The CRC, a new mandatory carbon trading scheme which will affect most businesses with electricity bills of over £500,000 in 2008, became law on 17 March.

The CRC requires qualifying organisations to buy, on an annual basis, carbon credits (or allowances) equivalent to 90% of their total UK energy use. The money raised by the scheme will then be ‘recycled’ back to the participants in varying amounts depending (largely) on their emission reduction performance, as reflected in an annually published league table.

Failure to comply with the CRC may lead to hefty fines, “naming and shaming” and even potential director liability.

Registration for the CRC will begin on 1 April 2010 and organisations will need to consider a number of issues, some of which are outlined below.

Registration

  • Organisations (see below) qualify for the CRC if their aggregate UK electricity consumption in 2008 exceeded 6000MWh from so-called ‘half-hourly meters’.
  • Qualifying organisations must register online via the CRC Registry from 1 April 2010 and must have done so by 30 September 2010.
  • Applications for ‘disaggregation’ (which we will explain below) must be made by 30 June 2010.

Disaggregation is likely to be key to reducing the overall cost of the CRC for a large number of businesses.

Groups of companies

The CRC treats a Group of companies as a single organisation for participation in the scheme. An entity (A) is considered part of a Group with another entity (B) if A is the parent or subsidiary of B, or if A is a March 2010 subsidiary of any of B’s parents. A parent-subsidiary relationship can be formed in a number of ways, including where the parent:

  • holds the majority of voting rights in the subsidiary; or
  • is a member of the subsidiary with rights to appoint/ remove the majority of its board of directors; or
  • has a right to exercise a dominant influence over the subsidiary.

The rules on what constitutes a “group” can lead to some strange results. For example, in the context of private equity and funds, there is a risk that investee companies become aggregated with the investor/fund manager. Again, in the banking sector, debt-for-equity swaps can present a difficulty if the underlying investment becomes part of the bank’s Group.

Where a Group participates in the scheme, all Group companies will be jointly and severally liable for any non-compliances with the scheme rules.

Overseas entities are covered by the scheme, although the obligation to hold allowances equal to a Group’s energy use only applies in relation to the UK.

Disaggregation

Groups can choose to ‘disaggregate’ any subsidiaries which would qualify for the CRC in their own right (known as Significant Group Undertakings or SGUs). This means the selected SGUs will become separate participants of CRC. However, disaggregation is only possible with the consent of the SGU and to the extent that the remainder of the Group does not fall below the 6,000MWh qualification threshold.

Considered application of the rules on disaggregation could enable Groups to achieve significant cost savings as the impact of growth in a Group (in terms of its position in the league table) is isolated to the disaggregated Group.

Joint ventures and franchises

Certain other business structures will require careful examination when assessing the application of the CRC including:

  • Joint ventures; where one party has a greater than 50% stake, that person will be responsible for the energy use, but where no single person or entity has a majority share, the JV itself is responsible;
  • Franchises; where the CRC deems that a ‘franchise’ exists, typically the franchisor assumes responsibility for the energy use attributable to the franchisees.

Leased premises

Landlords and tenants may wish to consider how they will allocate the benefits and burdens of the CRC. Responsibility under the scheme will depend on the supply arrangements: if the landlord holds the supply contract, energy use may be regarded as the landlord’s (even if the cost is passed on to the tenant) but where the landlord entity is a different entity to that holding the supply contract (even where these two companies are in the same group) the tenant may be regarded as responsible for the energy use.