Economic Analysis of the Extended Producer Responsibility Movement:Understanding Costs, Effectiveness, and the Role for Policy

International Forum on the Environment

Karen Palmer and Margaret Walls1

Resources for the Future

February 2002

Abstract

In many European countries and in Japan, an increasing number of products are subject to “take-back” laws, under which producers are responsible for ensuring that their products or packaging are collected from consumers and recycled at the end of those products’ useful lives. This “extended producer responsibility” movement arose from a desire to reduce waste disposal, relieve the burden on municipalities handling a growing volume of waste, and spur so-called “design for environment” on the part of manufacturers. In the United States, policy-makers have thus far shunned this mandatory take-back approach for a more voluntary effort. In addition, the focus on producers is muted somewhat in favor of an emphasis up and down the product chain. The term “product stewardship” has grown in place of EPR. In this study, we describe the wide range of both mandatory European-style EPR programs in place and the voluntary efforts undertaken by industry in the U.S. We then assess, from an economic efficiency standpoint, the rationale for giving producers a role in management of end-of-life products. We reiterate the long-standing economic arguments for incentive-based policies. And finally, we evaluate the voluntary programs and whether they have the potential to achieve product stewardship objectives.

I. Introduction

In 1991, the German government changed the face of solid waste policy in that

country, and began an international movement, by passing the first so-called product

“take-back” law. The 1991 Packaging Ordinance requires packaging manufacturers and

distributors to take back packaging from consumers and ensure that a specified

percentage of it is recycled. Manufacturers and distributors can meet their obligations

by joining a “producer responsibility organization” which handles collection and

arranges for recycling.

1 Contact: walls@rff.org; palmer@rff.org. We deeply appreciate the support of the Economic and Social Research Institute of Japan and Resources for the Future. Responsibility for errors and opinions rests with the authors.

The product take-back concept evolved in other countries into a broader

initiative known as “extended producer responsibility” (EPR). EPR is a policy concept

in which a producer’s physical and/or financial responsibility for a product is extended

to the post-consumer phase of the product’s life-cycle (OECD, 2001). EPR policies

include take-back mandates, as in Germany, but other types of instruments may also fall

under the EPR umbrella (Palmer and Walls, 1999).

EPR has taken hold in both Europe and Japan. A number of countries have

passed laws and the European Union has passed directives covering a wide range of

products. In the United States, however, there has been resistance to adopting

wholesale the EPR approach. The singular focus on producer responsibility has been,

not surprisingly, hotly contested by U.S. business interests. Furthermore, the idea of

replacing, or duplicating, the decentralized solid waste collection and recycling system

that exists in the U.S. with a centralized, mandatory system in which producers are

responsible for collecting and recycling their products at end-of-life has been viewed as

a Draconian change from the status quo.

Nonetheless, the U.S. Environmental Protection Agency, some state

governments, and a number of environmental groups have come to support some of the

ideas that lie behind the EPR concept. These ideas have evolved into a derivative of

EPR known variously as “extended product responsibility,” “shared product

responsibility,” and “product stewardship.” These notions share two characteristics that

differentiate them from extended producer responsibility: they assign responsibility up

and down the product chain, rather than solely on producers, and they address

environmental effects throughout the product life-cycle, rather than just at the post-

consumer waste stage.

On its web site, the U.S. EPA gives the following definition of product

stewardship:

Product stewardship is a product-centered approach to environmental protection. Also known as extended product responsibility, product stewardship calls on those in the product life cycle – manufacturers, retailers, users, and disposers – to share responsibility for reducing the environmental impacts of products.2

2 See http://www.epa.gov/epr/about/index.html.

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Despite these stated differences between product stewardship and the European

concept of EPR, in practice most product stewardship efforts have a major role for

producers. In fact, on the same web site, EPA goes on to say: “In most cases,

manufacturers have the greatest ability, and therefore the greatest responsibility, to

reduce the environmental impacts of their products.”

Product stewardship efforts in existence in the U.S. are primarily voluntary

programs, though they run the gamut from independent efforts at individual firms to

cooperative programs jointly run by industry, state and local governments, and non-

governmental organizations. And some state government policies, including legislated

product fees used to support recycling efforts, also help to promote the goals of product

stewardship.

This paper is divided into two parts. The first part is essentially descriptive. In

it, we describe the EPR and product stewardship movements in Europe, Japan, and the

United States, beginning with a brief account of activities in Europe and Japan,

followed by descriptions of the mostly voluntary programs in the U.S. We also look at

some legislated programs in some U.S. states that, while not labeled as product

stewardship per se, have the feature that producers are made responsible in some way

for end-of-life products. The second part of the study is an evaluation of product

stewardship and EPR. We present economic arguments for the use of policies to

address waste disposal externalities. We argue the virtues of “incentive-based” policies

and contrast them with so-called “command-and-control” approaches. We then discuss

voluntary approaches to environmental protection and their strengths and weaknesses,

with applications to voluntary product stewardship efforts. Finally, we present our

conclusions about the role for government policy in achieving the goals of EPR and

product stewardship.

Given the fairly broad definition of product stewardship that EPA is using, many

U.S. firms have voluntary programs in place that perhaps some observers would

classify as product stewardship. We limit ourselves to programs that, while they may

have ancillary environmental effects, have a primary focus on reducing post-consumer

solid waste and promoting recycling. And for the voluntary programs at private firms,

we limit ourselves to those programs that the firms themselves refer to as product

stewardship. Even imposing those limits, we still are not exhaustive in our survey of

existing U.S. programs. Our goal is to present a picture of the kinds of things that are

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going on in the U.S. in this area and to the extent possible, evaluate the merits and the

shortcomings of the programs.

The short period of time that many programs have been operating and the lack

of data – particularly data on costs – from those programs that have been operating for a

number of years, makes an overall benefit-cost type of assessment essentially

impossible for us to do in this study. Moreover, as other authors have pointed out

(Tojo, Lindhqvist, and Davis, 2001), one needs to be extremely careful comparing

results across countries because of differences in how waste flows are defined and how

costs and recycling rates are calculated.

Our primary objective here is two-fold. First, we are interested in evaluating the

basic merits, from an economics and policy standpoint, of giving a role to producers in

end-of-life management of products. And second, we are interested in whether

voluntary programs – which seem far more feasible in a U.S. context than the

mandatory European approach – can achieve the goals of EPR and product stewardship.

We are also interested in understanding the role that incentive-based instruments could

play as either a part of an otherwise voluntary program or as a substitute for one.

Existing economics literature suggests that imperfections in recycling markets

provide one motivation for having producers involved in end-of-life management of

products. These imperfections block signals from reaching producers to design their

products to be more recyclable. This market failure is the primary motivation for

product stewardship but existing programs do not provide incentives for DfE. One

message from our work here is the designing programs that do provide these incentives

will be very difficult. We feel that it is very important that policymakers recognize this

and understand the inherent tradeoffs in any policies under consideration: low costs and

flexibility, on the one hand, and DfE incentives on the other. It is difficult to design

policy that does both. Having said this, however, we feel that exploring ways to design

product stewardship programs that provide explicit incentives for firms to engage in

DfE is important. We suggest two possibilities: a tradable recycling credits system and

a financial reward system.

We also suggest some basic rules of thumb for any product stewardship policy

or program to be successful. First, we feel it is essential that consumers be given

incentives to return their products for recycling. In general those programs that offer a

payment for items returned for recycling achieve a greater increase in recycling rates

than those that don’t. Second, consistent with the need to provide incentives to

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consumers, we find that product stewardship programs need to have penalties on firms

for non-compliance. These are necessary to induce the firms to perform and to motivate

them to provide their own inducements for consumers to return products for recycling.

Third, although penalties for noncompliance are important, it is also important to give

firms flexibility in how they respond to policies. Such flexibility is a hallmark of low-

cost incentive-based environmental policies, and we feel it is essential for cost-effective

product stewardship programs.

PART I.

II. EPR Initiatives in Europe and Japan

The original motivation for EPR in Europe – particularly for the Packaging

Directive in Germany – was to relieve the financial burden on municipalities of waste

management and to promote “design for environment” (DfE). The thinking was that

making producers take back and recycle their products would firstly, relieve

municipalities from collecting and disposing of those products – and most importantly,

incurring the cost of those activities – and secondly, give producers an incentive to

reduce packaging and design products with more recyclable packaging. In this section

of our paper, we describe a number of the EPR programs in Europe and Japan. In

section VI, we come back to this motivation for EPR and present out view of its merits.

II.A. The German Packaging Law. The German Ordinance on the Avoidance

and Recovery of Packaging Waste, passed in 1991, requires manufacturers and

distributors (the term used for retailers) to take back the packaging associated with the

products they sell. The requirements were phased in over three stages. As of December

1991, manufacturers and distributors have been required to take back all transport

packaging such as barrels, canisters, and pallets used during transport of goods from

manufacturers to distributors. As of April 1992, all distributors must take back

secondary packaging at the point of sale, and as of January 1993, distributors must take

back sales packaging.

The Ordinance sets recycling rate targets that vary across materials and currently

range from 60 to 75% (Schmid, 2001). Under the Ordinance, there are several

“responsible parties” — manufacturers of packaging; manufacturers of materials

intended for use in packaging; fabricators and assemblers of packaging articles;

commercial fillers; distributors selling packaged goods (i.e., retailers); and distributors

placing goods in packaging at the point of sale. These responsible parties may be

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released from their responsibility for take-back by joining a “Producer Responsibility

Organization” or PRO. In response to this PRO provision in the law, industry designed

the now well-known “Green Dot” system. A non-profit firm, the Duales System

Deutschland (DSD), licenses its logo, the Green Dot, to companies for a fee, then

arranges for collection, transport, and recycling of all packaging that is marked with the

logo. The fees, which are usually paid by the “filler” – primarily the owner of the

product brand name – vary across materials and are assessed on product sales. The

fees currently range from 0.076 euro/kilogram ($0.03/pound) for glass to 1.508

euro/kilogram ($0.603/pound) for plastics.3 There are small additional fees based on

volume.

The DSD handles 92 percent of all packaging waste in Germany and since 1995

has allowed its Green Dot logo to be used in other countries. It does this through an

organization it founded in 1995, the "Packaging Recovery Organization Europe” (PRO

EUROPE), which grants the right to use the Green Dot trademark to national collection

and recovery systems in other European countries. The Green Dot is now being used

by about 70,000 licensees in 13 European countries and in Canada.

German policy-makers and government officials seem convinced that their

approach is the right one. According to most published reports, the amount of

packaging and packaging waste has been greatly reduced since the law was passed.

Schmid (2001) reports that 1.5 million fewer tons of packaging were on the market in

2000 than in 1991. Tojo, Lindhqvist, and Davis (2001) cite government and DSD

reports that claim that the recycling targets are met or exceeded for all materials. Most

studies also report some material substitution, away from plastics toward materials,

such as glass, that have lower licensing fees. In an interesting comparison of a typical

German city with a population of 200,000 with a similarly sized city in Japan, Ueta and

Koizumi (2001) found that while only 5 percent, by weight, of the household waste

stream in the German city in 1998 was comprised of plastics, that figure was more than

twice as high in the Japanese city. Glass, on the other hand, made up over 13 percent of

the German city’s household waste stream in 1998 but only 4.4 percent in the Japanese

city.4 In addition, there is reportedly more reuse of packaging in Germany, particularly

transport packaging. Refillable beverage containers are also common.

3 For more information about the DSD and its fees see http://www.gruener-punkt.de/.4 This same study also reported that the German city generated approximately 15 percent less non-recyclable waste per household than the Japanese city.

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There have been problems with the German system, however. One problem has

to do with free riders in the system. There are two types of free riders: (1) packaging

without a Green Dot – from producers who do not join the DSD and pay the licensing

fee – often gets collected and recycled along with Green Dot packaging because

consumers mix it together, and (2) licensees sometimes put the logo on packaging for

which they have not paid fees, and non-licensees – i.e., producers who have not joined

the DSD – have used the Green Dot logo. Jaeckel (1998) reports that the first problem

leads to 20 percent of the waste handled by the DSD being non-Green Dot packaging.

A second problem with the system has to do with the monopoly nature of the DSD and

concerns raised by some firms that it sets licensing fees in a monopolistic manner.

