Carbon credit trading is on the way

22 August 2001
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23 August 2001

Now that the British government has taken the first step towards a system of carbon trading, purchasers will have to be aware of what it means for the bottom line. David Arminas reports

With the government's announcement that it is to establish an emissions trading scheme by April 2002, carbon credits are destined to become as well-known - and as controversial - as the euro.

That carbon credits will make it to the shores of Britain long before the euro should be read by energy buyers as the official signal to move out of first gear on the climate change issue.

Buyers will need to become highly knowledgeable about the effect carbon credits can have on their company's bottom line. Failure to understand the trading of carbon credits could cost a company dearly in the long run.

All companies, whether large or small users of energy, are paying the climate change levy - a 15 per cent surcharge on energy consumption including electricity and gas. The goal is to get them to use less energy and so save carbon emissions that would otherwise have been thrown into the atmosphere by power stations.

"People are beginning to see the impact of the 15 per cent levy on the bills," said Ian Dobson, energy consultant and chairman of CIPS's energy committee. "Chief executives are saying 'hang on, this is a big hit'. And it's coming off the bottom line."

Major energy users designated as high polluters are particularly sensitive to the blow of a 15 per cent increase in energy costs. Energy buyers should be starting to field questions on how to save on this.

One way is to take advantage of a possible 80 per cent reduction in the climate change levy. In return for this, a company undertakes to reduce energy consumption (measured in a yet-to-be determined carbon unit) per tonne of manufactured goods, a percentage set according to its sector's major trade association's negotiation with the government. In other words, the company must become more energy efficient by 2010.

Milestones have been set every two years on the way, starting in 2003. A 10 per cent reduction in energy consumption can be broken down into 2 per cent savings per milestone. If you don't make the first milestone, you stand to lose the 80 per cent climate change levy reduction, costing the company hundreds of thousands, even millions, of pounds in back-dated levy charges.

Purchasers at long-established manufacturers that are replacing ageing equipment are likely to reach the first and second milestones with ease. Energy efficiencies will be immediate with new, more efficient plant. But if a company is already efficient, the targets could be more difficult to hit. It may have to visit the carbon trading market to buy carbon units (called credits when sold on the market), which other companies have sold because they exceeded their targets.

One strategy is to reduce the risk of losing the 80 per cent levy reduction through missing a milestone. Purchasers might wish to exceed their target, thereby getting carbon credits to sell on the carbon trading market. This would make energy buying a profit-generating centre for the company.

But what if the company appears to be falling short of its second milestone and has sold off the carbon credits it gained by passing the first milestone? Will it have to return to the market to buy credits?

It is almost certain that there will be carbon trading times - for example, between January and March 2003 and then in 2005. Trading will be time-effective and the rates are likely to go up and down, a bit like currency on the money markets.

Some intricate number-crunching will have to be carried out by finance and procurement departments as milestones approach. Will it be less expensive to pay the levy as a result of a missing a milestone than to buy carbon credits? That is a question to which no one yet knows the answer, but one that procurement people will have to be prepared to debate.

The immediate concern for purchasers is not to underestimate the required co-operation among procurement, financial and engineering professionals. Foreknowledge of an impending missed milestone will be imperative in the carbon trading age.

With much at stake, we wait to see which company is first to designate a procurement professional its "carbon trader".

SMaug2001

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