Emission control

The Climate Change Act 2008 received Royal Assent on 26 November 2008 and introduced the world's first long-term legally binding framework aimed at limiting the emissions of greenhouse gases ('GHGs'). The Act sets targets for the UK to reduce its emissions of GHGs by at least 26 per cent by 2020, and by a total of 80 per cent by 2050 (compared to 1990 levels). One of the main mechanisms to secure such reductions will be through the proposed Carbon Reduction Commitment ('CRC').

The CRC will oblige certain organisations to take part in a new mandatory emissions trading scheme. It will apply to any persons or organisations that consume 6,000 MWh of electricity from half-hourly metered electricity supplies during a qualifying year '“ known as 'qualifying undertakings'. This is typically equivalent to an annual electricity bill of £1m. Government departments and the Scottish and Welsh Administrators will be required to participate regardless of their electricity consumption '“ known as 'government participants'.

The Department of Energy and Climate Change (DECC) has indicated that approximately 5,000 organisations are likely to be caught by the CRC including large energy users in buildings such as offices and banks, retailers and supermarkets, hotel chains, universities and state-funded schools. The CRC is designed to generate a shift in awareness, behaviour and infrastructure and is expected to lead to 4 Mt of CO2 savings by 2020 through improvements in energy efficiency.

DECC published the third and final consultation on the draft CRC Regulations on 12 March 2009. Published alongside the consultation is the Draft CRC Order 2010. The consultation closes on 4 June 2009.

Complying with the scheme

The CRC is a 'cap and trade' emissions trading scheme. Organisations that qualify for the CRC will be required to report their annual CO2 emissions to the Government at the end of each scheme year. Each participant will be required to hold and cancel a number of 'emission allowances' at the end of each scheme year that corresponds with its total CO2 emissions. The Government intends to sell allowances to participants and in future years will control the amount of CO2 emitted by the participants by limiting the number of allowances available for sale. Participants will be able to trade allowances among themselves on the 'secondary market'. There will be a stringent penalty regime for those participants that fail to hold sufficient allowances at the end of each year to cover their emissions.

Although the scheme is scheduled to commence in April 2010, the qualification year is based on an organisation's half-hourly metered electricity use between January and December 2008. The first year of the scheme will run from April 2010 to March 2011. The CRC will broadly be revenue neutral to the Exchequer, with the revenue raised by the Government through the annual sale/auction of allowances recycled back to participants in an annual payment six months after the sale/auction. The payment to each participant will be proportional to their 2010/2011 emissions, with a bonus or penalty based on their position within a performance league table. The league table is designed to leverage an organisation's reputation drivers, with the worst emitters effectively being 'named and shamed'.

On an annual basis, affected organisations will be required to report all their UK-based CO2 emissions from all of their fixed point energy sources. This includes electricity, gas and other fuel types such as liquefied petroleum gas and diesel. Organisations will not be required to report on their transport emissions.

Each CRC participant will need to open an online registry account to record and keep track of allowances purchased in the auction phase of the scheme or traded in the secondary market. Although the CRC scheme is self-certifying, the scheme administrator is expected to carry out an annual risk-based audit on approximately 20 per cent of the organisations falling under the CRC.

Landlord and tenant relationships

In March 2008 DEFRA published a report entitled 'Carbon Reduction Commitment '“ Organisational Structures'. The report sets out an analysis of the CRC organisational structures in the public and private sectors.

CRC arrangements are likely to cause changes to the traditional landlord-tenant relationship. The latest consultation indicates that the 'Government intends to assign responsibility for energy use emissions within the CRC to the CRC organisation that is the party to the energy supply contract and provides that:

• where the landlord is part of a CRC organisation and is the counterparty to the energy supply contract for the energy supplied to its tenant(s), then that CRC organisation will be responsible for the energy use emissions incurred by tenants; and
• where the tenant is the counterparty to the energy supply contract, and is part of a CRC organisation, then that CRC organisation will have responsibility for the energy use emissions of the tenant'.

The Government has decided not to proceed with the option of allowing limited transfers of emissions responsibility from the landlord to the tenant. Clearly, going forward, landlords and tenants will need to consider how the costs and benefits of the CRC can be apportioned between them in both new and existing tenancy arrangements.