The UK has pledged to make deep cuts in carbon emissions by 2050. But as new sustainability rules bite, what are the duties of businesses? Here we look at how to use cleaner energy, slash fuel bills and boost reputations
Britain is committed to massive carbon cuts, and whether businesses subscribe to green principles or not, they will be expected to play a key role. The Climate Change Act 2008 set a target for reducing greenhouse gas emissions to 80 per cent below 1990 levels by 2050, which assumes energy efficiency savings of around two per cent per annum for the next 40 years. That's a big ask.
Although many companies are implementing green operating policies and achieving environmental management standards, the business contribution to the target is being driven by myriad carbon-related sustainability rules. Yet many organisations have yet to understand the cost of compliance. The most onerous legislation is aimed at the heaviest energy users, utilities and heavy manufacturing sectors. It is spearheaded by the EU Emissions Trading Scheme (EU ETS), which caps the amount of carbon a business can emit and creates a market and price for carbon allowances.
The Climate Change Levy (CCL) is a tax on business energy use, with exemptions for organisations signed up to a Climate Change Agreement (CCA), a sector-wide arrangement that larger firms can adopt through their trade associations.
The costs of the EU-ETS and CCL will inevitably be passed on to consumers through higher bills or product prices, says Steve Lang, head of Ernst & Young's Cleantech practice. "For smaller firms, this will affect operating margins," he explains. "To reduce that impact, they would need to have some sort of hedging or fixed-price contract to avoid exposure to excessive price rises."
The red tape that affects costs for the largest number of businesses is also the newest, the CRC Energy Efficiency Scheme (CRC). Around 5,000 public and private sector organisations are involved; half-hourly electricity metering and yearly consumption of more than 6,000MWh, adding up to bills of £500,000, are the criteria for inclusion. Compliance requires companies and public bodies to report emissions and buy carbon allowances to cover excess output.
Launched as a cap-and-trade scheme last April, CRC offered financial incentives to businesses with the best carbon-cutting performance. Last October, the government modified the scheme; rather than recycling cash levied from carbon allowances back into CRC, it would keep the money, effectively creating a green tax that could raise up to £3.5bn of revenue by 2015.
Tony Rooke, sustainability practice leader at IT services provider Logica, says: "What was a carrot will now become a stick, and with the carbon price set at £12 per tonne of carbon emitted, it could add up to eight per cent to an organisation's energy costs. What it will do is encourage them to minimise that impact by monitoring energy consumption more closely, and redoubling their efforts to reduce it and avoid waste."
If the price of carbon rises, the financial burden will be deeper, with companies paying up to an extra 10 per cent on top of their fuel bills. Although there will be some leniency in the first year of the scheme, firms that miscalculate usage could face fines of £40 per tonne of misreported emissions.
For companies still under financial pressure from the economic crisis, the extra costs arising from CRC could not have come at a worse time. But with carbon reduction regulations here to stay, businesses should be focusing on the potential to make cost savings. "Why would you not want to improve your business operations and save money?" asks Alan McGill, a partner in the environmental reporting practice at PricewaterhouseCoopers. "Forget the green agenda and just apply the commercial principles. There are lots of companies looking at operational opportunities to take carbon out and bring benefits to the business."
To cut energy consumption and make savings, a business first needs to know its exact fuel usage, and when the energy is used. That means gathering accurate data. "Too many businesses rely on estimated data, which does not allow them to understand their energy consumption profile," says Ernst & Young's Lang.
Part of the rationale behind the government's initiative to roll out smart meters is not just to achieve a cut in consumption but also to promote more efficient use of power. Demand-led energy management, through the use of smart meters, allows businesses to time consumption optimally. For example, they could coincide fuel use with self-generation from solar or wind sources. Using energy overnight can bring cost benefits, too.
Lang adds: "There is an opportunity for companies to achieve significant cost savings by analysing accurate energy consumption in a structured way. These cost savings can be significant and feed straight through to the bottom line."
