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How carbon commitment will affect businesses

PUBLISHED: 12:50 20 January 2010 | UPDATED: 07:35 02 July 2010

Businesses are required to commit to carbon reductions under a new law.

Businesses are required to commit to carbon reductions under a new law.

Sam Williams

A whole host of new environmental legislation will become law in the coming years - and among the key planks is the Carbon Reduction Commitment which requires companies to cut their energy use or pay a penalty.

A whole host of new environmental legislation will become law in the coming years - and among the key planks is the Carbon Reduction Commitment which requires companies to cut their energy use or pay a penalty. SAM WILLIAMS reports.

From 1 April, thousands of the country's larger businesses will be forced to cut their energy use - or pay a penalty - as the government's Carbon Reduction Commitment comes into force.

The commitment, known as the CRC Energy Efficiency Scheme, is the UK's first mandatory carbon trading programme, and is aimed at helping meet the government's target to reduce the country's carbon dioxide (CO2) emissions by 60pc by 2050.

The scheme is expected to affect 5,000 companies nationally which use as least 6,000 Megawatt hours of energy each per year - which roughly translates into annual electricity and gas bills of £500,000 or more at today's prices.

So how does carbon trading work?

Under the CRC scheme, firms will be required to pay an up front “allowance” for each tonne of CO2 they emit, based on previous years' usage levels.

After a year they will then receive a rebate reflecting how well they have performed in cutting their energy use and CO2 emissions.

The result will be that those that manage to make big reductions will benefit with a bonus which could total millions of pounds, while those that fail to do so will lose out by a similar amount.

The scheme is aimed at “low intensity” energy users, such as office-based businesses, rather than very high energy users, such as manufacturing companies, which are already covered by other climate change legislation and European carbon trading agreements.

While it will affect a small minority of businesses nationally, the government says the scheme could cut 1.2 million tonnes of CO2 emissions per year by 2020 and the companies it affects are responsible for 25pc of the country's business emissions.

And it could have a major impact on the 5,000 businesses it will cover.

Dr Gideon Middleton, senior lecturer in business and climate change at the University of East Anglia, and director of the MBA in strategic carbon management, said the scheme was one of the “most important” pieces of environmental legislation affecting businesses set to come through to law in the near future.

He said: “Companies will have to pay up front and get their money back depending on how well they perform. They also have to commit to a reduction in CO2 emissions.

“It doesn't affect transport emissions but it affects electricity and gas use, and you can't just go out as a company and buy green electricity, you have to make the reduction yourself.

“If you have a large generating plant on site that can help, but companies have just got to work out how to reduce their consumption, there doesn't seem to be any way around it. Companies have got to commit to doing this.”

Mr Middleton said many companies which will be affected by the CRC scheme had already taken action to reduce energy use through simple and cost effective measures, but he said further energy savings could be more costly.

“Some companies have already taken action and reduced their energy use, by encouraging behavioural changes in staff to ensure they turn off lights and computers and don't leave computer screens on standby,” he said.

“These measures can reduce energy use by 10 or 20pc or even more in some cases. But once they have gone past that stage they will be looking at potentially costly changes to meet these targets, and those companies that have already gone through the simpler steps want some acknowledgement that they have got more of a challenge ahead of them.”

One of the businesses which will be affected by the CRC scheme is Aviva.

Tom Oxley, corporate responsibility manager at the insurer, which employs more than 6,000 in Norwich, says the company has taken many steps to reduce its carbon footprint in recent years.

Ahead of the start of the CRC scheme in April, the company has already begun replacing all light bulbs with energy efficient ones and undergone a gas boiler “optimisation” programme to ensure heating is used efficiently and only at the required times during the day.

The company has also looked at use of photocopiers and printers used across the business and used video conferencing to cut executive travel and breakdown company RAC - part of Aviva - has fitted speed limiters to vehicles to reduce petrol use.

Mr Oxley said Aviva backed the principle of the CRC scheme, and while he agreed that firms that had yet to take any of the less costly steps to reducing their energy use would find it easier to make savings and perform well in the CRC criteria, he said Aviva would continue to find ways to reduce its emissions.

He said the company - which has been undergoing a major cost cutting exercise in recent years - could become more energy efficient by reducing the number of buildings it operates from.

He said: “If you have a lower starting base you are more likely to make savings quicker with easier steps. But there are many other things we are doing, like consolidating our premises.

“If for example, we have staff scattered around 20 buildings, could they actually fit in 15 buildings, with hot-desking principles, to make it more efficient?

“There are lots of companies that might make operational efficiencies turn into environmental efficiencies and carbon reduction.”

But Mr Oxley said the CRC scheme has its faults.

While Aviva has been carbon neutral since 2006 by using green energy and offsetting its emissions, Mr Oxley said the CRC scheme did not recognise that and therefore offered no incentive to firms that choose to take such steps.

