Government sets out Carbon Reduction Commitment simplification detail

As announced during last week's Autumn Statement, the Government intends to abolish the performance league table associated with the scheme. However, it will continue to publish participants' aggregated energy use and emission data. It has also pledged to review the effectiveness of the scheme in 2016, and to remove the tax element of the CRC as a "high priority" when public finances allow.

"We have listened to the concerns of business and radically simplified the scheme in order to cut down on administrative costs and red tape," Climate Change Minister Greg Barker said. "The scheme will now be more flexible and light-touch, saving participants money and helping them to save energy."

"Whilst the latest announcement gives greater certainty as to the future of the scheme for the next few years there is no indication of how the government propose to remove the tax element of the scheme," said property expert Siobhan Cross of Pinsent Masons, the law firm behind Out-Law.com. "Could this for instance involve the re-introduction of some form of re-cyling payment and in that event, now the performance league table is being abolished how would such payments be calculated?"

"Whilst the performance league table has been abolished the fact that energy use and emissions data will still be published may provide some reputational drivers for the reduction of emissions," said cross. "Continued uncertainty around the future cost of emissions under the scheme makes drafting leases to deal fairly with how the burden of such costs or the benefit of any refund of costs should be provided for difficult."

The CRC is a mandatory scheme aimed at improving energy efficiency and cutting CO2 emissions in large public and private sector organisations that are not caught by the EU Emissions Trading Scheme (EU ETS). CRC participants must measure and report emissions, produced from their usage of electricity and heat, and purchase allowances to cover these emissions. Over 2,000 organisations are required to take part in the scheme.

The scheme has been criticised for being costly for businesses to comply with and administratively complex, and described as a revenue-raising exercise with little connection to energy demand reduction. Business lobby group the Confederation of British Industry (CBI) published a report earlier this year in which it urged the Government to scrap the scheme and replace it with a simpler environmental tax.

However, in its response (75-page / 1.2MB PDF) to a consultation held in March on the detail of the changes, the Government said that the "tailored combination of a range of drivers" remained "the most effective way to tackle the barriers to the uptake of energy efficiency". "We consider the simplified CRC is the best way to achieve greater energy efficiency and contribute to meeting our carbon budgets in the relevant sectors," the response document said.

The document sets out 46 simplifications to the scheme, the majority of which will take effect at the start of its second phase in 2014, but some of the changes will be brought into force more quickly. The performance league table will disappear on 1 June 2013 and the number of reportable fuels will be reduced from 29 to two. The reduction in the number of reportable fuels goes further than the simplifications proposed at the consultation stage. The Government had originally proposed reducing the number of fuels to be reported to four, including oil and kerosene, but will now only require organisations to report on emissions as a result of electricity, and gas when used for heating purposes. In addition, the date for the surrender of CRC allowances will be extended further to the end of October in each year.

Other simplifications will see the removal of the '90% rule', which required all participants to account for at least 90% of their carbon footprint emissions, and the introduction of an organisation-wide 2% de minimis threshold for gas for heating. The use of Electricity Generating Credits will also be restricted.

There will be greater flexibility to disaggregate for separate participation in the second phase of the scheme and new rules will determine where CRC responsibility should lie in relation to the treatment of trusts that hold real property assets.. In addition, state-funded schools in England will be withdrawn from the scheme, but alternative measures will be taken to incentivise them to reduce emissions.

Retrospective sales will continue during the remainder of the introductory phase. The cap and auctioning requirements of the scheme will be removed and there will be two fixed price allowance sales in the second phase; one forecast sale at the beginning of the year, and one buy-to-comply sale after the end of the reporting year. The forecast sale price will be lower than the price at the buy-to-comply sale so that participants have an incentive to forecast.

Property law expert Allyson Colby of Pinsent Masons, the law firm behind Out-Law.com, noted that in some areas the Government had not fully addressed industry concerns. The document proposes disapplying the general rule that the landlord of a property, rather than the tenant, be responsible for reporting emissions in respect of ground lease arrangements with a minimum duration of only 30 years, rather than the 40 years proposed by the original consultation.

"This will not address the concerns of those in the property industry who take the view that participation in the scheme should be linked to users of energy, instead of being based on who signs the energy contract, since landlords have very little control of their tenant's carbon emissions," she said.

The final reporting year of Phase 1 is in 2013/14, which is also the registration year for Phase 2. Updated guidance for Phase 2 qualification is expected to be published by the Scheme administrators in late November/early December 2012. Updated guidance for Phase 1 and Phase 2, including changed reporting requirements for 2012/13 reports, is expected in early 2013.

The forecast allowance price remains unchanged at £12 per tonne of carbon dioxide in 2013-14 and £16 per tonne of carbon dioxide in 2014-15.  From 2015-16 onwards, the allowance price will increase in line with the RPI.