The one key question about the system is its costs. It is difficult to know the full

costs of the system and even more difficult to compare Germany’s approach to

managing packaging waste with that in other countries. In a 1997 study, the OECD

estimated that the total costs for a ton of material in the DSD system – i.e., a ton that is

collected and recycled by the DSD but would otherwise have been disposed of in a

landfill – is approximately 700 DM, or $404. With the DSD reporting a material

volume of 4.7 million tons in 1994, total costs equaled 3.3 billion DM in that year, or

$2.0 billion. The DSD estimates that of the total costs, 80 percent go to collection,

transport and sorting; of the remainder, 15 percent is plastic recycling subsidies. These

costs do not include costs to regulators overseeing the program, nor do they include

costs of producers outside the DSD system but who must still abide by the law. The

OECD study states that the 700 DM exceeds the costs of incineration in Germany and

“approaches costs for handling a ton of hazardous waste.”5 DSD licensing fees have

decreased in recent years and the costs of the program have decreased as well.

As we stated in the introduction, it is very difficult to compare costs across

countries. To put the $400 per ton figure into some context, however, we note that a

1999 study by the Institute for Local Self-Reliance, funded by EPA, analyzed 18

“successful” community recycling programs in the U.S. – programs that achieved high

rates of waste diversion and recycling. Total costs of waste diversion– including both

recycling and composting programs – ranged across the communities but the highest

cost was only $161 per ton.6

5 See OECD (1998), p. 36.6 This community achieved a 40 percent waste diversion rate and 23 percent recycling rate. Other communities did better and had lower costs (see ILSR, 1999). These are curbside recycling programs which, for the most part, recycle packaging from consumer products, but they also recycle newspapers and costs

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II.B. Packaging EPR Programs in Other Countries. Several other European

countries followed the German lead in the early 1990s, developing packaging EPR

programs of their own. The Netherlands has a system that is slightly more voluntary

than the German one. So-called covenants, or negotiated agreements, are used

extensively in environmental policy in the Netherlands. The Packaging Covenant lays

out recycling, packaging reduction, hazardous materials reduction, and other goals;

companies then voluntarily sign up to specified goals that they have negotiated with

government. Once they sign up, the companies are legally bound to the terms of the

agreement. Responsibility for collection and transport of used packaging remains with

the local authorities in the Netherlands, unlike in Germany where the DSD operates

alongside municipalities collecting a separate waste stream from households. Like

Germany, though, a PRO is operating and ensuring that recycling targets are met.

Austria passed its packaging law in 1993 and its system is very similar to the

German one. Recycling targets are set, and a single PRO operates, charging license

fees to its members that are determined by the weight of packaging. Tojo, Lindhqvist,

and Davis (2001) report that other European countries with packaging EPR laws are

Finland, France, Norway, Sweden, Switzerland, and the U.K. The authors state that

published reports in Germany, Austria, the Netherlands, and Sweden show almost

universally high recycling rates for packaging in each of the countries.

In 1994, the European Union adopted the Packaging Directive, which sets out

recycling targets for packaging but allows each member country to decide how to go

about meeting the targets. At the end of 1999, the EU Commission submitted a review reporting the experiences with the Packaging Directive thus far. This report concluded that the recovery targets have already been achieved by all the Member States to whom the target applied, four years before the end of the implementation period. On the basis of this report, the Commission is currently working on an Amendment to the Directive. Schnurer (2001) reports that EU working documents contain both a proposed increase in the recovery quotas as a whole and a proposed increase in the targets for individual packaging materials.

usually cover yard waste collection and composting programs as well, something clearly not covered in the DSD system. On the other hand, the costs do not cover the costs of recycling upstream packaging, such as transport packaging, as in Germany. Thus the ILSR study costs cannot be strictly compared with the German system. They are simply presented as a benchmark.

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Like the European countries, Japan has also adopted a legislated EPR approach

for packaging. Packaging waste is viewed as a particular problem in Japan where it

makes up 60 percent of the total volume, and 20 to 30 percent of the total weight, of the

municipal solid waste stream (Clean Japan Center, 2001; Tanaka, 1998). The Container

and Packaging Recycling Law was passed in 1995. The law made manufacturers

responsible for meeting phased-in recycling rate targets for glass and PET bottles,

followed by targets for paper and plastic containers and packaging.7 The Japanese refer

to the targets as “voluntary.” For PET bottles, the rate is 50 percent by 2004; for glass

containers it is 80 percent by 2005. As in the Netherlands, local government in Japan

maintains responsibility for collection of packaging waste. However, industry is

responsible for, and pays for, recycling. A packaging PRO operates in Japan, the Japan

Container and Package Recycling Association. Okazawa (2001) reports that a 35

percent recycling rate was achieved for PET bottles in 2000, up from virtually zero

prior to passage of the law.

II.C. EPR Programs for Products Other than Packaging. EPR moved beyond

packaging in Europe and Japan in the 1990s to cover consumer batteries, electrical and

electronic equipment, and end-of-life vehicles. Austria, Belgium, Germany, Japan, The

Netherlands, and Switzerland all have mandated EPR programs for small consumer

batteries; some programs cover a wide range of batteries while some cover only nickel-

cadmium batteries (Raymond, 2001).

In September 2000, the European Union adopted a Directive on End-of-Life

Vehicles that incorporates the concept of EPR; the directive must be implemented by all

member states by April 2002. The Directive requires that all countries set up national

take-back and recycling systems for end-of-life passenger and light commercial

vehicles and that consumers be able to return vehicles for recycling without payment.

The Directive also states that by 2006, at least 85 percent of the average weight of an

end-of-life vehicle must be recovered, and at least 80 percent reused or recycled. By

2015 these recovery targets are increased to 95 percent (recovery) and 85 percent

(recycling).

Some European countries had already been moving ahead on EPR programs for

vehicles. Indeed, part of the reason for the EU directive, as with many EU directives,

was to harmonize laws, to some extent, across countries. Germany and The

7 Steel and aluminum cans, paper packs, and cardboard are not subject to the law. However, Okazawa (2001) reports that manufacturers “voluntarily” recycle these materials.

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Netherlands established voluntary vehicle EPR programs in the mid-1990s. Germany

approached the vehicle problem first with the 1992 proposed Scrap Car Rule, which

more-or-less replicated the approach that the German government had taken with

packaging. The Rule mandated that producers take back cars from their last owners

“principally” free of charge and meet reuse or recycling goals that varied by material

and ranged from 20 percent for plastics to nearly 100 percent for steel. The auto

industry responded to the draft rule by greatly increasing recycling in an effort to show

the government that a voluntary approach could work. In March 1996, the government

dropped the Scrap Car Rule in favor of the “Voluntary Pledge Regarding the

Environmentally Compatible Management of End-of-Life Vehicles.” The German auto

industry agreed to set up a national infrastructure of certified dismantlers; ensured that

vehicles will be taken back free of charge; pledged to reduce the amount of automobile

shredder residue sent to landfills from the current 75 percent of the weight of a vehicle

to a maximum of 15 percent by 2002 and 5 percent by 2015, allowing incineration with

energy recovery as an option; and pledged to redesign vehicles with an eye toward

recycling.

As they did for packaging, The Netherlands signed a negotiated agreement with

industry for end-of-life vehicle take-back and recycling. The binding agreement was

entered into by vehicle importers in the Netherlands in 1994 and establishes a

government-imposed advance disposal fee to help fund recycling. Veerman (2001)

reports that the fee is currently 40 euro (approximately $35) and is paid by consumers

when they buy a new vehicle. It was originally paid by importers into a fund managed

by the PRO that was established by importers and other actors in the product chain in

the Netherlands, the Auto Recycling Nederland (ARN). The ARN manages the

financing, take-back, and processing, of end-of-life vehicles.

Waste electrical and electronic equipment (WEEE) has received a great deal of

attention in recent years with several countries passing EPR laws addressing these

products. The Netherlands has two different systems for WEEE: household appliances,

televisions, and stereos (so-called “white and brown” goods) are handled in one way

while IT equipment (computers, printers, fax machines, copiers, and telephones) is

handled in another.8

8 Household appliances include small items such as coffee makers, toasters, irons, and the like, as well as dishwashers, washers, and dryers.

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Fees ranging from zero on small products to $15 for refrigerators and some TVs

are charged on products at point-of-sale; those fees are collected and managed by the

PRO (NVMP) which arranges for transportation and recycling of the products. As with

packaging, municipalities handle most of the collection; however, retailers are required

to take back an old product when selling a new one.9 Recovery and reuse targets were

negotiated with industry and vary across products, ranging from a high of 75 percent for

refrigerators down to 45 percent for small appliances (Ministry of Housing, Spatial

Planning and the Environment, 1998). All of the items are banned from landfills and

incinerators. The EPR law covering white and brown goods in The Netherlands has

been in effect since June 1998.

The main difference between the white/brown goods program and the IT

program in the Netherlands is the way that funds are raised by the PRO to pay for

recycling. White and brown goods are assessed a fee up-front, but the costs of

recycling IT-equipment is covered by payments made in arrears by manufacturers and

importers after the products have been processed. This means that processors separate

products by brand name and assess fees on individual producers based on the cost of

recycling each producer’s products. As far as we know, this is the only EPR program

that works in this way.

According to the European Union (2000), Denmark, Sweden, Austria, Belgium

and Italy have already passed EPR laws on WEEE, and Finland and Germany are

expected to do so. Switzerland has a program as well, as does Norway, which is not a

member of the European Union. The products covered in these programs vary slightly

across countries, and the systems work slightly differently as well. However, in all of

these countries a PRO collects fees up-front on products sold and uses the fees to pay

for recycling. Local government is involved in collection in all of the countries but the

mandatory “old for new” retail trade-in provision in the Netherlands also exists in

Sweden and Switzerland. Italy, Norway, and Belgium have mandated recycling rate

targets; Switzerland and Sweden have set no specific numerical requirements.10

In 2000, the European Union passed its WEEE Directive. The Directive

mandates that member countries have systems for take-back and recycling of WEEE

that allow consumers to exchange old products for new ones; that allow holders of

items collected from consumers to bring those items in for recycling free of charge; that 9 In the Netherlands, ninety percent of white/brown goods are handled through the municipal collection system and only 10 percent through retailer take-back.10 We are unclear, at this point, whether targets exist in Denmark or Austria.

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ensures that producers collect WEEE from sources other than private households (and

be permitted to collect from households if they so desire); and that reaches a WEEE

collection target of 4 kilograms per household per year by 31 December, 2005. The

Directive also sets recycling rate targets for specific types of WEEE. These targets

range from 50 percent up to 75 percent and must be met by 31 December 2005.11

The Japanese passed the Household Electric Appliances Recycling Law in 1998.

The law, which came into effect in April 2001, covers air conditioners, refrigerators,

washing machines, and TVs and sets recycling rate targets of 50 to 60 percent for these

items. It requires retailers to collect and transport the appliances to transfer stations;

municipalities may also collect and transport. Unlike the European systems, Japan’s

law requires consumers to pay end-of-life fees. These fees currently range from 500 to

2,500 yen for collection and from 3,500 to 4,600 yen for recycling; thus, the total fee

for collection and recycling, in U.S. dollars, would range from approximately $22 to

$53. Once items are collected and transported to recycling facilities, producers are

responsible for recycling. Tanabe (2001) reports that end-of-life fees were decided

upon to encourage consumers to extend the lives of their products; in Japan, it is typical

for consumers to buy new household appliances before the old ones have physically

worn out.

Taiwan also has an EPR program for WEEE; it covers computers, household

appliances, and air conditioners. Unlike the European programs, in Taiwan the

government is more involved in the financing of the system. It assesses fees on

producers, which cover collection, transport, and recycling; it then distributes these fees

to local government to pay for recycling. Collection is handled by local government.

III. Voluntary Product Stewardship Initiatives

In contrast to Europe and Japan, the approach to product stewardship in the

United States has been largely voluntary. Firms, acting individually and collectively,

have initiated a host of programs designed to promote product recycling and, in some

cases, design for environment (DfE). These initiatives can be categorized into three

types: firm-level programs, industry-wide programs and multi-stakeholder efforts

involving industry, government, environmental groups and others. In this section we

11 The lower target holds for small appliances such as irons and toasters, for consumer equipment such as TVs, video recorders, and radios, and for electric tools and toys. The higher target applies to large household appliances such as washers, dryer, refrigerators, and microwaves.

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describe several programs in each category. In a subsequent section we provide a more

general evaluation of these efforts and highlight differences among the programs.

III.A. Firm-Level Product Stewardship Initiatives

Nike’s Reuse a Shoe Program

In 1993 Nike began an athletic shoe recycling program it calls “Reuse a Shoe.”

Under this program Nike collects and grinds up defective and post-consumer athletic

shoes to make a material known as Nike Grind that is then used to produce athletic

surfaces including tennis and basketball courts, tracks, fields and playground surfaces.

