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The Government announced on 20th October a change to the Carbon Reduction Commitment Energy Efficiency Scheme (CRC) that means medium and large businesses will end up paying £1bn per year in a carbon tax that will not create a net reduction in greenhouse gases.
"The CRC Energy Efficiency scheme will be simplified to reduce the burden on businesses, with the first allowance sales for 2011-12 emissions now taking place in 2012 rather than 2011. Revenues from allowance sales totalling £1 billion a year by 2014-15 will be used to support the public finances, including spending on the environment, rather than recycled to participants. Further decisions on allowance sales are a matter for the Budget process." Spending Review, para. 2.108
The CRC, set up under the previous administration, is a mandatory emission trading scheme which applies to large non energy-intensive organisations in the public and private sectors. The scheme will charge qualifying organisations £12 per tonne for the carbon emissions arising from their energy use.
Before the spending review, the intention was that the scheme would be revenue neutral, with permit money recycled back to participants. The best performers would receive more money back than they had originally paid for the permits; the worst performers would lose out – getting back less than they spent.
The Government will now keep the money from permit sales, effectively turning the scheme into a carbon tax.
This change has made a bad scheme worse. At least under the previous scheme participants were incentivised for good performance as well as penalised for bad performance. Revenue earned by doing well on energy reduction could have been used for additional environmental initiatives outside of the scope of the scheme – such as transport, waste, resource use and carbon offsetting.
In addition, the CRC permits are now a direct operational cost on the organisations involved. The move to what is essentially a carbon tax will have the likely effect of depleting organisations’ environmental budgets further. It is improbable that the Government will earmark the tax for environmental projects, meaning less money will be spent on carbon reduction overall.
The CRC has always been imperfect. Due to an overlap with the EU Emission Trading Scheme, any reduction in energy use achieved by participants will ‘leak’ into other sectors.
Emissions from energy and other industrial sectors are already capped under the EU Emission Trading Scheme (EU ETS). Companies in these sectors have to buy a different type of permit, called an EU Allowance or EUA, for every tonne of carbon they emit. As the number of permits in circulation is fixed this creates a cap on emissions from the participating sectors.
If UK organisations reduce their energy use to avoid paying more in the CRC, energy companies will subsequently need to buy fewer EU Allowances. This will make more available to other sectors – cement and steel for example - or energy companies across the rest of the Europe. So although emissions from UK energy use may go down, emissions in other areas will go up.
The CRC has always been fundamentally flawed in this way. It creates a situation where organisations will work hard to reduce their energy use, but that will have no net effect on reducing emissions. The ‘pollution permits’ that are left unused by UK energy companies will be used instead by other companies, so the emissions will simply be displaced to elsewhere.
Carbon Retirement has highlighted a solution to these issues – an adjustment to the CRC which is win-win for the environment and the Government.
The Government has missed a trick. Given their fixation on generating revenue, they could work with the existing system, the EU ETS, by selling non-energy intensive companies EU Allowances instead of arbitrarily charging them £12 per tonne. This would have the dual effect of generating revenue whilst also reducing emissions.
Carbon Retirement’s proposal also has the potential to increase the current carbon price, by decreasing the supply of allowances. The Government has committed to bolstering the carbon price through implementing a price floor, with details expected ‘this autumn’. However no details about how this will work have yet been released.
 Written by Jane Burston, Director at Carbon Retirement. Carbon Retirement is a Government-assured carbon offset provider that removes 'pollution allowances' from the European system, forcing industry to invest in clean technology.
Created because of the perceived lack of transparency and robustness in the carbon markets, Carbon Retirement is different to all other offset providers. Instead of selling project based offsets, we cancel the EU’s pollution permits from the emission trading scheme on behalf of companies wishing to offset voluntarily. This effectively reduces the amount of permits that heavy industry in Europe can use to pollute. It is 100% additional and tackles carbon reduction right here in Europe.
If you’ve got any questions or would like to arrange an informal discussion, get in touch: info@carbonretirement.com or +44 (0) 207 1830 188. Visit us at www.carbonretirement.com.
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