What is a circular economy? How it works and why it matters

What is a circular economy? Learn more about circular economy principles and why they are crucial for a sustainable future for businesses and society alike.

October 7, 2024

A circular economy is a systemic approach to economic development designed to benefit businesses, society, and the environment. Unlike a linear economy, which operates on a ‘take-make-dispose’ model, a circular economy aims to minimize waste and keep resources in use for as long as possible – extracting their maximum value.

Forests play a vital role in this system, not only as a renewable source of materials but also as natural ecosystems that provide essential services like carbon sequestration, biodiversity conservation, and water filtration. A healthy forest ecosystem supports circularity by regenerating natural resources and maintaining ecological balance, which is critical for sustaining life on Earth.

Transitioning to a circular economy is essential to the mission of The Forest Stewardship Council®. This guide breaks down the core elements of circularity as well as how governments and corporations around the world can make the transition.

Table of contents

The growing population and strain on natural resources
Key circular economy principles
Linear economy vs. circular economy
Financial benefits of a circular economy
Environmental benefits of a circular economy
How to round out the linear economy
FSC’s approach to circularity

The growing population and strain on natural resources

The United Nations predicts the world’s population will reach 8.5 billion people by 2030 and 9.7 billion by 2050. Our natural resources will not increase at a scale large enough to meet this growing demand. And while many eco-conscious entities are turning from fossil-based materials to bio-based alternatives, they still rely on a linear production model to serve their growing consumer base.

Forests are uniquely positioned as a circular supplier because they act as a renewable source of materials like lumber, pulp, paper, bamboo, and other forest-derived products. According to the Food and Agriculture Organization of the United Nations, global wood production is at record levels – equating to about 4 billion cubic metres per year. The rising demand for these forest fibres increases pressure on essential ecosystems, exacerbating climate change, biodiversity loss, and pollution.

To help combat this issue, a bioeconomy aims to replace finite resources like fossil fuels with biological alternatives that can be regrown or reproduced. While this is a step in the right direction, a bioeconomy itself is not truly circular because these regenerative fibres are taken and placed into a linear “take, make, waste” system.

A circular economy, or circular bioeconomy, takes the concept of a bioeconomy one step further. It takes the regenerative fibres used in a bioeconomy and places them into a mechanical, circular system. This helps ensure the fibres are not wasted but instead reused as many times as possible.

Recycling according to strict environmental standards (like those required to achieve the FSC Recycled label) plays a small role in supporting a circular economy. However, it has its limitations. The process of recycling can rapidly degrade materials until they are no longer usable. Paper, for example, gets weaker with each recycling cycle due to shortened fibres.

Key circular economy principles

The United Nations Economic Commission for Europe (UNECE) reports that the use of material resources has surged more than tenfold since 1900 and is on track to double again by 2030. Such rampant consumption is unsustainable in the long term and threatens to exacerbate resource scarcity, biodiversity loss, and climate change.

According to the Ellen MacArthur Foundation, there are three principles of a circular economy that can help address over-consumption and strengthen supply chain resilience.

A graphic represents the key elements of a circular economy.

1. Focus on innovative production using waste or byproducts

The current economic model operates under a ‘take-make-waste’ system that takes raw materials from Earth, makes products out of them, and discards them later on as waste.

In a circular economy, designing a product begins with selecting the right materials based on functionality and the material’s life cycle. Considering these factors upfront helps ensure they can be efficiently cycled through reuse, repair, or remanufacture.

This helps frame waste as a potential resource – not just something to discard. Businesses can create a more sustainable and efficient system by redesigning products and production processes to minimize waste generation and pollution.

Real-world example: RE-ZIP is a circular packaging solutions company that specializes in reusable alternatives to traditional single-use packaging. They are revolutionizing the e-commerce industry by allowing each of their packages to be returned and reused multiple times before they are dissolved and added back into circulation.

2. Consider responsible consumption in product life cycles

Utilizing forest products efficiently is crucial for sustainable forest management. For instance, designing long-lasting products and implementing cascading use – forest-based materials move from high-value applications like lumber to lower-grade applications like biomass energy – extend the resource’s lifespan.

This is central to the circular economy, which is the concept of keeping products and materials in circulation for as long as possible. This principle emphasizes strategies like reuse, repair, and remanufacturing to extend the lifespan of goods and minimize the need for new production.

