The circular economy puzzle: Pricing as the missing piece

A "circular bioeconomy" is a novel production model that has recently gained momentum in the scientific and business community. This model reduces and recycles waste, transitions from fossil fuels to renewable bio-based alternatives, and regenerates natural systems.

However, it is a complex concept, and there are still significant questions that need to be answered: How should waste reduction be implemented? How far should we go in becoming "circular," taking into account the costs and benefits? In the context of a market economy, how can a circular bioeconomy system secure the support of farmers, industry, and consumers?

A new paper by renowned agricultural economists and scientists contends that the concept of a circular bioeconomy must be broadened beyond its technical focus on waste reduction and should include a values-based economic lens. The authors underscore the necessity of appropriate policies, incentives, and market signals to encourage consumers and producers to make environmentally responsible decisions and to contribute to the system's fairness.

"Zero waste is an appealing goal, but we also need to consider the economic consequences of achieving this goal -- the cost, who bears it, and how we get people to implement it. This requires us to not just focus on the environmental benefits of reducing waste and fossil fuel use, but to think about what level of waste is acceptable considering economic and equity goals as well as how we make the transition by inducing consumers and producers to make the right choices," said lead author Madhu Khanna, ACES Distinguished Professor in Environmental Economics and Alvin H. Baum Family Chair & Director of the Institute for Sustainability, Energy, and Environment (iSEE) at the University of Illinois Urbana-Champaign.

Khanna stated that the development of a circular bioeconomy will necessitate innovative concepts from researchers in various fields, including social scientists, in order to comprehend human behaviour and create the appropriate incentives.

The paper, which was published in Communications Earth and Environment, was co-authored by David Zilberman from the University of California, Berkeley; Gal Hochman from the University of Illinois Urbana-Champaign; and Bruno Basso from Michigan State University.

Khanna stated that a circular bioeconomy offers a framework for enhancing sustainability and reducing waste across the economy. It is designed to not only mitigate environmental pollution associated with agricultural production, but also to revolutionise the energy sector, plastics manufacturing, and other industries by utilising agricultural waste as a resource that can assist in the decarbonisation of the economy and the reduction of dependence on fossil fuels.

In order to ascertain the optimal level of circularity in a market economy, the authors integrated those concepts into an economic framework. They suggest five critical pathways to facilitate the transition:

Investment in research and development to reduce the cost of climate-smart and clean energy innovations, thereby facilitating technological advancements.

Regulatory incentives that impose a cost on environmental damage and waste, such as a carbon tax, and institutional changes, such as crop insurance programs, that reduce the risk of farmers adopting sustainable practices.

Circular products have robust markets.

Public education and awareness regarding the ecosystem advantages of a circular bioeconomy.

Equity considerations for consumers who are susceptible to high prices and displaced workers.

Researchers have made significant progress in the development of individual technologies that contribute to a circular bioeconomy in food and agriculture. These technologies include precision farming and digital agricultural technologies, which can enhance the efficiency of chemical utilisation for crop production, and advancements in synthetic biology, which can convert plants and waste materials into biofuels and biochemicals, thereby replacing petroleum-based, carbon dioxide-emitting energy sources.

However, a significant number of these technologies are prohibitively expensive. The authors asserted that additional investment is required to expand them and render them commercially viable and affordable for consumers and farmers.

One fundamental inquiry in the development of environmentally friendly policies is how to establish the appropriate incentives for individuals to adopt sustainable technology, as well as how to assign a value to the most effective methods. For instance, agricultural pollution presents a challenge in terms of its difficulty in quantifying and identifying the source of runoff or other contaminants. New tools, such as a "digital twin" -- a computerised replica of a field -- can assist in the assessment of the environmental impact of agricultural management practices, such as the addition of nitrogen to the soil. These types of advancements have the potential to result in targeted policies that incentivise farmers to achieve results, rather than offering them expensive uniform payments for participating in conservation programs.

According to the authors, the public and private sectors will be required to take action in order to create a comprehensive solution. Numerous corporations are currently implementing sustainable practices, and substantial numbers of consumers are prepared to pay a premium for sustainably sourced products and organic foods. However, these endeavours are significantly inadequate to mitigate climate change or mitigate pollutants that induce hypoxia in the Gulf of Mexico. Khanna stated that it is imperative to implement new government incentives and modify the regulation of pollution.

Educating consumers can alter their preferences and willingness to pay for climate-smart commodities, thereby generating market demand and political support. "If consumers don't demand enough of it, and aren't willing to pay, the producer is not going to produce it," according to Khanna.

The authors stated that the transition to a circular bioeconomy must be accompanied by social programs that protect low-income consumers from rising prices in the short term and offer new training to workers who may lose their jobs as the fossil fuel industry contracts.

The subsequent step will involve the establishment of more interdisciplinary research programs, in which economists collaborate with engineers and scientists to apply this framework to specific industries or supply chains. The objective is to ascertain the potential effects of a transition to a circular bioeconomy on that sector. Khanna expressed enthusiasm for the establishment of a new Centre in iSEE to facilitate this type of research, specifically the Levenick Centre for a Climate-Smart Circular Bioeconomy at Illinois.

Khanna stated that the transition to a circular bioeconomy will necessitate a consistent policy framework, long-term commitment, and investments that may not yield results for a decade or more.

"We are significantly falling short of meeting both our U.S. and global targets for carbon emissions reduction. Furthermore, the degradation of water quality and the loss of biodiversity are also escalating. Khanna stressed the importance of acknowledging the interconnectedness of these environmental issues, which encompasses plastic waste, air pollution, and water pollution. "All of these issues are rooted in our current production and consumption practices." Transitioning to a circular bioeconomy provides a comprehensive solution, as opposed to addressing these issues individually.

Reference: Madhu Khanna, David Zilberman, Gal Hochman, Bruno Basso. An economic perspective of the circular bioeconomy in the food and agricultural sector. Communications Earth & Environment, 2024; 5 (1) DOI: 10.1038/s43247-024-01663-6