Evidence Base (for summary sheets)
1. This Final Impact Assessment (IA) follows the completion of a consultation published in March 2012 on proposals to simplify the current CRC Energy Efficiency Scheme (CRC). It updates the evidence presented in the Consultation IA by incorporating the following:
· Comments from the RPC on the Consultation stage IA;
· Responses received from consultees;
· New data on Climate Change Agreements (CCA) exemptions obtained from the Environment Agency (EA);
· Comments from the National Audit Office (NAO) as a result of their assessment of the CRC Scheme for the Select Committee;
· All figures have been updated to 2012 real values using the new sets of energy prices, carbon values and conversion factors outlined in the latest energy projections (DECC Updated Emissions Projections October 2012) [1].
Summary of changes from the previous IA
2. The overall methodology for assessing the impacts of the simplification proposals in this IA remains the same as in the Consultation IA. It evaluates the proposals by comparing them to the ‘Business as Usual’ (BAU) scheme, which is characterised as a continuation of the CRC Scheme in its current form up to 2030. However, there are some significant changes since the Consultation stage IA which affect the baseline and the assessment of the preferred option’s impact.
3. This Final stage IA uses the updated dataset from the Environment Agency (31 May 2012) drawn from July 2011 Annual Report data submitted by Scheme participants. It includes more detailed information on CCA coverage, reflecting the increase in the number of CCA fuels reported which are exempt from CRC. This has the overall effect of reducing the emissions coverage of the CRC baseline relative to that reported in the Consultation IA. There is also a new energy demand trend from the DECC Updated Emissions Projections (October 2012).
4. The RPC opinion on the Consultation stage IA indicated a concern about the level of understanding of the Scheme among stakeholders; this would have affected their ability to respond to the consultation proposals. In response, the full consultation document published alongside the Consultation stage IA set out the full details of the current Scheme design. In addition, DECC hosted two workshops during the consultation period offering stakeholders the opportunity to clarify any issues regarding the current design of the Scheme or the simplification proposals.
5. The CRC is NOT in the scope of One-in, One-out (OIOO) calculations, as it has been classified as an environmental tax by HM Treasury (HMT). Nevertheless, this IA provides further evidence to support the Equivalent Annual Net Cost to Business (EANCB) calculation consistent with the current One-in, One-out Methodology.
6. Some changes have also been incorporated following comments from the National Audit Office (NAO) on the Consultation IA. These include updating estimates for capital expenditure and air quality benefits of the CRC Scheme for the whole period up to 2030 and providing some sensitivity analysis on the impact of the Scheme[2].
7. During the period of consultation, there has been an agreement between DECC, DfE, and HMT to remove schools from the CRC and implement alternative robust measures that will incentivise and support schools to obtain both energy cost and emissions savings. Consequently, in this Final IA, the CRC baseline has been modified to remove all schools from the scheme[3].
8. In parallel to the consultation process on the simplification proposals, the devolved administration of Northern Ireland (NI) is in the process of deciding their views on CRC simplification for Northern Ireland. Their decision and could affect the valuation of the counterfactual (i.e. baseline) against which the impact of simplification in this has been assessed.
Problem under consideration
9. The CRC came into force at the beginning of April 2010. It is designed to incentivise energy efficiency improvements in large non-energy intensive organisations in the public and private sectors. Large businesses and public sector organisations represent around 12% of the UK’s total carbon emissions.
10. Despite there being cost effective energy efficiency savings available to these public and private sector organisations, a 2005 independent report by the Carbon Trust demonstrated that these organisations’ emissions had remained more or less constant for the last twenty years owing to a range of barriers. These were identified as:
· The lack of board and senior level awareness of energy consumption issues;
· The lack of significant financial incentives to encourage energy efficiency savings;
· The lack of reputational benefits associated with leading in energy efficiency.
11. The CRC employs a range of mechanisms to address each of these barriers:
· The mandatory monitoring and reporting of energy consumption which is intended to increase awareness of energy use;
· A requirement on participants to purchase CRC allowances commensurate with their energy usage, thus providing a financial incentive to improve energy efficiency and raise senior level awareness of energy use;
· The annual publication of a performance league table (PLT), ranking participants on the basis of their energy efficiency achievements in comparison to the previous year, which is intended to create a reputational driver and raise board/senior level awareness of energy use[4].
12. Given that total energy costs are generally just 1-2% of the total operating costs in the target sector, providing the right combination of drivers is critical to sustaining senior management focus on energy efficiency.
13. Organisations that qualify for participation i.e. consume more than 6000MWh of electricity per year, are required to undertake a series of compliance activities, such as the annual reporting of their organisation’s emissions and the surrendering of a commensurate number of CRC allowances; designed to raise both the internal and external profile of an organisation’s energy usage. Further details of the rationale for the Scheme and its original design can be found in the October 2009 Impact Assessment and accompanying policy development documents.[5]
Rationale for intervention
14. Since the introduction of the CRC in April 2010, some stakeholders have argued that the Scheme is overly complex and administratively burdensome, especially in relation to emissions regulated under the EU Emissions Trading System (EU ETS) or a Climate Change Agreement (CCA). Further, some have also stated that the organisational focus of the Scheme is misaligned with their operational management structures and business processes.
15. Consequently, Government announced its intention to simplify the Scheme in the Annual Energy Statement published in August 2010. This directly led to a consultation exercise, updated Impact Assessment and an initial Amendment Order in April 2011[6] . The purpose of this 2011 amendment was primarily to create the legislative window in which to undertake a thorough simplification review of the Scheme.
16. Significant stakeholder engagement was undertaken to identify, develop and stress-test a range of simplification measures. A suite of high level measures was initially published in January 2011[7] focusing on the five headline areas of i) energy supplies; ii) organisational structure; iii) allowances and banking; iv) qualification and v) reducing the overlap between regulatory mechanisms. Subsequent discussions and engagement facilitated the further development of the proposals, with a number of the measures being discarded on the grounds of practicality, enforceability, stakeholder feedback, or incompatibility with other measures. The headlines of the measures being taken forward were announced in a Ministerial statement in June 2011[8] and set out in a formal consultation published in March 2012.
Description of options considered
17. The consultation sought views on a suite of 46 different simplification measures that were grouped into three packages according to whether they influence qualification for the Scheme (Package A), fuel supply rules (Package B) or administrative costs only (Package C). See Annex B for a full description of all the measures.
18. The consultation stage presented three options. As a result of the analysis in the Consultation stage IA, Option 2 has been discarded and the Final IA considers the preferred option (Option 1) against the baseline (Option 0):
· Option 0: The business as usual counterfactual – continuing the CRC Scheme in its current form.
· Option 1: Simplified CRC Scheme that implements all three simplification packages (A, B and C)
19. These two options incorporated improved evidence compared to previous impact assessments of the CRC, namely:
· Detailed coverage data, submitted by participants via Registration and the first Footprint and Annual reports submitted in July 2011.
· Bespoke DECC commissioned research on administrative costs of the CRC from one of the leading consultants in CRC compliance, KPMG. This research was based on a survey of administrative costs, desk-based research and qualitative interviews with a large number of CRC participants.
20. The intention was for a simplified CRC Scheme that would retain the necessary combination of reputational, financial and standardised energy measurement and monitoring drivers; needed to tackle the barriers to the uptake of energy efficiency. The proposals therefore retained the key elements of energy reporting, and the purchasing of allowances and, as a consequence, maintain CRC emissions savings, with the exception of the necessary adjustments to emissions coverage due to the revised simplification measures.
Summary of Consultation responses
22. Each of the proposals considered in the consultation document were addressed by specific questions. The responses primarily focused on commenting on individual proposals and whether they met the objectives of CRC simplification, namely to optimise the projected energy and carbon savings delivered by the CRC Scheme and to reduce its overall complexity; allowing energy efficiency and carbon savings to be delivered, but at a minimum administrative cost.
