Emissions Measuring and Reporting

Formerly known as the EU Emissions Trading Scheme, the EU Emissions Trading System (EU ETS) is a Europe-wide ‘cap and trade’ scheme – the first of its kind – that was launched in 2005 as one of the key policies introduced by the European Union to help meet its greenhouse gas (GHG) emission targets under the Kyoto Protocol.

Which organisations are covered by the EU ETS?

The EU ETS covers electricity generation and the main energy-intensive industries – power stations, refineries and offshore, iron and steel, cement and lime, paper, food and drink, glass, ceramics, engineering and the manufacture of vehicles.

According to the Department of Energy and Climate Change (DECC), these organisations collectively account for around 43 per cent of UK CO2 emissions.

From 2012, aviation will be included in the EU ETS for the first time. This will primarily affect aircraft operators with flights arriving at and departing from EU airports. More information on compliance with these new rules is available on the DECC website.

How does the EU ETS work?

Each EU member state sets an overall cap on the total emissions allowed from all the installations covered by the EU ETS. These total capped emissions are converted into allowances – one allowance equals one tonne of CO2 – which are then distributed 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.

Companies not covered by the EU ETS can open person-holding accounts within the registry. They do not receive any free EU allowances like EU ETS operators, but they can use the account to trade allowances with other registry accounts. As the price of carbon fluctuates, companies can trade allowances in a similar way to other commodities.

According to DECC, there are other reasons why companies not covered by the EU ETS might open a registry account. For example, if they are acting as intermediary or broker for a company within the scheme, or for the purposed of offsetting – a company could buy and surrender allowances, which would mean those allowances were no longer available and the level of the emissions cap has therefore been reduced. A UK company called Carbon Retirement will do this on behalf of companies looking to offset their carbon emissions.

What is the timetable for the EU ETS?

The EU ETS operates in three year phases, with new emissions caps being set for each phase. We are currently in the second phase, which runs from 2008-2012. The first phase (from 2005 to 2007) covered CO2 only, the second phase covers all GHG emissions and extended the range of organisations encompassed by the scheme.

Phase three, from 2013, aims to be more ambitious in its emissions reduction targets, while providing more predictable market conditions and more certainty for industry. The key difference compared with the current system is that there will be a centralised, EU-wide cap on emissions, rather than national allocation plans set by individual member states.

For more information on the changes to the requirements under phase three, visit the DECC website.

What are costs of EU ETS?

There are various costs associated with EU ETS compliance – including registration costs, preparation and management costs and the cost of buying of carbon allowances.

But a spokesperson for DECC pointed out: “The recent UK Government Impact Assessment of the EU Climate & Energy Package, suggests that the revised EU ETS provides good value for money.

“The central scenario suggests that the benefits of the package will outweigh the costs by approximately 10 times, with the EU ETS from 2013 providing approximately 60 per cent of emissions reductions in a cost effective manner.”

This view supports a report produced by the Climate Group in September 2009, which suggested that most organisations covered by the scheme had found that the financial benefits outweigh the costs. Companies reported that they have achieved energy efficiency gains by improving their monitoring and reporting of emissions and factoring the cost of carbon into all new product and business decisions.

However, some concern was expressed that competitiveness could be adversely affected when tougher emissions targets are introduced as part of the third phase in 2013 – especially if similar climate policies are not implemented in their competitors’ countries. The failure of the Copenhagen Summit on Climate Change in December to agree binding targets on emissions has raised those concerns, as have events in the US and Australia, where cap and trade legislation appears to be stalling.

More information on EU ETS can be found at:

• DECC

• Defra

• Carbon Trust

• Environment Agency

The Government has recognised the need to give special consideration to energy-intensive industries with regards to climate change, given their energy use and their need to compete internationally.

Consequently, energy-intensive industries can obtain an 65 per cent discount from the Climate Change Levy, provided they meet challenging targets for improving their energy efficiency or reducing their carbon emissions.

Climate Change Agreements (CCAs) set the terms under which eligible companies may claim the levy reduction.

Which organisations are covered by the CCAs?

Climate Change Agreements(CCAs) cover a wide range of industry sectors, from major energy-intensive processes, such as steel, chemicals and cement, to agricultural businesses, such as intensive pig and poultry rearing.

Smaller sites that do not meet the size thresholds of the Pollution Prevention and Control (PPC) Regulations, but otherwise would qualify, are also eligible for a CCA.

If a business thinks it may qualify for a Climate Change Agreement (CCA), it can only apply through a sector or trade association – businesses don’t have to be a member of the trade association to apply, although the association may charge an additional administrative fee to non-members.

Current Climate Change Agreements expire in March 2013 and the Government has been consulting on how to simplify CCA. The consultation closed on October 28 2011. The .

For more information visit the DECC website.

The CRC Energy Efficiency Scheme (CRC) – formerly known as the Carbon Reduction Commitment – is a mechanism which started in April 2010 and is designed to improve energy efficiency in large, ‘low energy-intensive’ organisations not already covered by UK Climate Change Agreements and the EU ETS. It is a cap and trade scheme, like the EU ETS, thereby providing a financial incentive to reduce energy use by putting a price on carbon emissions. Changes to the scheme announced in the Chancellor's Comprehensive Spending Review in October 2010, however, mean revenue raise through the scheme will go to the Treasury rather than be recycled among participants.

