Opinion of the European Economic and Social Committee on ‘The functional economy’ (own-initiative opinion)
Date: 2016-12-15
Institutions: European Economic and Social Committee
Subjects: economic model, economic policy, economic situation, economic transition, over-exploitation of resources








C_2017075EN.01000101.xml










10.3.2017   


EN


Official Journal of the European Union


C 75/1





Opinion of the European Economic and Social Committee on ‘The functional economy’
(own-initiative opinion)
(2017/C 075/01)






Rapporteur:



Thierry LIBAERT











Legal basis


Rule 29(2) of the Rules of Procedure




 


Own-initiative opinion




Plenary Assembly decision


21 January 2016




Section responsible


Section for the Single Market, Production and Consumption




Adopted in section


4 October 2016




Adopted at plenary


15 December 2016




Plenary session No


521




Outcome of vote
(for/against/abstentions)


169/0/3




1.   Conclusions and recommendations









1.1.


The EESC calls in this opinion for society to begin an economic transition from over-exploitation of resources and a throw-away culture to a more sustainable, job-rich era, based on quality rather than quantity. The EESC would very much like to see Europe take the initiative in devising new economic models.












1.2.


The EESC considers that the functional economy must be supported, as it will enable all or some of these challenges to be met. The functional economy is not an end in itself, but rather a tool which will help to achieve new consumption model objectives.












1.3.


Given the many unresolved questions and unknown factors regarding the supposed economic, environmental and social benefits of the functional economy, a thorough assessment should be carried out of services or product types in order to identify the advantages and if necessary establish the conditions under which the functional economy should be rolled out to people’s benefit.












1.4.


Labelling will then need to be promoted to indicate the environmental, social, economic or other impacts of the product or service acquired through the functional economy approach of access or use rather than ownership. Such labelling will enable consumers to know whether it would be best to opt to buy the product or service, and to make informed choices. With this in view, it is crucial that the information provided by companies be accurate and trustworthy, and authorities and mechanisms must be designated to guarantee this in the eyes of consumers.












1.5.


The EESC recommends that the Member States and stakeholders promote responsible consumption, including over the whole of the education process, with an emphasis on the functional economy. Provided it is rolled out sensibly, the functional economy can help overcome many current consumption challenges.












1.6.


More generally, the EESC recommends stepping up the pace of research and achievements in new methods of production and consumption connected to the functional economy:






—


Product eco-design, which guarantees the sustainability of resources used from the outset by factoring in the environmental impact of goods throughout their lifecycle. The functional economy can draw on new forms of design to make products more repairable, modular, etc.










—


The circular economy (see the EESC’s opinion on the circular economy package (1)), aims to establish a ‘cradle to cradle’ approach with a view to converting one company’s waste into another’s resources. The functional economy can make it possible to optimise the co-products and externalities of some companies for the production ends of others.










—


The collaborative economy, discussed in the EESC’s opinion of 21 January 2014 (2), whose theoretical basis is the functional economy. Development of these types of business together can, under certain conditions, cause the functional economy to yield benefits more rapidly, particularly in relation to the environment.










—


The economy for the common good (see EESC opinion of 17 September 2015 (3)).










—


The sharing economy, the special focus of the EESC opinion of 13 May 2016 (4).
















1.7.


An EU legislative package could provide a structure for services delivered through the functional economy, particularly with an eye to new consumption issues such as collaborative consumption, obsolescence, consumer understanding of these models, and a legal and tax framework that is friendlier to innovative businesses.












1.8.


By regionalising the functional economy it will be possible to meet the new challenges of sustainable regional development by experimenting with new economic models. The functional economy is useful for harnessing regional assets, getting away from the standardisation inherent in mass production — which is partly responsible for the disillusion with current consumption — and allowing for all production externalities. Cities are also one of the most suitable regional levels for developing functional economy solutions, as their density lends itself to approaches based on pooling.












1.9.


In order to cope with the fundamental shift to a new economic model with major systemic consequences in many areas, it is recommended that a new cross-cutting and permanent body be set up in the EESC to analyse these developments.












1.10.


An exchange platform making functional economy initiatives more visible across the EU would be useful, given that there are still few good practices and that these do not always receive the attention they deserve. Such a platform could be built into the European circular economy platform endorsed by the EESC in its opinion on the European Commission’s circular economy package.












1.11.


The functional economy can realign the various types of value of a good. Both use values and labour value must thus find a way to coexist within the functional economy.












1.12.


Clarifying and simplifying insurance issues relating to functional economy models will be crucial; models must be made clearer for end consumers so that the new functional economy services can be developed.




2.   Definition and substance: from ownership to use









2.1.


The functional economy is based on using rather than owning products. However, this means more than just incorporating added ‘services’ into a ‘product’: the functional economy takes into account all the changes in consumption by more effectively factoring-in the end-user and more resource-efficient economic models, even delivering co-benefits for regions. With this model, companies do not sell the product, but rather a function whose use is charged for. Manufacturers therefore have an interest a priori in gearing their business models towards developing good-quality, repairable goods which are easy to maintain, and in introducing appropriate production chains and logistics.












2.1.1.


The underlying economic paradigm still holds: that value lies in the benefits derived from use (use value) as well as in the good or service itself or its worth in the eyes of others (its labour value or exchange value).












2.1.2.


Under the traditional economic model, producers create value and consumers destroy it through consumption. With the functional economy, the interests of both parties must align, or at least converge, so that each safeguards — or even creates — that value. With the current digital revolution, the production and exploitation of usage data is such a new resource or value created by both parties.












2.1.3.


The new dynamic emerging around with the — still hypothetical — figure of the ‘prosumer’ (a neologism combining the two historically separate roles of producer and consumer) demonstrates how highly linear or vertical economic relationships are turning into more interlinked or horizontal patterns and structures.












2.1.4.


The functional economy can promote the dematerialisation of the economy by integrating all costs into the final price, and it must promote the decoupling of economic activity from its environmental impact.












2.2.


There are two schools of thought, offering two more or less successful models for applying the concept of the functional economy. The first covers service provision centred on use and ties in with the general idea of a service economy. It rethinks ownership relations but has little to say about products. The second focuses on the externalities of the functional economy which can lead to new solutions, where the sale of goods and services is seen as an integrated whole (looking at issues of work or the production of intangible resources, including regional resources) and the consumer is an integral part of the solution devised.












2.3.


The EESC advocates a balanced approach. The idea is not to promote the functional economy across the board but to do so only where it provides answers to the new challenges mentioned.




3.   Challenges









3.1.


The functional economy is interesting because in theory, or at least under certain conditions, it is able to provide an answer to the many challenges (whether economic, social, environmental or cultural) connected to current consumption.












3.2.


As part of an integrated approach, particularly at regional level, it can deliver co-benefits or positive externalities. For example, by using cooperation-based, cross-cutting working methods, local authorities factor into their provision of street-lighting considerations such as economic performance, safer public areas and reduced light pollution and energy consumption. By integrating this range of goals rather than focusing on one single parameter, it is possible to meet several objectives and keep costs under control.












3.2.1.


Pooling investment allows the functional economy to be used to promote innovation and thus sustainable development, including clean or green technological innovations. Such forms of innovation are often more capital-intensive than traditional solutions, and the functional economy enables them to be rolled out by consumers, who individually would not have the requisite financial capacity. For instance, an energy performance contract may give the user access to often costly energy-efficient technologies and services in return for a small monthly fee.












3.3.


Environmentally speaking, current consumption patterns based on individual ownership lead to under-use of goods and thus significant waste of natural resources: for instance, a car is currently unused 95 % of the time and in urban areas the number of passengers barely exceeds one (the average is 1,2 per vehicle).












3.3.1.


Acquiring a mobility service (such as a seat for a given number of kilometres or a car for a specified length of time and distance) allows these resources to be used more intensively. The functional economy can therefore increase the intensity of use of many consumer goods and thus create greater value with a smaller environmental footprint.












3.3.2.


Price-setting for functional economy services builds in all product and service costs and not just the marginal cost, meaning that the user has a more accurate understanding of the real costs. This sends a price signal that more closely reflects the real impact of production and thus promotes more responsible behaviour. (For instance, when buying an hour of car-sharing the user contributes to the total costs of wear and tear of the vehicle, insurance, parking, fuel, etc., with all the costs calculated on a pro rata basis. They are therefore likely to take a rational approach to using the vehicle as opposed to an approach based on ownership, where generally only the fuel is seen as a usage cost).












3.4.


In social terms, by reducing the cost of accessing a product or service, whether through pooled investment by several parties or by limiting the cost of the intended use to the access price, the functional economy can enable more consumers to access services that were previously unavailable to them. From an economic, legal or insurance point of view, the key issue then is to identify the investor and the holder of the capital made available to the users. The new legislation to be framed will be crucial here.












3.4.1.


There are many social issues which, like the environmental challenges, must be explored carefully to establish whether the functional economy will be beneficial in this area, and above all to establish the conditions under which the functional economy can be rolled out with an eye to social progress.












3.5.


The paradigm shift involved in moving from ownership to access is far from inconsequential. It underpins a switch from the model of conspicuous consumption and mimetic desire to more moderate consumption which is less rooted in compulsive behaviour or is at least less dependent on ownership of material goods.












