Is Mass Balance Accounting Good or Bad?
Introduction
In energy and environmental policy, the utility that comes from product consumption (like a fuel) often entails an environmental harm, especially upstream where the product is sourced. Consequently, producers who rely on potentially environmentally damaging inputs have cause to differentiate among feedstocks and other production inputs to capture the consumer value of a preference for material from specific sources (e.g., lower carbon fuels, recycled materials). But without separate infrastructure, certainty that a product is comprised entirely of a preferred input is not feasible. Policymakers and industry currently rely on a mechanism called “mass balance accounting” (MBA), which uses existing infrastructure to produce commodities that are partially comprised of a preferred source.
But MBA has become controversial in recent years—particularly in the plastics industry. Under MBA, plastic made from virgin oil can claim to be made from recycled plastic due to displacement. The policy issue is more complicated. Despite definitional critiques, the mechanism is intended to create a market value for preferred product inputs that otherwise would not be commercially viable and is key for many environmental policy and industry efforts to reduce pollution. Therefore, a better understanding of MBA is crucial for navigating current policy debates.
What Exactly Is MBA?
MBA is the idea that when materials enter a product stream, those specific materials are not tracked; instead, the net quantity of material is measured. This is especially important for products where inputs from various origins are mixed, since their separation would be impractical. This has some practical consideration for accounting, since it is much easier to estimate the proportion of a product that comes from a specific source than to track all materials, but it has considerable policy implications as well.
A good example of MBA in action is in the consumption of biogas, which is methane collected from livestock sources. Biogas is extracted using anaerobic digesters that extract methane from animal manure piles. Because methane is the combustible part of natural gas as a fuel, biogas and natural gas can be used interchangeably for electricity generation—even though their environmental impacts are quite different. Because biogas comes from a reduction of waste while natural gas is produced from virgin sources, biogas consumption reduces pollution.
Consider this as an example: If a natural gas power plant owner wanted to use biogas to produce low-carbon electricity, how would they source it? To be absolutely sure their power plant consumes only biogas, they could invest in building new pipelines and infrastructure that ensures direct connection to biogas sources; however, this would be enormously expensive. A much lower-cost alternative would be to use existing natural gas pipelines and infrastructure to transport biogas from its source to the power plant. But once the biogas is in the pipeline, it would be mixed with natural gas, making it impossible to determine if the power plant exclusively consumed biogas. This is where MBA comes in.
Under MBA, the power plant owner can claim credit for the consumption of biogas by paying biogas producers to supply the biogas that mixes with their natural gas supply. On net, the environmental effect is the same as (if not better than) if new infrastructure was built to supply the biogas, since its supply displacement effect under MBA is the same. Even though the power plant is truly burning mostly virgin natural gas molecules, they still supplied the resultant capital for the biogas that displaced virgin natural gas elsewhere—and if they paid for enough biogas to cover 100 percent of their operation, then they can claim their power plant operated on 100 percent biogas.
From an environmental policy perspective, MBA is the norm, and preferable for determining whether consumers are utilizing environmentally beneficial products. This is partly because it avoids the need for duplicative infrastructure, as noted in the previous example; however, the economic concept of “transaction costs” and their effect on environmental policy factors in as well.
A transaction cost is the cost associated with performing an economic exchange. For example, if someone takes their car to a mechanic, not only do they have to pay the mechanic, they must also invest time and resources to get the car there in the first place. This is a transaction cost. Ideally, when it comes to investing in environmentally beneficial activities, the cost to do so should be minimized, lest the transaction costs prove so large that they discourage those activities.
MBA minimizes transaction costs while maximizing environmentally beneficial activities. This is why environmentally focused policies like California’s Low Carbon Fuel Standard, the Regional Greenhouse Gas Initiative, and others use it.
MBA Controversy
Even though MBA has been the accepted norm, there is recent pushback against its utilization in recycling, particularly for “advanced recycling” (AR)—also called “chemical recycling”—involving plastics. Plastic recycling rates are difficult to improve, remaining at approximately 9 percent for the past decade. This is because plastic degrades as it is recycled, limiting the number of times it can be recycled and converted into usable materials. AR avoids this by reducing plastic back into its base components to be used again as feedstock. However, not all of that recycled plastic is of adequate quality to be used for new plastic, but it is sufficiently useful for producing fuel (just as plastic is produced from oil, making plastic into oil again can produce fuel).
Under MBA, firms using AR can convert plastic into petroleum fuels and then use virgin oil to produce new plastic. This is all considered recycling. However, some critics of AR argue that this shouldn’t count since resultant plastic products are not comprised of recycled material—and therein lies the controversy.
From an environmental perspective, whether recycled feedstocks from AR are used to produce fuel or plastic is irrelevant. The net effect (i.e., the total consumption of oil) is the same in either case. Even so, critics of MBA for plastic recycling would likely argue that the ability to claim the recyclability of plastic under MBA is central to plastic’s continued use. From the perspective of AR’s opponents, plastic manufacturers are trying to mislead people to believe that recycled plastic has more utility than it does and are leveraging recycling claims to do something they believe is net-harmful to the environment.
But from an outcomes perspective, restricting MBA would worsen environmental quality. Its purpose is to ensure that differentiated product sources can be equally utilized in production streams, and in the case of plastics, MBA encourages the use of AR to increase recycling and lessen waste. This is exactly how MBA is for biogas—it displaces virgin natural gas production in favor of something that lessens pollution. This is also the logic behind using MBA to ethically source minerals refined in the same facilities as unethically sourced minerals.
MBA enables environmentally beneficial activities by encouraging the use of existing infrastructure to reduce the costs of using recycled or preferred inputs. The absence of MBA would deter these activities, as it may not be feasible for such producers to incur the capital costs and burdens of generating new infrastructure—or, in the case of plastic, the effect would simply be to extract more oil to cover the absence of inputs from AR.
The opposition to MBA for AR is not rooted in strong environmental economics. Rather, it boils down to opposing mechanisms that could be used to sustain industries viewed as polluting. Because AR creates additional feedstocks for fuels, critics view it as sustaining the plastics industry and prefer a curtailment of plastic utilization altogether. Such an approach, though, ignores the fact that MBA does exactly what it is intended to do—increase recycling of plastic waste.
Policy Approach
MBA’s opponents must keep in mind that policy should focus on desired outcomes rather than selective application of protocols. If the desired outcome is lower emissions from petroleum fuel use, then policies that price or control those emissions would be more appropriate than rescinding the use of MBA in select industries. If the goal is to lessen plastic consumption, then policy should be targeted as such.
What makes little sense is the idea that MBA is fine for recycling or clean energy inputs for some industries but not others. This would introduce a new layer of politicking, where before investors in any type of environmentally beneficial activity that relies on MBA would have to consider eligibility. It would also introduce new ways to inject politics into environmental policy, where politicians could selectively grant the use of various accounting methods to preferred industries.
Conclusion
MBA is the standard means by which producers with differentiated inputs can value some inputs over others. As a matter of environmental policy, MBA enables activities like low-carbon fuels or recycled material to access incumbent infrastructure and expands the utilization of those product streams.
In controversies surrounding MBA, it is not the system itself that is critiqued, but the fact that it enables the support of industries that may have environmental externalities associated with them. While the intent of improved outcomes is laudable, attempts to restrict which industries can use MBA would be problematic from a policy perspective. Instead, policy ought to focus on effective mechanisms that directly target pollutants to be mitigated. Politicization of MBA could have unintended consequences, particularly for the many clean energy policy mechanisms that rely on it.