Squaring the Circle Policies from Europe’s Circular Economy Transition Squaring the Circle Policies From Europe’s Circular Economy Transition SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition © 2022 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org This work is a product of the staff of the World Bank Group. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. 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Cover design: Colorcom Inside pages: Shutterstock and The World Bank ii Contents Acknowledgments vii Chapter 5: The economics of circular economy 85 policies Executive Summary 1 5.1 Assessing the economic impacts of the 86 Chapter 1: Making the case for the circularity 19 circularity transition transition 5.1.1 Data and model overview 86 1.1 Heavy growth 20 5.1.2 Policy options and scenario design 87 1.2 Two planets 22 5.2 Current policy pathways are insufficient to 92 1.3 The promise of circularity 27 achieve significant reductions in primary 1.4 Squaring the circle 31 material use Chapter 2: Progress toward a CE within the EU 33 5.3 CE policies have the potential to deliver 93 absolute material decoupling 2.1 Europe’s dematerialization trajectory 34 5.4 A mix of domestic policy instruments will be 95 2.2 Uneven progress between Member States 35 needed to achieve CE aims 2.3 Material consumption beyond borders 40 5.5 Trade policy can play a role in balancing 98 2.4 Europe’s evolving policy landscape 43 sustainability and competitiveness objectives of CE 2.5 Conclusion 45 5.6 CE policies will have modest growth impacts 101 Chapter 3: The trade implications of the 46 but will accelerate ongoing structural and circularity transition distributional shifts in Europe 3.1 The EU’s dependency on external sources of 47 5.7 Using CE taxes to reduce labor taxes can be 105 materials growth and welfare enhancing 3.2 More stringent EU regulation may result in 51 5.8 Conclusions 106 more leakage Chapter 6 : A policy framework for the 107 3.3 Adverse effects on EU trade partners 53 circularity transition 3.4 Leveraging GVCs toward material-efficient 58 6.1 Institutions 108 production in the EU and in trade partner countries 6.2 Incentives 111 3.5 Conclusions 64 6.3 Information 113 Chapter 4: The role of the private sector: 67 6.4 Financing 115 Opportunities and barriers References 118 4.1 Speed, depth, and scale 68 Annexes 128 4.2 Country characteristics shape private sector 69 Annex 1: Sectoral splits in GTAP-CE database 129 capacity for circularity Annex 2: Regional and sectoral coverage of the 130 4.3 Firm links within and across sectors make for 74 ENVISAGE model used in this study thriving CEs Annex 3: Opportunities and challenges across 133 4.4 Addressing the barriers faced by CBMs 77 sectors 4.4.1 Micro-level barriers 77 Annex 4: Focus Sections 145 4.4.2 Meso-level barriers 79 4.4.3 Macro-level barriers 81 4.5 Conclusions 83 iii SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition FIGURES ES.1 Historical and projected global material 2 2.1 Resource productivity in comparison to 34 extraction by resource GDP and DMC, EU (2000–2020) ES.2 Environmental impacts of metal mining 3 2.2 EU resource productivity in relation to 35 across time comparators (2020) ES.3 From linear to circular economies 4 2.3 Municipal waste recycling rates 35 ES.4 Circular material use rate (left) and resource 5 2.4 Europe’s recycling rates by waste stream 36 productivity (right) of the EU MSs in 2020 (2004–2020) ES.5 Perceived clarity of roles and responsibilities 6 2.5 DMC per capita 36 and cross-government coordination for CE 2.6 Circular material use rate (left) and resource 37 implementation productivity (right) of the EU MSs in 2020 ES.6 Development of strategies and legislation 6 2.7 Per capita in-use stock of four focus 38 according to different stages of product life countries versus comparators cycle 2.8 Historical development of absolute and 38 ES.7 Circular economy opportunities across the 7 per capita material stocks by country by product life cycle category from 1990 to 2019 for Bulgaria, ES.8 Barriers to CBMs 8 Croatia, Poland, and Romania ES.9 Impact of combined CE policies on use of 11 2.9 Historical development of absolute iron and 39 primary materials in Europe in 2030 steel stock in Poland (inset) and its flow (Index 2021 = 100) versus BAU (2019) 2.10 Historical development of absolute iron and 40 ES.10 Change in real wage by skill level: Europe 12 steel stock in Croatia (inset) and its flow relative to the reference scenario (2030) (2019) ES.11 Stakeholders’ perceptions of level of 13 2.11 Comparison between DMC per capita and 41 developments of strategic and planning material footprint per capita for the EU-27, measures Bulgaria, Croatia, Poland, and Romania ES.12 Actors and roles in the CE network 15 2.12 Copper flows in Poland (2019) 42 ES.13 Stakeholders’ perceptions of level of 17 3.1 Importance of imports in EU domestic 47 development of CE regulatory instruments material consumption (score 0–5) 3.2 Material extraction, direct and embedded 48 1.1 Global material use by category 20 trade, globally and in the EU 1.2 Historical and projected global materials 21 3.3 Largest exporters of materials and fossil 49 extraction by resource fuels to the EU 1.3 Trends in material consumption: Human 21 3.4 EU versus RoW import dependency by 50 Development Index, Happiness Index, and category GDP per capita 3.5 EU trade of tier-1 material-intensive 51 1.4 Environmental impacts of metal mining 23 downstream goods - Import share and across time largest exporters of goods to the EU 1.5 Material use drives planetary boundaries’ 24 3.6 Correlation of domestic material 52 overshoot consumption and domestic material 1.6 Commodities price trends proceed in step 25 footprint with trade openness with material resource use 3.7 Determinants of domestic consumption and 53 footprint of materials and CO2 emissions 1.7 Domestic material consumption per capita 26 (2017) 3.8 CGE estimates of impacts on exports and 54 GDP 1.8 Distribution and dynamics of global material 26 stocks (1990–2010) 3.9 Countries that depend most on material 55 exports to the EU, in terms of share on 1.9 Circular economy activities: the 9RS 27 total trade and GDP or the adjusted RCA framework measure 1.10 From linear to circular economies 28 3.10 Analysis of countries that depend on 56 1.11 Promoting CE as a super-wicked problem 30 material exports to the EU iv 3.11 Main recipients of EU exports of waste 57 5.12 Change in unemployment rate (left) and real 104 3.12 EU imports of plastic 59 wage (right) by skill level: Europe relative to the reference scenario (2030) 3.13 CGE estimates of reconversion potential in 59 LMICs 5.13 Change in real wages by skill level at 104 country level (2030) - Combined scenario 3.14 LMIC exports of environmental goods 61 5.14 Percentage change in unemployment under 106 4.1 CBMs across the product life cycle 68 alternative revenue recycling scenarios 4.2 Economic impact of CE sectors and their 69 6.1 Perception on a leading group/body in 108 growth rate charge of the CE transition 4.3 CE VA versus drivers of production 70 6.2 Actors and roles in the CE network 109 4.4 KPIs for CE potential in Romania 72 6.3 Stakeholders’ perceptions of level of 111 4.5 KPIs for CE potential in Poland 72 developments of strategic and planning measures 4.6 KPIs for CE potential in Bulgaria 72 6.4 Perception of the development of policy/ 112 4.7 KPIs for CE potential in Croatia 73 regulatory instruments for promoting CE 4.8 Network analysis - Bulgaria 75 6.5 Perceptions about the existence of an M&E 115 4.9 Network analysis - Poland 76 system for CE 4.10 Network analysis - Romania 76 A3.1 Rates of post-consumer plastic waste 134 4.11 Micro-, meso-, and macro-level barriers 78 recycling, energy recovery, and landfill per facing CBMs country in 2018 5.1 Index of material use: production based 92 A3.2 Growth in demand for selected minerals 135 (left) and consumption based (right) under from clean energy technologies in 2040 BAU relative to 2020 levels 5.2 Impacts of the EGD-NDC scenario on 94 A3.3 WICER Framework 137 primary material use in Europe A3.4 Comparing life-cycle GHG emissions of 139 5.3 Impact of combined CE policies on use of 94 gasoline cars with EVs primary materials in Europe in 2030 (Index A3.5 Visualization of a resource cadaster - 142 2021 = 100) versus BAU Aggregation of 46 construction materials 5.4 Impact of primary production tax and 96 used in the city of Odense, Denmark, secondary production subsidy on metal ore stocked in buildings, roads, and pipe use compared to the EGD-NDC scenario networks 5.5 Impact of alternative scenarios on use of 97 A3.6 Practical application of the waste hierarchy 143 primary materials relative to the EGD-NDC for food scenario A4.1 Abatement potential and costs of circular 145 5.6 Price competitiveness impacts on European 98 economy opportunities by 2050 (cost in €/ producers relative to key global producers tCO2) of alternative policy scenarios for metals A4.2 Environmental tax revenues in EU MSs + 147 (left) and construction materials (right) UK as percentage of GDP 5.7 Production, consumption, and leakage of 99 A4.3 Circular Taxation Framework 148 alternative policies, with and without border A4.4 Landfill taxes across EU MSs 148 adjustments for metals A4.5 Increase in the number of EIPs by region 150 5.8 Impacts of selected CE scenarios on 101 (1990–2020) exports in regions/country groupings outside Europe A4.6 Distribution of EIPs by world region 151 5.9 Change in composition of LMIC exports by 101 A4.7 Integrated system of sludge from a 153 broad category under the ‘combined’ CE wastewater treatment plant, Industriepark scenario Höchst 5.10 Change in Europe’s GDP relative to the 103 A4.8 From sustainable to circular procurement - 157 EGD-NDC scenario (2030) A framework 5.11 Change in consumer prices in Europe 103 relative to reference scenario (2030) v SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition TABLES BOXES ES.1 Changes in key variables relative to the 13 4.1 Focus sector selection methodology and 71 EGD-NDC scenario (2030) resulting from evaluation of their circular potential tax on primary metals and fossil fuels when 4.2 Product life extension - firm capacities and 80 revenue is recycled directly to households beyond versus through a reduction in labor taxes 4.3 Examples for clusters facilitating CBMs 81 1.1 The relevance of circularity to the 29 achievement of SDGs 4.4 Regulatory conflicts constrain secondary 82 material use in construction 2.1 Examples of EU-wide targets in waste 43 management 5.1 GTAP-CE database 87 3.1 EU import concentration measures in 50 5.2 Environmental fiscal policies to support the 88 different goods categories CE transition 3.2 Index of export market penetration by 55 5.3 Production and consumption-based 93 goods category material use accounting 4.1 Economywide priority sectors with closer 74 A4.1 Examples of virgin materials Taxes in 149 links to key product value chains Europe 4.2 Practices available to corporate 79 A4.2 Digital solutions to end life products 154 departments, by CE activity A4.3 Digital Information Platforms for circularity 154 5.1 Definition of modelled scenarios 90 A4.4 Digital solutions enable PaaS 155 5.2 Impact of combined CE policies on use of 95 primary materials in 2030 (Index 2021 = A4.5 Solutions optimizing inputs at production 155 100) at the country level stage 5.3 Price and material use growth to 2030 (%) 95 5.4 Impact of alternative policies on production- 97 based metals and plastics use (2030) (%) 5.5 Impacts of BAT scenarios on key demand 100 and use variables for primary metals and construction materials 5.6 Change in share of output by broad sector 102 in 2030 relative to the reference scenario 5.7 Changes in key variables relative to the 105 EGD-NDC scenario (2030) resulting from tax on primary metals and fossil fuels when revenue is recycled directly to households (metals and plastics - tax) versus recycled through a reduction in labor taxes (metals and plastics - tax*labor) 6.1 An ‘institutions, incentives, information, and 116 financing’ policy package for the circular transition A3.1 Relevant CE actions across the 141 construction life cycle A4.1 Programs to encourage EIPs/industrial 152 symbiosis in the EU vi Acknowledgments T his report was written by a World Bank team Hrishikesh Prakash Patel, Susanna Dedring, and including Andrea Liverani, Sameer Akbar, Nigara Abate supported graphics and editing. Jiyoun Christina Chang, Tom Farole, Daria Anna Karpets, Linh van Nguyen, and Grace Aguilar Taglioni, Etienne Kechichian, and Arno Behrens. The provided project management support. Oliver Joy extended World Bank team included Remi Pelon, led communication and dissemination activities. Svetlana Edmeades, Gregoire Gautier, Thierry Ernesto Sanchez Triana, Mariana Iootty de Paiva Davy, Silpa Kaza, Quamrul Hassan, Stefan Ott, Dias, Grzegorz Peszko, Qing Wang, Helena Naber, Paul Phumpiu Chang Sanda Jugo, Orjana Ibrahimi, and David Knight Raffaello Cervigni (World Bank) Samuel Ruben Alexander Garoni, Gemma Torras and Miranda Schnitger (Government Lead, Ellen Vives, Eolina Petrova Milova, and Alexandru Cosmin MacArthur Foundation) were peer reviewers for the Buteica. activity. Background analysis for the report was provided The team is grateful to the following colleagues for by Dominique Van der Mensbrugghe and Maksym their advice and collaboration: Janine Borg, Anna Chepeliev (Purdue University, Global Trade Analysis Cameron, and Alice Senga (Secretariat of the Project); Penny Bamber and Karina Fernandez- European Circular Economy Stakeholders Platform Stark (Duke University); Jacques Villeneuve (French (ECESP), European Economic and Social Council Geological Survey and Geosciences Institute, (EESC); Peter Berkowitz and Sander Happaerts (EC BRGM); Gang Liu (University of southern Denmark); DG REGIO); Michel Kubicky (EC DG Grow); Monica Konstantin Sommer (University of Amsterdam/ Bennet and Daniel del Rio (Global Infrastructure Tinbergen Institute); Soraya Cuesta and Iker Larrea Hub); and Joss Blériot and Miranda Schnitger (Ellen (Global Factor); James Martin, Harry Doyle, Victoria MacArthur Foundation). Cherrier, Emma Watkins, Sophie Rippinger, Toon Smets, Nikul Pandya, Fleur Ruckley, and Daren The work was carried out under the guidance of Luscombe (Wood Group UK Ltd); Angel Anguiar, Steven Schonberger (Regional Director, Europe and Le (Allan) Wang, Renilde Becqué, Nah-yoon Central Asia), Gallina Vincelette (Country Director, Shin, Nidal Nouhad Mahmoud, Dario Quaranta, European Union), Arup Banerji (Country Director, and Maria Daniela Cordova Pizarro (FCI); Joanna Eastern Europe), and Kseniya Lvovsky (Practice Kulczycka and Agnieszka Sznyk; Ruslan Zhechkov, Manager, Environment, Natural Resources and the Venelina Varbova, Asel Doranova, Iana Stoyanova, Blue Economy, Europe and Central Asia). Nikolay Sidzhimov, Alexandra Chenaru-Ghenea, and Adriana Gheorghe; Heather Jones, Demetris Psaltopoulos, Philip Van der Celen, Nikša Tkalec, Domagoj Koprek, and Stefan Gospodinov. vii BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition viii BACK TO CONTENTS Executive Summary 1 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition Executive Summary Rising levels of resource consumption have dematerialization induced by global structural marked the course of human development. change will not suffice to contain the expected Whereas hunter-gatherers survived on averages of increase in material demand driven by population 0.5–1 tons of resources per capita a year, agrarian growth and the convergence in wealth and societies prospered on 3–6 tons per head. Today, living standards. Average per capita resource global average per capita consumption stands at consumption in high-income countries today is roughly 12.5 tons per year. Over the last century, as high as five times the average of that in African with widespread industrialization and rapid growth, countries. the global economy has witnessed a surge in material extraction and use. The total amount of Increasing rates of material use have serious materials mobilized between 2000 and 2015 already sustainability repercussions. Although most equals more than half of those extracted between materials remain abundant on earth, some— 1900 and 2000. By 2050, global demand for virgin including those critical to emerging sectors such materials is expected to at least double again as renewables and electronics—are scarce. (Figure ES1). Regardless, rising demand leads to ever higher economic costs of extraction, commodity supply These trends are expected to accelerate. shocks, and competition over access to raw Persistently high levels of material consumption materials. But the real sustainability concerns in high-income countries are accompanied arise from the environmental consequences by rapidly growing rates of consumption in of extraction, processing, use, and disposal of emerging economies. Current levels of economic materials. Extraction and processing involve energy- FIGURE ES.1: HISTORICAL AND PROJECTED GLOBAL MATERIAL EXTRACTION BY RESOURCE Billion Tons 200 Changes in trends for 180 extraction of minerals, non-metallic minerals 160 and metal ores occured post World War 2 and at 140 start of 1970s 120 100 80 60 40 Biomass Fossil fuels 20 Metal ores Historical Data Projections 00 Non-metallic minerals 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 Year Source: The European Commission (EC) Joint Research Centre (JRC) data 2 BACK TO CONTENTS EXECUTIVE SUMMARY intensive activities, causing large-scale disruption in Addressing emissions from industry can be ecosystems and water balances and air, soil, and technologically challenging and costly, particularly in water pollution. The transportation, utilization, and sectors such as iron, steel, aluminum, cement, and disposal of materials embodied in products (today, plastics, which are associated with hard-to-abate about 90 percent of the resources consumed emissions related to high-temperature processes, worldwide end up in waste) require environmental production emissions, and end-of-life emissions. sink services causing additional externalities. About Previous assessments have shown that circular 90 percent of total biodiversity loss and water economy (CE) strategies can cut global emissions stress impacts and 33 percent of health effects of by 39 percent, mostly in the construction, transport, air pollution are directly linked to resource extraction and food sectors. About one-third of nationally and processing. As material extraction and use determined contributions (NDCs) updated and attain ever higher levels, so do the corresponding submitted in 2021 mention CE measures.1 2 environmental impacts (Figure ES2). Over the past decade, material efficiency The global acceleration in material demand and resource productivity have surfaced on has implications for decarbonization targets. the global policy agenda. The rise of the CE The production of goods and services, including agenda reflects the objective of moving away food, for the global economy accounts for nearly from the current systems of production and half of the global greenhouse gas (GHG) emissions. consumption based on the ‘take-make-use- FIGURE ES.2: ENVIRONMENTAL IMPACTS OF METAL MINING ACROSS TIME (2000 = 1.0) 2.5 2 1.5 1 0.5 Iron and Steel Aluminium 0 Copper 2000 2005 2010 2015 2000 2005 2010 2015 2000 2005 2010 2015 Zinc, Lead, Tin and Nickel Production amounts Climate change Ecotoxicity impacts Gold, Platinum and Silver Source: IRP 2019. Note: Metal mining covers 10 metals meeting more than 95 percent of global extraction of metal ores.  1 https://emf.thirdlight.com/link/w750u7vysuy1-5a5i6n/@/preview/1?o; https://wri-indonesia.org/en/blog/3-steps-tackling-food-loss- and-waste; https://www.circle-economy.com/news/circular-economy-strategies-can-cut-global-emissions-by-39; https://www.wri. org/insights/how-circular-economy-can-help-nations-achieve-their-climate-goals. 2 Metabolic analyses show that circular mitigation opportunities can reduce territorial GHG emissions and decrease the aggregate carbon footprint of imported goods and materials (scope 3 emissions) by another 28 percent. Recent reports from Circle Economy, the Ellen MacArthur Foundation, Material Economics, and Shifting Paradigms have pointed to the GHG mitigation potential of reducing excessive resource use and waste disposal. On average about 30 percent of a nation’s carbon footprint is embedded in imported goods and materials. However, efforts to reduce these emissions are poorly incentivized as such schemes usually focus on territorial emissions alone. These embedded emissions can be an important part of a systems approach that aims at reducing GHG emissions since this approach analyzes the full value chain of carbon-intensive products and their potential substitutes. 3 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition waste’ linear economic model toward economies 2000 and 2020. Overall resource productivity centered on minimizing the use of virgin materials (euro per kg of domestic material consumption without adversely affecting welfare. The focus is [DMC]) increased by nearly 35 percent over the on a life-cycle approach to resource management, same period. These gains were supported by both which starts with reducing raw material demand exogenous shocks—particularly the impact of the by looping resources back into consumption and 2008 crisis on material intensive sectors such as production systems, through innovations in material construction—and structural change, leading to an design, production, and reutilization processes. increasing share of relatively less material-intensive services in EU total gross value added (VA). In addition to easing the environmental pressures, the circular transition can be a The transition, however, is still in its infancy. driver of private sector growth. Although there More than 87 percent of EU resource consumption are no ex-post studies to verify the growth and still comes from primary materials, and overall job creation potential of CE, several studies have EU waste generation keeps increasing. When indicated a link between resource efficiency and accounting for the actual material footprint of productivity gains, driven largely by the underlying Europe’s consumption—that is, the resources level of technological innovation, resulting in required along the entire supply chains of, and production savings. Based on this previous effectively embodied in, the products consumed modeling, work has focused on the growth effects in Europe—progress in decoupling growth from of material efficiency gains, with less attention paid material use appears more limited. Europe’s overall to distributional and labor market outcomes of resource productivity remains below comparator ancillary policies. countries such as the United States, Japan, and This report reviews Europe’s experience in the United Kingdom. Although the EU per capita spearheading CE policy. Its aim is not only to material footprint has stabilized following the 2008 highlight its features and accomplishments but also financial crisis, it is likely that it will resume its to identify existing barriers to future progress and upward trajectory once growth picks up again. key measures to overcome them. Its objective is Progress remains uneven among member dual: contributing to CE policy development within states (MSs). The four countries of focus of this the European Union (EU) and identifying lessons report (Bulgaria, Croatia, Poland, and Romania [EU- from the EU’s CE leadership that can be of benefit 4]) lag on key CE performance metrics (Figure ES.4). to non-European countries. Romania has the lowest circular material use rate Europe has made important progress in among EU MSs, while Bulgaria, Croatia, and Poland achieving material efficiency gains. Over the are also scoring below the EU average. All four rank past two decades, total material use has decreased among the bottom tiers for resource productivity as by 9.4 percent, from 6.6 billion to 6.0 billion tons. well as on more basic indicators such as landfilling The share of resources used derived from recycled rates. Despite recent progress, Romania still waste increased by almost 50 percent between landfills about three quarters of its municipal waste, FIGURE ES.3: FROM LINEAR TO CIRCULAR ECONOMIES Return Reuse Take Make Use Waste Recycle Repair Source: Original elaboration for this publication based on BOL (2020). 4 BACK TO CONTENTS EXECUTIVE SUMMARY while Bulgaria and Croatia have landfilling rates The private sector CE potential is shaped above 60 percent. While being some of the least by countries’ economic fabric. In addition resource efficient economies, Romania, Poland, and to different initial conditions in terms of material Bulgaria also display fast growth rates in material flow composition and standard CE performance consumption. metrics, sectoral composition determines EU MSs’ readiness to embark on the circularity transition. Local circumstances determine the starting The four countries of focus share some of the point of the transition. Due to the role that features described above as well as sectors with infrastructure plays in total resource use, low low circularity potential in terms of CE value added population densities typically lead to higher generated and growth rates, largely driven by weak DMC per capita. The structural composition of performance in key CE enablers such as technology the economy plays a key role, with economies and innovation and human capital. Countries such displaying a predominance of primary sectors as Bulgaria, Romania, and Poland show limited typically having relatively higher DMC. To varying connectivity in their CE production networks, degrees since EU accession, the four focus with weak or nonexistent sector links. In terms of countries have been experiencing outmigration and sectors with higher circularity potential, the four a transition out of mining—and manufacturing— countries tend to share some commonalities, such sector predominance. In addition, per capita income as machinery, automotive, food and beverage, and convergence requires catching up with the capital construction for Bulgaria and Croatia, as well as investments feeding growth through material stocks differences, such as the electrical and electronic accumulation. Finally, in some of these MSs, a equipment (EEE) sector in Romania. relatively large share of raw material production actually goes toward final products consumed in other countries. FIGURE ES.4: CIRCULAR MATERIAL USE RATE (LEFT) AND RESOURCE PRODUCTIVITY (RIGHT) OF THE EU MSS IN 2020 Circular material use rate (%) Resource productivity (Euro per kg.) Netherlands 30.9 Netherlands 5.4 Belgium 23 Luxembourg 5.0 France 22.2 Italy 3.7 Italy 21.6 France 3.3 Estonia 17.3 Belgium 3.3 Luxembourg 13.6 Ireland 3.3 Czechia 13.4 Germany 3.0 Germany 13.4 Spain 2.9 EU-27 12.8 Austria 2.3 Slovenia 12.3 EU-27 2.2 Austria 12 Denmark 2.2 Spain 11.2 Malta 2.1 Poland 9.9 Sweden 1.8 Hungary 8.7 Greece 1.7 Malta 7.9 Slovenia 1.7 Denmark 7.7 Slovakia 1.4 Sweden 7.1 Czechia 1.4 Slovakia 6.4 Finland 1.4 Finland 6.2 Cyprus 1.3 Greece 5.4 Portugal 1.2 Croatia 5.1 Latvia 1.2 Lithuania 4.4 Croatia 1.1 Latvia 4.2 Hungary 1.0 Cyprus 3.4 Lithuania 0.9 Bulgaria 2.6 Poland 0.8 Portugal 2.2 Estonia 0.7 Ireland 1.8 Bulgaria 0.4 Romania 1.3 Romania 0.4 0 5 10 15 20 25 30 35 0 1 2 3 4 5 6 Source: Eurostat 2021b, 2022d. 5 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition FIGURE ES.5: PERCEIVED CLARITY OF ROLES AND RESPONSIBILITIES AND CROSS-GOVERNMENT COORDINATION FOR CE IMPLEMENTATION EU-27 avg. 12% 24% 52% 12% Bulgaria 22% 67% 11% Croatia 19% 55% 26% Poland 29% 65% 6% Romania 21% 79% 0% 20% 40% 60% 80% 100% The roles and responsibilities are clear and there is an effective coordination between national, regional, and local governments. The roles and responsibilities are clear but coordination between national, regional, and local governments could be strengthened. The roles and responsibilities are not clear and there is not an effective coordination between national, regional, and local governments. I don't know. Source: World Bank. Catching-up MSs also often display materials are generally cheaper than recycled weaknesses in levels of awareness and policy materials. In the plastics sector, for example, development. Although initial conditions matter virgin materials are often cheaper than recycled in determining the speed of the transition, they ones while large quantities of plastics waste are do not constitute destiny. While coming from a still landfilled. In the area of critical raw materials, similar starting point, Slovenia achieved significant recycling is only economically viable for minerals circularity gains in recent years in relation to the that have reached a critical mass. In the water EU-4 countries, partly due to focused policy sector, low water tariffs prevent the transition to a attention. Key stakeholders mobilized through the circular water economy. Sectoral policies still focus European Stakeholders Platform report a general on downstream waste management activities, lack of clarity as to the agencies leading the CE whereas the potential for circular products is transition in the EU-4 countries (Figure FIGURE ES.6: DEVELOPMENT OF STRATEGIES AND LEGISLATION ES5). While national circular economy ACCORDING TO DIFFERENT STAGES OF PRODUCT LIFE CYCLE legislation is emerging across the EU, Extraction of materials in catching-up EU MSs, its scope 3.0 tends to remain heavily focused on waste management concerns (Figure 2.25 2.5 ES6). 2.0 1.5 Key sectors are still far from Recovery and 2.88 1.0 Manufacturing mainstreaming CE principles. waste management 0.5 2.63 Sectors such as plastics, construction, agriculture, transport, water, and rare earths display different levels of awareness and change. Although the reasons are manifold, 2.25 a recurring barrier to change is that 2.25 the economics still favors linear processes. In most sectors, markets Use Consumption Distribution of products for secondary raw materials remain underdeveloped, and primary raw Bulgaria Source: World Bank. 6 BACK TO CONTENTS EXECUTIVE SUMMARY typically set upstream in the design phase. Despite Although several sectors are already the limitations of recycling, particularly in sectors experiencing CE’s disruptive potential, CBM with fast-growing material requirements (for innovations tend to remain limited in scale, example, those related to low-carbon technologies), depth, and speed of adoption. The sharing policies incentivizing reduced consumption, economy in the hospitality sector is now estimated intensified product use, and extended lifetimes of to be more than double the size of Europe’s products and components are still far from being traditional hotel economy. The ‘uberization’ of taxi mainstreamed across products’ life cycles. services in major cities has had the same disruptive potential. Industries that have shifted away from Europe’s private sector is already playing a one-off product sales toward capital equipment critical role in creating innovative circular as a service (extractives equipment, jet and ship business models (CBMs). Most technological and propellers) have typically recorded higher-than- business model innovations across sectors have average margins, often through cost savings in stemmed from the private sector, although public maintenance, equipment use optimization, storage/ policies and support, including in research and logistics, and customer capture. In absolute terms, development (R&D), have certainly played a role. though, CBMs remain peripheral in most markets. CBMs—those centered on reducing the extraction Even recycled materials represent only 8.6 percent and use of natural resources and the generation of raw material input, while remanufactured of waste—are already in operation in a number of products take a tiny share of total manufacturing— economic sectors, including plastics, construction, the proportion of remanufacturing to new agribusiness, water, textiles, and metallurgy. Existing manufacturing in Europe is only 1.9 percent. Even CBMs tend to focus on recycling, reusing, repairing, producing secondary raw materials from waste only refurbishing, and remanufacturing, although accounts for 30 to 40 percent of the physical output increasing instances of more sophisticated business of sectors such as steel, as well as pulp and paper models (product as a service [PaaS]) are emerging in which it is most established. (Figure ES7). Despite their degree of sophistication, to the extent that these CBMs displace production Firms face a range of barriers in scaling up from traditional modes (that is, avoiding any and accelerating the deployment of CBMs. associated rebound effects from the transition), Despite their quick development, CBMs remain they deliver immediate benefits in reducing their a small niche across sectors and firms. Limited environmental footprint—the life-cycle CBMs based progress with their introduction is often blamed on on existing products or secondary raw materials technological constraints. Indeed, advancements in typically have relatively small global warming, recycling, design, and information technologies can acidification, and pollution impacts compared to in themselves give rise to new CBMs. Stakeholders, linear business models. however, also point to a different set of barriers FIGURE ES.7: CIRCULAR ECONOMY OPPORTUNITIES ACROSS THE PRODUCT LIFE CYCLE Product Life Extension: Resell Circular Supplies Product Life Extension: Repair / Upgrade Product Procurement Manufacturing Logistics Sales and Product End-of-life Reverse Design Marketing Use Disposal Logistics Resource Recovery: Waste as Resource Waste Share Leakage Other Production Process Product as Service (eliminate) Source: Adapted from Bani and Blom, “Rethinking the Road to the Circular Economy,” (January 2020), https://think.ing.com/uploads/ reports/Rethinking_the_road_to_the_circular_economy_FINAL_RB1.pdf. 7 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition facing firms at different levels of their operating influential departments, such as operations or environment, including (a) firm-specific barriers finance, taking limited interest in it. Companies typically under the direct control of firms; (b) those with markedly ‘linear’ backgrounds will naturally that affect the immediate environment surrounding find behavior change harder. Experience shows the firm’s operations, including cross-firm behavior that business leaders’ commitment and their role and collaboration along and across value chains in breaking linear inertia is a key enabler in CBM and sectors; and (c) economy-wide barriers related innovation. to the way entire markets operate (Figure ES8). While interlinked in several ways, some of these— Uncertainties related to the novelty of the particularly the macro-level ones—shape and transition compound risk perceptions and reinforce the others. constrain access to finance. As with any new business models, the lack of proven track records Corporate cultures, values, and beliefs shape can induce innovating companies to be perceived firms’ openness to CBM innovation. Business as highly risky. Initial investments to innovate model innovation requires adequate firm-level and ‘create’ new markets can lead to short-term capacities, in terms of rethinking product offerings, margins. Asset valuation in linear systems often the customer base, cash flow, and financing does not capture the CBM’s value, particularly in streams. Corporate inertia—resistance toward cases of ‘servitization.’ the need to adapt to external environment shifts arising from within firms—can slow sustainability- In addition to generally being relatively labor oriented business model innovation. Even in leading intensive, CBMs tend to require relatively countries such as the Netherlands, CE innovators higher skill levels. ‘R’ activities, such as reuse, within firms are frequently restricted to the corporate repurposing, and refurbishing, are more labor social responsibility (CSR) departments, with more intensive compared to their linear alternatives. FIGURE ES.8: BARRIERS TO CBMs Limited network Lack of CE targets Human capital connectivity in industrial policy and skills gap Corporate Lack of linkages culture Firm with research and Lack of organizational Tax disincentives technical insitutions in-house capabilities (VAT) R&D Regulatory Firm’s Risk Value chain confict Access to CBM perceptions fragmentation finance propensity Non- Natural resource Lack of clustering Upfront competitive subsidies infrastructure investments Business markets leaders’ commitment Lack of consumer demand Micro-level barriers Weak supporting Heavy fiscal sectors burden on labor Meso-level barriers Macro-level barriers Source: Adapted from Garrido-Prada et al. (2021); Khan, Daddi, and Iraldo (2021); Kirchherr et al. (2018); and Liu and Bai (2014). 8 BACK TO CONTENTS EXECUTIVE SUMMARY Reverse logistics, resource sorting, and product with linear products based on true pricing. But refurbishing all require sophisticated skill sets. today, not only are the externalities linked to linear Jobs creation through these CBMs is today mostly business models not taken into account in the concentrated in higher-skill categories and will pricing of virgin natural resources, they are also continue to be in the future, with labor market directly supported. All major natural resource- constraints already posing a considerable barrier based sectors, starting with fossil fuels, are heavily to firms. The analysis supporting this report shows subsidized—agriculture, fisheries, forestry, water, that labor market effects induced by the transition and mining. In addition to being subsidized directly will have a skills bias, supporting productivity growth by government budgetary and tax measures, but raising challenges for countries with higher natural resource extraction is often indirectly concentrations of unskilled workers, such as the supported by trade and other policy instruments, four Eastern European MSs examined in the report. which skews their opportunity cost. Beyond firm-specific and intra-firm barriers, In addition to progress at the country, macro-level constraints limit the private sector, and firm levels within the EU, the sector’s potential to innovate. Today’s linear achievement of CE outcomes in Europe economy prospers through economies of scale. It depends on dynamics beyond its borders. has been sustained by policies designed to develop Trade plays an increasingly significant role in the and optimize the take-make-dispose model for the circularity transition. EU production has become prevailing production and consumption systems. less material intensive over time, but the intensity Regulations, markets, investment tools, and of material inputs in EU consumption and imports practices, including financial risk assessment, are has increased at the same pace as income growth. adjusted to linear models, and externalities linked In addition to direct raw materials imports, the to linear business models are largely ignored. EU also imports materials indirectly, and, in fact, Publicly funded R&D still essentially caters to linear most trade in materials takes place in the form of business models. CE policy today tends to focus materials embedded into products. When these on new regulation aimed at filling informational are considered, the EU’s dependency on extra EU and mandatory standards gaps, which currently sources increases from only 11 percent of the EU’s constrain CE uptake among consumers and DMC to nearly 36 percent. producers. But, in addition to new rules, CE regulatory reforms need to address conflicts with While the EU’s dependency on raw materials existing regulation across sectors as well as actual is concentrated among a relatively small set adversarial regulation, such as health and safety of export countries, imports of embedded standards preventing recycled material reutilization. materials originate from a vast number of Regulatory action also should consider the sources. EU MSs are dependent on just a few downstream needs created in terms of monitoring trade partners for their direct imports of materials— and enforcement, given the existing shortcomings Brazil, the United States, and Ukraine alone account in achieving mandatory targets and abiding by for about 30 percent of all direct imports of materials norms in basic aspects, such as recycling and into the EU. On the other hand, countries that landfilling. produce these downstream, material-intensive products and export them to the EU include high- The price competitiveness of circular products to middle-income countries spanning from the most will continue to limit the attractiveness of important global manufacturing hubs (such as China most CBMs. It is typically cheaper for companies and the United States), to other technologically to buy virgin raw materials than to reuse waste advanced countries (Switzerland and the United materials.  In 2020, recycled plastics cost an Kingdom), to regional hubs in important middle- extra US$72 per metric ton compared with newly income countries (Türkiye, Argentina, and Ukraine), made plastic. With commodity prices still failing but exclude lower-income countries that are just to internalize their environmental externalities, breaking into manufacturing. even an enabling regulatory environment will face hurdles. Regulation will have faster and deeper Many low-income countries are economically impacts once circular products can compete dependent on the EU’s demand for materials. 9 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition Many lower-income countries are heavily dependent an attempt to break away from previous policies on the extraction of biomass, metals, and minerals focused on regulatory interventions on end-pipe that are exported to the EU. Trade dynamics are material streams such as landfilling and recycling, expected to witness significant declines in primary in view of life-cycle approaches and an attention to metals exports, balanced growth in recycled economic barriers. CE concerns are starting to be metals and exports, and significant opportunities mainstreamed across EU policy areas, starting with in plastics until 2030. The benefits will be reaped the 2021 Industrial Strategy update. Most recently, by lower-middle-income countries (LMICs) shifting in March 2022, the European Commission (EC) set away from commodity production and increasing the stage for regulating circularity requirements of their presence in new industries, including trade almost all categories of physical goods placed on and other services, while also making inroads the EU market, marking a potential step change into recycled copper, recycled steel, plastics, and toward more sustainable and circular products in plastics recycling. Countries with very little market the EU. diversification will have limited potential to react and rebound from a sudden contraction in EU demand The scale of the challenge justifies the EU’s for materials and will face additional hurdles in renewed level of ambition. Business-as-usual capturing opportunities. (BAU) policies will not suffice to achieve significant reductions in primary material use, which is The introduction of more stringent regulatory expected to grow 2.5 times by 2050 compared standards may induce production leakage. to 2000—even as European economies become Regulatory differences have historically been a weak increasingly services based. Europe will be able driver of shifts in trade in materials, and the current to maintain the recent trend of resource efficiency regulatory shift toward CE is unlikely to cause gains but not relative, not absolute, decoupling. The immediate harm to EU competitiveness. This may shift in the production of material-intensive goods change in the future, though, if the gap in regulatory outside the EU borders will continue, leading to an stringency between the EU and the rest of the world increasing relevance of imported materials in overall widens. Leakage of material-intensive production resource consumption. Growth rates in material use would mostly settle in capital-abundant economies, across the EU reflect different structural conditions which tend to be more developed countries and of MSs, with those MSs having more recently China. If leaked production settles in jurisdictions gained EU accession seeing a 2.5 faster growth in with lower environmental standards, EU CE policies production-based materials than the EU average, risk creating ‘linear production havens,’ which reflecting their role in catering to material demand will create additional hurdles in limiting material outside their borders. footprint. This indicates the need for coordinated action across borders and, particularly, for EU decarbonization policies will influence cooperative solutions aimed at reducing the material material use patterns but will be insufficient to intensity of production in other capital-abundant achieve substantial efficiency gains. In addition countries. to significantly reducing fossil fuel consumption, mitigation policies taken under the EU Green Deal For over a decade, the EU has been at the will affect the use of metal ores and nonmetallic leading edge of CE policy. The 2011 Roadmap minerals (NMM) by raising their production costs, to a Resource Efficient Europe already outlined a but to a very limited extent. While critical to reducing set of measures to increase resource productivity CO2 emissions, decarbonization policies will have and decouple economic growth from resource only a modest impact on primary material use use and its environmental impact. Since the and will need to be complemented by measures first EU Circular Economy Package in 2015, targeting materials. the transition to a CE has acquired increased relevance and is today central to the EU’s policy To increase the speed of the transition, Europe agenda encompassed in the European Green Deal needs a far-reaching suite of CE policies. A (EGD). The 2020 Circular Economy Action Plan comprehensive package of CE policies can allow represents the most ambitious and comprehensive Europe to reduce aggregate material use by a CE policy roadmap developed anywhere and range of 8 to 11 percent relative to the baseline and 10 BACK TO CONTENTS EXECUTIVE SUMMARY achieve absolute decoupling between growth and Comprehensive CE policies will accelerate virgin resource use—all within a decade. Policies will Europe’s shift toward services sector need to target both production and consumption, economies. Implementation of a broad vary according to the specific material being combination of CE policies will have sizable impacts targeted, and deploy different and complementary on the structure of Europe’s economy by 2030, with instruments, including both regulatory and fiscal the services sector increasing its share of output measures. by 2.3 percentage points, while industry will fall by a further nearly 1 percentage point and ‘other Europe can achieve its CE objective without goods and services’ (including extraction) by 1.6 compromising  growth while enhancing percentage points. Policies supporting solutions to environmental benefits. CE will no doubt create design out materials from production and product economic opportunities and many ‘bottom-up’ life extension make a particular contribution to the studies find CE to be a significant driver of growth. shift toward services. The scale of this structural The policy scenarios explored in this assessment shift is larger in the EU-4 MSs. all aim to achieve core CE sustainability objectives by reducing and shifting demand, thus incurring CE policies are likely to have moderately some economic costs. But even the most ambitious regressive labor market impacts, cushioned deployment of policies considered will reduce 2030 somewhat by progressive price impacts. gross domestic product (GDP) by only around 1 While individual policies have modest labor percent below baseline projections—real GDP is market impacts, their combination is likely to still 13.5 percent higher in 2030 compared to BAU lead to aggravating the ongoing skills bias in in 2021 under an ambitious CE scenario. This may Europe’s labor markets, with unskilled workers be considered a minor cost in achieving material experiencing modest welfare loss from expected efficiency objectives. Moreover, the modeling results real wages decline, whereas skilled workers will see presented in this report do not take into account the unemployment fall and wages rise. However, price substantial co-benefits of achieving CE objectives— changes induced by CE policies are likely to benefit for example, improved health, reduced congestion, poorer households relative to richer ones, with and strengthened natural capital—all of which would prices of food, transport, and services expected be expected to contribute to higher growth and to fall, while the prices will rise for manufactured higher welfare. goods. FIGURE ES.9: IMPACT OF COMBINED CE POLICIES ON USE OF PRIMARY MATERIALS IN EUROPE IN 2030 (INDEX 2021 = 100) VERSUS BAU 130 Europe index of production-based materials use (2030); combined scenario v BAU 120 110 100 90 80 70 60 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 All BAU All Combined FF BAU FF Combined MMO BAU MMO Combined NMN BAU NMN Combined Source: World Bank 11 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition Country-level distributional impacts can be revenues created by CE taxes to reduce labor taxes significant. A higher concentration of unskilled eliminates GDP losses and reverses negative labor workers in the four focus countries results in greater effects—with unemployment for both skilled and exposure to declines in unskilled activities. In the unskilled workers now falling, while wages rise— case of Poland, the analysis shows a potential real highlighting the opportunity of using CE taxes to wage decline of up to 5.6 percent. Although skilled support growth and welfare (Table ES1). workers tend to gain considerably, weaker skills concentrations in these countries result in overall The policy framework supporting the circular fewer opportunities to benefit from gains in skilled transition will need to target four dimensions: activities. Moreover, skilled workers appear to fare institutions, information, incentives, and less well in all four countries (compared to Europe financing. As discussed above, achieving material overall) under the upstream and demand-side use reductions in economically efficient and socially scenarios. Instead, their gains come mainly from inclusive ways requires the deployment of multiple the production-side CE intervention scenarios. This policy instruments. These require policy packages reflects the relatively weaker comparative advantage to address concomitantly the role of institutions, of these four countries in higher-skilled services information, incentives, and financing. activities and the concentration of skilled workers in (a) Institutions activities that will experience a relative decline under the upstream and demand-side scenarios.  Achieving absolute decoupling between growth and material use calls for a retooling The choice in the use of tax revenues is critical of government. Without the government’s to the outcomes of CE policies. The impacts enabling role, the private sector faces steep hurdles above assume that revenues raised through CE in leading the transition. Despite the novelty of taxes are distributed back to households. Using CE the policy agenda, EU governments are already tax revenues to reduce other taxes that may have filling technical gaps and empowering existing or distortive impacts on the economy can be more newly created units to support CE-related policies. efficient. Using revenue recycling to curtail labor Feedback gathered from public and private taxes can lead to growth- and welfare-enhancing stakeholders, however, shows that governments still outcomes. The opportunity to use the substantial have some way to go to incorporate the CE in their FIGURE ES.10: CHANGE IN REAL WAGE BY SKILL LEVEL: EUROPE RELATIVE TO THE REFERENCE SCENARIO (2030) 0.5 -1.1% 0.2% 0.1% -0.0% 0.0% 0.0 -0.1% -0.1% -0.5 -0.4% -0.6% 0.7% -1.0 -1.3% -1.3% -1.5 -1.4% -2.0 -2.5 -2.6% -3.0 EGD-NDC MetalFF- NMN-tax Design Extend Prefshift Combined (v BAU) total Unskilled Skilled Source: World Bank. 12 BACK TO CONTENTS EXECUTIVE SUMMARY TABLE ES.1: CHANGES IN KEY VARIABLES RELATIVE TO THE EGD-NDC SCENARIO (2030) RESULTING FROM TAX ON PRIMARY METALS AND FOSSIL FUELS WHEN REVENUE IS RECYCLED DIRECTLY TO HOUSEHOLDS VERSUS THROUGH A REDUCTION IN LABOR TAXES Revenues to Revenues to reduce households labor taxation Unemployment rate — unskilled (percentage point change) +0.20 −0.38 Real wage — unskilled (% change) −0.80 +1.50 GDP (% change) −0.20 +0.20 Consumer Price Index (CPI) (% change) −0.60 −0.70 Primary metals consumption based (% change) −5.10 −4.80 Source: World Bank. policies and operations. Among the EU-4 countries, coordination mechanisms to enhance coherence only Poland has a CE roadmap with clear priorities across sectoral policies. and focus areas. The opportunities and risks brought about Joined-up horizontal coordination across by circularity call for close involvement of central government agencies can achieve economic decision-making agencies. The need improved policy coherence for circularity. CE to deploy economic instruments such as material mandates tend to remain confined to departments taxes and circularity subsidies calls for an active role with remits limited to waste management. With of Ministries of Economy and Finance. In addition, stakeholders across EU MSs pointing to a Ministries of Finance typically have the reach and leadership gap at the national level, the first task mandate to foster closer collaboration across line of policy makers is to raise the profile of material ministries. The fiscal and economic impacts of efficiency goals across agencies. Frontrunners such such tools, as well as their necessary modulation as the Netherlands have produced government- to preserve competitiveness and fairness outcomes wide programs to mainstream CE objectives during the transition, require further coordination across sectoral legislation and investments, with agencies covering social protection and labor including through the establishment of institutional market remits. Luxembourg’s CE strategy has FIGURE ES.11: STAKEHOLDERS’ PERCEPTIONS OF LEVEL OF DEVELOPMENT OF STRATEGIC AND PLANNING MEASURES Do a national CE Strategy and an Action Plan adequately support the transition in your country? 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% EU-27 16% 39% 29% 16% Bulgaria 11% 78% 11% Croatia 7% 24% 34% 34% Poland 9% 51% 31% 9% Romania 29% 67% 5% There is a clear Strategy and Action Plan for the implementation of a circular economy transition. There is a clear Strategy but an Action Plan that guides its practical implementation is missing. There is neither a clear Strategy nor an Action Plan to implement it. I don't know. Source: World Bank. 13 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition seen the active involvement of the Ministries of Economic Co-operation and Development (OECD) Economy and Finance. This trend is already evident countries showed that most cities still perceive in countries outside Europe, especially those with themselves as being in the initial phase of the important trade flows with the continent because of transition. Enabling and incentivizing cities to make the implications of future regulatory developments. circularity central to their development strategies is a top priority. Empowering cities should start by Policy coherence for circularity needs to mainstreaming material efficiency concerns within include the trade dimension of the transition. critical sectors under their mandate such as waste The possibility of leakage of material-intensive management and recycling as well as in areas production toward linear production havens such as spatial planning, mobility, and the built following an increasingly stringent CE policy environment. environment in the EU calls for trade policy instruments to play a key role in addressing both Scaling up material efficiency gains requires sustainability and competitiveness concerns. coordinated efforts beyond government. International trade policy can be leveraged to Collaborative CE communities, hubs, and support domestic measures aimed at transforming networks are needed within and across economic production and consumption patterns. The EU can sectors, value chains, and regions. Such leverage global value chains (GVCs) to disseminate mechanisms can help increase the knowledge technology and achieve material efficiency gains in base, foster sharing experiences on CE policy, production processes located outside Europe on innovation and strategies, business models, a global scale while limiting risks of leakage. Given and projects. Ensuring that supply chains and that most leakage takes place in downstream consumers have the necessary technical skills, industries (see Chapter 3), designing policies finance, and information to respond to the EU’s (material taxes or regulatory measures) such that CE aims requires a nuanced understanding of lead firms take responsibility for primary material use the interconnected networks currently in place. and other externalities across the full value chain Decisions made in any market about how materials will be critical to remove the risk that materials are are extracted, transformed, transported, sold, and relocated to ‘linear production havens.’ This calls disposed of can have far-reaching ramifications. for a growing relevance of CE considerations within trade agreements. (b) Information Seeking cooperative solutions through trade Policies should aim to minimize coordination and other cross-border policies such as costs within and across firms. Despite increasing development cooperation appears crucial. the attention of Europe’s private sector, CE often Achieving CE gains in Europe will require supporting remains marginal to corporate considerations change beyond its borders. The impact of trade- even when circularity can have positive benefits related measures and the leveraging of lead firms in on margins and bottom lines. Firms’ cooperation GVCs will be commensurate with LMICs’ capacities requires information about circular aspects of to reorient and upgrade production. Support to products exchanged in business-to-business and LMICs toward investing and diffusing CE technology business-to-consumer transactions—mandatory will provide additional incentives aimed at raising product information requirements such as material production standards. passports or publicly accessible databases can facilitate this. The sharing of data and best practices Actual implementation will require vertical through knowledge platforms will bring down collaboration with subgovernment tiers. information and innovation costs. Involving business Cities can become engines of circularity due to associations and existing private sector platforms their regulatory and fiscal remits, responsibilities can leverage existing institutional infrastructure for key services such as waste and recycling, their to lower networking costs. Publicly supported role in fostering agglomeration economies, and, initiatives triangulating research institutions with not the least, the relative share of final resource firms across value chains and sectors can lead to consumption taking place within their boundaries. innovation in upstream and downstream material A 2020 survey  of 51 cities in Organisation for management. 