Environ Resource Econ
DOI 10.1007/s10640-014-9851-3
Efficient Waste Management Policies and Strategic
Behavior with Open Borders
M. Dubois · J. Eyckmans
Accepted: 16 November 2014
© Springer Science+Business Media Dordrecht 2014
Abstract During the last decade waste management has been characterized by two main
trends: the growth of international trade of waste materials and the introduction of extended
producer responsibility (EPR) as a policy instrument. In this paper a two-country stylized
model with imperfect competition in the recycling market is used to address two research
questions. First, how do EPR recycling targets interact with other policy instruments such
as taxes on recycling residues and excise duties? Second, how does strategic behavior of
national policy makers influences the use of policy instruments? The model demonstrates
that a combination of EPR with other instruments is needed to achieve the first-best outcome.
When governments do not coordinate policies across borders, strategic behavior may lead
to a ‘race to the bottom’ for taxes on recycling residues. Conversely, strategic behavior may
lead to a counter-intuitive ‘race to the top’ for excise duties and EPR recycling targets. It
is shown that these instruments are not only used to stimulate waste prevention but also to
extract rents from foreign recyclers.
Keywords Economic instruments · Extended producer responsibility · Strategic behavior ·
Trade · Waste · Recycling
1 Introduction
Two main trends have affected waste management in recent years. The first trend is the growth
of European and international trade of waste streams. European Member States doubled their
exports of hazardous waste and metal scrap from iron, copper, aluminum and nickel between
M. Dubois (B)
Policy Research Centre for Sustainable Materials, KU Leuven, Kasteelpark Arenberg 44,
Bus 2450, 3001 Leuven, Belgium
e-mail: [email protected]
J. Eyckmans
Centre for Economics and Corporate Sustainability, KU Leuven Campus Brussels,
Brussel, Belgium
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M. Dubois, J. Eyckmans
1999 and 2011. The exported volume of precious metal scrap has tripled and the volume of
waste plastics has increased fivefold. Even more remarkable is the growth in the value of
exported waste streams in that same period. The value of exported metal scrap and waste
plastics has increased by a factor of six while the value of exported precious metals has been
multiplied by fifteen (EEA 2012; Kellenberg 2012). Resource scarcity and environmental
regulation have led to the development of waste management as an economic sector that
generates jobs and value added. Between 2000 and 2008 employment in waste management
and recycling almost doubled to 2 million in the EU-27 (EEA 2011). Whereas waste was
considered unwanted in the past and national self-sufficiency in waste management was the
dominant paradigm, companies and countries are now often competing to attract waste for
recycling (Dubois 2013).
National policies have been adapted only partially to the international trend. On the one
hand, international waste shipments have been regulated by the Basel convention, the European Waste Framework directive (2008/98/EC) and the European Waste Shipment Regulation
(1013/2006). In principle, recycled homogeneous waste streams with positive market value
can be shipped worldwide with limited administrative constraints. Mixed waste streams can
be shipped within Europe for further recycling after notification. Waste destined for final
disposal such as landfilling or incineration still remains a national issue or is at least subject
to specific national legislation. On the other hand, no harmonization of policy instruments
has occurred within Europe (Bio IS 2012; Dubois 2013). Two relevant policy instruments
illustrate the disparity in Europe. First, excise duties on waste generating products such
as plastic bags or disposable cameras were introduced in Belgium already in 2007 while
Scotland is still planning its implementation. Second, Flanders (the northern part of Belgium) previously stimulated recycling with disposal tax exemptions for recycling residues
but has lately decided to revert this policy and to increase tax rates on recycling residues
(Vlaanderen 2011). In sharp contrast, the Netherlands that traditionally applied high taxes
for recycling residues recently abolished them (Rijksoverheid 2011). Similarly, contradicting
policy choices can be observed between the UK and Germany. Clearly, a common European
waste market, combined with policy instruments decided upon at the national level, opens
the possibility for strategic choice of regulatory regimes on behalf of the Member States.
The second important trend is the growing popularity of Extended Producer Responsibility
(EPR) as a policy instrument (Kaffine and O’Reilly 2013). EPR makes producers financially
responsible for the recycling of end-of-life consumption products, mostly by imposing recycling targets. For example, European directive 94/62/EC obliges producers using packaging
material (cans, wraps, boxes,…) to recycle at least 55 % of packaging waste. Directive
2006/66/EC imposes a collection target of 25 % (45 % from 2016) of the average weight
of batteries sold, combined with a target to limit recycling residues. Other recent examples
of EPR schemes include cars, tires, lubricants, electronic equipment, solar panels, furniture,
building materials and newspapers. In order to avoid a competitive disadvantage of domestic
producers, EPR obligations are imposed on importers or sellers of consumption products
rather than on the production plant level. Typically, producers make collective financial
agreements with recycling firms to fulfill their legal EPR obligations.
In line with other policy instruments for waste management, European Member States
enjoy significant autonomy about how to implement EPR. Although European regulation
imposes minimum targets, countries can raise national EPR recycling targets above the European minimum. Or they can impose EPR targets on waste streams that are not covered by
European regulation. Consequently, the variety of implemented EPR policies in Europe is
substantial. Frontrunners such as Belgium and the Netherlands impose high recycling rates
on a variety of waste streams while other countries restrict their policies to the European
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Efficient Waste Management Policies and Strategic Behavior with Open Borders
minima. An aspect that is not well understood up to now is the interaction of EPR with other
policy instruments. See for example the counter-intuitive result of Matsueda and Nagase
(2012) for the interaction of EPR with a tax on disposed mixed waste. Considering that policy choices for EPR targets, excise duties and taxation of recycling residues are disparate in
Europe, a better understanding of the underlying incentives is needed.
