In earlier postings we introduced the UK’s carbon reduction commitment (CRC) and we have considered which companies need to comply. In this posting we are covering the penalties that UK businesses will face if they fail to comply with various reporting requirements and fail to buy and surrender carbon emission allowances by the relevant deadline.

The table below sets out the obligations of the CRC, deadlines and penalties. An explanation of the technical terms is provided after the table.

Registering for the Scheme involves providing the scheme administrator, the Environment Agency (EA) with details of the group of companies (parent and subsidiaries), specific details about the parent company including name, place of business, email and telephone contact point and usual company registration information together with those details for each subsidiary company that individually would be obliged to comply with the CRC Scheme.

The Scheme Year runs from 6 April each year.

The first phase of the Scheme is three years from April 2010 when carbon will be sold at £12 per tonne. The subsequent phase of five years will see carbon allowances being sold at auction in advance, more allowance trading and a safety valve linked to the EU ETS.

The footprint report will cover the first Scheme year (starting in April 2010). This needs to contain details of all energy consumption (electricity, gas and any other energy consumed excluding transport fuel) for that year. Some of the more minor sources of energy consumption may be omitted but the footprint report must cover a minimum of 90% of total energy consumption. Even companies with climate change agreements (CCAs) and those in the EU ETS will have to compile a footprint report. Footprint reports will be required at the start of each phase of the CRC Scheme.

Residual measurement lists have to be provided for anything other than main electricity and gas consumption. There are detailed regulations about residual measurements, how these are dealt with. The cost of buying allowances for residual energy is, effectively, increased under the CRC Scheme.

The annual report which has to be provided by the end of July following each Scheme Year needs to show total relevant energy consumption broken down for electricity, gas and other fuel and principal subsidiaries who would qualify for the CRC alone must be reported on separately. There are details for renewable electricity that may have been generated, ROC’s and climate change agreements as well as energy that might not be covered by the Scheme. Basically, full information should be obtained and retained by UK businesses to ensure that the annual reporting requirements can be complied with in time.

Directors will have to sign the statements on behalf of their company or group of companies when reporting to the EA.

The performance commitment is the fundamental obligation behind the regulations. At the end of each Scheme Year UK businesses must hold sufficient carbon allowances to cover all of their carbon emissions (other than from transport) in the UK throughout that Scheme Year. There are exclusions for companies covered by CCAs and those falling within the EU ETS. As can be seen from the table above failure to comply is intended to be expensive.

Audits will take place and the CRC regulations impose extremely detailed record keeping obligations. Records have to be available to the EA as Scheme administrator who will audit a large number of participants during each Scheme Year. Records must be kept for the duration of each phase of the Scheme to which the records relate plus a full five years afterwards unless there is a dispute, in which case the records must be kept to the end of the dispute.

Publication is one of the penalties for non-compliance. The EA will make a public statement about failure to comply. Companies who place corporate social responsibility high on the agenda will be keen to avoid this.

Blocking is another punishment for failing to comply which means that the person participating in the Scheme will unable to access its allowances, unable to trade them and unable to comply with the obligation to surrender them at the end of each CRC Scheme year. Carbon allowances will be held in an ‘account’administered by the EA and effectively the company involved in the transgression will no longer be able to deal with its account Valuable allowances will be inaccessible.

Delay will lead to an increase in the penalties as the regulations provide that some of the penalties will increase if the UK business is over 40 days late in performing.

It is clear that the penalties will be capable of acting as a deterrent although the major advantage of complying with this legislation is not to avoid the penalties but to reduce energy costs for the UK businesses involved.

As ever with these postings this is based on draft Regulations which may change.