Ellen mac arthur foundation towards the circular economy vol.2
20132 TOWARDS THE CIRCULAR ECONOMY Opportunities for the consumer goods sector Pre-print versionFoundingPartners of theEllen MacArthurFoundation
ForewordA new term has emerged in recent years to describe our modern era—theAnthropocene. It rightly implies that in this age humans became the dominantforce shaping our physical environment. It is evident that an economy that extractsresources at increasing rates without consideration for the environment in which itoperates, without consideration for our natural planetary boundaries, cannot continueindefinitely. In a world of soon to be 9 billion consumers who are actively buyingmanufactured goods, this approach will hamper companies and undermine economies.We need a new way of doing business.The concept of a circular economy promises a way out. Here products do not quicklybecome waste, but are reused to extract their maximum value before safely andproductively returning to the biosphere. Most importantly for business leaders, such aneconomy can deliver growth. Innovative product designers and business leaders arealready venturing into this space.I don’t believe business can be a mere bystander in the system that gives it life. This iswhy decoupling economic growth from environmental impact and increasing positivesocial outcomes are two priority objectives that lie at the heart of my vision for corporatestrategy. Businesses need to reinvent themselves, and the circular economy frameworkprovides very promising perspectives, as outlined in the present report.I welcome this important contribution to the debate regarding the nature of ‘economicthings to come’. In 2012, the Ellen MacArthur Foundation report ‘Towards the circulareconomy’ contributed significantly to our understanding of the opportunity fordurable goods. This year’s report again takes the business point of view to explore theopportunity of the circular economy for fast-moving consumer goods. Building on allthe academic work of recent years and a large base of industry examples, it establishesneeded thought structures, identifies the major levers available, and calls out theeconomic opportunity.I envision a 21st century where innovation, values, and sheer drive will help harness thepower of regenerative processes, and this new report inspires our thinking on how tocreate prosperity that is not at the expense of tomorrow’s opportunities.Sincerely,Paul PolmanChief Executive Officer, Unilever
02 | TOWARDS THE CIRCULAR ECONOMYIn support of the circular economy‘As a founding partner to the Ellen MacArthur Foundation, at Kingfisher and B&Q weare already taking steps towards circularity. This is particularly relevant for us in timber,where we are regenerating working woodlands and finding a second life for our wastewood. This report identifies the massive opportunities of circularity for business.Circularity supports our Net Positive approach to doing business—where we go beyondminimising our negative impact and instead design ourselves to have a positive one.We are very excited about the report’s findings and are looking forward to continuingto work with the Foundation to understand how we unlock some of the commercialopportunities it highlights.’B&Q Ian Cheshire, Kingfisher Group, Chief Executive‘We are working with key strategic suppliers to explore the commercial opportunitiesof the circular economy, which we believe to be significant. We are also integrating theprinciples of the circular economy into our product development process. As a foundingpartner of the Ellen MacArthur Foundation, we are delighted to support this latest report,which underlines the relevance and opportunities provided by the circular economy.’BT Group Gavin Patterson, Chief Executive BT Retail‘The Circular Economy offers a profound transformational opportunity, which representsthe interests of both the global community as well as the next generation. Transitioningtowards a regenerative model will stimulate economic activity in the areas of productinnovation, remanufacturing, and refurbishment, and in turn generate employment.However, organisations must now question their ability to flex and adapt, to innovateand develop new business models that exploit the way the market is moving. In today’sincreasingly complex, interdependent, and interconnected era, technology will play acritical role in helping us understand and manage our vital resources in order to build agenuinely sustainable economy.’Cisco Chris Dedicoat, President, EMEA‘The Foundation’s latest report builds on work we have done internally, highlightingthe opportunities anaerobic digestion provides for producing renewable gas fromwaste. It gives new impetus to the work National Grid is doing around the circulareconomy with regards to the regeneration of major infrastructure assets, our ambitionto use the circular economy as a core focus for innovation and sustainability acrossour organisation, and to the joint ambition National Grid and the Foundation have ofinspiring a generation through our work in education.’National Grid Steve Holliday, Chief Executive‘The EU’s recent European Resource Efficiency Platform manifesto highlights theimportance of decoupling future economic progress from resource constraints.Renault has been pursuing this objective for some time and is working closely withthe Ellen MacArthur Foundation, applying circular processes, and shaping the futureof mobility with electric vehicles—initiatives that will safeguard our leading role in theautomotive sector. The new report brings added focus to this work, and we aredelighted to have had a role in its elaboration.’Renault Carlos Tavares, Chief Operating Officer for Renault
TOWARDS THE CIRCULAR ECONOMY | 03 Contents 1 Foreword 2 In support of the circular economy 4 Acknowledgements 5 Report synopsis 6 Executive summary 13 1. The limits of linear consumption25 2. From linear to circular37 3. How it works up close 81 4. An economic opportunity worth billions93 5. The shift has begun104 Appendix109 List of experts consulted110 List of figures
04 | TOWARDS THE CIRCULAR ECONOMYAcknowledgementsThe 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.Our special thanks go to the many leading academic, industry,and government agency experts who provided invaluableperspectives and expertise. A list of the contributors is includedat the end of this report.
TOWARDS THE CIRCULAR ECONOMY | 05Report synopsisIn January 2012, the Ellen MacArthur Foundation launched a report on thebusiness and economic rationale for a circular economy. Given the complexityof the topic, it offered an introduction to an alternative to the linear ‘take – make– dispose’ model of consumption. The report showed that this linear model isfacing competition from a pattern of resource deployment that is circular bydesign: it creates much more value from each unit of resource by recoveringand regenerating products and materials at the end of each service life. Morespecifically, it demonstrated that designing and using durable goods, such as carsand vans, washing machines, and mobile telephones, in accordance with circularprinciples offers materials savings in Europe that could be worth USD 380 billionin an initial transition period and up to USD 630 billion with full adoption.This year, the Foundation has turned its focus to ‘fast-moving’ consumer goods,products that typically have a lower unit cost, are bought more often, and havea much shorter service life than durable goods. Fast-moving consumer goodscurrently account for 35 per cent of material inputs into the economy, a significantpart of total consumer spending on tangible goods, and 75 per cent of municipalwaste. Importantly, the consumer goods sector absorbs more than 90 per cent ofour agricultural output—possibly our most embattled resource in the future.If we are to move to a circular economy, it is therefore crucial to test how itapplies to the consumer goods sector.Chapter 1Examining the success and limits of linear consumption and the powerof the circular economy concept to break through the linear ‘dead end’.Chapter 2Discussing how the principles of the circular economy apply to consumergoods—within both the biological and the technical spheres.Chapter 3Investigating how circular businesses can extract more value than the linear economy in three parts of the consumer goods industry: making useof food waste and food processing by-products, reducing the material impactof apparel without reducing consumer choice, and getting to grips withbeverage packaging.Chapter 4Describing the potential economic payoff of a rapid scale-up of circularbusiness models in the consumer goods sector.Chapter 5Proposing concrete steps for participants in the consumer goods industryand for the public sector to bring the circular economy into the mainstream.
