On 29 October, the UK Government announced a potential tax for plastic packaging products that contain less than 30% of recycled content. The proposed tax is credit negative for plastic packaging manufacturers because it disincentivizes the use of plastic packaging and as such has the potential to reduce industry growth rates. Moreover, the required use of at least 30% recycled content to avoid the tax could drive up raw material prices for recycled materials and negatively affect the profitability of plastic packaging firms.
The UK’s proposal for a plastic packaging tax comes only days after the European Parliament’s adoption of comprehensive proposals to tackle pollution from plastic waste and hence forms part of a broader effort towards more directive regulatory action. We rate 10 plastic packaging companies in Europe that are potentially affected by the various proposals. These include Faerch Plast Midco ApS (B3 stable) and RPC Group plc (Baa3 stable), for example, and Atlas Rigid GmbH (B2 stable), which has a mostly European presence. Exhibit 1 shows that these 10 companies generate 67% of their aggregate revenues in Europe, and the UK is a sizable market for many of these companies.
The plastic tax, if implemented as proposed after the consulting period, would present an additional incentive for consumers and consumer goods companies to reduce their use of plastic packaging. The proposed tax appears to cover all plastic packaging, unlike the European Union’s proposals, which mostly cover food and beverage packaging.
However, the UK's proposed tax also poses some challenges. For example, in some cases adequate alternative packaging solutions may not be available or plastic packaging forms a critical part of the product, such as for pharma products. Makers of some beauty and personal care products may find it challenging to achieve the recycled content requirements to avoid the tax. It remains unclear how those challenges would be addressed. Exhibit 2 shows that non-food and beverage end markets account for around half of revenue for the 10 companies potentially affected
The required use of at least 30% recycled content to avoid the tax may also lead to rising cost for recycled raw materials. For example, recycled polyethylene terephthalate (rPET) prices have risen this year and the UK has limited recycling infrastructure in place, with significant waste exports over the past several years. How these challenges will be resolved remains a critical question for plastic packaging firms as they attempt to achieve such recycling rates across all products, particularly for products that require high-purity recycled materials including food end-markets.
As in other proposed measures by the UK Government to eliminate all avoidable plastic waste in the UK by 2042, such as the drink bottles deposit scheme announced in March 2018, the tax proposal will now undergo a public consultation period that may result in changes.
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