The leakage effect may undermine the circular economy efforts

Abstract

In this paper, we examine the impact of the circular economy on global resource extraction. To this end, we make an input–output analysis dynamic by combining it with an agent-based model of the capital sector. This approach allows us to study the evolution of the circular economy due to the endogenous decisions of firms on whether to invest in the capital expansion of primary or secondary sectors. Previous studies have examined the macroeconomic effects of the circular economy using scenarios that exogenously impose higher recycling rates, improved resource efficiency, or lowered demand on the economy. Such studies typically assume static consumer budgets, no price adjustments, capital investments in recycling infrastructure, or technological innovation. We relax these assumptions in a novel agent-based input–output model (ABM-IO). We show that the circular economy can significantly reduce the extraction of iron, aluminum, and nonferrous metals if implemented globally. However, the leakage effect may also cause some metal-intensive industries to relocate outside the EU, offsetting the circular economy efforts. The risk of the leakage effect is especially high for copper.