Circular economy calls for new tax thinking

in Industry Insights, Tax, 19.07.2017

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 report[3] 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 innovate on the production side through resource efficiency improvements that cut costs, as well as motivating customers to purchase more energy and resource efficient products to lower costs.”[4] This would ultimately imply a holistic change to the tax system by shifting the tax burden from labour to (non-renewable) resources, waste and emissions in order to incentivise economic actors to adopt more sustainable business models.

Nevertheless, a complete overhaul of the tax system is very complex; Rome wasn’t built in a day. We can and should take smaller steps to change the tax system to support a circular economy.

Where to go from here?

While bottom-up initiatives will certainly define the future path of the circular economy, we rely on governments and institutions to create the necessary frameworks and incentives for these to thrive.

Of course, the ideas raised represent a radical shift from today’s established tax system. Tax legislation not, traditionally, being something that governments like to play fast and loose with, changes of this magnitude cannot happen before changes in mentality. Yet if we truly seek a circular economy, one that properly values the earth’s limited resources, this change in mentality is exactly what we need.

Several countries have already taken steps to adapt their tax system to accelerate the change towards a circular economy. Many scholars, businesses and politicians have taken up the challenge and initiated discussions on what tax measures better support the circular economy. Among others, the following ideas have been presented:

  • Changes in depreciation methods: the development of second hand markets for products increases their value and prevents them from being depreciated to zero. It also brings up the question of when in the lifecycle we want to tax a reusable resource.
  • Changing the VAT system to influence behaviour: lower VAT on labour-intensive services incentivises repairs and reduces waste.
  • Increases in the tax on emissions and technical material consumption: such a higher tax reduces the consumption of non-renewable resources.

This is the first article in a series that we have planned about how an appropriate tax policy can help shift towards a circular economy. Our next articles will delve into more detail on the ideas mentioned above. We will present case studies from other countries that have taken initiatives already and we will have interviews with other leading specialists in the field of circular economy. We invite you to watch this space for the next article.


Next up on the KPMG Blog:


[1]The Ex’tax Project (2016): New era. New plan. Europe. A fiscal strategy for an inclusive, circular economy.
[2]European Commission (1993): Growth, competitiveness and employment. Challenges and the ways forward into the 21th century.
[3]European Commission (2010): Annual Growth Survey. Advancing the EU’s comprehensive response to the crisis.
[4]Jeremy Rifkin (2016): The 3rd Industrial Revolution Strategy Study for the Grand Duchy of Luxembourg.


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