CRC Energy Efficiency Scheme Order 2010

Motion to Approve

19:20:00

Moved By

Lord Hunt of Kings Heath
That the draft Order laid before the House on 19 January be approved.

Relevant documents: 6th Report from the Joint Committee on Statutory Instruments and 9th Report from the Merits Committee.

The Minister of State, Department of Energy and Climate Change (Lord Hunt of Kings Heath)
My Lords, we have before us today the Carbon Reduction Commitment Energy Efficiency Scheme Order 2010. The order makes provisions that will drive forward energy efficiency and emissions reductions in large organisations, and has been developed with significant business and public sector input over the past four years. The order is the first to be laid under powers in the Climate Change Act 2008 that provide for the creation of trading schemes. When this House passed the Climate Change Act, it created a clear framework for the UK’s transition to a low-carbon economy and gave us the credibility to take the lead on the international stage. That Act, as well as making provisions for carbon budgets and other measures to reduce our carbon emissions, provides the legislative basis for the order.

The CRC Energy Efficiency Scheme Order 2010 will encourage participating organisations to reduce their emissions and become more energy efficient. Analysis by the Carbon Trust in 2005 of the large private and public organisation sector found significant potential for cost-effective emissions reductions through energy efficiency. In its analysis, the Carbon Trust found evidence that the introduction of energy efficiency measures was being hampered by at least four obstacles. These are: insufficient financial incentives to reduce emissions; uncertain reputational benefits from demonstrating leadership; split incentives between landlords and tenants; and, finally, organisational inertia. The disappointing rate of implementation of energy efficiency is one of the reasons why my Government have decided to introduce the CRC Energy Efficiency Scheme. The CRC is intended as a catalyst for action and is designed to address these barriers.

The scheme will cover large public and private sector organisations that produce approximately 10 per cent of the UK’s emissions. Private and public sector organisations that have at least one half-hourly meter settled on the half-hourly market and use more than 6,000 megawatt hours of electricity through all their half-hourly meters will qualify for the scheme. As a rule of thumb, organisations that spend more than £500,000 on their energy bills are likely to be covered by the CRC.

The Government will lead by example. All central government departments will participate, even where they do not meet the qualification threshold. Participants will be required to identify and report annually their electricity, gas or fuel-related emissions. Domestic housing and transport emissions are not included in the scheme. Participants are required to surrender a CRC allowance for every tonne of carbon dioxide emitted as a consequence of their reported energy supplies. These allowances can be bought from the annual government sale or on the secondary market.

We have created an additional safety valve buy-out mechanism whereby additional allowances can be purchased from the EU ETS if the price of CRC allowances becomes too high. The floor price of the safety valve mechanism is being increased from £12 to £14 per tonne of CO2 to ensure that it is used only as a last resort. This will be provided for in the recently published regulations to be made under the Finance Act, which will be laid before Parliament shortly.

After each year, the Environment Agency, as the scheme administrator, will publish a league table ranking participants by how effectively they reduced their emissions and became more energy efficient. CRC will be broadly revenue-neutral to the Exchequer: all revenue raised from the annual sale of allowances will be recycled to participants according to how well they perform in the league table.

The scheme has been designed to overcome the three main barriers to energy efficiency that were identified earlier. The league table overcomes the barrier of unclear reputational incentives. It will provide clear evidence of which organisations are the most energy efficient. The information will be available to investors, to the public and to other companies procuring goods and services. For the first time, energy efficiency will be a reputational issue.

Another barrier that we have addressed is the split incentive between landlords and tenants. This is a difficult area and we have chosen to assign the responsibility of reducing emissions to the landlord, where they have the contract with the electricity supplier. Landlords are building professionals; tenants are not. Landlords are more knowledgeable about the measures that can be implemented to reduce energy use, and about how to implement them cost-effectively. Furthermore, landlords rather than tenants can have by far the greater impact on the overall energy efficiency of a building. A recent study by the Carbon Trust revealed that landlords have the ability to implement measures that could bring about 80 per cent of available emissions reductions. These arguments convinced us that placing the responsibility on the landlord was the clearest and most effective way to reduce emissions.

The second major issue that we are tackling is the lack of financial incentives. This is countered by the revenue recycling, which adds an additional incentive on top of savings on energy bills for high performers.

