Usefulness of the article: Economic activities that reuse materials, products, and their components, or the « circular economy, » are being closely scrutinized by researchers and companies interested in mitigating emissions in industry. The purpose of this article is to understand how the circular economy could contribute to the fight against climate change in the basic materials industry, and the issues that remain to be clarified.

Abstract :

• The basic materials industry accounts for a significant share of Europe’s greenhouse gas (GHG) emissions.
• However, this industry is considered difficult to decarbonize due to the nature of its production techniques and the conditions for innovation in the sector.
• Given these difficulties and the time available to meet climate targets, the option of reducing demand for these materials through circular economy practices is being increasingly explored.
• The figures are significant: according to Material Economics, nearly half of European industry’s emissions could be mitigated through circular economy practices.
• Certain points remain to be clarified in order for the scope of this option to be credible. Indeed, the number of estimates on the subject remains insufficient. In addition, it is crucial to focus on the rebound effect and interactions with international trade.

In this note, we will focus specifically on what is known as the « basic materials » industry. This term refers to industrial activities that transform raw materials (minerals such as bauxite, carbonaceous materials such as wood or oil) into basic materials (aluminum, iron and steel, plastics, cement, glass, and paper).

These transformation processes require high energy inputs. This industry is therefore under particular scrutiny in the fight against climate change[1]. However, decarbonizing the production processes of these industries currently appears to be difficult. Thus, emission reduction trajectories propose a reduction in the use of these materials, through circular economy practices, in addition to the investments necessary for the decarbonization of production.

1. The basic materials industry

1.a) The basic materials industry is a major source of emissions

Greenhouse gases (GHGs) from basic materials account for approximately 62% of global direct GHG emissions from industry (excluding waste) and 70% of global direct industrial_CO2 emissions, with iron and steel, cement, chemicals, and non-ferrous metals[2](2019-2020 emissions). At the European Union (EU) level, the production of key materials and chemicals (steel, plastics, ammonia, and cement) emits around 500 million tons of_CO2 per year, or 14% of the EU’s total_CO2 emissions, according to Material Economics (2019). This represents 75% of the EU’s industrial emissions (McKinsey, 2022).

1.b) The basic materials industry is an international, relatively homogeneous, highly competitive market with significant capital expenditure.

From an economic and strategic perspective, this industry is key as it is at the base of the production chain. According to Wesseling et al. (2017), this market can be considered oligopolistic, with high barriers to entry due to fixed costs. The basic materials market is a global mass market with cyclical demand. The sector is highly competitive, with downward pressure on prices, which generally results in low profit margins on these materials. There are smaller markets for specialized materials, where competition is based on quality and margins are higher.

1.c) The basic materials industry is considered « difficult to decarbonize. »

Is it possible to decarbonize supply through innovation?

• From a technical standpoint, emissions from the production processes for these materials are considered difficult to reduce. On the one hand, the production of basic materials is very energy-intensive and requires large amounts of heat and electricity. On the other hand, carbon is also used in the chemical processes necessary for the production of materials. For example, when limestone is calcined to produce cement, a large amount of carbon is released from the rock. In the case of steel, carbon is used to remove oxygen from iron ore. In order to reduce these emissions, these basic processes would therefore have to be modified (Material Economics, 2019).
• From an economic perspective, the sector is characterized by low innovation rates due to high risks and costs, limited available capital, and long investment cycles, according to Wesseling et al. (2017). Industries tend to innovate incrementally, i.e., they improve their productivity along the same overall technological trajectories, without radically transforming the sector. More recently, at the technological level, Material Economics (2019) has listed emerging solutions such as the transition from carbon to hydrogen for steel production, new cementitious materials, and the use of biomass for plastics production. However, access to low-cost, climate-friendly hydrogen remains an uncertain variable (Chiappinelli et al, 2021).

So, is it a question of reducing production by lowering demand?

This does not happen automatically. Currently, demand for materials is still growing, and emissions for 2050 are expected to be almost the same as today if the trend continues (Material Economics, 2018 & 2019). Without profound change, the production of basic materials alone could exhaust the « carbon budget » available for a 2°C target (ibid.).

