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The Carbon Reduction Commitment: ignorance is not an option

The arrival of the UK’s first mandatory carbon reduction scheme next year will bring carbon measurement and reporting further into the mainstream and force businesses to consider how it might better manage its energy consumption and carbon emissions.

The introduction of the CRC represents the first inclusion of non-industrial organisations within a mandatory emissions trading mechanism. The scheme will mandate participation based on defined levels of energy consumption, requiring a large number of companies and public sector organisations to measure and report their emissions.

Approximately 5,000 of those organisations will have to purchase allowances at the beginning of a reporting year to cover their predicted emissions. The cost of purchasing allowances will be refunded at the end of a reporting year according to the performance of an organisation in reducing its emissions over that period and relative to the performance of the other scheme participants. Poor performers will be refunded less than they originally paid for allowances, introducing a loss to the balance sheet. At a price of £12 per tonne CO2 emitted, this introduces significant cost (and therefore risk) to the business bottom line. Moreover, significant penalties apply for non-compliance and failing to report accurately or on time.

Businesses and organisations coming within the remit of the CRC are already exposed to a tax designed to reduce energy consumption (and as such emissions) through the Climate Change Levy (CCL). However, the CCL is largely invisible to an organisation from a financial and accounting point of view.

The CRC is different, requiring upfront payment for emission allowances. For a large company with, for example, 25,000 tonnes of emissions coming within the remit of the scheme, this would mean an outlay of £300,000 at the proposed £12 per tonne/CO2 level. The significance and visibility of the outlay will engage CFOs seeking to maximise the refund, which entails the implementation of initiatives to reduce emissions. For many organisations, this will be the first time that efforts to reduce emissions will have been driven from the financial side of the business.

While the CRC might appear as a cost burden, many organisations are already realising the opportunities and benefits it can bring. Good performance in reducing emissions over the course of a reporting year could result in a refund greater than the original payment for allowances, but much more significant savings can be made as a direct result of reducing energy consumption. Low energy efficiency has always had a significant impact on the business bottom line, if one that has not necessarily been so readily apparent to financial managers. CRC serves to highlight such inefficiencies through the imposition of an additional financial impact visible at the CFO level.

Prudent business managers are already looking at ways to minimise compliance risk and financial exposure to the CRC through the adoption of energy efficiency initiatives. Key to the success of such initiatives is the ability to effectively measure energy consumption and emissions. This can be a complex and arduous task when performed manually, however the use of carbon-specific IT solutions can greatly facilitate this process, particularly for large organisations.

There are no currently stated plans to widen the scope of the CRC, however it is reasonable to expect that its remit will be extended in a top-down approach to capture ever smaller consumers of energy, right down to one-man bands. However, as the CRC is already making business managers realise, the financial savings that can be made through reducing energy consumption mean that prudent business would do well to put in place systems to minimise energy consumption and emissions now to realise immediate and significant financial savings, as well as making the most of opportunities under future regulatory regimes.

Greenstone Carbon Management Limited is a specialist carbon solutions company based in London. For further information please visit www.greenstonecarbon.comRelated articles Cutting carbon: British businesses should lead the way Craig Smith: Meet the eco one-man band that’s heading to a £1m turnover Carbon Trust launches £100m green loan

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