| SPOTLIGHT |
The introduction of the Carbon Reduction Commitment Energy Efficiency Scheme will bring considerable legal complexities, not just environmental challenges, for local authorities. Felicia Jackson reports.
Carbon emissions, management and mitigation are becoming a critical strategic issue for local authorities as we move to a legislative compliance regime. Many councils continue to view the coming changes as a technical issue for environmental directors or energy and property managers. Yet the CRC is likely to have a significant strategic, operational and legal impact, potentially changing the way in which local authorities operate.
According to Stephen Cirell, head of Eversheds’ local government group but currently on secondment as programme director for Green Cornwall, the thing that local government legal departments need to understand is that carbon compliance is going to affect the way key decisions are made.
“Every decision will have to consider carbon consequence, from procurement to new buildings,” he says. “If a council is on track for a lowered carbon footprint, but a new building or service would increase that footprint significantly, putting the council at risk of severe penalties or appearance at the bottom of the league table, it might be necessary to halt that project. At the very least, the carbon consequence has got to be considered.”
How the scheme works
The Carbon Reduction Commitment Energy Efficiency Scheme (CRCEES) is the UK government’s way of ensuring that the cost of carbon is factored into the decision-making processes of all large organisations, with a focus on improving energy efficiency. The CRCEES will see local authorities obliged to measure and publicly disclose and report their energy use and related emissions. While measurement will commence in 2010, from April 2011, local authorities will have to buy carbon credits to cover their projected emissions at a cost of £12 per tonne. After April 2013, the government plans to cap the availability of credits, which will then be sold in a blind auction.
The scheme itself is not a tax – under the rules the money raised by the CRC will be recycled amongst the participants, allocated by a performance league table. The best performers will receive a 10% bonus, while the worst performers will receive 10% penalties, with both fines and penalties escalating over time. There is significant financial and reputational risk arising from the league table, which will first be published in 2011. While the principles underlying the CRC are agreed to be positive, driving a step change in the way we manage carbon and energy, the scheme’s structure means that its implementation is going to be a challenge for every council.
The financial cost of the scheme, as well as the potential penalties associated with it, could be significant, as could the financial risk of failing to forecast exposure and the use of allowances against actual budgeted allowances. The structure of payments within the scheme (from the poorest performers to the best performers) means a cashflow gap of six months needs to be managed. Not only that, but as a cap is introduced to the CRCEES, local authorities will find themselves competing with the private sector for credits and for league table positioning. Laura Hughes, an associate at Browne Jacobson, warns that “the private sector could not only prove more advanced in managing the trading side, but in implementing energy efficiency programmes”, leaving the public sector to play catch up.
Legal impact
It is clear the CRCEES has significant financial and administrative implications beyond simple energy management – it also has legal complexities to which there are as yet no obvious resolutions. These surround group responsibilities and third party energy use, what Tom Bainbridge of Nabarro calls “the most overlooked complexity of the CRC”. Local authorities have responsibility not only for their own building load but also for local education, health and leisure, but not always the control required to change emissions profiles. Devon County Council has reported, for example, that it has financial control over only half its carbon footprint, but will be assessed and reimbursed on overall performance.
According to Hughes, this is a particular problem with schools. Local authorities will be liable for emissions from schools, even including foundation Schools and academies, which are funded directly from central government. The government’s response to the latest consultation said that local authorities will remain responsible for ‘managing the relationship’, which has not added much clarity to the situation.
Nabarro’s Bainbridge believes that “the big question is how to encourage participation in cutting emissions”. Will the new Draft Order (due later this year and expected to constitute a statutory requirement that schools provide local authorities with ‘reasonable assistance’) mean that schools will be required to render assistance, provide data, or actually spend money on the issue? A lack of clarity on where responsibility lies for emissions could eventually result in litigation, dependent on the sums involved. Property agreements cannot demand certain behaviours, so councils will also need to find innovative ways of encouraging commercial tenants to implement energy saving technologies and change their behaviours.
It could also prove difficult for some local authorities to be certain that they are reporting accurately. While it is critical to prepare as accurately as possible for the scheme during March–September 2010, Hugh Goulbourne of Cobbetts is hopeful “that the Environment Agency will take a sensible approach to organisations who try to work within the spirit of the scheme, requiring them to correct inaccurate reporting rather than moving straight to a fine.” Goulbourne also points out that there’s no such thing as a typical local authority and each will differ in terms of responsibility for third party emissions.
Getting started
Despite the complications arising from the scheme, the CRCEES provides an exciting opportunity for councils to act as agents for change within the local community. While the focus of the scheme is on cuts, both in terms of energy and carbon, the way in which these can be achieved, through the reorganisation of energy procurement, centralised billing, automatic meter readings, building management systems for managing lighting, heating and cooling, can be done through local authority leadership.
There will be upfront costs associated with this and debate remains as to the best time to start cutting emissions, to ensure best chance of good positioning in the league table. In the short term, the energy price is likely to have more effect on investment decisions. “As its stands, the cost of energy saved will far outweigh the cost of carbon,” Bainbridge points out. This is critical when councils are operating against a backdrop of cuts in central funding, high energy costs and the need for increased operational efficiencies at a local level.
Critical to how effective the CRCEES proves will be the long term cost of carbon, and the difference that makes to the investment case for individual projects or services. In the short term however, it is vital that local authorities begin to look seriously at how they measure their energy use. Martin Howe of Bevan Brittan argues that at the very least authorities should already be looking at automatic metering. He says: “Getting a handle on existing energy usage and understanding why it is what it is, will allow you to outline effective policy.”
Addressing the demands of the CRCEES moves far beyond the remit of energy managers alone. The opportunity for local and collective strategic partnerships could provide both cost savings and stimulate local growth but it will require senior management buy-in, and clear responsibility for action overall, not simply as part of an existing brief. For the CRCEES to be effective, its important that the scheme is not viewed solely as about process and compliance, but rather about an opportunity to reduce energy costs, invest in cost effective technologies and lead the transition to a low carbon economy.
Felicia Jackson is a freelance journalist.
