What is a circular economy?
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Published: 29 February 2024
Contributors: Amanda McGrath, Alexandra Jonker

What is a circular economy?

The circular economy is an economic model that aims to eliminate waste and promote sustainability through reuse and resource efficiency. Through sharing, repairing, refurbishment, remanufacturing and recycling, this model creates a closed-loop system that minimizes the amount of resources used. It also reduces the creation of waste, pollution and carbon emissions—a leading cause of climate change.

In a traditional linear economy, raw materials are extracted from the natural environment and transformed into products, which are used and then discarded as waste. This model relies on the continuous extraction of finite resources, which leads to environmental degradation and resource depletion. A circular economy aims to replace this “take-make-waste” pattern with a more sustainable economic system that minimizes waste and keeps products and resources in use for as long as possible. It is underpinned by the transition to renewable energy, as well as efforts to regenerate natural resources, protect the environment and support human health and well-being.

Why is the circular economy important?

The circular economy is a key driver of sustainability. The United Nations has highlighted the role of circularity in achieving its Sustainable Development Goals (SDGs). And many governments, policymakers and organizations around the world are exploring its potential to address global challenges such as climate change, biodiversity loss, disruption from material extraction and other environmental issues.

For example, research has found the extraction and processing of natural resources contribute to half of the world's total greenhouse gas emissions and over 90% of biodiversity loss and water stress around the Earth.1 By keeping resources in use for longer, a circular economy reduces the need for new resource extraction, which helps to conserve natural resources and reduce greenhouse gas emissions. To this end, a study from the Ellen MacArthur Foundation, a leading advocate for the circular economy, found that adopting the alternative economic model could cut Europe's carbon dioxide emissions in half.2 Additionally, it can create economic opportunities and generate value for businesses and society. Research suggests the circular economy could create USD 4.5 trillion in new economic output.3

How the circular economy works

A circular economy works by creating closed-loop systems where waste is minimized, resources are conserved and natural systems are regenerated. Strategies used to achieve this include:

  • Reducing waste and pollution: Circular economy principles advocate designing products and processes that minimize waste and pollution. Some examples include using renewable energy, reducing packaging and adopting sustainable waste management practices.
  • Extending product lifespan: For products to last as long as possible, they must be durable, repairable and upgradable. This also involves promoting reuse, refurbishment and recycling of products and materials.
  • Regenerating natural systems: A central tenet of a circular economy model is replenishing the parts of nature used or harmed by economic activity. This involves restoring ecosystems and natural resources through sustainable land use practices, reforestation and conservation efforts.
Examples of the circular economy in action

Organizations, industries and individuals are adopting circular solutions in a variety of ways. Some case studies of how it is being integrated into businesses and society include:

Renewable energy systems

The transition to renewable energy sources, such as wind, solar and hydroelectric power, supports the circular economy by reducing dependence on finite resources such as fossil fuels. Using regenerative, renewable resources to power day-to-day operations can reduce negative environmental impact, waste streams and overall material use. Renewable energy is also essential to applying circular economy principles to supply chain logistics, since it can impact choices around suppliers and transportation.

Repairable electronics

Instead of disposing of electronics as they break or wear out, more companies are trying to redesign them to be modular and easy to repair. This means that instead of replacing an entire device, users can replace just the faulty part, significantly extending the product's lifespan. Some companies are also embracing the idea of refurbishing and remanufacturing their technology products. This process involves taking back used products, restoring them to good condition and reselling them, often with a warranty.

Sharing economy platforms

Car-sharing and home-sharing services promote the efficient use of resources by enabling people to share assets rather than owning them individually, or to loan them out on a temporary basis so that they are utilized more often. This reduces the overall demand for manufacturing new products and encourages more sustainable consumption patterns and partnerships.

