Aerial view of Guernsey.  (Image: enrapture via Unsplash)        

What is the Circular Economy?

The circular economy proposes a profoundly different model leading to growth and jobs without compromising the environment.

By Manuel Albaladejo, Laura Franco Henao and Paula Mirazo

The prevailing linear ‘take-make-dispose’ economy is wasteful, extractive and responsible to a large degree for climate change and resource depletion. We need to adopt a new economic model if the Sustainable Development Goals (SDGs) and greenhouse gas (GHG) emission commitments under the Paris Agreement are to be achieved. The circular economy is a profoundly different model that can spur growth and generate jobs without compromising the environment, thus representing the cornerstone for a resilient and low-carbon economic recovery following the COVID-19 pandemic.

The circular economy, climate change, growth and jobs

The circular economy is a systems solutions framework for economic development, which addresses the root causes of global challenges such as climate change, biodiversity loss, waste and pollution while unveiling better growth opportunities.1 Driven by design and underpinned by renewable energy and the usage of renewable materials, the circular economy revolutionizes how we design, produce and consume everything around us. It is based on three principles, namely the elimination of waste and pollution, keeping products and materials in use, and regenerating natural systems.

Value creation opportunities under the circular economy are categorized into technical and biological cycles, as shown in the figure below. In the technical cycle, human-made materials and products remain in use for as long as possible. Value is created through sharing, maintenance, reuse, remanufacturing2 and recycling. In the biological cycle, materials safely re-enter nature, thus returning nutrients to the soil and natural ecosystems. In this cycle, materials and products are cascaded through multiple uses before being returned to the natural ecosystem as valuable nutrients.

Ellen McArthur Circular economy systems diagram resized
Note: Smaller circles represent greater value creation. Source: Ellen MacArthur Foundation.

The application of the circular economy has a direct impact in combating climate change and preventing waste. For instance, only changing how we produce and use steel, cement, aluminium and plastic could lead to a reduction of GHG emissions from these industries of up to 40 per cent by 2050.3 Using recycled or reused steel for building construction could generate up to 25 per cent in material cost savings per tonne of steel.4 Similarly, applying circularity principles to construction could mean reductions in materials (and costs) by using modular production and 3D printing, optimizing energy use, and reusing or recycling high-value materials at the deconstruction phase. Reducing plastic production and consumption can prevent one-third of projected global plastic waste generation by 2040.5 Given the current and anticipated increase in waste generation6, the transition to a circular economy has become crucial.7 

Projected waste generation by region

Source: Kaza et al. (2018)

By tackling structural inefficiencies across supply chains, the circular economy offers abundant value-creation opportunities at the industry level. For instance, the returnable packaging market is expected to grow from US$37 billion in 2018 to US$59 billion by 2026,8 while the second-hand clothing market is expected to be twice the size of fast fashion by 2029.9 Furthermore, research suggests that transitioning to a circular economy could generate a net economic benefit of €1.8 trillion for Europe by 2030, and an annual value of approximately US$624 billion in India by 2050, relative to the business-as-usual scenario.10

Recent research in Latin America and the Caribbean (LAC) also indicates that adopting a circular economy approach could create a net total of 4.8 million jobs in the region.11 Similarly, according to the European Commission, applying ambitious circular measures in Europe could generate around 700,000 new jobs.12 Taking into account the potential job losses derived from the application of industry 4.0 technologies, the circular economy must harness the Fourth Industrial Revolution’s potential whilst ensuring workers’ well-being and their participation in the economy. It is therefore essential for workers to have access to the necessary training opportunities to meet the circular economy’s employment demands.

A global movement

The transition towards a circular economy is not uniform and varies depending on a series of factors such as the degree of industrialization, the level of technological development, the availability of qualified human resources and access to finance, among others. This underscores the importance of tailor-made and context-specific strategies and plans.

Currently, China and Europe are global leaders in the transition towards circularity: the development of their inward and outward-looking circularity strategies have an influence on the rest of the world. Newcomer circular economy adopters can benefit from knowledge and best practice exchange, technology transfers and financial support from frontrunners through international cooperation schemes and policy dialogue. 

China was ahead of the global trend when it adopted its Circular Economy Promotion Law in 2009. More recently, the country’s outward measures, such as the 2018 Waste Import Ban, had a major global impact, including the diversion of waste flows to other developing countries, shocks in global trade prices of scrap and an overall questioning of the developed world’s recycling practices. Europe is also considered a frontrunner in the circular economy transition, demonstrated by its adoption of policies such as the European Green Deal, its First Circular Economy Action Plan, and over 60 circularity strategies and roadmaps at the regional, national and local levels. These key players are setting the stage for the transition, calling on the rest of the world to keep up.

A country’s stage of development affects how circularity is understood and addressed. The circular economy presents a specific set of challenges and opportunities for developing countries, particularly with reference to the informal sector, access to technological development, and institutional and financial capacity.This notwithstanding, the circular economy has gained increasing support around the world in recent years, illustrated by the adoption of circular policies in numerous and highly diverse countries.

Recent research, for example, finds that most countries in the LAC region have adopted one or more key circular economy policy measures.13 The African continent is also an example of a developing region that is witnessing an increase in circularity-related initiatives, such as the establishment of the African Circular Economy Network and the African Circular Economy Alliance, reflecting growing interest in and awareness of the subject. In addition to China, the circular economy is also taking off in other parts of Asia, mainly demonstrated by private sector initiatives embracing circularity principles or adopting circular business models. Advancing the circular economy in this region, which is characterized by rapid economic growth and an increasing degree of urbanization, is of paramount importance to achieve sustainable development, offset the negative impact of growth on the environment, and to capitalize on the economic opportunities offered by the circular economy.

Financing the transition

The private banking sector, multilateral development banks and development finance institutions around the globe have stepped up investments in circular economy activities. Notably, since 2016, there has been a ten-fold increase in the number of private market funds linked to investments in circular economy-related activities, and in 2020 alone, assets under management in CE-related public equity funds recorded a fourteen-fold increase.14 Financial support for the circular economy incentivizes innovation and investment, both at the public and the private level. Financial access is therefore essential for advancing the circular economy, i.e. the lack of access to finance represents a major obstacle to the transition.

The inevitability of transitioning to a circular economy is evinced by the pressing challenges it addresses, but also by the potential economic, environmental and social benefits it promises to generate by shifting to more sustainable production and consumption patterns. A successful transition requires context-specific measures, strong public sector commitment as well as the active participation of the private sector and civil society.

  • Manuel Albaladejo is Country Representative for Argentina, Chile, Paraguay and Uruguay, at the United Nations Industrial Development Organization (UNIDO).
  • Laura Franco Henao is Learning Engagement Manager at the Ellen MacArthur Foundation.
  • Paula Mirazo is Economic Transformation and Industrialization Research Assistant at the Regional Office in Uruguay of the United Nations Industrial Development Organization (UNIDO).

Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).

Read next