Circular Economy

Closed loop economy & circular economy: ‘You don’t have to do any of this, survival is not mandatory’. EMG Interview with Walter Stahel Founder Director of the Product Life Institute in Geneva

EMG: Please tell us about the Closed loop economy/circular economy model/ principles of Cradle to Cradle.

Closed loop economy When we first started having the waste discussion in the 1970s – when most waste was simply dumped in landfill – somebody coined the term ‘cradle to grave’, which put the emphasis on having better quality graves for waste; this to me  was not really progress.  As a reaction, I started using the term ‘cradle to cradle’, which emphasized that graves are the solution of last resort.

The reason why I prefer the term ‘circular economy’ or ‘loop economy’ to ‘cradle to cradle’ is the word economy, because it is the economics that, for me, are the most important thing. And if we look at the economics, then it’s very clear that the smallest loops – in other words, reusing, repairing, re manufacturing and re marketing goods and components in an industrial context – is where you get the biggest financial benefit, that being the lowest price for the consumer or the highest profit margin for the manufacturer.

When considering economic factors, one also needs to consider what will create the highest ecological benefit. For example, it’s vital to know what the embodied or ‘virtual’ water ratio of materials is when you are creating new products.

The smallest loops also create the highest social benefits because they are labour intensive. They use very few material and energy resources, and as they are decentralized, they benefit regional economies by providing local employment. Thinking in the context of sustainability, we are always trying to optimize these three factors – economic, ecologic and social.

Some applications of the circular economy are actually quite old, and we may not realize the number of things we already do that fit into the circular economy. Take, for example, the concepts of reusing, remarketing and repairing – the biggest success story regarding these ideas is eBay and all the other national and regional websites that allow people to sell used goods consumer to consumer, or business to consumer. Of course, before eBay we had flea markets and second‐hand clothes shops, but what exists today is a huge global remarketing platform, which is exactly what we are trying to achieve with the circular economy model.

eBay aims to remarket goods at the highest price. While profitability is a core aim of the business model of the circular economy, its main goal is performance. That means rethinking the idea of buying and selling goods as services, rather than products – so what we are buying and selling is performance.

The business model of renting goods has always existed in the industrial economy, but in a circular economy this is expanded to include a much wider range of items. If we can rent cars, apartments and offices, why not also rent clothes? Renting robes or uniforms for special occasions is common, so why not other sorts of clothes? Rental handbags is today

one of the big growth businesses, while renting tools and equipment is commonplace on building sites (business to business), particularly where specialized tools and equipment are required. Consumers can rent computers and mobile phones at almost any airport.

The circular economy also favours ‘shared’ goods as services, such as public transport, including railways, airlines, metro buses, city bikes and taxis, as well as pay‐roads, toll bridges and toll tunnels. In all of these transactions, you are buying performance. You buy the right to use the item, but with the security of knowing that its performance is guaranteed, and its lifecycle will be properly managed.

The latest developments in this area of ‘buying performance’ are in the field of electronics. We all use the Internet, smart phones, cloud computing, e‐banking, and so on. With all of these technological devices, people forget  that they’re using satellites to provide their service. Even when simply using an automated teller machine to get money when you’re abroad, this transaction goes via the cloud, via the Internet, and via satellites. GPS is used

everywhere today, from aviation and logistics, shipping and oil drilling to the cars we drive. In all these cases, we are buying a service that we have no responsibility to maintain; we just enjoy its performance with satisfaction.

The performance economy takes the principles of the circular economy to the extreme, where we no longer buy goods but simply services. To a certain degree, we as consumers, businesses – even politicians – are already fully engaged in this new economy.

EMG: What’s your view on the taking back of materials, as relating to the reuse or disposal of toxic materials?

If a company retains the ownership of its goods and materials, it has an incentive not to put any toxic materials into the product. If it has to include them, it will do so in such a way that it’s easy to take them back and separate them out. being especially careful not to integrate them into materials or products in such a way that they can’t be taken out. This is especially true for the very expensive materials such as rare earth elements that are used in electronics and IT products, which cannot be recycled.

EMG: Why do you think the circular economy model hasn’t spread further afield?

