Is the Circular Economy a Myth?

The circular economy is a generic term for an industrial economy that is, by design or intention, restorative and in which material flows are of two types, biological nutrients, designed to re-enter the biosphere safely, and technical nutrients, which are designed to circulate at high quality without entering the biosphere.

The term encompasses more than the production and consumption of goods and services.  It includes a shift from fossil fuels to renewable energy, the role of diversity as a characteristic of resilient and productive systems and of the role of money and finance as part of the wider debate.  To move forward a common language and metrics need to be created around how to manage stocks of products in a circular economy. If you can’t measure it, you can’t manage it!

Blog - Circular economy 4Pursuing the circular economy opportunity in an ambitious way would represent a big shift in economic thinking and priorities. In a circular economy a more balanced set of metrics need to be developed to measure the success of an economy, metrics more aligned with consumer utility and public expectations(1). For example, sharing and digitization have major potential to increase consumer utility but, are not well captured in GDP. Currently, we have no established metrics for the utilization of key infrastructure and products, for their longevity, or for success in preserving material and ecosystem value. Articles, policy seminars, statements, and targets for these topics are rare, compared with the pervasive focus on improving flows, as measured by GDP. Today’s linear economic model measures success almost exclusively in terms of a flow metric (GDP), and economic policies are designed to maximize flow. Most companies have linear business models. The linear “Make, Use, Dispose” thinking that feeds the GDP metric is well known and misses the impact this model has on our world as a whole. A new system and way of thinking needs to be implemented.

Systems thinking, as it applies to the circular economy, is the ability to understand how things influence one another within a whole. Elements are considered as ‘fitting in’ their infrastructure, environment and social context. Whilst a machine is also a system, systems thinking usually refers to nonlinear systems: systems where through feedback and imprecise starting conditions the outcome is not necessarily proportional to the input and where evolution of the system is possible: the system can display emergent properties.

Linear “Make, Use, Dispose” industrial processes and the lifestyles that feed on them deplete finite reserves to create products that end up in landfills or in incinerators. Circular “Make, Use, Re-use” processes attempt to maximize resource utilization thereby re-balancing the attention paid to stocks and flows. Effective flows achieve efficiency by optimizing the system, not the part. This is a key tenet to the idea of a circular economy.

Efficiency can lower the amount of energy and material used per dollar of GDP, but fails to decouple the consumption and degradation of resources from economic growth. The linear ‘Make, Use, Dispose’ economic model relies on large quantities of easily accessible resources and energy. Much of our existing efforts to decouple the global economy from resource constraints focus on driving ‘linear’ efficiencies—i.e., a reduction of resources and fossil energy consumed per unit of manufacturing output. The risk to supply security and safety associated with long, elaborately optimized global supply chains appears to be increasing.  Against this backdrop, business leaders are in search of a ‘better hedge’ and many are moving towards an industrial model that decouples revenues from material input.  Proponents of the circular economy stress that focusing on efficiency alone will not alter the finite nature of resource stocks, and—at best— simply delays the inevitable.  A change of the entire operating system is necessary.

This represents a considerable challenge to say the least so, where would we start? The current linear supply chain has been developed since the dawn of civilization. It moves usually homogeneous materials from a single source towards an ever-widening audience of consumers but the idea of a circular economy proposes to include a system to do just the opposite; move heterogeneous materials from a wide audience back towards…..what? The original source? A re-manufacturer? A host of liquidation or recycling options? Landfill? You quickly begin to recognize the enormity and complexity of the challenge. It’s not simply a matter of adding a reverse chain but adding a reverse chain that caters to a very diverse audience of, not end users (this breaks the concept of circularity) but re-users and their re-uses can be greater than the uses of the original end users of the supply chain.

As with every major transformation, it is vital to take a systematic approach, unraveling the issues at the point of greatest leverage. We can identify several basic commonalities that address circularity between the supply and reverse movement of materials so, in an effort to bring this challenge back into perspective, let’s start with those. Network design, materials purity and demand-side business model innovation each involves important commonalities between supply and reverse chains as it applies to circularity but, it is vital to see all three as a whole, as they are so intertwined.

