Expert Speak India Matters
Published on Jun 13, 2024

Implementing a circular economy can reduce discarded products, but policymakers must expand the contractual model's scope for maximum benefit.

Scaling circular economy


The adverse impact of a linear economy, where products are manufactured, consumed, and discarded, is evident in the environment and health of humans and animals in India. If we continue with a linear economic model, the problem will only worsen due to a rising material demand in a growing economy and product demand due to a large consumer base.

If we continue with a linear economic model, the problem will only worsen due to a rising material demand in a growing economy and product demand due to a large consumer base. 

Circular economy (CE) can alleviate these challenges by reducing discarded products in multiple ways, including prolonging the life of products through proper maintenance and repair, changing product ownership in the secondary market, refurbishing, and recycling. 

Reducing pollution through circular economy

India’s commitment to achieving net zero by 2070 needs a myriad of technologies, policy, and regulatory reforms, and innovative financial and business models. CE is one of the models that can support India’s ambition to reach net zero through energy savings. According to a research paper, the CE has the potential to save 6–11 percent of worldwide energy consumption. In addition, India’s path to a developed and green economy needs an enormous volume of materials, most of which would be imported. Reorienting from a linear to a CE will reduce demand for imported materials, thereby making it self-sufficient and saving foreign exchange. 

Although there are several benefits of a CE, there are challenges to adopting it on a large scale. The key challenges are the difficulty and cost of collecting used products, the lack of a supply chain infrastructure to reverse product flows and limited public participation; recovery value may be less than the cost; extremely heavy products are difficult to transport and recycle; and lack of existence of a secondary market. 

Although there are several benefits of a CE, there are challenges to adopting it on a large scale. The key challenges are the difficulty and cost of collecting used products, the lack of a supply chain infrastructure to reverse product flows and limited public participation.

Solutions

A contractual model targeting products that use extensive steel, aluminium, and cement can be an impactful and implementable solution that can address the challenges mentioned above. These products are energy intensive, hard to decarbonise, and polluting, so recycling products using these materials will reduce energy needs and mitigate pollution problems. Technically, they can be refurbished and reused. 

The contractual model stipulates that assets must be returned to the manufacturer after the end of asset life.

The contractual model stipulates that assets must be returned to the manufacturer after the end of asset life. For example, a steel company enters a contract with an auto manufacturer or auto component manufacturer. The condition is that the steel is no longer recycled or refurbished and must be returned to the steel manufacturer. The ownership doesn’t rest with the consumers after using the product if the consumers are not refurbishing or recycling themselves. The contract period can be the life of the asset. However, the user will pay the usual price of the product to the manufacturer upfront, not lease payments over the lease period in a leasing contract. There can be flexible upgrade options where consumers can switch to newer, more efficient models, encouraging continuous improvement in sustainability.

Maintenance rests with the user

In this contractual model, the user is responsible for regular maintenance to ensure products remain in optimal condition, reducing the need for replacements and, thus, waste. Maintenance practices must adhere to eco-friendly standards (e.g., using biodegradable lubricants). The manufacturing company trains users on the optimal use of the product to maximise its lifespan and efficiency. They can provide ongoing support to ensure users can address any operational issues without resorting to replacements. The manufacturer can offer incentives or discounts to consumers for maintaining the products well and returning them in good condition. A third party can be appointed where regular audits can ensure compliance with the sustainability goals set in the contract. This structure encourages the reuse, refurbishment, and proper disposal of products, ensuring a significant reduction in waste and an increase in resource efficiency across the product lifecycle. 

Favorable policies and regulations to enhance effectiveness

India has an extended producers’ responsibility policy but is limited to plastic waste management. To make the model impactful, policymakers must extend its scope and encompass a broader range of materials and products. The first step should be to identify products that offer substantial environmental benefits (for example, reducing energy needs compared to the linear model) that can be refurbished or recycled without incurring significant additional costs. The regulator can make it compulsory for the manufacturers of the identified products to enter into a contractual agreement with the user, in which the products must be returned to the manufacturer in case they are not refurbished and reused. The government can offer tax benefits and incentives if certain thresholds are crossed. For example, if the manufacturers recycle or refuse more than 60 percent of new product sales, they can assume 2 percent of tax benefits in theirincome tax. 

Besides, the government must support building infrastructure to collect used products from end consumers for refurbishing or recycling. Regulators can make it compulsory to disassemble products where high-value products can be reused (e.g., electronic items in batteries). The government can establish a green arbitration panel specialising in environmental conflicts to resolve disputes. The use of mediation and arbitration before any legal action to maintain partnership ethos and sustainability focus.

The manufacturer gains a reputation as a sustainable corporation, and they disclose better recycling rates compared to their peers. The consumer reduces operational costs through efficient and well-maintained products. 


Labanya Prakash Jena is the Programme Head, Center for Sustainable Finance, Climate Policy Initiative (CPI).

Chinmaya Behera is an Associate Professor at Goa Institute of Management.

Views are personal and do not represent that of the authors’ employers.

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Authors

Labanya Prakash Jena

Labanya Prakash Jena

Labanya Prakash Jena is the Head, Centre for Sustainable Finance, Climate Policy Initiative India. Before this, he was working as the Regional Climate Finance Adviser ...

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Chinmaya Behera

Chinmaya Behera

Chinmaya Behera is an Associate Professor at Goa Institute of Management. ...

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