A circular economy model of economic growth

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DOI: 10.1016/j.envsoft.2015.06.014
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A Circular Economy Model of Economic Growth
Donald A.R. George
University of Edinburgh
Edinburgh, UK
Brian Chi-ang Lin*
National Chengchi University
Taipei, Taiwan 11605
calin@nccu.edu.tw
Tel : 886-2-29387296
Fax : 886-2-29390074
Yunmin Chen
Academia Sinica
Taipei, Taiwan 11529
February 21, 2015
Highlights
A closed circular economy model is presented.
Environmental quality cannot be maintained or improved via economic growth.
The improvement in environmental quality can only be achieved by an increase in
the environmental self-renewal rate or the recycling ratio.
Abstract: The main purpose of this paper is to present a theoretical model
incorporating the concept of circular economic activities. We construct a circular
economy model with two types of economic resources, namely, a polluting input and
a recyclable input. Overall, our results indicate that the factors affecting economic
growth include the marginal product of the recyclable input, the recycling ratio, the
cost of using the environmentally polluting input and the level of pollution arising
from the employment of the polluting input. Our analysis also shows that, contrary to
the Environmental Kuznets Curve (EKC), environmental quality cannot be
maintained or improved via economic growth. Instead, the improvement in
environmental quality, as measured by a reduction in pollution, can only be achieved
by an increase in the environmental self-renewal rate or the recycling ratio.
Keywords: Circular Economy; Economic Growth; Sustainability; Environmental
Kuznets Curve; Self-Renewal Rate; Recycling Ratio
*Corresponding Author
2
The ultimate physical product of economic life is garbage.
Kenneth E. Boulding, 1970, p.162
1. Introduction
The conventional wisdom for analyzing economic activities is rooted in a
unidirectional concept of production, i.e., natural resources entering one end of the
production process and economic products emerging at the other end. In a market
economy, attention is focused on the value of economic products, while the depletion
of natural resources and the resultant accumulation of economic waste are typically
ignored. We can rationally expect that, if people do not engage in recycling resources
and managing waste, the reserves of many resources will soon vanish from the earth.
The aim of this paper is straightforward: to present a theoretical model
incorporating the concept of circular economic activities. In the 1960s, the embryonic
idea of a circular economy was first developed by Professor Kenneth E. Boulding, a
pioneer environmental economist. To Boulding (1966), the earth can be best
understood as a single spaceship with limited reservoirs of anything, either for
extraction or for pollution. In the spaceman economy, the essential measure of the
success is the nature, extent, quality, and complexity of the total capital stock rather
than economic throughput (Boulding, 1966, p. 9). As for the carrying capacity of an
economy, Daly (1991) uses the analogy of a sinking boat and points out that the boat
on which the cargos are optimally allocated might still sink under too much weight.
3
Andersen (2007) discusses the environmental economics of the circular economy
emphasizing the contributions of Pearce and Turner (1990) and argues that, in Europe,
significant advances have been achieved by the pricing of externalities.
To date, more and more countries in the world have taken measures to promote
the circular economy. Japan, Austria, Germany, and the Netherlands, for example,
have to some extent already developed strategies compatible with circular economic
activities (Heck, 2006). In China, the circular economy has even been accepted by the
central government as a vital strategy for achieving sustainable development (see, e.g.,
Yuan et al., 2006 and Geng et al., 2012). On August 29, 2008, the Standing
Committee of the Chinese 11th National People’s Congress (NPC) passed the Circular
Economy Law. Former Chinese President Hu Jintao immediately signed it into law
and it came into force in China on January 1, 2009.
It is well known that Romer (1986) and Lucas (1988) were the primary
developers of the new growth theory in the mainstream literature. However, the
growth-oriented exposition of this literature is rooted in the conventional
unidirectional concept of production and consumption. Recycling is now a significant
aspect of most developed economies and an important objective of policy, so it is time
to bring the aforementioned concept of the circular economy into theoretical
consideration. That is, economic waste and economic resources are interrelated and
4
they can no longer be considered to be independent. It is now time to weave them
tightly together.
