The Circularity Gap

Bio-based and Biodegradable Industries’ David Newman says he is a ‘circular economy sceptic’. Here, he looks at the 2021 Circularity Gap report, which he says suggests the world’s economy has become ‘more linear, not less’.

I have long been a sceptic on the circular economy. The core of my argument has been that the continuously declining real value of raw materials, and in general of manufactured goods, has meant that repurposing them, reusing them, recycling them or even (in the case of food waste) composting them, has cost more than producing new products from virgin raw materials sources. It has been cheaper to throw them away.

This is the Jevons Paradox[1] of course; increased production efficiency and consumption of a product will cause its price to fall. Scarcity has rarely been at play in recent economic history.

Circular Economy has become (along with sustainability) the mantra of anyone vaguely connected with using energy, material and food resources.

Now is an important moment to reassess progress – COP26 is ahead and commitments around climate can in part be met through resource management; our oceans are even more full of waste ; the EU Circular Economy strategy is moving from legislation to implementation; UK Governments are finalising their legislative proposals  on EPR and DRS; the pandemic has eased pressure on consumption and emissions giving us a chance to look forward with a different perspective from that of a couple of years ago.

Circular Economy has become (along with sustainability) the mantra of anyone vaguely connected with using energy, material and food resources. Governments are adopting circular economy strategies from the UK to the Netherlands to China and Chile. Hardly a day goes by without lofty declarations from global corporations of their support for sustainable, circular business models.

But these ambitions are hardly met by real progress. The 2021 Circularity Gap[2] report indicates that the world’s economy has become more linear, not less.  It says: “our world is only 8.6% circular, leaving a massive Circularity Gap. The outlook is grim. Just two years ago that number was 9.1%.” Outside of our professional bubble, the world is going in the opposite direction.

What is happening and can we hope that the outlook improves?

When I talk about circularity in this article I mean the re-use, repair, recycling of materials. I am going to skip issues around design, renewable energy, water use and reduction policies and focus on what becomes waste. Yes, I know you will complain “we should be talking about reduction and designing out waste” but I’m writing about what I understand.

To understand how to create material circularity we need to clear the air on some misconceptions: firstly the issues are not around new technologies that require perfecting.  Technologies exist and raising them as a barrier is a distraction often thrown up by those whose business model is soundly based upon linearity. Nobody will convince me that the human race, capable of sending a craft safely to Mars, is unable to solve any technological barriers we may believe exist to repurposing, reusing and recycling materials. It is not rocket science.

Secondly, the issues are not around public perception. I roll my eyes when I hear that “it is difficult to get the public along” or that “it is too complicated for consumers to understand”.  I hear this daily when discussing recycling. What a load of nonsense!

I roll my eyes when I hear that “it is difficult to get the public along” or that “it is too complicated for consumers to understand”.  I hear this daily when discussing recycling.

Again, this is a mantra thrown around as a way of avoiding responsibility and deflecting attention.  We have convinced our populations to remain inside, imprisoned, for a year without serious social unrest; years ago we convinced motorists to wear seat belts and they all do; if we want people to understand the issues around their consumption and recycling habits, we have all the instruments needed to do so.  Indeed, highly successful recycling schemes can be seen in many countries, today, right now. It is not complicated.

Finally, we should understand that if we believe that greater circularity is really beneficial (I do) leaving this to voluntary accords is not working as the Circularity Gap report shows.  All too often we have seen that voluntary accords are instruments used by those wanting to continue linear business models as a deflection from the need for stronger, legislative instruments. The recently announced voluntary EPR agreement in the USA for plastic waste[3] is an example of plastic producers and users uniting behind an initiative that has high visibility and almost zero impact on plastic waste reduction and treatment.

The cost comes out of their PR budgets. When real EPR legislation is tabled, impacted industries fight back fiercely as the USA shows[4].  The successful fight back by groups like Business Europe against the Circular Economy package of the EU[5] shows just how much big corporations do not like the circular economy model.  Asking them to volunteer for it is not going to work.

Have the economics of circularity changed?

Until recently, no. The 2020 pandemic accelerated a decline in the real costs of raw materials that had been generalised, with ups and downs, since the last economic crash of 2008. [6]

It is this trend of variable but generally declining raw material costs that has helped keep inflation low this last decade.  The trend has been a result of increased production capacities in low income countries where lower production costs have led to price declines; more efficient use of materials; a dematerialisation of the economy thanks to the internet; stagnant middle and working class incomes and ageing populations in the wealthier economies.

What this means for circularity is as evident today as it was in the past: making a new product from virgin materials will generally cost less than repurposing or recycling a used product.  Moreover, the real decline in the cost of many fast-moving consumer goods imported from Asia, has increased the propensity of consumers to discard them after use.  Look at clothing as an example: they cost so little, why bother re-using or recycling?

But other factors have played their part in making recycling economically unsustainable and we can see this in the plastic and paper industries. The Chinese National Sword policy pulled the rug out from under those industries’ recycling programmes, as we all remember. [7]

This long article from the Financial Times tells the tale of how recyclers overnight faced ruin.  The National Sword policy ‘“challenges us to admit that recycling isn’t free”, says Zoe Heller, assistant policy director at the California state recycling agency, CalRecycle.’  I assume most readers will know that too. Political perception seems at times not to.

