How Europe can become less dependent on raw materials imports

Abstract

This article focuses on the question of how the EU can become less dependent on raw materials imports in the future. One approach to this could be a strong EU resource-efficiency policy, although this is not one of the policy priorities European Commission President Jean-Claude Juncker has set himself for the next five years. Instead the focus lies on energy efficiency, and while it is true that the EU depends more on energy imports than on raw materials imports, there are several aspects of the matter that should be considered. First, only promoting energy efficiency may be too short-sighted. With a resource-efficiency policy, the EU could kill more birds with one stone by reducing its reliance on primary raw materials, reducing its CO₂ emissions and protecting the environment. Second, we could find ourselves in the midst of discussions about the sustainability of an EU resource-efficiency policy that are very much like those we have witnessed recently concerning biofuels and the question of unintended consequences.

Introduction

Mineral fuels and lubricants account for the greatest share in the EU's import statistics. According to Eurostat, 29.6 % of EU imports in 2013 were of mineral fuels and lubricants and 4.5 % of raw materials, that is, basic primary materials like iron ores or metals used in the production of goods, finished products or intermediate materials. In 2013 Europe's trade balance with regard to mineral fuels and lubricants amounted to minus €378 billion and for raw materials to minus €31 billion (Eurostat 2014a, b). Despite their comparatively low share in imports, raw materials costs are one of the largest factors affecting the input costs of European manufacturing companies. They constitute a significant fraction of companies’ total costs and thus have an enormous impact on European competitiveness in the global economy.

According to cost structure surveys conducted by the Federal Statistical Office of Germany (2014a, b) the share of raw materials costs accounts for 47 % of the German manufacturing industry's gross value added and for 30 % in the German construction industry. Energy costs in both branches only account for about 2 %. What is more, the price trend for raw materials points upwards (World Bank 2014). The electronics industry, for example, is suffering from the rising prices of aluminium, copper, gold, lead, nickel, palladium, platinum, silver, tantalite, tin and zinc. This impacts every company in the electronics supply chain and finds its way into the prices for the components they sell.

Therefore, a way of increasing the availability of high-quality secondary raw materials, that is, recycled raw materials, could have a positive impact on the EU economy. Additionally, the EU is facing more and more demand-side competition for imported raw materials from emerging countries such as China. This begs the question of whether the EU should pay more attention to material resources as it does to energy resources.

The idea of a ‘zero waste economy’

The outgoing European Commissioner for the Environment, Janez Potočnik, was, in this regard, a front runner on the EU level. ‘Moving to a circular economy is possible and profitable’, he promised in July 2014, when he presented his vision for a different economic model (European Commission 2014e), that is, a ‘zero waste economy’. His plan requires the European member states to recycle 70 % of municipal waste and 80 % of packaging waste by 2030, and the banning of burying recyclable waste in landfill as of 2025. These targets are not realistic given the actual situation. According to Eurostat (2014a, b), 34 % of municipal waste was still landfilled in the EU28 in 2012 and only 27 % was recycled.

Crucially, he also suggested including a target for resource productivity ¹ in the new Europe 2020 strategy, which was launched in 2010 as the EU's strategy for ‘smart, sustainable and inclusive growth’ (European Commission 2010). This strategy highlights the need for more effective recycling, among other factors, in order to exit the financial crisis and prepare the EU economy for the challenges of the next decade. The European Commission (2014d) took stock of the strategy in March 2014. Its communication states, among others things, that there is pressure on resources. In the paper the Commission notes that during the twentieth century the world increased its fossil fuel use by a factor of 12, whilst extracting 34 times as many material resources. It is said that today in the EU, each person consumes 15 tons of material annually while generating 5 tons of waste, with half going to landfill. It is further stated that businesses are facing rising costs for essential raw materials, energy and minerals, and that the absence of security of supply and the resulting price volatility are having a damaging effect on the economy. Furthermore, the EU's economic system still encourages the inefficient use of resources by pricing below true costs. In this regard, the World Business Council for Sustainable Development, a global association of some 200 international companies based in Geneva that deals exclusively with business and sustainable development, is quoted. It estimates that by 2050, a 4- to 10-fold increase in resource efficiency will be necessary, with significant improvements needed by 2020 (European Commission 2014d, 11). The Commission concludes that ‘promoting a more efficient use of resources would help to improve the competitiveness and profitability of European businesses’ (European Commission 2014d, 11). Resource efficiency could boost employment and economic growth, following the example of energy efficiency: during the crisis, action to improve energy efficiency in the residential sector proved helpful in boosting local demand for jobs and in producing financial savings over time.

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Comparable to the definition of labour productivity, resource productivity is defined as the ratio of gross domestic product (GDP) to material consumption, expressed in euros/kg.

