Carbon countdown

By David Williams

14 January 2010

A deal might not have come out of Copenhagen, but the public sector still faces scrutiny of its CO2 emissions. Many larger public bodies are covered by the Carbon Reduction Commitment, which comes into force in just over two months’ time. David Williams explains what is involved 

It might not seem a good time to be an environmentalist. The United Nations' failure in Copenhagen to impose legally binding targets for countries’ CO2 emissions was a heavy blow to anyone concerned about the state of the planet. And those eager to do their bit have most likely been thwarted by this winter’s relentless cold snap, which is forcing us to burn more fuel just to keep our homes and workplaces habitable.

At the dawn of a new decade, environmentalists could be forgiven for despairing that emissions are doomed to increase exponentially, and that climatic catastrophe is inevitable. They might be right, and it is easy to assume that the business of carbon reduction is simply on hold until world leaders can concoct an agreement that suits all of their ­conflicting interests.

Amid this fatalistic mood, the Department of Energy and Climate Change, led by Ed Miliband, is launching a scheme that it hopes will begin to screw down emissions from some of the biggest polluters in the country. The Carbon Reduction Commitment Energy Efficiency Scheme goes live in April. If successful, it could push the public sector to the forefront of efforts to reduce Britain’s carbon footprint while proving that living more sustainably needn’t be at the expense of economic growth.

The CRC was drawn up by the DECC and is being overseen by the Environment Agency. It is mandatory: from April 2010, around 5,000 of the UK’s biggest organisations – broadly those spending more than £500,000 per year on electricity – will register and begin monitoring and recording the total energy usage from their estates. Most large public sector bodies will be involved, including all departments of the UK, Welsh and Scottish governments, many first-tier local ­authorities and universities.

In 2011, each participant will have to buy carbon allowances to cover their ­emissions and, from April 2013, there will be a cap on the total number of allowances for sale, which will tighten each year. This will theoretically force organisations to reduce their energy usage and trade ­surplus allowances among themselves.

Leaving aside the technicalities, the CRC is a hugely elaborate nudge to participants to change their behaviour and act in a way that is in their own interests, as well as the environment’s. As Tony Grayling, head of environment policy at the EA, puts it: ‘The CRC is designed to promote behaviour that would in any case be rational but doesn’t always happen.’

And, although those included in the scheme are responsible for only 8% of the UK’s total greenhouse gas emissions, it is a highly significant 8%. The public sector should be expected to lead by example, while the best-resourced ­private bodies ought to be most able to innovate.

But the cleverest and most timely thing about the CRC could never have been foreseen when it was first outlined in 2007. Because its scores are based on total energy use, it emphasises bringing down energy bills over switching to renewables. In doing so, it makes the green agenda relevant to after-effects of the recession: even with a tentative return to growth, savings that do not involve redundancies will be enthusiastically embraced.

So is the public sector ready to risk taxpayers’ money on its environmental performance? The Local Government Information Unit has found little evidence to suggest public bodies are any less well prepared than private firms. Andy Johnston, head of the think-tank’s centre for local sustainability, argues that public bodies will actually have an inbuilt advantage, as they will be more ­accustomed to responding to new and complicated orders from Whitehall.

Spending cuts could also work in ­favour of public organisations, he adds. ‘The perverse advantage is that if spending is going to dip, energy consumption will shrink as well. You might find yourself in the top half of the league table not through any brilliant action by yourself, but simply because you shrank as an organisation.’

Some public bodies are already taking steps to make rapid reductions in their emissions. Cranfield University in Bedfordshire is working to halve its carbon footprint in five years. Oxford City Council is on target to reduce energy usage by 25% in three years. It then aims to find an additional 3% of efficiencies a year, amounting to an 80% reduction by 2050.

The council has been creating new procedures and ways of working. Its energy and climate change team now evaluates in advance the environmental implications of any decision facing the executive. Carbon reduction has been built into the corporate plan, and a carbon management board has been set up to ensure energy-saving measures are being adopted and properly executed across the authority.