What has also not changed yet is the pricing of externalities. If we think there are environmental benefits to circularity (climate change, waste management, water, air and soil pollution) then we should be using all the instruments we have to making circularity work.

This means pricing in the costs of the damage linearity does to us.  As we know that “recycling or repurposing“ of products to keep them in the economy is (generally) more costly than discarding them, we should have put into place mechanisms to reverse the price calculation- making throwing away more expensive.

Mostly we have not done this on a wide scale. Globally few nations have such mechanisms.  Mainly European countries have policies such as the introduction of taxes on landfills, incineration and EPR/DRS schemes and these are coming to the UK post 2023. All these are forms of environmental taxation which change the economic model by making the collection, recycling or repurposing of products cheaper than discarding them.  The EU and UK Plastic Taxes are other models to push recycled content or penalise wastage.

One reason that such policies are rare across the globe is that linear- model corporations have successfully pushed back on similar legislation[8] in jurisdictions on every continent.  As the Circularity Gap report illustrates, the linear economy model is still universal.

I was struck by something said in a webinar I attended on food production recently: why is healthy, organic food that is good for us, good for soils, better for the environment, more expensive than food which destroys biodiversity, leads to deforestation, poisons us, our soils, water and air? Shouldn’t it be the other way around? Unless we price in the real cost of the extraction, production and disposal of resources versus their recovery, linearity and environmental destruction is always going to win.

This is not about technology; not about “changing public attitudes”; nor is it about getting the industry together to sort out issues with voluntary programmes. No, this is crudely about money.  When money is involved, only Government policies can change the way money flows. Who has it wants to keep it.  To get materials back into the economy we are going to have to subsidise recycling much more heavily than we do; and/or make virgin materials more expensive.

And here’s the good news: it may be about to happen.

Raw material prices are rising again, and fast. According to Bloomberg, in an article from March 18th, there is a belief in the commodities markets that the world is entering a new “commodities supercycle”.

Investors are piling into commodities partly because we are awash with zero cost money from the stimuli programmes put in place globally; their relatively low value makes them attractive bets;  moreover, there is a  view that many commodities will benefit from the transition to an economy in which renewable energy will grow fast.

For renewable energy and electric vehicles read metals like copper[9], but also lithium[10], palladium, silver, gold.  Added to this, the continual and rapid transition to electronic communication fuels demand for many of those same minerals- so whilst we think we are dematerialising our economies, there are rock solid materials (excuse the pun) underpinning that process.

Consumer demand and ad hoc impacts are also changing the markets for plastic and paper.  Packaging use has boomed during the pandemic and looks unlikely to return to pre 2020 levels as home deliveries become the norm.

Add to this the rush to secure recycled plastics ahead of the application of plastic taxes in the EU and UK; the slow recovery of plastic producers in Texas after the severe winter, and we are currently living through what was yesterday an unimaginable boom in virgin and recycled plastic prices. China, by enforcing a ban on non-compostable single use plastics, has suddenly overnight created such a demand for compostable polymers that prices are rocketing- production cannot keep pace and supply chain issues are being impacted too.

The price of R-PET has risen rapidly[11]. Wood pulp prices have risen since October 2020 faster than anyone can recall [12].

All this will mean more inflation. Get ready for it and we have just seen April’s figures confirming this for the USA. But for the Circular Economy, the outcomes are potentially transformational. At exactly the time legislation is coming into play to stimulate pro-circular economy practices, raw material market rises will make recycled materials more attractive, as we see for plastics.

It is an exciting moment to be in the waste and resource industry as finally we may have the economic stars aligned to make some substantial progress towards greater circularity of our economies

Add to this the cost of EPR and DRS being introduced, for example in the UK, which will put around £3bn a year into the waste management industry, and suddenly the cost of recycling/repurposing becomes very much more competitive with the cost of disposal.

What we need to do now is to ensure that when the prices of virgin raw materials on international markets fall once more (predictable, inevitable, unstoppable), we are ready with fiscal mechanisms to keep their prices higher on the internal market relative to recycled materials to ensure the continual re-use and recycling of secondary raw materials from our recycling systems. Otherwise, we will go through the same story over again- prices fall, recyclate values collapse, recycling stops. End of the Circular Economy. Hard to do ? Very but not impossible.

A final piece of the puzzle is also slowly sorting itself out: carbon pricing.[13] A tonne of CO2 now costs around $50. If we are able to get our heads around including incineration in the pricing mechanisms  then we may actually turn a corner, making disposal even more expensive and locking in the economic mechanisms that privilege circularity. That incineration does not pay the carbon tax is ethically unjustifiable if we consider the circular economy a serious policy objective.

This is where our attention now needs to be – to look at exploiting this upward market cycle now to future-proof the circularity of materials in our economies. It is an exciting moment to be in the waste and resource industry as finally we may have the economic stars aligned to make some substantial progress towards greater circularity of our economies needed to meet our GHG pledges, and as a driver for new investments and jobs in the re-use, repair, recycling industries. Let’s grasp this opportunity now, it is time!

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