Another barrier has been organisational inertia. This is addressed by the carbon reduction commitment, which will bring energy efficiency to senior management attention via ranking in the league tables, and through the financial demands inherent in planning both for the CRC and to introduce energy-efficient measures. It is expected that the need to plan and to purchase carbon allowances will gain finance directors’ attention in a way that an incremental carbon tax on energy bills would not. The requirement for up-front purchase of allowances each April is intended to make organisations plan rather than deal with the consequences, as currently happens when energy bills are paid. Finally, the fact that an organisation’s energy efficiency choices directly impact on how much money will be recycled to them provides a novel financial incentive that is already drawing a lot of attention from potential participants.

The unique combination of financial and reputational drivers will bring the CRC, and hence energy efficiency, to the attention of boardrooms across the country, and will do so more effectively than any other policy that could have been undertaken.. In many debates on the issue, the need to bring this to the attention of the boards of both public and private sector organisations has been remarked upon. By targeting the CRC to overcome the barriers that have blocked progress in this area for so long, we are confident that by 2020 the CRC will have delivered emissions savings of a considerable amount, and financial savings for participants of around £1 billion per year. It is important to reflect that alongside the potential financial incentives and disincentives for organisations that are part of the CRC, at the end of the day, reducing energy consumption reduces bills overall.

I assure noble Lords that we have listened carefully to stakeholders during three rounds of consultation, and amended the scheme to improve the focus on energy efficiency and to allow greater flexibility for participants. I commend the order and beg to move.

Earl Attlee
My Lords, I apologise to the House for being a few minutes late into the Chamber. I was surprised when we started at 19.20 rather than 19.30: my comfort zone suddenly evaporated.

I will be brief, as the crucial points of this important matter will be picked up by my noble friend on the Front Bench.

The briefing that I am receiving from the UK ports industry suggests that DECC advisers and officials are not listening to them. As a result, the way in which the carbon reduction commitment is applied will have consequences that are unfair and, worse still, counterproductive in terms of maximising the impact of the scheme. Parts of the Minister’s speech reinforced that feeling on my part.

As noble Lords know, shipping is the most carbon-efficient form of mass transportation of goods. Therefore, it is vital that the future measures to reduce carbon dioxide emissions do not compromise the industry’s competitiveness with other modes of transport. Furthermore, the ports industry has a very good record on tackling carbon emissions throughout its operations. For example, I am told that, in the first half of 2009 alone, the port of Tilbury reduced its own use of electricity consumption by around 30 per cent, building on reductions achieved in previous years. Tilbury has a public aspiration to become Britain’s greenest port. I look forward to visiting the port for the first time shortly.

I fully support what the Minister said, but I ask that he ensures that he fully understands the intricacies of port estates and their operations. From what he said this evening, I am not convinced that he does. I urge him to take further time to consult and to make the necessary amendments to the CRC scheme, to ensure that the industry and its tenants can fully contribute to the county’s efforts to reduce carbon dioxide emissions.

19:30:00

Baroness Scott of Needham Market
I thank the Minister for bringing this important instrument to the House today. My noble friend Lord Teverson, who knows so much about these issues, is unable to be with us this evening. However, we have had a number of discussions about this. I can say at the outset that we on these Benches are very positive about what you are seeking to achieve through this.

The timing is particularly good for me because last week I was with a Commonwealth Parliamentary Association delegation to Bangladesh. This is a country where the rising sea levels in the south are already leading to mass migration and where melt waters from the Himalayas are causing widespread devastation. Climate change is a reality there that one can see every day and it puts this, and what we are seeking to achieve through this, very much into context.

I have a few questions for the noble Lord. First, can he confirm that fuel consumption is being calculated for these purposes on an average carbon emission level—in other words, that it is not taking into account how the carbon is generated? It seems rather odd to make no differentiation between organisations that are generating carbon that comes from renewable sources and those that are using coal-fired fuel. Is that the case, and might it be possible to adapt the scheme as we go on to recognise organisations that choose to use more sustainable energy forms?

Secondly, with the fixing of the carbon price at £12 per tonne, how confidant is the noble Lord that this is sufficiently high to genuinely have an impact on the behaviour of these large organisations—as he described it, the organisational inertia which has bedevilled us? How confident are the Government that there will be sufficient trading of these permits in order to create a viable market? There is certainly some doubt among experts that there will be.

Finally, even within the highly regulated EU ETS, there have been incidents of fraud and forged permits. Given that this scheme will include thousands of organisations, how confident are the Government about the auditing and management of the scheme?

