John Buttanshaw welcomes a consultation on energy efficiency measures for business that should simplify a complex area, and expects it will be the start of significant reform
The government recently launched a consultation on energy efficiency measures. Notable proposals include replacing the CRC Energy Efficiency Scheme and Climate Change Levy in favour of a single business energy consumption tax (based on the current CCL), as well as introducing a single reporting framework.
This consultation, named “Reforming the business energy efficiency tax landscape”, could have significant ramifications for businesses, including major property owners and developers, as well as for the UK’s efforts in meeting its climate change targets.
Significance of energy efficiency reform
When it comes to reducing greenhouse gas emissions associated with energy, decarbonisation of supply often holds the spotlight. This is not surprising given the scale of capital investment required in power infrastructure and continuing high profile news stories.
Increasing energy efficiency is a less prominent but nonetheless critical component of the green equation. It is essential to meeting the UK’s goal of an 80% reduction in its greenhouse gas emissions (from the 1990 baseline) by 2050, and the intermediate target of a 35% reduction by 2020.
It is interesting that an apparent push on reducing energy use comes at the same time the government has withdrawn certain subsidies for decarbonising energy generation, such as the removal of the exemption from the CCL for renewable electricity generation. Clearly these issues are interrelated and part of the cohesive energy policy sought by investors and industry.
Complexity and the need for change
The proposed simplification is welcome. At present, a single organisation could in theory have to report emissions under each of the CRC, the Energy Savings Opportunity Scheme, climate change agreements, the greenhouse gas reporting requirement, and the EU Emissions Trading System.
Each scheme requires different types of information, has different verification requirements and can apply to different parts of organisations. Sector-specific requirements may also apply – for example, although not a reporting mechanism in the same sense, those in the real estate sector will need to think about energy performance certificates and the Minimum Energy Efficiency Standards. Businesses can also experience a myriad of confusing tax implications depending on their energy consumption across different sites, activities and fuels.
Perhaps if less time was spent navigating the complexity of the various schemes, businesses would have more opportunity to take a step back and think strategically about their energy efficiency. They could then better price and/or realise the potential savings, leading to increased investment in the energy efficiency sector. The rationale for change is therefore clear.
Simplification is only a start
This is not necessarily to say that the current mechanisms do not work. For example, a recent Department of Energy & Climate Change paper found strong evidence that the CRC has had an effect on energy efficiency behaviour and carbon emissions at least as sizeable as, if not greater than was suggested by the original impact assessment (which often paints a rather rosy view of the perceived benefits of a policy being introduced). There clearly remains a case for a reporting and a tax mechanism that encourages the right behaviours and sends the right price signals, while encouraging investment.
Some important decisions will need to be made in deciding what such a mechanism will look like. Besides the fundamental cost and balance of taxes across fuels, this will include more detailed questions that will have important implications for businesses, not least in the property sector.
(1) Who bears the cost? The CCL is directly linked to energy bills, meaning that occupiers as end-users bear the cost. CRC costs, on the other hand, often fall to the landlord of multi-tenanted developments (and are not always passed down). This was a deliberate policy by government, as it felt landlords were best placed to drive improvements across multi-tenanted buildings. It is not clear whether this will remain the approach in a hybrid tax.
(2) What frequency of reporting? The consultation suggests that the single reporting mechanism will be based on ESOS. However, ESOS works on a four-year cycle, whereas most of the other mechanisms require at least annual reporting.
(3) Will there be naming and shaming? There is no public reporting requirement in ESOS, and the “performance league tables” of the CRC were axed in a previous simplification drive. This can be contrasted with, for example, the greenhouse gas reporting regime for listed companies which focuses entirely on public reporting and reputational aspects.
In addition to consolidating the regimes, the government also raises the prospect of entirely new mechanisms being developed. Views are invited on incentives such as tax relief, funding awarded on a competitive basis and feed-in tariffs, further expanding the scope of the review.
Broad consultation brings opportunities
Often a consultation will be on very specific proposals or legislation. That is not the case here. There are few specific proposals in the present consultation and even less detail on how they might be implemented. This consultation seems intended to set the tone for extensive future engagement in this area, and seeks to gauge business opinion on a range of options aimed at consolidating and enhancing current policies. Its broad nature may present businesses with an opportunity to influence the future direction of policy.
In short, this seems like a particularly good moment for businesses and other stakeholders to make their voices heard in this area. But be quick: the consultation closes on 9 November.
Details of the consultation and how to submit responses can be found at:
www.gov.uk/government/consultations/consultation-reforming-the-business-energy-efficiency-tax-landscape
John Buttanshaw is an environmental lawyer at international law firm
Herbert Smith Freehills
