How can tax policy promote the circular economy?

About 88% of materials are thrown away rather than re-used or recycled in the European Union. That creates mountains of refuse that is expensive to dispose of, and wastes valuable resources that could re-enter the economy rather than being incinerated or buried. For a resource-poor continent like Europe, waste has economic security implications: we have to import more primary materials, opening opportunities for coercion by supplier countries and exposing our industries to supply-chain vulnerabilities. Wasteful use of resources also causes more extraction and processing that create pollution.

Price-based instruments can incentivise producers and consumers to use resources more efficiently. However, national tax systems are systematically biased toward the linear ‘take-make-waste’ model because the environmental harms associated with virgin material extraction remain largely unpriced.

Our new paper reviews the effectiveness of different tax measures. We find that end-of-life instruments (eg landfill taxes, pay-as-you-throw and deposit-refund systems) perform best, while upstream instruments (taxes on virgin materials and aggregates) are not used enough. At the consumption stage, loss-framed penalties such as plastic-bag levies work well, but differentiated VAT rates are not targeted enough and bring high administrative and compliance costs.

The EU Circular Economy Act due out in November should aim to improve the governance of Extended Producer Responsibility systems to ring-fence the revenues for circularity. National governments should change tax codes and procurement frameworks to favour repair and second-hand sales over the purchase of new goods to keep products and components in use for longer. More generally, labour should be taxed less and resources more, to change the structural incentives and encourage repair and remanufacturing, which are more labour-intensive and use fewer resources.