Legal development

Energy from Waste to be included in the EU Emissions Trading System

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    What you need to know

    The EU and UK are looking to expand their respective market-based emissions trading schemes in order to align emission reduction targets with the global climate change goals of the Paris Agreement. One shared proposal is to bring energy-from-waste (EfW) facilities, which have previously been excluded, into scope, thereby putting a price on CO2 emitted from these facilities. 

    The European Parliament and Council have reached a provisional agreement to include EfW facilities in the EU Emissions Trading System (EU ETS) 1.   It is proposed that, by 31 July 2026, the European Commission will report on whether these facilities are to be in the EU ETS with the 'aim' of including them from 2028, with a possible opt-out until 31 December 2030.  Further details are awaited and EU EfW operators would be well advised to follow these developments closely.

    The expansion of the UK Emissions Trading Scheme (UK ETS) to include EfW facilities will have a significant impact on the nature and extent of EfW operators' obligations and liabilities. As such, UK EfW operators would also be well advised to follow developments closely.  The implications of this change will also have a broader impact across the supply chain, including Local Authorities, other waste disposal authorities and companies involved in the collection and disposal of municipal waste.  

    The application of a carbon price to EfW facilities in the EU and/or the UK will also encourage the further consideration of how decarbonisation technologies and practices can be developed to reduce ETS liabilities and contribute to emission reduction targets. 

    EfW facilities to be included in EU ETS by 2030 at the latest 

    On 18 December 2022 the European Parliament and Council reached a provisional agreement to revise the EU ETS and strengthen the "cornerstone" of the EU's climate change policy for the next decade (its "Fit for 55" Package). 

    Among the proposals agreed is the commitment to include 'municipal waste incineration installations' within the scope of the EU ETS. 

    In its press release, the European Parliament stated that:

    • EU countries will be required to measure, report and verify the emissions from EfW facilities from 2024.
    • By 31 July 2026, the Commission will assess and report on the possibility of including these installations in the EU ETS with the 'aim' of including them from 2028, with a possible opt-out until 31 December 2030 at the latest.

    The agreement reached is provisional and still requires formal approval from the European Parliament and Council before being published in the EU's Official Journal. This means that a number of important questions remain, including: 

    • what are the grounds for the opt-out 
    • will the EU ETS obligation apply only to fossil (and not biogenic) material
    • will carbon dioxide be the only greenhouse gas covered
    • what are the technical requirements for the monitoring, reporting and verification (MRV) of emissions 
    • will the proposal only apply to EfW facilities operating above 20MWth

    The specifics of the legislation will not be known until further details are disclosed.  EU EfW operators should follow developments closely. 

    What is the position under the UK ETS?

    From March to June 2022 the UK Government 2  ran the Developing the UK Emissions Trading Scheme (UK ETS) consultation. Following the expansion of the EfW sector over recent years and a judicial review 3, the consultation launched a call for evidence on expanding the UK ETS to include waste incineration (with no energy recovery) and EfW 4.  

    The consultation notes that EfW facilities emitted 6.2 MtCO2e in 2019, representing c.1% of UK emissions, and states that the Government is looking to explore expanding the UK ETS to waste incineration and EfW "by the mid-late 2020s".  In keeping with the structure of the UK ETS, the consultation proposes that the MRV and UK ETS compliance obligation sits with EfW operators.  

    The call for evidence requests feedback on a number of issues, in particular the approach to the MRV of emissions. This is a key factor in the extent of the MRV obligation and the cost of UK ETS compliance for operators. 

    The approach to MRV is important as it may impact on the extent and cost of an operator's UK ETS compliance obligation.  The consultation notes the mixed black bag waste treated at EfW facilities is typically assumed to be 50% from biogenic material and 50% from fossil material. The starting proposition in the consultation is for the UK ETS to cover the incineration of fossil material only (biogenic material would be excluded). This would mean that UK ETS allowances would only need to be acquired and surrendered in respect of fossil material incinerated at EfW facilities.  

    The consultation puts forward two options that could be used in determining the MRV obligation for each facility, namely: 

    1. an 'Individual facility monitoring' approach - requiring individual operators to determine the ratio of fossil and biogenic CO2 that is being emitted from their facilities themselves either via radiocarbon methods or a 'balance method' looking at data on chemical composition; or 
    2. an 'Emissions factor approach' - involving the use of an estimate for the composition of waste. This could be set at either a national or regional level, or each facility could derive their own emissions factor based on international standards. Emissions from burning fossil material (which would be required to determine an operator's UK ETS obligation) would then be calculated by multiplying the number of tonnes of waste processed by the emissions factor. 

