CRC scheme becomes ‘green tax’

Government changes to environmental legislation confirmed the fears of some observers with the birth of a green tax on some of the largest companies in the UK, instead of a ‘revenue-neutral’ scheme, as was previously promised.

Chancellor George Osborne announced in October’s Comprehensive Spending Review changes to the incoming Carbon Reduction Commitment Energy Efficiency Scheme (CRC). Under the scheme, some of the largest UK companies will have to pay for energy-related emissions. Originally, revenues from the CRC were supposed to be ploughed back into the scheme, but will now be subsumed into the public purse with no guarantee they will be spent on environmental initiatives. A further blow to companies is the loss of any rebate they were due to receive from participating in the CRC.

Revenue-neutral gone

The revenue generated through the CRC was originally earmarked for the Environment Agency to monitor the scheme, including handing out fines to companies that were late filing their emissions information.

The agency was due to distribute funds generated as rebates for companies that had made the greatest reduction in their emissions – so the scheme would be ‘revenue-neutral’. Eventually, it is supposed to cap the amount of emissions a company can produce, but it was this aspect many commentators and business leaders had thought would be dropped, rather than the recycling of payments.

According to energy consultancy Energy Team, this change will mean a business with an average £1m gas and electricity bill will pay £750,000 without a chance of a rebate. It also estimates prices will increase each year and businesses may end up spending £110,000 by 2015 for a £1m energy bill.

Although the scheme was initially brought about to change behaviour and encourage businesses to become more environmentally friendly, these changes mean the scheme will simply operate as a tax for companies taking part, claims Harry Manisty, PricewaterhouseCooper’s (PwC) environmental tax specialist.

League table

The CRC requires most companies that spend about £500,000 annually on energy bills to forecast and pay for their future carbon emissions for each financial year, calculated to the nearest tonne.

Companies are then entered into a league table that makes their emissions levels and progress in reducing emissions transparent. They should then have been in line to receive a rebate on their payments as a reward for having reduced their emissions and climbed the league table. Companies will also be able to trade carbon credits with one another in the future, in the way that the European Carbon Trading scheme allows.

Registration for the CRC ended in early September 2010, with an estimated 4,000 companies participating, along with government departments and local authorities.

The changes proved a “bit of a bombshell”, says Andy Johnston, a director at the Local Government Information Unit, which has helped public sector organisations prepare for the scheme. He points out the revenue from councils, the National Health Service and other public sector participants will not necessarily be extra income for the government, and from a public sector point of view it could end up being a “bizarre scheme”.

PwC’s Manisty has told Financial Director it looks as though the government is going to significantly increase the price of carbon. The initial design of the CRC put sales of emissions at £12 per tonne. However, recent government figures revealed that the scheme would generate £3.45bn over the next four fiscal years, raising the price of carbon to between £18 and £20 per tonne by 2014-15 – allowing for some reduction in emissions.

“Discrepancies between this price of carbon and the price paid for carbon emissions covered by the European Union’s Emissions Trading Scheme are likely to emerge, undermining the search for a consistent carbon price signal throughout the UK economy,” Manistry says.

He adds the government hopes to make changes to existing environmental schemes such as the Climate Change Levy (CCL). When businesses pay energy bills, a certain amount of the revenue is put towards the CCL, effectively acting as a tax on energy.

“The government had proposed to reform the CCL from a tax on energy to a tax linked to the carbon content of fuels, but now may face pressure to abandon these plans to avoid double taxation of carbon for CRC participants,” Manistry adds.

But it is not all doom and gloom for business from the emissions reduction world. Another change to be implemented has delayed payment of emissions by one year. Instead of companies paying for emissions in April 2011, they will be charged from April 2012, giving them more time to prepare to comply.

The CRC scheme has remained shrouded in complexity. Modifications to the scheme have come thick and fast, including its start date, payment of emissions, and which organisations will be involved. The government will launch a consultation in December on ways to simplify the scheme.