The CRC (Carbon Reduction Commitment) Scheme is a compulsory emissions trading scheme for large “non energy intensive” organisations that are not already included in the Emissions Trading Scheme or covered by Climate Change Agreements. Around 20,000 UK organisations are affected by the scheme and must register in April to December this year. In the first of a series of three articles Niki Leahy, FSN senior writer looks at what the scheme entails and the penalties if you do not comply.
The CRC is a “cap and trade” scheme – and basically means that qualifying organisations will have to purchase carbon allowances corresponding to their consumption of energy and by association, output of carbon dioxide emissions, (CO2). Organisations qualifying for the CRC are those that have electricity demand in excess of 6,000 MegaWatt Hours (MWhrs) per annum, settled on the half hourly electricity market. If your organisation qualifies, you will be required to register for the Scheme and have a mandatory requirement to calculate and report your output of CO2 from energy use from fixed site sources. Measured energy consumption relates to “conduct of business” and covers electricity, natural gas, LPG, coal, heating oil.
In addition to calculating energy consumption and converting this to output of CO2 emissions, qualifying organisations will have to report their output of CO2 – and their efforts to reduce their organisational carbon impact will be measured and reported by the Government. Therefore, the aim of the CRC Scheme is to “encourage” organisations to reduce their fixed source energy consumption and penalise those that do not.
Although the CRC Scheme is designed to be “revenue neutral”, i.e. the cost to of buying allowances to cover carbon dioxide emissions will be later recycled back to participants this will be will either be a larger or smaller amount than they originally paid for their carbon allowance, and the amount recycled will be dependant on their relative performance in the “CRC Scheme League Table”.
If you are a qualifying organisation, you will have received a letter from the Environment Agency, EA, (or its Northern Ireland and Scottish equivalents), asking you to register either as a participant in the Scheme, or to make an Information Disclosure effectively proving that your consumption was below the 6,000 MWh annual threshold. This electricity consumption has been monitored throughout 2008 by the Environment Agency in collaboration with all electricity suppliers in the UK market.
The following diagram illustrates the Scheme phases.
Can I identify likely costs if I have to register and participate?
If you have been advised by the EA that you must register for the Scheme, you will have considerable immediate, internal costs arising from the requirement for you to gather together information on all your half hourly electricity meters, and supply copy invoices for all electricity consumed by these meters, and by any other automatic meter readings or pseudo half hourly meters you may have. These will be directly related to the complexity of your organisation, and its size, as well as other factors, such as your having to account for energy consumed in any qualifying joint ventures or operating companies if you have a group structure.
In addition, in 2010, registration costs are £950, and there after there is an annual subsistence charge of £1,290. The EA estimate that the internal staff resource to prepare for the CRC is likely to be approximately 5% of annual energy spend, a conservative estimate given the complexity of the Scheme and the data trawl required to submit for registration alone in 2010.
On top of costs of compliance, the costs of non compliance under civil penalties are extensive and include:
- Failure to register on time (including provision of requisite information)
- £5,000 + £500/working day (up to a maximum of £40k).
- Failure to provide Footprint Report -£5,000 + further £500 per working day to a max of 40 days and doubled after 40 days
- Failure to provide Annual Report - £5,000 + further £500 per working day to a max of 40 days and doubled after 40 days
- Incorrect reporting (either footprint or annual report) -£40 per tCO2 for emissions incorrectly reported, to be applied outside 5% margin of error
- (no penalty if supplier error)
- Failure to comply with performance commitment - buy and cancel outstanding balance of allowances at £40/tCO2
- Failure to keep adequate records (the evidence pack) - £40 per tCO2 of total emissions reported in the most recent annual report
- Name and shame costs including publication on CRC Scheme website as poor performer, blocking accounts, bottom ranking in league tables and so on
After registering, participants calculate their total CO2 footprint for 2010, and produce a “footprint report”. In the footprint report, participants forecast their annual CO2 emissions subject to CRC and buy allowances upfront from the UK Government to cover these emissions for 2011. The first sale of carbon allowances takes place due in April 2011, and allowances have been fixed at £12 tonne, derived from using DEFRA’s average conversion factor of 0.543 kg CO2/kWhr. So for example, 6,000 MWhrs of electricity equates to £38,000 CRC carbon allowance cost. These allowances will need to be bought and surrendered according to the estimated output of CO2 emissions for each year, and from 2012 the recycling payment or refund becomes effective. The size of refunds with the penalty / bonus adjustment depending on the organisation’s relative performance in the reduction of emissions in comparison to all other participants, as in the CRC League table.
From 2013, carbon allowances will then become variable prices through auction under the cap and trade stage of the Scheme. Allowances will be capped by the government and the purchase price will be unknown until a sealed bid auction is complete. Because demand is anticipated to outstrip supply it is likely that a spot market will emerge in which participants can sell and purchase additional allowances.
The table below illustrates the costs of allowances, including any top up purchases that may be required, and how the bonus / penalty payments have been structured to drive the Scheme incentives.
What’s the best strategy?
If you qualify as a participant, then the Scheme appears to be sufficiently well designed to ensure that most organisations will wish to deliver the aim of the scheme – that is to reduce energy consumption and thus output of CO2 emissions. By acting early to reduce emissions each organisation can capitilise on the benefits of the Scheme which are to earn profit by being in the upper part of the league table, and acquire the prestige of having done well. Early action and relative performance may well have positive impacts upon share price, insurance costs, corporate reputational costs, and ranking and inclusion in sustainability assessment rating schemes. However, these benefits will need to be offset against the relative costs of achieving such energy reduction, in terms of capital investment for any new processes, systems, meters or other hardware required, as well as intangible costs to deliver behaviour change.
Although government revenue from the scheme will be recycled beginning in 2012, (based on performance) there will be a significant impact on cashflow at the start of the scheme for participants, which can be estimated according to the calculated output of CO2 emissions and related energy consumption.
What should my organisation be doing now?
If you are required to register for the CRC, (which you must do by July 2010), then you need to issue a guide to your finance managers on the identification of Half Hourly meters (HHM) that must be listed with the EA on registration. You should also be working with your energy providers to add to HHM 2008 data from automatic and pseudo meter readings. All this information needs to be captured in a spreadsheet that will function as an “audit trail” of electricity consumed in 2008 per qualifying HHM, per month, or quarter, with annual totals calculated per meter. You will need to collect copy invoices and/or statements for 2008 usage from HHMs to support this data. Because the information disclosure requirements for participation in the Scheme are more complicated that those for registration, my next articles will examine available data collection and performance management software that will enable your organisation to accurately measure and cost effectively report as required in later phases of the Scheme – as well as strategies for maximising your performance under the Scheme’s requirements in order to reduce your energy consumption and thus the financial costs of purchasing allowances.