- The proposed amendments to CRC really amount to tinkering at the edges of the regulation. They are far from the ‘radical’ approach called for by George Osborne and indeed are almost identical to the changes suggested by DECC all the way back in Summer 2011.
- We think it unlikely that the proposed changes will significantly reduce the administrative burden of CRC. In some cases we can see that the changes will actually have the reverse effect.
- The carbon floor price will introduce a third carbon tax on business electricity use from 1 April 2013. The vast majority of CRC participants have not the faintest idea of this change. If they were aware, and understood the magnitude of the projected revenue, there would be an overwhelming campaign for CRC to be replaced.
- Replacing CRC with an alternative scheme should provide a clear signal to business about the importance of saving energy. It should also replace the £1bn that CRC brings to the Treasury following the removal of the recycling payments.
- WSP believes that rather than the changes set out in the consultation, a better approach would be to take a more fundamental review of the CRC as a whole.
- We believe that a more effective outcome could be achieved by three policy measures:
On CRC allowance sales
- On electricity – substitute CRC revenue for the windfall revenue arising from the carbon price support. The carbon floor price comes into force on 1 April 2013. This is a tax on the use of fossil fuels by electricity generators. It will increase electricity costs by around 3% in year 1 and will raise an additional £700m for Treasury. Costs and income increase rapidly each year for the next four years. Much of the revenue from the carbon floor price is a windfall to Treasury, brought about because the EU ETS price is much lower than originally forecast in the consultation paper.
- On gas, oil and kerosene – substitute CRC revenue by increasing and pegging the climate change levy to the equivalent of the carbon floor price. We calculate that this policy would raise around an extra £100m in 2013/14, rising to £153m in 2015/16.
On the creation of a league table
- Implement mandatory carbon reporting by large companies Requiring large companies to report their Scope 1 and 2 emissions in line with Greenhouse Gas Protocol will provide a fairer picture of companies’ true carbon emissions and allow league tables to be created, if this is required. This option is one of the proposals that DEFRA consulted on in 2011.
The CRC is one of the UK Government’s five main policies to put a price on carbon and encourage businesses energy efficiency
The CRC is a mandatory scheme aimed at improving building energy efficiency and cutting carbon emissions in large business and public sector organisations. Large organisations with at least one half hourly meter settled on the half hourly market and who use more than 6,000MWh/annum of half hourly metered electricity qualify as participants for the scheme. Around 2800 firms are in the scheme today.
The CRC began on 1 April 2010 and the first compliance year ended on 31 March 2011. The first annual and footprint reports had to be submitted by 29 July 2011 and participants’ performance published in a league table in Autumn 2011 to create a reputational incentive to improve energy efficiency. Companies in CRC have to buy carbon allowances to cover their CRC emissions. These cost £12 per tonne at the moment, raising a predicted £750m this year for the Government.
CRC is one of five main Government policies which put a price on carbon for business. The other four policies are:
- The climate change levy – A tax on the use of energy in industry, commerce and the public sector. CCL is charged at a specific rate per unit of energy and today adds around 5% to the cost of electricity and gas supplied to customers. All revenue raised through the levy is recycled back to business through a 0.3 percentage point cut in employers’ national insurance contributions. It also finances support to energy efficiency such as the Enhanced Capital Allowance programme for energy efficient water and energy saving equipment.
- The EU Emissions Trading scheme. Under EU-ETS large, energy intensive emitters of carbon – such as power stations and industry – are given an allowance of carbon. If they emit less that their allowance, they can sell their allowances. If they emit more, then they can buy these from other emitters. Phase III of the scheme, from April 2013 will see the EU auctioning around 60% of EU Emissions allowances to participants. The market price of EU ETS allowances varies on the open market and is currently around €7 per tonne.
