What is the circular economy?

Learn more about how circularity can reduce resource exploitation.

By Asiyah Choudry

April 17, 2023

pile of used plastic bottles and aluminum cans

In our take-make-waste economic model, resources are extracted, turned into products, and then thrown out. The central aim of the linear economic model is profitability, often at the expense of the environment. In contrast, sustainability is embedded in a circular economy, which tries to retain as much value as possible from “waste,” using it as a resource for new production.

Three principles of a circular economy

According to the Ellen MacArthur Foundation, three principles form the basis of the circular economy:

#1: Elimination of pollution and waste

Most products are designed with the understanding that they will be disposed of at the end of their useful life. Producers can introduce circularity to the take-make-waste model by designing a product to ensure that its components re-enter the economy at the end of life.

#2: Products and materials continue to circulate

Through reuse, recycling, refurbishing, or repair, existing products and materials can continue to circulate in the economy for as long as possible without creating waste. Biodegradable materials and organic matter can return to the earth’s biological systems through composting.

#3: Regeneration of nature

By shifting from extracting raw materials to using existing materials and products as inputs for new production, we allow nature to regenerate.

Why circularity is critical

The take-make-waste economic model is a central driver of climate change and environmental degradation. The United Nations Environment Programme found that resource extraction is responsible for 90% of biodiversity loss and more than half of global greenhouse gas emissions. We are currently using natural resources faster than our planet can regenerate them. If the whole world consumed resources at the same rate as Americans, we would need 5.1 Earths to maintain our current level of consumption.

According to a report by Circle Economy, 100 billion tons of raw materials are extracted each year. Due to growing global material use, circularity in the global economy is shrinking. We are currently 7.2% circular (down from 9.1% in 2018), which means that only 7.2% of materials reenter the economy. If we reintroduce “waste” materials into the economy by implementing circular design, we can reduce our reliance on virgin raw materials, helping to limit global warming to below 2 degrees Celsius.

Factories with smoke and barren field

The circular economy in practice

One of the most well-known examples of circularity is the Kalundborg Symbiosis, a partnership between 14 companies based in Kalundborg, Denmark. The initiative was founded in 1972 to implement circularity. The Kalundborg Symbiosis is the first example of industrial symbiosis. One company’s excess energy, water, heat, or waste materials are a resource for another company. For example, cooling water from a combined heat and cooling plant is used for aquaculture.

Sun shining on mountain face and trees (el capitan, yosemite)

The Kalundborg Symbiosis improves economic and environmental efficiency, saving 24 million euros annually. Each year, the project avoids 635,000 tons of CO2 emissions, recycles 87,000 tons of materials, and re-uses 3.6 million cubic meters of water. However, while Kalundborg has achieved reductions in resource use and emissions, the industrial symbiosis also includes Denmark’s largest refinery — a heavy producer of petroleum products.

Challenges to a circular economy

Grocery aisle shelves full of disposable packaging

While the Kalundborg Symbiosis is a successful example of how we can move away from the concept of waste, an economic shift towards circularity will be challenging to implement. Achieving 100% circularity is probably not realistic. Certain materials can only be recycled a finite number of times. For example, paper can only be recycled 5-10 times before the fibers become unusable.

In addition, the transition to a circular economy will require changes in consumer behavior. Consumers are accustomed to buying products that are brand new and throwing them out once they are no longer useful. If consumers do not take interest in recycling programs or refurbished products, then implementing circularity will be challenging.

How businesses can drive the circular economy

Businesses can implement circular business models that promote sustainable resource use. One way that they can do this is through extended producer responsibility (EPR). In an EPR scheme, the producer retains responsibility for a product once the consumer is done with it. EPR can be voluntary. For example, Patagonia has collected post-consumer garments to create new clothes. Governments may also mandate that a producer diverts a certain amount of materials from landfills.

Another way that businesses can support a circular economy is by designing products that are more durable or that can be easily reused or recycled. The company Interface collects their customers’ old carpet tiles so that they can be reused somewhere else. If they cannot be reused, the old carpet tiles are recycled to create new ones. Often businesses may seek to implement circularity to help reduce their overall environmental footprint and achieve net-zero emissions.

Blue recycle bin with three arrows "recycle" symbol in white

How your finances can support the circular economy

If you’re an investor looking to reduce your climate impact, consider investing in companies and funds that advance the circular economy. In recent years, there has been a rise in financial products dedicated to advancing the circular economy, including public equity fund launches from Goldman Sachs and BlackRock (note: we recommend looking deeper than a fund’s label to avoid falling prey to greenwashing). In addition, renewable energy is a critical enabler in the production of circular goods and services and is another potential avenue for investment.

Hand holding a tiny clear glass globe

It is evident that the linear economic model is harming our planet. A shift toward a circular economy will enable us to reduce our dependence on virgin raw materials, allowing them to regenerate and ensuring they are available to future generations. While there are still challenges associated with achieving circularity, the benefits, including waste reduction, reduced greenhouse gas emissions, and greater resource efficiency make it a worthy investment.

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