The Environmental Impacts of

by

Katrina Marsh

Submitted in partial fulfillment of the requirements of the degree of Master of Development Economics

at

Dalhousie University Halifax, Nova Scotia April 2008

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Appendices Copyright Releases (if applicable) TABLE OF CONTENTS

LIST OF FIGURES v ABSTRACT vi ACKNOWLEDGEMENTS vii CHAPTER 1.0: INTRODUCTION 1 1.1 Introduction 1 1.2 Definitions 3 1.3 Outline 4 CHAPTER 2.0: INDUSTRIAL SYMBIOSIS: NATURAL DESIGN OR DESIGNED BY NATURE? ..: . 7 2.2 7 2.2 Kalundborg: An Industrial Ecology 13 2.3 Symbiosis: Better by Design? 18 2.4 Conclusion 25 CHAPTER 3.0: JOINT-PRODUCTION AND 27 3.1 Waste, Pollution and Recycling 27 3.2 and the Recycling of Joint-products 30 3.3 Joint-Production, Pollution and 39 3.4 Conclusion 43 CHAPTER 4.0: INDUSTRIAL SYMBIOSIS AS A POLLUTION REDUCTION STRATEGY 44 4.1 Definitions and Assumptions 45 4.2 The Limits of Industrial Symbiosis 47 4.3 Industrial Symbiosis and Joint- 57 4.5 Conclusion 61 CHAPTER 5.0: CONCLUSION 63

BIBLIOGRAPHY 66

iv LIST OF FIGURES

Figure 2.1 - Type 1, Type 2 and Type 3 Industrial Ecologies 10 Figure 2.2 - Industrial Symbiosis in Kalundborg, Denmark 16 Figure 3.1 - A Schematic of the Production Process 38 Figure 3.2 - The Thermodynamic Structure of Industrial Production in Terms of Mass and (Specific) Entropy 41 Figure 4.1 - Perfectly Competitive Markets 48 Figure 4.2 - By-Product Sales with Rising Marginal Separable Costs 50 Figure 4.3 - Output of X Under Increasing Separable Costs 51 Figure 4.4 - By-Product Sales with Rising Net Marketing Costs 52 Figure 4.5 - Disposal Costs 53 Figure 4.6 - Imperfectly Competitive Market for Waste when X*< XB 54 Figure 4.7 - Imperfectly Competitive Market for Waste when X*> XB 55 Figure 4.8 - Model of Industrial Symbiosis with Joint Externalities 59

v ABSTRACT

The growing concern over humanity's impact on the natural world is causing many to re­ evaluate the relationship between ecology and the economy. Industrial Ecology is one approach that seeks to transform industry along more sustainable lines by mimicking the organizational structures found in the natural world. More specifically, it seeks to emulate nature's prestigious use of 'closed-loop' , where the output of a metabolic or geological process is used as an input into another. Industrial ecologists have suggested that creating similar loops between firms by making greater use of industrial waste, a concept known as industrial symbiosis, could reduce the environmental impact of industry. However, a debate has developed over the best way to analyse and implement such a . Many industrial ecologists argue that , an analytical approach that uses whole systems as the basic unit and advocates change through planning and design, is integral to the establishment of industrial symbiosis. Conversely, the main argument of this paper is that since industry is essentially a self-organized system composed of independent actors, methodological individualism is a more insightful philosophical precept that can reveal or predict counter-intuitive behaviour within the system. In particular, the paper applies the concept of joint-production to industrial symbiosis, showing that when joint-products are produced in fixed proportions, closed-loop industrial systems may be insufficient as a pollution mitigation strategy or could possibly increase the environmental impact of industry.

vi ACKNOWLEDGEMENTS

As with any master's theses, this paper would have never been completed without the help of many people. First of all, I would like to thank my supervisor Ruth Forsdyke, for her support and suggestions. Although I wasn't always able to incorporate her many fascinating ideas into this paper, our discussions always brought a new light to the issue and helped my discover many new and exciting areas of economic theory. Professor Melvin Cross' assistance was instrumental throughout the writing process: in fact, the idea for this paper was born in an essay I wrote for his class on environmental economics. His comments always helped me to clarify my ideas, added rigour to my analysis and made this work clearer and more cogent. In addition to this thesis, I would also like to thank him for the class which helped to start my career in resource economics. As an internationally recognized expert in Industrial Ecology, Professor Ray Cote was a wonderful resource and support. He was always very generous with his time, his suggestions and his library, where I was able to access many of the sources cited in this work. As always, my parents Bill and Melrose Marsh were a tremendous help. My father is the only person who read this thesis who wasn't obligated to, offering many insights and editing suggestions, while my Mother kept me fromcompletel y despairing that I would ever get this done. Lastly, a big thank you goes out to Andrew Ritchie, both for being my mother's favourite son and for doing the leg work to get this finally finished.

vu CHAPTER 1.0: INTRODUCTION

1.1 Introduction

The existence of waste material - "stuff we don't want"- has implications for the health of the planet (Porter 2002; 2). Insofar as the contamination of the air, land and water can be traced to the inappropriate disposal of unwanted materials, pollution can be conceived as a problem of . However, discarded materials are not always utterly valueless, but often "a resource disguised as a nuisance" (Wolman 1978; 337). In the economist's conception of a world of insatiable desires competing for limited resources, it would seem logical that any useful material would at once be put to some useful end, so long as the benefits derived from its use outweighed the cost. Under these conditions, why would anything be wasted?

One explanation is to view problem of waste and the attendant pollution as a failure of coordination. Waste may be stuff that we don't want, but that they may find useful. As a result, getting it from us to them, and consequently transforming an unwanted substance into a wanted good, becomes the key to environmentally responsible disposal. Garbage only exists when this exchange can not be effected. This is the reasoning behind 'closed- loop' industrial systems, where waste products are collected and reused or recycled rather then disposed of by air, land or water.1 Many argue that circular systems mitigate the environmental impact of industry by both preventing the depletion of a scarce and exhaustible resources and by avoiding the accumulation of pollutants within the biosphere. Consequently, they may prove less environmentally damaging then a status quo that allows these materials to escape into or up chimneys.

This thesis will examine the potential environmental impacts of one type of closed-loop system; inter-firm waste exchanges also known as 'industrial symbioses or 'by-product synergies.' It will characterize the circumstances under which the environmental benefits ascribed to closed-loop systems - reduced demand for virgin resources as inputs and a

1 occurs when the waste can be reemployed it its original form, while recycling implies that the substances has undergone some form of modification.

1 reduction in the release of pollutant - apply to industrial symbiosis. More particularly, it will draw upon the economics of joint-production to determine the conditions under which waste exchanges may theoretically affect the firm's production decisions, thus increasing the use of inputs and release of pollutants. Whether or not industrial symbiosis always improves a firm's environmental performance, and which circumstances might lead to an unfavourable result, is an important factor in assessing the potential of closed- loop systems as a pollution reduction strategy.

Another major theme of this paper is the issue of the appropriate level of analysis. Much of the current literature on closed-loop systems for pre-consumer waste has come from industrial ecology, an interdisciplinary field which seeks to reorient industry on more sustainable lines by modeling industrial systems after . To date, many industrial ecologists have argued that economy/environment interactions are best understood by examining the behaviour of the whole system rather then its individual components, an approach known as a systems analysis. Conversely, this paper will argue that industrial symbiosis is a property of self-organized economic systems that emerges under certain circumstances. As a consequence, understanding and implementing symbiotic networks requires knowledge of the incentives and barriers that face the behaviour of individual actors. In other words, it is an area where methodological individualism should be used in tangent with a systems approach since it can reveal how incentives may lead self-organized systems to act in a counter-intuitive manner.

I hope this paper will help address three gaps in the related fields of industrial ecology and economics. First, a fuller appreciation of joint-production economics could be helpful in developing a line of analysis within industrial ecology based on methodological individualism. Secondly, industrial ecologists have largely assumed that closed-loop systems are more environmentally friendly then 'linear' systems in which are allowed to escape instead of reused. This thesis qualifies this assumption by examining a case where a closed-loop system may increase, rather then decrease, the environmental impact of a particular firm. Lastly, the study of closed-loop systems within economics has tended to focus on the recycling of post-consumer wastes - objects and materials that

2 have served their purpose and have reached the end of their useful life. Since markets for pre-consumer wastes may differ from their post-consumer counterparts in terms of the actors involved, their incentives and barriers to exchange, there is a need to develop economic models that focus more specifically on industrial waste exchanges.

1.2 Definitions

As a preliminary step, it may be useful to characterize some of the key terms used in this thesis, namely waste, pollution and closed-loop systems. To begin, waste is defined as unwanted materials. More formally, garbage, refuse, rubbish, residuals, junk and all its other synonyms fundamentally refer "to anything that is no longer privately valued by its owner for use or sale" (Porter 2002; 2). According to this definition, the essential characteristic of a waste is not its physical or chemical properties, but instead the circumstances in which it is found. In fact, virtually anything, matter or , can be defined as a waste depending on the situation: to a starving person alone on a desert island, a roll of dollar bills is as much garbage as an old newspaper.2 While waste is often thought of as a solid material, gas emissions, liquid effluents and residual energy in the form of heat are also trash in this broad sense of the term.

If a waste is defined by the private incentives that face its possessors, a pollutant is determined by its external costs. Pollution - matter or energy whose nature, location, or quantity has a harmful effect on the environment - is caused by the disposal of a 'waste' whose quality or quantity has a harmful effect on the environment (Callan and Thomas 2000). Mitigating pollution means reducing, reusing or recycling a potential pollutant in order to prevent its release into the environment. Closed-loop systems or the cycling of materials refer to the latter methods, where the output of one process of consumption or production is used as an input in another. This can be done through either reusing the waste in its original form, or processing the material in order to recycle it into a usable

2 As a noun, waste refers to an unwanted object or substance while as a verb it refers to the inefficient or inappropriate use of a resource. Presumably this second type of waste is different then the residuals from production and consumption considered here, namely unavoidable residuals that may arise even when resources are being used efficiently. This thesis does not address the question of whether or not production is always efficient, but instead focuses on the unavoidable residuals of economic activity.

3 good. An example of reuse is using an old pop can as a water container, while recycling would involve melting it back into aluminium. Since recycling involves an additional expenditure of energy and resources, close-loop systems based on recycling often have higher costs in terms of environmental impact than those based on reuse.

1.3 Outline

This thesis is divided into 4 chapters. After this brief introduction, Chapter 2 will examine Industrial Symbiosis as a key concept of Industrial Ecology, a field whose ultimate goal is to transform industrial systems along more environmental lines. Three main propositions form the heart of this approach: 1) Ecologies can act as an instructive metaphor for industrial systems - the goal is to create 'industrial ecologies' that mimic the form of natural systems; 2) Mimicking natural systems implies the propagation of closed-loop systems. A corollary of this proposition is that industrial systems are inherently wasteful as they do not make extensive use of the closed-loop systems found in nature; 3) The best way to approach the relationship between the environment and industry is from a system's perspective, which takes the system as a whole rather then the individual components as the unit of analysis. Industrial symbiosis is a key concept in industrial ecology that relates specifically to the study and creation of closed-loop industrial systems. A long list of benefits are ascribed to symbiotic industrial systems, of which reduced use of inputs, lower output of pollutants and increased profits are the most highly touted.

The complex series of waste and resource exchanges uncovered in an industrial park in Kalundborg, Denmark greatly influenced the development of industrial ecology. Eco- industrial parks - developments which attempt to recreate the linkages found at Kalundborg - were adopted as the concrete realization of the ideal of an industrial (Chertow 2000). The background of many of industrial ecologists in applied fields like business, management and engineering, coupled with the nature metaphor, contributed to the conception of industrial symbiosis as a novel planning approach for

4 industrial developments. This work emphasizes the need for government planning to faciliate such symbiotic relationships. Nevertheless, research by Pierre Desrochers into historical examples of waste exchanges and the failure of planned industrial symbiosis has contributed to a re-evaluation of this top-down perception, and as a result, the view of industrial symbiosis as a spontaneous, self-organized phenomenon is gaining sway. However, the focus on systems as the unit of analysis has meant that an understanding of the actions of individual firms, a key part of understanding self-organized systems, has not been developed within the Industrial Ecology literature.

Chapter 3 examines the contribution of economics, a discipline premised on methodological individualism, to the issues of waste disposal and recycling. For the most part the examination of closed-loop systems within the economic literature has largely focused on the implication of recycling of post-consumer wastes and policies designed to promote alternative modes of garbage disposal. Those models that deal explicitly with the role of joint-products in production do not consider the implication of recycling or reusing those wastes as an input in another process. While the study of joint-products does have a long history within economics, earlier theorists tended to treat the emergence of two goods from a single process as a special case. However, the new field of ecological economists suggests that joint-production in nature and in industry is ubiquitous due to the laws of physics that guide the transformation of matter. As such it is important to understanding interactions between the human economy and the environment.

