April 13, 2022
European Commission proposes package of measures announced in Circular Economy Action Plan | Sustainable products to be the new mainstream in the EU
On 30 March 2022, the European Commission (Commission) proposed a package of legislative measures as part of the European Green Deal (EGD) and previously announced in the Circular Economy Action Plan (CEAP). The legislative package aims at making almost all physical goods in the European Union (EU) market more durable and therefore more environment-friendly, circular and energy-efficient throughout their whole lifecycle, from the design phase to daily use, repurposing and end-of-life.
The CEAP is the Commission's answer to the growing energy use and inefficient use of materials and subsequent waste issue especially in relation to resource-intensive sectors such as electronics and ICT, batteries and vehicles, packaging, plastics, textiles construction and buildings, food, water and nutrients. In total, the Plan announced 35 legislative and non-legislative actions.
In December 2020, new regulations on sustainable batteries were adopted. This signaled the start of delivery for the CEAP and since then, other legislative proposals have been adopted. The package announced on 30 March 2022 will have comprehensive effects as it touches three key areas: (i) making sustainable products the norm; (ii) sustainable and circular textiles; and (iii) the construction products of tomorrow.
Making sustainable products the norm
Under this key area, the Commission is proposing four key initiatives:
Together, these proposals are designed to make sustainable products the norm – more energy-efficient, more friendly to the environment and more circular overall.
With the ESPR proposal, the Commission would replace the Ecodesign Directive to extend the applicable range of products beyond energy-related ones and broaden the scope of compliance requirements. The aim is to deliver more on circularity by making products more durable, reliable, reusable, upgradable, reparable, easier to maintain, refurbish and recycle, and energy-efficient.
The proposal also includes the creation of a digital product passport (DPP). The DPP will provide standardized information on the lifecycle of all products regulated under the ESPR and provide the ability to trace products. This means those products will have to be equipped with a machine-readable passport that contains specific information, which could take the form of "classes of performance," ranging from A to G, to facilitate comparison between products. The DPP will play a key role in enabling customers to make conscious decisions, based on the environmental impact of their purchases.
The ESPR proposal also introduces transparency requirements in relation to the destruction of unsold goods with the aim to reduce waste and disincentivize overproduction. Businesses would be required to disclose the quantity of products disposed and the reason to do so at every stage of the value chain, from manufacturers to online marketplaces.
Until this Regulation enters into force, the Commission has also adopted the Ecodesign and Energy Labelling Working Plan 2022 - 2024 to cover new energy-related products, and update and increase the ambition for products that are already regulated. The Commission intends to prioritize work on three main groups: heating and cooling appliances, rescale of energy labels and other reviews that represent significant additional savings potential in terms of energy or material savings (e.g., water pumps, fans, external power supplies).
Measures expected to be completed under the new workplan include regulations for ecodesign requirements and an energy labelling scheme for mobile phones and tablets. The ecodesign requirements, which will be adopted by the Commission, may apply to one specific product group or horizontally to more product groups, where technical similarities allow for the setting of common requirements. As mentioned above, ecodesign requirements include performance requirements and information requirements such as recyclability, durability, and how to use, repair and maintain.
Furthermore, the workplan lists specific tasks that the Commission is required to carry out under the Tyre Labelling Regulation. It also identifies the most promising candidates for further work: low temperature emitters (e.g., radiators, convertors), professional laundry appliances and dishwashers, universal external power supplies and electric vehicle chargers.
As announced in March 2021 and with work ongoing this year, the Commission is accelerating its focus on common dataspace. A common European Dataspace for Smart Circular Applications with data on value chains and product information is in scope. In co-operation with the national authorities, efforts will be increased on the enforcement of applicable sustainability requirements for products placed in the EU market, in particular, through inspections and market surveillance actions.
The Commission is also proposing to update the EU consumer law, which is a cornerstone of the CEAP. To support sustainable consumer choices, the Commission is therefore proposing to amend the Consumer Rights Directive. Traders will be required to provide information on durability, repairs and updates. Amendments to the UCPD will reduce greenwashing and early obsolescence of productions (e.g., products with an artificially limited lifetime).
EU Strategy for Sustainable and Circular Textiles
With the EU Strategy for Sustainable and Circular Textiles, the Commission aims to ensure that by 2030, textile products have a longer life, recyclable where possible, made as much as possible from recyclable material and are free of hazardous substances. In short, the production of textiles should not have a detrimental effect when it comes to ESG – notably the environmental and social aspects. A key element of producing sustainable textile products is the reduction of unintentional release of microplastics from textiles made from synthetic fibers. To address this, the Commission intends to include binding design requirements in the ESPR. This will be complemented by a further Commission-led initiative later in the year on microplastics reduction.
