Economic growth and human development are inextricably linked to demand for natural resources, as raw materials are an input into almost every sector of the global economy. Consumption drives economic growth, but the linear economic model that exists today of ‘take-make-consume-dispose’ is almost certainly not sustainable. The extraction, processing, use and disposal of finite natural resources deeply affect the planet’s climate, environment, and underlying resource supply.
The central premise of the circular economy is to break this ‘take-make-consume-dispose’ pattern by keeping products, commodities, and resources ‘in the loop’ for as long as possible. Creating integrated production and supply chains that reduce, reuse, repurpose, recycle, and remanufacture will ultimately maximise our resource efficiency and better align economic value creation with long-term ecological wellbeing.
In this month’s letter, we examine the key differences between the traditional ‘linear’ economic model and a circular economy. We discuss how Australia (with a relatively low circularity rate compared to the global average) stands to benefit from adopting a circular economy, as well as some of the investment opportunities available in this space.
“Meeting the needs of a growing and increasingly affluent population will require material extraction to double by 2060 under historical trends.”
In the linear economy that we know today, economic growth is strongly linked to raw material use. Indeed, according to the Organisation for Economic Co-operation and Development (2020), global materials extraction has doubled between 1990 and 2017 and is expected to double again by 2060.
The linear model of production and consumption is built on ‘take-make-consume-dispose’. For example, miners take metals from the ground, and this material is manufactured to make a fridge. Once the fridge reaches the end of its useful life, it is considered waste and moved to landfill. But the extraction, processing, use and disposal of natural resources deeply affects the planet’s climate, environment, and underlying resource supply.
Our economy favours a linear model, which is not sustainable with increasing consumption and rising populations
The key difference between linear and circular economies is the treatment of raw materials, including fossil fuels, metals, plants, and animals. In linear economies, economic growth is strongly linked to raw material use. But this is an unsustainable model over the long term, as most resources are finite and need time to replenish themselves for future use. In a world with increasing consumption and rising populations, economies which are not considering circular initiatives expose themselves to significant risks.
Circularity: A model of production and consumption that is designed to decouple economic growth from the consumption of finite resources.
Not only does the one-way production model of a linear economy cause significant strain on finite resources, it also contributes to significant amounts of waste. Current consumption requires the environmental resources of 2.3 planets, according to the World Business Council for Sustainable Development. The linear model fails to acknowledge a key issue, which is that natural resources are limited and need time to regenerate to make new resources available for future consumption.
On a planet with finite resources and a growing population, we have little choice but to move towards a circular economic model. Achieving a circular economy lies at the heart of the United Nations' Sustainable Development Goal (SDG) 12: Responsible Consumption and Production. This SDG calls for action to address waste, raise resource efficiency, improve supply chain accountability, and ultimately work toward a more sustainable future.
In circular economies, the focus is to ‘reduce, reuse, repurpose, recycle, and remanufacture’ to create integrated production and supply chains, ultimately maximising resource efficiency.
The concept of a circular economy is grounded in the ideas of sustainability and resource efficiency, and seeks to keep products, commodities, and resources ‘in the loop’ for as long as possible.
The central premise of the circular economy is to break the global ‘take-make-consume-dispose’ pattern of growth in order to reduce the environmental impact of production and consumption and eliminate waste. Circular economic concepts seek a closed-loop system, not only to minimise waste and enhance sustainability, but also to keep raw materials in productive use for longer to enhance productivity.
The focus is to ‘reduce, reuse, repurpose, recycle, and remanufacture’ to create integrated production and supply chains, ultimately maximising resource efficiency.
Ultimately, a circular economy represents a shift away from the linear model that we know today. Moving away from the status quo requires a clear understanding of the direct benefits and costs of circular opportunities, but also the indirect and flow-on effects to the broader economy.
In circular economies, ‘material footprint’ refers to the total amount of raw materials used to meet final demand for consumption and investment (Commonwealth Bank of Australia (CBA) (2023), Beyond economics). It is an indicator of the pressure put on the environment to support economic growth and to satisfy the material needs of the population. Since 2010, the world has seen a significant increase in its material footprint, driven by rising populations, increased consumption, and demand for materials. The global material footprint has seen a 70% increase since the year 2000 and 113% increase since 1990.
Without collaborative and concerted effort, the global material footprint is projected to grow to 190 billion metric tonnes by 2060, according to the United Nations. Even more alarming is that the global material footprint is rising faster than GDP growth and population growth. In other words, there has been no significant decoupling of material footprint growth from either population or economic growth since 2000. In order to reduce the strain on our natural resources, it is imperative we reverse that trend.
In its report, How circular is Australia’s economy?, CBA estimates Australia’s circularity rate to be around 5%, compared to the world economy at 9%. The circularity rate is the amount of materials that are recycled, reused and recovered relative to materials used.
By global standards, Australia’s circularity rate is low, which highlights the long journey ahead if Australia is to decouple economic growth from its material footprint. Increasing Australia’s circularity involves a reduction in the use of ‘newly’ extracted materials; it does not imply a reduction in the ‘use’ of materials.
“Circular activities and processes not only extend the usable life of products but also extend their value, create new jobs and raise economic growth.”
In the transition to increased circularity, economies like Australia, which are dependent on extraction and the export of raw materials, may be at more risk of disruption than economies that use materials for manufacturing. For example, Australia extracts a large amount of materials via mining and agriculture, while China uses a large amount of materials in manufacturing. Further, Australia is at risk from disruption as other countries adopt more circular initiatives. Governments in China, South Korea, and Japan have announced that their economies will be net-zero carbon emitters by 2060, 2050 and 2050 respectively. To meet their targets, they will reduce their imports of carbon-intensive energy sources like coal, oil and gas. These three countries are major importers of Australia’s mining exports. Therefore, Australia’s exports could be at risk when governments choose to reduce their-carbon intensive imports. To increase circularity from its current low levels, Australia needs to reduce the use of newly-extracted materials and consider innovative and transformative ways of doing so.
In its report, Potential economic pay-off of a circular economy, KPMG writes that “circular activities and processes not only extend the usable life of products but also extend their value, create new jobs and raise economic growth”.
It suggests that a circular economy in food, transport and the built environment represents a potential economic benefit for Australia of AUD 23 billion in GDP by 2025, and estimates that by 2047-48, the benefit of a circular economy will likely create an additional 17,000 full-time equivalent jobs for Australia.
To position itself on a global scale, Australia needs to consider circular initiatives from both a macro-economic and micro-economic perspective. As consumer sentiment and awareness of these issues grows, the circular economy has the potential to give us the tools to tackle environmental challenges, as well as provide us with the ability to encourage economic growth, increase jobs, and enhance our prosperity.
It is important to recognise that circularity remains in its nascency, and its full implementation in economies does come with risks.
The investment case for circularity really depends on the size and magnitude of the four key drivers outlined below. It is also important to recognise that circularity remains in its nascency and to be fully implemented in economies does come with risks. We see the below four drivers of circular initiatives:
