#CircularEconomy_1: Will Circular Business Models save the world? [deu/eng]

Everyone seems to be talking about the Circular Economy and Circular Business Models. There seems to be a general consensus that they have a very important role to play when it comes to reducing global environmental pressures and achieving environmental goals. In the #CircularEconomy blog series, some scientists of the Oeko-Institut raise few questions on the current state and potential of Circular Business Models and present their proposals on how the circular economy can really contribute to climate protection.

In this first post, Clara Löw and Siddharth Prakash present their first two hypotheses (out of seven) on the #CircularEconomy. The hypotheses raise questions that Öko-Institut staff are discussing behind the scenes. Over the course of the year, the blog series will provide insights into the debates - some of which are controversial. Case studies will be used to clarify the hypotheses.

Circular Economy is one of the main building blocks of the European Green Deal. The EU is implementing a transformative industrial strategy for a clean and circular economy on the way towards carbon neutrality until 2050. Among other things, the Circular Economy Action Plan that was published by the European Commission in March 2020, is perceived as a major milestone in contributing towards a radical change in the production and consumption patterns in the EU.

We note that scientific, political and economically oriented views shape and classify the circular economy very differently (Kirchherr et al. 2017 Resources, Conservation and Recycling, p. 221-232). The European Commission has defined Circular Economy in 2020 as follows: „In a circular economy, the value of products and materials is maintained for as long as possible. Waste and resource use are minimised, and when a product reaches the end of its life, it is used again to create further value.“

The recent Circularity Gap Report 2021 estimates that doubling global circularity will reduce global greenhouse gas emissions by 39 percent by 2032 and pave the path well below 2 degrees temperature rise. In this way, a Circular Economy will support the greenhouse gas mitigation targets, which currently are not ambitious enough to help achieving the goals of the Paris agreement.

We would like to raise a few questions and we have framed a series of hypotheses. The hypotheses can be looked at as an inventory of aspects on which Oeko-Institut’s colleagues discuss behind the scenes. We are planning to give you some insights into – sometimes controversial – debates during the year 2021, already teasing your interest through our seven hypotheses which will be published consecutively.

Hypothesis 1 There is no invisible hand in circular markets.

One of the notions within the Circular Economy discourse is the high potential attributed to Circular Business Models (CBM). Packaging free supermarkets, repair cafés, second-hand shops, leasing and sharing models, marketing of durable, refurbished or remanufactured goods and upcycling initiatives – the list is long and growing. Environment and society will benefit from CBMs’ activities as long as they effectively lead to an absolute reduction of overall environmental pressures. Thereby, a typical narrative has been built on the assumption that a direct interaction between the companies offering CBMs and consumers actively demanding them will transform production & consumption patterns.

Is this really the case? According to an OECD-study, in most sectors, the market penetration of circular business models remains limited and is usually no more than 5 to 10 percent in economic terms. In other words, 90 to 95 percent of the business models are still based on the linear take-make-waste approach. Our experience has shown that the prevailing economic rationale – both of businesses and consumers – which is built on the principle of saving/ minimizing individual costs will hinder the sustainable transformational processes at the global level. For instance, the German Packaging Act even stipulates that distributors of non-recyclable packaging should pay a higher license fee to the producer responsibility organizations (PRO) than those who use recyclable packaging. In practice, however, this rule is hardly applied because the competing PROs have to fear losing customers if they charge higher license fees for non-recyclable packaging. This has limited the impact of the Extended Producer Responsibility (EPR) mechanism.

No doubt that consumers and businesses are an integral part of any transformational process. We, however, perceive the main responsibility on the side of policy-making for setting the conditions in a way that CBMs can flourish in the mass market. Thus, we think that the potential of CBMs, under current framework conditions, is overrated and that they on their own will not lead to a large-scale transformation of the mass market.    

 Hypothesis 2 Call spade a spade: Current economic conditions and political priorities will keep Circular Business Models in a niche

Looking into the statistical data, we can see that a significant reduction in the use of raw materials for business and consumption has not yet taken place and waste volumes continue to be at a very high level. Even though some reports suggest a decreasing material or waste intensity in a few sectors and countries, that is decreasing amount of material consumed or waste generated against per unit increase in the Gross Domestic Product, the much-propagated absolute decoupling of resource use and economic growth has turned out to be wishful thinking at a global scale.

According to an OECD study, global materials use is projected to more than double from 79 giga tonnes (Gt) in 2011 to 167 Gt in 2060 (assuming a stable material relative decoupling). Knowing that a large share of greenhouse gas emissions is directly or indirectly linked to materials management and use, increasing material use will in all likelihood jeopardize the global climate goals of the Paris agreement.

Thus, under current economic and political framework conditions, we put a question mark on the ability of the CBMs to achieve a high market penetration and contribute towards an absolute reduction of material use and greenhouse gas emissions.

Just to give some practical examples: We have shown in our studies, for instance for the Federal German Environment Agency (UBA), that the lifespan and use time of electrical and electronic appliances has been going down. Repair and refurbishment businesses are just not competitive enough in economic terms when it comes to comparing the repair costs with falling and ridiculously low prices of new products. Although the EU Ecodesign Directive has passed some repairability-related requirements for some product groups, they might not be sufficient to substantially increase the use times of products, especially if new products continue to be offered at throwaway prices.

We have recommended that minimum durability and quality standards for the products are required as well, which may lead to an increase in the initial costs of products but would help in saving overall societal costs. In a recent study for the Federation of German Consumer Organisations (vzbv), we projected annual savings of about 3.7 billion Euro and almost 4 million tonnes greenhouse gas emissions in Germany if lifetimes of smartphones, washing machines, televisions and notebooks were extended according to consumers’ expectations.

What do we conclude from this hypothesis? In order to bring the Circular Business Models to the mass market, we need to reverse the incentive patterns: This includes ambitious minimum durability standards for products, high taxation and disincentives for resource-hungry products and services as well as substantial positive incentives, subsidies and tax rebates for CBMs. The existing political priorities seem to be operating otherwise, as the examples above show. At the end of the day, the Circular Business Models are providing a service to our society without being paid adequately for it. On the other hand, linear business models are causing higher societal costs (externalization of costs) but are easily getting away with it.  

Clara Löw and Siddharth Prakash are experts in the Sustainable Products & Material Flows Division in Freiburg. Their research focuses on sustainable materials, products and consumption.

Lecture "Policy instruments for upstream Circular Economy" by Siddharth Prakash at "15th Asia-Pacific Roundtable for Sustainable Consumption and Production", 4. Mai 2021. Video on YouTube,

Presentation