The Rise of the Circular Economy

June 20, 2017
Editor(s): Daniel Pederick
Writer(s): Oliver Thorne, Patricia Nunga, Sarah Tan

Over 2.12 billion tonnes of waste is generated globally each year. Some of this waste is recycled, but a lot of it is dumped, causing problems for the environment and the population (The World Counts, 2017). A major push has begun to reuse a greater percentage of this waste in favour of environmental protectionism and resource allocation.

Denmark, for example, reformed its resource strategy in 2013 and passed legislation requiring all waste to be either treated as resources to be recycled or reused. Targeting a 50% recycling rate of household items, the government poured significant investment into incineration plants. Present measures such as planning more advanced return systems for a variety of products, including clothing, electronics and rare minerals, are currently underway so that each element in a product can be reused in new production (Braw 2014).

As both developed and developing economies begin to recognize the potential benefits of reusing the planet’s scarce resources, more and more solutions-centric schemes and technologies are being analysed around the globe to reduce waste and scrap the ‘take-make-consume-dispose’ approach to production. This concept is known as a circular economy, a regenerative system that aims to minimise waste and emission, whilst simultaneously decreasing resource input, by closing production loops through recycling and reusing waste and materials.

That is, more than seven billion people share the planet’s limited resources.

 

What is a circular economy?

As the world industrializes, many economies are faced with the challenge of adopting resource efficient technologies. With the current patterns of consumption and production, cheaper and more convenient methods prove to be unsustainable as demand and supply reach their natural limits. Hence, the growing significance of ‘living well within the limits of the planet’ has resulted in the European Union and other nations’ goals of contributing to a variety of production schemes that target conservation and resource maximization (EEA 2016). Circular economies are the product of designing processes aimed at resolving the natural opposition between capital and consumption.

The circular economy is one that takes measures towards increasing the share of renewable and recyclable resources, whilst advocating methods that conserve the environment and maximise the use of capital. The European Environment Agency (EEA) maintains in its EU 2020 strategy that this necessitates examining elements of the value chain such as product design and production processes ranging from business models to consumption patterns (2016). These practices can effectively reduce emissions, and retaining the life and value of products prevents the over-generation of waste while still creating sources of revenue for businesses. With its aims of maximizing material productivity, circular economies initially appear as a promising solution to satisfying consumption demands without crossing environmental boundaries.

Figure 1: How a circular economy functions.

(“Circular Economy System Diagram – Ellen MacArthur Foundation”, 2017)

 

Benefits of a Circular Economy

Materials and resources that are in use for a longer period within the economy have more value extracted from them within the circular economy (“Explainer: What is a circular economy?” 2017). But how exactly does the circular economy do this?

One way that the circular economy does this is by focusing on the use of renewable energy – on sources that are infinite such as solar energy, hydropower and many more. This is enabled by a reduction of threshold energy levels required by a restorative, circular economy.  Take the agricultural production system for example. It runs on current solar income while “significant amounts of fossil fuels are used in fertilisers, farm machinery, processing and through the supply chain” (“Characteristics Of A Circular Economy”, 2017) in the operating system globally. Instead of using fossil fuels, we could use food waste which can be reduced, reused and recycled for its nutrients as biofuel and fertilisers throughout the supply chain.

Within Australia, some states, governments, and local communities have even begun using food waste instead of fossil fuels through initiatives such as the Sustainability Victoria programme and waste treatment facilities such as South Australia Water’s Glenelg wastewater treatment. This is Australia’s first co-digestion facility, and was commissioned in 2013 (“Australian communities are fighting food waste with circular economies”, 2017).

Furthermore, the circular economy can preserve and enhance natural capital by encouraging flows of nutrients within the system. Thus, this creates conditions that allow for the regeneration of resources in the biocycle which diminishes the wastage of biological materials and accelerates the decomposition process of these materials.

The circular economy theoretically also optimises resource yields for the technical components of products by deliberately designing these technical components to fit within the technical cycle, thus, eliminating any waste within the technical cycle (“Characteristics Of A Circular Economy”, 2017). Products whose technical components consists of non-biodegradable materials such as polymers, alloys and other man-made compounds, are devised to be disassembled and regenerated at the end of its useful life so that they can be reused as parts of the new, identical products. Thus, non-biodegradable technological waste and toxic waste are simultaneously reduced within the circular economy. This way of closing the loop within the linear economy transforms it to become a circular economy that can maintain valuable finite substances.

