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Background
Recently the European Council, as part of the COVID-19 recovery
package, adopted a proposal to levy a plastic tax with effect from
1 January 2021. A new revenue stream is proposed to be mobilized
through new taxes on plastics and is embedded in the EU's long-term
budget (2021-27) or Multiannual Financial Framework (MFF)
account.
The Proposal
The levy will be composed of a share of revenues from national
contributions calculated on the weight of nonrecycled plastic
packaging waste with an effective rate of €0.80 per kilogram,
effective 1 January 2021. The proceeds from the tax will be used to
support the general EU budget but shall not be used as a repayment
mechanism for EU borrowings, especially at international financial
markets. Although the EU plastic levy proposal does not envisage
recovery in the form of national taxation, the payments will come
from the national budgets and Member States will likely (not
obligatory) use this opportunity to create equivalent plastic
levies at national markets to recoup the costs of their
contributions to the EU budget. Member States have already
initiated different national tax projects according to local
situations: e.g., Finland (packaging made from nonrenewable natural
resources), Italy (single-use plastics except compostable or
recycled plastic), Lithuania (composite plastic), Spain
(nonreusable plastic packaging), Slovenia (composites and plastic
coated paper), and the UK, which will soon exit the EU (plastic
packaging that does not contain at least 30% recycled plastic). The
levy will be paid annually by each Member State. It will create a
new burden for manufacturers placing packaged goods on the market,
because it will be based on the amount in weight of plastic placed
on the market/waste generated, and not on the plastic waste
recycled. As a result of earlier negotiations, countries with a per
capita gross national income below the EU average will be eligible
for a rebate. The amount paid to the EU on this basis amounts to
€6.6 billion annually, minus the rebates to various countries
estimated at €700 million to €800 million.
What is Unclear
There are some open questions regarding the tax proposal and
implementation mechanism. First, the tax is set to be imposed on
the countries, and not on the polluters or the consumer packaging
companies. The onus of recouping the tax amount already paid to the
EU treasury is left to individual countries. So technically, each
country can devise its own scheme to pass the cost on to the
packaging companies while some might even absorb the cost and
recover in some other manner. Since weaker countries are exempt,
which will create an asymmetry in terms of the levy across Europe,
and if each country devises its own mechanism to recover the cost
of the plastic tax, then it will lead to fragmentation of the EU
market and work against the single-market concept. Moreover, if a
set of countries imposes the tax while others do not, then there is
a chance of migration of packaging companies or part of their
activities to countries with less tax burden. Another big topic
that is unclear is the methodology of determining the unrecycled
quantity. The resource mobilization target of €6.6 billion (less
€700-800 million) is derived from the Eurostat reported recycling
rate of 42% (thus, the unrecycled rate of 58% or 7.5 million metric
tons), which is based on the directive 94/62/EC, which measures
recycling at gross level or post sorting stage. The old directive
has been superseded by the new directive issued in 2018, which
measures recycling at the input level to the recyclers. Under the
new directive, the recycling rate is much lower at around 30%. In
fact, if all the provisions of the new directive are applied, then
the recycling rate will fall further to around 25-30%, raising the
unrecycled rate to 70-75% or even more. It is not clear yet when
this new methodology of computation will be implemented, but when
it eventually is, the tax burden will increase on countries, and by
extension, on the packaging companies.
Effect on circularity
As we know, EU policymakers want to transform the European plastic
economy from a linear one to a circular one by 2030. This
transition is expected to be accomplished by raising the recycling
rate, converting plastic waste into secondary raw material, and
making packaging reusable and recyclable. This approach will
require significant resource allocation in terms of building
recycling and sorting infrastructure, changing standards, and
improving design principles. The plastic tax is aimed at imposing
penalties for not recycling; however, the fund accrued will be
spent in bridging the EU budget, rather than building resources
needed to achieve circularity. The target is to raise the cost of
packaging to such a level that it acts as a disincentive and
triggers product and design switches to products that are
considered more environmentally friendly from a circularity
perspective.
