Environmental Science and Pollution Research (2020) 27:12566–12578

https://doi.org/10.1007/s11356-020-07847-9

RESEARCH ARTICLE

The determinants for a circular economy in Europe

Margarita Robaina 1 & José Villar 2 & Elisabeth T. Pereira 1

Received: 11 June 2019 / Accepted: 23 January 2020 / Published online: 30 January 2020
# Springer-Verlag GmbH Germany, part of Springer Nature 2020

Abstract
The circular economy contrasts with the traditional linear economy since it presents a sustainable way both to produce goods and
services and to contribute to the development of economies. This paper aims to contribute to a better knowledge of the efficiency
of resources productivity, a common indicator to compare how circular economies are, through the estimation of the main
determinants for the circular economy in Europe. A systematic analysis and comparison of the performance of all the
European Union countries was performed to get further insight into their root causes and to help designing future policies
towards a more circular European Union economy. With this purpose, a set of determinant factors for a circular economy in
Europe were analysed, under the period between 2000 and 2016. A cluster analysis was applied and complemented with three
econometric estimation methods: panel unit root tests, panel cointegration tests and vector autoregression model. The main
findings allowed to cluster European countries into three different groups according to the growth rate of their resources
productivity and to explain them according to the selected exploratory factors. Special efforts were made to explain the highest
productivity growth group, as a way to find relevant drivers towards sustainable productivity growths.

Keywords Circular economy . Resources productivity . Europe . Panel data . Cluster analysis . Sustainable growth

