UK: CRC - the Latest Twist - a "Stealth" Tax?

Last Updated: 21 October 2010
Article by Elizabeth Shepherd and Michelle T. Davies

The Treasury announced yesterday in its Comprehensive Spending Review that the CRC Energy Efficiency Scheme is to be simplified "to reduce the burden on businesses". The good news is that CRC allowances will not have to be purchased until 2012 (although they must still cover 2011-2012 emissions onwards). The bad news is that the Treasury will keep the money raised from selling CRC allowances (which they expect to total  £1 billion a year by 2014 - 2015), rather than recycling it back to participants.

In summary:-

  • CRC is, as some people have previously suggested, apparently to be turned into a tax.  This is the net effect of the Treasury keeping the money which had been intended to be recycled back to participants. They state that it will be used to support the public finances, including spending on the environment.  This is clearly a significant change and in some press yesterday, it was described as a £3.5 billion green 'stealth' tax. It is not clear whether recycling payments will ever be reintroduced, but it seems unlikely.
  • The first allowance sales for 2011-12 emissions will now take place in 2012 rather than 2011. This means that in 2012 participants will probably have to buy 2 years' worth of allowances - some retrospectively for 2011-2012 and some looking forward to cover 2012-2013 emissions. We say "probably", because we currently have no information on how exactly this will work.   
  • The Treasury has said that "further decisions on allowance sales are a matter for the Budget process". It is not known what exactly is meant by that i.e. whether this comment relates to recycling arrangements or the procedures around allowance sales, their timing and whether an auction process is still proposed.
  • The same landlord and tenant issues remain, in terms of the debate around whether a landlord is, or should be, entitled to recharge the cost of CRC allowances to the tenant. If anything, it will make the debate more heated, now that there is neither hope nor expectation for either party of getting any money back through the recycling payments. On existing leases, landlords may now seek to argue that CRC is a "tax" which they are entitled to recharge to tenants through the service charge, though tenants are likely to resist this argument. For some time Eversheds has been working closely with the British Property Federation with a view to achieving an industry standard approach to the allocation of responsibility for CRC costs between landlord and tenant, but these latest developments are not helpful to this.
  • It is unclear whether there will still be a performance league table. If there will be, with the link to recycling payments now removed, the incentives for good performance will be reputational and linked to saving energy costs, rather than around maximising the recycling payments.
  • PFI is not mentioned, so we assume no changes at present to the Environment Agency's recently published guidance regarding the allocation of responsibility for CRC costs.
  • The obligations around data collection and reporting remain unchanged, so far as we know. This means that annual and footprint reporting is still required.

In conclusion, the Government seems to have realised that it has missed a trick (in terms of £1 billion a year by 2014-2015) at a time when it is looking to maximise its revenue and reduce its expenditure. The withdrawal of recycling payments will come as a blow to businesses, which had understood to date that CRC would be Treasury neutral - not so any longer. Furthermore, the one year postponement of the need to purchase CRC allowances is little compensation. since allowances will still have to be purchased in respect of 2011 - 2012 emissions, albeit only in 2012, so this is simply a timing issue. Businesses which had begun to come to terms with CRC (and have already incurred costs, for example in achieving accreditation to the Carbon Trust Standard) will now have to adjust their strategies in the light of these changes, and for landlords and tenants, life has not become any easier.

This will certainly not be the last word on CRC. We are now awaiting the Government's response to the recent Climate Change Committee report which proposed postponing the auction sale for allowances until the start of phase 3 in April 2016. The effect of this would be no cap on the number of available allowances and a fixed price sale each year until 2016, so as to reduce the complexity. It is too early to say however if this suggestion will be taken up.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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