23. The majority of consultation respondents agreed with the measures proposed and welcomed the complete package of simplification proposals as a step in the right direction. In particular,
· The proposals on simplifying the qualification criteria and threshold; simplifying the supply rules in defining energy supply in the Scheme;
· A more coherent policy framework reducing policy overlaps with other climate change/energy efficiency policies (e.g. EU ETS installations, CCA facilities);
· Flexible organisational rules to accommodate the natural business/energy management structures; and
· Processes of organisations and the allowance sale process in the introductory phase and from phase II onwards
24. However, a number of concerns did emerge around the following issues:-
· The rules of the CRC could remain too complex and difficult to understand for some organisations, even after the simplification proposals are implemented;
· The proposals could be more ambitious. Some respondents argued that the number of fuels in the CRC should be reduced to just two (i.e. electricity and gas) as opposed to the four proposed (i.e. electricity, gas, gas oil and kerosene);
· Whether de-minimis thresholds should be adopted to keep administrative costs down;
· Some argued that the estimated administrative cost reductions were too optimistic; and
· Some suggested the CRC should be replaced with a more conventional environmental tax.
25. Taking all the responses to the simplification proposals into consideration, the Government is satisfied that overall, the simplifications will deliver significant improvements to the Scheme and they reflect changes that the majority of stakeholders wish to see.
26. After analysing the evidence provided by respondents on this issue, the Government has decided that the number of fuels in the Scheme should be reduced from 29 to 2. The Scheme will now only cover emissions generated from the consumption of electricity and gas. On gas, the Government has decided to require participants to report on, and purchase allowances for, gas consumption if it is equal to or exceeds a de minimis threshold equal to 2% of their electricity consumption. Furthermore, since the overwhelming majority of gas use[9] is for heating purposes, Government has decided to require participants to purchase allowances for gas use on the assumption that all gas use is for heating purposes. It is considered that this assumption reduces the administrative costs to participants of distinguishing between gas use for different purposes. However, if a participant wishes to demonstrate that a proportion of their gas use is not for heating purposes, they may do so. The Government maintains that these additional measures combined, contribute towards reducing the Scheme’s overall complexity and the administrative burden on participants.
27. Government is aware of a difference of opinion among respondents concerning the potential levels of administrative cost savings that can be achieved through the proposed simplification measures. A large part of the administration cost is driven by the monitoring and reporting of energy and emissions, therefore there are concerns that simplification will result in an increase in the overall cost of compliance, including one-off costs in understanding the new requirements to meet CRC liabilities. The Government acknowledges these concerns and (as explained above) has updated the evidence base on the current CRC Scheme in a number of areas where robust evidence has been provided.
28. As a result, Option 1 remains the Government’s preferred option, although there have been some modifications to the measures proposed under this option to take account of the evidence gathered from the consultation exercise. These modifications are explained below in the section describing Option 1.
Option 0 – The current CRC Scheme (Business as Usual)
29. The CRC was designed as a mandatory scheme aimed at improving energy efficiency and cutting emissions in large public and private sector organisations. The Scheme features a combination of drivers, which together aspire to encourage organisations to develop energy management strategies that promote a better understanding of their energy usage and increase the potential for energy reductions.
30. Qualification for the Scheme is based on electricity consumption across organisations and groups of undertakings, rather than on an individual site basis. Organisations qualify as participants if, during the 2008 calendar year, they had at least one half-hourly electricity meter (HHM), settled on the half hourly market and if they consumed at least 6,000 MWh (megawatt hours) through all qualifying meters.
31. Each qualifying organisation needs to understand which energy supplies it needs to report on, and which supplies require allowances to be purchased. This involves several key issues:
· Understanding its organisational structure;
· Identifying what energy is supplied to the organisation;
· Identifying how much of that energy the organisation is responsible for under the CRC;
· Understanding which supplies count towards qualification and which count towards compliance.
Cost and benefits of Option 0
BAU emissions
32. The Consultation IA included new evidence on CRC coverage, collated from actual data from the registration process and the first Footprint and Annual reports submitted at the end of July 2011 – all of which were required to provide a complete picture from which to update the baseline estimates of the Scheme.
33. This IA revises the emissions coverage of the CRC using an updated dataset (version dated 31 May 2012) of CRC participants’ actual returns from their Annual Reports provided by the Environment Agency[10]. It includes more detailed information on CCA coverage, reflecting an increase in CCA fuels reported which are exempt from the CRC Scheme[11]. This has the overall effect of reducing the emissions coverage of the CRC baseline relative to that reported in the Consultation IA.
34. Table 1 below provides some summary statistics on CRC participants and the emissions coverage of the Scheme. Under the current design, participants are required to report on their total emissions that fall within the scope of the Scheme once per phase in their Footprint Reports. These footprint emissions (200MtCO2) include emissions already regulated under CCA or the EU ETS, as well as participants’ electricity, gas and residual fuel use[12] – with the exception of any subsidiaries eligible for one of the three CCA exemptions[13]. The purpose of reporting footprint emissions is to establish participants’ total emissions, and their subsequent compliance, with the requirement to have at least 90% of their emissions regulated by the CRC, CCA or EU ETS mechanisms.
Table 1 CRC summary data for current scheme
|
Current Scheme |
Participant |
UK & Local government (Mandated) Participant |
Total |
|
Number of participants |
2,630 |
78 |
2,708 (2,779) |
|
Footprint Emissions (MtCO2) |
196.7 |
3.8 |
200.5 (199.7) |
|
CRC Emissions (MtCO2) |
54.2 |
3.5 |
57.7 (61) |
Note: Figs in brackets reflect those reported in Table 7 of the Consultation IA
35. The distribution of CRC emissions by fuel (as shown in Table 2) indicates that 97% of CRC emissions are related to electricity and gas use. This confirms consultation stage estimates of fuel savings which assumed that emissions from fuels other than electricity and gas are negligible.
Table 2 CRC Emissions in the Annual Report 2011 (current scheme) by fuel, in MtCO2
|
Fuel |
MtCO2 |
Percent |
|
Electricity |
46.13 |
79.9 |
|
Gas |
9.59 |
16.6 |
|
Kerosene |
0.07 |
0.1 |
|
Gas Oil |
1.46 |
2.5 |
|
Other |
0.52 |
0.9 |
|
Total CRC Emissions |
57.7 |
100% |
36. In conclusion, the removal of CCA and EU ETS emissions, CCA exempt subsidiaries and up to 10% of their residual emissions, and the removal of schools provides an updated estimate of the coverage of the CRC. In total, this update indicates that the CRC covers emissions corresponding to about 57.7 million tonnes of carbon dioxide (MtCO2) per year. This is also the figure of relevance for annual reporting, league table performance and surrender of CRC allowances.
BAU administrative costs
37. The 2010 IA identified a number of general administrative burdens which were grouped into categories based on the preferred monitoring and reporting rules of the CRC. These categories are:
· Understanding the rules
· Initial collection and analysis of energy data
· Developing a compliance strategy
· Understanding and participating in an auction
· Trading activities
· Submitting data to co-ordinator
· Verifying data
· Energy audit activities
· Other hidden activities
38. Based on the coverage of the CRC and the monitoring and reporting costs, the initial CRC IA estimated the amount of effort required for organisations of different sizes to participate in the proposed scheme to be £278m[14] up to 2025.
39. Since NERA’s analysis of the initial CRC Scheme was published[15], there have been changes to the structure and form of the CRC. These changes have been accounted for and baseline costs modified accordingly.
40. In order to assess the extent of administrative costs raised by the current scheme, DECC commissioned consultants KPMG to assist in gathering data, through a survey of participants, to help determine a more accurate estimate of these costs. The analysis was structured in such a way that it allows the impacts of the simplification measures to be estimated using the Standard Cost Model[16]. Annex C contains further details of the KPMG survey.