In terms of addressing social inequalities in the textiles industry, the EU's proposal for a Corporate Sustainability Due Diligence Directive (see EY Global Tax Alert, European Commission proposes new Directive on corporate sustainability due diligence aimed at establishing legal accountability for global value chains, dated 2 March 2022) introduces obligations for certain large companies to account for adverse impacts on human rights and on the environment. Third countries with significant textiles EU imports will also be subject to the new obligations.
In line with the proposed ESPR, the Commission will introduce mandatory ecodesign requirements for textiles focusing on aspects of product design such as quality and material composition. As part of those requirements, the Commission will introduce minimum mandatory green public procurement (GPP) criteria and targets and will phase in compulsory reporting to monitor GPP uptake. Products will be prioritized and high priority items will likely include personal and household textiles, carpets and mattresses.
Acknowledging the need for digital tools and the role of traceability in value chains, there will be a DPP for textiles. In parallel, the Textile Labelling Regulation will be reviewed and mandatory disclosures will be introduced on key sustainability and circularity elements. Work also continues on an international framework on transparency and traceability for sustainable value chains in the garment and footwear industry.
Efforts to combat greenwashing continues with more encouragement to use EU-wide methodology (Product and Organisation Environmental Footprint) when it comes to environmental claims. Further proposals on the Green Claims Initiative are expected in 2022, which will guide requirements for sustainability labelling. Amendments to the UCPD will further reduce greenwashing in the textiles industry and beyond. Environmental claims must be thoroughly verified.
As already announced, EU Member States must have separate textile waste collections in place by 1 January 2025. Recognizing the role of Extended Producer Responsibility schemes in promoting circularity and reducing waste levels, the Commission will propose harmonized EPR rules for textiles with eco-modulation of fees. Work continues to understand levels of textile and waste, and mandatory targets for textile waste re-use and recycling are expected in 2024.
The EU Textiles Strategy refers to the need for research, investment and innovation in the textiles and circularity space, with new calls under Horizon Europe (EU's flagship innovation funding program) and LIFE (EU's funding instrument for the environment and climate action). To transform the textiles ecosystem, the way forward will be co-created with work beginning this year on the Transition Pathway for the Textiles Ecosystem. On the theme of collaboration, the EU also commits to working with other partners at global, regional and bilateral levels to support sustainable textile value chains.
Amended Construction Products Regulation
In light of EGD policy ambitions, the Commission proposes to amend the existing Regulation. This will help to address sustainability performance of construction products and ensure the construction ecosystem overall contributes more to the broader climate and sustainability goals in Europe.
Similar to the ESPR referenced above, the amended Construction Products Regulation will introduce harmonized sustainable criteria for construction products. The impact means sustainability will be more broadly embedded in their products and packaging. The amended Regulation will mean more attention must be paid to design of packaging and product, preference given to recyclable materials, adherence to minimum recycled content obligations and ultimately, products should lend themselves to re-use, remanufacturing and recycling. In addition, instructions on use and repair must be available.
Declarations of conformity and performance will be required to demonstrate EU standards have been met. From a consumer perspective, a CE marking will be added to show the products have met high safety, health and environmental protection requirements. In the future, the use of a DPP is likely, to further facilitate value chain transparency. Research, investment and innovation in the green construction industry is further supported by Horizon Europe.
The proposed measures underline the importance of a circular economy in terms of achieving the ambitions set out in the EGD. Industry-wide, leading companies are already looking at adjusting operating and business models in the pursuit of sustainability. Shifting toward the circular economy and in particular, shifting from a linear to a more circular business model is a complicated undertaking, impacting the company's own business and operating models as well as its upstream and downstream value chain.
Circular business models redefine the product and market combination and usually impact distributions channels, positioning in the market, pricing, and warranty, among others. Product re-design may result in new products or production-related intellectual property, which may attract research and development incentives (fiscal and non-fiscal). Supply chains could significantly change as businesses own their products through the lifecycle (product-as-a-service models) or are required to collect back their products or offer maintenance and repair services. Those changes may bring direct and indirect taxes implications concerning new transaction flows should be considered. Transitioning to "product as a service" business models may result in value added tax, withholding tax, transfer pricing and permanent establishment implications.
Last but not least, it is important to consider these measures in the context of wider sustainability taxes and policies. For example, with a greater focus on managing packaging waste, understanding the costs and role of initiatives such as Extended Producer Responsibility in addition to new or revised plastic packaging taxes is important. As is understanding the incentives, funding and finance opportunities available for those innovating in the circularity space. The CEAP is a roadmap that is being consistently operationalized with the introduction of dedicated legislative and non-legislative initiatives. It will continue to play an important role in the process of decoupling of the economic growth from the extensive use of natural resources.
It will be important for companies to monitor developments in the circular economy space, and understand the impact from a legal, business, operational, tax and transfer pricing perspective.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Belastingadviseurs LLP, Amsterdam
Ernst & Young Law Talasiewicz Zakrzewska i Wspolnicy sp.k., Warsaw
Ernst & Young Abogados, Barcelona
Ernst & Young LLP (United Kingdom), London