Government invites discussion on including EfW in UK ETS by 2028

The UK Government has launched a public consultation on its plan to expand the UK Emissions Trading Scheme (UK ETS) to include waste incineration and Energy from Waste (EfW) facilities. The consultation, which runs from today (23 May) to 18 July 2024, seeks input from stakeholders on the design and implementation of this policy aimed at driving decarbonisation in the sector.

The UK ETS, which came into operation on 1 January 2021, sets a cap on total emissions from covered sectors, including power generation, aviation, and energy-intensive industries, and allows participants to trade emission allowances to meet their obligations cost-effectively.

In 2022, UK ETS-covered emissions totaled 111 million tonnes of CO2 equivalent (MtCO2e), with stationary installations accounting for 103 MtCO2e and aircraft operators responsible for 8 MtCO2e.

The waste incineration sector, including EfW facilities, has been a growing source of emissions in the UK. In 2021, fossil CO2 emissions from EfW facilities reached approximately 7.0 MtCO2, while waste incineration without energy recovery contributed around 0.07 MtCO2. Together, these emissions account for about 1.4 per cent of the UK's total greenhouse gas emissions in 2021.

As part of its Net Zero Strategy, the UK Government committed to exploring the expansion of the UK ETS to cover the two-thirds of uncovered emissions. The inclusion of EfW in the UK ETS is seen as a key step in aligning the industry with the UK's net zero ambitions and driving investment in low-carbon waste treatment technologies. However, the tone of the consultation document published today suggests a softening of the Government's stance on the timeline compared to previous statements. In July 2023, the Government had confirmed its intention to include waste incineration and EfW in the UK ETS from 2028, preceded by a two-year transitional phasing period from 2026-2028.

The proposed regulated activities include the incineration and combustion of waste, as well as other energy recovery processes from waste. This encompasses a range of technologies and facilities, such as:

• Energy from Waste (EfW) plants: These facilities burn waste at high temperatures (>850°C) to generate electricity and/or heat. In 2022, there were 55 operational EfW facilities in the UK, with a further 16 under construction. The average capacity of an EfW plant in the UK was 317,000 tonnes per annum.
• Waste incineration without energy recovery: These facilities incinerate waste without harnessing the energy produced. As of 2022, there were 21 such facilities in the UK, including installations that manage clinical and hazardous waste. The average capacity of these incinerators was significantly lower than EfW plants, at 16,000 tonnes per annum.
• Advanced Thermal Treatment (ATT) and Advanced Conversion Technology (ACT): These processes use technologies such as pyrolysis and gasification to break down waste into constituent parts, producing fuel gases or liquids that can be used for energy generation or transport fuels. In 2022, there were nine operational ATT and ACT sites in the UK, with an average capacity of 98,000 tonnes per annum.

The consultation proposes to include only the fossil CO2 emissions from these activities within the scope of the UK ETS. Biogenic CO2 emissions, such as those from the combustion of food, paper, and wood waste, would not be covered.

In terms of emissions thresholds, the consultation proposes that all waste incineration facilities would be included in the UK ETS, regardless of their thermal input capacity. This differs from the current 20MW thermal input threshold used for combustion installations in other sectors. The rationale for this approach is the heterogeneous nature of waste feedstock, which can lead to variations in thermal input over time. This variation in waste composition affects the amount of heat energy released during incineration, making it challenging to set a consistent thermal input threshold for including these facilities in the UK ETS.

However, the consultation does propose to maintain the existing emission-based thresholds for the ‘Hospital and Small Emitter’ (HSE) opt-out and ‘Ultra-Small Emitter’ (USE) exemption. Facilities with fossil CO2 emissions between 2,500 and 25,000 tonnes per annum would be eligible for HSE status, which entails a simplified monitoring and reporting regime and exemption from allowance surrender obligations. Those with emissions below 2,500 tonnes per annum could apply for USE status, requiring only minimal monitoring and no surrender obligations.

The consultation seeks stakeholder views on several key questions related to the scope of the expansion:

• Do you agree with the proposed coverage of activities and technologies, including incineration, energy recovery, and the production of waste-derived fuels? Are there any additional technologies that should be considered?
• Should any specific waste streams, such as hazardous or clinical waste, be exempt from the UK ETS? The Government is currently not minded to provide any exemptions to maintain a level playing field and avoid potential misclassification of waste.
• Is the proposed approach of including all waste incineration facilities, regardless of thermal input capacity, appropriate? Should an alternative threshold, such as waste throughput, be considered?
• Are the proposed emission thresholds for HSE and USE status suitable for the waste incineration sector? Is there a risk that smaller facilities might be developed to avoid full UK ETS obligations?

The responses to these questions will help inform the final design of the UK ETS expansion to the waste incineration sector, ensuring that the scope and thresholds are appropriately tailored to the specific characteristics and challenges of this industry.

Adjusting the emissions cap

One of the key considerations in expanding the UK ETS to the waste incineration sector is the adjustment of the overall emissions cap to account for the additional covered emissions. The consultation document outlines the Government's proposed approach to increasing the allowance cap in a way that ensures consistency with the UK's net zero target and carbon budget commitments.

In the 2023 Authority Response, the Government decided to align the UK ETS cap for Phase I (2021-2030) with a net zero-consistent trajectory, reducing the total allowances by over 30 per cent from 1,365 million to 936 million. The response also indicated that the cap would be further adjusted to accommodate the inclusion of new sectors like waste incineration.

