The Environmental Services Association (ESA) has responded to the consultation on proposals to expand the UK Emissions Trading Scheme (UK ETS) to include energy from waste (EfW).
The application of the UK ETS to energy from waste represents the most significant regulatory intervention to the UK waste industry in a generation. This article summarises the ESA’s response to the consultation, which closed on 2 August 2024.
ESA supports the proposal of extending carbon pricing to EfW facilities across the UK. If designed correctly, ESA agrees with the principles established by the UK ETS Authority that carbon pricing could support waste reduction, kickstart the stagnant recycling rates across the UK, and essentially, provide a powerful incentive for the decarbonisation of emissions from residual waste management.
From ESAs estimates, the scale of this policy intervention could be as great as £1 billion per year come 2028. This will fundamentally change the economics of the sector, and impact all stakeholders across the value chain, including local government, waste producers and the general public.
It’s therefore essential that this intervention is applied with the utmost care to avoid any perverse outcomes and unintended market distortions. If not implemented correctly, this policy could lead to operator failure – it could create contractual and commercial difficulties across the market and leave councils facing an unavoidable additional annual bill of £730m, or £25 per household, to meet their statutory obligations to safely manage general rubbish.
Additionally, without sufficient safeguards in place, we could see waste moving down the hierarchy towards landfill, exported offshore, or into the hands of waste criminals.
It's imperative to the success of this policy measure that the mechanism for determining total emissions from EfW facilities is aligned to the carbon content of feedstocks and associated costs passed back to the producers of waste.
Any discrepancy between these two mechanisms risks in extensive disputes and potential legal dispute across the industry creating significant cash flow challenges for the industry that could ultimately result in EfW becoming unviable and ceasing operations, wastes being diverted to lower cost/environmental outcomes, and also solvency issues for operators in the sector.
ESA proposes that the monitoring, reporting, and verification and cost pass through process should start with a simple approach during the early years of application of UK ETS to EfW. ESA recommends that a range of emissions factors are established, based upon local authority collection systems, that are calibrated on a yearly basis using Carbon-14 flue gas analysis.
This is the most significant regulatory intervention to the UK waste industry in a generation and, according to government timelines, there are less than two years to put in place the right legislative and regulatory framework to ensure it delivers on its key purpose and does not result in unintended consequences.
This consultation is welcome but lacks the detail needed for the sector to begin to plan for inclusion within the UK ETS by 1st January 2026. To maintain this ambitious timetable detailed information and guidance are needed from UK ETS Authority as soon as possible.
ESA recommends that the legislation sets out in detail the principles to be followed by operators and their customers in terms of accepting the financial exposure of ETS costs. These principles should be mandated so that they are followed, and they should not be allowed in any way to be undermined by contradictory/vague principles in change in law regimes.
ESA recommends, as a minimum, that mandatory/binding guidance is issued which all operators and customers must follow, and very prescriptive and detailed Procurement Policy Notes issued by Cabinet Office or the relevant central government department.
Bad debt relief must be available for EfW operators prior to full inclusion within the ETS. A support mechanism must be provided to ensure suitable relief is available in the case that a waste customer becomes insolvent, or unable to pay for the ETS costs that must be passed through to them.
Including landfill within the UK ETS is not the correct mechanism to protect against the diversion of waste to landfill as it is likely to result in the opposite effect. A more practical approach is to introduce a comprehensive combustible waste to landfill ban in England by 2028, coupled with landfill tax increases in line with expected carbon prices.
ESA doesn’t agree with the proposal to include hazardous and clinical waste incinerators within the UK ETS.
ESA doesn’t agree with the proposed approach to adjusting the cap with the use of the emissions trajectory for the overall power sector in the UK. The proposed cap adjustment is too low by 2-3Mt considering the projected capacity of waste incineration capacity in 2028-2030.
Effective policy regulation and enforcement is fundamental to avoid leakage in the waste management sector, to maximise compliance and to reduce the potential for increased waste crime. The ESA urge stronger and more effective enforcement and increased collaboration between revenue and environmental regulator.
Paul Collins, senior associate in our business risk and regulation team, has been supporting the ESA on its response to the UK ETS Authority on proposals to expand the scheme to include energy from waste. Having been a senior lawyer for Defra, the Department of Energy and Climate Change and the Environment Agency, Paul was able to help the ESA with their understanding of how government departments and the environmental regulators operate. Paul also advised on what the potential implications of the expansion of the UK ETS might mean for the recycling and waste management sector. For more information, please contact the energy and resource management team.