Given the complexity of decarbonizing supply, a growing number of research papers and opinion articles are promoting the circular economy as a mitigation option (McKinsey 2022, Ellen MacArthur Foundation, 2021, Wessling et al., 2017; IPCC, 2022). It is classified as a demand-side measure , i .e . , it would reduce material requirements. According to McKinsey (2022), a genuine transition in materials must take place if we are to have any chance of achieving climate targets. In this note, we therefore examine this strategy of « induced demand reduction »[3]for basic materials within the framework of the circular economy.

2. Circular economy: an option for achieving carbon neutrality in the European Union

The European Union aims to achieve climate neutrality by 2050, with an interim target of at least a 55% net reduction in greenhouse gas emissions by 2030 compared to 1990 levels. Climate or carbon neutrality is defined as « a situation in which anthropogenic greenhouse gas emissions into the atmosphere are offset by anthropogenic removals during a given period »[4].

2.a) Different mitigation options, including the circular economy

To achieve climate goals, the report by the Intergovernmental Panel on Climate Change (IPCC) puts forward several mitigation options for industry: energy efficiency, materials demand management, improved materials efficiency, circular material flows, electrification, as well as CCS (Carbon Capture and Storage) and CCU (Carbon Capture and Utilization) (IPCC, 2022). The report concludes that there is no « silver bullet » for decarbonizing industry. All available options, both technological and behavioral, must be mobilized if we are to achieve climate goals (IPCC, 2022). It remains to be seen what contribution each option will make, whether major or minor. It should be noted that the IPCC does not issue policy guidelines, but merely sets out the various alternatives available to the population in the fight against climate change.

2.b) What do circular economy measures actually involve?

Studies by Material Economics(2018) and (2019), and Ellen MacArthur (2021), examine different scenarios for achieving net-zero emissions for European production of key basic materials. These scenarios combine differentcircular economy options( material efficiency and recycling) with options for innovation in production processes and carbon capture.

In the context of the circular economy, material efficiency refers to the production of products with identical economic functionality but using less material (Material Economics, 2019).

In practice, material efficiency refers to techniques that reduce the weight of products and building structures, limit waste during production, encourage the recirculation of products and their components through a circular value chain organization, and promote service-based business models such as rental and sharing. For example, many construction projects use up to 50% more cement and steel than is actually necessary with value chain optimization. Sharing-based transportation models could also reduce material requirements per passenger by more than 50% and lower travel costs (Material Economics, 2018 and 2019; Ellen MacArthur, 2021).

With regard to recycling ( the reintroduction of waste materials into new goods), studies highlight the need to improve the quality of recycling by increasing the quality of inputs (products to be recycled) and outputs (recycled materials; Ellen MacArthur, 2021). For steel, the challenge will be to avoid contamination by other metals, particularly copper; and for plastics that cannot be mechanically recycled, to develop chemical recycling[5](Material Economics, 2019; McKinsey, 2022). This will also require coordination between actors in the value chain and the organization of efficient collection and sorting systems.

2.c) Expectations in figures for the « circular economy » option

In this section, we focus on a few studies that analyze circular economy scenarios at the industry level.

According to Material Economics (2018), at the European level, circularity measures could reduce emissions from the materials industry by 56% by 2050 ( in the steel, cement, aluminum, and plastics sectors). Globally, according to the Ellen MacArthur Foundation (2021), this contribution would be 40% by 2050 for these same four materials.

The Material Economics study (2019) distinguishes between material efficiency measures and the use of new (recycled or low-carbon) materials. They estimate that circular economy options that increase material efficiency could reduce emissions by 31% by 2050, while recycling and the use of new materials (e.g., bioplastics) could reduce emissions by 33% in the plastics, cement, and steel sectors.For plastics, in the « circular » scenario (where the circular option is predominant), production volume would be reduced to 52 million tons (Mt) in 2050, with 62% of production coming from recycling (mechanical and chemical) and the remaining 38% from biomass (Material Economics, 2019). Mechanical recycling could meet 26% of demand, and chemical recycling 47% (Material Economics, 2019). Currently, recycling (chemical and mechanical) accounts for only about 10% of plastics placed on the market (Material Economics, 2018). For cement, in the scenario favoring the « circular economy » option, the need for cementitious material production would be reduced by 44% thanks to the adoption of efficiency and material recirculation measures through coordination and the widespread adoption of new practices by actors in the construction value chain (concrete producers, architects, builders, demolition companies, and other actors; Material Economics 2019). As forsteel, again in the circular economy scenario, European demand would amount to 139 million tons in 2050 (compared to more than 150 Mt currently), thanks to material efficiency measures; and 70% of iron requirements would be supplied from waste.

