What price carbon reduction?

Despite the economic difficulties we are all currently facing, the UK Government remains committed to, and indeed is in the process of, increasing its self-imposed targets in the area of carbon reduction. The final version of the Climate Change Bill is likely to include a requirement to reduce the UK’s CO2 emissions by at least 80% by 2050 as against 1990 levels. A key element of the Bill which will put these aspirations into practice is the Carbon Reduction Commitment (“CRC”). CRC is a mandatory, UK-only carbon trading scheme which will start in April 2010. It will operate as a cap and trade scheme within which affected organisations must purchase and surrender allowances to cover their CO2 emissions. Those organisations whose electricity consumption via half-hourly meters exceeds 6,000 MWH during calendar year 2008 will be caught by the scheme. While this threshold is likely to mean that many primary care Trusts will not be affected, it is likely many NHS bodies (including most, if not all, NHS acute Trusts) will be. It is also inevitable, given the carbon reduction targets which the UK Government has set itself, that over time this threshold will be reduced, and thus that more businesses will be drawn into the scheme.

Introductory phase

During the introductory phase, which will start in April 2010, allowances to emit carbon will be sold by the Government at a fixed price currently anticipated to be £12 per tonne. During this phase participants will be able to buy as many allowances as they wish. It is intended to be a “learning by doing” phase such that entities with no previous experience of emissions trading can gain experience of forecasting the amount of allowances they will need and develop compliance strategies prior to the start of the first capped phase in April 2013. During the capped phase the price will be set by the market. Given the Government’s aspirations in relation to carbon reduction, and the criticism which surrounded the European Union Emissions Trading Scheme (“EU ETS”), where an over-generous cap led to a dramatic fall in the carbon price, we anticipate that the cap will be reduced over time. There will be one auction per year – participants will be able to choose whether to buy in that auction or, alternatively, in the secondary market. In a worst case scenario there will be a link to the EU ETS such that participants will always be able to source the allowances they need – albeit that the price might be different from that paid during the auction.