Background — introduction and model overview
Submitted manuscript · April 3, 2026
Submitted text: reproduced from the frozen April 3 manuscript. Its model descriptions and results refer to the submitted specification; current equations, closure experiments and analyses are available in the site navigation.
Introduction
The transition to sustainability is nowadays understood to go beyond the energy transition, requiring the adoption of circular-economy (CE) strategies that seek to reduce material throughput, as well as emissions, increasing efficiency in resource use (Geissdoerfer et al., 2017; Korhonen et al., 2018). In recent years, the global policy landscape has begun to shift from high-level “roadmaps” to legally binding regulations and sector-specific enforcement (Barrie et al., 2024). Results from most academic studies, conducting ex-ante analysis, have projected positive environmental and socio-economic impacts of the adoption of CE strategies, especially at the national or regional level (Aguilar-Hernandez et al., 2018; Fevereiro et al., 2025).
Yet, the effects of a circular transition cannot be assessed only in the country where policy is legislated. This is because supply chains, trade relations, and financial hierarchies connect countries and regions asymmetrically. This implies that policies designed for cleaner production and consumption in advanced economies may reallocate costs, demand pressures, and ecological burdens across countries rather than resolve them globally (Wiedmann et al., 2015; Dorninger et al., 2021). Moreover, recent research suggests that circularity and decarbonisation do not necessarily move together, since circular initiatives can generate energy-intensive processes, upstream emission increases, or burden-shifting across supply chains when they are not coordinated with broader net-zero strategies (Arranz et al., 2026).
Circular transitions occur within a global economy that is characterised by unequal ecological exchange, persistent structural asymmetries, and monetary and financial constraints (Hornborg, 2009; Hickel et al., 2022). The literature on ecologically unequal exchange shows that environmental improvements in high-income economies are typically associated with the externalisation of extraction, energy use, labour, and waste-intensive production through trade and global value chains (Wiedmann et al., 2015; Dorninger et al., 2021). This implies that CE policies cannot be assessed only using domestic indicators of efficiency or decarbonisation. Ecological gains in the centre might actually rely on the continued ecological appropriation of labour, land, energy, and materials from the periphery (Lenzen et al., 2012; Hickel et al., 2022). Additionally, research on degrowth and global dependency indicates that ecological transition is driven by a “twin problem”: the material excesses of the Global North make transformation necessary, while North–South dependencies constrain the policy space and development opportunities of the Global South (Gräbner-Radkowitsch and Strunk, 2023; Hickel, 2020).
In this context, ecological macroeconomic modelling offers a complementary perspective: climate policies introduced in the centre may generate contractionary pressures, external imbalances, and financial instability in the periphery, especially when policy coordination is weak and structural asymmetries remain unchanged (Althouse et al., 2020; Campiglio et al., 2018). For example, Fevereiro and Lowe (2025) show that different types of green transition strategies in the Global North lead to lower GDP and employment and worsening trade balances in the Global South under existing patterns of specialisation. Furthermore, the current international monetary and financial system limits the ability of many countries in the Global South to absorb shocks, sustain green investment, or pursue autonomous transition strategies, even where “green” finance is available (Svartzman and Althouse, 2020; Volz et al., 2015).
Yet CE policy is often analyzed from technical or managerial perspectives that emphasize recycling, efficiency, product-life extension, or demand shifts (Kirchherr et al., 2017; Geissdoerfer et al., 2017). Less attention is paid to the structural relations through which environmental benefits and socio-economic costs are distributed internationally, and to the fact that different CE channels do not have the same macroeconomic or ecological effects. We argue, therefore, that the question is not whether circular-economy practices reduce emissions or material extraction in isolation, but under what conditions they do so, for whom, through which demand and production channels, and with what distributional consequences across regions. Specifically, the ecological, social and macroeconomic effectiveness of CE policies in the context of ecologically unequal exchange is contingent on whether they operate through final demand, intermediate production, or investment dynamics — a channel-based distinction that existing open-economy CE analyses have not systematically pursued.