    In addition to MRV, the call for evidence raises important questions on a number of other key areas of scheme design, including: 

    • The timing of the proposed expansion of the UK ETS, including the potential phasing of UK ETS obligations 
    • Whether any incineration activities (in particular hazardous or healthcare wastes) should be excluded 
    • Whether pyrolysis / gasification facilities should be treated differently 
    • The proposal to place the point of MRV obligation on operators of waste incinerators / EfW facilities 
    • The risk of unintended consequences, in particular disruption to the waste hierarchy (e.g. if waste was diverted to landfill)
    • The impact of any carbon tax on landfill taxes (in order to maintain the waste hierarchy) and on gate fees generally
    • The scope of greenhouse gases covered 
    • The commercial impacts of the proposed expansion, in particular the contractual implications as between operators, fuel suppliers and Local Authorities and the potential 'pass through' of costs
    • The timing of the expansion of the UK ETS in light of the cost and speed of rolling out carbon capture technology at EfW facilities
    • The commercial viability of certain UK EfW facilities once carbon taxes are factored into the economics of these facilities.

    The consultation notes that further guidance should be provided to stakeholders as part of the Government's consultation response, which has not yet been published. 

    What does the inclusion of EfW in the EU ETS mean for the UK? 

    First and foremost, following its call for evidence, the Government is likely to proceed to expand the UK ETS to cover EfW and waste incineration. It now appears to be a matter of "when" and not "if" EfW and waste incineration installations will be covered by the UK ETS. Operators, investors and funders should therefore all foresee a carbon price applying to EfW in the UK and build this into their financial modelling 

    From a commercial perspective, Ashurst is aware that many operators and developers of EfW facilities have already factored in the UK ETS into their long term business plans and are considering the best way to future-proof their assets to ensure they remain financially viable in the medium to long term.  Many, however, are adopting a "wait and see" approach, hoping that further clarity will assist in their decision making processes.

    The impact of these changes is already forcing some owners and operators of EfW facilities to consider the feasibility of developing carbon capture and storage capabilities on site or on adjacent sites, to mitigate their potential cost exposure and to reap the potential benefits of decarbonised assets, for example carbon credits.

    At the other end of the spectrum, the advent of the ETS is forcing others to consider the possibility of EfW facilities ceasing to be commercial viable if carbon pricing cannot adequately be passed down to waste suppliers and/or to Local Authorities under PPP contracts.

    From a legal standpoint, while both the EU and the UK are obliged to maintain an effective system of carbon pricing and "cooperate on carbon pricing", 6 post-Brexit, there is no legal obligation for the UK ETS to mirror the EU ETS.

    A degree of scheme alignment between the UK ETS and the EU ETS is to be expected, in particular to avoid undesirable competitiveness impacts. However, there may be aspects where the Government considers a different approach to the UK ETS scheme design is necessary or desirable. 

    In terms of timing, there are risks to the UK being a "first mover" and including EfW in the UK ETS before it is included in the EU ETS. This is because it would put UK EfW operators at a commercial disadvantage to their EU counterparts and may lead to market disruption, such as increasing the export of refuse derived fuels to the EU, where it would be cheaper to incinerate. 

    From a commercial perspective, a particular point of interest will be the possible pass-down UK ETS costs (including allowance costs, monitoring costs, costs of obtaining / maintaining a UK ETS permit) under relevant contracts, e.g. under change in law provisions. Contracts being entered into now should similarly foresee the need to address the introduction of a carbon price and many fuel supply agreements and O&M agreements have, for some years, anticipated such changes within the change in law mechanisms. 

    Considering matters over a long-term basis, the application of a carbon price to EfW facilities in the EU and/or the UK will encourage further detailed consideration of how decarbonisation technologies and practices can be developed to reduce ETS liabilities and contribute to emission reduction targets, e.g. carbon capture usage and storage, or enhanced pre-treatment of residual waste before incineration to reduce fossil material (e.g. plastic) in the waste stream. 

    Please contact the authors, below, should you wish to discuss any of these issues in detail.  

    We would like to thank Eli Garrett for his contribution to this article.

    1. In this article we refer to 'Energy from Waste (EfW) facilities', the EU ETS refers to 'municipal waste incinerators'.

    2. This is a joint consultation of the UK Government, the Scottish Government, the Welsh Government and the Department of Agriculture, Environment and Rural Affairs for Northern Ireland; however for ease of reading we have referred to simply to "the Government" in this article

    3. For a summary see Challenge to UK emissions trading scheme dismissed | Ashurst

    4. EfW captures both incineration with energy recovery (also known as 'conventional' EfW) and advanced thermal treatment (ATT) / Advanced Conversion Technology (ACT) – which covers gasification and pyrolysis

    5. To acquire and surrender UK ETS allowances matching total reportable emissions 

    6. See Article 391, EU – UK Trade and Cooperation Agreement, here

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.

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