Towards a circular economy: Business Rationale for an accelerated transition

Towards a circular economy: Business Rationale for an accelerated transition

The Ellen MacArthur Foundation is presenting an executive summary of the latest findings on the business rationale towards a circular economy, and TextileFuture is offeringEllen MacArthur cover the results. TextileFuture have not reproduced the different notes on sources, however the original document does entail these. The entire report is commercially available online

Introduction

Today’s linear ‘take, make, dispose’ economic model, which relies on large quantities of cheap, easily accessible materials and energy, has been at the heart of industrial development and has generated an unprecedented level of growth.

Yet recent sharp price rises, increased volatility and growing pressure on resources have alerted business leaders and policy makers to the necessity of rethinking materials and energy use – the time is right, many argue, to take advantage of the potential benefits of a circular economy.

A circular economy is one that is restorative and regenerative by design and aims to keep products, components, and materials at their highest utility and value at all times, distinguishing between technical and biological cycles. This new economic model seeks to ultimately de-couple global economic development from finite resource consumption. A circular economy addresses mounting resource-related challenges for business and economies, and could generate growth, create jobs, and reduce environmental impacts, including carbon emissions. As the call for a new economic model based on systems-thinking grows louder, an unprecedented favourable alignment of technological and social factors today can enable the transition to a circular economy.

This document is an executive summary of the analysis that the Ellen MacArthur Foundation has conducted to date.

 

Section 1: Drivers for change and a new economic model

The global economy’s evolution has been dominated by a linear model of production and consumption, in which goods are manufactured from raw materials, sold, used and then discarded as waste. While great strides have been made in improving resource efficiency, any system based on consumption rather than on the restorative use of resources entails significant losses along the value chain.

Furthermore, the rapid acceleration of consumptive and extractive economies since the mid 20th century has resulted in an exponential growth of negative externalities. There is a high likelihood of exacerbating these trends as the global middle class will more than double in size to nearly 5 billion by 2030. Working towards efficiency as a solution – a reduction of resources and fossil energy consumed per unit of economic output – will not alter the finite nature of material stocks but can only delay the inevitable.

A number of factors indicate that the linear model is increasingly being challenged by the very context within which it operates, and that a deeper change of the operating system of our economy is necessary.

Economic losses and structural waste. The current economy is surprisingly wasteful in its model of value creation. In Europe, material recycling and waste-based energy recovery captures only 5 percent of the original raw material value. Analysis has also found significant structural waste in sectors that many would consider mature and optimised. For example, in Europe, the average car is parked 92 % of the time, 31 % of food is wasted along the value chain, and the average office is used only 35–50 % of the time, even during working hours.

Price risks

Recently, many companies have begun to notice that a linear system increases their exposure to risks, most notably volatile resource prices and supply disruptions. Higher resource price volatility can dampen economic growth by increasing uncertainty, discouraging businesses from investing and increasing the cost of hedging against resource-related risks. The last decade has seen higher price volatility for metals and agricultural output than in any single decade in the 20th century.

Supply risks

Many areas of the world possess few natural deposits of non-renewable resources of their own and so must rely on imports. The European Union imports six times as much materials and natural resources as it exports. Japan imports almost all its petroleum, as well as other liquid fuels, and its natural gas, and India imports around 80% and 40% respectively. As well as risks to the supply of raw materials themselves, the risk to supply security and safety associated with long, elaborately optimised global supply chains appears to be increasing.

Natural systems degradation

A fundamental challenge to long-term global wealth creation is the set of negative environmental consequences related to the linear model. Depletion of low-cost reserves, and increasingly, the degradation of natural capital are affecting the productivity of economies. Elements contributing to these environmental pressures include climate change, loss of biodiversity and natural capital, land degradation, and ocean pollution.

Regulatory trends

In recent years, businesses have witnessed an increased effort on the part of regulators to curtail and price negative externalities. Since 2009, the number of climate change laws has increased by 66 %, from 300 to 500. Carbon pricing, in the form of an emissions trading scheme or a carbon tax, has been implemented or is scheduled to commence in almost 40 countries and over 20 cities, states and regions. In Europe, 20 countries levy landfill taxes, which together raised revenues of EUR 2.1 billion in 2009/2010.

Against this backdrop, the call for a new economic model is getting louder. There’s increasing evidence of organisations, businesses, and prominent figures, these are explicitly working towards this goal: organisations, such as B Lab, are working towards the “road to a new economy”, serving a global movement of entrepreneurs that use the power of business to generate positive impact; “The B Team” consists of a number of prominent business leaders, all committed to “the end of business as usual”. Long term perspectives are gradually coming back towards the centre of the stage.

