Carbon Reduction Commitment Energy Efficiency Scheme: How it works The Carbon Reduction Commitment Energy Efficiency Scheme (CRC) is a mandatory emissions reporting and cap-and-trade scheme for large UK organisations. It specifically targets those organisations with annual half-hourly metered (HHM) electricity consumption over 6,000 megawatt hours (MWh). Why was the CRC introduced? A variety of studies have shown that improving the energy efficiency of UK organisations has the potential to deliver significant environmental and financial benefits. A big share of that potential is within organisations not covered by the EU Emissions Trading System (EU ETS) or Climate Change Agreements (CCAs), and the CRC has been introduced to fill this policy gap. It aims to make large businesses and public sector organisations more energy efficient. By 2020, it could potentially be saving 4.4 megatonnes of CO 2 (MtCO 2 ) equivalent to 1.2Mt of carbon and 1 billion every year. 1 What is the CRC? In this section we introduce the primary elements of the CRC, the timing of the scheme, and its role alongside other policy. Primary elements of the CRC The CRC comprises three primary elements: 1. Emissions reporting requirement 2. A new carbon price 3. Ranking of participants in a performance league table. CRC participants must regularly report on and purchase allowances for their emissions. The cost of buying allowances from the government will be recycled to participants based on their share of the scheme s emissions at the start of the scheme and how well they perform relative to other CRC participants in reducing emissions. Further information The Environment Agency has produced extensive guidance on the CRC scheme, which you can download here: www.environment-agency.gov.uk/business/topics/ pollution/98263.aspx 1 Department of Energy and Climate Change, Carbon Reduction Commitment: government response and policy decisions, October 2009.
2 Emissions reporting requirement If your organisation is a participant in the CRC, you must measure your energy supplies accurately and: provide a footprint report in 2011 that shows emissions from electricity and fuel supplies in the 2010/2011 financial year report emissions in an annual report in 2010/2011 and in each subsequent year keep records of these emissions in an evidence pack, which may be audited by the CRC regulators. 2 A new carbon price From the 2011/2012 financial year, CRC participants will need to buy allowances for every tonne of carbon they emit and then hand over these allowances to the scheme administrator. You can purchase allowances in three ways: a. directly from government b. from other CRC participants or third parties c. through the safety valve, allowing the purchase of allowances from the EU ETS market. Directly from government During the introductory phase that runs until March 2013, your organisation may buy any number of allowances in a government sale at a fixed price of 12/tCO 2. The first sale is in April 2011. From 2013, the number of CRC allowances will be capped and the annual sale of allowances will be conducted via an auction. The price will depend on demand for allowances and could be significantly higher than in the introductory phase. To participate in the auction, you must submit a bid schedule that states how many allowances you wish to buy at different prices. The government will aggregate all the bids to determine the price corresponding to the volume of allowances for sale. Every participant then receives the number of allowances they bid for at this auction clearing price. The money raised by the government from the sale of allowances each April will be recycled back to participants six months later in October. Each organisation will receive a portion of the total recycled amount based on its percentage share of total CRC emissions in 2010/2011. It will also receive a bonus or penalty, based on its place in the league table which reflects whether its emissions have gone up or down. From other CRC participants or third parties Your organisation can also buy and sell allowances from or to other CRC participants and third parties via the secondary market. Through the safety valve To ensure that CRC allowance prices do not rise much above the EU ETS allowance price, the CRC allows organisations to purchase additional allowances from the administrator via the EU ETS safety valve. The administrator will purchase these allowances from the EU ETS market, and your organisation will either pay 14/tCO 2 or the EU ETS price whichever is higher at that time. The price through the safety valve will always be a minimum of 14/tCO 2. 2 The Environment Agency is the regulator for England and Wales, and for Scotland and Northern Ireland the regulators are the Scottish Environment Protection Agency (SEPA) and the Northern Ireland Environment Agency (NIEA) respectively.
3 Ranking of participants in a performance league table The CRC performance league table will show how each participant is performing, compared to others on the scheme. Your league table position each year will be determined by performance in three metrics: a. early action metric: 50% of your score is based on what percentage of your organisation s electricity and gas supplies is covered by voluntary automatic meter readings (AMR) in the year to 31 March 2011. The other half is based on the proportion of your CRC emissions certified under the Carbon Trust Standard or an equivalent scheme. b. absolute metric: the percentage change in your organisation s emissions, compared to the average of the previous five years (or number of years available until 2014/2015, when phase 2 begins). Further information Visit www.carbontruststandard.com to find out about achieving the Carbon Trust Standard. c. growth metric: the percentage change in emissions per unit turnover, compared to the average of the previous five years (or number of years available until 2014/2015). Each year, your league table score will be calculated as the weighted sum of your ranking in each of the three metrics: (Weighting Early action metric x Early action metric) + (Weighting Growth metric x Growth metric) + (Weighting Absolute metric x Absolute metric) = League table score The weighting of the three metrics changes each year, and in the first year the position is based on only the early action metric. The maximum bonus or penalty also changes each year. Your organisation s recycling payment will be affected by your position in the league table, with the best performer receiving the maximum bonus, and the worst performer receiving the maximum penalty. The maximum bonus or penalty will start from ±10% of your base recycling payment and will increase by 10% each year until it reaches 50%. Alongside the league table there will be additional information indicating each organisation s commitment to carbon reduction, including how much renewable energy they are generating onsite. Figure 1 shows how the weighting of the three metrics and the maximum bonus or penalty changes over time. Timing of the CRC The CRC came into force in April 2010, and is divided into phases the first beginning in April 2011. The introductory phase is three years, and all subsequent phases consist of five trading years. Before each new phase begins, you will have to qualify to continue on the scheme and register your participation. In the introductory phase, the key timings are as follows: Qualification year qualification for the introductory phase is based on your half-hourly electricity supplies during the 2008 calendar year. Registration period as shown in Figure 1, you must have registered for the introductory phase via the CRC online registry by 30 September 2010. The first capped phase starts in April 2013. However, qualification for this phase will be based on your energy use from April 2010 to March 2011, and you must have registered for it by September 2011.
4 Figure 1 Timeline of key dates for CRC introductory phase April 2010 April 2011 April 2012 April 2013 30 September Registration deadline April First Government sale of allowances April Second Government sale of allowances April Capped phase starts, first auction of allowances July Footprint report due First annual report due covering 2010/2011 emissions July Second annual report due Surrender allowances for 2011/2012 emissions July Third annual report due Surrender allowances for 2012/2013 emissions October First recycling payment October Second recycling payment October Third recycling payment Feb Dec Oct Aug Jun Apr Feb Dec Oct Aug Jun Apr Feb Dec Oct Aug Jun Apr Feb Dec Oct Aug Jun Apr Metric weightings Early action 100% Absolute 0% Growth 0% Metric weightings Early action 40% Absolute 45% Growth 15% Metric weightings Early action 20% Absolute 60% Growth 20% Bonus/ penalty: +/-10% Bonus/ penalty: +/-20% Bonus/ penalty: +/-30% CRC s role alongside other policy The CRC aims to significantly reduce UK carbon emissions not covered by other pieces of legislation. The primary focus is to reduce emissions in non-energyintensive sectors in the UK. This complements the role of CCAs and the EU ETS, which are directed primarily at energy-intensive organisations. Alongside the CRC, organisations can take advantage of subsidies for renewable electricity and heat. For renewable generation of electricity, organisations can be rewarded with Feed-in Tariffs (FITs) and Renewable Obligation Certificates (ROCs). To support producers of renewable heat, a Renewable Heat Incentive (RHI) is also under consideration.
5 Does the CRC affect you? Around 20,000 organisations will be affected by the CRC, and around 5,000 organisations will be required to participate. Is your organisation included in CRC? If you had at least one half-hourly electricity meter settled on the half-hourly market and your metered electricity supply in 2008 was greater than 6,000MWh, you are a full participant in CRC. As a participant, you must record, report on and purchase allowances to cover your CRC emissions. If you had at least one half-hourly electricity meter settled on the market, but used less than 6,000MWh, you don t qualify for the CRC. However, you must still provide the administrator with a list of all your organisation s HHMs settled on the market and calculate how much electricity you were supplied through them. This includes any automatic meter reading meters. Once you have made that disclosure, you don t need to purchase carbon allowances or participate in the CRC. How is an organisation defined? For the purposes of the CRC, organisations are defined by the Companies Act 2006 definitions of parent and subsidiary undertakings. Public authorities are defined by the Freedom of Information Act 2000. Private sector The qualification rules for CRC apply to the highest parent company in a group. There are also specific rules for different types of organisations, such as franchisors and joint ventures, so consider whether these are relevant to you. Overseas companies must appoint a UK primary member to account for energy supplies consumed in the UK. If your organisation has large subsidiaries that would qualify for the CRC in their own right, these organisations have the option to participate independently from the organisational group. These large subsidiaries are called Significant Group Undertakings (SGUs). More information is available in the Environment Agency guidance at www.environment-agency.gov.uk/ business/topics/pollution/98263.aspx Public sector All UK government departments are mandated participants and therefore must register. The Secretary of State can also make it compulsory for other local government organisations to participate. State-funded schools, academies and City Technology Colleges in England and Wales will be grouped with their local authority. English universities will also be grouped with their independent colleges to determine qualification.
6 Which emissions are included? Figure 2 Calculating your CRC emissions The emissions regulated by the CRC are a subset of your organisation s total emissions from energy use. Total energy use emissions are those from consumption of electricity, gas, diesel, coal and other fuel types. To calculate your CRC emissions, you must firstly remove all supplies not covered by the scheme. These include supplies from transport, domestic accommodation, energy consumed outside the UK and any unconsumed supplies. The remaining emissions are called relevant emissions. From those relevant emissions, remove any covered by electricity generating credits. If you generate electricity from renewable sources and do not claim ROCs or FITs, you may be able to claim electricity generating credits. These can be subtracted from your CRC emissions, meaning you have to buy fewer allowances. Next, remove emissions of any subsidiaries with at least 25% of relevant emissions covered by CCAs. At this stage, you have derived your organisation s total footprint emissions. At least 90% of your total footprint emissions must be covered by the CRC, CCAs, or the EU ETS. You must include all emissions from core sources gas and electricity through correct meters. However, you can exclude up to 10% of your total footprint emissions if these are from other non-core residual supplies. Finally, remove all emissions covered by CCAs and the EU ETS, and you have derived your organisation s CRC emissions. Total energy use emissions Relevant emissions Total footprint emissions Regulated emissions CRC emissions Remove domestic accommodation, transport and unconsumed supplies. Remove emissions rewarded with electricity generating credits Remove emissions of CCA-exempt members Option to remove 10% of total emissions but not those from core supplies or covered by EU ETS and CCAs Remove emissions covered by EU ETS and CCAs
7 How will this affect you? According to the Department of Energy and Climate Change (DECC), the CRC is intended to deliver annual carbon and energy cost savings of 4.4MtCO 2 and 1 billion by 2020. 3 The impact and opportunity for your organisation will depend on how it performs under the scheme. What s the impact on my organisation? Improving your energy efficiency will save you money and improve your organisation s reputation. The CRC further strengthens the business case for doing this. There is a clear financial incentive to perform well in the CRC. You will reduce the number of emissions allowances you need to buy, and potentially earn a bonus on your revenue recycling payment. On the other hand, you will have to buy more allowances, and risk a penalty on your recycling payment, if you don t reduce your consumption. The recycling payment is based on two calculations: Your base payment will be the percentage of all CRC emissions your organisation accounted for in 2010/2011, multiplied by the total revenue the government earned from the sale of allowances that year. A bonus or penalty, determined by your organisation s position in the performance league table, is then applied to the base payment to give you the total amount you will receive. So the more you can improve your energy efficiency and reduce emissions, the higher recycling payment you will receive. Figure 3 shows two organisations, A and B, both of which emitted 100,000tCO 2 e in 2010/2011, but have since performed very differently. Organisation A reduced its emissions to 75,000tCO 2 e by 2012/2013 and so needed to buy fewer allowances at 12/tCO 2 e. As a result, it scored well in the three performance metrics and sits at the top of the league table, so its recycle payment will be increased by the maximum bonus of +20%. Organisation B has increased its emissions to 125ktCO 2 e and is now at the bottom of the league table. So it will have to pay the maximum penalty (-20%) on its recycling payment. As a result of lower allowance costs and a bonus on its recycling payment, Organisation A actually earns a net profit of 396,000 after its CRC allowance purchases and recycling payment. This net profit is over and above any gains from energy cost savings. In contrast, because Organisation B has had to buy more allowances and has received a penalty on its recycling payment, it has made a loss of 636,000 on the CRC. In total, Organisation A has over 1 million more than Organisation B at the end of the year. 3 Department of Energy and Climate Change, Carbon Reduction Commitment: government response and policy decisions, October 2009.
8 Figure 3 Example of revenue recycling payments and allowance costs Organisation A Organisation B Allowance costs in 2012/2013 Recycling base payment Organisations emissions in 2012/2013 (ktco 2 e) 75 125 Cost of allowances purchased at 12/tCO2e ( k) - 900-1,500 Total CRC market emissions in 2012/2013 (ktco 2 e) 45,000 Government revenue raised in sale in April 2012 at 12/tCO 2 e ( k) 540,000 Total CRC market emissions in 2010/2011 (ktco 2 e) 50,000 Organisations emissions in 2010/2011 (ktco 2 e) 100 100 Share of total CRC market emissions 0.2% 0.2% Organisations recycling base payment in 2012/2013 ( k) 1,080 1,080 Bonus/penalty on base payment League table position 1 5,000 Maximum bonus/penalty in 2012/13 20% Organisations bonus/penalty in 2012/13 (% of base payment) 20% -20% Organisations bonus/penalty in 2012/13 ( k) 216-216 Total cost or benefit through allowance purchase and recycle payment ( k) 396-636 Act now Your organisation stands to make money and strengthen its environmental credentials through the CRC if it acts now. What s more, cutting your emissions by using less energy will help your organisation save money by reducing energy bills. You can save more from the CRC if you start improving your energy efficiency now, particularly as the cost of allowances may go up after the introductory phase. A company director will need to authorise individual roles when you register. You should let your directors know in advance that they need to do this to speed up the process. Your organisation s position in the performance league table will determine the recycling payment you receive. Organisations that rank higher up will receive a bonus payment; organisations lower down the table will receive a penalty. The first recycle payment in 2011 has a maximum bonus or penalty rate of 10%; this will rise to +/- 50% by 2015. The publicly available performance league table will also improve your organisation s reputation by showing how you compare to all other participants within the CRC.
9 Compliance costs The charge for registering as a participant is 950, with an additional annual fee of 1,290. If your organisation uses less than 6,000MWh per year of half-hourly electricity, you will not need to pay this charge. Because there are six months between when you buy allowances in April and when you receive your recycling payments the following October, the CRC may affect your organisation s cash flow position. The first sale of allowances is in April 2011. What are your immediate legal requirements? Penalties There are several civil penalties that you might face if you fail to comply with the CRC. For example: failing to register will cost your organisation 5,000 plus 500 per day failing to register a HHM will cost 500 per HHM. failing to submit a footprint or annual report by the deadline will cost your organisation 5,000 plus 500 per day. There are also criminal penalties for offences such as falsification and obstruction. Your organisation must have obtained a Government Gateway certificate (GGC) before registering for the scheme. A GGC is used to verify your identity and lets you enter the Government Gateway system. To register, your organisation must have identified key management roles (senior officer contact, primary and secondary contacts) and identify half-hourly electricity supplies in 2008. For the introductory phase, your organisation must have registered by 30 September 2010 via the online registration: www.crc.environment-agency.gov.uk/ crcregistry/web/login?execution=e1s1 Also, you should start collating an evidence pack to demonstrate that you comply with the CRC, and continuously update these records throughout the scheme. For the introductory phase, you will need to provide one footprint report and three annual reports. However, some Phase 2 reporting requirements also occur during those three years. Our compliance checklist sets out everything you need to do (see Figure 4).
