UK: The Carbon Reduction Commitment

Last Updated: 2 November 2009
Article by Matthew Dumbrell

UK companies and organisations with substantial electricity consumption are slowly coming to terms with the Carbon Reduction Commitment (CRC) program – the UK government's mandatory trading CO2 emissions trading scheme -- and those that haven't are running out of time to do so.  This note aims to summarise the key features of the CRC program, to help identify whether the CRC program applies to your organisation, and steps you will need to take if the CRC program applies to your organisation.

Who Will Be Affected?

The CRC program is, in essence, a cap-and-trade CO2 emissions trading scheme for large electricity consumers in the UK.  The program applies to both the public and private sectors, but is only designed to capture emissions in the UK (see references to foreign parent companies below).  The program is also designed to work in parallel with existing carbon emissions schemes (see below), aiming to capture those large scale consumers (e.g. utilities) not already targeted by existing schemes.

The program's yardstick is half hourly metered electricity usage.  Half hourly meters (HHM) (also known as "00" electricity meters) are used on sites with a large supply of commercial electricity, generally with a peak load above 100kW.  These sites are equipped with a meter reading every 30 minutes of the day (hence the reference to the 'half hourly' primary meter).   The program doesn't just apply to mandatory HHMs or meters specifically designated as HHMs or 00, however.  The CRC program will cover all organisations all meters that monitor electricity consumption on a half hourly basis, including those using voluntary automatic meters, "pseudo" half hourly meters and remotely-read Automatic Meter Reading meters that produce half hourly data.  Remember that metering is the key to qualification and it makes no difference if a participant's account is settled on the half hourly market or not.  If in doubt about your metering arrangements, be sure to contact your electricity supplier.

An organisation will qualify as a participant in the CRC program if during the calendar year ending 31 December 2008 (known as the Qualification Year) it had at least one HHM within its organisation settled on the half hourly market and the total half hourly electricity consumption across the organisation was at least 6,000 megawatt-hours (MWh).  Note that organisations that meet the HHM criterion but consume less than 6000MWh of half hourly electricity will not qualify as a participant, but will still need to submit information to the administrator at the end of the Qualification Year (the program timetable is discussed further below)

How Does The CRC Program Deal With Corporate Groups And Joint Ventures?

Under the CRC program, corporate subsidiaries are considered as part of the larger group of their ultimate parent which is ultimately designated the 'primary member' acting on behalf of the group.  Subsidiaries pass on their electricity consumption information to the primary member for collation and submitting to the CRC administrator.  If the parent is not located in the UK, then a subsidiary of that organisation in the UK must be nominated to represent the organisation. 

Shareholders holding a majority stake in a joint venture will need to aggregate the JV's consumption with their own (which could see the CRC program having a bearing on decisions to invest in JVs).  Where a JV has no majority shareholder, and if it meets the thresholds above, it will report on its own basis to the CRC scheme.  Note that primary members will need to determine the implications of the group/JV structures as at 31 December 2008 for the purposes of the Qualification Year.

The Responsibilities Of Landlords And Franchisees

The CRC program's rules specify that any tenant whose landlord has qualified as a CRC participant and is a counterparty to the tenant's contract for electricity supply will be captured under the landlord's aggregate consumption calculation.  Similarly, franchisees are aggregated under their franchisor's calculations, even if the franchisee is owned by another CRC participant.  Landlords and franchisors are not permitted to transfer these obligations back upon their tenants and franchisees, however they may seek to charge costs back to their tenants/franchisees by agreement.

How Does The CRC Interact With Other Emissions Trading Programs?

The CRC program aims to minimise administrative overlap with other emissions trading programs (which are generally targeted at energy intensive industries and utilities) and will only cover emissions outside of Climate Change Agreements (CCAs) and the direct emissions already covered by the EU Emissions Trading System (EU ETS). Any subsidiary of an organisation with more than 25% of their energy use emissions covered by a CCA will be completely exempt from the scheme (however the remainder of the group will still be captured).

The CRC program also contains exclusions for transport emissions and emissions related to onward supply.  At the time of writing, guidelines for these exclusions were yet to be released.

What Information Goes In The Annual Report?

Each CRC participant is required to submit to the CRC administrator an Annual Report as part of the allowance/report/offset timetable discussed below.  A participant's Annual Report provides a calculation of its total CO2 emissions for a given Compliance Year.  Participants first need to calculate their total fixed point energy consumption from electricity, gas and any other fuel sources such as LPG, diesel and coal.  From these baseline energy consumption figures, participants will then calculate the level of CO2 emitted by each source of energy, giving an aggregate CO2 emissions figure.  From this figure participants may then account for transport and onward supply exclusions (mentioned above) and any changes to their organisational structure.  Any CO2 allowances purchased from the government will then be surrendered or cancelled to match this net CO2 emissions figure (discussed below).

