Getting Extended Producer Responsibility Right

An emerging state-level policy known as “Extended Producer Responsibility” (EPR) focuses on addressing key waste concerns—namely, plastic pollution. The idea is that the responsibility for pollution caused by a particular product extends to the initial producer of that product. The concept has some merits, but it also has challenges. On one hand, producers should be best able to address issues that make their products hard to recycle or dispose of; on the other, it doesn’t seem appropriate to punish producers for the improper disposal of their products by consumers. Importantly, from a policy outcomes perspective, EPR hits upon potential improvements to current waste management practices. But there are serious policy risks in its implementation.

What is EPR?

Currently, EPR policy has been enacted and/or is anticipated to be enacted in nine states. EPR is a tax levied on producers of affected products, with revenues directed toward waste management of those products. In most cases, fees paid to cities by plastic producers are used to bolster recycling. While nobody enjoys taxes, the economic principle of “pollution taxes” can be thought of as “polluter pays.” Because pollution harms a public good (the environment), the party responsible for the pollution ought to pay for that harm, which then incentivizes them to lessen that harm.

The economic logic behind pollution taxes is more than just trying to address an injustice or grievance via the tax code. Because people’s behavior favors activities that avoid the tax burden, these taxes incentivize a more environmentally friendly ordering of capital (e.g., a carbon tax would encourage switching from coal to the less carbon-intensive natural gas, thereby reducing the tax burden as well as pollution).

The logic of EPR is similar, though it does encounter some challenges. For example, it ignores the fact that most plastic waste in the United States does not result in plastic pollution, meaning that taxing plastics may not achieve the desired environmental outcome. Adequate EPR design requires something more, leading to the second half of the policy: utilizing revenues to improve recycling or waste management in American cities.

What would well-designed EPR look like?

An effective EPR policy should focus on reducing plastic pollution at the lowest cost possible. To receive the merits of a pollution tax while recognizing that EPR cannot be so granular as to penalize individual polluters, it needs a subset policy that rewards pollution abatement.

In other words, if EPR imposes a tax on plastic producers as an expectation that their production will result in at least some plastic pollution, the producers ought to be refunded for plastic that is properly disposed of. This is the method used by “deposit refund systems” (DRSs) for beverage containers, where beverage buyers pay a fee that is refunded when they recycle the container. Such a system properly incentivizes recycling and punishes waste. This type of system would directly promote reduced pollution while encouraging industries to invest in the desired outcome—recycling—to avoid EPR-related costs. It also creates opportunities for the most efficient producers and recyclers to gain an advantage over competitors who pollute more and are less able to mitigate their tax burden under EPR.

What would poorly designed EPR look like?

As with many policy terms, a simple phrase like “extended producer responsibility” can encompass a host of policies that are unrelated to—or perversely antagonistic toward—the objective of reduced pollution. Poorly designed EPR policies seek to impose a new tax on businesses that would then pay for social programs unrelated to waste management. EPR programs in name only, they would be no different functionally than other tax-and-spend policies. This would be economically inefficient because taxes levied only against a narrow base distort capital investment by impacting industry profitability via government fiat as opposed to the economic utility of production.

Additionally, poorly designed programs would fail to reduce the tax burden on companies that successfully achieve waste management goals. The virtue of pollution taxes is that they incentivize avoided pollution through a built-in mechanism that forces producers to internalize the costs of the externalities from their production. If an EPR lacks the ability to reduce tax burdens, then there is no incentive for firms to reduce pollution.

These policies should also avoid making publicly funded waste management efforts entirely dependent upon EPR revenues. Though the recycling industry depends upon a certain measure of public subsidy, it is not divorced from the incentives of the market. Pollution reduction is a public good, while waste products themselves carry minimal market value. The comparative value of various recycling streams, such as aluminum compared to plastic, creates a market incentive for upstream packaging producers to invest in production that carries greater value from recycling and to have lower net life-cycle packaging costs.

