Carbon Reduction Commitment


Author: Roy Perrott


A brief reminder of what the Carbon Reduction Commitment (CRC) involves, in case you missed our client seminar on this topic earlier this month.

Basically, the scheme requires large energy users to offset their carbon emissions by buying carbon allowances from the Government. The scheme comes into force on 1 April this year. Although the first allowances will not need to be bought until April 2011, there is still plenty of work to be done by businesses that fall within the scheme.

If your business used more than 6,000 MW of electricity in 2008 – which equates to about £500,000 at current prices – you will be affected. The Government estimates that up to 30,000 businesses nationwide will fall within the scheme. But even if you are not directly affected, read on, as the CRC will have an impact in other ways, particularly in relation to leases.

So, how will the system work? At the end of 2009, the Environment Agency, which is responsible for administering the scheme, wrote to large energy users asking them to provide details of their 2008 electricity consumption. Those organisations that exceed the 6,000 MW threshold must register to join the CRC scheme by the end of September this year or face large fines.

Organisations that qualify for the scheme will have to buy carbon allowances to cover their carbon emissions. For the first two years of the scheme, these will be purchased direct from the Government at a fixed price of £12 per tonne. In this first phase, the minimum use of 6,000 MW will translate into carbon allowances costing approximately £40,000: a significant sum. After this, a market will be set up where the allowances will be openly traded.

Low energy users will be able to sell excess allowances to heavy users. Revenue from the scheme will not be kept by the Government but will be returned to the participants depending on their position in a league table.

Those organisations that have managed to cut their energy consumption will receive a partial refund, whereas those who finish lower down the table will receive nothing. The idea is that businesses will make significant energy savings, not just to save money but also because of the benefit to their reputation that will result from a good showing in the league table.

Even if you do not have to register to join the CRC, it is still likely to affect you. Unless the tenant has an independent electricity supply (check meters do not count), the tenant’s usage will count towards the landlord’s consumption. This is going to be particularly relevant for multi-let properties.

If a tenant’s consumption pushes the landlord over the 6,000 MW limit, the landlord is, understandably, going to want to pass at least some of its CRC costs on to the tenant. But how? Adding the costs to the service charge would be the obvious answer but that is not as straightforward as it seems. Does the lease entitle the landlord to pass on the cost? Existing leases almost certainly won’t. Even in new leases, it is by no means clear how the landlord’s CRC costs, which are spread across its entire portfolio, should be apportioned among individual tenants. Should there be a flat charge, or should wasteful tenants pay more? If the landlord subsequently receives a reimbursement from the scheme, should this be shared with the tenants? How does the landlord deal with the mismatch between the CRC year, which runs from April to March, and its service charge year? And what happens if a landlord within the scheme sells to someone outside the scheme, or vice versa?

Early signs are that there is no clear consensus within the industry about how to deal with CRC. Some landlords have indicated that they will take the cost on the chin. Others want to pass the cost down to their tenants but are unsure how to go about it. Most are biding their time, waiting to see what others do. We will keep you updated on what is a rapidly changing picture. In the meantime, we would be delighted to help if you have any queries on this complex regime.

Roy Perrott, Professional Support Lawyer, Fladgate LLP (rperrott@fladgate.com)

 

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