How Sustainable Taxation Can Create a Circular Economy

By Piotr Jędrzejuk
Circular economy (also known as industrial ecology, cradle to cradle, or closed loop economy) is an industrial economy in which biological and technical materials continuously circulate without damaging our environment. Products within the system consist of biological materials which can reenter the biosphere after they’re discarded or be reused as goods or materials. The ideology of the Circular Economy represents the future of our economy, as it is a way to redesign the traditional throughput production system into one which can sustain continues growth without affecting future generations.

In 1976, Walter R. Stahel and Genevieve Reday-Mulvey in their report “The Potential for Substituting Manpower for Energy” to the Commission of the European Communities have proven that

“A circular economy increases employment because less than a quarter of the labor input to produce a physical good is engaged in the fabrication of basic raw materials such as cement, steel, glass and resins, while more than three quarter are in the manufacturing phase. The reverse is true for energy inputs: three times as much energy is used to extract virgin or primary materials as is used to manufacture products from these materials. The reuse of components and goods (including embodied energy, water and GHG emissions) through remarketing, repair, remanufacturing, technologic upgrading, instead of manufacturing new ones therefore uses considerably less energy and provides more jobs to fulfill a given need.”

It’s been over three decades and not much has been done in this direction as most businesses continue to be driven by the rules of traditional capitalism promoting linear production and consumption. Resource-intensive growth becomes highly questionable when natural resources become scarce. The value of raw materials will increase, causing an increase in the price of consumer goods. Steeper prices will limit user consumption, and businesses will need to rethink their businesses strategy in order to design resource-miser competitive goods.  There are businesses today benefitting from sustainable development strategies of ‘natural capitalism’ or the so called ‘circular economy.’ For example:

  • Michelin now sells performance of tires rather than the product itself, renting  long-life tires that are easy to re-tread and generating a higher profit margin. If the same tire can do twice the distance Michelin gets twice the money, increasing the company’s turnover.
  • Rank Xerox, between 1992 and 1995 saved supply costs of €64 million, after it introduced a voluntary program to recover parts of end-of-life photocopiers for reuse or recycling. They have improved BOM costs by redesigning a 15-cent spring on a roller that now saves the U.S. parent US$40 million annually. As of today, its Japanese partner Fuji Xerox currently recovers 98% of its materials.
  • Caterpillar remanufactures engines blocks and components to as good as new condition; remanufactured engines cost 30%-60% less than making new ones from scratch, with a higher profit margin.

More examples can be found in the report released by Ellen MacArthur Foundation which is the first ever to look at the economic and business rationale for an accelerated transition towards a circular economy.

To speed up the introduction of such business models, Stahel believes that a sustainable taxation may be the solution to the problem: governments should not tax renewable resources including human labor, but tax the consumption of non-renewable resources both materials and energies, as well as undesired wastes and emissions This could help overcoming the present crisis and encourage a shift to a circular economy.  The new taxation model would encourage businesses to implement up-to-date environment-friendly solutions and focus on reuse and remanufacturing. Such a shift in taxation would further promote and reward a circular economy with its regional low-carbon and low-resource solutions. Sustainable taxation will bring benefits to the environment, society, and economy.

In his report The Virtuous Circle? Sustainable Economics and Taxation in a Time of Austerity”, Stahel states that designing and implementing a tax system which supports and incentivizes material efficiency, sufficiency and prevention may be the biggest challenge for the policymakers of this century. Incentives for prevention have been used in the field of health and safety but not in the field of resource efficiency and emissions into the environment.

Check out this video to hear more from Walter Stahel

[Image credit: StarrGazr, Flickr]

By Piotr Jędrzejuk (@sustainbusper)

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