Circular Economy Calls For New Tax Thinking

Take a second to think about the plastic bottle from which you just drank, the computer you have just typed on, the chair on which you sit. Typically, for such goods, raw materials are taken, the item is produced, then it is consumed and eventually thrown away. The results are shrinking natural resources and growing landfills. The circular economy envisions a shift away from such a linear "take-make-dispose" model to a system where products, components and materials are reused in new cycles, thus closing the trajectories into loops. In this system where everything is a resource for something else, the notion of waste disappears.

Circularity goes far beyond the concept of recycling. It is a complete system, involving changes in business models and product design, as well as collaboration between suppliers and customers. The circular economy is not about making things "less bad" but about making things "much better" - in effect, it's about creating economic value. And that includes the creation of new jobs to meet the need for new skills in craft, design and product repair.

For this to happen, changes in mentality and behaviour are needed, like providing products as a service instead of selling them, repairing something when it's broken instead of throwing it away, and collaborating openly with others.

What has tax got to do with it?

For these changes to take hold, incentives should be put into place. An appropriate tax policy can provide such incentives. However, our tax system is not yet adapted to promoting the circular economy.

Today, 51 percent of globally collected taxes are derived from labour taxation, while environmental (or consumption) taxes - energy, transport, pollution and resources - represent only 6 percent.1

Shifting towards a circular economy will involve designing a tax system with a different taxation of renewable and non-renewable resources. Why should we heavily tax something that we want companies to use - humans, who can themselves be considered a renewable resource - while having low taxation on non-renewable material resources?

As early as 1993, the European Commission noticed this need for a tax shift.2 In 2010, an EU report3 stated that "shifting taxes away from labour should be a priority for all Member States." More recently, the Rifkin report also outlined the need for a taxation system that would place Luxembourg as the EU circular economy leader on the basis that "an innovative tax system motivates actions to...

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