Ellen mac arthur foundation towards the circular economy vol.1Document Transcript
20131 TOWARDS THE CIRCULAR ECONOMY Economic and business rationale for an accelerated transitionFoundingPartners of theEllen MacArthurFoundation
AcknowledgementsThe Ellen MacArthur Foundation was formed in 2010 to inspirea generation to rethink, redesign and build a positive future.The Foundation believes that the circular economy provides acoherent framework for systems level redesign and as such offersus an opportunity to harness innovation and creativity to enable apositive, restorative economy.The Foundation is supported by a group of ‘Founding Partners’—B&Q, BT, Cisco, National Grid and Renault. Each of theseorganisations has been instrumental in the initial formation ofthe Foundation, the instigation of this report and continues tosupport its activities in education, communications and workingas a business catalyst.McKinsey & Company, a global management consulting firm,provided the overall project management, developed the factbase and delivered the analytics for the report.In addition to a number of leading academic and industry experts,an extended group of organisations provided input and expertise.They included Caterpillar, Cyberpac, Desso, EPEA, ForesightGroup, ISE, Marks & Spencer, Product-Life Institute, Ricoh,Turntoo, and Vestas.
02 | TOWARDS THE CIRCULAR ECONOMYForewordAn opportunity to rethink our economic futureThe Ellen MacArthur Foundation’s report on the Economics of a Circular Economyinvites readers to imagine an economy in which today’s goods are tomorrow’s resources,forming a virtuous cycle that fosters prosperity in a world of finite resources.This change in perspective is important to address many of today’s fundamentalchallenges. Traditional linear consumption patterns (‘take-make-dispose’) are coming upagainst constraints on the availability of resources. The challenges on the resource sideare compounded by rising demand from the world’s growing and increasingly affluentpopulation. As a result, we are observing unsustainable overuse of resources, higherprice levels, and more volatility in many markets.As part of our strategy for Europe 2020, the European Commission has chosen torespond to these challenges by moving to a more restorative economic system that drivessubstantial and lasting improvements of our resource productivity. It is our choice how,and how fast, we want to manage this inevitable transition. Good policy offers short- andlong-term economic, social, and environmental benefits. But success in increasing ouroverall resilience ultimately depends on the private sector’s ability to adopt and profitablydevelop the relevant new business models.The Foundation’s report paints a clear picture: our linear ‘take-make-dispose’ approachis leading to scarcity, volatility, and pricing levels that are unaffordable for our economy’smanufacturing base.As a compelling response to these challenges, the report advocates the adoption of thecircular economy, and provides an array of case examples, a solid framework, and a fewguiding principles for doing so. Through analysis of a number of specific examples, theresearch also highlights immediate and relatively easy-to-implement opportunities. On thebasis of current technologies and trends, it derives an estimate of the net material costsaving benefits of adopting a more restorative approach—more than USD 600 billion p.a.by 2025, net of material costs incurred during reverse-cycle activities. The correspondingshift towards buying and selling ‘performance’ and designing products for regenerationshould also spur positive secondary effects such as a wave of innovations and employmentin growth sectors of the economy, whilst increasing Europe’s competitiveness in the globalmarketplace. Many business leaders believe the innovation challenge of the century willbe to foster prosperity in a world of finite resources. Coming up with answers to thischallenge will create competitive advantage.While The Foundation’s first report has taken a European perspective, I believe that itslessons are relevant at a global level. It will not be possible for developing economies toshare the developed world’s level of living standards and provide for future generationsunless we dramatically change the way we run our global economy.The Foundation’s report offers a fresh perspective on what a transition path to a circulareconomy at global scale could look like. It is time to ‘mainstream’ the circular economyas a credible, powerful, and lasting answer to our current and future growth and resourcechallenges.As you read the report, I urge you to consider where and how you can contribute to jointlymoving towards a new era of economic opportunity.Sincerely,Janez PotocnikEuropean Commissoner for the Environment
TOWARDS THE CIRCULAR ECONOMY | 03 Contents 1 Acknowledgements 2 Foreword 4 In support of the circular economy 5 Report synopsis 6 Executive summary13 1. The limits of linear consumption21 2. From linear to circular35 3. How it works up close63 4. An economic opportunity worth billions77 5. The shift has begun85 Appendix93 List of leading experts94 List of figures
04 | TOWARDS THE CIRCULAR ECONOMYIn support of the circular economy‘The time is coming when it will no longer make economic sense for ‘business as usual’and the circular economy will thrive. Our thinking is in its infancy but we’re taking stepsnow to see what works in practice and to understand the implications of reworkingour business model. We are preparing to lead this change by rethinking the way we dobusiness because the reality is, it isn’t a choice anymore’.B&Q Euan Sutherland, CEO of Kingfisher U.K. & Ireland(Chairman of the B&Q Board)‘The concept of the circular economy tallies completely with our thinking at BT aboutthe importance of providing goods and services sustainably. As a company, we feelintimately involved with these ideas, because digital technology will play a crucial role inproviding the information needed to create iterative logistics and restorative systems’.BT Group Gavin Patterson, Chief Executive BT Retail‘The Circular Economy is a blueprint for a new sustainable economy, one that hasinnovation and efficiency at its heart and addresses the business challenges presentedby continued economic unpredictability, exponential population growth and ourescalating demand for the world’s natural resources. Pioneering work carried out bythe Ellen MacArthur Foundation presents an opportunity to fundamentally rethink howwe run our business and challenge all aspects of traditional operating models, from howwe use natural resources, to the way we design and manufacture products, through tohow we educate and train the next generation. We are delighted to be part of the EllenMacArthur Foundation and we are committed to exploring how Cisco, our customers,partners and employees can benefit from the principles of the Circular Economy’.Cisco Chris Dedicoat, President, EMEA‘This is an extremely important time for the energy industry with challenges aroundsustainability, security and affordability. At National Grid, over the next 9 years, weare looking to recruit in the region of 2,500 engineers and scientists, a mixture ofexperienced engineers and development programme trainees; all vital to the future ofour business. That means we need young people with science, technology, engineeringand mathematics skills, with creative minds and a passion to make a difference. Thecircular economy provides a positive, coherent, innovation challenge through whichyoung people see the relevance and opportunity of these subjects in terms of re-thinking and redesigning their future.’National Grid Steve Holliday, Chief Executive‘Renault believes that innovation favours progress only if the greatest number stand tobenefit from it. Renault believes that the optimisation of existing solutions will not beenough to realise the vision of sustainable mobility for all. The launch of Renault’s newgame changing fleet of electric vehicles demonstrates that this is possible. A growingpopulation and increasingly volatile resource market will challenge businesses workingin a business as usual model. Renault is working in partnership with the Ellen MacArthurFoundation to realise the opportunities of redesigning the future through the vision of aregenerative, circular economy’.Renault Carlos Tavares, Chief Operating Officer for Renault
TOWARDS THE CIRCULAR ECONOMY | 05 Report synopsis To describe this opportunity to generate rapid and lasting economic benefits and enlist broad support for putting it into full-scale practice, we have structured this report into five chapters, each answering basic questions about the circular economy and the changes it implies:1 The limits of linear consumption outlines the limits of the current ‘take-make-dispose’ system and assesses the risks it poses to global economic growth.2 From linear to circular—Accelerating a proven concept frames the opportunities presented by a circular economy, the origins and early successes of the proven concept of circular business models, and the ways in which they drive value creation.3 How it works up close—Case examples of circular products demonstrates through detailed case studies the many ways in which companies can benefit from circular business models and the key building blocks needed on a systemic level to shift business in this direction.4 An economic opportunity worth billions—Charting the new territory maps out what moving towards a circular economy could mean on a macroeconomic level and how circular business models could benefit different market participants.5 The shift has begun—‘Mainstreaming’ the circular economy proposes winning strategies for businesses to bring the circular economy into the mainstream and a roadmap for an accelerated transition towards a circular economy.
06 | TOWARDS THE CIRCULAR ECONOMY Executive summary In the face of sharp volatility increases 1. The limits of linear consumption across the global economy and proliferating signs of resource depletion, Throughout its evolution and diversification, the call for a new economic model our industrial economy has hardly moved is getting louder. In the quest for a beyond one fundamental characteristic substantial improvement in resource established in the early days of performance across the economy, industrialisation: a linear model of resource businesses have started to explore ways to consumption that follows a ‘take-make- reuse products or their components and dispose’ pattern. Companies harvest and restore more of their precious material, extract materials, use them to manufacture a energy and labour inputs. The time is product, and sell the product to a consumer— right, many argue, to take this concept who then discards it when it no longer serves of a ‘circular economy’ one step further, its purpose. Indeed, this is more true now to analyse its promise for businesses and than ever—in terms of volume, some 65 billion economies, and to prepare the ground for tonnes of raw materials entered the economic its adoption. system in 2010, and this figure is expected to grow to about 82 billion tonnes in 2020 (see How does the circular economy compare Figure 1 in Chapter 1). to the race to improve efficiency within today’s ‘take-make-dispose’ economy? Whilst major strides have been made in What are the benefits of a restorative improving resource efficiency and exploring model to businesses and the economy? new forms of energy, less thought has been How can companies and policy makers given to systematically designing out material carry the concept to its breakthrough at leakage and disposal. However, any system scale? Can some of today’s fundamental based on consumption rather than on the shifts in technology and consumer restorative use of non-renewable resources behaviour be used to accelerate the entails significant losses of value and negative transition? To answer these questions effects all along the material chain. for the European Union, our researchers sought to identify success stories of Recently, many companies have also begun circular business models, to determine to notice that this linear system increases what factors enable these success stories, their exposure to risks, most notably higher and to glean from these examples a better resource prices and supply disruptions. sense of which sectors and products hold More and more businesses feel squeezed the most potential for circularity, how between rising and less predictable prices large this potential might be, and what in resource markets on the one hand and the broader economic impact could look high competition and stagnating demand like. In doing so, we reviewed about a for certain sectors on the other. The turn of dozen mainstream products reflecting the millennium marked the point when real various circular design concepts, undertook prices of natural resources began to climb economic analysis for key resource-intense upwards, essentially erasing a century’s worth business sectors, and interviewed more of real price declines (see Figure 4 in Chapter than 50 experts1. What came out clearly 1). At the same time, price volatility levels1 Unless explicitly statedotherwise, all quotations in this resembles a 16th century map more than an for metals, food, and non-food agriculturaldocument are from interviews exact account of the complete economic output in the first decade of the 21st centuryconducted in the period fromNovember 2011 through January benefits. But it is a promising picture, with were higher than in any single decade in the2012 (a list of experts consultedfor the analysis and reporting is product case study analyses indicating 20th century (see Figure 5 in Chapter 1). Ifgiven in the appendix) an annual net material cost savings2 no action is taken, high prices and volatility2 Savings described are net of opportunity of up to USD 380 billion in a will likely be here to stay if growth is robust,the resources consumed during transition scenario and of up to USD 630 populations grow and urbanise, and resourcecircular production processes,but they are gross of labour billion in an advanced scenario, looking extraction costs continue to rise. With threeand energy costs. In each casestudy we examined, energy costs only at a subset of EU manufacturing billion new middle-class consumers expectedrepresented an additional source sectors. to enter the market by 2030, price signalsof savings, as will be detailedlater in this report. Labour costs may not be strong or extensive enough torepresented an additional source turn the situation around fast enough toof savings for some productsbut not for others meet this growth requirement. Against this
TOWARDS THE CIRCULAR ECONOMY | 07An annual net material cost savings opportunity of upto USD 380 billion in a transition scenario and of up toUSD 630 billion in an advanced scenario, looking onlyat a subset of EU manufacturing sectors.backdrop, business leaders are in search of in place to ensure the return and thereaftera ‘better hedge’ and an industrial model that the reuse of the product or its componentsdecouples revenues from material input: the and materials at the end of its period of‘circular economy’. primary use.2. From linear to circular—Accelerating a These principles all drive four clear-cutproven concept sources of value creation that offer arbitrage opportunities in comparison with linearA circular economy is an industrial system product design and materials usage:that is restorative or regenerative byintention and design (see Figure 6 in Chapter The ‘power of the inner circle’ refers to2). It replaces the ‘end-of-life’ concept minimising comparative material usagewith restoration, shifts towards the use of vis-à-vis the linear production system. Therenewable energy, eliminates the use of toxic tighter the circle, i.e., the less a product haschemicals, which impair reuse, and aims for to be changed in reuse, refurbishment andthe elimination of waste through the superior remanufacturing and the faster it returnsdesign of materials, products, systems, and, to use, the higher the potential savings onwithin this, business models. the shares of material, labour, energy, and capital embedded in the product and on theSuch an economy is based on few simple associated rucksack of externalities (suchprinciples. First, at its core, a circular as greenhouse gas (GHG) emissions, water,economy aims to ‘design out’ waste. Waste toxicity).does not exist—products are designed andoptimised for a cycle of disassembly and The ‘power of circling longer’ refers toreuse. These tight component and product maximising the number of consecutive cyclescycles define the circular economy and set (be it reuse, remanufacturing, or recycling)it apart from disposal and even recycling and/or the time in each cycle.where large amounts of embedded energyand labour are lost. Secondly, circularity The ‘power of cascaded use’ refers tointroduces a strict differentiation between diversifying reuse across the value chain,consumable and durable components of as when cotton clothing is reused first asa product. Unlike today, consumables in second-hand apparel, then crosses to thethe circular economy are largely made of furniture industry as fibre-fill in upholstery,biological ingredients or ‘nutrients’ that are at and the fibre-fill is later reused in stone woolleast non-toxic and possibly even beneficial, insulation for construction—in each caseand can be safely returned to the biosphere— substituting for an inflow of virgin materialsdirectly or in a cascade of consecutive uses. into the economy—before the cotton fibresDurables such as engines or computers, are safely returned to the biosphere.on the other hand, are made of technicalnutrients unsuitable for the biosphere, The ‘power of pure circles’, finally, lieslike metals and most plastics. These are in the fact that uncontaminated materialdesigned from the start for reuse. Thirdly, streams increase collection and redistributionthe energy required to fuel this cycle should efficiency while maintaining quality,be renewable by nature, again to decrease particularly of technical materials, which, inresource dependence and increase system turn, extends product longevity and thusresilience (e.g., to oil shocks). increases material productivity.For technical nutrients, the circular economy These four ways to increase materiallargely replaces the concept of a consumer productivity are not merely one-off effectswith that of a user. This calls for a new that will dent resource demand for a shortcontract between businesses and their period of time during the initial phase ofcustomers based on product performance. introduction of these circular setups. TheirUnlike in today’s ‘buy-and-consume’ lasting power lies in changing the run rate ofeconomy, durable products are leased, required material intake. They can thereforerented, or shared wherever possible. If they add up to substantial cumulative advantagesare sold, there are incentives or agreements over a classical linear business-as-usual case (see Figure 10 in Chapter 2).
08 | TOWARDS THE CIRCULAR ECONOMYExecutive summaryContinuedThe report provides ample evidence that nutrients returns those back to the biospherecircularity has started to make inroads on via composting and anaerobic digestion.the linear economy and that it has moved Furthermore, reverse cycles will not only bebeyond the proof of concept—a number confined within an industry but also ‘cascaded’of businesses are already thriving on it. across different industries.Innovative products and contracts designedfor the circular economy are already available We analysed the options for several differentin a variety of forms—from innovative categories of resource-intensive products—designs of daily materials and products (e.g., from fast-moving consumer goods such asbiodegradable food packaging and easy-to- food and fashion, longer-lasting productsdisassemble office printers) to pay-per-use such as phones, washing machines, and lightcontracts (e.g., for tyres). Demonstrably, commercial vehicles. We also include single-these examples have in common that they family houses as an example of a long-lifehave focused on optimising the total system product. We used our circularity model toperformance rather than that of a single study products belonging to the ‘sweet-spot’component. segment—the segment with the highest circular economy potential—namely, complex3. How it works up close—Case examples of medium-lived products—in full depth. Ourcircular products analysis showed that use of circular economy approaches would support improvements suchIt is evident that reuse and better design as the following:can significantly reduce the material bill andthe expense of disposal. But how do these The cost of remanufacturing mobile phonesadvantages stack up against a production could be reduced by 50% per device—if thesystem that has been optimised for industry made phones easier to take apart,throughput? How can the governing principle improved the reverse cycle, and offeredof ‘selling more equals more revenues’ incentives to return phones.be replaced? And how can the choice forcircular products, and using rather than High-end washing machines would beconsuming, be rendered more attractive for accessible for most households if they werecustomers? leased instead of sold—customers would save roughly a third per wash cycle, and theIn order for companies to materialise manufacturer would earn roughly a third morethe savings associated with a circular in profits. Over a 20-year period, replacing thesystem by reusing resource inputs to the purchase of five 2,000-cycle machines withmaximum degree, they need to increase leases to one 10,000-cycle machine would alsothe rate at which their products are yield almost 180 kg of steel savings and morecollected and subsequently reused and/or than 2.5 tonnes of CO2e savings.their components/materials recuperated.Apart from the automotive industry, few The U.K. could save USD 1.1 billion a yearindustries currently achieve a collection on landfill cost by keeping organic foodrate of 25%. When shifting from linear to waste out of landfills—this would also reducecircular approaches, the rule of thumb for greenhouse gas emissions by 7.4 millionoptimisation is: ‘the tighter the reverse cycle, tonnes p.a. and could deliver up to 2 GWhthe less embedded energy and labour are worth of electricity and provide much-neededlost and the more material is preserved’. soil restoration and specialty chemicals.Today’s recycling processes are typically‘loose’ or long cycles that reduce material These results and those of the otherutility to its lowest ‘nutrient’ level. This products studied in detail in this report (lightis even more true for the incineration of commercial vehicle, smartphone, and textilewaste. In a circular economy, by contrast, cascade) confirm that with some adjustmentsreverse activities in the circular economy to product design, business model, reversewill extend across an array of circles for cycle processes, and/or other enabling factors,repair and refurbishment of products, and the circular system can yield significantremanufacturing of technical components. material productivity improvements and canLikewise, the reverse chain for biological be profitable for manufacturers:
TOWARDS THE CIRCULAR ECONOMY | 09 Analysis shows that the concept works and is economically viable and scalable for diverse products regardless of length of service life. Circular design, i.e., improvements in Radical designs win. The more consistently material selection and product design circular design principles were adopted in (standardisation/modularisation of the R&D phase of the cases we analysed, components, purer material flows, and design the higher the economic rewards seem to for easier disassembly) are at the heart of a be. Caterpillar, for example, says it is ‘just at circular economy. the beginning of full circular design—e.g., material science has already and will bring Innovative business models, especially further major progress into the longevity of changing from ownership to performance- components.’ based payment models, are instrumental in translating products designed for reuse into Admittedly, this remains a rough chart of attractive value propositions. the potential for the circular economy. It is our hope, however, that this exercise will Core competencies along reverse cycles and provide companies with sufficient confidence cascades involve establishing cost-effective, to embark on the transformational journey better-quality collection and treatment and identify profitable opportunities today— systems (either by producers themselves or especially piloting circular test cases can by third parties). often be done with little expansion to the core capabilities and at moderate risk. Enablers to improve cross-cycle and cross- sector performance are factors that support 4. An economic opportunity worth billions— the required changes at a systems level and Charting the new territory include higher transparency, alignment of incentives, and the establishment of industry Eliminating waste from the industrial chain standards for better cross-chain and cross- by reusing materials to the maximum extent sector collaboration; access to financing possible promises production cost savings and risk management tools; regulation and and less resource dependence. However, this infrastructure development; and—last but not report argues that the benefits of a circular least—education, both to increase general economy are not merely operational but awareness and to create the skill base to strategic, not just for industry but also for drive circular innovation. customers, and serve as sources of both efficiency and innovation. In summary, our analysis highlights the net benefits a circular economy could bring How economies win in terms of reduced material inputs and associated labour and energy costs as well Economies will benefit from substantial net as reduced carbon emissions along the entire material savings, mitigation of volatility and supply chain: supply risks, positive multipliers, potential employment benefits, reduced externalities, Not a niche-only solution. In the past, and long-term resilience of the economy: products associated with a circular model have targeted small niche segments. Substantial net material savings. Based However, our analysis shows that the concept on detailed product level modelling, the works and is economically viable and scalable report estimates that the circular economy for diverse products regardless of length of represents a net material cost saving service life. opportunity of USD 340 to 380 billion p.a. at EU level for a ‘transition scenario’ and Opportunities now. Despite our conservative USD 520 to 630 billion p.a. for an ‘advanced assumptions about changes in product and scenario’, in both cases net of the materials value chain design and consumer adoption, used in reverse-cycle activities (see Figure our analysis highlights significant business 18 in Chapter 4). The latter would equate to benefits today—even in a world with 19 to 23% of current total input costs3 or a entrenched consumer behaviour, imperfect recurrent 3 to 3.9% of 2010 EU GDP. Benefits3 Most recent data for design and material formulations, and far in the advanced scenario are highest in thesector input costs on EU from perfect incentives. automotive sector (USD 170 to 200 billionlevel come from EurostatInput/Output tables 2007 p.a.), followed by machinery and equipment
10 | TOWARDS THE CIRCULAR ECONOMYExecutive summaryContinued(USD 110 to 130 billion p.a.), and by electrical The circular approach offers developedmachinery (USD 75 to 90 billion p.a.). These economies an avenue to resilient growth, anumbers are indicative as they only cover systemic answer to reducing dependency‘sweet spot’ sectors that represent a little on resource markets, and a means to reduceless than half of GDP contribution of EU exposure to resource price shocks as well asmanufacturing sectors. They also assume societal and environmental ‘external’ coststhe addition of only one product cycle with that are not picked up by companies. Atoday’s technologies. Yet many cycles would circular economy would shift the economicbe possible and technological innovation balance away from energy-intensive materialscould likely lead to rapid improvements and primary extraction. It would create a newand additional cost savings. However, these sector dedicated to reverse cycle activitiesopportunities are clearly aspirational for for reuse, refurbishing, remanufacturing,now, and companies must make creative and and recycling. At the same time, emergingbold moves, break out of the linear system, market economies can benefit from the factand ensure that the underlying arbitrage that they are not as ‘locked-in’ as advancedopportunities are robust over time. economies and have the chance to leap- frog straight into establishing circular setupsMitigation of price volatility and supply when building up their manufacturing-basedrisks. The resulting net material savings sectors. Indeed, many emerging marketwould result in a shift down the cost curve economies are also more material intensivefor various raw materials. For steel the global than typical advanced economies, andnet material savings could add up to more therefore could expect even greater relativethan 100 million tonnes of iron ore in 2025 savings from circular business models. So,if applied to a sizeable part of the material the circular economy will have winners, andflows (i.e., in the steel-intensive automotive, it is worth exploring the dynamics that themachining, and other transport sectors, adoption of the circular economy will trigger.which account for about 40% of demand).In addition, such a shift would move us away How companies winfrom the steep right-hand side of the costcurve, thus likely reducing demand-driven Our case studies demonstrate that thevolatility (see Figure 19 in Chapter 4). principles of the circular economy—if thoughtfully applied—can provide short-Sectoral shift and possible employment term cost benefits today and some strikingbenefits. Creating a ‘user-centric economy’ longer-term strategic opportunities as wellespecially in the tertiary (services) sector as new profit pools in reverse cycle serviceswill lead to increased rates of innovation, (collection sorting, funding and financing ofemployment, and capital productivity, all of new business models).which are important multipliers. Importantly, the effects of the circularReduced externalities. As material and economy could mitigate a number ofproducts are the carrier of the embedded strategic challenges companies face today:externalities, a reduction in volumes willalso lead to a reduction in associated Reduced material bills and warranty risks.externalities—higher than any incremental Through reselling and component recovery,efficiency improvement in the existing a company can significantly reduce thematerial chain. material bill, even without the effects from yet-to-be-created circular materials andLasting benefits for a more resilient advanced reverse technology. In addition,economy. Importantly, any increase in ‘building to last’ can also reduce warrantymaterial productivity is likely to have a costs.positive impact on economic developmentbeyond the effects of circularity on specificsectors. Circularity as a ‘rethinking device’has proved to be a powerful new frame,capable of sparking creative solutions andstimulating innovation.
TOWARDS THE CIRCULAR ECONOMY | 11 The principles of the circular economy—if thoughtfully applied—can provide short-term cost benefits today and some striking longer-term strategic opportunities Improved customer interaction and 5. The shift has begun—‘Mainstreaming’ loyalty. Getting products returned to the the circular economy manufacturer at the end of the usage cycle requires a new customer relationship: Our economy is currently locked into a ‘consumers’ become ‘users’. With leasing system where everything from production or ‘performance’ contracts in place, more economics and contracts to regulation customer insights are generated for improved and mindsets favours the linear model of personalisation, customisation, and retention. production and consumption. However, this lock-in is weakening under the pressure of Less product complexity and more several powerful disruptive trends: manageable life cycles. Providing stable, First, resource scarcity and tighter sometimes reusable product kernels or environmental standards are here to skeletons, and treating other parts of the stay. Their effect will be to reward circular product as add-ons (such as software, businesses over ‘take-make-dispose’ casings, or extension devices), enables businesses. As National Grid explains: companies to master the challenge of ever- ‘we are now analysing our supply chains shorter product life cycles and to provide systematically [for circularity potential]. The highly customised solutions whilst keeping potential is bigger than we initially thought’. product portfolio complexity low. Second, information technology is now so How consumers and users win advanced that it can be used to trace material through the supply chain, identify products The benefits of tighter cycles will be shared and material fractions, and track product between companies and customers. And status during use. Furthermore, social media yet the examples in the report indicate that platforms exist that can be used to mobilise the real customer benefits go beyond the millions of customers around new products price effect and extend to reduced costs and services instantaneously. of obsolescence, increased choice, and secondary benefits. Third, we are in the midst of a pervasive shift in consumer behaviour. A new generation Premature obsolescence is reduced in of customers seem prepared to prefer built-to-last or reusable products. For the access over ownership. This can be seen in customer, this could significantly bring down the increase of shared cars,4 machinery, and total ownership costs. even articles of daily use. In a related vein, social networks have increased the levels Choice and convenience are increased as of transparency and consumers’ ability to producers can tailor duration, type of use, advocate responsible products and business and product components to the specific practices. customer—replacing today’s standard purchase with a broader set of contractual Circular business design is now poised options. to move from the sidelines and into the mainstream. The mushrooming of new and Secondary benefits accrue to the customer more circular business propositions—from if products deliver more than their basic biodegradable textiles to utility computing— function—for example, carpets that act as confirms that momentum. air filters or packaging as fertiliser. Needless to say, customers will also benefit from the And yet, the obstacles remain daunting. They reduction of environmental costs in a circular range from current product design, to cultural system. resistance, to ‘subsidised’ commodity and4 Organised car sharing has energy prices. Some of these barriers maybeen growing from fewer Whilst the transition to a circular economy fade on their own, with time. Others couldthan 50,000 membersof car-sharing programs will bring dislocations, higher resource require specific new frameworks—in termsglobally in the mid-1990s, to and materials productivity should have a of corporate governance, cross-industryaround 500,000 in the late2000s. According to Frost & stabilising effect, creating some ‘breathing collaboration, technology, or regulation.Sullivan, this number is likelyto increase another 10-fold room’ as the world deals with the strains ofbetween 2009 and 2016 expanding and ageing societies.
12 | TOWARDS THE CIRCULAR ECONOMYExecutive summaryContinuedTo push circularity past its tipping point Such a transition offers new prospects toand capture the larger prize projected for economies in search of sources of growth2025, the Ellen MacArthur Foundation and and employment.At the same time, it is aits partners intend to lay further groundwork source of resilience and stability in a moreand work towards the removal of some volatile world. Its inception will likely followsignificant obstacles. Here is a roadmap for a ‘creative destruction’ pattern and createthat revolution: winners and losers. The time to act is now.The next five years will be the pioneering As our resource consumption andphase. We expect that industry pioneers dependence continue to rise and our growthwill start building competitive advantage threatens to negate our production efficiencyin various ways: they will build core efforts, governments and companies havecompetencies in circular product design, started looking at the circular model not onlydrive business model innovation, create the as a hedge against resource scarcity but ascapacities for the reverse cycle, and use an engine for innovation and growth. Thisthe brand and volume strength of leading report suggests that this opportunity is realcorporations to gain market share. With these and represents an attractive new territoryprerequisites in place, the benefits associated for pioneering enterprises and institutions.with our transition scenario seem within This report is, however, just the start ofreach—material cost savings in the ‘sweet a mobilisation process—we intend to gospot’ sectors of 12 to 14% p.a. deeper into different products and sectors, assess the business opportunity in moreTowards 2025, there is a chance for detail, identify roadblocks and provide thecircularity to go mainstream, and for savings tools to overcome them, and understand theto move beyond the 20% mark, as described macroeconomic impacts in more depth. Thein the advanced scenario. However, more Ellen MacArthur Foundation and its partnerstransformational change is needed from the are committed to identifying, convening,corporate sector and from government given and motivating the pioneers of the circulartoday’s taxation, regulatory, and business economy. The Foundation provides the factclimate. The mainstreaming phase will base and case study repository, shares bestinvolve organising reverse-cycle markets, practices, and excites and educates the nextrethinking taxation, igniting innovation and generation through the opportunities thisentrepreneurship, stepping up education, and redesign revolution creates. In this way, itissuing a more suitable set of environmental helps to bring down the barriers and createguidelines and rules—especially with regards the leadership and momentum that the boldto properly accounting for externalities. vision of the circular economy deserves.Moving manufacturing away from wastefullinear material consumption patterns couldprove to be a major innovation engine, muchas the renewable energy sector is today.
1The limits of linear consumptionOutlines the limits of the current ‘take-make-dispose’ system and assesses therisks it poses to global economic growth.
