Carbon Reduction Commitment - more changes ahead

30.06.11

 

Greg Barker, the Minister for Energy and Climate Change, has today announced proposals to simplify the Carbon Reduction Commitment scheme (CRC). This follows a suite of consultations published in January. The proposals are designed to reduce the administrative burden of the CRC on businesses and increase flexibility in how participants take part in the scheme.

The key proposals affecting the property sector are:

Sales of allowances

The CRC scheme is divided into phases. During the introductory phase, it was always intended that allowances would be unlimited and sold at a fixed price. The current legislation anticipates however that, during subsequent phases (from 2014 onwards), sales would be by way of a government "auction". This would see the total available allowances capped and participants would have to bid for them. Government now proposes to drop the auction mechanism for phase two. Instead, unlimited fixed price allowance sales would apply for this phase as well as the introductory phase. This may be reviewed for subsequent phases.

In the current compliance year (2011-12), allowances are only available for purchase at the end of the year (effectively in arrears). Government proposes that this should continue for the remainder of the introductory phase. However, from phase two onwards, it is now proposed that there will be two sales per year (one at the beginning, and one at the end). The price of allowances in the second sale would be higher than that in the first, to encourage participants to budget and control their energy consumption. Organisations would still be able to trade allowances on the secondary market.

Participants may, therefore, choose to buy allowances in arrears rather than in advance. However, landlords looking to recover the cost of allowances from their tenants may find resistance to that, in view of the increased cost. When selling investment properties, landlords would also need to ensure they were able to recover the cost of allowances bought after the sale for energy consumed before it - a point highlighted in our previous alert.

Simplification of the organisational rules

Currently, groups of organisations need to participate as one entity. This can be particularly ill-suited to a real estate industry focused on individual properties. Although it is possible under the current rules to "disaggregate" certain parts of a group to participate separately, this can only be done in limited circumstances.

The government proposes to allow groups to be split for CRC purposes in line with their natural business and management structures. The existing requirement for the remainder of the group not to fall below the qualification threshold would no longer apply.

Other proposals

Other proposals include:

  • A reduction in the number of fuels covered by the scheme from 29 to just four: electricity, gas, kerosene and diesel
  • Simplification of the qualification process
  • Reducing overlap with other schemes such as Climate Change Agreements (CCAs) and the European Union Emissions Trading Scheme (EU ETS).

Landlord and tenant rules

As part of the previous consultation the government gauged stakeholder views on whether the treatment of landlord/tenant relationships could be simplified (currently, a landlord who supplies gas and electricity to its tenants will be liable to account for that energy under the CRC). It appears that there was "no clear consensus" on this, and so government is not intending to fundamentally review its position in this area. This will be a disappointment to many investors and institutional landlords. Nor does the government intend to progress any proposal which would allow landlords and tenants to agree the responsibility for emissions between themselves.

Consultation

A formal consultation will be published in February 2012 but today's press release states that "comments from participants are encouraged now". More details of the proposals can be found on the Department for Energy and Climate Change website.

 

Key Contact

Mark Chester, partner, +44 (0)870 733 0603, mark_chester@wragge.com

This alert may contain information of general interest about current legal issues, but does not give legal advice.

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