An Economic Analysis of the Product Stewardship Movement:

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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 Walls[1]

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.

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]

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 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 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 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.

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]

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.

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 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]

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 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 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]

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.

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 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 |Price |

|ink printer |$17.00 |

|laser printer (includes fax machines) |$34.00 |

|all in ones (copiers) |$30.00 |

|PCs (no CRTs, includes laptops and keyboards) |$21.00 |

|monitors (CRTs, flat panel terminals) |$29.00 |

|scanners |$21.00 |

|handhelds (PDAs, calculators) |$13.00 |

|network 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 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 busy[30]) 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 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 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 ), 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 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 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.

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.

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.

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.

• 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 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 ).

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 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 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.

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]

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 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.

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 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 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 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 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; and

• 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) 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 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, 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 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 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, 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.

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 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. 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.

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 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.

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 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.

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[1] Contact: walls@; palmer@. 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.

[2] See .

[3] For more information about the DSD and its fees see .

[4] This same study also reported that the German city generated approximately 15 percent less non-recyclable waste per household than the Japanese city.

[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 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.

[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.

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

[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.

[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.

[12] See discussion of Reuse-A-Shoe program at .

[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 .

[17] For more about Nike’s PVC free pledge see (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 ibm/environment/

[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.

[22]A 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 .

[23] See for more information on this program.

[24] With this service, customers are responsible for supplying the box.

[25] This program is described at .

[26] For more information, see .

[27] For more information see .

[28] For more information on the donation program see .

[29] For more information see Sony Press Release at .

[30] Personal communication, Tony Hainault.

[31] See the Minnesota Office of Environmental Assistance Web site at .

[32]Fees 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 .

[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)

[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.

[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.

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

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

[42] Details on the fees charged by states can be found at .

[43] Information on state fees is found at .

[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).

[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).

[47]Linderhof, 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.

[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.

[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).

[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.

[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.

[56] 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.

[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.

[60] An alternative explanation might be that the 33/50 program had effects that spilled over to other chemicals.

[61]From Nike Web site and personal communications with Jim Goddard of Nike and Rhea Hale of IBM.

[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.

[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.

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