Download A financial director`s guide to the carbon reduction

Profit from early action with
the Carbon Trust Standard
A Financial Director’s guide to the
Carbon Reduction Commitment
Energy Efficiency Scheme
Last updated: October 2009
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Profit from early action with the Carbon Trust Standard
Contents
03
Click on the topics to link
to the relevant pages.
04The Carbon Reduction Commitment Energy
Efficiency Scheme (CRC) – the essentials
Introduction
04 Coverage
05 Participation and compliance
06 Important dates and deadlines
07 The Performance League Table
07 The cost of the CRC and value at stake
08 Penalties
09
Accounting for the CRC
09 Balance sheet implications
10 Financing allowance purchase
10 Internal audit and reporting systems
10 Risk management
11 Further guidance on accounting for the CRC/carbon accounting
12
Take early action
12 The Carbon Trust Standard – an early action metric
13 Claiming the benefit
14
Checklist of next steps
15
Further information
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Profit from early action with the Carbon Trust Standard
Introduction
The Carbon Reduction Commitment
offers a significant financial incentive to large
organisations to reduce their carbon.
Lord Puttnam
The Carbon Reduction Commitment (CRC) is a mandatory emissions
trading scheme starting in April 2010.
Around 20,000 organisations will be
affected by the new regulation and
5,000 organisations will participate
in a Carbon Reduction Commitment
League Table and what’s more, your
organisation could be one of them.
Organisations that are affected by
the CRC will have to purchase carbon
allowances from the Government from
April 2011 – which could cost tens
or hundreds of thousands of pounds
depending on their emissions.
Many organisations have not yet
considered the financial, compliance,
audit and carbon management
implications of the new regulations.
This guide is designed to bring you up
to speed on how the CRC could affect
your organisation. It covers four areas:
1. The CRC, including the essentials
of the legislation, coverage,
compliance and penalties for
non-compliance;
2. Financial implications of the CRC
including accounting for carbon
credits and accounting systems;
3. How to capitalise on the
opportunities with the
Carbon Trust Standard; and
4. Action: a practical checklist of
next steps.
Note: This guide is based on the consultation on the draft order regulations published in October 2009.
The final regulations are yet to be published and are subject to change. For full details on the draft
regulations visit www.decc.gov.uk/en/content/cms/consultations/crc/crc.aspx
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Profit from early action with the Carbon Trust Standard
The Carbon Reduction Commitment
Energy Efficiency Scheme (CRC)
– the essentials
The UK has committed to reduce its greenhouse gas emissions by 80%
by 2050 from a baseline of 1990. Achieving this will require radical changes
across all sections of the economy along with new regulation by the
Department for Energy and Climate Change (DECC) to help implement
the necessary changes.
The UK has committed
to reduce its greenhouse
gas emissions by 80%
by 2050 from a baseline
of 1990.
The Carbon Reduction Commitment
(CRC) is the new emissions trading
scheme affecting many large public
and private sector organisations.
The organisations targeted by
the CRC typically have relatively
low energy intensity and most are
outside existing schemes such as
the EU Emissions Trading Scheme
and Climate Change Agreements.
Example sectors affected include
retail, leisure, some manufacturing,
professional services, many other
office based activities and the public
sector including local authorities,
universities and NHS Trusts etc.
Coverage
Around 5,000 organisations are
expected to participate in the CRC.
The key qualification criteria is
based on the amount of electricity
purchased in 2008.
Organisations that purchased more
than 6,000MWh of electricity through
half-hourly meters are likely to be
included in the CRC.
Depending on the price you pay for
your electricity, this threshold would
equate to an electricity bill of around
£500,000 a year. The qualification
rules apply to the highest parent
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Profit from early action with the Carbon Trust Standard
...having gained the Standard we will have
a higher ranking in the CRC league table. This
will definitely reduce costs to our business.
Adrian Swindells, General Manger (Ops),
Abbey Corrugated
company in a corporate group
and consumption is calculated
taking into account all majority
owned subsidiaries.
Under the latest rules, major
subsidiaries known as Significant
Group Undertakings (SGUs) that
qualify in their own right may
participate separately.
The Environment Agency will
administer the CRC on behalf of DECC
in England and Wales (The Scottish
Environment Protection Agency and
Northern Ireland Environment Agency
with take responsibility in Scotland
and Northern Ireland).
The CRC requires organisations that
meet or exceed this threshold to
register with the Environment Agency
and to provide data by April 2011 on
total annual energy usage (including
gas, other fossil fuels and electricity).
Smaller organisations with lower
electricity consumption may also
need to register their details with the
Environment Agency. Exemptions are
available for organisations covered
by other regulations such as Climate
Change Agreements.