Nike gives the material to five different sports surface manufacturers that have paid a

licensing fee for using the Nike logo on the surfaces they produce. The revenues from

the licensing fees are used by Nike to donate sports surfaces to non-profit organizations

and communities around the world.12

The Nike Grind program recycles just over 2 million shoes per year.13 Most of

the shoes that are recycled are defective shoes that cannot be sold in the market place.14

The rest are used shoes that consumers have returned to one of the 55 retail outlets in 16

states that accepts shoes for recycling or to Reuse-A-Shoe collection events run by

schools, community organizations or community solid waste programs. Nike will

accept any brand of athletic shoe as long as they do not have metal cleats or other metal

parts. There is no charge for the service.

The effectiveness of this program in reducing disposal of athletic shoes in the

United States is difficult to evaluate. Nike sold roughly 80 million pairs of shoes in the

U.S. in the fiscal year that ended in May 2001.15 If all of the 2 million shoes recycled

are post-consumer shoes, the program yielded a recycling rate of approximately 2.5

percent in fiscal 2000/01. If only half were post-consumer – and this is still probably an

optimistic assumption – the recycling rate would be 1.25 percent.16

12 See discussion of Reuse-A-Shoe program at http://www.nikebiz.com/environ/reuse.shtml.13 Personal communications, Jim Goddard.14 Exactly how many of the 2 million shoes recycled each year are post consumer and how many are defective shoes from manufacturing facilities is unclear. Nike officials cannot – or at any rate, do not – provide that information. 15 These numbers are estimated based on total revenues from shoe sales reported in the Nike Inc. Annual Report on Form 10-K (August 2001). Total revenues from sales of footwear in the U.S. were $3,208 million; if the average wholesale price of shoes is approximately $40 per pair, then the total quantity of shoes sold in the U.S. is approximately 80 million pairs. All of the post-consumer shoes currently reprocessed by the Nike Reuse-A-Shoe program come from the United States. 16 Even this recycling rate is not strictly correct since consumers can recycle shoes from any manufacturer, not just Nike, through the Reuse-A-Shoe program. In 2000 Nike’s share of the U.S. shoe market was 39% (Business Wire, 2000). See http://www.snowboardnetwork.com/sports/athletic_footwear_market_share.htm.

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This low recycling rate is not surprising given the spotty geographic coverage of

the collection system and the lack of incentives for consumers to return shoes for

recycling. Even consumers who live near a collection point are probably not aware of

the program. There is also little incentive for consumers to go to the trouble of taking

shoes in for recycling when disposal is easy and essentially free in most communities.

Nike claims that its program has led the company to redesign its shoes to be more

recyclable. They have also started a major initiative to reduce the use of toxic

substances in their shoes, beginning with the elimination of PVCs in most of their

products beginning in January 2002.17

Nike’s Reuse-A-Shoe program is unique within the footwear industry.

However, several computer manufacturers have started take-back programs to help

reduce disposal and increase recycling of used computer equipment. These programs

are described below.

IBM’s PC Recycling Service

On November 14, 2000, IBM started its PC Recycling Service. This service is

available to residential or small business computer users in the United States who are

interested in recycling a single (or small number) of PCs. The service costs $29.99 and

for that price the customer receives a box (26” x 26” x 26”) for shipping the equipment,

a pre-paid UPS label addressed to Envirocycle, the electronics recycler under contract

with IBM, and packing instructions. The box will hold a 15 inch monitor, a printer, a

computer and a keyboard. IBM will accept computers made by any manufacturer. To

recycle a computer, one must pack it up according to the instructions, affix the UPS

shipping label to the box and deliver it to the nearest UPS office.18

When Envirocycle receives the equipment, they evaluate it to determine if it is

suitable for donation to charity. IBM has an arrangement with Gifts in Kind

International (GIKI) to provide them with PCs that are of reasonably recent vintage

(currently a Pentium I or higher) and in good working order for donation to nonprofit

organizations throughout the world. If a computer is deemed suitable for donation, the

customer who sent in that computer will receive a receipt describing the equipment that

was donated that can be used for income tax purposes.19 Otherwise, the customer will

receive a receipt indicating that his or her PC has been recycled.17 For more about Nike’s PVC free pledge see www.nike.com (accessed January 27, 2002).18 Pick up by UPS can be arranged, but at an additional charge.19 For more information on this program see www.ibm.com/ibm/environment/

14

IBM promotes this service primarily on its web page, either to people who are

shopping for a new PC, or to residential consumers or small businesses who are looking

for a way to recycle their old PCs.20 The $29.99 fee covers the cost of shipping the

equipment and recycling it. IBM sells roughly 200 units of this service per month.21

Hewlett Packard

Hewlett Packard also offers a computer hardware recycling service to residential

and business computer owners through its Planet Partners Product Take-back Program.

Unlike IBM, HP does the recycling itself rather than contract with an independent

recycler. Customers use a web interface accessible at www.hp.com/go/recycle to sign

up for the service which includes pickup, transportation and evaluation of their

equipment. Equipment from any manufacturer is accepted. Equipment that is deemed

usable will be donated to charity and other equipment will be recycled. Under HP’s

program consumers do not receive a receipt regarding the fate of their equipment.

The price for the service varies by type of equipment as shown in Table 1. The

prices range from $13 for a handheld device to $34.00 for a laser printer or piece of

network equipment.22 This price includes pick up of the equipment, transport and

assessment for donation or recycling of equipment not suitable for donation.

Compaq

Compaq Computer does not have its own computer recycling program, but it

does participate in a program called the Electronic Take-Back Program that is run by

United Recycling Services of West Chicago, Illinois.23 Under this program, which is

Table 1.Prices for HP’s Planet Partners Product Take-back Program

Type of Equipment Priceink printer $17.00laser printer (includes fax machines) $34.00all in ones (copiers) $30.00

20 For several years IBM has been recycling obsolete computer equipment that was leased to large business customers. Under this program, IBM has been able to reap some economies of scale in computer recycling and to realize some value from reclaiming parts and materials from old computers and finding new uses for them. In 2001, leases accounted for 35 % of all hardware sales by IBM. (Bloomberg News 2002).21 Personal communication, Rhea Hale.22A box including a PC, a monitor and a laser printer would cost $76.00 reflecting a discount applied to orders containing multiple pieces of equipment. For more information about pricing of shipments containing multiple pieces of equipment see https://warp1.external.hp.com/recycle/hardware_id.asp.23 See http://www.unitedrecycling.com/takeback/main.html for more information on this program.

15

PCs (no CRTs, includes laptops and keyboards)

$21.00

monitors (CRTs, flat panel terminals) $29.00scanners $21.00handhelds (PDAs, calculators) $13.00network equipment $34.00

similar to the IBM program in many ways, customers pay $27.99 to recycle used

personal computer equipment. The price covers the cost of a prepaid UPS shipping

label to United, assessment for reusability and donation and recycling costs.24

Customers also receive a certificate for a 6 – 9% discount on future purchases of

selected Compaq equipment. This service is available for residents of Illinois,

Wisconsin, Indiana, Missouri, Minnesota, Michigan and Iowa only.

Gateway

Gateway computers has a two-part program that provides incentives for

purchasers of new Gateway computers to either trade in, donate or recycle their old

computers.25 Under the first option, Gateways Trade-In service, a customer who

purchases a new PC from Gateway has the option of trading his or her old PC in

exchange for its average market value on the computer resale market.26 Only those

computers that are of sufficiently recent vintage to be valuable in the secondary market

are eligible for the Trade-In service. Under the second option, Gateway will provide a

credit of up to $50 for a computer that has been donated to a charity or sent for

recycling. In order to get the credit, customers need to furnish a receipt indicating that

the equipment was donated or recycled and provide information on how to contact the

charity or recycler to verify what has taken place. The credit ranges between $25 for a

monitor or CPU by itself to $50 for a complete system.

Dell Computer Corporation

Dell Computer Corporation does not have any type of program to promote PC

recycling, but they do offer several services to provide consumers with other

alternatives to disposal for used computer equipment.27 These include a trade-up

program, an on-line auction for used PCs and a donation program. The Dell trade-up

24 With this service, customers are responsible for supplying the box.25 This program is described at http://www.gateway.com/home/programs/tradein_recycle.shtml.26 For more information, see http://www.gateway.com/home/programs/tradein_faq.shtml.27 For more information see http://www.dell.com/html/us/segments/dhs/dell_exchange.htm.

16

program is very similar to Gateway’s Trade-In service. Users of this service will get a

credit based on the value of the computer they are trading in toward the purchase of a

new Dell computer. Any brand of computer is acceptable, although it must be of

sufficiently recent vintage to have value on the secondary market.

The on-line auction is a forum where participants can post the specifications of

their old computer equipment and offer it up for sale to the highest bidder. This service

is similar to E-bay and other more general on-line auction services, but it is specialized

in computer equipment.

Dell’s computer donation program is a partnership with the National Christina

Foundation (NCF), an organization that donates computers to training and educational

organizations that service individuals with disabilities and economically disadvantaged

individuals. This program is administered by NCF who collects the information on the

computer specifications, identifies a recipient for the equipment and arranges shipment

if the donor does not choose to do so.28 Donors are provided with a receipt listing the

market value of their equipment to use for tax purposes.

Sony, Panasonic and Sharp

These companies have similar programs designed to facilitate the recycling of

electronics products. All three companies are most active in the state of Minnesota,

which is not surprising given that this state is at the forefront in the United States in

developing and promoting product stewardship programs. (See discussion below of

Minnesota’s “Plug into Recycling Program”.)

In October of 2000, Sony began a 5-year partnership with Waste Management to

promote electronics recycling in Minnesota.29 Under this partnership, Sony electronics

products are accepted for free for recycling during certain hours (in particular Saturday

hours when waste transfer stations are not busy30) at a number of Waste Management

facilities located throughout the southern part of the state. Electronic products made by

other manufacturers are also accepted for recycling at the Waste Management facilities,

but a fee is charged for recycling of those products. In the first seven months of the

program, almost 5000 pounds of product had been recycled.31 This represents just

28 For more information on the donation program see http://www.cristina.org/dsf/dell.ncf.29 For more information see Sony Press Release at http://www.sel.sony.com/SEL/corpcomm/news/corporate/108.html.30 Personal communication, Tony Hainault.31 See the Minnesota Office of Environmental Assistance Web site at http://www.moea.state.mn.us/plugin/sonyevents.cfm.

17

about 1 pound of equipment for every 227 persons living in the counties of Minnesota

where the Waste Management Facilities are located.

Sony, Panasonic and Sharp partnered with Asset Recovery Corporation in a

series of electronics collection events held in the St. Paul–Minneapolis area of

Minnesota in April 2001 and again in the fall (Asset Recovery Corp., 2001). Each of

these three companies paid for transport and recycling of any of its own equipment

returned for recycling while customers paid for the recycling of equipment from other

manufacturers. The fees charged for other equipment at the first event ranged from $5

to $25, with console TVs, stereos, and copiers charged the highest fees.32

During these collection events, nearly 41 tons of electronic equipment were

collected for recycling, roughly 1 pound for every 18 people in the St. Paul/Minneapolis

metropolitan region. Items collected at the kick-off event, were analyzed in detail in

terms of composition, manufacturer, vintage and other factors. The collection event at

this location was responsible for over 6 tons of material, just over 30 percent of which

was manufactured by one of the three participating manufacturers.33 At subsequent

events, an average of 6 percent of collected equipment was manufactured by one of the

sponsors of the event. The rest was paid for by people returning the equipment.

Panasonic and Sharp have also agreed to pay for the recycling of their

equipment collected through the Hennepin County electronics recycling program.

Under this program, Hennepin County, which has run a drop off recycling program for

electronic waste for many years, is responsible for disassembly of equipment and

transporting it to ARC. ARC is then responsible for recycling the components, using

the payments from Panasonic and Sharp.

Best Buy

Best Buy, a national chain of retail stores specializing in electronic products,

also has an electronics recycling program.34 Under this program, Best Buy sponsored

10 electronics collection events at different locations throughout the U.S. in the summer

32Fees differed across the different collection events and in some locations were disaggregated across products (personal communication, Ryan Laber, September 2001).33 ARC expects that this high percentage of equipment from participating partners was probably due to the much higher publicity that this particular event received in which the names of the participating partners were highly publicized. The role of the partner companies was less prominently promoted in the other events.34 This program is managed for Best Buy by e-4 partners, a Minnesota consulting firm. For more information about the Best Buy program see http://www.e4partners.com/homepage.htm.