It’s simply because the problems we have been discussing, are mostly problems of industrialized countries such as in Europe and North America. Developing countries have a completely different problem. They have a scarcity of resources, including goods, skills and food. In situations of scarcity, the best strategy that we have is mass production to produce cheap goods to raise the quality of life of the population.

In emerging economies like China, once they have a stock of infrastructure, goods and public services, they can then start to care for this stock and carry out proper operation and maintenance processes. However, if you consider countries in Africa where poverty and scarcity is the rule, the circular economy is not much use to them. They first have to accumulate wealth before they can build stocks of infrastructure and goods, which they can then maintain and conserve.

Cradle to Cradle will never be a global model. It’s already used in less developed countries, but only because of poverty. People are forced to repair and remanufacture goods but in a very ‘low tech’ way. They are also recycling in a very polluting way. The recycling smelters in Africa and Asia burn electronic products in order to recover the rare earth elements. So many of the less developed countries are already applying Cradle to Cradle principles, but – ironically – in a disastrous way for the environment and human health.

The traditional, linear concept of the industrial economy still has many advantages for economic actors, and one is that you externalize the cost of risk and waste. Currently there is no legislation that would force a business to internalize these costs. If you can externalize it to the nation states and consumers, then your profit margin is higher, you make more money.

In the long term, you also have to consider political stability. For example, there is one very green project being developed in the Sahara desert, called DESERTEC. It is a huge solar panel farm that will generate electricity that will be transferred to Europe. The project is about five years old and supported by a number of  major European companies. However, if you look at the situation in the Sahara today, it might seem crazy to invest billions in a region where the policing is done by Al Qaeda terrorists! I think if you want to help Africa, or many of these countries, then you need to give them help so they can help themselves, but don’t try to get involved in doing it for them.

EMG: What are key obstacles on government level, and what could be the solutions?

These are mostly to do with the existing frameworks conditions in the current economy. Basically, policy makers are still living in the industrial economy – in other words, if they want to create jobs or do something to grow the economy, the only thing they can think of is a programme like ‘Cash for Clunkers’, for example. They want to scrap cars that are just eight

or nine years old and make people buy new cars. They completely ignore the alternative, which would be to remanufacture the engines of these cars, because it’s mostly in the engine where you can improve the environmental performance of the car. Remanufacturing engines would probably cost about the same as what the Cash for Clunkers initiative paid and it would maintain 80% of the material investment in the car, which is the body, and make it a better car.

However, I think the biggest impact that policy makers could make is with regard to taxation. If we had ‘sustainable taxation’, which would be a tax on non‐renewable resources (energy and materials) and no tax on renewable resources—and work, human labour, is a renewable resource—it  would give activities of the circular economy an immediate incentive.

The second key aspect of sustainable taxation would be that value added tax (VAT) is only levied on activities where there was actually value added. Since all the activities of a circular economy inherently maintain value, they should not have to pay value added tax. This concept has been accepted in principle by the UK treasury and several other European countries, such as in Scandinavia, where there is 25% VAT. By not levying VAT on repairs, remarketing or remanufacturing of goods, you would create a clear signal to business that it’s beneficial to get involved in the sustainable activities of the circular economy.

Income tax is essentially a European invention. Historically it has been introduced to finance wars. In France, it was the First World War in 1914. In England, it was the Napoleonic Wars in the early 19th century. After the wars had finished, the tax was never abolished, because the countries had got used to this nice new income.

Countries like China, Russia and India don’t tax wages. In the United States, 11 states have no income tax and another 12 I think are looking at abandoning it. So how are they getting their income? Well, Texas, for example, is getting its tax income simply by taxing oil production. Similarly, Florida taxes the construction industry. In Russia, half of the national tax income comes from taxing oil and gas production and sales.

Governments should tax things that they want to restrain, and not tax the things they want to promote, such as labour. But of course, each country has to make its own decisions about taxation based on its individual national priorities.

EMG: What can businesses do to be drivers of the circular economy/ closed loop economy?

