Part of Our EU-27 Green Tax Wiki

The European Green Deal is a roadmap of policy initiatives seeking to make the European Union climate neutral by 2050 (“A European Green Deal”). An ambitious end goal, one of the biggest action points is transitioning the EU into a efficient—yet still competitive—circular economy over the next 30 years.

What is a circular economy?

The modern economy is a linear economy of goods and purchases, overwhelmingly comprised of single-lifestyle products that follow a “take, make, dispose” model of production (“Circular Economy”). However, the dwindling reserves of our finite resources paired with our growing world population make this economic model unsustainable.

A circular economy is a fundamental restructuring of the economy to reward resource productivity and bring about closed-loop cycles of material use. Through initiatives along the entire lifecycle of each product, it keeps natural resources within the economy, working to eliminate waste in order to prevent the inefficient use of our natural resources. Not only does a circular economy have obvious environmental benefits, this model also builds resilient economies and generates growth (“What is a Circular Economy?”).

The Role of Green Taxes

Green taxes have a big role to play in the shift from the current economy to a circular model. Green policies like increasing green taxation on pollution and natural resources, getting rid of environmentally harmful subsidies, value added tax (VAT) reductions, and tax breaks for green initiatives will all begin to place the burden of resource irresponsibility on producers and encourage environmentally friendly resource use and production practices.

The large scale implementation of these policies will provide the perfect economic environment to transition to a circular economy. It will introduce a “pricing system that addresses negative externalities in the pricing and distribution chain” and will thus encourage circular business models. By placing the economic burden on the producers along the supply chain, it incentivizes their responsible resource use. Recycling materials that are already in the system, instead of processing and introducing new raw materials, will become the cheapest option for companies, effectively making firms the driving force behind converting the economy from a linear to a circular model.

It will also create a demand for eco-friendly technology, as businesses seek to design higher quality products (and products that can easily be recycled, re-used, or repaired) and demand better technologies for efficient recycling (or up-cycling) of materials (Anastasio).

Since the circular economy is labor intensive—requiring people to fill jobs in repair, research, development, recycling, and more—“reducing the fiscal pressure on labor” will incentivize employment and cause economic growth (Anastasio, 12). This economic shift, driven by green taxes, which lowers labor costs and increases the cost of natural resources “while re-directing incentives towards greener services and innovation” is a necessary prerequisite for the establishment of the circular economy (Anastasio, 12).

In summary: green taxes are essential drivers in the transition from a linear to a circular economy through their encouragement of efficient resource use, de-incentivizing of pollution, and development of eco-friendly technologies, all on a backdrop of overall economic growth.

Other Benefits of Green Taxes

Green initiatives towards responsible resource use and pollution can take a number of different forms which make them adaptable for the diverse array of countries within the European Union. They include the already mentioned initiatives such as VAT reductions, tax breaks for green initiatives, elimination of environmentally harmful subsidies, and taxation to decrease pollution and natural resource acquirement.

However, they can also be expressed as pay as you throw schemes, deposit refund systems, extended producer responsibility schemes, rewards for environmentally friendly products, or taxes on incineration or landfilling. Through the diverse array of green policy options, countries can pick and choose the right policies for themselves and their existing economies.

Current Barriers to the Circular Economy

Though green taxes in the areas of resource use and pollution are going to be the most effective in enacting a circular economy in the European Union, these areas provide much less revenue for governments than other, more profitable green taxes, such as energy and transportation taxes (Anastasio).

Also, despite high monetary revenue from green taxes, many governments lean away from them because green taxes can cause a reduction in labor taxes (as discussed previously in this paper) and labor accounts for a huge portion of tax revenue for most EU member states—in some cases comprising of more than half the annual total.

The Circular Economy Action Plan also runs into various barriers because of the size and diversity in the coalition of the countries in the European Union. Different states prioritize the environmental fiscal reforms needed to enact a circular economy at varying levels. Currently, countries such as the Netherlands and Croatia lead with progressive green taxes on resources and pollution, but other EU members such as Italy, Portugal, and Austria are slower on the uptake. Because the economies of all EU member countries are so intertwined, failure to present a united front in the pursuit of circular economy hinders the effort on every level.

Case Studies

Two existing examples of successful implementation of green taxes in the context of the circular economy can be seen in the Irish plastic bag levy and the Dutch landfill tax (both cases are featured for further reading on other Green Tax Wiki pages.)

The Netherlands is currently leading the way in the pursuit of a national circular economy with a 2016 strategy allotting 27 million euros to ensure the country will be running completely on reusable raw materials by 2050. Again, “market based instruments that reflect the environmental cost of pollution and resource depletion will be key in the transition” (Anastasio, 15). Other key goals include identifying, and removing, all market incentives that promote the purchase of new items and disposal of old. They are also focusing on “socially responsible purchasing” to investigate “integral life cycle costs, environmental performance, and the social costs during and after the life cycle of a product” (Anastasio, 15) and hold producers accountable for those costs.

Citations

“A European Green Deal.” European Commission - European Commission, European Commission, ec.europa.eu/info/node/123797.

Anastasio, Mauro. The Circular Economy: Practical Steps to Enhance the EU Package . Green Budget Europe, 2016, The Circular Economy: Practical Steps to Enhance the EU Package , green-budget.eu/wpcontent/uploads/GBE-Circular-Economy-policy-briefing-.pdf.

"Circular economy." Wikipedia, The Free Encyclopedia. Wikipedia, The Free Encyclopedia, 2 Apr. 2020. Web. 8 Apr. 2020. https://en.wikipedia.org/wiki/Circular_economy

“What Is a Circular Economy?” Ellen MacArthur Foundation, Ellen MacArthur Foundation, www.ellenmacarthurfoundation.org/circular-economy/concept.