circular economy

Redrawing economics: circular economy

10 aprile 2020 -

Every year, humans consume way more than the planet has to offer in terms of biological and mineral resources. The day we exceed nature’s budget for the year is called Earth Overshoot Day and, according to the Global Footprint Foundation, we systematically reach it way before we should. Modern capitalist economies are designed for economic growth and the fuel of this growth is consumption. The problem is obviously that the natural resources to consume on our planet are limited.


Besides, the way we extract these resources is destroying natural environments and making the Earth unable to satisfy the needs of a growing population. It is also clear that the waste produced is already a serious problem since landfills have limited capacity and most of the solutions involving combustion raise obvious environmental concerns.

In some disciplines such as resource and environmental economics researchers are starting to develop models to tackle these issues from a theoretical point of view. In the meantime, economic agents in the real world are starting to change their behavior slowly but consistently towards the so called “circular economy”. This is happening because many companies are starting to worry about the risks associated with the current linear economic system, such as higher resource prices and supply disruption. Besides, consumers (in particular younger people) are orienting their behavior towards more eco-friendly choices, often preferring access over ownership, as we can see from the exponential growth of car sharing programs in Europe. It is then very rational to think that our economies will (hopefully) be shaped as circular in the future, so it is worth to understand how this alternative system works.


The idea of a circular economy is not only about recycling. According to a report published by Green Economy Observatory (GEO) of Bocconi University in 2015, circularity not only implies a better capacity to reuse the waste of consumption, but it also means to prevent the leakages at all the fundamental steps from the initial extraction of raw materials to the moment of the final recollection. The point is obviously to reduce the flux of natural resources coming from caves and ecosystems and then change the processes of design, production, each step. Ideally, the result will be an economic system that tends to get a decreasing percentage of resources from the planet while managing to reuse the biological and technical components of pre-existing products, since these are conceived for this purpose from the beginning. Some examples of possible best practices for businesses are the design of durable and reparable products, the systematic substitution of non-reusable materials and the promotion of markets for complementary by-products.


Another version of the “cradle-to-cradle” approach (which is opposed to the current “take-make-dispose” one) has been proposed by the Ellen MacArthur Foundation in another 2015 report. This circular economy model makes a distinction between consumable and durable components, separating the consumer from the user to better show the different product cycles (see picture below). Consumable components are mostly biological nutrients which should be ultimately returned to the biosphere through the creation of biochemical feedstock (which could be used by original parts manufacturers) or to the production of biogas energy. The technical components, instead, other than being reused as much as possible, should be returned to either product or parts manufacturers to be repaired, redistributed or refurbished many times. In this framework, consumers and users should just follow the correct recycling procedures, which is something that already happens in many countries in the world.


circular mechanism


The power of a circular approach allows to create value without the need of a constant and gigantic influx of virgin materials. But is it realistic to imagine firms replacing their business plans and consumers changing their habits so radically? Given the benefits that they would receive, yes. According to the MacArthur Foundation, companies could reduce significantly the marginal cost of materials by USD 340 to 380 billion per year in a transition scenario while benefitting from a mitigation of price volatility and supply risks. Besides, the sectoral shift coming from this ‘user-centric’ economy could create millions of jobs and consumers may observe better product quality without any increase in the final price thanks to reduced material bills. In general, global economy would become more resilient while allowing the planet to bear our heavy environmental footprint.


Furthermore, it is important to point out that, even if the incentives to abandon the linear economy are strong and we would expect any rational agent to follow them, the idea of leaving the transition in the hands of the free market’s “invisible hand” is clearly naïve. The global economic system is essentially based on a linear model of production and consumption, which makes the short-run profit mentality very resilient to radical changes. Public institutions at both national and supranational level must lead the way to reach this epochal transformation, providing the appropriate legal framework to guarantee the right balance between business opportunities, social well-being and environmental preservation.


In conclusion, with the correct political inputs, the circular economy is far from being an impossible goal, given its compatibility with economic growth and prosperity. Obviously, the process also needs a strong commitment of individual consumers, who must become finally aware that the planet is running out of the resources we all need to live and flourish.