What is Circular Economy and How Does It Work?

circular economy

In this article, we delve into what circular economy is, how it works and what are some of the benefits of transitioning to such a regenerative and waste-free system.

What is Circular Economy?

The concept of circular economy revolves around sustainable production and consumption practices aimed at 

  • minimizing waste, 
  • preserving resources, and 
  • fostering long-term environmental and economic well-being. 

Unlike the traditional linear model of “take, make, waste,” circular economy focuses on maximizing the value and utility of products throughout their lifecycle.

Table listing differences between linear and circular economy business models

Circular economy principles involve reusing, refurbishing, and recycling materials and products whenever possible. It emphasizes the reduction of resource consumption and waste generation through 

  • innovative design, 
  • efficient production processes, and 
  • promotion of renewable materials and energy sources.

Circular economy initiatives aim to transform industries by creating closed-loop systems where waste from one process becomes a valuable resource for another. It entails shifting from a throwaway culture to one that prioritizes repair, reuse, and regeneration.

This approach has gained global recognition as a crucial solution to address sustainability challenges. It requires a significant shift in mindset and practices, prompting us to rethink our current linear industrial economy. By embracing circular economy principles, we can pave the way for a more resilient, resource-efficient, and sustainable future for generations to come.

How does Circular Economy Work?

Minimizing Waste and Pollution

Adopting a “waste equals food” mindset. This approach entails recovering and repurposing materials, aiming to eliminate the concept of waste altogether. By viewing waste as a valuable resource, we can identify opportunities to reintegrate materials back into the production cycle. 

Additionally, it is essential to ensure that any biological materials returned to the Earth are harmless and non-toxic, supporting the regeneration of natural systems without compromising environmental well-being. Embracing this approach not only reduces our reliance on finite resources but also promotes a sustainable and harmonious relationship with the environment, where materials and resources can circulate in a safe and beneficial manner.

Watch this slideshow video for a brief introduction to Circular Economy.

Extending Product Lifespan

By maximizing the lifespan of materials and products, whenever feasible across multiple use cycles, the circular economy aims to optimize resource utilization and minimize waste generation. This approach emphasizes the importance of designing products for durability, repairability, and reusability, enabling them to serve their intended purpose for extended periods. 

By extending the life of materials and products, we can significantly reduce the demand for new resources and alleviate the environmental impacts associated with extraction, production, and disposal. Embracing this circular mindset not only promotes sustainability but also encourages more efficient and responsible use of finite resources.

Closing Resource Loops

Maximizing the retention of embedded energy, water, and other process inputs within products and materials for as long as possible. This involves designing products and production processes in a way that allows for the preservation and efficient use of these valuable resources throughout their entire lifecycle. By extending the lifespan of products, and promoting reuse, repair, and remanufacturing, we can prevent the premature loss of these embedded resources. 

This minimizes the need for additional resource extraction and reduces energy consumption and waste generation associated with the manufacturing of new products. Embracing this approach enables us to unlock the full value of resources and ensures a more sustainable and resource-efficient economy. By valuing and preserving the embedded inputs, we can achieve a more resilient and responsible use of resources, benefiting both the environment and society as a whole.

5 different types of circular business models

Emphasizing Circular Business Models

Emphasizing circular business models is a key aspect of transitioning towards a circular economy. These innovative models focus on creating value through resource efficiency, sustainable practices, and closed-loop systems. 

Circular business models encompass various strategies, such as product-as-a-service, sharing economy platforms, and remanufacturing processes. They encourage collaboration, partnerships, and the development of new revenue streams. These models not only benefit the environment by minimizing resource depletion and waste generation but also offer economic advantages, including cost savings, increased customer loyalty, and access to new markets. 

Want to know more about circular business models with real-world examples? Click here to read our article dedicated to the topic.

What does ‘Circular Economy in Action’ look like?

Reuse Case

Company: RePack

RePack is a company that offers reusable packaging solutions, specifically focusing on reusable bags. Their innovative approach aims to reduce single-use packaging waste and promote a circular economy. Repack’s reusable bags are designed to be durable, functional, and environmentally friendly.

