Can Downstream Waste Disposal Policies Encourage Upstream “Design for Environment”?

Abstract

Design for takes place when firms explicitly incorporate environmental issues in their product design and manufacturing decisions (Joseph Fiksel, 1996). To reduce waste associated with consumer products, for example, firms can reduce product weight, including the amount of packaging that comes with a product, and make products easier and less costly to recycle. The latter can be accomplished by changing the type of material used in a product, avoiding mixing of materials in a single product, coding and labeling when different materials are used, and designing for ease of disassembly (U.S. Congress Office of Technology Assessment, 1992; Fiksel, 1996). An important debate centers around the question of whether design for environment (DfE) needs to be explicitly targeted using policy instruments focused on producers or whether instruments send sufficient signals back upstream. One important downstream instrument is a disposal fee (i.e., charging households a price per pound, per bag, or per can for their trash). Many observers feel that downstream instruments do not send appropriate signals back upstream.' Some economists and others have suggested, on the other hand, that disposal fees can, in theory, send signals upstream to producers (Karen Palmer and Walls, 1998). We find that disposal fees provide incentives for efficient DfE only when there is a fully functioning recycling market (i.e., only when recyclers pay households a price for each of their recyclable items and that price varies with the degree of product recyclability). In the real world, transactions costs of paying households for each individual item recycled would be prohibitively high. In a more realistic setting in which households may place some items in a recycling bin but are not paid for doing so, a disposal fee by itself will not yield a social optimum. It encourages households to place items in the bin, but all items allowed in the bin are of equal value to the household (i.e., there is no reason to prefer an easily recyclable aluminum can to a difficult-to-recycle plastic milk jug). This means that there is no signal to producers to make products more recyclable. If the government can set product taxes that vary with product recyclability, the social optimum can be restored, but this option is not practicable.2 We argue that the infeasibility of (i) paying households for recycling and (ii) taxing products according to their recyclability means that a first-best outcome is no longer attainable. Instead, we set up a constrained second-best optimum and solve for policy instruments that achieve this outcome. We find that a disposal * School of Economics and Finance, Victoria University of Wellington, Wellington, New Zealand. Walls is also a University Fellow with Resources for the Future, Washington, DC. The helpful comments of Karen Palmer, Don Fullerton. and Hilary Sigman are greatlv appreciated. 1 Manufacturer requirements, such as Germany's well-known packaging take-back law, were developed, at least in part, as a way to encourage DfE. See (www.oecd.org/env/epr/index.htm) for updates from a series of OECD workshops held in 1997-1999 on the broader topic of extended producer responsibility. In practice, individual German producers do not actually take back their own products at end-of-life. They have formed a consortium that arranges to collect members' waste from households (marked with a green dot) and recycle it. We do not address take-back mandates in this paper. 2 In Calcott and Walls (1999), we derive these taxes. Don Fullerton and Wenbo Wu (1998) show that a direct subsidy to recyclability (combined with other instruments) can yield a social optimum. This subsidy depends on production function parameters; thus if firms differ, the subsidy would vary across firms. More i-mportantly, observing and measuring recyclability to determine subsidy payments would be virtually impossible.