06 | TOWARDS THE CIRCULAR ECONOMY Executive summary The last 150 years of industrial evolution • Household food waste. An income1 stream have been dominated by a one-way of USD 1.5 billion1 could be generated annually or linear model of production and for municipalities and investors by collecting consumption in which goods are household food waste in the U.K. separately manufactured from raw materials, sold, and processing it in line with circular used, and then discarded as waste. This principles to generate biogas and return model has been exceptionally successful nutrients to agricultural soils. If all countries in in providing affordable products to the EU matched Italy’s high rates of separate consumers and material prosperity to collection of household food waste for biogas billions. In developed economies, it has and compost production, the resulting income largely displaced a traditional economy stream would give towns and cities a new that featured more reuse and regeneration source of revenue. but required more labour and produced lower returns on investment. • Industrial beverage processing waste. An additional profit of USD 1.90 – 2.00 per While there is still room for the linear hectolitre of beer produced could be created model to expand geographically and in Brazil on top of the margin for beer by realise even higher efficiencies, there selling the biggest waste product, brewer’s are signs that the coming decades spent grains, to farmers in the fish farming will require productivity gains and (specifically tilapia) and livestock sectors, thus quality improvements at a new order of ‘cascading’ it to another industry as a feed magnitude. As the global middle class supplement. Cascaded uses are relevant for more than doubles in size to nearly many food processing by-products. 5 billion by 2030, consumption and material intensity will rise accordingly, • Textiles. A revenue of USD 1,975 per tonne driving up input costs and price volatility of clothing collected could be generated in at a time when access to new resource the U.K. if the garments were sold at current reserves is becoming more challenging prices, with the gross profit of USD 1,295 and expensive. Perhaps most troubling comfortably outweighing the cost of USD 680 is that this sudden surge in demand may required to collect and sort each tonne. Like have adverse effects on the environment Italy in household food waste collection, the that further constrain supply. Symptoms of U.K. sets a standard worth emulating, with these constraints are currently most visible an average clothing collection rate of 65% of in the food and water supply. Declines in clothes discarded. soil fertility are already estimated to cost around USD 40 billion globally. • Packaging. A cost reduction of 20 per cent from USD 29 to USD 24 per hectolitre of beer Modern circular and regenerative forms consumed would be possible in the U.K. by of consumption—so far limited to a few shifting from disposable to reusable glass beer high-end categories—represent a promising bottles, which would lower the cost incurred alternative and are gaining ground. for packaging, processing, and distribution. Powerful examples of their economic While durability would require a 34% increase viability at scale exist today, from anaerobic in the amount of glass used per bottle, this digestion of household waste to apparel increase in material would be dwarfed by the recovery. While these examples are still savings that accrue from being able to reuse limited in geographical scope, we estimate such bottles up to 30 times, as currently the full potential of the circular economy achieved in Germany. to be as much as USD 700 billion in global consumer goods materials savings Over time, the market is likely to alone. Our product- and country-level systematically reward companies with an analyses covered examples in product edge in circular business practices and hence categories that represent 80 per cent of dramatically lower resource requirements. the total consumer goods market by value, With new technologies in hand, they can namely food, beverages, textiles, and win by scaling up the concept of the circular1 Includes revenue from feed- packaging. Highlights of opportunities for economy. There will also be rewards in rapidlyin-tariff in the U.K. and avoidedlandfill fees profitable businesses include the following: urbanising countries where waste streams of
TOWARDS THE CIRCULAR ECONOMY | 07nutrients, heat, partially treated wastewater • Manufacturers’ margins are beingor CO2 can be converted back into high-value compressed by slow growth in demand,biological products or energy using much increasing costs, and higher price volatilityshorter and more resilient supply chains. The for resources.time to invest in building a circular economyis now. • Agricultural productivity is growing more slowly than ever before, and soil fertility1. The success—and limits—of linear and even the nutritional value of foods areconsumption declining.Between 1900 and 2000, global GDP grew • The risks to food security and safetytwenty times and created hitherto unknown associated with long, ‘hyper-optimised’levels of material prosperity. The availability global supply chains appear to be increasing.of consumer goods of increasing quality andreliability at ever-lower cost was supported For these reasons, alternative models forby new production technologies, globalised production, distribution, and consumptionsupply chains, fewer labour inputs, and based on reusing resources andwhat we call a ‘linear’ industrial economy. regenerating natural capital have caught theWithin this linear model, resources are attention of businesses around the world.extracted from the earth for production and ‘Circular’ sources of value appear moreconsumption on a one-way track with no transformational and less incremental thanplans for reuse or active regeneration of the further efficiency improvements.natural systems from which they have beentaken. In developed economies, the linear 2. Rediscovering a circular modeleconomy has largely displaced the traditional‘lower productivity’ circular economy. For durables, the benefits of reuse have been widely demonstrated. For consumer goods—The linear economy is material and energy such as food and beverages or apparel andintensive; it relies on economies of scale, and their packaging—which are short-lived andtypically builds on complex and international often transformed during use, the economicsupply chains. All these supply chains have benefits of a circular design are morea common goal—the consumer. The goods complex in origin and harder to assess.an OECD citizen buys for consumptionannually—800 kg of food and beverages, We estimate the total material value of120 kg of packaging, and 20 kg of new fast-moving consumer goods at USD 3.2clothing and shoes—are, for the most part, trillion. Currently, we recover an estimatednot returned for any further economic use. 20 per cent of this material, largely throughIn the current ‘take-make-dispose’ system, decomposition (cascading of waste andaround 80 per cent of these materials will by-products through adjacent supply chains,end up in incinerators, landfill or wastewater. returning nutrients to the soil, and recycling)They come to a dead end. and partly through reuse. In the future, we believe that a much higher share of consumerThere is still room to expand the linear goods materials could potentially beeconomy model geographically to the recovered though reuse and decomposition.developing world, where labour and capital Even in the near term, without the dramaticare not yet organised around agricultural application of bio-based products and theor processing value chains optimised for full redesign of supply chains, the value thatefficiency. At the same time, there are can be recovered could be increased togrowing signs that the power of the linear 50 per cent.model is reaching a limit: Recovering part of the USD 2.6 trillion• In modern manufacturing processes, of material value lost today is a hugeopportunities to increase efficiency still opportunity for fast-moving consumer goodsexist, but the gains are largely incremental companies. However, they face significantand insufficient to generate real competitive hurdles as they try to break out of the linearadvantage or differentiation. model. We need to build efficient collection