14 BACK TO CONTENTS EXECUTIVE SUMMARY FIGURE ES.12: ACTORS AND ROLES IN THE CE NETWORK Barriers Research and Technology Government and Enablers Educational Institutions, Development Consultancies CE NETWORK GOVERNANCE Business and Market Consumer Government, Business, Government Creation Behavior Media, CSOs Source: Adapted from Cramer (2020). Industrial parks provide a cost-effective means small and medium enterprises (SMEs) will benefit to enhance CE synergies across industry from policy measures addressing the up-front costs sectors. CE-oriented industrial parks can facilitate and skills requirements of digitization (Annex 4, interactions between science, technology and Focus Section E). business, and upstream and downstream input- output links across businesses and sectors. Firm-level capacities can be supported by Successful industrial parks provide high-quality, tailored skills programs. Due to the relatively specialized services, with particular emphasis on higher labor and skills intensity of CBMs, public business incubation, spinoff activities, networking, support to businesses in filling the circular skills gap and logistics. Eco-industrial parks (EIPs) generate will be crucial. Measures include (a) dedicated labor material efficiencies by promoting recycling and the market needs assessments of CE development reuse of resources and waste through industrial trends, business demand, and existing educational symbiosis in input-output relationships. In the offerings; (b) targeted skills development programs process, tenant firms can achieve more cost- where the market alone does not generate them; efficient production, which is also resilient to price and (c) support for coordination across education fluctuations and resource scarcity. According and industry actors in establishing circular skills to estimates, scaling up EIPs could save EU development partnerships. Different countries show businesses €1.4 billion a year and generate €1.5 different levels of readiness at the outset of the billion in sales (Annex 4, Focus Section D). circularity transition. While displaying potential, the four MSs targeted by the analysis all lag in terms Supporting firms’ digitization processes is of skills presence. The ample material efficiency critical to material management innovation. gains that can be reaped in these MSs call for an Digital applications are today a key enabler of PaaS additional policy and investment focus in this area. CBMs. Digital tools such as artificial intelligence (AI), robotics, and internet of things (IoT) are already CE metrics should be geared to support being used to optimize production processes, transition policies. Today, standard CE metrics resulting in less waste and reduced emissions. provide information on key outcome dimensions, Digitally enabled solutions such as 3D printing can such as waste collection/landfilling/sorting/recycling help cut costs and optimize production. Online rates, usage of secondary materials, and domestic platforms are already facilitating the reutilization of materials consumption. While they provide a products, components, and materials by enabling necessary macro-level view, the level of aggregation reuse, repair, and remanufacturing business models. of these indicators does not always lend itself to Due to their share in Europe’s productive networks applications by policy makers and companies, and their role in creating and contributing to CBMs, even in basic commodities and critical sectors. 15 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition Water footprint metrics can guide the identification quality standards for repair activities, are examples of efficient and sustainable water production and of regulatory gaps. Adversarial regulations prevent consumption systems, while metrics for ‘end-of- some key CE practices such as those limiting the waste’ construction and demolition waste (CDW) use of recycled materials in road construction or can enable actors to certify the quality of recycled restrictions regarding cross-country waste trading. and reused materials. Better material and sector Examples of regulatory conflicts include provisions resolution can allow for measures targeting value for addressing other policy goals that actually affect chains and material streams. Considering both circularity objectives such as those addressing stocks and flows would provide a more complete health and safety standards—progress on food picture of countries’ different dematerialization waste reduction, recycled plastics, and CDW pathways and improve the management of existing utilization. Starting at the EU level, policy makers material assets. Finally, given that material flow can proactively create supportive regulation for dynamics are slow to change, metrics could the enabling framework for circularity. Addressing better support policies by tracking their ongoing regulatory conflicts ahead of bringing new implementation and immediate impacts. Examples instruments to the table will enhance the impact of of results chain tracking of CE fiscal policies are the latter. (a) levels of material subsidies/taxes, (b) price wedge dynamics between primary and secondary Addressing the economic distortions that materials, and (c) rates of secondary material reinforce linear economies can unleash the utilization across sectors. Similar indicator chains private sector’s CE potential. The business case can be designed for a range of CE measures, for CEs is limited by distorted pricing. Rebalancing allowing for more regular and just-in-time feedback the incentives requires a combination of fiscal and to decision-makers and citizens on progress. regulatory policies targeting both production and demand. As mentioned above, if implemented Removing informational barriers constraining correctly such policies can redress the regressive consumer actions is necessary but insufficient impacts of attaining material decoupling, with both in itself. The parameters and benefits of the CE are growth and welfare enhancing outcomes. A low- still largely unknown to consumers, preventing their hanging fruit here is the phasing out of subsidies to critical role in accelerating the transition. Policies material production and use, starting with fossil fuel empowering consumers include awareness-raising subsidies, which reach €55–58 billion a year in the measures and tools such as product labeling EU, mostly through tax expenditures. Beyond fossil and standards. Providing transparent and easily fuels, material production and consumption are accessible information on parameters such as subsidized across sectors either directly or through product life span, repairability, and refurbishing tax deductions/reductions, including in construction options creates consumer choice in relation to (gravel and sand), agriculture, land and forestry, linear products. Opportunities for consumers to fisheries, water, and, of course, waste. exercise their preferences will increase demand and send a message to the market, but this will also be Circular fiscal reforms shift the tax burden insufficient without adequate information to other from labor to materials. The introduction and dimensions, such as incentives. increase of taxes on material production can be coupled with a corresponding, revenue-neutral (c) Incentives decrease in labor taxes, with positive effects on The lack of supportive regulation constrains growth and welfare. Shifting the tax burden from the emergence of CBMs on several fronts. labor to materials has the potential to address Regulatory barriers can be divided into three both the market failures induced by linearity and categories: (a) regulatory gaps lowering CE uptake; the market distortions generated by labor taxation, (b) regulations related to materials and resources which contributes to higher relative use of materials that actually hinder CE goals; and (c) regulatory and offshoring (leakage) of production. Taxation also conflicts across sectors affecting CBMs. Insufficient addresses rebound effects stemming directly from implementation and enforcement of recycling increased material efficiencies and indirectly from targets and landfill bans, as well as the lack of growth-enhancing policies. 16 BACK TO CONTENTS EXECUTIVE SUMMARY FIGURE ES.13: STAKEHOLDERS’ PERCEPTIONS OF LEVEL OF DEVELOPMENT OF CE REGULATORY INSTRUMENTS (SCORE 0–5) ES 11: Stakeholders’ perceptions of level of development of CE regulatory instruments (score 0 - 5) 2.00 1.50 1.00 0.50 0.00 Product labeling Recycled content Green public Extended Right to repair Sanctions such as mandates procurement Producer The Polluter pays Responsibility . EU-27 Bulgaria Croatia Poland Romania Source: World Bank. There is ample potential in Europe to consider 2020 CE Action Plan encourages the application a circularity tax shift. Current taxation patterns of economic instruments. Even in the case of make virgin raw materials cheaper than secondary value added tax (VAT), where broad application ones, weaken the business case for CBMs, and parameters are set in Brussels, their actual constrain public investments in CE. In 2019, the determination and application remains primarily 27 EU countries (EU-27) raised roughly €5.6 trillion under the remit of MSs. While the reform of in tax revenues—52 percent of those were labor VAT regimes to promote CBMs, such as repair taxes (personal income tax [PIT], payroll, social services, PaaS, and the utilization of secondary security contribution [SSC] taxes). The average materials, has already seen a limited application, it EU tax wedge in total labor costs is about 39 can be deepened and expanded. percent: for every €1.00 in labor costs, €0.39 is taken by Treasury. Conversely, taxes on pollution Public procurement can play a key role in and resources generated about €10 million—0.19 making markets for CBMs. Every year, over percent of total tax revenues and 0.08 percent of 250,000 public authorities in the EU spend around the total EU GDP. 14 percent of GDP (roughly €2 trillion per year) on the purchase of services, works, and supplies. No circularity-oriented fiscal reform will Public procurement plays a key role in creating succeed without phasing out subsidies for new markets but also in scaling demand. Today, material production and use, starting with Public Procurement Directives provide a framework fossil fuel subsidies. Europe’s experience shows to introduce sustainability considerations, but how hard it is to eradicate environmentally harmful their voluntary nature makes for a limited uptake subsidies (EHSs). An assessment of the coherence within national legislation and the procedures of of environmental policy with current subsidies in Italy purchasing authorities. In 2018, 60 percent of showed 56 EHS categories that are detrimental to public contracts were awarded purely based on achieving CE objectives, for a financial value of at lowest-price criteria. The adoption of circular public least €13.5 billion in 2019. procurement (CPP) remains, however, incipient in several MSs, including the four focus countries Although the design of any CE-oriented tax of this report. Policy should address existing reforms will require EU-level coordination, constraints to deploying CPP, starting with the responsibility for their implementation largely limited understanding of the economic benefits of remains with MSs. EU-level policy action has CPP across and beyond government, particularly long focused on instruments within the EU’s Budget Departments and legislators, and the remit, notably regulatory measures backed by systematic utilization of full-cost accounting and life- information instruments and tools. But the EC’s cycle costing (LCC). 17 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition (d) Financing including in EU-4. But financing the CE will not take off in the absence of the reform of policies that The recent growth in CE financing is continue to support linear models. promising, and the EU is mainstreaming CE objectives through its different funding The CE calls for a new reform agenda. programs. The private sector is already paying Promoting CBMs without dismantling the linear attention, with commercial financing that flows economy and the policies supporting it is inefficient into CE investments now growing rapidly, and insufficient. It may well continue to foster the particularly in the form of equity and mainly driven emergence of niche markets and products, but by environmental, social, and governance (ESG) it will remain inadequate in decoupling welfare considerations. Traditional EU programs, such as creation from material consumption. The circularity the European Structural and Investment Funds, transition will proceed through incremental steps. Horizon 2020, and the LIFE Programme, and More than by technological progress, its pace the more recent Recovery and Resilience Facility will be dictated by the removal of the institutional, (RRF) help integrate CE objectives. Some of the informational, and incentive barriers limiting the larger commercial banks are stepping up to the profit-making opportunities brought about by CBMs challenge, including by reconsidering traditional and their wide adoption. Europe is already showing financial and accounting approaches not adapted that the case for the transition no longer needs to to CBMs. While EU governments can perhaps be made and an acceleration is possible. Through do more to support CE investments, including comprehensive policies, the EU will achieve its through guarantee instruments and blended finance circularity ambitions while creating growth and solutions, overall, there seems to be no lack of welfare and promoting resource efficiency progress public and private financing opportunities. In fact, beyond its borders. the absorption of funds seems to be a problem, 18 BACK TO CONTENTS Chapter 1 Making the case for the circularity transition 19 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition 1.1 Heavy growth 1.0 percent increase in GDP leading to an increase of about 0.8 percent in material consumption, both Global economic development has proceeded in high-income and low-income countries. The hand in hand with material use. Over 96 billion decades after the Second World War, particularly tons (96 Gt) of natural resources were used by since the 1970s, witnessed a threefold increase in production and consumption systems globally global materials’ harvesting. Roughly one-third of all in 2019. Nonmetallic minerals (NMM), such as materials extracted globally since 1900 were only sand, gravel, and limestone used in construction, mobilized between 2002 and 2015 (Figure 1.2).4 particularly for infrastructure, account for about half of this, with the rest being taken by biomass Global convergence in wealth and living (27 percent), fossil fuels (17 percent), and metals standards, coupled with population growth, (10 percent). The evolution of human economies is expected to at least double demand for took place through steady increases in material per materials by 2050 (Figure 1.2). In addition to capita use. Hunter-gatherer systems developed its historically strong correlation with income, and thrived on averages of 0.5 to 1  metric ton per material consumption tends to rise in line with other capita, and agrarian societies prospered on 3 to 6 determinants of progress such as human capital tons per head. Today, the global average per capita and life satisfaction, albeit in a less linear fashion consumption stands at roughly 12.5 tons.3 (Figure 1.3), as the quality of services delivered to society is frequently dependent on both material Rapid and increasingly material-intensive stocks and flows (Chapter 2).5 growth over the past century has driven a surge in material extraction and use. The expected economic dematerialization Industrialization marked a step change in material induced by global structural change will not consumption. The past century saw a fourfold suffice to contain the global surge in material increase in global population and a 23-fold demand in the coming decades. Material increase in economic output. Economic growth efficiency improves in line with technological was characterized by a relatively high resource progress and a higher share of services in the elasticity of gross domestic product (GDP), with a economy. Projections indicate that the growing FIGURE 1.1: GLOBAL MATERIAL USE BY CATEGORY Million tons Non-metallic Minerals (Construction) Biomass Fossil Fuels Non-ferrous Metals Ferrous Metals Timber Non-metallic Minerals (Other Uses) 0 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000 Non-Infrastructure Infrastructure Source: Global Infrastructure Hub 2021. 3 Krausmann et al. 2009; Global Infrastructure Hub 2021; Halberl et al. 2009; IRP 2019. 4 Haberl et al. 2020; IRP 2011; Krausmann et al. 2018; OECD 2019. 5 Carmona et al. 2020; IRP 2017. 20 BACK TO CONTENTS MAKING THE CASE FOR THE CIRCULARITY TRANSITION FIGURE 1.2: HISTORICAL AND PROJECTED GLOBAL MATERIALS EXTRACTION BY RESOURCE 200 180 Changes in trends for 160 extraction of minerals, non-metallic minerals and 140 metal ores occurred post World War II and in early of 1970s 120 Billion Tons 100 80 60 40 20 Historical Data Projections 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 Year Biomass Fossil Fuels Metal Ores Non-metallic Minerals Source: European Commission (EC) Joint Research Center. FIGURE 1.3: TRENDS IN MATERIAL CONSUMPTION: HUMAN DEVELOPMENT INDEX, HAPPINESS INDEX, AND GDP PER CAPITA 1.0 0.9 Human Development Index, Happiness Index, GDP per Capita 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 0 10 20 30 40 50 60 Real Material Consumption, per Capita, Tons Human Development Index Happiness Index GDP per Capita Log. (Human Development Index) Log. (Happiness Index) Linear (GDP per capita) Source: World Bank data. 21 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition share of the tertiary sector in the global economy nearly half of the global GHG emissions. Addressing will reduce growth in material use by unit of GDP, GHG emissions from industry can be technologically as it is less material intensive than agriculture or challenging and costly, particularly in sectors such industry. This effect is expected to be coupled with as iron, steel, aluminum, cement, and plastics, the impact of technological developments helping to which are associated with hard-to-abate emissions delink growth in production levels from the material related to high-temperature processes, production inputs to production. This would lead the global emissions, and end-of-life emissions. In the food economy’s material intensity declining at a rate system, food waste is a major source of GHG of 1.3 percent per year on average in the coming emissions. In fact, it is estimated that if food waste decades, reflecting relative decoupling. This means were a country (including food lost in supply chains that economic growth is happening faster than and food wasted by retailers and consumers), it growth in resource extraction. However, absolute would be the third largest GHG emitter in the world. decoupling (total material use falling while the An increasing focus on material efficiency and economy grows) has not yet been observed, even circularity will help align the emissions trajectory of in advanced economies, particularly once materials these sectors with the goals of the Paris Agreement. embodied in imports are considered. The result is that, although not as fast as GDP, use of global Waste is a major cause of public health, materials will continue to increase as countries environmental, social, and economic costs. achieve higher levels of income.6 Globally, inadequate solid waste management contributes to climate change—accounting for about 5 percent of global carbon emissions—and 1.2 Two planets plastic pollution, which has caused damages to the marine environment estimated at over US$21 The linear business as usual (BAU) carries billion per year.7 Locally, solid waste harms public sustainability, security, and equity implications. health, putting millions at risk due to soil and water Natural assets remain the key foundations of our contamination and poor air quality. Solid waste prosperity and well-being, but our economic model generation is set to double in large and medium- is increasingly predicated on their erosion. In a linear size cities by 2050 and triple in the world’s poorest economy, the production of goods and services countries. comes at the expense of ecosystems and the vital services they provide such as biodiversity; resilience Reducing material consumption leads to less to extreme weather events; and clean air, water, pollution, waste, and related health impacts and soil. The great acceleration in material resource and is key to preserving vital ecosystem extraction and consumption has long been identified services and natural resources, including as being responsible for major shares of today’s biodiversity. In the linear system, products environmental burden. Material management—the eventually end up as waste, most of which is extraction, production, transformation, transport, landfilled or incinerated. For instance, the world consumption, and disposal of materials used to generates around 400 million tons of plastics waste make products and infrastructure—today accounts annually as well as 54 million tons of electronic for 90 percent of total biodiversity loss and water waste,8 which becomes hazardous to human health stress impacts and 33 percent of health impacts and ecosystems when mismanaged. One of the due to air pollution. principal aims of the circular economy (CE) is to minimize waste and pollution by returning products, Natural resource management significantly materials, and resources into the product cycle at contributes to global greenhouse gas (GHG) the end of their use. Reducing waste and pollution emissions. The production of goods and services, and associated negative environmental impacts including food, for the global economy accounts for will thus have substantial benefits for public health, 6 OECD 2018a. 7 Mcilgorm et al. 2022. 8 UNEP https://www.unep.org/interactives/beat-plastic-pollution/#:~:text=Today%2C%20we%20produce%20about%20300,of%20 the%20entire%20human%20population.; Ellen Macarthur Foundation https://ellenmacarthurfoundation.org/topics/biodiversity/ overview; Forti et al. (2020). 22 BACK TO CONTENTS MAKING THE CASE FOR THE CIRCULARITY TRANSITION FIGURE 1.4: ENVIRONMENTAL IMPACTS OF METAL MINING ACROSS TIME (2000 = 1.0) 2.5 2 1.5 1 0.5 Iron and Steel Aluminium Copper 0 2000 2005 2010 2015 2000 2005 2010 2015 2000 2005 2010 2015 Zinc, Lead, Tin, and Nickel Production amounts Climate change Ecotoxicity impacts Gold, Platinum, and Silver Source: UNEP 2019. Note: Metal mining covers 10 metals meeting more than 95 percent of global extraction of metal ores.  including through designing out toxic chemicals. addresses plastic waste and has been instrumental In addition, it is estimated that the extraction and in generating momentum to launch negotiations processing of natural resources is responsible for a new treaty to end plastic pollution. Similarly, for more than 90 percent of biodiversity loss. chemical safety as promoted by the Strategic Decreasing the need for virgin materials can thus Approach to International Chemicals Management make a major contribution to healthy ecosystems (SAICM) will require improving chemicals and biodiversity preservation. management through the adoption of circularity in chemistry and its products. Further links exist The objectives of several international with the Montreal Protocol, for example, through environmental agreements revolve around designing out ozone-depleting substances (ODSs) the achievement of material efficiency gains. and increasing the lifetime of refrigeration and air There is currently no international environmental conditioning appliances, and with the Minimata agreement specifically dedicated to the CE, even Convention, where the elimination of mercury from though the Sustainable Development Goals (SDGs) industrial activities aligns with the circularity principle contain several targets and indicators aimed of designing out toxic materials. at increasing circularity under SDG 12. Indeed, circularity will be required to achieve the visions The crossing of key planetary boundaries and goals of numerous international environmental has material use as its main driver.9 agreements, particularly those related to the The immediate limits to current levels of virgin elimination of toxic substances and waste. For materials stem from their environmental impacts, example, the Basel, Rotterdam, and Stockholm particularly when considering the potential (BRS) Conventions aim to protect human health irreversibility of some of these impacts on natural and the environment from hazardous chemicals ecosystems, biodiversity, and climate trends. and wastes. The Basel Convention is the only Based on today’s production technologies and global legally binding agreement that specifically resource demand patterns for major metals, global 9 Allwood et al. 2011; IRP 2019; Klee and Graedel 2004; Rockström et al. 2009; Steffen et al. 2015. 23 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition FIGURE 1.5: MATERIAL USE DRIVES PLANETARY BOUNDARIES’ OVERSHOOT CLIMATE CHANGE FRESHWATER CHANGE Increasing risk Freshwater use (Blue water) BIOSPHERE Green INTEGRITY E/MSY water STRATOSPHERIC OZONE DEPLETION perating spac BII fe o e Sa (Not yet quantified) ATMOSPHERIC AEROSOL LAND-SYSTEM LOADING CHANGE (Not yet qualified) NOVEL ENTITIES OCEAN ACIDIFICATION P N BIOGEOCHEMICAL FLOWS Source: Stockholm Resilience Center, based on Steffen et al. (2015); and Persson et al. (2022). production will need to be reduced by 40 times for the largest proportion of global material compared with 2016 levels to keep within safe earth consumption—are rapidly increasing. In a world of system boundaries.10 increased competition over resource access and ever higher rates of extraction, both advanced In addition to sustainability concerns, and emerging economies face supply risks. The ballooning resource consumption compounds COVID-19 pandemic compounded the already risks from commodity supply shocks, with existing exposure of both advanced and emerging worldwide trade and economic security economies to commodity markets volatility and implications. Many basic materials such as iron supply chain and price shocks (Figure 1.6). More ore as well as NMM are generally available and importantly, several raw materials that are ‘critical’ remain abundant in the earth’s crust, albeit at lower to emerging sectors (such as renewables and and decreasing concentrations than the deposits digital industries) as well as established ones mined today. But concerns around resource (such as machinery, vehicle parts and standard constraints cannot be dismissed. Extraction rates electronics) are actually rare. Manufacturers are for NMM—including sand, gravel, and clay that running increasing supply risks because of their are used in large quantities to produce concrete, dependence on rare earth metals such as cobalt, asphalt, and glass for infrastructure and account Steinman et al. (2017) argue that resource use accounts for more than 90 percent variation in environmental damage indicators 10 across countries. Van der Voet, van Oers, and Nikolic (2004) show a tight coupling between aggregate mass flows and ecological impact. 24 BACK TO CONTENTS MAKING THE CASE FOR THE CIRCULARITY TRANSITION FIGURE 1.6: COMMODITIES PRICE TRENDS PROCEED IN STEP WITH MATERIAL RESOURCE USE Index 140 120 100 80 60 40 20 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 YEAR ENERGY FOOD RAW MATERIALS MINERALS Source: World Bank data. tungsten, tantalum, tin, indium, bauxite, and copper, By 2010, countries outside the Organisation for which are ultimately finite, nonrenewable resources, Economic Co-operation and Development (OECD) whose remaining reserves are increasingly located in group and China had a share of only 18 percent remote or protected locations.11 of global stocks, whereas their share of the global population was 62 percent. Although the share of Current patterns of resource consumption global materials stocks held by industrial countries is reflect the growing divide between and slowly decreasing in line with the rapid acceleration within countries. On average, each human being in stocks held by emerging economies such as consumed 8 tons of materials in 1980, 10 tons China (by 2010 China already owned 22 percent of in 2009, and over 12 tons today. But per capita global stocks), developing countries’ share in the consumption levels are increasingly uneven across global stock of materials is projected to continue countries and income brackets. North America’s to remain limited based on current flows, with large average stands at 21.94 tons compared with differences in per capita stocks continuing to exist Africa’s at 4.76 tons. The wealthiest billion people between industrial and emerging countries, on the on the planet consume 72 percent of the world’s one hand, and developing countries, on the other resources, while the poorest billion consume less (Figure 1.8). than 1 percent.12 Addressing the growing environmental, equity, Once measured in terms of global material and economic security imbalances brought stocks dynamics, rather than yearly flows, about by material consumption patterns the materials divide is even starker. The extent requires breaking away from traditional of resource extraction needed for developing production and consumption systems. Our countries to match high-income countries’ material economy is based on a linear model of extraction, endowments is staggering. Between 1900 and utilization, and disposal (also known as take- 2010, industrial countries held the largest share of make-use-waste model, Figure 1.10) of resources. global material stocks, essentially embodied in fixed Globally, the amount of materials embodied in capital assets, such as buildings and infrastructure. Valero and Valero 2015; Van Vuuren, Strengers, and De Vries 1999. 11 IRP and UNEP 2018. 12 25 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition FIGURE 1.7: DOMESTIC MATERIAL CONSUMPTION PER CAPITA (2017) Source: Based on data from United Nations (UN) Statistics Division. FIGURE 1.8: DISTRIBUTION AND DYNAMICS OF GLOBAL MATERIAL STOCKS (1990–2010) A Distribution of Global Stocks Stock Growth Dynamics B Shares in Global Stock(%) Net additions to Stock(Pg/year) 100 30 Rest of World Global 25 Industrial China 80 Rest of World China 20 60 Industrial 15 40 10 20 5 0 0 1900 1930 1960 1990 2010 1900 1930 1960 1990 2010 Source: Krausmann et al. 2017. products discarded after reaching their end of life disposed of within the first six months of their is expected to increase by 70 percent by 2050, life, it is estimated that 80 percent of a product’s largely outpacing population growth. This is far from environmental impact is determined during the being solely a solid waste management problem. design phase. This indicates that the solutions With roughly 90 percent of the raw materials require a transformation of the entire operating used in manufacturing becoming waste before system, not just at the end-of-life disposal of the final product leaves the production plant and resources.13 about 80 percent of products manufactured being 13 Ellen MacArthur Foundation 2021a; World Bank 2018. 26 BACK TO CONTENTS MAKING THE CASE FOR THE CIRCULARITY TRANSITION FIGURE 1.9: CIRCULAR ECONOMY ACTIVITIES: THE 9RS FRAMEWORK Smarter product use R0 Refuse Make product redundant by abandoning its function and manufacture R1 Rethink or by offering the same function with a radically different product R2 Reduce Extend lifespan of R3 Reuse Re-use by another consumer of discarded product product and its parts which is still in good condition and fulfills its original function R4 Repair Repair and maintenance of defective product so it can be used with its original function R5 Refurbish Restore an old product and bring it up to date R6 Remanufacture Use parts of discarded product in a new product with the same function R7 Repurpose Use discarded products or its part in a new product with a different function Useful applications of R8 Recycle Process materials to obtain the same (high grade) or materials lower (low grade) quality R9 Recovery Incineration of material with energy recovery Source: Adapted from Potting et al. (2017) and Morseletto (2020). Linearity implies that by 2060 we will need intervening at the different stages of the product at least two planets to meet the demand for life cycle, including during design and production; materials. Unless prosperity can be dramatically (c) avoiding inefficiencies, thereby inducing decoupled from resource use, environmental resource savings within the whole production- pressures, economic risks, and inequality will consumption cycle; and (d) encouraging innovation continue their rise, and an increasing number of through new business models that minimize the tipping points will rapidly be crossed. The rise of the negative environmental externalities associated CE concept responds to a growing consensus of with extraction, production, and consumption the relevance of these trends. processes.14 Its conceptualization has evolved by extending end-of-pipe waste management approaches centered on the 3Rs rule (reduce, 1.3. The promise of circularity reuse, and recycle) to more extensive and fine- A CE aims at creating welfare while minimizing grained frameworks encompassing upstream the production, consumption, and disposal consideration of materials, such as the 9Rs of materials. CE-related policies, investments, hierarchy adopted by the Ellen MacArthur’s and business models strive to maximize resource Foundation, which further articulates the hierarchy efficiency by organizing production-consumption of circularity and has become a benchmark (Figure systems into closed loops, thereby reducing 1.10).15 Given that material management accounts extraction, waste, and related environmental for up to two-thirds of global GHG emissions, the pressures. CE can play a key role in climate change mitigation. In industry, circularity can cost-effectively reduce Current definitions of CE tend to articulate GHG emissions, which are considered hard to complementary objectives: (a) preserving the abate—particularly in the production of iron, steel, value of products, materials, and resources for aluminum, cement, and plastics. as long as possible; (b) phasing out waste by 14 A 2017 metareview counted more than 114 definitions of CE (Kirchherr, Reike, and Hekkert 2017). Among the most known is the one by the Ellen MacArthur Foundation (2013) which frames CE as “an industrial economy that is restorative or regenerative by intention and design.” For an overall discussion, see Kirchherr, Reike, and Hekkert (2017). 15 Cramer 2014. 27 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition FIGURE 1.10: FROM LINEAR TO CIRCULAR ECONOMIES Return Reuse Take Make Use Waste Recycle Repair Source: Based on BoI (2020). In addition to easing environmental pressures, produced is still in use today, and 7 million tons of the circular transition can be a driver of private potentially recyclable aluminum is lost to landfills sector growth. Although there are still very few every year, particularly through consumer products. ex post studies to verify growth and job creation Overall, the adoption of circular business models potential of CE, technological innovation in resource (CBMs) remains in its infancy.18 efficiency can lead to productivity gains. What is certain is that the goal of decoupling natural A range of theoretical weaknesses often go resource extraction and use from economic output unaddressed in the mainstream description has already led to a range of concrete business and promotion of CE. This further adds to the applications aimed at closing resource utilization complexity of the concept. loops, slowing down material use, as evidenced by • Despite the attempts to articulate the concept the growth of repair and remanufacture services, of circularity through a more refined hierarchy of the birth of the sharing economy,16 or quite simply actions, the diverse definitions of the different Rs by an uptick in recycling and reuse rates. Today, that exist within the discipline add to the fuzzy an estimated 8 percent of the Dutch workforce is conceptualization of the CE agenda.19 employed in CE jobs, with the biggest concentration • Perfectly closed material loops are ideal in activities that preserve and extend the value archetypes. Today technology allows certain of materials already in use, such as reuse and materials (glass and aluminum) to be fully recycling.17 recyclable, but even zero waste advocates Despite the promise of multiple environmental recognize that a share (up to 10 percent) is and economic objectives, actual progress nonrecyclable/non-compostable/nonreusable.20 on the ground remains slow. Indeed, by • Rebound effects expected from resource some measures, the global ‘circularity gap’ is efficiency gains are often not considered. growing. The global rate of recycling—the most elemental level of the circularity hierarchy, for which • While being over-conceptualized, CE is currently technologies are largely available—is still limited, ‘under measured.’ The flurry of CE dimensions is at just 13 percent. Even perfectly and infinitely matched by a dearth of attention to classifying recyclable materials are lost every day to landfills. and measuring material stocks and flows in CE About 22 percent of all copper ever mined has metrics reports. been landfilled, only 75 percent of aluminum ever 16 The sharing economy means different things to different people. In one of its accepted meanings, the sharing economy is a system of renting and a service economy as a shift from a system of selling and buying to just utilization of products (Stahel 1986; Zhu 2010). The suggested system will reduce resource needs and the wasted and lower production capacity will be compensated by the creation of a new service economy (PaaS) which has been heralded as an effective instrument for moving society toward resource efficiency (Tukker 2015). 17 Circle Economy 2017; EC 2019a; IISD 2020. 18 Circle Economy 2020. 19 Reike, Vermeulen, and Witjes 2018. 20 Hestin et al, 2010. 28 BACK TO CONTENTS EXECUTIVE SUMMARY TABLE 1.1: THE RELEVANCE OF CIRCULARITY TO THE ACHIEVEMENT OF SDGs SDG Link 12 Sustainable CE practices decoupling economic activity from resource use and Consumption and associated environmental and social impacts are at the heart of this goal. Production 2 Zero Hunger SDG target 12.3 pledges to reduce food losses along production and supply chains, including post-harvest losses. Regenerative agricultural practices are key to reducing malnutrition and eliminating hunger. 3 Good Health and Circular mobility solutions can cut urban air pollution and provide low-carbon Wellbeing mobility. Toxic waste and industrial effluent reduction has a direct impact on population health 6 Clean Water and CE practices such as small-scale water purification, sustainable sanitization, Sanitation waste water treatment, water reuse and recycling, nutrient recovery, biogas systems, and so on can help increase access to safe drinking water and equitable sanitation, reduce pollution, and improve water quality. 7 Affordable and The shift to renewables and increased energy efficiency are examples of Clean Energy circularity in the use of energy resources. 8 Decent Work and CBMs can generate efficiency savings. Waste valorization can generate Economic Growth higher-value green jobs. 9 Resilient Very high resource efficiencies required due to the large share of materials Infrastructure embodied in infrastructure 11 Sustainable Cities Cities account for 75% of global natural resource consumption, 78% of and Communities energy, 60–75% of GHG emissions, and 50% of waste generation. Because of their remits, cities are key actors in designing and implementing material efficiency interventions. 14 Life below Water Preventing waste generation and leakages from land-based activities through CE practices will directly reduce waste entering the oceans. This also includes recovery of nutrients from wastewater streams before entering oceans. Additionally, CE contribution to tackling climate change will indirectly reduce ocean acidification. Source: Schroeder et al. 2019. Despite such shortcomings, the mounting But its actual application remains nascent. awareness of the need to transition away from Explicit CE policy development only dates back ‘linear’ economic models has placed CE within to the late 1990s, with the early application of the realm of mainstream sustainability policy. closed-loop thinking in Germany22 and Japan.23 With CE approaches increasingly seen as central to China has in many ways been a frontrunner in the achievement of various SDGs, starting with SDG considering the policy implications of the concept, 12 on Sustainable Consumption and Production with a first strategy developed in 2003 and then (Table 1.1), entities such as the Group of Seven (G- later developed and extended within several five- 7) and the Group of Twenty (G-20) have made it the year plans.24 But the transition clearly requires centerpiece of their work programs.21 systemic changes that only powerful, disruptive, and steadily implemented measures can trigger. 21 Schroeder et al. 2019. 22 Germany’s 1996 ‘Closed Substance Cycle and Waste Management Act’ made both producers and consumers responsible for recycling, reuse, and dispose of waste “in order to conserve natural resources and ensure environmental sustainability.” 23 Bangert 2021. 24 Mathews and Tan 2016. 29 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition The challenges that national and local policy makers actions underpinned by coherent and operational face in building CEs are mostly not of a technical policy frameworks. Opportunities for closing the nature. They are rather economic and institutional in resource loop are highly contextual, depending nature. Information and accountability frameworks, on what drives an inefficient resource cycle within normative and legal tools, and collaboration a country. Actions should be designed around platforms have been built to suit linear models; those drivers. Progress is also constrained by institutional and cultural inertia hinders change and multiple barriers, including policy biases providing maintains the status quo or leads to uncoordinated advantages to linear economic models, and the and fragmented approaches; and externalities are mix of regulatory, economic/fiscal, and soft tools not factored into material resource pricing, inevitably needed to shape economic actors’ incentives to leading to linear preferences. In this light, the overcome such barriers, which are largely country achievement of substantial materials efficiency gains specific. Although the willingness and capacities to seems to have all the hallmarks of a super-wicked shape such incentives lie primarily within the realm policy problem25 (Figure 1.11). of national policy making, an adequate level of action and attention by national governments is still The circular transition will require country- missing. level attention. Most of the existing analytical and policy work has a global or business/sector focus, Lastly, CE policies have implications for with relevant studies mostly utilizing a case-by-case the developing world. The CE can often be or sector-by-sector approach, without considering dismissed as a high-income country policy problem. systemic interdependencies. The progress of In many ways, it is—wealthy countries bear a circular models of production and consumption disproportionate share of materials consumption will largely revolve around country-level and local and its environmental and economic spillovers. FIGURE 1.11: PROMOTING CE AS A SUPER-WICKED PROBLEM Cross border Vested interests nature of the in linear status Complexity/ problem quo fragmentation of value chains Information Limited asymmetries for constituencies Weak capacity or supporting Consumers’ private and public governments to (voters’) lack of sectors change regulate and awareness and Technology and enforce choice infrastructure capacity thresholds Constraints to scalable business Luck of metrics models Tragedy of the Lack and actual commons / free distortion of riding problem Bias in price signals investment and policy decisions Limited visibility Solutions of impacts Perceived long spanning micro, ter nature of meso, macro Scarce R&D impancts (time Linear inertia in domains inconsistency) production and consumption systems Few profit making opportunities Policy incoherence Source: Original elaboration for this publication. Levin et al. 2012. 25 30 BACK TO CONTENTS EXECUTIVE SUMMARY At the same time, the environmental impacts of the EU and the rest of the world and provides linear economic models are felt globally and often, recommendations on how possible negative effects primarily, in lower-income countries. Conversely, can be overcome through trade and aid policy. while the current distribution of material flows and stocks has global equity implications, material The role of the private sector in driving the transition efficiency policies implemented by high-income is addressed in Chapter 4. While it is already an countries will inevitably have repercussions beyond engine of CE innovation, the private sector is their borders. still confronted with barriers at different levels. If companies are to scale up CE-related investments, removing these barriers is the policy priority for 1.4 Squaring the circle governments.  This report proposes a policy framework Chapter 5 addresses the economics of the to bridge the gap between envisioning and transition to a CE through a computable general implementing the circularity transition. Its main equilibrium (CGE) modeling exercise. It shows aim is to contribute to the development of reforms that neither BAU nor limited measures will and investments accelerating CBMs and limiting achieve substantial efficiency gains. However, a linear ‘take-make-use-waste’ activities. The focus comprehensive suite of targeted policies can reduce is on the EU and its MSs, with particular attention Europe’s resource use at very little economic cost or paid to Bulgaria, Croatia, Poland, and Romania (EU- in ways that are both growth and welfare enhancing, 4). The EU is a frontrunner in the CE agenda and depending on how new fiscal revenues are used.  plays a global role in ‘exporting’ it, through both the sheer weight of the single market and its role as a Chapter 6 proposes a policy framework for the global environmental standards maker. The report circular transition, drawing on the preceding showcases the EU’s significant achievements as analysis. The framework is built on four key well as aspects to consider for accelerating the policy pillars (institutions, incentives, information, circularity transition, with a view to contributing and financing) critical to addressing the barriers to policy development inside the EU and sharing to accelerating Europe’s progress in achieving lessons with countries outside the bloc. The report materials efficiency and circularity objectives.  therefore targets not only EU policy makers but The report is based on different also a global audience willing to learn from the EU’s methodological approaches. Most of the experience. research is based on the analysis and elaboration This report is structured in six chapters, of official data as well as desk research and a complemented by an annex with sectoral deep literature review, including a review of policies, dives and focus sections dedicated to thematic strategies, and action plans. In addition, a survey issues. has been conducted among key stakeholders in the CE in various EU MSs, the results of which Following this introduction, Chapter 2 gives an are integrated into the different chapters. Results overview of the state of circularity in the EU. It on the economics of circularity (Chapter 5) and shows that significant resource efficiency gains have partly of the trade implications (Chapter 3) are been achieved over the past two decades and the based on a unique global CGE exercise using the EU has mainstreamed resource efficiency and CE ‘environmental impact and sustainability applied principles into its policy. However, progress among general equilibrium’ (ENVISAGE) model. This MSs is uneven and needs to accelerate to contain model was calibrated on the extended Global the environmental impacts of Europe’s resource Trade Analysis Project Circulatory Economy consumption.  (GTAP-CE) database, which includes both primary and secondary activities for key materials. The The role of trade in making or breaking the circularity geographical coverage of the modeling exercise ambitions of the EU is introduced in Chapter 3. The included the 27 EU countries (EU-27), European chapter describes the impacts of the potentially Free Trade Association (EFTA) states (Iceland, widening gap in regulatory stringency between Liechtenstein, Norway, and Switzerland), and the 31 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition United Kingdom. In the rest of the report, the terms not cover all economic sectors. It does not delve ‘EU’ and ‘Europe’ are used interchangeably unless into micro-level processes related to technology otherwise stated explicitly. and engineering constraints and opportunities nor does it provide an exhaustive treatment of regulatory The report does not aim to provide a landscapes. Nonetheless, it provides insights on comprehensive treatment of challenges and the direction of travel of the EU and its MSs and potential solutions. The complexity of the circular recommendations to accelerate the transition. transition and its systemwide nature cannot be easily covered within a single piece. The report does 32 BACK TO CONTENTS Chapter 2 Progress toward a CE within the EU 33 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition Since 2008, the EU has made important progress went down by 9.4 percent, from 6.6 billion tons in in its transition toward a more material-efficient 2000 to 6.0 billion tons in 2020 (Figure 2.1). DMC economy. Dematerialization is caused by both increased consistently between 2000 and 2007, endogenous and exogenous drivers and is decreased sharply after 2008, and has since differentiated within and across MSs. EU MSs, flattened out after 2012.26 including the four countries of focus in this study, show different initial conditions in embarking on the Europe’s resource productivity is improving but CE transition, in terms of economic structure and remains below peer countries. Between 2000 capacities. Such heterogeneity will emerge as an and 2020, Europe achieved absolute decoupling opportunity for achieving further materials efficiency of economic growth from domestic resource use. gains, but it is also a challenge for implementing DMC decreased by 9.4 percent while the economy the increasingly ambitious direction being set by the grew by 22.5 percent (Figure 2.1). As a result, EU EU’s CE policy. resource productivity improved by 35.2 percent, from €1.19 per kg of DMC in 2000 to €2.23 per kg in 2020. Despite such progress, the EU’s resource 2.1 Europe’s dematerialization productivity remains slightly below comparator trajectory economies (Figure 2.2), although it is significantly higher than emerging economies such as China. Since 2008, the EU has made significant progress in increasing its resource Reduced rates of DMC have been productivity. Europe’s economy depends on accompanied by increased waste generation. virgin materials for about 87 percent of its material Overall EU waste generation (excluding major consumption, but it is increasingly becoming more mineral waste) continued to increase at an average resource efficient. Its circular material use rate— annual rate of 4.2 percent between 2004 and the share of resources used derived from recycled 2018, reaching 812 million tons. Despite progress waste—increased from 8.3 percent in 2004 to 12.8 in recycling rates in key waste streams (Figure 2.4), percent in 2020. Domestic material consumption the EU still recycles less than half its total waste (DMC), the annual quantity of raw materials generation (2016) and large differences remain extracted in the EU plus all physical imports minus across MSs (Figure 2.3).27 all physical exports, is also decreasing. DMC FIGURE 2.1: RESOURCE PRODUCTIVITY IN COMPARISON TO GDP AND DMC, EU (2000–2020) 140 135 130 125 (Index 2000 = 100) 120 115 110 105 100 95 90 85 2000 2003 2006 2009 2012 2015 2018  Resource productivity  Domestic material consumption  Gross domestic products Source: Eurostat. 26 Eurostat 2021b. 27 Eurostat 2021c; OECD 2022. 34 BACK TO CONTENTS PROGRESS TOWARD A CE WITHIN THE EU FIGURE 2.2: EU RESOURCE PRODUCTIVITY IN RELATION particularly construction. Due to its relatively low TO COMPARATORS (2020) resource productivity, the sector’s contraction led 6 to an improvement in overall resource productivity. USD / kg 5.3 EU dematerialization was supported by the 5 transition toward renewable energy and away from 4.6 fossil fuel consumption, which decreased by 32.2 percent during the same period. Europe’s structural 4 shift away from manufacturing and toward less 3.1 material-intensive services—the contribution of 3 the services sector to EU total gross value added 2.5 (GVA) increased from 71.0 percent in 2005 to 73.1 percent in 2020—was a second driver. Finally, 2 increased rates of material-intensive production outsourced outside of Europe reduced domestic 1 0.6 material consumption, as imports of finished or semifinished products typically weigh less than the 0 total raw materials used to produce them.28 European United Japan United China Union States Kingdom Source: Eurostat 2022d; OECD 2022. 2.2 Uneven progress between Member States Material efficiency gains have been supported by a number of drivers. In addition to demand The transition to a CE does not proceed contractions induced by economic shocks, homogeneously. Vast differences characterize the decreasing DMC was driven by structural change progress achieved by EU MSs. The Dutch economy and the outsourcing of material-intensive production recorded the highest circular material use rate (31 beyond Europe’s borders. The 2008 global financial percent), followed by Belgium and France. Other crisis severely affected material-intensive sectors, Western European member states (MSs) such as FIGURE 2.3: MUNICIPAL WASTE RECYCLING RATES (%) 80 70 60 50 40 30 20 10 0 EU-27    ec ola    Cz P ain  Slo ny A ia the ria Be ds itz m De and ark xe nia Sw rg Fra n Fin e d No a Slo ay Ire a Hu d y ep   Bu lic Es ia Cr ia Po tia Gr al Cy e Ro rus nia Lit aly h R nd ar nc tvi ki c e lan lan n r ton g Sw lgiu ou ub rw a n ee oa ed Ne ust lga Sp va ve Lu hua rtu ma t ng nm p La rm rla I erl mb Ge 2004      2019      Source: EEA 2021. Eurostat 2021d. 28 35 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition FIGURE 2.4: EUROPE’S RECYCLING RATES BY WASTE STREAM (2004–2020) % 80 70 66% 60 50 48% 48% 39% 40 30 20 10 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Packaging waste Overall recycling rate Municipal rate Electrical and electronic waste Source: EEA 2021. Domestic material consumption per capita FIGURE 2.5: DMC PER CAPITA ICELAND Tons per capita 7.5 – 10.3 10.3 – 12.1 SWEDEN FINLAND 12.1 – 17.5 ESTONIA NORWAY 17.5 – 22.3 LATVIA UNITED LITHUANIA 22.3 – 31.4 KINGDOM IRELAND a NETHERLANDS POLAND BELGIUM GERMANY Most Recent Value* CZECH REPUBLIC SLOVAKIA 2017: Bosnia and Herzegovina 2018: Turkey, Albania SWITZERLAND AUSTRIA HUNGARY ROMANIA 2019: Iceland, Norway, FRANCE SLOVENIA CROATIA Switzerland, Serbia, United BOSNIA AND SERBIA BULGARIA Kingdom and North ITALY HERZEGOVINA Macedonia MACEDONIA, FYR TURKEY ALBANIA 2020: Rest of values PORTUGAL GREECE SPAIN CYPRUS MALTA Sources: Eurostat 2021b, 2022d. Portugal (2.2 percent) and Ireland (1.8 percent) were EU average. Resource productivity follows similar among the worst performers. The four countries of patterns of variation between EU MSs, with the focus in this report show large potential for further highest-performing country, the Netherlands, circularity gains. Romania (1.3 percent) had the displaying almost 14 times higher resource lowest circular materials use rate among EU MSs. productivity than that of the most under performing But Bulgaria (2.6 percent), Croatia (5.1 percent), country, Romania.29 and Poland (9.9 percent) also score below the 29 Eurostat 2021b. 36 BACK TO CONTENTS PROGRESS TOWARD A CE WITHIN THE EU FIGURE 2.6: CIRCULAR MATERIAL USE RATE (LEFT) AND RESOURCE PRODUCTIVITY (RIGHT) OF THE EU MSs IN 2020 Circular material use rate (%) Resource productivity (Euro per kg.) Netherlands 30.9 Netherlands 5.4 Belgium 23 Luxembourg 5.0 France 22.2 Italy 3.7 Italy 21.6 France 3.3 Estonia 17.3 Belgium 3.3 Luxembourg 13.6 Ireland 3.3 Czechia 13.4 Germany 3.0 Germany 13.4 Spain 2.9 EU-27 12.8 Austria 2.3 Slovenia 12.3 EU-27 2.2 Austria 12 Denmark 2.2 Spain 11.2 Malta 2.1 Poland 9.9 Sweden 1.8 Hungary 8.7 Greece 1.7 Malta 7.9 Slovenia 1.7 Denmark 7.7 Slovakia 1.4 Sweden 7.1 Czechia 1.4 Slovakia 6.4 Finland 1.4 Finland 6.2 Cyprus 1.3 Greece 5.4 Portugal 1.2 Croatia 5.1 Latvia 1.2 Lithuania 4.4 Croatia 1.1 Latvia 4.2 Hungary 1.0 Cyprus 3.4 Lithuania 0.9 Bulgaria 2.6 Poland 0.8 Portugal 2.2 Estonia 0.7 Ireland 1.8 Bulgaria 0.4 Romania 1.3 Romania 0.4 0 5 10 15 20 25 30 35 0 1 2 3 4 5 6 Sources: Eurostat 2021b, 2022d. Material consumption varies between, and country underwent a similar economic transition within, MSs. DMC per capita between MSs to the four focus countries of this report but has ranges from 7.4 tons per capita to 31.3 tons (Figure achieved significant circularity gains in recent years. 2.6). Structural characteristics play a role. Low From a nearly all-landfilling economy, it moved population density (Scandinavia) is a key driver of to a predominantly recycling society by making DMC rates, because of the relatively larger material circularity a national priority and developing a solid requirements for infrastructure, for example, roads CE framework with advanced national policies and and energy, serving relatively smaller numbers contributions from local and regional authorities. As of people living in these regions. The relative a result, Slovenia is now a frontrunner in separate importance of primary sectors such as mining and waste collection and recycling rates. Municipal forestry as well as downstream industries such as waste recycling rates are above the EU average pulp production and a higher dependence on fossil and the country scores second place at the EU level fuels for electricity generation are often determining with a recycling rate of 59.2 percent. factors in Eastern Europe countries.30 Current levels of in-use stocks shape resource Initial conditions matter in determining the consumption rates. In-use materials stocks31 in speed of the transition, but they do not buildings, infrastructure, machinery, and equipment constitute destiny. Although income levels and of all four focus countries are also increasing (Figure the share of the services sector in the economy 2.7), albeit at varying levels. Between 1990 and are important drivers, they are not determining 2019, absolute stocks’ growth recorded average factors. Slovenia provides an example of vision and annual growth rates between 0.2 and 1.5 percent. policy playing a role in moving an economy toward Bulgaria’s in-use materials stock decreased until circularity from initially unfavorable conditions. The 2003 but started growing thereafter. Growth of ESPON 2019. 