European Union: The Implications Of The Transition To A ‘Circular Economy', And Overview Of The Content And Current Status Of Draft EU Implementing Legislation

In this client alert we discuss the implications of the transition to a 'circular economy' for producers of, and traders in, raw and/or recycled materials of all kinds, manufacturers of products and actors in all stages of the commodity and product value chain, and provide an overview of the content and current status of draft EU implementing legislation.

Introduction

Imagine a world without waste where everything is reused or recycled.

A world without customers, but instead only 'users', who access services rather than owning products.

A world in which manufacturers receive payment throughout their product's life-cycle, rather than all at the beginning of its period of use.

A world in which economic growth is fundamentally decoupled from resource consumption.

Sound fanciful? Not to many of the world's leading companies who are busy embracing the concept of the 'circular economy'. Nor to the European Commission.

Closing the loop

In December 2015, the European Commission published "Closing the loop — An EU action plan for the circular economy".

The Commission's initiative (to support the transition to a circular economy in the EU) proposes at least 54 separate policy measures – particularly in the areas of waste, eco-design, producer responsibility and product stewardship. It is one of the most wide-ranging policy initiatives the EU has ever proposed.

In March 2016, the European Commission published the first legislation that specifically derives from the Commission's circular economy package, while the UK House of Lords staged a debate dedicated to the subject.

The circular economy is a global project of the World Economic Forum (WEF) and was also one of the themes at the WEF's meeting in Davos earlier this year.

A transition to a truly circular economy would represent a major macro-economic shift: truly an end to 'business as usual'.

EU (and indeed wider global) circular economy policies have significant implications for:

• Producers of, and traders in, raw and/or recycled materials of all kinds (including but not limited to metals, paper, glass and plastics and their constituent substances)
• Manufacturers of products (of all kinds, large, small, for consumers and businesses) and their packaging
• Actors in all stages of the commodity and product value chain, including those in the waste management/recycling sector and those providing asset-based financing solutions

For those not already familiar with the concept of the circular economy, this article:

• Explains the theory behind the concept
• Highlights some of the key legislative elements of the EU's current plan
• Suggests some of the high level risks and opportunities that transition to a circular economy presents for existing and future businesses, including in particular from the concept of 'enhanced producer responsibility'

The 'circular economy' concept

The concept of a circular economy has its roots in sustainable development and corporate responsibility.

It is relatively new at the European level, although the term has been in use for a number of years and many businesses around the world have already embraced it.

In essence, moving to a circular economy represents a fundamental shift away from the current linear 'take-make-consume-dispose' economic model that prevails in the EU and most other developed economies.

That model – a system based on consumption rather than restorative use of resources – tends to assume that natural resources are abundantly available, easy to source and cheap to dispose of. As such, it does not adequately reward eco-designed products and is now considered by policy-makers and many businesses not to be sustainable.

Global resource use in 2030 is expected to be twice that of 2010, as the global population rises from 7.2 billion now to an expected 11 billion by 2100.

Meanwhile, EU recycling and energy recovery only captures around 5 per cent of original raw material value.

The concept of a circular economy has gained greater traction in European policymaking in recent times because it is seen to represent a positive, solutions-based approach to achieving economic development within increasing environmental constraints.

It has been estimated that full adoption of a circular economy model could save the EU economy net €1.8 trillion by 2030. We explain below some of the ways in which that might be achieved.

European country governments increasingly identify the circular economy as a political priority at domestic level.

Reducing dependency on natural resources

Reducing EU dependency on natural resources is a key objective of the EU Commission's plan, and this is significant for products manufacturers and those in the physical commodities supply chain.

Europe's economy depends on an uninterrupted flow of natural resources and materials, including water, crops, timber, metals, minerals and energy. Imports provide a substantial proportion of these materials. Increasingly, this dependence is seen as a source of vulnerability for the EU and its businesses.

Sustainable commodities and waste-as-a-resource business models

A circular economy seeks ultimately to decouple global economic development from finite resource consumption.

It involves new models of business-to-consumer and business-to-business transactions, based on accessing services rather than owning products.

