Ellen mac arthur foundation towards the circular economy vol.1
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