Overcoming economic barriers to a circular system

Circular Economy, cradle-to-cradle, beyond take-make-waste, the new material flow model… There are many names for the idea that our current linear resource-extraction and -use model might be less than perfect – but have any of them really caught on?

Faced with rapidly progressing environmental degradation, we must think about regenerative rather than consumptive modes of living on this planet. Whilst we are not directly “running out of materials […] our economy depends on the productivity […] of biological systems that start to default.” (a). The concept of a Circular Economy is thus compelling, and has achieved some popularity with policy makers, businesses and consumers. But as intuitive as the idea sounds, examples of its application remain scarce (b) . Successful, large-scale circular systems are rare and academic research remains fragmented. Of course, systemic change is difficult to accomplish and hugely path dependent. Understanding what currently stands in the way of faster change is therefore key. In what follows, we aim to explore some of the challenges the Circular Economy is facing today. Ultimately, these barriers can be translated into areas for policy, companies and individuals to tackle.

Broadly speaking, the Circular Economy (CE) is a model of production and consumption in which existing materials and products are shared, leased, reused, repaired, reconditioned and recycled for as long as possible. In this way, the useful life cycle of the materials and products should be maximized (c) . Whilst this loose description gives a good idea of what CE is about, the (academic) literature is missing a universally accepted definition. In their paper “Circular Economy as an Essentially Contested Concept” from 2018, Korhonen et. al highlight that the concept is “based on a fragmented collection of ideas derived from various scientific disciplines” such as industrial ecology, product-service systems, material sciences, ecological economics and others. Out of some 40 shortlisted academic papers, only eight were found to even contain a definition of CE, all of which differed in their foundations.

These conceptual challenges highlight both a weakness and a strength of CE: On the one hand, a field that aims to redefine nothing less than the way we produce and consume by definition has to have the ambition to be interdisciplinary, complex and take a holistic approach. On the other hand, lack of quantifiable outcomes, “solid theoretical foundations” (d) and “actual scientific research” (e) are an easy point of criticism. More challenging yet are persistently unanswered questions in broader economic theory about the moral role of social needs and economic growth. These questions crystallize in the circular economy debate but are really lingering below most economic frameworks.

The Ellen MacArthur Foundation, a leading think-tank on the topic, describes a Circular Economy as resilient in the long term, creating positive, society-wide benefits and solving environmental issues – all whilst generating profitable and scalable business opportunities. A vision that sounds almost too good to be true. Why are we not just going for it?

As hinted at above, there is a broader debate about the necessity and consequences of growth in our current economic system. Books like Goerner’s “Money and Sustainability – The Missing Link” or Eric Beinhocker’s “The Origin of Wealth” discuss the relationship between an interest-driven monetary system, economic growth and environmental degradation. Ultimately, it may just not be possible to resolve all challenges through measures like pricing out negative externalities or regulating away barriers to entry for circular business models. In some cases, making a moral case against certain types of consumption might the better way forward. We will not dive further into systemic questions, but it is crucial to keep in mind that it is structures and paradigms that influence which types of change are feasible and which aren’t.

Nonetheless, even at a level that doesn’t quite challenge the entire economic system as we know it, levers can be used to give CE a head start. A key reason why obvious improvements are not implemented through the market are market failures. Just as with CO2 and global warming there are plenty of unaddressed externalities to do with material waste and manufacturing byproducts. Negative externalities – or broadly “third-party-costs” – create an skewed playing field. Wherever a business model benefits from imposing a cost it doesn’t have to pay for (e.g. online suppliers not having to care about the disposal of their packaging), a business model that doesn’t do so finds itself at a disadvantage. Just as many economists agree that some form of CO2-pricing is the most efficient solution to mitigate emissions, policymakers should think about accounting for the costs that waste and environmental degradation induce and start pricing at least the most severe of them.

Since for the economist – and most companies – it all boils down to competitiveness and costs, we attempt to list some of the most critical cost issues below. They could be a start for targeted regulation or just thinking about how to close the cost gap:

Making more money by making worse stuff
One key parameter influencing how resource intense our economy is, is simply how much we consume. Theoretically, the longer products last or are used, the smaller the extraction and waste problem. However, shortening the life- or use-time of a product can be profit maximizing for those who manufacture them, especially if they are not selling products-as-a-service. Such strategies range from ‘advertising’ perfectly functioning devices out of use (does your phone contract offer you a new phone every 2 years?) to utilizing inferior materials, to deliberately designing products to break after a certain amount of time (“planned obsolescence”) (f).
CE means moving products in a circle – but additional supply chains can mean additional costs
Moving resources in a circle is not at least a logistical challenge. Reverse logistics, or the effort to recover materials, introduces additional supply chains which cost money (and can cost additional resources such as fuel). Recovering raw materials can be strenuous – think extracting metal bars out of an old building. In addition, without documentation on age, content, and use of materials, quality tests may have to be administered.
The bottom line is that – especially given today’s high taxes on labor, and low taxes on material consumption –reuse, recovery, repair and recycling are cheaper are often more expensive than simply producing new materials. Changing these cost structures will require changes in responsibility for waste recovery, technical innovation in material assessments and better physical tracking of materials throughout their lifecycles, and perhaps a chance in tax structures as well. (g)
Cost of transition: Changing product and business model can be expensive
Currently, startups are at the front of circular innovation. However, for large-scale adoption of circular business models, existing companies and corporations will be crucial. Shifting existing business models from linear to circular involves going back to the drawing board, rethinking partners and strategies and potentially retraining staff. The literature on organizational change highlights how expensive interventions such as technology adoption, changes in product range and branding, and staff retraining can be. In addition, capital investments in infrastructure may be required, which may come with requirements for “slow capital,” to support the pace of large-scale change.
Vested interests: why change a winning horse?
Lastly, incumbent firms naturally have an economic interest in preserving the structures that makes them successful. This can result in market distortions such as barriers to entry or lobbying against certain technologies and regulatory changes. The CE debate can draw from a large set of literature and models on incumbents influence on technology and regulation adoption. (h) Again, the emissions debate offers a useful parallel.

