On 17 November 2010, the Secretary of State for Energy and Climate Change, Chris Huhne, announced further delays and consultation in relation to the CRC Energy Efficiency Scheme (CRC). In response to ongoing criticism over the complexity of the CRC, he accepted that "implementation fell short of the ideal" but that the new proposals, although relatively limited in nature, will "create a window for us to engage in proper dialogue with participants about what we need to do to improve it."

In this e-bulletin, we look at the main proposals put out to consultation and other developments since the announcement in the Spending Review that revenues from the scheme would not be recycled back to participants. This move has been widely portrayed as turning the CRC into a carbon "stealth tax" (see our e-bulletin available here).

Delay to cap-and-trade

The primary focus of the consultation is on postponing the start of phase 2 of the scheme (the first main cap-and-trade phase) to allow time for Government to complete the "simplification review". Under the proposals, phase 2 would commence in April 2013 rather than April 2011 as originally planned. To accommodate this change, the window for participants to register for phase 2 would also be put back two years to April-September 2013.

The consultation proposes that the footprint year and the annual reporting year at the beginning of phase 2 be combined into a single reporting year, such that the requirement to purchase and surrender allowances in phase 2 would only be postponed by one year from 2013/14 to 2014/15. The introductory phase (phase 1) would therefore be extended by one year to March 2014 and allowances for 2013/14 would still need to be surrendered as part of the introductory phase.

Allowance prices and trading

The consultation confirms that allowances will be sold during the introductory phase at £12 per tonne as originally planned, but repeats the announcement in the Spending Review that further decisions on allowance sales are a matter for the Budget process. Considerable uncertainty therefore remains in relation to allowance purchase and trade in phase 2 and whether the majority of the scheme will be abolished and replaced by a carbon tax.

The Spending Review announced that the first allowance sale for 2011/12 emissions will take place in 2012 rather than 2011, meaning that allowances would be purchased retrospectively once final emissions are known. It remains unclear whether all successive sales will also take place at the end of a scheme year and not at the beginning as originally planned. This, along with any fixing of allowance prices in the Budget, could rob the CRC of its market trading element and would mean that the proposed system of auctioning would be difficult to apply.

Information disclosures

Organisations with at least one half hourly electricity meter but which do not qualify as CRC participants are currently required to make an information disclosure about their electricity supplies at the beginning of each phase. The consultation proposes abolishing this requirement, which currently affects around 15,000 organisations, for phase 2 and successive phases on the basis that it will only deliver limited further carbon-related benefits.

Landlord and tenant

The consultation reiterates Government's view that landlords rather than tenants generally have the greatest ability to influence a building's energy consumption. As such, no amendments to the landlord and tenant responsibility rules are proposed (except a very specific disapplication of the rules for Northern Ireland government departments).

Now that revenues will not be recycled, it is more likely that landlords will scrutinise issues as to whether and how to recover CRC costs from tenants. There has also been speculation as to whether costs are now more easily recoverable from tenants under existing and new leases as a tax or outgoing. Although this may be possible, recovery under non-CRC specific clauses is by no means certain and will depend on the drafting of the specific clause.

Performance league table

The performance league table will be retained as the main reputational driver, with the first table published in October 2011. The consultation proposes one minor change to the table to be published at the end of the introductory phase (October 2014) such that it will be based only on absolute and relative changes in emissions and will no longer take into account the early action metric.

Reaction by business

The CBI director-general Richard Lambert welcomed the consultation saying it would "mark the start of winning back those businesses angered by the decision to remove the cash-back incentive" but that "much more needs to be done. It is critical that the CRC becomes an effective tool for encouraging energy efficiency, and not just another tax". Chris Huhne acknowledged that "given a blank slate, we would do things a little differently". Given the more far-reaching consultation and simplification of the scheme promised, businesses will continue to face considerable uncertainty over the eventual form and operation of the scheme which may only serve to impede measures to address energy efficiency and emissions.