Key points

  • The CRC is to be retained - at least for the time being
  • It will however be simplified to reduce the administrative burden on business
  • Allowance prices for 2013-14 and beyond have been announced
  • There is a suggestion that, at some point in the future, the scheme will once again become revenue-neutral to government
  • The government has published its response to the consultation run earlier this year, with detailed proposals for simplification of the scheme

Background

On 5 December 2012, the Chancellor delivered his Autumn Statement.

In the Budget on 21 March 2012, the Chancellor had stated that:

"The Carbon Reduction Commitment was established by the previous Government. It is cumbersome, bureaucratic and imposes unnecessary cost on business. So we will seek major savings in the administrative cost of the Commitment for business. If those cannot be found, I will bring forward proposals this autumn to replace the revenues with an alternative environmental tax."

However, it now appears that rather than be replaced by an environmental tax, the Carbon Reduction Commitment (CRC) Energy Efficiency Scheme is to survive in some form - at least for the next few years. Government is apparently of the view that "the tailored combination of a range of drivers remains the most effective way to tackle the barriers to the uptake of energy efficiency".

The Chancellor said in the Autumn Statement that "The Government will simplify the [CRC] from 2013, providing very significant administrative savings for businesses". This announcement follows a consultation run in the spring of this year. The government's response to that consultation was published by the Department of Energy and Climate Change (DECC) on 10 December 2012. The government estimates that its proposed reforms will deliver a 55% reduction in administrative costs for participants, amounting to some £272 million up to the year 2030.

Changes to the scheme

Allowance prices

The Autumn Statement contains confirmation of the price of CRC allowances for the next few years. The price will stay at its current level of £12 per tonne of CO2 for 2013-14. In 2014-15 (which is the start of phase two of the scheme) this will go up to £16. From 2015-16 it is intended that the price should rise in accordance with the Retail Prices Index.

The March consultation proposed that, in phase two, instead of an auction there would be two fixed price allowance sales per year - one forecast and one retrospective ("buy-to-comply"). The price at the forecast sale would be lower than the price in the second sale, so facilitating the trading of allowances between participants. It appears from the government response that this proposal is to be implemented. However, it is not clear which of the two sale prices is reflected in the Autumn Statement.

Performance League Table

The Performance League Table (PLT), which ranks participants according to how well they have done in reducing their CRC emissions, is to be abolished. The PLT originally had an important role in determining the amount to be returned to participants (see "The future", below) but its current role is mainly to provide a reputational incentive to the scheme.

As it is proposed that the PLT will be abolished with effect from the current scheme year onwards (see below), it seems that there will be only one more PLT - the one which is currently awaited for the year 2011-12. The government does however propose to continue to publish participants' aggregated energy use and emission data.

Other changes

The consultation proposed reducing the number of fuels which are covered by the scheme from 29 to 4. In fact, the government has decided to reduce the coverage of the scheme even further, so that just electricity and gas are covered (and gas is only caught to the extent that it is used for heating purposes). Further, there will be a de minimis for gas (set at 2% of a participant's overall electricity consumption) so that participants do not need to report on their gas emissions if they fall below this level.

The consultation paper recognised that the way trusts are dealt with by the current rules on qualification and participation is not satisfactory, and made a number of proposals for change. These proposals are - broadly - to be implemented, save that trusts which do not have a majority beneficiary will be required to aggregate with their trustee or operator for qualification purposes only (and could then disaggregate). This means that:  

  • For trusts where there is one controlling beneficial owner, these should be grouped with the beneficial owner for qualification purposes and participation
  • For trusts that have engaged an operator to carry out regulated activity, responsibility would rest with the operator. For qualification purposes, all trusts that the operator is responsible for would be aggregated together but they would be allowed to disaggregate for participation
  • For all other trusts, CRC responsibility would rest with the trustee. Again, for qualification purposes, all trusts that the trustee is responsible for would be aggregated together but allowed to disaggregate for participation.

Many of the other changes proposed by the consultation are also to be implemented, including:  

  • Restricting the qualification criteria to supplies through settled half hourly meters only (but maintaining the qualification threshold at 6,000 MWh)
  • Changes to the rules on when a party will be deemed to be "supplied" with energy for the purposes of the CRC (and consequently will have to report on that energy and buy allowances to cover it). The landlord and tenant rules however remain unchanged (save for a minor exception which is unlikely to be of assistance in practice)
  • Disapplying the CRC supply rules to EU Emissions Trading System installations and Climate Change Agreement (CCA) Facilities and removing the three CCA exemptions
  • Increasing the flexibility for disaggregation, to allow any undertaking within a group to disaggregate and participate separately.

More information on these proposals can be found in our earlier Alert.

The government is also planning to consider how to encourage new renewable on-site generation through the CRC.

The future

The changes will be made by way of secondary legislation via the affirmative resolution process. It is intended that the resulting Order will come into force on 1 June 2013. The majority of the changes will be introduced at the start of the second phase. However, the following changes will be implemented in relation to the last two years of the introductory phase (2012-13 and 2013-14):  

  • Reduction in fuels covered by the scheme
  • Introduction of a 2% de minimis threshold for gas
  • Abolition of the PLT
  • Restriction of the circumstances in which Electricity Generating Credits can be used (this follows on from the reduction in the number of fuels)
  • Extension of the surrender date for CRC allowances to the end of October following the relevant scheme year.

Looking further ahead, both the Autumn Statement and the response to the consultation provide that the CRC will be subject to a "full review" in 2016, to analyse its effectiveness. This review will consider "whether the CRC remains the appropriate policy to meet industrial energy efficiency and carbon reduction objectives, and will consider alternative approaches that could achieve the same objectives". So it seems the scheme may not yet be entirely safe from abolition.

Intriguingly, the documents go on to say that "The tax element of the CRC introduced at Spending Review 2010 will be a high priority for removal when the public finances allow". In its original incarnation, revenue raised from the purchase of CRC allowances was to be "recycled" to participants. The recycling payment was abolished in the 2010 spending review, which led some commentators to the view that the scheme was, in reality, now a tax.

Does the latest announcement illustrate an intention to return the scheme to be non-profit making for government? If so, this would be welcome news to participants, although may lead to complex negotiations between landlords and tenants as to how any "refund" there may be should be shared out between them, where the tenants have contributed to the cost of allowances.

2012-13 is not just a trading year for participants in phase one of the scheme, but also the qualification year for phase two. The consultation response states that "Updated guidance for Phase 2 qualification is expected to be published by the Scheme administrators in late November/early December 2012". This target would appear to have slipped slightly.

Updated guidance for both phases, including the changed reporting requirements for the current year, is expected in early 2013.