The Circular Economy as the New Normal

The Circular Economy as the New Normal

Our dominant economic system focuses on the creation of wealth. It is based on capitalism in combination with industrialisation. In its early form, this combination helped develop and innovate means for the production and consumption of goods and services. It also provided a means for social mobility and helped give rise to the middle class and growing social equity within the developed world. Competition, supported by modern science, has been instrumental in driving technological progress, leading to a steady increase in quality of life. The driving economic factor of competition within finite markets, however, also gave rise to latter-day developments such as the exponential concentration of disposable wealth to an increasingly small number of people. Our current system also caused the unacceptable build-up of waste and pollution. The increased call for efficiency to safeguard profitability has widened social chasms. 

As a result of this, society appears to be preparing for a change and shift of equilibrium, much like the late eighteenth and early nineteenth century, when the social order was revolutionized and power shifted from the elite to include much broader sections of society. Then and now, perceived inequality and the wish to negate it, lie at the heart of the matter.

The existing structures being challenged, currently often global corporations and their supporting governmental and financial structures, typically respond with protectionism, wishing to extend the status quo. This prompts the question: which dominant thesis will be responsible for breaking this status quo and reform our economic system? 

Source: Guido Braam and Dionne Ewen, https://archive.org/details/Breakthrough2180910
This work is in the Public Domain.

Introduction

As stated, in times of perceived instability, self-preservation expresses itself in protectionist memes such as xenophobia and a general "fear of the unknown". Consider the fact that the earliest railways were not laid down by the owners of stage-coaches and that the smartphone was not invented by a phone company. Established structures hardly ever give rise to the new by self-reflection and the embrace of change, as they are often blind to the unsustainability of their own approaches. 

This thesis is defined by system-wide collaboration and the creation of abundance through regeneration of finite resources through continuous cycling. The first relies on system thinking and is mostly hindered by mindset, the latter can be dealt with through the proper application of design thinking and understanding that the value of things lies in their functionality, rather than in their constituent materials. A state of the art smartphone only contains several euros-worth of material, but close to a thousand euros of added intelligence and appreciated functional value.

The Circular Economy

A circular economy, however, is not "just" about cycling bare economic value. It also takes into account the need for balance and social fairness, and it does away with the zero-sum game in "classical" capitalism where one might gain at the expense of another and not add net value to the system as a whole. In a true circular economy assets are available to all, but the difference in success is defined by the total value added on a systemic level, which can in turn be expressed in monetary terms. 

This systemic approach is what makes a circular economic paradigm the model of choice. It fuses the basic idea that wealth creation and progress are goals worthy of pursuing with methodologies that ensure that these goals can be met without system depletion and ever-increasing social inequality.

Systemic collaboration demands new ways of thinking and working, and it relies much more on disclosure of key insights than on non-disclosure of competitively sensitive intellectual property. It requires supply chains to be integrated into the entire use cycle of products, so that information on the value of our goods in circulation may be preserved for future reference, and it requires transparency and open standards, not protectionism. 

Systemic collaboration further increases the awareness of interconnectedness amongst people. None of us exist in isolation and so our personal and professional ventures do not either. We have a shared responsibility for stewardship, not only for those we know, but also for those we do not know, as well as our planet as a whole, now, and for future generations. This may appear to be a lofty argument, but our success as a species fully depends on us taking this responsibility seriously. 

We all strive for meaning in our lives, we wish to connect and to pass on whatever quality we may have added to the system to those who follow in our footsteps. Meaning can most certainly be found in our joint exploration of novel ways to replace the generation of wealth with the generation and preservation of value. To do so, we invite all to ignore or overcome the reflex of self-preservation, striving to maintain the status quo, and innovate in a more radical fashion, finding systemic interrelatedness as a welcoming framework for collaborative approaches.