Effect on Polyolefins
As the EU plastic tax implementation profile is evolving, it is
challenging to forecast the impact it is likely to have on the
plastic market in general and polyolefin market in particular.
Therefore, we have made some assumptions about the arc the EU
plastic tax proposal is likely to take in order to write this
section. Firstly, the onus of cascading the tax to plastic
packaging companies is left to the individual countries. It is
unclear if and how the countries will pass along the tax. Since the
tax burden is not uniform across the countries and some countries
may get concessions, it is uncertain whether the various countries
will develop similar mechanisms and levy charges on the packaging
companies. In addition, it is not yet known how the countries will
evaluate the recycling rate and how soon the methodology will
reflect the new directive announced a couple of years ago. It is
important to define this methodology, as it will raise the
"unrecycled" plastic packaging evaluation significantly. For
simplicity, we have assumed that the tax will be cascaded uniformly
to the packaging companies across the countries. The rationale
driving this assumption is that EU partners are unlikely to breach
the single-market principle and may not want to complicate the
situation by having multiple regimes on this front.
Therefore, it is assumed that the plastic packaging companies will
pay an equivalent of €800 per metric ton on the unrecycled part of
their packaging starting in 2021. Considering the 58% unrecycled
packaging waste being reported by Eurostat, the cost of packaging
would rise significantly, estimated to be between 20% and 60%. The
cost of packaging as a percentage of cash cost varies from product
to product and ranges between 1% to 10% depending on the product
being packed. Considering the above, inflation in cost, and a
median cost percentage of packaging in the total cash cost of the
final product, the cost inflation of the latter could be between 3%
and 8%, which is very high and something that the consumers are
unlikely to accept. This scenario will leave the packaging
companies with limited choices, as absorbing the cost is not
tenable because this will erode their bottom line. So, the possible
outcome would be as follows:
Wherever possible and assuming the alternate is economically
viable, the packaging companies are likely to shift to nonplastic
material such as wood, paper, cotton, or metal. Under the
Single-Use Plastic directive, EU policymakers have already charted
a course for replacing 10 plastic articles of daily use gradually
by 2025. This process will accelerate, owing to the plastic tax.
The overall market impact could be as high as 2-3% of demand by
2025.
Use of more recyclable packaging material will be in vogue. For
example, complex multilayer/multimaterial design options will make
way for simpler monomaterial solutions. This might be good news for
polyethylene (PE) as different variants of PE have features
affecting printing and barrier and sealing layers in a substrate.
The total displacement could be as high 2% of PE packaging demand
growth in nonfood- and food-packaging sectors in the multilayer
film sector. However, this transition will not be easily
accomplished as other materials are quite well entrenched and are
likely to fight back on the technical side, especially for critical
applications, as all-PE structures are not very popular across all
formats.
We will see recycling content rise significantly along with the
recycling rate. Although the tax itself will not build recycling
infrastructure, raising the cost of overall packaging will provide
more incentive to recyclers. Post-consumer recyclates will see
their market expand and margins dramatically improve. This would
mean that their reinvestment economics will improve significantly,
which will open the way for capital investment. Both the mechanical
and chemical recycling spaces will see better return prospects,
which will stimulate innovation and expansion.
Imported plastic packaging will also be under the ambit of the
plastic tax, and therefore plastics that are coming in as
components, semifinished products, or as finished units are likely
to be affected in terms of design requirements from a recyclability
perspective.
Overall, the plastic tax will redefine the plastic business in
Europe, although much ground needs to be covered before the outcome
of the tax becomes clear. There is no doubt that the tax will be
rolled out, and therefore the industry needs to proactively process
the various scenarios delineated above to assess the impact on
their business profile.
IHS Markit offers a long-term outlook on supply and demand
globally and on a country level, along with a live capacity
database and trade flow analysis on a country-to-country basis in
our
World Analysis (WA) service. In addition, the WA now also
provides 10-year price and margin quarterly updates for North
America, West Europe, and Asia.
Posted 24 September 2020 by Kaushik Mitra, Executive Director, Polyolefin, EMEA, IHS Markit