CIRCEE

General Scope and Connection with Climate Mitigation

Introduction

The decarbonization of our production processes and consumption habits plays a key role in achieving long-term climate targets. One effective way to achieve this is by shifting from a linear economic system to a circular one, which emphasizes resource efficiency and reducing Greenhouse Gas emissions. Unlike the traditional linear economy, which relies on a "take-make-dispose" model, the circular economy aims to keep resources in use for as long as possible, minimizing waste and reducing the need for new resource extraction. This shift can lead to significant environmental benefits including reduced greenhouse gas emissions, lower energy and material consumption and improved resource efficiency. With the ongoing energy transition, the demand for metals required in low-carbon technologies and various end-use applications is rising, consequently exerting additional pressure on resources. Furthermore, population growth and digitalization contribute significantly to these pressures. Circular economy strategies such as product design for durability and recyclability, closed-loop material flows, and extended producer responsibility can help reduce the carbon footprint of industries and products, while also creating new business opportunities, enhancing resource security, and reducing the impact of resource price volatility on economies.

Assessing the full potential of a circular economy requires a macro-level and integrated assessment approach that addresses the complex interdependencies and trade-offs between environmental, social, and economic objectives. Policy support, lifestyle changes, innovation, and new business models such as sharing and digitalization models are key enablers for the transition to a circular economy, as well as a deep understanding of the underlying drivers and barriers. As these policies and lifestyle changes are key in driving the transition toward a circular economy, understanding their implications is essential. However, assessing the impacts of a circular economy on socio-economic-climate systems remains a complex and challenging task. The integration of the circular economy (CE) poses many challenges to the Integrated Assessment Models (IAMs) and macroeconomic modeling community, including accounting for physical material flows and industrial ecology aspects.

CIRCEE (CIRCular Energy Economy), developed by the RFF-CMCC European Institute on Economics and the Environment, addresses these challenges by developing a stylized dynamic general equilibrium model, soft-linked to the IAM WITCH and the LIFE model of Pettifor, Wilson, and Agnew \citep{bib1}, that integrates key industrial ecology aspects and households’ low-carbon lifestyle heterogeneity. In this paper, we propose a novel approach for evaluating the potential impacts of a circular economy on socio-economic-climate systems; using macroeconomic models that incorporate industrial ecology aspects, such as thermodynamic laws. Our framework captures the dynamic feedback loops between physical and economic systems and assesses the trade-offs and synergies between different sustainability objectives. The stylized model will serve as a modeling starting point for the IAM community and will help map CE strategies into existing climate scenarios.

Model Scope

CIRCEE is a stylized dynamic general equilibrium model that monitors physical material and waste stock/flows. It incorporates key industrial ecology principles to evaluate how circular economy strategies and enablers can decrease future greenhouse gas emissions and enhance resource efficiency, especially in resource-poor economies. The main focus of CIRCEE is on countries that may become relatively less reliant on resources in the the long run due to the adoption of circular economy strategies and new business models, such as the sharing economy and digitalization. CIRCEE can be shocked by many exogenous forces linked to circular economy strategies and enablers.

