The Committee on Climate Change has made recommendations that the Carbon Reduction Energy Efficiency scheme needs to be simplified.
The key messages in the report are:
• If a cap were to be set for the second phase of then CRC, the CCC analysis suggests that this could embody an annual emissions reduction of up to 4% resulting in an emissions reduction of around 30% by 2017 relative to 2008 levels.
• Given the uncertainty over the abatement potential due to the lack of a robust evidence
base, there would be a risk of very low prices and limited financial incentives for energy efficiency improvement under a capped scheme. This risk could be mitigated through the setting of a reserve price in the auction of CRC allowances. The risk of very high prices is already addressed through a safety valve.
• However, introducing a cap and an auction mechanism would add an extra layer of complexity to what is already a very complex scheme, with no apparent benefits in terms of strengthening incentives for energy efficiency improvement.
• Therefore the CCC recommends that alternative options are considered. In particular, extending the first phase design through the second phase (i.e. selling an unlimited number of allowances at a fixed price) would provide financial and reputational incentives equivalent to those under the proposed cap, but would avoid the extra complexity that an auction would entail.
• It also highlights options for a more fundamental redesign of the scheme (e.g. reforming revenue recycling, or dropping the need to purchase allowances). If these options were to be considered, it should be within the broader context of carbon price strengthening, and would require better evidence on the way that specific financial incentives under the CRC actually work in practice.
Unsurprisingly, the recommendations have been swiftly welcomed by the CBI.
Separately, I liked this piece on Business Green about CRC which it seems is drowning in acronym soup.