consortium of different players along the material chain fromproducers of products, retailers, waste management operators, technology providers, design and research institution as wellas municipalities we are working on establishing a unique database and decision support tools, based on these we arebuilding a comprehensive framework to quantify and evaluate different strategies to improve resource productivity.
What does the initiative deliver? The work will focus on four main levers:▪ Shifting from convenience to value – analyze which resources in the current waste stream should be extracted due to
strategic criticality and economic attractiveness (e.g., rare earths) rather than ease of collection and sorting only (e.g.,glass, paper)
▪ Improving efficiency along the waste stream – identifying economically most efficient treatment options to maintaincritical resources in the economic loop and reduce total cost of the waste management
▪ Cradle to cradle transformation – Improvements in design, production processes and logistics systems cansignificantly improve the reuse of components rather than recyclates, which will further reduce the leakage of labor, massand energy
▪ Making it happen – While the economics indicate many self-funding options exist to improve overall efficiency, cross-industry collaboration will be critical to close more loops and regulatory incentivation might be required to fast track scaleand learning curve effects
Why is this unique? Yes, there many obvious opportunities for improving resource productivity to reduce costs, andimprove top-line and investment performance, and some of these are already pursued by innovative institutions, butconsistent tools and superior databases are required – the fundamental assessment of the material economics will createthe foundation for shaping and benefiting from the new area of resource productivity
Why McKinsey? McKinsey & Company has a track record in facilitating the development of such cross-industry agendas
(e.g. climate change, water productivity). We now invite leading and innovative institutions to strengthen our existingconsortium to develop a distinctive and integrated perspective on the future business opportunities in harnessing waste
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Waste generation and its disposal is an increasingly intractable problemglobally and is expected to worsen in the next decades
Source: EPA; UNEP; Financial Times; The Guardian; “The Chinese economy: fighting inflation, deepening reforms”; McKinsey analysisPhoto credits: Alex Hofford/EPA; Alex Brandon/AP
Globally
▪The world generates ~10 million tons of waste per day, nearly 70% of which goesdirectly to landfill destroying economic value and causing environmental damage
▪ The global waste market was around EUR 140bn in 2008
– About 80% in services/ops; in low-income countries collection alone drains 80‐
90% of total waste management budget
– OECD: EUR 90bnMSW market
– Developing countries: 20 50% of recurring municipal budget spent on solid‐
waste management while only 50% of urban population is covered
▪ In the short term, the MSW market keeps growing strongly (8% cagr over 2007-11)
▪ Across the globe, waste volume growth should be at least partially decoupled fromGDP growth by 2025
4
+2%
2025
130
2010
100
Mexico
+3%
2025
750
2010
500
China
+2%
250
2025
350
2010India
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Non-optimized waste disposal leads to 5 types of problems,principally related to landfills
Economic valuedestruction
Environment
Public healthSocial
afflictions
Informal/illegaleconomic
activity
▪ Methane emissionsgenerated in landfills
▪ Leachates percolatinginto aquifers
▪ Contamination of soiland water bodies
▪ Stomach and lungrelated diseasescaused by improper waste disposal
▪ Criminal associationsof informal networksinvolved in the wastecollection anddisposal
▪ A high percentage of
the value chain is nottaxed
▪ Limited capacity of informal networks tomaximize valueextraction
▪ Poorest sections of society depend onwaste and scavengingfor survival
▪ Entire families work inmiserable conditions
▪ Expanding cities haveno space for landfills
▪ Communities do notwant landfills near them since this lowersquality of life andproperty prices
▪ Improper management of thewaste value chaindoes not allow for maximum valueextraction
5
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The time is right to define a new economic model for solid wasteDrivers
Waste taking centrestage in climatedebate
▪ Global emissions from solid waste landfilling amounting to 750Mt CO2e per year in 2005; growing by 0.9% annually
▪ New focus on waste-driven emissions along all product value chains (waste avoidance resulting in less emissions fromthe extracting, transporting, and processing of raw materials)
