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The Circular Economy – Roundabouts And Toboggans For Growth

Economics / Energy Resources Feb 10, 2014 - 12:32 PM GMT

By: Andrew_McKillop


Waste Dumps to Resource Mountains

The Sochi Winter Games waste dump could interest future corporate geologists a lot more than the Chernobyl sarcophage. Leaked reports and furtive newsreel footage shows a pyramid 35-stories high, thinly and partly covered in soil, more than 150 metres wide at its base. And growing. Leakage from the Sochi pyramid of waste is, of course, toxic but also contains a hard-to-believe mix and mingle of metals, minerals and organic compounds including gold and with in fact little surprise, uranium and also of course pesticides, chrome hexafluoride, dioxin and similar deadly poisons with a high dollar value per unit weight – either as a resource or as a threat to society needing expensive disposal.

Interviewed by McKinsey & Co this week, Philips CEO Frans van Houten said that two years ago, Philips decided to embed “circular-economy thinking” in its corporate strategic vision and mission, both as a competitive necessity - and with the conviction that companies solving resource constraints will have an advantage. Corporate thinkers at Philips also argue that the “circular economy” would be good for everybody – for the economy and jobs, as well as the environment.

Van Houten in his interview claimed that customers will “increasingly consider natural resources” in their buying decisions and will give preference to supplier companies that show responsible behavior. Designing products and services for a circular economy, he said, can also bring cost savings to a company despite the received wisdom that designing-for-dismantling and recycling adds costs. In his view that is not true.

Van Houten said this challenge drives breakthrough thinking and can generate superior margins, adding that for Philips, its major lighting business is a key example. The lighting business of major suppliers like Philips has however already proven unpredictable, not only due to changing “long life lamp” technology but also the post-2008 crisis making business and municipal customers unable or reluctant to engage big investments. Philips, like its competitors, made a shift to treating corporate and city lighting as a service, but this faces the major shifts in why and how corporate and city deciders run their lighting. The quick answer for Philips and its competitors was that these major customers did not buy light fixtures and luminaires for their nice design or even their low energy consumption or their recyclability – but only for the light itself.

In fact major city lighting agencies and departments, like their corporate opposite numbers also buy lighting systems for the heat they generate, for advertising billboard support, and for public safety and security. Their user logic can be as seemingly-perverse as buying lighting to run it all day and all night, but not primarily for light. Supporting rationales to this corporate and municipal behavior, apart from heat and security, include the costs of turning lights off, needing more surveillance and shortening lamp life through increased on-off utilization. Power tariffs and peak-baseload price variations and charges then also back this “perverse rationale”, often reinforced by national administrations which want very reliable wide-area urban lighting, mainly for security reasons. Recycling lamps and luminaires comes a long way down the decision tree or hierarchy.

From Lead to LED
The 2010 UNEP International Resource Panel study estimated that on a per capita basis for the world's 7 billion human population, above-ground stocks of lead are about 8 kilograms, zinc about 11 kgs, copper about 50 kgs, aluminium over 80 kgs and for iron and steel about 2200 kilograms. For the most-developed countries, the panel estimated these figures can be multiplied by about 5 - 17 times, depending on metal. Before the now-proven health hazards of lead additives to gasoline as an octane raiser were fully known, in the 1990s, street dust in some major cities could attain about 2% lead by weight – equal to prized and highly economic “virgin lead” mining resources. 

Replacing street lighting with LED luminaires is seen as a growing business for Philips but outside the energy sector defined as short-run and immediate energy consumption on a daily basis, energy saving and reduced environment impact from recycling is an even better bet. One major example is aluminium where 95 percent of the energy needed to produce “virgin metal” aluminium from bauxite ore is saved by using recycled scrap material. Through recycling, aluminium falls from being the most energy-intensive base or common metal, to one of the lowest, explaining almost-stagnant world output of virgin aluminium, but growing use of the metal throughout the economy.

UNEP's panel also treated the much broader, more important question this throws up. Does society need to worry about the intensive use of metals if the stock of theoretically recyclable and economic waste metals (and of course plastics and glass) is so widely available?

Under any hypothesis, this and other expert studies on the same theme conclude and accept that through about the last 150 years there has been an accelerating shift  from underground geological resources, to above-ground metal stocks in society – treated as trash. Apart from the major and important energy-saving issue, however, there are several other key factors for deciding if or when, and at what rate recycled materials and resources begin to dominate the economic process.

For Philips, the benefits of energy saving for corporate and municipal customers rank highest in their lighting decisions. Energy savings on a before-and-after basis by shifting from filament and some tube-type lighting, to all-LED lighting, are typically 50 to 70 percent but offset additional and new costs imposed by the “classical economy” can impact this neat reasoning. Urban energy managers, for example, can rely on corporate “over-lighting”as a resource for street security and source of advertising revenues where corporate lighting extends over a considerable area around individual corporate buildings. Subsidized or preferential power tariffs for the corporate “over-user” of energy can be offset against the city's need to invest in, operate and maintain specific street security lighting, and run advertising billboards leased to publicists.

