As a measure of the perceived importance of this levy, note how quickly it was passed. “Recent EU regulation and policy on plastics came into force much faster than any other regulation and policy I’ve seen before in the EU,” says Edward Sims, Climate Change and Sustainability Services Senior Manager at EY Godkendt Revisionspartnerselskab in Denmark. “Normally, new EU rules and policies take several years to pass. Recent EU plastics regulation and policy happened comparatively quickly.”
Similar measures are heading for the UK and the US, for example, where California is considering a tax on single-use plastic sold in the state, at a maximum of one cent per item, to be introduced in 2022. Comments accompanying the new UK tax again signify the use of tax policy as a way to drive new behaviors. Andy Bradford, Indirect Tax Executive Director, Ernst & Young LLP (UK), says, “The UK Government has explained that the Plastic Packaging Tax aims to encourage the use of recycled plastic, rather than new plastic, within plastic packaging. It is hoped that this, in turn, will stimulate increased levels of recycling and the collection of plastic waste, diverting plastic away from landfill or incineration.”
Tax functions across the board face a complex task to comply with a growing labyrinth of laws. The new plastic taxes in Italy, Spain and the UK are only the tip of the iceberg in Europe. Indeed, Poland and Sweden have announced they will implement new legislation soon. Soft drinks trade body Union of European Beverages Associations (UNESDA) claims that the EU’s plastics levy would cost producers at least an extra €7.7 billion a year, if passed on to the packaging value chain.7
Dealing with a lack of clarity
Yet the cost to those ultimately liable for paying the taxes is unclear, and will vary from country to country, as each makes decisions about their own sovereign tax system. Under the UK’s proposals, those liable include plastic packaging producers, importers, business customers of producers and consumers. The rules may be different in another jurisdiction.
“It’s going to be important where the tax is charged, what it is charged on and who bears the ultimate costs,” says Turnsek. “Is it charged to the plastic converter? Is it charged to the manufacturing brand that uses the plastic packaging? Is secondary and tertiary packaging in scope of plastic taxes as well? If there’s a levy charged on plastics, the price of certain products might need to go up. Does the producer absorb that cost or is it passed to the consumer?”
Another question is understanding where in the organization the tax “sits.” Bradford says, “How will the liable plastic be identified and who will be responsible for calculating the tax due? In some cases, systems may be able to be configured to identify plastic use and the values for tax purposes. However, the necessary changes need to be considered now and stakeholders engaged.” While 2022 may seem a while away, preparation is key.
Unsurprisingly, the EU’s plastics levy has come under fire from the plastics industry, which has argued that such taxes risk imposing a larger economic burden on less wealthy countries. A statement responding to the EU’s plastics levy from UNESDA — signed by companies in the packaging value chain — says the levy would “penalise those countries that are less well-equipped with recycling infrastructure.”8
“Plastic taxes should be viewed as a policy lever to be pulled by governments to further stimulate circularity in plastics and packaging in Europe and across the world,” says Sims.
Indeed, these new targets don’t merely equate to a rise in costs and operational headaches for businesses. The prospect of a plastics-heavy supply chain becoming more expensive is driving businesses to collaborate with industry partners to explore new ways of manufacturing packaging so that it includes less plastic.
There are some upsides for businesses. First, there is the chance to appeal to consumers and investors by displaying a bold and decisive approach to environmental, social and corporate governance (ESG) policy.
Then there’s the opportunity to benefit from a vast range of economic incentives being offered by governments, as another key tool to drive businesses to innovate new production habits.
In 2018, for example, the United Nations Environment Programme (UNEP) laid out a recommended roadmap to sustainability, centered on single-use plastics. It included suggesting economic incentives — such as tax rebates — to encourage the use of environmentally friendly alternatives and support the transition.
Meanwhile, extended producer responsibilities (EPR) is a policy measure which encourages producers of plastic to improve design. This incentivizes recycling by giving the producer responsibility for the cost of waste past the point of the consumer,9 encouraging businesses to improve design for recycling and reduce waste generation through the financing of the waste collection and recycling system.
The UK plans to update the EPR system for packaging in 2023, having previously implemented a first system for producer responsibility in 1997. Its Department for Environment Food and Rural Affairs (DEFRA) said the existing system had helped increase the recycling of packaging waste to 63.9% in 2017, up from a quarter 20 years earlier.10
“Economic incentives will certainly have their effect,” says Toon Borghgraef, EY Climate Change and Sustainability Services Manager at EY Assurance Services BV for Belgium. “As the responsibility for plastic packaging is increasingly passed back to businesses, they will look to produce less plastic waste.”
As stated, innovation will become increasingly important to businesses grappling with the changes — as they explore new ways to produce plastic, and thus avoid the levy.
“Brands are really thinking about this,” says Sims. “How can they boost their recycled content? A lot of the focus is on consumer packaging and consumer-facing plastics, but there are lots of industrial plastics, too. So, this plastic levy is focusing on minds right now.”
While such incentives can help producers in the short term to transition to a circular economy, one natural question is what happens to those new habits and directions once the incentive period comes to its inevitable end. Here, says Sims, it’s essential to “have an economic as well as an environmental rationale behind it,” so the process remains viable for businesses once those incentives are removed.
The way forward
COVID-19 has left businesses in a state of flux. The majority have been forced to rethink their supply chains, operating models and risk exposure in the wake of the pandemic and the long-term consumer trends it has accelerated. Forward-looking companies will use this as an opportunity to make their operations more sustainable. Given the need to continue to invest in technology and innovation to future-proof their operations anyway, the focus on sustainability offers one way forward.
Insights into intangible assets, including innovation and brand, enable investors to look beyond a company’s book value. A 2019 EY report on measuring long-term value found that, while in the past, 80% of a company’s market value could be read off the balance sheet, that had fallen to just under half at the time of publication.11
As the focus on sustainability grows, businesses can expect the introduction of more plastics incentives, taxes and other measures globally. In five to 10 years’ time, sustainability will be essential to business, against a backdrop of other environmental measures, such as those aiming to reduce carbon emissions, and higher standards expected in ESG reporting.
Having a good overview of how the taxes and economic incentives will be implemented from country to country will be vital. It is worth noting that some countries already have plastic and packaging taxes in place. “The EU levy requires financing and existing plastic taxes may be reviewed and potentially adjusted,” remarks Turnsek, “As more countries are likely to introduce plastic packaging taxes, for financing and behavioral changing purposes, a full and up-to-date picture of the plastic packaging taxes landscape will be vital.” Teams will need to quantify the potential impacts of the new rules on the business, embed this information in their systems to ensure reporting and costing models are accurate, and adjust pricing accordingly.
Large corporates may well be able to more easily adapt to the rules, while small to medium-sized enterprises with fewer dedicated tax professionals can expect a more challenging transition.
A well-formed department will have the expertise and technology in place to help navigate the business through the complex plastics maze.
“The best preparation is to develop a sustainable packaging strategy,” says Borghgraef. “One that incorporates the legislative drive but aligns with corporate ambitions.”