What does the Carbon Reduction Commitment mean?

The CRC scheme is set to require over 5,000 organisations operating within the UK in the public and private sectors, to internalise the cost of carbon emissions by putting a price on every tonne of carbon emitted as a result of their activities.

Whilst the scheme may initially be perceived as an additional cost, organisations willing to engage in strategic carbon management, could potentially generate revenue, positive marketing and significant cost savings as a consequence of energy efficiency. Considerable cash flow will be tied up within the scheme and participating organisations should be considering the cost implications now.

Organisations that will be legally required to participate are those whose half hourly metered (HHM) electricity readings in 2008 were in excess of 6,000MWh/yr (which equates approximately to £500,000). These organisations will be required to report on their carbon emissions generated through not only electricity use but also all ‘core’ non-transport carbon emissions from the use of gas, coal, oil and any other non-HHM electrical sources.

The scheme will be in full operation from 2010, running from April to April each year. During the course of each April organisations will be required to purchase carbon allowances to cover their emissions for the coming year (initially at £12/tonne CO2 emitted). At the end of the year sufficient allowances must be surrendered to cover the actual emissions generated. If an organisation has reduced its emissions and has an excess of allowances they will be able to sell these allowances within a secondary market or use them in the following year. Those organisations who generate more emissions than their allowances allow must purchase additional credits from the secondary market (likely at an elevated price) or from an EU Emissions Trading Scheme (ETS).

For the first three years an introductory phase will be in place whereby the number of allowances available will not be capped. After April 2013 the scheme will be capped for the first time, limiting the number of allowances available and increasing the price of allowances at auction. Participant organisations will be obliged to make emissions savings in order to avoid financial penalties.

An organisation’s progress towards emissions reduction will be compared to others within the CRC league table. Their position in the league table will reflect their emission performance for the year, their carbon emissions in relations to growth in turnover, and; for the first three years, their attempts to make ‘early action’ towards commitment to the scheme.

The scheme itself is designed to be revenue neutral to the Treasury, with only an administration fee (for the Environment Agency) being removed from the CRC fund. The majority of the allowance auction money will be returned to participants as a recycle payment.  The level of which is determined by the organisation’s carbon reduction performance over the previous year.

Although the scheme is designed to be revenue neutral, it will present a significant issue in terms of business cash flow. A participant in the scheme who is using simply 6,000 MWh/yr can expect to initially pay £35,000 per round of the scheme. Recycle payments will only be released on an 18-month returns cycle. This effectively doubles the amount of money tied up within the scheme. Accounting for gas and non-HHM electrical metering, the majority of qualifying businesses will use significantly more than 6,000 MWh/yr Realistic figures suggest that the scheme costs will run at approximately 15-20 per cent of an organisations energy bill.

Targeted organisations falling within the 6000MWh/yr threshold represent a group of businesses whose energy costs typically account for three per cent of turnover. Whilst the scheme is adding an administrative burden in terms of its requirement to report and trade, the potential rewards for engaging in carbon management far outweigh the costs.

All organisations who currently have half hourly metered electrical supply must consider whether the CRC applies to them either directly or through their parent companies and groups as it is the energy consumption of the highest legal business entity which is responsible for the emissions of it UK operations. They will then need to begin considering both the budgetary implications of the scheme and the action that can be taken to make significant cost savings through carbon management. 

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