Liberalization in the Danish waste sector: an institutional perspective

Infrastructure/resources, actors and rules/norms

In the context of the IDA framework (Figure 1), the physical infrastructure and resources refer to both the waste management facilities and the waste itself. Denmark currently has 27 waste incineration facilities in operation, of which seven are privately owned and the other 20 are owned either by a single municipality or by a group of municipalities (Danish EPA, 2010). Danish regulation that was implemented as part of the previously mentioned DWM prevents competition between domestic incineration facilities. Therefore each incineration plant, regardless of its ownership, has access to the following waste streams: MSW produced within the boundaries of the municipalities with ownership in the waste incineration plant; MSW from neighbouring municipalities, which do not have ownership in an incineration plant, but have contracted the use of an incineration facility for treatment of their MSW; industrial/commercial waste produced within the municipal area of the owner municipalities; industrial/commercial waste from municipalities that do not have ownership in an incineration plant; and industrial/commercial waste classified as suitable for incineration produced in other MS. In Denmark, MSW is defined as all waste that is collected from municipal collection schemes, which includes all household waste, as well as waste from institutions, commerce, offices and enterprises, which has a similar composition to household waste (Danish Parliament, 2012).

Currently, there is an installed excess capacity in the waste incineration-sector in Denmark (Danish Waste Association et al., 2014). This means that there is more technical potential for incineration of waste than there is domestic waste to utilize the invested capital. From 2009 the WFD (EU, 2008) has allowed industrial and commercial waste, classified as suitable for incineration, to be exported across MS boundaries for treatment in incineration facilities, which have obtained R1 classification (Hermansen, 2012). R1 classification denotes that the facility achieves a high level of energy recovery, and all 27 operational Danish incineration facilities have obtained this classification (EU, 2008). This situation has led to an increased net import of industrial/commercial waste for Danish waste incinerators (Danish EPA, 2013).

The actors that are relevant to the action arena of the IDA framework are: Danish municipalities, which are responsible for the management of MSW; joint municipal waste companies that have invested in incineration facilities; central public authorities in Denmark and other MS (particularly in neighbouring countries), which control the regulations and (to some extent) pricing structures for incineration; Danish and foreign producers of industrial/commercial waste; and the associated interest groups of these actors. Each of these actors has a different agenda and set of priorities. When the municipalities are involved, different organizations within one municipality may have different agendas. For example, the waste utility in each Danish municipality has the primary priority to ensure that there is access to sufficient incineration capacity in order to handle the waste of its citizens. On the other hand, it is paramount to a municipally owned (inter-municipal) waste company that has invested in incineration capacity that the economy of the incineration plant is optimal, which means ensuring a steady supply of right-quality waste to utilize the capacity of the incineration plant.

In Denmark, as in all EU MS, the regulation of waste is a combination of both EU and national regulations. The broad frameworks and principles for how waste should be managed is found in the EU regulation, but the implementation of the EU regulations as well as the organization of the waste sector is the responsibility of each MS itself. One aspect of Danish waste regulation, which limits the choices of actors in this action arena, is the application of taxes and regulation of the pricing of public utilities.

Denmark is one of six MS currently levying taxes on incinerated waste (European Commission DG ENV, 2012). When waste is delivered to a disposal facility, either a landfill or an incineration plant, the fee paid is a combination of the waste tax and a gate fee, which is a service fee, collected by the facility for treating the waste. The Danish rate of incineration tax is higher than in any other country, with €44 being charged for each tonne of waste incinerated (European Commission DG ENV, 2012). The gate fee can vary significantly from one facility to another, depending on the individual economy of each facility. There are many factors responsible for these differences, but one of the most important factors is the local price for district heating, as this represents the main income of the incineration facilities (Danish Waste Association et al., 2014). In 2013, the variation in income from sale of heat ranged between €6 and €14 per GJ (Danish Waste Association et al., 2014).

Three regulatory elements set the price of heat from incineration plants: (1) the ‘non-profitable-organization’ principle stating that each facility must have an independent economy, which covers its own costs without generating a profit; (2) a limitation as to what percentage of revenue comes from the sale of heat preventing the treatment of waste being subsidized by customers’ pay for heat; and (3) a nationally set price cap on the price of heat. Due to these pricing regulations, the limiting factor for the expansion of incineration capacity is the demand for heat on the local district-heating network. In a market situation where waste can be imported from other countries, there is a potential for areas with a high heating demand to expand their incineration facilities beyond the domestic supply of waste. This may explain why Denmark is witnessing a continued expansion of the incineration capacity, despite the fact that there is already an existing over-capacity.

