The Carbon Reduction Commitment ‘demystified’

Under the provisions of the Climate Change Act 2008, Britain is working towards an ambitious target of reducing greenhouse gas emissions by 80 percent by 2050 compared to a 1990 baseline. A key tool in the Government’s armoury as it strives to meet this and other legally binding environmental targets will be the Carbon Reduction Commitment (CRC) – a new mandatory emissions trading scheme, which it is anticipated will enter into force in April 2010.

The CRC is aimed at improving energy efficiency thereby reducing consumption and CO2 emissions. It will affect a broad range of non-energy intensive organisations both in the public and private sectors who will be faced with a raft of commercial considerations ranging from the introduction of new compliance procedures through financial and administrative costs to managing reputation and risk. So what are the key issues and how will the built environment be affected?

Participation and practical implementation
The CRC will apply to all organisations apart from those that fall within the scope of the EU Emissions Trading Scheme and bodies whose emissions are already covered by Climate Change Agreements. Transport emissions will also be exempt. The CRC, once it becomes law, will require organisations and Government bodies with a large energy demand to purchase CO2 allowances to cover their anticipated energy requirements. Those bodies will then surrender their allowances based upon actual energy use and emissions, purchasing additional allowances in the event that there is a shortfall – effectively a “cap and trade” based scheme. It should be noted, however, that unlike the EU Emissions Trading Scheme and Climate Change Agreements, the CRC will apply to persons and organisations, not installations and processes.

Compliance with the CRC will be mandatory. It will apply to all organisations that consume 6,000MWh of electricity or more from half hourly metered sources (i.e. “qualifying undertakings”). Government departments, however, will be obligated regardless of the measure of consumption. Energy consumption during 2008 will determine qualification in respect of the introductory phase of the CRC and qualifying organisations will have to register by September 30, 2010. The basic rule is that any electricity consumption must be taken into account if an organisation holds a contract with the electricity supplier for the electricity supplied – generally speaking, the organisation responsible for paying the bill. This may, of course, raise issues in the case of landlords and tenants, as the energy used in a leased building may be the responsibility of the customer who has the contract with the electricity supplier, in addition common parts must be considered – a point that will require further clarification.

Policing and enforcement
The CRC, once implemented, will be regulated by the Environment Agency in England and Wales, the Scottish Environment Protection Agency and the Northern Ireland Environment Agency. The regulators will enjoy wide powers, including the power to require the production of information, to audit and verify that information, conduct inspections and regulate by means of enforcement notice. A failure to comply with the CRC obligations may lead to a civil penalty notice of up to £5,000. Initially, if an “eligible” organisation fails to register then it will have to pay a fixed fine of £5,000 and may be fined an additional £500 for each subsequent working day that registration fails to take place. Organisations that fail to make an information disclosure when required will be liable to a fine of £1,000. Ignorance is not an excuse.

Corporate reputation
In line with CRC requirements, an annual performance ranked league table will be published by the Government – a public list of performance achieved by each CRC participant. As a consequence, energy efficiency data will be accessible and open to public scrutiny. Performance in the league tables will be assessed against certain metrics:

• An Absolute Carbon Reduction Metric – simply reflecting the relative changes in an organisation’s carbon emissions.

• An Early Action Metric – taking into account energy saving measures prior to the start of CRC (e.g. voluntarily installations of automatic meters).

• A Growth Metric – credits to organisations who are  expanding in an energy-efficient way.

At the end of first year of the CRC, performance will only be judged against the Early Action Metric, as (1) and (3) will be dependent upon data collated once the scheme is running, the Early Action Metric falling away after the first year. 

Fees and revenues
Participants will be required to pay registration fees and annual fees levied to cover the administration costs of an organisation’s account. The better a company performs in terms of reducing emissions, the higher it will appear on the annual league table. All revenue generated through the sale of emissions allowances under the CRC will be ‘recycled’ back to participants on the basis of the annual performance league table and their performance in reducing emissions.

During the introductory phase, allowances are to be sold at a fixed price of £12 per tonne of CO2. Those organisations that consume less than 6,000 MWh but have one or more half hourly electricity metres settled on the half hourly market will only be required to make an ‘information disclosure’ during the registration period.

The CRC and the construction industry
Buildings account for nearly half of Britain’s CO2 emissions. Naturally, organisations facing increasing public scrutiny will be examining their real estate and so the built environment is likely to be widely affected by the CRC. In this context, it is also worth noting that the vast majority of buildings in the UK are comprised of ‘existing stock’. Although it is arguably easier to address environmental issues in ‘new builds’, regulation such as the CRC will equally affect existing stock. As a result parties will need to consider addressing sustainability and CRC compliance issues in any refurbishment to existing stock.

The implementation of the CRC may see a further boost to the increasing interest in green clauses in building contracts. Until now, so-called ‘light green’ clauses, voluntary and non-prescriptive, have been prevalent but with greater scrutiny on energy consumption, obligatory ‘dark green’ clauses may gain popularity. Another question to be addressed is which party would bear the ‘sustainability’ risk in a new build development.

Whilst parties keen to embrace environmental construction, or indeed those reacting to government regulation such as the CRC, may impose sustainability obligations in their contracts, a major problem still facing the industry is how to measure such performance. BREEAM is now widely used as the standard for assessing the environmental impact of buildings but what (if any) will be the pre-eminent measuring standard to ensure CRC compliance, particularly when a number of eminent organisations are developing environmental measurement indices?

Conclusion
In terms of action that will be required by “affected” organisations, a comprehensive audit of existing building stock and detailed identification and verifications of all energy consumption will be necessary as “upfront” compliance preparation. As will the preparation of accurate and comprehensive records – key to managing CRC obligations. This exercise should be viewed on the critical timescale. From a transactional perspective, prescriptive, ‘green’ property clauses and construction contracts may well become the norm, tied in with the use of ‘light green’ memoranda of understanding and cultural changes in behaviour. 

It is clear that the government is intent on taking the ‘green’ agenda forward and the creep of environmental regulation will have implications for all of those affected in terms of additional costs, administration and resources necessary to ensure compliance, thereby avoiding potential liability and reputational risk. That said, however, their may also be benefits to be reaped. Compliance with the CRC could lead to substantial savings on energy costs, which in turn will lead to improvements in reputation the further an organisation moves up the CRC league table.

Source information:
Brian Greenwood, Partner and head of the Environment Group, Sherryll L’oken and Brad Fearn, associate in the Construction and Engineering Group at European law firm Taylor Wessing