Ellen mac arthur foundation towards the circular economy vol.1

2013

1
TOWARDS THE
CIRCULAR ECONOMY

Economic and business rationale
for an accelerated transition

Founding
Partners of the
Ellen MacArthur
Foundation

Acknowledgements

The Ellen MacArthur Foundation was formed in 2010 to inspire
a generation to rethink, redesign and build a positive future.
The Foundation believes that the circular economy provides a
coherent framework for systems level redesign and as such offers
us an opportunity to harness innovation and creativity to enable a
positive, restorative economy.

The Foundation is supported by a group of ‘Founding Partners’—
B&Q, BT, Cisco, National Grid and Renault. Each of these
organisations has been instrumental in the initial formation of
the Foundation, the instigation of this report and continues to
support its activities in education, communications and working
as a business catalyst.

McKinsey & Company, a global management consulting firm,
provided the overall project management, developed the fact
base and delivered the analytics for the report.

In addition to a number of leading academic and industry experts,
an extended group of organisations provided input and expertise.
They included Caterpillar, Cyberpac, Desso, EPEA, Foresight
Group, ISE, Marks & Spencer, Product-Life Institute, Ricoh,
Turntoo, and Vestas.

02 | TOWARDS THE CIRCULAR ECONOMY

Foreword

An opportunity to rethink our economic future
The Ellen MacArthur Foundation’s report on the Economics of a Circular Economy
invites readers to imagine an economy in which today’s goods are tomorrow’s resources,
forming a virtuous cycle that fosters prosperity in a world of finite resources.

This change in perspective is important to address many of today’s fundamental
challenges. Traditional linear consumption patterns (‘take-make-dispose’) are coming up
against constraints on the availability of resources. The challenges on the resource side
are compounded by rising demand from the world’s growing and increasingly affluent
population. As a result, we are observing unsustainable overuse of resources, higher
price levels, and more volatility in many markets.

As part of our strategy for Europe 2020, the European Commission has chosen to
respond to these challenges by moving to a more restorative economic system that drives
substantial and lasting improvements of our resource productivity. It is our choice how,
and how fast, we want to manage this inevitable transition. Good policy offers short- and
long-term economic, social, and environmental benefits. But success in increasing our
overall resilience ultimately depends on the private sector’s ability to adopt and profitably
develop the relevant new business models.

The Foundation’s report paints a clear picture: our linear ‘take-make-dispose’ approach
is leading to scarcity, volatility, and pricing levels that are unaffordable for our economy’s
manufacturing base.

As a compelling response to these challenges, the report advocates the adoption of the
circular economy, and provides an array of case examples, a solid framework, and a few
guiding principles for doing so. Through analysis of a number of specific examples, the
research also highlights immediate and relatively easy-to-implement opportunities. On the
basis of current technologies and trends, it derives an estimate of the net material cost
saving benefits of adopting a more restorative approach—more than USD 600 billion p.a.
by 2025, net of material costs incurred during reverse-cycle activities. The corresponding
shift towards buying and selling ‘performance’ and designing products for regeneration
should also spur positive secondary effects such as a wave of innovations and employment
in growth sectors of the economy, whilst increasing Europe’s competitiveness in the global
marketplace. Many business leaders believe the innovation challenge of the century will
be to foster prosperity in a world of finite resources. Coming up with answers to this
challenge will create competitive advantage.

While The Foundation’s first report has taken a European perspective, I believe that its
lessons are relevant at a global level. It will not be possible for developing economies to
share the developed world’s level of living standards and provide for future generations
unless we dramatically change the way we run our global economy.

The Foundation’s report offers a fresh perspective on what a transition path to a circular
economy at global scale could look like. It is time to ‘mainstream’ the circular economy
as a credible, powerful, and lasting answer to our current and future growth and resource
challenges.

As you read the report, I urge you to consider where and how you can contribute to jointly
moving towards a new era of economic opportunity.

Sincerely,
Janez Potocnik
European Commissoner for the Environment

TOWARDS THE CIRCULAR ECONOMY | 03

Contents

1 Acknowledgements

2 Foreword

4 In support of the circular economy

5 Report synopsis

6 Executive summary

13 1. The limits of linear consumption

21 2. From linear to circular

35 3. How it works up close

63 4. An economic opportunity worth billions

77 5. The shift has begun

85 Appendix

93 List of leading experts

94 List of figures


In support of the circular economy

‘The time is coming when it will no longer make economic sense for ‘business as usual’
and the circular economy will thrive. Our thinking is in its infancy but we’re taking steps
now to see what works in practice and to understand the implications of reworking
our business model. We are preparing to lead this change by rethinking the way we do
business because the reality is, it isn’t a choice anymore’.
B&Q Euan Sutherland, CEO of Kingfisher U.K. & Ireland
(Chairman of the B&Q Board)

‘The concept of the circular economy tallies completely with our thinking at BT about
the importance of providing goods and services sustainably. As a company, we feel
intimately involved with these ideas, because digital technology will play a crucial role in
providing the information needed to create iterative logistics and restorative systems’.
BT Group Gavin Patterson, Chief Executive BT Retail

‘The Circular Economy is a blueprint for a new sustainable economy, one that has
innovation and efficiency at its heart and addresses the business challenges presented
by continued economic unpredictability, exponential population growth and our
escalating demand for the world’s natural resources. Pioneering work carried out by
the Ellen MacArthur Foundation presents an opportunity to fundamentally rethink how
we run our business and challenge all aspects of traditional operating models, from how
we use natural resources, to the way we design and manufacture products, through to
how we educate and train the next generation. We are delighted to be part of the Ellen
MacArthur Foundation and we are committed to exploring how Cisco, our customers,
partners and employees can benefit from the principles of the Circular Economy’.
Cisco Chris Dedicoat, President, EMEA

‘This is an extremely important time for the energy industry with challenges around
sustainability, security and affordability. At National Grid, over the next 9 years, we
are looking to recruit in the region of 2,500 engineers and scientists, a mixture of
experienced engineers and development programme trainees; all vital to the future of
our business. That means we need young people with science, technology, engineering
and mathematics skills, with creative minds and a passion to make a difference. The
circular economy provides a positive, coherent, innovation challenge through which
young people see the relevance and opportunity of these subjects in terms of re-
thinking and redesigning their future.’
National Grid Steve Holliday, Chief Executive

‘Renault believes that innovation favours progress only if the greatest number stand to
benefit from it. Renault believes that the optimisation of existing solutions will not be
enough to realise the vision of sustainable mobility for all. The launch of Renault’s new
game changing fleet of electric vehicles demonstrates that this is possible. A growing
population and increasingly volatile resource market will challenge businesses working
in a business as usual model. Renault is working in partnership with the Ellen MacArthur
Foundation to realise the opportunities of redesigning the future through the vision of a
regenerative, circular economy’.
Renault Carlos Tavares, Chief Operating Officer for Renault


Report synopsis

To describe this opportunity to generate rapid and lasting
economic benefits and enlist broad support for putting it into
full-scale practice, we have structured this report into five
chapters, each answering basic questions about the circular
economy and the changes it implies:

1 The limits of linear consumption outlines the limits of the current
‘take-make-dispose’ system and assesses the risks it poses to global
economic growth.

2 From linear to circular—Accelerating a proven concept frames the
opportunities presented by a circular economy, the origins and early
successes of the proven concept of circular business models, and the
ways in which they drive value creation.

3 How it works up close—Case examples of circular products
demonstrates through detailed case studies the many ways in which
companies can benefit from circular business models and the key
building blocks needed on a systemic level to shift business in this
direction.

4
An economic opportunity worth billions—Charting the new territory
maps out what moving towards a circular economy could mean on a
macroeconomic level and how circular business models could benefit
different market participants.

5 The shift has begun—‘Mainstreaming’ the circular economy proposes
winning strategies for businesses to bring the circular economy into
the mainstream and a roadmap for an accelerated transition towards a
circular economy.


Executive summary

In the face of sharp volatility increases 1. The limits of linear consumption
across the global economy and
proliferating signs of resource depletion, Throughout its evolution and diversification,
the call for a new economic model our industrial economy has hardly moved
is getting louder. In the quest for a beyond one fundamental characteristic
substantial improvement in resource established in the early days of
performance across the economy, industrialisation: a linear model of resource
businesses have started to explore ways to consumption that follows a ‘take-make-
reuse products or their components and dispose’ pattern. Companies harvest and
restore more of their precious material, extract materials, use them to manufacture a
energy and labour inputs. The time is product, and sell the product to a consumer—
right, many argue, to take this concept who then discards it when it no longer serves
of a ‘circular economy’ one step further, its purpose. Indeed, this is more true now
to analyse its promise for businesses and than ever—in terms of volume, some 65 billion
economies, and to prepare the ground for tonnes of raw materials entered the economic
its adoption. system in 2010, and this figure is expected to
grow to about 82 billion tonnes in 2020 (see
How does the circular economy compare Figure 1 in Chapter 1).
to the race to improve efficiency within
today’s ‘take-make-dispose’ economy? Whilst major strides have been made in
What are the benefits of a restorative improving resource efficiency and exploring
model to businesses and the economy? new forms of energy, less thought has been
How can companies and policy makers given to systematically designing out material
carry the concept to its breakthrough at leakage and disposal. However, any system
scale? Can some of today’s fundamental based on consumption rather than on the
shifts in technology and consumer restorative use of non-renewable resources
behaviour be used to accelerate the entails significant losses of value and negative
transition? To answer these questions effects all along the material chain.
for the European Union, our researchers
sought to identify success stories of Recently, many companies have also begun
circular business models, to determine to notice that this linear system increases
what factors enable these success stories, their exposure to risks, most notably higher
and to glean from these examples a better resource prices and supply disruptions.
sense of which sectors and products hold More and more businesses feel squeezed
the most potential for circularity, how between rising and less predictable prices
large this potential might be, and what in resource markets on the one hand and
the broader economic impact could look high competition and stagnating demand
like. In doing so, we reviewed about a for certain sectors on the other. The turn of
dozen mainstream products reflecting the millennium marked the point when real
various circular design concepts, undertook prices of natural resources began to climb
economic analysis for key resource-intense upwards, essentially erasing a century’s worth
business sectors, and interviewed more of real price declines (see Figure 4 in Chapter
than 50 experts1. What came out clearly 1). At the same time, price volatility levels
1 Unless explicitly stated
otherwise, all quotations in this resembles a 16th century map more than an for metals, food, and non-food agricultural
document are from interviews exact account of the complete economic output in the first decade of the 21st century
conducted in the period from
November 2011 through January benefits. But it is a promising picture, with were higher than in any single decade in the
2012 (a list of experts consulted
for the analysis and reporting is
product case study analyses indicating 20th century (see Figure 5 in Chapter 1). If
given in the appendix) an annual net material cost savings2 no action is taken, high prices and volatility
2 Savings described are net of opportunity of up to USD 380 billion in a will likely be here to stay if growth is robust,
the resources consumed during transition scenario and of up to USD 630 populations grow and urbanise, and resource
circular production processes,
but they are gross of labour billion in an advanced scenario, looking extraction costs continue to rise. With three
and energy costs. In each case
study we examined, energy costs
only at a subset of EU manufacturing billion new middle-class consumers expected
represented an additional source sectors. to enter the market by 2030, price signals
of savings, as will be detailed
later in this report. Labour costs may not be strong or extensive enough to
represented an additional source turn the situation around fast enough to
of savings for some products
but not for others meet this growth requirement. Against this


An annual net material cost savings opportunity of up
to USD 380 billion in a transition scenario and of up to
USD 630 billion in an advanced scenario, looking only
at a subset of EU manufacturing sectors.

backdrop, business leaders are in search of in place to ensure the return and thereafter
a ‘better hedge’ and an industrial model that the reuse of the product or its components
decouples revenues from material input: the and materials at the end of its period of
‘circular economy’. primary use.

2. From linear to circular—Accelerating a These principles all drive four clear-cut
proven concept sources of value creation that offer arbitrage
opportunities in comparison with linear
A circular economy is an industrial system product design and materials usage:
that is restorative or regenerative by
intention and design (see Figure 6 in Chapter The ‘power of the inner circle’ refers to
2). It replaces the ‘end-of-life’ concept minimising comparative material usage
with restoration, shifts towards the use of vis-à-vis the linear production system. The
renewable energy, eliminates the use of toxic tighter the circle, i.e., the less a product has
chemicals, which impair reuse, and aims for to be changed in reuse, refurbishment and
the elimination of waste through the superior remanufacturing and the faster it returns
design of materials, products, systems, and, to use, the higher the potential savings on
within this, business models. the shares of material, labour, energy, and
capital embedded in the product and on the
Such an economy is based on few simple associated rucksack of externalities (such
principles. First, at its core, a circular as greenhouse gas (GHG) emissions, water,
economy aims to ‘design out’ waste. Waste toxicity).
does not exist—products are designed and
optimised for a cycle of disassembly and The ‘power of circling longer’ refers to
reuse. These tight component and product maximising the number of consecutive cycles
cycles define the circular economy and set (be it reuse, remanufacturing, or recycling)
it apart from disposal and even recycling and/or the time in each cycle.
where large amounts of embedded energy
and labour are lost. Secondly, circularity The ‘power of cascaded use’ refers to
introduces a strict differentiation between diversifying reuse across the value chain,
consumable and durable components of as when cotton clothing is reused first as
a product. Unlike today, consumables in second-hand apparel, then crosses to the
the circular economy are largely made of furniture industry as fibre-fill in upholstery,
biological ingredients or ‘nutrients’ that are at and the fibre-fill is later reused in stone wool
least non-toxic and possibly even beneficial, insulation for construction—in each case
and can be safely returned to the biosphere— substituting for an inflow of virgin materials
directly or in a cascade of consecutive uses. into the economy—before the cotton fibres
Durables such as engines or computers, are safely returned to the biosphere.
on the other hand, are made of technical
nutrients unsuitable for the biosphere, The ‘power of pure circles’, finally, lies
like metals and most plastics. These are in the fact that uncontaminated material
designed from the start for reuse. Thirdly, streams increase collection and redistribution
the energy required to fuel this cycle should efficiency while maintaining quality,
be renewable by nature, again to decrease particularly of technical materials, which, in
resource dependence and increase system turn, extends product longevity and thus
resilience (e.g., to oil shocks). increases material productivity.

For technical nutrients, the circular economy These four ways to increase material
largely replaces the concept of a consumer productivity are not merely one-off effects
with that of a user. This calls for a new that will dent resource demand for a short
contract between businesses and their period of time during the initial phase of
customers based on product performance. introduction of these circular setups. Their
Unlike in today’s ‘buy-and-consume’ lasting power lies in changing the run rate of
economy, durable products are leased, required material intake. They can therefore
rented, or shared wherever possible. If they add up to substantial cumulative advantages
are sold, there are incentives or agreements over a classical linear business-as-usual case
(see Figure 10 in Chapter 2).


Executive summary
Continued

The report provides ample evidence that nutrients returns those back to the biosphere
circularity has started to make inroads on via composting and anaerobic digestion.
the linear economy and that it has moved Furthermore, reverse cycles will not only be
beyond the proof of concept—a number confined within an industry but also ‘cascaded’
of businesses are already thriving on it. across different industries.
Innovative products and contracts designed
for the circular economy are already available We analysed the options for several different
in a variety of forms—from innovative categories of resource-intensive products—
designs of daily materials and products (e.g., from fast-moving consumer goods such as
biodegradable food packaging and easy-to- food and fashion, longer-lasting products
disassemble office printers) to pay-per-use such as phones, washing machines, and light
contracts (e.g., for tyres). Demonstrably, commercial vehicles. We also include single-
these examples have in common that they family houses as an example of a long-life
have focused on optimising the total system product. We used our circularity model to
performance rather than that of a single study products belonging to the ‘sweet-spot’
component. segment—the segment with the highest
circular economy potential—namely, complex
3. How it works up close—Case examples of medium-lived products—in full depth. Our
circular products analysis showed that use of circular economy
approaches would support improvements such
It is evident that reuse and better design as the following:
can significantly reduce the material bill and
the expense of disposal. But how do these The cost of remanufacturing mobile phones
advantages stack up against a production could be reduced by 50% per device—if the
system that has been optimised for industry made phones easier to take apart,
throughput? How can the governing principle improved the reverse cycle, and offered
of ‘selling more equals more revenues’ incentives to return phones.
be replaced? And how can the choice for
circular products, and using rather than High-end washing machines would be
consuming, be rendered more attractive for accessible for most households if they were
customers? leased instead of sold—customers would
save roughly a third per wash cycle, and the
In order for companies to materialise manufacturer would earn roughly a third more
the savings associated with a circular in profits. Over a 20-year period, replacing the
system by reusing resource inputs to the purchase of five 2,000-cycle machines with
maximum degree, they need to increase leases to one 10,000-cycle machine would also
the rate at which their products are yield almost 180 kg of steel savings and more
collected and subsequently reused and/or than 2.5 tonnes of CO2e savings.
their components/materials recuperated.
Apart from the automotive industry, few The U.K. could save USD 1.1 billion a year
industries currently achieve a collection on landfill cost by keeping organic food
rate of 25%. When shifting from linear to waste out of landfills—this would also reduce
circular approaches, the rule of thumb for greenhouse gas emissions by 7.4 million
optimisation is: ‘the tighter the reverse cycle, tonnes p.a. and could deliver up to 2 GWh
the less embedded energy and labour are worth of electricity and provide much-needed
lost and the more material is preserved’. soil restoration and specialty chemicals.
Today’s recycling processes are typically
‘loose’ or long cycles that reduce material These results and those of the other
utility to its lowest ‘nutrient’ level. This products studied in detail in this report (light
is even more true for the incineration of commercial vehicle, smartphone, and textile
waste. In a circular economy, by contrast, cascade) confirm that with some adjustments
reverse activities in the circular economy to product design, business model, reverse
will extend across an array of circles for cycle processes, and/or other enabling factors,
repair and refurbishment of products, and the circular system can yield significant
remanufacturing of technical components. material productivity improvements and can
Likewise, the reverse chain for biological be profitable for manufacturers:


Analysis shows that the concept works
and is economically viable and scalable
for diverse products regardless of length
of service life.

Circular design, i.e., improvements in Radical designs win. The more consistently
material selection and product design circular design principles were adopted in
(standardisation/modularisation of the R&D phase of the cases we analysed,
components, purer material flows, and design the higher the economic rewards seem to
for easier disassembly) are at the heart of a be. Caterpillar, for example, says it is ‘just at
circular economy. the beginning of full circular design—e.g.,
material science has already and will bring
Innovative business models, especially further major progress into the longevity of
changing from ownership to performance- components.’
based payment models, are instrumental in
translating products designed for reuse into Admittedly, this remains a rough chart of
attractive value propositions. the potential for the circular economy. It is
our hope, however, that this exercise will
Core competencies along reverse cycles and provide companies with sufficient confidence
cascades involve establishing cost-effective, to embark on the transformational journey
better-quality collection and treatment and identify profitable opportunities today—
systems (either by producers themselves or especially piloting circular test cases can
by third parties). often be done with little expansion to the
core capabilities and at moderate risk.
Enablers to improve cross-cycle and cross-
sector performance are factors that support 4. An economic opportunity worth billions—
the required changes at a systems level and Charting the new territory
include higher transparency, alignment of
incentives, and the establishment of industry Eliminating waste from the industrial chain
standards for better cross-chain and cross- by reusing materials to the maximum extent
sector collaboration; access to financing possible promises production cost savings
and risk management tools; regulation and and less resource dependence. However, this
infrastructure development; and—last but not report argues that the benefits of a circular
least—education, both to increase general economy are not merely operational but
awareness and to create the skill base to strategic, not just for industry but also for
drive circular innovation. customers, and serve as sources of both
efficiency and innovation.
In summary, our analysis highlights the net
benefits a circular economy could bring How economies win
in terms of reduced material inputs and
associated labour and energy costs as well Economies will benefit from substantial net
as reduced carbon emissions along the entire material savings, mitigation of volatility and
supply chain: supply risks, positive multipliers, potential
employment benefits, reduced externalities,
Not a niche-only solution. In the past, and long-term resilience of the economy:
products associated with a circular model
have targeted small niche segments. Substantial net material savings. Based
However, our analysis shows that the concept on detailed product level modelling, the
works and is economically viable and scalable report estimates that the circular economy
for diverse products regardless of length of represents a net material cost saving
service life. opportunity of USD 340 to 380 billion p.a.
at EU level for a ‘transition scenario’ and
Opportunities now. Despite our conservative USD 520 to 630 billion p.a. for an ‘advanced
assumptions about changes in product and scenario’, in both cases net of the materials
value chain design and consumer adoption, used in reverse-cycle activities (see Figure
our analysis highlights significant business 18 in Chapter 4). The latter would equate to
benefits today—even in a world with 19 to 23% of current total input costs3 or a
entrenched consumer behaviour, imperfect recurrent 3 to 3.9% of 2010 EU GDP. Benefits
3 Most recent data for design and material formulations, and far in the advanced scenario are highest in the
sector input costs on EU
from perfect incentives. automotive sector (USD 170 to 200 billion
level come from Eurostat
Input/Output tables 2007 p.a.), followed by machinery and equipment


Executive summary
Continued

(USD 110 to 130 billion p.a.), and by electrical The circular approach offers developed
machinery (USD 75 to 90 billion p.a.). These economies an avenue to resilient growth, a
numbers are indicative as they only cover systemic answer to reducing dependency
‘sweet spot’ sectors that represent a little on resource markets, and a means to reduce
less than half of GDP contribution of EU exposure to resource price shocks as well as
manufacturing sectors. They also assume societal and environmental ‘external’ costs
the addition of only one product cycle with that are not picked up by companies. A
today’s technologies. Yet many cycles would circular economy would shift the economic
be possible and technological innovation balance away from energy-intensive materials
could likely lead to rapid improvements and primary extraction. It would create a new
and additional cost savings. However, these sector dedicated to reverse cycle activities
opportunities are clearly aspirational for for reuse, refurbishing, remanufacturing,
now, and companies must make creative and and recycling. At the same time, emerging
bold moves, break out of the linear system, market economies can benefit from the fact
and ensure that the underlying arbitrage that they are not as ‘locked-in’ as advanced
opportunities are robust over time. economies and have the chance to leap-
frog straight into establishing circular setups
Mitigation of price volatility and supply when building up their manufacturing-based
risks. The resulting net material savings sectors. Indeed, many emerging market
would result in a shift down the cost curve economies are also more material intensive
for various raw materials. For steel the global than typical advanced economies, and
net material savings could add up to more therefore could expect even greater relative
than 100 million tonnes of iron ore in 2025 savings from circular business models. So,
if applied to a sizeable part of the material the circular economy will have winners, and
flows (i.e., in the steel-intensive automotive, it is worth exploring the dynamics that the
machining, and other transport sectors, adoption of the circular economy will trigger.
which account for about 40% of demand).
In addition, such a shift would move us away How companies win
from the steep right-hand side of the cost
curve, thus likely reducing demand-driven Our case studies demonstrate that the
volatility (see Figure 19 in Chapter 4). principles of the circular economy—if
thoughtfully applied—can provide short-
Sectoral shift and possible employment term cost benefits today and some striking
benefits. Creating a ‘user-centric economy’ longer-term strategic opportunities as well
especially in the tertiary (services) sector as new profit pools in reverse cycle services
will lead to increased rates of innovation, (collection sorting, funding and financing of
employment, and capital productivity, all of new business models).
which are important multipliers.
Importantly, the effects of the circular
Reduced externalities. As material and economy could mitigate a number of
products are the carrier of the embedded strategic challenges companies face today:
externalities, a reduction in volumes will
also lead to a reduction in associated Reduced material bills and warranty risks.
externalities—higher than any incremental Through reselling and component recovery,
efficiency improvement in the existing a company can significantly reduce the
material chain. material bill, even without the effects from
yet-to-be-created circular materials and
Lasting benefits for a more resilient advanced reverse technology. In addition,
economy. Importantly, any increase in ‘building to last’ can also reduce warranty
material productivity is likely to have a costs.
positive impact on economic development
beyond the effects of circularity on specific
sectors. Circularity as a ‘rethinking device’
has proved to be a powerful new frame,
capable of sparking creative solutions and
stimulating innovation.


The principles of the circular economy—if thoughtfully
applied—can provide short-term cost benefits today
and some striking longer-term strategic opportunities

Improved customer interaction and 5. The shift has begun—‘Mainstreaming’
loyalty. Getting products returned to the the circular economy
manufacturer at the end of the usage cycle
requires a new customer relationship: Our economy is currently locked into a
‘consumers’ become ‘users’. With leasing system where everything from production
or ‘performance’ contracts in place, more economics and contracts to regulation
customer insights are generated for improved and mindsets favours the linear model of
personalisation, customisation, and retention. production and consumption. However, this
lock-in is weakening under the pressure of
Less product complexity and more several powerful disruptive trends:
manageable life cycles. Providing stable, First, resource scarcity and tighter
sometimes reusable product kernels or environmental standards are here to
skeletons, and treating other parts of the stay. Their effect will be to reward circular
product as add-ons (such as software, businesses over ‘take-make-dispose’
casings, or extension devices), enables businesses. As National Grid explains:
companies to master the challenge of ever- ‘we are now analysing our supply chains
shorter product life cycles and to provide systematically [for circularity potential]. The
highly customised solutions whilst keeping potential is bigger than we initially thought’.
product portfolio complexity low.
Second, information technology is now so
How consumers and users win advanced that it can be used to trace material
through the supply chain, identify products
The benefits of tighter cycles will be shared and material fractions, and track product
between companies and customers. And status during use. Furthermore, social media
yet the examples in the report indicate that platforms exist that can be used to mobilise
the real customer benefits go beyond the millions of customers around new products
price effect and extend to reduced costs and services instantaneously.
of obsolescence, increased choice, and
secondary benefits. Third, we are in the midst of a pervasive shift
in consumer behaviour. A new generation
Premature obsolescence is reduced in of customers seem prepared to prefer
built-to-last or reusable products. For the access over ownership. This can be seen in
customer, this could significantly bring down the increase of shared cars,4 machinery, and
total ownership costs. even articles of daily use. In a related vein,
social networks have increased the levels
Choice and convenience are increased as of transparency and consumers’ ability to
producers can tailor duration, type of use, advocate responsible products and business
and product components to the specific practices.
customer—replacing today’s standard
purchase with a broader set of contractual Circular business design is now poised
options. to move from the sidelines and into the
mainstream. The mushrooming of new and
Secondary benefits accrue to the customer more circular business propositions—from
if products deliver more than their basic biodegradable textiles to utility computing—
function—for example, carpets that act as confirms that momentum.
air filters or packaging as fertiliser. Needless
to say, customers will also benefit from the And yet, the obstacles remain daunting. They
reduction of environmental costs in a circular range from current product design, to cultural
system. resistance, to ‘subsidised’ commodity and
4 Organised car sharing has
energy prices. Some of these barriers may
been growing from fewer Whilst the transition to a circular economy fade on their own, with time. Others could
than 50,000 members
of car-sharing programs will bring dislocations, higher resource require specific new frameworks—in terms
globally in the mid-1990s, to and materials productivity should have a of corporate governance, cross-industry
around 500,000 in the late
2000s. According to Frost & stabilising effect, creating some ‘breathing collaboration, technology, or regulation.
Sullivan, this number is likely
to increase another 10-fold
room’ as the world deals with the strains of
between 2009 and 2016 expanding and ageing societies.


Executive summary
Continued

To push circularity past its tipping point Such a transition offers new prospects to
and capture the larger prize projected for economies in search of sources of growth
2025, the Ellen MacArthur Foundation and and employment.At the same time, it is a
its partners intend to lay further groundwork source of resilience and stability in a more
and work towards the removal of some volatile world. Its inception will likely follow
significant obstacles. Here is a roadmap for a ‘creative destruction’ pattern and create
that revolution: winners and losers. The time to act is now.

The next five years will be the pioneering As our resource consumption and
phase. We expect that industry pioneers dependence continue to rise and our growth
will start building competitive advantage threatens to negate our production efficiency
in various ways: they will build core efforts, governments and companies have
competencies in circular product design, started looking at the circular model not only
drive business model innovation, create the as a hedge against resource scarcity but as
capacities for the reverse cycle, and use an engine for innovation and growth. This
the brand and volume strength of leading report suggests that this opportunity is real
corporations to gain market share. With these and represents an attractive new territory
prerequisites in place, the benefits associated for pioneering enterprises and institutions.
with our transition scenario seem within This report is, however, just the start of
reach—material cost savings in the ‘sweet a mobilisation process—we intend to go
spot’ sectors of 12 to 14% p.a. deeper into different products and sectors,
assess the business opportunity in more
Towards 2025, there is a chance for detail, identify roadblocks and provide the
circularity to go mainstream, and for savings tools to overcome them, and understand the
to move beyond the 20% mark, as described macroeconomic impacts in more depth. The
in the advanced scenario. However, more Ellen MacArthur Foundation and its partners
transformational change is needed from the are committed to identifying, convening,
corporate sector and from government given and motivating the pioneers of the circular
today’s taxation, regulatory, and business economy. The Foundation provides the fact
climate. The mainstreaming phase will base and case study repository, shares best
involve organising reverse-cycle markets, practices, and excites and educates the next
rethinking taxation, igniting innovation and generation through the opportunities this
entrepreneurship, stepping up education, and redesign revolution creates. In this way, it
issuing a more suitable set of environmental helps to bring down the barriers and create
guidelines and rules—especially with regards the leadership and momentum that the bold
to properly accounting for externalities. vision of the circular economy deserves.

Moving manufacturing away from wasteful
linear material consumption patterns could
prove to be a major innovation engine, much
as the renewable energy sector is today.

1
The limits of linear consumption

Outlines the limits of the current ‘take-
make-dispose’ system and assesses the
risks it poses to global economic growth.