18

and fall of 2001.35 All but two of these events were held at Best Buy retail stores and

some of the events were co-sponsored by manufacturers including Toshiba America

Inc. and Panasonic.

The list of items accepted at these events included computers, monitors, printers,

fax machines, televisions, stereos, camcorders, cellular phones and VCRs. Most of the

items were accepted for free, but there was a $10 charge for monitors and a $15 charge

for televisions.

For each event Best Buy had a contract with a recycler who was responsible for

taking items from consumers, placing them in their own trucks and transporting the

equipment to their recycling facility. The Rechargeable Battery Recycling Corporation

(see below) also attended several of the events to reclaim rechargeable batteries for

recycling. A local charity also attended each event to cull out those pieces of

equipment, generally computers, printers or scanners, that were in good enough

working order to be reusable.36

Four events were held in Minnesota, the corporate home of Best Buy and the

state with perhaps the longest history of electronics recycling programs for consumers.

Two of the Minnesota events ranked at the top of the ten events in terms of number of

participants and total weight of equipment collected. The third highest ranked event in

terms of total number of participants and amount collected was the one held in

Framingham, Massachusetts. Higher than average participation in Massachusetts is not

surprising given that disposal of CRTs at municipal solid waste incinerators and

landfills is prohibited in that state. The fourth highest participation rate was at an event

held in Skokie, Illinois. At this event residential consumers were not charged for

dropping off monitors or TVs as the cost of recycling these items was subsidized by the

local solid waste agency. In total, across all events, 286 people participated, bringing in

25,724 pounds of equipment (see http://www.e4partners.com/homepage.htm), or

approximately 90 pounds per participant.

III.B. Industry-led Coordinated Initiatives

Rechargeable Battery Recycling Corporation

In 1994 the manufacturers of recycled batteries and of products that use those

batteries established the Rechargeable Battery Recycling Corporation (RBRC) to 35 An event scheduled to be held in Frederick, Maryland in mid September was postponed until spring due to the September 11 terrorist attacks.36 The charities did not take any monitors except at the Chicago area collection event. (Conroy 2001)

19

manage an industry-wide recycling program This program was established because 8

states had already passed laws requiring take-back of Ni-Cd batteries and others were

considering doing so (Fishbein, 2001). To avoid having to comply with different laws

in different states, the industry set up the RBRC, a non-profit corporation to operate the

battery take back and recycling program. Prior to 1996 the RBRC ran pilot collection

programs in selected states including Minnesota and New Jersey. In 1996, RBRC

began a national program to collect rechargeable Ni-Cd batteries. The program spread

to Canada in 1997 and in 2001 the RBRC added Nickel Metal Hydride (Ni-MH),

lithium ion (Li-ion) and small sealed lead batteries to its program.

The RBRC is funded through a system of licensing fees. The RBRC licenses

battery manufacturers to place its seal on the battery cells it produces indicating that the

batteries can and should be recycled through the RBRC program at the end of their

useful lives. The program charges participating manufacturers a licensing fee based on

the weight of the battery cell and the cell type (Millard, 2001). Thus, the RBRC

operates very much like the DSD in Germany and the RBRC logo serves much the

same purpose as the Green Dot logo. The RBRC estimates that over 90 percent of the

rechargeable Ni-Cd batteries sold in the United States are included in the program.

More than 320 companies are paying to apply the RBRC seal to their batteries, but no

seal is required to return a rechargeable battery to an RBRC collection site.

The RBRC currently has arrangements with nearly 35,000 collection sites in the

United States. Over 90 percent of all collection sites are at retail stores. The other sites

are operated by communities, other public agencies or licensees themselves. All of the

collection boxes and bags and promotional material are supplied and paid for by RBRC.

Collection sites ship the collected batteries to regional consolidation centers at no cost

and RBRC pays all recycling costs. The batteries are recycled under contract with

Inmetco.

Battery returns and recycling have not grown in line with RBRC’s expectations.

In a 1998 report, RBRC projected that it would recycle over 8 million pounds of Ni-Cd

batteries in 2000 and that the rechargeable battery recycling rate for the United States

and Canada would increase from 15%, its level in the mid 1990s, to 35% by 2000.37 In

fact, RBRC reports that 3.5 million pounds of Ni-Cd batteries were collected for

recycling in 2000 and they estimate that collections will total just over 3.7 million for

37 Fishbein (2001) has a table that shows RBRC’s 1998 projections of Ni-Cd battery recycling in the United States and Canada through 2005.

20

2001 (Millard, 2001). RBRC does not report battery recycling rates and has not done

so since 1998. However, if earlier forecasts of Ni-Cd battery disposal for 2000 and

2001 are roughly correct,38 and assuming that 90% of all Ni-Cd batteries are in the

RBRC program, then the associated recycling rate for RBRC participating Ni-Cd

batteries for 2000 and 2001 would be just around 14%, slightly below the 15% rate

estimated for 1995.39

The RBRC spent a total of $6.7 million in 2000; this includes $2.7 million on

recycling and almost this same amount on public education and marketing. In the same

year, $8.8 million in licensing fees were collected. Although we do not have explicit

information on it, free-riding is likely to be a problem with the RBRC system. All

batteries, even those without the logo, are accepted at RBRC collection sites and are

recycled, while only battery manufacturers that choose to join the system pay the

licensing fees.

The Alberta Lubricating Oil Material Recycling and Management Regulation

The oil industry in the western Canadian provinces of Alberta, British

Columbia, Saskatchewan, and Manitoba run a program to encourage the recycling of

used motor oil, oil containers, and oil filters. In the late 1980s, the environmental

problem caused by improper disposal of used oil rose to the forefront in western

Canada. At the request of the Canadian Council of Ministers of Environment, the oil

industry set up a task force to address the problem. In 1993, the Western Canada Used

Oil/Container/Filter Industry Task Force was formed to coordinate efforts to reduce

disposal of used oil and to develop a consistent program across provinces. What

resulted was an industry-run program in which first sales and imports of motor oil, oil

containers, and oil filters are subject to a tax, referred to as an Environmental Handling

Charge (EHC). Authorized collectors and transporters of used oil are paid what is

called a Return Incentive (RI) for every liter, container, and filter that is collected and

transported to an authorized processing or re-refining center. The program is run

separately in each province. Alberta's and Saskatchewan's programs began in 1997,

with Manitoba's following in April 1998.

38 This is a big assumption. The RBRC numbers from 1998 assume that total poundage of Ni-Cd batteries entering the waste stream increases at an average annual rate of 9.5 % between 1995 and 2000 and then remains roughly flat after that.39 Since RBRC actually collects batteries made by non-participating manufacturers at its collection sites, the denominator in the recycling rate should probably be the total pounds of Ni-Cd batteries entering the waste stream rather than RBRC licensees’ batteries.

21

An interesting feature of this program is that even though the refund incentives

are paid to authorized collectors and transporters, generators of used oil, including do-

it-yourself oil changers, farmers and others are actually benefiting from the refund

incentives. In the case of both used oil and used oil filters, the collectors have paid

generators up to 37% of the refund incentive for turning in their used oil and 35 percent

of the return incentive for oil filters (McCormack, 2000). This system thus provides

incentives to downstream consumers even though the return incentive payment

explicitly created by the system is only paid to authorized collectors. This pass-through

suggests that it is possible to set up an “upstream” deposit and refund system and still

have the private market, on its own, provide incentives downstream.

22

The Vehicle Recycling Partnership

In some industries, collection of post-consumer items poses less of a challenge

than it does in others. Approximately 95 % of the 11 million vehicles that are retired

from service each year in the United States make it into the recycling system. In this

system, dismantlers disassemble the car, salvage usable parts for resale, remove

hazardous materials and components such as batteries, oil filters and tires and send the

rest for shredding. Typically after shredding, the iron, steel and non-ferrous metals

(representing about 75% of the weight of the car) are recycled and the remaining

“fluff,” which includes shredded seat cushions and carpet, is landfilled (Pace and

Giallorenzo, 2001).

In 1991, a bill was introduced in the U.S. House of Representatives that was

seen by the auto industry as the potential forerunner to mandatory recycling (Davis,

1997). At around the same time, legislation was being proposed in Germany and

discussed in other European countries. In response to these perceived threats, the three

major U.S. automakers, GM, Ford, and Chrysler, formed the Vehicle Recycling

Partnership (VRP). The VRP promised to improve recycling technologies and find

ways to recycle the non-metal components of a car. The group performs research into

ways to improve the recycling process, especially for non-metal components, and ways

to promote use of recyclable and recycled materials in new car design. It has developed

a new method for removing fluids from cars during the dismantling process that greatly

reduces the time needed to perform this function. The Vehicle Recycling Development

Center — a joint project between the three auto makers and the Automotive Recyclers

Association, the American Plastics Council and the Institute for Scrap Recycling

Industries — is also dismantling different models of cars and developing a data base

regarding components in different vehicle models to help dismantlers sort vehicle

components for recycling.

For a while, Saturn and Ford had take-back and recycling programs for plastic

bumpers. Ford entered into an agreement with a recycler to purchase plastic made form

recycled bumpers; Saturn had its own take-back and recycling program. It is unclear

whether these programs are still in operation.

23

III.C. Joint Efforts Among Industry, Government and Other Stakeholders

Minnesota Electronics Recycling Initiative

In 1999, the Minnesota Office of Environmental Assistance (MOEA) initiated

the first large scale public/private effort to learn more about the costs and feasibility of

electronics recycling (Hainault, 2001; Hainault et al., 2001). Sony, Panasonic, Waste

Management’s Asset Recovery Group and the American Plastics Council co-sponsored

this effort which was called “Plug into Recycling.” MOEA selected local groups to run

a variety of different types of collection events including single-event drop-offs, on-

going drop-offs, collection at retail stores and curbside collection. All types of

electrical and electronic equipment -- essentially anything with a cord or a battery --

was eligible for collection under the program. There was no charge to consumers for

dropping off items. The program sponsors paid for transport and processing of

recyclables and provided some financial support to communities for promotion of the

events.

This project had five primary objectives: to explore economies of scale in

collection and recycling, to evaluate high-end recycling of CRT glass and engineering

plastics, to evaluate the costs of recycling materials, to increase privately funded

electronics recycling and to identify infrastructure needs and compare the costs of

different approaches to collection. In order to achieve these objectives the collectors

and the recycler were asked to keep track of the quantities of different types of

equipment that were collected, of the costs of collection and processing and to survey

the people who brought equipment to collection sites. Roughly 9,000 people

participated in the 64 events in the summer and fall of 1999 and 7,639 of those replied

to the participant survey. A total of 575 tons of electronic equipment, just under one

pound per person in the region served by the events, was collected.40

Some of the best data available on recycling electronics was gathered in this

effort and it is publicly available. Some of the important findings are as follows.

The participation rate for the collection events sponsored by the program was less than 1% -- i.e., 9,000 participants out of 1.3 million people estimated to be served by the events.

Televisions and computer monitors accounted for 76% of the equipment collected. The remaining 24% was split into 7% household electronics, 12% consumer electronics and 5% CPUs.

40 The study estimates that roughly 1.3 million people were served by these events.

24

Collection events at retail stores were the best attended.

Packaging of material was found to be important to preventing breakage. Packaging also contributed non-trivially to the weight of the material delivered to the recycler. In addition to the 575 tons of electronic equipment, l,125 tons of packing material (shrink wrap, pallets and metal roll-off boxes) was also delivered to the recycler. Most of this material could be reused, but its weight contributed to the costs of transporting the material.

The program was costly. Collection costs were roughly $288 per ton of material collected and just under $18.60 per participant. Collection costs per participant were 35% below average at the retail store events due to the high level of participation at those events.

The net costs of transporting, processing and marketing reusable and secondary materials was $160 per ton (cost net of revenues from sales of reusable or secondary materials). Nearly 40% of the latter cost was attributable to transportation from collection points to the recycling center.

Together collection and transport account for roughly 75% of the net costs of collection, transport and recycling averaged across all types of equipment collected in this project.

Carpet Stewardship Memorandum of Understanding

In 2000, representatives from the states of Minnesota, Iowa and Wisconsin, the

U.S. EPA, non-governmental organizations (NGOs) and the carpet industry joined with

carpet retailers and materials suppliers to form the Midwestern Workgroup on Carpet

Recycling. Members of this group signed a memorandum of understanding in January

2001 that included two key provisions. The first was a commitment to create an

independent organization, funded by industry, to be responsible for the collection and

recycling of discarded carpet.41 The second was an agreement to continue meeting to

develop a set of “negotiated outcomes” to serve as goals for reuse and recycling of

carpet for the next ten years.

