Climake Newsletter #22: Can Regulation Transform Plastic Waste into a Commodity?
+ the societal cost of carbon, green blockchain, climate change's impact on food, and celebrating an environmental legend
The Climake Newsletter offers quick digests and insights around what is happening in climate finance. While Climake’s current focus of work is India-centric, we capture a global perspective of climate finance in this newsletter on a fortnightly basis.
Yvon Chounard is the founder and owner of Patagonia, the socially responsible outdoor clothing and gear company, that he started as a way to provide better climbing gear for himself and mountaineers he knew. Rather, he was the owner until last month, when he donated his entire stake in the company, worth USD 3 billion, to a trust that will support initiatives that address climate change and protect undeveloped land around the world.
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This step can be seen as a continuation of the type of actions and ethos of Mr. Chounard and of his company; Patagonia and its causes have often used business as a tool to drive more sustainable and socially responsible practices. We celebrate any push that adds more resources to climate action, but perhaps a little more so with Yvon Chounard and his hope that this might, influence a new form of capitalism that puts the environment more central.
Climate Finance by the Numbers
The societal cost of each additional ton of carbon dioxide
Voluntary carbon credits have emerged as one of the fastest growing climate action sectors in the past year. If you are a business, say in aviation or petrochemicals, that cannot naturally get to zero emissions, the alternative is to buy carbon credits from projects that are meant to be saving the world from additional CO2 generation. Depending on which index you believe, these credits trade anywhere between $8-$15 per ton of CO2. However, as carbon markets become more widespread, questions have emerged on whether the projects that sell carbon offsets are offering the equivalent of not emitting new CO2 at all.
A recent Princeton and Berkeley study shows that may not be the case. The study uses sophisticated socioeconomic projections, climate modelling, climate impact assessments, and economic modelling to assess how climate change will impact agriculture, temperature-related deaths, energy expenditures, and sea-level rise. Their conclusion: each new ton of CO2 emitted into the atmosphere today costs the society $185.
The study is remarkable in that it builds multi-century models for population growth, GPD and emissions, and combines latest learnings and advancements across climate science, economics, demography and other disciplines. Building such accurate measures of cost of emissions are critical - at the outset, they inform policy makers and governments on the true costs and benefits of climate action. US government today uses $51 as the baseline benefit for each ton of CO2 emission saved and we suspect that some policy decisions could look very different if the true cost of inaction, or benefit thereof, is factored in.
We believe that the study also presents two inferences for the carbon offset industry. Rather, think of these are two alternate pathways for the industry’s future. One possibility is that the price of carbon offsets will increase to reflect the reality of eliminating CO2. Indeed, Bloomberg estimates that carbon offset prices could rise 50x in some scenarios by 2030, to $215 a ton. The other possibility is that companies and investors start to focus more on primary emission reductions, rather than relying significantly on offsets. At the very least, buyers are already starting to make a distinction in the quality of offsets, with higher demand and prices for carbon offset projects that prevent emissions, as opposed to passive projects that save existing carbon sinks and do not create additionality.
The percentage reduction of carbon emissions linked to the blockchain platform Ethereum after its recent change in how tokens are earned
The popular blockchain platform Ethereum’s peak carbon emission contribution topped at 11 million tons in May 2022. It was using as much electricity as the country of Austria at 72 terawatt-hours a year. However, seemingly overnight, on September 16th, the network’s entire climate pollution dropped from the 11 million tons of CO2 emissions a year to around 870 tons. This is the equivalent to the annual emissions from a hundred homes in the US.
The change is primarily in how transactions on the platform are validated, moving from a proof of work approach (a scenario where mining farms used extensive computing powers to perform calculations for validation to take place) to a proof of stake concept, where… mining farms and their vast energy requirements are seemingly not needed. (We mainly come with sustainability, climate and financing expertise here at Climake HQ, but thankfully there are smarter people than us to explain what has happened with this event, affectionately called, “The Merge”.)
A 99% reduction in carbon emissions in anything significant (the 11 million tonnes drop is equal to 0.2% of the world’s emissions) is worth taking notice. Energy and carbon impacts of cryptocurrencies and the blockchain, due to said mining farms have been a long-running issue. They have been flagged as a counter to their hype and hope as an alternate currency, as an authentication tool, or a traceability and transparency layer for consumer products, materials, and even carbon sequestration projects.
