Favourable alignment of enablers
Consumer preferences are shifting away from ownership
Today’s users are displaying a preference for access over ownership, i.e. services over products. This is important because young urban and rural consumers’ lifestyle choices in this decade have the power to shift the economic model away from the linear system. The new bias may have originated in necessity, driven by the depressed economy and widespread youth under or unemployment. How pervasive the shift will become remains to be seen, but a new model of consumption seems emergent, in which consumers embrace services that enable them to access products on demand rather than owning them, thus becoming users.
Collaborative use models that provide more interaction between users, retailers and manufacturers are seeing greater uptake (see Box 2). The implications of this shift to different business models (performance-for-pay models, rent or leasing schemes, return and reuse, for example) are profound in many ways:
Higher asset productivity. The use of assets can be increased as most of the sharing models rely on greater utilization of previously under-used but highly valued assets, which drives down the associated operating costs per unit of use.
Higher asset availability and quality. These collaborative use models also allow service providers to reap benefits such as increased longevity and lower maintenance costs, improving their margin or cost-competitiveness. This in turn also drives down unit costs per use.
Fewer information blind spots. Technologies such as radio-frequency identification (RFID, discussed in the next section) enable better tracking of embedded materials and components, which reduces costs and consequently increases the margin for revalorizing products at the end of their current use.
Box 2: The ‘sharing economy’ and its implications for the circular economy
The sharing economy is a reinvention of traditional market behaviours towards collaborative consumption models. Rather than simple consumption, the sharing economy is founded on the principle of maximizing the utility of assets via renting, lending, swapping, bartering and giving—facilitated by technology. The sharing economy provides the ability to unlock the untapped social, economic and environmental value of underutilized assets.32
About a decade ago, companies such as Zipcar started to capitalize on the idle capacity of cars (unused in the US for an average of 23 hours a day) by developing platforms that charge for usage. Today there are literally hundreds of ways one can share different kinds of assets: space, skills, stuff and time.
The sharing economy is driven by three primary benefits: economic—more efficient and resilient use of financial resources; environmental—more efficient and sustainable use of resources; and communal—deeper social connections among people. All of these are enabled and scaled by technology platforms. Three principal systems operate within the sharing economy and collaborative consumption:
Redistribution markets reallocate items or services no longer required to someone or somewhere where they are needed. Examples include eBay (auction site) or Craigslist (local classified ads).
Product service systems allow members to pay for the benefit of using a product without needing to own it outright. Examples include Zipcar, RelayRides and City CarShare for mobility services, equipment rental from Getable and peer-to-peer (P2P) high-end household rentals from Snapgoods.
Collaborative lifestyles platforms allow people to share and exchange less tangible assets such as time, skills, money, experience or space. Examples include Skillshare for P2P learning, Airbnb for offering accommodation, and TaskRabbit for outsourcing small jobs and tasks to others in their neighbourhood.
In addition to these three systems, there are a variety of related models of collaborative production, transaction, investment and marketplace creation. Well-known examples include Wikipedia (crowdsourced online encyclopaedia) and Kickstarter (crowdfunding).
All of these systems are enabled by four key principles: trust between strangers, belief in the effective management of common resources, the existence of idle capacity and the build-up of a critical mass of users, customers, consumers, producers and/or members.
The sharing economy is conceivable in nearly any sector of society and corner of the globe. Sectors that have experienced robust traction include accommodation, transportation, tourism, office space, financial services and retail products. Areas where significant growth is expected include P2P car sharing, errand marketplaces, product rental and P2P and social lending. The sharing economy continues to grow at almost breakneck speed. It is estimated that in 2013, more than US$ 3.5 billion in revenues will be generated from transactions in the sharing economy in the US.33 While the market size is still small, investors are optimistic about the future growth of these business models (e.g. the P2P financial lending market is estimated to reach US$ 5 billion by the end of 2013, and car-sharing revenues in North America alone could hit US$ 3.3 billion by 2016).34
In September 2012, Seoul’s Metropolitan Government announced a new initiative: “Sharing City Seoul.” This includes 20 sharing programmes and policies for generating or diffusing “sharing city” infrastructure. The government regards “sharing city” as a new alternative for social reform that can resolve many economic, social, and environmental issues of the city simultaneously by creating new business opportunities, recovering trust-based relationships, and minimizing wastage of resources, as sharing allows the community to gain more benefits with fewer resources, since it enhances the usefulness of resources. Therefore, the government can provide more services to citizens with a smaller budget. For example, a 492-vehicle car sharing service is being introduced together with selected government parking lots and municipal buildings being open to the public during off-hours and idle days. In addition, students who need a room can be connected to senior citizens who have extra rooms, and more.35
Benefits within the circular economy model stem from increased resource productivity, greater ability to keep track of products, components and materials, which increases the opportunity for profitable revalorization at the end of the respective use cycle as well as allowing suppliers of products and services to capture the benefits of improved circular designs.
