Transitioning to a Circular Economy: What are the Challenges?
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The expected increase in world population to 9.7 billion world citizens in 2050, alongside a growing middle-class, is leading to an explosive demand for raw materials. Accordingly, without drastic changes in consumption and production practices, the global need for resources is expected to double from 2015 to 2050. It is against this background, that policymakers across the globe are increasingly aware of the need to decouple wealth creation from the consumption of finite resources and transition from an economy based on extraction, consumption and disposal (a linear economy) to one of regeneration and restoration (a circular economy). Nevertheless, moving from an economy where resources are consumed and discarded towards a global circular economy is still long and complex challenges lie ahead.
What is the Circular Economy?
The circular economy is a broad concept for a socio-economic model that promotes a transition towards a more sustainable future. While the concept itself is defined in over 100 ways, it can be summarized as a system: a) that is restorative and regenerative by design; b) in which waste and pollution no longer exist; and c) wherein products, components, services, materials and their by-products circulate at their highest value for the longest period.
The model of the current linear economy relies on a continued increase in production, consumption and discarding of products, whereby globally, most waste is currently either dumped or disposed of in some form of landfill. The EU alone generated 225.7 million tons of municipal waste in 2020, of which only 66 million tons was recycled. Consequently, many existing initiatives in the linear economy are focused on the back-end of the supply chain, attempting to solve the waste challenge by means of legislation, regional policies, and other strategies.
However, within the circular logic, instead of managing the generated waste, the focus is placed on preventing the generation of waste in the first place by means of designing out waste and promoting high-quality reuse of resources. This is one of the reasons that in a circular economy the focus is also on the front-end of the supply chain.
According to the European Environment Agency (EEA), the ever-increasing waste streams, which are generated by the linear economy, are not only an environmental problem but also constitute an economic loss. The circular economy, on the other hand, could potentially deliver multiple environmental, social and economic benefits (refer to Table 1 for some examples).
Table 1. Examples of economic, social and environmental benefits
|Examples for benefits of the Circular Economy|
|Economic benefits||● Complying with increased regulation and reporting standards
● Avoiding linear risks (e.g. resource scarcity, supply chain disruptions)
● Enjoying substantial resource savings
● Improving stakeholder relations
● Grasping new opportunities and circular business models
|Social benefits||● Ensuring primary needs (e.g. water/food security)
● Enhancing work opportunities
● Equalizing distribution of resources
● Keeping within planetary boundaries
● Improving well-being, health and social inclusion
|Environmental benefits||● Reducing the use of non-renewable resources
● Achieving emission-reduction goals
● Safeguarding biodiversity and nature
● Living on and from healthy and resilient soils
● Decreasing waste generation
Given the critical necessity and the potential benefits, promoting the transition towards a circular economy is increasingly becoming a priority for decision makers in both the public and the private sectors. Consequently, national circular action plans are implemented and examples of national policies within the EU and/or best practices performed by businesses can be viewed on the EU Stakeholder Platform. Nevertheless, performing a meaningful transition to a circular economy on a global scale is a mammoth task and significant obstacles abound.
Transitioning to a Circular Economy: What are the Main Challenges?
As of 2022, only 8.6% of the world economy is considered circular. Expanding and mainstreaming the transition to a global circular system thus requires unprecedented collaboration between sectors and countries across the world.
It is possible to divide the main challenges of transitioning to a circular economy into four main categories: redesigning value chains, aligning circularity with business interests, promoting a “circular behavior”, and designing effective policies.
Challenge 1: How to redesign Value Chains?
From the food we eat to the mobile phones we use, most of the products we consume involve a large chain of participants in the production process before they reach us. These value chains encapsulate all activities that go into creating a product. With globalization, these chains have increased in complexity and now stretch over continents and jurisdictions.