08 | TOWARDS THE CIRCULAR ECONOMYExecutive summaryContinuedsystems to capture the materials value of Clothinggoods that are consumed far from their There are profitable circular opportunities topoint of origin, design better combinations reuse end-of-life clothing, which, in additionof goods and packaging, and dramatically to being worn again, can also be cascadedincrease the attention management gives to down to other industries to make insulationrecovering value in the post-use stages of or stuffing, or simply recycled into yarn tothe supply chain. Enough thriving examples make fabrics that save virgin fibres. If sold atof circular business models already exist current prices in the U.K., a tonne of collectedtoday to give us confidence that these and sorted clothing can generate a revenuechallenges can be met. of USD 1,975, or a gross profit of USD 1,295 after subtracting the USD 680 required to3. Commercial opportunities today collect and sort each tonne. We also see an opportunity in expanding the ‘clothing-for-In our product-level analysis, we have hire’ segment to everyday clothes, as anotherstudied specific examples in product offshoot of the asset-light trend.categories that represent 80 per cent ofthe total consumer goods market by value: Packagingfood, beverages, textiles, and packaging. Recovery for reuse, keeping packaging inCircular opportunities exist all along circulation longer, will deliver dramaticallythe value chain: in manufacturing (food greater materials savings and profit than theand beverages), in the distribution and traditional linear one-way system, especiallyconsumption stages (textiles, packaging), if collection rates are high. Our modellingand in post-use processing (food waste). of beer containers shows that shifting toGenerally, in developing countries, reusable glass bottles would lower the costmore circular opportunities are lost at of packaging, processing, and distribution bythe manufacturing stage. In developed approximately 20 per cent per hectolitre ofcountries, losses are more heavily beer consumed.concentrated at the consumer level. Recovery for decomposition is another option.Food and beverages End-of-life materials can be cycled backThere are profitable ways to deal with through one of two forms: either recycling thethe mixed food waste discarded by materials or returning nutrients to the soil viahouseholds and the hospitality sector. biodegradable packaging.In the U.K., processing this waste in linewith circular principles could generate an Recycling—This is a solution when it is notincome stream of USD 1.5 billion annually— feasible to install reuse infrastructure, butproviding a major economic opportunity significant materials savings are immediatelyfor both municipalities and investors while available by collecting and recycling usedgenerating biogas and returning nutrients packaging. In OECD countries, prices of rawto agricultural soils. materials already make it profitable today for collection and recycling companies toThere is further potential for circularity in increase the volume and range of the differentindustrial food processing, where waste is fractions recycled. Our case shows a profit ofmostly created as a by-product—such as nearly USD 200 per tonne of plastic collectedbrewer’s spent grains in beer-making or for recycling. In parallel, more thoughtfulorange peel in juice production. With beer— product design and material choices shouldthe world’s third most-popular beverage also significantly improve recovery andafter water and tea, and representative of regeneration solutions.foods and beverages that generate valuableprocessing by-products—keeping brewer’s Biodegradable packaging—This is the solutionspent grains out of landfill. Instead, selling of choice when single-use packaging canthem as a feed supplement in accordance facilitate the return of bio-based materialswith circular principles, can create a profit (e.g., food) back to the soil, or when no otherof USD 1.90 per hectolitre of beer produced. viable end-of-life option exists. Most available biodegradable materials are currently more expensive than traditional packaging, but
TOWARDS THE CIRCULAR ECONOMY | 09 innovative solutions are being developed unique landscapes. Higher land productivity, in specific applications and could allow less waste in the food value chain, and the the profitable evolution of biodegradable return of nutrients to the soil will enhance the packaging. value of land and soil as assets. The circular economy, by moving much more biological Because they extract value from what are material through the anaerobic digestion or otherwise wasted resources, these and other composting process and back into the soil, examples of the modern circular economy will reduce the need for replenishment with are inherently more productive than linear additional nutrients. This is the principle of business models. Technologies and regulatory regeneration at work. solutions already exist to support businesses and investors in seizing such opportunities • Job creation potential. A circular economy and changing consumption habits towards might bring greater local employment, longer use and reuse. As Steve Sharp, especially in entry-level and semi-skilled jobs, executive director of marketing at Marks & which would address a serious issue facing Spencer, says: ‘Not many years ago people the economies of developed countries. would have been incredulous at the idea of This total prize is just the beginning of a routinely recycling bottles and plastic, yet much bigger set of transformative value- this is now commonplace behaviour. We want creation plays as the world scales up the to try to achieve that same shift of behaviour new circular technologies and business with our Shwopping campaign and make models. We are likely to see a selective recycling clothes a habit’. M&S CEO Mark ‘grafting’ of new circular business models and Bolland adds: ‘We’re leading a change in the technologies during this period of transition. way we all shop for clothing, forever.2’ Initially, these grafts may appear to be modest in their impact and play into niche 4. Accounting for the business and markets (e.g., growing greenhouse tomatoes, economic benefits hiring out high-end fashion items). But over the next 15 years these new business models The full value of these circular opportunities will likely gain an increasing competitive for fast-moving consumer goods could be advantage, because they inherently create as much as USD 700 billion per annum in much more value from each unit of resource. material savings or a recurring 1.1 per cent In addition, they are likely to meet other of 2010 GDP, all net of materials used in the market requirements, associated with reverse-cycle processes (see Figure 20 in more secure supply, more convenience for Chapter 4). Those materials savings would consumers, and lower environmental costs. represent about 20 per cent of the materials input costs incurred by the consumer goods In a world of 9 or 10 billion consumers with industry. In addition, we expect the following fierce competition for resources, market benefits: forces are likely to favour those models that best combine specialised knowledge and • Innovation. The aspiration to replace one- cross-sector collaboration to create the most way products with goods that are ‘circular by value per unit of resource over those models design’ and create reverse logistics networks that simply rely on ever more resource and other systems to support the circular extraction and throughput. Natural selection economy is a powerful spur to new ideas. will likely favour the agile hybrids—able to The benefits of a more innovative economy quickly combine circularity with scale—that include higher rates of technological are best adapted to a planet transformed development; improved materials, labour, by humanity. and energy efficiency, and more profit opportunities for companies. By 2030, the prize could be much more than USD 700 billion—and we expect to see • Land productivity and soil health. Land circular business models accounting for a degradation costs an estimated USD 40 large part of the global bio-value chains. billion annually worldwide, without taking In that not-so-distant world, investors,2 http://platform-online.net/2012/10/ms-unveil- into account the hidden costs of increased managers, and regulators will be talkingfirst-shwopping-garment/ fertiliser use, loss of biodiversity, and loss of about how companies get going and start
