Trade to the rescue

Companies may escape penalties by buying credits awarded to firms that exceed carbon dioxide emissions reduction targets, writes Derek Goodban

The Climate Change Bill will make the UK government's long-term goal of a 60% reduction in carbon dioxide emissions by 2050 a legally binding target. It will also enable Whitehall to draft secondary legislation to help it achieve this. Carbon-trading schemes are key to this effort.

Most carbon-trading schemes adopt a 'cap- and-trade' principle. The government imposes a sector cap on emissions and issues a number of allowances to operators within the sector. Each allowance entitles its holder to emit a stated amount of carbon dioxide over a specified period and operators are able to sell surplus allowances to those who have a shortfall. If their emissions exceed credits, firms are heavily penalised.

The EU Emissions Trading Scheme (EUETS) already applies to energy-intensive sectors. Fifty-one food and drink plants are covered in the UK, though many have been able to opt out because they are party to UK climate change agreements. Mars was fined in December 2006 for failing to meet its obligations under EUETS.

A government consultation has touched on two new methods that could help reduce emissions in the public and private sectors. They would apply to organisations with annual electricity consumption greater than 3,000 megawatt hours and would affect many more food and drink premises than are covered under EUETS (including supermarkets).

The first instrument suggested is an Energy Performance Commitment (EPC). This would be binding and involves an auction-based cap-and-trade scheme to target emissions not covered by EUETS or current UK agreements. The government would cap the total energy-use emissions of those covered by EPC.

Participants would purchase allowances at auction, or from each other, and would have to surrender allowances equal to their target emissions levels. Auction revenues would be recycled to EPC participants.

The second suggestion would be a voluntary system of benchmarking under which participants would report their emissions and would then be compared against a benchmark.

Benchmarks would be sector and activity specific and would serve to inform participants how they compare to similar businesses. Such a scheme would also promote greater availability of information on how businesses can improve efficiency.

The adoption of either scheme would have significant consequences for many firms in the food and drinks industry. FM

Derek Goodban is an energy partner with Wragge & Co