Businesses play a critical role in the transition to a circular economy 10 min read
Overuse and improper disposal of plastics and other materials is a global crisis. As the world recognises the need to better protect energy and natural resources, improve biodiversity practices, and get a better handle on climate change, there is a global movement in transitioning towards a circular economy.
While the circular economy is a dynamic concept that is evolving with policy changes, societal shifts and technological advancements, businesses are under increasing pressure to recognise their role in helping to transition from a 'take, make, waste' economy, to a close–looped system that will better the planet.
In this Insight, we explore the global movement towards a circular economy, the stricter requirements that international markets are imposing in relation to recycled content and materials used, and the increase in government regulation as the spotlight starts to shine on businesses to lead the transition.
- There is a global movement to address humanity's overuse of materials, overgeneration of waste and improper disposal of that waste. Businesses are adopting product stewardship principles to demonstrate accountability for all materials used in their value chain and all waste that is generated from those materials.
- Businesses are embracing circular economy opportunities as stakeholder expectations increase and governments impose stricter regulations and restrictions.
- There is currently a strong push to agree on a global plastics treaty by the end of 2024, with an ambition to end plastic pollution by 2040. Australia is playing a central role in these negotiations as a member of the High Ambition Coalition to End Plastic Pollution.
- The Federal Government expects Australian businesses to quickly move towards sharing and verifying information with their immediate suppliers and immediate customers as supported through the Traceability Framework.
- The Government is proposing to impose mandatory requirements as to the materials that can be used in packaging and will make businesses legally responsible for all packaging they place on the market.
A circular economy is one in which products and materials are designed so they can be reused, remanufactured, recycled or recovered, and thus maintained in the economy for as long as possible, along with the resources from which they are made.1 The outputs of one process become the inputs of another process, so there is no leakage of materials into the environment, or landfill.
The generation of energy from waste is not generally considered to form part of a circular economy because waste is still leaving the economic cycle. However, energy from waste is often included in discussions about the circular economy because it is aligned with the principle of maximising the value generated from waste.
The following diagram shows the main participants in the circular economy and highlights several ways that waste is currently 'leaked' from it.
Consumers (both businesses and individuals) dispose of waste. Some of this waste will leak from the circular economy, in the form of improperly disposed waste or litter. In addition, because consumers are largely responsible for sorting recyclable waste from non-recyclable waste, any recyclable waste that is not sorted by the consumer into recycling represents a leakage from the circular economy. Opportunities for investment to plug these leaks could include:
- investment in waste collection services, to reduce the incidence of litter;
- harmonisation of waste collection systems (including kerbside collection systems), to make it easier for consumers to separate recyclable waste from non-recyclable waste. In June 2023 Australia's Minister for the Environment and Water agreed to develop a national roadmap for the harmonisation of kerbside collections, for ministers to consider in 2024; and
- activities that physically remove litter from the environment.
Waste collection facilities collect waste from consumers. They then sort that waste, and send it to resource recovery facilities or to landfill. Some waste could be diverted to landfill at this stage (and therefore leaked from the circular economy) because there is insufficient capacity within resource recovery facilities to recycle the waste. Opportunities for investment to plug these leaks could include:
- increasing the capacity of resource recovery facilities; and
- increasing the capacity of waste collection services to sort waste into different recycling streams.
Resource recovery facilities process waste in order to extract recovered materials that can be used to manufacture recycled products. Some waste will leak from the circular economy at this stage if there is a limit to the amount of recovered materials that can be extracted from a particular recycling feedstock. In addition, it may not be possible to extract materials to the purity standards that are required by industry. This is a significant area for potential investment, which could include:
- investment in new types of recycling (so previously unrecyclable wastes can be recycled);
- increases in the capacity of resource recovery facilities;
- investment in technology that allows more materials to be extracted as part of recycling processes; and
- investment in technology that increases the purity of recovered materials, so they are easier to use in industry.
In some cases, a processing facility may take the recovered materials generated by a resource recovery facility and use them to make recycled products to be used as inputs into manufacturing processes.
