CRC registrations looms: manage your carbon or face the consequences

By 30 September 2010, the registration deadline for the CRC scheme will have closed and an estimated 2,800 companies that fall under the CRC 'cap and trade' regulation will probably have failed to meet the registration deadline. By: Travis Miller and Graham Margetson of www.foresitesystems.com

By 30 September 2010, the registration deadline for the CRC scheme will have closed and an estimated 2,800 companies that fall under the CRC 'cap and trade' regulation will probably have failed to meet the registration deadline.

Additionally, the 20,000 companies who have half-hour meters, and must also register under the scheme, will probably also be in violation of their registration obligations.

The penalties for missing this deadline is sever, and it is estimated the fines for non-compliance will easily reach into the tens of millions of pounds in a few weeks.

The cost breakdown associated with the fines is as follows. The initial fine for failing to register will be £5,000.

Each subsequent day the registration is delayed, will result in an additional fine of £500, until the cumulative fines reach £45,000.

The availability of energy consumption data and the three (3) year warning to businesses under the scope of the legislation means that violators are easily identifiable and have no defense related to a lack of notice.

Moreover, the remaining window of opportunity available for registration is even narrower than it appears.

This is because firms must entertain a validation process that will be conducted by the Environmental Agency before enrollment and subsequent registration can be completed.

The validation process is anticipated to take a couple weeks; however, the sheer volume of applications that will probably be submitted in the coming month may delay that process further.

Accordingly, the realistic deadline required for the initial submission of pre-validation registration documents is the end of August 2010 at the latest.

COMPANIES SUBJECT TO THE REGIME

Under the CRC registration requirements, companies with half-hour electricity metered consumption greater than 6,000 MWh per year (approximately £500,000) in 2008 must register before the deadline.

Accordingly, large public and private sector organizations across the UK, including:

supermarkets, water companies, banks, local authorities (including state-funded schools), and central government departments are anticipated to fall under the scope of the regulation.
For subsidiaries of organizations, or members of an organizational group, the group must generally act as one entity and register jointly.

The CRC guidance documents dictate that the highest parent organization will normally be the 'primary member' who must carry out administrative actions on behalf of the group. The remaining subsidiary organizations within the group must then provide information about their energy use to the primary member.

The organization or organizational group is responsible for electing the reporting agent to manage this process, who can be either internal or external.

However, the liability caused by inaccurate reporting cannot be delegated, nor can the risks associated with non-regulation.

If the highest parent organization is based outside the UK, the group must nominate a UK subsidiary to represent the whole organisation.

Additionally, should either a domestic or international organization have one or more subsidiaries that would be eligible to participate in their own right, were they not part of a group (known as Significant Group Undertakings - SGUs), it has the choice to disaggregate these large subsidiaries to participate in the CRC separately.

However, as part of the registration process a participant must nominate and declare any SGU that it wishes to disaggregate and participate separately in CRC. These decisions and disclosures should be made prior to the initial registration.

PEOPLE SUBJECT TO THE REGIME

In addition to the businesses' obligation to register, there is a personal obligation associated with the CRC regulations.

Registering organizations must provide to the Environmental Agency an appropriate contact who can serve as a senior officer.

This designated senior officer will need to exercise management control for the whole organization or group.

For a company, the senior officer should be a Director (registered at Companies House) and for a public body or organization of individuals they should be at an equivalent level, for example, Chief Executive, Board Member, Partner, Chief Constable, Executive Council Member, Trustee, or similar.

Senior officers must register their full first name as listed at Companies House or on the organization's website.

This identified senior officer will be expected to take an authoritative role and serve as a primary contact for the organization.

He or she will need to authorize the primary and secondary contacts and the account representatives, on behalf of the group or organization.

The senior officer represents the compliance account holder in CRC and therefore will have enforcement and civil penalty notices sent to them directly.

As an added incentive to appoint the appropriate parties, the legislation underlying the CRC scheme designates that company directors who fail to meet their responsibilities may face imprisonment.

Accordingly, while non conformance will be treated as a civil offence, a failure to respond to subsequent demands will lead to the issue being treated as a criminal offence.

POST REGISTRATION OBLIGATIONS

Once registration is completed, a cap and trade program will commence necessitating staggered annual audits of approximately 20% of participants, to verify they are creating a valid greenhouse gas emission inventory.

Reporting obligations will follow traditional financial disclosure reporting periods, with annual reports due in April of each year.

These reports will closely follow the recent trend of disclosing corporate social responsibility metrics associated with the financial risks and opportunities of climate change.

Accordingly, there is a mandate to implement a verifiable emission inventory program and to adopt auditable corporate policies that can maximize a company's standing in the CRC league table.

