Posted on July 21, 2009 by David Wagner

CRC Penalties for UK Businesses

This post was written by Siobhan Hayes.

In earlier postings we introduced the UK’s carbon reduction commitment (CRC) and we have considered which companies need to comply. In this posting we are covering the penalties that UK businesses will face if they fail to comply with various reporting requirements and fail to buy and surrender carbon emission allowances by the relevant deadline.

The table below sets out the obligations of the CRC, deadlines and penalties. An explanation of the technical terms is provided after the table.

Obligation

Recurring Deadline

1st Deadline

Penalties

To register for the CRC Scheme

Last working day of first year of all phases of CRC Scheme apart from first phase

30 September 2010

£5,000 plus risk of daily penalty of £500 and publication.

To provide a footprint report

Final working day of July following 1st year of a phase of CRC Scheme

29 July 2011

£5,000 plus daily penalty of £0.05 for each tonne of CO2 unreported and publication. Penalties increase if over 40 days late.

To provide a residual measurement list

Final working day of July following 1st year of a phase

29 July 2011

  

To provide an annual report

Final working day of July following end of Scheme Year

29 July 2011

£5,000 plus daily penalty plus £0.05 for each tonne of CO2 unreported and publication. Penalties increase if over 40 days late or if reports are incorrect.

To provide directors signed statement of record

Final working day of July following end of Scheme Year

29 July 2011

  

To comply with the performance commitment

Final working day of July following end of Scheme Year

29 July 2011

Obtain allowances to cover shortfall and £40 for each tCO2 of shortfall and publication and blocking

To keep records

Ongoing

  

Enforcement notice and for serious breaches penalty of £5 per tCO2 of previous year’s emissions

To co-operate with the EA

Ongoing

    

 

Registering for the Scheme involves providing the scheme administrator, the Environment Agency (EA) with details of the group of companies (parent and subsidiaries), specific details about the parent company including name, place of business, email and telephone contact point and usual company registration information together with those details for each subsidiary company that individually would be obliged to comply with the CRC Scheme.

The Scheme Year runs from 6 April each year. 

The first phase of the Scheme is three years from April 2010 when carbon will be sold at £12 per tonne. The subsequent phase of five years will see carbon allowances being sold at auction in advance, more allowance trading and a safety valve linked to the EU ETS.

The footprint report will cover the first Scheme year (starting in April 2010). This needs to contain details of all energy consumption (electricity, gas and any other energy consumed excluding transport fuel) for that year. Some of the more minor sources of energy consumption may be omitted but the footprint report must cover a minimum of 90% of total energy consumption. Even companies with climate change agreements (CCAs) and those in the EU ETS will have to compile a footprint report. Footprint reports will be required at the start of each phase of the CRC Scheme.

Residual measurement lists have to be provided for anything other than main electricity and gas consumption. There are detailed regulations about residual measurements, how these are dealt with. The cost of buying allowances for residual energy is, effectively, increased under the CRC Scheme.

The annual report which has to be provided by the end of July following each Scheme Year needs to show total relevant energy consumption broken down for electricity, gas and other fuel and principal subsidiaries who would qualify for the CRC alone must be reported on separately. There are details for renewable electricity that may have been generated, ROC’s and climate change agreements as well as energy that might not be covered by the Scheme. Basically, full information should be obtained and retained by UK businesses to ensure that the annual reporting requirements can be complied with in time.

Directors will have to sign the statements on behalf of their company or group of companies when reporting to the EA.

The performance commitment is the fundamental obligation behind the regulations. At the end of each Scheme Year UK businesses must hold sufficient carbon allowances to cover all of their carbon emissions (other than from transport) in the UK throughout that Scheme Year. There are exclusions for companies covered by CCAs and those falling within the EU ETS. As can be seen from the table above failure to comply is intended to be expensive. 

Audits will take place and the CRC regulations impose extremely detailed record keeping obligations. Records have to be available to the EA as Scheme administrator who will audit a large number of participants during each Scheme Year. Records must be kept for the duration of each phase of the Scheme to which the records relate plus a full five years afterwards unless there is a dispute, in which case the records must be kept to the end of the dispute.

Publication is one of the penalties for non-compliance. The EA will make a public statement about failure to comply. Companies who place corporate social responsibility high on the agenda will be keen to avoid this.

Blocking is another punishment for failing to comply which means that the person participating in the Scheme will unable to access its allowances, unable to trade them and unable to comply with the obligation to surrender them at the end of each CRC Scheme year. Carbon allowances will be held in an ‘account’administered by the EA and effectively the company involved in the transgression will no longer be able to deal with its account Valuable allowances will be inaccessible.

Delay will lead to an increase in the penalties as the regulations provide that some of the penalties will increase if the UK business is over 40 days late in performing.

It is clear that the penalties will be capable of acting as a deterrent although the major advantage of complying with this legislation is not to avoid the penalties but to reduce energy costs for the UK businesses involved.

As ever with these postings this is based on draft Regulations which may change.
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Posted on May 5, 2009 by David Wagner

In the UK, Some Lessons Learned from Buncefield

This post was written by Indeg Kerr and Siobhan Hayes.