30 In-use stock is defined as the matter within any final commodity with a positive or economic value that is used by a human 31 population (Gerst and Graedel. 2021). 37 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition FIGURE 2.7: PER CAPITA IN-USE STOCK OF FOUR FOCUS in-use stock is mainly driven by NMM in all four COUNTRIES VERSUS COMPARATORS countries. Per capita in-use stocks have been Per capita in-use stock (2018) (tons / capita) 400 growing in recent years without showing any 350 indication of saturation. In fact, their per capita in- 300 use stock in 2018 was surprisingly higher than 250 higher-income economies (Figure 2.8). In addition 200 to rapid materials stock accumulation, high per 150 capita materials stocks reflect material-intensive 100 construction methods before 1990 and decreasing 50 population (Bulgaria 20 percent, Croatia 15 percent, 0 Bulgaria Croatia Poland Romania United United Germany and Romania 17 percent) during the same period.32 States Kingdom This calls for more efficient use of materials in-built Source: Original analysis (Bulgaria, Croatia, Poland, and Romania); Streeck 2021 (United States); Streeck et al., 2020 in capital assets. (United Kingdom); Schiller et al. 2017 (Germany). FIGURE 2.8: HISTORICAL DEVELOPMENT OF ABSOLUTE AND PER CAPITA MATERIAL STOCKS BY COUNTRY BY CATEGORY FROM 1990 TO 2019 FOR BULGARIA, CROATIA, POLAND, AND ROMANIA Bulgaria Croatia Downcycling materials 3 450 2 450 400 400 Plastics 2.5 Per capital material stock (t/cap) Per capital material stock (t/cap) 350 350 1.5 Flat glass Absolute material stock (Gt) Absolute material stock (Gt) 2 300 300 Container glass 250 250 1.5 1 200 200 S&G used for base layers and other purpose 1 150 150 Asphalt 0.5 100 100 0.5 Brick 50 50 0 0 0 0 Concrete 1990 1992 1994 1996 1998 2000 2002 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2004 2006 2008 2010 2012 2014 2016 2018 Lead Poland Romania Zinc 10 250 7 350 6 300 Copper 8 200 Per capital material stock (t/cap) Per capital material stock (t/cap) Absolute material stock (Gt) Absolute material stock (Gt) 5 250 Aluminum 6 150 4 200 Steel 3 150 4 100 P&B 2 100 Wood-based panels 2 50 1 50 Sawn wood 0 0 0 0 per Capita 1996 1996 1998 2000 1998 2014 2014 1990 1994 2002 2006 2008 2010 2018 2000 2004 2012 2016 1990 1994 2002 2004 2006 2008 2010 2012 2016 2018 1992 1992 Source: Original analysis for this publication based on (a) IRP; (b) Eurostat; (c) United States Geological Survey (USGS); (d) British Geological Survey (BGS); (e) World Bureau of Metal Statistics; (f) United Nations Commodity Trade Database; (g) Food and Agricultural Organization of the United Nations; (h) United Nations Statistical Commission; (i) World Steel Association (j) Tilasto database (k) Statistics Poland; (l) National Institute of Statistics of Romania; (m) National Statistical institute of Bulgaria33 Daxbeck et al. 2009; Streek et al. 2020, 2021; Schiller et al. 2017. 32 IRP. Global Material Flows Database by International Resource Panel. https://www.resourcepanel.org/global-material-flows- 33 database; EuroStat, economy-wide material flow account (EW-MFA);https://ec.europa.eu/eurostat/web/environment/material-flows- and-resource-productivity; USGS,, https://www.usgs.gov/; BGS. https://www.bgs.ac.uk/; World Bureau of Metal Statistics. https:// world-bureau.co.uk/; UN ComTrade. https://comtrade.un.org/; FAO. https://www.fao.org/statistics/en/; UN Statistical Commission. https://unstats.un.org/unsd/statcom/; World Steel Association, Steel statistical yearbook https://worldsteel.org/steel-by-topic/ statistics/steel-statistical-yearbook/; Tilasto database https://www.tilasto.com/en; Statistics Poland https://stat.gov.pl/en/; National Institute of Statistics of Romania https://insse.ro/cms/en; National statistical institute of Bulgaria. https://www.nsi.bg/en. 38 BACK TO CONTENTS PROGRESS TOWARD A CE WITHIN THE EU FIGURE 2.9: HISTORICAL DEVELOPMENT OF ABSOLUTE IRON AND STEEL STOCK IN POLAND (INSET) AND ITS FLOW (2019) 350 Iron and Steel flow in Poland, 2019 300 In-use Iron/Steel Stock 250 200 Export (Mt) 150 1438 5420 100 50 7922 0 Extractive waste 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Year 3128 Loss Processing & Processed 933 254 Production materials for Land lled Extraction Semi- stock buildup manufacturing Use 2755 Manufacturing 9152 7714 6255 4013 Waste Management 3922 Import 8779 261 Mt 2652 8086 5449 6024 Recycling Iron ore Steel equivalent Source: Original analysis for this publication based on (a) IRP; (b) Eurostat; (c) World Steel Association; and (d) USGS.34 Increasing rates of material stock (Figure 2.8). In 2019, 9.4 million tons of steel was accumulation can limit countries’ future added to its stock and 8.8 million tons out of stock circularity potential. Material stocks remain in became available for recovery, of which 6 million service for a long time, locking in opportunities tons was recycled back into the country (Figure and constraining material efficiency. While building 2.9). In contrast, in-use steel stock in Croatia is still new stocks requires material flows, so do their accumulating without any saturation (Figure 2.10). In maintenance, operation, and functioning. The the same year, in Croatia, 0.86 million tons of steel estimated average lifetimes for typical materials was added to the stocks, whereas only about half used in buildings, including concrete, bricks, and of that went out of the stock (Figure 2.10), while iron/steel are 52, 75, and 34 years, respectively.35 only 0.03 million tons (6 percent) of end-of-life When added to in-use stocks, these materials will steel is recycled back to its economy. At current typically not be available for recycling and recovery accumulation rates and BAU policies, Croatia will for several decades while requiring additional not meet the growing demand for steel even with full materials and energy during their lifetime. Catching recovery of end-of-life materials. This underscores up on in-house stocks therefore locks in resource the scale of the challenge in achieving material flows, for instance, in-use steel stock in Poland, decoupling. which has been saturated for the past two decades 34 IRP, Global Material Flows Database by International Resource Panel https://www.resourcepanel.org/global-material-flows-database; EuroStat, economy-wide material flow account (EW-MFA) https://ec.europa.eu/eurostat/web/environment/material-flows-and- resource-productivity; World Steel Association, Steel statistical yearbook. https://worldsteel.org/steel-by-topic/statistics/steel- statistical-yearbook/; USGS, Iron and Steel Statistics and Information, https://www.usgs.gov/centers/national-minerals-information- center/iron-and-steel-statistics-and-information. 35 Streeck et al. 2020. 39 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition FIGURE 2.10: HISTORICAL DEVELOPMENT OF ABSOLUTE IRON AND STEEL STOCK IN CROATIA (INSET) AND ITS FLOW (2019) 30 In-use Iron/Steel Stock 25 Iron and Steel flow in Croatia, 2019 20 (Mt) 15 Export 10 68 14 5 290 Extractive waste 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Loss Processing 2 15 Landfilled & Processed Extraction Production 460 materials for stock buildup Semi- Use manufacturing Manufacturing 69 1 1 502 Waste 387 Management Import 29 29Mt Mt 491 16 691 461 31 Recycling Iron ore Steel equivalent Source: Original analysis for this publication based on (a) IRP; (b) Eurostat; (c) World Steel Association; and (d) USGS.36 2.3 Material consumption beyond crisis. However, contrary to DMC, it picks up thereafter, reaching 23.4 tons per capita in 2017 borders (the latest available). Comparison between DMC Europe’s dematerialization progress partly and material footprints clearly shows that the EU stems from the outsourcing of material- has shifted raw material extraction and processing intensive processes. As seen above, Europe’s to other regions to meet the resources required for resource consumption, as measured in DMC terms, their societal needs. In other words, DMC-based has decreased since 2008 and remained flat since dematerialization in the EU has been realized at then. But when considering the total amount of raw the cost of increasing domestic consumption materials extracted to meet final demand (that is, and associated environmental burdens in other the material footprint), the resource consumption countries. of the EU-27 has actually increased.37 Figure 2.11 In the four focus countries, DMC per capita shows that the EU per capita material footprint has increased during the same period. also declined sharply after the 2008 global financial Figure 2.11 presents DMC per capita for the four 36 IRP, Global Material Flows Database by International Resource Panel https://www.resourcepanel.org/global-material-flows-database; EuroStat, economy-wide material flow account (EW-MFA) https://ec.europa.eu/eurostat/web/environment/material-flows-and- resource-productivity; World Steel Association, Steel statistical yearbook https://worldsteel.org/steel-by-topic/statistics/steel- statistical-yearbook/; United States Geological Survey (USGS) Iron and Steel Statistics and Information, https://www.usgs.gov/ centers/national-minerals-information-center/iron-and-steel-statistics-and-information. 37 By including all materials used across a product supply chain, rather than merely those embodied in the product, material footprint indicators better represent the environmental pressures stemming from material consumption (Wiedmann et al. 2015this question is far from trivial to answer and has indeed not been addressed satisfactorily in the scholarly literature. We use the most comprehensive and most highly resolved economic input–output framework of the world economy together with a detailed database of global material flows to calculate the full material requirements of all countries covering a period of two decades. Called the “material footprint,” this indicator provides a consumption perspective of resource use and new insights into the actual resource productivity of nations.Metrics on resource productivity currently used by governments suggest that some developed countries have increased the use of natural resources at a slower rate than economic growth (relative decoupling). 40 BACK TO CONTENTS PROGRESS TOWARD A CE WITHIN THE EU FIGURE 2.11: COMPARISON BETWEEN DMC PER CAPITA AND MATERIAL FOOTPRINT PER CAPITA FOR THE EU-27, BULGARIA, CROATIA, POLAND, AND ROMANIA EU - 27 Bulgaria Croatia 30 30 30 25 25 25 20 20 20 t/cap t/cap t/cap 15 15 15 10 10 10 5 5 5 0 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Poland Romania 30 30 25 25 20 20 DMC per capita t/cap t/cap 15 15 Material footprint per capita 10 10 5 5 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Eurostat and OECD. Note: DMC per capita and material footprint per capita from OECD statistic database (https://stats.oecd.org). Currently, Eurostat does not publish material footprint for individual MSs other than the EU-27 in raw material equivalent (RME). While the difference between DMC from the OECD statistic database and EuroStat is minimal within 1–2 percent, material footprint of the EU-27 between two sources has a large difference as material footprint of the EU-27 measured in RME from Eurostat is relatively similar to DMC and only slightly higher than DMC in 2019 (DMC 14.1 tons per capita versus RME 14.5 tons per capita). This report uses OECD data for consistency due to lack of data for MSs. focus countries. While the per capita material lower material footprint per capita than DMC per consumption of all countries dropped after the capita, meaning that raw materials produced in financial crisis, it has since been increasing these countries are mostly used for meeting the continuously, with no indication of dematerialization demand for final products in other countries. This in terms of domestic consumption. Croatia has not explanation is also supported by waste generation recovered to the level of DMC per capita before the statistics. The share of mining and quarrying waste global financial crisis, but it shows an increasing in total waste in Bulgaria and Romania is at 82.4 trend in the past five years. and 88 percent, respectively, compared with 26.6 percent of the EU average in 2018. Non-exported The shifting burden of raw material extraction mine tailings are included in the DMC of exporting also takes place across EU MSs. The four focus countries, whereas they are allocated to the countries show different trends in their material countries importing final products when accounting footprint and DMC trajectories (Figure 2.11). for the material footprint. In Poland, the material Bulgaria and Romania, characterized by lower footprint per capita surpassed DMC per capita in income levels and strong mining sectors, have a 2002, indicating a transition from producing raw 41 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition materials to focusing on more downstream activities Waste exports contribute to shifting the of the value chains as well as the country’s record environmental burden associated with levels of growth. Poland is following the path of resource consumption. In 2020, EU exports of other wealthier countries in externalizing resource- waste to non-EU countries reached 32.7 million intensive processes.38 tons, representing an increase of 75 percent since 2004. Waste trade could facilitate more efficient and Both DMC and material footprint are highly cost-effective recovery, for instance, by leveraging aggregated indicators that do not reflect the the international network of recovery facilities. heterogeneity of circularity progress by different However, recipients tend to include countries with materials. For example, as a transitioning economy, weaker environmental regulations and poor recovery Poland has significantly different trade patterns capacities. In 2020, the largest recipient was Türkiye depending on materials. Poland is a copper (13.7 million tons), followed by India and the United exporting country with a strong focus on upstream Kingdom. Waste export is also considered a serious activities (that is, extraction) within the copper life loss of materials and resources. It is estimated cycle. It therefore generates a significant amount of that the EU annually loses between €800 million mining waste, as shown in Figure 2.12. Conversely, and €1.7 billion through waste exports. Given that for steel, Poland strongly depends on import flows, some of these materials are considered critical and not only raw materials, but also semi- and final subject to supply risks, the opportunity costs of steel-based material products, as shown in Figure exporting these materials need to be considered. 2.9, and the country has the highest recycling rate The revision of the Waste Shipments Regulation for steel, achieving more than 89 percent in 2018.39 proposed by the EC in 2021 contains measures FIGURE 2.12: COPPER FLOWS IN POLAND (2019) Copper flow in Poland, 2019 Export 590 227 255 161 Extractive waste 30745 Processing Loss & Extraction Production Use 8 3 Processed Landfilled materials for 31438 Semi- 144 stock buildup Manufacturing manufacturing Waste 584 357 114 135 Mt 29 Mt Management 429 6.2 Import 20 185 138 52 Recycling Copper ore Copper equivalent Source: Original analysis for this publication based on (a) IRP; (b) Eurostat; (c) Statistics Poland; and (d) USGS.40 38 Eurostat 2021c. 39 WEKA Industrie Medien GmbH 2021. 40 International Resource Panel (IRP), Global Material Flows Database https://www.resourcepanel.org/global-material-flows-database; EuroStat, economy-wide material flow account (EW-MFA) https://ec.europa.eu/eurostat/web/environment/material-flows-and- resource-productivity; Statistics Poland https://stat.gov.pl/en/; United States Geological Survey (USGS) Iron and Steel Statistics and Information, https://www.usgs.gov/centers/national-minerals-information-center/iron-and-steel-statistics-and-information. 42 BACK TO CONTENTS PROGRESS TOWARD A CE WITHIN THE EU to limit the environmental impacts of waste trade Equipment (WEEE) Directive sets targets for the and is expected to induce EU MSs to take more separate collection and recycling of electrical and responsibility for their waste by building their own electronic waste. In addition, the Landfill Directive capacity for recycling and recovery.41 sets a target for limiting the share of municipal waste landfilled. Overall, EU waste legislation has set more than 30 binding targets for 2015–2030.43 2.4 Europe’s evolving policy landscape TABLE 2.1: EXAMPLES OF EU-WIDE TARGETS IN WASTE MANAGEMENT The transition to a CE has become a central feature of the EU’s policy agenda. As a term, Legislation Objective Target Year CE has been around for many years, but in the (%) EU, it only became widely used with the first EU Waste Preparing for reuse 50 2020 Framework and the recycling of 55 2025 Circular Economy Package in 2015. Since then, it Directive municipal waste (by 60 2030 has featured in various strands of policy and is now weight) 65 2035 central to the 2019 European Green Deal (EGD). Preparing for reuse, 70 2020 Beyond its sustainability objectives, EU policy casts recycling, and other circularity within long-term growth considerations, material recovery as shown in the EU’s 2020 Industrial Strategy. The of nonhazardous 2020 Circular Economy Action Plan (CEAP) provides construction and demolition waste (CDW) a product-focused policy framework aimed at (by weight) improving product design, empowering consumers Packaging Recycling - all 65 2025 and public buyers, and promoting circularity in and packaging 70 2030 production processes. The CEAP focuses on seven Packaging Recycling - plastic 50 2025 Waste key product value chains that combine resource Directive 55 2030 intensity and circularity potential: electronics and Recycling -wood 25 2025 information and communication technology (ICT); 30 2030 batteries and vehicles; packaging; plastics; textiles; Recycling - ferrous 70 2025 construction and buildings; and food, water, and metals 80 2030 nutrients. While the plan includes a list of 35 actions Recycling - aluminum 50 2025 that promote circularity along the entire life cycle 60 2030 of products, it does not set an EU-level target to Recycling - glass 70 2025 reduce the material footprint with respect to the use 75 2030 of the material in absolute terms.42 Recycling - paper and 75 2025 cardboard 85 2030 While EU legislation already embodies Directive on Separate collection of 77 2025 circularity principles, it remains largely focused Single-Use plastic bottles 90 2029 on recycling. EU legislation encourages MSs Plastics Recycled plastic 25 2025 to prioritize waste hierarchy principles (that is, in polyethylene prevention and reuse as first-order options), followed terephthalate (PET) by recycling (including composting) and energy beverage bottles recovery, with landfilling only as a last resort. In Recycled plastic in all 30 2030 plastic beverage bottles applying the waste hierarchy, the Waste Framework Landfill Share of municipal 10 2035 Directive (WFD) sets targets for recycling and Directive waste landfilled preparing for reuse of municipal waste and calls on MSs to set up systems for the separate collection of Source: Directive on waste (2008/98/EC), Directive (EU) on packaging and packaging waste (2018/852), Directive (EU) on biowaste and textiles. The Packaging and Packaging the reduction of the impact of certain plastic products on the Waste Directive sets targets for recycling packaging environment (2019/904), and Directive on the landfill of waste (1999/31/EC). waste, and the Waste Electrical and Electronic 41 EC 2021b; Eurostat 2021e; Parajuly and Fitzpatrick 2020; United Nations University 2015. 42 EC 2019b, 2020e; Pantzar and Suljada 2020. 43 EEA 2021. 43 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition New policy proposals are shifting the focus Slow uptake of EU-level CE policies by MSs upstream toward more sustainable and delays progress. EU-level policy setting (Section circular products. With the proposal for a new 2.4) requires and builds on national- and regional- Ecodesign for Sustainable Products Regulation level visions and implementation. Among the four (ESPR) published in March 2022,44 the EC has focus countries, only Poland has adopted a national presented a framework that will allow it to regulate CE strategy. While circular strategies are under circularity requirements for almost all categories development in Bulgaria and Romania, progress has of physical goods placed on the EU market. been limited and their adoption has been delayed. Performance and information requirements Supportive national legislation still largely focuses covered by the framework address the entire on waste management, and, even in this area, the range of circular activities, including product transposition of EU legislation is incomplete. All four durability, reusability, upgradability, reparability, countries received an early warning report from the and recyclability, among others. Based on the EC in 2018 because they were identified at risk of existing eco-design framework, the approach missing the 2020 target of 50 percent preparation allows for product-specific measures based on for reuse/recycling for municipal waste stipulated in dedicated impact assessments. Importantly, the the EU WFD. ESPR proposal enables mandatory green public procurement (GPP) criteria, prevents the destruction Subnational governments often drive the of unsold consumer goods, and reinforces the transition, even within countries with lagging market surveillance and customs control on the national-level attention. In Romania, the city of products regulated. Buzau has developed a CE strategy until 2030 and is home to the largest integrated recycling  park The EU’s regulatory framework for circularity in Europe. In Bulgaria, the city of Burgas is is rapidly evolving, but the application of developing projects in support of the CE, including economic instruments remains modest. an industrial park focusing on industrial symbiosis. The EU’s system of quotas, for instance, In Poland, many cities and regions are actively regarding mandatory minimum recycled material working toward the transition to a CE through content of products (see the example of plastic its participation in EU programs such as Horizon beverage bottles in Table 1.1), aims to encourage 2020 and Interreg. Examples include the regions of secondary raw material markets. In most Łódzkie, Małopolska, Mazowieckie, Pomorskie, and sectors, however, secondary raw materials tend Wielkopolska. In Croatia, three cities, namely Prelog, to remain noncompetitive compared to virgin Krk, and Koprivnica, have reached a separate waste resources. EU legislation mandates MSs to collection share exceeding 50 percent. Prelog, for introduce extended producer responsibility (EPR) example, is the city with the first reuse center in to support recovery and recycling of materials in Croatia. areas including packaging, waste electrical and electronic equipment (WEEE), batteries, and end- Progress will require increased coherence of-life vehicles (ELVs). But the application of fiscal across policy areas and increased uptake by incentives to achieve material efficiency objectives MSs. The need for additional coherence starts at has been more limited, partly due to the limited EU the EU level. One example is agriculture. Despite competence in taxation matters. One remarkable its increasing focus on incentivizing sustainable exception is a new contribution of EU MSs to the agricultural practices, the EU’s Common Agricultural EU budget introduced in 2021, which is based Policy (CAP)—responsible for 36 percent of the on the quantity of packaging waste that is not overall EU budget in 2019—continues to provide recycled (at a rate of €0.80 per kg). Technically, this incentive structures encouraging linear production contribution is not a tax but a levy based on national processes, which maintain the material footprint of plastics waste management patterns and treated as the EU agri-food sector. Similarly, EHSs encouraging an own resource. resource consumption, such as fossil fuel subsidies, are still pervasive within MSs’ expenditure frameworks (Annex, Focus Section C), creating https://ec.europa.eu/environment/publications/proposal-ecodesign-sustainable-products-regulation_en 44 44 BACK TO CONTENTS PROGRESS TOWARD A CE WITHIN THE EU systemic disincentives to accelerate the circular Some of their economies depend on the material- transition.45 intensive sectors that partly meet the global demand for resources. In addition, their in-use material stocks have been continuously increasing and will 2.5 Conclusion continue to increase in line with their economic The EU has mainstreamed resource efficiency transition. and CE principles into its policies. Its CEAP The progress achieved so far will not contain has become an indispensable part of Europe’s the environmental impacts of Europe’s material growth strategy and the EGD. These policies have consumption. Under a BAU scenario, the amount accompanied decreased DMC and improved of materials needed to meet EU demand could resource productivity over the past two decades. increase by a factor of 2.1 by 2050 compared with Progress remains limited to some key indicators, 2000. With a per capita resource consumption of however, and when accounting for material footprint 13 tons per European (2020) and waste generation dynamics, progress in reducing resource intensity of 5.2 tons (2018), the average European has an appears more limited still. ecological footprint of 4.8 global hectares (gha), Progress in transitioning toward a CE remains compared with the global biocapacity of 1.7 gha per uneven between MSs and material categories. person.46 Ambitious policies are required to address The four focus countries show growing resource these trends.47 consumption and limited use of circular materials. 45 EC, n.d.-f. 46 The ecological footprint is the area required to address resource production and waste absorption (Global Footprint Network 2022). 47 Baldock and Charveriat 2018; Eurostat 2021c. 45 BACK TO CONTENTS Chapter 3 The trade implications of the circularity transition 46 BACK TO CONTENTS THE TRADE IMPLICATIONS OF THE CIRCULARITY TRANSITION International trade has a significant impact on • Most of the trade partners from which the the trajectory and outcomes of CE policy. This EU sources its materials could potentially chapter assesses the dynamics of the relationship diversify away from commodity production. between trade and CE outcomes both in the EU But such a structural change needs to be and globally, with a specific focus on developing supported by the EU and other high-income countries. Four key findings are as follows: countries. Facilitating the shift toward a CE in partner countries is in the EU’s interest, as it • About 11 percent of EU MSs’ DMC and represents the most effective way of reducing almost 36 percent of their total footprint the net material intensity of global production. are imported. Interestingly, while EU production has become less intensive in material inputs • Leveraging the major presence of brands over time, the intensity of material inputs in EU and lead firms in global value chains (GVCs) consumption and imports has increased at the would accelerate the needed changes in same pace as income growth. This suggests production and consumption. Firms holding that reducing imports of materials will require major brands are responsible for designing more than just a change in the relative cost of products, organizing financing, and innovation. materials at the border. A shift in EU consumer This allows them to use their influence to push habits will also be necessary. for more stringent standards worldwide. • Most material-intensive production that leaks out of the EU is likely to go to other 3.1 The EU’s dependency on capital-intensive countries, not to capital- external sources of materials constrained low- and middle-income countries (LMICs). Hence, while LMICs will The EU’s direct imports of materials are not benefit from possible trade diversion, they nonnegligible. The EU imports 11.2 percent of will suffer from adverse effects on their exports its domestic consumption (Figure 3.1). Import and GDP. The largest impacts are likely to be dependency on materials is much lower than felt by the poorest and most fragile countries in import dependency on fossil fuels, which stands at the world, whose dependency on commodity almost 80 percent. However, the aggregate figures exports to the EU is greater. overshadow much higher external dependency on some categories such as metal ores, where it FIGURE 3.1: IMPORTANCE OF IMPORTS IN EU DOMESTIC MATERIAL CONSUMPTION Import dependency on materials Import dependency in EU domestic Import dependency on (aggregated) material usage fossil fuels % % % 12 80 75.3 80 78.3 11.2 10.6 70 70 10 60 60 54.3 8 50 50 6 40 40 30 30 4 20 20 12.9 2 10 10 3.3 0 0 0 EU RoW Biomass Metal Non-metallic EU RoW ores minerals Source: UNEP and Eurostat data. 47 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition FIGURE 3.2: MATERIAL EXTRACTION, DIRECT AND EMBEDDED TRADE, GLOBALLY AND IN THE EU Tons of materials extracted and traded Materials imported or extracted by the EU Million tons globally, 2017 Million tons 50000 3000 2500 40000 2000 30000 1500 20000 1000 10000 500 0 0 Biomass Fossi fuels Metal ores Non-metallic Biomass Fossi fuels Metal ores Non-metallic minerals minerals Extracted Traded Extracted Imports Embedded Imports Import dependency in materials Import dependency in EU DMC and MF % (aggregated) % 40 200 35 30 150 25 20 100 15 10 50 5 0 0 Biomass Metal ores Non-metallic EU RoW minerals DMC MF DMC MF Source: UNEP and Eurostat data. Note: EU excludes intra-EU trade. stands at 78.3 percent of DMC.48 Some individual that is, as embedded in other products. Materials goods such as rare earths also post high external are a major input to manufactured products as dependency, despite representing a small share diverse as communication equipment, jewelry, and of overall EU imports, and are indispensable and wet corn milling. When this indirect (or virtual) trade critical inputs for many advanced technologies. of materials is considered, the EU dependency Annex 3 discusses rare earths specifically. on extra-EU sources more than triples (that is, it increases from 11.2 to 35.7 percent; see Figure 3.2 The EU’s dependency increases threefold and Figure 3.3).49 The EU’s external dependency when materials embedded in other imports figures are in line with world aggregates, except for are included. In addition to direct imports of metal ores, a category in which the EU dependency materials, the EU also imports materials indirectly, from extra-EU sources is high, concerning both 48 Import dependency is measured as physical imports over extraction plus physical imports minus physical exports. External dependency on biomass and minerals is 12.9 and 3.3 percent, respectively. 49 Estimates of embedded materials may be downward biased. Embedded materials are not a directly observed quantity. These flows are calculated based on final consumer demand and global input-output tables. Hence, materials embedded in intermediate trade flows are not included and thus their relevance compared to physical imports can in some cases be underestimated. 48 BACK TO CONTENTS THE TRADE IMPLICATIONS OF THE CIRCULARITY TRANSITION FIGURE 3.3: LARGEST EXPORTERS OF MATERIALS AND FOSSIL FUELS TO THE EU Largest exports of materials (w/o fuels) to EU Largest exports of fuels to EU T$ T$ Brazil Russia United States Norway Ukraine United States Canada Great Britain Russia Kazakhstan Great Britain Saudi Arabia China Nigeria Turkey Iraq South Africa Libya Peru Algeria Argentina Azerbaijan Chile India Morocco Qatar Vietnam Turkey India Egypt 0 3 6 9 12 15 0 3 6 9 1 15 Millions Millions Share on materials (w/o fuels) imports from EU Share on fuel imports from EU %, Other=countries with <1.5% %, Other = countries with <1.5% Other Russia Brazil Other United States Norway Ukraine Canada United States Russia Great Britain Great Britain Kazakhstan China Saudi Arabia Turkey South Africa Nigeria Peru Iraq Argentina Libya Chile Algeria Morocco Azerbaijan Vietnam India India Switzerland 0 5 10 15 20 25 30 0 5 10 15 20 25 30 35 Source: BACI-ComTrade data. direct and total consumption. There is, however, substantial heterogeneity across different materials, and treating all A handful of countries account for most of the direct imports of materials to the EU as EU direct imports of materials. Overall, EU MSs one aggregate may be misleading. Table 3.1 are dependent on just a few trade partners for their presents measures of concentration known as the direct imports of materials.50 The largest EU trading Theil Index and Hirschman-Herfindahl Index (HHI), partner of materials is Brazil, followed by the United adjusted by the authors to capture the specificity States and Ukraine (Figure 3.3). Taken together, of trade in different categories of materials. Overall, these three countries alone account for about 30 the table shows that EU sourcing of biomass and percent of all direct imports of materials into the minerals is more diversified than metals, a category EU.51 in which sourcing is almost as concentrated as 50 Data by trade partners are only available for direct trade, so we will not be able to capture diversification of the supplier base for virtual or embedded trade. 51 When we include fuels in the definition of materials, the largest single exporter of materials to the EU is not surprisingly the Russian Federation. Its exports account for about 25 percent of EU imports in materials. But the largest part of these imports are fuels, accounting for almost 76 percent of all Russian exports to the EU. Other large exporters of fuels to the EU are Norway, the United States, and Kazakhstan. 49 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition FIGURE 3.4: EU VERSUS RoW IMPORT DEPENDENCY BY CATEGORY Import dependency in DMC, EU vs RoW Import dependency in MF, EU vs RoW % % 80 200 70 60 150 50 40 100 30 20 50 10 0 0 Biomass Metal ores Non-metallic Biomass Metal ores Non-metallic minerals minerals EU RoW EU RoW Source: UNEP and Eurostat data. Note: MF = Material Footprint; RoW = Rest of the world. in fuels. About 54.9 percent of all EU imports of environmentally harmful or worth protecting metals are sourced in as few as five countries (for becomes vital. To some degree, these decisions fuels, this figure is 59.7 percent). At the other end will be arbitrary, but they also have important of the spectrum, direct imports of biomass are the implications for the destiny of many more countries, least concentrated category of materials, posting firms, and industries that the sole focus on direct a degree of diversification in sourcing that is similar trade of materials might suggest. Second, most to non-primary commodities. Despite the lower of the countries that produce these downstream, measures of concentration, as soon as one focuses material-intensive products and export them to the on individual products, the EU’s dependency on just EU are high- to middle-income countries spanning a few sources increases for biomass too. from the most important global manufacturing hubs (China and the United States) to other technology Most indirect imports of materials originate advanced countries (Switzerland and the United from other high-income countries or China. Kingdom) to regional hubs in important middle- Most of the EU’s exposure to the rest of the world income countries (Türkiye, Argentina, and Ukraine) is through materials embedded in downstream but exclude lower-income countries that are just products. Thus, the analysis above would be breaking into manufacturing (Figure 3.5). incomplete without assessing which countries produce and export these downstream, material- In conclusion, most trade in materials takes intensive products to the EU. Two conclusions place in the form of embedded materials, and can be drawn. First, following all the downstream this has important policy implications. Most links of materials rapidly becomes difficult. Some materials are not shipped in their raw form but international convergence on how to define instead are incorporated in manufactured goods, and delimit which goods should be considered which has important policy implications (see Section TABLE 3.1: EU IMPORT CONCENTRATION MEASURES IN DIFFERENT GOODS CATEGORIES Overall Materials Biomass Metal ores Minerals Fuels economy Theil Index 3.300 3.177 3.582 2.926 3.117 2.708 Herfindhal-Hirshman Index (HHI) 0.073 0.091 0.047 0.081 0.062 0.128 Top 5 exporters’ share 0.528 0.512 0.386 0.549 0.460 0.597 Top 10 exporters’ share 0.675 0.692 0.565 0.777 0.720 0.824 Top 15 exporters’ share 0.748 0.791 0.683 0.864 0.838 0.894 Source: Original calculations for this publication based on BACI-ComTrade data. Note: Rows 3 to five 5 show the share that the top exporters have in the total EU import volume in this goods category. 50 BACK TO CONTENTS THE TRADE IMPLICATIONS OF THE CIRCULARITY TRANSITION FIGURE 3.5: EU TRADE OF TIER-1 MATERIAL-INTENSIVE DOWNSTREAM GOODS - IMPORT SHARE AND LARGEST EXPORTERS OF GOODS TO THE EU Largest Exporters of indirect goods to EU Share on indirect goods imports from EU T$ %, Other = countries with < 1.5% MYS KOR TUR MYS NOR TUR NOR ARG ARG SGP SGP ION ION UKR UKR JPN JPN BRA BRA IND IND RUS RUS CHN CHN GBR GBR USA USA CHE CHE Other 0 5.0e+0.6 1.0e+07 1.5e+07 2.0e+07 0 5 10 15 20 Source: Original calculations based on BACI-ComTrade data. Note: Tier-1 downstream goods are defined as those whose direct input of material accounts for 10 percent or more of the total (see methodology in Annex B). 3.2). Effective legislation on the CE will need to trade stimulates. Second, most material-intense account for the fact that most materials that enter production settles in places with a capital-abundant the EU are embedded in downstream products and economy. Third, regulatory differences have the set of countries and trading partners that EU historically been a weak driver of trade in materials, legislation will affect is broader than the analysis of but this may change in the future. direct trade flows would suggest. A first conclusion is, therefore, that the EU will need to seriously Freer trade is associated with GDP growth consider the potential repercussions of its policy and, through this channel, with higher levels of on the CE on some of its largest trading partners. domestic and total consumption of materials. Furthermore, the bloc itself is likely to be vulnerable Material consumption, both domestic and its to policy responses by these countries.  footprint, grows in sync with trade openness. In periods of rapid trade integration, such as during the 1990s, material usage has also increased at a 3.2 More stringent EU regulation comparable speed (Figure 3.6). This correlation may result in more leakage between trade openness and environmental exploitation does not present a causal link, Following the introduction of more stringent however, since these increases in trade openness CE legislation, production may ‘leak’ out of also correspond to periods when global income the EU. If this then settles in jurisdictions with and consumption increase. Econometric analysis lower environmental standards, we refer to such confirms that it is precisely the increase in income countries as ‘linear production havens.’ Given this triggered by trade that leads to more material risk, it is useful to analyze the relationship between usage. It does so by increasing the scale of trade and a country’s domestic usage of materials production, which in turn is responsible for higher and its total material footprint. Based on evidence material usage. In theory, increases in income can from 147 countries worldwide over 23 years, three also bring about improvements in technique and main conclusions can be reached. First, freer trade efficiency gains, which refer to the use of materials is associated with higher levels of production and per unit of production. In practice, these income- consumption of materials, but most of this positive related improvements in technique decrease association is explained by increases in GDP that domestic consumption significantly, but they 51 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition FIGURE 3.6: CORRELATION OF DOMESTIC MATERIAL CONSUMPTION AND DOMESTIC MATERIAL FOOTPRINT WITH TRADE OPENNESS 0.050 0.050 Percentage Change (dlog) Percentage Change (dlog) 0.000 0.000 -0.050 -0.050 -0.100 -0.100 -0.150 1995 2000 2005 2010 2015 1995 2000 2005 2010 2015 Trade Openness Domestic Material Consumption Trade Openness Material Footprint CO2 Emissions per Capita per Capita CO2 Footprint per Capita per Capita Source: Sommer and Taglioni 2022. Note: Average of a sample of 147 countries over 23 years. have no significant effect on the material footprint is easily shown by expressing the variables in trade measure. The results for raw materials mimic those intensity terms instead of levels. This modification already well studied of CO2 emissions. allows us to neutralize the size effect of income so that the resulting coefficient associated with the In overall terms, the negative scale effect income only reflects the technique effects. Income- associated with more income dominates, related improvements in technique are highly leading to more overall consumption of visible on domestic consumption and emissions materials. These results are illustrated in Figure 3.7, but not for the footprint of a country. This means which plots the coefficients and confidence intervals that richer countries may be able to reduce their of a set of econometric regressions evaluating domestic/direct usage of materials, but they do not the role that trade openness, income (GDP), and significantly reduce their consumption of embedded a country’s capital intensity play in accounting for materials and CO2. This discrepancy between DMC and footprint. The corresponding effects domestic and total consumption also indicates for pollution (CO2 emissions) are also reported for that—absent a modification in consumption benchmarking. Focusing first on Figure 3.7a, which habits—some outsourcing of material-intensive presents baseline results for variables expressed in production is in order. The next key question levels, the key finding is that the seemingly strong is therefore what drives the relocation of such correlation between trade openness and material production. This is discussed in the following consumption depicted in Figure 3.6 does not paragraphs.  survive the econometric treatment. Once country differences in income levels are accounted for, the Most material-intense production settles in trade openness coefficient is close to zero and places with a capital-abundant economy. statistically not significant. The large-scale effect of Based on historical data, evidence for a ‘linear- GDP dominates the entire relationship and drives production-haven’ effect in material consumption domestic material and total consumption. is weak. Poorer countries, which tend to have laxer environmental legislation, tend to increase Improvements in techniques associated with their DMC when opening up for trade, while rich higher income reduce DMC but not a country’s countries do not reduce it. Similar evidence holds footprint. The results of Figure 3.7b show another for CO2 emissions. The overall result is a coefficient important insight: while in theory income leads to close to zero for the interaction between trade improvements in technique, these effects are too openness and income, as shown in Figure 3.7. small to offset the negative size or scale effect. This Most material-intense production settles, instead, 52 BACK TO CONTENTS THE TRADE IMPLICATIONS OF THE CIRCULARITY TRANSITION FIGURE 3.7: DETERMINANTS OF DOMESTIC CONSUMPTION AND FOOTPRINT OF MATERIALS AND CO2 EMISSIONS Materials CO2 Materials CO2 Trade Openness Trade Openness Relative Capital Intensity * TO Relative Capital Intensity * TO Relative Income * TO Relative Income * TO Income Income Capital Intensity Capital Intensity -.2 0 .2 .4 -.2 0 .2 .4 -.2 -.1 0 .1 .2 -.4 -.2 0 .2 Domestic Material Consumption Domestic CO2 Emissions Domestic Material Consumption CO2 Emissions - Production Material Footprint CO2 Footprint Material Footprint CO2 Emissions - Consumption Source: Sommer and Taglioni 2022. in places with a capital-abundant economy. In such effects for the footprint measures, provides Figure 3.7, this is demonstrated by the fact that the some evidence for both material and emission interaction between trade openness and income leakage. Even though the magnitude of these is dominated by the interaction between capital effects is small, it may increase as regulations intensity and income, although both coefficients are start diverging more. However, the analysis also small. This means that capital-intense countries, shows that material-intensive production mostly which tend to be high-income or middle-income settles in places with capital abundance, which countries, become both more material intensive and tend to be mostly developed countries and China, dirtier when opening up for trade. Interestingly, that as discussed in Section 3.3. Hence, this evidence is the case for both the domestic and the footprint should indicate to policy makers that trade policy measure, meaning that if more capital-abundant must be taken seriously when designing future countries open up, then they will also increase their regulation on CE issues. Furthermore, cooperative material and CO2 footprints. solutions with other capital-abundant countries are needed to reduce the material intensity of the What will happen if the EU starts tightening production that potentially accumulates there and CE regulation? By computing the marginal effects make it environment friendly.  of increasing trade openness for different levels of relative income and relative capital intensity, one can attempt to answer this question. The results indicate 3.3 Adverse effects on EU trade that, for high levels of relative capital abundance, an partners increase in trade openness significantly increases DMC and emissions. This is demonstrated by Considering the potential impacts of stricter the fact that while a 1.0 percent increase in trade CE regulations on EU trading partners should openness leads to an increase of DMC by about be an integral part of the EU CE strategy. In 0.1 percent and of CO2 emissions by 0.065 percent aggregate, CGE analysis suggests that the impact for low to median levels of relative income, the on trade partners’ exports and GDP will be limited effect moves toward zero or becomes negative the (Figure 3.8 and Chapter 5). However, the EU is an richer the country is. We take this as a weak signal important global importer of materials. It accounts of looming ‘material leakage and linear production for more than one-quarter of the world’s imports of haven’ (LPHH) and of ’pollution haven’ (PHH) should such goods and is a dominant trade partner for the regulatory gap between countries increase. In many smaller exporters of raw materials. Many short, richer countries decrease their emissions and of these countries tend to have an insufficiently domestic material usage when opening up to trade, diversified economy to absorb a sudden shortfall while the opposite is the case for poor countries. in demand from an important trade partner. Hence, This, together with the fact that we cannot establish a contraction of EU demand could pose a major 53 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition FIGURE 3.8: CGE ESTIMATES OF IMPACTS ON EXPORTS AND GDP Exports (2030) relative to baseline (EGD-NDC scenario) GDP (2030) relative to baseline (EGD-NDC scenario) for Combined CE scenario for Combined CE scenario 1 0.0 0.0% 0 -0.1% -0.2 -1 -0.5% -0.5% -0.2% -0.8% -2 -0.4 -0.4% -0.4% -3 -0.6 -4 -0.6% -0.6% -5 -0.8 -6 -1.0 -7 -1.0% -7.5% -8 -1.2 EU Non-EU ECA China SSA MNA LMIC* EU Non-EU ECA China SSA MNA LMIC* Source: World Bank. threat to many neighbors and some of the poorest and Ethiopia, Ukraine, and Georgia (all 17 percent) developing economies. The potential effects that also have high shares of dependency on exports a reduction in material imports will have on specific of materials. Clearly, for the smaller countries, such developing countries should be considered, not as exports also represent a large share of their GDP. an afterthought but as an integral part of the EU CE For example, Liberia, Sierra Leone, and Ukraine strategy. all accrue more than 5 percent of total GDP from the export of such materials to the EU. Finally, if Dependency on EU demand is high among we focus on our measure of adjusted RCAs, there many small and fragile countries. While the are several African countries whose exports to the United States and Brazil are the largest EU partners EU are skewed toward materials subject to CE in the direct trade of materials (see Section 3.1), regulation. These include, in addition to the already these countries are not those most dependent mentioned Sierra Leone, Liberia, and Ethiopia, on EU demand. Many lower-income countries Burkina Faso, the Central African Republic, Kenya, possessing very little market diversification are Rwanda, and Somalia as well as some fragile heavily dependent on the extraction of biomass, countries around the world such as Palestine, metals, and minerals that are exported to the EU. Timor-Leste, and Paraguay. In comparison, the To identify which countries might be especially dependence of some countries on EU imports of dependent on material exports to the EU, we fossil fuels is even higher. For example, 60 percent defined an adjusted revealed comparative of Libya’s exports and 30 percent of its GDP advantages (RCAs) measure that gives insights are based on fossil fuel exports to the EU. Other into how large the share of a given good is in the countries also post large dependency rates on total exports of a country compared with the same EU imports of fossil fuels: Azerbaijan (49 percent), measure on a global scale. Ethiopia (17 percent), and Kazakhstan (40 percent). Even some large economies, including Russia and For as many as 17 countries, exports of Nigeria, are dependent on the export of materials materials to the EU represented more than (predominantly fossil fuels but also other materials) 10 percent of the total in 2019 (Figure 3.9). In to the EU (more than 30 percent of these countries’ the case of Sierra Leone, for example, more than total exports. 30 percent of its total exports are in materials to the EU (mostly metal ores). Monserrat (22 percent) 54 BACK TO CONTENTS THE TRADE IMPLICATIONS OF THE CIRCULARITY TRANSITION FIGURE 3.9: COUNTRIES THAT DEPEND MOST ON MATERIAL EXPORTS TO THE EU, IN TERMS OF SHARE ON TOTAL TRADE AND GDP OR THE ADJUSTED RCA MEASURE Share of materials (w/o fuels) exports to EU Share of materials (w/o fuels) exports to EU % of total exports % of total GDP Sierra Leone Liberia Montserrat Sierra Leone Ethiopia Ukraine Ukraine Mauritania Georgia Guinea Comoros Moldova Central African Republic Guyana Grenada Serbia Moldova Madagascar Kenya Morocco Uganda North Macedonia Burundi Honduras Mauritania Armenia Madagascar Georgia Cameroon Costa Rica 0 5 10 15 20 25 30 35 0 1 2 3 4 5 6 Adjusted RCA - materials (w/o fuels) 20 15 10 5 0 Burundi Somalia Timor-Leste Norfolk Island Burkina Faso Ethiopia Rwanda Central African Republic Uganda Kenya Bolivia Sierra Leone Guam Palestine Paraguay Source: BACI-ComTrade data. TABLE 3.2: INDEX OF EXPORT MARKET PENETRATION BY GOODS CATEGORY Country Overall Biomass Metal ores Minerals Fuels Dirty goods (World Bank) SLE – Sierra Leone 0.012 0.010 0.060 0.007 0.008 0.015 IRQ - Iraq 0.013 0.011 0.014 0.010 0.041 0.012 LBR - Liberia 0.013 0.011 0.038 0.007 0.018 0.011 LBY - Libya 0.014 0.008 0.013 0.007 0.046 0.017 MRT - Mauritania 0.014 0.013 0.026 0.011 0.031 0.010 ARM - Armenia 0.017 0.016 0.048 0.018 0.020 0.017 GEO - Georgia 0.018 0.018 0.026 0.013 0.022 0.022 DZA - Algeria 0.019 0.015 0.016 0.019 0.072 0.013 GNQ – Equatorial Guinea 0.019 0.013 0.009 0.005 0.044 0.017 AZE - Azerbaijan 0.022 0.020 0.024 0.013 0.070 0.021 MDA - Moldova 0.022 0.024 .N/A 0.008 0.008 0.014 55 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition Country Overall Biomass Metal ores Minerals Fuels Dirty goods (World Bank) KAZ - Kazakhstan 0.026 0.024 0.036 0.025 0.056 0.039 MDG - Madagascar 0.035 0.036 0.028 0.027 0.046 0.010 CRI – Costa Rica 0.042 0.047 0.017 0.018 0.028 0.033 NOR - Norway 0.043 0.034 0.051 0.067 0.086 0.139 UKR - Ukraine 0.061 0.064 0.116 0.045 0.046 0.054 MAR - Morocco 0.067 0.070 0.081 0.065 0.027 0.057 RUS - Russia 0.107 0.100 0.101 0.100 0.210 0.175 Source: BACI-ComTrade data. Note: Higher numbers indicate that a country exports to relatively more countries in this category and thus indicate a greater diversification, and countries are ranked by increasing degree of diversification. Most of the countries that we consider to be index of export market penetration also shows heavily dependent on exports of materials that larger and more developed countries in the list to the EU are also often poorly diversified manage to serve more markets than smaller or less in terms of their export basket in general. In developed countries such as Armenia, Moldova, particular, for Sierra Leone, Ukraine, Madagascar, and Mauritania. and Mauritius, more than 35 percent of total exports are material exports, mostly either metal ores or These numbers suggest that the potential for biomass (Figure 3.10), and these countries, plus diversification and a rebound from a sudden a handful of others, also serve very few export contraction in EU demand for materials is markets (Table 3.2). Our adjusted version of the limited. This potential is even more limited in FIGURE 3.10: ANALYSIS OF COUNTRIES THAT DEPEND ON MATERIAL EXPORTS TO THE EU Export intensity Share of materials (w/o fuels) exports on total exports Total export value as % share of GDP % Liberia Sierra Leone Morocco Morocco Ukraine Ukraine Madagascar Moldova Mauritania Mauritania Armenia Armenia Moldova Casta Rica Casta Rica Georgia Sierra Leone Liberia Georgia Madagascar 0 10 20 30 40 50 60 0 10 20 30 40 50 60 70 80 Share of materials (w/o fuels) exports on GDP Share of materials (w/o fuels) exports to EU % % of total materials (w/o fuels) exports Morocco Georgia Ukraine Liberia Sierra Leone Madagascar Liberia Sierra Leone Moldova Ukraine Mauritania Mauritania Armenia Casta Rica Madagascar Moldova Casta Rica Armenia Georgia Morocco 0 5 10 15 20 0 20 40 60 80 Source: Sommer and Taglioni 2022 56 BACK TO CONTENTS THE TRADE IMPLICATIONS OF THE CIRCULARITY TRANSITION those countries that will be hurt the most. From a Reducing exports of waste will adversely affect dynamic point of view, if the EU succeeds through important regional trade partners. When, in its regulatory agenda in setting new more stringent 2017, China decided to reduce the amount of waste global standards for the CE, that is, exporting de imported from the G-7 countries from 60 to 10 facto its regulatory framework, then the medium-term percent in less than a year, there were considerable effects for countries that do not manage to comply global repercussions. The EU’s intent to reduce may become even more severe over time, lowering the volume of waste produced and exported to demand for these countries’ exports of raw materials world markets may have similarly large global even further. It will thus be important for the EU to repercussions. Currently, the EU exports roughly consider these large dependencies when designing US$1.4 billion in waste. The largest importer of EU new policies and regulations on material inputs. waste in 2019 was Türkiye, a country that increased its imports of EU waste dramatically after China Reducing waste and material intensity in banned ‘dirty’ waste imports in 2017. As a result, consumer goods may also lead to unwanted EU waste represents 1.6 percent of total Turkish negative economic and social impacts in imports, which is a nonnegligible share. Another partner countries. The EU’s CEAP targets the EU neighbor, Moldova, is also relatively reliant reduction of waste in the EU as one of the key areas on EU waste imports (1 percent of the country’s for improvement. In recent years, waste exports total imports) and Pakistan is not far behind, at have become a global emergency and a problem 0.7 percent of its imports (Figure 3.11). It is hard that calls for urgent solutions. There may, however, to judge the full extent to which these imports of be unwanted negative economic and social impacts waste are critical to the recipient economy, but associated with such a move which should also be their existence and importance for some EU trade considered.  partners should not be underestimated. FIGURE 3.11: MAIN RECIPIENTS OF EU EXPORTS OF WASTE Share of waste Exports of waste by EU countries % share % share Differentiated by destination 1.0 80 0.82 70 68.0 0.8 0.73 60 Percentage share Percentage share 0.62 50 0.6 40 32.0 0.4 30 20 0.2 10 0.0 0 On world On EU On EU exports Rest of World EU trade exports (including (excluding intra-EU intra-EU trade) trade) Largest importers of waste exports from EU Share of waste imports from EU on total imports T$ % Turkey Turkey Moldova China Pakistan Great Britain Norway India Egypt North Macedonia United States Swizterland Japan India Switzerland Serbia Morocco South Korea Great Britain Norway Albania Belarus Pakistan Japan Egypt Ukraine 0 500000 1000000 1500000 2000000 2500000 3000000 3500000 0.0 0.5 1.0 1.5 2.0 Source: Sommer and Taglioni 2022. 57 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition Economic and social impacts of reducing especially those in developing countries, may end e-waste in the consumer durable industry up being pushed out of the chain. In these cases, should also not be neglected. EU legislation to sustainability gains will have negative social impacts, reduce waste may also affect developing countries which will also need to be managed. Section 3.4 through this indirect but important channel, discusses how these outcomes can be avoided. potentially disrupting development trajectories within the developing world and undermining With regard to plastics and single-use plastics, gains made in female employment. This sector the EU is more self-sufficient, and legislation is resource intensive and an immense waste can move faster. The CEAP also targets the generator. Millions of goods, from cell phones and reduction of single-use plastics, which makes it printers to microwaves and washing machines, interesting to look at EU imports in this category. are disposed of every year. This is fueled by the Since we focus only on three HS4 codes for which industry preference for business models based we are confident of capturing nothing else but on maximizing the number of units sold and single-use plastics, packaging, and waste, the for products with ever shorter life cycles and share relative to total EU imports is naturally small. limited repair options. Although there is already a Interestingly, it appears that most EU imports are global proliferation of multiple extended producer from within the bloc (about 71 percent, Figure 3.12). responsibility requirements to limit these nefarious The largest non-EU trading partner in single-use business trends—78 countries have policies and/ plastics is China, which provides about one-third of or legislation to make manufacturers responsible for EU imports in this category, followed by the United environmentally sound disposal—the EU may want Kingdom and Switzerland. Some small countries to go further, with the potential to force a reshaping and insular states, such as Montserrat or Samoa, of those consumer goods value chains, from however, are highly dependent on exports of such apparel to electronics and white goods that span goods, even if the total volumes are negligible in numerous countries around the world and whose the aggregate. This evidence suggests that single- business model is based on mass production of use plastics is one area in which the EU can move goods with unnecessary short life-cycles and limited faster, since most of the effects will not be felt to none opportunities to reuse and repair.  