1. The limits of linear consumption

Throughout its evolution and diversification, a circular economy, unlimited resources
our industrial economy has never moved like labour take on a more central role in
beyond one fundamental characteristic economic processes, and resources that
established in the early days of are limited by natural supply play more
industrialisation: a linear model of resource of a supporting role. This concept holds
consumption that follows a ‘take-make- considerable promise, as has already been
dispose’ pattern. Companies extract verified in a number of industries, of being
materials, apply energy and labour to able to counter-act the imbalances currently
manufacture a product, and sell it to an end building up between the supply of and
consumer—who then discards it when it no demand for natural resources.
longer serves its purpose. While great strides
have been made in improving resource More efficiency remains desirable, but to
efficiency, any system based on consumption address the magnitude of the resource
rather than on the restorative use of crunch now approaching, minimising inputs
resources entails significant losses all along must be joined by innovating the way we
the value chain. work with the output. Making the leap from
consuming and discarding products to
Recently, many companies have also begun using and reusing them to the maximum
to notice that this linear system increases extent possible, in closer alignment with the
their exposure to risks, most notably higher patterns of living systems, is vital to ensure
resource prices. More and more businesses that continuing growth generates greater
feel squeezed between rising and less prosperity.
predictable prices in resource markets on the
one hand and stagnating demand in many Since farming began in the Fertile Crescent
consumer markets on the other. The start around 10,000 years ago, the world’s
of the new millennium marks the turning population has increased nearly 15,000-
point when real prices of natural resources fold, from an estimated total of 4 million5
began to surge upwards, essentially erasing a (less than half the population of Greater
century’s worth of real price declines. At the London today) to pass the 7 billion mark
same time, price volatility levels for metals, in October 2011—and it is projected to
food, and non-food agricultural output in the grow to 9 billion by 2050. While about two
first decade of the 21st century were higher billion people continue to subsist in basic
than in any single decade in the 20th century. agrarian conditions or worse, three billion are
Prices and volatility are likely to remain expected to join the ranks of middle-class
high as populations grow and urbanise, consumers by 2030. Their new prosperity will
resource extraction moves to harder-to- trigger a surge of demand both larger and in
reach locations, and the environmental costs a shorter time period than the world has ever
associated with the depletion of natural experienced. Even the most conservative
capital increase. projections for global economic growth over
the next decade suggest that demand for
Against this backdrop, the search for an oil, coal, iron ore, and other natural resources
industrial model that can further decouple will rise by at least a third, with about 90%
sales revenues from material input has of that increase coming from growth in
5 McEvedy, C., and R. Jones increased interest in concepts associated emerging markets.6
(1978), Atlas of World
Population History, 368 pp.,
with the ‘circular economy’. Though still
Penguin, London a theoretical construct, the term ‘circular The current ‘take-make-dispose’ model
6 McKinsey Global Institute: economy’ denotes an industrial economy entails significant resource losses
Resource revolution: Meeting that is restorative by intention and design.
the world’s energy, materials,
food, and water needs; In a circular economy, products are Through most of the past century, declining
November 2011
designed for ease of reuse, disassembly real resource prices have supported
7 The low and steadily falling and refurbishment, or recycling, with the economic growth in advanced economies.7
level of resource prices, in real
terms, over the 20th century— understanding that it is the reuse of vast The low level of resource prices, relative to
and its positive implications amounts of material reclaimed from end- labour costs, has also created the current
for economic growth—are
discussed in depth in the of-life products, rather than the extraction wasteful system of resource use. Reusing
McKinsey Global Institute’s
November 2011 report Resource
of resources, that is the foundation of materials has not been a major economic
Revolution, cited above economic growth. With the adoption of priority, given the ease of obtaining new


FIGURE 1
Global resource extraction is expected to grow to 82 billion tonnes in 2020

Global resource extraction1 % change,
BILLION TONNES 1980-2020

82
CAGR:
11 200
+1.8%
65
8 15 81
55
6 12
40 11 20 67
Metal ores 4 16
Fossil energy carriers 8 16
Biomass 12
36 116
27
Non-metallic 22
minerals 16

1980 2002 2010E2 2020E
Per capita
TONNES 9.1 8.7 9.5 10.6

1 Resource used: amount of extracted resources that enters the economic system for further processing or direct consumption. All materials used are
transformed within the economic system, incl. material used to generate energy and other material used in the production process
2 Forecasted from 2002 OECD figures and OECD extraction scenario for 2020

SOURCE: OECD; Behrens (2007); WMM Global Insight; Ellen MacArthur Foundation circular economy team

input materials and cheaply disposing agricultural harvesting losses, as well as
of refuse. In fact, the biggest economic soil excavation and dredged materials from
efficiency gains have resulted from using construction activities).8
more resources, especially energy, to reduce
labour costs. The system has had difficulties Food markets provide a snapshot of wastage
in correcting itself as long as the fiscal along the value chain. Losses of materials
regimes and accounting rules that govern it occur at several different steps in the
allowed for a broad range of indirect costs production of food: losses in the field due to
to remain unaccounted for—the so-called pests or pathogens, losses during agricultural
‘externalities’. Further inertia on the part production due to poor efficiency, spills or
of the market stems from lock-in effects, leakages during transport (exacerbated by
for example due to the lengthy and costly ever-longer global supply chains), losses
approval periods faced by some products during storage and at the retailer’s due to
such as pharmaceuticals and fertilisers. food surpassing its sell-by date or being
stored in the wrong conditions, and products
We characterise the resulting system as a simply going unused by end consumers.
‘take-make-dispose’ or ‘linear’ model. The Along the entire food supply chain, these
premise of this model is simple: companies losses globally add up to an estimated
extract materials, apply energy to them to one-third of food produced for human
manufacture a product, and sell the product consumption every year.9
to an end consumer, who then discards it
when it no longer works or no longer serves End-of-life waste. For most materials, rates
the user’s purpose. The linear production of conventional recovery after the end of
model incurs unnecessary resource losses in their (first) functional life are quite low
several ways: compared with primary manufacturing rates.
In terms of volume, some 65 billion tonnes of
Waste in the production chain. In the raw materials entered the global economic
production of goods, significant volumes system in 2010—a figure expected to grow to
of materials are commonly lost in the chain about 82 billion tonnes in 2020 (Figure 1).
between mining and final manufacturing. For In Europe, 2.7 billion tonnes of waste was
instance, the Sustainable Europe Research generated in 2010, but only about 40% of
8 Materialsflows.net
Institute (SERI) estimates that, each year, that was reused, recycled, or composted
9 J. Gustavsson, C. Cederberg,
U. Sonesson, R. van Otterdijk,
the manufacturing of products in OECD and digested (Figure 2). Looking at
A. Meybeck. Global food losses countries consumes over 21 billion tonnes of individual waste streams, an even starker
and food waste – Extent, causes
and prevention. Food And materials that aren’t physically incorporated picture emerges: current recycling rates
Agriculture Organization Of The into the products themselves (i.e., materials are significant for only a handful of waste
United Nations, Rome, 2011
that never enter the economic system—such types, mostly those that occur in large, fairly
10 UNEP International Resource
Panel Recycling Rates of Metals
as overburden and parting materials from homogeneous volumes. A recent UNEP
– a status report. 2011 mining, by-catch from fishing, wood and report,10 for example, notes that only around


Continued

Losses are also apparent at the level of
FIGURE 2 specific industries. Rubble produced during
We are still losing enormous tonnages of material
Million tonnes, EU27, 2010E
the construction and demolition of buildings,
which accounts for 26% of the total non-
2,670 industrial solid waste produced in the United
States, includes many recyclable materials
Other1 211
from steel to wood to concrete. Only 20
Energy
93
to 30% of all construction and demolition
production
waste is ultimately recycled or reused, often
Water collection
treatment & 170 because buildings are designed and built
supply2
in a way that is not conducive to breaking
60% down parts into recyclable let alone reusable
Households 226
of total components (Figure 3).13 The result is a
waste not
recycled, significant loss of valuable materials for the
composted
or reused
system.
Industrial 350
Energy use. In the linear system, disposal of
a product in landfill means that all its residual
energy is lost. The incineration or recycling of
discarded products recoups a small share of
1,116 this energy, whereas reuse saves significantly
Mining &
quarrying
742 more energy. The use of energy resources in
104 Other3
a linear production model is typically most
20 Glass & plastics
65 Paper & wood
intensive in the upstream parts of the supply
Animal & vegetal
chain—i.e., the steps involved in extracting
68
materials from the earth and converting
76 Metals
them into a commercially usable form. In
the production of semi-finished aluminium
products (‘semis’), for instance, the
processes of refining, smelting, and casting
Construction 878
783 Minerals
bauxite into semi-finished aluminium account
for 80% of the energy consumed (and 67% of
the total costs incurred).14 Because much of
this energy can be saved with a system that
11 U.S. Geological Survey
Minerals Information Database
relies less on upstream production, i.e., does
not use new materials as inputs each time
12 Losses are calculated based Total Recycled,
on expected recovered volume end-of-life composted, a product is made, the aluminium industry
of 2010 metal production, streams and reused and its customers have been quite relentless
assuming today’s materials
recycling rates remaining in pursuing high recycling rates (according
constant until end-of-life of 1 Includes services and agriculture, forestry & fishing
all product applications. The 2 Also includes sewerage and other waste management activities to UNEP, end-of-life recycling rates for
difference between recovered 3 Includes used oils, rubber, textiles, household waste, chemical waste,
and other non-specified aluminium range from 43 to 70%, while
volume and hypothetically
recoverable volumes under SOURCE: Eurostat waste statistics (2011) those for other major non-ferrous metals
complete recycling, multiplied are lower—e.g., copper 43 to 53%, zinc 19 to
with today’s market prices
for secondary materials, gives 52%, magnesium 39%).15 This has not been
monetary loss
the case for most other metals, although it is
one-third of the 60 metals it studied showed
13 U.S. EPA, Buildings and their particularly relevant in an economic system
Impact on the Environment: A a global end-of-life recycling rate of 25% or
Statistical Summary; revised that is largely dependent on fossil fuels for
more. Taking a closer look at various ferrous
April 22, 2009 the provision of its energy, as these cannot
and non-ferrous metals reveals that even for
14 JFK database; WBMS; EAA; be replaced within a reasonable time scale
IAI; NFID model v4.30; McKinsey metals that already have high recycling rates,
and come with a greenhouse gas footprint.
analysis significant value is lost—ranging from annual
While the consumption of energy for
15 UNEP International Resource losses of USD 52 billion for copper and
Panel, Recycling Rates of Metals biological inputs is spread fairly evenly along
USD 34 billion for gold, to USD 15 billion for
– a status report. 2011 the value chain, here, too, total consumption
aluminium and USD 7 billion for silver.11 12
16 McKinsey Global Institute: is significant—in the U.S., for example, it
Resource revolution: Meeting the
world’s energy, materials, food,
is 17% of all energy demand16 —and the
and water needs; November 2011 reduction of post-consumer food waste


FIGURE 3
Construction and demolition (C&D): A noteworthy opportunity

US C&D waste 2008

C&D is a significant Less than one-third is A lot of the discarded material
waste stream currently recovered could be recovered
100% = 100% = 100% = Potential
615 mn tonnes 160 mn tonnes 112-128 mn tonnes applications

Other 14%
Recycled 20%
or reused - Gypsum board 10% Fertilizer additive
30%
Concrete/rock/brick 11% Gravel, erosion control

Reuse of soil
Soil/fines 11% after treatment
74 26 C&D
Asphalt products 14% Road building material
70%
Discarded -
80%
Wood flooring
Lumber 40%
construction material

C&D waste as End-of-life Composition of
a share of total treatment of discarded C&D waste
C&D waste

SOURCE: Buildings and their Impact on the Environment: A Statistical Summary; revised April 22,
2009 – EPA; Journal of Environmental Engineering; Ellen MacArthur Foundation circular economy team

could thus offer tremendous energy savings. climate and water regulation, the depletion
The reduced energy intensity of the circular of timber and fuel supplies, losses in
model results in a reduction of threshold agricultural productivity, and the costs of lost
energy demand and further enables a shift to nutrient cycling, soil conservation, and flood
renewable energy—a virtuous cycle. prevention.19

Erosion of ecosystem services. At least as The current model creates imbalances that
troubling as climate change, and far less weigh on economic growth
well understood, is the erosion over the past
two centuries of ‘ecosystem services’, that The troubles inherent in a system that does
is those benefits derived from ecosystems not maximise the benefits of energy and
that support and enhance human wellbeing, natural resource usage have become evident
such as forests (which, as an essential both in the high level of real commodity
counterpart of atmospheric, soil, and prices, and in their volatility.
17 Ruth DeFries, Stefano
hydrological systems, absorb carbon dioxide
Pagiola et al, Millennium and emit oxygen, add to soil carbon, and Since 2000, the prices of natural resources
Ecosystem Assessment,
Current State & Trends regulate water tables—and deliver a host of have risen dramatically, erasing a century’s
Assessment, 2005 other benefits). The Millennium Ecosystem worth of real price declines. In McKinsey’s
18 Will Steffen, Åsa Persson Assessment examined 24 ecosystems Commodity Price Index for 2011, the
et al, The Anthropocene:
From Global Change to
services, from direct services such as food arithmetic average of prices in four
Planetary Stewardship, 2011 provision to more indirect services such as commodity sub-indices (food, non-food
19 TEEB for Business, The ecological control of pests and diseases, agricultural items, metals, and energy)
Economics of Ecology and and found that 15 of the 24 are being stood at a higher level than at any time in
Biodiversity, 2010
degraded or used unsustainably. In other the past century (Figure 4).20 Higher prices
20 Sources: Grilli and Yang;
Pfaffenzeller; World Bank;
words, humanity now consumes more than for commodities, most notably oil and
International Monetary Fund; the productivity of Earth’s ecosystems can food, are in the headlines—from the record-
Organisation for
Economic Cooperation and provide sustainably, and is thus reducing breaking USD 147/barrel price for West
Development statistics; the Earth’s natural capital, not just living Texas Intermediate crude oil in 2008 to the
UN Food and Agriculture
Organization; UN Comtrade; off of its productivity.17 18 As an example 107% rise in wheat prices from June 2010
McKinsey analysis
of the potential cost associated with this to January 2011, setting off unrest in several
21 Chicago Mercantile trend, a recent report, The Economics of emerging market economies.21 22 Similarly
Exchange (http://www.
cmegroup.com/company/ Ecosystems and Biodiversity, suggests that dramatic price increases have hit other
history/magazine/vol7- ecosystem services lost to deforestation in commodities, from base metals to precious
issue2/epicenterof-
energy.html) China alone cost the global economy some metals and specialty materials like rare earth
22 IndexMundi (http://www.
USD 12 billion annually over the period from oxides. Even in the absence of specific price
indexmundi.com/commoditi 1950 to 1998. These losses accrue across spikes, sustained higher resource costs
es/?commodity=wheat&mo
nths=60) several dimensions, including the costs of


Continued

of exchange-traded funds) has given new
FIGURE 4
Sharp price increases in commodities since 2000 have investors access to commodity markets,
erased all the real price declines of the 20th century creating the potential for ‘fad’ investments to
McKinsey Commodity Price Index (years 1999-2001 = 100)1 exacerbate near-term price swings.
260

240 World War I
Together, high and volatile commodity prices
220 • dampen the growth of global businesses—
1970s and ultimately economic growth. These
200 oil shock
• effects manifest themselves in two main
180
World War II ways: input cost spikes and increasing
160 hedging costs. As commodity prices have
140 • risen, companies have reported a hit on
120 profits due to sharp increases in input
100 • • costs. PepsiCo, for instance, announced in
80 Post-war Turning point
February 2011 that it expected input costs
Great
60
Depression Depression in price trend for the fiscal year to rise by USD 1.4 to 1.6
billion, or between 8 and 9.5% of total input
40
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 costs, due to commodity price increases.24
1 Based on arithmetic average of 4 commodity sub-indices: food, non-food agricultural items, metals, and energy;
PepsiCo also said that it didn’t plan to fully
2011 prices based on average of first eight months of 2011. offset these losses through price-hikes—
SOURCE: Grilli and Yang; Pfaffenzeller; World Bank; International Monetary Fund; Organisation for highlighting another, parallel trend, in
Economic Co-operation and Development statistics; UN Food and Agriculture Organization; UN Comtrade;
Ellen MacArthur Foundation circular economy team which firms face a ‘profit squeeze’ because
competition prevents them from offsetting
input price increases by raising their sales
could certainly dampen the prospects for an price. Tata Steel offers another recent case in
already fragile global economy, and are not point: the purchase price of input materials
going unnoticed by companies. for steelmaking jumped, but the market
price for steel did not rise enough to offset
Also troubling, from a business standpoint, is Tata’s suddenly higher costs, leading to lost
the recent jump in the volatility of resource margins for the company.25 Some firms that
prices. For metals, food, and non-food rely heavily on commodities as raw inputs
agricultural items, volatility levels in the first minimise their exposure to future price-
decade of the 21st century were higher than swings via hedging contracts—at a cost.
in any decade in the 20th century The total cost of hedging varies significantly
(Figure 5).23 depending on a company’s credit rating and
the expected volatility of markets, but in the
Several factors have driven commodity current market environment, a firm lacking a
23 Annual price volatility price volatility over the past decade. First, first-rate credit history could well spend 10%
calculated as the standard increased demand for many metals has of the total amount it hedges on financial
deviation of McKinsey
commodity subindices divided pushed prices to the far right end of their service fees.26 These fees represent not only
by the average of the subindex
over the time frame; Source:
respective cost curves—where the cost of a direct cost but also an opportunity cost—in
McKinsey Global Institute producing an additional unit of output is less volatile markets, money is more likely to
24 Jonathan Birchall, ‘Pepsi relatively high. This results in a situation be spent on business projects, research, and
faces steep input price inflation’, where small shifts in demand can lead innovation, potentially leading to growth.
Financial Times, 10 February 2011
to disproportionately large price swings.
25 ‘Tata Steel Q2 net profit
plunges 89%’, Economic Times,
Simultaneously, the exhaustion of easy- Current imbalances are likely to get worse
11 November 2011 to-access reserves has increased the before they get better
26 Chana Schoenberger, technological requirements for extracting
“Exposed!” The Wall Street many commodities—from oil and gas to Several factors indicate that resource
Journal, 2 March,, 2011
zinc and gold—making resource access scarcity, price squeezes, and volatility will
27 Per-capita GDP, measured in
1990 international dollars, PPP
more vulnerable to malfunctions and hence continue or increase. Here we outline some
and inflation weighted; Source: disruptions in the supply chain. Weather of the more prominent challenges of meeting
Angus Maddison; University of
Groningen patterns and political shocks, too, have future resource needs:
continually jarred supply dynamics. And
28 McKinsey Global Institute:
Resource revolution: Meeting the finally, innovation in financial markets
and water needs; November 2011
(including the development and proliferation


circular economy principles into business
FIGURE 5 models sooner rather than later. The baseline
Price volatility has risen above long-term trends in recent decades
UN forecast for global population growth
Price volatility1, in %, 10-year average ending at start of year cited2 projects the global population will stabilise
Food Metals Agricultural materials at around 10 billion by 2100.29 All the same,
35 important demographic shifts within the
global population could ultimately prove more
30 Volatility increases
across commodities important than the size of the population
in 2000s itself, especially the three billion new
25
individuals entering the consuming middle
20 class by 2030.30

15
Infrastructure needs. Besides more
10
infrastructure for a larger population,
the world will also need to expand its
5 infrastructure to get at harder-to-access
resources. Newly discovered reserves do
0
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2011
exist, but tapping them will require heavy
investment in infrastructure and new
1 Calculated as the standard deviation of the commodity sub-index divided by the average of the sub-index over
the time frame
technology. McKinsey estimates that (all else
2 2000-2011: 11-year average being equal) meeting future demands for
SOURCE: Grilli and Yang; Pfaffenzeller; World Bank; International Monetary Fund; Organisation for
Economic Co-operation and Development statistics; UN Food and Agriculture Organization; UN Comtrade; steel, water, agricultural products, and energy
Ellen MacArthur Foundation circular economy team
would require a total investment of around
USD 3 trillion per year31 —an amount roughly
Demographic trends. The world faces a 50% higher than current investment levels.
29 The most reliable and unique demographic challenge over the Should this investment fail to materialise, the
commonly cited models for global
population growth are those of
coming decades—though the economic result could be continued supply constraints.
the United Nations. aspects of demographics may prove more This threat is particularly pressing for
The UN’s estimates vary
significantly based on the fertility difficult to manage than the population agriculture in advanced economies, many of
rate used as an input, but all of
their core scenarios
aspects. China and India, the two largest which are much closer to the technological
involve fertility rates significantly countries by population, are each poised to limit and already producing near their
below the
current global rate
undergo a significant economic transition maximum potential yields.32
in coming decades. Looking at the recent
30 United Nations Population
Division: World Population past gives a sense of both the scope and the Political risks. Recent history shows
Prospects: 2010 Revision, 2010;
and McKinsey Global
speed of the shift. China, starting in 1982, the impact political events can have on
Institute: Resource revolution: took only 12 years to double its per-capita commodity supply. There are numerous
Meeting the world’s energy,
materials, food, and water needs;
GDP from USD 1,300–2,600, and India, historical instances in which political events
November 2011” starting in 1989, took only 16 years to achieve have triggered commodity price spikes:
31 McKinsey Global Institute: the same doubling.27 By comparison, it took the 1972 Arab oil embargo is one example;
Resource revolution: Meeting the
the United Kingdom 154 years to make another is the export declines following the
and water the same transition. Every bit as striking is 1978 Iranian revolution; a third is the price
needs; November 2011
the sheer number of people in China’s and shocks following Iraq’s invasion of Kuwait in
32 Based on yield achievement of India’s populations entering these periods 1990.33 Some commodities are particularly
wheat, rice, maize, and soybean;
maximum attainable yield of economic growth—which implies that a vulnerable: nearly half the new projects to
provided by International Institute
for Applied Systems Analysis
breathtaking number of new middle-class develop copper reserves, for instance, are in
and benchmarked by region consumers could be entering the global countries with high political risk.34 Perhaps
based on climate and technology.
Data from Food and Agriculture
economy if the two countries continue more shockingly, roughly 80% of all available
Organization and International their current growth patterns. McKinsey arable land on earth lies in areas afflicted by
Institute for Applied Systems
Analysis anticipates the emergence of three billion political or infrastructural issues. Some 37%
33 ‘Oil markets and Arab
new middle-class consumers by 2030, led of the world’s proven oil reserves, and 19%
unrest: The Price of Fear’, by economic growth in these two countries of proven gas reserves, are also in countries
The Economist, March 3, 2011
and other rapidly growing—and significantly with a high level of political risk. Political
34 Political risk as per the sized—emerging market economies.28 This decisions also drive cartels, subsidies, and
Economist Intelligence Unit’s
Political Instability Index. mass of new spenders will have significant trade barriers, all of which can trigger or
Countries scoring more than 5.0
on ‘underlying vulnerability’ are
impact on resource demand, a prospect that worsen resource scarcity and push up prices
classified as ‘low political stability’ underlines the potential value of introducing and volatility levels


Continued

Globalised markets. The rapid integration of It is true that a few individual companies
financial markets and the increasing ease of have already started taking the initiative
transporting resources globally mean that to counter the negative effects of a linear
regional price shocks can quickly become approach. The set of benefits that can be
global. There are many examples in recent captured by an individual company on
history, from the impact that Hurricane its own, however, is bounded, and system
Ike in the Gulf of Mexico had on energy limitations will need to be addressed in
markets, to the air travel chaos caused by order to let markets react fully to the pricing
the eruption of the Eyjafjallajökull in Iceland, signals described. A good example of such
to the supply chain disruptions ensuing from system-enhancing steps is the levying
the Fukushima disaster in Japan. This trend of landfill taxes in a growing number of
is likely to continue and, in all likelihood, to countries, as this provides a more level
become more acute as emerging markets playing field for waste treatment and product
integrate more thoroughly into global value recovery methods that aim to preserve
chains and financial systems. resources. A further step might then be to
render some of the environmental and social
Climate. Some resource industries could effects of our resource-based systems more
face disruption from variations in regional visible so as to let them steer the market.
climates over time, particularly water
and agriculture. The U.S. Environmental In this report, we argue for a specific type
Protection Agency suggests that changes in of productivity—a more ‘circular’ business
climate could affect snow cover, stream flow, model in which many more products are
and glacial patterns—and hence fresh water reused, refurbished, and redistributed than
supply, erosion patterns, irrigation needs, and today. More components and materials
flood management requirements, and thus could be remanufactured and ultimately
the overall supply of agricultural products.35 recycled. And more food and other organic
Supply constraints and uncertainty would waste could loop through value-extracting
likely drive up prices and volatility. McKinsey processes such as biochemical extraction
research suggests that by 2030, the disparity and anaerobic digestion. Our preliminary
between global water demand and water research shows that moving in the direction
supply could reach 40%, driven in large part of such a model could lead to significant
by increased demand for energy production, economic benefits for specific industries. It
which is highly water-intensive.36 could more broadly help mitigate aspects
of the current system that put pressure on
Taken together, these dynamics present resource supply, commodity prices, and
a major challenge for the current ‘take- volatility. It could also restore the natural
make-dispose’ system. While this system, capital that is essential for the continual
too, will respond to price signals, these provision of food, feed, and fibre.
signals are incomplete and distorted. We
therefore believe that under a business-as-
usual scenario the market will not overcome
the lock-in effect of existing production
economics, regulations, and mindsets
and will therefore not address the large
and continued imbalances described here
quickly and extensively enough to be able
to keep meeting future demand. If it was
declining resource prices that fuelled much
35 ‘Climate Change
Indicators: Snow and Ice’, of the economic growth of the past century,
from: Climate Change
Indicators Report, U.S.
upward price shifts could, if not stall, then
Environmental Protection severely hamper further growth in the
Agency, 2010, p. 54
decades to come.
36 McKinsey and
Company: Transforming
the Water Economy –
Seven Ways to Ensure
Resources for Growth;
January 2011

2

From linear to circular
Accelerating a proven concept

Frames the opportunities presented by a circular
economy, the origins and early successes of the
proven concept of circular business models, and

1
the ways in which they drive value creation.


2. From linear to circular
Accelerating a proven concept

The linear ‘take-make-dispose’ model relies service shifts, where appropriate. As circular
on large quantities of easily accessible economy thinker Walter Stahel explains, ‘The
resources and energy, and as such is linear model turned services into products
increasingly unfit for the reality in which that can be sold, but this throughput
it operates. Working towards efficiency approach is a wasteful one. [...] In the past,
alone—a reduction of resources and fossil reuse and service-life extension were often
energy consumed per unit of manufacturing strategies in situations of scarcity or poverty
output—will not alter the finite nature and led to products of inferior quality. Today,
of their stocks but can only delay the they are signs of good resource husbandry
inevitable. A change of the entire operating and smart management’.38
system seems necessary.
The circular economy is based on a few
The circular economy perspective and simple principles
principles
Design out waste. Waste does not exist when
The circular economy refers to an industrial the biological and technical components
economy that is restorative by intention; (or ‘nutrients’) of a product are designed by
aims to rely on renewable energy; minimises, intention to fit within a biological or technical
tracks, and eliminates the use of toxic materials cycle, designed for disassembly
chemicals; and eradicates waste through and refurbishment. The biological nutrients
careful design. The term goes beyond the are non-toxic and can be simply composted.
mechanics of production and consumption of Technical nutrients—polymers, alloys, and
goods and services in the areas that it seeks other man-made materials are designed to be
to redefine (examples include rebuilding used again with minimal energy and highest
capital, including social and natural, and the quality retention (whereas recycling as
shift from consumer to user). The concept commonly understood results in a reduction
of the circular economy is grounded in the in quality and feeds back into the process as
study of non-linear systems, particularly a crude feedstock).
living ones. A major consequence of taking
insights from living systems is the notion of Build resilience through diversity.
optimising systems rather than components, Modularity, versatility, and adaptivity are
which can also be referred to as ‘design prized features that need to be prioritised
to fit’. It involves a careful management in an uncertain and fast-evolving world.
of materials flows, which, in the circular Diverse systems with many connections
economy, are of two types as described and scales are more resilient in the face of
by McDonough and Braungart: biological external shocks than systems built simply for
nutrients, designed to re-enter the biosphere efficiency—throughput maximisation driven
safely and build natural capital, and technical to the extreme results in fragility.
nutrients, which are designed to circulate at
high quality without entering the biosphere.37 Michael Braungart confirms, ‘Natural systems
support resilient abundance by adapting
As a result, the circular economy draws a to their environments with an infinite mix
sharp distinction between the consumption of diversity, uniformity and complexity.
and use of materials: circular economy The industrial revolution and globalisation
advocates the need for a ‘functional service’ focused on uniformity so our systems
model in which manufacturers or retailers are often unstable. To fix that we can
increasingly retain the ownership of their manufacture products with the same flair for
37 William McDonough and products and, where possible, act as service resilience by using successful natural systems
Michael Braungart, Cradle to
Cradle: remaking the way we providers—selling the use of products, not as models’.
make things, New York:
North Point Press, 2002
their one-way consumption. This shift has
direct implications for the development of Rely on energy from renewable sources.
38 Unless explicitly stated
otherwise, all quotations in this
efficient and effective take-back systems and Systems should ultimately aim to run on
document are from interviews the proliferation of product- and business- renewable sources. As Vestas, the wind
conducted in the period from
November 2011 through January model design practices that generate more energy company, puts it: ‘Any circular story
2012 (A list of experts consulted
for the analysis and reporting is
durable products, facilitate disassembly should start by looking into the energy
given in the appendix) and refurbishment, and consider product/


‘Rather than using eco-efficiency to try and minimise material flows, eco-effectiveness
transforms products and related material flows to support a workable relationship
between ecological systems and economic growth. Instead of reducing or delaying
the cradle-to-grave flow of materials, eco-effectiveness creates metabolisms where
materials are used over and over again at a high level of quality.’ Michael Braungart

involved in the production process’. Walter
Efficiency vs. effectiveness— Stahel has argued that human labour
a key distinction should fall in that same category: ‘Shifting
taxation from labour to energy and material
consumption would fast-track adoption of
Eco-efficiency begins with the more circular business models; it would also
assumption of a one-way, linear make sure that we are putting the efficiency
flow of materials through industrial pressure on the true bottleneck of our
systems: raw materials are extracted resource consuming society/economy (there
from the environment, transformed is no shortage of labour and (renewable)
into products, and eventually energy in the long term).’
disposed of. In this system, eco-
efficient techniques seek only to Think in ‘systems’. The ability to understand
minimise the volume, velocity, and how parts influence one another within a
toxicity of the material flow system, whole, and the relationship of the whole to
but are incapable of altering its linear the parts, is crucial. Elements are considered
progression. Some materials are in their relationship with their infrastructure,
recycled, but often as an end-of-pipe environment, and social contexts. Whilst
solution, since these materials are not a machine is also a system, it is bounded
designed to be recycled. Instead of and assumed to be deterministic. Systems
true recycling, this process is actually thinking usually refers to non-linear systems
downcycling, a downgrade in material (feedback-rich systems). In such systems, the
quality, which limits usability and combination of imprecise starting conditions
maintains the linear, cradle-to-grave plus feedback leads to multiple, often
dynamic of the material flow system. surprising consequences and to outcomes
that are not necessarily proportional to the
In contrast to this approach of input. Applying these insights to engineering
minimisation and dematerialisation, and business challenges, Chris Allen, CEO
the concept of eco-effectiveness of Biomimicry 3.8, explains: ‘In our work
proposes the transformation of with our clients, we will frame the problems
products and their associated we aim to solve from a systems integration
material flows such that they form perspective, and always in context—since
a supportive relationship with in nature nothing grows out of context’.
ecological systems and future Systems thinking emphasises flow and
economic growth. The goal is not to connection over time and has the potential
minimise the cradle-to-grave flow of to encompass regenerative conditions rather
materials, but to generate cyclical, than needing to limit its focus to one or more
cradle-to-cradle ‘metabolisms’ that parts and the short term.
enable materials to maintain their
status as resources and accumulate Waste is food. On the biological nutrient
intelligence over time (upcycling). side, the ability to reintroduce products and
This inherently generates a synergistic materials back into the biosphere through
relationship between ecological non-toxic, restorative loops is at the heart
and economic systems, a positive of the idea. On the technical nutrient side,
recoupling of the relationship improvements in quality are also possible;
between economy and ecology. this is called upcycling.