The consultation proposes to add allowances to the cap equivalent to the projected emissions from the waste incineration sector, based on emissions trajectories aligned with the Carbon Budget Delivery Plan (CBDP). This approach involves using the Department for Energy Security and Net Zero's Dynamic Dispatch Model (DDM) to estimate emissions from EfW, EfW combined heat and power (CHP), and ACT facilities, along with Energy and Emissions Projections (EEP) for waste incineration without energy recovery.
The cap adjustment also factors in the anticipated emissions reductions from waste incineration plants that will participate in the Industrial Carbon Capture Business Model (ICC BM), a government support scheme for the deployment of carbon capture technology.
Based on these calculations, the consultation estimates that an additional 21.9 million allowances will be needed over the period 2028-2030 to cover the waste incineration sector's emissions. This represents a 2 per cent increase in the total number of allowances available during Phase I of the UK ETS (2021-2030).
This proposed approach aims to ensure that the UK ETS cap remains aligned with the UK's net zero emissions target and carbon budget commitments while accommodating the inclusion of the waste incineration sector in the scheme.
The consultation seeks stakeholder views on the suitability of this approach to adjusting the cap and its potential impact on the wider UK ETS market. It also invites alternative proposals or evidence that could inform the final cap adjustment decision.

Proposed timeline

The consultation document sets out the proposed requirements and timeline for waste incineration facilities participating in the expanded UK ETS. The Government intends to apply the same regulatory obligations to the waste sector as those currently in place for other participants, with some sector-specific adaptations.

Waste incineration operators will need to apply for a Greenhouse Gas Emissions Permit and comply with its conditions, including monitoring, reporting, and verification (MRV) requirements. The compliance cycle will follow the existing UK ETS calendar, with a scheme year running from 1 January to 31 December and reporting and surrender deadlines of 31 March and 30 April, respectively.

To facilitate a smooth transition, the consultation proposes a two-year MRV period from 1 January 2026 to 31 December 2027. During this time, waste incineration facilities will be required to monitor and report their emissions but will not face obligations to surrender allowances. This phased approach aims to provide operators with time to familiarise themselves with the UK ETS requirements, establish robust MRV systems, and inform future cap adjustments.

The consultation presents two options for the MRV period: a mandatory approach, where all facilities must comply with full UK ETS monitoring and reporting requirements from 2026, and a voluntary approach, where operators can choose to participate and share data with the Government and their customers. The mandatory option would require operators to apply for permits and submit monitoring plans before 2026, while the voluntary option would offer more flexibility but may result in less comprehensive data collection.

From 1 January 2028, waste incineration facilities will become fully subject to UK ETS obligations, including the surrender of allowances to cover their reported emissions. The consultation seeks views on the practicality of applying the existing UK ETS regulatory requirements to the waste sector and the preferred approach for the MRV period. It also invites views on the type and timing of guidance needed to support participants in understanding and complying with their new obligations.

Addressing potential risks and impacts

One of the primary concerns is the potential for waste to be diverted away from incineration and towards landfills or exported as refuse-derived fuel (RDF) if the carbon price makes incineration relatively more expensive.

To mitigate the risk of increased landfilling, the consultation highlights the role of existing landfill taxes in England, Scotland, Wales, and Northern Ireland. These taxes are designed to incentivise the diversion of waste from landfills and will be kept under review to ensure they continue to support the waste hierarchy. The consultation also seeks views on the potential inclusion of landfill emissions within the UK ETS as a longer-term solution, although this would require further consultation and policy development.

Regarding the risk of increased RDF exports, the consultation explores several policy options, such as limiting the number of export permits issued, implementing a fixed or variable permitting charge, or introducing an export ban. However, the Government recognises the need to balance these measures with the UK's international trade commitments and the practical realities of waste management in certain regions.

The consultation also addresses the importance of supporting decarbonisation efforts within the waste sector and local authorities. It highlights the role of existing and upcoming policies, such as the Resources and Waste Strategy, Extended Producer Responsibility for packaging, and recycling reforms, in reducing the amount of fossil-based materials sent to incineration. The Government proposes to align the UK ETS with these policies, including enabling the pass-through of carbon costs to waste producers through the packaging Extended Producer Responsibility scheme. This means that companies producing packaged goods would not only bear the costs of managing the packaging waste they generate but also share the carbon costs associated with the proportion of their products sent for incineration. In doing so, it will create a financial incentive for producers to improve the design of their packaging and encourage recycling, reuse, etc.

For local authorities, which are among the largest customers of waste incineration facilities, the consultation outlines plans to assess the financial impact of the UK ETS and consider potential support measures. This may include funding opportunities for specific decarbonisation activities or exploring alternative cost mitigation mechanisms.

The consultation seeks stakeholder input on the effectiveness of the proposed risk mitigation measures, the types of decarbonisation support needed for the waste sector and local authorities, and the practicality of aligning the UK ETS with other waste and resource management policies.

Incentivising Heat Networks

Alongside the main consultation, the Government has launched a Call for Evidence on the potential for the UK ETS to incentivise waste incineration facilities to export heat to local heat networks. The UK ETS already provides some support for heat export through free allowances for installations that utilise waste heat. However, the Call for Evidence seeks to explore additional mechanisms to encourage the development of heat networks and reduce barriers to investment.

The Call for Evidence invites stakeholder views on the desirability of using the UK ETS to support heat offtake, the most effective incentive mechanisms (e.g., free allowances, allowance subtractions), and the potential impacts on the wider heat network market. It also seeks input on the types of heat (e.g., waste heat, surplus heat, or purpose-produced heat) that should be eligible for incentives and how the level of support should be determined.

The responses to the Call for Evidence will inform the Government's future policy development in this area, with the aim of maximising the environmental benefits of the UK ETS expansion to the waste incineration sector.

The consultation on the expansion of the UK ETS to waste incineration will run for eight weeks, closing on 18 July 2024. Following the consultation period, the Government will analyse the responses and aim to publish a formal response later in the year, setting out its final policy decisions and implementation plan.