U.K. Organizations Get Ready for the "Carbon Reduction Commitment"

The U.K. government has committed the country to reduce greenhouse gas emissions. The government cannot do it alone, so it has begun to introduce legislation that will provide incentives for individuals and organizations throughout the U.K. to reduce energy consumption.

The latest legislation is the Climate Change Act 2008, which sets ambitious goals for reducing carbon dioxide emissions throughout the U.K. It requires the U.K. to reduce greenhouse gas emissions at least 26 percent below 1990 levels by 2020, and 80 percent below 1990 levels by 2050. A central element of the legislation is a carbon budgeting system that limits emissions over a series of five-year periods, beginning
June 1, 2009.

Overview

This article looks at one aspect of the Climate Change Act—a mandatory Emissions Trading Scheme for large users of electricity, known as the Carbon Reduction Commitment, which will apply to public and private sector enterprises throughout the U.K. (the "Regulations"). The government estimates that about 20,000 organizations, including all central government departments, will have to report electricity consumption to it as a result of the Regulations, while about 5,000 will have to participate fully in the Emissions Trading Scheme and purchase credits to account for energy usage. Organizations that use more than 6,000 megawatt hours per year of electricity (an annual bill of about £500,000) will be most affected. Although qualification for the scheme is based upon electricity usage, the Regulations cover—and organizations will have to purchase credits for—all energy, including heat, but not transportation fuels.

To simplify the process, the Regulations require corporate and other groups to participate as a single entity, with responsibility for reporting, monitoring and paying for energy usage at the top. Hilton Hotels, for example, will be responsible for all its hotels, including subsidiaries such as Doubletree, throughout the U.K.

The Carbon Reduction Commitment is designed to complement other efforts to reduce CO₂ emissions in the U.K., such as the European Union's Emissions Trading System and domestic Climate Change Agreements, which govern energy-intensive industries such as glass manufacturing. The U.K. government claims many if not all organizations will more than recoup the costs of compliance by conserving electricity and switching to cleaner energy sources. Although details—and thus costs—of the scheme are yet to be worked out, estimates are that participants will have to spend a minimum of £38,000 a year on credits.

How the Regulations Will Work

Beginning in April 2010, many large users of electricity throughout England, Wales, Scotland and Northern Ireland will have to purchase credits corresponding to CO₂ emissions, based initially on 2008 consumption. For the first several years, the government will sell credits for £12 per ton of CO₂ produced as a result of the organization's consumption. Organizations that use more energy than anticipated will be able to purchase credits on a secondary market or, if necessary—and for a higher price—from the government. Because energy from renewable sources, such as wind power, results in the generation of less CO₂ than traditional power sources, it will require fewer credits, providing an incentive both to conserve energy and shop for cleaner sources.

The U.K. government will even publish an annual "league table" showing which organizations perform best in limiting emissions, based on a complicated metric. The hope is that this competition will generate good will for companies and public support for the Carbon Reduction Commitment.

Every enterprise in the United Kingdom must consider whether it is affected by the Regulations, as hefty penalties will be imposed for non-compliance. In a nutshell, the regulations will require enterprises to:

1. notify the government of their electricity consumption; and, depending on the amount used,
2. buy credits for the enterprise's expected energy consumption in each tax year.

If an enterprise is required to buy credits, it will lose one credit for each ton of greenhouse gasses deemed to have been emitted through its energy consumption. Excess credits can be banked for future years or sold to other participators in the scheme. At the end of each tax year, all participators are put into a published table to show performance, and those that demonstrate a saving in consumption obtain a cash bonus from the pool of money the government will hold. This bonus will be funded by those whose gas emissions exceed credits.

Who Is Affected

To decide whether they are affected by the Regulations, enterprises will need to determine whether their "Collective Group"—being the company, any subsidiary company, joint venture body in which they have a majority control and franchisees—metered their electricity consumption on a half-hourly basis in 2008. In the U.K., sites with a peak load above 100kw usually have half-hour meters.

If there is metering on this basis anywhere in the Collective Group, the next consideration is whether it consumed at least 6,000 mwh in 2008. If so, the organization will most likely have to participate fully in the Regulations and buy credits. If not, it will most likely to have to make disclosures of energy consumption to the government.

Landlords need to take particular care in determining whether the Regulations affect them, as the electricity a landlord purchases for common parts and, possibly, tenants' space is deemed to be the landlord's consumption. Landlords will need to reflect on whether the lease or other agreement under which tenants occupy allows the recharge of regulatory compliance costs.

The Way Forward

Full details of the Regulations have not yet been published. However, as they will take full effect in 2010, enterprises must prepare themselves by:

1. working out whether and to what extent they will have to participate;
2. starting to gather necessary information—which will include details of all electricity consumed from all half-hourly meters throughout the U.K.;
3. ensuring that everyone within the Collective Group keeps a lookout for an information pack the government will be issuing in September 2009;
4. (if participation seems likely) ensuring that the organization's energy suppliers are notified so they can begin to provide the information required to demonstrate compliance;
5. considering arrangements to budget for the cost of complying (including, for those that have to fully participate, the purchase of credits and the payment of participation fees);
6. considering internal procedures for compiling required reports and preserving records;
7. determining the extent to which the Collective Group participates in the existing EU Emissions Trading System or a Climate Change Agreement;
8. considering (if a landlord or a franchisor) how the organization will secure cooperation from tenants and franchisees in providing information and assistance in compliance with the Regulations—and how to pass on the cost to them;
9. planning future energy requirements, particularly as some forms will require the purchase of more credits than others—for example, combined heat and power units that burn wood chips will require more credits than taking "mains" electricity (buying from traditional sources of power).