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How Economies of Scale are Achieved in a Circular Economy

Adrian Samson/Getty Images economies of scale

The world has operated on a linear economy for the past 75 years, and a monumental shift in waste streams could push it to become more circular.

Ron Gonen, founder and CEO of Closed Loop Partners, discussed how alternatives to natural resource extraction are causing the nation's economy to evolve.

 "The financial beneficiaries [a linear] system were the extraction industries, the oil and gas industry, the mining industry," he said to WASTECON attendees. "What we're focused on in is moving towards a circular economy where we're able to manufacture without reliance on natural resource extraction. We want to rely on using recycled content and rely on material science so we can develop new types of materials that are better, stronger. We want to make sure that we never have to rely on the disposal of products. We're able to collect those products and either reuse them or put them back into the manufacturing system."

As the world moves to more efficient waste management systems, the circular economy could present a $4.5 trillion opportunity by 2030.

GDP as an Economic Indicator

In order to scale, Gonen first explained how advertising and marketing in the United States influenced consumer sentiment toward recycling.

Pre-World War II, the U.S. government advocated for recycling as a "patriotic duty," while a sizable amount of natural resource extraction took place.

"At that time, resources were viewed as a major commodity and a major value to our national security," Gonen said. "The messaging we received from industry was that quality was the highest form of status in America. The better the product you had access to - whether it be clothes or automobiles or something for your home - the higher the status."

Following the end of the war, status no longer became focused on quality but rather the number of things that every American family possessed. The marketing message shifted to massive consumption as a measure of success. 

Then came the concept of gross domestic product (GDP).

"A lot of people think that GDP has always been around forever," he said. "In fact, you don't really read much about it until the 1960s."

Gonen said that what makes GDP so interesting is that a professor who developed the concept around GDP never intended it to be used as the sole measure of the nation's economy. Still, the metric remained valuable as the country transitioned to massive consumption.

"GDP does not measure the quality of education, the safety of our communities, the quality of our air, water or green spaces, or the affordability of our house," he continued.

And while GDP has increased, these factors have decreased.

As the government began to measure economic productivity using GDP in the 1970s, schools began to integrate the concept into economics and business courses. Core curriculum was centered on bottom-line profits rather than supply chain and community health. 

When Greed Became Good

A profit-driven society emerged as a cultural norm.Gonen cited the 1987 film "Wall Street" starring Michael Douglas. 

"His character Gordon Gekko had a very famous speech," he explained. "It's a speech about how greed is good. This is the culmination of that kind of attitude becoming a core part of our business culture."

As individual greed and a focus on the self versus the whole, the consequences of the new mindset began to materialize in the early 2000s. Massive corporate scandals such as Enron, Tyco and WorldCom made media headlines on what seemed like a daily basis.

"These are just a few examples of what happens when you infuse culture and the economy with just a pure bottom-line focus on profits," Gonen said. "You had a situation where our entire economy became built on natural resource extraction. And as you're seeing today, natural resource extraction created massive environmental damage, massive damage to our health."

As American consumption proliferated, landfills became the end-game for all of the products manufactured on the concept of quantity, not quality. And the environmental impact is just beginning.

"Open-air landfills today are the world's third-largest emitter of greenhouse gas emissions along with a number of other major health issues," he said.

The Winners and Losers

Every time something is purchased, a consumer is essentially forced to pay a fee for natural resource extraction.

The extraction industry has been reaping the benefits while taxpayers have had to pay for cleanups as the liner economy takes it toll on the environment. However, there will be another economic shift in the next 50 years.

"Retailers, technology companies, material science companies, financial institutions, individual investors are focused on rebuilding our economy to focus on this circular [model]," Gonen said. "So, what does that look like? It looks like an economic model that focuses on local markets, where materials stay in that local market from a usability, collection, processing and remanufacturing standpoint."

Gonen noted that when he first began discussing circular concepts in 2014, people viewed it as merely aspirational. Today, headlines show broken supply chains that were first built in the 1950s when it made economic sense to manufacture on an international scale and ship it back to the United States. Labor rates were cheap, pollution wasn't monitored and it was cost-effective to ship overseas from a logistics standpoint.

A rise in labor rates in the last 10-15 years and a regulatory oversight focused on environmental protections have caused large companies to adjust how they manufacture goods.

"And the circular economy is a way to solve for those supply chain issues," he said.

Product design is a catalyst in the move toward a circular system as companies develop products with less materials, more recycled content and new materials are created.

When reused materials are consistently utilized in the manufacturing process, a major consumer goods company no longer has to worry about commodities and the regulatory issues related to landfill or pollution, he said. As a result, economies of scale are realized and margins increase.

"It's much less expensive to manufacture in a circular economy than it is to constantly extract natural resources, Gonen said. "And there are consumer preferences. It's clear that consumers want to understand where their product is coming from, how it was made, what's going to happen to it and that they're not polluting the environment."

 

 

 

 

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