Outcome: limited liberalization

By 2002, it was widely believed in the action arena that the Danish waste sector would need to undergo a reorganization due to an increasingly liberalized EU environment, and a liberal-conservative government pushed for the same. The anticipation that the EU market for waste would be opened spurred the Danish EPA to set up a cross-ministerial working group to investigate how the waste sector may be reorganized to incorporate liberal market principles. This group reported their findings in 2004 (Danish EPA, 2010), but at this point the new FWD was put forward and the group’s work was postponed. The report is one of several that have been conducted over the last one and a half decade on the organization of the sector. The reorganization of the waste sector in 2010 has to varying extents drawn on the findings of all of these different analyses.

In the authors’ review of eight such reports (Bøgelund and Larsen, 2004; Bøgelund et al., 2002; Brix, 2010; Copenhagen Economics, 2004; Danish EPA, 2010; Ea Energianalyse, 2010; Incentive Partners, 2010; Mortensen et al., 2011) we found that there were three general scenarios for liberalization that were investigated and compared:

The main difference between the two liberalization scenarios is that under the mixed scenario, which was chosen, there is no competition for MSW among the incinerators in Denmark. The main argument is assumedly to protect the district-heating sector, which has not been liberalized.

The intended outcome of the liberalization of the Danish waste sector is that it will lead to both a socioeconomic and an environmental benefit. Liberalization of public services is part of the neo-liberal economic agenda that is currently dominant in the European political landscape. Neo-liberal economic ideals underpin the single market principle, which is the foundation of the EU directives (European Commission, 2000). The assumption is that a single, competitive market will be more efficient than governments in running public services, and that the pressure to be as efficient as possible will equate into more technological advances and simultaneously a decreased cost for society as investments will only be made where they can be economically justified. One interesting observation that can be made when applying this (economic) thinking to the Danish waste sector is that the DWM, which is characterized by being highly regulated and dominated by public ownership without any aspect of competition has developed one of the most efficient waste systems in Europe (apart from, in particular, recycling of household waste). Regardless of this, it is assumed that further efficiency can be achieved in a liberalized waste market.

When discussing the level of choice of the different actors, we can then see that the regulatory and normative institutions of the EU and the Danish institutional and political landscape, have determined how the Danish waste sector is being liberalized. The Danish EPA on the one hand side is bound by some regulatory and normative institutions to implement at least a level of liberalization allowing for industrial and commercial waste suitable for combustion to be traded on a European market. On the other hand side, it is bound by other institutions to leave the existing system as unaffected as possible. The choice made by the Danish authorities as to how and when the sector should be liberalized is still developing, however slowly but in a continuing process.

Welfare-state worldview underpins the Danish Waste Model

An institutional explanation for the decision to inhibit the competition between Danish incinerators can be found in the welfare-state worldview that underpins the structure and operation of the DWM. All waste incineration facilities in Denmark, whether they are under public or private ownership, must operate under a set of economic restrictions. These regulations dictate that an incineration facility must not operate at either a profit or a loss in the long term. This is to ensure that both waste treatment and the sale of heat remain affordable services for all citizens. In addition to this, the price that can be demanded for the heat produced is capped at a level that ensures that it is competitively priced with the available alternative sources, and a facility’s income from the sale of heat must not exceed one third of the facility’s economy in order to ensure that the sale of heat does not subsidize the treatment of the waste.

This regulatory structure favours the municipal ownership of incineration facilities as it renders incineration plants an unattractive investment for private actors. It also reflects a democratic principle of the Danish society that all citizens should have access to the same level of services regardless of where (in the country) they live. Since the partial liberalization of the waste market in 2010, two privately owned waste incineration facilities have ceased operating. However, the municipal-owned waste companies are not allowed to collect source-separated industrial and commercial waste suitable for recycling. This undermines the ability of the municipal waste companies to raise revenue from the sale of valuable resources, stressing the economy of the waste companies.