Introduction
The economic model of the current world is based on
extracting, using and throwing away. At present, we use too
large quantities of cheap and easily accessible materials and
energy, and we could be reaching our planet physical limits in
what concerns emissions to or extractions from the environ-
ment, and how much this environment can be changed by
direct human modification (Steffen et al. 2015). In European
countries, this situation is particularly worrying. Indeed, ac-
cording to EEA (2016), each citizen used an average of
13.1 tonnes of materials in 2014 and about 60% of them were
neither recycled nor reused. Europe is losing as much as 95%
Responsible editor: Eyup Dogan
* Margarita Robaina
mrobaina@ua.pt
1 Foundation (2015), a CE aims to keep the products, compo-
GOVCOPP - Research Unit in Governance, Competitiveness and
Public Policy, and DEGEIT - Department of Economics,
Management, Industrial Engineering and Tourism, University of
Aveiro, Aveiro, Portugal
2 1
Centre for Power and Energy Systems, INESC TEC, Campus da
FEUP, Rua Dr Roberto Frias, 4200-465 Porto, Portugal
of the value of the material and energy used, which means that
the value of recycled materials and recovered energy is only
5% of the value of virgin materials1 (McKinsey Center for
Business and Environment, and Ellen MacArthur
Foundation 2015). An additional source of distressing comes
from the fact that Europe is the only region in the world that
imports more natural resources and pollution than exports
(Tukker et al. 2016), meaning that Europe and other devel-
oped countries are very reliant on foreign emissions and re-
sources. Indeed, the European Union depends on energy and
natural resource imports, and an increasing proportion of what
it consumes is produced elsewhere in the world, indirectly
increasing other countries’ emissions.
In contrast with the traditional linear economy, the circular
economy (CE) concept (EC 2014b) appeared as a sustainable
way of producing goods and services and developing econo-
mies (see Kalmykova et al. (2018) and Kirchherr et al. (2017)
for a CE concept overview). According to McKinsey Center
for Business and Environment, and Ellen MacArthur
nents and materials at their greatest usefulness and value at all
times, and is based on three basic principles (Ellen Macarthur
Virgin raw material: that has not been previously used or consumed or
subjected to processing other than for its original production.
Environ Sci Pollut Res (2020) 27:12566–12578
Foundation 2015): 1) preserving and valuing natural capital
by controlling finite stocks and balancing flows of renewable
resources; 2) optimising resources productivity through the
circulation of products, components and materials, both in
technical and biological cycles; and 3) enhancing the effec-
tiveness of the system by reducing harm to human welfare,
regarding for instance, food, mobility, shelter, education,
health and entertainment, and managing externalities related
to land use, air, water and noise pollution, release of sub-
stances and climate change.
The transformation towards a CE in developed and devel-
oping countries could increase job generation and economic
progress. However, for an effective transformation, invest-
ments (both public and private) should be catalysed and sup-
ported by targeted public expenditures, policy reforms and
regulatory changes. The Circular Economy and Resource
Efficiency Agency of the UK published, in 2015, an analysis
of the potential of a CE in the European Union (EU) labour
market (WRAP 2015) and showed that it could create up to 3
million extra jobs (in repair, waste, recycling activities) and
reduce unemployment by 520,000 in all EU member states by
2030. At the same time, it could counter some of the causes of
global warming, the irrational consumption of resources and
many of the factors that lead to the deterioration of ecosys-
tems. As explained in Deloitte (2016), while the current linear
economy causes emissions of greenhouse gases (GHG), most-
ly through the consumption of fossil fuels, the CE reduces the
extraction and production of raw materials, the processes and
manufacture steps, the need of energy, and therefore the final
GHG emissions. The same report states that the CE could lead
to a global reduction of approximately 550 Mt CO2 eq (as
much as a 33%), or a 3/5th of the current target to reach the
reduction of 50% to keep global warming below 2 °C
by 2050 (IPCC 2014). In this sense, the European
Commission proposed a “Circular Economy Package”
by the end of 2015, and many business leaders are
considering complying with it as a way to increasing
growth and profitability. Some of the European documents
with strategic guidelines for green growth and CE transforma-
tion are EC 2010, 2011, 2014a.
Measuring how much the economy of countries or sectors
is complying with the principles of the CE, sometimes called
the degree of circularity, is a very complex task. Some coun-
tries, including Belgium, Germany and Netherlands, are al-
ready carrying out experimental work on new indicators to
specifically measure the transition to a CE (EEA 2016). The
more circular the economy, the fewer natural resources are
used, and the less environmental pressure is generated.
Therefore, a way to monitor economies’ performances on
the efficient usage of resources towards a more CE is through
the resource productivity (RP) indicator (EEA 2016), which
relates the gross domestic product (GDP) either to the raw
material consumption (RMC) or to the domestic material
12567
consumption (DMC). The RP accounts for the wellness of
the economy in relation to the amount of resources used.
In a transition from a linear to a circular economy, under-
standing which factors explain the different performances of
countries in terms of their RP may help to identify the main
determinants of a good or of a bad performance in the usage of
resources. Focusing on those countries with higher growth
rates (as this paper does with EU countries) can help other
countries to improve their lower performances.
However, the literature concerning this topic is rather
scarce, and studies frequently focus on specific regions and
disaggregate resource usage by type of material. For instance
Weisz et al. (2006) disaggregates the DMC for the EU-15
countries into 12 types of materials in order to analyse the
determinants of cross-country variations in the levels of ma-
terial use. The DMC cross-country variability is then com-
pared with the variability of several indicators such as the
economy structure (as the percentage share of the tertiary sec-
tor in the overall GDP), the population density, the economic
development (per capita GDP) and the final energy consump-
tion. The authors conclude that the structure of the economy is
an important determinant of the use of several materials such
as biomass, industrial minerals, ores and fossil fuels, while the
influence of national income is not so relevant. In fact, if a
country has a structure of activities more material intensive, its
RP will be higher than in the case of a structure based on
services’ activities. The authors point out examples of econo-
mies with extreme specialisations in material-intensive sectors
such as Finland and Sweden in forestry and mining (iron
ores), Ireland and Denmark in livestock production, or
Greece in mining (lignite and bauxite). The authors give the
