Profit from early action with the Carbon Trust Standard

Transcription

1 Profit from early action with the Carbon Trust Standard A Financial Director s guide to the Carbon Reduction Commitment Energy Efficiency Scheme Last updated: October 2009

2 2 03 Introduction Click on the topics to link to the relevant pages. 04 The Carbon Reduction Commitment Energy Efficiency Scheme (CRC) the essentials 04 Coverage 05 Participation and compliance 06 Important dates and deadlines 07 The Performance League Table 07 The cost of the CRC and value at stake 08 Penalties 09 Accounting for the CRC 09 Balance sheet implications 10 Financing allowance purchase 10 Internal audit and reporting systems 10 Risk management 11 Further guidance on accounting for the CRC/carbon accounting 12 Take early action 12 The Carbon Trust Standard an early action metric 13 Claiming the benefit 14 Checklist of next steps 15 Further information

3 3 Introduction The Carbon Reduction Commitment offers a significant financial incentive to large organisations to reduce their carbon. Lord Puttnam The Carbon Reduction Commitment (CRC) is a mandatory emissions trading scheme starting in April Around 20,000 organisations will be affected by the new regulation and 5,000 organisations will participate in a Carbon Reduction Commitment League Table and what s more, your organisation could be one of them. Organisations that are affected by the CRC will have to purchase carbon allowances from the Government from April 2011 which could cost tens or hundreds of thousands of pounds depending on their emissions. Many organisations have not yet considered the financial, compliance, audit and carbon management implications of the new regulations. This guide is designed to bring you up to speed on how the CRC could affect your organisation. It covers four areas: 1. The CRC, including the essentials of the legislation, coverage, compliance and penalties for non-compliance; 2. Financial implications of the CRC including accounting for carbon credits and accounting systems; 3. How to capitalise on the opportunities with the Carbon Trust Standard; and 4. Action: a practical checklist of next steps. Note: This guide is based on the consultation on the draft order regulations published in October The final regulations are yet to be published and are subject to change. For full details on the draft regulations visit

4 4 The Carbon Reduction Commitment Energy Efficiency Scheme (CRC) the essentials The UK has committed to reduce its greenhouse gas emissions by 80% by 2050 from a baseline of Achieving this will require radical changes across all sections of the economy along with new regulation by the Department for Energy and Climate Change (DECC) to help implement the necessary changes. The UK has committed to reduce its greenhouse gas emissions by 80% by 2050 from a baseline of The Carbon Reduction Commitment (CRC) is the new emissions trading scheme affecting many large public and private sector organisations. The organisations targeted by the CRC typically have relatively low energy intensity and most are outside existing schemes such as the EU Emissions Trading Scheme and Climate Change Agreements. Example sectors affected include retail, leisure, some manufacturing, professional services, many other office based activities and the public sector including local authorities, universities and NHS Trusts etc. Coverage Around 5,000 organisations are expected to participate in the CRC. The key qualification criteria is based on the amount of electricity purchased in Organisations that purchased more than 6,000MWh of electricity through half-hourly meters are likely to be included in the CRC. Depending on the price you pay for your electricity, this threshold would equate to an electricity bill of around 500,000 a year. The qualification rules apply to the highest parent

