Markets for used motor oil in California under a controversial deposit - refund system

This paper explores the used motor oil markets in California under the regulatory scheme along with potential distortions introduced from elements of SB 546. California Senate Bill (SB) 545 modified the requirements of the deposit-refund system (DRS) for used oil outlined in the California Oil Recycling Enhancement Act (COREA) by introducing a differential fee and incentive system. The motivation behind the deposit-refund system is to assign a fee equal to the consumption externality of disposing used oil into the environment. This fee is refunded when consumers return their used oil for recycling. The DRS system in California is problematic, operating more closely to a consumption tax on motor oil. When the policy design no longer reflects the intention, it alters the price signals and introduces distortions in input markets. Furthermore, since the policy is operating at the state level, it inadvertently introduces through rent-seeking behavior non-tariff barriers to trade with other states. This adds additional distortions to the functioning of the the relevant markets.