Creating circular economies

The circular economy refers to an industrial economy that is restorative by intention; aims to rely on renewable energy; minimises, tracks and eliminates the use of toxic chemicals; and eradicates waste through careful design. The term goes beyond the mechanics of production and consumption of goods and services […] (examples include rebuilding capital including social and natural, and the shift from consumer to user). The concept of the circular economy is grounded in the study of non-linear, particular living systems. A major outcome of taking insights from living systems is the notion of optimising systems rather than components.
Ellen MacArthur Foundation (2013a)

Questions about how to create a circular and regenerative economy based on the resource and energy flow patterns we can observe in ecosystems have inspired thought-leaders and innovators in ecological design and ecological economics for a number of decades; now these questions are being asked by global financial institutions, the European Commission, leading companies, and mainstream consultancies like McKinsey. I choose to take this as a positive sign that the culturally creative conversations started by ecologically literate pioneers decades ago are beginning to reach critical mass for a transformational cultural response to the converging crises.†

In recent years, the work of the Ellen MacArthur foundation and its CE100 initiative has taken the conversation about how to facilitate the transition towards a circular economy into corporate boardrooms around the world. The CE100 unites businesses and local authorities in different regions around the globe with innovators in ecological design to enable rapid information exchange and collective intelligence.

The initiative aims to facilitate the swift implementation of industrial process improvements that have been estimated to be worth more than US$1 trillion to the global economy. The CE100 offers a best practice and best process database so businesses can learn from each other’s experiences. It also offers an online executive education programme to help get industry leaders and their management teams on board and informed.

The kind of transformation needed to implement the circular economy approach locally, regionally and globally can only occur if it is driven by widespread cross-sector collaboration. Business leaders are waking up to the multiple benefits of focusing on collaborative advantage rather than competitive advantage. Regenerative systems are defined by collaboration and win-win-win solutions, rather than competition and zero- sum games creating winners and losers.

Walter Stahel (2014) highlights characteristics of a circular economy that distinguish it from a linear economy based on extraction, production, consumption and disposal (waste):

  1. “The smaller the loop (activity-wise and geographically) the more profitable and resource efficient it is.” The aim is not to create one globalized circular economy, rather, the most effective strategy is to appropriately scale-link multiple circular economies at local, regional and global scales.
  2. “Loops have no beginning and no end”, so they require continuous collaboration along the entire value chain.
  3. “The speed of the circular flows is crucial: the efficiency of managing stock in the circular economy increases with a decreasing flow speed”; and therefore companies will have to rethink strategies based on ‘planned obsolescence’ and create high-quality, durable products.
  4. “Continued ownership is cost efficient: reuse, repair and remanufacture without change of ownership save double transaction costs.” This creates an incentive for companies to sell (lease) the use or service provided by their products, rather than the products themselves.
  5. “A circular economy needs functioning markets”.

The current market system, far from being a free market, is regulated in ways that privatize profits and externalize the costs of the social and environmental damage done in the manufacture, distribution and disposal of the product as collateral damage rather than including them in the true cost accounting of a given product. To create functioning markets we need legislation insisting that social and environmental costs are included in product pricing, and a shift from taxing work to taxing resource and energy use.

The shift from a linear to a circular economy has multiple economic, social and environmental benefits. In 2014, McKinsey staff suggested that the circular economy is already “starting to help companies create more value while reducing their dependence on scarce resources”. They concluded that “the era of largely ignoring resource costs is over” and that business leaders are starting to ask the important question: “Could an industrial system that is regenerative by design — a circular economy, which restores material, energy, and labour inputs be good for both society and business?” (Nguyen et al., 2014).

Renault has already created a remanufacturing plant where many mechanical components for their cars are remanufactured. Design for disassembly, closed-loop material recycling and working systemically along the entire supply chain have brought increased profitability along with a wide diversity of environmental benefits. Renault is applying Horizon 2 innovation by taking already profitable steps towards a circular economy. The team at McKinsey highlighted that there is:

a growing body of evidence suggesting that the business opportunities in a circular economy are real — and large […] In fact, our research suggests that the savings in material alone could exceed $1 trillion a year by 2025 and that, under the right conditions, a circular economy could become a tangible driver of global industrial innovation, job creation, and growth for the 21st century.
Hanh Nguyen et al. (2014)

The CEO of Philips, Frans van Houten, believes we are “on the cusp of a new economic revolution” and will need a fundamental rethink of how we define ‘value’ and ‘ownership’. In line with Stahel’s insights about the optimal functioning of circular economies, he suggests: “Perhaps instead of selling products, businesses such as Philips should retain ownership and sell their use as a service, allowing us to optimize the use of resources” (van Houten, 2014). In an interview about work within Philips he said: “It’s rewarding to see how enthusiastic people can be when they learn what they can do from a circular thinking point of view” (Fleming & Zils, 2014). Enthusiasm is kindled by meaning rather than money alone. Given the chance, most people would prefer that their daily work contribute to the creation of a regenerative culture rather than simply to paying their bills on the Titanic.

To what extend this upsurge in interest in the ‘circular economy’ will lead to true Horizon 2+ innovation that builds a bridge towards the wider cultural transformation (H3), rather than being captured by ‘business as usual’ (H1) and turning out to be H2- innovation, will depend how deeply this approach transforms the businesses and institutions that engage with it. If large multinational companies retain ownership over their products and only sell access to them, this could further drive inequality and create unfair dependencies for the product users.

In order to achieve H2+ and H3 type transformation, the multiple social, economic and environmental benefits of the circular economy approach have to be communicated to, and understood by, the entire workforce not just top management. The technical changes in product design, production processes and product life-cycles need to be contextualized within the wider cultural change towards thriving local and regional communities and a regenerative culture. Transformative change in production and consumption will not just be a change in the how, but also a change in why and as such it will transform the very nature of large corporations. I believe their future lies in the role of global knowledge partners that support distributed manufacturing by facilitating global-local collaboration.

The schematic diagram in Figure 24 was created by the Ellen MacArthur Foundation and maps out the various elements of a circular economy.

I have had the opportunity to experience first-hand how the vision of co-creating a regionally based circular economy project can inspire people and create widespread collaboration among previously isolated stakeholders. While the ‘Glocal-project’ on Majorca for Ecover and in collaboration with Forum for the Future, mentioned in Chapter 5, was put on hold after the initial pilot, it has already created a shift in attitude among many of the island-based participants. Our work has seeded a new way of thinking that is more systemic, explores the potential of closing the loops, and the collaborations necessary to do so effectively. Other companies are beginning to show an interest in this long-range innovation experiment in how to create island-scale circular bio-economies.

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Another Forum for the Future project with the aluminium recycling specialist Novelis Inc. supported the creation of the world’s largest aluminium recycling facility in Germany. The facility is expected to process 400,000 metric tonnes of aluminium scrap every year in an optimized process that reduces carbon emissions and makes this valuable metal available for reuse in the can and automotive industry. The shift is from traditional ‘supply chain thinking’ to ‘value network thinking’. The approach creates and incentivizes new ways to collaborate in the creation of win-win-win solutions.

John Gardner (2014), vice-president and chief sustainability officer at Novelis, calls this “disruptive innovation through collaboration”. Once the circular economy approach is more effectively linked with a re- regionalization of production and consumption this disruptive innovation will turn into transformative innovation for regenerative cultures. Regionally, circular bio-economies will create jobs and vibrant regional economies.

[This is an excerpt of a subchapter from Designing Regenerative Cultures, published by Triarchy Press, 2016.]

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