UK: The CRC - Making Reform Work For The Public Sector

Last Updated: 11 March 2011
Article by Nicholas Walker

The uncertainty surrounding the future of the Carbon Reduction Commitment Energy Efficiency Scheme (CRC) continues. However, amongst this uncertainty there may be an opportunity to make the scheme work better for public sector participants.

The CRC was on the drawing board for a long time before finally coming into force last year. Almost as soon as the deadline for registration passed, at the end of September, fundamental changes were announced in the Comprehensive Spending Review (CSR).

Both parties in the Coalition Government are critical of the complexity of the CRC and, in February, DECC launched five discussion papers on possible reforms. DECC is open to revisiting all aspects of the scheme and has sought views on, amongst other things, "the treatment of public versus private sector participants".

What changed?

The most significant change announced in the CSR was the scrapping of Recycling Payments. The CRC was originally intended to be a 'revenue neutral scheme' – where the net cost of a £12 Allowance (representing one tonne of CO2 emitted) for even the worst performer was to be around £1.20. The changes announced meant that the cost of each Allowance would be £12 to all participants, adding 10% to the cost of energy and operating for all intents and purposes as a carbon tax.

The cost of Allowances is certain to rise above £12 in the coming years – whether or not the cap and trade element of the CRC is retained. What's more, the revenue generated by the sale of Allowances - which at a predicted £1 billion per year is significant - will go straight to the Treasury. The Green Investment Bank was announced at the same time as these changes to the CRC and not hypothecating the funds raised from the sale of Allowances to the GIB is surely a missed opportunity to advance the move towards a low carbon economy.

Drivers for change.

The changes announced in the CSR have transformed the drivers of the scheme from the juicy carrot of revenue and good PR to the gnarled stick of taxation. The initial purpose of the CRC was, primarily, as a mechanism for behavioural change - the best performing participants would have made money from the scheme, as well as enjoying the green kudos of being ranked at the top of the CRC league table. This element of competition, coupled with the increasing costs of buying allowances as the cap and trade element of the scheme kicked in, was to have driven participants to make ever greater carbon savings. The public sector was included in the scheme and, in order to show how it was leading by example, even Government Departments that were too small to meet the qualification criteria were expected to participate. Now that the CRC is, in effect, a tax there is a valid argument that public sector participants should be treated differently from those in the private sector.

Public v Private

During the CRC registration process it became apparent that the scheme's regulator, the Environment Agency (EA), had significantly overestimated the number of participants. The EA explained that it had not appreciated the degree to which many participants were interconnected.

What this means in practice is that private sector participants are, to a greater extent than first anticipated, large organisations which will likely have the budget, access to capital, expertise, manpower and management systems in place to implement an effective carbon reduction strategy and manage their energy efficiency across their whole CRC group. Large participants can also take advantage of their buying power when investing in carbon reduction technologies.

By contrast, the CRC has been unleashed on the public sector in a period of unprecedented cutbacks. My own view is that the changes could hit the public sector particularly hard, placing those with severe budgetary constraints in something of a Catch 22; because a lower annual bill for Allowances requires some investment and, once the extra money has been found for the purchase of Allowances, there may simply be nothing left to invest.

Public sector participants may find life even harder (a Catch 44, if you like) because, even if they do find room in their budget to invest in carbon reduction technologies, they face the added encumbrance of the procurement rules.

If the CRC League Table is retained after the scheme is reformed, there is a danger that it could begin to mimic the Premier League – with the same very rich players occupying the top spots, some medium sized private sector entities in the relative comfort of mid table obscurity and, fighting it out at the bottom, the cash starved public sector. Recycling payments may have been complicated, but they would at least have levelled the playing field across the public and private sectors – all participants would have got back more or less what they put in, plus or minus a little bit depending on the effort they had made to reduce their CO2 emissions.

Level the playing field.

There is quite a simple way to ensure that public sector participants have the means to invest in carbon reduction, perhaps for an introductory period. All that the Government needs to do is give public sector participants Allowances at a discounted rate or, better still, free. There are a number of ways of doing this, for instance:

Public sector participants could be allowed to offset the costs of any carbon reduction programmes/equipment purchased in the previous year against the cost of Allowances; Public Sector participants could buy their Allowances at a 50% discount; Public sector participants could be given a bloc of Allowances equivalent to 75% of their previous years CO2 emissions – leaving a shortfall of 25% and providing an incentive to make real CO2 savings.

There is an argument that this treatment of the public sector is unfair but it is not without precedent in the private sector. When the EU Emissions Trading Scheme (EU ETS) came into force, participants were initially given free Allowances (EUA's) on the basis of their historical emissions (an allocation process known as 'Grandfathering') and in recognition of the fact that participants would be at a competitive disadvantage over their competitors in other parts of the world who did not have to participate in the scheme.

Treating public sector participants differently doesn't, and shouldn't, be permanent but a period of a few years would provide public sector participants with some time to divert the costs of buying Allowances into carbon reduction projects. If the aim of the CRC remains to change the way we, as a society, think about energy and consumption it is a price well worth paying.

The consultation runs until 11 March. Further details can be found here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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