Beyond the CRC

As 2019 marks the end of the CRC Energy Efficiency Scheme, James Parsons investigates the implications of the new policies the government is seeking to implement to require firms to report on their emissions

Arrows. Photograph: Pedrosek/Shutterstock

Under current decarbonisation policies the UK will bust its fifth carbon budget for 2028-32 by 9.7%, according to the Clean Growth Strategy published by the Department for Business, Energy and Industrial Strategy (BEIS) in October.

A new self-reported metric by which the department wants to measure its progress – the emissions intensity ratio (EIR) – will be published each year and will measure the amount of greenhouse gases (in tonnes of CO2 equivalent) produced for each unit of gross domestic product (GDP) created, the strategy announced.

To meet the 2032 targets, the EIR will need to fall by an average of 5% per year, compared to the current 4% annual fall since 1990.

Against this backdrop, the government is trying to galvanise large businesses to report their energy efficiency and emissions contributions via Companies House, coupled with an intensity metric.

Included among the 20 plus documents published by BEIS on the same day as the Clean Growth Strategy was a consultation on a framework for streamlined energy and carbon reporting (SECR).

The proposals would bring large private companies and or energy-intensive companies under a UK-wide “simplified energy and carbon reporting framework” by April 2019, in line with the government’s industrial strategy. The public sector is not included in the department’s consultation.

Reporting options

Four options for the proposed SECR scheme are being considered by BEIS as it tries to find a substitute for the CRC Energy Efficiency Scheme, which is being wound up (see box).

SECR options

  • Option 1: No new reporting policy is implemented.
  • Option 2: All companies using more than six gigawatt hours of electricity per year to report on their electricity, gas and transport energy use and emissions and an intensity metric (with a global scope for energy and emissions for exchange-listed companies) in their annual reports like those under the CRC Energy Efficiency Scheme.
  • Option 3: A variation of Option 2, where reporting requirements are the same, but the scope of the scheme is all “large companies”.
  • Option 4: Same scope as Option 3, but participants must also report on their energy efficiency opportunities and progress towards them.

All but a business-as-usual approach would require businesses to report their direct and indirect emissions, and possibly their progress towards energy efficiency.

Under the proposed SECR scheme, all large companies covered by the Companies Act 2006 would need to disclose their energy use and carbon emissions across all their operations, mirroring the current carbon reporting obligations for companies listed on the stock exchange – this could even be extended to limited liability partnerships (LLPs), under the proposals.

The government proposes using either energy use, similar to the current CRC requirements, or company size, as seen in the Non-Financial Disclosures Reporting Directive, as the threshold for determining who the framework will apply to.

Its final choice will have a significant impact, because 4,000 large companies would be required to report under a CRC-style energy-use metric, while 9,100 individual businesses would report under the definition of a large group used by Companies House or the government’s Energy Saving Opportunities Scheme (ESOS) (see box).

The ESOS effect

An evaluation of the Energy Saving Opportunity Scheme published by BEIS in October showed energy efficiency was improving. Of the companies surveyed, 79% reported “some form of energy efficiency improvement” between the start of 2005 and mid-2016. A third stated that ESOS had influenced at least some of these improvements, with some having sought certification to the ISO 50001 energy management standard.

Myles McCarthy, managing director of implementation services at the Carbon Trust, told ENDS that there were practical difficulties with establishing which firms would be caught by energy or carbon-based measures.

“The challenge with that is it’s difficult sometimes, based on current data in the market, to determine who is in that category.”

McCarthy points to the CRC energy metric, which is based on an amount of electricity consumption from each site operated by a business.

“Now if you go up to a company, say a legal team, a financial team, or even an environmental team and say to them,‘Do any of your sites consume more than six gigawatt hours of electricity?,’ most of them will look quite blank.”

Although not quite perfect, McCarthy believes something like staff numbers or revenue would be the easiest metrics to determine qualification for a new carbon reporting scheme.

BEIS is hoping to see SECR embrace the digital age with a company’s carbon and energy report filed with Companies House electronically.

Kate Levick, director of policy and regulation at carbon-disclosure organisation CDP, told ENDS that SECR is an important move which would allow shareholders to request data on energy and carbon emissions precisely because they will be made part of annual reports.