10 | TOWARDS THE CIRCULAR ECONOMYExecutive summaryContinuedlearning how to hybridise their business redefine the way value chains work inmodels—for markets that will be worth well distribution, waste recovery, and consumerover USD 25 trillion. choice without increasing material impact5. The shift has begun—mainstreaming the • New business models that improve controlcircular economy over scarce resources and ‘assetise’ them for reuse in value-maximising transfersWhy now? Our economy currently seems as feedstock to subsequent industrial orlocked into a system in which everything agricultural processesfrom production economics and contractsto regulation and the way people behave • A new model of collaborative consumerismfavours the linear model of production —in which consumers embrace services thatand consumption. However, this lock-in is enable them to access products on demandweakening under the pressure of several rather than owning them—and collaborativepowerful disruptive trends. First, resource consumption models that provide morescarcity and tighter environmental standards interaction between consumers, retailers,are here to stay. Their effect will be to reward and manufacturers (e.g., performance-for-circular businesses that extract value from pay models, rent or leasing schemes, returnwasted resources over take-make-dispose and reuse)businesses. Second, information technologyis now so advanced that it can trace materials • New packaging technologies and systemsanywhere in the supply chain, identify that extend food life and minimise packagingproducts and material fractions, and track waste.product status during use. Third, we are inthe midst of a pervasive shift in consumer Companies are successfully building morebehaviour: a new generation of consumers circular business models in and for theseems prepared to prefer access over consumer goods industry, and we see newownership. roles and vantage points emerging:Capturing the new opportunities will • Volume aggregators: Markets for residuesrequire leading corporations and municipal and by-products are currently severely underauthorities to develop a new set of developed, creating arbitrage opportunities‘circular’ muscles and capabilities along for volume aggregators who stand at thetheir traditional supply chains. These new forefront of organising these markets. Asos,capabilities will be reinforced by a set of an aspiring online ‘fashion destination’ thatfundamental developments in resource offers more than 850 brands of new clothes,markets, technology and information has extended its scope to the reversesystems, and consumer preferences: cycle by creating a parallel platform where consumers can resell end-of-life clothing, and• Urbanisation that centralises flows of small firms can market ‘vintage’ garmentsconsumer goods and waste streams and accessories as well as new ones. More specialised companies offer sales platforms• A set of new technologies (e.g., in the business-to-business environment, too,anaerobic digestion) that enables dramatic such as the Waste Producer Exchange (WPE)improvements in the way value is extracted in the U.K., which supports users in sellingfrom today’s biological waste streams as well waste products and materials.as opportunities to combine multiple wastestreams (CO2, heat, wastewater, nutrients) • Technology pioneers: New technologies,into advanced agro-manufacturing systems (such as PHA bioplastics production from industrial wastewater) offer technology• New IT capabilities that support more leaders a vast array of opportunities. A recentprecise management and tracking and rush of private equity capital into recyclingtracing of biological flows in the system and circular technology may signal the first(e.g., RFID chips that provide detailed influx of semi-permanent settlers on thisinformation about product spoilage rates) frontier. Veolia has pioneered the production• Emergence of online retail channels that of bioplastics from sludge. Wastewater
TOWARDS THE CIRCULAR ECONOMY | 11treatment systems today often use bacteria Chicago, a vertical aquaponic farm growingthat eat sludge and neutralise it into carbon. tilapia and vegetables that also serves asUsing proprietary technology, Veolia an incubator for craft food businessesachieved a breakthrough in converting this and operates an anaerobic digester and a‘wastewater carbon’ into biomass rich in PHA, combined heat and power plant. Discardedwhich has mechanical properties equivalent materials from one business are used as ato polypropylene and is thus valuable in resource for another in an explicitlymaking consumer plastics and chemicals. circular system.Veolia produced the first biopolymersfrom municipal waste in 2011, and is now • Product-to-service converters: In the textilerefining the process to meet end-customer industry, players like Patagonia—whichspecifications at full-scale wastewater pioneered the ‘Common Threads Initiative’treatment sites in Belgium and Sweden. to reduce the environmental footprint of its garments—seek longer and more intimate• Micro-marketeers: In the food and beverage customer relationships beyond the pointindustry, large retailers such as Woolworths in of sale. Value-added offerings like repair,Australia, WholeFoods in the U.S., and Migros amendment, return and leasing offer muchin Switzerland, as well as global food giants greater customer interaction at multiplesuch as Unilever, Nestlé, Danone, and Kraft touchpoints. Some players are beginningFoods, are preparing for markets with more to redefine themselves as fashion or stylelocal sourcing, distributed manufacturing, partners with superior customer insights andincreased customer interaction, diversified value opportunities along the life cycle andcustomer demand, multi-channel purchasing across different categories.(including home-delivery), and ultimatelymore intimate customer relationships. At We do not know how the shift will comethe same time, low-cost same-day delivery about. It would come slowly or in a suddenservices allow local brick-and-mortar sweep, as a reaction to external shocks. Itcompanies to compete with national brands may be the outcome of stirring public stimulionline, further propelled by the emergence (‘man on the moon’) or of a killer application,of online ‘hyper-local’ advertising platforms as a silent manufacturing revolution. Itthat allow people to find such businesses could even emerge as grassroots consumerin their neighbourhood. Serving these activism, or as voluntary, inclusive industrymicro-markets at scale and developing commitment. History has seen all of thesean integrated ‘systems’ offering that links patterns lead to breakthroughs: we do notproducts, ordering, delivery, and aftersales know which of them will tip consumption intoservice could be the name of the game, and a more regenerative mode. We do expect,could even feature ‘assisted’ self-production however, that the shift will play out betweenby the consumer. In such a strategy, the pioneering industry leaders, discriminating,circular economy could become a major well-informed consumers, and forward-source of differentiation—if not an obligation. looking public constituencies.Micro-marketeers could proactively offerB2B service contracts, develop blueprints for‘zero-waste’ plants, or establish food wastereuse centres.• Urban-loop providers: Urbanisation inemerging economies will create urban andperi-urban systems where waste streams ofnutrients, heat, partially treated wastewater,or CO2 are converted back into high-valuebiological products using much shorter andmore resilient supply chains than today.Urban-loop economies offer a playing fieldfor businesses with sophisticated know-howin design, engineering, and infrastructureoperations. An example of this is The Plant,
12 | TOWARDS THE CIRCULAR ECONOMYExecutive summaryContinuedTo support collaboration and knowledgetransfer between companies engaged inimplementing circular economy solutions,the Ellen MacArthur Foundation has createdthe Circular Economy 100, an invitationalglobal platform for 100 pioneering businessesto accelerate the transition to a circulareconomy over a 1,000-day innovation period.The CE100 supports its members via anumber of enabling initiatives, including:an online library of best practices, insightsand learnings, acceleration workshops, anannual summit to showcase solutions andleading thinking, network and partnershipopportunities with other CE100 membersand universities, and executive education.
1The limits of linear consumptionExamining the success and limits oflinear consumption and the power ofthe circular economy concept to breakthrough the linear ‘dead end’.
