The United Kingdom (UK) is developing a bold new measure to regulate greenhouse gas (GHG) emissions from supermarket chains, hotel chains, banks, large offices, government departments, and other large commercial and public entities by 2010. As one of the first nationwide efforts to regulate greenhouse gas emissions from entities not captured in the EU emissions trading scheme, this program is one to watch for policymakers, analysts, and investors looking for the next stage of climate change regulation and opportunity.

The UK’s “Carbon Reduction Commitment” (CRC) program, detailed in a May 2007 White Paper and then refined in a June 2007 Consultation Document, will require many corporations and organizations that consume over 6,000 MWh of electricity per year to participate in a cap and trade program. The program requires participants to purchase emissions allowances (either at auction or on the secondary market) to cover the annual CO2 emissions resulting from energy use exceeding their allowance. The program targets larger non-energy intensive companies and organizations that are not already regulated under the existing emissions trading regulations aimed at heavy industry. While the CRC program is still in the proposal stage at this point, staff at the UK’s Department for Environment, Food and Rural Affairs (DEFRA) are confident that the final version of the CRC program will be “up and running” by January 2010.

DEFRA is betting that, by shifting some of the regulatory burden for reducing emissions to the commercial and public sectors, the UK may be able to save energy and reduce emissions at a lower cost than by focusing on heavy industry and transportation alone. The CRC model may also be an important prototype for other countries looking for ways to reduce their carbon footprint while encouraging continued economic growth.

Given the significant long-term energy (and financial) savings from increasing energy efficiency, the UK’s approach makes sense, but there will still be winners and losers. A CRC-style electricity cap and trade program will create new market opportunities for energy-efficient technologies and materials (HVAC, lighting, insulation, computers, etc.), operating practices, and innovative architectural designs. For companies willing to factor energy efficiency into their capital budgets and operations and facility management plans, participation in a CRC-type market may even provide competitive advantages. On the other hand, underfunded government entities and marginal companies may find the prospect of long-term energy savings to be cold comfort in the face of the immediate costs imposed by investing in new technologies or buying emissions credits.

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