Economic Instruments for the Circular Economy in Italy

6. Instruments for consideration for reform or introduction

Abstract

Building on the assessment of economic instruments currently in place in Italy presented in Chapter 5, this chapter explores opportunities for instrument uptake and reform. The chapter focuses on virgin material taxation on construction aggregates, landfill and incineration taxes, fiscal incentives for circularity and reuse, pay-as-you-throw and deposit-refund systems. The chapter concludes with cross-cutting recommendations for improving the use of economic instruments to promote the circular economy, including the need for regular monitoring and evaluation and insights on multi-level governance.

6.1. Introduction

The analysis contained in the previous chapter suggests that there is a large potential to enhance the use of economic instruments in Italy to promote the transition to a sustainable and circular economy. Stronger price signals can help steer production and consumption towards more sustainable choices, boost markets for secondary raw materials, and promote green innovation and infrastructural investments. This chapter delves into identified opportunities for instrument uptake and reform, including virgin material taxation on construction aggregates, landfill and incineration taxes, fiscal incentives for circularity, pay-as-you-throw (PAYT) and deposit-refund systems. This chapter concludes with cross-cutting recommendations on the improved use of economic instruments for the circular economy, including insights on multi-level governance.

6.2. Virgin material taxation on construction aggregates

The construction sector plays a crucial role in the Italian economy. However, it also has a large and growing impact on the demand for raw materials and on non-municipal waste generation. Baseline projections from OECD modelling indicate that both output and material intensity of the construction sector are expected to increase significantly by 2050, driving up materials use (see Chapter 2 for further details). The reliance on virgin materials in the construction sector exposes the country to supply risks and volatile commodity prices, potentially slowing down economic activities and hindering Italy’s competitiveness. Recently, the National Recovery and Resilience Plan (NRRP)-funded infrastructural projects and tax deduction measures for renovations in buildings (e.g. the “Superbonus 110%” tax credit) exposed the country’s reliance on domestic extraction and imports of virgin materials, as well as its vulnerability to supply shocks. At the same time, the country will need to continue to enhance its efforts to reduce construction and demolition waste (CDW) and increase recycling in order to meet the increasingly stringent EU targets on waste recovery and recycling.

Italy could consider the introduction of a virgin material tax primarily aimed at discouraging the extraction of quarried construction aggregates and accelerating the shift to secondary alternatives. Quarrying generates important environmental impacts across Italy’s regions (MiTE, 2021[1]). During the extraction phase, adverse consequences include air, water and noise pollution, land use, loss of biodiversity, and impacts related to the movement of heavy machinery. In addition, some adverse effects may manifest only after the extraction phase is finished, for example, hydrological impacts or soil erosion.

Although virgin material taxes are more challenging to implement than royalties, taxes may contribute to a drop in the demand for virgin materials. Experience from selected OECD countries suggests that taxation can have an impact despite the relatively low price elasticity of construction aggregates, especially when implemented in combination with landfill taxes and other supporting measures. Furthermore, revenues have been used to finance funds with community or environmental aims, such as recovering abandoned quarries or carrying out environmental rehabilitation (Söderholm, 2011[2]). Potentially, revenues could also be used to finance incentive mechanisms aligned with higher circularity and sustainability, such as support for secondary materials.

The potential environmental and economic impacts of the introduction of virgin material taxes in Italy would need to be evaluated. To date, virgin material taxes have been confined to commodities with relatively limited international trade due to concerns about disrupting domestic industry with higher material costs (OECD, 2021[3]). The introduction of virgin material taxes might therefore face challenges in terms of political feasibility. Economic impacts, especially on the competitiveness of domestic firms, may be significant under certain conditions. Environmental outcomes may vary depending on various factors, including the tax rate, the enforcement level, as well as the effectiveness of complementary measures in increasing the supply of recycled materials. The impact of taxes on competitiveness may also reduce environmental outcomes, where the tax may lead to the relocation of extraction or production to countries with lower environmental standards.

The literature recommends implementing taxes or fees on construction aggregates in combination with additional policies aimed at increasing the demand for and supply of recycled materials to enhance the positive impacts of the tax on the use of secondary raw materials (Söderholm, 2011[2]). Virgin material taxes alone, often, may not provide sufficient incentives for operators to improve their environmental performance and to substantially increase the supply of recycled materials (Söderholm, 2011[2]). The difficulty possibly lies in ensuring that the full impact of the virgin material tax is transferred down the supply chain to the users of virgin materials. Relevant measures that generate synergies with virgin material taxes include landfill taxes, end-of-waste criteria for CDW and classification of industrial by-products, minimum recycled content requirements, support for selective demolition and improved quality standards for CDW, and enhanced monitoring of waste and controls on illegal disposal.

