Carbon commitments: what you need to know

A mandatory carbon dioxide emissions trading scheme is set to come into effect in 2010 to help combat climate change. Some councils and private waste firms will have to participate in the scheme, as Helen Nicholson explains

In March the Government published its long-awaited, third and final consultation on the implementation of a mandatory UK-wide carbon emissions trading scheme, known as the Carbon Reduction Commitment (CRC). Accompanying the consultation, are the Draft CRC Order 2010, an updated regulatory impact assessment on the CRC and a draft user-guide setting out practical steps to achieve compliance.

The CRC is a mandatory carbon dioxide emissions trading scheme for large, non-energy intensive organisations not already regulated by climate change agreements or EU Emissions Trading Scheme (EU ETS). Aimed at improving energy efficiency and reducing the amount of carbon dioxide emitted in the UK, it is intended to help the UK achieve the legally binding targets set out in the Climate Change Act 2008. This codified ambitious targets for greenhouse gas emissions to be reduced by at least 26% by 2020 and by 80% by 2050, compared to 1990 levels.

Participation levels
It is estimated that some 20,000 public and private sector organisations will be required to participate in the CRC, with around 5,000 organisations qualifying as full participants. These are likely to include some large private sector businesses, retailers, banks, supermarkets, hotel and restaurant chains, water companies, telecommunications companies, large local authorities and universities, and all central government departments regardless of qualifying thresholds.

To qualify as a full participant an organisation must be a customer under a contract for the supply of electricity, have at least one half-hourly meter settled on the half-hourly market, and consume at least 6,000 MWh of half-hourly metered electricity during a one year qualifying period. If only the first two of these criteria is met, then the organisation will not be a full participant. However, organisations with a half hourly meter supply will be required to submit an 'information disclosure' via the online CRC registry.

In September, qualification packs will be issued to all organisations with half-hourly metered electricity supplies (identified through data supplied by electricity suppliers) who will be required to provide certain information to determine whether they qualify as full participants in the CRC for the introductory phase of the CRC.

Fully participating organisations will be sold allowances based on their energy usage in a CRC year. At the end of each year, they must surrender sufficient allowances to cover the amount of CO2 they have emitted. Should their future emissions fall below the level of allowances they hold for the relevant CRC year, they may sell the excess. Organisations exceeding their quota must buy surplus allowances from other participants or from the Government during the introductory phase.

The CRC is scheduled to commence in April 2010, with a three-year introductory phase ending in March 2013. All subsequent phases will each last for five years. During the introductory phase there will be a fixed price sale of emissions allowances by the Government, with the price expected to be set at £12 per tonne of CO2.

The first compliance year will run from April 2010 to March 2011, during which no allowance sales will take place. Organisations will therefore need to buy allowances in April 2011 to cover both the 2010 and 2011 CRC years. Participants must report and surrender allowances for 2010 and 2011 in July 2011. Phase 2 (April 2013-March 2018) will be the first capped phase and will introduce full auctioning.

Sealed bid auction
The Government will cap total emissions allowances based on targets and CRC performance in the introductory phase. Allowances will be sold to organisations in a sealed bid auction at the start of each year, aimed at reducing emissions and driving forward an active secondary market whereby excessive allowances are sold and purchased.

The draft CRC order has introduced several civil and criminal penalties for non-compliance. The Government will also publish a CRC performance league table, ranking participants on their respective performance. It is designed both to assist the Government in calculating the level of annual recycling payments back to participants, and to act as a reputational driver.

The CRC is revenue-neutral, so the monies received by government for the purchasing of allowances will be recycled to participants through annual payments back to each participant in proportion to their CRC emissions with a bonus or penalty adjustment based on their relative performance.

The consultation closes on 4 June 2009. The 6,000 organisations notified have until that date to submit their comments. This is the last opportunity to have a say in how the legislation is drafted and to highlight any areas that could be improved. The order is scheduled to come into force in April 2010, but it is a complex piece of legislation and early preparation is essential.

Helen Nicholson is a solicitor in the planning and environmental team at Pinsent Masons

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