How financial innovation could ease the plastic-pollution problem

Amid public concern about the global plastic-pollution crisis, companies recently have begun stepping up their efforts to eliminate single-use plastics and do more with recycled plastic. It’s a sensible move, in principle. But plastic, a material so common that we hardly notice it, has proven devilishly difficult to recover and process for reuse. Just 16 percent of plastic waste is collected for recycling — less than the fraction that leaks into the ocean. The remainder is either burned or landfilled, wiping out nearly all its value.

One reason why so little plastic gets recycled is that demand for recycled plastic fluctuates with the price of oil. When oil prices drop, virgin plastic can be made inexpensively, so demand for recycled plastic weakens. The periodic softening of the recycled-plastic market makes it hard for recycling companies to attract the capital they need to scale up — or even to stay in business. And without a major increase in plastic-recycling capacity, companies will be unable to source enough recycled plastic to make a dent in the world’s plastic-pollution crisis.

The first step toward unlocking investment in new recycling capacity should be to establish less-volatile supply and demand conditions. Reduced price volatility would create certainty for recycling companies and potential investors across a medium-term horizon. Volatility-reducing mechanisms that have succeeded in other commodity markets also could work for plastics recycling, either individually or as elements of a hybrid solution.

Subsidized insurance. The most market-driven approach we’ve seen is subsidized insurance. The U.S. Department of Agriculture, for example, administers a crop-insurance program to protect farmers against supply-side and market shocks. With crop insurance, farmers receive payouts when they experience yield losses, or when market prices fall precipitously. Notwithstanding some complications, the program covers about 80 percent of U.S. cropland and has helped small suppliers survive rough patches.

The crop-insurance policies are available because of a public-private partnership, whereby the U.S. Department of Agriculture subsidizes the cost of reinsurance to approved private insurers and establishes premium rates along with terms and conditions. Such an arrangement could be replicated for recycled plastics, with plastics-pricing insurance policies supported by an endowment, which corporate players or governments might fund, or an insurance company might back.

Cost-plus contract. A different mechanism is a cost-plus contract between suppliers and customers, which has been shown to keep dairy prices steady. Faced with volatile milk prices that could fluctuate as much as 20 percent in a month, Danone, the food company, made multi­year deals with sustainably run family farms that supply its North American and European businesses. Under Danone’s cost performance model, the farms secure long-term contracts to supply fresh milk to Danone and, in turn, agree to be paid a fixed margin above their cost of production and to commit to continuous improvement. Danone and its suppliers all benefit from predictable pricing, and Danone can market its products as sustainably sourced.

In the recycled-plastics market, cost-plus contracts could function similarly, creating demand and pricing certainty while ensuring that recyclers treat workers ethically and meet environmental standards. Furthermore, depending on the length of these contracts, they can create the longer-term demand stability that would encourage investment. Some companies are experimenting with such contracts between themselves and cooperatives of waste workers in Latin America. These small-scale experiments could provide a starting point for cost-plus contracts that cover an expansive and diverse group of waste-collection companies, recycled-plastics processors, recycled-plastics buyers and other organizations.

Fairtrade. Another program based on cost-plus pricing is Fairtrade, a far-reaching effort to hold prices paid to suppliers for goods, from coffee to soccer balls, above a threshold that allows for fair wages and working conditions and environmentally sustainable practices. The general concept is to establish a minimum commodity price for each market. Buyers that agree to pay that price for a commodity can then sell it as a Fairtrade product. The program includes a system to certify whether suppliers are meeting Fairtrade’s social and environmental standards.

Since the certification process can be complex, companies that participate need to believe that the extra effort is outweighed by the benefits of certification (such as risk mitigation and perceptions of products). But once a certification system is set up for plastics recyclers, a Fairtrade-style program could help many small recycling companies across different countries.

Price floor. The need for large-scale solutions points to another volatility-reducing mechanism: the price floor. To take one example, the Food Corporation of India (FCI) sets price floors for 24 crops at the beginning of the sowing season, in line with global commodity prices. Should the market price of a crop fall below the FCI’s price floor, the Indian government steps in to buy farmers’ harvests of that crop at the designated price. The government then distributes the purchased crops to needy populations. This system has helped to limit price volatility for the 24 crops covered, thereby providing greater economic security for a significant number of small farmers.

For recycled plastics, a price floor would need to be established by a government at a regional or national level. The buyer of last resort could be a government or a group of corporate players, who would have greater access than small producers to a global market for resale or use. The price-floor and last-resort buying requirement would have to be backed up by efforts to ensure demand for the recycled plastic, so that last-resort purchases do not go to waste.

Volatility-reducing mechanisms alone will not end plastic pollution, but they can stimulate investment in the programs and infrastructure required to recapture and recycle substantial amounts of plastic. They also could provide models for other commodities, such as metal and paper, whose price fluctuations also limit the scale of recycling.

Whatever the approach, the goal should be a stable market that fosters investment in recycling collection, sorting and processing. Without more recycling, the world is unlikely to solve its plastic-waste problem, or indeed its waste problem as a whole.

Shannon Bouton and Cynthia Shih are global leaders at McKinsey.org.