• Regulatory environment

Regulation should set the goals – companies should choose the methods

We won’t have circularity without the markets, and we won’t have the markets unless we create the rules for them, says Jyrki Katainen, president of Finnish Innovation Fund Sitra.

Our current economy and its regulations have been designed for the linear use of virgin materials – create a product from scratch, use, discard.

For a circular economy, new standards are needed.

“Currently, it is easier to transport and trade oil within the EU than it is to transport and trade waste,” notes Jyrki Katainen, President of the Finnish Innovation Fund Sitra.

"The risk is that we regulate the wrong part of the equation."

The odd situation results from regulatory framework: oil has clear standards for quality and safety. Regulating waste is more complicated, as there are different kinds of plastics and materials involved.

But it’s not just about complexity.

“Partly it’s just that in in the past we haven’t cared about circularity as much,” Katainen says.

“It’s rather incredible to consider that only 9 percent of natural resources used in the world have been recycled.”

This could be a source for anxiety, but for Katainen it is also a reason for hope, as circularity offers companies wide new business opportunities—for example, for trading and reusing waste across borders. As long as we create the rules that set the stage for those opportunities.

“To put it simply, we won’t have circularity without the markets, and we won’t have the markets unless we create the rules for the marketplace.”

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Regulation should not limit the use of new technologies

Katainen, if anyone, knows regulation. Before his current post at Sitra, Katainen was the European Commission Vice-President for Jobs, Growth, Investment and Competitiveness. Prior to that, he held the positions of Prime Minister of Finland and Finance Minister.

For Katainen, one risk of regulation is that we might end up regulating the wrong part of the equation with good intentions and end up hurting the issue rather than helping.

“Regulation aiming to advance circular economy should focus on regulating the goal, but not necessarily the means by which the goal is reached,” Katainen says.

The reason is simple. New technologies are invented all the time, and regulation that focuses too strictly on the means can end up stifling innovation.

For example, reducing the amount of new plastic entering the markets and replacing it with recycled plastics is the right goal. However, banning all new plastics might be the wrong solution as the definition and nature of plastics is evolving.

Katainen gives an example: A Finnish company called Sulapac has been developing plastics that are biodegradable in water and in the sea. However, if all plastics are banned and if the product falls under the law’s definition of plastic, this innovation might not be able to enter the markets even though it would advance the ultimate goal of regulators—decreasing the amount of microplastics in the world’s oceans.

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The EU should lead in creating global standards for circularity

The European Union has a significant role in creating global standards.

For example, when the EU created the Ecodesign Directive, it set the requirements for energy efficiency and other qualities for a wide group of products ranging from refrigerators and televisions to welding equipment. The products sold in the European Union have to meet the requirements regardless of their place of origin.

The current EU Commission has suggested that the Ecodesign Directive should be expanded to include requirements related to circularity.

“I strongly believe this is the right approach,” Katainen says.

“We need global standards for circularity where global regulation sets the goal, but countries can decide at the national level their solutions for reaching that goal. For example, the EU could decide that by 2030, a certain percentage of different materials has to be recycled. However, the solutions for reaching that goal could be local. We need both global standards and local solutions.”

Katainen thinks circular economy should also be part of international trade negotiations.

Currently, the negotiations tackle questions such as lowering or removing tariffs and include discussions on quality standards. In the future, the negotiations should include circularity standards for circularity.

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Companies need to have the space to innovate new circular business models

During his years at the European Commission, Katainen saw examples of companies changing their business models towards circularity based on business prospects rather than as a response to regulations.

Because of this, he thinks regulation should always leave room for companies’ own innovation in business models.

Examples of such innovation include a lighting company that switched from selling lamps and lighting to offering a service that would take care all of a client’s lighting needs from electricity bills to maintenance, or a tractor manufacturer that created a service where it picked up used components—for example, gear boxes—and remanufactured them to the extent that they became equivalent to a new product.

Sitra has compiled lists of such successful circular business models.

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Biomass-based economy needs to focus on circularity as well

Wood-based products are often seen as a sustainable alternative to fossil-based materials, for example, in food packaging. On the other hand, forests are equally often seen as carbon sinks that should be left standing instead of used as raw materials.

For Katainen, the key issue is circularity.

“Not all biomass-based economy is circular economy, nor is it automatically sustainable. I believe that biomass can be used sustainably to replace fossil-based materials, but the use of biomass must also be sustainable. This means that circularity has to be built into it from the beginning and companies have to design their biomass-based products for circularity. Otherwise, there won’t be a future for that business either.”

This design can and should start from the beginning—for example, from the methods for maintaining the forests.

Sitra is currently supporting an initiative that develops climate friendly agriculture by researching and implementing farming methods that can enhance soil and plants’ ability to function as carbon sinks. Such initiatives could possibly be expanded to managing the soil in forests to support biodiversity and absorption of carbon, Katainen suggests.

This could make wood-based materials even more sustainable—the common goal for everyone involved.

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