Carbon Reduction Commitment Are you affected? April 2009

Transcription

1 Carbon Reduction Commitment Are you affected? April 2009 What is the CRC?... 2 Who will have to participate?... 2 Summary... 2 Identifying potential qualifying undertakings... 3 Are there any exemptions?... 4 Transport exemption... 4 CCA 25% exemption... 4 CCA residual group exemption... 4 How will the CRC work?... 5 Summary... 5 Which emissions will be covered?... 5 Introductory and capped phases... 5 League table... 6 Recycling payment, bonuses and penalties... 7 Non participant obligations... 7 What should you be doing now?... 7 Comment... 8 How can Mills & Reeve help?... 9 This briefing note provides an introduction to the Carbon Reduction Commitment ( CRC ) scheme as described in the Department for Energy and Climate Change s March 2009 consultation, the accompanying draft Carbon Reduction Commitment Order 2010 ( the Order ) and draft User Guide. This note replaces our March 2009 briefing. 1

2 What is the CRC? The CRC is a mandatory emissions trading scheme aimed at securing reductions in carbon dioxide emissions from large, non energy-intensive, public and private sector organisations. These organisations account for approximately 10% of the UK s total carbon dioxide emissions. It is hoped that the CRC will incentivise organisations to reduce energy consumption and to invest in energy saving initiatives. The CRC is the first major policy initiative to flow from the recently enacted Climate Change Act 2008, which included a commitment from the Government to reduce UK greenhouse gas emissions by at least 80% (compared with 1990 levels) by Although the commencement of the CRC scheme is some way off the first scheme year is expected to be the 2010/2011 financial year those affected should be preparing now. Who will have to participate? Summary Companies, partnerships, NHS bodies, universities, local authorities and other large organisations will be required to participate in the scheme if: they use half hourly metering; and their electricity consumption, through half hourly meters, was 6000 megawatt hours or more during the 1 January 31 December 2008 qualification year. (This is equivalent to an annual electricity bill in excess of approximately 1million at current prices.) Organisations which satisfy these criteria are known as qualifying undertakings. Some organisations which have half hourly meters but do not meet the electricity consumption qualifying criteria will still have reporting obligations. This is discussed in more detail below. UK Central Government departments will lead by example as they will have to participate regardless of whether or not they exceed the usage qualification threshold. The Government estimates that approximately 5000 organisations will be required to join the scheme as full participants, with as many as 15,000 having reporting obligations. Qualifying undertakings and Central Government departments are together known as participants. 2

3 Identifying potential qualifying undertakings Qualifying undertakings can be either single entity organisations or organisations consisting of a number of related entities. The identification of qualifying undertakings differs according to the type of organisation involved. Private Sector. A single company which is not part of a larger corporate structure could be a qualifying undertaking in its own right if it meets the qualification threshold. A group of companies will have to participate as a qualifying undertaking if the combined electricity usage of the highest parent company and all of its subsidiaries meets the qualification threshold. In this situation, the group must nominate a primary member which will have primary legal responsibility under the scheme and will liaise directly with the scheme administrator 1. If the highest parent company is based overseas, the parent and all parts of that organisation in the UK will be a qualifying undertaking if their combined UK electricity usage meets the qualification threshold. Overseas electricity consumption is not covered by the scheme. The overseas parent will have to nominate one of its UK based subsidiaries to act as the primary member. Where there are joint venture arrangements in place, the electricity consumption of the joint venture company will be aggregated with that of the company owning the majority stake. Where there is no majority stakeholder, the joint venture company will only fall within the scheme if it meets the qualification threshold in its own right. Public sector. Subject to the special cases referred to below, the Government is proposing that each public sector organisation with its own distinct legal status will be a qualifying undertaking and participate in the scheme in its own right if it meets the qualification threshold. This would include NHS organisations such as Strategic Health Authorities, Primary Care Trusts, NHS Trusts and NHS Foundation Trusts, local authorities and regulatory bodies such as the Environment Agency and Health & Safety Executive. Special cases. Some organisations are given special treatment when it comes to identifying qualifying undertakings. In the higher education sector, the Government has decided to group together the Colleges of the Universities of Oxford, Cambridge and Durham under their respective Universities for the purpose of deciding whether the qualification threshold is met. Therefore, individual Colleges will not participate in their own right. According to the Government, this approach will best leverage reputational drivers because the Universities have a higher name and brand recognition than their Colleges. 2 State funded schools, including City Technology Colleges and Academies, will be grouped together with local authorities for the purpose of identifying the qualifying undertaking. This means that the electricity consumption of local authorities and the state funded schools in 1 In England and Wales, the scheme administrator will be the Environment Agency. 2 Page 53 of the Department for Energy and Climate Change Consultation on the Draft Order to implement the Carbon Reduction Commitment dated March

