Europe | A review of three key environmental tax changes to take place in 2023

• Three key environmental tax changes are in the pipeline for 2023 in Europe. They include: (i) updated extended producer responsibility regulations for packaging in the United Kingdom; (ii) a new plastic packaging tax in Spain; and (iii) the European Union Carbon Border Adjustment Mechanism.

• Businesses should consider the impact of these measures now and may need to take action in the short term to comply with their obligations.

United Kingdom (UK) updated Extended Producer Responsibility (EPR) regulations for packaging

Effective date: Expected 28 February 2023

Scope

The provisions apply to individual businesses, subsidiaries or groups with annual turnover of more than £1 million and responsible for handling or supplying over 25 tons of packaging in a calendar year. 

As a response to increased calls to reform the regime and to incentivize producers to take more responsibility for the materials and the products they place on the market, the UK will implement an extended version of the EPR scheme for packaging from 2023. The UK’s current EPR system does not cover the full costs of disposing of packaging waste and the aim of the new scheme is to reduce packaging waste, increase re-use and recycling of packaging. 

At the end of November 2022, the draft UK EPR statutory instrument was laid before Parliament for approval. The regulations set out data collection and reporting requirements on the amount and type of packaging placed on the market by UK organizations. These regulations will require producers and handlers of packaging made up of any material to collect and report their packaging data from March 2023. This data will be used to calculate the EPR fees applicable from 2024 (date to be confirmed), with additional obligations such as modulated fees based on recyclability and label requirements expected to be introduced from 2025 onwards.

Implications

The updated UK EPR legislation is expected to result in increased operational costs and compliance obligations that will require companies to implement new, or strengthen and standardize existing data processes, to comply with implementation timelines as well as identify and ensure clear responsibility and accountability is assigned between different functions and stakeholders within the organisation.

Introduction of Plastic Packaging Tax (PPT) regime in Spain

Effective date: 1 January 2023

Scope

PPT applies to most industrial and consumer products businesses that manufacture, import or acquire intra-community non-reusable plastic packaging for its final use within the Spanish market. 

The Spanish legislature has approved a new tax on non-reusable plastic packaging, which will take effect as of 1 January 2023. The PPT has a very broad scope, tax rate of €0.45 per kg of non-recycled plastic packaging. For the taxpayers and other participants in the supply chain, the main formal obligations will include filing of periodic plastic tax returns, custom declarations, registration, record keeping, alongside various accounting obligations. 

Implications

There are a number of significant differences compared to the PPT already in force since 1 April 2022 in the UK. For example, the Spanish PPT covers both transactions of (empty) packaging materials itself and packaged products, and is applicable to primary, secondary and tertiary packaging.

The upcoming Spanish PPT will require a separate assessment to be undertaken by companies with a physical footprint in Spain to attest to the impact of the new regime on costs and operations and that the company is compliant with the reporting obligations that are due to start from 1 January 2023. For details, see the latest EY Global Tax Alert here.

European Union (EU) Carbon Border Adjustment Mechanism (CBAM)

Effective date: 1 October 2023

Scope

The CBAM applies to companies importing in-scope goods into the EU, i.e., cement, electricity, iron and steel, aluminium, hydrogen and some downstream products.

A critical element of the EU “Fit for 55” package is the introduction of a new CBAM. The CBAM looks to address “carbon leakage” issues resulting from existing carbon pricing regimes in place by applying a carbon price on certain goods imported into the EU.

CBAM reporting and charges will be based on “embedded emissions,” which are essentially greenhouse gas (GHG) emissions occurring during manufacture. Charges are paid through the purchase and surrender of CBAM certificates, and the price of a certificate is expected to be equivalent to an EU allowance (one ton of emissions) under the EU Emission Trading System (EU ETS).

The latest press release from the European Parliament confirms three key facts for CBAM preparations:

1. The regime will apply from 1 October 2023, with a transition period (free allocation phase-out period yet to agreed)

2. The scope will be extended to hydrogen and some downstream products, but will initially not include polymers and organic chemicals

3. Some indirect emissions will need to be reported

You can find the press release here and the EY Global Tax Alert here.

The legislation is expected in January 2023.

Implications

To date, only intensive Scope 1 emitters (i.e., businesses with substantive direct GHG emissions) and businesses voluntarily participating in ETS markets have been required to comply with carbon pricing regimes. The CBAM means businesses across a range of industry sectors will now need to consider impacts of the regime on their operating costs and compliance activities, which will require new internal responsibilities and skills.

For additional information with respect to this Alert, please contact the following:

UK ETS

• Danny Vu, London

Spanish PPT

• Pedro Gonzalez-Gaggero, Sevilla
• Ángel Pascual, Madrid
• Hugo González, Madrid
• Julián Illanes, Madrid
• Íñigo Hernández, Barcelona

Carbon Border Adjustment Mechanism

• Richard J. Albert, Leipzig
• Alwyn Hopkins, London
• Derek Leith, Aberdeen
• Kasia Klaczynska-Lewis, Warsaw
• Slawomir Czajka, Warsaw
• Ashish Sinha, Zurich
• Aron Nagy, Budapest
• Franky de Pril, Diegem
• Gert van Telgen, Amsterdam
• Milen Raikov, Sofia
• Alessandra di Salvo, Rome
• Pedro Gonzalez-gaggero Prieto-carreño, Madrid
• Marguerite Trzaska, Paris
• Zoran Dimoski, Stockholm
• Martijn Schippers, Rotterdam
• Ilona van den Eijnde, New York

Emission Trading System

• Kasia Klaczynska-Lewis, Warsaw
• Dariusz Kryczka, Warsaw
• Sebastian Helmes, Berlin
• Eric-Holger Glattfeld, Berlin

EMEIA Sustainability Tax Services

• Alenka Turnsek, London
• Ana Fallas Conejo, Amsterdam
• Maike Moore, Berlin

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.