A study rapport requested by the Club of Rome, 2015
The Circular Economy and Benefits for Society – Jobs and Climate Clear Winners in an Economy Based on Renewable Energy and Resource Efficiency
To read the full rapport, click here.
Executive Summary
The central theme of this report is how to greatly enhance resource efficiency. The proposition is that a circular economy, where products are designed for ease of recycling, reuse, disassembly and remanufacturing should replace the traditional, linear ’take, make & dispose’ model that has dominated the economy so far. This, no doubt, is a major prerequisite to stay within the Planetary Boundaries.
It now takes the Earth almost one and a half year to regenerate what we use in a year (Ecological Footprint). Both governments and businesses are beginning to realize that our linear systems of resource use expose both societies and businesses to a number of serious risks. Resource constraints as well as increasing volumes of waste and pollution are likely to impose increasing threats to welfare and wellbeing and, from a business point of view, to competitiveness, profits and business continuity. Simply put: We are in urgent need of decoupling, or put in other words, a transition to an inclusive and circular economy.
The ’circular economy’ is an industrial system that is restorative by intention and design. The idea is that rather than discarding products before the value are fully utilized, we should use and re-use them. Presently only a few percentage points of the original product value is recovered after use.
While relative decoupling of economic growth from resource use has been happening over the past decades, the gains made so far have been rapidly eaten up by a combination of economic growth and the so-called rebound effect, i.e. that the resources freed up by increased efficiency are used up very soon through increased consumption. Here is where the circular economy as a powerful concept comes into play.
Most studies so far on the circular economy have focused primarily on the business case for enhanced resource efficiency. This report rather focuses on the social benefits that a transformation from a linear to a circular economy would entail.
The main purpose of this report is to broadly explore the potential for a significant increase in resource efficiency and to specifically assess what the main benefits for society would be – looking at carbon emissions and employment in particular. We are using the Dutch, Finnish, French, Spanish and Swedish economies as test cases.
It seems from the countries this study has explored – Finland, France, the Netherlands, Spain and Sweden – that the circular economy is a concept which will offer a number of societal benefits for Europe, not least in terms of carbon emissions reductions and new jobs.
The study is relevant not only from an academic but also from a political perspective, particularly in the EU context. The European Commission took several important initiatives in the area of resource efficiency during the years 2011-2014, culminating with the Circular Economy Package.
In November, 2014, the Juncker Commission decided to withdraw the proposal under the pretext of “deregulation”. After a lot of critique the Commission has made a commitment to re-launch its proposal. The objective will be to present a revised proposal in December 2015. According to several statements by the Commission – and implicit in the public consultation on the topic – the aim now is a much broader scope, aiming to “promote the circular economy across the whole value chain”.
We hope that this report can provide valuable input to the discussion on the Commission’s new proposal, as well as national policies, particularly in terms of highlighting the opportunities offered by the Circular Economy for the EU’s competitiveness and jobs agenda.
Case Study findings
In this study the target date for the changes to be obtained in terms of decoupling is set for 2030. By making use of a traditional Input/Output model – which accounts for the interdependencies of different branches of a national economy – the report assesses first and foremost what the likely effects would be on carbon emissions and job opportunities in Finland, France, the Netherlands, Spain and Sweden – of the following key steps in a circular economy:
1) Enhancing energy efficiency The economy in each country would become 25% more energy-efficient.
2) Increasing the percentage of renewable energy in the energy mix, by cutting fossil fuel use in half and substituting it with renewable energy sources, as for example wind, solar and biofuels.
3) Organizing manufacturing along the lines of a materially-efficient circular/performance-based economy, i e by extending wealth, minimizing waste and maximizing the reuse and recycling of materials. A combination of a 25% overall increase in material efficiency + 50% of all virgin materials being replaced by secondary materials + doubling the product life of long-lived consumer products compared to today.
The results are very clear. For each and every one of the three decoupling alternatives – in each of the countries studied – there would be a significant reduction in carbon emissions. In addition, the employment effects would be clearly positive. The results were the following in summary:
The renewable-scenario for all five countries led to an estimated 50% reduction in carbon emissions. That was expected, as halving fossil fuel use should have that effect.
