What is carbon trading?
Carbon trading is currently the central pillar of the Kyoto Protocol and other international agreements aimed at slowing climate change.
Emissions’ trading (also known as cap and trade) is a market-based approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants. Carbon emissions’ trading is a form of emissions trading that specifically targets carbon dioxide.
A central authority (usually a governmental body) sets a limit or cap on the amount of a pollutant that can be emitted. The limit or cap is allocated or sold tofirms in the form of emissions permits which represent the right to emit or discharge a specific volume of the specified pollutant. Firms are required to hold a number of permits (or credits) equivalent to their emission levels. The total number of permits cannot exceed the cap, limiting total emis-sions to that level. Firms that need to increase their emission permits must buy permits from those who require fewer permits. The transfer of permits is referred to as a trade. In effect, the buyer is paying a charge for polluting, while the seller is being rewarded for having reduced emissions. Thus, in theory, those who can reduce emissions most cheaply do so, achieving the pollution reduction at the lowest cost to society.
Carbon trading in the UK
New rules set out by the government will pitch some of the UK’s largest organizations against each other in a drive to cut carbon dioxide (CO2) emissions.
For thefirst time large non-energy intensive organizations, which account for about 10% of UK CO2emissions, will be legally bound to closely monitor and report their emissions from energy use in preparation for carbon trading.
The Government scheme, known as the CRC Energy Efficiency Scheme, will include businesses will be ranked according to reductions in energy use and improvements in energy efficiency alongside public sector organizations such as NHS trusts, local authorities and government departments.
Analysis for the Environment Agency suggests that the scheme could reduce CO2emissions by up to 11.6 million tonnes per year by 2020, the equivalent of taking four million cars off the road. It is also expected to save organi-zations money through reduced energy bills, benefiting the economy by at least £1billion by 2020.
During the introductory phase in 2012, allowances are being sold at afixed price of £12 per tonne of CO2. A further 15,000 organizations that use less than 6,000 MWh, but still have at least one half hourly electricity meter, will be obliged to register and declare their electricity use.
How does the EU Emission Trading System (EU ETS) work?
Each EU member state must develop a National Allocation Plan (NAP) approved by the European Commission.
This sets an overall cap on the total emissions allowed from all the installations covered by the system. This is converted into allowances (one allowance equals one tonne of CO2), which are then distributed by EU member states to installations covered by the system.
At the end of each year, installations are required to surrender allowances to account for their actual emissions.
They may use all or part of their allocation. Installations can emit more than their allocation by buying allowances from the market. Similarly, an installation that emits less than its allocation can sell its surplus allowances. The environmental outcome is not affected because the amount of allowances allocated isfixed.
CRC scheme
The Carbon Reduction Commitment Energy Efficiency Scheme (CRC) was introduced in 2010 following years of design and many rounds of consultation. Registration and the making of Information Disclosures took considerable effort for many organizations and most hoped that things would settle down from 30 September 2010. But before a month was out the Comprehensive Spending Review heralded further change, which was consulted on over a 4 week period in the run up to Christmas 2010. And in January 2011 a furtherfive Government discussions papers were issued in an attempt to engage business in further simplification measures.
Qualification for the scheme is based on electricity supply across organizations and groups of undertakings, rather than at an individual site basis. Organizations that are a single entity, that is, they are not part of a group, will need to establish qualification for CRC across the sites that are part of that organization.
Organizations that are part of a group will be grouped under the highest parent undertaking.
Organizations qualified as participants for Phase 1 if, during the 2008 calendar year, they had at least one half-hourly electricity meter (HHM), settled on the half half-hourly market and if they consumed at least 6,000 MWh (mega-watt hours) through all half-hourly meters.
If an organization consumed less than 6,000 MWh of electricity, they did not need to register for Phase 1.
A megawatt hour (MWh) is an amount of electricity. It does not mean watts per hour. A megawatt hour is the equivalent of a million-watt device being used for a period of one hour.
To put the CRC energy use into perspective, 100 computers running constantly 24 hours a day, for 273 years would equal 6,000 MWh. There are a 1,000 kilowatt hours (KWh) in a megawatt hour.
Organizations that qualified for Phase 1 may not for Phase 2. This will be especially important for organizations that were only just above the Introductory Phase threshold of 6000 MWh electricity usage in 2008, and so qualify, but have made progress in energy reduction projects since then. If an organization consumes more than 6,000 MWh during the Phase 2 qualification year (1 April 2012 to 31 March 2013) then they will qualify for the scheme. This same principal applies to all planned future phases.
Phase 1 registration and information disclosures are closed. The Environment Agency is currently contacting those organizations that it thinks are responsible for half-hourly electricity meters that were not declared in those registrations and information disclosures.
Participants in Phase 1 (those who made full registrations) should be tracking and recording ALL their energy consumptions from 1 April 2010.
Participants should also be conducting internal audits, keeping records of them and be prepared for an Environ-ment Agency audit. There is planned 20–25% coverage of random audits each year.