There is still the problem of Ethereum’s bigger older brother, Bitcoin. The OG crypto, with an estimated current value of 387 million from its highs of more than a trillion in 2020, will continue to have a carbon problem due to how entrenched its proof of work operating approach is. At last count, its energy consumption was 95.8 terawatt-hours making it the 34th most energy consuming nation in the world.
Ethereum’s proof of stake approach is, of course, not driven exclusively with climate intentions in mind - the cost benefits of no mining will make it more accessible - but its significantly cheaper approach, and more ubiquitous use and adoption, can offer a greener path for blockchain’s growth.
14,117 million tons
The projected increase in imports of cereal by South Asian countries by 2030 due to climate change
Climate change effects are expected to increase the import of cereals in South Asia by 580%, from 2,414 million metrics to 16,531 million metrics tons by 2030. The statistic comes from the recent Global Food Policy Report 2022 published by International Food Policy Research Institute (IFPRI) on the impact of climate change on global food systems. For context, India consumed 230 million tonnes of cereals in FY 2022.
Extreme weather patterns such as higher rainfall and more intense drought will lead to variability in food supply, which is expected to endanger up to 750 million people in South Asia by 2030. Research shows that the odds of children suffering from stunting, anaemia, malnutrition increases to 60% in climate vulnerable places if left unattended. South Asia will need thrice its current food reserves to offset the impact.
Countries dependent on imports are going to face further issues as constrained supply will lead to higher prices. We have seen an example of this happening through the halt in supply of cereals from Ukraine, due to its conflict with Russia, leading to countries like India declaring an export ban on wheat to prioritise its own food security.
Incidences of extreme dry and wet spells due to climate change are already on the rise across South Asia. Last Month, almost 1/3rd of Pakistan was submerged due to rains and flash floods, while in May, the temperature in the central Pakistani town of Jacobabad soared to 51 degree Celsius, infamously getting the title of “Hottest Place on Earth”.
Climate adaptation solutions for food security are becoming more urgent than before. Our report, The State of Climate Finance in India 2022 discusses the lack of funding for on-farm adaptation solutions. Investment in research and development and growth finance for adaptation-related innovations like, climate-resilient crops, post-harvest storage and cold chains, and accurate localized weather prediction solutions, is needed in the region. 2030 is less than a decade away and the consequences of inaction will be significant.
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THE BIG READ
Plastic Recycling: Can Regulation Transform Waste into a Commodity?
Plastic Extended Producer Responsibility (EPR) regulation in India have often been targeted as ineffective. But our guest writer this week, Anthony Randazzo, makes a case for how India’s Plastic EPR norms and the recently revised regulations in particular, has the potential to be a driver for innovation and impact.
This article was initially published on Anthony’s blog, The Impact Money Blog. You can read the original article at the link here. We thank Anthony for allowing us to reprint his article.
One of my biggest pet peeves is plastic waste. Every Wednesday I place my blue bin filled with recyclable plastics on the side of the curb, but I have no idea what happens after they are collected. It is a mystery. I suspect much of it goes into a landfill, which is depressing. What is the point of separating and collecting plastic packaging if it just ends up in the same place as other waste? Some call it “wish-cycling” i.e., wishful thinking about recycling that relieves a sense of guilt, but ultimately achieves nothing.
That is why I am encouraged by what is happening in India. It recently passed new Extended Producer Responsibility (“EPR”) regulations that put the onus of plastic waste collection and recycling back onto the companies that sell the products to consumers. As the second largest country in the world by population, India produces about 3.5 million tons of plastic waste per year. While some 60% of the waste is currently collected through informal channels and “recycled,” the majority of that plastic is actually either “downcycled” into materials that cannot be further reused and recycled or transformed into a furnace oil via pyrolysis (high temperature heating), a non-environmentally friendly process. Neither of these solutions offer truly sustainable forms of recycling in the circular economy sense. The new EPR regulations are changing that.