6.3. Landfill taxes

A reform of the Italian landfill tax will likely be needed to discourage landfilling in favour of recycling, especially in regions where both landfill tax rates and recycling rates are particularly low. Existing practices both at the international level and in Italy’s regions show that higher landfill costs are usually associated with better sorting at source and lower landfilling (Legambiente, 2021[4]). Higher landfill taxes can incentivise the much-needed development of recycling and organic waste management infrastructure, especially when introduced as part of a policy mix (OECD, 2019[5]). The National Strategy for the Circular Economy and the related roadmap (Cronoprogramma) foresees the reform of the Italian landfill tax as well as the removal of environmentally harmful subsidies related to waste disposal, as identified by the National Catalogue on Environmentally Harmful and Favourable Subsidies. This action will also be in line with the ambitions of the revised EU Landfill Directive.

General principles for the reform of landfill taxes in Italy may include the following elements:

• A reform of the instrument at the national level to ensure the presence of minimum disincentives against landfilling. The maximum threshold of EUR 25.82/t, applied only for certain types of waste in selected regions, has not been updated since the introduction of the landfill tax in 1996, losing one-third of its initial value in real terms (REF Ricerche, 2020[6]).

• A continued, progressive increase of minimum landfill tax rates could help to ensure that the instrument continues to provide an effective price signal. The example of the UK Landfill Tax is a relevant one, as its rate has increased steadily since its introduction. The tax helped to internalise the environmental impacts of landfilling, and has contributed to major structural changes in the management of waste. The gradual increase in landfill tax rates could also generate support for the reform of the tax. At the same time, it is important that increases in minimum tax rates are planned in advance, for instance, with an annual escalator, to minimise the risk that revisions of tax rates are delayed or not adequately implemented, and to ensure clarity and transparency for industry and waste management operators.

• The removal of provisions that can be considered subsidies to disposal in landfills. According to Italian legislation, waste disposal is eligible for a reduced value added tax (VAT) rate at 10%. As the VAT reduction applies indiscriminately to the management, storage and disposal of selected municipal and non-municipal waste, it also covers landfilled, unsorted municipal waste. As such, the Ministry of Environment and Energy Security (MASE) (2022[7]) has classified it as an environmentally harmful subsidy.

• The partial earmarking of landfill taxes for investments in waste management (e.g. infrastructural investments, the post-closure costs of landfills), as well as for waste prevention objectives, could be considered to further support progress in the sector. Although there was a commitment to use a share of the revenues to finance infrastructural investments for more virtuous waste management, in practice, only 1% of revenues has been allocated to such investments (European Commission, 2021[8]). The earmarking of tax revenues for waste management should be considered carefully, as it also has drawbacks and could lead to risks for revenue dependency and lock-in effects.1

• In terms of complementary measures, it is important that higher landfill tax rates are introduced in parallel to infrastructural improvements. Past experience from EU countries shows that landfill (and incineration) taxes are effective where alternative options are available to waste operators, i.e. where there is a generally well-functioning system of separate collection and infrastructure for recycling and composting. The gradual introduction of additional landfill bans on certain types of waste can also be seen as creating a stronger policy mix (OECD, 2019[5]).

6.4. Incineration taxes

Italy applies a tax on incineration without energy recovery that is equal to 20% of the standard rate applied to landfilling. The existing tax does not apply to incineration with energy recovery. As the incineration tax does not provide meaningful incentives to prefer more virtuous waste disposal options, MASE (2022[7]) has classified it as an environmentally harmful subsidy. Its detrimental impact is expected to be minimal overall as this disposal option represents a negligible amount of non-municipal waste (and the country does not have incineration plants without energy recovery for municipal waste).

Italy could consider a reform of the incineration tax to include waste-to-energy facilities so as to prioritise recycling over incineration, and also to favour better-performing energy recovery options. This intervention could be especially relevant in regions that need to substantially reduce their use of landfilling and thus ensure that foreseen landfill restrictions and higher landfill costs do not drive waste operators towards investing solely in incineration capacity to replace landfilling. An incineration tax could help to prioritise waste prevention and treatment options that sit higher in the waste hierarchy. It could also help to mitigate the potential drive to invest in incineration capacity to replace landfilling and thus prevent potential lock-in effects in the long term. The introduction of an incineration tax might also help to transition towards the inclusion of waste-to-energy plants in the EU Emissions Trading System market, foreseen in the coming years.

