CIRCEE

General Scope and Connection with Climate Mitigation

Introduction

Decarbonizing our production processes and consumption habits is crucial to achieving long-term climate targets. One effective way to accomplish this is by shifting from a linear economic system to a circular one, emphasising resource efficiency and reducing Greenhouse Gas (GHG) 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 GHG 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 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 critical 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 vital 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 circular economy (CE) integration poses many challenges to the Integrated Assessment Models (IAMs) and macroeconomic modelling community, including accounting for physical material flows and industrial ecology.

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 WITCH integrated assessment model and the LIFE model of Pettifor, Wilson, and Agnew (2023), that integrates key industrial ecology aspects and households' low-carbon lifestyle heterogeneity. 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 starting point for the IAM community and help map CE strategies into existing climate scenarios.

Model Scope

CIRCEE is a deterministic Dynamic and Stochastic General Equilibrium (DSGE) model with resource stock/flow consistency (refer to Figure). It incorporates some industrial ecology principles to evaluate how CE strategies and enablers can decrease future greenhouse gas emissions and enhance resource efficiency. First, the production-side of the economy follows a standard Constant Elasticity Substitution (CES) tree (see Figure) that combines different CES nests of inputs capital, labor, energy and materials. For accounting reasons, the CES nest of material inputs that combines primary materials and secondary materials is transformed as an additive function of the two inputs à la Mensbrugghe and Peters (2016). The material additive CES function allows us to verify the mass balance condition, and track material flows in a more precise manner. Each sector of final good production obey the rule of conservation of mass. The production structure of the economy is not changed, as it still produces from a standard nested CES function of capital, labor, energy and materials. Materials entering the system must equal to material leaving the system, whether it be in the form of good exports, additions to the in-use stocks or waste disposal. Second, we ensure that a 100% recycling scenario is not feasible, so that the economy cannot recover all recyclable waste. A ‘loss’ parameter, estimated from data about recycling activities, is attached to the use of recyclable waste in the production process of secondary materials to capture the environmental loss of materials during the recycling process. In addition, there is a natural obsolescence rate of durable goods, so that durable goods cannot be repaired on and off. Raw materials are extracted from abroad and are then used for material processing that feeds the production processes of final goods in terms of primary material inputs. These final goods are then consumed and disposed of at a certain time depending on the life of the goods. The waste generated by end-uses as well as production processes can be either landfilled/incinerated or recycled. Recycled/recovered materials can be fed back to the economy to ensure a higher circularity rate or exported abroad. I

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The economy is populated by heterogeneous households, input and good-producing sectors and the government. On the demand side of the economy, three types of households are differentiated by their low-carbon lifestyles and liquidity constraints. The lifestyles are those outlined in the Pettifor, Wilson, and Agnew (2023). Households choose to consume different types of goods: non-durables, semi-durables, durable and "housing" goods, and other types of services, such as home-produced energy services, sharing energy services, and repairing services. They make intratemporal choices regarding the composition of their consumption basket (e.g. consuming a sharing energy service rather than home-producing it) and intertemporal choices between different types of assets available to them (capital, durable and semi-durable). In CIRCEE, owners can make their durable goods available for rent to other individuals when they are not using them and are willing to rent them. The goods are shared via a digital matching platform.

3 types of low-carbon lifestyles in CIRCEE from the Low-carbon lifestyles framework of Pettifor, Wilson and Agnew (2023)

On the economy's supply side, the economy is populated by nine sectors producing the following products: primary material, secondary material, non-durable goods, semi-durable goods, durable goods, capital goods, sharing energy services, repairing services, and housing. All sectors, except the repairing sector, produce from labour, capital, energy (electricity and fuels), and material (primary and secondary) inputs. The repairing sector only produces repairing/remanufacturing services using labor and capital. The production structure of the economy is economically and physically consistent. It considers critical thermodynamic limits such as ruling out the 100 per cent recycling and repairing scenario, a minimal material balance condition, a thermodynamic efficiency condition, physical resources stock and flows, and volume-preserving CES functions. The energy supply side and housing demand are exogenous of CIRCEE. CIRCEE is soft-linked to the IAM model https://www.witchmodel.org/ from the RFF-CMCC European Institute on Economics and the Environment (EIEE) to assess the overall GHG mitigation potential of circular economy strategies. And, CIRCEE uses simulation from IEBUILDING for housing demand.

The government levies taxes, implements circular economy policies, and makes public expenses. In addition, the model considers trade flows between the domestic economy and other countries since imports and exports of goods may have different material intensities. Also, it is essential to consider the potential negative consequences of transitioning toward a circular economy for resource-rich economies, which can lead to justice issues. While reducing the import of resources can benefit economies with limited resources, it may have a negative impact on resource-rich economies, resulting in a decrease in their GDP. Therefore, it is important to recognize that the circular economy might be a zero-sum game.