On a global scale, Saygin and Gielen are studying decarbonization trajectories for the global chemical and petrochemical sector (fertilizers, plastics). In their scenario, the circular economy (reduction, reuse, recycling) accounts for 16% of the reduction. Recycling rates are multiplied by six and demand for products is reduced by a third.

3. What remains to be understood and evaluated

The circular economy is never presented as the only option and is part of a mix of different mitigation strategies. However, it is becoming increasingly prominent in debates and literature on climate change. In addition to the progress that needs to be made to meet the proposed scenarios (e.g., a sharp increase in recycling rates), certain aspects need to be studied further to confirm the potential of the circular economy.

3.a) The lack of literature on the « circular economy » option has led to a lack of consensus on the potential scale of the circular economy.

Despite the importance given in debates to circular strategies for combating climate change, the IPCC notes that these mitigation options remain underrepresented in climate change scenario models and integrated assessment models[7](IPCC, 2022). This topic is still relatively new in academic literature due to the complex and interdisciplinary nature of the concept, the lack of standardized measures and methodologies, and the limited implementation of circular economy practices by industry, resulting in a lack of empirical evidence. There are therefore still too few studies for a consensus to emerge on the scale of a circular economy scenario (Aguilar-Hernandez et al., 2021). Furthermore, the report deplores the fact that some studies do not reflect changes in demand for basic materials. In addition, some studies make unjustified claims: Cantzler et al. (2020) reviewed 341 studies in the academic literature linking the circular economy and climate change mitigation. The majority of studies focus on incremental measures that claim to mitigate climate change, without demonstrating this.[8]

3.b) The possibility of a rebound effect remains the main threat of uncertainty regarding the effectiveness of the circular economy.

The rebound effect is an economic phenomenon, also known as the « Jevons paradox. » It illustrates the fact that a policy or action aimed at reducing the use of a resource by improving its efficiency may ultimately lead to an increase in the use of the resource, canceling out the efficiency gains.[9]

Zink and Geyer (2017) examine the rebound effect in the circular economy and identify two main mechanisms. If recycling does not reduce extraction but simply adds to it, the environment is impacted by primary production (extraction and processing) in addition to secondary production (recycling). Beyond the risk of the rebound effect, the two mechanisms identified by the authors may simply reduce the effectiveness of circular measures, without completely canceling out their benefits. For example, in their study, Material Economics (2018) incorporated the possibility of a partial rebound effect for lower-quality recycled plastics and shared mobility.

The first mechanism (the price effect) corresponds to cases where recycled materials (or second-hand goods) are sufficiently similar in terms of characteristics to virgin materials (or new goods). The development of recycling, without constraints on the production of virgin materials[10], then adds competitive pressure to the materials market, increasing supply, reducing prices, and stimulating demand.

In the second case, the recycled material (or reused goods) is of lower quality and does not compete with virgin materials (or new goods) in the same market. Recycling can then open the door to new markets by responding to new demand. For example, applications can be found for lower-quality recycled plastic, such as spreading it on new roads or using it for insulation. In this case, the recycled material (e.g., plastic) can also replace other materials (Zink and Geyer, 2017; Material Economics, 2019): the rebound effect will then concern plastics, while a reduction may occur for other materials. The same reasoning can also be applied to reuse: the purchase of a second-hand item may replace a situation where nothing would have been purchased, rather than a situation where a new item would have been purchased.

Zink and Geyer (2017) consider ways of avoiding the rebound effect (producing better substitutes while limiting the price effect) and conclude that it is probably impossible to establish robust theoretical conditions (necessary and sufficient) for avoiding a rebound. But naturally, the rebound effect should be limited in the context of restricted extraction and saturated demand, for example, for very durable and bulky goods (e.g., furniture); or at the macroeconomic level, when the country has a high level of urbanization and efficient infrastructure.

