A new carbon cutting Government incentive scheme was introduced on April 1 which will require large public and private sector organisations to improve their energy efficiency. Jean-Yves Cherruault, environmental accounting manager at carbon reduction company Sustain, looks at the implications of the new Carbon Reduction Commitment (CRC) and offers some practical advice to those organisations that will need to act.
According to a global survey published in March 2010,
environmental regulation can have a significant impact on
companies' sustainability activities. However, the same survey from
management consultancy
firm McKinsey indicates some worrying trends. Only around 30 per
cent of executives say their companies actively seek opportunities
to invest in sustainability or embed it in their business practices
and only 40 per cent feel prepared to deal with regulation in the
next three to five years.
This seems to be a trend that is reflected in the UK. Anecdotal evidence shows that the majority of organisations preparing for the CRC scheme are at risk of significantly 'misstating' their carbon emissions.
The CRC is an excellent opportunity to integrate a wider sustainability strategy, including proactive carbon management and governance, into their business. The rewards, such as reputational gains, reducing energy costs and gaining a competitive edge, are significant.
However CRC participants are yet to grasp fully the significance
of the financial, reputational and administrative implications for
their organisations. They need to act now to understand how they
will be
affected and ensure a strategy is in place to support and maximise
compliance with the scheme.
CRC is essentially a mandatory emissions trading scheme that will affect around 5,000 organisations. Only those organisations that used at least 6,000 megawatt hours of electricity through their half hourly meters during 2008 will qualify. These include government departments, manufacturers, retailers, banks, supermarkets, banks and local authorities.
Participants will be required to report annually their total energy related CO2 emissions. They will also need to purchase sufficient CO2 allowances in advance to cover each year's qualifying emissions. Spend will be recycled back in October each year with a bonus or penalty based on the participant's position within a publically available performance league table, which will be published for the first time in October 2011.
During the initial phase of the CRC, the price of carbon allowances will be fixed at £12 per tonne CO2, with no cap on the amount of carbon allowances that can be purchased. The second phase of the scheme, starting in 2013, will cap the number of allowances available and their price will be set by the market.
Businesses that perform well and reduce their emissions will be able to generate further income from selling any unused credits. However penalties will apply for those who have exceeded their allowance and not bought the shortfall.
For many organisations, CRC will completely change the way they think about carbon. In a consumerfacing environment, the reputation risks associated with the scheme are considerable. Organisations that have declared investments in carbon reduction and sustainability initiatives to gain competitive advantage over their peers will need to sustain their efforts or risk a poor position on the league table, which could damage their reputation. There are of course significant financial risks too in terms of penalties and losing out on reduced energy costs if organisations do not embrace the scheme.
CRC is only at the start of its life and the rules are only going to get more stringent so it's crucial that participants are organised right from the start. A proactive response will require a CRC-dedicated team to develop and co-ordinate internal management and new policies that will apply to all levels of the business.
The scheme presents specific challenges to certain sectors. For example, one of the CRC rules requires organisations with more than one location to collate all emissions from each site and report to the scheme regulator under the parent company. This clearly presents challenges for large public sector organisations, such as the National Health Service and local authorities, that have numerous sites and operations. Participants must therefore establish a single decision-making point of contact who will report and trade on behalf of their entire organisation.
Participants have until September 2010 to register for the CRC scheme. Those who get it right from the start are likely to benefit in the long term from significant reputational and financial gains as they position themselves as leaders in tackling climate change.
Top 10 tips towards CRC excellence
- Work out how your organisation is defined according to CRC rules.
- Establish how energy and emissions data is collected and reported for each building or site owned or occupied by your company.
- Set up a CRC team that it responsible for co-ordinating, communicating and managing the scheme internally. This should be a multi-functional team that includes people from across the organisation, including operations, finance, legal and communication.
- Establish verifiable energy and emissions data streams, data management processes and responsibilities at the various sites.
- Understand the financial implications and risks that are specific to your organisation. For example penalties for non-compliance can be up to five per cent of the turnover.
- Ensure the finance team is fully engaged. They will need to budget for purchasing allowances at the beginning of each CRC year, manage the organisation's account on the CRC registry and consider various strategies to ensure energy saving measures provide a good return on investment.
- Develop a system to forecast energy use and emissions that will be robust enough to inform the annual CRC carbon credits purchasing process.
- Develop a model which calculates emissions saved from a range
of different carbon reduction options. This would show how much CO2
each option would save per year and at what price per
tonne of CO2 saved. This is called a Marginal Abatement Cost Curve (MACC). - Prepare and maintain the mandatory annual emissions report and evidence pack as part of the CRC annual reporting cycle.
- Ensure processes and people are in place to manage and deliver the implementation of carbon saving measures and monitor their effectiveness.