Participation and compliance
Under the CRC participants will be
obliged to:
• Measure their carbon emissions
accurately and provide an
annual footprint report to the
Environment Agency;
• Produce an ‘evidence pack’
providing supporting information
on the footprint report;
• Purchase carbon allowances to cover
their emissions and surrender a
sufficient quantity of allowances to
the Environment Agency each year.
In the introductory phase of the
CRC (2010-13), allowances will be
purchased from the Government at
a fixed price of £12 per tonne of CO2.
From 2013 the capped phase of
the CRC will start. In this phase the
Government will cap the number of
allowances available and the fixed
quantity available will be auctioned.
At this point the price will be variable
and could be significantly higher.
More details on which organisations will be covered by the CRC, and a detailed explanation of all
aspects of the scheme, are available in the user guide published by DECC:
www.decc.gov.uk/en/content/cms/consultations/crc/crc.aspx
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Profit from early action with the Carbon Trust Standard
If you’re a large business or a public sector
organisation, the CRC is something you’re going to
have to deal with. Fortunately, the Carbon Trust
Standard can help as it’s recognised under the CRC.
That means that organisations who’ve been awarded
the Standard will be better placed on the CRC league
table and reduce the cost of compliance.
Important dates and deadlines
Key dates in the first 18 months of the CRC include:
Tom Delay, CEO The Carbon Trust
1st April 2010
1st April 2011
July 2011
October 2011
The first ‘compliance year’
begins. Organisations need
to register between April
and 30th September 2010.
Registration packs should
be sent out in October 2009.
The second compliance year
begins. Organisations will
need to purchase carbon
allowances to cover forecast
carbon emissions for the
year 2011-12.
Each organisation must submit
a ‘footprint report’ for the
first year (2010-11) by the last
working day of July.
The first ‘recycling payment’
will be made, returning all
the money raised in April
2011 to the participants.
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Profit from early action with the Carbon Trust Standard
Organisations that
are ranked highly
will receive a bonus
payment; organisations
that are ranked lower
will receive a penalty.
The Performance League Table
All organisations will be ranked in
a performance league table using
three ‘metrics’:
• Absolute metric: their relative
change in absolute emissions;
• Growth metric: their change in
emissions relative to revenue;
• Early action metric: whether they
have taken voluntary steps to reduce
emissions prior to the CRC.
The revenue raised from the sale
of allowances will be recycled back
to participants in the CRC after a
six month period. However, the
amount of money paid back will
vary depending on the performance
of the organisation, as an incentive
to cut carbon emissions.
Organisations that are ranked highly
will receive a bonus payment;
organisations that are ranked lower
will receive a penalty. In year one the
maximum bonus or penalty rate is 10%.
This will rise to +/- 50% by year five.
This recycle mechanism means that
organisations that perform well will be
able to make money from the CRC
while poor performers will be penalised.
The cost of the CRC and value at stake
The energy manager (or environment
or corporate responsibility manager) in
many organisations will have a view on
the extent to which the organisation
falls within the scope of the CRC; many
will not yet have an accurate view on
the extent of the financial exposure.
Finance Directors will also need to
work with their energy teams to get
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Profit from early action with the Carbon Trust Standard
Gaining the Carbon Trust Standard
is also an early action metric for the CRC
scheme and will improve the company’s
position on the league table.
Mark Oliver, Managing Director,
H+H UK Limited
a more accurate fix on the organisation’s
exposure and to develop appropriate
reporting and auditing procedures.
The estimated cost of allowances for
organisations of different sizes and
the potential value at stake from the
bonus/penalty payments in 2011 is
illustrated right:
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.
CRC Footprint (tCO2 ) 5,000 50,000 100,000
Approximate energy bill:
~£750k
~£7.5m
~£15m
Annual allowance cost £60k £600k £1.2m
Estimated value at stake 2011 £12k £120k £240k
1. CRC Footprint is the total CRC emissions that the organisation is responsible for.
2. Approximate energy bill shows the approximate energy costs associated with the CRC footprint
for each column.
3. Annual allowance cost: this is calculated based on carbon allowances of £12/tCO2 in the first phase
of the CRC.
4. Estimated value at stake: Based on a maximum bonus or penalty rate of +/- 10% in the first year of
the CRC the value at stake between the best and worse recycle payments can be estimated as around
20% of the cost of the allowances purchased.
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Profit from early action with the Carbon Trust Standard
Accounting for the CRC
The Standard will also make
a positive contribution to our
standing in the league table of the
Government’s new carbon trading
scheme, the Carbon Reduction
Commitment (CRC).
Dr Steven Boorman,
Director Corporate Responsibility,
Royal Mail Group
The CRC has a number of important
implications for Finance Directors:
• The P&L and Balance Sheet
implications of reserves and
allowance purchases and the
anticipated and actual recycle
payments (including any bonus
or penalty) should be considered;
• The cost of allowances may need
to be financed for six months prior
to the recycle date;
• Sufficient internal audit over energy
and carbon data is required to ensure
that data is robust;
• Compliance and regulatory risks
should be managed effectively.