The Definition of a Circular Economy

The circular economy is an economic and industrial system that prioritizes the reusability of products and raw materials. The restorative power of natural resources is the starting point for a sustainable system where value destruction is minimized and value creation is optimized. This is opposite to the linear system in which economic growth is accompanied by using up non-renewable resources, disposal after use, and where the objectives do not directly relate to shared value creation. 

The current ideas around the circular economy are not new. They stand on the shoulders of giants like Walter Stahel's performance economy, Gunter Pauli's 'blue economy', the systems thinking of Donella Meadows, and the work of Michael Braungart and Bill McDonough who introduced Cradle-to-Cradle. The recent enthusiasm also brings much fragmentation and diffusion, leading for example to more than 114 definitions for the circular economy.

The Rise Of The Circular Economy

Over the last five years interest in the concept of the circular economy has risen tremendously. The report from McKinsey in conjunction with the Ellen MacArthur Foundation published in 2012 at the World Economic Forum ignited the idea, for CEOs and heads of government, that economic growth and restoration of our planet can be combined with this circular vision.

The years that followed yielded an ever wider, more integrated, and more nuanced picture about what the circular economy is and can be. After years of reports, overviews, and reviews of material flows, the first (new) circular concepts were brought to market. Well-known examples are Philips' 'light-as-a-service' model and companies such as Interface and Desso which used Crade2Cradle and later the circular economy as the integrated model for their strategic transformation. Soon more pioneers followed with their first pilots. For example Mud Jeans received global attention with the 'lease-a-jeans' concept. 

 Much has been written about the different drivers that have caused the recent acceleration of the circular economy. Most frequently mentioned is the risk of resource scarcity, price volatility, and increasing worldwide product demand. The technological sector, for example, faces scarcity of precious metals, such as gold, silver, and platinum. 

There are also the opportunities that drive sectors to keep up with the rapidly changing environment. For example, changing functionalities - and ownership - of buildings and business districts are more common. This challenges the construction sector to grasp this opportunity to remain relevant and diversify from competitors. Other drivers vary widely: reduction of greenhouse gas emissions and waste, legislation, innovation, marketing, collaboration, new value propositions, and opportunities to increase residual value. 

The Circular Economy And The Status Quo

In the meantime we have seen many pilots, a growing number of start-ups, more and more attempts by business to develop circular alternatives for their existing product-market combinations, and new coalitions of parties with new circular innovations. The government plays a clear role on the national and local levels in pushing the circular economy forward. 

Yet the logical and inevitable circular economy has not shown an exponential growth. Not because the concept is incorrect, but because our current linear system is too much of a steady status quo that has been optimized in the course of decades and therefore still appears to be more cost-efficient than circular concepts. The key is that circular innovations lack the same scale or/and have to deal with barriers that come with every paradigm shift. 

These are the typical first mover 'costs' and weigh heavily on a relatively small group of pioneers, barriers that include necessary alterations in laws and regulations, new risk assessment within financial institutions, unproven business models, and new ways of collaboration. They can be overcome in pilots and small-scale trajectories, but are a real roadblock once the projects are upscaled - a classic 'Catch 22'.

The success of the transition towards a circular economy in this phase will depend heavily on whether there is sufficient demand from the market. Demand gives air to the market by enabling entrepreneurs to raise the bar when it comes to innovation. It gives support and evidence that it can be done and with the right scale, and it becomes more feasible to get a return on the investment. The logic behind the circular economy leads to the hypothesis that a positive business case can be found in each sector, but the 'switching costs' are still too high for most companies. In other words, reality is tough. Governments on the local, national and European level play a crucial role in this development stage. They have the ability to be a launch customer and they are in prime position to change the rules of the game in favor of the circular economy.

How To Overcome The 'Implementation Gap'

Scaling is the necessary next step in order to make the circular economy mainstream. The last five years were characterized by creating awareness about the potential of the circular concept for businesses and government. First attempts and the many reports on the subject resulted in a better and more nuanced perspective on the circular economy. On the other hand, continuing the discussion on this topic is a rather safe strategy and the redundancy of impact reports and opportunity assessments can lead to even further procrastination by 'analysis paralysis'. 