In chapter 4, joint production economics, which employs the methodological individualistic perspective, is used to examine some issues that may be overlooked when a systems wide approach is used. The aim is this chapter is to clarify the conditions under which a market-based waste disposal strategy would be desirable. More specifically, it will show that when fixed proportions of the joint-products are produced and the demand for the main good and the waste product are independent of each other, the appeal of industrial symbiosis as a pollution reduction strategy may be mitigated by a number of factors. First, there may be limits to the amount of waste the market may absorb or that

5 the firm may choose to sell. In these scenarios, industrial symbiosis strategies must be supplemented by other pollution reduction or elimination policies in order to achieve the closed-loop 'cyclical' industrial systems envisioned by industrial ecology.

Secondly, the marketing of a waste product may have unintended side-effects which could mitigate the environmental benefit of this market-based waste pollution policy. For one, when the firm is receiving additional income for each unit of waste sold, it will have an incentive to increase production of the composite good. If a non-renewable resource, like a fossil fuel, is one of the inputs, increased production may increase the rate of extraction. This side-effect may or may not be of great concern, depending on the magnitude of the firm's or industry's impact on the demand for the non-renewable resource and the availability and price of substitutes. Another concern suggested by Stephen Baumgartner is the possibility that increased production of the composite good would entail the production of another environmentally harmful joint-product. In this case the environmental benefit of industrial symbiosis would depend on the relative toxicity of the two wastes and the value placed on the health of the natural world.

6 CHAPTER 2.0: INDUSTRIAL SYMBIOSIS: NATURAL DESIGN OR DESIGNED BY NATURE?

While the marketing of wastes has long been studied, it is only with the development of industrial ecology and the related concept of industrial symbiosis that it has come to be advocated as a pollution reduction strategy (Desrochers 2002).3 Much of the current empirical and theoretical literature on waste exchanges, as well as policy initiatives aimed at creating closed-loop systems for pre-consumer waste, has been informed by this perspective. For this reason, this thesis takes the literature on industrial ecology as its departure point. This chapter argues that a system's approach to analysis, the background of many industrial ecologists in applied fields like engineering and business, and the pre­ eminence of one particular example of waste exchange led to the conception of Industrial Symbiosis as a novel design principal for industrial developments. However, modern and historical examples of by-product and resource exchanges indicate suggest that they are more accurately conceived of as an aspect of a self-organizing industrial system, suggesting that the field is in need of a more developed theory of individual and firm behaviour.

2.2 Industrial Ecology

The term 'industrial ecology' is subject to numerous classifications: it is called "a vision, a research field, and a source of inspiration for practical work" (den Hond 2000; 60), "an organizing principal" (Dale 2006), and "an operational approach to sustainability" (Erkman 2007). In center of the plethora of concepts, management tools, design principals, policy initiatives and research associated with the term is the core idea that nature can serve as a model for building better economic systems: Industrial ecology involves designing industrial infrastructures as if they were a series of interlocking manmade ecosystems interfacing with the

3 As will be shown later in the thesis, writings on reuse and recycling of waste was date from at least the late 19th century. Economic models of recycling and reuse began to arise in the 1970s concurrent to the burgeoning environmental movement

7 natural global ecosystem. Industrial ecology takes the pattern of the natural environment as a model for solving environmental problems, creating a new paradigm for the industrial system in the process. . . . The aim of industrial ecology is to interpret and adapt an understanding of the natural system and apply it to the design of the manmade system, in order to achieve a pattern of industrialization that is not only more efficient, but that is intrinsically adjusted to the tolerance and characteristics of the natural system (Tibbs 1993; 3). Industrial ecology is a diffuse term that is applied to a broad assortment of concepts (Andrews 2001). However, while the details pertaining to the characteristics, aims and foundation of an industrial ecosystem vary from author to author, the industry-as-ecology analogy has served to unite insights from a diverse group of planners, managers, engineers, policy makers and academics into a coherent field of research (Garner and Keoleian 1995, Erkman 1997, Cote 1998, Cote and Wallner 2006).

The use of natural systems as a model for economic development and other key concepts within industrial ecology have existed in one form or another since at least the 1960s. Erkman (1997) traces early manifestations of industrial ecology in the writings of ecologists, the intellectual atmosphere surrounding the nascent United Nations Environment Program, and research undertaken in Belgium and Japan. Despite these early sprouts, it was not until 1989 that the set of ideas associated with industrial ecology began to coalesce and take root with the publishing of Strategies for Manufacturing by Robert Frosch and Nicholas E. Gallopoulos. In contrast to previous attempts, Strategies for Manufacturing sparked great interest in the idea of an industrial ecology (Erkman 1997). The paper used a description of the flow of plastic, iron and platinum from production to disposal to elucidate what would become the field's central tenet, that modeling industry on nature implies propagating closed-loop or cyclical industrial systems: The traditional model of industrial activity - in which individual manufacturing processes take in raw materials and generate products to be sold plus waste to be disposed of - should be transformed into a more

8 integrated model: an industrial ecosystem. In such a system the consumption of energy and materials is optimized, waste generation is minimized and the effluents of one process - whether they are spent catalysts from petroleum refining, fly and bottom ash from electric-power generation or discarded plastic containers from consumer products - serve as the raw material for another process. (Frosch and Gallopoulos 1989; 144) The paper acted as a catalyst, inspiring a number of writings and conferences that eventually came together under the rubric of industrial ecology (Erkman 1997).4

Industrial Ecologists contrast the idea of an industrial ecology with our current 'linear' industrial system (Fonds and 2006, Lowe and Evans 1994, Cote 2006). A linear system is the opposite of a cyclical one: instead of reusing wastes from production, it allows them to escape into the surrounding environment. Jelinski et al. (1992) identify three types of industrial ecosystems, each one defined by the degree to which it approximated the ideal closed loop system to be found in nature. Modern industry in developed nations corresponds to a Type 1 system that treats energy and materials as unlimited resources and does not restrict the flow of waste products into the environment. A Type 2 system employs a limited degree of recycling, but still requires material inputs and produces outputs. The ideal to which industrial ecology strives is a Type 3 system, which corresponds to a natural ecosystems in which all materials are reused and the only input is energy.5 While industrial ecologists disagree on whether a large-scale Type 3 industrial ecosystem is feasible, the field's ultimate goal is to transform our Type 1 industrial system so that it resembles a Type 3 natural system as closely as possible (Krones 2007).6

4 Today industrial ecology is an established academic field, with a peer-reviewed journal, the Journal of Industrial Ecology, edited by the Yale University School of Forestry and Environmental Studies since 1997. A second journal, Progress in Industrial Ecology, began publication in 2004. Numerous universities, including Dalhousie, offer courses while graduate programs have been established in American and European Universities. 5 Prior to the adoption of chemical pesticide and fertilizers, agricultural systems may have looked rather like Type 3 industrial ecologies, with the use of manure as a fertilizer, seeds from last year's harvest and energy inputs from the sun. 6 Many authors, particularly Ayres (2004) have posited that the description of natural ecosystems as perfect waste recyclers requiring only input of solar energy is a mischaracterization. For example, many important deposits of natural resources, notably coal and petroleum, are accumulated biological wastes. As Robinson

9 Resources Unlimited Industrial & Activity Space Energy for Waste

Type 1 Industrial Ecosystem OJ Resources Limited Industrial & Space Activity Energy for Waste

Type 2 Industrial Ecosystem

Oil Resources Industrial & Activity Energy

Type 3 Industrial Ecosystem

Figure 2.1 - Type 1, Type 2 and Type 3 Industrial Ecologies. Adopted from Krones (2007), page 52.

Industrial Ecologists have also argued that adopting a systems approach, which takes whole systems rather then individual elements as the focus of analysis, is a key part of realizing this transformation.7 A system is a model which describes a phenomenon as the

and Mendis (2006) state: "Ironically, the concept of ecology is one that has received little analytic treatment within the industrial ecology literature. 7 A key antecedent of industrial ecology, Limits to Growth, was informed by the branch of systems analysis developed by Jay Forrester of MIT. This seminal report released by the Club of Rome argues that pollution and limited resources would check growth in the human population and global standards of living (Garner and Keoleian 1995). Limits to Growth attracted both praise and censure. Critics argued that the model used was too simplistic in that it ignored the role of prices in signaling scarcity of natural resources and

10 result of the interactions between a group of interrelated and interdependent parts or subsystems. If one of these parts no longer operates, the system as a whole is affected (McNamera 1997). For example, the cardiovascular system is a model that describes the flow of blood through a as the result of the interaction between the heart, veins, arteries and lungs. Remove one of these elements, and the system no longer functions as intended. Systems analysis is predicated in part on the idea that all systems share common characteristics and as such are amenable to similar analytical constructs. Kast and Rosenzweig (1972) identify a number of these patterns. Of particular relevance to industrial ecology are holism, input-transformation-output models and open and closed systems.

Holism refers to the idea that "[t]he whole is not just the sum of the parts; the system itself can be explained only as a totality. Holism is the opposite of elementarism, which views the total as the sum of its individual parts" (Kast and Rosenzweig 1972; 450). In other words, a holistic perspective focuses on understanding how the heart, lungs, veins and arteries work together to circulate blood, rather then studying the functioning of one of these elements in isolation. It also addresses the issue of how a system operates within its environment, such as how the cardiovascular system affects and is affected by other biological systems within the human body. The first text book in industrial ecology emphasised the use of a holistic perspective: Industrial ecology requires that an industrial system be viewed not in isolation from its surrounding systems, but in concert with them. It is a systems view in which one seeks to optimize the total materials cycle, from virgin materials, to finished material, to component, to product, to obselet product, and to ultimate disposal (Grendal and Allenbury as quoted by Chertow 2000, 314).

consequently triggering more efficient technologies and substitution to new sources of materials and energy (Solow 1972). Nevertheless, its key components, the presentation of the current economic systems as inherently unsustainable and the usefulness of a systems approach to analysis, continue to exert considerable influence, and have been adopted as two of the central tenants of industrial ecology (Garner andKeoleian 1995, Erkman 1997).

11 The above definition also emphasises another aspect of systems thinking adopted by industrial ecology: input-transformation-output models. Such models describe systems as structures which receive inputs from their environment, change them in some manner, and then release them back into the environment from which they came (Kast and Rosenzweig 1972). In keeping with the biological metaphor, the term "" is often used to refer to such transformations: The word metabolism, as used in its original biological context, connotes the internal processes of a living organism. The organism ingests energy- rich, low-entropy materials ("food") to provide for its own maintenance and functions, as well as a surplus to permit growth and/or reproduction. The process also necessarily involves the excretion or exhalation of waste outputs, consisting of degraded, high-entropy materials. There is a compelling analogy between biological organisms and industrial activities - indeed, the whole - not only because both are materials-processing systems driven by a flow of free energy, but because both are examples of self-organizing "dissipative systems" in a stable state, far from thermodynamic equilibrium (Ayres 1994;). Industrial ecology has used the concept of industrial Metabolism to understand industrial systems in terms of the flows of materials to and from the environment, with the aim of restructuring economies so that they operate in harmony with the natural world (Erkman 1997, Cote and Cohen-Rosenthal 1998, Ayres and Ayres 1996). Lastly, the distinction between open (linear) and closed (circular) systems mentioned above is an important part of industrial ecology that has been adapted from the systems analysis.

Industrial Ecology employs two different approaches for creating industrial ecosystems. The first concentrates on the course that resources take through an economy, either examining the way a particular material flows through the industrial ecosystem or mitigating the waste and energy streams associated with a specific production process (Five Winds 2006). An example of a focus on specific material flows is a recent paper by Cain et al. (2007) which traces how mercury is released into the environment. Using a process called substance flow analysis, the team pinpointed how production or

12 consumption of dental amalgam, fluorescent lamps, bulk liquid mercury, auto switches, thermostats and measurement and control devices contributed to the escape of this element into the ecosystem. Alternatively, "Life Cycle Assessment" and "Design for Environment" are two examples of environmental management tools that focus on the waste streams associated with a particular product.8

2.2 Kalundborg: An Industrial Ecology

The second approach to establishing an industrial ecosystem is to create closed loop systems through the reuse of waste. In fact, "[o]ne of the most important objectives in industrial ecology is to develop symbiotic relationships between industries by making one facility's waste another's raw material (Fonds andYong 2006; 210)." In keeping with the nature metaphor, the creation of such closed systems has been given the name "industrial symbiosis". In biology, symbiosis refers to two dissimilar organisms that are in a close relationship (Nehm and Uloi 2001). Like industrial ecology itself, the term lacks a precise definition. Descriptions have ranged from the all-inclusive - "industrial symbiosis embraces all concepts for reducing negative impacts on nature and the environment" (Nehm and Uloi 2001; 5) - to the well defined - "at least three different entities must be involved in exchanging at least two different resources to be counted as a basic type of industrial symbiosis" (Chertow 2007; 12).9

Multiple benefits are presumed to result from such exchanges. In terms of the environment, industrial symbiosis could reduce the use of virgin materials and lessen the

8 Life Cycle Assessment provides a "systematic evaluation of the environmental aspects of a product or service system through all stages of its life cycle" (UNEP 2007). Some examples of companies which use Life Cycle Analysis in product development are Dell Computers, Volvo and Xerox to improve their environmental profile. Another example of the 'product' approach to Industrial Ecology is the Better by Design Guide that uses the questionnaire format to help companies identify ways in which "to weave environmental considerations into product design (design for the environment), while using inspiration from our natural world to optimize and distinguish your designs" (Better by Design 2006). 9 Chertow (2007) justifies this somewhat arbitrary definition by arguing that it differentiates industrial symbiosis from simple byproduct exchanges, defined as the case where two firms are involved in the exchange of one good. Unlike a by-product exchange, which can be represented as an ordinary transaction, industrial symbiosis is often represented as a new way of ordering industrial activity that goes beyond business as usual (Cote 2006). However some authors include simple by-product exchanges under the industrial symbiosis rubric, and this thesis follows their lead.

