Vital information for the property industry

From April 2010 a new mandatory cap and trade scheme for carbon dioxide (CO²) emissions will come into force. Large commercial property developers, owners and occupiers in both the public and private sectors will be required to participate. With poor compliance potentially resulting in increased costs, bad publicity and even criminal prosecution, the property industry cannot afford to ignore this imminent legal development.

What is the CRC?

The CRC is a mandatory emissions trading scheme for the UK, designed to cut energy use and encourage investment in reducing CO².

In September 2009, the Environment Agency (who will administer the CRC) will contact all potential CRC participants with qualification and registration information. In April 2010, the CRC will come into force.

How will the CRC affect you?

The CRC will apply to an organisation (including its subsidiaries) if, during the 2008 calendar year, all of its properties combined: (1) consumed at least 6,000 mega-watt hours of electricity (equal to approximately £500,000 of electricity bills/annum); and (2) had at least one “half hourly electricity meter” (a meter which records total energy consumption every half hour and automatically transfers this information to the energy supplier). Should an organisation not fully meet the criteria, it may still need to submit an information disclosure to the Environment Agency.

What will you be required to do

Following registration in the CRC scheme, participants are advised to set a “carbon budget” by: (1) predicting their CO² emissions from all energy use (including energy use for lighting, heating and cooling but excluding transport emissions and emissions covered by the EU Emissions Trading Scheme or Climate Change Agreements); and (2) purchasing sufficient “allowances” to cover them (1 allowance = 1 tonne of CO²). Initially allowances will be purchased at a fixed price of £12/tonne CO² from the Environment Agency. However, from April 2013, the total pool of allowances will be capped and subject to auction.

In order to keep within carbon budgets, participants will be encouraged to develop systems to manage their CO² emissions and to deploy the use of energy efficient technologies (eg, micro-generation). Failure to keep within budget will necessitate participants purchasing additional allowances on a secondary market and incurring additional costs.

On an annual basis, participants will be required to submit reports to the Environment Agency detailing, for example, total energy consumption and the amount of energy generated from renewable sources. In addition, participants will be required to cancel allowances corresponding to their total CO² emissions.

Following annual reporting, the Environment Agency will publish a league table showing how all participants have performed under the CRC scheme. Based on ranking in the league table, revenues received from the original sale of allowances will be recycled back to participants. In essence, this means that high performance will be rewarded by good publicity and bonuses in the form of “recycled payments” (predicted to equate to up to 150% of the original outlay for allowances by 2020). However, participants which fail to perform under the scheme will be “named and shamed” in an increasingly environmentally conscious property market and will in effect bear extra costs (because they will not benefit from recycled payments).

What are the penalties for non-compliance?

Those who fail to comply with theCRC scheme may be served with an Enforcement Notice requiring action to be taken within a set time. Failure to comply with an Enforcement Notice will be a criminal offence and fines may be imposed of up to £50,000 in the Magistrates’ Court or an unlimited fine on conviction in the Crown Court.

In addition, individual directors and officers may be subject to personal liability where an offence is proved to have been committed with their consent, connivance or neglect. In extreme circumstances, they could be subject to imprisonment for a term not exceeding three months on conviction in the Magistrates Court, or for a term not exceeding two years on conviction in the Crown Court.

Practical issues

Group structures

Responsibility for CRC compliance in group structures (and property portfolios) will rest with the highest parent organisation. This can result in a situation where a company based overseas is required to take responsibility for the emissions of its subsidiaries or properties in the UK. Specific arrangements will also apply to franchises, joint ventures, private finance initiatives and public private partnerships.

Rented property

A landlord or tenant (meeting the criteria for CRC participation) will be required to participate in the CRC if they are responsible for purchasing a property’s energy (ie, as counterparty to the energy supply contract). In practical terms, assuming that the criteria for CRC participation are met:

  1. Where a whole building is fully let to a tenant, the tenant will usually be responsible for purchasing the energy used by the building. Therefore, the tenant (or its parent organisation) will be the CRC participant.
  2. In multi-let premises where the landlord has responsibility for the energy used in the whole building, the landlord (or its parent organisation) will be required to participate in the CRC. This applies even if the landlord can claim the costs back from tenants by way of a service charge.
  3. In multi-let premises where the landlord pays for the energy used in common parts and individual tenants are responsible for purchasing energy used in their own units, both the landlord and the tenant (or their parent organisations) will be required to participate in the CRC.

What steps you can take to become CRC ready

Potential participants can prepare for the imminent onset of the CRC by taking the following steps.

Data gathering: Obtain information on electricity consumption for 2008 (the proposed base year). CRC participants will need to aggregate the energy used in buildings that they own (both in their own occupation and tenanted out) where they are responsible for purchasing energy used. Participants may engage with their energy suppliers with regard to collecting necessary data.

Budget for compliance: Assess the likely costs of CRC participation including administrative costs and the costs of purchasing allowances and budget ahead. Although the costs of purchasing allowances have the potential to be recycled back at a later date, the time lapse between purchasing allowances and receiving any recycled payment (approximately six months) will inevitably affect cash flow.

Establish organisational responsibility: Appoint someone (preferably a director or senior manager of the parent organisation) to be responsible and accountable for CRC participation (a CRC Co-ordinator). In addition, where a participant owns more than one property, it should appoint an individual in each building (a CRC Officer) to take responsibility for CRC participation (including progressing energy improvements for that building and passing energy use data to the CRC Co-ordinator).

Maintain records: Familiarise key personnel (including the CRC Co-ordinator and CRC Officers) with the record keeping requirements under the CRC scheme (as currently proposed) and plan for compliance. Training programmes may be set up for this purpose.

Change meters: Consider changing all meters (especially in rented property) to be measured on the half hour in order to ensure that information for all properties is comparable and reliable. Sub-meters for rented property will also enable landlords to assess the energy used by individual tenants.

Plan for energy efficiency: For existing buildings, plan ways in which CO² emissions could be decreased (this may involve appointing specialist consultants to assist). For new developments, consider energy efficiency requirements at the design stage.

Property transactions: Participants will need to consider whether they are likely to buy and sell property within a scheme year as this may affect the number of allowances that will need to be purchased. In addition, when conducting due diligence exercises prior to purchasing a property, regard should be given to the CRC credentials of the property to be purchased (eg, how energy efficient is it, or how much money will need to be spent to make it energy efficient). Failure to consider such issues may lead to additional costs and to a loss of position on the league table.

Seek legal advice for leases: Seek legal advice relating to the drafting of agreements which seek to apportion responsibility for CRC participation. For example, landlords and tenants may wish to negotiate lease clauses to cover CRC participation (including the sharing of the costs and benefits of participation).