The drive to shift the material composition
of consumables from technical towards
biological nutrients and to have those
cascade through different applications before
extracting valuable feedstock and finally re-
introducing their nutrients into the biosphere,
rounds out the core principles of a restorative
circular economy. Figure 6 illustrates how


Continued

FIGURE 6 The circular economy—an industrial system that is restorative by design

Mining/materials manufacturing

Farming/collection1
Parts manufacturer Technical nutrients
Biological nutrients

Biochemical
feedstock Product manufacturer
Restoration Biosphere Recycle

Service provider
Refurbish/
remanufacture

Reuse/redistribute

Biogas Maintenance
Cascades
6 2803 0006 9

Consumer User
Anaerobic
digestion/ Collection Collection
composting

Extraction of
biochemical Energy recovery
feedstock2

Leakage to be minimised

Landfill

1 Hunting and fishing
2 Can take both post-harvest and post-consumer waste as an input
Source: Ellen MacArthur Foundation circular economy team

The drive to shift the material composition
of consumables from technical towards
biological nutrients and to have those
cascade through different applications
before extracting valuable feedstock and
finally re-introducing their nutrients into the
biosphere, rounds out the core principles
of a restorative circular economy. Figure 6
illustrates how technological and biological
nutrient-based products and materials cycle
through the economic system, each with
their own set of characteristics—which will
be detailed later in this chapter.


technological and biological nutrient-based • Upcycling. A process of converting
products and materials cycle through the materials into new materials of higher
economic system, each with their own set of quality and increased functionality.
characteristics—which will be detailed later in
this chapter. Biochemicals extraction
Applying biomass conversion processes and
Terminology39 equipment to produce low-volume but high-
value chemical products, or low-value high-
Reuse of goods volume liquid transport fuel—and thereby
The use of a product again for the same generating electricity and process heat
purpose in its original form or with little fuels, power, and chemicals from biomass. In
enhancement or change. This can also apply to a ‘biorefinery’ such processes are combined
what Walter Stahel calls ‘catalytic goods’, e.g., to produce more than one product or type
water used as a cooling medium or in process of energy.
technology.
Composting
Product refurbishment A biological process during which naturally
A process of returning a product to good occurring microorganisms (e.g., bacteria and
working condition by replacing or repairing fungi), insects, snails, and earthworms break
major components that are faulty or close down organic materials (such as leaves,
to failure, and making ‘cosmetic’ changes grass clippings, garden debris, and certain
to update the appearance of a product, food wastes) into a soil-like material called
such as cleaning, changing fabric, painting compost. Composting is a form of recycling,
or refinishing. Any subsequent warranty is a natural way of returning biological
generally less than issued for a new or a nutrients to the soil.
remanufactured product, but the warranty
is likely to cover the whole product (unlike Anaerobic digestion
repair). Accordingly, the performance may be A process in which microorganisms break
less than as-new. down organic materials, such as food scraps,
manure, and sewage sludge, in the absence
Component remanufacturing of oxygen. Anaerobic digestion produces
A process of disassembly and recovery at the biogas and a solid residual. Biogas, made
subassembly or component level. Functioning, primarily of methane and carbon dioxide,
reusable parts are taken out of a used product can be used as a source of energy similar
and rebuilt into a new one. This process to natural gas. The solid residual can be
includes quality assurance and potential applied on the land or composted and used
enhancements or changes to the components. as a soil amendment.

Cascading of components and materials Energy recovery
Putting materials and components into The conversion of non-recyclable waste
39 Our understanding of reuse, different uses after end-of-life across different materials into useable heat, electricity, or
refurbishing, and cascading is in
line with definitions developed by
value streams and extracting, over time, stored fuel through a variety of so-called waste-
the Centre for Remanufacturing energy and material ‘coherence’. Along the to-energy processes, including combustion,
and Reuse (CRR). With respect to
remanufacturing, our focus is on cascade, this material order declines (in other gasification, pyrolysis, anaerobic digestion,
recovery at module/component words, entropy increases). and landfill gas recovery.
level, whereas the CRR defines
remanufacturing as ‘returning
a used product to at least its
original performance with a
Material recycling Landfilling
warranty that is equivalent to • Functional recycling. A process of recovering Disposing of waste in a site used for the
or better than that of the newly
manufactured product’— Adrian materials for the original purpose or for other controlled deposit of solid waste onto or
Chapman et al., ‘Remanufacturing
in the U.K. – A snapshot of the
purposes, excluding energy recovery.40 into land.
U.K. remanufacturing industry’;
Centre for Remanufacturing &
Reuse report, August 2010
• Downcycling. A process of converting
materials into new materials of lesser quality
40 This definition is in line with
Article 3(7) of Directive 94/62/ and reduced functionality.
EC. This article additionally states
that recycling includes organic
recycling


Continued

Professor Dr. Michael Braungart
Professor Dr. Michael Braungart is
the founder and scientific director of Circular economy—schools of thought
EPEA Environmental Protection and
Encouragement Agency, co-founder The circular economy concept has deep-
and managing director of McDonough rooted origins and cannot be traced back
Braungart Design Chemistry (MBDC), to one single date or author. Its practical
and scientific director of the Hamburger applications to modern economic systems
Umweltinstitut (HUI). He teaches at the and industrial processes, however, have
University of Lüneburg and the Dutch gained momentum since the late 1970s as
Research Institute for Transitions (DRIFT) a result of the efforts of a small number
of Erasmus University, and is a visiting of academics, thought-leaders, and
professor at the Darden School of businesses.
Business. He teaches process engineering
and lectures on topics such as eco- The general concept has been refined and
efficiency and eco-effectiveness, Cradle to developed by the following schools of
Cradle® design, and intelligent materials thought.
pooling.
Regenerative Design. In the 1970s, an
Professor Roland Clift CBE FREng American professor named John T. Lyle
Emeritus Professor of Environmental launched a challenge for graduate students.
Technology and Founding Director of the Lyle asked students to forge ideas for a
Centre for Environmental Strategy at the society in which ‘daily activities were based
University of Surrey; Executive Director on the value of living within the limits of
of the International Society for Industrial available renewable resources without
Ecology; past member of the Royal environmental degradation,’ according to a
Commission on Environmental Pollution California research centre that is now named
and the Science Advisory Council of Defra. after Lyle.41 The term regenerative design
came to be associated with this idea—that
Professor Walter R. Stahel all systems, from agriculture onwards, could
Professor Walter Stahel is head of risk be orchestrated in a regenerative manner
management at the Geneva Association. (in other words, that processes themselves
In 1982, he founded the Product-Life renew or regenerate the sources of energy
Institute, Europe’s oldest sustainability and materials that they consume).
consultancy. An alumnus of the Swiss
Federal Institute of Technology, Zurich, Performance Economy. Walter Stahel,
Stahel has authored several award- architect and industrial analyst, sketched
winning academic papers and is a visiting in his 1976 research report to the European
professor at the Faculty of Engineering Commission The Potential for Substituting
and Physical Sciences at the University of Manpower for Energy, co-authored with
Surrey. Genevieve Reday, the vision of an economy
in loops (or circular economy) and its impact
Janine Benyus on job creation, economic competitiveness,
Janine Benyus is a natural sciences writer, resource savings, and waste prevention.42 43
innovation consultant, and author of six Stahel’s Product-Life Institute, considered
books, including her latest—Biomimicry: one of the first pragmatic and credible
Innovation Inspired by Nature. In 1998, sustainability think tanks, pursues four
Janine co-founded an education and main goals: product-life extension, long-life
innovation practice called Biomimicry goods, reconditioning activities, and waste
Guild, which has helped clients such as prevention. It also insists on the importance
General Electric, HOK Architects, Levi’s, of selling services rather than products, an
NASA, and Seventh Generation create idea referred to as the ‘functional service
sustainable products, processes, and economy’, now more widely subsumed into
policies based on nature’s principles. the notion of ‘performance economy’. Stahel


argues that the circular economy should be Industrial Ecology. Industrial ecology is
considered a framework, and its supporters the study of material and energy flows
see it as a coherent model that forms a through industrial systems. Its international
valuable part of a response to the end of the society is headed by Professor Roland Clift
era of low cost oil and materials. at the Centre for Environmental Strategy
at the University of Surrey. Focusing on
Cradle to Cradle. German chemist and connections between operators within the
visionary Michael Braungart went on to ‘industrial ecosystem’, this approach aims
develop, together with American architect at creating closed-loop processes in which
Bill McDonough, the Cradle to Cradle™ waste serves as an input, thus eliminating
concept and certification process. This design the notion of an undesirable by-product.
philosophy considers all material involved Industrial ecology adopts a systemic point
in industrial and commercial processes to of view, designing production processes in
be nutrients, of which there are two main accordance with local ecological constraints
categories: technical and biological. The whilst looking at their global impact from
Cradle to Cradle framework focuses on the outset, and attempting to shape them
design for effectiveness in terms of products so they perform as close to living systems
with positive impact, which fundamentally as possible. This framework is sometimes
differentiates it from the traditional design referred to as the ‘science of sustainability’,
focus on reducing negative impacts. given its interdisciplinary nature, and
its principles can also be applied in the
Cradle to Cradle design perceives the safe and services sector. With an emphasis on natural
productive processes of nature’s ‘biological capital restoration, industrial ecology also
metabolism’ as a model for developing a focuses on social wellbeing.
‘technical metabolism’ flow of industrial
materials. The model puts a particular Biomimicry. Janine Benyus, author of
emphasis on precisely defining the molecular Biomimicry: Innovation Inspired by Nature,
composition of materials—‘knowing what you defines her approach as ‘a new discipline
have, which is the basis of every quality-based that studies nature’s best ideas and then
materials recycling system’. In some cases, imitates these designs and processes to
notably for technological products that are solve human problems’. Studying a leaf
subject to frequent upgrades, durability is not to invent a better solar cell is an example.
the optimum strategy—in that instance, it is She thinks of it as ‘innovation inspired by
preferable to design the products in a way nature’.44 Biomimicry relies on three key
that makes their disassembly and the recovery principles:
of their components easy, either to upgrade
• Nature as model: Study nature’s models
some elements or to use individual parts for
and emulate these forms, processes,
the next generation. It is thus important to
systems, and strategies to solve human
be able to, for various families of products,
problems.
define the use period, as it influences their
conception: will the object remain in use for • Nature as measure: Use an ecological
ten years or more (washing machine) or rather standard to judge the sustainability of our 41 “History of the Lyle
Center”, Lyle Center for
two (mobile phone)? Product components innovations. Regenerative Studies,
Cal Poly Pomona
can be designed for continuous recovery
• Nature as mentor: View and value nature (http://www.csupomona.
and reutilisation as biological and technical edu/~crs/history.html)
not based on what we can extract from the
nutrients within these metabolisms. The Cradle 42 The report was
natural world, but what we can learn from it.
to Cradle framework addresses not only published in 1982 as
the book Jobs for
materials but also energy and water inputs and Tomorrow: The Potential
for Substituting
builds on three key principles: ‘Waste equals Manpower for Energy 98
food’—‘Use current solar income’—‘Celebrate
43 www.performance-
diversity’. economy.org

44 http://www.
biomimicryinstitute.
org/about-us/what-is-
biomimicry.html


Continued

The concept and principles of the circular from end-of-life vehicle disassemblers as well
economy have already been put into practice as with new parts where necessary. Renault’s
successfully by very different companies ability to structure and run its reverse
across the manufacturing landscape. logistics chain and access a steady stream of
Prominent examples include Michelin, cores, together with its deployment of highly
Caterpillar, Renault, Ricoh, and Desso. skilled labour, has allowed the company to
grow its remanufacturing operations into a
• In the 1920s, Michelin pioneered 200 million euro business.
leasing tyres under a pay-per-kilometre
programme. As of 2011, Michelin Fleet • Ricoh, provider of managed document
Solutions had 290,000 vehicles under services, production printing, office
contract in 23 countries, offering tyre solutions and IT services, is another Fortune
management (upgrades, maintenance, 500 company, active in 180 countries. It
replacement) to optimise the performance developed ‘GreenLine’ as part of its Total
of large truck fleets—in Europe, 50% of Green Office Solutions programme, which
large truck fleets externalise their tyre aims to minimise the environmental impact
management. By maintaining control over of products at its customers’ sites. Copiers
the tyres throughout their usage period, and printers returning from their leasing
Michelin is able to easily collect them at end programme are inspected, dismantled, and
of the leases and extend their technical life go through an extensive renewal process—
(for instance by retreading) as well as to including key components replacement and
ensure proper reintegration into the material software update—before re-entering the
cascade at end of life. market under the GreenLine label with the
same warranty scheme that is applied to
• Caterpillar created its remanufacturing new devices. Because it increases customers’
division in 1972; it has kept on growing choice, Ricoh’s GreenLine programme has
ever since—over the last decade at a brisk quickly become a success story and it now
8 to 10%, well above the growth rate of the keeps pace with Ricoh’s new equipment sales.
global economy as a whole. It now has a
remanufacturing portfolio of hundreds of • After buying out the company, the top
parts and handled more than 70,000 tonnes management team at Desso took inspiration
of remanufactured products in 2010, up from from the Cradle to Cradle™ movement and
45,000 tonnes in 2005. Growth is expected decided to pursue C2C CertificationCM for the
to continue as Caterpillar’s engineers are entire company. A major spur to innovation
working systematically through its backlog of and an inspiration for both customers and
warehoused used parts to bring them back employees, Desso’s broad adoption of
into economic use.45 circular economy principles has been driving
top-line growth. After the buyout in 2007,
• From its start in a suburban garage in its European market share for carpet tiles
1898, Renault has grown into a leader, grew from 15 to 23% and profit margins
first in automotive engineering and now (normalised EBIT of the original carpet
also in remanufacturing. It operates a business) from 1 to 9%, with about half of this
dedicated remanufacturing plant near Paris, gain directly attributable to the introduction
France. There, several hundred employees of C2C™ principles. In its ambition to change
re-engineer 17 different mechanical over the complete system rather than cherry-
subassemblies, from water pumps to engines. pick individual measures, Desso is also
Renault works with its distributor network to phasing in renewable energy sources for each
obtain used subassemblies, and supplements of its production sites—in line with another
these with used parts purchased directly core C2C™ principle.

45 Corporate annual reports
2005 to 2010; Product-Life
Institute website (http://
www.productlife.org/en/
archive/case-studies/
caterpillar-remanufactured-
products-group)


FIGURE 7 The circular economy at work: Ricoh’s Comet Circle™

Parts Materials
manufac- Materials
Product manufac- supplier
manufacturer turer
turer
Sales Reuse of parts
company
Reuse of products User of
recycling
materials
Long use Closed loop Generation of raw materials
materials Open loop • Chemical recycling
Product Parts recycling Materials Oil recovery • Metals recycling
Maintenance recovery recovery materials company,
recovery
User company
center center company recycling smelting
company Metals

Thermal
energy Energy recovery
Collection Sorting and Disassembly oil collection (Energy, CO2)
company
center disassembly
Recycling
center Final
Shredder
company disposal
company
Shredder dust
© 1994 RICOH Crushing of products Landfill

Resource Recirculation at Ricoh

In 1994, Ricoh established the Comet portfolio with lower-cost models and
Circle™ as a catalyst for change. It serving a wider range of customers to
expresses a comprehensive picture of rendering its offering more competitive
how Ricoh can reduce its environmental by mixing ‘new’ and recirculation
impact, not only in its activities as a equipment.
manufacturer and sales company, but
also upstream and downstream—along Its evolved relationship with its
the entire lifecycle of its products. products in use is producing further
The Comet Circle™ centres on the results: optimising the years that
belief that all product parts should machines are in operation at customer
be designed and manufactured in sites and generating annuity;
a way that they can be recycled or generating additional revenue and
reused. Ricoh management uses the margin by selling equipment more
Comet Circle™ as a real tool to plan its than once; and of course making a
portfolio of products and activities. It considerable contribution to resource
is on this basis that Ricoh established conservation. Ricoh’s objectives are to
the GreenLine label as a concrete reduce the input of new resources by
expression of its resource recirculation 25% by 2020 and by 87.5% by 2050
business, with the priority focus on from the level of 2007; and to reduce
inner-loop recycling. the use of—or prepare alternative
materials for—the major materials
The benefits of moving on a ‘tighter of products that are at high risk of
loop’—long use and reuse (the left side depletion (e.g., crude oil, copper, and
of the Comet Circle™) —are manifold chromium) by 2050.
for Ricoh, from enhancing its product


Continued

linear alternative (including the avoidance
Sources of value creation of end-of-life treatment costs), setting up
in a circular economy circular systems can make economic sense.
The principles of the circular economy offer With increasing resource prices and higher
not only a description of how it should work end-of-life treatment costs, this arbitrage
as a whole, but also an outline of specific becomes more attractive, especially in the
sources of core economic value creation beginning when the economies of scale and
potential. The economics and comparative scope of the reverse cycle can benefit from
attractiveness of different circular setups higher productivity gains (because of their
(e.g., reuse versus remanufacturing versus low starting base given that many reverse
recycling) can differ significantly for different processes are still subscale today).
products, components, or types of material,
whether in a specific geography or segment
of the (global) supply chain—all of which we
spell out in the next chapter. Nevertheless,
there are four simple principles of circular
value creation that hold true.

Power of circling longer: A second core
value creation potential stems from keeping
products, components, and materials in
use longer within the circular economy.
This can be done by either going through
more consecutive cycles (e.g., not only
Power of the inner circle: In general, the one refurbishment of an engine core but
tighter the circles are, the larger the savings multiple consecutive ones) or by spending
should be in the embedded costs in terms more time within a cycle (e.g., extending
of material, labour, energy, capital and of the the use of a washing machine from 1,000 to
associated rucksack of externalities, such as 10,000 cycles). This prolongation of usage
GHG emissions, water, or toxic substances will substitute virgin material inflows to
(Figure 8). Given the inefficiencies along counter the dissipation of material out of
the linear supply chain, tighter circles will the economy (which, assuming constant
also benefit from a comparatively higher demand and given the second law of
virgin material substitution effect (given thermodynamics, i.e., ‘matter is decaying
the process inefficiencies along the linear towards entropy’, will eventually happen).
chain). This arbitrage opportunity revealed Here, too, rising resource prices render
by contrasting the linear to the circular setup this value-creation lever more attractive.
is at the core of their relative economic Increased operating and maintenance costs,
value creation potential. Whenever the however, and/or losing out against efficiency
costs of collecting, reprocessing, and gains due to rapid innovation of the product,
returning the product, component or could eat up this positive arbitrage potential.
material into the economy is lower than the


$ $ $

Power of cascaded use and inbound
material/product substitution: While
the previous value creation levers refer to
reusing identical products and materials
within the circular setup for a specific
product, component or material category,
there is also an arbitrage opportunity in
the cascading of products, components municipal waste collection). Scale economies
or materials across different product and efficiency gains in the reverse cycle can
categories (Figure 9) (e.g., transforming be obtained through improvements in the
cotton-based clothing into fibrefill for original design of products—such as ease of
furniture and, later, into insulation material separation, better identification of embedded
before returning it as a biological nutrient components, and material substitution—and
safely into the biosphere). In these in the reverse processes—such as reduced
cascades, the arbitrage value creation product damage rates during collection and
potential is rooted in the lower marginal transportation, lower reconditioning scrap
costs of reusing the cascading material rates, and reduced contamination of material
as a substitute for virgin material inflows streams during and after collection. These
and their embedded costs (labour, energy, improvements to the product and the reverse
material) as well as externalities against the cycle process translate into further reductions
marginal costs of bringing the material back of the comparative costs of the reverse
into a repurposed use. cycle while maintaining nutrients, especially
technical ones, at higher quality throughout
the cycles, which typically extends longevity
Power of pure, non-toxic, or at least and thus overall material productivity. Beyond
easier-to-separate inputs and designs: the performance of the reverse cycle, keeping
The power of this fourth major lever is toxic materials out of the product design can
a further enhancement to the above- bring other measurable advantages. When
mentioned value creation potential and Desso, for example, decided to eliminate
offers an additional host of benefits. To all toxic chemicals in its carpet tiles—in line
generate maximum value, each of the above with Cradle to Cradle principles—its business
levers requires a certain purity of material benefited from an uptake in the aviation
and quality of products and components. market, where carpet offgassing can affect
Currently, many post-consumption material passenger health and comfort.
streams become available as mixtures of
materials, either because of the way these
materials were selected and combined
in a previous single product or because
they are collected and handled without
segmentation and without regard for
preserving purity and quality (e.g., in


Continued

• We are able to increase each of the
FIGURE 8 The impact of more circular production processes
accumulates across several layers of inputs
reuse, refurbishment, and remanufacturing
cycles by an additional cycle, i.e., instead
of discarding the product after the first
two years, we can run the product through
an extra cycle before it becomes unfit
for purpose (given wear and tear or any
of the other limits to repeated use—see
sidebar on the factors driving premature
obsolescence).

The differences between the BAU and
the circular scenarios for both new virgin
material required and the build-up of stock
highlight the substantial savings effect of
the circular setup (Figure 10).

• Need for virgin material extraction would
1 Including impact on biodiversity and ecosystem services decrease substantially. The impact of a
circular set-up on virgin material extractions
needs is considerable. This does not
represent a temporary effect—the widening
Long-term effects of circularity on material spread between the two lines continues
stocks and mix even after growing collection rates and
reuse/refurbishing rates come to a plateau
The combined effect of these value creation (a point which can be seen visually as the
levers will profoundly change for the better ‘kink’ in the line that represents circular
both the mix as well as the run rate at demand).
which our extracted material stocks will
grow. To illustrate these long-term effects, • Growth of landfill and total material stock
we prepared a simple theoretical example would decrease as a consequence of these
consisting of a single product (made of one substitution effects. Most importantly, the
material) over a 30-year time frame with and growth rate would not resume the same
without reverse cycles. We first modelled speed of material demand as in the BAU
the business-as-usual (BAU) scenario and scenario, as the substitution at product level
then modified this scenario by gradually will proportionally save more raw material
introducing the circular value-creation levers. than a comparative product created from
virgin material. As a result the underlying
For the circular scenario, we assumed that: run rates are reduced.

• We have the same efficiency losses along This model assumes that, at any of these
the value chain from one product step to the stages, the economic trade-offs between
next as for BAU the cost of virgin inputs and the cost of
material that has been kept in the cycle via
• We face the same demand growth of 3% circular streams would always favour the
p.a., but: circular setup. Obviously, this would not
hold true if the price of the virgin material
• We build up reverse cycle treatment is at a level below the cost of keeping
capacities, also at the rate of 4 percentage materials in the reverse cycles. Other trade-
points per annum, with a cap at 40% each for offs must be considered as well. As Peter
reuse/refurbishment and remanufacturing for Guthrie, who leads the Centre of Sustainable
the end-of-life flows Development at Cambridge University’s
Department of Engineering, puts it: ‘There
• We recycle the share of the collected will always need to be consumption
material that exceeds the 40% limits on our of virgin materials, and the process of
reverse treatment capacities


FIGURE 9 Cascading keeps materials in circulation for longer—textile example

Farming/collection

Insulation Furniture Garment
Restoration Biosphere
Parts Fibre Stuffing 1
Yarn, cloth
manufacturer

Biochemical Products Insulation Yarn
feedstock manufacturer Furniture Apparel recycling
material

Biogas
Service provider Insulation Furniture Apparel
material sales sales sales

6 2803 0006 9 6 2803 0006 9 6 2803 0006 9
Reuse2
Consumer Consumer Consumer
Anaerobic
digestion/
composting Collection Collection Collection

Extraction of Energy recovery
biochemical
feedstock


Landfill

1 Furniture stuffing material can be reused several times
2 Examples of reuse include donation, exchange, resale


cycling will always require some energy use. The time seems right, now, to embrace more
The balance of resource use for different widely and accelerate the circular design
options needs to be carefully considered.’ philosophy. Resource prices are soaring,
Still, Guthrie says, ‘The whole approach of and the implicit or explicit costs of disposal
circularity is precisely the direction of travel drastically increasing. At the same time,
for improved sustainability performance.’ progress in technologies and material science
is yielding longer-lasting and more reusable
To provide a perspective on how robust this designs whilst increased visibility along the
arbitrage opportunity is in practice, Chapter value chain enables better tracking of the
3 examines the effects and costs of reverse whereabouts of products and materials, and
treatments and disposal options for a number consumers and corporations have grown
of selected products in detail, and identifies more accustomed to commercial practices
what building blocks need to be put in place based on performance instead of ownership.
to capture the potential benefits. Chapter 4
then assesses how large this potential
could be if scaled up across the economy.
Chapter 5 puts forward strategies that will
allow companies to extract maximum value
from moving towards more circular business
models.


Continued

FIGURE 10
A circular economy would not just ‘buy time’ — it would reduce the amount
of material consumed to a lower set point
ILLUSTRATIVE

Effect of circular system on primary material demand in widget market1
Volume of annual material input required

700
Demand, BAU2
600
500
400 Virgin material
substituted by
300 circular material
200 Demand under
100 circular system
0
2010 2015 2020 2025 2030 2035 2040

Effect of circular system on material stock and landfill Material stock
Cumulative volume of material used Material landfilled
In use

7,000
6,000 BAU2
5,000
4,000 Circular
3,000 system
2,000
1,000
0
2010 2015 2020 2025 2030 2035 2040

1 Assumptions: Widgets have a 5-year product life; demand for widgets assumed to grow at 3% p.a.; collection
rate rises from 0% in 2010 to 90% in 2040; reuse and refurbishment rates scale up over time, from 0% to 40%
each; all collected material that is not reused or refurbished is recycled
2 Business as usual

SOURCE: Ellen MacArthur Foundation circular economy team

3
How it works up close
Case examples of circular products
Demonstrates through detailed case studies the many
ways in which companies can benefit from circular business
models and the key building blocks needed on a systemic
level to shift business in this direction.

1


3. How it works up close
Case examples of circular products

It is evident that reuse and better design Instead, we have selected a broad range
can significantly reduce the material bill of manufactured products to illustrate the
and the expense of waste disposal and various design choices and business model
that they can create new enterprises and changes that may help companies reap
more useful products—meeting needs of the benefits of a more circular product
new customers as the population grows. and service portfolio. For some complex
But—from an economics perspective—can products, we go into more detail, because
these advantages match the advantages it is here where the case is most difficult to
of products designed for mass production make. The sector focus of these analyses
based on low labour costs and economies is on manufacturing and, here, the final
of scale? From a business and consumer production stage of the value chain. In other
perspective—can producing, selling, words, we do not analyse the economic
and consuming less material be a more effects on upstream participants in the
attractive proposition? Our treatment of market. Within manufacturing, we examined
these questions in the pages that follow is an intentionally wide range of product types.
in many ways a ‘sixteenth century map’ of Given the starkly different characteristics
the circular economy, a rough chart of its of short-lived manufactured goods (such
potential. It is our hope that this analysis as, say, food packaging) versus long-lived
will entice companies to embark on this manufactured goods (e.g., material used in
journey, and, in that process, refine it with housing construction), we intentionally chose
an ever-more solid base of evidence—not products in both categories, as well as a mid-
only by demonstrating its terrific potential, range, medium-lived category.
but also by testifying to the trials and
tribulations of a transformation into the Our analysis leads us to believe that this
circular economy. final category, medium-lived products—
and specifically, complex medium-lived
To demonstrate the economic opportunity of products—is a sweet-spot segment for
such a model, EMF and its partners analysed circularity. These, then, are the products we
the options for several different categories examine in full depth with our circularity
of resource-intensive products—from fast- calculator (for details on the analysis, see
moving consumer goods such as food and sidebar). The eight sectors that produce
fashion, to longer-lasting products such these and similar types of products represent
as phones, washing machines, and light- 48.6%, or nearly half, of the GDP contribution
commercial vehicles, and including single- of the manufacturing sector within the
family houses as an example of a long-life EU economy, demonstrating that circular
product. Because the service sector is not business activities have the potential to
a converter of materials, services as such outgrow its their ‘niche’ status and become
are not directly affected by the adoption of relevant in the mainstream economy.46
circularity principles. Thus we do not cover
services in our analysis—although it is worth In the pages that follow, we describe at
noting that as a purchaser of products, the length our analysis of products in our
sector could have a considerable impact in ‘sweet spot’ sectors, namely mobile phones,
bringing about change, and of course the smartphones, light commercial vehicles,
circular economy would greatly expand the washing machines—for which we applied
need for services. While the shift towards the circularity calculator—and power tools.
renewable energy is a key principle of the We also discuss the potential for circularity
circular economy, a full assessment of the across the broader economy, from the
impact of a circular transition on the energy long-lived (e.g., buildings) to consumables
sector is also outside the scope of this report, (e.g., packaging and food products), parts
and the analysis excludes energy and other of the manufacturing sector, and calculate a
utilities as producing sectors. cascade for textiles as an example of short-
lived products.

46 GDP contribution based on
Eurostat Input/Output tables
2007 for EU-27 economies


Buildings—Mastery of reverse cycle skills supported deconstruction through both
can make all the difference legislation and policies that stimulate. In
the U.S., local, state, and federal agencies
While many long-lived assets such as have started to encourage deconstruction
buildings and road infrastructure consist programmes for their beneficial effects on
largely of metals, minerals, and petroleum- employment and community building. It may
derived construction materials (i.e., technical be for this reason that private sector take-
nutrients), there is also a significant role for up has been limited, and deconstruction
bio-based materials such as various kinds of activities are currently largely the domain of
wood. Whatever the source and character smaller local players.
of the nutrient, we see that the circularity
potential for such long-lived assets has gone
largely untapped, resulting in a great loss of Medium-lived complex products—The heart
volume and value, as discussed earlier in this of the opportunity
text. Various initiatives have demonstrated
the potential for value retention—the findings In contrast to long-lived products, such as
of one such pilot in Riverdale, MD (USA) and buildings or bridges, the sectors we focus
the order of magnitude of the improvement on generally include products that are in use
potential it demonstrates can be considered for a short enough timeframe that they are
typical.47 The pilot initiative showed that subject to frequent technological innovation,
deconstructing rather than demolishing but long enough that they are not subject to
U.S. houses built in the 1950s and 1960s one-off consumption. Most products in these
would divert 76% of the rubble produced sectors contain multiple parts and therefore
from going to landfill—thereby avoiding are suitable for disassembly or refurbishment.
the associated landfill cost and preserving Finally, this portion of the economy is quite
valuable building components large—the eight sectors we focus on account
and materials for recycling and reuse. for about USD 1.98 trillion in final sales in the
47 NAHB Research Center, Moreover, deconstruction case studies EU-27, or a little less than half of the region’s
Deconstruction—Building
Disassembly and Material Salvage: have shown important social benefits, final sales from manufacturing.52 The eight
The Riverdale Case Study, June
1997. Prepared for U.S. EPA Urban
including significant increases in labour sectors, as categorised by Eurostat, are
and Economic Development requirements,48 job creation at a local level,49 as follows: machinery and equipment;
Division
and better employment conditions and office machinery and computers; electrical
48 Charles J. Kibert et al., educational opportunities.50 As an illustration, machinery and apparatus; radio, television,
Implementing deconstruction in
the United States Brian Milani estimated that, ‘If deconstruction and communication equipment and
49 DiRamio et al. http://www.
were fully integrated into the U.S. demolition apparatus; medical, precision and optical
bigideasforjobs.org/ industry, which takes down about 200,000 instruments, watches and clocks; motor
50 Frank Regan, Rochester
buildings annually, the equivalent of vehicles, trailers, and semi-trailers; other
Environmental News Examiner, 200,000 jobs would be created’.51 transport equipment; and furniture and other
2010
manufactured goods.53
51 Brian Milani, Building
Materials in a Green Economy:
Leading construction companies such as
Community-based Strategies for Skanska, a Swedish project development and
Dematerialization,
2001
construction group with worldwide activities,
have made the possibilities of deconstruction
52 Final uses at basic prices
(e.g., excluding shipping costs, an inherent part of their strategy and services
customisations, etc.), from
Eurostat Input/Output tables
portfolio. In Japan, Kajima Construction
2007 for EU-27 economies Corporation developed a new deconstruction
53 It is worth noting that these
technique that allowed it to recycle 99%
sectors each contain dozens of the steel and concrete and 92% from a
and, in some cases, hundreds of
specific product types. Not all building. The Japanese government has
product types fit all the criteria
we outline—some, for instance,
have relatively shorter or longer
lifespans; others have only one
or two components and are not
particularly complex. That said,
utilising these sectors as a proxy
allows us to roughly define the
size of the economy that would
be affected by circular
production methods


Continued

The Circularity Calculator informed assumptions to determine the
total savings on material, labour, energy, and
In order to calculate the economic impact carbon emissions as well as the trade balance
of moving to a circular system at the effect at market level, if producers across
product level, we applied a ‘circularity the product industry (e.g., the mobile phone
calculator’ analysis to each of our selected market) were to adopt circular production
products. In simple terms, this analysis techniques.
compares the inputs needed to make a
new product in today’s system (the ‘linear’ Our analysis shows that, for the products
product) with those that would be needed selected (mobile phones, smartphones, light
to make the same product using circular commercial vehicles, and washing machines),
economy principles (the ‘circular’ product). circularity can be profitable on a product-
specific level—and that it could make a
The analysis focuses on five key areas of significant economic impact at the level of
economic and environmental impact, each the product market.
of which relates to the broader benefits of
circularity discussed earlier in this document. Our initial analysis explicitly excluded any
consideration of the profits of individual
The five areas are: companies. Instead, we focused on effects
Material inputs. For each product, we at an industry level—as we believe the
compared the material intensity of a ‘linear’ competitive structure would likely change
version, discarded by its first owner, with the during a shift to a circular economy. Further
material intensity of a ‘circular’ version, for analysis at the company level, however,
which we calculated and factored in various has demonstrated that adopting circular
forms of circular options (reuse, refurbishing, techniques would likely prove profitable for
remanufacturing, recycling). We compared individual companies as well, even with a
materials in dollar terms, as tonnages would certain degree of demand substitution of
fail to account for the differing values of existing products.
different input materials.
We ran our circularity calculator for two
Labour inputs. For each product, we scenarios:
considered the labour required to make • A more conservative ‘transition scenario’,
a new product versus the labour required where we make assumptions mainly on
to make a circular loop (i.e., to refurbish, changes in product designs and reverse
remanufacture, recycle, or otherwise reuse supply chain skills. We typically assumed
the product). improvements in underlying economics,
collection rate increases of 20 to 30
Energy inputs. For each product, we percentage points, and a roughly 30
considered the difference in energy required percentage point shift from recycling to
to make a new product versus a circular refurbishing or remanufacturing activities.
product. • An ‘advanced scenario’, showing
the potential effect of a world that has
Carbon emissions. For each product, we undergone more radical change and has
considered the carbon footprint of the further developed reverse technologies
process of manufacturing a new product and infrastructure and other enabling
versus the emissions generated to make a conditions such as customer acceptance,
circular loop. cross-chain and cross-sector collaboration,
and legal frameworks. Our analyses assumed
Balance of trade. For each product, we
further collection rate increases of 30 to 40
considered which inputs are imported into
percentage points and an additional 5 to 10
the European Union, for the production
percentage points shift to refurbishing or
process of both linear and circular versions.
remanufacturing.
We took the results of our analysis in each
The key data and assumptions underlying our
area above, for one of our specific products
circularity calculator analyses for the selected
in each case, and combined them with
products are outlined in the appendix.


