Facts on circular economy in the EU & worldwide: what, where, who & how

9. What about the impact of circular economy practices on prices and taxes?

The evolution of linear economies has been, inter alia, driven by a market that does not tell the ‘ecological truth’, as most “environmental externalities” (such as environmental damage caused by extraction but also by the transport or use of ressources are not reflected in market prices ²⁸.

In a circular economy, optimization of the use of non-renewable resources implies taking into account and integrating quantitatively these "externalities" in the calculation of the overall value of a product or a service.

By definition these “market prices” of products and services ignore the intrinsic value of non-renewable resources, the impact of their exploitation (including transport) and the part that can sustainably be exploited in the long-term : a.o. fossil fuels, but also rare earths or phosphates and even fresh water, for example. (www.greenfacts.org/fr/ressources-phosphate/index.htm)

It remains nowadays that, while the price of a consumer good is a balance of several drivers (economic conditions, competition, availability of raw materials, etc.), there is still no system operationally integrating these “externalities” in the prices or in regulatory practices. If the true global cost of the circular economy model embedding these externalities into prices was compared with the apparent cost of the linear economy model, then a proper comparison of the costs for pursuing a circular economy over a linear economy could be made²⁹ lowering, as suggested by Stahel quoted by the CoR report, those on work and increasing those on the consumption of non-renewable resources in the form of materials and fossil fuels.

On the basis of such accounting and more specific indicators, it becomes possible but also of crucial importance to rethink taxation and pricing. To move society towards sustainability – both socially and ecologically – and accelerate the transition to a circular economy, would however require such a tax shift. Unfortunately, as underlined by the EASAC report, efforts needed to establish a circular economy model through price policies (such as via taxes and subsidies, or by more truthful pricing) are not seen as an essential adjustment to an inherently flawed and unsustainable economic model, but rather, as a burden to society.

Changing society towards greater sustainability - both societally and ecologically - and accelerating the transition to a circular economy, requires this change in the valorisation and ownership of resources as well as in the taxation systems, reducing, as suggested by Walter Stahel cited in the Club of Rome(CoR) report³⁰, those on labor and increasing those on levies and consumption of materials and fossil energies and other non-renewable resources.

Adapting for example in the E.U. the Value Added Tax (VAT) system by integrating the cost of externalities would allow to differentiate the products and/or activities demonstrating a lesser impact, and to facilitate the development of a more sustainable win-win circular economy for the environment, consumers, governments and business activities altogether. The CoR report suggests for example that goods produced by secondary materials – where VAT has already been paid once – should be exempted from it, a reform that would promote the use of secondary materials and help correct a situation where it is often less expensive to use virgin materials than recycled ones.

A Resolution adopted by the EU Parliament in 2015 urged the Commission to propose a lead indicator and a dashboard of sub-indicators on resource efficiency, including ecosystem services. It also stated that these indicators should be included in the European Semester Process and in all impact assessments. The EU Parliament Resolution also urged the Commission to promote the use of resource-efficiency indicators through international conventions in order to allow comparability between industries and economies and to ensure a level playing field, and to support dialogue and cooperation with third countries.

²⁸ Not to speak about “social externalities”
²⁹ French Commissariat général du développement durable -Monétarisation des biens, services et impacts environnementaux : la variabilité des valeurs monétaires.
www.developpement-durable.gouv.fr/IMG/pdf/ED126.pdf  
³⁰ ”The Performance Economy” (2010) Walter Stahel