The Carbon Reduction Commitment

The Government recently announced its Carbon Reduction Commitment draft, which will affect around 25,000 businesses. Carbon management experts Suzy Hodgson and Jamal Gore from Carbon Clear explain the implications of these proposals.

The Department of Energy and Climate Change (DECC) says that businesses are fully aware of their obligations under the impending Carbon Reduction Commitment (CRC) legislation. However, we are not so sure.

On 12 March the DECC released draft proposals, which will affect approximately 20,000 UK firms. Companies will have to submit a CRC information disclosure to the Environment Agency by next summer, while roughly 5,000 will have to pay registration fees and participate fully in the scheme.

Despite its innocuous-sounding name, companies should not take the Carbon Reduction Commitment lightly, as failure to prepare properly will pose serious financial and reputational risks.

At the same time, it's a good opportunity for environmental managers to help their companies use the CRC to achieve real emissions reductions, cut costs and identify new sources of competitive advantage.

WHAT IS THE CRC?

The CRC is designed to help the government meet the 80% greenhouse gas reduction target set out in the Climate Change Act. It is a mandatory, auction-based emissions trading scheme targeted at large, non-energy-intensive companies such as large hotel groups.

Every company, charity and government body with at least one half-hourly electricity meter needs to be aware of the CRC.

Like the EU Emissions Trading Scheme (EU-ETS), the CRC uses market forces and competition to drive corporate carbon reductions. In its introductory phase (April 2010 to March 2013), businesses will buy emissions allowances equal to their carbon footprint at £12 per tonne of CO2.

But once the CRC enters the "capped" phase in April 2013, the government will limit the number of allowances and auction them to the highest bidder. At the end of each year, firms that end up with more allowances than they need can sell them into a secondary market, while firms with a shortfall will have to buy more or be fined.

In the CRC's first year, a company's ranking in the league table will be determined solely by what volume of its emissions is covered by voluntarily installed automatic metering (AMR), and what volume is covered by a Carbon Trust Standard or Energy Efficiency Accreditation Scheme certificate.

After that, rankings will be based upon the organisation's absolute emissions reductions compared with all other participants, and the relative improvement in emissions compared with company growth.

THE BENEFITS

Revenues raised through the government's sale or auction of allowances will be recycled back to participants via a publicly viewable league table. Companies with a better than average league table score may receive more money back than they put in, while those that score poorly will receive less.

The CRC could have major financial implications for companies, especially in a challenging economic climate. DECC expects the CRC to lower annual corporate energy bills by nearly £1b by 2020 as companies find the most cost effective ways to reduce their emissions. These savings translate into improved profitability and a stronger economy.

Lower emissions also mean a smaller outlay for allowances in subsequent years. In addition, consumers are likely to use the league table to identify lower-carbon suppliers of goods and services.

NON-COMPLIANCE

On the other hand, getting it wrong poses risks. Approximately 20,000 companies with at least one half-hourly meter will be required to submit an initial Information Disclosure - failure to do so will result in a one-off fine of £1,000.

The 5,000 or so organisations required to participate fully in the CRC will face an immediate fine of £5,000 if they do not register by the deadline, and an additional fine of £500 for each subsequent day of delay.

Failure to provide a footprint report by the deadline also results in an immediate fine of £5,000, and a further fine of £0.05 per tonne of CO2 per day, rising to £0.10 per tonne of CO2 per day after 40 days.

Once the scheme is up and running, failure to provide an annual report will result in fines plus a bottom ranking in the league table. Where emissions are misreported, a fine of £40 per tonne of CO2 incorrectly reported will be levied. Failure to buy enough allowances will also incur a fine of £40 per tonne of CO2. Outright falsification of evidence is considered a criminal offence, punishable by imprisonment of up to three years and a fine of up to £50,000.

Environment managers need to be aware that CRC information notices and registration requests will be sent to the billing address on record with each company's electricity provider. This means much of the CRC information will end up with facilities managers or accounts payable.

Environmental managers need to understand the requirements and to lead their organisations' response to the CRC. Under the CRC, environmental management is elevated to a strategic role, which, if executed properly, can deliver measurable competitive advantage to the company. But if the requirements are not properly addressed, significant costs will be incurred.

The financial carrots and sticks in the CRC and the reputational spur of a public league table may make a number of otherwise borderline or low priority environmental initiatives more attractive.

For instance, environmental managers may now be able to fast track boiler retrofit or lighting replacement schemes that might otherwise be starved of investment, or get the go-ahead to install on-site renewables where the cost of carbon under the CRC makes them economical.

SO WHAT DOES THIS MEAN?

The CRC may help integrate environmental management into every corner of the organisation. But the legislation is not the only reason firms may wish to support green initiatives in the midst of an economic downturn.

Environmental programmes also help to demonstrate a company's commitment to sustainability, improve staff morale and retention, and attract new customers.

Regulations like the CRC provide an added incentive, and help environmental managers quantify the potential risks and benefits in a language that other parts of the company can easily understand.

• Suzy Hodgson is a principal consultant and Jamal Gore is managing director at specialist carbon management company Carbon Clear.

WHAT YOU NEED TO DO NOW

• Check your electricity data for 2008 to assess your participation in the scheme
• Determine your strategic approach and align your organisation accordingly
• Calculate your likely CRC emissions footprint in order to calculate the allowances you will need to purchase (and the likely impact on your cash-flow). Failure to purchase the correct level of permits may incur higher charges, penalties and further impact cash-flow
• crc@carbon-clear.com

THE CRC IN A NUTSHELL

• The Carbon Reduction Commitment (CRC) is a mandatory cap and trade emissions scheme that will launch in April 2010, for which organisations need to prepare now.
• The scheme will target up to 5,000 large organisations including hotel chains, whose emissions are currently not included in the EU Emissions Trading Scheme or Climate Change Agreements.
• Under the scheme, organisations must calculate and report their carbon emissions annually. From April 2011 participants must buy CRC allowances to cover their anticipated emissions for each year (emissions will be based on electricity, gas, fuel oil, LPG and solid fuel). Initially the scheme will be uncapped and it is expected that the allowances will be £12 per tonne of CO2.
• The Department for Environment, Food and Rural Affairs estimates that, as a percentage of an organisation's current energy spend, costs will be around 6% on allowances and 5% on administration.