Blog: Five economic incentives that can revolutionise the fashion sector
Brussels, 5 February 2020.
By Josefine Koehler, Policy Officer at Ecopreneur.eu
In the third of our blog post series about the fashion industry, Josefine Koehler explains different economic incentives that can revolutionarily transform the fashion sector.
Fashion, as part of the textiles sector, is an important part of our economy — in fact, it is the seventh largest economy (if ranked alongside different country GDPs)1. Textiles are the EU’s fourth largest cause of environmental pressures after food, housing and transport2, emitting about 8%3 of global carbon emissions while causing highly negative social impacts as well. Improving on this is all the more relevant since, according to the recent third edition of the Circularity Gap Report, the overall global uptake of recycled materials has decreased to 8,6% — a step back of 0,5% with respect to 20184.
The fashion sector, therefore, is looking for strong and powerful interventions that re-shape production, distribution and consumption patterns while closing the loop of materials. In the experience of the 3.000 “eco-preneurs” in our network, this begins with tackling the lack of demand for circular fashion. To attract more consumers, economic incentives are crucial.
The overall intention of economic incentives, such as CO2 pricing, is to solve a major market failure in our economy: external costs along the value chain resulting from placing products on the market are not included in the price. Capturing these impacts through “true pricing” will make circular fashion and services cheaper and fast fashion more expensive. This will automatically boost the demand for circular products and services, thus solving one of the major obstacles for a circular economy. Economic incentives have been found most effective in making industry move. They can, for instance, increase the value of reused or recycled materials and contribute to creating clean cycles.
In the following, I will break down the five most important economic incentives.
1. Circular Procurement accelerates the demand.
As the European Commission defines, circular procurement sets an approach to “the purchase of works, goods and services that seek to contribute to the closed energy and material loops within supply chains, whilst minimising, and in the best case avoiding, negative environmental impacts and waste creation across the whole life cycle”5.
Ecopreneur.eu welcomes the recent proposal from the European Commission to make Green Public Procurement (GPP) mandatory. Still, experience shows that more is needed to change the practice of public procurement beyond a formal legal “re-branding” into „green“. First, municipalities, governments and also companies have to commit to actually applying new procurement criteria and investments favouring circular choices, resulting in collaborative learning-by-doing with exchange of best practices and developed criteria. Second, the public sector accounts for only 14% of the procurement market, which is why large companies should be invited to participate in this joint exercise as well. This way, a strong demand-pull from both the public and private sectors can be created which supports innovation for circular fashion and enables, through cost reductions, economies of scale.6
In the Netherlands, The Green Deal Circular Procurement, lead by several public and private organisations, involves a €100 million commitment from municipalities, governments and companies to pilot circular procurement, facilitating implementation and the removal of obstacles in regulation. Flanders, Paris and other regions are following this example and boosting the demand for circular products and services.6
2. Extended Producer Responsibility (EPR) incorporates all associated environmental costs in the product price.
EPR is a strategy to add all environmental externalities occurring during the product’s life cycle to its market price. Taking the Higg Index or the carbon footprint as a metrical base for a Product Environmental Footprint (PEF), so-called eco-modulated EPR fees can be calculated and directly considered in the price. These costs will have to be paid by the producer of the end product, typically the brand owner or the company that determines the specifications of garment or footwear, either by producing it themselves or by procuring on price and specifications. In other sectors, such as batteries, packaging, tyres or electronics, EPR is a proven instrument already. The schemes work because of all partners in the value chain, the producer has a key position to design for recycling and minimisation of waste.6
EPR is a privately operated scheme, backed by the government. Thus, this element of self-control allows the industry to design tailor-made schemes fostering innovation. High EPR fees on garments lacking circular design and high costs on waste management, will reflect their true price and increase the demand for — in the best case, cheaper — circular alternatives.6
Since 2006, France has an EPR scheme for end-of-use clothing, linen and shoes, besides 13 other sectors, implemented. Since then, the collection and recycling rates of textiles have tripled7. At the latest by 2025, all EU member states are required to have a separate collection for textiles8. This European requirement can be taken on by building on lessons learned from the French textile EPR scheme as well as other functioning EPR schemes from other countries.
