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

The aim of the Carbon Reduction Commitment 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. As a Climate Change Bill commiment, the scheme is aiming for a 60% redution in CO2 emissions 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. In doing so, it is anticipated that the scheme will affect 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. In essence, the CRC is targeted at low energy-intensive users.

The Climate Change Bill also sets the enabling powers for the Carbon Reduction Commitment and sets out the role of the Climate Change Committee that will oversee much of the CRC scheme.

Penalties

The CRC includes civil and criminal penalties for non-compliance. For example, a failure to register will attract a fine of £5,000 plus £500 per day.

Company directors will be responsible for signing-off the footprint report and ensuring full compliance with the regulations. The Environment Agency anticipates auditing 20% of participants each year. Failure to comply with the Carbon Reduction Commitment can result in severe penalties:

• Penalty for failing to register: £5000 plus £500 a day
• Penalty for failing to disclose information: £1000
• Penalty for failing to provide an annual report: £5000 plus 5p per tonne of CO2 a day for 40 days, and then doubled
• Penalty for incorrect reporting: £40 per tonne of CO2 emissions incorrectly reported (compared to £12 per tonne of first phase allowance costs)
• Penalty for failing to keep adequate records: £5 per tonne of CO2

Organisations will buy most of their allowances from the government in advance of producing emissions. Initially they will cost £12 per tonne, but from 2013 these will be auctioned. For the biggest organisations, the cost of this has the potential to be tens of millions of pounds per year. Six months after buying their allowances this money will be given back, but with a bonus added or a penalty deducted depending on how much energy is saved in the previous financial year.

Coverage

The CRC scheme will apply to organisations that have a half-hourly metered electricity consumption greater than 6,000 MWh per year. Organisations qualifying for CRC would have all their energy use covered by the scheme, this includes emissions from direct energy use as well as electricity purchased.Such organisations - including hotel chains, supermarkets, banks, central government and large Local Authorities - mostly fall below the threshold for the European Union Emissions Trading Scheme, but account for around 10% of the UK carbon emissions. Emissions covered by the EU Energy Trading Scheme and by a Climate Change Agreement would be exempt from the CRC, as would organisations with more than 25% of their emissions covered by Climate Change Agreements.

Operating mechanisms

Although mandatory, the Carbon Reduction Commitment will involve self-certification of emissions, backed up by auditing, rather than third-party verification. Emission allowances are to be auctioned, with all the income from the auctions recycled back to participants by the means of an annual payment based on participants' average annual emissions since the start of the scheme, with a bonus or penalty according to the organisation's position in a CRC league table. In March 2008 the Government responded to a consultation into the implementation of the CRC. The Government is minded to proceed with an allowance price of £12/tCO2 for the introductory three year phase, although this will be confirmed in the response to the Summer 2008 consultation on the CRC regulations. It is suggested there should be two fixed price sales in the first year of the scheme.

Participants in the Carbon Reduction Commitment will also be able to purchase (but not sell) emission allowances from the EU Emissions Trading Scheme at a price that is the higher of the EU ETS price or the minimum CRC floor price.

How will this affect me?

Simple . . . the more electricity you use, the more carbon emissions that are produced, the more you will pay. Click here to start your Carbon Workout, calculate your carbon footprint and find out how much carbon you produce at home, in the car and when you travel!