This year sees sustainability and climate change legislation become more challenging. Richard Sharman, partner at KPMG, looks at why local companies need to be aware of these changes
The UK’s Climate Change Bill will become law this year and as a result, local companies will begin to feel the impact of the Government’s strategy to achieve the 60 per cent reduction in emissions by 2050.
The Bill contains enabling powers to introduce new trading schemes, such as the Carbon Reduction Commitment (CRC), which comes into force in 2010, through secondary legislation and is likely to require companies listed on the Stock Exchange to include carbon emission information in their annual business report.
The CRC is a mandatory emissions trading scheme which was announced in the Government’s Energy White Paper in 2007 and covers large business and public sector organisations across the UK.
In total, up to 5,000 organisations nationwide may be impacted, covering participants’ direct and indirect CO2 emissions from all energy sources.
Designed to drive energy efficiency and carbon saving by giving organisations a financial incentive to do so through emissions trading, this is further combined with corporate social responsibility incentives through publishing an organisation’s performance in a league table.
The CRC will cover energy use emissions outside of Climate Change Agreements and the EU ETS. The Government is establishing a Committee on Climate Change (CCC) to advise on climate change issues, and it is this group that will advise ministers on the setting of emissions caps for each CRC phase.
The trading will begin with the UK Government selling tradable emissions allowances to participants at auction.
Participants will be required to purchase sufficient allowances either from the auction, the secondary market, or via the safety valve with the EU ETS, to cover their annual energy use CO2 emissions.
The scheme will be revenue-neutral to the Exchequer with the auction revenue being recycled to participants by means of a simple, direct, annual payment proportional to average annual emissions since the start of the scheme. A bonus or penalty will be made to a company based on the organisation’s position in the CRC league table. Those involved will be required to monitor and report their energy use and emissions.
All of this will be backed by an independent risk-based audit regime of around 20 per cent of organisations.
For those organisations involved in CRC, the work needs to start now to establish reporting systems and understand responsibilities, particularly with respect to landlord-tenant relationships.
To be involved in schemes such as these are of benefit to a business.
External pressure aside, companies measuring and then reducing their carbon footprints see real direct benefits.
Studies have shown that when a business begins to measure how much energy it uses, it tends to result in lower usage.
In addition, an adequate measurement framework with forecasts allows performance to be managed effectively against the targets set. For companies subject to carbon regulation, reporting will need to be in line with defined standards. For those businesses that want to report voluntarily, however, there are national guidelines such as those published by Defra.
The challenge of measuring a company’s footprint begins with choosing the right reporting standard. It is important to use a recognised methodology in order to ensure credibility.
Measurement of a product or service is generally where most confusion occurs in relation to consistency and accuracy of approach.
Measuring emissions from a product or service requires information from the entire life cycle – right back to the extraction of raw materials and right up to final disposal.
Requesting emissions information from suppliers and service providers can prove difficult as they may regard such data as sensitive, or they may not collect relevant information.
Even if data is provided it might be aggregated and difficult to breakdown to find out where emissions come from and how reductions can be achieved.
Currently, there are no established standards to measure product or service emissions. There is, however, a standard being developed by the British Standards Institute, in partnership with the Carbon Trust.
An important part of carbon measurement and reporting is to define boundaries and sources. Each organisation must set its reporting boundaries clearly. There are a number of accepted ways to do this.
Organisational boundaries define how a company will account for its own operations and those entities in which it has a stake.
Organisations should then focus upon the development of internal procedures to collect data.
It is essential to ensure engagement from the right management team and gain board level sponsorship if this is to be successful.
Establishing data requirements including format, frequency and the treatment of anomalies, together with quality control and monitoring procedures will be important, as too will be ways to incentivise employees to provide accurate reporting.
After the emissions data is collected a baseline and targets can be defined, based on the quality of data available and the message the organisation wishes to communicate to its stakeholders.
An historic baseline will demonstrate progress already made, but it is essential to disclose any assumptions and estimates that have been used to arrive at this historic picture.
With the CRC, emissions reduction regulation is progressing to cover not only carbon intensive sectors such as manufacturing and engineering but also the wider business community.
Businesses that are already reporting will be at an advantage.
They will understand the implications of regulation already on the horizon and will be able to participate in the debate about future climate legislation.
As standards and regulations tighten, more companies will face caps and will have to look seriously at their carbon footprint.
Reduction, offsetting and reporting will become part of a modern business and for those companies that get it wrong, serious financial penalties could occur, either through bad investment decisions or direct fines.