Mike Boswell looks at the new reality facing UK packaging firms post-April 1st, and asks how it might affect pricing.
The UK was the first European country to implement a plastics packaging tax on April 1st 2022. Other countries including Italy and Spain have delayed the implementation of similar tax regimes until 2023 and other governments are likely to implement similar levies in the near future. In the case of the UK Packaging Tax, there has been widespread criticism that none of the substantial tax income received by HM Treasury will be directly applied to supporting the recycling of UK plastics packaging waste. Instead, HM Treasury has put forward the argument that the tax itself will serve as a sufficient incentive, and that if this is not the case then the tax will be increased further in order to achieve higher rates of recycling. This article considers the economics of this argument, and the risks that higher rates of tax applied by other countries may deprive UK plastic converters wishing to incorporate 30%+ of recycled content of UK produced recycled feedstock.
The question of the packaging tax itself being a significant incentive can be considered using the following equation:
Total Cost1 of including 30% recycled material </= Cost of virgin material + tax2
1. Total Cost needs to include the cost of the recycled material taking account of any productivity gains or losses and any other associated cost premiums or savings.
2. Packaging Tax is currently £200 per tonne
The following graph is based upon the above equation at a range of virgin material prices. In the case of limited supply of recycled material, recycled material with attract a premium above virgin material of +£200 per tonne up to the premiums provided by the graph. Clearly this a paradigm shift from the view that recycled materials should sell at a discount compared to virgin polymer.
Another important consideration is the situation in which other countries apply higher rates of tax and have a deficit of recycled material; subject to the following equation UK recyclers will make better profits by exporting recycled material. The graph explores the effect of the level of tax on the potential price premium that export markets can afford, and where that premium exceeds the return on UK sales, there will be an incentive to export.
Export Price – (Additional Logistics Cost + Applicable Taxes + Other Costs) > UK Price
Summary
In the event that demand for recycled material exceeds supply (this is already evident, and a situation that is likely to persist) the price of recycled materials relative to virgin materials could increase significantly, which would mean that HM Treasury is correct in its assertion that the tax in and of itself is an incentive to increase recycling rates.
Higher packaging tax rates in other countries may lead to a ‘recycled material drain’, depriving UK plastic converters of recycled content
Where recycled content is not suitable for applications, converters will simply pay the tax and pass the premium down through the supply chain.
The packaging tax will almost certainly cause an incremental cost increase for plastics packaging, irrespective of reaching a 30% recycled threshold, or not.