ENERGY INSIGHT

Cap and Trade in CRC Energy Efficiency

Please note: The content of this article is in the process of being update to reflect the latest CRC scheme design. Updated content will be posted shortly. The Department of Energy and Climate Change (DECC) website contains complete details on program requirements and design.

Carbon Cap and Trade is at the Center of an Energy Efficiency Scheme

Any idea that directly affects the ability of an independent organization to do business is bound to be controversial and the cap and trade scheme,pivotal to the British government's CRC Energy Efficiency Scheme, has its fair share of detractors. While the program is being rolled out in the UK only and affects businesses in that country, theoretically in the future a network of cap and trade schemes could be linked across continents or even globally as part of the fight against global warming.

What exactly is a cap and trade scheme? The program restricts the amount of carbon dioxide that organizations release to the atmosphere, by giving them an allowance based on annual consumption. The government will allow the company to emit carbon dioxide by effectively selling it a license to do so. At the beginning of a trading year, the company will be licensed to use a certain amount of energy, resulting in a certain amount of greenhouse gas emissions. At there will be an overall cap on the number of allowances possible, countrywide, organizations must trade between themselves, setting market value accordingly.

What exactly is a cap and trade scheme? The program restricts the amount of carbon dioxide that organizations release to the atmosphere, by giving them an allowance based on annual consumption.

A cap and trade scheme works because of the scarcity involved. Underneath an overall ceiling, trading activity will dictate that the laws of supply and demand set a price per tonne of CO2. This is thought to be the best way of approaching the overall issue of carbon emission reduction, as financial constraints will focus the attention of the individual organization toward energy efficiency.

Within this kind of energy efficiency scheme, participants may purchase allowances from other organizations should they need to. This is of course not the best case scenario and will increase the cost of doing business for the affected company. As the government tightens allowances as the energy efficiency scheme unfolds, the price per tonne of carbon dioxide will increase and this will put additional pressures on the organization to become efficient.

Cap and Trade Centers the UK Carbon Reduction Commitment

Assuming a level of economic growth, there will be cause for additional energy consumption and as this happens, under the restrictions of a cap and trade scheme, further upward pressure will be applied to the price of a tonne of CO2. Those who believe in the balancing power of a free-market economy suggest that the market price of carbon dioxide will therefore be, by definition, palatable.

Unexpected events or a confluence of circumstances may dictate that the market value of carbon dioxide under the new energy efficiency scheme be unfairly elevated. In these circumstances, the UK government has said that it will operate a safety net to assist organizations adversely affected in this way. The government will seek to purchase additional allowances from within the EU Emissions Trading Scheme and will make these allowances available to an organization at a predetermined price.

UK’s CRC: the Former Energy Efficiency Scheme

An energy efficiency scheme such as the Carbon Reduction Commitment, as the British program was formerly known, is of considerable interest to politicians and corporations alike within the United States. The US House of Representatives has passed an Act including provisions to introduce such a scheme within the country. Whether or not this becomes law is open to conjecture, however, as there is a lot of opposition to the program from within the U.S. Senate.

If an organization is not able to reduce its energy use and carbon emissions, it is likely to face very significant economic pressures, due not only to the elevated cost of buying carbon, but the penalties that may well be imposed by the cap and trade scheme's administrators. Additional reputational harm is likely to be suffered.

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