In this context, the circular model of growth, decoupled from the consumption of finite resources and capable of delivering resilient economic systems, is increasingly looked upon as the next wave of development. An unprecedented favourable alignment of technological and societal factors is now making the transition to a circular economy possible at scale.

Advances in technology

Guided by circular economy principles, technological advances can create ever-greater opportunities for society. Information and industrial technologies are now coming online or being deployed at scale, which allow the creation of circular economy business approaches that were previously not possible. These advances allow more efficient collaboration and knowledge sharing, better tracking of materials, improved forward and reverse logistics set-ups, and increased use of renewable energy.

Acceptance of alternative business models

A new model of transaction is emerging, in which individuals embrace business models that enable them to access services rather than owning the products which deliver them, thus becoming users.

This has been demonstrated in some markets: rental, performance-based and sharing models, enabled by new technologies, are already finding ready customers, and experiencing exponential growth.

Urbanisation

For the first time in history, over half of the world’s population resides in urban areas. Continued urbanisation and overall demographic growth is projected to add another 2.5 billion people to the urban population by 2050, bringing the proportion of people living in cities to 66%.11 With this steady increase in urbanisation, the associated costs of many of the asset-sharing services and thcosts for reverse cycles, collecting and treating end-of-use materials will all benefit from much higher drop-off and pick-up density, simpler logistics, and greater appeal and scale for service providers.

Whilst still pervasive, the linear lock-in is getting weaker in the wake of powerful disruptive trends that will shape the economy for years to come. The rationale for transitioning to a circular model is increasingly documented, and the size of the economic opportunity – as well as the broader set of positive impacts – is gradually emerging both from an analytical perspective and through the compelling case studies provided by early adopters.

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Section 2: Rethinking value creation – the circular perspective

The notion of a circular economy has attracted increased attention in recent years.

The concept is characterised, more than defined, as an economy that is restorative and regenerative by design and aims to keep products, components, and materials at their highest utility and value at all times, distinguishing between technical and biological cycles. It is conceived as a continuous positive development cycle that preserves and enhances natural capital, optimises resource yields, and minimises system risks by managing finite stocks and renewable flows. It works effectively at every scale. This economic model seeks to ultimately decouple global economic development from finite resource consumption.

Major schools of thought related to the circular economy emerged in the 1970s but gained prominence in the 1990s. Examples include the functional service economy (performance economy) of Walter Stahel; the “cradle to cradle”® design philosophy of William McDonough and Michael Braungart; biomimicry as articulated by Janine Benyus; the industrial ecology of Reid Lifset and Thomas Graedel; natural capitalism by Amory and Hunter Lovins and Paul Hawken; and the blue economy systems approach described by Gunter Pauli.

The circular economy rests on three principles

Ellen MacArthur Fig. 1

 

Principle 1: Preserve and enhance natural capital by controlling finite stocks and balancing renewable resource flows. This starts by dematerialising utility – delivering utility virtually, whenever optimal. When resources are needed, the circular system selects them wisely and chooses technologies and processes that use renewable or better-performing resources, where possible. A circular economy also enhances natural capital by encouraging flows of nutrients within the system and creating the conditions for the regeneration of, for example, soil.

Principle 2: Optimise resource yields by circulating products, components, and materials at the highest utility at all times in both technical and biological cycles.

This means designing for remanufacturing, refurbishing, and recycling to keep technical components and materials circulating in and contributing to the economy.

Circular systems use tighter, inner loops (e.g. maintenance, rather than recycling) whenever possible, thereby preserving more embedded energy and other value.

These systems also maximise the number of consecutive cycles and/or the time spent in each cycle, by extending product life and optimising reuse. Sharing in turn increases product utilisation. Circular systems also encourage biological nutrients to re-enter the biosphere safely for decomposition to become valuable feedstock for a new cycle. In the biological cycle, products are designed by intention, to be consumed or metabolised by the economy and regenerate new resource value. For biological materials, the essence of value creation lies in the opportunity to extract additional value from products and materials by cascading them through other applications. As in any linear system, pursuing yield gains across all these levers is useful and requires continued system improvements. But unlike a linear system, a circular one would not compromise effectiveness.

 

Principle 3: Foster system effectiveness by revealing and designing out negative externalities. This includes reducing damage to systems and areas such as food, mobility, shelter, education, health, and entertainment, and managing externalities, such as land use, air, water and noise pollution, and the release of toxic substances.

