Business Models for the Circular Economy

Chapter 1. Introduction

Abstract

This chapter sets out the motivation for the development of this report. It notes the rapid growth of resource extraction, use and disposal that has taken place in recent years, and the adverse environmental impacts that are occurring as a result. Improved resource efficiency and a transition to a more circular economy are then highlighted as potential solutions to these issues: using natural resources relatively sparingly would allow economic growth to be decoupled from its less desirable environmental side-effects. The chapter concludes by identifying the more widespread adoption of circular business models as a concrete means of achieving decoupling.

Recent decades have witnessed an unprecedented growth in demand for resources. This has been driven by the rapid industrialisation of emerging economies and continued high levels of material consumption in developed countries. As a result, the weight of materials consumed worldwide has more than doubled since 1980, and increased ten-fold since 1900. By 2060, the world population is expected to increase from about 7 billion to about 10 billion (UN, 2017[1]). At the same time, per capita income of the world’s population is expected to roughly triple (OECD, 2019[2]). This will substantially increase demand for natural resources, especially if global production and consumption patterns converge with those of OECD countries. OECD modelling indicates that global primary materials use may more than double from 79 Gt in 2011 to 167 Gt in 2060, if existing trends continue (OECD, 2019[2]).

Continued rapid growth in natural resource use will have several economic and environmental consequences. First, ongoing harvesting of the highest quality mineral ores, fossil fuel reserves, and areas of agricultural land will tend to stimulate higher resource prices, with potentially negative consequences for resource access and economic development.1 Second, resource depletion in some countries, and the resulting concentration of supply in others, will tend to increase the likelihood of geo-politically related supply shocks. This may begin to represent a considerable operational risk for manufacturing firms with relatively one dimensional supply chains. Third, the environmental pressures generated by the extraction, processing, and disposal of natural resources will continue to weigh upon the planet’s sink capacity and, in some cases, become a constraint on economic activity. At the firm level, the threat of climate or other environmental regulation will become a significant business risk for resource intensive or polluting firms.

These concerns have led to increased interest in how to decouple economic activity from resource inputs and the generation of polluting by-products (Box 1.1). Promoting improved resource efficiency has become a major focus at the international level, and a succession of multilateral initiatives and frameworks have been introduced. An OECD Council Recommendation issued in 2008 encouraged member countries to “take appropriate actions to improve resource productivity and reduce negative environmental impacts of materials and product use”. In the same year, G8 environment ministers signed the Kobe 3R Action Plan, in which countries agreed to prioritise implementation of 3Rs policy in order to improve resource productivity. There have also been several important recent developments. The creation of the G7 Alliance on Resource Efficiency at Schloss Elmau in 2015, and the subsequent adoption of the Toyama Framework on Material Cycles, signalled increasing interest from G7 countries. The inclusion of specific goals related to resource efficiency in the 2030 Agenda for Sustainable Development also represented a major landmark. Finally, the introduction of resource efficiency into the G20 agenda in 2017 was notable, particularly given the presence in that forum of various countries with large resource endowments.

At the national level, transitioning to a more circular economy is also receiving considerable attention. Circular economy roadmaps have been introduced in the People’s Republic of China (hereafter China) in 2013, in the European Union in 2015, and in Finland, France, the Netherlands, and Scotland in 2016. Other countries have introduced national level policy frameworks with different names, but with largely similar objectives. Japan’s Fundamental Law for Establishing a Sound Material-Cycle Society and the United States’ Sustainable Materials Management Program Strategic Plan are two such examples.

Box 1.1. The potential benefits of a transition to a more resource efficient and circular economy

The transition to a more resource efficient and circular economy is not usually considered to be a policy goal in itself. Rather, it is the economic, environmental, and social gains that might accompany such a transition that seem to be of interest for governments. Specific benefits that are often cited include, (i) a reduction in the environmental pressures – greenhouse gas emissions, particulate pollution, toxicity, biodiversity loss etc – arising from current systems of production and consumption, (ii) economic expansion and job creation driven by the emergence of new opportunities in certain sectors, and (iii) reduced risk of raw material supply shocks either in the short term (due to geo-political factors), or in the longer term (due to natural resource depletion).

There is an emerging body of work that uses macroeconomic modelling tools to assess the second issue – that relating to economic growth and employment. The majority of existing modelling assessments find that a policy driven transition to a more resource efficient and circular economy could take place with (potentially significant) positive impacts on economic growth (McCarthy, Dellink and Bibas, 2018[3]). That said, this literature is rather limited in scope, and often includes ad-hoc assumptions that are overly optimistic. Ongoing modelling work at the OECD and elsewhere is beginning to address these issues.

This report addresses the first issue – the reductions in environmental pressure that could result from a circular economy transition. It focusses on the key activities – or business models – that will be required to drive such a transition, and assesses their scalability and environmental footprint relative to traditional (or “linear”) equivalents. The firm level approach taken in this report is intended to serve as a complement to the macroeconomic modelling work discussed above.

