Florian Ade University of Colorado at Boulder Term paper Econ 4545, Fall 2003 Mandatory deposits for non refillable beverage containers: Are they fixing the externalities? The German case. The bottle bill began as an antilitter measure but became a hallmark of the recycling revolution. Expanding it now makes good environmental and fiscal sense. Editorial, March 11, 2003 The Boston Globe I. Abstract Mandatory deposits for beverage containers are considered in the light of externalities. It is found that in a completely unregulated market they can help to reduce externalities. In a close look at the properties of the German mandatory deposit law, we find that instead of living up to the theoretical possibilities it increases externalities – thus causing a government imposed non market failure. II. Introduction Effective January 1, 2003 the so called Dosenpfand (mandatory deposit for non refillable containers for beverages) has been introduced in Germany. Since that a deposit of 0.25   US$) per conatiner has to be paid when purchasing beverages in non refillable containers. On returning the containers the deposit is handed back to the consumer. In this paper we will talk about three types of beverage containers according to the definition of the German deposit law: 1. Mehrweggetränkeverpackungen are containers for beverages that are used several times. This means, having been used they are returned to producers of beverages, cleaned and refilled. Usually these bottles are standardized so that e.g. a beer bottle from a brewery in north Germany that is consumed in the south will not be sent to north Germany but will be refilled in a local south German brewery. These types of containers will henceforth be called refillable containers. On these containers a deposit has always been applied in Germany. This deposit was not established by law but voluntarily by the beverage industry. 2. Ökologisch nicht vorteilhafte Einweggetränkeverpackungen are containers for beverages that are only usedFlorian Ade – Mandatory Deposits 2 one time and that have been declared environmentally disadvantageous by studies by the Bundesumweltamt (Federal Office for the Environment). The mandatory deposit applies to this group of containers that include e.g. cans and single-use bottles. This group of containers will be called non refillable containers. 3. Ökologisch vorteilhafte Einweggetränkeverpackungen are containers for beverages that are only used one time but have been declared environmentally advantageous by the Bundesumweltamt. This type of container includes polyethylene tube bags (e.g. for milk) and beverage cardboard box containers (e.g. juice). They are not subject to the mandatory deposit. These containers will be called advantageous non refillable containers (ANC). According to §4 of the German recycling law (VerpackV) anyone who sells any product to the consumer must take all packaging of the product back and must recycle it if recycling is possible. This obligation can be waived if the retailer participates in a system assuring nationwide recycling of the packaging sold in his store. The industry implemented such a system in the form of a joint stock company, the Duales System Deutschland (DSD). The DSD is a non profit monopoly (DSD, 2002). All companies participating in this system pay a certain amount per unit of packaging to the DSD which picks up packaging at every household in Germany. If a company does not want to participate it has still the choice to take back all packaging at its stores – or to set up a nationwide system itself. The DSD allows all participating companies the print its symbol Der Grüne Punkt (the green point) on their packaging so that consumers can identify which products are recycled by the DSD. Before the mandatory deposit came into force non refillable containers were recycled by the DSD. The aim of the German mandatory deposit law is to reduce the use of non refillable containers and thus to foster the use of refillable containers and ANCs. A second but less important goal is to avoid that containers are thrown into the environment. It is not the intent of the mandatory deposit to promote recycling as a well functioning recycling system – the DSD – was already in place before the law became applicable. III. Can a deposit law theoretically reduce the externalities of the usage of non refillable beverage containers?Florian Ade – Mandatory Deposits 3 In a completely unregulated market there are likely to be externalities from the use of non refillable containers. Assuming that consumers prefer not buying refillable containers - because the private cost of collecting, sorting and returning them is higher than the price advantage of beverages in refillable containers (Crittenden, 2003) - certain externalities may arise from this behavior. Customers e.g. are unlikely to take the full cost to society of cleaning up for littering, burning or land filling, waste collection, exhausts from production and disposal into account since they are not incorporated in prices. These social costs are assumed to appear only to a limited extend with refillable containers and ANCs. Thus the unregulated market fails by causing externalities. Introducing a mandatory deposit for non refillable containers might fix some of these externalities since the private cost of buying them in respect of the hassle of bringing them to the recycling station will equal the private cost of bringing back refillable containers. If we consider this and the price advantage of beverages in refillable containers we would expect that lots of costumers switch to refillable or to ANCs while some will still buy non-refillable as they might value other properties such as weight and breaking resistance of e.g. cans over glass bottles. Even those still buying non refillable containers are less likely to litter now as they have an incentive to give their non refillable containers back. Thus externalities resulting from littering will decrease as littering will go down. On the other hand, the argument that using refillable instead of non-refillable containers generally reduces externalities does not hold for all situations. Whether it holds highly depends from which packaging alternatives are considered and which products shall be packed and from further properties. For example RDC (2003, pp. 122-123.) shows in its study for the European Commission