3. A tax shift from labour to resources makes linear products more expensive and circular ones cheaper.
In OECD countries, the total public revenue from labour taxes, including personal income taxes, payroll taxes and social security contributions, is on average ten times higher than from green taxes on primary resources and environmental impacts9. Increasing the tax on resources and environment while decreasing it on labour is called the “tax shift”. While any package of measures can and will not be budget-neutral for every sector and for consumers with different consumption quota, the goal is to reach a reasonable and fair effect across different income groups6. The NGO Ex’tax has developed tools that demonstrate the vast range of options available to governments to shift the tax burden, ranging from CO2 pricing, water and fossil fuels to waste streams and pesticides9.
Realising a tax shift on a national level will be key to achieve circular ambitions set by government and businesses10. For companies, a tax shift will solve a major barrier: the lack of demand. In addition, it will bring following three advantages: First, as with EPR, fast fashion products will become more expensive than circular products and services, which will make latter ones more competitive in price on the market. Second, consumers will have more money to consume, but will pay more taxes if they choose linear products. And third, the reduced costs on labour enables companies to hire more labour for design, eco-innovation, repairs, services, etc. In particular, for green SMEs, having their increased labour investment, that is spent into innovation, customisation, more personal attention and customer service, less taxed will enable them to scale-up.
The Netherlands recently introduced a 3 per cent tax increase of the reduced VAT rate11, a tax increase on natural gas and plans to price carbon emissions as well as air travel12, in combination with a reduction of income tax and employers’ costs13. Several member states including Sweden, Germany and Austria have taken similar initiatives that can inspire others to follow and maybe form a “coalition of the willing”6.
4. Low VAT for circular products and services influences the choice of consumers and businesses for circularity.
Reuse and repair are examples of essential activities making the fashion industry more circular. Therefore, lowering the VAT on circular products and services is a key measure towards circular economy. It will bring financial advantages to the consumer choosing circular or to businesses engaging more in circularity. Repair services or second-hand products will become more financially attractive to consumers and businesses. However, the current VAT regime allows VAT reduction for fashion products only for some repairs, reselling or clearly defined social reasons. To use the full potential of VAT differentiation for the circular economy, the EU VAT Directive has to be opened. It is important to note that when the VAT differentiation shows an impact, further products and services will follow to apply it, thereby in itself undermining the states’ tax revenue. At this point, it becomes clear that a lower VAT is only a transition solution until the market and economy are ready for a final circular tax system based on resources and energy use, similar to the eco-modulation of fees (EPR).6
Opening the EU VAT Directive is obviously the task of the EU. However, taxation is a national policy instrument that allows every EU member state to change and differentiate VAT rates. Using this mandate will “nudge” consumers and create a business environment that will invite all companies to deliver circular fashion products and services replacing the linear ones.6
The Netherlands implemented a temporary low VAT on construction which resulted in 25 per cent more renovation projects and an extra turnover of €2.6 billion and a saving of almost 20.000 jobs14 . So far, additional member states, like Luxembourg, Denmark, Belgium or the UK have implemented tax reductions for repair services.15,16,17 Such examples promote starting more pilots for different products in order to demonstrate the potential of VAT differentiation to finally succeed in opening the VAT Directive.
5. CO2 pricing makes materials and products with high embedded carbon more expensive.
Last but not least, I would like to close with an element which gained more attention within the last couple of months: CO2 pricing. We did not work it out explicitly in our Circular Fashion Advocacy report, but it will clearly play a major role in reaching carbon neutrality by 2050. By charging companies for each tonne they emit, the use of renewable energy and a reduction of fossil fuel-based energy consumption are incentivised. Since about half of the global emissions are related to products and materials, this will also have a major impact on the circular transition, which is closely linked with the energy transition18. This is why we need a low-carbon circular economy. Carbon pricing can steer the fashion sector, which is responsible for 8% of the global emissions towards climate neutral production and distribution. Ecopreneur.eu, therefore, advocates higher carbon pricing in addition to the other four mentioned economic incentives to foster the transition in the fashion as well as in other sectors.
