1 Why resource efficiency matters

For many years, tackling climate change and environmental degradation lingered in the shadow of other policies as political leaders prioritised short-term economic issues. In terms of the former, the European Union’s transition to a net-zero economy has been boosted by the supply side measures taken to end dependence on Russian gas following Putin’s 2022 invasion of Ukraine. Carbon emissions are the focus of the international agenda on climate.

However, awareness remains low of the magnitude of human extraction from nature and the risks building up from breaching planetary environmental boundaries. This has led to the “tragedy of the horizon” of longer-term consequences ignored as short-term concerns prevail, despite the threats to human life and well-being. In addition to the problem of time horizons for environmental impacts, there is a global public good problem: the loss of biodiversity and other environmental impacts create harm across countries but governments cannot agree on sufficiently effective measures to address them.

This Policy Brief gives an overview of the environmental and economic cases for Europe to improve resource efficiency, particularly by increasing circularity in the single market. Greater resource efficiency would reduce pressure on nature, enabling biodiversity improvements and lessening pollution and water stress, both in Europe and regions where Europe’s imports come from. It would also improve the EU’s economic security and financial stability, as well as the competitiveness of European firms in the medium term.

Resources include materials, land and water. Materials include everything extracted from the earth and initial processing, and can be categorised into biomass, fossil fuels, metals and non-metallic minerals. Materials can be transported to other regions, while the effects of land and water use and pollution are local. However, all of these resources can be accounted for as ‘embedded’ environmental impacts (such as emissions, water and pollution) in the raw materials and products that are transported and traded internationally.

The current economic system does not encourage resource efficiency on a large scale, even though companies and consumers would see efficiency gains from circularity if multiple market failures were removed. The most obvious market failure is that the impact on nature of the linear economy is largely unpriced and often unmeasured because the environmental and human costs of extraction and processing of materials, and of their end-of life disposal, fall mainly on local residents and on taxpayers.

Environmental degradation is a problem for the economy as well as for nature. Many of the ecosystem services delivered by nature – from pollination to fertile soil – cannot be substituted by human technology. Others – such as fresh water – are extremely expensive and difficult to provide at scale when ecosystems are disrupted. 

In addition to the risks, the potential value of greater resource efficiency is also under-appreciated. This value includes opportunities to increase economic security, financial stability and competitiveness over the medium and longer terms. 

The EU has an important role to play in promoting resource efficiency because of Europe’s high levels of consumption and, on the positive side, its high quality of governance. The EU is a global leader in applying circularity principles. However, like other economies, the single market faces market failures of several kinds that prevent faster and more extensive moves to increase the efficiency of material use throughout value chains, in both production and consumption. Even when individual companies and consumers would benefit from efficiency gains from circularity, realising these gains requires public policy to set common standards and to create markets that can deliver inputs such as recyclates, and services such as repair.

We start with the scientific evidence on the environmental impact of global and European extraction and processing. We then show how resource efficiency would improve the EU’s economic security and financial stability, as well as the competitiveness of European firms in the medium term, particularly through increased circularity in the single market. We then provide policy recommendations for achieving greater resource efficiency in the EU.

 

2 The environmental case for resource efficiency

2.1 The impact of resource over-use on the planet

It is a harsh reality that the unsustainable extraction of resources from nature is already well beyond several key planetary boundaries. Biomass cultivation for food, forestry and textile production, mineral and fossil resource extraction, and processing of these primary materials are the principal drivers of the triple planetary crises of climate change, biodiversity loss and pollution (Figure 1). In 2022, these activities, including the fossil-fuel use that underpins them, were responsible for 64 percent of greenhouse gas emissions, 40 percent of air pollution health impacts, 98 percent of land biodiversity loss and nearly 100 percent of biodiversity loss from freshwater eutrophication.

Figure 1: Global environmental impacts of cultivation/extraction, processing and use of biomass, metals, non-metallic minerals and fossil resources, 2022

Source: Bruegel adapted from UNEP (2024), Figure 3.2. Notes: The dotted lines correspond to the impacts attributed to the cultivation/extraction and processing of materials, which are captured in four categories: biomass, metals, non-metallic minerals and fossil resources. See Annex 1 for definitions and an explanation of how economic activities are categorised.

