Circular economy explained: concept, applications and challenges

In a world where natural resources continue to be exploited at an accelerated pace and environmental impacts are becoming increasingly evident, the concept of a circular economy emerges as an urgent and promising alternative to the traditional model of production and consumption. But what exactly does this new economic approach mean? How does it work? And why is it considered important to adopt it now?

A new model for a new era

The circular economy is a model of economic development that seeks to eliminate waste, preserve natural resources, and regenerate the environment, by keeping products, components and materials in use for as long as possible. In contrast to the linear economy — based on the “take, make, consume, and dispose” pattern — the circular economy proposes a continuous cycle of resource reuse.

This approach is grounded in three key principles:

Eliminate waste and pollution through design

• Keep products and materials in use for as long as possible, at their highest value
• Regenerate natural systems by returning what was taken, in a balanced way
• Let’s explore each of these principles in more detail:

1. Eliminating waste and pollution through design

In a circular economy, design is the first line of defence against waste. Instead of trying to fix environmental damage at the end of a product’s life cycle, the focus is on preventing those impacts from occurring in the first place. This means designing products and processes with durability, disassembly, repairability, reuse, and safe return to nature or industry in mind.

Another critical aspect involves avoiding the use of toxic or polluting substances, and instead seeking solutions that minimise risks to both human health and the environment. In this way, eliminating waste and pollution through design is a preventive approach that considers the full life cycle of a product — from material selection to its reuse, disposal or reintegration into the ecosystem.

2. Keeping products and materials in use for longer

This principle is about preserving the economic, environmental, and social value of materials, and avoiding their premature disposal. Rather than producing, consuming, and discarding, the circular economy proposes a set of strategies to maximise the useful life of every product or resource.

These strategies include: preventive maintenance and regular repairs; reusing objects by different users or for different purposes; redistributing used products in secondary markets; remanufacturing, disassembling products down to components and rebuilding them to a like-new condition; and refurbishment, restoring the appearance or partial functionality of used items.

Each of these practices helps to keep products circulating in the production system instead of becoming waste. The longer these items remain in use at their highest possible value, the less pressure there is to extract new resources.

Recycling, while important, is considered a last resort in this cycle, as it often involves the loss of embedded energy and complexity in the original product. Therefore, circular logic places greater emphasis on actions closer to the core of the technical cycle, such as reuse, remanufacture and repair, rather than recycling alone.

3. Regenerating natural systems

The circular economy doesn’t just aim to avoid environmental harm — it seeks to restore and regenerate what has already been degraded. This principle is especially important for biological flows — materials that can safely return to the environment, such as organic waste, natural fibres, or bioplastics.

Regeneration includes practices such as:

• Regenerative agriculture, which improves soil health, sequesters carbon and enhances biodiversity
• Composting, which transforms organic waste into valuable nutrients
• Reusing animal and plant waste as natural fertilisers or converting them into biogas for energy
• Reforestation and ecological restoration of degraded areas

By returning nutrients and resources to nature in a controlled and healthy way, we reduce our ecological footprint and actively support the balance of ecosystems. This includes rethinking our use of water, soil and biomass, through methods that allow for their continuous renewal.

This regenerative approach also reflects a shift in mindset — from a logic of “use and destroy” to one of “use and care”. It’s not just about exploiting natural resources, but about caring for them as an integral part of our economic and social systems.

How does the circular economy work?

As previously discussed, in practice, the circular economy relies on strategies and technologies that extend the life cycle of products, such as:

• Reuse: The prolonged use of products by different people or for different purposes, keeping them in circulation without the need for reprocessing. This reduces the demand for new products and can include second-hand sales, redistribution through collaborative platforms, or donations — all of which maximise the original value of the item.
• Repair and maintenance: Fixing equipment and objects to ensure they continue functioning for longer, preventing early disposal. In addition to extending product lifespan, this practice promotes design for durability and strengthens local repair services, generating jobs and boosting regional economies.
• Refurbishment and remanufacturing: The restoration of products to a condition equivalent to new, involving different levels of intervention. Refurbishment is mainly aesthetic or functional, while remanufacturing involves complete disassembly, component replacement, and reassembly to factory-level standards — ideal for electronics, machinery, and vehicles.
• Recycling and composting: The reuse of materials and organic waste for new purposes, transforming discarded resources into raw materials. While recycling is essential, it requires energy and delivers lower value in the circular chain. Composting, on the other hand, returns nutrients to the soil, helping regenerate natural systems and close the biological loop.

In addition, this mindset encourages innovative business models, such as product leasing (product as a service), shared economy platforms, and reverse logistics systems — where products are returned to the manufacturer at the end of their useful life for reuse, refurbishment or recycling.

A system driven by innovation and technology

The transition to a circular economy relies heavily on digital technologies, renewable energy sources, and new paradigms for product and process design. Technological tools are essential to improving efficiency, reducing losses, and promoting the smart use of resources throughout the entire value chain.

The Internet of Things (IoT), for instance, enables real-time monitoring of equipment performance, helping to optimise maintenance, prevent failures, and extend product lifespan. This level of monitoring also supports service-based business models, where the manufacturer retains responsibility for product performance over time.

Artificial Intelligence (AI) can be used to forecast consumption patterns, reduce waste during production, customise logistics, and maximise material efficiency. Blockchain technology, on the other hand, ensures traceability and transparency across supply chains — particularly valuable in complex sectors such as textiles, electronics and food — where knowing the origin, composition, and destination of products is crucial to ensuring circularity.

Another key pillar of this transition is the use of clean and renewable energy, such as solar, wind and biomass. By replacing fossil fuels with renewable sources, greenhouse gas emissions can be significantly reduced. Furthermore, energy circularity contributes to making systems more resilient, decentralised and locally sourced — with lower environmental impact and greater supply security.

