The UK’s Carbon Reduction Commitment could bring financial rewards for participants

Feckless wasters of energy beware. From April next year, large corporations and public bodies in the UK not paying enough attention to their power consumption could find themselves named and shamed under a government scheme called the Carbon Reduction Commitment (CRC).

Electricity squanderers could also find themselves subsidising the less profligate. The CRC is a cap-and-trade scheme, with firms obliged to buy at auction or on the carbon market sufficient allowances to cover their emissions, calculated from their energy use. But unlike the European Union’s emissions trading scheme (ETS), the auction revenues will not be eagerly swallowed up by government coffers. Instead, the money will be given back to CRC participants based on their energy performance.

The European commission, which in July gave the CRC the green light under European Union state aid rules, described this aspect as “novel”. Participants will be ranked once a year in an energy-cutting league table, measured mainly on their absolute carbon reductions since the scheme’s start. The higher in the table a company is, the bigger its CRC pool payment.

The CRC is mandatory for big energy users – those with annual electricity bills of £500,000 or more. It is designed to catch companies such as banks, supermarkets and hotel chains. The CRC will also apply to public sector bodies such as large local authorities and universities. Power plants or heavy industry already covered by the EU ETS or by climate change agreements with government are excluded.

Ralf Martin, a research economist at the London School of Economics, says that in principle the CRC makes sense for Britain because services account for two-thirds of the British economy and the CRC deals with sectors “which haven’t been captured by the [emissions-reduction] agreements so far”.

For the government, securing emission reductions from the service sector is crucial. Binding EU legislation agreed at the end of 2008 commits Britain to reducing its greenhouse gas emissions from non-ETS sectors by 16% by 2020 compared with 2005.

Three-stage start-up

The CRC will kick off in April 2010, when an estimated 5,000 participants start to report their power consumption, from which a calculation of their greenhouse gas emissions can be made. Auctions will begin in April 2011. Allowances will each represent one tonne of carbon dioxide and will have a fixed £12 price tag. The third phase of the scheme will start in April 2013, when an overall allowances cap will be introduced, meaning companies will have to progressively reduce their emissions, or trade with other participants for extra credits.

Business is largely resigned to the scheme, though critical on some details. Beth Hinde of the British Retail Consortium says business “generally has to become much more carbon aware” and the CRC is “something that had to come”. However, she adds that the government could have designed the scheme better so that it does not take money from companies up-front for carbon allowances, and then hold onto it for several months before handing it back based on energy performance rankings.

But according to the UK government, the scheme could, in the period to 2020, generate savings of £1bn for participants, and could reduce the amount of carbon dioxide going into the atmosphere by 4.4m tonnes. If that happens, everyone will be a winner.

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