The circular economy is the basis of a new EU industrial policy

The European Commission’s paper “For a European Industrial Renaissance” underlines the importance of boosting manufacturing industry’s share of the EU’s GDP to around 20% by 2020 from 15% today. To reach that, adjustments to the regulatory framework will be vital. Although derided sometimes as the “old continent”, Europe is nevertheless very well placed to kick-start a new industrial era around the world thanks to its wealth of productive infrastructure, its skilled workforce and innovation capital.

But first, what must Europe, as cradle of the industrial revolution, do to re-invent itself and re-think the future? Faced with unprecedented price rises and volatility on commodities markets, Europe’s industrial economy needs tangible solutions if it is to be at the forefront of globalisation. For many corporate strategists and economists, it’s becoming clear that traditional routes to greater efficiency can have only a limited impact when faced with the systemic shifts the global economy is undergoing.

It’s a scenario that’s causing business leaders and politicians to suggest that the throughput economy has since the industrial revolution been based on a take-make-dispose flow of resources and energy no longer provides the socio-economic solutions we need. The rules of the game have changed, with a century of commodity price declines erased in a decade, three billion new middle-class consumers around the world expected by 2030, and unprecedented price volatility in the markets. The search is on for alternatives.

The idea of moving away from the linear “take, make and dispose” model is gaining traction. A circular economy would be regenerative, and would rely primarily on optimising biological and technical material flows. Products and services in this circular economy will be so designed that biological materials return to the food and farming system, while technical materials are kept in production and use loops without any loss of quality. This circular model will generate new revenue streams, reveal overcapacities and put assets to good use. As one leading performance economy thinker, Walter Stahel, has put it, the circular economy will ensure that the “goods of today become the resources of tomorrow, at yesterday’s prices”.

To help make the business case for circularity, the Ellen MacArthur Foundation has worked with McKinsey Consultants on three economic reports that show how circular economy would help de-couple economic development from finite resources and create a $1tn opportunity for businesses that are progressive enough to kick-start a transition.

Our first report shows that for Europe, the greatest potential offered by circular processes precisely matches the EU’s strongest points in high-value manufacturing, with up to $630bn in net material savings achievable yearly.

The Brussels Commission paper has emphasised that Europe already has a daily trade surplus in manufactured goods of a billion euro (€365bn annually), generated mainly by a few high and medium technology sectors. These include the automotive, machinery and equipment, pharmaceuticals, chemicals, aeronautics, space and creative industries sectors, and high-end goods in such other sectors as food. Our research suggests much untapped potential in re-use, refurbishment and re-manufacturing, and these would have the added benefit of reducing the energy needs.

Businesses are already starting to seize this opportunity. Renault is expanding operations at its Choisy-le-Roi plant in France, where four types of components are remanufactured using a process that restores used parts to their original quality, but at 30-50% of the cost. Another company, Kingfisher, is investing in innovations that include the ‘mining’ of resources from recovered power tools, while also piloting tool rental schemes.

The European Union, too, has now seen the potential benefits of the circular economy, and is introducing ideas for building a policy framework that encourages a shift towards the wider use of circular practices. The crucial but unanswered question, though, is whether such measures will prove to be bold enough to bring about a paradigm shift? The risk is that the EU’s recommendations will fall short of that and amount only to tweaks in Europe’s existing economic model.

The manifesto of the European Resource Efficiency Platform (EREP) in December 2012 produced agreement amongst its members that “the EU has no choice but to go for the transition to a resource-efficient and ultimately regenerative circular economy”, that would put the emphasis on job creation and global competitiveness. EREP underlined the importance of phasing out harmful subsidies that distort prices, especially in support of fossil fuels. Its report suggested a ‘product passport’ to document the contents of a product and provide much more transparency on how it can be repaired, remanufactured or recycled. High-quality recycling was seen as having “significant potential for creating jobs and growth”, and would align with the EU’s own objective of near-zero landfill by 2020 without resorting to the shortcut of using waste to fuel energy processes. These recommendations are clearly designed to avoid making circularity little more than a regulatory hoop through which industries jump, but instead a policy that sends positive signals on the economic advantage to them of circular business models.

The challenges that still lie ahead if the circular economy’s potential is even to be realised also mean that its fundamental principles must be questioned: for instance, can a regenerative model emerge without any changes to fiscal policies? The importance of the shift’s impact on commodity markets, coupled with the pressing need to address unemployment in Europe, raises important questions about the wisdom of continuing to tax labour rather than resources.

There seems an increasingly widespread view amongst European business leaders that our current economic models will not provide long-term prosperity in the context of global population growth and resource constraints. We believe that a circular economy framework offers guiding principles for re-thinking and redesigning our future. There have been promising signs that a shift is taking place, but reaching our goal will demand a pioneering sense of purpose if our ambitions are to be fulfilled with a system that rebuilds our economic, social and natural capital.