Review of non-trading scheme options for UK policies/measures to drive energy/carbon reductions if an emissions trading scheme is not in place Paper by the ETG Domestic Measures Group (version 9)
The road ahead
The road ahead 1. Even before Brexit became a reality, the end date for a number of carbon and energy policies was creeping ever nearer. The thinking about what should happen next had already begun. 2. The implications of Brexit may be that we withdraw from participating in the EU ETS, but, we still have targets to achieve under the Climate Change Act. 3. ETG is working with Government on the implications of staying in EU ETS; especially for the remainder of Phase 3. A separate paper is also being prepared on establishing trading scheme preferences if the UK leaves the EU ETS. 4. This paper looks at what the realistic non-trading scheme options could be in the absence of an ETS.
Carbon reporting schemes with financial elements Scheme Coverage Emissions (tco2) HMT Revenue EU ETS Approximately 1,000 sites with large combustion plant or operating specific manufacturing processes 176m 500m pa CRC Approximately 1,800 large energy consuming organisations including from the public sector. Excludes energy covered by EU ETS and CCAs 41m 600m pa CCAs Approximately 7,500 sites from energy intensive and environmentally regulated sectors. * HMT revenue comes from companies paying buy-out fees every two years. CCA companies receive over 200m per year in CCL relief. The Climate Change Levy underpins all these schemes and generates revenues for HMT of around 2 billion per annum. 23m 25m*
Schemes and organisation types ceasing to be covered by motivating policies/measures if EU ETS stops If EU ETS ceases upon Brexit If EU ETS ceases after Phase 3 Schemes Types of Organisation In light of CRC ceasing, in October 2017 the Government has proposed the idea of streamlined reporting of carbon emissions. This would purely be a mechanism for reporting and not linked to discounts or payment of carbon allowances. For the purposes of this paper, we have assumed a New Reporting Framework (NRF) will be in place. Therefore any options we look at focus on financially motivating companies to implement measures and not simply report on them. Any such option would be in addition to the exposure to international competition which already acts as a commercial driver for companies (especially those that are energy-intensive) to invest in measures to improve energy/carbon efficiency.
Other schemes relevant to this situation ESOS: Requirement for large organisations to assess potential for energy savings across their organisation every four years. GHG Reporting: Annual reporting of Greenhouse Gases in Director s Reports under the Companies Act mandatory for FTSE 500 companies. All the schemes referenced above, involve collating energy data and either reporting it to the relevant Government appointed Administrator, or, having it available for audit. ETG has previously called for simplification of this environment.
The reality on Brexit 1. There is not long to go until the most dramatic scenario of being out of EU ETS in March 2019 may come to pass. 2. This is a very very tight timescale for developing any new schemes that would have to go through the due processes (i.e. development, consultation, drafting, debating and then law making). 3. If EU ETS was not applicable, all CCA sites may have to include all their eligible fuels in their CCA. 4. Assuming that power generation would still be subject to the Carbon Price Floor, then the rate of CPS would automatically be increased by Treasury to reflect the removal of EU ETS cost. CCAs could be modified to capture eligible fuel use in industry and other large sites (hospitals, universities, offices etc.) that would fall out of EU ETS and otherwise not be covered by a scheme.
The reality after Brexit 1. If we stay in Phase 3 of the EU ETS until the end of 2020, as is the Government s stated as part of the Transition plan, it leaves two and a half years to develop the alternatives. 2. New schemes can normally be developed in three years, however, the civil service could be argued to not be working under normal circumstances due to Brexit. Therefore, extending or adapting existing schemes may be the easiest options from a Government perspective. 3. This paper next discusses such options; from simple taxation approaches, to schemes to incentivise implementation of measures. We have looked at how existing schemes; like CCAs and ESOS could be extended and adapted to be fit for purpose for the future.
Difference design features non ETS options Each option we present has its design features summarised in line with the table below. Scope: Coverage Scope: Sources Targets/Trajectory Compliance/Admin Cost impact Carbon leakage Visibility Set up or transition Regulation Success H/M/L: no. of organisations, sectors, sites, processes, energy streams? H/M/L: includes just elec/gas, all fuels, process emissions, others? could be sector or site specific, same for all, or none? Flexible (absolute/efficiency, energy/co2), one measure or none? adaptable complexity of admin or same for all participants? adaptable cost impacts or same for all? can address carbon leakage issues or not? impact of scheme visible to decision makers or easily hidden? easy or difficult for all stakeholders to set up? Multiple changes needed or just new SIs or none? easy or difficult for Government/Administrator to manage on going? H/M/L: likelihood of CO2 reductions being achieved?