National governments and the European Union still work with a 'top down' approach and the stimuli that are created for the market are often too large and too complex for small and medium-sized enterprises. Examples are the Horizon 2020 grants and the EFSI Fund. Applying to gain access to these financial resources requires substantial investment in employees or funding experts with a reasonably big risk of not being selected. Based on the insights gained so far it is fair to say that we are dealing with a large-scale 'implementation gap'.

Figure 7: Product Life Cycle Circular Economy

Think Big, Act Big, Act Together

In this chapter we describe the eight most important levers for scaling up the implementation and therefore the realization of the transition towards the logical and inevitable circular economy.

Scaling Up The Circular Economy

Scaling up means creating more demand: an increase in the number of launch customers (governments, business, consumers) for circular products and services will make companies act and innovate. There is no bigger incentive for a company than customer demand. That is why it is important that circular solutions be seen as the default solution.

From Circular Offices To Circular Construction

Office furniture is a great example of circular economy, because it is already standardised. Soon linear office furniture will be the exception to the rule. This started initially with pioneers in the carpet industry. But cradle-to-cradle companies, such as Royal Ahrend and Steelcase, use 'ready for disassembly' as a design principle for their office furniture, and Desko's refurbished furniture has contributed to this shift in the office furniture market. This movement recently started in the construction sector. Examples are a cradle-to-cradle-designed town hall in Venlo and Park2020 in Hoofddorp. The town hall consists of materials and products that are not harmful for people and the planet during the production process, use, and future use.

The circular economy is new and, as with all innovations, the first steps are the most expensive. The linear alternatives are optimized, have a certain scale to divide the fixed costs of innovation properly, and can lean on established recurring cash flows and depreciated assets. Moreover the issue of linear products and services is that their 'true costs' in terms of the environment are not accounted for. 

Examples are societal costs and hazards of greenhouse gas emissions and particulate matter. Furthermore, one of the gravest barriers is that virgin materials are cheaper than secondary materials. There is currently no mature system in place that enables trade in secondary materials such as we see in the 'commodity market'.

Recent research by Utrecht University shows that the circular economy remains a niche market for now and entrepreneurs are holding back their investments until the frontrunners 'pull the chestnuts out of the fire'. The right scale can break this. Our suggestion is to launch the system change by starting with a number of ambitious projects within a few sectors. Make sure that stagnation and obstacles are known, and research where and how positive impact is possible within the supply chain. Make sure that incentives for participating organizations are visible (e.g. financial or innovative incentives). Within these projects it will be necessary to take some risks, and one individual player cannot take this risk alone.

"It will remain a problem as long as primary materials are more inexpensive than secondary materials. The profound cause is that the system does not account for externalities in current pricing models. A limited profit-loss model overestimates the profitability of linear business models and underestimates circular ones," says Martijn Lopes Cardozo (CEO Black Bear). 

Just Do It

Think about the consequences before the start: a wise approach that usually takes some time to research, plan and subsequently carry out the plan. In current times this seems insufficient. Results of research are not sufficient to determine the right course, due to the volatility of change, systemic nature of issues and many existing, and even opposed, interests. This causes an 'analysis paralysis': the paralyzing effect of not (entirely) overlooking the situation. As a result initiatives are not handled as fast as hoped. It is important to create an environment where the goal remains stable, while the road to get there is not. 

Value Chain Collaboration

If you decide to start, collaborate with other interested parties. Value chain collaboration is complex. It is difficult to overlook the value chain and how to determine the roles and responsibilities of individual organizations. It is not always clear whether choices will have a positive or negative impact on other parties within the value chain. The circular economy strives to create win-win situations within a value chain: production and use of products and services should be considered a mutual challenge. A value chain that strives for maximum value retention stimulates long-term collaboration instead of short-term gains. Value chain collaboration demands an integral approach. Therefore, organizations with a circular business model face challenging situations when working together with linear organizations.

