Trading scheme for large nonenergy intensive organisations
July 01st 2008

DEFRA explains what the Carbon Reduction Committment means to businesses

Buying and selling, forward markets,futures – not concepts that loom large for most organisations grappling with energy efficiency. Yet this is set to change, at least for larger bodies, under the new Carbon Reduction Commitment (CRC). About 300 very large energy users in the UK are already grappling with carbon trading as the European Emissions Trading Scheme (EU ETS) ‘beds in’. But now it is, the UK Government has judged that the principle is ripe for extension to a wider group of organisations. The CRC will include those public and private sector organisations with a half-hourly metered electricity usage in excess of 6000 megawatt hours (MWh) in 2008.

Reducing emissions cost-effectively

The aim of emissions trading is to reduce greenhouse gas emissions at the lowest economic cost. All carbon emissions from participating organisations will need allowances equivalent to their emissions. If an allowance costs £x per tonne of carbon dioxide, but energy efficiency measures to eliminate those emissions cost £y per tonne, then an organisation will choose the less expensive option to meet its obligations; it will buy allowances if these are cheaper or invest in energy efficiency if this is less expensive. And if by investing in energy efficiency, it finds it has a surplus of emissions allowances, it can sell these to prospective buyers and offset the cost of the efficiency investment.

The Government meanwhile can fix the total number of allowances in circulation in order to cap the total emissions from participants in the scheme; hence the term ‘cap-and-trade’. And by progressively reducing the total number of allowances it can bring downward pressure on emissions by making allowances more expensive and efficiency investments more costeffective. Who will be included?

The 6000MWh applies to both public and private bodies. In the public sector large hospitals, local authorities, central Government departments and universities are among the groups specifically named in our recent Government consultation on the subject. And in some cases, organisations with lower electricity bills may also be included; the Department for Environment, Food and Rural Affairs (Defra) – which is the lead Government department for climate change – has recently announced that the whole of the central Government estate will be included in the programme, not just those departments over the electricity usage threshold. There are also some discussions taking place about the possibility of including all schools in the scheme.

One of the reasons the Government is focussing on large non-energy-intensive organisations is that, while the energy bills (and resulting carbon emissions) are significant, they only represent a small proportion of operating costs. As such there has been little incentive to pursue active energy management. The introduction of the CRC, which will combine a number of financial and reputational incentives, will, it is hoped, change that perception.

The CRC is a common UK wide scheme which will allow trading between all parts of the UK: it is due to start in 2010.

Allowances and accounting

Although the qualifying criterion is half hourly metered electricity demand, participants have to account for electricity supplies in profile classes 5-8, all gas supplied under daily reads as well as any supplies over 73.2MWh per year. In addition, any other sources of emissions (with the notable exception of transport) must be included so that at least 90% of all emissions are accounted for by CRC, EU Emissions Trading Scheme and Climate Change Agreements.

Organisations will then need to buy sufficient allowances to cover these emissions. For the first three years these will be sold at a fixed price, but from 2013 they will all be auctioned.

The auctions of allowances will take place at the start of each year, so organisations will need to have some idea of likely requirements before the accounting is done at the end of the year – when, in free trading, prices could be unpredictable. Incorrect forecasting could prove costly – if the market is short then allowances may be expensive to purchase at the end of the year; alternatively if everyone buys too many at the beginning of the year, there could be a drop in the price of the allowances as organisations try to sell their surplus (although organisations will be able to ‘bank’ allowances for use in future years so this effect should be mitigated).

The only way to be sure of avoiding the vagaries of the spot trading market is to work out what you will need in advance, and how to reduce that demand.

It will be even more important to determine likely requirements early when all of the allowances are auctioned in 2013 and the Government is starting to reduce the total number available – judicious purchasing could avoid substantial costs on the spot market later. In order to prevent price ‘spikes’ though, there will be a ‘safety valve’– participants will be able to buy from the EU ETS (but not sell into it). This will mean that the maximum price of emissions allowances will be set by the price on the ETS market.

Getting your money back

The Carbon Reduction Commitment is designed to be broadly ‘revenue neutral’ as far as Government is concerned and all the money raised by the sale of allowances will be recycled to participants. However, there are several ways in which organisations can receive more, rather than less, of these funds.

The refund will be based on performance against 2009 emissions (the baseline year for the scheme) and will be based on the ‘league table’ idea so well known in the education system. Your position in the table will depend on relative performance in three areas – it is not sector specific.

Part of the bonus will be based on how well the organisation has done in cutting its emissions. However, this might encourage people to delay energy efficiency measures so as to get maximum benefit once the scheme starts. To counter this,there are specific bonuses for ‘early adopters’ and the way to demonstrate early action is to have (i) voluntarily installed ‘automatic meter reading (AMR) and associated metering and software’ – i.e. automatic Monitoring & Targeting (aM&T) and/or (ii) have joined the Energy Efficiency Accreditation Scheme/Carbon Trust Standard. Finally there is an adjustment to take account of changes in the activity of an organisation, such as expansion or contraction after the baseline year of 2009. In the public sector ‘growth’ will be assessed by emissions per unit revenue expenditure so for a university, this might mean expansion of resources, provision of new premises or laboratories, an increased number of students or more block grant from the Government or through partnerships with business. This ‘growth’ metric is designed to reward those organisations that can grow their operations but restrict the growth of their carbon emissions. This may prove difficult for those expanding energy-hungry research resources, say in the biosciences.

Accounts and audits

Most public organisations will have to provide Display Energy Certificates (DECs) from this October and the information included in producing these will form the backbone of the information needed for the CRC.

Annual data statements – the official submission to the Government showing compliance with the organisation’s targets – will contain details of the organisation, total annual CO2 emissions, AMR metrics (if included) and growth metric (again, if included).

Accounting will be self-certified and the Government will only rigorously check 20% of annual returns.

However, anyone can be checked in any given year, so comprehensive records will need to be kept of all transactions and of emissions in what is termed the ‘Evidence Pack’ which will be key to the audit.

The evidence pack will have three parts:

• Structural records showing the type of organisation, type of site and types of energy used
• Data records showing energy consumption and CO2 emissions
• Special event records showing unusual events such as actions taken following a meter failure.

The evidence pack can be started now so that it can be added to progressively in good time for the start of the scheme. Like the introduction of Energy Performance Certificates, the process of embedding the CRC within an organisation will take a period of time. The sooner the structures are in place and the data collection begins, the easier it will be to meet the requirements when the scheme comes into force.

Action to reduce carbon emissions

The Carbon Reduction Commitment rewards those who become more efficient – they will need to buy fewer allowances and the recycling of funds will direct more money to them than others who do not do as well. But to make the most of the benefits – and avoid potential disadvantages – preparations need to start now!

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