After the initial agreement was signed, a newly constituted working group, the

Negotiated Outcomes Group, began meeting in March of 2001. This group included

representatives from a larger set of state governments, the federal government,

manufacturers of fiber and carpet, and environmental NGOs. This group developed a

list of goals for disposition of post-consumer carpet by 2012 that include a reuse goal of

41 Wilt and Hickle (2001), p. 5.

25

3-5%, a recycling goal of 20-25% percent, and caps on the use of waste carpet as fuel in

cement kilns (maximum of 3%) and in waste-to-energy facilities (maximum of 1%).

These caps are subject to modification if greater use of waste carpet in these two energy

applications is deemed necessary to encourage collection of used carpet and if the

environmental consequences of increased incineration of carpet are deemed acceptable.

These goals are enumerated in the Memorandum of Understanding (MOU) on Carpet

Stewardship, signed by members of this group. The MOU took effect in January 2002.

The MOU also commits the carpet industry to establishing a third party

organization that is responsible for meeting these recycling and reuse goals. This

group, the Carpet America Recovery Effort (CARE) will be responsible for enhancing

the used carpet collection infrastructure and for assessing the industry’s progress in

achieving the goals set out in the MOU. The carpet industry is responsible for

providing the funding required to meet the goals of the Negotiated Outcomes Group.

The MOU also establishes a time-line for evaluating progress toward meeting the MOU

goals and for establishing new goals for future time periods.

National Electronics Product Stewardship Initiative

A multi-stakeholder effort similar to the recently completed carpet initiative is

currently underway for electronics products. This effort, known as the National

Electronics Product Stewardship Initiative, or NEPSI, brings together representatives

from over 20 state governments, the U.S. EPA, electronics manufacturers, retailers,

recyclers and non-governmental organizations. This group seeks to develop a system to

maximize collection, reuse and recycling of used electronics and to provide incentives

for environmentally friendly changes to product design including source reduction,

reduced use of toxics, increased use of recycled inputs and making products that are

easier to recycle. The group began meeting in July 2001 and hopes to reach an

agreement on how best to achieve its goals by the end of 2002 (see

http://www.nepsi.org).

IV. Government Policies to Promote Product Stewardship

Although most of the product stewardship programs in the United States are

voluntary efforts, there are some state laws and regulations that are designed to

encourage greater involvement by producers or retailers or both in the management of

products at the end of their useful lives and in particular, in assuming financial

26

responsibility for recycling products. These include state laws regarding disposal and

recycling of tires, batteries, and used motor oil. Some of these laws or regulations

speak directly to the role of producers and retailers while others are more indirect.

Examples of some of these laws are discussed below.

Tires

According to the Scrap Tire Management Council, thirty-seven states ban

disposal of whole tires in landfills, although over 80% of these states allow landfill

disposal of shredded tires. Thirty four states have advance disposal fees, ranging from

$0.25 to $5.00 per tire, on new tire sales which are collected and managed either by the

tire dealer, the tire wholesaler or by the state.42 The funds accumulated from these fees

are generally used to finance a variety of waste tire management activities including

promoting recycling, promoting the use of tire-derived fuels and funding the clean-up of

existing scrap tire piles. Unlike other consumer products, initial tire collection is not

difficult because most people are willing (even eager) to leave their old tires at the

dealers when they purchase new ones. Where the system can fall apart is getting tire

dealers to recycle or dispose of tires in a responsible manner. Funds collected by the

dealers can help to cover the costs of responsible management of the used tires that are

returned to them. Across the country, recovery of scrap tires for use as fuel or new

products, such as asphalt and flooring material, is growing. Of the 270 million used

tires generated in 1998, 177.5 million (or almost 66%) were recovered. By 2000, scrap

tire generation had grown to 273 million, and 196 million, or nearly 72%, were recycled

or sold to fuel markets.

Lead Acid Batteries

Thirty-seven states have adopted some form of legislation governing disposal

and recycling of lead acid batteries. Many of these states have adopted a variation of

the model battery recycling law developed by the Battery Council International. This

law includes an explicit ban on disposal of lead-acid batteries and a deposit on all

battery sales not accompanied by a trade-in. Ten states have a battery deposit, usually

between $5 and $10, that must be paid on all new lead acid batteries that are purchased

without a trade-in of a used battery.43 In most states, part or all of this deposit will be

42 Details on the fees charged by states can be found at http://www.rma.org/scraptires/pdf/scraptire_leg.pdf.43 Information on state fees is found at http://www.batterycouncil.org/states.html.

27

refunded if a used battery is brought back to the store within 30 days of the purchase.

Retailers are required to ensure that the used batteries that they take back are recycled.

The recycling rate for lead-acid batteries is close to 96%. The favorable economics of

reclaiming lead from spent batteries is undoubtedly contributes to this high rate, but the

deposit-refund programs also appear to help. Prior to the establishment of the

programs, the recycling rate was approximately 85%.

Used Motor Oil

In 1991, California passed the Oil Recycling Enhancement Act, which is

administered by the California Integrated Waste Management Board (CIWMB). This

act was designed to discourage illegal disposal of used oil. Under the act, oil

manufacturers must pay a fee of $0.16 per gallon of lubricating oil sold in California to

the Waste Management Board. This fee is then refunded in full on a per gallon basis to

used oil collection programs certified by the state, including curbside programs and

collection centers, for every gallon of oil that is returned for recycling. These programs

must collect used oil from the public at no charge and offer the $0.16 per gallon fee to

consumers who bring in used oil to be recycled. The program has resulted in a 150%

increase in the total quantity of oil being recycled in the state over the 7 year period

from 1993 to 2000 (CIWMB, 2001).

Summary

The policies reviewed above represent just a sample of the growing number of

laws and regulations that states are adopting to limit disposal and promote recycling of

different products. We highlight the above programs because they place some financial

responsibility on producers by assessing up-front fees, and in some cases, they require

retailers or other collectors of used products to guarantee that products are recycled.

One interesting feature shared by most of hese programs is the inclusion of some

type of financial incentive to promote collection and recycling. In the next section, we

argue that such incentives are key features of successful programs. The discussion

centers on the use of incentive-based policies and how they might be structured to

encourage DfE and promote producer responsibility.

PART II.

28

V. Incentive Based Instruments Versus Command-and-Control

Environmental economists generally advocate the use of economic incentive-

based, or market-based, instruments to internalize environmental externalities such as

those associated with waste disposal. Incentive-based (IB) instruments are

characterized by the use of financial incentives provided to market participants to

reduce an environmental externality – i.e., to reduce a side-effect from production or

consumption that is not accounted for in private market transactions. A clearer picture

of what is an IB instrument arises when we offer the contrast of "command-and-

control" (C&C) instruments. C&C approaches to environmental problems include

design standards that require firms to use a particular control technology, performance

standards that specify a maximum amount of pollution from each polluter (or pollution

per unit of some input or output), or outright bans on the use of something (e.g., lead in

gasoline or CFCs). Obviously, command-and-control options provide incentives of a

sort. They are necessarily accompanied by penalties for noncompliance, so polluters

have an incentive to comply to avoid the penalty.44 The key distinction between IB and

C&C approaches lies in the flexibility of the former relative to the latter and the

potential cost savings this flexibility brings about. We elucidate these points by

comparing emissions taxes with regulatory standards.

The quintessential incentive-based environmental policy is the Pigovian

emissions tax. An emissions tax is one levied per unit of emissions and paid by each

polluter on all its emissions. To provide proper incentives to reduce the environmental

externality it is important that the tax be levied on emissions – i.e., on the externality-

generating activity and not on some related thing such as output. And to be a true

Pigovian tax, the tax rate must be equal to the marginal environmental costs of those

emissions at the social optimum. The social optimum is the level of pollution where the

extra benefit to society from eliminating another unit of the pollutant is exactly equal to

the extra cost. Another policy option with many of the same features of the Pigovian

tax is marketable pollution permits. If the number of permits issued by the government

is set to generate the socially optimal level of pollution, then the permit price is exactly

the same as the Pigovian tax.45

44 The penalty could take the form of a monetary fine or it could take the form of shutting operations down for a period of time while a problem is fixed.45 In a world of uncertainty about the costs of abatement, there can be differences in the outcomes with taxes and permits (see Weitzman (1974) for the classic treatment of this problem; Baumol and Oates (1988) have a good explanation in Chapter 5).

29

These IB options have several advantages over C&C policies. First, a tax or

equivalent marketable permit system is the least cost way of achieving any given

reduction in pollution, including one that differs from the social optimum because it

brings about more pollution abatement from producers who find it relatively easy to

abate and less from those for whom abatement is difficult. Second, a pollution tax has

what are often called "dynamic efficiency" effects. Because polluters pay the tax on all

units of pollution, they have an incentive to develop cheaper and more effective ways of

reducing their pollution, since doing so reduces their costs.46 Emissions standards or

technology-based standards do not similarly reward efforts to do better than the

standard. Third, recent research suggests an added benefit from environmental taxes

over command-and-control approaches: the revenues generated from such taxes can be

used to reduce other distortionary taxes such as income taxes (Bovenberg and de Mooij,

1994; Parry, 1995; Bovenberg and Goulder, 1996).

Despite these desirable properties of Pigovian taxes, there may be many

circumstances in which they are infeasible. Hazardous and solid waste disposal may be

two examples. Because of the relative ease of disposing illegally of one's waste,

charging a price – i.e., a Pigovian tax – for disposal could have unwelcome

repercussions. The tax would necessarily have to be accompanied by a penalty for

illegal dumping, but enforcement of illegal dumping laws can be difficult and costly.

Systems that charge for solid waste collection and disposal – so-called “pay as you

throw” (PAYT) programs – are becoming more common in the U.S. These programs

typically charge a fee per bag or per container thus giving households the incentive to

reduce the amount they dispose of.47 Most evidence thus far suggests that illegal

dumping has not been a problem in most PAYT communities. If the fees charged in

these programs were higher, however, it could be a problem.

Several studies by economists suggest an alternative IB policy for solid waste

that has many of the desirable features of a Pigovian tax without the attendant illegal

disposal problem: a product tax coupled with a recycling subsidy (see, for example,

Dinan, 1993; Fullerton and Kinnaman, 1996; Palmer and Walls, 1997; Calcott and

46 Under the SO2 allowance trading program in the U.S., electric utilities and their suppliers have lowered their costs of reducing SO2 emissions through innovations in coal switching and blending and cost-reducing improvements in flue gas desulfurization equipment (see Burtraw, 1996, for discussion).47Linderhof, et al. (2001) report on weight-based pricing used in a Dutch community. According to Allers (2002), a co-author of that study, illegal dumping was monitored carefully by the town and was found to be “minimal, but not nonexistant.” Several other communities in The Netherlands are also considering weight-based pricing.

30

Walls, 2000). This combination of policy instruments has the two features of a

Pigovian tax that make it an optimal policy: an output reduction effect and an input

substitution effect.48 The product tax and recycling subsidy give firms the incentive to

both produce less output and substitute recycled inputs for virgin inputs in production.

If the tax and subsidy are weight-based, producers have the incentive to downsize

products and if the tax and subsidy vary by material, the policy encourages material

substitution.

The product tax/recycling subsidy policy is sometimes referred to as a "deposit-

refund." In traditional deposit-refund, or "bottle-bill," programs, consumers pay a

deposit (tax) on a container at the time of purchase and receive a refund (subsidy) equal

to their initial deposit when they return the container to a designated collection center.

The lead-acid battery programs described above are similar to bottle bills.49

An approach with similar results for recycling and solid waste but probably

lower administrative costs is something we refer to as an "upstream combined

tax/subsidy (UCTS)."50 In Palmer, Sigman, and Walls (1997), the UCTS combines a

tax (i.e., deposit) on produced intermediate goods such as aluminum ingot, rolls of a

specific grade of paper, and sheets of steel, with a subsidy (i.e., refund) granted to

collectors of recyclables such as used beverage cans, old newspapers, and so forth, who

subsequently sell the goods for reprocessing. Although the tax and subsidy are not

levied directly on consumers, consumers would feel the effect through higher product

prices and if the tax is levied per pound, consumers can be expected to adjust their

purchasing behavior toward lighter-weight products.

The Western Canada used oil program described above is an example of a

UCTS. The environmental handling charge is the upstream tax and the return incentive,

paid to collectors of used oil, is the subsidy. As we pointed out in our discussion of that

program, collectors have passed on some of the return incentive to final consumers who

return their used oil.

48 For good discussions of the output and substitution effects, see Spulber (1985) and Fullerton (1997).49 Bottle bill programs generally have fairly high administrative and transaction costs associated with them because bottles must be returned to a collection center such as a supermarket; the supermarket then must sort the containers by brand; and brand distributors then pick up the sorted containers for recycling. The California beverage container recycling program uses a more limited network of parking lot redemption centers where consumers can return their containers for a refund. This system limits the processing costs imposed on beverage retailers. Lead-acid batteries are not sorted by brand and in many cases, returning batteries is not inconvenient since consumers are having a new battery installed by a mechanic anyway.50 The UCTS described here is similar to the “two part instrument” advocated by Fullerton and Wolverton (1999). They envision a combination tax on “dirty production” and subsidy to recycling or “clean production” that can be implemented upstream in the production process to avoid transaction costs.

31

An important question about the UCTS, however, and the one most relevant to

our discussion of EPR and product stewardship, is whether such a policy – or any IB

policy – could provide incentives for improving product recyclability. The main

impetus for producer take-back and EPR is to spur this kind of DfE. In developing

these programs in the first place, government policy-makers in Europe thought that by

making producers responsible for products at end-of-life, they would have the incentive

to design those products to be more recyclable.

Before we discuss IB policies, however, it must be pointed out that in current

take-back programs, the incentives for DfE are largely muted because of the way the

programs are implemented. Individual producers do not recycle their own products at

end-of-life, nor do they pay the cost of recycling their own products. PROs arrange

collection and recycling of all firms’ products jointly, thus an individual firm has little

incentive to redesign its products since the costs are borne by the firm itself while the

benefits are reaped by everyone.

Calcott and Walls (2000; 2001) explore the DfE issue in some detail in a

theoretical model that incorporates producers making design choices that affect product

recyclability. They find that, if recycling markets work perfectly – i.e., if recyclers pay

consumers for products and the prices they pay vary with the degree of product

recyclability – then either a Pigovian tax on disposal or a UCTS can yield a first-best,

efficient level of waste disposal, recycling, and design for environment. If however,

recycling markets do not work perfectly – more specifically, if it is too difficult and

costly for recyclers to pay prices for recyclable materials that vary with their degree of

recyclability – then a first-best outcome cannot be reached. Calcott and Walls argue

that there is probably some “sand in the gears” of recycling markets preventing

attainment of the first-best. It is costly to collect and transport recyclables, and it is

difficult for recyclers to sort products by their degree of recyclability and pay

consumers a price based on that degree of recyclability. Curbside collection programs

are good examples: households simply toss a variety of items in the bin – PET bottles

alongside aluminum cans – and are not paid individually for these items. Indeed, they

are not paid at all. It is this missing market – or imperfect market, in any case – that

provides an economic justification for the producer take-back movement.

Calcott and Walls find that a constrained, second-best, optimum can be reached

with IB instruments, however. They show that the constrained optimum can be reached

with a UCTS in which the product tax takes on one of two rates depending on whether

32

the product is recyclable enough to be accepted by processors – i.e., processors do not

incur a loss if they recycle it. The tax on products that do not reach that recyclability

threshold is the standard Pigovian tax and thus can be viewed as an “advance disposal

fee.” Products that meet the threshold receive a subsidy when they are recycled that is

equal to the tax paid up-front. Calcott and Walls (2001) also find that there is a second

set of instruments that also yields the constrained optimum: a single tax/subsidy

combined with a Pigovian tax on disposal. Thus, if illegal dumping is not a problem, it

is feasible to have a UCTS along with the disposal fee and yield the second-best

outcome.

In the Calcott and Walls models, the constrained optimum is the best outcome

that can be achieved given the transactions costs in recycling markets. Although the

authors do not compare their IB instruments with a possible take-back, or other

mandatory program, it is fair to say that a take-back program in which individual

producers must collect their own products from millions of consumers and have them

recycled would be very costly. The more typical outcome – one in which a PRO

collects licensing fees from member firms that vary by material and weight and then

ensures that recycling rate standards are met -- ends up having incentive effects much

like the UCTS. The licensing fees are similar to the up-front product taxes and the

recycling rate standards provide incentives similar to (though not exactly the same as

nor necessarily as strong as) the recycling subsidy.51

An alternative to the UCTS that might be more effective in promoting DfE

would be a tradable recycling credit system. Tradable recycling credits are similar in

spirit to tradable emission permits mentioned above. An even better analogy might be a

renewable energy portfolio standard.52 Under a renewable energy portfolio standard,

electricity producers are required to either produce a minimum portion of their

electricity using renewable energy sources such as wind or solar or hold credits showing

that another renewable generator has produced the requisite amount of energy.

A tradable recycling credit program for electronics, for example, might work as

follows. Every manufacturer or importer would be required to meet a recycling rate

target for its products. The target could be an overall weight target, such as 50% of the

weight of the product must be recycled, or a set of specific targets by component

material type. Producers could do the recycling themselves or they could pay a recycler 51 The incentives created by a recycling rate standard are stronger when there is a financial penalty associated with failure to achieve the standard, or conversely, a reward payment for achieving or exceeding the standard.52 For more information on Renewable Portfolio Standards see Clemmer, Nogee and Brower (1999).

33

to do it. With an overall weight target, any time a pound of a particular producer’s

material is recycled, a recycling credit is granted to that firm by the recycler.53

Recyclers would be required to keep track of what they recycled by brand. At the end

of the year, producers must show that they have met the recycling target or hold enough

credits that they’ve purchased from others to comply with the target.

Designing and implementing a tradable recycling credit scheme raises several

issues and challenges. These include questions about how collection might work and

the effect of different collection schemes on incentives for DfE; how to incorporate

incentives for product downsizing and waste minimization; how to address hazardous

components of products; and how to deal with long-lived products such as electronics

and vehicles.54

Another possibility worth exploring might be a combination of a UCTS with a

system of financial rewards for the attainment of particular design objectives. Both a

reward system and a tradable recycling credits scheme – and virtually any system with

strong incentives for DfE – have the potential to be very costly to implement because of

the necessity of tracking individual firms’ products through the system. In our opinion,

there is no way around this problem. Thus, there seem to be critical trade-offs that

policy-makers need to consider when deciding on policy options: simplicity and

flexibility coupled with minimal incentives for DfE, on the one hand, versus complexity

and high administrative and monitoring costs combined with sharp DfE incentives, on

the other. More research is needed on the potential for IB policies with strong DfE

incentives.

Given this policy dilemma, as well as the reluctance in the U.S. to adopt the

European approach, we turn to an assessment of the voluntary programs we described

above. Do they have the potential to achieve some of the goals of product stewardship

and EPR? What are some of the key issues that need to be addressed to make voluntary

programs work? Do voluntary programs have the incentives that we argued in this

53 This approach is different from the approach described in the report, “Tradable Certificates for Recycling of Waste Electrical and Electronic Equipment” produced by Environmental Resources Management for the European Commission. Under the ERM scheme, credits are awarded to the company that pays for the recycling of the electronic equipment and not to the company that originally produced or imported the equipment. In this type of scheme, recyclers do not keep track of exactly which firms’ products they are recycling. The costs of such a scheme might be lower than the one we describe but so are the incentives for DfE.54 Insights into some of these questions may come from analyzing the existing UK Packaging Recovery Notes system to determine what the pros and cons of that system are and the extent to which the desirable features of that system might be transferable to a tradable recycling credit system for electronic equipment, batteries, tires or other products.

34

section are critical to the design of a cost-effective policy? We address these issues in

the next section.

VI. Evaluating Voluntary Environmental Programs

Although there has been no analysis by economists of voluntary product

stewardship programs, there is a fairly substantial literature on voluntary environmental

programs of other types, primarily those initiated by environmental regulators. The

U.S. EPA has supported a number of voluntary efforts and pollution prevention

initiatives over the past couple of decades. Examples include the 33/50 program, the

WasteWi$e program, the Energy Star program, and Project Excel. In this section of our

paper, we present some arguments drawn from the literature for why firms may enter

into these programs and discuss what types of outcomes these programs have achieved

or might be expected to achieve given their features. We then draw some lessons for

voluntary product stewardship programs.

VI.A. Examples of Voluntary Environmental Programs

The literature analyzes firm participation in several different voluntary programs

run by EPA. EPA’s Waste Wise program is a program to reduce solid waste generation

either by participants or their customers. The program is open to a wide range of

organizations including firms, schools, hospitals, non-profits and local governments.

Under the program, organizations set their own waste reduction goals and then develop

systems for evaluating progress toward that goal. EPA provides technical assistance to

help organizations achieve their goals and free publicity and public recognition of the

achievements of participating organizations. In 2001, the seventh year of the program,

more than 1,100 organizations participated in the program.

EPA’s Green Lights program began in 1991.55 The goal of this program was to

reduce greenhouse gas emissions from electricity generation by increasing the

efficiency of lighting systems used by businesses. Firms study their lighting use and

then promise to upgrade the lighting systems in their facilities as long as it is cost-

effective to do so. The EPA provides information and technical assistance to

55 In the late 1990s this program was merged into EPA’s Energy Star program. Energy Star was originally a labeling program for equipment that met certain energy efficiency goals set by EPA, but this program has expanded to include certification of the energy efficiency of facilities such as office buildings and schools.

35

participants. As of 1998, there were over 2,500 partners who had reduced their energy

use by 4.7 billion kilowatt hours per year (Videras and Alberini, 2000).

EPA’s 33/50 program, launched in February of 1991, had a goal of reducing

releases and transfers of 17 priority toxic chemicals tracked in the Toxics Release

Inventory (TRI)56 by 33% from 1988 levels by 1992 and by 50% by 1995. Firms were

solicited for participation in the program based upon the volume of their releases and

transfers of toxic substances; EPA solicited firms with the highest levels of releases

most actively. Participants were asked to commit to particular levels of reductions of

toxic chemicals. Nearly 1,300 firms volunteered to participate in the program and,

collectively, they met the goal of 50% reduction in 1994, a year earlier than scheduled

(U.S. EPA 1999).

Project XL is a voluntary program established by EPA in 1995 to give firms the

opportunity to negotiate agreements that would replace specific regulatory requirements

in exchange for improved overall environmental performance by the firm. Examples

include waiving requirements for obtaining new permits for air emissions for every

process change in a facility in exchange for a facility-wide cap on total emissions where

the cap is set tighter than the baseline level (Blackman et al., 2001). As of late 2000,

there were 50 XL projects that had either been approved or were underway or in

development (U.S. EPA, 2000).57

VI.B. Motives for Participation in Voluntary Programs

The economics literature identifies several motives firms might have for

participating in voluntary environmental programs (Videras, 2001; Videras and

Alberini, 2000; Lyon and Maxwell, 1999; Reinhardt, 1999). Many of these motives

could also apply to industry-run environmental initiatives including product stewardship

programs. These motives include

cost reduction;

appealing to environmentally-conscious customers;

preempting future government regulation;

relief from existing regulation;

gaining a competitive advantage in the marketplace; and56 The Toxics Release Inventory requires manufacturing and other firms with more than 10 employees to report on-site releases and off site transfers of over 600 hazardous chemicals.57 Roughly 20 of these 50 projects involve local government or government agencies and not private firms.

36

facilitating collusion among firms in the industry.

Below we discuss each of these motivations with regard to environmental

voluntary programs in general and how they might relate to the product stewardship

movement, in particular.

Lower costs. The idea that reducing emissions, waste or use of hazardous

substances will help to reduce costs is something that continues to be popular with

environmental advocates and even with some academics (Porter and van der Linde,

1995). The suggestion that there is no trade-off between higher costs and lower

emissions or waste certainly has its appeal. However, as Reinhardt (1999) points out,

two conditions must hold for environmental volunteerism by firms to be cost reducing.

First, there needs to be an obstacle to firms minimizing costs such as a market

imperfection, an information asymmetry or a government intervention. Otherwise, if

markets were perfectly competitive, firms would already need to be minimizing costs to

stay in business. Second, the action that firms take under the voluntary initiative needs

to either change the costs or benefits of some of the firm’s activities or change the

information flow to workers in the firm.

The evidence that improved environmental performance actually reduces costs

is largely anecdotal and the role of the various market imperfections suggested by

Reinhardt in contributing to these results has not been analyzed empirically. Voluntary

programs could reduce costs of environmental compliance when offered as an

alternative to command and control programs as in the case of Project XL. However,

one study by Boyd (1998) suggests that firms are rejecting some opportunities for

reducing their emissions or use of hazardous substances – so-called pollution prevention

initiatives -- because after some study or small scale experimentation, these efforts

revealed themselves unlikely to be profitable.

