Can modelling help better understand the transition to a more circular economy?

By Ruben Bibas, Jean Chateau, Rob Dellink, Elisa Lanzi, Eleonora Mavroeidi, OECD Environment Directorate

Image credit: ESB Professional

Economic models have been used for decades to quantify the future costs and benefits of climate policies. With increasing interest in the concept and implementation of a circular economy, the question is: can models also help better understand the transition to a more circular economy?

The answer is yes! Models can provide a better understanding of the link between economic development, materials use and the environmental pressures linked to the extraction, processing and disposal of materials. These include greenhouse gas emissions, pollution to the soil, water and air, and toxic effects on humans and aquatic and terrestrial ecosystems. Furthermore, models can be used to analyse the costs and benefits of resource efficiency and circular economy (RE-CE) policies, showing the trade-offs between economic consequences and the reduction of the environmental impacts.

The innovative modelling approach of the OECD’s RE-CIRCLE project shows that models can be a very useful tool to better understand the transition to a circular economy.  For this project, the OECD ENV-Linkages model has been extended to include materials use for 60 different materials across four categories: biomass resources, fossil fuels, metals and non-metallic minerals. Furthermore, the model has been enhanced to consider both primary and secondary metals, meaning that within the model metal products can be produced using metal ores as well as recycled scrap metal.

Exploiting these model developments, the Global Material Resources Outlook published in 2019 showed that, unless more ambitious policies are implemented, materials use is projected to double by 2060 and rise from 89 billion tonnes in 2017 to 167 billion tonnes in 2060. That means that daily individual consumption of materials would increase from 33 kg in 2017 to 45 kg in 2060 in the absence of policy change. Both population growth and improved living standards contribute to this growth while materials growth can be limited by technology improvements and structural change (the evolution of the shares of the various activities in the economy). The consequence of an increasing growth in materials use is an increase in its environmental consequences, which include a projected doubling of greenhouse gas emissions.

Source: Global Materials Outlook to 2060

RE-CE policies can limit the growth of materials use and its environmental impacts. Simulations with the ENV-Linkages model show that a RE-CE policy package can prove very effective in reducing raw materials use, with minimal effects on economic growth. The RE-CE policy package triggers a relative decoupling of raw material use from economic growth in future years and a switch from raw to recycled materials. The lower use of materials and the shift from raw materials use to recycled materials reduces the environmental impacts significantly.

The specific policy package analysed in the model’s simulations shows that, at the global level, raw materials use can be reduced by 27% for metals and 8% for non-metallic minerals, with a limited impact on global economic activity, equivalent to an overall loss of 0.2% of global GDP, compared to the baseline scenario for the year 2040. The economic impacts are small but hide regional disparities, which depend on whether countries are net importers or exporters of raw materials, as well as on the production technologies available and the input costs of primary and secondary materials.

The differences in costs between sectors and regions in the implementation of RE-CE policies result in changes in demand and trade patterns across regions. Changes in the regional sourcing of the primary materials account for roughly one-third of the total reduction in materials use. The remaining two thirds come from reduced economic activity and increased efficiency. In addition, the competitiveness of some firms, especially ones that produce less efficiently, may be hurt, while other firms, such as those using recycled products, can increase their share on the domestic and global markets.

A crucial effect to ensure the success of RE-CE policies is their potential impacts on job creation. Simulations with ENV-Linkages shows that the modelled RE-CE policy package has a marginal but positive employment impacts for most countries. The jobs lost in the sectors that provide raw materials (e.g. mining and construction) are more than compensated by jobs created in booming sectors (including recycling). Although the aggregate employment effect is small and limited to 18 million jobs in 2040, it hides larger reallocations across sectors and countries. Countries with large extraction sectors face slightly more job losses than job creations.

A major advantage of the new features of the ENV-Linkages model is that it now allows us to analyse both resource efficiency and climate policies. Combining the RE-CE policy package with policies to support a low-carbon energy transition shows strong synergies. The mutually supportive policies drive a stronger decrease in raw materials use, while GDP costs remain limited.

The possibility to study integrated policies within a coherent modelling framework provides policy makers with the analysis and evidence base to support policy shifts towards greener economies. This is particularly important in the current push towards a green recovery as a major part of the economic stimulus to recover from the COVID-19 pandemic.

The ENV-Linkages model has also been enhanced to study the economic consequences of air pollution policies, including interactions between climate and air pollution policies. We are currently using these new modelling capabilities to explore important topics, such as the implications of the Covid pandemic and response measures on a range of environmental pressures. And – because we’re not scared of a challenge – we are working on further expanding the model to include plastic consumption and waste. This will allow us to study scenarios that aim to reduce plastic leakage to the environment. All these developments will put us in a great place to assess the interlinkages between the economy and a wide range of environmental pressures.

Further reading

Bibas, Chateau and Lanzi (2021), “Policy scenarios for a transition to a more resource efficient and circular economy”, OECD Environment Working Papers, No. 169, OECD Publishing, Paris, https://doi.org/10.1787/c1f3c8d0-en.

Chateau and Mavroeidi (2020), “The jobs potential of a transition towards a resource efficient and circular economy”, OECD Environment Working Papers, No. 167, OECD Publishing, Paris, https://doi.org/10.1787/28e768df-en.

Dellink (2020), “The consequences of a more resource efficient and circular economy for international trade patterns: A modelling assessment”, OECD Environment Working Papers, No. 165, OECD Publishing, Paris, https://doi.org/10.1787/fa01b672-en.

OECD (2019), Global Material Resources Outlook to 2060: Economic Drivers and Environmental Consequences, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264307452-en.

OECD (2020), Improving resource efficiency and the circularity of economies for a greener world, OECD Environment Policy Papers, No. 20, OECD Publishing, Paris,, https://doi.org/10.1787/1b38a38f-en.

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