Beyond Energy: Incentivizing Decarbonization through the Circular Economy

In recent years, the replacement of fossil fuels with renewables in power generation and improvements in energy use efficiency have contributed the largest proportions of global CO₂ emissions reduction.  With the recent acceleration of ambitions on decarbonization – and countries adopting targets to achieve net-zero carbon emissions by the middle of this century – these predominant measures have limitations: first, there is evidence that direct electrification may not be feasible in ‘hard-to-abate’ sectors outside of electricity generation. Second, the predominant approach has disregarded the globalization of trade and supply chains and spatial dissociation between places of extraction, production, and consumption. In the current ‘linear’ decarbonization model, a sole focus on the reduction of emissions from energy production is likely to be insufficient to achieve net-zero objectives, as emissions would need to decline very rapidly to offset the expansion in economic output.

In this paper, the authors ask what other solutions can be used to enhance decarbonization and meet net zero carbon targets. The circular economy – a traditional concept in the economics of production and management of resources that has typically been adopted at the organizational level – can be a strong complement to existing policies in enhancing decarbonization through non-energy means. However, some broad conditions need to be met for circular economy approaches to lead to net economic as well as environmental benefits when extended to an economywide level, including the more intensive use of an existing stock of resources, development of secondary markets to aid circular flows, and measures to prevent or mitigate unintended consequences.

The authors argue that there is a strong case for the establishment of clear public policy frameworks to ensure that circular economy approaches can complement decarbonization policies, while at the same time avoiding unintended consequences of sectoral application at the macro level. In practical terms, there are barriers to implementation, including: prevailing government regulation that is dominantly oriented towards the linear model of economic operation and hence decarbonization; the complexity of consumer behaviour; and, the absence of a dominant business model encapsulating the main components of the circular economy approach.

Circular economy approaches implemented through cohesive public policy frameworks should become an integrated part of the existing instruments of decarbonization, as during the energy transition they can potentially fulfil the dual functions of efficiency and decarbonization. Moreover, circular economy approaches would continue to be relevant even beyond a time when full decarbonization has been achieved, by playing their traditional function of improving efficiency, ultimately making the adoption of circular economy policies a “no-regrets” strategy for governments.

By: Anupama Sen , Luca Meini , Carlo Napoli