EXPANDING THE UK EMISSIONS TRADING SCHEME TO COVER ESMISSIONS FROM WASTE

At the end of March, the UK Government published its long-awaited consultation (the "Consultation") on the further development of the UK Emissions Trading Scheme ("UK ETS") indicating the future capacity and scope of the UK scheme. The UK ETS was launched on 1 January 2021 to replace Great Britain's participation in the EU ETS after the end of the Brexit transition period and has been so far closely aligned to the EU ETS. The goal of the Consultation is to make the UK ETS the world's first net-zero consistent cap and trade market, and ensure it plays a crucial role in achieving the UK's ambitious climate targets, including net-zero greenhouse gas emissions ("GHG") by 2050.

The scheme is currently modelled on the EU ETS and existing excluded sectors were carried over when the UK ETS was implemented, meaning that emissions from waste incineration with no energy recovery and energy from waste ("EfW") are at present not covered in the remit of the scheme. The Consultation indicates the intention for the UK ETS to develop and mature independently of the EU ETS into a more ambitious and expansive scheme. Chapter 7 of the Consultation proposes the expansion of the UK ETS to cover emissions from waste incineration, with the goal of reducing emissions by incentivising waste incinerators to supply heat, increase the recovery of residual waste in ways which lowers overall carbon emissions, and adopt decarbonisation technologies and practices.

The Consultation on EfW's inclusion with the UK ETS takes the following call for evidence, with a number of questions for respondents to consider. The answers to these questions would help the Government form policy which can be expected to be the subject of a further Consultation in due course.

Key areas of the consultation concerning EfW include:

1. implementing the expansion of the ETS to waste incineration and EfW by the mid-late 2020s;
2. the Monitoring, Reporting, and Verification ("MRV") obligations to be placed on operators of waste incinerators and EfW plants; and
3. the wider impacts of applying the UK ETS to waste incineration and EfW, specifically:
   1. distributional and market impacts; and
   2. interaction with planned and existing policy.

1. Background

The proposal to include waste incinerators in the UK ETS is consistent with the gradually increasing pressure exerted on the Government to reduce emissions from the waste management sector. In the 2020 Sixth Carbon Budget report, the Climate Change Committee ("CCC") recommended that any new EfW should be built with Carbon Capture and Storage ("CCS") or be CCS-ready. The Government displayed an intention to develop policy consistent with this recommendation in May 2021 when the Department for Business, Energy & Industrial Strategy ("BEIS"), in its update on the business model for Industrial Carbon Capture ("ICC"), announced a minded-to position to provide support for the application of CCUS at EfW facilities via the ICC business model. A further update in November 2021 confirmed its decision to enable waste management CCS projects to be eligible for ICC business model support and for phase 2 of the cluster sequencing process.

Unlike other sectors supported under the ICC business model, waste management processes are not currently subject to the UK ETS or any other form of carbon pricing. If the primary purpose of an installation is the incineration of hazardous or municipal waste then the installation is entirely zero-rated in the UK ETS, putting the instruction outside of the UK ETS' scope. The inclusion of support for the waste management sector under the ICC business model, therefore, is more comprehensible in light of the recent proposal to expand the UK ETS to cover the sector. Arguably inclusion in the UK ETS will provide a direct financial incentivisation for operators of waste incinerators and EfW plants to invest in and implement CCUS technology to reduce CO2 emissions.

2. Timing

To align with wider waste reforms later this decade, the Consultation proposes expanding the UK ETS to waste incineration and EfW by the mid-late 20s. As noted below, the Consultation identifies a number of factors that will need to be notified in this period to implement the UK ETS policy alongside other tax and policy structures around the UK waste sector. A key issue for prospective and current EfW investors will be how their long-term waste supply agreements will respond to any change in law introducing the UK ETS to the sector and the pricing of the contracted gate fee.

3. Monitoring, reporting and verification of emissions

The Consultation's starting point is that the UK ETS should cover the incineration of fossil material by all waste incinerators. This means the UK ETS obligation for robust MRV would be placed on all operators of waste incinerators. For EfW this would mean conventional incineration, Advanced Thermal Treatment and Advanced Conversation Technology would all fall under the scope of ETS and pay a carbon price.

Fuel burnt at waste incinerators and EfW plants generally contain a mix of fossil and biogenic material. The ICC business model notes that the utilisation of CCUS on emissions from biogenic waste could result in negative emissions. This is acknowledged in the Consultation, however, the Authority confirms that at this point negative emissions will not be covered by the UK ETS. The proposed ETS obligation would apply to the processing of fossil waste only. This gives rise to the question of how the CO2 emissions will be calculated since it can be difficult to determine the exact ratio of biogenic and fossil CO2 in the total CO2 emitted.

The Consultation suggests two options for determining the UK ETS MRV obligations for each plant:

1. Individual plant monitoring: individual operators would be required to determine the ratio of fossil and biogenic CO2 that is being emitted from their plants, either via the radiocarbon (14C isotope method), or by the "balance method".
2. Emissions factor: this approach would use an estimate for the composition of waste (an emissions factor) which would then be multiplied by the tonnes of waste processed to estimate a plant's emissions from fossil waste and therefore determine its ETS obligation. The emissions factor could be national or regional, or each plant could derive their own based on international standards.

4. Wider impacts of expanding the ETS to cover waste incineration and EFW

The Consultation eludes to a number of potentially negative impacts of including waste incineration in the ETS, however, it largely leaves gaps on how these are to be addressed.

Inclusion in the UK ETS will undoubtedly cause increased costs for operators. The Consultation is unclear on how these will be mitigated. It notes that EfW plants will have the option to pass the additional costs of the UK ETS through to local authorities (LA's) under long-term contracts (as noted above, the ability of an operator to pass on the cost across all waste supply contracts will need to be considered by the operator. It also suggests that higher incineration costs will have a positive effect by incentivising local authorities to recycle more, however, this is caveated by the acknowledgement that additional recycling infrastructure would be needed to achieve this. The Consultation also points out that some businesses will incur extra costs, however the knock-on effect of this is not addressed.

A further harmful impact of rising costs for operators noted by the Consultation is the risk of disrupting the waste hierarchy. The waste hierarchy ranks waste management options, prioritising the prevention of waste in the first place. When waste is created, it gives priority to preparing it for re-use, then recycling, then recovery, and finally landfill. The concern is that inclusion in the UK ETS may undermine the waste hierarchy by motivating the sector to send more waste to landfills if it became a less expensive form of waste treatment or to increase its exports of refuse-derived fuel.

The Consultation seeks to mitigate this concern by stating that they will consider the impact of including the waste sector in the round with Landfill Tax In particular, the Consultation will seek to ensure that no perverse economic incentives encourage certain materials to be diverted back to landfill.

The Consultation notes the importance of CCS in meeting climate targets and confirms that it is seeking views on how effective the UK ETS could be to incentivise CCS uptake for EfW and waste incineration plants across the UK, given that only certain EfW facilities are located proximate to proposed industrial cluster for carbon capture.

5.  Responding to the Consultation

The Consultation closes on 17 June 2022 and responses will inform policy development. After reviewing responses and evidence, the final position will be published in the government response to the Consultation.

The public law team at Herbert Smith Freehills have wide experience of advising on the approach to consultation responses, including consideration of factors such as whether consultees have been provided with sufficient time and information to prepare an informed response and to instruct experts if necessary. This is in circumstances where it is important that relevant expert and factual information is put before BEIS at this stage, as it is difficult to introduce new evidence later.

Should you require any assistance in preparing a response to the Consultation please contact Nusrat Zar, a partner in the public law team, at nusrat.zar@hsf.com