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The Social Power of the Circular Economy

A circular economy isn’t just about materials; it’s about people too. In a circular economy, instead of resources extracted from the earth, people will become the most important driver for growth. Craftsmanship and ingenuity are abundantly deployed, and natural resources are saved. As taxes play a fundamental role in the economy, the first step is to shift taxes from labour to natural resource use and pollution.

Clever use of resources

Licensed under CC - credit Flickr user: Rightbrainphotography
Licensed under CC – credit Flickr user: Rightbrainphotography

When was the last time you had a piece of clothing repaired? It’s probably been a while, as, in our part of the world, repair costs are high. Upholstering a couch, for example, may cost up to 80% of the original purchasing price. Having your jeans mended may cost the same as buying a new pair at H&M. Most of us won’t give it a second thought and head out to shop.

Over the last few years, awareness has been growing about the need to use natural resources more wisely. In a circular economy, natural resources are brought in a closed loop. Businesses can then add value over and over again, through recycling (‘urban mining’), repair, refurbishment, and lease and maintenance services, which increase the lifespan of products.

But there’s a catch.

Circular business models are generally more labour-intensive than business models focused on simply selling products. Companies will need to employ people to recollect, repair and disassemble products and provide customer services. A circular economy also requires the redesign of products to make them suitable for repair and disassembly. Massive innovation efforts will be needed to develop biobased materials and renewable energy sources.

In short: circular activities require manpower, craftsmanship, creativity and ingenuity.

Labour taxes are high, pollution is tax-free

Licensed under CC - credit Flickr user: Images Money
Licensed under CC – credit Flickr user: Images Money

Unfortunately, at the moment, Western economies put a high tax burden on honest work, while leaving pollution and the use of natural resources tax-free and even subsidized. This is a major barrier to create more jobs and shift to sustainable resource use.

In the EU, only a fraction of tax revenues is based on natural resources (such as water, metals and minerals) and pollution (including carbon emissions). Aviation fuel, for example, is tax-free, which makes flying from Amsterdam to Paris cheaper than taking the train.

While environmental taxes are low and on a decreasing trend, the tax burden on labour is growing. Across the EU, labour taxes (including social contributions) provide 51% of total tax revenues.

Consequently, businesses are more concerned about reducing the number of employees than reducing their ecological footprint. Gaining efficiency generally means making people redundant, outsourcing to low-income countries and lowering service levels.

The effects are visible everywhere: fewer waiters in restaurants, fewer teachers to educate children, less personal attention for patients in hospitals. Anyone who has ever been put on hold when dialling a help desk has experienced the impact of services at the lowest possible costs.

An inclusive, circular economy starts with a tax shift

In Europe alone, more than 22 million people are unemployed. From a social perspective, unemployment is a disaster. It causes a range of problems including poverty, health problems and stress. It denies people the opportunity to take care of their families, to participate in society and develop their full potential.

From an economic perspective, unemployment means that human capital is underutilized. In other words: there is an abundance of untapped potential for prosperity, growth and wellbeing.

Wouldn’t it be smarter to actually deploy this goldmine of talents and capacities?

A circular economy isn’t just about materials; it’s about people too. In an inclusive, circular economy, growth will be based on human capital instead of the extraction of natural resources. As taxes play such a fundamental role in the economy, step one is to shift taxes from labour to natural resource use and pollution.

Tax Shift

Putting a tax shift in practice

The Ex’tax Project Foundation has been exploring the potential of a tax shift from labour to natural resources and consumption, with the help of Deloitte, EY, KPMG Meijburg and PwC. The report New era. New plan provides an overview of the extensive literature on this topic, as institutions like the European Commission, European Parliament, the OECD and the IMF have published about the principles of a tax shift. The study also provides a Policy Toolkit to help identify potential government action.

The circular economy going mainstream

A tax shift will enable consumption patterns to shift from mass consumption to more (local) custom-made goods and personal services-delivery.

Creative and circular business models are already emerging at social enterprises like Elvis & Kresse (high-end products made of scrap fire hoses and leather), Kromkommer (upcycling food waste), Bundles (pay-per-wash washing machines), and the Repair Café (social hubs for repair services). Large businesses are also adopting innovative business models. Excellent examples are Philips (pay-per-lux), Royal DSM (turning agricultural waste into fuels) and Interface (using discarded fishing nets).

Just imagine what happens if the tax system is no longer a barrier for this type of businesses models to go mainstream. When inclusive and circular business models become the rule rather than the exception.

A tax shift will be key to unleash the social power of the circular economy.

Editor’s Note:

This piece gives a broad introduction to ideas that have been discussed over a relatively long period of time, in particular in the work of Walter Stahel since the 1960s. It is an interesting topic, and a critical one for the circular economy.

We highly recommend attending Femke’s Disruptive Innovation Festival session at 15:00 GMT on Friday, where you’ll have the opportunity to ask your questions and to learn more about the history of some of these ideas. 

DIF 2015 session: Tax Reform: The Key to a Circular Economy

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The Author

Femke Groothuis

Femke Groothuis

Femke Groothuis is Founder and President of The Ex’tax Project, a think-tank focused on the shift of taxation from labour to natural resource use.

Between 1999 and 2009 Femke Groothuis was Investment Manager at Ex’tent Green Venture Capital, a pioneering private fund for green and social investments. She has advised entrepreneurs on legal, financial and shareholders issues and business plans, in sectors ranging from retail and hospitality to biotech.

Groothuis is a political scientist specialized in International Relations and Environment. She has lived, worked and studied in The Netherlands, Italy, Kenya, Vietnam, England and New Zealand.