The circular economy is pitched as an answer to the world’s sustainability challenges – and more. How does circularity work? And is it actually achievable?
For many, the concepts associated with sustainability are fairly new. While some of us have been recycling for years, it’s only recently that we have begun to question the flights we take when we go on holiday, our commute to work, or our steak on a Friday night. Many businesses are just getting to grips with the need to cut greenhouse gas emissions, improve ethnic diversity in their workforce and shatter the glass ceiling that keeps women out of many boardrooms.
And now there’s something else for everyone to think about: circularity. As a concept, the circular economy is simple enough to explain to a child: it’s how the natural world works. Take the water cycle, for instance. Water moves from the sky to the land and back again – nothing is wasted; everything is used again. Or when a tree falls in the woods, it is broken down by various organisms, eventually becoming nutrients for other plants.
So far, so straightforward. But when you apply circularity to an individual company, an entire industry or a national economy, it becomes enormously complex. It requires a rethinking of how we buy and consume, almost every business practice and relationship, and the fundamental drivers of government policy. Some believe circularity is actually incompatible with capitalism and economic growth, the cornerstones of human activity over the past few centuries.
What’s the point of the circular economy?
Before we get to the implications of the circular model, it’s important to understand what it’s for. Circularity is often mentioned as the next step – or even a giant leap – in sustainability. Certainly, it has huge benefits for the environment and a significant ethical dimension. The Energy Transitions Commission, a body partly funded by energy companies, estimates greater circularity could reduce CO2 emissions from the plastics, steel, aluminium and cement industries by 40% globally by 2050.
Marc Engel, chief supply chain officer at Unilever notes that combining circular economy and net-zero approaches to carbon creates a significant opportunity to accelerate climate action. “A focus on energy efficiency and decarbonisation alone in a system where so many of our resources exist in a take-make-and-throwaway economy does not meet the challenge,” he explains. Harald Friedl, CEO of Netherlands’ based social enterprise Circle Economy, says circularity is the only way to keep global heating to 1.5 °C above pre-industrial levels.
However, circularity is not just about protecting the environment, improving people’s wellbeing or other aspects of sustainability. Instead, the circular economy rethinks how we use scarce raw materials – and how we reuse them, according to Joost van Dun, circular economy lead at ING. In this sense, it is an economic, rather than an environmental, model and a tool to achieve sustainability, rather than a goal itself.
The Ellen MacArthur Foundation, which champions circularity, contrasts our current ‘take-make-waste’ linear economy with a circular model that decouples economic growth from the consumption of finite resources and builds economic, natural, and social capital. The Foundation says the circular economy can be summarised in just three principles: design out waste and pollution; keep materials and products in use; and regenerate natural systems.
How does the circular economy work in practice?
The circular economy requires enormous change, especially among companies. Adopting circularity’s zero waste philosophy of reduce, reuse and recycle – what ING’s chief economist Mark Cliffe calls the “veganism of sustainability” – is easier said than done. Companies need to rethink design, sourcing, procurement and production. Supply chains all the way back to the wells, fields, mines and quarries where resources originate may need to be reconfigured.
While that challenge sounds enormous, it doesn’t have to happen overnight. “It is a step-by-step process that requires pilots or implementation of circular principles by individual business units,” explains van Dun.” Even at companies such as Philips, where the circular economy is a top priority, revenues generated by circular business models are expected to be just 15% of the total stream by 2020, he adds.
Moreover, there is no single ‘right’ way for companies to go circular. There are five circular business models and companies can deploy any combination of them.
One model is about product re-use, resource recovery and recycling and refurbishing of components. As part of their sustainability strategies, many companies already do plenty of this. As long ago as 2008, Renault created a specialised subsidiary to manage copper, steel, aluminium, plastics and other waste materials and parts from end-of-life vehicles.
