Mike Barlow, Partner, Burges Salmon

[Music] Hello and welcome to Environment Matters, a podcast by the Environment team at Burges Salmon.

I'm Mike Barlow, the head of the Environment team, and in today's podcast we'll be discussing waste, both changes to regulation and the impact on the sector.

For this discussion, I'm joined by Victoria Barnes, who's a senior associate in the Environment team and a regular contributor to this podcast. Hello Victoria.

Victoria Barnes, Senior Associate, Burges Salmon

Hi Mike.


I'm also delighted to be joined by Greg Fearn, an associate in the Projects team specializing in renewable energy and waste. Hello and welcome Greg.

Greg Fearn, Associate, Burges Salmon

Hi, it's nice to be here Mike cheers.


o, perhaps we should start with the basics, when we talk about waste, we often hear the phrase the circular economy, Victoria what is a circular economy and why is it so important or at the heart of the UK government's waste strategy?


Thanks Mike, so a circular economy is probably best described as an alternative economic model to replace the sort of linear model where sort of take, make and waste and maybe the best way to sort of explain it is the resources we've got at our disposal, they're finite and our consumption of them is placing an increasing strain on the planet and so the circular economy model is all about maximising those resources in order to extract the maximum value and recover and reuse by-products and waste to make new materials, or products.

So, as our population grows, we know our consumption is growing and inevitably more waste is being created and I'd said this is having this huge impact on the environment, the natural world, the climate and so moving to the circular economy is all about redressing that balance, maximizing the value of the resources we use, minimize the waste we create and thereby cutting emissions and creating a more environmentally sustainable planet and that's really why it is so fundamental to the government's 25 year environment plan and its ambition of Net Zero by 2050.


Thanks Victoria, that's really helpful and I think because it's so fundamental that means or has been shown by how much change there has been in the regulation and how much change we're expecting to come through, obviously we can't cover all of that in this podcast but just to name some of the examples, we've seen extended producer responsibility coming in, plastic tax, bans on single-use plastics, changes to the waste carrier and waste breaker system, waste tracking and digitalization proposals, a waste target, deposit return schemes proposed and that's just to name a few and we weren't intending to go over all of those today but really just to focus on some of the key issues in the sector and we've picked out a number of those.

So, Greg turning to you, what would you say are the main legal or regulatory changes that we're currently seeing?


I mean, at the moment I think the one change that's really capturing the attention of most of our clients, and I think the market more generally as well, is the expansion of the UK emissions trading scheme or UK ETS to include waste incineration and energy from waste plants.


So that's very interesting, perhaps you could tell us a little bit more about what UK ETS is and why our clients are so interested in it?


So, UK ETS is not new, it actually came into effect in January 2021 and is a cap and trade scheme which seeks to reduce fossil greenhouse gases in energy intensive sectors, the way it works is that the cap is set on the maximum permitted level of emissions across a specified sector and then that is progressively reduced over time, so that as the cap falls, the cost of the allowances rises which hopefully then stimulates investment in reducing greenhouse gas emissions and within that cap participants receive a free allowance amount and they can also buy emission allowances at auction or on the secondary market and they can then trade that with other participants as they need to.

So whilst it's not new, as I say came in in January 2021, initially all municipal waste and hazardous and incineration facilities were exempt from both the UK ETS and the previous EU ETS scheme that preceded that and that was because of the essential sanitary function that they provided, however following a consultation in 2022 the UK ETS Authority announced that from 2028, it intended to expand the scheme to include municipal waste and hazardous facilities and that's likely to have been driven by the fact that disposal and treatment of waste, including waste water represented around 6% of UK greenhouse gas emissions in 2021 and the desire to obviously achieve net zero by 2050.


Thanks Greg, that definitely is a significant development, so Victoria what do we know about the proposed changes to the scheme?


So we know when the UK ETS is due to come in force, as Greg mentioned, it's anticipated that energy from waste and waste incineration facilities will be included in the UK ETS from 2028, there is a suggested 2-year phasing in period expected between 2026 and 2028 which will require installations to monitor their CO2 emissions but they will not have to surrender allowances in respect of those emissions.

The phasing period will provide operators and customers with an opportunity to understand the UK ETS reporting cycle and evaluate any sort of consequential cost impact. That said, you know the timetable is still really ambitious in our view, we also know who will be responsible for complying with UK ETS, namely the person who has control over the operation of the waste incineration or energy from waste facility.

