In the 1990s and early 2000s, seven European countries took steps to shift the tax burden from labour to energy and transportation. In 2008, the Canadian province British Columbia began to tax fossil fuel users.

All revenues are recycled through tax cuts on both labour and capital. An additional tax credit for low-income households has made the carbon tax progressive.

Tax reform in low- and middle-income countries

It is widely believed that the governments of many low- and middle-income countries should be aiming to increase the amounts they raise in tax revenue ('domestic resource mobilisation').

According to the World Bank, developing low- and middle-income countries are likely to rely increasingly on tax revenues to finance development objectives: between 50% and 80% of what is required for the SDGs would need to come from domestic resources. 

Given the high unemployment rates, increasing taxes on labour in these countries is not necessarily the best option for increasing revenues sustainably. Taxing the use of natural resources might be a way of 'leapfrogging' tax systems to meet the needs of the SDG era and the development of social protection systems.

Principles for the tax 'evolution'

For a tax reform to be sustainable, it is essential that the impacts are fairly distributed among income groups. Tax systems need to adapt to changing circumstances and provide stability and consistency; also, the communication about tax reform should be open and transparent. Finally, countries should lead by example while seeking international cooperation to enhance effectiveness.

Businesses are leading the change

Over the years, sustainability has become an increasingly important topic in the boardroom. In fact, business leaders are already leading the change in a number of ways, including the following.

1. Advocating climate action and carbon pricing. Since 2014, several major business initiatives in support of carbon pricing have been launched. In 2017, for example, investors with more than $22 trillion in assets urged G7 and G20 governments to act on climate change, including by applying carbon pricing.
2. Applying internal carbon pricing (and sometimes, internal water pricing). In 2017 almost 1,400 companies were factoring an internal 'shadow price' on carbon into their business plans, representing an eight-fold leap over four years. Applying such pricing has been proved to shift investment decisions toward low-carbon options as they become more competitive than polluting options
3.  Developing new business models. Driven by competitiveness and enabled by technological innovations, new business models are emerging in every sector, from energy to pharmaceuticals and financial services.

The circular economy

Over the last few years, the perspective of the circular economy has gained traction: moving away from today’s linear ‘take-make-waste’ industrial model to a carbon-neutral and regenerative model in which products are 'made to be made again'.

In this way, finite resources and materials are not wasted, and businesses can add value over and over again by applying business models such as repair and maintenance services, recycling, remanufacturing and refurbishment.

Several governments (including China, Germany and France) as well as the European Union have adopted the circular economy as a policy goal. Businesses - large and small, and in every sector - have started to explore innovative circular business opportunities. IKEA, for example, has started to repair and re-sell its own furniture and has announced its goal of being a fully circular business by 2030.

Tax systems should encourage, not hold back circular business models

There is a catch, though. Circular business models tend to be more labour and knowledge-intensive than linear models, as they revolve around providing services with products and innovation. When customers return a product this triggers a chain of customer service, handling, sorting, quality monitoring, cleaning, repair and modification.

In addition, to develop new materials and production processes, companies need to invest in ambitious research and development efforts. Circular business models require innovation, customisation and a different level of customer service than the 'business-as-usual' selling of mass-produced products.

When pollution is tax-free or even subsidised, and labour costs are high, businesses face a barrier to scaling up a circular business model. As most studies on the circular economy conclude, reducing labour taxes and increasing green taxes will be key to achieving the circular business ambitions set by governments and businesses.