example of the sector of minerals for construction, for which
the economic development is a more relevant determinant of
the DMC than the economic structure, since building is need-
ed for industrialisation and economic growth. However, the
effect varies through the EU-15 countries, partly due to differ-
ences in population densities. The study points out that high
population density results in below average necessity of cer-
tain materials (for instance for construction and transports in-
frastructure), but also in low per capita domestic resource
availability. On the other hand, very low population densities
lead to high per capita DMC and to high per capita resource
availability, which attracts materially intensive industries
(such as animal products, timber products, ore mining) and
to a high per capita household consumption of abundant re-
sources (e.g. wood).
Awasthi et al. (2018) analyses the CE concept for the 28
European member states, not from the perspective of materials
consumption but from the electronic devices waste (e-waste)
of each country, with economic, environmental, governance,
health and technological efficiency standards analysis. The
authors estimate a simple linear regression, the e-waste (clas-
sified in collected and reused/recycled typologies) being the
12568
dependent variable and the GDP in purchasing power stan-
dards the independent one. The relationship between two
typologies of e-waste with the population (as the inde-
pendent variable) is also evaluated. Results show a
strong influence of the GDP on the e-waste, but also,
that this kind of waste is very dependent on human
behaviours. Indeed, EC (2010) shows that lifestyle fac-
tors, such as continual increases in income, residential
floor area and technology development in consumer
electronics, are determinant factors of the resources
and energy consumption. In this case, the authors ana-
lyse Sweden at country level and Stockholm and
Gothenburg at urban level. Their analysis focuses not
only on the resource and energy evolution and their
drivers but also on the analysis of the policies that have
been adopted and their efficiency and on the proposal
of effective ways to reduce material consumption. They
point out that subsidies for energy-efficient renovations
and for non-fossil and fuel-efficient vehicles, environ-
mental taxes and, in cities, changes of the infrastructure
and urban structure are effective instruments for
reducing material consumption. Concerning nonfuel
resources, sharing economy, renovation instead of
purchasing of new products (as electronics) and
promotion of smaller residences are also pointed out
as effective policies.
Resource consumption and their determinants through
IPAT (I = P × A × T) analysis is proposed in EC (2010) and
used in EC (2014a), Dong et al. (2017) and West et al.
(2014). In this analysis, I = P × A × T, where P is the popula-
tion, A is the affluence calculated as GDP/population, T is the
technological coefficient computed as material intensity
(DMC/GDP) and I is the DMC. The authors evaluate the
contribution of each possible driver (P, A and T) to the growth
of I% (Robert A. Herendeen 1998). For instance, West and
Schandl (2013) applies the IPAT methodology on countries in
Latin America and the Caribbean countries as a whole and
finds that technological change did not moderate consumption
of materials, and that both population growth and per capita
income contribute to increase material use. The authors com-
pare countries in Latin America and the Caribbean with other
world regions and conclude that these countries will challenge
higher environmental pressures than expected, firstly, because
they will need to expand the extractive industries to face the
increasing demand in other world regions, and secondly, due
to their inherent domestic industrial transformations and ur-
banisation. For some regions in China, Japan, and South
Korea (Dong et al. 2017), the authors implement a material
flow account (MFA) indicator to analyse both the RP and the
efficiency, based on other indicators such as DMC, domestic
extract and physical trade balance. Using the MFA indicator,
the authors draw an Environmental Kuznets Curve and an
IPAT analysis. Conclusions point out that these countries are
Environ Sci Pollut Res (2020) 27:12566–12578
different on resource efficiency, productivity and consumption
patterns. For instance, Japan shows a clear dematerialisation
where technology is a central factor, while China is in a
growing path of material consumption with economic
growth and population being important drivers. A similar
methodology is applied in West et al. (2014) for Eastern
Europe, the Caucasus and Central Asia (EECCA) countries.
They conclude that the population has moderate environmen-
tal impact on materials consumption and that the growing
poverty of the EECCA region (due to the contraction period
of the post-Soviet era) was the strongest driver, turning DMC
lower, and making these countries more efficient at generating
GDP per tonne of material used.
Ranta et al. (2018) and Preston (2012) conclude that the suc-
cess of the CE initiatives depends on several economic and
societal stakeholders. In this context Ranta et al. (2018) identify
general and region-specific CE drivers and barriers in China, the
US, and Europe, using the institutional theory. They show that
the normative and cultural-cognitive pillars are very relevant
drivers of the CE initiatives. On the other side, the regulative
pillar alone is not capable of supporting sufficient change in the
institutional environment. Similarly, Fei et al. (2016) points out
that the CE initiatives often need societal support as legislative
and financial subsidies, and Dubey et al. (2016) refer to the
relevance of institutional support, norms and cultural aspects.
This paper proposes an estimation of the main determinants
for a CE in Europe. The European Union state members are
analysed for the period between 2000 and 2016 using a cluster
analysis with three complementary econometric estimation
methods: panel unit root tests, panel co-integration tests and
vector autoregression models. The main contributions are the
comparison among the performance of all EU countries using
the RP as EC indicator and the systematic analysis of these
performances to get further insight into their root causes, to
help designing future policies towards a more circular EU
economy. There is a clear gap in the literature, as there are
no econometric studies that combine all the explanatory vari-
ables considered in this paper as determinants of circular econ-
omy, although these variables have already been used in other
studies. Moreover, the present work is innovative in making a
cluster analysis with different RP growth rates that helps
explaining the main different RP evolution paths and reaching
meaningful conclusions.
After this introduction on the relevance of the circular
economy concept and related literature, The “Preliminary
analysis” section performs a preliminary comparative analysis
of the EU countries (in terms of GDP, DMC and RP) and a
cluster analysis and the “Data and methodology” section de-
scribes the data and variables used and the methodology ap-
plied to target the main objectives of the present study. The
“Analysis and discussion of results” section analyses and dis-
cusses the obtained results, and the “Conclusions” section
concludes.
Environ Sci Pollut Res (2020) 27:12566–12578 12569