5 5...having gained the Standard we will have a higher ranking in the CRC league table. This will definitely reduce costs to our business. Adrian Swindells, General Manger (Ops), Abbey Corrugated company in a corporate group and consumption is calculated taking into account all majority owned subsidiaries. Under the latest rules, major subsidiaries known as Significant Group Undertakings (SGUs) that qualify in their own right may participate separately. The Environment Agency will administer the CRC on behalf of DECC in England and Wales (The Scottish Environment Protection Agency and Northern Ireland Environment Agency with take responsibility in Scotland and Northern Ireland). The CRC requires organisations that meet or exceed this threshold to register with the Environment Agency and to provide data by April 2011 on total annual energy usage (including gas, other fossil fuels and electricity). Smaller organisations with lower electricity consumption may also need to register their details with the Environment Agency. Exemptions are available for organisations covered by other regulations such as Climate Change Agreements. Participation and compliance Under the CRC participants will be obliged to: Measure their carbon emissions accurately and provide an annual footprint report to the Environment Agency; Produce an evidence pack providing supporting information on the footprint report; Purchase carbon allowances to cover their emissions and surrender a sufficient quantity of allowances to the Environment Agency each year. In the introductory phase of the CRC ( ), allowances will be purchased from the Government at a fixed price of 12 per tonne of CO2. From 2013 the capped phase of the CRC will start. In this phase the Government will cap the number of allowances available and the fixed quantity available will be auctioned. At this point the price will be variable and could be significantly higher. More details on which organisations will be covered by the CRC, and a detailed explanation of all aspects of the scheme, are available in the user guide published by DECC:

6 6 Important dates and deadlines Key dates in the first 18 months of the CRC include: If you re a large business or a public sector organisation, the CRC is something you re going to have to deal with. Fortunately, the Carbon Trust Standard can help as it s recognised under the CRC. That means that organisations who ve been awarded the Standard will be better placed on the CRC league table and reduce the cost of compliance. Tom Delay, CEO The Carbon Trust 1st April st April 2011 July 2011 October 2011 The first compliance year begins. Organisations need to register between April and 30th September Registration packs should be sent out in October The second compliance year begins. Organisations will need to purchase carbon allowances to cover forecast carbon emissions for the year Each organisation must submit a footprint report for the first year ( ) by the last working day of July. The first recycling payment will be made, returning all the money raised in April 2011 to the participants.

7 7 Organisations that are ranked highly will receive a bonus payment; organisations that are ranked lower will receive a penalty. The Performance League Table All organisations will be ranked in a performance league table using three metrics : Absolute metric: their relative change in absolute emissions; Growth metric: their change in emissions relative to revenue; Early action metric: whether they have taken voluntary steps to reduce emissions prior to the CRC. The revenue raised from the sale of allowances will be recycled back to participants in the CRC after a six month period. However, the amount of money paid back will vary depending on the performance of the organisation, as an incentive to cut carbon emissions. Organisations that are ranked highly will receive a bonus payment; organisations that are ranked lower will receive a penalty. In year one the maximum bonus or penalty rate is 10%. This will rise to +/- 50% by year five. This recycle mechanism means that organisations that perform well will be able to make money from the CRC while poor performers will be penalised. The cost of the CRC and value at stake The energy manager (or environment or corporate responsibility manager) in many organisations will have a view on the extent to which the organisation falls within the scope of the CRC; many will not yet have an accurate view on the extent of the financial exposure. Finance Directors will also need to work with their energy teams to get

8 8 Gaining the Carbon Trust Standard is also an early action metric for the CRC scheme and will improve the company s position on the league table. Mark Oliver, Managing Director, H+H UK Limited a more accurate fix on the organisation s exposure and to develop appropriate reporting and auditing procedures. The estimated cost of allowances for organisations of different sizes and the potential value at stake from the bonus/penalty payments in 2011 is illustrated right: Penalties The CRC includes civil and criminal penalties for non-compliance. For example, a failure to register will attract a fine of 5,000 plus 500 per day. Company Directors will be responsible for signing-off the footprint report and ensuring full compliance with the regulations. The Environment Agency anticipates auditing 20% of participants each year. CRC Footprint (tco2) 5,000 50, ,000 Approximate energy bill: ~ 750k ~ 7.5m ~ 15m Annual allowance cost 60k 600k 1.2m Estimated value at stake k 120k 240k 1. CRC Footprint is the total CRC emissions that the organisation is responsible for. 2. Approximate energy bill shows the approximate energy costs associated with the CRC footprint for each column. 3. Annual allowance cost: this is calculated based on carbon allowances of 12/tCO2 in the first phase of the CRC. 4. Estimated value at stake: Based on a maximum bonus or penalty rate of +/- 10% in the first year of the CRC the value at stake between the best and worse recycle payments can be estimated as around 20% of the cost of the allowances purchased.

