CRC: DECC response to March 2012 consultation on proposals to simplify the scheme

Practical Law UK Legal Update 1-523-0477 (Approx. 13 pages)

CRC: DECC response to March 2012 consultation on proposals to simplify the scheme

by PLC Environment

Background: earlier consultations on how to simplify the CRC

The CRC Energy Efficiency Scheme (CRC) is a mandatory emissions trading scheme for large non-energy intensive organisations in the private and public sectors in the UK. The CRC was introduced by the CRC Energy Efficiency Scheme Order 2010 (SI 2010/768) (CRC Order) and came into operation in April 2010.

The CRC is divided into several Phases:

Phase 1 (also known as the Introductory Phase) runs from 1 April 2010 to 31 March 2014.
The registration period for Phase 2 is due to start on 1 April 2013 and the compliance years for Phase 2 will start on 1 April 2014. Phase 2 will then run until 31 March 2019. Phase 1 and Phase 2 therefore overlap.

A number of participants, and industry and trade associations, have criticised the complexity and the administrative burden that the CRC places on participants. As a result, the Department of Energy and Climate Change (DECC) published:

In January 2011, five discussion papers, which sought initial views on how the scheme could be simplified (see Legal update, CRC: DECC publishes five discussion papers on simplifying the scheme).
In June 2011, detailed proposals on how to simplify the CRC and a summary of the responses to the five discussion papers published in January 2011 (see Legal update, CRC: government outlines detailed proposals to simplify the scheme).
In March 2012, a consultation document, containing revised proposals on how to simplify the CRC (see Legal update, CRC: detailed analysis of DECC consultation on proposals to simplify the scheme).

The main purpose of the various consultations and proposals is to reduce the administrative and regulatory burden on participants in the scheme.

In the March 2012 Budget, HM Treasury indicated that, if it was not possible to achieve very significant cuts in the administrative burdens, it would bring forward proposals in autumn 2012 to replace the CRC with an alternative environmental tax (see Legal update, 2012 Budget: environmental announcements: CRC Energy Efficiency Scheme).

In the December 2012 Autumn Statement (delivered by the Chancellor on 5 December 2012), the government indicated that DECC would publish a response to the March 2012 consultation and that the:

CRC will be simplified from 2013, rather than scrapped.
CRC Performance League Table will be abolished from 2013.
Price of CRC allowances will be as follows:
- £12 per tonne of carbon dioxide (tCO2) in 2013-14;
- £16/tCO2 in 2014-15; and
- from 2015-16 onwards, the price will increase in line with the Retail Prices Index (RPI).
Government will review the effectiveness of the CRC in 2016 and consider whether the same policy objectives could be achieved in a different way.
Tax element of the CRC, introduced in the Spending Review 2010, will be a high priority for removal when public finances allow.

(See Legal update, 2012 Autumn Statement: key environmental implications.)

For more information on the CRC in general, see:

Practice note, CRC Energy Efficiency Scheme: overview.
CRC Survival Kit.

Government response to March 2012 consultation

On 10 December 2012, DECC, together with the devolved administrations, published their response to the March 2012 consultation document:

The response document says that replies to the consultation were broadly in favour of the government's proposed changes. As a result, the government has said that it will implement the majority of the proposals set out in the March 2012 consultation document, subject to a limited number of changes set out in response to that consultation.

This update focuses on the changes to what was proposed in the March 2012 consultation. For an analysis of the other changes that the government has said it will implement without any modifications, see Legal update, CRC: detailed analysis of DECC consultation on proposals to simplify the scheme.

Subscribers may find it helpful to print out the March 2012 consultation document so that this can be read alongside the government's response to that document.

PLC will update its CRC Survival Kit once the Order making the necessary changes to the CRC has been made. For details of the government's next steps, see Next steps below. PLC will also produce a document bringing together the full package of changes (both the changes set out in the March 2012 consultation that will not be changed and the changes set out in the response document).