Collaborate

Van Houtum is an organization with an inspiring history regarding circular entrepreneurship. In 2014 the company wanted to produce hygienic paper made of old juice cartons in its factory in Limburg (NL). It was technically possible to do, but it was challenging to ensure an appropriate amount of old juice cartons as input for the production process. The organization was occupied for almost two years in making sure the business case was positive. Van Houtem worked together with the juice carton association, Suez and local and national governments to get access to all the juice cartons collected in the Netherlands. Value chain collaboration requires change in and between organizations. Sometimes it commences with one player in the chain, but players 'outside' or 'above' the chain may also have an important role to play. For example, the FrieslandCampina co-operative covers a larger part of the chain. But ports, financial institutions or philanthropic organizations could also be the initiators of value chain collaboration. 

Innovative Ways to Innovate

Design Thinking, Lean Startup and Permanent Beta show us new innovation approaches: 'learning by doing'. These approaches aim to collaborate and launch pilot projects as soon as possible. Develop and scale while the pilot is still running. In most cases, frontrunners use these approaches to innovate. 

It helps to create a physical environment for innovation where input is more important than output. Innovation needs space and time to develop and flourish in a creative way - a place where there is enough focus on value chains and impact. This requires a budget that does not depend on time-to-market, but trust that outcomes will be valuable. 

Mariana Mazzucato, author of The Entrepreneurial State, explains that her research has shown that countries who manage innovation through 'input' instead of 'output' have a higher return on investment. The Finnish Sitra Innovation Fund is a good example.

Creating a circular product or service requires collaborative design with organizations within the value chain and relevant disrupters outside the value chain. This process is often more difficult than it seems. In this open innovation track we collaborate in different stages with an ecosystem of partners and disrupters to create a circular solution at scale. We start small, defining the right ecosystem and collaborative approach, and then create a prototype before actually scaling up to pilot projects. Our public launch is underpinned by a large-scale go-to-market strategy.

Pragmatic And Programmatic Approach

organizations should get access to knowledge and innovation centers with specialists in the area of Design Thinking, open innovation, and value chain collaboration. These are resources they would normally not invest in themselves. Combining existing knowledge, insights, and practical challenges with innovations is key to creating an optimal learning curve. Unfortunately, this is not yet widely incorporated into ways of working. The government has a role as launching customer of pilot projects and knowledge institutions contribute by sharing knowledge. 

Even an extensive project cannot achieve a circular economy within the sector. A combination of projects that can learn and develop together, with bigger market demand and substantial size to remove barriers, might do so. This combination of projects should be governed within a programme structure. A programme has the advantage of knowledge sharing and, given the longer timeframe, also has opportunities to resolve common problems for all projects at once. A circular building programme was launched recently to accelerate 

accounts for 25-30 per cent of total EU waste. The construction sector in the Netherlands accounts for 40 per cent of total material use. This sector occupies a significant share of the Dutch economy. The Amsterdam region will build 250,000 new houses and large infrastructure and utility projects by 2040. organizations like Schiphol Airport in the same region have ambitions to develop a circular terminal, and the Port of Amsterdam has a strategic focus on renewables and circular. 

Figure 8: Open Innovation Track

Creating a circular product or service requires collaborative design with organizations within the value chain and relevant disrupters outside the value chain. This process is often more difficult than it seems. In this open innovation track we collaborate in different stages with an ecosystem of partners and disrupters to create a circular solution at scale. We start small, defining the right ecosystem and collaborative approach, and then create a prototype before actually scaling up to pilot projects. Our public launch is underpinned by a large-scale go-to-market strategy.

