The report feeds in to the Government's energy efficiency innovation review (see p 18). It will also inform the review of the climate change programme - now expected "early" in 2006.
The business and public sectors are responsible for more than one-third of UK carbon emissions, some 54 million tonnes in 2002. Energy-intensive industries contribute about 45% of this, with large non-energy-intensive firms and SMEs accounting for 25% and 20%, respectively. The Trust finds much scope to cut emissions using existing technology. By 2020 cost-effective cuts of 12% and 20% could be delivered in manufacturing and non-domestic buildings.
Existing policies such as the EU emissions trading scheme and climate change agreements (CCAs) offer a fairly robust framework for energy-intensive industries, the Trust says, despite problematic overlaps and some perverse incentives.
However, it argues that there is a policy gap in less energy-intensive sectors. Emissions from the service sector and commercial buildings are "rising rapidly" - but energy costs, even including the climate change levy, are not strong drivers for change.
The report considers a range of options to encourage energy efficiency measures in less energy-intensive organisations. It suggests that economically acceptable increases to the climate change levy - or even converting it to a carbon tax - would have little impact in the services sector. Meanwhile, extending EU ETS coverage would offer no direct incentive to reduce electricity consumption.
Instead, the Trust calls for a mandatory trading scheme for larger organisations that fall outside the EU ETS. The Trust argues that this would "increase the transparency of energy use and emissions in less energy-intensive organisations" and require them "to articulate a clear carbon management strategy."
The proposed scheme would differ in design and scope from the existing pilot UK ETS. It would include electricity-related emissions, which account for up to 70% of the target sectors' emissions, using either grid average carbon intensity or supplier-specific data.
The report suggests that the scheme could have significant coverage. Even if restricted initially to relatively large electricity users that have half-hourly meters, it would cover around 91,000 sites owned by 14,000 companies and public sector organisations. It would also capture baseline emissions of around 20mtC, split roughly equally between manufacturing industry and the service sector.
The Trust suggests that a new UK ETS could be expanded to include fleet haulage for large companies. Indeed, it notes that CCAs expire in 2012 - and suggests that many sectors should be transferred to a UK rather than EU trading scheme.
Allocation and target-setting are tricky issues in any trading scheme. The Trust recommends full auctioning of allowances to avoid time-consuming and controversial negotiations, with recycling of revenues into climate change levy rebates for the sectors concerned.
ENDS understands the Environment Department (DEFRA) is keen to include a new UK ETS in the revised climate change plan to achieve the Government's CO2 reduction target for 2010. However, the Treasury is worried about the administrative burden for many firms.
The Trust's chief economist Professor Michael Grubb tried to ease such concerns - stressing that the proposed trading scheme is "cost-effective and designed to be user-friendly for business." He said:"The last thing we would advocate is yet more red tape for UK plc."
The proposed UK ETS is the main element of a package that could reduce business and public sector carbon emissions by 4.7-5.1mtC by 2010 and 11.2-12.6mtC by 2020. By 2020, some 70-80% of the total saving would come from rigorous implementation of existing policy instruments - with the UK ETS delivering a further 2.2-3.6mtC.
The Trust's wider plan to overcome barriers to energy efficiency includes:
There is growing interest in the idea of "white certificate" trading, which would give firms tradable credits for individual carbon abatement projects. However, the Trust is sceptical. Verification would be complex and costly, it says, while it "may be hard to disentangle truly additional projects from those that would have happened anyway."
The Trust argues that its programme would deliver a significant net financial benefit to British business, and "have little or no impact in terms of competitiveness...except potentially in a few limited cases." It confirms last year's finding that the aluminium industry is by far the most exposed to climate change policies (ENDS Report 354, p 5 ). However, it now accepts that the steel and cement sectors could become vulnerable by 2020, which "might justify protection against imports from regions without equivalent measures."