41. The average cost of CRC participation, including all attributable costs, is represented in Table 3 below. These include the costs of all activities undertaken by participants in order to comply with registration, annual and footprint reports and one-off costs, such as identifying half hourly meters or training staff. Additionally, where organisations have used external consultants and experts to undertake CRC specific tasks (referred to as external costs), then these have also been included. In general, larger organisations have incurred relatively larger external costs as they tend to outsource CRC compliance services.
42. The different categories of costs in Table 4 represent different weighting approaches to extrapolate the sample results to the entire CRC population. These weightings are based on several stratification approaches to the distribution of participants and responses across Standard Industrial Classification (SIC) codes, Geography, Half Hourly Meters, etc. Average cost for year 1 range from about £31K to £38K[17] and for the whole of Phase I[18] range from £55K to £68K, which indicates that many of the CRC costs are front loaded. The survey confirmed some of the feedback from participants which indicated that CRC set up costs were higher than expected.
|
Table 3 Average CRC cost per respondent by stratification method, KPMG survey 2011
|
Chart 1 Distribution of CRC costs by activity
|
||||||||||||||||||||||||||
43. Chart 1 above shows the distribution of all compliance costs by activity related to the CRC, besides trading. These costs relate to One Off Costs, Registration, Footprint, Annual Reporting and the external costs of outsourcing services for compliance. The majority of CRC compliance costs take place in Year 1 of each phase whereas other costs, such as reporting costs, occur annually. Evidence from the KPMG survey provided an estimate of administrative costs at £100m in year 1 and a total of £499m for the period up to 2025. This is almost twice as much as the £278m figure published in the 2010 IA.
BAU Purchase of allowances and Trading costs
44. The original CRC Scheme is based on a cap and trade mechanism. This has been one of the areas where participants have raised concerns in terms of the complexity and cost implications of this. In particular, the initial allocation of allowances would have taken place through an auction that set the price at which government would have sold the allowances within the cap each year.
45. Given that trading is expected to be limited in Phase I and the annual sale will mostly take place in Phase II (i.e. 2014/2015) of the Scheme, participants have not yet incurred any such costs. Consequently, the KPMG survey only gathered information from respondents on their estimation of the time they devote to trading. Of the 740 responses to this survey, 352 (47%) provided an estimate of the time that they spend on carbon trading, with the majority of these (210 or 60%) indicating that they anticipated spending four days or more on carbon trading (See Chart 2). There is additional evidence within the 2010 IA[19] which estimated the cost of trading to be 5 days per year for each organisation.
Chart 2 Respondents’ estimates of anticipated time spent on carbon trading. Source KPMG survey 2011
46. Using the Standard Cost Model (SCM)[20] approach, this IA estimates an average cost of £188 per day, per participant. This is based on middle managers undertaking this role at £26.86 per hour for a seven hour day. Respondents to the 2011 survey who provided an estimate of the time spent on this activity indicated costs of between £188 (if they anticipated spending one day) and £752 based on spending four days on carbon trading (i.e. 4 days @ £26.86/hr for 7 hours). It is not known how many more days per year they could spend on trading when they reported spending 4 days or more. The estimate in the 2010 IA was 5 days per year for the same type of organisations, but given that 40% of respondents in the 2011 survey reported 3 days or less, this IA has set the number of days on average spent on trading at 4 days per year. Respondents to the March 2012 consultation did not raise any concerns or provide any further evidence that would result in alternative estimates.
47. In terms of buying allowances, it is estimated that it would take 6 full days of middle management time per year. This is based on the costs for larger participants as reported by the NERA/Enviros study and the evidence from Annual Reports, which suggested that all firms are in the larger category. Consequently, this IA has estimated the amount of time spent on the purchase of allowances to be 6 days per year, producing a cost of £1128 per participant; using the same amount of hours per day and staff grades as for trading (i.e. 6 days @ £26.86/hr and 7 hours per day). As a result, the overall cost of the cap and trade mechanism has been estimated at £1880 per year per participant and about £3.9m per year for all 2092 participants. Over the period 2013 to 2030, this amounts to £51m , just £1m less than the £52m estimated in the Consultation IA[21].
48. The Consultation IA estimated baseline administrative costs of the CRC to be £499m. This estimate was based largely on the KPMG study commissioned specifically to support the simplification review. Evidence from the KPMG survey indicated administrative costs in year 1, when the majority of compliance costs take place, to be £100m, with a total of £499m for the period up to 2025. This, combined with an estimated cost of £52m in respect of allowance purchasing and trading costs over the period 2013 to 2030, produced a CRC total administrative cost of £551m. These estimates did not attract any significant comments from respondents to the March 2012 consultation so are considered to be acceptable.
Table 4 Administrative costs (discounted) of the CRC Scheme
|
Baseline cost for CRC simplification assessment |
Consultation IA £m (2012) |
Final IA £m (2012) |
|
Baseline cost in 2010 IA (with trading) |
278 |
278 |
|
Baseline cost from KPMG survey 2011 (excl trading) |
499 |
446 |
|
Updated total trading & purchasing cost estimate |
52 |
50 |
|
Baseline Cost (KPMG) with trading & purchasing |
551 |
496 |
49. Consequently, in this Final IA baseline admin costs have been revised to reflect the change in coverage of the CRC, based on the latest dataset of participants, the decision to remove schools, and updated prices using supplementary Green Book guidance[22]. In effect, this reduces the estimated baseline administrative costs (excluding trading and allowance purchasing) to £446m from £499m in the March 2012 Consultation stage IA. This together with the revised trading and purchasing costs of £50m, provide an updated estimate of £496m for total baseline administrative costs. Table 4 above summarises these changes to the baseline administrative costs of the CRC.
BAU Benefits
50. There is a large body of evidence indicating the strong potential for reducing carbon emissions cost-effectively through increased energy efficiency in large, non-energy intensive organisations[23]. Energy efficiency savings were identified in the 2009 IA and, in this IA, it is assumed the same savings will continue under the current scheme (adjusted for changes in the baseline). The benefits of each policy option to be implemented include:
· Environmental benefits in terms of a reduction in CO2 emissions;
· Monetary benefits to the participant organisations (savings on energy bills from investment in energy efficiency); and
· Ancillary benefits in terms of improvements in local air quality.
51. Analysis of the CRC’s impact on carbon savings and energy bills is based on the NERA/Enviros study which draws on two databases of technological and behavioural measures: 1) NDEEM’s[24]abatement cost curves for the non-domestic sector and 2) the ENUSIM model for industrial sectors as modified by Enviros for the Energy Efficiency Innovation Review (2005).
52. It assumes that over time, and in response to the introduction of the Scheme, the existing cost effective potential for emission reductions will be taken up by participant organisations. NERA assumed various take-up rates for the CRC target group. Therefore, take-up of energy efficiency measures depends upon those who participate and on their behaviour once they are in the Scheme. This IA has used the central uptake rate assumptions from the NERA model.
53. Given that Footprint and Annual reports have produced detailed statistics from CRC participation, this IA has also modified the abatement potential initially identified by the NERA/Enviros study, by proportionally changing the take up rate of abatement potential in line with this latest evidence on CRC coverage.
54. These savings are additional to the savings of other policies that overlap in this sector, such as Smart Meters, Products Policy, Energy Performance of Buildings Directive (EPBD) and the Green Deal. Consequently, the net present value of the current CRC Scheme has been re-estimated in light of these changes.
55. Table 5 below shows the updated baseline Net Present Value (NPV) for the current scheme. This reflects that the CRC Scheme has a positive NPV of £3,956m. This is 20% lower than the NPV estimate from the Consultation IA. This change in NPV incorporates the change in the baseline as a result of removing schools from the Scheme and a downward revision in administrative costs based on updated information on participants.