4 their areas will be aggregated for the purpose of establishing whether the qualification threshold is met. Independent schools will only participate in the scheme as a qualifying undertaking if they (or the corporate group of which they form part) meet the qualification threshold in their own right. Are there any exemptions? There are three specific exemptions from the requirement to participate. Transport exemption This exemption applies to organisations which use large amounts of electricity for the transport of people or goods. The entire organisation will be excluded from the CRC scheme if its total electricity consumption in the qualification year 3, after deducting electricity consumed for transport, is less than 1000 megawatt hours. Electricity consumed by fixed devices, such as lifts, conveyor belts and escalators, as well as consumption relating to transport at a site for the purposes of entertainment, amusement, culture, scientific, historical or similar interest, will not be deducted for the purpose of this exemption. If the exemption applies, the organisation will not be required to participate in the CRC scheme as a full participant, although it will have reporting obligations. CCA 25% exemption Individual organisations (either single entity organisations or individual organisations forming part of a larger group) with more than 25% of their total emissions (from all energy sources) in a Climate Change Agreement ( CCA ) will be exempt from the CRC scheme meaning that emissions from that organisation will not be subject to the key requirements of the scheme. Unlike the transport exemption, eligibility for this exemption will be assessed during the course of the first year of each phase. CCA residual group exemption Where group members have been exempted from the scheme by virtue of the CCA 25% exemption, the entire group will be excluded from the scheme if its residual electricity consumption, after deducting any excluded member s electricity consumption, is less than 1000 megawatt hours in the first year of each phase. 3 In the introductory phase, which is discussed in more detail below, the qualification year is the 2008 calendar year. In subsequent phases, the qualification year will be the year prior to the commencement of the phase. 4

5 How will the CRC work? Summary Once the CRC scheme is fully operational, the Government will place a scheme-wide cap on the total amount of carbon dioxide that can be emitted by participants in each scheme year. The Government will sell off allowances equivalent to this cap; the idea being that participants will have to purchase sufficient allowances to cover their anticipated carbon dioxide emissions for the coming year. An amount of allowances equivalent to actual emissions will have to be surrendered at the end of each scheme year. Participants with insufficient allowances to cover their emissions will have to purchase more on the carbon market. Those with surplus allowances will be able to sell them. Which emissions will be covered? Emissions from electricity, gas, fuel oil, petrol, diesel, coal and liquefied petroleum gas consumption will fall within the scheme. However, some energy consumption emissions will not be covered by the CRC scheme. For example, if an organisation has emissions which fall within the European Union Emissions Trading Scheme ( EUETS ), those emissions will not also be targeted by the CRC scheme. Similarly, emissions which are governed by a CCA will not fall within the CRC scheme. These exemptions ensure that there is no double counting of the same emissions. As mentioned above, emissions generated in the transport of goods or people will not be covered by the CRC scheme. However, emissions from the use of fixed devices such as lifts, conveyor belts and escalators, as well as emissions from transport at a site for the purposes of entertainment, amusement, culture, scientific, historical or similar interest will be caught. Introductory and capped phases From April 2010, when the scheme is expected to start, there will be a three year introductory phase. During this period there will be no total emissions cap and allowances will be sold to participants at a fixed price. There will be no limit on the number of allowances that organisations will be able to buy. This will enable organisations to get used to the scheme the Government recognises that most participants will not be familiar with monitoring and reporting emissions and buying and trading allowances. The hope is that participants will become familiar with the scheme without having to deal with the complexity of a fixed volume auction or a Government imposed cap. The fixed price for one allowance during the introductory phase is expected to be 12, with each allowance enabling one tonne of carbon dioxide to be emitted. The first sale of fixed price allowances will be in April 2011, at the end of the first scheme year. This will be a double sale, where participants will purchase allowances to cover 5

