resolving failures in recycling markets: the role of technological innovation

RESEARCH ARTICLE

Resolving failures in recycling markets: the roleof technological innovation

Francesco Nicolli • Nick Johnstone • Patrik Soderholm

Received: 22 September 2011 / Accepted: 12 January 2012 / Published online: 22 February 2012

� Springer 2012

Abstract In addition to environmental externalities, markets for recyclable

materials are affected by other market barriers and failures. These include imperfect

and asymmetric information and technological and consumption externalities. In

this paper we review the nature of such failures and how they may affect markets for

certain recyclable materials. We then discuss how such failures can be overcome (in

part) by technological innovation, and present evidence on trends in patented

inventions drawing upon a rich database of patent applications. And finally, we

provide an econometric investigation on the role of policy measures in inducing

innovation in two areas—plastic packaging and end-of-life-vehicle waste.

Keywords Solid waste � Recycling � Market failure � Technological innovation

JEL Classification Q53 � Q55 � Q58

1 Introduction

Recycling is assuming an increasing importance in OECD economies. Historically,

recycling has occurred because it has been economic from a private perspective, and

as a consequence recycling rates have often been substantial even in the absence of

F. Nicolli (&)

Department of Economics, University of Ferrara, Via Voltapaletto 11, 44121 Ferrara, Italy

e-mail: [email protected]

N. Johnstone

OECD Environment Directorate, 2 rue Andre-Pascale, 75016 Paris, France


P. Soderholm

Economics Unit, Lulea University of Technology, 971 87 Lulea, Sweden


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Environ Econ Policy Stud (2012) 14:261–288

DOI 10.1007/s10018-012-0031-9

policy intervention. For instance, lead scrap has constituted about 50% of the raw

materials used in lead production and scrap-based production accounts for around

40% of global steel production (Swedish Steel Producers’ Association 2003).

However, the growth of markets for many classes of recyclable materials is due

in large to public policy incentives. The array of public policies include measures

that directly support the development of these markets, including, for instance,

waste collection schemes, deposit–refund systems, and public procurement

schemes. Public authorities also provide indirect support for recycling markets

through the internalisation of externalities at the waste management phase and

upstream raw material extraction.

If markets operate in conditions of economic efficiency and policy measures are

introduced for different waste management options to reflect their social costs,

recycling will be at its optimal level. However, in addition to the potential for the

non-internalisation of environmental externalities, other types of market failure may

constitute an impediment to the realisation of commercial opportunities in recycling

markets. The objective of this paper is to assess the relative importance of such

conditions, and discuss possible remedies (either by private or public actors) to

overcome these market imperfections. We pay particular attention to the role of

technological innovation as evidenced through patent activities in the waste

recovery sector in the OECD economies. Whether spontaneously through the

market or as a consequence of policy interventions, technological innovation can

play a significant role in overcoming failures in recycling markets.

Specifically, in the paper, we address causes of non-environmental market failures

related to information asymmetries, as well as technological and consumption

externalities. We highlight specific examples of such market imperfections, as well as

a number of market- and policy-driven measures to overcome them. Technological

innovation can reduce these information asymmetries by, for instance, facilitating

market participants’ assessment of the characteristics of different materials. Innova-

tion can also allow for the disassembly or separation of materials, facilitating recovery

of materials, thus limiting the need for manual visual inspections of waste streams to

assess quality, etc.

For these reasons it is useful to analyse, in more detail, the role and the

determinants of such technological innovation in the materials recovery sector. The

paper therefore also provides an econometric analysis of the effect of different

recycling policies on technological innovation in the recycling field. The quantitative

analysis is conducted using patent data from 29 countries over the time period

1970–2007, and we focus on innovations in the case of end-of-life vehicles (ELVs)

and plastics packaging. The reason is that for these two cases we have been able to

identify patent classes that list innovations, which tend to make recycling markets

work better by economising on information needs and permitting systematic

disassembly of products for the recovery of various components and materials. Thus,

although we do not explicitly investigate the extent to which technological

innovations reduce market inefficiencies in recycling markets, our selection of

patents suggests that this is a reasonable maintained hypothesis.

More generally, we add to the existing recycling economics literature in two

ways. First, one research strand involves a relatively large number of empirical

262 Environ Econ Policy Stud (2012) 14:261–288

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(econometric) studies that address the functioning of different secondary material

markets, although focusing primarily on the behaviour of well-established and thus

mature industries such as secondary metals1 and wastepaper.2 The studies on metal

scrap and wastepaper markets typically assume that these markets are not subject to

imperfections. For some materials (e.g., steel scrap, secondary aluminum, etc.) these

are reasonable assumptions, but for many used materials (e.g., plastics, rubber,

specialty metals, etc.) markets may be underdeveloped and highly inefficient in the

sense that there are significant unexploited gains from trade (OECD 2005). For this

reason it is important to explicitly investigate the nature of potential market failures

in recycling markets rather than assume that these work efficiently, and, in turn,

discuss any related policy implications.

Second, another growing research strand comprises several studies of waste

management policies. Pigouvian taxes on disposal are generally proposed to be

economically efficient. However, in the presence of illegal dumping a combined

output tax and recycling subsidy (equivalent to a deposit-refund system) will be

more efficient (Dinan 1993; Fullerton and Kinnaman 1995; Walls and Palmer 2001).

The tax discourages production, and thus acts to reduce waste. Moreover, if the tax

is assessed per pound of intermediate material produced, it will reduce the amount

of materials entering the waste stream. The recycling subsidy encourages

substitution of secondary materials for virgin materials (Palmer and Walls 1999).

However, these policy mixes depend on the presence of efficient private markets for

recycled materials. Calcott and Walls (2002) is one of few studies that addresses the

solid waste policy implications in the presence of imperfect recycling markets (i.e.,

with positive transaction costs).

The nature of these non-environmental market imperfections deserves increased

attention. In some cases the market actors themselves will find ways to deal with

apparent inefficiencies, but occasionally public policy intervention will be needed

and the nature of such intervention is likely to be different than that which is usually

found in the environmental policy toolbox. Two types of market failures require a

mix of policy tools, and it is useful to identify situations which call for policy

intervention beyond that of internalising environmental externalities. Moreover, at

least some of the failures identified can be overcome (or attenuated) through

technological innovation. Since public policy will indeed affect the pace and the

1 In the case of secondary metals, earlier studies tend to focus on copper, aluminium, steel and for the

most part on the North American or European markets (e.g., Barnett and Crandall 1986; Blomberg and

Hellmer 2000; Blomberg and Soderholm 2009; Bonzcar and Tilton 1975; Carlsen 1980; Gomez et al.

2007; Slade 1980a, b; Stollery 1983). Numerous models of metal markets which focus on the supply of

primary materials also contain equations for secondary and/or scrap metal supply. Examples of such

studies are the copper studies of Fisher et al. (1972), Wagenhals (1984), and Suan Tan (1987) and an early

study of the aluminium industry by Charles River Associates (1971).2 Econometric studies of supply and demand behaviour in the wastepaper market are surveyed in

Mansikkasalo and Soderholm (2011). Many of the early studies focused solely on the supply of

wastepaper by estimating a single supply equation (e.g., Anderson and Spiegelman 1977; Edwards 1979;

Kinkley and Lahiri 1984). Empirically these focus on the US market and occasionally on the UK.

Previous wastepaper demand studies include, for instance, Edgren and Moreland (1989), Nestor (1992),

Samakovlis (2003), and Lundmark and Soderholm (2003).