▪ Waste sector with potential to eliminate its greenhouse gas emissions completely (60% through recycling), on averageat a negative cost
New technologieschanging the game
▪ Relatively new technologies such as mechanical-biological (pre-)treatment (MBT), biomethanation, pyrolisis, andautoclaving (for bio-hazardous waste) changing economics of waste management
▪ Maturing operating concepts, for example around collection and recycling, taking hold across the globe
Demographics-drivengrowth in wastevolumes
▪ 3 billion people entering income brackets with growing waste intensity
▪ Urbanization amplifying personal consumption and waste generation
Growing pressure onlandfill utilization
▪ Exhaustion of mandated landfill capacity (e.g., UK by 2018, Beijing by 2014)▪ Efforts to phase out landfills and illegal littering (e.g., EU Member States restricted to landfilling a maximum of 50%
of the weight of biodegradable municipal waste produced in 1995)
Waste becoming avaluable resource
▪ Surge in commodity and energy markets likely to support much higher reuse/recovery rates (e.g., iron ore quality downto 63% from 65% in 10 y time; more gold in a ton of e-waste than in a ton of gold-bearing rock; Japanese scrap ironprice up by 50% over 3-year period; global potential of energy generation from waste agricultural biomass 50bn toe)
▪ Significant pipeline of investments (e.g., £700 million as PFI credits *for UK municipalities in 2010/11)
Shifting and more
complex economics
▪ Profitability gaining importance: Western European markets maturing quickly and EU legislation on waste transportgiving access to overcapacity in Northern Europe
▪ Recycling programs multiplying fractions reduced in size, requiring strategic and operational adjustments
▪ Compliance requiring cash-strapped municipalities to purchase waste services, providing new opportunities for wastemanagement companies and investors
▪ Increasingly volatile markets requiring ability to play commodity game and better contract design
▪ Favorable economics of distributed solutions (e.g., rural biogas digesters)
Stronger mandate for waste avoidance atsource
▪ European Extended Producer Responsibility regulation for packaging leading to development of 33cl drinks cans with55% less weight and glass bottles that are 66% lighter
▪ Amazon already selling 143 e-books for every 100 hardcover books – a trend that is growing
▪ Design for the Environment programs (EPA, EU, etc) including material reduction guidelines and research funding
*Grant to support a Private Finance Initiative (PFI) with the private sector making capital investments
SOURCE: State of California – Targeted State-wide Waste Characterization Study
California gathered detailed info on its generators …2006, Percentage by weight, pounds per employee
… and was therefore able to tailor its commercial waste programs
▪ E.g., Food stores are typically verylarge waste producers but already
recycle/compost 70 percent of thewaste they generate
▪ Offices currently recycle less than10% of their waste and offer therefore a good segment for atargeted program – CalRecycle hasmade resources available toeducate office managers on waste
avoidance, paper and packagingrecycling programs, purchasingguidelines, etc.
Waste management system map Key Hangzhou statistics
1 collectioncontractor
Trucks: 350 (including 54trucks are for
source-
separated MSW 1 )
Tricycles: 1,500
Waste collected
everyday
Starting 2010,there is no
MSW transfer
station in
Hangzhou city
Evaluating current MSW system design and key statistics are necessary to understanding potential interventions, calculatingthe economics, and emission reduction potential of different options to reduce greenhouse gas emissions
TianzilingPhase II
Sorting Landfill (2,328
t/day)
Yu HangJin Jiang800 t/day
Xiao ShanJin Jiang
800 t/day
1 MSW pre-sorting program started in 2009 in 100 communities; usess MSW bags in different colors to identify organic, recycable, dangerous and other 2 Tianziling Landfill Phase I was closed in 2007 when it reached capacity. Between 1991 and 2007 9 million tons of MSW were landfilled in Tianziling Phase I
SOURCE: Hangzhou Environment Report (2010); Zhang et.al, Municipal solid waste management in China: Status,problems and challenges (2010); Zhejiang Statistic Yearbook; Press search; SRP analysis
What does the MSW system look like today? HANGZHOU EXAMPLEC
only regular cash expenditures▪ Understand the full cost impact
of investments made toimprove the service
▪ Provides transparency and
accountability and helpsplanning future investments
▪ Helps identify expensiveactivities and decide on cost-cutting and resource allocation
▪ Avoids surprises down the road
when full effect of systemchanges kicks in
Why?