We very much support what the Government are seeking to achieve with this instrument.

Baroness Wilcox
My Lords, I thank the Minister for introducing these regulations at last. Any scheme aimed at improving energy efficiency and reducing carbon dioxide emissions must be seriously considered and developed. There is a legitimate role for government in providing business with stable, long-term incentives to invest in energy efficiency and carbon reduction. This order has the potential to be a progressive and effective tool in reducing the carbon emissions from UK business. However, serious questions remain over the development and implementation of the scheme. To ensure the success of this programme it is essential that the process be workable and intelligible throughout.

The CRC could have been an excellent starting point for a new carbon accountancy scheme, growing out of the inevitable accountancy that the scheme entails. The Government are sticking doggedly to their unambitious timeline for mandatory reporting that we fought so hard against during the passage of the Climate Change Act. Businesses across the UK have voiced concerns at the lengthy and overcomplicated process of consultation and publication that has taken place.

There have already been delays to the original timeline of this programme. As the April 2010 launch has remained fixed, there are real concerns that businesses will have too little time to comply now that the regulations have finally been published. Has contact been made with UK businesses to reassure them, or to offer them assistance, guidance and support so that UK business may be best equipped to properly comply in time and with the minimum disruptions possible to their business?

We can see that the burden of bureaucracy falls far beyond the companies which qualify in the regulations before us today. Many more companies will have to submit detailed reports to the scheme. While some of this is clearly necessary to ensure that we capture the right players, adding unnecessary bureaucracy and stress to the already challenging task of running a business, particularly in our current climate, is highly undesirable. What steps has the Minister taken to ensure that this reporting is as straightforward and simple as possible? Will he also assure us that the period of uncertainty for businesses waiting to hear about their qualification status is as short as possible?

These regulations seem to fall between being sensitive to individual sectors’ very different carbon abatement challenges, and being a simple blanket measure. Some sectors captured by the scheme will have a far greater exposure to its costs than others. DECC estimates additional costs of around 9 per cent on energy bills. While some sectors’ energy bills amounted to up to 65 per cent of their total OpEx costs, for others this is less than 10 per cent. It is clear that this scheme will squeeze some far harder than others. Has the Minister considered the knock-on effects of these to specific sectors of British business? If not, I urge him to do so.

There has been a good deal of uncertainty around the inclusion of structured companies. In the last round of consultation the regulations were changed to allow the separate inclusion of certain subsidiaries. Will the Minister explain how the valid and sensible steps to give a level playing field to companies owned through franchise structures and holding companies will not be exploited through restructuring larger firms to avoid involvement in, or fair payments to, the CRC scheme? There has been criticism of this piecemeal approach to considering the specifics of a given sector. We have already heard from my noble friend Lord Attlee—who spoke about it more eloquently than I ever could—about the problems perceived by the UK ports industry. There is very little that I can add to what he has already said. I am sure that the Minister will respond if he can.

As I said in the beginning, we enthusiastically support any measures to drive energy efficiency, as do the Liberal Democrats. We welcome this order. We hope to see rapid improvements in the processes and details of their implementation. The Government have struggled with this. I am sure that any Government, whoever happened to be in power at the time, would have struggled with bringing this to the table. It is very big, complicated, new and exciting. The bad boys will look for all the loopholes as they always do. One tries one’s best to write legislation in a way that gives the honest trader a fair crack of the whip. However, it is not easy. We support this as it stands.

Lord Hunt of Kings Heath
My Lords, I thank both noble Baronesses and the noble Earl for their constructive and helpful responses to the order. It is encouraging that there has been general support, although noble Lords have raised some legitimate issues and concerns which I will do my best to address. I thought that the remarks of the noble Baroness, Lady Scott, about rising sea levels in Bangladesh and the living experience of climate change provided a helpful anecdote for the current debate on the science. Issues have been clearly identified in relation to the Climatic Research Unit at the University of East Anglia and in the Intergovernmental Panel on Climate Change process, but nothing that has occurred seems to undermine the basic science. The evidence is clear that climate change is happening, and if we do not do something about it quickly, we will be bequeathing to future generations what can only be described as catastrophe. Unfortunately it is affecting the people of Bangladesh now.