Using a stylized model inspired by Kennedy (1994), this paper addresses two research
questions. First, the recent implementation of EPR interacts with existing excise duties and
taxation of recycling residues. How should these three policy instruments be combined to
achieve appropriate incentives for efficient waste management? Second, Member States will
pursue national interests. How does strategic behavior by individual member states influence
the efficiency of waste policies? Although the model relates to the European situation, the
results are generic and also apply to for example the US where tax competition between the
States is common.
The following section discusses relevant related literature. Section 3 introduces the stylized
model. Section 4 investigates how policy instruments can be used efficiently if local decision
makers coordinate policies. Section 5 assesses use of policy instruments in a non-cooperative
situation where waste can be shipped across borders but recycling residues are disposed
locally. The two final sections discuss the assumptions and the policy insights of the model.
2 Literature
Economic literature considers EPR as an instrument to internalize waste management costs.
Due to the risk of illegal disposal, municipalities typically subsidize waste collection such
that the price charged to consumers for waste collection and processing is very low or even
zero. This implicit consumer subsidy for waste generating products reduces incentives to
prevent, sort and recycle waste. In order to restore efficient incentives for waste management
when illegal disposal is difficult to detect and punish, the combination of a product tax that
restrains overconsumption (deposit) and a recycling subsidy that stimulates recycling (refund)
has been advocated in the economics literature (Fullerton and Kinnaman 1995; Choe and
Fraser 1999). Although this deposit-refund combination has been shown to be efficient in
theory, real world implemented EPR schemes typically work with static recycling targets as
described in the introduction (Dubois 2012). By modeling static targets for recycled content,
i.e. the amount of recycled material in new products, Palmer and Walls (1997) show that
targets are only efficient when they are combined with additional taxes on labor or output.
In a similar way, Fullerton and Wu (1998) show that EPR recycling targets can only be
efficient if combined with a household fee for waste collection. The inefficiency related to
static targets may explain why a more technical literature strand criticizes implemented EPR
schemes for its weak incentives for prevention and innovation (Lindhqvist and Lifset 2003;
Sachs 2006; Rotter 2012).
Since products are heterogeneous, EPR should be product-specific (Aalbers and Vollebergh 2008; Acuff and Kaffine 2013). Indeed, products with hazardous components such as
batteries or chemical products can increase the external disposal costs of mixed waste and
the upstream externalities that can be avoided by recycling. If internalization of waste externalities is heterogeneous across households (or municipalities) and consumption taxes are
uniform, the frequency of waste collection services can be differentiated to restore efficiency
(Ferrara 2003). Runkel (2003) and Fleckinger and Glachant (2010) indicate that the outcome
of EPR policy can be influenced by market power from producers. Matsueda and Nagase
(2012) focus on the EPR scheme for packaging in the UK. Their assessment shows that a
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M. Dubois, J. Eyckmans
disposal tax on the mixed waste fraction can increase the amount of disposed waste due to
the interaction with EPR. As the disposal tax already stimulates recycling at the waste stage
EPR recycling targets for producers are less stringent. This may lead to cheaper (and thus
more) consumption. Unlike this paper that focuses on EPR interaction with excise duties and
taxation of recycling residues, Matsueda and Nagase (2012) assessed the role of the disposal
tax for directly disposed waste. A related but for this paper less relevant literature strand
studies the effect of EPR on green product design (Calcott and Walls 2000, 2005).
A different literature strand discusses strategic use of environmental policy to protect
domestic interests in international competition. Barrett (1994) argues that imperfect competition distorts efficient use of environmental standards. Whether strategic behavior makes
environmental standards stricter or more flexible depends on competition and market structure of domestic and international markets. Markusen et al. (1995) and Kennedy (1994)
extend the analysis to environmental taxes. Local policy makers will reduce pollution taxes
if domestic production profits are considerable. Conversely, local policy makers may raise
pollution taxes to transfer local pollution to neighboring regions if local disutility of pollution
is high. This last effect fades away if damages from pollution are transboundary. Cassing and
Kuhn (2003) focus on rents arising from trade in hazardous waste between the developed and
the developing world. Strategic behavior is shown to distort tax rates away from Pigovian
levels in both parts of the world. The importance of environmental regulation in trade is
supported by the empirical assessment of Kellenberg (2012).
This paper contributes to the EPR literature, and more specifically to contributions from
Palmer and Walls (1997) and Fullerton and Wu (1998) as discussed above, by introducing
key insights of strategic trade policy literature. It is the first paper that models how market
power in an international recycling market affects EPR incentives. A better understanding
of strategic behavior by policy makers may strengthen arguments to shift more authority on
waste policy from the country level to the European level. In addition, the paper leads to a
better understanding of the interaction of recently implemented EPR targets with existing
instruments such as excise duties and disposal taxes.
3 Economic Model
In order to focus on strategic behavior of policy makers, a stylized two countries model of
production and waste recycling is used. Both countries are assumed ex ante identical. The
number of oligopolistic recyclers is fixed and cross border shopping by consumers is not taken
into account. The model abstracts from environmental impacts not related to waste, transport
costs and fixed costs for production and recycling. The model defines prevention of waste
in a narrow way that only allows for waste prevention by lowering consumption of waste
generating products. Although the intuition of the model applies to a broad range of waste
streams, the model is best understood with reference to packaging waste or non-rechargeable
batteries.
