In 2010 the Carbon Reduction Commitment Order will require many UK businesses to measure and report on their energy consumption, to buy allowances to cover their carbon emissions and to pay significant penalties if they do not comply. The CRC was summarised in a recent Reed Smith posting.

Unlike previous legislation affecting EU carbon emissions (the Emissions Trading Scheme) the CRC does not apply to specific installations or individual companies in relation to their own emissions. It applies to the whole of the organisation in the UK. For companies doing business in the UK that means that the CRC applies to the relevant UK group as a whole. If the UK group is owned by a parent incorporated overseas the parent will have compliance duties in respect of its UK subsidiaries.

The rules are not straightforward and involve a raft of potentially confusing definitions and terms to describe participating and responsible entities. This posting covers the key points on who has to comply:

  • The rules requiring full compliance apply to companies doing business in the UK which alone or as a group together meet the qualifying criterion (essentially by buying at least 6,000 MWh of electricity from any of the electricity supply companies and which is supplied through half-hourly meters or remotely read supply) and which have at least one settled half hourly electricity meter across the group.
  • Reporting obligations will apply to those who bought 3,000 to 6,000 MWh of electricity in 2008.
  • For the initial phase of the CRC scheme, the relevant group structure will be that which existed at 31 December 2008.
  • The parent entity in a UK group will be the “qualifying undertaking” and together with its UK subsidiaries will be a “combined participant”. If the qualifying UK group is foreign-owned, the terms of the Order clearly state that the ultimate overseas parent will be the “qualifying undertaking”.
  • As lawyers we get excited where legislation makes a company responsible for the actions of other members of its group and that is what the CRC does. Each of the companies within the combined participant is responsible, and jointly and severably liable, for the combined participant’s duties under the CRC laws, including the purchase of allowances and the range of potential financial penalties for non-compliance. The penalties have the potential to be costly and will be the subject of a separate posting.
  • From the current draft of the CRC Regulations, we think groups of companies held for investment purposes, like majority holdings by private equity houses, could be caught by the need to comply as well as trading groups. The parent entity in a private equity structure could therefore be responsible for assessing, monitoring and reporting compliance, and buying allowances, across its subsidiaries on an aggregated basis.
  • Each combined participant will need to have a “primary member” which will be the UK parent. If the parent is outside the UK and does not itself carry on business in the UK, a UK operating subsidiary may be nominated by the group. The primary member will be the first point of contact for the UK authorities in relation to the CRC.
  • A 50/50 owned joint venture which does not qualify as a subsidiary of a company under the UK Companies Act may have to participate as a qualifying undertaking in its own right, rather than be combined in a group with any of its shareholders.

Complicated rules will apply to the implications for members of combined participants of M&A transactions including “takeovers”, “mergers” and “demergers” as defined in the Order. We will cover this topic in a future update on the CRC.

Franchisors will have compliance responsibility for emissions by their “associated persons” meaning franchisees under arrangements requiring internal appearance of their premises to be similar to those of other franchisees or the franchisor. This will include vertical distribution chains like those of motor manufacturers who impose detailed premises standards on their dealers. Hotel franchise agreements may be caught as well.

If the franchisor is an overseas company and does not itself operate, or have any operating subsidiary, in the UK, it will be subject to the CRC requirements but will need to appoint a UK representative as the primary member for compliance.

Franchise compliance may be complicated where franschisees are themselves tenants and pay fuel costs through their service charge rather than direct.

Partnerships and other unincorporated associations will have to comply if they meet the qualifying criteria.

Note:

The CRC legislation is currently the subject of final consultation and it is possible its final form and the explanation above may change as a result of the final Order.