The extent to which resource-related environmental impacts have already severely transgressed planetary boundaries (Figure 2) means there is a high risk of disruption of the natural systems that underpin the Holocene, the stable and favourable conditions in which human civilisations have developed over the last 11,700 years (Richardson et al, 2023). Despite often being treated as separate issues, the non-linear interactions between environmental impacts mean that greater risks are building up from the aggregate effects of degradation of ecosystems (IPCC, 2022). This will have damaging and volatile impacts on economies, which are embedded in nature and rely on the services it provides (Dasgupta, 2021).

It is therefore worrying that the climate impacts and biodiversity loss driven by extraction and processing of materials are rising fast. Figure 3 shows that materials-related CO2 emissions have increased by 52 percent since 1995, reaching 26 gigatonnes in 2022. This alone exceeded by a factor of five the level of CO2 emissions that would enable the world to keep to the Paris target of a global temperature rise of no more than 1.5°C – and the chasm has widened despite measures to decarbonise economies. New annual species loss driven by land use change has consistently exceeded targets, increasing biodiversity loss. Annual species loss resulting from land-use change exceeded the international target by 35 times in 2022 (UNEP, 2024). Biomass cultivation and processing have driven the vast majority of land-based annual species losses historically.

Figure 2: Current status of the nine planetary boundaries

Source: Richardson et al (2023). Reproduced from https://www.science.org/doi/10.1126/sciadv.adh2458. Note:  N = nitrogen, P = phosphorus.

The divergence of climate and biodiversity impacts from intergovernmental targets is driven by growing extraction and processing. Material extraction grew for the last five decades at an annual rate of 2.3 percent (UNEP, 2024), but material productivity has hardly improved, unlike the other factors of production (Figure 4). Unlike emissions, these trends are only expected to speed up. The UN International Resource Panel forecasts resource use to increase by up to 60 percent by 2060 relative to 2020 levels if no significant action is taken (UNEP, 2024).

Figure 3: Global contribution of materials vs remaining economy and households to CO2 emissions and land-related biodiversity loss, 1995 – 2022

Source: Bruegel adapted from UNEP (2024), Figure 3.5. Notes: See Annex 2 for definitions and explanations of the targets.

Figure 4 shows limited improvement in material productivity since 1970, relative to improving productivity of energy, greenhouse gases and labour. Globalisation has contributed to this lag in the material productivity trend through the outsourcing of production to regions with lower material efficiency (UNEP, 2024). The energy crises of the 1970s and 2020s led to drives for energy efficiency, but there has been no systemic drive for similar increases in materials efficiency. This is despite relatively high material input costs in sectors such as manufacturing, which can be more than twice the labour and energy costs (VDI, 2016).

Figure 4: Global material extraction 1970 – 2024, and productivity of materials, greenhouse gases, energy and labour, 1970 – 2024

Source: UNEP (2024), Figures 2.9 and 2.23.

Demand for some materials is rising as a result of the decarbonisation of energy, transportation and other systems. The transition to renewable energy and electric vehicles presents a paradox: it is essential to reduce emissions and improve the outlook for climate change, but it is driving more extraction of certain critical raw materials in the short term, with uncertain but potentially profound environmental impacts (see, for example, Riofrancos et al, 2023; Watari et al, 2021; Sonter et al, 2020). Once decarbonisation has been largely achieved, it will reduce resource extraction because a functioning renewable energy system needs hardly any more materials, whereas a fossil-fuel system requires ongoing extraction of highly polluting hydrocarbons (ETC, 2023). Furthermore, once there are enough electric vehicles and other clean technologies in circulation, with an efficient re-use and recycling system, the secondary markets for materials will reduce demand for new extraction of critical raw materials (Karali and Shah, 2022).

2.2 The EU’s high consumption of resources

Europeans are responsible for a disproportionately large share of material extraction. The European continent’s per-capita resource use is more than three times higher than that of Africa, for example (UNEP, 2024). The EU comprises 6 percent of the world’s population, but its consumption accounts for between 70 percent and 97 percent of the ‘safe operating space’ across multiple planetary boundaries available for the entire planet (Sala et al, 2019; NegaWatt et al, 2024).

