DELIVERING THE CIRCULAR ECONOMY A TOOLKIT FOR POLICYMAKERS

74 • DELIVERING THE CIRCULAR ECONOMY – A TOOLKIT FOR POLICYMAKERS
APPROACHES FOR MODELLING ECONOMY-WIDE IMPACTS OF THE CIRCULAR
ECONOMY
Multiple methodological options are available to quantify the economy-wide impact of a
circular economy transition, each with its own advantages and limitations. Of course, any
approach needs to follow applicable impact assessment guidelines and requirements. 94
The choice of the most appropriate economy-wide modelling approach will depend,
among other things, on the desired attributes of the economic model and the availability
of resources. Figure 18 below presents a high-level description and comparison of some
of the most widely used methodological approaches for economic impact quantification.
Computable general equilibrium (CGE) models are among the most widely used types
of models for assessing economy-wide impacts of structural changes in the economy
and are a strong option to model the expected effects of a transition towards the
circular economy. A dynamic CGE model was selected in the Denmark pilot study, and
the rationale for selecting a CGE framework might be applicable to other policymakers
looking to conduct economy-wide impact assessments of the circular economy.
Whether it is with CGEs or other modelling approaches, economic impact assessment of
the circular economy is in its early stages and, as will be discussed later in this section,
multiple areas for methodological development remain.
‘HYBRID’ CGE APPROACHES FOR MODELLING CIRCULAR ECONOMY IMPACT
To assess the economy-wide impact of greater circularity in certain economic sectors
as accurately as possible, it is necessary to simultaneously model a large number of
products, technologies, and/or sectoral detail, as well as their interaction with the
broader economy. For such cases, ‘hybrid’ modelling approaches can be adopted.
These approaches combine the detail of product and sector-specific economic impact
modelling (e.g. the cost savings in the machinery sector as a result of increased
remanufacturing), with the aggregated, inter-sectoral features of an economy-wide
modelling framework (e.g. to assess the effects of greater productivity in the machinery
sector on growth and employment in the broader economy). CGE frameworks are well
suited to be used in conjunction with sector-specific models. Such ‘hybrid’ CGEs have
been used for impact assessment in many economic sectors and activities including
energy, transport or postal services and, recently, resource productivity. 95
A hybrid approach was developed and applied in the Denmark pilot, and might be useful
in other countries as well. The approach consists of a five-step process, as illustrated in
Figure 19.
1. Identify circular economy opportunities in each focus sector: as laid out in
Sections 2.2.1 and 2.2.2.
2. Perform ‘bottom-up’ sector-specific impact quantification: as laid out in
Section 2.2.3. Define the ‘business as usual’ or reference scenario, as well as the
circularity scenarios and sensitivities.
3. Conversion and scaling: this is a crucial ‘interface’ between sector-specific
impact quantification and economy-wide CGE. Departing from a reference
input-output (I/O) table, distribute sector-specific revenue and cost impacts
over the relevant supplying and consuming sectors. The end product of this step
is a ‘delta’ (meaning change from the baseline) input-output (I/O) table that is
balanced. 96 The delta I/O tables are then used as inputs to the CGE model.
4. Implementation in the CGE: The balanced delta I/O tables for the selected
94 See for example European Commission, Impact Assessment Guidelines (2009).
95 A hybrid bottom-up CGE approach was recently used in a European Commission study that quantified the
economic impacts of greater resource productivity in the built environment in the EU. See European Commission,
Assessment of Scenarios and Options towards a Resource Efficient Europe (2014).
96 A ‘balanced’ I/O table means one where the total changes (i.e. ‘delta’) in inputs or supply in the circularity
scenario equal the total demand or output delta.