Resource Scarcity, Circular Economy and the Energy Rebound : A Macro-Evolutionary Input-Output Model

In this paper, we propose an Agent-Based Stock-Flow Consistent model combined with an 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 resources. 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, such as: energy intensity, the capital-to-output ratio, or the capital-to-labor ratio. 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. In particular, if the recycling sector is characterised by the higher capital-to-output ratio than the mining sector, the CE transition can increase total production and energy use in the economy. Finally, we assess the role of different macroeconomic policies, namely mission-oriented innovation policies (MOIPs) and environmental taxation 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