13 release of pollutants by industry, although these gains have rarely been empirically verified (Chertow 2007). Inter-industry reuse of waste also has the potential to reduce input costs, provide firms with additional sources of revenue, promote job creation and improve a company's 'green' image (Dunn and Steinemann 1998, Gibbs et al. 2005, Chertow 2007). It is the potential combination of increased profits for industry with a reduced impact on the environment that makes industrial symbiosis such an appealing environmental policy.

A number of suggestions on how to implement industrial symbiosis have been put forward. For example, Ray Cote of Dalhousie University has developed the idea of industrial scavengers, businesses whose role would be to collect and process wastes from other firms as their primary business activity (Cote 2000). Another possibility is 'clusters of sustainability,' regionally-based networks of firms linked by resources exchanges like the National Industrial Symbiosis Programme in the UK.10 However, an initial and continuing focus of applying Industrial Symbiosis was on the idea of an Eco-Industrial Park (EIP) (Gibbs et al. 2005, Chertow 2000). Simply put, an EIP is an attempt to improve upon the environmental and economic performance of industry through the development of an industrial ecosystem within the park. To qualify they must be more then a single by-product exchange pattern or network of exchanges, a recycling business cluster, or a collection of companies making 'green' products (Cote and Cohen-Resonthal 1999).

The concept of how to implement industrial symbiosis in general and EIPs in particular has been greatly influenced by one particular example of inter-industry waste exchanges: an industrial park in the Danish city of Kalundborg. Located on the island of Seemand about 100km west of Copenhagen, the park features an intricate web of by-product and energy exchanges between the Asnes power plant, the Statoil oil refinery, the Novo pharmaceutical plant and the Gyproc drywall factory:

Established in 2005, the NISP is a government funded program that seeks to help companies become more resource efficient by fostering regional resource sharing. Free to businesses, it facilitates partnerships between private enterprises by collecting and disseminating information and providing technical advice.

14 "...the various material flows among the companies are based either on water, solid waste, or energy exchanges. In this system, wastewater and cooling water from the refinery are reused at the power plant: the wastewater for secondary purposes, the cooling water as feeder water for the boilers producing steam and electricity, and also as input water for the desulphurization process. The desulphurization process in turn produces industrial gypsum used in the production of plasterboard at the colocated Gyproc factory, thereby partly replacing the use of natural gypsum. The cogenerating power plant also produces heat for the town of Kalundborg and steam for the Novo facility and the Statoil refinery. The Novo facility is only supplied with steam from the power plant, whereas the refinery has production-related in-house steam generation capacity, partly supplied by preheated boiler water from the power plant in a total-supply-security system. In addition, heated cooling water from the condensation process at the power plant is piped off to a nearby fish farm, thereby increasing the efficiency in the farm, as the heated cooling water ensures full-scale production of the fish throughout the year. Finally, solid by-products such as fly ash from coal combustion, sludge from public wastewater treatment, and biomass from biogenetic fermentation at the Novo facility are recycled in various ways, both locally and non-locally. In total, industrial symbiosis in Kalundborg counts—depending on the definition— approximately 20 different by-product exchanges in operation, a number of potential projects, and a number of projects closed down as markets and technological innovations have developed (Jacobsen 2006; 241)."

15 Liquid Fertilizer

[Lake j- Statoil Gyp roc Dan Refinery Gas (StenrtbyJ Plasterboards Fertilizer! Surface Water T Waste Cold Water Hot „ I Gypsum Si Bitor !«• Cold Fish Inc. I I V Water Farm 4 Surface Water Fly Ash Asn e as "» Power Plant • Ft/Ash -^ Aalbrog Poertland Heat Soilrem A/S Water Gypsum as Surface Water vl/ Buffer Soil Amelioration Sludge Novo Group

Kalundborg Farmers Municipality Waste Water w

Figure 2.2 - Industrial Symbiosis in Kalundborg, Denmark. Adapted from Jacobsen (2006), page 83

Ehrenfield and Gertler (1997) list four factors that contributed to the development of the Kalundborg industrial ecology: economic, organizational, regulatory and technical. For one, it is evident that economic incentives were extremely important - all of the by­ product exchanges that occurred within Kalunborg arose from bilateral negotiations between partners who perceived mutual advantage in taking part (Ehrenfield and Gertler 1997). The park's initial series of exchanges involved water, which arose because limited local groundwater supplies and increased demand due to new industrial processes had led to a severe ground water deficit. Employing 'grey' water - water that has already been employed for some other purpose but which is not severely contaminated - from other plants was a cost effective solution that also had unintended environmental benefits (Jacobsen 2006). The exchanges were made more cost effective by the proximity between the trading companies, which reduced transportation costs. Furthermore, problems associated with municipal recycling programs, namely collecting, identifying, and sorting the waste, were not a factor in this industrial setting.

16 Secondly, organizational factors, specifically in the form of inter-firm networking, also played a large role. While there were initially no deliberate institutional mechanisms in place to encourage symbiosis, the smallness of the park and the surrounding community served to create a climate of trust and cooperation that smoothed the progress of the exchanges: Symbiosis requires exchange of information about nearby industries and their inputs and outputs that is often difficult or costly to obtain. Kalundborg's small size of about 12,000 residents and its relative isolation have made for a tight-knit community in which employees and managers interact socially with their counterparts on a regular basis. This cultural feature leads to what a local leader calls a short mental distance between firms (Ehrenfield and Gertler 1997).

These relationships were essential to mitigating the transaction costs associated with the waste exchanges. Transactions -costs are the expense associated with setting up, negotiating and monitoring a transaction. First developed by Ronald Coase in his seminal 1932 paper, the Theory of the First, the concept of transaction costs is used by neoclassical economics to explain industrial organization: if the transaction costs associated with a particular production activity are too high, then it will be carried through a command/control system within the firm itself (Coase 1932). In situations where there is little trust between the parties to an exchange or if monitoring is particularly expensive, the cost of setting up a transaction like a waste exchange can be prohibitive (Ehrenfield and Gertler 1997). Within Kalundborg, the short distances between the firms and strong personal relationships between managers likely served to reduce the cost and risk of establishing these exchanges. Later on, transaction costs were further reduced when the firms located at the industrial park established a park-wide research institute - the Symbiosis Institute - to find and facilitate further opportunities for by-product trade (Chertow 2007).

Regulatory factors, particularly laws and regulations, were also instrumental in the development of the park's 'industrial ecosystem'. The Danish environmental regulatory

17 system is based on negotiations between government and firms rather then on fixed standards and emissions. This allows for a great deal of flexibility which can foster new approaches to waste management. Additionally, environmental regulations can give rise to new by-products by mandating changes in processes. For instance, the Ansaes power plant was required by the government to remove sulphur from its emissions. However, the plant was able to choose a process that provided it with industrial gypsum, a product that could be sold to a drywall factory that happened to be located within the park (Jacobsen and Anderberg 2004). A similar situation has arisen in Alberta where natural gas production has resulted in large amounts of sulfur available for sale on the international markets (Truett and Truett 2000). Another important institutional factor is the legal liability associated with waste, since a firm may not be willing to let go of a harmful substance if it remains responsible for any noxious effects incurred after its sale (Frosch 1992).

Technological constraints refer to how easily wastes can be reused. Wastes or by­ products that require little processing and that are produced in large streams of predictable quantity and quality, like the flue gas, fly ash and heat streams from Asneas, are better substitutes for raw materials. The fact that the processing of gas and oil produces waste fitting this description explains why the documented cases of symbiosis have arisen in petrochemical complexes.11 However, many wastes are degraded matter which may prove difficult or even impossible to find a use for given current technologies (Dunn and Steinemann 1998). Even if new equipment or processes are developed, companies may be reluctant to change if this would entail a large cost in terms of machinery or time spent learning new techniques (Akerman).

2.3 Symbiosis: Better by Design?

Kalundborg is greatly influential within the field of industrial ecology. Almost every article cited in this thesis that employs the term 'Industrial Ecology' also makes some reference to Kalundborg's waste and energy exchanges, while many offer detailed

11 Examples of petrochemical complexes in which spontaneous symbiotic networks have arisen include Styria in Austria, Sarnia in Canada and Kiwinana in Australia.

18 descriptions or flow charts outlining the main exchanges that occur within its boundaries. The series of by-product and energy exchanges between the park's various industries have been called the "concrete realization of the industrial ecosystem Frosch and Gallopoulos theorized" (Chertow 2007; 12), the "paradigmatic exemplar of an eco- industrial park" (den Hond 2000; 66), and "the best known example of industrial ecology in the world" (Dunn and Steinemann 1998; 664). Consequently, recreating Kalundborg's industrial ecosystems through EIPs became a major focus of Industrial Ecology (Gibb et al 2005).

A key part of this project is establishing the requisite organizational factors outlined above. Many authors emphasize the importance of inter-firm cooperation to establishing eco-industrial parks, as Chertow (2000) presents in a much quoted definition of EIPs: An eco-industrial park or estate is a community of manufacturing and service businesses located together on a common property. Member businesses seek enhanced environmental, economic, and social performance through collaboration in managing environmental and resource issues. By working together, the community of businesses seeks a collective benefit that is greater than the sum of individual benefits each company would realize by only optimizing its individual performance (Chertow 2000;). Nehm and Uloi (2002) also stress that cooperation is a fundamental part of establishing an EIP: The environmental management systems (EMS's) used in industry today are mainly concentrated at the intra-organisational level. This paper suggests that require extending EMS's from the intra-organisational to the inter-organisational level. Industrial Symbiosis, we argue, is an environmental management perspective based on inter- organisational co-operation (Nehm and Uloi 2002; 6).

However, there is a divergence within Industrial Ecology between those who view planning as the best way to institute the required level of inter-firm cooperation, and

19 those who argue that such networks only arise spontaneously from the action of self- interested firms, although policy can play an enabling role. The former approach argues that Industrial Symbiosis can be achieved by deliberately recruiting and collocating industries with compatible waste streams within EIPs - in other words, that symbiosis can be engineered: [I]magine what a team of designers were to come up with if they were to start from scratch, locating and specifying industries and factories that had potentially synergistic and symbiotic relationships (Hawkins 1993; 63).

Indigo Development, a consulting firm that specializes in facilitating Eco-industrial parks, gave a more explicit definition of what this expanded role for management within an EIP would entail: In addition to standard park service, recruitment, and maintenance functions, park management does the following: » • Maintains the mix of companies needed to best use each others' by­ products as companies change; • Supports improvement in environmental performance for individual companies and the park as a whole; • Operates a site-wide that supports inter-company communications, informs members of local environmental conditions, and provides feedback on EIP performance (Indigo Development).12

Many attempts at recreating Kalundborg through the deliberate design of EIPs have been undertaken. For example, within China the concept of a '', an idea that draws directly from Industrial Ecology, is emerging as an important economic development strategy. The circular economy promotion law, a series of laws and regulations on waste recycling, is expected to be enacted sometime in 2007 or 2008 and Chinese planners have been promoting EIPs as a key strategy to establish a circular

Indigo development markets itself as "the first consulting company to apply industrial ecology to the challenges of local and regional sustainable development, beginning in 1993" (Indigo 2007). The company has helped governments and private enterprises use the principals of industrial ecology in their economic development and agricultural projects in China, Korea, Canada, California and elsewhere.

20 economy (Yuan et al. 2006). During the 1990s, the President's Council for Sustainable Development (PCSD), a panel assembled to advise President Clinton on "sustainable development and develop bold new approaches to achieve our economic, environmental, and equity goals" promoted the establishment of a number of EIPs in the US through policy initiatives (PCSD).

However, this direct approach to establishing industrial ecosystems did not meet with much success. Gibbs, Deutz and Proctor (2005) undertook an examination of 26 European and the 35 American operational, planned or attempted EIPs in to discover whether the concept of industrial ecosystems had proved to be a viable economic development concept. While the study made no distinctions between planned industrial symbiosis and examples that had developed spontaneously, most of the US industrial parks surveyed were connected with the PCSD initiative that had attempted to establish symbiosis through policy initiatives (Chertow 2007). Of the 61 sites examined, only four claimed to have established waste or energy exchanges between its members. Symbiosis was found to be more prevalent in Europe, and in fact at least one U.S. EIP developer claimed that it had abandoned the concept: [I]n one U.S. case, a conscious decision had been taken not to develop waste and energy interchanges, despite the initial aim of the site 'to replicate the success of Kalundborg'. This decision was taken after an analysis of the local economy's material resources and a critical review of Kalundborg which revealed that for this case there was 'no single source of any significance that could serve as an attractor to a broad range of businesses' and that waste exchange simply did not form the basis of a viable development strategy (Gibbs et al. 2005).

