The Climate Change Act became law on 26 November 2008. The Act is intended to facilitate the UK's transition to a low carbon economy, and to demonstrate the UK's commitment to combating climate change. More detail on the Climate Change Act can be found here.
Many see the Act's introduction as a watershed – the beginning of comprehensive legislation aimed at reducing the impacts of climate change. However, there is already a growing patchwork of regulation and legislation in the UK designed to reduce greenhouse gas emissions. And even where there is not yet formal regulation, some companies are taking steps to differentiate themselves from their competitors on the basis of climate change commitments.
There is no definition of what constitutes climate change law – like climate change itself, the legal expertise required pervades all sectors and legal disciplines. In this note, Wragge & Co's cross-sector experts draw attention to some of the key areas organisations will need to think about in the context of the wider climate change agenda.
Sustainable electricity generation
The central role of energy in the climate change agenda was recognised by the creation of the Department for Energy and Climate Change in October 2008. And, as the government made clear in its recent Renewable Energy Strategy consultation, the development of sustainable forms of electricity generation will play a central role in meeting the UK's climate change targets.
To this end, the government is keen to encourage the development of renewable forms of electricity generation – principally wind, biomass (plant and animal matter, which may include waste in some circumstances), biogas (gases derived from such plant and animal matter), hydro-electric, wave and solar.
The main incentive mechanism for the promotion of renewable electricity generation in the UK is the Renewables Obligation. Renewables Obligation Certificates (or ROCs) are issued to those who generate renewable electricity, who can then earn an income from selling the ROCs.
However, the Government has recently announced (as part of the Energy Act 2008) an intention to introduce a feed-in tariff for 'small-scale low-carbon generation'. More detail on the Energy Act can be found here.
The Climate Change Levy is also used to support sustainable energy, as sustainable forms of electricity generation are eligible for climate change levy exemption certificates (or LECs) – which, like ROCs, can be sold.
Renewable heat generation
Heat generation is set to catch up with electricity generation and transport when the Government introduces a renewable heat incentive. The relevant powers were introduced as part of the Energy Act 2008, but the incentive mechanism is unlikely to be introduced before April 2010.
Details of what form the incentive will take are not yet clear, but it appears likely to follow a similar format to the Renewables Obligation (see above) and the Renewable Transport Fuel Obligation (see below). More detail on the Energy Act can be found here.
Developing your own renewable generation
Increasingly, major corporates wish to develop tangible examples of their commitment to combating climate change. Many are seeking to achieve this by developing their own sources of renewable electricity generation, or (alternatively) contracting to acquire the output from a renewable generating facility that carries their brand.
There are a range of different structures which give the company a varying degree of control and risk - at one end of the spectrum building and operating the project itself, at the other simply leasing land to a third-party developer.
These renewable energy projects can be located adjacent to the company's existing facilities (on-site) or elsewhere (off-site). Where the project is on-site, the electricity can be supplied direct to the company. Where the project is off-site, the electricity generated can be offset against the company's consumption elsewhere. In both cases, the contractual arrangements will need to be considered carefully to maximise the financial benefits available.
Onshore wind remains the most popular choice of generation but proposed changes in the Renewables Obligation (see above) mean that other forms of generation (such as energy crop fuels) should become more viable in the future.
Low Carbon Distributed Generation (ESCOs)
In a similar vein, property developers are increasingly seeking (or being required by planning conditions) to include forms of low carbon distributed energy within new developments. Details on the powers by which such planning conditions can be imposed can be found here.
Such schemes generally involve the incorporation of heat and sustainable electricity generation as an integral part of the development. Natural gas or biomass fired combined heat and power stations are popular options, as well as ground source heat pumps where the site is suitable.
Typically, a developer will commission a third party (or incorporate its own subsidiary) to act as an energy services company (ESCO). The ESCO then finances, builds and operates the scheme – supplying the heat and electricity to the development's tenants on an exclusive basis.
Buying 'green' & low carbon' electricity
A number of companies wish to purchase 'green' or 'low carbon' electricity, and many make corporate social responsibility statements about their commitment to do so.
However, what constitutes green or low carbon electricity is a matter of debate. Different electricity suppliers use different criteria to define their green or low carbon tariffs.
Supplies of electricity that have Renewable Electricity Guarantee of Origin (REGOs) or Climate Change Levy Exemption Certificates (LECs) associated with them are generally thought to be the most robust - evidencing renewable sources or sources that qualify as good quality combined heat and power.
However, pronouncements by Defra and Ofgem (the energy regulator in Great Britain) have cast doubt on whether electricity can be classified as green unless the Renewables Obligation Certificates (see above) are retired.
The status of the electricity a company purchases may also be relevant to any carbon footprint analysis that a company undertakes (see below).
Emissions trading schemes (EU ETS)
In addition to legislation aimed at increasing sustainable electricity generation, there is a growing body of legislation aimed at limiting the greenhouse gas emissions associated with particular activities. In the main, legislation in the UK has taken the form of emissions trading schemes.
Most emissions trading schemes follow a "cap and trade" model. In each scheme year, the scheme participants must surrender a number of emissions allowances (often referred to as carbon credits) that corresponds to their greenhouse gas emissions. A scheme participant is allocated a number of allowances, but to the extent its emissions exceed the allowances allocated to it, it will have to purchase allowances to make up the shortfall (or face a significant financial penalty). A participant whose emissions are less than its allocated allowances can sell the excess allowances for financial gain. As a result, participants able to reduce their emissions at a cost less than the value of the allowances have a financial incentive to do so.
The EU Emissions Trading Scheme (EU ETS) is the most prominent current trading scheme. It currently focuses on energy intensive sectors – electricity generation, and the mineral and paper production sectors, for example – and carbon dioxide emissions. However, there are plans to extend its remit to other greenhouse gasses and to other sectors – such as aviation.
Other emissions trading schemes (CRC)
In addition to the planned extension of EU ETS, a number of further emissions trading schemes can be expected in the UK over the next few years.
The Climate Change Act 2008 not only sets binding targets for the reduction in UK greenhouse gas emissions, it also allows for the widespread creation of emissions trading schemes.
The first such scheme is likely to be the Carbon Reduction Commitment (CRC) - a cap and trade system to apply to large UK energy users in the public and private sectors.
The CRC is expected to apply only to carbon dioxide emissions, and to public and private sector organisations that consumed more than 6,000 MWh of half-hourly metered electricity between 1 January 2008 and 31 December 2008. Although the threshold for compliance is linked to half-hourly electricity consumption, if an organisation meets this threshold, the CRC will apply to emissions from its electricity, gas and other fuel consumption (but not transport emissions or those covered by EU ETS).
An increasing number of companies wish to make statements about the greenhouse gas emissions associated with their products, or about steps they have taken to reduce their greenhouse gas emissions.
The greenhouse gas emissions associated with a product or business are often referred to as its carbon footprint. In October 2008, the BSI published its specification for the assessment of the carbon footprint of goods and services – PAS 2050. This document is also supported by Defra and the Carbon Trust.
The carbon footprint analysis of a product will require assessments of the emissions associated with each step in the supply chain. Companies therefore need to consider the rights they have vis-à-vis their suppliers - to analyse emissions, to require reductions in emissions and to audit compliance.
To the extent that reductions in greenhouse gas emissions directly related to a product or business cannot practically be achieved, many companies are considering offsetting as an alternative.
Offsetting is achieved by funding unrelated projects that either remove a quantity of carbon emissions from the atmosphere, or ensure that a quantity of emissions is not released - planting trees that will absorb carbon dioxide, or developing a wind farm that will displace fossil-fuel generation.
The company may fund such projects directly, but is more likely to act through an intermediary. In either case, the company should be keen to ensure that the project is worthwhile – would the project have gone ahead in any event, is there any double counting?
The most robust schemes are thought to be those that rely on credits recognised by the Kyoto Protocol - Certified Emissions Reduction certificates (CERs), European Union Allowances (EAUs), and Emission Reduction Units (ERUs). These are the only credits recognised by Defra's draft Code of Best Practice for Carbon Offsetting.
The offset is achieved by acquiring and cancelling (or retiring) these certificates so that no-one else can rely on them to make further offsetting claims.
As was mentioned above, the three main energy-consuming sectors in the UK are electricity generation, transport and heat.
In terms of transport, it appears likely that some forms of transport (for example, aviation) will be included within EU ETS (see above). For the moment, however, reductions in emissions from transport are being driven via the Renewable Transport Fuel Obligation (RTFO), which was introduced in April 2008.
The RTFO is based, in part, on the Renewables Obligation (see above). The RTFO requires road transport fuel suppliers to ensure that a certain proportion of the fuel they supply comes from renewable sources. This proportion is initially set at 5% and is expected to rise to 10% after 2010-11. However, in light of public concern, the government is currently consulting on proposals to reduce the rate of increase.
Perhaps less fashionable than offsetting or developing windfarms, many experts argue that we would do better to concentrate on energy efficiency measures.
This is an area less driven by public demand, and more by regulation, including:
- Energy Performance Certificates (EPCs) - which give home owners, tenants and buyers information on the energy efficiency of a property, with the aim that there will be a premium on energy-efficient buildings;
- increasingly stringent Building Regulations and planning requirements; and
- the Carbon Emissions Reduction Target (CERT) - which imposes obligations on energy suppliers to achieve targets for promoting reductions in carbon emissions in the household sector.