For instance, initiatives like product-as-a-service and sharing platforms enable consumers to access products temporarily rather than owning them outright, promoting resource sharing and reducing overconsumption.

The rise of the sharing economy has spurred innovative business models in various sectors, including:

Offices and hotels using furniture-leasing programmes rather than buying new.
Construction companies leasing temporary elements (like fences and temporary doors) rather than discarding them after finalized construction.
Electronics leveraging cell phone e-waste recycling programmes and refurbishment services like Fairphone.

By prolonging product life cycles and encouraging resource efficiency, this principle reduces waste and creates new economic opportunities.

Real-world example: Holmris B8, a Danish furniture company, leverages the FSC certification to ensure responsible material sourcing. They also help ensure closed-loop recycling systems through their “take back" programme, which offers an environmentally responsible way to manage unwanted items.

3. Support regenerative practices to safeguard natural resources

A truly sustainable economy must also prioritize restoring and regenerating natural ecosystems. This principle involves minimizing negative environmental impacts and actively contributing to ecological restoration and biodiversity conservation.

While forest-based products are regenerative in their core definition, these ecosystems cannot support unlimited consumption. It’s essential to keep products in circulation for longer periods and to support the environments providing current and future resources. This can be achieved through strategies that support a more circular economy, including sustainable forest management.

Sustainable forest management supports a circular economy by encouraging forest regeneration and a net zero loss in forest cover. Chain of custody certification schemes, like FSC’s chain of custody programme, play a crucial role in supporting this circular model by verifying the sustainable harvesting of materials and tracking the flow of forest fibres through the supply chain. This system could be expanded in the future to help ensure the longevity of forest fibres within a circular economy.

Real-world example: Multinational retailer IKEA prominently features FSC-certified wood in its products, emphasizing sustainability through the product life cycle. IKEA is also committed to circularity and aspires to design all of its products with circularity in mind by 2030.

Linear economy vs. circular economy

Many companies follow a linear model: take, make, dispose. They extract raw materials, turn them into products, and then discard them as waste. While familiar, this "take-make-waste" system strains the planet's finite resources, creating pollution in the process.

A circular economy offers a more sustainable alternative. It aims to minimize waste and reduce resource consumption by designing products for reuse, repair, and recycling. Here, the goal is to keep products and materials in use for as long as possible. This can involve:

Designing products for easy repair and disassembly.
Remanufacturing old items into new ones.
Creating products from recycled materials.

The high use of forest-based fibres can lead to non-sustainable forest management practices, poorer biodiversity, and diminished involvement from local communities and Indigenous Peoples. All of these factors can lead to deforestation.

A circular approach, with its emphasis on reuse and recycling, can significantly reduce this demand. This translates to protecting forests and the vital role they play in the ecosystem.

An infographic compares a circular economy vs. a linear economy. — © FSC / Iván Castro

Financial benefits of a circular economy

The circular economy isn't just good for the planet – it also has financial benefits. Businesses that embrace circular practices can see significant improvements, such as:

Reduce costs by minimizing waste: By using fewer virgin materials and focusing on repair and remanufacturing, companies can minimize waste disposal fees and secure a more stable supply chain, especially for materials with volatile prices. In the future, this could translate into potential cost savings and increased profit margins.
Create new opportunities for local communities: The International Labour Organization estimates a net increase of 24 million jobs by 2030 thanks to the circular economy. This shift can empower people and communities by creating jobs that weren’t present in the linear model.

The circular economy has the potential to offer a win-win scenario for businesses, communities, and the environment.

Environmental benefits of a circular economy

Embracing a circular economy offers many environmental benefits – a major one being the conservation of natural resources. Communities that rely on these ecosystems for their livelihoods, such as Indigenous Peoples and those dependent on fishing and forestry, benefit directly from reduced environmental degradation.

A circular economy also combats climate change. Resource extraction and processing are energy-intensive activities that generate greenhouse gas emissions. While recycling is still energy-consuming, moving products into the reuse category can help save energy. By giving products a second life, a circular economy reduces this energy demand.

TheWorld Resources Institute estimates that a circular economy transition could cut global greenhouse gas emissions by 39 per cent (22.8 billion tons). This reduction would have a major impact on mitigating climate change and its devastating consequences, benefiting communities around the world.

