Monday, September 05, 2011

Proposed changes to Climate Change Agreements could increase carbon emissions

Firms which are eligible for Climate Change Agreements (CCAs) should find it easier to comply and some will save money under new Government proposals. However, the Government has not presented any estimates of the impact it will have on emissions.

The changes are intended to simplify the structure of the CCAs, making them easier to operate, and, the Government says, maintain their effectiveness in cutting carbon emissions.

But in the absence of any calculations on emissions, the fact that the Treasury will be better off as a result makes me suspicious that this is the real reason for the changes - and they don't care about the impact on emissions.

Read on to see what the changes are and how the Government benefits...

Current arrangements

CCAs apply to all energy intensive firms or sites that have to pay the Climate Change Levy, and cover a wide range of sectors, from steel, chemicals and cement, to agricultural businesses, such as intensive pig and poultry rearing.

Sites that are smaller than the size thresholds of the Pollution Prevention and Control (PPC) Regulations, but which would otherwise would qualify, are also eligible for a CCA.

This is rated at 47p per kWh for electricity, 16.4p per kWh for mains gas and 1.05p per kg for LPG. But 65% discounts (reduced from 80% last April) are available for signatories of a CCA. Part of the revenue from the CCL is used to fund energy efficiency initiatives, including The Carbon Trust (which is having its budget cut by 40%).

The current Climate Change Agreements are due to expire in March 2013. However, the Government announced in the 2011 Budget that CCAs will be extended to 2023 and that the Climate Change Levy discount on electricity will be increased from 65% to 80% from April 2013.

Under the current arrangements, if a sector meets its target for reducing carbon emissions, then the whole sector becomes eligible for a discount on the Climate Change Levy. If individual sites fail, the whole sector fails.

This approach has been criticised by the Environmental Audit Committee both on economic grounds (poor value for money for the taxpayer) and because it is unfair.

The proposals

So the Government is now proposing that all sites will instead be required to meet their targets on an individual basis. However, the downside is that this will mean an increase in cost to industry of £0.3m.

Furthermore, sites will have to report on their energy consumption every year, instead of every two years as now - resulting in another £0.2m cost increase. This will affect 2,384 participants.

However, Greg Barker claims in his foreword to the consultation document that overall the measures will cut the costs to business by £2.4 - £3.4m during the life of the scheme.

Savings will be made by removing the need to duplicate trading and verification with the EU Emissions Trading Scheme, by aligning reporting periods with the EU ETS, and by modifying certain other rules.

Most savings will result from industry no longer incurring costs in trading allowances at the end of their target period.

Treasury wins

The Treasury will also see a benefit. Savings will come to the administration of the scheme from amalgamating the current 54 sectors into 49 sectors and preventing further sectors from joining CCAs.

These sectors will, however, then lack the stimulus to save energy that the scheme provides, and miss out on the discounts on the CCL that would result from meeting their targets - which the Treasury will, of course, keep.

The Treasury will also benefit from the fact that the get-out clause for those missing their targets is no longer carbon trading - nor will firms be any more able to appeal for their targets to be amended in cases where legislative changes resulted in an increase of energy use or carbon emissions.

Instead, the proposed Buy-out Mechanism means that firms will pay the Treasury a fixed amount for each tonne of carbon dioxide a site underachieves against its target. Further fees wlll also be payable as penalties for other misdemeanours.

In addition, some 24 sectors will find their costs will increase because they will have to spend more time negotiating in what's called a 'bottom-up' way with others in their sector in order to meet their target. their costs could be up to an extra £165,000 per negotiation.

The changes would come in at the beginning of 2013. The first new certification period will commence on 1 April 2013 with the subsequent ones on 1 June 2015, 1 June 2017, 1 June 2019 and 1 June 2021.

The effect on carbon emissions

The Government is arguing that the changes will mean that participants will have less challenging emission reduction targets to meet, but that more targets will be met than at present, leading to overall higher savings and less reliance on purchasing allowances in order to meet targets.

This is because the cost of compliance will no longer be able to be spread between organisations within a sector, as has been done in the past.

Currently, the cost of complying with targets for those sectors that had missed them is very small, as the typical UK ETS allowance price has fluctuated between 50 pence to £4 per tonne of CO2.

By switching from using allowances, to make up the difference between a site's performance and its target, to a buy-out mechanism with a pre-determined price, DECC believes this is likely to lead to a greater willingness to accept challenging targets.

However, the Government has not actually calculated the effect on emissions that switching to the new system will have.

The Impact Assessment accompanying the consultation document admits that it "is unclear whether emissions and the incidence of non-compliance will be higher or lower after these administrative changes have taken place. But as they are likely to have positive and negative impacts to the level of target setting and compliance, they are assumed to be negligible."

The level of energy-intensive energy use of a site at which site becomes eligible for discounts is to reduced from the current 90% or more of the total energy use of the site to 70%. The Government claims that this will result in a small increase in energy efficiency.

But the removal of the need to independently verify claims of exceeding the target could result in some false claims.

Before the consultation is over on 28 October, it is vital we have a better idea whether these proposed changes will mean fewer, or more, carbon emissions.

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