Circular economy comes free

This article attempts to answer the question of “what would it cost for a nation to transition to the circular economy?” with “actually not a lot”. To explain this rather startling position you’ll need to bear with me while I explain the importance of a firm’s infrastructure for investment, what a circular business model is, where circular infrastructure fits and then where the money will come from to make new infrastructure and finally – what it will cost in terms of investment.

I hope to end up by convincing you that it is not money that stands in our way: to transition to a circular economy, one that provides for all our needs in an equitable way with a light touch on planetary resources is easily within our reach.

So lets start with firms. The world is made up of firms- each with its own owner, be it private, public or cooperative, be it a tiny mom and pop store, a cooperative, a limited liability partnership, a huge listed corporation or an operation to take care of waste run by a local authority – they all have a similar architecture.

The basic pattern of the firm

In the model above, working backwards, customers pay for products/services that have been produced by the firm’s employees using the firm’s equipment and inputs brought in from outside the firm.

You could say that the money from the customer pays the running costs of the firm, the costs for inputs and the employees as well as giving the owners money from what is left over after all bills are paid.

Herein lies one particular challenge of running a firm: you need to have the equipment in place before you can actually start making and selling. Owners need to find the money to pay set-up costs, which include getting the equipment in place, before they can get started. In many cases these costs will not be recovered until the firm has been going a good while as the firm needs to pay wages and inputs from its income first and pay off the cost of the equipment in instalments.

To use other terminology- this is the investment needed to start operations. In the same way, if you are going to remove the equipment and re-do the way the do business you this will need investment too.

What is then, the equipment needed for a circular business?

In terms of the circular economy let’s take a look at what kind of equipment would be needed:

The firm going circular – what is needed

The installed equipment the firm has needs to be able to do the following

Production

  • Use recycled material
  • Use biological material (easily recyclable)
  • Use renewable energy sources
  • Not burn fossil fuels or use electricity made from fossil fuel burning
  • Does not produce waste, rather materials that can be recycled

Product

  • No pollution from its use
  • Easily recycled after life time
  • Extended life-time (means less new material needed)

How much is needed to be spent (invested) to go circular?

Let us make some wild assumptions:

All essential needs, to be adequately and fairly provided in a circular way require roughly the same amounts of investment.

NeedRelative CostsExamples
Food and water provision100Natural fertiliser systems, Local production with fossil-free transport
Housing including heating and appliances100Fossil free electricity, complete recycling of waste, low energy needs, recycling of appliances, furniture, etc.
Health care100Waste recycling, high proximity
Mobility100Elimination of fossil fuels, increasing proximity and vehicle recycling
Social inclusion, jobs etc100Reduced material throughput of all jobs.
Total500
Rough estimate of costs (in relative terms) of investment in circularity

Is it possible, then to estimate the total cost of these measures to society?

Replacement of existing equipment already budgeted

Most pieces of equipment wear out or need to be upgraded sooner or later. This cost is already factored in. If you own a car, for example, you know sooner or later you will get it repaired or trade it in for a new one. So how much more would a circular version cost?

Could cost nothing more

With government subsidies being offered for electric cars, they could be adjusted to make the cost of ownership similar to that of a fossil car. Although you may ask if the subsidy costs society. Hardly, consider this thinking: Non-polluting and non-extractive business practices actually cost society less than extractive and polluting ones. The costs of pollution from fossil vehicles puts a huge strain on health services coming from people with breathing problems from pollution. So governments, which are the ones picking up the tab for non-circular business practices will gain by subsidising circular services.

Could be existing equipment is circular-ready anyway

All machines that run on electricity can use electricity from renewable resources. Maybe many machines can already use recycled materials. It is quite possible that installed equipment can be easily modified to produce left-over material that can be easily recycled. So how much of the 10% of the value of infrastructure needs to be changed out to go circular? If it is fifty percent then that is 5% of total expenditure. If it is 20 % then it makes just 2% of total expenditure.

Anyway, costs of circular products are coming down, so replacement costs coudl be similar to budgeted replacements.

Spending on new equipment boosts the economy

Of course the “cost to society” is a misnomer. We all want companies to sell their products so one company buying new equipment means one company selling its equipment. So rather than seeing it as a cost we could see it as a plus.

Most money invested is in existing assets anyway

You can look it up, but some 80% of all investments go to existing assets – like shares and real estate rather than “building back circular” These are gaining value faster than productivity is rising. So there is a lot of money out there. Surely some of that could be redirected to circularity for the sake of future generations?

Total amount of money needed.

You are probably thinking “yeah but its a lot of money anyway”. However, if you check corporations’ annual reports you will find that the actual value of their fixed assets – equipment and buildings, etc – is only a minor part of their overall worth.

Not only are changes to equipment planned anyway, they are also a smaller part of a company’s investments.

NeedInfrastructure value percentTotal company valuePercentage GDP (a proxy for relative size of company)
Food and water provision1010 00010
Housing1020 00020
Health care1010 00010
Mobility1010 00010
Social inclusion, jobs etc n/a
Total10% (5 000)50 000
Total Investment cost % of value=5000/500005%

I know this is overly simplistic and it would be good to look into the big picture in more detail. I challenge you, however, to prove that the 10% figure – something that is spent anyway – or even the 5% of GDP is out of the ballpark.

Of course, there are people without houses and food. Does that mean we have to invest in more construction and food production or does it mean we just need to distribute more equitably? Another statistic to work out.

Should you not wish to take on the challenge and accept that circular is free we should turn our discussion to more interesting topics, like why are we not doing it.

Could it be that we don’t have the technology – not so according to Johan Rockström of planetary boundaries fame, cited in this article.

So that discussion we’ll take next- do enter your email in the box on the right and follow me to be sure to get the next instalment direct in your email.

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