TWO North Yorkshire councils have dropped their legal challenge against the Government's decision to pull £65 million of funding for a controversial £1.4 billion waste incinerator.

The Allerton Waste Recovery Park scheme, between York and Harrogate, was given planning permission by North Yorkshire County Council in October 2012, but the Department for Environment, Food and Rural Affairs withdrew private finance initiative cash for the project last February after saying it was no longer needed.

The county council and City of York Council, who are partners in the scheme, applied for a judicial review into the decision, which was due to be heard at the end of this month. However, it has today been confirmed that this has been withdrawn.

In a statement, the county council said it had taken advice after Defra filed their grounds of defence, and had decided it would "not be in the public interest" to continue with the review. It said Defra would have had to take another look at its decision if the review had succeeded, but the "likely outcome" was that the Government department would reach the same conclusion and the funding would not be reinstated.

The two authorities have already spent more than £7 million on the scheme, but if they pull out, they may be liable for up to £5 million in termination payments to AmeyCespa, which would operate the plant through a 25-year deal. The councils have said the incinerator is a crucial part of their future waste strategies and is needed to cut landfill tax costs, but opponents claim it is outdated, too expensive and environmentally damaging.

David Bowe, the county council's corporate director for business and environmental services, said “The advice is that the councils’ case is strong and we continue to believe that Defra made an unlawful decision, but it is clear from this and other recent decisions that Defra do not wish to continue to support projects of this type anymore. 

"Even if we win, we cannot guarantee that we would get the waste infrastructure credits back. We worked closely with Defra for many years on this project and feel very disappointed by the way they have conducted themselves. but we now have to accept that the argument is not worth pursuing. 

“The loss of credits is a blow but it doesn’t mean the project is over.  We are continuing to work with our contractor, AmeyCespa, to mitigate the loss of credits and complete the last details of the contract. The final decision on whether project remains affordable and value for money will be made later in 2014 when this work is completed.”

A Defra spokesman said the department believed its decision had been "entirely lawful" and welcomed the withdrawal of the legal claim "in the interest of taxpayers".

Harrogate and Knaresborough MP Andrew Jones, an opponent of the incinerator, said more public money would have been "wasted" on the project if the legal challenge had gone ahead and he was pleased it had been withdrawn.

"It is difficult to see a way forward for this proposal retaining the incinerator element, which already has in its wake a trail of problems and can only look forward to an uncertain future financially," he said.

"Thousands of local residents are opposed to the incinerator. Harrogate Council’s planning committee unanimously opposed it and Harrogate’s full council also registered its strong opposition to the plans. The two local MPs, myself and [Selby and Ainsty member] Nigel Adams, also oppose the plans.

"Looking ahead, the removal of PFI credits brings the whole project into question.  This combined with the cost of delays, the lower than predicted increases in landfill taxes and the increase in recycling rates – particularly in the Harrogate district – really does make the financial case for proceeding difficult to sustain."

Mr Jones said a "cost-effective, environmentally-friendly and modern alternative" to the incinerator could still be built and he wanted to work with the county council and residents' groups to look into this, saying: "It is time to get everybody round the table again and agree a way to move on."