Environ Econ Policy Stud (2012) 14:261–288 263

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direction of technological innovation in the waste sector, this could assist in

overcoming important barriers to material recycling.

The paper proceeds as follows. In Sect. 2, we review and discuss the nature of—

as well as potential solutions to—three different potential market inefficiencies in

recycling markets. Section 3 reviews patent data to provide evidence on innovation

in technologies which facilitate recycling, and we discuss, in particular, the role of

public policy on innovations in the cases of ELVs and plastics packaging. Section 4

presents the results of the econometric analyses of the effect of policy measures on

patent counts. And finally, Sect. 5 provides some brief concluding remarks and

directions for future research.

2 Imperfect recycling markets

In this section, markets for secondary materials will be examined through the lens of

the theory of market efficiency. As was noted above, several sources of market

inefficiencies may affect material recycling rates. Our focus is primarily on potential

sources of market inefficiency in the recycling market itself, such as information

asymmetries and different types of externalities. Specifically, we highlight the role

of failures which can be at least partly overcome through technological innovation:

(a) information asymmetries related to waste quality; (b) consumption externalities

and risk aversion, and (c) technological externalities related to the products from

which secondary materials are derived. These are discussed in the remaining sub-

sections.3

It is not obvious that all these market characteristics call for policy intervention.

The strongest case for public policy intervention lies in those (inefficient) situations

where mutually beneficial market transactions do not take place, and where the

relevant private actors cannot be assumed to take the appropriate measures to make

this happen. In the discussion, we highlight the roles of both public policy and

private measures in improving the efficiency of recycling markets. The role of

technological innovation is also highlighted.

2.1 Information asymmetries and uncertainty about waste quality

In this section, we discuss how asymmetric information with respect to waste

quality can affect the market, i.e., where one party involved in a transaction has

more information than another, may lead to adverse selection (Akerlof 1970). In the

context of secondary materials, adverse selection could imply that the sellers of

recyclable materials that would provide clear ex post benefits to consumers are

unable to perfectly transfer this information to buyers since the quality of the

material is (partly) unobserved. Assuming that suppliers are divided between those

3 It should be noted that we do not here address the potential role of market power in these markets. This

represents an area where much work has been done in the past (e.g., Hervani 2005), and previous studies

have paid much attention to the issue of whether a limited number of firms in the production of primary

materials can restrict the substitution between primary and secondary materials due to imperfect

competition and strategic behaviour (e.g., Suslow 1986).


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who offer low-quality (‘‘lemons’’) and high-quality products, respectively, adverse

selection favours the sellers of ‘‘lemons’’ who are able to exploit their information

advantage over the buyers. Thus, even though buyers have a high willingness to pay

for high quality, the sellers with high-quality products will not be able to attain a

high enough price.

In the case of secondary materials ‘‘quality’’ may mean different things,

including the presence of contaminants in used waste oils, the structural strength of

scrap, the mix of plastics in a given bundle, etc. All of these attributes will reduce

the value of the material to the buyer. Most drastically, the presence of hazardous

substances could transform something with a positive price due to its potential for

material recovery into something with a significant cost. For instance, Symonds

et al. (1999) believe this problem affects the construction and demolition waste

sector, and Ardant and Gaspart (2003) also cite examples of hazardous waste in

steel scrap. In the presence of asymmetric information and adverse selection, there

will thus be a bias towards the sale of wastes, which are more contaminated,

structurally deficient, and/or which possess other negative attributes.

The likelihood of suppliers adopting a strategy of placing lower-quality materials

depends on a number of factors, including: (a) the cost of concealing negative

attributes of the secondary material, (b) the cost of mitigating these negative

attributes, (c) the cost for buyers of detecting any negative attributes, and (d) the

costs which arise ex post if the negative attributes are detected (Kerton and Bodell

1995). It has been pointed out in other contexts that the ‘‘lemons’’ problem is likely

to be much more important for markets in which transactions are infrequent, and

thus for which reputation effects are less important. Since upstream sellers of some

recyclable materials may only enter the market very infrequently, such reputation

effects may be weak. The problem of adverse selection is also likely to be

particularly significant for wastes where materials from different sources are

aggregated at the point of collection (e.g., used motor oil, some plastics,

construction and demolition waste, etc.). Identification of specific sources of

relatively low-quality waste is difficult in these cases.

There are ways in which the market itself can seek to address such problems.

Most obviously, tests of quality may be undertaken. In a review of the plastics

sector, Papineshi (2003) argues that on-site testing equipment is a pre-requisite for

involvement in this sector. However, in many cases this is impracticable for

technological or economic reasons. The only solution may then be to rely upon

sources of waste over which the firm has direct control, such as waste arising from

the production process itself. In the case of glass cullet used for flat glass

manufacturing, this strategy is frequently adopted (Enviros 2002).

Firms involved in material recovery may also integrate vertically back to the

collection stage, thus taking responsibility for this stage of production and giving

them greater control over the quality of the inputs purchased. This strategy has been

pursued in some cases in the plastics (Enviros 2003; Stromberg 2004) and

aluminum markets (Ecotec 2000). Even if vertical integration is not adopted, it may

be possible to control waste quality through other means; in the construction and

demolition waste sector, some buyers have responded to this problem by monitoring

the demolition process. The use of long-term supply contracts, which reduce the


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seller’s incentives to misrepresent the materials being sold, may also be adopted.

Ardant and Gaspart (2003) report that the steel scrap market has been segmented

between occasional sellers (who have fewer potential adverse reputation effects

from selling low-quality waste) and more regular and frequent sellers (for whom

such effects are likely to be significant).

The Institute of Scrap Recycling Industries has a transaction dispute settlement

mechanism to deal with cases of material misrepresentation (SRMG 2000).

However, this has been used only rarely since the costs associated with pursuing a

dispute are often out of proportion to the sums involved in the individual

transactions. However, here there may also be a role for public authorities in

addressing information asymmetries. The development of material testing protocols

is one area in which governments have sought to overcome some of these problems.

Moreover, strict application of ex post liability regimes will increase the cost of

detection for sellers and may be an effective deterrent. However, while the

‘‘quality’’ of the waste may be inferior, it is unlikely to be sufficiently unambiguous

to warrant launching suits of this kind. For this reason, public support for transaction

dispute settlement mechanisms of the sort described may be preferable.

2.2 Consumption externalities related to secondary material products

The previous section examined information failures which may relate to the sources

of secondary materials at the production input stage, but there may also be

information failures and commercial disincentives to the use of secondary materials

directly in final products. These failures relate to cases in which buyers have

incomplete information about the suitability of a given waste for a particular use.

The relative importance of such a situation for different types of recyclable

materials depends upon the ultimate use to which the material is put. Paper

manufactured from recycled newsprint is not a perfect substitute for paper derived

from virgin pulpwood for various high-end uses. However, for low-end uses, it may

well be. Similarly, many types of metal manufactured from scrap are perfect

technical substitutes for metals manufactured from virgin ore, but for specialised

sub-segments of the market this is not necessarily the case.

However, buyers may not be aware of the degree of substitutability between

products derived from secondary materials and those derived from primary

materials. One oft-cited example is the case of recycled paper, which in the initial

stages of market development was perceived to be of lower quality for numerous

uses for which it was perfectly appropriate. Such problems are, however, likely to

become less important in due course. Through learning, agents in more developed

market are able to apply available information more efficiently. Still, in extreme

cases this can undermine the long-run market potential for secondary materials,

particularly if supply-side factors such as important economies of scale make initial

market penetration costly.

