The circular economy today represents a major strategic business opportunity to expand the European market, secure significant economic returns and reduce our dependence on limited global resources. At the same time, it is it is a key tool to reduce the enormous pressure on our climate and environment. At a time when Europe faces geopolitical risks and extremely volatile commodity markets, the transition from a linear production model towards a circular economy is an absolute must to strengthen our long-term industrial resilience and competitiveness, as highlighted for example by the Clean Industrial Deal. By reducing the need for primary extraction, keeping materials in circulation for as long as possible and strongly supporting innovation, we can ensure that Europe remains at the forefront of sustainable global markets.

Economic opportunity versus slow progress

The consistent application of circular economy principles is not just about meeting environmental obligations, it is primarily a huge opportunity for economic growth. It is estimated that this transition could increase the European Union's GDP by 0.5 % by 2030. The European remanufacturing market alone has the potential to triple its volume in the near future, growing from the current €31 billion to €100 billion in 2030. The transition to circularity will also create around 700,000 new green jobs, mainly in the labour-intensive repair and recycling sectors, with up to 500,000 of them in the remanufacturing industry. For many European manufacturing companies, which today spend around 40 % of their total costs on input materials alone, circular models would mean a strong stabilisation of profitability and a reduction in cost exposure to primary raw material price fluctuations. If we do it right, up to 75 % of the EU's total demand for clean technology metals could be covered by domestic European recycling by 2050, drastically reducing our strategic dependence on imports.

Despite these undeniable macroeconomic benefits, current progress in the circular economy is critically insufficient. Linear behavioral models („extract – produce – discard“) continue to dominate the EU, characterized by enormous demand for materials, the dominance of products with artificially shortened lifespans, and ever-increasing waste generation. The share of circular materials used in the EU (i.e. the share of materials originating directly from recycling) increased by only a very weak 1.5 percentage points between 2010 and 2024. This stagnant development is therefore very far from the goal of the Clean Industry Agreement, which envisages doubling the rate of use of circular materials to the target of 24 % by 2030.

Investment Gap: Where is the funding missing?

This limited progress highlights a very serious structural mismatch between political ambitions and the real mobilisation of finance. To achieve the EU's objectives, we need to accelerate and scale up investment at an unprecedented pace. According to the latest and most comprehensive estimates from the European Commission (EC) and the European Investment Bank (EIB), private investment in circular activities has effectively stagnated at around 0.8 trillion GDP since 2019.

The EIB and EC study clearly shows that to fully implement the already adopted circular economy policies, we need to increase annual investments by up to 68 %. In absolute terms, this means that between 2025 and 2040 we need to find an additional 82 billion euros per year. The total estimated investment gap over this period thus reaches a monumental €1,229 billion. The largest investment gaps were identified in the earliest stages (product design) and at the very end of the product life cycle. This deficit in input design is very dangerous, as it is the design phase that determines up to 80% of the overall environmental impact and durability of a product. The priority sectors with the deepest capital needs are construction, textile industry, batteries and vehicles. To illustrate, the construction sector requires an astronomical €7.7 billion per year in the life extension and consumption phase alone, while the battery and vehicle sectors require extraordinary investments across all steps of the value chain. It is important to keep the cost of our inaction in mind. The Environmental Implementation Review estimates that the benefits and gains we are missing out on due to not achieving the circular economy objectives are around €84.5 billion per year. The costs of inaction thus significantly exceed the price of the necessary investments in sustainable solutions..

Funding Barriers: What's Really Hindering Progress?

A smooth transition to a circular economy encounters rigid structural economic and financial barriers that complicate access to capital for sustainable companies. Among the main financial obstacles The lack of adequate investment definitions is one of them. The current EU Taxonomy for Sustainable Investments focuses mainly on waste management and partly on services, while failing to classify design activities or innovations that actively prevent waste, or not covering areas with a huge impact, such as the textile industry. Even sincerely environmentally focused investors often overlook circular businesses in the statistics.

Another fundamental problem is the extremely high risk perception of credit institutions. Circular models are often in the early stage of technology, require high initial investments and have a longer payback period. Traditional risk-management tools of banks, anchored in classic solvency metrics and assessment of physical guarantees (collateral), are not prepared to value modern innovative models, such as the sale of „product as a service“ in the sharing economy. This problem is further exacerbated by the fact that while traditional entities and grants mainly finance capital expenditures (CAPEX), businesses in the circular sector suffer from undersizing due to the massive operating costs (OPEX) necessary for complex reverse logistics and reverse supply chains.

