How could a mutual credit system advance the circular economy?

Rob Cole talks to Eifion Williams, CEO of Circular Economy Wales, about how a mutual credit system can generate wealth within communities while encouraging a more circular, sustainable approach to resources and waste.

It’s the circular economy, stupid. Transitioning
 to an economic model that keeps resources 
in circulation for as long as possible, with an emphasis on reducing waste, has been placed squarely at the heart of sustainability thinking. Our current linear model, based on a take-make-dispose attitude to production and consumption, has placed an unbearable strain on the ecological systems that sustain us. A circular approach can reduce this pressure on our environment and safeguard our common future.

 How could a mutual credit system advance the circular economy?

But the circular economy is not just about imbuing our environment with resilience, it is about reinforcing our communities too, through buttressing local supply chains and ensuring these communities are provided with some protection from global economic volatility.

Working out how we transition to a circular economy has generated numerous approaches, from national policy – as we have seen with the Towards Zero Waste Strategy in Wales and the Circular Economy Strategy in Scotland
– to the SME (small- and medium-sized enterprises) level, where best practice is shared to demonstrate how being more resource-efficient can be a boon for enterprise.

Building resilience

One approach that could prove a useful tool in advancing the circular economy is mutual credit, a form of alternative currency that fosters a spirit of cooperativism. That is certainly the view of Eifion Williams, CEO of Circular Economy Wales, who has received funding from a Churchill Fellowship and the Welsh Government to research alternative and complementary currencies and establish whether such a system could be implemented in Wales. Williams has compiled his findings into a proposal for a Mutual Credit System, which was recently presented to Welsh First Minister Mark Drakeford.

“We feel the circular economy has far more scope
 to reach further and deeper,” says Williams. “The circular economy shouldn’t just be something that stops with industry, but can actually benefit people and communities and the wider environment. We want to be proactive and design systems in communities that specifically help people and communities. We also recognise that we need to not only think about the circularity of resources in our communities, we also need to think about the circularity of wealth generated in those communities.”

Williams and Circular Economy Wales are calling this approach ‘Circular Economy Plus’, as they establish complementary circular economic systems around resources, food and finance. “The fusion resulting from the white heat of this mission is our contribution to the Circular Economy debate,” says Williams.

Wales has gained a reputation for forward-thinking on sustainability, with ambitious recycling and waste reduction goals – it currently has a municipal recycling rate of 62.7 per cent, one of the highest in the world – allied with a desire to create a resilient, sustainable economy as laid out in the Welsh Government’s Towards Zero Waste Strategy and Well-being of Future Generations Act.

Mutual credit

A mutual credit system is known as a ‘complementary currency’, according to US author Thomas H Greco, rather than an ‘alternative currency’, which makes it distinct from local currencies such as the Bristol Pound and the Brixton Pound.

Where mutual credit differs is that all transactions within the system involve the exchange of spare goods and services – usually no more than 10 per cent of a company’s total capacity – for credits rather than cash. This is facilitated through a central system, whereby businesses accept payments from other businesses in the form of credits – if you have taken goods through the system, you owe debt to the system, while if you have given goods through the system, you are owed credits.

Importantly, while there is a financial value attached
 to these goods and services, whatever credit is accrued in the system by a member must be spent within the system, meaning that the credit cannot be withdrawn and converted into other currencies.

Local currencies seek to keep money in the local economy by encouraging people to spend them on local goods and services. But these currencies can fall down as it is possible to exchange them back into mainstream currencies, taking this cash out of the local economy. As Williams states: “Backed currencies, such as the Bristol Pound scheme, are purchased with sterling at the same value. These currencies are ‘backed’ and also convertible by the businesses using and accumulating them. Mutual credit has the benefit of not being actual money, therefore it tends not to scare the horses and require the same banking licences and protocols.”

In an increasingly precarious economic landscape, the increased liquidity provided by mutual credit can act as a safety valve for SMEs when cash flow is tight. Rather than laying off employees to ease cash flows, wages can be supported (on a voluntary basis) by mutual credits for food shops at a local supermarket, for example, while ensuring the company’s cash reserves don’t fall irreversibly low. “You’re keeping cashflow healthy as you’re trading in other goods and services you need so your reliance on sterling is reduced,” says Williams.

The key inspiration for Williams’ study was the Sardex mutual credit system operating in Sardinia. Set up in 2008, it is primarily a business-to-business (B2B) system that requires firms to offer goods and services to other businesses in return for Sardex credits, which they can then use to make purchases. Members can accrue a debt up to a certain limit, while no interest is paid on the transactions as no money is actually involved, though VAT must still be paid on goods for which it applies. Credits accumulated must be spent on goods and services provided by participating members and within a certain time limit, in order to continue the flow of goods and services around the system.