Addressing such complex research gaps requires a framework that simultaneously tracks sector-level demand channels, cross-border material and financial flows, macroeconomic dynamics, and ecological extensions — a combination that existing approaches provide only partially. Static multi-regional IO models capture cross-border ecological footprints but are silent on income distribution, financial balances, and demand-driven contractions (Wiedmann et al., 2015; Dorninger et al., 2021). Ecological stock-flow consistent models capture macro-financial dynamics and distributional effects but aggregate production into representative sectors, making it impossible to distinguish demand channels or CE substitution pathways (Dafermos et al., 2018; Carnevali et al., 2019). Two-region SFC models without IO structure capture cross-regional financial asymmetries but cannot distinguish material types or the channel architecture that governs policy leverage (Althouse et al., 2020; Fevereiro and Lowe, 2025).
We address this gap through a two-region ecological macroeconomic model, which combines all four dimensions in the global context of the transition to a circular economy, combining multi-regional input–output structure and stock–flow consistent dynamics, calibrated for the European Union and the Rest of the World using EXIOBASE 2011 data and 54 industries covering ten basic materials — food, energy, wood, plastics, pulp, paper, metals, glass, cement, and construction — each disaggregated into a primary (virgin, resource-intensive) and a secondary (resource-efficient) production sector. By combining ecological and input-output extensions with a macro-financial two-region framework, the model allows us to analyse complex circular-economy scenarios as structurally differentiated demand transition regimes rather than isolated technical shocks (Leontief, 1941; Aguilar-Hernandez et al., 2018; Fevereiro et al., 2025).
We simulate 14 circular economy transition scenarios, each targeting a different primary-to-secondary substitution pathway and varying systematically by demand channel (final demand, intermediate production, investment) and institutional sectors (households, government, firms). Model simulations show how dynamic sector-level changes in final demand, intermediate production, and sectoral expansion affect value added, employment, income distribution, fiscal and current-account balances, emissions, and material extraction domestically and across borders. In doing so, we examine how circular-economy policies generate transnational socio-ecological trade-offs and cross-regional macro-financial asymmetries.
Our results identify three structural patterns. First, the effectiveness of CE policy depends on the scale of the demand channel engaged: household food transitions generate the largest final-demand employment and material effects, government procurement is the primary CE lever for plastics, and consumer energy behaviour is structurally secondary to industrial procurement as a climate instrument. Second, intermediate production restructuring delivers stronger ecological gains — energy restructuring is the highest-leverage scenario in both emissions and primary material extraction — but generates modest macroeconomic contractions; metals is the exception, expanding output while reducing material throughput, yet producing a structural emissions rebound through the higher fossil-electricity intensity of secondary steel production. Third, most CE scenarios are distributionally regressive along two simultaneous dimensions: within the EU, mark-up pricing transfers the output contraction disproportionately to the wage bill; across borders, the same transitions deteriorate fiscal positions in the periphery and — in the energy scenario — generate a sustained rise in peripheral public debt as fossil export revenues permanently collapse.
Across the full scenario set, four distinct cross-border transmission patterns emerge — symmetric material contraction, competitive displacement, fossil-import collapse, and production leakage — trade-offs that are structurally embedded in the global production system and invisible to single-region frameworks. In symmetric contraction, both regions contract proportionally as secondary sectors require fewer intermediate inputs per unit of output, generating shared ecological gains at a shared macroeconomic cost. In competitive displacement, EU secondary-sector expansion directly substitutes for RoW primary exports, compressing peripheral output and employment while the core captures the productivity gain. In fossil-import collapse, the EU energy transition permanently eliminates fossil-fuel export revenues on which peripheral fiscal systems depend, generating a sustained rise in RoW public debt that deepens sovereign vulnerabilities already associated with financialised peripherality. In production leakage, the higher import content of secondary sectors means that part of the CE demand shift flows back to RoW as intermediate inputs, creating a partial positive spillover that partially offsets — but does not reverse — the core’s material savings. Each pattern implies a distinct distributional settlement between centre and periphery, and the policy implications differ accordingly.
This paper contributes to the ecological economics literature in three ways. First, it integrates circular-economy analysis with ecological macroeconomics in an open-economy, multi-regional framework. Second, it introduces a channel-based perspective that distinguishes between final-demand, intermediate-production, and investment-driven transition pathways. Third, it demonstrates that circular-economy policies generate systematic transnational trade-offs structurally embedded in the global production system. The findings suggest that an effective and just transition requires channel-specific, coordinated policy that simultaneously addresses circularity, decarbonisation, and the international asymmetries through which ecological costs are displaced.