Balance sheet implications
There is currently ongoing discussion
about how organisations should
account for the assets and liabilities
associated with participation in
the CRC. However, some initial
considerations are provided below,
and further useful links to guidance
from leading accounting firms is
provided at the end of this section.
In April 2011, participants must
forward purchase allowances for
the period April 2011 to March 2012
(at least). Participants will recognise
an asset in the form of allowances
for the next 12 months. In addition,
participants must recognise that each
allowance is entitled to a refund from
the Government.
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Profit from early action with the Carbon Trust Standard
...the Standard will help us achieve
real savings under the CRC.
Dr Steven Boorman,
Director Corporate Responsibility,
Royal Mail Group
The recognition and measurement of
the refund may be challenging for
some organisations as the level of
refund is determined by a number of
factors, namely the size of the recycling
fund and an organisation’s position in
the annual league table.
Financing allowance purchase
Cash-flow may be a concern to some
participants. Recycle payments are
made six months after the date that
allowances are purchased – and
so financing arrangements for that
six month period may need to
be considered.
Although the funds raised will be
recycled back to all participants, those
that perform well in the CRC league
tables will get a greater share at the
cost of poor performers.
Internal audit and reporting systems
It is recommended that companies
captured by the CRC ensure that
carbon data is reviewed, challenged
or assured if they consider the risk
to be material.
This review should be undertaken by
someone who understands carbon
footprinting, financial data and reporting
and could therefore be a representative
from the finance function, the estates
department, internal or external audit,
or by an independent adviser.
It is crucial that participants have
a robust data system to capture the
information required. Inaccurate
reporting is a risk as carbon/energy
management systems have rarely
been subjected to the same level of
scrutiny as financial systems. Current
feedback suggests that the majority of
organisations could be misstating their
carbon footprint by more than 5% with
current emissions reporting practice.
This puts the onus on organisations
to review and challenge data early.
Risk management
There are a number of new and
emerging risks and issues that FD’s
should be aware of around the CRC:
• Risk to reputation and brand may be
the greatest concern as companies
will be rated against each other and
it is likely there will be significant
attention from the press in the first
few years of the CRC. Increased
investor pressure in the current
climate could be a significant risk
for participant organisations;
• The CRC has very specific
boundaries which may not reflect
participants’ current organisational
structures or current carbon footprint
calculations. In particular there is a
challenge for internationally owned
organisations who form part of a
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Profit from early action with the Carbon Trust Standard
portfolio of otherwise unconnected
companies in the UK. The recent
decision to allow Significant Group
Undertakings (SGUs) to participate
separately maybe helpful and should
be considered.
• There are a number of ways that
organisations can breach compliance
with the scheme. For example If
organisations report late they will
be deemed non-compliant and can
expect to be fined.
• There will be a series of complex
rules around mergers and acquisitions
under the CRC which may also need
to be considered in advance;
Those organisations captured by the
CRC should start to set up internal
workshops now to make sure the
relevant people understand their roles
and responsibilities and that all risks
have been identified and mitigated
where possible.
• There is also a considerable risk
from financial penalties in the form
of fines, rather than penalties for
poor performance. The Government
has determined that fines for
misstatements of carbon footprint
greater than 5% could incur a penalty
of £40 per tonne of carbon misstated;
Further guidance on accounting for the CRC/carbon accounting
Leading accounting firms have produced some guidance for accountants on issues
to do with accounting for the CRC.
KPMG, Accounting for Carbon
www.kpmgcarbonadvisory.com/uploads/documents/106477_Accounting_for_Carbon_V18_
Accessible.pdf
KPMG, The Carbon Reduction Commitment, Making it Real
www.kpmgcarbonadvisory.com/uploads/documents/CRC%20Update%20-%20Making%20it%20
Real%20-%20March%202009.pdf
PwC, Trouble entry accounting – revisited
www.pwc.co.uk/eng/publications/trouble_entry_accounting_revisited.html
Ernst & Young, Carbon Reduction Commitment
www.ey.com/Publication/vwLUAssets/Carbon_Reduction_Commitment/$FILE/EY_Carbon_
Reduction_Commitment.pdf
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Profit from early action with the Carbon Trust Standard
Take early action
M EAS U RE
M A N AG E
The CRC aims to reward organisations that cut carbon emissions.
These organisations will receive bigger recycle payments based on their
position in the performance league table – and can profit from the CRC.
The first year of the league table is
based exclusively on the ‘early action
metric’ which will determine the full
bonus/penalty amount, rewarding
those organisations that have taken
‘early action’ to reduce carbon
emissions on a voluntary basis
before 2010.