Mobile phones—Extracting lasting value typical 24-month period, we did not identify
out of fashionable items a lot of economic potential except for the
obvious phone resale. Yet this circular option
With 1.6 billion mobile phones produced in also suffers under today’s limited return
2010, more phones are entering the market incentives and inadequate reverse logistics,
than there are consumers.54 As a result, in in that many collected devices are in poor
mature markets (Western Europe, North condition both functionally and in terms
America, Japan) consumers own 1.1 mobile of appearance. Further, demand for used
phones and average usage time is down to devices strongly varies between handset
less than 2.5 years.55 In emerging markets, make and model.
the sector is nevertheless still poised for
growth. With the advent of shortages of some rare
earth59 and precious metals, the recycling of
In 2010, Waste Electrical and Electronic mobile phones has gained momentum over
Equipment (WEEE) volumes in the EU-27 for the past year. Now, the share of phones being
IT and telecommunications equipment were channelled to recycling has risen to 9%, but
estimated at 750 thousand tonnes. Over the only a small fraction of the more than 20
next four years, total WEEE volumes in the different materials they contain is ultimately
EU-27 are expected to grow cumulatively recuperated.60
by more than 10%.56 Yet looking at volumes
of waste generated does not reveal the true To maximise the economic benefit of
54 Gartner statistics on mobile value embedded in consumer electronics keeping mobile phones or at least certain
device sales, February 2011
waste. While not being particularly significant components in a tighter circle at a profit for
55 CIA World Economic in terms of weight, mobile phone waste has the manufacturer, only a few things would
Factbook, 2011
considerable value embedded in its materials need to change in the short term (Figures
56 Jaco Huisman et al., 2008 and components. Typically weighing less 11A, 11B):
Review of Directive 2002/96 on
Waste Electrical and Electronic than 150 grams, a mobile phone is packed
Equipment – Final Report, United
with valuable materials such as gold, silver, Improving overall collection from 15%
Nations University working paper,
August 2007; Jaco Huisman, and rare earth metals. Given today’s low to 50% (close to the proposed WEEE
WEEE recast: from 4kg to 65%:
the compliance consequences, collection and recycling rates, nearly all regulation target of 65% by 2016).61 A better
United Nations University working of this material is lost. In Europe alone, collection system would allow manufacturers,
paper, March 2010
for example, 160 million discarded but remanufacturers, and vendors to gain scale,
57 U.S. Environmental Protection
uncollected devices represent a material which would justify investments in larger,
Agency (EPA), Electronics Waste
Management in the United States loss of up to USD 500 million annually. With more streamlined facilities and hence further
Through 2009, EPA working
paper, May 2011; Eurostat, WEEE collection rates in Europe hovering around improve the attractiveness of these circles
key statistics and data, 2011 15% and mobile phone designs becoming by increasing their efficiency. Collection
58 ‘Basic mobile phones’ include increasingly integrated, there is hardly any can be encouraged with lease/buy-back
low-cost phones and basic
component reuse or remanufacturing, and models, an improved customer dialogue, and,
communication devices as
defined by Gartner and the secondary mobile phone market (while under certain circumstances, with deposit
excludes smartphones. For our
calculations, we considered a fast growing) is almost negligible at around system, and will need to be complemented
sample of four mobile phones 6% of the primary market.57 with more semi-automated treatment and
selling at prices between USD 30
and 60 before VAT extraction systems or better pre-sorting
In order to understand the economic before shredding (to catch reusable phones
59 Rare earth elements
contained in mobile devices implications of circular activities in the and materials). For greater efficiency when
include Neodymium, Terbium,
and Erbium—Marc Humphries, mobile phone market, we applied our moving into the ‘advanced’ circularity
Rare Earth Elements: The Global circularity calculator to a standard low-cost stage, the phone industry would need to
Supply Chain, Congressional
Research Service Report, mobile phone valued at USD 36.58 We first form joint collection systems (e.g., with
September 2010
assessed the economics of different circular original equipment manufacturers (OEMs),
60 Roland Geyer and Vered options for mobile phones and subsequently operators, retailers, manufacturers, reverse
Doctori Blass, ‘The economics of
cell phone reuse and recycling’, considered associated environmental logistics companies). Such concerted efforts
International Journal of Advanced benefits (with a focus on carbon emission are essential to fully overcome interrelated
Manufacturing Technology, 2010,
Volume 47, pp. 515-525 savings). quality leakage points along all reverse value
chain steps.
61 European Commission,
‘Proposal for a Directive of the In today’s world with low collection rates,
European Parliament and of the
Council on Waste Electrical and partially attributable to contract schemes
Electronic Equipment (WEEE)’, that, in the majority of cases, do not require
Proposal for a directive, COD
2008/0241, December 2008 customers to trade in old devices after the


Continued

FIGURE 11A ESTIMATES
Mobile phones: Reuse and remanufacturing as a viable alternative to recycling

End-of-life product flows based on 2010 EU figures
Percentage of total end-of-life devices

Status quo Transition scenario

Mining Mining

Parts manufacturer
Parts manufacturer

Product manufacturer
9 Recycle Product manufacturer
10 Recycle

Service provider
0 Remanufacture1 Service provider
21 Remanufacture1

6 Reuse 19 Reuse

Maintenance Maintenance

User
User
15
85 50 50
Collection
Collection
Unaccounted Unaccounted
and landfill and landfill

1 Remanufacturing, here refers to the reuse of certain components and the recycling of residual materials
SOURCE: Gartner; EPA; Eurostat; UNEP; Ellen MacArthur Foundation circular economy team


Selling the entire phone ‘as is’ after minimal material input costs and reusing the entire
cleaning and repackaging. Our analysis phone does not require any direct material
shows that a second-hand vendor can realise input.
a profit of USD 6 (30% margin) per device,
even if placing the product on the market While a value of USD 6 to 7 per phone
with a 40% discount and spending USD 17 sounds negligible and is typically lower
on return collection (including buy-back than the average profit margin on a new
incentive), remarketing, and processing. standard low-cost phone (up to 25% of the
A used-phone market would benefit from selling price), capturing a significant fraction
guarantees to customers that manufacturers of the value in the 190 million collected
have software to completely erase a and uncollected end-of-life mobile phones
customer’s personal data after use, as well as in Europe, many of which could produce
from material choices that extend the life of value like that shown in our case study, can
the product ‘core’. be economically attractive for third parties
as well as manufacturers. From the OEM
Stripping out reusable components and perspective, the resale market is to a certain
implementing required design changes to extent a threat to sales of new products.
do this more easily. Of the 10 to 12 major In contrast remanufacturing activities on
components of a standard mobile phone, a component level reduce material costs
the top candidates for remanufacturing by incremental manufactured components
are the camera, display, and potentially the and will not pose a threat to sales of new
battery and charger. They are among the products as long as the latter are offered as
most valuable parts within a phone, are ‘new’ and without a discount. Such circular
comparatively easy to disassemble, and could business practices also offer a solution
be used in the production of new devices to the widespread problem of exporting
or in aftermarkets. Key factors for making consumer electronic waste and improper
such a circular treatment economically end-of-life treatment in developing countries.
and technically feasible are standardising By increasing their circular activities,
components such as displays, cameras, and manufacturers could thus also benefit from a
materials across models and potentially more positive public perception.
brands through agreement on industry
standards; moving to disassembly-friendly From a macroeconomic perspective,
product designs (e.g., easy-access, clip-hold the transition to a circular economy has
assembly instead of adhesives) to enhance major implications for material and energy
the ratio between the value of the material consumption as well as for the balance
and components reclaimed and the labour of trade in the European mobile phone
needed to extract it; and making reverse market. In a transition scenario in which
supply-chain processes more automated. 50% of devices are collected (of those, 38%
are reused, 41% are remanufactured, and
As shown in Figure 11B, we estimate that the 21% are recycled), market-wide savings on
costs of remanufacturing low-cost mobile manufacturing material costs could add up to
phones could be cut by around 50%62 per USD 1 billion (~30% of total industry material
device from their current level (e.g., USD input costs), and manufacturing energy costs
1.0 for collection and transport, USD 3.5 for savings to USD 60 million (~16% of total
disassembly, and USD 1.9 for initial screening) industry energy input costs) a year. These
62 Costs for the entire when proposed changes of the transition savings refer to costs incurred in the phone
disassembly process could be scenario can be realised. In addition, costs production process; further savings occur in
reduced by ~USD 2.5 per phone;
an additional USD 0.8 per phone occurring in the reuse and recycling process upstream value chain steps.63 In an advanced
could be saved in collection and
transport, as well as in the initial
could be reduced by USD 0.7, through more scenario with 95% collection and an equal
screening process efficient transport and initial screening. In split between reuse and remanufacturing,
63 Metal recycling leads to such a scenario, remanufacturing would material and energy savings are estimated to
reduced energy consumption yield material input cost savings of almost be more than USD 2 billion on material and
in the extraction phase. but
is implicitly considered in the 50% in the final phone production process. USD 160 million on energy annually, both net
material value of recycled metals,
not in energy cost savings
Functional recycling could save up to 20% of of material and energy used in the reverse-


Continued

cycle process. Taking into consideration the
FIGURE 11B material extraction and whole manufacturing
Mobile phones: Design changes and investments in reverse infrastructure process of parts and product, greenhouse
could greatly improve the circular business case
ESTIMATES
gas emission savings from circular activities
USD per device
could amount to 1.3 million tonnes of CO2e in
Status quo Improvement Transition a transition state and around 3 million tonnes
22.8
scenario1 (or 65% of primary production emissions) in
Cost improvement
the case of 95% collection.
Value improvement
16.6
Reuse
6.9 While primary mobile phone production is
6.2
0
0.7
largely located outside Europe, resellers and
recycling firms are typically geographically
close to the market. As remanufacturing
activities also include the recycling of residual
1.3
Remanufacture material, the process is assumed to take place
0.7
5.0 0.6 2.5 within Europe (also in order not to confront
2.6
6.4 the topic of illegal e-waste export—though
-1.4 a case could also be made for re-export
markets, given labour cost differentials). As a
Recycle materials 0.9 result, circular business practices would have
0.3 0.6
a positive USD 1 to 2 billion effect on Europe’s
3.1 1.3
3.0 0.1 0.3 trade balance surplus due to overall reduced
imports of new phones and component and
Recoverable Treatment Net benefit Circular Treatment Net benefit
value costs status quo design process improved material inputs.
1 Transition scenario: Conservative assumptions on improvements in circular design and the reverse cycle,
within today’s technical boundaries
Pushing the concept further by improving
SOURCE: Geyer & Doctori Blass (2008); Neto & Bloemhof-Ruwaard (2009); Neira et al. (2006); EPA; Umicore;
LME; Metal Bulletin; recellular.com; amazon.com; recyclemobilephones.co.uk; Ellen MacArthur Foundation circular designs to bring more components into the
economy team
remanufacturing loop, enabling mobile phones
to cycle not only once but potentially multiple
times through a product life cycle could even
lead to further optimisation potential and
further decrease material and energy input
costs in the market.


Smartphones—Making the ‘smart’ in vendors and customers. Additionally,
smartphone last longer companies often keep track of their assets
more systematically than individuals,
Although smartphones and basic mobile another factor contributing to higher
phones belong to the same product category, potential collection rates. Major players in
they differ in terms of design, functionality, the smartphone market estimate the current
value, and options for circular business. collection rates for smartphones to be
Smartphones generally feature more around 20%.
advanced technology and a broader range
of functions. Smartphones cost on average Once an end-of-life smartphone has been
around USD 400, but prices can reach USD collected, refurbishment is a financially
600 to 700. Material costs for OEMs are interesting treatment option, given the
typically around USD 100 to 130 per device.64 high potential resale value. The costs of
The higher value of smartphones compared refurbishment are not insignificant—replacing
with basic mobile phones does not stem the display, camera, battery, and casings of
from costlier raw material inputs but from a smartphone adds up to material costs of
the value added by technologically advanced around USD 45,66 and associated treatment
components and software. The smartphone costs, including collection, transport,
market has experienced significant growth in screening, executing the refurbishing process,
recent years and is expected to grow by 15% marketing the refurbished product, and other
per year in Europe between 2010 and 2014.65 administrative costs would add another
USD 45. That said, in the current market a
Given the high value of embedded components, refurbished phone may still yield a profit of
making the reverse circle as short as possible up to USD 100.
is essential to capturing the full circularity
potential of smartphones. Depending on a There are a few barriers, however, that
device’s condition, resale after refurbishment could prevent smartphone refurbishment
is a viable business opportunity as secondary from scaling beyond a niche operation in
market prices are estimated to be up to 60% the current market environment. One of the
of the original price. This stands in contrast primary barriers is the difficulty third-party
to refurbishment opportunities for basic players would face obtaining smartphone
mobile phones, for which, under current components at market prices, given that
market conditions, refurbishment costs the market is controlled by a small number
typically outweigh potential sales profits. The of players. Together with the fact that
economic benefit that can be drawn from refurbished smartphones typically have
recycling smartphones, by comparison, is lower margins than new ones, this presents
similar to that of basic mobile phones, given a significant obstacle to ramping up circular
that the processes involved and the value activities.
of the embedded raw materials is similar for
both products. What, then, could be done to tap smartphone
refurbishment potential?
Refurbishment in the business-to-busines
(B2B) context. Circular treatment of Changing product design and improving
smartphones is a particularly interesting treatment technologies could greatly
option in a B2B context, where fashion takes improve the business case for circular
64 Credit Suisse, ‘Smartphone
report’, broker report, August a backseat to functionality. Businesses that smartphones, according to our interviews
2009
supply their employees with smartphones with industry experts. Useful design changes
65 Gartner statistics on mobile also typically have well-established would include: reducing the use of adhesives
device sales, September 2010
mechanisms in place for end-of-life and increasing modularity of components,
66 Based on average material collection. As organising reverse logistics using higher-quality materials to increase
bills of seven different products—
Credit Suisse, ‘Smartphone is one of the most complicated tasks in the robustness of plastic casings, and some
report’, broker
report, August 2009
setting up a circular market for mobile technical tweaks to the circuit boards
devices, smartphones have a head start in within smartphones that would reduce
67 Specifically, industry sources
cite the need to increase the business settings because businesses can the likelihood of defects.67 Separately, the
space between printed circuit bundle smartphone purchases and returns, inclusion of fault-tracking software—that is,
board tracks as an
important design change effectively shortening the distance between software systems that identify which parts of


Continued

a broken phone need to be replaced—would to tap new customer and geographic
greatly facilitate the process of sorting used segments while earning a solid profit margin.
phones, which would improve the business Refurbishment of smartphones would also
case for circularity. contribute to reducing input price volatility
and the need to pay for hedging.
Establishing incentives to boost the
collection rate of smartphones, for both Light commercial vehicles—Getting extra
B2B and B2C collection, would improve mileage out of your material
the scale and thus the economics of
refurbishing operations. Such incentives Amongst the selected industries with
might include buy-back systems for medium-complexity and medium-lifetime
corporate customers, based on either a products, by far the largest is the automotive
cash payment or credit towards a new sector, with global yearly sales of USD 1,880
purchase, offered to customers who return billion.69 Light commercial vehicles account
their phones at the end of life. Additionally, for USD 240 billion of the total annual market
standardised software that fully wipes data for vehicles on the road.
from a smartphone would help overcome an
important psychological barrier—users’ fears For our business case and the subsequent
that their data on a returned phone could be calculations, we consider a representative
abused. light commercial vehicle with an average
lifetime of roughly eight years in the
Implementing these changes could reduce European Union. In this period, the van
treatment costs for refurbished smartphones goes through three distinct usage stages.
by as much as 30%, making circular business New vehicles ex-factory are typically used
models significantly more attractive. The for three to four years by customers that
resulting economic impact of an enlarged depend on high-quality, reliable transport.
market for refurbished smartphones could Average mileages during this stage of intense
be considerable. In a transition scenario usage (e.g., as a delivery truck for postal
in which collection rates are increased to and courier companies) are assumed to be
50%, and in which 60% of collected devices 100,000 km p.a. In a second stage, vehicles
are ultimately refurbished, overall material change ownership when ageing and wear
input cost savings in the European B2B and tear increase the cost of maintenance
smartphone market68 could amount to more as well as the likelihood of failures and
than EUR 350 million per year. Such a system downtime. Typical usage profiles include
would also save an estimated 100 thousand ownership by small to medium enterprises
tonnes of CO2e emissions (measured in that use the van to haul products between
the linear supply chain) and would reduce depots and construction sites at a lower
manufacturing energy costs by USD 4 million. frequency. Average mileage in this phase is
In a more advanced scenario (95% collection, assumed to be around 50,000 km p.a. After
50% refurbishment, and 50% recycling), this second stage, lasting four to five years,
in which manufacturers and vendors the van enters a third active usage period
cooperated to establish joint reverse supply across the EU’s eastern borders or in Africa,
chains, intra-firm incentive structures were goes to recycling, or is stored as a source of
fully aligned, and regulation was adjusted to spare parts.
enforce higher collection rates, net material
cost savings would add up to more than Looking at the technical and economic break
68 Total end-of-life enterprise
smartphones in Europe estimated
USD 550 million annually in Europe, or 13% points, only a minor fraction of components
to be 13.4 million devices in of the total amount the smartphone industry is responsible for the degradation in van
2010—based on Gartner statistics
on mobile device retirements, spends on inputs. performance. From a circular economy
September 2010; Yankee perspective, the question arises whether
smartphone statistics, 2011
Such an advanced scenario would also allay exchanging these components could extend
69 Contains major light vehicle
OEMs, major medium and heavy
manufacturer concerns that circular business overall the life of the vehicle or at least
commercial vehicle OEMs, and practices would diminish profits from increase its productivity—which is why we
major suppliers in the automotive
industry (Source: TCP, CLEPA, traditional production. In a diverse market modelled a scenario in which OEMs adopt
Annual reports, Automotive with strong growth, the refurbishment of refurbishment activities at scale.
World Truck Report, McKinsey
analysis) smartphones could enable manufacturers Conservatively considering current technical


FIGURE 12A ESTIMATES
Light commercial vehicles: Refurbishment—a profitable alternative

End-of-life material flows based on 2008 EU figures
Percentage of total end-of-life vehicle weight

Status quo Transition scenario

Mining Mining

Parts manufacturer
Parts manufacturer

Product manufacturer
Product manufacturer 63 Recycle1 44 Recycle1

Service provider 8 Remanufacture1 Service provider
5 Remanufacture1

0 Refurbish 26 Refurbish

Maintain & reuse2 Maintain & reuse2

User
User

71 75
14
14
Non-EU Collection in EU Collection in EU
export3 15 Non-EU
export3
11
Unaccounted Unaccounted
and landfill and landfill

1 Today, recycling and remanufacturing take place in single treatment process as spare parts are taken from end-of-life vehicles (split
here for better visibility)
2 Analysis focuses on end-of-life products (post de-registration), frequent resales of light commercial vehicles during intra-EU lifespan
are not considered due to lack of data
3 Light commercial vehicles exported from EU with unknown intended usage or treatment
SOURCE: Eurostat; ANFAC; Öko-Institut; EIU; Ellen MacArthur Foundation circular economy team

70 The collection rate is defined feasibility alone, we derived two levers Establishing professional refurbishing
as the percentage of total end-
of-life LCV volume (in terms of to move the status quo towards more systems to capture economies of scale in
weight) that is recovered through circularity: the reverse supply chain—by investing in
refurbishing, remanufacturing or
recycling. Exports of vehicles to proper tooling and achieving higher labour
non-EU countries, landfill,
and other non-accounted disposal
Improving vehicle design and focusing on efficiency through process standardisation,
are counted as not collected exchanging the ‘weakest link’ components, workflow optimisation, and specialisation.
71 Georg Mehlhart et al., European which wear out or are most likely to break Such refurbishing centres would typically be
second-hand car market analysis, first, allows for a second usage period at full located centrally within the OEM’s dealership
Öko-Institut working paper,
February 2011; Eurostat, ELV performance (i.e., 100,000 km p.a.). In our and service network.
waste database, 2011
example, six components are exchanged: the
72 In this scenario, 26% of total engine and suspension, bumpers, wheels, Although collection rates70 of vehicles
end-of-life vehicle weight is
recovered by refurbishment, 5% battery, and fluids. Design changes enable at the end of their final usage period
by remanufacturing, and 44% by easier, faster, and less expensive replacement (deregistration) are already as high
recycling. This implies that 30% of
collected vehicles are refurbished. of these critical components, e.g., as ~71%,71 partially due to stringent EU
The discrepancy between rates as
a percentage of total end-of-life
modularisation of the engine by changing the directives, shifting volumes from recycling
weight and as a percentage of design to bracket mounting, widening the to refurbishing—as outlined in the transition
number of end-of-life vehicles
stems from the fact that is it not engine bay for easier access to connection scenario72—can still save substantial material
possible to recover 100% of a points, and using quick fasteners instead of inputs by roughly USD 8.8 billion (i.e., 15%
vehicle’s weight through recycling
or remanufacturing screw couplings or bolted connections. of material budget) annually (Figure 12A).


Continued

contributions from refurbished vehicles
FIGURE 12B ESTIMATES
Light commercial vehicles: Refurbishment
as compared with original sales of new
is attractive for a large range of cases despite vehicles (Figure 12B). This positive
demand substitution of 50% perspective suggests that companies have
Net benefit1 from light commercial vehicle an arbitrage opportunity on refurbishment—
refurbishment, considering demand substitution effects2 if managed well. By marketing this new
USD thousand per vehicle
feature to customers and sharing the
Economically viable 24 savings with users through reduced prices,
they could also sharpen their competitive
15
edge. OEM and sector-level initiatives to
6 foster engineering education and R&D
2 Profit on activities specific to circular production
primary
sales could further support wider adoption of
-3
such circular business practices.
-11
100 75 50 25 0 Washing machines—Shifting ownership to
Discount on refurbished vehicle 3 achieve more cycles
Percent of new vehicle’s sales price

1 Net benefit from 1st refurbishment: price of refurbished vehicle minus
In Europe, more households own washing
reverse treatment costs
2 Demand substitution rate assumed at 50%, it refers to the percentage of
machines than cars.75 While washing
refurbished vans that replace the sale of a new van; cost of demand machines are far more standardised than
substitution is the profit margin on primary product sale
3 Original sales price of selected light commercial vehicle is approx. USD cars in both their physical dimensions
41,000; OEM profit margin approx. 4%
SOURCE: Eurostat; ANFAC; Öko-Institut; EIU; Ellen MacArthur Foundation and the amount of material they contain
circular economy team
(typically 30 to 40 kg of steel per machine),
they vary substantially in price and lifetime.
Customer segments range from the single-
In addition, this will save about USD 192 person household needing 110 washing
million in energy costs as well as reduce cycles a year, to hotels and laundromats,
the greenhouse gas emissions of the linear which commonly run their machines
supply chain by around 6.3 million tonnes. for 1,500 to 3,000 cycles a year. When
Such a scenario could be developed more contemplating a purchase, customers have
aggressively by increasing the share of a wide range of choices among models and
vehicles collected for refurbishment to 50% performance.
of total end-of-life vehicles.73 On an annual
basis, a total of over USD 16 billion of net Although all washing machines have similar
material, labour, and energy savings could be components, their longevity measured in
73 In this scenario, 43% of total
achieved in Europe alone. washing cycles ranges from about 2,000 for
end-of-life vehicle weight is entry-level machines76 to 10,000 for high-
recovered by refurbishment, 4%
by remanufacturing, and 32% by While this is a considerable economic quality machines. The common break points
recycling. The difference between saving from a macroeconomic perspective, are also well known: the motor, the pump,
rates as a percentage of end-of-
life weight and as a percentage of the question remains whether the and the plumbing.
end-of-life vehicles is explained in
the previous footnote
individual company could or should have
an interest in pursuing this potential. An economic opportunity with benefits
74 HIS Global Insight, Light
commercial vehicles sales in Demand substitution of new production— for the material balance. The industry
Europe, September 2011 by discounted remanufactured parts and average for domestic washing machines
75 Euromonitor washing machine high-quality refurbished vans—is a concern is 250 cycles a year.77 Given that warranty
statistics, 2011; Statistisches
Bundesamt, car statistics, 2009
that is understandably expressed in the periods are typically not more than one
industry. This point is especially acute to two years, average users frequently
76 A sub-segment of entry-level
machines is built for only 800 to as market forecasts for light commercial have an incentive to buy the lowest-cost
1,000 washing cycles vehicles indicate that, at least until 2015, machine and get, on average, 2,000
77 Ina Rüdenauer et al. , ‘Eco- sales will only increase moderately.74 A washing cycles. With usage periods of less
Efficiency Analysis of Washing
Machines’, Öko-Institut working
sensitivity analysis showing the impact of than 10 years in mind, customer groups
paper, November 2005; Rainer different discount and demand substitution with low usage intensity are inclined to opt
Stamminger et al., ‘Old Washing
Machines Wash Less Efficiently rate combinations shows that, for light for lower-quality machines. Yet, over the
and Consume More Resources’, commercial vehicles, one could maintain long term, high-end machines cost users
Hauswirtschaft und Wissenschaft,
2005, Vol. 3; expert interviews similar or even achieve higher profit roughly 12 cents per washing cycle, while


important that such gains—which are largely
FIGURE 13 driven by optimising temperature, spin rate,
Washing machines: Leasing durable
machines can be beneficial for both parties
and washing time—are also accessible to
users of ‘built-to-last’ machines. Luckily,
Customer’s net present costs1 of washing
machine usage over time2 energy efficiency-enhancing features such
USD per customer as wider ranges of programmes, automatic
-38% -26% -32%
load detection, sensor technologies, and
26% - 38%
customer auto dosing systems are usually a matter of
1,714 cost savings
through software, electronics, and sensor systems—
1,227 1,158 leasing
935 905 schemes components that could be reintegrated
582 into machines post production without
substantially changing their structure.79
5 years 10 years 20 years
Providing updating and upgrading washing
Purchase of low-end machines3 machine programmes after the first sale
5-year leasing model for high-end machine
can thus be a way to offer energy efficiency
improvements without regularly replacing the
High-end machine manufacturer’s profits whole machine.
from primary sale and leasing
USD per machine
Changing the business model to gain
970 660
+35% 35% increase against the low-cost segment. To realise
in producer
profits through the positive economic and ecological
173 leasing
137 186 arrangements implications of durable washing machines,
OEMs could consider offering high-
Sales price COGS OPEX Profit NVP from
(pre-VAT leasing2 end washing machines in a usage- or
and retail)
Primary sale of high-end machine performance-based model. This could enable
5-year leasing model for high-end machine
average users to profit from low per-cycle
costs of high-end machines within a shorter
1 Here, net present cost is the sum of a customer's discounted cash
78 To perform this analysis we outflows for washing machine purchases over a specific time horizon period of time. A five-year leasing agreement
calculated a net present value (5, 10, and 20 years)
(NPV) for high-end versus low- 2 Applied 8% discount rate would remove the high upfront cost barrier
cost machine purchases (the 20-
year NPV for a family using 500
3 Low-end washing machines with a lifetime of 2,000 cycles and
cost around USD 540
for customers and distribute costs over a
cycles per year is USD -1,714 when
SOURCE: Company information; Öko-Institut; Sundin (2004); UNU
defined period of time.
purchasing a low-cost machine (2008); Stamminger et al. (2005); Ellen MacArthur Foundation circular
versus USD -1,158 when buying a economy team
high-end product). In this context In a scenario where a 10,000-cycle machine
the net present value is the sum
of a customer’s discounted (8% worth USD 970 (before VAT and retail
discount rate) cash outflows for
washing machine purchases over
margin) is leased over a five-year period (11%
a specific time horizon low-end machines cost 27 cents per cycle. interest rate) by a family (500 cycles p.a.),
79 Ina Rüdenauer and Carl-Otto
We can also show that the costs incurred by both the customer and the manufacturer
Gensch, Einsparpotenziale an average household using one high-end could improve their economic situation.80
durch automatische Dosierung
bei Waschmaschinen,Öko- machine over a 20-year period are lower Over the implied lifetime of 20 years, the
Institut working paper, June than if the same household uses a series of machine could be leased four consecutive
2008; Ina Rüdenauer and
Rainer Grießhammer, PROSA low-end machines to do the same number of times with a certain degree of reconditioning
Waschmaschinen, Öko-Institut
working paper, June 2004;
washes over the same period.78 in-between (reflected in reconditioning costs
Panasonic company website; of USD 105 after every lease, which include
Samsung company website
The trade-offs between high- and low- transportation costs, quality checks, cleaning
80 This also holds when a third quality machines also have implications for and cosmetic changes, as well as software
party (e.g., bank) acts as an
intermediary and charges an material and energy consumption. Given and systems upgrades).81 Independent of the
additional 100-200 basis
points. How the economic
similar material compositions and production time horizon (5, 10 or 20 years), the value
improvement potential is processes, replacing five 2,000 cycle that both the user and the manufacturer
divided between manufacturer,
customer, and a potential third machines with one 10,000 cycle machine derive from the deal is higher than what they
party eventually depends on the yields almost 180 kg of steel savings and would get from a conventional sale
individual contract and existing
market dynamics (e.g., purchasing more than 2.5 tonnes of CO2e savings. (Figure 13).
power or competition)
These carbon emission savings could be
81 Underlying machine prices partially offset by missed energy efficiency In a way, such leasing contracts remove
for leasing contracts refer to
product value at given points in improvements that would have been more inefficiencies in the market that stem from
time under linear depreciation readily available if the household bought a maturity mismatch between the typical
over expected lifetime of 20 years
(=10,000 cycles) a new machine more often. It is therefore time horizon a household has when buying