Following this introduction, Section 1 provides an overview of the model; Section 2 describes the multi-regional input-output structure of demand; Section 3 presents the scenarios; Section 4 discusses the simulation results and their policy implications; and Section 5 provides conclusions and avenues for further research.
Model Overview
Background and Literature Overview
In recent years, several authors (e.g., Hardt and O’Neill, 2017; Bimpizas-Pinis et al., 2023; Fevereiro et al., 2025) have identified the combination of input-output (IO) analysis and stock-flow consistent (SFC) modelling as one of the most promising approaches for developing models assessing the economy-ecology nexus, including Circular Economy (CE) transition scenarios. IO models are analytical tools used to represent and quantify the interdependencies between different industries of a capitalist economy (e.g., Leontief, 1936, 1941). More specifically, IO models illustrate how changes in one industry, such as increased production or consumption, affect other industries through a system of interconnected inputs and outputs, providing insights into the overall economic impact of alternative shocks and policies (De Boer et al., 2021). On the other hand, SFC models can be considered a specific class of ‘system dynamics’ tools that replicate the dynamics of a financially sophisticated economy (e.g., Godley and Lavoie, 2007; Caverzasi and Godin, 2015; Nikiforos and Zezza, 2017). In the last decade, SFC models have gained traction in ecological macroeconomics too, due to their ability to integrate consistently and comprehensively the flows and stocks of the real economy, the financial sector, and the ecosystem (Dafermos et al., 2017, 2018; Carnevali et al., 2019, 2020, 2023).
However, existing approaches provide only partial insights into the CE transition (for a complete review, see Fevereiro et al., 2023). Multi-regional input-output models capture inter-industry linkages and cross-border ecological footprints, but remain static and fail to capture macroeconomic dynamics, income distribution, and financial constraints. Conversely, ecological stock-flow consistent models capture macro-financial dynamics and distributional effects, but typically rely on highly aggregated production structures, making it difficult to distinguish sectoral demand channels or circular substitution pathways. Only a limited number of studies have so far incorporated explicitly the IO structure of the economy into an SFC dynamic framework, but none in a multi-regional setting (e.g., Berg et al., 2015; Valdecantos and Valentini, 2017; Di Domenico et al., 2024; Thomsen et al., 2025; Jackson and Jackson, 2025; Pettena and Raberto, 2025; Veronese Passarella, 2025).
More recently, Veronese Passarella (2023) has extended a standard aggregative SFC model by introducing both a vertical disaggregation (across institutional sectors) and a horizontal disaggregation (across production industries), and has used this framework to explore simple circular economy scenarios. Subsequent contributions have further developed this line of research by broadening the scope of application and refining the treatment of inter-industry and cross-border linkages. For instance, Fevereiro et al. (2023) have expanded on Veronese Passarella (2023)’s analysis by applying it to a two-area economy, explicitly considering the effects of international trade, supply chain interdependencies, cross-border portfolio investments, and exchange rate fluctuations. While these recent contributions have begun to integrate IO structures within SFC frameworks, they have not systematically addressed the channel-specific nature of CE interventions and their interaction with existing global asymmetries. This paper builds on and extends this emerging literature by developing a two-region ecological IO-SFC model that explicitly incorporates demand-channel heterogeneity, sectoral substitution between primary and secondary production, and cross-border macro-financial linkages.
Model Characteristics
The analysis relies on a dynamic, ecological, multi-regional input-output, stock-flow consistent (IO-SFC) model calibrated on empirical input-output data (EXIOBASE 3). The model is designed to reproduce the evolution of an interconnected macro-financial-ecological system and to test the implications of alternative circular-economy (CE) trajectories.1
The model operates in discrete time and captures how system-level behaviour emerges from the interaction of its components, laying emphasis on financial-real interactions. It enforces stock-flow consistency across all sectors, ensuring that every flow has a corresponding change in a stock and that monetary, real, and physical balances hold by construction. The production side is represented through a two-region input-output structure, so all inter-industry linkages — within each region and across regions — are explicitly accounted for. The framework is fully open-economy: the world is divided into two regions (the European Union and the rest of the world), connected through goods trade and cross-border portfolio flows. Ecological relations are endogenised: emissions, resource extraction, and waste generation are linked directly to production technologies and material flows. Finally, the numerical parameters of the model are anchored in observed data, either drawn directly from existing time series (e.g., technical coefficients) or calibrated to replicate the prevailing levels of key macroeconomic aggregates.