Finally, to paraphrase historian Bregman at Davos last year: „Pricing, pricing, pricing, all the rest is secondary.“19
Read Ecopreneur.eu’s Circular Fashion Advocacy report to find out more about how strong circular economy policies will transform the sector.
References
1 McKinsey (2019). State of Fashion 2017. Retrieved from https://www.mckinsey.com/industries/retail/our-insights/the-state-of-fashion
2 European Environmental Agency (2019). Private Consumption: Textiles EU’s fourth largest cause of environmental pressures after food, housing, transport. Retrieved from https://www.eea.europa.eu/highlights/private-consumption-textiles-eus-fourth-1
3 United Nations (2019). Un launches environmental costs of staying fashionable. Retrieved from https://news.un.org/en/story/2019/03/1035161
4 Circle Economy (2020). Circularity Gap Report 2020. Retrieved from https://www.circularity-gap.world/2020
5 European Commission (2017). Circular Procurement. DG Environment. Retrieved from https://ec.europa.eu/environment/gpp/circular_procurement_en.htm
6 Ecopreneur.eu (2019). Circular Fashion Advocacy. Available at https://ecopreneur.eu/wp-content/uploads/2019/03/EcoP-Circular-Fashion-Advocacy-Report-28-3-19.pdf
7 Ernst & Young (2018). Study on the implementation of eco-design incentives in Extended Producer Responsibility. Retrieved from https://www.ey.com/Publication/vwLUAssets/EY-eco-design-incentives-in-epr-jul-18/$FILE/EY-eco-design-incentives-in-epr-jul-18.pdf
8 European Commission (2018). New waste rules will make EU global font-runner in waste management and recycling. Retrieved from https://ec.europa.eu/info/news/new-waste-rules-will-make-eu-global-front-runner-waste-management-and-recycling-2018-apr-18_en
9 Ex’tax (2019). Turning tax into a force of good. Retrieved from https://ex-tax.com/
10 Groothuis, F. ACCA (2018). Tax as a force for good: rebalancing our tax systems to support a global economy fit for the future. Retrieved from https://www.accaglobal.com/vn/en/professional-insights/global-profession/environmental-tax.html
11 NRC (2018). Vliegtaks 7 euro per ticket, ook vrachtvervoer belast. Retrieved from https://www.nrc.nl/nieuws/2018/12/07/vliegtaks-7-euro-per-ticket-ook-vrachtvervoer-belast-a3059863
12 Recycling Magazine (2018). FEAD welcomes proposal on VAT. Retrieved from https://www.recycling-magazine.com/2018/02/07/fead-welcomes-proposal-vat/
13 NOS (2019). Nibud: het leven wordt duurder, maar we gaan er toch iets op vooruit. Retrieved from https://nos.nl/artikel/2267948-nibud-het-leven-wordt-duurder-maar-we-gaan-er-toch-iets-op-vooruit.html
14 Busker, H. (2014). USP Consulting B.V. Monitor: wat zijn de effecten van de tijdelijke btwverlaging voor renovatie en onderhoud in de bouw-, installatie- en groenvoorziening? Retrieved from http://downloads.usp-mc.nl/2014/Belangrijkste_resultaten_2e_meting_BTW_monitor.pdf
15 Ernst & Young (2019). World Business Tax Guide. Retrieved from https://www.ey.com/Publication/vwLUAssets/ey-worldwide-corporate-tax-guide-2019/$FILE/ey-worldwide-corporate-tax-guide-2019.pdf
16 Business.gov.nl (n.d.): VAT rates and exemptions. Retrieved from https://business.gov.nl/regulation/vat-rates-exemptions/
17 UK Government (n.d.). VAT margin scheme. Retrieved from: https://www.gov.uk/vat-margin-schemes
18 Ellen MacArthur Foundation (2019). Complete the Picture: How the Circular Economy Tackles Climate Change. Retrieved from https://www.ellenmacarthurfoundation.org/our-work/activities/climate-change
19 Bregman (2019). „This is not rocket science“: Rutger Bregman tells Davos to talk about tax – video. Retrieved from https://www.theguardian.com/business/video/2019/jan/30/this-is-not-rocket-science-rutger-bregman-tells-davos-to-talk-about-tax-video
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