Managua (Nicaragua)example
▪ From: only budgeting and reporting the costs designated to the PublicCleansing department at the central municipal level
▪ To: accounting for fuel purchases by a central depot; spare parts and tirespurchased by the procurement unit, protective clothing procured by HR,repairs done by a central municipal workshop, and sweeping and illegaldumping clean-up activities within the municipal district offices
▪ Costs were underestimated by more than 50 percent
Start measuring the performance of your waste management
Possible performance metrics
Provide adequate
capacity
▪ System must process 12,500 tons of waste per day▪ 90% of the daily organic waste stream needs to be composted
▪ All saleable recyclables must be recycled
Goals
Reduce greenhouse gasemissions
▪ Reduce greenhouse gas emissions from landfill by at least 90% by2010
▪ Reduce waste to landfill by at least 30% by 2012
Minimize social impact ▪ Contractor must maintain the same labor level as it currently existsin sorting and collection
▪ Contractor must offer workers basic healthcare on par withgovernment employees
Allow city to share in
unexpected surplus
▪ Profits in excess of 15% IRR for contractor shall be returned to the
government
Minimize NIMBY effects ▪ Contractor must conduct ambience surveys (e.g., level of smell,noise, traffic) of neighboring residents; results of the surveys willdetermine level of ambience bonus paid to the contractor
Annual cost assumptions for 1,500,000 tons of Waste in Place (WIP)
22360-14
3642
38-32
36
57
40-19
Unlevered IRR Percent
23
16
51
Direct gas use is the most profitable option for larger landfills RIO EXAMPLE
1 Full cost includes O&M costs and capital expenditure. Does not include depreciation2 Assuming 6.5¢/kWh for electricity generation and $5/MMBtu for direct gas use3 Assuming a ton of WIP emits 0.032 tCO2e per year for 30 years and all technologies capture the same amount of methane; Carbon credit of
▪ Windrows are turned usingspecialized turning machinesto increase porosity,redistribute material, and breakup clumps
▪ Forced aeration can also beused
Options Description Key perspectives
▪ Scalable solution withmedium capital cost
▪ Most tested and commonly
used compostingtechnology
▪ Suitable for municipalitieswith large amounts of usable land
Source: Cornell University; EPA
A There are 3 broad types of composting
Windrow
▪ In-vessel systems are enclosedtechnologies where air flow andtemperature can be controlled(e.g., vertical reactor, horizontalreactor, and rotation drum)
▪ Relatively noveltechnology
▪ Faster but more risky andcapital intensive
▪ Suitable for municipalitieswith limited amounts of usable land, and largewaste budgets
In-vessel
Gore-covered
▪ Gore cover system leverages cover and forced aeration to control thetemperature and moisture of thedecomposition process
▪ Provides in-vessel-like compostingwithout the need for buildings,boxes, or bins
▪ Claims to require no odor treatment
▪ Novel▪ A lower cost alternativeto in-vessel options
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Anaerobic digestion speeds up decomposition and reduces spaceA
▪ Anaerobic digestion produces enough methane to operate the process with potentialexcess gas for sale
▪ Though anaerobic digestion has higher up-front costs, it reduces land requirementsdownstream, making this option especially attractive for land constrained municipalities
Source: Cornell University; EPA; Tchobanoglous
Methane can be captured andused to operate the process or sold as natural gasFacultative bacteria breaks down
organic materials in theabsence of oxygen and producemethane and carbon dioxide
Output still needs to go throughthe composting process beforebecoming marketable fertilizer,but, the process takessignificantly less time andspace, due to 50-70%reduction in waste volume
during the anaerobic digestionprocess
Organicfraction of MSW
Mixer
Blend tank
High-solidsanaerobicdigester
Plug flow reactor
Aerobiccomposter
Aerobic reactor
Soil amendment
Humus
Thermal energy
Biogas
Air
Anaerobic digestion speeds up decomposition and reduces spacerequirements of composting
A
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Sale of compost carbon credits and potential for waste diversionA
27SOURCE: EPA; United Nations Environment Programme; World Bank; EPA
Toxic incinerator ashes must be controlled
Air pollution control equipment can remove up to:▪ 99% of dioxins and furans▪ 99% of heavy metals, particulate matter and hydrogen chloride▪ 90% of sulfur dioxide▪ 65% of nitrogen oxides
About 25% of total waste volumeremains as two types of toxic ash . . .
