Does polycentric climate governance drive the circular economy? Evidence from subnational spending and dematerialization of production in the EU

Abstract

Subnational governments have progressively raised their share in the global flow of resources, knowledge, and standard-setting power to combat climate change, leveraging the channels of transnational networks and commitments to carbon neutrality, often exceeding the ambitions of central administrations. This paper explores whether polycentric climate governance, characterized by overlapping decision-making across governance levels, accelerates the transition to the circular economy. Using a novel dataset on SNG climate expenditures spanning 30 European countries from 2001 to 2019, we assess their impact on resource productivity (RP)—a key indicator of the circular economy, defined as GDP per kilogram of raw material consumption. The analysis employs a Panel-Corrected Standard Errors (PCSE) model to address heteroskedasticity, serial correlation, and cross-sectional dependence. To further ensure robustness, we implement instrumental variable techniques (IV-GMM), leveraging geographical fragmentation and climatic variation to address potential endogeneity. The results demonstrate that SNG climate-sensitive expenditures significantly enhance RP, with every $100 increase in per capita spending leading to measurable improvements in resource efficiency. In contrast, CG spending exhibits limited or even negative effects on RP, underscoring the unique capacity of SNGs to foster economic dematerialization. Mechanisms driving these effects include investments in waste management, energy, and transport systems, where SNGs outperform CGs in fostering localized and tailored solutions. These findings highlight the importance of empowering SNGs within polycentric governance frameworks to advance the circular economy and achieve sustainable growth. The study contributes to the literature by offering one of the first empirical analyses linking SNG spending to the circular economy.