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What is the circular economy?

The World Economic Forum’s circular economy definition is “an industrial system that is restorative or regenerative by intention and design.” As opposed to the traditional linear model that transforms raw materials into products that are used once and discarded, the circular model closes the loop by bringing products back into the cycle after use so they can be reused, recycled, or repurposed.  


In a linear economy, materials flow in a straight line from resource extraction, to manufacturing, and then to landfill. Value is created by producing and selling as many products as possible. This model is characterized by wasted resources and excessive pollution, causing ecosystem degradation, wealth concentrations, and social inequities.  


A circular economy model, on the other hand, aims to redefine growth to benefit people and the planet. It entails gradually decoupling economic activity from the consumption of finite resources and designing waste out of the system. Underpinned by a transition to renewable energy sources, the circular business model builds economic, natural, and social capital.  

It entails gradually decoupling economic activity from the consumption of finite resources and designing waste out of the system.

Principles of the circular economy

Also referred to as circularity, this model is based on three principles:


  1. Design out waste and pollution.
  2. Keep products and materials in use.
  3. Regenerate natural systems.


According to the Ellen MacArthur Foundation, acting on these three principles would have long-term benefits, such as a US$550 billion reduction in healthcare costs associated with the food sector alone.

How does the circular economy work? What are its success factors?

The success of the circular economy model depends on certain core elements. First, products must be designed to be future proof – made of the right materials for an appropriate lifetime. This includes using renewable energy and renewable, reusable, and non-toxic resources in an efficient way. Success requires a shift in mindset. Waste is a resource; it must be recovered for reuse and recycling, which in turn requires the right infrastructure. Enterprises must rethink their business models and find opportunities to create greater value by building on the interaction between products and services. And finally, the new model requires digital technology that can track, monitor, and analyze relevant data across the entire process.

Diagram of circular economy vs a linear economy

The circular economy vs a linear economy

Why is the circular economy important?

The entire planet stands to benefit from the circular economy. Every human being, enterprise, plant, and creature will benefit from an economic system that generates less waste and pollution, keeps products and materials in use longer, and regenerates natural ecosystems.


A circular economy has huge potential to improve business, societal, and environmental spheres and is the only way to ensure a sustainable lifestyle that allows us to meet our current needs without compromising the ability of future generations to meet theirs.


  • The environmental benefits of a circular economy are immense. A study by the Ellen MacArthur Foundation indicates that a circular economy development path could halve carbon dioxide emissions by 2030. In this model, the use of land, soil, water, and raw materials is better managed while the release of toxic pollutants and chemicals into the environment is monitored and reduced. A circular economy preserves natural habitats and biodiversity and helps halt mass extinctions of species suffering from the effects of climate change.
  • The benefits to society are equally extensive. First and foremost is the reduction of health hazards caused by waste and pollution. At the same time, improved design enables producers and consumers to reuse and recycle more. Keeping valuable resources circulating in the economy supports the market for secondary products and materials across all regions. Not only does this create new jobs, it also satisfies consumer demand for better, longer-lasting products. And additional job opportunities are created to remanufacture, maintain, and repair products that are part of a product-as-a-service business model.
  • And finally, the circular economy is lucrative. It makes businesses more resilient and better prepared to deal with unexpected changes. Companies are less dependent on the volatile prices of raw materials, protecting them from geopolitical crises and safeguarding supply chains already threatened by climate change events such as natural disasters. Another advantage to this model is that it fosters scenarios where products are rented or leased. This allows businesses to learn about customer usage patterns and behaviors and improve customer satisfaction and loyalty.

Examples of the circular economy

In 2016, the Dutch government announced its intention to become a 100% circular economy by 2050. The program focuses on smart design to reduce the need for raw materials, conscious use of products to extend lifecycle, and the use of waste as a raw material. For example, to reduce the country’s dependence on imported raw materials for the electronics industry, end-of-life smartphones are being recycled so the metals can be reused in new phones. The country is investing in projects such as creating better infrastructure for collecting household waste, reusing demolition waste from old buildings, and developing alternative materials such as composted grass to use in buildings. As a result, by as early as 2023, the circular economy in the Netherlands will account for a market value of 7.3 billion Euros and 54,000 jobs. 