After introducing the basic building blocks of the model in Sect. 3.1, we derive comparative
statics of the market equilibrium for the consumption good and recycling activities in Sect. 3.2.
In Sect. 3.3 we discuss the domestic welfare maximization problem and the optimal allocation
in a first-best world (Sect. 3.4). The outcome in the first-best world will later serve as a
benchmark to assess efficiency of different policy instruments in a decentralized market
setting.
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Efficient Waste Management Policies and Strategic Behavior with Open Borders
Fig. 1 Flow of materials and
financial transactions in one
country
3.1 Basic Building Blocks
Figure 1 depicts material flows by bold arrows and financial transactions by dotted lines. In
each of the two symmetric countries there are two markets. First, the product market where
consumers buy products from a producer. Second, the recycling market where the producer
pays a fee to recyclers to collect and recycle waste in line with local legal obligations. Firm
location is fixed and denoted by subscript i ∈ [H, F] representing location in the home
country H or foreign country F.
For a given price pi consumers buy a quantity of Q i products in the domestic market. After
consumption, these goods become waste. Consumer waste can either be directly disposed of
as mixed waste or it can be selectively collected for recycling. In either case, the consumers
are not charged. Consumers’ inverse demand is represented by a linear function as shown in
(1).
pi = P (Q i ) = B − bQ i , i ∈ {H, F}
(1)
In order to focus on the recycling market, producers are assumed to be competitive in both
countries. In each country, a mandatory minimum recycling target αi ∈ [0, 1] is applied
and enforced while the remaining fraction [1 − αi ] is sent to final disposal as mixed waste.
Consequently, as shown in (2), the product price consists of constant unit production costs
c, national excise duties di and recycling fees ri paid to local recyclers to recycle consumer
waste.
pi = P (Q i ) = c + di + αi ri , i ∈ {H, F}
(2)
Note that the consumption price can be different in both regions ex post. Although producers
charge the marginal production cost, final consumption prices depend on local excise duties
and imposed recycling targets. Arbitrage to exploit this price difference is however impossible
as local waste legislation applies to goods sold and imported, not to goods produced. In
addition, the assumption that cross-border shopping by consumers is negligible makes that
regional price differences can persist. Note also that due to the competitive product market
and due to the absence of fixed costs, producer profits will be zero.
Expressions (1) and (2) can now be used to write the inverse demand curve for recycling
services:
B − bQ i − c − di
ri =
(3)
≡ Ri (αi Q i )
αi
Marginal willingness to pay for waste management services Ri (αi Q i ) is proportional to the
demand for the consumption good. Differentiating (3) with respect to the overall quantity of
recyclable material αi Q i shows that demand for waste management is downward sloping as
expected:
b
Ri (αi Q i ) = − 2 < 0
(4)
αi
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M. Dubois, J. Eyckmans
Fig. 2 Generation and cross border trade of waste streams
In each country, n identical recyclers maximize profits in the recycling market, πri , by
choosing the amount of waste collected for recycling in the Home country, x iH , and in the
Foreign country, x Fi . The superscript denotes the location of the recycling firm while the
subscript denotes the location of consumption and waste generation. As all firms can be
active on both markets, there are 2n competing recyclers overall. In our model recycling is
a broad activity that comprises the whole waste management chain from collection of waste
from consumers to reprocessing and valorization of secondary materials. Recycling typically
also entails recycling residues that have to be disposed of. Waste collected by firms from the
Home country is represented by X iH = nxiH and the total amount of waste recycled in the
Home country is represented by X H .
H
F
H
XH
+ XH
= α H Q H and X H ≡ X H
H + XF
X FH + X FF = α F Q F
and X F ≡ X FH + X FF
(5)
Expression (5) shows the equilibrium condition for recycled material. The left hand side
(LHS) denotes total supply of waste collection services in a country by both Home and
Foreign recyclers. The Right Hand Side (RHS) stands for the total amount of waste generated
in the country, i.e. demand for waste management services. Equations in both countries are
symmetric as illustrated in Fig. 2.
In line with current European practices, collected waste streams destined for recycling can
cross borders without barriers but final disposal of recycling residues should be done locally.
For example, Belgian recycling facilities can import waste streams for recycling from the
Netherlands and Germany, but should dispose recycling residues in Belgium. Therefore, the
domestic tax on recycling residues, represented here as a tax per unit of recycling t H , applies
even for waste streams collected abroad.
In each country, recyclers charge a recycling fee ri to the producer/importer. Recyclers face
a net unit recycling cost s (αi ) = sαi that includes sales revenues from recycled resources.
Note that although constant economies of scale apply for recycling, the unit cost increases
linearly in the recycling fraction αi with s an exogenous constant. Indeed, since consumers
can freely dispose their mixed waste, raising the fraction of selectively collected waste fit for
recycling requires additional efforts such as curbstone collection services or refund systems.
