Implications of Carbon Markets for Implementing Circular Economy Models

Abstract

Carbon markets have become a prominent policy innovation to internalize the external costs of fossil energy use. Cap and trade schemes, such as the European Union Emissions Trading System (EU ETS, launched in 2005), allocate tradable emissions allowances to facilities; and offset programs, such as the Kyoto Protocol’s Clean Development Mechanism, credit emissions reductions at the level of individual projects. In parallel, policymakers in various countries around the world are embarking on efforts to conceptualize and move towards closed loop “circular economy” models. This paper explores the implications of existing carbon markets for efforts to transform economies from a linear to a circular model, based on selected case studies that highlight issues related to achieving material, energy and water efficiency (e.g., end-of-life treatment of tires, incentive schemes for home appliances). Policy relevant insights are also presented.

With a “gigaton gap” between emission reduction pledges currently put forward by all countries and the reductions necessary to have a reasonable chance of keeping global warming below 2°C, it is imperative to find effective means of achieving the structural changes that will lead to a low-carbon economy in time. Ironically, the improbability that an effective and comprehensive global climate protection strategy for the period beyond 2012 will be adopted in the near future presents a valuable opportunity to consider how market based mechanisms can be designed to drive, rather than hinder, the transition to a circular, low-carbon economy, as well as for leading countries to experiment with related policy innovations.

Keywords: super-efficient home appliances, scrap tire recycling, resource efficiency, low-carbon economy, governance and policy coherence