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 Waste & Emissions
Complying with the Emissions Trading Scheme could be costly for power generators and end users. But if they consider alternative options such as waste-derived fuels, they could meet the targets more easily and with potential gains. The recently enacted EU Emissions Trading Scheme (EU-ETS) may become the most significant environmental legislation yet to affect Europe's economy. Under the agreement, more than 12,000 installations across 25 countries are required to hold enough emission allowances to meet their annual output of carbon dioxide, with a gradual reduction of these allowances over time. In the search for opportunities to reduce carbon dioxide emissions, some energy-intensive industries are considering the use of solid wastes as a way to displace conventional fossil fuels for on-site power and heat applications. Will municipal solid waste (MSW) in particular prove to be a financially attractive fuel source? And what are the main technical, economic and commercial factors influencing its acceptability? To answer these questions, one must first understand how the EU-ETS works.

What is the EU-ETS?

The EU Emissions Trading Scheme is a binding agreement that establishes a limit on the amount of carbon dioxide emissions from specific European industries. An important feature of this initiative is that it is enforced through a market-based trading approach, where a limited number of emission credits, called EU Allowances (EUAs), are allocated to power generators and energy-intensive industries to match their output of carbon dioxide. EUAs can be bought or sold on the open market, giving stakeholders the flexibility either to reduce their emissions to match their allocation, or to purchase additional credits. The private sector generally favours this type of policy framework (as compared with a direct tax scheme, for example) because it enables companies to determine how they will comply with mandatory emission reductions, by choosing the lowest-cost method that best fits with their individual business profiles.

The EU-ETS is to be implemented in two phases: 2005-2007 and 2008-2012. The following industries will be regulated in the first phase of the scheme:
  • cement
  • power - including combined heat and power (CHP)
  • coke ovens and refineries
  • iron and steel
  • glass manufacturing
  • pulp and paper
  • tile manufacturing
  • any other site with fossil-fuel combustion that has an aggregate thermal capacity of > 20 MW.
The first phase of the scheme only regulates the emission of carbon dioxide. A review that was carried out in 2006 is assessing whether the scheme should also cover other greenhouse gases (GHGs) such as methane, sulphur hexaflouride (SFd), hydroflourocarbons (HFCs), nitrous oxide (NZO) and perflourinated compounds (PFCs). The review will also consider whether to include the aluminum, chemicals and transportation sectors, which are responsible for a large proportion of GHG emissions in Europe. Installations that exceed their emission allowances during the first phase will be penalized €40 per excess tonne of CO2 emitted, and €100 per tonne from 2008. An installation that does not comply will also be required to make up for the shortfall in the following year.

Applying the scheme on a nationwide level, each EU Member is responsible for periodically publishing a National Allocation Plan (NAP) that outlines:
  • the total quantity of allowances it intends to issue, and
  • how it proposes to distribute those allowances among the installations subject to the scheme.
Thus, there is some flexibility for governments of the Member States to choose how they plan to implement the EU-ETS.

However, each NAP must be submitted to - and formally approved by - the European Union. For most countries, EUAs will be allocated at no cost; and though some credits are withheld for new market entrants, governments, if they so choose, have the power to auction up to 5% of available credits in Phase 1 and 10% in Phase 2 to the highest bidder.

Where does MSW fit in with emissions trading?

Up to 70% of the composition of raw MSW is derived from biomass (i.e. biodegradable organics such as food waste, paper and cardboard). If used to produce power and/or heat, this biomass fraction is exempt from being counted towards emission targets, according to the rules of the EU-ETS. When MSW is processed into a fuel, some of its non-combustible fractions (such as metals, glass and inert fines) are removed; this results in an increase of the fuel's biomass fraction to as much as 95%. Substituting this MSW-derived fuel for fossil fuels can therefore substantially reduce the number of additional credits a facility may need to purchase, or can free up surplus credits which could be sold into the market as a source of income.

Until recently, industry in most parts of Europe has been cautious in considering the use of municipal solid waste and similar wastes for replacing fossil fuels in power stations and industrial boilers because of a host of technical and regulatory challenges (these will be discussed later). But MSW is becoming a much more financially attractive fuel source because of the need to find ways to reduce GHG emissions, as well as the complementary pressures and fiscal incentives to divert larger volumes of waste from landfill. In the context of these emerging drivers, the viability of utilizing MSW as a substitute fuel in power and industrial boilers and kilns must be re-evaluated.

Financial analysts have generally forecast that the prices of EU Allowances could be between €5 and €50 per tonne of carbon dioxide during the two phases of the EU-ETS. This price range reflects significant uncertainty about market activity, strictness of individual NAPs, and the impact of ratifying the Kyoto Protocol.