A new UK ETS replaced the UK’s participation in the EU ETS on 1 January 2021 – the same year the Climate Change Committee’s (CCC) 2021 progress report stressed that government needed to ‘address with urgency the rising emissions from, and use of, energy from waste (EfW).’

Three years on, the CCC’s list of priority actions for the government this year include strengthening the UK ETS, which has seen the average auction price fall from £53.38/t in 2023 to £35.08/t in 1Q2024 (compared with the government’s central carbon value of £268.97/t). Its 2024 report said the waste sector continues to show ‘very little progress’. The waste sector’s ‘good initial progress, with emissions falling from 41.9mn tCO₂e in 2008 to 25.9mn tCO₂e in 2013’ had come ‘almost exclusively via a reduction in methane emissions from landfill, caused by the 1996 Landfill Tax’. Crucially, ‘energy from waste emissions have substantially increased, meaning progress in reducing waste emissions has stalled’, the CCC notes.

When the UK ETS started, it carried over exclusions that had applied under the EU ETS, which included incineration of hazardous or municipal waste. The net zero imperative and a wish to move towards a ‘circular economy’ (ie, one where resource recovery replaces waste management) have changed that.

The change has been felt in the EU: on 18 December 2022 the European Parliament and Council reached a provisional agreement to include EfW facilities (in Europe generally referred to as municipal waste incineration – MWI) within the scope of the EU ETS, with the aim of including them from 2028 (albeit with a possible opt-out until 31 December 2030). It is not yet a ‘done deal’: the European Commission will report by 31 July 2026 on whether the facilities are to be included. In any case, since 1 January 2024, incineration facilities have been included for monitoring, reporting and verification (MRV) purposes, but without an obligation to surrender allowances for reported emissions.

In fact some EU member states are already bringing waste installations into their schemes. Denmark and Sweden have included waste incinerators since 2013. Germany is set to follow. According to the International Carbon Action Partnership, in November 2022 amendments to Germany’s national ETS broadened its scope to include waste-derived fuels from 2024, considering that inclusion of these plants in the national ETS would create a level playing field with other heat and power plants that already pay for their emissions. Pressure group Zero Waste Europe emphasised: ‘The inclusion of MWI is overdue.’

Inclusion of waste incineration has been in the offing for the UK ETS from the start. An application for judicial review of the UK ETS argued that its cap should be tighter and should include municipal waste. The application for judicial review was dismissed in June 2021; however, law firm Ashurst, which is involved in many UK EfW projects, said the case added to ‘growing pressure to include waste incineration, in particular municipal waste incineration, within the UK ETS’. The policy has now progressed to the point that EfW plants will be required to apply MRV and report on their emissions from 1 January 2026 and participate fully in the scheme from 1 January 2028.

Environmental services companies,who build and operate EfW plants have been relatively accepting of the move, although the Environmental Services Association (ESA) put the cost at around £700mn. It is intended that the cost should not fall on these companies, but instead be pushed back towards waste producers and encourage the latter to move to less carbon-intensive alternatives or simply reduce waste. In that case, the need to acquire and surrender allowances, and the cost of MRV, is unlikely to change the economics of electricity from EfW plants because (in theory) it will be recovered from the producers.

Nevertheless, the organisations that are most concerned about the change are local authorities, and the waste management organisations set up to fulfil that function on behalf of one or more local authorities. They anticipate that some part of the cost will fall on them and hence on their ratepayers, at a time when local authority services are already under financial pressure.

In a briefing, the Local Government Association (LGA) said it anticipated extra cost but also highlighted that: ‘ETS is a market-led scheme meaning the costs are volatile, moving around with the market due to factors often outside of the waste systems control.’ One member of the local authority waste sector said there was a feeling of ‘general doom’ about UK ETS expansion. What’s more, some in local authorities remain ‘staunch opponents’ to the move.

EfW operators will only be required to have UK ETS allowances to cover the fossil fuel-derived fraction of their waste (which includes items like plastics that derive from fossil fuels).

Still to be determined is not only how big that fraction is (the ESA estimates put it as low as 40%) but whether the proportion will be predictable, allowing it to be expressed as a simple proportion of the waste feed, or whether continuous monitoring and verification would have to be applied, at least for larger plants.

Charlotte Rule, Head of Climate and Energy Policy at the ESA, said the ESA wanted to develop MRV schemes that worked, that were understandable and that clearly revealed the carbon emissions burden that would require allowances. She said that system would be unique to EfW facilities and added: ‘The system is extremely complicated and it doesn’t exist in the current UK ETS.’

