The Carbon Reduction Commitment – how to manage your liabilities

01 March 2009

If you are in, you are in for the whole phase (initially 3 years) and it could cost you dearly.  How do you know if you are in, how much will it cost you and how can you manage that cost? 

Background 

The Carbon Reduction Commitment is on course to be introduced in the UK this year, despite the delays to the original timetable.  Having toyed with various participation thresholds (based on annual electricity consumption) ranging from 2,000MWh per year upwards, the UK Government has now settled on a threshold of 6,000MWh half hourly electricity.  The effect of this is that any organisation which consumed more than 6,000MWh of electricity during 2008 will be required to participate in the scheme.

It is those “participating organisations” who will be required to buy emissions allowances from 2010 onwards, thereby encouraging them to create renewable generation capacity.  

Who is affected? 

The scheme gives rise to the question of what constitutes a “participating organisation”, which will be governed in the regulations, a draft of which was published on 12 March 2009.  There will be rules for specific business arrangements, including:  

  • Groups of companies

  • Subsidiaries of overseas parents

  • Joint venture and private equity situations

  • Landlord and tenant relationships

  • Outsourcing arrangements

  • Facilities management arrangements

  • Franchises

  • Universities and schools

  • Hospitals

  • PFI and PPP projects

Many types of business will exceed the threshold, thereby requiring them to participate.  These include:

  • Large retailers

  • Banks

  • Supermarkets and hotel chains

  • Rail operators

  • Hospitals

  • Universities and schools

  • Government departments

What will this mean? 

If caught by the scheme, organisations will be required to participate in a “cap and trade” scheme similar, but not identical, to the European Emissions Trading Scheme under which participating companies will be required to hold and surrender sufficient ‘emission allowances’ at the end of each scheme year that corresponds with its total CO  emissions, or, purchase additional allowances.  During the introductory phase (2010-2013), the price of allowances will be fixed by the UK Government (currently intended to be £12 per tonne of CO ) but, in subsequent phases, the price will be determined by an annual auction of the allowances made available by the UK Government.  By reducing the number of available allowances in each phase, the UK Government will be able to increase their cost, thereby encouraging participants to seek renewable sources of energy. Outside of these auctions, allowances can be traded on the secondary market between organisations. 

There is a further sting in the tail because participants will be ranked in a league table, depending on their success in reducing their carbon emissions on a year-by-year basis.  This league table will have a dual purpose.  Not only will the laggards be open to public shame, but they will also suffer financially through a penalty system which will distribute the auction proceeds to those at the top of the league table rather than those near the bottom. 

What should you be doing?

You should be taking action now because the UK Government will be sending further letters later this year demanding information to determine whether you are a “participating organisation”.  Once drawn into the scheme, you will remain a participant for the whole of each phase - the introductory phase runs for 3 years and thereafter the phases run for 7 years, comprising a 2 year preparatory phase and a 5 year compliance period.