56. There has also been an upward revision of the capital cost estimate to £326m to ensure this includes (discounted) costs up to 2030. The initial assessment in the 2010 IA covered capital costs and savings from 2010 to 2015. From 2025 onwards there was a declining trend of legacy savings. These legacy savings have not been estimated in the Final IA. The CRC has been scheduled to continue up to 2047 but projections on energy demand trends and savings only go as far as 2030. Although there should be a number of savings identifiable after the conclusion of the Scheme these would be heavily discounted and would represent a negligible impact between the baseline and the preferred option. This IA maintains that these savings are not material to the simplification proposals.
57. Finally, the most significant change has been the revision to the air quality estimate. The consultation stage IA did not estimate air quality benefits. They just were adjusted from the 2010 IA estimation accounting for the updated coverage of the Scheme. This Final IA has fully modelled the air quality benefits consistently with published IAG guidance and has resulted in a new estimation of air quality benefits in the baseline of £65m (See table 4 for comparisons to baseline values).
Table 5 Net Present Value of CRC BAU adjusted to reflect latest evidence
|
|
|
Net Present Value (£m, in 2012 prices, discounted to 2011) |
Present Value of Costs (£2012m) |
|
Present Value of Benefits (£2012m) |
||||
|
Option |
Lifetime Change in TRADED INDIRECT emissions (MtCO2e) |
Lifetime Change in NON-TRADED emissions (MtCO2e) |
Capital Cost |
Admin Cost |
Air Quality |
Energy Savings |
Non-traded sector savings |
Traded sector savings |
|
|
New Baseline |
5.1 |
21.3 |
3956 |
326 |
496 |
65 |
3654 |
970 |
90 |
|
BAU Consultation IA |
10 |
22 |
4940 |
267 |
534 |
419 |
4064 |
974 |
284 |
|
Net Change |
-5 |
-1 |
-984 |
59 |
-38 |
-354 |
-410 |
-4 |
-194 |
Option 1 – A simplified CRC (with the implementation of all three packages)
58. In June 2011, Government published a ‘Next steps’ document based on stakeholders’ feedback on a set of discussion papers, which suggested a number of changes and simplifications to the Scheme for Phase II. Subsequently, the March 2012 Consultation document proposed 46 different measures that were grouped into 3 major simplification packages. These were:
· PackageA. Measures that change qualification status and therefore change the Scheme’s emissions coverage. An organisation that would cease to qualify as a result of these proposals won’t be included in the subsequent analysis of administrative savings.
· PackageB. Measures that change fuel supply rules and therefore also change the Scheme’s emissions coverage. Energy supplies removed from the CRC as a result of these measures are subsequently excluded from the cost-benefit analysis.
· PackageC. Other measures that do not change qualification or fuel supply rules, achieving a straightforward administrative cost reduction without affecting the Scheme’s emissions coverage. These cover most of the measures simplifying organisational structure, the allowance sale process and banking.
59. The majority of respondents agreed with the proposals and welcomed the complete package of simplification proposals as a step in the right direction. While some did raise concerns about certain issues (see Para 24 above), limited analytical evidence on administrative costs was submitted by respondents. Consequently, Government maintains that the overall estimated administrative costs savings are not materially affected by consultation responses.
60. In light of the updated evidence gathered, Government believes that the simplified proposals will deliver significant administrative cost savings and has therefore decided to proceed with the CRC simplification package, with a number of modifications that relate to Package B (measures that affect the fuel supply rules).
Reduction in the number of fuels
61. A number of participants have argued that instead of reducing the number of fuels to four, the number should instead be reduced to two (electricity and gas). The arguments are that gas oil and kerosene make up a small (less than 1%) proportion of most participants’ overall supply, and thus do not add significant benefit to be included but would reduce administrative costs if excluded. Information from Annual Reports indicate that in the first year of the Scheme, gas oil and kerosene consumption amounted to 1.7MtCO2 (around £20m revenue) or around 2.8% of overall scheme coverage. Despite the loss of coverage resulting in some loss in terms of the overall benefit of the Scheme, a significant amount of this coverage would regardless have been lost in Phase II on account of the proposal to restrict gas oil and kerosene only to that which is used for heating purposes. Consequently, the additional impact of removing all gas oil and kerosene from the Scheme should be minimal. The Government has decided therefore, that the loss of emissions coverage as a result of reducing to two fuels is less of a priority than pursuing a greater reduction in administrative complexity.
Gas only to be reported on within the CRC when used “for heating purposes”.
62. In response to stakeholder suggestions, the Government has decided to restrict the requirement for gas reporting to gas that is used for heat generation only. This modification will not significantly reduce CRC’s emissions coverage, as over 90% of gas consumed is for heating purposes which is still included.
63. To avoid increasing administrative costs, it is proposed to introduce an assumption that, unless a participant states otherwise, all gas is used for heating purposes. In addition, (as explained below) the introduction of a de minimis threshold for gas will further simplify the administrative requirements of the Scheme.
De minimis thresholds
64. There was strong support among respondents for the introduction of de minimis thresholds for fuels covered by the CRC. A de minimis threshold should ensure that participants who have very small sources of gas do not have to report these. As a result, the Government has decided to modify the original proposal and introduce an organisation-wide de minimis threshold for gas supply.
Gas – an organisation-based threshold
65. The Government believes it would be beneficial to introduce an organisation-wide threshold so that organisations with very low gas consumption overall do not need to report on their gas consumption at all.
66. The Government has decided to proceed with a 2%[25] de minimis threshold for gas[26]. In order to minimise administrative costs, this de minimis will only be assessed once per phase. This means that for Phase II, if a participant exceeds the de minimis in the reporting year 2014/15, then that participant will have to report their gas for the entirety of the second phase. If the participant does not exceed the de minimis then they will not have to report any gas for the duration of the second phase. This is expected to minimise administrative burdens.
Costs and benefits of Option 1 – full implementation of the simplification package
Package A
67. Measures that affect CRC qualification need to be analysed before any other measure because they impact on the emissions coverage of the Scheme. The remaining measures apply only to those participants who still qualify for the CRC. There are five measures that could have an impact on both administrative costs and emissions coverage (Annex B provides a fuller description of these measures):
· Qualification criteria: The CRC’s qualification criteria will be based on settled half hourly electricity meters instead of a) one half hourly meter and b) 6000MWh through all half hourly electricity meters.
· EU ETS installations and CCA facilities: Organisations will no longer need to consider electricity supplies to EU ETS and CCA facilities/installations when assessing CRC qualification. This will eliminate the need for CCA exemptions.
· Treatment of trusts: This measure, as proposed in the consultation document, would impact qualification for the Scheme by assigning the responsibility for trusts in a different way to those outlined in the current arrangements. The magnitude of this impact is currently unknown as data from the first compliance year does not allow for identification of different types of trust that would be affected by the simplification measures. Consultation respondents also did not provide any evidence of the impact.
· Landlord definition: The general approach is to place responsibility for emissions on the landlord. However, in very limited circumstances where the tenant is allowed to erect and occupy their own buildings, CRC responsibility will shift to tenants.
· Licensed activities: By excluding electricity and gas supplies used for the generation, transmission or distribution of electricity, or the transport, supply or shipping of gas from the CRC, some firms close to the qualification threshold may no longer qualify.
68. Qualification criteria and the removal of EU ETS and CCA facilities have the greatest impact on coverage and simplification measures. Both have been fully quantified below. The other three measures have been assessed on a qualitative basis.
Quantified impacts of qualification measures
Impact on coverage
69. The impact of removing EU ETS and CCA installations from qualification has been estimated using data from Registration, Footprint and Annual reports. Removing electricity supplies from CCA and EU ETS installations at the qualification stage not only simplifies reporting, but increases the overall coverage of the CRC. This occurs because if any firm still qualifies after removing CCA and EU ETS supplies, then it will have to bring to the Scheme non-CCA emissions that were previously exempt under the 25% rule.