If a material recovery facility (MRF) has guaranteed revenues through an EPR, the price they charge per bale of recycled material may not accurately reflect the true cost and value of that product stream. As an example, high-value materials like aluminum could be recycled less often under an EPR because MRFs would have reduced incentive to invest in aluminum recycling while upstream packagers would see less value in aluminum beverage containers. Simultaneously, subsidized capacity for lower-value plastic recycling would signal upstream packagers to use more plastic. While it makes some sense to direct EPR revenues toward recycling capacity, the revenue applications must be designed in such a way that market dynamics that incentivize private investment in recycling are not undercut.

EPR proposals should also be within the realm of economic and technological feasibility. If an EPR law requires an unachievable rate of recycled content for packaging materials (many single-use plastics cannot be made with recycled material), then the law could ironically diminish recycling investment since compliance with the law is unachievable regardless of industry investment.

Evaluating existing EPR policies

In addition to the EPR bills that have already passed, 95 state-level EPR bills are currently under consideration. Implemented, soon-to-be-implemented, and proposed EPR policies cover a wide range of regulatory requirements. Some are relatively modest. Minnesota, for example, requires packaging producers to register with a “producer responsibility organization” (PRO), which then assesses the recyclability of packaging materials. The Minnesota EPR also requires producers to cover a large portion of the recycling costs.

Other EPRs, such as California’s, compel packaging producers to pay an estimated $5 billion in fees and require 100 percent of single-use plastics to be recyclable or compostable. Given that single-use plastics are made from a variety of plastic types and shapes (some of which are not readily mechanically recyclable), it is unclear at this time how this mandate will be fulfilled and at what cost.

Some EPR proposals, such as the one in Michigan, seek to utilize the policy as a mechanism to levy fees on packaging producers that could then be invested in environmental justice efforts. This may be a laudable social goal—but from a policy perspective, it does little to reduce plastic pollution. There is also a concern that expanding the utilization of PROs beyond waste issues could lead to mission creep, wherein the tools available to the PRO are not ideally suited to the policy objectives it is tasked with. Past R Street work has explained how the expansion of certain government-created entities in electricity policy has diminished their effectiveness in achieving core policy objectives.

Generally, existing EPR policies largely miss the mark of efficient waste management policy. The EPRs would necessitate the establishment of PROs across the nation, each with unique and disparate requirements. Packaging that is legal in Minnesota may not be legal in California, and packaging that is legal in California may not be producible in large enough quantities to make it the national norm. Additionally, packaging designs based on PRO recommendations in one state may not be as easy to recycle in another.

As noted above, DRSs provide an example of recycling policy that effectively leverages market and consumer incentives to engage in more recycling. R Street examined DRSs and found that they substantially increased recycling rates at minimal cost, particularly when compared to other recycling policies.

DRSs succeed because they leverage the willingness of the consumer who holds the recyclable material to ensure the material is recycled. By contrast, EPRs require recycling while imposing penalties on producers with limited control over their products’ end of life.

Recommendations

There are several ways in which to improve state-level EPR proposals:

1. States should adopt more consistency or reciprocity in proposed fee structures and compliance requirements to avoid situations where packaging complies with one EPR but not another.
2. Packaging producers should be able to avoid EPR fees by achieving recycling or recyclability targets. Ironically, simply levying a fee could force packaging producers out of producing materials consumed in those states. This would harm consumers, who would have to pay more for products or lose access to products whose sellers do not want to use specific packaging required only by a small portion of their potential market share.
3. EPR revenues should not be used for policy objectives unrelated to the mechanisms raising the fee. In tax policy, selective application of taxes creates incentives for the targeted tax base to shrink or flee, which can leave policy priorities unfunded (e.g., if a school is funded by cigarette taxes and people stop smoking, new taxes would have to be raised to fund the school).

Conclusion

EPR is an emerging priority, which makes sense given that mismanaged plastic waste is a growing issue (as noted in R Street’s research). But many of the EPR proposals assessed are divorced from the problem of reducing pollution. Additionally, their adopted policy mechanisms often fail to utilize market-based policy advantages, resulting in policy mandates that are likely to be costlier than policies that leverage consumer choice. We recommend that states embracing EPR find opportunities to ensure that their targets are achievable and their policies are confined to actionable criteria. States would also benefit from developing methods of reciprocity or coordination, as packaging producers may find it less costly to avoid selling in specific states than to comply with local EPR requirements.