The authors of the paper determined that "initiatives based upon the interchange of wastes and cascading of energy are few in number and difficult to organize" (Gibbs et al. 2005). The Gibbs paper simply categorized projects as either "open, planned or failed." A later paper by Chertow (2007) examines in greater detail 15 EIPs that where included in Gibbs study and had been initiated by the PCSD policy initiative. Chertow determined

21 that 2 of the 15 original EIPs could be viewed as a success, although both had run into difficulties since 2004. The remainder consisted of a mixture of failed projects or those which had survived but had either renounced Industrial Symbiosis or the whole premise of an EIP to become a regular industrial development.

The planned approach to waste exchanges was also attempted on a larger scale. During post-war Hungary, state planners adopted a "production centered, preventative approach to industrial wastes that presents striking similarities to proposals that have been made in recent years in the name of industrial ecology and (Desrochers 2004; 1102). While the policy was initiated by economic factors rather then environmental considerations, this initiative stressed the importance of cyclical systems as a way to economize on scarce resources. In the 1950s, a series of laws and regulations required companies producing certain types of waste to collect and transfer then to other firms in accordance with quotas. However, this highly prescriptive approach resulted in several unintended consequences: First, the reuse of waste materials required additional raw materials, energy and labor, which, along with most products, were all in short supply. As a result, collected wastes were often left rotting and rusting on factory yards. Second, reuse, even when it materialized, did not prevent recovered wastes from becoming trash because these early recycled goods were in many cases not needed, and even chronic general shortages could not increase their appeal (Desroches 2004; 1103).

A less dictatorial approach to encouraging waste exchanges, which arose in the late 1970s and 80s, increased the price of waste disposal and used the funds to help firms adopt new technologies, granting them the freedom to make their own waste creation and disposal decisions. However, this attempt to inspire a waste-free economy through symbiosis did not result in symbiotic networks (Desrochers 2004).

The second approach to establishing Industrial Symbiosis argues that waste exchanges are a natural consequence of a firm's profit maximizing behaviour. This group takes

22 Kalunborg's development path, and not just its end result, as a model for recreating the industrial ecosystem. Pierre Desrochers, a professor of geography at of the University of Toronto, has been a vocal critic of the planned approach, arguing that closed-loop systems are an inherent part of market-based economies: Despite the widely shared belief among contemporary experts on sustainable development that traditional economic development was characterized by a linear 'extraction-and-dump' model, much historical evidence illustrates that this was not the case. On the contrary, 'closed loops' seem to have spontaneously emerged wherever people were free to create the most value out of given inputs, especially in diverse cities (Desrochers 2002).

Many of his articles on the subject have provided myriad examples of waste reuse by industry over the ages (Desrochers 2000, 2001, 2002, 2004, 2005). For example, he notes that the spontaneous formation of industrial recycling networks was well-documented by economists such as Karl Marx, John Hobson and Alfred Marshall. In fact, both Marx and Marshall considered the search for methods of production that would create value from a previously useless by-product, or in other words a waste, was an important source of product and process innovation (Kurz 1986). Desroches (2002) includes a list of the following 19th and 20th century books on waste exchanges, including titles such as Waste products and Undeveloped Substances: or, Hints for Enterprise in Neglected Fields (Simmonds 1862), Descriptive Catalogue of the Collection Illustrating the Utilization of Waste Prodcuts (Bethnal Green Branch Museaum 1875), and The Utilization of Waste Products: A Treatise on the Rational Utilization Recovery, and Treatment of Waste Products of All Kinds (Koller 1902). His articles also include many concrete example of symbiosis: In the middle of the nineteenth century, some 375,000 animals a year were slaughtered in New York's "animal district," located a few hundred feet from Times Square. Although the area was probably extremely unsanitary by today's standards, it was yet another prototype of EIP, where no potential resource was wasted. Bones became handles, buttons, and inputs

23 in textile coloration. Entrepreneurs converted marrow into tallow that chandlers, soap-makers, and the rapidly expanding chemical industry found valuable. Sugar refiners and fertilizer producers made use of residual blood. Hooves became gelatin and "Prussian Blue," while hides and hair were valuable commodities, and whatever remained was hog food (Miller 1998, 82).Yet not only locally produced bones became valuable commodities; many railway cars freighted with buffalo bones arrived in the metropolis for transformation into button molds, knife handles, and other uses (Simmonds 1875, 98). Other examples of spontaneous by-product exchanges mentioned in Desrochers work include the meat-packing district in Chicago, the reuse of imported waste silks and wool threads in the British textile industry in the late 19th century, and modern petrochemical complexes from around the world.

Desrochers's extensive historical examination of waste exchanges provides a convincing body of evidence challenging Industrial Ecology's preposition that industrial systems are inherently linear. Combined with the failure of 'designed' industrial ecosystems, this has strengthened the argument of those who view industrial symbiosis as a self-organized network based on mutually beneficial exchanges, rather then as a design principal for industrial developments. This has led some Industrial Ecologists to challenge the systems perspective that has dominated the field to date and to call for the development of a more coherent theory of individual and firm behaviour, one that draws from the economic theory of the firm (Andrews 2001, Jackson and Cliff 1998, Chertow 2007). While a system's perspective argues that some insights can only be garnered by examining systems as a whole, these authors would add the caveat that the behaviour of the individual elements of a system is essential to understanding self-organized systems like symbiotic industrial networks.

To date, Industrial Ecology has not developed a comprehensive theory of such 'micro' level forces (Andrews 2001). The field's emphasis on systems analysis preconditioned it

24 to concentrate on system-wide issues like identifying the flow of materials and energy and trying to determine how and where to change this steam: With some notable exceptions (e.g. Ehrenfeld 1994), the industrial ecology literature has focused on the development of design principals, engineering approaches, or business strategies for achieving lower energy and material intensity of industrial production" (Robinson and Mendis 2006; 250).

Another possible reason for this oversight is the great faith Industrial Ecologists have placed in the power of design. For example, Dale (2006) argues that "we need to engage in deliberate design and redesign of our present industrial systems (Dale 2006; 4).13 Cote (2006) adds that the objective of industrial ecology "is to study and design a system of production and consumption that can continue within the scope of the earth's carrying capacity" (Cote 2006; 116).14While the idea of deliberate design is appropriate when considering organizations that are managed within the hierarchical structure of an individual firm, like production processes and product design, it is less clear that it is equally applicable to systems that are characterized by self-organization.15 However, the idea that industrial systems could be designed, and the consequent search for appropriate design principals, may have circumvented the development of a theory of agency to explain spontaneous developments within the industrial system.

2.4 Conclusion

The purpose of the proceeding chapter was to outline the main elements of a body of literature that has inspired the study of closed-loop systems for industrial waste as an environmental policy. Characterized by a focus on systems analysis and the use of natural systems as a metaphor for industrial activity, some Industrial Ecologists have characterized waste exchanges as design principal for industrial developments that will

Original Italics 14 Italics added 15 It may be that this focus on design is due to the background of contributors to Industrial Ecology, who in general have come fromapplie d disciplines like business, management and engineering (Gibbs et al. 2005). For instance, Frosch was in charge or the research department at General Motors, while Gallopoulos was the head of the engine research department.

25 help to transform linear industrial systems to more closely resemble closed-loop systems found in nature. However, the failure of designed industrial symbiosis, historical examples and the paradigmatic Kalundburg industrial park indicate that waste exchanges are better thought of as a type of as a self-organized network that arises under certain circumstances. As such, the promotion of closed-loop industrial systems could benefit from a better understanding of 'micro' level factors that influence a business' waste disposal decisions.

Tentative efforts at establishing such a micro foundation have drawn on economic concepts like transaction costs (Chertow 2007, Andrews 2001) and agency (Andrews 2001, Jackson and Cliff 1998). The Kalundborg example also suggests that economic, technical, regulatory and organizational factors are also in play. The opportunity costs of the time and effort to engage in waste exchanges are likely another important factor, as other facets of production may take precedence in the minds of managers. However, all of these factors, while important, do not address the issues of how waste is produced and how this might promote or limit opportunities for exchange. The next chapter will examine the theory of joint-production and suggest that this body of knowledge may yield important insights to the limits of symbiotic networks as environmental strategy.

26 CHAPTER 3.0: JOINT-PRODUCTION AND RECYCLING WASTE

The preceding chapter focused on industrial ecology, a perspective that draws from a variety of disciplines, including management, business, engineering, planning, geography, environmental studies and economics. This section will focus exclusively on the contribution of economics to the recycling of industrial wastes. To begin, it distinguishes between 'joint-products' and post-consumer waste, arguing that each type may differ in the costs and benefits of establishing closed-loop systems. However, a brief review of the recycling literature suggests that for the most part, economic texts on recycling have examined issues pertaining to the recycling of post-consumer waste or highly aggregated models where such distinctions are of little importance.16 The exception is the work of ecological economist Stephan Baumgartner, who has developed models of joint- production that provide insights into the linked issues of waste disposal, pollution and environmental degradation.

3.1 Waste, Pollution and Recycling

In the first chapter, waste is defined as an unwanted object or substance whose defining characteristic is the attitude of its possessor rather then any inherent quality of the material. Consequently, the study of waste and recycling from an economics perspective should focus on how each of private and external benefits and costs determine what is wanted, what is garbage, and what we should do about it. This approach is distinct from the industrial ecologist's focus on material and energy flows or the engineer's on chemical and physical properties, which tend to underplay the role of an individual's or firm's motivations and values in shaping the outcomes of the system to which it belongs.

16 Example of such models discussed later in the chapter are Plourde (1972), Smith (1972), Lusky (1976), and Highfill and McAsey (2001). These papers are concerned with the optimal allocation of some scarce resource, typically labour, between productive, waste disposal and/or recycling sectors. In this case, it is the average rate at which the total stock of waste is growing and the productivity of labour in each of the chosen sectors that are the relevant facts; distinguishing between different types of waste adds no additional information of value. As a consequence, although Plourde assumes that waste arises as a fixed by-product of production, the model is unchanged if we assume that waste arises because a fixed proportion of consumption leaves an unwanted residual.

27 If private motivations determine which materials and objects are treated as garbage and which are considered useful materials, then classification systems for trash should focus on identifying and describing key factors with regards to why different kinds of trash are treated differently. Various authors have presented different taxonomies depending on which incentives they deemed most important. For instance, an environmental economics textbook by Callan and Thomas (2000) focuses on the link between waste and pollution. As a result they classify wastes by the medium it contaminates (water, air or land) and their relative harmfulness to the environment. In his book on recycling and waste, Porter (2002) emphasizes the role of disposal costs in influencing the incentives to recycle, distinguishing between municipal waste that is not subject to a marginal disposal cost and waste that does confer such a cost. The former taxonomy may be a useful way to tackle the external benefits of reducing waste, while the latter is more useful for looking at the private net benefits to the firm of reducing waste.

While the above characteristics are relevant, the most important distinction to this paper is between joint-products, also known as production residuals, and residuals from consumption. In his well received textbook on environmental economics, Titenburg (2000) defines 'new ' as materials left over from production and 'old scrap' as waste from the hands of consumers.17 An example of the former is aluminium from the creation of beverage cans, while examples of the latter include used paper, old computers, leftover packaging, etc. Since Titenburg was discussing recycling decisions, the distinction was made to highlight how two factors, the cost of collecting the waste and the profit motive, affect the ease with which closed-loop processes can be established: The difficulties in recycling new scrap are significantly less than those in recycling old scrap. New scrap is already at the place of production, and with most processes it can simply be re-entered into the input stream without transportation costs. Transport costs tend to be an important part of the cost of using old scrap. Equally important are the incentives

7 For simplicity's sake, producers are assumed to be firms and consumers households, although production and consumption are undertaken by both.

28 involved. Since new scrap never leaves the factory, it remains under the complete control of the manufacturer. Having the joint responsibility of creating a product and dealing with the scrap, the manufacturer now has an incentive to design the product with the use of scrap in mind. It would be advantageous to establish procedure guaranteeing the homogeneity of the scrap and minimizing the amount of processing necessary to recycle it. For all these reasons, it is likely the market for new scrap will work efficiently and effectively (Titenburg 2000; 189).

For leftover materials that are reused within a firm, this argument is valid: for example, 95% of new scrap plastic in the US was recycled decades before curbside recycling programs and labelling schemes made recycling old scrap plastic feasible (Porter 2002;). However, the market for new scrap may not always function efficiently. While scraps in the sense of residual inputs are often reusable within the same production process, other joint-products of production may have undergone a chemical or physical change that renders them unsuitable. In this case, producers may not be able to design appropriate employment for the wastes within the same factory. The whole premise behind industrial Symbiosis is that such scraps may be exchanged between businesses. If multiple firms are producing the wastes that are to be reused by a single firm, then the users of new scrap do not avoid the transport costs and associated with old scrap.

