IISD Speech: President and CEO Scott Vaughan at the World Circular Economy Forum 2017, Helsinki
The world meets in Helsinki to accelerate the progress well underway toward a cleaner, zero-waste, carbon-neutral circular economy. In May 2017, at the Belt and Road Initiative Forum in Beijing, President Xi Jing Ping underscored the central role of a green, low-carbon and circular economy in China and the broader and growing Belt and Road partnership. This amplifies China’s current commitment in its five-year plan to scale-up circular economy commitments.1
In Europe, remarkable changes are underway—led by markets, driven by business innovation, demanded by consumers and enabled by public policy—that are changing product design, value chains and trade patterns from a linear to a circular economy. The SDGs, in particular SDG 12 on Sustainable Production and Consumption, are providing structured focus to measuring implementation.
I want to focus on three macroeconomic indicators of relevance to the circular economy.
Is GDP Still Fit for the Purpose?
First, the overriding economic indicator that political leaders watch is quarterly and annual GDP.
A key question is whether this economic indicator—which emerged in an earlier version from the Great Depression and then within the Bretton Woods system 72 years ago—is fit for today’s purpose?
Estimates by the European Commission suggest the benefits from EU-wide resource-efficiency improvements along value chains could reduce material inputs by between 17 per cent and 24 per cent. These savings in turn would bring about potential savings of EUR 630 billion per year for European industry.
These numbers are clearly compelling. The problem with GDP, however, is that it does not measure—and essentially is indifferent to—savings, as it was created to measure income.
Models exist to measure the indirect income effects that arise from savings: in the case of the same Commission study, savings reinvested into the economy—through, for example, input substitution or investments in efficiency that include capital costs—can in turn be measured in GDP. They estimate circular economy approaches could boost EU-wide GDP by up to 3.9 per cent by creating new markets and products while creating value for business.
This arrival at the benefits of circular economy through GDP remains problematic; the move beyond GDP has been underway for many years, including very good work by SITRA, the French government through its Commission for Sustainable Development, and many others here.
The Trump Paris exit speech underscores the need to ramp up work on beyond GDP not just in the context of the circular economy, but also in view of the challenges the Paris accord must weather, and the integrated notion of the SDGs more broadly.
Trump’s speech could have been made in the 1970s. It cited economic studies that measured only the costs of climate mitigation action to jobs and sectors. It didn’t mention the costs of inaction, the benefits of action, quickly expanding global markets for low-carbon, green and sustainable good and services, let alone climate science.
I wanted to mention costs and benefits. The OECD has been making valuable contributions to measuring the economic costs of climate change and pollution. Last week, my IISD colleagues released a comprehensive report that estimated the pollution damage costs in Canada at $39 billion per year. A recent report of the U.S. National Academy of Science—Valuing Climate Damages: Updating Estimation of the Social Cost of Carbon Dioxide—puts the damage costs per one million metric tonne of CO2 equivalent at USD 42 a tonne.2
There are many other examples. Yet GDP won’t capture most of those damage costs, or the societal benefits of avoiding damages.
Which is why I think economic arguments around the circular economy need to address how it can be measured both within conventional GDP while simultaneously drawing on complementary “beyond GDP” accounts that are robust, transparent and standardized for comparability.
IISD released a report Comprehensive Wealth– that included GDP but measured four pillars: human capital, natural capital, social capital and produced capital. These four capital (rather than income) pillars are the standardized methodology that have emerged from over two decades of work.
In a nutshell, while the report showed that GDP can steadily increase, it is blind to declines in one or more of the four categories. In the case of Canada, the report showed a 25 per cent drop in natural capital in the past three decades. Data from net extraction rates in Europe and worldwide should make a compelling argument to maximize resource efficiency and recycling. The International Resource Panel estimates that the amount of primary materials extracted from the Earth tripled in the last four decades.
We need more comprehensive and holistic economic measurements than the current income-focused GDP to magnify the compelling reason why the circular economy is needed.
Employment and Circular Economy
The second area is jobs. In the 1970s, when the debate was limited to a choice between jobs or a clean environment, Trump’s speech might have made more sense. Yet the new and emerging circular economy offers strong potential for increased job growth. There has been good (though currently incomplete) work from statistical agencies such as the US Bureau of Labour Statistics, the ILO, the World Economic Forum, the International Renewable Energy Agency and others on increased job growth in the new economy. Again, the work of SITRA on income and labour in the new economy is excellent.
For the circular economy, we have heard the estimates from the Commission: successful implementation of a circular economy could potentially create more than 180,000 direct jobs in the EU by 2030, in addition to the estimated 400,000 jobs that will be generated by the implementation of the waste legislation in force.3 Linking these EU-wide targets to Horizon 2020 is welcome to build coherence between scientific research, including small and medium-sized enterprises in design towards eco-innovation, and economy-wide benefits from jobs and avoided pollutants.
