Turning carbon into cash

According to a recently published report by Business in the Environment, Financial Times, 21 February 2001, reported that the corporate sector is making a 'pitiful'.

While BiE's findings are bad enough, a report by Pensions Investment Research Consultants has shown the construction industry to be falling behind even the often poor performance of most other sectors.

The UK's draft Climate Change Programme sets out policies to reduce greenhouse gas emissions from business and other sectors, and in the longer term move to a lower carbon economy. Emissions trading is a key element of this policy, although at this stage it will be voluntary. This initiative provides an important business opportunity for the construction industry.

What is it?
In an emissions trading scheme participants are assigned a quantity of units to cover the levels of emissions they are allowed. This level may be calculated on the basis of, for example, a target level less than their actual emissions levels in the preceding year(s).

Participants who achieve emissions levels below their targets, will have more units than they need to cover their emissions and could trade these with other participants who are finding it more difficult or costly to meet their targets. Schemes can be international with individual countries as participants, or within countries with companies as the participants.

As carbon dioxide is the primary greenhouse gas these schemes are often referred to as carbon trading, but they can be applied to any greenhouse gas or other emissions. A scheme operating in the USA aims to cut sulphur dioxide emissions from large combustion plant sites and so reduce the occurrence of acid rain.

Emissions trading is designed to give participants the flexibility to deliver emissions reductions in the most cost-effective way.

The fact that this results in a price being attached to carbon, both signals the need to reduce emissions and gives an incentive to develop the low-carbon technologies needed to reduce greenhouse gas emissions.

The UK Government believes that – along with the environmental benefits – there are strategic reasons for making an early start to emissions trading in the UK. Under the Kyoto Protocol work has begun on establishing an international emissions trading scheme. This could produce a worldwide market that parts of UK industry are keen to exploit. An EU wide trading scheme is also being considered. The early development of a UK scheme will put the Government, UK business and the City of London in good positions to play leading and influential roles in developing and using the wider schemes.

Current proposals for the UK Emissions Trading Scheme are based on the work of the UK Emissions Trading Group (ETG), set up by the CBI and the Advisory Committee on Business and the Environment in June 1999. Initially supported by 25 major UK companies and government, the business support for the ETG has now grown to include more than 100 major companies and trade associations, with numerous academic and environmental non-governmental officers also playing an active role.

The scheme will initially focus on carbon dioxide emissions, but is likely to be widened at a later stage to include the five other greenhouse gases covered by the Kyoto Protocol – methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride.

To kick-start participation in the trading scheme, the Government has allocated £30 million (available from 2003–4) for incentive payments for participants who agree to binding and challenging emissions reduction targets. Companies will bid for the incentive payments, those committing to the greatest energy savings per pound of incentive having the greatest chance of success. The primary requirement for prospective participants is to establish accredited emission baselines now to provide a sound baseline against which any reductions are measured.

While the core of the scheme will be made up of companies with long-term emissions targets, specific emissions reduction projects will be allowed to generate credits that can be sold into the emissions allowance market. This element will be open to more participants and is designed to stimulate emissions reductions in areas not covered by the main part of the scheme, such as transport, construction and household energy efficiency.

This is a business opportunity the construction industry needs to wake up to

The proposed timetable for companies wanting to enter the scheme reflects the Government's wish to have a functioning UK scheme as soon as possible:

• rules for application for financial incentive published in March 2001
  
• bids for the financial incentive received from companies by early autumn 2001
  
• rules of the trading scheme finalised by late autumn 2001
  
• participation of companies confirmed by late autumn 2001
  
• the first compliance period to begin 1 January 2002
  
• the first compliance period to end 31 December 2002
  
• achievement of targets to be verified and reported and first incentive payments made in April 2003.

Current thinking on allocating allowances is to adopt free allocation of allowances to participants at the start of the scheme (this approach is known as 'grandfathering'). The allowances will reflect target emissions reductions, the baseline for setting the targets being average annual emissions in the three years up to and including 2000.

How does this apply to buildings?
Energy use in buildings currently accounts for 45% of total UK carbon dioxide emissions. From a technical point of view there is potential for reducing these emissions by an estimated 30%, but in practice market barriers prevent this. By giving a value to energy saving and rewarding those directly making the savings, the emissions trading scheme could help to overcome these barriers.

As the emissions reductions associated with building fabric persist for decades, the participation of the building sector is important for meeting more stringent emissions reduction goals in the future.

The main route for achieving savings in buildings is likely to be that part of the scheme awarding carbon credits for emission reduction projects. This should prove more accessible to a wider range of organisations than the core of the scheme which is likely to involve larger/energy intensive companies.

There are two main issues that may need further consideration to make the carbon credit projects scheme more attractive to those owning, managing, occupying, constructing and refurbishing buildings.

First, there is a danger that the administration costs associated with calculating the energy-use reduction targets for each project will discourage participation.

Secondly, more guidance on dealing with the 'ownership' of emissions, and therefore who will benefit from their reduction, would be helpful.

It should be possible to solve the first problem by establishing benchmarks for types of energy saving projects. For example, there could be a pre-defined, standard emission saving for improved insulation from upgrading building materials during refurbishment, and for making use of more energy efficient equipment when carrying out the work. Benchmarks are independent, open to scrutiny – and can be revised at pre-defined instances. This should provide more certainty for those in the scheme, particularly regarding the sort of project that could qualify for emission reduction credits, the levels of carbon reduction that the scheme might realise, and the genuineness of the carbon reductions.

A standard approach to setting emission targets could help the scheme to reach a wide range of emission sources both in and beyond the building sector – this will be essential if the UK Emissions Trading Scheme is ultimately to achieve the 60% reduction indicated in the recent Royal Commission Report (Energy – The Changing Climate).

Ownership of emissions is perhaps a more complex issue. Taking as an example a tenanted commercial office building, emission levels depend not only on the occupiers' actions but also:

• the building design and its implementation
  
• actions taken by the building owners to reduce energy loss through the fabric of the building and by installing energy efficient plant, and actions taken by the facilities management company to maintain and control the plant operation.

Care is needed to ensure that credit is given for emissions reductions generated directly by the scheme and not from incidental windfall gains. As noted above, effective benchmarking has an important role here.

As a general principle, emissions reductions should be allocated where responsibility and the ability to control exists. This would favour the inclusion of the electricity generators on a basis whereby they are responsible for emissions per kWh delivered, as they have control over the generation mix, while end users report emissions based on a fixed emission factor as they determine demand.

Companies should grasp the nettle
If construction companies are to take advantage of the opportunities offered by tradable carbon credits, they must first establish the accredited baseline emission levels against which any reductions can be measured.