Carbon Reduction Commitment: a tax like any other?


Author: Roy Perrott


The Carbon Reduction Commitment (CRC) scheme requires large energy users to offset their carbon emissions by buying carbon allowances from the government or on the open market. Businesses that used more than 6,000 MW of electricity in 2008 – which equates to about £500,000 at current prices – will be affected. The government has estimated that up to 30,000 businesses nationwide will fall within the scheme. But even if you are not directly affected, the CRC may still have an impact in other ways, particularly in relation to leases, where landlords may seek to pass the cost of the allowances on to their tenants.

As originally conceived, the CRC scheme was to have been revenue neutral. The proceeds received from the sale of carbon allowances would not go to the government. Instead, the money paid into the scheme would be "recycled" among the participants. Those participants who took steps to reduce their energy consumption, and therefore finished near the top of a league table, would receive a rebate. Those who finished near the bottom of the table, however, would receive nothing.

But times are hard and the government is strapped for cash. The temptation to snaffle the money that would otherwise have been recycled among the CRC participants has proved overwhelming. On 20 October, the government announced as part of its spending review that the recycling payments would be scrapped and the proceeds from the sale of carbon allowances will now go directly to the government to support the public finances. It is estimated that CRC will generate £1 billion a year in revenue by 2015. CRC has, therefore, in effect become a "green tax". As a sweetener to the industry, the scheme will be delayed by a year. The first sale of allowances, which was to have taken place in April 2011, will not now take place until April 2012.

You may have been following the debate in the property press as to whether a landlord will seek to, or even be allowed to, pass its CRC costs on to its tenants. The government has taken a hands off approach to this debate, seeing it as something for the property market to regulate. Earlier this year, a British Property Federation working party sought to achieve a common understanding on whether a tenant should be required to contribute to its landlord’s CRC costs. Unsurprisingly, no consensus was reached.

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.

In our experience, very few landlords have so far amended their leases to include an obligation on the tenant to pay the landlord’s CRC costs. For existing leases, of course, such an amendment would need the tenant’s consent but even for new leases CRC clauses are uncommon. Partly, this is due to the fact that we are in a tenant’s market. But the complexity of the CRC scheme is also a factor. How should the landlord’s CRC costs, which are spread across its entire portfolio, be apportioned among individual tenants? Should there be a flat charge, or should wasteful tenants pay more? Should the payments be included in the service charge or should the tenants be billed separately? 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?

If the CRC is now going to be a tax, this may make it easier for landlords to recover their CRC expenditure. A well drafted lease of commercial premises will require the tenant to pay any taxes and outgoings relating to the premises.

One can argue, though, that the CRC does not relate directly to the premises but rather to the landlord’s overall energy consumption. And is the CRC now a tax? It certainly looks that way. However, there is an argument that, if the carbon allowances can be bought on the public market – which the scheme still envisages – rather than direct from the government, the CRC is not really a tax, as the seller of the allowances is taking a share of the overall proceeds.

If the CRC is a tax, landlords may be content to leave their leases as they are but only a detailed payment clause, which would have to overcome the difficulties mentioned earlier, is likely to give the landlord certainty.

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

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