In a well-functioning market economy, businesses can do well by doing good. They can prosper by supplying customers with useful goods and services, providing jobs for their employees, treating them well, and participating as good citizens in their communities. The name of the game is creating value. Profits are the way we keep the score.
Creating value is, of course, a game that works well only when played by the rules. At the highest level, the rules are clear: Respect property rights, honor contracts, shun fraud, welcome free and open competition. Without these rules profits become decoupled from value creation. If you pad your profits through fraud, by cheating on contracts, skimping on customer service, or by blocking your rivals’ right to compete, you are no longer creating value. Any “bad profits” you may earn in the short run will soon come back to bite you.
When the rules are clear and easily enforced, businesses can set targets, innovate, and show off the best they have to offer. But the devil is in the details. Important though the high-level rules are, they need the support of thousands of more specific rules that fill in the operational details. If we get those operational rules wrong, the game goes awry.
How the rules can go wrong
To borrow a thought from Aristotle, rules, like men, may be bad in many ways, but good in only one way. It is easy to miss the target, but hard to hit it. Before introducing our case study of plastics pollution, it is worth considering four ways in which rules can go wrong.
Compliance burdens. Perhaps the most notorious way in which rules can go bad is by imposing excessive burdens of compliance – red tape, for short. The 1980 Paperwork Reduction Act (PRA) stands out as a notorious case in point. It requires any government agency that wants to ask a question of more than 9 people to complete a complex review process that can take more than a year. As a paper from the University of Michigan Law School puts it, “in an attempt to regulate the amount of paperwork foisted on the public, the PRA has created an enormous amount of paperwork for federal agencies—without any meaningful reduction in the paperwork burden faced by the public.” With the PRA, the government bureaucracy tied itself up in its own red tape, but managers from the private sector can point to equally burdensome regulations that affect their own operations.
Ambiguity. Some rules are so ambiguous that it is difficult to determine to whom and to what they apply. What exactly does it mean to “make a reasonable effort” or to observe “standard practices,” or to display “substantial compliance” with a vaguely stated principle? Where rules are ambiguous, the fear of penalties for unintended noncompliance may inhibit innovation or worthwhile business initiatives may suffer when regulatory authorities come down with arbitrary interpretations.
Outdated rules. Some rules and regulations may originally have been well founded but are rendered obsolete by new technology. If so, they can stifle innovation in serious ways. For example, until recently, U.S. regulations prohibited the auto industry from offering its customers adaptive headlights, a technology long used in Europe. Such headlights automatically lower beams to avoid blinding oncoming drivers. Even now, they are mostly available only on high-end cars, at significant cost to public safety.
Missing rules. Missing rules and regulations also have their costs. Some of the most glaring examples concern control of pollution. Pollution has long been recognized as a violation of property rights, one of the high-level rules of a market economy. Economists describe pollution as an externality. Lawyers sometimes prefer the term trespass. Trespass by pollution takes many forms from dumping toxic waste in rivers to emissions of greenhouse gases to improper disposal of plastic waste (discussed in detail below). In recent decades, governments at state, national, and even international levels have struggled to operationalize rules protecting people and property from harmful pollution, but many gaps remain. Of course, it is possible for companies to pursue private ordering; however mixed results can occasionally cause business leaders to cry, “regulate me!”
Taken one by one, each burdensome, ambiguous, outdated, or missing rule may look insignificant, but they add up. Before we know it, some players are doing well without creating value. Others who are trying to do their best are blocked by regulatory red tape that leaves them unable to monetize the value they create. The resulting failure to harmonize business goals with the wider ends of sustainability and prosperity creates systemic risk for the whole economy.
Regulating plastics pollution
With this overview in mind, let’s turn now to a specific case that illustrates the importance of appropriate rules at the detailed, operational level. The case focuses on the dilemma that plastics producers face in delivering the benefits of their products when used as packaging materials while avoiding the value-destroying effects of plastic waste and pollution. How can business leaders best address this dilemma? What works, what doesn’t? And what can they do to help get the rules right?
Many of the environmental harms associated with plastics pollution are the result of missing rules, as discussed above. Trespass by plastic packaging takes several forms: Litter that we dump into rivers or toss by the roadside; microplastics that enter our bodies as we drink bottled water or that end up in the air and water as we discard packaging; greenhouse gas emissions from the use of fossil fuels in the production of plastics and from incineration of plastic waste.
As always, there are tradeoffs. As the industry itself emphasizes, plastics have unique features that make them valuable. Lightweight packaging and vehicle components save fuel for transportation. Plastic bike helmets and plastic components of medical devices save lives. Plastic packaging reduces waste by keeping food fresh. Optimal rules need to weigh the benefits of plastics against the drawbacks, a process that is not always easy. Find substitutes where possible, while keeping in mind that the substitutes may sometimes have their own environmental downsides. Reduce the amount of plastic used to do any given job. Recycle where possible. Change the types of plastics used to reduce environmental harm and increase recyclability.
We are not starting from a blank state here. Much can be learned from the efforts of the EU, Japan, Australia, and other countries to deal with plastics pollution. Although the United States is in some ways playing catch-up, several states have taken promising initiatives. As of 2024, seven U.S. states had laws on the books and several more were considering them. Legislation had also been introduced at the Federal level, for example, the Break Free from Plastic Pollution Act.
