The transition to a circular economy model, aimed at maximizing the value of resources and reducing waste, is now a priority issue for public authorities. Alongside binding regulations and incentive policies, taxation represents a powerful lever for accelerating these paradigm shifts. By modulating taxes and creating new tax systems, governments can influence the behavior of economic players and consumers, steering them towards circular production and consumption patterns. This « circular taxation » takes a number of complementary forms, from VAT to bonus/malus schemes and tax credits.
VAT modulation, a strong price signal
One of the most effective tax tools for encouraging the circular economy is to modulate VAT rates according to whether products and services are reused, repaired or recycled. A powerful lever to give circular products a competitive edge over new products based on natural resources.
In practical terms, this means applying reduced or zero VAT rates to activities involving repair, reuse or the incorporation of recycled raw materials. Conversely, new products that consume large amounts of non-renewable natural resources could be subject to higher rates.
This strong price signal helps to redress the economic balance in favor of circular economy models, which are often penalized by higher labor and logistics costs than mass production. A measure already implemented in countries such as Sweden, which applies a reduced VAT rate on repairs.
In France, the Outre-Mer 360 report recommends experimenting with this VAT modulation in the overseas territories, as a veritable laboratory for reuse and recycling. This is an avenue worth exploring, with a view to rolling out the system nationwide.
Bonus/malus schemes to guide behavior
Beyond VAT, circular taxation can also take the form of financial bonuses/maluses, applied according to the more or less virtuous nature of products and services in terms of their impact on resources.
One example is the Walloon Region in Belgium, which has introduced a system of premiums and taxes to encourage the use of reused or recycled building materials. Construction or renovation projects benefit from a financial bonus if they include a minimum proportion of reused materials, and are penalized by a tax if they do not make sufficient use of locally available resources.
This type of system could be duplicated in other sectors, such as furniture, electronics or automobiles, by modulating purchase subsidies, conversion bonuses or taxes on the heaviest, most energy-hungry vehicles.
The aim is to send a clear price signal to consumers and businesses, encouraging them to favor circular economy offers rather than the purchase of new products that consume a lot of virgin resources.
Tax credits to finance the transition
But in addition to influencing consumer behavior, circular taxation must also provide financial support for companies as they make the transition to these new business models.
The introduction of specific tax credits, whether refundable or not, is a powerful lever for supporting efforts in eco-design, R&D, training and the adaptation of industrial tools and supply chains.
In France, the tax credit for the prevention of waste from the circular economy, or the tax credit for investments in transformation towards the industry of the future, are part of this logic. 570 million to finance investment and innovation projects in this field.
In the longer term, this public support will help secure new circular business models, by reducing the financial risks associated with the first few years of launch. This leverage effect is essential to boost investor confidence and accelerate the scaling-up of these virtuous offerings.
Towards a global and coherent circular tax system
While these various tax tools represent powerful levers for action, their effectiveness will depend on how they are coordinated within a truly global and coherent circular tax strategy on a national, or even European, scale.
We need to ensure that the various systems reinforce each other, without creating counter-productive offsetting or tax optimization effects. Close coordination between the different levels of governance (European Union, States, regions, etc.) will be essential.
What’s more, these tax measures will only make sense if they are part of an overall regulatory framework favorable to the circular economy. In particular, this means tightening eco-design criteria for products, extending extended producer responsibility channels and creating new material traceability standards.
Finally, we need to remain particularly vigilant about the social and economic acceptability of these new taxes, taking care to support the most modest households in the face of foreseeable price rises. Compensation mechanisms or circular energy cheques could be envisaged.
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