The ‘circular economy’ is coming round again – bigger and better

As an EU Commissioner for a decade, who am I to say what is good for business? I have never started or managed one, but have been frequently approached by business lobbies. The lesson I learned was not to make the mistake of equating the interests advocated by such groups with the wider interests of European business, and still less those of the European economy. Incumbent businesses defend the status quo and have little or no interest in any change that might undermine their own position. Their “liberalism” is often limited to keeping markets safe for themselves and minimising their regulatory and administrative burdens.

I have not forgotten as an economist the concept of comparative advantage and the principle of creative destruction. Both contain important lessons for Europe in the context of rising global demand for resources that range from minerals to energy, and from land to water. Economically rich but resource-poor, and population-intense Europe is at a clear comparative disadvantage when it comes to producing resource-intensive products, and therefore has a clear interest in maximising its returns on resource inputs.

As input costs for production factors like raw materials and energy combine to make certain sectors and companies less competitive, those that do not adapt will fail, and one hopes will be replaced by others better equipped to handle resource scarcities. In other words, creative destruction should ensure that some of our companies in Europe will remain efficient.

In the end, competitiveness and sustainable growth are about efficient resource allocation – resource efficiency. At its best, business has the capacity to innovate and invest in mobilising resources quickly and efficiently through effective markets. But that does not mean that being “kind” to business will lead to competitiveness. In the short term it may seem tempting to protect businesses from reality, but we should not kill businesses with kindness. This sounds a hard message, but maybe that’s why people talk about the hard laws of economics.

The resource pressure we witness today in fact has more to do with the soft laws of economics colliding with the hard laws of physics. We have one planet, with finite resources, and for the first time human activity is compromising our planet’s ability to cope, and that in turn is starting to impose limits on our economic growth.

Europe’s industrial growth in previous centuries was resource-inefficient. But with abundant resources to supply a few million middle-class consumers, that did not matter. Today, as the rest of the world catches up, lifting billions out of poverty and predicted to create three billion more middle-class consumers within a generation, the pressure on resources means that the 21^st Century will be the century of fragility.

Our growth and prosperity will be determined by our ability to deal with these constraints, and get more value out of each tonne of materials, each hectare of land, each cubic meter of water, and each joule of energy. We need a growth model that enables the rich economies to improve their sustainability whilst continuing to maintain – or indeed improve – living standards, and one that enables emerging economies to grow while decoupling human development from natural resource use and environmental impacts.

Private sector entrepreneurship, innovation and investment hold the key to unlocking such efficiency leaps in both rich, emerging and poor economies. Just as companies responded to higher labour costs by revolutionising labour productivity, so are exponential gains possible in resource efficiency, even in the prevailing linear system where we extract, produce, consume and throw away.

The biggest leaps in resource productivity – the ones that will allow us to decouple our GDP growth from resource use – will come, however, when we move from linear systems to circular ones, where resources remain in the system for as long as possible. The problem here for many leading companies is that they face systemic lock-ins to the linear model that range from infrastructure to financing, and from consumer behaviour to regulation.

The introduction in 2010 of resource efficiency as a flagship of the EU’s “Europe 2020” economic strategy, and its adoption of the circular economy package a year ago, were attempts to provide a more far-sighted framework for investment that would breakdown some of the lock-ins. They were not so much policy choices as a response to the way globalisation and global resource pressures were eroding Europe’s comparative advantages.

The circular economy package’s starting point was to use key pieces of waste legislation to boost the re-use and recycling of municipal waste to 70% or more and to increase the recycling of packaging waste to 80%, both by 2030, and to ban landfilling of recyclable waste five years earlier, while virtually eliminating all landfill by 2030. In short, the aim was a Europe without waste, as waste has become a resource.

In fact, the package goes even further. By increasing recycling it aims to bring materials back into productive use – completing the circle – with the waste phase only part of that circle. It also looked at its other parts to ask how can we make markets for secondary raw materials work better, reduce waste and increase resource efficiency and design waste products that last longer and are more recyclable.

It would be a mistake, though, to see the circular economy as a big monolithic circle; there are many circles and they vary for different products and materials. Although it would be an achievement to get today’s 43% recycling rates up to over 70%, recycling should be seen only as the “loop of last resort”. The better option is to eliminate waste altogether. Collecting and reprocessing costs are pretty high, even if not usually borne by the producer.

The closer the system gets to perpetuating the original purpose of a product, the higher will be the savings of materials, of labour, of energy and of capital, and the lower will be the environmental externalities. The circular economy package therefore looked at how we can move away from the concept of “fast moving consumer goods”, with high throughput, frequent purchases, low prices and short lifespans, to products that are durable, upgradable and repairable. And it stressed the importance of product design. Designers are usually given a brief which fits into a business model where margins are based on making products cheap and selling them expensively. Integrating life-cycle costs and impacts, and customer anthropology, will only become a reality when these business models change.

The package clearly had to go much wider than merely revising waste legislation. It had to look at how economic actors operate, particularly in sectors with high resource inputs. That’s why it included communications on green employment and skills, on resource efficiency opportunities in the building sector, and an action plan for SMEs.

Yet one of the first acts of the incoming Juncker Commission was to withdraw the circular economy package. Whatever the reason for that, it’s important to see its withdrawal as a real opportunity to strengthen the original proposals and make them “more circular”, in the words of the Commission’s vice-president Frans Timmermans to the European Parliament.

The 2014 package was ground-breaking because it was the first time that European waste policy had been broadened out of a legislative approach based mostly on targets, and linked to actions to reduce and prevent waste through actions in the design, production and consumption stages. I wouldn’t presume to say it was perfect, and I would have liked to go further, particularly by putting forward concrete proposals to encourage better design, remanufacturing and new business models. I am now hopeful that a new proposal will be driven forward for a reinforced and improved package, but I have some worries. I would acknowledge that the waste targets I proposed were ambitious, but not unrealistic. They were grounded in a solid impact assessment of rates of improvement already achieved in some EU member states, and applied these to laggards. Some member states may flinch at the investments they will have to make, but we had showed that those yielded the highest rewards. And as well as hoping that the new waste targets will be just as ambitious, I would be keen to see such other improvements as a greater focus on the prevention of waste, on reducing avoidable food waste, on reinforcing extended producer responsibility and on eliminating loopholes that member states could exploit to make their figures look better than they really are.

I also hope that the new package will be more than an action plan. New or re-packaged initiatives would be great, but what I presented last year was a strategy to re-orient our economies from the prevailing linear model to a more circular model that requires systemic change and longer-term private sector investment. That is why I proposed the “guiding star” of a long-term headline target for resource productivity supported by indicators for land, water, GHG and materials to provide a clear signal to the private sector, and to enable the semester process to be used to encourage member states in the right direction.

The European Resource Efficiency Platform has recommended a 30% increase in resource productivity by 2030 as achievable, and modelling suggests that would increase GDP by up to 3% and create around two million jobs while also protecting the environment and human health. As co-chair of the UN Environment Programme’s international resource panel, I see the prognosis for future resource pressures more clearly than ever. European businesses will be obliged to move towards more circular models if we are serious about improving competitiveness and keeping industry in Europe. The EU’s role is to provide the framework and conditions that will facilitate that transition with the least disruption.