The circular economy is one of the most powerful tools we have to tackle the climate crisis—but you wouldn’t know it from the carbon accounts.
The circular economy is one of the most powerful tools we have to tackle the climate crisis—but you wouldn’t know it from the carbon accounts.
In this episode, we’re joined by the Ellen MacArthur Foundation’s João Murilo Silva Merico, who explains how current accounting frameworks—like the Greenhouse Gas Protocol—often fail to recognise or reward the emissions benefits of circular practices such as reuse, remanufacturing, and sharing models.
You’ll hear:
Download the paper to find out more.
[00:00:00.06] - Seb Read
Imagine this, a room filled with businesses and policymakers. They agree on two things: circular economy is critical for tackling the climate crisis, but it is not showing up in their accounting of their greenhouse gas emissions. My guest on the Circular Economy Show today, João from the Ellen MacArthur Foundation, was in that room. Listen to this episode to find out what he and the Foundation did, what they found out and what businesses can do now to change that picture.
[00:00:34.03] - Seb Read
Thanks for joining us on the Circular Economy Show, João. Many of our listeners will have heard us talk about the topic of climate change in circular economy before, But I wanted actually if we could start by just recapping for the small percentage that perhaps haven't tuned into this topic. What is the connection between circular economy and climate? What role does the circular economy play in tackling the climate crisis?
[00:00:58.03] - João Murilo Silva Merico
Absolutely. Thank you for having me, Seb. It's a pleasure to be here. Well, in its essence, we cannot hit the Paris Agreement without the circular economy. Half of the emissions that we need to address will come from changing the ways we extract, use, and dispose of resources. The other half being energy. But on a deeper level, the energy problem is also a linear economy, circular economy issue. The way we are extracting coal and oil and burning for energy is also deeply rooted into a linear system. On a statistical level, yes, half of the emissions come from about energy, and the other half will come from addressing material use and resources. But our system is deeply rooted in the linear economy, and without transitioning and changing how we make use of our resources, we will not be able to hit the Paris Agreement.
[00:02:01.09] - Seb Read
Yes. To double down that point, I guess when people think of a car, for instance, they think about the exhaust fumes, the energy that's being burned by using that car, but they often don't think about all the materials and energy and what's involved in the production of that vehicle and the making of the metals and various things that go into making a car. Obviously, you're a first-time guest on the podcast, João, but I was actually watching you about a month ago on stage speaking to an audience at an Ellen MacArthur Foundation event and you told this fantastic story where you described talking about this topic of addressing emissions through circular economy to a policy and business audience. I wonder if you could just tell us that story again. What were you talking about and what happened in that room that day?
[00:02:50.02] - João Murilo Silva Merico
Yeah, exactly. It was a very powerful moment. We've been highlighting how crucial a circular economy is for addressing climate change. Since 2019, we've published a report and have made the point very strongly that about half of the emissions are related to how we use and manufacture and dispose of products. Other institutions have arrived at the same number. The International Resource Panel, for example, consistently arrive at very similar data. Organisations, companies, our members, they understand that. But in that room that day, we've had a great combination of businesses and policymakers in the room, and there was a sound agreement between them that they understand that the circular economy is important, but they cannot see that on their own accounting. They are attempting to implement circular economy strategies, pushing the idea forward, but they cannot see the benefit in when they report their emissions. That was a major issue.
[00:04:01.20] - Seb Read
And I think the really important point there is, and it's something that I hadn't really thought about before, is, of course, the moment you sign up to something like the Paris Agreement or your business and you set your target, say, this is how we're going to help tackle the climate crisis, climate change, you then have to start tracking. That's something that maybe a lot of organisations and countries haven't done for that long, depending on how long they've been invested in the issue. But you then have to say, these are our emissions today that we track to our activities at various levels without getting too technical about it. This is our target, and this is our year-on-year or however frequent the reporting is. If you can't show how something like a circular economy shows up in that, then it's hard to say, even if the macro data from something like our publications or the IRP publication says there's a really clear link here between this activity and missions reductions, it's quite hard to justify as part of that strategy. Then what did we do? What did we actually do to try and help them address that problem?
[00:05:06.13] - João Murilo Silva Merico
Yeah, exactly. It's hard to justify being part of the strategy. It's hard to justify being part of company's targets if they just simply cannot see that on their accounting. That's exactly that. After being been informed of this issue by a great number of businesses and policymakers, we've decided to dive deep into what was the problem, what was going on, why was that the case? If we know the circular economy can address a significant percentage of global emissions, why organisations were not seeing that on their accounting and policymakers were complaining about the same issue? Essentially, we started to investigate the Greenhouse Gas Protocol, which is the world's most widely used framework for accounting and measuring greenhouse gas emissions for organisations. Any company anywhere in the world will be familiar with the GHG protocol and how it divides emissions into scope one, two, and three. And when we began this process, we uncovered, together with companies in our network, from a broad range of industries, several areas of conflict where circular economy would then not be well-represented or would be penalised for the accounting. Well, the GHG Protocol is a fantastic initiative, but it was set up in the '90s.
