Regulate the entire value chain, not just the product
Haggai Alon, CEO & Founder, Security Matters Ltd (SMX)
“Plastic is an important and ubiquitous material in our economy and daily lives […] However, too often the way plastics are currently produced, used and discarded fails to capture the economic benefits of a more ‘circular’ approach and harms the environment […] Rethinking and improving the functioning of such a complex value chain requires efforts and greater cooperation by all its key players, from plastics producers to recyclers, retailers and consumers. It also calls for innovation and a shared vision to drive investment in the right direction.” (European Strategy for Plastics in a Circular Economy, January 2018).
Let’s face it. We can’t get rid of plastics in our modern life today. Especially not when they’re in every aspect of our daily lives and the economy in general. Plastic is in every human activity — from personal products like whitening toothpaste to in things we consume, even teabags, and also in metal cans, Tetra Pak and paper cups; not to mention in every single appliance and machinery we use.
Since we need plastic to live, work and play, and there is still not a less costly and more environmental-friendly substitute, governments (let’s look at Europe, primarily) have been trying to increase plastic recycling. The reason that it has not succeeded however is that products are being regulated instead of the whole value chain.
Plastic Products and Waste Management Regulation — the Current Approach and its Deficiencies
Plastic recycling was addressed in the first EU Circular Economy Action Plan from 2015 (“First Action Plan”) which recognised the challenges posed by plastic throughout the value chain and took into account their entire life-cycle. The vision of the First Action Plan, therefore, is a transition to a “New Plastics Economy”, which addresses all segments of plastics’ life-cycle (production, usage and recycling). This vision was adopted in 2018 at the EU Plastics Strategy in the Circular Economy (“Plastics Strategy”). 
Then the European Green Deal came along, which aims to achieve a resource-efficient and climate-neutral economy by 2050, and views transition towards a circular economy as a “number one priority.”
Circular economy, at its basic, is a realisation of a closed-loop flow of materials through the entire economic chain.
In theory, the First Action Plan and the Plastics Strategy embraces a transition towards a circular economy.
In practice, however, the actual EU regulation pertaining to plastics implements a non-circular product-oriented policy that tackles only some segments of the plastic value chain.
In more detail, the revised EU Packaging and Packaging Wasted Directive focuses only on the products’ initial design and its waste management, and doesn’t address how recycled plastics would be used. Thus, the current regulatory approach is failing to capture the economic benefits of a closed-loop system that exercises a comprehensive process of the entire plastic value chain.
This paper, therefore, offers a transition to a new regulatory approach, one that focuses on the entire value chain circle.
This approach offers economic incentives for the stakeholders across the value chain and facilitates cooperation between them. Such an approach is based on an expansion of the familiar idea of “carbon credits”, adjusted to the plastic value chain (“Plastic Credits”).
From an economic perspective, a regulatory approach focusing on the entire value chain may yield financial advantages by preserving the value of plastics in the market (more than 100 billion euros a year in the EU). From an environmental perspective, it may encourage plastic recycling and reduce the usage of virgin plastic materials in plastic products — thereby significantly influencing the carbon footprint and pollution.
The Transition Towards a Circular Economy in Plastics
The Plastics Strategy laid down its vision for a “sustainable products” policy, where “design and production fully respect the needs of reuse, repair, and recycling”. Based on this vision, the Plastics Strategy identified a few key actions: improving the design of plastics and plastic products to facilitate recycling; enhancing the separate collection of plastic waste to ensure high quality supply for the recycling industry; modernising the EU’s sorting and recycling capacity.
The Plastics Strategy sustainable product-oriented vision is in fact characterised by an open-ended process rather than the closed-loop of a circular economy. Indeed, the Plastics Strategy focuses only on two main segments of the plastic value chain — the initial production of the product (the design and material composition) and the collection of the used products (improved separate collection). Both of these strive to move to cleaner plastic waste streams and improve the quality of plastic recycling, yet they leave aside the aspect of the demand for recycled plastics.
