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INSIGHT: Taxing strategies to drive green growth

Economists have always questioned the viability of long-term economic growth on the grounds that finite resources could not be exploited indefinitely. 

From Malthus’ concerns regarding agricultural limits of supply in the late 18th century, to the Club of Rome’s Limits to Growth report in the 1970s, and the current concerns about climate change and natural resource exhaustion (see graph above), the idea that continued growth may lead to economic and ecological devastation has been well documented.

It is now recognised that to satisfy both the economic growth agenda and environmental sustainability, further efforts should focus on enabling so-called green growth, where the environmental impacts of resource consumption are decoupled (see box 1, below) from economic growth. 

For this to occur, many challenges and barriers need to be addressed. Hence the concept of a circular economy, where materials cascade through several lifecycles before being reintroduced safely back into the biosphere.

In order to form an accurate understanding of the level of circularity in the UK economy and what drives it, the flow of materials between lifecycle stages needs to be accounted for.

My research, aided by MRW market data, looked at the flow of two materials which are critical to the UK economy, paper and steel, and aimed to develop a clear understanding of the market-based economic drivers of recovery and utilisation rate for each. 

The aim was to predict the effects of introducing certain interventions, and to offer policy makers evidence from which to introduce mechanisms to account for the environmental externalities associated with resource consumption (see box 2, below).

Although similarities were observed between the factors driving the recovery and utilisation rates of paper and steel, the study highlights key differences between what drives their material flows. For example, only the paper recovery rate is influenced by landfill tax, and there are two key reasons why. 

First, the market for scrap steel was functioning well before the introduction of the landfill tax. Steel also has a comparatively high value compared with paper and so a greater level of recovery solely based on price dynamics would be expected.

Second, steel represents only a small proportion of the waste stream – a result of the strong scrap metal market. Even with taxes, it may still not be economical to separate and recover the remaining steel lost to landfill. 

On the other hand, paper comprises 26% of the municipal waste stream by mass and an escalating tax on landfill will affect payments heavily, thus driving further increases in paper recovery.

As might be expected, the natural resource price was found to drive the utilisation rate for both materials. As the rate concerns the proportion of scrap to virgin resource used in new production, the ratio between the prices is likely to affect the supply and demand curves of each. 

It follows that if the pricing of a natural resource is more volatile than scrap because of its exposure to a higher number of external influences, utilisation rate is likely to be affected positively by a rise in raw material price.

The study also has implications for environ-mental policy makers. As increasing natural resource prices were found to drive the utilisation rate of paper and steel, it would be worthwhile for policy makers to explore the effects of implementing a natural resource tax to complement landfill tax.

A pigovian tax of this type, intended to correct inefficient market outcomes, would further encourage the use of secondary materials. In combination with the landfill tax, it would lock materials into repeated cycles of use within national borders. 

As natural resource prices are predicted to rise further in the near future, the tax level could be manipulated to stimulate investment in utilisation capacity when natural resource prices are low, and allow the market to dictate circular economic development when resource prices are high (because of the increased savings of secondary in comparison with primary materials).

The UK already imposes a levy on resource extraction of aggregates. The Government could consider a natural resource tax like that launched in China in 2011, or similar to that proposed by the Green Alliance covering materials used not only in construction but in everyday items. 

Introducing a resource tax would likely face public opposition, but this could be relieved to a certain extent by ensuring that it is revenue- neutral, whereby income tax would be reduced by the same margin as a tax increase on resources.

The study also exposes strong opportunities for further research. A key finding was that circular economy dynamics depend on the material in focus – there is no single solution to incentivise circular economic development. 

The Government acknowledges that landfill tax as a pricing instrument is unlikely to be effective for all materials. So it is important to study more materials in an attempt identify and distinguish the fundamental drivers behind each.

1: Definitions

Green growth is defined as the situation in which the rate of reduction of environmental impact per unit of GDP exceeds the rate of increase in GDP, so that the absolute level of environmental impact declines over time. In the case of materials, this implies that the rate of resource consumption per unit of GDP (otherwise known as resource efficiency) decreases faster than the GDP growth rate, so that the absolute consumption levels fall. This scenario is also called absolute decoupling. Circular economic development is measured using recovery rate - the proportion of material captured from the waste stream in an appropriate manner to be reprocessed as a secondary resource, and utilisation rate - the proportion of secondary material used in new production.


2: Resource consumption

Waste is generated as a by-product, or an environmental externality of production and consumption. In economic terms, this is known as a market failure and arises when the social and environmental costs of dealing with waste are not incorporated into the cost of production/consumption. Externalities can be accounted for by introducing market-based interventions such as the landfill tax, which aims to internalise the full cost of waste generation and thus attain economic efficiency.

  • Stuart Clouth is a consultant at Resource Futures in Bristol, where he specialises in waste, recycling and circular economic models. Email: stuart.clouth@resourcefutures.co.uk
  • Data for the project was gathered through numerous sources, including MRW 


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