It remains to be seen what the new Commission will make of these ideas. Early in 2015 the Commission is expected to review the whole Europe 2020 strategy and will be given the opportunity to adjust key components. The majority of EU member states reject Potočnik's idea of adding an explicit resource efficiency target into the 2020 strategy: according to diplomatic sources in Brussels only eight member states are in favour (Belgium, Luxemburg, Finland, France, Greece, Portugal, Slovakia and Slovenia). The European Council's conclusion document of 28 October 2014 diplomatically says ‘no’: ‘Calling on the Commission to explore how to better integrate resource efficiency in the EU 2020 Strategy, including through the introduction of an EU non-binding aspirational target’ (European Council 2014, 5). Put simply, this means: We like resource efficiency but we don't need a target.

From energy efficiency to resource efficiency

So far, climate policy and the EU's dependency on energy imports have ranked much higher on the political agenda. These issues were discussed at the EU summit in October 2014. At this event, a 27 % energy efficiency target for 2030 in comparison to 1990 was agreed. Energy efficiency might help the EU guarantee the security of its energy supply, but should we not take a broader view and extend the term ‘efficiency’ to resources, since our European economy depends on raw materials as well? Does sustainable growth not mean to decouple growth from energy consumption and resource consumption? And do we really need a European framework for resource efficiency that includes targets?

For example, hybrid and plug-in electric vehicles can help to increase energy security, improve fuel economy, lower fuel costs and reduce emissions. They are supposed to be energy efficient. But are they also resource efficient? Producing these cars requires 15 metals, of which four are rare earth elements. This is the finding of a study by the German Institute for Applied Ecology (Buchert et al. 2011) that was commissioned by the German federal government. The background to the study is that the German federal government wants to incentivise the production of e-cars to bring one million of these vehicles onto German streets by 2020. If global demand for e-cars was to increase significantly, it would mean that the global demand for raw materials input would increase at the same time, without guaranteeing their recyclability.

Another example is offered by the construction sector. When presenting his proposals to turn Europe into a more circular economy in July 2014, the outgoing Environment Commissioner Janez Potočnik stated: ‘We hear a lot about the energy efficiency of buildings, but we need to look at the bigger picture as well’ (European Commission 2014c). Steps should be taken to make it easier to recycle construction and demolition waste, and to re-use it when constructing new buildings. Indeed, the Commission has thus far focused on energy efficiency in this sector. The current EU Energy Performance of Buildings Directive (European Parliament and Council 2010), whose regulations will be in force until 2020, prescribes that member states must establish minimum energy performance requirements and apply them to new and existing buildings. The aim is to ensure that by 2021 all new buildings are ‘nearly zero-energy buildings’. These buildings may be very energy efficient without being resource efficient.

However, and despite the examples given, resource efficiency in the EU is on the right path, as the Commission itself admits (European Commission 2014a; b, 6; c). Resource productivity in the EU, measured by Eurostat, grew by 60 % in the period 2000-13, an improvement rate of around 12 % per annum. Resource productivity for the EU27 was estimated by Eurostat to be 1.22 euros/kg in 2000 and 1.96 euros/kg in 2013 (GDP/domestic material consumption). However, former Environment Commissioner Janez Potočnik wants to ‘accelerate the transition to a circular economy’ (European Commission 2014c).

The vision of a circular economy with nearly zero waste is promising. Imagine an EU economy where everything we use is recycled. We still live with linear economic systems, that is, the ‘take-make-consume and dispose’ model. This model is based on the assumption that resources are abundant, available and cheap to dispose of. It is becoming increasingly clear that this is not a viable model for sustainable growth. A circular economy is possible if we rethink our current one-dimensional economic model. Of course, a zero waste economy can only be realised in the long term. The reason for this is that in a circular economy, re-use and repair become the norm. It requires changes throughout our value chains and new consumer behaviour. It implies a systematic change, that is, innovation in technologies, in organisation, in society, and in finance methods and policies. But would this have positive effects on real GDP and jobs?

Economic implications of a circular economy

We do not yet know if a circular economy could really create growth and jobs. Certainly, it would not if it were associated with a reduction in consumption. In this case it would adversely affect the circular flow of income (not to be confused with a circular economy). The circular flow of income model represents perpetual motion. Less consumption means withdrawal from the flow and hence lower income (GDP) and fewer jobs. A circular economy means the demateri-alisation of production. The solution would be to turn demand for products into demand for new services related to sharing, repairing, leasing and renting. The question is whether consumers are ready to change their ‘buy-use-and-throw-away’ behaviour, that is, to reduce product consumption for the benefit of services.