The biggest decision businesses wanting to promote the circular economy can take is to develop business models for taking back and remarketing their own products. This involves designing products for their full life cycle, through modular conception using standardized components, and system solutions instead of products.

The simple fact is if a business doesn’t take back its goods, then it can’t profit from its goods at the end of their life. There is little incentive to design things to be environmentally friendly if it increases your costs but doesn’t bring much in return. Why produce smart goods if somebody else will profit from them? If instead a company switches to selling the performance of its products, which means retaining the ownership of them, and logically also their embodied resources, and may substantially increase its future profits

Throughout the 20th century, commodity prices have been steadily trending downwards. However, since the year 2000, commodity prices have gone up, and now are again at a level comparable to 1900. Clearly, it does not make sense to retain ownership of materials and resources when the new commodities are cheaper than ones bought ten years ago.

However, if commodity prices go up, it suddenly makes sense to retain the ownership of goods because, simply put, the goods of today in the market are the resources of tomorrow, but at yesterday’s prices.

If a company begins selling performance instead of selling goods, and thereby retaining the ownership of the goods through rental or leasing arrangements, it then has a guarantee that it will have the resources necessary to produce new goods in five years’ or ten years’ time.

It also has the option to remanufacture the components or even the entire goods themselves, instead of putting them through a recycling loop. That decision is up to the individual manufacturers, if they retain the ownership. Only then can they decide what the most profitable option is for the business at the end of the technical service life of a product.

EMG: For some industries, it is relatively easy to implement a switch to a leasing or renting model, while for others it would involve significant investment in setting up the new processes. How can a business know when it is the right time to make the switch to such a model?

To be honest, I don’t think now is the best time. The best time may have been ten, or even five years ago when business was booming, and the pressure was less on companies to innovate because everything was booming. But in reality, any time is the right time if you have the courage to change your corporate strategy.

The ‘low‐hanging fruit’ of achieving sustainability for actors in the real estate renting business is  to ensure their buildings are properly insulated and performing well for energy efficiency. Public buildings in particular are a huge part of the total building stock of countries when you include schools, subsidized housing and government offices. Bringing these buildings up to modern insulation standards – that is, with a full thermal envelope –is a very labour‐intensive job, which requires relatively little energy or material input – just some insulating materials and better windows. Of course, if labour were cheaper (ie. not taxed) it would greatly reduce the cost.

However, the lasting benefit would still be that the energy required to heat or cool these buildings would be greatly reduced. This relates to one of the riddles that most governments have never solved, the Kyoto protocol. They have asked how we can significantly reduce CO2 and greenhouse gas emissions, while creating local jobs. If companies in the building industry fully adopted this business model, and put pressure on governments to support it, then I think it would be very difficult for governments to say they couldn’t afford this.

The core issue is about incentives. construction companies may prefer to pull down buildings and rebuild them, because that is their business. However, renovating and technologically upgrading existing buildings is a much faster, cheaper, and more efficient way to achieve energy efficiency of the building stock on a large scale.

EMG: What are some of the challenges that business could face in implementing a switch to the closed loop economy model?

Consider the example of carpet manufacturer Interface. Their CEO Ray Anderson led Interface and championed the practice of leasing carpets for over ten years and yet the idea has still not caught on with many businesses. The problem is not the company, but their customers, who may believe that they can manage the whole system at a cheaper cost than what Interface selling ‘carpet as a service’ can do.

Public budgets, for example, are clearly earmarked for schools, roads, or the military, but when it comes to taking a binding agreement on sustainability for 20 years, as Interface proposed with their green carpet lease, then the government’s treasury has a big problem because then they lose the ability to shift budgets between sectors.

if governments make a lease agreement they have a fixed cost per year. If they buy a carpet and make it last for 20 years with local services, but after 20 years find themselves in a difficult financial situation – such as the sequestration in the United States, or the austerity measures in the EU – then they simply solve the problem by not buying new carpets.

This flexibility of the treasury is lost when governments lease carpets in long‐term leasing agreements. Normally people don’t want to talk about these obstacles, but this is one of the realities why many of these new business models run into brick walls in the marketing stage. It is simply because the customer has other problems that have nothing to do with the carpet, but there is no way to overcome this other problem.