Collaborative business plays a key role in this model. Veolia, the global leader in water, waste, and energy management solutions, partnered with Philips, the Dutch consumer appliance and electronics giant, to develop a new kind of vacuum cleaner made from plastic waste. Veolia is involved in the manufacturing process right from the design stage. Its role is to help Philips integrate as much recycled plastic as possible into its new models of vacuum cleaners and coffee machines, and to supply Philips with quality materials. This partnership is helping Philips to reach its goals to generate 25% of sales from circular products, services, and solutions by 2025. 

How did the circular economy begin?

Industrialization and consumerism go hand in hand. The industrial revolution triggered a huge shift from a largely agricultural economy to jobs centered in manufacturing that drove mass migrations to cities. Industrial workers made more money than their rural counterparts, giving them greater buying power and leading to increased consumerism.


These trends were made possible by cheap and abundant materials, fossil fuel energy, and cheap labor. Steep population growth, rapid urbanization, and globalization based on a linear economic model have pushed these trends to extreme heights. While this model has led to an improved standard of living, it has also led to global warming, depletion of natural resources, and ecosystem destruction. 


Just as industrialization and consumerism did not occur overnight, the shift towards circularity has been decades in the making. In the late 1970s, Walter R. Stahel, a founding father of industrial sustainability, coined the term “cradle to cradle,” a design concept that aims to reduce waste by focusing on products that are safe for humans and the environment.  Popularized by the book Cradle to Cradle: Remaking The Way We Make Things, the concept was widely implemented by architect William McDonough, who was introduced as the “father of the circular economy” in 2017 at the World Economic Forum


Through her foundation, Ellen MacArthur has also been instrumental in developing and promoting circularity by inspiring businesses, academia, policymakers, and institutions to transition to the economic model of the future.

Is a circular economy possible?

Can these harmful trends of industrialization and consumerism be reversed while maintaining the levels of comfort and convenience society has grown to depend on? Proponents of the circular economy are convinced we are in a decisive decade. Shifting the system involves everyone and everything: businesses, governments, and individuals. By designing out waste and pollution, keeping products and materials in use, and regenerating natural systems we can reinvent everything. But how to accomplish such a Herculean task?


To help speed up the pace of change, the World Economic Forum created the Platform for Accelerating the Circular Economy (PACE) and launched the Circular Economy Action Agenda, a call for business, government, and civil society to rally around a collective plan of action. The organization has compiled a report for each of the five key areas – electronics, plastics, textiles, food, and capital equipment – that together account for most of the waste and carbon emissions harming the planet.  


Each Action Agenda consists of four chapters: Objectives, stating what a circular economy could look like for the focus area; Impact, an assessment of the potential impact on people and the planet if the objectives are achieved; Barriers that impede the implementation of circularity in that area; and a set of 10 Calls-to-Action

Technology drives the circular economy

Circular business models reuse everything, but they rely heavily on emerging technologies to enable the path to sustainable profitability.  


Companies undergoing digital transformation must rethink every aspect of their business: future vision, strategy, value chain, operations, pricing models, sales channels, and customer engagement. This presents a unique opportunity to use data and digital technology more efficiently for circular innovation.


As Deloitte notes in its “Recipe for Circular Economy Transformation” report, key elements for circular transformation include the Internet of Things (IoT) platformsartificial intelligence (AI)machine learning, and predictive analytics. These elements help companies better understand their use of resources and waste, material flows and areas of inefficiency, and how to deliver customer value. These technologies help companies find circular potential hotspots and align business strategy with profit models and pricing strategies.  


Blockchain, augmented reality, optimization, and smart mobility help companies rethink operations to optimize resources, break down silos, and connect data, devices, and partners. Big Data, apps, and e-commerce platforms enable personalization and create better customer experiences. And cloud services, social platforms, data visualization, and virtual reality (VR) enable engagement and continuous feedback loops for better design throughout the cycle.


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