Economic instruments and induced innovation: The European policies on end-of-life vehicles

The paper addresses the mechanisms by which specific economic instruments based on the 'producer responsibility principle' (PRP) can influence innovation when environmental policy has impact on very complex industrial subsystems. We consider the EU policy on End-of-Life Vehicles (Directive 2000/53/EC on ELVs) as a representative case study of 'multiple industry-PRP instrument' dynamic efficiency problems. In order to achieve ambitious policy targets on ELV recovery/recycling/reuse, interrelated sequences of single innovations in both upstream (car making) and downstream (car recycling/recovery) should take place. We explore the extent to which the introduction of a free take-back (FTB) instrument can influence industrial actors in contributing to 'innovation paths' that are still marked by technological uncertainty, evolving capabilities, and different cost-benefit balances for actors themselves. We conclude that differently from static approaches, in which the EI and its formulation is neutral with respect to policy effectiveness, the dynamic efficiency of EIs in ELV-like problems depends both on where, along the 'production-to-waste chain', and how, in terms of net cost allocation, the specific incentive is introduced. Consequently, in order to generate a 'policy-desired' innovation path, the way in which the EI-related incentive allocated to a certain industry is transmitted to other industries-whether upward or downward along the chain-is also relevant. Disregarding these effects can imply a 'dissipation' of innovation incentives, and the generation of 'regulation-induced rents' for some actors cannot be ruled out. Policies based on PRP should consider EIs in conjunction with 'enforceable' voluntary agreements.