Key lessons from the European Union’s circular economy transition

Today, a staggering 90% of Earth’s total biodiversity loss and up to two thirds of all greenhouse gas emissions result from the extraction and processing of raw materials. The latter can also be directly linked to one third of all air pollution-related health impacts and is a key driver of water stress, deforestation, and soil depletion.

Rising global resource consumption is intimately linked to concerns over economic security and equity. Although most materials remain abundant – for the moment – on the Earth’s crust, their availability is not guaranteed, particularly for critical raw materials such as rare earths that are vital to scaling up global renewable energy capacity. And not everyone benefits from today’s consumption trends, the environmental consequences of which are increasingly being outsourced to low-and middle-income countries. With the average material consumption per person in high-income economies being at least five times greater than the average of most African countries, convergence in welfare and growth will continue to lag.

The hard truth is that current demand for natural resources exceeds our planet's regenerative capacity by a factor of 1.75, and we simply do not have another Earth.

Go Circular

We need a new development agenda to decouple growth and welfare from material use. The circular economy (CE) model, focused on a life-cycle approach to resource management that breaks away from the traditional, linear “take-make-use-waste” approach is starting to gain traction.

CE starts with reducing raw material demand by looping resources back into consumption and production systems, through innovations in material design, production, and reutilization processes. In addition to easing environmental pressures, the circular transition can propel private sector growth.

Countries in the European Union (EU) have made serious progress in spearheading the development and implementation of CE policies, emerging as leaders on material efficiency.

Over the past two decades, total material use in the EU has decreased by 9.4%, and the share of resources derived from recycled waste increased by almost 50%. Yet progress in truly decoupling growth from material use appears more limited, once accounting for Europe’s actual material footprint, i.e. the resources effectively embodied in the products imported and consumed in Europe. The EU’s CE experience can therefore offer lessons for stakeholders within and outside of Europe, which is why we recently published an analysis Squaring the Circle: Policies from Europe’s Circular Economy Transition. Some key messages of the report include the following:

• The economy-wide costs associated with Europe’s circular transition are modest - even ambitious deployment of policies will reduce 2030 GDP by only around 1% below baseline projections. Still, labor market impacts, particularly for low skill workers, will need to be managed. Ambitious fiscal reforms aimed at shifting the tax burden away from labor and towards raw materials can be growth enhancing and mitigate adverse social impacts, while improving the competitiveness of circular business models vis-à-vis their linear alternatives.
• Domestic CE policies inevitably have cross-border impacts and spillovers. While the introduction of more stringent regulatory standards may induce production leakage - with the outsourcing of more material intensive industries within ‘linear production havens’ outside the EU’s borders - trade integration means that EU CE policies carry repercussions for Europe’s commercial partners, which might face higher standards and requirements. This points to an increasingly significant role of trade policy in supporting the circular transition.
• Europe’s private sector is and will remain the engine of the circular transition. But in absolute terms, circular business models remain peripheral in most markets. Recycled materials represent only 8.6% of total raw material input, while the share of remanufacturing to new manufacturing is 1.9%. Even the production of secondary raw materials from waste only accounts for 30 to 40% of the physical output of sectors in which this practice is more established, such as steel, pulp and paper. While firms across the EU are already implementing disruptive circular business models, they face a host of internal and external constraints in scaling up and accelerating innovation, such as firm-specific bottlenecks and economy-wide barriers. Without truly disruptive policies, CE business models risk remaining stuck in a growing niche market, rather than driving the displacement of the traditional linear economy.
• Low-income countries economically dependent on the EU’s demand for materials will be impacted by the resource efficiency gains achieved in high income countries through CE policies. While high-capacity countries can reap the benefits of the circular transition by adapting their productive sectors, the opportunities facing low-income economies heavily concentrated on the extraction and export of biomass, metals, and minerals will suffer from low economic diversification and technology adoption. Here, development interventions will need to focus on enhancing low-income countries’ capacity to adapt to future shifts in trade requirements.

Achieving material decoupling is possible. The lessons learned from the EU’s experience can help advance the world-wide effort to move to a truly circular economy, helping bring balance to global raw material consumption and build a more resilient and sustainable economy for all.