Triodos Research winter e-zine

Circular economy business models

Case Study

In a linear economic model, we operate at a deficit of natural capital, accumulating a debt we owe to future generations. The key objective of a circular economy is to eliminate such deficit. To achieve this, new circular business models need to be adopted. But what are they and how do they work?

We are depleting natural resources at an uncontrolled pace and we are generating incredible amounts of waste, accumulating a debt we owe to future generations. A solution for this may be that businesses adopt circular economy principles by reducing material use, reusing materials and products, and recycling materials for as long as possible. Waste, design for reuse and sharing become value drivers in circular business models.

Waste value model

The waste value model is a rather straightforward way of including circular principles into a business model. Waste produced in a linear production model is collected and all the recoverable residual value is extracted from it. However, used products are the input and they were not designed specifically with end-of-life value recovery in mind. That makes it difficult to reach high value-recovery rates, and large amounts of input still have to be send to landfill or incinerated when the recoverable value is too low. Waste management and recycling companies typically use the waste value model.

Reverse loop model

The transition towards a circular economy requires circular thinking to reach producers and product designers. The latter need to maximise the value and the duration of the entire life-cycle of products, spanning the production phase, to several subsequent usage loops, and finally to disposal. With circular design, end-of-life products simply become “end-of-loop”. Companies can specialise in preparing them for the next loop and using them as input, thus adopting the reverse loop model. Ideally, such input will be paid for, like any producer pays for its raw materials. Specialised recyclers with very high recovery rates or second-hand retailers are examples of companies adopting this model.

Circular input model

The circular input model aims at minimising the depletion of our natural resources endowment. It sees product designers maximising the percentage of the total input that’s circular. This means using inputs that are reused or recycled, but also using renewable resources that the ecosystem can replenish faster than they are being depleted. Designers may also focus on reducing the absolute amount of input required for their products.

Integrated circular model

A more integrated approach is adopted with the use of life-cycle analysis (LCA), in which designers aim to eliminate any negative effect that a product has on natural capital across all stages of its life cycle. Unlike the circular input model, that focuses on sourcing and production, LCA also measures and minimises, in the product design phase, the expected negative effects of usage and final disposal. Hence product designers focus on reparability, upgradability, reusability, ease of disassembly and recyclability of all components of a product. Non-recyclable components should be biological nutrients that can be harmlessly returned to the environment. The energy requirements of the process should be met by renewable sources.

End-of-life responsible model

Companies that apply the end-of-life responsible model choose to take direct responsibility over the entire life-cycle of their products. After use, people return products to the producer who has a direct economic interest in the extraction of all their recoverable value. Product design will focus on making value-recovery easy and effective after use. Users can either be offered incentives to return the products, or they can contractually commit to do so, in “Product-as-a-service” (PaaS) schemes. These agreements are the most accomplished form of end-of-life responsible model: the ownership of the products never leaves the producer. Users only pay for temporary access to the performance offered by the products and then return them. This could also encourage a greater number of people to rely on the same products to meet their needs (“sharing economy”).

Circular models and non-manufacturers

Circular business models are predominantly interesting for manufacturers of physical products. However, software producers and service providers also have a crucial role to play in a circular economy. For example, Internet of Things (IoT) applications are useful for product- and resource-tracking systems that are necessary for a circular economy to function. Other examples include the services related to the management of a reverse marketplace, or financial services tailored to the needs that arise from new business models and consumption behaviours.

What’s next?

Companies cannot create a circular economy on their own, and the role of various stakeholders  is crucial for success. Consumers need to shift their behaviour, stop buying goods beyond actual needs, and lose the negative association with goods that have already served somebody else. Regulators need to provide the right incentives, and investors should foster and support the transition by demanding more circular approaches through engagement or selection. To find out more about companies currently applying these different business models, see our article Circular economy frontrunners .

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