In seeking opportunities to reduce energy use and costs, organisations often overlook their IT function, in particular the use of data centres, which are responsible for at least two per cent of UK emissions, says Mike West, managing director of data centre consultancy Keysource. "Data centres generally make up a large proportion of a company's energy usage, yet it is often not clear who even pays the bills," he says. "There has to be a joined-up approach between facilities, IT and finance, along with buy-in from the board, to measure the cost of a data centre and potentially reduce energy consumption by as much as 25 per cent."
Other areas of sustainability red tape could provide scope for offsetting higher costs arising from CRC. Waste disposal is also determined by green regulations, such as the landfill tax. Reducing waste to landfill through separation, recovery and recycling will cut exposure to such levies. Businesses that generate suitable waste products could benefit from entering into joint ventures with Energy from Waste (EfW) plants.
Then there are the various incentives for businesses to use cleaner energy. A Renewable Heat Incentive (RHI) scheme that will encourage companies to make use of renewable heat is due to begin in July. Feed-in Tariffs (FiTs) reward businesses that install low-carbon electricity generating systems by allowing them to claim payments for power they produce, helping to offset the costs of legislation such as CRC.
But Richard Garth Jones, managing director of The Low Carbon Energy Company, warns that with government plans to speed up a review of FiTs amid fears that large-scale solar farm developers with high outputs are hijacking the incentive, the clock is ticking. "Anticipated cuts could see projects as small as 50kw, approximately 200 panel systems, receiving a reduced rate of return from the FiTs scheme or being unable to benefit from the incentive at all," he says.
The Green Deal, scheduled for launch next year, is a scheme that will provide low-interest loans to help households and small businesses pay for energy efficiency improvements. There are no up-front costs and repayments are made over time through savings made on fuel bills. There are also various tax breaks such as enhanced capital allowances for using energy-efficient and renewable technologies.
Businesses need to find ways to communicate their green credentials to key stakeholders, such as investors and consumers, and enable them to judge carbon efficiency performance accurately. One of the main reporting mechanisms is the Carbon Disclosure Project (CDP), which has around 3,000 organisations in some 60 countries measuring and disclosing greenhouse gas emissions and climate change strategies.
"This detailed response to companies' strategic
approach to carbon management is probably the most comprehensive benchmark around," says Lang. "Increasingly, companies are including carbon efficiency disclosures in the corporate responsibility section of their annual report."
It is an area that should engage all organisations, including those exempt from mandatory carbon monitoring and reporting, suggests Ken Starkey, professor of management and organisational learning at Nottingham University Business School.
"Consumers, future employees and supply chain customers are all more discerning and demanding of sustainability measures," he says. "How many companies have appointed a director of sustainability? That would say a lot about a company and its stance on social responsibility. That is the long-term picture, and it will create many new business opportunities, particularly for smaller firms."
In spite of a three-year moratorium on new regulation for small firms, sustainability legislation is underpinning the UK strategy for fulfilling 2050 carbon reduction obligations. Any hint that Britain is falling short of the target could prompt a new raft of green laws.
Mark Schofield, a partner in the environmental taxation practice at PricewaterhouseCoopers, says: "We have a plethora of green taxes, all operating and interacting with each other in different ways. A simpler and transparent single carbon tax would do away with the need for separate CRC and CCL schemes, or any additional layers of red tape, and make the process much simpler. I believe it could happen."
Case study: Article 13
Small businesses have a huge incentive to save energy and cut carbon emissions if they want to remain on the radar of clients and supply chain partners. With a core business function of advising other organisations on social responsibility, sustainability issues and business consultancy, Article 13 has to be squeaky clean.
Based in west London, the firm employs just 20 people and works with 250 associates worldwide. But as part of its environmental policy, the firm measures everything—from energy use within the business to the effects of transport.
Founding partner Neela Bettridge says: "It was the right thing to do, partly because of
the sector we work in; partly because rising energy prices have a direct impact on business costs, but also because we recognise there are real issues about sustainable resources
and that more green legislation is inevitable."
The process, she explains, was less onerous than most people might imagine. One person was assigned to carry out an initial audit and then report monthly on everything from electricity and the use of office consumables to business miles. Data is collated and assessed every four months and included in the company's annual report.
