Circular Economy in the Water Sector
FR/R0032
December 2020

Introduction

This Review of Current Knowledge describes the circular economy and how it relates to the water industry. It has been structured to explain:

The circular economy is an economic strategy based on minimising the production of waste and recycling material resources utilised in economic activity. This introductory section describes what an economy is and what it does in relation to the environment in physical terms. It defines the linear economy and its inefficiencies. It briefly explains current economic models and their deficiencies so that water utility policymakers can be aware of the current range of economic opinions they may encounter and have a context for understanding the range of economic theory available while making policy decisions.

The origins of the circular economy can be traced back to Kenneth Boulding’s investigations into the attributes of an ‘open economy’ in the late 1960s. In classical economics an open economy is presumed to possess unlimited resources for its production and unlimited sinks for its wastes, in comparison to a ‘closed economy’, a ‘Spaceship Earth’ economy as described by Boulding, which is subject to real physical limits. While Boulding did not create the term ‘circular economy’ his ‘Spaceship Earth’ economy (Boulding, 1966) defined the need for a real economy to recycle materials due to the level of resource demand and waste production that could occur in a physically isolated system. The concept of the need for increased resource and waste efficiency over the long term for an intensively productive economy was formalised in 1989 by the work of Pearce and Turner (1989) with their description of how the environment (the natural world) was the source of the material resources used in economic production whilst simultaneously being the receptor for all wastes produced by economic activity.

This led to the concept of the circular economy which is now most familiar in the definition offered by the Ellen MacArthur Foundation (https://www.ellenmacarthurfoundation.org/circular-economy/what-is-the-circular-economy ): the circular economy is ‘an industrial economy that is restorative or regenerative by intention and design.’ In comparison, the global economy as it now functions, operates as a predominantly linear process of resource extraction, processing and use associated with a high level of energy input that culminates in a high intensity of waste production entering the environment (Ellen MacArthur Foundation, 2013a, 2013b, 2014).

The deficiencies of circular economy theory arise from the same flaw that lies at the heart of classical macroeconomic theory – they both lack reference to the macroscopic physical basis of all systems provided by thermodynamics. This omission of thermodynamics leaves the concept of a circular economy open to critique, based on its lack of a formal physical basis. For example, there are absolute limits to material recycling set by thermodynamics. The lack of a thermodynamic description for most of the circular economy propositions described above also fails to recognise the critical role energy plays in any economy, from subsistence level to post-industrial and beyond. The European Academies Science Advisory Council reviewed circular economy concepts and commented on the physical constraints for current propositions for circular economy material recycling in this regard in 2015 (EASAC, 2015). Water utility policymakers and business strategists need to be aware that the criticisms that are given of circular economy measures do not invalidate the need for circular economy measures.

Thermodynamic analyses are now available for macroeconomic growth theory and where used they have supported the resource efficiency goals set by circular economy theory.

A brief review of the academic context for a circular economy Water utility policymakers and water utility business strategists should ideally be aware of where risks arise for business planning from use of different economic models. The current criticisms that are offered for circular economy measures do not invalidate the need for circular economy in water industry services and this section of the report will briefly describe why. Contemporary economic theory consists of several schools, ranging from neoclassical economics, which is based on classical economics but reinterprets classical economic theory based on neoliberal economic theory, to other schools that place economics within the context of physical environment and hence make allowance for impact on the environment. Neoclassical economics in effect regards the environment as irrelevant to the sustainability of economics due to how some of its key doctrines function (such as utility, substitution, externalities and discounting). In comparison, there are two sub-disciplines of contemporary economics which take the environment into account and relate its resources to the economy. These are environmental economics and ecological economics. These two schools of thought differ in their methods and consequently, in their conclusions. Environmental economics overlays classical economic theory, which has no physical science basis with consideration of environmental impacts. In contrast, ecological economics locates economics within a physical world model which leads its adherents to conclude that there are flaws in the doctrine of substitution. The ecological economists world-view requires conservation of natural capital for economic use and assumes the economic need and linkage to resource sustainability is strong rather than weak.

Ecological economists provide solutions to the flaws in discounting and externalities of neoclassical economics. An externality is a cost (negative eternality) or benefit (positive externality) rising from a service or goods production that affects a third party who did not chose to be affected by that activity. The corrections to these assumptions provided by ecological economists are now also familiar to water industry asset planners as ecosystem service values and natural capital values. Ecological economics is the only economic sub-discipline which incorporates thermodynamics in its economic models.

The circular economy as an economic model sits between environmental economics and ecological economics but its considerations and goals identify most closely with those of the ecological economists (e.g., Boulding, 1966; Kneese et al., 1970; Daly, 1994, 1997; Ayres, 2007). The circular economy has not yet been formalised in terms of thermodynamic analyses which leaves it open to criticisms arising from lack of such analyses. For example, it is not physically possible to achieve 100% recycling due to thermodynamic constraints (EASAC, 2015). ‘Zero waste’ is more about attractive terminology than physics. In comparison, ecological economics has recently used thermodynamic analyses to form its economic models, especially in the work of Robert Ayres (e.g. Ayres, 1998; Ayres et al., 2002; Ayres, 2004; Ayres and Warr, 2009).

Some ecological economists also critique the circular economy due to their perception that it legitimises the errors of neoclassical economics through lack of a fully integrated physical (thermodynamic) and economic model for itself, which can lead it to overestimating its environmental benefits (e.g., Zink et al., 2017). Another point of criticism is that the reliance of circular economy interventions on Cost-Benefit Analyses (CBA) to demonstrate their worth itself embodies uncertainty: a major flaw in the doctrine of externalities is that capital investment projects in services and production do not cover all downstream and upstream costs and a better environmental sustainability approach could be provided by an ethical, societal approach to setting economic constraints (e.g., Hislop and Hill, 2011).

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