CRC changes: streamlined or watered down?

The government's proposed reforms to the CRC could spell yet more uncertainty for businesses

01 Jul 2011, 12:20

Just when you thought the Carbon Reduction Commitment (CRC) could not get any more complicated it surprises you.

The government claims that the surprise changes to the CRC proposed yesterday will "simplify" and "streamline" the scheme, which indeed they might, one day.

In the meantime, these proposals will be put out to consultation - early next year according to DECC - before the government then responds to the consultation, makes any final alterations, and eventually changes the rules governing the scheme.

Given that the requirements for emissions reporting under the scheme run in line with the financial year, DECC will be hard pushed to finalise its new streamlined processes before the next year gets underway in April. After a year of uncertainty for the CRC, during which coalition ministers have scrapped the revenue recycling element and repeatedly signalled that they want to reform the way it operates, businesses and public sector bodies are now staring down the barrel of at least another 12 months of uncertainty.

Thankfully, the government has said that after these latest changes it will not review the scheme again until 2017. But there looks to be a reasonable chance that a stable set of long-term rules for the CRC will not come into effect until April 2013, about five years after the scheme was first announced.

The silver lining is that, despite this continued uncertainty, there are signs that the CRC is working. It is part of a package of policy measures that are encouraging or forcing businesses to better measure their energy use and carbon emissions and at long last take steps to enhance their energy efficiency.

As climate minister Greg Barker observed in his written ministerial statement announcing the proposed changes: "We have seen the importance of the CRC for stimulating the market for new low-carbon goods and service industries - including in energy measurement, in voltage optimisers and in low-energy lighting. I expect this to continue."

If the CRC is getting positive results during a first year that simply requires firms to report on their emissions and energy use it makes you wonder what could be achieved if they had certainty over what charges the scheme will impose and how it will operate in the future.

What of the changes proposed yesterday? Will they mark an improvement to the scheme when and if they do eventually come into effect?

There are some undoubtedly positive steps that will make it easier for organisations to comply with the scheme. It was always slightly ridiculous to ask mid-sized companies and public sector bodies to try to work out auctioning and allowance trading strategies for the second phase of the scheme, and as such the government's plan to move to fixed price allowance sales is to be welcomed.

Equally, a qualification process that required organisations to report on whether they had a qualifying electricity meter and then report separately on how much electricity they used was the very definition of unnecessary red tape, and the government has rightly proposed moving to a one-step registration process.

Similarly, requiring participants to track their use of 29 different fuels when only four provide the vast majority of the emissions covered by the scheme added a sizeable administrative burden for little gain.

However, other proposed changes to the scheme are bound to prove far more controversial and could attract accusations of watering down.

Hat tip to Chris Stubbs, director at global environmental consultancy WSP Environment & Energy, for the analysis, but it appears that proposals to exempt all EU ETS sites from the CRC would mean that substantial quantities of electricity-related greenhouse emissions will no longer be covered by the scheme.

For example, a steel plant may end up paying for the emissions it produces on site through the EU ETS, but emissions related to the electricity used to light the facility's offices and run its IT systems will face no such carbon charge. An incentive to encourage energy efficiency will be removed.

Similarly, proposals to change the way groups of businesses participate in the scheme will raise fears that private equity and investment groups will be able to structure themselves to avoid taking part in the CRC, despite their huge influence and responsibility for significant levels of emissions (again credit to Stubbs for pointing out the risk).

The most positive aspect of today's announcement (although plenty of business leaders will disagree) is that the government faced down intensive lobbying for it to reinstate the revenue recycling element of the CRC and ditch the "stealth tax" imposed by the Treasury during last October's spending review.

A lot of nonsense has been written about a decision that allows the exchequer to keep the revenue raised from the sale of CRC allowances, effectively imposing a £1bn tax on businesses and public sector bodies.

You can argue that the government should not impose an additional tax on businesses, though given the sheer scale of the deficit and the rigour of the government's austerity measures in other parts of the economy, it is a pretty weak argument.

But the suggestion by business groups that the decision to keep the CRC revenue will make it less effective at encouraging businesses to invest in energy efficiency is ridiculous. The government reckons that scrapping the revenue recycling element of the CRC and effectively cranking up the financial cost of energy will in fact prove more effective at encouraging firms to invest in energy efficiency than some complex bonus and penalty scheme. As numerous failed energy efficiency incentive schemes have shown in the past, the stick tends to be more effective than the carrot when trying to get firms to take efficiency seriously. I have yet to see a compelling analysis that disproves this hypothesis.

However, this does not necessarily mean that Barker was right to reject calls for the CRC to now be scrapped and replaced by a simpler carbon tax.

In his statement, Barker said that having considered calls for a straight carbon tax he had decided to retain the CRC, as "we believe that the tailored combination of reputational, financial and standardised energy measurement and monitoring drivers remains the most effective way to tackle the barriers to the uptake of energy efficiency".

He is right, of course, but a bit of joined up government thinking could have concluded that a straight carbon tax coupled with the approval of the current proposals for mandated carbon reporting for large firms that are being consulted on by Defra would have delivered a financial and reputational incentive for firms to cut carbon without the masses of red tape that still surrounds the CRC.

The simple imposition of mandated carbon reporting rules, as called for by large numbers of businesses, including the CBI, would increase pressure on firms to cut carbon and provide the information required for investors and NGOs to draw up their own carbon league tables without the need for the government to get involved.

Meanwhile, a straight carbon levy for large firms would head off the accusations of stealth taxation levelled at the CRC, generate revenue for the exchequer, and drive massive investment in energy efficiency and carbon reduction.

However, regardless of the strength of the case for a simpler carbon tax and reporting regime, the government's recent spate of u-turns makes it is highly unlikely that it will now scrap the CRC and replace it with a new approach.

The controversial scheme is here to stay, albeit in a slightly different form, and as such businesses must now move swiftly to ensure that they are complying with the scheme and minimising its impact by implementing the energy efficient measures that are already underway at many organisations.

  
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