Hot on the heels of its consultation before Christmas, the Government has published a suite of new consultations on the Carbon Reduction Commitment (CRC). At this stage the Government is not putting forward specific proposals for change. Rather, it is seeking views on ways in which the CRC can be simplified. Government has identified certain priority areas for simplification. Each is the subject of a separate discussion paper. The areas identified are:

Private sector organisational rules

The stated aim of the CRC is to tackle barriers to the uptake of energy efficiency in large organisations. For that reason, qualification for participation in the CRC is based on groups of organisations, rather than individual entities.

A number of options are identified for simplifying the organisational rules in CRC. These include:

  • The option for any undertaking in the group to be "disaggregated" from the rest of the group for the purposes of participation (currently, this is limited to "significant group undertakings")  
  • Qualification for the scheme to be based on energy consumption of individual organisations, rather than groups. In order not to lose emissions coverage, the threshold for qualification would need to be lowered  
  • Qualification based on a group structure which follows accounting, rather than Companies Act, rules  
  • Requiring organisations to group together based on their highest UK parent, as opposed to their highest overall parent (which may be situated overseas). In order not to lose emissions coverage, the threshold for qualification may need to be lowered  
  • Taking into account the transfer of a certain percentage of an organisation's energy use, as opposed to merely the transfer of a "significant group undertaking". This means that the sale and purchase of real estate may be taken into account in considerations of energy efficiency.  

These options are not exhaustive and Government welcomes suggestions of other options.

Review of the CRC supply rules

This is one of the key papers from a real estate perspective.

The definition of an energy supply in CRC is important, because it assigns CRC obligation and responsibility to the appropriate party. Government's policy was and is that responsibility for energy supplies rests with the party which can and should do most to improve energy efficiency. However, the supply rules are perceived to be contributing to the complexity of the scheme.

A number of options for simplification are set out in the paper. One of the options under consideration is to allow organisations to decide CRC responsibility between them, on the proviso that supplies which would have been included within the scheme would not, as a result, then fall outside the scheme. Another is to assign emissions responsibility on the basis of consumption rather than supply.

These options may have the effect of reversing the "landlord and tenant" rule, whereby supplies made to a landlord are currently the landlord's responsibility under the CRC, even if the energy is actually consumed by tenants. There is however an indication in the paper that Government would not favour such a change, on the basis that "it arguably does not reflect [the landlord and tenant's] respective influences to reduce consumption and therefore emissions over time".

Review of the CRC qualification criteria

To qualify for CRC under the current rules, an organisation must fulfil the following two criteria:

  • At any point during the qualification year for the phase in question, it had at least one half-hourly meter settled on the half-hourly market; and
  • Its electricity supply during the qualification year through half-hourly meters was at least 6,000 MWh.

Currently, there is a "perverse incentive" for organisations not to install smart meters, because such meters will contribute towards their CRC qualifying supplies. Government is considering aligning both the qualification criteria to focus on settled half-hourly meters only. However, this approach would need to be supported by a reduction in the 6,000 MWh qualification threshold.

An alternative option would be to restrict the second criterion to all electricity supplied, rather than electricity supplied through half-hourly meters.

Reducing the overlap between schemes

The CRC places a number of requirements on organisations which are subject to obligations under the EU Emissions Trading System or to Climate Change Agreements. Options under discussion are a blanket exclusion of such organisations from the scheme, exclusions from the CRC at the qualification stage and proposals to address wider overlap (e.g. with the Climate Change Levy). The possibility of extending Display Energy Certificates to the private sector is also mentioned.

Timing and frequency of allowances sales from 2012 onwards

Originally, allowances were to be bought in an auction at the start of each compliance year. However, the sale of allowances for the first trading year (2011/12) has been delayed until the end of that year (sometime between April and July 2012).

Under the powers of the Climate Change Act, the CRC scheme has to facilitate a market for the trade of allowances. This means that at some point (most likely the start of the second phase), there will need to be a shift from allowance sales in arrears to sales in advance. However, Government has stated that, so far as possible, a compulsory double sale in any one year should be avoided. The first part of the discussion paper therefore considers how this transition can be made during the introductory phase.

The second part of the discussion paper looks at different options for allowance sales in the second and subsequent phases. These include alternative auction mechanisms, as well as more radical alternatives such as unlimited allowances at a fixed price (thereby removing the "cap" element of the scheme).

One important point to note from this paper is that the details of allowance prices and sales are a matter for the budget process.

Further areas where simplification could be discussed

Although not the subject of individual discussion papers in their own right, the following aspects of the CRC have been identified by Government as areas which could also be revisited:

  • The nature of the reputational incentives of the scheme
  • Definition of transport used in the scheme  
  • Treatment of public versus private sector participants  
  • Energy threshold for qualification  
  • Treatment of heat  
  • Landlord/tenant relationships and responsibilities  

Start of the second phase

On 15 February the Government announced that it would be implementing all of the proposals in its November 2010 consultation. This means that, among other things, the qualification year for the second phase of CRC has been put back to 2012-13. The introductory phase of the scheme will be extended by one year as a result.

How to respond to the consultations

Responses should be submitted to by 11 March 2011.

Notwithstanding the review of the scheme, the Department of Energy and Climate Change states that "it is essential that all participants continue to comply with the existing scheme, in full, as set out in the current legislation".