Three steps to jumpstart the circular economy
The circular economy is on the rise. The European Union has embraced the concept and corporations around the world are exploring circular business models. But progression is painfully slow. Still, each year, 6.5 million people are dying from air pollution, a third of all food is wasted and 8 million tons of plastics end up in the oceans. We haven’t scratched the surface yet of the transition towards regenerative economies. The challenge is to speed up the process and break down the barriers for circular entrepreneurship. A major barrier is embedded in our tax code. A three-step update can turn tax into a circular economy catalyst.
Currently, public revenue is largely raised on employment while the use of natural resources remains untaxed or even subsidised.
The 28 EU countries collect some €5,400 billion in taxes each year. On average, more than 50% of tax revenues come from labour (payroll tax, personal income tax and social security contributions). Just 6% of tax revenues are ‘green’ taxes (mainly on energy and mobility).
Meanwhile governments around the globe actually subsidise fossil fuel consumption (and thus, pollution). The IEA estimates 2015 fossil-fuel subsidies at $325 billion, more than double the value of renewable energy subsidies.
Introducing better products is harder still when competing with products derived from ‘tax-free’ pollution and subsidised fossil fuels.
At the same time, the tax burden on labour stimulates businesses to minimise the number of employees, even if it means using more natural resources. It’s driving businesses to substitute people with machines and ship commodities and products across the globe.
High labour costs hold back labour-intensive R&D efforts as well as service-oriented business models (such as leasing, repair and maintenance services).
It is clear that, if we are serious about unleashing the full potential of the circular economy, our fiscal systems need an update.
To contribute to this goal, The Ex’tax Project* brought together fiscal experts of Deloitte, EY, KPMG Meijburg and PwC. The group developed a plan to significantly decrease labour taxes in the European Union, while increasing taxation of natural resource use, pollution and consumption (in this case: carbon emissions, water, fossil fuels, electricity and VAT). Cambridge Econometrics modelled the impacts in 27 EU Member States.
The results, published in the 2016 study New era. New plan, show that switching taxes from labour to pollution and resource use could:
- increase GDP levels by 2%
- create 6.6 million more jobs
- cut carbon emissions by 8.2% by 2020 and
- save € 27.7 billion on the energy import bill over a 5-year period.
UK-based company Trucost estimates the total value added of the scenario at over € 1,100 billion when taking into account the external benefits to society in terms of the health impacts of employment, reduced emissions and pollution levels and water savings.
Basically, three steps are needed to jump-start the circular economy:
Step 1: Put a price on pollution
Increase taxation of resource use and consumption, applying ‘the polluter pays’ principles. The New era study identifies over a hundred options as potential tax bases, ranging from carbon emissions to ecosystem services and land use. Governments will be able to start off with the low-hanging fruit or the most urgent issues in a particular region.
Step 2: Use the revenues to lower the tax burden on labour
The revenues of step 1 are used to lower personal income tax and social contributions (both for employees and employers). Careful design is required to make sure that the needs of vulnerable groups are addressed. In some countries (such as Poland), the revenues from resource taxes in the tax shift scenario were more than 100% of personal income tax revenues. These surpluses were available as income support.
Step 3: Tweak & adjust
In our fast-changing world, tax systems will continue to evolve and adapt to changing circumstances. The end-goal is to shift financial incentives, to enable growth based on human capital (capacities and talents) rather than the extraction of natural resources.
In the past, many groups including the OECD, ILO, European Parliament and the European Commission have supported these principles. OECD Secretary-General Angel Gurría states:
“The evidence-driven simulations presented in this report of the Ex’tax Project suggest that shifting taxes from labour to consumption and natural resources will result in more growth, more employment, and a smaller environmental footprint. We have enough evidence to support green tax reform and concrete policy action.”
It’s time we stand together and strongly urge our governments to turn tax from a barrier into a catalyst for the circular economy. The world has moved on; tax systems should do the same.
* The Ex’tax Project is inspired by the legacy of Dutch entrepreneur Eckart Wintzen, who promoted the concept of Value Extracted Tax since 1990. If you’re interested to help advance this work, please join us on Facebook, Twitter and LinkedIn and share this story.