The 422 Mantra: Understanding the Circular Economy Industry

The 422 Mantra: Understanding the Circular Economy Industry

  A short while ago, when we discussed recycling and circular economy in our columns; when we held green entrepreneur community “Green Like We Give A Damn” meetups, many people posed numerous questions which completely overwhelmed us. At the same time, we have also noticed that many people misunderstood the circular economy industry, as well as there are others who possess naive or idealistic views. The great Chinese scholar WANG Yang-Ming once spend much of his effort in examining the “source and essence of a bamboo,” in an effort to understand Zhu Xi’s approach based on the concept of “Guwu Zhizhi” (Acquiring knowledge by studying the nature of things). I am no WANG Yang-Ming, but if we try using an engineering logic to understand the mantra of the circular economy industry, I believe it can help you obtain a good understanding of the basic industry cores.

The underlying logic of how society operates can be found in material and cash flows

  In order to comprehend “circular economy,” you must at least understand what the terms “circular” and what “economy” are about. Let us use the following diagram to understand how modern society operates:

※Market supply and demand of environmental economics, from:Environmental Economics and Management: Theory, Policy and Applications, S. J. Callan and J. M. Thomas, 6th edition, IRWIN, 2013.

  Based on this chart, you and I belong to the “Household” on the left side of the diagram. We spend our cash at stores in exchange for the goods we need. Stores belong under the “Export Market” category located in the upper center of the diagram. When the store provides us with goods, the transaction generates both a “material flow” and a “cash flow.” The store restocks its inventory by ordering from the “Company” on the right side of the diagram, paying cash in the transaction. The company supplies the store with goods for sell, which also generates another flow of cash and materials. The “Factor Market” at the bottom center is similar to a manpower market. You offer labor service to the market, in exchange for income – which also generates a cash flow. For the company, it is paying the market to obtain the staffing it needs for work, which is a kind of material flow.   

  A market can only exist when there is exchange in goods (material) and cash. The economy can continue to operate once the market comes into being. Do you think talking about money is something too vulgar and earthy? Well, think again. We can only generate income if we work. Likewise, the way businesses make money is by selling its merchandise. These interactions form the basis for stable development of our society.

  So, if you plan on supporting the circular economy industry through recycling resources or you are a company seeking to earn or save money through recycling efforts, you have to realize both the core and essence of circular economy – which is “ECONOMY.” Therefore, if you want to talk circular economy, you have to approach it from the economic perspective. If you ignore the “supply and demand” that forms the fundamental mechanism of the market, there will be little hope in creating any kind of viable industry.

  It is not enough to have only material flows and cash flows. You would also need an “information flow.” At this point, let us take a quick look at another diagram below. This one provides an outline of Taiwan’s circular economy strategy. It is drafted by the Environmental Protection Administration (EPA) which used the circular economy strategy of the Netherlands as reference. In the diagram, you will notice the “Information Exchange Platform” on the top of the inner circle linking the elements of “Circulation” and “Production.” In a complex system like circular economy, as long as there is a market, any flow of material from one point to another will generate a cash flow traveling in the other direction. It also generates a corresponding information flow in which the data of both the material and cash flows are recorded.

  The matching “material flow,” “cash flow” and “information flow” constitutes an accurate and complete circular economy. On the other hand, if the three elements do not conform, there will be a problem. If we were to express the concept using the trendy lingo of Industrial IoT, we would describe it as the convergence of real-world economy with digital economy.

※Schematic diagram of circular economy policy, from:Environmental Protection Administration, Executive Yuan

Circular economy requires the real/virtual integration of material flow, cash flow, information flow, and energy flow

  If we to take it even further, when goods (or services) move around in the system in the form of “material flow,” because such action involves the use of energy and possible emission of pollutants (such as CO2 or air pollutants), it also generates a corresponding “energy flow.” For example, the act of waste-to-energy is a typical interaction between “material flow” and “energy flow.” Therefore, material flow, cash flow, and information flow are used to identify the system structure and the existence of the market. After we incorporate energy flow as the fourth element, we can obtain a complete picture of the system with all the details.

Circular economy must still abide by the two fundamental laws of physics

  I have mentioned in the previous section that there are some people who possess rather naive and idealistic views about the circular economy industry. For example, they believe that we could implement a closed circular economy allowing the perfect circulation of energy and resources. However, I must point out again that the process of continued circulation of energy and resources denies any possibility of achieving the perfect closed loop. We can explain this by using two fundamental laws of physics. The first law of thermodynamics talks about the “conservation of energy” which describes the transformation and transferring among different types of energy; however, the law denies the possibility of energy being created out of thin air. Meanwhile, the second law of thermodynamics points out that the efficiency of energy transformation process is never perfect, inevitably giving off low quality wasted heat. No matter how miraculous the process can appear, there is no way 100% conversion can be achieved.

  Now you can probably understand why we say there is guaranteed to be deterioration in quality when we use recycled paper or plastic as raw material to manufacture new products. Also, the production process also expends of both energy and resources. Therefore, it is more practical to deal with reduction at the source rather than being extravagant in an imagined closed loop.

Opportunity is only available to individuals capable of systems thinking and critical thinking 

  Another misconception people have about the circular economy industry is that everything will need government involvement. I myself have worked in the public sector before, so I will go into more practical details at green entrepreneur community meetup next week. The only way for circular economy to really operate – as well as sustaining long-term operations – is to establish a market, since having a market is the only way to create an economy. Government subsidies can only serve as leverage, and they cannot be in place indefinitely. Otherwise, it might risk paralyzing the market’s vitality. For example, if the price for regrind material is not attractive enough, the “cash flow” will not materialize because nobody will be interested in doing it. The “material flow” in the other direction will fail to come into being as well. As a result, the used material, which was intended to be sold to buyers, ends up heading into incinerators.

  From what I see, the main factors forming the pillars supporting circular economy market includes the following: stable and open regulations; low administrative cost; healthy supply and demand in the submarkets, and global circulation. We must possess the capabilities for “systems thinking” (firm grasp of all system details and flows) and “critical thinking” (a habit which challenges the norm). When combined with other specialized knowledge, they can help you acquire a comprehensive understanding of the operating principles of circular economy and help you secure business opportunities.

  Understanding the system is not an easy thing. At least at this point you are done reading this article and should be aware of employing engineering logic to better understand the mantra of the circular economy industry.

  1. The core and essence of circular economy is ECONOMY. It requires the real/virtual integration of material flow, cash flow, information flow, and energy flow.
  2. Even the most effective circular economy needs to abide by the two basic laws of physics. It is impossible for the continuous circulation process of material and energy to form a perfect closed loop. Therefore, it is more practical to deal with reduction at the source.
  3. Circular economy is a complex system. You must possess the capabilities of systems thinking and critical thinking to secure business opportunities.


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