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The economics of the circular economy

circular-firm

Economic Fiscal Reform calls for the economic system to align with the twin purposes of preserving and  indeed restoring the environment whilst providing a standard of living for citizens. Up to now, these purposes have not been central to the way economics has been practiced. We are, however, facing a pressing situation: soil degradation, atmospheric warming and mineral depletion are forcing us to rethink. The idea of the circular economy – where biological and mineral material circulate in the economy without being deposited – is gaining ground. Read More…

Suppose capitalism mimicked nature

Article updated June 6 after consideration of all the recent comments

We are stuck. On the one hand you have people who talk about economic growth as being the objective of policy – necessary to be able to pay back debts and achieve prosperity. On the other hand, you have the sustainable camp that claims infinite growth is impossible and therefore the whole economic system is bound to fail as it relies on it. You have people who claim we need GOOD growth as opposed to BAD growth. Bad growth would be the increased economic activity due to storms, break-ins and failures of products. Either way, the term capitalism comes up as if it were a system. Perhaps if we explored the idea of developing our thinking about capital we might find some ways forward.

My aim here is to clarify the idea of using capital as a central social planning approach, using the idea of settlement maturity. This is the idea that settlements, and the societies in them, like an eco-system, can mature. If society can mature, then maybe its capital profile will mature too.To be able to take this analytical line we need to understand first what ecological maturity is.

Let us look, then, at how nature grows and see if we can find some insights into how capital can grow, and what economic growth would look like through the eyes of sustainability.

Growth =net increase in mass

Growth (rapid increase in biomass)is a stage the ecosystems go through on their way to ecological maturity

There is still growth in mature eco-systems. Trees still grow, albeit slower. However, for the system as a whole there is little net increase in biomass.

Ecologists describe how all eco-systems strive to become mature. You probably have the idea somewhere in the back of your mind, how smaller animals give way to large predators, small plants become forests, rushing water becomes a swamp, etc.

One well-known description of maturity comes from the ecologist Odum,(ref 1) (table below)

Let’s take it bit by bit:

  • Gross production. This means the total amount of biomass that accumulates in the system. Note that as a system matures, the slower biomass increases. For example, young trees grow very fast, older trees grow much slower.
  • Biomass supported. As the system matures, more biomass is in the system – more trees grow, more animals and plants more in, and they are larger.
  • Total organic matter. As above, the more mature the system, the more in the eco-system.
  • Size of organism. In immature systems, the organisms are small. As the system matures, and there is more for predators to eat, for example, the more and larger the organisms become.
  • Niche specialism. As the system matures so does diversity. More specialized organisms move in.Mineral cycles. Eco systems need minerals to cycle in them in order to function, so to have more biomass they must retain nutrients.
  • Nutrient exchange rate organisms <> environment . Immature systems “leak” both heat and nutrients to other eco-systems.Role of detritus in nutrient cycling. As the system matures, detritus is more and more important as a source of minerals and energy for the organisms in it.Nutrient conservation. Mature systems conserve minerals and do not leak them to other systems.

We now need to explore the idea of capital.

The diagram below breaks down the categories of capital often used.
The categories should be be self evident. But from the point of view of accounting, human capital and social capital are not normally put on the books.
Financial capital is divided into that owned by the organisation and that borrowed. In English the terms foreign capital is used for money lent and equity is the money put into the company by its owners.

Now let us apply the idea of maturity using the idea of the built environment; a settlement.

An immature settlement might be a few tents that settlers might bring with them. They have no agriculture, there is no infrastructure, but they are surrounded by the bounty of nature and can begin to convert, for example, trees to buildings.We can envision an immature settlement, but can we envision a mature one? Surely our cities act like immature settlements: nutrients are lost to surrounding environment, metals and minerals end up in tips, and even our building reflect heat rather than gather the energy from the sun. The list below is an attempt to bring together ideas of what a more eco-mimicking city or settlement might look like.

GROSS PRODUCTION. Here we would see the production of buildings and transport infrastructure as complete, only repair and upgrade would be needed. Most production activity would be turned to food and heating and lighting.

BIOMASS SUPPORTED. The mature settlement would have a high level of biomass supported in the form of tree, and food -producing facilities.

TOTAL ORGANIC MATTER Total organic matter would be higher, to provide eco-system services like shade, energy capturing, building and clothing materials etc. A field does not represent this vision, we would expect more organic matter intensive methods, like forest agriculture, food forestry, would be used.

SIZE OF ORGANISM. It can be imagined that in this case, for a society organism means body, like an organization. As society matures, more specialized and larger organizations can provide efficiency of scale and specialization.