 

Ellen MacArthur Box 1PNG

 

A circular economy distinguishes between technical and biological cycles: The technical cycle involves the management of stocks of finite materials. The biological cycle encompasses the flows of renewable materials.

 

Consumption only occurs in the biological cycle. Renewable (biological) nutrients are mostly regenerated in the biological cycle.

While the principles outlined above act as principles for action, the following fundamental characteristics describe a circular economy:

Waste is “designed out”. In a circular economy, waste does not exist, and is designed out by intention. Biological materials are non-toxic and can easily be returned to the soil by composting or anaerobic digestion. Technical materials – polymers, alloys, and other man-made materials – are designed to be recovered, refreshed and upgraded, minimising the energy input required and maximising the retention of value (in terms of both economics and resources).

Diversity builds strength. A circular economy values diversity as a means of building strength. Across many types of systems, diversity is a key driver of versatility and resilience. In living systems, for example, biodiversity is essential to surviving environmental changes. Similarly, economies need a balance of various scales of businesses to thrive in the long term. The larger enterprises bring volume and efficiency, while the smaller ones offer alternative models when crises occur.

 

Renewable energy sources power the economy: The energy required to fuel the circular economy, should be renewable by nature, in order to decrease resource dependence and increase systems resilience (to oil shocks, for example). This will be further enabled by the reduced threshold energy levels required in a circular economy.

 

Think in systems: In a circular economy, systems-thinking is applied broadly. Many real-world elements, such as businesses, people or plants, are part of complex systems where different parts are strongly linked to each other, leading to some surprising consequences. In order to effectively transition to a circular economy, these links and consequences are taken into consideration at all times.

Prices or other feedback mechanisms should reflect real costs. In a circular economy, prices act as messages, and therefore need to reflect full costs in order to be effective. The full costs of negative externalities are revealed and taken into account, and perverse subsidies are removed. A lack of transparency on externalities acts as a barrier to the transition to a circular economy.

 

Ellen MacArthur Box 2

 

The power of the inner circle refers to the idea that the tighter the circle, the more valuable the strategy. Repairing and maintaining a product, for example a car, preserves most of its value. If this is not possible anymore, individual components can be reused, or remanufactured. This preserves more value than just recycling the materials. Inner circles preserve more of a product’s integrity, complexity, and embedded labour and energy.

The power of circling longer refers to maximising the number of consecutive cycles and/or the time in each cycle for products (e.g. reusing a product a number of times or extending product life). Each prolonged cycle avoids the material, energy and labour of creating a new product or component. For products requiring energy, though, the optimal serviceable life must take into account the improvement of energy performances over time.

The power of cascaded use refers to diversifying re-use across the value chain, for example, when cotton clothing is re-used first as second-hand apparel, then crosses to the furniture industry as fibre-fill in upholstery, and the fibrefill is later reused in stone wool insulation for construction—substituting for an inflow of virgin materials into the economy in each case—before the cotton fibres are safely returned to the biosphere.

The power of pure inputs, finally, lies in the fact that uncontaminated material streams increase collection and redistribution efficiency while maintaining quality, particularly of technical materials, which in turn extends product longevity and thus increases material productivity.

•Shift to renewable energy and materials

•Reclaim, retain, and restore health of ecosystems

•Return recovered biological resources to the biosphere

•Share assets (e.g. cars, rooms, appliances)

•Reuse/second hand

•Prolong life through maintenance, design for durability, upgradability, etc.

•Increase performance/efficiency of product

•Remove waste in production and supply chain

•Leverage big data, automation, remote sensing and steering

•Remanufacture products or components

•Recycle materials

•Digest anaerobically

•Extract bio-chemicals from organic waste

•Dematerialise directly (e.g. books, CDs, DVDs, travel)

•Dematerialise indirectly (e.g. online shopping)

•Replace old with advanced non-renewable materials

•Apply new technologies (e.g. 3D printing)

•Choose new product/service (e.g. multimodal transport)

 

Ellen McArthur Fig. 2

 

Assessing the opportunities: the resolve framework

Through research conducted on case studies and expert interviews, the Ellen MacArthur Foundation has broadly identified a set of six actions that businesses and governments can take in order to transition to a circular economy: Regenerate, Share, Optimise, Loop, Virtualise, and Exchange – together, the ReSOLVE framework. The ReSOLVE framework offers businesses and governments a tool for generating circular strategies and growth initiatives. In different ways, these actions all increase the utilisation of physical assets, prolong their life, and shift resource use from finite to renewable sources. Each action reinforces and accelerates the performance of the other actions.