71. This IA recalculates CRC coverage under the new proposals based on the percentage of emissions covered by CCA from different types of exemption reported at registration combined with Footprint and Annual reports. This indicates that the proposed qualification criteria and the removal of EU ETS and CCA facilities have the effect of reducing the number of CRC participants by approximately 1000.
Table 6 Impact on qualifying emissions from package A measures
|
Current Scheme |
Simplified Scheme – Package A |
|
|
Registrations |
2,764 (2,779) |
1,722 (1,735) |
|
Footprint Emissions (MtCO2) |
200.5 (199.7) |
180 (184.7) |
|
Total Emissions for Annual Report (CRC Emissions) (MtCO2) |
60.7 (61.0) |
56.2 (61.0) |
Note: Consultation IA figures in brackets
72. The change in the results of this IA in comparison to those outlined in the March 2012 Consultation IA, is driven by two main elements:
· First, an updated dataset from the Environment Agency. As a consequence some firms that the Consultation IA suggested would not qualify for the CRC, will in reality, still qualify for the Scheme. However, the number of emissions is lower overall due to the more accurate reporting of CCA target unit data. The reason for this is that the non-CCA emissions in some organisations are much lower than previously estimated, particularly as new analysis concerning qualification includes information from an additional 646 CCA target units.
· Second, the removal of schools from the baseline has a direct impact on the CRC Scheme by removing all of the emissions associated with them. It will also have an indirect impact, reducing the number of Local Authorities that qualify for the Scheme. The combined impact represents a reduction of emissions in Package A of 4.1MtCO2.
Impact on administrative savings
73. Administrative savings from qualification have been classified into three categories:
· A firm not qualifying will not incur any costs from Phase II onwards.
· Qualifying firms with CCAs will save on their CCA reporting.
· Qualifying firms with CCA exemptions will have to do annual reports.
74. Administrative costs remain unchanged in Phase I because new qualification will not take place until the start of Phase II. However, from Phase II onwards, there will be considerable savings from firms that cease to qualify for the Scheme. The number of firms in the CRC will decrease from 2,764 to 1,722. However, costs do not decrease proportionally as smaller organisations which will no longer qualify, also have a lower average cost. The average cost from organisations with less than 10,000 MWh is 47% of the average cost of the remainder of organisations, based on emissions data from Registry and Footprint reports and administrative savings data from the KPMG survey. Estimates of 2010-2011 costs have been excluded because these are one-off costs and cannot be recovered.
75. Some firms will have incurred extra costs by producing annual reports. Based on the estimation of qualifying thresholds in Part I, 93 firms who currently do not need to produce annual reports owing to their holding a CCA exemption will, as a result of the changes, now be obliged to submit an annual report. The unit cost of annual reporting has been estimated at £3093 per firm. Therefore, the aggregate cost for these 93 firms of producing an annual report each year is estimated to be £288k.
76. There are some one-off costs for the Environment Agency (EA) as a result of these proposals. These costs are related to updating the information management and IT systems. An initial view is that they would be minimal (around £567,000 based on CRC budget planning by DECC).
Table 7 Summary of costs and benefits from Package A qualification measures
|
|
|
Net Present Value (£m, in 2012 prices, discounted to 2011) |
Present Value of Costs (£2012m) |
|
Present Value of Benefits (£2012m) |
||||
|
Option |
Lifetime Change in TRADED INDIRECT emissions (MtCO2e) |
Lifetime Change in NON-TRADED emissions (MtCO2e) |
Capital Cost |
Admin Cost |
Air Quality |
Energy Savings |
Non-traded sector savings |
Traded sector savings |
|
|
Baseline |
5.1 |
21.3 |
3956 |
326 |
496 |
65 |
3654 |
970 |
90 |
|
A |
4.9 |
20.9 |
3960 |
319 |
377 |
63 |
3555 |
952 |
86 |
|
Net Change |
-0.2 |
-0.4 |
3 |
-7 |
-119 |
-2 |
-99 |
-19 |
-4 |
77. About 38% of participants will no longer qualify for the Scheme from Phase II onwards. On aggregate, simplifying qualification and removing the overlaps with CCAs and EU ETS policies is estimated to reduce administrative costs from £496m in the baseline to £377m[27]. However, there will be an estimated loss of 0.6 MtCO2e emissions savings associated with simplification which will impact on the benefits of the Scheme by:
· Reducing the value of energy savings by £99m;
· Reducing traded and non-traded carbon savings by £23m.
78. This reduction in benefits is offset by the reduction in administrative costs of £119m and capital costs of £7m. Overall there is only a 0.1% difference in NPV between both options. Although this is a small reduction in NPV, it is not entirely appropriate to assess the impact of simplification packages individually, particularly as they are designed to work in combination. For example, removing the overlaps in package A is strongly linked to reducing some of the footprint reporting costs in package C. Table 7 above sets out the impacts of implementing Package A.
Non-quantified impacts of qualification measures
79. Three of the qualification measures (i.e. treatment of trusts, landlord definition and licensed activities[28]) have not been quantified for the following reasons:
· They will have no significant impact on aggregate emissions or administrative burdens but would redistribute responsibility for CRC emissions more fairly.
· These measures would affect only a very limited number of participants and the costs of gathering reliable data, at the required level of disaggregation, would be disproportionate compared to a relatively low impact.
80. Although these measures are not quantified, stakeholder feedback has indicated that they will contribute to simplifying the CRC. There was strong support amongst consultation respondents for the landlord definition licensed activities measures as these provide clarity and remove ambiguity which in turn, reduces administrative costs. Although DECC has not been able to estimate the administrative impacts associated with these measures, they could slightly reduce CRC participation from some firms at the margin of the qualifying threshold. However, their impact on emissions is considered to be negligible overall.
Package B
81. Measures that affect fuel supply rules in the CRC would also have an impact on emissions covered by the Scheme although to a lesser extent than qualification measures. The two main measures have been fully quantified. However, the impact of some other measures in this section is difficult to quantify for a number of reasons. For instance, they apply to very limited or special cases, cover only certain types of supply relationships and are intended to prevent perverse incentives or are proposed on the grounds of fairness, with no impact on cost or emissions.
Quantified impacts of fuel supply related measures
82. There are three measures in this package that could have a significant impact on CRC participants. These are:
· Reduce the number of fuels. Government will reduce the number of fuels covered by the Scheme from 29 to 2 (electricity, gas).
· Remove the 90% applicable percentage. Participants are currently required to ensure that at least 90% of their emissions are regulated by the EU ETS, CCA or CRC, as appropriate. As CCA and EU ETS will not count for qualification, participants will now be required to report 100% of their electricity and gas consumption if they exceed the de minimis threshold.
83. Analysis for this IA, based on the Annual report, indicates that electricity and gas represent c. 96% of the Scheme’s total emissions, with the remaining 27 fuels accounting for the remaining 4% (see Table 2 above). Consequently, the proposal to reduce the number of fuels covered by the Scheme will reduce the reporting requirements on participants whilst broadly maintaining emission levels.
84. Reducing the number of fuels covered by the CRC is expected to reduce the total emissions covered by the CRC. However, in the new proposals, the overall impact is a small loss in emissions coverage of 1 MtCO2[29] given that removing the 90% applicable percentage rule means that participants would now have to report 100% of electricity and gas use.
85. The administrative costs associated with reporting residuals were identified in the KPMG survey from savings on time usually spent compiling and reporting residual supplies in the footprint and annual reports. In the baseline, participants spend £1.09m annually gathering data for non-core sources. Removing these costs for qualifying participants results in a total of £31m of discounted savings over the period to 2030.
86. For the purposes of this IA each package is assessed sequentially and on the basis of the full implementation of the preceding package. The figures presented in Table 8 below show the estimated impact of combining package B with the preceding package A. Packages A and B combined reduce administrative costs by £150m from the baseline and decrease traded and non-traded savings in emissions by 1 MtCO2.
