Table of Contents
Comments
Commenters1
CRC will feature a mechanism that allows participants to purchase additional CRC allowances during the course of the emissions year from the scheme Administrators. This ’safety valve’ mechanism has been designed to prevent the cost of allowances in the secondary market reaching levels that place an unreasonable economic burden on participants. This should be treated as an option of last resort, as it will be both more expensive to buy allowances through the safety valve than from the Government sale, and the money spent on these allowances will not be recycled back to participants. In the previous consultation there was strong support for this aspect of the scheme, with 74% of respondents agreeing with Government’s proposed mechanism.
CRC will feature a mechanism that allows participants to purchase additional CRC allowances during the course of the emissions year from the scheme Administrators. This ’safety valve’ mechanism has been designed to prevent the cost of allowances in the secondary market reaching levels that place an unreasonable economic burden on participants. This should be treated as an option of last resort, as it will be both more expensive to buy allowances through the safety valve than from the Government sale, and the money spent on these allowances will not be recycled back to participants. In the previous consultation there was strong support for this aspect of the scheme, with 74% of respondents agreeing with Government’s proposed mechanism.2
In order to maintain the environmental integrity of the scheme Government (28) will buy and cancel an EU Emissions Allowance (EUA) for every safety valve allowance created. Participants will be expected to bear the burden of the full cost of creating a safety valve allowance. This process is explained in greater detail in the box below.
In order to maintain the environmental integrity of the scheme Government (28) will buy and cancel an EU Emissions Allowance (EUA) for every safety valve allowance created. Participants will be expected to bear the burden of the full cost of creating a safety valve allowance. This process is explained in greater detail in the box below.3
The price of a CRC allowance in the Introductory Phase fixed price sales from Government will be £12/tCO2. In line with this standard Government sale price, the minimum price of a safety valve CRC allowance during the Introductory Phase will also be £12/tCO2, although it could be significantly higher than this. Participants will not be able to obtain allowances from the Administrator through the safety valve for less than the cost of an allowance in the fixed price sale.
The price of a CRC allowance in the Introductory Phase fixed price sales from Government will be £12/tCO2. In line with this standard Government sale price, the minimum price of a safety valve CRC allowance during the Introductory Phase will also be £12/tCO2, although it could be significantly higher than this. Participants will not be able to obtain allowances from the Administrator through the safety valve for less than the cost of an allowance in the fixed price sale.4
In practice, although the price of a safety valve allowance will be at least £12/tCO2, the actual cost to participants will always be higher. This is because the fee paid by participants for a safety valve allowance is comprised of the cost of purchasing the EUA, the broker’s fee, administrative fees and VAT. Also, there will be an administrative burden for a participant with each occasion they interact with the Administrators to buy allowances. This means that participants in CRC will have to consider the risk of paying (possibly substantially) more for a CRC allowance through the safety valve mechanism compared to buying allowances through the Government sale. These additional costs are expected to outweigh the cash flow benefits of buying allowances at the last possible moment. As a result, the safety valve is expected to be treated as an option of last resort.
In practice, although the price of a safety valve allowance will be at least £12/tCO2, the actual cost to participants will always be higher. This is because the fee paid by participants for a safety valve allowance is comprised of the cost of purchasing the EUA, the broker’s fee, administrative fees and VAT. Also, there will be an administrative burden for a participant with each occasion they interact with the Administrators to buy allowances. This means that participants in CRC will have to consider the risk of paying (possibly substantially) more for a CRC allowance through the safety valve mechanism compared to buying allowances through the Government sale. These additional costs are expected to outweigh the cash flow benefits of buying allowances at the last possible moment. As a result, the safety valve is expected to be treated as an option of last resort.
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The benefits from participation in CRC lie primarily in reduced energy costs due to energy efficiency improvements incentivised by the scheme. In order to secure these, organisations will need to plan and take action accordingly. The purchase of safety valve allowances is likely to indicate that this has not happened. Furthermore, if a significant number of organisations choose to purchase allowances from the safety valve system rather than the fixed price sale, there will be less money available to recycle to participants (as money spent on safety valve allowances will have been used to cover costs). It is therefore important that participants treat the safety valve as an option of last resort, as the purchase of a safety valve allowance represents both a lost opportunity to make efficiency savings within the organisation, and a payment for emissions reductions outside the target sector.
The benefits from participation in CRC lie primarily in reduced energy costs due to energy efficiency improvements incentivised by the scheme. In order to secure these, organisations will need to plan and take action accordingly. The purchase of safety valve allowances is likely to indicate that this has not happened. Furthermore, if a significant number of organisations choose to purchase allowances from the safety valve system rather than the fixed price sale, there will be less money available to recycle to participants (as money spent on safety valve allowances will have been used to cover costs). It is therefore important that participants treat the safety valve as an option of last resort, as the purchase of a safety valve allowance represents both a lost opportunity to make efficiency savings within the organisation, and a payment for emissions reductions outside the target sector.7
The proposed £12/tCO2 minimum price for the safety valve allowance is a result of further consideration, as committed to in the Government‟s response to the last consultation. Government believes that the proposed minimum price in the first phase of the scheme is a sensible precaution to safeguard the scheme‟s positive financial benefits to participants.
The proposed £12/tCO2 minimum price for the safety valve allowance is a result of further consideration, as committed to in the Government‟s response to the last consultation. Government believes that the proposed minimum price in the first phase of the scheme is a sensible precaution to safeguard the scheme‟s positive financial benefits to participants.8
Please refer to Article 91 in the draft order, which gives the Environment Agency powers to buy EUAs. The allocation of CRC allowances is provided for in the Allocation Regulations.
Please refer to Article 91 in the draft order, which gives the Environment Agency powers to buy EUAs. The allocation of CRC allowances is provided for in the Allocation Regulations.9
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28 In order to control the use of the safety valve mechanism and to underscore that the Safety Valve is there essentially as an option of last resort, participants will not be able to retire their own EU ETS allowance and request a Safety Valve allowance from the Administrators. They will have to make a purchase through the Administrators.
______28 In order to control the use of the safety valve mechanism and to underscore that the Safety Valve is there essentially as an option of last resort, participants will not be able to retire their own EU ETS allowance and request a Safety Valve allowance from the Administrators. They will have to make a purchase through the Administrators.
Tags: Administrator, broker, energy efficiency improvements, Environment Agency, EUAs, European Union, GBP, reduced energy costs