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Processing Costs

Note: EPA no longer updates this information, but it may be useful as a reference or resource.

In addition to collection costs, the funding required to implement a curbside recycling program includes the costs to sort, process, and market commodities. Paper can be sorted and baled; mixed containers can be separated into different colors of glass, types of plastic, etc. Processing costs per ton increase with increases in the number of co-mingled commodities.

Processing costs are impacted by how the materials are collected, the type of processing facilities locally available, and a variety of other factors. Revenues received for processed commodities offset program costs, but also can fluctuate as commodity market prices change. Striking the right balance between processing costs and program revenues can have a dramatic effect on program economics.

Although the switch to single-stream generally decreases collection costs, different communities have experienced mixed results regarding the costs of processing resulting from the change. Single-stream collection can result in higher contamination rates of collected commodities, which in turn leads to lower revenues for lower-grade recyclable commodities and higher residue levels (more material that cannot be sold in recycling markets). A common issue with single-stream recycling is that the glass contaminates the paper materials.

To date, there has been no definitive study on whether there is a clear economic winner—whether the decreased collection costs of single-stream recycling exceed the increased processing costs of this set out method. Most likely, neither method is inherently superior; the preferable method for each community is a function not only of the technical costs of collection and processing, but also of the institutional support for the program in terms of enforcing regulations, educating households, and encouraging participation.

Adjusting Contract Provisions

Community Success Story: Philadelphia, Pennsylvania

Philadelphia’s recycling program is responsible for saving the city money compared to the costs of trash removal. Due to a favorable contract negotiated with Blue Mountain Recycling in 2002 and to other factors, the City of Philadelphia realized that recycling had become cheaper than trash removal by as much as $25 per ton— a savings of almost $2 million a year achieved as a result of its recycling program.

Negotiating Waste Contracts and Services—Resource Management (RM) Contracting

Using contractual relationships to reduce, not just handle, waste is a novel idea that is attracting increasing attention in both industry and government.

In August, 2002, EPA Region 9 investigated how Resource Management (RM) contracting might assist Clark County, Nevada, to achieve higher recycling rates. Unlike traditional solid waste service contracts, RM compensates waste contractors based on performance in achieving waste reduction goals rather than the volume of waste disposed, creating an incentive to reduce waste, rather than increase it. More information (PDF) (45 pp, 691K, About PDF).

A community can adjust recycling contract specifications in many ways to improve the financial viability of its recycling program. This section examines actual recycling collection and processing contracts, offering examples of contracting strategies that can improve the economic profile of a recycling program. Such strategies might include:

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Sharing Market Risk of Selling Commodities

One of the greatest sources of uncertainty in recycling is the level of prevailing prices for commodities such as newspaper, mixed paper, corrugated, glass, plastic, and metal cans. Prices for commodities vary tremendously over several years, and this presents a significant risk to the processor. Typically, a risk-averse processor will seek to do one of two things: (1) assume a very low price for commodities in preparing a price proposal to avoid losses or (2) try to share the risk with the local community. In general, sharing the risk will result in lower processing costs to the community and the potential for some profit.

An additional type of risk associated with processing recyclables is the risk that material contamination will result in lower grades of commodities than was anticipated. Delivering contaminated materials to the processor is a risk that a community can minimize through appropriate education, enforcement of segregation requirements, and inspection of recyclables containers. Assurance that regulations will be enforced reduces the risks to the processor, again resulting in a lower processing cost.

The processor must also assume the technological risk of processing the materials in a way that will generate the highest and best grades of commodities for sale. If a community, for example, separates glass from an otherwise single-stream recyclables set out in order to minimize contamination of commodities with broken glass, then the community should also specify that its recyclables should be processed separately and not co-mingled with those from other communities that do not separate glass.

Market risk can be shared in many ways. Some examples include:

Des Moines, Iowa, contracts for processing of recyclables. The processor agrees to pay the city a minimum floor price and an annual minimum payment in return for the city’s guaranteed delivery of a minimum quantity of recyclables. The processor also agrees to market materials at the high end of prices quoted the Official Board Markets: The Yellow Sheet (Chicago market) for newspaper and mixed paper, and to share these revenues in excess of floor prices with the city.

Denver, Colorado, contracts for processing of recyclables, requiring the processor to offer a “recyclable revenue per ton” payable to the city, with a share in revenues received in excess of this base amount, which is referred to as the “up-market share.” The formula for the computation of the “up-market” share is based on a stated percentage distribution of commodities and average market prices for each commodity for the Chicago area (paper commodities except ONP7) and Midwest region (container commodities) as obtained in the first January issue each year of Official Board Markets: The Yellow Sheet (paper prices) and Mill Trade Journal’s Recycling Markets (containers). A base market value is computed in January, and a current market value is computed monthly using the current issues of the stated publications. To compute the “up-market revenue,” the city averages the 12 current market revenue figures and then compute the percentage difference between the annual average of current market values; the processors are allowed to propose what percentage of this additional revenue will be shared with the city. The contractor assumes the risk of market prices dipping below the proposed base market value. The up-market revenue is computed on a per ton basis; the city’s share is the per ton amount multiplied by the number of tons of recyclables multiplied by the percentage share offered to the city.