In 2021, EU domestic extraction of raw material amounted to 5.6 gigatonnes, the largest categories being non-metallic minerals (60.6 percent) and biomass (27.9 percent). Outside Europe, new material extraction generated by the EU’s demand for imported goods was 3.1 gigatonnes in 2021. The largest categories were fossil energy materials/carriers (46.3 percent) and metal ores (29.7 percent).

The EU’s material use – the weight of products consumed in the EU – comprised just under 5 gigatonnes in 2022. Approximately 35 percent this, or 1.76 gigatonnes, became waste. The remaining 65 percent accumulated as stock, for example in buildings and machinery (EEA, 2024).

However, Figure 5 indicates a positive exception to the global trends of increasing resource use, as shown in Figure 4, and that the EU’s circular economy policy might be having a tangible impact on resource efficiency. Although the EU’s material consumption remains disproportionately high, it has improved in the last 15 years (Figure 5). In the 14 current EU countries that were already members before 2004 (EU14), raw materials consumption grew after 1970, albeit at a slower rate than GDP. Since 2007, however, there has been an absolute decoupling in those countries of resource use from GDP growth, and a resulting boost in raw material productivity. In 2021, the material footprint of the EU was the same as in 1998, and 18 percent lower than in 2007, despite a 9 percent increase in GDP over the same period. This absolute decoupling – as opposed to a relative decoupling – is significant even though overall material volumes remain high.

Figure 5: Raw material productivity, raw material consumption and GDP, EU14, 1970 – 2021 (1970 = 1) 

Source: Bruegel based on Global Material Flows Database. Note: EU14 = Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain and Sweden.

2.3 Defining the circular economy 

The circular economy is an assembly of many different ideas and initiatives (Kovacic et al, 2020), but in essence it “revolves around maintaining high product and material value while extending their lifespan within the economy and eliminating unnecessary material usage” (Letta, 2024). More broadly, it is an alternative economic paradigm to the current mainly linear economy (ie extract-use-throw away), comprising a system that meets human needs – including food, mobility, shelter and health – in the most resource-efficient way possible (Potočnik and Nohl, 2023).

In practice, the circular economy involves actions such as designing products or processes for least resource use, optimisation of material use (through circular business models such as providing goods as a service; Systemiq, 2021), recycling and turning used resources into new products (Kovacic et al, 2020; Bocken et al, 2016; Geissdoerfer et al, 2018; Allwood, 2014). Frameworks such as the ‘9 Rs’ or ‘narrow-slow-close’ (ie use less material, use it for longer and then reuse it) encapsulate the ethos of the circular economy.

The potential environmental benefits of a circular economy are great. For example, circular approaches in seven important sectors – including steel, construction, plastics and vehicles – could reduce annual EU industrial emissions by 34 percent by 2050 relative to 2018, with reductions in greenhouse-gas emissions within the next one to five years (Agora Industry, 2022). Material efficiency through redesigned industrial processes and products, substitution of materials and enhanced recycling are examples of the circular measures that can contribute to emissions reduction.

Circular economy interventions could also help halt biodiversity loss in the EU and even help it to recover to 2000 levels by 2035 (Forslund et al, 2022). Agriculture, forestry and other land use change (such as the draining of wetlands) are the principal drivers of biodiversity loss globally (UNEP, 2024). Circular measures that would support the recovery of biodiversity include reducing input requirements for livestock farming, extending the lifetimes of buildings and other products that use timber, land use techniques in forestry and agriculture such as regenerative agriculture, and recycling of textiles (Forslund et al, 2022). 

2.4 The EU’s progress towards circularity so far

The EU has fostered circularity for more than a decade through regulation. Two Circular Economy Action Plans (CEAP) in 2015 and 2020 have broadened the scope of EU policy from a focus on waste to a wider vision for circularity, introducing ecodesign and shifting towards legally binding measures (Watkins and Meysner, 2022). Key measures include the Batteries Regulation (Regulation (EU) 2023/1542), the Right to Repair initiative, the directive on empowering consumers for the green transition (Directive (EU) 2024/825) and the Ecodesign for Sustainable Products Regulation (ESPR, Regulation (EU) 2024/1781). A new European Packaging and Packaging Waste Regulation, to update rules from the mid-1990s, is also pending adoption, at time of writing. The 2020 CEAP also contained several ambitious targets including on decoupling economic growth from resource use, doubling the circular material use rate and halving the amount of non-recycled municipal waste by 2030 – although these are non-binding.