Inaccurate perceptions of the true nature of a commodity can arise from

imperfect internalisation of consumption externalities. In particular, even if buyers

do learn from the consequences of their own purchase decisions, there may be

knowledge spillovers as information about the suitability of use is diffused


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throughout the economy. In effect, each potential buyer learns from the experience

of other potential buyers. In effect initial buyers generate information which is of

value to others and that can be appropriated by these at a low (or no) cost, but

because this value is not rewarded in the market early adoption may be lower than

that which is socially efficient (Jaffe et al. 2002). Ecotec (2000) argues that these

types of problems are significant for plastics recycling, but also perhaps for paper

and glass. In the presence of important knowledge spillovers, this can be one of the

primary motivations for demonstration projects.

These problems can in part be exacerbated by the improper choice of

terminology as well as standards based on inadequate quality criteria. At its most

extreme, the very term ‘‘waste’’ has a negative connotation in that it causes

cognitive associations with risk of inferior quality. The perceived costs can take the

form of increased administrative requirements, as well as negative attitudes among

buyers, and insurance and credit institutions (EC 1998). It is important to recognise

that even a small degree of perceived uncertainty concerning the relative quality of

some materials can have significant consequences on a market. In the presence of

‘‘disappointment aversion’’ (Gul 1991; Grant et al. 2001), buyers will ‘‘overweight’’

low-probability risks of quality inferiority. For instance, even if the cost premium

for the use of ‘‘virgin’’ lubricating oil is non-negligible relative to the use of ‘‘re-

refined’’ lubricating oil, buyers may shun the latter if it is thought to increase the

probability of engine failure even slightly. Similarly, in the case of retreaded versus

new tyres, if a household believes that that there is only a marginally increased

probability of a retreaded tyre causing a blow-out relative to a new tyre, this might

have disproportionate effects on demand.

It is important for public policy makers to recognise that preferences which

appear not to be in the interests of the buyers themselves may in fact just be a

reflection of normal levels of risk aversion evidenced elsewhere. Still, if there are

consumption externalities (and not just risk aversion), efforts should be made to

transmit the relevant information consistently and repeatedly (Shogren and Taylor

2008). However, perfect substitution is the exception and not the rule in secondary

material markets, and thus efforts to make consumers indifferent between products

derived from secondary and primary materials may run up against the rock of

human preferences.

One possible solution is the use of performance standards which are generic

across products, whether manufactured from primary or secondary materials. This

can be justified in cases where the origin of the material used is extraneous

information, which does not help consumers in making informed decisions

concerning the performance implications of the product. In the area of construction

and demolition waste there has been a long-standing debate as to whether or not

standards should be generic across products, irrespective of the origin (virgin or

secondary) of the materials from which they are manufactured. While some

governments (e.g., Austria, Denmark, Germany, Netherlands, etc.) have favoured

specific standards for products manufactured from construction and demolition

waste, others (e.g., France, Italy, Portugal, Finland, etc.) have favoured generic

performance standards (Symonds et al. 1999). The European Construction Products

Directive favours generic standards (Collins and Nixon 2003).


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However, even if a given standard is purportedly generic and performance-based

there may be subtle biases favouring the use of primary materials if the standards

were originally designed with virgin material manufacturing in mind. Papineshi

(2003) cites examples in the plastics area related to plastic bags, pallets and fencing,

where products derived from secondary materials could not meet existing

performance standards even if they were ‘‘superior’’ in many senses.

In order to overcome consumption externalities, demonstration projects can also

play an important role in fostering demand. In the area of construction and

demolition waste Symonds et al. (1999) cite policies in place in the United

Kingdom, The Netherlands and Denmark. In addition, public procurement policies

can play a potentially decisive role in diffusing information about the suitability of

particular products manufactured using secondary materials.

2.3 Technological externalities related to waste recovery and reuse

A technological externality exists when the production function of one agent enters

another agent’s production or utility function, without the latter being compensated

(Kolstad 2000). In this section, we address ‘‘non-environmental’’ technological

externalities, which tend to reduce material recycling rates. In the area of waste,

these externalities would arise when one firm manufactures a product in such a way

which increases the cost of recycling for the downstream processor, but for

institutional reasons there is no means by which the potential waste recovery facility

can provide the manufacturer with the incentives to change their product design

(Porter 2002; Calcott and Walls 2000).

An illustrative list of areas in which technological externalities could exist would

include the following: (a) the use of multi-layer plastics for food packaging which is

incompatible with mechanical recycling (Wilson 2002), (b) the use of a wide variety

of colours of glass bottles, resulting in costly separation for recovery (Ecotec 2000;

Porter 2002); (c) the use of inking technologies in paper printing, which requires new

technical solutions in paper recycling (Apotheker 1993); (d) metal applications such

as pigments in paints and as minor constituents in alloys, which make materials

uneconomical to recycle (ICME 1996); (e) the use of a wide variety of resins (Sterner

and Wahlber 1997) and blow-moulding versus injection moulding of plastics

(Palmer and Walls 1999); and (f) the use of polymers in cable manufacturing which

has reduced the potential for recovery of PVC (Enviros 2003).

The above-product characteristics provide market benefits, otherwise they would

not be undertaken. For instance, the use of complex plastic mixes in food packaging,

which reduces recyclability, is used to ensure minimum hygiene standards and

reduction of food wastes. The key question for policy makers is whether the firms

would have designed their products in such a way if they could capture the benefits

of increased recyclability themselves? Many characteristics of products restrict

recycling, and even if there were no missing markets firms would continue to design

them in a manner which constrained recycling possibilities.

This is an area in which the distinction between the environmental externality

and the non-environmental externality is particularly subtle. The sub-optimal level

of recycling due to technological externalities has nothing to do with any loss of


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environmental benefits associated with recycling, but rather with the economic costs

of not recycling. As such, the externality should be addressed, irrespective of

environmental concerns. Of course, the level of recycling would be greater still if

efforts to internalise associated environmental externalities favoured recycling over

other strategies, but the two market failures are quite distinct.

The externalities associated with product design will be internalised if subject to

a market transaction between those who are deriving the benefits and those who are

bearing the costs (Kolstad 2000). For instance, in cases where the manufacturer is

linked with the recycler by commercial transactions—as for many types of

industrial waste—the potential externality is internalised. Similarly, the problem is

likely to be obviated in cases where the waste stream exists within vertically

integrated industrial sectors (e.g., Watts et al. 2001).

In practice, overcoming the joint presence of environmental externalities and

‘‘missing markets’’ for product attributes is often achieved through the application

of one single instrument, which thus seeks to address both problems simultaneously.

Products which are subject to deposit–refund schemes or other forms of extended

producer responsibility would be one such example. Indeed, the presence of

technological externalities has often been the (usually unstated) logic behind

product take-back schemes. For instance, in his analysis of the Swedish producer

responsibility scheme for packaging materials, Hage (2007) concludes that this

system provides clear incentives for material substitution and output effects, but it

has few impacts on design for recyclability.

An alternative policy measure would be to provide support for research and

development in product designs which are more recyclable. However, this does not

address the fundamental problem of missing markets. Incentives have been

changed, but in a rather crude manner, which requires large amounts of information

for the public authority concerning alternative design options. Nonetheless, for

markets which are relatively immature, ‘‘design for environment’’ policies can play

an important role in helping to overcome barriers to the market penetration of

recycled materials.