by third countries. In the countries where these effects are felt, the relatively small overall amounts Many developing countries depend would make it possible to address the negative significantly on the consumer goods value externalities with compensation schemes. chain for their socioeconomic development. For example, electrical and electronic goods exports accounted for 44 percent of Vietnam’s exports 3.4 Leveraging GVCs toward in 2019 (US$123 billion), employing more than material-efficient production 600,000 people, 85 percent of whom are young in the EU and in trade partner females. Making more durable, more sustainable products reduces the need for factories and labor- countries intensive operations. While new but fewer jobs Between now and 2030, there will be can be created in high-value knowledge roles to significant declines in exports of primary analyze data, many factory workers in developing metals, balanced growth in recycled metals countries will be at risk of losing their jobs if a and exports, and significant opportunities in successful transition occurs to more sustainable plastics, according to CGE analysis. LMICs and less-material-intensive consumer goods. could shift away from commodity production and This will not only have a potential impact in the increase their presence in new industries, including assembly stages of manufacturing changes but trade and other services, while also making inroads is also likely to replicate throughout the supply into recycled copper, recycled steel, plastics, and chain. Manufacturers will need stronger and more plastics recycling (Figure 3.13). capable suppliers that can provide them with the quality guarantees required to produce durable Helping developing countries diversify away goods, and the weaker suppliers of components, from commodity production is also in the 58 BACK TO CONTENTS THE TRADE IMPLICATIONS OF THE CIRCULARITY TRANSITION FIGURE 3.12: EU IMPORTS OF PLASTIC Imports of plastic by EU countries Adjusted RCA - plastic Differentiated by origin 80 Samoa Andorra 70 Sint Maarten Niue 60 Nauru Percentage share 50 Montserrat Bosnia and Herzegovina 40 Israel Serbia 30 Vietnam Mauritius 20 Turkey New Zealand 10 China 0 Saint Barthélemy Rest of World EU 0 5 10 15 20 Largest exporters of plastic to EU Share on plastic imports from EU T$ %, Other = countries with <1.5% China China Great Britain Great Britain Switzerland Other United States Switzerland Turkey Vietnam United States Serbia Turkey Israel Vietnam India Serbia Norway Israel South Korea India Other Asia Norway Thailand South Korea Japan Other Asia Bosnia and Herzegovina Thailand 0 0.50 1.00 1.50 2.00 2.50 0 5 10 15 20 25 30 35 Source: Sommer and Taglioni 2022 FIGURE 3.13: CGE ESTIMATES OF RECONVERSION POTENTIAL IN LMICs Change in LMIC export value by main Change in LMIC export value by main commodity under Combined CE scenario, sector under Combined CE scenario, relative relative to baseline EGD-NDC scenario (2030) to baseline EGD-NDC scenario (2030) 2.2%, other services ATP-c Agriculture 0.04% XTP-c CNS-c XMF-c Industry -0.31% -2.8%, metals casting rom-c -3.0%, other metals rcp-c 3.3%, recycled copper Other goods and -2.7%, copper services -0.43% ral-c -4.9%, aluminum (incl extractives) ris-c 3.1%, recycled steel -3.2%, iron & steel NMM-c Power -0.85% 3.0%, plastics recycling PLT-c 25.8%, plastics P_C-c Trade and 1.78% PFD-c other services OIL-c MMO-c -3.2%, metal ores Transport and trade 0.07% 6.6%, non-metallic minerals AGR-c -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% Source: World Bank. 59 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition EU’s interest. A shift toward low material intensity ores from the ground and the first stages of requires producing many new and innovative removing superfluous materials and impurities. products at affordable prices—and doing so This is also the only segment of recycled metal at a rapid pace. The successful experience GVCs in which developing countries other than from technology-intensive goods as diverse as China play a significant role.52 China is the largest smartphones, solar energy panels, wind turbines, producer in the next stage of these GVCs. Chinese electric vehicles (EVs), and, most recently, commitments to establishing processing capacity vaccine production has shown that when this has in the 2000s, together with Japan’s historical happened, it was because of the complementary leadership in the smelting of nonferrous metals capabilities that GVCs can leverage. Moreover, and the region’s primacy in manufacturing, have there are important lessons to learn also from the made Asia-Pacific the center of the mid- and only country that has made significant inroads into downstream stages of the GVCs of these metals.53 many new emerging sectors, China. Its significant While Europe is the second-largest region in investment to develop an industrial expertise in the concentrate processing, refining, and usage for production and manipulation of base materials, and both aluminum and copper, this share has steadily in their usage inputs in downstream production, is declined as China’s position in the industry has one possible reason for its successful outcomes.  strengthened.54 The downstream segments of the value chain are mostly dominated by high- The main question is whether LMICs have the income countries, since recycling and reduction capacity to invest and compete in the new efforts largely hinge on the proactive stance of sectors. This section shows that, despite some the industries into which these commodities flow. promising inroads in some areas, at present most Products must be designed and developed with developing countries are still marginal players in the recycling and reduced metal use as the end goal. new emerging industries. For a structural shift to For example, reducing alloy use and improving take place toward material-efficient products, the traceability of the metals used to allow for direct EU and other rich countries need to facilitate the melt recycling. The downstream industries for transition in these countries, including by creating these commodities are similar, except for the large incentives for the private sector to design and invest food and beverage participation in aluminum. in material-efficient products and business models. Three categories, namely machinery equipment, construction, and transportation, account for Almost no developing country participates three-quarters of the end use in these metals. in the production of recycled metals. In recycled copper, aluminum, and steel, the The potential impact of EU initiatives and upstream stages of these industries (exploration, private actors is global in the industry of extraction, and primary processing) are highly food packaging. Meeting the steadily increasing concentrated in a small number of locations. This demand for food by a growing and richer world limited global footprint is due to reserve locations, population places significant pressure on the geological conditions of those reserves, and planet’s biomass. Innovative business models aimed the capital intensity of the operations necessary at reducing food loss in producer countries and to extract the metals from the ground. These food waste in consumer countries are emerging. In stages involve locating and extracting metal 52 The upstream mining stages of the copper GVC are dominated by Latin America (led by Chile and Peru), which accounts for 44 percent of copper concentrate production. Together with Australia, Canada, and Mexico, these top five countries accounted for 69 percent of global ore concentrate exports in 2019. The aluminum sector is even more consolidated with Australia accounting for 29 percent of the world’s bauxite output, followed by China (23 percent) and Guinea (15 percent). Guinea, indeed, is a central actor to the aluminum GVC. It holds 25 percent of the world’s bauxite reserves and accounted for 51 percent of global exports of aluminum concentrate in 2019. 53 Asia accounts for 75 percent of traded copper concentrate imports and produces 56 percent of the world’s refined copper; China accounts for two-thirds of that. Chile is the only significant non-Asian exporter of refined copper. China’s growing dominance is even more pronounced in the aluminum chain, where it increased its world market share of bauxite imports from 40 percent in 2010 to 72 percent in 2019. It is also by far the largest smelter of aluminum globally accounting for approximately 58 percent of primary aluminum output in 2020/21. 54 Very few aluminum and copper mining countries depend on the EU today as a destination. Only 7.5 percent of Guinea’s aluminum concentrate and 10 percent of Latin America’s copper concentrate are processed in European plants. 60 BACK TO CONTENTS THE TRADE IMPLICATIONS OF THE CIRCULARITY TRANSITION this context, food packaging has become a major sufficient economies of scale in packaging demand focus of CE initiatives.55 This is not surprising, as the and regulations that support recycling are in place, food sector also accounts for about 37 percent or exporters from developing countries can adapt 8.2 billion tons of global plastics. to these new demands. However, where these conditions are not met, they are forced to import, The most immediately available option to adding to global emissions and cost. improve sustainable goals for actors in the fresh produce chain is to improve plastic PET To drive this change, regulatory decisions in containers as much as possible. This includes the EU, together with the choice of business several actions: (a) increasing the share of recycled models by EU firms and GVCs, matter. The content and recyclability of packaging materials; (b) potential impact of EU initiatives and private actors reducing the total weight of PET in each container; is global; Europe is the world’s largest importer and (c) shifting designs such as reduced labeling; and sources close to 40 percent of its imports from (d) changing packaging type (from clamshells to outside the region. Achieving sustainable goals thus sealed punnets), which can reduce PET content requires policy makers and private sector firms alike by 40 percent. On recycling these containers, the to examine how actors beyond the EU’s borders are EU, the United Kingdom, and Canada are driving positioned to respond to these changes.  much of the change, establishing legal packaging requirements around these issues for food The lack of significant presence of developing containers. countries in material-efficient products mimics well-known patterns in green goods. However, capacity to meet these new The above anecdotal evidence is consistent with requirements varies across the diverse trends in green goods as reflected in the Asia- range of global fruit and vegetable exporters, Pacific Economic Cooperation (APEC) definition especially in developing countries. When (APEC 2012) of clean and environment-friendly FIGURE 3.14: LMIC EXPORTS OF ENVIRONMENTAL GOODS Share of clean good exports on total exports (%) Iraq 0.003 Mauritania 0.009 Equatorial Guinea 0.017 Libya 0.021 Algeria 0.026 Madagascar 0.063 Kazakhstan 0.077 Liberia 0.084 Azerbaijan 0.105 Armenia 0.277 Sierra Leone 0.336 Russia 0.416 Georgia 0.434 Costa Rica 0.476 Morocco 0.577 Ukraine 0.778 Moldova 0.782 Norway 1.658 0.0 0.5 1.0 1.5 2.0 Source: BACI-ComTrade data Packaging plays a critical role in the fresh produce industry, extending the shelf life of products, reducing post-harvest losses, and 55 protecting quality and food safety. Simply sheathing a cucumber in plastic wrap extends its shelf life by 66 percent. Transparent, sturdy, and resistant to humidity, plastic has been essential in facilitating long-distance shipping of high-value soft fruits from the production location to supermarket shelves. These soft fruits, such as berries and cherries, need greater protection and less handling than hard fruits that can be shipped in cartons (for example, bananas, citrus, and apples). 61 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition goods. This is a measure that we take as a rough Tropical and southern hemisphere suppliers proxy for countries’ ability to develop innovative have gained in importance in the upstream and environment-friendly business models and and midstream stages of the chain. While products. Based on such a list of goods, it appears northern hemisphere developed-country suppliers that the EU is a major producer and exporter and have dominated the industry (top four in 2001: much less an importer of them. Almost 60 percent 44 percent), the past two decades have seen this of the imports of these goods are supplied from market share decline (top four in 2019: 31 percent), within the EU (Figure 3.14). From a development with increased globalization of the industry and perspective, the other largest exporters of these significant growth from tropical and southern goods are capital-intensive countries and mostly hemisphere suppliers. Tropical and southern do not overlap with the exporters of raw materials hemisphere suppliers have gained importance in that need to shift away from commodity production. the milling stage of the chain by undertaking more Clean goods are imported for the most part from sawmill and pulp mill activities. The leading wood larger and richer economies. China is the biggest chip exporters include Vietnam, Australia, Chile, extra-EU source of clean goods imports (27.7 Thailand, and South Africa (total 82 percent of percent of total EU imports), followed by the United non-coniferous wood chip exports). China imports States (19.2 percent), the United Kingdom (9.5 about half of this trade (47 percent) and Japan a percent), and Switzerland (8.3 percent). Almost further 38 percent. Similar to the case of metals none of the countries that we previously identified and some green goods such as solar panels, the as heavily dependent on material exports also development of the global trade in pulp and the export green goods (Figure 3.15). Norway is an increasing opportunities for developing countries exception, but even there these goods exports to capture a market share in this segment have are minor, at only 1.7 percent of its total exports. also grown as a result of China’s installation of This finding is not surprising and is fully consistent processing capacity in its paper mills. Canada, with the econometric results shown above that the United States, and Sweden have been among most material-intense production settles in capital- the leading exporters of pulp for a long period. abundant countries (see Section 3.2). However, new southern hemisphere exporters, including Brazil, Chile, and Indonesia, have One sector in which developing countries emerged as important competitors supplying are making promising inroads is the one of market pulp to the new Chinese paper mills. sustainable forestry products. The growing China’s growth as an import market to process and importance of CEs amid rising concern for create forest-based products to meet demand has climate change has revitalized the global forestry been explosive, with its market share increasing industry. After a decade of slowdown induced by from 6.3 to 24 percent. As a result of the entry of digitization’s steady elimination of printing paper, the these new actors, trade in forest-based products industry is once again preparing for booming future has doubled in both value and volume since the demand. Buoyed by global commitments to climate turn of the century. action since 2015, forestry’s value proposition has shifted from providing basic printing paper and fuel Firms can help in this goal through disseminating to providing innovative, sustainable substitutes for a technology and contributing to lower production wide range of products, from concrete to plastics, costs and prices for CE products, but legislation fabrics, and steel.56 Developing countries are still needs to create the incentives for them to do marginal players in these new areas of growth, so. To realize a CE at scale, effective material but their presence is growing, particularly in the flow and longer life span on products need to be upstream (plantation and harvesting) and midstream enabled globally. Making these products possible (milling and processing) stages of production. requires changing consumer demand, making Paper packaging is being adopted as a biodegradable alternative to single-use plastics; resin-lined carts can even be used for long 56 shelf-life liquids, from milk to whisky. PureFibre from StoraEnso replaces single-use plastic—not only is it recyclable, but it has a 75 percent lower carbon footprint. New high-performance textiles such as modal and lyocell are being made from cellulose fibers. These can be even more sustainable than organic cotton; a t-shirt made from wood fiber, for example, uses just 1 percent of water required for a cotton shirt. These substitutions are driving renewed demand in the industry. 62 BACK TO CONTENTS THE TRADE IMPLICATIONS OF THE CIRCULARITY TRANSITION innovative goods rapidly affordable, and pushing adopted by capital equipment manufacturers stringent standards of production down the value in the past, is also likely to help the shift chain to producers globally. To achieve this effort, toward material-efficient production. Today’s regulatory interventions need to be matched with global economy is driven largely by a disposable measures that make firms with leading brands society, in which consumer business models are responsible for their global industrial strategies and sustained on economies of scale, while quality, facilitate financing of new technologies and their durability, and reuse are not central to producers’ dissemination across the globe. core business. The PaaS approach moves away from the traditional product-oriented business under Firms need to finance and design new which the good is sold outright to use-oriented (that technology, products, and business models is, pay per use) and results-oriented (that is, pay and disseminate them globally. Firms will need per outcome) ones where the product’s ownership capital investments in material-efficient business remains with the provider and the contracting (greenfield or through acquisitions) or strategic depends on availability or outcomes. As the product efforts to evolve (new) market segments. The then shifts from being a profit generator to part of current efforts in climate finance can serve as the cost function, the manufacturer is incentivized guidance on the tools that can help speed up the to increase its efficiency, extend its life cycle, and financing of innovative, material-efficient business. optimize the potential for reuse. By definition, these Various environmental, social, and governance products become capital equipment.  (ESG)-linked sources of capital terms have both grown and become more standardized by 2021, The experience in capital equipment value with total issuance being estimated at over US$1 chains offers numerous insights into how trillion (Green Bond Initiative).  to shift toward more material-efficient and durable products. It highlights both the Firms will also need to design products opportunities and challenges related to the and business models in a way that avoids approach of shifting the revenue stream from the production leaking away from jurisdictions product itself to the associated services. In capital with more stringent regulatory environments. equipment value chains, this strategy shift toward To do so, they need to be made responsible for PaaS has turned out to be good for both sellers the overall material footprint associated with the and buyers and has facilitated a shift to a more products they produce. A good starting point is to circular economy in the capital equipment industry. make them responsible for Scope 3 emissions.57 For manufacturers, this has been a profitable This will lead them to disseminate new technologies move, leading to high margins and opportunities and support the development of new competences for innovative services offering. Margins (EBITD)59 in LMICs in the critical areas of manufacturing of generated by services-based models have been base materials; sensor and connectivity technology; found to be considerably higher compared with new and supporting of trade, recycling, and other equipment sales. Moreover, unlike new equipment services. Evidence on how countries transition out sales, PaaS provides a long-term, captive, and of commodities and break into higher-value-added constant revenue generator for the manufacturer, activities suggests that developing competences mitigating revenue fluctuations and uncertainty in manufacturing, particularly in base metals, is during periods of economic downturn. a successful way of laying the foundations for sustainable industrialization.58  There are challenges to applying this model to the consumer durables sector, however. Helping firms develop product-as-a-service Highly fragmented buyer power and information (PaaS) approaches, of the type already asymmetries do not create the incentives for 57 GHG emissions are categorized into three groups or ’scopes’ by the most widely used international accounting tool, the GHG Protocol. Scope 1 covers direct emissions from owned or controlled sources. Scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating, and cooling consumed by the reporting company. Scope 3 includes all other indirect emissions that occur in the value chain. 58 Cherif and Hasanov 2019; World Bank 2020b. 59 EBITD = Earnings before interest, taxes, and deduction. 63 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition producers to manufacture good quality products 3.5 Conclusions and invest in shifting their revenue stream toward maintenance and repair services. In addition, The EU’s dependence on material imports strong forces exist against change from developing is significant, particularly when looking at total countries, especially those currently specializing in material consumption, inclusive of material footprint the mass manufacturing of consumer goods. These (Section 3.1). The analysis has also found small countries are largely dependent on rapid production but significant signs that if regulation tightens in systems for employment and export revenue and, the future, some production of materials as well as a consequence, are likely to be the major losers as downstream activity that is intensive in material in this shift.  inputs may relocate outside of the EU (Section 3.2). Based on evidence from historical data, however, it Hence, legislative change is also needed seems as if most material-intense production settles for such structural changes to happen at in places that already have a capital-abundant scale. Some countries are working to introduce economy, that is, mostly other rich countries and legislation and incentives to force consumer goods China. Still, unilateral action in the EU risks having companies to manufacture more durable products destabilizing spillovers on many lower-income for their markets. Requiring durability of products, countries, many of which are very poor, sometimes however, may prove insufficient to fully stimulate plagued by conflict and fragility, and posting an firms to shift to services-led products due to the undiversified domestic economy (Section 3.3). myriad of challenges that they face in doing so. The more ambitious the CE regulatory agenda, Many of these are internal organization challenges, the broader the range of impacts and affected from restructuring, operationalizing changes, and countries. Most importantly, the analysis has shown shifting attitudes among teams to finding the correct that more production means more use of materials pricing strategy across their market segments. and more pollution. That connection has to be While resolving these challenges depends mostly disrupted. To do so, addressing the problem at its on managerial strategies, there are other more source, that is, the production stage, is important. fundamental issues where government intervention But targeting production alone will not suffice. could catalyze change. In particular, there are Consumption habits also need to change. Currently, three areas in which governments could accelerate as countries become richer, they consume more change. First, governments can push for a change materials, even when their domestic production in consumer demand. Consumer protection becomes less intensive in raw commodities. agencies around the world need to be strengthened to channel consumer demands for more material- The EU can leverage GVCs for achieving efficient and durable goods. Second, the shift to overall reduction in the net resource intensity PaaS has a major impact on short- and medium- of production on a global scale and avoid term cash flow within businesses. Continued leakage. Assigning responsibility for Scope 3 equipment ownership by the manufacturer means emissions and material usage along the entire value that they must assume full up-front costs of that chain to the firms that design products and unlock product. The information asymmetries regarding financing can speed up the CE transition. New how potential services clients might treat these products that are material efficient and low waste products increases the risk associated with need to be invented, made affordable, and adopted financing them, making it more difficult or expensive rapidly on a global scale. Pushing lead firms to to borrow. Governments can play a role during make such changes will help in pivoting toward this transition period by providing access to lower- more material efficiency on the production side. cost financing. Third, such a shift hinges on well- It will also help disseminate new technology and developed digital connectivity and infrastructure, lower the prices for innovating CE-friendly products. another area in which public investment can help. This will also facilitate the shift in end consumer Governments have a key role to play in improving habits, since brands design products and influence these enabling factors and overcoming the consumer taste. Finally, such measures help market failures in access to finance to facilitate the pricing in externalities along the whole value chain transition.  associated with their end products, curbing the 64 BACK TO CONTENTS THE TRADE IMPLICATIONS OF THE CIRCULARITY TRANSITION risk of leakage and future relocation of production from outside of the region. Even for countries that toward pollution havens. Anything short of pricing in are not dependent on EU sales, as the leader in externalities along the whole value chain could imply the industry, the region has been at the forefront some form of leakage, even if so far none of this has of global standards setting. With increased trade been observed. in produce, issues of food safety, phytosanitary conditions, and acceptable product quality became The EU is an important global buyer, exporter, increasingly important.61 and home to many lead firms in GVCs. With this status comes a large standard-setting power, How actors beyond the EU’s borders are which the EU exerts through the globalization of positioned to respond to policy changes its standards and the internationalization of its lead matters. The multitude of global spillovers and firms. This role is visible in many industries but spill-backs in both the production and consumption perhaps most notably in those linked to forestry of materials and in downstream industries and in food-related value chains. The current suggests that unilateral measures are likely to face policy in Europe for forestry and related products pushbacks from trade partners across the globe. is an extension of decades-long efforts to improve Take the example of a shift from the current way recycling, enhance sustainable management of the EU consumer goods industry works to PaaS global forests, and eliminate illegal logging. The business models. As discussed in Section 3.4, region is the world’s largest exporter (33 percent) PaaS is considered a critical strategy to reduce and second-largest importer (29 percent) of forest both material intensity and waste and increase products. It leverages extensive influence over the the duration and reuse of many manufactured global industry through widespread adoption of the products. At first sight, one could argue that this is sustainability standards largely set by Europe, the a purely domestic measure, but in fact it can have internationalization of its lead firms, and the market major global repercussions. It is likely to create power it exerts over end products, from furniture many challenges in many emerging economies to packaging of materials. It has used this market that specialize in mass manufacturing, since these access through trade agreements to encourage are largely dependent on such rapid production and facilitate the development of multistakeholder systems for employment generation and export sustainability initiatives across the developing revenue and to achieve a range of socioeconomic world.60 In food industries, a host of initiatives in objectives. These countries are therefore likely to the European Union (EU) have set out to improve be the major losers if such a shift occurs, unless the sustainability of the fruit and vegetables GVC. they also operate the same shift. The global food These leverage public sector regulations, private value chain offers another telling example of why sector requirements, and civil society demands trade policy coordination is needed. Upstream not only to make the GVC more environmentally segments of the chain comprise many developing- friendly and healthy but also to ensure it operates country suppliers. Policies in these locations have on a fair and inclusive basis. The potential impact not necessarily focused yet on issues of the CE, as of these EU initiatives is global because of Europe’s priorities are focused more on social and economic importance as the world’s largest importer and needs of jobs creation and income generation. its sourcing of close to 40 percent of its imports As stand-alone measures, regulations, norms, 60 There are many examples of how the EU has shaped global sustainable forestry policy over the past three decades through the globalization of its standards and the internationalization of its lead firms. In the 1990s, the region pioneered certifications for sustainable forestry management (SFM) to alleviate the local consequences of deforestation. The Pan European Forest Certification (PEFC) was founded in 1999, introducing independent third-party certification. The PEFC has since expanded significantly beyond Europe, covering over 300 million ha of forest by 2021. Today, the PEFC works with national governments and regional groups (for example, Cameroon, Congo, and Gabon - Pan African Forest Certification for the Congo Basin) around the world to establish SFM frameworks. Its leading firms, Stora Enso (Finland), Holmen (Sweden), and UPM (Finland), are among the largest in the world (top 12). These firms have expanded abroad, with forests not only across Europe and Russia but also across North and South America, and have expanded their sustainable practices to both their own plantations and those they source from. Uruguay, a major supplier for pulp plants for both Stora Enso and UPM, has certified all of its forests in Forest Stewardship Council (FSC)/Programme for the Endorsement of Forest Certification. 61 In 1997, the EU, along with its leading supermarkets, established the now globally accepted norms through the creation of EUrepG.A.P. This became the predecessor to GLOBALG.A.P.—the most widely adopted standard around the world for fruit and vegetable production. This revolutionized global agriculture and pushed small actors out of the industry. 65 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition standards, and policies made in the EU may end up a unilateral reduction in the amount of materials in having exclusionary effects on developing countries the EU but also to help other countries make the producers. For example, smallholders who cannot same transition and manage any adverse impacts. effectively certify efficient use of materials could Second, assigning responsibility for CE outcomes be pushed out of the chain. Suppliers that cannot to the firms that design products and unlocking access sufficient recyclable packaging also may no financing can be achieved effectively through longer be able to sell fruit to high-value markets. accountability for Scope 3 emissions. Finally, the EU can deploy its large standard-setting power and the These findings motivate three main policy internationalization of its lead firms to push for more conclusions. First, trade policy and trade stringent standards globally. diplomacy at all levels (bilateral, regional, and multilateral) can be deployed not only to pursue 66 BACK TO CONTENTS EXECUTIVE SUMMARY Chapter 4 The role of the private sector: Opportunities and barriers 67 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition 4.1 Speed, depth, and scale the best known model) is now estimated to be more than double the size of Europe’s traditional hotel The private sector will be central to the economy and is having a huge impact on the hotel introduction of CE business models. Across industry. The ‘uberization’ of taxi services in major sectors, most, if not all, technological and business cities has had the same disruptive impact. Industries model innovations have stemmed from the private that have shifted away from one-off product sales sector, although public policies and support, toward capital equipment as a service (extractive including in research and development (R&D), have industries equipment, jet and ship propellers) have certainly played a role. CBMs—those centered typically recorded higher than average margins, on reducing the extraction and use of natural often through cost savings in maintenance, resources and the generation of waste—are already equipment use optimization, storage/logistics, and in operation in several economic sectors, including customer capture.63 plastics, construction, agribusiness, water, textiles, and metallurgy.62 But CBM innovations remain limited in scale, depth, and speed of adoption. Although Existing CBMs tend to focus on recycling, instances of CBMs—whether adopted wholly or reuse, repair, refurbish, and remanufacture, partly by a firm—are increasing, they are still limited although increasing instances of more in absolute terms and occupy a peripheral position sophisticated business models (PaaS) are in most markets, averaging a market penetration emerging. Despite their degree of sophistication, of between 5 and 10 percent in economic terms. to the extent that these CBMs displace production Recycled materials (metals, plastics, pulp and from traditional modes, they deliver immediate paper) represent only 8.6 percent of raw material benefits in reducing their environmental footprint. input, and remanufactured products account for The life-cycle CBMs based on existing products only a tiny share of global manufacturing—the or secondary raw materials typically have relatively proportion of remanufacturing to new manufacturing small impacts on global warming, acidification, and in Europe is only 1.9 percent. Even producing pollution compared with linear business models. secondary raw materials from waste only accounts for 30–40 percent of the physical output of the The rise of CBMs has the potential to disrupt sectors in which it is most established (such as pulp key economic sectors. For instance, the sharing and paper and steel).64 economy in the hospitality sector (of which Airbnb is FIGURE 4.1: CBMs ACROSS THE PRODUCT LIFE CYCLE Product Life Extension: Resell Circular Supplies Product Life Extension: Repair / Upgrade Product Procurement Manufacturing Logistics Sales and Product End-of-life Reverse Design Marketing Use Disposal Logistics Resource Recovery: Waste as Resource Waste Share Leakage Other Production Process Product as Service (eliminate) Source: Adapted from Mirjam Bani and Marieke Blom, “Rethinking the Road to the Circular Economy,” (January 2020), https://think.ing. com/uploads/reports/Rethinking_the_road_to_the_circular_economy _FINAL_RB1.pdf. and OECD 2019 62 Ellen McArthur Foundation 2018; Jagtap and Rahimifard 2017; Long et al. 2017; OECD 2019. 63 European Parliament 2017. 64 Bocken et al. 2016; Circle Economy 2022; Geyer, Jambeck, and Law 2017; Van Ewijk, Stegemann, and Ekins. 2017. 68 BACK TO CONTENTS THE ROLE OF THE PRIVATE SECTOR: OPPORTUNITIES AND BARRIERS Without rapid scale-up, the CE risks remaining 4.2 Country characteristics a niche rather than a fundamental disruptor. This is true within sectors as well as often even shape private sector capacity for in some of the larger firms that are pioneering circularity CE models. If circularity entails the large profit CBM penetration differs across EU MSs. As opportunities foreseen by modeling exercises and with any transition, countries’ initial conditions advocates of the concept, why have competitive shape the potential gains from the shift toward firms not embraced the concept already? What circularity. Chapter 2 discusses how EU MSs depart prevents the CE from reaching scale? Some of the from different starting points in terms of material answers lie within the firms themselves, but most flow composition and standard CE performance are found well beyond them. metrics. The private sector’s potential for circularity also differs markedly across countries. EU MSs, depending on their economic structure, show FIGURE 4.2: ECONOMIC IMPACT OF CE SECTORS AND THEIR GROWTH RATE Growth rate() by country and VAcategpcCE Norway Netherlands Latvia Hungary High CE VA pc Italy Slovenia Lithuania Denmark France Romania Poland Mid-high CE VA pc Serbia Greece Slovakia Belgium European Union - 28 countries (2013-2020) Germany (until 1990 former territory of the FRG) Portugal Mid-low CE VA pc Austria Cyprus Bulgaria United Kingdom Croatia Sweden Low CE VA pc Finland Spain Ranking of countries by Category of countries by VA growth rate Growth rate of the VA per capita (From top to bottom) CE Value Added (From top to bottom) Value added from CE sectors Value per capita, CE sectors (average, 2008-18) (average, 2000-18) Source: Eurostat 2021. Note: Indicator of CE impact includes ‘gross investment in tangible goods,’ ‘number of persons employed,’ and ‘value added at factor costs’ in three sectors: the recycling sector, repair and reuse sector, and rental and leasing sector. Data run from 2008 to 2018. Most countries have information after 2010. The VA growth rate was estimated as an average of annual growth rates. Data from 2008 to 2018 show that the growth rate of the value added generated by CE sectors varies across countries. 69 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition varying potential in key dimensions of a CE, such countries with lower CE economic impact. Although as sustainable inputs, extension of useful lifetime, or Romania shows higher growth rates than Bulgaria, increase in the intensity of use.65 This is in line with economic outcomes are still not significant. Croatia the findings of Chapter 5 which show that countries’ is on the borderline between mid-low CE and low different economic fabrics yield different economic CE VA per capita but with low levels of growth rates. gains and labor market effects, also depending on If this trend continues, it may lose the modest CE the suite of CE policies followed. economic impact achieved so far. Poland is in the upper of the mid-low CE VA per capita group, and VA generated by CE sectors varies across its growth rate is above the EU average. Thus, it countries. Growth rates of CE VA show how fast has a higher potential to move ahead, at a faster EU MSs have been moving in the transition toward pace, in its CE economic standing among European CBMs (Figure 4.2). The speed of the transition countries. depends on a country’s characteristics, with some MSs with lower growth rates already in the top Differences in the CE VA of countries depend category of economic impact (that is, higher CE VA on specific production drivers. Drivers of per capita). Bulgaria and Romania are among the production are enablers allowing countries to FIGURE 4.3: CE VA VERSUS DRIVERS OF PRODUCTION High CE VA Mid-High CE VA Mid-Low CE VA Low CE VA 0.8 CE VALUE ADDED (Billions) Norway 0.6 United Denmark Kingdom Germany Sweden 0.4 Italy Austria Netherlands Finland France 0.2 Croatia Belgium Slovenia Slovak Spain Lithuania Latvia Republic Poland Greece Portugal Cyprus Hungary Bulgaria Romania 10 20 30 40 50 Drivers of Production (Top #1, Bottom # 60) Source: Based on WEF (2018) data on production drivers. Indicators of the category of sustainable inputs include circular material use rate; share of total organic area in total utilized agricultural 65 area; and energy consumption in manufacture, transportation, and households. Indicators of the category of end-of-life include packaging waste recycle, generation of waste per GDP unit, industrial and municipal waste treated by recycle, patents to recycling, and secondary raw materials. Indicators of the category of extension of useful life include ELVs recovered and reuse, value added of retail sale of second-hand goods, and employment in repair and reuse sectors. Indicators of the category of increase of the intensity of use include individuals using websites or apps for transportation, accommodation services, collective transportation, and internet usage (European House - Ambrosetti and Enel foundation 2020). 70 BACK TO CONTENTS THE ROLE OF THE PRIVATE SECTOR: OPPORTUNITIES AND BARRIERS BOX 4.1: FOCUS SECTOR SELECTION METHODOLOGY AND EVALUATION OF THEIR CIRCULAR POTENTIAL In countries such as Romania, Bulgaria, Croatia, and Poland, where VA from the CE is still relatively low, a focus sector selection methodology can help better evaluate where policy makers’ actions should be directed to foster additional value creation and overcome barriers. To identify the barriers and enablers for adopting CE business models in the private sector more concretely in a country, targeting the right sectors is essential. A methodological approach to prioritizing sectors and evaluating their circular potential can help in better understanding the challenges and opportunities in the country context. The team developed such a focus sector selection methodology, including an evaluation of the CE potential in strategically relevant sectors. The first step involved selecting the strategic sectors according to their institutional and economic importance to the growing CE. Potential sectors were identified through a review of CE-related regulations, policies, national strategies, and action plans as well as other documents associated with industrial investments in markets and services (Annex 1). This first step produced a list of top five sectors which then allow for narrowing the prioritization down to the top three sectors with higher CE potential and impact over time. The second step determined the CE potential across 10 CE indicators, which allowed the sectors to be ranked. This step involved analyzing the top three sectors on their potential to adopt CE approaches in selected country examples with low CE VA, such as Bulgaria, Croatia, Romania, and Poland. capitalize on emerging technologies and future of localization, research, development, and innovation production opportunities. Countries with high and [R&D&I]); (b) sales at 100 percent of circularity mid-high CE VA rank higher on indicators linked potential (eco-labeling, servitization); and (c) useful to drivers of production positively correlated with life (reverse logistics), product life extension, and the CE VA, including technology and innovation, repairability at 100 percent of circularity potential. human capital, global trade and investment, and The secondary sector is construction (blue), with a institutional framework (Figure 4.3). On the other total of 68 percent circular potentiality. This market hand, countries with mid-low to low CE VA are also presents excellent opportunities for improvement ones that rank lower in the same indicators.66 The at the beginning of the pipe (key performance latter applies to Bulgaria, Croatia, and Romania, indicator [KPI] sustainable inputs at 56 percent), which rank low in terms of CE VA and indicators such as selecting local materials, fair trade, and linked to drivers of production.67 using recycled or secondary raw materials (50 percent). Finally, the third leading sector is food and Sectoral composition influences the potential beverages at 53 percent of circularity potentiality for the emergence of CBMs. The analysis shows (green). This sector shows significant opportunities that although certain sectors such as machinery for the enhancement of R&D&I to develop products and appliances and food and beverages are with adequate traceability (50 percent) and fair trade common, the EU-4 countries show differences in with suppliers and the use of sustainable and green terms of priority sectors (see Box 4.1). raw materials for packaging (87 percent). Bulgaria’s main CE potential sectors are Sectors including machinery and appliances, machinery and appliances, construction, construction, and food and beverages display and food and beverages. The first principal the highest level of circularity potential in sector, machinery and appliances (orange), with Bulgaria and Croatia (Figure 4.6 and 4.7). The 81 percent of circularity potential, has a better machinery and appliances sector (orange) has performance than construction and food and enormous potential in the CE pillar extension of beverages. The results show (Figure 3) that this useful lifetime (for example, distribution [83 percent], sector has enormous potential in the CE pillar: (a) sales [100 percent], useful life [100 percent], extension of a useful lifetime regarding transport product life extension [100 percent], and repairability and distribution at 83 percent of circularity [100 percent]). The second circular sector is potential (for example, remote transport and geo- 66 The drivers of production include about 60 indicators that aim to assess the country’s readiness for the future of production. 67 World Economic Forum 2018. 71 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition FIGURE 4.4: KPIs FOR CE POTENTIAL IN ROMANIA Main Romanian Sectors - Circular Potential 100% 80% 60% 40% 20% 0% Raw Effluent Transport Product Repare materials and waste Eco- and Ecodesign Sales Useful life life remanu- Recycling and manage- packaging Distribution extension facture suppliers ment plan EEE 50% 67% 56% 87% 94% 89% 100% 100% 100% 89% Food and beverages 50% 46% 67% 87% 83% 78% 22% 42% 33% 22% Automotive 33% 63% 56% 60% 83% 89% 100% 100% 100% 89% EEE Food and beverages Automotive FIGURE 4.5: KPIs FOR CE POTENTIAL IN POLAND Main Poland Sectors - Circular Potential 100% 80% 60% 40% 20% 0% Raw Effluent Transport and Product Repare materials and waste Eco- Distribu- Ecodesign Sales Useful life life remanufac Recycling and manage- packaging tion extension ture suppliers ment plan Construction 50% 63% 67% 60% 89% 89% 78% 58% 67% 67% Agriculture & Food 67% 63% 78% 87% 83% 83% 44% 58% 50% 22% Automotive 50% 63% 56% 73% 83% 89% 89% 92% 100% 89% Construction Agriculture & Food Automotive FIGURE 4.6: KPIs FOR CE POTENTIAL IN BULGARIA Main Bulgarian Sectors - Circular Potential 100% 80% 60% 40% 20% 0% Raw materials Effluent Transport Repare and suppliers and waste Eco- Product life Ecodesign and Sales Useful life remanu- Recycling management packaging extension Distribution facture plan Construction 50% 63% 67% 67% 89% 83% 78% 50% 67% 67% Food and beverages 50% 46% 67% 87% 83% 78% 22% 42% 33% 22% Machinery and appliances 50% 63% 56% 73% 83% 100% 100% 100% 100% 89% Construction Food and beverages Machinery and appliances 72 BACK TO CONTENTS THE ROLE OF THE PRIVATE SECTOR: OPPORTUNITIES AND BARRIERS FIGURE 4.7: KPIs FOR CE POTENTIAL IN CROATIA Main Croation Sectors - Circular Potential 100% 80% 60% 40% 20% 0% Raw Effluent Transport Product Repare materials and and waste Eco- and Ecodesign Sales Useful life life remanufac Recycling suppliers management packaging Distribu- extension ture plan tion Construction 50% 63% 67% 60% 89% 83% 78% 58% 67% 67% Food and beverage 50% 46% 67% 87% 83% 78% 22% 42% 33% 22% Machinery and appliances 50% 63% 56% 73% 83% 100% 100% 100% 100% 89% Construction Food and beverage Machinery and appliances Source: Original analysis for this publication based on The European House – Ambrosetti and Enel Foundation (2020). construction (blue), with 68 percent circularity. This opportunities at the end of the tube for reusing/ sector presents excellent improvement opportunities recycling materials in new facilities and construction regarding eco-design (63 percent), secondary (67 percent). The third main sector is agriculture raw materials selection (50 percent), product life and food (green), with 64 percent circularity. This extension (58 percent) (industrial symbiosis with sector has significant opportunities for packaging other industries), and repair and recycling materials improvements (87 percent) in KPIs such as eco- (67 percent). Finally, food and beverages, with 53 design (63 percent), useful lifetime (44 percent), percent of CE potential (green), is  the third leading and recycling (22 percent). Packaging is one of sector. This sector holds significant opportunities the most significant barriers for these industries to for improving packaging (87 percent) (eco-design, achieve circularity in the value chain. For example, useful lifetime, and recycling), which is one of the the eco-design analysis improves the material use of most significant steps for these industries to achieve secondary raw material selection (67 percent), and circularity in the value chain. there are significant opportunities at the end of the tube for recycling packaging. The most promising sectors in Poland include automotive, construction, and agriculture and Romania’s sectors with CE potential are food. Automotive (orange) presents the best CE electrical and electronic equipment (EEE), potentiality (78 percent) among the main sectors automotive, and food and beverages (Figure (Figure 5.5). This sector has vast potential in the CE 4.4). EEE (blue) has a higher circularity potential (83 pillars: extension of useful lifetime and increase of percent) than the other main sectors. This sector the intensity of use through six KPIs (for example, has a broader potential in the CE pillars: end-of- distribution [83 percent], sales [89 percent], life, extension of useful lifetime, and increase of the useful life [89 percent], product life extension [92 intensity of use. EEE has potentiality in seven of the percent], repairability [100 percent], and recycling ten KPIs: eco-packaging (87 percent); distribution [89 percent]). The second circular industry is (94 percent); sales (89 percent); full potentiality in construction (blue), with 68 percent circularity. useful life, product life extension, and repairability; This sector presents good upstream development and recycling (89 percent). The second circular opportunities at the beginning of the tube regarding industry is automotive (orange). This sector also has eco-design (63 percent), secondary raw material good potential in the CE pillars: extension of useful selection (50 percent), and ample end-of-pipe lifetime and increase of the intensity of use through 73 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition six KPIs (for example, distribution, sales, useful life, recycling, and repair and maintenance, among product life extension, repairability, and recycling). others. These links form the network of production Food and beverages is the third leading sector, supporting the emergence and consolidation of with 53 percent of circularity potential (green). This CBMs.68 sector presents major improvement opportunities in packaging (87 percent) through different KPIs, such CE business models require strong links across as eco-design, useful lifetime, and recycling. two types of sectors. The network structure of CEs is composed of supporting sectors [A] strongly related to key CE-related product value chains 4.3 Firm links within and across as well as ancillary sectors [B] (Table 4.1). Strong sectors make for thriving CEs network connectivity between supporting [A] and ancillary [B] sectors correlates with higher CE VA in Firms’ capacity to engage in CBMs depends key product value chains. The 2020 CEAP identifies on their position within production networks. seven key product value chains as priorities for the Accelerating CE development at scale and transition: electronics and ICT; batteries and vehicles; prioritizing actions require strengthening sectors packaging; plastics; textiles; construction and with circularity potential and firms’ links within buildings; and food, water, and nutrients. Table 4.1 production networks. CE sectors are often made considers the EC CEAP value chains in relation to of primarily local industries with different sectoral supporting and ancillary sectors. For instance, a key economic activities interconnecting with each other product value chain such as ‘electronics and ICT’ to form key product value chains. These activities has two strongly connected supporting sectors [A]: include sustainable design, reuse, remanufacturing, ‘computer, electronics, and optical products’ and TABLE 4.1: ECONOMYWIDE PRIORITY SECTORS WITH CLOSER LINKS TO KEY PRODUCT VALUE CHAINS ECONOMYWIDE PRIORITY SECTORS WITH CLOSER LINKS TO KEY PRODUCT VALUE CHAINS (Based on European Cluster Observatory, European Commission) Key product value (A) Supporting Sectors (Sectors closely (B) Ancillary sectors (sectors key to supporting sectors) chains (Action related to key product value chains) Plan, European Commission) 1. Electronics and D26: computer, D-61: D27: Electrical D62T63: IT D28: Machinery D69T82: Other ICT electronics and Telecommunications equipment and other business sector optical products information services services 2. Batteries and D45T47: D49T53: storage Transportation and D30: Other D28: Machinery D69T82: Other vehicles wholesale and D31T33: Other transport and equipment business sector retail trade; manufacturing; equipment services repair of motor repair and installation vehicles of machinery and equipment 3. Packaging D69T82: Other business sector services 4. Plastics D22: Rubber and plastic products D2OT21: Chemicals and pharmaceutical D69T82: Other business sector products services 5. Textiles D13T15: Textiles, wearing apparel, leather D28: Machinery and equipment D20T21: D69T82: Other and related products Chemicals and business sector pharmaceutical services products 6. Construction D41T43: Construction D24: Basic metals D25: Fabricated D28: Machinery D20T21: and Building metal products and equipment Chemicals and pharmaceutical products 7. Food water and D1OT12: Food DO1T03: Agriculture, D20T21: Chemicals and Pharmaceutical D69T82: Other business sector nutrients products, forestry and fishing products services beverages and tobacco Source: Based on data from EC (2017); EC (2020); European Cluster Observatory SUT, OECD (2018). Note: ICT = Information and communication technology. EC 2017. 68 74 BACK TO CONTENTS THE ROLE OF THE PRIVATE SECTOR: OPPORTUNITIES AND BARRIERS ‘telecommunications.’ In turn, these two supporting production networks, with weak or nonexistent sectors are fostered by four [B] ancillary sectors: sector links. Compared with Bulgaria and Romania, ‘electrical equipment,’ ‘IT and other information Poland has a better-connected production CE services,’ ‘machinery and equipment,’ and ‘business network, with more sector connectivity chains and services.’ overlaps between them, with a likely reinforcement of spillover effects between sector chains. Bulgaria, Network analysis shows different CE network on the other hand, shows fewer solid connections, connectivity between supporting [A] sectors revealing fewer business transactions. and ancillary [B] sectors in Bulgaria, Poland, and Romania.69 Using information from OECD’s To accelerate the transition, policy should Supply Use Tables,70 Figures 4.8, 4.9, and 4.10 focus on accelerating connectivity. Policy show the network for Bulgaria, Poland, and measures should aim to incentivize new business Romania, respectively. In these figures, red lines relationships and markets between CE transition highlight the outgoing market business relationship sectors and other sectors to which they provide from ancillary [B] sectors to other ancillary or outputs or from which they receive inputs. Policy supporting sectors. Blue lines highlight the outgoing makers whose countries show little connectivity, market business relationship from supporting such as in Bulgaria or Romania, should consider [A] sectors to other supporting [A] or ancillary the incentivization of business between sectors [B] sectors. While it is normal for all sectors to connected with dashed lines or without connection, be connected to others, strong CE production for example, through stakeholder platforms networks show several sector connectivity chains or cooperation initiatives to accelerate CE between supporting [A] and ancillary [B] sectors. development. The figures show that Bulgaria, Poland, and Romania have limited connectivity in their CE FIGURE 4.8: NETWORK ANALYSIS - BULGARIA ANCILLARY SECTORS [B] SUPPORTING SECTORS [A] Supporting CE sectors: • Transport equipment (TrnEq), Telecom Transport • Manufacturing, • Repair & installation of machinery Prof. (RepM), services • Information technology (IT). Wholesale • Chemicals (Chml), IT MaMeb & Retail • Machinery and equipment (MaEq), AgrF • Fabricated basic metals (MaMeb) MotVe ElecEq • Manufacture of metals (MaMe), TrnEq Comp • Electrical equipment (EleEq), MaMe Plast RepM MaEq Chem • Professional and technical services (Prof. services). FoodBT Ancillary sectors: Construction • Motor vehicles (MotVe), Solid lines – relatively higher business transactions • Transport, Group of sectors forming a strong Dashed lines – relatively lower business transactions • Telecom, Red lines – highlight the interconnection between ancillary • Wholesale & retail trade, connectivity chain sectors and from ancillary to supporting CE sectors Blue lines – highlight the interconnection between • Computers (Comp), supporting CE sectors and from supporting CE sectors to • Construction, Rubber & Plastics (Plast), ancillary sectors • Food, Beverage, and Tobacco (FoodBT), • Agricultural, Forestry, Fishing (AgrF). Source: Based on OECD (2018). 