Continued

a machine and the time horizon high-quality collected machines get refurbished (and the
machines are built for. The leasing scheme other half gets recycled) would generate net
transforms a long-term investment in a material cost savings of more than 12% of total
10,000-cycle machine into multiple cash industry input costs. In an advanced scenario,
flows and the right to use the machine alternative ownership models, such as leasing
for a certain period of time. This results in or performance-based arrangements, could
an economic win-win situation and yields be brought to higher scale with specialised
positive material and energy implications intermediaries entering the market.
through prolonged lifetimes of the products. Aligning incentives between customers and
manufacturers regarding contract financing
Combining benefits of new business models and duration is essential to make alternative
with effective refurbishment. As leasing ownership models work. In an advanced
models give manufacturers strong control scenario with proliferation of alternative
over products over the life cycle and result business models, an increase in manufacturer
in high and stable product return rates, they control over machines in circulation could be
facilitate the recovery of value embedded in reflected in collection rates of up to 95%. This
those collected products. End-of-life washing could be further supported by collaborative
machines are typically recycled, yet it is collection and treatment systems, which
estimated that only up to 10% of collected82 would improve the entire reverse supply
machines currently get refurbished.83 In many chain. In such a scenario, the net material
cases, old washing machines are intact and cost savings associated with refurbishment
would be reusable following the replacement and recycling could be around 18% of total
of some components (e.g., motor, bearings, industry input costs.
front panel, printed circuit board, or pump)
and some cosmetic changes. The cost for Shift to performance-based contracts already
collection, transport, the refurbishing process, happening. Many ideas have already been put
and other expenses is currently estimated forward to exploit the economic and business
to be around USD 170 per machine.84 The opportunities outlined above.
material cost of replaced components could
82 In Europe, ~40% of large
amount to as much as USD 300, but depends Pay-per-wash model. In Northern Europe,
domestic appliances are on the machine’s quality segment as well Electrolux offered customers per-wash
collected in official WEEE
channels. It is estimated that as the number of replaced parts. This could options based on smart metering. The
much more than that is collected make refurbishment economically viable in manufacturer installed its high-quality washing
via ‘unofficial’ channels. Source:
Eurostat, WEEE key statistics and some but not all cases. machines in customer homes, connected to a
data, 2011; CECED, Joint position
paper on WEEE recast second
dedicated measuring device installed at the
reading, CECED position paper, Combining new leasing models with power outlet. This enabled tracking of not
July 2011
refurbishing activities can be a particularly only the number of washing cycles but also
83 Jaco Huisman et al., 2008 interesting opportunity. In a situation where the programme (e.g., cold versus hot wash).
Review of Directive 2002/96 on
Waste Electrical and Electronic circular activities would be pooled and This business model was discontinued after
Equipment – Final Report, United
Nations University working
replacement parts prices would not be the utility provider discontinued the smart
paper, August 2007; Adrian subject to the high trade margins currently metering. Without this element, Electrolux
Chapman et al., Remanufacturing
in the U.K. – A snapshot of the observed, material costs in the refurbishment was unable to assess customer-specific usage
U.K. remanufacturing industry; process could be reduced by up to 40%. This and charge the customer accordingly. Further,
Centre for Remanufacturing &
Reuse report, August 2010 would make refurbishment more attractive customer acceptance was rather low; the
84 This is in line with the
and foster the idea of (multiple) leasing advantages (e.g., free servicing, easy trade-in
assumed cost for reconditioning systems for high-end but also other kinds of for upgrades, high-end machines with hardly
in the leasing process
washing machines, as their lifetimes increase any upfront costs) were not marketed
85 David Pringle, ‘Electrolux with effective circular treatment. adequately. 85
offers free washers to homes
that get wired’, Wall Street
Journal Europe, February
2000; Timothy C. McAloone
A comparison of costs for new and Refurbishing model. ISE, a specialty washing
and Mogens Myrup Andreasen, refurbished machines indicates that material machine company producing professional
Design for utility, sustainability
and societal virtues: developing input costs per product could be reduced by washing machines (10,000 to 12,000 cycles)
product service systems, up to 60%, net. From an industry perspective, in sizes comparable with domestic models,
International Design Conference
working paper, 2004; Jacquelyn a transition scenario in which the collection collects used heavy-duty washing machines
A. Ottman et al., ‘Green market
myopia’, Environment, 2006,
rate increases from 40% to 65% due to from hotel or laundromat customers. After
Vol. 48 (5) adoption of new leasing models, and 50% of


refurbishment, it sells these machines to the Longer-lasting machines will substitute
domestic market at a discount price. for new models and decrease sales. As
with any transformative technological
Lease model. Several market participants change, a shift toward a circular economy
have discovered the potential of offering would have winners and losers. It may
leasing contracts for washing machines well be that manufacturers of inexpensive
to commercial users as well as to private washing machines, with high per-wash
households. Specialty leasing providers costs to consumers, would have to adjust
such as Appliance Warehouse of America to competing offerings of longer-lasting,
offer a wide range of products and contract more efficient models in a circular economy.
specifications to meet customer demands. That said, it should not be discounted that
Home appliance manufacturers such as such ‘creative destruction’ also creates new
Bosch Siemens Hausgeräte provide leasing opportunities—for instance, refurbishing
to customers under a ‘full service’ scheme, and selling replacement parts for washing
which includes warranties that cover the machines, or participating in the various
whole contract time frame.86 This provides aspects of the service industry that would
the customer not only with increased be needed to support a circular washing
flexibility in terms of timing but also with machine business model.
better service levels and added convenience.
In such a setting, third-party financing Customers will not accept new, alternative
companies may take up an intermediary contract schemes. Some manufacturers
role, matching manufacturer and customer argue that customers are used to purchasing
incentives and handling administrative tasks. household goods rather than leasing or
renting them. Customers may avoid leasing
All of these already existing models have contracts due to uncertainty and insecurity
illustrated potential for increasing material about financing agreements. While this may
productivity. When explaining why these be true in the near term, there are myriad
models would not work, manufacturers examples of users shifting to different
typically cite the following concerns: ownership models. One case in point is the
industry for short-term, inter-city car rentals,
Total cost of ownership (TCO) will increase. which has proven to be a resilient model
Current washing machine manufacturers that has enabled consumers to scale back
cite the potential problem that customers car purchases in favour of less expensive
would be unable to participate in the and more convenient short-term rentals.
continuous efficiency gains in energy Furthermore, transparency with regard to
or water consumption offered by new contract conditions and effective marketing
washing machines. Therefore, a long-lasting of customer benefits (e.g., quality machines
model could be less attractive from a TCO with hardly any upfront costs and easy
perspective. This concern would be highly collection) would help remove such concerns.
problematic—were it not for the potential
of leasing models. As we have shown in our The financing of upfront production costs
net-present-value analysis, both washing poses a financial risk to manufacturers.
machine sellers and customers can benefit In a leasing scheme, the producer faces
from a model in which long-lasting machines a maturity mismatch between upfront
are leased to customers—who then have production costs and future cash flow
the option of upgrading to a different lease streams. Financing this gap from the
model if a more efficient model emerges. company’s own funds could be a financing
Furthermore, efficiency gains often stem risk to a certain extent, yet typically
from innovation in the washing programme these risks can be carried by financial
software or sensor systems, which can be intermediaries.
easily upgraded. Doing this would provide
a quick fix through which leasing firms and
customers could inexpensively participate in
86 Company website these continuous efficiency gains.
(http://www.bosch-
home.com/de/produkte.
html)


Continued

The end of Electrolux’s experiment with use of returned, empty distribution vehicles)
its new leasing business model shows that and product designs that increase durability
challenges may arise in the cooperation with and facilitate the process of disassembly and
business partners, which can hinder a new refurbishment (e.g., specifying a robust case
business model from becoming effective and made from impact-resistant polymers and
profitable. Adopting more circular business carefully placed protective rubber inserts,
models will therefore require skills in new vibration resistant connectors, and high-
forms of collaboration and alliance-building— quality copper motor windings).
but this, too, we see as eminently feasible,
and indeed quite lucrative given the potential Adopt new business models and a
rewards. segmented approach to circular activities.
One new business opportunity could be
Power tools—Power by the hour rental and leasing schemes for high-end
power tools. As these products are durable
Like mobile phones, power tools are currently and are typically used only sporadically
only recycled to a small extent as end-of- and for a defined period of time in the
life products and rarely remanufactured for household segment, high-quality power
reuse. Yet many used power tools contain tools could be hired out several times
electrical components that are very durable and repaired and refurbished at defined
and not subject to changes in technology intervals between hires. As part of a
or fashion, thus offering significant value service contract, a company could also
recovery potential. B&Q, the U.K. home create additional customer value by
improvement company, estimates that even offering training, workshops, and other
today 20% of collected power tools could be kinds of useful do-it-yourself information,
refurbished. Given the recoverable value and which serves a marketing purpose and
current costs of treatment, refurbishment also functions to highlight the increased
of power tools makes sense only for mid- value of durable products to customers.
range/high-end products. As power tools In a more comprehensive service offering,
are somewhat sensitive to humidity, more companies could provide kits with all the
products could be refurbished if they were equipment needed for a specific project
appropriately stored during their usage (e.g., constructing a new kitchen). This
phase and during the reverse logistics would mark a switch from a product to a
process. service or system business, in which the
power tool manufacturer hires out relevant
A scale-up to significant levels of refurbishment tools and collects them at the end of the
and adoption of new business models would project, during which the manufacturer
need to proceed along the following lines: sells consumables (e.g., screws, nails) and
other higher margin items as part of their
Implement in-store collection, testing ‘kitchen renovation kit’ (e.g., paints, fixtures).
processes, and alternative circular business This would increase efficient use of the
practices for power tools. End-of-life products and enhance overall lifetimes
collection points could be set up in every through frequent repair and refurbishment.
store for a per-store investment of ~USD When combined with additional customer
1,500, and labour costs could be kept to a services (such as support in project planning,
minimum. As an alternative to third-party selection of required equipment and
collection and recycling, end-of-life products materials), a contract scheme of this sort
could then be transferred back to the store’s could generate significantly more value for
distribution centres, where testing facilities customers than standard product purchases.
would check for reusability of products and
components. Some of the products could
then be refurbished or remanufactured in
internal or external facilities. The key success
factors of the approach are cost-efficient
reverse logistics (e.g., dry storage and making


Short-lived products and consumables — this leakage is compensated for with
The opportunity for biological nutrients mineral fertilisers that are energy-intensive
to produce—and sometimes geo-politically
Short-lived products and consumables challenging to procure. The U.S., for instance,
represent roughly another third of Europe’s have stopped all export of phosphate rock
manufacturing sector. Products such as (a critical ingredient in fertiliser under
textiles may have only a short usage period the current system) and China has raised
and products such as food and other its tariffs on the same—a problematic
agricultural products (e.g., paper) are often development since, together with Morocco/
consumed within days to months of initial Western Sahara, these countries were
production. For this type of product, the responsible for 67% of all the rock phosphate
most effective steps towards a more circular output on the market in 2009.87
economy are likely to move away from
technical nutrients to biologically based In what ways, then, would a circular economy
loops in order to make these products differ? First it would seek to avoid losses
serve a restorative purpose, rather than an in the value chain such as the ‘loss’ of land
exploitive one. Similarly, other steps focus through low yields, loss of food volumes and/
on improving their usage periods or, at a or spoilage caused by distance to market and
minimum, switching to cascading usages. In inadequate cold chains. The need to avoid
the following analysis, we look at food and food waste both at the point of sale with the
textiles: retailer and within households is gathering
momentum amongst corporate and political
• Food is an important segment in the decision makers—as evidenced by voluntary
consumables category. It is a major initiatives such as the Courtauld Commitment
contributor to current waste streams, yet in the U.K. and various initiatives originating
holds significant economic potential in at the European Commission. Motivations
being safely reintroduced into the biosphere can be grouped along three lines: compliance
to rebuild natural capital after energy and with the European directive on increasingly
specific nutrients have been extracted on the keeping organic waste out of landfill,
reverse loop. questions around social justice and access to
food, and—in a more complex and indirect
• Textiles offer a showcase of how a product/ way—the necessity to cut down on such
material can cascade through multiple waste if we want our agricultural supply
uses in different value chains and achieve chains to keep up with nutritional needs.
substantial material savings by consecutively
replacing other virgin material needs. The circular economy would avoid landfilling
and would try to extract the maximum
Food—Multi-vitamins for the earth value from agricultural materials. It would
inject valuable biological nutrients into a
Biological nutrients, after consumption—and truly circular path consisting of material
often even before consumption—become reuse (e.g., the reuse of wood in oriented
waste. In Europe today this waste is largely strand board or particle board), extraction
discarded, as sewage through our flush of biochemicals and commodity feedstocks
toilet-based sewerage systems, or as (e.g., specialty chemicals from orange peels),
an organic fraction in the municipal and extraction of nutrients and soil improvers
industrial solid waste streams. Only limited (through composting and anaerobic
amounts of what gets collected is ultimately digestion), and extraction of energy (through
87 A rock and a hard place:
Peak phosphorus and the composted, anaerobically digested, or anaerobic digestion and other waste-to-
threat to our food security,
Soil Association, p. 2
reused. energy technologies)—in other words
‘optimal biomass valorisation’ (Figure 14).88
88 L. Asveld, R. van Est, D.
Stemerding (eds): Getting to At the same time, ever more soils are
the core of the bio-economy: depleted of nutrients as we seek to nourish In the U.K., the annual amount spent on
a perspective on the
sustainable promise of a growing population with a changing and landfilling would fall by USD 1.1 billion if the
biomass; Rathenau Instituut
September 2011
increasingly land-intense diet. Currently, food fraction that is now in the municipal


Continued

FIGURE 14
Biological nutrients: Diverting organics from the landfill to create more value

EUR/tonne collected—negative numbers indicate a cost

Farming/
Biological nutrients collection Parts manufacturer

Biochemical
Restoration feedstock Product manufacturer
Revenues Revenues
Biosphere
(compost) 0 0 ?
0 0 10-25
Service provider/distributor

Biogas Cascades
Revenues
0 20 20 6 2803 0006 9

Consumer
Anaerobic
digestion/
Collection
composting
Costs
(0) (30)-(50) (30)-(50)
Extraction of
biochemical Landfill/sewage
feedstock1 Costs
Costs (80)-(130) (25) 0
(0) (0) (?)

Transition Advanced
Status quo scenario scenario

Total cost (80) - (130) (55) - (75) < (30) - (50)

Total revenue 0 20 > 30 - 45

Total net gain (80) - (130) (35) - (55) - (0) - ?

1 Can take both post-harvest and post-consumer waste as an input


solid waste were diverted to more useful
purposes such as compost and energy. In Rethinking agricultural
addition, the externalities of landfilling such as production systems
its impact on land use—including the societal
In natural ecosystems, essential
burden associated with siting choices—and
nutrients such as nitrogen and
greenhouse gas emissions would be greatly
phosphorous return to the land after
reduced. For example, up to 7.4 million tonnes
they have been absorbed by plants
of CO2e would be avoided by keeping organics
and digested by animals, maintaining a
out of landfill. Beyond landfill avoidance, the
healthy balance. In today’s agricultural
benefits of maintaining biological nutrients
production systems, however, it is
within a circular economy are manifold, from
common practice to remove most
the provision of specialty and commodity
above-ground biomass from the land
chemicals to land restoration and energy
and to disrupt the animal-to-soil loop as
provision:
well by keeping animals penned rather
than letting them out to pasture. As a
Feedstock provision. Full ‘valorisation’ means
consequence, it has become necessary
that we try to extract the maximum value
to sustain the yield of nutrient-depleted
from biomass waste before it is used for
soils with mineral fertilisers—a practice
energy or soil restoration purposes. In its most
that is affordable only so long as the
sophisticated form, valorisation happens at
energy to extract and process those
a so-called bio-refinery where—with the help
minerals is cheap and the minerals
of enzymes and bacteria—biomass is turned
remain available. Western Europe
into a full range of fibres, sugars, and proteins,
depends on imports for more than
and later plastics, medicines, and fuels.
80% of its phosphate requirements,89
Individual refining processes are already being
which is not without risk given the
applied successfully at commercial scale, but
real limits to economically accessible
only in few instances have such processes
phosphate rock reserves—one of the
been combined into a full refinery operation.
most important sources of mineral
Processum Biorefinery Initiative in Sweden
fertilisers—and the high concentration
is one of the few organisations producing a
of those reserves in only a few
full suite of biochemicals—in their case from
countries, as discussed earlier.
forest biomass. The extraction of specialty
chemicals typically only cuts volumes down
by 1 to 2 % and the remaining biomass, which
is rich in carbon, can subsequently be turned
into commodity chemicals such as bio-
polyethylene. While some large chemicals
players like Dow have entered the biopolymers
market, the market at present is mostly
driven by players in the biomass cultivation
and user industries, such as consumer goods
manufacturers. Because of the large range of
input materials, processes, and products, it is
difficult to put an average number on the cost
and net value of such production operations.

Land restoration. Here we are touching on
one of the key characteristics of the circular
economy—its ability to restore the land,
promote soil fertility, and thus increase harvests.
Alternative sources of nutrients (sewage, animal
waste, and food waste) could be sufficient to
cover the entire need for fertiliser in today’s
production systems and break the dependence
89 Current World Fertilizer Trends on foreign minerals. Doing so, however, would
and Outlook, Food and Agriculture
Organization, 2008, p. 12 require both technical innovation and changes in
the legislative framework.


Continued

Let’s take phosphorous from human excreta however, the U.K. AD infrastructure remains
as an example. Urbanisation is increasing largely undeveloped. That may change
sludge produced through municipal soon. The Scottish government, for example,
wastewater treatment; regulation is requiring intends to lead the way and has laid out
higher proportions of wastewater to be in one of its policy papers the significance
treated, further increasing sludge production; AD could hold for Scotland in terms of
and sludge management represents up to energy and soil restoration. Also in the U.K.,
50% of total wastewater treatment costs National Grid has taken an active interest
(which then, in turn, are further exacerbated in developing biogas, from food and other
by high energy costs, which account for 25 sources, as an alternative to natural gas for
to 30% of sludge management costs). While heating purposes. Because many biogas
little operational data is available on the providers are sub-scale, tapping into this
costs of recovering phosphorus from sewage source at scale will require a few changes
treatment plants, academic literature puts at the system level, for example by relaxing
the cost at an estimated 2 to 8 times that quality control rules, which were developed
of mined rock.90 Such high costs may make for activities in gas terminals, and by
sludge extraction an unlikely candidate to adjusting the commercial rules, which are
compete with mined phosphate rock, but in better suited for the oil majors for which they
2008 the price of the latter flared up even were designed.
beyond this point. Since then, prices have
dropped to a quarter of the high, but 2011 Textiles—Dressing up for different occasions
saw over a 30% increase in rock phosphate
prices, from a monthly average of USD 155/ Textiles, whether made of biological or
tonne in January to USD 203.50/tonne technical nutrients, offer a terrific example of
in December91—making the prospect of the cascading opportunity. This is particularly
profitable sewage nutrient recovery suddenly important for apparel, the usage of which is
much more realistic.92 Until that moment often largely determined by fashion rather
comes—or until technological development than technical lifetime limitations. Instead of
and scale bring down costs—businesses such disposal in the landfill after first use (where
as Ostara Nutrient Recovery Technologies they generate up to 3.6 million tonnes of
are building their business model mainly CO2e in the U.K.93), textiles can be reused
on the overall cost reductions for water multiple times. Reuse of apparel in good
treatment plants by reducing maintenance condition offers the lowest costs and biggest
requirements. On the other hand, a number savings. Various models exist, from donations
of low-tech developments on the market and clothes swaps to small- and large-
cut out the sludge phase altogether by scale commercial resale operations (e.g.,
separating urine from faeces, ranging from Patagonia’s Common Threads Initiative).
the PeePoo bag that enables villagers to
use their excrement straight as a fertiliser to When no longer suitable for its originally
separating toilets that allow infrastructure intended purpose, the next loop for clothing
clusters to develop small-scale nutrient can be re-yarning of treated fibres, with some
concentration solutions. reduced costs and savings on externalities.
End-of-life apparel can also be used as
Energy provision. Energy can be extracted stuffing in upholstered furniture, car seating,
from food waste in several different mattresses, and heat and sound insulation
ways, with anaerobic digestion (AD) and (as illustrated in Figure 9). Some of these
90 Water Environment Resource incineration being the most common ones. applications, too, can be repeated a few
Foundation (www.werf.com) Given food waste’s high moisture content, times. We modelled the effects of cotton
91 IndexMundi, Commodity Price AD will in many cases deliver superior value. textiles being transformed into furniture
Indices (http://www.indexmundi.
com)
In the U.K., for example, the food waste stuffing, and then reused again as housing
currently contained in the municipal solid insulation. For synthetic fibres there is also
92 World Bank (www.worldbank.
org), Water Environment waste stream could deliver up to 1,960 GWh the option of de- and repolymerisation into
Resource Foundation (www.werf. of energy through AD. And that is food waste new fibre applications. This process is, for
com)
only; the available volumes of animal waste— example, applied by the Italian company
93 2006 IPCC Guidelines for
National Greenhouse Gas
which is also well suited for digestion—are Aquafil, which turns Desso’s post-consumer
Inventories, McKinsey analysis more than 10 times as big. At the moment, carpet waste into new polymers and then


new yarns, and by Teijin in Japan, which turns the end of their useful life, take up precious
apparel from Patagonia’s post-consumer disposal capacity or visually pollute in the
collection programme into new polyester best case, and cause considerable damage to
fibres. Finally, after other options with health and environment in the worst?
more cost and resource savings have been
exhausted or are no longer possible due A better option may be to use materials
to the quality of the fibre, the final loop for that are biogenic in their origin, remain
textiles could consist of energy recovery unadulterated by toxic chemicals at all stages
in various possible forms. We modelled of their lifecycle, and after consumption
anaerobic digestion, a technology that is return to the biosystem—where they will
appropriate for cellulose-based textiles such restore systems that have been previously
as cotton and viscose, with all the residue depleted of minerals and organic nutrients.
going to landfill. Priorities here include moving short-lived
products into pure bio loops, increasing
These various transformations of cotton agricultural productivity to reduce land-
along the cascade allow for substitution of use conflicts, and providing the system for
conventional input materials, the production retrieving and treating bio-based materials as
of which may be energy intense or may compost.
require large amounts of water.94 These
include the polyurethane foam used as Moving short-lived products into purely
furniture stuffing, the stone wool typically biological circles can build on some existing
used for building insulation, and the foundations, for example, in packaging.
electricity production saved by creating Shortly after its introduction, cardboard
energy through anaerobic digestion. Our took off as a mass packaging material.
analysis shows that this replacement process Today, despite the advent of numerous new
is certainly economically viable (the numbers packaging materials and technologies, board
depend strongly on the assumptions around represents a third of the packaging market.
technology innovation, but cumulative costs Since the key raw materials are virgin and
along this particular U.K. cascade could secondary fibre, packaging of this type
amount to about USD 120 million, while should be inherently biodegradable and
the products they save cost up to USD compostable. Numerous studies and pilot
315 million).95 Furthermore, the cascade efforts have shown that this is the case, but
process saves CO2e emissions and water growing performance demands on paper for
94 PlasticsEurope: Eco-profiles usage associated with the production of the both print and packaging applications have
of the European Plastics Industry:
Polyurethane Flexible Foam, substituted products. Looking just at the U.K., led to the use of an increasing number of
Brussels, 2005 we determined that these savings could add additives, many of them toxic. When such
95 We analysed the cascade up to 1 million tonnes of CO2e and 16 million toxic materials end up in compost, it is no
of cotton textiles transformed
cubic meters of water. longer possible to apply it widely as soil
to furniture stuffing, then
transformed to housing insulation, improvement: in many cases, its best use is
and finally anaerobically digested
(with the resulting biogas Other short-lived products and consumables as daily cover in a landfill. Here, too, a design
converted into electricity and system that had not taken into account
the digestion residue landfilled).
Economic viability was assessed This category covers a broad range of the poor design outcomes for end-of-life
through comparison of wholesale
products for which circular solutions may treatment needs to be mended—the goal
price of conventional product
with its reused cotton substitute. take on entirely different forms. For some would be to flush toxic chemicals from the
Cotton-derived products turned
out to be highly competitive. For short-lived products, it may be possible to value chain as much as possible and find non-
this comparison, adjustments change their properties or that of the system harmful substitutes that can deliver the same
due to differences in weight and
insulation efficiency were applied. in which they function and, by doing so, to performance. The benefit of having healthy
The base cotton volume entering
switch the delivery of their function into the compost that is suitable for a broad range of
the cascade is defined as 50% of
today’s recycled textiles. Here, durables or service systems categories. For applications is real and measurable.
further potential exists as the
collection rate for textiles in the many more, however, their short lives cannot
U.K. is low at 22% and recycling be altered in an economically or functionally We do not need to resolve the technical/
only accounts for 6% of collected
volumes (Oakdene Hollins: acceptable way. Many forms of packaging, biological nutrient switch with today’s
Recycling of Low Grade Clothing
for instance, belong to this group. Why, then, materials only. Many companies have
Waste, September 2006;
McKinsey analysis). For the would we continue to serve these purposes taken on the challenge of providing bio-
following steps in the cascade, it
was assumed that 50% of material through the consumption of technical based materials that can rival conventional
enters the next cascading step nutrients—which are finite in nature and, at petroleum-derived products in terms of both


Continued

Harnessing innovation intake (e.g., substituting graphene
for indium tin oxide in solar cells).
Material and technological innovation Advances in biological materials (like
is a core enabler for fast-tracking self-healing mobile phone cases) or
transformation from a linear into a advances in chemistry (like non-toxic
circular economy. While many of the alternatives) could further accelerate
proposed alterations on the journey the adoption of concepts of the
to a circular economy will be gradual, circular economy. Changes in the
innovation could likely lead to a more durable, technical-component part
disruptive and accelerated arrival. of the product or product system
Also, while the analysis provided in could lead to a different usage of
this report is based on materials and consumables. A significant part of a
processes known today, a focusing of washing machine’s total environmental
innovative forces on the restorative impact, for example, arises from
circular economy model may lead the discharge of soiled water and
to opportunities that are currently dissipation of detergent. While recent
unknown to the economy. technological developments have so far
mainly focused on minimising the use
Changing the efficiency of production of detergents,96 it is also conceivable
processes, for instance, by moving to develop technologies (e.g., applying
towards 3D printing instead of membrane technology) that allow for
milling, could dramatically reduce detergent recovery after consumption.97
the production-induced waste of
resources while enabling more flexible
design and variations of produced This is the field of speculation, as
components, for example, the specific advances are happening behind closed
fitting of missing spare parts to extend doors at leading R&D outfits. Yet there
the life of a product such as a van, is certainly evidence that change is
and hence drive down inventory and underway. Former Ecover CEO and
obsolescence risks. ZERI creator Gunter Pauli, for instance,
has compiled 100 innovations in his
The introduction of alternative ‘Blue Economy’ initiative, several
materials could reduce input scarcity of which could also accelerate the
and potentially lower costs of material migration towards a more circular
economy.98

96 See for instance technologies
developed by Xeros, a University
of Leeds spin-off
(http://www.xerosltd.com/nylon-
polymer-technology.htm)

97 Tim Jackson, Material
Concerns: Pollution, Profit and
Quality of Life, London: Routledge
Chapman & Hall, 1996

98 The Blue Economy is an
open-source movement that
brings together concrete case
studies. These were compiled in
an eponymous report describing
‘100 innovations which can create
100 million jobs within the next
10 years’ that was handed over
to the Club of Rome in 2010.
As the official manifesto states,
‘using the resources available in
cascading systems, (...) the waste
of one product becomes the input
to create a new cash flow’


functionality and cost. These companies issue is that, with current high levels of
range from leading chemicals manufacturers landfilling, many inert bio-based materials
such as Dow (impact modifiers and process end up adding to the production of landfill
aids for polylactic acid or PLA) and BASF gas, so that more and more technology to
(Ecoflex) to niche players such as Cyberpac capture landfill gas is required. If landfill
(Harmless Packaging) and the Canadian firm diversion rates were to go up significantly,
Solegear Bioplastics (compostable plastics). however, as is to be expected under EU
legislation, bio-based materials such as
Overcoming functional gaps will require coated and printed paper and cartonboard
a great deal of innovation on the part of might negatively affect the quality of
chemicals and packaging companies, and recyclate—unless high-performance sorting
at the universities and research institutes technologies are applied. Large-scale
that provide these industries with new ideas deployment of biological nutrients would
and insights. As with the other challenges therefore require systems that capture them
posed by the circular economy, here, too, and return them to the earth. In such a
appropriate curriculum changes are vital system, new biological nutrient applications
to create and impart knowledge in and such as packaging, when designed with
across relevant disciplines, and researchers suitably bio-based coatings and inks, can
and companies alike will need to tap into actually reinforce the existing composting/
many different sources in order to generate anaerobic digestion system. As conventional
sufficient levels of innovation (see also packaging materials are often a source of
sidebar). In the marketplace, arriving at scale contamination in organic material, bio-based
will require buy-in from brand and volume alternatives may ensure a lower level of
leaders in the packaged goods industry so contamination for organics and hence better
that demand will pick up quickly and prices commercial value for the compost/digestate.
can come down.

Growing a sufficient supply of biofeedstocks
will require increases in agricultural
productivity to help free up the amount of
required arable land. In today’s agricultural
supply system, large-scale feedstock demand
for biochemicals will compete for land with
other biomass applications such as food,
fibre, and fuel. Since biochemicals fetch a
higher price than biofuels, they will likely
compete successfully with the latter, but
as the biofuels debate in recent years has
shown, under today’s circumstances even
the existing relatively small biofuel feedstock
volumes already raise important trade-off
questions in terms of land requirements.

