The Finance behind the Plastic Problem
The plastic problem has become a major talking point across the entire world. Almost every country in the world is alarmed with how much plastic is being used and the effect it has on the environment. Plastic is an extremely convenient product to use. However, the problem with plastic is that when it is disposed off, it tends to pollute the environment. Plastic is disposed off either by burning it or by dumping it in landfills. However, both these methods are toxic and pollute the entire ecosystem.
The harmful effects of plastic can be minimized by recycling it. This is why governments all over the world try to incentivize the use of recycled plastic over virgin plastic. However, even after all the encouragement, less than 16% of the total plastic used in the world is recycled!
In this article, we will try and understand the financial dynamics which make it economically prudent to use virgin plastic over recycled plastic even though it may be disastrous for the environment.
The Financial Reason behind the Economic Disasters
Before making any policy decisions, it needs to be understood that money is an important motivator and influences the decisions of people. Once this premise is understood, the plastic problem can be seen in financial terms.
The real reason why more plastic is not recycled is because of supply constraints. There just arent enough factories in the world that have the infrastructure to take in used plastic and recycle it. The obvious solution would be to create more factories. However, the more pertinent question is why private individuals arent creating such factories if they know that there is a demand for recycled plastic.
The answer lies in the volatility which is inherent in the plastic market. Recycled plastics are economically viable when the prices of oil are high. This is because plastic is a byproduct of oil. Hence, to produce more plastic more oil is needed. If oil is cheap, producing virgin plastic is cheaper. On the other hand, if oil is expensive, producing recycled plastic is cheaper.
The business of recycling plastic is therefore cyclical. Since there is no stable demand for recycled plastics, private individuals and companies do not want to invest in producing it. Also, since the ones producing it are taking a lot of risks, they tend to inflate the prices to earn a premium for the risk that they have undertaken. These inflated prices make recycled plastics less viable.
The bottom line is that if the volatility in the recycled plastics market is somehow reduced, it will attract more investment. When larger amounts of plastic starts getting recycled, businesses will face economies of scale, and the product will automatically become more competitive vis-à-vis virgin plastics.
How to Reduce Volatility?
The oil market is an international market. It is not possible for any one country or any one body to control the price of oil in the world. Since the market is volatile by nature, it will remain so. However, financial innovation can be used to make the market for recycled plastics less volatile.
Lets have a look at some of the methods that can be used to achieve this objective.
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