The CIRCular Energy-Economy model visual representation

The CIRCEE model is a stylized dynamic general equilibrium model that monitors material and waste flows/stocks and incorporates key elements of industrial ecology. The economy is populated by 3 aggregated agents, namely the households, the sectors of production and the public authority. On the household side, 3 types of households differentiated by their low-carbon lifestyles and liquidity constraints are populating the economy. The low-carbon lifestyle framework follows the one of Pettifor et al. (2023). Households choose to consume different types of goods - non-durables, semi-durables, durable goods and second-hand goods - and different types of services - home-produced energy services, (peer-to-peer) sharing energy services and repairing services. They make intra-temporal choices regarding the composition of their consumption good and services basket (e.g. consuming a sharing energy service rather than home-producing it) and inter-temporal choices from their savings and different types of assets (capital, durable and semi-durable goods, and second-hand goods). On the supply side of the economy, the economy is populated of 10 sectors producing the following products: primary (virgin) material, secondary (recycled) material, non-durable good, semi-durable good, durable good, capital good, (peer-to-peer) sharing services, repairing services, second-hand (durable) good, and housing. All sectors, except the repairing and second-hand sectors, produce from labor, capital, energy (electricity and fuels), and materials (primary and secondary) inputs. The production structure of the economy is economically and physically consistent. It considers key thermodynamic limits, such as ruling-out the 100% recycling and repairing scenario, a minimal material balance condition, a thermodynamic efficiency condition, physical resources stock and flows, and volume-preserving CES functions a la van der Mensbrugghe and Peters (2020). On the energy supply side, CIRCEE is soft linked to the IAM model WITCH from the RFF-CMCC European Institute on Economics and the Environment (EIEE) to assess the overall GHG mitigation potential of circular economy strategies. The public authority levies taxes, implements circular economy policies and makes public expenses. Finally, the model considers trade flows between the domestic economy and the rest of the world. The study of trade flows is important, as imports and exports of goods may have different material intensities.

The current geographical scope of CIRCEE is on Japan and South Korea. These countries are being studied first because they are among the least resource-rich economies in the OECD. Circular economy and new business models are essential for addressing climate change, improving resource security and promoting economic growth in these countries. While data availability will determine which additional OECD countries can be added to the model in the future, users may add other countries themselves, provided there is enough data to calibrate the model.

Users of CIRCEE can simulate the model for any desired number of years, using 2019 as the base year value, provided that the users have a clear trajectory of exogenous variables. Longer time horizon can also be run to avoid any end-of-horizon effect, but 2100 is generally sufficient. Results are usually reported for the period 2019-2060. The model has a yearly time step.

Model Development

• Status: in progress.
• Environment: The model uses the open-source modelling platform dynare which requires matlab, GNU Octave or julia.
• Documentation: in progress. Not yet available.
• Source code: link available end of May 2024 (M24 in CIRCOMOD).

Circular Economy Features

R Words coverage and implemented in the model

CIRCEE provides a broad perspective on the economic and natural resource demand implications of a circular economy by integrating many different circular economy strategies. CIRCEE encompasses the following R strategies at the macro level:

1. Recycle, Recover : substitute secondary (recycled) materials for primary (virgin) materials, recover energy from waste
2. Rethink, Repair, Reuse, Refurbish : substitute repaired and second-hand goods for newly produced goods, replace new goods with services (sharing economy) and intensify the use of long-lived goods (sharing economy), refurbish housing
3. Reduce, Refuse: improve material productivity via technological change, substitute non-material inputs for materials, Green Design Product to increase longevity and recyclability of goods, and reduce the consumption of certain goods for which the benefit can be done in other way

CE strategies and connexion with climate change mitigation.

CIRCEE integrates exogenous instruments, depending on different narratives, to help the economy in its way to circularity. For instance :

1. Substitute secondary (recycled) materials for primary (virgin) materials

Tax on landfill waste ★*

Subsidies towards the recycling sector ☆**

Mandatory recycling targets ★

Green product design to increase the recyclability of goods ☆

Extended Producer Responsibility (EPR) fees ☆

Shock on the recyclability rate of waste ★

Shock the share of secondary materials in the production function of sectors ★

Shock on material prices ☆

2. Substitute repaired and second-hand for newly produced goods

Discount/no VAT for repairing services ☆

Repair bonus ☆

Robotization of the repair sector ☆

Shock on second-hand goods demand ★

Reduced transaction costs on second-hand markets ☆

Shock households' preferences ★

3. Replace new goods with services (sharing economy)

Discount on sharing services price ☆

Reduce access fee to sharing digital platform ☆

Shock households' preferences ★

4. Increase the utilization rate of long-lived goods (sharing economy)

Shock on the utilization rate of durable goods ★

5. Refurbish housing

Shock on the refurbishing rate of the economy ★

6. Improve material productivity via technological change

Shock on the material leakage rate of sectors ★

Shock on material productivity ★

Subsidies towards R&D ☆

7. Substitute non-material inputs for materials

Shock the substitution elasticity between non-resource inputs and resource inputs for key sectors ★