Fig. 1 GDP, domestic material 14 000 000 2,5

consumption and RP in the EU-
28 countries
12 000 000

Domestic Material Consumption (thousand tonnes)

2,0

GDP (constant prices 2005 - million euros) and

Resources Producvity (euro per kilogram)

10 000 000

1,5
8 000 000

6 000 000
1,0
Domesc Material Consumpon (DMC)
4 000 000 Gross Domesc Product (GDP)
Resources Producvity (RP)
0,5
2 000 000

0 0,0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Preliminary analysis average improving speed but is outperformed by faster coun-

tries, or Croatia, that shows a similar behaviour, but starts from
Figure 1 shows, for the period 2000–2016, the evolution of the a much worse RP position. However, there is also a large set of
GDP, DMC and the resulting RP index for the aggregated 28 countries with very slow positive evolutions, being Belgium
EU countries.2 Years 2017 and 2018 were not used since at the or Romania among the slowest ones.
time this analysis was made, there were no enough data for all Figure 5 represents the evolution of the normalised produc-
the variables for these 2 years. As can be seen, there is a visible tivity of EU countries (computed for each year t as the RP of
fall of the GDP and the DMC at 2008, which can likely be year t, xt, divided by x2000) to help to identify different grow-
associated with the economic crisis. However it is very inter- ing speeds. For simplicity, it has been assumed that three
esting to note 1) how the GDP recovers soon its increasing groups are enough to represent the main different behaviours.
trend (by 2009 or 2010), while DMC keeps falling, probably Standard k-means clustering (Trevino 2016) has been applied
due to the need of increasing efficiency during crisis times, to identify the representatives or centroids of each group, la-
and 2) how this behaviour contributes to a more than 40% belled as low, medium and high, and to determine to which
increase of the total European RP between 2008 and 2016. cluster each country belongs to. Then, linear regressions have
The evolution of the RP indicator for the EU countries been fitted to each representative evolution (whose results are
(according to the notation in Table 1) is represented in in Fig. 5) with respective slopes of 0.04, 0.08 and 0.12. This
Fig. 2. Figures 3 and 4 compare the performance of EU coun- can be interpreted, for example for cluster low, that in average
tries with respect to this indicator for the years 2000 and 2016. the productivity index xt for any year t can be obtained as the
As can be seen, there is a great disparity between the RP of the initial productivity index x2000 times the slope and times the
European countries, with Netherlands, Luxembourg and the number of years, that is, x2000 × 0.04 × t. This shows that in-
UK being among the most efficient, with a significant distance dependently of their initial value at year 2000, in average the
to most of the others ones. In addition, even if the RP of all growing speeds of the faster countries (0.12), can be as much
countries is increasing, there are however very different as three times those of the slowest ones (0.04), and slightly
speeds. Countries like Italy, Spain or Slovakia had a RP less than the double of the group in the middle.
growth of more than 200% in the analysed period (2000– Mixing information of Figs. 2 and 5 can lead to interesting
2016), with Italy reaching or even surpassing the most effi- observations, made explicit in Fig. 6. Indeed, Fig. 6 shows, for
cient ones at the end of the period. Indeed, Figs. 3 and 4 show example, a first group of countries (such as Ireland or Spain),
some countries with very significant improvements between that in year 2000 had a low RP but with high-speed growth.
the beginning and the end of the 2000–2016 period, such as These countries are mainly those in the high growth cluster of
Italy, Spain, Ireland, Cyprus and Slovakia. On the other hand, Fig. 4 (with exception of Italy, whose growth path accelerated
other countries loose positions. For example, Sweden, has an after 2011). A second group of countries can be characterised
by a high RP in 2000, and therefore, more efficient at that
2 time, and possibly with little room for improvements, that
All the data used in this paper, the clustering and regression results, and the
figures are available in Excel format and can be requested by sending an email show a low productivity growth rate (clusters low and medi-
to the corresponding author, mrobaina@ua.pt um), as for example UK or Netherlands. A third group of
12570
Table 1 European countries and
their two-letter country code Belgium BE Greece
Bulgaria BG Spain
Czech Republic CZ France
Denmark DK Croatia
Germany DE Italy
Estonia EE Cyprus
Ireland IE Latvia
countries corresponds to those with low RP in 2000 and with a & Ratio between gross inland renewable energy consump-
low performance during the study period, as for example,
Portugal or Greece.
Data and methodology
After the preliminary analysis to classify EU countries accord-
ing to their RP growth rate, this section presents the possible
explanatory variables to explain the RP of these countries and & Gross domestic expenditure on R&D (GERD) in percent-
the methodology applied.
Data
The present study uses annual data for the period from 2000 to
2016 and for the following 26 European countries: Belgium,
Bulgaria, Czech Republic, Denmark, Germany, Estonia,
Ireland, Greece, Spain, Italy, France, Cyprus, Latvia,
Lithuania, Luxembourg, Hungary, Netherlands, Austria,
Poland, Portugal, Romania, Slovenia, Slovakia, Finland,
Sweden and UK. Malta and Croatia were excluded due to & Recycling rate in percentage (RECY) is the tonnage
the high rate of missing data. As already mentioned, the length
of the period was limited to the data availability. All data were
collected from the Eurostat database.
The dependent variable of this study is the RP of each
country (in €/kg), computed as the ratio of GDP over DMC.
This variable reflects the GDP generated per unit of resources
used by an economy. DMC indicates the total amount of ma-
terials with economic value and actually consumed by resi-
dent units. RP is considered a proxy of the circularity of the
economy, that is, the higher the RP, the more goods and ser-
vices the economy is producing with fewer resources (for
example, extracting fewer virgin materials, consuming less
energy or recycling more).
The following explanatory variables were considered:
& Environmental tax revenues in percentage of GDP (ET), & Population density (POP), as the number of inhabitants
which includes taxes on energy, transport, pollution and
resources. This variable allows testing if a higher level of
environmental taxes could lead to a more CE. For
example, EC (2014c) remarks that a shifting of the tax
burden from capital and labour to pollution can improve
productivity and competiveness.
Environ Sci Pollut Res (2020) 27:12566–12578
EL Lithuania LT Portugal PT
ES Luxembourg LU Romania RO
FR Hungary HU Slovenia SI
HR Malta MT Slovakia SK
IT Netherlands NL Finland FI
CY Austria AT Sweden SE
LV Poland PL United Kingdom UK
tion to the gross inland total energy consumption (REN).
This ratio allows to assess the impact, on the circularity of
its economy, of the share of renewable energy in the ener-
gy mix of a country. In this sense, Ellen Macarthur
Foundation (2015) indicates the renewable energy as the
main energy source for a circular economy to reduce fossil
energy dependence and enhance the adaptability of the
economic system towards oil negative effects.
age of the country GDP, including the expenditure on
research and development by business enterprises, higher
education institutions, and government and private non-
profit organisations. This explanatory variable may help to
assess if the investment in R&D of a country has some
positive effect on the productivity of the resources used.
For example, Ildırar et al. (2016) states that R&D and
innovation play an important role for the economic devel-
opment and RP improvement, affecting the countries’ eco-
nomic transformation and sustainable growth.
recycled from municipal waste divided by the total munic-
ipal produced waste. Recycling includes material
recycling and composting and anaerobic digestion.
Municipal waste consists largely of waste generated by
households but also includes wastes from small businesses
and public institutions, also collected by the municipality.
The idea is to see if a country with a higher level of
recycling also has a higher productivity of resources, and
therefore, a more circular economy. Recycling is consid-
ered by several studies as a crucial variable for attaining a
reduced natural resource consumption, a high RP and
therefore a more circular economy (Elia et al. 2017).
Moreover, Li et al. (2010) says that, at the national level,
circular economy represents a new pattern of economic
operation and aims to create a recycling oriented society.
per square kilometre, is to test if a more concentrated pop-
ulation leads to a lower consumption of materials and to a
lower attraction of materially intensive industries.
Weisz et al. (2006) indicates, for example, that an
increase of the population density leads to a lower
need of resources.
Environ Sci Pollut Res (2020) 27:12566–12578 12571