By extending the requirement to report global emissions from companies listed on a stock exchange to large private businesses, it is “much more helpful to investors, market participants” in the UK, she says.  
“Many of the firms headquartered in the UK or listed on the UK stock exchanges are big multinational companies with some of their main emissions and energy use outside the country, she says. “That would extend to large private companies too.”

The issue of transparency to allow investors to hold companies to account is also addressed by BEIS. It envisages a scenario where shareholders would be entitled to ask for copies of annual reports that include all carbon disclosures, possibly under the remit of the UK’s independent regulator, the Financial Reporting Council.

Carbon Trust’s McCarthy says: “We know from experience that if something is measured and reported, it’s more likely to be managed and then reduced… in many sectors we know it’s cost-efficient to be energy-efficient and carbon-efficient.”

Standardised disclosure

BEIS hopes this is the case. By standardising consistent disclosures of energy and carbon data a knock-on effect of raising and improving energy-efficiency measures will occur, according to the consultation document.

The department has identified potential savings of more than £2bn per year through improved energy efficiency in buildings and processes, with energy efficiency solutions a vital contribution to its own Clean Growth Strategy.

The consultation on the framework for SECR itself is the second consultation on energy and carbon measures in the past two years, building on reforms to the business energy-efficiency tax landscape. Although the business energy consumption tax elements of the CRC scheme will be inherited by the climate change levy in the form of increased rates from April 2019, the fate of the emissions-reporting arrangements under the CRC remain unknown.  

The CRC scheme was launched in 2010 to drive energy efficiency in large organisations left out of or not fully covered by other carbon-reduction schemes such as the EU Emissions Trading System and ESOS. But its effectiveness was undermined by frequent policy changes and complex overlaps with other schemes.

Around 5,200 businesses and public sector organisations are covered by the CRC, requiring them to report on their UK energy use and buy allowances to cover the associated carbon emissions.

Under SECR, elements of the CRC could be combined with mandatory greenhouse gas emissions reporting from 2019, BEIS says.

It proposes that all listed and new private companies that qualify for participation in the reporting framework will be required to report on the scope 1 (direct) and scope 2 (indirect energy) emissions for which they are responsible, though to different extents, and report scope 3 emissions on a voluntary basis (see box).

Scoping emissions

The Greenhouse Gas (GHG) Protocol – the widely used carbon accounting tool – categorises emissions into three groups dubbed ‘scopes’. These are considered the reference point for setting parameters in legislation and in global reporting standards, such as the International Organization for Standardization’s ISO 14064-1.

Each scope is defined based on where the emissions occur:

  • Scope 1 (direct emissions): Emissions from activities owned or controlled by an organisation that release emissions into the atmosphere. Examples include emissions from combustion in owned or controlled boilers, furnaces, vehicles; emissions from chemical production in owned or controlled process
    equipment.
  • Scope 2 (energy indirect emissions): Emissions released into the atmosphere associated with a company’s consumption of purchased electricity, heat, steam and cooling. These emissions that are a result of an organisation’s activities but which occur at sources they do not own or control.
  • Scope 3 (other indirect emissions): Emissions resulting from a company’s actions but occur at sources they do not own or control and are not classed as scope 2 emissions. Examples are business travel by means not owned or controlled by an organisation, waste disposal not owned or controlled, or purchased materials or fuels.

Source: DEFRA

Under SECR, reporting on electricity, gas and transport energy use (from road, rail, air and shipping) tied to an intensity metric would be required for private companies – in phase two of the CRC only electricity and gas use had to be reported.

To ensure companies act on the energy efficiency opportunities identified in energy audits, SECR could require companies to take action on the findings, and BEIS’s consultation is seeking views on this. 

This would be a significant deviation from ESOS, where companies are not required to publicly report any of the information accrued or evaluate or act on how energy is used within their businesses.

Currently, the government is also “minded” to require private companies to report only on their energy use within the UK and not their total global emissions as is required from listed companies.

BEIS intends to reduce the administrative burden of compliance through the new framework, something which it tried to do through amendments to the CRC but ended up causing confusion. 

Simplified reporting

As well as looking at simplifying carbon reporting requirements, BEIS is seeking views on how best to include the findings and recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) published in June 2017.