The most recent legislation aims to increase resource efficiency across the whole life-cycle of products. For example, the Batteries Regulation contains mandatory recycled content requirements for lithium, which could spur the creation of new markets for an element that is not widely recycled at present. The ESPR first working plan will ensure minimum ecodesign requirements in several high-impact intermediate and end-use products, including iron products, chemicals, furniture and textiles. These requirements could include resource efficiency, durability, level of recycled content and repairability.

To succeed, these measures will require many implementing regulations in the coming years to invigorate the so-far modest national application of circular principles. 

Although all EU countries have national circular economy roadmaps or strategies, or are currently developing one, most of these remain generic (EEA, 2024). The European Court of Auditors found in 2023 that Commission action since 2015 has led to little progress in influencing circular activities beyond these generic strategies, that waste management has remained the focus of funding and that reaching 2030 targets looked unlikely given current progress (ECA, 2023). However, hopeful signs of progress towards resource efficiency at national level include targets for absolute decoupling of material use from growth set by three EU countries (Austria, Finland and the Netherlands), and the start of a decline in raw material use in the EU (Figure 5). The economic case for action by governments, municipalities and firms needs to be understood better to motivate Europeans to act faster to decouple resource use from growth.

 

3 The economic case for greater resource efficiency

Greater resource efficiency would make a significant contribution to the EU’s major policy goals, most notably economic security and strategic autonomy, competitiveness and financial-system stability. This section discusses how resource efficiency through circular economy principles can support priorities at the top of the EU’s agenda.

3.1 Economic security and strategic autonomy

Raising resource efficiency would be the fastest way to de-risk the European economy. It would reduce dependence on authoritarian regimes and fragile supply chains, and make the EU less vulnerable to volatile commodity prices (Letta, 2024; WEF, 2024). Circular solutions will become more important as energy infrastructure dependencies shift from imports of fossil fuels (commodities) to the import of critical raw materials (CRMs; to create capital assets in renewable energy). This does not mean that the EU should aim to move to autarky and become a self-sufficient economy or introduce protectionist policies. Rather, the elimination of wasteful use of materials and energy has the potential to support the economic-security objectives of reducing import dependencies for critical products and deepening the single market and making it more flexible (Pisani-Ferry et al, 2024). A well-functioning circular single market would increase the EU’s resilience against import shocks. Critical dependencies can be reduced by bringing down demand for imported virgin materials, by substituting them with local, re-used and recycled materials and by using fewer materials thanks to efficiency-by-design or repair opportunities. 

In energy, the recovery of biodegradable waste could contribute significantly to supply diversification. Biogas and biomethane could meet 10 percent of natural gas demand by 2030, to which better food-waste collection and processing could contribute. Biogas production emits little carbon and prevents organic material from going to landfill. Given that organic waste accounts for up to 50 percent of municipal waste (ECN, 2022) and 10 percent of all greenhouse gas emissions (WWF, 2021), that would reduce environmental damage while contributing to energy security.

The next decades are likely to be characterised by supply bottlenecks as climate shocks proliferate, economies race to decarbonise and trade rivalries disrupt flows. But even in the very short term, resource efficiency can offer a buffer to protect the EU’s economic security. For CRMs, supply deficits are already expected for 2024 (Stewart et al, 2023). In the medium term, there are forecasts of potential supply gaps for copper and lithium of up to 10 percent and 49 percent respectively in 2030 (ETC, 2023).

Commodity price volatility is another threat to economic security. Since 2020, the prices of critical minerals used in batteries underwent both dramatic increases and large declines (IEA, 2024). Certain battery-grade lithium compounds increased in price by 800 percent to 1000 percent in just over one year (Riofrancos et al, 2023). This volatility is likely to increase because of climate impacts, with 25 percent of mining executives expecting climate risks to be very significant in their operations in the next five years (KPMG, 2023).