CRC will be simplified rather than scrapped

Although a number of respondents argued that the CRC should be replaced by a carbon tax, the government has decided that the CRC (in a simpler format) remains the best way to incentivise the private and public sector to increase energy efficiency, thereby helping the UK meet its target for reducing greenhouse gas emissions.

The overall package of changes to the CRC are expected to reduce participants' administrative costs by 55%.

The government has decided that a simplified CRC will provide the most effective way of incentivising organisations to implement energy efficiency measures. It thinks that the tailored combination of reputational, financial and standardised energy measurement and monitoring drivers remains the most effective way to tackle the wide range of barriers to the uptake of energy efficiency that exist in the sectors covered by the CRC.

Review of CRC in 2016

The government will review the effectiveness of the CRC in 2016 and consider whether the same policy objectives could be achieved in a better way.

The government has also said that "the tax element of the CRC introduced at Spending Review 2010 will be a high priority for removal when the public finances allow". The government has not elaborated on what it means by this. For commentary on which this might entail, see Comment below.

(Paragraph 13-14, response document.)

Landlord and tenant rule (building leases): changes to proposal 9

The March 2012 consultation document proposed that the "landlord and tenant rule" should not apply to construction leases (often referred to in the property industry as building leases). The majority of respondents were in favour of this change. The government will therefore go ahead with this change but will reduce the qualifying period for building leases from 40 years to 30 years, to reflect the fact that the term of building leases (and therefore the payback period for energy efficiency improvements to the building) is usually 20-30 years.

As a result, responsibility for complying with the CRC will transfer from the landlord to the tenant if:

There is a lease duration period of 30 years or more; and
The tenant agrees to construct (and remove, if relevant) any buildings; and
The tenant agrees to be responsible for the installation of any gas, electricity and water services.

No other changes will be made to the "landlord and tenant rule" although a minority of respondents reiterated the point that landlords have limited power to influence their tenants' behaviour in commercial leases (not just building leases). However, the government has said that it remains of the view that landlords are the ones best placed to influence energy consumption and that this is supported by a report published by the Carbon Trust in 2009.

(Paragraphs 42-49, response document.)

For more information on the landlord and tenant rule, see:

Number of fuels covered by the CRC: changes to proposal 12

At present, participants are required to report on their energy supplies from 29 fuels. The March 2012 consultation document proposed reducing this to four fuels (electricity, gas, gas oil and kerosene, where the latter two are used for heating only).

The government said that:

It will reduce the list to just electricity and gas (when the latter is used for heating), as gas oil and kerosene make up a very small percentage of most participants' energy supplies.
There is will be an assumption that all gas used is for heating purposes, unless a participant demonstrates otherwise.
There will be a 2% de minimis threshold for reporting on gas supplies (see 90% rule: changes to proposal 14 below). However, there will be no de minimis for electricity supplies.

The government also said it will treat input fuels to combined heat and power (CHP) plants as being used primarily for electricity generating purposes and so will not be covered by the CRC.

(Paragraphs 58-73, response document.)

90% rule: changes to proposal 14

The March 2012 consultation document proposed removing the requirement that participants demonstrate that at least 90% of their emissions are regulated under the EU Emissions Trading Scheme (EU ETS), climate change agreements (CCAs) or the CRC (known as the "90% rule").

The government has decided that the 90% rule is no longer needed in light of its decision to require reporting of 100% of participant's supplies of electricity and gas (see Number of fuels covered by the CRC: changes to proposal 12 above).

However, the requirement to report on gas supplies will be subject to a 2% de minimis threshold. Therefore, participants will only be required to report on (and buy allowances for) gas supplies if their consumption of gas used for heating is 2% or more of their overall energy consumption in the first reporting year of a Phase. Participants will only need to assess the 2% threshold once per Phase. Therefore, if a participant can show that its supplies were below the 2% threshold in the first reporting year of Phase 2 (2014/15), it will not need to report on its gas supplies for the whole of Phase 2.

(Paragraphs 74-81, response document.)

