Carbon commitment 'lacks ambition'

The government's new Carbon Reduction Commitment aims to cut emissions from large non-energy-intensive organisations such as water companies. Merlin Hyman of the EIC analyses the scheme, which starts in 2010, and questions its efficacy.

As we have seen over the past 18 months, the political establishment has finally started to take the looming environmental crisis seriously.

The battle lines of political debate have been redrawn and no party can now expect to been taken seriously at the ballot box without credible environmental policies.

Over the next year, we will see whether the government has the will to stand up to vested interests, turn its rhetoric into reality, and put in place a policy framework to drive change.

Central to the government's long-term climate change policy is a commitment to cut CO2 emissions by 60% by 2050. The forthcoming Climate Change Bill will set a legal framework for meeting this target. But, in order to meet the 60%, every part of our economy and society - from central and local government, to businesses large and small, to individuals and communities - must do its bit.

The Environmental Industries Commission (EIC), with 330-plus member companies, has grown to be the largest trade association in Europe for the environmental technology and services industry. And it has been lobbying at the highest level for 12 years for effective legislation and regulation to help these pillars of our economy and society to contribute to tackling climate change.

Low-carbon economy
Effective climate change legislation and regulation not only drives a market in low-carbon technologies but also contributes to future prosperity, putting the UK on a path towards a low-carbon economy.

At long last, the EIC's message that environmental protection and economic growth advance together is becoming widely accepted in the corridors of power.

Recently, the government has turned its attention to tackling the climate change impact of the non-energy-intensive sector. This includes much of the water industry.

Typically, organisations in this sector have energy costs of less than 1% of their total annual costs which, on the surface, may suggest that its climate change impact is relatively small.

However, with no further action taken, government analysis indicates that CO2 emissions from large non-energy-intensive businesses and the public sector will rise steadily, with emissions estimated to be about 11% higher in 2030 compared with 2010 levels.

Every part of our economy and society must do its bit, and the non-energy-intensive sector is no exception. It is crucial, therefore, that measures are introduced that will focus this sector on reducing energy use and tackling its carbon emissions while continuing to maximise economic prosperity.

As the Stern report said: "There are clear benefits from strong and early action to tackle climate change, particularly where there are substantial gains in efficiency to be achieved."

EIC has, therefore, engaged in a high-level lobbying campaign in support of policies for tackling the climate change impact of the non-energy-intensive sector.

Following EIC's lobbying, the government announced the introduction of a Carbon Reduction Commitment (CRC). This is a new mandatory cap and trade scheme to reduce carbon emissions from some 5,000 large non-energy-intensive organisations such as water companies, supermarkets and banks.

The scheme will start with a three-year introductory phase in 2010. It will require organisations whose mandatory half hourly metered electricity consumption is greater than 6,000MWh per year to hold allowances corresponding to their energy use emissions - both direct emissions and indirect emissions.

These allowances will be issued via an auction process. The revenue from this will be recycled to participants by means of a simple, direct, annual payment proportional to average annual emissions since the start of the scheme, with a bonus/penalty depending on the organisation's position in a CRC league table.

EIC believes that the CRC has the potential to be an effective mechanism to tackle carbon emissions from the large non-energy intensive sector. This is by encouraging the management of those organisations that will operate under the scheme to focus on the issues of energy use and the benefits of energy efficiency measures.

The recent Treasury report - Moving to a Global Low Carbon Economy: Implementing the Stern Review - concluded that the CRC can be expected to achieve reductions of about four million tonnes of CO2 a year by 2020. This is equivalent to a saving of 1.2M tonnes of carbon.

The emissions coverage for the CRC is 14M tonnes of carbon; therefore a saving of 1.2M tonnes of carbon by 2020 is equivalent to only an 8.6% reduction.

This is despite the recent European Commission Action Plan for Energy Efficiency concluding that "even though energy efficiency has improved considerably in recent years, it is still technically and economically feasible to save at least 20% of total primary energy by 2020 on top of what would be achieved by price effects and structural changes in the economy, natural replacement of technology and measures already in place".

EIC believes that it is crucial that the CRC reflects the full potential for energy efficiency. In order to achieve this, the proposed Committee on Climate Change under the Climate Change Bill should have at least an advisory role on setting the caps under CRC.

Furthermore, EIC believes that an overall fixed target should be set for 2020, and that the caps for CRC Phases should be set at a level in order to achieve this. This overall target should be at least aligned with the UK's emission reduction targets in the proposed Climate Change Bill. And it should reflect the full energy efficiency potential as set out in the EU Energy Efficiency Action Plan.

With a forecast emissions coverage of 14M tonnes of carbon, EIC believes that an overall target of 2.8M tonnes of carbon should be set.

This is equivalent to a 20% saving and, therefore, reflecting the potential for energy efficiency as set out in the EU Action Plan.

The CRC will include a buy-only link to the EU Emissions Trading Scheme (ETS) - the safety valve price, at any given point, would either be the prevailing EU ETS price, or a pre-defined floor price, whichever were the higher.

Therefore, if an organisation wishes to purchase allowances from the EU ETS, it will be required to inform the CRC Scheme Administrator - the Environment Agency (EA). The EA will then buy the allowances from the EU ETS and sell them on the organisation at the CRC floor price (or the prevailing EU ETS price). Once payment had been received, the administrator would cancel the EU ETS allowances.

EIC feels that the proposed safety value mechanism has a significant design flaw. It could place the EA in a position where it could benefit by £5-10 on every trade.

In the event of a price slump in the ETS, the safety valve option would place the EA in a position where it would buy EU ETS allowances for e1 and then sell this to CRC participants for the floor price, say £8 or e12. This could net the agency significant margin on each trade.

Energy use
The CRC will not target emissions covered by the Climate Change Agreements nor direct emissions covered by the EU Emissions Trading Scheme. Organisations with more than 25% of their energy use emissions in Climate Change Agreements will be exempt from the CRC.

The National Audit Office report The Climate Change Levy and Climate Change Agreements: A Review by the National Audit Office recently concluded that many of the targets under Climate Change Agreements are too weak.

EIC's members, who have great experience advising business on energy efficiency, have regularly informed ministers since the introduction of the agreements that the potential for savings in the sectors covered is much greater than reflected in the agreements.

Therefore, the proposed 25% threshold is too low as it would exclude organisations that, in reality, have a minority of their emissions covered by weak Climate Change Agreement targets.

It is crucial to ensure that the commercial sector makes a proportionate contribution to meeting the UK's target to reduce carbon dioxide emissions by 60% by 2050.

Therefore, the 25% threshold should be significantly increased.

We would also like to highlight that the CRC will best operate in collaboration with other policy mechanisms that will support managers in improving energy efficiency.

A higher exclusion threshold (based on the amount of energy use in Climate Change Agreements) must be accompanied by more stringent Climate Change Agreement targets, which are, at the very least, aligned with the UK's emission reduction targets in the proposed Climate Change Bill.

EIC believes that the CRC has the potential to be an effective mechanism to tackle carbon emissions from the large non-energy-intensive sector, particularly driving water companies to consider their energy use. But the scheme is lacking in ambition and fails to fully reflect the potential for improving energy efficiency across the non-energy-intensive sector.

Merlin Hyman is director of the EIC. T: 0207 935 1675

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