Fig. 2 RP of the EU countries 4,5

EU28 BE BG CZ DK DE
EE IE EL ES FR HR
4,0 IT CY LV LT LU HU
MT NL AT PL PT RO
SI SK FI SE UK
3,5 UK

GDP/DMC - Euro per kilogram

3,0
NL IT
FR
2,5

EU28
LU SE
2,0 BE
DE

1,5 DK ES CY
MT IE SI
EL
AT SK FI
HU CZ
1,0
LT
PT
HR
PL LV
0,5
EE
RO
BG
0,0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

& Gross value added by services sectors, in percentage of
total GDP (SERV) and gross value added by industry sec-
tors, in percentage of total GDP (IND). These two last
variables are to assess if the structure of the economy
(more services-based or industry-based) affects the RP.
Indeed, different levels of RP between countries could
not mean that one is less efficient than the other, but on
the contrary, that one has more activities intensive on ma-
terials or in energy than the other. Economic structure is an
important determinant of the use of several materials such
as biomass, industrial minerals, ores and fossil fuels.
In fact, if a country has a structure of activities more
material intensive, its RP will be higher than in the
case of a structure based on services’ activities
(Weisz et al. 2006).
Considering the above variables, the model proposed is the
following linear regression:
RP ¼ αit þ β1 ET þ β 2 REN þ β3 GERD þ β4 RECY
þ β5 POP þ β 6 SERV þ β7 IND þ εit
where subscripts i and t refer to country and time respectively,
β1, β2, β3, β4, β5, β6,and β7 are the slope parameters to be
estimated, and Ɛ is the error term.
Methodology
The methodology selected is common in the literature when
panel data are concerned and is based on performing several
tests to determine the most appropriate model. In this case, (i)
panel unit root tests and (ii) panel cointegration tests were used
first, which allowed to select (iii) vector autorregression model
as the most appropriate model.
Panel unit root tests
Recent literature suggests that panel-based unit root tests have
higher power than unit root tests based on individual time
series. Consider the following autoregressive AR(1) process
for panel data (Mahadevan and Asafu-Adjaye 2007):
yit ¼ ρi yit−1 þ Δi X it þ μit ð2Þ
ð1Þ

2,5 4,5
4,0
2,0 3,5
Euros per Kilogram

3,0
Euros per kilogram

1,5 2,5
2,0
1,0 1,5
1,0
0,5 0,5
0,0
0,0
LU

LV
BG
UK

AT

PL
FR
ES

EL
SI

FI
DE
EU28

HU
CZ
LU

LV
BG
PT
LT

PL
UK

MT
FR

ES

SK
DE
IT

IE
HR

Fig. 3 RP in the EU countries in 2000 Fig. 4 RP in the EU countries in 2016

12572 Environ Sci Pollut Res (2020) 27:12566–12578

3,5
EU28 BE BG CZ DK DE EE IE
EL ES FR HR IT CY LV LT
LU HU MT NL AT PL PT RO
SI SK FI SE UK low medium high IE ES
3,0 SK IT

high
CZ HU
2,5
Normlized GDP/DMC (base year 2000)

CY SI
EE BG
medium LV
LT LU
2,0 NL
PL PT
UK FR BE
EU28 DE
DK
low AT
1,5 HR FI
EL RO
MT
SE

1,0

0,5
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Fig. 5 Normalised productivity of the EU countries (base year 2000). BE, DK, DE, EL, FR, HR, MT, AT, PT, RO, FI, SE, UK. Source: own
High growth countries: BG, CZ, IE, ES, IT, LV, HU, SK. Medium elaboration with data from Eurostat
growth countries: EE, CY, LT, LU, NL, PL, SI. Low growth countries:

where i = 1,2, …, N, represents countries observed over We performed four panel unit root tests: Levin, Lin and
periods and t = 1,2,…, T. Xit is exogenous variables in Chu (LLC) (Levin et al. 2002); Im, Pesaran and Shin (IPS)
the model, including any fixed effects or individual (Im et al. 2003); the Fisher type tests using Augmented
trends and ρi is the autoregressive coefficient. If ρi < 1, Dickey-Fuller (ADF); and the Phillips-Perron (PP) tests
yit is said to be weakly trend-stationary. Conversely, if (Maddala and Shaowen 1999), (Choi 2001).
ρi = 1, then yit contains a unit root. μit is the stationary In order to test, under the null hypothesis, that all individual
error terms. series of the panel contain a unit root, Levin et al. (2002)

