Methane emissions, largely driven by human activity, account for nearly 45% of current net global warming, with waste contributing approximately 20%. Despite this meaningful impact, financial investments in organic waste management remain critically low and disproportionately focused on large-scale projects. A staggering 94%, or $4.08 billion, of methane abatement finance in the waste sector was directed towards waste-to-energy incinerators in 2021 and 2022. In stark contrast, only 1%, or $20 million, was allocated to organic waste management.

Furthermore, these projects often overlook the inclusion of local communities and informal sectors, notably in emerging markets where these groups are significantly affected by waste management initiatives and actively participate in climate action.

Decentralized Models: A Cost-Effective Solution

A financial analysis conducted by the Climate Policy Initiative (CPI), under the coordination of the Global Alliance for Incinerator Alternatives (GAIA), examined various waste management business models in Indonesia and Brazil. The findings reveal critical insights into the efficiency and inclusivity of different approaches.

• Limited Public Budgets: Public budget allocations for waste management in both Indonesia and Brazil are low and primarily directed towards large-scale projects. Brazil allocates a higher percentage, ranging from 1.9% to 5.1% of each municipal budget, compared to Indonesia’s 0.3% to 2.4%.
• Cost Efficiency of Decentralized Models: Waste management operators employing decentralized models demonstrate greater cost efficiency. These include community groups in Indonesia, and waste picker cooperatives and home composting initiatives in Brazil.
• Competitive Levelized Cost of waste Management (LCOW): Community-based and informal operators are competitive in terms of LCOW, despite having the lowest operating margins.

Specifically, community groups in Indonesia had an LCOW of $28-$63 per ton, compared to $11-$92 per ton for private operators and $49-$59 per ton for government operators. In Brazil, home composting had an LCOW of $1.69-$19.12 per ton, waste picker cooperatives $17.63-$20.90 per ton, private operators $74.65-$324.10 per ton, and government-operated facilities $22.96-$46.36 per ton.

• Advantages of Decentralized Models: Decentralized models achieve cost efficiencies due to advantages in capital expenditure and operational expenditure. Capital expenditure on fixed assets, such as land acquisition, contributes significantly to total asset value, accounting for 89% in relevant Indonesian cases and 58% in Brazil. This presents a major barrier to entry for industrial players but less so for decentralized models like home composting.
• Labor-Intensive sector: Operational expenditure is the main cost driver for all groups across both countries, except for home composting in Brazil.Labor is the largest operational expense, ranging from 74% to 98% in Indonesia and 48% to 90% in Brazil, highlighting the labor-intensive nature of the waste management sector and its potential for job creation.
• Co-benefits: Co-benefits are particularly evident in government- and community-operated business models, including job creation, provision of food from farming using waste management byproducts, and improved air and water quality from reduced methane and CO₂ emissions from waste processing and transportation.
• Complex Capital Structures: Community groups have the most complex capital structures, comprising finance from private entities (49%) and the government (48%), and also grants from corporate social duty and philanthropic sources (3%). Though, their operational funding is entirely derived from their operational revenues, creating financial strain due to small waste processing volumes and high labor dependency. Reliance on shorter-lived assets further increases their need for recurrent capital inflows, placing pressure on their funding mechanisms.

Recommendations for Scaling Up Financing

Based on these findings, the following action items are recommended to help scale up financing for organic solid waste management in Indonesia and Brazil:

1. Holistic Approach: Design a holistic approach to waste management, linking it with other critical sectors such as health, environment, and climate change mitigation.
2. Stakeholder Involvement: Involve all stakeholders in waste management, including communities and informal workers. The government should lead, coordinate, and involve all stakeholders, including informal workers and community groups that participate in waste management activities, as neither the public nor the private sector can fully cover all waste management needs alone.
3. Measurable Indicators: Create measurable and transparent indicators to evaluate the implementation of waste management interventions. Both public and private projects should have a monitoring and evaluation system with measurable indicators, including to calculate budget savings from upstream organic waste management.
4. Legal Status for Informal Workers: Create legal status/certainty for informal stakeholders in the waste management sector.It is significant to create a legal contract between all waste management operators, including informal service providers, with the government or other entities receiving the service, to ensure cash flow and thus equal access to project financing from banks or other private financing institutions.

Expert Insights

Experts emphasize the importance of integrating waste management into broader sustainability strategies. As one analyst noted, Waste management should not be considered in isolation; it should be linked with other importent sectors such as health, environment, and climate change mitigation.

Another key advice focuses on inclusivity. The government should lead, coordinate, and involve all stakeholders, including informal workers and community groups that participate in waste management activities.