Market Based Instruments usher in the circular economy in a timely way

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. 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.

This article explores how to use price signals to steer firms’ buying behaviour in a way that keeps the economy stable. Market-based instruments are financial mechanisms that steer price signals to guide the behaviour of firms and markets in general.

What not to do

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. 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 be substituted. The same goes for recycled materials being substituted for extracted ones.

Add a progressive charge on virgin material and distribute it to all taxpayers alike. (Fee and dividend model.)

As proposed by 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.

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.

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.

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