Product Differentiation. Firms may engage in environmental volunteerism to

make their products more appealing to “green” consumers and thus increase their

profits. Reinhardt points out that this strategy will only work if consumers are willing

to pay for the environmental attribute in question, if there is credible information about

this environmental attribute available to consumers, and if there is some protection

against imitators. Opportunities for successful product differentiation of this type

appear to be limited, but further study is needed to better understand when such

activities are likely. The empirical literature reviewed by Lyon and Maxwell (1999)

37

suggests that green consumerism does not play a big role in voluntary initiatives to

reduce toxic emissions, those that have been subject to the most study.58 They go on to

suggest that the desire to attract talented employees who care about environmental

performance or environmentally conscious investors may also be motivators for

environmental volunteerism.

Preempt Regulation. Firms may also engage in voluntary environmental

actions to preempt future regulation. The creation of the RBRC by the rechargeable

battery industry provides an example. When RBRC was created, eight states had

already passed laws requiring retailers and manufacturers of products that contain

rechargeable batteries to take back those batteries for recycling or proper disposal and

many more states were considering following suit (Fishbein et al., 2000). Members of

industry, envisioning a patchwork of regulations across different states, decided to

establish the national voluntary RBRC program that focused exclusively on recycling.

Participation in NEPSI by electronics producers is likely motivated, in large

part, by a desire to prevent states from adopting take-back legislation – particularly

legislation that differs in different states.

Dawson and Segerson (2000) find that voluntary agreements to achieve an

industry-wide cap on emissions in order to prevent government from imposing an

emissions tax are sustainable despite incentives for firms to free ride on the efforts of

other firms. However, they show that the social costs of pollution control under these

agreements tend to be higher than with an emissions tax and suggest that the

transactions costs of the tax regime must be high to justify the voluntary approach on

welfare grounds.

Maxwell, Lyon and Hackett (1998) show that when the political costs of

organizing citizens to influence environmental policy are taken into account, it can be

welfare enhancing to have firms engage in voluntary abatement activities. By allowing

themselves to be preempted, consumers will have more resources to devote to other

activities while, at the same time, total abatement will be higher than it would have been

in the absence of a voluntary program.59

On the other hand, when legislators allow negotiated regulations to preempt

new laws, the outcome could include very weak regulations. Work by Segerson and

58 They point out, however, that these factors may be more important motivators for environmental initiatives of other types.59 This result holds unless corporate efforts to lobby policymakers reduces the marginal effectiveness of lobbying by citizens or environmental groups.

38

Miceli (1998) suggests that if regulators are not motivated to maximize social welfare

and have been delegated the authority to negotiate regulatory agreements that could

substitute for legislation, then these negotiated agreements could reduce welfare.

Regulatory Relief. Short of actually attempting to preempt regulation, a firm

may also use a voluntary action as a means of demonstrating to the regulator that it is

improving its environmental performance and is therefore, perhaps, worthy of some

regulatory or compliance relief. Empirical research by Videras and Alberini (2000)

suggests that the desire to demonstrate improved environmental performance was an

important driver of firm participation in EPA’s 33/50 program. This motivation seems

particularly relevant for firm-level voluntary initiatives and less so for industry-level

programs where it may be difficult for a firm to distinguish itself from others in this

regard.

Competitive Advantage. Firms may also use environmental voluntary programs

to gain an advantage over current or potential competitors. For example, a firm may

undertake a voluntary program to demonstrate that achieving a particular environmental

objective or imposing a particular constraint is not costly and thereby raise the chances

that what the firm did voluntarily will become mandatory for its competitors. DuPont

pursued such a strategy in the case of CFCs, a substance invented by DuPont that was

shown to contribute to ozone depletion. Prior to any regulatory requirement to do so,

DuPont announced that it would stop producing CFCs and that it had developed

substitutes for this substance, thereby facilitating the worldwide ban on use of CFCs.

Industry-wide voluntary programs may also be a way of raising the costs of all firms in

the industry and thus reducing entry by new competitors or limiting the ability of

smaller firms to compete. Reinhardt (1980) suggests that the chemical industry’s

Responsible Care initiative might be an example of such a program. This program

developed by the Chemical Manufacturers Association calls on member firms to

comply with behavioral codes designed to reduce the probability of an accidental

release and to improve relations with surrounding communities.

Facilitate Collusion. Industry-wide product stewardship initiatives could

provide a means to support collusion in an industry. Videras (2001) argues that if

participants in a voluntary pollution prevention agreement commit to report emissions

and if emissions are directly related to output, then a voluntary agreement could be used

to support collusion in the product market. Voluntary agreements also provide

opportunities for frequent contact and, in some cases, standardization of technologies,

39

both of which can help to facilitate coordination of pricing strategies among would-be

competitors.

VI.C. Outcomes of Voluntary Environmental Programs

Specific voluntary programs and the potential of the voluntary environmental

movement in general could be evaluated along a number of different dimensions: (1)

how well the program performed relative to ex ante expectations, (2) the extent to

which the program reduced emissions or to which it improved the environment, (3) the

cost or cost-effectiveness of the program and (4) the implications of the program for

social welfare. In practice, the few evaluations that exist focus on the first item with

attention sometimes given to the middle two. Few studies of actual programs attempt to

measure implications for social welfare, although the theoretical literature on

volunteerism does have some lessons to offer in this regard.

The performance of EPA voluntary programs relative to their ex ante goals is a

mixed bag. The 33/50 program met its goal of a 50% reduction in releases and transfers

of included chemicals a year ahead of schedule and exceeded its goal for the target year

of 1995. While both participants and non-participants in the 33/50 program contributed

to this reduction in total emissions, EPA (2000) notes that reductions of chemicals

included in 33/50 exceeded those of other TRI substances not included in the 33/50

program, suggesting that the program was an important factor in bringing about these

decreases. Project XL, on the other hand, has had difficulty attracting participants,

particularly participants prepared to propose innovative approaches to environmental

controls, an important goal of the program. The goal for this project was to attract 50

programs by the end of 1996, but as of late 1999, only 15 projects had been approved

(Blackman et al., 2001). For other projects, such as the Green Lights program it may be

difficult to ascribe results to the program per se because firms that may have been

planning to install energy efficient lighting without the program – for cost saving

reasons – may have done so under the program to get the related publicity.

Environmental outcomes from these programs can be more difficult to assess,

both due to problems with identifying the baseline and with attributing improvements to

a specific voluntary program. The fact that releases of other TRI listed chemicals not

included in 33/50 were declining over the same time period suggests that disclosure

requirements under TRI could be responsible for some of the improvements attributed

40

to 33/50.60 For XL projects, improvements to the environment beyond the status quo

are a necessary component for project approval and thus assuming that baseline

environmental releases are estimated accurately, projects approved under this program

will have a positive effect on the environment.

Few of these programs have been assessed in terms of total costs or cost-

effectiveness. Firms that participate in Project XL have reported reduced costs of

environmental compliance. However, the program itself can impose substantial

transaction costs on firms. Blackman and Mazurek (2000) find that the early projects

approved under project XL had high transactions costs due to the cost of interacting

with EPA. Transaction costs were highest for those projects that involved complicated

proposals to cap emissions from multiple facilities or to allow trading across different

pollutants. These costs combined with the program requirement that innovative

pollution control solutions be transferred to other facilities – preventing the innovative

firm from capturing the benefits of its innovation – may have contributed to low

volunteer rates. This research did find that interacting with stakeholders did not

contribute as much to transaction costs as some had thought it would.

Much less is known about how specific voluntary programs affect social

welfare. Blackman and Boyd (2000) find that although allowing firms to have facility-

specific tailored regulation, as happens under Project XL, always increases consumer

surplus and environmental outcomes, it could reduce producer surplus and therefore

social welfare in oligopolistic settings by creating opportunities for inefficient firms to

steal market share from efficient firms. However, if the firms that participate in XL are

market leaders (as is generally the case) or monopolists, then welfare increases

unambiguously with a tailored regulation program. An important assumption here is

that the cost savings to firms outweigh the transaction costs of participating in the

program or else firms would not elect to participate.

More generally, the theoretical literature on corporate environmentalism offers

four insights on the welfare implications of voluntary environmental programs (Lyon

and Maxwell, 1999). First, the literature suggests that while environmental

volunteerism by firms to attract green consumers typically may be welfare enhancing, it

need not be and is unlikely to yield the social optimum. Second, environmental

volunteerism to preempt stricter environmental regulation of firms will, except in

certain cases, provide benefits to both consumers and producers. Third, when they are 60 An alternative explanation might be that the 33/50 program had effects that spilled over to other chemicals.

41

beneficial to society, voluntary programs are generally more of a complement than a

substitute to government regulation because, even when they are welfare enhancing,

they rarely achieve the social optimum. Fourth, if environmental volunteerism is

leading regulators to weaken standards or to adopt tighter regulations than necessary

resulting in artificially high prices, consumers will suffer.

VI.D. Implications for Product Stewardship Programs

Several of the factors that motivate corporate environmentalism in general also

play a role in motivating product stewardship initiatives specifically. In addition, other

factors specific to product stewardship may also play a role. Different factors motivate

firms to initiate their own product stewardship programs from those that influence firm

participation in industry-level or multi-stakeholder initiatives. As with other private

environmental initiatives, a firm’s motivation can have important implications for the

social welfare consequences of product stewardship activities.

Firm-Level Initiatives. Initiatives at the individual firm level appear likely to be influenced by one of at least three different factors:

desire to reduce cost or directly increase profits,

desire to appeal to green consumers, and

“learning by doing” – i.e., learning about the costs and feasibility of take-back and recycling activities in anticipation of future regulations or to simply evaluate market opportunities.

One factor that appears unlikely to be important here is the desire to obtain

regulatory relief from existing regulations, because there are few regulations currently

applied to firms that are directly related to the goals of product stewardship.

Preempting future regulations or legislation is a possible motivator but more likely for

the industry-wide initiatives, as we explain below.

In certain cases, cost reduction or direct profit enhancement may be an

important motivator for certain product stewardship initiatives. For example, IBM

currently leases about 35% of all hardware that it sells and is actively and profitably

recycling equipment that is returned at the end of those leases (Bloomberg News, 2002).

In 2001, the recycling side of this business had a higher profit margin than the computer

leasing side. Customers also receive a share of the money that IBM receives from

recyclers, generally in the form of lower lease rates. This business-only program is

profitable in part because of the large volumes of equipment that can be collected,

42

which helps to lower the per unit collection costs. In contrast, IBM’s PC Recycling

Service costs $29.99 per box of equipment shipped for recycling and a substantial part

of that fee is attributable to the high costs of collecting used computers one at a time.

The carpet industry’s motivation for entering into their negotiated agreement

arose, in large part, from a desire to get reliable feedstocks of secondary fibers for use

in manufacturing new carpet. Making new carpet from secondary rather than virgin

materials is apparently cost-effective, but the industry had trouble getting enough

secondary material through traditional collection and recycling systems.

The desire to appeal to green consumers is clearly a factor in a number of

programs such as Nike’s Reuse-A-Shoe program and several take-back or recycling

services for used personal computers.61 In Nike’s case, they appear to have

distinguished themselves among their competitors in the athletic footwear business as

they are the only company currently offering a take-back program for shoes (although

collection sites are limited). In the case of personal computers, however, there are

several programs available from a variety of computer companies. This suggests that

perhaps another motive may be operating here since Reinhardt’s condition of barriers to

imitation does not appear to hold.

In anticipation of future regulation or a future voluntary product stewardship

agreement among producers in their industry, firms may be offering their own programs

to learn more about costs and feasibility of certain approaches to collecting and

recycling end-of-life products. This desire to learn is clearly part of the motivation for

IBM’s PC recycling service, Sony and Panasonics electronics recycling program with

ARC and Best Buy’s electronics recycling program as well. Many of these firm-level

programs are producing information that is proprietary to the firms, and as such, will

affect primarily each firm’s ability to respond to new programs or regulations.

The best publicly available information on the costs of these programs comes

from the Minnesota “Plug into Recycling Program.” We discussed their findings in

section III.C. above. Clearly, Minnesota and its partners undertook the program to

study and understand the costs and effectiveness of a wide-range of collection and

recycling programs.

61From Nike Web site and personal communications with Jim Goddard of Nike and Rhea Hale of IBM.

43

Industry-level and Joint Stakeholder Initiatives. Firm participation in

industry-wide initiatives and stakeholder processes tend to be motivated by a different

set of factors. These factors may include

preempting future regulation,

instilling a competitive advantage, or perhaps

facilitating collusion.