No less serious are direct economic obstacles, namely market failures in the form of unvalued externalities. The social and environmental costs of classic linear production – in the form of unlimited emissions or high waste generation – are not freely passed on to market prices. Therefore, traditional, planet-unfriendly models are more attractive in terms of price, which grossly disadvantages circular products. The crisis of European plastic recyclers, who are losing out to cheap imports of materials of unclear origin, which often falsely declare the share of recycled material, serves as a warning example. The market also suffers from the problem of „split incentives“, when the first player in the chain has to pay for expensive circular technology or infrastructure, while the financial profit from the final recycling and sale is attributed to someone else entirely, thus eliminating any private incentive for investment. Moreover, our current tax system literally discourages circular strategies. The current VAT and labour taxation system indirectly penalises repair and remanufacturing services. The costs of labour required for repairs, taxed at the full rate, often exceed the savings from mass machine production of a brand new product, which has understandably led to a long-term decline in consumer demand for repair services since 2017.

The practical impact of these barriers was demonstrated by the European demonstration project ReCiPSS, supported by EU funds with the amount of 6.8 million euros. The project proved that if white goods (washing machines, dryers) are sold via subscription (pay-per-use) and car parts are fully reconditioned, it is possible to drastically reduce material demand and emissions, and the model is also economically viable. However, it was subsequently suffocated on the market by meaningless regulations, duplicatively applied taxes on reconditioning and complicated legal definitions of waste, which hinder innovation and penalize legislation in favor of the old, linear approach to production.

Catalysts and Solutions: How to Unlock Change?

Systemic treatment of this condition requires decisive interventions through the deployment of functional economic and financial instruments throughout the entire product chain. From the perspective of economic levers is the primary objective to make prices real. Extended Producer Responsibility (EPR) must directly, financially, reward designs that guarantee longer durability and real, high recyclability through modulated fees, not just the fulfillment of minimum administrative requirements. The introduction of differentiated taxes, VAT relief for repair services and state support programs (repair vouchers) will provide an immediate stimulus to customer demand and tip the scales from buying unnecessary new goods to maintaining existing ones. Since the so-called green public procurement (GPP) covers a huge part of the market (about 14 % of EU GDP), procurers at state and local level must by law require circular criteria, especially in tenders for textile products, vehicle fleet maintenance and plastic components. At the end of the day, there must be a strong charging of landfill and incineration, the implementation of strict fees for waste exports from the EU, and the expansion of Deposit Return Systems so that domestic processing and recycling capacities remain fully utilized. The upcoming Circular Economy Act should lend the necessary framework of a single internal market for seamless trade in secondary and critical raw materials to all of this.

In context financial incentives The market cannot take the first step on its own – public money must act as a catalyst. So-called blended finance, through instruments such as InvestEU, combines public grants, guarantees or subordinated debt and assumes initial losses with the aim of so-called de-risking. Once the public fund takes the first step, it subsequently attracts private capital, as the overall level of perceived risk for early but expensive innovations is significantly reduced. An excellent, directly working example of such an approach is demonstrated by the European Investment Bank (EIB). Between 2020 and 2024, the bank, using its own screening based on the Taxonomy, sharply increased its investments, supporting 153 circular projects with a total volume of €5.1 billion. Expert advice and money help to promote expensive recycling infrastructure or lean production so that they are sufficiently „bankable“ from the market perspective. For the credit ecosystem to thrive, it will be necessary to create so-called performance-oriented loans on a public scale, introduce green municipal bonds into urban logistics, and offer companies special insurance tailored to the risks of renting goods in the sharing economy. Finally, strong education on both sides – corporate and financial – will be key. Financial managers need to build „circular literacy“, deepen their understanding of the intangible assets of innovative services, and learn to read standardized reports under the Corporate Sustainability Reporting Directive (CSRD), otherwise they will not be able to properly assess the creditworthiness of green business plans.

The price of inaction

Closing the gap that currently exists in the supply of finance to the circular economy sector no longer requires just cosmetic changes to partial legislation. It requires a complete, system-wide transformation of the underlying economic conditions that today criminally favor a linear system of extraction, short-term consumption and waste accumulation. Acute systemic obstacles in the area of information asymmetry for investors, partial definitions in the outdated financial Taxonomy, as well as an unfair market environment with a poorly set VAT, are certain to be beyond the power of market forces alone. If European states swiftly use targeted public investment to protect projects in their early stages and align procurement regulations and incentives with the requirement for long-term durability of goods, new, massive and sustainable economic returns will be unlocked for Europe. While we are faced with the urgent task of finding an additional €82 billion per year, it is essential to keep in mind the most important number: by passively waiting, we are losing more than €84.5 billion in market and economic value every year. With well-deployed instruments and political commitment, investing in the circular economy is therefore undoubtedly the cheapest and most economically sensible path for a safe and resilient European market of the future. JRi&CO2AI

Source: Unleashing the circular economy: investment needs, obstacles and enabling conditions