This product-oriented vision was implemented in the revised EU Packaging and packaging waste directive. The directive set recycling targets (55% of plastic packaging by 2030) and updated measures designed to facilitate recycling and waste management. The Directive reinforced the “essential requirements” to, inter alia, improve design for reuse and promote high-quality recycling. In addition, the Directive enforced the extended producer responsibility (EPR) schemes as of the end of 2024, which ensure that the producer bears some of the responsibility for reducing the environmental impact of the manufacture and disposal of its products (see for example the green dot scheme).
The current “sustainable product” open-ended approach could be visualised like this:
This product-oriented approach is a typical “command and control”-regulation that forces producers of plastic products to facilitate the recycling process.
Having only the recycling aspect improved, however, will do very little to decrease the total production of plastics. The fact is that there is low demand market for recycled plastics because of cost.
And if demand is low, then there’s no economic value in investing in recycling facilities.
As stated by Daniel Calleja, the Director General of the European Commission’s Directorate General for Environment, “without a clear and dependable demand for recycled plastics, there will not be the necessary confidence to invest in recycling facilities”:
Everybody understands the importance of the balance between supply and demand in making markets work. On the supply side, new separate collection obligations and recycling targets will ensure a plentiful supply of plastics for recycling in Europe […] But what about the demand side? Without a clear and dependable demand for recycled plastics, there will not be the necessary confidence to invest in recycling facilities […]
Yet today only about 6% of the plastic in new products comes from recyclates, and this is often limited to low-value or niche applications.
It seems that as long as the recyclates are more expensive than the virgin materials, there will be no motivation to use them without enhanced incentives.
As of today, the European Commission calls on the industrial sector to come forward with voluntary commitments to back its vision (see for example the Circular Plastics Alliance). In addition, the new Circular Economy Action Plan from 2020 (“New Action Plan”) suggests imposing a minimum percentage of recycled materials in new products.
These measures, however, are only partial and not sufficient to encourage a viable secondary market for recycled raw materials.
An integrated closed-loop approach, on the other hand, can create a comprehensive value chain from recyclates to producers of the products, who can in turn create recyclable and reusable products.
Alternative Circular Value Chain Approach — from Carbon Credits to Plastic Credits
In order to capture the economic benefits of the entire plastic value chain, an alternative regulatory approach is suggested.
This approach posits a transition from the current open-ended regulatory approach towards a circular one by facilitating cross-industry dialogue. The circular value chain approach (CVCA) is not focused only on the sustainability of the products themselves, but rather on the entire process.
By introducing Plastic Credits to the market — a certificate representing the right to produce a unit of virgin plastic material — the proposed approach enables the trading of these credits between different parties across the value chain.
Before further elaborating on the CVCA, it is important to note that the proposed approach is different than the existing “plastic waste recovery and recycling credits,” an initiative suggested in the 3R Crediting Mechanism. According to the 3R mechanism, credits are issued by plastic recovery and recycling activities worldwide. Companies may buy these credits in order to financially support plastic waste recovery and recycling projects.
Importantly, the plastic waste recovery and recycling credits are not value chain oriented, but rather product-oriented. Moreover, buying plastic waste recovery credits is voluntary, whereas the CVCA’s plastic credits are to be required for plastic production to be permitted. Thus the CVCA generates plastic trading across the entire value chain.
The CVCA can be visualized as follows:
The CVCA, applied to the market for plastics through Plastic Credits, would operate according to the following framework:
· Plastic Credits will be required for every use of virgin plastic material in producing new products. Initial allowance of Plastic Credits, therefore, would be periodically allocated to the underlying industries to enable the initial production of new products with virgin plastic material once the Plastic Credits scheme kicks in.
· Producers with a greater need for virgin plastic materials would value such Plastic Credits more than producers who can switch away from virgin plastic to more sustainable alternatives. Consequently, the former would be able to trade Plastic Credits with the latter and more generally, a secondary market for such Plastic Credits would be established.
· Additional Plastic Credits would be allocated when plastic materials are recycled and used in new products. Over time, the periodic allowances would be reduced as the total amount of available Plastic Credits in the secondary market reaches an optimal level.
· On a technological level, in order to govern the CVCA mechanism, it will be necessary to implement tracing capabilities within the plastic materials.