Councillor John Tanner, executive member for ‘cleaner, greener Oxford’, says: ‘Anybody who doesn’t get into carbon reduction in a big way is a mug.’ His ambition is to surround the city with wind turbines and close a local power plant.

But he emphasises that knowing how effective any new measure will be is as important as coming up with ingenious ways to cut emissions: the council has had to learn to gather and analyse energy data as rigorously as accountants process financial figures.

The council has no single magic-bullet carbon reduction scheme, and is depending instead on many small-scale savings. These range from the obvious, such as switching to fuel-efficient lighting, to the obscure, such as fitting devices to regulate the flow of electrical current. In the side-room where Public Finance meets Tanner, LED lighting is being trialled, using a fraction of the power of ­fluorescent tubes.

Savings are already being made. ‘It’s been easier than I expected,’ says Tanner. ‘Once you give people the target, they go for it.’ Gains have been made by replacing 1,400 computers with a new generation of machines that run on 40% less power. A single £5,000 session teaching 300 staff members to drive efficiently paid for itself within weeks, and is currently generating savings of 15% on fuel – worth  £69,000 a year.

Another important early gain was in installing covers for the city’s swimming pools. A single cover costing £17,000 in one leisure centre has knocked 10% off the building’s energy usage. The cover saved 63 tonnes of CO2 – or £12,000 – in its first year.

But, for the time being, Oxford City Council remains an exception, and the CRC’s job is to ensure that this approach becomes the norm. So is it powerful enough to bring about full-scale cultural shifts in public bodies and big business?

The short answer is that carbon trading is unproven. The CRC’s only real precedent is the European Union Emissions Trading Scheme, which began in 2005 and covers big polluters, such as energy companies. It has yet to make any clear carbon savings. Closer to home, the LGIU ran a trial scheme modelled on the CRC during 2008/09. It resulted in a slight increase in emissions, after many authorities were wrong-footed by last February’s cold snap.

Critics of the CRC say it is difficult to imagine finance directors getting excited at the prospect of saving emissions priced at £12 per tonne, when you remember that each tonne of CO2 emitted already costs around £200 in energy bills.

And if the financial incentives are relatively small, the CRC’s ‘reputational driver’, a carbon reduction league table, is at best an unknown quantity. A poor ­placing might be an embarrassment, but would it be enough to force organisations to act? Voters throwing out a council administration because it failed on CO2 would be unprecedented. Equally, it seems very unlikely that the public would boycott, say, a supermarket chain with a poor environmental record.

Along with the modest carrots and sticks involved, it is also worth bearing in mind other apparent compromises built into the CRC. Emissions generated by transport will be exempt – a big win for food retailers, whose produce often travels thousands of miles in its journey from farm to outlet. There’s also the growth metric – which allows businesses to emit more as long as their turnover increases faster. That seems fair and simple, but it does sidestep the central environmental question of whether the earth can sustain eternal, unlimited economic expansion.

Furthermore, it is not clear what would happen if the CRC scheme as a whole simply emits more carbon than the cap allows. The DECC says only that the government expects the organisations involved to take up the energy saving measures that are already available. The department maintains that its method is more likely to spur organisations to act than simply raising taxes on emissions, or awarding tax breaks for the greenest.

Mike Childs, head of climate change at Friends of the Earth, is ‘not at all’ confident that the CRC can bring emissions down. He argues the government should simply spend more to improve the performance of public bodies, and that taxes and regulation will be more effective in forcing emissions down in the private sector.

Ian Mulheirn, director of the Social Market Foundation, agrees that increasing green taxes would be more reliable than carbon trading. He argues that the market is just not pricing carbon effectively, and that the massive volatility of the EU scheme – which saw carbon prices triple, halve and then deflate to zero in the first two years – has actually harmed green investment.

‘With the EUETS, it is extremely difficult to incentivise any long-term green planning because no-one’s got a clue what any future price will be… let’s fix the price and give people the certainty,’ he says.