As part of a G20 programme led by Bank of England governor Mark Carney and former New York mayor Michael Bloomberg, the TCFD looked at how businesses can best report on governance, strategy, risk management and metrics and targets, to reflect the type of information investors say they need to make better decisions when factoring in climate change.

According to the TCFD, climate risk should be considered in two ways: highlighting transition risks (upcoming legal, technology, policy and market changes) and physical risks (posed to assets by extreme weather events and warming temperatures).

BEIS’s thinking is that investment is attracted to companies with lower energy use and emissions. This in turn will increase the rate of return on energy-efficiency technologies, support innovation and build the market for energy-efficiency and low-carbon products and services over the long term. Disclosed information can also inform the development of government policy on energy efficiency, BEIS believes.

But a key aspect of the reporting framework outlined by BEIS will be the mandatory aspects of the TCFD’s recommendations, which CDP is calling for.

“We are very supportive of the TCFD recommendations,” Levick says. “We would like the government to implement them and ideally make putting that information into mainstream reports mandatory.”

Different focus

Although Levick commended the government’s proposed inclusion of the TCFD’s recommendations, she pointed to the fact that the motivations of the government and the TCFD are different.

Whereas the TCFD’s recommendations were driven by central banks and finance ministries trying to achieve financial stability in the economy due to anxieties around climate change risks, the origins of BEIS’s consultation is rooted in companies being energy efficient, she said.

The TCFD is looking at future risks related to climate change whereas SECR is looking backwards at performance data on energy consumption and emissions.

To further muddy the waters, the UK implemented a set of non-binding guidelines to help companies comply with the EU Non-Financial Reporting Directive in December 2016.

This implementation requires large “public interest organisations” with more than 500 employees to report on their environmental, social, human rights and anti-corruption performance.

But these companies’ future non-financial reports do not have to be verified by an independent party, the government decided.

What is more confusing is that this directive is not mentioned in the SECR consultation, whereas the EU Energy Efficiency Directive incorporating ESOS requirements is.

“This consultation is written in the context of exiting the EU, so it very clearly sets out its caveats at the beginning around Brexit.

“But the thinking is, to some extent, based on EU architecture,” Levick says.

EU links ‘desirable’

For some observers, maintaining a close link with the EU is desirable because of shared expertise in the remit of decarbonisation. There is a danger that with a hard Brexit, collaborative efforts will be lost,” says Ian Byrne, the deputy chief executive of the National Energy Foundation.

Mandatory transparency of greenhouse gas emissions is only available for around 1,000 UK companies which publish their carbon data. And only 39% of FTSE 100 companies list climate change as a risk in their annual reports, according to research by sustainability consultants Carbon Clear.

But if reporting of energy and carbon data could be prioritised for all large UK businesses, the government sees far-reaching implications for the economy and the development of standards for a green bond market.

This too is something the government has revisited since the Clean Growth Strategy in the form of a second Green Deal framework, covering home energy efficiency upgrades, and a consultation on how best to establish markets for energy efficiency in the domestic sector.

“Most of the incentives we’ve seen in recent years have very much been based on the installation giving cash back for X or Y measures, as opposed to trying to ingrain [energy efficiency] into the property market itself,” Richard Twinn from the UK Green Building Council told ENDS.

“So the link between energy efficiency and property value needs to be created to create green products on the market.”

If an independent regulator such as the Financial Reporting Council could be given levers to push companies into action through mandatory instruments under SECR, the gains from other market sectors could be huge. 

Casting the net: how to define a large company?

Buildings. Photograph: Krisztian Miklosy/123RFOne of the biggest decisions for the new reporting scheme will be how to define a ‘large company’. The definition under the Companies Act 2006 requires a business to meet two criteria within a financial year:
  • It employs more than 250 employees or has an annual turnover greater than £36m;
  • Its annual balance sheet totals more than £18m.
There are ‘smoothing provisions’ which apply if a company crosses over the size threshold – in this case a change must persist for two years to have an effect on the company’s classification.

If BEIS decides to apply the definition of large companies under ESOS, derived from the requirements of article 8 of the Energy Efficiency Directive, a company must:

  • Employ an average of 250 or more people in a certain 12-month period; and/or
  • Have an annual turnover in excess of €50m and an annual balance sheet total in excess of €43m.

james.parsons@haymarket.com

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