14 | TOWARDS THE CIRCULAR ECONOMY 1. The limits of linear consumption With around USD 12 trillion in annual sales3, As a result, consumer demand from emerging the fast-moving consumer goods industry economies has the potential to exponentially is a force to reckon with in the global increase the use of materials, bring about economy. While expenditure levels for dramatic rises in input costs, and result in such goods are vastly different across the hard-to- manage commodity volatility. In the globe, they represent a significant share of face of unprecedented resource demands, household budgets in both developed and radical resource efficiency will no longer suffice. emerging markets4. The influence of the Efficiency can lower the amount of energy and sector stretches beyond its financial impact: materials used per dollar of GDP, but fails to it takes in approximately USD 3 trillion decouple the consumption and degradation of worth of materials5 and is responsible for resources from economic growth. This calls for the vast majority (75%) of municipal solid system level redesign. The circular economy waste6. It also drives a large share of losses provides a model which, if implemented in virgin forests due to the conversion of correctly, would go much further than land for agricultural use, one of the key minimising waste. Effective cycling of the many supply sectors for the packaged goods materials our society discards would enable us industry7. If we are to move to a circular to rebuild our natural assets—soil and soil quality economy, it is therefore critical for us to in particular—so crucial to continued prosperity. address consumer products head on. We’re sitting on a consumption Circular patterns vary over time and geography time bomb The material impact of the consumer goods Historically, consumer industries operated industry is set to rise exponentially, driven by using more circular principles. A large a growing middle class in emerging markets: proportion of food was grown locally, three billion additional consumers in the next bought loose and prepared in the home, 20 years, with a higher propensity to buy without further processing. Packaging manufactured goods (Figure 1). This will be was generally owned by the consumer, driven by the following factors: and almost entirely reused, while apparel would be repeatedly repaired and • Far more consumers. The OECD estimates reused, and often passed down through that the global middle class will increase generations. A larger share of edible food from 1.9 billion in 2009 to 4.9 billion in 2030 would be consumed (e.g., vegetables with with almost 90% of the growth coming from slight blemishes); unavoidable food waste the Asia-Pacific region8. would be cycled for use in animal feed. Human and animal waste was seen as a • Much higher consumption. The advent of valuable resource and cycled, typically disposable incomes to many more households back onto the land and sometimes their means that a large number of consumers will chemical value would be extracted, such move from ‘doing without’ to enjoying the as in tanning and dyeing processes.3 Euromonitor 2012 benefits of their improved financial position by buying more items. Consumption in In short, the idea that ‘waste equals4 Approximately 23%-28% emerging markets is expected to rise to food’ was very much part of all aspectsin USA (U.S. Bureau of LaborStatistics) and 52%-64% in USD 30 trillion per year by 2025, up from of daily life. While Western countriesChina (China national statisticsyearbook) USD 12 trillion in 2010. The rise in disposable have largely abandoned such systems income is in part dependent on the health and habits, much of consumption in the5 Euromonitor 2012, expertinterviews of the global economy, and prospects for developing world still functions using a sustained growth in the linear economy may more circular model, with far more active6 US EPA 2010 be limited by resource constraints. cycling of discarded materials, especially7 TEEB: Mainstreaming food waste, much higher penetration ofthe economics ofnature—a synthesis of the • Higher material intensity. In addition, these reusable packaging, a high proportionapproach, conclusions andrecommendations of TEEB; new consumers will switch from loose, of food bought loose (e.g., vegetables2010 unbranded products to manufactured goods. from markets) or in bulk, and much more8 Perspectives on Global The material impact of such packaged goods livestock/crop integration in small-scale/Development 2012, Social is much greater, both because of processing subsistence farming.cohesion in a shifting world.OECD losses and packaging.
TOWARDS THE CIRCULAR ECONOMY | 15FIGURE 1 A potential consumption time bomb12010-2025 1.1bn more people Dramatic shift to packaged products RICE FLOUR 1.8bn more middle-class consumers Much greater waste at end of life SUPER $ $$$ Food: Caloric consumption Food spending Packaging End-of-life materials +24% +57% +47% +41%1 Estimate based on the comparison of low-income countries or population segment (e.g., India) and middle/high income countries and segments (e.g., US)SOURCE: World Bank. Ellen MacArthur Foundation circular economy team
16 | TOWARDS THE CIRCULAR ECONOMY 1. The limits of linear consumption Continued The consumer goods industry— time, or just a few times. This is obviously locked in a linear paradigm? very different from the relatively expensive durable consumer and business-to-business A key insight in circular economy thinking is products, where use is measured in multiple the division between biological and technical years, and where the case for reconditioning, materials. Biological ‘nutrients’ (cf. Braungart repair or recovery of the value inherent in the & McDonough) are designed to re-enter products is more obvious. the biosphere safely for decomposition to become valuable feedstock for a new cycle— • Packaging component. Consumer goods i.e., ‘waste equals food’. These products generally contain two components: the are designed by intention to literally be product itself, and its packaging (part of consumed or metabolised by the economy which is usually discarded immediately the and regenerate new resource value. Technical product is used). The impact of producing ‘nutrients’ are materials that either do not and discarding materials is significant for degrade easily or cause contamination both product and packaging, so we need to within the biological nutrient flow. These explore solutions for each. durable materials and products are designed by intention to retain embedded quality • Multi-staged value chain. Consumer and energy. products are created, sourced and used via a global value chain, starting with raw At first glance, it might appear harder to agricultural and chemical inputs. These adopt circular principles in the consumer go through a manufacturing process, a industry than in the durable goods sector, complex distribution and retail chain, use given some of its intrinsic characteristics. by consumers, and waste collection, before Consumption in reality mostly means typically ending their lives in landfill, sewage ‘destruction’ and the loss of potentially or incineration. Importantly, manufacturers, valuable products, components, and retailers and waste handlers are usually materials—and their associated embedded separate parties (unlike in some durable energy and restorative value. categories such as automotive), and frequently have misaligned or competing In addition to this, adoption of circular interests. This means that to create approaches in the consumer goods industry successful new circular models, we need is complicated by four factors: to assess their impact on profitability for manufacturing, retail/distribution, and waste • Large volumes in broad distribution. handling. Fast-moving consumer goods (or ‘consumer packaged goods’) are characterised by high Waste as part of the linear system results throughput volumes, are bought frequently, in economic losses on all fronts represent a large physical volume (in developed countries, for example, consumers Declining real resource prices (especially buy almost a tonne worth of consumer fossil fuels) have been the engine of goods per year, including packaging),9 and