To ensure that decarbonisation is not disrupted, the circular market for CRMs needs to expand faster. Through end-of-life recovery, design for materials efficiency and extended product lifetimes, more reliable markets for critical minerals can be developed that would improve economic security. According to one estimate, secondary materials could meet up to 91 percent of US demand for CRMs in low-carbon technologies by 2050 (Karali and Shah, 2022). Another example is Apple’s calculation that from one metric ton of iPhone components, recyclers can recover the amount of gold and copper typically extracted from 2,000 metric tons of mined rock (Apple, 2024) – but users need incentives to return old devices and those devices need to be designed for easy materials recovery. The EU’s Critical Raw Materials Act (CRMA, Regulation (EU) 2024/1252) sets targets for recycling to meet 25 percent of EU annual consumption of strategic raw materials by 2030.

The value embedded in disused electronic devices globally is around $57 billion. The EU has room to increase from its current 39 percent recycling rate for waste electrical and electronic equipment (WEEE) (EEA, 2024). The contribution of recycled minerals to fresh inputs that are crucial for electronics is also very low: cobalt (22 percent), nickel (16 percent), neodymium (1 percent) and lithium (0 percent), even though significant supply gaps are forecast for these transition materials (ETC, 2023). This is partly driven by low rates of recovery due to poor product design for end of life and the lack of well-established infrastructure for recovery of such minerals (Charles et al, 2020). 

However, although end-of-life treatment is important, the high projected demand for CRMs suggests that recycling alone cannot meet all the EU’s needs. One estimate suggests that globally, recycling may only start to play a substantial role in reducing virgin material extraction after 2040, once enough recyclable materials are in use (Peplow, 2023). To achieve economic security, end-of-life treatment must be pursued in conjunction with other measures to reduce the volume of CRMs needed further up the production chain.

Beyond CRMs, design of products so that they use less raw materials, and resource efficiency through repair and durability have great potential to contribute to economic security. Many household appliances are treated as obsolete far before their designed lifetimes are over, partly driven by a culture of constant upgrading to the latest model (EEA, 2024). Design also has a role to play in developing clean circular loops. This ensures that products are designed to minimise the use of substances of concern and other pollutants, to facilitate end-of-life recovery.

Circularity would contribute to other aspects of security. By reducing biodiversity loss, it would also diminish bio-risks to health, such as epidemics, and environmental disasters due to extraction, such as landslips. It would also reduce the drivers of armed conflict, as shown in the Environmental Justice Atlas, which maps how the extraction of resources and resource management drive conflict. These conflicts will proliferate with the increase in extraction for decarbonisation, given that 32 percent to 40 percent of this extraction is expected to occur in countries with weak to failing resource governance (Watari et al, 2021).

Resource efficiency would be a major contribution to security at an existential level – not only economic security but nature’s support of life and every kind of human activity. Recent European debates have been dominated by external threats – from Russia and China to COVID-19 – but the environmental threats to security have not gone away and tipping-points are looming (Lenton et al, 2019).

3.2 Competitiveness

A circular single market (the term used in Letta, 2024) could boost European competitiveness in several ways. First, it would help eliminate inefficiencies in resource use in production and consumption that prevail under the linear economy, because of market and government failures such as cheap resources with prices that do not include environmental impacts, or lack of information about resource-efficient production methods (section 4). By increasing efficiency in how goods are produced and in how long they are used, the EU can achieve greater productivity that will enhance its competitiveness over the long term. At firm level, greater resource efficiency means lower input material costs. This allows firms to set lower prices and to invest in R&D or increase wages, all of which enhance competitiveness (Flachenecker and Kornejew, 2019).

A second issue is opportunity cost. Europe will further lose competitiveness if it misses out on the growth of new, green sectors – not only clean tech but also the major opportunities for Europe to develop competitive products and services around the circular economy (EEA, 2024). Material productivity improvements have been shown to generate spillover innovations, contributing positively to firms’ successes (Rennings and Rammer, 2009). In a study of 52,000 firms in 12 EU countries, Flachenecker and Kornejew (2019) found that firms that developed eco-innovations to improve material productivity increased their market shares while reducing their CO2 footprints.