This means that operators will be legally responsible for holding a UK ETS permit, they'll be responsible for monitoring, reporting and verifying emissions and they'll be responsible for acquiring additional allowances via auction or the secondary market and surrendering them.


Thanks Victoria, that's really helpful, so we know some of the basics, I think the timings then and who's responsible and some of the basic elements which they've got to undertake, are there any other elements which are more uncertain at this stage?


Yeah there's a couple of elements to sort of mention where there is uncertainty or lack of full clarity over, so we know roughly which technologies will be caught, the UK ETS will be expanded to cover energy from waste and waste incineration without energy recovery, which we've mentioned, but the UK ETS Authority also intends to include advanced thermal treatment, advanced conversion technology and other related advanced waste technologies, however there is currently some debate in the sector on whether this includes waste to fuel technology, given the government's desire to increase investment in that sector.

Another element which is still undecided and which is of critical importance is the monitoring, reporting and verification or MRV process, there were two MRV options proposed in the 2022 consultation, the first option was that there will be individual plant monitoring 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.

And then the second option was an emissions factor approach involving the use of an estimate from the composition of waste, this could be set either at 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 operator's UK ETS obligation, would then be calculated by multiplying the number of tonnes of waste processed by the emissions factor.

As I said, those two options were in the consultation but it's yet to be determined which option is going to end up being part of UK ETS for the new facilities coming in, there is an intention to consult on more detailed proposals for MRV and as I said it remains of key importance principally as it will likely inform the approach that contractual counterparties will take to the pass through of UK ETS liabilities.

And do we know whether UK ETS is going to relate to all of an operator's emissions or is it just the CO2 emissions? So the UK ETS will apply only to the processing of fossil waste and will continue to cover fossil CO2 emissions only and no other greenhouse gases, in practice this means that operators will only need to surrender UK ETS allowances in relation to their fossil CO2 emissions, there will be no requirement to surrender allowances covering biogenic emissions such as emissions from wood, paper or plants for example.

This broadly aligns with the existing approach to biomass under the UK ETS, if the UK however is expanded in due course to cover the wider waste sector, including landfill, the UK ETS Authority may explore including other greenhouse gases in particular methane, as I mentioned earlier, further consultations expected on MRV, but also on the other details for implementing all the key aspects of the reformed UK ETS.


That's a very helpful summary of the changes we know about and those which may come in, thank you for that Victoria. Greg, what impact do you think this is going to have on the sector?


I mean, I think the potential here is huge I mean it's been seen by many in the sector as the most significant regulatory intervention to the UK waste industry in a generation and I don't think that is understating it to be honest because it's likely to change the whole economics of the sector and impact on stakeholders across the value chain.

I've seen local government waste producers and the general public as well, the proposed expansion of UK ETS was considered for introduction on the basis that it would encourage residual waste to be recovered in ways that lower carbon emissions as well as incentivise investments into new decarbonisation technologies such as carbon capture and storage.


Okay, and you could look at this as being a little way off, but is it having any impact on the work that you're doing at the moment?


Yeah it definitely is, we're already starting to see this in both new projects and existing projects, I mean just to give some examples, some owners and operators of EFW facilities have started to consider the feasibility of developing carbon capture and storage capabilities on their sites, as Victoria mentioned it's the CO2 emissions that will be what's monitored by UK ETS so that would be a really helpful way for them to mitigate their potential cost exposure and to reap the potential benefits of decarbonized assets and have another revenue stream.

We've already seen Infinium and Viridor both announce plans to incorporate carbon capture into their EFW plans and whilst those plans had always been in the pipeline, they definitely appear to have gained pace since the proposed introduction of UK ETS.

We've also been asked to review and negotiate a number of contracts that are seeking to pass through UK ETS liabilities, mostly the cost of carbon emissions under the contractual arrangements, particularly we've seen specific contractual arrangements for changing carbon law rather than just a change in law which has been interesting to deal with, the possibility to pass down those UK ETS costs as well including the allowances costs and the monitoring cost that Victoria mentioned earlier which could be quite significant, we've already started to look at the change in law of provisions as a particular point of interest for those.

And then at the other end of the spectrum we're aware that the advent of the ETS is forcing others to consider the possibility of EFW facilities ceasing to be commercially viable as well, some contracts do allow for uneconomic wear, where changing law results in something being uneconomic to actually cease trading so it will be interesting to see where that turns out as well. In terms of new projects with a carbon price effectively applying to EFW operators, developers and investors are certainly going to have to start thinking about how they're going to build that into their financial modelling for viability and a lot of existing operators and developers have started to factor this into their long-term business plans, as I've mentioned but we're definitely seeing some from conversations we're having that are adopting a more wait and see approach and hoping that further clarity will assist in their decision making processes.