Work by the Global Partners of the Ellen MacArthur Foundation suggest the circular economy would create between 7,000 and 13,000 job equivalents in Denmark alone by 2035; other country-based analyses are providing additional and robust data.
With this ongoing work, we need to amplify the net labour implications of the circular economy—both within Europe as well as with trading partners—as well as its sector-specific employment, wage and income implications.
Clearly, anxiety around jobs, wages and income inequality remains deep among many citizens. Again, households may see quarterly GDP indicators showing net increases yet speak little to their families and communities.
This emphasis on jobs is even more urgent in developing countries. Development in most industrialized economies in the past century has been based on a high GDP-to-raw material coefficient: on average, for every 1 per cent increase in GDP, raw material use has risen by 0.4 per cent, with a high proportion of raw material inputs in industrial economies returned to the environment as wastes.
We thus urgently need to show that breaking away from the GDP model will not hamper, but rather help meet, the development ambitions of developing countries.
According to the ICMM, in roughly 50 developing countries (including Botswana, DRC, Suriname, Mongolia and Zambia), mining is responsible for the largest share of the national economy. Yet the sector is shedding jobs as it increases automation. We thus need to look carefully at the link between jobs and the circular economy in the additional context of automation.
A recent IISD report (Mining a Mirage) estimated that current shifts to automation throughout the mining supply chain based on current technologies and planned operational changes will reduce employment by between 30–40 per cent in open-cut, iron-ore mines, and upwards of 75 per cent in open-pit mines.
We need to support developing country mining activities that move toward higher value precious metals and materials, a shift that is already underway. We also need to think about how the current frameworks of Impact Benefit Agreements (IBAs) could take into account home-country recycling of materials in relation to an emerging new generation of IBAs. There is a need for similar employment effects of the circular economy to address food waste and its impact on developing country agricultural labour markets and trade, and other key sectors.
Getting Incentives Right
The third cluster is fiscal treatment. There is an increased emphasis on the role of fiscal policies in climate change: over 50 countries use market-based climate policies within their Nationally Determined Contribution plans. For a decade, IISD has been working on identifying, reducing and eliminating fossil fuel subsidies, and applauds the leadership of Finland as part of the Friends of Fossil Fuel Subsidy Reform.
Fiscal measures such as waste management practices—notably through landfill and incineration taxes, pay-as-you-throw, extended producer responsibility and incentives to promote reuse and recycling—have improved.
Yet there are many fiscal policies in place that encourage the exploration and exploitation of new resources and discourage recycling. In the mining, oil and gas sectors, exploration companies often have very high tax write-offs for operations, measures to attract investors through flow-though shares, and use generous accelerated capital cost appreciation rates unavailable to others.
I wanted to make a final comment.
The financial system is traditionally rigid and risk-averse in providing capital to investments in efficiency. This is slowly changing. For example, the Green Bond Principles umbrella identifies energy efficiency and renewable energy as key investment criteria. China is now the global leader in green bonds, and despite the Trump speech, private sector climate finance—as well as supporting signals from central banks around climate risk—will only increase. The Natural Capital Financing Facility of the Commission, the European Investment Bank and its programs are doing welcome work. Canada has established a new Developing Finance Initiative under Export Development Canada, and, with the Asia Infrastructure Investment Bank, can leap-frog legacy projects like coal and fossil fuels in favour of a new generation of clean, low-carbon and circular economy-based projects.
1 The 13th Five –Year plan sets out a number of commitments for guiding circular development, including accelerating efforts to recycle resources from refuse. The plan commits to industrial layouts based on material flow and industrial linkage, encouraging industrial parks to adopt a more circular operational flow, establishing hybrid industry-agriculture circular economy demonstration zones, and promoting the coupled growth of enterprises, industrial parks, and industries. It notes the importance of facilitating the recovery and utilization of mineral resources from urban waste, ensuring that resources from industrial solid waste and other types of mass refuse are recycled and reused, accelerating the establishment of systems for the recycling or safe disposal of urban kitchen waste, construction refuse, and textile waste, and developing remanufacturing in line with standards, and extending the producer responsibility system.
2 Retrieved from https://www.nap.edu/catalog/24651/valuing-climate-damages-updating-estimation-of-the-social-cost-of?utm_source=NASEM+News+and+Publications&utm_campaign=6d2a04c6c2-NAP_mail_new_2017-05-30&utm_medium=email&utm_term=0_96101de015-6d2a04c6c2-102211113&goal=0_96101de015-6d2a04c6c2-102211113&mc_cid=6d2a04c6c2&mc_eid=3028f247c1
3 The Commission sets out targets includin recycling 65 per cent of municipal waste by 2030; recycling 75 per cent of packaging waste by 2030; binding landfill target to reduce landfill to a maximum of 10 per cent of municipal waste by 2030; a ban on landfilling of separately collected waste; the promotion of economic instruments to discourage landfilling; simplified and improved definitions and harmonized calculation methods for recycling rates throughout the EU and other measures.