Circular Economy in Practice #4: Commitment, Economics & Tattoos, with Vice President Katainen
Produced by Camille Duran / Coordinated by Han Nguyen / Published by Gabriela Lemos Borba & Linnéa Hultén / Senior Editors Eleen Murphy & Camille Duran / Transcribed by Oanh Nguyen / Music Credits: License by Ins. Green White Space.
Transcript from the Episode
Camille Duran (CD): Today we talk economics. And to do so, we have the Vice President of the European Commission on the show! Jyrki Katainen.
Yeah baby, and we go deep!
[Jyrki Katainen’s voice]: We are very committed because according to our own understanding, Circular Economy will be the next mega trend in the world market economy.
CD: Vice President Katainen is in charge of Jobs, Growth, Investment and Competitiveness at the European Commission. Who better than him could we invite to address those issues in depth in the context of the EU Circular Economy policy package of course.
So today I wanted to make a mark. A mark to celebrate the European Commission’s commitment towards Circular Economy.
So I called a tattoo artist and got into a little bit of a multitasking exercise during the interview.
You’ll understand in a minute.
[Tattoo artist’s voice] So, if there’s anything, just tell me and we’ll take a break. Don’t forget to breath, and stay still….
[Telephone operator’s voice] Good morning, Cabinet of Katainen?
CD: Hello good morning, this is Camille Duran from the Green Exhcange?
[Telephone operator’s voice]: Yes, I’m just going to put you through to Vice President Katainen now, are you ready?
CD: Yes, thank you.
You’re listening to The Green Exchange, episode four of our series: Circular Economy in practice – Seducing The Financial Sector.
Yes, I thought that getting myself a circular economy tattoo on the shoulder while interviewing Katainen was a good idea since we were going to talk about commitment.
But let me back up for a second because this is actually a very serious interview.
CIRCULAR CHANGE – LOW HANGING FRUIT & GOVERNMENT SUBSIDIES
As we touched on earlier, in a transition towards a circular economy there are some changes that can be made incrementally, or by improving existing systems. Like increasing recycling rates for instance, of better designing products so they can enter circular loops. I am not saying it’s easy, but we are talking about improving practices within an existing system.
Then you have changes that are more radical. And they need to happen too. Selling products ‘as a service’ as we discussed is a good example. This creates a complete different cash flow structure for a company. Instead of receiving 200 euros right away when you buy your new jacket, the company may receive 5 euros per month from the subscription. Even if everyone agrees that there are long-term economic benefits to circularity of the economy, there are a few roadblocks we need to figure out.
This is something I had a chance to discuss earlier with Bas De Leeuw. He is the Managing Director of the World Resources Forum – by the way, we will be publishing his extensive interview in full as a bonus episode. To give you a taste, here is one key moment which connects to today’s episode and what I was talking about earlier.
BAS DE LEEUW (BDL): Industry, the business sector, is of course very diverse. Not only big and small but also in the way they would like to respond to consumer markets and to their target groups.
CD: Yes Bas. I asked both a large furniture company and a large packaging company if they recognised the economic challenges of the transition and the lack of financial incentives in the short term. In other words, why would I disrupt my own empire when I am making huge margins in a throw-away single use model, with global supply chains and cash flow structures based on volume sales or asset sales.
Of course they didn’t want to answer this and told me instead that “Sustainability is in the DNA of the organisation bla,h blah, blah, and all the CSR (Corporate Social Responsibility) stuff.”
What are your thoughts on this?
BDL: There are many companies, in particularly big companies, that want to be seen as pioneering, as leading society, partly because of corporate social responsibility arguments, branding arguments and that’s of course good. But I think it would be unrealistic to expect that if there is no business case for drastically investing in the circle economy that all companies in the world would start to do that. So then once more you need to have the supports from governments, taxes and subsidies. Also the small and medium sized enterprises cannot be expected of course to invest in, let’s say, secondary materials when they know that they can get raw materials for half of the price.
CD: So what you are saying that in terms of financing this transition or financing the shift, it needs to be facilitated by government and by subsidies and they play a key role in facilitating this move.