Fig. 6 RP growth (2000–2016)

and levels in 2000 in EU countries
Environ Sci Pollut Res (2020) 27:12566–12578
proposed a panel-based ADF test that restricts parameters by
keeping them identical across sectional regions, as represented
by the following equation:
k
Δyit ¼ ci þ ρi yit−1 þ ∑ c j þ ρi yit− j þ εit
j−1
where t = 1, 2,…, T is the time periods, and i = 1,2,…,
N is the members of the panel. The LLC adopts the null
hypothesis of ρi = ρ = 0 for all i, against the alternative
hypothesis ρ 1 = ρ 2 = … = ρ < 0 for all i, with the test
based on the statistics t ρ ¼ b ρ=s:e:ðb
ρÞ. However, one
drawback is that ρ is restricted by being kept identical
across regions under both the null and alternative hy-
potheses. Alternatively, one can allow ρ varying freely
across cross-sections. The IPS, Fisher-ADF and Fisher-
PP tests are of this form.
Im et al. (2003) begins by specifying a separate ADF re-
gression for each cross section:
pi
0 VAR estimation
Δyit ¼ αyit−1 þ ∑β ij Δyit−1 þ X it δ þ εit
j¼1
In this test the null hypothesis is written as H0 : αi = 0,
while the alternative hypothesis is given by:
 endogenous variables in the system (Lütkepohl 2005). The
αi ¼ 0 for i ¼ 1; 2; …; N 1
H1 :
αi < 0 for i ¼ N þ 1; N þ 2; …; N
(where the i may be reordered as necessary) which may be
interpreted as a non-zero fraction of the individual processes is
stationary.
An alternative approach to panel unit root tests uses
Fisher (1932) results from deriving tests that combine
the p values from individual unit root tests. This idea
has been proposed by Maddala and Shaowen (1999) and
by Choi (2001). If πi is defined as the p value from any
individual unit root test for cross-section i, then under
the null of unit root for all N cross-sections, the follow-
ing asymptotic result holds:
N
−2 ∑ logðπi Þ→x22N
i¼1
In addition, Choi (2001) proved that:
1 N
Z ¼ pffiffiffiffi ∑ Φ−1 ðπ i Þ→N ð0; 1Þ
N i¼1
where Φ−1 is the inverse of the standard normal cumulative
distribution function.
Both the asymptotic x2 and standard normal statistics
using ADF and PP individual unit root tests were used.
The null and alternative hypotheses are the same as for
the as IPS.
12573
Panel cointegration tests
Once assured the non-stationarity, the cointegration hypothe-
sis of the series must be tested, which is usually done with the
ð3Þ methodology proposed in Engle and Granger (1987). This
methodology examines the residuals of a regression and con-
tends that there is cointegration if ut ~ I(0). The first contribu-
tion for this approach has been presented, among others, by
Pedroni (1999, 2001, 2004) and Kao and Chiang (2000), giv-
en the following equation:
yit ¼ αi þ δit þ β1i ⋅x1i;t þ β 2i ⋅x2i;t þ ::: þ βki ⋅xki;t þ εit
ð7Þ
where t = 1, 2, ..., T and k = 1, 2, ..., K. Parameter α designates
the individual characteristics and parameter δ is the trend. It is
further assumed that variables y and x are integrated of order
one, that is, I(1). Thus, under the null hypothesis that there is
cointegration, the residuals will also be I(1).
ð4Þ
The vector autoregression (VAR) approach requires a struc-
tural modelling, since it considers every endogenous variable
in the system as a function of the lagged values of all of the
mathematical representation of a VAR is:
yt ¼ A1 yt−1 þ … þ Ap yt−p þ Bxt þ ϵt ð8Þ
where yt is a vector of size k of endogenous variables, xt is a
vector of size d of exogenous variables, A1, …, Ap and B are
matrices of coefficients to be estimated, and ϵt is a vector of
innovations that may be contemporaneously correlated but are
uncorrelated with their own lagged values and uncorrelated
with all of the right-hand side variables.
Analysis and discussion of results
The panel unit root tests mentioned in the “Preliminary anal-
ð5Þ ysis” section were applied to all the variables, and the results
are collected in Table 2. As can be seen, most variables are
non-stationary, suggesting the possibility of long-term rela-
tionships among them. However, in the first differences unit
root tests, all variables are stationary.
ð6Þ
The results of the cointegration test showed that variables
are not cointegrated. Therefore, according to these two test, as
usually described in the literature (see for example Galadima
and Aminu (2019), Sims (1980), or Farzanegan and
Markwardt (2009)), the most appropriate model is the previ-
ously described VAR model.
Table 3 presents the results obtained through the estimation
of the VAR model with RP as dependent variable, for the
12574
complete panel and for the three clusters low, medium and
high represented in Fig. 5. The Eviews software with automat-
ic lag length selection based on Schwarz information criterion
(Farzanegan and Markwardt 2009) was used for the estima-
tions. It can be observed that all the explanatory variables are
significant for the general panel as well as for the three clusters
of countries, and all models show good performance (R2 and
R2 adjust high and similar for all models). However, the sign
of some variables is different across the four groups.
Correlation among variables was also tested. Although
GERD and RECY (and to a less extent SERV and IND)
showed larger correlations, they were acceptable to estimate
the VAR coefficients. Other variable such as REN and SERV
that could be expected more correlated had actually very low
correlations. In addition, some extra estimations were per-
formed removing one of these variables at a time to confirm
that there were no very significant differences in others coef-
ficient estimations.
From Table 3, several conclusions can be drawn:
& A negative sign of ET in all models shows that an increase
in environmental taxes has a negative effect on RP. This
may have to do with the negative impact that taxes have
on GDP. Decreasing GDP also decreases the resources
used, but not in the same proportion, causing a decrease
of RP. This efficiency loss has to do with the deadweight
loss related with the implementation of taxes (Karl and
Fair 1999). This impact is greater in the countries with
more RP growth rate, possibly because these countries
may have more elastic demand and supply curves (which
increases the deadweight loss), and less possibility to com-
pensate taxes increases with an efficiency increase which
is already growing at high rate. For these countries, in-
creasing efficiency is probably costlier than paying addi-
tional taxes. A rise in ET would therefore not result in an
improvement in RP but rather a fall, due to the increased
costs that would translate into GDP declines.
& The negative sign of GERD for the panel and cluster high
models shows that investments in research and develop-
ment have a negative impact on RP of the panel and for
those countries with highest growth rate. This seemingly
contradictory signal may be related to the fact that these
investments in R&D may be for areas not necessarily im-
proving productivity, especially for faster growth coun-
tries. For low and medium growth countries, the signal is
positive, meaning that GERD has a positive impact on RP.
& The signal expected for IND should be negative, since the
larger the percentage of industry in the structure of the
economy, the greater the use of resources for the same
production level (lower RP). Although a positive signal
is verified for the general model, for the clusters estima-
tion, the signal is as expected, with greater impact in low
and medium growth clusters, perhaps because in these
Environ Sci Pollut Res (2020) 27:12566–12578
countries, there is a larger proportion of tertiary sector,
and raising industry could have a higher impact. These
results are in accordance with Weisz et al. (2006), where
the sectors’ economic structure revealed to be a very im-
portant factor in RP. Nevertheless, the opposite sign be-
tween the global panel and the clusters, the estimated co-
efficients very close to zero, and the fact that this variable
it is only significant at 10% show that the impact of this
variable may not be very conclusive.
& In all the models, POP shows a positive signal on RP, with
greater magnitude in the high and medium growth
countries. This is coherent with literature results, where
for example Weisz et al. (2006) also points out that high
population density results in below average need of
resources.
& Recycling (RECY) has the expected signal in the high and
medium growth countries, that is, the greater the
recycling, the greater the productivity of resources.
However, for those countries with lower growth, recycling
does not have a positive impact on efficiency. This could
be due to the fact that low growth countries are both those
that already performed well, and have reached their effi-
ciency frontier so that additional recycling has more costs
than benefits, or those that are performing worse due to
inefficient processes that do not contribute to improve
efficiency, included the recycling process.
& Renewable energy (REN) has the expected positive signal
only for the high growth countries, similarly as for
recycling. It seems, therefore, that similar conclusions
can be drawn.
& Services (SERV) present a positive signal for all models,
as expected, because tertiary economies tend to be more
efficient in the use of resources. This coefficient is higher
in medium and high growth countries. However, the cir-
cularity of a country with high RP due to a service-based
economy should be interpreted cautiously. Indeed, this
country could be consuming manufactured goods pro-
duced in other countries, keeping or not intellectual prop-
erty and innovation, but delocalising the productive pro-
cess to other countries.
Conclusions
This paper has analysed a set of determinant factors for a
circular economy in Europe, considering most European
Union state members for the period between 2000 and 2016.
As in other similar works, the RP was selected as a proxy of
the countries’ economy circularity. Since the RP increases in
average for most of the considered countries, a cluster analysis
was initially performed to group countries into three catego-
ries with different RP growth rates (that have been called low,
Environ Sci Pollut Res (2020) 27:12566–12578 12575

