Sustainability Taxation Snapshot

Do you have full visibility on the impact that Irish and Global Environmental Taxes have on your business? Our first Sustainability Taxation Snapshot will provide some insights on Plastics and Carbon tax legislative and policy issues facing businesses across Ireland.

Plastic packaging regulations: Impacts, Challenges and Solutions

Existing and new European Union (“EU”) regulations will transform the way that plastic packaging is produced, used and recycled across the EU. These EU regulations are in the process of being transposed into national requirements across the entire EU. They will require both producers and users of plastic packaging to adapt their businesses.

Plastics policies impact nearly all sectors, especially packaging and consumer goods. How will plastics policies impact your operations?

Overview of the EU plastics policy

EU Plastics Levy

Additional fees?

From 1 January 2021, EU Member States will pay €0.80 for every kilogram of non-recyclable plastic packaging placed on their market. This tax supplements the EU's own revenue and will be paid by EU Member States, based on the amount of non-recyclable plastic packaging waste in each country. Thus, Member States are free to decide how to implement it, and while some States may decide to pay the contribution to the EU from their national budget, it is likely that many will impose a new form of taxation on plastic packaging products, which will lead to different regimes across the EU.

In Belgium it is anticipated that levy costs will be passed to producers and users of plastic packaging via increased Extended Producer Responsibility (“EPR”) compliance obligations. Italy will introduce their recently-delayed non-reusable plastics tax with effect from January 2022 by taxing those who produce or buy plastic from other European countries or import single-use plastic items, known as ‘Macsi‘, at 45 cents per kilogram of plastic product. Spain has set forth an almost identical draft bill for implementation which will impose a 45c/per kilo tax on the manufacture, importation or intra-community acquisition of non-reusable plastic packaging for its final use within the Spanish market however, this similarly has been delayed until early 2022.

With effect from 1st April 2022, the UK will also introduce a new plastic packaging tax which will apply to plastic packaging manufactured in, or imported into the UK, that does not contain at least 30% recycled plastic. This tax will be charged to businesses at £200 per tonne however, the tax will not be charged where less than 10 tonnes of plastic packaging are manufactured and/or imported by a business annually. Legislation will be introduced in Finance Bill 2021 and is estimated to raise approx. £235 million for the UK Exchequer in its first year of operation.

There are several implementation options, such as for the tax to be borne by the producers of plastic packaging or by companies whose products are packaged in plastic or by companies which sell consumer products.

Several uncertainties remain about this tax, but we expect that any new measures will affect many companies, such as those in the retail and consumer goods sector, manufacturers of plastic packaging and other industries that use plastic packaging while there is also potential for this tax to be passed onto consumers by businesses.

As yet, Ireland has not sought to implement a plastic packaging tax and has instead decided to pay the EU levy through other forms of taxation instead. However, with other EU States seeking to introduce similar taxes next year, a domestic plastic tax should be expected in the near future.

EU Single-Use Plastics Directive

Plastics ban?

The EU has adopted a Directive¹, commonly referred to as the Single Use Plastics (“SUP”) Directive, with the objectives to prevent and reduce the impact of certain plastic products on the environment, in particular the aquatic environment, and on human health, as well as to promote the transition to a circular economy. This SUP Directive requires a ban or limitation on the sale of certain SUP items on the EU market (e.g. cotton buds, straws, plates, cutlery, cigarette butts, etc.). Member States are required to incorporate this ban into national legislation from 3 July 2021.

Ireland will comply with the Directive by ensuring that certain SUP items will be banned from being placed on the Irish market from 3 July 2021². These SUP items include cotton bud sticks; cutlery; plates; stirrers; chopsticks; straws; expanded polystyrene single use food and beverage containers; and all oxo-degradable plastic products.

For plastics packaging with less widely available alternatives (e.g. food containers and cups for beverages), we list below at a high level, the bans and legislative requirements that will be put in place in Ireland over the next two to three years:

• By 5 January 2023, producers of packaging will, in addition to their existing EPR, be required to cover the costs of litter clean up; and
• By 5 January 2023, producers of tobacco products which contain plastic will be subject to the EPR scheme which ensures that producers maintain both a financial and physical responsibility for certain goods even in the post-consumer phase of their lifespan. Producers of balloons, wet wipes and fishing gear will also have to comply with the EPR scheme by 31 December 2024;
• From 3 July 2024 beverage containers (bottles, cartons) up to three litres in size will be banned from the Irish market, unless its cap is attached to the main part of the container.

