Recent Changes to the UK's Carbon Emissions Trading Scheme, <i>Real Estate Intelligence</i>

Recent Changes to the UK's Carbon Emissions Trading Scheme, Real Estate Intelligence

The CRC Energy Efficiency Scheme Order 2013 came into force on 20 May this year. It introduces various changes to the UK’s stand alone mandatory system of carbon emissions trading (the "CRC"). The new rules introduce certain simplification changes that were announced by the Government in December 2012 following a long process of consultations.

The main purpose of the original CRC, which came into operation on 1 April 2010, remains. It aims to intensify energy efficiency improvements of large private non-intensive energy users and public sector organisations too small to qualify under the EU emissions trading system. The cost of participation should be far outweighed by the energy efficiency cost savings the scheme encourages. At the same time the CRC contributes to the necessary carbon emissions reductions that the UK has to meet through its international climate change commitments.

The scheme involves organisations monitoring and purchasing allowances to cover their carbon-dioxide emissions. One allowance is required for each tonne of carbon emitted. Full participation under the existing scheme is required if, in a relevant qualification year, (a) an organisation has at least one meter settled on the half hourly market; and (b) the total of their half hourly metered electricity consumption is greater than 6,000 megawatt hours (“MWh”) in that year. The CRC operates by reference to phases and compliance years. Participant’s allowances are held in compliance accounts the Environmental Agency run registry. At the end of each compliance year participants will have to surrender sufficient allowances to cover the amounts of emissions for that period.

Despite the May 2013 Order the CRC structure remains largely the same. Whilst most of the changes will only apply from the second phase of the scheme ( now confusingly renamed the “Initial Phase”), a number have taken effect from 1 June 2013, and so will apply to the remaining period of the first phase which ends in 2014. In particular the number of fuels participants have to account for in their energy reporting has been reduced from 29 fuels to just electricity and gas (and only where gas is used for heating). At the same time a 2% de minimus threshold for reporting of gas supplies has been introduced. Under the original scheme arrangements the Environment Agency reviewed carbon reduction achievements and published a performance league table ranking the participants' energy use. This was seen as an important tool to encourage better energy efficiency behaviour, but this requirement has now been scrapped. 

As indicated above the relevant phases of the scheme have been renamed. What was Phase 2, that runs from April 2013 to March 2019, is now called the "Initial Phase". What is currently Phase 1 is now referred to as the "First Phase" and what was called Phase 3 is now known as the “Second Phase” and so on. Importantly the qualification criteria under the new scheme is not radically different in that it remains at 6,000 MWh but qualification will now be based on electricity supplied only through settled half hourly meters, rather than other types of half hourly meters and dynamic supply as was previously the case. A more cumbersome change has occurred as a result of the removal of the residual percentage rule (known as the "90% Rule"). Participants will have to effectively report 100% of their energy use (subject to the 2% gas de minimus rule) rather than 90% and so this may actually increase the administrative burden, even though the intention of the new rules was to simplify the system.

The "Landlord and Tenant" rule persists with one slight change. Energy supplies provided by the landlord to the tenant (for example by way of sub-metering) are still treated as the Landlord’s consumption and so CRC compliance in respect of such supplies remains with the Landlord. As a concession though compliance in such cases will transfer to the tenant if the property is let on a building lease of 30 years or more.

The rules also make a number of changes on organisational structures so that, organisations can participate under their "natural business units". Subsidiaries or a group of subsidiaries can now apply for a separate registration under the CRC scheme without having to be a "significant group undertaking" (SGU) (ie. a part of an organisation which would qualify to participate in its own right). This will allow for greater flexibility on participation. The definition of SGU has also been replaced with one of participant equivalent (PE). Changes have also been made to the way trusts are treated where they hold real estate assets. An operator of a trust may apply for registration as a separate participant in relation to any trust for which it carries on a regulatory activity. When this occurs the operator will not be grouped with its parent undertaking for the purpose of the compliance. This will offer professional trustees greater flexibility.

Two fixed price sales of allowances will be held each year, a forward sale at a fixed price and a “buy to comply” sale towards the end of the compliance year, so that companies can meet allowance shortfalls. The current cost for a forward allowance is £12 per tonne but this will rise to £16 in 2014/15 and from 2016/15 onwards, the price is set to increase in line with the Retail Prices Index. Details are awaited as to how much higher the “buy to comply” sale price will be. Other changes include extending categories of unmetered supplies, an expansion of unconsumed supply rules, the removal of the requirement to produce footprint reports and, importantly, the removal of energy supplies from EU ETS installations and climate change agreement facilities. In addition, the CRC will no longer apply to state funded schools in England.

Whilst the changes appear to provide a degree of simplification, it is fair to say that the CRC Scheme is still complicated. A further review of the Scheme is scheduled to take place in 2016.

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Chris Papanicolaou

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