Emissions trading and beyond

It is a well understood aspect of the manufacturing sector that effort expended on energy saving techniques can contribute directly to bottom line profits. This is increasingly the case as the extra costs associated with Climate Change Levy need to be covered by industrial users of energy.

As Companies covered by Climate Change Agreements have now reached the end of the first ‘milestone’ period where actual performance is compared against the pre-agreed targets, the attention of those Companies who have performed better than their targets has now turned to the need to have this overperformance verified by a UKAS-approved verifier and converted to allowances in the Emissions Trading Registry.

Target performance

Companies who have performed better than their targets have many choices to make depending on the relationship between the individual Company and the Trade Association who are overseeing the arrangements for the sector Climate Change Agreement. In some cases the Company may be constrained to contribute this overperformance to the sector as a whole but in most cases it will be for the Company to retain this overperformance as a credit for their own use. This can take three forms at this stage of the 10 year CCA cycle.

Firstly the Company can choose to ‘ringfence’ the overperformance (converted into Tonnes of Carbon Dioxide equivalent) by simply declaring this intention in the annual return to the Trade Association (the CCA 10 return) in which case the overperformance is retained for the sole future use of the Company.

The second option is to ‘bank the overperformance as allowances in the UK Emissions Trading Registry for future use towards meeting subsequent milestone targets or for commercial trading. The third option is to convert the overperformance into Emissions Trading Scheme (ETS) allowances and then immediately trade them on the Emissions Trading Market to realise their current market value.

The ‘ringfencing’ option is the simplest but does not give any certainty to the value of the potential allowances as formal verification by a UKAS approved verifier is still required before the allowances can be officially moved into the trading registry to allow either of the other two options to be realised. The rules do allow ringfenced allowances to be carried forward through future milestone periods and then formally verified as an aggregated amount.

This means that the costs of verification can be defrayed across a larger quantity of allowances but there must be a concern that carrying out a verification activity on data some years old may be more difficult and may lead to some of the potential allowances being lost.

In developing a verification service for Companies within the Ceramics and related sectors, CICS became the first certification body to achieve UKAS approval for verification of ETS allowances generated by Climate Change Agreement participants. The first verification opinion was issued on 25 November 2002 and CICS is now actively working with Companies and Trade Associations in 12 sectors with Climate Change Agreements.

Verified allowances

Early clients for the verification service included Trade Associations seeking collective verification of the entire sector; groups of Companies from within the same sector and individual Companies.

In terms of the Companies, some are intending to actively trade the verified allowances in the market and others just wish to have total certainty that the full value of the allowances is readily available for future use.

A further dimension to this certainty is that DEFRA have indicated that Companies who have had their performance verified by a UKAS approved verifier will not be subject to further random audits as part of routine checks on CCA compliance.

Because of the rigours imposed by the UKAS procedures the cost of verification is not cheap and will typically be between £2,000 and £3,000 for a single large site. However the UKAS procedures recognise that where a number of Companies are members of a sector agreement then some benefit can be gained from the collective data collection and validation processes carried out either by the Trade Association or by their sub contractor. This allows a risk assessment to be carried out on a collective basis and a sampling methodology to be developed whereby only a proportion of the sites need to be visited and verified individually. This reduces the costs significantly and makes the whole process much more cost effective – even for Companies or sites which may have only modest quantities of overperformance to be verified.

Energy efficiency

In the most straightforward cases the verification activity comprises a simple check of the quantities of energy used in the milestone period and the quantity of production. If energy is supplied from metered sources with reliable invoices and the unit of production in the CCA agreement is the same as the unit of sale then few problems are experienced.

However, in the real world energy invoices are rarely totally reliable and in a number of industries the unit of sale may be a number of items whereas the unit of measurement for energy efficiency purposes may be a weight of product. This introduces an element of complication when conversion factors are introduced.

In the more complex cases the verification is further complicated by eligibility issues where only parts of the site are eligible for CCL relief or where the site has issues in relation to the ’90/10 rule’. The use of non standard and un-metered energy sources then adds a final dimension of complexity.

The complex process of negotiating Climate Change Agreements has imposed an uncomfortable burden on Trade Associations and individual Companies alike over the last three years.

Although the process of verification by a UKAS-approved verifier may appear to be just another extra layer of bureaucracy on the whole activity, it must be recognised that this is a necessary hurdle to overcome if the effort expended in energy efficiency to perform better than the target is to be further enhanced by the ability to convert this performance into ETS allowances which have a real commercial value.