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Commentary

Toward a Low-Carbon Circular Economy: The emerging role of trade

Circular economy solutions will play a critical role in the path to decarbonization. Kevin Moss from the World Resources Institute, Mari Pantsar from Sitra, the Finnish Innovation Fund, and Scott Vaughan from the China Council for International Cooperation on Environment and Development outline how trade policy can support the transition.
By Kevin Moss, Mari Pantsar, Scott Vaughan on November 24, 2021

Momentum toward the Glasgow climate summit continues: more than 60 countries have already communicated net-zero targets, while some 90 governments have updated their nationally determined contribution plans to include new targets, additional details as to how they will reach them, or both. Initiatives such as the No New Coal initiative and announcements that China will discontinue the international financing of coal provide cautious optimism that this conference of the parties could deliver substantive results.

Outpacing international treaty negotiations is the surge in net-zero pledges from non-state actors. By September 2021, more than 4,500 companies, cities and regions, hospitals, educational institutions, and others had promised to slash their greenhouse gas emissions by half by 2030, and to reach net-zero by 2050 at the latest, and more than 1,900 companies had made a commitment to set a science-based target for climate.

Circular economy solutions play an indispensable role in decarbonization pathways.

Circular economy solutions play an indispensable role in decarbonization pathways. To date, few nationally determined contributions explicitly identify circular actions. Yet achieving the Paris Agreement goals will be impossible without them: the carbon footprint associated with the extraction and processing of resource materials (including fossil fuels and agriculture) accounts for half of global greenhouse gas emissions. Accordingly, a key focus of the 2021 World Circular Economy Forum was identifying not whether, but how, circular economy is critical to the Glasgow outcomes.

One dimension of circular economy actions involves different dimensions of trade and supply chains.

Introduce Government Incentives That Extract New Value From Waste Material

Each year, a global market of USD 315 billion is generated through trade in waste. The United Nations Conference on Trade and Development reckons that 550 tons of waste from metals, plastics, electronics, paper, clothing, and other waste materials is traded annually. A core objective of the circular economy is to reduce waste streams through the reuse and recycling of materials. A good example of progress in finding new values for older materials is the increase in secondary raw materials and decrease in the processing of primary ones. This is important from a climate perspective: processing primary materials has a much higher carbon footprint compared to secondary materials. Put another way, the recycling of raw materials demands far less energy—as much as 90% less depending on the material—compared to primary resources (Organisation for Economic Co-operation and Development [OECD], 2019).

A core objective of the circular economy is to reduce waste streams through the reuse and recycling of materials.

This shift from primary to secondary materials is critical to decoupling GDP growth from material intensity: the OECD estimates a decoupling rate of around 1.3% a year. Metals recycling is already growing faster than primary metal mining. The recycling sector is poised to surpass primary mining in the coming decades.

As one-third of all natural resources that are extracted and processed are traded, these shifts toward secondary materials have important implications for trade. For example, trade in metal waste and metal scrap—which forms the bulk of all trade in waste and scrap—grew from USD 22 billion in 2002 to USD 82 billion in 2017. While these changes pressure primary mining and the thousands of jobs in that sector, increased secondary materials are creating new trade-in service opportunities and associated jobs from specialist consultants who design for reuse and repair from the get-go, through materials reprocessing and transportation to on-site engineering services to replace and maintain.

Although trade in secondary materials continues to grow, it is still outpaced by demand for raw materials, which is expected to double by 2060. Most of the future demand comes from developing countries, as people around the world move from poverty into the middle classes. Moreover, the sharp growth in the use of primary metals such as lithium and cobalt to drive electrification and information technologies continues unabated.

Government policy plays an important role in helping markets and consumers find new values in secondary materials. The Netherlands introduced measures capping primary materials at 50% and China’s 14th Five Year Plan discourages the demolition of old buildings, limits skyscrapers, and encourages renovation and retrofitting. The European Union (EU) has committed to developing a new circular product policy under its 2020 EU Circular Economy Action Plan, beginning with the most resource- and energy-intensive sectors. The plan anticipates new regulations—including mandatory recycled content requirements and standards—that will cover not only products made in the EU but also all imports.

Government policy plays an important role in helping markets and consumers find new values in secondary materials.

As circular economy actions continue to change the composition of trade in many areas, more effort is needed among trading partners to share practices. Ideally, work is needed to develop international circular economy standards that not only include finished product characteristics, but also address product design features, given that 80% of a product’s environmental impacts are determined in the design phase. Work by the International Organization for Standardization and its Technical Committee 323 on material quality standards could help in upstream standards.