Option 1 Business As Usual Description: Continue with Climate Change Levy, existing exemptions for RO/FiTs/CFD/min-met, Carbon Price Floor and assume NRF is implemented in some form. CRC ends in 2019. CCA targets end in 2020 and associated CCL discount in 2023. Some rates (like CCL and CPS) could be increased to offset lost EUETS revenues. No new incentivisation schemes are developed and no existing schemes are extended. The overall cost of energy is the most important driver for increased efficiency and if the total cost is too high then it will hurt the competitiveness of UK businesses, especially those ineligible for reliefs or exemptions. In time, it would make sense to rationalise the different taxes and levies to form a single carbon tax. Coverage Sources Targets Compliance Cost impact Carbon leakage Visibility Set up Regulation Success H: All organisations L: just electricity and fuels via existing taxes (no process emissions or other sources) None None (beyond NRF and remaining CCA target periods) Same for all Same cost impact for all Will not address carbon leakage issues Low visibility unless high cost No set up No changes required (except to change rates) Easy for Government (no Administrator needed) L: Unlikely to stimulate reductions unless rates are very high
Option 2 Payment of levies Description: As Option 1: BAU without EU ETS but payment of CCL is not monthly and is instead periodically; i.e. quarterly or annually. This could still be achieved via utility bills. This change will increase the visibility of paying the CCL and hence prompt more discussion about how to minimise (i.e. through using less energy). Cash flows for all stakeholders will be impacted. Administration will be required by all stakeholders to prepare, and submit, and process and check returns. Coverage Sources Targets Compliance Cost impact Carbon leakage Visibility Set up Regulation Success H: All organisations L: just electricity and fuels via existing taxes (no process emissions or other sources) None None (beyond NRF and remaining CCA target periods) Same for all Same cost impact for all Will not address carbon leakage issues M: Slightly more visibility as higher lump sums No set up except for utilities to change billing Some changes to existing Easy for Government (no Administrator needed) M: Could stimulate some more reductions due to higher visibility
Option 3 Annual Rebates Description: As Option 1: BAU without EU ETS but although payment of CCL remains via utility bills, rebates are given for X% year on year reductions on site energy use. The % would be the same for all sites and set by Government. The application for a rebate would be claimed from a Government Administrator and probably need to be accompanied by validation from an independent 3 rd party. The rebate would be for Y% of CCL paid for making the required reduction of X%, or, maybe for being certified to ISO 50001. The two % figures being the same for all sites provides simplicity but does not reflect where the savings can actually be achieved. Coverage Sources Targets Compliance Cost impact Carbon leakage Visibility Set up Regulation Success H: All organisations L: just electricity and fuels via existing taxes (no process emissions or other sources) Same reduction expected for all One absolute energy measure for all Same for all Same % net cost impact but depends on making reductions Will not address carbon leakage issues H: Visible financial reward Will need to establish baseline year and then report annually Change to the Finance Act and new SIs Government Administrator needed M: Could stimulate some reductions.
Option 4 Capped emissions Description: As Option 1: BAU without EU ETS but. with annual external reporting of CO2 emissions, all organisations participating required to reduce by X% per year (which is the cap). Those below can pay a penalty of Y /tonne (hence cost of compliance is capped). The % reduction required being the same for organisations provides simplicity but does not reflect where the savings can actually be achieved. The incentive to reduce is less direct as its dependent on the cap being appropriate. This option may not be suitable for the power sector, as the share and output of fossil-fired generation can fluctuate substantially from year to year depending on (for example) average wind speed and fuel prices. Coverage Sources Targets Compliance Cost impact Carbon leakage Visibility Set up Regulation Success H: Could be high: flexible at which level applied H: Could be high: flexible at which sources included Same for all, cap to be set by Government One measure: CO2, could be as defined via NRF. Complexity could be flexed for company size Same % net cost impact but depends on making reductions Will not address carbon leakage issues H: Visible financial reward Will need to establish baseline year and then report annually New SI needed Government Administrator needed M: Could stimulate some reductions.
Option 5 Environmental Permitting Description: As Option 1: BAU without EU ETS but. Environmental Permitting already requires some sites to monitor their emissions. Official reporting of CO2 could be required for permitted sites and payments for CO2 emissions established. Coverage Sources Targets Compliance Cost impact Carbon leakage Visibility Set up Regulation Success M: Only permitted sites H: Could be high: flexible at which sources included None (assuming permits drive BAT to be installed) One measure: CO2, could be as defined via NRF. Same for all Same CO2 unit cost but net cost depends on making reductions Will not address carbon leakage issues H: Visible financial payment Increase beyond existing especially around payment Change to the Finance Act and EPR Regs; maybe new SI Government Administrator needed H: Could stimulate some achievable reductions.
Option 6 CCA2 extended Description: As Option 1: BAU without EU ETS but. Extend lifetime of current CCAs so that new target periods in place from 2021 onwards, and CCL discount extended beyond March 2023. Fuels previously covered under EU ETS would now, by default, go back into the CCA. New targets would need to be negotiated. Coverage Sources Targets Compliance Cost impact Carbon leakage Visibility Set up Regulation Success M: site based M: All energy sources (plus will include former EUETS energy) Sector and site specific targets can be negotiated Flexible (can be absolute vs efficiency, energy vs CO2) Same admin for all Same % net cost impact but depends on making reductions Can address carbon leakage issues M: Financial impact seen via monthly bills and two yearly compliance costs Minimal as extension of existing New SI needed Government Administrator needed but already in place H: Stimulate achievable reductions.
