Abstract
This paper develops a conceptual framework for the management of used oil that encompasses a tax (deposit) on manufactured oil and sector-specific subsidies (refunds) on producers who purchase recycled oil as an input in production. The framework mirrors the deposit-refund systems implemented in the used oil recycling programs of Italy, Spain, Australia and in the US State of California that favor re-refining uses over re-processing routes that lead to combustion of recycled oil as fuel. Our analysis considers environmental damage to arise jointly from improper disposal of used oil and from air pollution created by combustion of used oil. We demonstrate that the optimal policy involves a tax on manufactured oil and a subsidy of equal value on used oil collection irrespective of the ultimate end-use of used oil as re-refined lubricating oil or fuel oil. We derive policy implications to evaluate recently proposed changes to the management system for used oil in California.
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Notes
Used oil is typically run through fine mesh strainers to remove metals and chemically-treated for contaminants before being sold as recycled oil. For expedience, we refer to all used oil that is collected as “recycled oil”.
Both re-refining and distillation processes produce a combination of the primary product (oil and diesel fuel) and asphalt flux, whereas fuel oil is combusted directly. For expositional convenience, the model suppresses the asphalt flux market by considering a single production function for a composite good in each sector. This assumption entails no loss of generality in our model, as we are not concerned with the relative prices of goods within the composite and do not distinguish between the environmental externalities associated with these goods.
The fee paid by manufacturers of new oil temporarily rises to $0.26 per gallon over the period 2010-2013 before decreasing to $0.24 per gallon on January 1, 2014. The incentive payment was raised to $0.40 per gallon for “do-it-yourself” (DIY) oil changers; however, the DIY market segment remains a small share of used oil collection.
For a good summary of marine diesel fuels, see http://www.dieselnet.com/standards/us/fuel.php.
IMO ship pollution rules are contained in the “International Convention on the Prevention of Pollution from Ships”, known as MARPOL 73/78 (http://www.dieselnet.com/standards/inter/imo.php).
Discarded oil in this case includes motor oil that leaks onto highways from engine crankcases or is “lost” as heat during the process of lubricating combustion engines.
For this reason, used oil collection programs typically consider only a share of manufactured oil to be recoverable. In Italy, 32 % of oil is considered recoverable, while 50 % of lubricating oil is considered recoverable in Denmark, 55 % in the U.K., and 64 % in Finland and Alberta, Canada (Hollins 2009).
The possibility of corner solutions does not affect our analysis of used oil market provided that environmental externalities from the various uses of unrefined oil as lubricating oil, marine diesel fuel, and fuel oil are sufficiently small that continued use of each product is socially optimal.
In general, air pollution policy also encourages investment in end-of-pipe abatement activities to meet the prevailing emissions standard.
Abbreviations
- n:
-
Number of identical individuals in the jurisdiction
- u(.):
-
Utility function of each individual
- c(.):
-
Composite consumption function for lubricating oil
- m:
-
Marine diesel oil (MDO)
- b:
-
Residual fuel oil (RFO) used for industrial combustion (burning)
- r:
-
Recycled oil (quantity delivered to certified collection centers)
- d:
-
Uncollected used oil (disposed through means other than recycling)
- v:
-
Virgin oil used to produce lubricating oil, RFO, and MDO
- \(\hbox {f}^\mathrm{c}(.)\) :
-
Production function for lubricating oil
- \(\hbox {f}^\mathrm{m}(.)\) :
-
Production function for MDO
- \(\hbox {f}^\mathrm{b}(.)\) :
-
Production function for RFO
- \(\hbox {v}_\mathrm{c}\) :
-
Virgin oil used to produce lubricating oil
- \(\hbox {v}_\mathrm{m}\) :
-
Virgin oil used to produce MDO
- \(\hbox {v}_\mathrm{b}\) :
-
Virgin oil used to produce RFO
- \(\hbox {r}_\mathrm{c}\) :
-
Recycled oil used to produce lubricating oil
- \(\hbox {r}_\mathrm{m}\) :
-
Recycled oil used to produce MDO
- \(\hbox {r}_\mathrm{b}\) :
-
Recycled oil used to produce RFO
- \(\hbox {k}_\mathrm{c}\) :
-
Household resources used to produce lubricating oil
- \(\hbox {k}_\mathrm{m}\) :
-
Household resources used to produce MDO
- \(\hbox {k}_\mathrm{b}\) :
-
Household resources used for RFO combustion
- \(\hbox {k}_\mathrm{v}\) :
-
Household resources used for acquiring virgin oil
- \(\hbox {k}_\mathrm{d}\) :
-
Household resources used for disposing uncollected used oil
- \(\upalpha \) :
-
Marginal product of resources used in acquiring virgin oil
- g(.):
-
Function relating household resources to disposal of uncollected used oil
- \(\hbox {p}_\mathrm{c }\) :
-
Price of lubricating oil
- \(\hbox {p}_\mathrm{m}\) :
-
Price of MDO
- \(\hbox {p}_\mathrm{b}\) :
-
Price of RFO
- \(\hbox {p}_\mathrm{v}\) :
-
Price of virgin oil
- \(\hbox {p}_\mathrm{r}\) :
-
Price of recycled oil
- \(\hbox {p}_\mathrm{k}\) :
-
Price earned on household resources (labor, capital)
- \(\hbox {t}_\mathrm{c }\) :
-
Tax on lubricating oil
- \(\hbox {t}_\mathrm{m}\) :
-
Tax on MDO
- \(\hbox {t}_\mathrm{b}\) :
-
Tax on RFO
- \(\hbox {t}_\mathrm{r,c}\) :
-
Tax (rebate) on recycled oil used to produce lubricating oil
- \(\hbox {t}_\mathrm{r,m}\) :
-
Tax (rebate) on recycled oil used to produce MDO
- \(\hbox {t}_\mathrm{r,b}\) :
-
Tax (rebate) on recycled oil used to produce RFO
- \(\hbox {t}_\mathrm{v,c}\) :
-
Tax on virgin oil used to produce lubricating oil
- \(\hbox {t}_\mathrm{v,m}\) :
-
Tax on virgin oil used to produce MDO
- \(\hbox {t}_\mathrm{v,b}\) :
-
Tax on virgin oil used to produce RFO
- M:
-
Total amount of MDO used in the jurisdiction
- B:
-
Total amount of burning (industrial combustion) in the jurisdiction
- D:
-
Total amount of uncollected used oil in the jurisdiction
- V:
-
Total amount of virgin oil used in the jurisdiction
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Hamilton, S.F., Sunding, D.L. Optimal Recycling Policy for Used Lubricating Oil: The Case of California’s Used Oil Management Policy. Environ Resource Econ 62, 3–17 (2015). https://doi.org/10.1007/s10640-014-9812-x
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DOI: https://doi.org/10.1007/s10640-014-9812-x