Risks of the Circular Economy

The Circular Economy is seen by many as the holy grail for a sustainable and future proof economy. Billions of euros of cost reductions and the creation of many new jobs are expected as a result. Also the recently published plan of the European Commission refers to these opportunities. I don’t doubt these opportunities, but what the possible risks are, is barely being discussed.

When people discuss the risks of the Circular Economy, they are generally talking about the risks for achieving the circular economy, or actually the challenges with regards to its implementation. For example, the need to radically change production, use and processing of products, the change of business cases without the guarantee for success or the challenge to fully recycle all resources without any quality loss (MVO Nederland).

Of course, these challenges can be risks for individual businesses, but they don’t pose any substantial risk to the economy or to society. And for most of these challenges solutions are already available or under development. But since we’re talking about an economic system shift from the “take-make-waste” economy to a circular one, we should also look at the systemic risks that it may bring about. Risks that do not pose a threat to individual companies but to entire sectors, cause social disruption or new environmental issues. I will discuss four systemic risks that I can foresee if some of the current ideas and trends will gain more momentum. I have called these: too big to fail, a resource bubble, ecological poverty and shifts of power.

1. Too big to fail

So now and then I have the feeling that Babylonian confusions occur when people discuss the Circular Economy. Do we speak the same language? You can find many different perspectives and definitions on the circular economy in science and on the internet.

Meanwhile, governmental policies and legislation are being developed in support of the Circular Economy. But the Circular Economy does not exist. Even though the idea exists since the seventies, the meaning, implementation and effects are only starting to emerge. Especially within an era in which minerals are  traded globally, resources become scarce, technology advances quickly, new business models are being developed and the importance of our ecological system is only starting to get acknowledged.

So what’s the risk? That we are about to roll into a generally accepted system of which the derivatives and dependencies are not incalculable. Sounds familiar? Indeed, that happend as well in the system that we are getting out of and of which the most recent crisis was its result. That was an economic system in which banks became too big to fail. And when they did fail they either went bankrupt, and many lost their savings (Lehman), or they were saved by states through loans and debts causing increased taxes and social pressure. Especially when we want to keep meeting our physical needs (food, shelter, healthcare, mobility) in a sustainable way, we should prevent that organisations on key positions within that economic system become too big to fail. Because that is a system, we have learned, is not future proof.

2. Resource bubble

One of the many assumptions is that the Circular Economy is about the preservation of resource value within the economy. Sharing, reuse, refurbishing and upcycling are all important ingredients to extend life span and keep that value within our economy. To achieve this, we are constantly developing new technological processes to recycle old materials to new ones with even better properties. But while we are doing this, we learn that some man-made materials are not that good or useful as initially expected. Asbestos, CFS’s, once technological highlights that are now causing health and environmental problems. Large investment have to be made to remove these materials from production methods and sanitize places where they have been used. The insight that a material may have very negative effects will cause inherent value loss even though the materials may be recycled rather easily. This value loss can be a result of the harmful effects that materials may cause on the long run, but also because materials slowly leak away into nature or because reuse or recycling is just technically impossible on the long run.

Since we are developing more and more synthetic materials every year, the chance increases that there will be materials that cause problems on the long term. Some of these, initially highly valuable materials, will need to be depreciated prematurely resulting in big financial losses. With that in mind, if more materials will emerge that need to be prematurely depreciated but companies await hopefully for new technological advancement, a resource bubble will be created with an increased risk of bursting and huge effects for the economy.

3. Ecological poverty

Currently we are still mining more resources from nature (the ecology) than that same ecology can “produce” and regenerate. Next tot that we try to keep these materials as long as possible within our economy. Because resources often leave the economy through influence of ecological mechanisms such as corrosion and decomposition, the value starts to decrease. Various organisation state that the Circular Economy aims for increasing the time that materials stay within the economy. This process of retrieving more materials from the ecology than it can produce and keeping them as long as possible in the economy prevents the ecology to make use of these materials for its own mechanisms and keep its cycle going. This may result in ecological poverty.

An example is the top-soil depletion that is currently occurring all around the world. Because we use more and more land for economic activities, room for plants and animals that keep the soil “alive” and fertile is decreasing. Next to that, mown grass, fallen leaves and remnants of harvested crops are removed and used as cattle feed or for generating bio-energy. This way important nutrients within this “waste” is taken out of the biological cycle causing top-soil to slowly deplete.

4. Shifts of power

One of the reasons to move towards a circular economy is the increasing resource scarcity. We simply want stable prices and we want to be independent of unreliable partners. New business models are being developed to avoid these problems. One of these models is about companies organising their own resource bank. By keeping resources under management of a single party, while they are flowing throughout the supply chain, allows the resource price to be removed from every transaction. This can be achieved because the chain manager stays owner of the material and asks other chain partners for a service instead of a product. For example, in Germany there are various energy network operators that do not sell their waste or other materials leaving their operations, but lease these resources to disassemble and smelt them according to various specifications. Meanwhile the material stays in the possession of those network operators. The company smelting the metals has become a service company instead of a company that needs to buy its feedstock and sell high quality metal. The network operators then ask a cable factory to make new cables from their recycled metals. This way, the chain managers  keep ownership and control over the flow of resources.

Because a single party within the supply chain becomes owner of the resources, a shift in dependency may occur. Currently all parties in that supply chain are interdependent of each other. In various circular economic business models, they become dependent of a single party that manages the resources. That party controls who has access to those resources and who does not. A form of power of which we cannot foresee all socially and economic effects.

Fair enough…

The risks that may occur are predicted extrapolations of the current ideas and implementations of the circular economy. The problem here is that the actual definition and principles of the circular economy are still ill-defined. That increases the uncertainty on the chance that these risks may occur. However the same goes for all opportunities that many write about. But to have a fair discussion on the risks we should at least start talking about them and not only preach about the beautiful opportunities that the Circular Economy may bring about. It is important that we start to talk the same language.

Especially when we speak about systems and transitions that affect and are expected to secure our future welfare. As it affects us all, we should be able to discuss and question these ideas and concept openly and publicly. One issue that often occurs, is that new concepts or business models are blindly accepted as holy grail and repeated over and over again. Above all, those who make their money on the Circular Economy and spread the word should also be more outspoken about the possible disadvantages. The need for an improved economic system in which we move away from a take-make-waste principle is crystal clear for many. The time has come to have a fair discussion.