A new commodity to trade

Recyclers operating in the plastics space know historic market challenges all too well. First, when virgin material pricing goes down, demand for recycled material can follow. Second, brands have created a sizable, collective demand for recycled plastic, yet the available supply of material does not meet the material specification for food contact, color or some other aesthetic or functional quality. Lastly, the cost of baled feedstock can vary widely. All these challenges can create a volatile scenario where raising capital for new investments is difficult and recyclers encounter barriers to expansion.

While the plastic recycling industry has been around for around three decades, it is still in the process of maturing to achieve the scale that is necessary for recycled plastic inputs to overtake virgin inputs. This is not unlike the challenges other emerging markets have faced, such as the green energy market. A key funding mechanism for expanding the green energy market to its current scale has been the use of an environmental commodity known as a Renewable Energy Certificate, or a REC. Under the new Recycled Material Standard (RMS) program from Charlottesville, Virginia-based GreenBlue, a similar commodity trading system has been developed: Attributes of Recycled Content, or ARCs. Its early supporters say they see vast potential in the new system.

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A new market is born 

In the second quarter of 2023, Granite Peak Plastics, St. Louis, became the first recycler to have ARC credits purchased in the new ARC credit trading system. Granite Peak Plastics became one of the first recyclers to become eligible to generate ARCs when the company achieved RMS certification in December 2021. When selling material into a market that does not benefit from the claim of recycled content, an RMS-certified ARC generator can strip the claim from the material (becoming a credit), then simply sell the plastic or finished product without a claim. 

Being in this position, Granite Peak Plastics found ARCs have given it some unique operational flexibility. Granite Peak Plastics has the option of selling its postconsumer polyethylene (PE) as recycled PE or simply as PE, depending on the customer needs and market conditions. When the postconsumer PE is sold simply as material, the company can issue an ARC for sale to a company that wants to support investments in PE recycling. 

In the case of this first ARC transaction, that business was Atlanta-based Veritiv Corp., a distributor of packaging across North America. As a distributor, Veritiv does not have its own package processing capabilities, but the company has a stated goal to “drive product development to increase recycled and renewable content and minimize virgin material usage.” However, Veritiv has limited control over materials selected by vendors. When a company is in that position, how can it support the use of recycled materials without being able to fully control the materials in its supply chain? ARCs become the perfect tool to address that. 

“At Veritiv, we have a passion for uncovering and solving problems in every area of our business, including sustainability,” Martha Issa, senior director of Sustainability at Veritiv, says. “Despite the unprecedented focus on improving recycling, there is still not enough recycling infrastructure; therefore, we are pleased to have found this new approach to owning the investment into recycling and reusing plastics. Sustainability is both a responsibility and an opportunity to drive growth, profitability and long-term value while leaving a lighter footprint on our planet. By investing in the circularity of single-use plastics, we can improve the overall environmental impact with regard to the packaging products we distribute.” 

The transaction of environmental commodities, such as RECs or ARCs, can occur directly or be facilitated by a third party providing environmental solutions—a brokering-type structure that many in the plastics recycling world are familiar with. In this case, ACT Commodities, an organization well-known globally for providing renewable energy, carbon credits, renewable fuels and other decarbonization solutions, linked the seller and the buyer of the ARCs.  

“The role ACT plays is critical in representing ARCs to their customers,” says Greg Janson, president and CEO of Granite Peak Plastics. “The customers that ACT is talking to are not typically customers that we would be talking to, so a broker has a purpose, and that’s to introduce something to an audience that the producer is not going to have.”

“We are excited to see this first ARC transaction take place,” says Angela Choi, a trader at ACT Commodities, which has a U.S. office in New York City. “Having seen the power other environmental markets have had on lowering global emissions and advancing the global energy transition, we believe it will catalyze investment in the plastics recycling industry to scale the solutions that will enable brands to meet their circularity goals much more quickly than natural market maturation would enable.” 

To learn more from the three parties involved in this historic first trade of ARCs, a recording of a recent webinar on the topic can be viewed on the RMS website. 

