Bin there, done that: Consultation published on the expansion of the UK ETS to the waste sector

In May, the UK ETS Authority (the "Authority") published a consultation on the expansion of the UK Emission Trading Scheme (the "UK ETS") to the waste sector (the "Consultation"), which was first announced in July 2023 (see here). The expansion will be implemented in phases, starting with a two year transitional period from 1 January 2026. The Consultation seeks views as to whether monitoring, reporting and verification ("MRV") requirements will be mandatory during this period. If they are, companies will need to have an approved monitoring plan in place by 1 January 2026. From 1 January 2028, waste incineration facilities ("WIFs") will be required to surrender allowances ("UKAs") in respect of their carbon dioxide emissions.

The Consultation seeks views on the following areas:

1. the scope of the proposed expansion, including possible exemptions;
2. requirements for participants (including MRV requirements); and
3. how the UK ETS cap should be adjusted following the expansion of the UK ETS scope.

It also includes a Call for Evidence on incentivising investment in heat networks.

The Scope of the expansion

Technologies in scope

The Authority indicated that it aims to ensure that the expansion of the UK ETS to the waste sector maintains a level playing field across different technologies. In light of this, it is proposed that the expansion would cover:

• the incineration and combustion of waste, of which Energy from Waste ("EfW") is the largest sector affected;
• the energy recovery from waste, including Advanced Thermal Treatment and Advanced Conversion Technology;
• the direct emissions associated with the production of waste-to-fuel activities such as sustainable aviation fuels; and
• chemical recycling facilities which perform energy recovery activities or which produce fuels for burning, together, Waste Incineration Facilities ("WIFs").

Emissions in scope

To align with the current scope of the UK ETS, it is proposed that only fossil (and not biogenic) carbon dioxide emissions would be covered.

Small emitter statuses

The Authority confirmed that it is not minded to use the existing 20MW thermal input threshold for the inclusion of combustion units due to the heterogeneity of waste feedstock: all WIFs will therefore be in scope of the UK ETS. However, hospitals or small emitters may be able to apply for one of the following statuses once they have participated in the MRV-only period:

Participating in the scheme

The transitional period from 2026 to 2028

The Authority seeks views as to whether the UK ETS MRV obligations should be mandatory or voluntary during the transitional period. An MRV-only period would provide data which would enable the Authority to verify the net-zero consistent emissions trajectory and identify any issues with the proposed approach.

Monitoring, reporting and verification of CO2 emissions

WIFs will only need to purchase and surrender allowances in respect of fossil (not biogenic) emissions. The Authority is exploring methods that WIFs could use to determine the split between their fossil and biogenic emissions. This has included an external report which analyses the accuracy, cost and practicality of certain methods (eg feedstock sampling and analysis, flue gas sampling and predictive (balance) methods).

However, in light of the installation and operation costs of these methods, the Authority is also considering how default calculation factors could be used, including how these would account for national, regional and local differences in waste management KPIs.

The Authority proposes to align waste sector MRV requirements with the tiered approach currently used in the UK ETS, and is considering which of the following would be most suitable:

• uncertainty range tiers assigned for measurement-based methods for the determination of overall carbon dioxide emissions at installations; or
• methodological approach tiers that are assigned to facilities for the determination of biomass fractions in the fuels they burn.

Adjusting the UK ETS cap

In July 2023, the Authority indicated that it would align the cap with a net-zero trajectory, but that this would be amended to account for the inclusion of any new sectors. The amended Phase I cap proposed has been formulated following consideration of the Government's latest decarbonisation pathways. The proposed adjustment will add allowances to the UK ETS cap for each remaining year in Phase I (2028 to 2030 inclusive). These will not be ring-fenced for sectors that are new to the scope of the UK ETS. The adjustment figures will be confirmed in the Authority's response.

Adverse impacts

Sustainable waste management

The Authority has recognised concerns raised by stakeholders in the waste management sector that the expansion of the scope of the UK ETS to include EW may lead to:

1. decreased cost of sending waste to landfill, which could encourage greater use of landfills and disincentivise investment in more sustainable waste management alternatives; and
2. increased export of waste as Refuse Derived Fuel ("RDF") or Solid Recovered Fuel ("SRF").

To mitigate these risks, the Authority is considering increasing landfill taxes, including landfill emissions in the UK ETS, creating a RDF/SRF export tax and/or a RDF/SRF permitting system.

Impact on customers

The Authority has indicated that it will work with the relevant government departments to assess the financial impact of this scope expansion on the local government sector given that local authorities are the largest customers of WIFs.

As it is expected that the majority of UK ETS compliance costs will be passed through to WIF customers, the Consultation outlines the importance of accurately apportioning the fossil content between customers of WIFs such that cost apportionment can reflect customer efforts to recycle and/or reduce emissions. The Authority is consulting on the following options: (1) sampling; (2) a default calculation factor; or (3) a combined approach. ​​​​​

Call for Evidence: UK ETS and heat networks

The Consultation also includes a Call for Evidence on how the UK ETS could incentivise participants, including WIFs, to export heat via heat networks. Heat networks supply heat from a central source to consumers and help reduce emissions associated with heating domestic and commercial buildings. The UK ETS currently provides some incentive through free allocations for installations that export or utilise heat. However, the Authority has recognised an opportunity to reduce some barriers faced by UK ETS participants who seek to invest in a heat network and export or utilise heat. It is therefore calling for evidence regarding how UK ETS participants could be encouraged to capture and use surplus or waste heat.

Next steps

The Consultation was initially scheduled to close in July, but the deadline was extended to 2 August 2024. The Authority plans to:

1. use the responses to develop its final policy decisions before the start of the transition period on 1 January 2026;
2. publish guidance to help new participants meet their UK ETS obligations before the commencement of the transition period; and
3. given the importance of CCS to EfW sites without CCS pipeline access, consult in due course on how to integrate into the UK ETS framework the recognition of non-pipeline transport ("NPT") by allowing UK ETS participants wo use NPT for CO2 storage to subtract relevant amounts from emissions.

If you would like to understand more what the Consultation means for you or your business, or to learn about making a submission, please do not hesitate to get in touch.