Taxation, a lever for the circular transition

byGiulia/01/08/2024 08:30

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.

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.

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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Taxation, a lever for the circular transition

VAT modulation, a strong price signal

Bonus/malus schemes to guide behavior

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Towards a global and coherent circular tax system

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