Producer's choice of design-for-environment under environmental taxation

Abstract

Nowadays, the concept of Design for Environment (DfE) is getting more and more important and popular for sustainable operations. Observations from real-world practices and extant literature indicate that currently, companies do not have strong incentive to establish DfE. To this end, this paper proposes the use of an environmental tax to enhance DfE, which will contribute to reducing wastes from the origins, improving the environmental performance and maximizing the social welfare. In this paper, by building a stylized analytical model, we examine three forms of environmental taxes (linear tax, constant tax and zero tax) and evaluate how they affect the producer's optimal DfE level. We interestingly find that the “constant tax” does not encourage sustainable product design and the “zero tax” is even better than the “constant tax”. On the contrary, the “linear tax” can promote sustainable product design and can be regarded as the best. We further discover that the “linear tax” can help balance the DfE level, the stakeholders’ benefits and the social welfare performance. The leveraging effect of marginal DfE allowance in the “linear tax” is surprisingly important and useful. Finally, we extend the basic model to cover four cases to check the robustness of the analytical results in the basic model and several important managerial insights for the development of sustainable product design are generated from the stakeholders and environment perspectives.