At macro level, a functioning circular economy needs well-functioning markets for secondary raw materials characterised by consistent price signals and standardised product-quality specifications (EEA, 2024). The Circular Economy Act proposed in the political guidelines for the 2024-2029 European Commission could foster world-leading waste and secondary materials markets, attracting global investments and expertise (von der Leyen, 2024).

For example, the European remanufacturing market’s circular potential is projected to grow from its current value of €31 billion to €100 billion by 2030, creating half a million new jobs (World Bank, 2022). In Finland, the circular potential for textile fibres could yield €1.2 billion in investments and generate 17,000 new jobs. In the agricultural sector, initiatives such as the Dutch 2018 circular agricultural plan, which includes practices such as local production, reusing waste flows and identifying symbiosis between the supply chains of arable, livestock and horticulture sectors, are likely to be in high demand globally as competition for land and biomass increases (King et al, 2023; Muscat et al, 2020). 

Third, the EU’s circularity standards are likely to spread as other countries aim to go circular as well. Europe is poor in resources but rich in human capital, and world-class in making regulations that create and lead markets (Bradford, 2020). Many governments around the world struggle with the problems of increasing volumes of waste (Kaza et al, 2018) and are creating circular economy plans. As environmental regulation increases internationally, European companies – in the context of the EU setting global norms for ecodesign, repairability, durability and recyclability through its circular economy strategy – will be able to comply with this regulation more cost-effectively than other firms (Gunningham et al, 2004). European firms might also have a comparative advantage in developing the most energy- and resource-efficient products and services.

Fourth, European firms are more vulnerable to volatility in global markets for many materials than are Chinese producers which have long-standing vertical integration of their supply chains with extraction and processing. Through resource efficiency, European firms would reduce their exposures to material price fluctuations and insure themselves against supply shocks (Flachenecker and Kornejew, 2019). Furthermore, in the future, the cost of many raw materials may rise because climate change will make both land and water scarcer (IPCC, 2022), raising the costs of extraction and processing (which are often very water-intensive). This will be in addition to more governments starting to price pollution and emissions. Although regulation to increase circularity might increase costs in the short and medium terms, this is likely to be out-weighed by the longer-term benefits if it gives European companies an incentive to invest in resource efficiency. An analogy would be European standards on fuel efficiency (see Oki, 2021), which led to the creation of cars that were more competitive when oil prices went up.

3.3 Financial stability

Resource inefficiency causes excessive extraction of materials that degrades the natural assets that provide ecosystem services. This poses systemic risks to the financial sector. The European Central Bank is among the financial institutions now calculating the exposure of financial institutions to ecosystem services. It has found that 75 percent of all corporate loan exposures in the euro area have a strong dependency on at least one ecosystem service (Boldrini et al, 2023). The ECB is also starting to measure the contribution of the financial sector to the degradation of natural assets, having calculated that corporate loans in the euro area have driven biodiversity loss globally equivalent to the loss of 582 million hectares of pristine natural areas (Ceglar et al, 2023).

The Dutch and French national banks have calculated exposure to biodiversity risks for their own financial institutions of €510 billion and 42 percent of the value of securities portfolios held respectively (van Toor et al., 2020; Svartzman et al., 2021). In the private sector, credit ratings agencies and insurers are developing their own methodologies for risk assessment around the costs of environmental degradation. 

In addition to evaluating risk, valuation of natural assets is a powerful tool for fostering the circular economy. It puts a price on the degrading of ecosystem services, which reduces systemic risk to the financial sector and encourages value creation through means other than cultivation and extraction. Nature can be a high-value investment; the European Commission estimates that every euro invested in EU nature restoration adds €4 to €38 in benefits (European Commission, 2022). This attention to environmental and climate risks in the financial system is an important step forward in recognising and analysing previously uncalculated risks. However, central banks, financial regulators and credit agencies cannot introduce the policies and laws that would reduce these risks. Only governments and international institutions can lead the system change to a circular economy. 