[00:06:30.23] - João Murilo Silva Merico
It was set up under a linear economy blueprint with linear economy rules. In order to assign emissions responsibility for companies and so on, it penalises strategies that can actually reduce emissions. We uncovered five main areas that need urgent addressing, and that would significantly improve how companies see the potential circular economy in heating their net zero targets.
[00:07:04.12] - Seb Read
We can probably come on to those five areas in a moment, João. I think it's quite a profound point you just made, actually, that something set up in the '90s, it was very hard to foresee the innovations that are going to be needed to tackle the climate crisis, obviously, which is a very different issue, even the '90s, compared to now in terms of the projections, in terms of the science, in terms of how far, obviously, the economy has changed how rapidly the issue has increased in terms of prevalence and challenge. But I wonder if we could just dive into when you said actually what you found was that actually there were companies could be penalised actually for or circular economy models or circular innovations could be penalised. What does that mean? What innovations or what circular economy things might be almost penalised by the way the GHG protocol was set up?
[00:07:57.13] - João Murilo Silva Merico
Great question. There's a few. One of the most prominent ones that our other organisations are also aware is in terms of durability. It is very hard to implement systems of reuse and repair and remanufacturing manufacturing, a circular economy that thrives with products and materials that simply do not last. Durability is a key component. How the current protocol and the guidance is set up at the moment, companies are essentially penalised for increasing the durability of their products and their materials. That is because in the year of sale, companies have to report not the emissions that have occurred in the production process, not only those, but they also have to forecast the emissions that will occur in the lifetime of the product. Those are essentially our future emissions, which creates a problem in comparing short-lived goods with durable products because a cell phone, for example, that lasts five years, will report very little emissions compared to a cell phone that would last 20 years because it has emissions when you charge the phone during its usable life. But what we were proposing is, of course, these emissions occur and they have to be captured, but it's important to address how they are captured.
[00:09:27.11] - João Murilo Silva Merico
So potentially reporting these emissions year on year so that they align with each year of reporting rather than all of them being lumped together in one year would make the comparison more fair. Otherwise, any company developing any product that is durable would basically look worse than short-lived goods just because of a decision on where to allocate those emissions.
[00:09:56.15] - Seb Read
That's where in some ways, it's an accounting challenge you're describing right as well, which is to say that what that doesn't account for currently is that potentially a product lasting 20 years instead of five years may negate the need to produce more products, which would also show up on a year-on-year accounting basis.
[00:10:16.12] - João Murilo Silva Merico
Exactly. Yes, that's a very good point. A product that lasts longer would essentially remove the need to continue manufacturing a product to substitute the obsolescence of of the short-lived good. This benefit becomes shadowed by the need of companies to report all these future emissions ahead of time, which makes the comparison between these two types of product unfair and inaccurate.
[00:10:45.18] - Seb Read
Another example that I've heard mentioned is around new business models. There's a lot, obviously, in the fashion industry around rental, for instance, or resale or whatever it might be. But many circular economy innovations relate to, can we somehow provide a product as a service or in some other form of business model, other than just selling it outright? I understand that also has some disadvantage in the way that things are accounted for in the current GHG protocol.
[00:11:15.05] - João Murilo Silva Merico
Absolutely. It's important to emphasise that the GHG protocol is trying to capture all the emissions that a company has in its processes. But in order to do that, it has to take some decisions on where and when to allocate these emissions. That's where the conflicts are arising. In terms of the rental model you were just mentioning, companies, when they set up rental, what they're doing is that they're changing the ownership structure of the product. Instead of in the protocol, being considered that you sold the product to a customer, you still retained that ownership. That means that you are reporting your emissions of product use. For example, a car, a company's renting a car, the emissions of using or driving would now be responsibility of the company's scope one instead of their scope three, which is customers using the car. The issue with that is that when financial institutions are going to look at the climate benefit of companies, financial institutions are not required at the moment to report the scope three emissions of who they're investing in. So essentially, by companies implementing rental model and moving these emissions from scope three to scope one, they're going to look more carbon-intensive on the eyes of investors than if they were operating on a linear model.
[00:12:44.24] - João Murilo Silva Merico
This is obviously not true, but it's just around a decision of how the allocation changes to the scope one, and that investors only have visibility of company scope one and scope two, creating the false impression that by implementing rental models, suddenly, companies have a major increase in their emissions.
[00:13:03.19] - Seb Read
What's the answer to that one, João?
[00:13:07.11] - João Murilo Silva Merico
Yeah. But first, it would be great if financial institutions also reported scope three emissions of who they invest in. But in order for that to be fair and useful for financial institutions, that means all companies have to be required. When following GHG protocol, they should be required to report their scope three so that financial institutions institutions have easy access to that data. That is because right now what we have is that scope three is optional for reporting. In order to follow the guidelines of the GHG protocol, only scope one and two are mandatory. So making scope three mandatory and require financial institutions to report that on who they invest in would fix that problem.