To the best of our knowledge, a theoretical circular economy (CE) model has yet
to appear in the literature. By utilizing a simple model with two types of economic
resources, namely a polluting input and a recyclable input, this paper not only
analyses the impact of the recyclable resource on economic growth, but it also offers a
new perspective on achieving sustainability. Overall, our results indicate that
economic growth is subject to the following factors, a) the marginal product of the
recyclable input, b) the recycling ratio, c) the cost of using the environmentally
polluting input and d) the level of pollution arising from the employment of the
polluting input. The remainder of the paper proceeds as follows. Section 2 sets up the
basic model and analyzes the dynamic behavior of a circular economy. Section 3
explains the driving force behind sustainability. Section 4 concludes.
2. The Circular Economy Model
2.1 The Social Objective Function
We consider a closed economy with zero population growth. The model is
designed to focus on the ecologically crucial issues of recycling and pollution so, for
the sake of tractability, we abstract from capital accumulation and technical progress.
Our model may be contrasted with the Green Solow model of Brock and Taylor (2010)
5
which focuses on technological progress in pollution abatement and establishes the
Environmental Kuznets Curve (EKC) as a necessary by-product of convergence to a
sustainable growth path. We focus on the optimization problem faced by a benevolent
social planner allocating resources in a centralized economy. The optimal conditions
would be targets for the government in a decentralized economy to meet. Such a
planner would take the competitive equilibrium into account and design tax systems
or regulations to offset externalities, and thereby implement the optimal allocation. In
this paper, we characterize the optimal growth path: how such a growth path could be
implemented is left for further research.
The social planner maximizes a social welfare function equal to the discounted
present value of a future utility stream dependent on consumption and the stock of
pollution, given by:
0
),( dtPcueU t
(1)
The instantaneous utility function is given by
),,( Pcu
where
c
and
P
stand for
consumption and the stock of pollution, respectively. We further assume
,0
c
u
,0
P
u
0
cc
u
and
so that the social planner is assumed to like consumption
and dislike pollution and his preferences are concave. The parameter
is the rate of
time preference. The intertemporal elasticity of substitution (
) is assumed constant,
6
so that
.
cu u
cc
c
2.2 The Waste Accumulation Equation
Suppose that output,
q
is produced via a concave production function
:
),( zxq
(2)
using two factors of production,
x
(the rate of use of the recyclable resource, such as
paper, glass, bottles, plastic or animal waste) and
z
(the rate of use of the
environmentally polluting resource, which can usefully be thought of as an extracted
resource such as coal, oil, or natural gas). Over time the two inputs evolve, but at each
instant in time they can be treated as independent, with well-defined marginal
products. The unit cost of using the polluting resource is denoted by
and the total
flow cost of employing the polluting resource is equal to
z
. Output produced in any
given period but not consumed or used for the employment of the polluting resource,
accumulates as (potentially recyclable) waste. Suppose a proportion
(the
recycling ratio) of the stock of waste can be recycled each period, and denote the
stock of waste as
S
. The dynamics of waste accumulation in the circular economy
can therefore be written:
SzczxS
),(
(3)
Recycling turns waste into a useful factor of production so that:
Sx
. Substituting
for
x
in equation (3) yields the waste accumulation equation:
7
SzczSS
),(
(4)
2.3 The Pollution Accumulation Equation
The level of pollution generated in this economy depends on the amount of the
polluting resource used, the recycling ratio, and the self-renewal capability of the
natural environment. We assume that each unit of the polluting input (
z
) generates
units of pollution. In each period, there also exists a quantity of waste denoted by
S)1(
that cannot be recycled for the next period. This non-recyclable waste is
assumed to generate units of pollution one for one. Finally, the natural environment is
