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BREAKING NEWS

No small change

Written by Peter Davy
December 2009

The latest efforts to tackle climate change represent a new challenge for many of the organisations affected by a new scheme. Peter Davy asks what the Carbon Reduction Commitment will mean for business

Whatever ultimately comes out of the Copenhagen climate summit in December, many UK businesses already have their next target on the climate change agenda - and it's significantly more immediate than the reductions governments are prone to target for decades hence. From April 2010 and before September, about 20,000 businesses will have to either register or provide disclosures for the Carbon Reduction Commitment (CRC) Energy Efficiency Scheme.

The scheme requires large organisations outside the energy intensive industries already covered by the EU Emissions Trading Scheme to measure and monitor their energy use and buy allowances corresponding to their emissions. To encourage companies to reduce their energy use, participants will also be ranked in a league table each October, and the best performing from among them will receive a financial bonus paid for by a penalty on those at the bottom of the table.

As Energy and Climate Change Minister Joan Ruddock put it: "The CRC Energy Efficiency Scheme will help organisations to become more energy efficient, to save significant sums of money on fuel bills, and to show customers, clients and competitors that their organisation is a leader in tackling climate change."

Not everyone, though, shares the minister's confidence. When Europe's biggest environmental website Edie (Environmental Data Interactive Exchange), conducted a survey in October, it found less than a third - 31 per cent - of businesses reckoned they were ready for the scheme, while a "CRC simulation", run by the North East regional development agency the following month suggested a significant number of businesses would struggle with reporting and verifying energy use.

In fact, in some ways, compliance with the scheme shouldn't be such a burden. For a start, after a consultation the DECC announced in October that the initial year will simply involve reporting, without any need to buy allowances: an announcement that was welcomed by many of the scheme participants worried about their cash flow, but also disappointed some in the industry. "It was a great opportunity to see them put their money where their mouth is, but we'll now have to wait until the following year," says James Dunne, managing director at SEDS (Sustainable Energy Design Solutions). The extra time, though, means companies can put the money they'd budgeted for the scheme into making a head start on boosting efficiency.

But even when the scheme is up and running for real, it's easy to overstate the impact. At the initial fixed priced for allowances of £12/tCO2, the potential fine for a firm with an annual energy bill of £500,000 will be about £5,000 - just one per cent of its spending on energy. "If you're an organisation that has a reasonably high energy intensity or a very small operating margin it could be significant, but for many it is relatively small amount," admits Mark Johnson, knowledge leader on the CRC for AEA, an energy and environmental consultancy and the principal technical adviser to the Department of Energy and Climate Change (DECC) during its development of the regulations.

Furthermore, even if companies are concerned by the threat of a penalty, there's some argument that the scheme itself discourages early action by its focus on improvements relative to the base year. Initially, in fact, the league table results will be largely determined by whether companies have implemented automated reading and attained the Carbon Trust Standard. In subsequent years, though, the league table position will reflect improvements made in energy efficiency against 2010 to 2011, and eventually a rolling five-year average. Not surprisingly, canny companies have been asking consultants whether it's worth holding off on moves that will cut their energy use until after that date to ensure improvements are reflected in their position in the league.

"The problem is that the CRC basically starts with the presumption that nobody has ever considered energy efficiency before," complains Callum Stuart at consultants McKinnon & Clarke. "There is only so much you can do and it seems a little foolish to assume all these organisations are starting at the bottom rung of the ladder." For those that have already invested heavily in energy reduction, such as First Direct, the concern is they could lose out. "We hope we don't get penalised for doing the right thing," remarks Michaela Wright, head of CSR at the bank.

NEVER A BETTER TIME

There are good reasons to take the CRC seriously now, though. The first is that for some organisations, compliance even in the first year is going to be a challenge. As John Fields at Power Efficiency (which is helping the Royal Opera House among others to meet its CRC targets) explains, much of the legislation to date has concentrated on individual buildings or facilities, but the CRC operates across groups. Banks and others with multiple branches and offices, franchises and property companies face particular issues.

"For any organisation with a group structure that isn't straightforward, this isn't going to be trivial," says Fields. Likewise, the impact of the scheme in the medium-term might be more significant than some anticipate. Initially, for instance, an unlimited number of allowances will be available at a fixed price of £12 per tonne of CO2, but in 2013 the second phase begins. Then, the government will cap the number of allowances available each year and all allowances will be auctioned. That's when the trading will start in earnest.

The penalties and bonuses available, too, will rachet up after the initial year's trading: from 10 per cent in the first year of full operation (2011/12), 20 per cent of the value of allowances purchased in the next year, and then up 10 per cent each subsequent year to a maximum of 50 per cent. "Very quickly the scheme could start to have a far higher financial impact than was previously expected," reckons Stuart. For many, though, it still won't be primarily about the money. Instead, concern is focused on the attendant publicity of making a bad showing on the league table, and not just for those at the bottom: many companies will want to compare well with their peers.

Fields says he's had quite a few companies saying they want to be in the top quartile of the league table that they reckon will inevitably be extracted for their market. Of course, that still leaves open the question of whether companies should postpone any improvements until the scheme is underway, but there are two reasons to think not.

First, because it probably doesn't make financial sense. With carbon allowance costs initially set at £12 a tonne, for instance, the allowances will cost the equivalent in most organisation of seven or 10 per cent of the amount spent on energy. Of that sum, the best performing companies in the league table stand to gain just 10 per cent at the end of the first year in which allowances have to be purchased - ie. just one per cent of the organisation's energy costs. Therefore if a company can cut its energy bill by three per cent, it will have saved three times as much. That's certainly how Alexandra Hammond, sustainability manager at Guy's and St Thomas' NHS Foundation Trust sees things: "The organisations focussing on energy savings are already enjoying the benefits," she points out. "We'd be making a serious blunder if we focused all our efforts on trying to be portrayed all in the league tables." Likewise, First Direct's efforts have already seen the company save over £200,000 a year on its energy bill - about what a mid-sized firm (relative to the others in the scheme) might expect as a bonus for coming right at the top of the league.

Second, any benefit from a high league table ranking is uncertain; in fact, one legitimate criticism of the scheme is that it's difficult to use it to make investment decisions because you've no way of knowing whether an investment will see you rise to the top of the table to secure a bonus (or, indeed, avoid sinking to the bottom with the resultant penalty). As Stuart puts it: "Unless you can sit and guess what every other participant is going to do, you can't calculate where you're going to end up on the league table."

Fundamentally, though, most organisations don't have to worry themselves about postponing improvements simply because they still have plenty of scope for getting better. As Fields puts it, "The scheme could possibly handicap those that have already done a lot, but to be honest I don't think many are that far along. "There's still a lot more most could do."


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