CESIS Electronic Working Paper Series
Paper No. 431
A Review of the Circular Economy and its Implementation
Almas Heshmati
April, 2016
The Royal Institute of technology
Centre of Excellence for Science and Innovation Studies (CESIS)
http://www.cesis.se
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A Review of the Circular Economy and its
Implementation
Almas Heshmati
Jönköping International Business School (JIBS),
Centre of Excellence for Science and Innovation Studies (CESIS),
and Department of Economics, Room K526,
Sogang University, 35 Baekbeom-ro (Sinsu-dong #1),
Mapo-gu, Seoul 121-742 Korea,
E-mail: almas.heshmati@gmail.com
Abstract: Circular economy (CE) is a sustainable development strategy that is being
proposed to tackle urgent problems of environmental degradation and resource scarcity.
CE’s 3R principles are to reduce, reuse and recycle materials. The principles account for a
circular system where all materials are recycled, all energy is derived from renewables;
activities support and rebuild the ecosystem and support human health and a healthy
society and resources are used to generate value. This study is a review of the rapidly
growing literature on CE covering its concept and current practices and assessing its
implementation. The review also serves as an assessment of the design, implementation
and effectiveness of CE related policies. It first presents the concept of CE and compares it
with the current linear economy of taking materials, producing goods and disposing waste.
It explains why it is imperative to move away from a linear economy towards regenerative
sustainable industrial development with a closed loop. The paper then introduces current
practices that have been introduced and discusses standards for the assessment of CE’s
development and performance. The main focus here is on providing a summary of the data
analysis of key CE indicators to give a picture of CE practices. Third, based on an analysis
of literature, the paper identifies the underlying problems and challenges to CE in an
entrepreneurial perspective. Finally, the review provides a conclusion on CE’s current
development and gives policy suggestions for its future development as part of an
entrepreneurial and innovative national level development strategy.
Keywords: Circular economy; environmental policy; national development strategy;
sustainable development strategy; entrepreneurial strategy.
JEL Classification Codes: E01; F18; F64; H23; O44; Q50; Q53; Q55; Q58; R11;
Comments and suggestions from two anonymous reviewers on an earlier version of this manuscript and
financial support from Swedish Entrepreneuship Forum are gratefully acknowledge.
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1. INTRODUCTION TO CIRCULAR ECONOMY
Environment and economics are closely inter-related. However, most economics textbooks
pay little attention to the environment and in the best case scenario, a chapter illustrating
how the economic theory can be applied to diverse environmental issues is added to them.
This approach obscures the fundamental ways in which environment affects economic
thinking. Circular economy (CE) with its 3R principles of reducing, reusing and recycling
material clearly illustrates the strong linkages between the environment and economics. In
an effort to breach this gap, the concept of circular economy was first introduced by Pearce
and Turner. In their Economics of Natural Resources and the Environment (1990) they
outline the theories within and between economics of natural resources and their
interactions and implications for the concept of how economics works. The authors
elaborate on environment both as an input and as a receiver of waste. They illustrate that
ignoring the environment means ignoring the economy as this is a linear or open-ended
system without an in-built system for recycling.
The amount of resources used in production and consumption by the first law of
thermodynamics cannot be destroyed and are equal to waste that ends up in the
environmental system. Kenneth Boulding’s 1966 essay The Economics of Coming
Spaceship Earth contemplates the earth as a closed economic system in which the
economy and the environment are characterized by a circular relationship where
everything is input into everything else. The model of economics and environmental
relation in Pearce and Turner (1990) is further extended by Boulding to account for the
natural environment’s assimilative waste capacity, disposal of non-recyclable resources
and non-renewable or exhaustible resources. The search is to find out what needs to occur
for economics and the environment to coexist in equilibrium. Leontief (1928, 1991
translation) in The Economy as a Circular Flow refers to the economic theory’s main focus
on price theory and neglecting the material point of view. He suggests re-establishing the
correct relationship between the material and value points of view and arranging the two
views such that the material approach is of considerable importance (also see Samuelson,
1991).
Rapid environmental deterioration around the world has led to the development of policies
for reducing the negative impacts of production and consumption on the environment. A
number of countries have introduced acts and laws for establishing the recycling principle
of a circular economy. Germany is the forerunner in this as it started implementing CE in
1996. This was accompanied by the enactment of the law ‘Closed Substance Cycle and
Waste Management Act’. The law provides a framework for implementing closed cycle
waste management and ensures environmentally compatible waste disposal and
assimilative waste capacity. Another example of an attempt to start implementing CE is in
Japan. The Government of Japan has developed a comprehensive legal framework for the
country’s move towards a recycling-based society (METI, 2004; Morioka et al., 2005).
‘The Basic Law for Establishing a Recycling-Based Society’, which come into force in
2002 provides quantitative targets for recycling and long-term dematerialization of
Japanese society (Van Berkel et al., 2009).
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China is the third country that is engaged in serious efforts to implement CE on a large
scale. However, in contrast to the German and Japanese cases, the Chinese government for
various reasons like retaining competitiveness, intends to initially introduce the CE
framework on a smaller scale through a number of pilot studies so that it has a better basis
for assessing its large scale and full coverage in the longer run. This policy is similar to
economic liberalization which started with costal free economic zones.