Nevertheless, studies launched by the Commission have run a range of scenarios to gauge the impact. They have concluded that an EU resource-efficiency policy would have positive effects on growth and jobs–-and alleviate the dependency on raw materials imports. A macroeconomic study by the German Institute of Economic Structures Research (2012) on the links between the economy and the environment points out that import dependency is high in the categories of metals and minerals. Furthermore, there are limited options to substitute these materials, but there is a high potential to increase the proportion of them which, after complete initial use, may be used repeatedly in production as a starting material (secondary materials). Summarising the results of the simulation experiments that have been undertaken by the research team, a ‘well calibrated’ policy mix would reduce total material demand in all EU member states by at least 17 % and up to 24 %. Therefore, real GDP would increase by between €240 and €380 billion. Moreover, employment would rise, with between 1.4 and 2.8 million people finding work. According to the research, a good policy mix would consist of three elements: taxation of the inputs of metals and metal products, which would affect the machinery and automobile industries, among others; an international sectoral agreement on the recycling of metals and non-metallic minerals; and information and consultation programmes for firms.

Another, more recent study reported similar findings (Cambridge Econometrics 2014). It showed that–-unlike fossil fuel consumption, which is going to decrease by 22 % in the EU by 2030–-metal and mineral raw material consumption is expected to continue to grow until 2030 (by 39 and 26 %, respectively), as these are still closely coupled to economic activity. The researchers estimate that total raw material consumption is expected to increase by an average of 0.7 % per annum until 2030. The study suggests that it could be possible to meet resource productivity targets through policies. The policies that would lead to higher rates of growth and employment across the EU are threefold: market-based instruments such as taxation, privately funded measures such as recycling and publicly funded capital investment to improve efficiency.

The devil lies in the detail

One can question the significance of the findings of these studies, to which the European Commission communication A Zero Waste Programme for Europe refers (2014e). The devil lies in the detail and the existing sources of information are insufficient.

One key element of the Commission's plan is a set of ambitious targets (as outlined above) and to define precise key indicators to monitor progress. In this regard, the usefulness of the indicator the European Commission has opted to use for ‘resource productivity’, to measure the improvements due to the efficiency policy, is debatable. Resource productivity is defined as the ratio of GDP to domestic material consumption (Eurostat 2013). However, this concept does not take into account the global aspects of EU consumption. The denominator only accounts for direct material inputs, that is, domestic extraction used and material imports. It does not account for the hidden flows associated with the imports of products, in other words the costs that are incurred abroad (indirect resource use). This indicator may provide biased incentives as far as the member states under consideration are concerned, since they will reduce their resource input costs by substituting domestic production of resource-intensive products with product imports.

Past mistakes in sustainability policies

When it comes to false incentives, it is worth looking at the current debate on the sustainability of biofuels, known as the ‘food or fuel’ or ‘indirect land use change’ discussion, which has led to a recasting of the Renewable Energy Directive (European Parliament and Council 2009b) and the Fuel Quality Directive (European Parliament and Council 2009a). Indirect land use change relates to the unintended consequence of releasing more carbon emissions due to land-use changes around the world induced by the expansion of croplands for ethanol or biodiesel production in response to the increased global demand for biofuels.

The policy discussions over biofuels reflect the increasing complexity of the issue. Originally promoted as a way of decreasing dependence on fossil fuels and avoiding the carbon emissions generated by them, biofuel production has now been widely recognised as having strong links with the agricultural markets and even land-use patterns. The 2009 Renewable Energy Directive prescribed a binding 10 % sub-target by 2020 for the use of biofuels in the transport sector. A reduction of this sub-target is now under discussion between EU member states and the European Parliament due to the questionable sustainability of biofuels. It has thus obviously proved wrong to set such a high target for biofuels and has led to unintended policy incentives.

Conclusion

The arguments for strict resource-efficiency policies are convincing at first glance. The idea of a circular economy evokes fascination, since it would relieve the EU of material dependencies and suggests that the European economy could become more competitive. We do not know if a circular economy functions in reality. More independent research that integrates the findings of the natural sciences with economic reasoning would be needed, but this interdisciplinary approach is still very young. Thus the feeling remains that the findings of recent studies should be treated with caution and that they have exaggerated the effect of ambitious political goals. They all tell us that a circular economy is feasible, but fall short of providing a comprehensive analysis of the potential pitfalls.

Particular caution is required concerning special targets such as ‘resource productivity’, as is shown by the example of the sustainability of biofuels being called into question. The devil lies in the detail. The question is whether the proposed indicator to measure progress in resource efficiency is appropriate. At this stage, this indicator would be used to influence policy choices without considering the economic, social and environmental impacts of decisions. Would this offer the right policy signal?

The strategy for sustainable growth is a complex issue. Setting too many targets at the same time might be incoherent and could lead to many unexpected results. A dilution of priorities needs to be avoided. Commission President Juncker's first priority is to create jobs. More than six million people lost their job during the crisis, and youth unemployment has reached record highs.

Undertaking the experiment of a circular economy now might be risky and could further endanger the creation of jobs. And as Eurostat's statistics show, resource efficiency in the EU is already in a good way–-without a strict European resource-efficiency policy. However, there is no doubt that Europe could become more independent of raw materials imports through greater resource efficiency. Therefore, a strict resource-efficiency policy (e.g. taxes on materials inputs) could certainly be helpful in reducing import dependency, but we should be aware of the potentially adverse effects on growth and jobs.