UC Irvine

Extended producer responsibility (EPR) is a policy tool that holds producers financially responsible for the post-use collection, recycling, and disposal of their products. Many EPR implementations are collective—a large collection and recycling network (CRN) handles multiple producers’ products in order to benefit from scale and scope economies. The total cost is then allocated to producers based on metrics such as their return shares by weight. Such weight-based proportional allocation mechanisms are criticized in practice for not taking into account the heterogeneity in the costs imposed by different producers’ products. The consequence is cost allocations that impose higher costs on certain producer groups than they can achieve independently. This may lead some producers to break away from collective systems, resulting in fragmented systems with higher total cost. Yet cost efficiency is a key legislative and producer concern. To address this concern, this paper develops cost allocation mechanisms that induce participation in collective systems and maximize cost efficiency. The cost allocation mechanisms we propose consist of adjustments to the widely used return share method and include the weighing of return shares based on processing costs and the rewarding of capacity contributions to collective systems. We validate our theoretical results using Washington state EPR implementation data and provide insights into how these mechanisms can be implemented in practice. This paper was accepted by Serguei Netessine, operations management.