In order keep the results intuitive, the impact of taxation for recycling residues on recycling
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Efficient Waste Management Policies and Strategic Behavior with Open Borders
processes is omitted. In the discussion section at the end of the paper, the effect of this
assumption will be assessed. The recycling market is modeled as a Cournot oligopoly. The
profit maximization problem of a representative recycler in the Home country is therefore:
Max πrH =
(6)
[Ri (αi Q i ) − sαi − t H ] xiH
H ,x H
xH
F
i
After taking the First Order Condition (FOC) with respect to xiH using (5), expression (4) can
be inserted to characterize the behavior of a single recycling firm from the Home country:
ri −
b H
xi − sαi − t H = 0, i ∈ {H, F}
αi2
(7)
In a symmetric way, (8) characterizes behavior of a single firm from the Foreign country.
ri −
b F
xi − sαi − t F = 0, i ∈ {H, F}
αi2
(8)
In order to determine the recycling fee in a country, conditions (7) and (8) should be multiplied
by n and added to each other using (5):
ri = sαi +
tH + tF
b
Q i , i ∈ {H, F}
+
2
2nαi
(9)
Expression (9) indicates that in the Cournot equilibrium, the recycling fee consists of the
recycling unit cost, average recycling residues tax rate and an oligopoly markup. Note that
the markup term is inversely proportional to the number of firms. More competition in the
recycling industry results in a lower recycling fee. By inserting (3) and rearranging, the
consumption level of waste generating products can be determined as a function of available
policy instruments:
Q i = Q i (t H , t F , αi , di ) =
t +t
2n B − c − sαi2 − di − αi H 2 F
, i ∈ {H, F}
2n + 1
b
(10)
More competition in the waste recycling industry results in more waste generating consumption because the price of recycling is lower (see higher). Waste processing activity in the
Home country can be assessed by inserting expression (7) into (9):
X iH = X iH (t H , t F , αi , di ) =
α2 t F − t H
αi Q i
+n i
, i ∈ {H, F}
2
b
2
(11)
The last term in (11) stresses the crucial role of domestic taxation of recycling residues.
With identical disposal tax rates the recycling firms of countries Home and Foreign would
each have a market share of 50 %. If, however, domestic taxes are higher than foreign taxes,
exports of recyclable waste will exceed imports and Domestic recyclers lose market share
compared to Foreign recyclers.
3.2 Comparative Statics Market Equilibrium
Some comparative statics help to make policy effects explicit for further analysis. Instruments
will be denoted without subscript if they are coordinated across the border such that they are
identical in both countries. For example, in order to assess the impact of taxes on recycling
residues, expression (10) and (11) should be differentiated with respect to t H = t F = t if
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M. Dubois, J. Eyckmans
countries coordinate policies and with respect to ti if countries do not coordinate. The two
other policy instruments are kept constant.
∂ QH
∂ QH
∂ QF
α
2n α
2n
∂t = − [2n+1] b < − [2n+1] 2b = ∂t H = ∂t H < 0
(12)
if αi = α > 0
∂ X iH
α ∂ QH
nα 2
α ∂ QH
∂t H = 2 ∂t H − 2b < 2 ∂t H < 0
According to the upper equation of (12), taxes on recycling residues only have an impact on
waste generation if a strictly positive EPR recycling target applies. Consequently, waste prevention can only be achieved by a combination of instruments. It also shows that higher taxes
on recycling residues have more effect if countries coordinate their policies than when they act
in isolation. Finally, the upper equation indicates that disposal taxes influence consumption in
the Home country as well as in the Foreign country. Indeed, since, in a Cournot competition
model, oligopolists take into account the costs from competing firms to determine market
behavior, higher costs for recycling firms in country Home result in higher prices for waste
treatment services in country Foreign. The lower equation shows that domestic recycling is
affected by an increase in the domestic disposal tax rate in two ways. The domestic waste tax
does not only raise the price of waste generating goods via EPR recycling targets (first term)
but also weakens competitiveness of domestic recyclers (second term). The lower equation
can be rewritten to assess the elasticity with respect to a marginal change in the disposal
tax starting from a symmetric situation, i.e. a situation where consumption and recycling are
identical in both countries.
ε X H ,t H < ε Q H ,t < 0
H
if αi = α > 0 = di , ε X H ,t H =
∂ X H tH
∂t H X H
and ε Q H ,t H =
∂ Q H tH
∂t H Q H
(13)
To observe the impact of EPR recycling targets, expression (10) can be differentiated with
respect to α and αi while keeping other policy instruments constant. Expression (14) reveals
that an increase in the EPR recycling target reduces domestic consumption and hence waste
generation. Conversely, the domestic recycling target does not affect consumption abroad.
∂ QH
∂ QF
2n
tH + tF
∂ QH
2sα H +
<0=
=−
(14)
=
∂α
∂α H
2
∂α H
[2n + 1] b
Expression (14) can be easily rewritten to make the elasticities explicit:
ε Q H ,α = ε Q H ,α H < 0 with ε Q H ,α H =
∂ Q H αH
∂α H Q H
and ε Q H ,α =
∂ QH α
∂α Q H
(15)
In order to assess the effect of excise duties on the product market, condition (10) can be
differentiated with respect to d and di while keeping other policy instruments constant. It
shows that an increase in excise duty reduces domestic consumption of waste generating
goods regardless of the policies in neighboring regions.
∂ Qi
∂ Qi
2n
∂ QH
=
=−
<0=
∂d
∂di
b [2n + 1]
∂d F
(16)
3.3 Domestic Welfare Maximization
In order to maximize welfare, policy instruments can be used to influence market behavior. We
assume that domestic welfare Wi is made up of consumer surplus C Si , recycling profits πri ,
tax revenues and environmental externalities from disposal. As discussed, due to the perfect
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Efficient Waste Management Policies and Strategic Behavior with Open Borders
competition in the product market and the absence of fixed costs, profits from producers are
zero and are therefore absent in the expression for welfare.