Worse still would be support for specific recycling technologies, which reduce

the downstream impacts of technological externalities at the recycling stage,

without simultaneously affecting the upstream incentives to internalise such

externalities. This indirectly provides incentives for the design of products which

possess technological externalities. The public authority may find itself ‘‘chasing its

own tail’’, providing increased levels of public support for recycling technologies to

address technological externalities, generated by firms who face no incentive to

design their products for recyclability. For example, if significant resources are

devoted towards the development of sorting technologies to allow for the recycling

of complex mixed wastes, product designers and manufactures will be discouraged

from redesigning their products even if the net social costs of doing so would be

less.

Calcott and Walls (2000, 2002) note that in practice it would be very difficult for

policy-makers to attain a first-best outcome in the case of these design issues,

primarily since product-specific taxes that vary with the degree of recyclability are

difficult (costly) to implement. Instead, they investigate a constrained second-best


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optimum in which recycling markets are imperfect, and find that a product tax/

recycling subsidy combined with a disposal tax set at less than the Pigovian rate

(i.e., less than the marginal social cost of disposal) will achieve this outcome. Thus,

in providing incentives for product design, markets and taxes here complement each

other, and the above policy mix falls under the umbrella of producer responsibility

system (Walls 2003). Strong incentives for recyclability also require, though, that

recyclers keep track of exactly which firms’ products they are recycling. In practice,

the administrative costs of implementing such a system are typically too high, and

most existing producer responsibility systems imply rather a collective responsi-

bility to address recyclability issues (e.g., Hage 2007; O’Doherty et al. 2003).

2.4 Concluding remarks

Market failures are present when there are unexploited gains from trade, and, in

effect, profitable opportunities are not being exploited. The fundamental causes of

market failure in recycling markets are related to imperfect information, search and

transaction costs, technological and consumption externalities, and other factors.

Many of these factors are prevalent in markets for at least some recyclable

materials. The prevalence of barriers and failures in recyclable material markets can

be attributed to their very specific nature of supply and demand. Table 1 provides an

Table 1 Types of market failure and examples of potentially affected waste streams

Class of market

imperfection

Potentially affected

waste streams

Cause of market imperfection

Information

asymmetry

Construction and

demolition waste

Uncertain quality of materials which restricts potential uses

Plastic packaging Presence of contaminants which increase costs of recovery

Scrap metal Presence of contaminants or materials which can result in

high unanticipated disposal costs or damage reprocessing

equipment

Used paper and

board

Mixed paper streams which result in high sorting costs, or

lower value uses

Consumption

externalities

Used lubricating oil Knowledge spillovers between consumers and concern about

possibility of engine damage

Retreaded tyres Knowledge spillovers between consumers and concern about

possibility of blow-outs

Technological

externalities

Used lubricating oil Presence of contaminants, additives or water which

undermine potential for re-refining

Scrap metal alloys Use of composites which restrict or prevent potential for

recovery

Electrical appliances Difficulty of sorting/separation due to mixed nature of waste,

although technologies are fast-improving

End-of-life vehicles Use of composite materials and design of vehicle components

which complicate disassembly

Plastic packaging Use of composite plastics which increase reprocessing costs

and restrict potential uses


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overview of some of the market failures and barriers which affect a number of

selected markets.

3 Technological innovation as a means to resolve failures in recycling markets

There are different channels through which such market failures can be addressed

(i.e., web-based exchanges to overcome transaction costs, third-party certification to

overcome information failures, product standards which reduce technological

externalities, etc.). Whether as a response to such measures or as a complement,

technological innovation can also play an important role in resolving market

failures. Examples include:

• Innovations which allow for the disassembly of products in order to facilitate the

recovery of recyclable components and safe disposal of hazardous elements.

This is common in areas such as ELVs and waste electronics. Such innovations

would overcome technological externalities.

• Innovations which facilitate the identification and sorting of mixed waste in

order to allow for the recovery of recyclable materials. This can increase the

‘purity’ of recycled inputs, reducing information asymmetries.

• Innovations associated with the monitoring and assessment of the physical and

chemical properties of components manufactured from recycled inputs. This can

reduce consumption externalities.

The assessment of the role that public policy interventions can play in

encouraging the development and adoption of such innovations is the focus of

this and the next section. In order to undertake such an assessment efforts were

made to identify innovations of this kind on the basis of counts of patent documents

included in the European Patent Office (EPO) World Patent Statistical (PATSTAT)

database. It is important to recognise that patents cannot be used to develop a

measure of all innovations. First, they are designed only to protect technologicalinventions (Adams 2006). In addition, less formal ways (than intellectual property

rights) to protect technological inventions also exist—notably industrial secrecy, or

purposefully complex technical specifications (Frietch and Schmooch 2006).

Surveys of inventors indicate that the rate at which new innovations are patented

varies across industries (Cohen et al. 2000; Blind et al. 2006). A further critique of

patent data relates to the fact that not everything that is patented is eventually

commercialised and adopted. There are, however, significant fees attached to the

examination of a patent application (and to renewal fees, once the patent has been

granted). So it is safe to assume that, at least in the expectations of the applicant or

the patent holder, the prospects for commercialisation and adoption are good.

Moreover, the great advantage of patent data is that they can be used as a

measure of technological innovation because they focus on outputs of the inventive

process (Griliches 1990; OECD 2009). This is in contrast to many other potential

candidates (e.g. research and development expenditures, number of scientific

personnel, etc.), which are at best imperfect indicators of the innovative

performance of an economy since they focus on inputs. Moreover, patent data


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provide a wealth of information on the nature of the invention and the applicant, the

data are readily available (if not always in a convenient format), and discrete (and

thus easily subject to statistical analysis). Significantly, there are very few examples

of economically significant inventions, which have not been patented (Dernis et al.

2001). Most importantly for this study, they can be disaggregated to specific

technological areas.

The main empirical challenge in this paper is to identify patent classes in the

recycling field that address innovations that can overcome or reduce the presence of

important information failures and technological externalities in the sector. We

selected the relevant categories among all the possible International Patent

Classification (IPC) class codes (for further information on the use of PATSTAT

for the generation of indicators of environmental innovation see http://www.oecd.

org/environment/innovation). The relevant classes were identified in two different

ways. First, we closely reviewed the descriptions of the IPC categories to identify

those which are appropriate, and then checked if they actually corresponded to the

relevant types of inventions, searching patent titles and abstracts for relevant key-

words on espacenet.com, the on-line world patent search engine maintained by the

EPO which contains a scan of all patents from over 80 offices worldwide.4

We were not able to identify all technology types which can play a role in

overcoming failures and inefficiencies in recycling markets. For instance, software

cannot be protected under most IP regimes, and even if they could be protected the

relevant inventions are of such wide applicability it would be inappropriate to

attribute them specifically to waste exchanges. However, it has been possible to

identify a number of areas which facilitate recycling and the use of recycled inputs,

and the relevant IPC classes are presented in Table 2. In addition, there are two

areas in which it has been possible to identify classes which relate more directly to

the types of market failures and inefficiencies discussed above. These include

disassembly of motor vehicles and the sorting of plastics. In the remainder of this

section we comment on overall trends in recycling innovation and we then pay

special attention to the role of public policy in influencing innovation trends for

ELVs and plastic packaging, respectively.

