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Carbon Reduction Commitment (CRC)

by Michael Smith
NBS Information Specialist

In October 2010, the Government announced significant changes to the Carbon Reduction Commitment (CRC) as a part of the Comprehensive Spending Review.

The CRC is now in force and, despite now being a tax, offers opportunities for companies to improve their energy efficiency and save money. This short briefing looks at how the CRC can help achieve the savings.

What is the Carbon Reduction Commitment?

The CRC Energy Efficiency scheme is a mandatory UK carbon emissions trading scheme covering organisations that use more than 6,000MWh per year of electricity (equivalent to an annual electricity bill of about £500,000). The scheme is operated by the Department of Environment and Climate Change (DECC) and aligned to the Energy Act 2008 and the Climate Change Act 2008.

In effect, to be in line with the CRC, the more carbon dioxide a company emits the more it will cost under the rules of the scheme.

Which energy sources are included?

All energy sources, electricity, gas, solid fuel and oil, are included over the qualifying period. The regulations will cover around 5,000 businesses, including most high street chains as well as public sector bodies.

Participants in the scheme will buy allowances from the government each year to cover their emissions in the previous year. Thus, organisations that decrease their emissions can lower their costs under the CRC scheme.

There are two important changes about buying allowances that the Government announced in October 2010:

The money raised from the sale of allowances will be retained by the Government rather than recycled back to CRC participants
The first sale of allowances to cover emissions in fiscal year 2011/12 will be in 2012 rather than 2011.

With effect from April 2011, companies have to pay £12 for each tonne of carbon dioxide they emit; however, this will not become due until April 2012. This figure is expected to rise to £14 per tonne from 2013, payable in April 2014. This equates to a tax of around £76,000 for a company with a £1 million electricity bill, rising to £114,000 from April 2014.

Government has stated that revenue from the sale of CRC allowances, totalling an expected £1 billion a year by 2014/15, will be used to support the public finances, including spending on the environment.

Operating as a cap and trade scheme, the programme restricts the amount of carbon dioxide that organisations release to the atmosphere by allocating them an allowance based on annual consumption.

How the CRC works

The Government will allow a company to emit carbon dioxide by effectively selling it a license to do so. At the end of each year, companies and institutions must surrender sufficient allowances to cover their emissions; however, they can buy additional allowances, if needed, or sell any surplus.

After April 2013, these allowances will be auctioned with a diminishing number of allowances available to companies in the scheme as time passes. Participants will also be able to buy allowances on the secondary market, or purchase EU Emissions Trading Scheme (EU ETS) allowances.

From 2013 it has been calculated that as many as 25,000 organisations will be included in the scheme as emissions other than carbon dioxide are included.

Participants successful in reducing energy consumption will save money on energy bills and need to purchase fewer allowances. It is envisaged that these savings will be in excess of the costs of participation. In addition, participants that perform well will also be placed higher in the performance league table, which will be published annually by the Environment Agency, boosting their reputation as an energy-conscious organisation.

£5 billion available

There is estimated to be a total pot of £5 billion per annum available to UK companies to increase their energy efficiency. Most companies can apply for a number of different schemes. However, the bad news is that the onus is on businesses to find out what's on offer, keep up to date with what's new, and to apply for them themselves.

Complete package

To aid in finding funding, various expert consultants have entered the market offering a complete package of expert services, analysing different options required to meet customer's needs, and fully developing a comprehensive project plan to meet the corporate, financial and business objectives of CRC participating companies.

These consultants will seek to provide the up front business and project development and business case analyses, engineering, construction management, installation services and project financing needs on a comprehensive basis, aiming to provide a complete customer solution.

Conclusion

The CRC energy efficiency scheme is an opportunity for organisations to do their bit for the planet and save themselves money at the same time. Government urges the best way to make improvements to energy efficiency is to make an investment in the scheme. This will not only reduce energy bills and provide a short-term payback, but will also significantly reduce the carbon emissions of the company, reducing the amount payable to the CRC scheme.

The potential costs and opportunities will help ensure that climate change mitigation and adaptation are increasingly viewed as a strategic priority and become a permanent feature of board level agencies. Acting early will not only enable an organisation to gain financially, achieving savings and a good position in the league table, but will also avoid penalties resulting from being at the bottom.