economic growth in advanced economies come at relatively low prices (i.e., each throughout most of the last century10. The purchase is individually quite cheap). Large low level of resource prices relative to labour quantities of packaged goods typically end costs has also created the current wasteful9 EPA, Euromonitor 2012, USEconomic Research Service, up widely dispersed, rendering them more system of resource use. Reusing biologicalIRI, Veronis Suhler Stevenson,Winery and Distillery Waste difficult to recover economically, unlike and technical materials has not been aManagement, Bloomberg, SRI, mobile phones or cars. major economic priority given the ease ofRISI, Let’s Recycle, Knowaste, EyeSee Mission, ‘Waste: Uncovering obtaining new input materials and cheaplythe Global Food Scandal’, Press • Product lifespan. Most fast-moving disposing of refuse. As Jamie Lawrence,search consumer goods have a short to very short Senior Sustainability Advisor Forest and10 The low and steadily fallinglevel of resource prices, in real lifespan. Some product categories are Timber at Kingfisher, points out, access toterms, over the 20th century— literally consumed, such as food, beverages, virgin wood and fibre has been so easy inand its positive implications foreconomic growth—are discussed cosmetics, and paper tissues, meaning they the past that reusing fibre was never onin depth in the McKinsey Global are no longer fit for use after first use. Other the industry’s agenda. In fact, the biggestInstitute’s November 2011 reportResource Revolution, cited above categories are used for only a relatively short economic efficiency gains have resulted from
TOWARDS THE CIRCULAR ECONOMY | 17 FIGURE 2 Path to a circular economy—design and recover consumer goods for reuse or decomposition % of FMCG products (by value) Recovered for Not recovered2 Recovered decomposition1 for reuse3 Today 18% 80% 2% Near-term4 Future5 1 Decomposition to allow materials to be recycled or biodegraded, depending on product/packaging material characteristics and end of life collection 2 Cannot be reused, recycled or biodegraded due to poor design and/or lack of end-of-life collection options 3 Reuse can include direct reuse for the same or different value streams or industries 3 Economic feasibility demonstrated in this report 4 Economic feasibility not yet proven SOURCE: Euromonitor 2011, Expert interviews, Ellen MacArthur Foundation circular economy team using more resources, especially energy, to • Value lost in agriculture. A large share of reduce labour costs. Such a system had few inputs for the consumer goods production difficulties delivering lower costs as long as system originates in the agricultural supply the fiscal regimes and accounting rules that chain. Losses of such material occur at govern it allowed many indirect costs to several different steps in the production of remain unaccounted for—the externalities. crops and in animal husbandry : losses due A systems analysis, however, reveals losses to mechanical damage or spillage during throughout the value chain. harvest, animal death during breeding, or discards during fishing (globally this The picture is similar in the consumer goods amounts to 8% of catches).11 Crops sorted out sector. Globally, only 20% of FMCG products post-harvest due to product specifications are currently recovered at the end of their are another source of loss (especially true useful life, largely through ‘decomposition’ in of fruits and vegetables in industrialised its broadest sense—the cascading of waste countries), as well as spillage or degradation and by-products through adjacent supply during transport and storage, exacerbated by chains, recycling of used products and ever-longer global supply chains. packaging, and the return of nutrients to the soil (Figure 2). Very little reuse occurs today, • Value lost in processing. In the production partly, of course, because of the one-off of consumer goods, significant volumes nature of consumption, but also because of of materials are commonly lost during the preponderance of single-use packaging. processing. The Food and Agriculture The materials left unrecovered—landfilled, Organisation estimates that 8-12% of total incinerated, or lost in waste water—can be food inputs are lost in the processing stage.1211 FAO: Global Food Losses observed all along the value chain, from Such losses can either be due to the specificand Food Waste—Extent,causes and prevention, 2011 production to post-consumption. process (e.g., beer brewing inherently12 FAO: Global Food Lossesand Food Waste—Extent,causes and prevention, 2011
18 | TOWARDS THE CIRCULAR ECONOMY 1. The limits of linear consumption Continued generates waste volumes, with 15-20% of theoretical end of life at all because its use input materials—including water—never does not match the intent of its design. making it into the final product13), accidental (process glitches and interruptions, for Throughout the value chain, it is worth instance), or due to narrowly defined distinguishing between value losses that are product specifications—where both incoming unavoidable (bones left on the plate after materials and processed output may be consumption of meat or textile trimmings unduly discarded. after cutting patterns have been optimised for yield), losses that are avoidable (dairy • Value lost in distribution. In low-income losses due to inadequate cold chains or countries, fruit, vegetables, fish/seafood purchased but unconsumed foodstuffs), and and dairy products suffer particularly heavy those that are likely avoidable. Examples of losses during post-harvest handing and the latter include apparel discarded due to distribution—often in the region of 10 - 20% natural variations in the fibre or vegetable of the input material.14 Causes include food trimmings rejected during processing (or sales not meeting the sell-by date, being even in the kitchen) that are the result of stored under the wrong conditions, or failing overly strict specifications. While food loss to meet tight retailer standards. statistics typically only take into account the share of crops and products intended for • Value lost in use. In medium- and high- human consumption, it is important that all income countries, a large proportion of losses and waste are investigated for further products are not put to the use for which useful applications. they were purchased. This applies especially to food (the average U.S. family throws Everyone loses out in the linear approach away half the food they buy, worth USD 164 billion)15 as well as to other consumer The material losses that have been described product categories. Cosmetics for example along the value chain impact the economy are frequently left unfinished. Many clothes in very direct ways, as they are associated are only worn a few times before being with real costs for both producers and disposed of or forgotten. U.K. households for consumers. These financial effects will be instance have around USD 50 billion worth of sustained and possibly exacerbated farther clothing in their wardrobes that has not been out as our natural capital becomes eroded worn for a year.16 and declines in performance over time. Moreover, the entire economic system is • Value lost at end of life. A large proportion starting to experience a whole new level of of consumer goods are wasted at the end risk exposure. Nowhere does this play out of their first use. Packaging, food waste more explicitly than in our agricultural supply and discarded textiles often end up in chain, as the next section will explain. landfill where they have zero value; in fact, they attract additional costs for collection Cost burdens and disposal. Current recycling rates are Recent spikes in input costs are an indication significant for only a handful of waste that the industry may be reaching a limit types—mostly those that occur in large, where demand starts to accelerate ahead of fairly homogeneous volumes. Packaging is an ever more constrained supply. Most inputs perhaps the most widely recognised source to consumer goods, both agricultural and13 Expert interviews, Ellen of waste. technical in nature, have seen high prices andMacArthur circular economyteam. Every litre of beer unprecedented levels of volatility in recentproduced generates between • Value lost in design. Durability of design years, creating pressure on companies’150 and 200 grams of brew-ers grains and durability required in use are often not profitability. Businesses are feeling squeezed14 FAO: Global Food Losses well matched. Packaging, if used only once, between rising and less predictable pricesand Food Waste—Extent, should be designed for ‘decomposition’ and in resource markets on the one handcauses and prevention, 2011 subsequent regeneration, whether through and stagnating demand in many mature15 FAO: Global Food Losses the biological sphere, or—if it can be isolated consumer markets on the other.and Food Waste—Extent,causes and prevention, 2011 and processed easily and at extremely high16 WRAP, Valuing our levels of recovery— the technical sphere. Rising commodity prices. Commodityclothes, 2012 Clothing today frequently does not reach its prices fell by roughly half in real terms over
