The circular economy opportunity

In a context of cheap and accessible energy and materials, the linear model inherited from the Industrial Revolution proved hugely successful and fuelled the unprecedented economic development seen throughout the 20th century. With new discoveries, increased efficiency and new technologies of the 1900s, commodity prices steadily declined over the course of the century. However, the rising volatility of commodity prices—a feature of today’s business landscape—generates an inability to predict resource and energy prices. This can be devastating to companies with high fixed costs that rely on economies of scale. In that context, gradual efficiency gains will not suffice, and it looks as though “business as usual” is seriously questioned by the reality in which it operates.

It would seem that the “rules of the game” for our economy are changing, and business leaders, innovators, academics, students and scientists are looking for a positive way out—a new model through which we can rethink progress in the 21st century. One option is the circular economy, a model that has been gaining traction around the world in recent years. Such a system is regenerative by design and primarily relies on optimizing two distinct material flows—biological and technical. Products and services in this model are designed to enable efficient circulation, with biological materials returning to the food and farming system, and technical materials being kept in production and use loops without loss of quality. A circular model generates new revenue streams, reveals overcapacity and maximizes asset utilization whilst ensuring that, as leading performance economy thinker Walter Stahel puts it, the “goods of today become the resources of tomorrow at yesterday’s prices.”

“It would seem that the ‘rules of the game’ for our economy are changing, and business leaders, innovators, academics, students and scientists are looking for a positive way out—a new model through which we can rethink progress in the 21st century.” – Ellen MacArthur

Technological advances facilitate new business models that maximize asset use—finding and booking the nearest communal car or bike only has been made convenient with smartphones and mobile networking. Product tagging and tracking and the growing Internet of things also are enabling manufacturers or service providers to keep an eye on their products—how much they’re being used, if they’re performing properly and when they’re about to go wrong. This makes product recovery feasible and opens up new customer service or aftermarket opportunities for companies.

Global trends are providing a fertile environment for a shift in the economy. In addition to being a new lens for innovation, increasing circularity could offer a significant economic advantage too. Launched in June 2015 at the European Commission’s stakeholder conference on the circular economy, our report “Growth Within: A Circular Economy Vision for a Competitive Europe,” available at www.ellenmacarthur foundation.org/publications/growth-within-a-circular-economy-vision-for-a-competitive-europe, produced with the McKinsey Center for Business and Environment and supported by SUN (Siftungsfonds für Umweltökonomie und Nachhaltigkeit) reveals that by adopting circular economy principles, Europe can take advantage of the impending technology revolution to create a net benefit of €1.8 trillion ($2 trillion) by 2030, or twice the benefits seen on the current development path (€900 billion, or $1 trillion). This would be accompanied by better societal outcomes, including an increase of €3,000 ($3,360) in income for EU households. This would further translate into an 11 percent gross domestic product (GDP) increase by 2030 versus today compared with 4 percent in the current development path. The circular economy also would have significant impacts on the environment for Europe: carbon dioxide emissions would be halved by 2030 relative to today’s levels (48 percent by 2030 across the three basic needs studied, or 83 percent by 2050). Primary material consumption measured by car and construction materials, land, synthetic fertilizer, pesticides, agricultural water, fuels and nonrenewable electricity could drop 32 percent by 2030 and 53 percent by 2050 compared with today.

In a world of uncertainty, many are asking what the future economy will look like in the context of population growth and resource constraints. Our research and analysis tends to indicate that a circular economy framework could offer guiding principles for rethinking and redesigning our futures. There are promising signs of a shift taking place, but reaching this goal will require pioneering ambition, combined with varied collaboration to deliver the benefits of a system that rebuilds economic, social and natural capital.

Ellen MacArthur is the founder and chair of trustees with the Ellen MacArthur Foundation, based in the United Kingdom. She made yachting history in 2005, becoming the fastest solo sailor to circumnavigate the globe, and is a founder of the Ellen MacArthur Cancer Trust. Having become aware of the finite nature of the resources our linear economy relies upon, she stepped away from professional sailing in 2009 to launch the Ellen MacArthur Foundation following four years spent traveling the world and researching the challenges facing our current global economy.