What Do the Economists Say?
Environmental economists studying Extended Producer Responsibility (EPR) examine how to achieve the socially optimal levels of waste generation and disposal through economic models (Palmer et al 1997; Palmer and Walls 1997, 1999; Fullerton and Wu 1998; Calcott and Walls 2000, 2002; Walls and Palmer 2000; Walls 2003, 2006) This body of literature prioritizes a social perspective, addressing issues from the viewpoint of policymakers, with the aim of achieving the most favorable social outcomes.
In their 1997 study, Palmer, Walls, and Sigman analyzed the social costs associated with three waste management policies—deposit/refund systems, recycling subsidies, and advanced disposal fees—concluding that the deposit/refund system is the most cost-effective option Additionally, Palmer and Walls examined the efficiency of deposit/refund systems alongside recycling content standards in achieving optimal disposal levels Their research employed partial equilibrium models within competitive markets, yet did not factor in the recyclability of products in their evaluations.
Fullerton and Wu (1998) and Walls and Palmer (2000) developed models that evaluate environmental externalities across a product's life cycle, analyzing the effectiveness of various policies such as disposal fees, recyclable design subsidies, and regulatory standards in achieving optimal product recyclability They found that the choice of policy depends on objectives, market failures, and implementation feasibility Additionally, Calcott and Walls (2000, 2002) examined the impact of deposit/refund systems and disposal fees on promoting design for environment (DfE) and recyclability, concluding that downstream policies are often impractical due to underdeveloped recycling markets Their research indicates that deposit/refund policies are more effective in reaching a constrained social optimum for recyclability.
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Calcott and Walls (2002) highlight the impact of transaction costs on recycling markets, arguing that these costs can hinder market functionality and affect environmental policy efficiency Palmer and Walls (1999) analyze three specific policies—upstream combined product tax and recycling subsidy (UCTS), manufacturer take-back requirements, and unit-based pricing—finding that UCTS is particularly cost-effective due to lower transaction costs Walls (2006) offers a comprehensive overview of various environmental policies under Extended Producer Responsibility (EPR), drawing insights from real-world applications The studies collectively emphasize achieving social optimum through different policies while considering product recyclability and design for environment (DfE) decisions Walls (2006) is particularly valuable for comparing the effectiveness of policy instruments such as advance recovery fees, recycling subsidies, unit-based pricing, take-back mandates, and recycling rate targets.
An advance recycling fee (ARF) is a charge imposed on consumers or producers at the point of purchase, aimed at funding the recycling of products This fee is typically calculated based on the product's unit weight or quantity sold According to Walls (2006), the implementation of ARF is anticipated to lead to a reduction in production and consumption, thereby minimizing the use of virgin materials Additionally, when ARF is based on product weight, it may influence producers to design lighter and smaller products to lower their fees.
A recycling subsidy system provides financial incentives to recycling parties based on the weight of items, indirectly influencing product design and encouraging increased production and consumption This model enhances recycling efforts, with more significant benefits observed when subsidies are allocated by product weight rather than per unit However, the implementation of such a system requires funding from social planners, posing challenges for its execution.
A deposit/refund system integrates a tax on production or consumption with a recycling subsidy that is proportional to the recyclability of the product By combining a recycling subsidy with an Advanced Recycling Fee (ARF), this system effectively enhances recycling efforts, decreases the reliance on virgin materials, and lowers overall product consumption Additionally, it contributes to reducing product weight and improving Design for Environment (DfE) practices The funding for these subsidies can be managed through the advance recycling fees collected.
A recycling target represents a mandated recycling rate established by policymakers, indicating the percentage of sold products that must be recycled In a tradable recycling credits scheme, producers who fail to meet these recycling targets can purchase credits to comply with regulations.
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Environmental legislation on product take-back and recovery encourages producers to reduce product size and weight by allowing them to buy and sell recycling credits This system not only incentivizes recycling but also aims to decrease output and the use of virgin materials However, implementing a producer responsibility organization for take-back operations adds costs When combined with a tradable credit scheme, it can significantly influence product design, although transaction costs may be a concern.