TOWARDS THE CIRCULAR ECONOMY | 19 the course of the 20th century. However, for instance, PepsiCo announced that they the start of the new millennium marked a expected input costs for the fiscal year to rise turning point when the real prices of natural by USD 1.4 – 1.6 billion, or between 8 and 9.5% resources began to surge upwards. In a trend of total input costs, due to commodity price separate from the financial and economic increases.20 PepsiCo also said they did not crises, commodity prices in aggregate plan to fully offset these losses through price- increased by nearly 150% from 2002 to hikes—highlighting another, parallel trend 2010, erasing the last century’s worth of in which firms face a profit squeeze due to real price declines. Price increases have hit softer demand.21 Similarly, H&M, the clothing not only metals, such as gold and copper, company, suffered from a significant drop in but also direct inputs for consumer goods. profits in 2011 due to rising cotton prices that In 2011, for example, cotton prices in the they did not pass on to customers through US surged almost 40% in two months and higher prices or lower quality.22 remain at levels double the pre-2007 price of cotton.17 Similarly, polyester prices increased Loss of energy. Another financial and from USD 1.3/kg in 2010 to USD 2.1/kg in economic impact of note in the linear 2011. Meanwhile, average clothing prices economy is the associated energy lost decreased from an average of USD 15.2 per whenever materials are discarded somewhere garment in 2006 to USD 14.9 per garment in in the value chain. The consumption of energy 2011.18 The combination of higher input costs for biological inputs is significant. In the U.S., and lower retail prices is putting pressure on for example, food production and preparation producers’ margins and forcing them to seek represents 17% of all energy demand.23 The ways to control rising input costs. incineration of discarded process waste or end-of-life products recoups only a small Increasing price volatility. At the same share of this energy. time, the last decade has seen higher price volatility for metals, food and non- Erosion of natural capital food agricultural output than in any single17 Indexmundi, average decade in the 20th century.19 High prices are Natural capital and ecosystem servicesspot price for a pound ofupland cotton one issue; their volatility is another. Higher volatility of resource prices can dampen Natural capital is the potential value18 Price for 1.4/1.5 denierstaple fibre economic growth by increasing uncertainty, held in natural resources, which include and this may discourage businesses from mineral assets but also extend to19 Annual price volatilitycalculated as the standard investing. Volatility-induced uncertainty biodiversity and ecosystems on whichdeviation of McKinsey also increases the costs of hedging against human activity and welfare depend.commodity subindicesdivided by the average of resource-related risks; in his book ‘Antifragile’ As defined by Robert Costanza at thethe subindex over the timeframe; Source: McKinsey Nassim Taleb states that the value at risk University of Maryland in a seminal articleGlobal Institute: Resource of black swan events like Hurricane Sandy published in Nature: ‘Ecosystem servicesrevolution: Meeting theworld’s energy, materials, cannot possibly be estimated—effectively consist of flows of materials, energy, andfood, and water needs, rendering such future events uninsurable. information from natural capital stocksNovember 2011 Both prices and volatility are likely to remain which combine with manufactured20 ‘Pepsi faces steep input high for a number of reasons. One is that and human capital services to produceprice inflation’, FinancialTimes, 10 February 2011 populations are growing and urbanising, human welfare.’24 These services include21 ‘Tata Steel Q2 net profit boosting demand. Resource extraction is also for example carbon sequestration, cropplunges 89%’, Economic moving to harder-to-reach, less fertile and/or pollination, or nutrient dispersalTimes, 11 November 2011 more politically unstable locations. Another and cycling.22 ‘H&M hit by soaringcotton prices’, Financial factor is that the depletion of natural capitalTimes, March 2011 and the erosion of ecosystems services are23 McKinsey Global continuing, with associated environmentalInstitute: Resourcerevolution: Meeting the costs on the rise but still largely treated asworld’s energy, materials, externalities.food, and water needs,November 2011 Curbed economic growth. Together, high24 Robert Costanza et al,The value of the world’s and volatile commodity prices dampen theecosystem services andnatural capital, Nature Vol. growth of global businesses—and ultimately387, May 15, 1997 the economy at large. In February 2011,
20 | TOWARDS THE CIRCULAR ECONOMY 1. The limits of linear consumption Continued Disposal’s heavy toll. Regardless of the In other words, the global economy is inherent lost value of discarded items, now reducing the Earth’s natural capital, where these items end up is problematic and is unable to generate the necessary in and of itself. From Greece to Indonesia surplus to rebuild the deficit.28,29 Take land and Mali to Kazakhstan, large shares of degradation.‘Today’s agriculture does not municipal solid waste end up in dumps or allow the soil to enrich itself, but depends sub-standard landfills. If not conducted on chemical fertilisers that don’t replace the25 CO2e stands for carbon properly, dumping or landfilling creates both wide variety of nutrients plants and humansdioxide equivalent. This is ameasure used to compare short- and long-term risks for human health need’ says Dr Tim Lobstein, the U.K.’s Foodthe emissions from variousgreenhouse gases based and the environment in the form of harmful Commission director.30 Land degradationupon their global warming leachate, dust, odour, local traffic burden, costs an estimated USD 40 billion31 annuallypotential. For example, theglobal warming potential for and powerful greenhouse gas emissions. worldwide, without taking into accountmethane over 100 years is 21. Any biodegradable material, from kitchen the costs of increased fertiliser use, loss ofThis means that emissionsof one million metric tons waste to paper and cardboard to wood and biodiversity, and loss of unique landscapes.of methane is equivalent toemissions of 21 million metric natural textiles, generates landfill gas when ittons of carbon dioxide decays under anaerobic conditions. Landfill Global scope of risk exposure(http://stats.oecd.org/glossary/detail.asp?ID=285). gas consists of around 50% methane, which Concern over the economic costs of the is a greenhouse gas over twenty times more linear economy has recently been joined by26 U.K. Department ofEnergy and Climate Change powerful than CO2. For each U.K. household, worries over the uncertain effects of climatestatistics, 2012 landfilled clothing results in 1.5 million tonnes change and geopolitical interconnectedness.27 One compelling and of CO2e25 emissions per year—0.3% of totaloften overlooked exampleof such ecosystem emissions.26 Even sanitary landfills can be Recent research has highlighted nineservices is healthcare: the problematic as they require