14 | TOWARDS THE CIRCULAR ECONOMY 1. The limits of linear consumption Throughout its evolution and diversification, a circular economy, unlimited resources our industrial economy has never moved like labour take on a more central role in beyond one fundamental characteristic economic processes, and resources that established in the early days of are limited by natural supply play more industrialisation: a linear model of resource of a supporting role. This concept holds consumption that follows a ‘take-make- considerable promise, as has already been dispose’ pattern. Companies extract verified in a number of industries, of being materials, apply energy and labour to able to counter-act the imbalances currently manufacture a product, and sell it to an end building up between the supply of and consumer—who then discards it when it no demand for natural resources. longer serves its purpose. While great strides have been made in improving resource More efficiency remains desirable, but to efficiency, any system based on consumption address the magnitude of the resource rather than on the restorative use of crunch now approaching, minimising inputs resources entails significant losses all along must be joined by innovating the way we the value chain. work with the output. Making the leap from consuming and discarding products to Recently, many companies have also begun using and reusing them to the maximum to notice that this linear system increases extent possible, in closer alignment with the their exposure to risks, most notably higher patterns of living systems, is vital to ensure resource prices. More and more businesses that continuing growth generates greater feel squeezed between rising and less prosperity. predictable prices in resource markets on the one hand and stagnating demand in many Since farming began in the Fertile Crescent consumer markets on the other. The start around 10,000 years ago, the world’s of the new millennium marks the turning population has increased nearly 15,000- point when real prices of natural resources fold, from an estimated total of 4 million5 began to surge upwards, essentially erasing a (less than half the population of Greater century’s worth of real price declines. At the London today) to pass the 7 billion mark same time, price volatility levels for metals, in October 2011—and it is projected to food, and non-food agricultural output in the grow to 9 billion by 2050. While about two first decade of the 21st century were higher billion people continue to subsist in basic than in any single decade in the 20th century. agrarian conditions or worse, three billion are Prices and volatility are likely to remain expected to join the ranks of middle-class high as populations grow and urbanise, consumers by 2030. Their new prosperity will resource extraction moves to harder-to- trigger a surge of demand both larger and in reach locations, and the environmental costs a shorter time period than the world has ever associated with the depletion of natural experienced. Even the most conservative capital increase. projections for global economic growth over the next decade suggest that demand for Against this backdrop, the search for an oil, coal, iron ore, and other natural resources industrial model that can further decouple will rise by at least a third, with about 90% sales revenues from material input has of that increase coming from growth in5 McEvedy, C., and R. Jones increased interest in concepts associated emerging markets.6(1978), Atlas of WorldPopulation History, 368 pp., with the ‘circular economy’. Though stillPenguin, London a theoretical construct, the term ‘circular The current ‘take-make-dispose’ model6 McKinsey Global Institute: economy’ denotes an industrial economy entails significant resource lossesResource revolution: Meeting that is restorative by intention and design.the world’s energy, materials,food, and water needs; In a circular economy, products are Through most of the past century, decliningNovember 2011 designed for ease of reuse, disassembly real resource prices have supported7 The low and steadily falling and refurbishment, or recycling, with the economic growth in advanced economies.7level of resource prices, in realterms, over the 20th century— understanding that it is the reuse of vast The low level of resource prices, relative toand its positive implications amounts of material reclaimed from end- labour costs, has also created the currentfor economic growth—arediscussed in depth in the of-life products, rather than the extraction wasteful system of resource use. ReusingMcKinsey Global Institute’sNovember 2011 report Resource of resources, that is the foundation of materials has not been a major economicRevolution, cited above economic growth. With the adoption of priority, given the ease of obtaining new
TOWARDS THE CIRCULAR ECONOMY | 15 FIGURE 1 Global resource extraction is expected to grow to 82 billion tonnes in 2020 Global resource extraction1 % change, BILLION TONNES 1980-2020 82 CAGR: 11 200 +1.8% 65 8 15 81 55 6 12 40 11 20 67 Metal ores 4 16 Fossil energy carriers 8 16 Biomass 12 36 116 27 Non-metallic 22 minerals 16 1980 2002 2010E2 2020E Per capita TONNES 9.1 8.7 9.5 10.6 1 Resource used: amount of extracted resources that enters the economic system for further processing or direct consumption. All materials used are transformed within the economic system, incl. material used to generate energy and other material used in the production process 2 Forecasted from 2002 OECD figures and OECD extraction scenario for 2020 SOURCE: OECD; Behrens (2007); WMM Global Insight; Ellen MacArthur Foundation circular economy team input materials and cheaply disposing agricultural harvesting losses, as well as of refuse. In fact, the biggest economic soil excavation and dredged materials from efficiency gains have resulted from using construction activities).8 more resources, especially energy, to reduce labour costs. The system has had difficulties Food markets provide a snapshot of wastage in correcting itself as long as the fiscal along the value chain. Losses of materials regimes and accounting rules that govern it occur at several different steps in the allowed for a broad range of indirect costs production of food: losses in the field due to to remain unaccounted for—the so-called pests or pathogens, losses during agricultural ‘externalities’. Further inertia on the part production due to poor efficiency, spills or of the market stems from lock-in effects, leakages during transport (exacerbated by for example due to the lengthy and costly ever-longer global supply chains), losses approval periods faced by some products during storage and at the retailer’s due to such as pharmaceuticals and fertilisers. food surpassing its sell-by date or being stored in the wrong conditions, and products We characterise the resulting system as a simply going unused by end consumers. ‘take-make-dispose’ or ‘linear’ model. The Along the entire food supply chain, these premise of this model is simple: companies losses globally add up to an estimated extract materials, apply energy to them to one-third of food produced for human manufacture a product, and sell the product consumption every year.9 to an end consumer, who then discards it when it no longer works or no longer serves End-of-life waste. For most materials, rates the user’s purpose. The linear production of conventional recovery after the end of model incurs unnecessary resource losses in their (first) functional life are quite low several ways: compared with primary manufacturing rates. In terms of volume, some 65 billion tonnes of Waste in the production chain. In the raw materials entered the global economic production of goods, significant volumes system in 2010—a figure expected to grow to of materials are commonly lost in the chain about 82 billion tonnes in 2020 (Figure 1). between mining and final manufacturing. For In Europe, 2.7 billion tonnes of waste was instance, the Sustainable Europe Research generated in 2010, but only about 40% of8 Materialsflows.net Institute (SERI) estimates that, each year, that was reused, recycled, or composted9 J. Gustavsson, C. Cederberg,U. Sonesson, R. van Otterdijk, the manufacturing of products in OECD and digested (Figure 2). Looking atA. Meybeck. Global food losses countries consumes over 21 billion tonnes of individual waste streams, an even starkerand food waste – Extent, causesand prevention. Food And materials that aren’t physically incorporated picture emerges: current recycling ratesAgriculture Organization Of The into the products themselves (i.e., materials are significant for only a handful of wasteUnited Nations, Rome, 2011 that never enter the economic system—such types, mostly those that occur in large, fairly10 UNEP International ResourcePanel Recycling Rates of Metals as overburden and parting materials from homogeneous volumes. A recent UNEP– a status report. 2011 mining, by-catch from fishing, wood and report,10 for example, notes that only around
16 | TOWARDS THE CIRCULAR ECONOMY 1. The limits of linear consumption Continued Losses are also apparent at the level of FIGURE 2 specific industries. Rubble produced during We are still losing enormous tonnages of material Million tonnes, EU27, 2010E the construction and demolition of buildings, which accounts for 26% of the total non- 2,670 industrial solid waste produced in the United States, includes many recyclable materials Other1 211 from steel to wood to concrete. Only 20 Energy 93 to 30% of all construction and demolition production waste is ultimately recycled or reused, often Water collection treatment & 170 because buildings are designed and built supply2 in a way that is not conducive to breaking 60% down parts into recyclable let alone reusable Households 226 of total components (Figure 3).13 The result is a waste not recycled, significant loss of valuable materials for the composted or reused system. Industrial 350 Energy use. In the linear system, disposal of a product in landfill means that all its residual energy is lost. The incineration or recycling of discarded products recoups a small share of 1,116 this energy, whereas reuse saves significantly Mining & quarrying 742 more energy. The use of energy resources in 104 Other3 a linear production model is typically most 20 Glass & plastics 65 Paper & wood intensive in the upstream parts of the supply Animal & vegetal chain—i.e., the steps involved in extracting 68 materials from the earth and converting 76 Metals them into a commercially usable form. In the production of semi-finished aluminium products (‘semis’), for instance, the processes of refining, smelting, and casting Construction 878 783 Minerals bauxite into semi-finished aluminium account for 80% of the energy consumed (and 67% of the total costs incurred).14 Because much of this energy can be saved with a system that11 U.S. Geological SurveyMinerals Information Database relies less on upstream production, i.e., does not use new materials as inputs each time12 Losses are calculated based Total Recycled,on expected recovered volume end-of-life composted, a product is made, the aluminium industryof 2010 metal production, streams and reused and its customers have been quite relentlessassuming today’s materialsrecycling rates remaining in pursuing high recycling rates (accordingconstant until end-of-life of 1 Includes services and agriculture, forestry & fishingall product applications. The 2 Also includes sewerage and other waste management activities to UNEP, end-of-life recycling rates fordifference between recovered 3 Includes used oils, rubber, textiles, household waste, chemical waste, and other non-specified aluminium range from 43 to 70%, whilevolume and hypotheticallyrecoverable volumes under SOURCE: Eurostat waste statistics (2011) those for other major non-ferrous metalscomplete recycling, multiplied are lower—e.g., copper 43 to 53%, zinc 19 towith today’s market pricesfor secondary materials, gives 52%, magnesium 39%).15 This has not beenmonetary loss the case for most other metals, although it is one-third of the 60 metals it studied showed13 U.S. EPA, Buildings and their particularly relevant in an economic systemImpact on the Environment: A a global end-of-life recycling rate of 25% orStatistical Summary; revised that is largely dependent on fossil fuels for more. Taking a closer look at various ferrousApril 22, 2009 the provision of its energy, as these cannot and non-ferrous metals reveals that even for14 JFK database; WBMS; EAA; be replaced within a reasonable time scaleIAI; NFID model v4.30; McKinsey metals that already have high recycling rates, and come with a greenhouse gas footprint.analysis significant value is lost—ranging from annual While the consumption of energy for15 UNEP International Resource losses of USD 52 billion for copper andPanel, Recycling Rates of Metals biological inputs is spread fairly evenly along USD 34 billion for gold, to USD 15 billion for– a status report. 2011 the value chain, here, too, total consumption aluminium and USD 7 billion for silver.11 1216 McKinsey Global Institute: is significant—in the U.S., for example, itResource revolution: Meeting theworld’s energy, materials, food, is 17% of all energy demand16 —and theand water needs; November 2011 reduction of post-consumer food waste
TOWARDS THE CIRCULAR ECONOMY | 17 FIGURE 3 Construction and demolition (C&D): A noteworthy opportunity US C&D waste 2008 C&D is a significant Less than one-third is A lot of the discarded material waste stream currently recovered could be recovered 100% = 100% = 100% = Potential 615 mn tonnes 160 mn tonnes 112-128 mn tonnes applications Other 14% Recycled 20% or reused - Gypsum board 10% Fertilizer additive 30% Concrete/rock/brick 11% Gravel, erosion control Reuse of soil Soil/fines 11% after treatment 74 26 C&D Asphalt products 14% Road building material 70% Discarded - 80% Wood flooring Lumber 40% construction material C&D waste as End-of-life Composition of a share of total treatment of discarded C&D waste C&D waste SOURCE: Buildings and their Impact on the Environment: A Statistical Summary; revised April 22, 2009 – EPA; Journal of Environmental Engineering; Ellen MacArthur Foundation circular economy team could thus offer tremendous energy savings. climate and water regulation, the depletion The reduced energy intensity of the circular of timber and fuel supplies, losses in model results in a reduction of threshold agricultural productivity, and the costs of lost energy demand and further enables a shift to nutrient cycling, soil conservation, and flood renewable energy—a virtuous cycle. prevention.19 Erosion of ecosystem services. At least as The current model creates imbalances that troubling as climate change, and far less weigh on economic growth well understood, is the erosion over the past two centuries of ‘ecosystem services’, that The troubles inherent in a system that does is those benefits derived from ecosystems not maximise the benefits of energy and that support and enhance human wellbeing, natural resource usage have become evident such as forests (which, as an essential both in the high level of real commodity counterpart of atmospheric, soil, and prices, and in their volatility.17 Ruth DeFries, Stefano hydrological systems, absorb carbon dioxidePagiola et al, Millennium and emit oxygen, add to soil carbon, and Since 2000, the prices of natural resourcesEcosystem Assessment,Current State & Trends regulate water tables—and deliver a host of have risen dramatically, erasing a century’sAssessment, 2005 other benefits). The Millennium Ecosystem worth of real price declines. In McKinsey’s18 Will Steffen, Åsa Persson Assessment examined 24 ecosystems Commodity Price Index for 2011, theet al, The Anthropocene:From Global Change to services, from direct services such as food arithmetic average of prices in fourPlanetary Stewardship, 2011 provision to more indirect services such as commodity sub-indices (food, non-food19 TEEB for Business, The ecological control of pests and diseases, agricultural items, metals, and energy)Economics of Ecology and and found that 15 of the 24 are being stood at a higher level than at any time inBiodiversity, 2010 degraded or used unsustainably. In other the past century (Figure 4).20 Higher prices20 Sources: Grilli and Yang;Pfaffenzeller; World Bank; words, humanity now consumes more than for commodities, most notably oil andInternational Monetary Fund; the productivity of Earth’s ecosystems can food, are in the headlines—from the record-Organisation forEconomic Cooperation and provide sustainably, and is thus reducing breaking USD 147/barrel price for WestDevelopment statistics; the Earth’s natural capital, not just living Texas Intermediate crude oil in 2008 to theUN Food and AgricultureOrganization; UN Comtrade; off of its productivity.17 18 As an example 107% rise in wheat prices from June 2010McKinsey analysis of the potential cost associated with this to January 2011, setting off unrest in several21 Chicago Mercantile trend, a recent report, The Economics of emerging market economies.21 22 SimilarlyExchange (http://www.cmegroup.com/company/ Ecosystems and Biodiversity, suggests that dramatic price increases have hit otherhistory/magazine/vol7- ecosystem services lost to deforestation in commodities, from base metals to preciousissue2/epicenterof-energy.html) China alone cost the global economy some metals and specialty materials like rare earth22 IndexMundi (http://www. USD 12 billion annually over the period from oxides. Even in the absence of specific priceindexmundi.com/commoditi 1950 to 1998. These losses accrue across spikes, sustained higher resource costses/?commodity=wheat&months=60) several dimensions, including the costs of
18 | TOWARDS THE CIRCULAR ECONOMY 1. The limits of linear consumption Continued of exchange-traded funds) has given new FIGURE 4 Sharp price increases in commodities since 2000 have investors access to commodity markets, erased all the real price declines of the 20th century creating the potential for ‘fad’ investments to McKinsey Commodity Price Index (years 1999-2001 = 100)1 exacerbate near-term price swings. 260 240 World War I Together, high and volatile commodity prices 220 • dampen the growth of global businesses— 1970s and ultimately economic growth. These 200 oil shock • effects manifest themselves in two main 180 World War II ways: input cost spikes and increasing 160 hedging costs. As commodity prices have 140 • risen, companies have reported a hit on 120 profits due to sharp increases in input 100 • • costs. PepsiCo, for instance, announced in 80 Post-war Turning point February 2011 that it expected input costs Great 60 Depression Depression in price trend for the fiscal year to rise by USD 1.4 to 1.6 billion, or between 8 and 9.5% of total input 40 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 costs, due to commodity price increases.24 1 Based on arithmetic average of 4 commodity sub-indices: food, non-food agricultural items, metals, and energy; PepsiCo also said that it didn’t plan to fully 2011 prices based on average of first eight months of 2011. offset these losses through price-hikes— SOURCE: Grilli and Yang; Pfaffenzeller; World Bank; International Monetary Fund; Organisation for highlighting another, parallel trend, in Economic Co-operation and Development statistics; UN Food and Agriculture Organization; UN Comtrade; Ellen MacArthur Foundation circular economy team which firms face a ‘profit squeeze’ because competition prevents them from offsetting input price increases by raising their sales could certainly dampen the prospects for an price. Tata Steel offers another recent case in already fragile global economy, and are not point: the purchase price of input materials going unnoticed by companies. for steelmaking jumped, but the market price for steel did not rise enough to offset Also troubling, from a business standpoint, is Tata’s suddenly higher costs, leading to lost the recent jump in the volatility of resource margins for the company.25 Some firms that prices. For metals, food, and non-food rely heavily on commodities as raw inputs agricultural items, volatility levels in the first minimise their exposure to future price- decade of the 21st century were higher than swings via hedging contracts—at a cost. in any decade in the 20th century The total cost of hedging varies significantly (Figure 5).23 depending on a company’s credit rating and the expected volatility of markets, but in the Several factors have driven commodity current market environment, a firm lacking a23 Annual price volatility price volatility over the past decade. First, first-rate credit history could well spend 10%calculated as the standard increased demand for many metals has of the total amount it hedges on financialdeviation of McKinseycommodity subindices divided pushed prices to the far right end of their service fees.26 These fees represent not onlyby the average of the subindexover the time frame; Source: respective cost curves—where the cost of a direct cost but also an opportunity cost—inMcKinsey Global Institute producing an additional unit of output is less volatile markets, money is more likely to24 Jonathan Birchall, ‘Pepsi relatively high. This results in a situation be spent on business projects, research, andfaces steep input price inflation’, where small shifts in demand can lead innovation, potentially leading to growth.Financial Times, 10 February 2011 to disproportionately large price swings.25 ‘Tata Steel Q2 net profitplunges 89%’, Economic Times, Simultaneously, the exhaustion of easy- Current imbalances are likely to get worse11 November 2011 to-access reserves has increased the before they get better26 Chana Schoenberger, technological requirements for extracting“Exposed!” The Wall Street many commodities—from oil and gas to Several factors indicate that resourceJournal, 2 March,, 2011 zinc and gold—making resource access scarcity, price squeezes, and volatility will27 Per-capita GDP, measured in1990 international dollars, PPP more vulnerable to malfunctions and hence continue or increase. Here we outline someand inflation weighted; Source: disruptions in the supply chain. Weather of the more prominent challenges of meetingAngus Maddison; University ofGroningen patterns and political shocks, too, have future resource needs: continually jarred supply dynamics. And28 McKinsey Global Institute:Resource revolution: Meeting the finally, innovation in financial marketsworld’s energy, materials, food,and water needs; November 2011 (including the development and proliferation
TOWARDS THE CIRCULAR ECONOMY | 19 circular economy principles into business FIGURE 5 models sooner rather than later. The baseline Price volatility has risen above long-term trends in recent decades UN forecast for global population growth Price volatility1, in %, 10-year average ending at start of year cited2 projects the global population will stabilise Food Metals Agricultural materials at around 10 billion by 2100.29 All the same, 35 important demographic shifts within the global population could ultimately prove more 30 Volatility increases across commodities important than the size of the population in 2000s itself, especially the three billion new 25 individuals entering the consuming middle 20 class by 2030.30 15 Infrastructure needs. Besides more 10 infrastructure for a larger population, the world will also need to expand its 5 infrastructure to get at harder-to-access resources. Newly discovered reserves do 0 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2011 exist, but tapping them will require heavy investment in infrastructure and new 1 Calculated as the standard deviation of the commodity sub-index divided by the average of the sub-index over the time frame technology. McKinsey estimates that (all else 2 2000-2011: 11-year average being equal) meeting future demands for SOURCE: Grilli and Yang; Pfaffenzeller; World Bank; International Monetary Fund; Organisation for Economic Co-operation and Development statistics; UN Food and Agriculture Organization; UN Comtrade; steel, water, agricultural products, and energy Ellen MacArthur Foundation circular economy team would require a total investment of around USD 3 trillion per year31 —an amount roughly Demographic trends. The world faces a 50% higher than current investment levels.29 The most reliable and unique demographic challenge over the Should this investment fail to materialise, thecommonly cited models for globalpopulation growth are those of coming decades—though the economic result could be continued supply constraints.the United Nations. aspects of demographics may prove more This threat is particularly pressing forThe UN’s estimates varysignificantly based on the fertility difficult to manage than the population agriculture in advanced economies, many ofrate used as an input, but all oftheir core scenarios aspects. China and India, the two largest which are much closer to the technologicalinvolve fertility rates significantly countries by population, are each poised to limit and already producing near theirbelow thecurrent global rate undergo a significant economic transition maximum potential yields.32 in coming decades. Looking at the recent30 United Nations PopulationDivision: World Population past gives a sense of both the scope and the Political risks. Recent history showsProspects: 2010 Revision, 2010;and McKinsey Global speed of the shift. China, starting in 1982, the impact political events can have onInstitute: Resource revolution: took only 12 years to double its per-capita commodity supply. There are numerousMeeting the world’s energy,materials, food, and water needs; GDP from USD 1,300–2,600, and India, historical instances in which political eventsNovember 2011” starting in 1989, took only 16 years to achieve have triggered commodity price spikes:31 McKinsey Global Institute: the same doubling.27 By comparison, it took the 1972 Arab oil embargo is one example;Resource revolution: Meeting theworld’s energy, materials, food, the United Kingdom 154 years to make another is the export declines following theand water the same transition. Every bit as striking is 1978 Iranian revolution; a third is the priceneeds; November 2011 the sheer number of people in China’s and shocks following Iraq’s invasion of Kuwait in32 Based on yield achievement of India’s populations entering these periods 1990.33 Some commodities are particularlywheat, rice, maize, and soybean;maximum attainable yield of economic growth—which implies that a vulnerable: nearly half the new projects toprovided by International Institutefor Applied Systems Analysis breathtaking number of new middle-class develop copper reserves, for instance, are inand benchmarked by region consumers could be entering the global countries with high political risk.34 Perhapsbased on climate and technology.Data from Food and Agriculture economy if the two countries continue more shockingly, roughly 80% of all availableOrganization and International their current growth patterns. McKinsey arable land on earth lies in areas afflicted byInstitute for Applied SystemsAnalysis anticipates the emergence of three billion political or infrastructural issues. Some 37%33 ‘Oil markets and Arab new middle-class consumers by 2030, led of the world’s proven oil reserves, and 19%unrest: The Price of Fear’, by economic growth in these two countries of proven gas reserves, are also in countriesThe Economist, March 3, 2011 and other rapidly growing—and significantly with a high level of political risk. Political34 Political risk as per the sized—emerging market economies.28 This decisions also drive cartels, subsidies, andEconomist Intelligence Unit’sPolitical Instability Index. mass of new spenders will have significant trade barriers, all of which can trigger orCountries scoring more than 5.0on ‘underlying vulnerability’ are impact on resource demand, a prospect that worsen resource scarcity and push up pricesclassified as ‘low political stability’ underlines the potential value of introducing and volatility levels
20 | TOWARDS THE CIRCULAR ECONOMY 1. The limits of linear consumption Continued Globalised markets. The rapid integration of It is true that a few individual companies financial markets and the increasing ease of have already started taking the initiative transporting resources globally mean that to counter the negative effects of a linear regional price shocks can quickly become approach. The set of benefits that can be global. There are many examples in recent captured by an individual company on history, from the impact that Hurricane its own, however, is bounded, and system Ike in the Gulf of Mexico had on energy limitations will need to be addressed in markets, to the air travel chaos caused by order to let markets react fully to the pricing the eruption of the Eyjafjallajökull in Iceland, signals described. A good example of such to the supply chain disruptions ensuing from system-enhancing steps is the levying the Fukushima disaster in Japan. This trend of landfill taxes in a growing number of is likely to continue and, in all likelihood, to countries, as this provides a more level become more acute as emerging markets playing field for waste treatment and product integrate more thoroughly into global value recovery methods that aim to preserve chains and financial systems. resources. A further step might then be to render some of the environmental and social Climate. Some resource industries could effects of our resource-based systems more face disruption from variations in regional visible so as to let them steer the market. climates over time, particularly water and agriculture. The U.S. Environmental In this report, we argue for a specific type Protection Agency suggests that changes in of productivity—a more ‘circular’ business climate could affect snow cover, stream flow, model in which many more products are and glacial patterns—and hence fresh water reused, refurbished, and redistributed than supply, erosion patterns, irrigation needs, and today. More components and materials flood management requirements, and thus could be remanufactured and ultimately the overall supply of agricultural products.35 recycled. And more food and other organic Supply constraints and uncertainty would waste could loop through value-extracting likely drive up prices and volatility. McKinsey processes such as biochemical extraction research suggests that by 2030, the disparity and anaerobic digestion. Our preliminary between global water demand and water research shows that moving in the direction supply could reach 40%, driven in large part of such a model could lead to significant by increased demand for energy production, economic benefits for specific industries. It which is highly water-intensive.36 could more broadly help mitigate aspects of the current system that put pressure on Taken together, these dynamics present resource supply, commodity prices, and a major challenge for the current ‘take- volatility. It could also restore the natural make-dispose’ system. While this system, capital that is essential for the continual too, will respond to price signals, these provision of food, feed, and fibre. signals are incomplete and distorted. We therefore believe that under a business-as- usual scenario the market will not overcome the lock-in effect of existing production economics, regulations, and mindsets and will therefore not address the large and continued imbalances described here quickly and extensively enough to be able to keep meeting future demand. If it was declining resource prices that fuelled much35 ‘Climate ChangeIndicators: Snow and Ice’, of the economic growth of the past century,from: Climate ChangeIndicators Report, U.S. upward price shifts could, if not stall, thenEnvironmental Protection severely hamper further growth in theAgency, 2010, p. 54 decades to come.36 McKinsey andCompany: Transformingthe Water Economy –Seven Ways to EnsureResources for Growth;January 2011
2 TOWARDS THE CIRCULAR ECONOMY | 04From linear to circularAccelerating a proven conceptFrames the opportunities presented by a circulareconomy, the origins and early successes of theproven concept of circular business models, and 1the ways in which they drive value creation.
22 | TOWARDS THE CIRCULAR ECONOMY 2. From linear to circular Accelerating a proven concept The linear ‘take-make-dispose’ model relies service shifts, where appropriate. As circular on large quantities of easily accessible economy thinker Walter Stahel explains, ‘The resources and energy, and as such is linear model turned services into products increasingly unfit for the reality in which that can be sold, but this throughput it operates. Working towards efficiency approach is a wasteful one. [...] In the past, alone—a reduction of resources and fossil reuse and service-life extension were often energy consumed per unit of manufacturing strategies in situations of scarcity or poverty output—will not alter the finite nature and led to products of inferior quality. Today, of their stocks but can only delay the they are signs of good resource husbandry inevitable. A change of the entire operating and smart management’.38 system seems necessary. The circular economy is based on a few The circular economy perspective and simple principles principles Design out waste. Waste does not exist when The circular economy refers to an industrial the biological and technical components economy that is restorative by intention; (or ‘nutrients’) of a product are designed by aims to rely on renewable energy; minimises, intention to fit within a biological or technical tracks, and eliminates the use of toxic materials cycle, designed for disassembly chemicals; and eradicates waste through and refurbishment. The biological nutrients careful design. The term goes beyond the are non-toxic and can be simply composted. mechanics of production and consumption of Technical nutrients—polymers, alloys, and goods and services in the areas that it seeks other man-made materials are designed to be to redefine (examples include rebuilding used again with minimal energy and highest capital, including social and natural, and the quality retention (whereas recycling as shift from consumer to user). The concept commonly understood results in a reduction of the circular economy is grounded in the in quality and feeds back into the process as study of non-linear systems, particularly a crude feedstock). living ones. A major consequence of taking insights from living systems is the notion of Build resilience through diversity. optimising systems rather than components, Modularity, versatility, and adaptivity are which can also be referred to as ‘design prized features that need to be prioritised to fit’. It involves a careful management in an uncertain and fast-evolving world. of materials flows, which, in the circular Diverse systems with many connections economy, are of two types as described and scales are more resilient in the face of by McDonough and Braungart: biological external shocks than systems built simply for nutrients, designed to re-enter the biosphere efficiency—throughput maximisation driven safely and build natural capital, and technical to the extreme results in fragility. nutrients, which are designed to circulate at high quality without entering the biosphere.37 Michael Braungart confirms, ‘Natural systems support resilient abundance by adapting As a result, the circular economy draws a to their environments with an infinite mix sharp distinction between the consumption of diversity, uniformity and complexity. and use of materials: circular economy The industrial revolution and globalisation advocates the need for a ‘functional service’ focused on uniformity so our systems model in which manufacturers or retailers are often unstable. To fix that we can increasingly retain the ownership of their manufacture products with the same flair for37 William McDonough and products and, where possible, act as service resilience by using successful natural systemsMichael Braungart, Cradle toCradle: remaking the way we providers—selling the use of products, not as models’.make things, New York:North Point Press, 2002 their one-way consumption. This shift has direct implications for the development of Rely on energy from renewable sources.38 Unless explicitly statedotherwise, all quotations in this efficient and effective take-back systems and Systems should ultimately aim to run ondocument are from interviews the proliferation of product- and business- renewable sources. As Vestas, the windconducted in the period fromNovember 2011 through January model design practices that generate more energy company, puts it: ‘Any circular story2012 (A list of experts consultedfor the analysis and reporting is durable products, facilitate disassembly should start by looking into the energygiven in the appendix) and refurbishment, and consider product/
TOWARDS THE CIRCULAR ECONOMY | 23‘Rather than using eco-efficiency to try and minimise material flows, eco-effectivenesstransforms products and related material flows to support a workable relationshipbetween ecological systems and economic growth. Instead of reducing or delayingthe cradle-to-grave flow of materials, eco-effectiveness creates metabolisms wherematerials are used over and over again at a high level of quality.’ Michael Braungart involved in the production process’. Walter Efficiency vs. effectiveness— Stahel has argued that human labour a key distinction should fall in that same category: ‘Shifting taxation from labour to energy and material consumption would fast-track adoption of Eco-efficiency begins with the more circular business models; it would also assumption of a one-way, linear make sure that we are putting the efficiency ﬂow of materials through industrial pressure on the true bottleneck of our systems: raw materials are extracted resource consuming society/economy (there from the environment, transformed is no shortage of labour and (renewable) into products, and eventually energy in the long term).’ disposed of. In this system, eco- efficient techniques seek only to Think in ‘systems’. The ability to understand minimise the volume, velocity, and how parts influence one another within a toxicity of the material ﬂow system, whole, and the relationship of the whole to but are incapable of altering its linear the parts, is crucial. Elements are considered progression. Some materials are in their relationship with their infrastructure, recycled, but often as an end-of-pipe environment, and social contexts. Whilst solution, since these materials are not a machine is also a system, it is bounded designed to be recycled. Instead of and assumed to be deterministic. Systems true recycling, this process is actually thinking usually refers to non-linear systems downcycling, a downgrade in material (feedback-rich systems). In such systems, the quality, which limits usability and combination of imprecise starting conditions maintains the linear, cradle-to-grave plus feedback leads to multiple, often dynamic of the material ﬂow system. surprising consequences and to outcomes that are not necessarily proportional to the In contrast to this approach of input. Applying these insights to engineering minimisation and dematerialisation, and business challenges, Chris Allen, CEO the concept of eco-effectiveness of Biomimicry 3.8, explains: ‘In our work proposes the transformation of with our clients, we will frame the problems products and their associated we aim to solve from a systems integration material ﬂows such that they form perspective, and always in context—since a supportive relationship with in nature nothing grows out of context’. ecological systems and future Systems thinking emphasises flow and economic growth. The goal is not to connection over time and has the potential minimise the cradle-to-grave ﬂow of to encompass regenerative conditions rather materials, but to generate cyclical, than needing to limit its focus to one or more cradle-to-cradle ‘metabolisms’ that parts and the short term. enable materials to maintain their status as resources and accumulate Waste is food. On the biological nutrient intelligence over time (upcycling). side, the ability to reintroduce products and This inherently generates a synergistic materials back into the biosphere through relationship between ecological non-toxic, restorative loops is at the heart and economic systems, a positive of the idea. On the technical nutrient side, recoupling of the relationship improvements in quality are also possible; between economy and ecology. this is called upcycling. The drive to shift the material composition of consumables from technical towards biological nutrients and to have those cascade through different applications before extracting valuable feedstock and finally re- introducing their nutrients into the biosphere, rounds out the core principles of a restorative circular economy. Figure 6 illustrates how
24 | TOWARDS THE CIRCULAR ECONOMY 2. From linear to circular Continued FIGURE 6 The circular economy—an industrial system that is restorative by design Mining/materials manufacturing Farming/collection1 Parts manufacturer Technical nutrientsBiological nutrients Biochemical feedstock Product manufacturerRestoration Biosphere Recycle Service provider Refurbish/ remanufacture Reuse/redistribute Biogas Maintenance Cascades 6 2803 0006 9 Consumer User Anaerobic digestion/ Collection Collection composting Extraction of biochemical Energy recovery feedstock2 Leakage to be minimised Landfill 1 Hunting and fishing 2 Can take both post-harvest and post-consumer waste as an input Source: Ellen MacArthur Foundation circular economy team The drive to shift the material composition of consumables from technical towards biological nutrients and to have those cascade through different applications before extracting valuable feedstock and finally re-introducing their nutrients into the biosphere, rounds out the core principles of a restorative circular economy. Figure 6 illustrates how technological and biological nutrient-based products and materials cycle through the economic system, each with their own set of characteristics—which will be detailed later in this chapter.
