Carbon and Energy Newsletter - June 2022

It has been a busy first half of the year in the carbon and energy world. The first year of reporting under the new UK ETS scheme has been completed and the government is consulting further on potential amendments to this and the CCA scheme. The Science Based Target Initiative has launched a new Net Zero Target Standard and more funding for energy reduction initiatives has been released through the Industrial Energy Transformation Fund (IETF). We have also now extended the scope of the newsletter to incorporate updates relating to broader climate reporting and TCFD. Read on to discover more.

UK Emission Trading Scheme Consultation

In March the Government published their consultation on the development of the UK ETS. One of the key proposals is a potential significant tightening of the allowance cap (and consequently free allowance allocation) from 2024 to align the scheme with the Government’s Net Zero ambitions. This could potentially have significant cost implications for business, with organisations receiving fewer free allowances.

Other proposals related to, the potential expansion of UK ETS reporting in the oil and gas industry to include emissions from venting and non-combustion activities, the application of a sustainability criteria to solid biomass before it can be classified as zero emissions, reviewing the combustion threshold for UK ETS eligibility (potentially lowering the threshold), expanding the UK ETS to waste incineration and energy from waste.

If you are likely to be impacted by any of these proposed changes to the scheme we would recommend that you review the full consultation document which can be found here. The consultation is open to replies until 17th June 2022.

Compensation for the indirect costs of the UK ETS and the CPS mechanism

The government has introduced a scheme designed to enable energy intensive industries deemed to be exposed to a significant risk of carbon leakage to be compensated from the indirect costs of the UK ETS and Carbon Price Support (CPS) systems incorporated into their electricity costs. To be eligible your business needs to be within an eligible sector (predominantly related to chemical, metals, textiles and paper manufacture) and meet the cost impact criteria – indirect carbon costs being 5% or more of GVA over a given period. Eligible businesses can subsequently claim for compensation equivalent of up to 1.5% of their GVA or 75% of their total indirect emissions costs, whichever is greater. More information can be found here.

SBTi Net Zero Target

The Science Based Target initiative (SBTi) has launched a new standard providing a specific set of criteria for businesses wishing to set a Net Zero target. The target must include a short-term science-based reduction target in line with 1.5°C pathways, incorporating all of Scope 1 and 2 emissions, plus at least two thirds of significant Scope 3 emissions. For most organisations, the long-term Net Zero target must incorporate 90% of Scope 3 emissions and achieve absolute emission reductions of 90%, with the remainder being potentially offset through appropriate schemes.

These targets may seem particularly ambitious for some organisations, and it may be necessary to further develop your carbon reporting systems and internal targets before considering aligning these with SBTi. More information can be found here.

Climate Change Agreements (CCA) Consultation

In December the Department for Business, Energy and Industrial Strategy (BEIS) published a consultation on their proposals for the future of the CCA scheme. The document does state that ‘there continues to be a place for a voluntary agreement scheme as a part of how we reach net zero emissions for UK industry’, however some potentially significant changes to eligibility and scheme rules are proposed, these include: increasing the length of the scheme to support the setting of long-term ambitious targets, the introduction of additional annual reporting requirements, reforming agreements to ensure that more action is being taken relating to energy efficiency improvements, reviewing eligibility criteria to create ‘a consistent set of eligibility criteria to ensure the scheme is both supporting those businesses which should be shielded from the full rate of CCL while also delivering value for money’. The consultation document can be found here.

Energy Transformation Fund (IETF)

BEIS has opened the Phase 2 competition window for the £70 million Industrial Energy Transformation Fund (IETF). The fund provides grant funding towards the costs of feasibility and engineering studies to investigate identified energy efficiency and decarbonisation projects prior to investment, projects to deploy energy reduction technologies and projects implementing technologies that achieve emission savings. The competition is open to the manufacturing, mining and quarrying, material recovery/recycling and data centre sectors. The minimum and maximum funding thresholds range from £30k to £30 million dependent on the type of project. Further information can be found here.

Climate Risk and Resilience

The Intergovernmental Panel on Climate Change (IPCC) has continued the release of the Sixth Assessment Report (AR6) during the first half of this year. The contribution from Working Group I, The Physical Science Basis, was released in August 2021. The contribution from Working Group II, Impacts, Adaptation and Vulnerability, was released in February 2022. The contribution from Working Group III, Mitigation of Climate Change, was released in April 2022. The final AR6 product (Synthesis Report) is due for release in September this year. Headline statements from the AR6 reports make it clear that “worldwide climate resilient development action is more urgent than previously assessed”, and that “a strengthening of policies” is required to limit global warming to well below 2°C.

The World Economic Forum released the Global Risks Report 2022. Two of the top three global risks for the next two years to emerge from the report were climate related (‘extreme weather’ and ‘climate action failure’). In the long term (5 to 10 years), the top five risks from the global risks horizon were environment and climate related. A key output of the report was that “governments, businesses, and societies are facing increasing pressure to transition to Net Zero economies”.

CDP released a new report on the financial impacts of climate-related water risks. High and Dry: How water issues are stranding assets presents insight gleaned from corporate CDP reporting and research, particularly, how assets are already becoming stranded due to water-related risks such as demand, scarcity, and flooding. Focusing on the key industries of coal, oil and gas, electric utilities, and metals and mining, it is apparent that US$15.5 billion of assets have already been stranded or are currently at risk.

Climate-related Financial Disclosure and TCFD

The International Financial Reporting Standards (IFRS) announced the formation of a new International Sustainability Standards Board (ISSB) that will establish new disclosure standards to better inform investors. The ISSB will consolidate existing organisations (including the Task Force on Climate-related Financial Disclosures) to develop a unified set of climate and sustainability disclosure requirements and recommendations.

Since April 2022, certain UK companies have been required to submit climate-related financial disclosures in their annual reporting. Current companies within scope are listed companies, banks and insurers with over 500 employees. Plus, UK registered AIM companies, LLPs, and other companies with over 500 employees or turnovers exceeding £500 million.

In March 2022 the US Securities and Exchange Commission (SEC) proposed a new ruling to enhance and standardise climate-related disclosures in the US. The ruling is broadly consistent with TCFD requirements and also includes emissions related disclosures. Comments on the proposed ruling are due this month, with legislation potentially passing in time for reporting in February 2024.

SLR’s Carbon & Energy Management team can provide support in all the above areas of carbon and energy reporting and management. If you need any assistance or require further information, then please contact us.