Guide to the Carbon Reduction Commitments

As of October 2009, this page now contains obsolete information: for the latest on the Carbon Reduction Commitment (now CRC Energy Efficiency) Scheme click here.

The Carbon Reduction Commitment scheme is a mandatory initiative from the UK Government which is set to be enforced from April 2010, although businesses set to be involved in the scheme need to start preparing their budgets now for the consequences ahead.

Is your business affected by the scheme? What action do you need to take? How can your involvement actually result in a profit? Read on to find out...

Is my business affected?
Can I avoid participation in the Carbon Reduction Commitment by reducing my energy consumption now?
How will the Carbon Reduction Commitment operate?
When does my business need to start purchasing carbon credits?
Who profits from the Carbon Reduction Commitment scheme?
What metrics decide my business's placement in the CRC league tables?
How can my business climb the CRC league table?
Should I wait until 2011 (or later) before cutting my emissions?

Is My Business Affected?

This section now contains obsolete information: for the latest on the CRC Scheme click here.

Carbon Reduction Commitment (CRC) is a scheme for all UK businesses using more than 6,000 MWh through half-hourly meters annually (this equates to around £500,000 in yearly energy bills), starting in April 2010. It will affect around 5,000 businesses and will cost an average of £38,000 per year - these projected expenses include the cost of staff and their appropriate training for the CRC reporting procedure.

If your business has a hour-hourly meter but consumes less than 6,000MWh per year, your business will not be compelled to be involved in the Carbon Reduction Commitment scheme but you will need to disclose some information to the CRC administrator: a list of the half-hourly meters that your business uses and your annual energy usage from them should it exceed 3,000MWh per year.

Qualification packs will be sent to the billing addresses of all half-hourly meters settled on the half-hourly market in September 2009. Further details on information disclosures will be given in those packs.

Can I avoid participation in the Carbon Reduction Commitment by reducing my energy consumption now?

Unfortunately not. The qualification period for the introductory phase of the CRC was 2008 - it is the energy bills from that year which participation will be decided from. However, actions taken now to reduce your business's energy usage will strongly count towards your position in the first and second years' league tables, which will be published as a way of judging the relative performance of participating companies.

League table positioning has important financial implications for business involved with Carbon Reduction Commitments. Reinbursement of CRC credits is modified by league table positioning, so that companies at the top of the table can actually profit from their involvement with the scheme! See here for more details.

The qualification period for the first seven-year Carbon Reduction Commitment cycle is likely to be the 2011 calendar year. Companies below the current qualification threshold but who anticipate growth in their business's energy usage, especially due to company growth and expansion, should contact Somar International for ways of saving energy now in order to avoid inclusion in the next cycle. As companies involved in the scheme reduce their energy usage, and as the Government continues to set more stringent emission targets in order to meet their targets of an 80% emission reduction by 2050, expect the qualification threshold to be lowered for the next phase.

How will the Carbon Reduction Commitment scheme operate?

The Carbon Reduction Commitment scheme will eventually operate over seven-year cycles, but the initial introductory cycle will run for three years from April 2010 and consists of four key phases:

Qualification period (2008)
Registration period (April-Sept 2010)
Footprint year (April 2010-2011)
Compliance years (April 2010-2013)

As already mentioned, the introductory cycle's qualification period has already expired. In order to get the scheme up and running, the other three phases of the Carbon Reduction Commitment will run concurrently. The Registration period requires all firms mandatorily affected to register with the scheme, outlining their total energy usage across the company (not just the electricity usage through half-hourly meters, but emissions dealt with under the Climate Change Agreements and the EU Emissions Trading Scheme are exempt).

The Footprint year requires monitoring of emissions which will be used as a baseline for following years, whilst Compliance years require the purchase of carbon allowances to cover emissions sufficiently. They are bought on a yearly basis in advance based on projected emissions, then unused CRC credits can be traded on the secondary market.

When does my business need to start purchasing carbon credits?

This section now contains obsolete information: for the latest on the CRC Scheme click here.

Purchasing credits for the first year will be defered. The first round of CRC purchasing is in April 2011, with the carbon credits on sale will be at a fixed price of £12/tCO2. Unlike future rounds of allowance purchases it will cover the first two years of the scheme (retrospectively including 2010), creating a substantial extra cash flow burden. Businesses will be forced to buy credits for those emissions they had already created during 2010, and for those that they estimate they will use across 2011.

Some companies have already begun to feature the cost of CRC credits into their budget plans. The extra burden of two year's worth of carbon penalties at once also gives your company a clear choice: do you spend money in order to be allowed to spend money on energy bills, or spend money to save money on energy bills. Energy efficiency projects are often sidelined due to cashflow considerations: the Carbon Reduction Commitment will force your business to budget extra funds - how you choose to use them will have a critical effect on your company's long-term profitability, with energy-efficiency investments guaranteeing increased profits year-on-year.

Who profits from the Carbon Reduction Commitment scheme?

The money collected by the UK Government from the scheme is recycled directly back to the participants at the end of each Compliance year: the entire scheme from the Government's perspective is revenue-neutral. The revenue is repaid to the companies involved in proportion to their relative emissions in the first year of the scheme - for example, if a company was responsible for 2% of all emissions in the scheme in the first year, that company would receive 2% of the funds raised each year of the CRC cycle.

