The Clean Energy and Sustainability Group at Eversheds suggest some practical tips for preparing for a new carbon trading scheme that the government assesses will affect between 4,000 and 5,000 businesses and organisations in the UK and will be introduced from January 2010.
Introduction
Following two rounds of consultation in 2006 to 2007, the government is set to introduce a new carbon trading scheme the Carbon Reduction Commitment ("CRC") - under the powers to be granted when the Climate Change Bill is enacted later this year.
The scheme is a result of the government looking for ways to achieve its self-imposed target to reduce the UK's carbon emissions by 20 per cent by 2010 and the new UK targets of 26 per cent to 32 per cent by 2020 and 60 per cent by 2050 which will be mandated in the Climate Change Bill when enacted. Analysis has highlighted that a number of organisations are not caught by existing Climate Change Policy measures, such as the EU Emissions Trading Scheme (EU ETS) and the Climate Change Levy Agreements (CCAs). The analysis has found that large commercial and public sector organisations account for about 14 million tonnes of carbon (MtC) emissions (approximately 10 per cent of the UK's emissions) and could cost-effectively save 1.1 MtC per year by 2020. In addition, the government's Updated Energy Projections indicate that without measures to target this group of organisations, emissions will increase by around 11 per cent by 2030.
The government's response to the consultation that took place last summer, information on the coverage and policy design of the scheme including the allocation of allowances, monitoring and reporting requirements and the design of the performance league tables, is anticipated in late February 2008 and a further consultation on the details of the CRC Regulations is expected in summer 2008.
Key Features of the New Scheme
Exactly what is it?
The CRC will operate as a cap and trade' scheme with the government setting an overall scheme cap within which organisations must purchase and surrender allowances to cover their annual CO2 emissions. An introductory phase of the CRC, which will have a fixed price sale of allowances rather than an auction, is proposed to take effect from January 2010 with the first capped and auctioned phase starting in 2013. The cap will be decreased steadily over subsequent phases.
The scheme proposes both a carrot and stick approach to incentivise participants to reduce their carbon footprint. Following annual reporting of emissions the government will publish a performance league table. Organisations that reduce their emissions will rank towards the top of the annual performance league table and organisations that fail to do so will be placed lower down the tables and will, it is hoped, be incentivised by the negative publicity associated with being carbon inefficient.
The CRC is intended to be revenue neutral and recycle revenue back to participants. A payment will be made back to participants based on their average annual emissions since the start of the scheme and a bonus or penalty payment dependant on their position in the league table.
What will it involve?
Each year organisations covered by CRC will need to:
- forecast their emissions for the coming year based on consumption in previous years and energy efficiency or other carbon abatement strategies
- purchase the necessary allowances from the auction at the start of the year - although it should be noted that participation in the auction is not compulsory, an organisation could decide to buy allowances solely on the secondary market or through the safety valve to the EU ETS
- monitor and manage emissions during the year
- depending upon actual emissions, buy or sell allowances in the secondary market
- report on actual emissions and surrender a sufficient number of allowances via the online registry.
Who is covered?
The CRC will target large non-energy-intensive organisations with an annual electricity consumption from mandatory half hourly meters (ie 100 kw meters if in England, Scotland or Wales, or 70 kw if in Northern Ireland) of over 6,000 MWh between 1 January 2008 and 31 December 2008. At current electricity prices this equates to an annual electricity bill of over approximately £500,000. Once an organisation is within the ambit of the scheme all of its energy use emissions from all sources (electricity, gas, other fuels) will be covered.
The types of organisation affected are likely to include supermarkets, hotel chains, banks, large offices, hospitals, universities, central government departments and large local authorities. Any type of organisation with the requisite energy consumption will be caught to the extent its activities are not already covered by EU ETS or CCAs. Organisations with more than 25 per cent of their energy use emissions covered by CCAs will in fact be completely exempt from CRC. It should be noted that only the organisation within a group that has a CCA is exempt, not the entire group. There is no equivalent exemption for those affected by EU ETS, probably because the government only estimates that 5 per cent of CRC participants will have a proportion of their emissions covered by EU ETS. These participants will still be covered by CRC for electricity use and any direct energy use emissions not covered by EU ETS.
The highest UK parent organisation of a group of companies or organisations will be liable for the obligations imposed by the scheme. This is likely to be more complex to determine for public sector organisations than for companies, given the different layers of organisation that often arise.
DEFRA are proposing a three stage approach in order to identify organisations covered by the scheme, which will involve a communication of data between electricity suppliers, various subsidiary organisations with responsibility for electricity bills, the parent company for CRC purposes and the CRC Scheme Administrator (the Environment Agency).
What you should be doing now
- Work out if your organisation is covered by the scheme. During February and March this year, the major energy suppliers will be mailing out leaflets on behalf of DEFRA to all their customers who have half hourly meters. You should check with your facilities or accounts teams (those likely to receive the half hourly meter electricity bills in the first instance) to see if they have received one of these leaflets and to determine what your organisation's energy consumption for 2007 was as this will give a good indication of the consumption for 2008.
- If your organisation is covered, find out who are the relevant individuals within the various parts of the organisation and any subsidiaries who are responsible for energy consumption and who can assist in data collection including any necessary dialogue with your electricity or fuel suppliers.
- Set up a working group to arrange for data collection for your organisation and liaising with the CRC Scheme Administrator regarding registration of the group with the scheme.
- Work out what opportunities exist within the group as regards energy efficiency or other carbon abatement measures.
- Start to develop an emissions trading strategy.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
