3 Economic instruments to promote circular economy in the construction sector

This chapter discusses the possible role of the construction sector in the circular economy transition. First, the current developments of the sector in the Nordic region are highlighted. After that options for economic instruments to promote circular economy in the construction sector is elaborated.

The construction sector is a complex sector containing a wide variety of materials and product groups. The lifetime of different products can vary significantly. A circular economy of products with long lifespans (decades or even centuries) is not seen as potential target group compared to products with shorter lifespans.

The implementation of circular practices in the construction sector has attracted a lot of interest since the EU’s Circular Economy Action Plan identifies the construction sector as one of the priority areas for closing material loops (European Commission, 2023c).

Circular economy strategies and models for the construction sector aim to minimize the resource consumption by contributing to more sustainable design choices and by reducing the need for new buildings. Additionally, strategies like maintenance, repair, and renovation of buildings extend their lifespan, while exploring new ways to utilize existing infrastructure and reusing components from demolished constructions, prevents waste generation. Enabling a circular economy in the construction sector relies on effective recycling of waste materials through improved sorting and separating activities, as well as increasing the use of recycled content in construction components.

Value is added and retained during the life cycle of a construction project as Figure 9 demonstrates. In addition, the value chain’s various stages contain features that promote circular economy adding to that value. For example, the planning and design phase plays a crucial role in enabling sustainable material use including recycled materials. This phase also effects to maintenance requirements, flexibility in changing the intended use of the structure, and the expected lifespan. As construction begins, focus on material efficiency and effective waste management becomes paramount. This ensures that resources are used efficiently, and waste generation is minimised. Once the structure is in use, the duration of its lifespan is determined by the effective management and maintenance practices used. As the structure reaches its end-of-life stage, careful considerations must be made regarding the fate of the generated waste materials. This may involve recycling or other appropriate disposal methods (Wahlström et al., 2021).

Source: Originally adapted from Achterberg, Hinfelaar, & Bocken, 2016

A study by Karlsson et al (2020) shows that a successful decarbonization of the supply chain for buildings and infrastructure will require parallel emission abatement measures that includes a variety of policies and strategies to transform the sector. The analysis estimates that out of the total carbon impact from construction of buildings accounts 32 percent of the total building construction emissions originates from concrete and other cement-based products. To better support decision-makers on the climate transition, the authors suggest to further investigate possibilities for making use of negative emissions by making use of carbon capture storage (CCS) and carbon sinks such as making more use of long-lived wood-based construction materials in houses.

The construction sector is one of the largest economic sectors within EU and the Nordic countries. It is an energy- and material-intensive sector that produces significant amounts of air emissions and waste. Development tends to be slow but efforts to promote sustainability are becoming increasingly common and circular economy practices have begun to gain traction. 

The selected Nordic countries in this study and their respective turnover in the construction sector for year 2021 is shown in Figure 10 below. In 2021, the total turnover for the entire construction sector in Finland was 43.2 billion Euros, in Sweden it was 92.8 billion Euros, and in Norway it was 66.6 billion Euros. Relative to each country’s gross domestic product (GDP) value for Finland, the construction sector turnover accounts to 17 percent of the total GDP (250 billion Euros in 2021). For Sweden the share of the construction sector turnover is also 17 percent as GDP is estimated to 540 billion Euros. For Norway it accounts to 16 percent, as GDP is estimated to 414 billion Euro in the same year (Eurostat, 2023).

Source: Statistics Sweden (2021), Statistics Norway (2021), Statistics Finland (2021)

The construction sector provides many employment opportunities across Sweden, Norway and Finland. In 2021, the sector employed about 345 000 people in Sweden, it accounts to 12 percent of the total workforce. In Norway, the sector employs about 246 000 people, it accounts to 11 percent of the total workforce. In Finland the construction sector employs about 154 000 people, it accounts to about 11 percent of the total workforce. An overview of the total amount of employees within specialised construction activities

These activities usually require specialised skills or equipment such as foundation work, concrete work, brick laying, stone setting.

, construction of buildings and civil engineering is shown in Figure 11.  