Although markets for new scrap may not automatically function more efficiently than for old scrap, the above passage calls attention to the fact that the barriers and incentives associated with establishing closed loop systems may differ depending on whether the waste was a residual from production or consumption. Wastes from production processes can often be described as joint-products created alongside a desired good. Multiple outputs often arise from a single production process, some of which are desirable 'goods' that can be sold or reprocessed while others may be undesirable 'bads' that can impose a disposal or environmental cost. Theories of joint-production suggest that turning a waste into a by-product that commands a price can have implications for the firm's production decisions. A similar situation does not exist for post consumer goods, since consumers

29 are not generally paid in cash to recycle their wastes. This thesis argues that this difference is a reason why industrial symbiosis may operate differently than recycling of post-consumer wastes in terms of their environmental impact.

3.2 Environmental Economics and the Recycling of Joint-products

The issue of how to establish closed-loop systems for either joint-products or post- consumer waste relates to a number of branches of economics. As the previous chapter of this thesis suggested, transaction costs and theories of agency, concepts developed within the subdiscipline of industrial organization, that have been applied by non-economists to the study of industrial symbiosis. Industrial ecologists have argued that externalities related to geographic location, a topic studied within spatial economics, are also important aspects of industrial waste exchanges (Cote 2006, Chertow 2000). Within the economics literature recycling has implications for the use of natural resources and the release of pollutants into the environment. As a result, recycling has typically fallen under the aegis of environmental or natural resource economics, which will be the focus of this literature review.

Springer (1998) argues that the environment has four functions in an economy: it provides consumable goods like air, recreation and space; it supplies natural resources as inputs of production; it is the space in which economic activity occurs; and it acts as a repository for waste materials. Within economics, the study of the relationship between the environment and humanity's material well-being initially focused on natural world simply as a source of the raw materials for economic activity. Kula (1998) traces the roots of environmental economics in the theories of Thomas Malthus, David Ricardo and

Some authors (De Young 1986) have argued that the satisfaction that many consumers feel upon 'doing the right thing' constitutes an important benefit that heavily influences recycling behavior. It is possible to argue that such individuals are paid in the psychological currency of guilt reduction/ moral pride when they choose to consume a recyclable product, augmenting the benefit from using such goods. An equivalent for firm behavior would be the intangible advantages of being a good corporate citizen like company moral: monetary gains derived from a green image would be part of a traditional cost/benefit calculation. Others thinkers like (Thagersen 1996) reject behavioral models that reduce recycling behavior to cost/benefit calculations, arguing that they fail to capture the degree to which beliefs and values are important factors.

30 William Jevons, who focused on the limits that natural resources like coal or agricultural land place on the growth in living standards.

The modern field of natural resource economics developed in the early 20th century with the work of Grey (1914) and Hotelling (1931), who first characterized the optimal rate of use for non-renewable materials like metals and minerals (Pearce 2002). In 1954, Gordon published a model that dealt with the optimal rate of extraction of a renewable resource, a fishery, which incorporated the stock's regenerative capacity in calculating the best harvest rate. The paper was also notable for expounding the 'tragedy of the commons': the idea that when everyone and anyone has access to a resource, it will be over- harvested because each individual user does not take into account the external cost her actions impose on others in depleting the total stock (Pearce 2002).

Overtime, the environment was recognized not only as a source of inputs but also as a provider of essential amenities, especially with regards to the assimilation of pollutants (Fisher and Peterson 1976). As it became increasingly apparent that assimilative capacity of the earth is not unlimited, environmental and resource economists began to examine the question of how best to allocate scarce environmental resources among the four uses listed above. The concept of an , first developed by Arthur Cecil Pigou in the early 20th century, was essential to explaining why a market system would not automatically allocate environmental resources efficiently: in the absence of prices for scarce environmental amenities, these environmental services would be overexploited because the individual user does not face the full cost of her action. Economists prescribed surrogate prices like taxes or fees to create the incentive to economize the use of these resources (Cropper and Oates 1992).

The study of economic/environment interactions consequently developed along these two complementary and often intersecting streams: natural resource economics, concerned with the discovery of an optimal rate of use of a stock, and environmental economics, which deals with the issues of pollution and valuation of environmental resources

31 (Cropper and Oates 1992). The recycling literature is one area where the two strands overlap. On the one hand, these models conceived of pollution and/or recyclable materials as stocks that increase over time, and seek to characterize the optimal allocation of resources between production, pollution abatement and recycling (Conrad 1999). However, recycling rates may be below the optimum level due to externalities: in the absence of prices for environmental amenities, an individual is not paying the full cost of waste disposal by dumping, burning or burying. In addition, she is not directly reaping all the benefit of averting pollution through recycling. This disconnect between public and private benefits and costs due to externalities cause recycling in a market system to fall below the socially optimal level (Springer 1998).

Along with the dynamic optimization and externalities approach, a third stream of thought has also influenced the recycling literature. This is the realization that production is essentially the transformation of matter, and as such it must subscribe to the laws of thermodynamics. Simply put, the first law of thermodynamics states that matter and energy can neither be created nor destroyed, while the second law contends that the amount of entropy in an increases over time. Entropy in physics refers to the creation of energy that is less available to do work, like heat, and is often applied to other disciplines to refer to the level of 'chaos', disorderliness or the number of unproductive elements in a system. For complex systems like economies or ecologies, the law of increasing entropy implies that to maintain the level of complexity, inputs of low entropy, easily useable energy must be continually added.

Kenneth Boulding's seminal 1966 article, The Economics of the Coming Spaceship Earth, was one of the first papers to argue that the laws of thermodynamics had important economic implications: Until Boulding's notion of spaceship Earth, externalities were generally regarded as fairly minor and manageable deviations from the optimum. Silent Spring had already suggested exactly the opposite - agrochemicals were pervasive to economic systems. Externalities were showing up long

19 Staff about environmental econ as a Branco of public economics

32 distances from the sources of emissions and were cumulating through time as well. Spaceship Earth similarly invoked the first law of thermodynamics to point out that whatever was taken out of natural resource sectors must reappear in equal weight as waste, which will likely affect the environment when disposed of: Matter and energy cannot be created or destroyed. As economies expand in the economic sense, so they are likely to expand in terms of physical resource extraction and hence in terms of physical waste emissions to the environment (Pearce 2002; 60).

In essence, Boulding's characterization of the Earth as a closed system except for energy inputs from the sun, along with the idea that each transformation of matter inevitably leads to greater amounts of entropy, lead to the realization that waste is pervasive in the economic system.20 Ayres and Kneese (1969) formally developed this idea, arguing that when the environment's capacity to absorb waste is limited, then the use of this free disposal system begins to impose external costs. Externalities consequently become pervasive within the system. Their model also developed the materials-balance principal, the idea that, in consequence of the indestructible nature of matter and energy, the mass of all inputs to a production process must equal the sum of the outputs:21

20 Although he is often credited with recognizing the important of the 1st law, Boulding's paper placed a much greater emphasis on the importance of 2nd law, arguing that while matter did not necessarily exhibit increasing levels of entropy over time, and thus could in theory be reused indefinitely, constraints on energy would ultimately limit growth: In regard to the energy system there is, unfortunately, no escape from the grim Second Law of Thermodynamics; and if there were no energy inputs into the Earth, any evolutionary or developmental process would be impossible. The large energy inputs which we have obtained from fossil fuels are strictly temporary.... If we should achieve the economic use of energy through fusion, of course, a much larger source of energy materials would be available, which would expand the time horizon of supplementary energy input into an open by perhaps tens to hundreds of thousands of years. Failing this, however, the time is not very far distant, historically speaking, when man will once more have to retreat to his current energy input from the sun (Boulding 1966; 7). In essence this is a reformulation of an old argument in Economics: the Malthusian prediction that scarce natural resources will ultimately limit growth where the is energy rather then land. This line of reasoning, labeled the "pessimist's model of growth", is one of the fundamental premises of both industrial ecology and ecological economics. 1 Ayres and Kneese may not have been the first to formally develop a materials-balance model of the economy, although they were probably the most responsible for the dissemination of this idea. In a footnote, Ayes and Kneese attribute the first development of the materials balance concept to a PhD dissertation by F.

33 [W]e find it useful initially to view environmental pollution and its control as a materials balance problem for the entire economy. The inputs to the system are fuels, foods, and raw materials which are partly converted into final goods and partly become waste residuals. Except for increases in inventory, final goods also ultimately enter the waste stream, thus goods which are "consumed" really only render certain services. Their material substance remains in existence and must either be reused or discharged to the ambient environment (Ayres and Kneese 1969; 284).

The materials balance principal often appears in the recycling literature in the form of a constraint that the total inputs of matter and energy must equal the total mass and energy of all outputs (Fullerton and Kinnaman 1995, Palmer and Wells 1997, Smith 1972). It also arises in the recognition that substituting one form of waste disposal for another, such as burning garbage instead of burying it, does not in fact dispose of the problem of externalities, since it simply changes the location of the matter from the earth to the air. As a result, recycling is often characterized as the only 'complete' means of waste disposal, meaning the only one that prevents the release of materials into the environment (Boulding 1966, Ayres and Knesse 1969). However, even then it is recognized that only matter has the potential to be completely recycled. Since recycled materials increase in entropy unless energy is added, so recycling systems will not be closed unless there is an internal energy source, meaning that such a system will still be open in terms of energy inputs.

There exists a large literature on recycling within environmental economics that draws on three concepts: externalities, the materials balance principal and the idea that there is some optimal rate at which a flow of waste should be allowed to degrade out environmental 'stock.' These papers have employed a number of approaches. Firstly, one

Smith in 1967. Ethridge (1972) cites a 1969 paper by Havlicck, Toliey and Wang as another early paper dealing with this subject matter. 22 Incidentally, Ayres and Kneese's paper was very influential on the field of industrial ecology (Erhenflled 2001). Robert Ayres has become a major theorist within industrial ecology, helping to develop the concepts of material flows and industrial metabolism. For example, see Ayres (1989). He also co-edited the field's most thorough collection of articles to date, A Handbook of Industrial Ecology (2000).

34 category of models seeks to characterize the optimal allocation of a scarce resource between the production, recycling and waste disposal sectors (Conrad 2001). Examples include Plourde (1972), Smith (1972), Lusky (1976), and Highfill and McAsey (2001). These papers are dynamic models that treat pollution as a stock of waste that accumulates over time, causing disutility in the form of environmental degradation. Society must allocate a scarce resource (usually labour) between recycling, waste disposal and production in such a way as to maximize social utility. Plourde conceives of waste as a fixed proportion of production, while Highfill and McAsey, Smith and Lusky conceive it as a residual of consumption. However, since these papers are addressing the question of how many resources should be devoted to recycling in the overall economy, distinctions between the sources of the waste matters very little for the end result. Furthermore, these models employ a highly aggregated approach that characterizes the optimal allocation between groups, and as such do little to explain the behavior of individual households or firms.

A second approach examines public policies that promote recycling as a means to mitigate the environmental costs of waste disposal. This class of papers uses partial or general equilibrium models to assess what impact certain policies have on recycling rates and/or their effects on general welfare (Conrad 2001). Policies often considered include subsidized municipal waste pick up programs, unit pricing for disposal, taxes on virgin materials, and subsidies for recycled material, recycled content standards and deposit/refund schemes. The focus tends to be on post-consumer goods and household choice between various disposal options or goods with more or less recycled inputs.

For instance, Sigman (1995) looks at the effect of various policies on recycling rates of lead batteries, Dinan (1993) uses newspapers as an example and Fullerton and Kinnaman (1995) refer to packaging and food wastes. Morris and Holthausen (1994), Wertz (1976) and Huhtala (1997) all deal explicitly with models of household decisions of waste disposal of post-consumer goods. Dobbs (1991) takes a different approach by assuming that the demand functions for a consumer good differs between "litterers" and "non- litterers. Palmer and Wells (1997) develop a model where both joint-product and post-

35 consumer wastes are created, but do not allow for the possibility that the joint-products are recycled. Even papers that deal more explicitly with the relationship between production decisions and recycling rates tend to focus on the choice between how much recycled inputs to use in the production of the main commodity, rather then on recycling the wastes of production. For example, papers on green design by Calcott and Walls (2000), Eichner and Pethig (2001), and Fullerton and Wu (1998) focus on how different policies affect the design of goods that end up as post-consumer waste, arguing that certain policies will increase the use of recycled materials.23

Despite the dearth of studies relating to the recycling of joint production, a few authors have incorporated the production of joint-product waste into models of firm behavior. In essence, these three papers by Ethridge (1973), Anderson (1987) and Conrad (2001) analyze the implications of the first and second law of thermodynamics on the theory of the firm. Although none of these papers analyze the specific case of industrial symbiosis, they provide a number of important insights on the relationship between ascribing a price to waste and a firm's production decisions.

