How to get on top of the carbon league

At present, UK policy on tackling carbon emissions from the business and public sector mainly focuses on energy-intensive organisations through Climate Change Agreements (CCAs) and the EU Emissions Trading Scheme (EU ETS). Now, a new cap-and-trade scheme is being introduced to encourage carbon reductions in non-energy-intensive sectors, which account for around 10% of the UK economy-wide emissions.

The Carbon Reduction Commitment (CRC; formerly the Energy Performance Commitment) aims to provide strong incentives for organisations to save money through energy efficiency measures, and looks to encompass around 51M tonnes CO2 a year from the outset, with the figure set to rise.

Who does it apply to?

A mandatory emissions-trading scheme, the CRC, aims to come into effect in 2010 and will target up to 5,000 large organisations within a 6,000MWh threshold, which roughly equates to annual electricity bills of more than £500,000 at current prices. All energy, other than transport fuels, will be covered, such as electricity, gas, fuel and oil.

Target organisations will include large commercial and public-sector organisations, including supermarkets, hotel chains, government departments and large local-authority buildings. Many of their emissions are currently not included in the EU ETS or CCAs

Once an organisation meets the criteria to be included in CRC, they must include at least 90% of emissions. Participants or subsidiaries with more than 25% of their energy use emissions covered by CCAs (including EU ETS) will be completely exempt from the CRC, thus avoiding double counting, reducing administration and delivering more environmental integrity.

How will it work?

As with the EU ETS, the CRC will operate on a cap-and-trade basis. Starting in January 2010, the scheme will follow a three-year introductory phase featuring simple fixed-price sales of £12 per tonne of CO2. The CRC will operate in full from 2013, when there will be a government-imposed cap on the number of allowances, and all allowances will be sold each year via an auction.

The government intends that the CRC will be a revenue-neutral scheme, with money gained from auctions to be distributed among qualifying organisations after allowances have been surrendered based on carbon reduction performance.

At the end of each year, company performance will be summarised in league tables outlining the best and worse performers in terms of carbon emissions and reduction for that year.

To avoid additional financial burden and making UK companies less competitive internationally, the revenues generated through the initial sale/auction of credits will be recycled back to participants. With companies receiving payments back from government in relation to their relative performance in the league table, the premise is simple – those performing well are rewarded financially for their good work, at the expense of those who are not. And they, in turn, suffer a small financial penalty. The starting point will be +/-10%, with year two possibly going to +/-20%, and extending to +/-50% in the second phase. The league table will be drawn up based on performance in three different metrics:

• The absolute metric. This is the participant’s percentage emissions reduction, comparing their current annual emissions to their average emissions over the preceding five years
• The early-action metric. This recognises actions taken on energy management prior to the start of the scheme
• The growth metric. This is designed to allow for commercial growth so that emissions at are in context of the business situation. This will be the participant’s percentage reduction in emissions per unit turnover (or revenue expenditure for the public sector), comparing their current level relative to their average over the preceding five years

Participants will receive a score for each of the three metrics which will be combined on a 60%: 20%: 20% (absolute: early action: growth) basis to give an overall league table ranking.

What has to be done?

Unlike the EU ETS, the scheme is designed to have a lighter touch in terms of administration requirements – relying on self-certification of emissions (backed up by a risk-based audit regime) rather than third-party verification.

Whether an organisation is subject to the CRC or not is determined based on this financial year’s electricity consumption, (qualification packs will be sent to all 70kVA meter customers in early 2009). If the organisation is included, it will be included for the whole phase and participants cannot leave (or join) the scheme during a phase. The first phase lasts for three years, with subsequent phases lasting for five years from then on, consequently providing long-term timescales to incentivise capital investment.

Qualifying organisations will be required to purchase allowances to cover their emissions from 2010. Opportunities to do so are via the government auction in January of each year or the secondary market in allowances. Qualifying organisations will then have to surrender their allowances to the Environment Agency to demonstrate compliance with the CRC.

The scheme aims to strengthen the incentive to improve energy and carbon management skills, bringing the issue to the respective company’s agenda at senior level – particularly in relation to increasing metering, company transparency and public reporting and, of course, CO2 reduction in the fight against climate change.

Sonya Bhonsle is a carbon advisor in the Carbon Projects team at Mouchel

www.mouchel.com