Counts of patent applications have been developed by year of application,

disaggregated either in terms of the country of residence of the inventor (‘‘inventor

country’’) or the country of the IP office in which protection is sought (‘‘patent

office country’’).5 Two alternative measures can be used. On the one hand, the count

can include all priority patent applications irrespective of the number of countries

for which protection is sought. On the other hand, the count can be restricted to

cases in which protection is sought in at least two countries (called ‘‘claimed

priorities’’), dropping those cases in which protection is only sought in one country

(called ‘‘singulars’’).

4 The contributions of Ivan Hascic (OECD Environment Directorate) in the refinement of the search

strategies and extraction of the data are gratefully acknowledged.5 See ENV/EPOC/WPNEP(2009)1/Final available at http://www.oecd.org/environment/innovation/indi

cators for a discussion of the construction of patent counts.


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http://www.oecd.org/environment/innovation

http://www.oecd.org/environment/innovation

http://www.oecd.org/environment/innovation/indicators

http://www.oecd.org/environment/innovation/indicators

Previous research has shown that the number of additional patent applications

(other than the priority application) is a good indicator of patent value (see Guellec

and van Potterie de la 2000; Harhoff et al. 2003). The derivation of claimed

priorities based on an economic threshold criterion was advocated already by Faust

(1990). Irrespective of the measure adopted, we do not include applications at

offices other than the priority office (‘‘duplicate’’ patent applications), since this

would result in double-counting of a single invention.

3.1 Overall trends in recycling innovation

Using the broader measure of innovation including both ‘claimed priorities’ and

‘‘singulars’’, the count of total global inventions in recycling is presented in Fig. 1,

Table 2 International patent classes (IPC) classifications for recycling technologies

ELVs B62D67 Systematic disassembly of vehicles for recovery of salvageable

components, e.g. for recycling

B30B9/32 Presses specially adapted for particular purposes—for consolidating scrap

metal or for compacting used cars

Paper D21B1/08-10 Paper-making: fibrous raw material or their mechanical treatment—using

waste paper

D21B1/32 Paper-making: defibrating by other means—of waste paper

D21C5/02 Other processes for obtaining cellulose, e.g. cooking cotton linters—

working up of waste paper

Plastic B29B17 Recovery of plastics or other constituents of waste material containing

plastics (chemical recovery, etc.)

C08J11 Recovery or working up of waste materials (plastics)

Metals B30B9/32 Process specially adapted for consolidating scrap metal (cans and bottle)

Glass C03B1/02 Compacting the glass batches, e.g., pelletising

C03C6/02 Glass batch composition: containing silicates, e.g., cullet

C03C6/08 Glass batch composition: containing pellets or agglomerates

Composting C05F17 Preparation of fertilisers characterised by the composting step

C05F9 Fertilisers from household or town refuse

Other B65D65/46 Applications of disintegrable, dissolvable or edible materials

C09K11/01 Recovery luminescent material

Fig. 1 Invention of recycling technologies (claimed priorities and singulars—all offices)


123

alongside measures for landfilling of solid waste (B09B) and waste incineration

(F23G5). It is interesting to note that the rates of growth have been relatively

similar, but that from 2000 or so there has been a notable drop in recycling

technology inventions.6 Given the recent policy emphasis on recycling (and

prevention) this finding is perhaps initially surprising.

Moreover, it would appear that the ‘quality’ (or ‘value’) of such inventions is

dropping. Figure 2 gives the percentage of ‘claimed priorities’ in total priority

patent applications (‘claimed priorities’ and ‘singulars’), clearly showing the steady

fall over recent decades. While the observations for the final years need to be treated

with caution—since the lag for ‘claiming’ a priority can be as long as 18 months—it

is clear that the percentage of claimed priorities has fallen from 25% in the late

1980s to about 10% or less in recent years.

In order to assess whether public policy has played a role in encouraging the

development of technologies which facilitate recycling the two following sub-

sections focus on two waste streams: ELVs and plastics packaging. In both cases,

governments have introduced targeted policy interventions, and as was noted above

these patent classes are relatively ‘clean’, thus addressing technologies which assist

in overcoming important market failures. We here provide a descriptive assessment

of these impacts, while in Sect. 4 we also present the results from econometric

investigations.

3.2 The case of ELVs

End-of-life vehicles are usually defined as cars and light trucks that are considered

waste and must be disposed.7 Automotive recycling started to become an issue in

the 1960s, due to the increasing number of abandoned vehicles in the countryside

Fig. 2 The ‘‘value’’ of recycling technology inventions (expressed as claimed priorities over sum ofclaimed priorities and singulars—all offices)

6 It should be noted that the sharp drop in the final year or two is due to administrative and publication

lags.7 The threshold size is usually eight passengers in addition to the driver in the car case, and a maximum

mass of 3.5 tonnes for trucks. See Eionet, waste definitions (available at http://www.eionet.org).


123

http://www.eionet.org

(Blount 2006). The first example of ELV regulation was enacted in Sweden in 1975

in order to regulate the problem of illegal dumping.

Subsequently, the focus shifted from the problem of illegal dumping to concerns

about the polluting component of ELV waste. Cars are in fact composed of many

different materials that have a significant impact on the environment such as

mercury, cadmium, hexavalent chromium, anti-freeze, brake fluid and oils, and

should not be disposed directly in normal landfill sites. Besides, automobiles contain

steel and aluminum (about the 75% of its weight) and a significant part of plastic,

which are materials that can be recycled. As such, from a waste management point

of view, the concerns related to ELV waste are manifold: on the one hand, about

25% of this waste has to be considered hazardous, and on the other hand an

important part of this waste flow (e.g., steel scrap) can be recycled. Innovations

which facilitate disassembly allow ‘technological externalities’ to be overcome.

Figure 3 presents data on the total number of patent applications in all patent

offices. Similar to the plastic and paper recycling case, the patents related to ELV

recycling activities had a stable trend until the end of the 1980s, and then registered

a rapid increase. Moreover, after this soar in patenting activities, the trend reached a

peak in 1993 and then started to decrease gradually, returning to the 1970s level

after 15 years of growth.

The three main countries, in terms of number of patent applications in this field

are Japan, followed by Germany and US. These three countries have both a high

propensity to innovate (and to patent), as well as a well-developed automobile

industry. It is reasonable to suppose that national regulations in Japan, Germany or

United States have had an impact on patenting levels internationally.

Given that ELVs have both recyclable and hazardous components, policies for

ELVs generally include: joint targets for recycling and reuse, bans or regulations on

the disposal of hazardous waste, and obligations for producers to regulate the use of

specific materials, in particular, car components (e.g., lead and mercury). Moreover,

these policies usually follow the polluter-pays-principle, in many cases implying

that producers are responsible for the cost to take back their products. On the one

hand, ELV regulation may provide incentives to car producers to develop products

Fig. 3 Evolution of patent applications for ELV technologies (claimed priorities and singulars,worldwide)


123

that are easier to recycle or that contain less polluting material; or on the other hand,

the regulations may provide incentives for the development of new and more

competitive ways of recycling ELVs.

At the European level the first Directive regarding ELVs is Directive 2000/53/

EC, first drafted in 1997. This Directive sought to harmonise the different country-

level legislation on ELVs, encouraging the adoption of regulatory measures in

those countries that still did not have a well-defined regulation. The Directive

follows the scheme common to all recent EU waste legislative instruments,

promoting the polluter-pays-principle and encouraging reuse and recycling. In

particular, the Directive makes the producer responsible for the cost to take back

(‘‘take-back principle’’) used cars and lorries, including those already on the

market. Moreover, it sets precise targets for recycling and reuse, with increasing

stringency through time (the first target was of 85% of recovery and 90% of

recycling that economic operator must reach by 2006). In this case the Directive

had to be implemented at country level by 2002, but some countries experienced

delays in their adoption.