TOWARDS THE CIRCULAR ECONOMY | 25 technological and biological nutrient-based • Upcycling. A process of converting products and materials cycle through the materials into new materials of higher economic system, each with their own set of quality and increased functionality. characteristics—which will be detailed later in this chapter. Biochemicals extraction Applying biomass conversion processes and Terminology39 equipment to produce low-volume but high- value chemical products, or low-value high- Reuse of goods volume liquid transport fuel—and thereby The use of a product again for the same generating electricity and process heat purpose in its original form or with little fuels, power, and chemicals from biomass. In enhancement or change. This can also apply to a ‘biorefinery’ such processes are combined what Walter Stahel calls ‘catalytic goods’, e.g., to produce more than one product or type water used as a cooling medium or in process of energy. technology. Composting Product refurbishment A biological process during which naturally A process of returning a product to good occurring microorganisms (e.g., bacteria and working condition by replacing or repairing fungi), insects, snails, and earthworms break major components that are faulty or close down organic materials (such as leaves, to failure, and making ‘cosmetic’ changes grass clippings, garden debris, and certain to update the appearance of a product, food wastes) into a soil-like material called such as cleaning, changing fabric, painting compost. Composting is a form of recycling, or refinishing. Any subsequent warranty is a natural way of returning biological generally less than issued for a new or a nutrients to the soil. remanufactured product, but the warranty is likely to cover the whole product (unlike Anaerobic digestion repair). Accordingly, the performance may be A process in which microorganisms break less than as-new. down organic materials, such as food scraps, manure, and sewage sludge, in the absence Component remanufacturing of oxygen. Anaerobic digestion produces A process of disassembly and recovery at the biogas and a solid residual. Biogas, made subassembly or component level. Functioning, primarily of methane and carbon dioxide, reusable parts are taken out of a used product can be used as a source of energy similar and rebuilt into a new one. This process to natural gas. The solid residual can be includes quality assurance and potential applied on the land or composted and used enhancements or changes to the components. as a soil amendment. Cascading of components and materials Energy recovery Putting materials and components into The conversion of non-recyclable waste39 Our understanding of reuse, different uses after end-of-life across different materials into useable heat, electricity, orrefurbishing, and cascading is inline with definitions developed by value streams and extracting, over time, stored fuel through a variety of so-called waste-the Centre for Remanufacturing energy and material ‘coherence’. Along the to-energy processes, including combustion,and Reuse (CRR). With respect toremanufacturing, our focus is on cascade, this material order declines (in other gasification, pyrolysis, anaerobic digestion,recovery at module/component words, entropy increases). and landfill gas recovery.level, whereas the CRR definesremanufacturing as ‘returninga used product to at least itsoriginal performance with a Material recycling Landfillingwarranty that is equivalent to • Functional recycling. A process of recovering Disposing of waste in a site used for theor better than that of the newlymanufactured product’— Adrian materials for the original purpose or for other controlled deposit of solid waste onto orChapman et al., ‘Remanufacturingin the U.K. – A snapshot of the purposes, excluding energy recovery.40 into land.U.K. remanufacturing industry’;Centre for Remanufacturing &Reuse report, August 2010 • Downcycling. A process of converting materials into new materials of lesser quality40 This definition is in line withArticle 3(7) of Directive 94/62/ and reduced functionality.EC. This article additionally statesthat recycling includes organicrecycling
26 | TOWARDS THE CIRCULAR ECONOMY2. From linear to circularContinuedProfessor Dr. Michael BraungartProfessor Dr. Michael Braungart isthe founder and scientific director of Circular economy—schools of thoughtEPEA Environmental Protection andEncouragement Agency, co-founder The circular economy concept has deep-and managing director of McDonough rooted origins and cannot be traced backBraungart Design Chemistry (MBDC), to one single date or author. Its practicaland scientific director of the Hamburger applications to modern economic systemsUmweltinstitut (HUI). He teaches at the and industrial processes, however, haveUniversity of Lüneburg and the Dutch gained momentum since the late 1970s asResearch Institute for Transitions (DRIFT) a result of the efforts of a small numberof Erasmus University, and is a visiting of academics, thought-leaders, andprofessor at the Darden School of businesses.Business. He teaches process engineeringand lectures on topics such as eco- The general concept has been refined andefficiency and eco-effectiveness, Cradle to developed by the following schools ofCradle® design, and intelligent materials thought.pooling. Regenerative Design. In the 1970s, anProfessor Roland Clift CBE FREng American professor named John T. LyleEmeritus Professor of Environmental launched a challenge for graduate students.Technology and Founding Director of the Lyle asked students to forge ideas for aCentre for Environmental Strategy at the society in which ‘daily activities were basedUniversity of Surrey; Executive Director on the value of living within the limits ofof the International Society for Industrial available renewable resources withoutEcology; past member of the Royal environmental degradation,’ according to aCommission on Environmental Pollution California research centre that is now namedand the Science Advisory Council of Defra. after Lyle.41 The term regenerative design came to be associated with this idea—thatProfessor Walter R. Stahel all systems, from agriculture onwards, couldProfessor Walter Stahel is head of risk be orchestrated in a regenerative mannermanagement at the Geneva Association. (in other words, that processes themselvesIn 1982, he founded the Product-Life renew or regenerate the sources of energyInstitute, Europe’s oldest sustainability and materials that they consume).consultancy. An alumnus of the SwissFederal Institute of Technology, Zurich, Performance Economy. Walter Stahel,Stahel has authored several award- architect and industrial analyst, sketchedwinning academic papers and is a visiting in his 1976 research report to the Europeanprofessor at the Faculty of Engineering Commission The Potential for Substitutingand Physical Sciences at the University of Manpower for Energy, co-authored withSurrey. Genevieve Reday, the vision of an economy in loops (or circular economy) and its impactJanine Benyus on job creation, economic competitiveness,Janine Benyus is a natural sciences writer, resource savings, and waste prevention.42 43innovation consultant, and author of six Stahel’s Product-Life Institute, consideredbooks, including her latest—Biomimicry: one of the first pragmatic and credibleInnovation Inspired by Nature. In 1998, sustainability think tanks, pursues fourJanine co-founded an education and main goals: product-life extension, long-lifeinnovation practice called Biomimicry goods, reconditioning activities, and wasteGuild, which has helped clients such as prevention. It also insists on the importanceGeneral Electric, HOK Architects, Levi’s, of selling services rather than products, anNASA, and Seventh Generation create idea referred to as the ‘functional servicesustainable products, processes, and economy’, now more widely subsumed intopolicies based on nature’s principles. the notion of ‘performance economy’. Stahel
TOWARDS THE CIRCULAR ECONOMY | 27argues that the circular economy should be Industrial Ecology. Industrial ecology isconsidered a framework, and its supporters the study of material and energy flowssee it as a coherent model that forms a through industrial systems. Its internationalvaluable part of a response to the end of the society is headed by Professor Roland Cliftera of low cost oil and materials. at the Centre for Environmental Strategy at the University of Surrey. Focusing onCradle to Cradle. German chemist and connections between operators within thevisionary Michael Braungart went on to ‘industrial ecosystem’, this approach aimsdevelop, together with American architect at creating closed-loop processes in whichBill McDonough, the Cradle to Cradle™ waste serves as an input, thus eliminatingconcept and certification process. This design the notion of an undesirable by-product.philosophy considers all material involved Industrial ecology adopts a systemic pointin industrial and commercial processes to of view, designing production processes inbe nutrients, of which there are two main accordance with local ecological constraintscategories: technical and biological. The whilst looking at their global impact fromCradle to Cradle framework focuses on the outset, and attempting to shape themdesign for effectiveness in terms of products so they perform as close to living systemswith positive impact, which fundamentally as possible. This framework is sometimesdifferentiates it from the traditional design referred to as the ‘science of sustainability’,focus on reducing negative impacts. given its interdisciplinary nature, and its principles can also be applied in theCradle to Cradle design perceives the safe and services sector. With an emphasis on naturalproductive processes of nature’s ‘biological capital restoration, industrial ecology alsometabolism’ as a model for developing a focuses on social wellbeing.‘technical metabolism’ flow of industrialmaterials. The model puts a particular Biomimicry. Janine Benyus, author ofemphasis on precisely defining the molecular Biomimicry: Innovation Inspired by Nature,composition of materials—‘knowing what you defines her approach as ‘a new disciplinehave, which is the basis of every quality-based that studies nature’s best ideas and thenmaterials recycling system’. In some cases, imitates these designs and processes tonotably for technological products that are solve human problems’. Studying a leafsubject to frequent upgrades, durability is not to invent a better solar cell is an example.the optimum strategy—in that instance, it is She thinks of it as ‘innovation inspired bypreferable to design the products in a way nature’.44 Biomimicry relies on three keythat makes their disassembly and the recovery principles:of their components easy, either to upgrade • Nature as model: Study nature’s modelssome elements or to use individual parts for and emulate these forms, processes,the next generation. It is thus important to systems, and strategies to solve humanbe able to, for various families of products, problems.define the use period, as it influences theirconception: will the object remain in use for • Nature as measure: Use an ecologicalten years or more (washing machine) or rather standard to judge the sustainability of our 41 “History of the Lyle Center”, Lyle Center fortwo (mobile phone)? Product components innovations. Regenerative Studies, Cal Poly Pomonacan be designed for continuous recovery • Nature as mentor: View and value nature (http://www.csupomona.and reutilisation as biological and technical edu/~crs/history.html) not based on what we can extract from thenutrients within these metabolisms. The Cradle 42 The report was natural world, but what we can learn from it.to Cradle framework addresses not only published in 1982 as the book Jobs formaterials but also energy and water inputs and Tomorrow: The Potential for Substitutingbuilds on three key principles: ‘Waste equals Manpower for Energy 98food’—‘Use current solar income’—‘Celebrate 43 www.performance-diversity’. economy.org 44 http://www. biomimicryinstitute. org/about-us/what-is- biomimicry.html
28 | TOWARDS THE CIRCULAR ECONOMY 2. From linear to circular Continued The concept and principles of the circular from end-of-life vehicle disassemblers as well economy have already been put into practice as with new parts where necessary. Renault’s successfully by very different companies ability to structure and run its reverse across the manufacturing landscape. logistics chain and access a steady stream of Prominent examples include Michelin, cores, together with its deployment of highly Caterpillar, Renault, Ricoh, and Desso. skilled labour, has allowed the company to grow its remanufacturing operations into a • In the 1920s, Michelin pioneered 200 million euro business. leasing tyres under a pay-per-kilometre programme. As of 2011, Michelin Fleet • Ricoh, provider of managed document Solutions had 290,000 vehicles under services, production printing, office contract in 23 countries, offering tyre solutions and IT services, is another Fortune management (upgrades, maintenance, 500 company, active in 180 countries. It replacement) to optimise the performance developed ‘GreenLine’ as part of its Total of large truck fleets—in Europe, 50% of Green Office Solutions programme, which large truck fleets externalise their tyre aims to minimise the environmental impact management. By maintaining control over of products at its customers’ sites. Copiers the tyres throughout their usage period, and printers returning from their leasing Michelin is able to easily collect them at end programme are inspected, dismantled, and of the leases and extend their technical life go through an extensive renewal process— (for instance by retreading) as well as to including key components replacement and ensure proper reintegration into the material software update—before re-entering the cascade at end of life. market under the GreenLine label with the same warranty scheme that is applied to • Caterpillar created its remanufacturing new devices. Because it increases customers’ division in 1972; it has kept on growing choice, Ricoh’s GreenLine programme has ever since—over the last decade at a brisk quickly become a success story and it now 8 to 10%, well above the growth rate of the keeps pace with Ricoh’s new equipment sales. global economy as a whole. It now has a remanufacturing portfolio of hundreds of • After buying out the company, the top parts and handled more than 70,000 tonnes management team at Desso took inspiration of remanufactured products in 2010, up from from the Cradle to Cradle™ movement and 45,000 tonnes in 2005. Growth is expected decided to pursue C2C CertificationCM for the to continue as Caterpillar’s engineers are entire company. A major spur to innovation working systematically through its backlog of and an inspiration for both customers and warehoused used parts to bring them back employees, Desso’s broad adoption of into economic use.45 circular economy principles has been driving top-line growth. After the buyout in 2007, • From its start in a suburban garage in its European market share for carpet tiles 1898, Renault has grown into a leader, grew from 15 to 23% and profit margins first in automotive engineering and now (normalised EBIT of the original carpet also in remanufacturing. It operates a business) from 1 to 9%, with about half of this dedicated remanufacturing plant near Paris, gain directly attributable to the introduction France. There, several hundred employees of C2C™ principles. In its ambition to change re-engineer 17 different mechanical over the complete system rather than cherry- subassemblies, from water pumps to engines. pick individual measures, Desso is also Renault works with its distributor network to phasing in renewable energy sources for each obtain used subassemblies, and supplements of its production sites—in line with another these with used parts purchased directly core C2C™ principle.45 Corporate annual reports2005 to 2010; Product-LifeInstitute website (http://www.productlife.org/en/archive/case-studies/caterpillar-remanufactured-products-group)
30 | TOWARDS THE CIRCULAR ECONOMY2. From linear to circularContinued linear alternative (including the avoidanceSources of value creation of end-of-life treatment costs), setting upin a circular economy circular systems can make economic sense.The principles of the circular economy offer With increasing resource prices and highernot only a description of how it should work end-of-life treatment costs, this arbitrageas a whole, but also an outline of specific becomes more attractive, especially in thesources of core economic value creation beginning when the economies of scale andpotential. The economics and comparative scope of the reverse cycle can benefit fromattractiveness of different circular setups higher productivity gains (because of their(e.g., reuse versus remanufacturing versus low starting base given that many reverserecycling) can differ significantly for different processes are still subscale today).products, components, or types of material,whether in a specific geography or segmentof the (global) supply chain—all of which wespell out in the next chapter. Nevertheless,there are four simple principles of circularvalue creation that hold true. Power of circling longer: A second core value creation potential stems from keeping products, components, and materials in use longer within the circular economy. This can be done by either going through more consecutive cycles (e.g., not onlyPower of the inner circle: In general, the one refurbishment of an engine core buttighter the circles are, the larger the savings multiple consecutive ones) or by spendingshould be in the embedded costs in terms more time within a cycle (e.g., extendingof material, labour, energy, capital and of the the use of a washing machine from 1,000 toassociated rucksack of externalities, such as 10,000 cycles). This prolongation of usageGHG emissions, water, or toxic substances will substitute virgin material inflows to(Figure 8). Given the inefficiencies along counter the dissipation of material out ofthe linear supply chain, tighter circles will the economy (which, assuming constantalso benefit from a comparatively higher demand and given the second law ofvirgin material substitution effect (given thermodynamics, i.e., ‘matter is decayingthe process inefficiencies along the linear towards entropy’, will eventually happen).chain). This arbitrage opportunity revealed Here, too, rising resource prices renderby contrasting the linear to the circular setup this value-creation lever more attractive.is at the core of their relative economic Increased operating and maintenance costs,value creation potential. Whenever the however, and/or losing out against efficiencycosts of collecting, reprocessing, and gains due to rapid innovation of the product,returning the product, component or could eat up this positive arbitrage potential.material into the economy is lower than the
TOWARDS THE CIRCULAR ECONOMY | 31 $ $ $Power of cascaded use and inboundmaterial/product substitution: Whilethe previous value creation levers refer toreusing identical products and materialswithin the circular setup for a specificproduct, component or material category,there is also an arbitrage opportunity inthe cascading of products, components municipal waste collection). Scale economiesor materials across different product and efficiency gains in the reverse cycle cancategories (Figure 9) (e.g., transforming be obtained through improvements in thecotton-based clothing into fibrefill for original design of products—such as ease offurniture and, later, into insulation material separation, better identification of embeddedbefore returning it as a biological nutrient components, and material substitution—andsafely into the biosphere). In these in the reverse processes—such as reducedcascades, the arbitrage value creation product damage rates during collection andpotential is rooted in the lower marginal transportation, lower reconditioning scrapcosts of reusing the cascading material rates, and reduced contamination of materialas a substitute for virgin material inflows streams during and after collection. Theseand their embedded costs (labour, energy, improvements to the product and the reversematerial) as well as externalities against the cycle process translate into further reductionsmarginal costs of bringing the material back of the comparative costs of the reverseinto a repurposed use. cycle while maintaining nutrients, especially technical ones, at higher quality throughout the cycles, which typically extends longevityPower of pure, non-toxic, or at least and thus overall material productivity. Beyondeasier-to-separate inputs and designs: the performance of the reverse cycle, keepingThe power of this fourth major lever is toxic materials out of the product design cana further enhancement to the above- bring other measurable advantages. Whenmentioned value creation potential and Desso, for example, decided to eliminateoffers an additional host of benefits. To all toxic chemicals in its carpet tiles—in linegenerate maximum value, each of the above with Cradle to Cradle principles—its businesslevers requires a certain purity of material benefited from an uptake in the aviationand quality of products and components. market, where carpet offgassing can affectCurrently, many post-consumption material passenger health and comfort.streams become available as mixtures ofmaterials, either because of the way thesematerials were selected and combinedin a previous single product or becausethey are collected and handled withoutsegmentation and without regard forpreserving purity and quality (e.g., in
32 | TOWARDS THE CIRCULAR ECONOMY 2. From linear to circular Continued • We are able to increase each of theFIGURE 8 The impact of more circular production processesaccumulates across several layers of inputs reuse, refurbishment, and remanufacturing cycles by an additional cycle, i.e., instead of discarding the product after the first two years, we can run the product through an extra cycle before it becomes unfit for purpose (given wear and tear or any of the other limits to repeated use—see sidebar on the factors driving premature obsolescence). The differences between the BAU and the circular scenarios for both new virgin material required and the build-up of stock highlight the substantial savings effect of the circular setup (Figure 10). • Need for virgin material extraction would 1 Including impact on biodiversity and ecosystem services decrease substantially. The impact of a Source: Ellen MacArthur Foundation circular economy team circular set-up on virgin material extractions needs is considerable. This does not represent a temporary effect—the widening Long-term effects of circularity on material spread between the two lines continues stocks and mix even after growing collection rates and reuse/refurbishing rates come to a plateau The combined effect of these value creation (a point which can be seen visually as the levers will profoundly change for the better ‘kink’ in the line that represents circular both the mix as well as the run rate at demand). which our extracted material stocks will grow. To illustrate these long-term effects, • Growth of landfill and total material stock we prepared a simple theoretical example would decrease as a consequence of these consisting of a single product (made of one substitution effects. Most importantly, the material) over a 30-year time frame with and growth rate would not resume the same without reverse cycles. We first modelled speed of material demand as in the BAU the business-as-usual (BAU) scenario and scenario, as the substitution at product level then modified this scenario by gradually will proportionally save more raw material introducing the circular value-creation levers. than a comparative product created from virgin material. As a result the underlying For the circular scenario, we assumed that: run rates are reduced. • We have the same efficiency losses along This model assumes that, at any of these the value chain from one product step to the stages, the economic trade-offs between next as for BAU the cost of virgin inputs and the cost of material that has been kept in the cycle via • We face the same demand growth of 3% circular streams would always favour the p.a., but: circular setup. Obviously, this would not hold true if the price of the virgin material • We build up reverse cycle treatment is at a level below the cost of keeping capacities, also at the rate of 4 percentage materials in the reverse cycles. Other trade- points per annum, with a cap at 40% each for offs must be considered as well. As Peter reuse/refurbishment and remanufacturing for Guthrie, who leads the Centre of Sustainable the end-of-life flows Development at Cambridge University’s Department of Engineering, puts it: ‘There • We recycle the share of the collected will always need to be consumption material that exceeds the 40% limits on our of virgin materials, and the process of reverse treatment capacities
TOWARDS THE CIRCULAR ECONOMY | 33FIGURE 9 Cascading keeps materials in circulation for longer—textile example Farming/collection Insulation Furniture GarmentRestoration Biosphere Parts Fibre Stuffing 1 Yarn, cloth manufacturer Biochemical Products Insulation Yarn feedstock manufacturer Furniture Apparel recycling material Biogas Service provider Insulation Furniture Apparel material sales sales sales 6 2803 0006 9 6 2803 0006 9 6 2803 0006 9 Reuse2 Consumer Consumer Consumer Anaerobic digestion/ composting Collection Collection Collection Extraction of Energy recovery biochemical feedstock Leakage to be minimised Landfill1 Furniture stuffing material can be reused several times2 Examples of reuse include donation, exchange, resaleSource: Ellen MacArthur Foundation circular economy team cycling will always require some energy use. The time seems right, now, to embrace more The balance of resource use for different widely and accelerate the circular design options needs to be carefully considered.’ philosophy. Resource prices are soaring, Still, Guthrie says, ‘The whole approach of and the implicit or explicit costs of disposal circularity is precisely the direction of travel drastically increasing. At the same time, for improved sustainability performance.’ progress in technologies and material science is yielding longer-lasting and more reusable To provide a perspective on how robust this designs whilst increased visibility along the arbitrage opportunity is in practice, Chapter value chain enables better tracking of the 3 examines the effects and costs of reverse whereabouts of products and materials, and treatments and disposal options for a number consumers and corporations have grown of selected products in detail, and identifies more accustomed to commercial practices what building blocks need to be put in place based on performance instead of ownership. to capture the potential benefits. Chapter 4 then assesses how large this potential could be if scaled up across the economy. Chapter 5 puts forward strategies that will allow companies to extract maximum value from moving towards more circular business models.
34 | TOWARDS THE CIRCULAR ECONOMY2. From linear to circularContinued FIGURE 10 A circular economy would not just ‘buy time’ — it would reduce the amount of material consumed to a lower set point ILLUSTRATIVE Effect of circular system on primary material demand in widget market1 Volume of annual material input required 700 Demand, BAU2 600 500 400 Virgin material substituted by 300 circular material 200 Demand under 100 circular system 0 2010 2015 2020 2025 2030 2035 2040 Effect of circular system on material stock and landfill Material stock Cumulative volume of material used Material landfilled In use 7,000 6,000 BAU2 5,000 4,000 Circular 3,000 system 2,000 1,000 0 2010 2015 2020 2025 2030 2035 2040 1 Assumptions: Widgets have a 5-year product life; demand for widgets assumed to grow at 3% p.a.; collection rate rises from 0% in 2010 to 90% in 2040; reuse and refurbishment rates scale up over time, from 0% to 40% each; all collected material that is not reused or refurbished is recycled 2 Business as usual SOURCE: Ellen MacArthur Foundation circular economy team
3How it works up closeCase examples of circular productsDemonstrates through detailed case studies the manyways in which companies can benefit from circular businessmodels and the key building blocks needed on a systemiclevel to shift business in this direction. 1
36 | TOWARDS THE CIRCULAR ECONOMY 3. How it works up close Case examples of circular products It is evident that reuse and better design Instead, we have selected a broad range can significantly reduce the material bill of manufactured products to illustrate the and the expense of waste disposal and various design choices and business model that they can create new enterprises and changes that may help companies reap more useful products—meeting needs of the benefits of a more circular product new customers as the population grows. and service portfolio. For some complex But—from an economics perspective—can products, we go into more detail, because these advantages match the advantages it is here where the case is most difficult to of products designed for mass production make. The sector focus of these analyses based on low labour costs and economies is on manufacturing and, here, the final of scale? From a business and consumer production stage of the value chain. In other perspective—can producing, selling, words, we do not analyse the economic and consuming less material be a more effects on upstream participants in the attractive proposition? Our treatment of market. Within manufacturing, we examined these questions in the pages that follow is an intentionally wide range of product types. in many ways a ‘sixteenth century map’ of Given the starkly different characteristics the circular economy, a rough chart of its of short-lived manufactured goods (such potential. It is our hope that this analysis as, say, food packaging) versus long-lived will entice companies to embark on this manufactured goods (e.g., material used in journey, and, in that process, refine it with housing construction), we intentionally chose an ever-more solid base of evidence—not products in both categories, as well as a mid- only by demonstrating its terrific potential, range, medium-lived category. but also by testifying to the trials and tribulations of a transformation into the Our analysis leads us to believe that this circular economy. final category, medium-lived products— and specifically, complex medium-lived To demonstrate the economic opportunity of products—is a sweet-spot segment for such a model, EMF and its partners analysed circularity. These, then, are the products we the options for several different categories examine in full depth with our circularity of resource-intensive products—from fast- calculator (for details on the analysis, see moving consumer goods such as food and sidebar). The eight sectors that produce fashion, to longer-lasting products such these and similar types of products represent as phones, washing machines, and light- 48.6%, or nearly half, of the GDP contribution commercial vehicles, and including single- of the manufacturing sector within the family houses as an example of a long-life EU economy, demonstrating that circular product. Because the service sector is not business activities have the potential to a converter of materials, services as such outgrow its their ‘niche’ status and become are not directly affected by the adoption of relevant in the mainstream economy.46 circularity principles. Thus we do not cover services in our analysis—although it is worth In the pages that follow, we describe at noting that as a purchaser of products, the length our analysis of products in our sector could have a considerable impact in ‘sweet spot’ sectors, namely mobile phones, bringing about change, and of course the smartphones, light commercial vehicles, circular economy would greatly expand the washing machines—for which we applied need for services. While the shift towards the circularity calculator—and power tools. renewable energy is a key principle of the We also discuss the potential for circularity circular economy, a full assessment of the across the broader economy, from the impact of a circular transition on the energy long-lived (e.g., buildings) to consumables sector is also outside the scope of this report, (e.g., packaging and food products), parts and the analysis excludes energy and other of the manufacturing sector, and calculate a utilities as producing sectors. cascade for textiles as an example of short- lived products.46 GDP contribution based onEurostat Input/Output tables2007 for EU-27 economies
TOWARDS THE CIRCULAR ECONOMY | 37 Buildings—Mastery of reverse cycle skills supported deconstruction through both can make all the difference legislation and policies that stimulate. In the U.S., local, state, and federal agencies While many long-lived assets such as have started to encourage deconstruction buildings and road infrastructure consist programmes for their beneficial effects on largely of metals, minerals, and petroleum- employment and community building. It may derived construction materials (i.e., technical be for this reason that private sector take- nutrients), there is also a significant role for up has been limited, and deconstruction bio-based materials such as various kinds of activities are currently largely the domain of wood. Whatever the source and character smaller local players. of the nutrient, we see that the circularity potential for such long-lived assets has gone largely untapped, resulting in a great loss of Medium-lived complex products—The heart volume and value, as discussed earlier in this of the opportunity text. Various initiatives have demonstrated the potential for value retention—the findings In contrast to long-lived products, such as of one such pilot in Riverdale, MD (USA) and buildings or bridges, the sectors we focus the order of magnitude of the improvement on generally include products that are in use potential it demonstrates can be considered for a short enough timeframe that they are typical.47 The pilot initiative showed that subject to frequent technological innovation, deconstructing rather than demolishing but long enough that they are not subject to U.S. houses built in the 1950s and 1960s one-off consumption. Most products in these would divert 76% of the rubble produced sectors contain multiple parts and therefore from going to landfill—thereby avoiding are suitable for disassembly or refurbishment. the associated landfill cost and preserving Finally, this portion of the economy is quite valuable building components large—the eight sectors we focus on account and materials for recycling and reuse. for about USD 1.98 trillion in final sales in the47 NAHB Research Center, Moreover, deconstruction case studies EU-27, or a little less than half of the region’sDeconstruction—BuildingDisassembly and Material Salvage: have shown important social benefits, final sales from manufacturing.52 The eightThe Riverdale Case Study, June1997. Prepared for U.S. EPA Urban including significant increases in labour sectors, as categorised by Eurostat, areand Economic Development requirements,48 job creation at a local level,49 as follows: machinery and equipment;Division and better employment conditions and office machinery and computers; electrical48 Charles J. Kibert et al., educational opportunities.50 As an illustration, machinery and apparatus; radio, television,Implementing deconstruction inthe United States Brian Milani estimated that, ‘If deconstruction and communication equipment and49 DiRamio et al. http://www. were fully integrated into the U.S. demolition apparatus; medical, precision and opticalbigideasforjobs.org/ industry, which takes down about 200,000 instruments, watches and clocks; motor50 Frank Regan, Rochester buildings annually, the equivalent of vehicles, trailers, and semi-trailers; otherEnvironmental News Examiner, 200,000 jobs would be created’.51 transport equipment; and furniture and other2010 manufactured goods.5351 Brian Milani, BuildingMaterials in a Green Economy: Leading construction companies such asCommunity-based Strategies for Skanska, a Swedish project development andDematerialization,2001 construction group with worldwide activities, have made the possibilities of deconstruction52 Final uses at basic prices(e.g., excluding shipping costs, an inherent part of their strategy and servicescustomisations, etc.), fromEurostat Input/Output tables portfolio. In Japan, Kajima Construction2007 for EU-27 economies Corporation developed a new deconstruction53 It is worth noting that these technique that allowed it to recycle 99%sectors each contain dozens of the steel and concrete and 92% from aand, in some cases, hundreds ofspecific product types. Not all building. The Japanese government hasproduct types fit all the criteriawe outline—some, for instance,have relatively shorter or longerlifespans; others have only oneor two components and are notparticularly complex. That said,utilising these sectors as a proxyallows us to roughly define thesize of the economy that wouldbe affected by circularproduction methods
38 | TOWARDS THE CIRCULAR ECONOMY3. How it works up closeContinued The Circularity Calculator informed assumptions to determine the total savings on material, labour, energy, and In order to calculate the economic impact carbon emissions as well as the trade balance of moving to a circular system at the effect at market level, if producers across product level, we applied a ‘circularity the product industry (e.g., the mobile phone calculator’ analysis to each of our selected market) were to adopt circular production products. In simple terms, this analysis techniques. compares the inputs needed to make a new product in today’s system (the ‘linear’ Our analysis shows that, for the products product) with those that would be needed selected (mobile phones, smartphones, light to make the same product using circular commercial vehicles, and washing machines), economy principles (the ‘circular’ product). circularity can be profitable on a product- specific level—and that it could make a The analysis focuses on five key areas of significant economic impact at the level of economic and environmental impact, each the product market. of which relates to the broader benefits of circularity discussed earlier in this document. Our initial analysis explicitly excluded any consideration of the profits of individual The five areas are: companies. Instead, we focused on effects Material inputs. For each product, we at an industry level—as we believe the compared the material intensity of a ‘linear’ competitive structure would likely change version, discarded by its first owner, with the during a shift to a circular economy. Further material intensity of a ‘circular’ version, for analysis at the company level, however, which we calculated and factored in various has demonstrated that adopting circular forms of circular options (reuse, refurbishing, techniques would likely prove profitable for remanufacturing, recycling). We compared individual companies as well, even with a materials in dollar terms, as tonnages would certain degree of demand substitution of fail to account for the differing values of existing products. different input materials. We ran our circularity calculator for two Labour inputs. For each product, we scenarios: considered the labour required to make • A more conservative ‘transition scenario’, a new product versus the labour required where we make assumptions mainly on to make a circular loop (i.e., to refurbish, changes in product designs and reverse remanufacture, recycle, or otherwise reuse supply chain skills. We typically assumed the product). improvements in underlying economics, collection rate increases of 20 to 30 Energy inputs. For each product, we percentage points, and a roughly 30 considered the difference in energy required percentage point shift from recycling to to make a new product versus a circular refurbishing or remanufacturing activities. product. • An ‘advanced scenario’, showing the potential effect of a world that has Carbon emissions. For each product, we undergone more radical change and has considered the carbon footprint of the further developed reverse technologies process of manufacturing a new product and infrastructure and other enabling versus the emissions generated to make a conditions such as customer acceptance, circular loop. cross-chain and cross-sector collaboration, and legal frameworks. Our analyses assumed Balance of trade. For each product, we further collection rate increases of 30 to 40 considered which inputs are imported into percentage points and an additional 5 to 10 the European Union, for the production percentage points shift to refurbishing or process of both linear and circular versions. remanufacturing. We took the results of our analysis in each The key data and assumptions underlying our area above, for one of our specific products circularity calculator analyses for the selected in each case, and combined them with products are outlined in the appendix.