Socio-demographic trends make the benefits easier to capture
For the first time in history, over half of the world’s population resides in urban areas. By 2020, urban populations are expected to rise by a further 20% to over 4.2 billion, 80% of them in developing countries.36 With this steady increase in urbanization, the associated costs of many of the asset-sharing services (see Box 2) and the costs for collecting and treating end-of-use materials are all able to benefit from much higher drop-off and pick-up density, simpler logistics, and greater appeal and scale for service providers. Centralized use should mean that reverse logistics—like the logistics of new product delivery—becomes more efficient and more cost-effective. The collection of household waste, as one example, will be cheaper due to shorter collection distances, and more efficient due to more frequent collection (increasing the collection rate and reducing waste leakage). Integrated systems are an ideal solution for recovering materials in urban areas, leveraging short transport distances and high population densities.
An example of this is The Plant, Chicago, a vertical aquaponic farm growing tilapia and vegetables that also serves as an incubator for craft food businesses and operates an anaerobic digester and a combined heat and power plant, with the goal of going off the grid in the next one or two years. It serves as a good example where the discarded materials from one business are used as a resource for another—industrial symbiosis. This vertical farm and food incubator plans to house artisan food businesses, including a beer brewery, bakery, kombucha (fermented tea) brewery, mushroom farm, and a shared kitchen. The spent grains from the brewery are fed to tilapia fish, while solids from the tilapia waste are fed to the mushrooms. The farms are much nearer to urban centres, so they promote local sourcing and the supply of fresher food. The shorter transportation distances reduce costs, energy consumption and carbon footprint.37
Advances in technology create ever greater opportunities to accelerate the transition
Information and industrial technologies are now coming online or being deployed at scale, which support closing the reverse loops. These advances allow better tracking of materials, more efficient collaboration and knowledge sharing, and improved forward and reverse logistics setups, i.e. initial product design and material innovation seamlessly joined up with subsequent processing of secondary material streams.
- Radio-frequency identification (RFID). It is critical to the success of circular business models to have technology to track the whereabouts and condition of materials, components and products as this reduces processing cost. The use of RFID has great capacity to boost materials reuse. Using RFID technology in sorting apparel and textiles at the end of their lives, for example, will enable the cascade of each type of textile to more suitable and higher-value applications than is the case today. Wider adoption of RFID could be facilitated by falling technology prices.