9 9 Accounting for the CRC The Standard will also make a positive contribution to our standing in the league table of the Government s new carbon trading scheme, the Carbon Reduction Commitment (CRC). Dr Steven Boorman, Director Corporate Responsibility, Royal Mail Group The CRC has a number of important implications for Finance Directors: The P&L and Balance Sheet implications of reserves and allowance purchases and the anticipated and actual recycle payments (including any bonus or penalty) should be considered; The cost of allowances may need to be financed for six months prior to the recycle date; Sufficient internal audit over energy and carbon data is required to ensure that data is robust; Compliance and regulatory risks should be managed effectively. Balance sheet implications There is currently ongoing discussion about how organisations should account for the assets and liabilities associated with participation in the CRC. However, some initial considerations are provided below, and further useful links to guidance from leading accounting firms is provided at the end of this section. In April 2011, participants must forward purchase allowances for the period April 2011 to March 2012 (at least). Participants will recognise an asset in the form of allowances for the next 12 months. In addition, participants must recognise that each allowance is entitled to a refund from the Government.

10 10...the Standard will help us achieve real savings under the CRC. Dr Steven Boorman, Director Corporate Responsibility, Royal Mail Group The recognition and measurement of the refund may be challenging for some organisations as the level of refund is determined by a number of factors, namely the size of the recycling fund and an organisation s position in the annual league table. Financing allowance purchase Cash-flow may be a concern to some participants. Recycle payments are made six months after the date that allowances are purchased and so financing arrangements for that six month period may need to be considered. Although the funds raised will be recycled back to all participants, those that perform well in the CRC league tables will get a greater share at the cost of poor performers. Internal audit and reporting systems It is recommended that companies captured by the CRC ensure that carbon data is reviewed, challenged or assured if they consider the risk to be material. This review should be undertaken by someone who understands carbon footprinting, financial data and reporting and could therefore be a representative from the finance function, the estates department, internal or external audit, or by an independent adviser. It is crucial that participants have a robust data system to capture the information required. Inaccurate reporting is a risk as carbon/energy management systems have rarely been subjected to the same level of scrutiny as financial systems. Current feedback suggests that the majority of organisations could be misstating their carbon footprint by more than 5% with current emissions reporting practice. This puts the onus on organisations to review and challenge data early. Risk management There are a number of new and emerging risks and issues that FD s should be aware of around the CRC: Risk to reputation and brand may be the greatest concern as companies will be rated against each other and it is likely there will be significant attention from the press in the first few years of the CRC. Increased investor pressure in the current climate could be a significant risk for participant organisations; The CRC has very specific boundaries which may not reflect participants current organisational structures or current carbon footprint calculations. In particular there is a challenge for internationally owned organisations who form part of a

11 11 portfolio of otherwise unconnected companies in the UK. The recent decision to allow Significant Group Undertakings (SGUs) to participate separately maybe helpful and should be considered. There will be a series of complex rules around mergers and acquisitions under the CRC which may also need to be considered in advance; There is also a considerable risk from financial penalties in the form of fines, rather than penalties for poor performance. The Government has determined that fines for misstatements of carbon footprint greater than 5% could incur a penalty of 40 per tonne of carbon misstated; There are a number of ways that organisations can breach compliance with the scheme. For example If organisations report late they will be deemed non-compliant and can expect to be fined. Those organisations captured by the CRC should start to set up internal workshops now to make sure the relevant people understand their roles and responsibilities and that all risks have been identified and mitigated where possible. Further guidance on accounting for the CRC/carbon accounting Leading accounting firms have produced some guidance for accountants on issues to do with accounting for the CRC. KPMG, Accounting for Carbon Accessible.pdf KPMG, The Carbon Reduction Commitment, Making it Real Real%20-%20March% pdf PwC, Trouble entry accounting revisited Ernst & Young, Carbon Reduction Commitment Reduction_Commitment.pdf