Incineration taxes may include an energy tax on the use of fossil fuels or a tax on fossil CO₂ emissions from the incineration of waste, as was the case in Sweden (Sahlin et al., 2007[9]). For comparison, Table ‎6.1 shows the price of landfill and incineration for combustible waste in a number of OECD countries and regions.

Table ‎6.1. Comparison of the price of landfill and incineration for combustible waste (various years)

	Landfill (EUR/tonne)			Incineration (EUR/tonne)			After-tax cost differential
	Cost	Tax	Total	Cost	Tax	Total	(incineration as % of landfill)
France	65	16	81	117	4	121	149
Catalonia (Spain)	34	12	46	50	9	59	128
Netherlands	20	17	37	71	13	84	227
England (UK)	26	101	127	109	0	109	86
Austria	70	87	157	125	8	133	85
Sweden	114	54	168	59	0	59	35
Wallonia (Belgium)	70	76	146	70	10	80	55

Source: calculated from data on page 95 of the “Comparative study of the taxation of waste disposal in Europe” (ADEME, 2017[10]) from (OECD, 2022[11]).

The report recommends that Italy continue to work on reforms to remove identified environmentally harmful subsidies applying to waste disposal operations, to maximise incentives for waste prevention and treatment options that sit higher in the waste hierarchy. As identified in the Italian Catalogue on Environmentally Harmful and Favourable Subsidies (MASE, 2022[7]), currently, a reduced VAT rate of 10% that applies indiscriminately to all waste operations, including landfilling and energy recovery. Any additional revenues from the reform of EHS could be dedicated to interventions that promote waste prevention and higher material recovery.

6.5. Fiscal incentives for circularity and reuse

Several countries employ fiscal measures to promote behaviour aligned with circularity and waste prevention, such as changes to the fiscal scheme to enable donations of unsold goods. Measures currently existing in Italy align with practices across EU countries (as summarised in Box ‎6.1 on food waste prevention). In Italy, corporate tax credits or reductions in the municipal waste tax (for non-households) incentivise donations of surplus goods, especially food, thereby contributing to waste prevention. However, there may be opportunities for the enhanced use of fiscal incentives to support secondary materials (as emphasised by Italy’s Strategy for the Circular Economy), as well as to promote refurbished, remanufactured and second-hand products.

Box ‎6.1. Food waste prevention measures across EU countries

Reducing food waste has large potential for reducing the environmental impact of food production and consumption. EU Member States have committed to meeting Sustainable Development Goal (SDG) target 12.3: to halve per capita global food waste at the retail and consumer levels and reduce food losses along production and supply chains by 2030. Selected EU countries have introduced a range of fiscal measures to reduce food waste along the value chain, including:

• VAT exemptions. Like Italy, other EU countries (e.g. Austria, Denmark, Germany and Slovenia) regard the monetary value of the donated food to be close to its “best before/use by” date and thus low or zero, equating to a very low or no VAT payable on the donated food (irrespective of the original value of the food product).

• Corporate tax credits. Some countries offer corporate tax credits on food donations. For instance, in France and in Spain, 60% and 35%, respectively, of the net book value of donated food can be claimed as a corporate tax credit that can be deducted from the corporate taxes due.

• Tax deductions. Other countries offer an enhanced tax deduction where donors can deduct more than 100% of the value of the food at the time of donation. For instance, Portugal has in place an enhanced tax deduction of up to 140%, if the food is used for a social purpose, limited to 0.008% of the donor’s turnover.

Beyond fiscal incentives, selected countries have introduced regulations to mandate the donation of unsold food and other goods. For instance, since 2016, France bans the destruction of food products that are still fit for consumption, and obliges retailers to create partnerships with charity organisations to donate unsold food products. Accompanying measures may include the creation of an anti-food waste hierarchy (e.g. in France), support for civil society initiatives, as well as soft measures, such as the obligation to offer doggy bags in commercial catering (e.g. in France) and environmental awareness campaigns.

Source: (European Commission, n.d.[12]).

In Italy, corporate income tax (CIT) incentives were recently introduced specifically to stimulate the circular economy and the shift to secondary raw materials and other recovered materials (discussed in section 5.4). Despite the recent implementation of these measures, it is important to assess their effectiveness in achieving the set objectives, also to better inform the instrument design. Some of the opportunities for improvement in the use of these instruments are further discussed in Chapter 10.