The leakages, and opportunities for investment, at this stage are similar to the resource recovery stage. The goal is to create more manufacturing inputs from recycled materials to reduce the use of virgin materials in manufacturing
Manufacturers then use recycled products in manufacturing processes. Waste will leak from the circular economy at this stage if manufacturers decide to use virgin material instead of recycled materials. In some cases, manufacturers might prefer to use virgin materials instead of recycled content because (in some but not all cases) virgin materials may be cheaper. In addition, if a manufacturer uses recycled content, it may be more difficult for that manufacturer to verify its compliance with any applicable standards and specifications. Investment at this point could include:
- investment in verification processes, to give comfort to manufacturers that recycled materials will satisfy their (and their customers') requirements; and
- improvements in manufacturing processes, to allow a greater use of recycled materials.
Retailers then sell to consumers goods manufactured using recycled materials. Although retailers might not necessarily be involved in the recycling or manufacturing processes, they have a critical role to play in the circular economy because of their influence on the type and composition of goods that are sold. They also have a large influence on the quantity and types of packaging that are used to transport products between businesses in a supply chain (business to business packaging) or to supply products to consumers (consumer packaging).
While any leakages of waste from the circular economy are problematic, consumers, industry and governments are increasingly focused on reducing:
- plastic waste, due to the particularly acute environmental impacts caused by plastic; and
- packaging waste, because packaging is often the part of a product with the shortest life span.
The transition to a circular economy is multifaceted, and some of the factors leading this transition that businesses should be aware of include global developments, increasing stakeholder expectations, government regulation and international restrictions imposed by export markets.
A global movement towards a circular economy
The world is realising that humanity's overuse of materials, overgeneration of waste and improper disposal of that waste is contributing to a global crisis.
This crisis is also feeding into other global crises. For example:
- a recent report prepared by Blue Environment for the Australian Marine Conservation Society and World Wide Fund for Nature Australia shows that the plastics Australians consume in one year produce the same amount of greenhouse gases as 5.7 million cars;2
- the extraction and processing of natural materials accounts for more than 90% of global biodiversity loss and water stress impacts3. In addition, a significant amount of improperly disposed-of waste finds its way into the environment, where it has significant impact on biodiversity; and
- even if waste is properly disposed of, the need for society to allocate increasingly large amounts of space to landfill puts pressure on biodiversity and presents other land use challenges, including making it more difficult for Australia to respond to the housing crisis.
There is currently a strong push to agree on a global plastics treaty by the end of 2024, with an ambition to end plastic pollution by 2040. Australia is playing a central role in these negotiations as a member of the High Ambition Coalition to End Plastic Pollution.
As the Paris Agreement did for climate change, a global plastics treaty could act as a major impetus for businesses to align their policies with it, and adopt science-based targets that are consistent with the treaty.
Access to export markets
Many export markets are setting strict requirements on the amount of recycled content that must be present in materials sold in them. For example, the European Union's (EU) proposed EcoDesign for Sustainable Products Regulation would allow the European Commission to set recycled content requirements. The proposed regulation also provides for the introduction of Digital Product Passports, which will provide for the collection and sharing of information across a supply chain, in order to verify the amount of recycled content in a product.
Stakeholder expectations of product stewardship
Product stewardship is the concept that a business is responsible for all materials used in its value chain, and all waste generated from those materials.
This means that under product stewardship principles, business are accountable for all materials used and waste generated:
- in the manufacture of any inputs into their business;
- as part of the activities within the business's operational control;
- as part of any subsequent manufacturing processes after the goods leave the business's operational control;
- as part of any business-to-business packaging used in any part of the value chain;
- as part of any packaging associated with the supply of the product to the consumer; and
- by the use, and ultimate disposal, of the products by the end consumer.
Because of the environmental issues discussed above, businesses are coming under increased pressure from their customers, suppliers, employees and shareholders to address issues with the materials they use, and to transition to a circular economy.
In some industries, these expectations could operate as a requirement of continuing to do business. For example, procurement contracts could potentially prescribe minimum recycled content standards.
In other instances, businesses that sell products that are more closely aligned to the circular economy may be able to charge a green premium for those goods.