Using a phased-in approach, producers, importers and brand owners of plastic packaging in India will be required to meet minimum targets for collecting and recycling their plastic waste starting in April 2024. The requirement starts at 50% for so-called “category I” plastics (think clear PET plastic bottles and other rigid colored plastic containers) and gradually scales up to 80% by 2027. Moreover, starting in April 2025, the same companies will be required to demonstrate that at least 30% of this same category of plastic packaging is manufactured using post-consumer recycled (“PCR”) content. In other words, brand owners will no longer be allowed to downcycle their plastic waste or use only virgin plastic in their packaging. They must show that it is made from, in part, recycled plastic. These PCR requirements gradually scale up to 60% by 2028. Any companies that fail to meet these targets will have to pay “environmental compensation” penalties that will be used to offset the costs of collecting their waste.
As a result, fast-moving consumer goods companies or “FMCGs” like Reckitt Benckiser and Unilever are actively looking to partner with local solution providers that will enable them to meet these new requirements. EPR has created a business opportunity for many Indian plastic waste processing companies that are now heavily investing in new production facilities and technologies to meet this future demand for high quality recycled plastic granules that can be seamlessly integrated with virgin plastic. This is no small feat. Food grade plastic must meet safety standards for human contact to be used to meet PCR content requirements. This requires grinding the plastic waste into flakes and washing them to make sure all contaminants and impurities are removed before extruding them into plastic granules. For quality control purposes, FMCGs also require end-to-end traceability in the waste recycling supply chains, which means plastic waste processors must have technology for mapping and documenting the procurement of their plastic waste feedstock.
While these new processing facilities and technologies are expensive, the EPR guidelines have created the enabling environment to de-risk the necessary investments. Whereas some plastic waste processors in India are already successfully catering to a down-cycle market for recycled PET plastic, which can be turned for example into polyester fiber, the new regulations create a huge market opportunity for these players to shift to higher-end food-grade and human contact safe recycled plastics. Climate finance experts in India like Simmi Sareen of Unitus Capital agree that the regulatory framework is shifting incentives. “The EPR regulations will make it more profitable to upcycle plastic waste into premium granules thereby enabling brand owners to meet their PCR content requirements,” says Simmi.
Many consumer goods brands like Coca Cola have already made public pledges to use PCR content in their packaging to make their brands more environmentally friendly, but the Indian EPR regulations now make it mandatory. This has created demand that is already translating into off-take agreements between consumer goods companies and local plastic waste processors even before the new recycling facilities have come on-line, further de-risking the market opportunity. These transactions could be potentially quite lucrative. A 2020 study published by Accenture and the Federated Indian Chambers of Commerce and Industry suggests the value that can be extracted from more sustainable plastic packaging processes could be worth $100 billion over ten years.
Another interesting feature of the EPR regulations is the ability for brand owners that exceed their recycling targets to sell any surplus credits to other brand owners that fall short. The rules of this EPR credit scheme have yet to be worked out, but it would potentially create a trading scheme, similar to carbon credits, that could be monetized. Other categories of plastic, such as flexible single layer and multilayer plastics are also included in the EPR scheme but have less ambitious targets for recycling and PCR packaging content as these categories of plastics are more difficult to recycle.
Above and beyond the EPR regulations, India also implemented a ban on single-use plastics this year, such as straws, utensils, and thin plastic bags. While the implementation across India has been uneven, it has created a noticeable shift to the use of biodegradable alternatives in the restaurant and hospitality sectors.
So, if a developing country like India can implement EPR regulations, why can’t a developed country like the United States? I suspect that widely held stereotypes about government regulations being bad for business (because they create compliance costs that get passed on to consumers) is one source of resistance. Lobbying by consumer goods groups or plastic producers who would prefer to maintain the status quo might be another reason. In reality, the Indian EPR regulations are stimulating investments in new technologies and creating new market opportunities and jobs in furtherance of a circular economy. EPR is turning plastic waste into a feedstock for the production of a valuable commodity. It is a win-win for consumer brands and consumers alike and benefits the environment by reducing a plastic waste problem that will only get worse over time with inaction.
Regulation is not always “bad” for business. As India is demonstrating, it can be a powerful force that guides the invisible hand to correct a negative externality, leading to innovation, investment, new market opportunities, job creation and a cleaner, more sustainable economy.
That’s it for Edition #22 of our newsletter.
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Simmi Sareen and Shravan Shankar
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