New Carbon Trading Legislation in the UK: Its Affect on UK Corporations Using Energy (The CRC Scheme)
Jul 20, 2010 QuickCounsel Download PDF
CRC (the Carbon Reduction Commitment Energy Efficiency Scheme), the UK-only mandatory carbon-trading scheme, began in April 2010. It is the next stage in the UK Government’s ambitious carbon dioxide reduction programme and it is vital to achieving the UK’s overall target of reducing energy emissions by 2050 by at least 80% compared with the 1990 baseline.
Every corporation using energy in the UK needs to understand CRC and its implications. Assuming that any member of your group had at least one half hourly electricity meter in UK property in 2008, you have until 30 September 2010 either to register with the Environment Agency or make an information disclosure on-line (depending upon your electricity consumption through those half hourly meters in 2008).
Corporations that have to register for CRC must buy annual allowances matched to their anticipated energy use. The more energy a corporation consumes, the more expensive it will be to comply. This, combined with the fact that increasing energy efficiency will help organisations to reduce their energy costs, is intended to encourage corporations to reduce their CO2 emissions.
If CRC is successful, it is likely to form a template for carbon trading schemes in other EU Member States.
Who the CRC Affects
The principal obligations fall on any UK corporation that consumed more than 6,000MWh in total of electricity via half hourly meters in 2008 (equivalent to around £500,000 worth of electricity). A half hourly meter is one which is able to measure electricity consumption supplied at least every half hour and is used by electricity suppliers to calculate the amount of electricity used.
Electricity usage of groups in the UK as of 31 December 2008 is aggregated for this purpose, using the broad definitions of “subsidiary undertakings” in the Companies Act 2006. Where ultimate ownership of a corporation is based outside the UK, then one of its UK entities must be nominated to take responsibility for compliance.
Any corporation that qualifies, based upon the above criteria, will be caught by CRC for the three-year introductory phase (April 2010 – March 2013), even if its electricity consumption were to drop below 6,000MWh of electricity during that phase. Qualification for the next phase of CRC (which lasts until March 2018) will be based on energy usage for the year April 2010 – March 2011. Qualification criteria for that phase have not yet been set.
If a corporation's “group” electricity consumption in 2008 was less than 6,000MWh, but it had at least one half hourly meter, it will be exempt from full participation, but it will still need to make an information disclosure on-line.
How to Comply
Corporations that qualify as full participants must register on-line before 30 September 2010. A senior officer must be named as part of the registration process. This means a director or someone of equivalent standing within the corporation.
If a corporation is a party to a Climate Change Agreement, then it still has to register, however it may be exempt from some of the obligations of CRC, subject to certain criteria being fulfilled.
If any corporation within the “group” would qualify for CRC in its own right (“a significant group undertaking”), it can be disaggregated from the rest of the “group” (i.e. it will participate in CRC independently from the rest of the “group”). This option is only available, however, if a number of conditions are fulfilled, including the “group” registration having been completed by 31 July 2010 (the date has just been put back by one month from 30 June 2010), and the remaining “group” continuing to meet the qualification criteria after disaggregation.
Full participants must buy CRC allowances from 1 April 2011 to cover CO2 emissions arising from their UK energy consumption (electricity, gas and other fuel). The year from 1 April 2010 is data reporting only. There are civil and criminal penalties for noncompliance.
From 1 April 2011 until 31 March 2013, allowances will be sold at a fixed price (£12 per tonne of CO2) and there will be unlimited allowances. From April 2013 onwards, the Government will place a cap on the number of allowances. Allowances from April 2013 will be sold at auction, and the price will be dependent upon demand each year.
Any corporation which finds during a year that it has not bought sufficient allowances will need to buy them on the secondary market or via the EU Emissions Trading Scheme, at a cost in either case which may well exceed the fixed price of £12 per tonne of CO2. Some element of carbon trading is likely to be necessary, and corporations need to consider what their strategy towards buying allowances is going to be.
At the end of each scheme year, a full participant must surrender allowances to cover all energy emissions during that scheme year. Auction revenues (i.e., money raised by the Government in its annual sale of allowances) will be recycled back to CRC participants in proportion to emissions, and respective positions published annually in a performance league table.
Any corporation that is a full participant in CRC must maintain a detailed evidence pack, or collection of records, to be used to demonstrate compliance with CRC, and to enable the Environment Agency for audit purposes. There is detailed guidance available as to the requirements for the evidence pack.
The Likely Cost
It is estimated that 6,000MWh of electricity in 2008 equates to approximately £38,500 worth of allowances, based upon £12 per tonne during the introductory phase. This covers electricity only however, any corporation caught by CRC will need to buy allowances to cover its energy usage generally (i.e. electricity, gas, fuel other than any used for transport).
The Impact of Buying and Selling Real Estate and Corporations on CRC Obligations
If a corporation buys or sells real estate during a CRC year, this will simply affect the number of allowances that are needed to comply. It may find that it has bought too many or too few allowances.
The same applies for purchases and sales of subsidiaries, except where the subsidiary in question would qualify for CRC in its own right. In those circumstances, the idea is that the responsibility for that subsidiary’s emissions will transfer to the purchaser with effect from the start of the CRC in which the purchase took place. In addition, historic emissions baselines and revenue recycling calculations will be adjusted to reflect the change.
Landlord and Tenant Situations
Where tenants pay their own energy bills, then CRC is their responsibility. Where the landlord pays the energy bills, then CRC is its responsibility, and the current thinking is that CRC costs may not be recoverable through the lease without specific wording to cover the situation.
Conclusion: Steps to Take Now
If your corporation uses energy in the UK and has not already assessed whether it qualifies for CRC, then urgent action is required. As a starting point, you need to consider which corporations formed part of your group structure (including joint ventures) as at 31 December 2008, and then whether any of those corporations had at least one half hourly electricity meter in 2008.
If so, you will need to assess aggregate electricity consumption through those meters in 2008 to decide whether you must register or make an online information disclosure. You must then nominate a group company based in the UK to take primary responsibility for compliance, and commence the extensive data collection exercise which CRC requires.
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