Recycled content claims under demand benefit and supply uncertainty: Multi-period model and application to glasswool insulation

Abstract

Manufacturers often declare recycled content claims that are specific (e.g., to each production period) or average (e.g., across many production periods). Such claims are manifested through the choice of certification and generate demand for the manufacturer’s recycled content product. However, since the amount of usable recycled input available from local sources is often limited and uncertain, and external (non-local) sources are expensive, a manufacturer needs to balance the demand-side benefits of a recycled content claim with the associated sourcing and inventory costs. In this paper, we develop a multi-period model over a planning horizon, where a manufacturer makes a product’s source mix decision (recycled input vs. virgin content) and recycled input carryover decision each period in the presence of a stochastic supply and external sourcing cost. We solve for the manufacturer’s optimal recycled content claim decision over a planning horizon and calculate the manufacturer’s profit, recycled input, and virgin raw material usage at the optimal claim. Our key contributions are as follows. We show that (i) a shorter (longer) planning horizon may sometimes increase (decrease) the recycled content claim, (ii) demand stimulation for recycled products may sometimes decrease the optimal recycled content claim, and (iii) supply stabilization (i.e., lowering variability in the municipal stream) may decrease the recycled content claim. We provide numerical results for parameters driven by European data from the fiberglass insulation industry and use our analysis to quantify the impact of several European policies relevant to the glasswool insulation industry on a manufacturer’s incentive to incorporate recycled content.