UK Emission Trading Scheme to include waste incineration installations

Steve Gummer and Gonzalo Puertas take a look at the UK Emission Trading Scheme and new decisions on waste incineration.

The Department for Business, Energy & Industrial Strategy recently closed a consultation to call for evidence on expanding the UK Emission Trading Scheme (“ETS”) to cover waste incineration and inform future ETS policy development by the mid-late 2020s, including the introduction of a carbon tax. This was followed by a decision of the European Parliament on 22 June 2022 of including municipal waste incinerators in the scope of the EU ETS as of 2026.

The UK ETS

Following the end of the Brexit transition period, the UK ETS went live on 1 January 2021 to replace the UK’s participation in the EU ETS (currently operating under Phase IV from 2021 to 2030) and continue to provide a carbon pricing mechanism as a tool for achieving greenhouse gas (“GHG”) mitigation goals and meeting the UK’s Net Zero 2050 target. Under the Ireland/Northern Ireland Protocol, electricity generators in Northern Ireland remained within the EU ETS.

The UK ETS is established through The Greenhouse Gas Emissions Trading Scheme Order 2020 currently applicable to energy intensive industries, the power generation sector and aviation. It has been amended in respect of allocation of allowances (to emit CO2), installations’ monitoring plan, emissions targets, the UK ETS registry, and regulators’ powers of enforcement; the latest of them made early 2022. The fundamental features and processes in the UK ETS broadly mirror those under the EU ETS, including the mechanism of and the thresholds for the opt-out for hospitals and small emitters.

The UK ETS works on the cap and trade principle under which participants receive free allowances and/or buy emission allowances at auction or on the secondary market which they can trade with other participants as needed. Each year, installation operators and aircraft operators covered by the scheme must surrender allowances to cover their reportable emissions. The cap is reduced over time, so that total emissions must fall. Operators may receive enforcement notices and/or significant civil penalties if they do not comply with obligations under the GHG ETS Order 2020.

Exemptions

The following do not constitute an ‘installation’ for purposes of the GHG ETS Order 2020 and are therefore beyond the scope of the UK ETS:

• an installation that uses only biomass as a fuel;
• an installation, or part of an installation, of which the primary purpose is research and development (including the testing of new products and processes);
• an installation, of which the primary purpose is the incineration of hazardous or municipal waste; and
• a relevant Northern Ireland electricity generator

Potential expansion

The UK ETS authorities are now seeking to expand carbon pricing to cover waste incineration. According to Chapter 7 of the consultation, the starting proposition is that the UK ETS should cover the incineration of fossil waste only (e.g. plastics, certain textiles, rubber, liquid solvents, and waste oil but not waste from biological sources i.e. food waste) and assess whether carbon tax should be considered either as part of the UK ETS or a separate instrument. The aim is to support liquidity by increasing the number of market participants, to deliver more cost-effective decarbonisation across the whole economy, and encouraging residual waste to be recovered in a way which lowers overall carbon emissions, such as chemical recycling.

Next steps

The UK ETS authorities will use consultation responses to inform further policy development. Further detail on next steps for implementation will be set out in the government response to this consultation. As many incineration plants have long-term contracts with local authorities, it remains to be seen:

• the extent to which ETS obligations should apply to waste incineration and facilities processing these waste streams;
• whether ETS obligations will only apply to incinerators operating above the current 20MWth threshold;
• the additional ETS costs for businesses that they can pass through to local authorities; and
• while applying the ETS may create the incentive for local authorities to recycle more, this would require the necessary recycling infrastructure to support it.

Steve Gummer is a Partner and Gonzalo Puertas is an Associate (Peru Qualified) at Sharpe Pritchard.

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