Although this is not a debate about Copenhagen, it is worth saying that despite the disappointment about a lack of agreement on a legal treaty, none the less we are seeing with the accord a significant number of countries making their own commitment. We have to build on that and work towards the Conference of the Parties 16 meeting to be held in Mexico at the end of this year. In that context, this order is important because perhaps we have not placed the required emphasis on energy efficiency as a means of reducing emissions. I am convinced that there are huge gains to be made if we can motivate individuals and organisations to take energy efficiency seriously. I take the point made by the noble Baroness, Lady Wilcox, about the complexity of and the time taken to produce the order, but with the league table approach and a system of financial penalties and incentives, we have an opportunity to make serious inroads into a sector which we have found very difficult to encourage to take energy efficiency seriously.

Perhaps I may start by dealing with the issue of complexity because it is a fair point. Noble Lords very kindly did not comment on the length of the order, but it is not brief and I accept, even though we are talking about large public and private sector organisations which therefore ought to have the capacity to deal with this issue, that there are questions about whether this is too complex a system. I can say that we have consulted fully with the Better Regulation Task Force, which in my experience is not backward in raising issues that have to be dealt with, and I believe that we have gone through all the hoops in that regard. We set out to design a scheme that is as fair and transparent as possible and we engaged extensively with stakeholders to make sure that that was the case.

I want to come back to the noble Earl, Lord Attlee, on the question of fairness. His essential point was to ask whether the scheme is fair to the port sector. We have tried to ensure fairness across the sectors, and to an extent the complexity of the order arises from the fact that we have therefore had to engage with a range of intricate organisational structures. I know that this contrasts, for example, with the installation-based approach of the EU ETS, but we do not think that that would have been suitable. I also do not think that it would have identified some of the barriers that I have already referred to.

19:45:00

I want to assure the noble Baroness, Lady Wilcox, that we are committed to keeping the scheme under review, and that we will look to identify any opportunities to simplify it. However, in the light of comments made by both the noble Baroness and the noble Earl, this of course has to be an organic process. The order is a first and we need to learn as we go along. We will review it on a regular basis, and if issues are raised which show that in the building of the edifice of the CRC—if we have missed points out or learn that there are problems as we go along—we will be prepared to make amendments from time to time. That has been the approach taken by my department in relation to a number of the interventions that we have made. I can think, for example, of the introduction of banding in the renewables obligation scheme. That was done very much in response to comments and concerns raised by stakeholders. We will continue in the same way.

The noble Baroness, Lady Wilcox, referred to the timeline. I probably do not need to go into it, but I am happy to send the timeline to noble Lords if they wish to see it. In brief, the introductory phase is from April 2010 to 2013. The first annual reporting year will start from April this year, the second annual reporting year being 2011 to 2012 and the third from 2012 to 2013, with the first sale of allowances taking place in April 2011. There is always a balance to be struck between wanting to get on with something and wanting to give businesses and public sector organisations time to adjust. I hope that we have got it right and that we can look forward to the introductory year starting in only a few weeks’ time.

Both the noble Earl, Lord Attlee, and the noble Baroness, Lady Wilcox, went on to ask how well we have communicated with the organisations that are going to have to deal with the scheme. We have worked very hard with the Environment Agency, the scheme administrator. In April 2009 the agency held eight regional seminars involving more than 600 delegates. Two further national events are scheduled for this year, to be held this month and in March, and the agency wrote to all potential participants during May and June 2009 to inform them about the scheme. My officials and representatives from the Environment Agency have over the past year hosted around 140 events in order to consult on and raise awareness of the scheme. Lastly, what my speaking note calls “newsblast emails”—whatever that means, but it sounds jolly good—have been distributed to our CRC stakeholder list which comprises more than 16,000 individuals. I think it means that we are highlighting what is taking place. There has been an important effort to get this across. I accept that we need to do more and we will be working with the Environment Agency to do all that we can to ensure that the organisations that will be affected know that the scheme is coming their way.

I take on board what the noble Earl, Lord Attlee, says about the ports, and I am aware of the concerns that have been expressed. Some noble Lords may have heard from Forth Ports on these issues. One of the concerns is the apparent inability of the ports to influence their tenants’ emissions. For instance, I note in a briefing sent out by Forth Ports that,

“it is worth remembering that electricity on-sales represent a substantial revenue stream”.

I take that to mean that this is a profit centre: the more electricity that tenants use, the more income is generated for the ports. That is a problem, of course, because the CRC is designed as an incentive which seeks to reverse that.

