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TOWARDS THE CIRCULAR ECONOMY

TOWARDS THE CIRCULAR ECONOMY. Ellen MacArthur Foundation. Leonardo. Den Bosch, Sep 2012. This seems attractive in a world of changing resource prices (and more environmental pressure). McKinsey Commodity Price Index (years 1999 - 2001 = 100) 1. World War I. World War II. 1970s oil shock.

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TOWARDS THE CIRCULAR ECONOMY

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  1. TOWARDS THE CIRCULAR ECONOMY Ellen MacArthur Foundation Leonardo Den Bosch, Sep 2012

  2. This seems attractive in a world of changing resource prices (and more environmental pressure) McKinsey Commodity Price Index (years 1999 - 2001 = 100)1 World War I World War II 1970s oil shock Postwar depression Great Depression Turning point in price trend 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 1 Based on arithmetic average of 4 commodity subindices: food, nonfood agricultural items, metals, and energy; 2011 prices based on average of first 8 months of 2011 Source: Grilli and Yang; Pfaffenzeller; World Bank; International Monetary Fund; Organisation for Economic Co­operation and Development statistics; UN Food and Agriculture Organization; UN Comtrade; Ellen MacArthur Foundation circular economy team

  3. A perfect storm of forces makes the time right for a transition Resource constraints Mobilised governments • 3 bn new consumers are driving resource demand • Exhaustion of easy-to-access reserves • Need for imports from volatile regions stretches supply and increases volatility • Governments drive strategic resource programs (D, UK, EU, …) • UK landfill tax hikes • Seattle works with food retail-ers to promote nutrient-based packaging The new consumer Enabling technology • Emerging bias of acces over ownership • Car-sharing services are an example—membership is spiking • New technologies improve product tracking and separation • Better supply chain manage-ment makes reverse logistics feasible Source: The Guardian: Seattle Public Utilities (Seattle.gov); Frost & Sullivan,"Sustainable and Innovative Personal Transport Solutions—Strategic Analysis of Car sharing Market in Europe”

  4. So, the Ellen MacArthur Foundation asked McKinsey to find out whether a circular system is economically viable Does it really solve the resource question? Is it profitable for business? Is it good for the economy? Source: Ellen MacArthur Foundation circular economy team

  5. Mining/materials manufacturing Farming/ collection1 Parts manufacurer Biochemical feedstock Product manufacturer Restoration Recycle Service provider Refurbish/remanufacture Cascades Biogas Reuse/redistribute Maintenance Anaerobic digestion/ composting Collection Collection Extraction of biochemical feedstock2 Energy recovery Leakage—to be minimized Landfill We first had to understand how the circular economy works … Biological nutrients Technical nutrients 1 Hunting and fishing 2 Can take both postharvest and postconsumer waste as an input Source: Ellen MacArthur Foundation circular economy team

  6. $ $ $ … and how it is linked to economic value drivers The power of … … the inner circle … circling longer … pure/non-toxic/easier-to- separate inputs and designs … cascaded use across industries

  7. A circular economy would not just "buy time"—it would reduce the amount of material consumed to a lower set point ILLUSTRATIVE Effect of circular system on primary material demand in widget market Volume of annual material input required 1,500 Demand BAU Virgin material substituted by circular material 1,000 500 Demand under circularity 0 2010 20 30 40 50 60 70 2075 Effect of circular system on material stock and landfills Cumulative volume of material used 25,000 In use BAU material stock 20,000 BAU landfilled 15,000 10,000 Material stock under circularity 5,000 Landfill under circularity 0 2010 20 30 40 50 60 70 2075 Source: Ellen MacArthur Foundation circular economy team

  8. Based on that, we analysed selected product markets in detail, dis-covering high potential for reusing of resources—mobile phones End-of-life product flows based on 2010 EU figures Percentage of total end-of-life devices ESTIMATES Status quo Transition scenario1 Mining Mining Parts manufacturer Parts manufacturer 10 Recycle 9 Recycle Product manufacturer Product manufacturer Remanu-facture2 Remanu-facture2 Service provider Service provider 21 0 Reuse 6 19 Reuse Mainte-nance Mainte-nance 15 50 50 85 Collection Collection Unaccounted and landfill Unaccounted and landfill 1 Transition scenario: conservative assumptions on improvements in circular design and the reverse cycle, within today's technical boundaries 2 Remanufacturing, here refers to the reuse of certain components and the recycling of residual materials Source: Gartner; EPA; Eurostat; UNEP; Ellen MacArthur Foundation circular economy team

  9. Design changes and investments in reverse infrastructure could greatly improve the circular business case—mobile phone example ESTIMATES USD per device Status quo Improvement Transition scenario Cost improvement 22.8 Value improvement 16.6 6.9 6.2 0 0.7 Reuse 1.3 5.0 0.7 0.6 2.5 6.4 Remanufacture 2.6 -1.4 0.9 0.6 3.1 3.0 0.3 1.3 0.3 0.1 Recycle materials Recover-able value Treatment costs Net benefitstatus quo Circular design Treatment process Net benefit improved Source: Geyer & Doctori Blass (2008); Neto & Bloemhof-Ruwaard (2009); Neira et al. (2006); EPA; Umicore; LME; Metal Bulletin; recellular.com; amazon.com; recyclemobilephones.co.uk; Ellen MacArthur Foundation circular economy team

