Turning Trash into Cash

Do you know how much you pay for trash collection?

Neither do I. And that's a problem, because it means that most of us throw away more than we should

It's a classic case of market failure, and one that can easily be fixed, as a startup called RecycleBank has learned. The company, which helps people turn their trash into cash, recently attracted a $2 million investment from Coca-Cola (Charts, Fortune 500), as part of the beverage giant's effort to promote recycling.

Let me explain why the trash market doesn't work in most of America. It costs money to collect and dispose of garbage, of course, and we all pay for it, usually through local taxes.

But since the costs are invisible in most places, there's no economic incentive to throw away less. That's one reason why U.S. residents, businesses and institutions generated more than 245 million tons of municipal solid waste in 2005, according to EPA, which says that's 4.5 pounds per person per day.

Much of what winds up in landfills - paper, food waste and yard clippings - could be recycled, reused or composted, which would save energy and reduce greenhouse gas emissions.

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What to do? One option is for local governments to charge people for trash pickup based on what they throw away, a concept called "pay as you throw." About 5,250 cities and towns, representing about 20% of the country's population, do just that.

But the idea of "pay as you throw" is often politically unpopular because it is seen, mistakenly, as a tax. It's actually just a way of allocating costs more fairly.

Another option - the one taken by Philadelphia-based RecycleBank - rewards people for recycling. Think of it as the carrot, as opposed to the stick. (Both can be recycled, by the way.)

Here's how it works: Customers who sign-up with RecycleBank receive a special container embedded with a computer chip. Every time the recycling truck comes for a pickup, it records the weight of the bin and transmits it wirelessly to an online account. Homeowners accrue up to $35 worth of credits a month based on the amount of recycling they do.

The credits, in turn, can be turned into coupons that can be redeemed at more than 300 retailers, including Starbucks (Charts, Fortune 500), Whole Foods (Charts, Fortune 500) and Rite Aid (Charts, Fortune 500).

In the end, homeowners save money, cities save money as disposal costs go down and Recycle Bank wins by collecting a share of cities' savings.

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It's green all around, as Ron Gonen, RecycleBank's chief executive explained when we met this week at the National Recycling Coalition conference in Denver. "We're a rewards and loyalty program that motivates people to take positive environmental actions," says Gonen. He's just 32, and cooked up the business plan for RecycleBank while studying for his MBA at Columbia.

Launched three years ago, RecycleBank has about 100,000 residential customers in Pennsylvania, New Jersey and Delaware. Recycling volumes have climbed across the board, according to Gonen.

In Wilmington, about 90 percent of residents participate in RecycleBank's rewards program, and the amount of garbage headed to the local landfill has dropped by about 40%. That saves the city, which pays roughly $70 a ton in tipping