From April 2010 the Carbon Reduction Commitment (CRC) – a new mandatory cap and trade scheme for carbon dioxide emissions – will come into force in the UK. Technology companies operating in the UK and consuming energy in their own right and/or on behalf of others (e.g. through a data centre) may be required to participate.

Whilst the CRC has the potential to deliver benefits to the technology sector such as an increased take-up of clean tech services and products, it could also result in UK technology operations (in the event of non-compliance) incurring increased costs, damaged reputation and criminal prosecution.

With energy costs and environmental regulation in the UK on the increase, it will be essential for the technology sector to take action now to plan and budget for compliance in order to maintain market competitiveness.

What is the CRC?

The CRC is a mandatory emissions trading scheme for the UK, designed to cut energy use and encourage investment in reducing carbon dioxide. Annual emissions are calculated by reference to energy use and will not include: (a) emissions covered by the EU Emissions Trading Scheme; (b) emissions covered by climate change agreements (subject to certain thresholds); or (c) emissions from transport.

When will it apply?

The CRC will commence on 1 April 2010 and will initially run for a three year introductory phase. Subsequent phases will each run for seven “compliance years” (running from April to March).

Who might be required to participate?

Qualification criteria

Eligible persons (see below) will qualify for participation in the CRC if, during the relevant qualification year (i.e. the 2008 calendar year for the introductory phase, and the compliance year (April-March) prior to the first compliance year for subsequent phases), their UK operations:

  • consumed at least 6,000 mega-watt hours of electricity; and
  • had at least one “half hourly electricity meter” (a mandatory meter which records total energy consumption every half hour and automatically transfers this information to the energy supplier).

Should an eligible person not fully meet the qualification criteria, it may still need to submit an information disclosure to the Environment Agency (the CRC regulator in England and Wales).

Eligible persons

Persons eligible to participate in the CRC include:

  1. companies incorporated and carrying on business in the UK
  2. partnerships and other unincorporated associations carrying on business in the UK;
  3. other persons carrying on business in the UK (i.e. including non-UK incorporated companies);
  4. overseas companies which are the parents of subsidiaries falling under categories (a) to (c) above.

The date on which eligibility is assessed is 31 December 2008 in respect of the introductory phase and 31 March prior to the beginning of the relevant phase for subsequent phases.

Relevant energy use

For qualification purposes, only the “electricity” use of eligible persons will be assessed. It should be noted, however, that for the purpose of participating in the CRC scheme (see purchasing allowances below), an operation’s entire non-transport “energy” use should be assessed. This will include energy and fossil fuels including energy consumed in heating and cooling.

Examples of technology operations likely to qualify for CRC participation

  1. Technology companies (whether incorporated in the UK or not) with operations in the UK. (This is likely to include companies spending approximately £500,000 or more per annum on their UK electricity use);
  2. Outsourcing service providers and third party data centres which use energy in the UK on behalf of their customers (and on their own behalf). (It has been estimated that data centres of about 5,000 square feet or more will be likely to use enough electricity to qualify for CRC participation); and
  3. Non-UK parent companies of (1) and (2).

What will CRC participation involve?

Registration

Qualifying persons will need to register with the Environment Agency for participation in each phase of the CRC. The registration period for the introductory phase will run for six months commencing on 1 April 2010.

Purchasing allowances

For each compliance year, CRC participants will need to purchase sufficient allowances to cover their annual emissions from non-transport energy use. Allowances may be purchased on the primary market (from the Environment Agency) or on a secondary market (e.g. from other CRC participants trading un-used allowances). One allowance will be the equivalent of 1 tonne of CO².

The first allowances will go on sale in the second compliance year of the introductory phase. This effectively means that CRC participants will need to purchase allowances in arrears for the first compliance year (2010/11) and in advance for the second compliance year (2011/12).

The Environment Agency will initially sell allowances at a fixed price of £12/tonne CO². However, from April 2013, the total pool of allowances will be capped and subject to auction.

Emissions management

CRC participants will be encouraged to develop systems to manage their CO² emissions and to deploy the use of energy efficient technologies (e.g. micro-generation). CRC participants using more energy than they originally predicted will need to purchase additional allowances to fulfil their CRC obligations.

Report submission

Annually (following the end of a compliance year), CRC participants will be required to submit reports to the Environment Agency detailing, for example, total energy consumption and the amount of energy generated from renewable sources. The first report will be due in July 2011 (this will relate to the first compliance year (2010/11)).

Allowances surrender

CRC participants will be required to cancel allowances corresponding to their total CO² emissions in July following a compliance year. The first surrendering of allowances will be due in July 2011 (this will relate to the first compliance year (2010/11)).

League table

Following annual reporting, the Environment Agency will publish a league table showing how all participants have performed under the CRC scheme. The league table ranking will be based on three metrics: (1) percentage change in CO² emissions (i.e. absolute growth in emissions); (2) carbon intensity of any growth or decline in turnover (i.e. relative growth in emissions); and (3) early action in advance of the CRC (i.e. action prior to the CRC coming into force to manage emissions limited to fitting automatic meter-reading equipment and becoming certified by the Carbon Trust’s emission reduction standard). The metrics will be weighted by factors of (1) 60 per cent (2) 20 per cent and (3) 20per cent respectively for the second and third compliance years in the introductory phase; and (1) 75 per cent and (2) 25 per cent (excluding the early action metric) for subsequent phases.

Introductory phase - three years

Please click here to view table.

Opportunities for the technology sector

League table

Based on ranking in the league table, revenues received from the original sale of allowances will be recycled back to participants. In essence, this means that high performance will be rewarded by good publicity and bonuses in the form of “recycled payments” (predicted to equate to up to 150 per cent of the original outlay for allowances by 2020). The first recycled payment (relating to allowances purchased in 2010/11 and 2011/12) will be paid in October 2011.