There are financial and reputational rewards for those who use less energy. I know also that there have been concerns about what might kindly be described as erratic tenants. I would add that there is nothing to stop any port from asking its tenants to take responsibility for their own emissions by connecting directly to the grid. The noble Earl asked whether I would continue to look at the matter. I will continue to do so but, as I said, this is the start of a process. Noble Lords have not raised the issue of schools, for instance, but concerns have also been raised about schools being brought within a local authority’s responsibility. I again give the assurance that we will be monitoring the scheme and its introduction very closely. If it proves that we have to make changes, we will want to do so. However, I also want to give certainty to businesses that we are not going to suddenly come in and change it after a few months. We need to see how it works in practice, and give some stability to those organisations as well.

I turn to the question of price and trading. We have had very happy debates on the EU ETS and issues to do with the carbon price. The noble Baroness is probably aware that because Copenhagen was not all we wanted it to be, the EU has not been able to say that it will go from a 20 per cent to a 30 per cent emission target. We wanted that as it would have had a positive impact on the carbon price, which is low at the moment and is undoubtedly causing some difficulties. Obviously, we do not want that to happen in relation to the allowances on this scheme. I am advised that we think we have got it right, but again, we will have to look at that very carefully.

On the issue of auditing, my understanding is that we are currently drafting guidance for the Environment Agency on the criteria that equivalent schemes must meet to be recognised as equivalent to the CTS under the early action metric. I take the point the noble Baroness raises: there has to be integrity in the system, and people have to trust the measurement; she is absolutely right. Throughout the whole emission trading sector, the point about clean development mechanisms is that integrity of the measurement system is critical. One of the unnoticed gains from Copenhagen was the agreement in the accord to have, for the first time, a much more vigorous process in relation to measurement. It applies just as much here as it does to wider international trading schemes.

As for the impact on business, I turn first to the noble Baronesses, and come back to the issue of price and the question of whether there will be sufficient robustness in the system to make businesses want to take this seriously. We think that it is going to work; it is designed to encourage cost-effective emission reductions. The problem has always been that although the amount of savings we think will come through reduced energy demand is £1 billion a year, energy costs in the budget of large organisations can typically be quite low. That is the problem we face: directors of finance going to their boards do not see it as a major expenditure item, yet from our point of view, we have to get across to them that this is serious. In many cases, it takes very little effort for organisations to become more energy efficient. I believe that the combination of the allowances system, the incentives for organisations that do well, and, perhaps in some cases, the league table, will provide the necessary incentives.

In my opening remarks, I referred to the fact that government departments will be enrolled in this scheme, even though some of them do not reach the thresholds. League tables will have a very powerful impact on government departments themselves. Noble Lords know that my department moved into its offices in Whitehall Place in October 2008—in a building with the lowest rating for energy efficiency that you can have. We took a bit of punishment for this, but we have improved. This shows that external pressure, combined with leadership inside the organisation, can lead to that kind of change.

I turn to the issue of renewables and why they are not raised here. This is a question I asked my officials too. The noble Baroness is quite right; no differentiation is made in relation to where electricity comes from. The reason is that we are talking about ensuring energy efficiency; that, in essence, is taken as the currency. I suspect that we could have a theological debate about that, but this has been decided in terms of simplicity. That is why you do not get different recognition for renewable, nuclear or, hopefully in the future, carbon capture and storage, or whatever.

The noble Baroness, Lady Wilcox, asked why we group private equity funds with their investee companies. This raises the whole issue of what the correct governance structure is in these kinds of circumstances. We have taken the decision that grouping organisations in the CRC is determined by whether or not there is a parent-subsidiary relationship as defined in the Companies Act. Where such a relationship exists, we think it is appropriate for the subsidiary company to be grouped under the parent to ensure that accountability is applied at the correct level. The criteria set out in the Companies Act involve a level of influence of parents over their subsidiaries that should be sufficient for private equity funds to encourage their investee companies to become more energy efficient. Private equity funds have an excellent opportunity to use their strategic overview of different companies to facilitate the take-up of best practice, and can use their influence to raise energy efficiency up the corporate agenda. I also think that in deciding to use this approach, we will overcome the problem that the noble Baroness rightfully raised in her opening remarks.

I am encouraged by the generally positive response to this order tonight. We will be looking very carefully at implementation and at issues that arise when the scheme is introduced. Overall, however, I think that this could be very positive and powerful in ensuring that energy efficiency in this country takes a further leap forward in the next few years.

Motion agreed.

19:58:00

Sitting suspended.