A new carbon tax - who nicked our recycled money?

One of the facets of the Energy Bill that is wending its way through Parliament at the moment is that the "Carbon Reduction Commitment" (CRC) is going to be simplified from that introduced by the previous government last year.

Trying to explain the old CRC to the 'person on the street' is not the easiest task and I have seen many eyes glazing over. Crudely, it is a legal requirement on big organisations (including councils) to buy credits for the carbon that they emit, starting in July 2011. The amount by which emissions were reduced each year would then be used to construct a league table and the money paid for the credits would then be recycled back to the organisations according to their position on the league table. So, the good boys and girls would not only get their own money back, but they would also get some of the bad boys and girls' money too. Sort of - and I'm never sure I get it completely.

What the Energy Bill does is to ditch the recycling, effectively turning the CRC into a simple Carbon Tax in which everyone loses. This sounds like bad news, but the more I reflect on it, the more I think it's actually good.

The headline bad news is that Bristol City Council will probably have to pay something like £750,000 in the first year, based on £12/ton of carbon. In the old scheme, we would have got some or all or more of this back depending on where we came in the league table. Now we'll get nothing. The money will be going into national carbon reduction work - probably carbon capture and storage projects.

And this is the first 'good' news. The league table was unlikely to do Bristol City Council many favours. Firstly, it was based largely on annual carbon reduction and this favours the laggards who've done little or nothing in the past. Given our long-standing commitment in this area, we've already (to use a much hated phrase) picked the low-hanging fruit - we've done the simple stuff that cuts lots of carbon for little money. Basically, the more you cut, the harder the next cut is, so the system would have favoured 'dirty' councils and companies.

Secondly, it takes councils a long time to do things - even good councils. We have to consult and do legal checks and go through procurement procedures. In contrast, companies can act much quicker as they don't need to go through the same red tape. The net result is that I would have expected to find most councils in the bottom half of the table and this would have meant that our taxpayers' money could have been recycled to fleet-of-foot and deep-pocketed multinationals like Tesco.

So, my best guess is that we wouldn't have done particularly well out of the recycling system - we'd have got some cash back, but the most would have gone to reward people cutting carbon for the first time or those able to throw quick money at it. I don't think we'd have been winners, though I think we'd have done ok compared to other councils.

The big 'good news', however, is the certainty of a tax. It means you can plan. It was very difficult to get people's head around the old system - "we have to give them money and then they might give some of it back and maybe more" isn't a good basis for building financial models and doesn't make sense to accountants. Now we know pretty much exactly what CRC will cost the Council and we can factor it into things.

This is a good thing because it, for the first time, means that we can 'cost' a carbon reduction. For example, if there is a possible project that will cut 800 tons of carbon next year, it makes complete financial sense to spend anything up to £10,000 on doing it, because we'd save that in tax at £12/ton. At the moment, we have to mess around with projections of energy savings and this is messy because energy prices are unpredictable.

Where this will be particularly useful is in schools. Around £350,000 of the Council's bill will be derived from schools who contribute 40% (and rising) of the total carbon. Because schools are largely independent entities these days, there is no means of passing the tax onto the schools, even if someone wanted to - it's the Council's problem. What the new CRC system does is give the Council a financially compelling reason to proactively do things to school buildings to save carbon. Previously, the lack of clarity made this very difficult to justify as the cost saving was practically impossible to calculate with any certainty.

I hope this made some sense - I can almost hear people glazing over even through the internet!