69 The network analysis follows the same approach as the World Bank Group World Development Report (WDR) on GVCs (World Bank 2020), with the difference that here the focus is on local economies with a view to identify supporting and ancillary sectors related to CE key product value chains (see Table 4.1). 70 OECD 2018. 75 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition FIGURE 4.9: NETWORK ANALYSIS - POLAND ANCILLARY SECTORS [B] SUPPORTING SECTORS [A] Supporting CE sectors: • Transport equipment (TrnEq), Construction • Manufacturing, Telecom Transport • Repair & installation of machinery (RepM), Prof. • Information technology (IT). services • Chemicals (Chml), Wholesale • Machinery and equipment (MaEq), & Retail MaMeb • Fabricated basic metals (MaMeb) AgrF • Manufacture of metals (MaMe), ElecEq • Electrical equipment (EleEq), IT • Professional and technical services Chem (Prof. services). MaMe Plast Comp TrnEq MaEq RepM FoodBT Ancillary sectors: MotVe • Motor vehicles (MotVe), • Transport, Solid lines – relatively higher business transactions • Telecom, Dashed lines – relatively lower business transactions • Wholesale & retail trade, Group of sectors Red lines – highlight the interconnection between ancillary forming a strong sectors and from ancillary to supporting CE sectors • Computers (Comp), connectivity chain Blue lines – highlight the interconnection between • Construction, Rubber & Plastics (Plast), supporting CE sectors and from supporting CE sectors to • Food, Beverage, and Tobacco (FoodBT), ancillary sectors • Agricultural, Forestry, Fishing (AgrF). Source: Based on OECD (2018). FIGURE 4.10: NETWORK ANALYSIS - ROMANIA ANCILLARY SECTORS [B] SUPPORTING SECTORS [A] Transport Supporting CE sectors: MaMeb • Transport equipment (TrnEq), Wholesale • Manufacturing, & Retail • Repair & installation of machinery Prof. AgrF (RepM), services • Information technology (IT). MotVe Telecom • Chemicals (Chml), MaMe • Machinery and equipment (MaEq), • Fabricated basic metals (MaMeb) FoodBT • Manufacture of metals (MaMe), Comp • Electrical equipment (EleEq), IT Plast • Professional and technical services Chem MaEq RepM TrnEq (Prof. services). ElecEq Construction Ancillary sectors: • Motor vehicles (MotVe), • Transport, • Telecom, Solid lines – relatively higher business transactions • Wholesale & retail trade, Dashed lines – relatively lower business transactions Group of sectors Red lines – highlight the interconnection between ancillary • Computers (Comp), forming a strong sectors and from ancillary to supporting CE sectors • Construction, Rubber & Plastics (Plast), connectivity chain Blue lines – highlight the interconnection between supporting CE sectors and from supporting CE sectors to ancillary sectors • Food, Beverage, and Tobacco (FoodBT), • Agricultural, Forestry, Fishing (AgrF). Source: Based on OECD (2018). 76 BACK TO CONTENTS THE ROLE OF THE PRIVATE SECTOR: OPPORTUNITIES AND BARRIERS 4.4 Addressing the barriers faced 4.4.1. Micro-level barriers by CBMs Introducing CBMs often requires an overhaul of corporate cultures, values, and beliefs. The business case for circularity typically Companies’ values shape their behavior, including revolves around well-defined considerations. choices on business model innovation and Alignment with public expectations in line with ESG entry into new markets. Organizational inertia— objectives is definitely one such consideration. the inability of firms to adapt to shifts in their But the drivers of private sector innovation stem environment—can generate strong internal more from the identification of profit opportunities resistance to change, including in relation to than corporate responsibility considerations. sustainability-oriented business model innovation. Cost savings and higher margins resulting from Dedicated surveys indicate the private sector’s using less material inputs and energy (including doubts regarding the potential to move to resilience to value chain disruptions) remain a core CBMs, with firms seeing their own organization driver in several sectors, particularly the digital and as the main barrier to a transition to CE. Even in electronics industry which increasingly relies on rare leading countries such as the Netherlands, the earths. Even more important are the commercial CE innovations are frequently restricted to the opportunities arising from product and business corporate social responsibility (CSR)/environmental model innovations, including accessing new departments of a firm, with more influential markets, delivering greater customer value, and departments in a firm (for example, operations diversifying the consumer base.71 or finance) taking only a limited interest. Without Several barriers affect firms’ decisions and addressing corporate values, the expectations of capacity to develop and implement CBMs. advocates and policy makers of the private sector’s Limited progress with the introduction of CBMs driving role in the CE transition will go unmet.73 is often blamed on technological constraints. Business leaders’ commitment is a key enabler Advances in recycling, design, and information in CBM innovation. Companies with markedly technologies, particularly in digitalization and ‘linear’ backgrounds will naturally find behavior artificial intelligence (AI), can in themselves give rise change harder. However, while corporate value to new CBMs. Stakeholder surveys, however, also systems can be and are changed from within, forces point to a different set of barriers facing firms at outside the firm can encourage or hinder change. different levels of their operating environment. At the If the reputational market value of firms being micro level, there are barriers that are firm specific CE-friendly prevails among consumers, this can and typically under the direct control of firms. incentivize firms to promote a CE corporate culture.74 Meso-level barriers are found in the immediate environment surrounding a firm’s operations. These Business model innovation necessitates barriers affect cross-firm behavior, for instance, adequate firm-level capacities. From a capacity along and across value chains and sectors, perspective, CE business practices require a where cooperative behavior can be hindered. At specific set of organizational resources to be the macro level, there are barriers relating to the managed or developed throughout the innovation way entire markets operate and policy is made. process. This ranges from rethinking product While interlinked in several ways, some of these— offerings, redefining the target customer base, particularly the macro-level barriers—shape and and in some cases changing revenue streams reinforce the others (Figure 4.11).72 and financing models.75 Take the example of a firm that is considering shifting to a PaaS business model. The shift would alter cash flow and up- 71 Adapted from UNEP (2021). 72 Kirchherr et al. 2018; Geissdoerfer et al. 2017; Masi et al. 2018; Rizos et al. 2016. 73 Deloitte 2017. 74 Bertels et al. 2010; Linnenluecke and Griffiths 2010; Matinaro and Liu 2017; Rizos et al. 2016; Salvador et al. 2020; Schaltegger, Hansen, and Lüdeke-Freund 2016. 75 Ünal, Urbinati, and Chiaroni (2019) suggest size has an impact, and Salvador et al. (2020) describe size as a limiting factor. 77 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition FIGURE 4.11: MICRO-, MESO-, AND MACRO-LEVEL BARRIERS FACING CBMs Limited network Lack of CE targets Human capital connectivity in industrial policy and skills gap Corporate Lack of linkages culture Firm with research and Lack of organizational Tax disincentives technical insitutions in-house capabilities (VAT) R&D Regulatory Firm’s Risk Value chain confict Access to CBM perceptions fragmentation finance propensity Non- Natural resource Lack of clustering Upfront competitive subsidies infrastructure investments Business markets leaders’ commitment Lack of consumer demand Micro-level barriers Weak supporting Heavy fiscal sectors burden on labor Meso-level barriers Macro-level barriers Source: Based on Garrido-Prada et al. (2021); Khan, Daddi, and Iraldo (2021); Kirchherr et al. (2018); Liu and Bai (2014). front investment dynamics, with information gaps rapid technological shifts and market volatility.76 regarding links up and down the value chain and associated financing risks, thus making access to Risk perceptions arising from linear to circular credit more challenging. shifts extend beyond the firm, affecting access to finance. Overall, the financial sector sees circular Uncertainties related to the novelty of the projects as highly risky and often not bankable. transition compound firms’ risk perceptions. When measuring risk, two main factors have to be Although corporate value systems and capacities considered: (a) the creditworthiness of the borrower can be and are changed from within firms, outside (or the risk profile of the project) and (b) the value forces can encourage corporate inertia. The nascent of the collateral (for example, underlying assets nature of the CE transition is one. Uncertainties can or contracts). As new CBMs often do not have be numerous and varied in nature. Depending on a strong track record, these firms can easily be the specific CBM, they can include (a) doubts on labeled as being too risky. Often, initial investments the quality, quantity, and timing of product returns to innovate and access the market are high, which in reverse logistics; (b) customer perceptions on may have implications for margins in the short run used or remanufactured products; (c) regulatory but may lead to a profitable company in the longer compliance with health and safety provisions; (d) run. The value of the collateral is measured by the litigation risks related to new circular products; (e) market value of the company, where the valuation of unknown residual product value; (f) the impact of assets (and their residual value) plays an important future legislation; (g) long payback periods typical of role—asset valuation for linear business models may CBMs; and (h) dynamic contextual factors, such as be different from valuation in a circular system.77 Antikainen and Valkokari 2016; Guldmann and Huulgaard 2020; Hopkinson et al. 2018; Linder and Williander 2017. 76 ING. 77 78 BACK TO CONTENTS THE ROLE OF THE PRIVATE SECTOR: OPPORTUNITIES AND BARRIERS TABLE 4.2: PRACTICES AVAILABLE TO CORPORATE DEPARTMENTS, BY CE ACTIVITY Activity Corporate CE Practice Department Design Research, Bio-mimicry, Cradle to Cradle, Design for: disassembly/deconstruction Innovation and Design for flexibility, recoverability/recyclability, durability, regenerative design, Design modularity and standardization, green chemistry Buy Procurement Bio-based, biodegradable, compostable resources; critical raw materials and rare earths substitutes, Reclaimed, Recycled, Renewable, Reused/reusable resources, Safe chemicals, Services (not products) Make Production and Additive manufacturing, Dematerialization, Jidoka (autonomation), Kaizen Manufacturing (continuous improvement), Kanban (just-in-time), Lean manufacturing, Poka Yoke, Prefabrication, Refurbishing, Re-manufacturing, Resource efficiency, Six-Sigma Sell Sales and Co-branded services, Digitization and virtualization, Leasing, Pay-per-service unit Marketing Sharing platforms Dispose Waste Cascading Compatibilizers, Composting, Deconstruction and disassembly, Energy Management recovery, Feedback recycling, Industrial symbiosis, Recycling, Re-purposing, Reverse logistics, Secondary material marketplaces, Selective extraction, Take- back programs, Waste to Energy Finance Finance and Assess creditworthiness risk, Assess ESG risk, Assess linear risk, Extend Accounting investment time horizon, Factoring, Incentives end-of-life returns, Integrate circular value in models, Natural capital valuation, Prioritize cash flow, Purchase order finance, Standard asset management, Supply chain financing Source: Original elaboration for this publication. These challenges are compounded for small 4.4.2 Meso-level barriers and medium enterprises (SMEs), which are central to Europe’s transition. SMEs dominate Information costs and risk perceptions can the private sector landscape in several EU countries. be smoothened out by favoring collaborative Smaller firms may not have the capabilities or knowledge generation and cooperative learning financial resources to engage in organizational among firms throughout production networks transformations, particularly when high up-front and across value chains. In addition to identifying investments are required. Although the circularity common necessary changes in production innovation landscape is rife with start-ups capable of processes and bringing down information and capturing niche markets, when the issue is going to innovation costs by sharing data and best practices, scale, a firm’s size matters. Shifting from BAU linear shared knowledge platforms can help firms business models to CBMs requires strong functions organize their interaction with government policy in distribution and production planning, inventories, makers and regulators. This interaction should be reverse logistics management, and marketing. done with a  view to improving the overall business Overhauling such a set of core functions requires environment, standardizing or harmonizing the substantial amounts of time and investment on the technical characteristics of products, and creating firm’s part, which can deter initiatives to explore and transparent industry-level incentives that better invest in CE activities. In addition, SMEs typically support the industry development of the CE and have few resources to invest in technological R&D possibilities of new CBMs.  and little ability to influence the behavior of other firms in their value chain.78 Rizos et al. 2016. 78 79 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition BOX 4.2: PRODUCT LIFE EXTENSION - FIRM CAPACITIES AND BEYOND Regulation and incentives can encourage manufacturing for durability and avoiding planned obsolescence. Right to Repair policy approaches include making consumer manufacturers responsible for ensuring reparability and providing access to the necessary spare parts for an extended period. Obligatory extended warranty systems go a step further by making the producer accountable for either the repair or replacement of the product. Extended producer responsibility or end-of-life regulations make manufacturers responsible for the adequate collection, treatment, and recovery of products. Turning appropriate disposal of goods into a cost for the manufacturer can incentivize them to improve durability. EU countries are at the forefront in the application of these instruments. Requiring durability of products, however, may prove insufficient to fully stimulate firms to shift to a services- led product due to the myriad of challenges they face. Many of these are internal organization challenges, from restructuring, operationalizing changes, and shifting attitudes among teams to finding the correct pricing strategy across their market segments. While resolving these depends mostly on managerial strategies, there are other more fundamental issues where government intervention could catalyze change. First is the scale of changes. Whereas capital equipment sales volumes are typically low, in the consumer goods markets, a services model requires keeping track of millions of items in every market. Digital technology is essential in making this both possible and economically feasible. The internet of things (IoT) can provide companies with up-to- date information on the status and use of their products. IoT, nonetheless, requires widespread and low-cost digital connectivity and infrastructure and sufficient human capital with digital skills to enable manufacturers to build the data systems required to manage, analyze, and act on the information from each consumer product. Governments need to accelerate developments in digital connectivity and infrastructure and invest in human capital development in digital (See Annex 4, Focus Section E). Second, the shift to PaaS has a major impact on short- and medium-term cash flow within businesses. Continued equipment ownership by the manufacturer means that the manufacturer must assume full up-front costs of that product. The information asymmetries regarding how potential services clients might treat these products increases the risk associated with financing them, making it more difficult or expensive to borrow. Third, due to weak and fragmented buyer power in consumer goods, it is difficult for individual consumers to make demands of producers to change their approach and the latter thus have little incentive to change. Clustering has important network effects in is higher in Western Europe MSs, where more lowering the costs of the transition faced by than 250 circularity relevant clusters are already firms. Clusters are geographically close groups of operating. In Eastern Europe, where the industrial interlinked companies and ancillary agencies within landscape is more scattered, additional incentives or across sectors that share commonalities and will be needed to support the development of externalities. In facilitating collaboration between circularity-oriented clusters. Selected examples can private companies, public stakeholders, investors, be found in Box 4.3.79 and knowledge institutions, clusters can be Value chain organization can reduce powerful tools in closing material loops in systems transaction costs across markets and of interconnected firms. They result in (a) less geographies. Value chains shape input-output dispersed value chains; (b) economies of scale and relationships and the collaboration of participating scope through shared core corporate functions; (c) firms and in themselves are already established improved operational and resource efficiencies in networks where firms can collaborate toward CBM manufacturing, transport, and input-output links; innovation along the design-make-sell-dispose and (d) knowledge spillovers and other forms of and finance spectrums. Because of their size and industrial symbiosis. Studies show that clusters clout, lead firms in GVCs have a key role to play also promote circular approaches for firms not in stewarding the CE transition. Lead firms can explicitly aiming to implement CBMs. The analysis shape the design of products, require resource in Section 4.3 shows that industrial density matters efficiency standards in production processes, in establishing networking effects. Industrial density Cluster Excellence Denmark 2019; Porter and Kramer 2011, 2019. 79 80 BACK TO CONTENTS THE ROLE OF THE PRIVATE SECTOR: OPPORTUNITIES AND BARRIERS identify investors, create and open new markets, 4.4.3 Macro-level barriers and engage in supply chain financing for new CBMs. GVCs become particularly relevant when the Beyond firm-specific and intra-firm barriers, objective is to encourage CBM innovations across macro-level constraints limit the private markets and geographies. sector’s potential to innovate. Today’s global economy is driven by linear business models In addition to generally being relatively labor sustained by economies of scale. The take-make- intensive, CBMs tend to require relatively dispose model has since prospered through higher skill levels. ‘R’ activities,  such as reuse, policies designed around it. The activities of today’s recycling, repurposing, refurbishing, and so on, are economic operators are shaped by systems relatively labor intensive compared to their linear developed and optimized for the prevailing linear alternatives. Jobs directly associated with the CE production and consumption. Regulations, markets, were estimated to employ 3.9 million people in investment tools, and practices, including financial Europe as of 2018, up from 3.4 million in 2014. risk assessment, are adjusted to linear models, and Circular jobs are currently mostly concentrated in externalities linked to linear business models are higher-skill categories and will continue to be so in largely not considered. the future. Reverse logistics, resource sorting and product refurbishing all require sophisticated skill Consumers are not yet driving demand for sets. As to be discussed in Chapter 5 labor market circular products. Surveys show that although effects induced by the CE transition will have a clear consumers are increasingly asking for circular skills bias. Labor market constraints will pose a products, only a minority are willing to pay considerable barrier to firms, particularly in countries up for them. Perceived quality issues, lack of with a higher concentration of unskilled workers, understanding of the environmental benefits, and such as the EU’s Eastern Europe MSs examined in particularly higher costs per se are key barriers. the report.80 These results suggest that willingness to pay and BOX 4.3: EXAMPLES FOR CLUSTERS FACILITATING CBMS Clustering starts at the firm level. In Poland, AgroBioCluster promotes and channels circular vouchers, C-VoUCHER, to their members. C-VoUCHER is the first pan-European initiative funded by the EC to support SMEs in rethinking business models, providing access to new knowledge, linking to smart green venture capital, and opening doors to new markets and customers. Swedish (Paper Province cluster) and Danish (Circular North Denmark) clusters engage companies in a CE while creating synergies between social, sustainable challenges and business. Finland and Holland also play a central role in building circular knowledge bridges between research and business. For instance, Tapojärvi Oy is a Finland company specialized in mining services, industry processes, and material handling. The cluster has been supporting the company to achieve its goal that no disposable waste would be generated at any stage. To promote CBMs, government can take various measures to create networks between public and private companies. In the Netherlands, the central government has set up the Versnellingshuis Nederland Circular and launched the programs Van Afval Naar Grondstof (VANG) and the Ruimte in Regelels voor Groene Groei (Space in Rules for Green Growth). The International Council for Local Environmental Initiatives (ICLEI) focuses on how local governments can lead the transition to a CE. Their project and initiatives tackle issues of production, consumption, and waste prevention from multiple perspectives.81 EC 2018. 80 Arctic Smartness, n.d.; Holland Circular Hotspot 2022; ICLEI n.d.; OECD 2020; Polish Circular Hotspot, (accessed in March 2022), 81 http://circularhotspot.pl/en; Versnellingshuis Nederland Circular n.d. 81 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition increased demand for circular products require foremost with the EC, are creating the enabling broad-based awareness campaigns plus accepted framework for circularity, both through actual definitions and labelling of circular products which regulatory reforms or by helping to increase are currently not existing. Even with those in place, companies’ capacity to factor their impacts businesses will still face the challenge of making into business decisions. But regulatory barriers circular products price competitive compared remain—they can be divided into three categories: to their linear alternatives. Until this is achieved, (a) regulatory gaps lowering CE uptake, (b) the public sector can contribute to making and regulatory conflicts across sectors affecting supporting markets for circular products through CBMs, and (c) regulations related to materials and public procurement measures (Annex 4, Focus resources actually hindering CE goals. Insufficient Section F).82 implementation and enforcement of recycling targets and landfill bans as well as the lack of Labor market features affect firms’ uptake of quality standards for repair activities are examples CBMs. Circular jobs are today mostly concentrated of regulatory gaps. Examples of regulatory conflicts in higher-skill categories and will continue to be include provisions addressing health and safety so in the future. Business in countries with higher standards which affect progress on food waste concentrations of unskilled workers—such as the reduction and plastics use. Regulatory conflict Eastern Europe MSs examined in the report—will compounds the effect of adversarial regulations find it comparatively harder to locate adequate preventing key CE practices such as those limiting resources as well as customers—consumers of the use of recycled materials in road construction or circular products at times may require additional restrictions regarding cross-country waste trading. skills. Digitally enabled PaaS models, such as those based on mobility applications, are accessible to The price competitiveness of circular products citizens who can use digital tools.83 will continue to limit the attractiveness of Emergence of CBMs is limited by policies most CBMs. An enabling regulatory environment designed for take-make-dispose economic can have faster and deeper impacts once circular models. The activities of today’s economic products can compete with linear products based operators are shaped by systems developed on true pricing. Not only are the externalities linked and optimized for the prevailing linear production to linear business models not considered in the and consumption systems. Linear policy lock-ins pricing of virgin natural resources, but they are constrain the emergence of CBMs on a number also directly supported, for example, fossil fuel of fronts—starting with regulation. Regulation is subsidies. In addition to providing a disincentive the area where policy makers, starting first and to key circularity objectives in the energy sector, BOX 4.4: REGULATORY CONFLICTS CONSTRAIN SECONDARY MATERIAL USE IN CONSTRUCTION Secondary materials are those that cease to be waste through appropriate preparation and processing (taking into account EN15804) and can therefore be used as a substitute for primary materials. The construction industry currently uses almost no secondary materials. For instance, in the Netherlands, a leading country in the CE, secondary materials account for only 3–4 percent of all construction materials used in buildings. When materials are separated during the demolition of buildings, they are classified as waste because of health and safety regulations which prevents their reuse in construction. The latter typically fall within the framework of national and EU waste legislation, while use of CDW in construction, on the other hand, is regulated by the Construction Products Regulation [CPR] (EU, Regulation No. 305/2011). To promote recycling, CDW needs to stop being classified as waste and should be given the status of ‘end-of-waste’ material, to be covered by product—not waste—regulations. Only a few countries (Austria, Belgium, France, the Netherlands, and the United Kingdom) have developed end-of-waste criteria for CDW. EC, Directorate-General for Environment 2014; Pretner et al. 2021. 82 European Policy Center 2020. 83 82 BACK TO CONTENTS THE ROLE OF THE PRIVATE SECTOR: OPPORTUNITIES AND BARRIERS such as resource efficiency and the penetration of on private returns might not be necessarily positive, renewables, fossil fuel subsidies shape the cost at least in the short term, due to immediate impacts structures of extraction, transport, and production on costs. In this context, each firm is expected of materials and products, lowering the cost of to react differently, and the adoption of CBMs at linear products for the consumer. Despite its the firm level will also be contingent on the firm’s decarbonization objectives, Europe’s fossil fuel intrinsic characteristics—firm size, age, export subsidies have remained at close to €50 billion orientation, ownership structure, and managerial since 2008. When using bottom-up, inventory practices which are key determinants of change methodologies and including less traditional (often and capacity for business model innovation. But off-budget) subsidies provided through fiscal in addition to firm-level heterogeneities, individual support, public finance, and investment by state- firms’ capacity to benefit from and drive the owned enterprises, the measures are even higher. transition is determined by differences in their This is particularly the case in energy-intensive external operating environments—the economic economies such as Bulgaria, Croatia, Poland, and fabric and the policy landscapes in which they Romania, where total fiscal support to fossil fuels conduct their transactions. is estimated to range between 0.2 percent of GDP (Romania) and 3.1 percent (Bulgaria).84 Important barriers prevent them from accelerating, scaling, and deepening the Limiting the current levels of fiscal support to transition. Some of the constraints faced by firms the linear economy is the priority. Beyond fossil in engaging in CBMs are similar to those they face fuels, all major natural resource-based sectors are in linear economies, but they typically are of a heavily subsidized—agriculture, fisheries, forestry, different scale—access to finance is one example. water, and mining.85 Natural resource extraction While certain barriers are under firms’ full or partial is often subsidized (a) directly by government control, others fall squarely outside of it, which budgetary and tax measures, (b) indirectly by trade in turn shape firm specific constraints. To unlock and other policy instruments that alter price signals, the potential of the private sector, policy needs to and (c) implicitly by allowing producers not to address these barriers one by one, as firms on their internalize the costs of externalities associated with own will not be able to tear them down, particularly the production process or to include in the price those at the meso and macro levels. the opportunity cost of immediate consumption. In certain sectors, such as metal production, Enabling the private sector’s role requires subsidies make mineral resources more profitable multifaceted policy packages. Supporting and accessible to extract than the corresponding policies include changing economic incentives resources in the built environment. Similarly, such as through fiscal measures, changing public recycled plastics end up costing substantially more investment and procurement processes, providing than virgin plastic. This, combined with the fact that targeted funding, supporting cross-firm knowledge secondary materials typically struggle to achieve spillovers, encouraging business-to-business the same level of quality as virgin production, collaboration, and investing in skills. means that businesses have little or no incentive Europe’s public authorities will need to support to use secondary materials, despite well-known businesses in filling the circular skills gap. environmental benefits.86 Central and subnational governments can address the CE skills gaps through various measures, for 4.5 Conclusions example, by (a) financing dedicated labor market needs assessments of CE development trends, Firms are and will remain the engines of CE. business demand, and existing educational Adopting CBMs is likely to generate positive returns offerings; (b) financing or subsidizing targeted skills on (economywide) aggregate welfare. Still, effects development programs where the market does not 84 World Bank 2021c. 85 Environmental Assessment Institute 2005; Porter 1996. 86 Environmental Assessment Institute 2005; Johansson, Krook, and Eklund 2014; Porter 1996. 83 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition generate them; and (c) supporting coordination be reaped in these MSs (see Chapter 2) call for an across education and industry actors to establish additional policy and investment focus. circular skills development partnerships.87 Policy lock-ins mask the risks facing linear Supporting policies will be particularly business models. Linear business models face important in MSs in need of catching up on uncertainties posed by fluctuating raw material the CE agenda. Different countries show differing prices, scarce materials, geopolitical dependence levels of readiness at the outset of the CE transition. on different materials, and uncertain demand. But This chapter shows that, while displaying potential, for most firms, linear risks are still outweighed by particularly in key sectors, the four MSs targeted the uncertainties that CBMs face in changing key by this analysis are lagging in those areas where building blocks of their business, navigating against other MSs are leading the CE transition, namely dominant business paradigms, and confronting the industrial density needed to generate cross-firm barriers stemming from the current economic links, consumer awareness, and skills presence. models and the policies built to support them.88 The significant material efficiency gains that can Circular Jobs Initiative 2021. 87 Bocken, Boons, and Baldassarre 2019; Circle Economy 2018. 88 84 BACK TO CONTENTS Chapter 5 The economics of circular economy policies 85 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition 5.1 Assessing the economic • Growth and competitiveness: How do CE policies affect growth? What are the implications impacts of the circularity for competitiveness of European producers in transition domestic and export markets? This chapter aims to assess the implications • Development: How do CE policies affect of alternative policy choices for achieving development outcomes of trading partners, CE objectives and their wider economic and particularly developing countries? social impacts. It builds on the insights provided in • Inclusion: How do CE policies affect previous chapters on the dynamics that determine distributional outcomes through price and labor the use of primary materials, including the incentives market channels? that shape private sector decisions and the role of trade. Given the broad scope of CE and the need to The analysis focuses on Europe,89 and selected influence both supply- and demand-side decisions country-specific results for EU-4 are also at the local and global levels, policy responses will included to illustrate or highlight differences in likely need to be comprehensive, incorporating the overall findings. The remainder of this section elements of fiscal, trade, and regulatory policy summarizes the modeling approach. Section 5.2 and potentially even education policy and public motivates the need for CE-specific policies. Section communication to influence consumer preferences. 5.3 provides an overview of the overall impacts of Ultimately, the success of CE policies will depend CE policies on achieving core CE sustainability not only on how they contribute to reduce material objectives. Sections 5.4 and 5.5 follow on from the use but also on their relative economic and social discussions in previous chapters, assessing the impacts, including the degree to which they implications of domestic and trade policy options for encourage or discourage investment, how they achieving CE aims. Section 5.6 assesses economic influence processes of structural economic change, and distributional impacts of CE policies. Finally, and their distributional consequences. Section 5.7 concludes with a summary of main findings. Because these issues involve complex processes shaped by changing prices, trade patterns, and technology choices, this chapter 5.1.1 Data and model overview makes use of a unique global CGE modeling The model is based on a newly developed exercise to assess the economic impact CE database that allows to splitting primary of achieving CE policy objectives and how and secondary activities for key materials. outcomes differ across alternative broad policy The standard GTAP database that underlies nearly approaches. The analysis explores the outcomes all global CGE modeling efforts, including those of CE policy across a number of dimensions: focused on the CE policies,90 does not provide • Sustainability: How do CE policies affect use of sufficient representation of production technologies primary materials, both from the production and (that is, primary, secondary, and recycling activities), consumption perspectives? What impact do CE mining sectors (for example, metal ores and policies have on broader sustainability objectives, Nonmetallic Minerals [NMM]), and information on notably reduction in GHG emissions (and the quantity flows of the corresponding resources conversely, to what degree do policies targeting required for a consistent assessment of the CE GHG emissions reduction reduce primary transition pathways. To overcome this limitation, materials use?) a specific version of the GTAP-CE database has been developed for this report (Box 5.1) to allow for • Resilience: How do CE policies affect import detailed reporting on primary materials. dependence and exposure to primary commodity shocks? 89 In this chapter, ‘Europe’ refers to countries in the EU as well as EFTA countries and the United Kingdom—see Annex 2 for detailed country coverage of the modeling. 90 Bibas, Château, and Lanzi 2021; OECD 2018; Winning et al. 2017. 86 BACK TO CONTENTS THE ECONOMICS OF CIRCULAR ECONOMY POLICIES The modeling focuses on critical materials model runs through 2030 and so should be viewed but does not cover all aspects of what could as reflecting the relatively short-run impacts of CE. be considered part of the CE. The analysis of primary materials presented in this chapter 5.1.2 Policy options and scenario encompasses metal ores, NMM, and fossil fuels but does not include biomass. It also does not explicitly design cover aspects of the CE related to water use and ENVISAGE is applied to simulate a baseline agriculture or energy efficiency. and a set of stylized policy scenarios which intend to represent main pillars of CE BOX 5.1: GTAP-CE DATABASE transition. The starting point is a baseline scenario (BAU), which is ‘policy free’ except for country- The GTAP-CE database introduces additional specific Nationally Determined Contributions disaggregation of certain GTAP sectors and (NDCs). NDCs are converted to country-specific incorporates material flows accounting for the prices on carbon that depend on a country’s selected commodities. The starting point for the economy and carbon intensity and the stringency disaggregation is the GTAP-Power 10 database of its commitment and are achieved using country- with 76 sectors, 141 regions, and 2014 reference specific carbon prices.91 NDC mitigation targets year (Chepeliev 2020). Four sectors of the original are derived from recent empirical studies.92 The GTAP-Power 10 database are further split into 23 subsectors, providing a more detailed actual reference point for the policy simulations, representation of categories such as metallic and however, is based on a scenario that represents nonmetallic minerals mining, rubber and plastic an interpretation of the EU’s Green Deal mitigation products, iron and steel, and nonferrous metals target (EGD-NDC). While the Green Deal in practice (see Annex 1). Corresponding sectoral splits are includes a broad range of environmental objectives developed for all 141 regions reported in the and instruments,93 the modelled EGD-NDC scenario GTAP-Power 10 database. focuses on achieving the EU’s enhanced NDC target of reducing CO2 emissions by 55 percent The analysis relies on a recursive dynamic by 2030 relative to the 1990 level (compared to global CGE model, the ENVISAGE model, 40 percent in the BAU scenario). Again, the model calibrated on the GTAP-CE database. For achieves the target primarily through a carbon price, modeling, an aggregation of the GTAP-CE database although several fiscal policies are implemented that includes 20 regions and 42 activities is used within the EGD-NDC scenario to complement (see Annex 2). Three specific features of the model carbon pricing, including removal of production should be highlighted in the context of the current subsidies to fossil fuels and transportation activities analysis: (a) the model assumes that different (production tax rates are set to 3 percent), increase electricity generation technologies and primary in the sales tax for petroleum products (by 5 versus secondary production activities produce percent), and subsidy to renewable generation homogenous goods; (b) the model includes a wage (5 percent). Thus, the reference scenario in the formation mechanism that allows for short-run model incorporates emission reduction policy but deviations from full-employment (induced by the no explicit measures targeting reduction of material policy shock) but long-term equilibrium between use. labor supply and demand; and (c) ENVISAGE uses vintage capital specification, with old vintage representing installed capital and new vintage representing the most recent supply of capital. The former is meant to be only partially mobile across sectors, whereas the latter is fully mobile. Finally, the 91 Actual implementation of a country’s mitigation policy is likely to rely on one or more instruments, which may or may not include an explicit carbon price. 92 Böhringer et al. 2021; Chepeliev et al. 2021. 93 EC 2019. 87 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition BOX 5.2: ENVIRONMENTAL FISCAL POLICIES TO SUPPORT THE CE TRANSITION Environmental fiscal policy is well established. Environmental taxes and levies are used in virtually every jurisdiction as a tool to cut pollution levels and, of course, to raise revenues. Their rationale is grounded in the Pigouvian principle of internalizing the environmental impacts and therefore addressing market failures and their welfare implications (Annex 4, Focus Section C). Circular taxation addresses key bottlenecks affecting the transition. Circular taxation aims to change economic agents’ incentives toward circular principles rather than traditional linear models. Conventional environmental taxation targets end-of-life stages of production and consumption, leaving aside other stages of the product’s life cycle. Levels of taxation are often too low to alter behaviors. Rather than a product-by-product approach, circular taxation requires rethinking critical building blocks of current taxation systems. A CE taxation framework includes the following building blocks: • The introduction or strengthening of taxes on raw materials. • A general shift from labor to resource/material taxes • A reconsideration of value added tax (VAT) application • The strengthening of waste management taxes, starting with stronger landfill taxes • A general shift from taxation away from ‘services’ to ‘material intensive products.’ Material taxes can achieve both environmental and revenue raising results. In addition to (a) internalizing the environmental externalities arising from resource extraction and use and (b) supporting environmental regulations addressing the relevant market failure, raw material taxes address concerns of resource depletion and encourage the substitution of virgin material resources with secondary and recycled materials. From a fiscal resource point of view, the current centrality of raw materials in economic activity and its likely persistence in the future imply a low long-run price elasticity of demand. Raw material resources could thus represent a stable tax base for governments.94 While the use of fiscal tools is recognized as critical to advance the transition, their use remains relatively limited in Europe. Both the Green Deal Communication and the CEAP make reference to the relevance of fiscal instruments to promote the transition. The 2015 EU CE Action Plan states that “price is a key factor affecting purchasing decisions, both in the value chain and for final consumers. Member States are therefore encouraged to provide incentives and use economic instruments, such as taxation, to ensure that product prices better reflect environmental costs.” So far, however, the main initiatives have been focusing on the energy/ climate sectors, in the context of the revisions of the energy taxation directive and the introduction of the carbon adjustment border mechanism. The utilization of fiscal measures to promote circularity by altering relative prices and changing the behavior of firms and consumers has not yet been addressed widely. Indeed, just 5.9 percent of total tax revenues in the EU come from environmental taxes (versus almost 52 percent from labor taxes), and environmental taxes as a share of GDP have declined by 20 percent over the last two decades. Nevertheless, some good examples exist: • In Denmark, a tax on extracted raw materials (sand, gravel, stones, peat, clay, and limestone) was introduced in 1990 in conjunction with a waste tax, to reduce the use of these natural materials and promote the use of recycled products, such as CDW. The combined aggregate and waste taxes have produced a greater demand for recycled substitutes: in 1985 only 12 percent of CDW was recycled, compared with 94 percent in 2004. The Danish model of sorting CDW at source is an effective strategy of increasing the supply of recycled material, according to the study. 94 Hogg et al. 2014; Eckermann et al. 2015; Söderholm 2011; Söderholm and Tilton 2012. 88 BACK TO CONTENTS THE ECONOMICS OF CIRCULAR ECONOMY POLICIES • In Sweden, since 2016 a deduction of 50 percent (RUT tax deduction) on labor costs has been allowed for home repairs and maintenance, to support product lifetime extension.95 Similarly, in 2017 Sweden introduced a VAT reduction from 25 to 12 percent for repair of products such as textiles, shoes, leather products, and bicycles.96 Belgium has introduced a reduced VAT rate of 6 percent for demolition and reconstruction activities, while Ireland, the Netherlands, Slovenia, Luxembourg, and Finland have introduced VAT reductions for certain repair services. CIRCULAR TAXATION FRAMEWORK Resources Reuse/Repair Hierarchy TAX TAX relief TAX Product use Waste Production Management Raw Retail EOL Materials Source: Adapted from Milios (2021). The main scenarios are structured around materials (metals and plastics - subsidy); and (c) reduction of primary material use in the EU, both the tax and subsidy are combined (metals and that is, improving circularity. These are specified plastics - total). In the case of construction materials in Table 5.1. Apart from the BAU scenario, all policy (NMM such as limestone and clay), which account shocks introduced in the scenarios apply only to for the largest share of primary materials (in volume Europe. They will be introduced from 2023 and fully terms), recycling and secondary production are implemented by 2027. The first set of scenarios uncommon, so only a tax scenario is considered considers various fiscal policy approaches, with a (Non-metallic minerals - tax). Following the focus on reducing extraction and production using approach in the United Kingdom and elsewhere,97 primary materials. As discussed in Chapter 4, the scenario imposes a tax on extraction of raw linear business models often benefit from subsidies minerals rather than taxing the production of across the value chain as well as not having to processed commodities. This different treatment pay for resulting environmental externalities. Fiscal of metals and construction materials also offers policies are therefore likely to play a critical role in the opportunity to see how outcomes differ when levelling the playing field between linear and circular imposing taxes at different stages in the value chain. business models by pricing in environmental externalities (Box 5.2). Getting prices right through Chapter 3 highlights the likelihood of trade fiscal policy will also be critical to underpin the leakage along the value chain as a result of effectiveness of regulatory policy. Scenarios material taxes, a finding that is replicated in presented here assess policies whereby (a) a this chapter. This chapter therefore also considers, tax is imposed on primary production of metals for both metals and construction materials, (for example, steel, aluminum, and copper) and additional scenarios assessing the implications of plastics (metals and plastics - tax); (b) a subsidy is trade policy action that extends the tax on domestic granted to secondary production that uses recycled producers to also cover foreign producers exporting to Europe, through the imposition of a tax at the 95 Almén et al. 2020. 96 OU 2017. 97 EEA 2008. 89 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition border (metals and plastics - total*BAT and Non- and (c) to workers and employers, through labor metallic minerals - tax*BAT).98 tax relief. Given the heavy burden of labor taxes in Europe and the likelihood that CE policies will shift Finally, the analysis considers alternative the balance of demand toward (skilled) labor,99 as approaches for using the revenues generated discussed in Chapter 4, the analysis considers the by materials taxes. Essentially, revenues can implications of a scenario whereby tax revenues be distributed (through the government) to three are used to reduce taxes on labor (metals and agents: (a) to producers, to reduce corporate plastics - tax*labor) rather than transferred directly taxes or provide a general or targeted subsidy, to households, which the default for all other for example, a subsidy on the use of secondary scenarios. The primary metals and plastics tax materials; (b) to consumers, through income tax scenario is chosen to illustrate this alternative reductions or direct transfers, potentially targeting revenue recycling scenario. households likely to lose out from the transition; TABLE 5.1: DEFINITION OF MODELLED SCENARIOS Policy objective Scenario name Description BAU Initial scenario, which includes interpretation of global NDCs100 and implemented using carbon prices to drive decarbonization EGD-NDC BAU plus an interpretation of the EU’s NDC commitment under the EU Green Deal intended to lead to a 55% (Reference scenario) reduction in EU CO2 emissions in 2030 relative to 1990 and implemented with carbon prices to drive decarbonization Reducing extraction Metals and EGD-NDC plus 30% tax on primary production of metals and production/ plastics - tax and plastics in Europe only increasing recycling Metals and (sub-scenario) Metals and plastics - tax with recycling of plastics - all additional tax revenue from taxing primary production tax*labor of metals and plastics by reducing labor taxes (uniform reduction across all sectors) Metals and EGD-NDC plus a 30% subsidy on secondary production of plastics - subsidy metals and plastics in Europe only Metals and EGD-NDC plus a 30% tax on primary production of metals plastics - total and plastics and a 30% subsidy on secondary production of metals and plastics in Europe only Metals and Metals and plastics - total with BAT based on the content plastics - of primary metals and plastic embedded into imports of total*BAT manufactured goods plus a subsidy to exporters to offset the impact of the primary materials tax on the value of materials embedded in export products 98 BAT = Border adjustment tax. 99 EC 2022. 100 Based on countries’ first NDC submissions to UNFCC. 90 BACK TO CONTENTS THE ECONOMICS OF CIRCULAR ECONOMY POLICIES Policy objective Scenario name Description Non-metallic EGD-NDC plus 20% tax on mining and imports of Non- minerals - tax metallic minerals (construction materials), with rebate for exports Non-metallic Non-metallic minerals - tax with BAT based on the content minerals - of NMM embedded into imports of manufactured goods tax*BAT plus a subsidy to exporters to offset the impact of the primary materials tax on the value of materials embedded in export products Redesign/‘design Redesign EGD-NDC plus an improvement in the efficient use of out’ materials and materials in six activities (wood and paper products, material waste primary plastics, secondary plastics, metal casting, other manufacturing, and construction) in Europe only. The improvement in materials’ use affects the use of wood and paper products, chemicals, plastics, plastic recycling, NMM, iron and steel, recycled steel, aluminum, recycled aluminum, copper, recycled copper, other metal products, other recycled metals, metal casting products, and other manufacturing. The improvement is 2% per year starting in 2023. These improvements are compensated by increasing use of other services per unit of output due to higher R&D, design, and other expenditures Extending product Product life EGD-NDC plus a 20% reduction in the final consumption of lifetime extension other manufacturing with respect to EGD-NDC, achieved by an increase in the consumption of other services, in Europe only (demand for all other categories is fixed at the EGD-NDC level) Shifting consumption Consumption EGD-NDC plus a 20% reduction in the final consumption patterns away from bundle shift of material goods (including fossil fuels) achieved through materials changes in consumption (through phantom taxes) in Europe only. In this scenario, there is a compensating increase in the consumption of other (nonmaterial) goods Combined Metals and plastics - tax + Non-metallic minerals - tax + Redesign + Consumption bundle shift scenarios101 The second set of scenarios focuses on CE • ‘Designing-out’ materials and material actions that affect the upstream design and waste (redesign). The stylized scenario aims consumption of products. Such actions are likely to reflect the outcomes of policies that would to involve policies that are regulatory and behavioral incentivize firms to invest in design that would in nature (although fiscal policy levers may also reduce the relative use of materials in final be relevant), and so scenarios in the model are products and material waste from the production more exploratory and are defined by CE outcomes process. rather than by specifying policies. They address the following CE objectives: The ‘product life extension’ scenario was not included in the ‘combined’ scenario due to some overlaps with the ‘redesign’ and 101 ‘consumption bundle shift’ scenarios. 