LOOPED IN with Carl Warkentin

Transforming a highly optimized industry with textile recycling pioneer Luke Henning from Circ

• Carl Warkentin • Season 1 • Episode 1

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In a world increasingly burdened by textile waste, the urgency for sustainable practices in the fashion industry has never been more pressing. Join us for an engaging conversation with Luke Henning, Chief Business Officer at Circ, as we tackle the complexities of textile recycling and the vision behind establishing a true circular economy. Luke shares his in-depth expertise and insights on how Circ aims to reinvent the way we view clothing waste and recycling through innovative technology and proactive industry strategies.

This episode dives into the essence of Circ's mission, emphasizing that striving for circularity goes beyond merely recycling materials. Luke sheds light on the intricate relationships between brands, suppliers, and technologies that drive successful recycling initiatives. Discover how their unique approach to hydrothermal processing sets them apart from traditional recycling methods and why this could be the key to unlocking a sustainable future for textiles.

We also explore the vital role that regulation and EPR schemes play in transforming the industry. Luke explains how these structures can incentivize brands toward greater sustainability while simultaneously addressing economic realities in implementing circular systems. 

As we look to the future, Luke shares his optimistic vision for the textile industry's shift toward circularity by 2030, highlighting milestones that can propel us into a new era of environmentally responsible fashion. Tune in to gain a deeper understanding of the pressing issues at hand and what needs to be done to drive long-lasting change. Subscribe, share, and join the conversation on how we can collectively move toward a more sustainable textile industry!

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Carl:

Today I'm excited to speak with Luke Henning, chief Business Officer at Circ, one of the leading companies in textile recycling. Luke, I follow Circ for a while now and I first met you in person last year in London and met you as a thought leader in the industry. I was immediately impressed by your deep knowledge and holistic approach to circularity. On Circ's website, you state we're just a bunch of science-loving humans on a mission to achieve circularity that goes beyond just recycling. It speaks to a much broader vision. Can you tell us more about Circ's mission and what drives you and the team?

Luke:

So our mission is to protect the planet from the cost of clothing. That's our overarching mission and it's very much what drives our people. And actually what drives me is getting up with this idea of tackling big challenges and ultimately trying to build a better world. And you're right we talk about circularity, even though our focus is on recycling. That is not circularity. We're trying to insist, we're dealing with that end of life piece, but circularity is so much broader. We need to encompass all aspects of it and assist in all aspects of circularity.

Carl:

Maybe a bit broad and direct question in the beginning, but what is it at the moment, at this very moment, that keeps you up at night? Like, what are you currently struggling with in regards of circ and regarding generally circularity in the textiles industry?

Luke:

That's a nice big question.

Luke:

I know, I know, industry, that's a nice big question, I know I think, having spent a lot of time at this now, one of the things realized is there's a bit of a structural mismatch here. You're trying to transform one of the world's oldest and most established industry. Mean people have worn clothes for a while now, you know, and hopefully will continue to wear clothes, but you come into an industry that is super, super optimized. Nothing runs as efficiently as clothing, just about because you have to make it fast, you have to make it cheap and you have to make it fast. You have to make it cheap and you have to make it good, although that's getting a bit more debatable, right.

Luke:

But the point is, you've got this huge industry. It's very dispersed. You, it's not concentrated. Even the big companies that you think of, like, you know, the zaras of the world, the h&ms of the world, the shearas of the world, the H&Ms of the world, the Sheeans of the world they control a very small percentage of the overall market. So when you're trying to transform this industry, you're trying to get demand out of the brands, because they're the people who have the most power in the industry and you're trying to get them to show commitment to buy this recycled product. But that's not what they normally do. No brand really goes back and is like, hey, I'm going to buy thread, or I'm going to buy the input to thread Right, absolutely, that's not the area they play in thread or I'm going to buy the input to thread right, absolutely.

Luke:

That's not the area they play in.

Luke:

They're used to going to the supply chain, which is a long and complicated supply chain, going often to only the tier one suppliers so the people who actually make the garments for them and saying, hey, I want garments that look like this.

Luke:

Now we're saying you guys need to show the industry and the supply chain that you're willing to buy this. We're trying to work with these brands to do something that's very unnatural for them but that is needed for the industry, which is to commit to basically being guarantors to their supply chain partners that if this stuff gets made, they will actually buy it, while they see circularity and sustainability as a macro trend. We haven't seen enough buy-in yet from consumers in a lot of ways for them to feel that comfortable to make such a big bet, and I think that's where regulation is stepping in and basically driving people in this direction. It's trying to close that gap. But, yeah, what keeps me up at night is how to get all of these moving pieces to move together and drive circularity through the supply chain all the way through to the brands.

Carl:

I totally hear you and you're absolutely right. It's a highly optimized industry as long as it's in the linear industry that we're in right now and it's, it's really difficult and a big challenge to make it circular, because a lot of times I feel we we try to bend this, the linear system, to a bit more to make it a bit more round, but that doesn't make it circular. So and there's a lot of talk and I think that's one of the purposes of this podcast is to really go a bit away from all of these panel discussions on big conferences where everybody has two minutes on a panel to talk a little bit about what they're doing and what needs to be done. But a lot of times I miss this. How can we actually do this and transition this? So I would like to dig deeper into this today, but maybe let's circle back a little bit.

