UK carbon trading to have little impact on emissions

Any UK businesses and public sector bodies set to join the government's new Carbon Reduction Commitment (CRC) and yet to develop a comprehensive carbon management strategy should do so immediately or risk severe financial penalties.

That is the stark warning of a new report released today by green business research firm Verdantix, which argues that while the scheme's initial impact on emissions levels will be limited the penalties for non-compliance make robust carbon management a necessity for the 5,000 organisations involved.

The report, Verdantix Best Practices For The Carbon Reduction Commitment, predicts that the gradual roll out of the cap-and-trade scheme means that the initial phase of the scheme up to 2013 will see limited emission cuts and little trading of carbon credits.

"There is no trading in the first year and credits bought in the second year can be rolled over into the third year," explained Verdantix director David Metcalfe. "Firms will be risk averse initially and will buy all the credits they need as well as some excess that they can roll over into the last year if need be. As a result, there will be very little need for trading until the third year when it will make sense to get rid of any excess credits."

However, the report warns that while firms will not initially be required to make deep emission cuts as a result of the scheme they will need to comply with the new regulations or risk both financial penalties in the first phase of the scheme and far higher carbon costs from 2013 when the charges for failing to cut emissions increase.

Under the scheme, organisations that fail to provide emissions data to the Environment Agency within one month of the deadline will lose their entire expenditure on CRC allowances - a sum of at least £500,000 and potentially as much as £4 million. The report predicts that as many as 10 per cent of the organisations covered by the CRC will not be in a position to provide accurate emissions data from 2010 and will run the risk of being caught out by Environment Agency audits.

"If you have not done so already now is the time to talk to the executive team about getting the carbon management strategies in place you need to measure, report and reduce emissions," advised Metcalfe.

He added that finance departments would also have to budget to ensure they can buy the necessary credits. "A company with emissions of 250,000 tonnes will have to pay £6m in April 2010 to the government for two years worth of credits, they'll get £3m back in October 2010 and another £3m back in April 2011 when they will also have to pay a further £3m for the next year," he explained. " These are not insignificant sums and they need to budgeted for now."

"A company with emissions of 250,000 tonnes will have to pay £6m in April 2011 to the government for two years worth of credits, they'll get £3m back in October 2011 and another £3m back in April 2011, they then need to pay £3m in April 2012," he explained. "These are not insignificant sums and they need to budgeted for now."

The report also warns that the benchmark for future caps will be set from next year and as a result of the imminent recession emission levels for 2009 are likely to be lower than expected, making it harder in future years for firms to come in under their caps.

Moreover, the financial penalties associated with the scheme will get much more severe from 2013 when the worst performing organisations will see 30 per cent of the money they pay for carbon credits transferred to the best performing firms in the form of a bonus.

"In 2012-2013, a company with emissions roughly equivalent to the hotel and restaurant chain Whitbread paying out £3m a year for credits would risk losing £900,000 if it came bottom of the government's league table," explained Metcalfe. "That is the when the real drivers for bringing down emissions come in and firms would be wise to prepare for them now."