[00:13:56.20] - Seb Read
That also really highlights what you were saying earlier of why the root cause of any of these challenges is the linear economy. When we design these really good initiatives, if they're still designed with the linear economy in mind, it can be really difficult. The current linear economy assumes infinite resources, no interaction things. It imagines a business is basically from the moment something goes into the factory to the moment someone buys it. Of course, what we know is that the economy doesn't operate that way. Something does happen to that product after it's bought. There's a load of things. There are a load of impacts and things to consider before it reaches that factory door. But that system perspective then has to be somehow incorporated into everything we understand about the economy to give us a clear picture.
[00:14:43.14] - João Murilo Silva Merico
Absolutely. Another clear example is in terms of end-of-life. When companies, they have to report the emissions of the end-of-life of their product. Currently, the guidance allows for incineration with waste energy, with energy recovery, to report zero emissions. They allow that to happen even if the companies do not purchase this energy afterwards, even if this incineration happens elsewhere. That is a major problem because now you're asking businesses that want to implement recycling, repairing, reusing to compete with linear practises such as incineration, reporting zero emissions, which is also highly inaccurate because a lot of emissions have taken place in the process of incineration. They should be appropriately allocated as well.
[00:15:43.23] - Seb Read
What you're saying there is It just needs to be like for like, right? In terms of if those things to account for. Those are really helpful illustrative examples, João. Thank you. And they really bring it to life in terms of what is actually obviously quite technical. Technical work in terms of how emissions are allocated, how they're measured, how they're tracked. But really understanding them through those examples is really powerful. I guess, my... As we come to the end of our conversation, I'm interested. What now? What next? What can businesses do in this space if If the challenges you're reflecting on in this conversation are familiar to them, they're like, Yeah, we don't see our emissions, and we feel like we're being punished for making more durable products or trying to extend their life, whatever it might be, what are the pathways for them? How can they engage? What can they do?
[00:16:32.03] - João Murilo Silva Merico
Fantastic. Fantastic question. Essentially, out of this project, we established a good relationship with the GHG Protocol, and we're now sitting at the technical working group for promoting changes to the scope three guidelines, particularly. All the changes that were proposed in our paper together together with the businesses that helped us develop this paper, are going to be fed into this process. Companies are absolutely encouraged to also reach out to us, in particular because This is a long process. The GHG Protocol revision will take a couple of years. If they're experiencing these issues, then there's more things that maybe even we missed on our paper because different industries experience different problems, they can feed that to us and we'll definitely bring that into conversation into the GHG Protocol to actually change how emissions are accounted for companies. Another area they can, of course, have direct influence is they can, of course, look at our paper and the GHG Protocol, once a decision has been taken on what to change, they make that public. Companies can voice their opinion, and they can feed into that revision process, and they can use our insights to help push momentum for the need to change the way they've been accounting emissions and make sure the circular economy is fairly and accurately captured in that process.
[00:18:14.05] - Seb Read
In terms of that engagement with the GHG Protocol, João, I think you mentioned there were five challenges, five recommendation areas. I wonder if you just give us a sense of what are the types of themes, what are the areas that you're working on or advising shall we say, through the technical working group?
[00:18:32.22] - João Murilo Silva Merico
Absolutely. Well, essentially, first, there's an overall lack of clarity and consistency in how circular economy activities are treated in emissions reporting. Our first area is to make sure that the new revisions of the GHG Protocol do embed a very clear approach to how to report circular economy emissions, because not all issues are direct penalizations, but some are just simply companies not sure how to report suddenly when there are multiple uses of a product and multiple users. It complicates the reporting and creating that clarity is vital. We're making proposals to improve how circular material inflows in procurement are reported, product use and durability, circular material outflows and end-of-life, and as well as financed emissions. Those are our main areas of of influence.
[00:19:31.02] - Seb Read
Great. Thank you, João. And then final question. It's a bit of a leading question because the incredible inside knowledge I hold. But is this just a problem for businesses? Is this emissions accounting thing restricted to businesses?
[00:19:44.20] - João Murilo Silva Merico
No, it's not. And that is a fantastic question. We witnessed a very similar problem. Policymakers have been feeding to us, and we know countries experience a very similar issue where circular economy simply isn't feasible, particularly because the system is based on a production-based system. They don't have to report emissions of consumption, which means that if countries currently substitute some of their consumption through repairing, remanufacturing, repurposing, their emissions might even go up simply because they never had to account for the emissions of their consumption. That is a problem that is definitely worth investigating We're looking into it.
[00:20:32.09] - Seb Read
Sounds like it's your next challenge, João. Thanks so much for joining us on the Circular Economy Show. It was really great having you, and we'll speak to you again, I'm sure, in the future as these projects develop.
[00:20:43.16] - Seb Read
So the message is simple. The circular economy is a critical part of tackling the climate crisis, and therefore it needs to show up as a positive on the accounts of businesses and governments all over the world. Thank you for listening to this episode of The Circular Economy Show. We'll put a link to the paper that João mentioned in our show notes. If you've enjoyed this episode, then please do share it with your colleagues, and we'll see you next time.