Italy may wish to consider fiscal measures and other policy instruments that could more systematically incentivise sustainable and circular production and consumption patterns and waste prevention. While measures currently in place are likely to contribute to waste prevention (as discussed in Chapter 5), they focus on encouraging donations to charities, food banks and other not-for-profit organisations. There are limited price signals for enterprises operating in the profit-seeking economy to shift to activities such as reuse, repair, leasing and second-hand sales. Moreover, it is possible that this differentiation may disadvantage businesses such as second-hand shops, as social enterprises can sell donated goods at low prices, while the former generally have higher labour costs and do not necessarily benefit from VAT reductions. Italy could consider the relevance of introducing tax relief measures in support of:

• Sales of second-hand, remanufactured or refurbished goods: to mitigate economic barriers and move towards a higher preference for used goods in consumer purchasing decisions. The measure would also contribute to supporting emerging business models that are based on leasing, refurbishing or second-hand sales.

• Repair activities: to increase the affordability and availability of repair services and boost the uptake of reuse as a significant option in consumer decisions concerning old, used products (Milios, 2021[13]). Repair services are particularly labour intensive and small-scale activities, often involving local shops and micro-enterprises. The measure would therefore help to enhance the competitiveness of repair businesses as well as create jobs.

Some OECD countries have implemented reduced VAT rates on labour-intensive repair activities. Italy could evaluate the relevance of extending the list of goods and services to which a reduced VAT applies, to incentivise circular practices. VAT reductions and other fiscal incentives are implemented by some countries to incentivise repair and reuse both at the national or sub-national level (as presented in Box ‎6.2). In Italy, the VAT standard rate is set at 22% and super-reduced and reduced rates are provided for specific lists of goods and services (e.g. 4% for essential goods, 5% for selected social, health and educational services, and 10% for certain construction services).2 In the EU, the scope for environmental differentiation of VAT rates remains limited by EU rules governing VAT structure (Directive 2006/112/EC).3 Products and services that are considered less harmful for the environment, including repair activities, have recently been added to the list of goods eligible for VAT exemptions or reductions (European Commission, 2021[14]).

VAT reductions could potentially incentivise changes in business and consumer behaviour, but several important considerations would need to be taken into account in their design and implementation. The environmental outcomes economic impacts of VAT reductions would need to be carefully evaluated, as well as any distributional impacts. Furthermore, differentiated VAT tax rates may create new opportunities for tax evasion by misreporting sales at a lower tax category, and thus sharply increasing administration and monitoring costs, both for enterprises and tax authorities. The relevance of VAT reductions to promote circularity and the potential associated drawbacks are further discussed in Chapter 9 (for the example of products with recycled content).

The economic and environmental impacts of tax incentives may strongly depend on the presence of complementary regulatory, economic and information-based measures. A recent assessment of Sweden’s repair/reuse tax relief highlighted the importance of increasing public awareness about repair opportunities and their related environmental benefits, as well as adequately disseminating the existence of tax reduction measures to citizens (Dalhammar et al., 2020[15]). For measures aimed at incentivising second-hand sales, accompanying interventions might be needed to minimise the risks of rebound income effects (i.e. consumers buy more goods with the same budget) and substitution effects (i.e. second-hand goods do not replace the acquisition of new goods, with consumers buying additional goods). Complementary measures may include measures targeted at promoting longer lifespans for products, either at the production level (e.g. through measures promoting eco-design or bans on the landfilling/incineration of unsold merchandise) or by disseminating best practices among consumers (for instance, wash and care instructions for textiles).

In this sense, the integration of new initiatives into existing structures could potentially facilitate implementation, reduce costs and increase awareness by stakeholders. For instance, as France intends to do by introducing reuse and repair funds within existing EPR schemes (as already discussed in Box 5.2 in Chapter 5). The incorporation of reuse and repair targets, as well as of modulated fees for durability requirements, could be considered for potential introduction in the context of existing EPR schemes (including the EPR scheme for textiles currently in the implementation phase).

Beyond fiscal incentives and modulated EPR fees, other opportunities include: municipalities taking advantage of reductions in the municipal waste disposal tax and the full incorporation of waste prevention objectives in regional waste management and prevention plans. Furthermore, there is scope for the full integration of waste prevention objectives in public procurement specifications, as is already the case for donations of surplus food in catering services.

Box ‎6.2. International experiences with measures to promote reuse and repair

VAT reductions for repair services have been introduced in Sweden, Belgium, Ireland, Luxembourg, Malta, the Netherlands, Poland, Slovenia, Finland, and the Czech Republic (the latter in 2020, but discontinued in 2024). In Sweden, a reduced VAT rate (from 25% to 12%) applies to the repair of bicycles, shoes, clothes and other textiles since 2017. In addition, 50% of the labour costs of repairing large appliances are deductible from personal income tax, up to a maximum of KR 25 000/year (EUR 2 385), or KR 50 000/year (EUR 4 770) for people over 65 years old (European Environmental Agency, 2019[16]). Since labour income taxes are high in Sweden, this measure has positively altered the relative attractiveness of repair versus replacement.