Bettridge adds: "The use of videoconferencing alone helped us to save £5,000 a year on travel costs. We monitor energy bills carefully and are always looking for better deals when current agreements come to an end. We have no qualms about switching suppliers and we recently moved to a green tariff. Legislation may be driving the change, but reducing your carbon footprint makes business sense."
Case study: Jaguar Land Rover
As a manufacturing company, Jaguar Land Rover has borne the brunt of sustainability regulations and the growing costs of compliance. The carmaker, which employs 15,000 people, including 3,500 engineers at two product development centres in the Midlands, is part of the EU ETS scheme and has signed up to a Climate Change Agreement.
Head of sustainability Frances Leedham says: "One of my objectives is to make environment and sustainability part of doing business. It was unheard of a few years ago, but there is a clear incentive to decarbonise our economy and focus on renewable energy. Across our UK facilities we have set ambitious targets, and by 2012 we aim to reduce operating carbon emissions by 25 per cent, waste to landfill by 25 per cent and water consumption by 10 per cent."
So crucial is the company's sustainability agenda to long-term business growth that a £9m fund has been set aside for investment in efficiency measures across the business, targeting areas where the biggest savings can be made.
Jaguar Land Rover's paint shops, for example, have been identified as the largest consumer of energy in the whole manufacturing process. By sharing best practice between production sites, the company has implemented more than 50 initiatives-from optimising use of air compressors to closing parts of the paint shops when they are not being used.
These measures have saved 13,200 tonnes of carbon emissions and more than £1.5m in energy costs over the past two years. But Leedham insists smaller schemes have a significant effect, too: "Things such as lighting, heating and PC shutdown policies are as important as the bigger manufacturing issues. Engaging employees in our environmental strategy is fundamental to achieving sustainability targets."
Case study: VocaLink
Case study: VocaLink
VocaLink, a specialist payments partner for banks, their corporate customers and government departments, processes more than 500 million payments each month and manages a network of around 60,000 ATMs in the UK. The company employs 700 people and was one of the first businesses to sign up to the CRC.
Chief operating officer Ian Gausden says: "Three years ago,
we achieved the ISO 14001 environmental management standard, which enabled us to bring consistency to all our processes, and anticipate any forthcoming legislation that might impact on us."
VocaLink has measured energy consumption since 2006 and uses automatic meter readers at all of its sites. Last year, it introduced an environment dashboard to provide summary reporting through which the business can monitor energy use, waste and recycling. This ability to track the organisational footprint will help VocaLink comply with CRC and identify opportunities for further savings.
Lighting has been upgraded, saving £2,500 annually; most of VocaLink's PCs have been replaced with energy-efficient Thin Client boxes, and the larger servers have been consolidated, achieving annual savings of around £15,000. This year VocaLink will cut its number of data centres from four to three, reducing energy consumption and emissions, while each site will be fitted with low-consumption equipment that allows higher, safe-operating temperatures and avoids unnecessary energy use from cooling systems.
In spite of boosting staff numbers, electricity consumption at VocaLink's head office has fallen for three consecutive years, with an average saving of more than six per cent. "Before the changes to CRC we anticipated doing well out of the cap-and-trade scheme. Now we are confident that we can minimise the impact of the legislation on our energy costs," says Gausden.
Gather accurate energy data. Too many companies rely on estimated usage. Firms that misreport emissions face heavy fines.
Install smart meters. They'll help you make more efficient use of energy and avoid peak-time charges.
Monitor the IT function. Measure the cost of data centres and potentially cut energy consumption by 25 per cent.
Reduce waste through separation, recovery and recycling. It will cut your exposure to green legislation such as the landfill tax.
Sign up to a Renewable Heat Incentive (RHI) scheme, which will encourage cleaner energy use.
Look at Feed-in Tariffs (FiTS), which allow businesses to claim payments for low-carbon electricity they produce.
Take advantage of the Green Deal, which will provide low-interest loans to help small firms pay for energy efficiency improvements.
Link energy usage with self-generation from solar or wind sources.
