CRC and the Spending Review - The Government keeps the money

Background

Even before the expiry of the first registration period for the CRC Energy Efficiency Scheme (CRC) on 30 September 2010 there were murmurings of discontent about the complexity of the scheme.

In the July 2010 Annual Energy Statement the Government declared its intention to “keep the operation of this scheme under active review with a particular eye on simplifying it and ensuring it properly incentivises those who do most to improve energy efficiency. We will aim to introduce changes ahead of the capped phase.”

On 11 August 2010, Energy and Climate Change Minister Greg Barker conceded that “the original complexity of the scheme may have deterred some organisations” and called for suggestions as to how the scheme could be made simpler in the future.

This call for simplification was echoed by the Committee on Climate Change in their report to Government in September 2010, which highlighted options for a fundamental redesign of the scheme including reforming the revenue recycling proposals and even dropping the need to purchase allowances.

Spending Review

Clearly, this discontent has not fallen on deaf ears. Although not specifically mentioned in the Chancellor’s speech to parliament on October 20 2010, paragraph 2.108 of the Spending Review 2010 states:

“The CRC Energy Efficiency scheme will be simplified to reduce the burden on businesses, with the first allowance sales for 2011-12 emissions now taking place in 2012 rather than 2011. Revenues from allowance sales totalling £1 billion a year by 2014-15 will be used to support the public finances, including spending on the environment, rather than recycled to participants. Further decisions on allowance sales are a matter for the budget process.”

In one brief paragraph the Government has fundamentally altered the way in which the scheme is supposed to operate.

Impacts

Clearly, a lot of detail will have to emerge to understand the full impact of the proposals. For example, is the postponement of the sale of allowances to 2012 merely a postponement or is the plan for allowances in respect of 2011-12 energy emissions to be purchased in 2012 in arrears (as opposed to the original design of the scheme where allowances are to be purchased in respect of estimated future emissions)?

What is clear is that the plan for the scheme to be ‘revenue neutral’ to the Government has been abandoned. Instead of paying back the money generated from the sale of allowances, based on emissions proportions and comparative performance (as demonstrated in the annual league tables), the Government has now decided to retain the money and use it, “to support the public finances, including spending on the environment”.

The fact that the payments are to be deferred for a year, on whatever basis, will be cold comfort to those organisations required to fully participate. Instead of facing a 6-month cashflow consequence they will now be supporting public finances (including environment spending) based on emissions from the energy use they are responsible for under the scheme. What the economic consequences of this volte-face might be on participating organisations remains to be seen but it is a substantial financial burden that will not yet have been budgeted for.

Burdens

Exactly how the CRC will be simplified to reduce the burden on businesses will probably take some time to emerge but, given the Government’s deficit reduction plan, the financial impacts of the CRC is one burden on businesses that has been increased, not reduced.

We will be monitoring developments and will issue further briefing notes accordingly, but if you should have any comment or queries in the meantime, then please do not hesitate to contact us.

Lawyers