The Effects of Pricing Waste Generation: a Synthetic Control Approach
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A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Bueno, Matheus; Valente, Marica Article — Accepted Version (Postprint) The effects of pricing waste generation: A synthetic control approach Journal of Environmental Economics and Management Provided in Cooperation with: German Institute for Economic Research (DIW Berlin) Suggested Citation: Bueno, Matheus; Valente, Marica (2019) : The effects of pricing waste generation: A synthetic control approach, Journal of Environmental Economics and Management, ISSN 0095-0696, Elsevier, Amsterdam, Vol. 96, pp. 274-285, http://dx.doi.org/10.1016/j.jeem.2019.06.004 This Version is available at: http://hdl.handle.net/10419/235579 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/4.0/ www.econstor.eu This is the postprint of an article published in Journal of Environmental Economics and Management 96 (2019), p. 274-285, available online at: https://doi.org/10.1016/j.jeem.2019.06.004 The effects of pricing waste generation: A synthetic control approach Matheus Bueno∗ and Marica Valentey Abstract To internalize pollution externalities into household waste generation, Unit Pricing Systems (UPS) have been adopted worldwide. This paper evaluates the causal effects of a UPS on the disposal of municipal solid waste in Trento, Italy. Using a unique panel dataset of monthly waste generation in Italian municipalities, we employ the synthetic control method, which allows us to account for possible time-varying ef- fects of unobservables. Our results show that the policy was effective, with a significant decrease of the priced waste stream, unsorted waste, by 37.5%. This effect seems to be largely driven by behavioral changes towards waste avoidance (−8:6%) and possibly by a smaller increase in recycling (+6:1%). By comparing these results to those obtained by a difference-in-differences approach, we show that failing to account for time-varying effects of unobservables may lead to a mismeasurement of policy effects. Keywords: Waste generation, Unit pricing, Synthetic controls, Policy endogeneity, Selection on unobservables © <2021>. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/ ∗Toulouse School of Economics, Toulouse, France. Email: [email protected]. yCorresponding author. Humboldt University of Berlin and German Institute for Economic Research (DIW Berlin), Berlin, Germany. Email: [email protected], +49-30-89789-507. 1 1 Introduction The generation of Municipal Solid Waste (MSW) characterizes a classic example of nega- tive externality, as its environmental and treatment costs are higher than its private ones. Standard flat fees on MSW collection, however, do not usually suffice for internalizing the cost difference into individuals' waste generation behavior. Therefore, pricing waste per collected unit, a form of Pigouvian fee (Pigou, 1932), has been increasingly used as a policy instrument, known as Unit Pricing Systems (UPSs) or pay-as-you-throw pro- grams. Existing empirical evaluations of such policies generally find them to be effective, when controlling for selection bias due to unobserved determinants of their adoption with time-invariant effects on waste generation.1 Nevertheless, despite their growing popularity, there is an empirical gap on UPSs' effectiveness when the effects of unobservables on waste generation vary over time, and on the behavioral mechanisms behind UPSs' effects. Using a unique data on monthly waste generation for nineteen municipalities in Italy between 2008 and 2016, this paper attempts to fill this gap by evaluating the causal effects of a UPS implemented on the disposal of unsorted MSW in the municipality of Trento in 2013. The first contribution of this paper is to address the endogeneity associated with UPS adoption due to selection on unobservables with time-varying effects. Waste generation in municipalities adopting this policy may have unobserved determinants that spawn diverging waste generation trends with respect to municipalities not adopting it. For example, the effects of pro-environmental attitudes on waste generation may vary over time depending on, e.g., learning effects from awareness-raising campaigns at the local level that inform citizens on the excess waste problem, and promote recycling and waste reduction behaviors. The impacts of unobservables on waste generation may cause non- parallel trends in outcomes, invalidating the identification assumption of standard policy evaluations based on differencing out fixed individual characteristics with time-invariant effects, such as with fixed effects and difference-in-differences (DID) estimation (Gobillon and Magnac, 2016). To account for time-varying effects of unobservables, we implement the Synthetic Con- trol Method (SCM) (Abadie and Gardeazabal, 2003; Abadie et al., 2010). This method reconstructs the counterfactual outcomes using a combination of untreated municipalities with similar outcome trajectories that did not select into treatment, hence replicating the unobserved heterogeneity and allowing it to have time-varying effects. Several empiri- cal applications in other areas of study have been implementing the SCM2, but, in the authors' best knowledge, this is the first paper doing so to evaluate waste pricing policies. Secondly, this paper adds to the literature by studying the behavioral mechanisms 1See, e.g., the survey in Huang et al. (2011), and the literature review in Section 2. 2See, e.g., Abadie et al. (2015), Acemoglu et al. (2016), Billmeier and Nannicini (2013), Cavallo et al. (2013), and Pinotti (2015). 2 behind the partial effects on the priced waste stream. When the relative price of unsorted waste increases, individuals may shift away from generating unsorted waste either by recycling more or by avoiding waste generation of any sort, e.g., by using less packaging.3 Thereby, this paper looks at which behavioral response prevails by evaluating policy causal effects separately for total, recycling and unsorted waste. Our results indicate policy effects of sizable magnitude, and changes in waste gener- ation behavior. Unsorted waste generation fell immediately after UPS implementation and levelled off after around two years, with an average decrease of 37.5% in the post- treatment period. This partial effect seems to have been largely driven by waste avoidance and a relatively smaller increase in recycling, with total waste decreasing by 8.6% and recycling waste increasing by 6.1%. Placebo tests show that the unsorted waste reduction is strongly significant, while weaker and no significance is found for the causal effects on total and recycling waste, respectively. Finally, we show that the use of the SCM rather than a DID approach is justified in this application because the parallel trend assump- tion needed for the validity of the latter is violated. The successful reconstruction of the unobserved heterogeneity by the SCM, on the other hand, allowed to control for its time-varying effects. The remainder of the paper is organized as follows: Section 2 provides a brief review of the related literature on UPS, and discusses potential methodological shortcomings. Section 3 outlines the SCM used to estimate the policy causal effects under study. Back- ground and data are described in Section 4. Section 5 provides the results, and Section 6 concludes and discusses implications of this study. 2 Literature Starting in the 1970s, UPSs have been broadly implemented both in Asia and the United States, e.g., in municipalities of Japan, California, and Michigan (?Miranda and Bauer, 1996). By the mid-2000s, UPSs have been used in 30 of the 100 largest municipalities in the country as, e.g., Seattle and San Jos´e(Skumatz, 2008). Afterwards, UPS was adopted in many European countries, particularly Switzerland, the Netherlands, the northeastern area of Germany, Denmark and Italy (for a review, see, e.g., Reichenbach, 2008). Since the 1990s, following their implementation, UPSs' effects have been extensively studied in the literature. Evaluations in the United States respond for a large chunk of the early and current literature (Fullerton and Kinnaman, 1996, 2000; Hong et al., 1993; Huang et al., 2011; Miranda and Bauer, 1996; Podolsky and Nestor, 1998; Reschovsky and Stone, 1994; Van Houtven and Morris, 1999; Wright et al., 2018). Studies for other regions have followed through for, e.g., Korea (Hong and Adams, 1999;