Table 2 Panel unit root tests results, period 2000–2016

Level First difference

LLC IPS ADF PP LLC IPS ADF PP

RP 1.97 6.79 8.88 6.80 − 15.86*** − 12.90*** 245.09*** 309.71***

ET − 0.78 0.01 58.33 58.51 − 11.18*** − 9.78*** 189.47*** 226.21*** 179.77***
GERD − 1.15 3.17 40.16 41.04 − 8.52*** − 8.55*** 170.07*** 222.34***
IND − 5.16*** − 2.20** 74.23** 319.11*** − 13.74*** − 10.55*** 199.32*** 95.41***
POP 6.24 5.96 49.86 41.46 − 2.207** − 2.73*** 91.97*** 275.24***
RECY − 2.65*** 2.30 58.77 50.32 − 12.59*** − 12.55*** 237.88*** 275.67***
REN 3.04 7.88 9.06 4.46 − 13.73*** − 12.24*** 229.80*** 247.78***
SERV − 4.37*** − 1.30* 67.47* 67.53* − 16.17*** − 12.31*** 231.15***

***p < 0.01

**p < 0.05
*p < 0.1

medium and high growth groups). The analysis of the avail-
able data (panel unit root and panel co-integration tests) sug-
gested to use VAR modelling to determine the impact of the
selected explanatory variables (basically corresponding to en-
vironmental taxes or ET, share of renewable energy consump-
tion or REN, expenditure on R&D or GERD, recycling rate or
RECY, population density or POP, services sector share or
SERV, and industry sector share or IND).
From the results obtained with the VAR modelling ap-
proach, several interesting conclusions can be drawn:
& The explanatory variables selected are all of them signif-
icant for the general panel and for the three different RP
growth rate groups, being all of the relevant determinants
of the circularity of the considered countries. All VAR
models have coefficients of determination (adjusted R2)
larger than 98% indicating that most of the variability of
RP is explained by the explanatory variables selected, be-
ing an appropriate choice.
& Some of the explanatory factors, such as ET, IND, POP
and SERV have a similar impact on all groups, although
with different intensities. For these variables, conclusions
are similar for all groups, and can be summarised by the
fact that ET and IND decrease RP, while POP and SERV
increase RP. Taxes are generally associated with the so-
called deadweight loss that affects in the same direction of

