Recent proposed amendments the UK and EU Emissions Trading Schemes (ETS)

Introduction

In this article we provide an update on significant new proposals affecting the UK and EU ETS. In particular, we consider the recent consultation on the potential expansion of the UK ETS to include waste, waste incineration and greenhouse gas removals (GGRs). We also look at the new draft EU regulation for permanent capture and utilisation of carbon emissions (CCU) in products which are exempt from the obligation to surrender allowances under the EU ETS.

This updater builds upon our previous articles on the subject (see, e.g., our article on the inclusion of energy from waste (EfW) into the UK ETS).

• UK ETS updates
• EU ETS updates
• Conclusion

UK ETS updates

In the UK, the Department for Energy Security and Net Zero (DESNZ) has published consultations (due to close in August 2024) on expanding the UK ETS to include EfW and waste incineration, and integrating GGRs. The outcome of the consultations will determine the proposed way forward.

The waste consultation seeks views on the following proposals:

• Scope: UK ETS to apply to facilities that conduct incineration and combustion of waste, including hazardous or clinical waste, and other energy recovery from waste, including fuel production. Waste incineration facilities will only need to purchase and surrender allowances for their fossil emissions, and not biogenic emissions. There will be no exemption of incineration facilities under the 20MW thermal input threshold that are on the same site as another regulated activity.
• Cap: adjustment to the UK ETS phase I base cap to account for emissions from EfW and waste incineration by adding 21.9 million allowances from 2028.
• Participation: to expand the UK ETS to waste incineration facilities in 2028, which includes a two-year tiered monitoring, reporting and verification transitional phasing period from 2026.
• Adverse impacts: to manage the risk of landfill becoming cheaper than waste incineration, the expansion of the UK ETS may cover landfill emissions and a review of landfill taxes is being considered. The possibility of implementing mitigation measures such as permitting or licensing systems which would allow for the export of refuse derived fuel and solid recovered fuel is being explored. Also, the carbon price will be considered as part of the packaging extended producer responsibility cost recovery process.
• Heat networks: options to incentivise heat offtake via heat networks through the UK ETS are being considered.

The GGR consultation seeks views on the following proposals:

• Principles: the development of a framework for policy design to be used by the UK ETS Authority to integrate GGRs into the UK ETS.
• Cap: the application of the existing cap to GGRs. The ETS could reach a point where there will not be enough emissions allowances that can be replaced by allowances from GGRs, so the option of setting a new net cap is being considered.
• Allowances: to award allowances to the GGR operator / developer after the GGR has taken place and been verified, though it is noted that this approach may not be simple to apply in all circumstances. The route to market is being considered, as GGRs operators could sell allowances awarded or auctions could be facilitated on their behalf.
• Permanence: GGRs will only be eligible if they can store carbon for a minimum period of time (feedback is requested as to what this minimum period of time should be). A liability measure will apply to the GGR operator in the event of the re-emission of carbon dioxide. A fungibility measure will apply to some GGRs, where GGRs that store carbon for shorter periods of time or with a higher risk of re-emission of carbon dioxide will be awarded fewer allowances.
• Integration: there will be supply restrictions on GGRs entering the ETS, but there will not be demand restrictions on who can buy GGRs. The ETS could integrate GGRs from 2028 onwards, and the integration date will depend on the evidence gathered through the consultation.

EU ETS updates

Back in 2023, the EU introduced significant amendments to the EU ETS framework, including creating an exemption from the obligation to surrender allowances in respect of emissions of greenhouse gases "considered to have been captured and utilised in such a way that they have become permanently chemically bound in a product…". The European Commission has recently published a draft regulation (the draft Delegated Regulation) for consultation (now closed) setting out the requirements for greenhouse gases to be considered to have become permanently bound in a product.

Key points from the draft Delegated Regulation are:

• CO2 is considered to be permanently chemically bound in a product where all of the following criteria are met:
  1. The CO2 has become chemically bound in a product through an active and controlled utilisation process and which allows for the measurement and determination of the amount of CO2 equivalent bound in the product; and
  2. The CO2 remains permanently chemically bound in a product so as not to enter the atmosphere under normal use of the product (including any normal activity taking place after the product's end of life) for a period of at least several centuries. Where a product has multiple normal uses and end of life pathways, all pathways need to be taken into account. Products that during normal use (including any normal activity taking place after the end of life) may be exposed to high temperature combustion, such as waste incineration, shall not qualify as permanently chemically bound.
• The products that are considered to meet the requirements are mineral carbonates used in carbonated aggregates used unbound or bound in mineral based construction products; carbonated cement constituents used in concrete or other cement-based products; carbonated concrete, including blocks, pavers or aerated concrete; and carbonated bricks or tiles.

The draft Delegated Regulation provides that the European Commission shall review the list of CCU products based on relevant technological developments and innovation in the field.

Following the European Commission's adoption of the regulation, the European Parliament and the Council will have the opportunity to examine this (usually they have 2 months to do so). If there is no objection, the regulation will enter into force shortly thereafter.

Conclusion

These proposals will impact those market players active in the waste sector as well as those involved in the development of new technologies around GGRs and CCU. Should these changes go ahead and be implemented, it will remain to be seen whether they will be a sufficient incentive to drive investment in decarbonisation.

The NRF Environment team will continue to monitor amendments to the ETS and provide further updates as appropriate. Our global climate change and sustainability practice has extensive experience advising clients across all key environmental and carbon markets.