Seattle, Washington, has a market-risk-sharing clause in its residential collection contracts through which a price source and dollar amount for each commodity is specified. When the price rises above the specified amount, all of the additional revenue are shared with the city; when the price dips below the specified amount, payments to the contractor are increased by all the lost revenue. These computations are not based on the actual sales prices received by the processor, but rather on published prices. If the processor can market commodities at prices above the stated published figures, the additional revenue remains with the processor. Similarly, if the processor cannot market a commodity at a price as high as the published source, then the processor absorbs the revenue deficit.

The Seattle contract specifies base prices for various commodities, including:

Seattle sorts a sample of recyclables from one collection route every 3 years to determine the percentage distribution of these commodities so the monthly adjustment can be made to all the recyclable tons collected.

Seattle does not have to monitor the actual sales made by its processor, thus avoiding the often difficult challenge of determining which material at a large materials recycling facility (MRF) originated from its residents and which came from residents of other communities. The contract says simply, “Marketing of the product is at the contractor’s risk, expense, and profit (or loss).” The city pays the processor a per ton fee (just less than $20) for processing.

Phoenix, Arizona, requires the processor to bid a guaranteed minimum floor price for each of 19 different commodities. The contractor must pay the agreed-upon percentage share to the city, computing the city’s share using the greater of the actual price received for each commodity or the guaranteed minimum price for that commodity. Thus, the processor accepts all of the market risk for prices dropping below the guaranteed minimum, and shares the profit potential if prices rise above the floor.

In summary, when embarking on new or expanded recycling programs, communities can generally reduce costs by sharing the marketing risk with the recycling processor. When a recycling program becomes stabilized and mature, and when diversion rates are well-established (e.g., Seattle), it is less important for communities to engage in such risk-sharing.

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Sharing Responsibilities for Educating Community Members

Increasing participation and diversion rates is one of the most effective ways to make recycling economical—on a per ton basis, collecting large amounts of materials at every household is much less costly than collecting small quantities at every fifth household. Most communities do not include an education and diversion goal in their recycling collection contracts. However, several cities and towns have such clauses.

San Jose, California, has an extensive outreach and diversion requirement for its recycling contractor. The contractor agrees to divert 35 percent from the residential solid waste stream (curbside recyclables and yard debris), at least 50 percent of large items (bulky items such as refrigerators), and at least 50 percent of materials collected in neighborhood clean-ups. Payments are reduced if these diversion rates are not attained.

San Jose also requires community education and outreach from its contractor. The contractor must develop an annual outreach program plan for city approval, and the plan must include, at a minimum: (1) one direct mail piece to each household, (2) support of recycling programs as directed by the city, (3) door-to-door interaction with residents regarding recycling, (4) presentations at schools or community events, (5) placement of city-provided signs on collection vehicles, and (6) maintenance of a Web site with direct links to the city’s recycling Web site and opportunities for comments and questions.

Seattle, Washington, requires extensive publicity and outreach from its contractors. At the outset of the contract, contractors must provide each community member with recycling program requirements—what materials are collected when and how each should be prepared. Community members must be informed of collection options such as what size containers can be used for collection. Before the start of collection, the contractor must "produce and deliver user-friendly recycling ‘how to’ information and promotional materials to each structure." Annually, the contractor must produce and deliver updates to each structure informing community members of any problem areas, changes in the program, and participation rates. The contractor must produce and deliver promotional posters for all multi-family buildings that receive centralized apartment recycling services, placing the posters (with the permission of the property manager) in lobbies or common areas. The contractor must also visit residents of any apartment complex that is not recycling to inform them of the availability of the service and its benefits. The city provides an incentive payment to the contractors for bringing additional apartment buildings into the recycling program. The reward is $2,000 on a one-time basis for each percentage point above the target. The target is the number of structures participating on a specified date multiplied by 1.2. For example, if participation increases by 23 percent, the contractor receives three times $2,000, or $6,000. The city doubles the reward if the contractor increases participation by more than 45 percent. City approval of all publicity and outreach materials is specified in all contracts described above.

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Specifying Processor Marketing Responsibilities

San Jose, Denver, and Seattle have all devised contracts for recycling collection that do not require monitoring of processing plants and separation of tonnages processed from one community versus another. Phoenix, which recently developed a contract for processing of single stream recyclables, takes a more hands-on approach.

Phoenix, Arizona, requires all materials that will be processed to reach specified commodity grades. In particular, materials must be processed to meet the market specifications outlined in the Institute of Scrap Recycling Industries’ “Scrap Specifications Circular 2004: Guidelines for Nonferrous Scrap, Ferrous Scrap, Glass Cullet, Paper Stock, Plastic Scrap, Electronic Scrap” (or the most current version of that document).

Phoenix levies penalties on the processor if materials are not marketed at the specified grades—direct costs for disposal of any rejected materials plus the amount that would have been the city’s share in revenue from the sale of commodities had the material not been rejected or downgraded. Specific grades of material and how they must be marketed are specified in the Phoenix contract:

Phoenix also requires its recycling processor to develop an extensive marketing plan that names brokers and other markets and includes a contingency plan for marketing materials if prices drop dramatically.

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Specifying Processing Quality

Phoenix also imposes a recyclables residue guarantee on its processor which starts at 5 percent during plant startup and decreases to 1 percent maximum. The city proposes best efforts to ensure minimum contamination of recyclables, but does not grant any relief to the processor unless more than 20 percent of delivered materials are rejected. Phoenix has a single-stream set out system for curbside recyclable collection. The city constructed the processing plant using tax-exempt bonds and is highly attentive to plant operating standards.

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