Inflation and the ecological transition: A European perspective: Part 2

By Biagio Bossone, Maria Elena Camarda, Vincenzo D’alberti D’alberti, Maria Grazia Guttadauria, Daniela Pagliaro and Maddalena Vietti Niclot

The scarcity of raw materials drives inflation. One solution is to resort with more conviction to the circular economy. There is a need for recycling plants and developing the “industrial symbiosis” process in circular production districts, as part II of this blog post argues from a European perspective.

Inflation and the circular economy

As the shortage of raw materials is an important factor in higher inflationary dynamics, national authorities must pay attention to measures that can facilitate the recovery of the so-called secondary raw materials or end-of-waste materials (European Commission 2008). These are residues that have lost their qualification as waste after recovery operations and can be reintroduced into the production process. It is a question of strengthening the implementation of the principle of resource recycling or reuse, which liesdo you think at the heart of the concept of a “circular economy.”

Households and businesses are more willing to pay for the use of durable goods rather than buy them. Thanks to digital technologies and new designs, products today can be maintained efficiently, allowing for their life cycle to be extended. Regulatory restrictions on pollution and waste as they apply to products throughout the entire life cycle make resource reuse highly beneficial.

The reuse of secondary raw materials has a threefold advantage. It allows for achieving (i) greater security in the supply of materials (in the face of constantly growing demand); (ii) a cleaner and healthier environment (due to the lower pressures of the extraction of natural resources and the reduction in the generation of waste); and (iii) savings on the purchase of raw materials, which may then lead to lower and less rapidly growing final prices.

A few years ago, a well-known report on the circular economy in Europe (Ellen MacArthur Foundation 2015) estimated that by implementing the principles of the circular economy, by 2050 Europe could improve its productivity by up to 3 percent, creating the conditions for containing price growth on the supply side and supporting economic growth. By 2030, the improvement in productivity would generate cost savings of up to 600 billion euros per year (consider, for example, the construction sector, with construction costs that could be halved, or the mobility sector, where costs could be reduced by 75%) and an increase in gross domestic product of up to seven percentage points higher compared to the baseline.

Strong commitments are needed

Achieving these results today is essential. The New Circular Economy Action Plan (European Commission 2020), approved by the European Parliament in 2021, can mark a decisive step toward the adoption of a circular production model. It would provide significant savings, notably in areas where the pressure on prices is most intense: electronics, batteries and vehicles, packaging, plastics, textiles, building, food, water, and nutrients.

It will be necessary to intervene in critical areas:

• The absence of European standards in the field of circular economy, which entails uncertainties about the quality of secondary raw materials and makes it difficult to verify the levels of impurities and sustainability of high degrees of recycling.

• The heterogeneity of national regulations, which, together with high transport costs, hinders the exchange of secondary raw materials between European countries, preventing their marketing and circulation in the European Union.

• The inadequacy of incentives for the use of recycled materials in products and infrastructures, which weakens the demand for secondary raw materials and prevents the development of a market.

Still more is needed. Considering that to date 66 percent of industrial carbon dioxide emissions are caused by the production of steel, plastic, aluminium, and cement (figure 2), a significant reduction of these emissions will require intensifying the recycling of these materials and increasing the recourse to eco-design to obtain “removable” materials.

This will permit the achievement of a rate of recovery that would otherwise be impossible to attain (although, of course, any recovery necessarily implies energy costs and carbon dioxide emissions, no matter how efficient it is). Recycling plants will have to be established and the process of “industrial symbiosis” will have to be promoted (inter alia, through the creation of circular production districts), whereby the waste produced by companies would be valued as raw materials to be employed by other companies.

Figure 2. Four Main Categories of Critical Subjects

Source: The Circular Economy – a Powerful Force for Climate Mitigation, Material Economics, 2018.

Policy considerations

Implementing the principles of a circular economy will have direct and indirect beneficial effects on the ecological transition, mitigating the inflationary tensions that the transition will inevitably engender and which would hinder the transition in turn. Nonetheless, these effects will be observed only once the transition has been accomplished; meanwhile, significant costs will hit the economies and societies.

This is why central banks have an important role to play in promoting these principles. Much as many central banks are growingly active, today, in mainstreaming green finance within their national financial sector strategies and policies,¹ they can greatly contribute to the understanding of both the economic impact of circular businesses and the risks related to linear economy practices. Importantly, they should encourage the financial system to support projects involving the circular economy.  

Since all these actions will take time to produce positive effects, redistributive fiscal policies (which, on one side, would take from those who benefit from inflation and, on the other, would compensate those who are penalized by it), in combination with the European mechanisms for a “just transition”, will constitute indispensable tools to guarantee a faster transition that will leave no one behind.²

To address the social and economic imbalances that are already being experienced and clearly rising, the use of such tools will need to be incisive and timely.

The authors of this blog post are experts of the Public Investment Evaluation Unit at Italy’s Presidency of the Council of Ministers, coordinated by co-author Maria Elena Camarda. The blog post is an abstract from a broader report the authors prepared for the Presidency on energy, commodities, and inflation in the context of sustainable development. The views expressed in the blog post reflect those of the authors only and do not necessarily reflect the views of the Presidency or the other institutions with which the authors are affiliated.