CRC: government lays draft regulations on sale of allowances before Parliament

Practical Law UK Legal Update 2-517-2580 (Approx. 5 pages)

CRC: government lays draft regulations on sale of allowances before Parliament

by PLC Environment

Background: the CRC

The CRC Energy Efficiency Scheme (CRC) is a mandatory emissions trading scheme for large non-energy intensive organisations in the private and public sectors in the UK. The CRC was introduced by the CRC Energy Efficiency Scheme Order 2010 (SI 2010/768) (CRC Order) and came into operation in April 2010.

The CRC is divided into several phases. Phase 1 (also known as the Introductory Phase) runs from 1 April 2010 until 31 March 2014. Phase 2 will run from 1 April 2013 until 31 March 2019. Participants are required to report on their greenhouse gas emissions and buy sufficient allowances to cover the amount they emitted each year. Each allowance represents one tonne of carbon dioxide (CO2).

It was originally envisaged that:

Phase 1 would involve the sale of an unlimited number of allowances by the Environment Agency (EA) at a fixed price of £12/tCO2, with the first sale taking place in 2011. There would be forecast/forward sale of allowances before the end of the relevant compliance year (based on a participant's estimate of how much they were likely to have emitted), followed by a sale of additional allowances at a higher price by the EA at the end of the compliance year via a "safety valve mechanism" (or alternatively, participants could buy additional allowances on the secondary market).
From Phase 2 onwards, the government would auction a limited (capped) number of allowances.
The revenue from the sale of allowances would be recycled back to participants based on their ranking in a CRC league table.

In February 2010 (before the CRC came into operation in April 2010), the government published a draft of the CRC Energy Efficiency Scheme (Allocation of Allowances for Payment) Regulations 2010, setting out how allowances would be sold in Phase 1.

However, the government subsequently announced, as part of its plans to simplify the CRC, that:

The fixed price sale of allowances in Phase 1 will be retrospective only, with the first sale taking place in 2012 rather than 2011. There will therefore be no need to have a safety valve mechanism.
The auctioning of a limited (capped) number of allowances in Phase 2 will be replaced by two fixed price sales per year (a cheaper forward sale and a more expensive retrospective sale).
The revenue from the sale of allowances will not be recycled back to participants as originally envisaged.

For more information on these changes, see Legal update, CRC: government outlines detailed proposals to simplify the scheme.

For more information on the CRC in general, see:

Practice note, CRC Energy Efficiency Scheme: overview.
CRC Survival Kit.

Draft CRC Energy Efficiency Scheme (Allocation of Allowances for Payment) Regulations [2012]

On 12 January 2012, the Department of Energy and Climate Change (DECC) announced that HM Treasury had laid the Draft CRC Energy Efficiency Scheme (Allocation of Allowances for Payment) Regulations [2012] before Parliament.

The Draft Regulations set out how allowances under Phase 1 of the CRC will be sold by the EA. They do not cover Phase 2 of the scheme.

There will be three sales of allowances in Phase 1. The:

First sale will take place between 1 June and 31 July 2012.
Second sale will take place between 3 June 2013 and the last working day of July 2013.
Third sale will take place between 2 June 2014 and the last working day of July 2014.

The Draft Regulations refer to these as "primary allocation periods". They also refer to "secondary allocation periods", which are designed to enable the EA to sell (allocate) allowances requested by a participant during the primary allocation period but which the EA did not have sufficient time to process.

The sales in Phase 1 will be retrospective, so participants will know how much they emitted when they buy allowances (whilst in Phase 2 there will be both a forward and a retrospective sale each year). As previously announced, the cost of allowances in the first sale will be £12/tCO2. According to DECC, "future prices are a matter for the Budget process" (see DECC: Latest News: Publication of updated version of the draft CRC Energy Efficiency Scheme (CRC) Allocation Regulations (12 January 2012)).

If a participant fails to submit sufficient allowances to the EA to cover the amount it has emitted, it will be subject to a number of civil penalties (see Practice note, CRC Energy Efficiency Scheme: enforcement and penalties).

Next steps

The government is expected to consult, in February 2012, on draft legislation to amend the CRC Order to reflect the changes it plans to make to Phase 2 of the scheme. It is envisaged that the amending legislation will come into force in April 2013. For more information, see Legal update, CRC: government outlines detailed proposals to simplify the scheme: Next steps.

The deadline for registering as a participant for Phase 2 is 30 September 2013. Organisations have to assess whether they are covered by Phase 2 based on their energy consumption in the period 1 April 2012 to 31 March 2013 (known as the qualification year). For more information, see Practice note, CRC Energy Efficiency Scheme: overview: Qualification Year and registration.

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