For what it's worth, personally I am quite hopeful that the expansion of UK ETS will result in investment in the sector and further detail consideration of how decarbonisation technologies and practices such as carbon capture or enhanced pre- treatment of residual waste before incineration to help reduce the fossil material that's actually in the waste stream and therefore resulting in the emissions can be developed to help reduce those ETS liabilities and contribute to the reduction in emissions as well.


Thanks Greg, I mean I can see these changes to UK ETS are going to be really a big issue for the sector, is there anything else that's around as well that's worth bringing up at this stage?


I think the one in particular that springs to mind is probably sustainable aviation fuel or SAF, because I can definitely see that being another key disruptor in this sector, so it's part of trying to drive the decarbonisation within the UK's Aviation sector, the government confirmed in July of 2022 that it would introduce a SAF mandate in 2025 that would require at least 10% of fuel to be made from sustainable feed stocks by 2030, there's still quite a lot to be decided on this and that the government is currently consulting on a revenue certainty mechanism for SAF projects, but it has invested in early stage development of eight UK SAF plants through the green fuels green skies competition and has also provided five projects with a share of over 165 million pound advanced fuels fund as well and so SAF I think will provide the sector with another off taker for waste, as Victoria mentioned earlier it will be interesting to see whether they are captured by UK ETS as part of that, but definitely having another off taker in the sector will create more competition in the circular economy market and I think therefore hopefully encourage further innovation.

We're advising a number of clients and developers, investors in this sector and it's something that I find really exciting.


Yeah, I can see that, it's a lot to keep you and your clients busy coming out of those things.

Victoria, any insights in relation to waste from an environmental standpoint?


A couple of points actually Mike, so reflecting back on sort of the circular economy and our sort of discussion on that at the beginning, the aim sort of underpinning the expansion of UK ETS namely reducing residual waste and decarbonising EFW and waste incineration, that will only be realised if the government's able to deliver on the resource and waste strategy policies that you outlined Mike at the at the beginning of our discussion amongst others and we actually then see you know and realise this reduction in the amount of non-recyclable waste generated in the first place and recycling increased, so it's going to be really important that at the same time that these policies actually all dovetail together.

Equally at the same time there really needs to be the development of other regulatory drivers that are needed to sort of protect against landfill leakage and what I mean here is that the UK ETS could actually generate perverse incentives to divert waste down the waste hierarchy towards landfill and there also maybe the need for further regulation to minimise the export of residual waste outside the UK so we may see more regulation in that space coming down the line.

I guess second point to make is that beyond sort of the UK ETS and related policies, waste and tackling waste crime is increasingly on the environment agency's agenda and we've seen a real uptick in enforcement activity by the EA which we anticipate will continue especially in light of the EA's new enforcement powers for permitting breaches in the form of variable monetary penalties, you know we discussed VMP's Mike in a podcast episode last year, and also the EA is committing new resources to tackling waste crime and illegality, it's increasing its coordination efforts with the Police, HMRC and export authorities and it's creating a new economic crime unit, so those are kind of my insights on what may develop in the waste sector from an environmental perspective.


Right, so well thank you to you both, that's probably all we've got time for today, I think it's been really useful listening to you both about these important changes which are taking place in relation to waste and the sector more generally, I mean I've been an environmental lawyer for many years now and waste has always been one of the most difficult issues to deal with, from issues such as definition of waste and end of waste and clearly if we're going to deliver a proper circular economy there's an awful lot that needs to be done and clearly that is being done and we've talked about some really important things in the sector, being the UK ETS, sustainable aviation fuels and the points Victoria has made about perverse incentives and the need for sort of proper enforcement in the sector and there's clearly a lot that's going to be changing and developing over the next few years. So, we will definitely keep you all informed on that, but I hope that you have enjoyed this look into the waste sector.

Thank you for listening to Environment Matters, this is the final episode in our series. If you did enjoy it and would like to hear some more of our thoughts on environmental issues generally, then you may also enjoy listening to our previous podcast episodes on greenwashing, natural capital, variable monetary penalties and our 2024 horizon scanning. All of these are available on Apple, Spotify or wherever you listen to your podcasts.

If you'd like to know more about our Environment or Energy teams and how our experts can work with you, you can contact me and the rest of our team via our website.