Formally, the model consists of accounting identities and behavioural equations relating industries and institutional sectors. These are organised into three blocks: the economic–financial block, the social block, and the ecological block.
Economic and Financial Block
Each region comprises five institutional sectors: households, private firms, government, commercial banks, and the central bank. The institutional structure of the economy is identical in the two regions, and in the baseline no trade constraints or financial restrictions are imposed. Households earn wages and capital income (distributed profits, interest, and capital gains) and allocate their disposable income across consumption and asset holdings. Consumption is a fixed function of disposable income and wealth, while portfolio allocation follows a Tobin-type mechanism based on relative returns and liquidity preferences. Households may take out personal loans to finance durable consumption or expenditure exceeding current income.
Contrary to a typical SFC model, private firms are disaggregated into 54 productive sectors based on IO data. Unless specifically affected by change in one of the scenarios tested, firms operate under fixed input proportions (Leontief technology) and constant returns to scale. Industries produce homogeneous outputs and set prices via mark-ups over unit costs, which include intermediate inputs, labour costs, and the depreciation of the capital stock. Firms adjust their capital stock toward a target capital–output ratio; this generates investment demand even when output is constant. Investment is financed through retained earnings, bank credit, and the issuance of shares purchased by domestic and foreign households.
Government consumption expenditure — both consumption and public investment — is exogenous. Revenues accrue from income taxes, VAT, import duties, and central-bank profits. Budget deficits are financed through the issuance of government bills. Central banks accommodate the demand for currency and purchase the portion of government debt not absorbed by the private sector. The policy rate set by the central bank determines the interest rates on loans, deposits, and government bills through sector-specific mark-ups. Commercial banks supply credit elastically: firms receive all the financing they require for production and investment. Deposits exceeding the volume of loans are placed in government bills; if loans exceed deposits, banks borrow from the central bank.
Ecological Block
The ecological sub-model follows recent advances in ecological SFC modelling. Waste generation, land use, and water use are tied to industrial production through sector-specific coefficients. In the baseline, waste flows are processed by traditional waste-management industries. In CE scenarios, new recycling/reuse channels are introduced. Industrial CO2 emissions depend on the use of non-renewable energy inputs, determined by energy-intensity coefficients, the share of non-renewables in each industry’s energy mix, and a uniform emissions factor. Accumulated emissions contribute to atmospheric concentrations, which feed into a simplified climate-response module.
Materials are disaggregated into ten categories: food, energy, wood, plastics, pulp, paper, metals, glass, cement, and construction. Material extraction and energy use reflect both new production and the recycling of socio-economic stocks. Renewable energy is replenished periodically, whereas non-renewables are depleted.
Data Collection and Calibration
Model simulation is carried out in an R environment, using EXIOBASE 3 v 3.8.2, with data calibrated for the baseline year of 2011. The original 164-sector, 49-region classification is aggregated into two regions (EU and rest of world) and 54 sectors, among which 13 sectors specifically produce goods based on re-processed material inputs.2 From EXIOBASE data we derive the technical coefficients, labour productivity, real wages, sectoral employment (including gender composition), final demand structure, emissions coefficients, and material-use data required to initialise the technological and environmental parameters. In turn, macro aggregates such as GDP, final demand components, trade flows, and gross output serve as calibration targets.
Remaining parameters are assigned through an evolutionary random-search routine (see Appendix 3 for calibration targets and goodness-of-fit details). The algorithm perturbs an initial set of parameter values, evaluates the resulting steady-state values of key variables against their targets, and accepts parameter updates only when the goodness-of-fit improves. This process continues until a satisfactory baseline is reached, subject to constraints ensuring economically meaningful outcomes.3 This calibration phase must also stabilise the system so that, at the moment policy shocks are introduced, the model is near a steady configuration. The resulting calibration yields a good but improvable match to observed data, with consumption slightly overestimated in the EU and investment underestimated in both regions.
