The UK Carbon Reduction Commitment

The CRC is essentially a mandatory carbon trading scheme which aims to encourage large commercial and public sector organisations to reduce their emissions. The scheme will require organisations to buy ‘allowances’ which cover the value of their expected energy use for the following year. If the purchased allowances fall short of what is consumed then a penalty must be paid. The scheme will apply to organisations that use more than 6,000 MWh – this equates to an organisation having an annual energy bill of more than £500,000. For the purposes of the CRC, the energy emissions of both parent organisations and their subsidiaries will be added together. The scheme is designed to include all sources of fixed site energy emissions but excludes emissions from energy used in transport.

The CRC is designed to be “light touch” in terms of administrative requirements – relying on self-certification of emissions backed up by a risk-based audit regime. It will become a legal requirement for qualifying companies in the UK and is designed to supplement the requirements of Display Energy Certificates (DEC) and Energy Performance Certificates (EPC).

The CRC Process
On an annual basis organisations will be required to report their UK-based CO2 emissions from all their fixed point energy sources, including electricity, gas and other fuel types such as LPG. Participants will be required to purchase allowances corresponding to their emissions from energy use, and to then surrender them at the end of each year.

There will be an introductory three-year phase-in period which starts in April 2011 during which time carbon allowances will be sold at a fixed price of £12/tCO2. This will be a unique sale, in that it will be for both 2010/11 allowances as well as those forecast for 2011/12. All future sales or auctions will only be for allowances for the year ahead. In the second phase, from January 2013, allowances will be limited and auctioned.

The Government will publish a league table to show the performance of all participants, with organisations receiving bonus payments or penalties according to their position in the table. This method of ‘revenue recycling’ is intended to encourage and incentivise further investment in energy efficiency improvements, whilst also making the scheme broadly revenue neutral to the Exchequer. The bonus payments will be based on the revenue raised from the sale of credits and from the penalties imposed on poor performers.

The league table will be calculated on participants’ performance in three different metrics:

• The ‘absolute’ metric which compares an organisation’s current annual emissions with their average emissions over the preceding five years, giving a figure for the percentage emissions reduction.

• The ‘early action’ metric which is based on two equally weighted factors – (i) the percentage of emissions covered by voluntarily installed automatic metering and (ii) the percentage of the organisation’s emissions covered by the Energy Efficiency Accreditation Scheme. This is a good practice standard requiring management commitment, investment and sound energy efficiency measures which is run by the Carbon Trust and which has been recently relaunched as the Carbon Trust Standard.

• The ‘growth’ metric – which is designed to provide context for organisations which are growing commercially, but whose emissions are increasing at a slower rate (or even decreasing) in relation to that commercial growth.

Participants will receive a weighted score for each of the three metrics – 60 percent for the absolute metric, 20 percent for the early action metric and 20 percent for the growth metric. This then gives an overall league table ranking. The league table will also include three tick-box questions asking whether organisations disclose the following in their annual reporting: longer term carbon targets, annual performance against such targets and list a named director responsible for carbon emissions.

Registration for the scheme is scheduled to begin in April 2010, with a three year introductory phase and the first capped phase beginning in January 2013. Organisations should therefore now be looking to undertake the following actions in order to be compliant by the time the scheme is fully in force:

Before July 2009, organisations must find out whether their consumption levels require them to take part in the scheme. This means collating and summarising their energy consumption data for 2008 and sending it to parent companies where necessary. The parent company (or single large organisation) will then further collate consumption data to see whether they meet the 6,000MWh criteria. In July 2009 the Environment Agency (the body administering the scheme) will send out registration packs which will enable energy users to open an account in the UK registry. Once opened, the account will be used during 2010 to submit details of total half hourly energy consumptions made during 2008, together with a list of half hourly meters. In April 2011 the first sale of allowances takes place, this being a double sale to cover allowances for 2010/11 and 2011/12. The sale will allowqualifying organisations to buy carbon allowances from the Government at a fixed price of £12/tCO2. In the first quarter of 2011 qualifying companies must check their 2010 emissions levels in order to determine whether sufficient allowances have been bought, with additional allowances to be bought as required. During July 2011, the first annual report will be published and qualifying companies will be required to surrender allowances as required to cover their emissions. The administrators will publish the CRC league table to show the performance of qualifying companies and will then make bonus payments or impose penalties according to energy performance and position in the league table.

Organisations should now, therefore, not only be looking at ways to keep abreast of the forthcoming timetable of requirements, but they should also be looking for ways to reduce their emissions prior to 2010 when the first full measurement period begins. Additionally, they should be looking at ways to implement metering strategies and energy reduction techniques in order to gain maximum benefit under the ‘Early Action Metric’. Ultimately longer term energy monitoring and carbon reduction strategies must be drawn up to ensure that the cost of buying yearly allowances is brought down and penalties are definitely avoided.

The overall aim of the CRC is to reduce carbon emissions in large, non-energy intensive organisations by 1.2 million tonnes of carbon per year by 2020. The financial imperative which lies at the heart of the scheme may well mean that it has greater impact than EPCs and DECs have so far had. However, it remains to be seen whether organisations will interpret the initiative as a positive means of encouraging investment in energy saving measures or whether they will simply take a negative stance with regard to the payment of penalty charges. What is certain is that if they ignore the guidance that will undoubtedly be provided they will receive a nasty shock when the first league tables are published.

By Andy Greenwood, Associate at Ridge

Andy Greenwood is an associate at property and construction consultants, Ridge. He leads the newly formed Ridge Sustainable Design Team that will provide expert sustainable design and operational support and advice across the breadth of the consultancy’s service offering.