The lack of a more profound change in the sector may be considered path dependency or institutional inertia. A recent article on institutional inertia in relation to action on climate change suggests that individual actors in the role as institutional entrepreneurs can instigate change (Munck af Rosenschöld et al., 2014). This would suggest that in the case of the Danish waste sector, there is a lack of institutional entrepreneurs, or that the institutional structures are resistant to the agency of individual actors.

With the municipal waste companies unable to bid for the handling of recyclable industrial/commercial waste, it is presumed that the market will deal with this waste. However, another explanation why this waste – in general – is not being traded on the domestic market is that the amount of waste available in the Danish market is too small for recycling facilities to be economically viable. Therefore, the waste is exported to facilities abroad, in particular where transport costs are low. This was also common practice before liberalization, with the municipal waste companies only acting as traders of resources to primarily foreign recycling facilities.

The discourse in the waste sector tends to focus on technological factors. A technological lock-in by the dominant incineration facilities exists making the system inflexible to a smaller content of recyclable materials in the waste to be incinerated. At the same time, there is scepticism in the sector regarding the appropriateness of investing in new facilities for sorting recyclable waste streams.

Taxation of waste incineration influences domestic competition

One of the main choices of the central authorities affecting the competition among incineration facilities is the level of taxation applied to all waste that is incinerated. The Danish waste tax was established to ensure that landfilling is the most expensive option, whereas incineration is cheaper than landfilling but more expensive than recycling, which is exempt from tax. Whereas the landfill tax, which 20 MS have chosen to implement, has worked well in steering waste away from landfilling, the six MS that have implemented an incineration tax have not seen the same response in waste being shifted from incineration to recycling (European Commission DG ENV, 2012). In a comparative study, Dubois finds that waste taxation ‘is highly disparate across European regions’, and argues that a more coherent taxation with strong incentives for sustainable waste management is crucial (Dubois, 2013, p. 1776). In a liberalized market, an incineration tax placed in only one geographic region will steer waste away from local incineration facilities and toward incineration facilities in countries that do not have an incineration tax instead of the intended outcome of steering waste higher up the waste hierarchy. Due to low transport costs, it is possible to ship waste over long distances, and still maintain cost effectiveness. However, transportation of waste is not desirable due to transport-related emissions and the fact that it is counter to the proximity principle stating that where possible waste should be treated locally. Due to such experiences, the Netherlands, Sweden and Norway have all removed incineration taxes (European Commission DG ENV, 2012).

The Danish authorities have so far decided to keep the incineration tax, as the average total charge for incineration per tonne of waste (incineration tax plus gate fees) remains competitive with other MS (European Commission DG ENV, 2012). However, the situation within the country is that the gate fees vary markedly from one facility to another. In 2013, the gate fee ranged from approximately €33 up to €117 per tonne waste delivered (Danish Waste Association et al., 2014). The regulations preventing Danish incineration facilities from competing with each other for domestic waste so far has protected the most inefficient facilities from losing large amounts of waste. It is foreseen that if the barriers preventing competition are lifted and Denmark were to move to a more complete liberalization scenario, the incineration tax would also need to be lowered or removed (Mortensen et al., 2011). In a recent strategy document by the Danish Environment Ministry, it is made clear that ‘the government will modernize the incineration sector to ensure that waste is incinerated at the most efficient plants’ (Danish Government, 2013).

Supremacy of waste incineration leads to a technological lock-in

In the 1990s, several Danish municipalities experimented with separate collection of organic (biological) waste. As with all new technologies, the implementation phase caused difficulties, most of all in two municipalities in particular. For the biogas production in Helsingør Municipality, one of the factors causing a closedown was smell, another was nylon-stockings inhibiting the pulp-stirring; for the sorting system in Århus Municipality, the critical issue was the lack of real recycling, as large quantities of waste that had been source separated at the households had to be redirected for incineration (Danish EPA, 2011). This and other examples have contributed to a certain level of scepticism in the population that waste separated for recycling will in fact be recycled. Further to this, as the WFD recommends ‘Life Cycle Thinking’ (LCT) to be applied alongside with the waste hierarchy, and some of Denmark’s technical universities are active in the field of life cycle assessment (LCA), a series of LCA studies were carried through in the early and mid-2000s showing that in an environmental comparison biological treatment of waste had really no advantage to incineration. The environmental benefit gained from avoided fossil-fuel energy production was greater than the environmental burdens of incineration (Christensen, 2004; Kirkeby, 2005; Kirkeby and Christensen, 2004; Kirkeby et al., 2006). The LCA results from projects based on the so-called ‘Easewaste’ method were actually used basically to question the waste hierarchy: ‘… the study also showed that the prioritisation that traditionally has been used, the waste hierarchy, is not necessarily satisfactory when considering the environmental consequences. The waste hierarchy, which states that waste minimisation should be prioritized above recycling and reuse above incineration with energy recovery above the landfilling, may have functioned well until now, where new understanding and methods are available for a systematic approach of environmental assessment’ (Kirkeby et al., 2006, p. 35).

