Key points

  • Recycling payments are scrapped
  • The first sale of allowances is deferred to 2012 (rather than April 2011 as previously planned)

As part of the Spending Review in October, the Government announced major changes to the CRC Energy Efficiency Scheme (CRC). Further details are awaited; however, some of the issues raised by the announcement are considered below.

Deferral of first allowance sale

Participants in the scheme must purchase allowances to cover their carbon emissions. The first sale of allowances was due to take place in April 2011, only a few months away. For reasons which are not yet known, the Government has announced that the first sale of allowances will now take place in 2012.

As yet, it is unclear how the mechanics of this first sale will work. A letter from Government to participants indicates that the sale has merely been postponed, rather than the need to purchase allowances for the year 2011-12 having been removed altogether. If correct, this means that allowances for the first year will be purchased retrospectively, once final emissions are known.

Several consequences flow from this:

  • It is not known whether allowances for subsequent years will also be bought "in arrears" at the end of the year to which they relate, or whether for the 2012-13 compliance year onwards the Government will revert to its original plan of selling allowances in April at the start of the relevant year.

If the change simply relates to 2011-12, this means that, while the financial effects of the scheme will be delayed, participants will face a double hit in April 2012 of having to purchase allowances for two years in one go.

  • If allowances are always to be purchased in arrears, this will presumably have an impact on the sale process itself. During the first phase of the scheme, allowances will be sold at a fixed price of £12 per tonne of CO2. In subsequent phases, the legislation currently provides for there to be an auction at the start of the year in which participants "bid" for a number of allowances at the price they are prepared to pay. The bids of participants, and the number of allowances bid for, determine the final cost of allowances in the auction. In all phases, a "safety valve" at the end of the year enables participants who have underestimated their emissions, or acquired insufficient allowances in the original sale, to purchase additional allowances to meet their obligations under the scheme.

If allowances are purchased in arrears, the safety valve would appear unnecessary. The auction mechanism also seems difficult to apply to such a system. Will the Government choose to adopt a fixed price sale in subsequent phases too? Whatever happens, commentators seem agreed that the price of allowances will almost certainly go up.

  • Purchasing allowances at the end of the year rather than at the start will also have consequences where a landlord sells a building during a compliance year, before purchasing any allowances. If the landlord is hoping to recover CRC costs from its tenants, but has not received any payments on account before the sale, it may find it is unable to recover the cost of allowances attributable to that building's energy consumption. One way to avoid this would be to charge tenants in advance. However, to do this the landlord will obviously need to estimate the level of emissions for that building for the year. Will any "settling up" needed at the end of the year be carried out as between the seller and buyer after the building is transferred?

Abolition of recycling payments

The second part of the Government's announcement was the more dramatic. Participants will no longer receive any money back through the scheme. Revenue raised by the scheme was due to be "recycled" to participants each October, in accordance with a performance league table. Although the league table will remain, revenue raised from the sale of allowances will now be used to support public finances (including spending on the environment).

Although it had been a virtually impossible task to accurately predict how much a participant might receive back via recycling payments, the possibility of making a profit under the scheme had led some participants to view it as an opportunity. As a result, some have invested in energy efficiency measures to try to improve their position in the league table. Landlords were considering whether the administrative costs of passing on CRC expenditure to their tenants, and finding a way of fairly dividing the recycling payment between them, might outweigh the pull of the traditional "clear" lease.

Now that the recycling payment has gone, CRC is a "dead cost" that landlords will want to find a way to pass on to tenants. Inevitably, this raises the stakes for those negotiating new leases. Landlords and tenants need to be clear at the outset what costs (if any) they are each intending to bear.

Things to consider

The Government has stated that a public dialogue and consultation with participants on how to further simplify the CRC scheme will commence shortly, with a view to legislative proposals being made next year. It appears that more changes are on the horizon. One thing is clear: the abolition of recycling payments has certainly simplified the scheme, but at what cost to participants?