Cost savings

Compliance with the CRC has the potential to make CRC participants more energy efficient which could, in turn, produce savings in energy bills.

Demand for clean technology

The CRC may serve to promote the use of clean technology by CRC participants where such products enable them to function more efficiently and to reduce emissions. For example, logistics software can optimise fleet movements and electronic communications can reduce paper use and travel.

Demand for outsourcing and third party data centres

The CRC may encourage participants to consider outsourcing their IT infrastructure and other energy emitting functions to outsourcing service providers and third party data centres.

Risks for the technology sector

League table ranking

Participants which fail to perform under the CRC will be “named and shamed” by the publishing of a league table, and will in effect bear extra costs (because they will not benefit from recycled payments).

League table metrics

Participants seeking to expand their UK operations may be penalised by the league table ranking system. Following the introductory phase, league table ranking will largely be calculated with reference to a participant’s absolute growth in emissions (which would naturally increase with an expansion in operations) as opposed to relative growth in emissions (which may decrease (irrespective of business expansion) should a participant take energy efficiency measures). This risk is particularly relevant for UK outsourcing service providers and third party data centres (see below).

UK outsourcing and third party data centres

In order to avoid CRC participation, eligible persons may transfer their UK energy use to outsourcing service providers (e.g. call centres) and third party data centres. Where these providers and data centres operate in the UK, their increased energy use and emissions (resulting from the “carbon dumping”) may affect their league table ranking and lead to reputational damage and increased costs (because they will not benefit from recycled payments). Should providers and data centres be forced to increase their fees (as a result of higher energy costs), they may lose custom to non-UK (cheaper) operations.

Company liability

Those who fail to comply with the CRC scheme may be served with an Enforcement Notice requiring action to be taken within a set time. Failure to comply with an Enforcement Notice will be a criminal offence and fines may be imposed of up to £50,000 in the Magistrates’ Court or an unlimited fine on conviction in the Crown Court.

Directors’ and officers’ liability

Individual directors and officers may be subject to personal liability where an offence is proved to have been committed with their consent, connivance or neglect. In extreme circumstances, they could be subject to imprisonment for a term not exceeding three months on conviction in the Magistrates’ Court, or for a term not exceeding two years in on conviction in the Crown Court.

Cost

The CRC is likely to increase greatly the costs of using energy in the UK (which are already less competitive than that in continental Europe) as participants will need to purchase allowances in proportion to the amount of energy used.

Practical issues for the technology sector

Group companies – Aggregated emissions

Eligible subsidiaries (i.e. eligible persons with the same parent company (including overseas parent companies)) will be treated as a single entity under the CRC and their total aggregated UK energy consumption will be assessed for the purposes of qualification and purchasing allowances.

Group companies – The primary member

UK incorporated parent companies will generally act as the “primary member” (i.e. the member held to be responsible for complying with the CRC on the group’s behalf) for their eligible subsidiaries.

Overseas parent companies may nominate one of their eligible subsidiaries to act as the primary member on their behalf.

Rented property

Where an eligible person rents a property in the UK, it (as opposed to the landlord) will only be responsible for the energy consumed in the building (for the purpose of assessing qualification and emissions) if it is responsible for purchasing that energy (i.e. as counterparty to the energy supply contract).  

Should responsibility for the building’s energy rest with the landlord, the landlord and tenant may seek to include lease provisions which deal with cost and benefit sharing (i.e. sharing the recycled payments).

On site renewables

The CRC makes no distinction between renewable energy and energy sourced from conventional producers. All energy is assumed to have an average carbon intensity for the UK national grid. On-site generation will only be counted as zero carbon if the CRC participant opts to forgo the subsidy available under the Renewables Obligation. However, energy generated from on-site renewables may be counted as zero carbon where it is delivered through a separate mechanism (e.g. through feed-in tariffs, due to be introduced in April 2010).

Steps to become CRC ready

Potential participants can prepare for the imminent onset of the CRC by taking the following steps.

Assessing qualification

Obtain information on electricity consumption for 2008 (the proposed base year). Eligible persons may engage with their energy suppliers with regard to collecting necessary data.

Establish organisational responsibility

Appoint someone (preferably a director or senior manager) to be responsible and accountable for CRC participation (a CRC Coordinator) and appoint suitable persons (CRC Officers) to report relevant energy data to him on a regular basis.

Budget for compliance

Assess the likely costs of CRC participation including administrative costs and the costs of purchasing allowances and budget ahead. Although the cost of purchasing allowances has the potential to be recycled back at a later date, the time lapse between purchasing allowances and receiving any recycled payment (approximately 6 months) will inevitably affect cash flow (particularly during a recession). Participants should be particularly careful to budget for their first purchase of allowances (in April 2011) as this will cover two years’ worth of allowances (relating to compliance years 2010/11 and 2011/12).

Data capture and reporting

Participants may consider implementing new systems such as automated data collection networks (sub-meters) to make the capture of data more efficient, regular and reliable.

Maintain records

Familiarise key personnel (including the CRC Coordinator and CRC Officers) with the record keeping requirements under the CRC scheme and plan for compliance (e.g. data collection and filing). Training programmes may need to be set up for this purpose.

Plan for energy efficiency

Explore ways and plan to decrease CO² emissions through, for example, retrofitting buildings with energy saving technologies and providing staff training and incentives to reduce energy use.

Consider CRC compliance in due diligence

When conducting due diligence exercises, regard should be given to the CRC credentials of the other parties to the transaction. Failure to consider such issues may lead to loss of reputation and/or financial loss (e.g. on the share purchase of a low ranking organisation) and loss of position on the league table.