Questions upon questions about planned ‘EU plastics tax’

Instrument of environmental policy or ‘trick’ to counter budget deficits?

Levy would not benefit the EU budget or the environment but would strip the circular economy of important funds.

Response to the suggested EU-wide levy on non-recycled plastic packaging – the so-called ‘plastics tax’ – has not been very positive. Experts are harshly critical: they say it is not effective, neither for environmental protection nor for budgetary consolidation. On the other hand, environmental associations see the possible new tax as an opportunity to ‘increase recycling and support waste-avoidance programmes’.

Experts criticise the plastics tax for not being ring-fenced, i.e. earmarked for a specific purpose, as this would deprive the process of transformation to a circular economy of the investment funds it urgently requires and thus do more harm than good when it comes to protecting the environment and preventing climate change.

The EU’s former budget commissioner Günther Oettinger first brought up the idea of a levy on plastic packaging as a new source of income for the EU in January 2018. He justified his proposal by pointing out that despite recycling too much of the plastic packaging produced and used is being disposed of as waste.

The current long-term EU budget expires on 31 December 2020 and the member states have not yet been able to reach agreement on a new budget for the next financial period, which covers the years 2021 to 2027. Consequently, no negotiations on this issue have yet taken place between the EU Parliament and the European Council. The European Council also failed to reach agreement on the EU’s long-term budget at a special summit held on 20-21 February this year. But while the EU members are still haggling over details and benefits, a new idea for co-financing the future EU budget is making the rounds: an EU levy on non-recycled plastic packaging. This is a proposal put forward by the president of the EU Council, Charles Michel. According to the proposal, non-recycled plastic packaging will be subject to a tax of 80 cents a kilogram.

It is at this point that industry insiders immediately raise equally important questions about the structure of the proposed levy: for example, how should recyclable plastic packaging that is not recycled be handled? Will the levy also apply to such products? Observers, and not only those in Brussels, are expecting lively discussions on this and other detailed questions, also with the industries concerned. Against this background, insiders in Brussels believe that the plastics tax under consideration is still an awfully long way off due to the lack of a foreseeable consensus, especially among the EU member states.

Nevertheless, the EU Commission hopes that such a tax would generate additional income of at least 6.6 billion euros for the long-term budget. According to information from those close to Michel, the proponents of the new plastics tax are speculating that, together with possible surpluses from the European Emissions Trading Scheme (ETS), it will pour 14 to 15 billion euros a year into Brussels’ coffers over the seven-year financing period. They calculate this could fill the hole in the EU budget created by Brexit and the extensive measures introduced by the EU to combat the corona pandemic.

However, when the president of the European Commission, Ursula von der Leyen, presented the trillion-euro EU crisis budget in Brussels, it was already clear that any plans to counter-finance this spending with levies on plastics, CO2 and/or digital services were regarded as being unrealistic. One reason is that EU law does not allow the Commission to introduce taxes itself. The EU is also not directly involved in tax collection and the setting of tax rates. As the EU itself explains, the amount of tax paid by individual citizens is decided by their respective national governments, which also decide on how the tax revenues are spent.

A plastics tax would therefore have to be incorporated into national law – as is the case with the energy tax. However, the revenue would then go to the federal budget and not to the EU. The EU can only coordinate tax rules and tax rates in the member states to prevent national differences from adversely affecting cross-border trade and distorting competition. As with the German energy tax, which is an excise duty, the federal government could also introduce different tax rates for packaging, for example depending on the environmental impact of the packaging.

Moreover, political observers have fundamental doubts as to whether significant taxes can be enforced at all at EU level. The EU’s own taxes would shift fiscal sovereignty from the national governments to Brussels. And national governments are not interested in that.

Apart from this, critics, such as the Federation of German Industries (BDI), consider the proposed levy to be an unsuitable instrument that will neither provide environmental protection nor solve the budgetary problems.

As matters stand, there is thus complete uncertainty as to whether such an EU tax will be implemented. The debate about duties as a separate source of EU revenue has been going on for years – so far without any result. If the member states cannot agree on an EU-wide levy, a plastics tax would have to be implemented in national law. This could lead to the threat of duties being inconsistent and competition within the EU being distorted as a result. When the European Energy Tax Directive 2006 set out to harmonise mineral oil duty, it only led to all member states stipulating minimum tax rates, but it did not lead to fuel being taxed uniformly.

At first glance, the idea of a plastics levy seems to have a certain appeal because it gives the impression of killing two birds with one stone: it would open up a new source of income for the EU and at the same time demonstrate how resolutely the EU is tackling the supposed ‘flood of plastic waste’, which the media are covering with shocking images of beaches and seas strewn with rubbish. However, as Dr Martin Engelmann who is managing director of Industrie-Vereinigung Kunststoffverpackungen (IK) and represents the many critics of the plastics tax comments on Plas.TV, there are several snags when it comes to the vision of a win-win instrument that benefits the environment and the EU budget in equal measure.

Packaging tax lacks ring-fencing

The expert notes first of all that the EU Commission has not yet presented a proper impact assessment on the subject. He explains that this means no one, not even the authorities in Brussels, can at present make any reliable statements about the effects of such a measure on sustainability. In unison with other market specialists, he also criticises in particular the fact that the revenues from the levy are not ring-fenced but will instead flow directly into the EU’s general budget. This means additional funds for further research and development in the field of plastics recycling are not anticipated from the planned levy. Dr Engelmann therefore concludes it will have virtually no direct impact on the goals of the circular economy or environmental protection.

Instead, it would deprive those countries in Europe that are only just starting to develop an efficient recycling infrastructure, as well as those that are committed to expanding their existing capacities in this area, of the resources needed to do so. After all, it is estimated that the plastics tax will cost European industry at least 8.24 billion euros a year.

Ultimately, a plastics tax would thus deprive manufacturers in the EU member states of important resources that they need to further optimise the circular economy for plastic packaging — in line with the political objective that all packaging in Europe should be recyclable by 2030.

Furthermore, the recycling infrastructure in most EU countries is still the responsibility of municipalities. Observers therefore fear that there may not be much interest in investing in this infrastructure in the member states because all packaging might be classified as non-recyclable and subjected to the tax. This would adversely affect the recycling of paper, metal and glass, and would therefore probably not be desirable politically. If investments were to be made in the alternatives, this would be a clear competitive disadvantage for plastics and would lead to costly lawsuits.

When looking at the big picture, one should also not forget that experts are still arguing about whether, from an ecological point of view, plastics recycling is preferable in principle to newly produced alternatives.

Sceptics therefore fear that the introduction of the plastics tax that is currently under discussion in the EU would ultimately only result in a lose-lose situation, with one big loser: the environment.

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