New policies and the historic pace of their enforcement are driving ambitious targets to reduce plastic use. For years, international agencies prioritized the carbon footprint to address environmental effects. That broad approach to emissions is narrowing, with governments taking aim at the production, use/re-use, and disposal of plastics, often using tax policy as their ammunition.
Businesses must track related tax proposals, but also need to understand the overriding goals being set in order to gain perspective on likely tax disruption.
Tax and finance functions must pay heed to “plastic taxes,” with many local governments and countries adopting laws on items such as plastic bags, ranging from a tax on single-use bags to outright bans. There’s an opportunity for the corporate tax function to protect the company from risk, guide it to incentives, and align it with key consumer and investor trends.
Keeping Goals in Sight
The world is facing a huge plastic pollution problem and governments are introducing new approaches to curb it. One key measure is the “plastics tax,” which is being applied by different jurisdictions at different rates, in a range of ways.
Despite global meetings and discussions, such as the COP26 conference, these taxes still are not coordinated, and multinationals’ tax functions may face a challenge trying to keep pace with their potential risk exposure. Tax functions across the board face a complex task to comply with a growing maze of laws. Taxes on plastic packaging in the U.K. are the beginning. Effective dates for new taxes in Italy and Spain are delayed but are expected to become effective in 2023. Poland and Sweden have announced they will also implement new legislation. These seem to be only the beginning of such changes in Europe.
Each new rule has the capacity to challenge traditional business operations and stems from goals set by international communities, countries and local jurisdictions. The European Commission’s Strategy for Plastics in a Circular Economy, for example, aims to make all plastic packaging reusable or recyclable by 2030. The EU will also require member states to produce polyethylene terephthalate (PET) drink bottles with at least 25% of recycled plastic by 2025. This will rise to at least 30% by 2030.
European “plastic tax” legislation at a glance:
Updated from EY Plastics and Packaging Taxes webcast summary
As an example, one of the most progressive new taxes is the U.K. government’s Plastic Packaging Tax, which promotes the use of recycled, rather than new plastic, in packaging to stimulate increased levels of recycling and the collection of plastic waste directed to landfill or incineration. The U.K.’s proposed minimum recycling targets for six types of packaging, including plastic, equate to a recycling rate of almost 75% by 2030. England’s charge for single-use plastics, according to U.K. government reports, has reduced their use by more than 95% since 2015.
Each new environmental policy can equate to both rising costs and operational headaches for businesses. Any necessary organizational implications should be considered with stakeholders engaged before 2022, when many taxes become effective, but with governmental goals as a hint to future challenges.
In response, corporations can innovate and appeal to consumers and investors with a stronger environmental, social and governance (ESG) policy. They can reduce the plastics-heavy supply chain of packaging in collaboration with industry partners.
These new targets do not 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, however, some upsides for businesses. First, there is the chance to appeal to consumers and investors by displaying a bold and decisive approach to ESG policy. There is also the opportunity to benefit from a vast range of economic incentives being offered by governments to drive businesses toward new production habits.
In 2018, economic incentives including tax rebates were proposed by the United Nations Environment Programme in a roadmap for sustainability, addressing single-use plastics. Meanwhile, extended producer responsibility (EPR) policies encourage better design for recycling by making producers responsible for financing and operating the post-consumer waste collection and recycling systems.
Such production innovation does boost recycled content for consumer packaging, consumer-facing plastics and industrial plastics. The U.K. first implemented an EPR system in 1997, which is credited with increasing the recycling of packaging waste from 25% at the time to 63.9% in 2017. An update to the EPR system for packaging is expected by the Department for Environment Food & Rural Affairs in 2023.
The Way Forward
In the short term, the pandemic pushed businesses to rethink their supply chains, operating models and risk exposure—including investments in technology and innovation. As forward-looking companies adjust, their designs are more sustainable to future-proof their operations for long-term value.
Long-term, operational and manufacturing innovation must also derive some economic benefit, or expiring incentives packages could lead to environmental reversals. Measuring that benefit should include intangible assets like innovation and brand, both of which enable investors to look beyond a company’s book value as it covers initial investments.
Even before ESG trends and pre-pandemic, an EY report on measuring long-term value found that 80% of a responding company’s market value could be read off the balance sheet in the past, dropping to just under half by 2019.
Environmental sustainability goals have become a government essential, with taxes, economic incentives and new laws tackling everything from carbon emissions to landfills. Plastics and packaging taxes have become the latest tool to drive behavioral change while also replenishing drained government coffers.
Tax teams need a comprehensive, current and far-reaching picture of the “plastic tax” landscape to quantify the impacts on their businesses, embed this information in their systems to ensure reporting and costing models are accurate, and adjust pricing accordingly. Only with the right expertise and technology in place will they be able to navigate the complex plastics maze, and to inform other functions of the potential for organizational change.
It’s a fast-moving picture, and tax teams face a challenge keeping up. But those who can, will have an opportunity to be a strategic partner to the business: to help avoid risk, seize new incentives, and align with changing consumer and investor tastes.
The views expressed in this article are those of the authors and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Kate Barton is EY Global Vice Chair—Tax.