Source: Statistics Sweden (2021), Statistics Norway (2021), Statistics Finland (2021)

Given the data in Figures 10 and 11, it is easy to understand that the building and construction sector was one of the key priorities identified in the large Nordic study on circular economy potential 2020–2022. It was recognised as a priority in all the Nordic countries (except no explicit mentioning in Faroe Islands and Greenland). The Nordic construction sector was shown to have a shared opportunity to build a common hierarchy framework for the reuse and repurposing of buildings, as well as to create digital marketplaces for the circulation of construction materials. The role of circular design as a key enabler was also recognised.

The Nordic countries have already launched several processes towards developing a sustainable and circular construction sector, among these the flagship programmes Nordic sustainable construction

https://nordicsustainableconstruction.com/

and the Nordic networks for circular construction

https://nordiccircularconstruction.com/

.

There are also several interesting national developments in the Nordic countries. For example, in 2022, the Swedish government decided to appoint a commission within the National Board of Housing, Building and Planning (Boverket) to further develop the work with circular transformation of the construction and real estate sector, with the aim to help achieving Sweden’s environmental and climate goals. The working group was given the task of mapping and analysing the current operations in reuse and recycling of existing building materials, building parts and construction, as well as mapping and analysing the supply and demand of critical building materials. The work also includes examining potential indicators to monitor the circular development within the sector, launching outreach campaigns and increasing public awareness on the topic, and examining the digitalization potential. Results are expected by December 2024 (Swedish Government, 2022b).

In 2022, the Norwegian Agency for Public and Financial Management (DFÖ) conducted a joint study with Deloitte on how the circular economy could be improved within the construction and real estate sector. The report highlights the need for requirements of re-use and includes a mapping of existing re-use of materials. It also introduces shared economy concepts within the public sector, requirements for local suppliers providing bio-based construction materials, leasing options instead of consuming new goods, etc. To date, the marketplaces for building materials are insufficient and there are severe difficulties in calculating the emission savings stemming from sustainable choices (DFÖ, 2022). Regarding the marketplaces, the same concerns are shared across the Nordics (Hjelt, M et al. 2022).

As of today, Norway has a tax on commercial buildings (dokumentavgiften) which provides an incentive to demolish old and existing buildings, instead of renovating them. If the buyer demolishes the entire building, they only have to pay taxes on the land area, but if they decide to renovate the building, a document tax needs to be paid on the entire sales price. This is an example of a counterproductive economic instrument that creates barriers for the circular transition (Kartverket, 2023).

Economic instruments offer a range of opportunities to incentivise positive change and drive the transition towards more resource-efficient construction and demolition processes. This chapter examines different economic instrument options that can be tailored to address specific circular economy challenges within the construction sector.

Policies play a crucial role in influencing recycling rates and promoting sustainable practices within the construction sector. Several economic instruments can be employed, including natural resource taxes, green public procurement (GPP), VAT, import taxes, Extended producer responsibility (EPR), waste taxes, in addition to different kind of subsidies. These instruments aim to incentivise the recycling and reuse of construction and demolition waste and enhance the incorporation of recycled content in new construction projects. Figure 12 shows how different economic instruments could be placed into the value chain of the construction sector.

Zu Castell-Rüdenhausen et al. (2021) identified economic barriers as the main obstacle to the reuse and recycling of construction and demolition waste. The high price of secondary raw materials and used products often surpasses that of virgin raw materials and new products like aggregates, wood, glass, and gypsum. In some cases, demolition companies may opt for landfilling due to perceived cost-effectiveness. Moreover, there are additional costs associated with sorting waste into fractions that meet the quality requirements of secondary raw material producers.

Source: Originally adapted from Achterberg, Hinfelaar, & Bocken, 2016

The construction sector is a significant consumer of natural resources, relying heavily on materials such as aggregates, minerals, and wood. Natural resource taxes for the construction sector could aim to reduce the extraction of natural resources by imposing a tax on the use of materials. However, it should be noted that the government and municipalities have major roles in many building projects. Natural resource tax might be passed on to the prices of end products, thus leading to unintended effects if the costs of the new taxes are mainly burdening the municipal budgets, instead of steering the industry’s behavior.   

