The Circular Economy – Who Should Be Participating?

By Ashleigh

The phrase itself – the circular economy – is easy enough to understand. It generally represents the concept of using recycled materials as inputs into manufacturing processes with outputs in turn later recycled themselves. Massive potential benefits are possible with large-scale adaptation to a closed-loop system such as this, from environmental (reduced deforestation levels, decreased landfill use) to corporate profitability (improved operational efficiencies) to personal health (reduced exposure to hazardous waste). Exhibit 1 illustrates the vast number of constituencies impacted in modern biological and technical processes.

In contrast, the linear economy, which focuses extracting, producing, and discarding, has throughout much of our industrialized history allowed for immense profits to be generated without consideration for the volume of natural resources consumed. However, business profitability and even viability in the future will depend on ability to adapt to declining natural resources and to maneuver around changing environmental and regulatory dynamics.

While global adoption of a circular economy seems a worthy yet distant goal, I argue that abundant smaller loops exist and represent a logical first step for individual companies looking to become more sustainable. These small loops are the linking together of certain supply chain processes among currently unrelated fields. For instance, as highlighted in a recent New York Times article, a paper mill in the Netherlands sources phosphate from a nearby baby-food factory which produces it as a waste byproduct and previously paid considerable amounts to dispose of it. The phosphate is used in anaerobic fermentation at the paper mill and is part of several changes the company has made to its supply chain, further to its exclusive use of recycled fibers, to reduce its overall footprint.

As demonstrated with the paper mill example, there are certain characteristics which make some companies naturally more inclined to participate in circular systems. In the matrix below I have summarized the key traits and corresponding industries which I believe could achieve significant ROI on capital invested in supply chain modifications and which are therefore best-suited to partake in circular activities:

Circular Economy Potential Players

Company Characteristic Best Attributes for Near-term Adoption Ideal Players
Input materials Fossil fuels Any manufacturer requiring a large power source; chemical companies
Scarce resources (trees, water) Paper / packaging industry; printing / publishing companies; many others
Expensive resources (metals) Information & communications technology (“ICT”); car manufacturers; commercial building construction
Output materials Large quantity generated relative to saleable output Agriculture; mining; textiles; numerous other commodity-type manufacturers
Costly to discard Most any industry which generates waste
Cost structure Large percentage of operating costs attributable to material cost Upstream low-tech, high-volume manufacturers (commodity products)
Product value-add not directly related to material composition Consumer product packaging companies (bottles, cartons)
Location Country is highly developed / industrialized with numerous players across the supply chain All of developed world in which manufacturing takes place
Country has recycling infrastructure in place Top countries: Switzerland, Austria, Germany, Netherlands, Norway, Sweden, U.S.; also most of Western world (varies by material)
Country government has demonstrated propensity to support “green” efforts Europe; potentially U.S.

Closure of smaller economic loops therefore falls upon the shoulders of leading companies operating in the industries and sub-industries listed above (Dow, International Paper, Procter & Gamble, Apple, to name few) to reach up and down the supply chain to partner with other players and work toward developing processes, logistics, and technologies to build a circular system in which waste becomes raw materials. This will require reciprocal trust and willingness to work together and a joint focus on long-term cost reduction. This could take the form of bilateral partnership among major corporations or trade association leadership to gather smaller companies. Companies operating with expensive and scarce resources will have real ROI potential and making the business case should not be difficult.

I would also argue that, if government leaders wish to promote environmental sustainability among businesses, they should target their incentives specifically on the most relevant manufacturers – agriculture, mining, paper, metals, ICT, CPG, and others list above – rather than broad-sweeping regulations. I would look specifically to the U.S. and Europe, with their recycling infrastructures and vastly developed industries providing dense and intermingled supply chains, to push hardest on this front. China’s limited recycling capabilities currently hinder its ability to build even small closed loops, but this will slowly change. If the circular economy is ever to be achieved on global scale, the U.S. and Europe must demonstrate how to do it.

Exhibit 1: The Circular Economy An Industrial System that is Restorative by Design

Circular Economy Ellen MacArthur Foundation

Sources:

http://www.ellenmacarthurfoundation.org/

http://www.ellenmacarthurfoundation.org/circular-economy/circular-economy/interactive-system-diagram

http://www.nytimes.com/2014/11/19/business/energy-environment/closing-the-loop-on-recycled-paper.html?ref=energy-environment&_r=0

http://www.energydigital.com/greentech/1751/Which-Countries-Are-Best-at-Recycling

http://www.ert.eu/node/560

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About macomberjohnd

HBS Finance faculty interested in sustainability in the built environment including devices, structures, townships, and cities.

One Response to “The Circular Economy – Who Should Be Participating?”

  1. By John Macomber

    There is a lot of potential in designing in circularity, or re-use, or restorative aspects. In some ways the obstacles are in a) forethought: one has to set this up in advance, coordinating across multiple actors; b) balancing throughput: one firm’s waste output may not be in the right quantity to be the next organization’s input; and c) the ubiquitous question of pricing of externalities. When there was plenty of material in the ground to dig up, eat, incorporate into goods, or burn there was (and might still be) low cost to do so. When there is no explicit cost to dispose, then organizations will dispose cheaply. Familiar story about chemicals in rivers, old tires in backyards, carbon in the atmosphere.

    Absent a sudden adoption of full costing of externalities, there are still some quite interesting manifestations of circularity. We have discussed some of this in the course notably around the Sound Group China case, where it’s possible to reduce the waste stream by not having as much packaging waste brought into the system to begin with; Walmart is a leader in this area. It’s possible to reduce the waste stream by designing goods to be disassembled and the parts re-used; Mercedes-Benz claims to be a leader in this area (this is similar to the Dow and Apple illustrations in the post). Anaerobic digestion makes power from methane thrown off from cow and pig excrement; but to be effective this depends on being located near the farms and depends on balancing the throughput of the (very) raw materials.

    The Kalundborg industrial park in Denmark is an early illustration of a planned circular economy subset. They call it “industrial symbiosis” much in the spirit of the MacArthur illustration in the post.

    http://www.symbiosis.dk/en

    The actors include: Energy plant, pig farm, gypsum drywall plant, cement plant, pharmaceutical manufacturing, and others.

    Here is a post from the Spring 2013 iteration of IB2E that discussed Kalundborg further:

    https://innovbusenergyenviro.wordpress.com/2013/03/06/kalundborg-bps-in-denmark-runs-cars-produces-electricity-and-heats-houses-with-straw/

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