Carbon Reduction Commitment Energy Efficiency Scheme: Are You Prepared?

On 1 April 2010, the new UK-wide compulsory Carbon Reduction Commitment Energy Efficiency Scheme (‘the Scheme’) came into force under powers contained in the Climate Change Act 2008. The Scheme is administered by the Environment Agency and has been designed to reduce greenhouse gas emissions across the UK by 80% by the year 2050 and make organisations more energy efficient.

The Scheme applies to the public sector and large businesses (including those that are part of a group, joint ventures and franchisees or franchisors) that, in 2008, had at least one “half-hourly” electricity meter and consumed at least 6,000 megawatt hours (MWH) of electricity through “half-hourly” meters. To put this in perspective, consumption on this scale would equate to an annual electricity bill of approximately £500,000 and the average household in the UK consumes just 5 MWH each year.

The Government has estimated that around 5,000 organisations will be required to fully participate in the Scheme. Those organisations that have a half-hourly meter but do not meet the consumption threshold (approximately a further 20,000 organisations) will also be required to participate by providing information about their energy use; your business could be one of these.

How the Scheme works

Briefly, the Scheme requires all participating organisations to put systems in place to monitor and gather information on CO2 emissions as well as report to the Environment Agency on a regular basis. It is divided into phases and during each phase, organisations will be required to take action and comply with different obligations set out in the Scheme.

Those organisations which are required to fully participate will, more importantly, also have to estimate how much CO2 they are likely to emit each year and then buy and trade ‘allowances’ based on this estimate. Allowances will initially be available to buy from the Government and participating organisations will be required to purchase one allowance per tonne (at a cost of £12 for each allowance) of estimated CO2 emissions.

To allow organisations to adapt to the Scheme, there will be no need to purchase allowances in the first year (April 2010 – March 2011).

If organisations underestimate their annual energy usage and think that they are going to exceed their emissions target, additional allowances can be purchased either from other participating organisations, who have overestimated their CO2 emissions, or traders (on what has been termed the ‘secondary market’). Alternatively additional allowances can be purchased via the ‘safety valve’ scheme, which prevents allowances from becoming too expensive on the secondary market.

However, organisations should be cautious when assessing how many allowances they require, as each year the Government will set a cap on the amount of CO2 that can be emitted. This amount will be reflected in the number of allowances that will be available for purchase.

At the end of each Scheme year, all the money received by the Government from the sale of allowances will be recycled back to the participating organisations based on how well they have performed. A league table will be compiled and a bonus/penalty payment will be applied to those organisations that have performed the best/worst.

What does this mean for businesses?

All organisations which are required to participate in the Scheme should ensure that they:

• Register via the online registry at www.environment-agency.gov.uk/crc between April 2010 and September 2010;
• start monitoring and recording their CO2 emissions (from April 2010); and
• start purchasing allowances (from April 2011).

The Scheme is therefore intended to provide organisations with the opportunity to gain a better understanding of energy usage and promotes efficiency savings by encouraging a reduction in CO2 emissions. This should reduce the cost of an organisation’s involvement in the Scheme and cut energy bills. Further, the recycling payment and bonus/penalty payments should act as financial incentives for organisations to comply with the Scheme.

Organisations may also wish to consider the impact that a low position on the league table (which will be available for the public to view) could have on the business itself.

Penalties for failure to comply with the Scheme

If an organisation is required to participate in the Scheme and fails to register, a financial penalty can be imposed. This has been set at £5,000 and will increase by £500 each day until the non-complying organisation registers.

Similarly, a financial penalty can also be imposed if, at the end of a year, a participating organisation fails to surrender enough allowances. This is currently £40 per tonne of CO2 emitted for which the organisation did not surrender an allowance.

Further Information

For further information about this Scheme see www.environment-agency.gov.uk/crc