The Run on Recycled Plastic

Plastic recycling has grown over the past few decades but still only accounted for 9 percent of the world’s plastic waste in 2020—roughly 34 million metric tons per year. That’s less than half the amount that was improperly dumped or washed into waterways, according to data from the Organisation for Economic Cooperation and Development (see Figure 1). Rising incomes will only increase demand for plastic in the coming decades, particularly for packaging or textiles (see Figure 2).

But recycling could get a boost as technologies improve and governments impose stricter recycling rules. The European Union will require food packaging and bottles to include recycled plastic by 2040 and is considering recycled plastic mandates for new vehicles. The United Kingdom now charges a tax on plastic packaging containing less than 30 percent recycled content. Australia, Canada, India, Indonesia, and other countries are proposing their own recycled content rules for certain types of packaging, while China, Chile, and Kenya, among others, are banning single-use plastic bags.

Since plastic products are globally traded, these domestic policies will have broad ramifications. At current production levels, however, the world will not be able to meet the projected demand for recycled material. Emerging and developing economies, in particular, would benefit from more capacity since they will account for more than half the growth in the world’s plastic waste by 2060, according to OECD figures. For recyclers, this represents both a challenge and an investment opportunity.

Opportunities for Plastic Recycling Firms

There are two steps to plastic recycling. The first involves collecting plastic waste and sorting it by type. This is usually done by municipal governments, private companies, or informal workers who sift through landfills looking for recyclable plastic. The second, performed by recyclers and plastic producers, takes that presorted plastic waste and uses it to produce new plastic products.

A new group of emerging technologies, collectively known as chemical recycling promises to make more types of plastic recyclable. Investors are increasingly investing in R&D and commercial-scale chemical recycling projects.

Unlike traditional mechanical recycling, which shreds and melts products like plastic bottles to produce new ones, chemical recycling breaks down plastic waste into its component chemicals, which are turned into new products. That means hard-to-recycle products such as take-out containers, car parts, or household appliances could now be more easily recyclable. What’s more, chemical processes could allow products to be recycled multiple times. There are drawbacks to chemical recycling, however. It emits more greenhouse gases than mechanical recycling, and consumes more energy and water, which it contaminates. But chemical recycling can still be an improvement over dumping plastic waste in landfills or incinerating it, research suggests. Building a facility is also more expensive.

About 80 percent of the 308,000 metric tons of annualized recycling capacity announcements tracked by Bloomberg New Energy Finance in the second half of 2024 were for chemical recycling projects. By 2030, chemical recycling capacity could reach around 5 million metric tons, up from less than 1 million in 2023.

For now, most of this investment has taken place in the United States or Europe (see Figures 3 and 4). But interest is growing in emerging markets. Greenback Recycling Technologies, for instance, plans to develop new capacity in Latin America using microwave-induced recycling technology to process up to 90,000 metric tons of hard-to-recycle waste such as flexible plastic packaging. PETRONAS Chemical Group also recently announced it would build Asia’s largest chemical recycling plant.

There are early indications that government recycling requirements are driving up the so-called “green premium,” or the difference between the higher prices for recycled plastic prices and lower ones for virgin plastic, particularly for chemical recycling plants. A BloombergNEF survey of 27 plastic recyclers in Europe showed that the green premium for chemical recycling was between 30 percent and 70 percent for high quality recycled plastic. They expect it to remain steady or rise by 2030. That could give investors an incentive to build more plants in emerging markets. But geopolitical tensions or government policy changes could alter that thinking.

Experts at McKinsey estimate that meeting the coming demand would require an additional $50 billion investment by 2030 compared to 2020 (see Figure 5). One third of that would go to collecting and sorting plastic waste, usually the tightest bottleneck in the recycling process. That means countries with large amounts of mismanaged plastic—such as Brazil, Türkiye, or Thailand—could use it as recycling feedstock to make new material to sell to customers in Europe or elsewhere. For hard-to-recycle plastics, such as car parts, there’s an opportunity for India, Brazil, Mexico, all of which have auto manufacturing plants.

Indorama Ventures, the world’s largest polyethylene terephthalate (PET) recycler, is planning to expand its Thailand plants, and open new ones in Indonesia and India with IFC’s support. Indorama is also working with small- and medium-sized businesses to make furniture out of recycled PET. Mohinani has subsidiaries in Nigeria and Ghana that each recycle up to 13,200 metric tons of PET bottles with plans to expand.

Obstacles to Overcome

A major challenge is the shortage of recycling feedstock. About 40 percent of plastic collected for recycling is lost along the way because it isn’t sorted properly or because it’s contaminated, according to the OECD. Slightly more than half the mechanical recyclers surveyed by BloombergNEF last year cited a shortage of suitable feedstock as their biggest challenge. That shortage will only grow as demand for recycled material rises.

Developing countries deal with an opaque and fragmented informal recycling supply chain. In many countries, plastic reaches recyclers through collectors, who gather plastic waste from landfills and take it to aggregators. These aggregators, working out of their homes or small shops, sort the plastic and send it on to the recyclers.

Those lower in the supply chain often don’t know what prices are being charged further up, which makes it impossible for them to adjust their prices in response to market changes. Recyclers keep up to 80 percent of the supply chain’s total profit margins, according to a survey of collectors, aggregators and recyclers in four Asian countries by The Circulate Initiative.

To some degree, it makes sense for recyclers to be compensated for their capital investment and the risk they take on. In practice, however, concentrating profits in this way means the lower ends of the supply chain don’t benefit from higher prices for recycled materials, making the overall market less efficient.

Investing in more efficient plastic collection and sorting programs could bring these informal workers into the formal economy while giving recycling plants a more reliable supply of feedstock. A recent study by Ronald Berger, a consulting firm, pointed to collection and automated sorting facilities as one of the main investment opportunities.

The packaging industry, among others, could also rework plastic designs to make them easier to recycle. Replacing colored plastic bottles with clear ones, as the soda brand Sprite recently did, would help. Recyclers in Southeast Asia pay $84 more per metric ton for clear bottles than for colored ones, according to the Ellen MacArthur Foundation. Avoiding oversize labels, aluminum foil caps and metal pumps on cleaning or skin care products would also be a promising development since these complicate recycling.

Boosting the amount of plastic the world recycles would not only benefit investors and recyclers. It would also result in lower greenhouse gas emissions. A recent study modelling the 2050 effect of eight policy options under discussion as part of ongoing talks toward a United Nations treaty on plastics found a 40 percent minimum recycled content requirement would be the most effective in curbing mismanaged plastic and reducing new plastic production. Developing countries would see some of the biggest effects (see Figure 6).

Plastic recycling is a key part of the circular economy, which seeks to minimize the use of natural resources, maintain the value of products in the value chain, and reduce waste. Reducing plastic waste requires many levers, including the design of plastics that are easier to recycle, production lines that incorporate alternative materials, reuse and refill business models to extend the useful life of materials, and extensive collection and recycling efforts. Recent interest from investors suggests recycling is also an area where there is money to be made.

Infographics by Irina Sarchenko, IFC