Increasing government regulation
The global movement towards a circular economy is resonating with domestic stakeholders who are expecting Australian businesses to play a critical role in the transition to a circular economy. As set out below, Australian governments have typically left it to businesses to make the transition, however, there is a growing feeling that government's patience in this area is limited and businesses may be exposed to tougher regulation if they do not take action themselves.
While governments across Australia are playing a strong role in establishing the architecture of a circular economy, they are largely leaving it up to industry to voluntarily transition to a circular economy.
Measures adopted by Australian governments include:
The Traceability Framework
The Federal Government recently released a National Framework for Recycled Content Traceability. The purpose of the Traceability Framework is to 'track' recycled material through the supply chain, to make it easier to verify the quantity, origin and quality of recycled material within a product.
The Traceability Framework will provide guidance on the recycled content information that should be collected and shared within a supply chain. It will also set the minimum traceability capabilities for supply chains. The Traceability Framework will be designed as a single standard for Australia that will be interoperable with outer standards, particularly international standards.
This should, hopefully, mean that Australian businesses that adopt the Traceability Framework find it easier to export their products to markets (such as the EU) that have adopted their own traceability requirements. It will be a matter for industry to create the platforms required to implement the Traceability Framework.
While participation in the Traceability Framework will at least initially be voluntary, the Federal Government expects that businesses will:
- initially trace information 'one step forward, one step back' (ie participants will need to trace the movement of their inputs from their immediate suppliers and outputs to their immediate customers); and
- by 2028, be able to trace the movement of recycled content throughout their entire value chain.
Endorsement of product stewardship schemes
Most Australian jurisdictions have legislation for the establishment of product stewardship schemes.
Under a product stewardship scheme, scheme members agree to work together to transition towards a more circular economy. This could include reporting on key recycling metrics, developing and implementing targets, facilitating the recycling of materials or facilitating the uptake in the use of recycled materials.
The Recycling and Waste Reduction Act 2020 (Cth) allows the Federal Minister for the Environment and Water to:
- endorse voluntary product stewardship schemes, which participants are free (but not obliged) to participate in;
- set up co-regulatory schemes with industry. A co-regulatory scheme is designed and run by industry (with the endorsement of government). However, the Government can require certain classes of entities to become members of the scheme. This prevents businesses from 'free-riding' on the efforts of scheme participants; or
- impose mandatory requirements on industry.
Funding of recycling initiatives
Through its Recycling Modernisation Fund, the Federal Government is investing $250 million in new and upgraded recycling infrastructure.
Regulation of greenwashing
In light of the ACCC's and ASIC's recent crackdowns on greenwashing, businesses need to make sure that any claims they make about the circularity of their products are not misleading or deceptive. This could include:
- claims about the amount of recycled content in a product;
- the extent to which a product is recyclable;
- the extent to which a particular products are actually recycled once they are put on the market; and
- the amount of waste that is generated by a business.
In addition, businesses that invest in recycling or waste reduction initiatives might seek to make claims about the amount of waste that will be reduced as a result. As businesses may have limited visibility or control over their supply chains, it may be difficult for them to verify the claims they make in these areas. The Traceability Framework will, hopefully, assist in this respect, by establishing a framework for business to share and verify information across a supply chain, so that supportable claims can be made about the recycled content in a product. However, at this stage, the Traceability Framework will only cover the verification of the amount of recycled content in a product. It will not apply to any of the other types of green claims outlined above.
For this reason, governments and industry need to agree on broader standards for the measurement and disclosure of waste, and for the verification of green claims and commitments. The circular economy needs an equivalent of the Greenhouse Gas Protocol, which, for many years, has been widely accepted as the global standard for measuring greenhouse gas emissions where statutory schemes do not apply.
A number of industry standards, such as Verra's Plastic Waste Reduction Standard and 3R Initiative, are gaining prominence. However, it is yet to be seen whether any of these standards will achieve widescale acceptance.
Potential for stronger regulation
As flagged, the Federal Government has shown that its patience with industry voluntarily transitioning to a circular economy is limited.
