What is it?
The carbon reduction commitment is a scheme aimed at reducing the energy consumption of buildings. It takes the form of a compulsory trading scheme by which participants buy allowances to cover their emissions and can receive payments based on their performance in reducing emissions.
Who will it affect?
- have a ‘half hourly meter’ to measure electricity use and pay electricity bills to the supplier (ie not to a landlord or someone else who pays the supplier);
- consume more than 6,000 MWh per year (equates to bills in the region of £500,000);
must take part in the scheme.
It is expected that only 5,000 organisation’s in the UK will require to participate fully in the scheme. However 20,000 organisations are expected to be required to participate to the extent of making an information disclosure once every few years on their electricity usage.
- Group organisations count as one entity (even if subsidiaries would qualify for CRC in their own right).
- Government Departments are included in CRC regardless of whether they meet the qualification threshold or not.
- The energy use of Joint ventures, Private Finance Initiatives and Public Private Partnerships is aggregated with that of the majority owner organisation there one organisation has a share of more than 50%. If there is no majority owner with more than 50% then the JV is counted as a separate organisation.
Click here to view flow chart.
Emissions Although qualification for the scheme is based entirely on electricity usage, once an organisation is registered as a participant, all energy use (where the organisation is counter party to the supply contract) including gas, coal and other fuel types is to be taken into consideration when calculating the emissions for which allowances must be purchased.
When will it begin? April 2010 is the start date. All organisations who qualify as participants will require to register between 1 April 2010 and 30 September 2010. Those who have a half hourly meter but do not consume more than 6,000 MWh will not require to register but will have to make a disclosure of their electricity consumption in the same time frame.
However, to a certain extent, CRC has begun already as qualification for the scheme will be determined on the basis of electricity consumption in 2008.
SEPA (the scheme administrator in Scotland, the Environment Agency in England) is due to issue registration packs to organisations with half hourly meters during September 2009.
Phase 1 - The introductory phase: 2010 -2013 During the introductory phase, participants will be able to purchase unlimited allowances to cover their emissions. The price of the allowances will be fixed.
Phase 2 – The capped phase: 2013 onwards In April 2013 the Government will introduce a cap on the total number of allowances available. The cap will be set with regard to the actual emissions recorded in the introductory phase with the intention of reducing total emissions across the sector. During the second phase, the allowances will be sold at auction rather than at a fixed price.
Purchasing allowances The participant will purchase allowances in April every year. It will purchase allowances on the basis of the energy it expects to use in the year ahead.1 If it underestimates and uses more energy than expected it can purchase allowances on the secondary market (i.e. from other participants) or via a ‘safety valve’ which has been introduced to prevent prices becoming too high. However, the price of allowances purchased via the safety valve will always be higher than buying at a fixed price from the Government.
Reporting Throughout the year organisations are required to monitor use and, at the end of each year, must report on actual emissions and surrender sufficient allowances to cover the output.
Policing The scheme will be backed up by both criminal and civil penalties for non-compliance. The penalties may be applied in relations to failings in respect of:
- Registration/information disclosure;
- Reporting and record keeping;
- Surrendering sufficient allowances.
In Scotland, SEPA (in England, the Environment Agency) will regulate and audit the scheme. A rolling risk based audit covering 20% of participants will take place every year.
Recycling payments The Government is going to ‘recycle’ all revenue it receives from the scheme back to participants. The recycling payments will be made by reference to the organisations share in the total CRC emissions and its performance in reducing emissions. A league table will show the organisation’s performance and the recycling payment the organisation receives will be adjusted by a bonus or penalty determined by the organisation’s position in the league.
Click here to view the timetable
Issues for landlords and tenants The responsibility for emissions rests with the ‘counterparty’ to the energy supply contract (i.e. whoever’s name is on the bill). Consequently, in some cases this may be tenant and in others, the landlord. Sometimes the landlord may be responsible for emissions in the common parts and the tenant for emissions relating to its premises. In cases where the letting is of the whole building and the tenant is the sole counterparty to the energy supply contracts there will be no issues as the landlord will not require to pass any costs on to the tenant. However, where the landlord is counterparty to the energy supply contracts and/or there are multiple tenants, the following issues will arise:
- Apportioning costs and recycling benefits;
- Control of emissions.
- Calculation of costs and problems in passing on to tenants.
- Effect on consent for alienation and alterations.
Apportionment The legislation does not provide for apportionment of costs and recycling benefits between landlords and tenants. This is left to the parties to agree between themselves as a matter of contract. Leases may require to contain drafting allowing recovery of CRC costs from the tenants and providing for distribution of recycling payments from (and apportionment between) tenants. In some cases issues might arise as to whether existing leases allow landlords to recover CRC costs and this may encourage landlords to seek variations.
Control In the situation where the landlord pays the bills and recovers the cost from the tenant through the service charge, problems may arise. The landlord (if it qualifies) will be the participant in terms of the scheme, however, its emissions will be based on the tenant’s consumption which it may not to be able to control. Also depending on the terms of the lease, it may be unable to recover the CRC costs without obtaining a variation to the lease.
Tenants who pay energy bills via a service charge may suffer in multi-occupancy buildings in situations where they are energy efficient but the inefficiency of other tenants, over whom they have no control, reduces recycling payments.
Calculating costs If a landlord is able and wishes to pass the costs of CRC compliance on to tenants, there will be additional issues:
- The allowances landlords require to purchase will calculated on an organisational level and the landlord will have to decide how to allocate the cost of purchasing these to particular buildings.
- At the time the allowances are purchased the landlord will not know whether these are sufficient or in excess of what is required.
- The landlord may wish to pass on recycling benefits to tenants. (If it does not do so then there may be no motivation for tenants to reduce emissions.) If it does do so then it will have to find a way of apportioning the benefits amongst tenants according to performance.
- In addition to the cost of allowances, administration costs for large organisations are likely to be substantial and the landlord will have to decide whether to absorb these or attempt to pass them on.
- Further issues relating to the calculation of costs may arise on assignations.
Consent Landlords ability to take account of potentially adverse effects on carbon emissions when granting consent to alterations, assignations and sub-lettings may become an issue. This may lead to a desire to tighten up alienation and alteration provisions in new leases.
Why CRC cannot be ignored Even if an organisation is not a participant, this does not necessarily mean that it can safely ignore CRC. Some issues may still arise:
- The organisation’s landlords may be participants.
- The building may be purchased by another party who is a participant.
- The ability to recover costs/control emissions may affect the marketability of the lease.
Further Information The Government’s carbon reduction commitment user guide: http://www.defra.gov.uk/environment/climatechange/uk/business/crc/comply.htm#userguide
DEFRA web page dedicated to the CRC: http://www.defra.gov.uk/environment/climatechange/uk/business/crc/index.htm British Property
Federation guide for landlords and tenants: http://www.bpf.org.uk/pdf/21400/CRC%20Guide%20A4.pdf
SEPA, who will administer the scheme in Scotland, has published some FAQ’s: http://www.sepa.org.uk/climate_change/solutions/carbon_reduction_commitment/what_will_carbon_trading_mean.aspx