Product Policy in Support of the Global Transition to a Circular Economy: Trade interaction

This article was originally published in IISD's Trade and Sustainability Review, Volume 1, Issue 3. 

The transition to a circular economy entails a deep paradigm shift set to address the triple crises of climate change, nature and biodiversity loss, and the unsustainable use of natural resources. The fundamental logic of the linear take-make-discard economy will be replaced with one based on a new policy that ushers in safer, more durable, repairable, and recyclable goods—as well as replacing conventional product ownership with business models including product-as-a-service-systems, leasing, and sharing. The economy must be decoupled from virgin material input if we are to remain within our planetary boundaries.

The European Union is taking the lead in the global circular economy transition with its Circular Economy Action Plan (CEAP) of March 2020. In the CEAP, the European Commission lays out the framework for a new sustainable product policy. While recycling, reverse value chains, and markets for secondary raw materials remain highly relevant in the circular economy, the focus has moved decidedly upstream to the design phase.

In fact, 80% of a product’s environmental impact is determined during the design phase. For the economy to become circular, each product and material must be designed toward circularity at the outset, from a cradle-to-cradle perspective—and its life cycle traced accordingly. Here, another innovation in the CEAP relates to developing and expanding the use of digital product passports.

“The transition to a circular economy entails a deep paradigm shift set to address the triple crises of climate change, nature and biodiversity loss, and the unsustainable use of natural resources.”

The transition to the circular economy goes hand in hand with the transition the world is undergoing to a digital economy, a process greatly accelerated by the COVID-19 crisis.

The European Union’s level of ambition on the circular economy is high, and it is not alone. A growing number of countries are adopting their own circular economy plans or roadmaps, including China, India, Chile, and many African countries. As they stake out the way forward, regulatory measures and circular product policy are part and parcel of the implementation process.

Trade, Regulation, Standard Setting, and the Global Circular Economy Transition

As the circular economy transition spreads around the globe, the practicalities of this new economic order will come to the fore. Trade is a key connector and enabler. The way we produce, consume, rent, repair, and eventually discard, recycle, and reintegrate our goods and materials into the economy is intricately linked through global value chains—increasingly also through reverse value chains.

The current trade system is not well geared toward the circular economy revolution, however. Our customs codes are often blind to secondary raw materials or goods destined for reuse and refurbishment, and their updating process is slow. Differentiation based on process and production methods—including their resource and energy efficiency—is still controversial.

International cooperation is needed to implement the circular economy shift. Informal discussions on trade and the circular economy are ongoing at the World Trade Organization, and the Organisation for Economic Co-operation and Development (OECD) is leading the way in valuable technical background work, with input from a wide range of stakeholders. Business-led organizations such as the World Economic Forum and the International Chamber of Commerce are providing important practical insight.

As the implementation of the circular economy goes ahead, much of it will be based on new regulations and standards that are being developed in different parts of the world. The risk is that these circular economy standards will be different or incompatible. Therefore, the time to start coordinating the work is now, rather than having to work out complicated conformity assessment and mutual recognition schemes after the fact.

Management Standards and Product Standards

The OECD (2020) and the European Union (2019) have defined two categories of standards relevant to the circular economy focusing on: (i) organizational and management aspects of a circular economy and (ii) products that work toward circular economy objectives.

An example of the former, the International Organization for Standardization is working on an international circular economy standard focusing on organization and management (Technical Committee 323), with the participation of all major trading blocs. This is a slow but important process that will be a gamechanger for businesses and government regulators alike.

The OECD divides circular product standards into two categories according to where they occur in the value chain. The first group is related to upstream design and production. These include material content standards, recycled content standards, hazardous content standards, recyclability standards, reparability standards, and sustainable production standards. The second group focuses on the downstream part of the value chain. These include material quality standards for waste and scrap and secondary raw materials, as well as product quality standards for refurbished, remanufactured, and second-hand goods.

Much of the standard setting related to the latter category, e.g., circular product policy, will likely be business driven and take place outside the diplomatic—let alone trade—negotiating framework.

Detailed product policy is being worked out in separate jurisdictions, often building on the back of current product standards. Most materials and products in use are already subject to numerous quality and safety standards. This is nothing new to the private sector. Most of the time, the work is not starting from scratch; rather, it modifies existing product standards.

When it comes to new circular business models and circular services, the situation is different—indeed, it is starting from a clean slate. This holds true in the area of digitally enabled circular solutions.

