UK to extend carbon trading to service sector

London, 24 May: The UK government is to go ahead with a carbon 'cap and trade' scheme for large commercial and public sector organisations, such as banks and supermarkets, according to its energy white paper published on 23 May.

It also unveiled details of a government competition to build a carbon capture and storage (CCS) power plant, an expansion of the UK's renewable energy capacity and a public consultation on the potential of building new nuclear power plants to meet the UK's energy needs.

"With the measures we are proposing … we can cut emissions by 23-33 million tonnes of carbon by 2020," said Alistair Darling, UK trade and industry secretary.

The emissions trading scheme (ETS), which will be known as the Carbon Reduction Commitment (CRC), will target greenhouse gas emissions from energy use by organisations with electricity consumption of more than 6,000MWh per year.

"[It] will be a cost-effective scheme that will save over 1 million tonnes (Mt) of carbon per year by 2020," said David Miliband, UK environment secretary. In terms of carbon dioxide (CO2), that is an annual saving of more than 4Mt.

The CRC received a cautious welcome from the Confederation of British Industry (CBI), the UK employers' group. "While we need to look at the finer details, it is encouraging that the government has heeded concerns over its emissions scheme for major service sector businesses. By raising the thresholds it will avoid capturing smaller companies, with the extra red tape that would have entailed," said Richard Lambert, CBI director-general.

There had been some industry concern last year, when the scheme was first mooted, that the proposed threshold of 3,000MWh would mean the CRC included many small and medium-sized businesses. It was thought that the ability of these companies to invest in new energy efficiency measures would be undermined due to the cost of their involvement in the scheme.

Allowances will be distributed via an auction. The revenue from the auction will be re-cycled to participants "by means of a simple, direct, annual payment proportional to average annual emissions since the start of scheme, with a bonus/penalty depending on the organisation's position in a CRC league table", the white paper said.

The scheme will start with a pilot phase, with a "fixed-price sale of allowances", and the government plans a yet-to-be-determined price safety valve to "avoid spikes in the price of allowances". CRC participants will also be allowed to buy allowances from the EU ETS, which caps emissions from large industrial installations, but will not be allowed to sell into the EU-wide scheme.

A public consultation on the CRC scheme will be launched in June.

The government said it will launch a competition in November for a subsidy to build a demonstration CCS power plant in the UK. The plant must have a capacity of at least 300MW, capture around 90% of the CO2 and be fully operational between 2011 and 2014.

However, the competition is too late for a CCS project just abandoned by BP at Peterhead in Scotland. A BP spokesman said was linked to the imminent exhaustion of the Miller oilfield – where the CO2 would have been stored.

"It would be difficult technically and economically to keep the field open for an indefinite period with no certainty that the project will go ahead," he said. "We have already gone past the date when we had hoped to start the project."

The white paper also outlined ways in which the government plans to meet its aspiration for 20% of UK electricity supplies to come from renewables. This included an increasing of the renewables obligation up to 20%. The government also published a Biomass Strategy, which aims to expand the supply and use of energy from this renewable fuel source.

The government also launched a public consultation on whether it is in the public interest to allow the private sector to invest in new nuclear power plants. The consultation is open until 10 October.