Corporate shame to drive cap-and-trade success

Officials at Defra are hoping that the shame of being labelled one of the worst performing organisations in the UK at curbing energy use will drive firms to invest in energy efficiency measures.

Under its planned Carbon Reduction Commitment (CRC), which will be introduced in 2010 and affect around 5,000 organisations, participants will be rated in a new league table based on their ability to cut electricity use. The government is confident that the "reputational risk" of being amongst the worst performers in this league table will be central to the cap-and-trade scheme's success.

The carbon trading scheme is designed to be "revenue neutral" and as such firms can expect to see the bulk of the money they pay for carbon credits returned at the end of each year with the poorest performers initially at risk of losing just 10 per cent of that sum through penalty payments. For a firm with an electricity bill of £500,000 this equates to a penalty of under £4,000.

Whitehall accepts such modest sums are unlikely to instigate major behavioural change in large corporate environments, but is hopeful that the associated brand risks of being publicly labelled a poor performer will increase focus on energy saving measures.

"For many organisations, electricity bills are just one per cent of operational costs so putting additional financial costs on them [through the CRC] does not necessarily change much," admitted Ian Trim, senior policy adviser at Defra. "The reputational element attached to the league table will be the driver for change."

Defra officials said that positions in the league table will be assigned based on three weighted metrics: an absolute metric, based on annual emissions relative to the organisation's proceeding five year average; a voluntary early action metric, based on the extent to which organisations have invested in energy efficiency measures such as smart meters prior to the CRC launching; and a growth metric that measures emissions per unit of turnover and therefore accounts for firms that see their carbon footprint grow as a result of expansion.

Ray Gluckman, consulting group director at green consultancy Enviros, which is working with Defra on implementing the CRC, said that as an organisation's position within the league table will be relative to that of its peers it will face genuine competitive pressure to curb carbon emissions. "Someone has to come bottom and some companies will perform badly," he warned. "Even if they perform quite well and cut emissions, they might still have performed worse than everybody else."

One delegate agreed that the brand risks associated with ending up near the bottom of the league table would provide a greater incentive for action amongst those firms that exceed their emissions cap than the prospect of having to buy in extra carbon credits. "Within hours of the league table being published for the first time we're going to know the best and worst DIY chains, the best and worst pub chains and so on," he said. "There will be these sub-league tables within the overall league table and as such we shouldn't underestimate the reputational risk factor."

However, Gill Hall, director of the Carbon Centre of Excellence at IT giant IBM, warned that while the CRC league table would force chief executives to take the issue seriously the extent to which poor performance in the table causes brand damage to a firm will only be determined by the credibility of the metrics involved. "The league table must be seen as fair," she said, adding that if there are concerns about the "perceived fairness" of the table then companies would be able to minimise any brand damage from performing poorly by simply arguing that they support alternative environmental metrics and standards.

Moreover, Gluckman advised that firms should not ignore the financial element of the CRC altogether, noting that with the government committed to increasing the proportion of money that will be witheld as a penalty or returned to the best performers as a bonus, the scheme could also have a significant financial impact within five years.

This story first appeared at BusinessGreen's Corporate Climate Response Blog