Policy makers, most likely in public-private-
partnership constellations, need to stimulate
end-of-life treatment systems that are
suitable for the materials on the market—
including biological and biochemical ones.
The key is to provide the system. Examples
include Seattle and San Francisco, both of
which have not only set the rules for the
choice of bio-nutrient-based materials for
single-use fast-food packaging, but have
also provided the municipal infrastructure to
properly handle such waste. A more complex


Continued

FIGURE 15 EXAMPLES
Building blocks of a circular economy—what’s needed to win

A

6 2803 0006 9

B Collection
Collection

C

D
A B C D
Skills in circular product New business models Skills in building cascades/ Enablers to improve
design and production reverse cycle cross-cycle and cross-
• ‘Consumer as user’ sector performance
• Material choice • Performance • Collection systems:
contracts User-friendly, 1. Cross-cycle and cross-
optimised for
• Products become cost-effective, sector collaboration
circular setup
services quality-preserving facilitating factors
• Design to last
e.g., joint product
• More modularisation/
• Treatment/extraction development and
standardisation
technology: optimising infrastructure
• Easier disassembly
volume and quality management through
• Production process
efficiency
• IT-enabled transparency
and information sharing
• Joint collection systems
• Industry standards
• Aligned incentives
• Match-maker mechanisms

2. Favourable
investment climate
Availability of financing and
risk management tools

3. Rules of the game to
quickly reach scale
Regulation in the
areas of accounting,
taxation, customs tariffs,
customer and corporate
responsibility, certification,
standardisation

4. Education
• Awareness raising in
general public and
business community
• Integration of circular
Source: Ellen MacArthur Foundation circular economy team concepts in university
curricula


Putting it all together—Building blocks New business models. The ability to
of a circular economy translate better designs with longer-lasting
(component) usage into attractive value
Despite their differences, the examples propositions is essential for more circular
discussed—from fashionable mobile phones products to compete successfully against
and long-lasting washing machines to highly efficient, low-cost, linearly produced
textiles that cascade through multiple usage products. Changing from ownership to
periods—all draw on the same essential usage- and performance-based payment
building blocks of a circular economy models (e.g., leasing, hiring—as in the
(Figure 15). washing machine example) and expanding
the product definition to embed it in related
Skills in circular product design and services (e.g., power tools combined with
production. In nearly all of the examples, building kits and training) are elements
improvements in product design and of such business models. Here, too, we
material selection have reduced the cost of expect an accelerating uptake over time
moving products into ever-tighter reverse as manufacturers—and their customers—
circles, without compromising structural become more familiar with such alternative
integrity or function. Besides material models. Thomas Rau at Turntoo notes:
selection, which clearly plays a critical role ‘The benefits of performance-based usage
in enabling circularity, other areas important contracts are just now being fully understood
for economically successful circular design and adopted by our corporate partners and
are modular and standardised components, customers.’ This is not a one-size-fits-all
design for disassembly, design to last, and solution—good knowledge of value chain
production process efficiencies that minimise participants’ needs and ongoing innovation
waste. To optimise designs and materials for are required to find a fitting model. ‘So far,
production and repeated use in closed loops, we have not found a product for which our
the core competency is thinking in terms model does not work; and we have already
of systems and being able to see ‘the wood looked at many different types’, adds Rau.
and the trees’. A clear view on the product, Renault points out that leasing models
its nutrients (and suppliers), multiple also allow full traceability of batteries and
customers, and the reverse process, explicitly therefore guarantee them a high collection
supplemented by the circular economy rate for closed-loop re-engineering or
principles outlined in Chapter 2, are a recycling.
necessary aspect of optimisation. At present,
the principles of segregating biological from Skills in building reverse cycles and
technical nutrients and phasing out toxic cascades. Without cost-efficient, better
materials are under-used and are therefore quality collection and treatment systems
a priority. A few design changes can help with effective segmentation of end-of-life
achieve this segmentation. First, products products, the leakage of components and
can be modularised so problem elements can materials out of the system will continue,
easily be isolated and replaced. As part of the undermining the economics of circular
same process, manufacturers can determine design. Building up the capabilities and
what long-lived materials should be used to infrastructure to close these loops is
form the core of a modularised product—i.e., therefore critical. Collection systems must
the skeleton that lives on while modules and be user-friendly (addressing users’ key
customisable add-ons are replaced. Design reasons for making or not making returns,
methods, also virtual ones, for modularising such as guaranteeing complete deletion of a
and standardising components, as well as user’s phone data to allay privacy concerns),
flexible mounting techniques (e.g., snap they must be located in areas accessible to
fasteners instead of adhesives) are well customers and end-of-life specialists, and
known and can be used to make products they must be capable of maintaining the
easier to disassemble in preparation for their quality of the materials reclaimed. Treatment
next round trip. and extraction technology is unevenly
developed and must be increased in terms
of volumes handled and the quality of the
treatment. Whilst the challenges of raising


Continued

collection rates must not be underestimated • ‘Rules of the game’ in the form of better
(see the significant efforts of Europe’s aligned economic incentives from tax
consumer electronics industry), initial authorities and regulators on issues such
steps can easily be taken already in today’s as cost of landfill and labour costs could
environment (e.g., centralising refurbishment potentially speed up adoption of more circular
of light commercial vans to support it with business models. Professor Roland Clift notes
the use of professional tools). on this topic: ‘Some of the current incentives
at systems levels are just perverse—for
Enabling factors to improve cross-cycle example, taxing labour instead of material.
and cross-sector performance. For the The one resource is non-renewable and in
widespread reuse of materials and higher short supply yet free of taxes and the other is
resource productivity to become as common renewable but taxed’. Furthermore, regulation
and unremarkable as litter and landfills in the areas of customer and corporate
are today, market mechanisms will have to responsibility, accounting, certification, and
play a dominant role, but they will benefit standardisation can help to quickly reach
from support by policy makers, educational scale.
institutions, and popular opinion leaders.
• All parties need access to financing and
• Effective cross-chain and cross-sector risk management tools to support capital
collaboration are imperative for the large- investment and R&D. These points are closely
scale establishment of a circular system. linked to the above-mentioned ‘rules of the
As an example, joint product development game’: a stable regulatory environment is a
and infrastructure management (with, focal point for investors. As Andrew Page,
amongst other goals, that of driving a partner at Foresight Group, the asset
down collection and manufacturing costs) management group pioneering environmental
can be facilitated by transparency along infrastructure investing in the U.K., puts it: ‘A
the value chain, available ‘match-maker’ firm legislative and economic framework is the
mechanisms, establishment of industry number one success factor for the transition
standards (e.g., product labelling), and the towards a circular economy’. Cyberpac, a
alignment of incentives among business specialty packaging company, explains: ‘The
partners. Maintaining visibility along the uncertain investment environment currently
value cycles on the whereabouts and the restrains large retailers from investing in
conditions of components across different new technologies’. Governments can create
stakeholders is essential for most circular further funding stimuli by underwriting
business models to operate efficiently. B&Q some of the risks associated with innovative,
points out, ‘As a trading company, whilst we ‘green’ businesses. For instance, the newly
adhere to all health and safety legislation established Green Investment Bank, an
and proactively work to exclude/reduce initiative launched by the U.K. Department
problematic chemicals from our products—as for Business, Innovation and Skills, aims to
we did when we led the way by significantly ‘accelerate private sector investments in
reducing the harmful chemicals in paint (now the U.K.’s transition to a green economy’
industry standard)—at this time we don’t (including the waste sector), offering
currently know every material contained targeted financial interventions to overcome
in every product we sell. Understanding all market failures such as risk aversion due
the materials and components with every to informational asymmetries and high
product and better labelling of these will transaction costs
be will be crucial for our success in the
Circular Economy game’. This information • The shift to the circular economy must
needs to feed into well-developed company- also be supported by the education system
internal databases and tracking systems, with integration into university curricula and
so that one can easily look up the origin, outreach programs to increase awareness
age, and range of potential applications—‘a in the general public and business, science,
critical requirement for a high-performance and engineering communities—see also the
remanufacturing system’, says Jean-Philippe sidebar on education and skills.
Hermine, CEO of Renault Environnement.


FIGURE 16 Transition to a circular economy: Examples of circular business model adoption

Examples ILLUSTRATIVE
Building
blocks of
a circular Mobile phone Light commercial vehicle (LCV) Washing machine
economy
From... To... From... To... From... To...

Product Highly integrated Component Limited degree Design for Efficiency Regular software
A design product designs standardisation of modularisation disassembly— gains in energy updates and
and low degree (e.g., displays) (e.g., bolted wider design and water upgrades of
of component and design for connections in of engine bay consumption electronics and
standardisation disassembly LCV engine bay) and use of quick drive economic sensor systems
(e.g., clip-hold fasteners obsolescence post sale
assembly) and limit lifetimes

Business Low customer Deposit Customer Warranty offered Customer Creation of
B models incentives to payment concerns about on refurbished concerns about transparent,
return devices or leasing quality of refur- vehicles alternative ‘win-win’ leasing
after usage models bished vehicles business models contracts
and effective
marketing

Reverse Limited Automated Sub-scale Centralised Quality losses Manufacturer-
C cycle skills development disassembly and refurbishing refurbishment within inapprop- controlled
and choice of efficient tech- facilities plants with opti- riate collection collection,
circular options nologies (e.g., mised workflows, channels enabled by
fault-tracking allowing for eco- leasing models
software) nomies of scale

High damage/ Industry-wide University OEM/sector Diverging Specialised
D Cross-cycle
and cross- loss rate along efforts to curricula for initiatives to incentives of intermediaries
sector coll- all reverse value establish engineers still foster R&D customers enable
aboration chain steps comprehensive focused on of circular and producers alternative
collection and linear system production in context of ownership models
treatment system methods new ownership on larger scale
models


Systematically looking at these building The in-depth analysis of the different products
blocks can yield specific ideas on how to selected for in-depth study suggest, which is
move business practices forward from the summarised in the appendix, that a circular
current state. Figure 16 summarises what the economy would shift the economic balance in
concerted adoption of these levers could three foreseeable ways. The shares of factor
look like for some of our sample products. inputs will change: products will be made and
Whilst the list of enablers is long, the trends distributed with less material but in some cases
supporting a large-scale shift bode well with more labour. Along the value chain, the
for concerted action. Both resource prices relative importance of primary extraction and
and disposal costs are rising, increasing production operations will decrease, while
motivation to find new solutions. Progress new activities grow up around repeated use
in technological and material development of products, components, and materials—a
supports longer-lasting and more reusable ‘re-sector’ will emerge for reuse, refurbishing,
designs, increased visibility along the value remanufacturing, and recycling offering new
chain enables all participants to better track opportunities for business building. The
products and materials, and consumer and inherent economics of going circular seem to be
corporations have grown more accustomed applicable across a diverse set of products. In
to contracts and usage practices based on the following section we will look at how these
performance instead of ownership. findings would translate to opportunities at
economy, company and user level.


Continued

Education and skills in the circular
economy

The root of our existing educational spans products, technologies, and
system mirrors that of our economic molecules, materials, and energy
system. Both emerged from the flows, and makes explicit those links
traditions and the world view that between the subject specialties,
originated in the Enlightenment: which are chronically underplayed at
the world is ‘machine-like’. Science the present time.
now reveals that the world is not
especially ‘machine-like’—it is more Whole systems design may look like
connected, feedback-driven, and a conventional skills agenda, but such
reliant upon non-linear systems. As a view would underestimate it. Skills,
a result, with ‘systems thinking’ at crucially, are developed within a
its heart, a new scientifically based context and this leads to the question
world-view is taking hold: that of the of ‘which skills?’ and ‘how do they
21st century Enlightenment. relate?’ The emphasis in learning is
likely to increasingly change through
This shift is consonant with the ideas rebalancing* and making sure the
underlying the report—reinventing skills underlying systems design are
progress to reflect new insights into as practised and emphasised as the
living systems. This scientific world- more established subjects.
view recognises the importance of
connection and flow, where feedback In summary, the Foundation delivers
drives change, and where the old an education programme that
one-way idea of a ‘cradle to grave’ advances the STEM agenda (science,
production system is replaced technology, engineering, and maths)
by ‘cradle to cradle’ just as the and also a broader one that parallels
relationship of the part to the whole how we are now remaking the world.
has reversed in emphasis. Our new Our model is supportive and yet
concern with the state of the whole in anticipatory—bridging the worlds of
relation to the part replaces a focus education and business in a unique
on the part in isolation. way.

The education system, if it remains *Examples of rebalancing include
true to its emphasis on mirroring these pairs: problem solving/
the scientific state of play, and the appreciation and reframing; analysis/
economic concerns of dominant synthesis; reductionism/whole
nation states and leading institutions, system emphasis; closed cause and
will wish to evolve to enable learners effect/multiple influences through
to grasp ‘whole systems’ design. This time and space.

4
An economic opportunity worth billions
Charting the new territory

Maps out what moving towards a circular
economy could mean on a macroeconomic
level and how circular business models could

1
benefit different market participants.


4. An economic opportunity worth billions
Charting the new territory

Given that we are still at the beginning of Examining the benefits EU-wide
a journey to circularity, and assuming that
we can identify profitable new options to Our case studies show the positive business
establish circular setups (e.g., by applying impact of circular business models on a
insights from the selected products we product level. In Chapter 3, we described
examined), we believe that a substantial how we scaled up from the level of an
scale-up from the current starting position individual product to the entire market for
is possible and in fact highly likely. Whilst that product (‘The Circularity Calculator’).
full quantification of a likely end-game will Next, to see what the order of magnitude
require further work, the case for rapid of economic impact might be if more
value creation is quite strong, particularly if businesses were to adopt these methods,
we assume circular business practices reach we ran a second scale-up model, applying
a tipping point and thereafter see more results from our selected product analyses
widespread acceptance. Eliminating waste to the eight sectors we see as having
from the industrial chain by ‘closing the particularly high potential for adopting
loop’ promises production cost savings and circular technologies. These eight sectors
less resource dependence. The benefits are contain products of medium complexity
not merely operational but also strategic; (i.e., circular design principles could be
not merely for industry but also for users; incorporated initially with minor changes to
and not merely a source of efficiency, but existing technologies and processes) and
also a source of innovation and growth. The medium usage periods (i.e., products will go
potential identified so far represents only a through a number of product cycles in the
small fraction of what could be possible if next 15 years).99
circular business models were to be applied Together, these eight sectors represent a
at scale. little under half of the contribution the EU
manufacturing sector makes to overall EU
In the following chapter we will therefore GDP—so this would not represent a narrow or
explore: isolated movement.

How economies will win from substantial To perform our scale-up, we compared the
net savings on material and energy costs, total absolute cost savings on materials and
improved mitigation of volatility and supply energy (net of the required materials and
risks, higher multipliers due to sectoral shifts energy used in the respective reverse cycle)
and reduced externalities for our selected products with the total input
costs for each respective product. We chose
How companies will win by creating new this ratio because it factors out value-add
profit pools and competitive advantage, across different products and industries,
building resilience against some of today’s which is highly variable and potentially a
most strategic challenges, and expanding distorting factor in our analysis.100 We then
from their respective starting situations applied the range of percentage savings
from our detailed analysis to the selected
How consumers and users will win by target sectors to see what kinds of net
gaining more choice, experiencing fewer material cost savings might be expected
hassles from premature obsolescence, were all producers to adopt similar circular
99 As discussed in chapter 3, the
and enjoying improved service quality and setups. We focused on the net material and
eight sectors, as categorised by secondary benefits. energy cost savings as the net economic
Eurostat, are as follows: machinery
and equipment; office machinery benefit of shifts in associated labour costs,
and computers; electrical the redirection of investments, and the split
machinery and apparatus; radio,
television, and communication of savings between users and providers or
equipment and apparatus; medical,
precision and optical instruments,
across players along the value chain would
watches and clocks; motor likely vary across sectors and regions and
vehicles, trailers, and semi-trailers;
other transport equipment; and therefore defies exact prediction.
furniture and other manufactured
goods
Of course, we do not expect all producers
100 For further details on the
methodology discussed in this
to instantly adopt circular business
section, please see the appendix practices. Therefore, we established two


FIGURE 17
Increasing circular activities is a promising business
opportunity for a variety of products
ILLUSTRATIVE
Circular activities
as promising
business
opportunity

High

Potential
for circular
business
practices1

1 “Potential” for circularity assessed by product’s suitability in
Low terms of product design (e.g., modularisation, non-toxicity),
reverse logistics (e.g., developed remanufacturing activities)
and likelihood of developing circular activities; and by ease of
implementing these, which is driven by customer acceptance
of circular practices and products, and convenience/incentive
to return goods; “Opportunity captured today” is driven by
reuse, refurbishing, remanufacturing and recycling activities
in respective markets; positioning is validated by expert
indications gathered during interviews.
Low High

Opportunity captured today1

scenarios: in our ‘transition scenario’, we of products on a matrix showing both
make assumptions mainly about changes their potential to adopt circular business
in product designs—in line with current models and capture value through these
technologies and capabilities—and business models (Figure 17). This high-level
reverse-cycle skills. We typically assumed analysis confirms that increasing circular
improvements in underlying collection rate activities would likely represent a promising
increases of 20 to 30 percentage points, and business opportunity for a variety of other
roughly a 30 percentage point shift from products—at least on the basis of sharing
recycling to refurbishing or remanufacturing similar product characteristics. The two
activities. This is in line with interventions main components we examined are product
defined by some governments. suitability and ease of implementation.
Within suitability, products with circular
In our ‘advanced scenario’, we show product-design characteristics (such as
the potential effect of a world that has non-toxic materials, easy to disassemble,
undergone more radical change and has modularised), and those with developed
further developed reverse technologies and reverse cycle processes (such as efficient
infrastructure and other enabling conditions collection, transportation, and treatment
such as customer acceptance, cross-chain systems) stand the best chance at
and cross-sector collaboration, and legal developing circular business models. On the
frameworks. Our product analyses assumed implementation side, product categories
further collection rate increases of 30 to in which circular business practices have
40 percentage points and an additional 5 already been successfully adopted, embraced
to 10 percentage-point shift to refurbishing by customers, and have established user-
or remanufacturing (tighter loops that friendly collection systems represent a
in general yield higher net material cost promising segment, as do those that are well
savings). Our intention was not to attempt to suited for new usage (versus ownership)
give an exact prediction of future economic models (for instance, due to frequency of
composition, but to establish the order of use/total cost of ownership). What does
magnitude and the nature of the lasting this mean in terms of specific products
structural shift, whilst both grounding our and business development? The products
analysis in current realities and showing the most suitable for circularity are those in the
scope of potential medium-term impact upper left-hand quadrant, from shampoos
towards 2025 were some of the current to hospital beds. Additional categories
barriers to fade. we see as potentially promising include
some business lines that are already quite
To further validate this approach of advanced, including construction equipment,
generalising the findings of our in-depth heavy machinery, and aeronautics.
product analysis, we plotted several types


Continued

How economies win—Unlocking a multi- restorative circular economy. We would also
billion USD opportunity, fast and lastingly expect significant economic potential for circular
business models outside Europe. As a starting
It is evident that reuse and better design in a point, emerging market economies often are not
circular economy can significantly reduce the as ‘locked-in’ to existing manufacturing models
material bill and the expense of disposal. But, as advanced economies, and thus have the
from an economic perspective, can those savings chance to leap-frog straight into circular set-ups
produce a significant effect economy wide? when building their manufacturing sectors. Many
emerging economies are also more material-
Substantial net material cost savings. Based intensive than advanced economies, and thus
on detailed product level modelling, the report could expect even greater relative savings from
estimates that the circular economy represents circular business practices.101
an annual material cost saving opportunity
of USD 340 to 380 billion p.a. at EU level for FIGURE 18
ROUGH ESTIMATES

a ‘transition scenario’ and USD 520 to 630 Adoption of circular setups in relevant
manufacturing sectors could yield net material
billion p.a., or a recurring 3 to 3.9% of 2010 EU cost savings of USD 340 – 630 billion per year
GDP, for an ‘advanced scenario’, all net of the in EU alone
materials used in the reverse-cycle processes. Net material cost savings1 in complex durables
with medium lifespans
(Figure 18). These figures are intended to USD billion per year, based on current total input
demonstrate the order of magnitude of the costs per sector,2 EU
520-630
savings that could be expected in a circular (19-23%)1
economy. Rather than trying to explicitly
model the effect of circularity for the entire
economy—which is highly dependent on
many factors such as industry structure and Motor vehicles
conduct, elasticities, or the drive of companies
to reap the circular potential—we decided
to ground our estimate on the observed
potential material savings for the products
from our case studies. We limited the scale-up 340-380
(12-14%)1
to those sectors that hold the most potential Machinery and
equipment
for mimicking the success of these products
(i.e., products of medium complexity) and
that contain products of medium-term usage
periods (3 to 10 years), so that adoption of Electrical
circular design and processes could actually machinery
& apparatus
affect the material balance over the next 15
years. These medium-lived products represent
Other transport
a little less than half of the contributions
made by manufacturing to the EU’s gross
Furniture
domestic product today—but clearly they
do not represent an exhaustive list of all Radio, TV, and
short-, medium-, and long-lived products that communication

could be produced and delivered circularly. Medical precision and
optical equipment
Similarly, our analysis only covers material
Office machinery
and energy savings, as the net economic and computers
benefit of shifts in associated labour costs, Transition Advanced
scenario3 scenario4
redirection of investments, and the split of
1 Material input cost savings net of material costs incurred for reverse
savings between users and providers or across cycle activities, percentages as share of total input costs in medium-
lived complex product sectors
players along the value chain would likely 2 Most recent data for sector input costs on EU level come from
101 However, a projection on
Eurostat Input/Output tables 2007
the size of the potential and vary across sectors and regions and therefore 3 Transition scenario: Conservative assumptions, focusing on changes
adoption rate will require in product designs, reverse cycle capabilities
more in-depth analysis given
defies exact prediction. We conclude, however, 4 Advanced scenario: Assuming more radical change especially in terms
of further developed reverse-supply-chain competencies, and other
the high variance in starting that the order of magnitude identified for enabling conditions like customer acceptance, cross-chain and cross-
positions (e.g., collection rates sector collaboration and legal frameworks
in Europe tend to be higher Europe confirms that we are looking at a
SOURCE: Eurostat Input/Output tables 2007 for EU-27 economies;
than in other parts of the substantial opportunity at the economic level Ellen MacArthur Foundation circular economy team
world) and different mix of
economic activities founded on a structural and lasting shift—a


ILLUSTRATIVE
FIGURE 19 Sample AND ROUGH
A small reduction in demand would put downward reduction ESTIMATES
pressure on both iron ore prices and volatility in quantity
of iron ore
200 2025 Global Iron Ore Cost Curve1 demanded
190 2010 USD/tonne, not corrected for real mining cost inflation
180 1
170
160 Potential savings
150
140
130
120
110
100
90 2 Scope for potential price drop,
80 given sample reduction in demand
70
Potential price floor
60 in 2025 under
50 circular economy
40
30 Production
20 Million
10 Tonnes
0
0 250 500 750 1,000 1,250 1,500 1,750 2,000 2,250 2,500 2,750 3,000 3,250
1 Note: this is not a projection of iron ore demand in 2025; rather it is an illustration of the impact of a demand reduction;
see footnote 105 for more details.
SOURCE: McKinsey iron ore cost curve

Mitigation of price volatility and supply our analysis of refurbishing light-commercial
risks. Our product analysis shows vehicles (LCVs) and washing machines, we
the considerable effect that reducing assessed the potential for reducing global
downstream demand through circularity can iron ore demand across several sectors that
have on upstream demand, especially by we see as particularly ripe for savings. We
avoiding material loss due to inefficiencies focused our analysis on three steel-intensive
102 Source: McKinsey Global steel along the linear value chain (reducing 1 tonne sectors—the automotive, railway, and
and iron ore models; WSA
of final steel demand, for instance, saves machinery sectors—which together represent
103 McKinsey Flat Steel Demand
Model
over 1.3 tonnes of iron ore and over 5 tonnes around 45% of global steel demand.103 We
of earth being moved). At present, the assumed conservatively that recycling rates
104 Refurbishment requires 75 to
95% less steel than manufacturing production of many raw materials falls at the remain constant and that only 25% of non-
a new product far-right end of their respective cost curves, recycled products are refurbished in 2025—
105 This iron ore cost curve in some cases close to supply limits. The and then extrapolated what savings would be
is illustrative. Cost is for
standardised sinter fines, at
implication is frequent increases in pricing possible if the material savings from our LCV
the CIF price (cost, insurance, levels and volatility. Further acceleration of and washing machine refurbishment
freight) for delivery at the Chinese
border. Operational costs of demand pressure is likely as three billion cases were scaled globally.104 Our analysis
individual mines are adjusted consumers are expected to enter the shows that savings from global iron ore
to a standardised 62% sinter
fines product using value-in- market until 2030. This means that any shift demand reductions, even under our
use corrections and Fe dilution
effects. No real cost inflation is
leftwards on the respective cost curves could conservative refurbishing rate, could well add
applied to the cost curve between have a calming impact on volatility. Other up to 110 to 170 million tonnes per year (or 4
2011 and 2025 for the purpose
of the specific illustration of this factors, such as speculative trading, however, to 6% of expected 2025 demand). Whilst this
exhibit. This cost curve also does could still lead to some volatility. may seem small, such volume changes would
not take into account the effect of
real mining cost inflation. Example likely have a calming effect on pricing levels
demand reduction in the exhibit
is based on material savings of
Steel is a good example. Looking at and volatility, as can be seen in our illustrative
steel observed in product case forecasted steel and iron ore demand over cost curve figure (Figure 19),105 106 —though the
studies and extrapolated to steel-
intensive sectors deemed to have the next two decades, the incentives for exact savings in dollar terms would depend
high potential for circularity—i.e., reducing resource consumption become heavily on a variety of factors, including
the automotive, railway, and
machinery sectors. increasingly clear. By 2025, global steel the volume and types of supply coming on
Note:McKinsey’s iron ore
demand is expected to rise to more than 2 line between now and then, and thus exact
projections expect an increase billion tonnes per year, a 50% increase over effects on steel or iron ore prices are quite
in supply in the second and third
quartiles of the cost curve—this current levels. Likewise, iron ore demand difficult to forecast with any reasonable
increase will likely also put is forecasted to rise in parallel to around degree of confidence.
downward pressure on prices and
volatility 2.7 billion tonnes.102 From our case study
106 It is worth noting that
analysis, circular business practices appear Growth multiplier due to sectoral shift and
McKinsey’s iron ore cost curve to be an effective way to limit the growth possible employment benefits. The three
anticipates that new supply
will also be added at lower in iron ore extraction needs, which in turn main macroeconomic sectors—the primary
price points, which would place are putting pressure on prices and volatility. sector (extraction), the secondary sector
additional downward pressure on
both prices and volatility Using data on steel savings gleaned from (manufacturing), and the tertiary sector


Continued

(services)—would each have opportunities by the recession in the late 2000s than were
under a circular model, though we anticipate workers in other sectors.108
that the service sector would feel the
biggest impact. The increased need for Reduced externalities. The circular approach
financing and leasing arrangements for a offers developed economies an avenue
wide swath of products and reverse cycle to resilient growth, a systemic answer to
services, as well as the need to expand reducing dependency on resource markets.
services along the reverse cycles, would It also provides a means to reduce exposure
likely bring significant job growth in services to resource price shocks and mitigates the
(Figure 20). This shift could be particularly need to absorb disposal costs—which consist
dramatic in developing economies, which at of the loss of environmental quality and the
present are much more reliant on primary public costs for treatment that is not paid
industries. Net employment effects will for by individual companies. Higher reuse
likely vary across sectors. The extraction and remanufacturing rates for mobile phones
sector—though it may face pressures on the in the EU, for example, could eradicate at
virgin extraction side of its business—would least 1.3 million tonnes of CO2e annually
also have opportunities to benefit from at 2010 production levels in our transition
circularity. Smelters, for example, would scenario, net of the emissions produced
almost certainly see expansion and new job during reverse-cycle processes. In addition
opportunities in secondary extraction. The to the economic benefits, the exclusion of
manufacturing sector is likely to undergo energy- or water-intensive production steps
significant changes, given the removal of (like aluminium smelting) as well as a move
material bottlenecks and the need to adjust towards less toxic materials (such as using
operations. Whether the newly generated more biological nutrients for consumables
remanufacturing volume will more than such as food packaging) could contribute to
compensate for the pressure put on reducing pressure on GHG emissions, water
conventional ‘linear’ manufacturing depends usage, and biodiversity.
in large part on the specific circumstances
of different manufacturing industries. Given Lasting benefits for a more resilient
the strong fundamentals of the underlying economy. Beyond its fundamental value
business case (assuming comprehensive creation potential over the next 10 to 15
design changes to products, service delivery years, a large-scale transition to a circular
processes, etc.), adopting more circular economy promises to address fundamentally
business models would bring significant some of the economy’s long-term challenges.
benefits, including improved innovation Improved material productivity, enhanced
across the economy (Figure 21). While the innovation capabilities, and a further shift
exact GDP implications of more innovation from mass production employment to
across an economy are difficult to quantify, skilled labour, are all potential gains that
the benefits of a more innovative economy will significantly increase the resilience
include higher rates of technological of economies. They will also provide
development, improved material, labour, fundamental changes that would make it
and energy efficiency, and more profit harder to revert back to the troubles of a
opportunities for companies. linear ‘take-make-dispose’-based economy.
Importantly, with its greatly reduced material
Finally, other sources report that a move intensity and a production base that is largely
toward a circular economy could potentially running on renewable sources of energy, the
create moderate benefits, either in terms of circular economy offers a viable contribution
job growth or employment market resilience. to climate change mitigation and fossil fuel
Sita Group, the waste management arm independence. Moreover, the demonstrable
107 French National
Assembly, Rapport
of Suez Environment, estimates that some decoupling of growth and resource demand
D’information No. 3880, 500,000 jobs are created by the recycling will also slow the current rates of resource
October 26, 2011, p. 75
industry in the EU, and this number could depletion.
108 Remanufacturing in well rise in a circular economy.107 A recent
the U.K.: A snapshot of
the U.K. remanufacturing report from the Centre for Manufacturing
industry, Centre for
Remanufacturing
and Reuse argued that workers in the U.K.
and Reuse, August 2010 remanufacturing industry were less affected


FIGURE 20 Effect on
Employment effects vary across primary, secondary, and tertiary sectors of a circular economy employment
activity
(directional)
Primary sector
Mining/materials manufacturing
Farming/collection

Recycle

Secondary sector Parts manufacturer

Restoration Biosphere
Biochemical
Refurbish/
feedstock Product manufacturer remanufacture

Tertiary sector Service provider/
distributor
Reuse/redistribute

Biogas Maintenance
Cascades
6 2803 0006 9

Consumer User
Anaerobic
digestion/ Collection Collection
composting

Extraction of
biochemical Energy recovery
feedstock


Landfill


FIGURE 21
Revamping industry, reducing material bottlenecks, and creating tertiary sector opportunities
would benefit labour, capital, and innovation

Labour intensity Innovation index1 Capital intensity
Labour spending per unit of GDP output, IBM/Melbourne Institute Index Total expenditures/labour expenditures,
EU-27 economies EU-27 economies
0.30 321 4.07

274

2.97

180
0.16
0.14 1.87

Primary Secondary Tertiary Primary Secondary Tertiary Primary Secondary Tertiary

1 Components of index include: R&D intensity; patent, trademark & design intensity; organization/Managerial innovation; and productivity

SOURCE: Labour intensity calculated using data taken from Eurostat Input-Output tables for EU-27; Innovation data from IBM/Melbourne Institute
Innovation Index (covering Australian Industry), 2010


Continued

Factors driving premature obsolescence How to mitigate. Consider ways to
‘refresh’ products—through cosmetic
What about the real (physical) limits redesign—to provide consumers with a
to keeping products, components, and product that feels new and offers new
materials in the loop ‘forever’? Products value (software, casing, critical new
do eventually reach a physical limit, given components) but does not require new
the second law of thermodynamics.109 material input.
Today, however, reaching these physical
limits is more the exception than the rule. Economic obsolescence. When the
Other factors typically determine when a cost of ownership outweighs the cost of
product is discarded—sometimes at a point buying and owning a new item it becomes
when only a small fraction of the potential economically obsolete. Automobiles, for
usage periods of its various components instance, are sent to junkyards because
have elapsed. Unlocking the value of of high maintenance costs, products are
circularity will thus require tackling various thrown away when their owners move
forms of premature obsolescence, be they and it costs more to transport the item
technical, fashion-related, economic, or than buy a new one, and old appliances
regulatory in nature. that consume more energy are commonly
discarded in favour of new, more efficient
The ‘weakest link’ component. When one models. Finally, some products are
component breaks, the entire product with discarded in response to government
all its residual value is usually discarded incentives such as those offered in the
before the end of its natural lifetime. The recent ‘cash for clunkers’ programmes.
related term, ‘planned obsolescence’,
assumes that designers and manufacturers How to mitigate. Design products to
deliberately do not address technical weak better allow for disassembly and strategic
links in order to boost new product sales. replacement of parts that the parts that
are most reusable can easily be separated
How to mitigate. Design products that and reused and those most subject to
wear out evenly—as Patagonia commits technological progress and efficiency
to doing for its apparel—or, if more gains driving total cost of usage can
appropriate, in a way that individual be exchanged/upgraded more easily;
components can be replaced (Patagonia create infrastructure facilitating return of
designs its garments so that they do products to manufacturers.
not need to be taken apart completely
if, for example, a zipper were to fail); Financial/legal obsolescence. When
encourage the manufacture and sale of the owner of a product is a corporation,
individual components; rethink business products may be retired for accounting
models to make planned obsolescence or legal liability reasons. Firms typically
less relevant (in systems where a “seller” retire computers, for example, when the
retains ownership there is less incentive for warranty expires.
obsolescence) (Figure 22).
How to mitigate. Rethink legal and
Fashion obsolescence. Consumer products accounting frameworks that compel firms
are commonly retired before the end of to retire products before the end of their
their useful lives due to fashion trends useful lives; establish infrastructure for
that encourage consumers to ‘upgrade’ ensuring that products that are retired
to a new product for style reasons. For when still usable are then refurbished
example, more than 130 million working or resold, rather than simply being
109 Tim Jackson, Material
Concerns: Pollution, Profit and
but ‘retired’ mobile phones sit unused in discarded.
Quality of Life, London: Routledge the United States because their owners
Chapman & Hall, 1996
have purchased a replacement phone.110
110 Slade, Giles, Made to Break:
Technology and Obsolescence
in America; Harvard University
Press; 2006


logistics not only as an opportunity to fill
ILLUSTRATIVE
FIGURE 22 backhaul loads but as an attractive stand-
Refurbishment helps to overcome a dynamic where ‘weakest-link’ components
define a product’s life — example light commercial vehicle alone business. DHL, for instance, established
Proposal for improved state beverage distribution platforms in the
U.K. that include the distribution, refilling,
Weakest link: Key component with Original part 1st replacement
shortest lifetime determines end repair and collection of vending machines.
2nd replacement Expected residual
Selected
of first product life2 lifetime of OEMs like Caterpillar use their vendor and
components1 component at time
of refurbishment distribution system as a collection network
Engine
Replaced every
for used engine cores, linking the cores to a
Suspension
refurbishment deposit and a discount system to maximise
the re-entry of used components into their
Gearbox Replaced
every second rapidly growing remanufacturing
Clutch refurbishment operations.111 Any reverse logistics system
Catalytic Reused on relies on its scale. ‘Scale really matters in the
converter aftermarket reverse loop, improving the marginal cost
after end of
Steering vehicle life position for collection and remanufacturing
Expected operations and fetching better prices for
lifetime (km)
sales of larger quantities’, explains Craig
1st 2nd End of
refurbishment refurbishment product life Dikeman at National Grid.