Year 1 (Qualification year) full energy reports needed to be submitted summer 2011 – Participants in Phase 1 needed to report their full year 1 energy consumptions (1 April 2010 to 31 March 2011) in the period 1 April 2011 to 31 July 2011. The report had to include ALL energy used, not just the electricity through the half hourly meters that were declared during registration. CO2credits are not required and do not need to be paid for in the qualification period. At the end of the 2nd year (registration period), CO2credits will be purchased based on the second year’s carbon emissions.
Participants in Phase 1 have to buy their first tranche of emissions allowances in summer 2012 and they must buy enough to cover their actual emissions in year 2 (1 April 2011 to 31 March 2012). In other words they will be buying in arrears. Prices will befixed at £12/tonne, equivalent to approximately 10% of the total cost of the energy itself.
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There is no revenue recycling so CRC is now a flat tax at £12/tonne of CO2or roughly 10% of the energy bill itself.
The league table will still be published, based on the same performance metrics as before – absolute emissions, relative emissions and early action metrics– with the early action metrics tapering away over the first three years.
CRC Phase 1 has been extended and now runs until 31 March 2014, in other words it has four reporting years rather than the previous three.
The Phase 2 qualification year is 1 April 2012 to 31 March 2013. Phase 2 registration occurs in the period 2013/
2014. Thefirst reporting year in Phase 2 will be 1 April 2013 to 31 March 2014 and the fifth reporting year of Phase 2 will end 31 March 2018. The third phase will begin on 1 April 2018.
Simplifying the CRC energy efficiency acheme
In 2011, the Government set out its proposals for the future of the scheme. Responding to feedback received, the government proposed a number of simplifications to the CRC scheme which, subject to further analysis and formal consultation, will be implemented from Phase 2 onwards (where registration for Phase 2 begins in April 2013).
Amongst other simplifications the Government is proposing to:
Reduce the number of fuels covered by the scheme
Under the current scheme, businesses have to report on the emissions from 29 different fuels and we pro-pose reducing this to four: electricity, gas, kerosene and diesel for heating. This will cover over approxi-mately 95% of emissions captured under the CRC scheme while significantly reducing the administration burden of the scheme.
Move to fixed price allowance sales
Instead of establishing an emissions cap and holding annual auctions as proposed by the previous Admin-istration we propose from the start of phase 2 in 2014 there should be two sales per year where the price of allowances isfixed. This would remove the need for businesses to come up with auctioning strategies and give price certainty to help investment decisions. A lower price in thefirst sale will incentivize good energy management and reward those who successfully forecast energy use.
Simplify the organizational rules
Abolish the need for large businesses to participate in groups which do not reflect their natural structure.
Make qualification processes easier
To make qualification a one step process instead of two. Previously businesses had to firstly prove they had a qualifying electricity meter and then declare they used a particular amount of electricity. This would be abolished in favor of participants just having to prove they use a certain amount of electricity from the qua-lifying meter.
Reducing overlap with other schemes
Any CCA or EU ETS site would be automatically exempt from the CRC scheme.
Carbon floor
What is a carbonfloor price and why is it needed?
Creating a carbonfloor price in the UK essentially requires our industries to pay a top up if the market price for carbon falls below a certain level.
A carbonfloor price is a regulatory/taxation policy that states that polluters must pay a minimum amount of money for the right to pollute. This is likely to take the form of a tax that requires those who qualify to make a payment to the Treasury. It is expected to replace the existing Climate Change Levy, which is a downstream tax on energy use rather than a direct upstream tax on greenhouse gas pollution.
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Roughly half of Europe’s emissions are covered by a European regulation that caps emissions (the EU Emissions Trading Scheme) requiring them to submit sufficient permits to cover their emissions. Permits, known as allowan-ces, can be freely traded and the price someone is willing to pay to acquire them determines the price of pollution.
At present because there are too many allowances available in the market compared to the demand prices are relatively low– at around €15 per tonne of carbon dioxide equivalent. This low price is not necessarily enough to dissuade polluters from continuing to emit and does not provide an attractive enough return for would-be investors in low carbon solutions. There is also the risk that it could fall even lower. This lack of price certainty is seen as a potentially important barrier to investment.
A carbonfloor price is therefore primarily designed to attract low carbon investment into a country by making the price of pollution higher and increasing the rewards for low carbon projects. As explained below it is not in and of itself an environmental policy and in terms of value for money it must be assessed as an industrial policy.
The UK could decide to impose an immediately effectivefloor price, which takes the price of pollution all the way up to this projected level of cost. This would however have a very significant impact on the competitiveness of UK industry relative to competitors in the rest of Europe. It is much more likely that thefloor price will initially be set either at today’s market levels (around £13–14 per tonne) or slightly above, incorporating the cost of the Climate Change Levy which is currently equivalent to around £4–6 per tonne. A price escalator may also be built-in to steadily increase thefloor over time.
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