January 27th, 2017
by Ad Lansink
The path from a linear to a circular economy will not be an easy one. There are many barriers which may hinder or delay the transition process, and many policy choices to make – each of which represents a branch along this path.
However, these potential problems can be overcome – at least partially – by being clear about what the choices are, thus allowing us to formulate clear and targeted policies. Experience of earlier transitions in the field of waste policy has taught that public support is best gained through transparent policy and good communication about the advantages and disadvantages of new systems.
Many of these choices can be presented as dilemmas, although often there are a range of options between the two outlying, extreme positions. They include:
- Control by government or producer responsibility
- Fiscal measures or free market power
- Binding (eco)directives or freedom for producers
- National policy or international cooperation
- Local and regional markets or continental and global markets
- Business models on macro or micro scales
- Lease society or the right to ownership
If we look at the measures which have already achieved some degree of success, in some cases it appears that one branch is clearly more compatible with a circular economy than the other. In other cases, it is possible to imagine multiple branches leading in the desired direction, and it remains for us to find the most effective and acceptable approach.
The first three dilemmas concern the relative roles of regulation and market forces. Across the world, our economic systems are a balance between the two: there are few if any fully planned economies, and none where markets are left wholly untrammeled by regulation. Many of the measures needed for a circular economy require us to strike this balance in new areas.
For example, in the development of extended producer responsibility (EPR) schemes, we must choose how much room producers are given to decide how to meet their responsibilities, and how far government steers the application of the ‘polluter pays’ principle. Europe’s approach to EPR falls somewhere in the middle of this dichotomy. Theoretically, EPR could be managed by industry itself, but in practice an external institution or body is typically needed to assess whether and to what extent industry adheres to the agreements. Because of the social impact — and also to prevent free riders — it is appropriate that government fulfills this role.
If we accept that trade must be regulated, there can be little reason to protest a modest amount of additional extra regulation for the important purpose of protecting the environment. Here, it seems obvious that government has a clear part to play in steering us towards a circular economy; well-designed regulation and fiscal measures can then harness market forces and ingenuity to achieve the desired outcomes efficiently.
Circling the border
Though some environmental issues may only have local or regional effects, the prevention of and fight against environmental damage requires international cooperation, even on a global scale in the case of climate policy. Many environmental problems have a clear cross border impact. Examples are plentiful enough they might almost grow on trees:
- climate change due to CO2-emissions,
- water pollution by hazardous substances,
- air pollution by vehicle emissions from cars,
- contamination of ground water by heavy metals, and
- the release of plastics into the oceans.
Therefore, international legislation must be preferred above national policy. Differences within Europe and the freedom of member states to choose certain means or aspects of policy may hinder the creation of the oft-requested level playing field. Differences in taxation may also obstruct the development of a common, broadly accepted financial policy, especially in the fields such as environmental taxes, CO2 pricing and VAT.
Nevertheless, EU environmental directives can provide a firm legal framework for the transition to the circular economy. Outside Europe, the outcome of ongoing discussions about the terms of free trade treaties will influence the international success of circular economic business models.
During recent decades, economic development has involved ever-greater globalisation. The production of bulk goods has moved to low-wage countries, placing a large distance, both geographical and economic, between production and marketing sites. Often, the links of the supply chain are far apart, and globalisation can make it harder to close resource loops simply because material flows through various countries with different environmental policies.
Leading examples of globalised trade include the production of white and brown goods, and the development and manufacture of smart phones, but textile retailers and recyclers also know its impacts all too well. Small companies operating in local and regional markets often lose out to the scaling of large industries and multinationals acting on continental and global markets.
Nevertheless, at the local and regional level there have been many initiatives geared towards the circular economy, which have managed to ‘close the loop’ at least in part. In some cases, regional authorities (for example, Amsterdam, with the city’s Circular Challenge) have taken the lead, while in others leadership has come from small private companies and enthusiastic entrepreneurs (such as in the cooperation seen at Blue City in Rotterdam).
A meaningful transition to a circular economy requires the development of workable business models based on closing one or more loops, both in the production process and during the use of products. Value creation is an essential condition, and not only financial value, but also economic, ecological and social value. Time is just as important as function, especially in relation to the transition to service oriented business models.
Looking at the key terms for conceptual business models (as developed by technology strategist and consultancy Accenture), outcomes may differ depending on the extent to which these models reduce the extent of the supply chains:
- Circular supplies: this model is relevant for companies dealing with scarce commodities, which are replaced with fully renewable, recyclable or biodegradable resource inputs.
- Resource recovery: this model leverages technological innovations and capabilities to recover and reuse resource outputs, eliminating material leakage and maximising economic value.
- Product life extension: this model extends the lifecycle of products, ensuring that they remain economically useful. Wasted materials remain available and products are improved through remanufacturing and refurbishing.
- Sharing platforms: this model concerns the sharing of products and assets with a low ownership or use rate. Here, companies maximise the use of the products they sell, enhancing productivity and creating value.
- Products as a service: in this model, customers use products through lease arrangements. In contrast with the classic buy-to-own approach, companies with high operational costs earn benefits from pay-for-use, managing maintenance and recapturing the residual value of used products.
The future will show which of these business models survive and which create the highest value – although this may depend upon time, place and product.
A new lease of life
Many advocates of the circular economy mention service-oriented business models as a sine qua non for a successful transition. They provide an incentive to extend the lifetimes of products and for importers and producers to take back the used products. Good reverse logistics may allow products to be refurbished or remanufactured, extending their lifetime. Not all products are suitable for a second or third life, and in such cases disassembling and recycling remain important. The resulting losses of material and even function are an inevitable gap in the loop.
More important is the question of whether people will accept the necessity of leasing or other forms of service oriented mechanisms; the right of ownership and property is deeply rooted in society. Leasing brown and white goods is feasible, and parts of society already know the advantages of leasing high value items such as cars or houses. But despite its advantages, an obligation to lease would evoke resistance, quite apart from the fact that obligations must be regulated.
The property dilemma may well be amongst the most difficult to resolve, along with the tricky problems around taxation and financial policy. Yet if we are to forge a path through the issues currently leading to unsustainable losses of resources and energy from our economies, meet them we must. It may be a hard road to travel, but it’s a journey we cannot afford to shirk.