There are two early actions which
are recognised:
C ERTI FY
REDUCE
1. Installation of voluntary
Automatic Metering (AMR).
2. Achieving certification against
the Carbon Trust Standard
or equivalent.
The Carbon Trust Standard –
an early action metric
The Carbon Trust Standard is an
independent voluntary certification
scheme chosen as an early action
metric under the CRC. It is a mark
of excellence that publicly recognises
organisations that have genuinely
reduced their carbon footprint and
committed to reducing it year on year.
Over 150 organisations have now
achieved the Carbon Trust Standard
including public sector organisations
such as London Fire Brigade, Fife
Council and University of Manchester
to household names such as B&Q,
O2, first direct and Tesco.
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Profit from early action with the Carbon Trust Standard
These organisations
have collectively
saved over £50m per
annum as a result of
reducing carbon.
These organisations have collectively
saved over £50m per annum as a result
of reducing carbon and many have
identified operational improvements and
business opportunities by using carbon
to provide a different perspective on the
way they do business.
Claiming the benefit
To claim the early action benefit,
organisations must have a valid Carbon
Trust Standard Certificate at the end
of the first year of the CRC scheme
(currently 31st March 2011) and other
pilot years. However, organisations
should contact us now to ensure
there is sufficient time to meet the
Carbon Trust Standard criteria should
shortfalls be identified.
the scheme. This means that the
Carbon Trust Standard will therefore
be responsible for the following
weightings in the performance
league table:
• Year 1: 50%
• Year 2: 20%
• Year 3: 10%
To achieve the Carbon Trust Standard
organisations will need to demonstrate
that they have:
• Measured their carbon footprint;
• Achieved a reduction in their
carbon emissions;
• Evidence of good carbon
management.
The Government has decided to allow
greater weighting given to the Early
Action metric in the second year of
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Profit from early action with the Carbon Trust Standard
Checklist of next steps
To take action now:
ead the ‘User Guide’ to the CRC published by DECC.
R
www.decc.gov.uk/en/content/cms/consultations/crc/crc.aspx
Or
Analyse whether you are required to participate in the CRC.
Apply for Gap Analysis – two days of consultancy
that evaluates your readiness to meet the criteria.
nderstand and calculate your likely exposure in terms of carbon emissions
U
and carbon allowance costs. Speak to the person responsible
for energy (energy/environmental/CR manager) and request:
Apply for the Carbon Trust Standard – you may not
be able to demonstrate a reduction next year.
For more information or to apply visit
www.carbontruststandard.com
or call 0800 019 1443.
• Footprint data for 2008 period;
• Estimated footprint for the second year of the CRC 2011-12.
Profit from taking early action:
• Apply for the Carbon Trust Standard while you can;
• Install voluntary half-hourly metering.
Consider how you will finance the purchase of allowances and
account for your carbon assets and liabilities.
Register with the Environment Agency from April 2010.
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Profit from early action with the Carbon Trust Standard
Further information
ICAEW
www.icaew.com/corporateresponsibility
[email protected]
The Carbon Trust Standard – for more information or to apply
www.carbontruststandard.com
[email protected]
0800 019 1443
The Carbon Trust – for carbon reduction advice and support
www.carbontrust.co.uk
0800 085 2005
© The Carbon Trust, 2009 All rights reserved.
CTSC 018
The Carbon Trust is funded by the UK Government. It is an independent company set up by the
Government to accelerate the move to a low carbon economy.
This document has been prepared by the Carbon Trust with the assistance of the Institute of Chartered
Accountants in England and Wales. It is intended for your information only and is not a comprehensive
guide to the Carbon Reduction Commitment, nor should it be used as a substitute for professional
advice. The Carbon Trust has no control over the content in any websites or documentation provided
through any links in this document. As the legislation governing the Carbon Reduction Commitment
has not been finalised, you should not take any action, or refrain from taking action, based solely on the
information contained in this document. If you need advice on how to obtain the Carbon Trust Standard,
general advice regarding how to reduce your carbon emissions, or any other information connected
with this document please refer to the relevant contacts provided above.
Department of Energy and Climate Change
Legislation and Policy Development
www.decc.gov.uk/en/content/cms/what_we_do/lc_uk/crc/crc.aspx
The Environment Agency
Lead UK CRC administrator, and CRC regulator for England and Wales
www.environment-agency.gov.uk/crc
[email protected]
The Scottish Environment Protection Agency (SEPA)
CRC regulator for Scotland
www.sepa.org.uk/climate_change/solutions/carbon_reduction_commitment.aspx
The Department of the Environment for Northern Ireland
Legislation and Policy Development
www.doeni.gov.uk/crc
The Northern Ireland Environment Agency
CRC Regulator for Northern Ireland
www.ni-environment.gov.uk/pollution-home/crc_carbon_reduction_commitment.htm
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