6 actual emissions during the 2010/11 scheme year and forecast emissions for the 2011/12 scheme year. A further fixed price sale will take place in April 2012, covering the third and final introductory phase year. From April 2013, the capped phase will begin, which will see a scheme-wide cap on emissions being introduced and the online auctioning of a limited number of allowances equal to the cap. The Government is not intending to cap emissions of individual participants or sectors. The auctions will be held in April each year, when participants will have to purchase allowances to cover their emissions for the following year. League table At the end of each scheme year, the Government will, based on information submitted by scheme participants, publish a league table showing the relative performance of all participants. Positions in the league table will be based on three criteria. Carbon emissions Those who reduce their emissions will score more highly than those who have not. Participants will be ranked according to the percentage change in emissions. Early action This is only relevant in the introductory phase. Credit will be given to those participants who have been operating good energy management practices for some time. Those practices are limited to the voluntary installation of automatic metering above and beyond the legally required minimum and the extent to which the organisation s emissions are certified under the Energy Efficiency Accreditation Scheme or its successor, the Carbon Trust Standard. Organisational growth This is designed to give credit to organisations that can grow in a carbon efficient manner. Additional credit will be based on the change in carbon emissions per unit of turnover. Participants scores for each criteria will be combined in order to give a score for overall performance. This figure will determine positions in the league table. In the first year of the scheme (ie the first year of the introductory phase), when it will not be possible to calculate scores for the carbon emissions and organisational growth criteria, positions in the league table (and, therefore, the amount of the bonus payment/penalty see below) will be determined solely by the early action criteria. In subsequent years, scores from each of the criteria will be weighted, with the carbon emissions criteria receiving the highest weighting. Although the scheme does give credit to those organisations which have already made significant moves towards reducing their carbon emissions, this is given relatively little 6

7 weight when compared with the carbon emissions criteria. This reflects the Government s view that the scheme s primary emphasis should be on absolute carbon savings. Recycling payment, bonuses and penalties The CRC scheme will be revenue neutral to the Exchequer, ie it is not designed to raise money for the Government. The idea is that revenue raised from selling allowances, either at a fixed price or by auction, will be recycled back to the scheme participants. The Government is proposing that participants will receive a payment, called a recycling payment, in the October following an allowance sale. Regardless of what happens in subsequent years, the payment will be proportionate to participants 2010/11 emissions, which is the base recycling year. If, in subsequent years, a participant reduces its emissions, it will still receive a recycling payment proportional to its 2010/11 emissions. The CRC scheme is designed so that those organisations which reduce their emissions will receive a recycling payment which is more than the amount that they have paid to purchase carbon allowances. This, the Government argues, will be an incentive to participants to reduce carbon emissions. The CRC scheme will contain a further incentive. There will be an additional bonus payment or penalty deduction based on a participant s position in the league table. In the first year of the scheme, this is likely to be +/- 10% of the recycling payment, rising to +/- 20% in the second year and then rising 10% each year until it reaches +/- 50% in year five. The Government has not ruled out the possibility that the bonus payment/deduction could, eventually, reach +/- 100% of the recycling payment. Non participant obligations Those organisations which have half hourly meters but do not exceed the qualification threshold will still have reporting obligations, even though they will not be required to participate fully in the scheme. This obligation will apply to those organisations who used more than 3000 megawatt hours of electricity through half hourly meters in The Government has included this obligation so that it can monitor potential new scheme participants. What should you be doing now? 1 Start collating information so as to be able to calculate your electricity use for 2008, which is the qualification period, including the electricity use of any subsidiaries. 2 Organisations with more complicated legal structures, including joint venture and PFI arrangements should consider carefully what effect, if any, this will have on the calculation process. 7

