The law tightens grip on carbon emissions

Posted on 4 Jun 2009 by The Manufacturer

Many manufacturers will be aware of the Carbon Reduction Commitment (CRC) legislation that comes into effect in April 2010. But exactly how it works, who is eligible, who is exempt and how it will affect manufacturers is hidden in the detail. Dennis Frize gets to the nub of the issue.

CRC is the latest legislative instrument devised to help the UK reach its Climate Change Commitment target to reduce greenhouse gas emissions by 80% in absolute terms by 2050. High energy usage manufacturers will be familiar with existing schemes like the EU Emissions Trading Scheme (ETS) and Climate Change Agreements (CCAs). The CRC legislation targets the next level of energy users by consumption and in combination the three schemes will cover 90% of the UK’s non-domestic energy use.

Do your maths
Companies that are eligible for CRC are those for whom the electricity bill of the whole organisation is above £500,000 per year. But CRC compliance only targets UK organisations that have one of about 100,000 half hourly meters installed. Simply count the total consumption of all the meters in your organisation, if it totals 6,000 MWhr per year or more (excluding ETS and CCAs) you are in; if it is less then just gather evidence of your consumption and register this in the evidence pack.

The Department of Energy and Climate Change (DECC), who devised the Carbon Reduction Commitment, estimates that 5,000 organisations will participate in the scheme. EEF, the manufacturers’ organisation, estimates that around 1,500 or 30% will come from the manufacturing sector.

Defining a qualifying organisation under the CRC is a key and complex part of this legislative instrument. The evidence pack requires a director’s signature to sign off on behalf of the organisation. An organisation in CRC terms includes all subsidiaries and some tenants. If the company is foreign-owned, CRC requires that a proxy UK parent is nominated as the UK parent (see box).

Parental guidance
Take a company like Saint Gobain, a manufacturer of glass with recognised ‘green’ credentials. It has an energy bill running into the tens of millions of pounds and is therefore already covered by EU ETS and CCAs. But as the nominated UK parent the company is now going through the laborious task of auditing energy consumption in over 1,000 subsidiaries that report to a European structure, in order to calculate which parts of its consumption is exempt under CRC.

Being part of the club
For eligible organisations, CRC is essentially a cap and trade mechanism where companies are required to trade allowances to match their carbon emissions. Unlike other schemes, DECC has employed a new approach for CRC by including new financial and reputational dimensions to the scheme.

On the financial side, DECC estimates that the cost of the scheme equates to 11% of an organisation’s energy bill, where 5% accounts for the administration costs of reporting emissions from all energy sources (electricity, gas, oil, LPG etc) consumed by fixed installations (transportation emissions are exempt) and 6% in financing the permit costs. Permits are currently priced at £12 per tonne of CO2, as the scheme matures the price will become market-driven. The CRC scheme however is revenue-neutral to the Treasury, meaning that all permit monies received will be recycled back to participants six months later plus or minus a percentage based on the participants’ ability to reduce their emissions since the start of the scheme.

As Delvin Lane, head of Energy360 at British Gas Business, says, “by employing a cap and trade scheme, the Government has given businesses a choice in how the scheme will affect them”. Energy360, British Gas Business’ integrated energy management division, was established to engage with business to provide advice and practical support starting with a value stake analysis. “Our experience means that we can help manufacturers start to think about an implementation plan, and prioritise activities for the best returns,” Lane adds.

This is sound advice if you consider that every tonne of CO2 costs about £150 in electricity, so any substantial CO2 reduction greatly outweighs the costs of the scheme.

Penalties and letters
The Environment Agency has been appointed to enforce CRC legislation and it has been equipped with a robust penalty system. Organisations that do not comply are subject to a series of penalties; even if a company is not eligible for the scheme, late registration penalties are calculated at £500 per day, and for companies that qualify for the scheme, failure to report results incurs an immediate £5,000 fine and a further fine of £0.05 per tonne of CO2 per day. Falsification of evidence is considered a criminal offence which could lead to imprisonment and a fine up to £50,000.

The Environment Agency sent a ‘Heads Up’ letter last month to the billing addresses of the 100,000 half hourly meters in the UK, prompting action. Now it is up to manufacturers to ensure that the letter makes its way to a board director, who will eventually be required to sign off the evidence pack for the entire organisation. A registration pack will follow in September.

EEF’s primary concern with this process is the time scale. “Under the Government’s plans, businesses will have just four months to prepare. We think that is inadequate,” it said in a statement.

In a quick survey, The Manufacturer found this was echoed by just over half the companies surveyed, who felt the CRC timeline was too short. Of the companies that thought they were likely to participate in CRC, over 82% felt that not enough time had been allowed to prepare.

Reputational driver
An entirely new dimension to emissions capping schemes, and for some a big concern, is the CRC league table, referred to by DECC as the ‘name and shame’ table. This is the reputational driver of the scheme. The 5,000 qualifying organisations will be ranked in order of pre-defined CRC metrics, and the ranking will determine whether a penalty or bonus adjustment is made to the recycled fees received.