The ‘Plastics ban’ has far reaching consequences for any business that produces SUP and/or uses SUP in its supply chain. As more developments and guidance are expected on the application of the SUP Directive it is important to keep abreast of any developments as the SUP Directive is introduced across the EU.

Extended Producer Responsibility (“EPR”) in the EU

Are you compliant?

As also referred to earlier the EPR is a practice and a policy approach in which producers take responsibility for the management of the disposal of products they produce once those products are designated as no longer useful by consumers. Every company that sells packaged products on the EU market has an obligation to take back its packaging waste, through EPR legislation. EPR legislation shifts the negative environmental externalities of waste packaging from taxpayers to producers, consistent with the “polluter pays principle.”

To address the problem of increasing waste, governments are turning to stricter EPR policies. This places more financial/physical responsibility on business for the collection, treatment and disposal of post-consumer products.

Ireland uses the EPR model for dealing with a number of waste streams and has developed six Producer Responsibility Initiatives, based on the ‘producer pays’ principle. These initiatives include packaging, batteries, waste electrical and electronical equipment (WEEE), end of life vehicles (ELVs) that contain hazardous materials, tyres and farm plastics i.e. silage wrap and bags. Under the model, producers are tasked with the responsibility to finance the collection and provide environmentally sound waste management for their products at end of life. The scheme spreads across multiple waste recycling areas including plastics, batteries, electrical waste and electronic equipment and end of life vehicles.

How will your business be impacted?

Businesses impacted by the EU SUP Directive and the EU plastics levy should assess how this complex plastics packaging legislative landscape may be applicable to them.

This includes carrying out an impact assessment of the EU plastics levy and the measures in the EU SUP Directive, as well as ensuring that their business is compliant with other requirements for packaging (notably, on EPR), as the rules evolve.

How can we help?

EY assists clients to navigate the complex plastics packaging legislative landscape as it evolves. This includes impact assessment of the EU plastics levy and the measures in the SUP Directive, as well as helping companies to ensure they are compliant with Irish and International EPR requirements for packaging.

Helping you navigate carbon taxes and business impacts

Reducing carbon emissions is an imperative for the EU and understanding the impact of carbon taxes on your business is essential. The carbon pricing landscape is constantly changing as pressure is rising from stakeholders to act now.

Setting an adequate price on carbon emissions can play a significant role in:

• Changing behaviour and incentivising environmentally friendly decision making.
• Mobilising technological advancements to generate carbon neutral growth.
• Driving reduction in carbon emissions.

What are the typical carbon tax policy instruments and how will they impact your business?

Carbon Tax

Carbon tax is calculated based on the amount of CO2 emissions released in the combustion of carbon-based fossil fuels, i.e. coal, oil, natural gas, etc. at a predetermined price per tonne of CO2 emissions. In Ireland the suppliers of fossil fuels are liable to pay the carbon tax who then pass the tax onto customers through increased prices.

The carbon tax was introduced in 2009 on petrol, diesel, oils and gas, and was extended to solid fuels (coal and peat) in 2013 and 2014. The rate per tonne of CO2 emissions was increased in the 2020 Finance Bill by €7.50 from €26 to €33.50 per tonne of CO2 emission and the Irish Government is aiming to increase the price of carbon tax to €100 per tonne of CO2 emissions by 2030.

The forecasted increases in the carbon tax rate planned for the next nine years will most likely become a financial burden, unless measures are put in place by organisations to reduce its carbon footprint by moving to more sustainable energy sources.

Just to name one on of the tax reliefs, the scheme for accelerated capital allowances, included in s285A TCA 97, offers a 100% tax deduction for spending on certain energy efficient equipment. This results in an upfront cash advantage for businesses that choose the energy efficient option when purchasing equipment. The time period for claims has been extended to 31 December 2023 in the 2020 Finance Bill.

The move towards more sustainable energy sources may not only result in lower costs but may also create the opportunity to make use of the incentives, tax reliefs and R&D credits that are available.

EU Emissions Trading System (“ETS”)

The cornerstone of the EU’s policy to combat climate change and reduce greenhouse gas emissions cost effectively is the EU ETS, which operates in all EU countries plus Iceland, Liechtenstein and Norway.  The ETS puts a limit on emissions from installations in the power sector, manufacturing industry and airlines operating between the countries mentioned above and covers around 40% of the EU’s greenhouse gas emissions.