In the UK, the High Court issued judgment at the end of March in the civil litigation to decide on liability following the 2005 explosion at the Buncefield oil storage depot. The judgment raises a number of practical management issues to be considered by anyone operating a facility covered by the Control of Major Accident Hazards Regulations 1999 (COMAH) or simply managing hazardous substances in significant quantities. This article provides an overview of the judgment and outlines significant issues to consider.

In the March 20, 2009 judgment, the oil company Total was found to have been negligent and liable in nuisance to claimants inside and outside the perimeter of the site. In addition, Chevron (who was Total's joint venture partner) was found not liable to contribute. The way is open for thousands of reported claimants to seek hundreds of millions in damages. The insurers covering some of the other companies involved at the site (who had already paid out some claims) may try to recover some of the money paid out.

The prosecutions for any criminal liabilities arising as a result of this incident have not yet been heard. The Health & Safety Executive is prosecuting Hertfordshire Oil Storage Ltd (HOSL) under the Control of Major Accident Hazards Regulations 1999 (COMAH). HOSL was the Total/Chevron joint venture company at the time. Interestingly, the HSE is not proceeding against Total and this anomaly may not be explained until the criminal proceedings are heard.

Furthermore, the calculation and recovery of damages will take some time following the High Court judgment, but some parts of the judgment have dealt with pure economic loss suffered by some of the claimants. This has always been more difficult to recover under English law than recovering compensation for physical damage. The intricacies of the shareholdings, joint venture agreements and employee relationships in this case are extremely complex and much of the High Court judgment was tied up with them.

Practical Issues
The judgment has pointed to a number of practical management issues to be considered by anyone operating a facility covered by COMAH or simply involving hazardous substances in significant quantities. Some of these are just applied common sense and most are not new law, but, as a result of this verdict, note:

  • The use of joint venture companies will not automatically shield joint venturers from civil liability, particularly when one of them continues to employ the employees and control how they work. Total had vicarious liability for the negligent acts of Total's employees at Buncefield, even though the site was under the control of the joint venture company. Total, not HOSL, employed and supervised the relevant employees.
  • Clients using joint venture companies in this situation need to make it clear internally to staff, to the organisations that deal with them, and to all relevant authorities, who is operating their site. In this case, some of the documents produced at court referred to the joint venture company as operator and some referred to Total. It was Total who prepared the COMAH safety report and sent it to the HSE without even supplying a copy to the joint venture company. Total's own employees were inconsistent and unclear. Paperwork and actions must be both clear and consistent.
  • Clients need clear written instructions for their operations, even for operations that are thought to be routine. The paperwork needs to be in good order. The judge gained a clear impression from the evidence that practices within the Buncefield control room were sloppy (at best). He pointed to an overall lack of planning and monitoring of the oil filling operations. He said that written instructions would form the standards for supervisors to be trained, monitored and disciplined. Where these were missing, he could only conclude the company's practices were poor.
  • Do not think that you can rely on a contract clause to be indemnified against your own negligence. A long history of cases has made this very difficult to achieve, especially where the indemnity wording is in general terms. The judge held that Total could not rely on the general indemnity provisions in the joint venture and associated agreements to cover them for their negligence.
  • If you have a contract to operate a facility where you do not have any ownership or are not entitled to possession of the facility, then you are unlikely to be able to recover the loss of profits or additional operating costs if the facility is damaged by the negligence of a third party. In this case, Shell had a contract to run and operate a pipeline from Buncefield to supply aviation fuel to various airports including Heathrow. They used the pipeline but did not own it and were not "in possession," so could not recover compensation for being unable to supply that fuel, or for the additional costs of supplying some fuel by road. They could recover the cost of the lost fuel arising as a result of the explosion. When negotiating contracts for vulnerable facilities, realise the consequences of the structure of the arrangement, and remember to draft contract clauses to cover your position.
  • Operating within the scope of a permit where hazardous substances are used or stored will not provide a defence against all the possible criminal sanctions or potential civil liabilities that can arise if hazardous substances escape and cause damage.
  • In addition to the existing range of common law claims and criminal liabilities, new regulations (the Environmental Damage (Prevention and Remediation) Regulations 2009) have just come into force for England. They deal with the remediation of environmental damage to natural habitats and cover removal of the threat of that damage. Liabilities under these Regulations will only apply to damage occurring after 1 March 2009 in England. Similar Regulations will apply to the rest of the UK shortly. Operators of sites containing significant amounts of hazardous substances might care to note that the duties imposed by these Regulations include notifying the relevant regulatory authorities of environmental damage or the imminent threat of it, and include taking the steps necessary to remediate any damage caused or to prevent it happening altogether.
     

Conclusion
Environmental liabilities in the UK overlap. In this case, the joint venture and associated agreements were complicated by various corporate takeovers in the past. What was clear was that Total had been negligent. All COMAH site operators and anyone working with significant quantities of hazardous substances should make sure that adequate systems are in place to operate safely, and that these are written down and clearly communicated to all staff.
 
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