Environmental Law ReSource : Environmental Lawyer & Attorney : Reed Smith Law Firm : Climate Change, Sustainability

The Environment Agency (EA) manages the CRC and compiles the league table. This year the rankings are based only on two specific early actions that each participant could have taken to improve their energy efficiencies. The first is the installation of automatic metering and the second is how much each participant’s emissions are covered by the Carbon Trust Standard (which certifies organisations that achieve reductions in carbon emissions and commit to reduce them further in future) or another equivalent and EA-approved carbon reduction scheme.

Critics would say that these are very simplistic measures and would not take into account any other energy efficiency measures which had already been put into place. They also point to the fact that those who took their actions too early get no credit for them in this league table. Organisations generating electricity from renewable sources for their own use whilst potentially very ‘green’ do not count in the league table rankings (and are dealt with in a complex way for CRC reporting and buying allowances).

The league table gets a bit more interesting next year when, in addition to the metering and carbon reduction scheme standards, the ranking in the league table will be affected by two additional factors:

• The participants’ percentage change in their CRC emissions when compared to the first CRC year’s emissions; and
• The percentage change in annual CRC emissions per unit of turnover (or revenue) that will recognise organisations that are growing sustainably.

The government has said that it may revise the reputational element of the CRC when it sees how it operates in the first few years. A number of organisations have been critical of the league tables. The British Retail Consortium has called for them to be scrapped. Many others are critical. They certainly serve far less purpose now that there is no repayment to participants based on their position in the table.

Nonetheless, there are some interesting facts and figures in the table though. We noticed, for example, that:

• The Ministry of Defence wase the biggest emitter of CRC measured CO2 (1,754,541 tonnes) and if their emissions remain the same for year 2 of the CRC, the Ministry’s bill for allowances will be just over £21 million (at the likely fixed price of £12 per tonne); and
• The Charity Commission emitted 382 CRC tonnes of CO2 and would, if nothing changes, spend £4,584 on allowances.

The first time the obligation to buy allowances to cover CO2 emissions will apply is 2012. When costs have to be budgeted and paid for we expect companies will be more motivated than before to take steps to reduce costs, even if these are long term plans that do not immediately show up as a higher position in the CRC league table.

As originally envisaged, the CRC was going to reward those cutting their carbon emissions by refunding them the cost of their allowances many months after they had originally bought them. Plenty of controversy arose as to how this was going to be measured and calculated but the original idea of the CRC was that it was revenue neutral for the UK Government. Not surprisingly, given the state of the UK economy, the proceeds from selling the carbon allowances will now form part of the public finances.

There is no doubt that businesses, particularly those with a keen interest in green issues, will be disappointed by the loss of the refund for those improving their emissions. They will see their costs increasing. On a tiny positive note, the change means that businesses will know with more certainty at the start of each year what the CRC will cost. We wonder if more landlords will now try harder to get tenants to pay a share of the building’s CRC costs now the complex refund provisions have been abolished.

The recent report from the Committee on Climate Change on reducing the complexities of the CRC is already out of date and we await developments but in the meantime any business that thinks it has to comply but missed the September deadline for registration should still work on their compliance process. See our posting outlining the CRC Scheme if you are still unsure.
We have saved the good news until last! Under these recent changes, the only sweetener that the Government has offered is that the first sale of allowances to cover the CRC year 2011 - 2012 will now take place in 2012 and not 2011 as previously planned.

For advice or to arrange a client workshop get in touch with your usual contact at Reed Smith or the authors.
 

Who will be in the CRC Scheme?

• Businesses that, in 2008, had at least one half hourly electricity meter and consumed over 6,000 MWh of electricity will initially be full participants in the scheme. It has been estimated that this would be equivalent to an electricity bill of £1,000,000.
• Businesses that, in 2008, had at least one half hourly meter but consumed less than 6,000 MWh of electricity will initially have reporting requirements only under the CRC.
• All businesses with half hourly meters will soon receive information packs from the EA which will start the compliance process.

Which companies need to comply?

• Companies in groups count as one undertaking for the CRC and the highest UK parent will have to comply. One or more UK subsidiaries of an overseas parent will generally be grouped as one undertaking for CRC compliance.
• Joint ventures and those with complex corporate structures need to work out now who will have what obligations under the CRC. Joint venture companies’ energy use will be aggregated with the majority shareholder’s own group’s figures.
• For the initial period of the scheme you need to consider the group structure as of 31 December 2008.
• Franchisors will be grouped with their franchisees for CRC purposes where the franchisor specifies how the franchisees’ premises are to be used and equipped. This will apply equally to other businesses running vertical distribution like motor manufacturers being responsible for their authorised dealers.
• Schools, universities and the public sector will fall into the scheme under specific rules.
• Subsequent blog postings will look at some of the complications for groups, joint ventures, franchisors and complex organisations in more detail.
   

What has to be measured and reported on?
Although the qualification for the initial phase of the CRC scheme is based on 2008 electricity consumption, organisations will need to report on 90% of all energy consumed (excluding transport fuel). Small energy sources can be ignored by complex businesses once they have covered 90% of their energy but once the scheme is running there will be compliance complications surrounding this 90% figure.

When does this start to cost money?
There may be immediate costs for businesses in the information gathering exercise for energy consumption, in monitoring, reporting and, shortly, registering under the scheme. However, the first time allowances have to be bought is 2011 but there is a double charge in 2011 where allowances are bought to cover 2010 and 2011. After that there is an annual process for buying and surrendering allowances and receiving refunds.

The initial cost of allowances will be fixed by the government but after the first three years of the scheme, allowances will be auctioned and traded. Costs will then vary in the market place.
 

What should businesses do now?

• Determine whether you need to report or buy allowances. Your electricity suppliers can tell you whether you have any half hourly meters if your records do not show that.
• Consider the implications of your UK group structure as on 31 December 2008.
• Set up an internal system to provide information to the highest UK parent company of your organisation or elect that one sister company will deal with compliance.
• Select a board director to take responsibility for CRC as reports will have to be signed at board level.
• Train and authorise staff to deal with CRC.
• Work out where all your fuel sources are and how you monitor them.
• Take early action to improve your energy efficiency. Not only will this cut your bills now but it will help you to improve your place on the league table of CRC businesses which increases the amount of your refund in due course.
• Take early advice if you have any uncertainties about your organisation and the scheme. Useful advice can be found on the Climate Change pages of the Department of the Environment Food and Rural Affairs website. We can provide advice on the draft Regulations.
• Remember to forecast and plan ahead for the double charge in 2011.
• Investors who have energy contracts for their let properties should review their leases to see if CRC costs can be recovered and new leases being granted should contain new wording so that there can be no doubt about cost recovery.
• Continue to read our CRC blogs by subscribing to the feeds or by e mail
   

Small Print
We have based this note on draft regulations which may, of course, change.