Other countries have introduced other tax relief measures and incentives, either at the national or local level, to reduce the labour costs of repair. In Austria, a repair scheme was set up to reduce the costs of repair services, which is often very labour intensive. For instance, in the city of Graz, residents can apply for small grants covering 50% of the labour costs of repair, up to an annual maximum of EUR 100 per household.

Flanders: a success story of integrating reuse shops into the regional materials management policy

Flanders, one of the three regions of Belgium, is among the best performers in the EU in terms of waste management and recycling. Since 2016, with the approval of an updated waste plan, the region has aimed to move beyond waste management to effectively prevent waste. The plan included waste reduction targets as well as a reuse quota of 7 kg per inhabitant to be achieved by 2022. As of 2019, the Flemish region achieved reuse amounts of 33.3 kg per capita for furniture, electrical and electronic equipment (EEE), textiles and household goods, cumulatively (Delanoeije and Bachus, 2020[17]).

The setting of reuse targets in the Flemish waste prevention policy is, so far, recognised as a key element in driving this change. The creation of a federation of recognised thrift/reuse shops (‘Kringloopwinkels’ or ‘Kringwinkels’) was also key. The network provides support to reuse shops in the form of regular quality auditing and training programmes, or help with marketing campaigns, hence contributing to guaranteeing minimum quality standards for the products sold at reuse centres (OVAM, 2015[18]). Across Belgium, a reduced VAT rate applies to sales in all reuse centres.

Source: (Reeuse, 2017[19]).

6.6. Pay-as-you throw systems

As discussed in Chapter 5, pay-as-you-throw (PAYT) systems, which charge households on the amount of their mixed waste, can generally help reduce the amount of residual waste generated by households, thereby reducing local waste management costs. Although PAYT is already common in municipalities in many regions in Italy, especially in the North and Centre, there is a large scope to expedite the implementation of PAYT at the national level.

Common challenges to the introduction of PAYT include political-economy barriers nature at the level of local administrations, the financial and administrative burden on the implementing authorities, and the organisation requirements associated with the initial implementation of the system. Measures to promote the wider adoption of PAYT schemes include increased obligations to adopt PAYT systems, economic incentives and other supporting measures. An effective monitoring and enforcement system will be required to limit illegal waste dumping as a response to the PAYT scheme, preceded by effective awareness raising campaigns to educate households on the “why and how” of waste separate collection.

In the case of Italy, enhanced technical and financial support to municipalities, as well as local cooperation, may help spur the transition to PAYT systems, especially in small municipalities where PAYT implementation costs tend to be disproportionally high. A gradual implementation of the system may also help to achieve higher environmental outcomes once the system is accepted by the community. Strong political will at the regional level, including in regional waste management plans (“Piani Regionali di Gestione dei Rifiuti”), can be pivotal in adopting PAYT models at the local level. Obligations and economic incentives can also support the implementation of PAYT, as implemented by Emilia-Romagna4 (obligation to implement PAYT and economic incentives) and Lazio5 (regional law mandating the implementation of PAYT systems).

Accompanying soft measures, such as information, awareness-raising and behaviourally informed measures, may substantially enhance the effectiveness of PAYT systems. Informing citizens and businesses on the rationale behind PAYT and the environmental benefits of sorting waste collection can more effectively change their sorting behaviour. Increased awareness of the impacts of waste could also generate changes in consumption patterns towards habits that are better aligned with waste prevention. The use of interventions informed by behavioural sciences could promote more virtuous household behaviours and drive improvements in municipal waste sorting.6

6.7. Deposit refund systems

Deposit Refund (or Return) Systems (DRS) are employed in several OECD and non-OECD countries to ensure high collection rates and the quality of specific end-of-life products, currently mostly for beverage packaging. A DRS requires consumers to pay a deposit on the item at the point of sale, which is refunded when the customer returns the item or packaging to a collection point. As such, a DRS provides consumers with an economic incentive to return a product or product packaging in a high-quality condition to appropriate collection points instead of disposing of it in mixed municipal solid waste, fly-tipping or littering (Laubinger et al., 2022[20]). DRS most often apply to beverage containers, as well as products that would otherwise be costly or hazardous if mixed with general household waste, such as batteries.