BDL: Absolutely, absolutely. And of course, there, I mean, the low hanging fruits where the business case is very obvious, of course, there is no support needed and businesses are already taking a good action. But, where the fruits are hanging a bit higher, you need to influence those framework conditions as a global governance.
CD: And that’s exactly what we wanted to cover in our interview with Vice President Katainen.
I feel we are ready to jump in. Back to the tattoo shop. We have to make a little bit crazy setup because the sound of the machine was quite loud but I guess it worked.
We were going to have Vice President Katainen over the phone for some 30 minutes, and since the tattoo artist could not come to the studio with all his equipment and stuff, the studio came to the tattoo artist with all the equipment and stuff.
[Short conversation between CD and the tattoo artist.]
[BACKGROUND SOUND & DISCUSSION – TATTOO SHOP]
[Johan Signer’s voice] When it comes to deciding what we are going to apply to Camille’s shoulder, we have the approach of making an abstract symbol containing three circles that are not yet closed. And three circles symbolise industry, public sector, civil society. That three circles are not closed symbolises that work needs to be done.
CD: And when we reach a full circular economy then we can close it. In twenty years.
[Short conversation between CD and the tattoo artist]
A few moment later.
CD: OK, let’s go.
[Telephone operator’s voice]: Good morning…cabinet of Katainen.
CD: Hello good morning, this is Camille Duran from The Green Exchange.
[Telephone operator’s voice]: Yes. I’m just going to put you through to Vice President Katainen now. Are you ready?
CD: Yeah, OK. Thank you.
CD: Hoopla- go DJ.
JYRKI KATAINEN (JK): Hello, Jyrki Katainen.
CD: Good morning.
JK: Good morning.
CD: How are you?
JK: I’m fine.
CD: How is the day in Brussels so far?
JK: Yes, it’s quite nice, actually. Very summer-like weather, quite warm and sunny. Not always very typical weather in Brussels.
CD: Thank you very much for being with us, I think you were briefed by your team on the key points we wanted to address, so maybe we can jump right in?
JK: Yup. Very good.
CIRCULAR ECONOMY – THE NEXT MEGA TREND
CD: Vice president Katainen thank you very much for making time for us we know how busy you are. We are going to talk about financing the transition towards Circular Economy. But before we dive in I wanted to get your feeling on how serious and committed the EU actually is about the Circular Economy transition?
JK: We are very committed because according to our own understanding, Circular Economy will be the next mega trend in the world market economy because it makes a lot of business sense. It has big environmental and societal benefits. It will help businesses to reduce risks and also it will raise productivity and competitiveness. So those are the reasons why Commission proposed a Circular Economy package just a little bit more than year ago.
CD: Well that’s good to hear, because we feel many organizations are very serious about contributing to its implementation.
CD: Today I wanted to use this interview to make something symbolic, something that will last and that we’ll be able to look at in 2030, and hopefully in 2050, and feel very proud of, looking at the transition we’ll have been able to achieve all together.
Now you probably have no idea what I am talking about right now.
I am actually in a tattoo shop, and I have a tattoo artist ready to go beside me, and what I would like to do is get a circular economy symbol tattooed on my shoulder while we run this interview – if it doesn’t make you uncomfortable?
JK: No, no, no, no. It sounds interesting!
CD: I though about this, and I think that sometimes in life you have to show that you’re serious. And we all are serious here.
JK: You are very brave and committed.
CD: Yeah, let’s go because I want to be careful with your time. I hope it’s not going to be too noisy.
JK: Best of luck.
CD: [Aside] I pause here for a second. In the post production process we lower the volume of my track while he replies on the phone because the sound of the machine is quite disturbing.
Alright. Back to it.
CD: So at this point in the series, we have introduced everything and we really want to dive into the financial aspects. So, in the financial industry; first of all, we are successful when we minimise risks and maximise returns – and it’s kind of the golden rule, right?
In practice, how can we incentivise the financial industry to support companies that are successfully making the transition, and avoid those that cannot or are in a shrinking sector?