The global natures of supply chains means that trade and trade flows play a critical role in a transition to a circular economy (UNEP). In multiple stages of a value chain, decisions are made that influence the circularity of each particular product. As multiple independent participants, often in different countries, are part of a chain, some organizations relate to disruptions in the chain as risk. The COVID-19 pandemic is a recent example that highlighted the interconnectedness of countries and the importance of global value chains and their dependence on a resilient trading system. Managing risks in this area is already a well-known challenge. The question as to how to implement circular principles along the full gamut of value-chain partners regardless of geographical location is thus pertinent.
Potential enabling actions that would help to redesign and/or optimize value chains in accordance with circular models include:
- Defining value chain responsibility: The EU Green Deal proposes reshaping the Extended Producer Responsibility (EPR) to ensure proper management of the potential waste flowing from the products/service sold. Examples include extended warranties and mandatory take-back guarantees. The EPR is focused on downstream activities, while upstream multiple activities can also be performed (see below).
- Focusing on design decisions prior to procurement: Design decisions made by R&D teams can avoid, for example, the extraction of non-renewable resources by exploring alternative materials, extending product lifetime due to easy modularity and upgradability.
- Collaborating with like-minded partners: By collaborating with like-minded partners, both upstream and downstream in the value chain, it becomes more feasible to design the value-chain in a circular way end-to-end.
- Optimizing value extraction: While most firms focus on the value that can be extracted from the “usage” phase of a product, there are opportunities to be gained in all life stages of the product. The Value Hillis a practical model that can be applied to obtain value in pre- and post-use phases as well.
- Tracking and optimizing resource use: Resource availability, quality, usage and waste streams can be monitored by digitalization and intelligent robots. Digitalization can also be used to strengthen connections between supply chain actors and help in coordinating the supply chain more efficiently.
Challenge 2: How to Align Circularity With Competitive Business Models?
While it is widely acknowledged that collaboration is key in the transition to a circular economy, there are challenges to collaboration when it comes to the competitive position of individual companies. The first barrier is the costs of the transition (e.g. R&D, asset investments, digital infrastructure) and the questions around who should foot the bill. Second, competition with (often cheaper) virgin materials makes the business case for recovery managers relatively uneconomic and hence less desirable. Delivering a new product instead of an existing one that breaks down is usually cheaper simply because the design of current products mainly emphasizes function; it does not take repair into account. In addition, products that are sold with repair or refurbishment options have shown high costs associated with transportation activities (i.e. beginning with when products are sent back to producers for refurbishment). Third, there is an existing mismatch between the supply and demand of non-virgin (secondary) raw materials. Many argue for the need for a “circular product policy framework” that would aim to ensure a level playing field for global competition. Such a framework might include minimum mandatory standards such as circular design characteristics (an example is Fairphone, which created a smartphone that is designed for longevity, easy repair, and modular upgrades) digital accessibility through a product passport, preventing waste status of products where circular strategies remain reasonable, and more.
The competitiveness factor is not only relevant between different companies that are competing for market share, but also within a single organization. For instance, a circular product will not always win the hearts of internal decision makers as this product might cannibalize another successful (linear) product of the same firm.
Potential enabling actions that would help in aligning circular models with competitive business models include the following:
- Focusing on integrating circular principles into innovation: Integrating circular principles into the process of improving products and/or services offered will help looking at circularity as an integral part of the business and can also help to ensure maximum efficiency in production and consumption. The focus on innovation can also tend to lead to higher customer satisfaction.
- Adjusting to stakeholders’ need for long-term value creation: Financial value alone may no longer satisfy the needs of direct and indirect stakeholders. Long-term value creation is essential in building a sustainable growth strategy.
- Defining Intellectual Property (IP) carefully: If remanufacturing is performed by a third party (independent from the manufacturer), it is recommended to define IP to remain in control of the product manufacturing process.
- Investing in disruptive technologies: Well-integrated new technologies and business models could help in maximizing the value extracted from assets and material stocks.
- Stimulating circular procurement: Asking one’s own suppliers for circular options to stimulate the market for secondary resources, materials, components and products.
Challenge 3: How to Promote “Circular Behavior”?