New approaches to packaging

Retail outlets that operate on a zero-waste principle allow customers to bring their own containers, reducing packaging waste and promoting the reuse of materials. Other companies aim to eliminate plastic pollution by offering consumer products in reusable packaging. Customers return empty containers, which are then cleaned and reused, reducing the need for single-use packaging. In other cases, they may swap plastic packaging for biodegradable materials (such as bioplastics made from plant-based materials that decompose naturally). This cradle-to-cradle design approach—meaning it creates a continuous cycle between human use and nature—can reduce the volume of waste in landfills.

Product-as-a-Service (PaaS)

Companies are increasingly shifting from a “sell and forget” model to one that sees the entire product lifecycle. This includes exploring leasing models or offering “product-as-a-service,” where consumers pay for the service a product provides, rather than owning the product itself.

Textile recycling and reuse

Many fashion brands are adopting circular business models, such as renting clothes or using fewer virgin materials and more recycled inputs in their products. Some companies encourage customers to return old clothes for recycling or resale. This approach reduces waste and the demand for new raw materials, supporting a more sustainable fashion industry.

Upcycling food waste

Building more sustainable food systems involves tackling food waste. Research suggests 1.18 billion tonnes of food produced for human consumption is lost or wasted every year.4 In Japan, for example, the government has implemented a Food Recycling Law, which promotes the use of food waste as compostable animal feed and fertilizer. Elsewhere, companies are using food waste to create new products, such as turning coffee grounds into biofuels, using fruit peels to make natural dyes or using unsold or unused bread from bakeries and sandwich makers to brew beer.

Business benefits of a circular economy approach

A circular economy approach can benefit businesses in several ways, including:

  • Cost savings: By reducing waste and using resources more efficiently, businesses can save money on raw materials, energy and waste disposal.
  • Innovation: Adopting circular business models can drive competitiveness and create new revenue streams, such as developing new products made from recycled materials or offering repair and maintenance services.
  • Brand reputation: Embracing sustainability and circularity can help a company appeal to environmentally conscious consumers and establish itself as a business sustainability leader.
  • Regulatory compliance: As sustainability reporting becomes increasingly mandatory, businesses that adopt circular practices may be better positioned to comply with a host of local and international regulations.
How technology aids the circular economy

Sustainable technology solutions can help track and manage resources, enable new business strategies and create efficiencies in production and distribution processes. Innovations in digital technology help companies track and optimize resource use in their value chains and consumers to make sustainable choices.

For example, Internet of Things (IoT) devices can provide real-time data about product use and condition. This makes predictive maintenance easier and allows product-as-a-service models. Artificial Intelligence (AI) can enhance resource efficiency in manufacturing and supply chains, while blockchain technology can enable transparent and secure tracking of materials and products throughout their lifecycle, promoting traceability and accountability.

Renewable energy technologies are essential for decarbonization and reducing greenhouse gas emissions. Digital platforms, such as online marketplaces and resource-sharing services, can facilitate the exchange of goods and services, promoting reuse and reducing waste. And 3D printing technology can support localized production, reducing transportation and logistics costs and waste.

Circular economy policy initiatives

Policymakers are supporting a circular economy transition with policies that offer incentives for companies to adopt sustainable practices and new business models. They are also implementing ways to penalize wasteful behaviors, as well as fund research into sustainable solutions. For example, the European Union’s Circular Economy Action Plan, part of the European Commission’s Green Deal, outlines measures to make sustainable products the norm in the EU. It also includes strategies to reduce waste and increase recycling rates. Other countries, including China, Japan and the Netherlands, have developed their own national circular economy policies that seek to stimulate economic growth, improve resource efficiency, regenerate natural environments and reduce environmental impacts.

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1 Facts and Figures (link resides outside ibm.com), United Nations, January 2024

2 Towards a circular economy: Business rationale for an accelerated transition (link resides outside ibm.com), Ellen MacArthur Foundation, November 2015

3 Waste to Wealth (link resides outside ibm.com), Accenture, September 2015

4 5 facts about food waste and hunger (link resides outside ibm.com), World Food Programme, June 2020