For more information on the "90% rule" and the CRC's interaction with the EU ETS and CCAs, see Practice note, CRC Energy Efficiency Scheme: exclusions and exemptions: Do Residual Supplies need to be included in a Participant's Regulated Emissions and is a Residual Measurement List required?.

Obligation on energy suppliers to provide annual energy statements: changes to proposal 15

As a result of the government's decision to reduce the number of fuels covered by the CRC to just two (electricity and gas used for heating), there is no longer any need to consider whether the obligation on energy suppliers to provide annual energy statements to participants should be extended to gas oil and kerosene.

(Paragraphs 82-83, response document.)

Academies and state funded schools: changes to proposal 23

The government has decided that the CRC will not apply to state funded schools (including academies) in England, due to local authorities' limited abilities to influence these establishments. The government will instead "implement alternative robust measures that will incentivise and support schools to obtain both energy cost and carbon savings".

The devolved administrations will decide separately on how the CRC should apply to schools and academies in their jurisdictions.

(Paragraphs 107-112, response document.)

For more information on how the CRC applies to schools and academies, see:

Trusts: changes to proposal 33

The March 2012 consultation document proposed that responsibility for compliance with the CRC should rest with the entity that has the greatest influence over the energy efficiency. Therefore, trusts with one controlling beneficial owner, or trusts where there is an investor (beneficiary) with a share of over 50%, would have their energy supplies grouped with the beneficial owner/investors for the purposes of qualification and participation in the CRC.

The following trusts would be treated as undertakings for the purposes of the CRC:

Trusts that carry out activities under the Financial Services and Market Act 2000 (for example, private equity funds or collective investments). CRC responsibility would rest with the operator of the trust/private equity fund.
All other trusts not falling into the categories already specified (for example, discretionary trusts, or unincorporated property joint ventures). CRC responsibility would rest with the trustee.

Trusts that are treated as undertakings under the CRC would be kept separate so that they are not grouped together for CRC purposes just because they have the same organisation acting as trustee.

The government has said in its response to the consultation that the proposals as set out in the March 2012 consultation document could result in avoidance and loss of CRC coverage. It will therefore amend these proposals so that trusts that do not have a majority beneficiary will be required to aggregate with their trustee or operator for the purposes of deciding whether they qualify for the CRC. Trusts would be aggregated for qualification purposes, but would then need to apply the simplified rules on disaggregation (set out in the March 2012 consultation document) in order to participate as separate entities.

The government has also said that it will not amend the rules on private equity funds that are structured as limited partnerships.

(Paragraphs 118-122, response document.)

For more information on how the CRC applies to trusts including those used by private equity funds, see:

Sale of allowances: changes to proposal 39

The March 2012 consultation proposed that:

The auctioning of a limited (capped) number of allowances in Phase 2 would be replaced by two fixed price sales per year in Phase 2. The first sale would be a cheaper forecast (forward) sale at the beginning of an annual reporting year. The second sale would be a more expensive "buy-to-comply" sale after the end of an annual reporting year.
The safety valve would be removed, since it will not be needed if there are two sales of allowances each year and the scheme is not capped.
Banking allowances for use in a future Phase would not be allowed.
For the last two years of Phase 1 and beyond, the deadline for surrendering allowances annually to the scheme administrator would be moved from July to September.

The government has said in its response to the consultation that:

It will go ahead with two fixed price sales per year in Phase 2.
Participants will be able to bank allowances within a Phase but not between Phases.
The deadline for surrender of CRC allowances annually will be extended from end of July to the end of October (rather than September), from 2013 onwards.

(Paragraphs 124-128, response document.)

The Treasury had already said in the Autumn Statement on 5 December 2012 that the price of CRC allowances will be as follows:

£12 per tonne of carbon dioxide (tCO2) in 2013/14.
£16/tCO2 in 2014/15.
From 2015/16 onwards, the price will increase in line with the Retail Prices Index (RPI).

(See Legal update, 2012 Autumn Statement: environmental implications: CRC Energy Efficiency Scheme.)

