From 1 April 2010, the first phase of the Carbon Reduction Commitment scheme ("CRC") will require certain public and private sector organisations to become more energy efficient. The scheme is one of the government's methods of tackling carbon dioxide ("CO2") emissions, by requiring the heaviest users of electricity to monitor and record their CO2 emissions.

This is one of several initiatives aimed at reducing greenhouse gas emissions by 80% by 2050, compared with 1990 levels. A 'cap and trade' mechanism will provide financial incentives for organisations to reduce their energy usage and therefore their CO2 emissions. CRC will be run by the Department for Energy and Climate Change ("DECC") and the Environment Agency ("EA").

Eligibility

There will be two levels of required involvement in the scheme – full participation and information disclosure. In total it is estimated that around 20,000 organisations will be required to participate in the scheme, but only around 5,000 of the heaviest electricity users are likely to be required to participate fully. This will include local authorities, supermarkets, major retailers, banks and central government departments.

The qualification criteria for the introductory phase of the scheme are based on how much electricity organisations were supplied with in 2008. All organisations that have at least one half hourly meter ("HHM") settled on the half hourly market will be required to disclose information, but only those which consumed at least 6,000 MWh through all HHMs will be required to register as participants of the scheme.

Calculating emissions

Between April 2010 and March 2011, which is the first 'footprint year', participants are required to record CO2 emissions. Certain types of CO2 emissions can be excluded for CRC purposes. Emissions covered by the EU Emissions Trading Scheme ("EU ETS") or by a Climate Change Agreement need not be included. Energy from sources such as transport, domestic accommodation and unconsumed supply can also be deducted. A footprint report must be submitted to the CRC administrator by 29 July 2011, giving details of emissions figures.

Purchasing allowances

Allowances are a crucial part of the CRC. The first year of the CRC will be a reporting year only. Participants will not be required to purchase allowances until April 2011. Once this introductory phase is over and the CRC scheme is fully operational, at the beginning of the compliance year, participants will be required to purchase as many allowances as they think they will need to cover their CRC emissions. To begin with these will be sold at a fixed price of £12 per allowance. If additional allowances are required, these can be purchased on the secondary market from other CRC participants and traders registered with the CRC, or via the scheme's 'safety valve mechanism'.

Four months after the end of the compliance year, participants will be required to submit a report and must surrender one allowance for every tonne of CO2 emitted. Once all participants have reported their figures, a league table will be compiled. This will rank participants according to their CO2 emissions. This public league table is seen as one of the key incentives to encourage energy efficiency.   

After the introductory phase, a cap on allowances will be introduced, which will limit the total number of allowances available to be purchased by participants. Allowances will also be sold by way of auction, rather than at a fixed price. This is the 'cap and trade' mechanism, which will further encourage participants to reduce their emissions so that they need to purchase fewer allowances.

Revenue recycling

The CRC is intended to be 'revenue neutral' as far as the government is concerned. All the revenue raised by the sale of allowances will be recycled and returned to participants, according to how well they have performed in terms of energy efficiency. This gives organisations a financial incentive to reduce their CO2 emissions. If an organisation uses less electricity, they will not only need to purchase fewer allowances, but will receive a higher percentage of the revenue generated from the scheme – a double incentive to improve energy efficiency.

The impact of the CRC on renewable energy has been one point of criticism. It is thought that there has not been enough focus on incorporating renewable energy into the incentive scheme. Renewable energy is not considered to be "carbon neutral" under the CRC, so where on-site renewable energy generators ("OREGs") use the energy generated to supply themselves, in terms of the CRC this will still be deemed to produce the same amount of emissions as electricity generated from non-renewable sources. In other words, there is no incentive in terms of renewable energy, although many people believe there should be.

Next steps

The registration period for the CRC begins in April 2010 and runs until September 2010. Those organisations which qualify for the scheme must register as participants, or provide the relevant disclosure information during this period. If you would like any further information or advice on how the CRC might affect your organisation please contact either Richard Cockburn or Hazel Vallance.

04 March 2010

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