Taxes are key to transition.

There is a broad consensus regarding the importance of fiscal policy and the tax system as a fundamental tool for promoting transformations aimed at meeting environmental challenges. However, the proliferation of new, specific, and relatively marginal taxes with environmental objectives is proving to be a failure. Their modest results have fallen far short of expectations and fail to mitigate the serious environmental problems affecting the planet and society today. Furthermore, the capacity to even collect these taxes has decreased over the years.

It is increasingly evident that the inherited fiscal architecture of the past reinforces the unsustainability of the linear economic model. The transition towards a circular economy implies systemic changes that affect all aspects of economic life and require implementation of a policy mix that integrates a wide range of policies and instruments. The question is, what kind of changes in the tax system can effectively contribute to this transition? Systemic change towards CE must be accompanied by systemic change in the architecture of the tax system. However, here we suggest the need for a strategic roadmap that sets out a sequence of gradual, step-by-step changes that allow for major but feasible changes in the short term, clearly oriented to the objectives of long-term architectural change.

The strategic proposal, which can be implemented in the medium to long term, is based on the idea of prioritizing taxes on non-renewable resources (“Georgian taxes”) and eliminating or reducing the tax on renewable resources (including labor, which is considered the most renewable resource). Alternatively, a general and transversal tax could be created that reflects the combined value of all the externalities associated with each product or the chain of activities involved in its production, from the extraction of the raw material to consumption. Favorable tax treatment of renewable versus non-renewable resources would change relative prices in favor of the former, giving economic agents direct incentives to change towards a circular economy and sustainability. This radical shift towards circularity in the fiscal architecture would entail replacing current large taxes—designed within the framework of the linear economy and beneficial to it—and introducing new types of circular tax with great collection capacity.

When introducing radical structure changes to the tax system, powerful barriers will inevitably arise. Defining and refining policies, then gaining minimum international consensus among relevant countries, is a long and arduous social and policy process. With such formidable obstacles to overcome, these ambitious proposals could suffer the same fate as their green economy predecessors have since the 1990s.

Given the urgency of the serious environmental challenges we face, waiting is not an option. It, therefore, seems reasonable to propose changes to the current tax system that are feasible and viable in the short term and that will foster the transition towards a circular economy and sustainability. The starting point is an essentially dysfunctional fiscal framework, given the principles on which large taxes are based and because many tax benefits are available to key sectors of the linear economy that have a high environmental impact. In moving towards a circular economy, the first steps should focus on ambitious reform and make use of available tax expenditure measures, including the many tax benefits, exemptions, deductions, and allowances applicable to existing large taxes (e.g., VAT, income tax, corporate tax, etc.). Due to the current huge presence of tax expenditure in the general tax policy (mainly with nonenvironmental purposes) they could be reshaped and used to promote the transition towards a circular economy, in line with the proposals discussed above. First of all, we must do away with all environmentally harmful subsidies and tax benefits and replace them with a tax treatment favorable to all circular and sustainable activities.

Such a transition would be reinforced by measures to facilitate the shift from the current taxation of labor-related activities to taxation of resources, non-renewable energy, and GHGs. This would substantially increase the coverage of the environmental tax base and progressively increase the applied tax rates.