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Deep inside Mario Draghi’s 400-page report on ‘The future of European competitiveness’, issued on 9 September and intended as a foundation for European Commission strategic planning in the next five years, lies an important market failure. On critical raw materials, Draghi states that secondary raw materials are mostly more expensive than primary ones. He notes however that this would change “if the negative environmental externalities associated with the resource-intensive (energy, carbon) production of primary raw materials would be internalised.”
This is a fundamental argument in environmental economics: raw materials are artificially cheap because the costs of their extraction and processing are paid by local people who suffer from the destruction of nature, pollution and water shortages. And then taxpayers pay for end-of-life disposal of the final products – far from the ‘polluter pays’ principle.
The EU has addressed this failure in relation to greenhouse gas emissions by putting a carbon price on the environmental damage they cause. But the other negative externalities of massive extraction and processing – including biodiversity loss and health damage – remain unpriced in advanced and developing countries alike. Thus, firms lack incentives to improve their efficiency in resource use and waste is ever growing – causing a collective problem.
Draghi’s solution would be to extend the EU emissions trading scheme to incineration and landfilling to make recycled goods more attractive. To avoid crowding out of domestic secondary material production by imports of cheaper virgin material, he says the EU should combine carbon pricing with minimum recycled content requirements.
He focuses on critical raw materials and on the end of life of products. However, much more could be done earlier in the life of products – up to 80% of environmental impacts could be eliminated in the design phase of products. The application of circular principles (such as using the fewest resources possible, extending their productive life for as long as possible, and eliminating waste) in just seven sectors, including steel, construction, plastics and vehicles, could reduce annual EU industrial emissions by 34% by 2050. A circular single market would protect the resource-poor European economy from price volatility that damages competitiveness, and from future increases in the cost of many raw materials.
Surprisingly, while Draghi’s report covers many other aspects of improving European productivity growth, he leaves out the contribution that materials productivity – how long and how efficiently materials are used – can make. There are also considerable innovation spillovers from circular technology. Moreover, the solutions that European companies are developing for waste management, resource efficient production and ecodesign are exportable to the many other regions where governments are seeking to recover value from waste and reduce the environmental impacts of extraction....
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