The EU ETS works on the 'cap and trade' principle setting a cap on the total amount of certain greenhouse gases that can be emitted by the installations covered by the system. A fixed number of allowances which are the currency of the carbon market are issued at the relevant business at the carbon market price.

At the end of each year, businesses must surrender enough allowances to fully cover their emissions or they will face heavy fines. If businesses reduce their emissions, they can keep the spare allowances or sell them. By limiting the total number of allowances available, the EU ensures the allowances have value. Over time the cap is reduced, fewer allowances are issued, techniques to cut emissions are developed and total greenhouse gas emissions drop.

On 14th July 2021, the European Commission published their “Fit for 55” campaign which sets forth the organisation’s aim to reduce net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels and the wider ambition of carbon neutrality by 2050.³ The Commission proposed several amendments to the ETS in order further lower the overall emissions cap, phase out free emissions allowances for aviation and align with the global Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).

Proposals also include establishing a new emissions trading scheme for road transport and buildings to ensure that all economic sectors play their part in establishing a greener future. It is hoped that governments will use a dedicated portion of revenue generated from this new scheme to address the future social impact of the changes on transport users and vulnerable households while the EU is also encouraging  aviation fuel suppliers to blend sustainable aviation fuels into jet fuel under the ReFuelEU Aviation Initiative.⁴

To place the price of carbon under the lens the graph below illustrates the price an allowance holder is paying for the right under the EU ETS to emit one tonne of carbon dioxide or the equivalent amount of two more powerful greenhouse gases, nitrous oxide and perfluorocarbons.

Source: Carbon Price Viewer - Ember (ember-climate.org)

According to the IETA’s annual GHG Market Sentiment Survey⁵ the carbon market participants expect the COVID-19 pandemic to weigh heavily on emissions allowance prices for the next two years, with longer-term price expectations for the coming decade also dropping as countries push for sustainable and low-carbon futures post-pandemic. The survey reveals that EU ETS prices will average €31.71/tCO2 in Phase 4 (2021-30), a reduction of 12% from last year’s €36.05/t prediction.

EU Carbon Border Adjustment Mechanism (EU CBAM): Carbon Border Tax

The Draft EU plans for a CBAM seeks to introduce a charge aimed at ensuring that the cost of foreign products imported to the EU reflects their carbon content with the purpose to reduce carbon leakage and protect competitiveness of the EU businesses.

If successfully implemented on 1 January 2023, the EU CBAM would be the first instance of carbon border levies. The CBAM will leave no sector unaffected with implications depending on industry, carbon footprint and exporter position.

Although a UNCTAD report published on 14th July criticised the mechanism for its impact on trade with developing countries and its limited attempt to mitigate climate change (only 0.1% of global CO2 emissions will be reduced), there is no doubt that the system will increase EU green revenue streams and allow for further investment in sustainability projects across the Bloc.⁶

For more details on the EU CBAM refer to our latest EY Insights [How the EU aims to enforce sustainability goals beyond its borders].

How will your business be impacted?

Businesses should determine the direct and indirect cost of carbon taxes and carbon pricing policies on their business as well as ensuring their business is compliant with the relevant carbon pricing instruments provisions as the pricing of carbon evolve globally.

We can help you navigate and respond to the complex carbon pricing and tax landscape

Policy developments and its impact on your business

EY teams can help you determine whether and to what extent policy and tax legislation developments impact your operations, through policy & tax analysis, forecasts and assessments, such as carbon modelling. We continuously map relevant stakeholders and can assist with public consultations.

Investment in operational improvements

EY teams can also inform you of R&D reliefs, grants and incentives, including impact on global trade for any operational improvements.

Tax advisory and compliance

While also keeping businesses informed as to future carbon tax changes both domestically and at an EU and international level, we are helping companies to ensure they are compliant with Irish and global carbon pricing regulations and legislations as the pricing of carbon evolves globally. We can also in collaboration with our supply chain team help you assess whether there are more sustainable alternatives to your existing structure.

EY Sustainability Tax Contacts

If you require further information, please call your regular contact in EY or contact any of the following:

• Deirdre Hogan | Partner, Indirect Tax | +353 1 221 2433
• Bernard Kelly | Director, Indirect Tax | +353 1 221 2453
• Nadia De Wet | Senior Manager, Business Tax Advisory | +353 1 475 0555
• Andrew Coster | Tax Assistant, Indirect Tax | +353 1 221 2673