All these laws have certain things in common.
- First, the laws set quantitative targets. In most cases those targets take the form of minimum percentages of recycled material. Some ban certain types of plastic packaging outright.
- Second, the laws supplement the targets with extended producer responsibility (EPR). The need for EPR arises from the fact that more often than not, the collection, sorting, and recycling of plastic packaging costs more than the revenues from selling the recycled materials. Under EPR, parties that introduce plastic packaging onto the market pay fees into a pool to cover the net costs of collecting and processing their materials after use. The fees provide an incentive to reduce use of plastics where possible. Individual companies fulfill their obligations by joining independent, nonprofit Producer Responsibility Organizations (PROs), such as the Circular Action Alliance.
- Third, the laws fine-tune EPR incentives with eco-modulation. Under eco-modulation, the fees that participants pay decrease when they design packaging in ways that make it easier to recycle. For example, the Consumer Goods Forum has a set of golden design rules that suggest exactly which plastics to use and which to avoid, how to modify labels and printing to make containers more recyclable, and the importance of minimizing “headroom” (empty space in packages) and “overwrap,” (outer layers of plastic film that are sometimes redundant or purely decorative).
Despite these positive aspects, existing laws leave substantial room for improvement. Beyond the fact that they do not yet cover the whole country or all kinds of plastics, there are several ways in which a bit of fine-tuning could help avoid the “rules gone wrong” issues discussed above.
One problem is inconsistencies among regulations imposed at the state level. Inconsistent rules are inherently suboptimal. The need to comply with differing regulations depending on where a product is made or sold clearly increases compliance burdens. As the American Chemistry Council has emphasized, clear federal standards and definitions are needed to make the United States a leader in this field.
Second, there is a tension between the use of command-and-control targets focused on the percentage of recycled content and strategies that rely more on incentives. For example, eco-modulation incentives to reduce the weight of packaging by eliminating excess headroom or overwrap are more effective than simple targets stated as a percentage of recycled material. The use of incentives has the additional advantage of avoiding ambiguity. Rather than, say, requiring producers to “make reasonable efforts” to reduce the weight of packaging, the EPR approach converts an ambiguous target to the more measurable goal of cost-effectiveness. If the result is still more plastics pollution than policymakers want, then they can strengthen the incentive – the EPR fee that producers pay – until the outcome is satisfactory.
A third way to fine-tune the rules is through balance between the supply and demand sides of the problem. As a brief from the Association of Plastic Recyclers puts it, “To be successful, recycled content requirements that create stronger demand for recycled materials must be paired with supply-side policies that directly influence households and businesses to recycle more.” Balancing rules for supply with rules for demand can reduce compliance costs without reducing effectiveness. For example, “bottle bills” that incentivize returns by consumers can make rules for recyclable content more effective.
Finally, there is the issue of keeping regulations from becoming outdated. The debate over so-called chemical recycling is a case in point. Chemical recycling is a process that breaks plastics down into their constituent molecular components and then reconstitutes them into feedstocks for production of new products. Some in the industry see the specific targets of the Break Free from Plastic Pollution Act as out-of-date in that they envision only traditional “mechanical” recycling as the real thing. For that reason, the American Chemistry Council favors a more recent bill, the Accelerating the Circular Economy Act. But some environmentalists forcefully oppose that bill’s support of chemical recycling.
Acting on the rules
Business leaders should view the rules of the game for plastics pollution, or for that matter, any rules that affect their line of business, as opportunities to position their firm in ways that take advantage of emerging trends. In some cases, the actions needed to do this are internal. For example, the Circular Action Alliance, a nonprofit producer responsibility organization for plastics, recommends some no-regret steps to take immediately: Gather data that will be needed later to comply with EPR. Examine products and processes for potential improvements. Educate everyone involved in relevant science.
Beyond changes to their internal policies, business leaders also face opportunities to influence public policy. Here, they have many tools at their disposal, including campaign spending, lobbying, advocacy, and philanthropy. They can employ any of these either directly or through business associations. The Erb Principles of Corporate Political Responsibility (CPR) provide both general guidelines for reasoned engagement and a step-by-step decision tool. Key questions to include: What is the challenge? Does our firm have an authentic basis for engaging in this issue? Should we engage in this area, and why? How can we engage responsibly? How will we communicate and follow up with specific actions?
In the case of plastics pollution, one applicable CPR principle invites affected firms to consider which policy options best encourage healthy market rules of the game – rules that foster competition on the basis of quality, price and long-term value while minimizing costs externalized to other stakeholders and aligning private interests with the broader public good. On technology-specific issues, such as chemical recycling, the CPR principles recommend giving careful thought to whether advocacy of one or another option is made in good faith, based on evidence and respect for independent, peer-reviewed science.
Regardless of the product or service their firm provides, businesses leaders increasingly realize that they are more likely to meet their goals when the rules of the game benefit long-term value creation. But weighing what is truly in their interest and the interests the society in which their activities are embedded is a complex task. As always, the devil is in the details.