As the WFD allows for waste to be handled at a lower level of the waste hierarchy if LCT provides for a better environmental outcome, these LCAs were used to legitimize the Danish reliance on incineration. These studies, however, assume that the marginal fuel for electricity and heat production is fossil fuel sources. In a future with no fossil fuel energy, this benefit from avoided impacts will not be present. The studies have also been criticized for not including the terminal loss of possibly valuable resources, which is the case by incineration and for overestimating the CO₂-neutrality of the recovered energy. Given that there has been over 10 years of technological advancements, and that the models used for calculating environmental impacts have also been greatly improved, these LCAs are probably outdated. But the legitimacy that they gave to the activity of incineration of household waste survives. For practitioners at the incineration plants, an important reason for their reluctance to skip the biological waste and leave for other treatment methods is the fact that the remaining waste will have much higher calorific value necessitating a total and costly technical transformation of the plants.

On a domestic level, incineration was seen as the technology, which allowed for a shift away from landfilling, but more importantly, was also considered a renewable source of energy. A welfare-economic analysis by the Danish EPA in 2003, ‘Should household waste be burned or recycled?’ was decisive for the authorities’ choice of not following the path of recycling. The analysis, allegedly integrating environmental considerations concluded that, ‘… it is not worthwhile for society to recycle organic household waste by anaerobic digestion or central composting. Incineration is economically the cheapest option, followed by gasification, whereas the central composting is the most expensive option for society’ (Danish EPA, 2003, pp. 9–10, own translation). In a subsequent report ‘Account on the status of biological refuse’ (Danish EPA, 2003), the EPA repeats that biological waste treatment is more expensive than incineration due to a costlier collection of separated biological waste, but concedes that as local conditions may vary a great deal, biological treatment may be attractive in many instances. The analysis of collection costs was, however, based on very few data and rested on narrow assumptions of available collection technologies and remuneration systems. Overall, the analyses, in combination with the critical experiences of Århus and Helsingør Municipalities, strengthened the incineration discourse.

It is debatable to what extent waste is as a renewable energy resource, particularly due to the content of plastic wastes, which are essentially fossil fuels. The future necessity for heat is also questionable, as new demands for energy-efficient buildings will negate much of the current demand. In practice, the low price of district heating, facilitated by the provision of heat by the incineration plants, inhibits energy-saving measures in a large part of the Danish building mass, which as such accounts for 40% of the energy use in Denmark.

The technological lock-in is also related to the DWM in which the Danish municipalities, responsible for managing MSW are bound by regulation and by economic incentive to utilize the incineration facilities that they own themselves. As of December 2010, only 19 of the 98 Danish municipalities did not share ownership in an incineration facility (Danish EPA, 2010). In cases where a municipality does not own a share in an incineration plant, then it is the responsibility of the municipality to enter into a contract with an incineration plant that will accept its MSW. Furthermore, when comparing recycling and incineration rates in municipalities having incineration plant ownership with municipalities not having ownership, it is revealed that recycling of MSW is negatively affected by municipal incineration plant ownership (Danish EPA, 2010). Although the characteristics of MSW make it a poorer quality for incineration than certain industrial waste streams, in 2011 MSW represented 59% of the waste incinerated in Denmark (Mortensen et al., 2011). This means that Danish incineration facilities will continue to rely on MSW for stability of supply, and that municipalities need not fear being outcompeted by foreign waste, at least in the short to medium term. Furthermore, the WFD includes a provision that a MS can deny the import of waste shipments, which would displace the incineration of MSW (EU, 2008).