- The ‘Internet of everything’. Cisco, the American network equipment company, says there are already more ‘things’ connected to the Internet than people—over 12.5 billion devices in 2010 alone. This number is predicted to grow to 25 billion by 2015, and 50 billion by 2020. Connections today come in the form of home and office IT devices such as PCs and laptops, mobile smart devices and new connected business and manufacturing devices. In the future, everything is likely to be connected, from container ships and buildings to needles, books, cows, pens, trees and shoes. This interconnectedness will enable tracking efficiency that was previously inconceivable. In the city of Nice, for instance, Cisco and the Think Global alliance are showcasing an Internet of Everything concept called Connected Boulevard. This initiative has equipped the city with hundreds of different sensors and detecting devices that capture data from daily life through the city’s hybrid infrastructure linked up via a Cisco wi-fi network. The data are processed into real-time information and converted into intelligence with the help of context-aware location analytics before being disseminated to multiple city services. The city can expect improvements in traffic flow, less pollution, and could potentially save 20 to 80 percent in electricity bills by calibrating street light intensity with pedestrian and traffic peaks as well as real-time weather conditions such as fog and rain. As Neil Harris, Head of Sustainable Business at Cisco EMEA, envisions: “The Internet and the new wave of capabilities that the information and communication technology industry is building will provide a critical set of business capabilities that are essential to the robust expansion of circular economy-inspired business models. The Internet of Everything will expose the digital ‘life-story’ of materials, components and products that will allow seamless/automated reintegration of materials back into economic systems, addressing concerns around transparency, ownership, quality and value. In addition, the data collected and knowledge acquired will pave the way for even greater innovation, essentially further accelerating stakeholder interest in the circular economic opportunity.”38 Rachel Botsman of Collaborative Lab (and World Economic Forum’s Young Global Leader) said during the Circular Economy 100 Annual Summit: “Technology fundamentally creates two things: it basically creates the efficiency to match millions of haves with millions of wants in ways that have never been possible. And equally important, it creates a social glue of trust, meaning exchanges can happen directly between two strangers, where we used to trade and exchange directly through institutions.”39
- Partners for revalorization. Technologies that facilitate the identification of potential partners for revalorization to generate end-of-use benefits from liquid markets are essential to identify the best arbitrage opportunity (e.g. trying to sell a used product versus component harvesting and reintegration into the next product). This makes costs that were previously fixed scalable. Setting up circular ventures (via cloud computing, for example) is one avenue; another is to avoid premature obsolescence (such as encapsulating the innovation into software rather than hardware via exchangeable printed circuit boards).
- Advanced manufacturing and processing technologies (especially in reverse cycle capabilities) open up completely new paradigms for adopting circular business models at lower cost. For example, 3D printing substantially reduces waste in the manufacturing process itself, allows the reduction of product inventory by moving to make-to-order from what are often make-to-stock systems, and is widely used in the rework of spare parts, where otherwise the larger asset would have ceased to be useful (e.g. overhauling its mechanical components).40
- Advanced reverse treatment technologies (e.g. anaerobic digestion, cultivating waste-eating microbes and algae in biofactories, filtering proteins out of wastewater from breweries) enable dramatic improvements in the way value is extracted from today’s biological waste streams. Opportunities also exist to combine multiple waste streams (CO2, heat, waste water, nutrients) into advanced agro-manufacturing systems. Valorization of CO2 as a resource has seen substantial improvements in economic viability over recent years as primary research is being translated into applications. Many technologies are expected to be commercialized in the next five years, including liquid fuel from bioenergy and CO2, polymers using CO2 as a carbon source, decarbonization of cement production, and much more.41 Some World Economic Forum’s Technology Pioneers are advanced in these areas such as Novacem, carbon negative cement, and Joule Unlimited, biofuel from CO2. New packaging technologies and systems that extend food life and minimize packaging waste (e.g. fully compostable mycelium-based packaging from another Technology Pioneer, Ecovative) and other material innovations are coming online.42 All of these emerging technologies could contribute to increasing the value circular business models capture, and reduce unit costs if scaled up. Textile innovators such as Worn Again are developing processes to recapture polyester and cellulose from cotton which can be reintroduced into the polyester and viscose supply chains. It is expected that up to 99.9% of the polyester and available cellulose will be recaptured and returned as resources into these supply chains.43
Governments and regulators are mobilizing
Governments around the globe have started to provide positive stimulus and rewards for the adoption of circular business models. The higher prices for linear end-of-use treatment options (particularly landfilling and energy recovery) are increasing the arbitrage opportunities of alternative reverse options. Under the Waste Framework Directive, EU member states have increased landfill costs for discarding construction and demolition waste (among other measures), which has effectively boosted the reuse and recycling rate of concrete, timber, and other construction materials, as well as improved construction processes to reduce waste.44 Governments are taking a more active stance to enable and actively promote migration towards circular setups at a regional level, including Japan and China (see Box 3).
The common motivations behind these shifts are heightened concern over resource constraints and increasing awareness of the economic and environmental benefits of the circular economy. The European Commission’s manifesto for a resource-efficient Europe issued in December 2012 begins:
“In a world with growing pressures on resources and the environment, the EU has no choice but to go for the transition to a resource-efficient and ultimately regenerative circular economy. Our future jobs and competitiveness, as a major importer of resources, are dependent on our ability to get more added value, and achieve overall decoupling, through a systemic change in the use and recovery of resources in the economy.”