People play an important role in the transition towards a circular economy, but the question concerning the division of labor in the promotion of circular behavior is still very much debated. Producers point to policymakers to create incentives for businesses (for example, to create a level playing field) and customers point to producers (for example, to create waste-free products). Efforts are required by all sides in order to alter the current reality, in which products are designed to fail (after a certain time), to become outdated and out of fashion. An example of a policy effort to implement legislation encouraging a circular economy is the EU’s proposed eco-design resolution to ensure a longer shelf life for products.
In addition to the role of policymakers and manufacturers, a related angle from which to consider the obstacles to circular behavior is to consider psychological factors that drive consumption patterns, a topic that has been studied from multiple angles. A 2012 study published in the Journal of Public Policy and Marketing shows that individual behavior causing environmental problems is exacerbated by five adaptive tendencies rooted in human beings’ evolutionary history, e.g. shortsightedness.
Understanding behavioral patterns and taking it into account when working with different audiences to help them change the way they create and consume products is key in accelerating the transition towards a circular economy.
Potential enabling actions to encourage circular behaviors include:
- Leading by example: The actions one performs can inspire other people.
- Informing, inspiring and involving: For strategies to be effective, it is recommended to work with, rather than against, the adaptive tendencies rooted in human beings’ behavioral patterns.
- Highlighting personal benefits in the short term: Making the benefits of the transition to circular practices in the short term more palpable, would help make the necessity of the behavioral shift more tangible and thus more desirable.
- Promoting awareness and encouraging the development of relevant skills and competences: The more people are aware of the consequences of their actions, the more likely they are to take conscious decisions in their daily life.
- Following the majority: Research findings show that people are strongly influenced in their choice of behavior by what they think the majority does. Knowing and applying this can shape behavior towards circular practices.
Challenge 4: How to Design Effective Policies?
Legislation can go a long way in facilitating the transition to a circular economy. Pioneering examples are already in place, for instance the Extended Producer Responsibility (EPR) scheme implemented by various nations in the world or the EU’s efforts of banning single use plastics. Unfortunately, legislation also has shown its shortcomings due to other laws and regulations that limit its efficacy, as well as the lack of global consensus. Furthermore, unclear definitions can get in the way, causing conflicting national implementations. Another barrier includes the import bans of circular products due to protectionist reasons, a barrier that is currently being addressed by the World Trade Organization. Moreover, there are currently only limited financial incentives for the promotion of circularity while foreign regulatory barriers persist e.g. non-renewable resources like oil may have taxation levels comparable to or lower than renewable ones; labor costs are higher compared to virgin resources, etc. Another barrier includes the price of products / services whose costs still fail to accurately incorporate the costs of ecological damages. Introducing additional taxes that incorporate such environmental damages is politically sensitive and often difficult to pass. Accordingly, the EU Green Deal Circular Economy Action Plan is focusing on related matters in an attempt to create more incentives for circularity.
Potential enabling actions to promote effective policies include the following:
- Teaming up across sectors: Triple helix collaborations, wherein public, private and civil society initiatives team up could be conducive in promoting circular solutions that work in practice.
- Lobbying to remove barriers in legislation: Frontrunner firms can join lobbying initiatives that set out to drive circularity, for example economic incentives to encourage the recovery of more secondary raw materials etc.
- Involving the private sector and civil society organizations: Involving businesses as well as civil society organizations could be helpful in promoting awareness and knowledge concerning circular policies.
- Promoting incentives for circular production efforts: Governments-led subsidies can help in encouraging businesses to shift their operations to include circular design, production and/or supply chain efforts.
Transitioning to a Circular Economy: Outlook
Alongside climate change, environmental degradation poses one of the most critical threats to humanity in the 21st century. The transition to a circular economy across the globe is thus a crucial step in confronting this challenge. Similar to the fight against climate change, the transition to a circular economy on a global scale needs to take place in a holistic and systemic fashion that rests on multi-sector and international coordination and collaboration efforts.
The opinions expressed in this text are solely that of the author/s and do not necessarily reflect the views of the Israel Public Policy Institute (IPPI) and/or its partners.
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