A circular economy keeps the value of resources in the economy for longer, extends the useful lifespan of products and reduces waste, offering the prospect of reduced environmental and climatic pressures and increased domestic competitiveness. Italy is one of the leading European actors in the transition to a circular economy. It has one of the lowest levels of domestic material consumption per capita in the EU and has already exceeded most EU targets for the recycling of municipal solid waste. However, Italy could progress even further to decouple economic growth from material consumption, as recently evidenced by the vulnerability of the Italian economy in the face of supply chain disruptions and the high prices of virgin raw materials. The adoption of the National Strategy for the Circular Economy in 2022 strengthened the country’s policy ambition to quickly transition from linear to circular patterns of production and consumption.
Among the envisioned measures, the national strategy calls for a strengthened use of economic instruments to create a more coherent and effective policy mix aligned with national policy ambitions. Economic instruments are widely used across OECD countries to favour more sustainable practices and penalise harmful behaviour, helping to re-orient consumer and company behaviours towards higher environmental benefits, while limiting economic impacts. Although Italy already employs various economic instruments (such as green public procurement, Extended Producer Responsibility and corporate tax credits), there is potential to further internalise negative externalities and strengthen price signals to align consumer and company behaviour with higher sustainability and circularity.
Developed in the context of a collaboration with the Directorate-General for Structural Reform Support (DG REFORM) of the European Commission, this report identifies opportunities for an improved and innovative use of economic instruments to support the circular economy in Italy, including through reforms, enhanced implementation, and instrument introduction. Part I of this report takes stock of the Italian policy landscape and compares it to international practices. It recognises the large potential to strengthen the use of economic instruments and recommends the following options for further consideration:
1. The introduction of virgin material taxation of construction aggregates to strengthen price signals so as to curb primary materials demand and promote the use of secondary materials.
2. The prioritisation of a reform of the landfill tax characterised by a strong co-ordination between the national and the regional level to harmonise and progressively increase landfill tax rates across regions, effectively discourage landfilling and further promote recycling.
3. Continued reforms to remove environmentally harmful subsidies, including those related to the circular economy and waste, such as the reduced value added tax (VAT) rate that applies indiscriminately to waste storage, management and disposal.
4. The introduction of an incineration tax that applies to waste-to-energy facilities to maximise incentives for waste prevention and treatment options that sit higher in the waste hierarchy and prevent potential long-term lock-in effects.
5. The continued implementation of pay-as-you throw systems to help further reduce both the generation of residual waste by households and local waste management costs.
6. Wider support for practices aligned with waste prevention and continued strengthening of Extended Producer Responsibility schemes to support waste prevention through eco-design requirements and the promotion of reuse and repair practices.
7. Continued increases in the ambition of public procurement approaches that promote circularity and green innovation. Innovative strategies may involve a needs assessment, a focus on services and new business models (rather than products), and the adoption of contractual clauses and tender specifications that extend product lifespans.
Part II of this report contains in-depth analysis of a sub-set of instruments that could support the policy goal of reducing demand for virgin materials and shifting to secondary materials. Envisioned environmental benefits include reduced impacts associated with material extraction and lower greenhouse gas (GHG) emissions, in addition to economic benefits to secure the supply of raw materials. As agreed with Italy’s Ministry of Environment and Energy Security, this part focuses on three instruments: virgin material taxation on construction aggregates, reduced VAT rates on products with recycled content (for potential introduction), and corporate tax credits (to strengthen existing measures).
Virgin material taxation of construction aggregates. The construction sector plays a key role in the Italian economy, but its high reliance on virgin materials is associated with significant environmental impacts and concerns about security of supply. A virgin material tax on construction aggregates could help internalise the environmental and social costs of quarrying, mitigate virgin material demand, and promote the shift to secondary alternatives (including from end-of-waste processes), especially in the construction sector. A national framework is important for establishing a harmonised approach, while giving regions some flexibility to adapt to local circumstances. This would include the setting and regular update of harmonised minimum tax rates for each material category at the national level. The report recommends tax rates based on a physical metric (ad quantum), ideally based on both the surface area affected and the extracted volumes. Given that demand elasticity of supply for construction aggregates tends to be low, virgin material taxes are most effective when combined with policies aimed at increasing the supply of secondary materials as well as effective control systems. This is also substantiated by evidence from the use of such taxes in other countries.
Reduced VAT rates on products with recycled content. Reduced VAT rates are often put forward to encourage the consumption of environmentally friendly goods or labour-intensive repair activities. The application of a preferential VAT rate on products with recycled content (in Italy, from 22% to a 10% reduced rate) could theoretically help to lower prices, potentially incentivising both consumers and producers to prefer them over less circular alternatives. However, issues of limited pass-through to consumer prices, an uncertain consumer response, and risks of rebound effects on primary and secondary material consumption could all diminish the expected environmental benefits of the measure. Moreover, implementation would require legislative changes to the EU VAT Directive, as well as information and certification schemes to clearly identify the eligible goods. Furthermore, reduced VAT rates potentially generate significant losses in fiscal revenues, pose higher costs of monitoring and compliance, and potentially lead to distributional impacts. The cost effectiveness of this measure should therefore be carefully considered against alternative instruments (such as direct subsidies).
Corporate tax credits to promote recycled content. Italy implemented corporate tax credits to support preferred (recycled and compostable) materials in packaging and products as recently as 2021 and has since strengthened or discontinued some of them. Uptake by the industry differed greatly for introduced measures, but the brevity of their use prevents a more detailed assessment. Sustaining measures over multiple years would provide firms a better opportunity to factor them into their long-term investment plans, as well as help enhance data collection and ex-post evaluation. Market studies and industry consultations could inform the design of tax credits, notably, the recycled content threshold and the size of the tax credit, helping to calibrate both in a way that avoids the risk of unintended effects. Progressively tightening requirements over time may also help to ensure that these provide meaningful incentives for firms in the long run. More broadly, as corporate tax credits entail additional costs, their use should be justified by a proven impact on the behaviour of firms and the associated environmental gains.
Based on model simulations, carried out as part of this report, a combination of fiscal incentives (or subsidies) with environmental taxation is recommended to amplify GHG emissions savings and other environmental benefits, while achieving budget neutrality. Taxation can counter potential rebound effects on consumption associated with fiscal incentives or the unintended consequences of material substitution, and overall generate stronger price signals to reduce virgin materials use. Fiscal incentives (such as reduced VAT or corporate tax credits) alone are unlikely to bring about strong economic incentives, but they could serve as “supporting measures” as part of a larger policy mix. Where possible, policies should be based on life cycle metrics to guarantee reductions in environmental impacts.