Section 3: The circular economy opportunity

The circular economy has been gaining traction with businesses and policymakers, with significant opportunities identified for both groups of stakeholders. If we transition to a circular economy, the impact will be felt across society.

The Ellen MacArthur Foundation, SUN, and McKinsey have identified that by adopting circular economy principles, Europe can take advantage of the impending technology revolution to create a net benefit of EUR 1.8 trillion by 2030, or EUR 0.9 trillion more than in the current linear development path. The circular economy could create tremendous opportunities for industrial renewal, regeneration, and innovation.

 

Ellen McArthur Fig. 3

 

What is the economic opportunity?

Improved economic growth, substantial net material cost savings, the creation of employment opportunities, and increased innovation.

Growth Within: a circular economy vision for a competitive Europe”, Ellen MacArthur Foundation, SUN, McKinsey & Co. (June 2015). Due to the regional-specific nature of the report “Growth Within”, the currency used in this instance is the Euro. Net benefits include primary resource costs, other cash out costs, and negative externalities. In the current development path, a a technology revolution is assumed, but rebound effects and a lack of appropriate system integration do not solve resource and externalities issues.

Economic growth: Economic growth, as defined by GDP, would be achieved mainly through a combination of increased revenues from emerging circular activities, and lower cost of production through the more productive utilisation of inputs. These changes in input and output of economic production activities affect economy wide supply, demand and prices, rippling through all sectors of the economy and resulting in a series of indirect effects that add to overall growth. Such effects include increased spending and savings resulting from an increase in household income, in turn resulting from greater remuneration to labour. Together, these effects add up to a positive change in GDP. On a circular economy development path, European GDP could increase as much as 11% by 2030 and 27% by 2050, compared with 4% and 15% in the current development scenario.

Substantial net material cost savings: Based on detailed product-level modelling, the Ellen MacArthur Foundation has estimated that, in the sectors of complex medium-lived products in the EU the annual net material cost savings opportunity amounts to up to USD 630 billion in an advanced circular economy scenario. For fast moving consumer goods (FMCG), we identified an additional potential of up to USD 700 billion globally. In addition, sector specific analysis conducted indicates that the U.K. could save USD 1.1 billion a year on landfill costs per annum, deliver 2 GWh worth of electricity, and provide much-needed soil restoration and specialty chemicals by keeping organic waste out of landfills.

Job creation potential: The Ellen MacArthur Foundation, SUN, and McKinsey supported the largest comparative study to date of the employment impacts of a circular economy transition, with 65 reviewed academic papers indicating that “existing studies point to the positive employment effects occurring in the case that the circular economy is implemented”. This impact on employment is largely attributable to increased spending fuelled by the lower prices expected across sectors and to the labour-intensity of high quality recycling activities and higher skilled jobs in remanufacturing. Employment opportunities would not be limited to remanufacturing and growth within large corporations; the employment story in the circular economy is rich and diverse. Jobs will be created across industrial sectors, through the development of local reverse logistics, within small and medium enterprises, through increased innovation and entrepreneurship, and a new service-based economy. In analysis conducted on Denmark, modelling suggested that ten circular economy opportunities could unlock, by 2035, 7,300–11,300 job equivalents, or 0.4–0.6% relative to a ‘business as usual’ scenario. In the longer term, employment often correlates with innovation and competitiveness, which should strengthen in the circular scenario.

Innovation: The aspiration to replace one-way products with goods that are ‘circular by design’ and create reverse logistics networks and other systems to support the circular economy is a powerful spur to new ideas. The benefits of a more innovative economy include higher rates of technological development, improved materials, labour, and energy efficiency, and more profit opportunities for companies.

 

Ellen MacArthur Fig. 4

Transition: Potential new EU employment base

•218 million jobs in EU-28, 2014

•Unemployment rate: 10.2%

•Today ~2,3 million jobs, ~1% of EU jobs1

New jobs from increased recycling, reverse logistics, secondary markets

•Substitution from raw materials to secondary implies less demand for virgin raw materials

•Some of the resulting employment loss outside EU

•Today, 30 million manufacturing jobs,~14% of EU jobs

•New jobs due to upgrade,repair, re-manufacturing activities (labour intensive)

•Jobs loss innew products manufacturing

•Net e.ect likely to di.er substantially between sectors and companies

•Possible price increase on materials reduce demand

•Some of the resulting employment loss outside EU

•Increased consumption driven by lower prices

•New jobs created by innovation and investments from circular economy transition

•Overall positive circular economy e.ect on jobs

•More important are general labour market policies about gender inclusion, retirement age, and structural barriers regarding entry salaries, etc. – Based on 2008 data.