Another model is circular supplies, where renewable, recyclable or biodegradable resources replace finite resources. Again, many companies have embraced this idea: 60% of the raw materials used by IKEA are now from renewable sources and a further 10% are pre- or post-consumer recycled material. “We are committed to using only renewable or recycled materials to make our products by 2030,” says Lena Pripp-Kovac, head of sustainability at the company.
A third circular model changes the way companies think about products, with a view to extending their life. As high-end outdoor clothing brand Patagonia (which has embraced the circular economy), notes “the single best thing we can do for the planet is to keep our stuff in use longer”. The European Remanufacturing Council, launched in January 2017, aims to extend the life of components and products through remanufacturing, which currently represents less than 3% of manufacturing activity in Europe. Members such as IBM and Lexmark are working to develop, promote and exchange best practice.
Another model, which has gained plenty of attention, is product-as-a-service. For instance, instead of just selling tyres, Michelin has signed contracts with transport companies to provide a “tailored tyre management solution” over a set period. Sharing platforms, such as Spain’s SocialCar and pan-European parking space service Parclick, can also be circular as they increase the use of existing resources. In other words, one of the hottest sectors of recent years is circular: “people are often surprised by that,” says van Dun.
Challenges are legio
According to ING’s Cliffe, there are six principal challenges facing businesses when moving to a circular model. On the demand side, there is limited appetite to pay for circularity among consumers, especially in emerging markets. There are also strong counter trends: fast fashion is gaining ground and same day delivery is highly valued by consumers. And from an investment perspective, there remain doubts over whether investors can achieve higher returns from circular economy companies; if they can’t, capital for investment is going to be a problem.
Meanwhile, on the supply side, virgin raw materials are cheaper in many instances - though not all: recovered PET (polyethylene terephthalate), used for drinks bottles, costs around €250 per tonne, compared to roughly €1,200 per tonne for virgin PET. In addition, the scale of the transformation required to become circular at a time of broader technological and business model change is daunting. Moreover, companies will have to learn to operate in new ways, including collaboration with competitors, that are contrary to existing business practices and mindsets.
Another challenge is that significant innovation is necessary to make circularity economically viable. There’s a huge infrastructure gap to be overcome if circularity is to work effectively, for example. “The creation of a more widespread trade in used materials would perhaps be the greatest boost to the advancement of the circular economy. At the moment there is uncertainty about the value of resources and a secondary market [is necessary to] provide clarity,” van Dun explains.
And these are just the primary challenges. As Ambika Jindal, lead for the Valuing Water Initiative at the Netherlands’ Ministry of Foreign Affairs notes, circular models tend to have numerous secondary consequences and considerations. “In nature, the water cycle is inherently circular,” she says. “But we interrupt it for industrial, consumer and agricultural purposes – the latter responsible for 70% of freshwater use – and make it linear.”
However, solutions to address water use in agriculture highlight the potential for unintended consequences. Any effective solution must encompass the entire water cycle. “For example, drip irrigation might appear to be a simple fix for the huge amounts of water wasted in agriculture but it ignores the impact this would have on groundwater levels,” says Jindal. “Similarly, many solutions that try to recover water use from agriculture need to deal with the problem of pesticides run-off, which significantly restrict re-use opportunities.”
The social implications of tackling water challenges must also be addressed, she says. “Often we blame agriculture and farmers for the water challenges we face and expect them to take the full burden of sustainability. However, in many value chains farmers face severe economic pressure and can barely make daily wages; they do not have the luxury to value water in the short term, although they know they run a risk in the long term.”
A different type of growth
While there is a vocal contingent of environmentalists (and some circular economy proponents) who believe the global economy has to stop growing if there is to be any chance of achieving sustainability, this is not the mainstream view.
Van Dun is adamant: “Circularity doesn’t require economic growth to end; growth is still essential to take people out of poverty. Instead, the circular economy seeks a better way of growing the economy.” Indeed, by enhancing productivity, circularity could boost growth while making it more sustainable in the long term by decoupling it from resource use. A report by Business in the Community’s Circular Economy Taskforce found that the circular economy could increase EU’s GDP by 8% by 2050.