TOWARDS THE CIRCULAR ECONOMY | 39 Mobile phones—Extracting lasting value typical 24-month period, we did not identify out of fashionable items a lot of economic potential except for the obvious phone resale. Yet this circular option With 1.6 billion mobile phones produced in also suffers under today’s limited return 2010, more phones are entering the market incentives and inadequate reverse logistics, than there are consumers.54 As a result, in in that many collected devices are in poor mature markets (Western Europe, North condition both functionally and in terms America, Japan) consumers own 1.1 mobile of appearance. Further, demand for used phones and average usage time is down to devices strongly varies between handset less than 2.5 years.55 In emerging markets, make and model. the sector is nevertheless still poised for growth. With the advent of shortages of some rare earth59 and precious metals, the recycling of In 2010, Waste Electrical and Electronic mobile phones has gained momentum over Equipment (WEEE) volumes in the EU-27 for the past year. Now, the share of phones being IT and telecommunications equipment were channelled to recycling has risen to 9%, but estimated at 750 thousand tonnes. Over the only a small fraction of the more than 20 next four years, total WEEE volumes in the different materials they contain is ultimately EU-27 are expected to grow cumulatively recuperated.60 by more than 10%.56 Yet looking at volumes of waste generated does not reveal the true To maximise the economic benefit of54 Gartner statistics on mobile value embedded in consumer electronics keeping mobile phones or at least certaindevice sales, February 2011 waste. While not being particularly significant components in a tighter circle at a profit for55 CIA World Economic in terms of weight, mobile phone waste has the manufacturer, only a few things wouldFactbook, 2011 considerable value embedded in its materials need to change in the short term (Figures56 Jaco Huisman et al., 2008 and components. Typically weighing less 11A, 11B):Review of Directive 2002/96 onWaste Electrical and Electronic than 150 grams, a mobile phone is packedEquipment – Final Report, United with valuable materials such as gold, silver, Improving overall collection from 15%Nations University working paper,August 2007; Jaco Huisman, and rare earth metals. Given today’s low to 50% (close to the proposed WEEEWEEE recast: from 4kg to 65%:the compliance consequences, collection and recycling rates, nearly all regulation target of 65% by 2016).61 A betterUnited Nations University working of this material is lost. In Europe alone, collection system would allow manufacturers,paper, March 2010 for example, 160 million discarded but remanufacturers, and vendors to gain scale,57 U.S. Environmental Protection uncollected devices represent a material which would justify investments in larger,Agency (EPA), Electronics WasteManagement in the United States loss of up to USD 500 million annually. With more streamlined facilities and hence furtherThrough 2009, EPA workingpaper, May 2011; Eurostat, WEEE collection rates in Europe hovering around improve the attractiveness of these circleskey statistics and data, 2011 15% and mobile phone designs becoming by increasing their efficiency. Collection58 ‘Basic mobile phones’ include increasingly integrated, there is hardly any can be encouraged with lease/buy-backlow-cost phones and basic component reuse or remanufacturing, and models, an improved customer dialogue, and,communication devices asdefined by Gartner and the secondary mobile phone market (while under certain circumstances, with depositexcludes smartphones. For ourcalculations, we considered a fast growing) is almost negligible at around system, and will need to be complementedsample of four mobile phones 6% of the primary market.57 with more semi-automated treatment andselling at prices between USD 30and 60 before VAT extraction systems or better pre-sorting In order to understand the economic before shredding (to catch reusable phones59 Rare earth elementscontained in mobile devices implications of circular activities in the and materials). For greater efficiency wheninclude Neodymium, Terbium,and Erbium—Marc Humphries, mobile phone market, we applied our moving into the ‘advanced’ circularityRare Earth Elements: The Global circularity calculator to a standard low-cost stage, the phone industry would need toSupply Chain, CongressionalResearch Service Report, mobile phone valued at USD 36.58 We first form joint collection systems (e.g., withSeptember 2010 assessed the economics of different circular original equipment manufacturers (OEMs),60 Roland Geyer and Vered options for mobile phones and subsequently operators, retailers, manufacturers, reverseDoctori Blass, ‘The economics ofcell phone reuse and recycling’, considered associated environmental logistics companies). Such concerted effortsInternational Journal of Advanced benefits (with a focus on carbon emission are essential to fully overcome interrelatedManufacturing Technology, 2010,Volume 47, pp. 515-525 savings). quality leakage points along all reverse value chain steps.61 European Commission,‘Proposal for a Directive of the In today’s world with low collection rates,European Parliament and of theCouncil on Waste Electrical and partially attributable to contract schemesElectronic Equipment (WEEE)’, that, in the majority of cases, do not requireProposal for a directive, COD2008/0241, December 2008 customers to trade in old devices after the
40 | TOWARDS THE CIRCULAR ECONOMY 3. How it works up close ContinuedFIGURE 11A ESTIMATESMobile phones: Reuse and remanufacturing as a viable alternative to recyclingEnd-of-life product flows based on 2010 EU figuresPercentage of total end-of-life devices Status quo Transition scenario Mining Mining Parts manufacturer Parts manufacturer Product manufacturer 9 Recycle Product manufacturer 10 Recycle Service provider 0 Remanufacture1 Service provider 21 Remanufacture1 6 Reuse 19 Reuse Maintenance Maintenance User User 15 85 50 50 Collection Collection Unaccounted Unaccounted and landfill and landfill 1 Remanufacturing, here refers to the reuse of certain components and the recycling of residual materials SOURCE: Gartner; EPA; Eurostat; UNEP; Ellen MacArthur Foundation circular economy team
TOWARDS THE CIRCULAR ECONOMY | 41 Selling the entire phone ‘as is’ after minimal material input costs and reusing the entire cleaning and repackaging. Our analysis phone does not require any direct material shows that a second-hand vendor can realise input. a profit of USD 6 (30% margin) per device, even if placing the product on the market While a value of USD 6 to 7 per phone with a 40% discount and spending USD 17 sounds negligible and is typically lower on return collection (including buy-back than the average profit margin on a new incentive), remarketing, and processing. standard low-cost phone (up to 25% of the A used-phone market would benefit from selling price), capturing a significant fraction guarantees to customers that manufacturers of the value in the 190 million collected have software to completely erase a and uncollected end-of-life mobile phones customer’s personal data after use, as well as in Europe, many of which could produce from material choices that extend the life of value like that shown in our case study, can the product ‘core’. be economically attractive for third parties as well as manufacturers. From the OEM Stripping out reusable components and perspective, the resale market is to a certain implementing required design changes to extent a threat to sales of new products. do this more easily. Of the 10 to 12 major In contrast remanufacturing activities on components of a standard mobile phone, a component level reduce material costs the top candidates for remanufacturing by incremental manufactured components are the camera, display, and potentially the and will not pose a threat to sales of new battery and charger. They are among the products as long as the latter are offered as most valuable parts within a phone, are ‘new’ and without a discount. Such circular comparatively easy to disassemble, and could business practices also offer a solution be used in the production of new devices to the widespread problem of exporting or in aftermarkets. Key factors for making consumer electronic waste and improper such a circular treatment economically end-of-life treatment in developing countries. and technically feasible are standardising By increasing their circular activities, components such as displays, cameras, and manufacturers could thus also benefit from a materials across models and potentially more positive public perception. brands through agreement on industry standards; moving to disassembly-friendly From a macroeconomic perspective, product designs (e.g., easy-access, clip-hold the transition to a circular economy has assembly instead of adhesives) to enhance major implications for material and energy the ratio between the value of the material consumption as well as for the balance and components reclaimed and the labour of trade in the European mobile phone needed to extract it; and making reverse market. In a transition scenario in which supply-chain processes more automated. 50% of devices are collected (of those, 38% are reused, 41% are remanufactured, and As shown in Figure 11B, we estimate that the 21% are recycled), market-wide savings on costs of remanufacturing low-cost mobile manufacturing material costs could add up to phones could be cut by around 50%62 per USD 1 billion (~30% of total industry material device from their current level (e.g., USD input costs), and manufacturing energy costs 1.0 for collection and transport, USD 3.5 for savings to USD 60 million (~16% of total disassembly, and USD 1.9 for initial screening) industry energy input costs) a year. These62 Costs for the entire when proposed changes of the transition savings refer to costs incurred in the phonedisassembly process could be scenario can be realised. In addition, costs production process; further savings occur inreduced by ~USD 2.5 per phone;an additional USD 0.8 per phone occurring in the reuse and recycling process upstream value chain steps.63 In an advancedcould be saved in collection andtransport, as well as in the initial could be reduced by USD 0.7, through more scenario with 95% collection and an equalscreening process efficient transport and initial screening. In split between reuse and remanufacturing,63 Metal recycling leads to such a scenario, remanufacturing would material and energy savings are estimated toreduced energy consumption yield material input cost savings of almost be more than USD 2 billion on material andin the extraction phase. butis implicitly considered in the 50% in the final phone production process. USD 160 million on energy annually, both netmaterial value of recycled metals,not in energy cost savings Functional recycling could save up to 20% of of material and energy used in the reverse-
42 | TOWARDS THE CIRCULAR ECONOMY 3. How it works up close Continued cycle process. Taking into consideration the FIGURE 11B material extraction and whole manufacturing Mobile phones: Design changes and investments in reverse infrastructure process of parts and product, greenhouse could greatly improve the circular business case ESTIMATES gas emission savings from circular activities USD per device could amount to 1.3 million tonnes of CO2e in Status quo Improvement Transition a transition state and around 3 million tonnes 22.8 scenario1 (or 65% of primary production emissions) in Cost improvement the case of 95% collection. Value improvement 16.6Reuse 6.9 While primary mobile phone production is 6.2 0 0.7 largely located outside Europe, resellers and recycling firms are typically geographically close to the market. As remanufacturing activities also include the recycling of residual 1.3Remanufacture material, the process is assumed to take place 0.7 5.0 0.6 2.5 within Europe (also in order not to confront 2.6 6.4 the topic of illegal e-waste export—though -1.4 a case could also be made for re-export markets, given labour cost differentials). As aRecycle materials 0.9 result, circular business practices would have 0.3 0.6 a positive USD 1 to 2 billion effect on Europe’s 3.1 1.3 3.0 0.1 0.3 trade balance surplus due to overall reduced imports of new phones and component and Recoverable Treatment Net benefit Circular Treatment Net benefit value costs status quo design process improved material inputs.1 Transition scenario: Conservative assumptions on improvements in circular design and the reverse cycle, within today’s technical boundaries Pushing the concept further by improvingSOURCE: Geyer & Doctori Blass (2008); Neto & Bloemhof-Ruwaard (2009); Neira et al. (2006); EPA; Umicore;LME; Metal Bulletin; recellular.com; amazon.com; recyclemobilephones.co.uk; Ellen MacArthur Foundation circular designs to bring more components into theeconomy team remanufacturing loop, enabling mobile phones to cycle not only once but potentially multiple times through a product life cycle could even lead to further optimisation potential and further decrease material and energy input costs in the market.
TOWARDS THE CIRCULAR ECONOMY | 43 Smartphones—Making the ‘smart’ in vendors and customers. Additionally, smartphone last longer companies often keep track of their assets more systematically than individuals, Although smartphones and basic mobile another factor contributing to higher phones belong to the same product category, potential collection rates. Major players in they differ in terms of design, functionality, the smartphone market estimate the current value, and options for circular business. collection rates for smartphones to be Smartphones generally feature more around 20%. advanced technology and a broader range of functions. Smartphones cost on average Once an end-of-life smartphone has been around USD 400, but prices can reach USD collected, refurbishment is a financially 600 to 700. Material costs for OEMs are interesting treatment option, given the typically around USD 100 to 130 per device.64 high potential resale value. The costs of The higher value of smartphones compared refurbishment are not insignificant—replacing with basic mobile phones does not stem the display, camera, battery, and casings of from costlier raw material inputs but from a smartphone adds up to material costs of the value added by technologically advanced around USD 45,66 and associated treatment components and software. The smartphone costs, including collection, transport, market has experienced significant growth in screening, executing the refurbishing process, recent years and is expected to grow by 15% marketing the refurbished product, and other per year in Europe between 2010 and 2014.65 administrative costs would add another USD 45. That said, in the current market a Given the high value of embedded components, refurbished phone may still yield a profit of making the reverse circle as short as possible up to USD 100. is essential to capturing the full circularity potential of smartphones. Depending on a There are a few barriers, however, that device’s condition, resale after refurbishment could prevent smartphone refurbishment is a viable business opportunity as secondary from scaling beyond a niche operation in market prices are estimated to be up to 60% the current market environment. One of the of the original price. This stands in contrast primary barriers is the difficulty third-party to refurbishment opportunities for basic players would face obtaining smartphone mobile phones, for which, under current components at market prices, given that market conditions, refurbishment costs the market is controlled by a small number typically outweigh potential sales profits. The of players. Together with the fact that economic benefit that can be drawn from refurbished smartphones typically have recycling smartphones, by comparison, is lower margins than new ones, this presents similar to that of basic mobile phones, given a significant obstacle to ramping up circular that the processes involved and the value activities. of the embedded raw materials is similar for both products. What, then, could be done to tap smartphone refurbishment potential? Refurbishment in the business-to-busines (B2B) context. Circular treatment of Changing product design and improving smartphones is a particularly interesting treatment technologies could greatly option in a B2B context, where fashion takes improve the business case for circular64 Credit Suisse, ‘Smartphonereport’, broker report, August a backseat to functionality. Businesses that smartphones, according to our interviews2009 supply their employees with smartphones with industry experts. Useful design changes65 Gartner statistics on mobile also typically have well-established would include: reducing the use of adhesivesdevice sales, September 2010 mechanisms in place for end-of-life and increasing modularity of components,66 Based on average material collection. As organising reverse logistics using higher-quality materials to increasebills of seven different products—Credit Suisse, ‘Smartphone is one of the most complicated tasks in the robustness of plastic casings, and somereport’, brokerreport, August 2009 setting up a circular market for mobile technical tweaks to the circuit boards devices, smartphones have a head start in within smartphones that would reduce67 Specifically, industry sourcescite the need to increase the business settings because businesses can the likelihood of defects.67 Separately, thespace between printed circuit bundle smartphone purchases and returns, inclusion of fault-tracking software—that is,board tracks as animportant design change effectively shortening the distance between software systems that identify which parts of
44 | TOWARDS THE CIRCULAR ECONOMY 3. How it works up close Continued a broken phone need to be replaced—would to tap new customer and geographic greatly facilitate the process of sorting used segments while earning a solid profit margin. phones, which would improve the business Refurbishment of smartphones would also case for circularity. contribute to reducing input price volatility and the need to pay for hedging. Establishing incentives to boost the collection rate of smartphones, for both Light commercial vehicles—Getting extra B2B and B2C collection, would improve mileage out of your material the scale and thus the economics of refurbishing operations. Such incentives Amongst the selected industries with might include buy-back systems for medium-complexity and medium-lifetime corporate customers, based on either a products, by far the largest is the automotive cash payment or credit towards a new sector, with global yearly sales of USD 1,880 purchase, offered to customers who return billion.69 Light commercial vehicles account their phones at the end of life. Additionally, for USD 240 billion of the total annual market standardised software that fully wipes data for vehicles on the road. from a smartphone would help overcome an important psychological barrier—users’ fears For our business case and the subsequent that their data on a returned phone could be calculations, we consider a representative abused. light commercial vehicle with an average lifetime of roughly eight years in the Implementing these changes could reduce European Union. In this period, the van treatment costs for refurbished smartphones goes through three distinct usage stages. by as much as 30%, making circular business New vehicles ex-factory are typically used models significantly more attractive. The for three to four years by customers that resulting economic impact of an enlarged depend on high-quality, reliable transport. market for refurbished smartphones could Average mileages during this stage of intense be considerable. In a transition scenario usage (e.g., as a delivery truck for postal in which collection rates are increased to and courier companies) are assumed to be 50%, and in which 60% of collected devices 100,000 km p.a. In a second stage, vehicles are ultimately refurbished, overall material change ownership when ageing and wear input cost savings in the European B2B and tear increase the cost of maintenance smartphone market68 could amount to more as well as the likelihood of failures and than EUR 350 million per year. Such a system downtime. Typical usage profiles include would also save an estimated 100 thousand ownership by small to medium enterprises tonnes of CO2e emissions (measured in that use the van to haul products between the linear supply chain) and would reduce depots and construction sites at a lower manufacturing energy costs by USD 4 million. frequency. Average mileage in this phase is In a more advanced scenario (95% collection, assumed to be around 50,000 km p.a. After 50% refurbishment, and 50% recycling), this second stage, lasting four to five years, in which manufacturers and vendors the van enters a third active usage period cooperated to establish joint reverse supply across the EU’s eastern borders or in Africa, chains, intra-firm incentive structures were goes to recycling, or is stored as a source of fully aligned, and regulation was adjusted to spare parts. enforce higher collection rates, net material cost savings would add up to more than Looking at the technical and economic break68 Total end-of-life enterprisesmartphones in Europe estimated USD 550 million annually in Europe, or 13% points, only a minor fraction of componentsto be 13.4 million devices in of the total amount the smartphone industry is responsible for the degradation in van2010—based on Gartner statisticson mobile device retirements, spends on inputs. performance. From a circular economySeptember 2010; Yankee perspective, the question arises whethersmartphone statistics, 2011 Such an advanced scenario would also allay exchanging these components could extend69 Contains major light vehicleOEMs, major medium and heavy manufacturer concerns that circular business overall the life of the vehicle or at leastcommercial vehicle OEMs, and practices would diminish profits from increase its productivity—which is why wemajor suppliers in the automotiveindustry (Source: TCP, CLEPA, traditional production. In a diverse market modelled a scenario in which OEMs adoptAnnual reports, Automotive with strong growth, the refurbishment of refurbishment activities at scale.World Truck Report, McKinseyanalysis) smartphones could enable manufacturers Conservatively considering current technical
TOWARDS THE CIRCULAR ECONOMY | 45 FIGURE 12A ESTIMATES Light commercial vehicles: Refurbishment—a profitable alternative End-of-life material flows based on 2008 EU figures Percentage of total end-of-life vehicle weight Status quo Transition scenario Mining Mining Parts manufacturer Parts manufacturer Product manufacturer Product manufacturer 63 Recycle1 44 Recycle1 Service provider 8 Remanufacture1 Service provider 5 Remanufacture1 0 Refurbish 26 Refurbish Maintain & reuse2 Maintain & reuse2 User User 71 75 14 14 Non-EU Collection in EU Collection in EU export3 15 Non-EU export3 11 Unaccounted Unaccounted and landfill and landfill 1 Today, recycling and remanufacturing take place in single treatment process as spare parts are taken from end-of-life vehicles (split here for better visibility) 2 Analysis focuses on end-of-life products (post de-registration), frequent resales of light commercial vehicles during intra-EU lifespan are not considered due to lack of data 3 Light commercial vehicles exported from EU with unknown intended usage or treatment SOURCE: Eurostat; ANFAC; Öko-Institut; EIU; Ellen MacArthur Foundation circular economy team70 The collection rate is defined feasibility alone, we derived two levers Establishing professional refurbishingas the percentage of total end-of-life LCV volume (in terms of to move the status quo towards more systems to capture economies of scale inweight) that is recovered through circularity: the reverse supply chain—by investing inrefurbishing, remanufacturing orrecycling. Exports of vehicles to proper tooling and achieving higher labournon-EU countries, landfill,and other non-accounted disposal Improving vehicle design and focusing on efficiency through process standardisation,are counted as not collected exchanging the ‘weakest link’ components, workflow optimisation, and specialisation.71 Georg Mehlhart et al., European which wear out or are most likely to break Such refurbishing centres would typically besecond-hand car market analysis, first, allows for a second usage period at full located centrally within the OEM’s dealershipÖko-Institut working paper,February 2011; Eurostat, ELV performance (i.e., 100,000 km p.a.). In our and service network.waste database, 2011 example, six components are exchanged: the72 In this scenario, 26% of total engine and suspension, bumpers, wheels, Although collection rates70 of vehiclesend-of-life vehicle weight isrecovered by refurbishment, 5% battery, and fluids. Design changes enable at the end of their final usage periodby remanufacturing, and 44% by easier, faster, and less expensive replacement (deregistration) are already as highrecycling. This implies that 30% ofcollected vehicles are refurbished. of these critical components, e.g., as ~71%,71 partially due to stringent EUThe discrepancy between rates asa percentage of total end-of-life modularisation of the engine by changing the directives, shifting volumes from recyclingweight and as a percentage of design to bracket mounting, widening the to refurbishing—as outlined in the transitionnumber of end-of-life vehiclesstems from the fact that is it not engine bay for easier access to connection scenario72—can still save substantial materialpossible to recover 100% of a points, and using quick fasteners instead of inputs by roughly USD 8.8 billion (i.e., 15%vehicle’s weight through recyclingor remanufacturing screw couplings or bolted connections. of material budget) annually (Figure 12A).