· Governmental grants and/or tax benefits are required to incentivise infrastructure investments in order to support transition of resources from virgin materials production to recovery and recycling technologies.
The advantages of this approach are evident. Producers of new products will have an increased incentive to reduce their dependency on virgin plastic materials, thereby reducing their need to purchase more Plastic Credits or allowing them to sell such credits. Furthermore, they would receive an additional incentive to use recycled plastic materials as this would allow them to receive supplementary Plastic Credits.
From an economic perspective, this approach would provide opportunities for companies as plastics would be worth much more. This means that it would then be worthwhile to preserve these plastics in order to make use of them again. This, as opposed to the existing practice of discarding used plastic materials because it is not worthwhile to recycle.
Most importantly, from an environmental perspective, use of virgin plastics would be reduced and the plastics that is used would be recycled. This would relieve the pressure on natural resources.
1. The Circular Value Chain Approach posits a transition from the current open-ended regulatory approach towards a closed-loop one by facilitating cross-industry dialogue.
2. The CVCA introduces Plastic Credits to the market.
3. The trading of Plastic Credits between stakeholders is based on dollars and cents, and captures the economic benefits of the entire plastic value chain.
4. The CVCA is the optimal way to reach Equilibrium Economy™ and to reduce the total amount of virgin plastic materials around the globe.
 See Communication From The Commission To The European Parliament, The Council, The European Economic And Social Committee And The Committee Of The Regions, A European Strategy for Plastics in a Circular Economy (16.01.2018) https://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1516265440535&uri=COM:2018:28:FIN
 The European Commission launched a first Circular Economy Action Plan in 2015. See Communication From The Commission To The European Parliament, The Council, The European Economic And Social Committee And The Committee Of The Regions, Closing the loop — An EU action plan for the Circular Economy (2.12.2015) https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52015DC0614
 See supra note 1.
 Frédéric Simon, “Circular economy erected as ‘number one priority’ of European Green Deal”, Euractiv(13 November 2019) https://www.euractiv.com/section/circular-economy/news/circular-economy-is-number-one-priority-of-european-green-deal/
 The European Green Deal was presented on 2019. See Communication From The Commission To The European Parliament, The European Council, The Council, The European Economic And Social Committee And The Committee Of The Regions, The European Green Deal (11.12.2019) https://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1588580774040&uri=CELEX:52019DC0640
 On the history and various definitions of circular economy see Martin Geissdoerfer, Paulo Savaget, Nancy Bocken, Erik Jan Hultink, The Circular Economy — A new sustainability paradigm?, 143(1) Journal of Cleaner Production 757 (2017).
 See Directive (EU) 2018/852 amends Directive 94/62/EC
 See Daniel Calleja, “Why the ‘New Plastics Economy’ must be a circular economy”, Field Actions Science Reports (October 2019).
 See supra note 1.
 On the similarities and differences between the concept of circular economy and sustainability see supra note 4.
 The rules on extended producer responsibility laid down in Directive 2008/98/EC on waste https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:32008L0098. (“The introduction of extended producer responsibility in this Directive is one of the means to support the design and production of goods which take into full account and facilitate the efficient use of resources during their whole life-cycle including their repair, re-use, disassembly and recycling without compromising the free circulation of goods on the internal market”).
 See supra note 8.
 See https://ec.europa.eu/commission/presscorner/detail/en/IP_19_5583 (more than 100 public and private partners from the whole plastics value chain signed declaration that prompts voluntary actions for market creation in recycled plastics and laid out measures to reach the target of 10 million tons of recycled plastics used to make new products every year in Europe by 2025).
 Adopted on March 2020. See Communication From The Commission To The European Parliament, The Council, The European Economic And Social Committee And The Committee Of The Regions, A new Circular Economy Action Plan — For a cleaner and more competitive Europe (11.03.2020) https://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1583933814386&uri=COM:2020:98:FIN
 The 3R Initiative was founded in 2019 by Danone, Veolia, Nestlé, Tetra Pak and is led by international standard-setter Verra and environmental market developer BVRio. See https://www.3rinitiative.org/