91 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition • Extending product lifetime (product life below economic growth (Figure 5.1), maintaining extension). The stylized scenario aims to recent trends toward relative, but not absolute, reflect the outcomes of policies (for example, decoupling. extended producer responsibility and right to repair) that would allow for extension of usable BAU will entail an increasing share of imported life of products and thus reduce relative material materials. As discussed in Chapter 3, over recent disposal and reduce demand for new material. decades, the European economy has shifted the production of material-intensive goods outside • Reducing consumer demand for materials its borders. The modeling results show that this (consumption bundle shift). The stylized trend is set to continue. Across all of Europe, use scenario aims to reflect the outcomes of of primary materials, as measured by production- policies (including potentially regulatory, fiscal, based accounting (see Box 5.3), will grow by 10 and behavioral in nature) designed to shift percent by 2030 (compared with 2021) under consumption patterns away from material goods BAU. When measured in terms of consumption- (for example, toward services). based accounting, though, growth in material use increases to almost twice as much (17 percent), The remainder of the chapter describes the results showing the increased role of imported materials. based on the above scenarios. Growth rates in material use across the EU reflect different structural conditions of MSs. 5.2 Current policy pathways are From a production-based perspective, material insufficient to achieve significant use grows significantly faster in MSs having more reductions in primary material recently gained EU accession—2.5 times faster in EU-7 compared to EU-16 + EFTA and the United use Kingdom. One exception here is Poland, which Under ‘BAU’, Europe will not achieve absolute sees a decline in production-based material use decoupling in material use. Chapter 2 details by 2030, even while consumption-based material how over the past decades Europe’s economy has use grows in line with the European average. achieved substantial resource efficiency gains, in line This likely reflects structural change in the Polish with other higher-income economies. At the same economy (a relative shift away from extraction time reaching and sustaining absolute material and primary materials processing). Overall, much decoupling in production, especially consumption smaller differences in growth of material use are of primary materials, has remained challenging, apparent across countries using consumption- particularly in periods of economic expansion. based measures (except for Croatia, which is the Under BAU, the production and use of primary only country showing faster production-based than materials continue to grow, if only at a pace well consumption-based growth). FIGURE 5.1: INDEX OF MATERIAL USE: PRODUCTION BASED (LEFT) AND CONSUMPTION BASED (RIGHT) UNDER BAU BAU total materials use: production-based accounting (2021=100) BAU total materials use: consumption-based accounting (2021=100) 130 130 125 125 120 120 115 115 110 110 105 105 100 100 95 95 90 90 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Europe overall EU16 + UK + EFTA Bulgaria Croatia Europe overall EU16 + UK + EFTA Bulgaria Croatia Poland Romania Other E. Europe Poland Romania Other E. Europe Source: World Bank. 92 BACK TO CONTENTS THE ECONOMICS OF CIRCULAR ECONOMY POLICIES BOX 5.3: PRODUCTION AND CONSUMPTION-BASED MATERIAL USE ACCOUNTING To provide an accounting of material use flows, two distinct conceptual frameworks are used. The first approach follows a production-based perspective, which can also be referred to as a territorial-based accounting, and tracks the raw materials (for example, bauxite ore) at the point of their direct consumption (for example, country where bauxite is used to produce aluminum). Production-based accounting can be represented through the direct material consumption (DMC) indicator and is obtained by adding domestic extraction and imports of the corresponding raw commodity and subtracting exports (Eurostat 2001). While being conceptually sound, for open economies the production-based approach fails to adequately quantify the life cycle-wide environmental pressures associated with domestic consumption (Schaffartzik et al. 2014). For instance, if iron ore is used to produce steel in country A, which is further exported and actually consumed in country B, the production-based perspective would attribute the iron ore use to country A (where steel was produced) and not country B (where actual consumption of steel took place). To account for the raw commodities embedded into traded goods, a consumption-based perspective is introduced. From a consumption perspective, raw materials used in the production of exported goods should be accounted for in the importing country. This concept has also been applied in a similar way for the accounting of GHG emissions (for example, Davis and Caldeira 2010 and Peters 2008). To provide an accounting of the life-cycle materials embedded in bilateral trade, the analysis presented in this chapter follows an approach outlined in Peters (2008) for the case of CO2 emissions. Country-specific raw material use per unit of output by sector is used to estimate materials associated with bilateral trade flows. For every commodity, the total weight of raw materials associated with production of the specific commodity and embedded in trade flows from region r to region s (frs) is estimated as frs = Fr(E - Ar)-1mrs, where Fr is a vector of region-specific raw material uses per unit of output by industries, E is an identity matrix, Ar is the technological matrix, which represents the industry requirements of domestically produced products in region r, and mrs corresponds to the bilateral trade flow from region r to region s. From the consumption-based perspective, material consumption in a country is then estimated as a weight of all materials used for the production process in this country minus materials embedded into exports plus materials embedded into imports. Decarbonization policies under the EGD are 5.3 CE policies have the potential not sufficient to deliver resource efficiency gains but can complement circularity policies. to deliver absolute material Policies targeting GHG emission reduction under decoupling the EGD (EGD-NDC) will have large impacts on Can CE policies have the same scale of fossil fuel use from a production-based accounting impact on primary materials like metals and perspective and a smaller, yet significant, impact construction materials that decarbonization when measured on a consumption basis. These has on fossil fuels? Can they achieve absolute policies will also contribute to reduce metal ores decoupling? Figure 5.3 summarizes the material and non-metallic minerals use by raising the cost use impacts of a comprehensive set of CE policies of their production, but the scale of the effect will addressing both production and consumption be limited—less than 1 percent relative to BAU for sides (combined). The results suggest that a metals and 1 to 2 percent for non-metallic minerals package of CE policies not only delivers large (Figure 5.2). Thus, while decarbonization policies reductions in primary material use relative to are a helpful complement, policies that specifically BAU, but would also result in absolute material target primary materials will be required. decoupling by 2030 from a production-based accounting perspective. In the combined scenario, use of primary metals falls 15 percent from 2021 levels in 2030 and nearly 30 percent from BAU, while non-metallic minerals use remains flat (and 93 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition FIGURE 5.2: IMPACTS OF THE EGD-NDC SCENARIO ON PRIMARY MATERIAL USE IN EUROPE Change in primary materials use in Europe (2030): EGD-NDC versus BAU 0% -1% -1% -1% -2% -5% -8% -10% -10% -12% -12% -15% -20% -20% -25% -30% -30% MM0 NMN FF-coal FF-gas FF-oil Production-based Consumption-based Source: World Bank. falls 15 percent relative to BAU). Fossil fuels will fall Bulgaria and especially Poland are expected to by 11 percent even under BAU, but they decline experience a decline in (production-based) primary another 20 percent under the combined scenario material use at a much faster rate than Europe (although most of this is driven by EGD-NDC rather overall (Table 5.2). However, in both cases, this is than targeted CE policies). driven primarily by a rapid decline in fossil fuel use driven by decarbonization policies (EGD-NDC policy Overall progress masks country-specific scenario) rather than specific CE policies. In fact, variation in material reduction rates. Overall, Bulgaria and Croatia actually experience a small FIGURE 5.3: IMPACT OF COMBINED CE POLICIES ON USE OF PRIMARY MATERIALS IN EUROPE IN 2030 (INDEX 2021 = 100) VERSUS BAU Europe index of production - based materials use (2030): combined scenario v BAU 130 120 110 100 90 80 70 60 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 All BAU Metals BAU All Combined Metals Combined Fossil Fuels BAU Non-metallic minerals BAU Fossil Fuels Combined Non-metallic minerals Combined Source: World Bank. 94 BACK TO CONTENTS THE ECONOMICS OF CIRCULAR ECONOMY POLICIES TABLE 5.2: IMPACT OF COMBINED CE POLICIES ON USE OF PRIMARY MATERIALS IN 2030 (INDEX 2021 = 100) AT THE COUNTRY LEVEL All materials Fossil fuels Metals Non-metallic minerals BAU Combined BAU Combined BAU Combined BAU Combined Bulgaria 105 82 84 59 129 104 117 97 Croatia 114 97 91 70 111 107 115 99 Poland 97 74 86 62 127 87 119 107 Romania 118 96 89 66 125 86 120 99 Source: World Bank data. increase in use of metals, while Poland experiences reducing primary material use is getting prices a small increase in non-metallic minerals use by right, for instance, through economic instruments 2030. aimed at better reflecting the environmental externalities stemming from material production Achieving material decoupling from a and consumption. A first question here is whether consumption-based perspective is more emission reduction policies can substantially reduce challenging. It is important to emphasize that material use by increasing fossil fuel prices. The modeled combined CE policies achieve absolute EGD-NDC scenario shows that while significantly decoupling only from a production-based increasing fossil fuel prices, carbon pricing has perspective. From a consumption-based accounting minimal impacts on prices of metals and non-metallic perspective, use of primary metals and non-metallic minerals. However, dedicated policies aimed at minerals still rises (by 4 percent and 13 percent, correcting materials’ pricing can significantly reduce respectively) over this period. This reflects the material use (Table 5.3). Where fiscal policies (in this challenges of trade leakage presented in Chapter 3 case, production taxes) are imposed, producer prices (see later discussion in Section 5.5 for further details rise significantly, contributing to reduced material on modeling results with trade leakages). use. Of course, elasticities vary across products, and in the examples shown here, use of metals and 5.4 A mix of domestic policy non-metallic minerals appears to be somewhat less sensitive to price changes than fossil fuels (coal). instruments will be needed to Nevertheless, the role of pricing is clear, highlighting achieve CE aims the importance of fiscal policy tools in delivering on CE objectives. Prices will need to rise to meet the objectives of reducing materials use. A starting point to TABLE 5.3: PRICE AND MATERIAL USE102 GROWTH TO 2030 (%) Coal power Coal use Primary Iron Primary Non-metallic Non-metallic price growth growth and steel metals use minerals minerals use price growth growth price growth growth EGD-NDC versus BAU 25.4 −30.3 −1.1 −1.2 0.6 −0.8 Material tax versus EGD-NDC103 n.a. n.a. 24.2 −16.6 21.0 −5.0 Production-based material use. 102 Results shown here for metals are based on the metals and plastics – tax scenario; results shown for non-metallic minerals are based 103 on the ‘non-metallic minerals - tax’ scenario. 95 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition Taxing primary materials can have similar effects on overall consumption trends. Also, effects as subsidizing secondary production. both have a similar impact on consumption-based Fiscal policy targeting production prices to reduce material use—in both cases a much smaller impact, use of primary materials can take two broad which may be expected given that the policy is forms—taxes or subsidies. The modeling exercise targeting production rather than consumption and a explored a scenario with a 30 percent tax imposed number of barriers may restrict pricing pass-through on primary metals and plastics production to raise to consumers (for example, leakage, as discussed prices and incentivize a shift away from primary later). production (either to secondary production using recycled metals or to other materials). A second While the price channel will clearly play an scenario provides a 30 percent production subsidy essential role in reducing demand for primary for secondary materials production, to reduce materials, it will not be sufficient on its own. A the gap in relative prices between primary and range of policy approaches will need to be tailored secondary metals production and incentivize a to the specific dynamics of different materials, shift to secondary production. The results shown particularly to address both the production and in the Figure 5.4 suggest that both policies would consumption sides of the equation. Policies have a similar impact in reducing production-based targeting upstream product design and downstream material use. consumption can effectively complement fiscal policies. These include FIGURE 5.4: IMPACT OF PRIMARY PRODUCTION TAX AND SECONDARY PRODUCTION SUBSIDY ON METAL ORE • Designing products to reduce material usage USE COMPARED TO THE EGD-NDC SCENARIO and waste (redesign), Sustainability impacts of scenarios to reduce • Extending the useable lifetime of products metals and plastics use (2030) (product life extension), and 0% • Shifting consumption patterns away from -5% materials and toward services (consumption -5.1% -5.5% bundle shift). -10% -9.3% Fiscal measures can support all three -15% approaches, as price signals at the consumer -15.6% -16.2% level are likely to play an important role in -20% shifting demand. But they are also likely to benefit from regulatory (for example, material standards, -25% rights to repair, extended producer responsibility) and social/behavioral policies (for example, -30% -28.5% Metals and Metals and Metals and education and public awareness, behavioral plastics-tax plastics-subsidy plastics-total incentives). Figure 5.5 presents the results on Production-based Consumption-based material use from a combination of production-side fiscal policies as well as complementary policies Source: World Bank. targeting upstream product design and downstream consumption. A policy mix combining taxes and subsidies delivers the highest material efficiency gains. Alternative policies deliver varying impacts. Perhaps the most important finding from the For example, while material tax policies affect analysis comes in a scenario where both the tax production-based material use much more and subsidy are combined. In this case, the impact than consumption-based use, upstream and on reducing material use nearly doubles. This consumption-side CE policies appear to reduce suggests that the approaches are complementary. both on a similar scale (affecting consumption slightly more than production in most cases). When limited to targeting production, however, Moreover, while material taxes have almost no both subsidies and taxes will have limited impacts outside the specific materials they target, 96 BACK TO CONTENTS THE ECONOMICS OF CIRCULAR ECONOMY POLICIES FIGURE 5.5: IMPACT OF ALTERNATIVE SCENARIOS ON USE OF PRIMARY MATERIALS RELATIVE TO THE EGD-NDC SCENARIO Change in production and consumption of primary materials (2030) under alternative scenarios 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% -25.0% -30.0% Metals and Non-metallic Redesign Product life Consumption Combined plastics- tax minerals- tax' extension bundle shift Metals Production-based Metals Consumption-based Non-metallic minerals Production-based Non-metallic minerals Consumption-based Fossil fuels Production-based Fossil fuels Consumption-based Source: World Bank. upstream and consumption-side CE policies production of iron and steel, aluminum, copper, reduce demand for all materials, although their and plastics. But while in the case of iron, steel, influence on demand for metals is larger than for and copper, the tax alone stimulates a significant NMM and fossil fuels. Combining both production- growth in recycling and secondary production, and consumption-side policies almost doubles the response is much more muted in aluminum material reduction impact of introducing any and plastics; in the case of plastics, introducing a one of the measures individually. This suggests subsidy for secondary production is highly effective production- and consumption-side measures in stimulating a growth in recycling and secondary are complementary and supports the idea of production, but again for aluminum the response introducing integrated policy packages to achieve is smaller (Table 5.4). Upstream and demand-side CE objectives. scenarios reduce both primary and secondary production, again with a much stronger response in Appropriate policy choices may also depend iron and steel and copper relative to aluminum (with on the specific material being targeted. For plastics in the middle). example, a tax on primary production of metals and fossil fuels has large impact in reducing primary TABLE 5.4: IMPACT OF ALTERNATIVE POLICIES ON PRODUCTION-BASED METALS AND PLASTICS USE (2030) (%)   Metals and Metals and Metals and Redesign Product life Consumption plastics - tax plastics - plastics - extension bundle shift subsidy total Iron and steel - −24 −26 −46 −16 −4 −4 primary Iron and steel - 35 45 89 −16 −4 −4 secondary Iron and steel - 25 36 69 −15 −4 −4 recycling Aluminum - −41 −42 −67 −8 −2 −2 primary Aluminum - 16 19 35 −9 −2 −2 secondary 97 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition   Metals and Metals and Metals and Redesign Product life Consumption plastics - tax plastics - plastics - extension bundle shift subsidy total Aluminum - 8 12 21 −6 −2 −2 recycling Copper - primary −20 −23 −40 −13 −3 −3 Copper - 37 51 101 −13 −3 −3 secondary Copper - 23 34 67 −11 −3 −4 recycling Plastics - −32 −7 −37 −10 −2 −4 primary Plastics - 14 88 115 −10 −2 −4 secondary Plastics - 9 49 64 −16 −2 −3 recycling 5.5 Trade policy can play a role producers who are not required to comply with those policies. Figure 5.6 shows how material taxes in balancing sustainability and compound already-eroding price competitiveness competitiveness objectives of CE for European producers of primary metals and construction materials. European exporters are likely Circularity-oriented fiscal policies may hit the to be hit significantly in global markets unless some competitiveness of European producers. As sort of export exemption or subsidy is put in place discussed earlier, by changing relative prices, fiscal to offset the impacts of policies raising production (and regulatory) policy levers can have a powerful prices. And European producers are likely to face impact on European production and consumption threats to domestic markets from lower-cost of primary materials. But of course, raising relative importers. prices for domestic producers will influence their competitiveness in global markets compared to FIGURE 5.6: PRICE COMPETITIVENESS IMPACTS ON EUROPEAN PRODUCERS RELATIVE TO KEY GLOBAL PRODUCERS OF ALTERNATIVE POLICY SCENARIOS FOR METALS (LEFT) AND CONSTRUCTION MATERIALS (RIGHT) Change in EU iron and steel price competitiveness Change in EU construction materials price competitiveness (to 2030) relative to key producers (to 2030) relative to key producers 0% 10% 5% -10% 0% -5% -20% -10% -30% -15% -20% -40% -25% -30% -50% -35% -60% -40% China US OECD Asia China US OECD Asia BAU EGD-NDC Material tax BAU EGD-NDC Material tax Source: World Bank. 98 BACK TO CONTENTS THE ECONOMICS OF CIRCULAR ECONOMY POLICIES FIGURE 5.7: PRODUCTION, CONSUMPTION, AND LEAKAGE OF ALTERNATIVE POLICIES, WITH AND WITHOUT BORDER ADJUSTMENTS FOR METALS EU production, consumption, and trade leakage in EU production, consumption, and trade leakage in primary metals (2030) non-metallic minerals (2030) 0.0 40.0 0.0 500.0 20.0 448.0 -10.0 400.0 13.8 -50.0 5.3 0.0 -20.0 -2.0 -100.0 300.0 -30.0 -20.4 -20.0 -35.6 -40.0 200.0 -40.0 -150.0 -50.0 -60.0 100.0 -200.0 -60.0 -80.0 13.3 -250.0 -16.8 0.0 -70.0 -100.0 -47.4 -105.7 -300.0 -100.0 -80.0 -120.0 -123.8 -144.8 -90.0 -140.0 -350.0 -200.0 Metals & Metals & Non- Non- Redesign Product Consumption Non-metallic Non-metallic Redesign Product Consumption plastics- plastics- metallic metallic life bundle minerals- minerals- life bundle shift total total*BAT minerals- minerals- extension shift tax tax* tax tax*BAT extension BAT  Production  Consumption  Leakage rate (right axis)  Production  Consumption  Leakage rate (right axis) Source: World Bank. Domestic fiscal policies risk weakening system) to ensure a level playing field between competitiveness while trade leakage can European producers and imports—in effect undermine sustainability objectives. The price extending European domestic decarbonization gap induced by the application of fiscal policies policy to all trading partners. As a material taxation on material production can result in substantial policy would have similar characteristics and leakage (as shown in Chapter 3) whereby primary leakage effects, it is worth considering how a border materials production is offshored and exported tax targeting materials would affect competitiveness back into European markets. This undermines and sustainability objectives of CE policy. Figure the sustainability objectives of CE policy and is 5.7 shows the impacts of adding BATs to domestic illustrated by the gap in the decline of material use fiscal instruments applied to primary metals and as measured by production and consumption. non-metallic minerals.105 The results indicate Figure 5.7 shows how significant this problem may that BATs106 would reduce leakage and close the be, particularly in fiscal policy scenarios, where gap between primary material production and leakage is large as is the subsequent erosion of consumption rates. In the case of primary metals, material reduction achieved by CE policies. the introduction of a BAT results in consumption in Europe to decline by an additional 35.6 million tons Taxing primary material imports reduces by 2030 relative to the fiscal policy scenario without leakage. BATs have received considerable attention BATs (Table 5.5)—almost a 75 percent additional of late as the EU plans to introduce them on reduction beyond what results from introducing carbon emissions (the ‘carbon border adjustment domestic taxation without corresponding BAT. This mechanism’ [CBAM]) under the Green Deal to stem results from production demand in the rest of the leakage of emissions-intensive activities.104 Under world falling by 15 million metric tons relative to CBAM, exporters of emission-intensive goods to EGD-NDC compared with an increase of 5 million the EU would be required to pay a tax (equivalent to tons under the scenario without BAT. what EU producers pay under the emissions trading 104 EC 2021. 105 To model these impacts, two sub-scenarios are introduced to incorporate BATs into the fiscal instrument scenarios for primary metals and non-metallic minerals: metals and plastics - total*BAT and non-metallic minerals - tax*BAT. 106 The BAT scenarios impose a tax on imports and subsidize exporters to offset the costs of domestic taxes on exporters competing with producers in export market who do not face such taxes. 99 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition TABLE 5.5: IMPACTS OF BAT SCENARIOS ON KEY DEMAND AND USE VARIABLES FOR PRIMARY METALS AND CONSTRUCTION MATERIALS METALS EGD-NDC Metals and Metals and Impact of material Impact of BAT plastics - plastics - tax versus EGD-NDC versus EGD-NDC total total*BAT scenario (%) scenario % (versus material tax scenario %) EU production-based use 278 199 201 −28 −28 (+0.8) EU consumption-based use 518 469 434 −9 −16 (−7) Rest of world production 6,007 6,012 5,992 0 0 (0) EU exports (embedded) 88 61 60 −31 −32 (−2) EU imports (embedded) 327 331 293 1 −10 (−11) Non-metallic minerals EGD-NDC Non-metallic Non-metallic Impact of material Impact of BAT versus minerals - tax minerals - tax versus EGD-NDC EGD-NDC scenario tax*BAT scenario (versus material tax scenario) EU production-based use 4,302 4,087 4,215 −5 3 (−2) EU consumption-based use 6,524 6,427 6,420 −1 0 (−2) Rest of world production 85,472 86,436 85,346 1 −1 (0) EU exports 678 626 672 −8 7 (−1) EU imports 2,900 2,966 2,877 2 −3 (−1) Source: World Bank. But BATs raise prices and can be difficult value chain, with potentially negative consequences to implement. Price effects will be felt by both for competitiveness of domestic producers in consumers and producers demanding primary higher-value-added positions further down the materials in the production of downstream value chain. For example, imposing a border tax products. Imposing BATs in the metals sector on primary steel levels the playing field for domestic would raise Europe’s Consumer Price Index (CPI) primary producers with foreign producers who do by close to 1 percent over the fiscal policy scenario not pay a material tax, but if it is not also imposed without BAT. Material-intensive economies would on cars using that steel, domestic producers of be affected more adversely—for example, prices cars may find themselves outcompeted by those would increase by 1.4 percent in Poland and same foreign producers. This is important because, Romania. Moreover, the experience with CBAM as discussed in Chapter 3, the majority of primary suggests that BATs face significant implementation materials consumed in the EU come in not through challenges. Politically, BATs are a barrier to free primary material imports but rather through primary trade and a BAT on primary materials would, like materials embedded in other imported products. In CBAM, be seen as biased against developing the scenarios presented above, taxes are imposed countries, with justification under Article XX of the on all primary material inputs embedded in imports General Agreement on Tariffs and Trade (GATT) (so, for example, not just primary steel but the value even more challenging than for CBAM. They are of primary steel in the import of a car). In practice, also administratively complex with requirements however, imposing any material tax across the for sometimes complex monitoring, reporting, and value chain can be technically difficult to implement, verification arrangements. so it is likely that, at least initially, a tax on primary materials would not account for embedded Irrespective of the instrument, CE policy materials in downstream products, creating a needs to consider embedded materials across potential distortion for European producers. In the the value chain if it is to address leakage long term, however, anything short of pricing in effectively. CE policies can contribute to changes externalities along the whole value chain will likely in relative prices of inputs at different stages of the result in some form of leakage. 100 BACK TO CONTENTS THE ECONOMICS OF CIRCULAR ECONOMY POLICIES FIGURE 5.8: IMPACTS OF SELECTED CE SCENARIOS ON FIGURE 5.9: CHANGE IN COMPOSITION OF LMIC EXPORTS IN REGIONS/COUNTRY GROUPINGS OUTSIDE EXPORTS BY BROAD CATEGORY UNDER THE EUROPE ‘COMBINED’ CE SCENARIO Exports (2030) relative to baseline (EGD-NDC scenario) Change in LMIC export value by main sector under Combined CE for alternative scenarios scenario, relative to baseline EGD-NDC scenario (2030) 0.5% 0.1% Other goods 0.0% and services -0.4% 0.0% (incl extractives) -0.1% -0.1% -0.2% -0.2% -0.5% -0.3% Transport 0.1% -0.5% -0.5% and trade -0.8% -1.0% Power -0.8% -1.5% Industry -0.3% -2.0% Trade and 1.8% -2.5% other services -3.0% Agriculture 0.0% Non-EU ECA China SSA MNA LMIC* -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% Metals & plastics-total Combined Source: World Bank. Note: *LMICs are defined here as low- and middle-income countries outside of the EU, excluding China and Russia Given the importance of the trade channel in by gains in exports of recycled metals. Overall, shaping CE outcomes, Europe’s CE policies the results imply large shifts in the structure of will have significant global spillovers. Chapter developing-country exports—away from extractives, 3 describes the potential risks to developing power, and industry and toward more services countries of policies that reduce European demand (Figure 5.9). In practice, as discussed in Chapter for primary materials, particularly for those countries 3, many countries will not have the capacity (skills, highly concentrated in primary commodity exports. institutions, technology) to make these adjustments Results from the modeling suggest that overall in the short to medium term. export impacts are modest if not insignificant (Figure 5.8). In most regions, and especially in China, imposition of BAT substantially reduces exports. 5.6 CE policies will have Under a comprehensive CE scenario that combines modest growth impacts but will production- and consumption-side measures (but accelerate ongoing structural does not include BAT), Europe’s neighbors face the largest hit to exports, while overall impacts in Sub- and distributional shifts in Europe Saharan Africa and in LMICs are not more than 0.5 Comprehensive CE policies will accelerate percent compared to the reference scenario. One Europe’s shift toward services economies. reason why the impacts appear modest is that Implementation of a broad combination of CE while some CE measures reduce overall demand for policies would have sizeable impacts on the primary materials, others may strengthen the relative structure of Europe’s economy by 2030, with comparative advantage of LMICs as exporters services increasing its share of output by 2.3 (particularly if BAT is not imposed). Overall, however, percentage points while industry falls further by the model results probably underestimate the a nearly 1 percentage point and ‘other goods and potential negative impacts on developing-country services’ (including extraction) fall by 1.6 percentage exporters as it assumes that economies adjust points (Table 5.6). equally to changing demand and price structures. For example, while the model shows developing Upstream and consumption-side CE policies countries experiencing substantial declines in will have the largest impact on these structural primary metals exports, these are largely offset shifts. The shifts are largest under a scenario where 101 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition producers ‘design-out’ materials from production, impacts are again relatively larger in newer MSs in effect replacing material inputs with services (5 percent growth in relative share of the industrial inputs. Similarly, product lifetime extension sees sector in Bulgaria, 3 percent in Croatia, and 2 a shift away from production sectors to services percent in Romania, under the ‘metals and plastics sectors (for example, repair and reuse), while overall - total’ scenario) and appear to come more at the consumption shifts away from materials quite expense of the power and extraction sectors than obviously shift economic activity toward services. By from services. contrast, production-side fiscal policies in the metals and plastics sectors work in the opposite direction CE objectives can be achieved at a relatively to the consumption-side policies, increasing small direct cost to the economy. The policies industry relative to services. This may seem scenarios explored in this assessment all aim counterintuitive but relates to the relative impact to achieve core CE sustainability objectives by of tax and subsidy policies on driving secondary reducing and shifting demand. Thus, they have production to the point where it more than offsets macroeconomic costs, if relatively minor.108 In the primary production, increasing the relative share of combined scenario, total annual GDP is around 1 industry.107 percent lower relative to the reference scenario in 2030—for most of the individual policy scenarios, The scale of structural shifts is larger in the the cost is around 0.3–0.4 percent of 2030 GDP newer MSs. In Bulgaria and Poland, for example, (Figure 5.10). These findings are in line with other the share of the ‘trade and other services’ sector recent CGE assessments.109 However, a number of increases by 6 percent relative to the EGD-NDC other studies indicate that moderate to significant scenario by 2030 in the ‘redesign’ scenario (and economic gains are possible from adopting CE, by 3 percent in the ‘product life extension’ and based on assumptions of large efficiency gains, no ‘consumption bundle shift’ scenarios) while the resource constraints, and price declines leading relative share of the industry sector declines to substantial increases in consumer spending commensurately. For production-side policies, (rebound effects).110 Importantly, the modeling TABLE 5.6: CHANGE IN SHARE OF OUTPUT BY BROAD SECTOR IN 2030 RELATIVE TO THE REFERENCE SCENARIO   Agriculture Industry Power Transport Trade and other Other goods services and services Metals and (0.01) 0.34 (0.07) (0.02) (0.28) 0.03 plastics - total NMM - tax 0.00 (0.02) (0.00) (0.00) 0.03 (0.02) Redesign 0.01 (0.64) (0.02) 0.01 1.80 (1.16) Product life (0.00) (0.13) (0.00) (0.00) 0.87 (0.72) extension Consumption 0.02 (0.36) 0.07 0.04 0.92 (0.70) bundle shift Combined 0.00 (0.90) 0.10 0.10 2.30 (1.60) Source: World Bank. 107 Specifically, the tax on primary materials reduces primary production to the point where it actually becomes smaller relative to secondary production. When the subsidy to secondary production is introduced together with the tax, it is stimulating a part of the industrial sector that is now larger than the primary sector, so the net effect becomes positive for industry. 108 One important methodological note: upstream and consumption scenarios (redesign, product life extension, consumption bundle shift) do not consider costs (investments) required to achieve them—such investments would be expected to contribute positively to growth. 109 Bibas, Chateau, and Lanzi 2021. 110 Cambridge Econometrics, Trinomics, and ICF 2018; Ellen MacArthur Foundation, McKinsey, and SUN 2015. 102 BACK TO CONTENTS THE ECONOMICS OF CIRCULAR ECONOMY POLICIES FIGURE 5.10: CHANGE IN EUROPE’S GDP RELATIVE TO FIGURE 5.11: CHANGE IN CONSUMER PRICES IN THE EGD-NDC SCENARIO (2030) EUROPE RELATIVE TO REFERENCE SCENARIO (2030) Change in real GDP-Europe (2030) relative to EGD-NDC scenario Change in CPI Europe (2030) relative to EGD emissions scenario 0.0% 0.73% -0.02% -0.2% 0.60% 0.52% 0.48% 0.42% -0.33% -0.4% -0.36% 0.40% -0.40% -0.45% 0.16% -0.6% 0.20% 0.02% 0.03% -0.8% -0.76% 0.00% -0.03% -1.0% -0.98% -0.20% -0.20% -1.2% -0.40% EGD-NDC Non- Redesign Consump- Metals & Metals & Combined EGD- Metals Metals Non- Non- Redesign Product Con- Combined (v BAU) metallic tion plastics- plastics- NDC and and metallic metallic life sump- minerals- bundle tax subsidy (v BAU) plastics plastics minerals minerals extension tion tax shift - Total -Total* - Tax - Tax* bundle Source: World Bank. BAT BAT shift results presented here do not consider the and may be welfare enhancing for poorer substantial co-benefits of achieving CE objectives, households. The combined scenario shows virtually for example, improved health, reduced congestion, no change in overall consumer prices compared to and strengthened natural capital, all of which would the reference scenario (Figure 5.12), although this be expected to contribute to higher productivity and masks significant differences across scenarios. While GDP growth as well as higher welfare. Moreover, it fiscal policy scenarios are expected to result in lower is important to recognize that this ‘cost’ is relative consumer prices, as noted earlier, the imposition to baseline growth—real GDP in the combined of a border tax for primary metals would have the scenario is still 13.5 percent higher in 2030 opposite effect, increasing CPI by 0.7 percent. compared to BAU in 2021. GDP implications at Demand-side scenarios (product life extension and the country level are broadly in line with overall EU consumption bundle shift) also result in modest trends, with Bulgaria and Poland most exposed to increases in consumer prices. But price impacts vary production-side policies targeting metals and fossil significantly across consumption categories. Under fuels and Poland and Romania most exposed to the ‘combined’ scenario, for example, prices for policies that aim to ‘design-out’ materials as inputs food and beverages, transport, and other services— in production, perhaps reflecting their positions in items with a heavy weight in the consumption European manufacturing value chains. baskets of lower-income deciles—fall by more than 5 percent in Europe relative to the reference Overall welfare impacts are slightly higher but scenario (and in the range of 10–20 percent in EU- still modest. Household welfare in the combined 4). Meanwhile, prices of extractive and manufactured scenario is around 1.5 percent lower than in the goods—which have a heavier weight in the reference scenario in 2030, driven by impacts on consumption basket of higher-income deciles—rise consumer prices and labor earnings (see below). sharply. Energy prices experience modest gains (less At the country level, welfare costs in the combined than 1 percent) in Europe overall but fall in each of scenario range from a low of −0.4 percent in the EU-4 countries. The net effect of this pattern of Bulgaria (that is, households experience small net price changes is that poorer households in each of welfare gains in Bulgaria) to a high of 2.5 percent in these countries, especially in Bulgaria and Romania, Romania. may experience lower relative prices as a result of CE policies and will certainly experience lower prices Consumer price impacts vary across CE relative to richer households. policies, but they are broadly progressive 103 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition FIGURE 5.12: CHANGE IN UNEMPLOYMENT RATE (LEFT) AND REAL WAGE (RIGHT) BY SKILL LEVEL: EUROPE RELATIVE TO THE REFERENCE SCENARIO (2030) Europe percentage point change in unemployment Europe change in average real wage (2030) rate (2030) relative to EGD-NDC scenario relative to EGD-NDC scenario 0.70 0.50 0.1% 0.2% 0.1% -0.1% 0.60 0.57 0.00 0.0% 0.0% -0.1% 0.50 -0.50 -0.4% -0.6% 0.40 0.35 -0.7% 0.35 0.33 -1.00 0.30 -1.3% -1.50 -1.3% -1.4% 0.20 0.10 0.09 -2.00 0.10 0.06 0.02 0.01 0.01 0.00 -2.50 -0.02 -2.6% -0.04 -0.05 -0.03 -0.10 -3.00 EGD-NDC Metals Non- Re- Product Con- Combined EGD-NDC Metals Non- Re- Product Con- Combined (v BAU) and metallic design life sump- (v BAU) and metallic design life sump- plastics minerals extension tion plastics minerals extension tion - Total - Tax bundle - Total - Tax bundle shift shift Unskilled Skilled Unskilled Skilled Source: World Bank. These positive distributional impacts from noted above on GDP, with different methodologies price changes are offset by modest, regressive and assumptions) project substantial employment impacts from CE policies in labor markets. growth as a result of a shift to CE.113 Most of these While labor market impacts from most individual CE studies support the findings on the expected strong policies are modest, in combination (‘combined’) relative growth of skilled employment. they are relatively significant for unskilled workers (Figure 5.12). Compared to the reference scenario, FIGURE 5.13: CHANGE IN REAL WAGES BY SKILL LEVEL AT COUNTRY LEVEL (2030) - COMBINED SCENARIO unskilled workers see unemployment rise by 0.6 percentage points and real wages decline by 2.6 Change in real wages by skill level at country level (2030) - Combined scenario percent. Skilled workers, by contrast, experience lower unemployment and only slightly lower 4.0% 2.9% wages. Impacts vary markedly across individual 3.0% 2.0% CE policy scenarios. Fiscal policies targeting 2.0% 1.4% production of primary materials have almost no 1.0% impact on unemployment and wages. By contrast, 0.0% -0.4% the upstream and demand-side scenarios show -1.0% much larger effects, with a clear skills bias. Under -2.0% -2.5% all three scenarios (redesign, product life extension, -3.0% and consumption bundle shift), unemployment -4.0% -3.9% -5.0% -4.5% rises and wages fall for unskilled workers, while -6.0% -5.6% unemployment falls and wages rise for skilled -7.0% workers. The findings on labor market outcomes Un- Skilled Un- Skilled Un- Skilled Un- Skilled skilled skilled skilled skilled are broadly in line with several studies which expect Bulgaria Croatia Poland Romania decline111 or marginal gains112 in employment from CE policies. However, many other studies (again, as Source: World Bank. 111 Donati et al. 2020. 112 Cambridge Econometrics, Trinomics, and ICF 2018; OECD 2020. 113 IISD 2020; ILO 2019; Wiebe et al. 2019. 104 BACK TO CONTENTS THE ECONOMICS OF CIRCULAR ECONOMY POLICIES Country-level distributional impacts can be circumstances. Like all environmental taxes, CE significant, driven by underlying sectoral material taxes have the potential to be used to and skills structures. For example, in the reduce other taxes that may have distortive impacts combined scenario (Figure 5.13), real wages for on the economy, including labor taxes. A large unskilled workers in Poland are down 5.6 percent. body of literature has shown that revenue recycling Moreover, skilled workers gain considerably in through the reduction in labor taxes can be used all countries but Croatia. One notable difference to maximize economic efficiency, compared with in the newer MSs relative to Europe overall is alternative revenue recycling options.114 that the largest impacts are seen through the production-side CE scenarios than through the TABLE 5.7: CHANGES IN KEY VARIABLES RELATIVE TO upstream and demand-side scenarios. Specifically, THE EGD-NDC SCENARIO (2030) RESULTING FROM TAX ON PRIMARY METALS AND FOSSIL FUELS WHEN skilled workers appear to fare poorly in all four REVENUE IS RECYCLED DIRECTLY TO HOUSEHOLDS countries (compared to Europe overall) under the (METALS AND PLASTICS - TAX) VERSUS RECYCLED upstream and demand-side scenarios; rather THROUGH A REDUCTION IN LABOR TAXES (METALS AND PLASTICS - TAX*LABOR) their gains come mainly in the production-side CE intervention scenarios. In parallel, unskilled workers Metals and Metals and in these countries see wages fall more through plastics - plastics - production-side interventions than in Europe tax tax*labor overall. This likely reflects the higher concentration Unemployment rate - unskilled +0.20 −0.38 of unskilled workers in the newer MSs, resulting in (percentage point change) greater exposure to declines in unskilled activities Real wage - unskilled (% −0.8% +1.5% and at a weaker position to benefit from gains change) in skilled activities. This reflects the relatively GDP (% change) −0.2% +0.2% weaker comparative advantage of these four countries in higher-skilled service activities and the CPI (% change) −0.6% −0.7% concentration of skilled workers in activities that will Primary metal consumption −5.1% −4.8% experience relative decline under the upstream- and based (% change) demand-side scenarios. Source: World Bank. Leveraging material taxes to reduce labor 5.7 Using CE taxes to reduce taxes has significant positive labor market labor taxes can be growth and and growth impacts. Table 5.7 illustrates how welfare enhancing significant these impacts can be—in this case by taking the scenario that imposes a tax on primary The choice of how tax revenues are used can metals and fossil fuels (metals and plastics - tax) have a significant impact on the outcomes which is recycled to households and creating an of material fiscal policies. While the above alternative scenario where this same tax is used to discussion shows that CE policies have some reduce labor taxes. The results indicate large and negative welfare effects, the scale of the effects positive labor market impacts—unemployment for is modest and there may be opportunities in the both skilled and unskilled workers now falls while implementation of CE policies to mitigate negative wages rise—while overall economy impacts turn impacts. One such mechanism is the way in which positive, with only a small rise in material demand. revenues raised through taxes are used. In all the Thus, shifting the tax burden from labor to materials modelled scenarios discussed in this chapter, has the potential to address both the market failures the default is that any revenues raised through induced by linearity and the market distortions tax policies are distributed back to households in generated by labor taxation, which contributes a lump sum. But in practice, governments have to higher relative use of materials and offshoring many choices in how they use revenues, which (leakage) of production. may be more or less efficient depending on the Chen et al. 2020; Zhu et al. 2018. 114 105 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition FIGURE 5.14: PERCENTAGE CHANGE IN UNEMPLOYMENT UNDER ALTERNATIVE REVENUE RECYCLING SCENARIOS Europe percentage point change in unemployment rate (2030) relative Europe % change in average real wage (2030) relative to to EGD-NDC scenario under alternative revenue recycling scenarios EGD-NDC scenario under alternative revenue recycling scenarios 0.30 2.00% 0.20 1.5% 0.20 0.16 1.50% 1.3% 0.10 1.00% 0.00 0.50% -0.10 0.00% -0.20 -0.50% -0.30 -0.8% -0.40 -1.00% -0.38 -1.0% -0.42 -0.50 -1.50% Skilled Unskilled Skilled Unskilled Metals & plastics-tax Metals & plastics-tax*labor Metals & plastics-tax Metals & plastics-tax*labor Source: World Bank. 5.8 Conclusions (as described in Chapter 3), designing policies (material taxes or regulatory measures) such that Current policy pathways are not sufficient lead firms take responsibility for primary material use to achieve significant reductions in primary and other externalities across the full value chain material use. Consumption of primary materials will be critical to remove the risk that materials are continues to grow even as European economies relocated to ‘linear production havens.’ Importantly, increasingly become services economies. Climate such a measure may also support LMICs to reorient mitigation measures taken under the EU Green Deal and upgrade production, since it will provide a will reduce CO2 emissions but have only a modest strong incentive for investing and diffusing CE impact on primary material use. technology and raising standards in LMICs. CE policies have the potential to deliver CE policies are likely to have small growth absolute material decoupling. Aggregate and moderately regressive labor market material use in the EU could decline up to 8–11 impacts, cushioned somewhat by progressive percent (relative to the baseline in 2030) under price impacts. Under a comprehensive set of CE alternative CE policies, allowing to achieve absolute policies, GDP is only around 1 percent below the decoupling. baseline in 2030; considering co-benefits of CE policies, growth impacts are likely to be positive. One size does not fit all: achieving CE Unemployment is expected to rise and wages objectives will require a comprehensive policy are expected to fall slightly, with unskilled workers mix that targets production and consumption. experiencing modest welfare loss. However, price Both fiscal and regulatory policies targeting changes induced by CE policies are likely to benefit production and consumption will be needed; the poorer households relative to richer ones, as prices nature and scope of policies will also need to vary of food, transport, and services fall while prices of depending on the specific material being targeted. manufactured goods rise. Trade leakage is a concern—CE policies Leveraging CE tax revenues to reduce should target consumption and reach across labor taxes can be both growth and welfare the value chain. Targeting consumption is enhancing. Taking the opportunity to use the particularly critical to address leakage, as the substantial revenues created by CE taxes and using results show substantial leakage from production- it to reduce labor taxes eliminates GDP losses and based policy measures but negative leakage from reverses negative labor effects, highlighting the consumption (demand)-based measures. Given that opportunity of using CE taxes to support growth most leakage takes place in downstream industries and welfare. 106 BACK TO CONTENTS Chapter 6 A policy framework for the circularity transition 107 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition This report has identified key constraints to Europe’s perception is of the lack of a competent authority progress in achieving material efficiency and leading the CE transition (Figure 7.1). circularity objectives. Several of these are inbuilt in the linear bias inherent in the current economic The opportunities and risks brought about by model and the policies supporting it. This chapter circularity, and the need for adequate levers highlights the major constraints that need to be to shift business models across sectors, addressed, which can be elaborated along four call for the close involvement of economic dimensions: institutions, incentives, information, and decision-making agencies. This trend is evident financing. in countries both inside and outside Europe, especially those with important trade flows with the continent, as future policy developments in 6.1 Institutions Europe have the potential to affect its commercial partners, particularly in key value chains. Türkiye’s Europe is championing the CE agenda globally, institutional setup for developing and implementing but progress will be determined by national- its CE policy sees a collaboration between the level leadership. The relative infancy of CE as a Ministry of Environment and the Ministry of Trade national-level agenda will require deliberate steps, with a view to anticipating threats and grasping new starting with the mandates and capacities of central competitiveness opportunities. government agencies. Because of the emphasis on environmental sustainability gains and the relative The policy mix necessary to achieve material importance of recycling at least in the early stages efficiency gains also calls for a frontline role of implementation, in most countries the CE agenda for economic decision-making agencies. The remains linked to the solid waste management need to deploy economic instruments, such as policy and operations. So far this has meant that material taxes and circularity subsidies, calls for an Ministries of Environment have been tasked with active role of Ministries of Economy and Finance. operationalizing the EU policy and normative In addition, Ministries of Finance typically have the framework as well as developing country-specific reach and mandate to foster closer collaboration policy. Increasingly, though, the multiple benefits across line ministries. The fiscal and economic promised by the circularity transition, together with impacts of such tools, as well as their necessary its complexity, have led to the recognition that other modulation to preserve competitiveness and agencies beyond Environment Ministries have an fairness outcomes during the CE transition, require active role to play. However, based on a survey of further coordination with agencies covering social key stakeholders in the EU-4 countries, the general protection and labor market remits. FIGURE 6.1: PERCEPTION ON A LEADING GROUP/BODY IN CHARGE OF THE CE TRANSITION 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% EU-27 21% 44% 16% 20% Bulgaria 11% 22% 44% 22% Croatia 9% 24% 16% 51% Poland 14% 63% 14% 9% Romania 11% 50% 21% 18% There is a clear body/working group who leads this process with sufficient capacity. There is a body/working group who leads this process, but with insufficient capacity to establish an ambitious circular economy vision and drive its implementation. There is no existing body/working group that provides leadership for the circular transition. I don't know. Source: World Bank. 108 BACK TO CONTENTS A POLICY FRAMEWORK FOR THE CIRCULARITY TRANSITION A range of institutional tools can support a Governments can foster the formation ‘whole-of-government’ approach to the CE and strengthening of collaborative CE transition. The creation of coordination platforms communities, hubs, and networks within and or advisory bodies to steer the CE transition across economic sectors, value chains, and provides one of the most common approaches. A regions. Such mechanisms can help increase the lead agency such as a Ministry of Environment/ knowledge base and foster sharing experiences Commerce, or, at times, a higher-level body such on CE policies, innovations, and business as the Cabinet of the Prime Minister or the Ministry models (Figure 6.2). The EU-4 countries are still of Economy and Finance, is tasked to foster characterized by a fragmentation of actors (national/ collaboration across ministries. An alternative path local) as well as weak capacity. Croatia has recently pursued by some countries (for example, Italy) created a Circular Economy Committee (CEC) is to set up Ministries for Ecological Transition, comprising technical representatives of relevant with a mandate covering coordination across ministries as well as businesses, academia, and environmental, economic, energy, or demographic civil society. The Strategic Research and Innovation policy areas. For example, Croatia has created its Partnership (SRIP) in Slovenia, which was founded Ministry of Economy and Sustainable Development, by the Chamber of Commerce and Industry of which takes a lead on the circularity agenda. Štajerska, the National Institute of Chemistry and the Faculty of Chemistry and Chemical Technology Cross-sectoral ownership tends to increase of the University of Maribor brings together the the visibility of the CE agenda among business central government, private sector, academia, and stakeholders and consumers and helps research organizations. While fostering greater support greater policy coherence. National collaboration and coherence, such partnerships/ CE legislation is emerging in all EU countries, platforms can also promote technological innovation but its scope tends to remain heavily focused on and serve as a conduit of global best practices waste management concerns. Mainstreaming for the public and private sectors. The European CE principles across sectors can ensure mutually Circular Economy Stakeholder Platform is an reinforcing policies across different levels of example of a cross-country community of practice government and reduce regulatory conflict through structured through in-country networks. broadly owned revisions of existing and planned policies and legislation. FIGURE 6.2: ACTORS AND ROLES IN THE CE NETWORK Barriers Research and Technology Government and Enablers Educational Institutions, Development Consultancies CE NETWORK GOVERNANCE Business and Market Consumer Government, Business, Government Creation Behavior Media, CSOs Source: Adapted from Cramer 2020. 109 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition While national governments can create leeway can be reduced. In countries such as the nationwide enabling conditions, cities are the Netherlands, for instance, cities are not allowed incubators for solutions and innovation. Cities to set local requirements for construction and are centers of resource consumption and incur demolition that exceed the national Construction significant expenses to manage the externalities. Act.116 About 75 percent of the world’s natural resources, 78 percent of world energy, 60–75 percent of the Despite these barriers, European cities are world’s GHG emissions, and 50 percent of the increasingly turning to circularity as a key world’s waste are generated in cities. At the same principle of their development strategies. time, because of their remits, city governments Amsterdam, Brussels, and Paris are the leading incur many of the costs induced by economywide examples of a number of cities developing citywide linearities—solid waste management, structural circular economy plans and strategies, developing waste such as underutilized buildings, and ad hoc metrics and facilitating collaboration among congestion and pollution all fall within cities agencies and private stakeholders, and empowering mandates. Managing waste costs on average local communities. 20 percent of municipal budgets in low-income Ambitious CE strategies and action plans can countries, 10 percent in middle-income countries, catalyze private investments. Ensuring alignment and 4 percent in high-income countries.115 with the EU’s CEAP requires strategic and planning However, cities also have the means to efforts based on country-specific circumstances. support the CE transition. They have inherent Participative process and careful analysis can advantages such as density and proximity of elicit competitive advantages and impacts of producers and consumers and access to resources policy options (Figure 6.3). Building blocks include such as capital, technology, and skills, which can (a) material flow analyses; (b) identification and pave the way for innovative business models. City prioritization of key materials, products, sectors, governments have key financial tools to facilitate the and value chains; (c) assessment of co-benefits transition to CEs, for example, (a) taxing power on with climate, pollution, and nature protection goals; critical segments of product life, starting from waste; (d) stakeholder mapping and consultations; (e) (b) financial incentives (subsidies and so on) to local action planning; (f) funding for implementation; and businesses to support repair and reuse shops and (g) monitoring and evaluation (M&E). Feedback other CE-related initiatives; (c) construction permits gathered from public and private stakeholders, disincentivizing virgin materials and promoting however, shows that governments still have some recycling by mandating the amount of secondary way to go. Among the EU-4 countries only Poland materials required in construction projects; (d) has a CE roadmap that was published in 2019 and land planning through zoning and permits, which focuses on prioritized thematic areas. is critical to keep cities dense and prevent sprawl Policy coherence for circularity needs to and additional soil sealing; and (e) demolition and include the trade dimension of the transition. renovation permits which regulate deconstruction The possibility of leakage of material-intensive and how CDW is handled. production toward linear production havens Nonetheless, cities need to overcome a following an increasingly stringent CE policy number of important barriers to pursue environment in the EU calls for trade policy circularity, some common to national-level instruments to play a key role in addressing both governments and other specific to cities sustainability and competitiveness concerns. themselves. Barriers that cities face can be International trade policy can be leveraged to summarized as lack of awareness, lack of technical support domestic measures aimed at transforming capacity, lack of coherent strategies, funding production and consumption patterns. The EU constraints, and regulation. Without an enabling can leverage GVCs to disseminate technology environment across governance levels, cities’ and achieve material efficiency gains in production Ellen MacArthur Foundation 2020; World Bank 2018. 115 Jonker and Navarro 2017; OECD 2020. 116 110 BACK TO CONTENTS A POLICY FRAMEWORK FOR THE CIRCULARITY TRANSITION FIGURE 6.3: STAKEHOLDERS’ PERCEPTIONS OF LEVEL OF DEVELOPMENTS OF STRATEGIC AND PLANNING MEASURES Do a national CE Strategy and an Action Plan adequately support the transition in your country? 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% EU-27 16% 39% 29% 16% Bulgaria 11% 78% 11% Croatia 7% 24% 34% 34% Poland 9% 51% 31% 9% Romania 29% 67% 5% There is a clear Strategy and Action Plan for the implementation of a circular economy transition. There is a clear Strategy but an Action Plan that guides its practical implementation is missing. There is neither a clear Strategy nor an Action Plan to implement it. I don't know. Source: World Bank. processes located outside Europe on a global scale are still largely aligned with the linear economy while limiting risks of leakage. Given that most models and hence get in the way of using leakage takes place in downstream industries (as secondary raw materials. discussed in Chapter 3), designing policies (material taxes or regulatory measures) such that lead firms Regulation can push circularity at three take responsibility for primary material use and other levels: product, company, and procurement. externalities across the full value chain will be critical The product level is about setting standards to remove the risk that materials are relocated to so that products can be recirculated after their ‘linear production havens.’ This calls for a growing useful life, and ‘planned obsolescence’ does not relevance of CE considerations within trade get in the way’.117 So, the proposed Eco-design agreements. for Sustainable Products Regulation that allows benchmarking for circular aspects of product performance, including durability, reparability, 6.2 Incentives recyclability, minimum recycled content, and hazardous substances content, will be key. At the Stronger market-based incentives supporting company level, the EU taxonomy and the adoption the transition toward circularity are required to of corporate sustainability reporting standards can make circular products more competitive. Most lead to CE becoming an integral part of business, importantly, due to current taxation patterns, virgin whereby companies are nudged to be transparent raw materials are often cheaper than secondary about their circular activities. Private and public ones, weakening incentives to engage in business procurement can then focus on products and transformation. For example, recycled plastics are services that are actively supporting circularity and more expensive than conventional virgin plastics as hence help scale solutions led by companies that the cost structure of recycled plastics production is are built around the concept of circularity. different from that of virgin production. Government support and subsidies for hydrocarbon inputs to Additional regulatory instruments that could plastics production undermine the competitiveness be instrumental in pushing circularity include of recycled materials. Other than pricing, regulations the right to repair, recycled content mandates, The concerns with planned obsolescence are as follows: design features that do not allow for repair and refurbishment, the 117 unavailability of spare parts and high repair costs, and marketing strategies pushing consumers to buy new products and replace existing one quickly. 