References
Aguilar-Hernandez, G. A., Sigüenza-Sanchez, C. P., Donati, F., Rodrigues, J. F. D., Tukker, A. (2018). Assessing circularity interventions: A review of MRIO-based studies. Journal of Economic Structures, 8(1), 1–16.
Althouse, J., Guarini, G., Porcile, G. (2020). Ecological macroeconomics in the open economy: Sustainability, unequal exchange and policy coordination in a center–periphery model. Ecological Economics, 172, 106628.
Arranz, C.F.A., Arroyabe, M.F., Demirel, P., Kesidou, E., Panwar, R., Pinkse, J., 2026. Reconciling circular economy and net zero: Firm capabilities to resolve sustainability tensions. British Journal of Management, 00, e70061.
Barrie, J. et al. (2024). From roadmaps to regulation: global CE policy trends. Resources, Conservation and Recycling, forthcoming.
Berg, M., Hartley, B., Richters, O. (2015). A stock-flow consistent input-output model with applications to energy price shocks, interest rates, and heat emissions. New Journal of Physics, 17(1), 015011.
Bimpizas-Pinis, M., De Boer, B., Genovese, A., Jabbour, C.J.C., Khan, S.A.R. (2023). A systematic literature review on the environmental impacts of transitioning towards a circular economy. Journal of Cleaner Production, 405, 137056.
Campiglio, E., Dafermos, Y., Monnin, P., Ryan-Collins, J., Schotten, G., Tanaka, M., 2018. Climate change challenges for central banks and financial regulators. Nature Climate Change, 8(6), 462–468.
Carnevali, E., Deleidi, M., Pariboni, R., Veronese Passarella, M. (2019). Cross-border financial flows and global warming in a two-area ecological SFC model. Socio-Economic Review, 17(3), 617–648.
Carnevali, E., Deleidi, M., Pariboni, R., Veronese Passarella, M. (2020). A dynamic stock-flow consistent model with a full recovery of waste and a net-zero emissions target. Review of Political Economy, 32(4), 527–552.
Carnevali, E., Deleidi, M., Pariboni, R., Veronese Passarella, M. (2023). SFC models and the ecological transition. Metroeconomica, 74(4), 862–905.
Caverzasi, E., Godin, A. (2015). Post-Keynesian stock-flow-consistent modelling: a survey. Cambridge Journal of Economics, 39(1), 157–187.
Dafermos, Y., Nikolaidi, M., Galanis, G. (2017). A stock-flow-fund ecological macroeconomic model. Ecological Economics, 131, 191–207.
Dafermos, Y., Nikolaidi, M., Galanis, G. (2018). Climate change, financial stability and monetary policy. Ecological Economics, 152, 219–234.
De Boer, B. F., Rietveld, E., Rodrigues, J. F., Tukker, A. (2021). Global environmental and socio-economic impacts of a transition to a circular economy in metal and electrical products: A Dutch case study. Journal of Industrial Ecology, 25(5), 1264–1271.
Di Domenico, L., Barbieri Góes, M. C., Gallo, E. (2024). Distribution, capital intensity and public debt-to-GDP ratio: an input output-stock flow consistent model. Economia Politica, 41(2), 395–416.
Dorninger, C., Hornborg, A., Abson, D. J., von Wehrden, H., Schaffartzik, A., Giljum, S., Engler, J.-O., Feller, R. L., Hubacek, K., Wieland, H. (2021). Global patterns of ecologically unequal exchange: Implications for sustainability in the 21st century. Ecological Economics, 179, 106824.
Fevereiro, J.B.R.T., Kaltenbrunner, A., Kesidou, E., Veronese Passarella, M. (2023). A two-area ecological input-output stock-flow consistent model for circular economy analysis. Working Paper, University of Leeds.
Fevereiro, J.B.R.T., Lowe, B.H. (2025). Macroeconomic implications for the Global South of a green transition in the Global North. Ecological Economics, 237, 108691.
Geissdoerfer, M., Savaget, P., Bocken, N.M.P., Hultink, E.J., 2017. The circular economy – A new sustainability paradigm? Journal of Cleaner Production, 143, 757–768.
Godley, W., Lavoie, M. (2007). Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth. Palgrave Macmillan, Basingstoke.