Option 7 CCA3 Description: As Option 1: BAU without EU ETS but. Revisions to current CCAs (learning from CCA1 and CCA2) to become CCA3. Fuels previously covered under EU ETS would now, by default, go back into the CCA. New targets would need to be negotiated. Revisions could include: Site based performance only. Trading of CO2 to meet target if fail. Creation of new sectors. Differing rebate levels linked to competitiveness issues. Extend to include process emissions. Annual rather than bi-annual targets. Increased involvement of Senior Management and sign off on financial statements (e.g. CCL discount received) Coverage Sources Targets Compliance Cost impact Carbon leakage Visibility Set up Regulation Success H: continue with site based but extend sectors/activities included H: All energy and process emissions Sector and site specific targets can be negotiated Flexible (can be absolute vs efficiency, energy vs CO2) Can flex to reflect simplicity of the sector Can flex to reflect different sector circumstances Can address carbon leakage issues Higher visibility through more sign offs For some sectors minimal as extension of existing CCAs, greater for any new sectors Amendment to Finance Act and new SIs needed Administrator already in place but will need amending H: Stimulate achievable reductions.
Option 8 ESOS Project Implementation Description: As Option 1: BAU without EU ETS but. Financial rewards for implementing projects identified through ESOS audits. Incentive could be linked to CCL relief or could be oneoff payments/grants before and/or after implementation. Government administration would be needed to oversee. An independent 3 rd party would be needed by each company to verify that projects have been implemented and savings being achieved. Senior management would be needed to sign off. As ESOS is only applicable to non SMEs, SMEs could become eligible for this if they voluntarily choose to comply with ESOS. Coverage Sources Targets Compliance Cost impact Carbon leakage Visibility Set up Regulation Success H: open to all who have to or choose to comply with ESOS H: All energy use None Discrete evaluation of each project s savings achieved Same for all, likely to be complex Bespoke to each company as relates to energy savings actually implemented Only helps carbon leakage if further savings can be implemented Clear link between implementation and reward Detailed rules needed and new systems to process New SI needed and maybe an amendment to Finance Act (if CCL linked) New government processes needed and if application is project related then high volume expected H: Stimulate achievable and implementable reductions.
Option 9 Carbon tax Description: Rationalisation of CCL, CPF and EUETS incomes into one Carbon Tax. Variable rates of tax paid dependent on whether fuels used for power generation or not. Exemptions could apply for specific activities (i.e. an equivalent min/met exemption, or sectors at risk of international competition). Coverage Sources Targets Compliance Cost impact Carbon leakage Visibility Set up Regulation Success H: All organisations L: just electricity and fuels via existing taxes (no process emissions or other sources) None None (beyond NRF and remaining CCA target periods) Same for all Variable for power generators, sectors at risk of carbon leakage/international competition and the rest Could address if exemptions are targeted Low visibility unless high cost Some set up to administer exemptions. Changes needed to Finance Act and some SIs Ongoing administration needed to review eligibility for exemptions. Unknown: Reduction dependent on level of tax rate
Summary of the options 1 BAU 2 payment of levies 3 annual rebates 4 5 capped env. emissions permitting 6 CCA2 7 CCA3 8 ESOS projects Coverage H H H H M M H H H Sources L L L H H M H M L Targets N N A A A S S N N 9 Carbon tax N N O O O F F O N Compliance S S S A/S S A/S A A/S A/S Cost impact Carbon leakage S S A/S A/S A/S A/S A A A/S N N N N N C C C/N C Visibility H H/V V V V H/V V V H Set up E E D D D/E E D/E D D/E Regulation N S M S M S M M M E E D D D/E D/E D/E D D/E Success L M M M H H H H? Description H/M/L: (G/A/R) no. of organisations, sectors, sites, processes, energy streams? H/M/L: (G/A/R) includes just elec/gas, all fuels, process emissions, others? Could be sector or site specific (S), same for all (A), or none (N)? Flexible (absolute/efficiency, energy/co2,f), one measure (O) or none (N)? Adaptable (A) complexity of admin or same for all (S) participants? Adaptable (A) cost impacts or same for all (S)? Can (C) address carbon leakage issues or not (N)? Impact of scheme visible (V) to decision makers or easily hidden (H)? Easy (E) or difficult (D) for all stakeholders to set up? Multiple changes needed (M) or just new Sis (S) or none (N)? Easy (E) or difficult (D) for Government/ Administrator to manage on going? H/M/L: likelihood of CO2 reductions being achieved? Note we have assumed for all the options that the current range of green taxes and associated exemptions remain and a new reporting framework (whose design is currently under consultation) for carbon and energy is put in place.
Next steps The purpose of this paper is to present a range of options to Government which could be used or adapted to motivate large energy users to reduce energy use and carbon emissions if EU ETS no longer operates in the UK and no replacement trading scheme has been or will be developed and implemented. A separate paper has been produced by ETG on traded options. We have provided options which consider the reality of the current situation; i.e. there is little time and resource available to create, consult, legislate and implement brand new schemes. Therefore we have looked to adapt existing mechanisms. We hope this paper provides Government with constructive ideas on how this policy landscape could evolve and the benefits or challenges each option presents. ETG members look forward to discussing this paper with Government and working collaboratively on developing some options in detail.