CRC: First CRC appeal dismissed by Secretary of State | Practical Law

CRC: First CRC appeal dismissed by Secretary of State | Practical Law

On 1 March 2012, the Secretary of State issued a decision dismissing an appeal under the CRC Energy Efficiency Scheme (CRC) brought by ATH (Resources) Limited against an enforcement notice served by the Environment Agency requiring the company to register a participant in the CRC.

CRC: First CRC appeal dismissed by Secretary of State

Practical Law UK Legal Update 2-518-3296 (Approx. 5 pages)

CRC: First CRC appeal dismissed by Secretary of State

by PLC Environment
Published on 06 Mar 2012 • UK
On 1 March 2012, the Secretary of State issued a decision dismissing an appeal under the CRC Energy Efficiency Scheme (CRC) brought by ATH (Resources) Limited against an enforcement notice served by the Environment Agency requiring the company to register a participant in the CRC.
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On 1 March 2012, the Secretary of State issued a decision dismissing an appeal under the CRC Energy Efficiency Scheme (CRC) brought by ATH (Resources) Limited (ATH) against an enforcement notice served by the Environment Agency requiring the company to register as a participant in the CRC.
ATH claimed it was not required to register as a participant because the carbon dioxide emissions from its operations were covered by the CRC exclusion applicable to transport emissions. ATH also claimed that the CRC is contrary to EU law in that the forthcoming CRC Energy Efficiency Scheme (Allocation of Allowances for Payment) Regulations 2012 will impose a tax that is contrary to the Energy Taxation Directive (Directive 2003/96/EC restructuring the Community framework for the taxation of energy products and electricity).
This is the first appeal to have been heard under the CRC.

Background

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 until 31 March 2014.
The scheme requires participants to measure and report on their energy consumption and buy allowances for the amount of carbon dioxide (CO2) emissions associated with their energy consumption. There are significant financial penalties for failing to comply with the scheme. The deadline for registering as a participant for Phase 1 of the CRC was 30 September 2010.
An organisation must participate in Phase I of the CRC if both of the following apply:
  • It was supplied with electricity by at least one Settled Half Hourly Meter (Settled HHM) during the Qualification Year (the 2008 calendar year).
  • It was supplied with over 6,000 megawatt hours (MWh) of half hourly electricity through all of its HHMs during that Qualification Year.
Energy used in the transportation of people or goods is generally exempt from the CRC. Paragraph 22 of Schedule 1 to the CRC Order states that energy is consumed for the purposes of transport if it is used by a:
  • Road going vehicle.
  • Vessel.
  • Aircraft.
  • Train and for related network services.
Energy supplies used for all other forms of transport will not benefit from the transport exclusion and will therefore be covered by the CRC.
The Draft CRC Energy Efficiency Scheme (Allocation of Allowances for Payment) Regulations 2012 were laid before Parliament in January 2012. The Draft Allocation of Allowances Regulations set out how the Environment Agency (EA) will sell allowances in Phase 1 to participants in the CRC. There will be three sales of allowances in Phase 1. The first sale will take place between 1 June and 31 July 2012. The cost of allowances in the first sale will be £12 per tonne of carbon dioxide (tCO2).
For more information on:

Energy Taxation Directive

The Energy Taxation Directive sets out the framework for the taxation of energy products and electricity in the EU (Directive 2003/96/EC restructuring the Community framework for the taxation of energy products and electricity).
However, the European Commission believes:
  • The current Directive does not reflect the EU's climate change commitments, including its targets for greenhouse gas (GHG) emission reductions and increased energy efficiency.
  • Problems have emerged in the internal market as member states have started to introduce their own national carbon taxes or take different approaches to supporting low-carbon energy products. These different national approaches may result in double taxation or other impacts on businesses operating across national boundaries.
  • The current Directive is inconsistent with the EU Emissions Trading Scheme (EU ETS).
Therefore, in April 2011, the Commission published a draft Directive to revise the existing Energy Taxation Directive. The draft Directive will now be debated by the European Parliament and Council.
The main change proposed in the draft Directive is to divide energy tax into:
  • A tax on the energy content.
  • A tax on the CO2 content.
For more information, see Legal update, European Commission proposes revision of Energy Taxation Directive: environmental implications.