A graphic outlines the financial and environmental benefits of a circular economy.

How to round out the linear economy

Closing the circular economy gap requires concerted efforts at multiple levels, from policymakers and businesses to consumers and communities.

To move towards a more sustainable model, individuals can start by adopting sustainable consumption habits, such as:

Buying regenerative or renewable materials.
Buying more durable and long-lasting products.
Repairing items instead of replacing them.
Supporting businesses that prioritize sustainability and circularity.

Advocating for policies that promote resource conservation, waste reduction, and sustainable production can also make a significant difference. Additionally, engaging with local communities, participating in grassroots initiatives, and supporting organizations that champion circular economy solutions can promote sustainability and drive collective action.

On a broader scale, governments and policymakers play a crucial role in facilitating the transition to a circular economy. This includes measures such as:

Establishing producer responsibility within product lifecycles and supply chains.
Implementing supportive policies and regulations into their strategic plans.
Investing in research and innovation.
Supporting recycling infrastructure development.
Incentivizing circular business models through tax breaks and grants.
Providing incentives for businesses to adopt circular practices.

Circular economy examples

One example of success comes from Amsterdam. The Dutch capital has embraced a circular economy strategy, aiming to be completely waste-free by 2050. This includes initiatives like a city-owned clothing repair company that provides affordable repair services, extending the life of garments and creating jobs in the process. The circular economy offers a win-win scenario for businesses, communities, and forests.

Another example comes from the circular economy action plan set out by the European Commission in March 2020 as part of the EU Green Deal.

This plan includes measures to expand the use of sustainable products in the EU and empower consumers to make more environmentally conscious purchasing decisions. It also aims to launch specific action plans in sectors that use the most resources, including electronics, packaging, plastics, and textiles.

A pivotal component of this plan is the sustainable design regulation, which mandates products placed on the EU market be designed with circularity in mind. This regulation fosters innovation and drives a shift toward more sustainable products that are kept in circulation longer.

The waste directive in this legislative practice also introduces financial incentives to encourage circular practices. This includes potential fees for companies based on the amount of non-circular waste they generate, incentivizing waste reduction and material recovery and reuse.

These measures underscore the EU’s commitment to a circular economy and serve as a blueprint for other regions with similar goals.

FSC’s approach to circularity

Choosing regenerative or renewable materials and more durable products is a crucial first step towards a circular economy. Today, many of FSC’s current certifications and offerings naturally help advance these circularity goals.

As outlined in the key circular economy principles section above, the Ellen MacArthur Foundation highlights three key principles to circularity, including:

Eliminate waste
Reuse materials
Regenerate ecosystems

FSC certification currently provides solutions for addressing the “eliminate waste” and “regenerate ecosystem” elements of this model, and FSC is actively pursuing solutions for the “reuse materials” principle.

For instance, thousands of companies worldwide already use the FSC Recycled label on their packaging, fashion, or furniture products to signify a product is composed of recycled or reclaimed forest materials. Additionally, the FSC 100% label indicates that a company's product is 100% sourced from FSC-certified forests, which are independently audited to confirm their sustainable management. The FSC Mix label also allows virgin bio-materials to be mixed with recycled or reclaimed materials, reducing the need for virgin inputs while maintaining sustainability standards.

These FSC certifications help lessen pressure on forest ecosystems and contribute to a more closed-loop cycle. In fact, industry leaders are already making use of FSC services – including the Allen MacArthur Material Circularity Indicator (MCI). By leveraging FSC-certified forest-based biomaterials, the Allen MacArthur MCI can calculate the circularity index of materials.

To help FSC chart a path toward an even more circular future, FSC launched the Circularity Hub in 2023. The programme contains dedicated experts tasked with mapping out the future of circularity within FSC and spearheading the system change required.

Additional resources

Learn more about the EU’s action plan to achieve a circular economy by 2050. Explore case studies of cities successfully implementing circular economy strategies from the Ellen MacArthur Foundation. Read about what the UNECE is doing to support small and medium-sized businesses in embracing circular economy models.

You can also review The European Forest Institute’s new 10-point Action Plan for a Circular Bioeconomy of Wellbeing which calls for collective action to put nature at the heart of the economy and set the world on a sustainable path. Finally, learn more about bio-based sourcing and circularity from FSC in the Forest For The Future podcast.