Max
di ,αi ,ti
Wi = C Si + nπri + di Q i + ti X i − em [1 − αi ] Q i − er X i i ∈ {H, F}
(17)
The marginal external cost of mixed waste em comprises not only the environmental externality from disposal but also includes the marginal collection and treatment costs of mixed waste
that are financed by the municipality. In addition, the externality cost should be interpreted
as a net cost as it includes potentially positive externalities from recycling such as avoided
carbon emissions for metal recycling that are foregone if mixed waste is directly disposed
(Acuff and Kaffine 2013). Recycling also induces an external cost er because a fraction of
the recycled material will end up as recycling residue that needs to be disposed of. Disposal
of these residues through incineration or landfilling will induce an environmental cost. To
compare both externalities two effects should be taken into account. First, although recycling
residues are only a fraction of waste collected, the environmental externality from disposing
recycling residues is expressed per unit of waste collected for recycling. Such rescaling highlights that the external cost of mixed waste is typically more substantial than the external cost
of recycling, even if recycling residues arise. Second, the externality of recycling residues is
limited to the environmental impact of disposal. In contrast, the externality of mixed waste
includes not only the environmental impact of disposal but also the implicit consumption
subsidy from cheap waste collection as discussed in the literature section. Therefore, the
marginal externality of recycling residues is assumed significantly lower than the marginal
externality of mixed waste: er < em .
Q H
Max
d H ,α H ,t H
WH =
P (z)dz − [c + d H + α H r H ] Q H +
[ri − sαi − t H ] X iH
i
0
+ dH Q H + tH X
H
− em [1 − α H ] Q H − er X H
(18)
The Home country’s welfare maximization problem (17) can be rewritten to obtain (18).
This expression can now be used to assess the strategic incentives of national authorities for
policy intervention.
3.4 First-Best Outcome
The first-best outcome that maximizes social welfare W is derived under the assumption
of a hypothetical benevolent central planner having perfect information and full control of
all actions. Social welfare is defined as utility from consumption minus production costs,
recycling costs and the net disposal externality. As there are no transboundary externalities,
the welfare optimization can be solved for each country separately. In addition, since both
countries are assumed identical, we can drop the country subscripts and write the welfare
program generically as follows:
Q
Max W =
Q,α
P (z)dz − c + sα 2 + em [1 − α] + αer Q
(19)
0
There are two control variables: the recycling target α and consumption level of waste generating goods Q. The FOC of (19) with respect to the recycling target (20) requires that
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M. Dubois, J. Eyckmans
the marginal cost of extra waste recycling (LHS) equals the corresponding marginal benefit
(RHS).
em − er
2sα ∗ = em − er ⇒ α ∗ =
(20)
2s
The marginal costs equal the increase in the unit cost of additional recycling activity. The
marginal benefit is given by the avoided environmental damages from mixed waste disposal
minus the increase of externalities from disposal of recycling residues. The expression can
be rearranged easily to yield an explicit solution for the optimal first best recycling target
which depends positively on the marginal environmental damage of mixed waste disposal,
and negatively on the marginal damages of recycling residue disposal and the slope parameter
of the recycling unit cost curve.
The FOC of (19) with respect to Q determines the efficient consumption level of waste
generating goods:
2
r]
B − c − em + [em −e
B − c − sα ∗2 − em 1 − α ∗ − α ∗ er
4s
Q∗ =
=
(21)
b
b
Deviating from the first-best values denoted as α ∗ and Q ∗ always results in welfare loss.
The first-best values will be used in the following sections as a benchmark to evaluate policy
measures in a decentralized market where governments and market actors maximize their
own interests rather than the common good.
4 Coordinated Instruments
This section assesses efficient use of policy instruments when national policy makers are
prepared to coordinate policies across borders. Coordinated policies would for example apply
if European Member States agree to one common disposal tax or to a common recycling target.
For coordinated instruments the subscript is omitted in the sequel: t = t H = t F , α = α H =
α F , d = d H = d F . We assume a hypothetical benevolent central planner that choses the
appropriate level of policy instruments in order to maximize joint welfare of both countries.
Welfare maximization (18) can be simplified using the following property of a coordinated
setting: X iH = X iF = α2Q .
Q H
Max
d,α,t
WH =
P (z)dz − c + sα 2 + em [1 − α H ] + er α Q
(22)
0
Efficient use of policy instruments can be assessed by taking the FOC of (22) with respect to
one of the three policy instruments represented as θ ∈ {t, α, d} while keeping the other two
instruments constant. Using (1) and (10) the FOC can be written generically as follows:1
∂Q b
Q H + d H + α H t − em [1 − α] − αer
∂θ 2n
∂α
= [2sα + er − em ]
Q with θ ∈ {t, α, d}
(23)
∂θ
The LHS of (23) depicts the marginal benefits and costs of increasing consumption slightly:
gain of recycling profits and taxation revenues vs increase in external costs of mixed waste
1 Note that ∂α/∂θ = 1 if θ = α and ∂α/∂θ = 0 otherwise.
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Efficient Waste Management Policies and Strategic Behavior with Open Borders
and recycling residues. The RHS depicts the marginal costs and benefits of more intensive
recycling: higher recycling unit cost and more external costs from recycling residues vs less
external damage from mixed waste disposal.
4.1 Single Instrument Case
We start by considering the case in which the central planner uses only one single policy
instrument while other instruments are set equal to zero.
Proposition 1 No single instrument can achieve the first-best welfare level.
