Circular Economy Becomes Mainstream
-Siddhartha Roy,Former Economic Advisor, Tata Group

From the days of steam engine till date industrial growth has been marked by ‘take, make and waste or dispose’ approach. However, as this linear model is being substituted by a ‘take, make, return and recycle or reuse’ proposition, we have an emerging circular economy. In this new approach the wastage level comes down dramatically along with environmental pollution.

Traditional manufacturing starts with natural resource inputs, transforms them into a manufactured product, consumer uses it and finally scraps it or turns it into waste. However, in a circular economy the attempt is to design out waste, the emphasis is on prolonging the lifespan of products and materials, along with recovery of materials for reuse.

UNCTAD studies have shown that, increases in resource prices and their volatility have forced both businesses and Governments to review their policies relating to use of natural resources and energy. This has got further buttressed by Paris Climate Change agreement.

Traditionally one has learnt that traded goods have a positive price, whereas ‘waste’ is treated as a non-good with a negative value. Basically getting rid of a non-good waste even when it is not hazardous like mercury or asbestos was considered uneconomical. However, when circularity is in-built in the design of the product development and manufacturing then recovery of materials become easier. This leads to positive value of waste and development of a secondary market for materials which acts as a hedge against virgin materials price.

There are various estimates of savings that can be obtained through the circular economy route , according to World Economic Forum benefits can be around $4.5 trillion by 2030. Many a times these estimates aren’t exact predictions but projections under certain assumptions. Without getting into controversy, suffice it to say the savings can be substantial.

Closing of the wastage loop in the manufacturing process coupled with reuse and recovery of material have been studied in detail by the Ellen MacArthur Foundation, UNCTAD and leading management consultancies. Current indicators suggest significant country-wise and industry-wise variations. The indicative recycling rate for steel in Europe is 88%, whereas that of plastic is 26%, for glass paper and wood the rate is 70% plus. For electronics which is an industry with a large potential, the recycling process and hence secondary markets are yet to take off.

Talking about circular economy to Indians is like preaching to the converted. Sharing, reusing, repairing, refurbishing and recycling, materials and products as long as possible are ingrained in our culture and businesses. So the country does not need a top down directives, instead Indian businesses need regulatory and fiscal nudges.

In order to make a circular economy successful one has to start with the designing of products, secondly the concept of ownership of products can be transformed into service purchase agreements. One illustration is hired tractor services.

Coming back to waste minimization in a circular economy, several insights have been brought to the fore by the SAP practitioners. At the design stage itself inclusive of these features could be useful. There are-

A) Modularity: Modular components can be taken out of a product when they need replacement or become technologically obsolete.

B) Maintenance: Parts can be refurbished and reused before discarding.

C) Disassembly: should be possible to disassemble products, such that companies can recover a significant percentage of embedded material for reuse or recycling

D) Regeneration: Products can be designed to use regenerative and accessible material. If material is sourced from countries with high geo-political risk then disruptions can happen. We need to realize that bulk if the rare earth materials used in electronics industry are sourced out of China.

E) Recovery: From the design stage itself the process of disassembly and recovery including reverse logistics need to be kept in mind.

The steps indicated here require high level of digitization and application of AI. In other words, minimizing waste and creating a secondary market for recycled products require significant investments at the firm level. To make this viable especially in the initial years fiscal policy support from the Government would be needed. Taxation can be linked to waste management hierarchy.

For example, landfill and incineration of waste should attract no tax benefit. For new products using recycled materials, the tax rate should be lower in order to encourage such practices. In the area of ‘services purchase’ which will be more dominant than ownership of goods, tax incentives may be provided.

Circular economy has many advantages, but it is not without pitfalls. To be candid the circular economy proposition also involves social, economic and environmental trade-offs at the local industry level. Firstly the economics of recycling may not be profitable for MSMEs, it may give competitive advantage to larger corporates. Secondly, import of refurbished products can be damaging for local industry; this could call for judicious use of non-trade barriers (NTBs). At the end of the day there is a need to ensure that local employment and industrial growth do not get affected adversely.

Siddhartha Roy is the former Economic Advisor of the Tata Group. Currently he is the CEO of SR Associates an Economic Advisory and Strategic Consultancy enterprise.

Disclaimer: The opinions expressed in this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of Indiastat and Indiastat does not assume any responsibility or liability for the same.

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