“We support the CRC scheme strategically, but if I was designing it I would change some of the tactics of it,” he said.

“If a company pays extra for a green energy tariff they are doing that because they want to reduce their carbon output by using green sources of energy.

“If while they are paying that tariff the government says they will charge you anyway there is no incentive for the company to continue to use a green tariff.”

He added: “The crux is you have really got to reduce your carbon use in the first place by using less energy and you have to make the most efficient use of it you can.

“Then you have to think, can you recycle any of it, for example the heat that comes from a computer data centre, can you reuse that?

“Then you can offset the carbon you use.

“Carbon equals climate change, and if the climate changes even by very small amount it affects the severity and frequency of floods and storms.

“We sell products that pay out when that happens, which underlines why we are very actively involved.”

Three is the magic number for new consultancy

Three University of East Anglia graduates have set up a new consultancy offering businesses help to cut their carbon emissions and save money.

Alastair Newens, Zaour Israfilof and Akshay Kulkarni - all of whom recently completed the world's first MBA course in carbon management - set up their company 3 Carbon Elements late last year.

Offering help to firms with measuring, reporting and managing carbon emissions, the business will also help businesses wanting to become carbon neutral.

As well as meeting forthcoming legislation - such as the Carbon Reduction Commitment - Mr Israfilof said reducing and offsetting energy use would help businesses become more competitive and save money.

He said: ”Becoming carbon neutral can help any organisation to become more competitive.

“It is about public perception. You are showing your commitment to reducing emissions not just your own but taking the extra step of reducing emissions somewhere else, for example developing countries.

“On the other hand some companies are required to report their carbon footprint if they want to participate in government contracts, for example.

“If you can prove you are carbon neutral the chances are they will look more favourably on you than your competitors.

“Apart from corporate image, there is a strong business case to become a low-carbon or carbon neutral company.

“Just by reducing carbon emissions we will save money. This is the most important thing we want to deliver to our clients.”

He said the company was offering a free energy measuring service to businesses, and had already secured work with brewer Adnam's and print firm Anglia Print.

Mr Israfilof added: “Reducing carbon is already important for business and it will definitely become more important in the not too distant future as the government introduces new legislation.”

What is the Carbon Reduction Commitment?

Starting in April 2010, the CRC is the UK's first mandatory carbon trading scheme. The initial phase will be compulsory for organisations that consume more than 6,000 MWh of metered electricity during the period from January 2008 to December 2008. At today's prices, this is roughly equivalent to electricity bills of approximately £500,000 per year.

The aim of CRC is to reduce the level of carbon emissions currently produced by the larger 'low energy-intensive' organisations by approximately 1.2 million tonnes of CO2 per year by 2020 - and a 60% redution by 2050.

The Carbon Reduction Commitment will cover both public and private sector organisations. At present, the carbon reduction scheme is expected to affect approximately 5,000 organisations in the UK affecting 25% of total business sector emissions within the UK.

The scheme will work in tandem with the existing European Union Emissions Trading Scheme and Climate Change Agreements. As a result, where emissions have been captured by the EU ETS and CCA, these emissions will not be captured by the CRC.

What are the benefits or costs to business?

Financial

The carbon reduction commitment acts as a clear risk to organisations that fail to reduce their carbon emissions. The financial implications could result in penalties of thousands, or even millions, of pounds for large organisations. However, there is also the opportunity for the best performing organisations to receive similarly large bonus payments as reward for their efforts.

Brand and Marketing

With the carbon reduction commitment league tables being published each year, information of all organisations that fall within the scheme will be made public. As such, the best performing organisations will benefit from recognition of their achievements.

Corporate Social Responsibility

Over time, organisations that make significant savings in the first few years will find it more and more difficult to achieve such high-level percentage savings on their carbon emissions. This could be considered as a negative aspect of the carbon reduction commitment scheme, as there will be less incentive for organisations to continue their commitment to reduce CO2. However, having reduced their carbon emissions, these organisations will enjoy long-term financial benefits from reduced energy costs.

Timeline

2008 - identification of which non-energy intensive organisations in the UK have consumed more than 6,000 MWh of metered electricity.

July 2009 - The Environment Agency issued letters to the billing address of all relevent properties to make them aware of the CRC.

April 2010 - The Carbon Reduction Commitment scheme officially begins, but most organisations will have started managing their portfolio several months earlier.

April 2011 - The first sale of allowances will take place to cover the following year's forecasted emissions

July 2011 - Each organisation must submit their Footprint Report by July 2011 and allowances must be surrendered by this time.

October 2011 - The first recycling payment will be made with companies receiving their allowances with the bonus/penalty payment depending on their performance in the league table

For more information visit www.carbonreductioncommitment.info.

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