Facts

The EA served an enforcement notice on ATH (Resources) Limited (ATH) on 8 February 2011 requiring ATH to register as a participant in Phase 1 of the CRC. ATH appealed against the notice under article 111 of the CRC Order. ATH is one of the largest producers of coal in the UK.
The Secretary of State for Energy and Climate Change appointed David Hart QC to hear the appeal and to prepare a report with recommendations for the Secretary of State. The hearing was heard on 7-8 November 2011 and Mr Hart's report was presented to the Secretary of State on 12 January 2012.
The Secretary of State was asked to decide whether:
  • Electricity consumed by a conveyor operated by ATH is covered by the transport exclusion under the CRC.
  • The CRC Order, and the Draft Allocation of Allowances Regulations in particular, will create a tax that is contrary to the existing Energy Taxation Directive.
If the electricity was being consumed for the purposes of transport, then ATH would not be required to register as a participant. ATH estimates that if the company is required to participate in the CRC, the cost will be in the order of £1.4 million for each of the three years in which allowances will be sold in Phase 1.

Decision

The Secretary of State issued its decision on 1 March 2012, dismissing the appeal and affirming the EA's enforcement notice without any modifications.
The Secretary of State agreed with Mr Hart that:
  • Electricity consumed by ATH's conveyor is not covered by the CRC exclusion for transport emissions.
  • There is no need to decide on whether the CRC is contrary to the Energy Taxation Directive because the Allocation of Allowances Regulations have not yet been made and therefore they are not currently relevant to the interpretation of the CRC Order itself. The CRC Order, and the requirement to register as a participant, do not impose a tax. The taxation element would only arise if, and when, the Allocation of Allowances Regulations are adopted.

Comment

The Secretary of State's decision is very short (five pages). Neither the EA's enforcement notice, nor Mr Hart's report or ATH's skeleton arguments appear to be available to the public at present, thus making it very difficult to analyse the Secretary of State's decision in any detail.
According to ATH's press release, the company is considering whether to apply for judicial review of the Secretary of State's decision. For the time being ATH's position is as follows:
"If the anticipated Allocation Regulations come into force as currently drafted (expected to be April 2012), and if the Group is ultimately required to participate in CRC, the cost to the Group could be in the order of £1.4 million for each of the three years from April 2012 in respect of emissions generated in each preceding 12 month period, as announced at the time of the preliminary results in January. The Group will be discussing the position with its legal advisers and will not be making any payments under the CRC Scheme until further clarity on the legality of the CRC Scheme is received."
ATH, one of the largest coal producers in the UK, posted a full-year pre-tax loss of £5.8 million and the price of their shares is down 29% since the beginning of the year (see UK dismisses ATH appeal in carbon reduction scheme, Reuters, 2 March 2012).
When the CRC first came into operation in April 2010, it was envisaged that the revenue from the sale of CRC allowances would be recycled back to participants based on their rankings in a Performance League Table. However, in October 2010, the government announced that this would no longer be the case and that the revenue from the sale of CRC allowances would instead be used to support the public finances. Not surprisingly, this caused a great deal of consternation and has resulted in many organisations viewing the CRC as a carbon tax (see Legal update, CRC: Government scraps recycling of revenue from the sale of allowances).
In the meantime, the government was expected to launch a consultation in February 2012 on changes to Phase 2 of the CRC but no announcement has been made so far (see Legal update, CRC: government outlines detailed proposals to simplify the scheme). Also, there has been no announcement on when the Draft Allocation of Allowances Regulations are likely to come into force.
However, there has been some speculation in the press that the government may decide to merge the CRC with a revised climate change levy and an obligation on companies to report on their GHG emissions, and that an announcement on this might be made in the Budget on 21 March 2012 (see Defra minister hints CRC may be reformed, BusinessGreen, 9 November 2011 and CBI urges Osborne to reform UK carbon taxes, BusinessGreen, 22 February 2012).

Sources