Policies for Material Circularity: the Case of Lithium

Abstract

Improper waste management carries social risks and dissipates high-value materials. Moreover, material market prices do not reflect these hidden costs and values. Two important questions are how prices can inform society about their resource use impact and how market-based policies optimize material circularity. This study adds to the literature by analyzing the effect of market-based policies aimed at promoting circular material reuse in a market defied by harmful waste but enhanced by recycling. The findings indicate that a landfill tax is a first-best policy since it targets the external costs of waste disposal, improves welfare, reduces damages, and boosts recycling. If a landfill tax is not feasible, other programs like taxes, subsidies, and a tax-subsidy scheme provide second-best results. Remarkably, recycling subsidies can stimulate higher raw material extraction and generate rebound effects. We also explore other non-market-based strategies to prevent waste and make recycling more cost-competitive and easier to recycle. The numerical results and sensitivity analysis of the lithium market illustrate the model's flexibility and prove why some policies are superior to others for reducing waste and creating value from used materials. Our study results serve as a guide to designing policies for optimal material circularity.