ENV GLOBAL FORUM OCT 2016 - Session 2 - Bernd MEYER "Macroeconomic impacts of Circular Economy"

1. Münster, Mai 2015WWW.GWS-OS.COM / © GWS 2016
What do we know about the macro-economic
impacts of the circular economy?
Bernd Meyer
OECD Global Forum on Environment
Towards quantifying the links between environment
and economic growth
24 – 25 October 2016, Paris

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► POLFREE FP7 project: www.polfree.eu
► Partners: UCL (coordinator: Paul Ekins), ICIS, TNO, SERI, WI, PIK, GWS
Central questions for the modeling work package:
► How will the economy evolve in the business-as-usual case till 2050 and
what does it mean for the environment?
► How will it be possible to meet the following ambitious environmental
targets till 2050 and what does it mean for the economy?
Environmental targets for 2050:
• CO2 emissions: EU: - 80% compared with 1990,
other countries: consistent with 2 °C or 4 °C pathway,
• cropland footprint: - 30 % compared with 2005,
• raw material consumption (RMC): reduction to 5 tons per capita,
• water exploitation index: below 20%.
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Main scenarios:
► Business-as-usual:
• EU: climate policy following the EU reference scenario,
no resource policy.
• Other countries: no environmental policy at all.
► Global Cooperation: All countries cooperate implementing a common
policy mix with incrementally rising intensities
• to reach the global 2 degree emission path,
• and to meet the above resource targets in 2050 per country.
► EU Goes Ahead: Only the EU implements these policies, other countries:
• Follow only a moderate climate policy reaching the 4 degrees emission path.
• No action in resource policy.
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Global Cooperation EU Goes Ahead
Climate policy upstream carbon tax, regulation of the
share of renewables, regulations and
economic instruments favoring e-
mobility & investment in energy
efficiency of buildings
Difference to Global Cooperation:
In EU:
- ETS with elastic supply.
- Taxes are designed, so that they do not
endanger international competitiveness
• e.g. taxes on final demand instead of
upstream taxes
• or direct compensation of taxes
In Non-EU:
• Moderate climate policy that allows to
stay at 4 degree warming pathway
• No resource policy action
use of minerals regulation for recycling, upstream tax
for mineral inputs, public innovation
fund for material efficiency
agricultural land
and water use
regulation for water abstraction of
agriculture, information programs to
avoid food waste & to reduce yield
gaps, tax on meat consumption
ETR tax revenues are used for a reduction
of taxes on goods and services with low
carbon and resource contents
Main Policy Mixes: Regulations, economic and information
instruments

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Models
► GINFORS (GWS) and EXIOMOD (TNO): Environmentally Extended Global
Multi Regional Input-Output (EE-GMRIO) models.
• Interconnections between the environment and economy (energy use &
emissions, resources in deep detail).
• Ability to analyze impacts on economic sub-sectors and product groups in
deep detail.
► Two key differences between GINFORS and EXIOMOD:
• Main source of historical data
− GINFORS: WIOD database, global multiregional time-series of Input-Output tables
with accompanying socio-economic and environmental data.
− EXIOMOD: EXIOBASE more sectoral detail but reports only for one year.
• Theoretical foundation
− GINFORS: Keynesian, econometric estimation of parameters.
− EXIOMOD: Neoclassical, parameterization by assumption.
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► Results of GINFORS (Meyer et al. 2015):
• Environmental targets will be met,
• Strong positive effects on employment and GDP.
► Results of EXIOMOD (Hu et al. 2015):
• Environmental targets could not be reached. Strong rebound effects.
• No significant positive economic effects.
Two Reasons for divergence:
1. Critical parameter assumptions of EXIOMOD:
• Price elasticity of intermediate demand zero: taxes on resource intensive
intermediate demand have no direct effect on resource use.
• Price elasticity of consumption -1 and of imports -5 are relatively high in
absolute terms: Danger of strong rebound effects.
Conclusion 1: Different modelling approaches may produce very
different results
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2. Fundamental differences between the mainstream neoclassical and the
Keynesian paradigm.
• Behavioral Equations: Abstract theoretical assumption of optimization on
perfect markets versus econometrically estimated equations based on
bounded rationality on imperfect markets.
• Prices: equilibrium prices versus price setting behavior of suppliers (goods
markets) or result of bargaining process (labor market).
• Production: supply side dominance versus demand dependency (production
clearing the market).
• Investment: Top down modelling (closure rule) versus bottom up modelling
of sectoral investment (accelerator hypothesis) without constraints.
• Circular flow of income: no multiplier (supply side dominance) versus
interdependency of production and demand in a multiplier/accelerator
process.
Arguments favoring the Keynesian paradigm:
Neoclassical models are theoretical models without an empirical basis.
Keynesian models are based on a theory which has been tested
econometrically. They are at least able to explain the past.
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Conclusion 2: Business-as-usual paints a gloomy picture for the
global environment and prosperity
Key results with the model GINFORS
► By assumption:
• Rise of resource prices (IEA, 6 degree scenario) .
• World population : 2050: + 30% against 2015 (UN, medium variant).
► Strong rise of crop prices.
• Social problems,
• Rising shares for food in consumption reducing demand for other products.
► Reduction of the average growth rate of real global GDP from 2.6% (1995-
2015) to 2.2% (2015-2050), which will happen mainly after 2030.
► Rising public debt ratios in many countries.
► CO2 emissions rise till 2050 by 50% (compared with 2015).
► Extractions of abiotic resources rise by 70% till 2050 (comp. with 2015).

