Embracing The Circular Economy

Intermediate
  • The circular economy is built on sustainability
  • The aim is to design waste out of the system
  • It eliminates the impact of negative externalities
  • It drives energy efficiency and security

New Times, New Challenges

COVID-19 has destabilised both national economies and indeed the global economy.

Even as societies and businesses take steps to reopen, the global pandemic continues to pose significant problems. In the paper “Global Economic Prospects” [1] the World Bank Group suggest a baseline scenario of a 5.2% contraction in global GDP in 2020. This would mark a deeper contraction than that felt in 2009 in the aftermath of the global financial crisis of 2007/8, Figure 1.

Global GDP Growth

The world will emerge, into a post COVID-19 era and no nation can seriously believe it can return to business as usual. Many business models have been shattered and despite government furlough schemes there will be lost jobs and companies that will not be able to reopen their doors.

Many have remarked at how clear the skies have looked as international air travel has been curtailed. The atmosphere over certain cities that were once full of pollution has cleared as motor vehicle journeys and hence, emissions, have been curtailed. Such was the fall in the demand for oil that at one stage the oil futures for West Texas Intermediate May 2020 contract closed on its last day of trading at -$37.63/Barrel … yes it traded at a negative price! [2]

Rebuild, Reuse By Leaping From Linear Laziness

The Explorer, [3] reports that the world’s leader’s cannot simply think about getting their respective economies moving again by unleashing many rebuilding or new build infrastructure projects in such a way that will once again ignore the need of addressing climate or the environment in a dash for growth.

The journal estimates that almost 92% of the world’s resources i.e. concrete, metals, plastics, wood etc are only ever deployed for a single use before being discarded. It underlines how mankind has been too cavalier in exploiting easy access resources and then applied science and engineering to reach for what was once deemed inaccessible and uneconomic before recycling was entertained.

Such frivolous use of the Earth’s natural resources in a single use, linear fashion is, to say the least, wasteful. We say this when in fact many resources could be deployed in a loop, maybe a perpetual cycle of use and reuse in a way that could lead to sustainable economic development.

The Linear v The Circular Economy

The emerging consensus is that the entire world must undertake the transformation from the linear or Take-Make-Waste Systemand proactively seek the reuse of inputs so as to lay a path toward a thriving economy to benefit everyone on Earth, our rather fragile home.

The circular economy offers us a way to do just that by literally designing out waste. This means we can keep natural resources in use that will, over time allow the planet to heal and open a whole new range of commercial opportunities so creating new, sustainable and fulfilling employment prospects.

Saying No To Negative Externalities

The standard definition of a negative externality is a cost suffered by a third party because of an economic transaction.

In a transaction, the producer and consumer are the first and second parties; third parties include any agent or resource that is indirectly affected. These may also be known as spillover effects, and a negative externality is also referred to as an external cost which leads to a loss of welfare.

Some externalities, e.g. waste, arise from consumption while other externalities, say carbon emissions from factories, are the result of production.

Net welfare loss is seen in two situations.

  • When the marginal cost to society of an activity exceeds the marginal benefit to society – TOO MUCH IS PRODUCED
  • When the marginal benefit of an activity is greater than the marginal cost – TOO LITTLE IS PRODUCED

As an illustration, consider a manufacturer of steel who emits pollutants into the atmosphere. The free market equilibrium will occur when marginal private benefit = marginal private costs, (MPB = MPC) at output Q and price P. The market equilibrium is at point A. However, if we add external costs, the socially efficient output is Q1, at point B in Figure 3. At Q marginal social costs (at C) are greater than marginal social benefits (at A) so there is a net loss in social welfare.

Negative Externality and Welfare Loss

One can see that if steel is used just once before being scrapped and/or discarded, the demand for new steel use see the production activity generate a new level of welfare loss. The triangle “ABC” can be referred to as the Welfare Loss. If one were considering pollution it is easy to grasp how the planet will be affected as the land is scarred in the search for more iron ore and emissions are created in the transportation or the ore, the creation of new steel and the transportation to the various manufacturers of semi-finished and finished goods.

Building On The Concept

The Organisation For Economic Cooperation and Development (OECD) has provided a comprehensive assessment of the negative influences air pollution imposes, [4].

The OECD identified the key factors in mortality and health alterations arising from pollutant concentration of OECD and non-OECD countries. When there is no cooperation from the industrial operator and given the developing presence of global warming it is logical that combating air pollution requires more a realistic yet rigorous level of regulation.

There is a need to define the elasticity of marginal social benefit (MSB), marginal private benefit (MPB), marginal social cost (MSC), and marginal private cost (MPC) with respect to the scale of pollution so as to provide key information about surplus and deadweight loss.

Therefore, we need to construct a model of non-cooperative and cooperative behaviour, Figure 4.

Negative Externality and Welfare Loss In Non-Cooperative and Cooperative Behaviour

As a result, the socially optimal point resulting from cooperative behavior between the industrial operator and societywill be seen to occur at the intersection of the MSC and MSB.

For non-cooperative behavior, one can equate the functions represented by the MSC and MSB1 so as to attain a socially optimal outcome.

The circular economy assumes the move toward cooperative behaviour, this allows us to equate MSC and MSB2. We can designate O1 and O2 as social optima.

By evaluating the difference between the MSC and MPC functions at the x-value of these optimal points results in the value of τ1 and τ2, the total amount of Pigouvian taxes needed to correct for the remaining externality.

The model indicates that when there is cooperation between the industrial operator and their consideration of society and minimal third-party negative effects the remedial action required to correct for the externality and fully negate it is significantly lower than noncooperative behavior.

This is a win-winas it allows businesses to allocate the previously lost income to more efficient uses. The area α represents the deadweight loss to the economy and as proved, the total deadweight lost,

and value of foregone transactions is lower for cooperative behavior than non-cooperative behavior.

