Investigation: Flawed emissions trading rules leave UK firms stuck in catch-22

The failure of the government's upcoming emissions trading scheme to recognise investments businesses have already made in renewable energy is threatening to alienate some of the UK's most high-profile green business pioneers, with critics accusing the government of "blackmailing" businesses into accepting carbon accounting rules that will downplay their support for green energy.

The Carbon Reduction Commitment (CRC) is due to start in April 2010 and is at the centre of the government's efforts to encourage mid-level emitters such as supermarkets, hotels and other big businesses to reduce their carbon footprint. The cap-and-trade scheme is modelled on the EU emissions trading scheme and will cap emissions for all UK businesses spending more than £500,000 a year on electricity, forcing them to buy in carbon credits to cover any emissions that exceed their allocation.

However, while in favour of carbon trading in principle, some of the UK's most prominent supporters of lower-carbon business models are concerned about the structure of a scheme that they fear will fail to adequately recognise the emission reductions delivered by those companies already investing in renewable energy.

Late last year, Asda, B&Q, BT, Dalkia and the Co-operative Group – all firms that have invested in emission-reduction initiatives in recent years – wrote a joint letter to Defra voicing concern that under the rules of the CRC, renewable electricity that they were generating onsite, as well as electricity purchased from green tariffs that came through the grid but from renewable sources, would be considered to have the same emissions as standard energy from the grid.

"Any clean electricity generated onsite or purchased through the grid will be given the same emissions figure in the CRC as that of natural gas or even coal, despite costing these firms far more," said Susan Pelmore, policy analyst at the Renewable Energy Association (REA).

The counter-intuitive accounting rules are the result of these firms having already been awarded renewable obligation certificates (ROCs) for the renewable energy they generated onsite. They can sell these under a government scheme that was designed to provide incentives for investment in renewable energy generation.

Consequently, the government decided last summer that companies that had been issued ROCs for renewables had effectively already sold the green benefit of their schemes and as such, the energy should not be recognised as zero-carbon under the CRC.

"The aim was to avoid double counting," explained Harry Morrison of the government-backed Carbon Trust, adding that similarly, those firms buying renewable energy from the grid through so-called green tariffs would also not have the associated emission savings recorded under the CRC. "The thinking here was that there's been a lot of green tariffs and there are serious questions over their additionality – that is, whether they are actually saving carbon which would not have been saved anyway," he continued. "Plus, if the energy is coming from a wind farm, that wind farm will most likely already have applied for subsidies."

However, Pelmore said it was still unclear as to why firms investing in onsite renewables or green tariffs should see associated emission reductions ignored by the CRC.

"It's difficult to see the double counting," she argued. "ROCs were never an emissions trading scheme – it wasn't about selling the carbon benefits. It was a technology support scheme designed to advance investment in particular types of immature renewables. If ROCs had been about rewarding clean energy use, they would have included large-scale hydro and energy from waste projects – both clean ways of generating energy – but they are not rewarded with ROCs because they are established technologies."

A third consultation on the CRC scheme is due in February, but observers believe it is extremely unlikely that the rules will be changed at this late stage.

To help appease critics who claim that the CRC will effectively punish those firms that have gone the extra yard to cut emissions by investing in green energy, an early-adopter scheme has been introduced which will aim to ensure the CRC rewards those companies that have already undertaken emission-reduction efforts.

Known as the Carbon Trust Carbon Standard, and run by the Carbon Trust, the labelling scheme allows firms to improve their position in the CRC league table – which will publicly rank firms on their emission reduction efforts – based on their past investments in low-carbon initiatives and technologies.

To achieve the Carbon Standard, firms must demonstrate that they have measured emissions and demonstrated reductions over a three-year period previous to their application.

However, the way emissions are measured under the standard is exactly the same as the way they will be measured under the CRC – meaning that electricity generated through renewables for which subsidies have already been claimed will be considered to have the same carbon footprint as electricity from the grid.

Observers claim the scheme has left many firms in a catch-22 situation. They were opposed to the way the CRC measures emissions and felt the league tables would not adequately reflect their early action, yet by signing up to the very scheme that was designed to remedy that problem, they will have to tacitly accept a carbon accounting method they regard as flawed.

One particularly disgruntled early mover argued that the Carbon Standard scheme represented "a clever piece of blackmail", adding that "the improved table position we will see thanks to adopting the carbon standard will nowhere near reflect how much we've done on renewables".

Morrison is keen to emphasise that the Carbon Trust quango runs the Carbon Standard, and that it is not a government scheme, somewhat negating accusations of deliberate blackmail.

And despite their objections, almost all early movers have decided to take part in the Carbon Standard, while continuing to express their objections to the government. B&Q, BT, HP and Morrisons have all signed up – despite the fact that they are not happy with the scheme, with B&Q continuing to express strong objections.

Nevertheless, some companies are not at all happy and a notable absentee from the Carbon Standard scheme thus far is BskyB – which has purchased much of its energy through green tariffs as part of its high-profile commitment to being carbon neutral.

However, the company is likely to eventually sign up, despite serious reservations over a carbon accounting technique that could undermine its claims of carbon neutrality. "We are likely to sign up and to be a critical friend to the scheme," said one Sky source. "What other choice do we have?"

Businessgreen.com asked Harry Morrison of the Carbon Trust if he felt that Carbon Standard adoption adequately compensated businesses that had been early movers.

"Measurements had to be made in some way," he said. "The Standard gives them a great opportunity to prove themselves and only those who have been committed for three years can achieve it. And there's still time to get it next year if they want."

A spokesman for the Department of Energy and Climate Change said: " Organisations that have onsite renewable generation have the ability to sell Renewable Obligation Certificates to the suppliers who are under the obligation to source renewable energy. CRC does not offer additional incentives, but does not remove this substantial financial incentive for onsite renewable generation. "