Everything Changes – What is the Carbon Reduction Commitment?

An estimated 5,000 organisations – from retailers and hotel chains, to government departments and Premiership football clubs – need to know about the Carbon Reduction Commitment (CRC). Those UK-based outfits whose half-hourly metered electricity consumption was greater than 6,000MWh last year will have to take part in this new emissions trading scheme which starts in 2010.

It is a groundbreaking initiative. Not because of its level of ambition (as the EIC’s Danny Stevens suggests on page 10, it might only cut the country’s emissions by 8.6%) or its underlying principles (afterall, emissions trading has been going on for years now). But its innovation is attached to what it is attempting to regulate: the commercial sector. The large, energy-intensive polluters (primarily the utility companies) have already been taken care of, enveloped as they are in the EU Emissions Trading Scheme (EU ETS). The CRC aims to deal with the next wrung on the ladder – a group of organisations with big energy bills that aren’t used to be regulated in such a way.

The scheme applies to any corporate group or public sector body that has an electricity bill of around £1M. If the company has a number of subsidiaries, the consumption of all of them will be aggregated to determine whether it qualifies to enter the system. Every firm with half-hourly metering systems that use more than 6,000 MWh of electricity a year must report to the government by September 2010, giving their consumption data for 2008 and completing a registration pack (which is likely to be sent out this July). Meanwhile, those that are just below the threshold – consuming between 3,000 and 6,000 MWh of electricity – will also have to calculate their consumption and produce an annual report to the regulator to prove they are exempt from the CRC. Failure to comply will incur a £1,000 fine.

Landlords that are in charge of the electricity contracts for their property will need to take responsibility and participate in the scheme too.

So, what should companies do? Well, the first stage is to work out the carbon footprint of their operations, excluding emissions arising from transport (at this point, the impact of transport is not included in the CRC scheme). This must be done between 1 April 2010 and 31 March 2011, although the sooner companies work out their carbon footprint the better. The first step is crucial. It ensures participants are aware of where their emissions are coming from and once the emissions sources have been identified they are fixed for each phase of the CRC, even if actual emissions from those sources go up or down. It is also a good idea for firms to see whether any subsidiaries already take part in the EU ETS of Climate Change Agreements; emissions covered by these systems are not counted for the purposes of CRC so as not to overlap with those schemes.

Participants should also note that if their energy is bought via the National Grid, it makes no difference whether if it comes from a renewable energy provider or not. But, if a company creates energy on site from renewable sources (like micro wind turbines or solar PV) and does not claim ROCs (Renewable Obligation Certificates) for it, it will be deemed to be zero-rated under the CRC. This is because, according to the government, the CRC is about incentivising energy efficiency; it is not another scheme to drive the renewables market.

The introductory phase
The first year of the scheme is all about identifying the qualifying companies and their emissions.

The following two years are the introductory phase, running from 1 April 2011 to 31 March 2013. The idea of this period is get participants familiar with how the system works (and also to give the government a chance to change things that aren’t working). During these 24 months, an unlimited number of allowances, of one tonne of CO2, will be sold at a fixed price.

In April 2011, the first sale will take place, covering the previous year (2010/11) as well as the forthcoming compliance year (2011/12). The government argues that the retrospective sale is important because it offers a chance for companies to familiarise themselves with their emissions levels in order to be more intelligent in the way they buy allowances in the future.

There is another fixed price sale in April 2012 and then in 2013 (and each year after), all allowances will be sold by a government auction with the number of allowances slowly dropping every year to encourage emissions reductions. It is probably too early to say, but some commentators believe the cost of allowances will be in the region of 7% and 13% of a participants energy bill (although most of this will be repaid, depending on how well the company has performed).

At the end of each compliance year it will become clear whether companies will have sufficient allowances to cover their qualifying emissions sources. If there is a shortfall, they will need to buy more allowances, or preferably take further action to improve energy efficiency on site.

Top of the league
The CRC is not designed to make money for the government, so all funds generated by the buying of allowances will be refunded to those companies doing a good job through ‘recycling’ payments. These will be paid in the October following the end of each compliance year.

Each company involved in the CRC will have its performance published in the form of a league table – an idea that has caused quite a stir among business leaders, conscious of how important corporate reputation is to the bottom line. “The issue with CRC performance league tables is how it is presented when published,” says Chris Tuppen, BT’s head of sustainable development and corporate accountability. Tuppen is concerned that some people might consider the CRC league table to represent a company’s entire carbon footprint, when it only reveals the carbon equivalent of the energy consumption of the organisation. “It becomes difficult in a communication sense because you have, in effect, two carbon footprints – it’s complicated enough,” he says.

It is thought that companies will get between 95% and 110% of their outlay back during the early years of the scheme. But as the CRC settles down and matures, companies that perform well could make a substantial amount of money.

The league table, which determines the level of the recycling payment, ranks businesses on their emissions reductions, the emissions relative to growth, and whether companies took action before the CRC even started.

The scheme is unquestionably complicated. The CBI’s director of business environment, Dr Neil Bentley suggests that many businesses are just not ready for the challenges it will present. “Many companies remain unaware and unprepared for what the CRC will involve, and are in for a real shock when these changes become law,” he says. “The government needs to do much more to raise awareness within the business community, and to ensure these regulations do not become an unnecessary bureaucratic burden.” The government has, however, promised not to be too demanding, especially when it comes to emissions reporting. It has said that only 20% of participants will be subjected to external audits a year. But fines for non-compliance will be big, according to the Department of Energy and Climate Change (DECC).

DECC has issued a consultation on the CRC and interested parties have until 4 June to respond. But, as James Patterson at environmental consultants Environ says: “Whatever the final CRC legislation contains, there is no doubt that it will be a minefield and far more complicated than anyone could have anticipated.”

The advice is: start preparing now. “Firms need to start gearing up for the changes now by thinking about how they plan to monitor their energy use, and improve energy efficiency to ensure they comply with the new regulations,” says Bentley.

Failing to engage properly in the scheme – and making genuine carbon reductions – could be very costly indeed.