14 June 2015

The Circular Economy and a Resource Hierarchy

On an unassuming webpage hosted by the European Commission (EC) is a really important consultation on the circular economy, which closes on August 20th 2015.  It's a rare opportunity to help shape policy which could provide a real competitive enabler for Europe, as well as have hugely positive implications for the environment.  Below I introduce some aspects of the breadth of the opportunity, using a 'resource hierarchy' concept.

An introduction to the Circular Economy

The circular economy is a term used to describe economic activity which seeks to be as resource efficient as possible, and is the antithesis of consumerism and the throwaway society with which the western world has become accustomed with.  It's got huge economic potential, with research suggesting the creation of tens of thousands of new jobs in the UK alone.  It seeks to restore both technical and biological 'nutrients', minimise energy use and avoid toxic chemicals.  And its aim is to send planned obsolescence into extinction!

One of the challenges for the circular economy is that a circle sounds very simple, and there is a risk that offering take-back programmes and simple recycling is considered 'operating in the circular economy' - albeit potentially simply reinforcing a fundamentally unsustainable business model. For example, I recently wrote a critique of the clothing (retail) industry and outlined some opportunities in this sector for more creative business models to be developed.  Mud Jeans and Patagonia are oft-cited examples of organisations being disruptive in this sector, but there is still a long way to go before fast-fashion becomes redundant.


Waste Hierarchy

Readers may be familiar with the 'waste hierarchy', which helps articulate a priority of how physical goods should be managed at the end of the life.  For example, although it is better to recycle than send waste to landfill, it's even more preferable to reuse something, or even eliminate the waste before it's created. 

The Waste Hierarchy
This model does not address any associated implications on business models directly, and using the term waste inherently misses the opportunity of a valuable resource.  So in some sense, the waste hierarchy may have reached its own 'use by date'.

Resource Hierarchy

If the concept of the waste hierarchy is combined with the circular economy, as well as emerging business models like collaborative consumption, a 'new order' of priority can be developed:

A proposed 'Resource Hierarchy'

I have grouped the various business models into 'divisions', hinting that, much like in the waste hierarchy, there should be nudges towards promoting the business models towards the top of the hierarchy.



Premier League

In the Premier League there are business models which eliminate the product altogether.   In some cases, this could be a classic dematerialisation, as we've seen in the music industry from CDs to streaming.  For most organisations though, it's likely to be more subtle and it's about driving-out 'experience-based revenues'.  This means shifting purchasing away from physical products into experiences which people are willing to pay for.  A strong brand is likely to be very important in this.

The Championship

The Championship includes the bulk of where we're likely to see disruptive business models enter the economy.  With products which are built to last, they can be shared and reused, with ownership moving to access.  Secondary business models will emerge with reverse logistics providers helping distribute products to other users (or a central owner).  Existing models in this league include eBay, repair cafes, car sharing, white goods rental and charity shops.

First Division
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The first division is a really important league, as when the useful life of the product has come to an end, this division seeks to extract even more value from the product.  In upcycling, the product is transformed into something new and more sophisticated, e.g. Elvis and Kresse's transformation of old fire hoses into luxury goods.  In downcycling, it's the opposite, e.g. car tyres into road surfaces or aggregate.  And finally, recycling simply seeks to take the materials and use them to recreate the same product again, without any degradation in the quality.  In any of these models, products need to be designed for disassembly, so for example, mobile phones and tablet computers have a long way to go in this regard.

Second Division

Finally, in the second division, just ahead of landfill, is Energy from Waste. This should only be considered for residual waste when other options in higher divisions have been explored.  A high biodegradable content (e.g. food and wood) is preferable, and the efficiency of the plant to convert into useful energy is also critical to its success.  As a non-intermittent source of energy, it may have a role to help balance the supply of electricity to the grid.


Summary

The circular economy touches on a wide breadth of business models which can all have a positive impact on the environment.  They can also open new revenue streams, reduce costs, enhance reputations and reduce risk.  The 'Resource Hierarchy' helps organisations understand the relative priority which such models may take.

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