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Explainer: what is the circular economy?

When the who’s who of business and world leaders met at last month’s World Economic Forum in Davos a different industrial model was on the agenda: the circular economy. It’s a term the average person may…

We know recycling, but the concept of a circular economy is much broader. Dan Peled/AAPImage

When the who’s who of business and world leaders met at last month’s World Economic Forum in Davos a different industrial model was on the agenda: the circular economy.

It’s a term the average person may not have come across yet, but the idea has gained sufficient traction in business, political and environmental circles to be the subject of a report released at the Forum’s influential annual meeting and to be the focus of an initiative supported by leading companies to encourage business to embrace its principles.

In Europe, the biggest annual conference on environmental policy will this year focus on the circular economy and how to unlock its potential, while China’s latest five-year plan has an entire chapter devoted to efforts to “vigorously develop a circular economy”.

In Australia, various NGOs and academic institutions are already engaged with promoting and developing a better understanding of the model.

As such, the core idea behind the circular economy is not new. There is significant overlap with concepts such as “cradle-to-cradle” design and with industrial ecology, which have been around for decades. But it’s only now that these ideas are becoming more mainstream.

So what is the circular economy and why should Australians care about it? While many may assume it is about recycling, the model involves much more than that.

Currently, the dominant mode of making and using things in our economy involves digging up resources to manufacture products and infrastructure, then discarding to landfill or recycling when we are finished with those materials. This has been dubbed the “take-make-dispose” economy.

Globally, in the consumer goods sector about 20% of total material value is recovered while 80% goes to waste.

In Australia, about half the waste we generate is being recycled but with continued growth in economic output, the volume of waste going into landfill here continues to rise.

Often, we are throwing away valuable resources in this “linear” model. Without change, this can only get worse as three billion new middle-class consumers enter the global market in the next 15 years.

The circular economy addresses these unnecessary resource losses.

How does it do that? More recycling is part of it but the circular economy involves much more. It is a model of industrial production which involves designing products so they last longer, so they can be repaired and upgraded, so they can be reused or resold (on eBay, for example), and so their materials can be used in remanufacture.

It is a more “restorative” process, where components and materials can be reused many times.

This will involve a shift on the part of businesses that are accustomed to generating ongoing revenue via planned or “inbuilt” obsolescence.

One example of the sort of switch that might be involved is for businesses to sell services instead of products – for example, selling “hours behind the wheel” rather than selling cars, which is what happens with car-share schemes such as GoGet, Hertz 24/7 and GreenShareCar.

This sort of change is starting to happen, but the report launched by the WEF and the Ellen McArthur Foundation at Davos last month considered a crucial issue: how to scale up the circular economy model.

Dominic Barton, Managing Director of McKinsey & Co, which collaborated on the report, spelled out the business case. The world economy is A$72 trillion in size but applying the circular economy model would lead to at least $1 trillion in savings immediately, he said, and potentially much more in years ahead.

These savings would flow from waste reduction and lower capital requirements for businesses. Other potential benefits include reduced volatility in the price of inputs, along with greater innovation and job creation.

Remanufacturing and recycling in Europe, for example, already employs more than one million people. There, companies such as Renault have found that while remanufacturing is more labour-intensive, reduced waste and lower capital expenses mean profits are maintained.

Ellen MacArthur released Project Mainstream at the World Economic Forum. Laurent Gillieron/EPA

Project Mainstream, which was launched at Davos, is designed to promote collaboration in pursuit of the circular economy, particularly across the massive global supply networks of key industry sectors. Household names such as Unilever, Cisco, Philips and Renault are some of the global partners with the Ellen MacArthur Foundation in this initiative.

A number of factors will help drive progress towards a circular economy. Businesses will increasingly be motivated to do more with less as water, energy and resources become more expensive in coming decades.

In an era of “big data”, we know more about where resources are, which means it will be easier to recover them profitably. New technologies such as 3D printing offer the potential to reduce materials and energy use, and wastage, by allowing products to be produced on demand rather than just in case.

