The European Green Deal and the new circular economy action plan propose different regulations that affect all industries in Europe and the paper and packaging industry is not an exception. Therefore, it is crucial to analyze the challenges and opportunities that some of these regulations pose to the industry and the possible implications for the future of the European paper and packaging market.
Decarbonization is one of the main points of the European Green Deal, with the goal to be a carbon-neutral economy in 2050 and achieve a reduction of at least 55% (compared with 1990) in carbon emissions by 2030. In general, fiber-based products have an advantage compared with other industries. Papermaking is already carbon-neutral if we do not consider the energy used in the production process.
Integrated paper companies have an advantage in achieving this goal as they produce their own energy during the production process, purchasing less energy from fossil fuels and generating less carbon dioxide emissions than semi-integrated and non-integrated companies.
Most paper companies, however, especially non-integrated companies, buy some fossil fuels to run production, significantly increasing their carbon footprint. The industry needs to continue reducing its carbon footprint by transitioning to renewable energy sources and reducing its reliance on fossil fuels.
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Innovation and investment machinery or modernization programs that improve energy efficiency and reduce air and water emissions are necessary for paper companies to reduce their carbon footprint. Every day, particularly after the energy crisis in 2022, we see more and more paper companies focusing on investing in projects that improve energy efficiency and energy utilization.
These investments not only allow companies to achieve the proposed goals by the European Green Deal, but also increase their competitive advantage in the market. More energy-efficient machinery will translate into lower production costs, making these companies more competitive.
Companies that won’t innovate could be out of the market because they will have much higher production costs, putting them at a disadvantage. In normal conditions, purchased energy costs represent between 12-21% of the total cash cost of paper for the packaging industry (this share was much higher during the energy crises of 2022), making it an important driver in total production costs. In addition, the reputation of companies that won’t innovate could be compromised, because they could be considered more polluting companies.
The circular economy is another key topic in the European Green Deal. To reduce the disposal of packaging waste and to promote a more circularity, the European Packaging and Packaging Waste Directive established some measures to prevent the production of packaging waste and ensure that all packaging is reusable or recyclable in an economically feasible way by 2030. For recycling of paper and cardboard waste, the directive sets a recycling rate target of 70% for 2025 and 85% in 2030.
The European paper industry already had one of the highest recycling rates. Based on the last data available from Eurostat, the recycling rate for paper and cardboard waste was 81.5%, demonstrating the sustainable characteristics of the business. The industry actively collects, sorts and recycles paper and paperboard products to minimize waste and conserve resources. Recycling rates, however, have been decreasing in the last few years and increasing those rates is not an easy task.
Since the Covid-19 pandemic, when consumption patterns transformed boosting e-commerce and consumption at home, recycling is happening more and more at consumers’ houses than at companies, which has affected the quantity and the quality of recycling paper. Consumers at home, different than businesses, do not always have the knowledge necessary to follow good sorting and recycling processes. From contaminating the paper with food to mixing incorrect materials, there is a lot of recycled paper that gets damaged during the recycling selection.
To overcome this limitation, it is necessary for the European Commission to promote that each country inform and educate their residents about the correct recycling and sorting processes. Also, packaging companies, combined with end-user companies, could agree to include more complete recycling instructions in their packaging as a guide for final consumers.
Another possible challenge to recycling rates in the future is that the quantity and quality of recycled paper could be affected by the digital-era trends. Currently, most of the recycled paper of good quality is coming from the graphic paper industry. With the digitalization of books, newspapers and magazines, this market has been contracting in the past years, and it is not expected that this will change in the future. Less graphic paper in the economy would affect collection rates of paper for recycling and the quality of available recycled paper.
Nevertheless, the most challenging situation related to this specific regulation is the preference for reusable packaging over recyclable. The European Packaging and Packaging Waste Directive prioritizes reusable packaging because it views this kind of packaging as one of the best ways to minimize waste generation and has set targets for reusable packaging for different final-use industries for 2030.