Although common up until the 1960s and 1970s in Italy, the use of DRS is today limited to specific commercial cases, usually for the supply of beverages to households or companies. In 2017, the Ministry for the Environment, Land and Sea (MATTM, currently known as the Ministry of Environment and Energy Security, MASE) launched a year-long voluntary pilot scheme to test DRS for specific types of food packaging (Decree 142/2017).7 In 2021, the Simplifications Decree opened up new opportunities for the implementation of DRS by introducing economic incentives for “deposit return systems” and “systems for the reuse of packaging” (Decree Law 77/2021).8 It foresaw the introduction of DRS for plastic, glass and metal beverage containers. However, the legislative process for the development of specific criteria and objectives for deposit refund systems is currently on hold. Recent reforms made to EPR schemes (Leg. Decree 116/2020)9 could also help create a favourable environment for the introduction of DRS in combination with EPR schemes for specific waste streams.

As also mentioned in Chapter 3, the revised EU Regulation on Packaging and Packaging Waste is expected to introduce rules for the mandatory introduction of deposit refund schemes for single-use plastic beverage bottles and single-use metal beverage containers by 1 January 2029 to ensure the separate collection of at least 90% of these packaging materials. In addition, at least 40% of these containers should be made available as reusable packaging, with a system for reuse available to consumers.

The introduction of DRS for packaging could offer opportunities to improve resource efficiency and contribute to better recycling rates. Typically, packaging design and implementation are complex in terms of investment and operational costs, but DRS can be highly effective in improving the quality and quantity of collected materials. The Reloop Platform (2020[21]) estimates that European countries with DRS in place achieve the highest collection rates: from 85% in Sweden (84% for PET bottles and 86% for metal cans) to 98% in Germany (99% for metal and 97% for PET containers). When combined with existing EPR schemes, they can contribute to increasing collection and recycling rates, enabling the creation of reuse systems, providing incentives for eco-design, as well as generating opportunities for economies of scale (Laubinger et al., 2022[20]).

According to a recent study (Eunomia, 2023[22]) for Associazione dei Comuni Virtuosi and A Buon Rendere, the introduction of a DRS in Italy would increase the collection rate of PET bottles from 73% to 94%. This would help achieve EU targets for the collection and recycling of single-use plastic bottles, save around EUR 72 million of annual local waste management costs for municipalities, and reduce littering in the environment by around 30%, among other benefits. Other studies commissioned by ANCI (Associazione Nazionale Comuni Italiani) and CONAI indicate that a DRS for plastic bottles in Italy would face significant implementation costs, amounting to EUR 1.4 billion of investments, or EUR 579 million of annual management costs (550% more than in the current EPR system). They also point to the limits of DRS, including required changes in consumer habits and a lack of incentives for waste prevention (Di Stefano, 2023[23]).

In general, several important considerations would need to be taken into account in the design of DRS for beverage bottles, including (Laubinger et al., 2022[20]):

• A DRS should be implemented with quantifiable targets to ensure that the system works towards high collection rates.

• Deposit fees should be set at rates sufficiently high to provide a price signal to return the item. They should also be updated periodically to mitigate inflation and the erosion of incentives over time.

• DRS can be implemented as voluntary schemes or be mandated by regulation. Various DRS can be set up by industry, especially where there are sufficient economic incentives to recover products or packaging for reuse or recycling. Moreover, policy intervention can ensure that a DRS is implemented despite the lack of a business case, for instance, where the value of recovered materials or products is relatively low, or where policy makers intend to prevent littering.

The introduction of DRS should be co-ordinated with existing EPR schemes. As a DRS often targets high-value materials and isolates this from the remaining waste stream, this can have financial implications for the incumbent producer responsibility organisation (PRO) that are deprived of recycling revenues. Furthermore, the PRO may still be responsible for the costs of unreturned items that end up in mixed waste or are being littered. These issues can downgrade the support of stakeholders for the adoption of DRS policy. DRS policy should establish methods for arbitration between producers, DRS operators and PROs so as to address instances of overlap or compensation for services rendered.

6.8. Cross-cutting recommendations

6.8.1. Overcoming challenges in the reform of economic instruments

The present analysis calls for a rethinking of the country’s use of economic instruments with a view to making it more coherent and effective in delivering on the ambitions of Italy’s Strategy for a Circular Economy and enabling progress on sustainable development goals and climate commitments. The effective design and implementation of any wide-ranging reforms in the use of economic and fiscal instruments for environmental policy will face a number of challenges.

• Limited empirical evidence to inform policy design on less-tested instruments. While the use of economic instruments in environmental policy is not new, there is still only limited experience with the use of fiscal incentives for behavioural change by firms or consumers aligned with circular economy policy objectives. This implies that there are limited comparative lessons to be drawn from the experience of other countries, as well as less data to evaluate the economic and environmental impacts of the policies under consideration. This especially applies to measures that have been less thoroughly tested up to now, such as corporate tax credits, to support recycled materials.