Continuous improvement is key

Now that the first trade has occurred, a number of recyclers are looking at the opportunities ARCs could create for their businesses, and various companies are looking at how ARCs could help them meet goals to support recycled materials use. At the core of any credible environmental commodity trading system is integrity and quality assurance. This is achieved by ensuring recyclers and auditors understand the tight parameters for ARC eligibility. Recyclers not only have to meet the operational requirements of the RMS, but their assets producing recycled materials also must meet eligibility requirements, including additionality criteria. Additionality can be demonstrated by showing that capacity is created beyond business as usual because of the investment. The RMS has Legal, Newness, Common Practice, Financial, Technology or Performance Benchmark tests to qualify for additionality. 

While this first transaction occurred smoothly, the RMS team saw an opportunity to provide additional guidance on what type of recycler could qualify for ARCs. Specifically, it was necessary to clearly define which recyclers could generate ARCs in the instance that material is not being transformed into pellets but instead being sold as flakes for manufacturing. A wide range of operational differences and capabilities can be seen in recyclers generating flaked plastics as compared to those producing finished pellets. For example, should a recycler shredding PET bottles and selling dirty flake be eligible to generate ARCs? (Remember the purpose of ARCs is to meaningfully drive investment that rapidly will evolve the system, so that level of activity would not be eligible to generate ARCs.) On the other hand, a recycler that shreds those bottles and takes that flake through a number of value-add processes to meet the specifications of an end market could be eligible to generate ARCs. 

Given the range of varying capability in this space, the RMS team wanted to develop guidance that would, first and foremost, maintain the spirit and integrity of the standard and, secondly, reflect industry practices and be implementable by recyclers and auditors. To ensure the guidance being developed was representative of the industry, the team assembled recyclers reprocessing different types of plastics for different industry verticals. The resulting guidance document very clearly describes which recycling activities will make an RMS-certified recycler eligible for ARCs and which would not. After collaborative development and careful review by the RMS advisory committee, this new ARC guidance is expected to be published in July.   

The future forecast of credit systems

Like RECs, ARCs are an environmental commodity designed to help an immature industry scale rapidly. So, where are we today with RECs and green energy? RECs were launched in 2001 to enable companies that didn’t directly have access to green energy supplies to support the growth of green energy. Today, green energy is generally at cost parity with fossil-based fuels, and renewable energy is expected to dip below and likely remain less than the cost of nonrenewable energy soon. We have reached an historic inflection point in the economics and scale of renewable energy, and RECs had a significant impact on that.

What happens to the REC commodity trading industry once renewable energy is cheaper and more readily available than nonrenewable energy? Very likely this funding mechanism goes away and natural market forces take over. The same can be said for the fate of every environmental commodity. The goal is to scale the new system to the point that a financial intervention is no longer needed. The same goal exists for ARCs. They are a market intervention that is needed now and, if we are collectively successful in scaling the use of recycled plastics and other materials, it will be a market intervention that can hopefully be retired in 20 years or less. To the skeptics who are concerned that ARCs or other plastic credits will displace direct use and demand for recycled materials, consider how effective they can be when they are used appropriately.

“Circularity is a huge and complex problem that is going to take a pretty wide portfolio of approaches and solutions,” Choi said during the recent webinar. “One of the largest hurdles that we identified, specifically in the United States, was a lack of capital from both public and private sources to update and upgrade recycling systems. And we saw a similar issue with renewable energy years ago, which has been really bolstered by the REC trading systems, and we now see renewable energy as a top priority.”

In Choi’s view, the future looks bright for this new commodity. “The ARC system is a conceptual analog of the RECs; but, for plastics recycling, we are anticipating a very similar expansion of the recycling infrastructure through the sale of ARCs to properly process plastic waste.” 

It is an exciting time to be in the recycling industry and particularly the plastics recycling industry. With the rise of new best practices through standards, voluntary action in conjunction with new regulations driving change and entirely new markets for commodities emerging that will directly support recyclers, the recycling industry of today will look very different than the industry two years from now, and it’s the recyclers who will drive that change.

Kim Holmes is a research consultant for the Recycled Materials Standard and the principal consultant at 4R Sustainability Inc., based in Portland, Oregon, and can be reached at kholmes@4RSustainability.com.