46 | TOWARDS THE CIRCULAR ECONOMY 3. How it works up close Continued contributions from refurbished vehicles FIGURE 12B ESTIMATES Light commercial vehicles: Refurbishment as compared with original sales of new is attractive for a large range of cases despite vehicles (Figure 12B). This positive demand substitution of 50% perspective suggests that companies have Net benefit1 from light commercial vehicle an arbitrage opportunity on refurbishment— refurbishment, considering demand substitution effects2 if managed well. By marketing this new USD thousand per vehicle feature to customers and sharing the Economically viable 24 savings with users through reduced prices, they could also sharpen their competitive 15 edge. OEM and sector-level initiatives to 6 foster engineering education and R&D 2 Profit on activities specific to circular production primary sales could further support wider adoption of -3 such circular business practices. -11 100 75 50 25 0 Washing machines—Shifting ownership to Discount on refurbished vehicle 3 achieve more cycles Percent of new vehicle’s sales price 1 Net benefit from 1st refurbishment: price of refurbished vehicle minus In Europe, more households own washing reverse treatment costs 2 Demand substitution rate assumed at 50%, it refers to the percentage of machines than cars.75 While washing refurbished vans that replace the sale of a new van; cost of demand machines are far more standardised than substitution is the profit margin on primary product sale 3 Original sales price of selected light commercial vehicle is approx. USD cars in both their physical dimensions 41,000; OEM profit margin approx. 4% SOURCE: Eurostat; ANFAC; Öko-Institut; EIU; Ellen MacArthur Foundation and the amount of material they contain circular economy team (typically 30 to 40 kg of steel per machine), they vary substantially in price and lifetime. Customer segments range from the single- In addition, this will save about USD 192 person household needing 110 washing million in energy costs as well as reduce cycles a year, to hotels and laundromats, the greenhouse gas emissions of the linear which commonly run their machines supply chain by around 6.3 million tonnes. for 1,500 to 3,000 cycles a year. When Such a scenario could be developed more contemplating a purchase, customers have aggressively by increasing the share of a wide range of choices among models and vehicles collected for refurbishment to 50% performance. of total end-of-life vehicles.73 On an annual basis, a total of over USD 16 billion of net Although all washing machines have similar material, labour, and energy savings could be components, their longevity measured in73 In this scenario, 43% of total achieved in Europe alone. washing cycles ranges from about 2,000 forend-of-life vehicle weight is entry-level machines76 to 10,000 for high-recovered by refurbishment, 4%by remanufacturing, and 32% by While this is a considerable economic quality machines. The common break pointsrecycling. The difference between saving from a macroeconomic perspective, are also well known: the motor, the pump,rates as a percentage of end-of-life weight and as a percentage of the question remains whether the and the plumbing.end-of-life vehicles is explained inthe previous footnote individual company could or should have an interest in pursuing this potential. An economic opportunity with benefits74 HIS Global Insight, Lightcommercial vehicles sales in Demand substitution of new production— for the material balance. The industryEurope, September 2011 by discounted remanufactured parts and average for domestic washing machines75 Euromonitor washing machine high-quality refurbished vans—is a concern is 250 cycles a year.77 Given that warrantystatistics, 2011; StatistischesBundesamt, car statistics, 2009 that is understandably expressed in the periods are typically not more than one industry. This point is especially acute to two years, average users frequently76 A sub-segment of entry-levelmachines is built for only 800 to as market forecasts for light commercial have an incentive to buy the lowest-cost1,000 washing cycles vehicles indicate that, at least until 2015, machine and get, on average, 2,00077 Ina Rüdenauer et al. , ‘Eco- sales will only increase moderately.74 A washing cycles. With usage periods of lessEfficiency Analysis of WashingMachines’, Öko-Institut working sensitivity analysis showing the impact of than 10 years in mind, customer groupspaper, November 2005; Rainer different discount and demand substitution with low usage intensity are inclined to optStamminger et al., ‘Old WashingMachines Wash Less Efficiently rate combinations shows that, for light for lower-quality machines. Yet, over theand Consume More Resources’, commercial vehicles, one could maintain long term, high-end machines cost usersHauswirtschaft und Wissenschaft,2005, Vol. 3; expert interviews similar or even achieve higher profit roughly 12 cents per washing cycle, while
TOWARDS THE CIRCULAR ECONOMY | 47 important that such gains—which are largely FIGURE 13 driven by optimising temperature, spin rate, Washing machines: Leasing durable machines can be beneficial for both parties and washing time—are also accessible to users of ‘built-to-last’ machines. Luckily, Customer’s net present costs1 of washing machine usage over time2 energy efficiency-enhancing features such USD per customer as wider ranges of programmes, automatic -38% -26% -32% load detection, sensor technologies, and 26% - 38% customer auto dosing systems are usually a matter of 1,714 cost savings through software, electronics, and sensor systems— 1,227 1,158 leasing 935 905 schemes components that could be reintegrated 582 into machines post production without substantially changing their structure.79 5 years 10 years 20 years Providing updating and upgrading washing Purchase of low-end machines3 machine programmes after the first sale 5-year leasing model for high-end machine can thus be a way to offer energy efficiency improvements without regularly replacing the High-end machine manufacturer’s profits whole machine. from primary sale and leasing USD per machine Changing the business model to gain 970 660 +35% 35% increase against the low-cost segment. To realise in producer profits through the positive economic and ecological 173 leasing 137 186 arrangements implications of durable washing machines, OEMs could consider offering high- Sales price COGS OPEX Profit NVP from (pre-VAT leasing2 end washing machines in a usage- or and retail) Primary sale of high-end machine performance-based model. This could enable 5-year leasing model for high-end machine average users to profit from low per-cycle costs of high-end machines within a shorter 1 Here, net present cost is the sum of a customers discounted cash78 To perform this analysis we outflows for washing machine purchases over a specific time horizon period of time. A five-year leasing agreementcalculated a net present value (5, 10, and 20 years)(NPV) for high-end versus low- 2 Applied 8% discount rate would remove the high upfront cost barriercost machine purchases (the 20-year NPV for a family using 500 3 Low-end washing machines with a lifetime of 2,000 cycles and cost around USD 540 for customers and distribute costs over acycles per year is USD -1,714 when SOURCE: Company information; Öko-Institut; Sundin (2004); UNU defined period of time.purchasing a low-cost machine (2008); Stamminger et al. (2005); Ellen MacArthur Foundation circularversus USD -1,158 when buying a economy teamhigh-end product). In this context In a scenario where a 10,000-cycle machinethe net present value is the sumof a customer’s discounted (8% worth USD 970 (before VAT and retaildiscount rate) cash outflows forwashing machine purchases over margin) is leased over a five-year period (11%a specific time horizon low-end machines cost 27 cents per cycle. interest rate) by a family (500 cycles p.a.),79 Ina Rüdenauer and Carl-Otto We can also show that the costs incurred by both the customer and the manufacturerGensch, Einsparpotenziale an average household using one high-end could improve their economic situation.80durch automatische Dosierungbei Waschmaschinen,Öko- machine over a 20-year period are lower Over the implied lifetime of 20 years, theInstitut working paper, June than if the same household uses a series of machine could be leased four consecutive2008; Ina Rüdenauer andRainer Grießhammer, PROSA low-end machines to do the same number of times with a certain degree of reconditioningWaschmaschinen, Öko-Institutworking paper, June 2004; washes over the same period.78 in-between (reflected in reconditioning costsPanasonic company website; of USD 105 after every lease, which includeSamsung company website The trade-offs between high- and low- transportation costs, quality checks, cleaning80 This also holds when a third quality machines also have implications for and cosmetic changes, as well as softwareparty (e.g., bank) acts as anintermediary and charges an material and energy consumption. Given and systems upgrades).81 Independent of theadditional 100-200 basispoints. How the economic similar material compositions and production time horizon (5, 10 or 20 years), the valueimprovement potential is processes, replacing five 2,000 cycle that both the user and the manufacturerdivided between manufacturer,customer, and a potential third machines with one 10,000 cycle machine derive from the deal is higher than what theyparty eventually depends on the yields almost 180 kg of steel savings and would get from a conventional saleindividual contract and existingmarket dynamics (e.g., purchasing more than 2.5 tonnes of CO2e savings. (Figure 13).power or competition) These carbon emission savings could be81 Underlying machine prices partially offset by missed energy efficiency In a way, such leasing contracts removefor leasing contracts refer toproduct value at given points in improvements that would have been more inefficiencies in the market that stem fromtime under linear depreciation readily available if the household bought a maturity mismatch between the typicalover expected lifetime of 20 years(=10,000 cycles) a new machine more often. It is therefore time horizon a household has when buying
48 | TOWARDS THE CIRCULAR ECONOMY 3. How it works up close Continued a machine and the time horizon high-quality collected machines get refurbished (and the machines are built for. The leasing scheme other half gets recycled) would generate net transforms a long-term investment in a material cost savings of more than 12% of total 10,000-cycle machine into multiple cash industry input costs. In an advanced scenario, flows and the right to use the machine alternative ownership models, such as leasing for a certain period of time. This results in or performance-based arrangements, could an economic win-win situation and yields be brought to higher scale with specialised positive material and energy implications intermediaries entering the market. through prolonged lifetimes of the products. Aligning incentives between customers and manufacturers regarding contract financing Combining benefits of new business models and duration is essential to make alternative with effective refurbishment. As leasing ownership models work. In an advanced models give manufacturers strong control scenario with proliferation of alternative over products over the life cycle and result business models, an increase in manufacturer in high and stable product return rates, they control over machines in circulation could be facilitate the recovery of value embedded in reflected in collection rates of up to 95%. This those collected products. End-of-life washing could be further supported by collaborative machines are typically recycled, yet it is collection and treatment systems, which estimated that only up to 10% of collected82 would improve the entire reverse supply machines currently get refurbished.83 In many chain. In such a scenario, the net material cases, old washing machines are intact and cost savings associated with refurbishment would be reusable following the replacement and recycling could be around 18% of total of some components (e.g., motor, bearings, industry input costs. front panel, printed circuit board, or pump) and some cosmetic changes. The cost for Shift to performance-based contracts already collection, transport, the refurbishing process, happening. Many ideas have already been put and other expenses is currently estimated forward to exploit the economic and business to be around USD 170 per machine.84 The opportunities outlined above. material cost of replaced components could82 In Europe, ~40% of large amount to as much as USD 300, but depends Pay-per-wash model. In Northern Europe,domestic appliances are on the machine’s quality segment as well Electrolux offered customers per-washcollected in official WEEEchannels. It is estimated that as the number of replaced parts. This could options based on smart metering. Themuch more than that is collected make refurbishment economically viable in manufacturer installed its high-quality washingvia ‘unofficial’ channels. Source:Eurostat, WEEE key statistics and some but not all cases. machines in customer homes, connected to adata, 2011; CECED, Joint positionpaper on WEEE recast second dedicated measuring device installed at thereading, CECED position paper, Combining new leasing models with power outlet. This enabled tracking of notJuly 2011 refurbishing activities can be a particularly only the number of washing cycles but also83 Jaco Huisman et al., 2008 interesting opportunity. In a situation where the programme (e.g., cold versus hot wash).Review of Directive 2002/96 onWaste Electrical and Electronic circular activities would be pooled and This business model was discontinued afterEquipment – Final Report, UnitedNations University working replacement parts prices would not be the utility provider discontinued the smartpaper, August 2007; Adrian subject to the high trade margins currently metering. Without this element, ElectroluxChapman et al., Remanufacturingin the U.K. – A snapshot of the observed, material costs in the refurbishment was unable to assess customer-specific usageU.K. remanufacturing industry; process could be reduced by up to 40%. This and charge the customer accordingly. Further,Centre for Remanufacturing &Reuse report, August 2010 would make refurbishment more attractive customer acceptance was rather low; the84 This is in line with the and foster the idea of (multiple) leasing advantages (e.g., free servicing, easy trade-inassumed cost for reconditioning systems for high-end but also other kinds of for upgrades, high-end machines with hardlyin the leasing process washing machines, as their lifetimes increase any upfront costs) were not marketed85 David Pringle, ‘Electrolux with effective circular treatment. adequately. 85offers free washers to homesthat get wired’, Wall StreetJournal Europe, February2000; Timothy C. McAloone A comparison of costs for new and Refurbishing model. ISE, a specialty washingand Mogens Myrup Andreasen, refurbished machines indicates that material machine company producing professionalDesign for utility, sustainabilityand societal virtues: developing input costs per product could be reduced by washing machines (10,000 to 12,000 cycles)product service systems, up to 60%, net. From an industry perspective, in sizes comparable with domestic models,International Design Conferenceworking paper, 2004; Jacquelyn a transition scenario in which the collection collects used heavy-duty washing machinesA. Ottman et al., ‘Green marketmyopia’, Environment, 2006, rate increases from 40% to 65% due to from hotel or laundromat customers. AfterVol. 48 (5) adoption of new leasing models, and 50% of
TOWARDS THE CIRCULAR ECONOMY | 49 refurbishment, it sells these machines to the Longer-lasting machines will substitute domestic market at a discount price. for new models and decrease sales. As with any transformative technological Lease model. Several market participants change, a shift toward a circular economy have discovered the potential of offering would have winners and losers. It may leasing contracts for washing machines well be that manufacturers of inexpensive to commercial users as well as to private washing machines, with high per-wash households. Specialty leasing providers costs to consumers, would have to adjust such as Appliance Warehouse of America to competing offerings of longer-lasting, offer a wide range of products and contract more efficient models in a circular economy. specifications to meet customer demands. That said, it should not be discounted that Home appliance manufacturers such as such ‘creative destruction’ also creates new Bosch Siemens Hausgeräte provide leasing opportunities—for instance, refurbishing to customers under a ‘full service’ scheme, and selling replacement parts for washing which includes warranties that cover the machines, or participating in the various whole contract time frame.86 This provides aspects of the service industry that would the customer not only with increased be needed to support a circular washing flexibility in terms of timing but also with machine business model. better service levels and added convenience. In such a setting, third-party financing Customers will not accept new, alternative companies may take up an intermediary contract schemes. Some manufacturers role, matching manufacturer and customer argue that customers are used to purchasing incentives and handling administrative tasks. household goods rather than leasing or renting them. Customers may avoid leasing All of these already existing models have contracts due to uncertainty and insecurity illustrated potential for increasing material about financing agreements. While this may productivity. When explaining why these be true in the near term, there are myriad models would not work, manufacturers examples of users shifting to different typically cite the following concerns: ownership models. One case in point is the industry for short-term, inter-city car rentals, Total cost of ownership (TCO) will increase. which has proven to be a resilient model Current washing machine manufacturers that has enabled consumers to scale back cite the potential problem that customers car purchases in favour of less expensive would be unable to participate in the and more convenient short-term rentals. continuous efficiency gains in energy Furthermore, transparency with regard to or water consumption offered by new contract conditions and effective marketing washing machines. Therefore, a long-lasting of customer benefits (e.g., quality machines model could be less attractive from a TCO with hardly any upfront costs and easy perspective. This concern would be highly collection) would help remove such concerns. problematic—were it not for the potential of leasing models. As we have shown in our The financing of upfront production costs net-present-value analysis, both washing poses a financial risk to manufacturers. machine sellers and customers can benefit In a leasing scheme, the producer faces from a model in which long-lasting machines a maturity mismatch between upfront are leased to customers—who then have production costs and future cash flow the option of upgrading to a different lease streams. Financing this gap from the model if a more efficient model emerges. company’s own funds could be a financing Furthermore, efficiency gains often stem risk to a certain extent, yet typically from innovation in the washing programme these risks can be carried by financial software or sensor systems, which can be intermediaries. easily upgraded. Doing this would provide a quick fix through which leasing firms and customers could inexpensively participate in86 Company website these continuous efficiency gains.(http://www.bosch-home.com/de/produkte.html)
50 | TOWARDS THE CIRCULAR ECONOMY3. How it works up closeContinuedThe end of Electrolux’s experiment with use of returned, empty distribution vehicles)its new leasing business model shows that and product designs that increase durabilitychallenges may arise in the cooperation with and facilitate the process of disassembly andbusiness partners, which can hinder a new refurbishment (e.g., specifying a robust casebusiness model from becoming effective and made from impact-resistant polymers andprofitable. Adopting more circular business carefully placed protective rubber inserts,models will therefore require skills in new vibration resistant connectors, and high-forms of collaboration and alliance-building— quality copper motor windings).but this, too, we see as eminently feasible,and indeed quite lucrative given the potential Adopt new business models and arewards. segmented approach to circular activities. One new business opportunity could bePower tools—Power by the hour rental and leasing schemes for high-end power tools. As these products are durableLike mobile phones, power tools are currently and are typically used only sporadicallyonly recycled to a small extent as end-of- and for a defined period of time in thelife products and rarely remanufactured for household segment, high-quality powerreuse. Yet many used power tools contain tools could be hired out several timeselectrical components that are very durable and repaired and refurbished at definedand not subject to changes in technology intervals between hires. As part of aor fashion, thus offering significant value service contract, a company could alsorecovery potential. B&Q, the U.K. home create additional customer value byimprovement company, estimates that even offering training, workshops, and othertoday 20% of collected power tools could be kinds of useful do-it-yourself information,refurbished. Given the recoverable value and which serves a marketing purpose andcurrent costs of treatment, refurbishment also functions to highlight the increasedof power tools makes sense only for mid- value of durable products to customers.range/high-end products. As power tools In a more comprehensive service offering,are somewhat sensitive to humidity, more companies could provide kits with all theproducts could be refurbished if they were equipment needed for a specific projectappropriately stored during their usage (e.g., constructing a new kitchen). Thisphase and during the reverse logistics would mark a switch from a product to aprocess. service or system business, in which the power tool manufacturer hires out relevantA scale-up to significant levels of refurbishment tools and collects them at the end of theand adoption of new business models would project, during which the manufacturerneed to proceed along the following lines: sells consumables (e.g., screws, nails) and other higher margin items as part of theirImplement in-store collection, testing ‘kitchen renovation kit’ (e.g., paints, fixtures).processes, and alternative circular business This would increase efficient use of thepractices for power tools. End-of-life products and enhance overall lifetimescollection points could be set up in every through frequent repair and refurbishment.store for a per-store investment of ~USD When combined with additional customer1,500, and labour costs could be kept to a services (such as support in project planning,minimum. As an alternative to third-party selection of required equipment andcollection and recycling, end-of-life products materials), a contract scheme of this sortcould then be transferred back to the store’s could generate significantly more value fordistribution centres, where testing facilities customers than standard product purchases.would check for reusability of products andcomponents. Some of the products couldthen be refurbished or remanufactured ininternal or external facilities. The key successfactors of the approach are cost-efficientreverse logistics (e.g., dry storage and making
TOWARDS THE CIRCULAR ECONOMY | 51 Short-lived products and consumables — this leakage is compensated for with The opportunity for biological nutrients mineral fertilisers that are energy-intensive to produce—and sometimes geo-politically Short-lived products and consumables challenging to procure. The U.S., for instance, represent roughly another third of Europe’s have stopped all export of phosphate rock manufacturing sector. Products such as (a critical ingredient in fertiliser under textiles may have only a short usage period the current system) and China has raised and products such as food and other its tariffs on the same—a problematic agricultural products (e.g., paper) are often development since, together with Morocco/ consumed within days to months of initial Western Sahara, these countries were production. For this type of product, the responsible for 67% of all the rock phosphate most effective steps towards a more circular output on the market in 2009.87 economy are likely to move away from technical nutrients to biologically based In what ways, then, would a circular economy loops in order to make these products differ? First it would seek to avoid losses serve a restorative purpose, rather than an in the value chain such as the ‘loss’ of land exploitive one. Similarly, other steps focus through low yields, loss of food volumes and/ on improving their usage periods or, at a or spoilage caused by distance to market and minimum, switching to cascading usages. In inadequate cold chains. The need to avoid the following analysis, we look at food and food waste both at the point of sale with the textiles: retailer and within households is gathering momentum amongst corporate and political • Food is an important segment in the decision makers—as evidenced by voluntary consumables category. It is a major initiatives such as the Courtauld Commitment contributor to current waste streams, yet in the U.K. and various initiatives originating holds significant economic potential in at the European Commission. Motivations being safely reintroduced into the biosphere can be grouped along three lines: compliance to rebuild natural capital after energy and with the European directive on increasingly specific nutrients have been extracted on the keeping organic waste out of landfill, reverse loop. questions around social justice and access to food, and—in a more complex and indirect • Textiles offer a showcase of how a product/ way—the necessity to cut down on such material can cascade through multiple waste if we want our agricultural supply uses in different value chains and achieve chains to keep up with nutritional needs. substantial material savings by consecutively replacing other virgin material needs. The circular economy would avoid landfilling and would try to extract the maximum Food—Multi-vitamins for the earth value from agricultural materials. It would inject valuable biological nutrients into a Biological nutrients, after consumption—and truly circular path consisting of material often even before consumption—become reuse (e.g., the reuse of wood in oriented waste. In Europe today this waste is largely strand board or particle board), extraction discarded, as sewage through our flush of biochemicals and commodity feedstocks toilet-based sewerage systems, or as (e.g., specialty chemicals from orange peels), an organic fraction in the municipal and extraction of nutrients and soil improvers industrial solid waste streams. Only limited (through composting and anaerobic amounts of what gets collected is ultimately digestion), and extraction of energy (through87 A rock and a hard place:Peak phosphorus and the composted, anaerobically digested, or anaerobic digestion and other waste-to-threat to our food security,Soil Association, p. 2 reused. energy technologies)—in other words ‘optimal biomass valorisation’ (Figure 14).8888 L. Asveld, R. van Est, D.Stemerding (eds): Getting to At the same time, ever more soils arethe core of the bio-economy: depleted of nutrients as we seek to nourish In the U.K., the annual amount spent ona perspective on thesustainable promise of a growing population with a changing and landfilling would fall by USD 1.1 billion if thebiomass; Rathenau InstituutSeptember 2011 increasingly land-intense diet. Currently, food fraction that is now in the municipal
52 | TOWARDS THE CIRCULAR ECONOMY3. How it works up closeContinued FIGURE 14 Biological nutrients: Diverting organics from the landfill to create more value EUR/tonne collected—negative numbers indicate a cost Farming/ Biological nutrients collection Parts manufacturer Biochemical Restoration feedstock Product manufacturer Revenues Revenues Biosphere (compost) 0 0 ? 0 0 10-25 Service provider/distributor Biogas Cascades Revenues 0 20 20 6 2803 0006 9 Consumer Anaerobic digestion/ Collection composting Costs (0) (30)-(50) (30)-(50) Extraction of biochemical Landfill/sewage feedstock1 Costs Costs (80)-(130) (25) 0 (0) (0) (?) Transition Advanced Status quo scenario scenario Total cost (80) - (130) (55) - (75) < (30) - (50) Total revenue 0 20 > 30 - 45 Total net gain (80) - (130) (35) - (55) - (0) - ? 1 Can take both post-harvest and post-consumer waste as an input Source: Ellen MacArthur Foundation circular economy team
TOWARDS THE CIRCULAR ECONOMY | 53 solid waste were diverted to more useful purposes such as compost and energy. In Rethinking agricultural addition, the externalities of landfilling such as production systems its impact on land use—including the societal In natural ecosystems, essential burden associated with siting choices—and nutrients such as nitrogen and greenhouse gas emissions would be greatly phosphorous return to the land after reduced. For example, up to 7.4 million tonnes they have been absorbed by plants of CO2e would be avoided by keeping organics and digested by animals, maintaining a out of landfill. Beyond landfill avoidance, the healthy balance. In today’s agricultural benefits of maintaining biological nutrients production systems, however, it is within a circular economy are manifold, from common practice to remove most the provision of specialty and commodity above-ground biomass from the land chemicals to land restoration and energy and to disrupt the animal-to-soil loop as provision: well by keeping animals penned rather than letting them out to pasture. As a Feedstock provision. Full ‘valorisation’ means consequence, it has become necessary that we try to extract the maximum value to sustain the yield of nutrient-depleted from biomass waste before it is used for soils with mineral fertilisers—a practice energy or soil restoration purposes. In its most that is affordable only so long as the sophisticated form, valorisation happens at energy to extract and process those a so-called bio-refinery where—with the help minerals is cheap and the minerals of enzymes and bacteria—biomass is turned remain available. Western Europe into a full range of fibres, sugars, and proteins, depends on imports for more than and later plastics, medicines, and fuels. 80% of its phosphate requirements,89 Individual refining processes are already being which is not without risk given the applied successfully at commercial scale, but real limits to economically accessible only in few instances have such processes phosphate rock reserves—one of the been combined into a full refinery operation. most important sources of mineral Processum Biorefinery Initiative in Sweden fertilisers—and the high concentration is one of the few organisations producing a of those reserves in only a few full suite of biochemicals—in their case from countries, as discussed earlier. forest biomass. The extraction of specialty chemicals typically only cuts volumes down by 1 to 2 % and the remaining biomass, which is rich in carbon, can subsequently be turned into commodity chemicals such as bio- polyethylene. While some large chemicals players like Dow have entered the biopolymers market, the market at present is mostly driven by players in the biomass cultivation and user industries, such as consumer goods manufacturers. Because of the large range of input materials, processes, and products, it is difficult to put an average number on the cost and net value of such production operations. Land restoration. Here we are touching on one of the key characteristics of the circular economy—its ability to restore the land, promote soil fertility, and thus increase harvests. Alternative sources of nutrients (sewage, animal waste, and food waste) could be sufficient to cover the entire need for fertiliser in today’s production systems and break the dependence89 Current World Fertilizer Trends on foreign minerals. Doing so, however, wouldand Outlook, Food and AgricultureOrganization, 2008, p. 12 require both technical innovation and changes in the legislative framework.
54 | TOWARDS THE CIRCULAR ECONOMY 3. How it works up close Continued Let’s take phosphorous from human excreta however, the U.K. AD infrastructure remains as an example. Urbanisation is increasing largely undeveloped. That may change sludge produced through municipal soon. The Scottish government, for example, wastewater treatment; regulation is requiring intends to lead the way and has laid out higher proportions of wastewater to be in one of its policy papers the significance treated, further increasing sludge production; AD could hold for Scotland in terms of and sludge management represents up to energy and soil restoration. Also in the U.K., 50% of total wastewater treatment costs National Grid has taken an active interest (which then, in turn, are further exacerbated in developing biogas, from food and other by high energy costs, which account for 25 sources, as an alternative to natural gas for to 30% of sludge management costs). While heating purposes. Because many biogas little operational data is available on the providers are sub-scale, tapping into this costs of recovering phosphorus from sewage source at scale will require a few changes treatment plants, academic literature puts at the system level, for example by relaxing the cost at an estimated 2 to 8 times that quality control rules, which were developed of mined rock.90 Such high costs may make for activities in gas terminals, and by sludge extraction an unlikely candidate to adjusting the commercial rules, which are compete with mined phosphate rock, but in better suited for the oil majors for which they 2008 the price of the latter flared up even were designed. beyond this point. Since then, prices have dropped to a quarter of the high, but 2011 Textiles—Dressing up for different occasions saw over a 30% increase in rock phosphate prices, from a monthly average of USD 155/ Textiles, whether made of biological or tonne in January to USD 203.50/tonne technical nutrients, offer a terrific example of in December91—making the prospect of the cascading opportunity. This is particularly profitable sewage nutrient recovery suddenly important for apparel, the usage of which is much more realistic.92 Until that moment often largely determined by fashion rather comes—or until technological development than technical lifetime limitations. Instead of and scale bring down costs—businesses such disposal in the landfill after first use (where as Ostara Nutrient Recovery Technologies they generate up to 3.6 million tonnes of are building their business model mainly CO2e in the U.K.93), textiles can be reused on the overall cost reductions for water multiple times. Reuse of apparel in good treatment plants by reducing maintenance condition offers the lowest costs and biggest requirements. On the other hand, a number savings. Various models exist, from donations of low-tech developments on the market and clothes swaps to small- and large- cut out the sludge phase altogether by scale commercial resale operations (e.g., separating urine from faeces, ranging from Patagonia’s Common Threads Initiative). the PeePoo bag that enables villagers to use their excrement straight as a fertiliser to When no longer suitable for its originally separating toilets that allow infrastructure intended purpose, the next loop for clothing clusters to develop small-scale nutrient can be re-yarning of treated fibres, with some concentration solutions. reduced costs and savings on externalities. End-of-life apparel can also be used as Energy provision. Energy can be extracted stuffing in upholstered furniture, car seating, from food waste in several different mattresses, and heat and sound insulation ways, with anaerobic digestion (AD) and (as illustrated in Figure 9). Some of these90 Water Environment Resource incineration being the most common ones. applications, too, can be repeated a fewFoundation (www.werf.com) Given food waste’s high moisture content, times. We modelled the effects of cotton91 IndexMundi, Commodity Price AD will in many cases deliver superior value. textiles being transformed into furnitureIndices (http://www.indexmundi.com) In the U.K., for example, the food waste stuffing, and then reused again as housing currently contained in the municipal solid insulation. For synthetic fibres there is also92 World Bank (www.worldbank.org), Water Environment waste stream could deliver up to 1,960 GWh the option of de- and repolymerisation intoResource Foundation (www.werf. of energy through AD. And that is food waste new fibre applications. This process is, forcom) only; the available volumes of animal waste— example, applied by the Italian company93 2006 IPCC Guidelines forNational Greenhouse Gas which is also well suited for digestion—are Aquafil, which turns Desso’s post-consumerInventories, McKinsey analysis more than 10 times as big. At the moment, carpet waste into new polymers and then
TOWARDS THE CIRCULAR ECONOMY | 55 new yarns, and by Teijin in Japan, which turns the end of their useful life, take up precious apparel from Patagonia’s post-consumer disposal capacity or visually pollute in the collection programme into new polyester best case, and cause considerable damage to fibres. Finally, after other options with health and environment in the worst? more cost and resource savings have been exhausted or are no longer possible due A better option may be to use materials to the quality of the fibre, the final loop for that are biogenic in their origin, remain textiles could consist of energy recovery unadulterated by toxic chemicals at all stages in various possible forms. We modelled of their lifecycle, and after consumption anaerobic digestion, a technology that is return to the biosystem—where they will appropriate for cellulose-based textiles such restore systems that have been previously as cotton and viscose, with all the residue depleted of minerals and organic nutrients. going to landfill. Priorities here include moving short-lived products into pure bio loops, increasing These various transformations of cotton agricultural productivity to reduce land- along the cascade allow for substitution of use conflicts, and providing the system for conventional input materials, the production retrieving and treating bio-based materials as of which may be energy intense or may compost. require large amounts of water.94 These include the polyurethane foam used as Moving short-lived products into purely furniture stuffing, the stone wool typically biological circles can build on some existing used for building insulation, and the foundations, for example, in packaging. electricity production saved by creating Shortly after its introduction, cardboard energy through anaerobic digestion. Our took off as a mass packaging material. analysis shows that this replacement process Today, despite the advent of numerous new is certainly economically viable (the numbers packaging materials and technologies, board depend strongly on the assumptions around represents a third of the packaging market. technology innovation, but cumulative costs Since the key raw materials are virgin and along this particular U.K. cascade could secondary fibre, packaging of this type amount to about USD 120 million, while should be inherently biodegradable and the products they save cost up to USD compostable. Numerous studies and pilot 315 million).95 Furthermore, the cascade efforts have shown that this is the case, but process saves CO2e emissions and water growing performance demands on paper for94 PlasticsEurope: Eco-profiles usage associated with the production of the both print and packaging applications haveof the European Plastics Industry:Polyurethane Flexible Foam, substituted products. Looking just at the U.K., led to the use of an increasing number ofBrussels, 2005 we determined that these savings could add additives, many of them toxic. When such95 We analysed the cascade up to 1 million tonnes of CO2e and 16 million toxic materials end up in compost, it is noof cotton textiles transformed cubic meters of water. longer possible to apply it widely as soilto furniture stuffing, thentransformed to housing insulation, improvement: in many cases, its best use isand finally anaerobically digested(with the resulting biogas Other short-lived products and consumables as daily cover in a landfill. Here, too, a designconverted into electricity and system that had not taken into accountthe digestion residue landfilled).Economic viability was assessed This category covers a broad range of the poor design outcomes for end-of-lifethrough comparison of wholesale products for which circular solutions may treatment needs to be mended—the goalprice of conventional productwith its reused cotton substitute. take on entirely different forms. For some would be to flush toxic chemicals from theCotton-derived products turnedout to be highly competitive. For short-lived products, it may be possible to value chain as much as possible and find non-this comparison, adjustments change their properties or that of the system harmful substitutes that can deliver the samedue to differences in weight andinsulation efficiency were applied. in which they function and, by doing so, to performance. The benefit of having healthyThe base cotton volume entering switch the delivery of their function into the compost that is suitable for a broad range ofthe cascade is defined as 50% oftoday’s recycled textiles. Here, durables or service systems categories. For applications is real and measurable.further potential exists as thecollection rate for textiles in the many more, however, their short lives cannotU.K. is low at 22% and recycling be altered in an economically or functionally We do not need to resolve the technical/only accounts for 6% of collectedvolumes (Oakdene Hollins: acceptable way. Many forms of packaging, biological nutrient switch with today’sRecycling of Low Grade Clothing for instance, belong to this group. Why, then, materials only. Many companies haveWaste, September 2006;McKinsey analysis). For the would we continue to serve these purposes taken on the challenge of providing bio-following steps in the cascade, itwas assumed that 50% of material through the consumption of technical based materials that can rival conventionalenters the next cascading step nutrients—which are finite in nature and, at petroleum-derived products in terms of both
56 | TOWARDS THE CIRCULAR ECONOMY 3. How it works up close Continued Harnessing innovation intake (e.g., substituting graphene for indium tin oxide in solar cells). Material and technological innovation Advances in biological materials (like is a core enabler for fast-tracking self-healing mobile phone cases) or transformation from a linear into a advances in chemistry (like non-toxic circular economy. While many of the alternatives) could further accelerate proposed alterations on the journey the adoption of concepts of the to a circular economy will be gradual, circular economy. Changes in the innovation could likely lead to a more durable, technical-component part disruptive and accelerated arrival. of the product or product system Also, while the analysis provided in could lead to a different usage of this report is based on materials and consumables. A significant part of a processes known today, a focusing of washing machine’s total environmental innovative forces on the restorative impact, for example, arises from circular economy model may lead the discharge of soiled water and to opportunities that are currently dissipation of detergent. While recent unknown to the economy. technological developments have so far mainly focused on minimising the use Changing the efficiency of production of detergents,96 it is also conceivable processes, for instance, by moving to develop technologies (e.g., applying towards 3D printing instead of membrane technology) that allow for milling, could dramatically reduce detergent recovery after consumption.97 the production-induced waste of resources while enabling more flexible design and variations of produced This is the field of speculation, as components, for example, the specific advances are happening behind closed fitting of missing spare parts to extend doors at leading R&D outfits. Yet there the life of a product such as a van, is certainly evidence that change is and hence drive down inventory and underway. Former Ecover CEO and obsolescence risks. ZERI creator Gunter Pauli, for instance, has compiled 100 innovations in his The introduction of alternative ‘Blue Economy’ initiative, several materials could reduce input scarcity of which could also accelerate the and potentially lower costs of material migration towards a more circular economy.9896 See for instance technologiesdeveloped by Xeros, a Universityof Leeds spin-off(http://www.xerosltd.com/nylon-polymer-technology.htm)97 Tim Jackson, MaterialConcerns: Pollution, Profit andQuality of Life, London: RoutledgeChapman & Hall, 199698 The Blue Economy is anopen-source movement thatbrings together concrete casestudies. These were compiled inan eponymous report describing‘100 innovations which can create100 million jobs within the next10 years’ that was handed overto the Club of Rome in 2010.As the official manifesto states,‘using the resources available incascading systems, (...) the wasteof one product becomes the inputto create a new cash flow’
TOWARDS THE CIRCULAR ECONOMY | 57functionality and cost. These companies issue is that, with current high levels ofrange from leading chemicals manufacturers landfilling, many inert bio-based materialssuch as Dow (impact modifiers and process end up adding to the production of landfillaids for polylactic acid or PLA) and BASF gas, so that more and more technology to(Ecoflex) to niche players such as Cyberpac capture landfill gas is required. If landfill(Harmless Packaging) and the Canadian firm diversion rates were to go up significantly,Solegear Bioplastics (compostable plastics). however, as is to be expected under EU legislation, bio-based materials such asOvercoming functional gaps will require coated and printed paper and cartonboarda great deal of innovation on the part of might negatively affect the quality ofchemicals and packaging companies, and recyclate—unless high-performance sortingat the universities and research institutes technologies are applied. Large-scalethat provide these industries with new ideas deployment of biological nutrients wouldand insights. As with the other challenges therefore require systems that capture themposed by the circular economy, here, too, and return them to the earth. In such aappropriate curriculum changes are vital system, new biological nutrient applicationsto create and impart knowledge in and such as packaging, when designed withacross relevant disciplines, and researchers suitably bio-based coatings and inks, canand companies alike will need to tap into actually reinforce the existing composting/many different sources in order to generate anaerobic digestion system. As conventionalsufficient levels of innovation (see also packaging materials are often a source ofsidebar). In the marketplace, arriving at scale contamination in organic material, bio-basedwill require buy-in from brand and volume alternatives may ensure a lower level ofleaders in the packaged goods industry so contamination for organics and hence betterthat demand will pick up quickly and prices commercial value for the compost/digestate.can come down.Growing a sufficient supply of biofeedstockswill require increases in agriculturalproductivity to help free up the amount ofrequired arable land. In today’s agriculturalsupply system, large-scale feedstock demandfor biochemicals will compete for land withother biomass applications such as food,fibre, and fuel. Since biochemicals fetch ahigher price than biofuels, they will likelycompete successfully with the latter, butas the biofuels debate in recent years hasshown, under today’s circumstances eventhe existing relatively small biofuel feedstockvolumes already raise important trade-offquestions in terms of land requirements.Policy makers, most likely in public-private-partnership constellations, need to stimulateend-of-life treatment systems that aresuitable for the materials on the market—including biological and biochemical ones.The key is to provide the system. Examplesinclude Seattle and San Francisco, both ofwhich have not only set the rules for thechoice of bio-nutrient-based materials forsingle-use fast-food packaging, but havealso provided the municipal infrastructure toproperly handle such waste. A more complex
58 | TOWARDS THE CIRCULAR ECONOMY3. How it works up closeContinued FIGURE 15 EXAMPLES Building blocks of a circular economy—what’s needed to win A 6 2803 0006 9 B Collection Collection C D A B C D Skills in circular product New business models Skills in building cascades/ Enablers to improve design and production reverse cycle cross-cycle and cross- • ‘Consumer as user’ sector performance • Material choice • Performance • Collection systems: contracts User-friendly, 1. Cross-cycle and cross- optimised for • Products become cost-effective, sector collaboration circular setup services quality-preserving facilitating factors • Design to last e.g., joint product • More modularisation/ • Treatment/extraction development and standardisation technology: optimising infrastructure • Easier disassembly volume and quality management through • Production process efficiency • IT-enabled transparency and information sharing • Joint collection systems • Industry standards • Aligned incentives • Match-maker mechanisms 2. Favourable investment climate Availability of financing and risk management tools 3. Rules of the game to quickly reach scale Regulation in the areas of accounting, taxation, customs tariffs, customer and corporate responsibility, certification, standardisation 4. Education • Awareness raising in general public and business community • Integration of circular Source: Ellen MacArthur Foundation circular economy team concepts in university curricula
TOWARDS THE CIRCULAR ECONOMY | 59Putting it all together—Building blocks New business models. The ability toof a circular economy translate better designs with longer-lasting (component) usage into attractive valueDespite their differences, the examples propositions is essential for more circulardiscussed—from fashionable mobile phones products to compete successfully againstand long-lasting washing machines to highly efficient, low-cost, linearly producedtextiles that cascade through multiple usage products. Changing from ownership toperiods—all draw on the same essential usage- and performance-based paymentbuilding blocks of a circular economy models (e.g., leasing, hiring—as in the(Figure 15). washing machine example) and expanding the product definition to embed it in relatedSkills in circular product design and services (e.g., power tools combined withproduction. In nearly all of the examples, building kits and training) are elementsimprovements in product design and of such business models. Here, too, wematerial selection have reduced the cost of expect an accelerating uptake over timemoving products into ever-tighter reverse as manufacturers—and their customers—circles, without compromising structural become more familiar with such alternativeintegrity or function. Besides material models. Thomas Rau at Turntoo notes:selection, which clearly plays a critical role ‘The benefits of performance-based usagein enabling circularity, other areas important contracts are just now being fully understoodfor economically successful circular design and adopted by our corporate partners andare modular and standardised components, customers.’ This is not a one-size-fits-alldesign for disassembly, design to last, and solution—good knowledge of value chainproduction process efficiencies that minimise participants’ needs and ongoing innovationwaste. To optimise designs and materials for are required to find a fitting model. ‘So far,production and repeated use in closed loops, we have not found a product for which ourthe core competency is thinking in terms model does not work; and we have alreadyof systems and being able to see ‘the wood looked at many different types’, adds Rau.and the trees’. A clear view on the product, Renault points out that leasing modelsits nutrients (and suppliers), multiple also allow full traceability of batteries andcustomers, and the reverse process, explicitly therefore guarantee them a high collectionsupplemented by the circular economy rate for closed-loop re-engineering orprinciples outlined in Chapter 2, are a recycling.necessary aspect of optimisation. At present,the principles of segregating biological from Skills in building reverse cycles andtechnical nutrients and phasing out toxic cascades. Without cost-efficient, bettermaterials are under-used and are therefore quality collection and treatment systemsa priority. A few design changes can help with effective segmentation of end-of-lifeachieve this segmentation. First, products products, the leakage of components andcan be modularised so problem elements can materials out of the system will continue,easily be isolated and replaced. As part of the undermining the economics of circularsame process, manufacturers can determine design. Building up the capabilities andwhat long-lived materials should be used to infrastructure to close these loops isform the core of a modularised product—i.e., therefore critical. Collection systems mustthe skeleton that lives on while modules and be user-friendly (addressing users’ keycustomisable add-ons are replaced. Design reasons for making or not making returns,methods, also virtual ones, for modularising such as guaranteeing complete deletion of aand standardising components, as well as user’s phone data to allay privacy concerns),flexible mounting techniques (e.g., snap they must be located in areas accessible tofasteners instead of adhesives) are well customers and end-of-life specialists, andknown and can be used to make products they must be capable of maintaining theeasier to disassemble in preparation for their quality of the materials reclaimed. Treatmentnext round trip. and extraction technology is unevenly developed and must be increased in terms of volumes handled and the quality of the treatment. Whilst the challenges of raising
60 | TOWARDS THE CIRCULAR ECONOMY3. How it works up closeContinuedcollection rates must not be underestimated • ‘Rules of the game’ in the form of better(see the significant efforts of Europe’s aligned economic incentives from taxconsumer electronics industry), initial authorities and regulators on issues suchsteps can easily be taken already in today’s as cost of landfill and labour costs couldenvironment (e.g., centralising refurbishment potentially speed up adoption of more circularof light commercial vans to support it with business models. Professor Roland Clift notesthe use of professional tools). on this topic: ‘Some of the current incentives at systems levels are just perverse—forEnabling factors to improve cross-cycle example, taxing labour instead of material.and cross-sector performance. For the The one resource is non-renewable and inwidespread reuse of materials and higher short supply yet free of taxes and the other isresource productivity to become as common renewable but taxed’. Furthermore, regulationand unremarkable as litter and landfills in the areas of customer and corporateare today, market mechanisms will have to responsibility, accounting, certification, andplay a dominant role, but they will benefit standardisation can help to quickly reachfrom support by policy makers, educational scale.institutions, and popular opinion leaders. • All parties need access to financing and• Effective cross-chain and cross-sector risk management tools to support capitalcollaboration are imperative for the large- investment and R&D. These points are closelyscale establishment of a circular system. linked to the above-mentioned ‘rules of theAs an example, joint product development game’: a stable regulatory environment is aand infrastructure management (with, focal point for investors. As Andrew Page,amongst other goals, that of driving a partner at Foresight Group, the assetdown collection and manufacturing costs) management group pioneering environmentalcan be facilitated by transparency along infrastructure investing in the U.K., puts it: ‘Athe value chain, available ‘match-maker’ firm legislative and economic framework is themechanisms, establishment of industry number one success factor for the transitionstandards (e.g., product labelling), and the towards a circular economy’. Cyberpac, aalignment of incentives among business specialty packaging company, explains: ‘Thepartners. Maintaining visibility along the uncertain investment environment currentlyvalue cycles on the whereabouts and the restrains large retailers from investing inconditions of components across different new technologies’. Governments can createstakeholders is essential for most circular further funding stimuli by underwritingbusiness models to operate efficiently. B&Q some of the risks associated with innovative,points out, ‘As a trading company, whilst we ‘green’ businesses. For instance, the newlyadhere to all health and safety legislation established Green Investment Bank, anand proactively work to exclude/reduce initiative launched by the U.K. Departmentproblematic chemicals from our products—as for Business, Innovation and Skills, aims towe did when we led the way by significantly ‘accelerate private sector investments inreducing the harmful chemicals in paint (now the U.K.’s transition to a green economy’industry standard)—at this time we don’t (including the waste sector), offeringcurrently know every material contained targeted financial interventions to overcomein every product we sell. Understanding all market failures such as risk aversion duethe materials and components with every to informational asymmetries and highproduct and better labelling of these will transaction costsbe will be crucial for our success in theCircular Economy game’. This information • The shift to the circular economy mustneeds to feed into well-developed company- also be supported by the education systeminternal databases and tracking systems, with integration into university curricula andso that one can easily look up the origin, outreach programs to increase awarenessage, and range of potential applications—‘a in the general public and business, science,critical requirement for a high-performance and engineering communities—see also theremanufacturing system’, says Jean-Philippe sidebar on education and skills.Hermine, CEO of Renault Environnement.
