This study investigates the impact of a policy designed to encourage municipalities to domestically recycle plastic waste in Japan. Using an instrumental variable (IV) approach, I examine whether the Containers and Packaging Recycling Law (CPRL), which includes policies such as subsidising recycling for municipalities and providing municipalities with recyclers, increases the domestic recycling volume of post-consumer plastic waste. The results show that the CPRL increases the recycling volume of plastic packaging waste by approximately 3.10 kg per capita and that of plastic bottles by 0.49 kg per capita. These increases are equivalent to a reduction of 2.6 million tons of CO2 emissions per year, saving US$6.8 million in environmental costs. I also find evidence that these estimated impacts of the CPRL are larger than those of recycling policies aimed at households such as unit-based pricing and door-to-door collection. In contrast to previous studies, my results suggest that, in addition to policies promoting recycling in households, policies designed to encourage municipalities play an important role in the recycling of post-consumer plastic waste. These results demonstrate the importance of understanding the heterogeneity of policy effects on emitters and processors in improving environmental outcomes.