This baseline figure is then modified by a bonus or penalty depending on where in the Carbon Reduction Commitment league tables the company resides. The bonus/penalty rates for the top- and bottom-placed participants has been set for the first five years to be:

Phase	Year	Bonus/Penalty Rate
Introductory Phase	1	+/- 10%
Introductory Phase	2	+/- 20%
First Capped Phase	3	+/- 30%
First Capped Phase	4	+/- 40%
First Capped Phase	5	+/- 50%

This refund modification scheme means that the best-performing companies in the league table will actually earn money from their involvement in the scheme, whilst poor performers will be hit by stronger costs. Therefore the system creates a double-incentive for businesses to cut save energy: the Government will pay you money to save money!

What metrics decide my business's placement in the CRC league tables?

This section now contains obsolete information: for the latest on the CRC Scheme click here.

Annual league tables will detail companies' performances over the year, which are expected to be made public in order to further incentivise energy efficiency. The league table will include an absolute metric (carbon emissions), a growth metric (carbon intensity) and an early action metric.

The absolute metric is the base metric on which the league table will be constructed and will be the percentage change of annual emissions relative to the organisation’s previous five year rolling average.

The growth metric will measure the organisation’s percentage change in emissions per unit of turnover relative to its average emissions per unit of turnover. For the public sector it will be per unit of revenue expenditure rather than unit of turnover.

The early action metric will only feature in the Introductory CRC phase, and will be calculated from measures put in place before the Carbon Reduction Commitment scheme – equal weighting between the percentage of emissions covered by non-mandatory automatic metering and the percentage of emissions covered by Carbon Trust Standard certificate.

The weightings for the three metrics in deciding league table placements will be:

Metric	Weighting
Metric	Intro Phase Year 1	Intro Phase Year 2+3	Future Phases
Absolute	0%	60%	75%
Early Action	100%	20%	0%
Growth	0%	20%	25%

This means that for the first year of the scheme, league table rankings will be decided purely on the early action metric, meaning that attaining the Carbon Trust Standard will massively impact your company's CRC refund. To find out how what is required to attain the Carbon Trust Standard, and how Somar International's range of energy-saving technologies can help you to meet those requirements, contact us today.

The Carbon Reduction Commitment scheme will be a high-profile environmental initiative which will attract a huge amount of public and media attention, especially regarding the positioning of well-known brands in the league table. Can your business afford to be seen at the bottom? What price for your brand's reputation?

How can my business climb the CRC league table?

This section now contains obsolete information: for the latest on the CRC Scheme click here.

As well as attaining Carbon Trust Standard certification and getting smart meters for your energy supplies in order to maximise your early action score, greater energy efficiency is the key to benefitting from inclusion in the Carbon Reduction Commitment scheme.

Although investing in on-site renewable energy generation would seem to be an obvious method of lowering carbon emissions, some renewable energy generation will not be exempt (if Renewable Obligation Certificates (ROCs) are issued), and will be included at the grid average emission factor. This is so that the Government does not double up on incentives for renewables which it has under other schemes.

Additionally, emissions from the transport of people and goods are exempt. Both these exemptions mean that the focus for improvements has been strongly narrowed towards energy efficiency projects.

An initial tier of efficiency measures can be based on changing workplace behaviour. Encouraging employees to switch off lights and power down computers when not in use can make some energy savings and, in these times of economic turmoil, staff can more easily appreciate the benefits of helping their company to cut energy costs rather than cut employment costs.

The strongest way to make improvements to energy efficiency is to make investments in low-energy technology upgrades, especially in areas such as heating, refrigeration, motor control and lighting. For example, Somar's intellgent Eluma lighting consistently saves 70-80% on commercial and industrial energy bills for lighting, with Return On Investment (ROI) periods of between 12-18 months. As well as great financial benefits, businesses installing such energy-saving products also reap substantial environmental savings and operational rewards.

Further action could be taken by embarking on more capital-intensive projects such as systems integration, green data centres and on-site generation, which generally have smaller additional carbon savings and longer ROI periods. More fundamental changes can be made by redesigning products to have a smaller manufacturing footprint, lowering the intrinsic carbon footprint of their creation.

Should I wait until 2011 (or later) before cutting my emissions?

Some companies might be tempted to only start cutting back on emssions once the CRC credit purchasing system is underway, as a way of maximising the potential returns from finishing towards the top of the league table. Aside from the unpredictability involved in such a tactic arising from other companies' actions during the course of the Carbon Reduction Commitment cycle, delaying energy efficiency measures will simply cost your business more money than the potential rewards.

Due to the short ROI of some energy efficiency projects, a delay could mean that by the time your company installs an energy-saving product it could have already paid for itself! The financial savings that can be made through energy efficiency are so substantial that they outweigh the likely rewards from the CRC fund recycling scheme. Inaction only costs your business more money.

Companies which engage in the process fully and invest in low-carbon technology and business practices will reap the financial and promotional rewards of their involvement with the CRC. Companies who simply aim to comply with the paperwork will incur additional costs and risk their reputations in an ever-increasingly eco-aware consumer environment. Which will your business be?

Start saving money and carbon today: contact Somar International now to find out more about the intelligent way to save energy.

Sit at the summit of the CRC League Tables!