Why do we need a circular economy?

The current linear economic model — based on extracting, producing, consuming and discarding — generates waste on a massive scale and contributes to the depletion of finite natural resources. According to many experts, this trend accelerates environmental degradation, contributes to biodiversity collapse and intensifies climate change.

In this context, the circular economy offers an integrated response to multiple global crises, providing solutions that align economic development with environmental regeneration. Among the key challenges it addresses are:

• Climate crisis: The circular economy can help mitigate climate change by reducing greenhouse gas emissions, promoting greater energy efficiency, and encouraging more rational use of resources throughout all stages of the production cycle.
• Waste crisis: By prioritising reuse, product redesign, composting and recycling, the circular model can reduce waste generation, address improper disposal, and extend the lifespan of materials — easing the pressure on landfills and ecosystems.
• Economic and social crisis: The shift towards a circular economy stimulates new business models, fosters innovation, supports local value chains and generates green jobs — particularly in sectors such as repair, remanufacturing, waste management, clean technology, and sharing-based services.

Real-world examples of the circular eEconomy

The ideas and principles of the circular economy are already being applied across several sectors. Here are a few notable initiatives:

• Fashion
  Some brands are investing in fabric reuse, clothing rental services, and encouraging customers to return used garments for refurbishment or recycling. There are also initiatives using organically grown cotton produced through regenerative agriculture, which reduces the environmental impact across the supply chain.
• Construction
  Companies are increasingly adopting the reuse of demolition materials such as timber, steel and concrete. Many are also incorporating biodegradable or recycled materials into new building projects, reducing reliance on virgin raw materials and minimising construction waste.
• Electronics
  Products like smartphones and laptops are being designed with modular components, allowing for easier repairs and part replacement instead of full device replacement. Some companies now offer buy-back and remanufacturing programs with extended warranties, helping to keep valuable materials in circulation.
• Packaging
  Supermarkets and retailers are testing bulk sales systems, refillable containers, and biodegradable or reusable packaging solutions. Other companies are developing alternatives such as water-soluble plastics or materials made from agricultural waste.

Circular economy is more than just recycling

As previously mentioned, although recycling is an important part of the circular economy, it is often seen as a last resort, since it still requires energy and industrial processing that can generate emissions. Ideally, materials should be prevented from becoming waste in the first place — by focusing on durable, modular design, extended product use, and sharing models.

While recycling remains useful, it provides lower value compared to earlier interventions in the product life cycle, such as reuse, repair and remanufacture — which preserve more of the original material, labour and energy embedded in the product.

Challenges in the transition to a circular economy

Despite growing awareness and global progress, the shift from a linear model to a circular economy is far from simple. It involves structural, economic, cultural and regulatory barriers. Among the main obstacles are:

• Lack of knowledge and public policy: Many countries have yet to develop robust national strategies for the circular economy and often lack legal frameworks that actively encourage the adoption of circular practices at scale. Without clear guidelines, measurable targets and regulatory incentives, progress tends to be fragmented and inconsistent.
• Limited access to finance: Transforming business models requires investment in innovation, technology, process redesign and capacity-building. For many businesses — especially micro, small and medium-sized enterprises — access to credit lines, subsidies or impact partnerships remains limited, making the implementation of circular solutions more difficult.
• Supply chain complexity: Global production chains are highly fragmented and often lack transparency. This makes it challenging to trace materials, assess environmental impacts and ensure circularity across the entire product life cycle. The absence of interoperability and clear communication between different supply chain actors hinders the adoption of regenerative practices and the closure of material loops.
• Cultural and behavioural challenges: Both consumers and companies are still largely embedded in a mindset of fast consumption, disposability and constant replacement. The transition demands a collective shift in behaviour, involving new consumption habits, greater appreciation for durability, and a willingness to repair and reuse. This shift also requires education, strategic communication, and economic incentives that make circular models more attractive and accessible.

The benefits of a circular economy

Despite the challenges, the potential benefits of the circular economy are significant. From an economic perspective, it can lead to cost savings on raw materials and energy, while also fostering innovation, entrepreneurship, and job creation — particularly in sectors such as repair, reverse logistics, design, and technology.

From an environmental standpoint, circular strategies aim to reduce greenhouse gas emissions, lower the extraction of natural resources, and promote the preservation of biodiversity and ecosystems.

Socially, this model offers the potential to improve quality of life through access to more durable products, shared-use services, and the strengthening of local and regional economies.

Pathways to a more circular future

The transition to a circular economy requires coordinated action from governments, businesses, researchers and citizens. Key measures to enable this shift include:

• Environmental education and awareness starting from early schooling
• Tax and regulatory incentives to support circular business models
• Investment in infrastructure for recycling, repair and reuse
• Development of standardised metrics and indicators to track circularity progress
• Promotion of research, innovation and the development of clean technologies

Conclusion

The circular economy represents more than just a shift in the production model — it proposes a new way of thinking about how we live, consume, and relate to the planet’s resources. By prioritising smarter use of materials, redesigning processes, and regenerating ecosystems, this approach offers concrete responses to environmental, social and economic crises.

However, its implementation requires coordinated action, investment in innovation, effective public policies, and a deep cultural transformation. Businesses, governments, and citizens all have a critical role to play in this transition, which must be guided by both responsibility and ambition.

Building a circular economy is an opportunity to innovate, regenerate, and reimagine the future. Moving in this direction means ensuring that development and sustainability go hand in hand.

Did you like the subject? Learn more about the circular economy at, How to build a circular economy | Ellen MacArthur Foundation. On our website see other financial concepts and subjects, Back to Default.