Carbon Reduction Commitment - Update

21/05/2009 by David Slade.

Outline of the Carbon Reduction Commitment (CRC)

The CRC is a mandatory carbon emissions cap and trade mechanism for non-energy intensive businesses. Although not directed specifically at buildings, energy use by and in buildings will represent a substantial part of the emissions that are covered. The policy is aimed primarily at businesses that fall outside the European Emissions Trading System (EU-ETS) and Climate Change Agreements (CCAs) but nevertheless have substantial energy consumption.

Participants will be required to buy emissions allowances at the start of each year, surrendering sufficient to cover their measured emissions at the end of the year. The money collected will be returned to participants, but not equally - there will be a league table of performance, with those at the top of the table receiving more than those at the bottom. Participants will be allowed to buy and sell allowances to each other (or to intermediaries) and to bank unused allowances for future years.

After several years of discussion and consultation, the scheme will get underway in the next year or so. Participation will be based on energy consumption during 2008/9, with an initial, introductory, phase running from April 2010 to March 2013. A second, developed phase will run from April 2013 to March 2016.

In more detail

Participants
Participants are organisations, who may be private or public. Many local authorities will have to participate (and must include all their schools. It is estimated that schools will account for the majority of their liability).

The qualifying requirements are that the organisation (including subsidiaries) must have at least one site with mandatory half-hourly electricity metering, and the organisation’s total annual electricity consumption (on all sites) must have been 6,000 MWh or more in 2008/9. This is estimated to cover 4,000 to 5,000 businesses (some of which will have subsidiaries for which they are also responsible)

Scope
The scheme includes emissions resulting directly from processes and indirectly from energy purchases. It excludes transport energy and energy for onward supply or storage. Emissions already subject to EU-ETS trading or CCAs are not part of the CRC process (but are counted when determining whether an organisation qualifies).

Regulated core emissions - which must be included - are those from half-hourly electricity meters, electricity profile classes 5 to 8, daily-read gas meters and other gas meters if consumption is over 73,000 kWh per year. Organisations may choose to include other energy. There is a policy objective that 90% of emissions from qualifying organisations should be subject to EU-ETS trading, CCAs or CRC. If the core emissions plus those covered by EU-ETS and CCAs do not reach this threshold, non-core emissions must be included to reach at least the 90% level. If 90% of emissions are already covered by EU-ETS or CCAs the organisation is exempt from CRC. Subsidiaries for which at least 25% of their energy is covered by CCAs do not have to be included.

On-site electricity (and presumably heat) generation can be netted off consumption (if it has been metered). Exports gain credit at grid-average intensity. The treatment of off-site renewables depends on whether ROCs have been claimed. If they have, off-site electricity is treated as if it was grid electricity. If not, it is a zero (or low) carbon source. Green tariffs are ignored.

Phase I
Registration of participants will be in April 2010. In April 2011, participants will be required to buy allowances to cover the previous year (2010/11) and the following year (2011/12). This is to ease the cashflow penalty that would be associated with initial purchase a full year before any return. In subsequent years, April purchases will simply cover the following year. In Phase I an unlimited supply of allowances will be sold at a fixed price of £12 per tCO2 - but participants will only be able to purchase them during April. After that, they must trade in the spot market if they have too many or too few. (This means that the minimum possible initial outlay is about £38,000 - it will often be much larger).

Phase II
In phase II, there will be a fixed number of allowances each year, sold via an auction (sealed bids, single strike price). There will be limits on the maximum number of allowances that a single entity may purchase in the auction, and only participants and their agents may bid (though third parties may trade in the secondary market).

Other features
The initial target was for the CRC to deliver about 4.5 MtCO2 but the Committee on Climate change has been asked to recommend the actual cap, and may well set it at a more demanding level.

There will be a “safety valve” - in effect a price limit - in that participants will be able to buy additional allowances form the EU-ETS via the scheme administrator (the Environmental agency)

League table and recycling
The basis of recycling will be that each participant receives cash proportional to their share of total emissions. However, this will be adjusted by a series of penalties and bonuses. Initially the impact of these will be limited: a maximum adjustment of +/- 10% in the first year, rising to +/- 50% in year 5.

The penalties and bonuses will depend on a points system that is based on:

1. The organisation’s % change in emissions from the previous 5-year average and, voluntarily ,
2. In phase I only: “early actions” comprising voluntary use of automatically read meters (not submeters); participation ion CCAs; meeting the new Carbon Trust Standard (which also requires audited evidence of having made emissions savings)
3. Evidence of becoming more carbon-efficient (for example, achieving a higher turnover with no increase in emissions)

These will be weighted 60:20:20. It was pointed out that, in practice, until there is sufficient data to quantify emissions reductions, the only adjustments (limited to 10%) will be for “early actions”

Process and auditing
The process will be one of self-certification with a standard annual report form sent to a central registry, plus “risk-based” auditing. Energy suppliers will produce (on request) annual statements of energy supplied to participating organisations. Guidance on acceptable approximations will be produced. Penalties will be financial and will be “proportionate to the emissions”

Discussion and comments

Awareness
Awareness of the CRC amongst organisations and their advisors and agents is generally low, but it is planned to increase publicity.

Data quality, availability and skills
It is believed that many of the participants will have difficulty collecting reliable data, especially from subsidiaries - and will initially lack the skills to process them. (The financial community seems to be even less aware of CRC than management generally). However, some local authorities have been experimenting with carbon trading and developing their understanding.

Ownership
In many organisations, it will not be clear who has ownership of the process - or whether the “owners” will have power to influence outcomes. Examples include: schools, where local authorities have responsibility but budgets priorities are largely set by schools; and landlords and tenants. The legal responsibility lies with the organisation that holds the contract with the electricity supplier

Impact
Many speakers noted that private organisations, in particular, seemed to be more motivated by the reputational risks from the league table than by the financial penalties or opportunities.

Renewables
Several speakers complained about the treatment of off-site renewables (and CHP). In effect the CRC is constraining energy use rather than emissions. Organisations who are investing heavily in off-site wind generation will not see an advantage in the CRC if they claim ROCs - without which the investment may well not be economically viable. In effect, energy suppliers can account a supply as zero carbon, but consumers cannot. The (not entirely convincing) justifications were: that the purpose of CRC s to incentivise organisations to take actions on their own sites and; allowing off-site renewables to be treated as carbon-free would be double-counting. (Comment: there seems to be a good deal of possible double counting of benefits here. For example, if a new lighting system is installed in a buildings the carbon savings could be accounted as a benefit of Building Regulations, of CRC and of EU-ETS)

Other points
There appears to be potential synergy between DEC and CRC processes and objectives, but no apparent formal links.

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