Current waste stream contracts may specify both the minimum tonnage supplied (with an associated ‘gate fee’ paid to the operator from avoided landfill tax) and the minimum calorific value of the waste. So, modifying waste streams to manage UK ETS liabilities may have implications for EfW contracts. The LGA pointed out in its briefing that ‘as public service providers, local authorities have to collect all types of waste, including those that do not participate in recycling schemes and those difficult and expensive to process’.

Along with set up costs for MVR, existing waste management contracts may be subject to renegotiation because of the change in law. That also adds uncertainty.

James Nierinck, a Senior Associate at Ashurst, said that it may be difficult to calculate the ETS liability. ‘It is easy to set up a straw man with one waste contract, one operator, etc. In reality, it involves complex supply chains with several parties, where there are a number of waste streams with different fossil carbon contents. How can the costs be passed down in an equitable way?’ Stakeholders are still working through issues on calculating the ETS cost and deciding who pays it.

Crucially, ‘energy from waste emissions have substantially increased [in the UK], meaning progress in reducing waste emissions has stalled,’ the CCC notes.

Energy sector implications
What are the implications of expanding the UK ETS to include EfW? There may be three outcomes that might impinge on the electricity industry. EfW plants are already required to be ready to install carbon capture and storage (CCS) and to supply heat networks. The former may be incentivised by being inside the UK ETS.

A question raised at a session at the Resource and Waste Management (RWM) Expo, was whether it could lead to a ‘two tier’ EfW sector, split between large plants with CCS and small plants taking a relatively well-specified waste stream. But as the ESA’s Rule noted, the next generation of EfW plants are already in the planning pipeline and the subject of consultation, so they are unlikely to grow or add extra capacity.

Richard Crowley from SLR Consulting said: ‘Look at this from a cost/benefit point of view. CCS has the greatest benefit on mitigation, but at vastly inflated capital cost that may be more expensive than paying the carbon cost [of allowances].’ He also pointed out that EfW assets were ageing and distributed across the country and asked: ‘Does it make sense to bolt CCS on to these? The technology is not proven and we need to see costs come down.’

ESA’s Rule agreed, saying the CCS option was ‘heavily focused on those near [the identified industrial] clusters’, the number of which she put at 15 at most. Furthermore, the majority have ‘no viable option’ for transporting or storing CO₂, she noted.

The UK ETS may also link with the UK’s policy to expand the use of district heating in place of other domestic heating options and individual gas boilers in particular. Under existing ETS criteria, electricity generators who currently, and intend to, export measurable heat for the purpose of district heating are awarded free allowances. The ESA argues this should also apply to EfW plants ‘to avoid distortion across sectors, and to maximise the potential’.

EfW plants have been required to be ‘district heat ready’ for at least two decades, which has mainly required them to install pipework to transport steam to the site boundary and the necessary valves. However, up to now there has been little take-up of the heat on offer and there has been limited incentive for EfW operators to promote the option to divert steam that could be used to generate electricity.

Ashurst’s Nierinck said that some additional support through the UK ETS was being considered. This was an ‘aspect being acknowledged through a  UK ETS Authority Call for Evidence, which asks whether the UK ETS should be used to incentivise heat networks’, he said.

Waste authorities may manage their allowance liabilities by increased sorting at the collection stage, managing the amount of fossil-derived fuel that enters the EfW plant. The start-up costs of such a process are likely to be lower than the CCS option and sorting may also help divert waste fractions into re-use or recycle routes that are higher up the waste hierarchy, which could support the government’s ‘circular economy’ aims. However, that could require renegotiation of the minimum calorific values required under current EfW contracts.

There is some pressure in Europe to require emissions allowances from bio-derived as well as fossil-derived waste. European pressure group Zero Waste Europe says: ‘Installations should be required to surrender allowances covering emissions of CO₂ of both fossil and non-fossil origin. The suggested zero-rating of non-fossil CO₂ undermines the objective of the policy.’ But although questions have been raised about some biofuels in the UK – mostly in respect of the large biomass plant at Drax – it has not been a question around the UK ETS.

• Further reading: ‘Waste not want not – how Europe could better treat its refuse’. Waste-derived fuel can play an important part in the European Union’s transition towards a circular economy and an energy-secure, net-zero society – particularly if an integrated tax regime for waste was in place, suggests Andy Jones, Managing Director at Totus Environmental and Chair of the RDF Industry Group.
• What are the three reasons why biogas is harder to fund than wind or solar? Michael Ware, Project Supervisor with international renewable energy advisor Green Giraffe, provides an answer.