It should be noted that the rebound effect is difficult to quantify and predict with certainty. Its magnitude can vary depending on many factors. It would therefore be advisable to identify the mix of public policies that would prevent or at least mitigate this rebound effect, in order to remain on the trajectory predicted by the scenarios.

3.d) The desirability or « order » of circular options is not always obvious

The environmental impact of a product and the economic organization of an industry involve many environmental dimensions, and it is sometimes difficult to decide on « the best option. » In particular, circular economy strategies are often listed in a hierarchical order to be followed, for example, in the context of the « 3Rs » (Reduce, Reuse, Recycle), as presented in Ghisellini et al. (2016) or the waste hierarchy defined by the European Waste Framework Directive.

For example, there are high expectations for chemical recycling of plastics, in particular, because in order to limit the risk of rebound, secondary materials must be good substitutes for virgin materials (so that the risk is only 50/50; Zink and Geyer, 2017). However, the environmental performance of this technology has been criticized because it can be very energy-intensive (Marty et al., 2019; Euractiv, 2020). In their study, Saygin and Gielen (2021) also emphasize the importance of taking into account the carbon stored in plastics when evaluating circular options.

Furthermore, according to the hierarchy, the priority would be to systematically increase the lifespan of products (reducing waste at source). However, Hummen and Desing (2021) recommend studying this on a case-by-case basis and conclude that extending the lifespan « ever further » is not necessarily the best option. They take the example of a product that has a high environmental impact during its operation and loses performance with wear and tear. They show that replacing the product before it reaches the end of its life with an advanced alternative (e.g., less energy-intensive) can result in a better environmental balance than prolonged use.

3.e) Industrial strategy, international trade, and other issues

As mentioned, the basic materials industry is strategic for a country because it is at the base of the production chain. In addition, it is subject to strong international competition. This could explain why national regulations on GHG emissions are generally more lenient for these industries (Wesseling et al., 2017). In many countries, they pay lower energy taxes than other energy users.

This raises a number of questions: Given that these industries have been protected for many years, will governments be prepared to commit to an ambitious climate policy that reduces production in these industries and favors recycling companies? Furthermore, given that consumption can be subject to cyclical phases, can it represent a secure supply for the economy?

Finally, what might be the effects of international trade? Currently, the EU exports 14% of its steel production and 29% of its plastic production, and imports comparable quantities (Material Economics, 2019). A decline in local demand due to circular economy strategies could be offset by exports of materials from European industry, provided that they can compete with foreign producers in terms of price, particularly Chinese steel producers. In addition, a restriction on the supply of European base materials, or insufficiently high-quality recycling, could be circumvented by importing foreign raw materials.

Conclusion

Emissions from basic industry account for 75% of industrial emissions in the EU. This industry has long been considered difficult to decarbonize due to the production techniques used to produce basic materials and slow innovation dynamics. As a result, a growing number of research papers and opinion articles are highlighting the need to reduce demand through circular economy practices. These circular economy practices aim, for example, to make products and building structures lighter, reduce waste in production, promote the reuse of products and their components, and increase recycling in terms of both quantity and quality.

Some studies estimate that the circular economy could make a major contribution to industry: more than half of European industrial emissions could be reduced by 2050 (Material Economics, 2018, 2019). However, there are still too few studies for these figures to be definitive. For the scale of this option to be credible, it will be necessary, among other things, to study the possible rebound effects of material efficiency measures, integrate growing demand for materials, consider the trade-offs between circular strategies and other environmental parameters, and anticipate the interactions between regional policies and international trade in raw and secondary materials.

Bibliography

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Glossary

• Anthropogenic emissions: Emissions of greenhouse gases (GHGs), aerosols, and precursors of GHGs or aerosols due to human activities. These activities include the use of fossil fuels, deforestation, land use change, livestock production, fertilization, waste management, and industrial processes. Definition from the IPCC glossary:https://www.ipcc.ch/site/assets/uploads/2018/02/AR5_WG3_glossary_FR.pdf