Challenge to UK emissions trading scheme dismissed

Summary

A judicial review challenging the design of the UK ETS and the exclusion of municipal waste incinerators from the scheme has been dismissed by the High Court.  For the waste sector, the effect of this decision is that municipal and hazardous waste incineration will continue to be excluded from the UK ETS.  

However, this case adds to growing pressure to include waste incineration, in particular municipal waste incineration, within the UK ETS. There may be further developments to come as it has been reported that the claimant is considering an appeal.  The EU's proposals to revise the EU ETS in line with its revised 2030 emissions reductions targets are also due to be published in the coming weeks.

Context

On 1 January 2021, a new UK emissions trading scheme (UK ETS) replaced the UK's participation in the EU ETS. The four governments of the UK established the scheme which aims to provide continuity of emissions trading for UK businesses following the end of the Brexit implementation period. 

Emissions trading schemes utilise a "cap and trade" approach to achieving a reduction in greenhouse gas (GHG) emissions. A cap is set on the total amount of certain GHGs that can be emitted by specified sectors covered by the scheme, which reduces over time. Within the cap, participants receive free allowances and/or purchase emission allowances at auction or on a secondary market which can then be traded with other participants to ensure the emissions cap is maintained.

The UK ETS applies to various industries, including the power generation sector. In establishing the UK ETS, the UK Government and devolved administrations carried over existing exclusions under the EU ETS, notably the incineration of hazardous or municipal waste. 

The UK ETS has an annual starting cap on emissions allowances of 156m tonnes of CO2. This is 5% below the UK's expected notional share of the EU ETS cap for Phase IV of the EU ETS (2021 – 2030), but it is considerably above projected emissions (which range from c.126 – 131 MtCO2e)¹.  On 20 March 2020, the Climate Change Committee criticised the UK ETS cap, stating that it would be inconsistent with the UK's Net Zero ambitions.  However, the Government intends to consult on setting a 'net zero consistent' cap trajectory this year.

The Challenge

A judicial review was brought by Georgia Elliot-Smith to challenge the design of the UK ETS, including the omission of municipal waste incinerators from the scheme, on two grounds:

First, the decision setting the UK ETS cap was taken leaving out of account a material consideration, namely the requirement in Article 4.1 of the Paris Agreement to act urgently to limit GHG emissions in the short-to-medium term; and

Second, the power in s.44 of the Climate Change Act 2008 to establish trading schemes had been exercised for an 'improper purpose' because the UK ETS as designed would be ineffective at reducing GHG emissions as the cap on emissions was set above the projected level of ‘business as usual’ emissions.

Elliot-Smith's position was that, had the decision in setting the cap been properly made, municipal waste incinerators could have been brought within the scope of the UK ETS.

Decision

In a judgment made available on 15 June 2021, Mr Justice Dove dismissed the judicial review challenge.

On the first ground, Mr Justice Dove held that it was not the Court's role to resolve questions of construction relating to the Paris Agreement. While at first glance this might sound surprising, this is in line with the earlier authorities. The main reason behind this approach is that the Paris Agreement is an unincorporated international treaty, and the Courts very rarely step into construing such provisions, for fear of setting a global precedent and cutting across the Paris Agreement's dispute resolution provisions. Following previous case law, the Court held that the Government's interpretation of the Paris Agreement need only be 'tenable'. In Dove J's view, the Government's interpretation was not only 'tenable', but 'entirely appropriate'.

On the second ground, Mr Justice Dove held that a trading scheme within the definition provided by section 44 (2)(a) of the Climate Change Act 2008 does not necessarily have to achieve a reduction greenhouse gas emissions, rather it is sufficient that scheme 'limits or encourages the limitation' of emissions. He also accepted modelling conducted by the government showed that the UK ETS would deliver a reduction in emissions. 

Comment

For the waste sector, the effect of this decision is that, municipal and hazardous waste incineration will continue to be excluded from the first phase of the UK ETS. However, this case adds to growing pressure to include waste incineration, in particular municipal waste incineration, within the UK ETS.  

The European Commission is also carrying out an impact assessment for the increase to the EU's 2030 GHG emissions reduction target to 55% and intends to publish proposals on revisions to energy and climate legislation to implement the target, including the EU ETS. 

The key themes in this judicial review were that, in setting the UK ETS cap significantly above projected 'business as usual' emissions: 

• the Government allegedly failed to take account of the urgent need to take short-to-medium term action to address climate change, as set out in the Paris Agreement; 
• the UK ETS was, in effect, an unlawful 'trading scheme' as it was not designed to actually reduce emissions;  
• if the Government had set a tighter cap, then municipal waste incinerators could have been included within the scope of the scheme.  

However, the judicial review was roundly dismissed by Mr Justice Dove. As is often the case, the reasons for dismissing the challenge are technical legal ones.  

In summary, the first ground was dismissed on the basis that the Courts will rarely seek to construe unincorporated international treaties. The second ground was dismissed on a point of statutory construction, specifically, how the definition of a 'trading scheme' in the Climate Change Act should be interpreted. Mr Justice Dove did not agree with the claimant's argument that the concept that trading schemes must in law bring about a reduction in emissions should be 'read in'.  It has been reported that Ms Elliot-Smith is considering an appeal.

_{1 Department of Business, Energy and Industrial Strategy, The Future of UK Carbon Pricing Impact Assessment, paragraph 23 (7 December 2020) <https://www.legislation.gov.uk/ukia/2020/108/pdfs/ukia_20200108_en.pdf>}