TOWARDS THE CIRCULAR ECONOMY | 61 FIGURE 16 Transition to a circular economy: Examples of circular business model adoption Examples ILLUSTRATIVE Building blocks of a circular Mobile phone Light commercial vehicle (LCV) Washing machine economy From... To... From... To... From... To... Product Highly integrated Component Limited degree Design for Efficiency Regular softwareA design product designs standardisation of modularisation disassembly— gains in energy updates and and low degree (e.g., displays) (e.g., bolted wider design and water upgrades of of component and design for connections in of engine bay consumption electronics and standardisation disassembly LCV engine bay) and use of quick drive economic sensor systems (e.g., clip-hold fasteners obsolescence post sale assembly) and limit lifetimes Business Low customer Deposit Customer Warranty offered Customer Creation ofB models incentives to payment concerns about on refurbished concerns about transparent, return devices or leasing quality of refur- vehicles alternative ‘win-win’ leasing after usage models bished vehicles business models contracts and effective marketing Reverse Limited Automated Sub-scale Centralised Quality losses Manufacturer-C cycle skills development disassembly and refurbishing refurbishment within inapprop- controlled and choice of efficient tech- facilities plants with opti- riate collection collection, circular options nologies (e.g., mised workflows, channels enabled by fault-tracking allowing for eco- leasing models software) nomies of scale High damage/ Industry-wide University OEM/sector Diverging SpecialisedD Cross-cycle and cross- loss rate along efforts to curricula for initiatives to incentives of intermediaries sector coll- all reverse value establish engineers still foster R&D customers enable aboration chain steps comprehensive focused on of circular and producers alternative collection and linear system production in context of ownership models treatment system methods new ownership on larger scale models Source: Ellen MacArthur Foundation circular economy team Systematically looking at these building The in-depth analysis of the different products blocks can yield specific ideas on how to selected for in-depth study suggest, which is move business practices forward from the summarised in the appendix, that a circular current state. Figure 16 summarises what the economy would shift the economic balance in concerted adoption of these levers could three foreseeable ways. The shares of factor look like for some of our sample products. inputs will change: products will be made and Whilst the list of enablers is long, the trends distributed with less material but in some cases supporting a large-scale shift bode well with more labour. Along the value chain, the for concerted action. Both resource prices relative importance of primary extraction and and disposal costs are rising, increasing production operations will decrease, while motivation to find new solutions. Progress new activities grow up around repeated use in technological and material development of products, components, and materials—a supports longer-lasting and more reusable ‘re-sector’ will emerge for reuse, refurbishing, designs, increased visibility along the value remanufacturing, and recycling offering new chain enables all participants to better track opportunities for business building. The products and materials, and consumer and inherent economics of going circular seem to be corporations have grown more accustomed applicable across a diverse set of products. In to contracts and usage practices based on the following section we will look at how these performance instead of ownership. findings would translate to opportunities at economy, company and user level.
62 | TOWARDS THE CIRCULAR ECONOMY3. How it works up closeContinued Education and skills in the circular economy The root of our existing educational spans products, technologies, and system mirrors that of our economic molecules, materials, and energy system. Both emerged from the flows, and makes explicit those links traditions and the world view that between the subject specialties, originated in the Enlightenment: which are chronically underplayed at the world is ‘machine-like’. Science the present time. now reveals that the world is not especially ‘machine-like’—it is more Whole systems design may look like connected, feedback-driven, and a conventional skills agenda, but such reliant upon non-linear systems. As a view would underestimate it. Skills, a result, with ‘systems thinking’ at crucially, are developed within a its heart, a new scientifically based context and this leads to the question world-view is taking hold: that of the of ‘which skills?’ and ‘how do they 21st century Enlightenment. relate?’ The emphasis in learning is likely to increasingly change through This shift is consonant with the ideas rebalancing* and making sure the underlying the report—reinventing skills underlying systems design are progress to reflect new insights into as practised and emphasised as the living systems. This scientific world- more established subjects. view recognises the importance of connection and flow, where feedback In summary, the Foundation delivers drives change, and where the old an education programme that one-way idea of a ‘cradle to grave’ advances the STEM agenda (science, production system is replaced technology, engineering, and maths) by ‘cradle to cradle’ just as the and also a broader one that parallels relationship of the part to the whole how we are now remaking the world. has reversed in emphasis. Our new Our model is supportive and yet concern with the state of the whole in anticipatory—bridging the worlds of relation to the part replaces a focus education and business in a unique on the part in isolation. way. The education system, if it remains *Examples of rebalancing include true to its emphasis on mirroring these pairs: problem solving/ the scientific state of play, and the appreciation and reframing; analysis/ economic concerns of dominant synthesis; reductionism/whole nation states and leading institutions, system emphasis; closed cause and will wish to evolve to enable learners effect/multiple influences through to grasp ‘whole systems’ design. This time and space.
4An economic opportunity worth billionsCharting the new territoryMaps out what moving towards a circulareconomy could mean on a macroeconomiclevel and how circular business models could 1benefit different market participants.
64 | TOWARDS THE CIRCULAR ECONOMY 4. An economic opportunity worth billions Charting the new territory Given that we are still at the beginning of Examining the benefits EU-wide a journey to circularity, and assuming that we can identify profitable new options to Our case studies show the positive business establish circular setups (e.g., by applying impact of circular business models on a insights from the selected products we product level. In Chapter 3, we described examined), we believe that a substantial how we scaled up from the level of an scale-up from the current starting position individual product to the entire market for is possible and in fact highly likely. Whilst that product (‘The Circularity Calculator’). full quantification of a likely end-game will Next, to see what the order of magnitude require further work, the case for rapid of economic impact might be if more value creation is quite strong, particularly if businesses were to adopt these methods, we assume circular business practices reach we ran a second scale-up model, applying a tipping point and thereafter see more results from our selected product analyses widespread acceptance. Eliminating waste to the eight sectors we see as having from the industrial chain by ‘closing the particularly high potential for adopting loop’ promises production cost savings and circular technologies. These eight sectors less resource dependence. The benefits are contain products of medium complexity not merely operational but also strategic; (i.e., circular design principles could be not merely for industry but also for users; incorporated initially with minor changes to and not merely a source of efficiency, but existing technologies and processes) and also a source of innovation and growth. The medium usage periods (i.e., products will go potential identified so far represents only a through a number of product cycles in the small fraction of what could be possible if next 15 years).99 circular business models were to be applied Together, these eight sectors represent a at scale. little under half of the contribution the EU manufacturing sector makes to overall EU In the following chapter we will therefore GDP—so this would not represent a narrow or explore: isolated movement. How economies will win from substantial To perform our scale-up, we compared the net savings on material and energy costs, total absolute cost savings on materials and improved mitigation of volatility and supply energy (net of the required materials and risks, higher multipliers due to sectoral shifts energy used in the respective reverse cycle) and reduced externalities for our selected products with the total input costs for each respective product. We chose How companies will win by creating new this ratio because it factors out value-add profit pools and competitive advantage, across different products and industries, building resilience against some of today’s which is highly variable and potentially a most strategic challenges, and expanding distorting factor in our analysis.100 We then from their respective starting situations applied the range of percentage savings from our detailed analysis to the selected How consumers and users will win by target sectors to see what kinds of net gaining more choice, experiencing fewer material cost savings might be expected hassles from premature obsolescence, were all producers to adopt similar circular99 As discussed in chapter 3, the and enjoying improved service quality and setups. We focused on the net material andeight sectors, as categorised by secondary benefits. energy cost savings as the net economicEurostat, are as follows: machineryand equipment; office machinery benefit of shifts in associated labour costs,and computers; electrical the redirection of investments, and the splitmachinery and apparatus; radio,television, and communication of savings between users and providers orequipment and apparatus; medical,precision and optical instruments, across players along the value chain wouldwatches and clocks; motor likely vary across sectors and regions andvehicles, trailers, and semi-trailers;other transport equipment; and therefore defies exact prediction.furniture and other manufacturedgoods Of course, we do not expect all producers100 For further details on themethodology discussed in this to instantly adopt circular businesssection, please see the appendix practices. Therefore, we established two
TOWARDS THE CIRCULAR ECONOMY | 65 FIGURE 17 Increasing circular activities is a promising business opportunity for a variety of products ILLUSTRATIVE Circular activities as promising business opportunity HighPotentialfor circularbusinesspractices1 1 “Potential” for circularity assessed by product’s suitability in Low terms of product design (e.g., modularisation, non-toxicity), reverse logistics (e.g., developed remanufacturing activities) and likelihood of developing circular activities; and by ease of implementing these, which is driven by customer acceptance of circular practices and products, and convenience/incentive to return goods; “Opportunity captured today” is driven by reuse, refurbishing, remanufacturing and recycling activities in respective markets; positioning is validated by expert indications gathered during interviews. SOURCE: Ellen MacArthur Foundation circular economy team Low High Opportunity captured today1 scenarios: in our ‘transition scenario’, we of products on a matrix showing both make assumptions mainly about changes their potential to adopt circular business in product designs—in line with current models and capture value through these technologies and capabilities—and business models (Figure 17). This high-level reverse-cycle skills. We typically assumed analysis confirms that increasing circular improvements in underlying collection rate activities would likely represent a promising increases of 20 to 30 percentage points, and business opportunity for a variety of other roughly a 30 percentage point shift from products—at least on the basis of sharing recycling to refurbishing or remanufacturing similar product characteristics. The two activities. This is in line with interventions main components we examined are product defined by some governments. suitability and ease of implementation. Within suitability, products with circular In our ‘advanced scenario’, we show product-design characteristics (such as the potential effect of a world that has non-toxic materials, easy to disassemble, undergone more radical change and has modularised), and those with developed further developed reverse technologies and reverse cycle processes (such as efficient infrastructure and other enabling conditions collection, transportation, and treatment such as customer acceptance, cross-chain systems) stand the best chance at and cross-sector collaboration, and legal developing circular business models. On the frameworks. Our product analyses assumed implementation side, product categories further collection rate increases of 30 to in which circular business practices have 40 percentage points and an additional 5 already been successfully adopted, embraced to 10 percentage-point shift to refurbishing by customers, and have established user- or remanufacturing (tighter loops that friendly collection systems represent a in general yield higher net material cost promising segment, as do those that are well savings). Our intention was not to attempt to suited for new usage (versus ownership) give an exact prediction of future economic models (for instance, due to frequency of composition, but to establish the order of use/total cost of ownership). What does magnitude and the nature of the lasting this mean in terms of specific products structural shift, whilst both grounding our and business development? The products analysis in current realities and showing the most suitable for circularity are those in the scope of potential medium-term impact upper left-hand quadrant, from shampoos towards 2025 were some of the current to hospital beds. Additional categories barriers to fade. we see as potentially promising include some business lines that are already quite To further validate this approach of advanced, including construction equipment, generalising the findings of our in-depth heavy machinery, and aeronautics. product analysis, we plotted several types
66 | TOWARDS THE CIRCULAR ECONOMY 4. An economic opportunity worth billions Continued How economies win—Unlocking a multi- restorative circular economy. We would also billion USD opportunity, fast and lastingly expect significant economic potential for circular business models outside Europe. As a starting It is evident that reuse and better design in a point, emerging market economies often are not circular economy can significantly reduce the as ‘locked-in’ to existing manufacturing models material bill and the expense of disposal. But, as advanced economies, and thus have the from an economic perspective, can those savings chance to leap-frog straight into circular set-ups produce a significant effect economy wide? when building their manufacturing sectors. Many emerging economies are also more material- Substantial net material cost savings. Based intensive than advanced economies, and thus on detailed product level modelling, the report could expect even greater relative savings from estimates that the circular economy represents circular business practices.101 an annual material cost saving opportunity of USD 340 to 380 billion p.a. at EU level for FIGURE 18 ROUGH ESTIMATES a ‘transition scenario’ and USD 520 to 630 Adoption of circular setups in relevant manufacturing sectors could yield net material billion p.a., or a recurring 3 to 3.9% of 2010 EU cost savings of USD 340 – 630 billion per year GDP, for an ‘advanced scenario’, all net of the in EU alone materials used in the reverse-cycle processes. Net material cost savings1 in complex durables with medium lifespans (Figure 18). These figures are intended to USD billion per year, based on current total input demonstrate the order of magnitude of the costs per sector,2 EU 520-630 savings that could be expected in a circular (19-23%)1 economy. Rather than trying to explicitly model the effect of circularity for the entire economy—which is highly dependent on many factors such as industry structure and Motor vehicles conduct, elasticities, or the drive of companies to reap the circular potential—we decided to ground our estimate on the observed potential material savings for the products from our case studies. We limited the scale-up 340-380 (12-14%)1 to those sectors that hold the most potential Machinery and equipment for mimicking the success of these products (i.e., products of medium complexity) and that contain products of medium-term usage periods (3 to 10 years), so that adoption of Electrical circular design and processes could actually machinery & apparatus affect the material balance over the next 15 years. These medium-lived products represent Other transport a little less than half of the contributions made by manufacturing to the EU’s gross Furniture domestic product today—but clearly they do not represent an exhaustive list of all Radio, TV, and short-, medium-, and long-lived products that communication could be produced and delivered circularly. Medical precision and optical equipment Similarly, our analysis only covers material Office machinery and energy savings, as the net economic and computers benefit of shifts in associated labour costs, Transition Advanced scenario3 scenario4 redirection of investments, and the split of 1 Material input cost savings net of material costs incurred for reverse savings between users and providers or across cycle activities, percentages as share of total input costs in medium- lived complex product sectors players along the value chain would likely 2 Most recent data for sector input costs on EU level come from101 However, a projection on Eurostat Input/Output tables 2007the size of the potential and vary across sectors and regions and therefore 3 Transition scenario: Conservative assumptions, focusing on changesadoption rate will require in product designs, reverse cycle capabilitiesmore in-depth analysis given defies exact prediction. We conclude, however, 4 Advanced scenario: Assuming more radical change especially in terms of further developed reverse-supply-chain competencies, and otherthe high variance in starting that the order of magnitude identified for enabling conditions like customer acceptance, cross-chain and cross-positions (e.g., collection rates sector collaboration and legal frameworksin Europe tend to be higher Europe confirms that we are looking at a SOURCE: Eurostat Input/Output tables 2007 for EU-27 economies;than in other parts of the substantial opportunity at the economic level Ellen MacArthur Foundation circular economy teamworld) and different mix ofeconomic activities founded on a structural and lasting shift—a
TOWARDS THE CIRCULAR ECONOMY | 67 ILLUSTRATIVE FIGURE 19 Sample AND ROUGH A small reduction in demand would put downward reduction ESTIMATES pressure on both iron ore prices and volatility in quantity of iron ore 200 2025 Global Iron Ore Cost Curve1 demanded 190 2010 USD/tonne, not corrected for real mining cost inflation 180 1 170 160 Potential savings 150 140 130 120 110 100 90 2 Scope for potential price drop, 80 given sample reduction in demand 70 Potential price floor 60 in 2025 under 50 circular economy 40 30 Production 20 Million 10 Tonnes 0 0 250 500 750 1,000 1,250 1,500 1,750 2,000 2,250 2,500 2,750 3,000 3,250 1 Note: this is not a projection of iron ore demand in 2025; rather it is an illustration of the impact of a demand reduction; see footnote 105 for more details. SOURCE: McKinsey iron ore cost curve Mitigation of price volatility and supply our analysis of refurbishing light-commercial risks. Our product analysis shows vehicles (LCVs) and washing machines, we the considerable effect that reducing assessed the potential for reducing global downstream demand through circularity can iron ore demand across several sectors that have on upstream demand, especially by we see as particularly ripe for savings. We avoiding material loss due to inefficiencies focused our analysis on three steel-intensive102 Source: McKinsey Global steel along the linear value chain (reducing 1 tonne sectors—the automotive, railway, andand iron ore models; WSA of final steel demand, for instance, saves machinery sectors—which together represent103 McKinsey Flat Steel DemandModel over 1.3 tonnes of iron ore and over 5 tonnes around 45% of global steel demand.103 We of earth being moved). At present, the assumed conservatively that recycling rates104 Refurbishment requires 75 to95% less steel than manufacturing production of many raw materials falls at the remain constant and that only 25% of non-a new product far-right end of their respective cost curves, recycled products are refurbished in 2025—105 This iron ore cost curve in some cases close to supply limits. The and then extrapolated what savings would beis illustrative. Cost is forstandardised sinter fines, at implication is frequent increases in pricing possible if the material savings from our LCVthe CIF price (cost, insurance, levels and volatility. Further acceleration of and washing machine refurbishmentfreight) for delivery at the Chineseborder. Operational costs of demand pressure is likely as three billion cases were scaled globally.104 Our analysisindividual mines are adjusted consumers are expected to enter the shows that savings from global iron oreto a standardised 62% sinterfines product using value-in- market until 2030. This means that any shift demand reductions, even under ouruse corrections and Fe dilutioneffects. No real cost inflation is leftwards on the respective cost curves could conservative refurbishing rate, could well addapplied to the cost curve between have a calming impact on volatility. Other up to 110 to 170 million tonnes per year (or 42011 and 2025 for the purposeof the specific illustration of this factors, such as speculative trading, however, to 6% of expected 2025 demand). Whilst thisexhibit. This cost curve also does could still lead to some volatility. may seem small, such volume changes wouldnot take into account the effect ofreal mining cost inflation. Example likely have a calming effect on pricing levelsdemand reduction in the exhibitis based on material savings of Steel is a good example. Looking at and volatility, as can be seen in our illustrativesteel observed in product case forecasted steel and iron ore demand over cost curve figure (Figure 19),105 106 —though thestudies and extrapolated to steel-intensive sectors deemed to have the next two decades, the incentives for exact savings in dollar terms would dependhigh potential for circularity—i.e., reducing resource consumption become heavily on a variety of factors, includingthe automotive, railway, andmachinery sectors. increasingly clear. By 2025, global steel the volume and types of supply coming onNote:McKinsey’s iron ore demand is expected to rise to more than 2 line between now and then, and thus exactprojections expect an increase billion tonnes per year, a 50% increase over effects on steel or iron ore prices are quitein supply in the second and thirdquartiles of the cost curve—this current levels. Likewise, iron ore demand difficult to forecast with any reasonableincrease will likely also put is forecasted to rise in parallel to around degree of confidence.downward pressure on prices andvolatility 2.7 billion tonnes.102 From our case study106 It is worth noting that analysis, circular business practices appear Growth multiplier due to sectoral shift andMcKinsey’s iron ore cost curve to be an effective way to limit the growth possible employment benefits. The threeanticipates that new supplywill also be added at lower in iron ore extraction needs, which in turn main macroeconomic sectors—the primaryprice points, which would place are putting pressure on prices and volatility. sector (extraction), the secondary sectoradditional downward pressure onboth prices and volatility Using data on steel savings gleaned from (manufacturing), and the tertiary sector
68 | TOWARDS THE CIRCULAR ECONOMY 4. An economic opportunity worth billions Continued (services)—would each have opportunities by the recession in the late 2000s than were under a circular model, though we anticipate workers in other sectors.108 that the service sector would feel the biggest impact. The increased need for Reduced externalities. The circular approach financing and leasing arrangements for a offers developed economies an avenue wide swath of products and reverse cycle to resilient growth, a systemic answer to services, as well as the need to expand reducing dependency on resource markets. services along the reverse cycles, would It also provides a means to reduce exposure likely bring significant job growth in services to resource price shocks and mitigates the (Figure 20). This shift could be particularly need to absorb disposal costs—which consist dramatic in developing economies, which at of the loss of environmental quality and the present are much more reliant on primary public costs for treatment that is not paid industries. Net employment effects will for by individual companies. Higher reuse likely vary across sectors. The extraction and remanufacturing rates for mobile phones sector—though it may face pressures on the in the EU, for example, could eradicate at virgin extraction side of its business—would least 1.3 million tonnes of CO2e annually also have opportunities to benefit from at 2010 production levels in our transition circularity. Smelters, for example, would scenario, net of the emissions produced almost certainly see expansion and new job during reverse-cycle processes. In addition opportunities in secondary extraction. The to the economic benefits, the exclusion of manufacturing sector is likely to undergo energy- or water-intensive production steps significant changes, given the removal of (like aluminium smelting) as well as a move material bottlenecks and the need to adjust towards less toxic materials (such as using operations. Whether the newly generated more biological nutrients for consumables remanufacturing volume will more than such as food packaging) could contribute to compensate for the pressure put on reducing pressure on GHG emissions, water conventional ‘linear’ manufacturing depends usage, and biodiversity. in large part on the specific circumstances of different manufacturing industries. Given Lasting benefits for a more resilient the strong fundamentals of the underlying economy. Beyond its fundamental value business case (assuming comprehensive creation potential over the next 10 to 15 design changes to products, service delivery years, a large-scale transition to a circular processes, etc.), adopting more circular economy promises to address fundamentally business models would bring significant some of the economy’s long-term challenges. benefits, including improved innovation Improved material productivity, enhanced across the economy (Figure 21). While the innovation capabilities, and a further shift exact GDP implications of more innovation from mass production employment to across an economy are difficult to quantify, skilled labour, are all potential gains that the benefits of a more innovative economy will significantly increase the resilience include higher rates of technological of economies. They will also provide development, improved material, labour, fundamental changes that would make it and energy efficiency, and more profit harder to revert back to the troubles of a opportunities for companies. linear ‘take-make-dispose’-based economy. Importantly, with its greatly reduced material Finally, other sources report that a move intensity and a production base that is largely toward a circular economy could potentially running on renewable sources of energy, the create moderate benefits, either in terms of circular economy offers a viable contribution job growth or employment market resilience. to climate change mitigation and fossil fuel Sita Group, the waste management arm independence. Moreover, the demonstrable107 French NationalAssembly, Rapport of Suez Environment, estimates that some decoupling of growth and resource demandD’information No. 3880, 500,000 jobs are created by the recycling will also slow the current rates of resourceOctober 26, 2011, p. 75 industry in the EU, and this number could depletion.108 Remanufacturing in well rise in a circular economy.107 A recentthe U.K.: A snapshot ofthe U.K. remanufacturing report from the Centre for Manufacturingindustry, Centre forRemanufacturing and Reuse argued that workers in the U.K.and Reuse, August 2010 remanufacturing industry were less affected
TOWARDS THE CIRCULAR ECONOMY | 69 FIGURE 20 Effect on Employment effects vary across primary, secondary, and tertiary sectors of a circular economy employment activity (directional)Primary sector Mining/materials manufacturing Farming/collection RecycleSecondary sector Parts manufacturer Restoration Biosphere Biochemical Refurbish/ feedstock Product manufacturer remanufactureTertiary sector Service provider/ distributor Reuse/redistribute Biogas Maintenance Cascades 6 2803 0006 9 Consumer User Anaerobic digestion/ Collection Collection composting Extraction of biochemical Energy recovery feedstock Leakage to be minimised Landfill SOURCE: Ellen MacArthur Foundation circular economy team FIGURE 21 Revamping industry, reducing material bottlenecks, and creating tertiary sector opportunities would benefit labour, capital, and innovation Labour intensity Innovation index1 Capital intensity Labour spending per unit of GDP output, IBM/Melbourne Institute Index Total expenditures/labour expenditures, EU-27 economies EU-27 economies 0.30 321 4.07 274 2.97 180 0.16 0.14 1.87 Primary Secondary Tertiary Primary Secondary Tertiary Primary Secondary Tertiary 1 Components of index include: R&D intensity; patent, trademark & design intensity; organization/Managerial innovation; and productivity SOURCE: Labour intensity calculated using data taken from Eurostat Input-Output tables for EU-27; Innovation data from IBM/Melbourne Institute Innovation Index (covering Australian Industry), 2010
70 | TOWARDS THE CIRCULAR ECONOMY 4. An economic opportunity worth billions Continued Factors driving premature obsolescence How to mitigate. Consider ways to ‘refresh’ products—through cosmetic What about the real (physical) limits redesign—to provide consumers with a to keeping products, components, and product that feels new and offers new materials in the loop ‘forever’? Products value (software, casing, critical new do eventually reach a physical limit, given components) but does not require new the second law of thermodynamics.109 material input. Today, however, reaching these physical limits is more the exception than the rule. Economic obsolescence. When the Other factors typically determine when a cost of ownership outweighs the cost of product is discarded—sometimes at a point buying and owning a new item it becomes when only a small fraction of the potential economically obsolete. Automobiles, for usage periods of its various components instance, are sent to junkyards because have elapsed. Unlocking the value of of high maintenance costs, products are circularity will thus require tackling various thrown away when their owners move forms of premature obsolescence, be they and it costs more to transport the item technical, fashion-related, economic, or than buy a new one, and old appliances regulatory in nature. that consume more energy are commonly discarded in favour of new, more efficient The ‘weakest link’ component. When one models. Finally, some products are component breaks, the entire product with discarded in response to government all its residual value is usually discarded incentives such as those offered in the before the end of its natural lifetime. The recent ‘cash for clunkers’ programmes. related term, ‘planned obsolescence’, assumes that designers and manufacturers How to mitigate. Design products to deliberately do not address technical weak better allow for disassembly and strategic links in order to boost new product sales. replacement of parts that the parts that are most reusable can easily be separated How to mitigate. Design products that and reused and those most subject to wear out evenly—as Patagonia commits technological progress and efficiency to doing for its apparel—or, if more gains driving total cost of usage can appropriate, in a way that individual be exchanged/upgraded more easily; components can be replaced (Patagonia create infrastructure facilitating return of designs its garments so that they do products to manufacturers. not need to be taken apart completely if, for example, a zipper were to fail); Financial/legal obsolescence. When encourage the manufacture and sale of the owner of a product is a corporation, individual components; rethink business products may be retired for accounting models to make planned obsolescence or legal liability reasons. Firms typically less relevant (in systems where a “seller” retire computers, for example, when the retains ownership there is less incentive for warranty expires. obsolescence) (Figure 22). How to mitigate. Rethink legal and Fashion obsolescence. Consumer products accounting frameworks that compel firms are commonly retired before the end of to retire products before the end of their their useful lives due to fashion trends useful lives; establish infrastructure for that encourage consumers to ‘upgrade’ ensuring that products that are retired to a new product for style reasons. For when still usable are then refurbished example, more than 130 million working or resold, rather than simply being109 Tim Jackson, MaterialConcerns: Pollution, Profit and but ‘retired’ mobile phones sit unused in discarded.Quality of Life, London: Routledge the United States because their ownersChapman & Hall, 1996 have purchased a replacement phone.110110 Slade, Giles, Made to Break:Technology and Obsolescencein America; Harvard UniversityPress; 2006
TOWARDS THE CIRCULAR ECONOMY | 71 logistics not only as an opportunity to fill ILLUSTRATIVE FIGURE 22 backhaul loads but as an attractive stand- Refurbishment helps to overcome a dynamic where ‘weakest-link’ components define a product’s life — example light commercial vehicle alone business. DHL, for instance, established Proposal for improved state beverage distribution platforms in the U.K. that include the distribution, refilling, Weakest link: Key component with Original part 1st replacement shortest lifetime determines end repair and collection of vending machines. 2nd replacement Expected residual Selected of first product life2 lifetime of OEMs like Caterpillar use their vendor and components1 component at time of refurbishment distribution system as a collection network Engine Replaced every for used engine cores, linking the cores to a Suspension refurbishment deposit and a discount system to maximise the re-entry of used components into their Gearbox Replaced every second rapidly growing remanufacturing Clutch refurbishment operations.111 Any reverse logistics system Catalytic Reused on relies on its scale. ‘Scale really matters in the converter aftermarket reverse loop, improving the marginal cost after end of Steering vehicle life position for collection and remanufacturing Expected operations and fetching better prices for lifetime (km) sales of larger quantities’, explains Craig 1st 2nd End of refurbishment refurbishment product life Dikeman at National Grid. 1 Regular maintenance for easily replaceable parts (e.g., oil or tires) 2 Either by actual key component failure or pre-emptive reverse treatment (e.g., refurbishment) Product remarketers and sales platforms SOURCE: Ellen MacArthur Foundation circular economy team are rapidly expanding and growing into substantial enterprises, facilitating longer lives or higher utilisation and hence utility How companies win—Tapping into the profit levels for mass-produced goods. The term pool opportunities of a circular economy ‘collaborative consumption’, coined by Ray Algar, a U.K.-based management consultant, Companies are set to win in two ways. On and popularised by Rachel Botsman and the one hand, the circular economy will Roo Rogers, gives a name and is injecting offer new profit pools in building up circular fashionability into time-honoured activities activities. On the other, the benefits of the such as sharing, bartering, lending, trading, circular economy will address a number of renting, (re-)gifting, and swapping. In a the pressing strategic challenges of today’s sense the term is a misnomer, in that it businesses. refers to ‘usage’ contracts rather than ‘consumption’—but, in any case, the model New profit pool potential along the reverse has proven wildly popular. The formats value cycles. Businesses that provide it entails build on patterns familiar from solutions and services along the reverse church bazaars, ‘rent-a-tuxedo’, and ‘party- cycle are bound to reap attractive growth plan’ sales formats and, if well designed, opportunities. Winners are already emerging do not require consumers to shift their today along the reverse cycle where they are behaviour outside of their comfort zones. supporting the ongoing migration towards a The omnipresence of network technologies more circular economy (Figure 23). and social media is dramatically increasing reach and reducing distribution cost for Collection and reverse logistics, as seen providers of sales and remarketing services. in our case examples, are an important In the consumer-to-consumer environment, part of any system aiming to increase market players like eBay and Craigslist led material productivity by ensuring that the way to increasing the amount of second- end of life products can be reintroduced hand goods traded online. Amazon too has into the business system. Classical waste created a successful open platform for selling management operators such as Veolia and used products—giving suppliers access to111 Corporate annual reports Remondis are increasingly diversifying the almost 150 million customers worldwide and2005 to 2010; Product-Life fractions they can handle and divert from applying a very granular understanding ofInstitute website (http://www.productlife.org/en/ landfilling towards more recycling and even customers’ individual needs and interests.archive/case-studies/ refurbishment operations. Logistics service In the business-to-business environment ascaterpillar-remanufactured-products-group) providers are increasingly looking at reverse well, typically more specialised companies