  10. Our deep-dive analyses show that substantial savings are already possible with minor changes to the current setup TRANSITION SCENARIO Net material cost savings (percentage of material costs vs. primary production) Profit change in circular activity USD/product Example From …  To … Mobile phone— remanufacturing • Collection rate increase by 35% pts • Remanufacturing rate from 0 to 42% +4 48 Deep dive on prior pages Smartphone— refurbishment • Collection rate increase by 30% pts • Refurbishing rate from 38 to 60% +14 66 Light commercial vehicle—refurbishment • No collection rate change • Refurbishing rate from 0 to 30% +2,056 89 Washing machine— refurbishment • Collection rate increase by 25% pts • Refurbishing rate from 10 to 50% +135 63 Textiles—cascading1 • Collection rate of 22%, of which 14% enter cascade • 50% material enters next cascading step +442 622 1 Cascading example for UK market 2 Here, product refers to 10 kg of collected cotton material Source: Ellen MacArthur Foundation circular economy team

  11. Adoption of circular setups in subset of EU manufacturing sectors could yield net material cost savings of up to USD 630 billion p.a. Net material cost savings in complex durables with medium lifespans USD billions per year, based on current total input costs per sector, EU ROUGH ESTIMATES 520 - 630 (19 - 23%) Motor vehicles 340 - 380 (12 - 14%) Machinery and equipment Electrical machinery and apparatus Other transport Furniture Radio, TV, and communication Medical precision and optical equipment Office machinery and computers Transition scenario Advanced scenario Source: Eurostat input/output tables 2007 for EU-27 economies; Ellen MacArthur Foundation circular economy team

  12. Significant barriers remain – action is needed in four critical areas ILLUSTRATIVE Building blocks Barriers A Design to last Modularisation • Premature obsolescence • Limited degree of modularisation that would facilitate upgrade or maintenance • Materials chemically contaminated Design for disassembly Ban of toxics Design/production B • Low customer incentives to return products after usage • Limited control of manufacturers/retailers over post-sale value chain From consumer to user Technology improvements Business models Extension and upgrade of collection infrastructure C • Subscale and thus expensive reverse operations • Lack of professionalisation Pooling of reverse operations "Relogistics" D • Misaligned incentives • Lack of standards Enablers to increase systemwide coordination Education Rules of the game Cross-chain and cross-sector cooperation Source: Ellen MacArthur Foundation circular economy team

  13. The first steps of the transition are already underway—there remains lots to do for companies, governments, and research institutions Companies Governments Research institutions • Develop viable business mdels for … • Financial institutions • Equipment/consumer goods manufacturer • Logistics providers • Service firms (rental, MRO, …) • Information services • … • Set standards (esp. toxicity) • Procurement • Support „re-“infrastructure • Level the playingfield (taxation, gate fees, etc.) • Stimulate R&D, education • Continue to analyse potential of circular business models • Drive material and techno-logy innovation • Help to activate govern-ments and businesses Source: Ellen MacArthur Foundation circular economy team

  14. Market growth Annual average2 +7% +8% +5% Resource intensity Annual average change1 +3% -2% -2% Material intensity Reduction potential Assumed no. of lifecycles -50% -67% -75% 2 3 4 For several examples, circular design is likely to deliver a resource performance far beyond the incremental efficiency improvement Carpet Fridge Furniture Linearsystem Circular system 1 In Germany, based on resource productivity growth 1995 - 2005; resources include material, energy, and water 2 Globally, growth rates for carpets and fridges are 2009 - 14E averages, for furniture 2004 - 09 averages Source: German System of Integrated Environmental and Economic Accounting; Euromonitor (2011); Centre for Industrial Studies (2011); Freedonia (2011); Ellen MacArthur Foundation circular economy team

  15. Restoration Refurbish/remanufacture Biogas Reuse/redistribute Maintenance Anaerobic digestion/ composting Extraction of biochemical feedstock Employment effects vary across primary, secondary, and tertiary sectors of a circular economy Effect on employment activity (directional) Mining/materials manufacturing Primarysector Farming/ collection Parts manufacturer Recycle Secondarysector Biochemical feedstock Product manufacturer Service provider Tertiary sector Cascades Collection Collection Energy recovery Leakage—to be minimized Landfill Source: Ellen MacArthur Foundation circular economy team

  16. FIGURE 21 Revamping industry, reducing material bottlenecks, and creating tertiary sector opportunities would benefit labour, capital, and innovation Labour intensity Labour spending per unit of GDP output, EU-27 economies Innovation index¹ IBM/Melbourne Institute Index Capital intensity Total expenditures / labour expenditures, EU-27 economies 0.30 4.07 2.97 0.16 0.14 1.87 Primary Secondary Tertiary Primary Secondary Tertiary Primary Secondary Tertiary 1 Components of index include: R&D intensity; patent, trademark and design intensity; organization/managerial innovation; and productivity SOURCE: Labour intensity calculated using data taken from Eurostat Input-Output tables for EU-27; Innovation data from IBM/Melbourne Institute Innovation Index (covering Australian Industry), 2010

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