assumed to self-renew in such a way that stock of pollution decays naturally at a rate
. Putting all these considerations together, the net rate of environmental degradation
can be captured by the following pollution accumulation equation. That is:
SPzP )1(
(5)
2.4 Optimal Growth in the Circular Economy
Given the laws of motion of equations (4) and (5) for the two state variables,
P
and
S
, the benevolent social planner chooses the control variables,
c
and
z
, to
maximize the social welfare function. Taking costate variables
for the state
variables
S
and
for the state variable
P
, the circular economy can be analyzed
by setting up the following Hamiltonian function:
])1([]),([),( SPzSzczSPcueH t
(6)
8
where
and
are the discounted shadow prices of waste and pollution,
respectively. The first-order conditions for this problem are given by equations (7), (8),
(9) and (10):
0
c
t
cueH
(7)
0)(

zz
H
(8)

)1()( xS
H
(9)

P
t
PueH
(10)
Rearranging (8) we obtain:
)(
z
(11)
and differentiating wrt t yields:
))((
zz
z
z
(12)
Taking the derivative of (7) wrt time gives:
tt
cc eecu
(13)
Substituting for
using (9) and for
using (7), yields:
)]1)(()1()[(
z
x
cc
c
cu u
c
c
(14)
where the expression
cu u
cc
c
corresponds to the intertemporal elasticity of
substitution, which we assume to take the constant value
, giving the following
9
expression for the growth rate of consumption.
)]1)(()1([
z
x
c
c
(15)
The expression in (15) is similar to the standard consumption time path if we
ignore the two sets of parentheses. The marginal product of the recyclable input
appears in (15) and affects the optimal growth rate of consumption. A higher marginal
product of the recyclable input will increase the growth rate of consumption. In
addition, it is clear from (15) that, comparing optimal growth paths, the growth rate of
consumption decreases with
(the rate of time preference) and increases with
(the recycling ratio),
(the unit cost of using the polluting input) and
(the
incremental pollution from using an additional unit of the polluting input). If the cost
of using the environmentally polluting input increases, the economy will substitute the
recyclable input for the polluting input and the optimal rate of economic growth will
increase.
To derive the optimal path of the polluting resource usage we substitute
equations (9) and (11) into equation (12) to obtain:
)])(1()1()[(
z
x
zz
z
z
(16)
It is relatively straightforward to show that the dynamical system consisting of
equations (4), (5), (15) and (16) has two eigenvalues with positive real parts. Taking
10
c
and
z
to be jump variables ensures that our model satisfies the Blanchard/Kahn
stability condition. Imposing the transversality condition
0PS
as
t
,
ensures that optimal paths converge to a steady state. According to (16), the quantity
of the polluting input employed depends on
and the usage of the recyclable input.
To meet the transversality condition, we assume that
0lim
P
t
and
0
. At the
early stage, the recycling technology has yet to mature. Only a small quantity of the
recyclable input emerges and this phenomenon results in a higher marginal product of
the recyclable input. The negative sign of
z
indicates that the economy uses a larger
amount of the polluting resource in production. As the recyclable input creates a
higher marginal product, society gradually substitutes the recyclable input for the
polluting input in production. Over time, the economy uses a larger amount of the
recyclable resource for production and the marginal product of the recyclable input
begins to fall. At this stage, the sign of
z
turns positive.
3. The Driving Force behind Sustainability
According to (15), consumption has been increasing when the relative size of x/z
is small (or
x
is larger than
z
). After x/z increases to a certain threshold, the
marginal product of the recyclable input has gradually diminished and the level of
consumption at this time reaches its maximum, i.e.,
0
c
. After the turning point,
11
0
c
, this single-peaked relationship is shown in the upper right-hand quadrant in
Figure 1. The bottom left-hand quadrant shows the relationship between the
recyclable-polluting input ratio and the pollution level measured in terms of the
polluting input. The slope is dependent on the environmental self-renewal rate,
, and
the recycling ratio,
. The slope becomes steeper if
or
becomes larger.