To begin, Ethridge (1973) examines the case where two outputs, which can be measured in some common unit or mass or energy, are produced from a single process of production: Yp, the main product, and Y0, a residual from production that itself is divisible into a by-product (Yb) and a waste (Yw). The proportion of Ypto Y0 created by the production process is denoted by k. By-products command a positive price, while wastes are either discharged into the environment freely or subject to a per unit disposal cost. Since this model allows any amount of waste to be transformed into a by-product at no cost, imposing a disposal fee induces the firm to increase by-product recovery,

23 This apparent focus upon post-consumer goods and household recycling decisions within the recycling literature is perhaps partially due to the ' crisis' in the late 80s and early 90s, which spurred research in to recycling as a possible alternative (Ackerman 1997). Conversely, industrial symbiosis has only recently begun to be considered as a means of environmental and economic development. Recycling of post-consumer waste would have been favoured by firms (particularly in the plastics industry and drinks industry) over a policy of discouraging the consumption of products such as water in plastic bottles by high taxes or maintaining or developing systems of reusable containers. Consumers in a very time constrained society and given with certain habit would rarely be in favour of refilling their containers. The distribution of products via bins could also reduce the competitive advantage of corporations that use packaging and brand promotion to sell their products and would reduce the high value added due to the packaging.

36 decrease production of Yp and/or decrease k. He argues that k would change because firms would switch inputs from producing the main product to the by-product depending on which good's marginal product was higher. The total level of input use could also be affected.

Ethridge's central question - what happens to a firm's level and mix of production when a price is attached to a previously free disposal service? - is essentially the opposite of this thesis's central concern: what happens to the firm's production decisions when a price is attached to a previously worthless by product? As the first of one of the very few papers this author has found relating to byproduct waste, it provides an important basis for the model developed in the next section. However, his analysis makes a number of assumptions. First, he allows the firm to recover by-products from waste at zero cost. Second, Ethridge did not consider the overall impact of the firm's production decisions on environmental quality. For instance, while he mentioned that, under certain conditions, a user charge for waste disposal may induce the firm to use more of the input, he did not consider whether the environmental benefit derived from reducing waste could be balanced by the damage done by increasing resource use.

Anderson (1982) also developed a theory of the firm that incorporates the material- balance principal, however, his model pays more attention to the system's inputs. Three different classes of inputs are considered: 1) raw materials, or the material components of goods; 2) agents, namely capital and labour, which render raw materials into useful goods; and 3) energy required to enable agents to act. The labour input can be distinguished from capital as it includes its own energy resources. Production is the process by which agents use energy to transform raw materials into output. Because of the first and second laws of thermodynamics, the total mass of the inputs is equal to the combined mass of output and waste (R = Q + W) and the amount of energy used to power capital is equal to the amount of waste energy or heat generated (E= Ew). This last term reflects the increase of entropy in the waste stream. The energy also does the work which creates the complexity, or in other words lowers the entropy of the final product.

37 Energy Raw Materials (R) (E)

* *

Production Labour Capital * * (L) (K) • 4* * • Waste Output Waste Energy

Figure 3.1 - A Schematic of the Production Process. Adapted from Anderson (1982), page 2.

Anderson further classifies waste into various types. To him, by-product wastes are unusable parts of inputs, such as the orange peels that are left-over from the production of orange juice. The existence of this type of residual is dependant on the requirements of the production process and the physical properties of the inputs. In contrast, economic waste is the incomplete utilization of the useable part of the input; for instance, letting some quantity of juice remain in the rind. Anderson's main argument was that with a given technology, substitution between classes of inputs is limited: when making doughnuts, you cannot make up for a lack of flour by working harder, although you may be able to use more sugar or eggs. However, when economic waste is present, agent inputs can be substituted to reduce the amount of residual produced: a little more effort or better equipment could reduce the amount of juice that is wasted. Substitution between the agent and material input can occur through the employment of labour and capital to reduce waste. Anderson's paper does not deal explicitly with industrial symbiosis since it only analyzes the case where recovered economic waste is reemployed within the same production process. However, its characterization of the production process provides a useful basis for the analysis of the case where by-product waste is sold.

38 The last and most recent article to deal with the relationship between production, recycling and waste is a 2001 article by Klaus Conrad. His model also assumes that industrial waste is generated as a fixed portion of the raw material; for example, the peel of an orange constitutes a part of the fruit that can not be employed in the production of juice. Some amount of effort is expended in separating the waste from the usable part of the input; the above example, removing the peel from the pulp. The central question is what impact imposing a fee on waste disposal will have on the amount of by-product recovered for reuse within the firm? Although Conrad focuses exclusively on infra-firm cycling, his paper provides an important basis for the ideas developed in the next chapter.

3.3 Joint-Production, Pollution and Ecological Economics

The above articles fall under the rubric of environmental economics; however, this is not the only approach to the study of environment/economy interactions in general and recycling in particular. While Boulding influenced environmental economics by arguing for the pervasiveness of externalities and for suggesting the mass-balance requirement, he was also influential in the development of ecological economics (Pearce 2002). The 'spaceship' metaphor evoked an image of the economy as an open subsystem of the ecosphere, drawing materials from and releasing them to the surrounding natural system. Consequently, the services and resources provided by the environment ultimately limit capacity for . Recycling consequently becomes an essential part of a sustainable system: The closed economy of the future might similarly be called the "spaceman" economy, in which the earth has become a single spaceship, without unlimited reservoirs of anything, either for extraction of pollution, and in which, therefore, man must find his place in a cyclical ecological system which is capable of continuous reproduction of material form even though it cannot escape having inputs of energy (Boulding 1966; 9).

39 Accordingly, ecological economics is a school of thought that addresses the same subject matter as environmental economics, but stresses that economy-environment interactions must be viewed "from a point of view which stresses that the human economy is an open subsystem of and embedded in the larger, but finite, closed, and non-growing system of non-human nature" (Baumgartner 2000; 9). This is in contrast to environmental economics, that places little emphasis on the effect the embedded nature of the economy has on its functioning as a whole or upon individual markets.24

Stefan Baumgartner, an ecological economist from the University of Heidelberg in Germany, has written extensively on the implications of joint-product for the environment, arguing that it "should be considered one of the conceptual foundations of ecological economics" (Baumgartner 2001; 365). This is due to the fact that the idea of externalities, vital to the economic approach towards analyzing the economy, can alternatively be conceived as the result of joint production: In the usual externality approach this relationship is conceptualized as an issue of welfare/utility loss of the person affected by the external effect. That is, the description is based on the effect. One could, however, recast this relationship starting from the cause of the effect. Very often one would observe that the starting point is an unintended joint product (Baumgartner et al 2001; 370). While the concept of an externality can be abstract, joint production focuses attention on the details of the process and renders them more accessible. Further more, he argues that

Ecological economics has much in common with industrial ecology, as both approaches appreciate ecological analogies and focus on the material aspects of the economy activity. For example Daly, a seminal author within the ecological economics movement, stresses the importance of the natural systems analogy to economics: [A]n ultimately central place for biological analogies in economics has been claimed by no less an authority than Alfred Marshall in this famous statement, "The Mecca of the economist lies in economic biology rather than in economic dynamics" (Marshall, 1920, Preface, p. 14), and in his further statement that "in the later stages of economics, when we are approaching nearly to the conditions of life, biological analogies are to be preferred to mechanical" (Marshall, 1925, Preface, p.317). Among current economic theorists it would appear that only the works of Kenneth Boulding (1950, 1958, 1966) and Nicholas Georgscu-Roegen (1966)... reveal a disposition to take Marshall seriously on this point (Daly 1968; 393).

40 the fundamental causes for joint-production can be traced to the First and Second laws of thermodynamics. Think of a production process where all of the raw material and the material fuel end up as part of the desired product, for example, the production of cement. In that case, mass conservation alone would not require any joint product. But because the desired product has lower specific entropy than the raw material, and there is some non-negative entropy generated by the process, there is a need for a joint output taking up the excess entropy. In many cases, as in the example of cement production, this happens in the form of low-temperature heat, which may be contained in the product, a by-product or transferred to the environment (Baumgartner 2006; 53).

This argument establishes a theoretical basis for the ubiquity of joint production. As a consequence, understanding pollution may mean understanding a firm's decisions regarding the disposal of unwanted joint-product.

/ \ Low entropy fuel Low entropy product

Production Process High entropy raw High entropy material joint product

Figure 3.2 - The Thermodynaic Struture of Industrial Production in Terms of Mass and (Specific) Entropy. Adapted from: Baumgartner (2006), page 51.

While few models of recycling deal with joint-production either within or between firms, the analysis of multiple outputs resulting from a single production process has a long history in economic thought. Baumgartner (2006) notes that many notable economist devoted attention to the case of multiple products of production, including Adam Smith, John Stuart Mill, Karl Marx, Johann Heirich von Thunen, William Stanley Jevons, Alfred Marshall, and Kenneth Arrow and Gerard Debrue. Many of these economist's insights are particularly relevant to an analysis of industrial symbiosis. Kurz (1986) credits Adam

41 Smith's analysis of the by-production of meat and skins through hunting as the first articulation of the "rule of freegoods: " the idea that goods in excess supply have no value to humans. Free goods arise in the case where the proportion at which the joint-products are created is fixed and demand for one good does not match supply: The skins of the larger animal were the original materials of clothing. Among nations of hunters and shepherds, therefore, whose food consists chiefly in the flesh of those animals, every man, by providing himself with food, provides himself with the materials of more clothing than he can wear. If there was no foreign commerce, the greater part of them would be thrown away as things of no value (Adam Smith Inquiry into the Nature and Causes of the Wealth of Nations, as quoted in Kurz 1986; 12). Consequently, in cases of fixed production it is only by chance that demand for the by­ product will match supply.

Baumgartner goes on to cite German economist Johann Heinrich von Thiinen classic text, The Isolated State, in which von Thiinen argues that joint-products are not necessarily produced in fixed proportion, but often can be varied within the production process. In fact, von Thiinen can be recognized as an early theorist on industrial symbiosis, since his models on the optimal location of economic activity suggested that different production process would be located so that the waste of one could be used as the inputs of another (Baumgartner 2006).Baumgartner also credits him with noticing that it is the specific circumstances that determines which product is the main by-product and which one the by-product, and not some inherent characteristic of either joint-product.25 Jevons applied the theory of marginal utility to joint production, noting that some of these 'goods' were in fact 'bads', yielding negative utilities for the possessor. He and Karl Marx both attributed environmental pollution to negatively valued joint-products (Baumgartner 2006).

A modem example of this is a factory in Tennessee that originally produced cotton knit underwear and night shirts for female inmates. The owners discovered that the scraps from the garments made excellent gun cleaning-patches, and started to sell this product to various government departments and private retailers. Eventually, sales of the patches outstripped underwear sales 4 to 1 (Perloff 2001).

42 3.4 Conclusion

This chapter has argued that waste is essentially an economic concept, since it is the context in which a material is found, and not necessarily its physical properties, that determine whether a material is useful, useless or harmful. Accordingly, any undertaking to reduce waste, including the creation of closed-loop systems, must take into account the incentives facing its disposal. An important distinction in this regard is between post- consumer waste and joint-products of production. While environmental economics have given a lot of attention to the issues surrounding the cycling of post-consumer waste, there is a dearth of papers relating to inter-firm recycling of joint-products. The exception is a number of models which explicitly incorporate a consideration of the laws of thermodynamics. Ecological economist Stefan Baumgartner in particular has written prolifically on the role of joint-product analysis in environmental economics, deriving a model that considers the effect of ambivalent joint-production -industrial symbiosis - on environmental health. The next chapter will examine whether similar trade-offs exist within a single firm that engages in joint production.

43 CHAPTER 4.0: INDUSTRIAL SYMBIOSIS AS A POLLUTION REDUCTION STRATEGY

The first section of this thesis suggested that within a market system, methodological individualism can yield important insights to industrial symbiosis that may be missed by a more holistic perspective: more precisely, it can be used to examine the motives and barriers shaping individual firm behaviour in order to better predict and understand the behaviour of the aggregated whole. Philosophically grounded in methodological individualism, the economic literature relating to closed-loop systems was the subject of the second section. The main purpose of that chapter was to review economic papers on subjects relating to industrial symbiosis, a neglected if not ignored topic within economics, in order to determine what observations about inter-firm waste exchanges were already well established and to suggest fruitful avenues for further exploration. This third and final section will apply joint-product economics to industrial symbiosis, showing how the analysis of individual behaviour may bring attention to problems that are overlooked in an aggregated systems-oriented methodology.

As outlined in the last section, the study of joint production has a long history within economics. Early economists like Smith and Mill were interested in the case where both joint-products were 'goods', while later thinkers considered the consequences of joint- products with negative utility. However, the analysis of the transformation of a 'bad' joint product into a 'good' is a recent development. This chapter will expand upon models of joint production in order to analyze this case, which is essentially industrial symbiosis. More specifically, it will outline three problems that may limit the effectiveness of industrial symbiosis as a pollution mitigation strategy: imperfect markets, separable costs and joint-externalities.

The outline of the section is as follows. The first part will define some of the terms used in the proceeding discussion and outline a few of the assumptions that underline our analysis. It will continue with an examination of the impact that the sale of a waste product has on the production decisions of the firm, arguing that imperfect markets and

44 high marketing costs may limit industrial symbiosis' use as a pollution mitigation strategy. Next, the paper will use the concept of joint-externalities developed by Baumgartner to outline the circumstances where industrial symbiosis may in fact do more harm then good. The section concludes with some policy implications.

