Introduction

The Carbon Reduction Commitment is a mandatory emissions trading scheme. To be introduced under powers taken in the Climate Change Act 2008 its twin aims are to improve energy efficiency and reduce the UK's carbon dioxide (CO2) emissions. The scheme is targeted at energy-intensive organisations and is likely to capture organisations ranging from hotel chains to rail operators. All central Government Departments in Great Britain will be caught.

The Government estimates that around 5,000 organisations will be obliged to participate fully in the scheme with a further 15,000 being required to make a periodic information disclosure about their electricity usage. Full participants will be required to, on an annual basis, purchase and cancel allowances matching their CO2 emissions from fixed-point energy sources. Additionally their performance in reducing emissions will be reflected in a published performance league table.

Earlier this year the Government consulted on a draft of the Carbon Reduction Commitment Order 2010 (Order) - the secondary legislation through which the scheme will be implemented. The consultation can be read on the Department for Energy and Climate Change's website and further information on the scheme itself can be found on the Department for Environment, Food and Rural Affairs' website.

A summary of certain key aspects of the scheme follows.

Application

The scheme will be compulsory for organisations which had at least one half-hourly meter (HHM) settled on the HH market in the calendar year 2008 and whose electricity consumption in that year through all HHMs was 6,000 MWh or more. Organisations that used less than 6,000 MWh of electricity but had at least one HHM settled on the half-hourly market will be required to comply with certain information disclosure requirements. Electricity consumption is generally attributed to the organisation which is the counter-party to the electricity supply contract.

While qualification is established on the basis of electricity usage, for those organisations caught, the scheme will apply to emissions from energy use in the form of electricity, gas and other fuel types (for example coal, LPG and diesel)[1].

The scheme targets organisations not sites. Corporate groups will constitute a single organisation for the purposes of both qualification for and on-going compliance with the scheme. Usually the highest parent organisation will participate in the scheme on behalf of all companies in the corporate group. There are specific proposals in the Order for dealing with changes in corporate groups (sales/purchases), and for the application of the scheme to joint ventures, franchise arrangements and certain educational establishments.

Scheme operation

The scheme is split into an introductory phase and subsequent phases. The introductory phase covers the period from April 2010 to March 2013. Subsequent phases will last for seven years.

Each phase has:

  • a qualification period during which organisations must work out whether they qualify for the scheme;
  • a registration period during which qualifying organisations must either submit their information disclosure (information participants) or register as a participant (full participants);
  • a footprint year during which full participants must monitor their emissions from energy use, calculate what emissions are to be included in the scheme and submit that information in a footprint report; and
  • a series of compliance years (each of which runs from 1 April to 31 March) during which full participants must purchase allowances for each tonne of CO2 emitted and monitor energy usage.

Full participants must report their actual emissions in July following the end of each compliance year in the form of an annual report. They must at the same time cancel allowances held by them equivalent to the actual emissions reported.

A performance league table will be produced and published by the scheme administrator in the October following the end of a compliance year with an organisation's position based on how well it has performed against certain metrics. Revenue raised by the Government from the sale of allowances will be recycled back to participants depending on their position in the league table.

There are detailed ongoing requirements regarding the keeping of records in the form of an evidence pack. The evidence pack is to be made available to the scheme administrator when required for the purposes of audit. A director or a person of equivalent standing within the organisation must sign an annual statement of records confirming that adequate records have been kept for the purposes of the scheme.

The introductory phase

The introductory phase is intended to provide organisations with the opportunity to get used to operating under an emissions trading scheme before the scheme becomes fully operational.

There are a number of key differences between the introductory phase and future phases including:

  • sale of allowances - in the introductory phase the Government will sell allowances in a month-long sale at a fixed price of £12 per allowance. There will no cap on the number of allowances sold. In future phases allowances will be sold via a closed auction with a cap placed on the number of allowances available based on emissions data from the introductory phase and the Government's emissions reduction targets.
  • performance metrics - standing in the performance league table is based on comparative performance against three weighted metrics: the early action metric which takes account of certain energy savings measures adopted before commencement of the scheme; the absolute metric which reflects changes in an organisations CRC emissions; and the growth metric which measures changes in emissions intensity (by considering emissions against turnover). The early action metric carries significant weight in the introductory phase (100% in the first compliance year and 20% in the second and third years). However it plays no part in subsequent phases.

Because of the timing of the introduction of the scheme there are also some timing differences in the early years of the introductory phase. One key difference is the first Government sale of allowances. This takes place in April 2011 and organisations will need to buy allowances for the first two compliance years. Subsequent sales take place in advance in April of each compliance year.

The introductory phase timetable

Key early milestones in the introductory phase of the scheme therefore include:

  • 1 April 2010 - commencement of introductory phase and first compliance year.
  • 30 September 2010 - last date for registration (full participants) and information disclosure (information participants).
  • 1 April 2011 - start of first Government sale of allowances and commencement of second compliance year.
  • 29 July 2011 - final date for submission of footprint report and first annual report and cancellation of allowances in respect of first compliance year.
  • October 2011 - first recycling payment made based on published performance league table.

Enforcement and penalties

The scheme is expected to carry a range of financial and reputational penalties for non-compliance. In the case of full participants the Order provides for:

  • failure to register on time - fine of £5,000 plus £500 for each subsequent working day prior to registration until last working day of July (the next reporting deadline);
  • failure to provide footprint report on time - fine of £5,000 plus £0.05 per tonne of CO2 for each working day, up to a maximum of 40 working days, for which the information remains unreported and after that 40-day period a one-off sum equal to the fine in respect of those 40 days;
  • failure to provide annual report on time - equivalent fine to that for failure to provide footprint report, emissions doubled for calculating position in league table, transfer of all allowances blocked and bottom ranking in performance league table;
  • incorrect reporting - £40 per tonne of CO2 incorrectly reported (subject to a 5% tolerance);
  • failure to comply with commitment - required to obtain and cancel outstanding balance of allowances as soon as possible, fine of £40 for each tonne of CO2 for which an allowance not cancelled and transfer of allowances blocked;
  • failure to keep adequate records - fine of £5 per tonne of CO2 of emissions reported in last annual report.

In each case non-compliance is also made public. There are also criminal sanctions for a range of offences relating to falsification of information, obstruction of the scheme administrator and failure to comply with an enforcement notice. The sanctions can be applied to both the organisation and its officers.

The Government seems serious about enforcement. Recent press comment suggests that the Environment Agency is to launch a dedicated unit of around 50 auditors and inspectors with wide-ranging powers to search company premises, view energy meters and seize records to ensure the scheme is complied with.

Conclusions and next steps

The aims behind the scheme appear laudable. However, the Government wanted to make the scheme as simple as possible bearing in mind that many of those covered will not have had to deal with anything similar before.

There is little doubt that the scheme has been designed to be "administratively light touch" but that is not the same as simple. And those covered by it will have to quickly become very familiar with the contents of the (in its current consultation draft form 91 page) Carbon Reduction Commitment Order 2010 and begin preparations soon if they are to meet their legal obligations and avoid possible enforcement action.