What are the challenges – and opportunities – of moving towards a circular economy?
What are the challenges – and opportunities – of moving towards a circular economy?
Sustainability is not yet a winning proposition. Since World War Two, waste volumes have been increasing in all our shared spaces: space waste has become a hazard for space exploration, life in the oceans is jeopardised by indigestible plastic particles, the CO2 level of the atmosphere keeps rising.
These phenomena are the result of a linear and globalised ‘throughput’ economy, which ends at the point of sale with manufacturers passing ownership and liability to the consumer.
A circular economy enables us to change this. It rests on five pillars:
Nature: the need to conserve nature and the natural environment as the basis for life on Earth, considering nature’s carrying capacity.
Toxicity: the need to conserve the health and safety of people and animals by not releasing toxic agents into the environment.
Resource productivity: the need of industrialised countries to dematerialise their lifestyle; a quantitative issue, measurable in megatonnes, to reduce resource consumption by 90 per cent through daring, innovative and creative business strategies.
Social ecology: the need to reinforce the fabric of societal structures – including peace and human rights, dignity and democracy, employment and social integration, security and safety – based on sharing and caring.
Cultural ecology: the need to embrace education and knowledge, ethics and culture, attitudes towards risk-taking, and values (of national heritage and other assets) at the individual, corporate and state level.
The circular economy is based on an intelligent, decentralised use of water, energy, materials and people – “economics as if people mattered” as Fritz Schumacher put it – and a search for holistic solutions.
Today, public policy does not guide individuals to instinctively choose the path of sustainable reuse. Nor does it incite manufacturers to change course towards strict producer liability, as imposed on the tobacco and asbestos industries in industrialised countries.
Social and cultural ecology differ regionally: the idea of a ‘zero’ target has worked to promote zero accidents and zero casualties. But zero waste is only an inspiring objective in Asian cultures. In the West, efficiency is a better incentive, “turning a tonne of resources into a tonne of product” was the motivating challenge given to DuPont managers in the 1990s to achieve zero waste.
Circularity is the basis of all life on Earth. But we need to distinguish between different kinds of cycles:
Natural cycles know no waste – all waste is human-made. The common denominator of cycles is that they focus on stocks: be that by preserving biodiversity, educating people, giving away surplus food, managing the built environment or treating cities as urban mines.
These are all forms of an intelligent, decentralised stock management. Economic growth is measured as the increase in quality and quantity of stocks, assets and capitals – not higher throughput (in other words, GDP).
Billions of second-hand banknotes and coins are bought and sold daily worldwide, as are millions of used shipping containers, which are rented or leased by logistics companies. These circular economies are omnipresent but not identified as such because they are familiar, local and low key. They need little publicity, packaging or mass transport. By contrast, the linear industrial economy is deafeningly loud and pervasively visible through its publicity and through the movement of goods.
Circular-economy champions are manifold: second-hand markets such as auction houses, eBay and antique dealerships. Repair champions can be found in the innumerable small and medium-sized enterprises (SMEs) maintaining equipment, vehicles, goods, garments, infrastructure and buildings, but also in non-commercial self-help groups, such as the hundreds of repair cafés in the sharing society or websites such as www.ifixit.com.
Caring and good husbandry are the guiding principles of any circular economy of stocks or capitals, be they natural, human, cultural or manufactured. In economically struggling nations, the circular economy was initially a strategy to overcome poverty and scarcity. Then, local services of reuse, repair and remanufacture of objects developed. Used goods such as steel barrels were transformed into kitchenware or small water turbines to produce local electricity.
Meanwhile, the linear industrial economy is necessary to create stocks to overcome shortages of shelter, food and manufactured objects, until sufficient stocks exist. In markets near saturation, manufacturing no longer increases, but replaces, existing wealth, and the circular economy is more efficient in managing stocks.
The linear industrial economy is complementary to the supply of components of innovative technology when it comes to upgrading existing stock, such as reprogrammable microchips.
In microeconomic terms, the societal advantages of a circular economy of manufactured stocks are:
Scientific, technical and commercial innovation in four domains drive the circular economy:
Economic actors need to change their business models to include the factor of time, if they are to profit from the longer service lives of goods.
The circular economy substitutes manpower for energy and material – the opposite of mechanisation. Macroeconomic studies by the Club of Rome think tank in seven EU countries found that a shift to a circular economy would reduce national greenhouse gas emissions by 70 per cent and grow the workforce by four per cent.
Human capital is a resource that has a qualitative component. Governments can increase its quality through education and vocational training, but they often ignore inconvenient facts such as:
Do governments therefore have a moral obligation to promote the use of human capital before any other resource?
Policymakers can promote the circular economy by adapting the framework conditions accordingly. Sweden is the first country to do this – the Swedish Parliament decided at the end of 2016 to make the labour expenses for repairs tax-deductible, and to reduce VAT on repairs by 50 per cent from 25 per cent to 12 per cent.
Governments should not tax renewable resources including human labour, but instead tax loss of stocks, waste and emissions. This is taxation as if human labour mattered. Policymakers should also levy value-added tax only on value-added activities. The value-preserving activities of the circular economy should be exempt.
Not taxing work (human labour) will foster, and reduce the costs of, all activities based on caring, be it looking after human, natural, cultural or manufactured capital. Many of these caring activities are the responsibility of, and paid for by, nation states. This could lower non-taxed wages – also reducing administrative burdens. Users also have a role to play in job creation – more than half of all money spent on a 30-year-old car is the cost of local labour.
The performance economy
The most sustainable business model of the circular economy is the performance economy. It retains the ownership of goods and embodied resources, and turns consumers into users.
Economic actors in a performance economy have to internalise the liability and costs of risk and waste, but gain future resource security (‘the goods of today are the resources of tomorrow at yesterday’s price’). They increase their profitability by developing system-based solutions and exploiting sufficiency and efficiency, decoupling economic success from resource consumption and increasing competitiveness.
Lighthouses are a good example of system-based solutions: they have contributed more to the safety of shipping and sailors than any technical improvement to ships. They are durable, reliable and upgradeable in response to technological progress.
The performance economy is the preferred business model of service industries, digital businesses and the internet of things. Manufacturers of durable goods and pharmaceuticals, the United Nations Industrial Development Organization for chemical leasing, and public authorities for infrastructure have started adopting it.
The performance economy is competitive because it introduces a new notion of time and quality. In the words of Aristotle: “Real wealth is based on use, not ownership”.