UN Environment goodwill ambassador and solar aviation pioneer Bertrand Piccard differentiates between today’s model of quantitative growth and the qualitative growth delivered by the circular economy. “Qualitative growth means that we can create jobs and make profit by replacing the old, outdated, inefficient and polluted infrastructures by new modern and efficient ones,” he says.
Similarly, the idea that the circular economy requires the world to back away from innovation – as groups such as Extinction Rebellion, which brought London to a halt in October, would argue – is mistaken. Instead, fourth industrial revolution technologies – such as artificial intelligence, biotech and robotics – will be a crucial enabler of the circular economy. “It’s true that innovation can create waste through competition and redundancy but technology is the only way to develop the solutions necessary for circularity,” says van Dun.
For example, the product-as-a-service model is highly dependent on asset tracking and measuring usage, and remote maintenance requires that products are connectable; therefore, the internet of things could be important, van Dun says. “Similarly, 3D printing needs feedstock; circular substitutes and models will be important.” And AI can increase circularity by helping businesses and individuals to manage resources in a more efficient way, collating, analysing and interpreting environmental data, and democratising sustainability knowledge, according to Dan Botterill, CEO of UK-based consultancy Ditto Sustainability.
Just getting started
According to the Circularity Gap Report, published last year by Circle Economy, the world economy is currently only 9.1% circular. As van Dun concedes, the level of knowledge among companies about the circular economy differs considerably; some are unfamiliar with it. In other words, we’re still at the beginning of the transition to circularity.
While much of the work of creating a circular economy will fall to companies, government has a major role to play in creating the right environment for it to flourish. That means putting in place incentives such as subsidies and setting targets to spur companies into action. “The Netherlands’ government has set a target of 2050 to be fully circular and 2030 to reach a halfway point,” notes van Dun. “It’s important to have a point at the horizon to set the wheels in motion.”
Van Dun says that some laws may also need to be changed. “Consider, for example, the value development of products. In the current linear economy we depreciate products in a certain period,” he explains. “In the circular economy we’re focusing on keeping products as long as possible in the loop and on retaining value. This has implications for the rules concerning valuation and depreciation; accounting rules need to be adjusted.”
Governments must tread carefully when laying the foundations for the circular economy, however. Van Dun says that decisions about setting prices or introducing taxes on raw materials to encourage a switch to the circular economy (or lowering taxes on refurbishing products or repairs) need to be sensitively handled.
Banks and other finance providers also have an important role to play in accelerating circularity. “Banks can help to develop new business models that recognise the value inherent in circularity and distribute the risks and opportunities of new circular propositions fairly across the value chain,” says Mayke Geradts in sustainable finance at ING. ING realised that the market lacked guidance on how to uniformly apply circular economy thinking to the provision of debt and equity finance. So, working with other banks, it has devised circular economy finance guidelines as a joint framework to promote understanding and clarity.
The role of individuals in building a circular economy shouldn’t be overlooked. Given its complexity – and primary relevance to businesses – it’s unlikely today’s climate strikes will morph into marches demanding a circular economy. As a concept, circularity may never achieve widespread recognition among the public. But that’s not to say that a more circular economy won’t result from public pressure for action on the climate crisis and other issues – remember, the circular economy is as much a tool as a destination.
At the same time, governments can help to motivate individuals to change their behaviour in ways that encourage circularity. Dr Roland Mees, director, sustainable finance at ING, says that human beings are motivationally weak. “We know what to do as a society but often can’t relate or respond to it as individuals. We therefore need nudging strategies to encourage positive behaviour.”
In the Netherlands, one government department has said all meals will now be vegetarian unless people specifically ask for meat. “The principle of freedom of choice remains intact, but because requesting the less environmentally-friendly choice requires additional effort, there is likely to be an impact on meat consumption,” says Mees. It’s only a small change, but with the right nudges, we might all soon be helping the world make progress towards circularity.