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 :)