A cost-effective way of reducing the UK’s carbon emissions
June 21st 2009

The Department of Energy and Climate Change explains the CRC and its implications

The Carbon Reduction Commitment (CRC) is a groundbreaking energy efficiency scheme that will deliver emissions reductions of 4 million tonnes of carbon dioxide per year by 2020.Designed to complement existing policies,it will operate as a cap and trade system and will cover large public and private sector organisations in the UK.The scheme will begin in 2010 and your organisation may be obliged to participate.

Who is included?

Qualification for CRC is based on an organisation’s electricity consumption over the 2008 calendar year.Organisations, including their subsidiaries,which have a half hourly meter (HHM) settled on the half hourly market and consumed over 6,000 MWh of total half hourly metered electricity will have the legal obligation to register as a participant in CRC.

Those organisations that have a settled HHM but consume less than 6,000 MWh will have to disclose information to the administrator – the Environment Agency (EA).

The EA will be sending out registration packs for the CRC to all HHM billing addresses in September, with detailed guidance on how to complete registration.

How will the scheme work?

CRC will encourage participants to reduce emissions by creating financial and reputational incentives to save energy. Each year, participants will have to purchase allowances to cover their projected emissions, report on actual emissions and surrender sufficient allowances after the end of each year.

All revenue from the sale of allowances will be recycled back to participants on the basis of their relative performance against a rolling average.Participants will be ranked in a league table which will be publicly available.

These features of the scheme provide both reputational and financial benefits for those organisations which perform well in reducing emissions. Assessment of performance will take into account action organisations have taken prior to the scheme and organisations’ growth, as well as annual emissions reductions.

The league table will be based on weighted performance metrics, which are, for the introductory phase: absolute change in emissions (60%), relative emissions (20%) and a measure of ‘early action’ (20%). Performance in the first league table will be based entirely on the early action metric – as performance improvement will only become measurable with the second table.

The two elements which make up the early action metric score are:

• Percentage of gas and electricity emissions covered by Automatic Meter Reading (AMR)

• Accreditation under the Carbon Trust Standard scheme (formerly the Energy Efficiency Accreditation Scheme)

In future phases – i.e. from 2013 – there will be no early action metric.In some instances there will also be an adjustment to emissions baseline to reflect significant changes in business activity – such as acquisitions or divestments – which affect an organisation’s output or service delivery.

Ranking in the league table will be attached to a bonus or penalty, in addition to the basic recycling payment.

The bonus/penalty rates will increase over time. For Year 1 of the scheme, an organisation at the top or bottom of the league table would get a +/-10% bonus or penalty respectively.This will rise to +/- 20% by Year 2, increasing to +/- 50% by Year 5. The advice of the Committee on Climate Change will be taken into account in determining subsequent bonus/penalty proportions.

CRC will have significantly lower administrative burdens than the EU Emissions Trading Scheme (ETS).Rather than third party verification of all sites, the practice in EU ETS, participants in the CRC will self-certify emissions.Verification will take place through a risk based audit regime.

How to buy allowances in CRC?

The three year introductory phase of the CRC will prepare participants to take part in a full ‘cap and trade’ scheme from 2013. For the first phase, organisations will be able to buy all the allowances they need at a fixed price of £12 per tonne of carbon dioxide.There will be no limit to the number of allowances sold during this period.

From 2013,though,the Government will set a cap on the total number of allowable emissions over a period.These will be auctioned and the price will be determined by demand in the marketplace. By progressively reducing the cap, total emissions will be reduced in the target sector and there will be pressure on participants to reduce their own emissions. As there will be fewer allowances available, the price can be expected to rise.

Emissions trading is considered to be an economically efficient way of achieving carbon reductions. It delivers savings at lowest overall cost. If the price of allowances is £12 per tonne (as it will be for the next three years) then a participant’s purchasing decision will be based on whether they can cut emissions for less than this cost. If they can, it will be cheaper to invest in abatement measures, but if they cannot then they will purchase the allowances. The cost of emitting a tonne of carbon will therefore be a maximum of £12.

As participants have to buy allowances in advance (except for the first sale in April 2011 which will be a double sale), any variance from their projected emissions levels will either result in a surplus of allowances which they can sell in the market, or a shortfall, which they will have to make good through purchasing from the market.

What are the financial implications of CRC?

Analysis indicates that, by driving energy efficiency, CRC will have a NPV benefit of £1 billion. Individually,however, participants need to consider the impact of CRC on cash flow. In the three year introductory phase, organisations will be able to purchase allowances at a proposed fixed price of £12 per tonne of CO2, during a month-long sale.

They will have to work out, on the basis of your energy use and emissions abatement strategy, the cost of buying sufficient allowances. The first sale of allowances, however, will be a ‘double sale’where organisations must buy allowances to cover actual emissions for 2010-11 and projected emissions for 2011-12.

From 2013, where the number of allowances available will be subject to a cap, allowances will be auctioned rather than sold at fixed price.

Participants can buy and sell allowances on the secondary market if during the year they find they have purchased too few or too many allowances. Allowances can also be banked for use in future years so that holding excess allowances at the end of the year need not result in a financial loss.

Every year participants will receive their recycling payment. Because the payment depends on how other participants perform it is difficult to predict exactly how much money your organisation will receive. More information on the recycling payments is available in the CRC User Guide which was published in March 2009.

What should I do now?

CRC has various implications for your organisation including financial and reputational impacts.Therefore it is important to get your senior managers and finance department, as well as energy managers aware of the scheme and the new obligations that will apply.

It is also imperative to work out the scope of your organisation for CRC. All parts of an organisational group will participate together so you should ensure that your organisation has the necessary processes in place to monitor and share data across its operations.

To perform well in the scheme it will be important to develop or take forward an existing energy efficiency strategy and to develop clear objectives for the organisation in the CRC. In the early years of the scheme, your organisation’s score in the early action metric will be a significant factor in your performance. You should therefore look at attaining the Carbon Trust Standard and installing automatic meter reading in order as these actions will improve your performance in this metric.