Extended Producer Responsibility in Developing Economies: Waste

Diversion, Design Incentives, and Infrastructure Improvement

Luyi Gui

Paul Merage School of Business, University of California, Irvine, Irvine, California 92697

Electronic waste (e-waste) is a major environment problem, and recent figures indicate that
this problem is the most severe in developing countries. First, the fast economic growth in
developing countries leads to an exponentially increasing volume of e-waste. In 2014, it is
estimated that most of the e-waste worldwide (about 38%) was generated in Asia (Baldé
et al. 2014). Second, e-waste exports to developing countries remains a serious issue. It
is reported that approximately 23% of the e-waste generated in the developed world has
been exported to China, India and African countries (Breivik et al. 2014). Third, developing
countries generally lack the infrastructure and regulatory framework necessary for proper
treatment of the vast amount of e-waste they face. As a result, only an estimated 15% of
the total e-waste discarded globally in 2014 has been properly recycled by official take-back
systems, and the majority of the remainder volume was treated at inferior environmental
standards in developing countries, causing severe environmental and health damages (Baldé
et al. 2014).

Under the pressure to control the pollution by e-waste, developing countries in Asia, Africa
and South America have started to develop formal take-back programs based on the con-
cept of Extended Producer Responsibility (EPR), which holds producers responsible for the
treatment cost of their end-of-life products (OECD 2014). However, unlike in developed
countries where a mature recycling infrastructure exists, technologies and infrastructure for
environmentally sound e-waste recycling are lagging behind in developing countries. Hence,
the introduction of systematic collection and recycling infrastructures is a critical step in
EPR implementations in developing countries, and in many examples in practice, relies on

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the initiatives of producers. For example, in collaboration with local authorities, HP has
launched a large-scale recycling facility and a registered collection network for e-waste in
Kenya (The Guardian 2014). In China, the enactment of its EPR legislation prompted
major domestic electronics producers (e.g., Haier, Gree, TCL, Changhong) to build their
own recycling plants (CHEARI 2016). In this context, evidence from practice indicates that
there are two major concerns associated with EPR implementations based on producers’
infrastructure investment in developing countries.

Competition for return volume with the informal recycling sector: Driven by the
profit from recycled materials from e-waste, there typically exists a large informal recycling
sector in developing countries, consisting of junk peddlers and small family-run recycling
workshops that buy used products from consumers (Chi et al. 2011). This is a major dif-
ference from developed countries where consumers return used products for free or even pay
for recycling. These informal workshops use primitive recycling approaches at very low cost,
and thus can offer high prices to the consumers. This poses a significant challenge for the
newly-introduced formal recycling plants to compete in e-waste collection, resulting in low
processing volumes and a severe lack of scale economies in operations (Tong et al. 2005). For
example, in China, the capacity utilization level at the major government certified processors
is estimated to be about 50% for TVs and below 20% for other appliances such as refrigera-
tors, air conditioners and computers (Qu et al. 2015). In this case, producers that invest in
recycling facilities either suffer from a high processing cost, or need to raise the prices offered
to consumers and incur a high collection cost. This tradeoff constitutes a major concern for
producers about recycling infrastructural investment in developing countries.

Producers’ design incentives under infrastructural investments: A major policy

goal of EPR is incentivizing producers to design more recyclable products in order to reduce
their recycling costs. Note that the recycling cost also depends on the technology used and
the operational efficiency level of the recycling plant, which is decided by the producer that

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establishes the facility. Hence, how the producer’s incentives for design-for-recyclability are
affected by its infrastructural investment considerations is an important question for the EPR
implementation in developing countries. This issue is further complicated by the potential
impact of product design and recycling technology on the volume competition between the
formal and the informal recycling sectors. For example, the competition is more intense for
products that are easier to disassemble or designed with valuable materials (Qu et al. 2015).
On the other hand, recycling facilities with more advanced technology can better attract
return volumes from eco-sensitive consumers at lower prices (Zhang 2011).

While evidence of the above challenges is abundant in practice, a formal analytical study of
the associated cost tradeoffs and the environmental implications is lacking in the literature.
Hence, the first goal of this paper is to fill in this gap. To this end, the paper first considers a
single producer that invests in a formal recycling facility in a developing country, and studies
its optimal decision making regarding (i) the collection price offered to the consumers, (ii)
design-for-recyclability of its products, (iii) the recycling technology choices for the facility.
Analytical results based on a stylized model illustrate the existence of a critical tradeoff
between the optimal collection rate by the producer-invested facility versus the producer’s
design and technology choices. This implies that in the presence of an informal recycling
sector that has the cost advantages in competing for return volumes, EPR implementation
based on producer-invested recycling facilities is subject to either a low waste diversion
rate, or poor design or technology investment incentives. Sensitivity analysis of this tradeoff
offers further insights for EPR policy choices in developing countries. For example, it is
shown that a high collection target and governmental subsidies for waste collection to the
formal recycling facilities may improve waste diversion at the expense of producer’s design
incentives. However, a high collection rate may go hand-in-hand with the improvement in
recycling technology given effective consumer education that sufficiently improves the eco-
awareness of the general public.

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Note that the above study of the cost tradeoffs for a single producer assumes the producer’s
individual recycling responsibility for its own e-waste volume. Compared to systems that
implement individual responsibility, collective EPR implementations where a mix of different
producers’ products is recycled together are more prevalent in practice. This is also the case
in developing countries, e.g., in China, the recycling plants owned by major producers process
others’ products as well. Investigating the implications of collective implementations in the
context of developing countries is the second goal of this paper.

In particular, note that collective implementations can be operated in different ways, and
there exist two major models based on the examples in the EU and in the US. One is a
centrally-coordinated model where a system operator manages the flow of the entire return
volume and allocates the total cost incurred to the producers whose products have been
recycled. The other is a market-based model where the distribution of the returned products
and the cost incurred to producers are determined by market competition. Both models
can be observed in the context of developing countries and are enriched by the additional
challenges derived from return volume competition: In China, an example of the centrally-
coordinated model is the “old-for-new” campaign, a pilot EPR program where the collection
prices to the consumers were centrally determined, and the returned volume were processed
at designated facilities. This pilot program is replaced by the current market-based model in
2011 where all qualified recycling facilities can participate and compete for return volumes
(Zhang 2011). On one hand, the current model intensifies the competition for return volumes
and can significantly increases the operating cost of recycling facilities, a concern strongly
voiced in practice. On the other hand, competition can provide incentives for design and
technology improvement, while such incentives have been reported to be missing in the
“old-for-new” campaign. In the light of these practical evidence, the second part of this
paper focuses on how the above tradeoff leads to superior cost efficiency or effectiveness
in incentivizing design-for-recyclability and recycling technology improvement between the
centrally-coordinated and the market-based collective implementations.

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