For example, in June Australia's environment ministers agreed to:
- develop a new packaging regulatory scheme that will mandate obligations for packaging design and make industry responsible for the packaging it places on the market. This is a recognition that the voluntary initiatives to improve packaging are not, by themselves, sufficient to address the problem;
- support the implementation of a product stewardship scheme in the fashion industry to 30 June 2024; and
- implement a national product stewardship scheme for tyres (to be led by Western Australia) and solvents (to be led by NSW).
In addition, in her annual priority list, the Federal Minister for the Environment and Water states that she expects to see:
- an operational product stewardship scheme for photovoltaic systems by June 2023 (this is now overdue);
- measurable product design improvements to increase the durability, reparability, re-usability and/or recyclability of electronic and electrical products by June 2025;
- a product stewardship scheme for plastic oil containers by December 2023;
- a product stewardship scheme for child car seats by December 2023, and measurable product design improvements to increase the durability, re-usability and recyclability of child car seats consistent with circular economy principles by June 2025;
- a national product stewardship scheme for end-of-life clothing by June 2023 (this is now overdue);
- nationally coordinated and harmonised plans to phase out certain problematic and unnecessary single-use plastics; and
- a product stewardship scheme for plastics in health care waste by December 2025.
Adopting product stewardship principles
Business can support the transition to a circular economy by aligning their policies with product stewardship principles. This could require them to:
- ascertain (through measurement, modelling or estimation) the amount and types of materials used at each stage of the value chain;
- know the proportion of these materials that are made from recycled content;
- know the proportion of these materials that are recyclable;
- know or estimate the proportion of these materials that are, following their use, formally collected for re-use, recycling or disposal (as opposed to being improperly discharged into the environment as litter);
- know the proportion of these materials that are ultimately recycled;
- set robust and achievable targets for each of these metrics;
- make appropriate disclosures regarding these metrics; and
- periodically review their product lines and processes to ensure that the use of materials is optimised.
Participating in product stewardship schemes
Even if a business adopts the above product stewardship principles, if it has limited control over its supply chains there might be little it can do alone to improve the circularity of its products.
In those cases, participating in a product stewardship scheme could be one avenue for businesses within an industry to work together to improve supply chains across an entire industry or product sector.
Environmental markets are another way in which businesses, which may have little control over their supply chains, can set and deliver on product stewardship targets. They may also be a way to monetise investments in recycling activities.
A number of products, such as plastic credits, are being introduced that allow people who undertake waste reduction or recycling activities to earn credits, which they can sell to other businesses, which can use those credits to meet targets.
- a business could set a target that an equivalent of 100% of the materials it puts on the market will be collected by waste collection services (ie none of its products or packaging will end up as pollution or litter). While there may be some things that the business could do to influence its customers' behaviour and reduce litter, it may not be able to completely eliminate litter. The business could instead:
- form a robust estimate of the amount of its product that does ultimately become litter; and
- purchase credits from someone who has removed an equivalent amount of litter from the environment. The business could then claim that they have generated net zero pollution and litter; or
- the business could set a target that an equivalent of 100% of the materials it puts on the market will be recycled. Depending on the nature of the business's product, this might not be practically achievable. It could potentially meet this target by:
- forming a robust estimate of the amount of its product that will be recycled; and
- purchasing credits from someone who has recycled an equivalent amount of those materials (so that the business can claim its products are 'net 100% recycled at end of life').
It is also theoretically possible a business that has set targets for the amount of recycled content in its products could meet them by purchasing credits from other businesses that have increased the amount of recycled content in their products. However, the Traceability Framework does not recognise this as an appropriate way to validate claims about recycled content. In addition, we think that consumers are unlikely to place significant weight on claims about the recycled content of a product if they do not reflect the actual composition of the product but, rather, offsets purchased by the manufacturer. Container deposit schemes, where consumers pay a deposit which is refundable if the product is returned for recycling, are another market mechanism to encourage and facilitate recycling.
If you have questions about, or require assistance with, the matters raised in this Insight, please contact any of the people below.
See resolution adopted by the United Nations Environment Assembly on 15 March 2019.
Agreed Communique, Environment Ministers' Meeting, 9 June 2023.
United Nations Environment Programme, International Resource Panel, Global Resources Outlook 2019 (https://www.resourcepanel.org/reports/global-resources-outlook)].