In practical terms, carbon trading, the league table, and even the cap will be fairly insignificant in terms of the financial gains they offer and the threats they pose. Oxford City Council calculates it will have around £15,000 at stake in year one, and £72,000 at stake in year five. Even for a small second-tier authority, these are not large sums.

And they will be eclipsed by the fines the EA can impose for noncompliance. Although the EA is expected to be lenient to begin with, there is a limit to how generous the agency can afford to be because the scheme’s credibility will depend on participants submitting reliable information.

John Maddocks, CIPFA’s technical manager for sustainability and third sector, warns that the EA’s permitted margin of error of 5% is very tight, particularly for a new discipline.

‘It’s quite a challenge because they’re collecting energy data which hadn’t been collected before, and they’re looking for actual use rather than estimates.’ CIPFA is producing a CRC guide, to be published in the spring, in an effort to plug the knowledge gap in the public sector.

Councils will be concerned at assuming responsibility for energy usage in schools, which are independent, expanding their opening times and increasing their use of energy-intensive technology such as computers and electronic whiteboards. ‘A lot of schools may simply have paid the bills in the past without looking at the actual energy use,’ notes Maddocks.

The LGIU’s Johnston says the energy usage estimates of three organisations he has dealt with were wrong by a factor of ten. ‘The ability to get a number of any sort for April 1, 2010 is going to be extremely difficult for many,’ he says, citing one county council that does not even know how many buildings it is responsible for. ‘It’s scandalous how little public sector organisations know what they are spending on energy,’ says Johnston. ‘Regardless of climate change, it’s just good management.’

The EA will also be auditing participants’ energy usage. Where there are discrepancies between what it finds and what an organisation is reporting, there will be fines of £40 for every tonne of CO2 where the 5% margin of error is exceeded.

The DECC estimates that the smallest participant will be emitting 4,000 tonnes of CO2 a year – so could be fined £16,000 for getting its emissions report wrong by 10%. Such an organisation could also be fined £20,000 for incomplete or unsatisfactory carbon accounting, even if the numbers are right.

Although these are still low numbers, hardly capable of bankrupting even the smallest district council, they would still represent a significant surprise hit to the budget. Any well run public body will be keen to avoid them.

And even the best resourced, most ­uninterested CRC participants will be unable to sidestep the penalties for falsifying data: unspecified fines and imprisonment. Instant penalties of £5,000 can be imposed for failing to provide a carbon footprint report on deadline, and extra fines accrue daily until the report is submitted. The charge then doubles after 40 days.

And that might be the true importance of the CRC, at least in its early stages: it is designed to be impossible to avoid.

The CRC is bafflingly complex. It might be overelaborate, and under-powered. It might or might not precipitate a shift in the UK economy towards more sustainable energy sources, or drive carbon reductions of the order necessary to prevent catastrophic climate change. But what it cannot fail to do, for all its flaws and controversial methods, is bring ­energy efficiency to the attention of some of the most important public executives in the country.

How the CRC works

- An organisation qualifies automatically if it used at least 6,000mwh of electricity in 2008 – typically generating bills of more than £500,000
- Smaller organisations, such as some second-tier councils, might not qualify. However, those with at least one half-hourly electricity meter, required for all buildings using high levels of electricity, will still have to provide comprehensive electricity accounts in order to declare that their total usage is under the threshold
- Allowances will initially be priced at £12 per tonne of CO2 emitted
- Allowances will be refunded at the end of every year, but adjusted depending on an organisation’s placing in the league table
- In the first year, the best and worst performers stand to gain or lose 10% of the total cost of their allowances. This will be increased each year, reaching 50% either way by year five
- League table scores in the first year will be based on an ‘early action  metric’, rewarding organisations that have taken steps to reduce their emissions before the CRC started
- The ‘early action metric’ will be phased out over the first three years of the Carbon Reduction Commitment
- The Department of Energy and Climate Change expects the scheme will save 4.4m tonnes of carbon or £1bn by 2020