A unit-based fee policy, also known as a pay-as-you-throw model, charges users for recycling costs, effectively reducing waste output and reliance on virgin materials while enhancing recyclability However, a significant drawback of this approach is the potential increase in illegal dumping.
Effective waste disposal and recycling policies require significant government effort to monitor and document essential environmental characteristics, such as product recyclability This raises the question of the practicality of these policy instruments In the following section, we will examine the real-world application of these tools within the electronics industry across various geographical regions.
What Is Happening in Practice?
The WEEE Directive in the EU
The WEEE Directive (Directive 2003/108/EC) establishes extensive producer responsibility for the disposal of end-of-life electrical and electronic waste across Europe, setting it apart from legislation in other regions.
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Producers hold both physical and financial accountability for achieving specific recycling or recovery goals, while member states are required to ensure the collection of 4 kg of waste per capita annually, without any cost to end users.
The WEEE Directive has a notable shortcoming from the industry's viewpoint, particularly regarding the collective cost allocation among manufacturers Although the Directive stipulates that producers should manage their own waste, many countries enforce collective systems where costs are distributed based on market shares This approach has faced criticism from manufacturing organizations, as market shares do not accurately reflect waste shares, leading to inequitable cost distribution, especially between different types of manufacturers For instance, the disparity in recovery costs between cell phones and computer monitors illustrates the unfairness of sharing costs based on market share While some advocate for collective systems citing economies of scale that can lower average recovery costs, many manufacturers argue for individual producer responsibility to ensure fairness in waste management.
Atasu and Boyaci (2009) highlight key differences between collective and individual systems, particularly in terms of cost efficiency, noting that collective systems tend to incur higher average costs, especially in monopolistic contexts Additionally, they emphasize that individual systems foster better design incentives, as demonstrated by Atasu and Subramanian (2009), which leads to improved recyclable product design.
In the United States, 13 states have implemented product take-back legislation for electronics, with a particular focus on Maine, Washington, and California to illustrate key examples.
United States: Maine and Washington
Maine and Washington have implemented producer responsibility directives for household consumer products like computers, televisions, and DVD players, with Maine's directive effective since January 1, 2006, and Washington's starting on January 1, 2009 While these directives share similarities with the WEEE Directive, a key distinction is their unique approach to managing electronic waste.
The "return share" model requires manufacturers to cover the recycling costs linked to their products in the waste stream, aligning with the concept of individual responsibility This approach is viewed by manufacturers as a significant advancement towards greater accountability in waste management.
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Environmental legislation is increasingly focusing on product take-back and recovery initiatives, with states like Connecticut and Oregon considering a return share model as part of their planned product recovery programs.
The Maine directive mandates municipalities to collect waste and transfer it to designated consolidators, while manufacturers are responsible for establishing their own collection and recycling systems They have two options: either collect and recycle a portion of waste based on their return share or partner with a consolidator for recycling The return share is determined through statistical sampling of the waste stream Similarly, the Washington directive requires manufacturers to engage in an approved recycling plan, which can be a collective standard plan, an individual plan that meets legislative standards, or a collaborative system with other manufacturers Cost allocation for these plans is based on each manufacturer's return share, which is calculated using the Brand Data Management System implemented by the Department of Ecology.
United States: California
California has pioneered an advance recycling fee program, the first of its kind in the U.S., imposing a fee on consumers at the time of purchase for products with screens This fee ranges from $6 to $10 based on screen size, applying to all displays with a diagonal of at least 4 inches—$6 for screens 4 to 15 inches, $8 for 15 to 35 inches, and $10 for those larger than 35 inches The fee is applicable to all sales subject to California sales tax, including leases and online purchases Retailers face fines of up to $5,000 for failing to collect the fee, which partially funds local government initiatives to support authorized recyclers, while retailers retain 3 percent of the fee Additionally, manufacturers are required to inform consumers about recycling options.
2005, must report to the California Integrated Waste Management Board on the number of covered devices sold and the amount of hazardous materials they contain.
Taiwan
The Taiwanese Scrap Computer Management (SCM) Foundation, established on June 1, 1998, oversees the computer recycling program by collecting processing fees from manufacturers and importers for each recycled item The current fees for designated scrap computer components are NT$75 per PC main printed circuit board, NT$75 per PC hard disk, and NT$12.5 per PC power supply.