substantial space interlinked ‘planetary boundaries’—pharmaceutical industrymakes heavy use of close to centres of consumption where land thresholds that, if crossed, represent abiodiversity. Of all the anti-cancer drugs available today, comes at a premium, and they are usually significant risk to the resilience of the world’s42% are natural and 34% difficult to site due to community concerns, social and economic structures, especiallyare semi-natural. Source:Newman DJ, Cragg GM. so all but a handful of areas are running out for the most vulnerable communities, andNatural products as sources of space. Beijing will have no more landfill could potentially destabilise the widerof new drugs over the last 25years. J Nat Prod. 2007 space in 4 years’ time, Johannesburg in ecosystem.32 Examples of these thresholds28 Ruth DeFries et al, around 12 years, and the entire U.K. will run are greenhouse gas emissions that induceMillennium Ecosystem out of landfill capacity by 2018 if it continues climate change, rates of biodiversity loss,Assessment, Current State &Trends Assessment, 2005 its current disposal practices. and interference with global phosphorus and nitrogen cycles. A recent study by the29 Will Steffen et al, TheAnthropocene: From Moreover, much consumer goods waste Economics of Climate Adaptation WorkingGlobal Change to PlanetaryStewardship, 2011 never enters a waste collection system, Group that focused on the economic impact instead ending up as litter, giving rise to a of current climate patterns and potential30 www.guardian.co.uk/uk/2006/feb/02/ familiar list of problems. Unmanaged waste climate change scenarios in 2030 found thatfoodanddrink can lead to the injury and death of local some regions were at risk of losing 1 to 12%31 Klaus Kellner et al, wildlife and end up offshore where it can of their GDP annually as a result of existingTerminal Evaluation ofthe UNEP/FAO/GEF accumulate on beaches, in open waters (cf. climate patterns.Project ‘Land Degradation the Pacific Garbage Patch) in fish, birds, andAssessment in Drylands(LADA)’, May 2011 other animals—and ultimately in our own Geopolitical risk. The destabilising effects food chain. Because it is unsightly, litter can of such losses also translate into greater32 Johan Rockström etal, Planetary Boundaries: also impact the attractiveness of a location political risks. Recent history showsExploring the Safe OperatingSpace for Humanity, Ecology as a tourist destination or for business. the impact political events can have onand Society 2009 commodity supply. Rising grain prices are33 McKinsey Global Institute: The erosion of ‘ecosystem services’. The loss considered a factor that contributed toResource revolution: Meeting of those benefits derived from ecosystems the ‘Arab Spring’ unrest (grain prices rosethe world’s energy, materials,food, and water needs, that support and enhance human wellbeing by 37% in Egypt in 2007-2008).33,34 SomeNovember 2011 also deserves our full attention.27 The commodities are particularly vulnerable:34 The Observer, 16 July 2011 Millennium Ecosystem Assessment examined nearly half the new projects to develop35 Political risk as per the 24 ecosystems services, from direct services copper reserves are in countries with highEconomist Intelligence Unit’s such as food provision to more indirect political risk.35 Approximately 80% of allPolitical Instability Index.Countries scoring more services such as ecological control of pests available arable land on earth lies in areasthan 5.0 on ‘underlyingvulnerability’ are classified as and diseases, and found that 15 of the 24 afflicted by political or infrastructural issues.‘low political stability’ are being degraded or used unsustainably. Some 37% of the world’s proven oil reserves
TOWARDS THE CIRCULAR ECONOMY | 21 and 19% of proven gas reserves are in industrial areas, with knock-on effects in the countries with a high level of political risk. global automotive and computer industries: Political motives also drive cartels, subsidies, a quarter of the world’s computer hard disks and trade barriers, all of which can trigger or are made in Thailand.38 worsen resource scarcity and push up prices and volatility levels. The end of agriculture as we know it Greater interconnectedness of resources is a related issue. Commodity prices now show The agricultural supply chain is the most significant correlation with oil prices—and important supply chain for the consumer this holds true not only for metals and mining goods industry. Agricultural demand, products, but for food categories such as which has seen strong growth in the past, maize, wheat, and rice as well as beef. These is expected to keep expanding as both links increase the risk that shortages and populations and incomes rise. By 2030, price changes in one resource can rapidly demand for the top four agricultural spread to others. products—rice, wheat, soy and maize—is expected to rise 40 - 50% above 2010 The swift integration of financial markets levels.39,40 It is therefore worth contemplating and the increasing ease of transporting how the material losses, financial effects and resources globally also mean that regional especially systems implications play out in price shocks can quickly become global. As this sector. the World Bank’s ‘Turn Down the Heat’ report notes, specialisation in production systems Historically, the application of technology is continuing its unstoppable evolution and and products, particularly the combination of has gone international: our dependence on irrigation, mineral fertilisers, and pesticides infrastructure to deliver produced goods is used in the ‘Green Revolution’, have therefore growing—and with it, our economic generated impressive results, allowing supply exposure to events across the world. to keep pace with the increase in demand Natural catastrophes with ripple effects are (Figure 3). There are, however, signs that the numerous in recent history: Hurricane Sandy agricultural system as we know it is reaching (with costs estimated at USD 100 billion) its limits. The growth of grain yields has on the U.S. East Coast just last October, slowed to below population growth rates in and Typhoon Bopha in the Philippines in most regions—a sign that natural limits have December 2012 (which according to early been reached. Overall, worldwide cereal estimates caused a GDP loss of 0.3%).36 productivity growth has slowed over time from 2.7% in the 1970s to 1.3% in the 2000s.41 This trend is likely to continue and become As U.S. investor Jeremy Grantham remarked more acute as emerging markets integrate in his July 2012 newsletter:42 ‘Quite probably, more thoroughly into global value chains the most efficient grain producers are and financial systems. Many up-and-coming approaching a ‘glass ceiling’ where further economic centres in Asia, such as Kolkata increases in productivity per acre approach36 The Economist (Calcutta), Ho Chi Minh City, or Ningbo, zero at the grain species’ limit (just as raceIntelligence Unit are situated on the coast and are not only horses do not run materially faster now than37 Too big to flood, The accumulating assets at breakneck pace but in the 1920s).’ Several factors are expectedGuardian, 17 December 2012 also house growing numbers of immigrants to further exacerbate the stagnation of yield38 Too big to flood, The in low-lying, flood-prone areas.37 Because improvements, including a decrease in publicGuardian, 17 December 2012 of their role in regional and global markets, spending on agricultural R&D, increased39 USDA, FAO, expert severe damage to any of these cities by a soil degradation, greater water scarcity, andinterviewsThis includes demand from storm affects nearby and far-away regions climate change.energy and feed applications alike. The cost associated with such events is40 Food and Agriculture no longer simply that of local repairs and hasOrganization of the UnitedNations Statistical Division considerable social consequences. Large-(FAOSTAT) scale business interruption represents a very41 GMO Quarterly Newsletter, real setback in regional and potentially global‘Welcome to Dystopia’ July economic growth. 2011’s record flooding in2012, available at www.gmo.com and around Bangkok disabled several of its