Several other countries like Sweden have for a long time successively introduced various
incentive programs. They have also tried to facilitate optimal conditions for gradual and
effective increase in the rate of recycling through public education. The policy has been
successful and to the satisfaction of policymakers and environmentalists. Sweden,
Germany and several other European countries have managed to incorporate green
political parties in their political systems and processes of decision making which have
both encouraged and eased a transfer towards a circular economy.
Another significant effort by the European Commission (2012) is the European Resource
Efficiency Platform (EREP) – Manifesto and Policy Recommendations. The manifesto
calls on business, labor and civil society leaders to support resource efficiency and move to
a circular economy. It provides an action plan for transitioning to a resource efficient
Europe and ultimately becoming regenerative towards CE. The common feature in these
countries’ CE policies is preventing further environmental deterioration and conserving
scarce resources through effective use of renewable energy and managing production and
consumption wastes, especially through integrated solid waste management.
The limited existing evidence on the implementation of the circular economy in practice in
China and elsewhere suggests that consensus has been reached on the concept of CE which
in many ways resonates with the concept of industrial ecology. This concept emphasizes
the benefits of reusing and recycling residual waste materials. It includes energy, water,
different byproducts as well as knowledge (Jacobsen, 2006; Park et al., 2010; Yuan et al.,
2006). Industrial symbiosis is an extended concept which states that the overall benefits
come from integrated economic and environmental aspects. According to Anderson (1994)
economic benefits are attributed to firms’ agglomeration attracting pools of common
production factors such as capital, labor, energy, materials and infrastructure reducing unit
costs and raising factor productivity. Other economic benefits resulting from firms’
proximity include gains from transportation and transaction costs and technology
spillovers between firms (Coe et al., 2004). The environmental benefits arise from reduced
discharged waste and reduced use of virgin materials (Andersen, 2007). A third dimension
– social -- is added to the economic and environmental aspects by Zhu (2005). According
to him an ecological economy is required to bring about a fundamental change in the
traditional way of open and linear development. The three aspects jointly promote
competitiveness through efficient resource allocation and higher productivity by
redesigning industrial structures reducing negative externalities and finally by improving
the overall well-being in society.
This study is a review of the rapidly growing literature on CE covering its concept and
current practices as also assessing its implementation. The review serves as an assessment
of the design, implementation and effectiveness of CE’s policy and practices. It is
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conducted in a number of steps. First, the CE concept is presented and compared with our
current linear economy where one uses materials, producing goods and disposing waste
and explains why it is imperative to move towards a regenerative sustainable industrial
development with a closed loop. Second, current CE practices are introduced and the
standards for the assessment of its development and performance are discussed. Third,
based on an analysis of literature, the underlying problems and challenges in an
entrepreneurial perspective are analysed. Finally, the review provides a conclusion to CE’s
development and makes some policy suggestions for future improvements, adaptations and
further development as part of an entrepreneurial and innovative national level
development strategy.
The rest of this review is organized as follows. In Section 2 the importance of CE as a
development strategy is discussed. Current CE practices are presented in Section 3. An
assessment of CE and national indicators are classified in Section 4 which leads to the
development of a circular economy development index system. Section 5 looks at the
development of a circular economy in pilot studies while Section 6 discusses the
challenges and barriers in the successful development of a circular economy. The
discussion is extended to the future of CE as an entrepreneurial and innovative sustainable
national level development strategy in Section 7. The last section gives policy
recommendations and conclusions.
2. CIRCULAR ECONOMY AS A DEVELOPMENT STRATEGY
Zhou (2006) finds developing CE an urgent and long-term strategic task for China to build
a resource-saving and environment-friendly society. The timing is seen as optimal as China
is in an accelerating stage of urbanization and industrialization. The country has invested
significant resources and efforts in developing CE with the objective of promoting eco-
industrial development (EID). By using the coexistence of a healthy economy and
environmental health such a development attempts to integrate environmental management
so as to meet environmental, economic and community development goals (Chertow,
2000). Discussing CE’s development in China, Geng and Duberstein (2008a) describe the
measures being implemented for its long-term promotion. These include formulating
objectives, legislations, policies and incentive measures for China to leapfrog its way from
the current environmentally damaging development to a more sustainable path. They
identify a series of barriers and challenges to CE’s implementation and draw conclusions
from these. Geng et al. (2010a) evaluate the applicability and feasibility of the eco-
industrial park standard indicators.
In a review of CE as a development strategy in China which aims at improving efficiency
of material and energy use, reducing CO2 emissions, promoting enterprises’
competitiveness and removing green barriers in international trade, Su et al. (2013)
evaluate the implementation of the strategy in a number of pilot areas. The rich Chinese
literature on CE’s practical implementation is seen as a way of tackling the urgent
problems of environmental degradation and resource scarcity in the country. They study
and compare the performance of pilot cities Beijing, Shanghai, Tianjin and Dalian. There is
