The Circular Economy – “Loop”, “Lake” and “Performance” Models

Distinguishing between capital stock and flows opens up useful perspectives on the idea of a “circular economy” which aspires to replace the linear “once through” industrial economy which has dominated business in the industrialised countries since the industrial revolution. In the linear economy, the focus is on management of throughput flows. On the macro-economic level, the performance of the industrial economy is judged by measuring the sum of all flows (GDP); on the microeconomic level, by calculating the value added to the flows. Its optimisation stops at the point of sale where the responsibility for operating and disposing of the goods is passed to the buyer.

Arguably, the industrial economy is the best strategy to increase stock and expand economic activity to overcome scarcities of food, housing, infrastructure and/or equipment, as they exist in many developing countries. However, in markets near saturation, so that the number of new goods is similar to the number of scrapped goods, the relevance of the paradigm of economic growth has been questioned (e.g. Jackson 2009); in the absence of quantum leap innovation, the circular economy is a more viable business model than the industrial economy with regard to environmental, economic and social factors. Even where technology quantum leaps do take place through rapid innovation, the circular economy will complement the industrial economy.

The circular economy is based on value preservation, not value added. The basic elements are shown schematically in Fig. 7.1. The Reuse Loop includes secondhand markets (from garage sales and flea markets to eBay) as well as commercial and private reuse of goods (e.g. refilling of beverage containers, reuse and resale of garments). These activities are usually carried out locally. Loop 1, labelled Remanufacturing, includes repair, remanufacturing and “upgrading” to meet new technological standards or to meet new fashion expectations (Smith and Keoleian 2004). Remanufacturing may be a local activity (e.g. refurbishing of domestic appliances or cars) or may be carried out via regional service centres. Loop 2 represents recycling in which, rather than repairing or re-using manufactured goods and components, the product is reprocessed to recover secondary materials for return to the same use. Reprocessing may be a regional activity or may be part of a global supply system. Reprocessing includes operations such as recycling of paper and plastics, re-refining of fluids such as lubrication oils (Clift 2001) and, where practical, depolymerisation of polymers (Clift 1997). Some end-of-life goods and materials may go to other uses, such as export for re-use in other locations or “cascading” into lower specification applications (downcycling) including energy recovery, or may leak from the economic system as waste.

Different interpretations of the circular economy place different emphasis on the elements in Fig. 7.1. At its simplest (but also least profitable and materially efficient), the circular economy takes the form of the Loop economy, focussed on recycling (loop 2 in Fig. 7.1) in which the material of the product is not lost as waste but

Fig. 7.1 The basic loops of a circular economy (Adapted from Stahel and Reday-Mulvey 1976)

is reprocessed for return to the same use. This is the interpretation embodied in China's “Circular Economy” laws, for example. In the Loop Economy, ownership changes with each loop, each owner aiming to achieve the highest profit when passing on material goods.

The “Loop” or “cradle-to-cradle” concept is still framed in terms of flows and therefore overlooks ways to optimise the physical and economic performance of the economy based on optimising the use of the stock. An example of good stock management is provided by the 2008 EU Waste Directive, which appropriately calls for the reuse and service-life extension of goods as priorities, putting waste prevention before waste management. The Lake economy uses the same loops as the Loop economy, but with a focus on value preservation through stewardship and without changes in ownership: The main economic actors in such an economy are here termed “fleet managers”: they operate a fleet of similar goods, such as the vehicles of haulage or transport companies, and maintain their components (e.g. engines and tyres in the case of road vehicles). These owners may have their goods repaired or remanufactured by independent service companies. The focus is on managing the stock rather than the flows: “fleet managers” maintain ownership of their stock and therefore profit from the economic advantages of re-use and remanufacturing strategies.

If economic actors are selling performance, through business models such as “goods as services” or “molecules as services”, which means earning revenue and profits from stocks instead of flows, they shift from the Lake Economy, with its focus on maintaining the stock, to the Performance Economy which focuses on maximising the value obtained from using the stock. The Performance Economy demands an internalisation of the costs of waste and of risk over the full service-life of goods, which in turn are substantial financial incentives to include waste prevention and loss prevention at all stages in the product cycle from design to decommissioning.

The Performance Economy is primarily driven by competitiveness, the Lake Economy by long-term operation and maintenance cost optimisation and the Loop Economy by (environmental) legislation. Some of the business implications of the shift to the Performance model are explored by Stahel (2010) and in Sect. 4 of this chapter.

The stock perspective is routine for infrastructure and buildings but less familiar for other forms of manufactured capital. The shift from a flow to a stock perspective is enabled when economic actors (companies, consumers and public entities) assume longer-term ownership or stewardship of, for example, fleets of vehicles or goods, changing their business approach from the bigger-better-faster-safer model of an industrial flow economy to the functional view of goods of a Lake Economy. The motivation for commercial actors is usually to reduce operating costs (for example, retreading truck tyres by haulage companies, remanufacturing diesel engines), whereas public actors (armed forces and public administrations like railways, NASA) seek to reduce long-term system costs (mothballing of warships, “cemeteries” of aircraft for access to spare parts). For consumers, the motivation may be a personal relationship with goods (the “teddy bear” effect which leads individuals to keep personal souvenirs such as watches or pens, or family heritage objects such as paintings or vintage cars). By retaining the ownership of the goods and their embodied resources, fleet managers gain a resource security with regard to both future availability of resources and commodity prices. Expected scarcity of some critical materials therefore provides another driver to take the stock perspective.

If loops involve professional services, transaction costs occur, adding to the costs and often influencing the choice of the next owner: for example, sales such as buildings, domestic premises and artworks require fees to individuals or specialist dealers. However, some OEMs take back their own goods, disassemble them and reuse components as service parts, a strategy pursued by many IT manufacturers, or remanufacture and remarket them in exchange for faulty products. Such service exchange systems are used by some European car manufacturers: damaged car engines and gearboxes which cannot be repaired locally are returned to the OEM in exchange for an OEM-remanufactured product^[1] ; Sony Computer Entertainment Europe offers a remanufactured exchanged product when customers return a faulty product for repair, in order to reduce the time a customer is without the product. Further illustrative examples are discussed in later sections.

• [1] VW annually remanufactures 50,000 engines and the same number of gearboxes in a dedicated plant located in Kassel