 

4 How to improve the circular single market: policy recommendations 

We have described how resource efficiency can contribute to environmental and strategic goals and assessed the EU’s progress towards a circular economy. However, current progress can be characterised as an incremental approach to resource efficiency within the context of a linear economy, rather than a deep transformation through which circular behaviour becomes the norm (European Commission, 2019). To reap the environmental and economic benefits, this transition needs to go much faster.

The linear economy exists because producers, consumers and waste managers have optimised systems and behaviour to match the prevailing linear incentive structure (European Commission, 2019). An extensive literature documents the market and governance failures and barriers to a fully-fledged circular economy, creating a nexus of disincentives to making resource-efficient choices. Some of these barriers prevent companies and consumers from taking what would otherwise be financially positive resource efficiency actions (Table 1, part a). Others are systemic economic barriers (Table 1, part b).

Table 1: Barriers to resource efficiency

(a) Barriers that inhibit pursuit of financially positive resource efficiency actions

Information constraints

Consumers may not make rational economic and resource-efficient choices if they have incomplete information on efficiency, for example of energy-consuming appliances.

Financial barriers

Uncertain payoffs, competing conventional investment opportunities and inadequate credit markets may inhibit resource-efficient investment even if it would be financially positive. 

Path dependency

Pre-existing habits, relationships, knowledge and therefore technical and managerial capacity may inhibit the identification of opportunities to increase resource efficiency. 

Fiscal mismanagement 

Subsidies or tax incentives for polluting inputs (for example fossil fuels), enforcement gaps or incoherent policy (for example landfill taxes) may create disincentives. 

 

(b) Other barriers

Absent or incomplete pricing of externalities

The negative impacts of emissions, biodiversity loss and resource depletion may carry no price or a low price, making virgin materials artificially cheap, so private actors do not have a strong financial interest to use resources efficiently.   

Split incentives

Individual actors may lack an incentive to use resources efficiently, even if it is in the social interest to do so, if they are not exposed to the costs of waste disposal.

Infrastructure deficits

Actors may not have infrastructure to re-use resources to their maximum potential.

Market structures 

Lack of competition, protected industries and trade protectionism discourage innovation, including in resource efficiency. 

 

Source: Bruegel based on Ekins et al (2019) and Rentschler et al (2018).

Policy is essential to address these barriers and establish effective incentive structures to optimise resource efficiency. The next EU Circular Economy Act needs to ensure effective implementation of the current legislative tools at the right level of government. Some incentives might be more powerful if implemented in a more decentralised way (eg local or municipal level), such as incorporating circularity criteria into public procurement rules. 

Our policy recommendations highlight measures that would yield the highest returns if implemented at EU level, presented from most to least ambitious.

Price materials according to their environmental cost

In many parts of the world, there is currently little or no financial price put on the negative environmental effects of material extraction and processing. That makes virgin raw materials often cheaper than secondary materials, reducing investments in circular infrastructure and hindering circular business models. Environmental taxation is crucial to create a level playing-field for secondary materials and prevent arbitrage. To achieve this, more work should be done to identify the costs of climate, biodiversity and pollution externalities. Research into resource taxes and their feasibility should be encouraged, since there are few real-world examples and little literature on this (UNEP, 2024).

Producers must internalise the costs of disposal in purchase prices

The burden of landfill and incineration taxes and ‘pay-as-you-throw’ systems usually falls directly or indirectly on the consumer and taxpayer. If more responsibility for materials throughout their lifecycles falls on producers, they might redesign products radically for easy recycling or remanufacturing, or develop different business models such as product-as-a-service. Extended Producer Responsibility (EPR) should be strengthened and extended to other sectors with high impact, such as construction, where EPR schemes are not common.

Assess tax incentives throughout the economy

Environmental taxes are a major economic instrument to promote circularity, but are often countered by tax incentives in other sectors of the economy. Progress is needed to tackle the negative incentives created by fossil-fuel subsidies, which total €55 billion to €58 billion per year in the EU, and to shift more of the current high tax burden on labour, which in 2019 constituted 52 percent of EU tax revenues, onto pollution and resources, which constituted only 0.19 percent of tax revenues (World Bank, 2022).

