28 Feb 2018

A green fiscal reform for a circular economy

Kyra writes:*

The circular economy is the talk of the town. We are currently living in a linear economy: extracting resources, producing products, and throwing them away after usage. The circular economy poses an alternative to this system, as it advocates for the recycling and re-use of materials, as it stresses the limitation of resources on this planet.

As the circular economy slowly is stepping outside of the scientific arena into the real world. The Dutch government has made plans to become a fully circular country by 2050. These plans include ambitious goals, for example, reducing the use of primary resources by 50 percent by 2030.

So how is the Netherlands going to create a circular economy? It is interesting to note that the plans of the government do not entail any strict regulation or rules to incentivize action. The government proposes signing a ‘resource agreement’ with strategic partners that includes ‘transition agendas’ to achieve a circular economy.

Sounds vague? It is. A solution, however, can be quite simple. In order to achieve a circular economy the cost of using raw materials should be higher than the cost of recycling materials and re-using them. If this is the case, the recycled materials will be regarded as more favorable, and so the circular economy will be born. At the moment, recycling and reusing materials is often much more expensive than using raw materials. Making strategic agreements and transition agendas will most probably not contribute to a competitive price for recycling. In order to change this, and to incentive recycling practices, implementing a resource tax will be more effective.

A resource tax is a type of environmental tax. The aim of the tax is to internalize the externalities that are caused by market failure. In this case that is, the market doesn’t account for the degradation of resources on the one side, and the accumulating amounts of waste on the other side. Implementing a tax would make usage of raw materials more expensive, making it more viable to look into alternative options, such as using recycled material or even making products more durable.

When implementing a resource tax, it should be very clear what the goal of such a resource tax is: is the tax there to change behavior, or to generate revenue? A resources tax is sometimes provided as a win-win-win situation, aiming to achieve different goals at the same time. It is argued that when implementing a resource tax, the income tax can be diminished. This supposedly should lead to an incentive to save natural resources, solving the unemployment issue by making services more affordable, and will even boost creativity. This sounds as good as the policy plans of the government for a circular economy, but unfortunately also as unrealistic.

Bottom line: As the Dutch government claims to achieve a circular economy by 2050, action needs to be taken to achieve this goal. The proposed policies by the Dutch government will not be sufficient. A resource tax offers a strong policy instrument to achieve the desired changes in society. However, there should be great caution on how to implement this tax, making clear what its exact goal is to ensure effective implementation.

* Please help my environmental economics students by commenting on unclear analysis, other perspectives, data sources, etc. (Or you can just say something nice :)


  1. Dear Kyra,

    Managing 'N' types of resource in a circular economy may require N policies, which is problematic, but not impossible.

    The concept of the circular economy has some similarity with Herman Daly's steady-state economy. The circular economy might be more flexible than the steady-state economy, but it has similar goals.

    Our team of volunteers has developed a new macro-economic theory and policy for a 'steady risk economy'—which is an advance on the steady-state economy. We think the steady risk economy could answer some important questions about how to manage greenhouse emissions over the long term with a new financial incentive.

    The steady risk economy is based on a global reward price for carbon, called the 'global carbon reward’ and monetary policy for central banks. The reward should equal the Risk Cost of Carbon (RCC), which is the monetisation of climate risk.

    The new approach seems to provide a sound macroeconomic solution to the economic growth dilemma, and it also provides a solution to several paradoxes that currently trouble the time-discounting problem for the Social Cost of Carbon (SCC) and for setting optimal carbon taxes.

    An introduction to the new theory and policy is found here: www.global4c.org

    I would be happy to provide more information, and my colleague is based in the Netherlands, near Utrecht.


    Delton Chen Ph.D. 陈达涛
    Geo-Hydrology & Climate Risk Mitigation
    Global 4C Climate Policy

  2. Dear Kyra,

    A nice analysis and potentially a good stride forwards to a circular economy.

    I have two points you may want to think about. The first one is substitutes: you argue that increasing the price of raw resources will make recycling more attractive. That is only true if recycling is the next best thing and there are no other substitutes. Related, but more technical than an economics point: recycling is often more energy intensive. Unless we fix the energy generation problem we may have replaced one problem with another.

    The second point is: assume that such a tax is announced. What will current suppliers of the resource do? Dig up and sell while they still can. That is known as the green paradox. It may be less of a problem if the Netherlands is just a small market.

    Good luck with your essay.

  3. An interesting paper you may want to read is this one: https://www.researchgate.net/publication/313371834_Circular_Economy_Rebound It is about a rebound effect that was discovered in some forms of Circular Economy. The main question of the paper is whether closing material and product loops does, in fact, prevent primary production (as seen from an economic perspective).

    It can occur when the CE product either fails to compete with virgin alternatives or when the product causes a drop in price, increasing and shifting overall consumption.

    Maybe that's an interesting and somewhat contrasting view on the topic you're writing about :)


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