I only use recycled paper to pack all of my items. I shred up old catalogs and phone books and then squish them to make them crinkly.
It works great, is free, and best of all, my customers love it! I was worried about using it in my Bridal shop, but I have never had a complaint. I do use new tissue paper(which is recycled) to neatly wrap the items first, so they have a nice presentation. I am going to have a custom stamp made that explains why I use recycled packaging, that way I can stamp the inside of my boxes with it.
I wouldn't offer a discount, I LOVE buying from sellers that use 'green' packaging, so I consider it a value add, not the other way around. Plus, sometimes things like that are reasons I pick one seller over another, so make sure you tell your customers if you do start using recycled packaging.