- The Carbon floor price. From 1 April 2013, the UK Government will introduce a minimum carbon price for electricity generation. The aim of the policy is that it will set a firm carbon price for electricity generators and so allow them to invest in renewable generation with more certainty.i Rates will depend on the market price of the EU ETS and will be set to achieve a minimum carbon price (see Figure 1). Rates for 2013 and 2014 financial year were set in this year’s budget at £4.94 and £9.55 per tonne of CO2.
- Transport fuel taxes. Fuels used for transport are taxed on a per litre basis. Air passenger duty is also billed as an environmental tax by the government.
Current EU-ETS rates for 2013 and 2014 financial year were set in this year’s budget at £4.94 and £9.55 per tonne of CO2
The proposed amendments to CRC don’t amount to the substantial simplification that George Osborne sought in this year’s budget.
The Government’s consultation on making the Carbon Reduction Commitment (CRC) scheme simpler has been broadly welcomed.
Four key suggestions, out of the 60 proposed amendments, are:
- Reducing the number of fuels from 27 to just 4 This simplification will remove fuels such as peat and coal from the scope of CRC but will still include 93% of the carbon included in CRC today
- Removing the rule whereby companies needed to report and buy allowances for only 90% of their annual carbon emissions. The 90% rule was introduced to save companies having to record carbon emissions from every small building and for every team. In our experience, however, firms have needed to measure 100% of their emissions in order to then work out what they could elect to not report on under the 90% rule. There was minimal saving from the current 90% rule.
- Making the second phase allowance sale a fixed price rather than running a complex, reverse price auction to determine the price that participants pay.
- Clarifying the rules for trusts with real estate assets and for company groups.
These proposed changes, however, are largely the same as those proposed by DECC all the way back in summer 2011. George Osborne’s budget call to significantly simplify, or scrap, CRC seems to have led to few additional suggestions beyond the ones that had already been tabled.
Even with these proposals, CRC will continue to be a complex and burdensome regulation.
In addition, a number of key issues continue to remain.
- CRC has lost much of its interest to senior managers once the revenue recycling elements of CRC was removed.
- We disagree that landlords have more power than tenants to control energy use in their buildings.
- There is still no guidance on whether landlords can pass the cost of CRC on to tenants as a cost on energy. This has led to different approaches and an unnecessary power debate between building owners and occupiers.
- From 1 April 2013 business will be paying three separate carbon taxes on the electricity it uses – carbon floor support at the point of generation, climate change levy at the point of supply and CRC at the point of use. On gas and other fuels, companies will be paying two taxes – climate change levy and CRC. This complexity is completely unnecessary.
- Carbon emissions, on which the league table is based, is rarely representative of a company’s true carbon emissions. Landlords have to include the carbon emissions of their tenants. Transport emissions lie outside the scope of CRC.
In short, CRC today is a tax on building energy consumption. It has become overly complex and, we believe, should be replaced.
Any replacement to CRC should meet five key tests
- Patrick Brown and Peter Williamsii writing in Estates Gazette suggest that there should be five tests for any replacement to CRC.
- It must directly offer incentives to make reductions in energy use in buildings;
- It must guarantee at least the same level of revenue to HM Treasury as is expected from the sale of allowances under the CRCEES;
- It must result in a net reduction in regulatory burden;
- It must not disadvantage small and medium–sized enterprises (SMEs), which the government see as an agent of economic growth; and
- It should ideally combine a fiscal element with a reputational element so as to elevate decision–making on energy efficiency to board level.
Replacing CRC with a broader Climate Change Levy and introducing mandatory carbon reporting would provide a much simpler approach.
Click here to view the table.
- An alternative for CRC allowance sales for electricity use. Substitute CRC revenue for the windfall revenue that will come from carbon price support from 1 April 2013.
The Carbon Floor Price is a new policy instrument that is designed to encourage additional investment in low-carbon power generation by providing greater support and certainty to the carbon price.
The floor price will start at £15.70 in 2013 and will rise by around £2 each year to reach £30 by 2020. This floor price will be met by the Government placing an additional levy on fuels used by electricity generators. The levy will be broadly the forecast difference between the EU ETS market price and that of the carbon floor price.