Carl:

You personally, you started your career at KPMG, which is quite a different world from what you're doing now. When and how did you transition into the world of entrepreneurship and what led you to the circular economy space?

Luke:

So I was consulting predominantly to banks on financial risk. That was the area that I was working on at KPMG. My background was in financial engineering, was in financial engineering and I was leading our unit in Cape Town consulting across Africa and the Middle East, and I decided consulting maybe wasn't for me. I needed to make a change. I thought about doing an MBA as a way to shift. I looked at several programs and I was actually looking at executive MBAs. I'm older than I look and one of my closest friends actually my best man said to me don't do it, do a full-time MBA, take the time off, figure out what you want to do. Do a full-time MBA, take the time off, figure out what you want to do.

Luke:

So I went to Oxford to do my MBA, took the year off. While I was there, it reaffirmed my decision. I quit KPMG and I started focusing more on what was next, focusing more on what was next. Oxford is pretty unique with their business school that it has a very strong social entrepreneurship focus. So not just entrepreneurship, but very much on this impact, investing social entrepreneurship. That resonated really strongly with me. Beautiful. That resonated really strongly with me, beautiful. And so when I was looking around.

Luke:

I had this idea that I wanted to work in the US for a little bit and I ended up. One of my friends introduced me to Ed Scott, who is the chairman of CERC, and he had just invested in the predecessor company to CERC, titan Bioenergy Systems. And I sat down for brunch with him and he was like I've just invested in this company and I need someone to look at the spreadsheets and with my finance background, I said perfect, I'll meet these guys. Background, I said perfect, I'll, I'll meet these guys. Um. And so I met with peter and julian um, who originally started titan um together and then decided to come over, try it out, just went over during the summer and then ended up accepting a position from them. And then ended up accepting a position from them to join Titan. And there I saw the I liked their looking to solve big challenges.

Luke:

I was younger and more naive and I thought this was going to be this quick success. We were going to implement this technology in the US and then I was going to take this technology back to Southern Africa, where it would be incredibly life-changing for so many people, because it was all about energy independence and Southern Africa imports all of its fuel. Well, we developed a solution, but we didn't have product-market fit. That was mistake number one. Didn't have product market fit that was mistake number one.

Luke:

And so we ended up with a situation where the oil price dipped and we were pursuing biofuels, and so everyone went straight back to chasing oil. There were some notable market failures, and companies that had over-promised but under-delivered taken in huge amounts of money and then collapsed, and so no one was investing in the space. So we had to figure out what to do next. We zigged and zagged a bit until we fortuitously ended up being asked if we could recycle textiles through the technology that we'd been developing to extract chemicals from plants. So then, at that stage, a few of us discovered it was possible, and then we went out to the market to figure out if anyone cared and this was the end of 2017, figure out if anyone cared, and this was the end of 2017, beginning of 2018. And it turned out that this was the perfect moment, and so we joke sometimes better than having a solution is having a solution at the right time.

Carl:

And with a product market fit.

Luke:

Yeah exactly, but it's that there were people who actually cared about finding solutions to the problem, and this was very much when people were starting to make that shift towards hey, we need to be able to make textiles circular. There were some early front runners in the space. Our niche was unique. We came in, we got a massive interest. Our niche was unique we came in, we got a massive interest. And so we realized this was the direction we needed to take the company in. In fact, I think one of the most pivotal moments was when Patagonia called our office to find out what we were doing. Oh, wow.

Luke:

That must have been an amazing feeling and so you know, we transitioned the company. We ended up completely changing into textile recycling. We rebranded the company, took in series a and Series B investment progressively. We scaled it up from bench scale to lab scale, to full-scale pilot and now we're looking to scale. So that's our journey in a very rapid nutshell. But I ended up coming on from a finance perspective. I was the CFO for a while, then I transitioned to leading our corporate relationships and now I'm dealing more on the strategic initiatives of the company.

Carl:

We will later go back a bit to how it is to scale a CapEx-intense project like textile recycling. But since you just mentioned it, when was the moment that you really realized this project is really going to scale, because there are so many super impressive startups very early stage, because there's so many super impressive startups very early stage, and obviously, to transition from stage to stage until you actually can have an industrial scale planned, there's a lot of hurdles to overcome. What was the moment when you realized this could be really big? Was it when Patagonia called or at a later stage.

Luke:

No, I think the scaling question has been answered several times for me. I have got progressively more confidence as to the scalability of the technology over time. In the beginning it was can we do this? Do we think it's simple enough that it can scale, but our level of experience in scaling and industry we're a tiny team. That wasn't really us.

Luke:

I think we brought on a couple of really senior people who had had long careers in industry and now were doing the last quarter of their careers.

Luke:

Basically, they wanted to do something super positive for the world and joined a mission-driven company.

Luke:

And it was when some of those people came on with very strong engineering backgrounds, very strong chemical industry backgrounds, and they looked at the process and really said there's nothing scary here. In fact, what you're doing is a novel combination of well-understood chemistry in a lot of ways and there's a lot of equipment that you can use that is pretty much standard that will be able to run this process. That was it was those types of moments that really gave me confidence when we brought on the, our head of engineering, who has designed, built and operated plants on different continents around the world, farid, and he joined the company Purpose driven. You know, one of the things he said was I want to work with you guys because I've never been to a company where people are so excited to be there and to work there. He joined and he was doing deep dives into what we were doing and into our technology and he was like oh, I'm so happy to see how simple this is compared to other chemical plants that I have built, because there's nothing toxic.

