Carbon Reduction Commitment to include government departments

All government departments will be included in the forthcoming emissions trading scheme for large organisations such as supermarkets and local authorities, according to a policy paper from the Environment Department (DEFRA).

DEFRA has given more details about the shape of the Carbon Reduction Commitment (CRC) - a mandatory emissions trading scheme for large non-energy intensive organisations that is due to start in 2010.

Its revised proposals1 take account of responses to last summer’s consultation (ENDS Report 390, pp 41-43 ). The basic structure of the scheme remains intact, but DEFRA has made some key modifications and clarifications.

The criteria for inclusion in the scheme have been changed to include all organisations that have half-hourly electricity meters - not just mandatory half-hourly meters, as originally proposed - and that use more than 6,000MWh of electricity per year.

If an organisation meets these criteria its direct emissions - including those from burning coal, oil and gas and electricity use but excluding those from transport - will be caught by the scheme.

Organisations with half-hour meters will soon receive notice that they must present a statement on their energy use for 2008 to determine whether they are covered by the scheme.

However, organisations with more than 25% of their emissions covered by climate change agreements (CCAs) would be excluded from the scheme, as would all emissions regulated under the EU emissions trading scheme (EUETS).

DEFRA wants to allow organisations to exclude very small sources of energy use as long as they can demonstrate in each five-yearly phase that at least 90% of their total emissions are covered collectively by the CRC, CCAs, or the EUETS.

Large public organisations like local authorities and hospitals will be included in the scheme, but the government has yet to decide whether schools will be in local authority inventories.

But to "demonstrate leadership", all government departments will be included, regardless of whether they meet the criteria. In March, Chancellor Alasdair Darling announced an extra £30 million spread over three years for interest-free loans to pay for energy-saving measures in public organisations.

The scheme will operate without a cap for the first three years to allow participants to get used to the system, but after that annual emission limits will be based on a trajectory to a 2020 CRC target set independently by the Committee on Climate Change. The 2020 cap will take into account the mandatory target set out in the Climate Change Bill to cut overall UK emissions by at least 26% against 1990 levels by that year.

Participants will have to report on their energy use and submit allowances to cover their emissions in April each year. Energy suppliers will have to provide their customers with an annual statement each February, as long as they have been requested before November. The Environment Agency will audit 20% of participants each year.

Allowances will be auctioned in January each year, and they can be banked between years without limit. DEFRA proposes allowance prices of £12 per tonne of CO2 for the first three years. Thereafter prices will be determined by supply and demand based on the cap and participants’ ability to cut their CO2. There will be a "buy only" link to the EUETS which will operate at certain times of year to prevent allowance prices going too high.

As promised, the scheme will be revenue neutral to the Exchequer, but the government has dropped plans to use some of the auction receipts to pay for a system of interest-free loans to help participants pay for energy-saving measures. As a result, all of the revenue will go back to participants. Organisations will get a bonus or pay a penalty based on their position in a league table.

They will be ranked on absolute emissions reductions and emissions reductions per unit output. During the first three years participants will also get credit for early action, such as the fitting of automated meter reading systems, or participation in the Carbon Trust’s energy efficiency accreditation scheme.

In the first phase, absolute reductions would account for 60% of an organisation’s score, relative reductions for 20% and early action for 20%. In subsequent phases absolute reduction would account for 75% and relative reductions for 25%.

DEFRA has proposed a new formula for returning the revenue. In the first year those organisations at the top of the table would receive a bonus of up to 10% on top of their payment, while the worst performers would pay a penalty of up to 10%. This proportion would increase by 10% each year, and at the end of the phase it will be equivalent to 50% of the payment.

This change reflects the fact that energy costs represent just 1-3% of a typical CRC participant’s total costs. The table would be made public and DEFRA hopes that the reputational impacts of coming low down will focus management attention on reducing emissions. Experience with CCAs suggests that the discipline of measuring and reporting emissions can be effective in encouraging companies to improve their energy efficiency.

A further consultation along with draft regulations should be published in summer. The first phase of the CRC will start on 1 January 2010.

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