First, it is straightforward to see that a coordinated single disposal tax cannot lead to a
first-best outcome. The comparative statics result in (12) already showed that disposal taxes
only impact the consumption of waste generating goods if a strictly positive EPR recycling
target exists. Indeed, since consumers are not directly affected, higher disposal taxes will not
reduce overconsumption of waste generating goods.
Second, in order to see that a coordinated single EPR recycling targets does not lead to
a first-best outcome, (23) can be rearranged assuming d = t = 0 and using the elasticity
defined in (15). Expression (24) characterizes the second-best optimal recycling target.
em − er
bQ
∂Q α
−ε Q,α
α=
em [1 − α] + er α −
with ε Q,α =
+
<0
2s
2sα
2n
∂α Q
and d = t = 0
(24)
Note that the first term is exactly equal to the first-best recycling target in (20). The second
term can therefore be interpreted as the distortion from first-best. Expression (24) shows that
a single EPR recycling target can only lead to the first-best level outcome in the exceptional
case where em [1 − α] + αer = bQ/2n. This is the unlikely situation in which the marginal
externality cost exactly offsets oligopoly rents in the recycling market. Since the literature
section showed that incentives for prevention of waste generating goods are generally too
weak (Lindhqvist and Lifset 2003; Sachs 2006; Rotter 2012), we assume for the remainder
of the paper that the disposal externality is substantial and more important than the welfare
loss due to oligopoly rents in the recycling market: em [1 − α] + αer > b/2n Q. Under this
assumption, the second-best level for the recycling target in (24) is higher than the firstbest level because two market failures are addressed with a single instrument. The recycling
target should at the same time ensure efficient waste recycling and reduce overconsumption
of waste generating products. A high EPR target reduces overconsumption but creates at the
same time inefficiently high recycling costs compared to the first-best outcome.
Condition (24) contains an important policy insight. Although frontrunners in waste management such as the Netherlands and Belgium already have high recycling rates, there seems
to be a general belief in policy circles that even higher recycling targets are needed to reduce
negative impacts of waste. The assessment in this paper shows that high recycling targets
reduce negative impacts but unfortunately in an inefficient way. Overconsumption is reduced
but at the cost of excessive recycling efforts, i.e. higher than in the first-best case. Therefore
we investigate below whether combinations of an EPR recycling target with other economic
instruments can achieve more efficient outcomes.
Note that expression (24) confirms an old wisdom: market power reduces the need for
environmental regulation (see among others Requate 2005). Indeed, the second-best EPR
recycling target (24) depends negatively on the market power in the recycling market. The
recyclers’ oligopoly mark-up raises the price of waste generating goods. More market power
therefore restrains overconsumption and improves overall welfare.
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M. Dubois, J. Eyckmans
Third, it is straightforward to see that a coordinated single excise duty cannot achieve the
first-best outcome as it cannot influence the recycling efforts. If the EPR recycling targets are
zero, the recycling market will not exist. Actually, in this specific case without EPR recycling
targets, the oligopoly power of the recyclers is absent such that (23) can be simplified and
rearranged to:
d = em i f t = α = 0
(25)
If (25) is inserted in (10) it follows that the second-best excise duty restrains consumption in
an excessive way: Q H = [B − c − em ]/b < Q ∗ . Indeed, as the disposal externality is not
addressed by recycling targets, the excise duty can only target consumption. This use of the
excise relates to the concept of an advance disposal fee as discussed in Palmer et al. (1997).
4.2 Combined Instruments Case
The previous analysis suggested that two combinations may be interesting: EPR recycling
targets combined with disposal taxes and EPR recycling targets combined with excise duties.
In both cases, EPR recycling targets should be equal to the first-best level to achieve maximum
welfare: α = α ∗ .
Proposition 2 If countries coordinate policy instruments, EPR recycling targets can be combined with either excise duties or taxes on recycling residues to achieve the first-best welfare
level.
In order to determine the preferred level of the disposal tax for recycling residues with
coordinated instruments, (23) can be used while assuming that excise duties are zero and
recycling targets first-best.
1 −
α
bQ
(26)
−
if α = α∗ , d = 0
α
2n
α
To highlight that the combination of disposal taxes and EPR recycling targets can achieve
the first-best outcome in a coordinated setting, the two instruments are denoted with a
caret: ˆ. Indeed, by inserting (26) into (10), it can be shown that the first-best outcome will be
achieved: P (Q) = P (Q ∗ ). Expression (26) shows that the coordinated disposal tax for recycling residues internalizes the externalities from mixed waste and recycling residues minus
oligopoly rents. Combining EPR targets and disposal taxes to improve efficiency seems be
in contradiction with the results from Matsueda and Nagase (2012) that show that disposal
taxes reduce EPR effectiveness. However, they focus on a disposal tax on directly disposed
waste while this paper focuses on a disposal tax for residues after recycling.
In a similar way the preferred level of the excise duty can be deducted from (23) when it
is combined with the first-best EPR recycling target:
t = er + em
bQ
d = em [1 − α] + α er −
(27)
if α = α∗ , t = 0
2n
To highlight that the combination of excise duties and EPR recycling targets can achieve
the first-best outcome in a coordinated setting, the two instruments are denoted with a
caret: ˆ. Indeed, (27) can be inserted in the market outcome (10) to show that the first-best
level of consumption is achieved. Expression (27) indicates that the coordinated excise duty
should internalize the environmental externalities minus oligopoly rents in the waste market.
