European circular economy adds 7% growth by 2030

16 November 2015 Consultancy.uk

Humanity has in recent centuries taken an uncritical approach to the exploitation of the world’s finite resources. One way to reduce over-exploitation, while creating a huge boost to GDP is transforming to a circular economy, which seeks to maximise the utility, durability and sustainability of products. According to McKinsey & Company, such a transformation in Europe would increase GDP growth by 7% and disposable income by 11% by 2030 through a reduction of raw material costs.

In a report by McKinsey & Company – in cooperation with the Ellen MacArthur Foundation, SUN* and IZA** – titled ‘Growth Within: A Circular Economy Vision for a Competitive Europe’, the consulting firm considers the implications of a transformation from a linear, waste based economy to a circular, reusable based economy. The report is based on meta-analysis of a wide range of research into circular economies, as well as more 150 interviews and extensive economic modelling.

Exploiting resources
The European economy is one of the most successful in the world. The region’s growth, however, hides that much of Europe’s development (50% between 1960 and 1990 by some accounts) stemmed from resource exploitation. Industrialisation saw global resource exploitation increase ten-fold between 1900 and 2009, and Europe’s domestic energy use increase seven-fold. The high level of resource exploitation discloses another issue with Europe’s current economic model; it may be highly wasteful and inefficient.

Value loss of selected manufactured goods

The world’s natural resources and natural capital cannot sustain the continued and ever increasing levels of exploitation. Water resources in the EU are dwindling as excess withdrawal from rivers and groundwater overdraft exacerbate permanent or semi-permanent depletion of aquifers. Large areas of land, 5-10 million hectares globally, are lost each year. In addition to climate change, sources of degradation include misuse of fertilisers, irrigation, and machinery. Biodiversity suffers from expansion of commercial, industrial, mining, and construction sites into natural and semi-natural habitats, as a result of which 66% of species in Europe and 77% of European habitats are in poor conditions.

Wasted Europe
The resources in Europe are used in many cases in what could be considered extremely wasteful ways. Over the lifetime of all products, they are utilised less than 50% on average. Recycling is poorly executed in the EU. In 2012, on all products, only 5% of the total energy and material invested in products was recycled. Even apparently successful projects, like steel, PET, and paper recycling saw losses of 30–75%. According to the report, “for all practical purposes, Europe still uses resources once and then discards them.”

Structural waste in mobility system

Cars represent one of the largest sources of waste in Europe: they spend 92% of their time parked; when used, only 1.5 seats of the 5 seats is occupied; deadweight ratio stand at 12:1; and less than 20% of the energy in fuel is translated to kinetic energy, of which only 1/13 is used to transport people.

The food value chain represents another area in which resources are not effectively consumed in Europe. Slightly more than 2/3 of food produced is consumed by people; 11% is wasted at home, whilst distributors chuck as much as 20% of all food produced. Of fertilizers used, only 5% goes towards actually producing nutrients absorbed by humans, not all of which improve health and well-being, and only 40% of irrigation water makes it to plants. Soil degradation now affects 30%–85% of European agricultural land. Moreover, people tend to over-eat on often poorly refined calories, producing health problems and resulting in an overweight or obese population of more than 50%.

Structural waste in food system

 

Circular economy
The above represents what has been coined a ‘from the cradle-to-the-grave’ or linear economic model. A thing is made, used and then discarded, and replaced by a new model.  The idea of a circular economy model has been around since the 1970s, and envisages “a continuous positive development cycle that preserves and enhances natural capital, optimises resource yields, and minimises system risks by managing finite stocks and renewable flows.” The circular economy does not just reduce the systemic harm produced by a linear economy; it creates a positive reinforcing development cycle.

The reduction in waste is achieved through creating products whose collectable waste again is able to make up part of the production cycle for a new line of products, while the useful products produced are shared. The idea is built on three principles:

  1. Preserve and enhance natural capital: by controlling finite stocks and balancing renewable resource flows.
  2. Optimise resource yields: by circulating products, components, and materials in use at the highest utility at all times in both technical and biological cycles.
  3. Foster system effectiveness: by revealing and designing out negative externalities, such as pollution; climate change; and negative health effects related to resource use.

Circular Economic benefits
The transformation of an economy from a linear waste system – that damages natural capital while underutilising what it takes – to a circular system might be difficult. Arguments exist that such an economic model centres on businesses already “doing the best they economically can” through current recycling methods, and that the economic and political costs for a transition are high. To shed light on the matter, McKinsey considers possible barriers to transformation.

Comparison of development paths

In terms of economic benefits, the report suggests that through improvements to the longevity of goods, reduced costs of products and services are achieved, as well as a conversion of unproductive to productive time. This could result in increased consumption and thereby higher disposable income growth for Europeans. According to the research, disposable income growth will reach 18% by 2030 and 44% by 2050 in a circular scenario, compared with 7% and 24% in the current development scenario. GDP growth in Europe is also expected to see considerable benefits, increasing 11% by 2030 in the circular example compared to 4% in current scenario, which is an additional GDP growth of 7%. By 2050, GDP growth in the circular scenario is expected to almost double the current scenario, at 27% vs. 15%. Employment too would be boosted according to the report, benefitting from increased consumption as more disposable income comes online.

Besides economic benefits, the environment would win too. CO2 emissions are foreseen to drop 48% by 2030 and 83% by 2050 follow from circular effects, compared to 2012 levels. Natural resource consumption would also drop, as a result of lower uses of car and construction materials, real estate land, synthetic fertiliser, pesticides, agricultural water use.

* Stiftungsfonds für Umweltökonomie und Nachhaltigkeit.

** Institute for the Study of Labour.

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