Blog - Circular economy 1The Ellen MacArthur Foundation, in their series of reports titled, “Towards the Circular Economy”, suggest that materials purity – reorganizing and streamlining pure materials flows – is the most viable starting concept with the potential for carrying circularity to a tipping point(2). I don’t argue that conclusion considering a global perspective and projects already being undertaken but, network design and demand-side business model innovation need to be addressed simultaneously.  Having pure materials alone fails if no efficient system of getting them to the recycling facility exist and there is no demand for the recycled pure material.  

This article will start from a network design perspective. Whether it’s supply or reverse, the movement of each involves chains and represent the key units of action.  The reverse chain is an entirely different animal than the supply chain and you miss that point at your peril. Circularity is not a concept we can identify with current chains and, if we hope to do so, there are some fundamental challenges that we need to address before we can even consider circularity.

We need to separate the long-term efficiency that we seek from circularity away from the short-term margins that are identified with instant gratification and, so far, we seem to have this entire concept backwards. Why do we tax the labour component of supply instead of the material component when labor, material and overhead are the only three components of production? To encourage business to create pure material products and use recycled materials, we should be taxing material consumption in some measure, not labour.   

How can we address “improvements” with a circular model while we’re still struggling with the ridiculously dismal inefficiencies of the linear supply model? With the technological advances we have available to us today we should develop a focus towards automating the supply chain from end to end. With automated unmanned vehicles, radio frequency identification, satellite communications, software, sensors, analytics and decision modelling we should be able to further the available efficiencies of the current linear supply chain with an eye towards it supporting circularity.

Are we developing a circular model to “improve” the supply model or are we developing a completely new model that separates supply from return. We need to answer this question because, as I mentioned earlier and, as I’ll embellish upon in future posts, the reverse chain is an entirely different animal than the supply chain.

Seventeen years ago I started a company that handled reverse logistics for major retailers in western Canada. Wal-Mart was relatively new to Canada and my focus was liquidations which Wal-Mart needed.  I quickly learned that efficient reverse logistics is a much more complex study than supply chain logistics.  As an accountant and business owner I was able to experiment with different strategies and, in dealing with distressed inventory I’ve experienced the intricacies of what we’ll be up against in trying to develop a circular economy.

Blog - Circular economy 2Just consider warehouse or carrier damages that occur in the average distribution center each and every day for a standard department store. Depending on the extent and value of the damage there can be a lengthy insurance claim leaving this inventory in limbo until it’s settled. So, who covers the cost of this inventory as it sits in limbo? Where do you store it? How do you value it post settlement? How or where do you sell it for the greatest economic recovery? How do you account for it and how does that affect performance metrics? That’s just one small aspect of the reverse chain for one industry. When you realize there can be multiple chains for countless different industries you begin to grasp just how much is encompassed by the term “circular economy”.

At this point you begin to ask, “Are we developing metrics for the supply chain or the reverse?” because the reverse is quickly becoming as big and economically important as the supply! Hopefully, at this point you also begin to realize what we’re up against in terms of the complexity involved in trying to address circularity because it’s not just economics that needs to be considered nor is it single systems.

Third party expertise is coming to the forefront of the reverse chain because it has to. Recognizing this begins to support the title of this paper, “Is the Circular Economy a Myth?”

I can categorically state that the circular economy is definitely NOT a myth. The intention of this paper is to recognize not just the immediate importance of such a quest but perhaps more to caution against acting without deep consideration for what we’re up against. Certainly, we can begin efforts to address the more obvious problems of our current systems but let’s not kid ourselves that we actually “know” what we’re doing yet.

