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Companies rise to a new carbon-cutting challenge

The government’s Carbon Reduction Commitment scheme will create new and unique challenges for some 5,000 large bodies in the UK. Rob Bell explores the initiative’s significance and finds the downside risks are at least evenly balanced by potential benefits (Apr 2009)

The Carbon Reduction Commitment (CRC) will be central to UK efforts to reach the target set out in the Climate Change Bill for an 80% emissions reduction by 2050 – and it presents unprecedented challenges to thousands of organisations unused to carbon regulation.

A mandatory cap-and-trade scheme, the CRC will bring up to 5,000 previously unregulated large organisations into the climate change mitigation battle.

The scheme, which comes into effect in April 2010, will require organisations that consume more than 6,000 megawatt hours of electricity per year – an electricity bill of about £500,000 or more – to register self-certified statements on total energy use emissions, including gas and other fuels. Only stationary energy sources are covered – vehicles are not included.

As each compliance year begins, sufficient carbon allowances must be purchased at auction to cover total emissions based on the previous year’s consumption. Further allowances can be bought – or sold by high-flyers – through a secondary market. Following the end of the compliance year sufficient allowances to cover emissions must be surrendered.

The government will recycle allowance revenues to participants depending on their position in a carbon performance league table. Good performers will be eligible for a bonus. Poor performers will face a penalty.

A letter from environment ministers to potential participants states: "It will be in the interest of participating organisations to make significant energy savings – as well as saving money, they will gain from reputational benefits resulting from good performance in the league table. In addition, if organisations perform well, the money they get back should exceed the cost of buying allowances."

The government has endeavoured to minimise the CRC’s administrative burden, and claims it will only cover organisations large enough that the savings they make will offset the cost of participating. Nevertheless, the CRC creates an unusual set of challenges for participants.

Unlike the EU emissions trading scheme (EUETS), which targets energy-intensive industrial facilities and electricity generators, the CRC will affect organisations that have not necessarily seen themselves as major energy users such as supermarkets, retailers, larger local authorities, hotel chains and office-based businesses. It will present them with new challenges in data collection and reporting, and in reducing energy consumption, often across numerous and disparate operations.

While massive price hikes have done much to sharpen minds on the need to control energy costs, the CRC will require many participating organisations to formalise data collection and introduce ways to cut consumption in a way they have never had to before.

Learning the rules

Others have yet to consider energy use across the entire organisation or may not have even realised the CRC will involve them. According to Caroline Doble of environmental consultancy Enviros: "The main thing is to become familiar with the rules. Unlike most climate change schemes, the CRC is organisation-wide, which raises a whole range of questions.

"The CRC asks companies to take responsibility wherever they pay the energy bill ¬– whether they’re the landlord or a tenant – so reporting may be required for premises that an organisation doesn’t even think of as being theirs.

"Organisations first need to establish what constitutes their CRC burden. For example, the Tata Group has a range of subsidiaries in the UK, ranging from Corus to a beverage manufacturer. All of these must join together, despite being in completely different sectors, in order to provide the information the CRC demands of the parent company.

"What we’re finding is that the parent company often doesn’t even know what information is being captured – especially if it’s from overseas, and it doesn’t think of itself as a big energy-user."

Institutional fund manager the Hermes Group’s real estate arm, which is one of the country’s largest property managers, is well aware of the CRC’s implications. It has projected a 10% increase in energy costs and about a £100,000 a year financial trading risk.

The company is implementing an internal emissions trading scheme across its directly managed portfolio ahead of the CRC. It aims to achieve a 5% year-on-year reduction in emissions and provide its management with the skills to minimise risk and maximise opportunities under the new scheme.

Hermes Real Estate is in a strong position, with data collection mechanisms already in place across much of its portfolio due to a long-established responsible property management programme. However, head of responsible property investment Tatiana Bosteels sees challenges ahead.

Ms Bosteels, who worked on developing the UK and EU emission trading schemes and Kyoto Protocol mechanisms, says: "The first question is who is the legal entity. There are going to be big questions about who exactly is liable, particularly in property where there is a very large number of joint ventures and special vehicles.

"Putting a trading scheme in place now gives us an advantage in knowing exactly if the data we have is the data we’re going to need. And once we’ve looked at the details of how we allocate responsibility to occupiers and within joint ventures we can be prepared for the scheme in 2010."

Data collection across multiple sites will be a significant challenge for most organisations, and is a primary reason to begin preparing for the CRC now. Bosteels says: "Data collection has always been difficult – the EUETS is a good example – and I think the government is going to find it very difficult in the first stage of implementation to collect reliable, consistent data."

SLR Consulting carries out energy audits for the Carbon Trust, which is well-placed to offer advice to companies preparing for the CRC. Its consultants spend a lot of time working with companies to identify energy savings and implement reporting and verification systems. Peter McKendry, a principal with the company’s process engineering team, reports "a whole spectrum of performance from incredibly good to incredibly bad".

He says: "Multi-site organisations present a complex situation because information is not collected and collated in the right manner. We need to know what energy is being used, why and where, so we can identify how processes can be improved."

Horror story

Mr McKendry’s colleague, SLR director Alan Edwards, has a horror story that perfectly illustrates the challenges faced by multi-site organisations, often operating independently and without any form of company-wide environmental management strategy.

