Small companies fear extra burden - 22 May

Small companies have been warned that they could find themselves caught up in a new emissions trading scheme that is supposed to be aimed at big business.

In tomorrow's energy white paper, the government is expected to press ahead with the scheme to cut energy consumption among non-intensive users.

Many of the details will be decided only after further consultation. But manufacturers gave warning yesterday that the plan risked hurting industry by imposing extra burdens on small and medium-size companies while doing little to promote energy efficiency.

The new scheme would be the latest in a growing list of incentives and restrictions on business aimed at curbing greenhouse gas emissions. EEF, the manufacturers' group, described the new plan as "a sledgehammer to crack a nut", saying its research had suggested that one in 10 of its members could be affected.

The scheme's main targets are meant to be large service-sector organisations such as banks and supermarkets, for whom energy consumption is a relatively small part of total costs. The idea is to create an extra incentive to focus on energy efficiency for managers who generally concentrate on staff and buildings costs.

But the EEF argues that some manufacturers in industries such as defence, electronics and motor components with as few as 50-100 workers could be caught.

In consultations by the Department for the Environment, Food and Rural Affairs (Defra) since the scheme was first suggested in 2005, two possible qualifying thresholds have been suggested for companies: yearly electricity consumption of 3,000 megawatt hours or 10,000 MWh. Ministers think the higher threshold would require about 1,200 companies to take part, or about 5,000 under the lower. The EEF thinks that might include 600 of its members, and possibly thousands of other manufacturers.

The government's own regulatory impact assessment exercise suggested that with the lower threshold, the cost of administering the scheme would be higher than the investment in energy efficiency that would result from it.

"We have already had the emissions trading scheme, the climate change levy and so on," said Roger Salomone, the EEF's energy adviser. "Instead of stimulating investment, this might just take money away from projects that invest in energy efficiency."

However, Tony Ward, of Ernst & Young, defended the plan, saying that although it was expected to save less than half a percentage point from Britain's carbon dioxide emissions, its real value could be its effect on managers' attitudes to energy use.

He said: "The government is trying to bring greater attention to energy efficiency and trying to work towards behavioural change. Perhaps this just tilts the balance of energy demand."

The EEF suggested the best balance of costs and benefits could be achieved by choosing the higher threshold. The scheme has been a Defra initiative, pushed by David Miliband, environment secretary, ra-ther than Alistair Darling at the Department of Trade and Industry, who takes the lead on energy policy.

The proliferation of policy instruments for tackling greenhouse gas emissions has raised concerns about variations in the cost-effectiveness of different measures. In January, Ofgem, the electricity regulator, criticised the renewables obligation for electricity suppliers, saying: "The current mechanism is a very expensive way of reducing carbon emissions compared to other alternatives."

What businesses will have to do?

Although the details of how the new emissions trading scheme would work have yet to be decided, background papers for the environment department give businesses a pretty good idea of what to expect, writes Ed Crooks.

Companies and public bodies covered by the scheme would need to keep a record of their electricity consumption, and perhaps their other energy use, and report it to the government. They would then be set targets for cutting that consumption year by year, based on government estimates of the energy savings that were realistic for their industry.

Companies that failed to meet their targets would have to buy more allowances, initially from the government. Later, perhaps after two years, allowances could be bought only from companies that had exceeded their targets, creating an incentive for companies to cut their energy use further.

The scheme would be self-reporting, with one company in 20 audited by inspectors each year.