Circular economy examples from McKinsay

Mackinsy has two podcasts on the circular economy

The first describes how the linear model (from production through processing to design, retail and disposal) has prevailed for 150 years. Whilst great efficiencies have been made we lose alot of value when it is disposed. The CE concept is about capturing value through closing these disposal loops. However it is according to the experts on the pod much more than recycling.

“Recycling is the least value-capturing loop in a circular economy because it is only incrementally better than disposal. Rather, the tighter the loop, so to say, the more the original value is captured, including loops such as refurbishment or increased utilization, secondary-life uses, parts harvesting”.

they had that this CE principles of working will increase due to the Huge pressure on resources as middle class expands.

Innovation is important part of delivering CE. For example: Products can be viewed as a service. Examples would be “instead of buying tires, you buy kilometers. And instead of buying a jet engine, you buy hours of time in the air”.

There are lots of cost reductions that can come from material savings, reduced price volatility, and reduced need to duplicate value-adding activities.

A second pod focuses on CE in the food economy

In the interview the CEO of Danone Emmanuel Faber Innovation talks about focusing on extracting value from waste through managing their three key resources—water, milk, and plastic—as cycles rather than as conventional linear supply chains.

“One example of this is what we are doing in yogurt. To make Greek yogurt, you use a “strained” technology with a membrane, extracting a lot of acid whey. Instead of just seeing this acid whey as an effluent, we are testing technology solutions in five or six countries and working with different partners to find ways to use whey as a resource. We are already using whey protein, for instance, in our Early Life Nutrition business, and we will soon be able to use it for animal feed, fertilizers, and energy. What we’re doing is turning something that is a challenge today into something that will have value tomorrow”.

There are also corporate incentives at Danone for managers

“The annual incentive program for the 1,500 top managers at Danone encompassed the CO2 reduction objective, to the point where, broadly speaking, the yearly bonus attached to CO2 reduction was equivalent to the yearly bonus attached to profit generation. This is just one example of how we’re using incentives to embed our vision across the business”.

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Climate change and the commodity trade

The Swiss Research Institute of Commodities Foundation (SRIC) is an organization established to promote research on commodity training, finance and shipping. Last night, I attended a lecture SRIC organized in Geneva to raise awareness about climate change and the role for the commodity trade. It was attended by 50 people made up of traders and students. Here are my notes.

Professor Martin Beniston spoke about COP21 and what it had set out to do. He described the five themes of COP21 in Paris.

Objectives of Paris COP21

  1. Use latest research to drive policy

He gave example of main temperature anomalies since 1850 1 C per century. To understand this in a more tangible way he showed that in 1950 Geneva the temperature in July was 22 C with 3.5 mm precipitation. In the same year in Toulouse it was 24C with 1.5 mm. Fifty years later, Geneva has the same temperature and precipitation rate as Toulouse. So we are seeing a systematic shift of climatic regimes northwards.

  1. Humans are responsible

Unequivocable agreement amongst scientists that climate change is man made.

  1. An agreement was needed to replace Kyoto Protocol with more legally binding international agreement
  1. To limit global warming to 2C or less compared to pre industrial values

What does this means for commodity trade? – Increased risk to business from the impact of sea level rise on major trading ports like NY, Rotterdam, Shanghai. Hurricane impacts in SE Asia.

  1. Bottom up approach to climate policy

A new paradigm emerged in Paris to address CC in a bottom up way as an alternative to top down approach. To engage not only governments but also local authorities, business and industry and civil society.

Implementation of Paris Agreement

Despite a certain optimism, the road to full implementation of the Paris accord remains long and complex.

  • Main problem is that maths doesn’t add up. The Paris Agreement stipulate global warming should not exceed 2C and if possible by 1.5 . The Nationally Determined Contributions (the emissions reductions that countries have committed to) add to 3.5C rise in temperature not the 1.5 – 2 needed. So much effort is needed to bring down emissions.
  • Anti-climate commitment from Trump will be significant obstacle as US represent 30 per cent of carbon commitments.

The current price of fossil fuels is too low to incentivize and big switch to renewables. 80 per cent of emissions come from burning fossil fuels.

To wrap up.

Long inertia built into carbon system. It will not be possible to stop current trends rapidly.50 to 100 years for climate system to slow down if stopped emissions today.

While addressing the long term issues of emission abatements, adaptation strategies need to be implemented in order to:

  • Preserve human health
  • Ensure access to food, clean water, shelter, education and to
  • Sustain biodiversity conservation

Attaining these goals raises ethical questions of unequal access to education, resources and technologies. Poor countries need immediate access to development which determines how they think about CC. Second order priority compared to meeting daily priorities.

Professor Salvatore di Falco spoke about the economics of climate change.

Impact of CC on growth

Developing countries growth is negatively affected by climate change. Per capita growth rates track rainfall and temp anomalies in sub-Saharan African countries (Barrios 2010). This means countries are not only poorer today, but are on course to be relatively poorer in the future. Why is the case for developing countries? Because they rely heavily on agriculture and ag products.

Impacts on agriculture

Longer droughts with impact on the most important capital in agriculture namely soil which has less moisture and so reducing productivity. There are losers and winners. Developing countries are in the list of losers. Most agricultural commodity producers are in this list

There is a debate about whether to focus on mitigation or adaptation. However, it is clear that we can not do without adaptation. We have to focus on how to increase resilience of agricultural systems and how to identify and diffuse best practices for different sets of actors.