In a circular economy, products are specifically designed for remanufacturing, refurbishment and recycling; waste is 'designed out'; prices reflect real, full life-cycle costs; and renewable energy sources power the economy.

By conserving materials embodied in high-value products, or returning wastes to the economy as high quality secondary raw materials, a circular economy intentionally reduces demand for primary raw materials.

Such materials will, of course, continue to play an important role. However, ever greater attention will be paid to the environmental and social impacts of their production.

The Commission has committed to promoting the sustainable sourcing of raw material globally across value chains, facilitating the substitution of chemicals of concern and the promotion of innovative industrial 'symbiosis' processes.

New finance models

Circular business models also require and promote adaptive finance mechanisms.

For example, with a changed emphasis on selling services rather than products, property rights of products may increasingly not be transferred to the consumer (buyer), but may instead be kept by the producing company.

Significant opportunities exist in such a market for financing the managing and trading of second and third-life equipment, as well as new challenges in tracking and putting a value on assets as they are recycled and re-used.

In an economy in which businesses increasingly receive payment during their products' period of use rather than at the beginning of their life cycles, the timing and management of cash flow becomes critical.

Contents of the EU's action plan

The EU's action plan sets out a vast array of initiatives that are designed to address all stages of the lifecycle of products, including use and recycling of raw materials.

The circular economy is not merely an idea, it is being actively implemented today (both on a mandatory, but also on a significant voluntary basis).

The Commission's 'Closing the loop' action plan includes proposals affecting various important areas of product-related legislation including:

• Eco design of products
• Packaging and packaging waste
• Landfilling of waste
• WEEE (waste electrical and electronic equipment)
• End-of-life vehicles
• Batteries and accumulators

Headline targets

The proposals that have gained all the headlines are a series of proposed, overarching waste-related targets which include:

• A common EU target for recycling 65 per cent of municipal waste by 2030
• A common EU target for recycling 75 per cent of packaging waste by 2030
• A binding target to reduce landfill to a maximum of 10 per cent of municipal waste by 2030
• A ban on landfilling of separately collected waste
• Promotion of other economic instruments to discourage landfilling

A fundamental purpose of each of these targets is obviously to reduce demand for raw materials of all kinds in the EU.

While undoubtedly challenging, these targets are seen by some as too weak. For example, most of the main political groups in the European Parliament have been critical of what they see as a lack of ambition in the Commission's proposals. One can expect the EU Parliament to push for the Commission's plans to be further enhanced.

Packaging sector proposals

Proposed changes to the Packaging Waste Directive would require each EU member state to implement measures that achieve a minimum of 65 per cent by weight of all packaging waste "prepared for reuse and recycled" by 31 December 2025, and 75 per cent by weight by the end of 2030.

This burden is to be shared across different categories of packaging as follows:

Precisely what "prepared for reuse and recycled" means is still to be established.

Enhanced producer responsibility: WEEE, batteries and ELV-related proposals

Although the Commission's proposal appends draft directives amending the existing WEEE, batteries and ELV directives, the amendments to those directives are extremely minor, so at first blush it might appear that these sectors may feel little impact.

However, many of the most significant legislative proposals affecting these sectors are instead enshrined in proposed amendments to the EU Waste Framework Directive. This tends to mask the significance of some of those changes for individual sectors.

'Differentiated fee' take-back schemes

Some of the more significant draft amendments to the Waste Framework Directive are those that will affect producer responsibility 'take-back' schemes.

In particular, draft new Article 8(a) would require EU member states to:

• Ensure that extended producer responsibility schemes make publicly available information about:
  
  
  • their ownership and membership; and
  • the financial contributions (to scheme take-back costs) paid by its producer members.
• Ensure that the financial contributions paid by producers to comply with their extended producer responsibility obligations:
  
  
  • "cover the entire cost of waste management for the products [they put] on the Union market"; and
  • "are modulated on the basis of the real end-of-life cost of individual products or groups of similar products, notably by taking into account their re-usability and recyclability".

In other words, by some mechanism still to be agreed, within three and a half years of the revised Waste Framework Directive coming into force, costs of compliance will vary, according to how well each producer's products comply with circular economy principles.