The scheme, which now has around 2,900 participating businesses, has facilitated over €84 million in transactions since it was set up, including €40 million of transactions just last year, essentially “€40 million through the trade of goods in services in Sardinia for which businesses didn’t have to dip into their Euro account and damage their cash flow,” says Williams. “This is €40 million that stayed in the bank accounts of small businesses in Sardinia.”

Beyond B2B transactions, Sardex has also set up business-to-employee (B2E) and business-to-customer (B2C) aspects of the system after businesses found
that they couldn’t get rid of their Sardex credits quickly enough. The B2E scheme, which employees participate in voluntarily, sees companies offer credits for things like overtime, which employees can then redeem at local businesses. The B2C aspect is served by a credit card, the Sardex Bisoo, where consumers can earn points when they buy goods with euros – like a loyalty card
– which they can then use to buy goods through the Sardex system.

Williams claims that if Wales had implemented a mutual credit system in the same vein as the Sardex
in 2008, Welsh SMEs would by now be making an additional £256 million in turnover, in addition to £190 million saved. This additional turnover, which would be generated from adopting circular economy principles, ensuring spare capacity and surplus is used, with its full value being exploited rather than wasted, would be crucial in helping local SMEs not just survive, but thrive.

Targeting waste and recycling

Beyond improving SME turnover and resilience, Williams sees a number of ways in which a mutual credit system could reduce waste and boost recycling. Membership of a mutual credit system could be contingent on adopting circular economy principles, to ensure that all members are committed to advancing resource efficiency and making full use of scarce materials. In any case, circular transition has been estimated by the Ellen MacArthur Foundation to provide a benefit of up to £2 billion for Welsh SMEs in an advanced scenario.

A central part of this circular approach is buying locally, due to the shorter supply chains encouraged by a mutual credit system: members operate over a geographically limited area, and credit accrued must be redeemed through the system and thereby between the members operating in that geographically limited area. Shorter supply chains reduce carbon emissions from the transport of goods and leave less chance for products to be lost as waste through the chain.

“We will build interrelationships quicker with
 a mutual credit system by virtue of the fact that if you’ve earned credit to buy goods and services in a mutual credit system, you can only buy them in that particular region,” says Williams. “With mutual credit as an engine driver to sustain these relationships, I think we’ll get to a circular economy far quicker.”

In terms of local authorities, the system could
 also be used to incentivise and reward residents for participating in local authority recycling services,
such as organic waste collections. Williams cites the example of Lindbergh in Belgium, where residents 
in five municipalities were encouraged to take up
home composting of food waste through traditional communications approaches, while residents in five other municipalities were provided with a reward token scheme that could be redeemed for local services.
The difference was resounding – two per cent of the population targeted by the traditional communications campaign took up composting, while 30 per cent did so when incentivised with the redeemable tokens.

Williams believes this ‘tokenisation’ approach to incentives could work in a mutual credit scheme, helping councils to boost food waste collections through a ‘Zero Waste Household Credits’ scheme,
 with the finance provided by the local authority being replaced with credit accumulated through participation in the food waste collection service, redeemable through the scheme.

Householders would be able to spend their accrued credits in a similar fashion to the B2C Sardex Bisoo card. A 30 per cent uptake rate across Wales would add an additional three per cent to the Welsh recycling rate and provide a saving of £4,428,000 in avoided landfill tax, equivalent to around £200,000 for each local authority.

This article was taken from Issue 97

Finally, the credit reward approach could be used to kick-start Wales’ reuse revolution. Williams describes the idea of an ‘attic amnesty’, where people with goods stored in their homes that they no longer use could take them to local reuse organisations and redeem them for credits, which in turn could be used in those same organisations when they need something new. With an estimated £202.5 million worth of unused materials hidden away in Welsh homes, such a scheme could be key to unlocking the country’s reuse potential.

“Reuse is considered the low-hanging fruit by
 the Welsh Government, so a mutual credit scheme combined with the social economy allows you to reach parts of the community that the public sector probably wouldn’t be equipped to reach,” Williams says. “It could unlock a lot of reuse potential across Wales.”

Fundamental change

The opportunities presented by a mutual credit system are significant. It takes pressure off businesses and allows them to absorb economic shocks more easily, building in resilience, while also ingraining a resource-efficient approach to business and consumption, both from businesses and customers. In the case of Wales, these would be positive developments as the country continues its drive towards a more sustainable future.

Plans for a Welsh mutual credit system are still in their infancy, with the wider vision set to be unveiled at the Circular Economy Wales conference in November, before the start of a North Wales pilot in 2020. If the system takes off, the eyes of the sustainability world will be on Wales once again.