Background

The Coalition Government's Spending Review in October 2010 quite dramatically altered the CRC Scheme by removing the whole recycling payments aspect. The Government stated that the changes were in response to requests to simplify the scheme and reduce the burdens on businesses but the change has certainly not been well received. In addition, the Government confirmed that the first sale of allowances for 2011/12 emissions will take place in 2012 rather than 2011, so postponing the financial requirements of the CRC Scheme for participants. The CBI commented that although the announcement of a further consultation (see below) was welcomed much more needed to be done and in particular it is critical that the CRC Scheme becomes an effective tool for encouraging energy efficiency, and not just another tax.

Recycling of Revenue

The CRC Scheme as originally passed was to be cost neutral to the Treasury with the monies paid for the allowances being recycled back to the participants by reference to a performance league table. The revenues, estimated to amount to £1billion a year by 2014/15, will now be used to support public finances, including spending on the environment. The league table is however to be retained as a reputational driver as it will 'name and shame' those participants who are not performing well and the publication dates will remain as envisaged in the current legislation. This means the first league table will be published in October 2011 based on participants' footprint and annual reports provided in July 2011. An organisation if caught by the CRC Scheme should have already registered with the Environment Agency as the closing date for that remained unaltered, being 30 September 2010.

The removal of the recycling aspect has caused great concern as complying with the CRC Scheme now becomes a real cost to business of carrying on its operations and, of course, occupying property. There is also now a stronger argument that the wording of existing contracts, including leases, will enable the costs of the CRC Scheme to be passed to customers/tenants as the change makes these costs more analogous to a tax.

Amendment Order

The Government announced a further consultation and will in fact be consulting in two stages. The first consultation dealt with a number of limited changes to the CRC Scheme to push back some of the deadlines relating to the second phase so that these changes can be made before 1 April 2011. In addition the Department of Energy and Climate Change (DECC) is now seeking views from participants and other interested parties to assist in the consideration of amendments to the legislation and these changes will then be subject to further public consultation. DECC requested that initial views on simplifying the CRC Scheme were provided by 11 March 2011.

Key Changes

The first consultation which launched on 17 November 2010, closed on 17 December 2010. The results were published on 15 February 2011 with the amended order being made on 16 February 2011 which will come into effect on 1 April 2011. In particular concerns were raised about the weighting of the performance metrics in the last year of the introductory phase and the alignment between phase III of the EU ETS and the CRC Scheme's second phase.

The key changes in the amendment order are set out below.

The introductory phase of the CRC Scheme is extended until 31 March 2014, rather than 31 March 2013, with the second phase being delayed by 2 years to 1 April 2013, so will postpone the first allowance auction sale. This will provide participants with an additional year's experience managing compliance and performance within the introductory phase and measuring and reporting emissions before the cap and trade phase of the CRC Scheme begins.

The requirement to register for the second phase and subsequent phases is postponed by two years so registration for the second phase will take place in April-September 2013, rather than April-September 2011 as is currently the case. Similarly the qualification year for the second phase is postponed by two years to 2012/13 rather than 2010/11.

This is achieved by making the 2013/14 year both a footprint year1 and annual reporting year2 which is aligned with the approach in the introductory phase. This proposal will result in fewer administrative requirements upon participants.

The extension to the introductory phase pushes back the requirement to surrender phase two CRC allowances for one year, i.e from 2013/14 to 2014/15. Participants will still be required to surrender allowances in respect of their 2013/14 CRC emissions but this will be under the extended introductory phase rather than under the second phase.

Organisations who have at least one half hourly meter settled on the half-hourly market but who are not required to register as participants as their annual consumption is greater than 3,000 MWh but less than 6,000 MWh will no longer be required to make information disclosures. This will remove an administrative requirement on approximately 15,000 organisations and which is considered to deliver limited carbon-related benefits.

Priority Areas for Simplification

The idea is that these amendments will provide a suitable window in which to consult on the CRC Scheme simplification options, as part of the broader simplification review, and to make any amendments prior to the start of the second phase on 1 April 2013.

DECC has concluded that the priority areas for simplification include the following:

  • Private (business) sector organisational rules of the CRC Energy Efficiency Scheme
  • Review of the CRC supply rules
  • Review of the CRC qualification criteria
  • Reducing the overlap between schemes e.g. Climate Change Agreements and the EU Emissions Trading System
  • Timing and frequency of allowances sales in the CRC Energy Efficiency Scheme from 2012 onwards

As noted earlier in this article, views are being sought on how these aspects of the CRC Scheme could be simplified and DECC has produced discussion papers to stimulate discussion amongst interested parties which will hopefully result in ideas and suggestions for changes and improvements to the CRC Scheme for subsequent consideration by Government. It is these responses that are requested by 11 March 2011.

A number of other aspects of the CRC Scheme have also been highlighted as further areas where simplification could be discussed, including:

  • The nature of the reputational incentives of the scheme
  • Energy threshold for qualification
  • Landlord/Tenant relationships and responsibilities

In particular DECC has asked respondents to, in their submissions, address

"how your proposals would tackle the four barriers to the uptake of energy efficiency in large organisations (namely, insufficient financial drivers, uncertain reputational benefits of demonstrating leadership, split incentives between landlords and tenants and organisational inertia)".

DECC also reiterate that it is essential that all participants continue to comply with the existing scheme in full as set out in the current legislation and use the introductory phase to gain experience on reporting, complying and surrendering allowances. Organisations who fail to comply will be subject to enforcement action.

The wider consultation package on the CRC Scheme's simplification review is expected to be issued in the next few months.

Conclusion

Delaying the qualification date for the second phase does mean there is an opportunity for organisations to reduce their electricity consumption below the 6,000 MWh qualification threshold and if this can be achieved by current participants they will then be able to leave the CRC Scheme. This would mean of course the strict implementation by such organisations of energy saving measures and as to how realistic that will be is difficult to say but it would of course result in energy and carbon savings, which is a key aim of the legislation.