Balancing act: can the Government deliver a workable CRC?

As people go to the polling stations today to vote for their local councillors and European Parliamentary representatives, few will be giving much thought to the carbon being emitted by the buildings in which they will be marking their crosses. Increasingly, though executives at local authorities and businesses up and down the country are having to turn their minds to the somewhat abstract pursuit of working out how much CO2 is escaping from assets they didn’t even know existed. The reason for this is the Carbon Reduction Commitment (CRC), the first mandatory emissions trading scheme for non-energy intensive businesses anywhere in the world.

Today is the closing date for the third and final consultation on this groundbreaking regulation, which has already been two years in the planning and, when it comes into force, is expected to mobilise 5,000 organisations to save over four million tonnes of CO2 a year.

The scheme seems simple enough; any business or organisation with energy bills in excess of £500,000 a year – or which consume over 6,000 megawatt-hour (MWh) of electricity every year – will have to purchase annual carbon allowances upfront each year, starting in April 2010. Over the first three years, purchasers will pay a fixed rate of £12 for every allowance – each worth one tonne of CO2. From 2013, allowances will be auctioned and a cap will be placed on the number distributed, forcing those requiring more allowances to buy the shortfall from other lower-emitting companies that have a surplus at a price set by the market.

There will also be a League Table, which will effectively name and shame the worst polluting companies and organisations while enhancing the reputation of those achieving the lowest carbon emissions.

So far so good. The trouble is, delivering ‘light touch’ regulation across a range of businesses as diverse as retailers, hotels and telecoms companies – not to mention the complex asset make-up of local authorities – is bound to hit some snags.

As the final submissions get emailed over to the Department for Energy and Climate Change (DECC) today, the CRC team there is no doubt bracing itself for some fairly strongly worded objections to the CRC as it stands at the moment.

Since the consultation was launched in March, there has already been widespread press briefings and intense lobbying behind closed doors by businesses concerned that the rules as they stand do not allow them to claim their electricity as zero carbon, even if it is.

The CRC rules state that all electricity purchased by affected businesses will be measured the same – whether it is generated at a coal powered station or by a wind farm or small hydro plant – and cannot be counted towards lowering their carbon emissions.

It is also discouraging some businesses from building their own on-site renewable generation capacity because they cannot claim this electricity as zero carbon if they are also claiming renewable energy subsidies, or ROCs (Renewable Obligation Certificates), on the power. Sun Microsystems is one company that has already downed tools on solar and wind farm projects at one of its UK sites until the CRC is revised, while others such as BT, BSkyB and Eurostar, as well as a number of environmental groups are questioning the rationale of investing in green energy if they must either surrender the subsidy or the green benefit.

In a statement issued yesterday, Jo Butlin, vice president for Retail at renewable energy supplier SmartestEnergy, said: “With the CRC requirements firmly on company agendas, we could see large users and energy brokers starting to walk away from renewable offerings as they try to pre-empt the impact of the CRC. We need to see a real commitment from Government to support the independent renewable generation sector by transforming the CRC to achieve emissions reduction and increased renewable energy development."

For now anyway, the Government seems to be holding firm. It doesn’t want to see double counting – for example where a company producing zero carbon electricity sells ROCs to an electricity supplier that sells the electricity in question to another company, which also claims it as zero carbon.

It doesn’t want to see businesses only buying in green energy, either. “We need to see them improve their energy efficiency as well,” says Jane Dennett-Thorpe, head of CRC at DECC.

Speaking at a conference on CRC this week in London, Dennett-Thorpe admitted that while this was currently the most controversial issue facing her department at the moment, it was by no means the only one.

Indeed, her team is currently addressing a number of stakeholder concerns, ranging from the lack of clarity around the definition of the ‘organisation’ having to comply with CRC, to complexities around the landlord and tenant relationship, to issues over when transport is exempt or isn’t exempt from CRC.

“Transport is a knotty issue. How do we define on-site transportation? If an amusement park has trains is that part of the business?” she asks.

The definition of an organisation under CRC is certainly exercising the minds of the legal departments of companies and law firms at the moment.

Owen Lomas partner at Allen & Overy says in the case of CRC, the organisation that must comply is the “counterparty to the supply contract”. This could mean that all companies within a group could have to comply, with the UK parent generally acting as the ‘primary member’.

Lomas says where the complications start occurring is when there is more than one company or group involved in a business activity, such as in the case of franchises, joint ventures, Private Finance Initiatives or agreements between tenants and landlords.

He points out that most existing legal documents will not have a CRC clause in them making it difficult to retrospectively work out which party has to comply with the CRC.

Clearly there is some concern over how heavily the regulator, the Environment Agency, will come down on non-compliancy. There will be penalties but these will be civil rather than criminal and generally in the form of fines. However, because the mechanism will be so new, Dennett-Thorpe says, “errors will be taken into account”.

The Government has certainly stated that it wants to take a ‘soft-touch’ approach on CRC regulation, but what this actually means in the light of the Financial Services Authority’s regulation, or lack of it, concerning the banks, remains to be seen. Certainly some see the ‘soft-touch’ approach being adopted on CRC as causing anomalies in the system that could make the mechanism unworkable.

Trewin Restorick is chief executive officer of NGO Global Action Plan. He points out that the cost of administering the scheme is much more than had been previously estimated. “The figure that has been suggested is 43 pence per tonne of CO2, but we now know that to be way under,” he says.

Restorick says because the CRC is experimental and so full of anomalies it may even be ditched if a new Government takes over at the next general election. “Intellectually, the CRC is the best solution, but in reality it is difficult to know if it will work,” he says.

The Government has this summer to analyse the consultation. It will then respond to the consultation and lay a draft order before Parliament before the end of the year. 

It is less than a year before the legislation will come into force, but it remains to be seen how many businesses will sit tight and wait and see and how many will start taking action now on the CRC.

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