The Legal Classification of UK's CRC Emissions Allowances
This post was written by Luca Salerno and Siobhan Hayes.
In earlier postings we have introduced the UK’s Carbon Reduction Commitment (Energy Efficiency) Scheme (“CRC”) and have considered the impact for companies and groups and penalties for non-compliance. This note considers briefly what the problems are in the legal classification of carbon emission allowances and the issues that will need to be resolved by the time businesses start trading them.
What will a CRC allowance be? Will an allowance be private property or an administrative grant or a licence? And are the Regulations going to create the method and mechanism for trading allowances? Properties and companies are going to be bought and sold and organisations will have to offload or acquire allowances. Contracts are almost certainly going to have to cover buying and selling them so to do that well for clients we need to know what these allowances are. That will help us to understand the best way for the parent company in a UK group to sell its allowances to the buyer when the property is sold by a subsidiary.
There are other questions that need to be addresses:
- At some point we need to know how the sale of allowances will be treated in tax terms? Could this affect the structure of a deal?
- Will it be different if the parent company owning the allowances is registered in a jurisdiction other than the UK?
- Can they be charged to a bank lending money secured on property? If they are not how will a bank deal with a sale?
- What will happen to insolvency practitioners running companies where parent companies hold allowances?
The Financial Markets Law Committee (FMLC) has been looking into a parallel issue because Emissions Allowances under the European Union Emission Trading Scheme (EUAs) have been in existence and traded for some time. The FMLC’s extremely useful paper on the subject is available here.
By its very nature the trading of EUAs works over a number of jurisdictions and the FMLC concluded that emission allowances have aspects which are administrative grants as well as being private property. Their view is that the lack of certainty about the classification of EUAs could cause problems in the market for trading emissions and it seems likely that the trading of CRC allowances will be similarly hampered if their status is not clarified.
For anyone interested in the detail we really do recommend a read of the FMLC paper.
