The circular economy is good for growth, so why isn’t the Treasury on board? – Inside track

This post was originally published by Business Green.

Keeping materials and products in use at their highest value for as long as possible provides businesses with economic and resource security and saves consumers money.

So why does the Treasury seem so reluctant to get behind the transition?

For more than a decade, Green Alliance and our business partners in the Circular Economy Task Force have built a substantial body of evidence to highlight the significant advantages of a circular economy. As well as cutting carbon emissions, air pollution, negative impacts on biodiversity and water, it offers a host of economic opportunities. Economy wide studies show that a more circular economy leads to growth, potentially significant growth. One found that circular policies could lead to an increase of nearly one per cent of GDP by 2035 while another suggests it could contribute as much as £82bn in gross value added by 2030. Greater ambition to keep valuable resources circulating in the economy rather than going to waste could support more than 470,000 jobs across the country, particularly in occupations that will be suffering from high rates of unemployment over the next ten years or so.

At an individual business level, circular measures can offer a pathway to higher profits. We’ve spoken to ten circular businesses using viable models including reuse, repair and rental enterprises. For instance, the reusable nappy company Bambino Mio says selling reusables increases profitability by 26 per cent compared to disposable products; waste and resource management company SUEZ has a reuse network of 30 shops where, to take the example of a typical wooden chair, returns can increase by 700 per cent compared to recycling; and MAN UK, a company which leases truck fleets, sees margins two to three times greater than conventional manufacturers.

So the businesses are making more money but consumers are also saving money. Other organisations we interviewed pointed to the savings their customers make by opting to go circular: Library of Things, a rental hub for household items, says its users have collectively saved £640,000 since its inception, and Zipcar, the UK’s largest car club, says its members save around £300 per month compared to privately owning a car.

The economic potential is clear. But, our economy is dominated by and skewed towards a linear ‘take, make, use and throw’ mindset, which makes it hard to fully benefit from circularity. At the moment, the costs of environmental harm are not factored into product prices. That means high quality, longer lasting products are undercut by cheap, poor quality goods designed for single use or a short lifetime.

The businesses we spoke to highlighted the challenges they’ve faced trying to take off and grow. Circular models can have longer payback periods and need higher initial spending than linear businesses, so attracting investment can be hard. Incumbent, large scale linear businesses that consumers are used to are hard to compete with. The circular companies we interviewed agreed the sector needs more support from the government, and from the Treasury in particular, to help them move from the periphery into the mainstream and realise its full economic potential.

Circularity should be a cross departmental priority, as Chris Skidmore MP observed in the independent review into net zero commissioned by government. It is fundamental to climate action, building a resilient economy and protecting the environment. Given the Treasury’s important tax and spending responsibilities, and its role in co-ordinating policy across government, it is hard to see how the circular economy can grow unless the Treasury does more to support it.

But currently, the Treasury is not only not supporting circular business models but actively working against them, as the tax system is strongly geared towards a linear economy. VAT, for instance, has several perversities that discourage circularity. Full VAT is charged on repairs in the UK, in contrast to many European countries which offer reduced rates. No longer bound by EU VAT rules, the UK could actually go further and zero rate repairs to kickstart the industry. Renovating a house for energy saving is charged full VAT at 20 per cent, whereas new build is zero rated.

The Treasury could change the game and help more businesses, like those we spoke to, take off and grow, as well as helping larger businesses transition. As a first step, it should resolve these tax obstacles, but it should do more to redress the imbalance, including by setting up a kickstarter fund to support circular businesses starting out and larger businesses making the transition, and counter decades of investing almost exclusively in waste management.