Resource scarcity, circular economy and the energy rebound: A macro-evolutionary input-output model

Abstract

We propose an Agent-Based Stock-Flow Consistent model combined with a simplified Input-Output (IO) structure of production. In the model, heterogeneous firms interact in the energy, material, capital and consumption markets. Materials for production of consumer goods can be manufactured using non-renewable or recycled material inputs. We examine the conditions under which the circular economy emerges through market mechanisms, as well as it can be a source of the rebound effect. An important novelty of our approach is that recycling and mining sectors employ different types of capital for production. Capital goods (machinery) are produced by capital firms, which constantly engage in innovations to improve their technological features. This way we endogenize changes in technological coefficients of the Input-Output tables. We show that sectoral interdependencies along the value chain can render the energy rebound effect due to the circular economy (CE) even if energy intensity of the recycling process is lower compared to mining. This effect depends on the impact of investment in the recycling sector on the aggregate demand and energy use along the entire value chain. We assess the role of macroeconomic policies, namely mission-oriented innovation policies (MOIPs), active fiscal policies (AFPs), and environmental taxes in fostering the CE transition, while mitigating the rebound effect. We find that the combination of MOIPs and active fiscal policy is the most effective in promoting the circular economy, preserving employment and ensuring a sustainable growth path.