Next to pure cost considerations, there are also a handful of psychological or consumer behavior topics that are important to address:

Waterbed or rebound effects
The idea that “substituting […] secondary production” will reduce “environmentally intensive primary production” is intuitive. Empirically, however, it is not clear if this is actually what will happen. Eliminating waste and improving material efficiency could just lead to consumption elsewhere or make consumers ignore the real problem. This so-called rebound effect can be observed in other areas such as energy efficiency. (i) If energy efficiency improvements reduce electricity costs, electricity becomes relatively cheaper compared to other goods and consumer income increases. Both effects can lead to lower-than-expected energy savings. The size of the rebound effect is not a theoretical but an empirical question. To minimize circular rebound, CE products would have to be real “substitutes for primary production alternatives”, refrain from targeting only markets that cannot compete with primary alternatives, and decrease the aggregate demand for goods. (j)
Structural inertia and skepticism against change
Next to “rational” resistance against change, such as resistance driven by cost concerns, there can be aversion even if change was beneficial in the egoistic, profit-maximizing sense. Resistance against change is often driven by structural inertia – the tendency of organisations to continue on a set trajectory unless interrupted. In many cases this relates back to psychological skepticism, organizational culture or simply lack of exposure to new ideas.
Passive convenience and active countertrends
Lastly, on the demand side there are some passive and active trends against the adaptation of more circular products. On the passive side, consumers are used to certain products, regardless of their negative environmental impact. Familiarity alone doesn’t drive consumption decisions but can be an important factor for specific consumer groups. More importantly, there are active countertrends against a circular economy associated with lifestyle considerations. The most prominent examples are fast fashion and consumer electronics in which shortening consumption cycles are associated with status, style, etc.

Finally, there are a number of technical challenges. Needless to say, the speed of technology development is frequently underestimated. However, in some cases, there might be physical limitations or trade-offs with other areas, in which technological development is slower than we would wish. Changing to a circular economy should be discussed as a question of degree.

Finally, perfect circularity – reusing all material within a human life’s horizon – is not only physically unrealistic to achieve, but also might conflict with other goals such as social or environmental factors.

Take plastic recycling as an example: Mechanical recycling means essentially cleaning and chopping up used plastics to create raw material for new hydrocarbon products. Depending on the product and use case, this can work many times but eventually, the quality of the product will decline. The alternative is chemical recycling: chemically turning back various types of plastic polymers into monomers, the building blocks of all types of hydrocarbon products. Whilst this process might be desirable in some cases, it is also extremely energy-intensive. In a world in which we struggle to reach 100% renewable sources for our existing energy demand, adding high-energy-intensity recycling processes that essentially fight the laws of thermodynamics creates a real trade-off in sustainability goals.

A circular economy, while at first glance seems quite simple, will not be easy to achieve. Just a few of the potential reasons for the difficulty of this change – especially from the business perspective - have been outlined here. As the world continues along with its necessary work toward carbon neutrality and the avoidance of other environmental damage, while at the same time seeking to provide benefits to the humans everywhere, a circular economy can play a significant role. However, recognizing the challenges that stand in the way of making this change is an important first step to eventually addressing them, and turning grand vision into reality.

Sources:

(a) “A good disruption: redefining growth in the twenty-first century” (Stuchtey, 2016)

(b) https://www.circle-economy.com/news/our-world-is-now-only-8-6-circular [accessed 4.2.2020]

(c) European Parliament discussion note on the Circular Economy, https://www.europarl.europa.eu/news/de/headlines/economy/20151201STO05603/kreislaufwirtschaft-definition-und-vorteile [accessed 26.1.2020]

(d) Korhonen at al, 2017 and 2018

(e) Ibid.

(f) "Beyond planned obsolescence" (Wieser, 2016)

(g) A great idea for this is using RFID tags for material documentation, e.g. “Circular Economy and E-Waste: An Opportunity from RFID TAGs” (Condemi et al, 2019)

(h) "Vested interests in a positive theory of stagnation and growth" (Krusell, Rios-Rull, 1996)

(i) “The Rebound Effect and Energy Efficiency Policy” (Gillingham, Rapson & Wagner, 2015)

(j) “Circular Economy Rebound” (Zink and Geyer, 2017)

Opinions expressed in the article are the author’s own.

Mitsue GuerreroFebruary 18, 2020