NICHE SPECIALIZATION. People could have more specialized jobs as society matures. Early settlers might need to master a broad range of tasks without being able to go too deeply. In the specialized society everyone could master subjects deeper.

MINERAL CYCLES. It makes sense that an immature society digs up iron and other materials to get started. But after a while, the extraction of these substances can become polluting and maybe lead to scarcity. In this case, minerals already extracted should be recycled ad not released in to the biosphere. This approach is being pioneered by the natural step and Cradle to Cradle. The mature settlement is a mineral recycling society

NUTRIENT EXCHANGE RATE WITH ENVIRONMENT. The same here as for minerals. The mature society will retain nutrients for recycling, and do the surrounding environment a favour by not putting this burden onto it, as well as minimizing the work needed to obtain nutrients. These building blocks of life can stay within the settlement. More are only needed for growth.

ROLE OF DETRITUS Early settlers could make waste without it creating a problem or being seen as a loss of valuable resources as there probably were not much of them. Not so for the mature settlement, where the amount of biomass is high. Detritus is a resource and in the mature society there may be much of it. It can also accumulate and be a pollutant. So it needs recycling. This will mean a soil to soil perceptive for food systems – from soil to plate back to soil.

NUTRIENT CONSERVATION. Gathering nutrients requires a lot of work in an immature settlement. Mature settlements recognize the energy and effort needed in obtaining nutrients is far greater than the effort and work required to cycle them.

What we are describing, then, is that the concept of economic growth is not an end in itself but the process by which economic maturity is reached. At this point, capital is accumulated, analogous to the build up of bio-mass in the mature eco-system.

The effect on capital.The diagram below illustrates how capital is converted and increased in the maturing society, using money merely as a medium of exchange.

Natural capital to man-made capital (A) : For example, minerals and nutrients would be used to create housing and machines. At the same time, man-made capital should be in place to promote development of natural capital(B). Man-made capital cannot increase at the expense of natural capital, the two must grow together. Otherwise, the services that natural systems provide (like building materials, food, clean water, etc) will be unavailable.

Conversion of human capital to man-made and natural capital(C): human capital conversion works uniquely. Taking knowledge and applying it to solve the problem of creating man-made capital and natural capital can, if applied right, increase human capital through learning.This knowledge could be institutionalized in social capital in organizations and information systems.

Social capital, the development of organizations (D), would in turn be needed to run, organize, and develop the man-made capital (E) and natural capital(B).

The role of Financial Capital. In this diagram, money represents an accounting system that has significance in that the value of the whole increases over time. (If all forms of capital can be valued using the same system of measurements.) As the system matures it will accumulate biomass and minerals for recycling and organizations that accumulate knowledge. An accounting system could be developed that calculated in this way. Growth would slow down as the settlements matured- I leave it to later articles to explore how such an accounting system might work.

REFERENCES

1) Odum, E. P. 1969. The strategy of ecosystem development. Science, 104:262-270.

How to encourage sustainable local investment

Unitsoftrust

Units of Trust are investments in local businesses that are neither shares nor direct loans but preferential debentures that are issued in standard denominations so local community members can easily compare offers.

Unlike shares or direct loans, these debentures do not give money as interest, but products and services. Read More…

Impressions from Lands, Lives and Security conference Caux, 2016-07-03

caux

It is a true honour to take part in the Caux dialogues. On this the final day, as the sun sets over lake Geneva I will just share some general impressions.

This year’s conference focused on the challenge of migration. Most migrants come from dry land areas where climate change is creating tension as food productivity falls. These tensions over land reduce the ability to manage resources worsening degradation and resulting in more conflict. The conference brought together policymakers, scientists, activists and farmers to chart ways to unpack the complexity in the challenge. Read More…

Opinion: Put a price on phosphorus now and drive circularity

Stephen Hinton 2016

Photo: Maj-Lis Koivisto

In My Humble Opinion:

Put a price on phosphorus now to create a circular economy before it is too late

I’ve been thinking about some interesting feedback on food prices. At a recent meeting, I presented my case: dividend-bearing import surcharges on scarce substances can encourage reuse and recycling. The received opinion is that that anything that makes food more expensive cannot be done. And shouldn’t. Read More…

Envisioning a safe house for humanity driven by the economy

Can money make the world go green or does it just make it go round? This question has  been posed by the Swedish Sustainable Economy Foundation.

In the work leading up to their coming White Paper that aims to demonstrate who fiscal instruments, as part of Environmental Fiscal Reform, can create a stabilized economy that performs to requirements.

house

A safe house for humanity, with a fiscal system that supports it would, contain monetary incentives and disincentives. Human needs should be assured, and the system should provide each individual with protection should they come close to their needs not being met. It should also encourage sharing and generosity.

