New carbon trading scheme to penalise firms that fail to curb emissions

Around 5,000 of the UK's largest public and private organisations will face significant financial penalties if they fail to meet carbon reduction targets from 2010 onwards after the government yesterday confirmed it is to press ahead with plans for a major new carbon trading scheme.

Speaking at the publication of the government's response to its consultation on the planned Carbon Reduction Commitment (CRC) carbon trading mechanism, environment secretary Hilary Benn said the scheme would target emissions from all central government departments as well as local authorities and large businesses such as supermarkets, banks, hotel chains and department stores.

Under the planned legislation, organisations whose annual half-hourly metered electricity use, and 70 kilowatt metered electricity use in Northern Ireland, is above 6,000 MWh – which roughly equates to an energy bill of over £500,000 – will be obliged to enter the trading scheme. Such organisations are estimated to account for around a tenth of UK carbon emissions.

Participants will be required to purchase allowances corresponding to their emissions from energy use, excluding transport, and to then surrender them at the end of the year. For the first three years of the scheme the credits will be sold at the set price of £12 per tonne of CO2, then from 2013 organisations will have to buy the credits at auction.

Under the rules of the scheme, Defra will also impose a cap on emissions for organisations within the scheme in line with recommendations from the government's climate change committee. Firms that exceed their emissions cap will have to buy in extra credits to cover any excess emissions before surrendering their credits back to Defra, while those firms that come in under their cap will be able to sell their unused credits, creating a financial incentive for organisations to curb emissions.

The government insists the CRC will be "broadly revenue neutral" for the Treasury, as the money raised through the initial sale of credits will be returned to the participating organisations at the end of each year. However, to further incentivise firms to reduce their energy use the money that is returned will be adjusted to include a bonus or penalty payment based on how firms have performed in a "CRC league table" that will track participants' emission reduction efforts.

A spokesman for Defra said those companies that come in well below their emissions cap will receive back a bonus payment on top of the money they spent on credits at the start of the year as reward for their carbon reduction efforts. In contrast, those firms that fail to curb emissions sufficiently will not only have to buy in extra credits but will also receive back only a proportion of their initial payment to Defra.

Writing in its response to the consultation, Defra said that the proportion of initial payments that will be returned to participants as a bonus or taken as a penalty will increase over time, starting at 10 per cent for the first year and rising year-on-year up to year five when the worst performing firms could lose as much as 50 per cent of their initial payment. The department added that the government "does not rule out" the possibility of imposing a 100 per cent penalty or offering a 100 per cent bonus as the scheme progresses.

The spokesman said the aim of the bonuses and penalties was to ensure organisations that had traditionally failed to focus on energy efficiency start to take the issue seriously. "Companies like supermarkets spend millions on energy, but it is only a small proportion of costs so there has been a limited incentive for them to focus on energy efficiency," he explained. "This scheme aims to make them focus on energy efficiency measures as they can accrue major benefits from doing so."

The groundwork for the scheme's launch will begin to be laid from this month, as UK energy suppliers send out a leaflet to all bill payers of half hourly meters in Great Britain, and 70kVA metering systems in Northern Ireland, informing them that they may be covered by the scheme and directing them to a special area on the Defra website designed to help them assess whether or not they will be affected.

Defra said that those organisations that are certain to be covered by the CRC, as well as those "that may consider themselves at the margin of qualification" should now be preparing themselves to collate bills relating to their 2008 electricity use through half hourly/70kVA metering systems so that qualification for or exemption from the scheme can be confirmed in next year.

The Defra spokesman said that the department was aiming to gather information on participants' energy use from this year so that it can set appropriate emission caps and avoid the mistakes made during the early stages of the European Emissions Trading Scheme when an over allocation of credits undermined the market's effectiveness.

In related news, Benn yesterday announced that to help public sector bodies prepare for the CRC an extra £30m would be made available over the next three years in England through interest free loans for energy efficiency projects.

"It will not be easy for all organisations in the public sector to cut their emissions quickly – even though they'll be saving taxpayers' money in the long run by reducing energy bills," he said. "That's why we’re making £30m in interest-free loans available to help these organisations take up energy efficiency measures quickly."