What it is and who is affected
The UK-wide Carbon Reduction Commitment Energy Efficiency Scheme is a new, legally binding carbon cap and trading scheme designed to promote energy efficiency and help reduce carbon emissions.
It forms part of the Government’s strategy to reduce UK CO2 emissions by 80% by the year 2050, compared to the 1990 baseline. Organisations with half hourly metered electricity consumption greater than 6,000MWh during 2008 are subject to the CRC and must start preparing for it.
This will typically include UK-based parent companies and their UK subsidiaries (all measured as a single entity, unless the subsidiary is of significant size, in which case it can disaggregate itself from the parent company within the scheme).
Participating organisations will typically have large office complexes, data centres or manufacturing facilities that use electricity as a primary fuel. It is estimated that around 5,000 businesses within the UK are affected, although it is feared that even now, many of these organisations are still unaware of their obligations.
What the CRC means for businesses
The CRC is not about raising revenue for the Government, as it is openly stated that the entire scheme is intended to be revenue neutral. It is about encouraging businesses to look at their energy consumption more closely and to instil strong energy management practices throughout organisations. The levers used within the scheme to do this are:
- Cash flow – businesses will need to forecast energy usage at the start of each Carbon Reduction Commitment year (known as the footprint year, running from April to March), purchase carbon allowances from the Government to the equivalent level of the emissions and submit these into the scheme. Then through the year, they are required to monitor actual usage against forecast emissions, and trade accordingly. The first sale of allowances will be in April 2011. For the first three years of the scheme, the cost per tonne of carbon is capped at £12/tonne. However thereafter, an open market system will apply allowing the cost to fluctuate with demand. Originally, the first year was to comprise a 2 year payment, however since a public consultation exercise, this is now changed to a single year forecasting 2011/12, due to concerns about excessive cash-flow impact upon businesses.
- Reputation – a league table will be published in October of each year starting from 2011 listing all participating organisations in order of performance. Within the first year, ‘early action’ will be the only criteria assessed. For the 2nd year, early actions will become 40% of the assessment criteria and in the 3rd year, this will reduce to 20%. Thereafter, emissions levels (absolute and relative) will be the only criteria used.
- Cost – based upon a company’s league table position, a ‘recycle payment’ will be made each October of the scheme, increasingly rewarding good performers and penalising poor performers
With the impacts on cash flow, cost base, reputation and the ultimate risk of legal action for non-compliance, it is imperative that those companies affected by the Carbon Reduction Commitment are fully aware of their responsibilities and ensure that they are ready in plenty of time, armed with the necessary and correct information.
Early preparation will not only help companies to collate information in an unhurried and timely fashion, but will help them to establish sound energy management and forecasting processes, which will prove to be key for successful participation within the scheme over the coming years.
Good preparation is essential
In order to be sufficiently prepared, affected companies need to:
- Ensure that everyone in the organisation who will be impacted understands the CRC and their role (including the billing officer) so that they are prepared for a rapid turn-around and timely liaison with the relevant internal parties. The latest information on the scheme is available at www.environment-agency.gov.uk/crc.
- Take “early actions” – there are two of these that are required. One is to gain the Carbon Trust Standard accreditation (more information can be found at: http://www.carbontruststandard.com/). The other recommended early action is to install AMR meters on electricity sources purchased by the business that are not metered half-hourly by the energy provider. These meters not only allow the business to centrally track and manage energy consumption, but will also improve a company’s position within the Carbon Reduction Commitment League Table.
- Put in place carbon management and carbon budgeting processes within the business. Identify where and how energy is used within the organisation. Through a structured programme, organisations are able to identify where improvements can be made and plan for and implement these changes. This is a practice that will need to be refined - it is better to start now to ensure that subsequent management and budgeting for the purchase of carbon certificates is accurate.
- Plan cash flow. From April 2011, companies will need to purchase and submit carbon allowances equivalent to their emissions levels. As an example, companies that only just clear the 6,000MWh boundary for inclusion in the scheme will find themselves having to pay around £40,000 into it in the first year.
- Understand the rules, keep up to date with developments and most importantly, be honest. It is expected that random audits are likely to take place – companies should be warned that dishonesty is expected to ultimately result in fines or imprisonment.
The Carbon Reduction Commitment is a legally binding scheme which affects a large number of businesses across the UK.
As with most regulatory arrangements, a clear understanding of responsibilities and implications, early preparation and honesty are all essential elements for success.
If a company isn’t aware of how it is affected and what it needs to do, immediate action is required to confirm the necessary present and future actions, timescales, required information and potential penalties.