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CRC Energy Efficiency Scheme - an overview

03 March 2011 #Real Estate


The CRC Energy Efficiency Scheme (CRC) is the UK-wide mandatory emissions trading scheme, which applies to large businesses and public sector organisations and which came into operation on 1 April 2010.

Am I covered by the CRC?

If an organisation has any Settled Half Hourly Meters and was supplied with 6,000MWh or more of electricity through those meters during the year before each Phase (a period of four years for the Introductory Phase starting on 1 April 2010 and periods of six years thereafter), it will have to register as a participant in the CRC.

It was originally estimated that around 5,000 private and public sector organisations would be obliged to participate in the CRC, primarily those whose annual electricity bills are approximately £500,000 and over.  It was estimated that another 20,000 organisations would not be obliged to participate but would still have to provide the regulator with information about energy use.

The organisations covered by the CRC include large offices, large retailers (such as shopping centres and supermarkets), hotel chains, hospitals, schools and local authorities.

Registration is done online through the CRC Registry which is run by the Environment Agency.

The CRC is a cap and trade scheme

The government currently proposes to auction a certain number of Allowances to participants in each Phase after the Introductory Phase.  However, this may change owing to the suggestions made by the Committee on Climate Change in their report.  One Allowance is equal to one tonne of carbon dioxide and at the end of each Compliance Year (each year in a Phase), participants are obliged to surrender enough Allowances to cover the amount their emitted in that period.  Participants are permitted to trade Allowances with other participants so for example a participant that has more Allowances than its predicted emissions may wish to sell the surplus to another participant that does not have sufficient Allowances.

During the Introductory Phase (1 April 2010-31 March 2014) an unlimited number of Allowances will be sold by the government at a Fixed Price sale.  This will last for a month and the price of Allowances will be £12/tCO2.  It appears that the Fixed Price sale of Allowances will take place in April 2012 and April 2013 and it is assumed that in April 2012 participants will have to purchase Allowances to cover CRC emissions for the preceding year commencing April 2011 and their forecast emissions for the forthcoming year commencing 1 April 2012.

The current intention is that from Phase 2 (1 April 2013-31 March 2019) onwards, the number of Allowances available for sale will be limited by the government and sold at auctions held at the start of each Compliance Year with the first auction in Phase 2 taking place in April 2014.  There will be a maximum limit on the number of Allowances that can be bought in the auction by any one participant to prevent a single participant forcing up the price of Allowances.

Other than Allowances relating to the Introductory Phase, an Allowance can be used to cover emissions in future compliance years.

Once the government has held the fixed price sales or auction of Allowances, if participants wish to buy more Allowances, they can do so either through the Secondary Market (e.g. by buying Allowances from other participants) or the Safety Valve mechanism which enables participants to buy additional Allowances from the Administrator at certain stages during a Compliance Year.  The purpose of the Safety Valve is to protect against the price of Allowances becoming too high as compared to those in the wider carbon market.

From October 2011 and in October every subsequent year, the Administrator (being one of a number of regulators across the UK) will publish a league table or performance table ranking participants based on their respective performance in three Achievement Tables, each of which relates to one of three metrics:
  1. The absolute change in CRC emissions ("Absolute Metric");
  2. The "Early Action Metric";
  3. The relative change in CRC emissions ("Growth Metric").
The Absolute Metric is a measure of how a participant`s emissions have changed over the last Compliance Year as compared to a rolling average of the previous five years, the Early Action Metric is designed to give participants credit for actions they have already taken to reduce their emissions prior to the start of the CRC and the Growth Metric is designed to credit participants that grow in a "low carbon" way.

The Administrator will audit approximately 20% of participants each year so participants should anticipate being audited once every five years.

The CRC Order provides for both criminal and civil penalties for non compliance.

Landlords and Tenants

Under the CRC Landlords are liable for their tenants` emissions if they supply energy to their tenants (as is often the case in multi-let office buildings and shopping centres).  The terms of a lease may not always enable Landlords to recover these costs from their tenants and in such circumstances Landlords may be obliged to bear the cost of purchasing Allowances.

Landlords may wish to check the provisions of their existing leases to determine whether they are able to recover CRC costs from their tenants and to consider the amendment of their standard form leases for future lettings to enable them to recover such costs.
Clarkslegal, specialist Real Estate lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Real Estate matter please contact Clarkslegal's real estate team by email at realestate@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.

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Rachel Krol

Rachel Krol
Partner

E: rkrol@clarkslegal.com
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