The manifesto calls for stakeholders to encourage innovation and investment, adopt smart regulation and standards, abolish harmful subsidies and promote circular product and service designs, including the potential use of a ‘product passport’. It also urges the integration of resource management into wider policy areas and setting goals and performance indicators for achieving a resource-efficient economy and society by 2020.45
Japan focuses its efforts on resource management using a comprehensive set of regulations on waste management. The country has had significant success in reducing waste and improving recycling rates (e.g. 98% of metals are recycled and only 5% of waste goes to landfill). In China, the recently enacted 12th five-year plan (2011 – 2015) for economic and social development suggests continuous implementation and further development of the circular economy with the ‘Circular Economy Promotion Law of the People’s Republic of China’ (see Box 3).
Box 3: Regional examples of accelerating the circular economy
Japan has always lived with natural resource scarcity due to geological and geographical limits.46 Domestic resource extraction for energy is cost prohibitive, leading the country to depend on oil imports for its energy use. The oil crisis of 1970s and its effects on the world economy forced Japanese policy makers to rethink the county’s dependence on oil for growth and sustainability.
Japanese circular economy efforts followed a three-pronged approach. The first consisted of structural adjustments to reduce dependency on oil as a single energy source, and optimize industrial structure to improve the efficiency of energy utilization within industries. The second step involved legislation for environmental policies, establishing a comprehensive legal system, regulating waste management, and standardizing the approach to addressing violations. The third was increasing societal participation through education and public awareness campaigns.
Numerous policies and laws implemented since the 1970s have advanced the circular economy in Japan, but the period since 2000 has seen the greatest progress in legislation. Devised around the concept of ‘establishing a sound materials-cycle society,’ Japan’s system of policies focuses on waste management and resource depletion. Examples include the Law for the Promotion of Efficient Utilization of Resources, ratified in the year 2000 and aimed at minimizing waste by producers and consumers alike. The law was described as “epoch-making and unprecedented in the world,” and covered the entire product life span from upstream to downstream. The Law on Re-utilization of End of Life Automobiles, which came into force in 2002, also had significant implications. Everyone who buys a new vehicle must pay a recycling charge at the time of purchase. Money is collected and kept until the vehicle comes to the end of its life to be disposed. All dealerships and repair shops act an end-of-life-vehicle collectors to whom final users turn in their vehicles, and dismantlers/ shredders act as recyclers of end-of-life vehicles.
Japan’s materials flows are closely tracked with a variety of metrics and resource types, including regularly updated Sankey diagrams providing an overview of flows, target setting and tracking, measuring rates of cyclical use, reduction and disposal (for biomass, non-metal minerals, metals and fossils). The AEHA (Association for Electric Home Appliances) has devised elements of a product passport for electric home appliances covering plastic parts with a mass of 100 grams, standards and markings to improve ease of disassembly and separation, specific chemicals requirements and labelling, compact rechargeable batteries, and container packaging.
This three-pronged approach has been hugely successful. Japan’s recycling rate for metal is 98%, and is also high for other materials. In 2007, only 5% of Japan’s waste went into landfill. The majority of electronic appliances/electrical products are recycled, and up to 89% of the materials they contain are recovered. As a rule, recovered materials are used to manufacture the same type of products—a closed-loop system in action, in a genuinely recycling-based economy.
The idea of the circular economy is also well embedded in Japanese education and culture. This will doubtless ensure that Japan continues to be one of leading nations in this field.
Facing significant natural resource consumption, environmental degradation, and resulting public frustration, China’s government has considered ecological modernization, green growth, and low carbon development, with a national circular economy strategy.47 The leadership has developed a 50-year plan to address sustainable growth objectives and challenges. Important steps include the passage and implementation of the Cleaner Production Law in 2003, the commitment of US$ 1.2 billion in science/technology investment for sustainable development by the Ministry of Science and Technology and adopting the Circular Economy Promotion Law in 2009, which outlined national plans for safe urban municipal solid waste treatment, energy savings and emissions reduction.48
To demonstrate the efficiency and applicability of these plans, the state has made substantial investments in circular economy-oriented pilot projects, including the application of clean production techniques in specific sectors, and municipal and regional eco-industrial developments.
