Should Incineration Attract Finance from Green Bonds?
Not long after the UK's Municipal Bonds Agency published its Sustainable Finance Framework, it announced its intention to issue its debut green bond. When I read that the bond would issued on behalf of the North London Waste Authority to help build a new incinerator at Edmonton, you could have knocked me over with a feather.
Few things are more aptly described as dogma than the position which incineration occupies in the minds of the waste management industry. All too often, this is replicated in the mindset of those who design policies intended to improve the management of waste. There seems to be a reluctance to engage with analysis of whether this particular way of managing waste is actually fit for the 21st century, still less, to accept that incineration might actually be, or is becoming, worse than landfill. In 2014, after research had explored the conditions which might make incineration worse than landfill, Defra, with DECC (now BEIS) wrote:
244. Ensuring that energy from waste is robust to these changes and maintains its primacy over landfill in the long term will need to be a key consideration for Government policy and industry practice alike.
Why do that? I mean, why would it be the job of government departments to ensure that one technology retains primacy over another even if the evidence suggests that the justification for doing so no longer remains. As I’ll make clear below, the most likely way of incineration retaining its primacy over landfill is if we continue to use polluting fuel sources for power and heat. Are we really going to ransom the earth just to make incineration look better than landfill?
Once upon a time, it might have been plausible to assume that where energy was being generated by an incineration facility, the source of energy that it might be displacing was a power plant burning fossil fuels and spewing out air pollutants - NOx, SOx, particulates, etc.. But that’s changed radically in the UK. And as the range of countries seeking to clean up their act in respect of climate change has grown, in all of those making progress, the carbon intensity of the marginal source of energy generation is in decline. Logically, if the world is to keep global temperatures from rising more than 1.5 degrees C above pre-industrial levels, then the carbon intensity of the avoided source of energy will - everywhere - have to drop steeply towards zero in the coming decade, just as it has done over the last decade in the UK. That has profound implications for how ‘green’ incinerators look.
Broadly speaking, for every one tonne of residual municipal waste which is incinerated, one tonne of carbon dioxide is generated, roughly half of which – it varies - will be of fossil origin. According to a recent industry report by Tolvik, in 2020, the average generation of energy per tonne of waste across 54 incinerators in the UK was 557 kilowatt hours (kWh) of electricity and 118 kWh of heat per tonne of waste. Even if you add together the energy in the form of electricity and in the form of the heat (it’s not entirely clear that this is a sound approach), then the carbon intensity of the energy generated is, on average, 741 grams of fossil-derived carbon dioxide (CO2) per kWh. This falls to around 683 grams of fossil-derived carbon dioxide (CO2) per kWh once credit is given for recycling of aluminium and steel from the incinerator ash that falls through the grate. That's about double the carbon intensity of electricity generated by gas fired power stations, and compares with the 900g CO2/kWh or so that would be the result using (modern) coal fired power generation.
The ‘net’ climate change position of incineration is driven, essentially, by the difference between the carbon intensity of generation and the carbon intensity of the energy source that’s displaced. As long as the displaced source was coal (or oil), incineration looked interesting (as long as no one was worried about the non-fossil CO2 emissions). But in the move towards steadily lower carbon intensity power generation, incinerators look, first of all, ‘not so good’, and then, ultimately, ‘terrible’. I’ll spare you the details, but when you compare incineration with landfill, there is - usually, unless the landfill is ineffective at capturing methane - a set of conditions under which landfill no longer looks as bad as incineration from the perspective of its impact on climate change.
Interestingly, in the specific case of the North London Waste Authority incinerator, which is seeking to rasie funds through the bond issue, an analysis of this nature – comparing the proposed incinerator with a landfill - was undertaken by consultants working for the Authority. Naturally, the first thing one looks at in a critical review of such an analysis is the assumption used concerning what source of energy the report assumed was being avoided. The analysis used a figure for the carbon intensity of avoided power of 373 grams of CO2/kWh. The figure was taken from a Defra research report, published in 2014, but largely completed in 2013. NLWA’s consultants reference that report as the ‘Defra guideline’, possibly to lend credibility to their choice of figure. But the Defra report isn't ‘a guideline’, and in any case, choosing to use a figure for the carbon intensity of an avoided power source from the year 2013 for a facility which will not be operational until 2026 is either grossly misleading or reflects a failure to understand what is happening to th UK power generation system. And rather than using a non-guideline, Supplementary Guidance to the HM Treasury Green Book (provided by BEIS) indicates the carbon intensity of the long term marginal source of electricity which should be used in appraising projects and policies. The carbon intensity of the source displaced by additional generation in 2026 is 189 grams CO2/kWh, roughly half what was originally assumed.
Another part of the analysis that catches one’s eye is a methodological assumption concerning the landfill. The consultants undertaking the study calculated a quantity of carbon of non-fossil origin that was effectively sequestered in the landfill. Because non-fossil CO2 emissions from the incinerator were ignored / not counted, consistency would require the consultants to net off an amount of CO2 equivalent to what would have been released had the non-fossil carbon sequestered in the landfill been emitted as CO2. Although they calculated this amount, the consultants did not credit that sequestration effect. Their decision not to do so again referenced the document they referred to as the Defra guideline. The consultants claim that the ‘guideline’ was silent on the matter, but it wasn’t. Indeed, it made clear that one of two ways of dealing with this sequestration would be to net off the sequestered CO2 from the landfill’s other greenhouse gas emissions.
