Having been inundated with negative feedback from businesses and industry groups, the government has at last softened its stance and indicated it may be time to do away with the Carbon Reduction Commitment (CRC). Amid all the commotion surrounding the Budget, chancellor George Osborne said in no uncertain terms that unless major improvements to the scheme were made, the CRC faces being scrapped this year in favour of an alternative environmental tax.
The energy department was given one last throw of the dice and has since released a new set of proposals that it hopes will win over companies and prevent the CRC from being axed. Its consultation document puts forward 46 detailed changes that will radically cut down on red tape and slash administration costs by almost two-thirds, according to energy secretary Ed Davey.
In a nutshell, the CRC is a mandatory UK-wide trading initiative introduced in April 2010 with the aim of reducing emissions from large public and private sector organisations. It was designed to encourage companies to implement cost-effective energy efficiency solutions through the application of financial and reputational drivers.
Since its inception, the CRC has been the target for widespread derision and has been attacked for being complicated and expensive. A succession of policy revisions has failed to get the critics on side and it has faced repeated calls for it to be abolished. Government ministers have in the past always tried to play down the criticism, but Osborne’s recent contemptuous remarks leave little doubt that there has been a rethink in Whitehall and that the future of CRC rests on a knife-edge.
Since the Budget, the consensus has been that Osborne should have gone all the way and announced the CRC’s immediate dissolution. It seems no amount of tinkering will be enough to satisfy the doubters or get the business community on side. The last time we had a change in the rules, it was decided that the revenue recycling mechanism would be ditched and the money raised kept by the Treasury, so British firms could be forgiven for feeling less than optimistic when faced with yet more amendments to the policy.
In reality, the decision on whether or not to scrap the CRC will largely depend on cost. If the Department of Energy and Climate Change (Decc) can prove it can rein in the administrative burden, then the government might be inclined to keep it. Davey claims that his 46-strong list of proposals will lower the cost for businesses by £250 million up to 2030, with that figure rising to £330 million if the public sector is included.
KPMG, the auditing firm charged with keeping tabs on the costs, declared recently that the administrative toll of the scheme would come to around £97 million in the first year and £172 million for the whole of Phase One. Cost varies significantly from business to business, but this means that on average participants are paying £15,500 a year, adding around 5 per cent to the cost of carbon. Thus the CRC is clearly a millstone that many UK companies can ill afford, especially in today’s economic climate.
While most businesses would undoubtedly prefer a straightforward tax, the latest changes mean the CRC will at least be a lot less complicated if it is kept on. There are no nasty surprises this time around and the amendments would make an appreciable difference to the scheme’s participants. If agreed, the simplifications are due to take effect from Phase Two, starting in April 2013.
The number of fuels covered by the initiative will be reduced from 29 at present to four, and that alone will markedly lighten the scheme’s administrative burden. Companies will be required to account only for how much gas and electricity they use, as well as gas oil (diesel) and kerosene when used for heating. The 90 per cent rule will be dropped, removing another layer of complexity, and this will in turn eliminate the need for participants to compile a footprint report.
Alongside this, organisations will have to do less reporting and keep their records for a shorter length of time, while the overlap with Climate Change Agreements and the European Union’s Emissions Trading Scheme will be reduced. A key downside as it stands is that companies cannot always take part in their natural management structures, so the rules will be tweaked to allow greater flexibility. There will be no cap on allowances and there will be two fixed-price sales a year rather than auctions.
Should it decide to do away with the CRC, what will the government replace it with? The energy efficiency programme is expected to bring in £740 million to the Treasury in 2013/14 and an alternative green tax would have to be set up to replace the lost revenue. A final decision is expected in the autumn, pending the outcome of the consultation.
It is perhaps a coincidence that the government also put off a decision recently on whether or not to make it a legal requirement for all businesses to report on their greenhouse gas emissions. Ministers were forced to make the announcement before the Parliamentary recess in early April after it became clear they would miss the deadline set by the 2008 Climate Change Act.
The Confederation of British Industry has been arguing for some time that CRC revenue could be replaced by an increase in the Climate Change Levy paid by large energy users, while the introduction of mandatory carbon reporting rules would help keep the reputational aspect alive. If all public and private organisations were forced to submit data on their greenhouse gas emissions, a performance league table could be published similar to that in the CRC.
The other school of thought is that the CRC will be retained, but will be brought into line with new
rules for voluntary greenhouse gas reporting for companies that fall below the 6,000MWh qualification threshold. Decc has already taken a step in this direction with its proposal to move away from separate emissions factors for the CRC, opting instead to use the environment department’s standard greenhouse gas reporting guidelines. There is also the opportunity to bring the scheme more into line with Display Energy Certificates.
Tom Woolley is managing editor at The Energy Brokers, an energy consultancy specialising in procurement and risk management solutions for the industrial, commercial and public sector
This article first appeared in Utility Week’s print edition of 18 May 2012.
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