10 What do I do next, and how can the Carbon Trust help? Taking a strategic approach to the CRC can help integrate proactive carbon management within your business. Figure 4 gives a checklist of the key compliance and strategic actions your organisation can take to make the most of the CRC. What do you need to do straight away to comply? 1. Define the extent of your organisational structure [see How is your organisation defined]. 2. Determine whether your organisation meets the qualification criteria [see Timing of the CRC]. 3. Create a comprehensive and accurate record of your organisation s energy consumption in the footprint year, 1 April 2010 to 31 March 2011. 4. Calculate the emissions of your entire organisation. 5. Identify individuals to fill management roles for CRC compliance. One of your directors must authorise these people when completing registration. Your organisation will also need to manage reputational impacts, communications, carbon market risks and any other CRC impacts relevant to your organisation. 6. Your organisation must have registered via the online CRC registry by 30 September 2010. Take early action The early action metric will account for 100% of your organisation s position in the first performance league table. You should install AMR and obtain the Carbon Trust Standard as soon as possible to maximise your score in this metric. This will help you achieve a better position in the performance league table and potentially profit from the CRC. Understand and reduce It is vital that your organisation understands its emissions and how you can reduce these. By doing this, you can make the CRC an opportunity and prepare for bidding in the auction in capped phases. Your bid schedule should be based on a good understanding of emissions reduction options, how much they will cost and the potential carbon savings they will deliver. This will help you make an informed decision on how many allowances to bid for at each price. Make the most of the CRC The CRC puts a price on carbon emissions, creating an opportunity for organisations who can improve their energy efficiency. The scheme provides an incentive to develop a sound carbon reduction strategy and implement a robust action plan, which should be set against carbon targets for your organisation. The Carbon Trust has a range of services and online resources to assist you with these actions. Find out how we can help by ringing the Carbon Trust CRC advice line on 0800 085 2005.
11 Figure 4 Checklist of compliance and strategic actions for participants in the CRC Introductory phase 1st capped phase Compliance actions Strategic actions Compliance actions Strategic actions Create and update evidence pack, monitor energy use September 2010: Collate all 2008 HH electricity supply data September 2010: Assign management roles to individuals Online registration/information disclosure by 30 September 2010 April 2010: Buy allowances in Government sale July 2011: First annual report July 2011: Footprint report October 2011: Receive first recycling payment April 2012: Buy allowances in Government sale July 2012: Second annual report July 2012: Surrender allowances for 2011/2012 October 2012: Receive second recycling payment July 2013: Third annual report July 2013: Surrender allowances for 2012/2013 Plan out role of automatic meter reading Apply for the Carbon Trust Standard Work with the Carbon Trust to identify and implement carbon reduction opportunities, prioritise those that cost less than 12/tCO 2 e Continue automatic meter reading strategy Implement and review carbon reduction opportunities Develop and road test carbon trading strategy, trading allowances on secondary market and via safety valve Apply for renewal of Carbon Trust Standard Continue road testing and refining carbon trading strategy, trading allowances on secondary market and via safety valve Implement and review carbon reduction opportunities April 2010 April 2011 April 2012 April 2013 Online registration/information disclosure by 30 September 2011 July 2012: Footprint report April 2013: Buy allowances in Government auction July 2013: Annual report October 2013: Receive first recycling payment Identify carbon reduction opportunities, highlight those that cost less than 12/tCO 2 Review carbon reduction opportunities Create strategic bid schedule, based on current cost of carbon Decide on voluntary opt-in of residual sources 1st capped phase begins Act on carbon trading strategy, trading allowances on secondary market and via safety valve Implement and review carbon reduction opportunities Create and update evidence pack, monitor energy use Introductory phase ends