E-waste channel competition affects the selection of recycling standards and environmental practices

by Yen-Ting Lin, Wenli Xiao, Gökçe Esenduran, and Minyue Jin

Every year approximately 40 million tons of electronic waste (e-waste) is generated worldwide. Rabid demand for advanced electronics and the frequency at which companies launch high-tech products into the market have pushed the number of disposed electronic devices to unprecedented levels. With each new release and purchase of smartphones, tablets and computers, the pile of older, unwanted electronics grows. Unless properly treated, e-waste accumulates in landfills and contaminates soil and water.

The good news is that e-waste can be valuable, projected to be worth $5 billion in 2020. Hundreds of companies currently profit from the recovery, i.e., collection and recycling or reuse of electronic devices and components, and competition is intensifying within these recovery channels. As e-waste has grown, so, too, has the call for more responsible handling of these electronics, and two distinctly different recycling standards have emerged to foster accountability when processing e-waste. Our research examines factors, such as channel competition and processing economies of scale, which influence the adoption of these standards by recyclers and provide insights for policy makers and environmentalists as they explore how the practices of e-waste recovery channels can be improved.

E-Waste Recovery Channels

We started this research by investigating the common structure of e-waste recovery channels and how they work. These channels typically consist of collectors that gather e-waste from donors via waste drop-off and/or pick-up. These collectors then sort and sell the e-waste. Their customers are generally e-waste recyclers, but, when the discarded electronics still have value, collectors also sell some of these electronics in the secondary/resale markets (e.g., through Craigslist or eBay). While the secondary markets provide a sales option for collectors, they affect the volume of e-waste available to recyclers.

E-waste recyclers, after purchasing supplies of discarded electronics from collectors, process them by disassembling and smelting to get usable components, such as metals, plastics, and glass, and then sell the end-product to commodity markets. Our conversations with such recyclers revealed that two primary factors play an important role when making their business decisions: First, recyclers are subject to economies of scale due to the capital-intensive nature of their operations. Second, they are under increasing scrutiny to ensure the use of proper recycling practices and disposal of hazardous components in e-waste (e.g., lead, arsenic, cadmium). Therefore, e-waste recyclers can gain a competitive edge by obtaining one of the two available recycling standards that assures responsible e-waste handling and processing:

• The Responsible Recycling standard (R2) was developed in 2010 and is owned by Sustainable Electronics Recycling International (SERI), a non-governmental organization (NGO).
• The e-Stewards standard was created in 2010 by Basel Action Network (BAN), another NGO, and is more stringent than R2.

Specifically, the e-Stewards standard forbids export of nonfunctioning devices and hazardous materials, incineration of e-waste, open-system shredding of hazardous materials, and prison labor, and it requires safety and health standards for employees. Because of these more stringent requirements, companies that certify with e-Stewards face higher unit-processing costs. It is not surprising that R2, with more than 500 recyclers certified worldwide as of early 2016, has been more widely adopted than e-Stewards. Environmentalists and most NGOs, on the other hand, favor e-Stewards, and, thus, recyclers with that certification can attract environmentally conscious donors to collectors with which they are aligned, expanding the e-waste that comes to their companies.

Channel Competition and Economies of Scale Influence Selection of Recycling Standard

In our research, based on a game theoretic model, we examine the actions of donors, collectors, and recyclers. A critical differentiator we consider is the form of competition — or lack thereof — in the e-waste recovery markets. First, recovery channels compete against each other for the collection of e-waste from donors. In addition to this competition between recovery channels, within a recovery channel a recycler competes against the secondary market for e-waste quantity.

Our findings show that this recovery-channel competition plays an important role on the choice of an e-waste standard by recyclers. Specifically, competition between recovery channels motivates the adoption of the e-Stewards standard. Environmentally conscious donors are likely to favor channels in which the recycler holds e-Stewards certification, and, thus, the collector and recycler in that channel may attract more e-waste. Competition will lead all comparable recyclers to select e-Stewards for fear of losing e-waste from environmentally conscious donors, despite the lower processing costs and potentially higher profits with R2, resulting in a prisoner’s dilemma.

Without channel competition, we find that a recycler always chooses the R2 standard. Why choose a more stringent recycling standard that would increase processing costs yet not affect the volume of e-waste received from the collector? Consequently, more competition in the e-waste industry could lead to greater adoption of the more stringent standard and, hence, more environmentally responsible handling of e-waste.

The adoption of e-Stewards also depends on the cost disadvantage to the recycler (i.e., magnitude of cost differential compared to that of R2) and the strength of the recyclers’ scale economies. Ironically, our results show that large recyclers (i.e., with strong-scale economies) are likely to choose e-Stewards when the cost disadvantage of doing so is higher. On the other hand, small and midsized recyclers (i.e., with weak scale economies) are more likely to choose e-Stewards when the cost disadvantage is low. This result has important policy implications: incentives and subsidies to recyclers could encourage adoption of the more stringent standard, but only by small and midsized recyclers.

As consumers and businesses become more aware of the e-waste they are producing and look to responsibly discard it, the number of environmentally conscious donors is likely to similarly rise. This, too, will have an impact on the selection of a recycling standard: We found that only recyclers with weak scale economies are more likely to choose e-Stewards when the number of environmentally conscious donors increases. Such recyclers would rather optimize their processing capabilities (even at higher costs) than lose out on some business altogether. The policy implication is that raising donors’ environmental consciousness will increase adoption of e-Stewards, especially in markets where small and midsized recyclers operate.

The selection of a recycling standard also can be driven by differences between the recyclers. For example, a larger recycler (with higher scale economies) competing against a small or midsized recycler (with lower scale economies) would adopt R2, the less stringent standard. Therefore, policy makers should also take into account the differences between the recyclers when providing incentives for the adoption of more stringent standards.

The E-Waste Future

Volumes of e-waste will increase for the foreseeable future. Unless properly treated, contamination to the environment will increase as well. Members of e-waste recovery channels play critical roles in preventing escalation of this problem. But how they approach their roles in this fledgling industry and the management strategies they pursue are evolving. Our research findings will help collectors and recyclers answer important business questions they face: Which recycling standard should recyclers choose? How will external factors — competition, secondary market prices, available e-waste quantity — affect business strategies and, ultimately, profits? Our research also provides several insights for policy makers and NGOs that want to increase adoption of e-Stewards: lower barriers of entry for recyclers in order to induce competition, and raise donors’ environmental consciousness, especially in the markets where small and medium-sized recyclers operate.

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