If it’s taken from the dawn of civilization to get this far and overall, the global transport efficacy has recently been estimated to be lower than 10%(3) then who do we think we’re kidding? If 450 million wooden pallets are produced each year in the U.S. alone(4) to replenish the worn out pallets that are discarded and GHG emissions continue to increase unabated then how well are we progressing with our sustainability efforts? And that’s just in the supply chain! What we’ve created to date is so woefully inefficient and unsustainable that trying to identify a singular starting point is like playing the carnival game “whack-a-mole” by yourself for eternity; you’ll simply never win!

As a planetary population we all have to be playing together and all from a “systems thinking” perspective, unraveling the issues at the point of greatest leverage for each system in unison so the circular economy that we’re trying to achieve is allowed to display those emergent properties because it is from those emergent properties that we learn how to continue a successful forward progression.

I would suggest that a focal starting point extends farther beyond network design, materials purity or demand-side business model innovation. To repeat, today, we have no established metrics for the utilization of key infrastructure and products, for their longevity, or for success in preserving material and ecosystem value. If you can’t measure it, you can’t manage it!

Six major oil companies have written an open letter to governments and the United Nations saying that they can take faster climate action, if governments provide even stronger carbon pricing and eventually link it all up into a global system that puts a proper price on the environmental and economic costs of greenhouse gas emissions.

BG Group, BP, Eni, Royal Dutch Shell, Statoil and Total sent the letter to France’s Foreign Minister Laurent Fabius and Christiana Figueres, Executive Secretary of the UN Framework Convention on Climate Change (UNFCCC) The letter said:

“Our companies are already taking a number of actions to help limit emissions … For us to do more, we need governments across the world to provide us with clear, stable, long-term, ambitious policy frameworks. We believe that a price on carbon should be a key element of these frameworks.” (5)

How do we even start without first developing metrics to measure…..anything?

Secondly, even if we accept the Ellen MacArthur Foundation’s suggestion that materials purity – reorganizing and streamlining pure materials flows – is the most viable starting concept with the potential for carrying circularity to a tipping point, this won’t be achieved without being able to uniquely identify not only the material itself but whether that material is in the supply or reverse chain. The concept of circularity begins where the linear concept ends so we need to be able to identify which products are still in the supply chain and which products have come back into the reverse chain and this is a major crux of the entire problem.

The missing link between the supply and reverse chains is the end user. Privacy laws prevent tracking material past the point of sale so the vast majority of the materials we need to track are not in the supply or reverse chains. It is the end user that decides the fate of these materials and it is the end user that we need to focus on.

Blog - Circular economy 3An emphasis on legislation and consumer education would provide a model of circularity similar to that of Japan’s; one of the leading nations in the field of circular economics. The idea of a circular economy is embedded in their education and culture and the rest of us could learn from their example. As an island nation Japan has always lived with natural resource scarcity due to geological and geographical limits. This increased the pressure for Japan to develop a circular economy but, virgin resource scarcity of certain materials is quickly becoming a global problem. The longer we wait the worse it will get!

Data synchronization on material identification like that provided by GS1 needs to be the other focus of our efforts. We need to be able to uniquely identify individual products allowing identification of materials in the supply and reverse chains to streamline the material flows. Coupling this sort of unique identification capability with a leasing products strategy as opposed to a sale of products strategy would bypass the privacy laws and allow tracking throughout the products life-cycle.

I realize that this post leaves many unanswered questions but, the intention is to open the door for comment and debate on the idea of a circular economy. Future posts will offer options on advancing the circular economy.

Take part in the poll to vote on what you think is the best starting point to advance the circular economy.

  1. Walter Stahel, “How to Measure it”, The Performance Economy second edition – Palgrave MacMillan, page 84
  2. Ellen MacArthur Foundation, “Towards the Circular Economy”, Vol. 3, page 62
  3. Ballot E. and F. Fontane, “Rendement et efficience du transport: un nouvel indicateur de performance,” Revue Francaise de Gestion Industrielle, vol. 27, 41-55, 2008
  4. National Wooden Pallet and Container Association.

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