Table 3 VAR model results,

period 2000–2016 Complete panel Cluster Low Cluster Medium Cluster High

RP (− 1) 0.953210** 0.735449* 0.885054 1.095847

RP (− 2) 0.082085** 0.280890* 0.090087 − 0.084126
ET − 0.005192* − 0.007316** − 0.016073** − 0.038464**
GERD − 0.007735* 0.023910** 0.040179** − 0.029349**
IND 0.000284* − 0,001553*** − 0.003380*** − 0.000838***
POP 1.47E-05* 0.000192*** 0.000183*** 0.000667***
RECY 0.000336* − 0.000806*** 0.001371*** 0.002522***
REN − 0.000704* − 0.001166*** − 0.001892*** 0.000186***
SERV 0.000534* 0.000932*** 0.00167*** 0.001271***
R2 0.986780 0.984433 0.991295 0.982669
R2 adjust 0.986502 0.983705 0.990570 0.981420
Sum sq. resids 5.059323 1.935142 1.456016 1.426579
F statistic 3554.880 1351.762 1366.569 786.7041
Akaike AIC − 1.460883 − 1.594899 − 1.289376 − 1.423911
Schwarz SC − 1.369357 − 1.435251 − 1.061893 − 1.214849

***p < 0.01

**p < 0.05
*p < 0.1
12576
all countries (although affecting more high growth coun-
tries). More service-based countries show larger efficien-
cies since resources usage is lower (although, as remarked
in the previous section, this should be interpreted with
caution). Finally, larger population densities also increase
efficiency as is generally accepted (although its impact is
larger for high growth countries).
& Other factors, such as GERD, RECY and REN have dif-
ferent impacts (positive or negative) on the RP, depending
on the speed of growth of the countries considered.
RECY and REN have negative impact for low
growth countries and positive for high growth coun-
tries. On the contrary, GERD has a positive impact
on low growth countries, but negative on high
growth ones, as if R&D investment had a clearer
and faster return on initially low efficient economies,
with larger margin for improvements.
Other remarks, concerns and recommendations related to
this analysis are:
& According to the RP analysis, most efficient countries are
very often those that show the lowest RP efficiency
growth rates. For example, France, Germany or UK are
some of the most powerful EU economies, with the largest
RP values, but with lower RP growth rates, probably be-
cause they are already at their efficiency frontier with little
room for improvement. Other less economically healthy
countries such as Spain or Italy show larger RP growth
rates, approaching and even in some cases, as it is for Italy,
surpassing most efficient countries.
& There is a set of countries with low RP growth rate, not
due to being already efficient, and that departs from low
RP values and remain, possibly due to low efficient pro-
cesses and policies. For these countries (in the lower left
quadrant of Fig. 6), as for instance, Romania, Greece,
Finland or Portugal, some lessons that could be drawn
from this work, based on the significant variables for the
high growth cluster (with countries such as Ireland, Spain,
Czech Republic or Slovakia) are that: (i) environmental
taxes does not appear as an appropriate policy instrument
to raise RP; (ii) urban planning towards more population
concentration helps to improve RP; (iii) policies regarding
recycling and renewable energy usage are only effective
for the high growth cluster, suggesting the need of struc-
tural processes improvements in low RP low growth coun-
tries to make these factors contribute to circularity; (iv) an
economic structure favouring tertiarisation can also raise
the performance of the countries towards a better circular-
ity, but need to be analysed at a global scale, due to the
outsourcing activities that simultaneously may be decreas-
ing the efficiency of third countries; and (v) R&D invest-
ment policies should be promoted, since they have a
Environ Sci Pollut Res (2020) 27:12566–12578
positive impact on initially low efficient economies, with
larger margin for improvements.
& The above initiatives and policy recommendations should
be promoted by a CE framework, but considering regional
specificities with different RP growth rates (as cluster re-
sults revealed), which is agreement with, for example
Ranta et al. (2018) and Preston (2012).
& Using a VAR model instead of a more standard regression,
where lags of the dependent variable are used as explana-
tory variables, tends to improve the significance of the
estimation model but makes the interpretation harder.
Indeed, an important part of the variability of the depen-
dent variable is being explained by its own lags, as the
resulting coefficients show, suggesting the possibility of
exploring other alternative models, and other additional
explanatory variables.
& All countries have been classified into three different
growth rate efficiency groups, which indeed help to sim-
plify the analysis and facilitate the interpretation of the
results. However, some countries show more erratic and
oscillatory behaviours, and a more detailed analysis of
these behaviours could also reveal significant conclusions,
hidden under the selected approach.
Funding information This work was financially supported by the re-
search unit on Governance, Competitiveness and Public Policy (UID/
CPO/04058/2019), funded by national funds through FCT - Fundação
para a Ciência e a Tecnologia and by national funds through FCT -
Fundação para a Ciência e a Tecnologia within the project UID/EEA/
50014/2019.
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