An example of an industry that can make use of this feature of the circular economy is the automotive industry, and particularly the luxury automotive industry which has the necessary resources and manpower to easily enable this closed-loop recycling. According to experts Mark Esposito, Khaled Soufani and Terence Tse, luxury automakers should ideally establish programmes that more proactively collect end-of-life vehicles directly from end users and provide greater incentives for their customers to participate in these programmes so that materials eligible for closed-loop recycling can be directly extracted and remanufactured into new vehicle components (“How luxury carmakers can reduce waste and improve efficiency”, 2017). Luxury automakers can also offer rental of the vehicles to its customers which benefits these firms as they move from a manufacturing business model to a service-based business model which typically benefits from higher margins, greater differentiation potential and improved customer loyalty.

Figure 2: Circular economy uses for luxury car manufacturers.

(“How luxury carmakers can reduce waste and improve efficiency”, 2017)

Is a circular economy realistic?

There are questions raised as to whether a circular economy is economically feasible. The global economy is currently based on a linear economy, where most used goods are discarded and turned into waste. From this, there is a constant requirement for the mining of new resources, such as aluminium, which is counted as economic activity with many parties along the way taking a profit through supplying this resource.

In a circular economy, the requirement for the mining of new resources will largely be diminished (Tsoi 2015). Following the advent of the internet, where the marginal cost in distributing knowledge and entertainment is virtually free, there are concerns that the transition from a linear consumption based economy to a post scarcity economy of abundance will be tumultuous (GNU 1985). It is unclear whether a circular economy would exist as a series of isolationist closed systems across countries or economic blocks (such as the European Union), or whether it would promote globalisation through increased interdependence by selling recycled goods on global commodity markets (Tsoi 2015). There were also concerns that the Transatlantic Trade and Investment Partnership (TTIP) posed a risk to the advancement of the circular economy. Consequently, it is likely that if a circular economy were to be implemented on a global scale that this progress would thrust the global economy into a state of shock and uncertainty due to the change in direction.

Theoretically, each country with an excess surplus of recycled materials will want to sell it to the global commodity market at internationalised prices, as to reduce waste and obtain income that can be spent elsewhere. This can be a positive for workers in countries where the local purchasing power is higher, as the price differential can help them support themselves (Economist 2017). It can, however, increase costs for businesses purchasing these resources, placing industry and individuals from more developed countries at a competitive advantage.

Nevertheless, there are concerns that some countries may use this as an opportunity for protectionist and isolationist economic policies. Given the European Union has a large, well developed economy, their recent legislation to implement a domestic circular economy could possibly lead to only trading amongst themselves and placing tariffs against foreign resources to support the domestic prices, employment and stability. This is already evident in the European Union’s statistics – EU countries largely trade amongst themselves (by each respective country’s top 5 trade partners) and are far less dependent on foreign (non-EU) export and import trading than most other countries, such as Australia or China (EU 2006).

So is a circular economy a good idea?

The relatively new concept of a circular economy requires more informed decision-making to combine effective and feasible social, economic, and environmental solutions that sustainably manage natural resources. It has been shown that efficiently run circular economies such as the efforts in local governments of maintaining sustainability programs and the use of optimization technologies in manufacturing and automotive industries are feasible and beneficial.

Whilst the benefits of a circular economy are considerable, foreseeable consequences such as the possibility of protectionist and isolationist economic policies can prove to be harmful, especially to countries without a competitive advantage. In essence, consistent with modern technologies and policies, a circular economy and the processes involved in its successful implementation result in a situation where there are both winners and losers. In fact, in a recent report by the EEA, it has been found that the transition to a circular economy is expected to cause tension between government sectors and traditional businesses whose employees and contractors are likely to suffer with the changes associated to a circular economy (2016).

Whilst the circular economy may present challenges to the current linear based economy, and could lead to reduced economic growth by traditional metrics, there are calls for new ways of measuring economic progress, such as human welfare and environmental impact, or lack thereof (Tsoi 2015). The concept may need some refining in practice, and it would be important to mitigate against the impacts of the transition to the circular economy. Considering this, it is possible that it may just be the solution to balancing economic progress with environmental protection.

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.