A change to the UK’s Carbon Reduction Commitment has infuriated companies

Lurking in UK’s October spending review was a nasty surprise for business. Amid all the talk of essential austerity and bringing Britain back from the brink, the chancellor of the exchequer, George Osborne, made a small but fundamental change to the Carbon Reduction Commitment (CRC), a scheme to promote energy savings, and thus generate greenhouse gas reductions.

The CRC is mandatory for large, non-industrial consumers of power, both public and private, such as supermarkets, hospitals and government departments. It was designed to offer both carrot and stick. Participants are obliged to buy carbon allowances to cover their energy-related emissions, and the proceeds were to be redistributed, on the basis of an energy efficiency league table. The participants reducing their energy consumption most would be rewarded, with the rewards paid for by the poor performers.

But the coalition government removed the carrot. Instead of recycling the revenue, the government decided to keep it. Sophie Knight, spokeswoman for the Department of Energy and Climate Change, which administers the scheme, says the change “is part of the department’s way of contributing to the reduction of the deficit”.

Caught on the hop

This sudden switch caught companies completely by surprise – and they are not happy. The British Retail Consortium (BRC) says the plan is “appalling”. Richard Dodd of the BRC says: “We’re very annoyed that what has been several years in development has just been turned into a straightforward tax. They’ve spotted that there was a pot of money and decided ‘we’ll have that’.”

The UK government estimates that the diversion of the CRC cash will raise £1bn a year by 2014-15. The government also put back the first sales of CRC allowances, scheduled for April 2011, until 2012. Knight says there might be more changes. “There are plans to take a further look at the scheme and see what can be done to simplify it,” she says. A consultation process has now started.

Companies may not like it but they will have little choice but to live with the additional cost. The change is not likely to cause dramatic change, such as the relocation of firms, but, Dodd says, “investment in job creation will be hit. If you pile extra costs on businesses they can only respond by reducing costs elsewhere.”

But the amendment is not all bad, says Jane Burston, founder of Carbon Retirement, a carbon offsetting company. The chancellor’s fait accompli “does simplify the scheme and create a definitive cost on carbon which can now be incorporated into business planning. To that end I think the change is a positive step.”

However, the removal of the performance payment means there is less incentive for companies to reduce their emissions. Burston proposes an alternative: instead of setting up a CRC allowance auctioning scheme, simply oblige CRC participants to buy carbon allowances from the European Union’s emissions trading system. These allowances could then be cut, leading to genuine emission reductions by chipping away at the overall EU emissions cap.

“This option was previously not available as there was a need for the scheme to retain revenue to pay for the recycling payment,” Burston says. “The recent change announced under the spending review now makes this option possible.”

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