When customers receive their online orders in Repack’s reusable bags, they can easily return the empty bags by simply folding them and dropping them into any mailbox. Repack collects, inspects, and cleans these bags for future use. By encouraging the return and reuse of their bags, Repack helps eliminate the need for single-use packaging materials, such as cardboard boxes or plastic bags.

Product Life Extension Case

Company: iFixit 

One example of a company focused on product life extension is iFixit, and a product they offer is repair guides and tools for electronic devices. iFixit is a platform that provides comprehensive repair guides, step-by-step instructions, and high-quality tools to help individuals repair their electronic devices instead of replacing them.

Through their extensive library of free repair guides, iFixit empowers users to troubleshoot and fix various issues with smartphones, tablets, laptops, game consoles, and other electronic gadgets. They also offer repair kits that include specialized tools and replacement parts, making it easier for people to extend the life of their devices by repairing them rather than discarding them.

An interesting and fun TEDx talk about Circular Economy and climate change by Amy Aussieker, CEO of Envision Charlotte

What are the Benefits of Circular Economy? 

Reduction in greenhouse gas emissions  

According to The Circularity Gap Report 2021, in 2019, 59.1 billion tonnes of greenhouse gases were emitted to supply global wants and needs. Implementing circular economy principles can lead to a significant reduction in greenhouse gas emissions, directly impacting climate change. 

Circular economy relies entirely on renewable energy and materials, aiming to eradicate waste and pollution. According to a paper published by the Ellen MacArthur Foundation, circular economy strategies could potentially reduce emissions by 40% in 2050 when applied to four key industrial materials: cement, steel, plastic, and aluminum. This study highlights the immense potential of circular economy in decoupling economic growth from greenhouse gas emissions and driving a more sustainable future.

Waste elimination 

According to a World Bank report, if we continue on the current trajectory, global annual waste is projected to reach a staggering 3.4 billion tonnes by 2050. This alarming trend is compounded by the fact that only a mere 8.6% of the 100 billion tonnes of material entering the global economy annually is effectively recycled (ref: The Circularity Gap Report 2021). 

This unsustainable cycle not only places immense pressure on material commodity markets but also exacerbates environmental degradation while jeopardizing food and water security. However, embracing resource reuse not only reduces material dependence but also contributes to emission reduction and job creation, making it a vital component in addressing these pressing challenges. Adopting proactive strategies to eliminate waste is essential for creating a sustainable and resilient future.

‘In a circular economy, products and the materials they contain are highly valued. This contrasts with the traditional, linear economic model, which is based on a ‘take-make-consume-throw away’ pattern. In practice, a circular economy minimizes waste through reusing, repairing, refurbishing, and recycling existing materials and products.

European Parliament

Reduces pressure on the environmental systems 

Currently, industries heavily depend on natural resources as raw materials, exploiting ecosystems and treating them as mere waste sinks. This unsustainable approach has caused severe damage to various ecosystems, including those on land, in the air, and in the sea. However, a circular economy model offers a transformative solution that not only safeguards these ecosystems but also actively contributes to their restoration. 

By prioritizing the use of renewable resources and reducing emissions, the circular economy reduces pressure on environmental systems. This restoration is of utmost importance as it directly influences the quality of our food, water, and air, ensuring a healthier and more sustainable planet for future generations. Embracing circular economy principles is a powerful step towards balancing human activities with the resilience and regeneration of Earth’s natural systems.


The adoption of circular economy principles, which involve resource reuse and efficient supply chains that maximize value extraction, results in substantial cost savings for industries on a broader scale. A study conducted by McKinsey and The Ellen MacArthur Foundation highlights the potential impact of implementing circular economy strategies, stating that these approaches could enhance Europe’s resource productivity by 3% by 2030. Such improvements would generate annual cost savings of €600 billion, alongside an additional €1.8 trillion in other economic benefits. 