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Closed-Loop Supply Chains impose processing fees of NT$12.5 per unit for frame shells, NT$125 for PC monitors, and NT$200 for notebook computers According to legislation, these fees are supposed to be recalculated based on actual costs and potentially adjusted annually However, it is noteworthy that these fees have not been updated since 1998.
The SCM Foundation incentivizes consumer participation in recycling by offering reward money for unwanted computers at designated collection points, primarily located at computer retailers Consumers can receive immediate cash rewards, with collection points earning NT$50 for each notebook, NT$60 for each PC mainframe, and NT$70 for each PC monitor collected Funding for recyclers comes from a budget supported by fixed disposal fees, which are set according to the aforementioned amounts However, the effectiveness of this recycling initiative remains uncertain due to varying sales and disposal ratios throughout the product life cycle.
Japan
Japan's take-back legislation, enacted in April 2001, has become a model in the electronics industry, focusing on the responsible management of end-of-life products such as TVs, cooling devices, washing machines, and air conditioners This directive mandates that end users pay an end-of-life management fee, which is collected by retailers and allocated to a common recycling center The system allows producers to maintain control over their products' disposal, whether through recycling or repair, while enabling both producers and consumers to track the treatment of these products via a manifest system This system not only identifies the brand and category of products for effective recycling but also facilitates statistical data collection and enhances traceability, responding efficiently to customer inquiries.
The system enables manufacturers to receive valuable feedback on end-of-life product issues, allowing them to improve future designs Recycling plants offer insights related to product design, including suggestions for enhancing material composition, simplifying disassembly, and improving labeling Notably, the Japanese system incentivizes the creation of more environmentally friendly designs.
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Environmental Legislation on Product Take-Back and Recovery ◾ 31
Incentives to improve the efficiency of recycling operations create positive feedback on greener designs, sometimes even beyond the legal requirements.
Sweden
Sweden has implemented a distinctive financial system aimed at enhancing green design through a national legislation independent of the European Commission This system ensures the recycling of vehicles at the end of their life cycle, where automobile manufacturers pay negotiated insurance premiums to a private insurer to cover future recycling costs These premiums are calculated based on projected recycling expenses, leading to significant benefits such as reduced uncertainty in future recycling costs and incentives for manufacturers to create more environmentally friendly designs, as better recyclability translates to lower insurance premiums Additionally, similar premium structures are available for electronic waste in Sweden.
Discussion
EPR legislation presents complexities that vary significantly across countries, leading to differing outcomes, competitive disturbances, and fairness concerns Our experiences with managers indicate that while some manufacturers support certain implementations, others favor different approaches To effectively anticipate the social, business, or company-level impacts of such legislation, it is crucial to thoroughly understand the specific implementation structure, necessitating a systematic analysis of these systems.
1 What policy tool is chosen? Recycling rate, advance recycling fee, or unit- based fee?
2 Recovery management: Is there a single compliance scheme, or is there com- petition in the recycling market?
3 Physical responsibility: Are manufacturers collectively or individually responsible?
4 Financial responsibility: Who has the financial obligation: the end user, the purchaser, or the producer?
5 Cost sharing: If a collective producer responsibility system is employed, how is the cost allocation made between producers? Is it based on market share or return share? Is there recycling cost differentiation between producers?
6 Design incentives: Does the EPR legislation provide incentives for recyclable product?
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While our list addresses many practical issues, creating a universal best-case scenario for all producers and industry environments remains challenging Therefore, a pragmatic approach is essential to comprehend how various factors influence the effectiveness of Extended Producer Responsibility (EPR) legislation and its impact on diverse business settings In this article, we will explore recent academic research that offers technical insights into the business ramifications of different legislative frameworks.
What Is the Operations Management Perspective?
Production Economics
The initial article by Atasu et al (2009a) offers an overview of the key factors influencing the economic efficiency of take-back legislation Utilizing a generic economic model, the authors examine the environmental and economic effects of legislation akin to the WEEE Directive.
