With the growing likelihood that the earth’s temperature will warm beyond the four-alarm fire level of 1.5C, we have arrived at a make-or-break moment. What keeps me up at night is that despite the progress we’re making by investing in solutions designed to create a circular economy for plastics that can also materially reduce harmful GHG emissions, there is still so much more to do to achieve our goals.
I recently read about Frontier, an exciting new idea to accelerate carbon removal that got me thinking about how we might be able to accelerate our efforts to curb plastic pollution. Frontier is an advance market commitment (AMC) to buy an initial $925M of permanent carbon removal between 2022 and 2030. You can read more about it here, but basically it aims to accelerate the development of carbon removal technologies by guaranteeing future demand for them. Frontier’s team of technical and commercial experts facilitates purchases from high-potential carbon removal companies on behalf of the buyers.
It’s a collective, transparent process that’s forward looking – it’s about new models and solutions. Over time, the aim is to open Frontier to new buyers to further increase demand and spur new supply.
What does plastic recycling have to learn from Frontier?
Well for starters, the carbon removal marketplace suffers from a similar supply / demand problem as the market for recycled plastic. While there’s lots of demand from buyers, without any funding commitments, seller entrepreneurs bear all of the risk to raise capital and build the plants to recycle plastic or create innovative materials.
In fact, when it comes to recycled plastics, we’ve got a huge supply / demand imbalance. Multinational corporates have made impressive commitments to reduce their plastic waste – an important step in the right direction. Experts recently estimated that just for PET (one of the most popular polymer resins used in making plastic bottles and textiles), we’d need to create at least 1,800 new recycling plants across the globe with an average output of 25,000 tons/year to achieve the 2025 targets. In the U.S. alone, to meet the already announced company brand commitments for PET, we’d have to increase reclamation capacity in the use by 50% from its current capacity, according to a 2021 study by the American Institute for Packaging and the Environment.
But there are not yet enough suppliers to help these companies reach their goals. It’s the age-old problem of “if you build it, will they buy it?” If we want to create at-scale solutions, suppliers (and their investors) need more certainty that there will be buyers.
For example, I was in a conversation with a recycling entrepreneur in Thailand a few weeks ago who has a tremendous opportunity to expand their operations and grow their business. But they don’t know if they will have enough buyers. We could invest together to build a new plant, but that could take two years. What if buyers don’t show up then? This entrepreneur is successful today because of taking calculated risks. But is this just a bridge too far?
Offtake is one of the key risks holding back the development of more businesses that can help these companies meet their plastic commitments. Suppliers aren’t willing to take the risk of building new solutions at scale. And investors won’t come to the table and invest if the demand isn’t there. It’s a classic chicken and egg problem but it’s a huge factor stalling the transition to a circular economy for plastics.
Could an Advance Market Commitment be Part of the Answer to Curbing our Plastic Waste Habit?
Just like in the carbon removal sector, there’s lots of uncertainty about long-term demand and unproven technologies when it comes to plastic waste. AMCs can send a strong and immediate demand signal without picking winning technologies at the start.
But what’s particularly interesting to me is that Frontier is funded by big multinational corporates including Stripe, Alphabet, Shopify, Meta, McKinsey, and tens of thousands of businesses using Stripe Climate. This is a brilliant way to mitigate risk.
I know a bit about working with a collective of multinational companies at once to drive investment in the circular economy as this is central to my company’s model. But how do we do this in plastics beyond a collective of investors?
An AMC may be a great innovation for the development of a circular economy for plastic waste. Corporates spend billions in the procurement of plastics for their businesses, dwarfing the amount of money spent on investing in supplier entrepreneurs. So just like Frontier is shifting from an extractive to non-extractive solution for carbon removal, a shift in procurement spend from virgin to recycling in a clear, transparent way could make an enormous difference. It would essentially be a new sort of “buyers’ club” with an advance commitment to buy recycled plastics.
There are other solutions out there like plastic credits (still very nascent) and green bonds (not a new market and it’s a 1 to 1 concept rather than collaborative, so they are not creating the scale we need to see). But again, this is really a “rising tide lifts all boats” situation. We need all of these solutions and actors happening all at once.
So why isn’t there an AMC for plastics yet?
It’s a great idea in theory but realizing the vision of an AMC will have its challenges:
● Currently, corporates are all competing for a limited supply of recycled plastics, so it’s hard to think beyond securing one offtake contract at a time.
● Collaboration is hard and slow. Sometimes it seems like it may just be easier to do it by yourself.
● Procurement teams aren’t there yet – there can be a disconnect between objectives to maximize the margins in the short-term despite long term sustainable solutions. So, there are internal conflicts and headwinds that will need to be sorted.
● There are also persistent inflationary supply chain problems. Prices just continue to go up, and we need to create solutions that can scale quickly to drive them down.
There have been attempts at something like an AMC for plastics in the U.S. before, such as the APR Demand Champions program, an effort by the Association of Plastic Recyclers. The goal of the program is to drive end-market demand for PCR and to recognize companies for their increased investment in PCR-containing products. Businesses, government entities, universities and more can participate. This is a great first step and it’s a sign that there’s a precedent for something akin to an AMC for plastics. But now we need to supercharge these efforts.
There are some additional and not insubstantial roadblocks holding back an AMC for plastics. For starters we need to make it easier for corporates to come to the table and collaborate with direct competitors and capture real value together where they are making actual offtake and purchase agreements. It also means finding creative ways to break through inertia and to incentivize middle management, so they become active champions of the idea. And, we have to recognize this sort of collaboration could also raise antitrust concerns from regulators.
Circulate Capital’s model where we’ve created a collective of corporate commitments to invest is highly unusual and manages the direct competitive issues because all of the corporate investors have a stake in investing in new solutions. But it shows that where there’s a will there’s a way for this diverse group of stakeholders to cooperate and collaborate.
Investing Capital in Supply is Still the Key
So, what’s the takeaway here? While the demand catches up, we need to catalyze more capital to create meaningful change. Our biggest challenge continues to be our ability to unlock sufficient catalytic capital to bring about a circular economy for plastics. If we think about the problem as an investment challenge, then taking a key risk like offtake risk off the table through an AMC should go a long way to solving the problem. It presents the possibility of bringing in new capital commitments at scale – perhaps the biggest missing link to solving the plastics crisis (and my life’s work!).
Finally, perhaps what I like most about the idea of an AMC for plastics is that it represents a new and creative way of thinking. If we can all agree on the importance of scaling catalytic investment capital to the plastic waste challenge, then we stand the chance to meet the moment with real solutions. We are all working towards the same goal, so let’s find new ways for collective action that can make the difference.
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