Ellen Macarthur Foundation. Rethink the future

Point of view: Walter Stahel on taxation

• by Walter Stahel
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• 23 Aug 2011
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Taxing renewable resources is against the logic of a sustainable society. Human labour – work – is a renewable resource which has not been recognised as such by politicians so far. The result of not taxing work will be an acceleration of the transition to a circular economy, which is of a low-carbon and resource-miser nature. The impacts of such as transition on the present economy are summarised in this paper.

Walter Stahel is an architect, economist and one of the founding fathers of industrial sustainability. Credited with having coined the expression “Cradle to Cradle” in the late 1970s, Stahel worked on developing a “closed loop” approach to production processes and created the Product Life Institute in Geneva more than 25 years ago.

The following ideas will be presented by Stahel in detail to a wider public at the World Resource Forum in Davos, Switzerland, on 20 September 2011.

Introduction

Sustainability is built on economic, ecologic and social pillars and constitutes a dynamic balancing by society in exploiting the environment, creating economic wealth and fulfilling social needs.

Most political actions to increase sustainability in industrial countries so far have focused on specific (isolated) issues linked to safety, health and the environment, such as the prevention of accidents and waste as well as the reduction of toxicity or greenhouse gas (GHG) emission.

This paper proposes a solution which builds on synergies between the social, economic and environmental pillars of sustainability. The proposed change – exempting all renewable resources from taxation – represents a huge lever for a holistic change towards a more sustainable economy.

In reading the following ideas, the reader should ban such filters as “but we have never done things this way” in his mind and consider the impact of these ideas on the coming generations.

“Eating people is wrong” is a statement which most people will support and most will adhere to ; “taxing renewable energies is wrong” sounds equally right for most people.

Many governments subsidise such renewable resources as biomass, solar and wind energy. Yet human labour – work – is another renewable resource which, when intelligently used, has traditionally been taxed in most countries, but when wasted, is supported by State welfare.

A need for appropriate sustainable taxation

In a sustainable economy, taxes on renewable resources including work – human labour – are wrong and should be abandoned. The resulting loss of state revenue could be compensated by taxing the consumption of non-renewable resources in the form of materials and energies, and of undesired wastes and emissions. Such a shift in taxation would promote and reward a circular economy with its local low-carbon and low-resource solutions, which are inherently more labour-intensive than manufacturing as economies of scale are limited.

A circular economy increases employment because less than a quarter of the labour input to produce a physical good is engaged in the fabrication of basic raw materials such as cement, steel, glass and resins, while more than three quarter are in the manufacturing phase. The reverse is true for energy inputs: three times as much energy is used to extract virgin or primary materials as is used to manufacture products from these materials. Substituting reused components and goods for primary materials therefore use less energy but provide more jobs (cf. Stahel, Walter R and Reday-Mulvey, Genevieve (1976) The Potential for Substituting Manpower for Energy. Report to the Commission of the European Communities, Brussels.)

Changing the tax focus will by itself foster the transition to a more sustainable circular economy

• taxing the consumption of non-renewable energies instead of taxing labour will promote a circular regional economy instead of a linear global one: increasing costs of fuel-based transports by road, air and sea will favour local and regional solutions.
• taxing the consumption of non-renewable materials instead of labour will promote the local reuse of goods, components and molecules and thus reinforce the competitiveness of the value-preserving business models of a circular economy.

To summarise, a shift in taxation from renewable to non-renewable resources will reinforce the emerging trend towards a circular economy based on stock management instead of throughput, especially with regard to the material (physical) part of the economy. This trend is already fuelled by developments in markets, legislation and technology:

• Industrial economies are moving from scarcity to abundance,
• for consumer goods, the number of saturated markets where the number of new products sold annually approaches the number of used products scrapped is increasing in industrialised countries; more production no longer increases the stock available for use. Examples are the markets for cars, mobile phones and many other consumer goods.
• In capital goods, retrofitting (technological updating) of existing plants and infrastructure is cheaper and quicker than building new ones, and promoted by such manufacturers as ABB for power plants.
• The 2008 European waste directive has reconfirmed waste prevention as first priority, and has defined the re-use and service-life extension of goods (i.e. a circular economy for goods) as the main strategies to achieve waste prevention.
• Some new technologies use scarce materials in applications where molecules cannot be recovered economically through recycling, such as rare earths elements (REE) used in nanotechnology. Component reuse may then be the most feasible option.

Value preservation and stock optimisation thus become a second economic policy in addition to the industrial economy‟s creation of value added through production flow optimisation. A circular economy which allows maintaining the performance and value of manufactured capital can become the most profitable option for many types of goods.

The trend to a circular economy is further strengthened by business models built on retained ownership, such as:

• operational leasing by manufacturers, selling goods as services (e.g. Xerox selling customer satisfaction),
• public procurement based on buying services instead of hardware (e.g. U.S. administration),
• fleet managers such as railways and airlines selling (mobility) services.

These business models of a functional service economy are in many fields becoming the preferred option – witness the rapid rise of operational leasing and Private Finance Initiatives (PFI) for capital goods, and sharing schemes for consumer goods, such as car sharing (selling mobility).
Selling the performance of goods instead of the goods themselves involves the:

• internalisation of the costs of waste and of risk, which in the traditional production- consumption-waste society are carried by the state and the taxpayer,
• reduction of waste volumes as well as public expenses and an increase of disposable consumer incomes,
• maximisation of product durability, a modular system design for goods based on component standardisation and ease of maintenance, and
• creation of an in-house circular micro-economy by manufacturers and fleet managers to maximise profits.