 

The environmental and system-wide opportunities

Reduced emissions and primary material consumption, preserved and improved land productivity, and a reduction in negative externalities Carbon dioxide emissions. For Europe, the Ellen MacArthur Foundation found that a circular economy development path could halve carbon dioxide emissions by 2030, relative to today’s levels (48% reduction of carbon dioxide emissions by 2030 across mobility, food systems, and the built environment, or 83% by 2050).In addition, sector specific analysis conducted indicates that the U.K. could reduce greenhouse gas emissions by 7.4 million tonnes per annum by keeping organic waste out of landfills.

Primary material consumption: A circular economy development path could result in a reduction of primary material consumption (measured by car and construction materials, real estate land, synthetic fertiliser, pesticides, agricultural water use, fuels, and non-renewable electricity) by 32% by 2030 and 53% by 2050, compared with today.

Land productivity and soil health: Land degradation costs an estimated USD 40 billion annually worldwide, without taking into account the hidden costs of increased fertiliser use, loss of biodiversity and loss of unique landscapes. Higher land productivity, less waste in the food value chain, and the return of nutrients to the soil will enhance the value of land and soil as assets. The circular economy, by moving much more biological material through the anaerobic digestion or composting process and back into the soil, will reduce the need for replenishment with additional nutrients. Systematic use of available organic waste could help regenerate land and replace chemical fertilisers 2.7 times over. If Europe chose to take a circular economy approach to food systems, synthetic fertiliser consumption could fall by as much as 80% by 2050. This is the principle of regeneration at work.

Reduction in negative externalities e.g. congestion time. A circular economy would manage externalities, such as land use, air, water and noise pollution, release of toxic substances, and climate change. For example, the circular model would benefit households by reducing the cost of time lost to congestion by 16% by 2030, and close to 60% by 2050.

 

What is the opportunity for companies?

New and bigger profit pools, greater security in supply, and new demand for business services, building greater resilience as a result

Profit opportunities. Individual businesses could achieve lower input costs and in some cases create entirely new profit streams. The Ellen MacArthur Foundation’s analysis on complex medium-lived products and fast moving consumer goods showed that the use of circular economy approaches would support improvements such as the following:

• The cost of remanufacturing mobile phones could be reduced by 50% per device34 – if the industry made phones easier to take apart, improved the reverse cycle, and offered incentives to return phones

• High-end washing machines would be accessible for most households if they were leased instead of sold – customers would save roughly a third per wash cycle, and the manufacturer would earn roughly a third more in profits.

• The U.K. could create an income stream of USD 1.5 billion annually – by processing mixed food waste discarded by households and in the hospitality sector.

• A profit of USD 1.90 per hectolitre of beer produced can be captured – by selling brewer’s spent grains.

• In the U.K., each tonne of collected and sorted clothing can generate a revenue of USD 1,97538 – or a gross profit of USD 1,295 from reuse opportunities.

• Costs of packaging, processing and distribution of beer could be reduced by 20%– by shifting to reusable glass bottles

Reduced volatility and greater security of supply: The shift to a more circular economy implies using less virgin material and more recycled inputs with a higher share of labour costs, reducing a company’s exposure to ever more volatile raw materials prices, increasing resilience. The threat of supply chains being disrupted by natural disasters or geopolitical imbalances is lessened, too, because decentralised operators provide alternative materials sources.

New demand for business services: A circular economy would create demand for new business services, such as:

• Collection and reverse logistics companies that support end of life products being reintroduced into the system

• Product remarketers and sales platforms that facilitate longer lives or higher utilisation of products

• Parts and component remanufacturing and product refurbishment offering specialised knowledge

Collection, disassembly, refurbishment of products, integration into the remanufacturing process, and getting products out to users all require specialised skills and process know-how. Most of the case examples at scale are subsidiaries of existing manufacturers, which result in new business model opportunities for incumbents.

Improved customer interaction and loyalty. Circular solutions offer new ways tocreatively engage customers. New business models such as rentals or leasing contracts establish a longer-term relationship with customers, as the number of touch points increase over the lifetime of a product. These business models offer companies the chance to gain unique insights into usage patterns that can lead to a virtuous circle of improved products, better service, and greater customer satisfaction.

 

What is the opportunity for citizens?

Greater utility, as a result of more choice, lower prices, and lower total cost of ownership.

Increased disposable income: Across three sectors analysed (mobility, food systems, and the built environment), it was found that a circular economy development path could increase the disposable income of an average European household through the reduced cost of products and serv


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