Conclusively, this simple, yet elegant microeconomic model allows for optimal business performance and mutual benefit via business cooperation.

Remember The Power of R4

The role of resources in the circular economy can be summarised in four central tenets:

1. Reduce 2. Reuse 3. Recycle 4. Recover

The concept fits perfectly with growing interest in Environmental, Social, and Governance (ESG) and ethical investing which follows the logic of

(a) making fewer new input materials
(b) using fewer resources in any process with less waste

Reduce

In this regard advances in production technology are critical. Essential and that means turning old conventional thinking through a 180° thought process

Throughout the ages many items were made by taking a block of material such as stone or wood and letting the artisan reduce the size of the original block until a finished item appeared. In this process the statue was literally waiting inside the block of marble!

So instead of chipping away, how about adding to through the process of additive manufacturing. We can exploit computer-aided design (CAD) software and 3D printing so that additive manufacturing reduces the amount of materials needed for producing parts and components.

Reuse

Old, unneeded concrete can be recycled and used to create recycled aggregate.

In most cases, recycled aggregate will be used as a subbase material, but it can also be paired with virgin materials and reused as an aggregate in new concrete

Recycle

Most guitars be they acoustic or electric have a body made from wood. At the high end of electrics Alder, Ash or Mahogany is used. For acoustics, the preference is Sitka Spruce for the top with Cherry, Koa or Rosewood for the sides and back.

At the top of the acoustic market are C.F. Martin and Taylor. In recent years they have recognised that the offcuts of the wood they use to make guitars could be formed into a high-pressure laminate (HPL).

This is a series of laminations or layers of what is, essentially recycles wood fibre and waste offcuts that is like paper. These layers are impregnated with a phenolic resin and are heated while simultaneously being pressed at up to 2000 pounds of pressure per square inch and so it is hard and tough.

From a wider manufacturing point of view, the move to more sustainable guitar materials is well underway and many reasons, wood will become less frequently used in musical instruments.

Recover

All industries produce waste and by-products. In a circular economy structure, waste material is harvested for resources. Veolia Environnement VE SA turns waste into a resource through a network of material recovery facilities (MRF’s), hazardous waste facilities and energy recovery facilities (ERF’s).

The combined energy generated from the company’s ERF’s and landfill sites in the U.K. is 1.3m MWH, enough to power more than 319,000 homes, boosting U.K. energy security and reducing fossil fuel usage in the process. Converting landfill gas to energy further reduces carbon emissions as landfill gas contains a mix of CO2 and methane, which is 21 times more powerful as a greenhouse gas.

Not New In Idea…New In Focus

In 2013, a report [6] was the to consider the economic and business opportunity for the transition to a restorative, circular model. It detailed the potential for significant benefits across the EU, however, these benefits could be extended across the planet.

It argued that manufacturing in the European Union (EU) could realise net materials cost savings worth up to EUR 490 Billion (USD630 Billion) annually towards 2025 so stimulating economic activity in the areas of product development, remanufacturing, and refurbishment.

The report also identified the key building blocks in making the transition to a circular economy, namely in skills in circular design and production, new business models, skills in building cascades and reverse cycles, and cross-cycle/cross-sector collaboration.

In the U.S. Dell Technologies Inc. was the first company to offer free recycling to customers and to launch to the market a computer made from recycling materials from a verified third-party source. Dell reports that to date it has used more than 10 million kilograms of closed-loop plastics (those recycled from old computers) to make new parts. It added it installed these in over 125 different products including monitors, desktops and all-in-ones.

Simple Ideas…Big Impact

Such an economy is based on a few simple principles that has at its core designing out waste.

Future products are designed for a cycle of disassembly and reuse. Such well controlled tight component and product cycles saves a large amount of embedded energy and labour costs.

Circularity presents a strict differentiation between consumable and durable components of a product. To this point consumables in the circular economy are made of biological ingredients or that are at least non-toxic and possibly even beneficial and can safely be returned to the biosphere. They can also be used more than twice.

By design for a cascade of consecutive use the energy required to fuel this cycle should be renewable as it will serve in decreasing resource dependence and increase systems resilience.

This economic model is gaining traction and will be part of a greener future of globally sustainable investment and employment opportunities and so secure economic growth.

References

[1]

The Global Economic Outlook During the COVID-19 Pandemic: A Changed World

The World Bank © June 8, 2020

[2]

Global Macro Embracing The Circular Economy

June 22, 2020

The May 2020 contract for WTI traded at negative prices as on the last of trading before the roll into the June contract the majority of the storage facilities were full and amid minimal demand, market agents that were long of the may contract were looking to exit their positions in a hurry, even if it meant paying other parties to take the oil from them.

[3]

https://www.theexplorer.no/stories/renewable-resources/an-introduction-to-the-circular- economy/?gclid=EAIaIQobChMIt5aSvLKL6gIVia3tCh0sFgdPEAAYASAAEgKa7_D_BwE

[4]

“The Economic Consequences of Outdoor Air Pollution “

En – OECD. N.p., n.d. Web.

[5]

An Optimized Microeconomic Modeling System for Analyzing Industrial Externalities in Non-OECD Countries{U.S. Spelling Preserved}

Roy, A. and Mohan, A.
Coppell High School, Coppell, Texas, 75019, United States 2
Texas Academy of Mathematics and Science, Denton, Texas, 76201, United States © 2016
[6]
“Towards the Circular Economy: Economic and Business Rationale for an Accelerated Transition” Commissioned by the Ellen MacArthur Foundation and developed by McKinsey & Company © 2013

Macroeconomic Strategist

Stephen Pope is the Managing Partner of Spotlight Group. He has worked in the world of finance since 1982 and has performed d... Continued

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