The system should dis-incentivize the depletion of essential minerals and incentivize circularity. It should prevent vital planetary boundaries being breached, and incentivize inclusion.

Framing the energy and economy challenge for COP 21 in Paris

THIS ARTICLE WAS FIRST PUBLISHED ON THE TSSEF.SE WEBSITE

In the run-up to the climate talks in Paris, November 2015, the world economy seems to have hit a predicament: restricting fossil fuel burning at a time when austerity measures are biting hard might lower the already less-than-acceptable standards of the least advantaged. Waiting with restrictions on the other hand will risk climate system disruption –and negative effects on the economy – even further. What courses of action are reasonable in this situation? How does the societal system need to change?  Can the problem be part of the solution?

Environmental Fiscal Reform (EFR) needs to happen – that is, economic policy is needed to underpin the rapid change and redistribution needed. This article breaks these challenges down, offering a broad outline of the direction of changes that need to happen over the next 35 years using Sweden as an example. We explain where (EFR) can contribute, and what economic policy makers should aim for so the appeals from the scientists can be translated into a sustainable and fair economic reality.

Energy transition: an introduction to wedges

One aid to visualizing the energy transition challenge is as a set of wedges that frame the changes ahead. Given that fossil fuel intensity in the economy must be reduced radically, we can assume this will have wide-ranging effects on other aspects of the economy and energy provision in particular, hence several different types of “wedges”. Capturing the extent of this transition can be a useful first step in framing economic, particularly environmental fiscal, policy.

HIRSCH

The concept of a shortfall of in energy availability, first developed by Hirsch.

The wedge approach to energy intensity reduction in the economy was pioneered by Robert Hirsch in the Hirsch Report (Hirsch, 2008).  The diagram above illustrates the principle: the demand for fossil fuel is likely to increase, but the extraction shortfall means that demand will not be met creating an unfilled gap, the shape of a wedge.

This “wedge” can be mitigated according to Hirsch, using a range of options for replacing fossil energy sources and reducing demand. The various mitigation options can be presented as separate wedges.

The Swedish Sustainable Economy Foundation maintains that these wedges cannot be realized without adaptations of the economic system. To understand the concepts we offer the case of Sweden as a worked example.

Sweden as an example

According to our analysis for Sweden, there are 9 “wedges” to consider. The diagram below illustrates the scenario where energy demand reduces 50% over 35 years, fossil and nuclear energy are phased out completely and alternative energy sources are introduced or increased.

The wedges are a synthesis of opinions and figures taken from a wide variety of publicly available sources but are offered here just as a worked example and do not represent any government policy as a whole or even a comprehensive proposal from the Foundation. This approach can be seen as a working start.
wedge

A 50% decrease in energy intensity

Our starting point is that at present the Swedish economy, from the point of view of being capable of handling limitations in oil supply, has developed an over-dependency on oil. This dependency is understandable as oil-based liquid fuels are a highly energy dense and easily transportable energy source. No current technologies can replace this energy source scaling up in the time available or using renewable resources available. Some calculations assume that within the time-frame it will be possible to keep the same energy intensity. The Foundation however takes as its starting assumption that a 50% reduction is reasonable over 35 years.

pie1

Swedish energy mix 2014 – cirka 580 TWh in energy produced and 379 TWh in energy used

pie2

Swedish Energy mix 2051 – circa 290 TWh energy produced

In terms of living standards, that would put Sweden on a level where it was in the 50-60s.

New technology/efficiency increases

As a first guess, taking Sweden as an example, we envisage that it will be possible to reduce demand with technological fixes by 25% over the 35 years. Import to note is that increasing efficiency – of engines or machines – normally involves them becoming more popular and overall energy consumption increasing.

Refrigerators, for example, are more efficient, but people nowadays usually buy larger refrigerators so the total energy spent on refrigeration is more, despite the efficiency gains.

With the example of Sweden we should be reminded that the cold climate demands energy to heat homes, crucial during the winter, as well as the energy needed in food preservation and conservation. This is where the emphasis on home heating – via biomass, solar collectors and heat pumps – comes in the following analysis.

Another important lesson from this worked example is that the losses in energy – from that produced to that used are in the order of magnitude of almost 200 TWh lost in a production of 580TWh.  The bulk of these losses come from nuclear power (108TWh) so abandoning nuclear power will reduce the percentage of energy lost considerably.

In this case, economic incentives and barriers need to be in place to ensure that efficiency gains are not used to increase energy consumption. The final section of this article discusses policy instruments that might achieve this.