Table 8 Summary of costs and benefits from Package A and B combined
|
|
|
Net Present Value (£m, in 2012 prices, discounted to 2011) |
Present Value of Costs (£2012m) |
|
Present Value of Benefits (£2011m) |
||||
|
Option |
Lifetime Change in TRADED INDIRECT emissions (MtCO2e) |
Lifetime Change in NON-TRADED emissions (MtCO2e) |
Capital Cost |
Admin Cost |
Air Quality |
Energy Savings |
Non-traded sector savings |
Traded sector savings |
|
|
Baseline |
5.1 |
21.3 |
3956 |
326 |
496 |
65 |
3654 |
970 |
90 |
|
A+B |
4.7 |
20.6 |
3911 |
313 |
346 |
62 |
3487 |
938 |
84 |
|
Net Change |
-0.3 |
-0.7 |
-46 |
-13 |
-150 |
-3 |
-167 |
-32 |
-6 |
Non-quantified impacts of fuel supply related measures
87. In addition to the main measures quantified above, package B contains four additional measures that have not been quantified as they would only affect a very limited number of participants and the costs of gathering reliable data at the required level of disaggregation would be disproportionate given their relatively low impact. These measures are:
· Unmetered supplies: Government proposes to extend the scope of the Scheme to include passive pseudo half hourly and pseudo non half hourly unmetered supplies.
· Profile classes: Government proposes to remove domestic electricity meters of profile class 01 (‘domestic unrestricted’) and 02 (‘domestic Economy 7’) from the scope of the Scheme, along with non daily metered gas supplies below 73,200kWh per annum.
· Unconsumed supply: Government proposes to limit the circumstances in which unconsumed supply can be claimed to scenarios where the downstream supply relationship meets the CRC’s supply criteria.
· Natural Gas: Government proposes to restrict the scope of self-supplied gas to natural gas only.
88. All four measures were strongly supported by consultation respondents because they would provide additional clarification on the simplified scheme. On unmetered supplies, it was acknowledged that it would add to overall liability, however, this would be compensated by improved energy data on actual costs which will help manage energy efficiency in future. On unconsumed supply, respondents were not convinced the proposal would result in any major cost savings but, on balance, concluded that it was right that “party A” should be responsible for the supplies it receives, or supplies made at its direction. No further evidence on the impacts of these measures was provided by consultation respondents.
Package C
89. A number of the proposed measures will not impact on the coverage of emissions or energy savings. These measures cover a wide range of areas such as organisational rules, the requirements to keep records, registration changes and the allowance sale process (see Annex B for details of these measures). They simplify many of the areas that create unnecessary administrative burdens and were identified in the wider consultation with participants in April 2011. In addition, the KPMG survey has quantified the administrative costs from these activities. For example, organisational rules have been identified as one of the largest areas of complexity. Several other areas of the CRC have proven to be more complex to implement than originally intended, particularly around organisational boundaries.
Quantified impacts of Package C measures
90. There are a number of other measures in this package which aim to simplify the areas that create unnecessary administrative burdens for firms. These include: making the organisational rules more flexible; allowing for automatic re-registration; clarifying the supply rules; creating a more consistent approach to emissions factors; requiring fewer annual reports; and clarifying the obligations on energy suppliers.
91. The impacts of these measures are heavily interdependent and many affect several sources of administrative cost. For example, proposals about designated changes are also going to affect footprint reporting costs, maintaining organisational structure records in the Annual report, training costs and one-off costs. At the same time, some of the main sources of cost in the CRC (see Table 9) are simplified by several of these measures. For example, the cost of compiling the Annual Report evidence pack is affected by measures such as organisation structure, designated changes and, extension of annual energy statement obligation.
92. It is not possible to fully identify the impact of each measure individually so DECC has generated an estimate based on the stakeholder engagement exercise published in January 2011[30] which identified the proportional reduction in costs that these measures would deliver relative to the updated baseline. Responses to the March 2012 consultation have also been considered.
93. Table 9 gives the current breakdown of average administrative costs, by activity as a proportion of total Business as Usual administrative costs and how these proportions change as a consequence of the proposed measures.
94. Some of these cost reductions are certain, such as the need to gather data on residual sources which is going to be eliminated. However, it is more difficult to assess the savings from other areas, such as the reduction in compliance training costs for participants. .
Table 9 Breakdown of CRC administrative costs
|
CRC activities as a proportion of total BAU cost in a Footprint and Registration Year |
BAU |
New Scheme |
||
|
|
Footprint and Registration Year |
Annual Report Year |
Footprint and Registration Year |
Annual Report Year |
|
One off Costs |
|
|
|
|
|
Understanding the rules of the CRC (including attending training courses etc) |
14% |
- |
7% |
- |
|
Educating the organisation on the CRC (not on energy management in general) |
7% |
- |
4% |
- |
|
Other |
4% |
- |
0% |
- |
|
External Costs |
|
|
|
|
|
CRC Training |
2% |
- |
1% |
- |
|
Determining Organisational Boundaries |
3% |
- |
1% |
- |
|
CRC Evidence |
1% |
- |
1% |
- |
|
Outsource CRC Compliance |
6% |
- |
3% |
- |
|
Data /invoice collation/compilation specifically for CRC |
2% |
- |
1% |
- |
|
External/ outsourced internal audit or reviews |
3% |
- |
1% |
- |
|
Others |
4% |
- |
2% |
- |
|
Registration costs |
|
|
|
|
|
Determining your organisational boundaries and structure at 31/12/08 |
4% |
- |
2% |
- |
|
Identifying your 2008 HHMs and AMR usage |
4% |
- |
0% |
- |
|
Understanding and disaggregating your SGUs |
1% |
- |
0% |
- |
|
Claiming CCA exemption (if relevant) |
1% |
- |
0% |
- |
|
Registration for CRC Scheme |
2% |
- |
1% |
- |
|
Others |
0% |
- |
0% |
- |
|
Footprint Reports |
|
|
|
|
|
Determining structure as at 1.4.2010 |
2% |
- |
1% |
- |
|
Developing CRC compliance methodology |
4% |
- |
2% |
- |
|
Gathering data on core sources (non CCA / EU ETS) |
5% |
- |
5% |
- |
|
Assessing CCA / EU ETS emissions coverage |
1% |
- |
0% |
- |
|
Gathering data on residual sources |
4% |
- |
0% |
- |
|
Submitting your footprint report evidence pack |
5% |
- |
2% |
- |
|
Others |
0% |
- |
0% |
- |
|
Annual Reports |
|
|
|
|
|
Maintaining org structure records |
2% |
2% |
1% |
1% |
|
Maintaining source list |
2% |
2% |
0% |
0% |
|
Gathering data on core supplies |
4% |
4% |
4% |
4% |
|
Gathering data from non-core sources |
2% |
2% |
0% |
0% |
|
Collating information on renewables |
0% |
0% |
0% |
0% |
|
Gathering early action metrics data |
2% |
2% |
0% |
0% |
|
Reviewing and testing data |
3% |
3% |
1% |
1% |
|
Internal audit/sign off by management |
2% |
2% |
1% |
1% |
|
Compiling annual report evidence pack |
3% |
3% |
1% |
1% |
|
Liaising with the EA with questions etc. |
1% |
1% |
1% |
1% |
|
Others |
0% |
0% |
0% |
0% |
|
Total |
100% |
21% |
45% |
10% |
|
Savings from BAU |
- |
- |
55% |
11% |
95. There is also some uncertainty over these costs in the future. Theoretically, in the absence of any further changes to the Scheme, no re-training should be required unless there is a loss of knowledge in the organisation as a result of staff movements. Given that the average time in post could be less than five years, some of these costs could be incurred again. On the other hand participants should, in theory, have embedded their knowledge within the governance systems of the organisation (e.g. via electronic systems, spreadsheets, policies and procedures, CRC methodology documents, ISO14001 procedures etc) which means that the level of any re-training required should be significantly reduced. However, any estimate of the level of this re-training would be extremely variable and subject to multiple factors. The administrative savings from this package have been estimated by multiplying the percentage reduction in each of these activities as a result of simplification measures by the administrative costs that take place in each year up to 2030. Since administrative costs are much higher in a Footprint Report year which occurs in the first year of every phase, Footprint and Annual report years have been estimated separately.
