Have you ever asked yourself how the circular economy (CE) can come about in the context of the current economic system, which is (mostly) based on a linear model where we make, use and dispose of materials?
The idea of the CE came about because we have recognised that some of our current ways are not sustainable. Our current system is destructive. Our mining activities leave behind huge scars on the landscape. There are tens of thousands of abandoned mine sites in Australia, not rehabilitated. Our oceans have huge patches of garbage the size of whole countries floating around. We live on a planet with finite resources, yet our current system requires infinite growth to succeed. Most people would agree, I think, that we cannot go on as are now.
How do we transition without setting ourselves up for failure and disappointment? What do we need to change in order to succeed?
In my previous article I explained that the CE is a “systems solutions framework”.
We are actually still working on what that exactly means, but a few things are clear already. We need to think in systems and connect what is now managed in disaggregated markets.
For example: the raw materials industry works as a separate market to the many industries that make products from the raw materials. Take natural gas. Australia pumps natural gas out of the ground and sells it to a refinery or gas producer in Singapore. The gas producer makes various products out of gas and sells them worldwide. A plastic manufacturer buys polyethylene and makes plastic products, say our milk bottles, from the resin.
The way our current system works, at every step in the supply chain, only two parties talk to each other, the buyer and the seller. Our current market-based system also doesn’t allow buyers and sellers to collaborate too much, for fear of distorting markets or lessening competition.
In a CE, at least during the transition phase, the various parties in an extended market, meaning along the whole supply chain, may need to collaborate in order to find out the best ways to create circularity. Collaboration will become a necessity. Have we got the systems to allow that collaboration to work? No.
We are trying to create something like the above with industry stewardship schemes or expanded producer responsibility legislation. They are just crutches to teach an imperfect system how to hobble. Why? Firstly, stewardship schemes are typically voluntary, meaning companies can choose to participate. Why should they, if additional costs mean less profit?
We currently have two extended producer responsibility schemes in Australia. Not exactly game-changing stuff.
Let’s look at another example.
One of the ideas of a CE is that we use products for longer, make them repairable, share them and so on. How is that going to work?
Our current system demands companies to make a profit. No profit, no finance.
Profit means revenue minus costs. One way to make more profit or ensure ongoing profit is to minimise costs.
In the current system manufacturers are actually rewarded to use cheap components in their products. Two reasons. Firstly, using cheap components means the product can sell cheaper, meaning selling more revenue or more profit, or both. Secondly, using cheap components means building obsolescence into the product. It won’t last as long meaning customers need to buy another product earlier, meaning more revenue. Where, in the current system, is the incentive to make products last longer?
Another example is that our current economic system determines the value of things by their price. What is the value of a home? Ever seen the 1997 movie The Castle?
Money was meant to be a means to an end. We have turned money into the end.
The next example is how we measure success in an economy. GDP is the value of all goods and services sold in a year in a country. Generally speaking, if the GDP of a country goes up, we assume the country is doing well. Perversely, if we have lots of natural catastrophes, like floods and bushfires, our GDP goes up. Why? Because we all need to spend more on replacing homes, cars, etc. That’s the way our current system measures how successful our economy is going. Weird, you think? A bit more than weird, I think.
What’s the value of clean air, fresh water, and an afternoon chat with a friend? Nothing to worry about, because we aren’t measuring it. They are so-called externalities, meaning they are external to the economic system and we do not assign a value to them. Consequently, when a company pollutes the environment, we may fine that company. But other than that fine there is no direct impact on the value of the company. The fine may have an indirect impact in that the market participants decide to put a risk discount onto the value of the company. Of course, that only works if the company’s shares are traded on a market such as the share market. Private companies? Not to worry. Doesn’t exactly fill you with confidence? I understand.
How can we transition to a system, called circular economy, where products last longer and are repairable? The current system is fundamentally opposed to that idea.
How to solve the puzzle? Don’t we need answers before we can successfully transition to a CE?
Maybe I am a bit too harsh? NSW has put out a consultation draft for a Natural Capital Statement of Intent in an attempt to start putting an economic value on our environment. I haven’t read it yet, but in principle it is the right idea. How long will it take for it to have any impact?
What would need to change? A lot of things obviously. Importantly, we need to change. We can actually make a difference. We need to start valuing quality over quantity. We can choose to buy products that are covered by product stewardship schemes. We can demand extended producer responsibility schemes. A lot actually depends on us, the consumer. We spend the money that makes the economy tick.
Have we got any chance of transitioning to a Circular Economy by 2030 as the Environment Ministers agreed Communique from 21 October 2022 asserts?
Not a chance.
Let’s talk about the politics of CE in the next article.