UK Emissions Trading Scheme to be expanded to cover Energy-from-Waste

Background

In March 2022, the UK ETS Authority¹ consulted on proposals relating to the UK ETS. As part of this consultation, the Authority published a Call for Evidence on expanding the UK ETS to cover Energy-from-Waste (EfW).²

On 3 July, the Authority published its Main Response to the Consultation. This sets out the Authority’s minded-to position to include EfW in the UK ETS with full costs exposure from 1 January 2028.

Given the broad impact this is expected to have on the waste sector, we will be preparing two initial briefings to help our clients navigate, and prepare for, this change.

Part 1

In this Part 1 we respond to 10 FAQs relating to the proposed design of the expanded UK ETS.

Part 2

In Part 2 (to follow), we set out our views on the potential commercial and contractual implications of attaching a carbon price to EfW emissions.

1. When will the UK ETS be expanded to cover EfW?

The UK ETS will apply in full to EfW "from 2028". Given the UK ETS works on a calendar year compliance cycle, we understand this to mean that the UK ETS will apply in full from 1 January 2028.

There will be a two-year phase-in period from 2026-2028 during which time EfW facilities will monitor their CO2 emissions but will not have to surrender allowances in respect of these emissions. There will therefore be no 'carbon price' during this phase-in period. The Authority intends to consult by the end of 2023 on the details of implementing these proposals.

2028 was selected by the Authority as the first full year of costs exposure so as to align with other developments in waste policy, including restrictions on waste to landfill; the introduction of the Deposit Return Schemes (DRS); reforms to ensure consistent waste collections; and Extended Producer Responsibility (EPR).

2. Which technologies will be caught?

The UK ETS will be expanded to cover EfW and waste incineration without energy recovery. The Authority also intends to include advanced thermal treatment (ATT), advanced conversion technology (ACT) and other related advanced waste technologies (including waste-to-fuel facilities).

3. Who will be responsible for compliance (including monitoring, reporting and verification and surrendering UK ETS allowances)?

The "point of obligation", as it is described in the consultation, will be on "operators". An operator is the person who has control over the operation of the EfW facility. This means that operators will be:

• required to hold a UK ETS permit;
• responsible monitoring, reporting and verifying emissions (by 31 March of each compliance year); and
• responsible for acquiring allowances (via auction / secondary market) and surrendering these (by 30 April of each compliance year).

This is intended to align with existing monitoring requirements under environmental permits.

Note that this is the point of legal compliance under the UK ETS; it is envisaged that operators will seek to pass through UK ETS liabilities under existing contractual arrangements (more on this in Part 2, to follow).

4. Will operators be obliged to surrender UK ETS allowances covering all of their emissions?

In short, no. The Authority intends that the UK ETS will apply only to the processing of fossil waste. In practice, this means that operators will only need to surrender UK ETS allowances in relation to their fossil emissions; there will be no requirement to surrender allowances covering biogenic emissions. This broadly aligns with the existing approach to biomass under the UK ETS.

5. What is the anticipated cost of including the EfW sector in the UK ETS?

This is not addressed directly in the consultation response. However, the Authority estimates that it will need to add approximately seven million UK ETS allowances to the UK ETS cap to account for the UK ETS sector for the scheme year 2028. For illustration purposes, assuming a carbon price of £100/T, inclusion of EfW in the UK ETS will initially cost the waste sector in the region of £700 million per scheme year.

In practice, the total costs exposure could be higher as there will also be associated compliance costs including measurement / monitoring costs (including potentially new monitoring devices), reporting and verification costs (including third party verifiers), costs associated with applying for an UK ETS permit and permit subsistence fees.

6. Which greenhouse gases will be covered?

The Authority intends to cover fossil CO2 emissions at first (and not other greenhouse gases). This is consistent with the UK ETS which focuses almost exclusively on CO2. If the UK ETS is expanded in due course to cover the wider waste sector (including landfill), the Authority may explore including other greenhouse gases, in particular methane.

7. What approach / methodology will be taken for MRV?

This remains undecided. The Authority will continue to explore the two MRV options it proposed in the Call for Evidence, namely:

• Option A: individual plant monitoring, which would require a facility to determine the split of fossil/biogenic CO2 emissions by means of the C-14 method or "balance method"; and
• Option B: an emissions factor approach, which would apply an estimate for the waste composition to each facility's CO2 emissions to determine the volume of fossil CO2 being emitted.

The Authority intends to consult by the end of 2023 on more detailed proposals for MRV. MRV remains of key importance as it may inform the approach that contractual counterparties take to the pass-through of UK ETS liabilities.

8. Will any types of incinerator or waste streams be excluded (e.g. hazardous and clinical waste incinerators)?

The Authority is not minded to exempt hazardous waste or clinical waste (or incinerators which incinerate those wastes) from the UK ETS. Operators should therefore be prepared for these waste streams / incinerators to be caught by the UK ETS.

9. Will existing UK ETS 'opt-out' schemes be available?

The Authority intends to allow operators to benefit from both the 'Hospital and Small Emitter' and 'Ultra-Small Emitter' opt-out schemes. The primary benefit to the opt-out schemes is that an emitter does not need to surrender UK ETS allowances by 30 April in respect of an installation's reportable emissions. However, holders of 'Hospital and Small Emitter' permits would be given emissions targets, which, if breached would give rise to a civil penalty (equal to the amount of the exceedance multiplied by the carbon price for the scheme year).

The Ultra-Small Emitter (<2,500 TCO2e per year) is unlikely to be applicable to EfW facilities, given typical waste throughput. However, the Authority intends to slightly adjust the Hospital and Small Emitter opt-out criteria which will have the effect of making this opt-out more accessible to EfW facilities. Specifically, the Authority is minded to keep the emissions threshold at equal to or less than 25,000 TCO2e per year (excluding biomass) but remove the 35MW thermal input criterion.³

The Authority is aware that this threshold may encourage a movement towards smaller EfW facilities (so as to avoid the carbon price), and proposes to consult further on this issue by the end of 2023.

10. When is the next detailed consultation on this change?

The Authority has confirmed that it will publish further details on a number of the above items in a further consultation "later in 2023". Given the complexity of this topic, it is perhaps unsurprising that there will be a further consultation.

In the meantime, we would anticipate stakeholders, including project developers, investors, waste suppliers and local authorities, will all start to consider the potential impact of UK ETS expansion on their existing/future operations and contracts.

Authors: Nick Stalbow, Partner; Cameron Smith, Partner; Anthony Johnson, Partner; Eleanor Reeves, Partner; James Nierinck, Senior Associate; Joshua Kaye, Associate

Footnotes

_{1. Made up of the UK Government, Scottish Government, Welsh Government and the Department of Agriculture, Environment and Rural Affairs in Northern Ireland}

_{2. Where referring to EfW, this covers both EfW and waste incineration with no energy recovery. For further information on the initial consultation, please see our earlier briefing: Energy from Waste to be included in the EU Emissions Trading System (ashurst.com).}

_{3. The Authority is minded not to use the existing second limb of the HSE opt-out, being 35 MW thermal input for combustion activities.}