A waste tax can be an efficient economic instrument in promoting circular economy practices, particularly in the manufacturing stage of the construction sector. By levying taxes on the generation and disposal of waste, companies are incentivized to adopt sustainable practices, such as waste reduction, recycling, and resource recovery.

Savikko et al. (2022) estimate that in Finland, expanding the waste tax base and scope to include soil and rock waste fractions that are currently landfilled, would reduce the amount of waste landfilled by about 1.3 million tons. However, the study points out that an excessive waste tax could also lead to e.g., environmentally harmful alternatives, for example with transportation distances, and therefore suggests that further investigation is needed to explore the suitability of waste taxation as a means of directing the treatment of soil and rock materials that cannot be utilized. Also, the construction industry is hesitant as to whether a waste tax for soil and rock materials is a viable solution

Correspondence with the Confederation of Finnish Construction Industries RT 2/2023

. The industry sees that as these virgin materials will always be needed in the construction sector to some extent, adding a tax would most likely only increase the costs without offering any reasonable alternatives. Furthermore, the quality requirements of soil-based construction materials in many applications can currently not be matched with recycled material options, and the availability of recycled materials living up to the quality requirements, cannot be guaranteed.

EPR is currently implemented for certain waste streams, such as packaging waste, but not extensively for the construction sector as a whole. Expanding this concept to cover the construction and demolition sector would encourage manufacturers and suppliers to take greater responsibility for the entire lifecycle of their products. However, as mentioned before, the construction sector is multifaceted and deals with various products that often are part of large, complex systems. Hence, the scoping of sensible target products for EPR might be difficult (CPA, 2022). Implementing EPR in the construction sector would require collaboration between various stakeholders and careful consideration of the specific challenges and dynamics of the industry.

Although VAT is not specifically designed to promote circular economy in the construction and demolition sector, it can indirectly influence sustainable practices. By adjusting VAT rates or offering reduced rates for environmentally friendly products and services, the construction sector can be encouraged to adopt circular economy principles, such as using recycled materials.

Import tax could be an option for construction sector, however further investigation is needed to see what kind of and how much in volumes materials or products for construction sector use are imported from regions subject to an import tax. Subsidies could be targeted towards enhancing reuse activities.

There are some key characteristics and challenges that need to be considered when discussing circular economy in the construction sector and economic instruments. As mentioned, products in the construction sector often have a long lifespan such as buildings, roads and bridges, thus economic instruments are likely to have a limited effect in the short run. Additionally, virgin materials are still largely needed in the construction sector, as the availability of recycled materials is not yet guaranteed. Especially reusing and recycling materials and components from older constructions is often complex. To get more recycled content into use in the construction industry, the industry needs more guidance and knowledge building, costs should be reasonable, value chains for recycled materials should be enforced and recycled content should be part of the building process already from early stages of design. Old buildings and other structures should be seen as material banks that which contents reused over and over. From economic instruments, such as waste tax could steer construction waste being directed through reuse or recycling activities back into use.  

Estimating the impact of an economic instrument requires general equilibrium model analysis, due to the complexity of the value-chain perspective within the construction sector. The sector contains many different types of materials, several products groups and therefore many actors along the value-chain, which contributes further to its complexity. In the Nordics, both the industry and the policy makers are aware that the circularity of specific building materials is only a small part of the solution. Recycling solutions for concrete are for example already largely in use, but do not replace the need for virgin materials, as the circulated material cannot be reused as such for the same purposes. Instead, its typically used as filling material in new construction projects or aggregate in new concrete mixes. In the case of the Nordic construction sector, transforming the sector requires developing circular design and life-cycle models that enable the repurposing and reuse of whole buildings, their superstructures, and components. In addition, developing viable business models and markets for circular-economy products and services, including repair and renovation, are required (Sepponen et al. 2022).

Further circular opportunities in the sector can also be found e.g., in replacing single-use products and tools needed in construction activities with reusable products or leased products. Some examples include e.g., replacing single-used wooden scaffolds with reusable scaffolds, or leasing tools instead of owning them.