Most circular pilot project cities have met or exceeded the targets set. Beijing has achieved a 62% reduction in energy consumption per GDP in 2010, a 45% increase in the rate of treated wastewater recycling, and a 45% reduction in consumption per capita from 2005. Other cities such Dalian, Shanghai, and Tianjin have attained more modest improvements so far, but trends are similar.
China seems committed to the circular economy approach, and is regulating and investing accordingly. The next steps for Chinese government to aid the legitimacy of economic and environmental decisions concerning resource use and trade include the development of a circular-economy-oriented indicator system (e.g. emergy indicators taking into account all available energy input directly or indirectly required to generate a product).
It is widely recognized in Europe that the prevailing linear model of economic growth founded on resource consumption and pollutant emissions is unsustainable.49, Although Europe has been a standard-bearer of environmental consciousness, the global economic crisis, soaring commodity prices and growing awareness of the human impact on the environment have pushed the circular economy agenda into mainstream policy debate.
In Europe today, circular economy measures can be found in various environmental and economic policies. The EU has established resource-related policy goals extending as far ahead as 2050 as part of its Europe 2020 strategy. In many cases, these goals are accompanied by relevant targets and indicators to track implementation.
The Environmental Indicator Report of 2012A identified a total of 63 legally binding targets and 68 non-binding objectives across nine environmental policy areas that the EU member states have to meet. Many of the binding targets are set for 2015 and 2020, and address energy, air pollution, transport emissions and waste. The great majority of non-binding objectives are set for 2020, with sustainable consumption and production (SCP) and resource efficiency playing a larger role, along with biodiversity and land use.
For example, the EU has a non-binding objective to cut energy use to levels 20% below business-as-usual projections by 2020. Regarding air pollution, the EU has generally made good progress towards its 2020 emissions targets set by the Thematic Strategy on Air Pollution. Waste generated per capita should be in absolute decline by 2020 according to another non-binding objective. A further waste-related objective for member states is to reduce landfilling of waste to close to zero by 2020. An extrapolation of the trend points to a decline from 179 kg per capita in 2011 to 114 kg per capita in 2020. Achieving the target for near-zero landfill would thus seem to require a radical change in waste management practices. Furthermore, a potential obstacle to meeting the SCP objectives is that Europe leads the world in energy recovery mixed waste incinerators, with about 400 units. Although some are over-dimensioned and recycling is diminishing their inputs, mixed waste incinerators are the end-point of an entrenched linear supply chain (with some metals recovery) that diverts products and materials away from higher-value reverse loops directly to the lowest value use in the reuse hierarchy, energy recovery.50 Despite incineration over-capacity, its use is still growing in many economies ranging from China to the UK, where there is pressure to transit away from landfills.
In the Environmental Indicator Report of 2012, the European Environmental Agency undertook its first analysis of Europe’s progress in achieving a more sustainable, regenerative economy, using six key indicators to assess resource efficiency and a further six addressing ecosystem resilience. The findings here indicate mixed performance. Analysis does appear to suggest that Europe has made significant progress in improving resource efficiency, air quality, water use and recycling. Preserving ecosystem resilience and biodiversity is still falling short of the EU targets, however.
While status quo lock-in is a fact of life during any transition period, the linear economy lock-in is weakening under the pressure of several disruptive trends. As discussed, higher resource prices and volatility are here to stay. Businesses are in search of a ‘better hedge’ against potential problems in obtaining the resources they need. Many innovators and rapid transformers will be able to take advantage of these disruptions as growing profit pools. Enterprises that extract value from resources currently being wasted will likely reap higher rewards, while take-make-dispose businesses will likely find their economies of scale less powerful in the competitive race than in the past.
With pressures mounting and a well-aligned ability to act in many areas, many participants at the circular economy session during the World Economic Forum’s 2013 Annual Meeting and the Young Global Leaders Taskforce felt strongly that: “Surely the time to act is now”