What is the CRC Scheme?

The Carbon Reduction Commitment Energy Efficiency Scheme ("CRC Scheme") is a new mandatory climate change and energy saving Scheme aimed at improving energy efficiency and cutting carbon dioxide (CO²) emissions in the UK. It was introduced on 1 April 2010 and is administered by the UK's Environment Agency.

With effect from April 2011, qualifying organisations will be required to purchase "allowances" from the UK Government equal to their annual emissions, at an initial cost of £12 per tonne of CO² they produce.

During the introductory phase of the CRC Scheme there will be no limit on the number of allowances issued. From March 2013, however, allowances will be capped and sold by way of auction, thus creating a financial incentive for organisations to invest in ways to reduce the number of allowances they need to buy.

All proceeds from the CRC Scheme will be "recycled" back to participants. League tables will be published with participants ranked according to how their emissions have reduced. These rankings will determine the value of the "recycling payment" made, with participants who have improved their energy efficiency being given a bonus element and participants ranked lower on the league table suffering a penalty.

Who Will it Affect and What Action is Required?

Organisations will qualify for full participation in the CRC Scheme and must register with the Environment Agency by 30 September 2010, if they, together with members of their group:

  1. are responsible for an energy supply contract;
  2. had at least one "settled half-hourly" electricity meter (HHM) during 2008; and
  3. consumed energy in excess of 3,000 mega watt hours (MWh) during 2008.

The extent to which an organisation must participate depends on its energy consumption during the relevant "qualifying period". The relevant "qualifying period" during the Introductory Phase is 2008:

  1. Organisations that consumed between 3,000 MWh and 6,000 MWh (approximately £300,000 -£500,000 per annum) in 2008 must make an information disclosure to the Environment Agency.
  2. Organisations that consumed more than 6,000 MWh per year of half hourly metered electricity during 2008 qualify for full participation and need to register with the Environment Agency. Once registered they will need to monitor and record their emissions and purchase allowances annually.

It is estimated that initially around 5,000 organisations will qualify for full participation, including supermarkets, hotels, water companies, banks, local authorities and all central Government Departments. Qualifying organisations will have to comply fully with the Scheme or face financial and other penalties. A further 15,000 will have to make an information disclosure.

Which Entities are Grouped for the Purposes of the CRC Scheme?

Organisations are required to participate in the CRC Scheme on a group wide basis. Only UK energy consumption is counted for the purposes of the Scheme but all members of the group, including non UK members are jointly and severally liable for compliance. The highest parent entity within a structure has additional administrative responsibilities under the CRC Scheme. Where such entity is an offshore entity and has no UK subsidiaries in its group, it will need to appoint a compliance account holder with a principal place of activity in the UK to represent it in the CRC Scheme. Membership of a group is determined for the purpose of the CRC Scheme by applying the same tests used for determining an accounting group, as set out in the Companies Act 2006.

What Impact Will the CRC Scheme Have on Trustees?

There is particular interest at present surrounding the impact of the CRC Scheme on trusts where the trustees hold UK property directly. This interest stems from the way in which the CRC Energy Efficiency Scheme Order 2010 ("Order") requires organisations to aggregate their energy use for the purposes of the CRC Scheme and determines whether an entity is part of a group by reference to provisions in the UK Companies Act 2006. This appears to have unintended consequences for trustees.

Where a trustee holds UK real estate indirectly by way of shares in a company, it is recognised that the trustee is acting in a fiduciary capacity and the Order provides for the energy consumption of the Trust to be aggregated with that of other undertakings within the beneficiaries' group. Individuals are outside the scope of the CRC Scheme so, consequently, where the beneficiaries of the trust are individuals, the shareholdings are treated as owned by such individuals and any qualifying electricity supplied to the undertaking will not need to be aggregated with that consumed by the beneficiaries. Where the beneficiaries of the trust are undertakings then the shareholdings will be treated as owned by such undertakings in proportion to their rights under the trust instrument. Where any beneficiary is beneficially entitled to more than 50% of the voting shares in the undertaking held in the trust (or otherwise qualifies as a parent undertaking of that undertaking pursuant to Companies Act 2006) then any qualifying electricity supplied to each such undertaking must be aggregated with that consumed by the relevant beneficiary and its wider group.

By contrast, where UK real estate is held directly by a trustee on trust for several different clients, the current guidance on the Order is that the energy consumption for all such properties is aggregated at the level of the trustee for the purpose of determining whether the trustee is required to participate in the CRC Scheme.

In the context of professional trust companies, this could result in:

  1. properties being grouped together notwithstanding that there is no commonality of ownership or economic interest between the beneficiaries;
  2. entities being grouped together and brought into the scope of the CRC Scheme even though they are not genuine groups that the Order sought to cover.

Jersey Finance has been in correspondence with the Environment Agency in relation to the application of the CRC Scheme to trust structures but the response suggests that the issue cannot be resolved without the Order being amended.

What is the Timing for the CRC Scheme Being Introduced?

The CRC Scheme was introduced on 1 April 2010 and qualifying organisations must register by 30 September 2010.

The introductory phase of the CRC Scheme lasts for 3 years with participating organisations being required to purchase credits from April 2011 based on their energy consumption during 2008.

What are the Consequences of Failing to Register?

If an eligible organisation fails to register by 30 September 2010, it may be subject to a maximum fine of £45,000, comprising:

  1. a fixed fine of £5,000; plus
  2. an additional fine of £500 per working day for each subsequent working day of delay for a maximum of 80 working days.

Reputational damage must be also considered as noncompliance will be published.

What Steps Should be Taken Now?

If you administer entities with significant interests in the UK you should take the following steps in advance of 30 September 2010:

  1. liaise with clients in relation to each relevant entity and ascertain what steps are being taken to develop a CRC strategy;
  2. request a copy of any advice received by the client on its participation in the CRC Scheme;
  3. check that any advice takes into consideration the entities which you administer and where possible ask for client specific advice to be extended to your trust company so that you can rely on it;
  4. consider whether your trust company needs to participate in the CRC Scheme and possibly register with the Environment Agency in view of the current drafting of the Order. As part of this process you could check with the administrator of the CRC Scheme whether your trust company had a settled HHM in 2008 by emailing crchelp@environment-agency.co.uk . If your trust company did not have a settled HHM in 2008, it may still fall within the scope of the CRC Scheme where it appointed one or more agents to deal with energy contracts on its behalf for specific client structures.

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.