4.1 Definitions and Assumptions

To begin, it may be useful to define a number of terms and concepts more precisely. For instance, it is important to distinguish between the case where joint-products are yielded in fixed proportions, and the case where they can be varied. Some production processes may yield joint-outputs in set ratios: for example, one chicken will always yield two breast, two legs and two wings. This means that the producer will not be able to control the amount of by-product that is produced, meaning that it will not be able to set production at the profit maximizing level. Conversely, in other cases the producer may have some control over the ratios of joint products that are produced. Over the long run it may be possible to vary the respective yields of almost any process: for example, technologies have been developed to produce chickens with greater amounts of white relative to dark meat. However, varying the relative outputs of joint production often entails developing new processes or technologies, which could take time. In these cases fixed production accurately describes a production process at a particular point in time, even though it may be technically possible to vary the joint-products.

In addition, allowing the relative output of the by-products to vary introduces additional complexity, since maximizing profits now entails choosing an appropriate production ratio when choosing the profit maximizing output of the composite good. Assuming a fixed proportion of the main product to waste greatly simplifies analysis by allowing us to aggregate the two into a composite good, and probably characterizes many goods in the short run (Boulding, 1966; 580). For these reasons, the chapter deals exclusively with the case when joint-products are produced in fixed proportions.

45 To continue, a 'composite good' is the aggregation of the joint products that emerges from a single production process. For instance, 1 kg of the composite agricultural good 'wheat' might be composed of 0.5 kg of straw plus 0.5 kg of grain (Boulding 1966; 580). For simplicity's sake, it is assumed that all the joint products can be measured in some common unit. Borrowing from accounting terminology, we classify the 'main product' as the good which constitutes the largest portion of the total sales value of composite good, a 'by-product' as an output with a lower sales value and a 'waste' as joint-product of no value which often incurs additional disposal costs (Weil and Maher 2005; 21). Since we are examining situations where a waste may in fact be transformed into a by-product, the two terms are used interchangeably throughout the text.

Moving along, we discuss some of the assumptions that underpin this analysis. Perhaps the most essential is the presumption that the waste product can be sold. This not only supposes that a use for the unintended product exists, but that its price and quality is comparable to that of possible substitutes. Many other factors also influence whether or not a waste may be easily marketed. Wastes that are durable and not difficult to transport will find larger markets then those that dissipate rapidly, while toxic products may face regulations that restrict their uses. Predictability of supply, meaning that the waste is produced in reliable amounts of a consistent quality, is another important consideration (Desrochers 2001). Two related assumptions are that the demand for the waste product is independent of the demand for the main product and that the use of the market mechanism incurs no additional cost.

Given the assumptions outlined above, this paper will seek to determine the impact the sale of the waste will have on the composite good, and whether or not the firm will choose to sell all of the wastes it produces. Aside from the issue of imperfectly competitive markets, it will consider the effect of disposal costs and separable costs. Disposal costs refer to costs that the firm incurs to dispose of the waste through any mechanism other then the market. In some cases they may be negligible, for instance a factory may release C02 and other greenhouse gasses into the atmosphere for free.

26 See Boulding (1966) for an example of how related demand curves might change the analysis.

46 Conversely, they could be very expensive, like the cost of associated with the safe disposal of nuclear waste. A separable cost is a term taken from accounting, which notes that a 'split-off point often occurs in join-production. Before this point, the expenses incurred during production are common to all the joint products and cannot be allocated to one or another (Weil and Maher 2005; 467). After this point, a by-product may need to undergo additional processing before it can be marketed. It is important to note that according to this use of the term, a separable cost is not the marginal costs of producing the joint-product, but instead a cost that the firm will incur if and only if it decides to sell the byproduct on the market. The firmuse s this cost to decide whether all, none or some intermediary amount of the by-product will be sold on the market, but not how much of the composite good to produce.

4.2 The Limits of Industrial Symbiosis

Turning now to the question at hand, this section begins by considering a simple case where the composite good X is composed of two joint-products that can not be created separately and are generated in a fixed proportion. An example of such a case could be a corn stalk, whose total mass is divisible into a main product - the corn - and a by-product - the straw - in such a way that there is always one unit of straw produced for ever unit of corn. Let Xm represent the main product that is sold in the market for price Pm. The by-product, Xw, can be disposed of by releasing it into the environment or gathered up and sold on the market for price Pw. TC is the total cost of producing this composite good; it represents the cost of growing the whole corn stalk. Markets for both the main product and the by-product are perfectly competitive and disposal and separable costs are initially assumed to be non-existent. The firm's aim is to maximize the following profit function:

Max PmXm + PwXw - TC X

Assuming for simplicity's sake that the production of one unit of main product produces one unit of waste, such that Xw=Xm., the first order condition is:

47 Pm + Pw = MCm

Where MC is assumed to be increasing with X.

Figure 4.1 represents this initial scenario. Under industrial symbiosis, Pw would be greater than zero as the firm would receive a positive price for the product. In the absence of industrial symbiosis and disposal costs, the firm would only take the price it receives for the main product into account. Let X stand for the amount of the composite good that would be produced in the absence of industrial symbiosis. As shown in the diagram, because Pm + Pw is greater then Pm alone, the marketing of the by-product will always cause the firm to produce more of the composite good. In other words, X* will be greater than X. How much more depends on the magnitude of Pw. In addition, because there is a horizontal demand curve for waste and the use of the market is free, the firm can choose to dispose of all of the waste through the market.

MCP

MC

W

X X (Composite Good)

Figure 4.1 - Perfectly Competitive Markets

However, the introduction of separable costs may lead the firm to decide that it is not in its interest to market all of its by-products. In our example, suppose that there is some cost involved in gathering each additional unit of straw before it can be sold, represented

48 by MCW. The alternative would be to let the straw sit in the field to disintegrate overtime. The firm now faces two choices: how much of the total corn stalk to produce and, given the fact that it can not control how much of the by-product is created for a given amount of the main product, how much of the waste will it choose to dispose of through the market?

Let NPW represent the net price of the by-product, such that:

NPW = PW-MCW In the absence of disposal costs, the firm will choose to market the by-product only so long as the benefits from doing so exceed the costs. In other words, its will choose to sell an additional unit of the by-product providing the net-price it receives is greater then or equal to zero. When the firm faces constant separable costs a stark choice must be made: if this cost exceeds the price received from marketing the waste, net price will be negative and the firm will not sell any of the waste. If the reverse is true, net price will be positive and the firm will market all of the by-product.

Rising separable costs can lead to an intermediate situation where only some of the wastes are marketed, leaving the remainder to be disposed of by some alternative mechanism. In this case, the firm will choose to create by-product from waste up to the point where the net price of the waste is zero. Figure 4.2 illustrates this situation, where Xc represents the 'cut-off point where net price reaches zero. Up to Xc, the firm receives a positive net price for the by-product and will choose to market an extra unit of waste, afterwards the net price is negative and the firm will not choose to sell any more of the by-product.

49 MC,P

(By-Product)

Figure 4.2 - By-Product Sales with Rising Marginal Separable Costs

If the firm finds it profitable to produce a quantity of the main product such that the amount of waste produced is greater then the cut-off point (i.e. Xw >Xc), the firm will only choose to convert up to Xc of the waste into a sellable by-product. Once Xc is surpassed and the firm is no longer converting waste into by-product for sale, the firm's

marginal revenue curve drops to Pm. Since it is not receiving marginal revue from the decision to market the waste, industrial symbiosis will not induce the firm to increase production above what would have produced in the absence of industrial symbiosis. In addition, Xw-Xc of the waste will not be sold, meaning that industrial symbiosis will not completely eliminate the unwanted waste product.

50 MC,P

MC

(Composite Good) Converted to a left by-poduct as waste

Figure 4.3 - Output of X Under Increasing Separable Costs

Next is the impact of disposal costs. Recall that the net price was defined as the revenue received for the by-product minus the separable cost. Consequently, the net price can be though of as the benefit derived from the use of the market as a waste disposal mechanism: if net price is negative, it implies that the use of the market imposes a cost upon the firm. The existence of a disposal cost means that the firm may still choose to engage in industrial symbiosis even if it would receive a negative net price for the by­ product, so long as the cost of disposing of the waste through the market was less then the alternative form of disposal. In order to directly compare net price with disposal costs, or in other words the cost of using the market compared to some alternative form of

disposal, we can redefine net price as a 'net marketing cost'(NMCw):

NMCw = MCw-Pw. In this case, Pw can take on either a positive value, representing the revenue received for the sale of waste, or a negative value representing the cost of disposing of the waste.

51 So long as the net marketing cost is smaller then the marginal disposal costs, the firm will choose to market its waste. If both the net marketing cost and marginal disposal costs are constant, the firm would choose to market all of the by-product when the market was the cheaper form of disposal, and none when the alternative proved less expensive. However, if the cost of using the market was initially lower then the disposal cost but increasing with the output, a point would be reached where the firm would no longer find it profitable to sell additional waste. This is represented in Figure 4.4, where NPW is the net price received for the marketing of the waste and MCD is the marginal disposal cost. Once again, Xc represents cut-off point, or the maximum amount of waste the firm would choose to sell. The same result would occur even if MCD were not constant, so long as NMCw was raising faster then the marginal cost of disposal.

(By-Product)

Figure 4.4 - By-Product Sales with Rising Net Marketing Costs

If Xc is smaller than the profit maximizing output, the firm will not sell all of the by­ product it produces. As a result, it would face the constant disposal costs for the unsold portion of the by-product, causing the marginal cost curve of the composite good to shift upwards. Figure 4.5 demonstrates that the marketing of the by-product does not induce the firmt o produce a greater amount of the composite good then it would have otherwise;

52 however, once again Xw-Xc of the waste will not be disposed of through the market.

MCP

P M

W

(Composite Good)

Figure 4.5 - Disposal Costs

Relaxing the assumption of a perfectly competitive market introduces another reason why a business may fail to dispose of all of its by-product through the market. Assume that the firm faces a constant price for the main product, a downwards sloping marginal revenue curve for the by-product and no separable or disposal costs. At some point, represented by XB, the market for the by-product will become saturated and the firm will no longer receive positive marginal revenue for the sale of its wastes. Figure 4 demonstrates what occurs if the profit maximizing point is smaller than the point at which the market become saturated: all of the wastes will be sold and industrial symbiosis will cause increased production of the composite good.

53 MR,MC,P

(Composite Good)

Figure 4.6 - Imperfectly Competitive Market for Waste when X*< XB

Conversely, if X* s greater then XB, the impact of industrial symbiosis will be different. As shown in Figure 4.6, after XB the market is saturated and the firm no longer receives extra revenue from the sale of the waste; consequently, the firm will produce the same amount that it would if the waste products were not being marketed. Once again, the company will not be able to sell all of the waste product and must somehow dispose of the excess (see Truett and Truett 2001: 454-462).

54 MC,P

{Composite Good)

Figure 4.7 - Imperfectly Competitive Market for Waste when X*> XB

When the market for the main product is no longer perfectly competitive, it introduces the possibility that at some point the marginal revenue curve of the waste may intersect the marginal revenue curve for the main product, after which the 'waste' would become more valuable then the main product. In actual fact, this scenario took place in a factory in Tennessee that originally produced cotton knit underwear and night shirts for female inmates. The owners discovered that the scraps from the garments made excellent gun cleaning-patches, and started to sell this product to various government departments and private retailers. Eventually, sales of the patches outstripped underwear sales 4 to 1 (Perloff 2001: 608). Last is the impact of a change in the price of the waste product. Since it was assumed that the by-products are produced in fixed proportions, a change in price of the waste cannot induce the firm to alter the proportions of waste produced. Thus, no substitution effects occur. However, a change in the price of the waste will still induce an income effect. As a result, a rise in Pw will cause the firm to increase production of the composite good.

This section examined two factors that would limit the amount of waste the firm could dispose of through the market. The first of these was the issue of separable costs, or the

55 expense of processing the by-product before it can be sold. If these separable costs are such that at some point selling the wastes would incur a greater expense then an alternative form of disposal, the firm would choose to sell only as much of the by-product as was profitable. As a result, it would not be possible to dispose of all industrial wastes through the use of a market, leaving the remainder to be disposed of by some alternative mechanism. In this case Industrial Symbiosis is at best a partial solution to the problem of pollution.

The second factor relates to market structure. Normally an imperfectly competitive market is a problem because it allows a firm to restrict the level of output below the socially desirable level in order to extract an economic rent from consumers. In this scenario, fixed proportion joint-production means that the firm will not be able to set the production of the by-product at the profit maximizing level. Imperfect competition is now a problem because the firm is producing more of the by-product then the market can absorb (Truett and Truett 2001). One real-world example of this scenario occurred in the Canadian natural gas industry: In Canada, producers of natural gas obtain sulphur as a co-product in the process of scrubbing poisonous gases from the fuel. During the early 1970s, sulphur markets became so weak relative to world supply that the Canadian producers' stockpiles reached 10 million tons, enough to supply all U.S. industry for an entire year. The Canadian firms could not sell their natural gas without obtaining sulphur, and there was not way to destroy the excess output. Hence, the sulphur just piled up and became an environmental problem in western Canada (Truett and Truett 200; 457).

