Bank, borrow or buy? A model for LATS
A financial model has been developed to help local authorities decide whether to bank, borrow or buy LATS allowances. Richard Smith explains
The 1999 EU Landfill Directive required a 25% reduction on 1995 landfill levels by 2010, and a 65% cut by 2020. To implement these requirements, local authorities are being assigned allowances for the amount of residual biodegradable municipal waste (BMW) they may landfill. Achieving these considerable reductions faces another major obstacle – the waste we produce has been growing by about 3% every year, although this growth rate is now showing sign of decline.
But these allowances are backed up by a bite – authorities will face fines of £150 for every tonne of BMW landfilled beyond their allowance limit in any year, and the allowance will be progressively reduced. To provide further incentive to the need to address the allowances, and also to give some flexibility to the demands they impose, a complex system of trading is envisaged whereby authorities using more landfill can buy allowances from those using less – the landfill allowance trading scheme (LATS).
Simple solutions required
It is my belief that straightforward software is needed to help LAs with this extra complication in making their decisions as they grapple with the realities of the tightening limitations on waste management. To address this, Capita Symonds has developed a LATS Model to help LA decision-makers from a range of disciplines to agree on a common strategy on which waste treatment facilities are required and when, and on how best to approach the management of LATS.
Whether the department is planning, waste operations, procurement or finance, the LATS model enables the user to estimate how much BMW will need to be managed in future years, irrespective of LATS allowances, and how the tonnage may evolve over time. It can also estimate the impacts of the current and planned treatment facilities in dealing with these amounts – taking into account when new facilities may become available, how well they may perform when they are working – is calculated, thus arriving at the amounts of residual waste that would need to be landfilled.
Using these amounts, the model shows whether there would be a surplus or deficit of allowance in any particular year. An authority can then use the model to test how to deal with these surpluses or deficits. The model allows the user to see the interaction between the strategy and allowances for a range of possible variations. These variations might include:
- different assumptions about future patterns of waste arisings and composition
- different assumptions about the capacity and start date of future facilities
- changing information on delays to the completion of facilities by allowing the user to assign different probabilities to different outcomes rather than a single ‘guestimate’
- changing assumptions about facility performance for the first year of operation and the years to follow.
In use, the model initially estimates the tonnage of BMW that needs management, by looking at a series of factors such as number of households, inhabitants, and so on. It allows the user to input the future performance of existing treatment facilities and so indicates the need for additional or different facilities. Users can then define the types and capacities of added treatment facilities including when they will start and how well they will perform. All this then feeds through to the implications for LATS allowances by generating a pattern of surplus/deficit projections which users can try to reconcile by combinations of borrowing from future allowances, banking them for future use, buying or selling them.
The model also allows different estimates of the prices at which LATS allowances may trade in future, making it easier to judge whether additional expenditure on facilities (for example by bringing forward the start date of new capacity) is likely to be justified, or even whether it may be better to pay the fines for a short period. While the model will not give a magic answer, it shows a direct connection between the performance of the technical waste management strategy and the financial impact under LATS. This can be used as an aid to decision-making on both the technical and the financial aspects of a waste management strategy.
Richard Smith is associate director at Capita Symonds
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