Defra attempts to tackle cap-and-trade cash flow fears

Defra has today moved to quell fears that its new cap-and-trade scheme could result in cash flow issues for some firms, detailing new plans designed to minimise any disruption to corporate balance sheets arising from the scheme.

The Carbon Reduction Commitment (CRC) has been designed to be "revenue neutral" to those 5,000 organisations involved. Participants will be required to buy carbon credits each year only to have the money returned by the government the following year with an adjustment made for penalty or bonus payments arising from their relative efforts to curb electricity use.

Speaking at the Corporate Climate Response conference in London today, Dr Phillip Douglas, head of branch for the CRC at Defra, said that the scheme had been designed in this manner to ensure that "all the revenue is recycled to the participants", and as such it can not be positioned as tax.

However, some organisations had expressed concern over the timeline for these various payments, arguing that the government could benefit from considerable interest payments during the period that it holds the money raised through the CRC.

Under the original plan, participants would have to pay the government for their carbon credits each January and then wait 18 months until the following year's July to receive their adjusted return payments. Critics argued this approach would not only maximise interest payments for the government but also result in cash flow problems for participating organisations.

Douglas said that the government had responded to this feedback and would now ensure that it makes every effort to minimise cash flow issues. He explained that under the revised plans firms will pay for the first tranche of carbon credits in January 2010 and then pay for the second year's credits in January 2011 as originally intended. However, they will then receive back all the money they are owed for the two years in July 2011 with adjustments for bonuses and penalty payments made based on their performance in 2010.

He said that such a move would "drain the pot" of money held by the government, minimising cash flow issues for firms by ensuring that the Treasury only ever holds the money raised through the CRC for six months at a time.

The changes are just one of a number of reforms that the government has made in response to its CRC consultation, according to Douglas. He also cited plans to impose an initial fixed price for carbon credits of £12 and proposals for a simple sealed bid auction for credits from 2013 as evidence of the government's commitment to ensure that the scheme does not prove onerous to businesses.

However, some delegates at the conference continued to express concerns over the structure of the CRC. Several attendees criticised the Treasury's refusal to guarantee that any interest raised during the period the government does hold CRC payments will be returned to the scheme's participants, while others expressed disquiet over Defra plans to level administration charges at those organisations involved.

Moreover, Gaynor Hartnell, deputy director of the Renewable Energy Association (REA), reiterated calls for Defra to change the legislation to take account of energy organisations generate using on site renewable energy technologies.

She said that under current CRC proposals electricity generated from onsite renewable technologies such as solar panels or wind turbines will be assigned the same emissions as energy taken from the grid. She argued that this could result in the "absurd" scenario where a firm switching from using natural gas in a combined heat and power (CHP) system to using biomass would see CRC costs increase as the electricity generated from the biomass would have a higher emissions value attached under the CRC.

Hartnell said that the REA had joined with Asda, B&Q, BT, Dalkia and the Co-operative Group to write a joint letter to Defra voicing its concerns about the issue, but had not yet had a response.

Defra officials have said that accounting for onsite renewables under the CRC would unduly complicate the legislation and overlap with existing incentive schemes for renewable energy.

This article first appeared at BusinessGreen.com's Corporate Climate Response Blog