There was no significant net effect on employment unless the respective countries would give priority to using of domestic biomass, rather than other renewables, in substituting fossil fuels. However, when residue materials from the agricultural and forestry-sectors are used in the supply of renewable energy significant number of jobs will be created – not least in the rural regions, where unemployment rates most often are the highest. Up to 15,000 new jobs
could be created in Finland and Sweden, respectively, up to 50,000 jobs in the Netherlands, and up to 100,000 jobs in France and Spain, respectively. In addition, and equally important, there would be a surplus in the balance of trade with a third to two-thirds of a percentage point of GDP in all the countries being explored. As all of the countries examined are net importers of fossil fuels that was also an expected outcome.
The energy efficiency scenario would be likely to cut carbon emissions in all five countries by roughly 30%. Here, the effect on employment would be positive and add new jobs in the range of 15,000 people in Finland, 20,000 people in Sweden, 100,000 people in the Netherlands and 200,000 people in France and Spain, respectively. The trade balance would be improved in most countries, but less so than in the renewable scenario. France and Spain are likely to experience the largest trade surplus gains at 0.4% of GDP. The job increase is partly temporary in nature. However, it would last for many years, probably a couple of decades, during which time the necessary investments in retrofitting of old buildings and other efficiency improvements are undertaken.
The material efficiency scenario is likely to cut carbon emissions in all the countries by between 3 and 10%. The gains in terms of employment would be more significant – representing more than 50,000 people in Finland and Sweden, respectively, more than 100,000 in the Netherlands, more than 200,000 in Spain and more than 300,000 people in France. The same goes for the trade balance – the estimated trade surplus improvement would be in the magnitude of 1-2% of GDP. The new jobs generated are permanent in nature, primarily as a consequence of the changes in the goods-to-services ratio in the economy.
If all the three decoupling strategies would be pursued together the results would be substantial. As the three decoupling scenarios support and enforce each other in virtuous circles – improved resource efficiency having energy efficiency effects, and energy efficiency making it much easier to increase the share of renewable energy and cut the use of fossil fuels – the combined scenario would in reality be the easiest one to achieve:
1) Carbon emissions are likely to be cut by two thirds or more, almost 70% in Spain, structurally.
2) The number of additional jobs would exceed 75,000 in Finland, 100,000 in Sweden, 200,000 in the Netherlands, 400,000 in Spain and half a million in France. This means that unemployment rates could be cut by a third in Sweden and the Netherlands, and possibly more – maybe even cutting unemployment in half, provided that some of the likely trade surplus gains would be used for investments domestically, preferably in a way according to the investment-packages presented later on in the report. In Spain the unemployment rate is likely to be reduced from a bit above 20% to somewhere close to 15%, in Finland unemployment could be reduced by a third and in France by almost a third.
3) The improvement in the trade balance would be around – or even above – 1,5% of GDP in all of the countries studied – representing a few billion euros a year in Finland, more than five billion euros a year in Sweden, around 15 billion euros a year in the Netherlands, 20 billion euros in Spain and 50 billion euros in France. It should be noted, however, that there would be no trade balance gains globally. Some countries, especially fossil fuel and virgin material exporters, tend to lose. Over time – once economies around the world would become more circular, the benefits for the five European countries explored in this study would be reduced.
The result of the simulation is like a snapshot. It describes a hypothetical situation, based on certain assumptions. The simulations were based on a combination of manipulating sector supply chains – in favour of renewables and secondary materials – and anticipating at the same time a significantly higher overall level of resource efficiency in the economy.
Policy implications
While further case studies are needed to confirm the results of the case study of the Dutch, French, Finnish, Spanish and Swedish economies, it is nonetheless possible to draw some definite conclusions in terms of policy implications, of relevance for each country being part of the study and for the ongoing EU debate on a Circular Economy.
With a growing population, and in the developing countries a much-needed increase of per-capita-income (affluence), technology innovation, in combination with behaviour change – and underpinned by policy reforms – are the only options we have to bring down the environmental impacts. Luckily, there are many types of decoupling that could and should be achieved by improved technology, often complemented by behavioural change. Unfortunately, policies to promote such actions are rare. While the promotion of labor productivity has been a priority for economic policy-making in the past, resource productivity has been more or less neglected.
