Abstract

Capital depreciation is not merely a replacement cost: it is the physical channel through which installed assets become future waste. Assets of similar productive value but different depreciation rates therefore embody different intertemporal waste liabilities. We formulate a continuous-time planner's problem in which produced capital, waste, and natural capital evolve jointly, and show that the socially efficient user cost of capital contains a durability-specific circular wedge - an effective depreciation rate augmented in proportion to the shadow value of future waste, and time-varying along the transition path. Standard Pigouvian flow taxes alone therefore cannot decentralize the planner's allocation. Implementation additionally requires durability-adjusted depreciation-flow charges, increasing in the physical turnover rate and coupled with downstream recovery refunds, which supplies a formal dynamic foundation for eco-modulated Extended Producer Responsibility (EPR). Quantitatively, a benchmark-revenue-equivalent uniform EPR fee opens a steady-state consumption-equivalent welfare gap of 5.1% by misallocating capital across durability classes, operating almost entirely through output and consumption rather than through environmental damage. Eco-modulated fees also improve private durability choice when product lifetime is endogenous, and a sufficient-statistic pooled refund handles imperfectly observed recovery channels. Efficient circular policy must price product durability and intertemporal waste liabilities jointly.