Gräbner-Radkowitsch, C., Strunk, B. (2023). Degrowth and the Global South: The twin problem of global dependencies. Ecological Economics, 213, 107946.
Hardt, L., O’Neill, D. W. (2017). Ecological macroeconomic models: assessing current developments. Ecological Economics, 134, 198–211.
Hickel, J., 2020. Quantifying national responsibility for climate breakdown: an equality-based attribution approach for carbon dioxide emissions in excess of the planetary boundary. The Lancet Planetary Health, 4(9), e399–e404.
Hickel, J., Dorninger, C., Wieland, H., Suwandi, I., 2022. Imperialist appropriation in the world economy: drain from the Global South through unequal exchange, 1990–2015. Global Environmental Change, 73, 102467.
Hornborg, A., 2009. Zero-sum world: challenges in conceptualizing environmental load displacement and ecologically unequal exchange in the world-system. International Journal of Comparative Sociology, 50(3–4), 237–262.
Jackson, A., Jackson, T. (2025). Macroeconomic, sectoral and financial dynamics in energy transitions: a stock-flow consistent, input-output approach. Ecological Economics, 230, 108507.
Kirchherr, J., Reike, D., Hekkert, M., 2017. Conceptualizing the circular economy: an analysis of 114 definitions. Resources, Conservation and Recycling, 127, 221–232.
Korhonen, J., Honkasalo, A., Seppälä, J., 2018. Circular economy: the concept and its limitations. Ecological Economics, 143, 37–46.
Lenzen, M., Moran, D., Kanemoto, K., Geschke, A., 2012. Mapping the structure of the world economy. Environmental Science & Technology, 46(15), 8374–8381.
Leontief, W. (1936). Quantitative input-output relations in the economic system of the United States. Review of Economics and Statistics, 18(3), 105–125.
Leontief, W. (1941). The Structure of American Economy, 1919–1929. Harvard University Press, Cambridge.
Nikiforos, M., Zezza, G. (2017). Stock-flow consistent macroeconomic models: a survey. Journal of Economic Surveys, 31(5), 1204–1239.
Pettena, M., Raberto, M. (2025). Energy transition and structural change: a calibrated stock-flow consistent input-output model. Structural Change and Economic Dynamics, online.
Pollitt, H., Mercure, J.-F., 2018. The role of money and the financial sector in energy-economy models used for assessing climate and energy policy. Climate Policy, 18(2), 184–197.
Svartzman, R., Althouse, J. (2020). Greening the international monetary system? Not without addressing the political ecology of global imbalances. Review of International Political Economy, 28(4), 966–989.
Thomsen, S. F., Raza, H., Byrialsen, M. R. (2025). An assessment of carbon taxation policies: the case of Denmark. Ecological Economics, 238, 108741.
Valdecantos, S., Valentini, S. (2017). Financialization and capital accumulation dynamics in a post-Keynesian input-output macro model. Working Paper, Universidad Nacional de General Sarmiento.
Veronese Passarella, M. (2023). Technical change and the monetary circuit: an input-output stock-flow consistent dynamic model. Quaderni del Dipartimento di Economia Politica e Statistica — Università di Siena, n. 903.
Veronese Passarella, M. (2025). Destabilizing a stable economy: Minsky meets Graziani’s monetary circuit. International Journal of Political Economy, 54(3), 338–355.
Volz, U., Böhnke, J., Knierim, L., Richert, K., Röber, G.-M., Eidt, V. (2015). Financing the Green Transformation: How to Make Green Finance Work in Indonesia. Palgrave Macmillan, Basingstoke.
Wiedmann, T. O., Schandl, H., Lenzen, M., Moran, D., Suh, S., West, J., Kanemoto, K. (2015). The material footprint of nations. Proceedings of the National Academy of Sciences, 112(20), 6271–6276.
Social Block
Although households are modelled as an aggregate sector, the framework tracks the distribution of income and wealth between workers and rentiers, both before and after taxes. This allows the model to assess distributional consequences of alternative CE trajectories. Employment is determined by industry-specific labour demand. Population dynamics, and thus the size of the labour force, follow exogenous demographic growth and net immigration inflows. Cross-regional migration reacts to population size, unemployment differentials, and wage gaps.