Deposit-Refund Systems In Practice And Theory

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DISCUSSION PAPERN o ve m b e r 2 0 1 1 R F F D P 1 1 - 4 7Deposit-RefundSystems in Practiceand TheoryMargaret Walls1616 P St. NWWashington, DC 20036202-328-5000 www.rff.org

Deposit-Refund Systems in Practice and TheoryMargaret WallsAbstractA deposit-refund system combines a tax on product consumption with a rebate when the productor its packaging is returned for recycling. Deposit-refunds are used for beverage containers, lead-acidbatteries, motor oil, tires, various hazardous materials, electronics, and more. In addition, researchers haveshown that the approach can be used to address many other environmental problems beyond wastedisposal. By imposing an up-front fee on consumption and subsidizing ―green‖ inputs and mitigationactivities, a deposit-refund may be able to efficiently control pollution in much the same way as aPigovian tax. Theoretical models have shown that alternative waste disposal policies, such as virginmaterials taxes, advance disposal fees, recycled content standards, and recycling subsidies are inferior to adeposit-refund. These results have been corroborated in calibrated models of U.S. waste and recycling.And in theoretical models that consider joint environmental problems and product design considerations,the deposit-refund continues to have much to recommend it as a component of an overall socially optimalset of policies. More empirical research into deposit-refund systems is needed, particularly the upstreamsystems used for many products. In these systems, the processors or collectors of recyclables—rather thanconsumers—receive the refund. Upstream systems may have lower transaction costs and betterenvironmental outcomes than traditional downstream systems.Key Words: deposit-refund, waste disposal, recycling, source reduction, illegal dumping,Pigovian tax, advance disposal fee, upstream pollution, design for environmentJEL Classification Numbers: H23, Q53, Q58 2011 Resources for the Future. All rights reserved. No portion of this paper may be reproduced withoutpermission of the authors.Discussion papers are research materials circulated by their authors for purposes of information and discussion.They have not necessarily undergone formal peer review.

ContentsIntroduction . 1The Deposit-Refund in Practice . 2Bottle Bills . 2Batteries . 3Tires . 3Motor Oil . 4Consumer Electronics . 5The Deposit-Refund in Theory . 6Models of Consumption, Production, Waste, and Recycling . 6Interactions between Solid Waste and Pollution Externalities . 7―Design for Environment‖ and Extended Producer Responsibility . 8Concluding Remarks . 10References . 11

Resources for the FutureWallsDeposit-Refund Systems in Practice and TheoryMargaret Walls IntroductionA deposit-refund system combines a tax on product consumption with a rebate when theproduct or its packaging is returned for recycling or appropriate disposal. The best-knownexample of a deposit-refund system in the United States is the system of fees andreimbursements for beverage containers, currently in place in ten states. These so-called ―bottlebills‖ were originally adopted to combat litter problems, but the approach has now been appliedto much more than soft drink cans and bottles. Deposit-refunds have been established for otherkinds of containers, lead-acid batteries, motor oil, tires, various hazardous materials, electronics,and more. And the deposit-refund approach can be used to address many other environmentalproblems well beyond waste disposal, such as air and water pollution. By imposing an up-frontfee on production or consumption and using those fee revenues to rebate ―green‖ inputs andmitigation activities, a deposit-refund policy may be able to efficiently control pollution in muchthe same way as a Pigovian tax (Bohm 1981; Fullerton and Wolverton 2000).A deposit-refund has three potential advantages over a Pigovian tax, however. First, itavoids the ―midnight dumping‖ problem often associated with a Pigovian tax, a problem that isespecially serious in the case of solid and hazardous waste disposal (Sigman 1995). When legaldisposal is directly taxed, households and firms seek out alternative disposal options, whichinclude burning and illegal dumping, if those options are easy or penalties are small. Thedeposit-refund approach circumvents this problem by providing rebates for materials returned forrecycling. Second, a Pigovian tax has monitoring and enforcement problems in many settings.Litter is one example; taxing litter directly is ineffective given the difficulty monitoring it so adeposit-refund applied to bottles, packaging, plastic bags, and other products that often end up aslitter may be appropriate. Nonpoint source pollution is another example. In this case, it ispossible that a tax (deposit) on more easily monitored fertilizer sales combined with a subsidy(refund) for appropriate farmer mitigation activities may provide some of the incentives of aPigovian tax without that policy’s need to monitor individual pollutants. Third, tax evasion andavoidance is less of a problem with a deposit-refund system than with a Pigovian tax. It is The author is senior fellow and Thomas Klutznick Chair at Resources for the Future.1

Resources for the FutureWallsdifficult to evade taxes on product sales. Households and firms thus invest in generally beneficialactivities to increase their refund payments rather than harmful activities to avoid tax payments.An upstream deposit-refund system, in which the refund is paid to processors of recyclablematerials or to collectors of materials upon delivery to processors, rather than downstream toconsumers who return materials to collection centers, may be especially beneficial in this regard.This upstream model is discussed further below.The Deposit-Refund in PracticeBottle BillsOregon passed the first bottle bill, or container deposit law, in the United States, in 1971.The law imposed a deposit on all beer and soft drink containers that would be refunded uponreturn of the containers for recycling. As of mid-2011, ten states and eight Canadian provinceshad some kind of bottle bill.1 Almost all states set the deposit – and refund – at 5 cents percontainer; Michigan’s deposit-refund is 10 cents and California’s is 5 cents for containers lessthan 24 ounces and 10 cents for larger containers. In all states except California, the amount hasstayed the same over the years with no increase for inflation.The traditional type of bottle bill—in place in all of the bottle-bill states except Californiaand Hawaii—works through distributors and retailers, with retailers playing the role ofmiddlemen. Specifically, retailers pay distributors a deposit for each can or bottle purchased; theretailers then turn around and collect those deposits from con

return of the containers for recycling. As of mid-2011, ten states and eight Canadian provinces had some kind of bottle bill.1 Almost all states set the deposit – and refund – at 5 cents per container; Michigan’s deposit-refund is 10 cents and California’s is 5 cents for container

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