In addition to this EU level regulation, some countries introduced state level

policies starting from the early 1990s. For instance, in 1992 in Austria, an

agreement between the Federal Economic Chamber of Commerce (‘‘Wirtschafts-

kammer Osterreich’’), the Ministry of the Environment and the Ministry for

Economic Affairs, set the first national rules for recovery and take back of ELVs.8

Then, in 2002 a second law was enacted, transposing the European Directive. The

transposition of the Directive in Germany was enacted in 2002, and then was

amended in 2006 to meet the European target.

However, before that date Germany already had a set of different instruments to

regulate the sector. At the beginning of the 1990s, a voluntary agreement between

the government and many producers’ associations introduced the concept of

producer responsibility, stimulating recycling and encouraging producers to reduce

the quantity of dangerous material used in automobile construction. This voluntary

agreement also set precise targets for reuse, recycling and disposal (Lucas 2001). A

few years later, in 1998, an end-of-life ordinance was enacted, which set precise

minimum technical requirements for the treatment/recovery of ELVs, including

recycling and recovery targets.

Innovative examples of ELV regulation in Europe were enacted in Netherlands

and Sweden. The Netherlands introduced a scheme of free take-back on a voluntary

basis in early 1990s, while Sweden adopted the first national laws in 1975 in order

to regulate illegal dumping of automobiles in the countryside. Later, in 1998,

Sweden adopted an ordinance to promote producer responsibility, and finally in

2001 transposed the EU Directive into national law.

In 1990 Japan enacted legislation to promote recycling and the use of recycled

material, with a strong focus on the automotive industry, while in 1996 the first law

specifically targeting ELVs was introduced. This second legislation set clear targets

to reduce the amount of lead in new vehicles and, contextually, targets for recycling.

8 Policy Department, Economic and Scientific Policy, ELV Directive. An assessment of the current state

of implementation by Member States (IP/A/ENVI/FWC/2006-172/Lot 1/C1/SC2) (2006).


123

Finally, in 2002, a new Law on Recycling of ELVs was introduced: it specifies new

technical requirements for both dangerous materials and recycling and compared the

Japanese framework to the European one. In the US, there is no specific legislation

on ELVs at the federal levels, and ELV management has been addressed mainly at

the state level.

How do these policy initiatives correlate with patent counts in the three main

countries? Since we are concerned with both the invention and adoption of

technologies, the data are presented in terms of counts by office. Figure 4 displays

the results. The US data do not exhibit a discernible trend over the time period.

Germany seems to have a weaker response to the regulations introduced in the early

1990s, but we should bear in mind that Fig. 4 does not include German inventors

that filed at the EPO, whose inclusion would expand German share.9 Interestingly,

Fig. 4 indicates that early regulation in Japan may have spurred additional

innovation significantly, but as mentioned before the legislative measures which

followed in 1996 and 2002 do not appear to correlate with innovation performance

(see further Sect. 4).

3.3 The case of plastics packaging

Packaging waste is a growing and important waste stream, which accounts for

between 15 and 20% of total municipal solid waste in the OECD countries. The

word ‘‘packaging’’ usually refers to any material which is used to contain, protect,

handle, deliver and display goods, i.e. empty glass bottles, used plastic containers,

food wrappers, cans, etc. Market failures are particularly important in the context of

Fig. 4 Evolution of patents and regulations for main inventor countries for ELV technologies (3-yearmoving average)

9 The graph for EPO applications is not included in the analysis since the total counts of patents filed at

the EPO in relation to ELVs is very low. However, Germany has the biggest share.


123

plastic packaging since there are a wide variety of plastics with different

characteristics and used in different combinations. These differences cannot always

be identified easily, and have significant implications for recyclability. Figure 5

illustrates the total number of patent applications that have been filed in all countries

in relation to plastic recycling. The trend is stable or slightly increasing until the end

of the 1980s and then between 1988 and 1994 the number of patents grew very

quickly. After this sudden rise, at the beginning of the 2000s patenting activities

started to decrease.

At the European level, Directive 85/339 regulated the disposal of containers of

liquids for human consumption. This Directive, issued in 1985, covered all liquid

beverage containers and its objective was to encourage the reuse and the recycling

of such containers, promoting energy saving and reductions in raw material use.

Nevertheless, the impact of this first Directive was thought to be limited, and a new

Directive (94/62) was drafted soon after, and included more precise waste

performance goals. In particular, the Directive has the primary objective of reducing

the amount of waste generated and harmonising national measures for managing

packaging and packaging waste. It imposes targets for recovery and recycling, but

not for prevention. The Directive is made up of three different instruments: specific

quantitative targets for recycling and recovery, differentiated by material and by

country and increasing through time (generally between 55 and 60%).

Many European countries have their own packaging waste regulations. In some

cases this is merely the transposition of the Directive into national law, but in other

cases the policies preceded the last European Directive. Germany, for example,

issued a decree in 1990 (approved in 1991) that proposed one of the most stringent

packaging regulations worldwide. This decree, based on the polluter-pays-principle,

imposed the responsibility on the producer under the form of a deposit and take-

back schemes, unless the industry establishes alternative collection and recycling

systems that meet some very precise collection and sorting goals from 1993. By that

year 50% of all packages had to be recycled, while by 1995, at least 80% of all

packages had to be recycled. Moreover, this law set numerical goals for the sorting

of the collected materials (80% for plastics) and required industries to use at least

Fig. 5 Evolution of patent applications for plastics recycling technologies (claimed priorities andsingulars, worldwide)


123

72% of returnable containers for beer, water, soft drinks, fruit juice, and wine and

17% for milk.

Furthermore, even before the decree, in 1990 the German packaging industry

developed an eco-labelling system, called ‘‘green dot’’, which indicates the

packaging products that are eligible for collection. More recently, in 1998, Germany

adopted a new packaging ordinance, amended in 2008, which set new targets for re-

use, recovery and recycling but which does not alter significantly the overall country

strategy. In 1989, Italy imposed a tax on plastic shopping bags, and in 1988 the

government set up precise targets to be achieved by 1993 (60% for plastics).

Moreover, the National Waste Framework Law (D.Lgs. 22/1997) transposed

Directive 94/62/EC, establishing a consortium (CONAI) for the management of

packaging and packaging waste.

In 1988, The Netherlands established targets for the prevention and recycling of

29 waste streams, among which packaging was one of the first priorities (with a

target of 60% in recycling by the year 2000), while Denmark adopted a ban on non-

refillable containers for beer and soft drinks in 1982 and introduced a tax on

beverage containers in 1977. Like Denmark, both Finland and Sweden introduced

deposit–refund schemes and taxes on packaging liquid beverage starting from the

early 1970s. Later on, during the 1990s, all northern European countries introduced

new regulations to ensure compliance with the Directive. These followed the

general European guidelines, i.e. producer responsibility, low concentration of

heavy metal in packaging, promotion of recycling, and increasing policy stringency

through time.

In 1990 in Japan, an Industrial Structure Commission constituted by the

Government established precise targets for the different types of waste streams,

ranging between 40 and 60%; while in Canada in the same year a National

Packaging Protocol was proclaimed, which aimed at reducing the amount of the

packaging waste produced by 50% by the year 2000, setting intermediate targets

and entitling the manufacturer of this responsibility. Following this Protocol the

targets had to be met one half through new source reduction and reuse measures,

and the other half through recycling.