Case study Ethiopia

He presented results from a paper Di Falco and Veronesi 2014 in which a survey of farmers showed that producers were facing poor soils, declining yields and higher risk of crop failure. Climate change was exacerbating the situation. Solutions include diffusing better soil and water management practices in combination with new seeds as this reduced the likelihood of crop failure

What does climate change mean for the commodity trade?

Di Falco discussed how investors face the risk of stranded assets in terms of “unburnable carbon reserves” under a policy scenario where complying with emissions limits means can not burn reserve of fossil fuels. There are 565 to 886 billion tonnes of C02 is the carbon budget for limiting temperature rises to 2C. The carbon embedded in worlds reserves amount to 2860 billion tonnes, thus we can only use 20 per cent as a precautionary approach.

If current investment trends continue we may create a carbon bubble. Capital invested in expanding reserves can be wasted. According to HSBC, equity valuations could be reduced by 40 to 60 percent in a low emissions scenario. We need to have a greater understanding of the uncertainty and risk around fossil fuels and see how to redistribute these funds towards more attractive alternatives. There is a need for diversification.

“Smart investors can see that investing in companies that rely solely or heavily on constantly replenishing reserves of fossil fuels is becoming a very risky strategy” Lord Stern

Different commodities chains have different issues, but across all political inertia on mitigation makes adaptation unavoidable. Identification and diffusion of best practices is of paramount importance.

Aid for trade perspective

In the discussion that followed, it was remarked that commodity traders are mainly concerned with managing the risk of supply, CC increases that risk and the trade will invest in diffusion of best practices to enable its suppliers to maintain production.

SMEs exporters are in this situation of how to manage the declining productivity of their suppliers. This was illustrated in the survey of exporters carried out by ITC in 2014 in which they said CC along with price volatility and poor infrastructure are the biggest threats to their competitiveness.

It is therefore advisable for aid for trade agencies to continue mainstreaming the management of climate risks into agricultural projects, supporting SMEs and governments in their efforts to maintain productivity of suppliers, identify and manage climate risks and facilitate access to climate finance.

 

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Passing of Klaus Durbeck

I am sad to hear that Klaus Durbeck died this week. Klaus was a expert on the trade in medicinal plants. He worked in many emerging and developing economies around the world promoting the sustainable use of plants. I attended several conferences and trade fairs with him – he had huge knowledge about ways to engage communities in collecting plants in their local areas and to build value through strong stewardship. Here is a dedication to him from FairWild, an innovative certification scheme he helped establish.

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Trade, climate change and a “just transition”

International trade agencies joined forces this weekend to hold an event in the Marrakesh UNFCCC COP22 about how trade can contribute to the implementation of the Paris Agreement. The agreement provides a framework for countries to commit to reducing greenhouse gas emissions. For the first time, trade was officially on the agenda for discussions. This was a constructive step and built on the dialogue hosted by the LDC Group and ITC in Geneva in which the relationship between trade and climate change was explored.

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Trade and climate change expert panel at COP22 Marrakesh

Representatives from ITC, UNCTAD, WTO, IFAD and UNFCCC spoke with Peter Wooders from IISD moderating. Some of the main themes that emerged included the following:

  • The UNFCCC delegate highlighted that trade is implicitly recognized in Article 2 of the UNFCCC Convention “…to enable economic development to proceed in a sustainable manner.” It is also referred to more explicitly in the Kyoto Protocol article 2.3 “The Parties included in Annex I shall strive to implement policies and measures under this Article in such a way as to minimize adverse effects, including the adverse effects of climate change, effects on international trade, and social, environmental and economic impacts on other Parties, especially developing country Parties”
  • Trade liberalization speeds up the dissemination and increases innovation and investment in low carbon technologies – the plurilateral goods negotiations in Geneva are important in this respect. Given the bundling of services with environmental goods e.g. the maintenance of wind turbines, a trade liberalization agreement on services and inclusion of more developing countries will be important to drive further emissions reductions.
  • Implementing the Agreement through climate policies (known as “response measures” in the jargon) will have an impact on industries and employment. Low carbon sectors e.g. renewables and public transport will benefit whilst fossil fuel intensive sectors will suffer. Ensuring a “Just Transition” i.e. minimizing negative social impacts is necessary. This will be an increasingly important priority on the development agenda.

Earlier in the day, ICTSD held an event on the same subject. Similar messages emerged from the presentation, that trade is mutually supportive to the climate regime. The private sector were represented on the panel with a wind turbine association and large French energy group. Both advocated for a price on carbon and the removal of fossil fuel subsidies. The trade implications in terms of border carbon adjustments were discussed.

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Shipping remains free of carbon regulation

The International Maritime Organization (IMO) published its strategy last week for reducing emissions for world shipping. 2-3% of world carbon dioxide emissions come from shipping and they are predicted to grow by 50 to 250% by 2050.

As reported in Climate Central,

“Under the agreement reached Friday, an interim strategy for addressing greenhouse gas pollution from ships will be released in 2018. That will be followed five years later by the potential publication of a timeline describing climate-protection measures that could be imposed on ship operators and owners. Owners of large ships will provide confidential information about fuel consumption to the U.N. beginning in 2019.

The roadmap did not set any targets for greenhouse gas reductions, such as those that have underpinned national climate protection strategies and pledges under the Paris climate agreement. Nor does the roadmap commit the sector to setting such targets in 2023”

So no time frame for setting a target or agreeing on a mechanism to price carbon in the shipping industry.

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