96. CRC administrative costs have been estimated by the KPMG survey to be £100m in the first footprint year and £446m[31] for the whole period up to 2030. These proposals save £55m in a footprint year and £2m in an annual report year. Taking into account the impact of previous packages (A and B) which remove a large number of fuels and firms, the final impact of the Scheme is a 55% reduction of administrative costs from £496m to £224m.
97. The figures presented in Table 10 summarise the combined impact of all of the simplification measures. The final NPV of simplification proposals is £77m larger in the simplification option when compared to the baseline. This is mainly driven by a large reduction in administrative costs of £272m which is partially offset by a loss of energy savings of £167m. There are other small changes in capital costs, air quality benefits and carbon savings.
Table 10 Summary of costs and benefits from all three simplification packages A, B and C
|
|
|
Net Present Value (£m, in 2012 prices, discounted to 2011) |
Present Value of Costs (£2012m) |
|
Present Value of Benefits (£2012m) |
||||
|
Option |
Lifetime Change in TRADED INDIRECT emissions (MtCO2e) |
Lifetime Change in NON-TRADED emissions (MtCO2e) |
Capital Cost |
Admin Cost |
Air Quality |
Energy Savings |
Non-traded sector savings |
Traded sector savings |
|
|
Baseline |
5.1 |
21.3 |
3956 |
326 |
496 |
65 |
3654 |
970 |
90 |
|
A+B+C |
4.7 |
20.6 |
4033 |
313 |
224 |
62 |
3487 |
938 |
84 |
|
Net Change |
-0.3 |
-0.7 |
77 |
-13 |
-272 |
-3 |
-167 |
-32 |
-6 |
Non-quantified impacts of Package C measures
98. The CRC was originally intended to be a cap and trade scheme, but Government has decided to significantly simplify the process for selling allowances, in line with the proposals in the consultation document. The sale of allowances will continue on a retrospective, fixed price basis in the first phase.
99. In Phase II of the Scheme, trading will take place on a voluntary basis and participants are going to have the option of following a buy-to-comply approach. DECC’s view is that these changes to the allowance sale process will not impose additional administrative burdens but will instead reduce them as the decision is a simplification for participants.
100. This IA estimates that the cost of buying allowances represents 1 day per year of middle management time at £27/hr. Consultation respondents who commented on the allowance sale process were positive about the impact of the proposed measures and did not provide any further evidence on costs.
101. In respect of the Performance League Table which will no longer be published after 2012, administrative savings may accrue to the Environment Agency as a result of time saved in compiling the league table. Given that the Environment Agency will instead publish participants’ aggregated energy use and emissions data, the impact of removing the Performance League Table is considered to be small and has not been quantified in this IA.
Summary of changes since Consultation Stage IA
102. The Consultation stage IA claimed £347m in administrative savings (Table 11). Following revised analysis, these savings have been reduced by £76m to £272m. This is the result of a decrease in baseline administrative costs (£55m) and an increase in final administrative costs of the simplified scheme (£ 21m). These changes can be explained as follows:
103. Baseline Change: The administrative cost of the CRC in the Final IA is £55m lower than in the consultation stage. To a large extent this is a result of changes in the baseline coverage of the Scheme. For instance, with the removal of schools, baseline administrative costs have decreased by £33m.
104. The main explanation for a further decrease of £20.5m is that the Consultation stage IA overestimated baseline administrative costs related to the early action metrics by applying them to Phase II of the Scheme when they should only apply to Phase I. Estimates in this IA have been revised accordingly.
Table 11 Difference in administrative costs between Consultation and Final IA
|
£m (2012) |
Consultation IA |
Final IA |
Difference |
|
Baseline |
551 |
496 |
-55 |
|
Package A |
405 |
377 |
-28 |
|
Package A + B |
387 |
346 |
-41 |
|
Package A +B +C |
203 |
224 |
21 |
|
Change in Admin costs of preferred package (relative to baseline) |
347 |
272 |
-76 |
105. The final £1.5m difference can be explained by a reduction in trading costs in the Final IA. This is because the updated dataset from the EA includes new data on CCA participation from participants. The final data set contains a higher number of general and group exemptions than in the consultation stage baseline. Firms with general and group exemptions do not need to trade or surrender allowances and the cost associated with these activities decreases with the number of exemptions.
106. Package A: Administrative costs decreased in Package A by £28m. The removal of schools from the Scheme has reduced the baseline from which administrative savings can be made. This results in a reduction of £31m which is offset by an increase in £3m owing to modelling revisions, resulting in a net impact of £28m.
107. Package A + B: The administrative costs of package A+B are also lower compared to the consultation stage due to the reduction of £29m from the baseline. The other £12m is explained by a revision in the number of full participants as a result of the proposed changes. A lower proportion of qualifying firms does not change the unit cost but decreases the number of firms experiencing administrative costs, and also benefitting from the reduction in the number of fuels. Some of these differences are also driven by new data obtained for the Final IA and by the reduction in the number of fuels.
108. Package A + B + C: Administrative costs in this package are £21m higher than in the consultation IA. However the underlying change is much larger because the Final IA has a lower baseline due to the removal of schools and updated datasets. Due to revisions to the estimates there has been a decrease of £61m in administrative savings, which combined with a £40m lower baseline in package A + B, results in a £21m difference.
109. The combined effect of all 3 packages in Option 1 (the preferred option) is an increase in administrative costs of £75m in the Final IA compared to the Consultation stage IA. In summary, the differences in administrative between Consultation stage and Final IA can be explained by changes in the baseline and revisions to the previous estimates, including:
· Removal of schools from CRC participation
· Revisions to ensure that footprint costs and annual report cost apply to relevant years in Phase I, which reduces administrative costs of this package.
· The use of an updated dataset
· Revisions in light of responses to the consultation i.e. changes in participation and the number of fuels covered by the Scheme.
The administrative costs of calculating core supplies were previously assigned to non-core supplies, and vice versa. The Final IA eliminates this problem.
Direct costs and benefits to business – for Option 1
110. Since the decision to remove revenue recycling in October 2010 as part of the Comprehensive Spending Review, the CRC combines regulatory elements (such as standardised mandatory monitoring and reporting of energy use) with taxation aspects associated with the cost of allowances.
111. The net present value calculations treat the cost of allowances as a cost to business and a benefit to government with a neutral impact on the Net Present Value since it represents a net transfer between participants and government[32]. In order to estimate the financial impact on CRC businesses, this IA has excluded the proportion of energy savings in public sector from the calculation. It also excludes emissions, allowances and other costs from this sector.
112. Energy savings related to business only have been calculated by multiplying the amount of energy saved by the CRC with the market price of the respective energy source in the IAG guidance[33]. These savings are all additional savings and do not include other savings that will take place in these sectors from Products Policy, Smart Meters and Building regulations, all of which overlap with the CRC.
113. The impact of allowances has been calculated projecting CRC coverage in tonnes of CO2 after removing efficiency savings from baseline energy projections. The future price of allowances is set by HMT in the budget process. Allowance prices for the CRC have been set at £12 (in nominal terms) for the first three years of the Scheme. From 2014-2015 the price of allowances has been set at £16 and will increase in line with the RPI from 2015-2016. Administrative and capital costs are also adjusted to remove public bodies from these estimations. The results are presented in the Table 12 below.
