EVORA CRC Scrappage

CRC Scrappage: Winners and Losers

Today marks the end of the monitoring period for the third year of Phase 2 of the Carbon Reduction Commitment (CRC): the seventh year the scheme has operated.

That means in two years, CRC Participants will be starting to collate, report and then pay for their relevant emissions for the final time. Understandably, that can’t come soon enough for some.

The CRC started with good intentions under a progressive cap and trade scheme that rewarded those who reduced emissions through ‘recycling’ CRC allowances from those who did not. Before the Scheme took off, however, it was announced in the Spending Review 2010 that CRC allowances would not be recycled to participants in the scheme but instead would be used to support the public finances. Thereby, the CRC became a tax for all intents and purposes.

The CRC will be scrapped in 2019 and from this, it is important to understand who are the winners and losers and what actions should be taken now to mitigate risks for the ‘losers’ and take opportunities for the ‘winners’.

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A key decision to scrap the scheme was the cost of administration. Back-of-an-envelope maths tells me that the annual £1,290 subsistence fee paid by all 1,869 Participants in 2015/16 equates to an administrative cost of 0.27% of total revenues (£2.4m subsistence fee over £902m revenue through CRC allowance purchases).

For comparison, administrative costs for the Swedish Tax Administration is 0.1 % of total revenues for their carbon tax model.1 The approach used in Sweden (since 1991) will be implemented in the UK to maintain carbon tax revenues once the CRC is scrapped (more on this later).

So the Swedish model appears to cost half as much as the UK CRC model to administer. The true cost, in reality, is far higher once you add in the internal resource time and/or external consultant costs required to administer and meet CRC requirements such as maintaining an Evidence Pack, undertaking an Internal Audit and fulfilling actions to report, order and then surrender CRC allowances. Compared to the £1,290 annual subsistence fee, the true cost to Participants is likely to be three to 15 times higher, dependent on size and complexity, based on our experience. Suddenly, the Swedish models looks much more appealing: it has also contributed to Sweden’s total greenhouse gas emissions falling by 16 percent between 2000 and 2012, while its overall GDP grew by about 30 percent. 2

The CRC is being replaced by an increase in the Climate Change Levy (CCL): a tax on energy delivered to non-domestic users that is charged per kWh usage. Notably, the CCL is applicable to all energy users (with some exemptions), rather than a select group of CRC Participants. Key to the reduction in administrative cost, is the fact that energy users ‘do nothing’ to calculate their tax liability: a value is calculated and inserted as a line item on energy invoices and collected by the energy supplier. This will be a relief for some, however, the benefits of reporting emissions to improve understanding of impact (and costs) should not be forgotten.

From April 2018 to April 2019, the CCL is going to increase 48% in one year to ensure the CRC revenue of about £1bn is maintained for public finances. This increase will add approximately 3% to the ‘typical3’ energy spend of an air-conditioned office (see Table 1 below for estimated values).

CRC Scrappage: Winners and Losers: Blog Image 1

Table 1

At EVORA, we recommend building owners and tenants take action now to mitigate the onset of the tax hike through identifying and implementing energy efficiency measures that will lead to energy reductions.

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However, even with a 48% increase in the CCL, existing CRC Participants will see a net benefit through CRC scrappage, with a tax reduction equivalent to a 5.5% of total annual energy spend (see Table 2 below for estimated values).

CRC Scrappage: Winners and Losers: Blog Image 2

Table 2

The tax saving through scrapping the CRC Scheme (for CRC Participants) is notable at asset level and will be even greater when considered across a portfolio for an existing CRC Participant.

These savings present a great opportunity to budget for energy efficiency improvements that may otherwise have been put on hold. I recommend landlords / energy managers hold early dialogue with tenants / finance directors to discuss the savings and identify the economic case for progressing measures that will deliver attractive returns on investment. A number of measures could be considered, from strategic metering  and Monitoring and Targeting programmes (such as SIERA) to energy efficient retrofits  of LED lighting.

Whether you are a winner or a loser from the CRC scrappage / CCL tax hike, the overall message is the same: if you want to reduce your energy spend, the best action you can take is identify, implement and track the impact of energy efficiency measures.

Planning ahead will give you the best chance of success.

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1 Ministry of Finance, Sweden Senior Advisor Susanne Åkerfeldt, 2011
2 Worldbank.org, 2014
3 Typical energy usage calculated from Better Building Partnership Real Estate Environmental Benchmarks (BBP REEB) 2015 for air conditioned offices. Typical energy costs based on BEIS Prices of fuels purchased by non-domestic consumers in the UK, December 2016