Meanwhile, there is growing acceptance of economic models based on access rather than ownership and this “collaborative consumption” will also help unlock the untapped value of assets.

For Australia, rethinking the productivity of materials holds promise at what is a challenging time for traditional manufacturing. The circular economy offers the potential of job creation and innovation and a pathway to a resilient economic growth.

Join the conversation

41 Comments sorted by

  1. Terry Reynolds

    Financial and political strategist

    I'm dizzy just reading about it!

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  2. John Doyle

    architect

    Well, I am certainly glad to hear about action taking off on the circular economy!
    It's a concept which I only recently discovered, but unless we ditch now the linear economy fantasy we are doomed. The entire species is doomed if we don't recycle, because once we run out of phosphorus for example we will be unable to feed ourselves. When that happens life will become extremely nasty, brutish and short - like we used to think it was in earlier epochs.
    By recycling it has to be over 90% but we will…

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    1. Allan Gardiner

      Dr

      In reply to John Doyle

      John, there's no immediate cause for alarm. Everyone will find that their having to subsist on just a meagre daily ration of Soylent Green won't be anywhere near as bad as what some wafer-thin people would like people to believe, for it really is the bread of life.

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    2. John Doyle

      architect

      In reply to Allan Gardiner

      No Allan, no need for alarm, unless your grandchildren are allergic to the stuff. I'm sure we can get used to hagfish too although I hope I won't be around for that.

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    3. Daniel Boon

      logged in via LinkedIn

      In reply to John Doyle

      how does one arrive at a 'circular economy' when the article finishes with a 'resilient economic growth'?

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    4. Daniel Boon

      logged in via LinkedIn

      In reply to Henriette Vanechop

      how does one arrive at a 'circular economy' when the article finishes with a 'resilient economic growth'?

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  3. Alex Serpo

    Garbologist

    I had a look at the Australian Circular Economy page. My understanding is that this is an education program for school students - funded by an American charity. What else does it actually do?

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    1. In reply to Alex Serpo

      Comment removed by moderator.

  4. Jonathan Kelly

    IT Consultant

    I am an innocent when it comes to economics and something here puzzles me.

    We talk about economies growing. I always understood that as meaning (in the end) more people in society keep getting more or better 'stuff' over time (be that TVs or healthcare or comfort or cash etc). ie society as a whole grows in wealth over time. we all get bigger slices of pie because we get bigger pies.

    The only way to get bigger pies though is to keep adding more to the system - if we add more into the system…

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    1. John Doyle

      architect

      In reply to Jonathan Kelly

      I'm no economist either, but it's just arithmetic we are discussing here.
      The economy can grow exponentially whilst there are adequate resources and that's what has been the case in our current civilization.
      However this is finite. The Earth is finite, all the resources we utilize are finite, some already depleted, some getting close and a few only in no danger for the forseeable future.
      We are moving beyond the change over point and to continue as if we can do so with little consequence is a…

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    2. Julian Bontay

      Equities Analyst

      In reply to John Doyle

      John, you assume that GDP and wealth is linked to every increasing physical resource use. Though this is the case during developing country's growth spurts, it doesn't hold for post-industrial economies in the West, Japan etc. For example, the average car uses much less petrol than in the 1960's, and less steel to make as well, so we are not using up resources at the same rate that notional or even real GDP is growing.

      More and more GDP comes from services, such as legal, hairdressing, etc and…

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    3. Jonathan Kelly

      IT Consultant

      In reply to Julian Bontay

      More and more GDP growth is coming from
      productivity growth - doing things smarter, more effeciently, etc.

      I would think there must be a diminishing limit to this though - you can't keep getting more and more efficient for ever can you?.

      Similarly with services as a form of wealth increase, there must be some diminishing limit to how many haircuts and how much legal advice can be given (or be required) :)

      NB I am not trying to say we are all doomed, I am trying to get my head around 'growth' and stumble over the the idea that society can continue to keep getting more productive and more affluent for ever (ie a 'growing economy'), without an input of *something* from outside (raw materials, energy etc) to the system.

