Government Review of Climate Change Agreements

What you need to know

Context

The Climate Change Agreement Scheme was launched in 2001 as part of the Government’s drive to force businesses to reduce carbon emissions.  The CCA allows eligible businesses to claim a rebate of up to 65% on their climate change levy as long as they meet emissions reduction targets.

The current CCA scheme expires in 2013 and the Government has announced its intention to launch a new scheme which will run until 2023.  

The good news is that the new scheme will be simpler and with the potential for more businesses to be able to join.  However, it’s clear that the new policy will entail tougher targets, making it significantly more difficult for businesses to achieve and maintain the rebate.

In addition, the penalty for failing to achieve targets is likely to be more severe.  The Government’s recent consultation exercise indicated that the cost of carbon could increase from around £2.50 per tonne to £12 per tonne, and that there will also be severe penalties for late or inaccurate reporting.

While the final details of the new scheme won’t be released until mid-2012, companies that are already in the scheme need to understand the implications of these changes, and take action now to reduce liability which will impact 2012/13 budgets.

Targets Explained

There are a number of factors which mean that, under the new scheme, targets will be harder to achieve.  

• A new base level against which targets will be set
• Targets will be set for individual companies, not sectors
• Annual reporting periods will be replaced by bi-annual reporting periods.

New base level

Existing targets were based 1995-2000 emission levels.  The new targets will be based on 2008 levels, which are likely to be lower than the original targets since many companies have reduced emissions considerably over the period 2000-2008, order to achieve the maximum rebate.  

As a result, businesses will face increasing pressure to further improve against their 2008 performance.  Also The Department of Energy and Climate Change is considering that a review of the targets will take place in 2016.

Individual targets

At present, companies brought together under a ‘sector’ could achieve the rebate if their overall target was achieved.  Even if an individual company failed to achieve its target they were eligible for the rebate as long as the sector as a whole achieved its target.  

Under the new scheme this will no longer be possible.  Individual companies must meet their targets or buy carbon to make up the shortfall if they are to stay in the scheme.

Annual reporting periods

Under the current scheme, companies have a two year target period but only the second year is taken into consideration against the actual set target.  In effect, this has meant that companies have had to make a concerted effort to reduce emissions in relation to their CCL target only every two years.  

Now the new scheme will take every year into consideration, so a continual focus on emissions reduction will be required if penalties are to be avoided.

The four target periods under the new scheme will be 2013-14, 2015-16, 2017-18 and 2019-20.  All target periods will commence on 1st January and companies will continue to be able to choose between absolute and relative targets.  (NB: Absolute targets are based on energy consumption while relative targets are based on energy consumption in relation to output.)

Penalties Explained

Companies that fail to meet their targets will continue to be penalised by losing the rebate they are allowed to claim, and through the purchase of carbon credits to make up the shortfall.

If a company fails its target it will have to purchase CO2.  In recent years the cost of CO2 has been around £2 - £3 per tonne.  Under the new scheme the cost is set to rise significantly - three price options have been proposed:

• initial price of £12 per tonne
• price linked to CO2 equivalent to CCL on electricity
• price linked to the EU ETS.

All three options mean that companies face heavier penalties if they fail to achieve their targets.

Case Study

At its last milestone Company A failed to achieve its emissions target by 2,422 CO2 tonnes.  This meant Company A had to buy carbon credits at £1.50 per tonne – a total cost of £3,633.  Under the new scheme, in which the cost of carbon is set at £12 per tonne, the total penalty would escalate to £29,064.

The good news is that if a company surpasses its target the saved carbon can be banked and used in later years, should targets be missed.

Please note that if a target is not achieved due to energy supply disruptions, this will be taken into account when assessing your overall performance.  Effects of regulatory changes will only be taken into account when setting new targets.

Reporting Penalties

A penalty system looks set to be introduced to encourage timely and accurate reporting.  At present, a minor infringement can result in the termination of the CCA, causing a company to lose the CCL discount entirely.  Under the new scheme, companies will be penalised for late submission of data, as well as inaccurate or incomplete data.

Administration of the CCA

It’s likely that the changes to the CCA will result in an additional administration charge for participants.

Current administration by the Department for Environment and Climate Change (DECC) is likely to be transferred to the Environment Agency.  Proposals on introducing an administrative charge to businesses (or their respective Trade Association) is subject to a separate consultation which will be held later in 2012.  The charge will be in addition to the current Trade Association annual management charge.  At this stage it isn’t clear whether the charge will be fixed for all businesses, or arranged on a pro-rata basis according to energy usage or value of rebate.

Most other administrative functions will remain unchanged:

• All existing CCA sectors will continue to be eligible for a CCA
• All target units will continue to have an underlying agreement directly with the CCA scheme administrator
• The sectors will continue to have an Umbrella agreement directly with the CCA scheme administrator (although individual agreements will be shorter and simpler).

Summary

• More businesses will be eligible to join the new CCA scheme
• Targets will be harder to achieve
• Carbon credits will be significantly more expensive and there will be more severe penalties for reporting failures
• Companies need to act now as the new scheme will affect 2012/13 budgets.  Energy efficiency measures should be the priority to ensure targets can be met and the full rebate achieved.