The inverted U-curve in the upper left-hand quadrant depicts the relationship
between consumption and pollution. Such an inverted U-shape relation is reminiscent
of the EKC. They, however, differ in several respects. First, the vertical and horizontal
axes of the EKC are the opposite axes of our inverted U-curve as shown in Figure 1.
Second, our inverted U-curve shows that the level of pollution increases as the
economy grows. When the economy begins to slow down and consumption declines,
the level of pollution continues to increase, implying a departure from sustainability.
Third, and most importantly, our inverted U-curve implies that environmental quality
cannot be maintained or improved via economic growth, a result that is significantly
different from conventional wisdom such as the EKC hypothesis.
Our analysis shows that environmental quality can be improved upon or
upgraded via an increase in either the environmental self-renewal rate,
, or the
recycling ratio,
. In this regard, the social planner or the government can properly
initiate various indicators and/or mechanisms for promoting sustainability, for
12
example by including estimates of pollution and recycling in the national income
accounts. Supposing that the government further adopts an environmentally-friendly
policy and the population also begins to practice the dont waste waste philosophy,
the natural self-renewal capability and/or the recycling ratio will accordingly rise.
Under these circumstances, an increase in the environmental self-renewal rate,
, or
the recycling ratio,
, as shown in Figure 2, shifts the inverted U-curve inward,
implying a positive movement towards sustainability.
4. Conclusion
Not surprisingly, the emergence of circular economic activities is instrumental
for promoting sustainability and has attracted increasing attention in recent years. To
resolve the problem of dwindling economic resources, it is necessary to develop an
integrated perspective of the economy, namely, a circular economy. In this regard, we
suggest a new perspective on achieving sustainable growth and treat economic waste
as a useful economic resource and argue that it is time to substitute the circular
economy for the conventional unidirectional concept of resources and products in the
market economy.
In this paper, we introduce a closed circular economy model with two types of
economic resources, namely, a polluting input and a recyclable input. Our results
indicate that the factors affecting economic growth include the marginal product of
13
the recyclable input, the recycling ratio, the cost of using the environmentally
polluting input and the level of pollution arising from the employment of the polluting
input. Our analysis shows that environmental quality cannot be maintained or
improved via economic growth. Instead, the improvement in environmental quality
can only be achieved by an increase in the environmental self-renewal rate or the
recycling ratio.
There are at least three extensions of our simplified work. First, we have not
been able to say the implementation of the circular optimal growth path. Second,
capital accumulation and technical change are not modeled and thus their potential
impacts are not accounted for. One could develop an updated version of the model in
which the production of physical capital generates pollution and technical
breakthrough increases recycling. Finally, it would be interesting to introduce an open
circular economy model in which country A is a resource-abundant country and
country B is a high-tech country for introducing the recycling technology. An
international circular economy can come into existence as long as both countries reuse
and recycle more waste for production and consumption.
Acknowledgments
For useful comments and suggestions, we thank seminar participants at Renmin University of China,
University of International Business and Economics, National Sun Yat-sen University, National Yunlin
University of Science and Technology, Konan University, and Keio University.
c
14
Figure 1: Relationships among consumption, the recyclable input, the polluting input,
and pollution
Note: The slope of the curve shown in the bottom left-hand quadrant is dependent on
the ratio
)1(
.
x/z
x/z
p/z
)1( 0
0
a
a
b
c
b
c
45°
c
15
Figure 2: Effect of self-renewal capability on consumption, pollution,
and sustainability
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)1( 0
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    In this paper, we develop a methodology for studying the sustainability of the circular economy model, based on environmental indicators, and its impact on European Union (EU) economic growth. In open-end systems, waste is converted back to materials and objects through recycling; hence, a linear economy is transformed into a circular economy (CE). Environmental factors support the argument for the sustainable implementation of a circular economy. The main objective of this paper is to analyze the sustainability of the CE indicators and to elaborate a multilinear regression model with panel data for determining the dependency of the main CE factors on EU economic growth. Starting with the model of economic growth based on circular material use rate, recycling rate of municipal waste (RRMW), trade in recycling materials, labor productivity, environmental taxes, and resource productivity as independent variables, six statistical hypotheses were validated through a multiple regression model with the use of the statistical software EViews 11. The research study was conducted for 27 EU countries, and the data was collected from the European Union Statistical Office (EUROSTAT), during the time frame 2010 to 2017. Based on econometric modeling, the paper highlights that circular economy generates sustainable economic growth across the EU.
