The Carbon Reduction Commitment (CRC)

CBI Climate Change Summit conference

2 December 2008

Dr Philip Douglas

Head of Branch, CRC

CRC Summary Mandatory auction based emissions trading scheme

– targeting UK energy use emissions of highest parent organisation, from business + public sector organisations

– Large organisations: HHM electricity > 6,000 MWhr / year

– Climate Committee to advise Ministers on CRC caps

Revenue neutral to the Exchequer– Auction revenue recycled to participants

Avoiding overlap– Target energy use emissions outside EU ETS and CCAs

– Organisations with more than 25% of their emissions in CCAs would be completely exempt

As simple a scheme as possible

CRC Summary

“Cap and trade”: Certainty of environmental outcome through the cap – participants decide where reductions take place

Three key actions during the scheme year1. Purchase allowances at auction, taking account

of energy efficiency effort

2. Surrender allowances equal to total emissions, buying / selling allowances as appropriate

3. Receive a recycling payment

Policy development

From consultation to policy: Market Design I

Stakeholder concern Action

Complexity of auction design

• A simpler sealed bid auction• Simple fixed price sale in 3 year introductory phase

CRC revenue recycling undermines rest of scheme, leading to risk of ad-hoc changes / further regulation

• Payment proportional to 2010 emissions, with a clear trajectory to strengthen the bonus / penalty over time, so that the revenue recycling gives positive incentives

Growth / decline – notably, impact on league table position from buying/selling large subsidiaries

• ‘Growth metric’ in the league table • Updating baselines when large subsidiaries bought / sold

Auction revenue top-sliced for Carbon Trust / Salix

• Not top-slicing

From consultation to policy: Market Design II

Stakeholder concern Action

League table based on ‘since the start of the scheme’ would eventually have old irrelevant data

• CRC league table to have only a “five year memory”, i.e. measure performance against previous 5 years

Improving the “early action” league table metric

• Basing “early action” league table metric on both AMR and EEAS• Only applies to the intro phase

Cash flow – 18 month gap between auction and revenue recycling

•Double recycling payment in first recycling payment• Gap reduced to 6 months

VAT applied to sales of allowances

• Not applying VAT to fixed price sales of allowances

From consultation to policy: Reporting

Stakeholder support Action

For clarifying approach to CHP, avoiding complexity

• A simple approach, ‘zero rating’ heat, and avoiding different factors for different CHP plant

For some disclosure based “tick box” questions in the CRC league table

• Yes / No questions on whether annual reporting includes a carbon target, performance against target, and a named Director

For an obligation on energy suppliers to provide an annual statement of gas and electricity use

• Requiring suppliers to produce such a statement, if asked by CRC organisations

CRC consultation responses0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

1a2a5a7a8a

10a11a1213

14a14b14c16a17181920212224262829

30a31a32a33a33b34a34b34c35a35b36

37a38a39a4041

43a43b45a47484950

Yes

Not sure

No

Number of respondents

Some key practicalities

Latest thinking on timetable• Government consultation on the draft CRC

regulations and CRC User Guide – expected around ~ end Feb 2009

• Stakeholder engagement and awareness raising by the Environment Agency – in Spring 2009

• CRC regulations go before UK Parliament and DAs – Autumn 2009

• Entry into force of the CRC regulations and start of scheme – in April 2010

• Note this timetable means that there would not be reporting in the period October 2009 – March 2010

2008 2009 2010

Calendar year 2008:

Assess HH electricity use for all organisations with settled half-hourly metering systems

1 Apr 2010:

Scheme Starts

April – Sept 2010: Registration

All qualifying organisations disclose total half hourly electricity consumption

Spring 2009:Env Agency awareness raising

The scheme will begin in April 2010

2011

Year one

2012

Year two

Parent Company

Subsidiaries with emissions in CCAs

Subsidiaries

In this company structure, subsidiaries M & N have emissions covered by CCAs. These CCAs cover more than 25% of the subsidiaries’ total emissions, therefore they are exempt from CRC

A

X

Y

Z

M

N

Emission Coverage

Are you the highest parent company?

Does your organisation have a HHM settled on the half hourly market?

Do you consume more than 6,000 MWh through all

HHM?

You qualify for CRC and must

register as a participant

You do not qualify as a CRC participant but will need to comply with requests from your highest

parent company

You do not qualify for the he rest of the guide is not relevant for you

You are required to make an information

Disclosure

Are you the highest parent company?

Does your organisation have a HHM settled on the half hourly market?

Do you consume more than 6,000 MWh through all

HHM?

You qualify for CRC and must

register as a participant

You do not qualify as a CRC participant but will need to comply with requests from your highest

parent company

You do not qualify for the CRC.

You are required to make an information

Disclosure

Qualification - summary

Government has proposed that HH electricity use will include:

Mandatory HH metersVoluntary remotely read AMR HH meters

Pseudo HH meters

What should you do now?

• Work out your organisation structure and where you fit into it• Establish a mechanism for collecting energy information at the highest UK part of the organisation• Start thinking about your sources to meet the 90% rule. Do you want to go beyond the minimum?• Decide if you want to participate in the early action metric

- Roll out AMR

- Register with Carbon Trust Standard (CTS – formerly EEAS)

What should you do now? (continued)

• Decide if you want to participate in the growth metric• Collate information on turnover / revenue for the whole organisation• To score ticks, you will need to annually report:

(i) a longer term quantitative carbon target

(ii) performance against that carbon target

(iii) a named Director responsible for carbon

• Familiarise yourself with the evidence pack

Context

Growing international interest in CRC

USA

Brazil

Japan

SouthKorea

China

Australia

New Zealand

Europe

“Diminishing returns in the EU ETS industries... In commerce there is much more scope to make progress” CBI, November 2005

Source: Ecofys: ENUSIM abatement curves, BRE buildings measures abatement curves

SMEs

Public sector

Large non-energyintensive

organisations

Large energyintensive industry

Absolute cost effective carbon abatement opportunity to 2020

3.2

0.1

0.5 1.8

0.8

1.10.5

MtC (% of total emissions in brackets); NPV positive at 15% discount rate

3.3 (13%)

2.3 (18%)

1.6 (15%)

0.8 (15%)

4.5 (20%)

4.3 (33%)

2.6 (25%)

1.3 (23%)

TOTALS

MANUFACTURING BUILDINGS TOTAL

4.1 (12%) 3.8 (22%) 7.9 (15%)

Technical potential

TOTAL

12.7 (25%)