8. Green Product Design to increase longevity of goods

Decrease the depreciation rate of durable, semi-durable and capital goods ★

EPR fees to incentivize green product design ☆

9. Reduce the consumption of certain goods for which the benefit can be done in other way

Shock households' preferences and expenses for certain types of goods ★

Reduce the demand for foreign goods that are relatively more material-intensive ★

Legends :

*★ : direct impact on GHG mitigation

**☆ : indirect impact on GHG mitigation

Synergies and trade-off between the R word in the context of the stylized model

On the demand side, in response to exogenous incentives, households make inter-temporal trade-off between different kind of assets, such as newly-produced capital and durable goods, and second-hand durable goods. Besides, households make also intra-temporal trade-off between different kind of goods and services. For instance, when a durable good such as a car reaches the end of its useful life, households have three options to continue consuming the energy service "mobility":

1. Purchase a newly produced car, which requires new materials and energy inputs. However, the new car typically has higher energy efficiency than the old one.
2. Continue consuming the energy service without purchasing a new durable good by engaging with the repairing service sector to extend the life of the old car. However, this option may have a negative impact on the overall energy efficiency of durable goods.
3. Participate in the peer-to-peer sharing market to use a car, without directly owning it, jointly with energy.
4. Participate in the second-hand durable goods market, where they can purchase a used car that is not yet at the end of its useful service life.

On the supply-side, sectors make intra-temporal trade-offs between different input mix. For instance, firms may choose to increase the use of recycled materials in their production process in response to external incentives promoting more circular behavior.

Insights for Analytical Framework

• Key mechanisms and interactions within CE strategies that lead to changes in GHG emissions.
• Tool exploration (demonstrating ideas before implementing them in large-scale quantitative models)
• Communication key CE dynamics (to the broader audience)

Refinement, Integration, Future Development

Refinement process

CIRCEE can be improved by including results from additional bottom-up models. The results can be used to refine the calibration of CIRCEE or integrate other circular economy techniques that are currently unavailable in CIRCEE due to insufficient data and literature on the subject. For instance, detailed bottom-up models for crucial sectors, such as transport and construction, can be soft-linked to CIRCEE model to improve its capabilities in evaluating circular economy (CE) strategies.

Integration

CIRCEE can be easily linked with other IAMs in a similar manner to WITCH. In particular, the primary output of CIRCEE that is utilized as an input in IAMs is the energy demand. From the energy demand, IAMs simulate the trajectory of energy prices of the energy system, and future GreenHouse Gases emissions that are fed into CIRCEE. From the new energy prices, CIRCEE feds back to the IAM the new energy demand. The user would repeat this cycle until the two models converge, implying that the energy demand, energy prices, and greenhouse gas (GHG) emissions stabilize. Note that if the material requirement of power generation technologies are present in the IAM, it can be linked to the material/waste stock and flows of CIRCEE.

Future features of the model.

1. CIRCEE's current version includes exogenously technological change that is directed towards improving material productivity and recycling quality. A future version will include an endogenous representation of this technological change;
2. CIRCEE's stable version does not include second-hand markets, though an unstable version exists. The future stable version will enable the exchange of durable goods in second-hand markets;
3. CIRCEE's current version includes exogenously digitalization via the narratives and shocks. The future version will include an endogenous representation of digitalization through technological change. This will primarily affect the sharing (energy) services sector and the robotization of the repairing sector. For instance, in the current version of CIRCEE, the increased use of capital compared to labor in the repairing services sector is an external factor introduced through narratives.
4. The current version of CIRCEE incorporates two forms of waste management, namely recycling and incineration/landfill. However, there is currently no connection between incineration in CIRCEE and the energy-technology module of WITCH. In a future version, a new energy technology related to waste incineration will be added to the WITCH module.