111 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition product labeling, and extended producer environmentally damaging products remain price responsibility schemes. The right to repair is competitive. Economic instruments, starting from not a well-developed instrument, since repair, taxation, can complement the role of regulation remanufacturing, and refurbishment of products by closing the gap between linear pricing and the are still not the norm. However, it is a powerful ‘true pricing’ of products, thus serving to increase instrument to advance in the CE transition that demand and supply of circular solutions. Some countries need to make further efforts to advance. countries are already leading the way. For example, There is a need to document and disseminate the while China put in place a ban on importing plastics economic and social benefits from the adoption of waste, it also reduced VAT on recycled plastics, the right to repair, given its relative competitiveness, thus encouraging its use. In the EU, however, VAT since the right to repair is a labor-intensive process regimes still tend to favor linear business models, for which a market could develop in most countries thereby discouraging the emergence of CBMs and bring substantial employment and growth. based on rent, repair, refurbish, and repurpose EPR is already showing promising results in EU activities. MSs, although with differing levels of success. However, its use is limited to certain sectors such Shifting the fiscal burden from labor to as electronics, tires, and packaging. It is important materials and pollution is a powerful to assess the options to expand EPR to cover mechanism to support the CE transition. additional sectors to reduce waste. Additional effort This requires reducing the tax on labor while could be made to use EPR to spur innovation. For increasing it on polluting activities. The challenge example, introducing eco-differentiation of the fee in of an immediate backlash from industries and from the EPR schemes instead of focusing on the cost of countries concerned about competitiveness can management of waste as the basis for the fee could be addressed by gradual implementation and clear induce eco-innovation and lead to waste avoidance. signals of the direction of travel and medium-term Additional regulatory instruments in the EU include targets. The opportunities arising from recycling recycled content mandates, green procurement, revenues from the pollution taxes to decrease the product labeling, and sanctions against polluters. cost of labor will not only support material efficiency However, implementation across EU-4 remains but also stimulate growth. uneven (Figure 6.3).118 Public procurement has a significant Strong economic and fiscal incentives are potential to accelerate the transition to a CE. needed to promote circular markets. In the Representing about €1.8 trillion each year, public present linear economy model, externalities are not procurement accounts for about 14 percent of the included in cost-benefit analysis, which means that EU’s GDP. Given its sheer size, public procurement FIGURE 6.4: PERCEPTION OF THE DEVELOPMENT OF POLICY/REGULATORY INSTRUMENTS FOR PROMOTING CE ES 11: Stakeholders’ perceptions of level of development of CE regulatory instruments (score 0 - 5) 2.00 1.50 1.00 0.50 0.00 Product labeling Recycled content Green public Extended Right to repair Sanctions such as mandates procurement Producer The Polluter pays Responsibility . EU-27 Bulgaria Croatia Poland Romania Source: World Bank. Normalized data in which the best performer gets the highest score, and the lowest performer gets the lowest score. 118 112 BACK TO CONTENTS A POLICY FRAMEWORK FOR THE CIRCULARITY TRANSITION has the power to shape markets and create new goods and services. Unless full cost accounting and ones by stimulating demand for circular goods and LCC are considered and communicated, Budget services. However, traditional valuation approaches Departments and other government agencies are used in public procurement perpetuate a linear bias. unlikely to agree to procurement activities promising The 2017 EC guidelines on circular procurement unclear long-term benefits but higher up-front costs. call for “a framework for the holistic consideration of Lastly, CPP benefits need to be communicated to environmental impacts and waste creation across legislators, as public procurement legal frameworks the whole life-cycle of goods and services.” The do not yet include principles of circularity or green EGD calls for public authorities to ensure that their procurement. procurement is green. However, circular public procurement (CPP) remains a voluntary instrument However, given the political will, procurement and has yet to become common practice across agencies can stimulate the market for CPP the EU public authorities on all levels.119 by overcoming the informational barriers constraining its rollout. Current market readiness Full cost accounting is central to CPP levels do not prevent procurement agencies from implementation, and some EU MSs are introducing nonbinding circularity requirements in spearheading pilot projects to test its viability tendering scoring systems, with a view to creating and acceptability. Life-cycle costing (LCC) market expectations of their mandatory nature in the considers ‘true pricing’ related to environmental longer term. Provided the government is supportive, externalities, as long as they can be monetized procurement agencies can encourage policy and monitored, as well as internal costs related coordination among central and local government to research, development, production, transport, authorities, leading to legal/regulatory frameworks use, maintenance, and end-of-life disposal. 120 The codifying the rationale for government function Dutch government has launched pilot projects (Annex 4). such as the N33 highway renovation applying a circular procurement process, among others, aimed at using renewable input resources. Other 6.3 Information European experiences are following suit (for Informational barriers at different levels example, Denmark, Sweden, and Latvia). These constrain the CE transition. At the public and other early adopters underline the importance sector level, a CE strategy with concrete targets of (a) preexisting market conditions that allow for and headline indicators is important to set the greater recycling; (b) close collaboration between pathway and manage expectations regarding the stakeholders, both inside the government and transition.122 However, this requires clarity on priority outside; (c) a good understanding of the concept measures to promote the circularity agenda, which of circular procurement; (d) sufficient fiscal space to decision-makers often lack. Within the private bear initially higher up-front costs; and (e) political sector, while large companies often have the will.121 capacities to initiate the shift to CBMs, SMEs lack However, the adoption of circular procurement the resources to do so. Working through business remains incipient in several EU MSs, as its associations and other private sector platforms widespread uptake faces numerous barriers. is one way to conduct the necessary outreach. In the short term, procurement agencies are Furthermore, awareness raising at the level of both constrained in launching tenders with circularity- internal organizations and external stakeholders oriented criteria by what the market can actually (including the value chain network) is crucial, and offer, given the still limited uptake of CBMs within they can advise on and improve the economic the private sector. And yet, CPP’s promise is viability and bankability of projects and visualize precisely to encourage and guide innovation in the collaborative arrangements within the supply chain. private sector by signaling demand for circularity 119 EC, n.d.-d, n.d.-e. 120 Circular Flanders, n.d. 121 Alhola and Salmenperä 2019; SZREDA 2020. 122 Behrens 2018. 113 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition Influencing the demand side through greater material assets. Finally, given that standard material information and awareness of consumers flow indicators tend to have long material cycles, is the ultimate lever in supporting the CE standard metrics of circularity policy implementation transition. Eco-design standards and labels for would allow for more regular and just-in-time products and services can provide transparent feedback to decision-makers and citizens on and easily accessible information for consumers progress. to exercise their preferences and send a message to the market. However, this presupposes levels Setting up measurable targets for circularity of awareness among consumers that are not yet can be an important driver for the CE transition present. Consumer demand can be more readily when complemented with appropriate affected by linking circularity to issues that affect indicators. Target setting in the EU has so far them directly, such as pollution and environmental focused on waste management. An advantage health, or are part of an ongoing transition, such of waste targets is that they are often easier to as that related to energy and climate mitigation.123 enforce than targets based on resource use or Similarly, increased cooperation by firms requires the raw material used. The disadvantage is that a information about circular aspects of products general waste target can lump all kinds of waste exchanged in business-to-business and business- together irrespective of their environmental impacts. to-consumer transactions through product Far fewer countries have targets on resource information requirements (for example, product productivity, which is usually expressed as GDP passports) or publicly accessible databases. over DMC. Even less in use are targets related to the supply of raw materials, though there are Transparency can increase accountability widespread concerns about reliance on resource among public and private stakeholders imports and security of supply. The Netherlands and involved in the transition. To support trade and Belgium are exceptions in the EU in that they both aid aspects of the global CE agenda, information have absolute resource reduction targets. on embodied materials in imports and their environmental effects should be transparently CE policies require a better understanding available, for example, through standards and of the firm-level features which can enable labeling. A system of accountability could be set or constrain the private sector’s capacity to up where the comparative strength of civil society engage in and drive the transition. Firm size, organizations (CSOs) in playing a watchdog role age, export orientation, ownership structure, and can be tapped to create a stronger accountability managerial practices are all likely to influence mechanism. companies’ capacity to develop CBMs. But a better grasp of firm-level constraints is needed for policies Efforts to develop CE metrics should be to provide adequate and targeted support to firms. geared to support transition policies. The EU tracks key indicators gathered by its MSs such as More granular indicators can support the waste collection, recycling rates, and the usage of development of CE targets. Materials differ in secondary materials. But while these indicators their environmental impacts, availability, scarcity, provide a good macro-level overview, their level and origin. Hence, it is important to further detail CE of aggregation may limit their application by policy targets through more granular indicators to ensure makers and companies (Annex 4, Focus Section that the target is met foremost through reductions B). Better materials and sector resolution can in raw materials that are scarce, whose supply is allow for measures targeting value chains and considered critical, and/or that are considered high material streams. Considering both stocks and impact from an environmental or social perspective. flows of materials would provide a fuller picture This could be complemented with indicators to of countries’ different dematerialization pathways strengthen the existing macroeconomic indicators and help improve the management of existing adopted at the national level, to measure, monitor, and benchmark the CE performance also at the The successful phaseout of lead from gasoline is an example of consumer demand driven by pollution and environmental health 123 concerns, while the shift away from compact fluorescent lamps is a good example of the global transition in energy and climate mitigation. 114 BACK TO CONTENTS A POLICY FRAMEWORK FOR THE CIRCULARITY TRANSITION FIGURE 6.5: PERCEPTIONS ABOUT THE EXISTENCE OF AN M&E SYSTEM FOR CE EU-27 avg. 31% 32% 37% Bulgaria 75% 13% Croatia 28% 25% 48% Poland 30% 36% 33% Romania 35% 41% 24% 0 20 40 60 80 100 Yes, there is monitoring system that measures one or more areas proposed by the EU in my country. No, there is not a monitoring or evaluation in my country that measures the areas proposed by the EU. I don't know. Source: World Bank. regional, local, sector, and corporate levels. Once The EU is providing several funding programs developed, these indicators can be used for M&E to support the transition to a CE, but the of CE, which is essential for tracking progress challenge is taking them to scale. Traditional and achieving targets. Currently, there is a lack of EU programs include the European Structural and knowledge about the level of M&E systems that Investment Funds, Horizon 2020, and the LIFE are in place and their performance across the EU-4 program. In addition, the European Investment countries (Figure 6.5). Bank (EIB) is providing finance and advice for CE projects through the European Fund for Strategic Investments and the ‘EU Finance for Innovators’ 6.4 Financing (InnovFin) Program. The Recovery and Resilience While recent growth in CE financing is Facility (RRF) provides the opportunity for financing promising, far more capital and activity are material efficiency investments. Overall, there needed to scale the CE and fully seize its seems to be no lack of (EU) finance, but absorption opportunity. Since the beginning of 2020, assets of funds is a problem, especially in the EU-4. The managed through public equity funds with the challenge of scaling needs to be overcome through CE as the sole or partial investment focus have connecting CE projects with commercial financing, increased sixfold, from US$0.3 billion to over US$2 given that these projects require co-financing of billion. Risk perceptions affecting the promoters of about three to four times grant amounts. CE projects are driven by traditional financial and Some of the larger commercial banks are accounting approaches that are not adapted to stepping up to the challenge. The Dutch Bank CBMs as well as by the institutional, informational, ING has moved into the space of financing circular and pricing barriers that perpetuate linear biases.124 deals and investments. ING regularly hosts Circular There is a key role for governments, central banks, Economy Business Simulation games, as a start of and financial regulators in aiding this transition. its journey with clients as well as with employees While governments can directly invest in circular and cities. They help clients develop circular activities and use regulation and fiscal incentives propositions and create valid business cases for to drive capital toward circular businesses, central circular propositions, focusing on a proper risk banks and financial regulators can integrate linear reward distribution among all parties involved. risks in their risk assessment and modeling. Together with Accenture and Circle Economy, ING Deployment of guarantee instruments and blended has set up a ‘circular supply chain accelerator’ finance solutions can catalyze commercial capital (CiSCA) to help large multinationals and their small toward CBM start-ups. and medium-size suppliers shift to CBMs. They have also introduced Circular Economy Finance Ellen MacArthur Foundation 2021. 124 115 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition Guidelines together with two other Dutch banks, successful without the simultaneous development of ABM AMRO and Rabobank. a comprehensive and consistent policy framework supporting circular and disincentivizing linear Financing the CE will not take off in the activities. Finance requires more than a green tag, absence of the reform of those policies that needing a business case at an acceptable risk level. continue to bias toward a linear model. The If policies and incentives continue to discriminate EU financing framework for the CE is evolving, against circularity, finance may well foster the addressing both public and private sectors. A emergence of niche markets and products, but potential game changer is the inclusion of the these will be inadequate to decouple welfare CE in the EU taxonomy for sustainable activities, creation from material consumption. which could substantially ease access to finance for CBMs. However, these efforts will not be TABLE 6.1: AN ‘INSTITUTIONS, INCENTIVES, INFORMATION, AND FINANCING’ POLICY PACKAGE FOR THE CIRCULAR TRANSITION Institutions Incentives Information Finance Capacities • CE policy Fiscal • Introduce tax breaks/ Knowledge • Invest in material Direct public • Innovation leadership reductions (VAT) for efficiency R&D support grants -broaden CE CBMs • Support • Debt financing mandates • Introduce subsidies circular skills and ensure • Circular to secondary development horizontal procurement materials and cross-agency • Raise consumer standards remove subsidies to coordination awareness material production • Step up and consumption • Introduce technical material labelling • Increase/introduce expertise and passports taxes on materials within line production, Collaboration • Data and Public-private • Concessional and central consumption, and infrastructure information initiatives credit schemes ministries disposal exchange • Enhance • Revision of • Implement a labor- programs vertical accounting to-material tax shift • Matchmaking standards coordination and empower and participation • Material cities platforms efficiency Policy • Introduce CE Economic • Tradable permits • Circularity hubs targets in coherence objectives instruments public-private • EPR instruments • Eco-industrial in the trade partnerships parks (EIPs) and industrial (PPPs). policy Regulations • Prohibitory/ Metrics and • Sector and mandatory provisions targets material • Resolve disaggregation regulatory • Performance plus stocks and conflicts standards flows metrics • Consider • Spatial planning • Policy trade-offs of implementation • Environmental transition and indicators permits supporting policies, such • Material as tax shifts efficiency and decoupling targets 116 BACK TO CONTENTS A POLICY FRAMEWORK FOR THE CIRCULARITY TRANSITION Institutions, incentives, information, and impact. Information asymmetries can be remedied financing are the pillars of the policy packages by improving metrics and ensuring their effective to enable and support the circular transition. communication. Improved metrics can then enable National public institutions need to have the the production of targets supporting monitoring and capacity and institutional framework to ensure policy reporting on progress. The removal of linear biases coherence across sectors to drive the CE agenda will unlock private sector financing and ensure that using a ‘whole-of-government’ approach. Fiscal scarce public resources are leveraged to support measures can be powerful tools, but they need the scale, depth, and speed of adoption of business to be coupled with smart regulations for greater models supporting the transition. 117 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition References Adams, K. T., M. Osmani, T. Thorpe, and J. 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Rattray. 2018. “Revenue Recycling and Cost Effective GHG Abatement: An Exploratory Analysis Using a Global Multi-Sector Multi-Region CGE Model.” Climate Change Economics 9 (1): 1840009. 127 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition Annexes 128 BACK TO CONTENTS ANNEXES ANNEX 1: SECTORAL SPLITS IN GTAP-CE DATABASE No. New sector New sector description Original sector Original sector description code 1 nmn Non-metallic minerals mining oxt Other extraction 2 mio Mining of iron ores 3 mao Mining of aluminum ores 4 mco Mining of copper ores 5 moo Mining of other ores 6 rbr Rubber products rpp Rubber and plastic products 7 plp Plastic products - primary 8 pls Plastic products - secondary 9 plr Recycling - plastics 10 isp Iron and steel - primary i_s Ferrous metals 11 iss Iron and steel - secondary 12 ris Recycling - iron and steel 13 isc Iron and steel casting 14 app Aluminum - primary nfm Non-ferrous metals 15 aps Aluminum - secondary 16 ral Recycling - aluminum 17 cpp Copper - primary 18 cps Copper - secondary 19 rcp Recycling - copper 20 mpp Other metals - primary 21 mps Other metals - secondary 22 rom Recycling - other metals 23 nfc Non-ferrous metals casting 129 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition ANNEX 2: REGIONAL AND SECTORAL COVERAGE OF THE ENVISAGE MODEL USED IN THIS STUDY Regional concordance No. Countries/regions represented in Disaggregated GTAP countries/regions this study 1 United States (USA) United States of America (USA) 2 China (CHN) China (CHN) 3 Russian Federation (RUS) Russian Federation (RUS) 4 Poland (POL) Poland (POL) 5 Romania (ROU) Romania (ROU) 6 Bulgaria (BGR) Bulgaria (BGR) 7 Croatia (HRV) Croatia (HRV) 8 Türkiye (TUR) Türkiye (TUR) 9 EU-16+EFTA+Great Britain (X16) Austria (AUT), Belgium (BEL), Cyprus (CYP), Denmark (DNK), Finland (FIN), France (FRA), Germany (DEU), Greece (GRC), Ireland (IRL), Italy (ITA), Luxembourg (LUX), Malta (MLT), Netherlands (NLD), Portugal (PRT), Spain (ESP), Sweden (SWE), United Kingdom (GBR), Switzerland (CHE), Norway (NOR), Rest of EFTA (XEF) 10 Rest of EU transition economies (EU7) Czech Republic (CZE), Estonia (EST), Hungary (HUN), Latvia (LVA), Lithuania (LTU), Slovakia (SVK), Slovenia (SVN) 11 Other OECD (XOE) Australia (AUS), New Zealand (NZL), Canada (CAN), Israel (ISR), Rest of the World (XTW) 12 Europe and Central Asia (ECA) without Albania (ALB), Belarus (BLR), Ukraine (UKR), Rest of Eastern Europe (XEE), Rest Russia (ECA) of Europe (XER), Kazakhstan (KAZ), Kyrgyz Republic (KGZ), Tajikistan (TJK), Rest of Former Soviet Union (XSU), Armenia (ARM), Azerbaijan (AZE), Georgia (GEO) 13 High income Asia (HYA) Hong Kong SAR, China (HKG); Japan (JPN); Republic of Korea (KOR); Taiwan, China (TWN); Singapore (SGP) 14 Low-income Asia and the Americas Rest of Oceania (XOC), Cambodia (KHM), Lao PDR (LAO), Rest of Southeast Asia (LAP) (XSE), Bangladesh (BGD), Nepal (NPL), Rest of South Asia (XSA), Rest of South America (XSM), Dominican Republic (DOM), Jamaica (JAM), Puerto Rico (PRI), Trinidad and Tobago (TTO), Rest of Caribbean (XCB) 15 Rest of East Asia and Pacific (XEA) Mongolia (MNG), Rest of East Asia (XEA), Brunei Darussalam (BRN), Indonesia (IDN), Malaysia (MYS), Philippines (PHL), Thailand (THA), Vietnam (VNM) 16 Rest of South Asia (XSA) India (IND), Pakistan (PAK), Sri Lanka (LKA) 17 Middle East and North Africa (MNA) Bahrain (BHR), Iran (IRN), Jordan (JOR), Kuwait (KWT), Oman (OMN), Qatar (QAT), Saudi Arabia (SAU), United Arab Emirates (ARE), Rest of Western Asia (XWS), Egypt (EGY), Morocco (MAR), Tunisia (TUN), Rest of North Africa (XNF) 18 Rest of Latin America and Caribbean Mexico (MEX), Rest of North America (XNA), Argentina (ARG), Bolivia (BOL), Brazil (XLC) (BRA), Chile (CHL), Colombia (COL), Ecuador (ECU), Paraguay (PRY), Peru (PER), Uruguay (URY), Venezuela (VEN), Costa Rica (CRI), Guatemala (GTM), Honduras (HND), Nicaragua (NIC), Panama (PAN), El Salvador (SLV), Rest of Central America (XCA) 130 BACK TO CONTENTS ANNEXES No. Countries/regions represented in Disaggregated GTAP countries/regions this study 19 Low-income Sub-Saharan Africa (LAF) Benin (BEN), Burkina Faso (BFA), Guinea (GIN), Senegal (SEN), Togo (TGO), Rest of Western Africa (XWF), Central Africa (XCF), South-Central Africa (XAC), Ethiopia (ETH), Madagascar (MDG), Malawi (MWI), Mauritius (MUS), Mozambique (MOZ), Rwanda (RWA), Tanzania (TZA), Uganda (UGA), Zambia (ZMB), Rest of Eastern Africa (XEC), Rest of South African Customs Union (XSC) 20 Rest of Sub-Saharan Africa (XAF) Cameroon (CMR), Côte d’Ivoire (CIV), Ghana (GHA), Nigeria (NGA), Kenya (KEN), Zimbabwe (ZWE), Botswana (BWA), Namibia (NAM), South Africa (ZAF) Sectoral/activity concordance No. Activities represented in this study Disaggregated GTAP-CE activities 1 Agriculture (AGR) Paddy rice (PDR), Wheat (WHT), Cereal grains nec (GRO), Vegetables, fruit, nuts (V_F), Oil seeds (OSD), Sugarcane, sugar beet (C_B), Plant-based fibers (PFB), Crops nec (OCR), Bovine cattle, sheep and goats, horses (CTL), Animal products nec (OAP), Raw milk (RMK), Wool, silkworm cocoons (WOL), Forestry (FRS), Fishing (FSH), Processed rice (PCR), Sugar (SGR) 2 Non-metallic minerals (NMN) Extraction of non-metallic minerals (NMN) 3 Mining of metal ores (MMO) Mining of iron ores (MOI), Mining of aluminum (bauxite) ores (MAO), Mining of copper ores (MCO), Mining of other metal ores (MOO) 4 Coal (COA) Coal (COA) 5 Oil (OIL) Oil (OIL) 6 Gas (GAS) Gas (GAS), Gas manufacture, distribution (GDT) 7 Processed food (PFD) Bovine meat products (CMT), Meat products nec (OMT), Vegetable oils and fats (VOL), Dairy products (MIL), Food products nec (OFD), Beverages and tobacco products (B_T) 8 Wood and paper products (WDP) Paper products, publishing (PPP) 9 Refined oil (P_C) Petroleum, coal products (P_C) 10 Chemical products (CHM) Chemical products (CHM), Basic pharmaceutical products (BPH), Rubber products (RBR) 11 Plastic primary (PLP) Plastic primary (PLP) 12 Plastic secondary (PLS) Plastic secondary (PLS) 13 Plastic recycling (PLR) Plastic recycling (PLR) 14 Non-metallic minerals (NMM) Non-metallic minerals (NMM) 15 Iron and steel - primary (ISP) Iron and steel - primary (ISP) 16 Iron and steel - secondary (ISS) Iron and steel - secondary (ISS) 17 Recycling - iron and steel (RIS) Recycling - iron and steel (RIS) 18 Aluminum - primary (APP) Aluminum - primary (APP) 19 Aluminum - secondary (APS) Aluminum - secondary (APS) 20 Recycling - aluminum (RAL) Recycling - aluminum (RAL) 21 Copper - primary (CPP) Copper - primary (CPP) 22 Copper - secondary (CPS) Copper - secondary (CPS) 23 Recycling - copper (RCP) Recycling - copper (RCP) 131 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition No. Activities represented in this study Disaggregated GTAP-CE activities 24 Other metals - primary (MPP) Other metals - primary (MPP) 25 Other metals - secondary (MPS) Other metals - secondary (MPS) 26 Recycling other metals (ROM) Recycling other metals (ROM) 27 Metals casting (MEC) Metals casting (MEC) 28 Other manufacturing (XMF) Textiles (TEX), Wearing apparel (WAP), Leather products (LEA), Wood products (LUM), Metal products (FMP), Computer, electronic and optical products (ELE), Electrical equipment (EEQ), Machinery and equipment nec (OME), Motor vehicles and parts (MVH), Transport equipment nec (OTN), Manufactures nec (OMF) 29 Electricity transmission and Electricity transmission and distribution (TnD) distribution (ETD) 30 Nuclear power (NUC) Nuclear power (NuclearBL) 31 Coal power (CLP) Coal power baseload (CoalBL) 32 Gas and oil power (GOP) Gas power baseload (GasBL), Gas power peakload (GasP), Oil power baseload (OilBL), Oil power peakload (OilP) 33 Wind power (WND) Wind power (WindBL) 34 Hydro power (HYD) Hydro power baseload (HydroBL), Hydro power peakload (HydroP) 35 Other power (XEL) Other baseload (OtherBL) 36 Solar power (SOL) Solar power (SolarP) 37 Construction (CNS) Construction (CNS) 38 Trade including warehousing (TRD) Trade (TRD), Accommodation, Food and service activities (AFS), Warehousing and support activities (WHS) 39 Other transport (XTP) Transport nec (OTP) 40 Water transport (WTP) Water transport (WTP) 41 Air transport (ATP) Air transport (ATP) 42 Other services (XSV) Water (WTR), Communication (CMN), Financial services nec (OFI), Insurance (formerly isr) (INS), Real estate activities (RSA), Business services nec (OBS), Recreational and other services (ROS), Public Administration and defense (OSG), Education (EDU), Human health and social work activities (HHT), Dwellings (DWE) 132 BACK TO CONTENTS ANNEXES ANNEX 3: OPPORTUNITIES AND CHALLENGES ACROSS SECTORS The transition to a CE requires a system-wide landfilled—the most unsustainable form of waste effort affecting all economics sectors. Part of management. However, the situation differs the complexity involved has to do with prioritization. significantly across MSs with recycling rates as This annex focuses on six sectors central to the low as 21 percent in countries such as Bulgaria European circularity agenda. It makes the case and Finland (see Figure A3.1). Low recycling rates for the criticality of these sectors, including their cause significant losses for the economy and the relevance for the climate and broader sustainability environment. For example, it is estimated that 95 implications while at the same time highlighting percent of the value of plastic packaging material is sector-specific challenges and solutions, some lost to the economy after a short first-use cycle. And of which have a bearing beyond specific sectors recycling plastics can reduce GHG emissions by themselves. The sectors selected include plastics, 76–93 percent (depending on the plastic resin type) critical raw materials (CRMs), water, transport, compared to the production of the same quantity construction, and agriculture. from fossil feedstock.126 Economic considerations and technological A3.1 Circular Plastics: Synchronizing limitations constitute key barriers to Upstream with the Downstream Stages more circularity in the plastics sector, but of the Plastics Value Chain consumers are increasingly demanding more sustainable products. Recycled feedstock is often Plastics are under increasing scrutiny due not economically competitive with virgin feedstocks to their growing presence in marine and at the local level. For example, stakeholders in terrestrial environments. The plastics value Romania indicated that the cost for recycled sector is a prominent contributor to the EU material locally was 30 percent higher than virgin economy: with a turnover of €350 billion in 2019, material. This is thought to be because local it supports over 1.56 million jobs across 55,000 markets are typically unable to satisfy the demand companies. Total EU consumption amounted to of local manufacturers due to limited availability and almost 51 million tons in 2019, with key sectors quality of feedstock. In addition, price volatility for of demand including packaging (40 percent), recycled raw materials is an issue, often due to local buildings and construction (20 percent), and supply issues, costs for reprocessing materials, automotive (9.6 percent). The sector faces growing and international market developments. On the environmental concerns, not only due to its technical side, key barriers are the difficulties (and continuing dependence on oil and gas extraction costs) associated with separating mixed and often and transformation as well as their associated contaminated plastics into polymer-specific fractions GHG emissions but also because of the increasing ready for recycling. This problem is worsened presence of (micro) plastics parts in marine and by products made of composite materials. On a terrestrial environments—plastics today account for positive note, consumer awareness of packaging approximately 80–85 percent of marine litter in the waste leakage is increasing, leading to growing EU.125 demand for improved use and collection and management of plastics waste. Plastics recycling remains generally low across the EU, causing significant economic While national governments tend to focus on and environmental damage. Only about one- the downstream of the plastics value chain, third of the 29.1 million tons of plastics collected circularity is often determined at the upstream across the EU in 2018 was recycled (both within stage. In each of the four MSs considered in and outside the EU). A large part of plastics waste this study, stakeholders have identified that the continues to be burnt for energy recovery (42.6 upstream sector is a weak point in the plastics percent), while about one-quarter of waste is EC 2019b; Plastics Europe 2021. 125 Ellen MacArthur Foundation 2016a; Own calculations based on Deloitte 2015; Plastics Europe 2021. 126 133 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition FIGURE A3.1: RATES OF POST-CONSUMER PLASTIC WASTE RECYCLING, ENERGY RECOVERY, AND LANDFILL PER COUNTRY IN 2018 Malta Greece Cyprus Bulgaria Croatia Latvia Romania Hungary Slovakia Poland Czech Republic Lithuania Spain Portugal Italy France Slovenia United kingdom Ireland Estonia Norway Denmark Belgium Finland Sweden Luxembourg Germany Netherlands Austria Switzerland 0 10 20 30 40 50 60 70 80 90 100 Recycling Energy Recovery Landfill Source: Plastics Europe 2021. value chain. Across MSs, the primary focus on innovations in materials, feedstocks, and ensuring high rates of plastic waste collection has product design. The high diversity of post- been accompanied by a narrow preference for consumer plastic types can pose challenges to landfilling or, at most, incinerating materials. This conventional plastic recycling. Other issues include has disregarded the significant potential to increase ‘small format’ processing (for example, tear-off lids), the capture and availability of clean recycled composite packaging (for example, sandwich box material for local industry at the downstream end. windows), and infrequently used resins which can At the same time, the circularity potential of the be difficult to sort and subsequently contaminate plastic value chain is mainly determined upstream. more common recyclates. Different grades of the Unless product designers choose properties and same plastic within a product can also negatively materials to align them with downstream recycling affect the quality of the output.127 At the same time, capabilities, capturing materials for recirculation will the use of more sustainable (biobased) plastics and be less cost-effective if not outright impossible. products is still limited, with advancement of this technology in its infancy. With regard to product Among upstream elements of the value design, the focus is generally on the use phase chain, particular attention is required around of products, with widespread disregard of their Deloitte 2017. 127 134 BACK TO CONTENTS ANNEXES recyclability at the end of their useful life. More A3.2 Rare Earths and Materials: work is, therefore, needed to ensure that products Circularity May Not Be Able to Solve offer better options for future circularity. This Criticality requires addressing—already at the design stage— concerns about additives (for example, colors, CRMs are characterized by crucial economic plasticizers, flame retardants) and thermoplastics importance and elevated supply risks. Another that complicate recycling. distinguishing characteristic is that they are indispensable to both the dual green and digital Business innovation is required to identify, transitions. The EU’s ‘digital sovereignty’ and the pilot, and roll out upstream solutions for the intention to confront semiconductor shortages and plastics value chain—financial incentives strengthen Europe’s technological leadership in chip are critical at the outset of the transition. In making rely on security of CRM supply, together addition to regulation and fiscal tools, financial with the resilience and competitiveness of the EU subsidies are a key incentivizing factor for the economy. The range of CRMs identified by the EU expansion of CE and eco-innovation in business. has more than doubled over the last decade—from Currently, businesses appear to have little, if any, 14 in 2011 to 30 in 2020. Economic importance is a financial incentive to facilitate innovation. Funding function of a material’s role in end-use applications through countries’ own mechanisms or EU sources and the value added of manufacturing sectors, while for new technologies is lacking in all the four MSs the supply risk is derived from the concentration considered. Furthermore, funds for innovation in the of supplies in producing countries and substitution design and manufacture of plastic products, or the and recycling rates. One of the most prominent collection and separation of plastics, are limited. examples of CRMs is rare earth elements used in Where funding is available, such as Romania, numerous low-carbon technologies. They bear the awareness and the release of capital to industry is highest supply risk of all CRMs because 98 percent limited. This lack of finance limits the ability of the of EU demand is sourced from China and recycling value chain to invest in innovative approaches and input rates are as low as 3–8 percent.128 new technologies. FIGURE A3.2: GROWTH IN DEMAND FOR SELECTED MINERALS FROM CLEAN ENERGY TECHNOLOGIES IN 2040 RELATIVE TO 2020 LEVELS (Index 2020=1) Battery-related minerals Renewables and network-related 45 42 8 7 40 7 35 6 30 25 5 25 21 19 4 20 3 2.9 2.7 3 15 13 2.3 2 1.7 1.8 8 8 2 10 6 6 5 3 1 0 0 STEPS SDS STEPS SDS STEPS SDS STEPS SDS STEPS SDS STEPS SDS STEPS SDS STEPS SDS STEPS SDS Lithium Lithium Graphite Graphite Cobalt Cobalt Nickel Manga- Manga- Nickel REEs REEs Molyb- Molyb- Copper Copper Silicon Silicon nese nese denum denum Source: IEA 2021. Note: REE = Rare Earth Elements. STEPS (Stated Policies Scenario) and SDS (Sustainable Development Scenario) are two different scenarios of energy transition. STEPS points to where the energy system is heading based on a sector-by-sector analysis of today’s policies and policy announcements. SDS points to what would be required in a trajectory consistent with meeting the Paris Agreement goals. EC, n.d.-a, 2020a. 128 135 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition Given that CRMs are essential for low-carbon percent recovery rate of cobalt from batteries in technologies such as solar panels, wind 2030 would only cover 20.4 percent of demand turbines, and EVs, their demand is expected in 2035. The flows of metals contained in end-of- to increase significantly in the context of life products correspond to a past demand (years the energy transition. The expected demand ago) that is not able to satisfy the future demand. for metals required to produce electric storage In addition, some ‘minor’ metals—such as tantalum, batteries—aluminum, cobalt, iron, lead, lithium, niobium, and rare earths—are used in such small manganese, and nickel—is projected to rise by quantities that their recycling is uneconomic. more than 1000 percent under a 2°C scenario. A case in point is niobium: it is used in as low Meeting the Paris Agreement objective would see concentrations as 0.1 percent in microalloyed steels global demand for minerals quadruple between whereas it is found at 1 percent grade in Araxá 2020 and 2040. Projected demand growth is (Brazil), the largest niobium deposit in the world. highest for lithium (over 40 times), followed by Policies to improve the recyclability of minor metals, graphite, cobalt, and nickel (19–25 times). Estimates such as improved eco-design, will need to be show that the EU would need 60 times more lithium considered to have an impact.131 and 15 times more cobalt for vehicle batteries and energy storage by 2050 and 10 times more rare For circularity to help address the CRM earths in permanent magnets.129 demand, circular policies need to go beyond recycling. These include, but are not limited Increased recycling rates can help address to, reducing consumption (through eco-design, supply security concerns associated with process optimization, responsible consumption such high levels of projected demand. Efforts and procurement), intensifying product use (sharing to increase the circularity of metals and minerals economy, short-term renting), extending life of could reduce demand for primary materials as well products and components (maintenance and repair, as the EU’s dependence on imported materials. donating and reselling, refurbishing, performance Indeed, metals are ideal candidates for a CE as they economy), and giving resources new life (industrial are in theory eternally recyclable. But recycling is ecology, recycling and composting, energy only economic viable for CRMs that have reached a recovery).132 In addition, in the face of increasing critical mass, such as tungsten and cobalt. The EU demand for CRMs, more emphasis needs to be is targeting battery minerals through a new Batteries placed on reducing the carbon intensity, particularly Regulation130 as there is sufficient potential for in the extraction and refining stages. For example, increased recycling rates. However, more recycling producing cobalt sulfate requires twice as much does not necessarily imply that these materials will energy as producing nickel sulfate, which would become less critical, as the continuing surge in plead in favor of shifting toward more nickel- demand will maintain pressures on the reliability of rich chemistries. A ‘green differentiation’ at the supplies. extraction and refining of raw materials would provide the basis for selecting producing countries, The sheer scale of demand calls for additional companies, or processes that have the lowest efforts in CRM’s circularity, which remains carbon footprint. limited by economic barriers. An assessment of the ‘recyclability’ of some critical minerals in the EU economy shows that the maximum contribution A3.3 Water Efficiency: Striking the from recycled scrap to EU demand is 49 percent Right Balance between Sustainability of the material input of tungsten and 8.4 percent and Affordability of indium. This means that even in a maximum recycling scenario, there is still a need of primary Over 100 million Europeans are already input for roughly 50 percent of tungsten and 90 affected by water scarcity and their number percent of indium production. Similarly, even a 95 will increase as climate change further 129 EC 2020a; IEA 2021; World Bank 2017. 130 EC 2020b. 131 EC et al. 2018; Talens Peiro 2018. 132 Smart Prosperity Institute 2020. 136 BACK TO CONTENTS ANNEXES exacerbates preexisting water stresses. experiencing water scarcity. As defined by the UN, Water is circular by nature, but Europe’s water a country experiences water stress when its annual resources have been under increasing stress over water supplies drop below 1,700 m3 per capita. In the past 50 years, mainly due to climate change the EU, this is the case in Malta, Cyprus, the Czech and increasing demand. In general, freshwater is Republic, and Poland, with Romania just above this abundantly available in Europe, but it is unevenly threshold.133 distributed. About one-third of the EU territory is exposed to permanent or temporary water stress A circular water economy increases resilience conditions, with major hotspots in intensively to water stress, reduces waste and pollution, irrigated agricultural areas, southern European and preserves natural ecosystems. Circularity islands with large tourism sectors, and large urban in the water sector means saving water where areas. But even northern central European countries possible and ensuring that water and other natural such as Finland (decrease in snow cover) and resources can be reused. The Water in Circular Germany (changes in precipitation patterns) are Economy and Resilience (WICER) Framework (see FIGURE A3.3: WICER FRAMEWORK IC ES mate and Be en u s e r ee rg y e RV f o r c l it a i nt i e s n ew SE r e s t u n ce abl cien i nv tic ee ta VE d a ne nd I an im n cl rg y D la on Harvest S Manage n ES Rainwater LU P Demand IG NC N Op Manage e DI r Reduce Stormwater tim tu str of OU non-revenue uc f ra e i ze AN water g i n i ze us TW Y op CITY PL e ra VER RESILIENT m AT E & M ax i tions P RE ex i s t i n SU Y COVER RG E EN DS P O L LU T I O N LI SO INDUSTRY BIO es ER Z LI s o u rc R e co ve r TI FER DELI TER pply AGRICULTURE WA re s NATURE y su our Manage & if Optimize ces EU ers Water R v SE Resources & Di Storage RES TO RE s on a nR e c e at l u m ti ag ha p or so e rge or ed aq & ui I n c- b a s fe r e s na tur Water R esto RE re d e g ra d e d la n d GE and watershe ds S Energy NER ATE NATURAL SYS TE M Nutrients Source: World Bank. EC n.d.-b; EEA 2018; Eurostat 2022a; WWAP 2012. 133 137 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition Figure A3.3) describes the key actions needed to while maintaining access to the most vulnerable in achieve three main outcomes: (1) deliver resilient a context of climate change, which is exacerbating and inclusive services, (2) design out waste and the issue of water stress. pollution, and (3) preserve and regenerate natural systems. 134 Water subsidy schemes can make good business sense as water tariffs increase. It Low water tariffs prevent the transition to a is remarkable that in many EU countries, water circular water economy. In Europe, as elsewhere, companies have introduced social water subsidies water consumption is driven by its cost rather than on a purely voluntary basis. This demonstrates availability. As a result, countries with scarce water that well-designed water subsidy schemes for the resources but low tariffs such as Greece, Italy, and poor make good business sense for commercially Spain have some of the highest rates of water run utilities. The provision of social water subsidies abstraction in the EU. As with other commodities, helps in reducing the rate of uncollected bills as well water prices do not reflect scarcity nor full as the administrative cost of managing unpaid debt. economic costs. More than for other commodities, It is becoming a key feature for making water tariffs political economy considerations play a key role in increases both financially and socially viable. setting pricing. Although cost recovery, including environmental and resource costs, is a key principle Better data are needed to align water use of the EU Water Framework Directive, it is rarely fully with its actual availability. The reporting and applied across MSs. The resulting undervaluation of monitoring frameworks supported by EU water water is partly due to the complexity of estimating legislation allow for a solid information base environmental and resource costs but partly also regarding water supply in terms of availability due to social and competitiveness issues related to and quality. However, much less information is the affordability of water in the face of rising prices. available regarding the amount of water embodied In addition to the inefficient and unsustainable use in agricultural and manufactured products. The of water and the degradation of water supplies, the water footprint of goods and services, also known lack of true pricing constitutes a major barrier to a as ‘virtual water’, is the amount of water consumed more circular water economy.135 or polluted for their production: this can be large, including in imported goods—producing 1 kg of EU MSs need to strike the right balance beef requires on (global) average around 15 tons of between higher water tariffs necessary to water. In addition to consumption, water footprint increase the sustainable use of water and can be applied to water quality, to assess the level social tariffs required to grant affordable of water pollution caused in the production of goods access to water services. The WFD’s requirement and services.136 to internalize environmental and resource costs in water pricing requires the implementation of water Adequate water footprint metrics can guide charges (both for abstraction and pollution) that the identification of efficient and sustainable would automatically induce an increase of water water production and consumption systems. In tariffs. On the other hand, in response to growing the water sector as well, progress toward circularity affordability issues and as water is considered requires better data. Water footprint knowledge as a primary good (essential for life), there is an based on standardized methodologies across the increasing application of social water tariff subsidies EU and applied to a wider range of products can across MSs aimed at securing access to water enable policy to better target CE interventions at services (water and sanitation) also for the poor. those products and value chains with the largest However, current tariff structures reduce incentives impact on water resources.137 for water savings. To ensure the long-term sustainability of water resources, MSs thus face the challenge of reflecting true pricing within tariffs 134 World Bank 2021b. 135 Directive 2000/60/EC; UN 2021. 136 Water Footprint Network n.d. 137 Sauvé et al. 2021. 138 BACK TO CONTENTS ANNEXES A3.4 Circularity in Transport: Achieving FIGURE A3.4: COMPARING LIFE-CYCLE GHG EMISSIONS OF GASOLINE CARS WITH EVs Decarbonization Beyond Electrification 300 The transport sector is an important driver 250 of material consumption and land use. The material demand of the transport sector is mainly 200 driven by passenger cars and road infrastructure. Some 300 million tons of steel, aluminum, and 150 plastics are currently embodied in passenger cars registered in the EU. Car production actually 100 requires even more materials, as up to 40 percent of metals get lost as scrap on the factory floor. The 50 EU-27’s road network of around 4.5 million km 0 contains roughly 85 billion tons of asphalt, bitumen, ICEV BEV ICEV BEV steel, and cement. Transport infrastructure uses 2021 cars 2021 cars 2030 cars 2030 cars a major portion of urban land (up to 60 percent Vehicle Manufacture Battery Manufacture Maintenance Fuel Consumption Fuel Electricity Production in commercial centers) and increasingly extends outside of cities as urban sprawl accelerates even in Source: ICCT 2021. regions with decreasing populations.138 Note: Life-cycle GHG emissions of average medium-size gasoline internal combustion engine and BEVs registered in Europe in Cars are among the most underutilized 2021 and projected to be registered in 2030. assets. Cars sit idle about 90 percent of the time, making them among the most underutilized assets materials on input have a value of €2,000-3,000.140 owned by households and commerce. Light commercial vehicles, primarily used for last mile Reducing material use can be cost-effective deliveries, run empty for 40–60 percent of the time, in decarbonizing the sector. Combined with while they operate with 50–60 percent capacity electrification, circularity strategies can potentially utilization rates (weight based) on laden trips.139 reduce carbon emissions by up to 75 percent Achieving efficiencies can therefore have vast while reducing resource consumption by up to economic benefits. Innovations in urban and freight 80 percent per kilometer by 2030. The policy mix transport—car sharing, carpooling, and efficient would include the decarbonization of vehicles life logistics systems such as those piloted by cities like cycle, resource recovery and closed material loops, Paris—are examples of circularity-oriented solutions lifetime optimization, and higher efficiency of vehicle which rely on both carrots (subsidies) and sticks use both in terms of time and occupancy. Increasing (taxation, such as road taxes or VAT rates for new the material efficiency of EVs can be cost-effective. cars) to drive change in the behavior of consumers For example, around 59 percent of emissions from and economic actors. material production for battery-electric vehicles (BEVs) could be abated in 2030 with long-term cost Recycling of vehicles and infrastructure often savings.141 results in downcycling in terms of quality and value. For ELVs, the primary focus of recycling is EV batteries encapsulate a range of existing on avoiding hazardous substances and recovering tensions between electrification and material spare parts, while material recovery is less of a management objectives. The EU’s Sustainable concern. Although EU legislation requires most and Smart Mobility Strategy aims to reach at least materials to be recycled, current processes results 30 million zero-emission cars on European roads by in significant degradation of quality and loss of 2030 (and all cars by 2050), most of which will be materials value. As a result, the scrapping value electric. EV batteries will drive demand for CRMs, of an ELV is close to zero, even though its raw raising questions on how to ensure resilience to 138 Kodukula 2018; Material Economics 2018. 139 IEA 2017. 140 Material Economics 2018. 141 World Economic Forum 2020a, 2020b. 139 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition their elevated supply risks (see above section on efficiency, vehicle emissions) tighten in Europe, CRMs). High rates of battery penetration also more cars are retired or pushed out of the market raise questions as to their afterlife once wear and before the end of their economic life-span, leading tear coupled with innovation in higher performing to an increase in the supply of ELVs. Extending batteries makes them obsolete for use in cars. the lifetime by exporting old cars meets resource While a ‘second life’ in stationary applications efficiency objectives but also dumps the pollution may be possible, batteries will inevitably require and safety risks associated with old cars on less retirement at the end of their life. In the EU, more wealthy markets.144 than 80 percent of standard lead-acid batteries are recycled, but lithium-ion or nickel-cadmium The circularity of the transport sector will be batteries typically equipping EVs do not yet rely on determined not only by the sustainability of any sustainable and industrial recycling solutions. cars and related recycling systems but also The proposed Battery Regulation’s objectives of full by the transport infrastructure and urban collection of automotive batteries and their recycling planning. Existing urban and inter‐urban transport and high level of recovery will require adequate solutions help curb the transport sector’s carbon policy incentives. Without these incentives, further and resource footprint by reducing the number of investments in research innovation may not come private vehicles on the road as well as the volume fast enough to avoid the first waves of EV batteries of land dedicated to roads and parking. Upscaling to be scrapped, together with the valuable materials already existing best practices will facilitate the they contain.142 transition to a CE, for example, by providing high- quality and high-frequency public transport, The rate of fleet renewal induced by the expanding high-quality cycling and walking required EV’s penetration will bring climate infrastructure, and improving urban design in view of dividends—but also entails material risks. more compact cities built for people, not for cars. Switching to EVs can significantly reduce life- cycle GHG emissions of cars. Figure A3.4 shows A3.5 Circular Buildings: Designing that lifetime emissions of BEVs in Europe may already be more than two-thirds lower than those Today’s Buildings for Tomorrow’s of comparable gasoline cars. As the electricity mix Economy continues to decarbonize, this gap is expected High levels of resource use and waste to widen until 2030. But the accelerating uptake generation make construction materials of EVs will reduce the average age and lifetime of a priority for the transition to a CE. The Europe’s current car fleet (currently at 11.5 years)— construction sector is a major driver of material reinforcing linear buy-own-scrap processes, at consumption and waste generation in the EU. least in the short term. For this to not become a The sector contributes about 9 percent to EU norm as EV innovation drives ever faster rates of GDP but accounts for about half of all extracted fleet renewal, reducing the resource footprint of materials. Sand and gravel alone—intensively used the next generation’s fleets through upstream and in construction, among other items, for making downstream interventions is critical.143 cement—made up more than one-third of EU DMC Secondhand car markets bring resource in 2019. At the same time, CDW is the largest waste efficiencies through lifetime extension but stream, with a share of 36 percent of total EU waste also lock in pollution and its externalities for generated in 2018. CDW represents an extensive longer, including in import markets. The EU is reservoir of secondary materials, including concrete, the world’s largest exporter of used vehicles. Major bricks, wood, glass, metals, and plastic, which have destinations for used vehicles from the EU are West/ the potential to be used over several life cycles and North Africa, Eastern Europe, the Caucasus, and partially replace new products and materials.145 Central Asia. As environmental regulations (fuel 142 EC 2020b, 2020c, 2021a; Eurostat 2018a; European Parliament 2019 143 ICCT 2021. 144 UNEP 2020. 145 EC, n.d.