This regulation could affect demand for fiber-based packaging because it is not usually considered reusable, and instead could promote the demand for reusable rigid plastic packaging. However, the regulation does not consider the vast quantity of emissions generated during the manufacturing of reusable rigid plastic alternatives, which have a higher environmental footprint than low-carbon fiber-based packaging, which goes against the main goals set by the European Green Deal. In fact, a study published by Fefco Containerboard shows that plastic crates will need to be reused at least 63 times to be more environmentally efficient than corrugated boxes.
Trying to show the European Commission that recycling could be as good or better than reusable packaging could be one of the main challenges for the industry.
Other circular economy regulations imposed by the European Commission are related to single-use plastic. In general, this regulation bans the use of single-use plastic in different categories including cotton buds, sticks cups for beverages, beverage containers, cigarette butts, plastic bags, packets and wrappers.
The impact of paper substitution is not only limited to European Commission regulations. Consumer preferences have also changed in this direction. Every day, consumers are asking for more and more for environmentally friendly packaging and this is reflected in their consumption decisions. For that reason, European companies, especially retail and fast-consumption companies, have focused their strategies on reducing the use of plastic in their packaging.
In fact, following announcements published by 150 European companies in different industries, mainly end users, about their environmental initiatives, we found that almost 80 companies (52%) focused their plans on plastic substitution, while only 16 companies (11%) announced plans for plastic recycling.
In general, demand for most types of paper and cardboard packaging will benefit from plastic substitution trends. Nevertheless, there are segments of the industry with higher impact because they are directly affected by the European Commission regulation. For example, the Plastic Bags Directive has set some rules to reduce the consumption of lightweight plastic bags. Through this regulation, plastic substitution has been and will continue to boost demand for machine-finished and machine-glazed kraft papers in the coming years.
However, not every segment of paper and cardboard will be positively affected by these proposals. Some paper-based packaging coated with polyethylene, or any other plastic resin used for wet strength like those used in food containers, is also affected by these laws.
In this sense, innovation is crucial. Research and development focused on finding non-plastic barriers for packaging is very important to respond to this regulation. In addition, any advances in more environmentally-friendly packaging that succeed in replacing plastic packaging or reducing the plastic components in the packaging will help the industry to take advantage of the current plastic substitution trends in the market.
Finally, it is important to analyze how European deforestation regulation could affect the industry. Based on the regulation, companies that trade with seven commodities including wood and derived products would need to conduct extensive due diligence on the value chain to ensure the goods they produce do not result from deforestation. This means that every pulp and paper producer in Europe will need to trace all the sources of the wood and report it.
In general, European paper producers use pulp in their production that comes from different sources and different companies. Similarly, pulp is made from a combination of different sources of wood and different trees, which makes the due diligence process very complicated, costly and time-consuming.
Due diligence is not the most difficult challenge from this regulation. The riskiest consequence for the industry would be if any of the companies that participate in the production chain lose their certification or the ability to demonstrate that they are not contributing to deforestation, others that use that company’s raw material will also lose their certification and their reputation will be affected.
Finally, the regulation could impact imports from foreign companies to Europe, because this regulation also applies to all pulp, paper, and packaging that arrive in Europe from external trade, not just domestic production. Imports of paper and packaging from other regions could decrease significantly, impacting not just the products from regions with higher deforestation risks but also foreign products from companies that face difficulties in tracing raw material sources and complying with these regulations.
Additionally, even if foreign companies succeed in getting the certifications to ensure their goods do not result from deforestation, it will be challenging for European authorities to verify and monitor that foreign companies in effect are doing what they preach and that they meet the same standards as European companies.
This regulation, however, could promote investment and innovation in the industry. Investors increasingly prioritize companies that are focused on sustainability and responsible sourcing, making the industry more attractive in this sense.
In conclusion, the different regulations from the European Green Deal bring a lot of challenges and opportunities for the paper and packaging industry that could transform the market. For that reason, it is vital for companies to stay informed and understand these regulations to proactively comply with them and adapt their strategies, innovations and investment plans to new market conditions.
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This article was first published in the PaperFIRST Mag.
Learn how to monitor packaging prices using cost and price indices and understand the underlying cost drivers, from material cost to labor, energy and more. Examples include cartonboard, liquid container and paper bag.