Market Based Instruments could usher in the circular economy
Let’s face it: if renewable solutions were cheaper for firms to use, they would. This is how price signals function to steer the behaviour of firms. For the circular economy to function, price signals should favour circular products and production methods. When the economy is performing to requirements it is circular. That is when, in other words, it needs to make better business sense to install circular and renewable energy infrastructure, and to install and use infrastructure that uses recycled materials. Without that, the linear economy — one that inputs extracted materials and outputs materials as waste — will continue to be the modus operandi of the profitable firm.
Sounds like a no-brainer. However, as one of my favourite sayings goes: theory is wonderful and shiny while reality is messy. Where to actually intervene in the system has kept many a theorist up at night.
Enter MBI. Market-based instruments are financial mechanisms that steer price signals to guide the behaviour of firms and markets in general. One specific kind of instrument, dynamic surcharges with repayment into the economy, are the brainchild of people like Anders Höglund of the Swedish Sustainable Economy Foundation (TSSEF.se) and coming into being among other things as Canada’s Carbon Dividend.
Let me give you the basic tour. As product prices to customers, and competition between firms, is driving present practices the best place to start is with product prices for therein lies a whole toolkit of opportunities at the disposal of central banks and government authorities.
The product cost price equation reveals the opportunity
ProductCost= Labour + Energy(Renewable + Fossil) + Materials (Recycled + VirginExtracted)
From the equation above it follows that the relative prices of renewable energy compared to fossil will affect the choice of energy source and the end-price of the product. If fossil materials are cheaper then they will dominate the mix. So will too the price of circular materials over extracted materials affect sourcing decisions. If renewable energy is more expensive to utilize then fossil energy will substitute it. The same goes for recycled materials being substituted for extracted ones.
As proposed by Anders Höglund from the Swedish Sustainable Economy Foundation, a progressive extraction surcharge (or import surcharge) on for example fossil fuels could be levied when the material enters the economy. This surcharge is raised at regular intervals. This is a process of discovery; the levy is raised until sustainable products reach price parity with unsustainable alternatives.
Price discovery: by raising the levy on fossil fuel introduction into the economy you find out the cost to not use them when fossil fuels are finally abandoned. That price may be much lower than many expect.
A surcharge on waste leaving the firm could have the same effect, assuming the surcharges are carried over to the final consumer price. This makes sustainable products competitive. We can represent this in the equations below.
ProductCost_Linear=Labour +Energy(Surcharge+Fossil) + Materials (Surcharge+VirginExtracted) + WasteSurcharge
ProductCost_Circular= Labour + Energy(Renewable)+ Materials(Recycled)
ProductCost_Linear + Surcharge>ProductCost_Circular
However, introducing the fee would make the overall range of product offering more expensive to the end-user.
ProductCost_Linear+ Surcharge> Normal Market Price
ProductCost_Circular>Normal Market Price
To redress the imbalance, all or most of the fees levied should be returned to tax payers as a dividend. Guaranteeing the repayment of a sufficient fraction of the dividend in equal amounts to every tax payer by law will be an important step in an Environmental Fiscal Reform and an essential component for majority support in a functioning Circular Economy.
All money collected from levies must go back into the economy — a dividend to all taxpayers. Otherwise you just drain the economy of money.
The equation would thus look like this:
ProductCost_Circular -Dividend=Normal Market Price
The repayment is needed to secure that the majority of the tax payers will always receive more dividend (repayment) each month than their increased cost of living due to the fees levied to correct the price signals and to create a sustainable economic incentive structure.
The way things work, those with most money buy the products and services that do the most damage. So surcharges of the type TSSEF proposes are actually ways to make “the polluter pay”. Calculations show that 70% of people actually get relatively more money in their pocket with this type of reform. That makes Canada’s Carbon Dividend a really good name for it.
So there you have it: influence the price of undesirable products, services and behaviours by surcharging them at source, and raising the surcharge until the market responds and performs to requirements. Channel the money back into the economy to ensure consumers have money to spend to fulfil their needs in a sustainable way.
To find out more about financial instruments for the circular economy see my website. To learn more about the circular economy visit our online academy for free training. Circleeconomy.teachable.com
