Circular Value Chains: An Enhanced Approach To Assess Value Capture and Upgrading

Manuel Albaladejo and Paula Mirazo
May 9, 2022
#Energy
#Latin America

The growing adoption of national circular economy strategies and roadmaps, “Green Deals”, and the ratification of international commitments pertaining to climate change set the stage for the adoption of circularity within global value chains (GVCs). Such measures can influence and alter the configuration, processes, and business dealings throughout the entire supply chain. Similarly, trends pointing to an increase in consumer empowerment, reflected in demands for greater transparency and access to information regarding sustainability practices, resource origin, repairability, among others, act as incentives to foster circularity throughout the entire value chain. Also, an urgent need exists for companies to adopt more sustainable production processes to comply with increasing sustainability regulations, contribute to climate change mitigation efforts and satisfy environmentally conscious clients. In this sense, circularity can play a key role considering its potential to mitigate climate change by fostering more sustainable production and consumption processes (Ellen MacArthur Foundation, 2019).

In this blog, we use the example of the forestry-cellulose-paper value chain in the Latin America and the Caribbean (ECLAC) to showcase the role of circularity in GVCs, not only seen from its greening impact but also from its economic contribution. So far, traditional value chain theory has failed to incorporate circularity as a way to capture added value. Similarly, upgrading within GVCs have been linked to the improvement and development of processes, products, and functions, while undermining the virtuous loops within existing business models that can create new sources of wealth and jobs. Thus, besides the traditional upstream and downstream shifts to capture value within the chain, back loop cycles relate to firms´ capabilities to recover, recycle and remanufacture waste streams in the production process as well as to make a more efficient and circular use of utilities like energy and water (Figure 1). Nonetheless, it is necessary to highlight that the economic benefits are principally related to savings and value capture in particular sectors where circularity is more feasible, and thus, more profitable.

Circularity in the forestry-cellulose-paper value chain
The Economic Commission for Latin America and the Caribbean (ECLAC) recently published its International Trade Outlook for Latin America and the Caribbean 2021 report in which it includes a study on the current state and potential of the circular economy within the forestry-cellulose-paper value chain (ECLAC, 2021). An analysis of trade data during the 2002-2019 period shows constant growth in value of trade in paper-, cellulose-, cardboard- and wood- related waste (EPN, 2018). Such trade patterns serve to underline the potential substitution of virgin material with recycled or recovered inputs, otherwise considered waste.

On one hand, the adoption of circularity in this sector can lead to both benefits linked to the global demand for circular products through international trade, such as diversifying export baskets, creating economies of scale and generating new income streams through the commercialization of waste and products derived from waste (Mulder et al, 2021). On the other hand, adopting circular production processes in this sector can lead to a series of important savings regarding resource, energy, and water use, resulting in more efficient and sustainable production processes (EPN, 2018) (Table 1).

Circularity in the forestry-cellulose-paper value chain can occur throughout different stages of the production process. Specifically, this value chain can be divided into one silvicultural stage, and two industrial stages, consisting in the transformation of raw materials into intermediate products, such as pulp and posteriorly, the elaboration of finished products, like paper and paperboard. The production of both intermediate and finished products can be sourced from both primary and/or secondary inputs.

Incentivizing trade in circular goods, such as paper/cardboard waste and scrap, and finished products using mainly recycled inputs can help foster overall circularity throughout the forestry-cellulose-paper value chain. Globally, during the 2002-2019 period, total exports from the forestry-cellulose-paper value chain doubled while the export of circular goods grew fourfold. Specifically, this has led to an increase of circular goods within this chain from 3% to 6% (Figure 2) (ECLAC, 2021).

Overall, at the global level, the forestry-cellulose-paper sector has increased its degree of circularity (ECLAC, 2021). Several trends related to an increase in demand for sustainable products as well as increasing requirements and standards relating to resource intensive sectors can act as incentives for an increased uptake of circular processes within this sector. However, a set of technical and regulatory barriers require close attention to achieve the full potential of the circular economy in the forestry-cellulose-paper value chain.

Recommendations for moving towards circular value chains
Several key actions at different levels, some of which can be extrapolated to GVCs in general, can contribute to advancing circularity within the forestry-cellulose-paper value chain.

Firstly, international cooperation has a crucial role to play by spotlighting the nexus between the international trade and circular economy agenda with the objective of generating consensus on the importance of sustainable trade by incentivizing and regulating trade in waste and products derived from waste. For example, the EU’s Forestry Strategy, which is part of its Green Deal, aims to improve forest protection by promoting certified deforestation-free supply chains.

Similarly, specific instruments such as international certifications, eco-labels and standards can attest to the circularity of products and processes. Such instruments respond both to increasing demands regarding customer empowerment as well as stricter sustainability (Mulder. et al, 2021). In the case of the forestry-cellulose-paper value chain, the Forest Stewardship Council (FSC) and the Programme for the Endorsement of Forest Certification (PEFC) can add-value and distinctiveness relative to non-certified products and enable consumers to know more about the provenance and process of their products (ECLAC, 2021). Similarly, policies such as extended producer responsibility, carbon pricing, subsidies, or incentives for recycling, as well as green public procurement programs can also nudge producers to adopt sustainable and circular processes throughout their entire chain of production (ECLAC, 2021).

Moreover, in some cases regulations alluding to definitions of waste, use of recycled content, among others act as barriers for the adoption of more circular processes. Therefore, adjusting and updating regulatory measures at the national levels can also facilitate the adoption of circular processes and the uptake of circular products relative to non-circular ones.

Overall, positioning the circular economy more visibly on the international agenda can contribute to driving and accelerating the transition at a global scale. The circular economy can generate environmental benefits and boost competitiveness at the GVC level, demonstrating that so-called “waste” can instead be transformed into valuable inputs for production. However, it may also occur that the benefits derived from the adoption of circular model remain concentrated in developed countries at the expense of their developing counterparts (Hofstetter et al, 2021). Such implications should thus be taken into consideration and addressed by development cooperation. This highlights the need for mainstreaming circularity in efforts regarding the creation of public-private partnerships, the transfer of knowledge and technology for capacity-building and in the elaboration and harmonization of definitions and standards (Mulder. et al).

References

ECLAC (2021). International Trade Outlook for Latin America and the Caribbean: Pursuing a resilient and sustainable recovery. Santiago: ECLAC.

Ellen MacArthur Foundation. (2019). Completing the Picture: How the Circular Economy Tackles Climate Change. Isle of Wight: Ellen MacArthur Foundation.

Ellen MacArthur Foundation. (2021) Universal Circular Economy Policy Goals: Enabling the transition. Isle of Wight: Ellen Macarthur Foundation.

Environmental Paper Network (2018). The State of the Global Paper Industry.

Hofstetter, J. S., De Marchi, V., Sarkis, J., Govindan, K., Klassen, R., Ometto, A. R., ... & Vazquez-Brust, D. (2021). From sustainable global value chains to circular economy—different silos, different perspectives, but many opportunities to build bridges. Circular Economy and Sustainability, 1(1), 21-47.

Mulder, N., Albaladejo, M., Mo, M., Olmos, X., & Dante, P. (2021) International Trade and the Circular Economy in Latin America and the Caribbean. Inclusive and Sustainable Industrial Development Working Paper Series 3/2021. ECLAC-UNIDO: Vienna.

OECD. Global Value Chains and Trade. Paris: OECD.

Schroeder, P (2018). Circular Economy and Power Relations in Global Value Chains: Tensions and Trade-Offs for Lower Income Countries. Resources, Conservation and Recycling, 136, 77-78

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