The current geographical scope of CIRCEE is Japan and South Korea (and, later on, France). These countries are being studied 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. Furthermore, the leading industries in Japan and South Korea depend heavily on key materials for their production processes, including semiconductors, automobiles, steel-making, ships, and the ICT industry. As a result, these countries are particularly vulnerable to fluctuations in material prices and issues related to the security of supply. The growing demand for materials in new low-carbon technologies, digitalization, and the heavy reliance on China's exports further exacerbate the challenges. Both countries have accelerated their transition toward a circular economy system to address these challenges and implemented various policies, such as Japan's Circular Economy Vision 2020 and South Korea's Framework Act on Resource Circularity. Data availability will determine which more OECD countries can be added to the model. However, users may add other countries themselves, provided there is enough data to calibrate the model.

CIRCEE users can run the model for any desired number of years, using 2019 as the base year value. A 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.

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CIRCEE allows the study of many scenarios, especially Shared Socioeconomic Pathways (SSPs) and Low Energy Demand (LED), that integrate different narratives for the circular economy. These scenarios match the storylines and quantification throughout the model to generate various scenarios.

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 offers a comprehensive outlook on the socio-economic-climatic consequences of implementing circular economy practices by integrating different strategies. At the macro level, CIRCEE encompasses most R strategies. The first one is"'Recycle R8'", which involves using secondary (recycled) materials instead of primary (virgin) materials. Increasing material circularity through strategies is key to the vision of a circular economy. The second one relates to "Reuse R3, Repair R4, Refurbish R5, and Remanufacture R6", which involves substituting newly produced goods with repaired or second-hand items to extend the lifespans of products, replacing new goods with services (such as in the sharing economy), intensifying the use of long-lived goods (also in the sharing economy) and refurbishing housing. The third encompasses "'Rethink R1,'"' Reduce R2 and Refuse R0'" which involves enhancing material productivity through technological advancements, replacing material inputs with non-material ones, using lighter materials, adopting Green Product Design to increase the durability and recyclability of goods, sharing products and services, higher use rates, and reducing the consumption of certain goods for which the same benefits can be achieved through alternative means. These strategies emphasize the significance of lowering material flows within the economy. Green product design is crucial in slowing down material flow by creating more durable and repairable goods. However, due to its inherent macrostructure, CIRCEE cannot fully capture the incentives that drive firms to engage in green product design. To support the economy's transition toward circularity, CIRCEE integrates various exogenous policies and economic instruments, described in detail throughout the model's analytical description.

CE strategies and connection with climate change mitigation.

CIRCEE integrates exogenous instruments, depending on different narratives, to help the economy to circularity. Each instrument has a direct (★) or indirect (☆) impact on GHG emissions.

Legend
★: direct impact on GHG mitigation ☆: indirect impact on GHG mitigation

1. Substitute secondary (recycled) materials for primary (virgin) materials (Recycle (R8))

• 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 ☆
• The 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 (Re-use (R3), Repair (R4), Remanufacture (R6))

• 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) (Rethink (R1))

• Discount on sharing services price ☆
• Reduce access fee to sharing digital platforms ☆
• Shock households' preferences ★

4. Increase the utilization rate of long-lived goods (sharing economy) (Rethink (R1), Repurpose (R7))

• Shock on the utilization rate of durable goods ★

5. Refurbish housing (Refurbish (R5))

• Shock on the refurbishing rate of the economy ★

6. Improve material productivity via technological change (Rethink (R1))

• Shock on the material leakage rate of sectors ★
• Shock on material productivity ★
• Subsidies towards R&D ☆

7. Substitute non-material inputs for materials (Refuse (R0))

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

8. Green Product Design to increase longevity of goods (Rethink (R1))

• 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 (Reduce (R2))

• Shock households' preferences and expenses for certain types of goods ★
• Reduce the demand for foreign goods that are relatively more material-intensive ★

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-offs between different kinds of assets, such as newly-produced capital and durable goods and second-hand durable goods. Besides, households also make intra-temporal trade-offs between different kinds 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 mixes. For instance, firms may increase the use of recycled materials in their production process in response to external incentives promoting more circular behaviour.

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.

For example, within CIRCEE, the rates of housing depreciation, housing demolition, and waste generated from demolition are derived from the bottom-up model simulation of building demand by Deetman et al. (2020). This bottom-up model captures various intricacies of the building sector that CIRCEE cannot, such as the influence of factors like floor space demand, urbanization, national building codes, and refurbishing rates on total building demand and the demolition of buildings. These factors directly affect the generation of construction and demolition waste and building demand in CIRCEE, which impacts material and energy demand, thereby influencing GHG emissions.

Integration

The soft-linking between WITCH and CIRCEE

CIRCEE can be easily similarly linked with other IAMs 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 GHG 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 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. 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.