In the absence of externalities from waste management, the ideal excise duty would be negative, and hence a consumption subsidy, in order to stimulate consumption and overcome the
market failure of oligopoly power in the recycling industry.
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Efficient Waste Management Policies and Strategic Behavior with Open Borders
5 Non-cooperative Policies
In contrast to the previous section, this section assumes that governments to not coordinate
policy instrument choice. We consider a non-cooperative policy game in which every region
maximizes its own domestic welfare, taking as given the policy choices of the other country.
Hence, we employ the simultaneous Nash equilibrium concept to solve the policy coordination game between countries Home and Foreign. At the same time, the Cournot oligopoly
equilibrium in the recycling market is inserted in the national welfare optimization problems.2
Proposition 3 If market power prevails in the recycling market, strategic behavior of
regional policy makers leads to a ‘race to the bottom’ for taxes on recycling residues. This
strategic behavior reduces welfare and leads to overconsumption of waste generating goods.
As a disposal tax on its own does not improve welfare (see analysis above), we consider
the combination of disposal taxes on recycling residues with EPR targets in a noncooperative setting. Excise duties are set equal to zero and EPR recycling targets are put
equal to their first best levels in both countries. In such a setting, consumption in both countries will be equal because disposal taxes affect consumption across borders in a symmetric
way as shown in expression (12) of the comparative statics section. The national welfare
maximization of country Home (18) can therefore be rearranged using (9).
Q H
Max
tH
WH =
P (z)dz − c + sα 2 + em [1 − α] + αer Q H
0
bQ
tH + tF
H
+
− er
+ X H − αQH
2nα
2
(28)
The last term shows that exports of waste (X H < α Q H ) are considered a loss of welfare
because tax revenues and recycling profits are flowing out of the country. Conversely, exporting also avoids the externality of recycling residues. The optimal domestic disposal tax rates
can be determined by solving the FOC and afterwards inserting (1) and(10).
∂Q H B − c − sα 2
2n
tH + tF
+
α
− em [1 − α] − αer
∂t H
2n + 1
2n + 1
2
H
∂X
b
∂ QH
tH + tF
+
−α
QH +
− er
∂t H
∂t H
2nα
2
b ∂Q
1
H
=0
(29)
+
+ X H − αQH
2nα ∂t H
2
The symmetry of both countries leads to a symmetric optimal use of disposal taxes. This
allows omitting the last term in the expression because domestic waste production and domestic waste recycling will be equal in a symmetric setting with symmetric use of instruments.
A more extensive discussion on this step for symmetric models can be found in Kennedy
(1994). Rearranging and using (10) leads to:
∂Q H
∂X H bQ H
+ t H − er
(30)
em [1 − α] =
∂t H
∂t H 2nα
2 This approach is consistent with a two-stage game set up. In the first stage, Home and Foreign governments
simultaneously choose policy instruments (disposal tax rates, excise duties and recycling rates) in a noncooperative way. Given the outcome of this first stage game, market participants decide in the second stage on
their optimal production levels in the product market and recycling market (Cournot oligopoly). The two-stage
model is solved backwardly.
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M. Dubois, J. Eyckmans
Condition (30) implies that domestic policy makers will balance the marginal benefit of
raising the domestic disposal tax with its corresponding marginal cost. A slight increase
in the disposal tax rate causes a reduction of consumption such that the externality related
to mixed waste diminishes (LHS). At the same time, the higher disposal tax leads to a
reduction in domestic recycling activities such that domestic recyclers’ profits, tax revenues
and recycling residue externalities diminish (RHS). Using the elasticities defined in (13) and
their relative magnitudes, we can rewrite the expression and compare with the tax determined
in the coordinated setting:
t H = er + em
1 − α ∗ ε Q H ,t H
bQ H
−
<
t if αi = α = α ∗ , di = 0
α ∗ ε X H ,t H
2nα ∗
(31)
The analysis indicates that tax competition leads to a ‘race to the bottom’. Non-cooperative
governments will choose disposal tax rates lower than the optimal tax rate if policies were
coordinated to maximize joint welfare. This result seems to fit well with casual empirical
observations in the European waste market. Countries such as the Netherlands and Germany
who have a policy of open borders for waste management have zero disposal taxes for
incineration and landfilling. Also, because a Norwegian disposal tax for incineration led to
high waste exports to Sweden, Norway abolished its disposal tax (Dubois 2013). In order to
improve the EPR prevention incentives in an open market, other policy measures than taxes
on recycling residues must be considered.
Proposition 4 If recycling profits are more important than domestic environmental externalities from recycling residues, strategic behavior of regional policy makers leads to ‘a race
to the top’ for excise duties and EPR recycling targets in order to extract profits from foreign
recyclers.
The use of EPR collection targets and excise duties is investigated in a non-cooperative
world where recyclers have market power. Disposal taxes are set equal to zero in both countries. As follows from the discussion on (11), if disposal taxes are symmetric, both countries
will have an equal market share in the recycling market: X iH = X iF = αi Q i /2. This allows
rewriting domestic welfare maximization (18) while inserting (9):
Q H
Max
d H ,α H
WH =
b
P (z)dz − c + sα 2H + em [1 − α H ] +
QH QH
2n
0
+
b Q2
αi Q i
i
− er
2n 2
2
i
(32)
i
In order to assess the optimal domestic EPR recycling target in a non-cooperative setting, (1)
and (10)should be inserted in the FOC with respect to the target while keeping excise duties
and disposal taxes equal to zero:
er α H er ∂ QH = 2sα H − em +
QH
em [1 − α H ] +
(33)
−
∂α H
2
2
The LHS of the expression denotes the marginal benefits of reducing consumption by an
increase in the EPR recycling target: lower externalities from mixed waste and recycling
residues when recycling happens locally. The RHS represents the marginal benefits and costs
of increasing the recycling target: higher recycling unit costs and higher externalities from
recycling residues when recycling happens locally vs lower externalities form mixed waste.
