[Report] Financial Policy Interventions for a Circular Economy

POLICY INTERVENTIONS THAT HELP FINANCE THE CIRCULAR TRANSITION

In 2016, The Dutch government set ambitious goals for a transition to circularity, aiming for a fully circular economy by 2050 and halving the use of raw materials by 2030.In a joint policy paper, Sustainable Finance Lab and Circle Economy outline the monumental task that the Dutch government is facing, including the financial bottlenecks that are impeding the circular transition and what the government can do to remedy this.Four bottlenecks that block the financing of the circular transitionFour main bottlenecks that slow down the financing of the circular transition have been identified:

1. Externalities. Producers and users of non-circular products do not pay the full price for the costs they incur, although these costs have a real price tag. At the moment, these expenses are not covered by the polluter, leading to a perceived lower financial return for circular initiatives.
2. Innovation risks and -spillovers. Innovation is indispensable for the circular transition. Innovative products and projects are associated with higher risks, which are hard for investors to calculate. In addition, there is a lack of equity (risk capital) in the Dutch financial landscape to finance innovative circular initiatives.
3. Transition risks and coordination problems. Besides the 'normal' risk of innovation, there are the further increased risks of system innovation in which many parties are interdependent. From product design to retail, the entire value chain must be geared to the circulation of components and materials. This requires a high degree of coordination and thus a system change.
4. Lack of knowledge and wrong incentives in the financial sector. Financial professionals must understand and adapt to the new circular way of working, products, services and business models. In addition, the financial sector has its own dynamic with incentives that  lead to short-term strategies that are often related to the linear system.

A selection of the promising roles for the Dutch government

The government can partially remedy these bottlenecks with the financial instruments at its disposal. With these instruments, the government can influence the innovation and transition system and thus create a better circular climate for businesses.

Inspired by foreign circular policy, and the lessons learned from the energy transition, Sustainable Finance Lab and Circle Economy have identified promising policy interventions that the Dutch government can take. Interventions that are currently not, or only partially, fulfilled. A selection of possible policy interventions include:

• Pricing externalities by increasing existing taxes on waste handling and energy usage, or introducing a Waste Trading Scheme (WTS) such as the Emission Trading Scheme (ETS) implemented for the energy transition. Such a WTS is a trading system that introduces a maximum (ceiling) to waste generation, ideally determined by the capacity of the earth for absorbing (different types of) waste. These tradable rights determine the market price for negative linear external effects. Similar tradable rights can be issued for the use of resources, where the ceiling should be based on the renewable nature of the resource in question.
• Competitions to evoke circular innovation. The government can encourage circular innovative breakthroughs by writing out competitive rewards. There are still a lot of circular challenges to come up with, just think of the enormous challenge we have to prevent, process and ‘circularizing’ plastic.
• Enforce minimum guarantee periods.The government can give direction to market parties through rules and regulations, reducing uncertainty for financiers. For example, in France penalties can be incurred when designing products for 'planned obsolescence'.
• The government as a financier. With the establishment of InvestNL, the Netherlands will have a public investment institution. This too can become an important tool for achieving circular objectives.
• The financial sector itself. It is important to recognize the financial sector itself as an indispensable part of the innovation system. It is crucial that financial professionals have sufficient knowledge of circularity. The government can stimulate circular investment decisions through knowledge development and dissemination of circular business models, circular opportunities and linear risks. The financial sector can be steered towards a more long-term vision through rules and regulations.

For a comprehensive list of circular policy instruments, the associated advantages and disadvantages and the research questions that must be answered in order to come to concrete recommendations, download the report here (In Dutch only).[cta link="https://circle-economy.com/financial-policy-interventions"]Download the Dutch report[/cta]