In a competitive marketplace, social planners should align target collection levels with the intensity of competition, as reducing environmental impact benefits monopolists when legislation is appropriately targeted The authors suggest that weight-based take-back legislation may not effectively measure environmental costs and advocate for collection and recovery targets based on product characteristics Notably, in competitive environments, manufacturers with lower environmental impacts may suffer due to the environmental hazards posed by others, leading them to focus on reducing take-back costs rather than enhancing product quality This highlights the need for individual producer responsibility to ensure fairness and promote greener designs.
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Environmental legislation is increasingly focusing on making manufacturers accountable for the lifecycle of their products through Individual Producer Responsibility (IPR) This approach not only holds each manufacturer responsible for their own goods but also fosters better design incentives, encouraging more sustainable practices in product development.
Policy Choices
The article by Atasu et al (2009b) explores how policy choices influence production economics, building on their previous work (Atasu et al 2009a) The authors highlight that varying structural aspects of legislation can lead to different welfare outcomes for stakeholders They categorize existing Extended Producer Responsibility (EPR) models into two types: the tax model and the recovery target model In the tax model, manufacturers or consumers pay a unit tax per item, with the social planner managing the collection and recovery of end-of-life products Conversely, in the recovery target model, the social planner establishes specific collection or recovery targets, making manufacturers responsible for both the physical and financial aspects of end-of-life product management.
The article highlights that a naive social welfare maximizing tax model aligns with the perspective of many European manufacturers, who argue that the current WEEE model shifts the responsibility of take-back systems from the government to them However, economic analyses reveal that this assumption is not always accurate In fact, manufacturers may find advantages in the rate model, even when the costs of operating both systems are similar Additionally, manufacturers could potentially lower their operational costs more effectively than a government-run system, making the rate model even more advantageous for them.
Cost Sharing within a Supply Chain
Jacobs and Subramanian (2009) build on the model established by Atasu et al (2009a,b), emphasizing that Extended Producer Responsibility (EPR) programs typically place the onus of environmental impacts on producers alone, as defined by regulators They highlight the importance of involving all supply chain actors to effectively meet EPR objectives Their research investigates how sharing EPR program costs among different tiers in the supply chain influences social welfare, revealing significant effects stemming from the level of cost-sharing and recovery processes.
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The outcomes of social welfare from sharing Extended Producer Responsibility (EPR) program costs are complex, necessitating careful design to achieve a balance between economic and environmental performance.
Supply Chain Coordination
The article by Subramanian et al (2009) examines how Extended Producer Responsibility (EPR) policy parameters affect product design and coordination incentives within a durable product design supply chain It highlights that coordinated supply chains make environmentally superior design choices compared to decentralized ones, thereby enhancing the environmental quality of products Additionally, the study explores how legislative parameters influence supply chain efficiency, revealing that while disposal costs aim to mitigate end-of-life environmental impacts, they can also lead to improved product designs that reduce environmental effects during the product's usage phase.
New Product Introductions
Take-back legislation significantly influences product design by potentially reducing the frequency of new product introductions, which is crucial for environmental sustainability According to Plambeck and Wang (2009), frequent new product launches contribute to increased waste and resource extraction They argue that such legislation can extend product lifespan, decrease e-waste, and ultimately enhance manufacturer profits Additionally, in highly competitive markets, take-back regulations can alleviate the pressure on manufacturers, allowing them to focus on sustainable practices rather than rapid production cycles.
Design for Recycling
Plambeck and Wang (2009) examine the frequency of new product introductions, while Atasu and Subramanian (2009) explore how take-back legislation influences manufacturers' environmentally friendly design choices, such as recyclability Their study focuses on a differentiated duopoly market, comprising both high-end and low-end manufacturers, to analyze the design incentives generated under collective frameworks.
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Environmental legislation focused on product take-back and recovery reveals that individual producer responsibility (IPR) models lead to improved recyclability in product design compared to collective responsibility systems Research indicates that high-end manufacturers tend to have lower recyclability choices than low-end manufacturers in collective systems, particularly as high-end sales increase However, under IPR, both high-end and low-end manufacturers prioritize designing more recyclable products Additionally, collaboration among manufacturers within IPR frameworks can further enhance product design synergies, resulting in even better recycling outcomes.