3.6.


Digitalisation can extend the scope of the functional economy, so that is no longer limited to its original sphere of business-to-business (B-to-B). If the costs of distribution and roll-out are reduced, digital solutions can provide functional economy solutions for everyone in a wide range of areas (such as music, mobility, equipment and the home). With these goals in mind and in order to ensure that the new economic model can operate alongside the existing one, a suitable tax and regulatory framework must be developed and implemented swiftly.












3.7.


Recent work and feedback have shown that functional economy practices succeed and are adopted when the solutions improve user experience and consumers’ quality of life, rather than on the basis of purely economic or environmental criteria. Good examples of this are car-sharing, which provides an effective solution to the crucial issue of city centre parking, and streaming, which offers almost instant access to a vast online catalogue.




4.   Obstacles and limitations









4.1.


In some instances the functional economy can speed up the rate of consumption and product renewal. In mobile telephony or long-term hire purchase of vehicles, it is not intuitively obvious that these models (generally long-term lease with option to purchase) do in fact extend product life or improve end-of-life recycling.












4.2.


While big industrial groups are best known for implementing specific projects, more traditional sectors such as agriculture — for instance via joint purchasing — and start-ups have a role to play in consolidating and rolling out the functional economy in society. Moreover, SMEs may also find new solutions for their clients in this concept and its application. Certain types of organisational structure, notably cooperatives, can also promote more horizontal forms of governance in which users are fully involved.












4.3.


By reducing the costs of accessing products or services, the functional economy can be an advantage for people on the lowest incomes, offering adaptable and flexible access to services and products. However, at the same time it can make these least well-off people more vulnerable if they are no longer able to pay to access, use or subscribe to a service. From this perspective, and in the current context of increasing economic insecurity in many European countries, ownership may seem preferable and safer for people with little material security. In addition, as regards access to certain goods and services, unequal access cannot be attributed solely to economic capital (i.e. financial resources): cultural and educational capital (social background, training) also come into play.












4.4.


From a societal perspective, the functional economy can make consumers, i.e. citizens, somewhat more dependent on economic organisations or a given technical or economic system. Once registered for a service, it is difficult — or even impossible — to repair, amend or change the product made available. The functional economy can therefore increase external control if users are not sufficiently involved in the design of the products and solutions developed. Economic and administrative models that promote consumer autonomy (in terms of consumer choices, behaviour and habits) must be sought and promoted.












4.5.


Digitalisation can extend the scope of the functional economy to include all consumers. However, it also raises many questions: value capture by some platforms, tax optimisation or avoidance, privacy (particularly through the way in which the data collected are used), market concentration (platform monopolies) and labour issues (as mentioned in point 1.6).












4.6.


Simply shifting to a ‘service economy’ will not shield the functional economy from the risk of all these obstacles or limitations. However, these can be overcome by adopting a more integrated approach to the functional economy, one that addresses issues of corporate governance, work and the regional perspective, and that factors in the consumer from the stage of designing the service through the product lifecycle.












4.7.


Nonetheless, legal measures are certainly necessary in relation to several of these points and particularly as regards competition and privacy.




5.   Championing a European drive to promote the functional economy









5.1.


There are many reasons — environmental, social, cultural, as well as economic — why the EU must concern itself with the functional economy. Digital issues, and more generally the relevance of this area to new economic models such as the sharing or circular economies, are also important here, particularly given the pace of change.












5.2.


In Europe, the functional economy provides a way for business to recreate added value and promote job-rich solutions (particularly upstream, in areas such as maintenance and repairs, but also downstream, when designing innovative economic models and related services) and in particular a way to make certain industries more competitive. By developing services that reflect consumer needs as closely as possible, rather than standardised, poorly adapted products, the functional economy could rekindle confidence between business and consumers and make consumption meaningful again.












5.3.


While large companies’ innovation departments, regional authorities and many experts support the functional economy, it is astonishing to see just how weak Europe’s efforts are in this area. Although the functional economy is at the heart of the circular economy, there is not a single reference to it in the Commission’s recent Closing the loop communication on the circular economy.












5.3.1.


Despite these uncertainties and limitations, in light of the uncertain political and economic situation in Europe at present, the functional economy is an opportunity for Europe to build on and develop the expertise and skills of many different players.





Brussels, 15 December 2016.


The President of the European Economic and Social Committee

Georges DASSIS




(1)  OJ C 264, 20.7.2016, p. 98.

(2)  OJ C 177, 11.6.2014, p. 1.

(3)  OJ C 13, 15.1.2016, p. 26.

(4)  OJ C 303, 19.8.2016, p. 36.