▪ 75-85% of total ash withconcentrations of mercury,cadmium, lead and other toxins
. . . which ends up in hazardous landfills and filters
▪ Collects at base of incinerator
▪ Must be landfilled, typically in a hazardous landfill or an ash-only “monofill”
Bottom ash
▪ 15-25% of total ash withconcentrations of mercury,
cadmium, lead, chromium,arsenic, selenium and other toxins
Fly ash
▪ Captured from flue gas by air-pollution control system through – Fabric filters: Cylindrical bags, or “baghouses,” that filter
The caloric value of waste determines combustibility
… and composition of waste type differs by regionEnergy content differs by waste type
0
0
Metal
Glass
Other 1,000
Food 1,800
Yard 4,200
Paper 7,700
Plastic 17,000
Waste energy contentBTU per pound
Solid waste composition100%
▪ If average annual caloric value of waste is less than 7,000 BTU per pound, incinerators must besupplemented with fuel, driving up costs
▪ As population becomes wealthier, the average caloric value of waste stream increases because organics asa percent of total waste decline and paper (packaging) as a percent of total waste increases
▪ Fluidized-bed incineration requires less combustible waste such as paper and wood
50 52
1625
12
1519
26
35
35
6
9
11
3
20
Scotland
12
7
30
Rio
101 3
15
China
10
33
19
Paper
Plastic
Metal
Glass
Other*
USA
11
8
5
Food
29
Europe
1 Yard waste included in other category
SOURCE: World Bank; EPA; Dresden University; SLR
C
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Gasification may be cost competitive with conventional PRELIMINARY
Gasification may be cost competitive with conventionalincineration, but is less proven at commercial scale
Economics and annual emissions prevented per ton of
waste for advanced and conventional technologies
2
67
85
Gasification
Incineration
(mass burner)1
0.9
0.6
EmissionspreventedtCO2e
Tipping fees re-quired for 15% IRR3
USD
1 Incineration creates other pollutants and may be difficult to implement due to public perception. Gasification technology is not yet proven on alarge scale
2 Based on city with 9,000 tons of waste and no sorting, carbon credit is $12/ton, all capex amortized over 20-year project life3 IRR from the cities’ perspective
▪ Raising funding in a foreigncurrency and ensuring contractsmaintain the balance between costsand revenue will mitigate risks tofinancing costs and future revenue
▪ Construction / development
risks▪ Vendor risk
▪ Contract terms are crucial to
mitigating construction anddevelopment risks. For example, afixed price, turn-key constructioncontract will avoid cost overruns or afailure of vendors to perform asexpected
1. Global industrial output contains significant material, energetic and strategic value that goes uncaptured(materials perspective)
– The global industrial end-of-pipe paradigm is wasteful and inefficient in financial, social and environmental terms
– It also exposes economies to critical resource bottlenecks
– Overall, the cost of the leakage amounts to x
1. Existing waste systems (with given products) can be rearranged today to recover a significant share of that value (regional perspective)
– Here are 5 regional waste management examples where stringent optimization unleashes significant value
– We identified three archetypes, depending on highest value leap: a) Organized landfill (vs littering, see Delhi), b)Incineration/recycling (vs landfill, see USA), c) Advanced recycling (vs glass, paper, etc only, see Germany)
– The cost/benefit model can be used by operators, generators and regulators to optimize their system
1. To fully capture the resource value of the industrial production, new circular product concepts are required – and possible (product perspective)
– Anecdotal evidence exists for the real step-change that can be brought about by the circular economy – thechallenge is then to measure system-level effects
– We have analyzed [5] indicator products that together represent [75]% of industrial output
– Three product archetypes predominate
– Total circularity effects to the economy are estimated to be approximately [ x] EUR, total non-financial effectsare these
1. Moving towards such a circular economy requires a fundamental transformation which can be attained if aset of guiding principles are followed, e.g.:
– End-of-life considerations are taken into account during the product design phase, and where necessarylightweighting efforts are balanced with the end-of-life impacts these may have
– Individual companies cannot bring about the necessary scale and coordination that is required to build aneconomically attractive circularity model
– For each actor, a discrete, 20-year migration plan can be outlined
SOURCE: McKinsey
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Unit of measureExample: US polypropylene demand 2004, Million
1. Much material is leaking from this system, unchecked
Highlights of our climate change work Highlights of our water work
▪ Global abatement potentialidentified in industry, power, transport,buildings, forestry, agriculture, and waste
▪ Local cost curves for 24 countriescompleted (incl. Australia, Brazil, China,Germany, Netherlands, Sweden,Switzerland, UK, US), and more to follow
▪ Climate Desk: combining climate economicssimulation models and expert support towardsinsights on economic impact of climate changeregulation on sectors, regions, technologies
▪ Convened Economics of Climate Adaptation working group and developed authoritative report
▪ Global water demand – supply view up to 2020/2030
▪ Global database of water mitigationmeasures (cost/impact)
▪ Regional water studies in5 geographies1
▪ Report presented by Robert Zoellik
at World Bank, November 2009▪ Sponsored by World Bank/IFC, ADB, Nestlé, Coke,
Pepsi, Syngenta, Veolia, Standard Chartered, etc.
