Budget Banishes CRC – and an Extension of ESOS Could Still be on the Cards, Warns Hogan Lovells
16 March 2016
The Chancellor announced in today's Budget that the Carbon Reduction Commitment (CRC) will be abolished, with effect from 2019.
The financial aspects of the CRC will be replaced by an increase in the Climate Change Levy, which will be much simpler administratively and largely resolve the "split incentive" issue that has arisen in commercial lease negotiations in particular over the past few years, with tenants benefitting from energy efficiency savings generated by investment from landlords. The Chancellor confirmed that the change is intended to be revenue neutral.
Commenting on these changes, Louise Moore, partner in Hogan Lovells energy and natural resources group, said:
"The Government consulted on this last year, and there was significant support in the consultation responses for its abolition, so this is no surprise. The abolition of the CRC and increase in the CCL will relieve businesses of an unhelpful administrative burden whilst maintaining (and possibly even enhancing) their commercial incentive to reduce energy consumption and greenhouse gas emissions. It will also free up resource at the Environment Agency, and all this is to be welcomed".
It had been thought, following the consultation last year, that the Energy Savings Opportunity Scheme (ESOS), which requires large businesses to conduct energy audits of their properties every four years, would be extended to replace the compulsory reporting element of the CRC, but there was no mention of this in the Budget. However, there is no indication yet that the Government does not intend still to make this change as well, so it could still be on the cards.
Large businesses will be familiar with ESOS from their experience of complying with it in December 2015/January 2016, but if it is extended then we can expect a wider range of businesses to be brought within its scope.
"If ESOS is extended then the businesses that come within its widened scope will need to start planning to comply straight away. The Environment Agency helpfully extended the compliance deadlines for ESOS from early December 2015 to late January 2016, but there is no indication as yet that they would do so again, so if you do come within the scope of ESOS you should assume that this time the compliance deadlines will be strictly enforced. Failure to comply can leave you open to fines and other penalties, including a mandatory "publication penalty", which could cause you reputational harm. So, if you think that ESOS may now apply to you, you should start thinking now about how you will comply with it, and make the necessary arrangements as soon as you can".
Lessons learned from the compliance process for December 2015/January 2016 include:
- Appoint and engage with your Lead Assessor as early as you can, to ensure that he understands your corporate and property-holding structures and will have sufficient resource to undertake all the audits that you require. If necessary, consider engaging additional consultants to assist with this. If you don't appoint until the last minute, there may be no Lead Assessors left with the capacity to help you.
- Start analysing your corporate and property-holding structures at the same time, so that you can identify all the entities that must be included in your filings, and all the properties that must be audited, to your Lead Assessor. Remember that entities that you "control" may be part of your corporate group for the purposes of ESOS, even if you only have a minority shareholding in them; if you can appoint directors, for instance, you probably have to treat them as part of your corporate group. You may need legal advice particularly on complex structures and marginal cases.
- Where you have members of your corporate group who are functionally separate, you should consider "disaggregating" them so that they participate separately and in their own right. You will need to have this conversation with them at an early stage, so that they have time to make their own arrangements and are less likely to refuse to disaggregate, and so that you have time to procure the necessary audits for them if they do refuse, rather than being left with legal responsibility for their non-compliance.