Under these conditions, policy makers must deal with two issues: the environmental problems associated with the excess wastes, and the problems associated with flooding the market either at home or abroad. In actual fact, Canadian natural gas producers were charged with dumping sulphur on the US market on a number of occasions (Prad'hommel995). Policies which try to mitigate the ill-effects of imperfect markets may further reduce the effectiveness of Industrial Symbiosis as an environmental policy.

56 Consequently, the existence of high separable costs and imperfect markets will limit the effectiveness of Industrial Symbiosis as a pollution reduction policy, in which case it will be desirable to employ strategies either in tandem with, or as an alternative to, the market.

Another question is whether or not the sale of waste is always an environmentally responsible practice. The previous section determined that so long as a firm is receiving revenue from the sale of additional units of wastes, industrial symbiosis will induce a firm to produce a greater amount of the composite good. An increase in the demand for the output would presumably result in an increase the demand for inputs. This is of particular concern in relation to the consumption of non-renewable resources like fossil fuels. If the increase in production is industry wide or if a single firm uses considerable amounts of the non-renewable ore or fuel, it may significantly increase the rate at which the resource is extracted. Given the concern some feel about the rate at which non­ renewable natural resources are being depleted, it may be worthwhile to consider this possibility when trying to establish symbiotic networks.

4.3 Industrial Symbiosis and Joint-Externalities

A second concern around industrial symbiosis as a pollution reduction strategy is based on the concept of external costs. In this context, external costs or negative externalities can be defined as a cost that is born by society at large that arises when a firm is not made fully responsible for the damage its wastes incur on others by damaging the environment. The existence of pollution means that the price for a good does not reflect the full cost to society of its production, resulting in overproduction of that good. In essence, the purpose of any pollution reduction strategy is to eliminate externalities by ensuring that the cost born by society for the production of an additional good is equal to the benefit it derives from its production. Industrial Symbiosis is posited as a one solution to this problem, since selling waste prevents its release into the ecosystem, thus avoiding external costs. In addition, Industrial Symbiosis can also be seen as increasing the benefit derived from the production of a good by turning the waste into a usable input. In either case, the

57 strategy supposedly brings actual production levels closer in line to what society as a whole would desire.

However, it is possible that by eliminating one externality, industrial symbiosis may give rise to another. This prospect was the subject of a paper by Stefan Baumgartner and Frank Jost (1999), who argued that under certain conditions industrial symbiosis entails a trade-off between two sets of externalities. Eliminating pollution from one kind emissions may inadvertently increased the harm done by another type. Key to their model is the idea of ambient joint production: the case where a particular joint-product may be a free good, a good, or a bad depending on the context. This paper is one of a very few to formally analyze the environmental implications of industrial symbiosis by considering a case of ambivalent joint production.

Their model demonstrates that, if applied alone and without additional policy instruments, using all of the wastes from one process as the inputs of another may not be the optimal policy from an environmental point of view. In the model, labour is used in two production processes. Process 1 produces Good 1 and a by-product. This by-product in turn can either be used as an input into Process 2, or released into the environment where it becomes Emissions 1. Process 2 uses Emissions 1 and labour to produce Good 2 and Emissions 2. The proportion of Emission 1 to be used in Process 2 is represented by a, which can takes on any value between or equal to zero and 1. Social welfare is represented as a function of the amount consumed of Good 1, Good 2 and an environmental good which is degraded by the release of Emission 1 and Emission 2. Since it is assumed that the firms who produce the goods are not responsible for the damage their emissions inflict upon the environment, both Emissions 1 and 2 represent external costs.

58 f— \ -a Proccess 2 Good 2 ,

f Emission 2

l_ Intermediate Labour Product

1-a Emission 1

Process 1 Goodl

Figure 4.8 - Model of Industrial Symbiosis with Joint Externalities. Source: Baumagartner and Jost (1999), page 233.

Baumgartner and Jost proceed to identify the optimal proportion of a under three scenarios: 1) a benchmark case where both emissions are harmless; 2) an example where the release of Emission 2 alone damages the environment; and 3) the implications when both emissions are harmful. Since it is assumed that the firms who produce the goods are not responsible for the damage their emissions inflict upon the environment, both Emissions 1 and 2 represent external costs.

In the benchmark scenario, they found that a depended on the strength of the preference for Good 2 as compared to Good 1 and the relative productivity of labour of the two production processes. For example, the more Good 1 is preferred to Good 2, the smaller the proportion of Emission 1 that will desired as an input to create Good 2. Labour productivity has a similar effect: if labour is more productive in Process 1 relative to Process 2, a is smaller. When the emissions from the second production process are deemed harmful, the preference for the environmental good begins to matter. In this second scenario, the higher the value placed on the environmental good, the lower the value of a. Baumgartner and Jost argue that under this scenario the optimal value of a will always be smaller then in the previous case.

Lastly, in the scenario where both emissions were harmful, the desirable proportion of Emissions 1 to use in Process 2 not only depends on the value placed on the environment,

59 Lastly, in the scenario where both emissions were harmful, the desirable proportion of Emissions 1 to use in Process 2 not only depends on the value placed on the environment, but also the relative harmfulness of the two emissions: the greater the relative harmfulness of Good 2 to Good 1, the smaller the optimal value of a. As a result, the sale of the wastes now implies a trade-off between the two externalities which complicates the choice of a. Its optimal value may be now higher or lower depending on the relative toxicity of Good 2 to Good 1 (Baumgartner and Jost 1999).

Baumgartner and Jost's model considered the case where the second externality is produced by a separate production process. To my knowledge, no formal model has been developed that considers the possibility that a similar trade off may occur within a single production process. This may be the case if the sale of by-product induces the firm to increase the level of production and hence the releases of a third 'unusable' joint-product like a greenhouse gas. In either case, the concept of joint-externalities has important implications for the use of industrial symbiosis as a pollution reduction strategy, since it clarifies that the policy's environmental benefits depend on two factors: 1) which by­ product is more harmful and 2) the extent to which industrial symbiosis increases production of the composite good and hence the release of the third joint-product.

Where joint externalities occur, another policy instrument maybe needed to insure the optimum outcome. If there are two targets but only one instrument, industrial symbiosis alone cannot fully address both targets. An ideal policy would use one economic instrument to internalize one external cost and a second to address the other. For instance, industrial symbiosis could be applied to neutralize a harmful waste, while a carbon tax could be implemented to address any increase in greenhouse gases emissions the sale of the waste produced. However, it is worthwhile to note that this analysis depends on the existence of externalities; in the absence of a threat to the environment, the question of appropriate policy instruments is irrelevant.

60 4.5 Conclusion

The purpose of this paper was to examine the conditions under which Industrial Symbiosis would be a feasible tactic to 'internalize' the external costs of pollution. Assuming that the joint-products are produced in fixed proportions and that demand for both goods are independent of each other, it identified two potential problems with this strategy. First, there may be limits to the amount of waste the market may absorb or that the firm may choose to sell. The paper argued that this might be the case if the market for the by-product were imperfectly competitive or if the waste needed additional processing before it could be marketed. In these scenarios, industrial symbiosis strategies must be supplemented by other pollution reduction or elimination policies in order to achieve the closed-loop 'cyclical' industrial systems envisioned by industrial ecology.

Secondly, the marketing of a waste product may have unintended side-effects which could mitigate the environmental benefit of this market-based waste pollution policy. For one, when the firm is receiving additional income for each unit of waste sold, it will have an incentive to increase production of the composite good. If a non-renewable resource, like a fossil fuel, is one of the inputs, increased production may increase the rate of extraction. This side-effect may or may not be of great concern, depending on the magnitude of the firm's or industry's impact on the demand for the depleteable resource and the availability and price of substitutes. Another concern is the possibility that increased production of the composite good would entail the production of another environmentally harmful joint-production. In this case the environmental benefit of industrial symbiosis would depend on the relative toxicity of the two wastes and the value placed on the health of the natural world. Naturally, these arguments only hold under the presumption that the joint-products are produced in fixed proportions and the demand curves for the two goods are independent. An analysis which relaxes these assumptions may yield different results, and would certainly add additional insight.

This is not to say that industrial symbiosis is not a useful addition to tool kit of economic instruments policy makers can use to create more sustainable systems. As Kalunburg and

61 the past historical examples outlined in this essay have proved, using waste as a resource is a powerful idea that will likely become increasingly important in industrial production. However, this essay points out that industrial symbiosis' usefulness as a pollution reduction policy will greatly depend on the specific characteristics of the products and markets involved, meaning that while it may be highly applicable in some contexts, it may be less appropriate in others. Given the various factors discussed in this paper, the question of which conditions provide an appropriate context for industrial symbiosis may largely be an empirical issue. Possible candidates for an empirical investigation such a study could include the Canadian natural gas and sulphur industry, or eco-industrial parks in Ontario or the United States.

62 CHAPTER 5.0: CONCLUSION

Given the growing concern over the impact of industrial systems on the natural world, and the possibly grave consequences for the future well being of human race, it is essential to extend our understanding of the strengths and weaknesses of the tools we have at our disposal to deal with pollution. This thesis has attempted to increase knowledge about one such policy tool, namely industrial symbiosis, a concept developed within the nascent field of industrial ecology that is premised on a 'wholistic' or 'systems' approach to analysis. This is not to say that such approaches to examining economic or industrial system are never insightful: on the contrary material-flow analysis, green design and other methodologies developed under the rubric of industrial ecology have made important observations on the impacts of specific products or processes on the environment. However, in the analysis of industrial symbiosis, a process which is best described as a functioning of a self-organised systems composed of individuals and groups responding to various barriers and motivations, a systems approach may not be able anticipate the behaviour of the system or the full implications of a particular policy.

This point was made by applying the concept of joint production, an idea grounded in methodological individualism, to industrial symbiosis. The first chapter described this term and its emergence from the field of industrial ecology. It showed how one emblematic example, the industrial park in Kalunborg Denmark, coupled with the field's emphasis on systems analysis, led to the misconception of industrial symbiosis as a design principal for industrial parks instead of part of the normal functioning of a market system. The second chapter examined the economics literature pertaining to closed-loop systems, noting that little research had been undertaken on industrial symbiosis. It also described the concept of joint-production, an idea with long roots in the discipline whose implications are being re-evaluated in the light of the economic consequences of the laws of thermodynamics. Lastly, the idea of joint-production was used to show in the case of fixed proportions, industrial symbiosis may either be an incomplete form of waste disposal or exacerbate the industry's impact on the environment through the production of joint externalities.

63 However, there remain several interesting and pertinent questions not addressed in this paper. For instance, how do firms actually make the decision of how to dispose of their waste? The analysis in Chapter 3 simply adopted the conventional assumption of a profit maximizing firm that operated as a single, indivisible entity. However, Posch (2004) has questioned the extent to which firms make the decision to join waste exchange network on a rational basis. While industries that generate a lot of waste or that face significant disposal costs may spend a lot of time and resources into minimizing that expense, when waste is less important to the firm's bottom line the decision may be much less reasoned out. In this case factors like lack of information, firm culture or what is most expedient to the decision-maker may play a more important role in determining the firm's behaviour then a simple calculation of costs and benefits (Posch 2004). A greater understanding of how firms actually make their waste disposal decisions would greatly ease the process of establishing closed-loops systems.

Another issue is the role industrial symbiosis plays in regional development and industry organization. As mentioned in Chapter 2, 19th century economist von Thiinen suggested that the exchange of joint production may have a role in the development of cities, an idea echoed by Desroches in his historical examination of industrial symbiosis networks summarized in Chapter 2. More recently Cote (2006) has drawn from Michael Porter's work on industrial clusters to suggest that industrial symbiotic networks may yield interesting new forms of industrial organization. In essence, an industrial cluster is a group of geographically co-located firms that are networked into horizontal and vertical relationships based on buyer-supplier relationships and shared economic institutions. Examples include information technology Silicon Valley in California and the similar cluster of high-tech firms in Ottawa. Industrial symbiotic networks may cause firms in different industries to cooperate in a similar manner, yielding more sustainable economies: In natural ecosystems, it is in fact the connectedness among species rather than simply the number of species that is key to maintaining stability.. .This is essentially what industry means by networking. What is

64 noteworthy is that by modifying a few words, the definition of industrial clusters could just as easily describe an assemblage of flora and fauna with its supporting physical infrastructure (habitat). (Cote 2006; 119). Thus, understanding the full benefit of industrial symbiosis may mean paying more attention to inter-firm forms of organization and cooperation.

When used in the right context either alone or with other policy instruments, industrial symbiosis has the potential to greatly reduce the impact of industry on the natural world. In the worlds of Robert Frosch, one of the pioneers of industrial ecology, it is an important step in the right direction: [T]ogether we must find a way to end the polarization on environmental and waste issues and find a way to bring various views together to bring a better integrated industrial ecology into being: a system that will really be able to minimize waste by both preventing and using it.

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