How saving resources can make businesses money

Rather than increasing costs to enterprises through taxes and regulations, the circular economy can broaden the sustainability menu for business

PUBLISHED : Wednesday, 16 April, 2014, 10:11am
UPDATED : Thursday, 17 April, 2014, 5:00am

Just over two weeks ago, the United Nations-sponsored Intergovernmental Panel on Climate Change released the part of its fifth assessment report dealing with the possible impacts of climate change.

In the absence of adequate action on carbon emission reductions and adaptation, the report warns that extreme weather, famine, disease, mass migration and conflict would occur. It attaches a high level of confidence to these predictions.

The reaction to all this has been rather muted. One might have expected more press, more debate, more statements of concern and more calls to action from politicians.

Perhaps too many are suffering from "dire prediction fatigue". Some question the validity of the science. Collective action is difficult when costs are immediate and the putative benefits delayed.

Co-operation from consumers is also crucial to render effective some circular economy actions

Governments have spent years arguing about the division of responsibility and equitable burden sharing instead of agreeing on what to do.

Perhaps one of the problems is that the climate change debate has not been linked adequately to thinking about other pressures weighing on the planet, notably resource depletion accentuated by growth in income and population.

Population will continue to grow, perhaps by as much as 40 per cent in the next 50 years, reaching some 10 billion people before it stabilises.

Today's middle class of about two billion people is forecast to become five billion by 2030. Asia, incidentally, will account for two-thirds of the middle class and half of middle-income consumption by then.

Commodity prices are likely to trend upwards for decades to come on account of these pressures.

If resource pressure and the threat of climate change were more explicitly linked, maybe it would be easier to spur action. This is certainly likely to be true when considering the part business should play in addressing contemporary and future sustainability challenges.

Instead of only raising carbon emission costs to enterprises through taxes and regulations, there could be money in rethinking business models through the lens of resource use.

The latter proposition was the import of a meeting that took place earlier this month in Hong Kong, organised by the Ellen Macarthur Foundation and the Fung Global Institute.

The Ellen Macarthur Foundation, based in Britain, has made a name for itself by promoting the concept of the circular economy. This is the antithesis of the linear economy, which is based on a simple model of resource extraction, use and disposal.

The circular economy seeks to conserve resources by eliminating waste and designing products for re-use. It is about "making to make again" and "using not using up", as the promotional material states.

A key point in the argument is that this approach to saving resources can make money for business. According to one report, smarter product design and waste elimination in consumer goods industries could be worth more than 1 per cent of global GDP.

Food and beverage waste can be turned into biogas or returned as nutrients to the soil. Clothing can be worn again, used as insulation or stuffing, or recycled. Packaging can be reused, recycled or made from biodegradable materials.

Appropriate infrastructure must be developed. Technological developments are important as well, such as digital commerce and 3-D printing.

One of the intriguing resource-saving innovation opportunities of particular interest to some businesses involves making and retaining products rather than making and selling them.

What is made is leased, maintained and taken back for reconditioning, re-use, or remanufacturing. Household appliances such as washing machines or refrigerators provide good examples of suitable products for such treatment.

This makes manufacturing industries into service providers and offers significant opportunities for "closing the production loop" and ensuring that trading up effectively means exchanging rather than discarding used products.

Two points about the concept of the circular economy deserve deeper consideration.

First, it is obviously not a panacea that eliminates the need for more wide-ranging sustainability initiatives, including those that may directly involve business. Co-operation from consumers is also crucial to render effective some circular economy actions taken by producers.

Second, firms will not always make money from pursuing a circular economy model. Much depends on underlying economic conditions and, perhaps more importantly, the policy environment.

Obtaining the full benefits from this approach to resource conservation will need a partnership between business and government - and quite possibly international co-operation when it comes to actions involving global value chains.

Policy can, of course, both help and hinder. The case for regulation must be clear. Regulatory design and administrative quality are also crucial. Any tax and subsidy structures need to be compatible with the underlying sustainability imperatives of the circular economy. Broadening the sustainability agenda and clarifying the role of business in pursuing that agenda are preconditions for any serious action designed to rescue us from our own destructiveness.

Patrick Low is vice-president of research at the Fung Global Institute