The cost of carbon soars and uncertainty persists under the CRC

London, 18 November 2010 – The UK Government yesterday announced further changes to the Carbon Reduction Commitment Scheme (CRC), adding to the uncertainty associated with rapidly developing business legislation. A new consultation period has now been announced, delaying some elements of the programme.

Darren Berman, Director of Energy & Sustainability, CBRE, said: “By proposing further changes to the scheme only weeks after abolishing the recycling payment, the Government has made it harder for businesses based in the UK to make investments in energy efficiency and carbon reduction.

“Whilst yesterday’s changes give the Government more time to review the legislation announced in October, as well as reduce administrative burden for smaller businesses, it should be conscious of the heart of the issue here, which is to almost guarantee carbon reductions - this legislation is not just another revenue generating initiative for Government.”

Phase 1 of the scheme started in April 2010, with Phase 2 due to commence in 2013 – this has now been delayed to 2014. It was intended that from Phase 2 there would be a cap on the number of allowances available, with the cost set by auction.

“The cost of carbon will now be fixed until April 2014, as the Government consults on the next phase of the scheme, and in particular on how, and whether, the auction will be implemented. It should be noted however that the consultation paper leaves open the option for the Government to increase the fixed price in future Budgets.”

Only last month the cost of compliance with the CRC scheme added approximately £1 billion a year to the cost to businesses. This shift to revenue generating rather than recycling the cost back to participants meant that participants were suddenly significantly incentivised to reduce their emissions, hiking carbon prices.

The abolition of recycling the sale of carbon allowances back to participants was announced last month, aimed to provide greater price transparency and reduced complexity in forecasting the true cost of carbon. However, it also means that the cost of compliance for the average participant has risen dramatically.

“The complexity of the CRC for larger participants and the urgent need to invest in energy efficiency remains. Yesterday’s changes, coming so closely after major changes announced only a few weeks ago risk discouraging businesses from investing in carbon reduction. There is an increasing need for businesses to manage risk in a continuously uncertain environment.”