Table 12 CRC Impact on Business
|
CRC Impact on Business |
Baseline |
Option 1 (preferred) |
|
£2011m |
|
|
|
Cost of allowances |
10,508 |
9,282 |
|
Energy Savings |
2,041 |
1,927 |
|
Admin Costs |
400 |
181 |
|
Capital Cost |
263 |
254 |
|
Net cost of Business |
9,130 |
7,791 |
114. The net cost to business is driven mainly by the cost of allowances. The aggregate cost of allowances in the baseline has been calculated by multiplying 52MtCO2 of emissions each year[34] with the price of allowances. In total, the net cost to business in the baseline is estimated at £9,130m of discounted costs up to 2030. The equivalent cost in Option 1 is estimated at £7,791m. This is slightly lower than the baseline cost because this option reduces the Scheme’s emissions coverage by 2MtCO2, representing a reduction in financial impacts to businesses of £1,340m over the whole period to 2030 with respect to the baseline. This corresponds to an annualised value of £92m.
115. In terms of financial impact the cost of allowances is higher than energy savings with a net impact on CRC businesses of £7.8bn over the whole period of appraisal. Compared to the £1,286bn of turnover reported by these organisations in their 2010 Footprint reports, the CRC represents 0.03% of the turnover of currently registered businesses for just one year.
116. The simplification of the CRC will deliver significant savings compared to the baseline situation of the existing scheme. These savings are estimated at around 55% of current administrative burdens. The reasons behind the difference from the March 2012 Consultation IA, which estimated 63% savings, are explained in paragraph 110.
117. In the CRC baseline, around 80% of participants and 70% of emissions originate from the non-public sector. Under the new scheme, there will be significant changes in the number of firms qualifying. Based on the analysis of Registration and Footprint reports, the non-public sector will represent 72% of organisations and 80% of total emissions.
118. Since the net cost to business calculation applies to the non-public sector only, the savings accruing to public sector organisations have been removed. This calculation covers a reduction in administrative cost of £272m and £13m in Capital cost and a decrease in energy savings of £167m resulting in £118m decrease in direct costs. This analysis covers only direct costs to 1300 organisations that will remain after the application of the simplifying proposals. After removing the public sector, it results in a £91m reduction of direct costs to businesses. On this basis, using a 20 year appraisal and a 3.5% discount rate, the equivalent annual net benefit to business is estimated to be £6m.
Table 13 ALL tables are: central prices & central uptake; Preferred Option A+B+C
|
These are with respect to the baseline |
|
|
|
|
Net Savings |
-167 |
|
|
|
Capital Cost |
-13 |
|
|
|
Admin Cost |
-272 |
|
|
|
Net change in direct costs |
-118 |
||
|
Net only business |
-91 |
||
|
Deflated value (2009) |
-87 |
||
|
EANCB (£m) |
-6 |
||
119. The simplification proposals covered in this IA are estimated to bring an annual reduction in administrative costs of £18m and net cost to businesses of £6m. When including the cost of allowances (which does not affect the NPV results) it would reduce the cost to businesses by £92m per year.
Risks and Assumptions
120. There are three areas of this IA where there remains some degree of uncertainty:
· There is limited information of CRC savings which have not been updated since the 2010 IA.
· Data issues around CRC reporting. The Environment Agency has not yet carried out audits on the reports submitted and there is no requirement to report from firms with exemptions or those outside of the Scheme.
· Respondentsto the administrative burdens survey have an incentive to overstate costs. The methodology has been designed to limit bias but there are some limitations to the methodology which is discussed further below in paragraph 131.
Each of these is discussed in more detail below.
CRC Savings
121. CRC savings are based on abatement potential identified in the Non-Domestic Energy Efficiency Model (NDEEM). There are a number of limitations to this model:
· The underlying data is outdated and thus does not reflect any new technologies, policy changes or the actual costs of abatement.
· NDEEM does not match the CRC policy needs. For example, industrial process emissions are not covered by this model.
· NDEEM works at an aggregate sector level and therefore ignores the effects of commercial and industrial structure which applies within sectors (e.g. different size and type of production process and whether their fuel use is traded or non-traded and, in the case of companies, across sectors). Note the CRC is based on companies rather than sites or processes).
122. Finally, the NERA/Enviros model has not accounted for the impact on emissions savings of the proposed move to replace the cap and trade mechanism with a fixed price sale of allowances. However, in the absence of any evidence of what this impact would be, this IA has no basis for estimating such an impact.
Data Issues from the Registration and Footprint report
123. CRC participants need to submit the following reports:
· A registration report, including participant’s characteristic, emissions and qualifying supplies. Some firms claim a general or group exemption at registration and as a result they do not need to submit any further reports
· A footprint report once per phase. This gives an account of all emissions covered by the organisation. Some firms can claim general or group exemptions at this stage and submit no further reports
· An annual report. Firms with no exemption or member exemption need to submit an annual report covering all of their CRC emissions.
124. Although actual data from the annual report[35] represents a considerable improvement on the existing evidence, there are still some issues around the quality of data obtained from registration and footprint reports. For example, some firms have reported kWh figures in MWh which increase emissions by 1000 times. Other firms have made mistakes on the type of exemption, for example, claiming a group exemption when they should claim a member exemption.
125. The Environment Agency maintains the CRC database and is planning to take a number of audits over the coming years, however, the results will not be available in time for this IA. However, it is expected that the accuracy of reporting will increase with subsequent annual reports and this would be taken into account in DECC’s plan for the evaluation of the CRC.
126. Registration and footprint reports are important in the analysis of qualification measures. This data is crucial in order to identify the reduction on qualifying emissions because:
· New qualification rules will only cover electricity supplies through settled half hourly meters
· CCA and EU-ETS supplies will not count towards qualification
127. Unfortunately, these emissions are not covered in annual reports. So this IA relies on registration and footprint report data. DECC has tried to overcome the lack of robustness by producing a matching exercise at meter level for participants with CCA exemptions. DECC statisticians advised against this approach because the match rate was very low and would introduce considerable bias.
128. Therefore, this IA has used footprint and registration data. This has been based on identifying the difference between company emissions and CCA emissions in these reports in order to:
· Eliminate outliers, (for example, firms reporting an impossible amount)
· Correct entries when errors have been identified by the EA (the EA can notify participants but cannot change them)
· Estimate total emissions for each individual firm.
129. This approach has some risks
· It has identified a number of large outliers, but less serious mistakes would have escaped from basic checks
· There have been a large number of manual modifications, which can involve some human error. This risk can be reduced by quality assuring the results.
Administrative Survey Results
130. Although the research has been designed to minimise bias[36] KPMG cannot verify the reliability or accuracy of any of the information obtained. Some of the key limitations of the methodology are:
· Almost all data is provided by participants and based on their own estimates of the time incurred. Few captured actual data on time sheets, particularly in relation to the split of administration time by CRC activity.
· There is significant variability in the average costs per participant throughout this report. This is driven by the heterogeneity of participants. There are substantial variations in the size, complexity and the approach of CRC participants, even within similar strata. The result of this is that one cannot control the robustness of the results with standard deviation estimates).
Conclusions
131. The issues mentioned above are within the acceptable limits of evidence and it would not be possible to improve the evidence used for these calculations in a way that would be proportionate For example, it would take an extremely onerous survey to determine the administrative costs associated with each aspect of the CRC and it would have been seen as a further increase in red tape.
132. Despite the limitations highlighted above, the evidence set out in this IA does represent a significant improvement in the existing evidence base for the following reasons:
· It is based on actual data on CRC participants drawn from Registration, Footprint and Annual reports submitted to the Environment Agency in July 2011, the first time these have been submitted.
· Consultants KPMG have conducted a comprehensive survey of participants designed to identify administrative costs of the current scheme and evaluate the impact that the proposed simplification measures will have on these costs.
Wider impacts
133. This IA quantifies the direct impact on businesses of the proposed simplification measures. The following impacts have been considered as having none or negligible effects:
· Costs in employment
· Barriers to start up and other impacts in small and medium size business
· Competitive distortions
· Regional distortions
· Social impacts such us well being, human rights and inequality