72 | TOWARDS THE CIRCULAR ECONOMY 4. An economic opportunity worth billions Continued are offering a sales platform for used and viable business opportunity, it also provides refurbished products. In the European an excellent means of building relationships remanufactured medical devices sector, with new customer segments’. literally dozens of providers such as Pharma Machines offer these services with dedicated Material recycling systems systems are sales platforms. well established. They typically take the form of regionally structured multi-user Parts and component remanufacturing and organisations (such as the many product- product refurbishment can be considered category-specific systems in Europe, from the hardest loop to close on the path to batteries to packaging) or are company a more circular economy because of the specific (reintroducing production waste specialised knowledge required. Collection, from car manufacturing into the material disassembly, refurbishment of products, flows, or Nespresso’s collection and recycling integration into the remanufacturing of spent capsules). Both group and single- process, and getting products out to users company solutions require a standard purity all require specialised skills and process level suitable for high-quality recycling know-how. Consequently, most of the processes. Consequently, the market has case examples at scale are subsidiaries generally developed into regionalised, of existing manufacturers, although specialised players with natural barriers to large-scale independent operations exist, growth beyond their starting footprint. A Cardone Industries, for example, has been number of companies have nevertheless supplying the U.S. automotive aftermarket started to enlarge the scale and scope of with remanufactured cores for over 40 their operations by adding new geographic years. Original equipment manufacturers regions and further material fractions to their do have a number of advantages. For portfolio. Tomra has used its technological instance, Caterpillar applies product capabilities to provide the technology for and process know-how from their new- large-scale, nation-wide collection schemes equipment business to their diesel engine (e.g., PET bottles). The company has grown remanufacturing operation; they also use at close to 20% per annum. Looking ahead, their existing dealer network and aftermarket it plans further improvements in technology service clout to ensure that components to reduce the burden of costly separation find their way back from the customer to and pre-sorting schemes and therefore their remanufacturing facilities. Caterpillar aims to achieve higher recycling yields at engineers study returned components and lower cost, resulting in rapid and profitable continually improve the company’s ability to growth for recyclers. Similar technology remanufacture them at lower cost and higher could be applied to the process of taking quality.112 This allows Caterpillar to provide the back products for remanufacturing and same warranty for ‘reman’ engines as for new refurbishing. Another company that is products. Product insights passed on from optimising recycling systems is Renault, the remanufacturing/refurbishment plant to which has long worked on augmenting the an OEM’s designers and engineers not only recycled content of its vehicles. ‘While 85% add to future remanufacturing margins but of the weight of a car is typically recycled, can also help to improve the performance of only 25% of the material input for new cars the original cores. Renault, another example, consists of recycled material’, says Jean- already has a process in place to make sure Philippe Hermine at Renault Environnement. that its new remanufacturing workshop for Because this disconnect is mainly due to electric vehicle batteries feeds engineers’ concerns about the quality of recycled insights into failure modes back into the new materials—in particular plastics—Renault is product development process. Critically, now developing ways to better retain the many OEMs also see it as a strategic priority technical and economic value of materials to serve in their aftersales markets—for brand all along the car’s life cycle. It is not only112 Corporate annual reports protection, customer retention, or volume actively managing a flow of quality material2005 to 2010; Product-LifeInstitute website (http://www. reasons—and remanufacturing offers them a dismantled from end-of-life vehicles andproductlife.org/en/archive/ way to do this with attractive margins. Cisco enhancing the actual recycling processes,case-studies/caterpillar-remanufactured-products- confirms, ‘Refurbishing various kinds of end- but is also adjusting the design specificationsgroup) of-life products is not only an economically of certain parts to allow for closed-loop, or
TOWARDS THE CIRCULAR ECONOMY | 73 FIGURE 23 The circular economy is creating a new ‘reverse’ sector Collection Secondary market Revenue in USD billions Tomra Amazon Revenue in USD billions +20% pa Amazon marketplace +26% pa allows third-party sellers Tomra produces reverse to use Amazons vending machines that 0.47 1.15 platform, giving them collect and sort empty access to more than beverage containers 121 million users in 60 0.19 0.36 countries 2005 2010 2005 2010 Remanufacturing Recycling Thousand tonnes of Caterpillar remanufactured products Remondis Revenue in USD billions Remanufacturing division +9% pa +10% pa Remondis provides Cat Reman remanufactures 70 recycling infrastructure 7.02 engines that are resold with and expertise in Europe, 45 4.38 ‘same-as-when-new Asia, and Australia performance and reliability’ 2005 2010 2005 2010 SOURCE: Tomra annual reports (2005, 2010); Ixtens research (based on Amazon SEC filings, Forrester analysis); Caterpillar annual reports (2005, 2010); Remondis annual reports (2005, 2010)‘functional’ recycling. This way, end-of-life a guaranteed price—which is especiallyvehicles are turned into high-grade materials attractive at times when commodity pricesappropriate for new cars, and downcycling is are on the rise. In one version of this win-winavoided. scheme, Turntoo has adapted the conventional leasing model to accommodate the exclusionEnabling business models that close of material value from the price. In another,reverse cycles. Closing the reverse cycle the company—working like a broker—providesmay well require yet more new businesses the product to the user for a certain numberto emerge. For instance, providing users and of years of usage. At the end of this phase,suppliers with sufficient incentives may be Turntoo buys the product back from thedifficult due to higher transaction costs and customer at the price of the embeddedinability to agree on specific rates. Turntoo, raw material at the time of original sale. Ata company with a vision of moving towards this stage, the manufacturer can decide toproduct use based on performance contracts refurbish the product for reuse or extract therather than on ownership, fills the void by material from the product for sale. Turntoooperating and financing schemes that are believes this dynamic will align incentives andbased on offering products such as office encourage manufacturers to design productsinteriors (e.g., lighting) net of their material for the longest life possible. The firm’s CEO,value. Such schemes provide advantages Thomas Rau, explains: ‘The different economicfor all participants: customers do not need incentives of our model drastically transformto part with cash for the material portion the way that people look at product andof the products they are using; Turntoo process design along the value cycles, andgenerates a revenue stream through its companies are, for example, starting to removeservices as an intermediary; and participating the break points of current designs’.manufacturers regain their materials at
74 | TOWARDS THE CIRCULAR ECONOMY 4. An economic opportunity worth billions Continued Circularity and Finance would simply replace other R&D expenditures, but it seems highly The spread and mainstream adoption probable that firms’ transition efforts of circular business models would would generate some new business for have several implications for the the financial services sector. financial services sector—and could lead to new opportunities for Indirect effects. A shift in corporate financial institutions. business models could affect the financial services sector in various other New financing models. In the circular ways. For instance, corporate lending economy, new ownership models—in might come to replace consumer which customers no longer purchase financing of purchases—requiring more as many goods directly, but rather robust solutions for product guarantees use them for a fee and then return and insurance coverage that could them—would demand new methods lead to opportunities for banks and of financing or significant expansion other financial services providers. and adaptation of existing methods. Separately, given the likelihood of The leasing of goods in transactions in reduced commodity price volatility both the business-to-business (B2B) under a circular model, the business of and the business-to-consumer (B2C) selling instruments that hedge against segment would likely become more changes in commodity prices would common, requiring a commensurate likely recede in relative importance. uptick in services relating both to structuring and managing leasing Economic effects. An overarching arrangements. indirect impact on the financial services industry—and, indeed, on all Traditional financing demand. other industries—would result from Increased demand for traditional the increase in capital productivity financing might well present a we expect to result from a shift from parallel opportunity. We expect the primary and secondary sectors significant new demand from to the tertiary sector under a circular firms attempting to reconfigure economy (Figure 21). Given that capital production methods. In addition, productivity is a driver of long-term the broadened ‘reverse cycle’ sector economic growth, such a shift could of firms needed to support circular have profound economic implications.113 business models—such as collection Achieving a healthy transition would businesses, refurbishment operations, rely heavily on the financial services or remarketing specialists—would sector serving as a clearinghouse for also require financing support. There capital—helping parts of the economy remains, of course, the question of with capital surpluses invest this money whether these capital expenditures more productively.113 Such a shift would beparticularly welcome given the‘equity gap’ cited by the McKinseyGlobal Institute in a recent report,The Emerging Equity Gap. In thereport, MGI forecasts a USD 12.3trillion gap between the amountof equity capital that investorsare willing to supply and theamount that companies need tofund growth in the next decade.Any mechanism, such as thecircular economy, that would helpstimulate capital productivity andfree up investment dollars mighttherefore have a very significanteffect on economic growth
TOWARDS THE CIRCULAR ECONOMY | 75Financing. Individual companies and groups leasing contracts in place, companies canof companies will need not only support gather more customer insights for improvedwith change-in-ownership models but also personalisation, customisation, and retention.funding for R&D and new technologies. As As Cisco puts it: ‘We think that broadeningin the linear economy, the financial sector our focus beyond pure-play manufacturing—has an important role to play in the circular to enhance our service offerings as well—willeconomy, both in transition and steady deepen our relationships with our customersstate. Because of the numbers of cases and create more value for everyone involved’.banks handle, they are typically also far Providing end-of-life treatment options andmore experienced and therefore better at incentives to use them could increase thestructuring long-term return models than number of customer touchpoints and helpcorporations alone. build a technology pioneer’s image.Mitigation of strategic challenges to build Less product complexity and moreresilience and competitive advantage. manageable life cycles. Providing stable,Circular concepts could address sometimes reusable product kernels andchallenges such as an intensified cost- treating other parts of the product as add-price squeeze, shorter product life cycles, ons (such as software, casings, or covers)geographic and political supply risks, enables companies to master the challengeincreased commoditisation of products, of ever-shorter product life cycles and toand decreased customer loyalty. provide highly customised solutions whilst keeping product complexity low.Reducing material bills and warranty risks.Through reselling and component recovery, Innovation boost due to system redesign/a company can significantly reduce its rethinking. Any increase in materialmaterial bill. In the case of mobile phones, productivity is likely to have an importantremanufacturing can reduce material costs positive influence on economic developmentby up to 50%—even without the effects beyond the effects of circularity on specificfrom yet-to-be-created circular materials sectors. Circularity as a ‘rethinking device’and advanced reverse technology. In has proved to be a powerful new frame,addition, ‘building to last’ can also reduce capable of sparking creative solutions andwarranty costs. A utility provider able to boosting innovation rates.reuse materials that are installed in fixedinfrastructure (e.g., overland electric power How consumers and users win—more choicelines) can reduce the utility’s exposure to at lower cost and higher convenienceprice hikes and supply risks. The net benefits of a closer loop are likelyImproved customer interaction and to be shared between companies andloyalty. ‘Instead of one-time transactions, customers. Marks & Spencer explains: ‘Ourcompanies can develop life-time service first closed-loop project has demonstratedrelationships with their customers,’ says that it is attractive to consumers—for high-Lauren Anderson, Innovation Director at value materials like cashmere and wool theCollaborative Consumption Labs. With cost of goods for virgin material would be’consumers’ of durable goods now becoming the double, so we would have to sell at a‘users’, companies will have to evolve as well. much higher price’. And yet the examples inNew, long-term customer relationships will this report indicate that the real customerbe vital to smooth the processes of providing benefits go beyond the immediate pricemaintenance, product upgrades, and other effect. Michelin’s pay-per-kilometre modelproduct-related services, and coaxing means less upfront pay-out, less stock-customers to return products at the end of keeping, and overall lower cost for fleeteach usage cycle. Moreover, with rental or
76 | TOWARDS THE CIRCULAR ECONOMY4. An economic opportunity worth billionsContinuedmanagers. Moreover, advantages extend toreduced costs of obsolescence, increasedchoice, and secondary benefits.Reduced obsolescence with built-to-last orreusable products will improve budgets andquality of life. For the customer, overcomingpremature obsolescence will significantlybring down total ownership costs and deliverhigher convenience due to avoiding hasslesassociated with repairs and returns.Choice is increased as producers cantailor duration, type of use, and productcomponents to the specific customer—replacing today’s standard purchase witha broader set of contractual options.‘Looking at the world from a circular designperspective will allow us to further segmentour customer base to provide better serviceat more competitive cost,’ says B&Q.Secondary benefits accrue to the customerif carpets also act as air filters or packagingas fertiliser. Needless to say, customerswill also benefit from the drastic reductionof environmental costs associated withcircularity.On a daily basis, consumers will experiencethis bundle of benefits in keeping with theirindividual preferences and circumstances.The repair-and-replacement chores currentlycaused by ‘weakest link’ elements will bereduced, decreasing expense and hassle,and expanded options for customisedproducts for home and work will enable newforms of personal expression and problem-solving (customisation may be the newshopping). Furthermore, well-made goodsand ‘two-in-one’ products with multiplefunctions might well bring both aestheticand utilitarian benefits. Whilst the transitionto a circular economy will bring dislocations,the more productive use of resources andmaterials should have a stabilising effecton the economy, giving the world some‘breathing room’ as it deals with the strains ofexpanding and ageing societies.
5The shift has begun‘Mainstreaming’ the circular economyProposes winning strategies for businesses to bring thecircular economy into the mainstream and a roadmapfor an accelerated transition towards a circular economy. 1
78 | TOWARDS THE CIRCULAR ECONOMY 5. The shift has begun ‘Mainstreaming’ the circular economy Our economies remain strongly locked into Third, and on a related note, we are a system where everything from production witnessing a pervasive shift in consumer economics to contracts, and from regulation behaviour. to mindsets, favours the linear model of Organised car sharing is growing at a rapid production and consumption. In that linear clip—from fewer than 50,000 members of world, reuse will indeed replace demand for car-sharing programs globally in the mid- a company’s incremental sales and weaken 1990s,116 to around 500,000 in the late revenue and profits. 2000s.117 According to Frost & Sullivan, this number is likely to increase another 10- This lock-in, however, is getting weaker in fold between 2009 and 2016, and the total the wake of powerful disruptive trends that number of cars in the car-sharing market is will shape the economy for years to come: likely to grow about 30% per year during this period.118 At this pace, by 2016 the car-sharing First, resource scarcity and tighter industry would replace the production of environmental standards are here to stay. more than one million new vehicles. The This perception is increasingly accepted list of ‘shareware’ extends beyond cars, by the business sector. In a 2011 McKinsey however, and in some regions even includes Quarterly executive survey, the number articles of daily use, such as bicycles, toys, of respondents who pursue sustainability musical instruments, and power tools.119 In initiatives to reduce costs or improve Germany, for instance, ‘swap in the city’ operating efficiency was up 70% over the garment exchanges have become popular previous year.114 Along with a changing and are magnets for urban consumers. Taken appreciation of the business rationale, together, circular business design seems investment in environment-related areas finally poised to move from the sidelines and has increased dramatically. According to a into the mainstream. The mushrooming of joint report by the World Economic Forum new and more circular business propositions— and Bloomberg, global investment in green from biodegradable packaging to utility business initiatives in 2010 alone totalled computing and from non-toxic ink to USD 243 billion, a 30% increase over the sewage phosphate recovery—confirms that prior year.115 Given their superior resource momentum is building. performance, it seems likely that investments in circular businesses will be systematically And yet, to capture the prize of the circular rewarded over the ‘take-make-dispose’ ones. economy some significant barriers must be114 ‘The business of sustainability: overcome. What is needed for this revolutionMcKinsey Global Survey results’,McKinsey Quarterly, October 2011. Second, we now possess the information to take place?The percentage of respondents technology that will allow us to shift. Wewho pursue sustainabilityinitiatives rose 14 percentage can trace material through the supply chain The transition is likely to be a messy processpoints, from 19 to 33% of all (e.g., using RFID), identify products and that defies prediction, and both the journeyrespondents material fractions (using the breathtaking and the destination will no doubt look and115 Green Investing 2011: Reducingthe Cost of Financing, World computing power of modern sorting feel different from what we might imagineEconomic Forum and Bloomberg, technology), and track the product status today. We expect this transition to be asApril 2011, p. 6 and costs during its use period (as already non-linear as its inner workings, as a dynamic116 Susan A. Shaheen and Adam practiced by some car manufacturers). series of leaps at an accelerating pace. Why?P. Cohen, “Growth in WorldwideCarsharing: An International Professor Clift points out that whilst theComparison”, TransportationResearch Record: Journal of the idea of a circular economy has been around The Ellen MacArthur Foundation andTransportation Research Board, for some time, further development and its partners believe that an accelerating2007, p. 84 wider acceptance of end-to-end costing adoption may result, first, from today’s fast117 Frost & Sullivan, “Sustainable and better tracking of products, combined proliferation of consumption patterns and,and Innovative Personal TransportSolutions—Strategic Analysis of with more acceptance of re-engineering and second, from the scale-invariance of manyCar sharing Market in Europe”,research report, January 2010 development of the necessary capabilities, circular solutions: once a tracking system will ease widespread adoption. Most or a collection system is in place, additional118 Frost & Sullivan, “Sustainableand Innovative Personal Transport importantly, there are social networks now volumes come at very low extra cost—theSolutions—Strategic Analysis of that can mobilise millions of users around a ‘internet principle’. We also see a ‘backlog’ ofCar sharing Market in Europe”,research report, January 2010 new idea instantaneously—from motivating existing technology, design, and contractual119 http://www.zeit.de/2011/51/ consumer awareness to facilitating concrete solutions that has existed for some time andMeins-ist-Deins action (e.g.,‘Carrotmobs’). that can now easily multiply as input-cost
TOWARDS THE CIRCULAR ECONOMY | 79 ratios and demand pass critical levels. The Roadmap towards 2025—Rapid pioneering mining houses are demonstrating how new and broad-based mainstreaming technologies and the need to address overall ore grade erosion can accelerate circular The pioneering phase businesses: Anglo-American and others are now developing businesses based on Recent decades have served to confirm the processing materials previously considered technical viability of circularity for a large mining wastes, such as tailings and fractions number of products and service models. The of the overburden. Some companies are next five years will be the pioneering phase taking this a step further by designing their in which circularity’s commercial viability production processes in a way that enables must be proven more widely. Customers them to reap additional rewards from the and producers could capture the savings products they produce when they return opportunity of the ‘transition scenario’ if their after their first usage period. Desso, the conduct shifts sufficiently (across all three Dutch carpet manufacturer, offers carpets sectors), as outlined in previous chapters. today that will be easier to regenerate and For Europe alone, the material savings could reuse more cost efficiently when they return well be in the order of magnitude associated in the years to come. with our transition scenario of 12 to 14%, worth USD 340 to 380 billion per annum120 These factors will make it hard to predict with (net of material expenditures during the any certainty how quickly principles of the reverse-cycle process). As they capture circular economy will become mainstream. these benefits, industry pioneers will build Different times to impact will prevail: some competitive advantage in a number of ways: products have long cycles, some do not. And some companies can start off circulating Companies will build core competencies a stockpile of returned goods, end-of-life in circular design. Circular product (and products, and process wastes; others need process) design requires advanced skills, to recover these resource volumes first and information sets, and working methods wait for improved designs to unlock the full that today are not readily available. Whilst potential of ‘going circular’. Still, we could much of the ‘software’ for the transition such imagine that circularity will take hold in two as cradle to cradle and the performance distinct phases. economy has been on the drawing board and in development by thought leaders for During a pioneering phase over the next some time, this knowledge must be brought five years, we would expect entrepreneurial into the production environment, debugged, companies to scale up circular models from refined, and rolled out into commercially their piloting state, largely relying on the viable solutions at scale. At the process level, existing market environment (with today’s the core of the process design challenge is input cost ratios, pioneer customers, and likely to be the need to overcome internal producer responsibility legislation) and their incentive mismatches (such as those own capabilities, especially around making between organisational units measured on rapid changes to their end-of-life treatment, their success in driving new product sales service model innovation, and product and other units aiming to reduce material designs. During the mainstreaming phase consumption through remanufacturing and thereafter, towards 2025, when we would remarketing of used products). expect the economy to have developed more cross-sector and cross-chain collaboration, Companies will drive business model built up a reverse infrastructure, and put in innovation, explore new service models, and place favourable regulation, we will see a challenge today’s orthodoxies of ownership- proliferation of offerings—possibly to the driven consumption: ‘Forget ownership, it is point that users have a true ‘circular option’ performance that counts’. Turntoo perceives for all important product categories. ownership as a key element to achieve the preservation of resources. ‘By shifting consumer perception from products to performance, manufacturers are challenged120 See also ‘Examining thebenefits EU-wide’ and Figure 18 to approach their products as ‘resource
80 | TOWARDS THE CIRCULAR ECONOMY 5. The shift has begun Continued depots’ and the raw materials will remain net of the expenditures on material during available for future generations’. Treating the reverse-cycle process. To realise this material usage as a service allows companies potential, however, more transformational to benefit over time from improved material action is needed on the part of the corporate productivity and product longevity, which sector working jointly with government. would not be rewarded in today’s short- Advancing the current taxation, regulatory, term price competition at the time of sale. and business environment to support Business model innovation will also include pervasive adoption of the circular economy collaboration across value chains to establish will require joint effort to foster cross-chain materials standards and information flows collaboration, develop collection systems that support circularity. We see a variety of at scale, redirect marketing efforts, provide steps companies are likely to take to help education, and involve service industries drive this innovation. First, companies with (such as the financial sector). significant market share and capabilities along several vertical steps of the linear Although we see businesses themselves value chain could play a major role in driving as the primary driver of a shift towards circularity into the mainstream by leveraging circularity, the public sector may also have their scale and vertical integration, much as a role to play. Specifically, governments can any other business might. Whilst many new help stimulate fast-track adoption of circular models, materials, and products will have business opportunities by adjusting the to come from entrepreneurs, these brand enablers to shift the rules of the game. ‘The and volume leaders can also play a critical government/regulatory approach’ typically role. Secondly, we envision ‘missing link’ can be further broken down into different roles where smaller firms will find market plays: opportunities—for instance, Turntoo’s ‘market maker’ role—facilitating new relationships Organising re-markets (and fighting between producers and consumers who are leakage). Today, ‘reverse cycles’ are interested in pay-per-performance models. significantly impaired by the high cost (and low convenience) of collection, lack of Jointly, pioneering companies will create aggregation facilities, and leakage from the the capacities for the reverse cycle. Current system through subsidised incineration or infrastructure is not well equipped to fulfil undue exports to emerging economies where the requirements of the circular economy. In materials are often downcycled using low- addition, Europe would need to build up or cost labour, typically with high losses and strengthen current remanufacturing skills, under poor working conditions. Achieving ‘re-logistics’ (return or reverse transport and scale in collection is critical and will benefit handling), storage, and information transfer from appropriate landfill gate fees, minimum capacities to keep materials and components return or collection quotas, and efficient identifiable as they cycle through different collection rules. uses and applications. Pursuing pioneering strategies focused on both sector-wide Rethinking incentives. Taxation today solutions (e.g., within advanced industries) largely relies on labour income. Resource and regional solutions (e.g., shared collection and labour market economists have long schemes within Europe, a single country, or argued that labour as a ‘renewable factor even a large metropolitan area like London input’ is currently penalised over material or Paris) is likely to yield the fastest proof and non-renewable inputs in most developed of concept and highest return by exploiting economies. They promote a shift of the economies of density and local scale. tax burden away from labour/income and towards non-renewable resources. Towards 2025: The mainstreaming phase Igniting innovation and entrepreneurship, There is a chance for circularity to go stepping up education. Circularity will mainstream and to capture (or exceed) the come as a bottom-up revolution, a natural benefits of the ‘advanced scenario’ in the response/defence as the resource cost121 See also ‘Examining the range of 19 to 23%, which is equal to about squeeze and volatility intensify. But such newbenefits EU-wide’ and Figure 18 USD 520 to 630 billion p.a. in Europe121 alone, products and businesses will take hold faster
TOWARDS THE CIRCULAR ECONOMY | 81 if entrepreneurship and venture investment some countries. In the U.K., for instance, an are welcomed and supported. Strengthening organisation called the Waste & Resources the education of future generations of Action Programme, or WRAP, aims to bring entrepreneurs, designers, chemical and community leaders and government leaders industrial engineers, of procurement officers, together to improve resource efficiency and product managers, will be critical to across the country. completely rethink and overturn today’s linear world. How to get started? Five ideas on how pioneers could drive the circular economy Providing a suitable international set of to breakthrough environmental rules. In the least intrusive way, government and public sector entities While the above suggestions focus on the can help to foster cross-chain collaboration broader transformation of the economy as a by establishing standards and guidelines. whole, we are putting forward five specific Product labelling is an important lever to ideas worth pursuing as they are likely to ensure proper treatment in the reverse loops drive benefits rapidly for the pioneers in regarding non-toxicity, purity, or handling the public and private sectors and might issues.122 Another is to phase out (toxic) allow them to get a head start on building chemicals that—if blended into waste— competitive advantage: significantly impair recycling or reuse of a much larger set of products and materials. Tightening circles along your own supply Finally, governments should re-examine chain. Firms with strong influence and certification programs to enable new ways of control over their current supply chains (e.g., confirming the viability or safety of circular in automotive, consumer electronics, trading products. As one example, no certification organisations and retailers) and those that guideline currently exists for second-hand exchange large volumes of products with a wind towers, so verification bureaus typically limited set of business partners (e.g., B2B cannot certify them—a major barrier to interfaces in the machining, manufacturing growth in the secondary market, given or chemical sectors) could map out the the liabilities incumbent in operating an leakage points of their current linear set-ups uncertified used wind tower. and apply their clout to move others in the chain towards tighter circular setups. Desso, Leading by example and driving scale up for example, managed to convince suppliers fast. There are also many opportunities for to comply with its higher standards of non- governments to use their own procurement toxicity and purity of materials, necessary and material handling to accelerate the to allow it to achieve higher recycling rates spread of circular setups. In the U.S., the for its carpet tiles and to keep material in policy to move towards procurement of the technical nutrient loop longer. Renault, performance-based services (rather than in another example, aims to strengthen its products) has created a market of significant reverse supply chain by helping is vendors scale. In its convenor or ‘matchmaking’ develop skills, redistributing margins along role, a government can initiate concerted the chain, and hence rendering the business efforts among different companies in model more viable for all players, and the value loops that are large enough to providing a more reliable outlet for recovered overcome diseconomies of scale. One materials and components. In Europe, example is in phosphorus markets, where potential capability gaps (in collection and122Knowing what is included in a few governments have started actively sorting, for instance) can be overcome fora product is vital information trying to help businesses extract value from many types of products by tapping intoto ensure proper treatmentor even completely avoid sewage sludge. In Germany, for instance, the reverse logistics and rapidly expandingcomplex separating procedures the Federal Environmental Office recently the capability set of ‘waste management’altogether, especially forplastics, which are extremely announced a goal of retrieving phosphorus firms—making ‘resource management’ a morehard to distinguish withoutlabelling due to similar product from sewage, and Sweden set up an action appropriate label for their activities. On thisdensity and chemical and plan in 2002 aimed at recycling 60% of front, Renault has chosen to partner withphysical properties. phosphorus, mainly through making sewage Suez Environnement/Sita in order to provide123 available for reuse.123 There may also be a role access to a steady supply of components andMcKinsey research on sludgemonetisation for intermediate, ‘convener’ institutions in materials.