This is not a long lead time for manufacturers to work out and implement product design and composition changes that best prepare them for these new requirements.

These are complex issues to address. For example, there is an obvious conflict between recyclability and durability.

There are also arguably limits to how far companies can legitimately be held accountable for the actions of their customers and others (for example littering, failure to use recycling facilities) and therefore how far the 'polluter pays' principle can be extended.

The details of how these high-level principles are implemented in practice will be critical to their impact and effectiveness.

For a system of differentiated take-back fees to work, there needs to be measurable and meaningful criteria for differentiating between 'good' and 'bad' products.

Just as critical is the need for these criteria to be harmonised across markets. A patchwork of different criteria across individual EU member states would place manufacturers in an invidious position and be counter-productive to the overall objective.

Waste prevention measures

Similarly, a completely rewritten Article 9 of the Waste Framework Directive will require member states to take the following measures, among others, to prevent waste generation:

• "encourage the use of products that are resource efficient, durable, repairable and recyclable"
• "identify and target (for what is unclear) products that are the main sources of raw materials of a high importance to the economy of the Union and whose supply is associated with a high risk to prevent that those materials become waste"
• "encourage the setting up of systems promoting reuse activities, including in particular for electrical and electronic equipment, textiles and furniture"
• "reduce waste generation in processes related to industrial production, extraction of minerals and construction and demolition"

Again, how these potentially very significant, but equally vague, requirements will be implemented at individual member state level remains to be seen.

Implementation is left to member state discretion, so is unlikely to be uniform, which has the potential to create a major strategic and compliance headache for global manufacturers.

It is worth noting that proposed Article 9(5) of the revised Waste Framework Directive would require the European Environment Agency to publish a report every year describing "the evolution as regards the prevention of waste generation for each member state...including on decoupling of waste generation from economic growth and on the transition towards a circular economy".

Eco-design

Eco-design, because it acts at the start of the value chain, is seen as a vitally important enabler of the transition to a circular economy.

Electrical and electronic products are considered particularly significant in this context. The EU Commission has promised to emphasise circular economy aspects in future product design requirements under the EU Ecodesign Directive.

To date, eco-design requirements have mainly targeted energy efficiency: in the future, issues such as repairability, durability, upgradability, recyclability and the identification of certain materials or substances, will be more systematically examined on a product-by-product basis.

At the time of writing, final reports of the Commission's 2015-2017 Eco Design Working Plan study are reported to be in the process of being approved for publication.

Other initiatives

Other new legislative measures in the EU to be developed under the Commission's plan will apply to 'priority' areas such as construction waste, mining waste, plastics, food waste, wastewater, green public procurement and waste-to-energy among other areas.

In February 2016, the Commission also published a roadmap on exploiting the potential of waste energy as part of the circular economy. This foresees a Communication later in 2016, which will assess how existing waste energy processes such as incineration, co-incineration and other processes can be optimised through new technology and changes in operation.

Impacts for business

Possible negative impacts to existing businesses of a move to a circular economy include:

• Reduced demand for virgin raw materials
• Changes to demand for employment in raw material production sectors and new product manufacturing
• Stranded assets

However, opportunities to gain competitive advantage exist for those who adapt most quickly and effectively through:

• Circular product design and production involving: prolonged asset life, reduced obsolescence and greater utility
• New business models, for example:
  
  
  • Models that focus on access to services rather than ownership, (such as hiring, renting and leasing)
  • Models in which the business establishes a longer-term relationship with the customer, resulting in:
    
    
    • Greater insights into usage patterns
    • New ways to creatively engage with customers
    • Greater customer loyalty and satisfaction
• An ever-increasing focus on reverse cycling, value preservation and reverse logistics infrastructure (waste management, collection and treatment)

For these and other reasons, many of the world's leading companies have already endorsed and begun to implement the circular economy concept into their own businesses, contracts and development plans.

The EU Commission's 'Closing the loop' proposal has been referred to the European Parliament and first reading is pending. Each of the draft-amending directives are currently at the first reading stage of the EU's ordinary legislative procedure. Now is therefore the time to become engaged in and seek to influence the shape of this important policy package.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.