Moreover, swift and decisive action is prudent, as the CRC league table will serve as a forced ranking system against which CRC members will be evaluated by both regulators and the general public.

The CRC league table simultaneously creates a financially advantageous opportunity for some and a public relations nightmare for others who fall within the scheme's scope.

All parties under the cap will be identified within the league table, and the eventual cost of compliance will be dictated by the organizations ranking within the table.

Under the CRC, payments will be required by all participants to compensate for the administration of the cap and trade system.

The cost of participation is currently projected to be approximately £38,000 annually for each organization that falls under the scope of the scheme.

However, the bulk of the revenues procured beneath the cap will be disseminated to the participants under a financial system that rewards success.

The CRC incentive program rewards success through three monetary opportunities. The first is efficiency and cost savings, which are estimated to exceed £1 billion by 2020.

The second and third intriguing opportunities are represented by the bonus payment opportunities and emission credit trading scheme that will disburse the bulk of the annual fees to participants.

THE CRC BONUS AND PENALTY SYSTEM

The CRC framework will use a bonus and penalty scheme to incentivize organizations to reduce their levels of emissions. Any bonus or penalty allocated to an organization will be based on their position in the league table.

During the first year of the CRC Energy Efficiency Scheme, the early action metric will act as the sole indicator of performance for organizations within the league table.

However, by the end of the third year, the early action metric will be removed from the league table calculation.

From that point onward, all organizations will be measured largely (75%) on absolute emissions and partially (25%) on the growth metric.

During the second year the margins for bonus and penalty will increase to 20%, with 30% being applied to the third year and so on.

By the fifth year, organizations in the top half of the table will receive a bonus, whereas all the organizations in the bottom half will receive a proportional penalty. The payout schedule is as follows:

Year 1 - approximately 10% +/- bonus or penalty
Year 2 - approximately 20% +/- bonus or penalty
Year 3 - approximately 30% +/- bonus or penalty
Year 4 - approximately 40% +/- bonus or penalty
Year 5 - approximately 50% +/- bonus or penalty.

Subsequent to the initial five-year period, the bonus and penalty has yet to be established. However, it is expected that the government will continue to take advice from the climate change committee and has not ruled out a 100% bonus and penalty scheme.

THE CRC TRADING CREDITS FOR REGISTRANTS UNDER THE CAP

The carbon reduction commitment emissions trading scheme will target emissions that are not currently included in the European Union's emissions trading scheme all climate change agreements.

During the initial phase of the carbon reduction commitments emissions trading scheme, starting in 2010, all allowances will be sold at a fixed price of £12 per tonne of CO2.

However, it is anticipated that from 2013, all allowances will be allocated through auctions that will develop a market price.

Over time, the number of available credits will diminish which is probably designed to drive up the price.

Thus, there is a strong market opportunity for CRC league leaders to generate significant income from allowance sales, as the market rationing begins.

Additionally, there is a strong incentive for accuracy within an organization's carbon accounting system. Specifically, where an annual report is submitted late, the fine appears as though it could be £5,000 + £0.05 per tonne of allocated allowances per working day.

Where submitted carbon emission details are more than 5% variation from actual, a fine of £40 per tonne of allocated annual allowances will be applied (compared to £12 per tonne of first phase allowance costs, this is a substantial penalty).

Where an evidence pack is incomplete or not up to date, violations will result in a penalty of £5 per tonne of allocated allowances.

A FINAL CAUTION

For organizations that have not taken early action or implemented a carbon account software program, the cost of compliance will probably be elevated.

The CRC scheme places a high value on accuracy that is reflected in the penalty costs for inaccurate filings.

Moreover, the implementation period for integrating a sound benchmarking and reporting business process for greenhouse gases will require energy, time, and costs.

Accordingly, the selection process underpinning your carbon accounting process should be made urgently, but with care. In short, exercise foresight, locate the resources you trust, and be confident that you can trust the resources you locate.

About Foresite

Foresite Sustainability Systems, Ltd. has been designing software based Global Environmental Management Systems (GEMS) for nearly two decades.

The resulting wealth of experience, innovative spirit, and international presence has provided Foresite with the ability to remain a best in class provider of environmental compliance engines for over 100 of the best and most recognizable blue chip companies in the world.

The flexibility of the GEMS platform and Foresite's pragmatic approach to compliance has made the Carbon Management and Supply Chain Greenhouse Gas Inventory Modules premiere tools for our client implementation of effective and sustainable greenhouse gas and energy usage monitoring and reduction strategies.

For more information, please contact Foresite's Director of Sales, Graham Margetson at graham.margetson@foresitesystems.com.

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