Behaviour change

25% of today’s demand reduction could come from changing behavior, using existing infrastructure. It is reasonable to assume this can be done over 35 years as the potential is there. For example: by sharing cars for lifts to work, the overall traffic in the morning commute could reduce by 50% if everyone shared. Recent statistics show, too, that up to 50% of food produced is wasted.

Renewables: heatpumps

Heat in pumps extract heat from expired air, the surrounding air or from the heat in the ground. For every unit of electricity used they gain about 8 units of heat. Increase in heat pump use would therefore mean a rise in the use of electricity for this purpose and require more electricity produced by solar, wind, biomass or hydro, or equivalent savings elsewhere. In this worked example we envisage heat pump use  increasing by about 400%.

Renewables: biomass

Biomass captures the energy from the sun and is a good potential energy source.  Biomass sources include many forms of waste, firewood and biogas – the latter can produce electricity as well as being used for heating and as a liquid fuel replacement. Some buses already run on biogas – we envisage a rapid expansion over the 35 year period by about 25%.

Renewables: windpower

Windpower produces mainly electricity, (some proponents suggest that the rotating blades can be attached to paddles via gears and the friction of the turning paddles can produce hot water). Hoping that wind technology can develop rapidly, our worked example calls for an increase of 400% in wind power.

Renewables: hydropower

In the Swedish scenario it is generally accepted that the large hydropower installations that regulate most of the large rivers in Sweden should not be extended. The installed base of hydropower is therefore expected to grow only slightly from smaller installation possibilities.

Renewables: solar

Unexpectedly for some, solar power does not show up in the graphs of Swedish energy mix as the present installed base is a small percentage of the total. It is however an important source of electricity and heated water and expected to grow over a thousand percent.

Non-renewables: nuclear

Sweden decided in a referendum to phase out nuclear power, so an initial assumption is a gradual phase out over the 35 year period.

Non-renewables: fossil fuels

Sweden currently produces about 206 TWh from fossil fuels, about 110 TWh goes into the transport system. It might be reasonable to assume that the fleet of fossil-fueled vehicles could be retired, replaced or converted to renewable fuels within the 35 year period.

Reflections on the plan

Requirements on rapid expansion of smallest technologies for buildings

It is remarkable at first sight that solar power, photo-voltaic in particular, shows up as being so small it is almost counted as zero in the overall mix. In 2014, solar accounted for 0.06% of total electricity production.

Even though solar shows up as this small fraction in the overall energy mix, there is potential for a panel to be installed on virtually every roof. The technology is available now, and is becoming better and cheaper.

So although the percentage of the mix is small now, the percentage of solar electricity and solar heat for each building is potentially large.

In other words, taken on a house for house or building for building basis, it is reasonable to assume that today’s 85% reliance on non-renewables can drop rapidly during the time period under consideration.

Year on year change for each wedge

Although the overall challenge might seem insurmountable, it is more encouraging to see the year on year changes required  amounting  to less than 25% year on year.

The concept of economic stabilization with digital technology

Technology has come a long way, and might offer solutions to creating an economy that performs to requirements. For example, transport vehicles today are based on technology that is over 100 years old. However, they are much safer, respond better to driver commands, are more efficient and environmentally safer today even though the basic technology – including that of the internal combustion engine –is the same.

These developments in the vehicle industry point the way to what might be possible with the economy – to use modern information technology to ensure the economy performs to requirements.

Digital control plays a large part in this development. Today, vehicles are equipped with digital control devices that monitor vehicle performance and adapt it according to driver input. Apart from the obvious controls like speed control, this control layer keeps the engine running smoothly and efficiently, it ensures that the breaks do not lock to cause skids, and even in a bend in the road adjusts the relative speed of the outside wheels to the inside wheels thus  increasing traction.

Dividend-bearing, flexible pollutant  surcharges

A dividend- bearing pollutant fee mechanism, also known as flexible pollutant fees has been proposed by many economic policy experts, including Anders Höglund of the Swedish Sustainable Economy Foundation.

The principle of the fee mechanism is a surcharge added to the fees levied when a potential pollutant is introduced to the economy, for example via extraction, import or manufacture.

The fee starts off low, and is raised depending on how society performs to abate the pollution arising from the use of the pollutant.

At the same time, money from the levied is fee is paid back to taxpayers to ensure that spending power, and thereby economic robustness, is unaffected by the levy.

As the fees levied are passed on to consumers, prices of pollutant-containing products rise in comparison to non-pollutant products and services. Consumers will be still able to choose to buy the more expensive product but with a good conscience that they are compensating others for the pollution from the consumption. Otherwise, non-pollutant bearing products become comparatively cheaper providing the economic incentive for society to invest in non-polluting alternatives.

