The case for a ‘circular’ tax break

To come up with a “disruptive innovation”: that’s the goal of Romain Ferrari, director of Fondation 2019 (2019 Foundation). Under the auspices of the Fondation de France (Foundation of France), since last July Fondation 2019 has been developing a toolkit with the aim of embedding the circular economy in our daily lives, on a mass scale.

At the heart of the foundation’s work - along with that of the French Environment and Energy Management Agency (Ademe) and businesses such as SEB, Samsic and Magencia – is the concept of circular VAT. The key is to internalize the externalities that arise from the production of a product, in order to promote those that have the least negative impact. The externalities evaluated include pollution, as well as health and social problems linked to the production and use of the product in question.

This circular VAT could take the form of, for example, a reduction in VAT of 10 points for a product that was designed following circular economy principles. Thus, a frying pan containing recycled materials—which is currently more expensive than a ‘standard’ frying pan—would become the cheaper option.

The idea began to take root following on from an observation: “a number of products that we need in our daily lives, when they are produced well—in keeping with the circular economy paradigm shift—are more expensive than standard products”, Romain Ferrari explained.

“Our goal is to ensure that these eco-responsible products are given back a profit margin, that will be shared between the consumer and the producer,” he added.

The biggest challenge is to convince government authorities to take on a tax expenditure, without seeing direct revenue from it. While the effects of pollution are measured over a five, ten or fifteen-year period, the State has to present its budget each year. “So we want to present authorities with evidence that these products create less externalities than standard options, that this reduction therefore leads to lower public expenditure, through the decrease in pollution and environmental damage,” Romain Ferrari argued. “This reduced public expenditure could justify the lower tax rate.”

For Romain Ferrari, what makes this study so significant is that it offers government authorities a trustworthy set of tools. The director of Fondation 2019 is aware that this type of analysis is not new. “Life cycle analyses have been carried out for the last 20 years. Our work is to develop the same thing, but for externalities,” he said.

If the subject seems highly specialized, in reality it is one of capital importance. “In today’s context, with oil prices too low and with too great a supply, we are seeing a loss of competitiveness in recycled materials, which are being sold cheaper than they were ten years ago. Hence the idea of stepping in to correct these market failures,” Ferrari maintained.

All the more necessary, according to Ferrari, since he doesn’t expect any radical measures to come from politicians, or from Emmanuel Macron, despite the latter having referred to the circular economy as a “new economic model.” “Recycling or the sorting of our waste – that’s not circular economy. We need to cut back and have the same product with two times less,” Ferrari said.

The work of Fondation 2019 is aligned with a wider ecological economy movement, which doesn’t seek to make the environment fit into the economy, but to rather to adapt the rules of the economy so that environmental issues are taken into account. “We need to change the transactional market, to adopt new rules. We won’t be punitive: these rules will be nice so that consumers love them, manufacturers make the best of them, and politicians tentatively reach out their fingertips to grab them. Without realizing that it’s going to initiate a disruption. It’s our touch of Trojan Horse,” Romain Ferrari said, with a smile.