A new scheme for less energy intensive sectors
July 17th 2006

Climate change is emerging asone of the greatest challenges ofmodern times and the businessand public sector needs to playits part in building a low carbon economy.Energy prices have recently increaseddramatically, improving the business casefor energy efficiency. However, there is aneed to review the effectiveness ofGovernment's policies already in place andto understand what more can be done todeliver significant carbon savings, whilstensuring that the internationalcompetitiveness of UK companies ismaintained or enhanced.

The Government's current Climate ChangeProgramme (CCP) is a solid foundation, with importantbuilding blocks such as the Climate Change Levy (CCL)and Climate Change Agreements (CCAs) already inplace. The EU Emissions Trading Scheme (EU ETS), whichprimarily covers the electricity generation sector andlarge industrial energy users, is another core element ofthe climate change mitigation programme. It will beable to deliver cost effective emission reductions if alevel playing field of robust emissions caps can be setacross the EU. The EU ETS should be extended beyond2012 to give firms the long-term certainty they need tomake investments.

The EU Emissions Trading Scheme and Climate ChangeAgreements focus on energy intensive industry. Thebreakdown of business and public sector emissionsgiven in Chart 1 shows that these schemes do not createa direct incentive to reduce energy use in a number ofsectors that account for a significant proportion of UKemissions. These sectors include non-energy intensivemanufacturing, the service sector and the public sectorwhere buildings contribute a significant share of theemissions generated. This gap needs to be addressednow as in the service sector alone, carbon emissions areforecast to increase by 20% by 2020.

These less energy intensive sectors are currently coveredby the Climate Change Levy. However, the impact of theClimate Change Levy is low because it does not createan adequate incentive in these sectors to reduce theiremissions where energy costs are typically only a verysmall proportion of the overall cost base. ClimateChange Agreements, which provide firms with an 80%rebate from the Climate Change Levy in return formeeting agreed targets, have proved to be highlyeffective in terms of cost effectively reducing emissionsin other areas in part due to the awareness raising effectof the targets themselves, but the sectors mentionedabove are not covered by the agreements.

Therefore, a new instrument is required to address theseless energy intensive sectors. In our view, this instrumentneeds to build upon the success of the Climate ChangeLevy and Climate Change Agreements approach andcould be a simple, company-based emissions tradingscheme that includes electricity emissions. This isimportant, because as indicated in chart 1, up to 70% ofemissions in the less-energy intensive sectors are relatedto the electricity they consume. It could raise awarenessand increase the transparency of companies' emissionsand abatement performance, without creating anadditional financial burden for the organisations involved.

We believe that there is a strong case for a new UKConsumption-based Emissions Trading Scheme (UKCETS) for large companies and organisations in sectorsoutside the current Climate Change Agreements and EUEmissions Trading Scheme. This could be a mandatorycompany level trading scheme, in which companiesacquire allowances to cover their total emissions fromsites across the country, and then freely trade thembetween all other companies in the scheme. The goal ofthe scheme would be to increase the transparency ofenergy use in less energy intensive organisations and toincentivise them to develop a clear carbonmanagement strategy. However, if this route were to bepursued, it would need to be implemented simply inorder to prevent creating an additional administrativeburden for firms.

Transaction costs for business could be kept to aminimum by focusing the scheme on largerorganisations based on, for example, their energyconsumption and using existing half-hourly meteredenergy bill data as the source for working out acompany's carbon emissions. Credits could be allocatedby auction at the outset of the scheme to avoid thecomplexity and administrative costs involved incompany-specific negotiations.

In order to be successful, such a scheme would need to beas simple as possible as already described, but would alsohave to avoid imposing an additional financial burden onbusiness. We believe that the latter objective could beachieved by giving companies a CCL rebate in line withthe cost of purchasing allowances through the scheme,although there are other ways of recycling any auctioningrevenues gained back to the participating companies. Alltrading activity could be published in annual reportsconsistently showing year on year total emissions, salesand purchases. Businesses would therefore be able to buyand sell credits from any other company within thescheme, benefiting on the back of their carbon reductionfrom the opportunity to make money, while contributingto tackling climate change making their progress clear toinvestors, customers and employees alike.

There is a clear recognition by less energy intensivebusinesses and the public sector that they will need toplay their part in addressing climate change by reducingtheir carbon emissions over time. Given this awareness,the key question is about choosing policy measures thatbest support them in this endeavour. We believe that asimplified trading approach though a ConsumptionbasedEmissions Trading Scheme would offer thesebusinesses a cost effective and flexible way to materiallyreduce emissions. The Government recognised thisneed in its recent review of the Climate ChangeProgramme, indicating that it "will decide in due coursewhether to take it forward".

Prompt implementation of the trading scheme couldgenerate significant carbon emissions savings from thesectors covered. Moreover, over a 15 year horizon to2020, there is sufficient cost effective emission reductionpotential to allow businesses within the scheme to cutcarbon in a way that also generates financial savings.

This is highlighted in Chart 2 which shows the emissionsreductions that could be achieved cost effectively acrosseach of the sectors shown in the previous chart. It isimportant to note that a significant share of the availableopportunity is in the large non-energy intensive sectorand public sector, the focus sectors for the new schemesuggested. Also, the level of remaining cost effectiveemissions reduction in buildings at around 20%, is farhigher than that across industry which sits in aggregateat just over 10%.

Adopting proven energy efficiency measures will bevital if businesses are to deliver the necessary carbonand cost savings. We know from our experience ofworking with tens of thousands of UK companies thatenergy efficiency delivers significant bottom linebenefits over the lifetime of the investment and offerseven more potential for savings today given thesignificant increase in energy prices.

Although it is not the only solution, we believe aConsumption-based Emissions Trading Scheme couldprovide additional impetus to drive UK businessestowards more energy efficient choices and reduce theircarbon emissions without harming their competitiveposition.

More articles from WEE News Desk: