Since the beginning of its mandate in 2019, the current European Commission made creating a circular economy a flagship objective of the EU political agenda. The coronavirus pandemic has made policymakers across European aware of the fact that the EU’s economy contains a number of weaknesses. The pandemic gave even more visibility to the unfairness and unsustainability of supply chains. Today’s linear, growth-based economy is exceeding all planetary boundaries. Without action, the average temperature on our planet is set to rise to between 3.5 and 5.5 degrees by the year 2100, according to OECD estimates. By 2050, humans will consume three times as many resources as the earth can sustainably and repeatedly provide. Furthermore, indicators show that Europe’s GDP growth over the past two decades did not always substantially contribute to achieving certain policy objectives of the EU. For instance, while the EU’s economy grew, interregional inequality remained a significant issue. The standard of living did increase, but much progress is still needed to achieve certain Sustainable Development Goals in Europe. Hence, today many European policymakers believe that the costs associated with linear economic growth are bigger than its benefits.
A fundamental transition towards circular economy is seen by many policymakers as the objective the world should collectively aim for. A circular economy is an economy in which products are never simply thrown away, but form the basis of renewed economic activity. In theory, a circular economy needs little to no input of natural resources. Instead of mining the planet for ore, coal or oil to create new products, a circular economy primarily repairs, reuses or recycles existing products. This promises to achieve more economic prosperity without using more resources. Thus, the EU’s Circular Economy Action plan is a key pillar in achieving EU-wide climate neutrality in 2050. According to the European Commission, other benefits include more industrial production inside the EU, as well as new business opportunities for SMEs. The Circular Economy Action Plan designates seven product categories to be prioritised: textiles; plastics; buildings and construction; computers and other electronics; packaging; batteries, cars, vans and lorries; and food and drinks.
In sum, it is likely that the EU’s legislative actions over the coming years will have a far-reaching impact on SMEs. If your company produces goods such as textiles, plastics or electronics, it is possible that you will be affected by new European measures aimed at fostering the production of more durable, repairable, reusable and recyclable goods. The construction sector will also fall under the scope of new legislation. For other SMEs, the new legislation will create new opportunities. Should the EU decide to increase requirements for repairability, for example, it would open up a lucrative new market for SMEs.
The contents of the Sustainable Products Initiative
The Sustainable Products Initiative (SPI) is one of the main pillars of the EU Circular Economy Action plan. By improving the environmental performance of products on the EU Single Market, it aims to contribute to the EU’s objective regarding climate neutrality, energy use and recycling.
To this aim, the SPI encompasses several legislative and non-legislative actions. Altogether, this will contribute to a significant shift in production processes and business models. The SPI seeks to shift consumers’ attitudes towards more sustainable consumption.
The main element of the SPI will be the revision of the Ecodesign Directive of 2009. This Directive currently only covers products that consume electric or fossil energy and/or water. It seeks to reduce the EU’s greenhouse gas emissions by improving the efficiency of these products The approach and scope of the existing Directive are too limited to achieve a fully circular economy. That is why the SPI will add a number of new product categories to the Directive, prioritising furniture, textiles, and certain ‘high-impact intermediate products’, including chemicals, steel and cement.
Once the scope is widened, the revision of the Directive will establish general principles regarding product sustainability. Here, the Commission will not only look at ecological aspects, but also include social factors. It will define the responsibilities of manufacturers in designing more durable, reusable, repairable or upgradeable products. It will create rules regarding production processes, for instance by setting minimum requirements for recycled content or the presence of hazardous chemicals in products. The initiative will also look at measures which will affect business models directly, such as legislative options to ban the destruction of unsold goods, or the shift to new circular models such as “products as a service”.
The initiative will also have a strong communication dimension. It will establish new requirements on mandatory sustainability labelling, to inform consumers and influence their purchase and consumption behaviours. Additionally, it will create a digital product passport, as well as a framework for the digital communication of supply chain information. This will likely cover all stages of the supply chain, from raw materials to retailing. Finally, the Commission intends to introduce new incentives. By offering various rewards and visibility opportunities for sustainable products, manufacturers are incentivised to make their products more sustainable. An example of this is the development of green procurement rules.
The upcoming legislation would need to resolve at least three foreseeable issues. First of all, there is the question of feasibility. Under the current legal system, manufacturers have a large degree of freedom to manufacture products. So long as energy-using products meet certain efficiency requirements, and so long they are in compliance with applicable safety and chemical composition rules, manufacturers are free to design their product in whichever way they deem best. Under the new system, more manufacturers will have to incorporate a wider range of sustainability principles and criteria. If these principles are not formulated correctly, or if criteria are not specified on a sector- or product-specific basis, there is a risk that SMEs will have to deal with requirements that are practically or economically infeasible. Secondly, there is the issue of red tape. SMEs would face financial and productivity losses in case they have to fill out extensive paperwork to ensure compliance with the revised Directive. Thirdly and finally, some SMEs will be forced to adapt their products and production processes. This means that they will have to make certain investments. This is only possible if adequate guidance, clarity and access to finance are provided. The envisaged changes to products will also lead to inevitable changes to the business models of certain SMEs. If a company is currently active in the field of single-use and/or unrepairable goods, it is likely that strategic adaptations will be needed to ensure continued profitability in the future.
The EU should carefully weave the new legislative landscape
The SPI will be part of a complex set of closely-related initiatives under the Circular Economy Action Plan. For instance, the Green Claims initiative – expected to be released together with the SPI in the first quarter of 2022 – will lay down rules on when and how an economic operator will be legally able to label its product as sustainable. The issue of labelling is further complicated by the development of Product Environmental Footprint Category Rules (PEFCRs). PEFCRs will define a number of criteria and measurements through which the environmental footprint of a product can be calculated. It is imaginable that PEFCRs will become the underlying technical basis for the Green Claims and Ecodesign rules, but the finetuning among the three is all but simple.
Another example of intertwined initiatives is market surveillance. Rules on market surveillance were recently revamped through Regulation 2019/1020, but the SPI will bring product compliance with EU several steps further. This may lead to additional costs for producers, retailers, and possibly consumers. Without proper market surveillance, uncompliant products placed on the market by “free-riders” would enjoy an unfair competitive advantage vis-à-vis compliant products. This would happen to the detriment of virtuous businesses, who are forced to invest without the certainty of a short-term return.
Last but not least, the future “right to repair” legislation will set additional requirements on producers and retailers operating in the EU market. This legislation will likely be aligned with the requirements of the SPI.
The complexity of this initiative is illustrated by the delay in the publication of the SPI by the European Commission. Initially envisaged for the first half of 2021, the package has been postponed until 2022. This does not come as a surprise, considering the paradigmatic shift that the SPI represents. The changes that the SPI will implement, will deeply affect product processes, as well as entire business and consumption models.
At Lykke Advice, we provide advice to companies and associations regarding the latest developments in the European institutions. We help you identify how upcoming legislation might affect your organisation. Please contact us if your company or association would like to know more about upcoming legislation, or if you want to influence the political process to make sure that the legislation benefits your interests.