• Political economy barriers (especially around environmental taxes). Considerations for the reform of economic instruments will also need to consider potential barriers, such as public acceptability or feasibility. Some degree of negative public perception and industry resistance to fiscal reform is usually expected. The current context of a cost-of-living crisis and deteriorating public finances due to the COVID-19 pandemic and pre-existing strains (OECD, 2022[24]) may be especially unfavourable to the introduction of economic instruments that are likely to raise concerns over economic impacts on consumers and firms (especially environmental taxes).

• Instrument choice. Challenges of a political economy nature may also influence decisions on instrument choice. Experience from OECD countries suggests that the reform and introduction of environmental taxes, such as landfill or incineration taxes, are to be prioritised over the introduction of less explicit instruments, such as ad hoc incentives through the tax code. This is due to the clear price signal that environmental taxes are capable to send consumers and firms to influence their behaviour, while being considerably less complex to administer and evaluate. However, the introduction of environmental taxes often leads to political economy challenges. Any reform will not only require good policy design but also effective policy communication and consensus-building if political acceptance is to be secured (OECD, 2021[25]).

6.8.2. Continue to foster monitoring and evaluation

The regular monitoring and evaluation of economic instruments is critical to inform current reform efforts and to ensure that the instruments remain effective in reaching set objectives in the long term. Better access to reliable data and information on instrument uptake, environmental outcomes and economic costs, as well as administrative and enforcement costs at all levels of government, can improve the quality and effectiveness of interventions.10 In this respect, a useful initiative in Italy is the creation and regular update of the Catalogue of Environmentally Harmful and Favourable Subsidies (EHS and EFS), under the supervision of MASE. Going forward, the expertise that has been created through this exercise could be further leveraged to accelerate the collection, sharing and update of relevant data on the use of economic instruments related to the circular economy at the right territorial scale.

There is a particular need to improve the evaluation of fiscal incentives with links to the circular economy transition that are relatively new in the policy mix and can benefit from less available empirical evidence. As additional information on their use becomes available, improved evaluation of environmental and economic outcomes could improve their effectiveness in reaching set objectives. Ensuring the timely implementation and continuation of fiscal incentives over multiple years would help to send clear and consistent price signals, provide better long-term visibility to economic actors, and enhance opportunities for adequate ex-post evaluation.

There is scope to enhance transparency over the governance of economic instruments and the use of associated revenues (especially at the sub-national level) to promote their role in the circular economy transition, increase the involvement of stakeholders and, more broadly, generate higher public acceptability. A good way of mainstreaming integrity and transparency practices would be to clearly communicate who pays for what for each economic instrument and to inform how revenues collected would be spent and according to which criteria.11 Proactively sharing information with key stakeholders could help secure social buy-in for the underlying policy goals.

6.8.3. Enhancing multi-level governance through improved co-ordination and capacity building

Obstacles linked to multiple levels of governance hinder the effective design and implementation of economic instruments for the circular economy. Economic instruments are often implemented in a fragmented and scattered way across the country, resulting in limited incentives for waste prevention, sustainable waste management and material recovery. The assessment presented in Chapter 5 highlighted a low uptake of PAYT in municipalities in the South of Italy, as well as wide variations in fee rates applied to extractive activities and landfilling. Some regional variation in the implementation of economic instruments does not contrast with the experience of other OECD countries12 and is generally justified in light of different local circumstances. However, some harmonisation would be desirable at the national level to ensure that the economic instruments implemented at the sub-national level are successful. The landfill tax, for example, would require a national level reform to update the rules setting the tax rate, and to introduce minimum requirements in terms of tax design, implementation and the use of tax revenues.

There is also room for clarity and transparency in roles and responsibilities at the different levels of government in the governance of economic instruments for the circular economy. While the Strategy for the Circular Economy foresees the implementation of several economic instruments across the value chain, it does not always identify clear roles, mechanisms and fora that may support their reform or implementation. Cities and regions are only mentioned as members of the Observatory for the implementation of the strategy. The observatory, which monitors the state of implementation of the strategy, could play an important role to support the reform of economic instruments.