The effect of taxing non-renewable resources instead of work on economic actors selling the utilisation of goods, such as railways, is balanced as it lowers their labour costs but increases their operation (energy) costs.

Re-marketing goods through e-bay and other second-hand markets has developed into a new "industry‟ over one decade. But few companies are as advanced as Lufthansa, which in its in-flight magazines offers used aircraft seats for sale. “Caring” increasingly influences producer and consumer attitudes in the circular economy, partly replacing “Fashion” as the driver of the consumer society.

Technological progress in a circular economy picks up speed because manufacturing and reuse activities are symbiotic. The circular economy is complementing manufacturing, not replacing it: quantum leaps in technology related to the manufacture and use of goods will continue to ensure that society draws the highest profits from innovative solutions; marginal progress, however, will be faster and more efficiently integrated into existing goods through technological upgrading services and retrofits.

If the public moneys spent in the 2010 cash-for-clunkers initiatives in over 20 countries had been used to remanufacture and technologically upgrade, or replace, the used engines, a similar result for the CO2 emissions would have been achieved with:

• billion of tons of new resources not consumed,
• billions of tons of related embodied GHG emissions, mining waste (the “rucksacks”) and water consumption avoided,
• billion of tons of waste prevented, and
• thousands of skilled jobs in local and regional workshops maintained

Similar results have been shown in research on the remanufacturing and technological upgrading of the first-generations of the high-speed trains of the German Bundesbahn, the refurbishment of major buildings and the remanufacturing of commercial aircraft.

Today’s economic policies, which are still based on the logic of the industrial revolution to increase throughput in order to increase GDP, give neither incentives nor rewards for the prevention of waste and emissions. The Kyoto Protocol, for instance, gives rewards for the reduction of GHG emissions of major polluters of the industrial economy but not for the prevention of the same emissions in a circular economy.

In a sustainable economy, a better use of existing wealth will become the preferred option for economic reasons; the environmental benefits are a result, not the driver. Business models to exploit the potential of locally available resources, both human work and skills and such physical assets as buildings and equipment (manufactured capital) will boost local economic opportunities, many of which are already today competitive with global manufacturing activities.

Designing and implementing a system of taxation which supports and incentivises sustainable solutions aiming to increase efficiency, sufficiency and prevention may be the biggest challenge for the policymakers of this century. Incentives for prevention have been used in the field of health and safety but not in the field of resource efficiency and emissions into the environment.

Why not taxing human labour, a renewable resource, makes sense

In industrialised countries, taxing the consumption of non-renewable resources and such undesirable results of the economic activity as emissions and waste, instead of labour, will give economic actors clear and powerful incentives to design more sustainable business models.

The resource angle

Employment is at the heart of the social pillar of sustainability. Human labour is the most versatile and adaptable of all resources, with a strong but perishable qualitative edge:

• it is the only resource capable of creativity and with the capacity to produce innovative solutions.
• human skills deteriorate if unused – continuity of work and continued learning are necessary to maintain and upgrade skills. A person who has been unemployed for a few years risks becoming unemployable.

Governments should give priority to human labour as a resource because a barrel of oil or a ton of coal left in the soil for another decade will not deteriorate, nor will it demand social welfare.

The government angle

Economic success does not depend on income taxes. Florida and Texas, the new power- houses of the U.S. economy, do not tax labour income; other nations and states have economic problems despite heavily taxing human labour.

Working people is a desire for nation states. Governments invest on average ten years in education and vocational training to teach young people marketable skills, and wasted human resources are of a high cost to governments.

A special case is “black labour” (editor’s note: cash-in-hand), a non-negligible part of the work force accounting for a double-digit percentage of many national GNP. Not taxing human labour would greatly reduce incentives for ‘blackmarket’ workers.

The economic angle: skills, stock, utilisation value, productive work

The circular economy is a high-quality world: Stradivari instruments and expensive watches do not live forever by design, but through periodic remanufacturing; retrofitting infrastructure and equipment is best done by silver workers with the knowledge and know-how of past technologies and skills necessary to maintain performances and value of physical assets.

Equally important for the circular economy are stock statistics. Quantity and quality of the existing stock of manufactured capital are largely unknown, Input-Output models for stock inexistent. Basic statistical tools for stock would greatly improve the overall efficiency of the circular economy.

The utilisation or replacement value of the circular economy will replace exchange value as central notion of economic value. Liability insurance, which today is based on depreciated value independently of the actual quality and use value of the goods involved in claims, could be among the sectors most hit.

Productive work in economic theory is limited to manufacturing; a surgeon operating a patient‟s leg is classified as useful work. In the new circular economy, value-preserving work in a low-carbon resource-miser context will become the truly productive work.

Conclusions

The transition towards a circular economy has started; China has even made the circular economy the centre of its economic policy. But adapting framework conditions including taxation to sustainability, such as not taxing renewable resources, lags behind.

In the past, reuse and service-life extension were often strategies in situations of scarcity or poverty and led to products of inferior quality. Today, they are signs of good resource husbandry and smart management.

The economic change described will come simply through the acceptance of the fact that taxing human labour is wrong, because work is a renewable resource !

About the author…

- Visiting Professor, Faculty of Engineering and Physical Sciences, University of Surrey.
- Guest Lecturer, Tohoku University, Japan
- Founder-Director of the Product-Life Institute- life.org, Geneva (since 1982)
- Vice Secretary-General and Head of Risk Management Research, The Geneva Association, Geneva (since 1986)
- Author of The Performance Economy, 2006 / 2010, Palgrave MacMillan,

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