State of Green Business

How HP, Rolls Royce and Caterpillar are going in circles

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Where does the digital economy meet the circular economy?

This article orginally appeared at the Ellen MacArthur Foundation's Circulate blog.

There is a consensus opinion that a rapid increase in the number of connected devices will play a role in reshaping the global economy over the next couple of decades. However, the real benefits of new digital technologies are realized when technical developments are combined with the evolution of a new economic system: a circular economy.

A circular model is restorative and regenerative by design, and aims to keep products, components and materials at their highest utility and value at all times.

There’s no question that developments such as the Internet of Things (IoT) already have the potential to bring significant economic benefits. A McKinsey report has predicted that the number of internet-connected devices could grow to as much as 50 billion by 2020, and Cisco has estimated that the trend could represent a $19 trillion economic opportunity globally.

Learn more about the circular economy at VERGE 16 from Sept. 19 to 22 in Santa Clara, California.

Yet the majority of IoT innovations coming to the fore in the present day work mostly on a product or specific business level. A report (PDF) released by Beecham Research in 2015 found opportunities for IoT technologies across the board in agriculture, but many proposed solutions assume that today’s farming methods remain relatively unchanged, and based on a one-way, linear model.

Making crop, livestock and water management in agriculture more efficient isn’t a bad thing. However, as Michael Braungart and William McDonough point out in their seminal book, "Cradle to Cradle: Remaking the Way We Make Things," diminishing returns will be seen in trying to make an ineffective system more efficient.

Historically, resource productivity increases have been met by rebound effects. So when relative prices decrease, consumers use more individual transport, floor space and food.

A piece of meta-research, which reviewed 69 studies across North America, Europe and Japan, found that decreasing relative costs by 10 percent had the long-term effect of raising vehicle and fuel demand by more than 10 percent and increasing traffic by 5 percent, making congestion and commuter time worse.

This means that while the benefits previously highlighted are good from a prosperity perspective, they could be accompanied by exacerbated externalities and resource challenges. The ineffective system is made only more efficient.

Digitization meets efficiency

The challenge: How can the economic potential of the digital revolution be exploited as part of a more effective system?

The Ellen MacArthur Foundation’s 2015 report, "Growth Within: A circular economy vision for a competitive Europe (PDF)," interrogated just that issue across three focus sectors, mobility, built environment and food. It found that in a business-as-usual scenario, new technologies and business models could help add $1 trillion worth of value to the European economy by 2030 through increased resource productivity and reduced costs.

The problem identified in Growth Within was that product-level innovation usually outpaces system-level innovation. It means that Europe’s complex urban planning, mobility and food systems may not be able to effectively integrate new evolving technologies in a way that maximizes their impact.

In contrast, the report suggests that the economic benefits of new technologies can be significantly enhanced by coupling the digital revolution with the principles of a circular economy.

The combination of the adoption of a circular economy and new technologies could create a net benefit of $2.02 trillion in Europe by 2030, twice the calculated benefits of the current path.

Further societal outcomes were also uncovered, including an 11 percent GDP increase by 2030, versus 4 percent on the current path, and an increase of $3,370 in disposable income for EU households.

In a scenario where circular economy models and technological developments are combined, Growth Within estimates that primary material consumption measured by car and construction materials, real estate land, synthetic fertilizer, pesticides, agricultural water use, fuels and non-renewable electricity could drop 32 percent by 2030 and 53 percent by 2050 compared with today.

The potential benefits for Europe outlined in Growth Within are enabled and ultimately powered by technological development, including IoT.

Scaling new systems

However, the scale of the economic opportunity is only unlocked when these innovations are integrated into an effective system.

The 2016 study "Intelligent Assets: unlocking the circular economy potential highlighted the following ways that digital connectivity," when considered in tandem with circular economy principles, is profoundly changing our understanding and appreciation of resource, energy and information flows.

An increasingly connected world has paved the way for a host of new business models. Some will be familiar with Rolls Royce’s "power by the hour" offering or Caterpillar’s history of leasing and re-manufacturing, but models based on performance rather than ownership are increasingly entering the consumer sector, thanks in part to widespread, high speed internet.

HP’s Instant Ink service, launched in 2014, has around a million subscribers in individuals and small businesses who pay a monthly fee based only on the number of pages they print. The connected printer orders ink automatically when supplies are running low, and HP have a system in place to collect used cartridges in order to reuse their materials. Instant Ink not only eliminates 67 percent of waste associated with the number of pages printed, but also builds a precious customer relationship.

Digital is disrupting another aspect of a business model: the reverse cycle. Our linear economy is largely based around getting products into customers’ hands, rather than getting them back, and the shortcomings of reverse logistics impede re-use activities.

One common challenge is that collected products are grouped together, resulting in a lack of information on the status, performance or value of each asset. Companies such as the U.K.-based Provenance have harnessed blockchain technology to develop a cheaper, more sophisticated tracking system to retain product information such as location and condition across multiple life cycles.

IBM’s Reuse Selection Tool also seeks to address this issue, using data on the design and material constitution of product, as well as regulatory, financial and supply information to inform decisions as to whether an asset should be reused, re-manufactured or recycled for its material value.

Connectivity and circularity

Connected devices can have a deeper impact than a fridge that tells you when you’re low on milk, optimizing resource yields and circulating products, components and materials at the highest utility at all times.

Connectivity already has had a significant impact on the way that cities work, and further disruption is on the horizon.

Take automation and self-driving cars as an example. On the current linear development path, ownership of connected, autonomous, electric cars will remain the dominant form of transport, but often privately owned and not designed for intensive or shared use.

By taking a systems approach, guided by circular economy principles, urban mobility could be a flexible, interchangeable offering that avoids negative rebound effects. With the circular economy framework as a guide, asset tracking paired with mobile technologies enable multiple car-sharing models such as Zipcar, DriveNow or Car2Go, which enable a larger number of people to reach their destinations with fewer assets and less time invested.

If this sounds familiar, that’s because it’s happening in some pioneering cities.

Citizens in Helsinki have access to a "mobility as a service" app, enabling users to plan and purchase a journey as efficiently as possible using a combination of the transport options on offer, including bus, taxi, ferry or bike. The vision developed by the Finnish capital’s officials is to make private car ownership obsolete — by introducing a better system.

While cleantech is bringing smarts to agriculture, it’s here that a sense of direction is perhaps most important. Conventional farming techniques tend to reduce natural capital, extracting nutrients from the soil and stifling the fungal, microbial and root networks required for productive and resilient crop growth.

So rather than making this system more efficient, digital tools can be applied to work towards regenerative practices and understand the value of externalities.

This means prompting farmers to optimize for long-term regeneration rather than short-term productivity. For example, using sensors to monitor soil nutrients and suggest crop rotation or intercropping, balancing pest levels with biodiversity, or providing field machinery with GPS pathways to reduce soil compaction.

The fourth industrial revolution is already becoming a reality, driven by digital intelligence, connectivity and automation. New and disruptive technologies reach the market every week.

What remains to be seen is whether these will result in incremental, isolated improvements to our linear development path, or become greater than the sum of their parts. The circular economy provides a framework for the latter, an update to our economic operating system to one that is restorative and regenerative by design.

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