There are also opportunities to continue to enhance co-ordination across levels of governments and to clarify the role of sub-national governments. MASE could facilitate co-ordination across local, regional and national levels of government by making the most of existing co-ordination mechanisms. Dedicated spaces, such as regular co-ordination meetings and working groups, as well as external initiatives (ICESP, 2022[26]; Circular Economy Network, 2022[27]), could be further leveraged to gather representatives from national, regional and local levels to share information on the implementation of economic instruments. Continued and strengthened consultations with lower levels of government could help to identify good practices and share lessons learned on the implementation of economic instruments. Collecting this information could provide a good basis for MASE to initiate some harmonisation of economic instruments across the regions. This is particularly relevant given that the views of local governments in public consultations do not always appear to be sufficiently recognised in national decision making (e.g. on the determination of waste tariffs) (ANCI Lombardia, 2022[28]).

Building capacities at scale remains key, as capacities of local governments vary across the country. Capacity building initiatives and trainings, such as those that were carried out within the CReIAMO PA programme (now concluded), remain crucial to identifying and mitigating capacity gaps in the design and implementation of economic instruments. The presence and regular update of guidelines for lower levels of government are also beneficial to facilitate their implementation. Future activities could focus on the mapping of the capacities of regional and local authorities related to the design, setting, implementation and monitoring of economic instruments so as to shed light on where capacity development efforts would be most beneficial.

Raising awareness on the potential of economic instruments could enhance their uptake, effectiveness and acceptability. According to the Eurobarometer survey, 55% of small and medium enterprises (SMEs) in Italy were not aware of any financial incentives in government programmes that supported circular economy-related activities (European Commission, 2016[29]). Although 41% of SMEs were aware of incentives, they were unsure of their nature or had not used them. Furthermore, two-thirds of SMEs, that had implemented a circular economy, reported not using any external funding (European Commission, 2016[29]). Better communicating the objectives of financial incentives, both with stakeholders and the general public, for example, through awareness raising campaigns on the use and functioning of existing fiscal incentives, could improve their uptake.

References

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[28] ANCI Lombardia (2022), Delibera ARERA in materia di gestione dei rifiuti, https://anci.lombardia.it/dettaglio-circolari/201911121221-delibera-arera-in-materia-di-gestione-dei-rifiuti/.

[27] Circular Economy Network (2022), Circular Economy Network, https://circulareconomynetwork.it/.

[15] Dalhammar, C. et al. (2020), Promoting the Repair Sector in Sweden.

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Notes

← 1.  OECD (2019[5]) notes that earmarking tax revenues for waste management can sometimes create complications. There is a risk that earmarking revenue creates dependency on funds from harmful activities and locks-in inefficient spending commitments. For example, in Estonia, where municipalities are dependent on landfill taxes to fund their waste management activities, the decline in landfilling rates have resulted in significant budget shortfalls.

← 2.  Presidential Decree No. 633 of 26 October 1972 “Establishment and regulation of value added tax”.

← 3.  Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax.

← 4.  Regional Law 16/2015 “Provisions in support of the circular economy, reduction of municipal waste generation, reuse of end-of-life goods, separate waste collection and amendments to Regional Law No. 31 of 19 August 1996 (regulation of the special tax for the landfilling of solid waste)”.

← 5.  Regional Law 12/2016 amending Regional Law 27/1998.

← 6.  Zoli and Congiu (2024). Individual behaviour and circular economy policies: opportunities in Italy.

← 7.  Law Decree of 3 July 2017, No. 142 “Regulation on the testing of a deposit-refund system for specific types of packaging intended for food use, pursuant to Article 219-bis of Legislative Decree No 152 of 3 April 2006”.

← 8.  “Semplificazioni” Law Decree of 31 May 2021, No. 77 “Governance of the National Recovery and Resilience Plan and initial measures to strengthen administrative structures and accelerate and streamline procedures”.

← 9.  Legislative Decree 116/2020 on waste and packaging (amending Leg. Decree 152/2006) implements: i) Directive (EU) 2018/851 amending Directive 2008/98/EC relating to waste; and ii) Directive (EU) 2018/852 amending Directive 1994/62/EC on packaging and packaging waste.

← 10.  Some countries have established clear roles and responsibilities for the monitoring of environmental policies, for instance, in Japan, the Government Policy Evaluations Act (Act No. 86) of 2001 clarifies the role of each ministry involved in policy evaluation, and describes how it should be carried out (OECD, 2020[31]).

← 11.  A good example is provided in France where the Ministry of the Economy and Finance and the Ministry of Public Action and Accounts have dedicated a section on their website to explaining the benefits and use of taxpayer contributions (OECD, 2021[30]) À quoi servent mes impôts? (What are my taxes for?) https://www.economie.gouv.fr/aqsmi.

← 12.  For instance, Japan applies a landfill tax on industrial waste in only 27 of 47 prefectures and in one city (OECD, 2019[5]).