Economic Incentives for Recycling Industries

Economic incentives are essential to the rapid growth of recycling industries. Incentives should steer economic activity in a direction that causes less environmental impact, encourage consumers to switch to cheaper eco-friendly products, and stimulate production of eco-friendly products through tax reduction (OECD, 2014). Depending on their needs and situation, some ASEAN+3 countries have adopted different approaches to offering economic incentives.

Indonesia aims to give recycling industries fiscal incentives, such as lowering the value-added tax (VAT) from 10% to 5% for recycling businesses. However, this scheme faces a challenge due to its indirect effect on profit. Since VAT will mainly be added to the selling price, recycling industries will have to depend on sales volume to gain higher profits. Demand for recycled products, however, is still low. The scheme is not expected to transform business-as-usual (Novastria, 2019). This kind of incentive should be integrated with other aspects such as ease of doing business, ease of obtaining loans, and business development services.

Indonesia has offered other economic incentives in various schemes as emphasised in Government Regulation No. 46/2017 on Environmental Economic Instruments. The most popular scheme is the green sukuk, which is conceptually similar to the green bond initiated by the World Bank in 2008 to raise funds to support projects related to climate change. However, the green sukuk was established by implementing sharia (Islamic law) financial concepts. Sukuk is the plural of sakk, which means legal instrument, deed, or cheque. It is Arabic for a guarantee certificate for sharia investment (Alsaeed, 2012).  In line with the World Bank’s global effort, the green sukuk aims to solve global warming through renewable energy, energy efficiency, green tourism, green buildings, sustainable agriculture, disaster risk reduction, sustainable transport, waste-to-energy and waste management, and sustainable management of natural resources. Government expenditure in these sectors can be monitored through a national budget tagging mechanism that emphasises performance and outcome (Haryanto, 2018). In ASEAN, Indonesia pioneered green bonds by releasing US$1.25 billion green sukuk in March 2018 (Anggraini, 2018). It is the world’s first sovereign green sukuk.

To support its recycling industries, China has conducted a similar but more advanced VAT initiative. China grants favourable VAT treatment to recycling industries through Circular No. 115 of State Administration of Taxation in Ministry of Finance in 2011. Since 01 August 2011, VAT exemption has been applied to any service related to waste and sludge treatment once certain criteria are met. A 50% VAT refund upon collection is applied to certain self-produced products such as gasoline; diesel fuel; waste plastic or rubber oils; petroleum coke; carbon black; recycled pulp; aluminium powder; recycled materials for automobiles, motorcycles, household electrical appliances, pipes, and chemical fibres; and recycled plastic products produced from waste plastics, waste PVC products, waste rubber products, and aluminium-plastic composite paper packaging materials (China Briefing, 2011). China also has a recycling subsidy policy on the reuse and recycling stage of the product life cycle. Simulations conducted by Chang et al. (2016) show that the higher the subsidy levels applied by government, the greater the recycling activity, thus increasing recyclers’ profit. However, the variation of subsidy levels has no impact on manufacturing variables such as innovation, pollution cost, and profit. Therefore, the upstream side must be optimised. Market factor interventions such as innovation ambience, which attracts manufacturers to use more recycled instead of virgin materials, as well as consumers’ awareness of products made from recycled materials, should be considered. Through interventions, the recycling subsidy policy will encourage not only reuse and recycling but also the entire stage of product life cycle.

In Viet Nam, the recycling industry, which started as small-scale craft villages scattered around the country, refers to family-run low-tech industry and thus lack of social and environmental considerations (P4G Partnering for Green Growth and the Global Goals 2030, 2019). Shifting from a traditional to a sustainable method that complies with environmental regulations is the biggest challenge. Although some large companies have emerged lately, the link between plastic manufacturers and recyclers remains limited. The government should promote recycling industries, including by providing low-interest loans, incentives, and other fiscal schemes. Recycling is mostly governed by the Vietnam Environment Administration under the Ministry of Natural Resources and Environment (MONRE) at the national level, and the Department of Natural Resources and Environment (DONRE) at the city and provincial levels. The government issued Circular No. 121/2008/TT-BTC on Guiding Incentive Mechanisms and Financial Supports for Investment in Solid Waste Management, where Article 2.5 states support for research and development of solid waste recycling, reuse, and disposal technologies. The government commits to support up to 30% of total funding for organisations and individuals who plan to invest in the construction of solid waste disposal facilities. The detailed guidance of the scheme is explained further in Joint Circular No. 2341/2000/TTLT/BKHCNMT-BTC. The government has also enhanced market development for recycled products by issuing Decree No. 19/2015/ND-CP on Detailing the Implementation of a Number of Articles of the Law on Environmental Protection, which encourages the procurement of recycled products. Article 47 states that heads of agencies and units using state budget must prioritise the public procurement of products manufactured by certified recycling industries.