Should we recycle paper? Roland Clift and David Pearce disagree about the most economical and environmental way of getting rid of rubbish. The paper industry is investing in recycling. The recent opening of a recycling mill at Aylesford increased the annual production of newsprint in the United Kingdom from 800,000 to 1.1 million tonnes. Used newsprint is now in demand, selling for Pounds 100 to Pounds 200 a tonne.

This is good news for the British paper industry. In the short term, it is also good news for the economy. Recycling shifts economic activity from the primary producer to the recycler. We import most of the paper we use, so recycling reduces imports. According to David Pearce, a former adviser to the Department of the Environment and a prominent figure in neo-classical environmental economics, we save more than Pounds 200 on our balance of payments per tonne of newsprint recycled.

But is recycling also good news for the environment? Like all capital-intensive plants, recycling mills must run continuously. The demand for waste paper has helped to push its price up. Even so, waste paper is now being imported. This should start to ring ecological alarm bells. How can long-distance movement of low-density waste, including transport by road, be good for the environment?

To find out whether paper recycling is an environmentally sustainable activity, we must go beyond economics. The question concerns the use of resources and environmental emissions, rather than who benefits economically. The appropriate tool is life-cycle assessment (LCA), also known as "cradle-to-grave" analysis. Rather than concentrating on the waste or on the factory, LCA looks at the whole supply chain, asking "where did this material come from, where will it go to, and what resources are used in processing or recycling it?" LCA can be used to compare the environmental impact of a range of ways of managing waste and where trade -offs between different impacts on the environment arise it exposes these without resorting to processes of doubtful validity like monetary valuation.

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Such analyses have already been carried out for paper recycling. The most detailed study is that by Virtanen and Nilsson. Its conclusions have been rejected by some because the authors have connections with the paper industry. However, at least three independent studies have produced the same conclusion as Virtanen and Nilsson: if you care for the environment, don't recycle newsprint.

The argument goes as follows. Newsprint comes from coniferous softwoods, which are a farmed crop in northern Europe. Modern integrated pulp mills get their energy by burning "thinnings" from forest management and those parts of the tree that are not turned into paper. Therefore consumption of non-renewable energy is small at worst; some mills even export energy. Furthermore, the mills are generally in places where water is not in short supply.

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Now contrast this with what happens if newsprint is recycled, in say, Cheshire or Kent. Energy is still needed, but renewable energy in the form of thinnings and so on is not available. Therefore energy from non-renewable fossil fuels is used. Water is also needed. Plus the paper must be de-inked, a chemical process that produces emissions, as does the process for making de-inking reagents.

The environmental effect of recycling newsprint, then, is to increase water use and emissions of pollutants as well as increasing the use of fossil fuels. This increase in fuel use leads to a rise in the amount of carbon dioxide released into the atmosphere, running directly counter to the Rio Agreement to reduce greenhouse gas emissions. To paraphrase a celebrated remark by environmental writer Mike Flood, intrepid recyclers and neo-classical economists would waste non-renewable resources like fossil fuels to save renewable materials like paper fibres.

So what is an environmentally responsible use for old newsprint? Do not see it as waste material, see it as a biofuel and burn it as an energy source, preferably locally to avoid the environmental cost of transport. The carbon dioxide released will recycle via the atmosphere to the next generation of trees. The energy recovered will displace use of fossil fuels.

But the idea of using waste paper as an energy source is not universally popular. One objection is that the analysis assumes tree farming to be sustainable. But the debate has been productive by increasing pressure on primary producers to improve forest management.

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So why is it that neo-classical environmental economics, which claims to help define "sustainable development", can advocate policies that are environmentally profligate? Much of the problem lies in the way economics has separated itself from the sciences - particularly from thermodynamics, the study of the flow and use of energy. Neo-classical economics pays lip-service to the first law of thermodynamics (that energy can be converted to a different form but not created) and rides rough-shod over the second law (that heat cannot be converted completely to mechanical work; some of it must be dissipated).

To compound the problem, the neo-classical approach evokes the so-called "rational actor" paradigm: roughly, the notion that if everyone acts in their own economic interest, then everything will be for the best in this best of all possible worlds. Unfortunately, economic analysis alone cannot ensure a rational economic act is not an act of environmental lunacy. Similarly, the preferences of people canvassed in the street are not necessarily consistent with scientific and technical realities.

We will find a route to sustainable activity only if we look more seriously at how we use resources, using tools like LCA. This requires economists to work seriously and constructively with other disciplines. It also requires neo-classical economics to be returned to its true role: as a useful tool for understanding some human activities, not a way of measuring environmental sustainability nor of assigning crude financial values to subtle things like quality of life.

Roland Clift is professor of environmental technology and director, centre for environmental strategy, University of Surrey.

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