Luke:

There's nothing crazy here. This is completely scalable. That gave me a lot of relief We've had in going through our Series B and the various rounds. We've had some serious engineering due diligence done on us.

Carl:

I mean when.

Luke:

Breakthrough invested, they put us through a very intensive due diligence done on us. I mean, when breakthrough invested, they put us through a very intensive due diligence and you know it was a competitive so that I think we had three potential leads there who all put us through intensive engineering due diligence and all of them being happy with the scalability really was was very good for my nerves and for my you know, anxiety. And so progressively we've had moments like that Because it's difficult for me to independently I'm not an engineer I cannot, you know, assess the scalability in reality. I can trust experts and the experts keep telling me, you know, this looks good.

Carl:

Wow. I mean, I hear from a lot of investors that they are really struggling finding CapEx Intense projects that they want to invest in, mostly because of the scalability and and because there are not a lot of people like senior people that are working in these startups that could actually, you know, help them scale with all the expertise building hardware like this. So it's impressive that you found very early on people like that and I mean circus, backed by some of the most influential investors and brands, right Like Zalando, inditex, patagonia, just to name a few. Was it this team decision, like how you set up your team, how you convinced investors to back CERC? I mean, as I said, many VCs shy away from CapEx-heavy projects. I hear this basically on a daily basis, especially still in Europe. I think in the US and in Asia it's a bit different, but you secured strategic investors, including Patagonia, and, as I hear, you were oversubscribed for many of your rounds. So what is your strategy to the success?

Luke:

There are a couple of key things, I think, that really helped us. One we have a pretty unique positioning in the market in that we are the company that's able to successfully recycle polycotton and recover both fractions, and polycotton is one of the biggest challenges. There are players playing in the recycled polyester space. There are in the pure cotton space, but as soon as you start to add even small amounts of blending, it starts to become really challenging if you aren't recovering both fractions. And so I think that was part of what attracted a lot of people to us.

Luke:

All hard tech starts at a certain level and needs to have a pathway, a credible pathway to climbing down the cost curve right, because these industries become more optimized over time. I mean polyester, viscose. They've had like a hundred years to optimize right. That's why the prices have come down so low to where they are now. I mean those modern polyester plants that are driving the super cheap polyester. You know most of those were built in the last 10, 15 years and despite a hundred year history of polyester.

Luke:

So credibility in terms of scalability, credibility, credibility in terms of probability and likelihood of climbing down the cost curve to a reasonable price point. And then it comes down to credibility and trustworthiness of your team. It is important. So it's that whole point about bet the jockey, not the horse in a way, in that you've got to believe the team can deliver on this and you've got to believe that the team will be able to adapt when things go wrong.

Luke:

Because in scaling any company, regardless of the technology type soft hard things are going to go wrong, type soft hard things are going to go wrong Will the company, will the leadership, be able to find a way? And how robust is the technology? But how will the leadership find a way to adjust to make the company still succeed? And I think the fact that we had had the experience in the biofuel space carried the scars from Cleantech 1.0, actually gave us a lot of credibility because we had already done effectivelya restart of this company. We'd seen how not to do it, we'd learned, we'd carried scars, we carried experience and that was a strong point for us.

Carl:

Right Did.

Luke:

launching your own collection with brands also play a role in the storytelling and making your technology more tangible for investors investors we actually only launched our first collection after we'd taken in breakthrough energy ventures into techs. We were actually one of the last to release the collection in a lot of ways because we'd had to do a lot of zigging and zagging during COVID because of the supply chain disruption and getting equipment and getting things installed. You have to basically be able to present garments. This is an industry where you are dealing with brands and they have to be able to touch and feel fabric. To be able to touch and feel fabric.

Luke:

When we first came into this industry and we showed up, peter and I, at our first major conference, we went to the Copenhagen Fashion Summit, nice event, and I was recently revisiting this with one of the people who saw our potential and really helped us and that was Dana Davis from Mara Hoffman. So Mara and Dana saw us and realized we knew nothing about this industry and decided to help us out. But we showed up and we're like, look, we've made terephthalic acid and we're showing little vials of white powder and people are like great, what is this used for? Is this for dyeing? Is this for finishing? You know, does this make my fabric softer, you know, will it make it white? I'm like, no, this is what all of your polyester fabric is made out of. And they're like, oh, wow, cool, does it make good polyester? Is it dyeable? What does it feel like, you know? Can it make nice clothes?

Luke:

So it was about getting those initial proof points. And then these collections have been vital getting those initial proof points. And then these collections have been vital because you've got to show your customers that you can create something that will delight their customers. And that is key Because sustainability is becoming more important and regulation is helping. But most people don't buy their clothes to be sustainable. You buy your clothes for personal branding. That's why people buy clothes. It is the cover of our book, and so we choose clothes that represent who we are and make us feel comfortable about who we are, who we are, and make us feel comfortable about who we are.

Carl:

I couldn't agree more Beautiful story and, as I can see, your collection also looks like a great success so far, so I'm really excited to see what's coming next. Let us go a bit into your technology and your process. For those who aren't familiar with textile recycling, Circ uses hydrothermal processing right to separate synthetic fibers from cellulosic content. Can you break this down for our listeners? How does hydrolysis work? And, for clarity, could you explain the key recycling methods? I mean, there is, like you know, mechanical recycling, thermomechanical recycling and chemical recycling, of which hydrolysis is one of several options. Can you give us a little overview and and why you chose hydrolysis or by other methods?