The case of the United States is more difficult to illustrate; there the regulatory

effort is traditionally both at State and Municipal levels. For this reason, the essence

of the American regulation is harder to trace and summarise, but according to

McCarthy (1993) by 1971 ten states had already established compulsory refunds for

beer and soft drink containers. However, it was between 1987 and 1992 that the

biggest legislative effort was undertaken, with 22 States having enacted laws to

promote recycling collection programs at local level, and legislation to regulate the

use of heavy metal in packaging.

In 1993, Korea adopted a policy to reduce the impact caused by over-packaging,

banning the use of some material such as PVC lamination and synthetic resins,

applying restrictions on the packaging-space ratio and the number of packaging

layers (two) for specific types of food product, and setting targets on the reuse of

packaging for specific products. More recently, in 2000, China promoted specific

technical policies for municipal solid waste disposal and the prevention and control

of pollution, restricting over-packaging.


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Have these policies had an impact on innovation in plastics recycling

technologies? In Fig. 6, we show how patenting activity responded to different

conditions and policies implemented in countries for the most important offices. In

this figure plastic recycling patent applications for Japan, United States and

Germany are presented. Before the introduction of strict policies, all three offices

exhibit a flat trend in patenting. Coinciding with the introduction of policies in the

period 1989–1991, patenting activity registered a big expansion in all the countries

considered, with Germany anticipating the others countries by about 1 year, and

Japan following 1 year after (see further Sect. 4).

4 An econometric analysis based on patent counts

In order to assess the effect of environmental policy on innovations which reduce

market failures for ELVs and plastics packaging, respectively, we undertook empirical

analysis of the effect of national and European Union regulations as well as other

factors on patent activities. In this section, we present the results from this quantitative

analysis beginning by a brief introduction to some important econometric and data-

related issues.

4.1 Model estimation issues and overall data needs

The dependent variable, patenting activity, is measured by the count of patent

applications (claimed priorities) by inventor country for each of the two categories.

Given the count nature of the dependent variable, negative binomial and Poisson

estimators are generally used to estimate the models (for details on count data models

see, for instance, Cameron and Trivedi 1998; Maddala 1983; Hausman et al. 1984).

Fig. 6 Patents and regulations for most important inventor countries for plastics (3-year moving average)


123

Generally, in count data the variance exceeds the mean (i.e. there is over-dispersion)

and the traditional Poisson distribution, which is based on an assumption of equi-

dispersion (i.e. mean and variance are equal) report non-correct standard errors of the

parameter estimates. For this reason, negative binomial estimates are generally

preferred to Poisson regression model, and it is these results which are presented

below. Nevertheless, results for Poisson regressions on the same dataset (not

presented here) confirm the results from the negative binomial models.

The data are retained in its original form, rather than taking logs on one (or both

sides) of the equation. This is due to the presence of zeros that would be dropped

with a logarithmic transformation. In particular, the total patent variable is equal to

zero in 7% of the cases. As a robustness check we ran some regressions using log

transformation of the regressors that also confirm the main findings presented

below.

The independent variables include policy variables addressing national regula-

tions and voluntary agreements as well as the introduction of EU Directives. In the

case of policy impacts we have attempted to identify proxies that could address the

stringency of these policies, i.e., an indicator of the shadow price of the regulations

by, for instance, comparing unconstrained and constrained behaviour (e.g., Gollop

and Roberts 1983). However, given our large sample of countries this was not

possible due to data availability constraints, and we instead use simply dummy

variables (discounted over time).

Moreover, in investigating the role of policy on innovation activity we have to

address the relevant time lags. First, it should be noted that patent applications

typically lag R&D investments suggesting thus that R&D expenses taking place in

time period t may lead to patent application no earlier than in time period

t ? x (x [ 0). At the same time, though, firms are generally made aware of the

regulation a few years before it is actually implemented and for this reason the

regulation may induce additional R&D before implementation. The implicit

assumption in this paper is that these two effects cancel out, i.e., we assume policy-

induced patent activities to take place already during the year at which the policy is

put into force.

In both models we include as one independent variable a count of total patents

(TOTPAT), which captures changes in total inventive capacity and propensity to

patent such inventions, across countries and years. This variable has also been

drawn from the European Patent Office (EPO) World Patent Statistical (PATSTAT)

database Country-fixed effects are included to account for unobservable country-

specific heterogeneity. The independent variables that are specific to each waste

category are reviewed below. All the residual variations are captured by the error

term (ei,t).10

10 The analysis has been conducted for the following 27 OECD countries, for the years 1970–2007:

Austria, Belgium, Canada, China, Cyprus, Czech Republic, Germany, Denmark, Estonia, Spain, Finland,

France, Great Britain, Greece, Hungary, Ireland, Italy, Japan, South Korea, Lithuania, Luxembourg,

Latvia, Netherlands, Poland, Portugal, Sweden, Slovenia, Slovakia, United States.


123

4.2 Results for ELVs

For the ELV-model the dependent variable (ELVPAT) is the count of applications

by inventor country. The policies included are set out below, and include both

national policy measures (ELVNATREG), voluntary agreements (ELVVOLAGR)

of the industry, and the relevant European Union Directive (ELVEURDIR). The

variables are equal to 1 for all affected countries in the year of introduction of the

policy. In subsequent years, their effect is assumed to be decreasing, and a discount

rate of 10% is applied. Moreover, in the case of the EU Directive (2000/53/EC), the

variable retains the value of 0 for countries with more stringent national regulations.

As was noted above we also include a count of total patents (TOTPAT), which is

assumed to capture the general propensity to patent.

Moreover, in a second model in order to capture the demand for inventions we

also include a variable to reflect the stock of scrapped vehicles (SCRPVEH), which

has been generated on the basis of data from the International Road Transport

Federation on vehicles in use and vehicles registered for the first time. Specifically,

SCRPVEH = VEHUSE(t - 1) - VEHUSE(t) ? NEWREGS (t), where VEHUSE

represents the number of vehicles in use during a given time period and NEWREGS

is the number of vehicles registered at time period t. These data have been drawn

from the International Road Federation’s World Road Statistics 2007, and we

hypothesise that an increase in this variable will induce an increase in ELV

innovations. Descriptive data for the two ELV models are presented in Table 3.

The results from the estimation of the negative binomial model are displayed in

Table 4 (standard errors in parentheses). The base model (1a) estimates indicate that

national regulations had a positive and a statistically significant influence on inventive

activity. The effect of voluntary agreements is also statistically significant and

positive. However, the EU Directive does not appear to have had an effect, suggesting

perhaps that the countries where recycling policies are prioritised had implemented

stricter national regulations already prior to the Directive being implemented.11

Table 3 Descriptive statistics

Variable Obs Mean Std. dev. Min Max

ELVPAT 808 1.189356 3.023356 0 25

ELVNATREG 808 0.112841 0.245747 0 1

ELVEURDIR 808 0.004951 0.070229 0 1

ELVVOLAGR 808 0.074314 0.206444 0 1

TOTPAT (1000s) 808 10753.59 25101.26 0 199,081

SCRPVEH 808 1.189356 3.023356 0 25

11 To further address the role of the EU Directive, we created a set of interaction terms, generated as the

product of Country dummies and the EU Directive discounted variable. The idea here is that the legal

cultures differ across countries, and some might be more efficient in terms of enforcing EU law into

national law (as well as monitoring outcomes). However, the importance of these dummy variables was

found to be limited; they are generally not statistically significant, with the exception of Germany, with a

positive and statistically significant coefficient, and Denmark, with a positive, but weakly significant

coefficient (10%).