In practice, there are various channels through which decoupling, improved resource efficiency, or the transition to a more circular economy can be achieved. At the aggregate level, decoupling could result from changes in the structure of the economy; a demand driven increase in the share of services in total output for example. At the level of individual production facilities, decoupling could result from technologically driven improvements in resource productivity; incremental improvements in the proportion of metal recovered from mineral ores for example. A third channel, and the one that represents the main focus of this report, involves “circular modes of production” or, put differently, activities that use virgin non-renewable resources (and the materials derived from them) relatively sparingly.

Box 1.2. Definitions in this report: resource efficiency, the circular economy, and circular business models

Resource efficiency is used by UNEP (2017[4]) to refer to a set of ideas including: (i) the technical efficiency of resource use, (ii) resource productivity, or the extent to which economic value is added to a given quantity of resources, and (iii) the extent to which resource extraction or use has negative impacts on the environment. In concrete terms, resource efficiency, or more precisely resource intensity, can be calculated as the ratio between the value of economic output from a particular sector or economy, and the amount of resources (typically in terms of weight) used to produce it. An improvement in resource efficiency therefore describes a situation where more economic value is being produced with a particular amount of resources (or one where fewer resources are being used).

There is no single accepted definition of the circular economy, although a comparison with the so-called linear economy (where natural resources are extracted, transformed into capital and consumer goods, and eventually disposed of in landfill or disposal facilities) is often made. In this context, emphasis is placed on a variety of mechanisms that modify the flow of products and materials through the economy, and ultimately result in lower rates of natural resource extraction. Previous OECD work in this area highlights three main mechanisms (McCarthy, Dellink and Bibas, 2018[3]): closing resource loops (the diversion of waste from disposal and subsequent transformation into secondary raw materials), slowing resource loops or flows (the retention of products, and their constituent materials, in the economy for longer periods), and narrowing resource flows (generating additional economic value from a fixed amount of natural resources).

Circular modes of production, and the business models that underpin them, represent the key activities that could realise a transition to a more resource efficient and circular economy. There is no clear consensus on what is and is not a circular business model. However, one key aspect – the defining one in the context of this report – is their relative sparing use of natural resource inputs. This results not only from facility level improvements in material productivity, but also from more fundamental changes in production and consumption patterns. For example, instead of using natural resource inputs more efficiently, renewable energy generation and the secondary raw material production do not use them at all.

Circular modes of production, and the business models that underpin them, involve fundamentally different ways of producing and consuming goods and services. The production of raw materials from waste, the reuse, repair, or remanufacture of unwanted or damaged products, and the sharing of already existing products are just three examples. Not all of these activities are necessarily new, but many are emerging more broadly in response to technological developments, urbanisation, heightened supply risks, and evolving consumer preferences. For policy makers, these developments raise a number of questions. What are the different business models that are of most interest from a circular economy perspective? What is their scalability potential? What are the environmental outcomes that can be expected from them, and which of them would merit policy support for scale-up? And finally, what are the policy measures that can help accelerate the scale-up of the most desirable business models?

This report addresses these questions by drawing together insights from the existing literature on circular business models. Chapter 2 introduces a typology of five key circular business models and highlights some of their shared characteristics and drivers for adoption. Chapter 3 uses well known examples to provide insights into the current market penetration, and potential scalability, of each of the headline business models. Chapter 4 addresses the environmental impact that could result from the widespread emergence of circular business models. It draws mostly on research from the lifecycle assessment literature, but also highlights the importance of economic mechanisms. Chapter 5 then briefly sets out the policy measures that could be implemented in order to promote the more widespread adoption of circular business models.

References

[3] McCarthy, A., R. Dellink and R. Bibas (2018), “The Macroeconomics of the Circular Economy Transition: A Critical Review of Modelling Approaches”, OECD Environment Working Papers, No. 130, OECD Publishing, Paris, http://dx.doi.org/10.1787/af983f9a-en.

[2] OECD (2019), Global Material Resources Outlook to 2060: Economic Drivers and Environmental Consequences, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264307452-en.

[5] OECD (2012), OECD Environmental Outlook to 2050: The Consequences of Inaction, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264122246-en.

[1] UN (2017), “World Population Prospects: key findings and advance tables”, https://esa.un.org/unpd/wpp/publications/Files/WPP2017_KeyFindings.pdf (accessed on 18 May 2018).

[4] UNEP (2017), “RESOURCE EFFICIENCY: POTENTIAL AND ECONOMIC IMPLICATIONS”, http://www.resourcepanel.org/sites/default/files/documents/document/media/resource_efficiency_report_march_2017_web_res.pdf (accessed on 23 April 2018).

Note

← 1.  This trend will be offset, to some extent, by various market mechanisms. Higher resource prices will trigger new exploration and the discovery of new reserves. They will also encourage resource saving technological change and, in some cases, substitution towards other relatively affordable materials.