The CRC aims to cut the CO2 emissions of participating organisations by approximately 1.2 million tonnes a year by 2020.

Which organisations are covered by the CRC?

The Government estimates that the scheme will initially cover around 4,000 large public and private sector organisations, such as supermarkets, water companies, banks, local authorities and all central Government departments – though eventually 20,000 organisations are likely to fall within the CRC’s remit.

Organisations are eligible if they (and their subsidiaries) have at least one half-hourly electricity meter (HHM) settled on the half-hourly market. They also qualify if their total half-hourly electricity consumption exceeded 6,000 megawatt-hours (MWh) during 2008.

Businesses that are a subsidiary of an organisation or part of a group, must act as one entity, with the highest parent organisation usually being the ‘primary member’ responsible for meeting the CRC’s admin requirements on behalf of the group.

How does the CRC work?

Under the CRC , companies will have to buy carbon allowances to cover their carbon emissions – as part of this they will have to measure and record energy use and calculate CO2 emissions (not including transport emissions).

There will be an annual performance league table that ranks participants by their energy efficiency performance, but money raised through the allowances will no longer be recycled back to participants, according to their position in the league table.

What is the timetable for the CRC?

The CRC began in April 2010 with a three-year introductory phase (subsequent phases will run for seven years).

Following a six-month registration period, organisations that qualified (based on their electricity consumption during 2008) had to register or make an information disclosure by September 30 2010.

The financial year 2010-2011 is also the qualification year for the second phase of the CRC and it is important that organisations monitor their half hourly electricity consumption during this period – a statement of consumption can be obtained from suppliers to help with this.

The first sale of allowances takes place in April 2011 and participants will be able to buy allowances at a fixed price of £12 a piece – each one worth a tonne of CO2.

However, Secretary of State for Energy and Climate Change Chris Huhne announced in November 2010 that the trading phase of the scheme – is to be delayed until 2013. A consultation of the CRC is also underway.

A change of heart by the Government in October 2009 means that participants will only have to purchase allowances to cover their forecast emissions for 2011/12 (and not for 2010/2011 too, as previously announced.)

For a more detailed timetable visit the DECC website .

What is compliance with the CRC likely to cost?

It’s one of those ‘how long is a piece of string?’ questions, but potential costs of participation in the CRC could include administration and consultancy advice and implementation of new technology as well as potential fines and penalties for failing to comply or poor performance (see below).

There are a number of relatively small fixed administration fees payable to the Environment Agency, which manages the CRC, the most substantial of which are a £950 one-off registration fee and an annual subsistence fee of £1,290.

There are then the internal costs of preparation for the CRC – making sure an organisation has all the right data and that there is a good audit trail. According to Harry Morrison, general manager at th eCarbon Trust Standard, “the leading organisations in the UK have been thinking about carbon reduction for some time and will have very little additional cost here.

“All the companies that have been through the Carbon Trust Standard, for example, have already been through a data collection and audit process, but for some of the organisations that are less prepared, that could be a substantial investment – although they will reap the rewards of that down the line.”

In terms of on-going management time, figures from NERA/Enviros calculate that the annal costs of complying will range from £7,000 a year for a single-site operation to £28,500 a year for an organisation with 50 or more sites.

Then there is the actual cost of participation – organisations covered by the scheme will have to buy their carbon allowances up-front at an initial cost of £12 per tonne of CO2, which may present a cashflow challenge for many organisations.

Overall, however, organisations are expected to benefit from participation in the CRC.As Morrison explained: “The way you can think about this is that everytime you use your gas and electricity in a typical mix, you are paying approximately £150 per tonne of CO2 – that compares to £12 a tonne for CO2 allowances. So by cutting your emissions, you are saving much more money.”

What are the penalties for failure to comply with the CRC?

If a company fails to register by the required deadline it could receive a fine of £5,000, plus an additional £500 per day, until it is successfully registered on the scheme.

Where an annual report is submitted late, the fine looks as though it could be £5,000 + £0.05 per tonne of allocated allowances per working day.

Where submitted carbon emission details are more than five per cent variation from actual, there will be a fine of £40 per tonne of allocated annual allowances and where an evidence pack is incomplete or not up to date the fine will be £5 per tonne of allocated allowances.

Non conformance will be treated as a civil offence. However, failure to respond to subsequent demands will lead to issue being treated as a criminal offence.

In January, DECC issued updated guidelines on the CRC.

The CBI has produced a guide for business on complying with the CRC .

Morrison recommends that organisations engage a broad set of skills in preparation for the CRC – not limit it to their environmental and energy people. “This should include the finance department, which is going to have to do the budgeting and the auditing, and the PR department, which is going to have to think about the reputational impact of the league tables.”

The Carbon Trust has produced a guide to the CRC, specifically for finance directors.

More information on the CRC can be found at:

• DECC

• Environment Agency

• Carbon Trust