EU Commission and Council take steps as part of the circular economy action plan - new rules on textiles and batteries

Executive summary

As part of its journey toward a more circular economy, the EU Commission and Council recently made further announcements to ensure producers of textiles as well as producers of batteries move toward more sustainable production, consumption, and disposal of their products in the European Union (EU). These measures are part of the Circular Economy Action Plan (CEAP), a key pillar of the European Green Deal, which is setting Europe on the path to climate neutrality by 2050.

Specific rules have been proposed to introduce Extended Producer Responsibility (EPR) requirements for textile producers across the EU. EPR is an environmental policy measure that extends a producer's responsibility to the full lifecycle of a product, which could include not only waste, recycling, return of products but also product design. Although numerous legislative stages remain before enactment, in-scope companies should note that the impact will be significant and will largely influence day-to-day operations.

Further, on 10 July 2023, the EU Council adopted a new regulation on batteries and waste batteries that will replace the existing legal framework (2006) by introducing more stringent requirements. The new legislation will become directly applicable across the EU as soon as August 2023. It is worth noting that these packages were released alongside a package of measures for a sustainable use of key natural resources and reflects Europe's continued commitment to the European Green Deal.

Circular economy for textiles

With the European consumption of textiles having the fourth highest impact on the environment and climate change, after food, housing and mobility,1 the full lifecycle of textile products has been under high scrutiny by the EU. The release of the "EU strategy for sustainable and circular textiles" on 30 March 2022 marked the policymakers' vision for more sustainable management of textile waste. On 5 July 2023, new EU rules were proposed, aimed at:

• Introducing a mandatory and harmonized EPR for textiles across EU Member States
• Promoting research and development (R&D) of innovative technologies for the circularity of the textiles sector, such as fiber-to-fiber recycling
• Preventing the practice of illegal exports of waste disguised as being for reuse

The above will support the new rules requiring separate collection of textile waste, which will become mandatory in the EU in 2025.

Potential implications — textiles

While steps in the regulatory process still need to be completed, companies either headquartered in the EU or present in the EU at some point of their supply chain should consider taking actions such as the following:

• Mapping responsibility of the EPR costs and obligations if products are only partly composed of textiles and preparing for new reporting obligations
• Reviewing supply chains and considering impacts such as durability, repairability and recyclability of textiles, carbon impact of textile processes (e.g., production or transportation) and/or water usage, human rights and labor considerations, and qualification for textile waste under the new waste shipment regulation
• Making use of available R&D incentives, grants and funding to finance sustainable textiles transformation
• Understanding and modeling other potential operational costs, in addition to EPR, such as for production, new shipping/waste and carbon-related costs
• Considering recycle/repair programs to champion circularity and reduce operational costs

For companies active in the sector, it will be important to continue to monitor developments in this regulatory space. Early understanding of their potential impact from a legal, business, operational, tax and transfer pricing perspective is crucial for adopting appropriate strategic measures.

New regulation: strengthening sustainability rules for batteries and waste batteries

On 10 July 2023, the EU Council adopted the new regulation on batteries and waste batteries regulation that will enter into force in the coming weeks. The regulation will repeal the existing batteries and waste batteries directive (2006/66/EC) and amend other related legal acts.2

Key updates introduced by the new regulation include:

• A broader and more detailed EPR regime
• Labeling and information requirements by 2026
• Obligation to set up an electronic "battery passport" and a QR code by 2027 (operators are also required to verify the source of raw materials used for batteries placed on the market — subject to small and medium-sized enterprises exemption from the due diligence rules)
• Obligation to ensure that portable batteries incorporated into appliances are removable and replaceable by the end-user by 2027
• Waste collection targets and separate lithium collection targets for waste batteries
• Mandatory minimum levels of recycled content (initially set at 6% for nickel, 6% for lithium, 16% for cobalt, 85% for lead) and maintaining recycled-content documentation
• Recycling efficiency target for waste batteries

EU Member States are required to establish rules on penalties applicable to infringements of the new battery and battery-waste regulation.

Potential implications — batteries

Primarily, it is important to remember that an EU regulation is a binding legislative act that must be directly applied in its entirety across the EU. Therefore, it will become immediately relevant to all companies headquartered in the EU, as well as to companies with an element of their supply chain in the EU. The new regulation will automatically replace previously applied national frameworks. However, it can be expected that some EU Member States may introduce additional obligations on a national level.

Affected businesses should consider and evaluate:

• Additional compliance and reporting obligations, with associated costs
• Increased regulatory focus on EPR systems
• Need for redesign of products if batteries are neither removable nor replaceable by the end-user or if the components are not compliant with the regulation's requirements
• Available R&D incentives, grants and funding to finance supply chain transformation, especially to meet new requirements
• Cost efficiency of a recycle/repair program
• New carbon footprint, in case of changes to the supply chain

It will be important for companies to reassess their obligations and their supply chain in light of the new rules to meet targets and timely comply.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Law Zakrzewska i Wspolnicy sp.k., Warsaw

• Kasia Klaczynska Lewis

Ernst & Young Abogados, Barcelona

• Hein Brinkmann

Ernst & Young Advisory, Marseille

• Lauriane Lorge

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.

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