Low oil prices: will they help or hinder action on plastics?

So the fall in the price of oil has been dramatic. Some commentators who want to see a reduction in the use of fossil fuels seem to feel that this is a good thing. I am not so sure, making things cheaper does not, in my view, encourage a reduction in demand. In addition there can be unforseen consequences in the complex global economy.

One such unforseen consequence could be felt in the plastics recycling sector. A fall in the oil price means virgin material can cost less than recycled material, and manufacturers then switch back to virgin. Investors are disincentivised from funding new plants, preventing an uptake in the use of recycled plastics. This would threaten the delivery of the UK Plastic Pact pledge, made by most retailers and consumer brands, to use 30% recycled content by 2025.

Will retailers and brands maintain their commitments? Will investors fund new plants even with low virgin plastic prices on the promise of regulatory action? Or will the sector fail as it did back in 2014 when oil prices fell sharply?

It looks like regulatory change will be critical to develop the use of recycled plastics. In this bog I review the proposed changes to regulation to assess if they will work, and look at the alternatives.

What has happened to the price of plastics?

There are a wide range of polymers used in the economy, but PET is one of the most widely used for packaging. Looking at just the market for this polymer, there were already price falls in 2019 due to increased supply from new US plants. Data from Plastics Information Europe suggests that virgin PET was already cheaper than recycled PET by early 2019.

Since the December 2019, this has got worse as virgin PET has only fallen a further 8% . This compares to falls in oil price of around 75% and a fall in the price of paraxylene, a feedstock for PET, of 30%. The more limited fall in virgin PET may be a result of seasonal ordering by drinks manufacturers, so further downward pressure looks likely.

The ultimate impact of these recent price changes on the industry will depend on the length of time that the price for virgin polymer remains below that of recycled. Whilst the prices for virgin polymer vary with fossil fuel prices, recycled polymer is more stable. If virgin prices stay below recycled for longer than 12 months, it is likely that recycling plants will start to struggle.

Will proposed regulations help?

The challenges to recycling plants in 2014 as oil prices fell meant that regulators are aware of the issue. In order to support the plastics recycling industry the UK and Italian governments have both proposed different measures to address this issue.

• The UK is planning a £200 a tonne tax on plastic with less than 30% recycled content.

• The Italian government has prosed a virgin polymer tax of €450 a tonne.

The EU is also proposing a tax of €800 a tonne on plastic packaging that is not recycled. It looks like the EU is proposing that member states pay this tax, they in turn may seek to recover this from industry, but it is not clear how it will be implemented.

For this analysis I consider just the UK and Italian government proposals. In figure 1, the impact of these measures on polymer prices is is plotted against a range of virgin PET prices. It includes the rPET price for comparison.

Source: rPET price from Plastics Information Europe (https://pieweb.plasteurope.com/) average of past 12 months

The current price for packaging PET from Plastics Information Europe is £850 a tonne, so the tax would not quite cover the difference in prices. A further fall in virgin PET price would render the tax ineffective. It is ineffective at low prices and is unnecessary with high prices.

The Italian proposal supports recycling across a wider range of low prices, but above £700 a tonne it is not needed to support recycling and the same issue applies as with the UK policy. Governments will be incentivising the use of alternative, non-plastic, materials that could have higher carbon footprints such as glass, or materials that combine paper and plastic, which are harder to recycle.

What is the alternative?

I think regulators have two choices: taxes on all virgin material use, adjusted for environmental impact, or a contract for difference approach to support just the plastic recycling market. The virgin material tax would be charged for all virgin materials, not just plastics, but could be limted to one application type such as packaging. This approach would be better if the aim is to raise government revenue and incentivise recycling.

A contract for difference approach would allow regulators to address any differential if virgin prices drop below recycled prices, but avoid adding additional cost if virgin prices are higher than recycled prices. It is already being used effectively in the electricity sector. This approach would work best just to encourage an uptake in the use of recycled materials.

Will companies support either of these approaches? In the industry consultation events in the UK, there has been little support for the plastics tax. Whilst I understand these concerns, I think that getting higher levels of recycled content is part of the action that consumers are expecting brands to take. Consumer and NGO pressure is likely to grow if brands fail to meet these targets.

Brands may not like it, but if they want the investment needed in recycling infrastructure to deliver their targets, they will need more support in place if oil prices remain low. If governments want to meet their targets on plastic recycling, they will have to use measures which are more sophisticated than the current tax proposals, and get it implemented quickly if timetables are to be met.

Henry le Fleming

Sustainability Analytics | henry@sustainabilityanalytics.co.uk | +44 7841 569 340

I founded Sustainability Analytics to help companies and investors develop better data to assess and manage sustainability issues. If you would some help working out a way to manage plastics in you business please get in touch.