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Circular Economy: Definition, Principles & Benefits in 2024

The Earth overshoot day (see Figure 1) in 2021 was July 29, which means that from January 1 to July 29, humans consumed all of the resources that the Earth regenerates annually. We roughly consume 1.7 Earth per year by stealing from our future and as both population and GDP per capita rise, we will be more likely to consume more natural resources if we do not shift our economic model from linear to circular.

In this article, we will outline the definition and principles of the circular economy and its business related benefits to show executives a way of increasing their profits while at the same time protecting nature and society.

Figure 1: Earth overshoot day:

Source: Geneva Environment Network

What is a circular economy?

A circular economy ensures longevity of business, environmental sustainability, human health and for many cases greater product quality. 

Circular economy aims to eliminate overuse of natural resources. It is an innovation based production and recycling paradigm that strives to utilize natural resources sustainably. Circular economy approaches recognize that the world’s resources are finite, and these resources can only be regenerated at a particular rate (naturally or artificially). The overuse of natural resources creates environmental, social and ecological issues thus threatening the long-term profits of businesses.

In other words, the circular economy is a new economic method that is displacing our current linear economy model, which is built on the make-use-dispose principle like we have endless natural resources. 

Circular economy

The Swedish timber sector is a good example of how a circular economy might work. Stakeholders have established a long-term tree-planting (regeneration of raw material) strategy based on demand, environmental and social projections. 

In return, Sweden’s forests have doubled in size compared to a century earlier, and the country now contributes 10% of global tree-based products while only having 1% of global commercial forest reserves. Model ensures Swedish timber companies produce high quality products since they never need to use young trees as timbers and protect ecological resources and human health due to positive impacts of forests.

Top 7 fundamental principles of circular economy

  1. Design long-lasting goods: To reduce the waste in a circular economy manufacturers produce goods with longer shelf-life. 
  2. Turn waste into raw material: It is feasible to turn rubbish into commodities, and this is an excellent strategy to ensure long-term sustainability. For example, Waterhaul, a sunglasses maker based in the UK, gets its raw material from ghost fishing nets that have been floating in the oceans for decades. Waterhaul also offers a lifetime warranty on their glasses, owing to the fact that their raw materials have survived long periods of time in the ocean.
  3. Reuse/repair items: If an object can be reused in the production of new goods or for other reasons, it increases efficiency. Renault, for example, gives discarded electric vehicle batteries a second life by repairing them. 
  4. Use biodegradable/recyclable materials: Piles of plastic waste threaten human health and ecological heritage since they enter into the food chain. As a result, it’s critical to use recyclable and biodegradable materials for packaging and production. Carlsberg, for example, collaborated with Paboca to move to wood-based, 100 percent biodegradable bottles.
  5. Introduce technological solutions: Digital transformation can be an enabler of sustainability. Companies can improve their supply chain sustainability by utilizing technologies such as public-cloud enterprise resource planning (ERP) applications that continuously monitor supply chain activity.
  6. Use renewable energy: Firms can collaborate with renewable energy providers to cut GHG emissions and report the results in their environmental social governance (ESG) reports. One of the environmental metrics in ESG reports is energy mix, which shows what proportion of electricity originates from renewable sources. By reporting such proactive information regarding your company you can attract more investors and consumers
  7. Increase Industrial symbiosis: Circular economy dictates cooperation of companies since they aim to minimize waste. Your solution can guide other companies that produce waste due to similar issues. For instance, Coca-cola, L’Oreal and Absolut joined Carlsberg’s wood based packaging initiative we mentioned above.

Top 5 benefits of circular economy to businesses

  1. Increase Efficiency: A circular economy, at its core, seeks for efficient resource utilization. As a result, Accenture estimates that it will produce approximately 4.5 trillion dollars global value until 2030.
  2. Hedge against commodity price fluctuations: Thanks to using waste, the circular economy protects firms against commodity price fluctuations. In the last 365 days, the Bloomberg commodity index (BCOM) has risen by more than 32%. It implies that the market players expect that the trend of rising resource prices will continue because it is computed by using future contract prices of a mix of commodities. In addition, China is home to 85% of the world’s rare elements. If tensions between China and Western countries rise as a result of trade disputes or other factors, these commodities costs may climb further. 
  3. Increase market share: Circular economy practices help your company to attract more customers. According to PwC, today’s consumers are more open to leasing or pay-per-use possibilities and do not need ownership of the product than in the past. Furthermore, compared to five years ago, 85% of consumers are more conscious about purchasing ecologically friendly goods.
  4. Take advantage of regulatory wind: By implementing practices of a circular economy your company can pay less tax compared to its rivals. Many countries have passed extended producer responsibility (EPR) bills which aim to introduce additional taxes to reflect all environmental costs of product life-cycles to nudge companies for circular economy practices.
  5. Take advantage of technological developments: Innovative methods to use someone’s by-product as a raw resource, and exact demand calculation, are at the heart of the circular economy. As a result, all technological advancements that improve information availability (big data-IoT), data interpretation (advanced analytics-behavioral analytics), and supply chain integration (cloud platforms-IoT-communication technologies) contribute to the development of a circular economy. Furthermore, IoT and mobile apps are the primary drivers of the pay-per-use business model’s proliferation.  

To find out about the top carbon footprint calculators to automate your carbon footprint calculation, see our article on the Top 7 Carbon Footprint Calculator Software/Tools for Businesses.

We would like to answer your further questions regarding circular economy:

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Cem Dilmegani
Principal Analyst
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Cem Dilmegani
Principal Analyst

Cem has been the principal analyst at AIMultiple since 2017. AIMultiple informs hundreds of thousands of businesses (as per similarWeb) including 60% of Fortune 500 every month.

Cem's work has been cited by leading global publications including Business Insider, Forbes, Washington Post, global firms like Deloitte, HPE, NGOs like World Economic Forum and supranational organizations like European Commission. You can see more reputable companies and media that referenced AIMultiple.

Throughout his career, Cem served as a tech consultant, tech buyer and tech entrepreneur. He advised businesses on their enterprise software, automation, cloud, AI / ML and other technology related decisions at McKinsey & Company and Altman Solon for more than a decade. He also published a McKinsey report on digitalization.

He led technology strategy and procurement of a telco while reporting to the CEO. He has also led commercial growth of deep tech company Hypatos that reached a 7 digit annual recurring revenue and a 9 digit valuation from 0 within 2 years. Cem's work in Hypatos was covered by leading technology publications like TechCrunch and Business Insider.

Cem regularly speaks at international technology conferences. He graduated from Bogazici University as a computer engineer and holds an MBA from Columbia Business School.

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