The Treasury consulted on the proposed structure and approach to the carbon floor price in 2010iii. The consultation provided three scenarios for the level of carbon price support that would be necessary at the start of the scheme – ranging from £1 at lowest to £3 at highest.
The reality is that the market price of EUETS permits are much lower than envisaged in that consultation. This means that Government has set the carbon price support at significantly higher levels than even the £3 level in the consultation (see Table 1).
Click here to view Figure 1.
The introduction of the floor price will increase the cost of electricity. We’d expect that generators will pass this cost on to business and homeowners. We’ve estimated the impact on electricity prices, but of course this will depend on the market price of electricity at the time.
The floor price support will also raise significant additional revenue for the Treasury – much more than originally planned because of the low market price for EU ETS allowances. In 2015/16 Treasury forecasts that carbon floor price support will raise £1.3bn a year (Table 2). This sum represents a significant windfall to government and – at the same time – also represents a significant and unforeseen cost to business.
- An alternative for CRC allowance sales for gas, oil and kerosene. Substitute CRC revenue for a higher Climate Change Levy which is set at the equivalent rate as the carbon floor price.
The introduction of the carbon floor price provides a consistent way to value carbon across the Government’s main carbon taxes. If achieving consistency is important, there is considerable merit in aligning climate change levy rates with at least the minimum rates of the carbon floor price. Scrapping CRC allowance sales for gas, oil and kerosene, replacing these with a higher climate change levy on these fuels would be much more simple.
Aligning the gas climate change levy rate with the carbon floor price would increase the levy at a faster rate than inflation – the current index rate. It would also progressively increase Government revenue from a fairly static £170m. We estimate that this policy would raise an £100m in 2013/14, rising to £153m in 2015/16 (see diagram below).
Click here to view Figure 2.
- An alternative to the CRC League Table. Introduce mandatory annual reporting of large companies’ Scope 1 and 2 emissions based on the Greenhouse Gas protocol.
The most authoritative accounting framework for greenhouse gas emissions in the world today is the Greenhouse Gas Protocol. It’s the framework used by most of our clients today and provides a consistent and reasonably well understood framework for preparing emissions inventories across the world.
Introducing mandatory reporting of large company emissions based on the GHG protocol approach would provide a much more authoritative basis for providing comparisons of company carbon performance than the CRC league table ever will – even when early action metrics are removed from the league table.
This is for the following reasons:
- GHG protocol covers a much wider range of emissions than just carbon emissions from buildings (see table 3).
- GHG protocol provides a more accurate representation of actual company emissions rather than one based on bill payment alone. Companies account for carbon emissions from the buildings they occupy, the travel they undertake and the products they make themselves.
- It simplifies the data collection process. Companies will just produce a report based on one consistent set of carbon metrics.
- This is a policy that DEFRA has already consulted on. While the results of the consultation have yet to be produced, we understand that there was strong support for introducing mandatory carbon reporting by large companies. There seems little merit in Government requiring companies to submit two sets of carbon performance data, using different approaches, metrics and conversion factors.
- Carbon Reduction Commitment has served its purpose. It’s helped put energy consumption on the board table and has dramatically raised the profile of energy efficiency opportunities and the practical impact of technical solutions, such as automatic meter reading. But it’s now not fit for purpose and the introduction of yet another carbon tax on business energy consumption makes the case for simplification and reform overwhelming.
- Replacing CRC with the windfall revenue forecast from carbon floor price together with an enhanced CCL pegged to the carbon floor price would raise at least an equivalent sum as CRC allowance sales (see Table 4).
- Without the recycling payment, the CRC league table has lost nearly all of its value. Replacing it with a league table based on mandatory carbon reporting using the GHG protocol would be nearly universally welcomed. This would be based on good science, consistent with international standards and would implement the outcomes from DEFRA’s consultation on carbon reporting.