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Four Ways Government Policies Are Accelerating The Transition To Circular Economy

Updated: Sep 16, 2021

In the pandemic’s aftermath, the theme of all recovery plans has been emerging stronger and more resilient. Moving towards economic recovery while meeting environmental and social goals requires unprecedented action from governments across the world. This is a pivotal moment for governments to step up and accelerate the transition to a circular economy – a systemic shift that will generate economic opportunities, and job growth while focusing simultaneously on environmental sustainability and social justice.

Though the concept has been widely popularized in Western economies, the circular economy is uniquely relevant for developing and emerging economies such as India. Many of these developing economies are heavily dependent on manufacturing and/or raw material extraction industries – which offer even more scope to optimise material flows and go circular (as compared to developed service-oriented economies). Governments today have an opportunity to reorient and avoid locking into linear systems as they grow.

Businesses are already recognising the need and opportunities to move to a circular economy. However, policy incentives are essential to eliminate market barriers and upscale voluntary commitments to more systemic transformation. Policymaking by governments is the first step to creating an enabling environment for the circular transition. This article highlights four ways in which governments can do so, with examples from across the world.

1. Making themselves circular through public procurement

The government is a large consumer of goods and services – ranging from purchasing construction material for infrastructure to services such as electricity. For instance, the European Union spends over €2 trillion (a sizeable 14% chunk of its GDP) on public procurement of goods and services every year. The procurement choices a government makes are a powerful tool to create an economy-wide impact.

Governments can stimulate demand for circularity by setting standards to that effect in public procurement. For instance, policymakers can require a minimum percentage of recycled content in materials; include environmental standards in public contracts; or assign higher weightage to circular suppliers when evaluating bids.

2. Mainstreaming the circular economy across sectors

The government department that hosts a circular economy policy is almost always the Ministry of Environment in a country. However, an economy-wide circular transition needs for the agenda to move beyond the siloed desks of environmental officers, and land across ministries, industries and cross-cutting departments. Policymaking by involving multi-stakeholder groups and encouraging collaboration can help reflect the circular economy across sectors and build ownership.

3. Enabling financing for the circular economy

Government and financial regulators play a crucial role in enabling finance to flow to circular economy projects. Governments can directly invest in circular activities – for instance by setting aside a budget to provide grants to circular SMEs or provide risk capital for early-stage pilots.

Beyond direct public financing, the private sector will provide (and already is providing) the substantial investments needed to transition to the circular economy. Here, the government can create regulatory conditions and use public funds to encourage private investmentments. Though indirect, this role of the government in creating incentives and de-risking investments is a powerful lever to unlock the critical private capital required to scale circularity.

However, especially in the case of developing and emerging economies, the COVID-19 pandemic further constrained the already limited public budgets dedicated to SDGs and circular initiatives. The circular transition presents an opportunity to use public funds for a resilient recovery – innovative financing mechanisms to address this could evolve in resource-constrained contexts. Ellen MacArthur Foundation’s report on ‘Financing the Circular Economy highlights several financial instruments such as public equity and bonds, discussed in our previous article Growing financial opportunities in the Circular Economy. EIB also recently launched Sustainability Awareness Bonds, where part of the proceeds are eligible to be used to finance the transition to a more circular economy.

4. Creating ripple effects globally

Governments, through their policies also influence their global trade and political partners. The introduction of circular economy policies and international trade agreements will change supply chains, and (dis)incentivise specific exports and imports.

The complexity of trade and its political economy makes it difficult to predict to what extent countries will be impacted by these shifting trade dynamics. However, it is clear governments with strong trade agreements can use their leverage to create ripple effects for circularity globally.

These are, among others, some ways that governments can start boosting circularity through policy as we emerge from the pandemic. However, embedding the circular economy into policies is only step one – policy needs to be complemented with dedicated financial resources, capacity building, and effective implementation. Once the frameworks are set in place, a collaboration between actors ranging from the national government to the private sector, civil society and local government can truly unlock the potential of a circular economy.

About the Author

Kruti Munot is a Project Manager at GIZ, where she works with local governments in Africa on issues of climate change and urban development. She holds an MSc from the London School of Economics and Political Science and is based in Brussels, Belgium. Her interests lie in urban development, circular economy, and the role of financial institutions in driving sustainable development.


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