The organization of Extended Product Responsibility in waste policy with product differentiation

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Pierre Fleckinger And Matthieu Glachant

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The Organization of Extended Producer Responsibility in Waste Policy with Product Di?erentiation Pierre Fleckinger, Matthieu Glachanty This version: February 2009 Abstract The paper analyzes the e¢ ciency of Extended Producer Responsibility (EPR) for waste management. We consider a vertically di?erentiated duopoly where endogenous market quality a?ects waste disposal costs. Each producer has to meet a take-back requirement that forces it to collect and treat the waste associated with its products. In line with reality, we assume that the producers can either organize themselves in- dividually or cooperate by setting up a Producer Responsibility Organization (PRO). We study the various implementations of EPR. Central to the analysis is the trade-o? between collusion made possible by the existence of a PRO and market power in the waste industry. Key words: extended producer responsibility, waste policy, product di?erentiation JEL codes: L13, Q53 University of Paris 1 & Paris School of Economics. Email: . yCorresponding author. Mines ParisTech, CERNA, 60 Boulevard Saint-Michel 75006 Paris. Email: . Phone: + 33 140519229. Fax: . 1

product di?erentiation

targeting producers

disposal costs

costs ?like

packaging

waste

reducing disposal

producers su¢

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Packaging

TheOrganizationofExtendedProducerResponsibilityinWastePolicywithProductDi¤erentiationPierreFleckinger,MatthieuGlachantyThisversion:February2009AbstractThepaperanalyzesthee¢ciencyofExtendedProducerResponsibility(EPR)forwastemanagement.Weconsideraverticallydi¤erentiatedduopolywhereendogenousmarketqualitya¤ectswastedisposalcosts.Eachproducerhastomeetatake-backrequirementthatforcesittocollectandtreatthewasteassociatedwithitsproducts.Inlinewithreality,weassumethattheproducerscaneitherorganizethemselvesin-dividuallyorcooperatebysettingupaProducerResponsibilityOrganization(PRO).WestudythevariousimplementationsofEPR.Centraltotheanalysisisthetrade-o¤betweencollusionmadepossiblebytheexistenceofaPROandmarketpowerinthewasteindustry.Keywords:extendedproducerresponsibility,wastepolicy,productdi¤erentiationJELcodes:L13,Q53UniversityofParis1&ParisSchoolofEconomics.Email:pierre.fleckinger@univ-paris1.fr.yCorrespondingauthor.MinesParisTech,CERNA,60BoulevardSaint-Michel75006Paris.Email:glachant@ensmp.fr.Phone:+33140519229.Fax:+33140519045.1

1IntroductionAnincreasinglypopularinstrumentforsolvingsolidwastemanagementproblemsistheExtendedProducerResponsibility(EPR)programinwhichtheGovernmentassignstopro-ducerstheresponsibilitynancialand/orphysicalforthetreatmentordisposaloftheirproductsattheendoflife.Itisexpectedthatsuchprogramscouldprovideincentivestopreventwasteatthesource,promoteenvironment-friendlyproductdesign,andsupporttheachievementofpublicrecyclingandmaterialsmanagementgoals.TheseminalprograminthisrespectistheGermanGreenDotschemewhichwasintroducedin1991todealwithpackagingwaste.EPRnowconcernsawiderangeofproductgroupsandwastestreamssuchaspackaging,electricalappliancesandelectronics,batteriesandaccumulators,usedoil,tiresandend-oflifevehiclesintheEuropeanUnion,Japan,SouthKorea,Canada,etc.TheUSAconstitutesanoteworthyexceptiontothistrend.ThispaperdevelopsaformalmodelofanExtendedProducerResponsibilityprogram.Weanalyzethewelfaree¤ectsofthispolicyapproachandthewayawelfare-maximizingauthorityshouldregulatetheseprograms.Inordertoconsidertheseissueswithmoreprecision,itisnecessarytodescribethekeyfeaturesofEPRprogramsinmoredetail[10].ThecoreofanEPRprogramiseitheratake-backrequirementmandatingindividualproducerstocollectandtreatthewastegenerated,oralegalobligationtonancetheseactivities.Inaddition,theregulatorfrequentlysetsrecyclingobjectives.Producerscanimplementindividualsolutionstofullltheirobligations.ApossibleexampleistheEuropeanDirective2000/53/CEadoptedin2000whichrequirescarmanufacturerstotakebackend-of-lifevehiclesfreeofcharge.InmostEUcountries,eachmanufacturerhasdecidedtolaunchitsownprogrambycontractingwithcardismantlersandshredders.However,bearingtheresponsibilityindividuallyisverycostlyforcertaingoodsandproducts.ImaginetheCocaColaCompanysettingupasystemonitsowntodealwith2

wastegeneratedbyitsCokecansandbottles.Fortheseproducts,companiesusuallyorganizethemselvescollectivelybycreatingaso-calledProducerResponsibilityOrganization(PRO,hereafter).APROisanon-protorganizationcontrolledbytheproducers,whoseprimarytaskistosetupandmanagetheinfrastructuresthatorganizethecollectionandprocessingofwasteonbehalfoftheirindividualmembers.ThesalientexampleistheDualesSystemDeutschland(DSD)GmbHcreatedundertheGreenDotprogram.ThewayinwhichindividualproducersnancethePROisacrucialaspectofEPRdesigninthatitdirectlyinuencesthesizeoftheincentivestopreventwaste.Theusualinstrumentconsistsofafeeperunitofproductthateachproducerputsonthemarket.Theproductfeeisfrequentlyuniformacrossbrands(e.g.$20perrefrigerator).Itcanalsotakeintoaccountwaste-relatedproductcharacteristics.ThisisthecaseofpackagingPROslikeDSD,forwhichthefeeratesvaryacrossmaterialsanddependontheweightandsizeofeachpackagingtype.Inthispaperweconsiderbothuniformfeesandincentivefeeswhichrewardindividualpreventione¤orts.1Mostimportantly,thedesignofaspecicEPRprogramistheresultofproducersdeci-sions.TheveryconceptofEPRisbasedpreciselyongivingproducersconsiderablefreedominthewaytheymeettheirobligations.Thisfeatureraisesseverale¢ciencyquestions.IstheassignmentofanEPRtoindividualproducerssu¢cienttoobtainasociallye¢cientoutcome?OrshouldregulatorsinterveneintheproducersdecisionstocooperateinaPRO?ShoulditregulatethewayproducersnancethePRO?Moregenerally,doPROsallowforcollusion?Thepaperaddressesthesequestions.Weconsideraduopolyinwhicheachproducerfacesatake-backrequirementthatforcesittomanagewastegeneratedbytheconsumptionofitsproducts.Inlinewithreality,weassumethattheproducercaneithergetorganizedindividuallyorcooperatewithothers.1Thepracticabilityofincentivefeesvariesacrossproducts.Forinstance,packagingisasimplegoodforwhichvariablefeesarerelativelyeasytoimplementfortworeasons:thenumberofwaste-relatedparametersislimited(packagingweight,sizeandtypeofmaterials)andtheseparametersareeasytomonitor.Formorecomplexgoodse.g.electricalappliancesandelectronicsincentivefeesaremoredi¢culttoimplement.3

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