123

The coefficient reflecting the impacts of total patent counts is positive and statistically

significant, as expected. In the alternative model (1b) with the scrapped vehicle stock

included the sample size decreases significantly. The effect of the stock of scrapped

vehicles is, however, found to be statistically insignificant.12 The other results are

similar to those of the base model.

4.3 Results for plastic packaging

The dependent variable in the plastics packaging model (PKGPAT) is also the count

of patent applications by inventor country. The policies included are set out below,

and include both national policy measures (PKGNATREG), voluntary agreements

(PKGVOLAGR) of the industry, and the relevant European Union Directives

(PKGEU85DIR and PKGEU94DIR) implemented in 1985 and 1994, respectively.

The variables are equal to 1 for all affected countries in the year of introduction of

the policy. In subsequent years, their effect is assumed to be decreasing, and a

discount rate of 10% is applied. As in the case for ELV recycling, in the case of the

EU Directives the variable retains the value of 0 for countries with more stringent

national regulations. In addition, we also here include a count of total patents

(TOTPAT). In order to capture the demand for inventions in plastics packaging we

Table 5 Descriptive statistics

Variable Obs Mean Std. dev. Min Max

PKGPAT 1,064 7.046147 19.28536 0 183.5

PKGNATREG 1,064 0.048085 0.166733 0 1

PKGEU85DIR 1,064 0.092586 0.220196 0 1

PKGEU94DIR 1,064 0.092586 0.220196 0 1

TOTPAT (1000s) 1,064 8,296.465 22,324.23 0 19,9081

Table 4 Results for ELV (NBREG)

Model 1a Model 1b

ELVNATREG 1.12875 (0.000) 0.92401 (0.000)

ELVEUDIR -13.37199 (0.986) -12.48195 (0.983)

ELVVOLAGR 0.59733 (0.013) 0.92864 (0.003)

SCRPVEH -0.00009 (0.118)

TOTPAT 0.00009 (0.000) 0.00001 (0.000)

CONSTANT -0.57219 (0.000) -0.28257 (0.244)

N 808 427

Log-likelihood -723.45369 -425.20775

Prob [ v2 0.000 0.000

12 Steel scrap is the most important material arising from ELVs, and for this reason we also tested

whether the relative price of steel scrap versus virgin iron ore affected the propensity innovate in ELV

recycling. However, also this variable had no statistically significant impact on patent counts.


123

also include two different variables in two subsequent models: total retail sales13

and final consumption expenditures.14 Descriptive data for the model estimations

are presented in Table 5.

The estimation results in Table 6 indicate that the effect of national regulations

and the second EU Directive (1994) have had a positive and statistically significant

impact on innovation activity in plastics packaging recycling technologies.

However, the variable reflecting the first EU Directive has no effect. Indeed, in

one model this effect is even negative and statistically significant. A possible

interpretation is that the first Directive’s low level of ambition was a downside

‘shock’. The 85/339/EEC in fact only covered the packaging of liquid beverage

containers intended for human consumption, and was considered by many as too

nebulous to promote a harmonisation of national policies.15 After this first

legislative effort, in fact, the European policy context was heterogeneous, with some

virtuous countries that developed plastic recycling schemes and other countries that

took no direct action. This generated some internal market issues, when cheap

secondary material from regulated countries appeared on the market of other

member states, putting pressure on collection and recycling activities that depended

on cost recovery through the sale of secondary raw materials. This might be one of

the reasons for the counterintuitive result associated with this variable.

As expected, total patents have a positive and statistically significant effect. The

two models (2b and 2c), which use different proxy measures of packaging waste

streams are quite different. When retail sales are included in the model the effect is

positive and statistically significant. However, when final consumption expenditures

are used the corresponding coefficient is insignificant from a statistical point of

view. Since the former is likely to be a better proxy measure of packaging waste

streams these results are not surprising.

Table 6 Results for packaging (NBREG)

Model 2a Model 2b (RETAIL) Model 2c (FCE)

PKGNATREG 1.16892 (0.000) 0.54091 (0.001) 0.69857 (0.000)

PKGEU85DIR -0.12751 (0.507) -0.36543 (0.069) -0.47196 (0.040)

PKGEU94DIR 1.275255 (0.000) 0.76201 (0.000) 0.79374 (0.000)

TOTPAT 0.00001 (0.000) 0.00006 (0.000) 0.00001 (0.000)

RETAIL/FCE 0.01129 (0.000) 0.0068 (0.296)

CONSTANT -0.42623 (0.000) -0.49278 (0.061) 0.12582 (0.296)

N 1,064 526 464

Log-likelihood -1,809.8485 -1,167.5105 -1,095.5939

Prob [ v2 0.000 0.000 0.000

13 Data on total retail sales volume have been obtained from OECD Main Economic Indicators:Production and Sales (see http://dotstat.oecd.org/Index.aspx).14 Final consumption expenditure of households, obtained from OECD National Accounts (http://dotstat.

oecd.org/Index.aspx).15 See, for example the European Commission Environmental Portal, http://ec.europa.eu/environment/

waste/packaging_index.htm.


123

http://dotstat.oecd.org/Index.aspx



http://ec.europa.eu/environment/waste/packaging_index.htm

http://ec.europa.eu/environment/waste/packaging_index.htm

5 Concluding remarks

Above and beyond the ‘environmental’ market failure associated with the non-

internalisation of externalities associated with waste generation, there are other

characteristics of markets related to recyclable materials and products manufactured

from recycled inputs which could result in sub-optimal levels of recycling. Three

specific issues have been discussed: information failures, consumption externalities,

and technological externalities. Examples have been provided of waste streams in

which one or more of these market barriers or failures may be important.

Over time as markets mature some of these failures may be overcome, resulting

in increased gains from trade. Organisational and managerial innovations are likely

to play a significant role. Technological innovation may also contribute and in this

paper examples have been provided in which this may be the case. For this reason it

is useful to assess whether public policies have played an important role in

encouraging recycling innovations that can (directly or indirectly) resolve important

market inefficiencies in recycling markets. We identified two patent classes that

could reasonably fulfil this criterion: ELVs and plastics packaging.

The graphical evidence presented related to recycling technologies in general and

to the specific cases of ELVs and plastics packaging is ambiguous. Still,

econometric analyses addressing the latter cases indicate that national policy

measures (and to some extent voluntary agreements) have played a role in inducing

such innovation. Conversely, only in one case have European Union Directives

played a significant role, namely in the case of the 1994 Packaging Directive. This

may reflect the fact that the main innovating countries only agreed to the different

Directives once sufficiently stringent national policies were in place. The results

also display that recycling innovations have also been influenced by the general

propensity to innovate as well as by the underlying demand for innovations (i.e.,

total retail sales in the case of plastics packaging recycling innovations).

Since this paper represents a first attempt to address the role of technological

innovation in facilitating the emergence of efficient recycling markets, there are

issues which need to be investigated in more detail in future studies. For instance, as

was noted above our paper only establishes an indirect link between recycling

innovations and market inefficiencies (through the selection of patent classes). An

important topic for future research could therefore be to explicitly study the

presence of market inefficiencies prior to and after the diffusion of new recycling

technology. Moreover, there exists also a need to identify and employ more

empirically valid measures of the stringency of public policy in the recycling field.

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