Circular Carbon in the UK Chemical Sector

High electricity prices remain one of the most significant structural barriers to investment in the UK chemical sector. Although the UK’s Modern Industrial Strategy recognises this challenge and commits to reducing industrial power costs, electricity-intensive technologies such as biomass pre-processing, chemical recycling, and carbon capture and use (CCU), remain commercially unviable under current conditions.

Energy price statistics published by DESNZ on 30 September 2024 show that the UK had the highest industrial electricity prices among reporting International Energy Agency member countries during the second half of 2024, with UK industrial electricity costs nearly double the median price across the IEA. These structural price differences directly influence investment decisions and restrict the economic viability of low-carbon and circular technologies.

The government has acknowledged these challenges and is developing targeted interventions. The British Industrial Competitiveness Scheme (BICS), introduced alongside the existing British Industry Supercharger, aims to reduce electricity costs by exempting eligible Energy Intensive Industries from the costs of the Renewables Obligation, Feed-in Tariffs, and the Capacity Market. From 2026, an uplift to the Network Charging Compensation scheme will further reduce cost burdens.

However, BICS will not take effect until 2027 and applies only to a subset of highly electricity-intensive firms. In the near term, high structural electricity and gas prices continue to undermine the economic viability of electricity-based, low-carbon feedstock technologies, delaying investment in biomass conversion, chemical recycling, hydrogen deployment, and CCU. A clear and stable policy framework, that targets competitive industrial electricity prices, is essential for enabling large-scale deployment of alternative feedstocks.

The UK’s carbon policy framework provides limited incentives for circular feedstocks, subverting the case for business investment.

As the UK’s flagship industrial decarbonisation mechanism, the UK Emissions Trading Scheme (ETS) has a key role to play but current rules do not support carbon circularity. For example, if a UK ETS participant were to capture its emissions and store them in permanent geological storage then those emissions would be counted as zero under the scheme rules. Whereas, if a site were to capture those emissions for use in a new product they would need to report those emissions and pay the full carbon cost associated.

An associated issue comes from the upcoming inclusion of ‘Greenhouse Gas Removals’ in the UK ETS. GGRs will be included in the UK ETS in 2029. But according to the Government’s proposals, CCU of atmospheric carbon in short-lived products (e.g. plastics) does not constitute a negative emission so will not receive a credit. This is regardless of the product’s treatment at end-of-life, and the imminent inclusion of the waste sector in the UK ETS. It also ignores the emissions that would be displaced from circulating this carbon back into the economy, as manufacturers procure carbon from virgin fossil sources instead.

An additional complexity comes with the accounting of biomass within the scheme. A site burning biomass (including biogas) for heat will have its emissions zero-rated. This creates a strong incentive to burn biomass as a route to decarbonisation. Yet without any comparative support for the use of biomass as an alternative feedstock, we risk driving demand away from potential feedstock uses, towards combustion.

Away from the UK ETS, the Climate Change Agreements (CCA) scheme is the most significant industrial energy efficiency scheme in the UK. The scheme provides relief on the Climate Change Levy (CCL) business energy tax, in exchange for a commitment to meet energy efficiency targets. But the CCA scheme does not have a method to account for the increase in energy use that a site can expect if it switches to using alternative feedstock (e.g. for pre-processing of biomass or capturing carbon). This oversight means that a site would most likely fail its energy efficiency targets were it to adopt a circular carbon feedstock, incurring significant penalties.

The Climate Change Levy itself supplies a further challenge. Various exemptions to the tax apply for the use of natural gas as a feedstock but the definition of ‘natural gas’ does not extend to biogas or syngas, which effectively precludes a switch to alternative feedstocks for those that wish to retain the benefit of CCL exemption.

The UK Government has also developed subsidy support mechanisms to assist the deployment of hydrogen and carbon capture technologies in the UK. Carbon capture, usage and storage (CCUS) and hydrogen are vital to the chemical sector’s net zero transition. Together, they can unlock investment in sustainable chemical production, support circular carbon systems, and enhance long-term industrial competitiveness. However, neither the CCUS Business Model nor the Hydrogen Production Business Model support the deployment of CCU. Within these support mechanisms, projects are only eligible for funding in relation to the captured emissions directed to the transport and storage network, and will not be supported for captured carbon directed to use in products.

