Under the initial phases of the CRC Energy Efficiency scheme (CRC) this will not be an issue, as the amount of carbon allowances available to purchase won’t be capped. After 2013, when the first capping period begins, if your carbon allowances purchased for the year ahead is not adequate to cover the amount of emissions emitted by your business, you will need to purchase these from the secondary market.
There will be a ‘safety valve’ mechanism in place to prevent the price of allowances rising too high in both the auction and secondary market, this will be a ‘buy only’ linked to the EU ETS - with a floor price of £12 per tonne of CO2 but it will fluctuate with the prices in the EU ETS.
The UK Government will set a limit or “cap” on the amount of CO2 that can be emitted by businesses covered by the CRC Energy Efficiency Scheme (CRC) within the UK. Businesses will then be issued with carbon allowances that represent their right to emit a specific amount of CO2. The total amount of allowances issued to UK businesses cannot exceed the cap therefore limiting the total emissions to that specific level.
Businesses that require an increase to their emission allowance will need to buy credits from businesses that emit less CO2 than the allowances they have obtained, therefore creating a revenue stream for that business. The transfer of allowances is referred to as a “trade”.
During the introductory phase (April 2011 - March 2013) the cost of carbon allowances will be £12 per tonne of C02.
The secondary market allows participants to trade allowances with other participating businesses. If a business has a deficit in allowances they can purchase these, at an agreed cost per allowance, from other participants or third parties.
This is an auction where a fixed number of identical commodities are sold for the same price. The buyers in the auction bid a maximum price that they’re willing to pay per item and the number of items required at that price. Usually these bids are sealed and the auctioneer then distributes the commodity to the highest bidder first, allocating them the number of items requested, then the second highest bidder and so forth until the commodity is exhausted.
The actual price each buyer pays for the item is equal to the lowest winning bid prior to the commodity becoming exhausted.