More controversially, the CRC table will be published and available for scrutiny by mainstream media, stakeholders, shareholders and competitors. The understanding of the table is currently low among participants in our quick survey:

CRC table metrics, including penalties and league table metrics, change over time. The weighting in the first three years can be seen below:

True representation?
Our survey expressed that there is little confidence that the CRC table will be an accurate reflection of the green credentials (i.e. carbon emission reduction behaviour) of the companies listed, with just under two thirds of respondents feeling that it would ‘not at all’ or at best ‘be limited’ in truly reflecting their green credentials, compared with one third saying it would be a fair reflection.

The Carbon Trust and the CRC
One early action measure that in year 1 accounts for 50% of the ranking metrics is whether or not the organisation has achieved the Carbon Trust Standard. Harry Morrison, general manager at the Carbon Trust Standard Company, emphasises that the Carbon Trust standard is a completely separate scheme, which looks at energy consumption data over three years and considers absolute performance that takes into account operational changes in the company. While there is no doubt that The Carbon Trust Standard will be very helpful in compiling the evidence pack required by CRC, the Carbon Trust not in a position to advise on company compliance. The Carbon Trust is Standard also differs in its application, as it can apply to an organisation or individual site.

It would be reasonable to think that the communications departments of the CRC-eligible organisations are already busy devising their communication strategy and working out high and low ranking scenarios as journalists are sharpening their pencils in preparation for sector-specific tables. But surprisingly while our survey indicates that preparation for CRC is underway as measured by the installation of AMRs (30%), by other measures: adopting the Carbon Trust Standard (24%), accurately measuring energy use (72%) and assessing the financial impact of CRC (25%), not one respondent was able to assess the reputational exposure of CRC (0%).

EEF, like other representative bodies, is critical of the scheme. In a statement it said:

“The Government has not provided prospective participants with sufficiently clear guidance on the scheme or on the changes throughout the consultation period. The scheme requires legal, financial and operational expertise, and co-ordinating this within companies in a short period of time is a significant challenge.

“Indeed we are sceptical that the current proposed structure of the Scheme is likely to succeed in delivering on Government’s aim of increasing energy efficiency without placing unnecessary burden on business.”

The clock is ticking
There is plenty of advice and technology available to improve energy saving with more tools coming on stream all the time. The CRC will focus a new group of businesses to become carbon managers, and as with all management, measurement comes first. By accurately measuring each production line and applying a carbon metric to each process, manufacturers will be able to identify more opportunities to reduce their cost and impact on the environment. As with all blanket schemes, its application will favour some sectors more than others. For manufacturers, energy has always been a very substantial chunk of running costs, more than ever now in light of the recent spikes in energy prices — it is a tough ask to improve on efficiency as most of the quick wins have already been implemented. For other sectors where energy is a minor part of the cost base (it is only 1% in retail) improvements in efficiency will be relatively easier.

Unleashing the power of a reputational table to a depressed market may at best focus the mind and at worst see production migrate away from the clutches of EU ETS, CCA and CRC regulations. Allowing just six months for companies to understand the requirements of a new and serious piece of corporate legislation and for them to define their place as a CRC-compliant organisation may prove too much to ask, within the deadline, in very demanding business conditions.

We are keen to know more about how CRC is
affecting your organisation, please tell us about your
CRC challenge by emailing [email protected]

Case Study: Does CRC reflect your green credentials?

Glass maker Saint-Gobain’s green record was recognised last month by The Sunday Times’ The Best Green Companies awards, where the newspaper ranked it eighth best in the UK.

The Sunday Times said: “The winner of our special award for staff training and motivation, whose bosses encourage employees to think about energy saving (88%). The environmental training they receive motivates the workforce to think about being green at home too (80%), and they are kept up-to-date with progress in reducing the company’s impact on the environment (84%).”

While this award acknowledges Saint-Gobain’s commitment to low carbon practices, the company is not yet aware of its precise CRC eligibility requirements.

Saint-Gobain’s main issue is working out which parts of its whole organisation, as defined by CRC, will fall under CRC as some sites are not part of its organisational structure and there is a lot of work involved in registration (totalling its subsidiaries etc). Even though the company was recognised, and even worthy of the creation of a special award by The Sunday Times, for energy saving — the fundamental point of CRC — it is impossible to forecast where it will land in the CRC league table. This is of particular importance to Saint-Gobain; as a glass manufacturer it sells its product to architects who are in turn under pressure to mitigate the effects of climate change on the buildings they design. Should the company score a low ranking it could negatively affect their sales. For Saint-Gobain, it is essential for the ranking to be crystal clear and transparent and that its customers factor in that the metrics are not technology-neutral; that is, a CRC league table position has little bearing on the low carbon status of their manufacturing processes. As a preventative measure, Saint-Gobain is considering a fast-track Carbon Standard Certification, which accounts for 50% of the metrics in year 1. The company says it is quietly confident that it will meet the Carbon Standard but applying it to hundreds of sites in time may prove a challenge.