March 19th, 2014

Incineration: let’s get fiscal

by Dominic Hogg


If you are serious about encouraging waste prevention, eco-design, re-use, remanufacture and high recycling rates, then it helps if you stop people throwing stuff away for peanuts. A high price on residual waste management is not a panacea; and it isn’t impossible to achieve good results in its absence. However, the decline in recycling rates in Germany as incinerator gate fees have bombed is testament to the fact that, whatever other regulations you have in place, at some point the economic imperative begins to bite: make chucking stuff away cheap, and it will kill off better alternatives.

The Landfill Tax (LFT) in the UK has played an important role in improving the way waste is managed. But with tax at £80 per tonne as of April and typical gate fees of £20 per tonne, other ways of managing residual waste have begun to look financially more attractive. Cheaper alternatives effectively undercut the LFT as the fundamental driver of the economics of waste management.


Paying the polluters

Fiscal measures like LFT are not just a means of pushing material up the waste hierarchy. For some time we’ve known that it makes sense to use taxes to internalise the costs of environmental damage within the market. At least in terms of policy, this seems to be the main recommendation of reports on the Circular Economy from McKinsey, the Ellen Macarthur Foundation and the World Economic Forum.

The Head of the IMF, Christine Lagarde, has also highlighted the need to ‘get prices right’, both to ensure that polluters pay, but also as part of a sensible tax policy. Models reliably show is that environmental taxes tend to be the source of tax revenue that depresses the economy least, and delivers the least-worst impact on employment. If you don’t need the extra revenue from environmental taxes, it can be used to reduce any regressive impacts, or to cut the tax paid on employment (NICs), or profits, or income.

So is the price of incineration ‘right’? To answer this requires a short digression about ‘environmentally harmful subsidies’. A ‘subsidy’ can be defined in a number of ways; ‘environmentally harmful’ adds further complications. At the absolutist end, some would argue that any action that affects others (for example, a factory emitting harmful pollutants and damaging air quality) can be considered ‘subsidised’ unless the polluter pays in full. At the minimalist end, we might apply the term only to support payments that encourage environmentally harmful activity, such as subsidising coal as a heating fuel. In the middle are what we might call ‘implicit’ subsidies, where things we might expect to be taxed are exempted. If we count these last as environmentally harmful subsidies we’re in the august company of the OECD – hardly radical greens.

When waste is incinerated the combustion process generates pollution, the levels of which are limited by law and controlled by permits. But the emissions are not zero, and they don’t disappear, so they have an effect, at the margin, on human health. In the UK they are untaxed.


Sins of emission

Incineration also emits carbon dioxide. Convention suggests that we should worry about whether the emissions origins are fossil (mainly from the combustion of plastics) or biogenic (from sources such as paper, card, garden waste or food waste). Typically, for each tonne of municipal waste combusted, around a tonne of CO2 is released, of which roughly half is of fossil origin. So we should at least be concerned about that half a tonne; personally, I think we should be concerned about the other half too. The climate doesn’t discriminate between the origins of CO2 molecules in its response to their emission. And will people bother to seek to avoid emissions that they’ve been told don’t ‘count’?

Either way, it’s clear that incineration emits CO2, and should pay accordingly, whether for the whole tonne or just the fossil half. In 2012/13 there were 5.5m such tonnes from local authority sources in England.

“Yes,” a developer might say, “but we do generate some energy, and that prevents the emissions of air pollutants and CO2 which would otherwise have come from other sources”. The air pollutants argument is easy to address: let’s tax them all. We shouldn’t distinguish between incineration, power stations, cement kilns, oil refineries, and industrial boilers. But given governments’ concerns about competitiveness, perhaps we shouldn’t be surprised by the limited extent to which such taxes are currently used.

But let’s be clear. These pollutants cause harm, to you and me, to your parents and your kids. We may regulate emitters, but we don’t actually incentivise them to reduce their emissions, still less, require them to compensate for the resulting costs and health damage – which also impact on competitiveness. These are good reasons for action at the European level, including border tax adjustments to ensure that imports into the EU were also captured by the tax.



Tax the stacks: EfW’s harmful emissions need to be put on a level playing field with other kinds of power generation. Photo by Dori, via Wikimedia Commons


So what about the CO2 emissions avoided? Electricity is the form of energy incinerators most commonly generate in this country. Again the sensible thing to do would be to tax all emissions: regardless of source, the same damage is being done. Power stations, and many other installations, are already included under the EU Emissions Trading Scheme (ETS). Now that we are in Phase III of the scheme, power stations must acquire through auction all the allowances they need to cover their emissions. Their value has been low for some time, averaging €4.31 per tonne of CO2 in 2013, and the UK uses a carbon price floor to ensure that here the price of allowances does not fall below a specified, gradually escalating level.

