Financial Means to Motivate the Reuse of Materials

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Our current economy is a linear one. That means we extract stuff out of the Earth, use that stuff to make other stuff, use the stuff as little as possible, and then dump that stuff into the environment to contaminate it. Whether in a big hole in the ground, by the side of the road, into a river or lake, or into the ocean. Now, considering that there are limited and finite quantities of the stuff we extract from the Earth, and our environment is getting more contaminated and degraded, this doesn’t really seem like the best long-term strategy.

On the other hand, the idea of a circular economy is that we make stuff, use that stuff as long and as much as possible, and when we are done with that stuff we take it apart and reuse what it’s made of to make more stuff, with as little new stuff as possible. With this strategy we conserve our supply of finite materials and we contaminate our environment far less.

Let’s not get too deep into the reasons and rationale for transitioning to a sustainable circular economy, because this episode is about HOW to get businesses to start reusing materials. How do we motivate companies to use recycled materials and take back and reuse their own products? How do we motivate them to ensure that their own products are easy to take back, disassemble, and reuse or recycle?

There are a few materials that get recycled and reused, such as steel, aluminum, paper, etc, but the vast majority of materials are never reused and simply disposed of. The mining, extraction, transport, processing, and more transport of raw materials from all over the world generates huge amounts of greenhouse gas emissions, toxic waste, and other forms of pollution, as well as many health and social issues for the associated regions. Reusing raw materials can save a large amount of energy, greenhouse gas emissions, pollution, and expense. For example, recycled steel uses around 60-74% less energy to produce than virgin steel. Recycled aluminum uses 95% less energy!

Clearly there are advantages, but it isn’t happening at a high enough rate. How can this trend be changed?

Obviously the motivation has to be monetary, financial. Nothing motivates a company like money. The Federal corporate tax rate in the United States is 21%. The idea I came up with is to allow a percentage of the corporate profits to be at a lower percentage, based on the percentage of raw material purchases and capital expenditures for things that are made from circular materials.

In addition there is an added benefit for taking back and reusing/recycling their own products, but more about that later.

So, as an example, let’s say a company has $100,000,000 in profits. At the normal tax rate their taxes would of course be $21 million. If 20% of their purchases are for circular materials, then 20% of their profits, or $20 million, would be taxed at the lower rate (15% for example) instead of 21%, saving them $1.2 million. If somehow all of their purchases were circular, then their taxes would only be $15 million, saving them $6 million.

Now, there is pre-consumer recycling and post-consumer recycling. Post-consumer means it has already been sold to, and used by, a regular end-user/purchaser like you or me. Pre-consumer means it is still inside of the manufacturing chain and hasn’t actually been sold to an end consumer yet, like waste products from a manufacturing process. So far, businesses are at least somewhat good at reusing materials, because there is a good financial incentive to do so. They can either sell their waste material to another company to make money from it, or at the least they can let another company have it, if only to save on disposal fees. Post-consumer is where things really break down. Companies don’t have large financial reasons or motivations to figure out how to get their material back once end consumers are done with it, so most of it simply gets thrown away. We should give some incentive for pre-consumer reuse, but the main incentive should be for post-consumer recycling. So, let’s say that their pre-consumer reuse percentage will be taxed at 19%, and their post-consumer reuse will be taxed at 15%. That gives companies a large financial incentive to get creative and figure out plans/methods/schemes/whatever for getting ahold of post-consumer material, and to prioritize it whenever possible. We’d also need them to prove that they are actually using all of that recycled material in new products.

To ensure that some company doesn’t just keep buying super expensive recycled raw materials just to get their percent higher, it would likely have to be some combination of a percent of the dollars spent on raw materials, and the percent of the raw materials by mass.

A further goal that came to my mind was that added benefit I mentioned earlier of not only encouraging them to purchase circular materials, but to take back their own products and reuse as much of those products as efficiently and cheaply as possible. Who knows better what the product is made of, and how to disassemble it, and can reuse the materials? To that end, if they take/accept back their own products to recycle them, or reuse the parts if possible, the amount of the old product that they are able to use in new products will count as the full COGS (Cost of Goods Sold) for the current price of those materials against their raw material purchase percentage.

For example, if that company sold products with a COGS (Cost of Goods Sold) of $100, and they are able to take those products back at the end of their life and reuse/recycle 50% of the product, then they will be able to apply $50 for each of those products taken back against their Circular material expenses, no matter how cheaply they get acquire and reuse them.  If they are able to reuse that material at a cost of only $20, but they get to apply the original cost $50 to their circular materials expenditures, then they will be applying $30 more for those materials that they are actually spending on the reuse. If they are able to accept 10,000 of those products back at that same percentage and cost, then they would be able to apply $500,000 against their circular raw materials percentage, even though they actually only spent $200,000. They will also be free to keep improving and refining their processes of reuse. Maybe they can get the cost down to $15, $10, or even $5, all while increasing the percent they are using. The higher the percent reused, and the lower their costs for reusing it, the bigger the benefit, because more of their profits will taxed at a lower rate.. In the same way as above, this percentage may also have to be a combination of dollars and mass to make it more fair and equitable.

This tax break, through two different methods, could be a powerful financial incentive for corporations to not only purchase more circular material for their raw material inputs, but to develop the strategies and methods necessary to take back their own products and reuse them as completely and cost effectively as possible.

By Eric Sparks, 2024