What does turning the CRC into a levy mean for the cash-strapped public sector? Lucie Ponting finds out.
Surprise changes to the CRC Energy Efficiency scheme tucked away in the government’s October 2010 Comprehensive Spending Review have received a mixed reception from cash-strapped public sector participants.
On the one hand, the news that revenues from the scheme will no longer be recycled back – eff ectively making the CRC more like a carbon “tax” in the short term – has significant cost implications, especially in the climate of wider public sector budget cuts.
But on the other hand, many are cautiously welcoming the removal of complex calculations associated with the revenue recycling aspect of the performance league table.
The change also tackles one of the key criticisms contained in the Committee on Climate Change’s (CCC) September 2010 report1 on the CRC’s second phase.
Committee members were concerned that revenue recycling linked to the league table meant that funds could be transferred from the hard-pressed public sector to private companies, and had called for the introduction of separate league tables. Although the reputational ramifications of the league table remain intact, there is now no risk of potentially “unfair” financial transfers between sectors.
For organisations that invested in Carbon Trust Standard certification or installing automatic meter readers (AMR) to take advantage of the CRC’s early action metric (EAM), there is frustration that these will now not accrue the direct financial benefit expected. In some cases, local authorities (LAs) not very far along the route to Carbon Trust Standard accreditation are reconsidering or cancelling their plans.
Large sums
The coalition government had already indicated it wanted to simplify the CRC. But its decision to retain revenue from the sale of allowances, which it says will total £1 billion a year by 2014 to 2015, to “support public finances”, rather than recycling the money back to participants based on their performance in the league table, came as a shock to most (see box below).
From the start, participants had been told the CRC would be revenue neutral to the Treasury. Around one-third of organisations participating fully in the CRC are in the public sector and include councils, fire services, universities and NHS trusts.
Mark Johnson, consultant at AEA and CRC expert, says there are negative financial implications for everyone – public or private sector – in having to pay the full carbon price and getting no money back.
“The net cost to participants is up, and up substantially,” he explains. With the carbon price still there at £12 per tonne, however, there should still be an incentive to make savings.
Karen Lawrence, head of CRC at the Local Government Information Unit (LGIU), has found the LAs she has spoken to are concerned that they will now have to find a large sum of money – approximately £2 million or so in year one for the largest county councils and an average of about £300,000–£350,000 for smaller councils or London
Boroughs – that is no longer refundable.
“Having expected to have only 10% of this ‘at risk’, rising to 50% by year five, this is clearly not ideal at a time when budgets are being severely cut everywhere,” she says.
Simpler life
Lawrence adds that the change does, however, make life simpler. With all the complex calculations around the league table gone, the cost of carbon (and any savings made) is much easier to calculate and to express and communicate to senior managers.
This is, she suggests, helping to focus the minds of finance directors. “Revenue recycling introduced uncertainty to the business case,” adds Johnson. “Now that has gone; it’s not necessarily a good thing but it does simplify things. People know where to start now.”
Kristina Peat, sustainability manager at North Yorkshire County Council, echoes this, arguing that removing revenue recycling has made it far easier to say how much it is going to cost the council.
“It is useful in that respect,” she says. “Before the change, we were talking to senior officers, saying it could be this … but we couldn’t give them a proper forecast.”
Despite this positive aspect, Peat believes the move will have an impact on the public sector. “It’s better in some ways; it’s now purely a cost, rather than about how you play the game in a carbon reduction scheme.”
But at the same time, the costs are very high – for North Yorkshire County Council about £750,000–£800,000 a year. “This is a substantial amount of money to find,” says Peat, “especially now when we are getting less overall and have a falling amount of money to spend.”
Anthony Hubbard, contracts and compliance officer at Portsmouth City Teaching Primary Care Trust (PCT) estates and facilities services says he and energy officer Colin Bingham, who are dealing with the CRC across Portsmouth and Hampshire PCTs, are already finding it easier to get trust support for energy-conservation projects on the basis of “spend to save”.
“One of the trusts had reckoned the cost would be £120,000–£130,000 with recycling and it would lose only 25% of this, worst case,” he explains. “Now they realise they will lose the lot, it has really focused minds on reducing energy and carbon.”
“We ended up with what we expected really: you pay for what you use and if you’re a big user, you pay the penalty,” emphasises Bingham. “Our outlook has always been on reducing kilowatts used, so we didn’t have to pay the carbon – we aimed to save as much as we could across the board anyway.”
They are also focusing on keeping those trusts, for example Portsmouth, that are not currently full CRC participants below the threshold, which they suspect will now fall in future in order to bring in more organisations.
Financial risk
The Chartered Institute of Public Finance and Accountancy (CIPFA), which represents people working in public finance, highlights the budgetary challenges facing the sector. “Budget planning in the public sector takes time,” said a CIPFA spokesperson, “and this unexpected change to the scheme means they are facing even greater pressures relating to decision making and finding the funds and cash flow to comply with CRC.”
Although the delay in the first sale of allowances – organisations no longer have to pay for these in April 2011 – is welcome in terms of cash flow, it is of relatively limited value.