8 3 In July 2009, the Environment Agency will send out registration packs to all those with half hourly meters. Those who receive these packs will need to provide information on their electricity consumption during The registration period for participants will run from April to September Now is a good time to think about ways of reducing energy usage. Those who are able to reduce their emissions stand to gain most from the CRC scheme. Reducing energy consumption will reduce compliance costs. 5 Organisations should be considering now the potential impact that the requirement to buy carbon allowances will have on cash flow. In April 2011, CRC organisations will have to purchase carbon allowances for two years and then wait six months before receiving recycling payments. 6 Organisations entering into new leases should consider the impact that the CRC will have on document drafting. Depending on the contractual arrangements in place, landlords may find themselves with responsibility under the scheme for energy used by their tenants. In this situation, landlords will want to be able to recover the cost of purchasing carbon allowances from the tenant, but the tenant will want to ensure that it receives a fair share of the recycling payment and any bonuses received by the landlord. Orthodox service charge provisions in existing leases may not necessarily assist landlords wanting to recover such costs from their tenants. It has been suggested that a voluntary good practice guidance document should be used to assist with the apportionment of costs/payments in this situation. 7 You can register your organisation with DEFRA to ensure that you are kept up-todate with the latest developments and to receive information on how the CRC scheme will work and what steps organisations can take to improve performance in the scheme. Registration is at 8 Those interested in influencing the legislation which will give legal effect to the Government s proposals can have their say as part of the Government s current consultation on the draft Order implementing the scheme, which remains open until Thursday 4 June Comment The CRC scheme will have a significant impact on the way in which large organisations operate. For the first time there will be clear financial and public relations disincentives for failing to reduce energy consumption and carbon dioxide emissions. There will be incentives for investing in energy saving design and construction techniques and for adapting existing policies and procedures to save energy. Organisations face the prospect of not only having to pay out more money in the event that their carbon emissions do not decrease, but also of being named and shamed, via the 8

9 league table, in the event of poor performance. There will be pressure from shareholders, funders and customers to improve environmental performance. In line with the Government s wider move towards ensuring punishments for regulatory breaches remove any financial gain from non-compliance, the CRC scheme will be underpinned by a robust suite of civil penalties. Failure to comply with key obligations such as the requirement for participants to register will result in immediate fixed penalties. In addition, the Government intends to publicise nearly all instances of non-compliance. The Order contains a number of criminal offences, although these are reserved for the most serious cases of non compliance. Private organisations with complicated corporate structures will have to think about which parts of their business need to be aggregated under the CRC for the purpose of establishing whether or not the organisation as a whole will fall within the scheme. For some organisations, this will be a difficult and time-consuming process. The CRC will have implications for the drafting of new leases. It will also impact upon corporate transactions such as sales, acquisitions mergers and de-mergers the Order contains detailed provisions about how organisational changes will be treated under the CRC. For some transactions, the due diligence process will have to be expanded to take account of the CRC and buyers will want to make sure that the sale and purchase agreement makes adequate provision for the transfer of any carbon allowances relating to the target company/assets. How can Mills & Reeve help? We are able to advise on the provisions of the draft Order and what your organisation should be doing now to ensure that you are ahead of the game in terms of compliance with the CRC scheme obligations. For further information, please contact either Rebecca Carriage or Oliver Ennis in the firm s Environmental Law Team or, alternatively, your usual Mills & Reeve contact. Rebecca Carriage Oliver Ennis Associate Solicitor for Mills & Reeve LLP for Mills & Reeve LLP +44(0) (0) rebecca.carriage@mills-reeve.com oliver.ennis@mills-reeve.com The contents of this document are copyright Mills & Reeve LLP. All rights reserved. This document contains general advice and comments only and therefore specific legal advice should be taken before reliance is placed upon it in any particular circumstances. Where hyperlinks are provided to third party websites, Mills & Reeve LLP is not responsible for the content of such sites. Mills & Reeve LLP is a limited liability partnership regulated by the Solicitors Regulation Authority and registered in England and Wales with registered number OC Its registered office is at Fountain House, 130 Fenchurch Street, London, EC3M 5DJ, which is the London office of Mills & Reeve LLP. A list of members may be inspected at any of the LLP's offices. The term "partner" is used to refer to a member of Mills & Reeve LLP. 9