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Key results with the model GINFORS
Conclusion 3: Global Cooperation would allow environmental
targets to be achieved whilst raising GDP and employment
► By assumption: lower resource prices (IEA, 2 degree scenario).
► Environmental targets globally achieved.
► Lower food prices.
► Policy mix induces higher investment and a multiplier/accelerator
interaction: higher world GDP (+5.2%) and employment in spite of losses
in resource extracting countries.
► Reduction of public debt in many countries compared with business-as-
usual (bau).

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► By assumption: Resource prices (IEA: 4 degree scenario).
► Environmental targets will be met only in the EU, no substantial reduction
of global resource demand and prices.
► “First Mover Advantage”: Dematerialization in the EU reduces production
costs and raises the trade surplus of the EU against Non EU countries.
► Policy mix induces higher investment and a multiplier/accelerator
interaction.
► First Mover Advantage and the multiplier/accelerator interaction create
in the EU a rise of real GDP (+ 12% in 2050 compared with bau) and of
employment (+ 3.4 million jobs in 2050 compared with bau).
► Reduction of public debt.
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Key results with the model GINFORS
Conclusion 4: EU Goes Ahead: If the EU pursues resource
efficiency unilaterally, substantial benefits remain

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Key results with the model GINFORS
► The business-as-usual will strongly endanger the services of nature and
induce lower growth and employment than in the past.
► A global cooperation on a broad mix of policy measurements to keep
global warming below 2°C and to boost resource efficiency would allow
• staying within planetary boundaries,
• and would also be beneficiary for green growth and jobs globally and in the
EU.
► If a global consensus can not be achieved in the near future the EU
should go ahead. A first mover advantage will create an economic
success in the EU stronger than in the case of global cooperation. This
may cause others to follow.
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Concluding Remarks 1: Key POLFREE Findings

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► Short-term options:
• Complementary model applications for comprehensive assessments of varied
policy mixes.
• Self-contained country analyses facilitating national policy recommendations.
► Medium to long-term issues:
• Continous extension and quality improvement of harmonised global
environmentally extended Multi Region Input-Output (EE-MRIO) database(s).
• Continous advancement (e.g. with regard to SDG implementation) and
application of dynamic EE-MRIO models that are able to assess the
interactions between the economy and environment.
© GWS mbH 12 Paris, October 2016
Concluding Remarks 2: Ongoing research needs

13. WWW.GWS-OS.COM / © GWS 2016
Thank you for your attention.
For contact details see:
http://www.gws-os.com/de/index.php/global-developments-and-
resources/team.html
Bernd Meyer Martin Distelkamp Mark Meyer