Property sector tries to make sense of the Carbon Reduction Commitment

Carbon Reduction Commitment

How is the Carbon Reduction Commitment meant to work? How well will it work? The property industry has been considering the implications.

On the face of it, the Carbon Reduction Commitment (CRC) to stimulate organisations using more than 6000 MWh of half-hour metered electricity in a year to take steps to reduce their carbon emissions is a simple and laudable strategy.

However, Charlotte Eddington of CB Richard Ellis, who chaired a working party that has prepared a guide to the Carbon Reduction Commitment for landlords and tenants,* believes that the scheme is far from simple. She says, ‘The scheme is not as easy as many are led to believe. When you dig into it, there are a lot of complexities.’

Nor does an electricity bill of around £500 000 a year for 6000 MWh represent as large a space as many people might think. She reckons 5000 organisations could be covered, and that this figure could be an underestimate.

Even though the scheme comes into effect in April 2010 with a 3-year introductory phase before a cap on emissions is imposed, Charlotte Eddington believes that ‘many people are blissfully unaware of the scheme’.

Research suggests that only about 35% of senior management in the UK are aware of the scheme, that over 54% of companies do not know if they are affected by it, while 50% of firms do not currently measure their carbon emissions.

What is known is that the commercial sector is responsible for 20 to 25% of UK carbon emissions, and that the CRC is seen as a way of engaging with the property industry.

One of the first impacts of the scheme will be that affected companies will have to pay an estimated £1.4 billion for allowances when they go on sale at the end of the first year of the scheme in 2011. There will be an immediate effect on cash flow, though no net cost in the longer term because the funds are recycled according to how the scheme’s participants perform, and the scheme overall will be revenue neutral to the Government.

The price of carbon allowances will initially be fixed at £12 per tonne. However, when the cap on emissions is applied after three years, the price is likely to increase significantly. Tatiana Bosteels, head of responsible property investment, suggests that the price

of credits from the secondary market might rise

to £50 per tonne in five years’ time.

The principle of the Carbon Reduction Commitment is that the polluter pays. But who is the polluter — the landlord or the tenant? There is often little that a landlord who pays the energy bill and then recoups it from tenants in service charges can do to influence how tenants use energy. However, Charlotte Eddington warns, ‘Quite a few people think you may not be able to pass on the CRC cost to tenants.’

Liz Peace, chief executive of the British Property Federation, says, ‘The property industry is fully behind moves to cut emissions, but the scheme has not been properly thought through. Large areas of uncertainty remain over how you apply the CRC around existing leases. Landlords have no legal remit to influence how tenants use energy. This guide will help, but Government needs to show a lot more flexibility if the aims of the CRC are to be realised.’

The major problem faced by property owners is that unlike other companies, they often pay the bills on behalf of their tenants and then bill them back through service charges. However, owners of shopping centres such as Westfield or Grosvenor, which owns Liverpool One, have no legal right to walk into a retail tenant and demand that they turn the lights off, meaning they could be out of pocket if shops waste energy.

Peter Williams a real-estate practice lawyer with Eversheds LLP shared his thoughts at a recent meeting of the property sector and other interests on involving tenants with the initial cost of the allowances and the recycling of funds later. ‘I initially thought that tenants may be prepared to pay on the principle of polluter — and then pigs flew past the window!’

In any case, as Julian Lyon of the RICS corporate occupiers group pointed out, tenants can

be several stages distant on the property ladder

from the organisation responsible for the Carbon Reduction Commitment — so the problem is rather remote.

Peter Williams believes that clients will not want to spend a lot of time discussions the Carbon Reduction Commitment in lease negotiations. They will be much more interested in the rent cost, as has always been the case.

The ‘polluter pays’ principle of the Carbon Reduction Commitment works by making the energy user purchase allowances for the energy they consume. Everyone in the scheme is entered into a league table. At the start of the scheme, those who perform well and use less energy than when the scheme started will rank at the top of the league table and will be awarded a payment that is calculated by reference to a 10% bonus. Those who perform badly will rank at the bottom of the table and will receive a payment that is calculated by reference to a 10% penalty. Those percentages will change over time, and those who do badly could eventually end up with a 50% penalty.

Neill Pennel, director of engineering and sustainability with Land Securities, the UK’s biggest property developer also has concerns about the workability of the scheme. ‘The CRC scheme as it is currently formulated does not work well in a commercial property context, as it takes no account of this division of responsibility between use and payment for energy, which means for us there is around £5 million per year in energy costs we are held accountable for but over which we have no direct control. In the long run, this has to been seen as a flaw in the scheme. We will try to apply the scheme in the spirit in which it was intended, but at the same time we must continue the dialogue with Government to improvement the mechanisms involved to make them more effective for the managed property sector.’

The current situation, according to Peter Walker, is that the working party that prepared the guide knows a lot more about the CRC than the rest of the world. ‘It has taken a year to understand it this well. We have lived and breathed the guide every day — and it’s horrible.’

The CRC strategy may be laudable, but it is clearly far from simple.

*The guide can be downloaded from www.bpf.org.uk (put crc guide in the search field)

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