Carbon reduction commitment This comes into effect next year, but the government is providing no guidance as to costs. Peter Williams and Charlotte Eddington consider the issues.
Last month, the government issued its response to this summer’s consultation on the draft order to implement the carbon reduction commitment (CRC). A considerable number of changes to the scheme have been proposed, many of which are technical. However, a number of the changes are important, including the following:
? Change of name: The CRC is now to be called the CRC Energy Efficiency Scheme. Despite this change, it is likely that the acronym CRC will still be used.
? Removal of the double purchase of allowances: The first year of the scheme (April 2010 to March 2011) will be a reporting-only year. Allowances to be surrendered against an organisation’s emissions will not have to be bought until year two (2011-12). This means that participants will not have to buy two years of allowances in April 2011, as was previously proposed.
? Extra credit for early action: In year two, any organisation that acts early to improve its energy efficiency will receive extra weighting.
? On-site renewables: Recognition will be given to organisations that use on-site renewable energy, such as wind turbines or solar panels, by publishing the increased carbon savings from their use. However, contrary to many consultees’ wishes, it will still be necessary to buy allowances for such energy.
? Subsidiaries participating individually: Subsidiary companies that would qualify in their own right for the CRC on the ground of electricity usage through half-hourly meters in 2008 (to be termed “significant group undertakings”) will be allowed to participate separately from the parent group. However, this is not an option if, by taking that significant group undertaking out of the parent group, the remainder of the group falls below the qualifying level.
? Domestic energy use not within the CRC: Energy use for domestic purposes will fall outside the scope of the CRC, although this will not affect domestic buildings that are used for education, employment, religious activities, recreation and medical care.
Landlord and tenant issues
Those who hoped that the government would provide guidance, or even direction, on how landlords and tenants are expected to divide the costs of the CRC have been disappointed. An additional provision in the legislation will require a tenant to co-operate with its landlord for the purpose of complying with the CRC other than this, there is no change to the landlord and tenant position. In particular, the policy of requiring landlords to be responsible for tenants’ emissions is unchanged, and there will be no mechanism to allow the voluntary transfer, by agreement, of responsibility from landlord to tenant that had been proposed in an earlier consultation.
The industry has been left to devise its own solutions. This had been widely anticipated and, thus, the same cross-industry CRC working party that drew up the Guide for landlords and tenants earlier this year has been reconvened to examine whether there is scope for agreement on standard lease provisions. If agreement can be reached, it is envisaged that the working party will issue a consultation paper on the topic.
A standard set of lease provisions would have the following advantages:
? Acceptability in the marketplace.
? Landlords, tenants and their respective lawyers would become familiar with the standard provisions.
? A collegiate approach to drafting would be more likely to take in all the permutations that need to be covered.
? Less time would be spent in negotiations.
? It would be possible to use standardised management systems.
? It would avoid the mayhem that would ensue if each landlord or law firm developed a “favoured” system of accounting for the cost of allowances and the distribution of the revenue recycling payments. Since this would not be transferable to other landlords, at best it could delay property transactions and at worst stifle them.
? Existing leases might perhaps be varied to incorporate the standard provisions by the agreement of landlords and tenants.
? Tenants of more than one landlord, such as multiple retailers, would find it helpful if all landlords were to treat CRC issues in the same way.
Standard lease provisions
If an attempt were to be made to develop standard lease provisions, it would be necessary to consider a number of issues, including the following:
? Would it be appropriate for tenants to contribute to their landlords’ costs of complying with the CRC?
? If landlords were to buy allowances to cover their tenants’ emissions, should they use their own funds or would these be provided by the tenants in the same way as an advance payment of service charge?
? Towards which (if any) of a landlord’s administrative costs might tenants be expected to contribute?
? Might allowances be bought for specific buildings or for a portfolio?
? How should the “cost” of allowances be ascertained, given that landlords are likely to buy them for their entire portfolio of buildings at different times and at different prices in any scheme year, and (except in the last year of the introductory phase) are permitted to hold over allowances to use in future years?
? Should the revenue recycling payments be distributed to tenants or be used to improve the energy efficiency of the landlord’s buildings?
? How should such payments be allocated? Is it possible to devise a system whereby tenants that reduce their energy use the most are rewarded, and the laggards penalised? Or will such a scheme be too difficult and expensive to operate?
? What would happen to the tenants’ contributions to the landlord’s CRC costs should the landlord sell the building?
? Who would take the risk if the landlord’s CRC policy of trading allowances results in higher costs for all parties? For instance, what would happen if the landlord guesses that the cost of allowances will be lower in the secondary market than at auction – but is ultimately proved to be wrong?
Make your voice heard
Organisations that are involved with commercial property – whether as owners, occupiers or managers – are invited to express their interest in participating in any consultation exercise by e-mailing crc@bpf.org.uk.
The government’s response to the consultation on the draft order can be viewed here.
Peter Williams is a professional support lawyer in the real estate group at Eversheds LLP and Charlotte Eddington is head of the energy and sustainability group at CB Richard Ellis and is chair of the cross-industry CRC working group
