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

Since it looks like there will be no new agreement to a commitment period under the Kyoto Protocol, negotiators are aiming to agree on when Kyoto Protocol parties can agree on new commitments. The EU's aim is for binding and enforceable emission cuts to be agreed to by all parties and to have a deal by 2015 to take effect by 2020 at the latest. (This five year lag period may be ambitious; it took the Kyoto Protocol original commitment period eight years to be ratified and come into force after it was adopted).

China, the world's biggest carbon emitter, has suggested it might sign up to a legally-binding deal to cut emissions after 2020, but it has set conditions. China's conditions include that (1) other big emitters (including US and India) sign up to a legally-binding deal to cut emission; and (2) finance is provided under a Green Climate Fund agreed at talks last year in Cancun, which aims to channel up to $100 billion a year by 2020 to help developing nations. In the United States, the second largest global emitter, environmental issues have become a heated argument between Democrats and the Republicans. It was widely supposed going in to Durban that any type of commitment out of the United States before next year's presidential elections was unlikely. Not surprisingly, Todd Stern, the U.S. special envoy for climate change, said China's conditions were not acceptable. But the basis he gave was because the United States would not agreed to any condition on compliance: "no condition of receiving the financing, no trap doors, no Swiss cheese (with holes) kind of agreement." Jonathan Pershing, deputy U.S. climate change envoy, left open the possibility that countries may increase their emission cuts but he noted that the pledges were just made at the 2009 Copenhagen climate summit and codified last year in Cancun, Mexico and that a new one here in Durban was unlikely. However, note that the emission cuts listed in the Cancun Agreements are not binding and enforceable under the Kyoto Protocol.

In sum, although the final resolution remains to be seen, it seems unlikely that COP 17 will yield an agreement on a new commitment period under the Kyoto Protocol or secure significant additional financing to help poorer nations adapt to a warmer planet.

Who will be in the Scheme

The business sectors that will be involved in the CRC Scheme are the large financial corporations and institutions, multiple retailers, supermarkets, hotel chains and large office occupiers. The public sector will also have to comply.

Some industries are high intensity energy users and already have to comply with the EU’s Emissions Trading Scheme (“ETS”). The CRC will catch low intensity energy users who use a significant amount of electricity in 2008 some of which is supplied through a half hourly meter. If you have at least one half hourly meter and expect to pay over £500,000 for electricity this year you are likely to be in the Scheme - for more information see below.

UK parent companies will be responsible for the compliance of the whole of their UK group and franchisors for their franchisees – more below.

The Scheme (in brief)

Electricity use now governs whether the Scheme will apply to you but if it does the Scheme will cover gas, electricity and other fuels (other than transport fuel) used by the organisation.

In late 2009 the affected organisations will have to report on their electricity usage for 2008 and gear up for compliance with the Scheme in 2010.

In 2010 those organisations in the Scheme will have to collect information about almost all the energy they use as this shows what their carbon emissions are. They will have to buy allowances to cover every tonne of carbon emitted and deal with the reporting requirements to be set up by the Scheme. The first requirement to buy allowances will arise in 2011.

The next phase of the Scheme is to reward those organisations which improve their energy efficiency overall and penalise those that do least well. A league table of the Scheme members’ energy efficiency performance will be drawn up. The incentives will be a refund of part of the cost of the allowances and the penalty will be a surcharge.

There is an initial simplified start to the CRC Scheme for the first three years so that businesses can gain the expertise they need in monitoring energy consumption and forecasting their emissions to buy the necessary allowances. They will have some time to create the management strategies they will need and after that in 2013 emissions trading will come into full effect. This is being called a cap and trade scheme. 

Who will be in the CRC Scheme?

If you have half hourly meters for your electricity supplies and your UK group uses over 6,000 kilo watt hours (kWh) in 2008 (estimated cost being over £500,000) you will fall within the Scheme. In the UK (but excluding Northern Ireland) half hourly meters are installed by the electricity suppliers when you are a significant user of electricity. If you do not know whether you have half hourly meters (and the definition of half hourly meters is likely to be a bit convoluted) then you can ask your electricity supplier. Although electricity use in Northern Ireland will count towards your supply calculation it is metered differently to the rest of the UK and a different test will apply.

If only some of your electricity supply comes from half hourly meters but your overall consumption for 2008 is going to be more than 6,000 kWh then for now the only safe thing is to assume you will be within the Scheme.

Earlier this year, the electricity suppliers sent information to all those organisations receiving half hourly bills inviting them to log their contact details so you may already be involved. 

A registration pack should be supplied to organisations with half hourly meters in July 2009. The Scheme begins in April 2010.

The ETS will not double up with the CRC Scheme but how overlap is to be avoided will be determined by the detail of the Regulations.

Which UK Company in the Group will have to comply?

Not all corporations operate a simple group structure where there is a parent with a series of wholly owned subsidiaries. If they do then the ultimate UK parent will have to comply for the whole of the UK group. 

Joint venture companies will be treated as separate entities for CRC if no party owns more than 50% but a shareholding of 51% or more will put the joint venture company into the CRC group of its majority shareholder.

Companies may share an electricity supply and you will need to know who signed the electricity supply contract. That counterparty to the supply contract will be the relevant company for CRC purposes.

The Government are proposing that a UK franchisor will have to comply for its UK franchisees. Again we need details from the draft regulations to understand how that will work in practice.

The company complying will need to keep separate records for its subsidiaries (or franchisees).

How will this affect landlords and tenants?

Many occupiers receive their electricity supply via their landlord by paying a fair proportion of the landlord’s electricity supply through a service charge. It is not possible to predict how the Scheme will work within existing service charge clauses; how to deal with any refund received by the landlord for energy efficiencies made in the year where CRC costs were paid by the tenant in the previous year, let alone the complications of how to deal with assignments of leases part way through the Scheme years.

The Government report on the consultation anticipates CRC costs being passed on to tenants and refund payments going into a separate fund designated for energy efficiencies but that does not give us any clues about how the energy efficiencies of a large group of companies can effectively be translated down to individual occupiers.

Will it be sensible for landlords to help as many of their tenants as possible to sign up directly for electricity rather than have a central supply and recharge the costs? We can only try to work this out when we see the detailed Regulations.

What should be done now?

• Work out if you are likely to fall within the CRC Scheme. Contact your supplier now if you do not know whether you have any half hourly meters.
• If you have a complex group structure, work out now how it works for the Scheme
• Set up effective reporting from subsidiaries to head office (or from franchisees to the franchisor) covering electricity this year and later all fuel sources (other than transport)
• Start to consider your long term energy management strategy
• Remember that all this compliance might lead to lower fuel consumption and significant savings for your organisation as well as a modest refund of the allowances you have to purchase
• If your stress levels are rising at the thought of all this take some comfort from the fact that the Scheme is not a revenue generating exercise by the Government. The refunds to the most energy efficient organisations will make the Scheme revenue neutral!

The small print

The Government have committed to the CRC in the Climate Change Act. This alert is based on the consultations to date but we need to see the detail of the Regulations to work out the detailed consequences for us and our clients.