Why we need a circular economy

The prosperity that we are enjoying today could largely be attributed to the industrial revolution of the 18th and early 19th centuries. Yet this enhancement of our standard of living has come at a steep price: the creation of the so-called linear economy.

In other words, we have a “take, make and dispose” economy. We take natural resources, make things and dispose of them in landfills and elsewhere.

This business arrangement in which companies operate with blinders on has created vast environmental and social consequences. Mass and conspicuous consumption, the burning of fossil fuels, the creation of dense urban environments and increased ownership of cars not only significantly endanger the natural world but will also erode our quality of life.

This path is simply not sustainable, both for the environment and the way we live.

Fortunately, more of us are reimagining the global economy and how it could function differently. That kind of thinking has resulted in many advanced ideas, such as Leader in Energy and Environmental Design (LEED) certification for “green” buildings, life-cycle sustainability assessment (LCSA) and cradle-to-cradle principles. These ideas aim to extract more value out of existing resources and illustrate how business philosophies are slowly changing.

The thinkers behind these ideas have pioneered a new standard for how the world could be run: the “circular economy.”

But the question we must ask is, can a more sustainable economy also deliver the gains in prosperity we’ve grown used to?

Problems with our existing model

The central aim of moving toward a circular economy is to improve resource productivity by keeping products and resources in use for as long as possible, through recovery, reuse, repair, remanufacturing and recycling. It is therefore, by and large, recuperative in nature. It is not so much about “doing more with less” but rather doing more with what we already have by solving the problem of low resource utilization.

At the moment, the world’s growth model wastes most of everything. Research in the US and Europe on consumption habits have shown how often the resources we reap from the Earth end up in landfills, little used. Planned obsolescence is how we live.

For instance, in any given year, only 40% of the garbage in Europe is recycled. In Germany, almost one-third of the household appliances consumers disposed of in 2012 were still functioning. Americans tossed out 141 million mobile devices in 2010 (89% went straight to a landfill). In the UK, it is estimated that as many as 125 million phones languish unused (four times the number currently in use). Cars in Europe remain parked 92% of the time, while business offices are used for less than half of working hours.

With this knowledge in hand, the opportunity for new usage efficiency across all industries and consumer lifestyles is right in front of our eyes.

Economy needs to change to survive

Though a circular economy may sound idealistic – if not like a fantasy – the truth is that the existing way of doing things is reaching the end of its utility.

Already, our economic productivity on a global level is being curbed by the rapid depletion of existing and readily available natural capital such as clean sources of potable water and forests. Since the 1970s, productivity gains in grain crops have fallen 66%, despite advances in fertilization and irrigation techniques over the decades. In a recent study by the MacArthur Foundation, it was found that perhaps 85% of Europe’s soil has been degraded.

The study also notes that mining for natural resources such as zinc has become more expensive and the quality has diminished, making it even more energy wasteful.

At the same time, resource consumption is expected to surge. According to the Organization for Economic Co-operation and Development, the global middle class will double by the year 2030. And that means even greater consumption, because we consume more as we earn more, if China’s rise is any guide.

This illustrates that we cannot continue to grow as a species and enjoy a high quality of life without changing the way we do things.

Creating a closed loop

As noted above, our primary goal in moving to a circular economy would be to preserve our way of life by making it sustainable, or technically viable indefinitely.

In a traditional linear economy, a landfill is the final stage of a resource’s life, when we can no longer make use of it. What the circular economy promotes is closed-loop recycling, which aims to reuse waste indefinitely and make new products without changing the inherent properties of the original material.

Rather than the economy or a company’s bottom line only growing from incremental cuts through efficiency gains, this economy seeks more value from existing materials in the current system. For sure, all physical materials eventually degrade. But if we can prolong their use as long as possible, we will gain more in value by extracting much less.

In a nutshell, the circular economy’s goal would be to decouple economic growth from resource consumption, allowing prosperity to continue rising while using less oil, minerals and other spoils of the Earth.

A piecemeal approach isn’t enough

On a small scale, many companies are already working on the problems of resource usage efficiency by developing new technologies, such as those underlying the so-called sharing economy.

Car sharing, for example, may reduce the number of vehicles on the road, or at least limit their growth, while apartment sharing provides a smart means to use our residences more efficiently, by making use of the assets in a more resourceful way. Not only does it reduce the environmental impact of our actions, but it also generates new revenue streams.

Or in a traditional industry such as carpet manufacturing, some companies are looking beyond efficiency gains in operations and supply chains to improve profitability. Dutch carpet specialist Desso, for one, focuses on ensuring all materials used are recycled, reused or remanufactured – and are not toxic.

But solutions within a single industry or company aren’t going to cut it, because this effectively ignores the needs of the overall system. It would be much better if all the players across the value chain from extraction to consumption teamed up to systemically alter the functioning mechanism of how products are produced.

Moreover, if we fix the problem in such a piecemeal way, we risk causing a so-called “rebound effect.” That is, efficiencies gained in one area – by driving less, for example – end up being offset by all those savings being spent consuming more of something else. We spend less on cabs and fuel but use that money to buy more gadgets.

For these reasons, we need the holistic and collaborative approach embodied in the circular economy to maximize the benefits of these new technologies.

A blueprint for fundamental change

The business case for such an economy is obvious: buying less and reusing more – in other words, increasing resource productivity – will reduce costs and efforts while improving efficiency, thus benefiting the bottom line. But the implications of greater resource productivity aren’t merely incremental.

Resource productivity has the potential to fundamentally change the way we produce products and services as well as create more value on both a micro and macro level. As such, the circular economy is a blueprint for claiming long-term sustainability and economic prosperity for companies and countries alike.

This article is published in collaboration with The Conversation. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Mark Esposito Professor of Business & Economics at Grenoble Ecole de Management and Harvard Extension School, Harvard University. Terence Tse is Associate Professor of Finance / Head of Competitiveness Studies at i7 Institute for Innovation and Competitiveness, ESCP Europe. 

Image: A labourer builds components of wind turbines at a wind power equipment factory in Zouping, Shandong province May 18, 2011. REUTERS/China Daily