Power stations in the UK are therefore already paying for their CO2 emissions – perhaps at a lower price than they should, but paying nonetheless. Incinerators, though, do not fall under the EU-ETS and need no allowances. The carbon price floor doesn’t apply to waste as a fuel. As a result, incinerators benefit from an implicit subsidy: not just in the UK, but across most of the EU.


Heated debate

Heat, the other major output of incineration, takes us into some interesting territory. The UK applies the existing Energy Taxation Directive minimum rates to the taxation of energy used in heating. Take a look at the excise duty rates paid on heating fuels across Europe here. The UK sticks out rather like a sore thumb, with no taxes on several fuels. Oil is taxed, but 12 Member States tax it at higher rates. So whilst the UK treats incineration rather more equally in terms of heat than electricity, this is due to our low tax rates on heating fuels.

There are also two forms of price support to consider.

The first comes from the tax regimes for power and heat. The small amount of energy we produce through incineration is untouched by taxes on power. However, the majority of generation is subject to tax, which is therefore effectively incorporated into the electricity price, providing a tangible benefit to incinerator operators and others not covered by the tax schemes.

Regarding heat, wherever fuels are heavily taxed the effect on heat prices from all sources can be very significant. In Denmark and Sweden, for example, escaping fuel taxes means an implicit subsidy of around €100 per tonne of waste (at least for domestic users), potentially translating into something of a bounty for incinerators.

Denmark addresses this, at least in part, through an incineration tax. This used to be based on the weight of waste incinerated, but is now around €50 per tonne of CO2 emitted.


NOx your SOx off

After Norway abolished its incineration tax – apparently too much waste was disappearing over the border to Sweden to escape Norwegian taxes – Sweden did the same. But it replaced it with a more innovative approach: a levy is charged on NOx from plants generating thermal energy, the revenue from which is refunded in line with thermal output, incentivising NOx efficiency.

Second, power and heat generated from incinerators benefit from more direct subsidies in the form of support measures on the output price, through mechanisms such as ROCs, Feed-in Tariffs, and the renewable heat incentive.

It seems that, in the UK and abroad, the tax system treats incineration plants with kid gloves, exempting them from costs that push up the prices of heat and power. They also escape paying for those externalities which remain untaxed more generally.

An incineration tax is one solution, and one that might appeal to a chancellor witnessing the revenue from LFT plateau and fall even as the rate increases. A suitable design would tax the main emissions on a per unit basis, and greenhouse gas emissions based on the carbon price floor. Waste exports would need to be taxed, but imports destined for incineration could be exempt.

If the case for taxing incineration is sound, the case for a more comprehensive fiscal reform is equally so. If I were writing Mr Osborne’s budget, I’d be sketching in a broad range of emissions-based taxes (such as on NOx, SOx, particulates, and various other pollutants) alongside cuts to payroll taxes and measures to prevent energy prices hitting the poorest. However, gazing into my fiscal crystal ball, I see this budget making no such change: the only forms of combustion being taxed will still be fuel and fags.


Dominic Hogg


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4 Comments on "Incineration: let’s get fiscal"

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Max Wallis

Correcting the above 14% figure UK Targets 2020 are given in
Reduction target in sectors not covered by the EU ETS compared to 2005 is 16.0%

Max Wallis

Incinerator CO2 does not require allowances under EU-ETS (unless above 50MWe). But the UK is required to meet CO2 limits and reductions in the waste-sector for 2020 (14% decrease for the UK as I recall). The rush to incinerate is surely pushing up CO2 emissions, and the authorities cannot offset it by retrospectively inflating methane emissions from landfills. So surely the need to report to Europe on our dismal record in waste sector emissions and then the need to meet the 2020 targets not a further good reason for taxing incineration as a process or incinerator CO2 directly?

Phillip Ward
It’s time this debate got started in earnest. We did give some thought to the need for an incineration tax when we were writing Waste Strategy 2000 – but decided it was too soon. Later the pressure to close PFI deals was an obstacle to any serious discussion. This should be a better time and a comprehensive view of pollution taxation is the right way to go. But signals that today’s budget will help business with its energy costs may be a hint that the Chancellor has his eye on the carbon floor price. That could be a move in… Read more »