How important are these two changes? Well, in their assessment for North London Waste Authority, the consultants claimed that the net contribution to climate change from the landfill would be almost nine times that of the incinerator. But just by correcting for the two issues just mentioned - the methodological flaw in the way the landfill was assessed, and updating the avoided carbon intensity associated with power generation - then keeping everything else exactly the same, the incinerator’s net contribution to climate change becomes double that of the landfill.
So what should a green investor think? First of all, we’re in the era of greenwash and you need to question all the numbers you see. If you don’t, you’ll end up drawing that label - of greenwashing - to yourself as sure as night follows day. Supporting as ‘green’ things which clearly are not deserves to be called out, and increasingly, it will be. That’s what we’re doing here.
Second, it’s my view, based on analysis of the emissions, that neither landfilling nor incineration have any place in a green investment portfolio. Some of one or both of them might well still be necessary in some form in years to come, but they are options of last resort. We mustn’t allow wrong-headed perspectives on ‘transition technologies’ - these are long-life assets - to keep a foot in the very door that needs to be rapidly closed. As long as we maintain a pretence that incinerators (and landfills) are green, the longer it will take to reduce our dependence on them. Landfills and incineration plants belong – like coal-fired power stations, and vehicles powered by fossil fuels - in the category of ‘things we need to minimise / should seek to eliminate’. And there’s not so much to choose between them any more. But you’d never know it from the policies in place here in UK.
This gives rise to a third point. Green or otherwise, what’s the ‘risk’ to which incinerators are exposed regarding change in the policy environment, and how might that affect the asset’s performance? Notwithstanding the fact that the climate change performance of incinerators has been steadily converging towards that of landfill, as of April 2022, in the UK, landfills will be taxed at almost £100 per tonne of waste that they treat. Incineration plants, on the other hand, are not subject to any tax, and they remain outside the UK's Emissions Trading Scheme (ETS). Far from being targets for financing by green bonds, incineration facilities should either be included within the UK ETS, or failing that, subject to taxation. The absence of the application of either ought properly to be considered as an implicit subsidy of the environmentally harmful type. The European Commission did not recommend the inclusion of incineration in the EU-ETS, but the Parliament is believed to be of the view that it should be included. Thankfully, following on from recommendations made by the Climate Change Committee, BEIS and the devolved governments are now consulting on including incineration within the UK-ETS as part of a wider consultation on the scheme’s development.
Over the last 10 years, the only evolution of note in the management of waste collected by local authorities in England has been the progressive switch from landfill to incineration: recycling has been stagnant. That is entirely consistent with a summary of the last ten years of Defra oversight: non-decisions and foot-dragging on key decisions that might have driven recycling forward, implicitly subsidising incineration, and inflation-linked increases in landfill tax. The tax on landfill isn’t, in England, helping to push more waste into recycling - weakness and uncertainty on policy matters has simply driven waste from landfills into incinerators.
There are some nuances to this debate, to be sure. Elsewhere we have argued that no incineration facility should operate any more without a high specification mixed waste sorting facility in place which can a) extract plastics for recycling, and b) reduce the fossil carbon intensity of the waste that is subsequently combusted. Such facilities are being installed in other European cities which have made commitments to reduce greenhouse gas emissions, and whose residual waste is incinerated. And no landfill should operate without a) a similar specification of sorting facility as well as b) biological stabilisation of the remaining biodegradable fraction (to reduce the extent of fugitive emissions of methane).
Even in these configurations, both of which would be perform better than the Edmonton facility, it might be argued that only the sorting facility (and the stabilisation element in the landfill system) should be eligible for green bond financing. The Edmonton facility has no such sorting facility in place to extract fossil derived plastics. It could have, and it should have, included this. The waste industry is also looking much more closely at carbon capture and storage. The North London Waste Authority has considered that it might have carbon capture and storage in place by 2035. It might. But then again, it might not. One of the strongest arguments for including incineration in the UK ETS is to drive forward improvements in the increasingly dreadful climate change performance of UK incinerators.
Those developing criteria and taxonomy for green bonds, or green investments, need to get their act together. Criteria that allow for inclusion of ‘energy / emission efficient’ waste to energy without any supporting criteria invite exactly the type of nonsense that the UKMBA’s debut bond is engaging in.
Those issuing second party opinions also need to sharpen up their critical faculties - green investors are poorly served by bland rubber-stamping exercises that offer zero valuable insight as to the merit of a framework or a set of criteria, and leave the way clear for bond issuers to stand accused - rightly - of greenwashing.
Days before this blog, and the associated report (see link below to download) were due to be published, the pause button was hit on the UK MBA green bond issue. Welcome as this is, it clearly hasn’t been entirely ditched. It should be. Until taxonomies and criteria are revised in a manner that properly reflects the impact of incineration facilities (and how these might be mitigated), I strongly advise green investors to steer clear of the UK Municipal Bonds Agency’s debut green bond issue if indeed the issue is ‘unpaused’. It is simply not green. Furthermore, any supposedly green investment seeking to support incineration anywhere on the planet needs to bear the points made above in mind. Any waste related installation being pitched as ‘green’ needs to be subject to critical scrutiny - evidence indicates, after all, it will not have been subject to any meaningful scrutiny by those offering second party opinions.
If we really think that by burning waste, and thereby emitting more or less all the carbon content of that waste as CO2, that we are doing ‘something green’, then we really are in deep, deep trouble.