Government publishes revised draft regulations on the sale of CRC allowances | Practical Law

Government publishes revised draft regulations on the sale of CRC allowances | Practical Law

An update on a revised draft of the CRC Energy Efficiency Scheme (Allocation of Allowances for Payment) Regulations 2010, which were published in February 2010.

Government publishes revised draft regulations on the sale of CRC allowances

Practical Law UK Legal Update 0-501-6005 (Approx. 3 pages)

Government publishes revised draft regulations on the sale of CRC allowances

by PLC Environment
Published on 02 Mar 2010 • UK
An update on a revised draft of the CRC Energy Efficiency Scheme (Allocation of Allowances for Payment) Regulations 2010, which were published in February 2010.
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In February 2010, the Department of Energy and Climate Change:
  • Published a revised version of the draft CRC Energy Efficiency Scheme (Allocation of Allowances for Payment) Regulations 2010 (the Draft Allocation Regulations); and
  • Confirmed that there will be no separate legislation on the recycling of revenue from the sale of Allowances under the CRC Energy Efficiency Scheme (the CRC) as the power to make these payments already exists under the Climate Change Act 2008.
The Draft Allocation Regulations cover the sale of Allowances in Phase 1 (the Introductory Phase) of the CRC, both in the Fixed Price Sales and through the Safety Valve.
This update will be of relevance to any private or public sector organisation in the UK that is required to participate in the CRC. The scheme will come into operation on 1 April 2010. Participants will be required to register for the scheme in April to September 2010, and the first sale of Allowances will take place in April 2011.
The Department of Energy and Climate Change (DECC) announced at the Environment Agency's CRC Energy Efficiency Scheme (CRC) conference, held on 24 February 2010 in Manchester, that a revised version of the Draft CRC Energy Efficiency Scheme (Allocation of Allowances for Payment) Regulations 2010 (the Draft Allocation Regulations) have been published and are due to be laid in Parliament before the summer recess. The Draft Allocation Regulations are accompanied by a Policy Note. Guidance on Allowances is due to be published on the Environment Agency's website towards the end of March 2010.
The Draft Allocation Regulations set out the detail of how Allowances will be sold in the Fixed Price Sales and through the Safety Valve during Phase 1 (the Introductory Phase) of the CRC Energy Efficiency Scheme (the CRC). Fixed Price Sales are called "Main Allocations" and Safety Valve sales are called "Additional Allocations" in the Draft Allocation Regulations.
During the Introductory Phase, an unlimited number of Allowances will be sold at an annual Fixed Price Sale. Each Fixed Price Sale will last for a month. The price of Allowances in each of these sales will be £12/tCO2. As the first Compliance Year (2010/2011) is a reporting-only year, there will only be two Fixed Price Sales of Allowances in the Introductory Phase: in April 2011 (for the 2011/2012 Compliance Year) and April 2012 (for the 2012/2013 Compliance Year).
Once the Government has held the Fixed Price Sales, if participants wish to buy any more Allowances after that (for example, because they have emitted more than they predicted), they can do so either through the Secondary Market (by buying Allowances from other Participants or other Account Holders) or through the Safety Valve. The Safety Valve enables Participants to buy additional Allowances from the Administrator at certain stages during a Compliance Year (see regulation 8(1)). The price of Allowances bought through the Safety Valve is related to the price of Allowances in the EU Emissions Trading Scheme (EU ETS), but a minimum floor has been set so that the price will always be higher than buying Allowances from the Government in the Fixed Price Sales (or auctions in subsequent Phases of the scheme).
DECC had initially said that the minimum price of Allowances bought through the Safety Valve would be £12/tCO2, even if the price of EU ETS allowances fell below that. However, the minimum price set out in the Draft Allocation Regulations is £14/tCO2 (see regulation 11). According to the Policy Note that was published alongside the Draft Allocation Regulations:
"...the minimum price needs to be higher than £12 to counter the cash flow benefits that participants could realise by postponing buying all their allowances until the last possible moment, should the EUA price remain around the £12 level....It has been concluded that the minimum price must be at least £14 in order to help avoid the safety valve offering better value for money should the EUA price remain relatively low. Raising the minimum safety valve price does not increase the overall costs of the scheme because Government anticipates there being very little use of the safety valve, and so the slightly higher price does not have a significant impact on the overall costs of the scheme to participants."
DECC has also confirmed that there will be no separate legislation on the recycling of revenue from the sale of Allowances as the power to make these Revenue Recycling payments is already provided for under section 53 of the Climate Change Act 2008 (For more information see Practice note, Climate Change Act 2008.) However, DECC did say at the Environment Agency's conference that it will be issuing the EA with "instructions" on how the payments will work in practice. It is not yet clear if this information will be made public.
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