EU Circular Product Policy and the Ecodesign Directive

As mentioned, one example of circular product policy development is that taking place in the European Union under the CEAP.

The EU Batteries Regulation, published in December 2020, lays out the blueprint for what circularity means for one product group, and lessons from the legislative negotiations may have a bearing on the upcoming Sustainable Products Initiative. This regulation covers the full life cycle of batteries, from sourcing to recycling. As electrification proceeds under countries’ climate neutrality targets, the production and use of batteries are expected to grow 14 times between 2018 and 2030, placing significant pressure on material extraction. The European Union is setting increasingly stringent targets for battery recycling, allowing for the reuse of key minerals such as cobalt, lithium, nickel, and lead.

Under the Sustainable Products legislative Initiative, the CEAP foresees the expansion of the Ecodesign Directive beyond energy-related goods as a primary tool to operationalize its new circular product policy. The directive, which stems from the first generation of the EU Circular Economy policy launched in 2016, focused on energy efficiency and was limited in scope (consumer electronics) compared to the new requirements for a much larger range of products—at its broadest, every product placed on the EU Single Market.

"As the circular economy transition spreads around the globe, the practicalities of this new economic order will come to the fore."

The focus is a set of priority product groups: electronics, information and communications technology, and textiles, but also furniture and high-impact intermediary products such as steel, cement, and chemicals. Overarching product policy principles and minimum sustainability and information requirements will be developed for most relevant goods.

There will also be rules and incentives on extended producer responsibility and product life extension. These include take-back schemes, products-as-a-service, and repair services or guarantees for spare parts availability.

In addition, the European Union will require sustainability labelling and disclosure of information to consumers on products along value chains, as well as set rules for mandatory minimum sustainability requirements on public procurement. Measures are planned on raw materials and goods as well as on production processes (e.g., to facilitate recycled content or remanufacturing and to minimize the use of hazardous substances).

Standards will be developed to complement ecodesign and energy labelling regulations. Together, they will indicate that a product meets the requirements. Manufacturers can then use the CE marking and sell the product in the European Union. The policy process is at an early stage: public consultations are ongoing and open both to EU and non-EU stakeholders.

Steps Ahead

As the development of new circular economy standards takes off, it will be important to consider trade impacts and international cooperation at the outset. The European Union cannot become an island. As the first mover, the bloc has the opportunity to become the standard-setter for the global circular economy.

Success will depend, however, on working with other leading countries and regions, and taking on board less advanced countries. Concerns have already been raised about the ability of developing countries to fulfill new requirements, awakening old fears about green protectionism.

However, it is important to recognize that the circular economy is not another green add-on and will not rely on traditional voluntary (or semi-voluntary) private sector standards. Rather, it goes beyond this and entails a whole new product policy in line with what is happening in the digital sphere, when new technologies and products are created. Increasingly, goods and services are also fully integrated, with implications for standards development.

Open dialogue and exchange are very important from the outset. Such discussions could take place in Geneva, bringing together trade negotiators and standard-setting bodies as well as the private sector, which will be carrying out the practical work.

“As the development of new circular economy standards takes off, it will be important to consider trade impacts and international cooperation at the outset.”

Free trade agreements could also provide a forum for dialogue and regulatory cooperation, given that they already have committees on technical barriers to trade or trade and sustainable development in place.

Under free trade agreements, another option would be to negotiate a new and specific chapter or annex on circular economy to cover issues related to standards and market access. As a possible model and example, the EU–Singapore and EU–Vietnam agreements contain chapters on sustainable energy that lay the groundwork for close cooperation. These chapters focus on removing tariff and non-tariff barriers as well as adhering to international standards and/or mutual recognition of standards. Similarly, specific chapters on the circular economy could focus on product policy development.

To strengthen cooperation between developing and developed countries, Aid for Trade could focus on technical assistance related to circular product policy and standards. Cooperation could also be facilitated along value chains such as textiles, information and communication technology, or plastics, involving the private sector and allowing co-creation and learning through doing, a strategy UNIDO is actively pursuing.

The transition to a global circular economy will involve many different paths and processes. Cooperation on relevant standard setting provides a pragmatic way to weave circularity into global value chains and facilitate circular trade. Malena Sell is a circular economy senior specialist at the Finnish Innovation Fund Sitra.

Malena Sell is a circular economy senior specialist at the Finnish Innovation Fund Sitra.

The views and opinions expressed in this publication are those of the authors and do not necessarily reflect the official policy or position of the International Institute for Sustainable Development.