The Carbon Reduction Commitment : Part I

A big thing is on its way, and one which could see the beginning of a UK which leads the world on the pathway to greater energy efficiency. The Carbon Reduction Commitment Energy Efficiency Scheme (the "CRC") comes into effect in April 2010; a carbon cap-and-trade scheme which will require all entities or corporate groups whose UK electricity use in 2008 was 6,000MWh or above to report on their annual energy use and buy carbon allowances to cover the coming year's projected emissions.

Once the CRC is up and running, participants will buy allowances from the government each April, with an unlimited number available at a fixed price until the second scheme phase begins in April 2013. Each of these covers one tonne of CO2, and participants will be required to hold and surrender sufficient allowances to cover their actual annual emissions, which they will have to report on after performing an energy self-audit. Inaccurate reporting, or the holding of insufficient allowances will carry significant financial penalties, and publication of the organisation's failure on the Environment Agency's website.

From April 2013, the April sales will become sealed bid uniform price auctions, where a limited number of allowances are offered to all participants. This number will gradually decrease during the lifetime of the scheme. Herein lies part of the reason the scheme is such a big thing; it means UK corporates will, for the first time, have to scrutinise and account for every energy using source within their organisation and reduce this energy use to avoid significant costs in the future. The auctioning and capping processes which starts in 2013 are likely to ensure that the price of allowances rises as time passes.

All scheme participants will then be ranked in a league table according to their performance, published annually by the Environment Agency. Performance is determined largely by looking at an organisation's absolute emissions reductions; this means the organisation's baseline emissions (its average emissions over the past five years) are compared to the figures from their latest emissions report to determine the decrease or increase over the year. Now, here's the rub - the scheme is not a carbon tax. All the revenue raised in the April sales / auctions will be recycled to participants come August, and the amount they receive back will be commensurate with their position in the league table. Those at the top will receive back the money they put in, plus a bonus. Those at the bottom will receive back less than they put in.

The CRC's league table is set to become one of the first objective and easily accessible measures of a company's environmental efforts versus its main competitors. As soon as performance data is published, it will be used by sectors to create their own internal tables to compare like against like. With players in the financial markets already looking for ways to short sell stocks in 'dirty' companies, as measured against new sustainability indices, poor performance may come to do more than damage a company's reputation.

Given we are a long way off seeing each product on the shelves advertise details of its carbon footprint in any meaningful way, this will make it infinitely easier for a growing group of 'green consumers' to consciously patronise brands which are genuinely living up to sustainability statements made in their annual reports and advertising campaigns.

Statements on sustainability within such reports will now come under far greater scrutiny from NGOs, who are likely to use the league table to pick apart the usual inoffensively meaningless environmental statements made by management. It is also quite plausible that activist shareholders of companies purporting to place great emphasis on sustainability at management level, may choose to take action if stock held fails to perform partly due to penalties being incurred in the scheme and an increasingly important group of green consumers looking elsewhere.

Part II of this article on the CRC will follow shortly, and will take a look at where the UK government might take the scheme next.