Recycling Markets
Toyasaki et al (2008) explore how scale economies and recycling market competition influence the efficiency of product take-back legislation They identify two recycling market types in regions with such legislation: monopolistic and competitive Manufacturers and legislators suggest that monopolistic systems leverage economies of scale, whereas competitive systems may lower recovery costs through market competition Despite the evident conflict between these market types, the conditions under which one model outperforms the other in economic efficiency remain unclear.
A comparison of recycling fees and profits reveals that monopolistic take-back systems consistently impose higher average fees than competitive systems, benefiting manufacturers and consumers economically Furthermore, these monopolistic systems disadvantage low market share manufacturers within a differentiated competition model, as they enforce a uniform recycling fee across all manufacturers Consequently, low-end manufacturers are likely to gain greater advantages from competitive recycling systems.
Discussion and Conclusions
This section summarizes insights gained from academic research and real-world applications of product take-back legislation It highlights that while socially optimal policy tools exist, they may be overlooked in practice due to challenges in implementation and lobbying efforts by manufacturing organizations Consequently, businesses often have the opportunity to shape take-back legislation in ways that serve their interests, despite the overarching goals of such policies.
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Closed-loop supply chains involve various producers and businesses, making it challenging to identify which policies benefit specific stakeholders Understanding these complexities is crucial for navigating the dynamics of closed-loop systems effectively.
Policymakers can enhance social welfare by optimizing implementation parameters of existing legislation, even when policies are suboptimal Collective producer responsibility systems can improve R&D choices and profitability for manufacturers, while individual systems can enhance recyclability Additionally, the social planner can influence the recycling market structure; a competitive market can lead to better social welfare and recycling levels From the manufacturer's perspective, fairness in legislation is paramount, as it affects competition Manufacturers should understand the collective nature of product take-back legislation, which, while cost-efficient, may not be fair Thus, fairness should take precedence over cost-efficiency, advocating for individual responsibility systems with environmental impact-based recovery targets Manufacturers can also lower recovery costs by designing more recyclable products.
2009) Thus, manufacturers should be aware of the type of legislation that works best for them to avoid fairness concerns.
Take-back legislation significantly influences manufacturers' R&D and product design decisions, particularly in competitive markets According to Plambeck and Wang (2009), such legislation can enhance profitability by incentivizing the development of higher-quality products Consumers, being strategic, anticipate cost increases due to Extended Producer Responsibility (EPR) laws, leading to less frequent product launches even amid competition Similarly, Atasu and Subramanian (2009) highlight that manufacturers can leverage the market valuation of recyclability, driven by legislation, to boost their profits.
A key takeaway from the study is that individual responsibility legislation offers the most significant green design incentives This insight is crucial for manufacturers that prioritize research and development (R&D) and innovation, as they can leverage specific types of legislation more effectively than others.
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Environmental Legislation on Product Take-Back and Recovery ◾ 37
Supply chain coordination plays a crucial role in enhancing the efficiency of take-back legislation and boosting manufacturer profits According to Subramanian et al (2009), effective supply chain coordination not only benefits social welfare, as noted by Jacobs and Subramanian (2009), but also enhances supply chain profits and promotes green design incentives in decentralized systems Furthermore, manufacturers can increase their profitability by strategically selecting their recovery channel partners, as demonstrated by Toyasaki et al (2008), who found that competitive recycling markets benefit both manufacturers and consumers by elevating their profits.
The efficiency of manufacturing practices, including supply chain decisions, R&D, and product design, is closely linked to the specific take-back legislation in place Manufacturers must assess how these regulations impact their core competencies and proactively seek legislation that minimizes harm or maximizes benefits Cost-efficient companies should identify cost-reduction opportunities within the legislation, while innovative firms should explore avenues for green design improvements Additionally, social planners need to address variations in business environments by moving away from a "one-size-fits-all" approach and creating tailored implementation strategies for different types of manufacturers The legislation in Japan and Maine exemplifies this flexibility, allowing manufacturers to choose their approach to product take-back and recovery.
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