Much of the discussion at this week’s COP21 summit in Paris will focus on the important topics of renewable energy development, energy efficiency, carbon pricing and the reduction of fossil fuel subsidies. What currently might be under-represented is the circular economy framework, which should be central to the debate given its potential contribution to a low-carbon system.
In the past five years, the circular economy has quickly found growing momentum and increased understanding among business leaders, researchers, policymakers and academics, many of whom see this framework as having the potential to address climate change and its effects. For this week’s Circulate Feature, we are delighted to share the work of Per-Anders Enkvist, Martin Stuchtey and Jocelyn Blériot,¹ who draw upon recent research to highlight how the adoption of a regenerative and restorative circular economy could contribute to the climate change mitigation agenda.
A low-carbon economy needs to be circular. This basic fact should get more recognition in the climate change debate.
The circular economy is receiving increased attention as a way to get more economic value out of products and materials, and as a way to regenerate natural capital. Many companies and policy makers are already taking action. For instance, the European Commission will present its “Circular Economy Package” today, laying out Europe’s circular economy strategy.
The circular economy can also act as a centerpiece of a low-carbon society, and indeed needs to be at the core of any low-carbon society. However, this is largely overlooked in the climate change debate and negotiations, which tend to focus on renewables, energy efficiency, and sequestration. Circularity and improved utilization of assets, when they are mentioned, are typically much further down the list.
That is a lost opportunity, for three reasons.
First, it will be very hard to achieve the two-degree target without taking big steps towards a circular economy. The production of raw materials accounts for approximately 19 percent of global greenhouse gas emissions, and the waste sector represents another 3 percent. To cut total global greenhouse gas emissions with the 80 to 90 percent that the IPCC says is necessary, these raw material and waste emissions will need to be addressed. Switching to renewable energy supply and improving energy efficiency in the production processes will help. The volume of materials must also be reduced, for example through reuse, re-manufacturing, and recycling of the obvious materials like copper and glass, and also of the less obvious like phosphorus and carbon itself.
This should be possible, given how we use materials today. In Europe, for instance, a full 95 percent² of the value of virgin materials is lost after one use cycle, as an average across all material categories, and in spite of recycling efforts. This is because far from all materials are reused or recycled, and because those that are get mixed with other materials and pollutants in the recovery process, so the secondary material can only be used in low- value applications. The high-quality steel in cars, for example, becomes so contaminated in the scrapping process that it is primarily used as low-value construction steel. The same story could be told about many other materials and world regions.
Second, many circular opportunities can be addressed profitably already in today’s market, and many more could be with appropriate incentives. In our recently published report “Growth Within: a Circular Economy Vision for a Competitive Europe”³, we identified more than 100 measures that are cost effective already, or very likely will be within five years. These measures could reduce European greenhouse gas emissions from travel, housing, and food by 48 percent by 2030 and 83 percent by 2050, compared to 2012. They could also save EUR 1.8 trillion per year by 2030 (including externalities of EUR 500 billion). An enormous double dividend, explained mostly by the large amounts of waste built into our largest product sectors and material flows, and the opportunity to now address that waste using new technology and circular principles. These principles call for circular use of finite resources, maximum utilization of resources taken into use, and the elimination of negative system effects (externalities).
Applying these principles will lead us to rethink entire industries. Take the mobility sector: the European car is used 8 percent of the time on average, and even then only one and a half out of the five seats. That translates into a 2 percent utilization rate for one of the biggest infrastructure categories, which ties up more than a year of disposable income for many families. New car sharing technologies – where bookings, checkouts, key codes, and payments are all managed through a smartphone – could now boost that rate significantly. This higher utilization, in turn, makes it more economically feasible to use cars with an all-electric drivetrain and made out of lightweight reusable materials since the higher upfront costs for these technologies are paid back over many more miles. This high- value car, in turn, is more economical to reuse, remanufacture, and recycle. So a positive loop of higher utilization, low-carbon energy, and less material consumption is created.
The result is a radically better system from a material and emissions point of view. But also one that customers appreciate because it frees them from idle time lost in congestion, poor service availability in crowded cities, and high ownership costs – as the very fast market growth of car sharing demonstrates. The “Growth Within” report contains many more examples of such opportunities.
Finally, a third to half of these carbon mitigation opportunities are additional to the ones in focus for the climate debate, making circularity an additional opportunity in the gigatons. Many of the circular economy opportunities will not be captured by a carbon price (or tax) or by the other actions in focus for the climate debate. The mechanisms of the circular economy are simply different.
In the cases of steel and plastics, for example, keeping the material value high would require actions such as better recovery, tracking, and recycling systems, improved secondary material markets, bans on certain toxins, and perhaps extended producer responsibilities. These kinds of policies could make a big difference for carbon emissions, but are not a major element in current climate discussions. Take the car sharing example: cities can make a big difference to the growth of these business models if they reserve parking spaces for shared cars and allow car sharing companies to build charging points.⁴ Again, such actions can make a large impact on emissions, but is not often discussed.
What would it take to achieve these opportunities? Most importantly, the circular economy should get recognized as one of the key pillars in the transition to a low-carbon society. Similar areas, such as energy efficiency and deforestation, have benefitted hugely from such recognition in the past decade, in terms of financing, policy development, knowledge investments, and concrete on-the-ground results. The circular economy is still in its infancy and would benefit immensely from a similar development. Second, if policy makers want to pursue circularity, they could adopt a similar approach to that taken on energy efficiency, with detailed interventions to remove market failures and allow inherently profitable opportunities to be captured. Since its inception with industrialization, the linear economy has created massive lock-ins. As a result, there are so many agency issues built into the material and product flows that a carbon price alone won’t be effective.
Progress has already been made in shifting the direction of the energy system. Now we need to address the material flows that underpin our industrial engine. The circular economy could be the missing vector needed to meet our climate targets.
Per-Anders Enkvist is an external advisor to McKinsey, Martin Stuchtey is the Director of the McKinsey Center for Business & Environment, and Joss Blériot is an executive officer at the Ellen MacArthur Foundation.
1 The authors would also like to thank Klaus Zumwinkel, Ellen MacArthur, Andrew Morlet, and Morten Rossé.
2 We define the material value retention ratio as the (output of the waste and recycling sector excluding waste collection services) / (output of the raw material sector, adjusted for net import of embedded materials in products). It is a measure of the sales of secondary materials as a share of primary materials.
3 Published June 2015; available for download at www.iza.org, www.mckinsey.com, or www.ellenmacarthurfoundation.org
4 According to car sharing company Autolib, each of their shared car replaces seven and a half privately owned cars and therefore saves considerable parking space, an important benefit to cities