1 Regular maintenance for easily replaceable parts (e.g., oil or tires)
2 Either by actual key component failure or pre-emptive reverse treatment (e.g., refurbishment) Product remarketers and sales platforms
SOURCE: Ellen MacArthur Foundation circular economy team are rapidly expanding and growing into
substantial enterprises, facilitating longer
lives or higher utilisation and hence utility
How companies win—Tapping into the profit levels for mass-produced goods. The term
pool opportunities of a circular economy ‘collaborative consumption’, coined by Ray
Algar, a U.K.-based management consultant,
Companies are set to win in two ways. On and popularised by Rachel Botsman and
the one hand, the circular economy will Roo Rogers, gives a name and is injecting
offer new profit pools in building up circular fashionability into time-honoured activities
activities. On the other, the benefits of the such as sharing, bartering, lending, trading,
circular economy will address a number of renting, (re-)gifting, and swapping. In a
the pressing strategic challenges of today’s sense the term is a misnomer, in that it
businesses. refers to ‘usage’ contracts rather than
‘consumption’—but, in any case, the model
New profit pool potential along the reverse has proven wildly popular. The formats
value cycles. Businesses that provide it entails build on patterns familiar from
solutions and services along the reverse church bazaars, ‘rent-a-tuxedo’, and ‘party-
cycle are bound to reap attractive growth plan’ sales formats and, if well designed,
opportunities. Winners are already emerging do not require consumers to shift their
today along the reverse cycle where they are behaviour outside of their comfort zones.
supporting the ongoing migration towards a The omnipresence of network technologies
more circular economy (Figure 23). and social media is dramatically increasing
reach and reducing distribution cost for
Collection and reverse logistics, as seen providers of sales and remarketing services.
in our case examples, are an important In the consumer-to-consumer environment,
part of any system aiming to increase market players like eBay and Craigslist led
material productivity by ensuring that the way to increasing the amount of second-
end of life products can be reintroduced hand goods traded online. Amazon too has
into the business system. Classical waste created a successful open platform for selling
management operators such as Veolia and used products—giving suppliers access to
111 Corporate annual reports
Remondis are increasingly diversifying the almost 150 million customers worldwide and
2005 to 2010; Product-Life fractions they can handle and divert from applying a very granular understanding of
Institute website (http://
www.productlife.org/en/ landfilling towards more recycling and even customers’ individual needs and interests.
archive/case-studies/ refurbishment operations. Logistics service In the business-to-business environment as
caterpillar-remanufactured-
products-group) providers are increasingly looking at reverse well, typically more specialised companies


Continued

are offering a sales platform for used and viable business opportunity, it also provides
refurbished products. In the European an excellent means of building relationships
remanufactured medical devices sector, with new customer segments’.
literally dozens of providers such as Pharma
Machines offer these services with dedicated Material recycling systems systems are
sales platforms. well established. They typically take the
form of regionally structured multi-user
Parts and component remanufacturing and organisations (such as the many product-
product refurbishment can be considered category-specific systems in Europe, from
the hardest loop to close on the path to batteries to packaging) or are company
a more circular economy because of the specific (reintroducing production waste
specialised knowledge required. Collection, from car manufacturing into the material
disassembly, refurbishment of products, flows, or Nespresso’s collection and recycling
integration into the remanufacturing of spent capsules). Both group and single-
process, and getting products out to users company solutions require a standard purity
all require specialised skills and process level suitable for high-quality recycling
know-how. Consequently, most of the processes. Consequently, the market has
case examples at scale are subsidiaries generally developed into regionalised,
of existing manufacturers, although specialised players with natural barriers to
large-scale independent operations exist, growth beyond their starting footprint. A
Cardone Industries, for example, has been number of companies have nevertheless
supplying the U.S. automotive aftermarket started to enlarge the scale and scope of
with remanufactured cores for over 40 their operations by adding new geographic
years. Original equipment manufacturers regions and further material fractions to their
do have a number of advantages. For portfolio. Tomra has used its technological
instance, Caterpillar applies product capabilities to provide the technology for
and process know-how from their new- large-scale, nation-wide collection schemes
equipment business to their diesel engine (e.g., PET bottles). The company has grown
remanufacturing operation; they also use at close to 20% per annum. Looking ahead,
their existing dealer network and aftermarket it plans further improvements in technology
service clout to ensure that components to reduce the burden of costly separation
find their way back from the customer to and pre-sorting schemes and therefore
their remanufacturing facilities. Caterpillar aims to achieve higher recycling yields at
engineers study returned components and lower cost, resulting in rapid and profitable
continually improve the company’s ability to growth for recyclers. Similar technology
remanufacture them at lower cost and higher could be applied to the process of taking
quality.112 This allows Caterpillar to provide the back products for remanufacturing and
same warranty for ‘reman’ engines as for new refurbishing. Another company that is
products. Product insights passed on from optimising recycling systems is Renault,
the remanufacturing/refurbishment plant to which has long worked on augmenting the
an OEM’s designers and engineers not only recycled content of its vehicles. ‘While 85%
add to future remanufacturing margins but of the weight of a car is typically recycled,
can also help to improve the performance of only 25% of the material input for new cars
the original cores. Renault, another example, consists of recycled material’, says Jean-
already has a process in place to make sure Philippe Hermine at Renault Environnement.
that its new remanufacturing workshop for Because this disconnect is mainly due to
electric vehicle batteries feeds engineers’ concerns about the quality of recycled
insights into failure modes back into the new materials—in particular plastics—Renault is
product development process. Critically, now developing ways to better retain the
many OEMs also see it as a strategic priority technical and economic value of materials
to serve in their aftersales markets—for brand all along the car’s life cycle. It is not only
112 Corporate annual reports protection, customer retention, or volume actively managing a flow of quality material
2005 to 2010; Product-Life
Institute website (http://www.
reasons—and remanufacturing offers them a dismantled from end-of-life vehicles and
productlife.org/en/archive/ way to do this with attractive margins. Cisco enhancing the actual recycling processes,
case-studies/caterpillar-
remanufactured-products-
confirms, ‘Refurbishing various kinds of end- but is also adjusting the design specifications
group) of-life products is not only an economically of certain parts to allow for closed-loop, or


FIGURE 23
The circular economy is creating a new ‘reverse’ sector

Collection Secondary market

Revenue in USD billions
Tomra Amazon Revenue in USD billions

+20% pa Amazon marketplace +26% pa
allows third-party sellers
Tomra produces reverse to use Amazon's
vending machines that 0.47 1.15
platform, giving them
collect and sort empty access to more than
beverage containers 121 million users in 60
0.19 0.36
countries

2005 2010 2005 2010

Remanufacturing Recycling
Thousand tonnes of
Caterpillar remanufactured products Remondis Revenue in USD billions
Remanufacturing
division +9% pa +10% pa
Remondis provides
Cat Reman remanufactures 70
recycling infrastructure
7.02
engines that are resold with and expertise in Europe,
45 4.38
‘same-as-when-new Asia, and Australia
performance and reliability’

2005 2010 2005 2010

SOURCE: Tomra annual reports (2005, 2010); Ixtens research (based on Amazon SEC filings, Forrester analysis); Caterpillar annual reports (2005, 2010);
Remondis annual reports (2005, 2010)

‘functional’ recycling. This way, end-of-life a guaranteed price—which is especially
vehicles are turned into high-grade materials attractive at times when commodity prices
appropriate for new cars, and downcycling is are on the rise. In one version of this win-win
avoided. scheme, Turntoo has adapted the conventional
leasing model to accommodate the exclusion
Enabling business models that close of material value from the price. In another,
reverse cycles. Closing the reverse cycle the company—working like a broker—provides
may well require yet more new businesses the product to the user for a certain number
to emerge. For instance, providing users and of years of usage. At the end of this phase,
suppliers with sufficient incentives may be Turntoo buys the product back from the
difficult due to higher transaction costs and customer at the price of the embedded
inability to agree on specific rates. Turntoo, raw material at the time of original sale. At
a company with a vision of moving towards this stage, the manufacturer can decide to
product use based on performance contracts refurbish the product for reuse or extract the
rather than on ownership, fills the void by material from the product for sale. Turntoo
operating and financing schemes that are believes this dynamic will align incentives and
based on offering products such as office encourage manufacturers to design products
interiors (e.g., lighting) net of their material for the longest life possible. The firm’s CEO,
value. Such schemes provide advantages Thomas Rau, explains: ‘The different economic
for all participants: customers do not need incentives of our model drastically transform
to part with cash for the material portion the way that people look at product and
of the products they are using; Turntoo process design along the value cycles, and
generates a revenue stream through its companies are, for example, starting to remove
services as an intermediary; and participating the break points of current designs’.
manufacturers regain their materials at


Continued

Circularity and Finance would simply replace other R&D
expenditures, but it seems highly
The spread and mainstream adoption probable that firms’ transition efforts
of circular business models would would generate some new business for
have several implications for the the financial services sector.
financial services sector—and
could lead to new opportunities for Indirect effects. A shift in corporate
financial institutions. business models could affect the
financial services sector in various other
New financing models. In the circular ways. For instance, corporate lending
economy, new ownership models—in might come to replace consumer
which customers no longer purchase financing of purchases—requiring more
as many goods directly, but rather robust solutions for product guarantees
use them for a fee and then return and insurance coverage that could
them—would demand new methods lead to opportunities for banks and
of financing or significant expansion other financial services providers.
and adaptation of existing methods. Separately, given the likelihood of
The leasing of goods in transactions in reduced commodity price volatility
both the business-to-business (B2B) under a circular model, the business of
and the business-to-consumer (B2C) selling instruments that hedge against
segment would likely become more changes in commodity prices would
common, requiring a commensurate likely recede in relative importance.
uptick in services relating both to
structuring and managing leasing Economic effects. An overarching
arrangements. indirect impact on the financial
services industry—and, indeed, on all
Traditional financing demand. other industries—would result from
Increased demand for traditional the increase in capital productivity
financing might well present a we expect to result from a shift from
parallel opportunity. We expect the primary and secondary sectors
significant new demand from to the tertiary sector under a circular
firms attempting to reconfigure economy (Figure 21). Given that capital
production methods. In addition, productivity is a driver of long-term
the broadened ‘reverse cycle’ sector economic growth, such a shift could
of firms needed to support circular have profound economic implications.113
business models—such as collection Achieving a healthy transition would
businesses, refurbishment operations, rely heavily on the financial services
or remarketing specialists—would sector serving as a clearinghouse for
also require financing support. There capital—helping parts of the economy
remains, of course, the question of with capital surpluses invest this money
whether these capital expenditures more productively.

113 Such a shift would be
particularly welcome given the
‘equity gap’ cited by the McKinsey
Global Institute in a recent report,
The Emerging Equity Gap. In the
report, MGI forecasts a USD 12.3
trillion gap between the amount
of equity capital that investors
are willing to supply and the
amount that companies need to
fund growth in the next decade.
Any mechanism, such as the
circular economy, that would help
stimulate capital productivity and
free up investment dollars might
therefore have a very significant
effect on economic growth


Financing. Individual companies and groups leasing contracts in place, companies can
of companies will need not only support gather more customer insights for improved
with change-in-ownership models but also personalisation, customisation, and retention.
funding for R&D and new technologies. As As Cisco puts it: ‘We think that broadening
in the linear economy, the financial sector our focus beyond pure-play manufacturing—
has an important role to play in the circular to enhance our service offerings as well—will
economy, both in transition and steady deepen our relationships with our customers
state. Because of the numbers of cases and create more value for everyone involved’.
banks handle, they are typically also far Providing end-of-life treatment options and
more experienced and therefore better at incentives to use them could increase the
structuring long-term return models than number of customer touchpoints and help
corporations alone. build a technology pioneer’s image.

Mitigation of strategic challenges to build Less product complexity and more
resilience and competitive advantage. manageable life cycles. Providing stable,
Circular concepts could address sometimes reusable product kernels and
challenges such as an intensified cost- treating other parts of the product as add-
price squeeze, shorter product life cycles, ons (such as software, casings, or covers)
geographic and political supply risks, enables companies to master the challenge
increased commoditisation of products, of ever-shorter product life cycles and to
and decreased customer loyalty. provide highly customised solutions whilst
keeping product complexity low.
Reducing material bills and warranty risks.
Through reselling and component recovery, Innovation boost due to system redesign/
a company can significantly reduce its rethinking. Any increase in material
material bill. In the case of mobile phones, productivity is likely to have an important
remanufacturing can reduce material costs positive influence on economic development
by up to 50%—even without the effects beyond the effects of circularity on specific
from yet-to-be-created circular materials sectors. Circularity as a ‘rethinking device’
and advanced reverse technology. In has proved to be a powerful new frame,
addition, ‘building to last’ can also reduce capable of sparking creative solutions and
warranty costs. A utility provider able to boosting innovation rates.
reuse materials that are installed in fixed
infrastructure (e.g., overland electric power How consumers and users win—more choice
lines) can reduce the utility’s exposure to at lower cost and higher convenience
price hikes and supply risks.
The net benefits of a closer loop are likely
Improved customer interaction and to be shared between companies and
loyalty. ‘Instead of one-time transactions, customers. Marks & Spencer explains: ‘Our
companies can develop life-time service first closed-loop project has demonstrated
relationships with their customers,’ says that it is attractive to consumers—for high-
Lauren Anderson, Innovation Director at value materials like cashmere and wool the
Collaborative Consumption Labs. With cost of goods for virgin material would be
’consumers’ of durable goods now becoming the double, so we would have to sell at a
‘users’, companies will have to evolve as well. much higher price’. And yet the examples in
New, long-term customer relationships will this report indicate that the real customer
be vital to smooth the processes of providing benefits go beyond the immediate price
maintenance, product upgrades, and other effect. Michelin’s pay-per-kilometre model
product-related services, and coaxing means less upfront pay-out, less stock-
customers to return products at the end of keeping, and overall lower cost for fleet
each usage cycle. Moreover, with rental or


Continued

managers. Moreover, advantages extend to
reduced costs of obsolescence, increased
choice, and secondary benefits.

Reduced obsolescence with built-to-last or
reusable products will improve budgets and
quality of life. For the customer, overcoming
premature obsolescence will significantly
bring down total ownership costs and deliver
higher convenience due to avoiding hassles
associated with repairs and returns.

Choice is increased as producers can
tailor duration, type of use, and product
components to the specific customer—
replacing today’s standard purchase with
a broader set of contractual options.
‘Looking at the world from a circular design
perspective will allow us to further segment
our customer base to provide better service
at more competitive cost,’ says B&Q.

Secondary benefits accrue to the customer
if carpets also act as air filters or packaging
as fertiliser. Needless to say, customers
will also benefit from the drastic reduction
of environmental costs associated with
circularity.

On a daily basis, consumers will experience
this bundle of benefits in keeping with their
individual preferences and circumstances.
The repair-and-replacement chores currently
caused by ‘weakest link’ elements will be
reduced, decreasing expense and hassle,
and expanded options for customised
products for home and work will enable new
forms of personal expression and problem-
solving (customisation may be the new
shopping). Furthermore, well-made goods
and ‘two-in-one’ products with multiple
functions might well bring both aesthetic
and utilitarian benefits. Whilst the transition
to a circular economy will bring dislocations,
the more productive use of resources and
materials should have a stabilising effect
on the economy, giving the world some
‘breathing room’ as it deals with the strains of
expanding and ageing societies.

5
The shift has begun
‘Mainstreaming’ the circular economy
Proposes winning strategies for businesses to bring the
circular economy into the mainstream and a roadmap
for an accelerated transition towards a circular economy.

1


5. The shift has begun
‘Mainstreaming’ the circular economy

Our economies remain strongly locked into Third, and on a related note, we are
a system where everything from production witnessing a pervasive shift in consumer
economics to contracts, and from regulation behaviour.
to mindsets, favours the linear model of Organised car sharing is growing at a rapid
production and consumption. In that linear clip—from fewer than 50,000 members of
world, reuse will indeed replace demand for car-sharing programs globally in the mid-
a company’s incremental sales and weaken 1990s,116 to around 500,000 in the late
revenue and profits. 2000s.117 According to Frost & Sullivan, this
number is likely to increase another 10-
This lock-in, however, is getting weaker in fold between 2009 and 2016, and the total
the wake of powerful disruptive trends that number of cars in the car-sharing market is
will shape the economy for years to come: likely to grow about 30% per year during this
period.118 At this pace, by 2016 the car-sharing
First, resource scarcity and tighter industry would replace the production of
environmental standards are here to stay. more than one million new vehicles. The
This perception is increasingly accepted list of ‘shareware’ extends beyond cars,
by the business sector. In a 2011 McKinsey however, and in some regions even includes
Quarterly executive survey, the number articles of daily use, such as bicycles, toys,
of respondents who pursue sustainability musical instruments, and power tools.119 In
initiatives to reduce costs or improve Germany, for instance, ‘swap in the city’
operating efficiency was up 70% over the garment exchanges have become popular
previous year.114 Along with a changing and are magnets for urban consumers. Taken
appreciation of the business rationale, together, circular business design seems
investment in environment-related areas finally poised to move from the sidelines and
has increased dramatically. According to a into the mainstream. The mushrooming of
joint report by the World Economic Forum new and more circular business propositions—
and Bloomberg, global investment in green from biodegradable packaging to utility
business initiatives in 2010 alone totalled computing and from non-toxic ink to
USD 243 billion, a 30% increase over the sewage phosphate recovery—confirms that
prior year.115 Given their superior resource momentum is building.
performance, it seems likely that investments
in circular businesses will be systematically And yet, to capture the prize of the circular
rewarded over the ‘take-make-dispose’ ones. economy some significant barriers must be
114 ‘The business of sustainability: overcome. What is needed for this revolution
McKinsey Global Survey results’,
McKinsey Quarterly, October 2011.
Second, we now possess the information to take place?
The percentage of respondents technology that will allow us to shift. We
who pursue sustainability
initiatives rose 14 percentage can trace material through the supply chain The transition is likely to be a messy process
points, from 19 to 33% of all (e.g., using RFID), identify products and that defies prediction, and both the journey
respondents
material fractions (using the breathtaking and the destination will no doubt look and
115 Green Investing 2011: Reducing
the Cost of Financing, World
computing power of modern sorting feel different from what we might imagine
Economic Forum and Bloomberg, technology), and track the product status today. We expect this transition to be as
April 2011, p. 6
and costs during its use period (as already non-linear as its inner workings, as a dynamic
116 Susan A. Shaheen and Adam practiced by some car manufacturers). series of leaps at an accelerating pace. Why?
P. Cohen, “Growth in Worldwide
Carsharing: An International Professor Clift points out that whilst the
Comparison”, Transportation
Research Record: Journal of the
idea of a circular economy has been around The Ellen MacArthur Foundation and
Transportation Research Board, for some time, further development and its partners believe that an accelerating
2007, p. 84
wider acceptance of end-to-end costing adoption may result, first, from today’s fast
117 Frost & Sullivan, “Sustainable and better tracking of products, combined proliferation of consumption patterns and,
and Innovative Personal Transport
Solutions—Strategic Analysis of with more acceptance of re-engineering and second, from the scale-invariance of many
Car sharing Market in Europe”,
research report, January 2010
development of the necessary capabilities, circular solutions: once a tracking system
will ease widespread adoption. Most or a collection system is in place, additional
118 Frost & Sullivan, “Sustainable
and Innovative Personal Transport importantly, there are social networks now volumes come at very low extra cost—the
Solutions—Strategic Analysis of that can mobilise millions of users around a ‘internet principle’. We also see a ‘backlog’ of
Car sharing Market in Europe”,
research report, January 2010 new idea instantaneously—from motivating existing technology, design, and contractual
119 http://www.zeit.de/2011/51/
consumer awareness to facilitating concrete solutions that has existed for some time and
Meins-ist-Deins action (e.g.,‘Carrotmobs’). that can now easily multiply as input-cost


ratios and demand pass critical levels. The Roadmap towards 2025—Rapid pioneering
mining houses are demonstrating how new and broad-based mainstreaming
technologies and the need to address overall
ore grade erosion can accelerate circular The pioneering phase
businesses: Anglo-American and others
are now developing businesses based on Recent decades have served to confirm the
processing materials previously considered technical viability of circularity for a large
mining wastes, such as tailings and fractions number of products and service models. The
of the overburden. Some companies are next five years will be the pioneering phase
taking this a step further by designing their in which circularity’s commercial viability
production processes in a way that enables must be proven more widely. Customers
them to reap additional rewards from the and producers could capture the savings
products they produce when they return opportunity of the ‘transition scenario’ if their
after their first usage period. Desso, the conduct shifts sufficiently (across all three
Dutch carpet manufacturer, offers carpets sectors), as outlined in previous chapters.
today that will be easier to regenerate and For Europe alone, the material savings could
reuse more cost efficiently when they return well be in the order of magnitude associated
in the years to come. with our transition scenario of 12 to 14%,
worth USD 340 to 380 billion per annum120
These factors will make it hard to predict with (net of material expenditures during the
any certainty how quickly principles of the reverse-cycle process). As they capture
circular economy will become mainstream. these benefits, industry pioneers will build
Different times to impact will prevail: some competitive advantage in a number of ways:
products have long cycles, some do not. And
some companies can start off circulating Companies will build core competencies
a stockpile of returned goods, end-of-life in circular design. Circular product (and
products, and process wastes; others need process) design requires advanced skills,
to recover these resource volumes first and information sets, and working methods
wait for improved designs to unlock the full that today are not readily available. Whilst
potential of ‘going circular’. Still, we could much of the ‘software’ for the transition such
imagine that circularity will take hold in two as cradle to cradle and the performance
distinct phases. economy has been on the drawing board
and in development by thought leaders for
During a pioneering phase over the next some time, this knowledge must be brought
five years, we would expect entrepreneurial into the production environment, debugged,
companies to scale up circular models from refined, and rolled out into commercially
their piloting state, largely relying on the viable solutions at scale. At the process level,
existing market environment (with today’s the core of the process design challenge is
input cost ratios, pioneer customers, and likely to be the need to overcome internal
producer responsibility legislation) and their incentive mismatches (such as those
own capabilities, especially around making between organisational units measured on
rapid changes to their end-of-life treatment, their success in driving new product sales
service model innovation, and product and other units aiming to reduce material
designs. During the mainstreaming phase consumption through remanufacturing and
thereafter, towards 2025, when we would remarketing of used products).
expect the economy to have developed more
cross-sector and cross-chain collaboration, Companies will drive business model
built up a reverse infrastructure, and put in innovation, explore new service models, and
place favourable regulation, we will see a challenge today’s orthodoxies of ownership-
proliferation of offerings—possibly to the driven consumption: ‘Forget ownership, it is
point that users have a true ‘circular option’ performance that counts’. Turntoo perceives
for all important product categories. ownership as a key element to achieve
the preservation of resources. ‘By shifting
consumer perception from products to
performance, manufacturers are challenged
120 See also ‘Examining the
benefits EU-wide’ and Figure 18 to approach their products as ‘resource


Continued

depots’ and the raw materials will remain net of the expenditures on material during
available for future generations’. Treating the reverse-cycle process. To realise this
material usage as a service allows companies potential, however, more transformational
to benefit over time from improved material action is needed on the part of the corporate
productivity and product longevity, which sector working jointly with government.
would not be rewarded in today’s short- Advancing the current taxation, regulatory,
term price competition at the time of sale. and business environment to support
Business model innovation will also include pervasive adoption of the circular economy
collaboration across value chains to establish will require joint effort to foster cross-chain
materials standards and information flows collaboration, develop collection systems
that support circularity. We see a variety of at scale, redirect marketing efforts, provide
steps companies are likely to take to help education, and involve service industries
drive this innovation. First, companies with (such as the financial sector).
significant market share and capabilities
along several vertical steps of the linear Although we see businesses themselves
value chain could play a major role in driving as the primary driver of a shift towards
circularity into the mainstream by leveraging circularity, the public sector may also have
their scale and vertical integration, much as a role to play. Specifically, governments can
any other business might. Whilst many new help stimulate fast-track adoption of circular
models, materials, and products will have business opportunities by adjusting the
to come from entrepreneurs, these brand enablers to shift the rules of the game. ‘The
and volume leaders can also play a critical government/regulatory approach’ typically
role. Secondly, we envision ‘missing link’ can be further broken down into different
roles where smaller firms will find market plays:
opportunities—for instance, Turntoo’s ‘market
maker’ role—facilitating new relationships Organising re-markets (and fighting
between producers and consumers who are leakage). Today, ‘reverse cycles’ are
interested in pay-per-performance models. significantly impaired by the high cost
(and low convenience) of collection, lack of
Jointly, pioneering companies will create aggregation facilities, and leakage from the
the capacities for the reverse cycle. Current system through subsidised incineration or
infrastructure is not well equipped to fulfil undue exports to emerging economies where
the requirements of the circular economy. In materials are often downcycled using low-
addition, Europe would need to build up or cost labour, typically with high losses and
strengthen current remanufacturing skills, under poor working conditions. Achieving
‘re-logistics’ (return or reverse transport and scale in collection is critical and will benefit
handling), storage, and information transfer from appropriate landfill gate fees, minimum
capacities to keep materials and components return or collection quotas, and efficient
identifiable as they cycle through different collection rules.
uses and applications. Pursuing pioneering
strategies focused on both sector-wide Rethinking incentives. Taxation today
solutions (e.g., within advanced industries) largely relies on labour income. Resource
and regional solutions (e.g., shared collection and labour market economists have long
schemes within Europe, a single country, or argued that labour as a ‘renewable factor
even a large metropolitan area like London input’ is currently penalised over material
or Paris) is likely to yield the fastest proof and non-renewable inputs in most developed
of concept and highest return by exploiting economies. They promote a shift of the
economies of density and local scale. tax burden away from labour/income and
towards non-renewable resources.
Towards 2025: The mainstreaming phase
Igniting innovation and entrepreneurship,
There is a chance for circularity to go stepping up education. Circularity will
mainstream and to capture (or exceed) the come as a bottom-up revolution, a natural
benefits of the ‘advanced scenario’ in the response/defence as the resource cost
121 See also ‘Examining the
range of 19 to 23%, which is equal to about squeeze and volatility intensify. But such new
benefits EU-wide’ and Figure 18 USD 520 to 630 billion p.a. in Europe121 alone, products and businesses will take hold faster


if entrepreneurship and venture investment some countries. In the U.K., for instance, an
are welcomed and supported. Strengthening organisation called the Waste & Resources
the education of future generations of Action Programme, or WRAP, aims to bring
entrepreneurs, designers, chemical and community leaders and government leaders
industrial engineers, of procurement officers, together to improve resource efficiency
and product managers, will be critical to across the country.
completely rethink and overturn today’s
linear world. How to get started? Five ideas on how
pioneers could drive the circular economy
Providing a suitable international set of to breakthrough
environmental rules. In the least intrusive
way, government and public sector entities While the above suggestions focus on the
can help to foster cross-chain collaboration broader transformation of the economy as a
by establishing standards and guidelines. whole, we are putting forward five specific
Product labelling is an important lever to ideas worth pursuing as they are likely to
ensure proper treatment in the reverse loops drive benefits rapidly for the pioneers in
regarding non-toxicity, purity, or handling the public and private sectors and might
issues.122 Another is to phase out (toxic) allow them to get a head start on building
chemicals that—if blended into waste— competitive advantage:
significantly impair recycling or reuse of a
much larger set of products and materials. Tightening circles along your own supply
Finally, governments should re-examine chain. Firms with strong influence and
certification programs to enable new ways of control over their current supply chains (e.g.,
confirming the viability or safety of circular in automotive, consumer electronics, trading
products. As one example, no certification organisations and retailers) and those that
guideline currently exists for second-hand exchange large volumes of products with a
wind towers, so verification bureaus typically limited set of business partners (e.g., B2B
cannot certify them—a major barrier to interfaces in the machining, manufacturing
growth in the secondary market, given or chemical sectors) could map out the
the liabilities incumbent in operating an leakage points of their current linear set-ups
uncertified used wind tower. and apply their clout to move others in the
chain towards tighter circular setups. Desso,
Leading by example and driving scale up for example, managed to convince suppliers
fast. There are also many opportunities for to comply with its higher standards of non-
governments to use their own procurement toxicity and purity of materials, necessary
and material handling to accelerate the to allow it to achieve higher recycling rates
spread of circular setups. In the U.S., the for its carpet tiles and to keep material in
policy to move towards procurement of the technical nutrient loop longer. Renault,
performance-based services (rather than in another example, aims to strengthen its
products) has created a market of significant reverse supply chain by helping is vendors
scale. In its convenor or ‘matchmaking’ develop skills, redistributing margins along
role, a government can initiate concerted the chain, and hence rendering the business
efforts among different companies in model more viable for all players, and
the value loops that are large enough to providing a more reliable outlet for recovered
overcome diseconomies of scale. One materials and components. In Europe,
example is in phosphorus markets, where potential capability gaps (in collection and
122
Knowing what is included in
a few governments have started actively sorting, for instance) can be overcome for
a product is vital information trying to help businesses extract value from many types of products by tapping into
to ensure proper treatment
or even completely avoid sewage sludge. In Germany, for instance, the reverse logistics and rapidly expanding
complex separating procedures the Federal Environmental Office recently the capability set of ‘waste management’
altogether, especially for
plastics, which are extremely announced a goal of retrieving phosphorus firms—making ‘resource management’ a more
hard to distinguish without
labelling due to similar product
from sewage, and Sweden set up an action appropriate label for their activities. On this
density and chemical and plan in 2002 aimed at recycling 60% of front, Renault has chosen to partner with
physical properties.
phosphorus, mainly through making sewage Suez Environnement/Sita in order to provide
123 available for reuse.123 There may also be a role access to a steady supply of components and
McKinsey research on sludge
monetisation for intermediate, ‘convener’ institutions in materials.