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    4. John Doyle

      architect

      In reply to Julian Bontay

      Thanks Julian for showing another point of view. Actually I think our so called post industrial economies are much worse off now than when they actually did produce worthwhile products. They still do it to some extent and yes sometimes they manage to get sustainability stars too.
      Any society that graduates 40 lawyers for every engineer is seriously showing decline.
      We are creating a mountain of debt, such that we can now never repay the capital, and before too long not even the interest repayments…

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    5. Brandon Young

      Retired

      In reply to Julian Bontay

      Hi Julian. Did you watch the video that John provided a link to earlier? Be interesting to see what you make of it.

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    6. Daniel Boon

      logged in via LinkedIn

      In reply to John Doyle

      I agree
      just how does one arrive at a 'circular economy' (when the article finishes) with a 'resilient economic growth'?

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    7. Daniel Boon

      logged in via LinkedIn

      In reply to Julian Bontay

      are you delusional Julian ...(an equities analyst) ... are you familiar with LCC? (life cycle costs of infrastructure) ... leaving aside GDP (and pretending that people will pay less for everything until such a time as it is free) how would you explain that if we have consumed half the world's (more easily obtained) energy and resources, and that the given LCC is about 2.5 the cost of building over 25 years, that we can maintain the (matrix) system?

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    8. Daniel Boon

      logged in via LinkedIn

      In reply to John Doyle

      yes ... a good example John; although many people - however well educated - cannot get their head around it ...

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  5. Dale Bloom

    Analyst

    A circular economy is what we had before so much importation.

    It may have cost more to buy a locally made product, but the money circulated through our economy, (and didn’t leave the country so quickly), and this gradually increased of wealth of all Australians.

    Many years ago, the sugar industry regarded molasses as a waste material, and would dump it on fields as a (not so good) fertilizer, or burn it in the sugar mill boilers.

    But eventually there were products developed that could be produced from molasses, and molasses sales from a sugar mill can now pay for the wages of the workers in the factory.

    So that could be an impetus to drive recycling of waste, if the sales of recycled products can pay for the wages of the workers.

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    1. John Doyle

      architect

      In reply to Dale Bloom

      That's not a circular economy Dale. It's just a less wasteful linear one.
      I don't know if there has ever been a circular economy. Perhaps in some small communities?
      In our case we are like all large empires and states. We get our resources and with work turn them into wealth. Empires were more profligate and more grasping than other governments so when they stopped expanding the resources stopped coming and they declined.
      The Roman empire stopped expanding because the EROEI [energy return on energy invested] equation became unproductive. Costs without enough benefit. The edges of the empire were deserts to the east and south, ocean to the west and forests to the north. Nowhere more to go. Britain and Wales were good exploitable lands [gold, tin]. Scotland was poor value, so it was not prized.
      For us today our whole world is threatened. No back up. We can't leave the mess we make.

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    2. Daniel Boon

      logged in via LinkedIn

      In reply to Dale Bloom

      I cannot agree with that observation Dale, based purely on the fact that population growth continues, so it is never 'circular' ...

      there was a Japanese movie about a village that maintained a set population, once you hit 70, you did 'the right thing' ... the Australian Aboriginals used infanticide to cap population growth to not exceed their lands carrying capacity ...

      'we' hold human life sacred, babies and old people that nature would deal with have non-renewable energy expended on them, but really, who profits from this? IMO, the drug companies and other corporations ...

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    3. Daniel Boon

      logged in via LinkedIn

      In reply to John Doyle

      in fact, on the ports side, the empire was productive but, as you pointed out, inland was not ...

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    4. Dale Bloom

      Analyst

      In reply to Daniel Boon

      It has to do with the “velocity of money”

      This should decrease when we earn money in Australia, then buy something that is imported.

      The velocity of money immediately stops, because the money has left the country.