To move the economy in the direction of a circular economy, with the potential to deliver considerable social benefits, would require deliberate policy measures – as well as targeted investments – over a period of time; the main objective being to reduce the energy and material throughput in society. Of central importance will be to view a circular economy not as an environmental issue alone, but as an integral part of jobs and competitiveness strategies.
On a related note, a current limitation is that most climate change mitigation strategies are sector-based, with a primary focus on energy use. The general level of resource use in society is seldom taken into account – in spite of the fact that the climate benefits from using products longer and from enhanced rates of recycling and reuse of materials ought to be obvious. The energy saved when recycling metals, for instance, is significant. As a consequence, climate change mitigation strategies need to become more holistic and consider resource efficiency as a key instrument.
In addition to this much needed reframing of the circular economy debate, far-reaching policy reforms are also needed. Some of these measures are already being implemented in some of the countries explored in this study as well as in the EU, albeit not to the extent possible. Such examples are support systems for renewable energy, emissions trading, the eco-design directive, energy efficiency standards, targets for recycling of materials, etc. All these policy measures are in need of being strengthened.
In addition a number of new policy measures should be considered, like a more proactive use of public procurement, earmarking investments in favour of resource efficiency within EU’s different funding schemes, adoption of resource efficiency targets for materials where scarcity is looming or the overall environmental impact of resource extraction and use is significant, and the promotion of new business models geared at functional sales.
It will also be of crucial importance to rethink taxation. This policy area is not an EU competence at present. But the European Commission should be encouraged to take the lead and stimulate a process encouraging Member States to embark on a necessary tax shift.
Taxation in industrialized countries is dominated by taxes on labor. Taxes on the use of natural resources and the resulting undesired waste and emissions, however, are very low. To move society towards sustainability – both socially and ecologically – would require a tax shift, lowering taxes on work and increasing taxes on the consumption of non-renewable resources in the form of materials and fossil fuels. Such a tax shift would accelerate the transition to a circular economy, which is low-carbon and resource-efficient in nature.
An economy favouring reuse and recycling of materials as well as product-life extension is, by definition, more labour-intensive than one based on a disposal philosophy, i.e. linear resource flows. The main reason, of course, is that caring for what has already been produced – through repair, maintenance, upgrading and remanufacturing – is more labour intensive than both mining and manufacturing (often in highly automated and robotized facilities).
Parallel to tax reform, the system of VAT should be carefully analyzed. Goods produced by secondary materials – where VAT has already been paid once – should be exempted from VAT. Such a reform would promote the use of secondary materials – i.e. reuse and recycling – and help correct a situation where it is often less expensive to use virgin materials than recycled ones.
The investments required – in addition to the normal level of investments – for moving towards a circular economy have been calculated to be in the range of 3% of GDP per annum – currently around six billion euros in Finland, 12 billion euros in Sweden, 20 billion euros in the Netherlands, 30 billion euros in Spain and 60 billion euros in France – every year from now on until 2030. This amount equals about half of the current Swedish balance of payment surplus, less than a third of the Dutch balance of payment surplus. Finland, France and Spain, having run trade and balance of payment deficits in recent years, would have to struggle more to finance these investments. The investments would be needed primarily in the following sectors:
1) agriculture, forestry, timber, pulp and paper to promote biofuels and to develop new bio based products
2) installation services and construction/renovation to promote energy-efficiency and renewable energy sources
3) sustainable infrastructure concerning especially energy and transport, for instance mass-transit transport systems and electric vehicles and ways to charge them
4) maintenance and repair, recycling and development to promote material-efficiency
5) engineering services and as well in education to be able to meet the increased demand for new competencies in areas like product design, recycling and remanufacturing as well as new business models. The labour force must be ready to take on a set of new tasks required in the emerging “new” economy.
Investments of that magnitude would decrease unemployment with another 2% in all of the countries studied due to the increased domestic production the investments would lead to. As more or less half of the total production value incurred by investments in Finland, France, the Netherlands, Spain or Sweden would take place abroad, i.e. foreign firms exporting components to the investment projects, unemployment would come down in other countries as well. This means that for every member-state deciding to embark on an investment package like the one described, there will be positive employment effects in the EU as a whole. This is a natural consequence in an open-market trading-zone like the EU.
Authors: Anders Wijkman and Kristian Skånberg
Modelling: Kristian Skånberg and Mårten Berglund