From Sustainability to Circular Economy

Part 1 – Circularity and Externalities

External effects of our economic system (externalities) lead to negative social and ecological impacts and corresponding 'external costs' on the way from raw material extraction to end products, which ultimately have to be borne by society and its individuals (e.g. direct and indirect costs of waste disposal). Pushing such negative social and ecological impacts out of the system (externalizing them as much as possible) distorts the 'true' value of a product. This way of doing business is no longer appropriate. External costs must be internalized into the economic system so that the true cost of a product alters consumer behavior. For example, the costs of generated waste via the value chain 'raw material - intermediate product - final product' as well as transport would have to be included in cost accounting and pricing mechanisms (internalization of external effects or costs).

In this context, a (cost) analysis of the end product in evaluation methods often refers to the 'cradle-to-grave perspective', which means that an externality generated in each sub-step of the value chain (e.g. generation of waste and its disposal) is associated with the end product to be evaluated. If the effective costs of the environmental impact of the waste generated were included in each remuneration of the partial steps, the prices of the end products would rise sharply. Those products with the lowest impact would have the greatest market advantage. The 'true' value of an environmentally friendly product would therefore be reflected in the low price; exactly opposite to what is found in retail today.

If the effective costs of environmental impacts caused by waste are internalized in the economic system, waste avoidance would be the most obvious economic response. Furthermore, activities such as repairing, reusing and recycling would be strongly encouraged. If waste is viewed as a secondary resource, mechanisms can develop that transform the linear economy from raw material to end product into a circular economy. Secondary raw materials can create new values in a circular economy, enriching the circular value chain with many new business interactions. End products that, on the one hand, can be produced with little waste or, on the other hand, can be incorporated into the circular value chain as easily as possible would be the most lucrative. The (cost) analysis of the end product in evaluation methods would now be based on the so-called cradle-to-cradle perspective; compare the corresponding certification system of the epea (Environmental Protection Encouragement Agency).

A circular economy can therefore achieve economic growth without having to constantly increase the use or extraction of natural resources in order to feed the value chain. With appropriate legal frameworks – e.g. the requirement for complete internalization of external effects through incentives for corresponding efforts and, at the same time, with incentives for the implementation of sustainable operations – the transformation to a circular value chain could be promoted.

Part 2 – Circularity and Sustainable Development

The increasing social and ecological awareness in recent decades has improved the linear economic system by attempting to internalize externalities by tightening the legal economic framework. For example, companies as central economic elements of the value chain have introduced strict health, safety and environmental standards into their business processes for compliance reasons. Sustainability aspects have also led them to record, evaluate and report on the social and environmental performance of their company.

From a global perspective, it could be expected that the UN goals of “sustainable development” - so-called SDGs (Sustainable Development Goals) - should also make an important contribution to improving economic systems towards a circular economy globally. The SDGs are particularly about reducing the prosperity gap between developed and developing states - underdeveloped or failed states.

If you look at the UN's 17 SDGs and their sub-goals (compare SDG definitions), you can assign these to the three pillars of sustainability - Economy/Society/Environment. Of course, for most goals there are direct interactions between the areas of the three sustainability pillars. For the area 'Environment' this can be summarized as follows:

Figure: Number of SDG sub-goals that interact directly with the environmental pillar

What is immediately noticeable in the figure is that SDG 12 'Consumption and Production' should actually be moved to the environmental pillar; all 12 sub-goals interact directly with environmental goals. SDG 11 'Cities and Human Settlements' also shows that the majority of its sub-goals have a direct impact on the environment. However, both SDGs also have a very strong connection to the economy, so that the way in which business is done and what economic framework conditions apply (for example how waste is dealt with) have a huge influence on the achievement of these goals.

The pillar ‘Environment’ plays an important role in transforming the economic system into a circular economy with regard to properly set incentive systems. As mentioned in part 1, it is clear that the aspect of circularity is central to production and consumption (SDG 12); e.g. in product design and the safe reuse of product parts in other ways (instead of being sent to waste channels) or in food production by minimizing the waste of soil (natural capital) through erosion and mismanagement.

Part 3 - Circularity and Natural Capital

Incentive instruments to improve the quality of environmental compartments (e.g. soil and water) and to regenerate or build up natural resources, for example by increasing the effectiveness of ecosystem services, should lead to an increase in usable natural capital. A circular economy with value creation from waste/secondary resources - gradually back to the regeneration of natural resources - would point the way for economic systems to a sustainable future - without economic growth endangering the planet or eroding the foundations for humanity's prosperity.

The challenge, however, is to assign value to the elements of natural capital so that they can enrich the circular value chain. Monetizing natural capital and services for the regeneration and/or development of natural resources would be essential to complete the circular economy.

However, monetizing defined elements of natural capital can only be successful if internationally agreed and “indicative” metrics can be applied in a certified manner; – “indicative” because otherwise the complexity of the metrics would be too difficult to understand and too expensive. An example of a simple indicative metric or parametric is the CO₂ equivalent for monetizing climate protection measures based on the carbon market. Indicative key figures for natural capital should be able to reflect the regenerative power of nature by measuring ecosystem services and also allow efforts to improve these services to be monetized or compensated. What needs to be discussed is whether biological diversity can be monetized as a general parameter for the state of defined elements of natural capital and for quantifying healthy and resilient ecosystems.

One way to derive indicative biodiversity metrics could be based on the analysis of DNA fragments occurring in the environment, i.e. gene sequences from biological systems that are released in an ecosystem via a wide variety of processes (excretes, food debris, molting debris, plant remains, pollen and much more). Such DNA fragments measured in the environment are referred to as e-DNA (environmental DNA). Corresponding analysis showed that only 15% of the gene sequences could be assigned to the species of a sampled area or body of water (compare ETH event at WEF 2024).

Being able to effectively measure biodiversity via e-DNA is therefore very challenging. On the other hand, relative biodiversity could be determined by the variety of fragments occurring at a given location compared to another. Their gene sequences would reveal patterns in a statistical and non-specific manner (i.e. non-target analysis and pattern analysis). These patterns could provide clues about the relative condition of a plot of soil or a natural area as a defining element of a region's natural capital. A water sample from the surface drainage of a sustainably managed agricultural area, a monoculture or a natural compensation area, a commercial forest or burnt-down forest, etc. would show different patterns. Using statistical methods with sufficient data (pattern database), a kind of 'biodiversity index' or 'condition index' for natural capital' could be derived. If such a key figure / index were internationally recognized, regional natural capital could be qualified and quantified and thus monetized.

Inventorying the various elements of natural capital using a 'condition index' and monetizing it via incentive systems (e.g. market-based instruments) would enable direct monetary returns from investments in the environment and natural capital. This would enrich the last step of a circular value chain in that the inevitable consumption of natural resources would be offset by measures to regenerate and build them up, thus generating new natural capital.

Marco Semadeni, Dr. Sc. nat . ETH

31.01.2024