Luke:

So in part we chose hydrolysis because we were working in hydrothermal processing before. We were using subcritical water processing to extract chemicals from plants. So this was the basis of what we were doing. Now, subcritical water processing not to be confused with supercritical water, which is when you heat water really hot this is more the medium range and what you do is you heat water, you keep it under pressure so it doesn't escape to steam, so it stays a liquid if you put it under pressure and then you it changes the chemical properties of the water. Water starts to act like a chemical solvent and will break down things. So, but let's go back and talk about some of those things.

Luke:

Mechanical recycling so this is used a lot in cotton recycling and what they do is they basically take cotton fabric and they put it over giant rolls with needles on them and it pulls it apart, right, and you can do that more or less gently and that will affect the quality of the cotton that you get out afterwards, because you can imagine if you are shredding something up, you are going to be breaking those fibers and shortening them, and when you shorten those fibers they become weaker and so it limits the applications that you can use that mechanically recycled cotton for. So you're also probably only going to mechanically recycle once, because after you've done it once, if you do it again it's going to get even shorter and you're going to get cotton that isn't suitable for re-spinning because the threads will just be too short. Thermomechanical is the most common used for polyester. So that's where they take the bottles. They chop them up, grind them up, melt them down and extrude them so they push them through spinnerets. It's like if you imagine people making spaghetti and they push the the pasta through those holes. It's the same process, just much finer holes. So they melt that down and they push it through. So that's the thermo heat mechanical, because it's just being pushed through under pressure.

Luke:

Chemical is where you look to break down these, these molecules, down to their basic components so that you can rebuild them. And so there, especially on the polyester side, you've got glycolysis, methanolysis and hydrolysis. Glycolysis you're using ethylene glycol to dissolve the polyester, and it's actually one of the chemicals that's in polyester, and you use it to basically chop apart the polyester and you get something called bhet as your primary monomer and then you distill back to get your ethylene glycol works well for pure polyester, um and. But it's an aggressive solvent and so it tends to break down anything else that's in there, which means that the other stuff is not really recoverable as anything useful. Generally people are using catalysts to boost these, so they add additional chemistry to the glycolysis process to basically try and keep it more gentle and to try and keep the temperatures lower for that depolymerization. Then, if you go to methanolesis, you're using methanol to break down the polyester and there you end up with something called DMT as your predominant chemical that you get out. And then you're trying to get out the glycols as well. Again, quite a strong solvent and so it tends to break down anything else that's in there and it can partially depolymerize some of the other stuff, which means you've got to clean it out. But again, because you're using distillation, you can.

Luke:

There are ways to get it out hydrolysis you can add some chemistry to make it gentle enough that it doesn't necessarily destroy the cotton, which is what we did.

Luke:

We developed a way to use hydrolysis where we could break apart the polyester without completely destroying the cellulose in the cotton, the polyester. We break it down to terephthalic acid, tpa and ethylene glycol. So our main monomer is we break it down to this terephthalic acid. That's more challenging to purify and that was one of the key technology steps. Where we had to develop was how to purify and clean that up, but that is the most commonly used chemical in polyester production at this point, so about 98% of polyester is made with TPA at the moment. So about 98% of polyester is made with TPA at the moment, because you can run it through the mega factories using what's called continuous polymerization, so they can put it in, combine it, form polyester and, at the same time, be making the threads, and so that's why people tend to go that route, and that was a happy accident for us to discover, in a way, but is another advantage we found, which is that we're producing the most desirable polyester monomer from our process.

Carl:

Thank you so much for clarifying this. I mean you mentioned before your USP is that you can at the same time recycle the cotton and the polyester also from blends. They are by now also other startups uh, out there mostly startups because it's a fairly new technology, but like other other startups claim to do something similar do they also choose the hydrolysis as part of it? Like when you think of other other projects? Um, in germany we have eden, I think we have one again in the uk in in in stockholm, renaissance. Like are you? Are you aware of these technologies as well?

Luke:

yes, so a lot of them are trying to pursue similar pathways. Warn again not hydrolysis, but there are several players who are looking at hydrolysis. The challenge again that I think a lot of them are going to find, which they may or may not have found yet, is the challenge of purification of the tpa, and that is, if they are using the standard industry method for purifying, that it becomes very energy intensive and cost prohibitive pretty quickly. We developed our own proprietary process for cleaning up the PTA and I think that is one of the key differentiators that we have in our technology.

Carl:

If we generally talk about the different recycling technologies, mechanical recycling is obviously using the least energy, right like it's, as you mentioned, you just rip apart the, the textile and and spin new new fibers and whereas in chemical recycling you really break down the, the polymers, into monomers. That takes a lot more energy. How energy intense is is your technology, and how much of a role does it even play? I mean, as today, energy can be very pricey, especially in the last uh couple of years. Uh, the price of energy went up a lot, especially here in germany. But um, looking forward, at one point there are people saying at one point, there's, you know, enough green energy, so energy should not be too much of a problem. What is your take on that?

Luke:

I think that I'm most excited, in terms of all green technologies, about the long-term development of fusion.

