Energy from Waste (EfW) facilities – what does the future hold with the expansion of the UK Emissions Trading Scheme (UK ETS)?

Introduction

Further to the UK Government’s consultation on reforming the UK ETS (the Consultation), on 3 July 2023 the UK ETS Authority¹ published its response to the Consultation (the Response). Our article providing a general summary of the Response can be found here.  

In this article, we specifically look at the new proposals for expanding the UK ETS to include waste incineration and EfW facilities. The proposals are anticipated to come into force from 2028 (with a phasing period between 2026-2028), therefore EfW operators need to understand what changes are expected as early as possible in order to prepare.

Recap of the UK ETS

As set out in our previous articles on this topic (see here and here), the UK ETS came into effect on 1 January 2021 to replace the EU Emissions Trading Scheme (EU ETS) after the end of the Brexit transition period. 

The UK ETS requires operators of installations in a number of energy-intensive sectors to surrender CO2 emission allowances equivalent to the total emissions of CO2 from the installations within a given year. The UK ETS is effectively a cap-and-trade system which sets a cap on the total level of permitted greenhouse gas emissions, while simultaneously creating a carbon market of emission allowances for any unused emissions allowances.

Proposals for EfW under the UK ETS

Following last’s year Consultation, which included a Call for Evidence on expanding the UK ETS to the waste sector (specifically on including EfW and waste incineration facilities with no energy recovery), the UK ETS Authority has now provided its Response setting out the proposals it intends to bring forward. 

The proposed expansion of the UK ETS to the waste sector was considered on the basis that it would encourage residual waste to be recovered in a way that lowers carbon emissions as well as incentivise investments into new decarbonisation technologies (including carbon capture and storage (CCS)).  

The proposals include the following key points: 

• Timing: EfW and waste incineration facilities will be included in the UK ETS from 2028. The UK ETS Authority is ‘minded to’ include a two-year phasing period between 2026-2028 where installations will be required to monitor their emissions (however, this is subject to further consultation). The UK ETS Authority believes that this phasing period will allow operators and customers to understand how the UK ETS reporting cycle functions and identify costs impacts. The proposal to include EfW and waste incineration facilities in the UK ETS from 2028 also means the UK ETS may end up aligning with the approach under the EU ETS. The European Commission is currently considering whether to include EfW and waste incineration facilities within the equivalent EU ETS from 2028 onwards, and is due to report back on its decision by July 2026.   

• Point of obligation: operators of waste incineration and EfW facilities will be responsible for the monitoring, reporting and verification (MRV) of emissions. Advanced thermal treatment (ATT), advanced conversion technology (ACT) and other related advanced waste technologies (including waste-to-fuel facilities) will be included. Notably, the UK ETS Authority is ‘not minded’ to exempt hazardous waste and clinical waste from the scope of the scheme (subject to further consultation). 

• Thresholds: currently, the UK ETS applies only to those installations that have a total rated thermal input exceeding 20MWth across heating systems that are 3MW or over. In the Response, the UK ETS Authority stated that it planned to review this threshold, but there is inadequate evidence to commit to a policy proposal and that it will need to gather more data around the potential market distortion caused by the existing threshold. Given that the current threshold would result in around half of all EfW facilities operational in the UK being caught by the UK ETS, the extent to which the threshold may be adjusted by the UK ETS Authority will need to be closely monitored by operators. Separately to the 20MWth threshold, the Response indicates that ultra-small emitters (emitting less than 2,500 tonnes of CO2e) will be able to opt out. In addition, the UK ETS is also ‘minded to’ use the existing threshold for Hospital and Small Emitters (i.e. 25,000 tonnes of CO2e per year) but for fossil emissions only.  

• MRV of emissions: the scheme will cover fossil emissions. However, the UK ETS Authority has not yet decided how such emissions will be calculated and, depending upon the approach adopted, it could result in significant additional costs to operators in order to ensure MRV compliance. The UK ETS Authority has also stated that it will explore in more detail the potential to include other greenhouse gases in the future (e.g. methane) and will also look at the applicability of current requirements for biomass for residual waste. 

Although more specific details on these proposals are still awaited, it is clear that there will be a series of new obligations on the EfW sector by expanding the scope of the UK ETS.

Next Steps

Before any final policy decision, the UK ETS Authority will take into account updates to assessments of the pace of emissions reductions needed to deliver climate targets and also obtain advice from the Climate Change Committee. The UK ETS Authority will consult on the details of the implementation by the end of 2023. 

Commentary

One of the key points behind the UK ETS Authority’s proposals is the belief that by covering waste under the UK ETS there will be a greater incentive to invest in cleaner technologies, including CCS. Some prominent market players are already exploring ways to incorporate CCS into their operations. For instance, Cory is looking to ship carbon from its EfW facilities on the Thames to Northern Light’s subsea storage facilities in Norway, while Encyclis is aiming to set up one of the first commercial CCS plants at its EfW facility in Cheshire. Those EfW operators based near the UK’s proposed CCS clusters (such as those in the north east and north west of the UK) will also be particularly well placed to take advantage of the CCS infrastructure that is scheduled for development. However, concern has been expressed about the ability of waste operators to incorporate decarbonisation and CCS technology into their plants, and whether there will be sufficient infrastructure and support in place for all. Some have also raised concern about how captured CO2 may be transported to CCS sites and the costs of doing so, particularly where they cannot make use of pipeline transmission. For some operators, such as those located further away from proposed CCS clusters or for operators of older plants with less scope for development, the costs associated with decarbonisation and CCS technology may prove to be prohibitive without further support from the UK government.      

If the inclusion of EfW facilities in the UK ETS is to be a success, consideration will also need to be given to the effect it will have on the existing EfW market, and whether the proposals will provide a real incentive considering the potential impact on operating and capital expenditures. 
Likewise, much uncertainty still remains about who will be expected to pick up the costs associated with the UK ETS. Although operators will be expected to shoulder the cost in the first instance, many respondents in the Consultation stated that they expect gate fees to increase and for costs to be either passed through to consumers and local authorities and/or for producers to take on extended responsibility. Over half of the respondents in the Consultation stated that contracts between operators and local authorities will also need to be re-negotiated, if the UK ETS Authority’s proposal is implemented.   

Further, it is still unclear the extent to which changes will be made to the rules governing landfill and export markets, with many in the waste sector having already voiced concern about the potential impact this could have on behaviours if treatment via EfW facilities is seen as too expensive as a result of its inclusion in the UK ETS.      

Finally, many EfW projects were commissioned on the basis of complex and heavily negotiated financial models, and the changes proposed by the UK ETS Authority could have a significant impact on the funding arrangements for EfW operators and local authorities alike. Many contracts concerning EfW projects will have also been drafted with change in law provisions that anticipated the inclusion of EfW facilities within the UK ETS. As a result, stakeholders are advised to keep a particularly close eye on this developing proposal, as well as reviewing any relevant change in law provisions in their contracts, if they are to understand what it means on a project specific basis.

Conclusion

With the UK ETS carbon price currently at £83.03 and set to continue to rise in the coming years, the waste sector will need to consider very closely how best to place itself in light of the changes on the horizon and address the likely increased costs connected with CO2 emissions, as well as UK ETS costs. 

At Norton Rose Fulbright we will continue to monitor these developments over the coming months and provide further updates on the amendments to the UK and EU ETS. If you have any questions or would like any further information about these issues, please contact us.