Continued

Looking for like-minded players in the sector Leverage your individual and collective
could then easily allow for national industry market clout. As the case examples have
consortia to emerge fast, as firms are facing shown, there are many nascent ideas on how
similar pressures at parts of the value chain to innovate and serve users better in the
that do not necessarily lead to conflicts of future with new offerings based on circular
interests or competitive gamesmanship (like economic business models. Individuals,
forming national or regional consortia to deal companies, and customers can now fast-
with the ever-increasing volume of electronic track adoption by exercising their right of
waste). This concern is expressed in public choice to demand, take up, and—jointly with
opinion polls and consumer surveys, and is the provider—continually improve products
reflected in new interest in above-ground and services. Why not ask for a lease-based
‘urban’ mining for scarce and valuable or performance-based model when you next
materials and components. consider purchasing furniture for home or
office, restocking machinery assets or vehicle
Catch the wave at the start. We are at the fleet, upgrading IT and the communications
beginning and will see the formation of system, or expanding and adjusting a
a number of new industries and product building portfolio? Governments can lend
categories that will transform the economy the full weight of their collective purchasing
by themselves. Free of pre-defined power to supporting circularity initiatives
structures, such as established design and de-risking the critical initial phase for
principles, processes, and disposal routes pioneers of the circular arena.
encrusted in brick and mortar or contract
interfaces in silos, several entire industries Build matchmaker businesses and profit
(e.g., the solar panel industry) or emerging from arbitrage. As laid out in the report,
product platforms (such as those for electric there is plenty of low-hanging fruit for the
or lightweight vehicles and car batteries) first movers in adopting circular setups at
have a one-time opportunity to embed a profit. For example, Turntoo’s ‘market
circular principles right from the design stage maker’ business model aims to facilitate
of the product, via material choices, through new relationships between the producers of
the establishment of service-based delivery material-based products (such as lighting
models, right up to the optimised setups for systems) and users simply interested in
circular reverse cycles. performance (in this case, light hours) to
establish a simple method for determining
Activate your (local) community. As last-mile prices that gives both the users and the
distribution, consumption, and disposal are suppliers an incentive. They are capitalising
typically fairly local activities, communities on the new transparency of the web and
should follow the example of municipalities eroding transaction costs. This business
like Seattle—which collaborated with the model not only provides Turntoo with a profit
food retailing sector to introduce biological- stream but also boosts circular business.
nutrient-based packaging to increase the
purity of communal food waste streams. Moving away from wasteful material
Community members could rapidly establish consumption patterns could prove to be the
local pilot applications of collaborative start of a wave of innovation no less powerful
cross-sector participation to further provide than that of the renewable energy sector. It
tangible proof of concept and important offers new prospects to economies in search
test beds for debugging and refining circular of sources of growth and future employment.
setups prior to national/international rollouts. At the same time, it is a source of resilience
Activities among small and medium- and stability in a more volatile world.
sized businesses in local clusters (e.g., the Its inception will likely follow a ‘creative
machining cluster in Southern Germany, destruction’ pattern and create winners
and chemical clusters in central Europe) and losers. As well as long-term benefits,
could represent similar starting grounds for the circular economy also offers immediate
community-based activities. opportunities that are waiting to be seized.


The concept of a ‘closed-loop’ economy The Ellen MacArthur Foundation
has intrigued academics, designers, and
marketers alike. The intellectual appeal of the The Ellen MacArthur Foundation is
concept might be related to the tangibility committed to identifying, convening, and
of the natural systems analogy or to its motivating the pioneers of the circular
reframing power in a world dominated by the economy. The Foundation provides the
linear supply chain paradigm. Or it might owe fact base and study repository, shares best
its appeal to the fact that it links the debate practices and excites and educates the next
around employment and growth with that generation. In this way, it helps to bring down
around resource security and sustainability. the barriers and create the leadership and
In fact, it offers a promising avenue for momentum that this bold vision deserves.
corporate leaders to escape the perennial
trade-off between growth and resource
protection.

The data and the case examples presented
do indeed indicate that the circular
economy—if executed—promises to
reconcile prosperity and sustainability and
to overcome these inherited trade-offs. The
report, however, also identifies the significant
gaps in our current understanding. The
concrete GDP and employment effects per
sector and region are the more obvious
knowledge gaps. Both of these topics will be
the subject of further study and analysis by
EMF and its partners.

One element of the circular economy,
however, seems largely undisputed: It helps
to minimise the economic impact of resource
scarcity. In light of history’s most dramatic
resource demand shock and emerging signs
of scarcity, improving the productivity of
materials and natural resources is a crucial
competitive response at company level and
self-preserving reflex at market level. For
these reasons, governments and companies
have started looking at the circular model not
only as a hedge against resource scarcity but
also as an engine for innovation and growth.
This report suggests that this opportunity is
real and is opening a rewarding new terrain
for pioneering enterprises and institutions.

This report is, however, just the start of
a mobilisation process—we intend to go
deeper into different products and sectors,
assess the business opportunity in more
detail, identify roadblocks and provide the
tools to overcome them, and understand the
macroeconomic effects in more depth.


‘Even if you do not believe in a sustainability agenda, the
efficiency gains of managing (circular) material flows should
convince you to go after this potential.’
National Grid

‘We’re proud to be a founding partner of the Ellen MacArthur
Foundation because we believe that the circular economy offers a
solid concept on which we can base our thinking for our potential
future business model. Resource scarcity is a real issue for any
business and the threats outlined in this report are very real.
Whilst we are only in the very early stages of exploring what we
can do to move us towards circular models, our initial exploration
confirms that this thinking could have substantial potential but
would undoubtedly require us to extend our thinking beyond our
current core competencies.’
B&Q

‘While not every product is appropriate for refurbishment, it
seems highly likely that nearly all big companies will have parts of
their product portfolio where circular business practices will prove
profitable.’
Cisco

‘Waiting for industry-wide coordination will not work. But as
there is so much low-hanging potential already at company level,
why wait? There is substantial first-mover advantage, especially
if you are open to take back materials/products from your
competitors.’
Desso

‘Nothing is impossible, particularly if it is inevitable’
Herman Mulder
Chairman of the Global Reporting Initiative


Appendix

Value drivers and assumptions of our in-depth product analysis
The objective of our in-depth case studies was not to explore technical or theoretical maxima, but
to validate that—with small changes to the ‘status quo’ in terms of technology, design, and reverse-cycle
capabilities—circular business models could produce attractive economic returns at product level. The
results we observed across different products, picked from different sectors, provided us with orders of
magnitude that we could use to scale up our results, first at the level of the market for a specific product
(as outlined in the ‘The Circulatory Calculator’ sidebar in Chapter 3), then at the EU economy level across
a specific portion of the manufacturing sector (see ‘Examining the benefits EU-wide’ in Chapter 4) and,
finally, in the case of steel/iron ore, at a global resource level, also described in Chapter 4 under the
heading, ‘Mitigation of price volatility and supply risks’. Our intent was to validate that adopting circular
business models would a) bring changes that are substantial and worth pursuing and b) drive lasting
structural shifts (e.g., in terms of shifting material demand and usage run rates, as illustrated in Chapter 2 in:
‘Long-term effects of circularity on material stocks and mix’).

The following section, which is intended to help elucidate the mechanics of our analysis, comprises a
high-level value driver tree, a compendium of the core assumptions regarding input values and likely
improvement levers, the resulting outputs of our in-depth diagnostics at cost item level, and descriptions
of the assumptions we make about what a circular system would entail in terms of collection and reverse
treatment rates for each of the products we examine.

The value driver tree in Figure 24 depicts the architecture of our model. Figure 25 outlines specific input
parameters and underlying assumptions regarding collection and reverse treatment rates. Figures 26
to 30 provide detailed information on the product-level economics of primary production and circular
activities.

The output of the driver tree is an estimate of net material cost savings, as a percentage of total input
costs, in the market for a specific product. Comparing this measure across several products gives us
a range for relative net material savings potential—which we then consider in order to estimate the
collective impact on our selected manufacturing sectors at the EU level.

In order to understand the effects of all specific treatment options, we explicitly chose products with
different opportunities for reverse-cycle treatment. This allowed us to cover all types of circular setups in
depth.

As we constrained the adoption of circular treatment processes (i.e., reuse, refurbishment,
remanufacturing) to certain limits in the ‘transition’ and ‘advanced’ scenarios, we used recycling as
the alternative treatment option for any products that were collected at end of life but not reused,
refurbished, or remanufactured. The overall collection rate, then, limits the total amount of products
treated along the reverse cycle. We assume that products not collected are landfilled—so, with exception
of the cascading case examples in the biological nutrient section in Chapter 3, we do not assume
additional benefits from waste-to-energy processes.

While we assumed an aggressive collection rate in the ‘advanced scenario’, we left this rate shy of 100%
in order to account for some losses; similarly, we assumed only one product cycle, where for some
products multiple cycles might be possible—and would presumably heighten the economic benefits
of circularity; finally, we factored out the possibility of substantial material or product innovations that
could potentially lead to much improved longevity of products or higher preservation of material quality.
The ‘advanced scenario’ only attempts to capture the effect of a high structural proliferation of the
circular economy in terms of collection rates and reverse treatment rates, while allowing further leakage,
which will be unavoidable (given the second law of thermodynamics, i.e., the dissipation towards
entropy).

In order to ground our analysis in current realities, we conducted extensive market-level research
through interviews with relevant partners from industry and academia. Our objective was to ensure
that the assumed improvement levers from the linear ‘status quo’ towards the circular ‘transition’ or
‘advanced’ scenario are individually technically feasible, commercially viable, and collectively sufficient
to describe a consistent new circular operating model.


Appendix

FIGURE 24 Driver tree: Factors affecting net material cost savings as a percentage of total input costs

Refurbishment/
reuse Material cost saved:
material cost of
Net material primary production
Refurbishing/
reuse rate1 X cost savings per
product Material cost in
refurbishment/
reuse process

Remanufacturing Material cost saved:
value of reused
Weighted net Net material
Remanufacturing components
material cost
savings per
+ rate1 X cost savings per
product Material cost in
product
remanufacturing
process

Net material cost Recycling Material cost saved:
savings in market X Net material value of recycled
p.a. Recycling rate 1
cost savings per materials
X
product
Material cost in
recycling process

Net material
cost savings as Collection rate
percentage of Collected end-
total input costs in of-life
X
market p.a products p.a.
Number of
end-of-life
products p.a.

Number of products
Total input costs put on market p.a.
in market p.a. X
Key drivers in
Number of end-of- circular business
life products p.a. practices

1 Rates as percentage of collected products; add up to 100%


Appendix

FIGURE 25 Scenarios for more collection and circular treatment rates in Europe

Scenario End-of-life Collected Reused Refurbished Remanu- Recycled Components and business model, transition and
products Percent Percent1 Percent 1 factured Percent1 advanced scenario
million p.a. Percent 1

Mobile Status quo 190 15 38 – – 62 • Improved circular capabilities (products designed for
phone disassembly, firms improve reverse-cycle skills)2 enable
higher remanufacturing rates in transition
Transition 190 50 38 – 41 21 • Deposit, leasing and buy-back systems push collection
rates closer to proposed EU 2016 target of 65% in
transition, and beyond that in the advanced scenario
Advanced 190 95 50 – 50 0 • Industry-wide efforts establish comprehensive
collection and treatment systems in advanced scenario

Smartphone Status quo 13 20 – 38 – 62 • Improved circular capabilities (modular design and
(B2B) material choice)2 foster refurbishment in transition
• B2B buy-back systems and software for wiping user
Transition 13 50 – 60 – 40 data push collection closer to proposed EU 2016 target
of 65% in transition (beyond that in advanced scenario)
• Joint vendor-supplier reverse supply chains, intra-firm
Advanced 13 95 – 50 – 50 alignment and regulation further increase collection
rates in advanced scenario

Light Status quo 1.5 86 – 0 – 100 • Improved circular capabilities (products designed for
commercial disassembly, firms improve reverse-cycle skills)2 enable
vehicle3 higher refurbishment in transition scenario
Transition 1.5 86 – 30 – 70 • Warranty offerings and proactive marketing measures
reduce customer concerns about refurbished products
• OEM/sector initiatives promoting circular production
Advanced 1.5 86 – 50 – 50 R&D foster refurbishment in the advanced scenario

• Improved circular capabilities (pooled, OEM-centric
Washing Status quo 2.34 40 – 10 – 90 circular activities)2 boost refurbishment in transition
machine • Transparent ‘win-win’ leasing contracts result in
increased collection, controlled by manufacturers
Transition 2.34 65 – 50 – 50 • Specialised intermediaries enable alternative
ownership models on larger scale in advanced
scenario
Advanced 2.34 95 – 50 – 50

1 Rates as % of collected products; add up to 100%
2 See detailed description in figures 27 to 30
3 Collection and treatment rates based on end-of-life products
4 Refers only to selected premium segment of washing machine market; total end-of-life washing machines would amount to ~20 million p.a.

SOURCE: Gartner statistics on mobile device sales, February 2011; Yankee statistics on mobile device sales, September 2011; U.S. Environmental Protection Agency
(EPA), Electronics Waste Management in the United States Through 2009, EPA working paper, May 2011; Eurostat, WEEE key statistics and data, 2011; Jaco Huisman
et al., 2008 Review of Directive 2002/96 on Waste Electrical and Electronic Equipment – Final Report, United Nations University working paper, August 2007; Georg
Mehlhart er al., European second-hand car market analysis, Öko-Institut working paper, February 2011; Eurostat, ELV waste database, 2011; Eurostat, WEEE key statistics
and data, 2011; CECED, Joint position paper on WEEE recast second reading, CECED position paper, July 2011; Euromonitor, houshold appliances statistics, 2011; Ellen
MacArthur Foundation circular economy team


Appendix

FIGURE 26 Overview of selected products—prices and costs in linear production

Mobile phone1 Smartphone1 Light commercial vehicle1 Washing machine1

USD Percent USD Percent USD Percent USD Percent

Price2 36 100% 400 100% 41,400 100% 970 100%

Input costs3 27 75% 228 57% 39,730 96% 832 86%

Material 16 44% 128 32% 22,760 55% 437 45%

Labour 2 6% 29 7% 4,140 10% 223 23%

Energy 2 6% 2 1% 680 2% 18 2%

Other4 7 19% 69 17% 12,150 29% 155 16%

1 Data is a standardised composite blend of 3 to 7 products
2 Excluding VAT and retail margin
3 Costs in final production; energy and labour costs in upstream activities partially embedded in material
4 Other includes SG&A; also includes R&D costs for light commercial vehicles

SOURCE: Credit Suisse, ‘Smartphone report’, broker report, August 2009; Bloomberg financial data; Pranshu Singhal, Integrated product policy pilot project, stage I
final report: life cycle environmental issues of mobile phones, Nokia report, April 2005; Ina Rüdenauer et al., Eco-Efficiency Analysis of Washing Machines, Öko-Institut
working paper, November 2005; Ellen MacArthur Foundation circular economy team


Appendix

FIGURE 27 Mobile phones: Economics of circular business activities

USD per product1, status quo and transition scenario

Reuse Remanufacture Recycle

Status quo Transition Status quo Transition Status quo Transition

Recoverable value 22.8 22.8 5.0 5.6 3.1 3.6

Treatment costs

Collection and transport 1.0 0.8 1.0 0.8 1.0 0.8

Buy-back 9.1 9.1 0.0 0.0 0.0 0.0

Screening 1.9 1.4 1.9 1.4 1.9 1.4

Activity specific process 0.0 0.0 3.5 1.0 0.2 0.2
(disassembly or recycling)

Cleaning and quality 2.0 2.0 0.0 0.0 0.0 0.0

Other 2.6 2.6 0.0 0.0 0.0 0.0

Material costs 0.0 0.0 0.0 0.0 0.0 0.0

Profit 6.2 6.9 -1.4 2.5 0.1 1.2

Net material cost savings 16.0 16.0 7.0 7.6 3.1 3.6

Improvements in product design • 130 seconds efficiency gains and yield improvement to 95% (from 70%) in
and reverse cycle skills disassembly process through standardised size of displays and cameras and
clip hold assembly

• Contributing to recycling yield improvement from 80% to 95% for metals,
through standardised material choice and improved recycling technology
(e.g., “pre-shredder” separation)

• 60% time savings in pre-processing through semi-automated pre-
processing (screening)

• 25% cost savings in transportation through optimised collection point
locations and bundled transport to processing facilities

1 Basic mobile phones selling at USD 30 to 80 before VAT with average lifetimes of around 2.5 years

SOURCE: Roland Geyer and Vered Doctori Blass, ‘The economics of cell phone reuse and recycling’, International Journal of Advanced Manufacturing Technology, 2010,
Volume 47, pp. 515-525; Joaquin Neira et al., End-of-Life Management of Cell Phones in the United States, dissertation University of California at Santa Barbara, April
2006; J. Quariguasi Frota Neto et al., ‘From closed-loop to sustainable supply chains: the WEEE case’, International Journal of Production Research, 2010, Volume 48, pp.
4463-4481; Ellen MacArthur Foundation circular economy team


Appendix

FIGURE 28 Smartphones: Economics of circular business activities


Refurbish Recycle

Status quo Transition Status quo Transition

Recoverable value 218.2 218.2 5.3 6.3

Treatment costs

Collection and transport 1.2 1.2 1.2 1.2

Buy back2 21.8 21.8
0.0 0.0
Screening 4.0 3.0
4.0 3.0
Activity specific process
(refurbishment or recycling) 14.9 10.4 0.2
0.2
Cleaning and quality 1.2 1.2 0.0
0.0
Other3 25.1 25.1 0.0
0.0

Material costs 45.1 42.9 0.0 0.0

Profit 126.7 112.6 0.0 2.0

Net material cost savings 83.0 85.0 5.3 6.3

Improvements in product design • 50% cost reductions in refurbishment process (excluding material) through
and reverse cycle skills reduced use of adhesives, modular assembly in production phase

• 20% less need to replace casing through more robust, high quality
materials in production process

• Contributing to recycling yield improvement from 80% to 95% for metals,
through standardised material choice and improved recycling technology
(e.g., “pre-shredder” separation)

• 25% cost reductions in initial screening process through fault-tracking
software

1 B2B smartphones selling at USD 300 to 600 before VAT with average lifetimes of up to 3.5 years
2 Introduction of buy-back scheme is a lever to increase collection and refurbishment rates. On a strict product level it is associated with additional costs
3 Other includes remarketing and selling costs, which are driven by recoverable value

SOURCE: Credit Suisse, ‘Smartphone report’, broker report, August 2009; Bloomberg financial data; Roland Geyer and Vered Doctori Blass, ‘The economics
of cell phone reuse and recycling’, International Journal of Advanced Manufacturing Technology, 2010, Volume 47, pp. 515-525; Joaquin Neira et al., End-of-
Life Management of Cell Phones in the United States, dissertation University of California at Santa Barbara, April 2006; J. Quariguasi Frota Neto et al., ‘From
closed-loop to sustainable supply chains: the WEEE case’, International Journal of Production Research, 2010, Volume 48, pp. 4463-4481; Ellen MacArthur
Foundation circular economy team


Appendix

FIGURE 29 Light commercial vehicles: Economics of circular business activities


Refurbish Recycle


Recoverable value 13,796 13,796 1,174 1,174

Treatment costs

Collection and transport2 0 426 0 0

Buy-back 7,366 7,366 0 0

Screening 13 0 13 13

Depollution 42 0 42 42

(refurbishment or recycling) 1,044 3193 472 472

Other4 2,070 2,070 0 0

Material costs 4,150 2,448 0 0

Profit -889 1,167 648 648

Net material cost savings 18,613 20,316 1,174 1,174

Improvements in product design • 33% decrease in refurbishment time realised by
and reverse cycle skills - Engine modularisation, wider design of engine bay (increased accessibility
of connection points such as screws and plugs), usage of quick fasteners
- Process standardisation, workflow optimisation, and specialisation in
dedicated refurbishing centers (would typically be located centrally within
the OEM’s dealership and service network)

• 40% decrease in material cost for refurbishment as centrally located, OEM
related refurbishing centers can source spare parts at reduced cost

1 Representative light commercial vehicle with an average lifetime of around 8 years in the EU (500-700 thousand kilometres)
2 Collection and transport costs only in transition state for refurbishment as this includes the transport to centralised refurbishment facilities
3 Includes costs for screening and depollution
4 Other includes SG&A costs, which are driven by recoverable value

SOURCE: Georg Mehlhart er al., European second-hand car market analysis, Öko-Institut working paper, February 2011; Eurostat, ELV
waste database, 2011; GHK, A study to examine the benefits of the End of Life Vehicles Directive and the costs and benefits of a revision
of the 2015 targets for recycling, reuse and recovery under the ELV Directive, GHK report, May 2006; Ellen MacArthur Foundation circular
economy team


Appendix

FIGURE 30 Washing machines: Economics of circular business activities


Refurbish Recycle


Recoverable value 560 560 38 38

Treatment costs

Collection and transport 12 12 12 12

(refurbishment or recycling) 80 80 14 14
2
Other 80 80 0 0

Material costs 297 161 0 0

Profit 93 228 12 12

Net material cost savings 140 275 38 38

Improvements in product design 40% decrease in material cost for refurbishment through pooled
and reverse cycle skills (OEM centralised) circular activities, as spare parts would not be
subject to high trade margins currently observed

1 Premium washing machine selling above USD 900 before VAT with average lifetime of 10,000 washing cycles
2 Other includes SG&A and other operating expenses

SOURCE: Adrian Chapman et al., Remanufacturing in the U.K. – A snapshot of the U.K. remanufacturing industry; Centre for
Remanufacturing & Reuse report, August 2010; Erik Sundin, Product and process design for successful remanufacturing, Linköping
Studies in Science and Technology, Dissertation No. 906, 2004; Ina Rüdenauer and Carl-Otto Gensch, Eco-Efficiency Analysis of
Washing Machines , Öko-Institut working paper, June 2008; Ellen MacArthur Foundation circular economy team


Experts consulted for the
analysis and reporting

Corporate experts
B&Q Zhanna Serdyukova
Matt Sexton Environmental Sustainability Consultant
Director of Corporate Social Responsibility Yasunori Naito
Roy Miller Manager, Environmental Management
Sustainability Manager – Products
OPAI
Caterpillar Douwe Jan Joustra
Greg Folley Managing Partner
Vice President with responsibility for the
Turntoo
Remanufacturing and Components division
Sabine Oberhuber
Cisco Managing Partner
Neil Harris
Turntoo and RAU
Head of Sustainability, Europe
Thomas Rau
Ian Redfern
Founder – Director – Architect
Development Director
Conrad Price Vestas
Product Manager Voice Rob Sauven
Technology Group Managing Director Vestas Technology UK ltd
Alastair Borissow
General Manager EMEA Remarketing
Academic experts
John Malian
Product Environmental Sustainability Program Advanced Sustainability LLP
Manager Chris Tuppen
Founder and Senior Partner
Cyberpac
John Hensley Biomimicry 3.8
Founder Chris Allen
Claire Black CEO
Sales & Production Manager Collaborative Consumption
Desso Lauren Anderson
Stef Kranendijk Innovation Director
CEO EPEA
Rudi Daelmans Michael Braungart & Douglas Mulhall
Sustainability Director Representatives of the Academic Chair,
Foresight Group Cradle to Cradle for Innovation and Quality
Andrew Page Rotterdam School of Management, Erasmus
Partner University, as well as EPEA Internationale

Umweltforschung
ISE Appliances
John Hopwood Product-Life Institute
Managing Director Walter R. Stahel
Founder-Director
Marks & Spencer
Carmel Mcquaid Rochester Institute of Technology
Climate Change Manager Nabil Z. Nasr
Dr Mark Sumner Assistant Provost for Academic
Sustainable Raw Materials Specialist Affairs & Director

National Grid University of Cambridge
Steve Wallace Peter Guthrie OBE
Head of Climate Change and Environment Professor & Director for Sustainable
Craig Dikeman Development and Head of the Centre for
Director of Inventory Management & Investment Sustainable Development
Recovery University of Surrey
Marcus Stewart International Society for Industrial Ecology
Future Distribution Networks Manager Roland Clift CBE, FREng
Additionally, a number of Roger Aspin
experts and practitioners Professor of Environmental Technology
from various sectors (e.g., Head of Logistics and Founding Director of the Centre for
consumer goods and Environmental Strategy
Renault
retail; financial sector;
logistics; motor vehicles; Jean-Philippe Hermine Executive Director
other transport; public VP Strategic Environmental Planning
sector; radio, TV, and University of York
communication; textiles; Ricoh Europe James Clark
waste management) have Olivier Vriesendorp Professor and Director of the Green
been interviewed.
Director, Product Marketing Chemistry Centre of Excellence for Industry


List of figures

1 Global resource extraction is expected to grow to 82 billion tonnes in 2020
2 We are still losing enormous tonnages of material
3 Construction and demolition (C&D): A noteworthy opportunity
4 Sharp price increases in commodities since 2000 have erased all the real price declines of
the 20th century
5 Price volatility has risen above long-term trends in recent decades
6 The circular economy—an industrial system that is restorative by design
7 The circular economy at work: Ricoh’s Comet Circle™
8 The impact of more circular production processes accumulates across several
layers of inputs
9 Cascading keeps materials in circulation for longer—textile example
10 A circular economy would not just ‘buy time’—it would reduce the amount of material
consumed to a lower set point
11A Mobile phones: Reuse and remanufacturing as a viable alternative to recycling
11B Mobile phones: Design changes and investments in reverse infrastructure could greatly
improve the circular business case
12A Light commercial vehicles: Refurbishment—a profitable alternative
12B Light commercial vehicles: Refurbishment is attractive for a large range of cases despite
demand substitution of 50%
13 Washing machines: Leasing durable machines can be beneficial for both parties
14 Biological nutrients: Diverting organics from the landfill to create more value
15 Building blocks of a circular economy—what’s needed to win
16 Transition to a circular economy: Examples of circular business model adoption
17 Increasing circular activities is a promising business opportunity for a variety of products
18 Adoption of circular setups in relevant manufacturing sectors could yield net material cost
savings of USD 340 – 630 billion per year in EU alone
19 A small reduction in demand would put downward pressure on both iron ore prices and
volatility
20 Employment effects vary across primary, secondary, and tertiary sectors of a circular
economy
21 Revamping industry, reducing material bottlenecks, and creating tertiary sector
opportunities would benefit labour, capital, and innovation
22 Refurbishment helps to overcome a dynamic where ‘weakest-link’ components define a
product’s life—example light commercial vehicle
23 The circular economy is creating a new ‘reverse’ sector
Appendix
24 Driver tree: Factors affecting net material cost savings as a percentage of total input costs
25 Scenarios for more collection and circular treatment rates in Europe
26 Overview of selected products—prices and costs in linear production
27 Mobile phones: Economics of circular business activities
28 Smartphones: Economics of circular business activities
29 Light commercial vehicles: Economics of circular business activities
30 Washing machines: Economics of circular business activities


About The Ellen MacArthur Foundation

The Ellen MacArthur Foundation was established in 2010 with the aim of inspiring
a generation to rethink, redesign, and build a positive future through the vision of
a circular economy, and focuses on three areas to help accelerate the transition
towards it.

Education—Curriculum development and in-service teacher training
Science, technology, engineering, maths, and design (STEM) are subjects that will
be at the heart of any transition to a circular economy. Equally crucial will be the
development of ‘systems thinking’—the skill of understanding how individual activities
interact within a bigger, interconnected world.

The Foundation is building a portfolio of stimulus resources to help develop these
skills, supporting teachers and establishing a network of education delivery partners
to enable scalable training and mentoring. A parallel development programme for
Higher Education has been established with a focus on supporting European business
and engineering institutions and linking them to best-practice business case studies
around the world. Currently, the Foundation is working to pilot, trial, and disseminate
a comprehensive education programme across the U.K. with a view to this being a
flexible, scalable model for use around the world. For more information, please visit the
Foundation’s website www.ellenmacarthurfoundation.org.

Communication—The opportunity for a redesign revolution
The Foundation works to communicate the ideas and opportunities around a circular
economy to key target audiences— educational institutions, business, and in the
public sector— using creative and social media. It believes that focusing on designing
a restorative model for the future offers a unique opportunity to engage an entire
generation when fused with the ability to transfer knowledge, co-create ideas and
connect people through digital media.

Business—Catalysing and connecting businesses
From its launch in September 2010, the Foundation has placed an importance on the
real-world relevance to its charitable programmes. Working with leading businesses in
key sectors of the economy provides a unique opportunity to make a difference.
B&Q, BT, Cisco, National Grid and Renault have supported the setup and development
of the new charity and continue to support its activities through a partnership
programme. In addition to working together with the Foundation to develop strategy
for a transition towards a circular economy business model, partners are also actively
supporting the Foundation’s work in education and communication.

In 2011, the Founding Partners supported ‘Project ReDesign’, a series of innovation
challenge workshops with 17-to-18 year old students across the U.K. The students were
asked to try their hand at designing products by intention to ‘fit’ within a system and
were able to interview Partners as business experts in their respective sectors. Winning
students have gone on to a series of internships within the businesses to learn more
about real-world design solutions for a circular economy.

Cross-sector collaboration will accelerate transition. To encourage this, the Foundation
has established a Knowledge Transfer Network for businesses, experts, consultants,
and academics. To register your interest and get connected please visit
www.thecirculareconomy.org

Ellen mac arthur foundation towards the circular economy vol.1

Ellen mac arthur foundation towards the circular economy vol.1

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Ellen mac arthur foundation towards the circular economy vol.1