-c; Eurostat 2018a, 2022b. 140 BACK TO CONTENTS ANNEXES Through the large share of material stocks in waste has been used for low-value backfilling (for use in the sector, construction drives current example, to fill holes on construction sites) and and future material flows. As seen in Chapter other low-grade recovery applications (for example, 2, material stocks remain in service for a long in road construction). This erodes the value the time, locking in opportunities and constraints materials had in CDW. The main reason is that past to material efficiency. While building new stocks construction practices make it difficult to generate requires material flows, so does their maintenance, high-purity materials during demolition. Increasing operation, and functioning. In-use material stocks the circularity of the construction sector thus need more attention and should not be overlooked requires action beyond waste management to cover in shaping a CE policy. Better managing in-use all phases of the life cycle (Table A3.1).147 stock materials may help reduce the growing demand for new stock-building materials as well The future circularity of buildings is determined as waste generation simultaneously, thus also by the way they are built today; buildings and contributing to addressing existing issues in the their components need to be designed in such waste management sector, for example, renovating a way that they can be easily deconstructed, existing buildings rather than demolishing and reused, and recycled. While much policy building new ones.146 emphasis has been placed on CDW management, there is much less attention on reversible buildings, The full potential of the CE in the construction that is, buildings that can easily be deconstructed sector can only be realized by extending or allow for individual components to be replaced. the focus beyond waste to cover all phases Numerous barriers need to be addressed, including of the construction life cycle. Even though high investment costs, difficulty in finding easily the vast majority of EU CDW (88 percent) has disassembled building products on the market, been recovered in 2018, most of the recovered difficulty in obtaining legal authorization for the TABLE A3.1: RELEVANT CE ACTIONS ACROSS THE CONSTRUCTION LIFE CYCLE Life cycle End of life Operation and Construction Material sourcing Design stage refurbishment and manufacture CE aspect • Deconstruction • Maximize • Minimize waste • Eco-design principles • Design for • Selective utilization of • Procure reused • Use less materials/ disassembly demolition buildings materials optimize material use • Design for • Reuse of products • Minimize waste • Procure • Use less hazardous adaptability and and components • Minimal recycled materials flexibility • Closed-loop maintenance materials • Increase the life-span • Design for recycling • Easy repair and • Off-site standardization • Design for product • Open-loop upgrade construction disassembly • Design out waste recycling • Adaptability • Design for product • Design in • Flexibility standardization modularity • Use secondary • Specify reclaimed materials materials • Take-back schemes • Specify recycled materials Reverse logistics Source: Adapted from Adams et al. 2017. Eurostat 2021c. 146 EEA 2020a; Eurostat 2022c. 147 141 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition FIGURE A3.5: VISUALIZATION OF A RESOURCE CADASTER - AGGREGATION OF 46 CONSTRUCTION MATERIALS USED IN THE CITY OF ODENSE, DENMARK, STOCKED IN BUILDINGS, ROADS, AND PIPE NETWORKS Source: Lanau and Liu 2020. Note: Data unit is 1,000 tons per cell, where one cell measures 100 m × 100 m. construction of reversible buildings, and involvement construction industry. Existing knowledge of a large number of operators during construction about secondary materials stocked in buildings which can reduce ambitions. Economic incentives and infrastructure is still scarce, fragmented, play a key role in the development and application and aggregated. High resolution ‘urban resource of reversible building technologies but need to cadasters’ generated from building stock modeling be complemented with awareness raising about can help inform stakeholders along the construction the economic and environmental benefits of value chain to improve planning for materials product lifetime extension and sustainable end- and component recovery and smart waste of-life management. In addition, collaborative, management. Similar information on secondary multi-stakeholder processes (involving designers, materials is needed for individual buildings. Material constructors, producers, and demolishers) help passports, for example, provide specifications of create transparency about buildings and their raw materials and components used in a building components, which facilitates reuse and recycling. as well as their potential future use. Upscaling these kinds of information systems will require Detailed knowledge about the type, amount, standardization of terminology and methodology and distribution of secondary materials and, more generally, a harmonization of tools and stocked in the built environment is essential systems. for circular strategies and activities in the 142 BACK TO CONTENTS ANNEXES Innovation requires local and national degradation. Around 20 percent of the total food institutions formation and transparency to produced in the EU is lost or wasted along the create a trust-based secondary material entire food value chain. This amounts to significant market. Since the construction sector largely economic losses, considering the natural resources operates within local value chains, institutions utilized for food production and the environmental fostering local stakeholder networking are critical externalities generated. Also, biodegradable to enhance material flow and waste management municipal waste—of which 60 percent is food across sectors and value chains. But without waste—is still largely destined for landfill or common definitions, criteria, and metrics for ‘end- incineration in the EU, with particularly low collection of-waste’ CDW, economic actors will not be rates in Romania, Croatia, and Bulgaria. A circular able to certify the quality of recycled and reused food economy builds on biocycles to use minimal materials. The current levels of distrust in the quality external inputs, closing nutrient loops, reducing of secondary materials will continue to prevent waste and emissions, and valorizing agri-food the capturing of their value through recycling and waste. The waste hierarchy adapted to food waste reuse applications. Similarly, a piecemeal approach offers a range of circular agri-food system strategies by MSs regarding the definition of end-of-waste preferable to waste disposal (Figure A3.6).148 criteria, traceability guidelines, pre-demolition audits, and material passports will create barriers to scale The CE can be an important driver of growth and efficiency. of sustainable agri-food systems in Europe, but an integrated policy framework with clear objectives is needed to accelerate it. Reducing A3.6 Circularity in the Agri-Food waste, increasing productivity, and optimizing System: Accelerating Innovation and material use is not only a good proposition Improving Policy Coordination for improving resource efficiency but is also economically prudent. To improve the sustainability European agriculture is a major driver of the agri-food system, all integrated elements of it of climate change and environmental FIGURE A3.6: PRACTICAL APPLICATION OF THE WASTE HIERARCHY FOR FOOD Source: Based on Sanchez et al. (2020). EEA 2020b. 148 143 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition need to be considered to ensure the right incentives requires significant investments in technology and are put in place. An integrated policy framework innovation, new skills and knowledge, and the ability with clear objectives is required, taking into account to measure impact. Innovation plays a critical role the complexity of the agri-food sector—the diversity in linking resource and economic efficiency and of production environments, products, producers, the public sector is well positioned to enable this processing options, length and types of value process by reducing the fixed costs of uptake of chains, and the different actors and functions within circular approaches and the provision of knowledge them. The CAP can play a major role in providing to address market failures associated with circular such a framework. systems. Partnerships and coordination are critical factors to make circularity work at different scales to The EU’s ambition for CE is clear, but it is respond to policy ambitions. less so for the integration of sectoral policies underpinning. With the Bioeconomy Strategy Circular agri-food systems are a good and Action Plan (2018), the CEAP (2020), and the business proposition for MSs, but large gaps Farm to Fork and Biodiversity Strategies (2020) remain. There is a divide between western and in place, the broader regulatory direction toward eastern EU MSs in terms of development and sustainable agri-food systems has never been uptake of circular approaches and a lot more can clearer. Yet, circularity of agri-food systems has be done to narrow this gap, in particular through largely been absent from the policy discussions improvements in the Agriculture Knowledge of the CAP reform process. While environmental and Innovation System (AKIS). Within the east, conditionalities continue to be integrated into the advancements in private sector initiatives in CAP policy framework, in parallel, CAP incentive agri-food circularity in four EU MSs (EU-4) structures continue to enforce linear production are significantly ahead of national regulatory processes. At the same time, there is also lack frameworks. This signals that the public sector of correspondence of objectives across existent needs to catch up and support the process of policy frameworks. For example, the Bioeconomy transformation toward circularity by enabling the Strategy does not further specify the potential investment climate through adequate incentives. contributions and impacts of the bioeconomy to the Because of the early development of bioeconomy- existing or future CAP. Similarly, in the EU’s Long- related interventions, many of the CE examples Term Vision for Rural Areas (2021), the sustainable in the agri-food sector in these four countries are development of the bioeconomy is only referenced upstream, focusing on biomass utilization. More as a ‘complementary’ action for one of the recently, and with the broader value chain systems proposed flagship initiatives (entrepreneurship and approach of the CE, more initiatives are surfacing social economy in rural areas). Considering these downstream. The scope of circular initiatives is also disconnects between different thematic and sector- changing, from large-scale biodigesters to more and level policy frameworks, it is not immediately clear smaller initiatives along the value chain, including which policy objectives and targets would be the packaging, food reuse, and so on. However, most relevant/applicable for guiding the transition significant investments in technology and innovation toward a circular agri-food system. are needed to support the circular transition of these countries. And perhaps a more differentiated, Investments in innovation and effective regional approach to promoting CE in agriculture is coordination are key for striking a balance required to close the gap between these countries between resource and economic efficiency for and their western peers in terms of biomass a green, resilient, and inclusive transformation. utilization and economic returns to circularity. Closing many loops along the agri-food system 144 BACK TO CONTENTS ANNEXES ANNEX 4: FOCUS SECTIONS Focus Section A. Circular Economies about one-third of NDCs updated and submitted in and Decarbonization 2021 that mention the CE.149 The CE is critical for effective climate action Circularity can cost-effectively reduce GHG and complements energy efficiency and low- emissions from industry which are considered carbon energy sources in achieving global hard to abate. Emissions from the industrial emissions reduction targets. Under the Paris sector accounted for 23 percent of global GHG Agreement, the global community has committed emissions in 2015. These emissions are largely to limit global warming to well below 2°C, preferably caused by the production of materials such as to 1.5°C above pre-industrial levels. To achieve iron, steel, aluminum, cement, and plastics, which this target, the world would need to reach climate are associated with hard-to-abate emissions neutrality by mid-century. Energy efficiency and low- related to high-temperature processes, production carbon energy sources have long been the focus emissions and end-of-life emissions. Cleaning up of climate mitigation. While energy efficiency and these emissions is difficult because (a) commercial low-carbon energy sources are essential for climate low carbon technologies are still missing for high- action, they are currently unable to sufficiently temperature processes; (b) some emissions do address emissions from industrial or agricultural not come from the combustion of fossil energy processes, which together account for some 46 but from chemical reactions during the production percent of global GHG emissions. An increasing of clinker and aluminum, for example; and (c) focus on material efficiency and circularity will help large amounts of carbon are released where align the emissions trajectory of these sectors materials are incinerated at the end of their life. with the goals of the Paris Agreement. The climate Material efficiency and CBMs can address these relevance of circularity is increasingly recognized in emissions by eliminating waste, reusing products FIGURE A4.1: ABATEMENT POTENTIAL AND COSTS OF CIRCULAR ECONOMY OPPORTUNITIES BY 2050 (COST IN €/ TCO2) ABATEMENT COST EUR / tCO2 Cars – sharing Cars – Prolong life Cars – Remanufacturing Buildings – Floor space sharing Other – Sharing and lifetime Plastics – Higher quality recycling 100 Buildings – Reduced waste in construction Plastics – Reuse Steel – Reduced copper 50 Aluminium – Increase collection EMISSIONS SAVINGS 50 100 Mt CO2 / Year 150 200 250 300 Cars – Lightweighting Buildings – Materials Ef ciency -50 Cement – Cement recycling Steel – Reduced fabrication losses Plastics – Chemical recycling Buildings – Reuse -100 Other – Materials Ef ciency Plastics – Increased recycling at current quality Aluminium – Avoid downgrading Steel – Increase collection Source: Material Economics 2018. Circle Economy 2021; UNFCCC, n.d.; WRI 2021. 149 145 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition and components, and recirculating materials in the development of national CE policies by revealing key sectors such as buildings and transport. As where material leakage happens and what kind shown in Figure A4.1, there are many CBMs that of levers exist to close the loop. Understanding can reduce emissions of the industrial sector cost- progress toward circularity requires using improved effectively.150 indicators. The Circular Economy Monitoring Framework proposed by the EC includes 10 In the food system, circularity helps sequester indicators to measure progress toward a CE in the carbon in the soil while reducing emissions EU and its MSs. These indicators are structured associated with food waste. Agriculture, forestry, along four areas: (a) production and consumption, and other land use (AFOLU) activities accounted (b) waste management, (c) secondary raw materials, for 23 percent of global GHG emissions between and (d) competitiveness and innovation. The design 2007 and 2016. At the same time 25–30 percent of of the monitoring framework prioritizes data that are total food produced is lost or wasted. In fact, it has being already collected to minimize the burden of been estimated that if food waste was a country additional data collection (PACE 2021). While these (including food lost in supply chains and food wasted indicators provide a good macro-level overview, by retailers and consumers), it would be the third- they are insufficient to gain full insight into how the largest GHG emitter in the world. Circular practices transition progresses. Current indicators are highly including regenerative agriculture, elimination of food aggregated and heavily based on flow account waste, and composting can reduce emissions from indicators. It is thus difficult for policy makers to the global food system by 49 percent in 2050 while understand the underlying causes of poor circularity at the same time regenerating natural systems. For in their countries and to prioritize materials and example, climate benefits could be achieved in the sectors. In addition, it is difficult for companies EU-4 through increasing separate collection and to relate their activities to these economic-wide higher recycling rates of biowaste, which remain indicators. considerably below the EU average.151 Improved indicators are required to measure In addition to mitigating climate change, the circularity of economic sectors and refined CE can help in adapting to the impacts of material categories. To improve circularity, it is rising temperatures. For example, the CE can important to understand material cycles in different help redistribute and reduce risks arising from the value chains. The level of circularity is subject to increasing vulnerability of global supply chains to the fundamental limit of materials, and the lifespan climate change impacts. Similarly, there is evidence of materials depends on their material properties that regenerative practices in the agri-food sector and their application. For example, the lifespan can restore the health of soils, increasing resilience of aluminum used in beverage cans is significantly to extreme weather events such as floods, shorter than the life-span of aluminum used in droughts, and storms.152 cars. Consequently, the approach to improving the circularity of the same materials used in the Focus Section B. Measuring Circularity different sectors could be different. Better resolution of sectors and material categories can help policy Quantifying the ways in which materials makers better target focus areas (value chains and are used, reused, recycled, and lost is an material streams) in their decision-making as well as important step to understand where a society industries to understand their contribution. stands in closing the material loop. Each MS has different natural endowments and economic Indicators need to take into account both structure, leading to its own unique material cycle. stocks and flows. Considering only flow Hence, there is the need for tailored priorities and variables does not provide a full picture of resource policies to accelerate the circular transition. the dematerialization process. Buildings and Understanding resource cycles and material stocks infrastructure stocks play an important role in and flows at different life cycles can better inform determining material inflows and outflows. Improved 150 Ellen MacArthur Foundation 2019; IRP 2020. 151 Ellen MacArthur Foundation 2019; IPCC 2019; WRI Indonesia 2018. 152 Ellen MacArthur Foundation 2019. 146 BACK TO CONTENTS ANNEXES characterization of material stocks and flows could FIGURE A4.2: ENVIRONMENTAL TAX REVENUES IN EU MSS + UK AS PERCENTAGE OF GDP inform a targeted transformation and enhance 2.5% circularity by allowing for better management of existing material assets. 2.0% Measuring CE progress with policy implementation indicators. For some material 1.5% streams and value chains, it is difficult to measure the circularity progress due to their long material 1.0% cycle. Thus, indicators that specify the level of policy implementation could be used to provide feedback to decision-makers and citizens on the progress of 0.5% the CE policy in place. 0.0% 1999 2020 Focus Section C. Material Fiscal Energy Taxes Transport Taxes Taxes on Pollution / Reforms Resources Source: Eurostat. 2020e Current policies make linear economic models price competitive compared to CBMs. Except The use of fiscal tools is critical to advance the for a few examples—notably, and increasingly, transition. Both the Green Deal Communication carbon and other GHGs—the environmental and the CEAP make reference to the relevance of externalities linked to linear business models are not fiscal instruments to promote the transition. The considered in the pricing of virgin natural resources. 2015 EU CE action plan153 states that “price is a As seen in Chapter 5, linear business models key factor affecting purchasing decisions, both in are also supported—directly through subsidies the value chain and for final consumers. Member supporting the entire chain of virgin material States are therefore encouraged to provide extraction, transformation, transport, and use as incentives and use economic instruments, such well as directly and indirectly through fossil fuel as taxation, to ensure that product prices better subsidies. While true pricing is not reflected in linear reflect environmental costs.” So far however, the products and services, regulatory action to support main initiatives have been focusing on the energy/ the transition to circularity will also be impaired. climate sectors in the context of the revisions of the energy taxation directive and the introduction of the Fiscal reforms offer a potent tool to level carbon adjustment border mechanism. The use of the playing field between linear and circular fiscal measures to promote circularity by altering business models. Environmental taxes and levies relative prices and changing the behavior of firms are used in virtually every jurisdiction as a tool to and consumers has not yet been addressed. cut pollution levels and of course raising revenues. Their rationale is grounded in the Pigouvian Circular taxation addresses key bottlenecks principle of internalizing the environmental impacts affecting the transition. Circular taxation aims to and therefore addressing market failures and change economic agents’ incentives toward circular their welfare implications. Although their role is principles rather than traditional linear models. increasingly catching the attention of policy makers, Conventional environmental taxation targets end-of- particularly in relation to their potential impact on life stages of production and consumption, leaving decarbonization policies, they have never played aside other stages of products’ life cycle. Levels of a significant role in most tax systems. Indeed, taxation are often too low to alter behaviors. Rather in Europe, over the last two decades the share than a product-by-product approach, circular of environmental taxes in relation to GDP has taxation requires rethinking critical building blocks of decreased by 20 percent. current taxation systems. A circular economy taxation framework includes the following building blocks: EC 2015. 153 147 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition FIGURE A4.3: CIRCULAR TAXATION FRAMEWORK Tax Shift from Services to Products Resources Reuse/Repair Hierarchy TAX TAX relief TAX Product use Waste Production Management Raw Retail EOL Materials Tax Shift from Labor to Materials Source: Adapted from Milos (2021). • Introduction or strengthening of taxes on raw (a) internalizing the environmental externalities materials arising from resource extraction and use and (b) • A general shift from labor to resource/material supporting environmental regulations addressing the taxes (OECD paper) relevant market failure, raw material taxes address concerns of resource depletion and encourage • A reconsideration of VAT application the substitution of virgin material resources with • Strengthening of waste management taxes, secondary and recycled materials. From a fiscal starting with stronger landfill taxes resource point of view, the current centrality of • A general shift from taxation away from ‘services’ raw materials in economic activity and its likely to ‘material intensive products’. persistence in the future imply a low long-run price elasticity of demand. Raw material resources could Stronger design and implementation of thus represent a stable tax base for governments.155 the fiscal framework supporting waste management is a critical first step. Capturing FIGURE A4.4: LANDFILL TAXES ACROSS EU MSs the externalities of waste disposal is critical to Austria reduce landfilling rates and encourage circular UK Belgium activities, starting with recycling. A review of the Ireland Finland waste management performance of EU MSs Denmark concluded that landfill taxes played a major role in Sweden Poland diverting waste away from landfills and supporting France Estonia the recycling sector. But several MSs still lag in the Latvia Czech Republic implementation of landfill taxes, either because of Bulgaria insufficient levels, regional variations (landfill taxes in Hungary Romania Italy can vary from €5.2 to €25.82 per ton and from Switzerland Netherland €7 to €41.19 in Spain, depending on the location, Slovenia which potentially drives ‘races to the bottom’ Luxembourg Portugal effects), or an outright gap—Croatia still does not Slovakia Lithuania have any landfill tax. 154 0 10 20 30 40 50 60 70 80 90 100 Material taxes can achieve both environmental Euros per waste ton and revenue raising results. In addition to Source: CAWEB 2021 EEA 2013. 154 Hogg et al. 2014; Eckermann et al. 2015; Söderholm 2011; Söderholm and Tilton 2012. 155 148 BACK TO CONTENTS ANNEXES BOX A4.1: EXAMPLES OF VIRGIN MATERIALS TAXES IN EUROPE In Sweden, a tax on natural gravel was introduced in 1996. The aim was to promote the use of crushed rock and recycled materials, such as concrete instead, as supplies were becoming limited in parts of the country. Although the tax encouraged substitution with other materials, it is applied uniformly across the country, even in regions where shortage in natural gravel is less of a problem and the importance of natural gravel as a groundwater reservoir material remains limited. In Denmark, a new tax on extracted raw materials (sand, gravel, stones, peat, clay, and limestone) was introduced in 1990 in conjunction with a waste tax, to reduce the use of these natural materials and to promote the use of recycled products, such as CDW. The combined aggregate and waste taxes have produced a greater demand for recycled substitutes: in 1985 only 12 percent of CDW was recycled, compared with 94 percent in 2004. The Danish model of sorting CDW at source is an effective strategy of increasing the supply of recycled material, according to the study. The labor and skills intensity of CBMs require constantly looped back rather than reaching ‘waste’ shifting the tax burden away from labor. CBMs status, VAT continues to apply. The end effect is to based on repair, refurbish, repurpose, reuse, and tax the preservation of materials’ residual value and PaaS are all comparatively more labor intensive the avoided environmental costs of disposing them compared to their alternatives and typically require and producing substitutes from virgin materials. The higher skill levels. In the EU-27, on average, 51.7 rationale for introducing VAT exemption or reduced percent of the tax burden falls on labor (personal rates for CBMs and products is clear. Some income tax, social security contributions, and countries have started experimenting with lower VAT payroll taxes)156. At the same time, as seen earlier, rates for recycled/upcycled materials and exempting environmental taxes (of all types, including natural secondhand goods. Few examples of circular VAT resource use and pollution) represent only 5.9 have already been applied in practice. In 2017, percent of total tax revenues. Shifting the tax burden Sweden introduced a VAT reduction from 25 to from jobs to materials can foster CBMs, therefore 12 percent for repair of products such as textiles, addressing both market failures induced by linearity shoes, leather products, and bicycles.159 Belgium as well as reducing market distortions generated has introduced a reduced VAT rate of 6 percent by labor taxation, as high labor costs reduce for demolition and reconstruction activities while employment rates and encourage firms’ decisions Ireland, the Netherlands, Slovenia, Luxembourg, to outsource production (often to low labor/high and Finland have introduced VAT reductions for material intensity economies). 157 Real-life examples certain repair services. VAT reforms will require a of circularity-oriented tax shift are scarce, although reevaluation of the EU VAT directive and adequate certain countries are taking steps in that direction. information on products’ embodied materials, One example is Sweden, which since 2016 allows through material passports, with a view to give deductions of 50 percent (Rengöring, Underhåll och them value for recovery, recycling, and reuse and Tvätt—(RUT [Cleaning, Maintenance, and Laundry] secondary market utilization. tax deduction) on labor costs for home repairs and maintenance.158 Effective circular fiscal systems are progressive fiscal systems. If the introduction VATs are an example of how current tax of circularity objectives in fiscal framework aims at systems have evolved to support linearity. VAT reducing environmental externalities, then economic applies to sequences of value addition throughout agents (both producers and consumers) who are materials’ life-span until they reach disposal stage. disproportionately responsible for those externalities But within systems where material and products are should face higher tax rates. Across countries, the 156 EC 2022. 157 Secretariat of the European Circular Economy Stakeholder Platform 2021. 158 Almén et al. 2020. 159 OU 2017. 149 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition poor contribute to environmental problems far less business parks, innovation centers, and technology than the wealthy, mainly because of their levels incubators. These all share the same objectives: (a) of consumption. Together with relatively higher facilitating interaction between science, technology, employment levels, social fairness can be a key and business, typically through partnerships ancillary benefit of circular taxation. And as argued between business and research institutions and (b) in the next section, a policy package supporting a facilitating upstream and downstream input-output shift from labor to materials tax can enhance growth links across business and sectors. Successful and welfare. industrial parks provide high-quality, specialized services, with particular emphasis on business incubation, spin-off activities, networking, and Focus Section D. Enabling Firms logistics.160 Through Industrial Parks Industrial agglomeration can reduce the Industrial parks provide a cost-effective means transaction, information, and coordination to enhance CE synergies across industry costs preventing the emergence of CBMs. sectors. In Europe, the term ‘industrial park’ can Governments in the EU countries have used mean different outfits including science parks, industrial parks as a tool to accelerate national technology parks, technopoles, research parks, and local industry development. For example, in FIGURE A4.5: INCREASE IN THE NUMBER OF EIPs BY REGION (1990–2020) Number of Eco-industrial Parks (EIPs) 500 400 350 300 250 200 150 100 50 1990 1995 2000 2005 2010 2015 2020 East Asia and Pacific Europe and Central Asia Latin America and Caribbean Middle East and North Africa North America South Asia Sub-Saharan Africa Source: World Bank 2021a. Opinion of the European Economic and Social Committee on ’The role of technology parks in the industrial transformation of the 160 new Member States.’ 2006/c 65/11. Office Journal of the European Union. https://eur-lex.europa.eu/legal-content/EN/TXT/ PDF/?uri=CELEX:52005IE1494&from=BG. 150 BACK TO CONTENTS ANNEXES Slovakia and Hungary, the governments’ active Ultimately, EIPs can support the greening and support for the development and expansion of decarbonization of value chains as well as improve industrial parks has helped create 64,500 new resource management and conservation, through jobs.161 These industrial parks often host a range their focused CE solutions. According to estimates, of industrial sectors and tenant firms, managed or scaling up EIPs could save EU businesses €1.4 regulated by national and municipal governments, billion a year and generate €1.5 billion in sales.162 and have backward and forward links with domestic Many EIPs already exist in the EU countries industries. They consume large quantities of water though the growth rate is slowing down. The EU and energy resources while at the same time countries alone account for 28.9 percent of 438 EIPs generate waste. The agglomeration of industries, that were identified in the World Bank’s global survey as well as the environmental and social externalities of EIPs (World Bank 2021a). The compounded associated with industrial production, presents an annual growth rate between 2010 and 2020 remains ideal opportunity to introduce CE principles. lower (1.8 percent) than other regions whose growth EIPs can generate material efficiencies rates range between 2 and 14 percent. EIPs in the through industrial symbiosis. EIPs can be EU countries score relatively high (2.58) owing to defined as industrial areas that promote cross- the adoption of advanced technologies and policies industry and community collaboration for (Figure A4.6). In the EU countries that were identified common benefits related to economic, social, as having operational EIPs, approximately 280 firms and environmental performance. EIPs enhance existed per EIP on average. In addition, the EIPs in the circularity of resources critical to industrial the EU region with high scores are associated with processes (water, energy, materials, and waste) by higher number of jobs.163 significantly reducing dependence on depletable Targeting industrial parks that house multiple resources such as fossil fuels. They promote the manufacturing units and businesses can recycling and reuse of resources and waste as provide the requisite push to adopt CE well as industrial symbiosis and renewables/bio- principles, particularly in resource-intensive based inputs. In the process, tenant firms can sectors in the EU such as textiles, electronics, achieve more cost-efficient production that is also and plastics. Industrial parks can adopt a resilient to price fluctuations and resource scarcity. combination of different strategies, technologies, FIGURE A4.6: DISTRIBUTION OF EIPs BY WORLD REGION Average Number of Jobs in Firms operating in EIPs by EIP Score Average EIPs Score by Region 150% 3.0% 131 2.67 2.58 2.50 2.50 2.46 2.43 2.5% 120% 2.0% 90% 84 74 79 1.48 70 1.5% 60% 49 1.0% 30% 0.5% 0% 0.0% Global East Asia & Pacific Europe & Central Asia South Europe Middle Sub- Latin East Asia North Asia & Central East Saharan America & Pacific America  EIP Score 1/2  EIP Score 3 Asia & North Africa & Caribbean Africa Source: World Bank 2021a. 161 By June 2020, nearly 64,500 new jobs were created in 77 industrial parks in Slovakia (European Monitoring Centre on Change, n.d.). 162 EC 2011; UNIDO; World Bank; and GIZ 2021. 163 World Bank 2021a. 151 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition and business models to foster the CE and reduce programs. In the United Kingdom, the National resource consumption and operational costs. Industrial Symbiosis Program (NISP) was launched in three regions as part of a policy initiative of the • Promoting higher renewable energy generation Business Council for Sustainable Development. and use and achieving carbon neutrality In Italy, a national law (decree 112/98) introduced Ecologically Equipped Industrial Areas, known as • Investing in common infrastructure and service APEAs in Italian, in 1998. In 2009, a new series provision to optimize the use of resources (for of regional laws (Tuscan Regulation 74/2009 - example, steam networks, CO2 recovery plants, Regione Toscana, 2009a and Resolution 1245/2009 cogeneration/trigeneration using biomass and/or - Regione Toscana, 2009b) were enacted in the biogas) Tuscany region to encourage industrial parks’ • Keeping materials and resources in use at the voluntary adoption of APEA certification. Unlike the park level by encouraging tenant firms to create UK, Korean, and Chinese cases where the central a symbiotic network and enabling their waste governments played a significant role in scaling up and by-product exchange (for example, creating EIP programs/industrial symbiosis projects, the a steam network between steel manufacturers program to manage the certification process in Italy and textile firms) is managed at the regional level and the central government does not play an active role. These • Designing out waste by encouraging tenant programs have been supported with other enabling firms to integrate circular designs and to use policies, incentives, and market-base mechanisms. environment-friendly technologies in their In Belgium, the ministerial decree (October 1, production facilities 2007) and the Flemish Government Decree - May 16, 2007/May 24, 2013) elaborated CO2 neutrality • Fostering the establishment of recycling requirements with implications for the design and enterprises and sorting facilities rendering management of new and existing industrial parks. services to tenant firms Following this decree, industrial parks in this region • Rethinking business models for improved included carbon neutrality requirement as part of energy, water, and waste management at the residency contract/sales conditions agreements park level between park operators and tenant firms.164 • Harnessing digital technologies to increase Table A4.1 provides a list of programs implemented resource circularity and material exchange. in the EU to encourage development of EIPs (the list is not exhaustive). Governments in the EU countries have adopted policies to encourage adoption of EIP TABLE A4.1: PROGRAMS TO ENCOURAGE EIPS/INDUSTRIAL SYMBIOSIS IN THE EU National programs Regional initiatives Local / voluntary initiatives NISP (UK) Cleantech Ostergotland (Sweden) Kalundborg (Denmark) Zero-emission park initiative (Germany) Eco-zoning, Wallonia (Belgium) Dunkerque (France) Environmentally equipped industrial Randstad (Netherlands) Handelo Industrial Park (Sweden) area (Italy) National waste management plan Cania Industrial Park (Italy) (Portugal) Source: Adapted from SOFIES 2013 and World Bank 2021a. Daddi et al. 2016; World Bank 2021a. 164 152 BACK TO CONTENTS ANNEXES EIPs in the EU countries have adopted Focus Section E: The Twin Transition - innovative technologies and business models Digitization that provide state-of-the-art infrastructure and services to help business achieve material Digital technologies can enable and accelerate efficiency gains. Together, these technologies and many barriers. Implementing CBMs can involve business models are helping to scale up the use trade-offs. For example, increasing products’ of renewable energy, water circularity and material/ durability can lead to introducing materials which energy recovery through industrial symbiosis and are more energy intensive in the production phase. other material recovery technologies. For example, Transitioning to service-based business models in Germany, Industriepark Höchst, which has and increasing recycling rates call for additional operated for more than two decades and generated investments in fixed capital to support logistics, 6.65 billion worth of investment and 22,000 jobs, at least in the initial stages. And highly integrated had invested in an innovative biogas technology and value chains may see transport costs increase due business model. This integrated system recovers to narrowing material resource flows. Information and reuses sludge from a wastewater treatment technologies offer solutions that break these plant and generates biogas, which is then used to challenges and move forward the CE transition produce electricity and steam in a combined heat along three dimensions: (a) improving knowledge, and power plant (Figure A4.7). Through this system, connections, and information sharing, (b) revealing more than 310,000 tons of sewage sludge is options to increase material efficiencies of products recovered annually. And together with solar energy, and processes, and (c) strengthening the roles of this innovative system contributed to mitigating over citizens and consumers.165 500,000 tCO2 emissions every year and provided Digitalization is already affecting how additional source of revenues for the park operator. businesses operate and the products and FIGURE A4.7: INTEGRATED SYSTEM OF SLUDGE FROM A WASTEWATER TREATMENT PLANT, INDUSTRIEPARK HÖCHST Filter Sewer sludge cake Steam Biogas plant Filterpress Sewer sludge (co-digestion) incineration plant Wastewater treatment plant Filtrate Solid co-substrates Stabilized sludge Nitrification Co-substrates pretreatment plant Biogas Biogas upgrading Sterilization Electricity Steam Wastewater Packaged co-generation plant treatment plant Source: Infraserv at Industriepark Höchst. European Policy Center 2020. 165 153 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition BOX A4.2: DIGITAL SOLUTIONS TO END LIFE PRODUCTS Existing applications for reusing, recycling, upcycling, and minimizing waste include numerous examples, such as Upmade, an Estonian company that enables the upcycling of textiles, therefore avoiding new material production and reducing waste. The company developed a software to help brands carry out a product-based analysis on its materials and design. Meanwhile, manufacturers can create Upmade-certified garments and are connected with brands through Upmade. Another example is FoodCloud, an online app and platform that facilitates the donation of surplus food from retailers to local charities in Ireland. Charities are automatically notified about unsold food surpluses, can collect the surplus food from the retailers, and distribute it to those in need. The app is currently in use in the United Kingdom and Ireland and cooperates with 3,200 supermarkets and 9,500 charity partners. One example related to enabling tracking and tracing is TrusTrace, a blockchain-powered collaboration platform that aims to increase product traceability and transparency within the fashion industry value chain. Fashion brands, retailers, and consumers gain access to 35 product line data on the substances and materials used in the production of apparel. BOX A4.3: DIGITAL INFORMATION PLATFORMS FOR CIRCULARITY WikiRate Project, the largest openly accessible database of environmental, social, and governmental data, is a collaborative platform enabling academics, investors, companies, and the general public to research, discuss, and rate company performance. Solutions enabling sustainable choices include Amazon’s Second Change web page, which provides instructions for recycling packaging, repairing equipment, and purchasing (certified) refurbished products. Another example is Bext360, which uses blockchain technology to monitor the sustainability of supply chains (for example, cotton, minerals, timber) and traces the consumer back to the producer. Examples of digital nudges for behavior change include apps such as My Little Plastic Footprint, which helps consumers reduce their personal plastic footprint by providing information about plastic waste and encourages them to reduce plastic waste; another example is Giki, a mobile app that awards badges to products on the British market based on their impact on environment and how ethically they were sourced and produced. services they provide. Business models are solutions are promising. For example, building increasingly shifting from producing goods to information modeling is a process of designing, delivering services, and digitalization plays a major planning, and constructing a building using digital role in this development. Numerous examples of 3D modeling software. AI can be used to improve digitalization enabling such new business models design processes by allowing designers to play already exist, which encourage product longevity, with numerous materials and structures and test reusability, and sharing; reduce demand for design proposals. In addition, integrating digital materials and negative externalities; and ultimately technologies into the design of a product can support dematerialization. provide opportunities to enhance the tracking of materials across the value chain, such as QR Information technology informs design choices codes, barcodes, watermarks, and radio-frequency such as end-of-life management and wider identification (RFID) supported by data-sharing environmental footprint. The design phase systems.166 determines what the environmental and climate footprints of products will be across their life cycle, Digital tools, such as AI, robotics, and IoT, are including during their use and end-of-life phases. being used to optimize production processes, In fact, it is estimated that up to 80 percent of a resulting in less waste and emissions. Europe product’s environmental impact is determined at is considered a global leader in industrial IoT (for the design phase. Although the development of example, machine-to-machine communication), circular digital technologies is still nascent, emerging which is used to monitor the functioning of EC 2012; Schweitzer 2019; Wilson 2016. 166 154 BACK TO CONTENTS ANNEXES machines, make them operational at off-peak times, recycling or energy recovery, and these practices enable predictive maintenance, and so on. Further, reduce demand for new products, thus saving digitally enabled solutions such as 3D printing can energy and materials that would have otherwise help cut costs and optimize production by using been used.168 only the exact amount of materials needed.167 Digitalization can both influence and empower Digitalization can also support improving citizens and consumers to play a crucial role in the reuse, repair, and remanufacturing of the transition to a CE. Data and digital solutions products. It is estimated that the European are already being deployed to inform, educate, and remanufacturing market (currently valued at €31 increase the awareness of people on sustainability billion) could grow to 100 billion by 2030, saving issues as well as to nudge people’s behavior toward 21 megatons of CO2 emissions, and create around buying more durable or recyclable products.169 500,000 new jobs. Online platforms facilitate the reuse of products, components, and materials, The EU is leveraging its digital transition giving them a second life. Also, digitalization in pursuit of circularity. In addition to the can also support remanufacturing, which entails policy direction set by the CEAP, a range of EC interventions at the end of a product’s life cycle instruments aim to support the deployment of (for example, dismantling, repairing or replacing digital solutions to foster circular innovations. parts, reassembling) to bring it back on the market, For example, Horizon Europe aims to support usually accompanied by a warrant. Remanufactured the development of indicators and data, novel products are considered more valuable compared materials and products, substitution and elimination to secondary raw materials obtained through of hazardous substances based on ‘safe by BOX A4.4: DIGITAL SOLUTIONS ENABLE PAAS Shifting to a PaaS business model can help businesses benefit from stronger customer relations and generate more stable revenue streams. Digital applications are today a key enabler of PaaS CBMs. Mobility as a service is attracting growing interest, especially in cities and can be provided through apps; for example, in Helsinki, residents can use Whim to access multiple transportation models (for example, train, taxi, bicycle) and users can either opt for monthly subscriptions or the pay-as-you-go method. Another example is clothing-as-a-service online platforms, which are growing in Europe and beyond: Tale Me is a Belgian rental service for maternity and children’s clothes; the Dutch brand MUD leans rents and recycles denim clothing; and Urban Outfitters is starting a rental service, Nuuly. BOX A4.5: SOLUTIONS OPTIMIZING INPUTS AT PRODUCTION STAGE Adidas and additive manufacturing company Carbon developed Futurecraft 4D, a new 3D printed shoe. These 3D printed footwear uses fewer materials and easily recyclable parts. Libelium provides farmers with sensor technology and an IoT-based platform to observe, measure, and respond to the environmental conditions, diseases, and pests that affect their agricultural production. This ‘precision agriculture’ enables growers to match farming practices to crop needs and reduces the use of pesticides, fertilizers, and water while boosting yields. Further, digitalization can help promote industrial symbiosis and the sharing of assets with other stakeholders, hence helping prevent waste. GreenLab is an industrial park developed as a public-private partnership in Denmark, which relies on the integrated intelligent infrastructure to enable energy exchanges between firms. 167 3D printing (for example, additive manufacturing) creates an object layer by layer by adding just the necessary amount of material to produce an item, rather than eliminating surplus material to get the desired product, thus minimizing waste in the production process (European Policy Center 2020). European Policy Center 2020; IoT Business News 2018. 168 Conseil Européen de Remanufacture, n.d.; European Policy Centre 2020; Jansson et al. 2017. 169 European Policy Center 2020. 155 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition design’ approach, CBMs and new production, some €1.8 trillion each year, it accounts for about and recycling technologies, including exploring the 14 percent of the EU’s GDP. Given the sheer size potential of chemical recycling, keeping in mind the of public procurement in the EU, public authorities role of digital tools to achieve circular objectives. not only play a significant role in the investment In addition, the Marie Skłodowska-Curie Actions ecosystem but also have the power to shape aim to support the development of skills and markets and to create new ones by stimulating a training and mobility of researchers in this area. critical mass of demand for innovative goods and Further, the European Institute of Innovation and services. Traditional valuation approaches used in Technology will coordinate innovation initiatives public procurement provide a disincentive to the on CE in collaboration with universities, research emergence of the CE. Circular goods and services organizations, industry, and SMEs within the may induce higher upfront costs but they reduce knowledge and innovation communities. The current maintenance and end-of-life disposal costs. 172 EU information and services toolbox includes a wide range of information and service instruments CPP aims at increasing the resource efficiency (for example, data analytics, cluster collaboration of products and services procured by public platforms, eco-design standards) supporting the EU authorities, therefore minimizing their industry to integrate the CE in their products and environmental impacts and waste creation. services (see Box A4.2 and Box A4.3).170 The 2017 EC guidelines on circular procurement call for “a framework for the holistic consideration The emergence and convergence of of environmental impacts and waste creation technologies bring new opportunities to across the whole life-cycle of goods and services.” accelerate the CE transition. Technologies such The EGD calls for public authorities to ensure that as IoT, big data, blockchain, and AI are creating new their procurement is green. However, CPP remains sustainable business models that will accelerate a voluntary instrument and has yet to become not only circularity but also the dematerialization common practice across the EU public authorities of the economy and reduce Europe’s dependence on all levels.173 on primary materials. For instance, IoT can enable automated location tracking and monitoring of Full cost accounting is central to CPP natural capital. Big data enables several aspects implementation. Full cost accounting helps of circular strategies such as improving waste-to- create the business case for circular good and resource matching in industrial symbiosis system services which would otherwise be considered through real-time gathering and processing of input- disadvantageous based on traditional estimation output flows. In addition, data analytics can be used methods. LCC considers costs related to as a tool to predict product health and wear, reduce environmental externalities, as long as they can be production downtime, schedule maintenance, and monetized and monitored, as well as internal costs optimize energy consumption.171 related to research, development, production, transport, use, maintenance, and end-of-life disposal.174 Focus Section F: Making Markets: Circular Public Procurement Some EU MSs are spearheading test projects using circular procurement. The Dutch Public procurement is an essential demand- government has launched trial projects such as side instrument to support sustainable the N33 highway renovation by applying a circular development. Public procurement refers to the procurement process, among others, aimed at purchase of works, goods, and services by public using renewable input resources. The Danish authorities on all levels of government. Representing Odense municipality constructed 40 new residences 170 EIT, n.d.; EC 2020d. 171 Bin et al. 2015; Ellen MacArthur Foundation 2016b; Kristoffersen et al. 2020; Lacy, Long, and Spindler 2020; Low et al. 2018; Porter and Heppelmann 2014; Shrouf, Ordieres, and Miragliotta 2014. 172 Bleda and Chicot 2020; EC, n.d.-d. 173 EC, n.d.-d, n.d.-e. 174 Circular Flanders, n.d. 156 BACK TO CONTENTS ANNEXES FIGURE A4.8: FROM SUSTAINABLE TO CIRCULAR PROCUREMENT - A FRAMEWORK Found in some form in nearly every Sustainable Procurement country in the region through the use of labels, ISO standards, and preferential Includes economically, socially, and treatment of businesses with sustainable environmentally sustainable procurement business practices. practices. Green Public Procurement (GPP) Promoted by the EU. Increasingly Includes LCC considerations in included in procurement legislation. Its procurement, reduced GHG emissions in application remains, however, limited. production both in terms of input materials as well as finalized product to be procured. Except for a few countries such as DK Circular Public Procurement and the NL, the concept is not applied Governments procure goods that are fully in procurement and poorly understood. recycled, containing reused or reusable Circularity is only applied incidentally resources. Works and goods procured when procuring renewable energies or consider the reuse of input materials in the recycled products as part of GPP. evaluation of bids. for youths with disabilities based on green and The adoption of circular procurement remains, circular procurement requirements. The Swedish however, incipient in several MSs, including Skane region purchased bioplastic aprons for its the four focus countries of this report. In hospitals from 100 percent renewable materials. In Romania, circular procurement is not yet being Latvia, the Preili municipality published a tender for discussed at the policy or institutional level, although the renewal of its public street lightening based on, the Agency for Regional Development of the North among others, the 100 percent recyclability of its East (a public entity) started educating procurement components at the end of their lifetime. These and specialists on the topic. Poland has laid out broad other early adopters underline the importance of: provisions on circularity in procurement and its CE roadmap mentions the role of procurement. In • preexisting market conditions that allow for Croatia, circular procurement is considered rather greater recycling incidentally, and in Bulgaria there is currently no • close collaboration between stakeholders, both evidence of initiatives or legislation addressing the inside the government and outside issue.176 • a good understanding of the concept of circular A widespread uptake of CPP faces barriers. procurement In the short term, procurement agencies are • sufficient fiscal space to bear initially higher constrained in launching tenders with circularity- upfront costs and oriented criteria by what the market can actually offer, given the still limited uptake of CBMs within • political will.175 the private sector. And yet, CPP’s promise is precisely to encourage and guide innovation in the Alhola and Salmenperä 2019; North Sea Region, n.d.; SZREDA 2020. 175 Alhola and Salmenperä 2019. 176 157 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition private sector by signaling demand for circularity to facilitate the transition to circular economies, goods and services. Similarly, procurement including the following: agencies incur constraints in the limited • Taxing power on critical segments of product life, understanding of the economic benefits of CPP starting from waste. The Netherlands imposes across governments. Unless full cost accounting high taxes on waste disposal and mixed waste and LCC are considered and communicated, to discourage these actions. Budget Departments and other government agencies are unlikely to agree to procurement • Financial incentives (subsidies and so on) to activities promising unclear long-term benefits local businesses to support repair and reuse but higher upfront costs. And last, CPP benefits shops and other CE-related initiatives and need to be communicated to legislators, as public to consumers for circular practices such as procurement legal frameworks do not yet include purchasing EVs or trading in old cars for electric principles of circularity or green procurement. bicycles. The informational barriers constraining the • Construction permits disincentivizing virgin rollout of CPP can be resolved. In the short materials and promoting recycling by mandating term, current market readiness levels do not the amount of secondary materials required in prevent procurement agencies from introducing construction projects. nonbinding circularity requirements in tendering • Land planning through zoning and permits, scoring systems, with a view to creating market which is critical to keep cities dense and to expectations of their mandatory nature in the longer prevent sprawl and additional soil sealing. In term. Procurement agencies can encourage policy addition to limiting stocks accumulation, dense coordination among central and local government cities also limit resource consumption flows authorities, leading to legal/regulatory frameworks particularly by incentivizing public mobility codifying the rationale for government function. modes. • Demolition and renovation permits that regulate Focus Section G: Cities as Circularity deconstruction and how CDW is handled, Engines requiring circularity criteria to be inserted in ex ante auditing of deconstruction plans. Cities are centers of resource consumption. Seventy-five percent of the world’s natural • Control over municipal solid waste management, resources, 78 percent of world energy, 60–75 including collection, treatment, and disposal. percent of world’s GHG emissions, and 50 They can enact incentives, bans, and percent of world’s waste are generated in cities. disincentives to make the disposal of materials At the same time, because of their remits, city into landfills undesirable while making reuse, governments incur many of the costs induced by remanufacturing, and recycling desirable. economywide linearities—solid waste management, • Direct control over municipally owned buildings structural waste such as underutilized buildings, and their features at construction, operations, and congestion and pollution all fall within cities’ and maintenance. mandates. Managing waste costs on average 20 percent of municipal budgets in low-income • Purchasing power to create markets for circular countries, 10 percent in middle-income countries, products through public procurement tenders, and 4 percent in high-income countries.177 requiring specific maintenance, take-back, and reuse criteria leading to better resource But cities can also be engines of circularity. management and potentially public finance They have inherent advantages such as density and savings. proximity of producers and consumers and access • Controlling of food service/catering at public to resources such as capital, technology, and skills, institutions such as hospitals, schools, and which can pave the way to innovative business prisons; they can set policies to procure local models. City governments also have key tools World Bank 2018. 177 158 BACK TO CONTENTS ANNEXES and regeneratively grown food and treat organic Cities have a lot of options when it comes to waste. enabling their transition to a CE. However, they also face important barriers, some common • Setting of policies and procedure for collection, to national-level governments and others specific recycling, recover, and reuse of waste through to cities themselves. Barriers that cities face can separate waste collections and treatment be summarized as lack of awareness, lack of systems. technical capacity, lack of coherent strategies, • Decision on whether to own or lease their own funding constraints, and regulation. Some of the fleets for public transit and municipal agency. challenges are compounded by cities being nested • Incentivization of mobility as a service within in national governments and typically within regional cities limits. or subnational governments as well. Without an enabling environment across governance levels, • Provision of incentives for funding local food cities’ leeway can be reduced. In countries such as businesses to adopt CE principles. the Netherlands, for instance, cities are not allowed • Collaboration with other levels of government to set local requirements for construction and to promote and support the sharing, swapping, demolition that exceed the national Construction leasing, and reuse of products through centers Act.178 and platforms, particularly for textiles and Despite these barriers, European cities are electronics. increasingly turning to circularity as a key • Promotion and enforcement of national principle of their development strategies. legislation, for instance, by making EPR a Amsterdam, Brussels, and Paris are the leading requirement for municipal procurement and examples of a number of cities developing city-wide for local businesses through incentives or circular economy plans and strategies, developing disincentives such as taxes and fees. ad hoc metrics and facilitating collaboration among agencies and private stakeholders, and empowering • Data—cities have data from their transportation local communities. systems, building operations, permits, and sales from transportation and building sectors, among others. Cities have control over what they collect, how they manage it, what they do with it, and if/how they share it. Jonker and Navarro 2017; OECD 2020. 178 159 BACK TO CONTENTS BACK TO CONTENTS EXECUTIVE SUMMARY 161 BACK TO CONTENTS SQUARING THE CIRCLE Policies from Europe’s Circular Economy Transition 162