12 12 Take early action MEASURE CERTIFY MANAGE REDUCE The CRC aims to reward organisations that cut carbon emissions. These organisations will receive bigger recycle payments based on their position in the performance league table and can profit from the CRC. The first year of the league table is based exclusively on the early action metric which will determine the full bonus/penalty amount, rewarding those organisations that have taken early action to reduce carbon emissions on a voluntary basis before There are two early actions which are recognised: 1. Installation of voluntary Automatic Metering (AMR). 2. Achieving certification against the Carbon Trust Standard or equivalent. The Carbon Trust Standard an early action metric The Carbon Trust Standard is an independent voluntary certification scheme chosen as an early action metric under the CRC. It is a mark of excellence that publicly recognises organisations that have genuinely reduced their carbon footprint and committed to reducing it year on year. Over 150 organisations have now achieved the Carbon Trust Standard including public sector organisations such as London Fire Brigade, Fife Council and University of Manchester to household names such as B&Q, O2, first direct and Tesco.

13 13 These organisations have collectively saved over 50m per annum as a result of reducing carbon. These organisations have collectively saved over 50m per annum as a result of reducing carbon and many have identified operational improvements and business opportunities by using carbon to provide a different perspective on the way they do business. Claiming the benefit To claim the early action benefit, organisations must have a valid Carbon Trust Standard Certificate at the end of the first year of the CRC scheme (currently 31st March 2011) and other pilot years. However, organisations should contact us now to ensure there is sufficient time to meet the Carbon Trust Standard criteria should shortfalls be identified. The Government has decided to allow greater weighting given to the Early Action metric in the second year of the scheme. This means that the Carbon Trust Standard will therefore be responsible for the following weightings in the performance league table: Year 1: 50% Year 2: 20% Year 3: 10% To achieve the Carbon Trust Standard organisations will need to demonstrate that they have: Measured their carbon footprint; Achieved a reduction in their carbon emissions; Evidence of good carbon management.

14 14 Checklist of next steps To take action now: Apply for the Carbon Trust Standard you may not be able to demonstrate a reduction next year. Or Apply for Gap Analysis two days of consultancy that evaluates your readiness to meet the criteria. For more information or to apply visit or call Read the User Guide to the CRC published by DECC. Analyse whether you are required to participate in the CRC. Understand and calculate your likely exposure in terms of carbon emissions and carbon allowance costs. Speak to the person responsible for energy (energy/environmental/cr manager) and request: Footprint data for 2008 period; Estimated footprint for the second year of the CRC Profit from taking early action: Apply for the Carbon Trust Standard while you can; Install voluntary half-hourly metering. Consider how you will finance the purchase of allowances and account for your carbon assets and liabilities. Register with the Environment Agency from April 2010.

15 15 Further information ICAEW The Carbon Trust Standard for more information or to apply The Carbon Trust for carbon reduction advice and support Department of Energy and Climate Change Legislation and Policy Development The Environment Agency Lead UK CRC administrator, and CRC regulator for England and Wales The Scottish Environment Protection Agency (SEPA) CRC regulator for Scotland CTSC 018 The Carbon Trust, 2009 All rights reserved. The Carbon Trust is funded by the UK Government. It is an independent company set up by the Government to accelerate the move to a low carbon economy. This document has been prepared by the Carbon Trust with the assistance of the Institute of Chartered Accountants in England and Wales. It is intended for your information only and is not a comprehensive guide to the Carbon Reduction Commitment, nor should it be used as a substitute for professional advice. The Carbon Trust has no control over the content in any websites or documentation provided through any links in this document. As the legislation governing the Carbon Reduction Commitment has not been finalised, you should not take any action, or refrain from taking action, based solely on the information contained in this document. If you need advice on how to obtain the Carbon Trust Standard, general advice regarding how to reduce your carbon emissions, or any other information connected with this document please refer to the relevant contacts provided above. The Department of the Environment for Northern Ireland Legislation and Policy Development The Northern Ireland Environment Agency CRC Regulator for Northern Ireland