82 | TOWARDS THE CIRCULAR ECONOMY5. The shift has begunContinuedLooking for like-minded players in the sector Leverage your individual and collectivecould then easily allow for national industry market clout. As the case examples haveconsortia to emerge fast, as firms are facing shown, there are many nascent ideas on howsimilar pressures at parts of the value chain to innovate and serve users better in thethat do not necessarily lead to conflicts of future with new offerings based on circularinterests or competitive gamesmanship (like economic business models. Individuals,forming national or regional consortia to deal companies, and customers can now fast-with the ever-increasing volume of electronic track adoption by exercising their right ofwaste). This concern is expressed in public choice to demand, take up, and—jointly withopinion polls and consumer surveys, and is the provider—continually improve productsreflected in new interest in above-ground and services. Why not ask for a lease-based‘urban’ mining for scarce and valuable or performance-based model when you nextmaterials and components. consider purchasing furniture for home or office, restocking machinery assets or vehicleCatch the wave at the start. We are at the fleet, upgrading IT and the communicationsbeginning and will see the formation of system, or expanding and adjusting aa number of new industries and product building portfolio? Governments can lendcategories that will transform the economy the full weight of their collective purchasingby themselves. Free of pre-defined power to supporting circularity initiativesstructures, such as established design and de-risking the critical initial phase forprinciples, processes, and disposal routes pioneers of the circular arena.encrusted in brick and mortar or contractinterfaces in silos, several entire industries Build matchmaker businesses and profit(e.g., the solar panel industry) or emerging from arbitrage. As laid out in the report,product platforms (such as those for electric there is plenty of low-hanging fruit for theor lightweight vehicles and car batteries) first movers in adopting circular setups athave a one-time opportunity to embed a profit. For example, Turntoo’s ‘marketcircular principles right from the design stage maker’ business model aims to facilitateof the product, via material choices, through new relationships between the producers ofthe establishment of service-based delivery material-based products (such as lightingmodels, right up to the optimised setups for systems) and users simply interested incircular reverse cycles. performance (in this case, light hours) to establish a simple method for determiningActivate your (local) community. As last-mile prices that gives both the users and thedistribution, consumption, and disposal are suppliers an incentive. They are capitalisingtypically fairly local activities, communities on the new transparency of the web andshould follow the example of municipalities eroding transaction costs. This businesslike Seattle—which collaborated with the model not only provides Turntoo with a profitfood retailing sector to introduce biological- stream but also boosts circular business.nutrient-based packaging to increase thepurity of communal food waste streams. Moving away from wasteful materialCommunity members could rapidly establish consumption patterns could prove to be thelocal pilot applications of collaborative start of a wave of innovation no less powerfulcross-sector participation to further provide than that of the renewable energy sector. Ittangible proof of concept and important offers new prospects to economies in searchtest beds for debugging and refining circular of sources of growth and future employment.setups prior to national/international rollouts. At the same time, it is a source of resilienceActivities among small and medium- and stability in a more volatile world.sized businesses in local clusters (e.g., the Its inception will likely follow a ‘creativemachining cluster in Southern Germany, destruction’ pattern and create winnersand chemical clusters in central Europe) and losers. As well as long-term benefits,could represent similar starting grounds for the circular economy also offers immediatecommunity-based activities. opportunities that are waiting to be seized.
TOWARDS THE CIRCULAR ECONOMY | 83The concept of a ‘closed-loop’ economy The Ellen MacArthur Foundationhas intrigued academics, designers, andmarketers alike. The intellectual appeal of the The Ellen MacArthur Foundation isconcept might be related to the tangibility committed to identifying, convening, andof the natural systems analogy or to its motivating the pioneers of the circularreframing power in a world dominated by the economy. The Foundation provides thelinear supply chain paradigm. Or it might owe fact base and study repository, shares bestits appeal to the fact that it links the debate practices and excites and educates the nextaround employment and growth with that generation. In this way, it helps to bring downaround resource security and sustainability. the barriers and create the leadership andIn fact, it offers a promising avenue for momentum that this bold vision deserves.corporate leaders to escape the perennialtrade-off between growth and resourceprotection.The data and the case examples presenteddo indeed indicate that the circulareconomy—if executed—promises toreconcile prosperity and sustainability andto overcome these inherited trade-offs. Thereport, however, also identifies the significantgaps in our current understanding. Theconcrete GDP and employment effects persector and region are the more obviousknowledge gaps. Both of these topics will bethe subject of further study and analysis byEMF and its partners.One element of the circular economy,however, seems largely undisputed: It helpsto minimise the economic impact of resourcescarcity. In light of history’s most dramaticresource demand shock and emerging signsof scarcity, improving the productivity ofmaterials and natural resources is a crucialcompetitive response at company level andself-preserving reflex at market level. Forthese reasons, governments and companieshave started looking at the circular model notonly as a hedge against resource scarcity butalso as an engine for innovation and growth.This report suggests that this opportunity isreal and is opening a rewarding new terrainfor pioneering enterprises and institutions.This report is, however, just the start ofa mobilisation process—we intend to godeeper into different products and sectors,assess the business opportunity in moredetail, identify roadblocks and provide thetools to overcome them, and understand themacroeconomic effects in more depth.
84 | TOWARDS THE CIRCULAR ECONOMY‘Even if you do not believe in a sustainability agenda, theefficiency gains of managing (circular) material flows shouldconvince you to go after this potential.’National Grid‘We’re proud to be a founding partner of the Ellen MacArthurFoundation because we believe that the circular economy offers asolid concept on which we can base our thinking for our potentialfuture business model. Resource scarcity is a real issue for anybusiness and the threats outlined in this report are very real.Whilst we are only in the very early stages of exploring what wecan do to move us towards circular models, our initial explorationconfirms that this thinking could have substantial potential butwould undoubtedly require us to extend our thinking beyond ourcurrent core competencies.’B&Q‘While not every product is appropriate for refurbishment, itseems highly likely that nearly all big companies will have parts oftheir product portfolio where circular business practices will proveprofitable.’Cisco ‘Waiting for industry-wide coordination will not work. But asthere is so much low-hanging potential already at company level,why wait? There is substantial first-mover advantage, especiallyif you are open to take back materials/products from yourcompetitors.’Desso‘Nothing is impossible, particularly if it is inevitable’Herman MulderChairman of the Global Reporting Initiative
TOWARDS THE CIRCULAR ECONOMY | 85AppendixValue drivers and assumptions of our in-depth product analysisThe objective of our in-depth case studies was not to explore technical or theoretical maxima, butto validate that—with small changes to the ‘status quo’ in terms of technology, design, and reverse-cyclecapabilities—circular business models could produce attractive economic returns at product level. Theresults we observed across different products, picked from different sectors, provided us with orders ofmagnitude that we could use to scale up our results, first at the level of the market for a specific product(as outlined in the ‘The Circulatory Calculator’ sidebar in Chapter 3), then at the EU economy level acrossa specific portion of the manufacturing sector (see ‘Examining the benefits EU-wide’ in Chapter 4) and,finally, in the case of steel/iron ore, at a global resource level, also described in Chapter 4 under theheading, ‘Mitigation of price volatility and supply risks’. Our intent was to validate that adopting circularbusiness models would a) bring changes that are substantial and worth pursuing and b) drive lastingstructural shifts (e.g., in terms of shifting material demand and usage run rates, as illustrated in Chapter 2 in:‘Long-term effects of circularity on material stocks and mix’).The following section, which is intended to help elucidate the mechanics of our analysis, comprises ahigh-level value driver tree, a compendium of the core assumptions regarding input values and likelyimprovement levers, the resulting outputs of our in-depth diagnostics at cost item level, and descriptionsof the assumptions we make about what a circular system would entail in terms of collection and reversetreatment rates for each of the products we examine.The value driver tree in Figure 24 depicts the architecture of our model. Figure 25 outlines specific inputparameters and underlying assumptions regarding collection and reverse treatment rates. Figures 26to 30 provide detailed information on the product-level economics of primary production and circularactivities.The output of the driver tree is an estimate of net material cost savings, as a percentage of total inputcosts, in the market for a specific product. Comparing this measure across several products gives usa range for relative net material savings potential—which we then consider in order to estimate thecollective impact on our selected manufacturing sectors at the EU level.In order to understand the effects of all specific treatment options, we explicitly chose products withdifferent opportunities for reverse-cycle treatment. This allowed us to cover all types of circular setups indepth.As we constrained the adoption of circular treatment processes (i.e., reuse, refurbishment,remanufacturing) to certain limits in the ‘transition’ and ‘advanced’ scenarios, we used recycling asthe alternative treatment option for any products that were collected at end of life but not reused,refurbished, or remanufactured. The overall collection rate, then, limits the total amount of productstreated along the reverse cycle. We assume that products not collected are landfilled—so, with exceptionof the cascading case examples in the biological nutrient section in Chapter 3, we do not assumeadditional benefits from waste-to-energy processes.While we assumed an aggressive collection rate in the ‘advanced scenario’, we left this rate shy of 100%in order to account for some losses; similarly, we assumed only one product cycle, where for someproducts multiple cycles might be possible—and would presumably heighten the economic benefitsof circularity; finally, we factored out the possibility of substantial material or product innovations thatcould potentially lead to much improved longevity of products or higher preservation of material quality.The ‘advanced scenario’ only attempts to capture the effect of a high structural proliferation of thecircular economy in terms of collection rates and reverse treatment rates, while allowing further leakage,which will be unavoidable (given the second law of thermodynamics, i.e., the dissipation towardsentropy).In order to ground our analysis in current realities, we conducted extensive market-level researchthrough interviews with relevant partners from industry and academia. Our objective was to ensurethat the assumed improvement levers from the linear ‘status quo’ towards the circular ‘transition’ or‘advanced’ scenario are individually technically feasible, commercially viable, and collectively sufficientto describe a consistent new circular operating model.
86 | TOWARDS THE CIRCULAR ECONOMY Appendix FIGURE 24 Driver tree: Factors affecting net material cost savings as a percentage of total input costs Refurbishment/ reuse Material cost saved: material cost of Net material primary production Refurbishing/ reuse rate1 X cost savings per product Material cost in refurbishment/ reuse process Remanufacturing Material cost saved: value of reused Weighted net Net material Remanufacturing components material cost savings per + rate1 X cost savings per product Material cost in product remanufacturing process Net material cost Recycling Material cost saved: savings in market X Net material value of recycled p.a. Recycling rate 1 cost savings per materials X product Material cost in recycling processNet materialcost savings as Collection ratepercentage of Collected end-total input costs in of-life Xmarket p.a products p.a. Number of end-of-life products p.a. Number of products Total input costs put on market p.a. in market p.a. X Key drivers in Number of end-of- circular business life products p.a. practices 1 Rates as percentage of collected products; add up to 100% SOURCE: Ellen MacArthur Foundation circular economy team
TOWARDS THE CIRCULAR ECONOMY | 87 AppendixFIGURE 25 Scenarios for more collection and circular treatment rates in Europe Scenario End-of-life Collected Reused Refurbished Remanu- Recycled Components and business model, transition and products Percent Percent1 Percent 1 factured Percent1 advanced scenario million p.a. Percent 1 Mobile Status quo 190 15 38 – – 62 • Improved circular capabilities (products designed for phone disassembly, firms improve reverse-cycle skills)2 enable higher remanufacturing rates in transition Transition 190 50 38 – 41 21 • Deposit, leasing and buy-back systems push collection rates closer to proposed EU 2016 target of 65% in transition, and beyond that in the advanced scenario Advanced 190 95 50 – 50 0 • Industry-wide efforts establish comprehensive collection and treatment systems in advanced scenario Smartphone Status quo 13 20 – 38 – 62 • Improved circular capabilities (modular design and (B2B) material choice)2 foster refurbishment in transition • B2B buy-back systems and software for wiping user Transition 13 50 – 60 – 40 data push collection closer to proposed EU 2016 target of 65% in transition (beyond that in advanced scenario) • Joint vendor-supplier reverse supply chains, intra-firm Advanced 13 95 – 50 – 50 alignment and regulation further increase collection rates in advanced scenario Light Status quo 1.5 86 – 0 – 100 • Improved circular capabilities (products designed for commercial disassembly, firms improve reverse-cycle skills)2 enable vehicle3 higher refurbishment in transition scenario Transition 1.5 86 – 30 – 70 • Warranty offerings and proactive marketing measures reduce customer concerns about refurbished products • OEM/sector initiatives promoting circular production Advanced 1.5 86 – 50 – 50 R&D foster refurbishment in the advanced scenario • Improved circular capabilities (pooled, OEM-centric Washing Status quo 2.34 40 – 10 – 90 circular activities)2 boost refurbishment in transition machine • Transparent ‘win-win’ leasing contracts result in increased collection, controlled by manufacturers Transition 2.34 65 – 50 – 50 • Specialised intermediaries enable alternative ownership models on larger scale in advanced scenario Advanced 2.34 95 – 50 – 501 Rates as % of collected products; add up to 100%2 See detailed description in figures 27 to 303 Collection and treatment rates based on end-of-life products4 Refers only to selected premium segment of washing machine market; total end-of-life washing machines would amount to ~20 million p.a.SOURCE: Gartner statistics on mobile device sales, February 2011; Yankee statistics on mobile device sales, September 2011; U.S. Environmental Protection Agency(EPA), Electronics Waste Management in the United States Through 2009, EPA working paper, May 2011; Eurostat, WEEE key statistics and data, 2011; Jaco Huismanet al., 2008 Review of Directive 2002/96 on Waste Electrical and Electronic Equipment – Final Report, United Nations University working paper, August 2007; GeorgMehlhart er al., European second-hand car market analysis, Öko-Institut working paper, February 2011; Eurostat, ELV waste database, 2011; Eurostat, WEEE key statisticsand data, 2011; CECED, Joint position paper on WEEE recast second reading, CECED position paper, July 2011; Euromonitor, houshold appliances statistics, 2011; EllenMacArthur Foundation circular economy team
88 | TOWARDS THE CIRCULAR ECONOMY AppendixFIGURE 26 Overview of selected products—prices and costs in linear production Mobile phone1 Smartphone1 Light commercial vehicle1 Washing machine1 USD Percent USD Percent USD Percent USD Percent Price2 36 100% 400 100% 41,400 100% 970 100% Input costs3 27 75% 228 57% 39,730 96% 832 86% Material 16 44% 128 32% 22,760 55% 437 45% Labour 2 6% 29 7% 4,140 10% 223 23% Energy 2 6% 2 1% 680 2% 18 2% Other4 7 19% 69 17% 12,150 29% 155 16%1 Data is a standardised composite blend of 3 to 7 products2 Excluding VAT and retail margin3 Costs in final production; energy and labour costs in upstream activities partially embedded in material4 Other includes SG&A; also includes R&D costs for light commercial vehiclesSOURCE: Credit Suisse, ‘Smartphone report’, broker report, August 2009; Bloomberg financial data; Pranshu Singhal, Integrated product policy pilot project, stage Ifinal report: life cycle environmental issues of mobile phones, Nokia report, April 2005; Ina Rüdenauer et al., Eco-Efficiency Analysis of Washing Machines, Öko-Institutworking paper, November 2005; Ellen MacArthur Foundation circular economy team
TOWARDS THE CIRCULAR ECONOMY | 89 AppendixFIGURE 27 Mobile phones: Economics of circular business activitiesUSD per product1, status quo and transition scenario Reuse Remanufacture Recycle Status quo Transition Status quo Transition Status quo Transition Recoverable value 22.8 22.8 5.0 5.6 3.1 3.6 Treatment costs Collection and transport 1.0 0.8 1.0 0.8 1.0 0.8 Buy-back 9.1 9.1 0.0 0.0 0.0 0.0 Screening 1.9 1.4 1.9 1.4 1.9 1.4 Activity specific process 0.0 0.0 3.5 1.0 0.2 0.2 (disassembly or recycling) Cleaning and quality 2.0 2.0 0.0 0.0 0.0 0.0 Other 2.6 2.6 0.0 0.0 0.0 0.0 Material costs 0.0 0.0 0.0 0.0 0.0 0.0 Profit 6.2 6.9 -1.4 2.5 0.1 1.2 Net material cost savings 16.0 16.0 7.0 7.6 3.1 3.6 Improvements in product design • 130 seconds efficiency gains and yield improvement to 95% (from 70%) in and reverse cycle skills disassembly process through standardised size of displays and cameras and clip hold assembly • Contributing to recycling yield improvement from 80% to 95% for metals, through standardised material choice and improved recycling technology (e.g., “pre-shredder” separation) • 60% time savings in pre-processing through semi-automated pre- processing (screening) • 25% cost savings in transportation through optimised collection point locations and bundled transport to processing facilities1 Basic mobile phones selling at USD 30 to 80 before VAT with average lifetimes of around 2.5 yearsSOURCE: Roland Geyer and Vered Doctori Blass, ‘The economics of cell phone reuse and recycling’, International Journal of Advanced Manufacturing Technology, 2010,Volume 47, pp. 515-525; Joaquin Neira et al., End-of-Life Management of Cell Phones in the United States, dissertation University of California at Santa Barbara, April2006; J. Quariguasi Frota Neto et al., ‘From closed-loop to sustainable supply chains: the WEEE case’, International Journal of Production Research, 2010, Volume 48, pp.4463-4481; Ellen MacArthur Foundation circular economy team
90 | TOWARDS THE CIRCULAR ECONOMY AppendixFIGURE 28 Smartphones: Economics of circular business activitiesUSD per product1, status quo and transition scenario Refurbish Recycle Status quo Transition Status quo Transition Recoverable value 218.2 218.2 5.3 6.3 Treatment costs Collection and transport 1.2 1.2 1.2 1.2 Buy back2 21.8 21.8 0.0 0.0 Screening 4.0 3.0 4.0 3.0 Activity specific process (refurbishment or recycling) 14.9 10.4 0.2 0.2 Cleaning and quality 1.2 1.2 0.0 0.0 Other3 25.1 25.1 0.0 0.0 Material costs 45.1 42.9 0.0 0.0 Profit 126.7 112.6 0.0 2.0 Net material cost savings 83.0 85.0 5.3 6.3 Improvements in product design • 50% cost reductions in refurbishment process (excluding material) through and reverse cycle skills reduced use of adhesives, modular assembly in production phase • 20% less need to replace casing through more robust, high quality materials in production process • Contributing to recycling yield improvement from 80% to 95% for metals, through standardised material choice and improved recycling technology (e.g., “pre-shredder” separation) • 25% cost reductions in initial screening process through fault-tracking software1 B2B smartphones selling at USD 300 to 600 before VAT with average lifetimes of up to 3.5 years2 Introduction of buy-back scheme is a lever to increase collection and refurbishment rates. On a strict product level it is associated with additional costs3 Other includes remarketing and selling costs, which are driven by recoverable valueSOURCE: Credit Suisse, ‘Smartphone report’, broker report, August 2009; Bloomberg financial data; Roland Geyer and Vered Doctori Blass, ‘The economicsof cell phone reuse and recycling’, International Journal of Advanced Manufacturing Technology, 2010, Volume 47, pp. 515-525; Joaquin Neira et al., End-of-Life Management of Cell Phones in the United States, dissertation University of California at Santa Barbara, April 2006; J. Quariguasi Frota Neto et al., ‘Fromclosed-loop to sustainable supply chains: the WEEE case’, International Journal of Production Research, 2010, Volume 48, pp. 4463-4481; Ellen MacArthurFoundation circular economy team
TOWARDS THE CIRCULAR ECONOMY | 91 AppendixFIGURE 29 Light commercial vehicles: Economics of circular business activitiesUSD per product1, status quo and transition scenario Refurbish Recycle Status quo Transition Status quo Transition Recoverable value 13,796 13,796 1,174 1,174 Treatment costs Collection and transport2 0 426 0 0 Buy-back 7,366 7,366 0 0 Screening 13 0 13 13 Depollution 42 0 42 42 Activity specific process (refurbishment or recycling) 1,044 3193 472 472 Other4 2,070 2,070 0 0 Material costs 4,150 2,448 0 0 Profit -889 1,167 648 648 Net material cost savings 18,613 20,316 1,174 1,174 Improvements in product design • 33% decrease in refurbishment time realised by and reverse cycle skills - Engine modularisation, wider design of engine bay (increased accessibility of connection points such as screws and plugs), usage of quick fasteners - Process standardisation, workflow optimisation, and specialisation in dedicated refurbishing centers (would typically be located centrally within the OEM’s dealership and service network) • 40% decrease in material cost for refurbishment as centrally located, OEM related refurbishing centers can source spare parts at reduced cost1 Representative light commercial vehicle with an average lifetime of around 8 years in the EU (500-700 thousand kilometres)2 Collection and transport costs only in transition state for refurbishment as this includes the transport to centralised refurbishment facilities3 Includes costs for screening and depollution4 Other includes SG&A costs, which are driven by recoverable valueSOURCE: Georg Mehlhart er al., European second-hand car market analysis, Öko-Institut working paper, February 2011; Eurostat, ELVwaste database, 2011; GHK, A study to examine the benefits of the End of Life Vehicles Directive and the costs and benefits of a revisionof the 2015 targets for recycling, reuse and recovery under the ELV Directive, GHK report, May 2006; Ellen MacArthur Foundation circulareconomy team
92 | TOWARDS THE CIRCULAR ECONOMY AppendixFIGURE 30 Washing machines: Economics of circular business activitiesUSD per product1, status quo and transition scenario Refurbish Recycle Status quo Transition Status quo Transition Recoverable value 560 560 38 38 Treatment costs Collection and transport 12 12 12 12 Activity specific process (refurbishment or recycling) 80 80 14 14 2 Other 80 80 0 0 Material costs 297 161 0 0 Profit 93 228 12 12 Net material cost savings 140 275 38 38 Improvements in product design 40% decrease in material cost for refurbishment through pooled and reverse cycle skills (OEM centralised) circular activities, as spare parts would not be subject to high trade margins currently observed1 Premium washing machine selling above USD 900 before VAT with average lifetime of 10,000 washing cycles2 Other includes SG&A and other operating expensesSOURCE: Adrian Chapman et al., Remanufacturing in the U.K. – A snapshot of the U.K. remanufacturing industry; Centre forRemanufacturing & Reuse report, August 2010; Erik Sundin, Product and process design for successful remanufacturing, LinköpingStudies in Science and Technology, Dissertation No. 906, 2004; Ina Rüdenauer and Carl-Otto Gensch, Eco-Efficiency Analysis ofWashing Machines , Öko-Institut working paper, June 2008; Ellen MacArthur Foundation circular economy team
TOWARDS THE CIRCULAR ECONOMY | 93 Experts consulted for the analysis and reporting Corporate experts B&Q Zhanna Serdyukova Matt Sexton Environmental Sustainability Consultant Director of Corporate Social Responsibility Yasunori Naito Roy Miller Manager, Environmental Management Sustainability Manager – Products OPAI Caterpillar Douwe Jan Joustra Greg Folley Managing Partner Vice President with responsibility for the Turntoo Remanufacturing and Components division Sabine Oberhuber Cisco Managing Partner Neil Harris Turntoo and RAU Head of Sustainability, Europe Thomas Rau Ian Redfern Founder – Director – Architect Development Director Conrad Price Vestas Product Manager Voice Rob Sauven Technology Group Managing Director Vestas Technology UK ltd Alastair Borissow General Manager EMEA Remarketing Academic experts John Malian Product Environmental Sustainability Program Advanced Sustainability LLP Manager Chris Tuppen Founder and Senior Partner Cyberpac John Hensley Biomimicry 3.8 Founder Chris Allen Claire Black CEO Sales & Production Manager Collaborative Consumption Desso Lauren Anderson Stef Kranendijk Innovation Director CEO EPEA Rudi Daelmans Michael Braungart & Douglas Mulhall Sustainability Director Representatives of the Academic Chair, Foresight Group Cradle to Cradle for Innovation and Quality Andrew Page Rotterdam School of Management, Erasmus Partner University, as well as EPEA Internationale Umweltforschung ISE Appliances John Hopwood Product-Life Institute Managing Director Walter R. Stahel Founder-Director Marks & Spencer Carmel Mcquaid Rochester Institute of Technology Climate Change Manager Nabil Z. Nasr Dr Mark Sumner Assistant Provost for Academic Sustainable Raw Materials Specialist Affairs & Director National Grid University of Cambridge Steve Wallace Peter Guthrie OBE Head of Climate Change and Environment Professor & Director for Sustainable Craig Dikeman Development and Head of the Centre for Director of Inventory Management & Investment Sustainable Development Recovery University of Surrey Marcus Stewart International Society for Industrial Ecology Future Distribution Networks Manager Roland Clift CBE, FREngAdditionally, a number of Roger Aspinexperts and practitioners Professor of Environmental Technologyfrom various sectors (e.g., Head of Logistics and Founding Director of the Centre forconsumer goods and Environmental Strategy Renaultretail; financial sector;logistics; motor vehicles; Jean-Philippe Hermine Executive Directorother transport; public VP Strategic Environmental Planningsector; radio, TV, and University of Yorkcommunication; textiles; Ricoh Europe James Clarkwaste management) have Olivier Vriesendorp Professor and Director of the Greenbeen interviewed. Director, Product Marketing Chemistry Centre of Excellence for Industry
94 | TOWARDS THE CIRCULAR ECONOMYList of figures1 Global resource extraction is expected to grow to 82 billion tonnes in 20202 We are still losing enormous tonnages of material3 Construction and demolition (C&D): A noteworthy opportunity4 Sharp price increases in commodities since 2000 have erased all the real price declines ofthe 20th century5 Price volatility has risen above long-term trends in recent decades6 The circular economy—an industrial system that is restorative by design7 The circular economy at work: Ricoh’s Comet Circle™8 The impact of more circular production processes accumulates across severallayers of inputs9 Cascading keeps materials in circulation for longer—textile example10 A circular economy would not just ‘buy time’—it would reduce the amount of materialconsumed to a lower set point11A Mobile phones: Reuse and remanufacturing as a viable alternative to recycling11B Mobile phones: Design changes and investments in reverse infrastructure could greatlyimprove the circular business case12A Light commercial vehicles: Refurbishment—a profitable alternative12B Light commercial vehicles: Refurbishment is attractive for a large range of cases despitedemand substitution of 50%13 Washing machines: Leasing durable machines can be beneficial for both parties14 Biological nutrients: Diverting organics from the landfill to create more value15 Building blocks of a circular economy—what’s needed to win16 Transition to a circular economy: Examples of circular business model adoption17 Increasing circular activities is a promising business opportunity for a variety of products18 Adoption of circular setups in relevant manufacturing sectors could yield net material costsavings of USD 340 – 630 billion per year in EU alone19 A small reduction in demand would put downward pressure on both iron ore prices andvolatility20 Employment effects vary across primary, secondary, and tertiary sectors of a circulareconomy21 Revamping industry, reducing material bottlenecks, and creating tertiary sectoropportunities would benefit labour, capital, and innovation22 Refurbishment helps to overcome a dynamic where ‘weakest-link’ components define aproduct’s life—example light commercial vehicle23 The circular economy is creating a new ‘reverse’ sectorAppendix24 Driver tree: Factors affecting net material cost savings as a percentage of total input costs25 Scenarios for more collection and circular treatment rates in Europe26 Overview of selected products—prices and costs in linear production27 Mobile phones: Economics of circular business activities28 Smartphones: Economics of circular business activities29 Light commercial vehicles: Economics of circular business activities30 Washing machines: Economics of circular business activities
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96 | TOWARDS THE CIRCULAR ECONOMYAbout The Ellen MacArthur FoundationThe Ellen MacArthur Foundation was established in 2010 with the aim of inspiringa generation to rethink, redesign, and build a positive future through the vision ofa circular economy, and focuses on three areas to help accelerate the transitiontowards it.Education—Curriculum development and in-service teacher trainingScience, technology, engineering, maths, and design (STEM) are subjects that willbe at the heart of any transition to a circular economy. Equally crucial will be thedevelopment of ‘systems thinking’—the skill of understanding how individual activitiesinteract within a bigger, interconnected world.The Foundation is building a portfolio of stimulus resources to help develop theseskills, supporting teachers and establishing a network of education delivery partnersto enable scalable training and mentoring. A parallel development programme forHigher Education has been established with a focus on supporting European businessand engineering institutions and linking them to best-practice business case studiesaround the world. Currently, the Foundation is working to pilot, trial, and disseminatea comprehensive education programme across the U.K. with a view to this being aflexible, scalable model for use around the world. For more information, please visit theFoundation’s website www.ellenmacarthurfoundation.org.Communication—The opportunity for a redesign revolutionThe Foundation works to communicate the ideas and opportunities around a circulareconomy to key target audiences— educational institutions, business, and in thepublic sector— using creative and social media. It believes that focusing on designinga restorative model for the future offers a unique opportunity to engage an entiregeneration when fused with the ability to transfer knowledge, co-create ideas andconnect people through digital media.Business—Catalysing and connecting businessesFrom its launch in September 2010, the Foundation has placed an importance on thereal-world relevance to its charitable programmes. Working with leading businesses inkey sectors of the economy provides a unique opportunity to make a difference.B&Q, BT, Cisco, National Grid and Renault have supported the setup and developmentof the new charity and continue to support its activities through a partnershipprogramme. In addition to working together with the Foundation to develop strategyfor a transition towards a circular economy business model, partners are also activelysupporting the Foundation’s work in education and communication.In 2011, the Founding Partners supported ‘Project ReDesign’, a series of innovationchallenge workshops with 17-to-18 year old students across the U.K. The students wereasked to try their hand at designing products by intention to ‘fit’ within a system andwere able to interview Partners as business experts in their respective sectors. Winningstudents have gone on to a series of internships within the businesses to learn moreabout real-world design solutions for a circular economy.Cross-sector collaboration will accelerate transition. To encourage this, the Foundationhas established a Knowledge Transfer Network for businesses, experts, consultants,and academics. To register your interest and get connected please visitwww.thecirculareconomy.org