Deep inside Mario Draghi’s 400-page report on ‘The future of European competitiveness’, issued on 9 September and intended as a foundation for European Commission strategic planning in the next five years, lies an important market failure. On critical raw materials, Draghi states that secondary raw materials are mostly more expensive than primary ones. He notes however that this would change “if the negative environmental externalities associated with the resource-intensive (energy, carbon) production of primary raw materials would be internalised.”
This is a fundamental argument in environmental economics: raw materials are artificially cheap because the costs of their extraction and processing are paid by local people who suffer from the destruction of nature, pollution and water shortages. And then taxpayers pay for end-of-life disposal of the final products – far from the ‘polluter pays’ principle.
The EU has addressed this failure in relation to greenhouse gas emissions by putting a carbon price on the environmental damage they cause. But the other negative externalities of massive extraction and processing – including biodiversity loss and health damage – remain unpriced in advanced and developing countries alike. Thus, firms lack incentives to improve their efficiency in resource use and waste is ever growing – causing a collective problem.
Draghi’s solution would be to extend the EU emissions trading scheme to incineration and landfilling to make recycled goods more attractive. To avoid crowding out of domestic secondary material production by imports of cheaper virgin material, he says the EU should combine carbon pricing with minimum recycled content requirements.
He focuses on critical raw materials and on the end of life of products. However, much more could be done earlier in the life of products – up to 80% of environmental impacts could be eliminated in the design phase of products. The application of circular principles (such as using the fewest resources possible, extending their productive life for as long as possible, and eliminating waste) in just seven sectors, including steel, construction, plastics and vehicles, could reduce annual EU industrial emissions by 34% by 2050. A circular single market would protect the resource-poor European economy from price volatility that damages competitiveness, and from future increases in the cost of many raw materials.
Surprisingly, while Draghi’s report covers many other aspects of improving European productivity growth, he leaves out the contribution that materials productivity – how long and how efficiently materials are used – can make. There are also considerable innovation spillovers from circular technology. Moreover, the solutions that European companies are developing for waste management, resource efficient production and ecodesign are exportable to the many other regions where governments are seeking to recover value from waste and reduce the environmental impacts of extraction.
These innovation and productivity benefits of circularity should be taken up by the European Commission in developing the Circular Economy Act, promised by Commission president Ursula von der Leyen. Draghi identifies many obstacles to circularity in critical raw materials that would enhance security of supply for the green and digital transitions. His report covers mainly the end-of-life of products, advocating incentivising investment in infrastructure for re-use and recycling; harmonising waste regulations across countries and removing the barriers to scale in recycling and recovering value from waste; strengthening the demand for secondary materials (eg through use of digital product passports to facilitate minimum content requirements); and preventing imports with lower recycled content obligations from undermining EU standards and causing loss of EU recycling capacity.
By contrast, another former Italian prime minister, Enrico Letta, made a more holistic case for the competitiveness benefits of circularity in his April report for the Council of the EU on the future of the single market. Letta highlighted the considerable opportunities for European firms to raise the potential return on investment by leveraging the full life-cycle value of resources and products, arguing that the linear economic model is “inherently unstable and inefficient”. He advocated the EU championing standards for circular product design, applying them not only to goods produced in Europe but also to imports.
These are sound recommendations for sustainable competitiveness that would benefit firms over the longer term and enhance economic security. However, they may be crowded out by short-termism, particularly demands for less regulation and for keeping prices down now. To stay the course, the Commission should listen to the positive views of companies in most sectors, which see the circular economy as an opportunity rather than a risk.
Draghi rightly calls attention to the major risks inherent in the “commodity supply model” of depending on extraction of raw materials from resource-rich nations and processing in other countries (eg China). But in addition to these political and market risks, climate change will make raw materials more expensive in future by reducing land and water availability. Regulation to increase circularity – such as the forthcoming Circular Economy Act – might raise production costs in the short term but this is likely to be outweighed by the benefits of giving European companies an incentive to invest in resource efficiency. They would then be better positioned to compete in harsher conditions in the future.
About the author:
Heather Grabbe is a Senior fellow at Bruegel, as well as visiting professor at University College London and KU Leuven. The focus of her research is the political economy of the European Green Deal and how the climate transition will change the EU’s international relationships and external policies.