What is the circular economy? | CNBC Explains

Here’s an idea. What if you never had to buy a lightbulb again? Instead, you lease light, like you lease a car or an apartment.

It's just one idea that’s part of the circular economy. Before we can understand the circular economy, well, it helps to define the linear economy. Most organizations today operate in the linear economy which is based on a 'take, make, and dispose' model.

So, for example, a lightbulb company takes resources, like glass or metal, to manufacture its products. The company makes the bulb and sells it to a customer like me who uses it. Once the lightbulb burns out, I dispose of it.

It’s likely neither the company nor I will ever see that lightbulb again. For a lightbulb company to make money in the linear economy, it tries to buy materials for the lowest cost possible and to sell as many bulbs as possible. This model operates as if there are infinite resources, like glass or metal, in the world.

But you and I know that’s not the case. That’s why the circular economy treats materials like they're finite. A company in the circular economy doesn’t just recycle products but maintains ownership of them all along, so the model looks more like this, make, use and return.

Let’s go back to the lightbulb example. Instead of buying bulbs, this office in London leases its light from Philips Lighting. It signed a 15-year lease for the service and pays a fee each quarter.

Philips still owns the actual lightbulbs and provides maintenance and replacements when needed, no extra cost. This model gives Philips the incentive to produce energy-efficient lightbulbs and it saves the office money with fixed lighting costs. It’s a radically different business model that makes companies more like service providers than sellers of a physical product.

And it turns out lots of companies are looking for ways to get involved. Take H&M, one of the world’s largest clothing retailers. It’s working on a strategy to become 100 percent circular.

The company collects old garments in its stores and recycles them. Since 2013, H&M says it has gathered more than 55,000 tons of fabric to reuse for new garments. Some governments are getting on board with the circular economy, too.

The European Union adopted an action plan in 2015 aiming to make supply chains, you guessed it, more circular. This includes everything from production to consumption, repair and manufacturing, and waste management. The point isn’t just to become more 'green' and create environmental benefits, there could be economic benefits too.

One report estimated a shift toward the circular economy in the E. U. could increase GDP by an additional 12 percentage points by 2050.

But moving from the linear economy to the circular economy also brings costs. Companies would need to redesign their supply chains and products in order for them to be used again and again. Manufacturers might be burdened when it comes to the actual logistics of disposing and recycling.

A recent report found only 22 percent of U. K. companies are trying to generate value from products that are returned for reuse, recycling or refurbishing.

It’s estimated the cost of transitioning to a fully efficient reuse and recycling system across Europe could be as much as 108 billion euros, roughly 130 billion dollars. Cost is one thing. Changing people’s mindsets is another.

And that’s what it'll take for the circular economy to go from an idea to reality for everyone. Hey guys, it's Elizabeth, thanks so much for watching! You can check out more of our videos over here.

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