Economic Analysis Series No.147
Cost Benefit Analysis of an Economic Instrument for Promoting Recycling
-The Plicy Simulation for Introducing Redemption System-

August, 1996
Yoshifumi Fujii(Visiting Fellow)
Masanobu Ishikawa(Visiting Fellow)
Kazutaka Noma
Toshiyuki Suzuki

The full text is written in Japanese.


1  Background

Municipal waste management is now one of the major policy issues in the developed contries. They are all having difficulties constructing new facilities such as incinerators and landfills due to environmental protection concerns, and they also face increasing waste management costs. In order to reduce waste and avoid landfill, these countries are being obliged to adopt recycling policies. In the U.S, ten states have introduced a deposit refund system since the 1980s and many municipalities have adopted a curb-side collection system. In European contries a varitery of economic instruments for recycling were introduced in the 1980s and the problem has become more political and international since Germany and France decided to adopt a more strict mandatory deposit system at the beginning of the 1990s, which may exert some influence on international economic and trade system. Germany's new law, in particular, requires packaging-related industries to recycle and reuse their packaging.

2  Redemption System

Of all the systems so far, a unique deposit refund system called the "Redemption System" in California state has achieved its goals at least cost and accomplished this over the shortest time period since 1987. This system is unique in several ways. First, the state originates and handles deposits and retailers pay deposits only to the state, which makes the system more integrated and efficient due to eliminating most sorting requirements by brand holders. And secondly, this system is cheaper because the returned containers are redeemed at "recycling centers" which are widely dispersed and close to residential areas. By contrast, the other deposit refund systems have higher costs because all retailers must redeem containers on their own premises. Thirdly, this system provides consumers with the choice of returning contatiners to recycling centers if they want refunds or to the curb-side locations if they prefer convenience. Thus the performance of the Redemption System provides up with some very interesting data about consumer preference between the monetary refund (economic incentives) and the in-convenience of returning the beverage container (distance to the collection point). In order to realize a higher recycling rate, policy alternatives are limited to providing many convenient recycling centers or increasing the redemption values -both of which increase the total system cost. At the same time, total revenue, determined by the recycling rate and deposit value, must balance the total cost, which consists of the capital and operating cost of the system and the total redemptions paid for returned containers.

3  Analytical Framework and Models

This study is intended to illustrate the optimal features subject to realizing the given recycling rate and budget constraints. The study is divided into three Parts. The first is the theoretical model analysis in which the total system costs plus the inconvenience to consumers are minimized for a given recycling rate. In this model it is hypothesized that inconvenience is simply augmented linear to the distance that consumers have to travel to return containers to the center. The point of this analysis is to determine which costs less:setting a higher redemption rate or dispersing many recycling centers. The second is an empirical study of consumer recycling behavior when consumers face a choice between economic incentive or convenience. The data was obtained from a survey in Japan. And the empirical results based on probabilistic discrete choice model which includes the price, distance and some attributes of the consumer is estimated. Finally, a policy simulation, which combines the theoretical model with the empirical consumer response to introducing a redemption system, is evaluated.

4  Results and Conclusion

The most important finding from the theoretical model analysis is that a policy of dispersing the recycling centers realizes optimum performance at the least total cost, and that the redemption value remains constant independent of the recycling rate. The empirical analysis of consumer response shows that the dominant factors affecting returning behavior are consumer attributes other than refund value or distance, such as prior experience of participating in voluntary recycling activities, the sense of environmental values, the age of the consumer, and whether a housewife or not. At the same time, however, the results of policy simulation indicate that an economic instrument such as redempion is effective in realizing a higher recycling rate because some people are more sensitive to the economic incentive, and it also can realize at lower social costs compared to conventional municipal waste management.

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