For more information on the sale of CRC allowances, see Practice note, CRC Energy Efficiency Scheme: overview: Sale of Allowances.

Performance League Table: changes to proposal 43

As announced by the Treasury in the December 2012 Autumn Statement, the government will abolish the Performance League Table from 2013 (see Legal update, 2012 Autumn Statement: environmental implications: CRC Energy Efficiency Scheme).

The government confirmed this in the response to the March 2012 consultation document and has said that the Environment Agency will, instead, publish data about participants' aggregated energy use and emissions.

(Paragraphs 136-137, response document.)

For more information on the Performance League Table, see Legal update, CRC: Environment Agency publishes first Performance League Table.

Next steps

CRC Amending Order

The government has said it will make and lay an Order (a revised version of the CRC (Amendment) Order 2013 which it consulted on) before Parliament, the Scottish Parliament, National Assembly for Wales and the Northern Ireland Assembly, with a view to the Order coming into force on 1 June 2013.

The Order will be subject to the affirmative resolution procedure, which means it will need the approval of both Houses of Parliament before it can be adopted in final form. For an explanation of how the affirmative resolution procedure works, see Practice note, The legislative process in the UK and how Bills become law: Statutory instruments.

However, note that the CRC Order will require separate approval in Wales and Northern Ireland.

CRC Guidance

The Environment Agency will publish:

In late November/early December 2012, updated guidance on the qualification process for Phase 2. The final reporting year for Phase 1 (2013/14) overlaps with the registration year for Phase 2.
In early 2013, updated guidance on Phases 1 and 2 (including guidance on the changes to the reporting requirements for 2012/13).

When will the changes take effect?

The majority of the proposals will take effect at the start of Phase 2 (that is, 1 April 2014), subject to the following exceptions, which will take effect from 1 June 2013 (that is, the last two years of the Introductory Phase ((2012/13 and 2013/14)):

Proposal 11 (as amended): reduction of fuels covered by the CRC from 29 to 2.
Proposal 14 (as amended): 2% de minimis threshold for reporting of gas supplies.
Proposal 18 (unchanged): limits on when Electricity Generation Credits can be used.
Proposal 39 (as amended): extension of the deadline by which CRC allowances must be surrendered.
Proposal 43 (as amended): abolition of the Performance League Table.

Comment

Real simplification or just tinkering around the edges?

The Treasury said in the March 2012 Budget that, if it was not possible to achieve very significant cuts in the administrative burdens, it would replace the CRC with an alternative environmental tax. It appears DECC has managed to convince the Chancellor (at least for the time being) that the proposed changes will deliver the necessary significant cuts. According to DECC, the full package of proposed changes will reduce participants' administrative costs by 55% (thought to equate to around £272 million).

DECC had also said that the scheme will be "dramatically simplified" by the changes. There is no doubt that some of the changes will make the scheme simpler (for example, reducing the number of fuels that need to reported on from 29 to 2) but it is arguable whether the simplification goes far enough.

For example, there will be very few changes to:

The rules on how to decide which parts of a corporate group are covered by the CRC. This is a very complex and time consuming task, especially for those who will be joining the scheme for the first time at the start of Phase 2 and for groups with very diversified business operations (where the gathering of energy data across the various subsidiaries is not straightforward) (see Practice note, CRC Energy Efficiency Scheme: impact on corporate structures).
The "landlord and tenant rule", which (notwithstanding DECC's view that landlords are able to influence their tenants' energy consumption) many in the commercial property sector (including the British Property Federation) still argue does not reflect the commercial reality of the current commercial rental market and adds unwelcome costs (especially in the current economic downturn) for those tenants whose landlords require them to reimburse CRC costs. There have been some changes in terms of how landlords and tenants engage in energy efficiency discussions (and other measures to improve the overall environmental performance of buildings) but progress to date has been very slow (see Legal update, Uptake of green leases in UK three years after launch of BBP's Green Lease Toolkit).