      Rather like the concert stops when the singer leaves the building.

      There is an interesting article here showing that despite a huge economic stimulus package by the US government, the velocity of money in the US has plummeted.

      http://viableopposition.blogspot.com.au/2013/10/the-ever-slowing-velocity-of-money.html

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  6. Michael Shand

    Software Tester

    Good Article, so a circular economy is just what hippies and permaculturalists have been advocating for generations, that waste is not waste it is actually a resource and we should model our economy on cycles as seen in nature

    Awesome, they are finally coming around

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  7. Antje Guenther

    logged in via email @flinders.edu.au

    There's a wonderful book that outlines the whole idea. It's called "Cradle to Cradle: Remaking the Way We Make Things" by William McDonough and Michael Braungart. It's quite wonderful how it explains that the current recycling we're doing is actually down-cycling, i.e., a plastic bottle may get a second life as a park bench or garbage bin, but eventually all the finite resources that went into producing the plastic bottle in the first place end up in landfill.
    The authors speak of creating two kinds…

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    1. Michael Hay

      retired

      In reply to Antje Guenther

      And so we say 'goodbye' to the 'built-in-obsolescence' which has maintained our manufacturing industries for so long. We revert to sensibility! and common sense! and we stop this endless spiral to heaven built of vast quantities of waste. Hallelujah!
      It would seem that the re-cycling industries which would evolve out of the waste being reusable would employ many people.

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    2. John Doyle

      architect

      In reply to Antje Guenther

      William McDonough's ideas are well known in architectural circles.The cradle to cradle idea is certainly an excellent one.
      We need however to find a way where even with recycling we use only a small amount of energy. Not having plastic bottles for a start.
      For a circular economy to work 95% of production needs to be recycled. And none of it is any good if we delay, because recycling doesn't produce food, it makes it less wasteful and that's a big help, as long as there is enough phosphorus to go around even 200 years from now. It's an enormous problem, an enormous challenge for us to survive long term.

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    3. Daniel Boon

      logged in via LinkedIn

      In reply to Henriette Vanechop

      unfortunately, the Professor has passed away ...

      and NO, the LNP will be required to sing off the sheet provided (a condition of membership) ..

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  8. Aaron Vallejo

    Foreman Wind Farm Construction

    I have been following William McDonough and Michael Braungart's work on Cradle to Cradle Certification since their documentary movie "The Next Industrial Revolution" was released in 2001.

    From my perspective, Cradle to Cradle Certification is THE recipe or instruction protocol on how to build our "circular economy".

    This is probably the best, graphics rich and recent presentation I can find for you all. Enjoy and join the excitement.

    http://www.youtube.com/watch?v=xfzBQWfKpFA

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  9. Daniel Boon

    logged in via LinkedIn

    Oxymoron example: when a World Economic Forum talks of a circular economy, with the obligatory green tint of environmental policy.

    I would like to know (can you name) these NGO's and academics.

    However, if this is some weird April 1st story a month early, then I get it; because to go around in a circle (circular) means we are back where we started and poses the question, 'why expend the energy (think entropy) in the first place'?

    So let me have my 2 bob's worth (without Moderator finding…

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    1. John Doyle

      architect

      In reply to Daniel Boon

      It doesn't, Daniel. But why not try spin? It's been very useful to hoodwink the man in the street.
      Anyway opposing the blandishments of the LNP et al is never useless.
      It's worth pointing out that we can, as individuals in numbers give these people a siege mentality and the more we question their legitimacy the more they will be under pressure, the more they will understand they are betraying their right to govern, the more they will feel they have to act for all, not just vested interests etc.
      Or be overthrown.

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  10. Yoron Hamber

    Thinking

    Like building things to last?

    Oh wait, that will destroy the circular economy, won't it? :)

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    1. John Doyle

      architect

      In reply to Yoron Hamber

      Not at all. There will be many buildings surplus to requirements that we will have a huge resource to recycle.

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