It all depends on the type of business. Michelin selling car tires as services, while jet engine manufactures are selling power by the hour. However, these markets are very clearly defined and the customer can see an advantage in both cases. They no longer have to think about the products, because they get them as a service at a fixed price, which is the best option for them.

In the car industry, which is another mass market, the idea of selling performance, or cars as services, is a business model completely at odds with what they are doing today. Today they are very efficiently producing cars in centralized, globalized supply chains, and then selling them through dealerships.

If a car manufacturer wants to go into car sharing or rental car schemes, it means he must have representatives or rental offices at every airport and in every town, and he can no longer really optimize his knowledge of efficiently manufacturing mass producing cars.

What often happens in the shift from selling goods to selling services is that because companies have a completely new challenge to meet, they need new skills, and have to set up new distribution channels and take‐back channels. Business people would ask themselves: why shouldn’t we simply continue the traditional business model, even if it isn’t sustainable? Even if it doesn’t contribute to job creation, if it doesn’t save resources or prevent waste but is a lock‐in situation between the government and industry, why do it? It’s relatively obvious where the levers are to change things, but who really wants to change things?

EMG: So why should businesses do it?

Well, the fact is, they don’t have to do it. When I gave presentations in the 1990s about the circular economy, I would often conclude with a slide that said ‘You don’t have to do any of this, survival is not mandatory’. I gave up using it after someone told me that slide was really depressing, but it is still the case for sustainability. You can completely ignore all the concepts of the circular economy, but if one of your competitors picks it up and it’s successful, then you have solved your problem, because your company will disappear.

EMG: Today, there is still a heavy focus on the reduction of waste, rather than the ‘designing out’ of waste.

I think reducing the input of materials has always been the objective of the manufacturing industry, for profit reasons. What will now change is that we move from processes where we ‘take off’ materials to processes where we ‘build up’ products, which means there is no manufacturing waste.

A great example of this is the new 3D printers, which at the moment work mostly for plastics. If these could be made also to work for metals then we would really have manufacturing processes that areis much more material and energy efficient, and wastefree.

Dealing with the end of life waste from manufactured goods is clearly an area where the circular economy is very efficient in solving the problem. I have never been a fan of what’s known as the ‘zero waste movement’, because in the western world, ‘zero’ is not really a motivating goal. A better way is turning it around so instead of talking about zero waste in a factory, you talk about 100% yield. Your shareholders expect you to turn one tonne of materials into one tonne of products that you can sell, so talk about the concept of 100% yield to any western managers and they will immediately see the challenge.

EMG: Another approach that has been quite popular in the UK for example, is carbon offsetting.

At the moment the price of carbon is about 3 euros per ton, so obviously the market for carbon has collapsed, and it only existed in Europe anyway.

The other problem facing carbon offsetting is finding investment opportunities. Sustainable investment today is just 5% of all investments, and if you look at some of the big companies where you can buy carbon offsets, they invest most of the money in money markets because they simply cannot find enough opportunities to invest the money they are collecting to carbon offsetting activities.

So the idea was interesting, but it meant that companies could whitewash their carbon  footprint. In reality – as I’ve said about many things before – either you do it yourself, or you find another solution. Outsourcing the problem is certainly not a solution.

Carbon offsetting is linked to CO2 emissions, so you can also reduce your CO2 emissions by switching from coal or oil to natural gas. The revolution that is happening in the US with shale gas is simply because any kind of natural gas or methane or biogas has many more H molecules and fewer C molecules, so it produces less CO2 and more H2O. This way, you will reduce not only your CO2 emissions, but all the greenhouse gas emissions including NOx and SOx, by about 80 %. But you do not increase energy efficiency this way!

So when we look after the stock we have and better ways to manage it, we move away from the idea that we can solve our problems by producing more goods, at least in the industrialized countries, our economy moves closer to a circular economy and our society benefits its nature of regional job creation, waste prevention and a greatly reduced resource consumption.

Closed loop economy, circular economy and performance economy interview with Walter Stahel

The phrase “cradle to cradle” itself was coined by Walter R. Stahel in the 1970s.