Recycling, Trade in Trash, and Strategic Environmental Policy
James H. Cassing, Dept. of Economics, 4S38 W. W. Posvar Hall, University of Pittsburgh, Pittsburgh,
PA 15260, USA, (jcassing+@pitt.edu)
Thomas KUHN, Department of Economics and Business Administration, Chemnitz University of
Technology, 09107 Chemnitz, Germany (t.kuhn@wirtschaft.tu-chemnitz.de, tokuhn@pitt.edu,), ph 001-412648-1748, fax 001-412-648-3011 (USA, till April, 8), ph +49-371-531-4942, fax +49-371-531-4343 (Germany,
from April, 9), corresponding author
For regular parallel sessions and posters
Main Topics: Transboundary Resource Management, International Environmental Policy, Industrial Ecology
Abstract
In this paper, we present a model, which captures a stylized account of worldwide trade in waste
materials in the presence of a recycling option. One obvious way in which international trade and the
environment are related is that to a considerable extent undesired by-products of production are in fact traded
internationally. For example, hazardous electronic wastes (E-wastes) are being exported to China, Pakistan, and
India primarily from North America and processed in operations that are harmful to human health and the
environment. Similarly, India is importing about half of the worlds discarded ships for being dismantled
manually in a dangerous and polluting process to be sold as scrap. China is a major importer of waste plastics
mostly originating from Germany until the political resistance of the Chinese population forced a succession of
the trade in 1995. On equal terms, considerable trade in waste products on the regional level is observed, for
instance in case of interstate solid waste shipments in the US, as well as in case of regional hazardous waste
disposal. Several U.S. Indian tribes are also importing wastes onto their quasi-sovereign reservations from
nearby urban areas. (References are given in the paper.) Associated with the growing trade in waste materials is
a series of treaties and understandings, such as the Basel Convention, which purport to control the trade in
globally optimal ways.
In two earlier papers (J. Cassing and T. Kuhn, Strategic Environmental Policies when Waste Products
are Tradable, Review of International Economics, 2003; J Cassing and T. Kuhn, The Political Economy of
Strategic Environmental Policy for World Markets in Waste Products, in R. Tandon, New World Order Series
Vol. 21, forthcoming) the focus has entirely been on international markets for waste materials. Waste exporters usually big industries like the chemical and nuclear industry or central processors for plastics wastes and such
kind- are taken able to exercise market power while importers -small firms in less developed countries- are
assumed pure price takers. However, many of the goods, which enter into international trade, could indeed be
converted once more into useful goods through recycling and so not cause damages in the home country.
Furthermore, while richer developed countries typically have access to sophisticated recycling technology
(possibly subsidized), less developed countries do not. The latter can and do, however, accept unprocessed
waste at a price from the more developed countries. This waste they either dispose of, as did North Korea with
spent nuclear waste from Taiwan, or process it in some usually low technology way, as in the ship-breaking case.
In this paper, we emphasize recycling as an alternate option to treat wastes. We analyze how optimal
policies are modified both when governments cooperate and when they do not. One purpose of the paper is to
cast light on the wisdom of such contentious international agreements as the Basel convention. More precisely,
we have set up a multiple stage game composed of a market stage and a policy stage. Waste is generated in a
developed country as an undesired by-product of final goods production and might be exported to some less
developed countries to get rid of any damages linked to waste treatment and disposal. The analysis is extended
with the incorporation of a domestic recycling industry able to exploit economies of scale in waste treatment
(due to sunk cost in R&D). Hence, the market structure for recyclables is oligopolistic. In contrast, the foreign
waste disposal industry in less developed countries is perfectly competitive based on diseconomies of scale
technologies. The assumption made for the time being is that the superior technology is available to developed
countries only.
With respect to the modeling of the environment we take account of the materials balance condition which holds
by nature and helps determining the waste output which is equal to the amount of virgin materials extracted.
Three environmental factors of production are thus considered, natural resources, a dirty input (discarded
wastes), and a clean input (recycled intermediates). Hence, in the approach taken here we explicitly model the
material-product chain created through the transformation of virgin and waste material into final products and
undesired waste products. Moreover, we model the circulation of matter by capturing the potential reuse of
recycled waste material in final production. This might be considered a novel feature in the strategic tradeliterature and provides a link between the environmental and ecological economics approach to the waste issue.
On the policy level, we give the domestic government the option of subsidizing (or taxing) recycling
and the foreign government the option of taxing (or subsidizing) the waste disposal industry in recognition that
1
there is a negative environmental externality associated with disposal. We simultaneously determine the market
equilibrium for the recycling market and the waste disposal market, followed by a discussion of their
comparative static results and optimal national and global policy in a number of non-cooperative and cooperative
settings.
We find that the presence of a recycling option modifies qualitatively the optimum set of environmental
policy from the standpoint of both national and world welfare. Some attention is paid the welfare implications of
the trade-off between international trade in waste, foreign disposal, and subsidization of innovations in the
recycling of waste. In the absence of recycling the expected eco-dumping result holds where the domestic (waste
exporter) tax rate is set below the Pigouvian rate, and the foreign tax rate is set above, the Pigouvian taxes. In
contrast, by means of recycling the domestic waste exporting country is no longer forced into eco-dumping but
can induce recycling at the Pareto-optimal level. This, however, requires subsidizing recycling at a rate
appropriate to offset the market power of the domestic recycling industry. Environmental policy must not be
disrupted because for the developed country any terms of trade effect can be ignored. The less developed country
still may want to disrupt the eco-tax set above the Pigouvian rate to improve the terms of trade. However, this
causes the (endogenous) recycling rate to increase and the price of recycled intermediates to fall so that waste
importing countries are forced to tax waste disposal less than they could in the absence of recycling. The
technological efficiency gap in waste disposal relative to recycling is supporting this result even more. In this
second-best world developing countries loose and developed gain, but world welfare is unambiguously higher.
International environmental agreements to worldwide implement first best Pigouvian taxation would call for a
compensation of less developed countries.
2