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Is ‘complex’ CRC to be changed?

30 September 2010

The Committee on Climate Change has recommended that Government redesigns the Carbon Reduction Commitment (CRC) energy efficiency scheme before the second phase to reduce its complexity. But not everyone agrees.

The CRC scheme requires large public and private sector organisations to buy allowances to cover emissions produced from their usage of electricity and heat.
The scheme is designed to strengthen financial and reputational incentives for these organisations to make energy efficiency improvements.
The sectors covered by the scheme produce 10 percent of the UK’s total greenhouse gas emissions. This report finds that by 2017, the scheme could reduce these emissions by 30 percent compared to 2008, helping the UK to meet carbon budgets.
The current intention is that a cap is set from 2013 with a fixed number of allowances made available to organisations through an auctioning system. However, the Committee’s analysis suggests that the scheme is already complex, and would become more so if a cap and auction were to be introduced, with no apparent benefits.
The Committee’s main recommendations are that:
 The sale of an unlimited number of allowances at fixed price should be extended from the first phase into the second phase, rather than introducing a second phase cap and complex auctioning scheme.
 Separate league tables and revenue recycling should be established for the public and private sectors, and public sector financial budgets should be set to allow upfront investments in energy efficiency improvements – this will allow for the fairer treatment of the two sectors, as the current scheme is at risk of transferring funds from public to private sector organisations.
 Participants should have to purchase CRC allowances to cover renewable energy generation, including heat. This is a departure from the current scheme whereby companies could receive double incentives for use of renewable energy. Financial incentives for renewable heat are important but should be introduced through the renewable heat incentive. League tables should be extended to cover renewable heat and renewable electricity, thereby providing additional reputational incentives for businesses.
Commenting on the report, the Chief Executive of the Committee on Climate Change, David Kennedy said: “The CRC scheme has the potential to make an important contribution towards meeting carbon budgets. However, current proposals risk making the scheme unnecessarily complex. We are therefore proposing that Government modifies its design to make participation in the scheme easier to for companies and public sector organisations”.
The Committee also set out options for a more fundamental redesign of the scheme, that Government could consider in the context of a strengthened carbon price. These included; reviewing the wider regulatory system and reforming the current method of revenue recycling and, dropping the requirement to purchase allowances. If the design of the 2nd phase was simplified, the Committee said that Government could consider lowering the threshold of the scheme to include smaller businesses.

On the other hand....
The consultancy, hurleypalmerflatt, has warned that proposals to ‘simplify’ the Carbon Reduction Commitment (CRC) could actually increase the cost to business.
According to Stuart Bowman Energy and Sustainability Director, hurleypalmerflatt, "The CRC – as currently designed at least - is not a tax. Companies that understand this and approach it well can end up adding to their bottom line. The net achievement of the ‘simplification’ proposed by the CCC on the other hand, would quite possibly see a redirection of this revenue from participants to the Treasury; one of the committee’s options is effectively to convert the CRC to a form of carbon tax".
hurleypalmerflatt has welcomed a number of the CCC’s recommendations and agrees that the scheme is complex; however, the company argues that better communication would help address industry concerns and improve compliance with the legislation. The proposal for a floor price for carbon is also recognised by hurleypalmerflatt as adding certainty for participants.
Recent analysis by hurleypalmerflatt of its clients from the past two years found that businesses could gain net revenue equivalent to 13 percent of their energy costs – or suffer a cost of 28 percent – depending on the approach they take to the Carbon Reduction Commitment. This opportunity would evaporate under some of the proposed simplifications leaving a flat cost of up to £550,000 per £1m annual energy spend. This additional cost is unlikely to translate into net additional incentives for corporate energy saving, and may not even reduce the cost of participating in the scheme.
However, hurleypalmerflatt calculates that those taking early action to optimise CRC performance could receive net income of £130,000.
Bowman added: "Those that see the CRC as an opportunity will benefit. We are in an era where sound environmental practice makes absolute commercial, as well as ethical, sense."

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