Sizing the Value Gap

Measuring value loss in the economy is a complex and multifaceted task. Conventional economic indicators—most notably Gross Domestic Product (GDP)—capture the monetary value of final goods and services produced over a specific period, but they fail to account for waste generation, the physical deterioration of fixed capital or the depletion of resources required to sustain that output, for example. This results in a critical gap in understanding value creation and economic performance. To better understand the performance of today’s global linear economy, it is necessary to account not only for value creation but also for value loss. This analysis thus seeks to help close this critical gap in understanding economic performance. To do so, the Value Gap translates inefficiencies in material use into monetary terms, making visible how much avoidable value is lost each year in a linear, take-make-waste paradigm, and how much of that loss could be avoided and value preserved through a more circular approach to material management.

Introducing the Value Gap

This chapter provides an overview of the methodology, data and tools used to measure the Value Gap. For more information, refer to the Methodology Document.

In operational terms, for practical reasons, the analysis adopts a deliberately pragmatic and largely business-as-usual approach to value measurement. This is opposed to more goal-oriented measurements such as the Human Development Index or Happiness Indices, which involve multi-dimensional frameworks that also quantify human well-being and life quality. To make value measurable on a global scale, it is primarily scoped as economic value expressed in monetary terms through prices. Within this framing, the analysis distinguishes between two main forms of value:

• Functional value refers to the utility embedded in materials, components, and products (what they are capable of doing) captured through their market value and considered as the main determinant of economic value creation.

• Created value encompasses the broader environmental and social impacts, both positive and negative, generated through economic activity, which largely remain external to prices under the prevailing linear paradigm (and are therefore at most only partially captured). [9] Examples include negative externalities such as pollution, as well as positive contributions like the provision of public goods such as public education, clean air, and public infrastructure.

In this analysis, inefficient material use (including for energy purposes) is treated as a loss of functional value during production, use, and end-of-life. Losses in created value are partially accounted for through the environmental and social costs of greenhouse gas emissions, as well as the environmental costs associated with unsorted waste. [10] This is how environmental and social costs, which are usually left out of market prices, are brought into the calculation in monetary terms.

Unpacking the Value Gap

The Value Gap represents the total avoidable monetary value lost in the economy due to linear practices, such as material losses and waste (including energy and food), the physical deterioration of assets, and unpriced environmental and social externalities. It is expressed as an absolute figure (in trillion euros) and can also be presented as a ratio of total value loss to total value creation, using GDP as a proxy for the latter. In this way, the Value Gap indicates how much value is lost to linearity for each unit of GDP generated. To understand this relationship, it is first necessary to examine how value creation is currently measured.