These findings underscore the significant financial advantages associated with transitioning to a circular economy, making it an attractive proposition for businesses looking to optimize resource utilization, reduce waste, and enhance overall profitability. By embracing circularity, industries can achieve not only environmental benefits but also substantial savings that contribute to long-term economic growth. 

innovation is one of the key benefits of circular economy


The transformation of consumer demand, coupled with concerns over resource scarcity and future insecurity, has become a catalyst for innovation within the economy. These driving forces have led to key advancements and novel approaches in various sectors. One notable trend is the exponential growth of the sharing economy and the emergence of “service as a substitute for product” models, which reflect a shift towards more sustainable consumption patterns. 

Furthermore, the ongoing technological revolution acts as an enabler, fostering increased innovation across industries. This heightened focus on innovation holds great potential for creating enhanced value for both businesses and consumers. As companies embrace circular economy principles and explore new ways to meet consumer needs while minimizing resource consumption, they are poised to unlock novel opportunities and further drive economic growth.

What are the Challenges to Circular Economy?

Customers’ Preference to Own

Consumers’ preference to purchase and own products outright rather than adopting alternative models such as leasing or rental poses a challenge to the circular economy for several reasons:

  • Total Cost of Ownership: Shifting to performance-based models, where products are leased or rented instead of purchased, may initially increase the total cost of ownership for customers. While these models can provide access to more efficient and durable products, customers might be reluctant to pay higher upfront costs or ongoing rental fees.
  • Reluctance to Replace: When customers own products, they may be less inclined to replace older models with newer, more efficient versions. This behavior can hinder the adoption of more sustainable and resource-efficient products in the market, as customers tend to stick with what they already own, even if there are better alternatives available.

More Durable Products= Fewer Sales

More durable products mean fewer sales in the longer term. It is a  challenge faced by manufacturers and retailers when they prioritize durability and longevity in their products. While designing durable products is an essential aspect of circular economy, it can pose certain difficulties:

  • Reduced Sales: When products are made to be more durable, they have a longer lifespan, resulting in fewer repeat sales. As a result, manufacturers and retailers may experience a decline in revenue in the long term, as customers do not need to replace or upgrade their products as frequently.
  • Market Adaptation: To address the challenge, manufacturers, and retailers need to adapt their offerings to include refurbishment, repair, and resale options. This may require changes in business strategies, such as establishing dedicated repair centers, partnering with refurbishment services, or creating platforms for resale. Adapting to these new market dynamics can be challenging and requires careful planning and investment.
one of the challenges when transitioning to a more circular model is keeping businesses competitive

Keeping Businesses Competitive and Profitable

Transitioning to circular economy practices while also maintaining their competitive position in the market can be challenging for many businesses. Two key factors contribute to this challenge:

  • Economic Pressures: Adopting circular economy principles often requires significant investments in new technologies, infrastructure, and processes. These upfront costs can put a financial strain on businesses, especially smaller enterprises that may lack the necessary resources. Balancing these investments with the need to remain competitive can be challenging.
  • Market Demand and Consumer Behavior: Circular economy practices may involve changes in product design, pricing models, and business operations. However, consumer demand and preferences may still lean towards conventional linear models. Businesses must navigate this consumer mindset and educate customers about the benefits of circular products and services to create a market for their offerings.

As of 2020, only 8.6% of the global economy was circular, a decline from 9.6% in 2018 (ref: The Circularity Gap Report 2021). This worrisome downward trend aligns with studies indicating a planet rapidly approaching 1.5°C warming by 2050, widespread ecosystem destruction, biodiversity loss, and looming water and food shortages.

In today’s world, circular economy stands as the sole viable business model for achieving sustainability, generating value for industry and consumers, and creating jobs, while restoring ecosystems. While commendable efforts, such as the EU’s Fit for 55 initiative to achieve climate neutrality by 2050, are underway, global action is necessary to avert the predicted climate crisis. Embracing the circular economy offers us an opportunity and framework to mitigate the pollution-induced changes our planet already confronts and navigate the crisis ahead.

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