Luke:

Yeah, because we use energy to combine all of these molecules, you're going to use energy to recover them. You want to make sure that you recover them in a way that is more beneficial than the original virgin materials, but you're still going to be using energy, and I think the great unlock for end-of-life solutions for far more products will be access to clean, affordable energy. We can recycle a lot more than we currently recycle already, but it's too energy intensive to break apart some of these molecules, so it doesn't actually make sense for us to do it at this point. So there are actually lots of things that are theoretically possible but not commercially viable because of this energy question. And I mean, if you're going to use massive amounts of energy running on coal to break apart something, you're going to run into serious challenges around this, because then you're you're de-sequestering carbon in the form of coal or oil to, or natural gas to, power. You know something that is meant to keep oil, natural gas in the ground yeah, that's.

Luke:

That's absurd, right, yeah, so I am very bullish on this, and actually I'm even more bullish because of ai, and not because I think ai will solve the problem, but just because ai is such an incredible energy hog that the level of investment in energy will massively increase over the next few years and that's a beautiful way to look at it.

Luke:

People will be focusing on how they create energy, and we're going to see small-scale nuclear come online, and nuclear is not where it was 40, 50 years ago when most nuclear plants were built, right.

Luke:

I mean, I was looking at these guys doing a test on one of the micro-reactors and they were saying the safe shutdown time when a warning is triggered on their reactor is 0.02 seconds, or something crazy. You know that that's how fast you could. You could stop the reaction. So, though we we have the potential to build things where the historic risks of meltdown are much lower, and also they're using way more energy out of the fuel, so the fuel is way more spent when they're done with it. So you have far less spent nuclear fuel out there that you have to deal with. So I'm pretty bullish on both. But Fusion would, of course, be the ideal, and I think, just because I'm passionate about it, I follow that technology, and every couple of weeks there are incremental improvements that bring us closer and closer to Fusion being a reality incremental improvements that bring us closer and closer to fusion being a reality.

Carl:

I already see the headline how AI enables textile recycling. That's a cool twist. I love it and I love what you said about. You know, energy and nuclear energy is super interesting because it's green, because it became a lot safer. But I also heard recently a lot about nuclear waste. Nuclear waste is always the problem, right, but you can also recycle that and that is another interesting way you know to do business as well, so it's a lot happening in the field.

Luke:

Yeah, I think there are some companies that are looking at taking that spent fuel. Basically that came from earlier reactors. There's so much energy still left in that. Can they use that as their fuel and get even more energy out and make that stuff, you know, less radioactive because you know there's, there's, there's. It's potentially a way for us to pass fuel down like a waterfall into the reactors.

Carl:

And there are, I think I'm aware of three projects. I think one of them is with a Bill Gates foundation, there's another German project and I think one in Asia where they have been working on this for the last 20 years already, and the return on energy, the ROI basically on the energy, is huge. It's a factor X compared to other industries. But I mean it's exciting. So I'm happy that we covered this not the focus I guess of of today's um, of today's today's podcast, but talking about your recycling technology, um, when it comes to mechanical and thermohane mechanical recycling, you need a high percentage, a high purity of feedstock right to recycle, and what I hear a lot is with chemical recycling, the. The advantage is that you don't have to have that that high of a purity. When it comes to the feedstock, on the other hand, I also ran projects myself where I realized you still need a very high quality and even chemical recyclers, even the big companies, they ask for high purity. What kind of feedstock do you need?

Luke:

So I actually want to touch on that because chemical recycling most of them need very pure feedstock. Quality of your feedstock is one of the most important considerations. The reason why you go to chemical is because mechanical and thermomechanical will eventually degrade the materials to the point where they can't be recycled like that anymore. So after you've mechanically recycled that cotton once, where's it going to go? It's going to have to go to chemical recycling. After you've recycled those bottles a few times, then, mechanically, where's it going to go? It's going to have to go to chemical.

Luke:

Some chemical has more tolerance of contamination because there are ways that you can build in it. When you break things down to a monomer level, when you break it down to its building blocks, sometimes it's easier to purify out some of those contaminants that come into the process. Right, but generally, like, if you're a polyester recycler, you want pure polyester. If you're a cotton recycler, you want pure cotton because it's going to be your most economically viable feedstock. On the output side, you're going to have process simplicity because you don't have to be cleaning all of the stuff out.

Luke:

For us we look at mixed color, mixed ratio. Polycarbons we can take in blended colors, we can take in blended ratios. What we would ultimately do is mix, like they do in the paper industry or in various pulping industries. Where they take some hardwood, take some softwood, they get to the ideal mix. We would probably take and push towards an ideal mix so that when we're designing our facilities we don't have to overbuild them. And what I mean by that is if I am building a, let's say, 200 ton per day facility and I'm doing 50-50, right, I need 200 tons of separation and then I need 120 tons to allow for variability of cotton processing or cellulose processing and 120 of polyester processing processing and 120 of polyester processing. If I am going to run my facility at 100% polyester or 100% cotton, the technology can handle it, but it would mean I would need to build a 200 separation unit, a 200 cellulose unit and a 200 polyester unit, and so I'd just be over building my facility.

Luke:

Okay so I want to build my facility with some flexibility, but not pure flexibility, otherwise my capex would just go through the roof right, yeah, that makes sense.

Carl:

We we touched upon regulation before as an you know, incentivation for, for textile recycling and to make it also economically viable. There's so much happening in all the different industries. When you look at Asia, when you look at Europe, with the Green Deal, now in the US, with California implementing the first EPR scheme, you are, you know, an American headquartered company and, as rumors has it, you you are building your first, you know, large scale plant outside the U S like. Can you, you know, talk a little bit about how you see the different markets and the dynamics and how you see the markets in general?

Luke:

So we did not look at us first, because the incentives, the regulatory environment, the support lags behind europe and even parts of asia. So the us is a giant and when it wakes up it can move pretty quickly. But where we see the most interest for our technology and the most support is in two areas From a regulatory standpoint and from an incentive standpoint and direct support. Europe definitely is the strongest. And you look at countries, I mean you look at France, you talk about EPR schemes. You look at countries, I mean you look at France, you talk about EPR schemes.

Carl:

France has had an EPR scheme for textiles since 2012?

Luke:

Something like that like 28 or something, yeah, yeah, or 2008,. It's like you're like wait what? And now California is announcing that they're going to be putting one in place. These guys have had one in place for well over a decade, so it just gives you a different viewpoint in how people look at these things and the level of support.

Luke:

In Asia, you have most of the supply chain and they're going to be the people who have to deliver on the circularity commitments and regulations of Europe and of America. So if they want to avoid being locked out of those markets because these actually act in some way as a slightly protectionist sort of ring fencing of those areas, they need to be able to install this capacity as well. So when we were looking at locations, we look in both Europe and in Southeast Asia, where 60% of the world's textiles are produced in a very small zone. Ultimately, regardless of where the first one is and we we do have a primary site that we are looking at, and you know we have some backup sites as well regardless of where the first one is, we're going to need to deploy these rapidly and globally.

Luke:

Textiles are a global problem and they may have slightly different focuses, like some regions will be more poly rich, some will be more cotton rich. Some will be very much focused on the post-industrial scrap, because there's a lot of underutilized post-industrial scrap out there that's going into downcycling markets or low-value markets because there's nothing else to do with them. Or there is the post-consumer, which is going to be the focus of somewhere like Europe and the US, where huge amounts of waste because you've got much higher consumption rates, less production, but that stuff is just building up and building up and building up. I mean, in some major US cities textiles are the largest proportion by weight of their landfills.

Luke:

How important for textile recycling is the EPR scheme, regardless of the country. So EPR and more broadly the regulation what does it do? Any new technology is going to have to climb down the cost curve and what I mean by that is when you first build these facilities. They're not going to be as efficient and as optimized as the entrenched players. I mean Polyester, viscose. They've had 100 years to get as optimized as possible. Cotton's had several thousand years to get optimized and we've done most of that optimization probably in the last 200 years. I mean, optimization of cotton was one of the things that drove the industrial revolution revolution. So if we look at it from that perspective, what regulation does is it helps rebalance those incentives.

Luke:

So the EPR schemes could be used, for example, to help supply capital to first-of-kind facilities to reduce the risk and bring in private investors. So essentially incentivize private investors to take on the risk profile of CapEx heavy hard tech. It can also be used in the beginning to offset costs of sorting and grading feedstock. So you reduce the cost of feedstock because right now the systems are immature in that space as well. So a lot more stuff that gets hand-sorted to see whether it's waste or hand-classified and that makes it expensive, or hand classified, and that makes it expensive.

Luke:

So EPR can be used to create a specific tax pool effectively, because it is a tax on the polluting industry, paid by the polluting industry to help clean up the problem. And that could be paying for infrastructure, reducing operating expenses in the beginning and allowing the breathing space for these technologies to get established and to start optimizing and optimizing and optimizing so that we can bring the cost down. If this wasn't in place, we wouldn't have solar, we wouldn't have electric vehicles. Right, there are so many clean technologies, there are so many technologies where we have put them in place, and they've only been successful because of these sorts of incentives.

Carl:

And how can we incentivize? Because I mean currently in so many countries throughout Europe we are creating EPR schemes and think of blueprints. How can it look like? As you mentioned, france already has it for a while, the Netherlands now also at the forefront. In Germany, we are currently developing one, and I myself am involved from the regulatory side and try to give my input on national level, but also in Brussels. I'm currently running a project with our non-profit initiative, circular republic, about how to implement an epr scheme on a voluntary basis already with certain brands, as other countries have done it as well.

Carl:

What I hear there is the first reaction from brands is we, we want that. You know it's a like let's put the producers at the forefront and they should have an impact on how the EPR scheme should look like, and not so much on the recycler side and all the recycling companies that they should decide and they get. They get rich by, you know, us producing. So there's always this bias. How can we make sure? Because there have been EPR schemes in other industries right, packaging, etc. And I think we should learn from them, because they are not all of them are great, to be quite frank. So what do you think like what is really important in setting up an EPR scheme?

Luke:

So, before we get into EPR, some of the things that you could do to make this more attractive. There are tariffs around the world on things like synthetic materials and all these things. What if you created an incentive for people to use recycled content Not just the stick, but a carrot as well? So put in a recycled content mandate, but potentially put in, you know, reduced tariffs for things that are circular materials, right? So create ease of flow. Then there are things like in Europe there's the end of waste criteria, where it's like where do you deem things to no longer be waste so you don't make recyclers, once they've recycled something, still have a product that is deemed as waste, and so they have to be waste handlers, even though they're shipping standard industrial chemicals. How do you basically take friction out of the system? Make it easy. I had to laugh at your comment about enriching recyclers.

Luke:

My view as to what you should be doing with EPRs right is build up those funds and deploy them as guarantee funds and at-risk capital Right, so that you this transformation is going to take a lot of capex, and the type of capex does not fit in the comfortable bucket for most venture capital funds. It falls outside of their required return profiles. They're all used to soft tech. They're not comfortable in the space, right. So there's a need to attract outside capital to the space Once you already have that first project up and running. There is a long line of people who want to be first, to be second. Right, there's a lot of capital that's waiting from established funds that want to go into circularity, but their risk profile is where they can only do the second, third, fourth, fifth, sixth facility. Right.

Luke:

What EPR schemes can do is change the economics of the first facility such that it's attractive enough to attract the capital that we need for those facilities. We have technologies out there that have been working for you know, some of us have been in this building our technologies for a decade. Right, we're doing the engineering. We're ready to scale Plow resources into those. Make those super investable. Make those super investable. Your downside is those early investors who are taking heavy risk might actually make a good financial return on those. So what? This is the unlock for the industry. Get one factory built of all of these. Get it running and optimized Right. Take a look at RenuCell now Circulus. They built the facility but they didn't have the resources to actually run it and optimize it. Your EPR scheme could have been supporting them till they got through that optimization phase.

Carl:

Give them some additional support and they may not have actually failed right and I mean a lot, of, a lot of rumors out there why renew cell in the end failed, right, like also with h&m pulling out, um, but yeah, it's a good point the.

Luke:

The point is, if you don't get the first facilities built, the next 20 don't get built totally.

Carl:

And I mean you mentioned before epr scheme. In the end it's a taxation system, right, and I had a, let's say, a conversation with a provocative thought the other day where somebody told me we have to think way bigger than in just another EPR scheme. We actually have to rethink the whole tax system and I don't want to go too much into detail now because I think that's also not the scope of our conversation today, but I thought that was an interesting point of view with the whole x-tax project right, like putting taxes on natural resources and pollution more than on on um or and lowering taxes on workforce, basically as a big idea of you know seeing where the money goes. What's your take on that?

Luke:

I think currently we, without some of those taxes and without some of those structures in place, we are not recognizing the true cost of what we are doing.

Luke:

Cost of what we are doing. I think when you look at oil extraction, for example, right, and they look at how much it costs to pull a barrel of oil out of the ground pulling the oil out of the ground is not the cost of a barrel of oil we forget that we are desequestering carbon. This is long-stored, deeply sequestered carbon that we are pulling out of sequestration and releasing into circulation and we are not recognizing that cost at all. And so if we look at any of those components, right, until we start pricing in for some of those externalities and the damage that we're seeing, you know, we won't see fundamental change. So rethinking the system and how we price goods is important. I think the other thing that's in some ways more structural that we need to address more than taxation is we need to have a mind shift. We need to work very constructively on changing the mindset of people to valuing the goods that they actually buy. Yeah, but I think you're right.

Carl:

There could be having a higher taxation on carbon carbon tax, for example, but also with the whole idea of X-Tax. What I think is appealing is that products become more expensive, that's true, but also people will have more money because taxes on work and so on labor will go down, which would then eventually and now this is not only about recycling, this is about circularity in general. So, for example, about reuse models, repair who repairs nowadays anything you know. It's so much cheaper to just go on amazon and buy. When it comes to a pair of shoes, when you, when you, you know go to a shoemaker and ask for a new sole, it's like you. You leave 60, 70 bucks and you can just buy a new pair of shoes and not even used ones. You just find them on sale, or you just go to H&M. And the same is with electronic devices and in all the other industries. So I think there's a general problem in how cheap products are, and I think the taxation system could work there as well.

Luke:

But it's not just how cheap they are, it's how we view them as disposable. The idea that clothes are something that you use and dispose of. That's only been the last 50 years. Go and ask people who were alive 50 years ago, you know like. Go ask 70 year olds how many items of clothing they had in their closet 50 years ago. You know it's and you would look after those clothes right In and you would look after those clothes right In the US you have Halloween is a huge holiday. Right. Everyone goes out and buys a cheap, disposable Halloween item that gets used once, once, one night of the year and then discarded because you don't want to wear the next year again exactly, yeah, what are we going to be this year?

Carl:

right or ugly christmas sweaters ugly christmas sweaters.

Luke:

Well, ugly christmas sweaters you can somewhat reuse, you could, but we have been trained to consume, consume, consume, right. We need to teach our kids to resist that training. As a parent with young kids it's incredibly difficult. But changing people's views towards products, because this is where we get back to the what does circularity mean, right, and how do we ensure a circular system?

Carl:

I should be the last line of defense, right, not a license to consume Absolutely right, and we already talked about it once, and before we wrap up, I would like to talk with you about this as well, because you have also the perspectives of the US and of Europe, when we don't only talk about recycling or recycling is only as you mentioned now as well one part of circular economy. Talk about recycling or recycling is only as you mentioned now as well, one part of circular economy, and the reason why I like circular economy it is it is because it is a business model, right, and that allows us to decouple growth from volume as well, which, for example, reuse models are great for, and and the more I'm, you know, working on that, and I had a big project, a re-commerce project in in germany, together with an american company, uh, gore-tex, and so so what we found is obviously you, you have to incentivize people to sell their products, you have to incentivize people to buy second-hand products, but they're, you know, like product identification. There's so many reasons why recommerce is still not not there where it could be or should be a lot of inefficiencies and product identification, repair, etc. But what I hear as well is, first of all, one thing is first of all, where are all the goods like, especially high-end products like gore tax jackets? Where are they? Because they are sold every year in millions. Nobody seems to throw them away. They don't appear in landfill, but at the same time people also don't sell them, so they must be probably stored in the cellar of each of us.

Carl:

But how different is the American second-hand market versus in Germany or Europe or other markets that you are aware of Because the US, with Patagonia and On Running secondhand market versus in germany or europe or other markets that you're aware of because the us, with patagonia and on running, they have rather successful models of re-commerce stores in the us. But at the same time, what I hear is that the demand for secondhand in the us is so much lower that actually doesn't even make sense to sell in the us, whereas in europe actually we have a quite a high demand for for good second-hand products. What is your view on this?

Luke:

I think reuse and second-hand is becoming much bigger a thing in the us. But it's difficult to at the low end of the market, justify second hand when the new is cheaper than the second. Hat, like, if you, if you could just hop on sheen or temu and you know it's cheaper to buy new underwear than to wash it. You know it's like you. You tend to create these weird skews in this sort of thing. You know, in good gear there is actually a relatively good secondhand market and you know that that's pretty popular. But actually a lot of that stuff that you're talking about also goes into what's called the tropical sort, and that is because a lot of secondhand clothing tends to go and be sent to the global south. You know, when you send a bale of clothing or you send a container of clothing to Accra, no one wants snow gear. And so what happens Before? When textile sorters are doing this, they take a lot of that stuff out and that's the first stuff that gets disposed of. Right, because it's impossible to go to mechanical recycling because it's contains loads of stuff. If it's not suitable for resale in that local market, that is the stuff that goes to incineration. Right, that is the stuff that actually goes to landfill, that gets dumped.

Luke:

Ironically, this has come a bit full circle for me, because my family used to import secondhand clothing into South Africa way back when in the early 90s. And yeah, I mean the thing is there were certain things that were that they would sell, but you really didn't want to see that skiing stuff, and so that would actually be something where you would. You would potentially change suppliers of your containers rather than, you know, go to one who's going to shift you, ship you that stuff. So a lot of that gore-teex and those sorts of things are actually designed for other climates than where most of this material moves to ultimately. So when the Gore-Tex stuff, you know, or the snow gear stuff, ends up in Accra, ends up in Chile, ends up in Kenya, it tends to.

Luke:

That's the stuff that tends to get dumped somewhere. Right, it's lower volume than a lot of the mass market stuff, which is why it doesn't seem as prevalent, right, but it does get dumped. But I mean you, you know, you can, courtesy of patagonia, courtesy of Nerona, courtesy of some of these companies, they have really high-end gear. So if you're willing to do secondhand, then you can get it, but also a lot of the people have this perception. The people who have the money to spend on a $500 ski jacket right have a perception that it needs to be new, that new is better than secondhand. But you know, I mean they don't think of the fact that the new one was probably $1,200 from like the doctor from Norona and $500 is a substantial discount. It is the people that are buying secondhand aren't necessarily in the 500 category yeah, right, that's a.

Carl:

That's a really good point. That's them probably more a mindset of, especially the younger generation where we're secondhand. Uh, it's becoming way more popular as well.

Luke:

I actually spoke to someone who said this to me at a textile conference. He said if I bought something from my wife and told her it had recycled stuff in it, she'd be horrified. If I told my kid it didn't have recycled content in it, they'd be horrified.

Carl:

Well, that wraps it up. Uh, probably, pretty, pretty nicely. Before we wrap up, I have I have a last question what? What is your take? Where do we stand in five years from now, which is already 2030, and what's your vision like you must be clearly pretty optimistic working in in the circular textile space, what's your take? Where do we stand in five years and beyond? How is the situation? How's the market going to look like when it comes to circularity in the textile space?

Luke:

That depends. I think we are very much at a crossroads now. If we can't get sufficient support via regulation and from the industry, the first facilities will not be built, which means the subsequent facilities will not be built and we will be stuck in stasis and circularity will not happen. And so so by 2030, we'll be throwing up our hands and going, oh, this isn't working. Or and this is why I still do what I do is I am optimistic that we will see that support coming from industry.

Luke:

We are seeing the regulations, and so what will happen is, by 2030, those first facilities will be built and operating and optimizing, and the second facilities, third facilities, will be in construction. It's way slower than the industry needs, but that's the more realistic view than, oh, we're going to drop down. You know, 20 plants at a time. It will accelerate very rapidly from there, which is exactly what happened with paper recycling in the in the late 80s and 90s. Right, yeah, it can move very fast once it's established, but I think by 2030 five years time will be, if the support comes in, those first facilities get, get built. We will be at that next inflection point, which will be rapid deployment of capital to roll these facilities out globally.

Carl:

Luke, thank you so much for your time. It's been a great conversation and really thank you, and I'm really excited to continue seeing what you guys are doing with Circ, and all the best of luck to you guys.

Luke:

Thanks, Carl.