▪ Working with leading water utilities to identify what alow-cost 21st century utility looks like and how wecan help to get there
1 India, China, South Africa, Brazil, GCC
SOURCE: McKinsey
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Unit of measure
Relevance of our effort – along the entire material chain ROUGH ESTIMATES
▪ Waste operators – could generate revenues of EUR 55 bn a year by setting up incinerators to treat just 20% of the waste generated in Beijing
▪ Technology providers – have the opportunity to capture the MRF market in US which needs to invest in 381MRFs (new and retrofit); NPV of this investment is $2.1 bn
▪ Basic materials companies – a single German automotive OEM sold ~7.2 mn cars in 2010; if it were able torecover the steel it put into those, it would get its hands on ~EUR 0.9 bn of materials
▪ Packaging companies – an aluminum company can save 90% in labor and energy by recycling aluminum cansrather than producing it from virgin material
▪ Fast moving consumer goods – FMCG companies should have strong motivation to reduce packaging; for beverages for example it makes up 19-21% of COGS; for cosmetics the potential is even higher as packagingmakes up to 25% of COGS and there are less demands on its physical properties
▪ Electronics and white goods companies – Only 2% of cell-phones are currently recycled; this means EUR 600mn is being lost to landfills and incinerators every year, or lost out of sight between its useful life and controlleddisposal
▪ Retailers – A large European retailer could reduce their store labor by an equivalent of thousands of FTE byreducing the packaging it needs to handle by 50%
▪ City governments – NYC could save up to $ 30 mn a year on its waste budget by increasing its residentialrecycling compliance rate
▪ Venture capitalists and PE funds – In emerging and least-developed countries there is potential to createmunicipal solid waste management markets to the tune of EUR 130bn
▪ Funding government bodies – Making simple improvements in solid waste management through landfilling inChina requires investing EUR 0.6bn a year in an urban infrastructure construction program
▪ Foundations with an interest in waste and sanitation – Indian cities need an investment of EUR 12 bn ininvestments over the next 20 years to build solid waste management services
SOURCE: McKinsey
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A consortium approach is required to address resource efficiency andconservation along the value chain
E.g., better disposal does not help in any other stage of product development;better landfill management reduces the environmental damage but thisdamage can be avoided to a larger extent by optimizing prior stages
Optimization efforts can have upstream and downstream effectsand cannot be tackled in isolation
SOURCE: McKinsey
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This initiative offers multiple benefits for participating cities
▪ The results of this project can be used directly by cities to optimizetheir waste management system: making choices around sourceseparation and collection, whether and how to build up recyclingcapacity , optimizing landfill fees and incentive structures,developing local markets for material resources, etc.
Excellent publicrelation opportunity
Quantitativeassessment of your
closed loop strategy
Access to world-classexpertise
Developing your citynetwork
▪ The project’s corporate consortium partners, together with theFraunhofer Institute – Europe’s largest research group andworldwide renown for its applied research – and McKinsey provideparticipating cities with access to the kind of world-class expertise
that is typically difficult to locate or finance for cities
▪ The project and its outreach activities cities invite city managers toexchange know-how and experiences with peers throughMcKinsey’s global network (NYC, London, Mexico City, KualaLumpur, Chicago, Rio, etc.) and through internal organizations suchas McKinsey’s China Urban Institute
▪ Every year at the world top in Davos, the 5 countries that participatein the Water Resources Group which McKinsey initiated a few yearsago report back on their progress; outreach at a similar level isplanned for the Zero Waste initiative