Scale Up Circular Business Models That Maximize Value From Reusing Goods

An even greater circular economy impact than the growth of secondary materials is the quickening pace of innovation in consumer markets. Product longevity strategies are higher in the circular economy hierarchy than materials recycling. A key goal of circular economy is to retain and reuse materials before they are recycled.

One change well underway is the rise of the sharing economy, driven largely by younger people and enabled by digitization. One example is the fashion and clothing sector. In 2009, the Rent the Runway e-commerce platform was launched to enable users to rent as well as purchase fashion labels; by 2019, the website’s market value exceeded USD 1 billion. Similar platforms covering many other consumer categories—from household appliances to gardening tools—continue to grow.

A change we need to see is consumers using products for longer before buying a replacement. In the information and communication technology sector, for example, smartphones, laptops, and other personal electronics could be kept for longer. An estimated 85% to 95% of the total carbon footprint of the first two years of a smartphone comes from the mining of metals used inside the phone. So finding ways to extend the average lifetime of a smartphone from its current average lifetime of 29 months can cut carbon emissions. The July 2021 Biden White House Executive Order is a good first step to repair efforts to include the tech sector. Similar initiatives in France, the European Parliament, and elsewhere suggest momentum in extending the lifetime of electronics, while a recent decision by the European Parliament to standardize a single plug for all smartphones and related devices promises to reduce the carbon and e-waste footprint of devices.

A change we need to see is consumers using products for longer before buying a replacement.

From a business perspective, this shifts the revenue opportunity from new product sales to services like repair, upgrade, and enhancement that extend product lifetimes. Such initiatives promise a continued increase in employment with circular economy services like repair experts. We also see increasing interest from business in buying back and reselling used goods. From bricks-and-mortar businesses such as IKEA and Walmart, to online services including thredUP in the United States and Xianyu in China and business-to-business services such as Shopify and Trove, the market for buying used goods is on the upswing.

Use International Trade Policy as an Enabler for a Fully Circular Economy

To date, trade has had a tenuous role in the circular economy. The Basel Convention on Transboundary Movement in Hazardous Waste remains weak, while the scope of international coverage of extended producer responsibility schemes is ambiguous.

The two most pronounced trade measures related to circular economy actions involve import bans and export restrictions. In the former area, the most prominent ban remains China’s announcement in 2017 and update in 2018 to ban the import of most wastes. In the latter, the OECD notes an annual increase in the use of export restrictions of around 7% affecting raw materials, noting that once export restrictions are imposed, they are rarely lifted.

Given the growing impact of circular economy actions on domestic and international supply chains, more proactive trade policies are needed.

Given the growing impact of circular economy actions on domestic and international supply chains, more proactive trade policies are needed. Action to tackle plastics pollution is a good start: a recent ministerial session examined ways trade policy can support national action in curbing single-use plastics. Besides policy—which could be stimulative or imposing—pacts between government and business are also a strong sign of the trend to find ways to decrease the use of new plastics, or to explore new plastics that are easily recyclable and thus reusable. An example is the European Plastics Pact.

The biggest contribution trade policy can make to the circular economy is by eliminating tariffs, non-tariff barriers, subsidies, and other measures that restrain trade in goods and services arising from circularity, and carving out a basket of preferences based on ongoing efforts to support environmental goods and services.

Such efforts have eluded the World Trade Organization (WTO), in part because bodies like the World Customs Organization have largely failed to differentiate traded products based on the ways—from energy input to recycled materials—they are made. There’s no question the trade community needs to move further in differentiating net-zero, sustainably sourced, or circular products from their counterparts: whatever the fate of EU’s carbon border adjustment measures plan, standards are urgently needed to facilitate greener trade.

Bilateral and regional free trade agreements represent the best option to advance circular economy actions.

Bilateral and regional free trade agreements represent the best option to advance circular economy actions. The Canada–EU Comprehensive Economic and Trade Agreement, for example, notes life-cycle assessment and action to trade in environmental goods and services. Given China’s September 2021 request to join the Comprehensive and Progressive Agreement for Transpacific Partnership, coupled with its renewed emphasis on a low-carbon circular economy, the partnership likewise offers opportunities to advance circularity and trade through its environmental provisions.

Conclusion

Trade can make a valuable contribution to a more sustainable future. Emerging trade flows in secondary materials will only grow in the near future. New business models will replace the existing linear approaches with more circular ones: repair, reuse, refurbish, remanufacture, and repurpose. And so trade in services will become more prevalent.

All that said, supporting policy by national governments is vital. There has never been a more important window than now to move ahead with a WTO agreement on climate-friendly rules and provisions that create a level playing field to scale up sustainable goods and services, with bilateral and regional trade agreements then setting out detailed chapters and clauses on low-carbon circular economy provisions. The road to a zero-emission, just, and equitable society requires greater engagement, support, and innovation from the trade community.

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