This article was first published by Apolitical

The circular economy is widely recognised as a tool to reduce carbon emissions and waste, as well as halt biodiversity loss. With billions of euros already streaming into green energy, the circular economy might seem like an attractive investment opportunity, too. However, circular businesses today are facing an uneven playing field — limiting their growth at best and proving ruinous at worst. Municipalities can — and must — utilise their powers to support circular businesses, focusing on levelling the policy playing field.

Circular businesses are those that strive to minimise waste, keep products, materials, and resources in use for as long as possible and regenerate natural resources. Among circular business models, Product-as-a-Service is perhaps the most common, which involves leasing or renting products rather than selling them, allowing customers to return, repair or upgrade products when needed. 

The EU Circular Economy Action Plan (CEAP) recognises the value of such business models in reducing emissions and waste. But although circular economy approaches are becoming increasingly popular in European cities, they have yet to become a common practice. In fact, circular initiatives often struggle to attract initial investment or scale-up funding, which is especially true for highly innovative enterprises. The recent bankruptcy of the Netherlands-based supermarket PieterPot, which delivered products in reusable packaging, serves as a stark reminder that the success of circular businesses in a linear, take-make-waste economy is far from guaranteed. 

To effectively compete with their linear counterparts, circular businesses will need targeted financial support as highlighted by the Circularity Gap Report 2024. Although financial institutions and private investors have sufficient funding available, they often struggle to find enough 'bankable' projects that meet their strict investment requirements. One reason for this is that traditional financial assessments used by banks fail to capture the full value proposition of circular businesses and the risks they typically mitigate. 

The novelty of circular models means that the track record is limited and deemed riskier as a result. On top of this, circular businesses often face unstable demand for and supply of recycled or recyclable materials while having higher transactional and operational costs. Because of this, the initiatives with the most impact potential are often the least bankable. 

Now, several EU-wide initiatives are being rolled out to tackle these issues. The EU Horizon-funded project DEFINITE-CCRI, for example, provides project development assistance to high-impact circular economy projects to attract private investors. However, more could be done on the local level to ensure the circular economy transition takes place at the speed and scale needed to fulfil the European Green Deal. 

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Public procurement accounts for 14% of the EU’s GDP and is thereby a decisive instrument for local governments to create demand for circular businesses. Whenever public institutions acquire products and services, they should always consider their optimal use throughout their lifetime. For example, local authorities can purchase refurbished or remanufactured items such as office furniture or computers. Assuming that enough circular businesses are operating in the city, municipalities could also set circular requirements for public tenders—minimum percentages for recycled content in products and materials, for example. These solutions could create stable demand for such enterprises, which, in turn, would make them more appealing to investors. The increased demand created by public procurement could also stimulate local innovation and give birth to new circular businesses. To this end, the city of Lisbon has already implemented a circular public procurement scheme for school meals, infrastructure and municipal buildings. 

Cities might also focus on spurring consumer demand for more circular options. This could include banning or restricting advertising of unsustainable goods and services, thus clearing the field for circular companies. For instance, in 2022, the Dutch city of Haarlem became the first city in the world to impose a ban on meat advertising, citing its negative climate effects. Another example of a demand-oriented shift is the French policy of subsidising clothes and shoe repairs, which can also be applied at the local level. 

The end goal of attracting private investment should not discourage cities from employing subsidies, tax breaks and blended finance schemes to bolster highly innovative projects in their initial phases. This type of funding is sometimes the only one early-stage initiatives can secure to pilot and scale their solution. However, it is vital to sustain support for circular start-ups beyond public funding. 

Creating circular economy hubs is a crucial component of this continuous support. In this way, cities can foster interconnected networks that unite businesses, public actors and investors. Engaging with investors enables circular start-ups to better understand their requirements and formulate more robust investment proposals. Simultaneously, funders gain the chance to identify and select promising initiatives. An example of this is the Basque Circular Hub in Bilbao, the first of its kind in Southern Europe. There are also instances of Europe-wide circular communities, such as the Circular Investment Readiness Network. 

Challenges to the circular economy transition are manifold, but so are the instances of overcoming them through local powers and initiatives. The survival and success of circular innovations hinge on how well local authorities can leverage their powers to create a conducive environment for the circular economy. 

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DEFINITE-CCRI brings together high-impact circularity projects and funding institutions to boost the transition to a circular economy. Learn more about DEFINITE-CCRI here.
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