Philips argues that LEDs have five-times the lifetime of normal lamps, which means much lower maintenance costs as well as operating costs, but is opposed by already widespread corporate and municipal programmed-replacement of lamps and luminaries, at lifetimes decided on a statistical basis. Supporting rationales from Philips and other LED lighting suppliers include IT networking capabilities in these lights, but for at lest the past 10 years these exist in all major developed country urban lighting systems, whatever their lighting technology. Short-life lamps are already systematically removed, for recycling, and their additional energy consumption due to shorter lifetimes is treated as a “perverse logic” resource and revenue-generator.

Waste Not but Want Not Economic Growth or Jobs

Philips has also branched out into recycling medical implants and prosthetic equipment, building its health-care turnover in refurbishing and recycling these medical devices to a $200 million-a-year business. CEO van Houten admits there is a “ major educational challenge” in persuading hospitals, clinics and their patients to use materiel recycled from the dead or abandoned and rejected for other reasons such as product failure.

Van Houten however leaves unstated the “high ground” economic impacts of this business, like its LED street lighting business and its major push for “recyclable” household products and appliances. Cheaper medical equipment enables high or very high medical labor costs to survive – as in the US and Europe, with definite downward impacts both on economic growth and public health. Offshoring and outplacement to lower-cost medical labor suppliers is inevitable and natural, reducing the total amount of spending-per-operation, only partly covered by increasing numbers of operations. The same paradigm applies to sharply reducing the amount of virgin metal consumed by the economy, replacing it with the resource mountain of urban waste recoverable at low energy cost.

The problem is the two paradigms are interchangeable and equal - in their downward impact on economic growth and job generation.

One key development goal for recycle-and-recover design and production is “upgradability” or the concept that lower-value elements or components of recyclable products can be upgraded and valorized, sold at a higher price after recycling. This could for example include some car components from mass market cheap saloons, recycled and utilized in upmarket luxury cars, justifying the part-by-part dismantling of low-range cars – rather than treating them only as scrap metal, and for plastic only for energy recovery-plus-dioxin. Growing recycling, on a theoretical basis can and will only reduce energy needs as well as the need for finished components and raw materials – cutting their prices by reducing upstream demand for virgin resources and components. And in overall terms reducing employment and economic growth.

In the case of Philips, its CEO says that the corporate  goal for its Consumer Lifestyle Group is for 10 percent recycled materials in the Group's total product portfolio by 2015, compared with 2 percent in 2012.  Not stated by its CEO however, all major domestic appliance producers including Philips have an active policy of increasing the lifetime of their products – reducing the annual average market absorbtion capacity of each product. For carmakers this is a semi-mortal threat, as average national car fleet lifetimes continue to grow towards double-digit scores in years, while world total “nameplate capacity” for producing new cars continues to grow. This problem and challenge is also now acute for cellphones and smartphones, where world production capacity continues to soar, towards 1.5 billion units per year, while unit lifetimes of the products in years stretches towards double-digits. Apple's “disappointing sales” and the wipeout for Blackberry and Alcatel-Lucent, as well as Nokia's “disappointing performance” for its new owner Microsoft are easy to understand.

Maxxed Out Resource Paradigm

Within the next 10-15 years it may be possible to identify the already-receding era of about 1985-2000 as the Peak Resources period. In that period of time, annual minerals and energy demand growth could easily come close to annual average GNP growth, on a world or national basis, and in many key national cases, and for key resources could run higher than annual GNP growth.

The reverse-paradigm is now increasingly likely. Resource and energy demand will grow slower than economic growth – which itself is trending down for reasons including reduced resource and energy demand per unit of GNP and unit of GNP growth. Since late 2013 and into 2014, the “retreat from emerging markets” is becoming an investor theme, with an inevitable knock on – sooner or later – to natural resource prices, demand and consumption. Certainly this decade, the long term trend of resource-lean energy-efficient production and maximised recycling of resources will play their own role intensifying the retreat from natural resources and energy of the “virgin” type, tending to depress economic growth of the “classic” type. Persuading or forcing political and corporate deciders to abandon this model is very difficult.

Energy, for example, is slowly becoming recognized as having a virgin form as familiar electricity, oil, gas and coal but also has a recyclable form as “embodied energy” in metals, materials, components and products. Why mine coal and pump oil when the energy already exists, above ground?

On environmental and energy saving grounds, the trend is positive. For classic economic growth and any kind of employment – like the real impacts of the IT revolution since the 1980s – the outturn is at least uncertain. On balance, in a classic-type economy, mining the resource mountain of  urban wastes is likely to push down economic growth and on a net basis, destroy jobs. The decision, finally, becomes political-only and therefore complicated.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2014 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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