UK cap and trade scheme kicks off

C&I Issue 7, 2010

The UK government’s cap and trade scheme to improve energy efficiency is set to begin registration this month, but almost half of businesses participating believe that government guidance has been inadequate and are unsure of how to calculate their CO2 emissions, according to an npower survey. Several chemical companies contacted appeared unaware of the scheme. The Chemical Industries Association (CIA) estimates that the chemical industry will be the seventh biggest participant in the CRC Energy Efficiency Scheme, which will affect a wide range of UK businesses, from hotel chains and government organisations to supermarkets.

The new regulations will be mandatory for all organisations in the UK, public and private, that use more than 6000MWh/year or buy their power on the half hourly meter. The scheme aims to limit their emissions with a ‘carrot and stick’ approach that will be administered by the Environment Agency (EA).

‘In general we think this sector is reasonably well prepared, compared to some others, partly because we are offering a CRC Registration Service,’ says Chris Reynolds, competitiveness & climate change executive at the CIA. ‘However, there will be pockets where awareness is poor and this is partly because the official [intraorganisation] communication has been quite scattergun.’

The CRC, which covers 50-60m t of CO2 emissions, eventually expects to be making savings of 4m t of CO2/year by 2020. Tony Grayling, head of climate change and sustainable development at the EA, says that savings could be nearer to 12m t of CO2/year if tighter caps are imposed. He also points out that the EA will be caught up in the new legislation and is preparing itself for the CRC by looking at its own energy intensive activities, such as water pumping.

Once the scheme is up and running, participants will need to buy permits for each tonne of CO2 emitted as a result of their electricity consumption. However, unlike other cap and trade schemes, notably the EU’s Emissions Trading System (ETS), it is not a tax that ends up in the government’s treasury, but is instead recycled to participants. This means that an organisation that cuts its energy use will recover all the money it paid for permits, plus a bonus. An organisation that performs poorly, compared with its peers, however, will lose some of the money it paid for credits. In 2011-12, the scheme’s first full year, organisations stand to gain or lose 10% of the cash they paid for credits. This percentage will be ratcheted up, with the bonus or penalty eventually reaching 50% of the credits bought in 2016-2017.

Organisations that shrink or grow substantially will have their targets adjusted by examining their turnover to emissions ratio over the past five years to ensure that they are not too taxing or lacking in ambition.

The credits will initially be bought direct from government, but will move to an auctioning scheme by 2013, which will see the market setting the price. Organisations in the CRC will be able to trade credits between themselves to meet their needs and the cap on the number of credits will be revisited every five years. The scheme will start with an initial floor price of £12/t of CO2.

But there are questions over whether the financial penalty is high enough to cause behavioural change, with the maximum fine possible in the first year of the scheme only £12,000. This is just a drop in the ocean for many of the businesses included, some of which have sales of billions of pounds.

‘It’s about reputational pressure as well, as your performance on this scheme will be published in a league table with all the other participants,’ says Grayling. ‘One of the purposes of this scheme is to raise the issue up to the senior management level of the organisations concerned.’

Stan Higgins, ceo of the North East of England Process Industry Cluster says: ‘It’s difficult to say what the impact will be for our industry – it’s another complication and extra costs in an already highly complex system.’

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