In addition, some of the organisations covered by the CRC will still be subject to several complex and overlapping carbon emissions reporting requirements under the EU ETS, CCAs and the forthcoming regulations the Department for Environment, Food and Rural Affairs (Defra) is going to introduce to require companies to report on GHG emissions in their annual reports under the Companies Act 2006 (see Legal update, Directors' report: Defra consultations on draft regulations on reporting of greenhouse gas emissions and revised guidance on environmental KPIs: detailed analysis: Comment).

Review of the scheme in 2016: scrapping the "tax element"?

Although the announcement that the CRC will be retained will no doubt come as a disappointment to some, the decision is not entirely surprising in light of the government's need to raise as much revenue as possible to tackle the ongoing economic crisis.

On the other hand, some have argued that those organisations that have already gone through the painful and (in some cases) expensive task of understanding and complying with Phase 1 of the scheme, might as well continue with the scheme rather than having to get to grips with something different. However, note that DECC has said that the Environment Agency will publish, in late November/early December 2012, updated guidance on the qualification process for Phase 2. The registration period for Phase 2 will start on 1 April 2013 and participants will need sufficient advance notification of the changes.

The government says it will review the scheme in 2016 and that the "tax element" of the CRC introduced in the Spending Review 2010 will be a high priority for removal when public finances allow. Does this mean the government is thinking of:

Re-introducing the recycling payments? It was originally envisaged when the CRC was first launched that the revenue from the sale of CRC allowances would be recycled back to participants based on their rankings in the Performance League Table. However, the government announced in the Spending Review 2010 that this would no longer be the case and that the revenue would instead be used to support public finances (see Legal update, CRC: Government scraps recycling of revenue from the sale of allowances). The announcement in the Spending Review 2010 was met with a great deal of criticism and led to many viewing the CRC as a carbon tax (see Legal update, CRC: Recovery of CRC costs from tenants - will it be easier now? and Legal update, New Treasury definition of what constitutes an environmental tax). It is difficult to see how recycling payments could be reintroduced if the Performance League Tables are going to be scrapped. Presumably, the government would need to devise a new mechanism for deciding how the recycling payments should be distributed back to participants.
Changing the CRC to a carbon reporting-only scheme? If this were the case, it could have a difficult overlap with Defra's forthcoming regulations on GHG reporting under the Companies Act 2006 (see Legal update, Directors' report: Defra consultations on draft regulations on reporting of greenhouse gas emissions and revised guidance on environmental KPIs: detailed analysis).

Abolishing the Performance League Table

There is very little explanation in the response document as to why the government has decided to abolish the Performance League Table from 2013 onwards.

All that is said in the response document (paragraph 136) is that a number of respondents have said that:

The League Table did not reflect accurately participants' efforts to implement energy efficiency measures (in particular, for measures that were put in place before the start of the scheme).
The way in which the first League Table (published in November 2011) did not engage the media, investors and participants in the way that the government had envisaged (see Legal update, CRC: Environment Agency publishes first Performance League Table). Arguably, in order for a comparison table like this to work as a "name and shame" list and drive changes in the supply chain, it has to (first) be comprehensible and (secondly) participants have to be convinced that their ranking in the table will make a difference to their reputation/brand and their financial bottom line. The last League Table is due to be published before the end of 2012 but very few people expect this to have a greater impact than the first one.

Instead, from 2013 onwards, the Environment Agency will publish details of participants' energy use and emissions but is this enough to provide the necessary reputational driver (one of the scheme's core principles)? Some would argue that there is very limited value in publishing raw data (with no analysis of what this means in practice or a sector-by-sector breakdown) and that the reputational driver would be better achieved through the forthcoming Defra regulations that will require companies to report on their GHG emissions under the Companies Act 2006. However, the Defra regulations are not themselves without their pitfalls, and in event will only apply (at least initially) to quoted companies (see Legal update, Directors' report: Defra consultations on draft regulations on reporting of greenhouse gas emissions and revised guidance on environmental KPIs: detailed analysis: Comment).

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