As Maxwell, Lyon and Hackett (1998) point out, organizing a push for a new

environmental regulation is costly to consumers. Firms can help to deter these efforts

by offering to voluntarily advance the environmental goals and both groups could end

up better off as a result. Having been affected by the spread of mandatory take-back

regulations in Europe, consumer electronics firms and firms in other industries are

eager to prevent the adoption of such costly regulations in the United States. Moreover,

they do not want to see fundamentally different approaches adopted in different states.

As a result they have joined in efforts such as the RBRC, the Carpet Stewardship MOU,

and NEPSI to provide a voluntary program that might substitute for regulation.

Voluntary product stewardship initiatives do not appear, on the surface, to be

driven by a desire to promote more stringent environmental regulation of firms as a

barrier to entry. Nonetheless, an agreement could have this effect even without

promoting regulation. For example, there is currently almost universal participation by

U.S. carpet manufacturers and fiber suppliers in the Carpet Stewardship MOU. Under

this MOU, carpet manufacturers and their suppliers are responsible for the financial

support of CARE, the industry PRO, and of its collection and recycling efforts. Even

though this is a voluntary agreement, there would be substantial pressure on any firm

attempting to enter the carpet manufacturing business in the US to join in this

agreement and to contribute financially to the effort. The added costs of fulfilling this

implicit obligation could be enough to make an entrant think twice about entering, to

the benefit of all existing firms in the industry.62

Participation in voluntary industry-wide agreements can also provide an

opportunity for facilitating collusion among firms. As Videras (2001) points out, this

approach is more likely to be effective when the voluntary agreements relate to limiting

62 Wood, tile, and laminate flooring are substitutes for carpet, however, and would act as a constraint on the extent of monopolistic pricing behavior that could be practiced by carpet manufacturers as a result of limiting entry into the industry.

44

emissions, emissions are directly related to output, and emissions are required to be

reported. Product stewardship initiatives promoting greater collection and recycling of

end-of-life equipment do not speak directly to limiting inputs to production – as

emissions usually do – and thus production per se and thus may be less effective as a

means of promoting collusion than the kinds of agreements studied by Videras.

However, being parties to such agreements can provide opportunities for firms to get

together to set fees to cover collection and recycling costs and other program

parameters that could have an unnecessarily adverse effect on consumers to the benefit

of producers.

Moreover, care must be taken in how the PRO is set up and what maximizing

behavior we can expect from it. If the PRO can exert monopoly power in recycling

markets, this can be detrimental to social welfare.

VII. Conclusions and The Role for Government

In this study, we reviewed the burgeoning EPR programs in Europe and Japan

and the voluntary product stewardship efforts in the United States. We described the

economic justification for intervention in waste markets and for policies that provide

incentives for some kind of producer involvement in management of end-of-life

products. The justification for producer involvement comes not from some notion of

fairness or the “polluter” pays principle, as some have argued, nor does it come from a

desire to reduce the financial burden on local governments dealing with waste

management. These are, for the most part, distributional issues and not issues of

efficiency or cost-effectiveness. Rather, the justification comes from the fact that

imperfectly functioning recycling markets prevent economic signals from being

transmitted back to producers to make their products more recyclable – i.e., to engage in

an efficient level of “design for environment.” Even with Pigovian taxes on waste

disposal or equivalent output taxes coupled with recycling subsidies, a less than

efficient amount of DfE takes place.

Having said this, however, we must emphasize that EPR programs as they exist

in Europe, with third party organizations handling collection and recycling jointly for

all firms in the industry, provide only weak DfE incentives, at best. And although cost

information is spotty, most evidence and our own intuition about the programs suggests

that they are costly. Administrative costs, the costs of setting up and running the PRO,

and the costs of dual collection systems are just three reasons why this is likely to be so.

45

Certainly, a national EPR program in the U.S. covering a wide range of products would

be a very Draconian change from the status quo.

European take-back programs all operate with a PRO, however, because firm-

specific take-back would be prohibitively expensive. In fact, it would be very difficult

to design a policy that is flexible and low cost to implement that also provides efficient

incentives for DfE. In our opinion, policymakers in the U.S. and elsewhere need to

openly recognize the difficulty in designing such a policy. And they need to

acknowledge the trade-offs that exist between flexibility and low costs, on the one hand,

and increased DfE, on the other. We feel it may be impossible to design a program that

“does it all.”

What then should policymakers do? We feel that a great deal of progress can be

made with some of the simpler and more flexible policies that we propose and that are

currently used for some products; that further study of the DfE issue is warranted; and

that a few rules of thumb apply to any policies or programs. We lay out these rules of

thumb first.

VII.A. Success “Rules of Thumb”

First, in order to have a substantial impact on recycling rates and waste

diversion, product stewardship programs or policies need to provide incentives for

consumers to return their products for recycling. Incentives can take several forms

including banning disposal, establishing convenient collection sites, and providing

refunds for returned items or allowing returns in lieu of deposits on replacement

products. These are incentives that are explicitly targeted at consumers. Incentives for

consumers could also filter down from producers and recyclers. For example, if

recyclers were subsidized, as they would be in our proposed “upstream combined

tax/subsidy” system or as they are in the western Canada used oil program, the recyclers

should have an incentive to increase the volume of materials they get from consumers.

Actually charging consumers for recycling services, as many of the computer

company programs do, particularly when consumers have access to free legal disposal,

is unlikely to increase recycling by much. Programs that merely make free collection

available, like the RBRC program, may not be enough to overcome the hassle costs of

getting products back to these collection sites and the virtually zero cost of throwing the

item in the trash.

46

Second, product stewardship programs or policies need penalties for non-

compliance to give firms an incentive to perform. Environmental programs backed by

legislation or regulations generally do this – legislation has the force of law behind it

and regulations are usually accompanied by penalties for noncompliance. But

voluntary agreements generally have neither of these things. Firm-level voluntary

programs are easily dropped by firms if the economy slows or if other issues take

priority. Industry-level or multi-stakeholder programs may be more difficult for firms

to abandon, but firms will be more likely to stick to the agreement if they face a

substantial penalty than if they do not. Moreover, if firms face penalties for non-

performance, they will have a stronger incentive to provide inducements for consumers

to return their products for recycling. The option of dropping out is one of the

drawbacks of the voluntary approach and a potential barrier to the success of voluntary

product stewardship programs.

It might be possible to overcome this barrier by using self-regulation such as

exists in some segments of the financial services industry. The National Association of

Securities Dealers (NASD), for example, regulates securities dealers and is responsible

for testing of dealers, examining securities firms to ensure compliance with federal

securities laws, and reviewing sales and advertising literature. The Maloney Act of

1938 gave legal authority to an industry-run regulatory board and the SEC authorized

the NASD to fill that role in 1939. How a similar system might work for enforcing

compliance with a voluntary product stewardship program is an important topic for

future research.

Third, although penalties for noncompliance are critical, this does not mean that

all firms should be required to do the same thing, either in a legislated program or a

voluntary one. For example, an industry-wide recycling rate target should not be met

by forcing each individual firm in the industry to meet the target. Allowing flexibility

across firms is the motivation for the tradable recycling credit system we suggested in

section IV. Such a system could be legislated or it could be part of a voluntary system.

If a tradable credit approach were adopted for carpet, for example, the carpet PRO,

CARE, could set up a system where each manufacturer would receive a recycling credit

each time a ton of its carpet was recycled. Such a system would provide incentives for

manufacturers to provide refunds for returned carpet and to find ways to make their

carpet more recyclable. Flexibility across firms is a hallmark of incentive-based

approaches to environmental protection. In addition to a tradable credit system, the

47

UCTS we proposed above is another IB approach that provides flexibility across firms.

All firms face the same tax rates and all recyclers the same subsidy rates for a particular

product, but the choices made in response to these rates are likely to vary across firms

and across recyclers.

In addition to these rules of thumb, we offer some concluding thoughts about

DfE concerns and about voluntary programs.

VII.B. Design for Environment

At the beginning of this section, we emphasized that designing a policy with

incentives for DfE would be difficult. We feel it is important to understand, however,

that the extent of the DfE concern varies by product type. For some products, design is

not a major issue. Packaging and other short-lived consumer products, for example,

might be perfectly suited to a UCTS. The tax and subsidy should be set on a per-pound

basis and perhaps vary across materials. Products and packaging would be downsized

as a result and some material substitution could occur. Moreover, as Calcott and Walls

(2001) explain, the policy would spur producers to make items somewhat more

recyclable in order to reach the threshold at which recycling becomes profitable. So

some DfE is encouraged by the policy.

For products such as electronic equipment, consumer appliances, and

automobiles, on the other hand, product redesign could be a critical part of reaching

waste reduction goals in a cost-effective way. At the same time, though, DfE is a more

complicated concept for these products. How electronics products, for example, should

be redesigned to be more recyclable is not an easy thing for producers themselves to

figure out, much less poorly informed government policymakers. As we stated above,

studying how a tradable credit system might work for these products would be a fruitful

avenue for future research. Another possibility, currently unexplored either in theory or

practice, would be to institute some kind of reward systems for producers that improve

their product designs. Such a system could operate in conjunction with a simpler UCTS

or other incentive-based approach. How difficult it would be for government

policymakers or regulators to pick winners in such a system is an empirical question

and one that would likely vary by product.

48

VII.C. Issues with Voluntary Programs

Since European-style mandated EPR is unlikely in the U.S. and government

policies such as the UCTS are not currently on the agenda, the question remains

whether the voluntary initiatives that we are seeing more and more of hold any promise

for achieving product stewardship goals.

We feel that firm-run voluntary programs are unlikely to be a very effective

approach to achieving overall product stewardship goals. First, as mentioned above,

firm-level programs are easily abandoned if they become too costly or if other issues

take precedent within the firm. These programs generally have high collection costs,

low participation rates and are not particularly cost-effective due to a single firm’s

inability to exploit economies of scale, particularly when dealing with residential

consumers. Theoretical analysis also suggests that voluntary programs rarely yield the

social optimum.

These programs do provide opportunities for firms to learn about the costs of

collecting and recycling the products they make, however, and about bottlenecks in the

collection and recycling system. Producers may also learn from working with recyclers

about cost-saving changes that they can make in their product design. The potential for

these types of lessons depends on the costs of recycling, the volume of material that

firms are getting back from consumers, and whether the producer is indeed even

interested in learning about recycling its products.

Voluntary efforts that involve collaboration among firms in an industry or

collaboration among firms and other stakeholders, such as government and

environmental groups, hold more promise than independent efforts by individual firms.

These arrangements, such as the Carpet Product Stewardship MOU, have the potential

for a bigger impact on product disposal and recycling because a larger segment of the

market is covered. As a result, there is a greater possibility for realizing economies of

scale in collection, transport and processing of recyclables. For these voluntary

programs to be effective, most firms in the industry must be participating to reduce free

riding, and as we mentioned above, the programs need to have some binding sanctions

on firms for not achieving the recycling goals of the agreement, or conversely, some

strong incentives for firms to behave in a way that advances the recycling and design

for environment goals.

A potential problem with joint collaborative efforts by industry, however, is that

they might facilitate collusion among firms to raise prices and engage in other

49

monopolistic behavior, either in product markets or markets for secondary materials.

Participation in a voluntary product stewardship arrangement provides opportunities for

firms to get together and share information that could be used to impel collusion.63

Moreover, the agreement itself can act as a serious barrier to entry into the industry.

VII.D. Summary

In summary, some of the goals of product stewardship are laudatory; in

particular, spurring producers to design for environment may be a key way to get waste

reduction at the lowest cost, particularly for some products such as electronics,

appliances, and vehicles. The political reality in the United States is currently that

voluntary programs are more likely than mandatory ones. Whether such programs can

succeed at reducing waste in a cost-effective manner depends on many factors. We feel

that the single over-riding factor for determining success, in either voluntary or

mandatory programs, is the extent of the incentives provided within the system.

Incentives for consumers to return products and/or for recyclers and producers to collect

those products from consumers are key. Incentives for firms to participate in the system

are also important, as are incentives for firms to reduce product weight and size and at

least to some extent, redesign products to be more recyclable. And finally, the system

should provide incentives for recyclers to recycle more. Economic instruments such as

the UCTS or a tradable recycling credit system could help to create the right types of

incentives for participants throughout the product lifecycle and, at the same time, offer

flexibility that helps to minimize the cost to society of reducing waste and increasing

recycling of consumer products.

63 Note that this is not just an issue for voluntary programs, as some of the mandatory take back programs established in Europe have been subject to challenges on anti-trust grounds related both to the exercise of market power in the product market and in the recycling market.

50

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