Friday, 8 February 2013

Carbon Offsets and the CRC "Tax"

One of the more surprising findings from Carbon Clear's 2012 research into the carbon performance of the FTSE 100 was the fact that only a small fraction of the country's largest companies offset their  greenhouse gas emissions.  In follow up conversations with some of these firms, representatives gave me a number of reasons why they don't offset, but one rationale has been cropping up with increasing frequency. To paraphrase: "We don't need to offset to demonstrate our low-carbon committment because we're paying the CRC tax."

Such a view might seem reasonable, but falls short of the mark.

The CRC requires large firms that are not covered under the EU ETS to report their energy emissions and pay a £12/tonne permit fee to the Government.  In an ideal world, those accumulated payments would go towards a range of emission reduction activities, from tree planting and forest restoration to incentives for clean energy investment, to support for energy efficiency in homes and offices. However, CRC revenues, estimated at over £1 billion, are not earmarked for green initiatives. The money goes into general revenues.

I'll say that again: There is no direct link between CRC payments and Government spending on emission reduction measures.

At best, the CRC drives emission reductions by helping companies become more aware of their energy consumption, and by very slightly increasing firms' energy bills. These measures will undoubtedly have some impact.  But with energy a relatively minor expense at most companies covered by the CRC, and permit fees equal to only about 10% of electricity costs, these incentives are relatively weak.

Many sustainability experts hoped that the CRC's Performance League Table (PLT) would provide a reputational driver that encourages firms to reduce their emissions, but there is little evidence to suggest the PLT has had much impact.  In its first year, PLT rank was assigned based on implementation of Early Action Metrics that would help a company collect better data, not on emission reductions.

The second round of league table results has been delayed for several months, apparently because so many companies have asked to refile their data with the Environment Agency. What is more, the currently delayed league table will be the last of its kind after Government announced in December 2012 that this element of the CRC will be scrapped. So much for reputational incentives.

All of this makes very tenuous the link between CRC participation and ambitious efforts to tackle companies' climate change impact.  To be clear, the CRC has helped to put climate change and carbon reporting on the corporate agenda in the UK, and many firms will use the increased awareness of their energy consumption to drive savings.  However, most of the resultant savings will be at the margin, and as we have noted previously the vast majority of a company's greenhouse gas emissions will continue unabated, and then remain in the atmosphere for decades or centuries.

There are only two real ways to tackle a company's carbon impact when it matters most - that is, right now.  The first is to reduce net emissions within the company's footprint boundary - through energy efficiency, behaviour change, process improvements, reforestation and other measures.  The second is to reduce emissions outside the company's footprint boundary, at the same rate or greater than the company's own emissions - by supporting verifiable emission reductions from another source. That second approach is called "offsetting".

Taken together, ambitious internal reductions and high quality offsetting form the core of a comprehensive carbon management strategy.

The CRC remains a legal requirement for many UK companies and it can make a contribution to the low-carbon agenda.  But tax or not, the CRC is not a substitute for carbon offsets when it comes to fighting climate change.