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CRC Energy Efficiency Scheme Order 2010

My Lords, we have before us today the Carbon Reduction Commitment Energy Efficiency Scheme Order 2010. The order makes provisions that will drive forward energy efficiency and emissions reductions in large organisations, and has been developed with significant business and public sector input over the past four years. The order is the first to be laid under powers in the Climate Change Act 2008 that provide for the creation of trading schemes. When this House passed the Climate Change Act, it created a clear framework for the UK’s transition to a low-carbon economy and gave us the credibility to take the lead on the international stage. That Act, as well as making provisions for carbon budgets and other measures to reduce our carbon emissions, provides the legislative basis for the order. The CRC Energy Efficiency Scheme Order 2010 will encourage participating organisations to reduce their emissions and become more energy efficient. Analysis by the Carbon Trust in 2005 of the large private and public organisation sector found significant potential for cost-effective emissions reductions through energy efficiency. In its analysis, the Carbon Trust found evidence that the introduction of energy efficiency measures was being hampered by at least four obstacles. These are: insufficient financial incentives to reduce emissions; uncertain reputational benefits from demonstrating leadership; split incentives between landlords and tenants; and, finally, organisational inertia. The disappointing rate of implementation of energy efficiency is one of the reasons why my Government have decided to introduce the CRC Energy Efficiency Scheme. The CRC is intended as a catalyst for action and is designed to address these barriers. The scheme will cover large public and private sector organisations that produce approximately 10 per cent of the UK’s emissions. Private and public sector organisations that have at least one half-hourly meter settled on the half-hourly market and use more than 6,000 megawatt hours of electricity through all their half-hourly meters will qualify for the scheme. As a rule of thumb, organisations that spend more than £500,000 on their energy bills are likely to be covered by the CRC. The Government will lead by example. All central government departments will participate, even where they do not meet the qualification threshold. Participants will be required to identify and report annually their electricity, gas or fuel-related emissions. Domestic housing and transport emissions are not included in the scheme. Participants are required to surrender a CRC allowance for every tonne of carbon dioxide emitted as a consequence of their reported energy supplies. These allowances can be bought from the annual government sale or on the secondary market. We have created an additional safety valve buy-out mechanism whereby additional allowances can be purchased from the EU ETS if the price of CRC allowances becomes too high. The floor price of the safety valve mechanism is being increased from £12 to £14 per tonne of CO2 to ensure that it is used only as a last resort. This will be provided for in the recently published regulations to be made under the Finance Act, which will be laid before Parliament shortly. After each year, the Environment Agency, as the scheme administrator, will publish a league table ranking participants by how effectively they reduced their emissions and became more energy efficient. CRC will be broadly revenue-neutral to the Exchequer: all revenue raised from the annual sale of allowances will be recycled to participants according to how well they perform in the league table. The scheme has been designed to overcome the three main barriers to energy efficiency that were identified earlier. The league table overcomes the barrier of unclear reputational incentives. It will provide clear evidence of which organisations are the most energy efficient. The information will be available to investors, to the public and to other companies procuring goods and services. For the first time, energy efficiency will be a reputational issue. Another barrier that we have addressed is the split incentive between landlords and tenants. This is a difficult area and we have chosen to assign the responsibility of reducing emissions to the landlord, where they have the contract with the electricity supplier. Landlords are building professionals; tenants are not. Landlords are more knowledgeable about the measures that can be implemented to reduce energy use, and about how to implement them cost-effectively. Furthermore, landlords rather than tenants can have by far the greater impact on the overall energy efficiency of a building. A recent study by the Carbon Trust revealed that landlords have the ability to implement measures that could bring about 80 per cent of available emissions reductions. These arguments convinced us that placing the responsibility on the landlord was the clearest and most effective way to reduce emissions. The second major issue that we are tackling is the lack of financial incentives. This is countered by the revenue recycling, which adds an additional incentive on top of savings on energy bills for high performers. Another barrier has been organisational inertia. This is addressed by the carbon reduction commitment, which will bring energy efficiency to senior management attention via ranking in the league tables, and through the financial demands inherent in planning both for the CRC and to introduce energy-efficient measures. It is expected that the need to plan and to purchase carbon allowances will gain finance directors’ attention in a way that an incremental carbon tax on energy bills would not. The requirement for up-front purchase of allowances each April is intended to make organisations plan rather than deal with the consequences, as currently happens when energy bills are paid. Finally, the fact that an organisation’s energy efficiency choices directly impact on how much money will be recycled to them provides a novel financial incentive that is already drawing a lot of attention from potential participants. The unique combination of financial and reputational drivers will bring the CRC, and hence energy efficiency, to the attention of boardrooms across the country, and will do so more effectively than any other policy that could have been undertaken.. In many debates on the issue, the need to bring this to the attention of the boards of both public and private sector organisations has been remarked upon. By targeting the CRC to overcome the barriers that have blocked progress in this area for so long, we are confident that by 2020 the CRC will have delivered emissions savings of a considerable amount, and financial savings for participants of around £1 billion per year. It is important to reflect that alongside the potential financial incentives and disincentives for organisations that are part of the CRC, at the end of the day, reducing energy consumption reduces bills overall. I assure noble Lords that we have listened carefully to stakeholders during three rounds of consultation, and amended the scheme to improve the focus on energy efficiency and to allow greater flexibility for participants. I commend the order and beg to move.