From an administrative perspective, two things should be noted about the compilation of the Annual Report.  Firstly, participants will be required to maintain an 'evidence pack', suitable for submission to the CRC program administrators in the case of an audit.  The pack should contain statements, invoices and any other documentation used to underpin the data in the Annual Report.  Secondly, participants should note that the deadline for submission of their Annual Report is only three months after the conclusion of the relevant Compliance Year, so the compilation of the report should be well in hand prior to the end of the Compliance Year.

Note also that the participants will also need to submit a "Footprint Report" on 31 July 2011, covering the same information as the Annual Report but also specifying any CRC emissions, providing evidence of any CCA exemptions, and demonstrating that 90% of the participant's net CO2 emissions figure as calculated in the Annual Report is covered by the CRC, CCA or EU ETS programs

What Is The Timetable For The Introductory Phase?

As mentioned above, the year to 31 December 2008 is referred to as the Qualification Year for the first Compliance Year of the CRC program, data from which is used to determine qualification for the CRC program on the criteria specified.  The first Compliance Year and the program proper commences on 1 April 2010.  The CRC program progresses on the basis of "Compliance Years", being 1 April to 31 March each year, thereafter.  The Introductory Phase refers to the first three Compliance Years of the CRC program, prior to the introduction of auctioning of CO2 allowances in April 2014.

In the first Compliance Year (1 April 2010 to 31 March 2011), participants register for the program based on their data for the Qualification Year and have their online registry account opened.  Over the course of this first Compliance Year participants will compile their first Annual Report of their total CO2 emissions for that Compliance Year (as per the above). 

The start of the second Compliance Year (April 2011 to March 2012) will be marked by the first opportunity for participants to purchase from the government CO2 allowances for the just-completed 2010/11 and upcoming 2011/12 Compliance Years, at a fixed price of £12 per tonne of CO2 emitted.  This first sale of allowances will be unlimited (with subsequent years capped and sold by auction in order for the CRC program's emissions reductions aims to bite, see below).  Participants may trade allowances on secondary markets at any time during the introductory and capped phases.  Also note that the initial sale of allowances is a "double" sale, offering allowances for the next two Compliance Years, so participants need to be sure to make allowances for this in their budgets.

Participants will need to monitor their CO2 emissions for the first Compliance Year carefully, so that when they submit their Annual Report for the first Compliance Year (due on 31 July 2011) they have purchased sufficient allowances.  On submission of the report, participants will surrender or cancel that number of allowances equivalent to their total CO2 emissions.

In October 2011, participants will receive their first Recycling Payment (paid out of the revenue derived from the CO2 allowance sales), depending on their position in CRC league tables published by the government (discussed below). 

The third Compliance Year (April 2012 to March 2013) will follow the same pattern as the second Compliance Year, commencing with a sale of an unlimited number of CO2 allowances to participants in April 2012, the submission of annual reports and subsequent surrender/cancellation of allowances for the 2011/12 Compliance Year in July 2012, and the second Recycling Payment to participants made in October.

How Are League Tables Compiled And Recycling Payments Made?

As is currently the fashion for most major policy initiatives, participants will be ranked in league tables reflecting their success in meeting certain performance metrics.  These league tables will then be used to apportion Recycling Payments among CRC participants.  At the time of writing, the CRC program guidance indicates the league table metrics will be split into three categories:

  • the Compulsory Absolute Metric (CAM), being the change in annual CO2 emissions of a participant relative to a preceding 5 year average;
  • the Voluntary Early Action Metric (VEAM), being the extent of use by the participant of voluntary Automatic Meter Reading and the extent of participation in the Energy Efficiency Accreditation Scheme or the Carbon Trust Standard; and
  • the Voluntary Growth Metric (VGM), being the change in CO2 emissions per unit of turnover or revenue expenditure.

The weighting of each metric for calculation of each Compliance Year's league tables will shift over time, as follows:

  • 2010/2011: VEAM 100%
  • 2011/2012 and 2012/2013: CAM 60%, VEAM 20%, VAM 20%.
  • 2013/2014 and beyond: VEAM metric to end, CAM 75%, VAM 25%.

Overall, the CRC program is meant to be revenue neutral: all monies collected from CO2 allowances sales and auctions are intended to be returned to participants in October of the relevant year via the league table process.

Participants in the CRC program should note that the league table process offers the opportunity for participants to profit from identifying points in their organisation where a low cost investment in emissions reductions could lead to a significant improvement in league table performance.  However, participants should also be wary of the significant reputational risk inherent in the CRC program's use of league tables, for those companies unable to improve upon previous years.

The Capped Phase And The Auction Process

In April 2003, the CRC program will switch to its "Capped Phase", at which point the unlimited, fixed-price purchase of CO2 allowances will be replaced by an auction of a limited number of CO2 allowances.  It is intended that the number of allowances be reduced in each subsequent Compliance Year. The timings of submission of Annual Reports, surrender/cancellation of CO2 allowance and Recycling Payments will continue as per the timetable for previous Compliance Years.

Further Information

For further information, please visit DEFRA's Carbon Reduction Commitment homepage at http://www.defra.gov.uk/environment/climatechange/uk/business/crc/index.htm.

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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