JK: Well sometimes slow repayments and low rates of return might make it difficult in the beginning to market projects in green economy but I firmly believe that financial sector is willing and capable to adapt new business models.
Sometimes it may be necessary for the public sector to step in with guaranties to cover first law seizing in order to reassure private investors, but we are confident that once the viability of this project is demonstrated, these concerns will dissipate. EU has established a new financial instrument which is named European Fund for Strategic Investment. Its acronym is EFSI. And it’s part of the European Investment Bank and it’s providing risk financing to private and public-private partnership investments, and this is an excellent tool for new technology investments and circular economy businesses.
But the main issue I think in this field is to create regulatory clarity and certainty for the private sector. For instance, as part of our Circular Economy package we proposed that we have to increase recycling of waste, and there will be an exact time or exact year when this has to happen. It’s legally binding target to member states. Also we want to reduce significantly municipal waste going to landfills. So once the regulation is in place, the entire road starts adapting there and then financial sector most probably will follow the needs of the investors.
CD: Right. And this is a key issue, often discussed with green finance. How do we build enough confidence so the private sector can really step in with financing. We’ll talk more about this, but another question first:
We see flows of money changing in a circular economy. For instance, the pay-for-use model has a very different cash flow structure from the traditional pay-for-ownership approach. And this directly impacts the cost structure of the company and of course its financing requirements. Do you recognise this challenge, and how can we facilitate the shift? What are some of your thoughts around this?
JK: Yeah I acknowledge that transition towards a circular economy will also challenge some established ways of how business is done. Our role is to help and support innovative approaches and encourage new business models; for instance, announced as part of the Circular Economy package, the action plan in which we are working on launching a platform to support the financing of the circular economy.
This platform should bring together Commission, European Investment Bank, national banks and commercial banks interested to participate and the aim would be to look into existing possibilities for financing circular economy projects, exchange best practices and point out gaps and eventually propose improvements and propose new instruments for financing circular projects.
Last January I participated in Davos annual meeting and it was quite fascinating to listen that there were already a big amount of banks – well known established, well-established commercial banks – who were already deciding new products for circular economy needs. For instance, they said that leasing is growing business and the leasing needs different financial opportunities than just a linear business model.
But it’s not only about financing. In early June this year the commission presented guidance through a communication aimed at supporting consumers and businesses and public authorities to engage confidently in the collaborative economy.
These new business models can make really an important contribution to job growth in the European Union, and encourage and develop in a new responsible manner. The lack of legal clarity and regulatory recommendation sometimes hamper the development of the collaborative economy in Europe.
So with this communication, the commission explains how to apply sixteen E.U. law to collaborate the economy with the objective of promoting the balanced development of a collaborative economy in Europe.
THE ISSUE WITH GDP & INCENTIVISING THE COMMERCIAL SECTOR
CD: If the efficiency of the economy increases because materials are not thrown away but enter new production processes, a positive effect on GDP is to be expected – even if the estimation is rather difficult. Do you like GDP as an indicator by the way?
JK: Yes I think it tells what it tells. I mean it doesn’t tell everything but it tells the production and normal economic growth. So I think it’s a useful tool but we should not expect everything from GDP.
CD: I agree, yes. One negative effect on GDP is the effect of repair and reuse – which has a positive societal value, but still, with repair and reuse, we need less products, so less volume of sales. What do you tell a CFO, a CEO, and their shareholders when they logically forecast such a scenario (less volume of sales)?
JK: Well we don’t have any exact estimate how many jobs and how much growth the circular economy or a broad range of actions proposed in our action plan will deliver.
However, there are a couple of international studies which are quite interesting. The first study indicates that resource efficiency is one of the main drivers of company’s competitiveness. EU manufacturing firms spend on average forty percent of the costs on raw materials compared to a share of twenty percent for labor costs.
It is estimated at a better use of resources could deliver savings over six hundred thirty billion Euros per year for European industry. Another study shows that business-led, private sector estimates…says it has the potential to boost EU’s GDP is very significant if we have more circular economy business models up and running. They are talking about close to 4% higher GDP only because of resource efficiency.