The current framework of waste policy stems from the 2018 Resource and Waste Strategy. In that Strategy, there was recognition of the important role of chemical recycling and bio-based chemicals, but a lack of defined measures and no concrete timeline for implementation. Devolved policy-making in this area has layered confusion and uncertainty on top of the slow pace of delivery, all the while the UK has continued to export valuable waste streams whilst its own processing capacity has declined.

Standards and labelling are one key area in which policy intervention is desperately needed. Plastics can be produced from a range of feedstocks and can be engineered with specific end-of-life outcomes in mind. Communicating these features adds complexity for consumers, particularly the terms ‘bio-based’, ‘biodegradable’, ‘compostable’. In 2019, the Government called for evidence on the development of standards for bio-based and biodegradable plastics but no actions were taken forward as a result.

Poorly defined terms can also be found in the existing policy landscape. For example, the Plastic Packaging Tax (PPT) excludes ‘cellulose-based polymers that have not been chemically modified’, whereas the Single-Use Plastics Ban (SUPB) excludes ‘natural polymers’. Multiple definitions complicate the policy landscape for potential market entrants.

The PPT and the Extended Producer Responsibility (EPR) are critical policies which could be leveraged to increase investment in circular chemicals in the UK. However, both have design elements that discourage the adoption of bio-based feedstock. For example, the PPT treats bio-based plastics in the same way as fossil plastics, while exempting fossil plastics with 30% recycled content. Yet some bio-based plastics (e.g. for organics recycling) are compostable and converted into CO₂ and biomass, it is not possible to recycle them.

Meanwhile, the EPR, which has been delayed several times from the originally planned 2023 launch date, penalises bio-based plastics by classifying materials like polylactic acid as “hard to recycle”. Under current plans this will result in a doubling of base EPR fees to ~£520 per tonne, effectively increasing bio-based production costs by ~20%.

Mass balance accounting will be a critical enabler in advancing low carbon content in chemicals. CIA welcomes the recognition of its importance under the PPT but movement remains slow, with implementation expected in April 2027. In a parallel effort, the Government is also developing a policy on accounting for the embodied carbon in imported industrial products. We support these efforts but their success will depend on whether consumers are willing to pay more for greener products, and on greater support for UK-based production.

Biomass is a critical low-carbon feedstock for the chemical sector, but supply is constrained and there is strong competition for resources from the energy and transport sectors. The chemical industry is primarily concerned with waste biomass, but we recognise the importance of the interplay with food production too.

The energy sector has been prioritised in the net zero transition. A number of schemes have funnelled limited biomass into power generation, for example the Green Gas Support Scheme which supports biogas injection into the national grid, or the Bioenergy Carbon Capture Business Model, which funds the combustion of biomass for energy. In the transport sector, the Renewable Transport Fuel Obligation (RTFO) encourages biomass for use in making fuel over its use in making chemicals. Overall, the UK lacks a strategic biomass allocation framework.

In the current Biomass Strategy 2023, there was clear recognition of bio-based chemicals but a lack of defined measures and no timetable to take forward support. There was a welcome commitment to assess how best to adopt the cascading use of biomass in the UK ,as part of the sustainability criteria, yet no action was taken as a result. There was also a proposal to commission a project to understand the economic and climate benefits to the UK of an increased use of bio-based chemicals, however the report has not been published.

Large-scale deployment of alternative feedstocks requires sustained, predictable, multi-year funding to support capital-intensive demonstration and first-of-a-kind commercial projects. When it comes to the UK chemical sector in particular, uncompetitive energy costs make public support even more critical. Although historically funding has been made available, this has been through smaller, one-off programmes that are not amenable to commercial deployment in the UK.

CIA’s Project 2035 research highlights the need for ongoing capital support, public-private partnerships, and risk-sharing mechanisms, to accelerate adoption of sustainable feedstocks and maintain the UK’s long-term global competitiveness.