TSSEF_MEchanism

The surcharge levied on import into the economy is paid fully or in part back to taxpayers. The charge is adjusted regularly depending on how well the economy lives up to agreed emissions targets, being raised if performance falls behind.

Similar to base lending rates, it is envisaged a government body is formed to regularly raise the surcharge levy as needed.

Benefits of flexible fees

  • As the mechanism employs modern information technology it ensures that the information acted upon is up to date and relevant. All actors benefit in the long run from a sustainable, robust and well-performing economy.
  • The redistribution mechanism will in practice mean an increase in economic security for the poorest citizens: this is in contrast to other approaches which will reduce the poor’s spending power.
  • By making pollutant import more expensive, the mechanism encourages green consumption and green jobs. It also encourages new investment in recycling technology, ushering in the circular economy.  It is preferable that citizens spend the money they have, rather than invest it in assets like houses and shares, as every penny consumed creates more work and thereby more jobs.
  • Levying a fee on activities that pollute, and paying it back to tax payers ensures the economy is stable, advantages the poor, and sends a strong signal to the investment community on where their money should go.

Applying flexible fees to the energy wedges

Returning to the initial diagram of the energy wedges for Sweden, our worked example could include the following:

  • Surcharges on import of fossil fuels and on nuclear fuels, aimed to drive a 35 year phase out.
  • A surcharge on all products levied according to fossil-fuel consumption in the production and distribution to national borders.

An import surcharge should be fairly simple to implement. Fossil fuel performance can be monitored by the government body, collecting data such as:

  • Efficiency of transport system
  • Uptake of alternatives
  • Investment in fossil-fueled infrastructure
  • Economic performance of transport system actors
  • Transport price development

The wedge approach, then, can be a useful tool for sorting out national energy strategies at high level. The flexible fee mechanism can be employed to ensure consumers continue to purchase in general, thus preserving employment, but finding environmental solutions cheaper they drive a green economy.

To help further understanding of the potential of fees on pollutants the Foundation offers a simulation run  a kind of business game. Read more about the simulations here.

The Foundation collaborates with a wide range of experts and universities. If you are interested in exploring the potential of using the wedges approach, please contact us.

References

IEA-PVPS  (2014) National Survey Report of PV power applications in Sweden 2014
IEA-PVPS National Survey Report of PV power applications in Sweden 2014

Hirsch, R. L. (2008). Mitigation of maximum world oil production: Shortage scenarios. Energy policy36(2), 881-889.

Fiscal Approaches to Driving the Circular Economy

I had the honour of addressing the Baltic Sea Action group on the opportunities to drive the circular economy using fiscal instruments.

The main thread of my presentation was the work done with the Swedish Sustainable Economy Foundation on the nutrients phosphorus and nitrogen from field to plate to field and the framework of the fiscal and economic realities affecting decisions at each step.

If you take a step back to see the whole chain, you realise that no-one wants to be counter-sustainable, but from each person’s viewpoint they must make economic decisions for the domain they are responsible for.

By going as far up the supply chain as possible, it is possible to add dividend-bearing surcharges to existing levies that stimulate a circular economy.

You can view and download the slides here

To view the whole presentation see the youtube clip below.

Dividend-bearing pollutant fees in simulation at European Phosphorus Platform

BERLIN 5 MARCH 2015: As an extra attraction at the 2nd European Sustainable Phosphorus Conference (ESPC2), The Swedish Sustainable Economy Foundation (TSSEF.SE) presented a shortened version of its simulation of divided-bearing pollutant fee mechanism. The  simulation, which is played as a business game scenario, pits a government charged with reducing emissions of phosphorus against food producers and property owners who are charged with following regulations and keeping profits up.

The aim of the simulation is to bring participants up close to the myriad of factors  – from technical and legal to emotional – surrounding putting a price on pollution. The simulation is aimed at giving participants an idea of how Environmental Fiscal Reform (EFR) works. The simulation highlights the dividend-bearing pollutant mechanism created by TSSEF. Basically a surcharge is levied as high up in the supply chain as possible on potential pollutants. (Pollutants are also useful substances, just in the wrong form and the wrong place.) Essential to understanding the levy is that it is paid back to taxpayers – to ensure that consumers retain spending power. Download the poster here. Read More…

Banks can play an important role in driving prosperity. Making money on asset-flipping doesn’t do it.

Professor Werner calls on Universities to look more into the role of local banks and the role of banks in general in the economy.

 

In this speech from MOTALA in Sweden Professor Werner explains the problem of large banks only investing in buying and selling assets, instead of investing in the local community in productive projects that create jobs.