He says: "We’ve had situations where functions are so split between departments you have to go to offices in opposite ends of the country to get hold of both the gas and electricity bills. It can be difficult to gain a cohesive picture of energy consumption."

However, it’s not all bad news. Like Hermes, most businesses are already taking at least some action on energy consumption, spurred by carbon reduction strategies, wider corporate social responsibility (CSR) and environmental commitments, and growing concern about energy security and costs.

Alan Edwards says: "My feeling is that many organisations may well have been dealing with the issues of carbon and their energy use already, but they’ve been doing so on their own terms. The CRC is going to require something more formal, and may force organisations to take action quickly where they might have taken a more long-term view if left to their own devices.

"But it’s a bit of a mixed picture. Some companies – those that haven’t really seen themselves as high energy users – are not doing anything, and are going to be thrown into the environmental arena. But a majority are already looking at energy costs and carbon. Rising energy costs are a big issue, but is it being addressed as part of a coordinated CSR-type operational optimisation, or on a more ad hoc basis?"

Reputational benefits

Successfully preparing for the advent of the CRC will allow organisations the opportunity to reap financial and reputational benefits, while those that do not will face considerable cost increases alongside rising financial penalties.

Taking action now is paramount, as Mr Edwards explains: "First, organisations need to work out exactly what they’re doing right now. Most companies probably think they’ve progressed to a certain extent on carbon emissions and energy, but it is key to understand where they are as a starting point.

"Then they need to consider objectives – where they want to be and how they’re going to get there – by looking at their processes and facilities and working out what they can do both practically and financially."

However, with energy management historically poor – especially among bodies that have never regarded energy as a considerable overhead and have no experience of the regulatory cosh – simple low-cost or no-cost savings are usually easy to identify.

The RSK Group consultancy takes minimising its energy use seriously, but an audit this year identified a further £18,000 in savings through improved energy efficiency. Brand and communications director Garry Charnock says: "If you look carefully you’ll find just how significant the potential savings are.

"We find we can identify an average of 25% savings on energy bills, so it’s worth companies making the effort. A lot of it is about stuff like staff behavioural change that we’ve been plugging away on for years. But companies are seeing the relevance now, particularly because of the hurdles they’re going to have to jump to meet the requirements of the CRC.

"And cost savings are a huge driver for everyone – it’s right at the top of the list, so when we tell firms they can make a 25% cost saving on their energy use straight away – and without spending any money – they generally say ‘why the hell didn’t we do this before’?"

Caroline Doble of Enviros agrees. "Because the CRC targets non-energy intensive organisations, for whom energy has not been as much of a worry, many will be behind the more switched-on businesses. The magnitude of the hike in prices means people have started to notice energy, but there is still not the understanding that there are cuts to be made through very simple steps."

Starting to take those steps means first finding where savings can be made, and this is why putting effective data-collection methods in place now will pay dividends once the CRC comes into force.

Once an organisation has established whether it is covered by the scheme and which properties will be affected, it is time to start putting data together. Ms Doble says: "The better the data, the better position an organisation is going to be in to commence carbon trading. If they don’t have all the information they need, then they won’t know how many carbon permits they need to buy.

"It’s not a headache for another day – if in three years’ time we are setting up a trading system, we’d want at least three years’ worth of energy records. And if you collect data now, you can start bringing energy costs down by identifying savings – which will help with companies’ immediate financial problems.

"It may be considered a low priority now – and it’s not a compliance risk until 2010, which is of course when people will start getting worried. But the better you manage your energy today, the better it will be for your costs in the short term, and the more prepared you’ll be once trading starts."

In a time of economic uncertainty when many businesses are struggling to stay afloat, the need to buy carbon allowances at the beginning of each compliance year may also represent a real challenge that must be paid for – even though government will return the cash six months later.

Ms Doble says: "Where we’ve helped organisations calculate how much they’re going to have to pay, suddenly the finance director gets a shock. You need someone within senior management making sure it’s understood that this large amount of money will be going out of the business for six months."

"Organisations should be getting ready for the CRC. There are too many that still feel it’s something they don’t have to think about yet. It’s not in place until April 2010, so why worry now? You should be thinking that we will have to start making these reductions, so we need to get started now."

Struggle in the public sector

For some bodies, meeting the CRC’s requirements will mean continuing and tightening strategies already in place. For others, it will be their first serious foray into energy efficiency. Public sector organisations in particular may struggle. For example, the decision to include state schools is likely to present resource-poor local authorities with huge challenges around data collection and verification, and coordinating efforts to reduce consumption.

However, help is available from consultancies and the government-funded Carbon Trust, which offers information and services including site surveys. Organisations can also seek accreditation under the Carbon Trust Standard, which provides a framework for data collection and presentation as well as certifying that an organisation has reduced its carbon footprint and is committed to further improvements. Accredited organisations will also receive recognition in the CRC league table.1

While the CRC represents a real challenge to participants, it is also an opportunity to cut costs. As Peter McKendry from SLR says: "Companies in the past might have considered the CRC obligations onerous, but the issues around energy security and price have changed their whole rationale – and if they look for cost savings they will find them, which will justify any investment burden. And at the end of the day its about resource efficiency. In every part of the business the same principles apply: identify and quantify, monitor, set targets and take action. It’s basic stuff that all businesses do."

FURTHER INFORMATION

  1. 1. www.carbontruststandard.com