The building programme has a pragmatic project approach, and sets high standards for circular construction, i.e. high-value, reusable, healthy, and sustainable materials and components for all buildings. Cradle-to-cradle will be used as a principle during the construction phase, and buildings should have a positive environmental impact during the phase of use. The programme focuses on various projects that can contribute to practical evidence to motivate adjustments in legislation. For example, there are several initiatives aiming to create material passports. Yet there is no standard available. This missing common understanding impedes organizations from discussing the future value of components. Working together in a programme could encourage a whole sector to embrace one standard material passport, a typical development that cannot be achieved by a single organization but only by collaboration.

Financing Experiments

One way to stimulate trust and collaboration is to make financial support available for projects that could lead to system change. These distinctive projects are only profitable if the entire value chain participates. These projects stimulate incentive alignment by sharing financial risks and benefits. 

The financial backer plays a key role in this financing experiment, because the government is unable to take on this role. The profits of these initiatives, both financial, social, and ecological, can only be achieved if the entire ecosystem participates. 

It seems to be difficult to organize these experiments, because results do not depend on one company, but on an entire ecosystem. An external financial backer is able to kick-start these initiatives, because it decreases the risks for all participants. When these experiments succeed it also gives practical evidence and trust for future collaborative experiments.

Patient Capital

Our current financial system assumes that products amortize in a fixed cycle. This dilemma can be solved once the 'exits', based on product life cycles, are acceptable for capital providers. A circular economy implies that physical products are never fully written off to zero, because materials - or even better - components or products are still in the loop and therefore valuable. They consist of raw materials and added value (e.g. labor, energy). 

A circular economy encourages value retention instead of value destruction, but in our current linear system this demands perseverance. The circular economy requires a mind shift and new ways of assessing the value of products after amortization. Third parties filling the gap between the current financial system, the market, and circular products have an important role to play. The government might play this role with a revolving fund, but financial institutions could also formalize such a fund. The residual value of real estate has potential to lead to alternative investment opportunities for major retirement funds.

One challenge will be the identification and quantification of risks that occur when financial decisions are based on different variables, such as terms, residual value, and other financial constitutions. As previously mentioned in this chapter, it is preferable to combine research and practice to avoid an 'analysis paralysis'. This combination should result in the identification of both risks and opportunities. Our goal should be long-term value retention and material revaluation, which has great potential to interest financial institutions as well.

It is time to thoroughly reassess whether the financial system is still future-proof. We should question whether current long-term investments that are 'safe' and 'solid' are still safe and solid in a fast-changing economic system. Financial institutions should reassess their investment portfolios with a 'circular mindset', because it takes less value destruction into account and has the potential to lead to solid, long-term investments. After all, all materials are revolving and have the potential to become solid 'commodities' to invest in. 

Organizational Transformation

While working together in value chains, doing open innovation projects, and participating in financing experiments sounds exciting and promising, there are also some internal adjustments to make within a company. First of all, when companies are serious about the circular economy, take some time to do an impact assessment. This will identify the biggest gains within the company and it provides direction for a strategic approach. 

After determining the possible impact and incorporating this on a strategic level, it is time to implement the circular business model within the organization (e.g. processes, input of materials, product design and development, market proposition, product use, and product end-of-use). All concerned departments should be involved in the organizational change to create commitment, entrepreneurship, and ambassadorship within the company. Which departments will face changes depends on the strategic decisions. It might impact suppliers, customers, or shareholders too. 

organizational transformation is crucial if a company has circular ambitions and wants to develop professionally. All changes go through a curve of resistance, and face difficulty and failure, but they also provide a great opportunity to innovate and reduce costs while consciously choosing to walk on the path of circularity. 

Finally...

It is obvious that the concept of the circular economy is generating traction and that many lessons have already been learned on a small scale. These lessons are the basis for scaling up a system transition that makes the circular economy the 'new normal'. The breakthrough to a circular economy requires a combination of technological solutions, adjustments in regulation and legislation, and new financial models, but it will blossom with sufficient demand. The right scale gives circular solutions the opportunity to compete with existing linear solutions.