Why Circular Economy is not always Cost-Efficient
Prof Dr. Bibhas K Mukhopadhyay
In the living world, there is no landfill, instead, materials simply flow. The waste of one species is food for another. Things grow, fade in time, and nutrients safely return to the soil. We, humans, however, prefer the linear approach of ‘Take. Make. Dispose’. With increasing existing and new needs, we eat into the finite set of resources and therefore - more and more waste, less and fewer resources available. Our linear ‘take-make-dispose’ approach is leading to scarcity, volatility, and pricing levels that are unaffordable for our economy’s manufacturing base. A circular economy is an industrial system that is restorative or regenerative by intention and design which leads to a more ‘Make. Use, Return’ approach,
In 2021, the European Parliament defined the circular economy as “a model of production and consumption, which involves sharing, leasing, reusing, repairing, refurbishing and recycling existing materials and products as long as possible. In this way, the life cycle of products is extended.”Three components that could be picked up from this fairly spot-on definition of circular economy are how we could a) Reduce waste to a minimum, b) After a product reaches the end of its life cycle, the raw materials could be disassembled and kept within the economy wherever possible in order to be able to use them again, thereby creating further value. It replaces the ‘end-of-life’ concept with restoration, shifts towards the use of renewable energy, eliminates the use of toxic chemicals, which impair reuse, and aims for the elimination of waste through the superior design of materials, products, and business models.
- Towards a ‘Make, Use, Return’ Model
The central idea around the circular economy is to move towards a more ‘Make. Use. Return’model, and marrying resourcefulness, design thinking for products built to last and recyclable, retrieving raw materials, and change in ownership models. In 2015, the Ellen MacArthur Foundation demonstrated that a circular economy could boost Europe’s resource productivity by 3 percent by 2030, generating cost savings of €600 billion a year.
Three examples, a) Clothing businesses have actively taken steps towards embracing circular economy practices, while some firms in the apparel industry have formed coalitions to promote nontoxic chemicals, improve cotton farming, and others are developing standards for garments that are reused or recycled. There is great scope for investing in the development of new fibres that lowers the environmental effects of production. B) Recovering the material value of bottles, from mixed recyclables or bottle-to-bottle recycling, could lead to a much higher payout. Metals, meanwhile, are commonly extracted from tires in open backyard fires—at great cost to both human health and the environment. Aggregating tires for use as industrial fuel could increase their value almost tenfold while crumbling them to make road-paving material yield even more. C) Dell has incorporated recycled plastics into its products, using the world’s largest takeback program of used electronics. Their cloud service lines provide customers with computing capabilities while eliminating the need for physical assets, reducing costs and carbon footprints. All these practices, as mentioned above, can help companies extract additional value from leakages or waste in the production process.
- Strategies for ‘Cradle to Cradle’ and not ‘Cradle to Grave’, with Examples
A Harvard study reviewed the manufacturing sector, the clothing, and furnishing in particular, and provided an understanding of the different strategies that embed a functioning circularity in this sector. Firstly, the study suggests that companies should consider leasing products instead of selling them, in this case, they can retain the continuity or circularity on an ongoing basis. From a stakeholder perspective, this also means that the companies remain responsible for the products after the consumers are finished with them.
Xerox, for example, over the years have followed this model where they leased their printers and photocopiers to corporate clients rather than selling. Clearly, it also entails ongoing after-sales and repair costs but is still more sustainable than replacing the devices after their life cycle ends.
Similarly, robes used at graduation ceremonies, companies have been renting them to grandaunts instead of selling them (there is a choice!). The company ‘rent the runway’ also rents designer clothes for one-off events which also boosts their brand value given the nature of the business since the apparel sector has evidently large amounts of waste contribution every year.
Secondly, also follows from the first one in principle – companies designing products that would have a longer product life cycle. A longer life span of a product would mean there will be fewer repeat purchases and at the same time, companies can leverage ‘durability’ as a competitive advantage over their rivals. This can also give them access to new markets and also price their products higher given the premium or differentiation nature of their offering.
For example, Bosch Power Tools extends the life of its used tools by remanufacturing them, this enables them to compete with new products from cheaper competitors.
Thirdly, companies can embed the recycling aspect during the product development stages and planning process. The idea here is to make sure that the product planning stages have considered the maximum recoverability of the materials used in the new products.
For example, Adidas partners with Parley, the latter makes textile thread using plastic waste from which Adidas manufactures its shoes and apparel. End result is less plastic at the bottom of the ocean.
- CAUTION: Barriers and Practical Challenges to Circularity
Fundamentally, the move from 'Take. Make. Dispose' to 'Make. Use. Return' and the graduation transition from 'cradle to grave' to 'cradle to cradle' calls for a new contract between businesses and their customers based on product performance. Unlike in today’s ‘buy-and-consume’ economy, durable products are leased, rented, or shared wherever possible.
Having said all the above pluses, some markets would rather stick with the ‘linear’ economy due to increased externalities, high transaction costs, and low volume. Several studies conducted by the Stockholm Resilience Centre, MacArthur Foundation, and World Resources Institute shed certain interesting perspectives. Firstly, adding environmental externalities [ e.g., extraction and the use of resources cause environmental costs] does make the circular economy more expensive. Externalities often fall outside of the current market mechanism and therefore remain unpriced and costs-wise, it would seem a lot cheaper to use secondary than primary resources. However, as long as externalities are not fully taken into account, the financial costs of using primary resources will in many cases be less than the costs of secondary resources. This puts the CE at a competitive disadvantage over the current linear economy.
Secondly, we must also consider the growing transactional and operational costs add to the burden and acts as a barrier to the circular economy. These costs include the costs of tracking down second-hand goods, finding suitable partners, organising reverse logistics, and negotiating the terms of the collaboration. The shift to a CE also implies an expansion of reuse and recycling activities, which are more labour-intensive. This will drive up operational costs related to collecting, sorting out, and processing of disposed goods.
Thirdly, volumes are too low for circular markets. The circular economy depends on markets for secondary resources and second-hand goods. Many of these markets are still absent due to insufficient demand or supply. There are scenarios where potential demand for circular goods is in place, but a lack of knowledge, willingness, and/or value chain coordination hinders the manifestation of circular supply. In addition, the lack of consumer demand is also a problem. However, the volume will be less of an issue for value chains that depend on physically scarce resources and/or that are less immune to geo-political supply risks. In other words, as the price of such goods and services goes up, markets will gradually be more inclined to go for a reuse and recycle mindset. So, in summary - conventional circular strategies need more intensive value chain cooperation; and it also requires secondary markets to emerge.
D. Potential win-win for Economies, Companies, and Consumers
Circular economy practices help Economies win in terms of substantial net marginal savings, mitigating price volatility and correspondent supply risks, sectoral shifts, and also a significant reduction in externalities. At the same time, companies also win with reduced material bills and warranty risks, improving customer interaction and building loyalty [when products are returned to the manufacturer at the end of the usage cycle requires a new customer relationship where consumers become users. Companies also start encountering less product complexity and more manageable life cycles.
And finally, consumers win with expanded choice and convenience, avoiding premature obsolescence and bringing down total ownership costs, and finally secondary benefits when products deliver more than their defined basic function, e.g., carpets used as air filters or packaging as fertiliser. The challenge in some markets with mainstreaming the circular economy is dependent on the heavy shift in the mindset in consumer behaviour. Markets have opened up to the philosophy and concept of collaborative consumption where there is an increase of shared cars, real estate, machinery, and daily-use items. This has also led to increased levels of transparency and consumers’ ability to comprehend and spread the word about responsible products and business practices.