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Efficient Waste Management Policies and Strategic Behavior with Open Borders
After rearranging, the elasticity determined in (15) can be used to assess the second-best
domestic EPR recycling target:
αH =
em −
2s
if
er α H −ε Q H ,α H > α > α∗
em [1 − α H ] +
2sα H
2
bQ H
er α H
>
and di = ti = 0
2n
2
er
2
+
(34)
The comparison between the coordinated EPR recycling target of (24) and the noncooperative rate shows that strategic behavior has two effects. First, since a non-cooperative
policy maker only cares about domestic externalities, recycling residues from exported waste
are not taken into account. Considering that about half of all waste is recycled abroad, a high
recycling rate becomes more attractive. Secondly, the profits from foreign recyclers that recycle domestic waste are considered as a welfare loss. Considering that high EPR recycling
targets restrain consumption, and consequently waste generation, profits can be extracted
from foreign recyclers by increasing the recycling target. Expression (34) shows that strategic behavior leads to a ‘race to the top’ if bQ H /2nα H > er /2, i.e. the oligopoly rent of
recyclers as determined in (3) is higher the domestic externality of recycling residues.
In a similar way, optimal domestic excises can be determined. Equations (1) and (10)
should be inserted in the FOC of (32) with respect to the excise duty while keeping disposal
taxes equal to zero and EPR recycling targets equal to the first-best level:
er α ∗
d H = em 1 − α ∗ +
> d i f
2
bQ H
er α ∗
α = α∗
>
ti = 0 and α H = 2n
2
(35)
Comparison with the excise in the coordinated setting of (27) shows that strategic behavior of
non-cooperative governments increases excise duties. Governments realize that their policies
have no impact on consumption and waste production abroad. In addition, excises duties do
not hamper competitiveness of domestic recyclers. Therefore, governments raise excises to
extract profits from foreign recyclers. By inserting (35) into (10), it can be shown that strategic
behavior to capture oligopoly rents from foreign recyclers restrains consumption more than
efficient.
6 Discussion
Throughout the paper two assumptions have been made that require further discussion. A
first assumption is the inelastic reaction of residue generation vis-à-vis taxation on recycling
residues, i.e. recycling processes do not reduce disposal of recycling residues, even if disposal
taxes increase. This assumption is valid for low levels of taxation because incentives will be
too weak to generate inefficient recycling efforts. However, recyclers may invest inefficiently
to avoid high disposal taxes that exceed the first-best Pigovian externality tax rate. With noncooperative governments however, disposal taxes will be low and the negative effect will not
be significant. A second effect omitted up to now is the impact of cross boundary pollution
originating from waste disposal (Kennedy 1994; Sigman 2002, 2005; Dubois 2013). Since
non-cooperative governments do not take transboundary pollution into account, the effects
of a ‘race to the bottom’ may be worsened because overconsumption is even more important.
In contrast, excessive taxation resulting from a ‘race to the top’ may actually serve, in an
indirect way, to internalize unaccounted for international externalities.
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M. Dubois, J. Eyckmans
7 Conclusion
Although the introduction of EPR has led to impressive recycling results in Europe, the
instrument is criticized for its lack of waste prevention incentives. This paper shows how
different policy instruments can be combined to restrain overconsumption of waste generating products. An important result is that an EPR recycling target as a single instrument
can create incentives for prevention but unfortunately in an inefficient way. Actual waste
policies are focusing on a gradual increase of EPR targets to reduce environmental damage.
A combination of EPR recycling targets with a disposal tax for recycling residues or with an
excise duty can achieve more efficient results.
Since waste management is increasingly organized at a European scale but policy instruments remain national, strategic behavior may have a negative effect on waste management
efficiency. Even though taxes on recycling residues can, in combination with EPR recycling
targets, improve prevention incentives, strategic behavior leads to a ‘race to the bottom’ if
governments are non-cooperative. In line with casual empirical observations, incentives for
prevention and recycling of waste should come from other instruments than disposal taxes.
In contrast, strategic behavior may lead to a ‘race to the top’ if EPR recycling targets
are combined with excise duties. Countries with significant waste export have incentives to
use excise duties to extract profits from foreign recyclers. A similar ‘race to the top’ can
be observed when EPR recycling targets are used in a non-cooperative setting. Although
excessive EPR targets induce excessive recycling costs, strategic behavior leads to high EPR
recycling targets to extract profits from foreign recyclers. This effect may among other reasons
provide an explanation for the very ambitious EPR recycling targets of countries in Western
Europe with intensive waste shipments.
The paper makes a strong plea for the combination of EPR recycling targets with other
instruments such as excise duties on waste generating products. In addition, the assessment
shows that waste management efficiency can be improved by transferring authority over
policy instruments from the Member States to the European level. A political economy
model that explains the barriers to make this transition feasible might prove a valuable topic
for future research.
Acknowledgments We thank Herman Vollebergh, Yoko Nagase, Sandra Rousseau and Stef Proost for their
valuable suggestions.
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