CIPFA explains that authorities will need to accrue for the cost of allowances incurred due to energy use during 2011/12 in that year’s accounts, even though the financial transaction does not take place until the 2012/13 financial year. Therefore they will still need to factor this cost into their budgets and provide for the amount in their 2011/12 accounts.
Early action
The reputational element of the league table remains unchanged and public sector bodies will have to fight for position with private sector businesses.
The LGIU’s Lawrence says that many councils invested in AMR and achieving the Carbon Trust Standard or an equivalent specifically to do well in the early league tables (and benefit from recycling payments) and are angry that their investment now has no financial reward. Anecdotally, some are reconsidering Carbon Trust Standard accreditation or pulling the plug immediately.
>> Comprehensive changes
The three main implications of the Comprehensive Spending Review changes are:
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in order to “clarify the price signal” to participants and to support the public finances, revenue from allowance sales will not be recycled back to participants by the UK government;
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the first sale of allowances will take place in 2012 instead of 2011, postponing the financial requirements of the scheme – participants will therefore be able to purchase allowances to cover their 2011–12 emissions at the end of the 2011–12 compliance year. Further decisions on allowance sales “are a matter for the Budget process”;
- and the performance league table will be retained as the main reputational driver within the scheme, with the metric weightings and publication dates as envisaged in the current legislation (including the October 2011 table).
North Yorkshire County Council has completed the Carbon Trust Standard process. “For us, we knew we were lagging in AMR, so to get a good score we went for accreditation,” Peat says. She concedes that there were some useful recommendations that the council integrated into its review of its carbon-reduction plan.
But the council would not have considered the standard, had it not been for the EAM. It is AMR that North Yorkshire intends to continue. “We need to get to grips with it because we need meter readings, and want to avoid the CRC’s 10% uplift on estimated bills,” says Peat. Lawrence agrees: “There is a much better business case for AMR,” she says, “quite apart from the EAM score, as it will help greatly with data collection for reporting purposes, and with energy management more widely.”
Maintaining reputation
Removing the financial incentive from the league table addressed a key CCC concern. But the committee’s observations about the fundamental differences between public and private sector organisations, particularly in the context of public sector cuts, remain relevant from the reputational point of view. Not only is it likely that budget constraints will reduce the finance available for improving energy efficiency but public abatement potential generally is much more limited compared with the commercial sector.
Johnson at AEA picks up the issue of the league table’s growth metric, which measures emissions per unit of turnover (or “revenue expenditure” for the public sector). “There is the question of whether biases inherent in the system will put the public sector at the top or bottom of the table,” he says.
Ultimately, in terms of reputation, it may be less about absolute position in the table and more about whether an organisation is rising or falling year-on-year. So far, the impact of public spending cuts on emissions intensity relative to revenue is unclear. But when facing budget cuts, for example, public sector bodies will probably try to protect services, and services result in emissions. In that case, revenue will go down but emissions will not drop as quickly.
Some CRC issues are unique to the public sector. For example, the sector’s lack of control over many of its properties, as well as the time it takes to get things agreed through committees and the executive, can put it in a very diff erent position to commercial and industrial operations.
For LAs, their lack of control over schools’ energy use is an unresolved problem. “Their emissions are our emissions; that’s 70% of the council’s reportable emissions,” explains Peat. “But in schools which are highly delegated, all we can do is persuade and encourage.”
Lawrence says that proposed changes to the schools finance regulations, under consultation, would have allowed councils to implement a system of passing on the schools’ share of any penalties and rewards based on CRC league table performance; however, it is not clear whether they can charge schools for their CRC bill.
This leaves councils bearing the financial burden for schools (often up to 50% of their total CRC bill) but having very little control over schools’ energy use.
Up for grabs
The spending review changes may have simplified accounting, but they have very little eff ect on the main administration costs, which include the time and effort to identify fuel sources, collect accurate data for footprint and annual reports, and to maintain an evidence pack.
Lawrence suggests that one effect may be to increase focus on reducing reported emissions. “Calculations that may have been considered too time consuming and not cost eff ective (ie separating out use by other organisations in mixed-use buildings or excluding small amounts of transport use) may now be worthwhile as each tonne of carbon costs money,” she says.
The consultation2 on further simplification of the CRC ended on 17 December 2010, and proposals included: extending the introductory phase by 12 months so that it runs until March 2014, and postponing the requirement to register for phase two from 2011 to 2013.
In terms of the promised wider review, Johnson believes there will still be a lot up for grabs. “It’s not right to assume this will end up being a tax,” he says. “This is something still to be decided.”
For the first year, allowances will be purchased retrospectively but it is undecided what will happen after that. The whole question of simplification is also wrapped up in the wider policy landscape. “We need to wait and see,” he emphasises.
But in the shorter term, things are clearer; there are now quite a lot of “knowns” regarding obligations and costs, so any uncertainty about phase two developments should not lead to inaction. Organisations need to continue to act and plan to reduce emissions and associated costs.
1 www.lexisurl.com/iema5867
2 www.lexisurl.com/iema5869