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    The aim of this study is to analyze the circular interconnections between recycling, renewable energy and economic development. A multi-equation system is employed, where recycling and renewable energy (among other growth-inducing factors) are assumed to be important for promoting sustainable development (as provided by the Human Development Index), showing that both are mostly driven by technology and human capital skills. The system of simultaneous equations is estimated in static and dynamic form through 3sls, exploring panel data for a set of 28 OECD countries over the period 2000–2016, capturing in this way important linkages between the levels of economic development, renewable energy consumption and recycling rates. The empirical evidence shows that the circular process is characterized by cumulative linkages with feedback effects, where recycling and renewable energy are important policy factors for generating sustainable economic development with less climate deterioration. This result supports the idea of circular interconnections between economic development and green policies, through renewables and recycling, generating a self-sustained development without environmental deterioration.
  • Purpose Business organisations are under serious threat to sustain their business due to globalisation, challenging market and recent economic competitiveness. The aim of this study is to address various pressures to circular supply chain management (CSCM) implementation for sustainability. Design/methodology/approach The present study is based on two research levels. Initially, extensive literature review has been made to identify 31 pressures to CSCM, and eight categories of pressures have been identified. At the second level, fuzzy analytical hierarchy process (F-AHP) has been applied to rank the identified pressures to CSCM implementation for sustainability. Findings “Financial Pressures (FP)” has been identified as most significant pressure to CSCM implementation for sustainability. Further, “Lack of support of top management (MP1)”, “Lack of implementation of laws and policies (GP2)” and “Lack of vision for CSCM (GP1)” have been found most critical sub-pressures CSCM implementation for sustainability. Research limitations/implications The final results give the prioritised list of all identified 31 sub-pressures and eight main pressure heads, which will be helpful in their removal for achieving the goal of CSCM implementation. It will be helpful for managers to take decisions promoting circular practices in supply chains to achieve truly sustainable supply chains. It will also be help for SC managers to understand the flow of activities and materials in CSC to get good results and remove pressures. Originality/value The present study plays an important role in circular activities implementation in supply chain for profit gain, and their pressure ranking may help the mangers to implement the CSCM effectively.
  • Purpose Given the lacuna in sustainability studies which investigate collaborative supply chain relationships in the context of the circular economy (CE), the purpose of this paper is to explore how farmers manage stakeholder relationship in the supply chain to reduce food waste within the CE framework. Design/methodology/approach A qualitative approach using semi-structured interviews is used to collect primary data for this research. Interviews are conducted with farmers across different farming types in the UK. A thematic analysis is used to discuss the most prominent themes. Findings The findings extend previous research investigating collaboration in sustainability settings. Farmers adopt collaborative relationships to manage exchanges of food waste and to share knowledge of waste management practices. However, contrary to extant literature, the study finds that geographic proximity is still relevant in the CE framework, although its importance is determined by the type of exchange: i.e. physical or non-physical. Practical implications Based on the study’s findings, recommendations for further research are proposed. The study also advises on practical considerations for supply chain managers wishing to adopt collaborative relationships to support circular models of supply chains. Originality/value The study contributes to the sustainability literature by adding new knowledge to the relatively new theory of the CE. It demonstrates that factors of collaboration identified in previous sustainability research are still relevant in the CE framework, and thus require further investigation into the significance of collaboration. The study is also of relevance to supply chain managers wishing to adopt the CE framework in the transition to more sustainable supply chains.