Recycling of raw material can make a significant contribution to achieving climate neutrality by 2050. Carbon pricing can encourage material recycling by making it more competitive with waste incineration and primary material production. However, accounting for the interactions among different markets in a theoretical model, this paper finds that carbon pricing on material manufacturing alone does not necessarily promote material recovery, if the derived demand for material is elastic, the supply of primary materials inelastic, and the emission intensity for recycling relatively high. In contrast, extending the scope of this policy to the waste sector guarantees a positive effect of carbon pricing on material recovery, together with a strengthened effect on emission mitigation. Using a numerical simulation on plastic waste, this paper shows that implementing carbon pricing on both sources is able to save 37% of CO2e emissions, compared to a policy with a limited scope on production saving 10% less. It is important to consider the full range of impacts and interactions when designing climate policy to ensure that it effectively delivers the objectives for both climate mitigation and circular economy.
Keywords: Carbon pricing, recycling, material production process emission, incineration, material efficiency