CD: How can governments incentivise and support their commercial sector to activate the shift and deliver short term results when the global landscape is so competitive and “linear”? Maybe you have very good intentions as a company and you are keen on implementing the strategies we are describing in this series. But your competitor in Asia doesn’t care, you’re playing on a global landscape, there is a war on prices…How do you compete?
JK: Well I’m not very sure if the world is still leaning towards a linear model. I just came back from China and there we discussed circular economy because circular economy is included in China’s current five-year plan and they are taking it very, very seriously. And everybody understands why because there is an environmental necessity.
And we agreed that we will compare our regulatory changes, or our ideas how the boost circular economy business models, both in China and in Europe; because in Europe, of course, we have environmental necessity to be more sustainable but also we have an economic necessity because our production should be higher added value, and our productivity should be higher in order to finance welfare model of our economy. So that’s why circular economy business models are necessary in order to improve added value and by doing so we can get more revenues for welfare society.
So the world market is already changing and one reassuring or assuring fact is that if you look at the best practices or best examples in circular economy field, they come from private sector. So private companies are leading the development at the moment. Then it should show everybody that Circular Economy is not just a public sector’s aim or traditional environmental stuff, instead it’s already up and running and it has come from the business logic. And now we as a regulator and decision maker have to understand how we can foster the development.
I just give you a couple of examples. The first one is that the public procurement accounts roughly of one fifth of EU’s GDP, so it could be a powerful tool to boost/activate circular economy business models if decision makers at local level and at the national level would use our guidlines permission as provided voluntarily […] for member states and for municipalities…
[SKYPE CALL DISCONNECTS]
CD: The call is disconnected. Let me just restart it.
CD: Hello this is Camille Duran again. Yeah we were disconnected.
Telephone operator: Oh, OK.
JK: All right let’s continue.
CD: Yes sorry we got disconnected.
This is very interesting, and it’s going to be encouraging for the financial sector to digest this because those guys are not so much into saving the planet, as we know they are more making sure they are going to get actual returns on their investment.
JK: Yes that’s right. Circular economy in its terms; in the term circular economy, both words really matter. There should be circular and there should be economy. And basically for policymakers, if we want to foster the circular economy, we have to see or we have to make sure that profits are coming from somewhere. Otherwise there’s no profit, there’s no economy. And that’s why regulators have to be very cautious not to regulate wrong things but instead to create right incentives which will change the business logic and aims the direction where the profits are coming from.
CD: I’m curious to hear your take on the tax system we have today and the necessary shift from taxing labour to taxing natural resources. Any recent development on that front?
JK: Yes taxation is a very good tool but at the European level it’s quite difficult to get common taxation because it in the decision progress we need unanimity and only one country can pluck everything but commissioners proposing. That’s why the commission itself has that much attention to European wide taxation but we are also providing information to member states to look at the best practices from other countries.
CD: OK so this is not something you are directly involved with but you provide some guidance’s and information to the national governments…
CD: Vice President Katainen, thank you for your time. I know you need to run and I am glad we could get into some levels of detail together. I still have half an hour of tattooing to go through before my circular economy symbol is ready.
JK: OK. Good luck!
CD: If this becomes a thing at the commission, we could start an Instagram profile dedicated to circular economy tattoos. What do you think?
JK: That’s a good idea.
CD: Good luck and speak to you again soon.
JK: OK thank you very much. Thank you. Bye.
CONCLUSION – SENDING TATTOO PROOF TO VICE PRESIDENT KATAINEN
CD: If once you had told me that one day, I would send a skin picture to the Vice President of the EU Commission, I would have called you crazy! But you know what, we had to send a proof that this was all real.
Now, we got very important insights from that discussion. Let’s make good use of it. We hope you like it and we’re going to follow-up on those points as we unfold the rest of the series.
In next episode Barack Obama is getting his own circular economy tattoo, and I give him a call from an helicopter on fire.
….No I’m kidding; the helicopter was not on fire!
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