Design whole systems for efficiency, not only individual products

In addition to designing individual products and services for efficiency, systems should be designed to meet human needs in the most resource-efficient ways. For example, Riofrancos et al (2023) found that continuation of the current US transport system with like-for-like replacement of current vehicles with electric vehicles, up to 2050, would create demand for three times more lithium than is currently available on the global market. However, this demand could be vastly reduced if the US were to encourage smaller car batteries, lighter vehicles and expansion of public transport.

Implement and harmonise regulatory measures

Effective implementation of sustainable product standards, requirements for recycled content and end-of-waste criteria are crucial for developing stable circular markets. They will foster steady streams of circular materials, while providing price signals and reliable, standardised information that will generate business confidence and economies of scale. 

Implementation also has to be coherent in order to counter perverse incentive structures. For example, the EU’s Waste Shipment Regulation (Regulation (EU) 2024/1157) makes it difficult for waste to cross borders in the EU, resulting in about 90 percent of waste being treated in the country where it was generated (EEA, 2021). However, recycling facilities need greater economies of scale to generate enough recovery of many materials to be profitable.

Incentivise investment

For the circular single market to achieve its potential in terms of boosting EU competitiveness, the 2024-2029 European Commission needs to build out the institutional and policy infrastructure to address the demand side, while framing it intelligently under the headings of the main strategic goals. This strategy will need to include materials efficiency, not only energy. Such an incentive structure would support the substantial investments that are necessary. Currently, projections of the economic benefits of the circular economy do not bring an equivalent scale of investment. For example, in plastics recycling alone, the European Investment Bank has estimated an investment gap of €6.7 billion to €8.6 billion to achieve EU targets (EIB, 2023). Policy needs to incentivise both public and private investment in the circular economy, which will be essential to the transformation from an inherently inefficient linear economic model (Letta, 2024).

Correct information asymmetries in the private sector

Firms are reluctant to share commercially sensitive information that might increase welfare but could reduce their competitiveness. The EU could provide missing institutions, such as a neutral inter-firm mediator, to enable confidential or anonymised information exchanges to take place, allowing firms to identify resource synergies with firms in other sectors. One example is facilitated industrial symbiosis, which was successful in the United Kingdom in overcoming data and trust problems to allow firms to trade used materials to mutual benefit. Such practices can lead to huge resource and financial savings, as demonstrated in the EU by the Kalundbourg eco-industrial park in Denmark. For critical and valuable materials, firms will need communication and data-sharing along the value chain to avoid pollutants and preserve the recycling potential of materials.

Circular economy review

Although the Commission regularly monitors, reports and reviews the impact of circular economy legislation, the incremental approach to resource efficiency makes it unlikely the EU’s 2030 targets on resource use will be met. This is exacerbated by a legislative framework that is dispersed across different parts of the European Commission. The Commission should launch a comprehensive review which assesses the whole European strategy on resources, similar to the 2001 ‘Strategy for a future chemicals policy’ (European Commission, 2001) which led to the REACH chemicals regulation of 2006 (registration, evaluation, authorisation and restriction of chemicals, Regulation (EC) No 1907/2006). The 2001 review increased momentum around a complex issue, resulting in a paradigm-shifting approach to chemicals legislation in the EU (Engström, 2020). A review of resource use could be a powerful catalyst for bolder action that, like the chemicals review, could transform the EU’s relationship with resources.

Leverage financing at EU level to enhance circularity

Lenders lack understanding of circular investments and of evaluating the benefits of circular models compared to linear models, the risks of which are also underestimated. An enhanced circular economy taxonomy would allow for investment and other financial tools, such as green bonds, to support circular businesses (EEA, 2024).

Make the business case for circularity

Support from European businesses may be greater than among politicians at present. For example, the German Chamber of Commerce showed that companies in most sectors see circularity as an opportunity rather than a risk (DIHK, 2024; Figure 6).

Figure 6: Corporate attitudes to the circular economy, Germany, 2024

Source: DIHK (2024). Note: The figure shows responses to the question: Is the development towards a circular economy more of an opportunity or a risk for your company’s current business model?

Improve metrics

All of the policy recommendations we have listed require improved and standardised metrics – both estimates of the value of a circular economy in macro variables, such as growth and employment, and the measurement of risk, reward and externalities for calibrating and implementing the right incentives to spur the transition to a circular economy (Box 1).