The Chancellor confirmed this week during the Spring Budget speech that the Carbon Reduction Scheme (CRC) will be abolished as a direct result of the Business Energy Tax Review. The CRC’s original aim was to encourage energy reduction for large scale business users but modifications to increase revenue for HM Treasury transformed it into a tax. The CRC currently delivers around £900 million of revenue to Treasury each year. The CRC reporting mechanism will remain in place until the end of Phase 2; the last reporting year being 2018-19. The revenue currently raised from the CRC Scheme will be replaced by an increase in Climate Change Levy (CCL) to ensure that the levels of income remains constant from 1st April 2019.
The outcome will result in all commercial businesses paying an increased energy tax through supplier invoices for each kilowatt hour of energy used. The level of the increase in CCL has yet to be decided but with increases in other non-commodity charges also likely to be forthcoming, whether CRC participants will see a reduction in overall costs remains to be seen; it is clear however that they will benefit from a reduction in administration. For businesses that are not required to participate in CRC, and already pay CCL in their utility costs, costs will rise significantly from 2019 as the tax burden increases. To compensate energy intensive industries where Climate Change Agreements (CCA) exist, CCL discount rates for electricity will increase from 90% to 93% and for gas from 65% to 78% from the same date in 2019 to ensure that the rise will not be greater than the RPI.
A primary objective of the Business Energy Efficiency Tax Review is to simplify carbon reporting requirements and reduce administrative burdens but this has yet to be addressed publically. Having removed the CRC reporting mechanism it remains to be seen what will be implemented to replace this. CRC has never been popular with participants as it is cumbersome to complete the reporting, maintain the necessary evidence pack and purchase allowances. It has also been a long standing grievance amongst energy managers that there is a great deal of duplication linked to meeting the reporting obligations of the Carbon Reduction Commitment (CRC), Green House Gas emissions (GHG), the global Mandatory Carbon Reporting and other voluntary schemes.
There has been some discussion that the Energy Savings Opportunity Scheme (ESOS) will be incorporated into the single reporting mechanism however, as ESOS is mandated by the EU as part of the Energy Efficiency Directive, this is likely to remain as long as there is not a ‘Yes’ vote for Brexit this summer. That said, the data collated could be utilised for compliance here too.
Indications are that, in simplifying the carbon reporting mechanism, the Government will ensure that a stark message is delivered annually at Board level with regard to the energy used within the business practices with the aim of driving investment in energy efficiency measures. This model raises questions with regard to the scope of the reporting and the fuels incorporated in such a framework. The separation of the taxation and reporting elements of CRC allows the Government to compel organisations to look beyond their mains utility supplies and examine the carbon footprint of the whole operation including transportation and oil. It is also important to consider how far businesses will be expected to delve into smaller elements of their energy use which may prove to be counterproductive placing additional burden on reporting that could be diverted into achieving energy efficiency measures.
One point that has been raised time and again is whether organisations will really be incentivised to reduce their energy use due to rising costs or should change be mandated. The expectation that the CRC Scheme would drive change was not forthcoming; after initial unrest at the level of cost, businesses generally settled down and accepted the cost and reporting requirements paying little attention to whether a year on year reduction was ever realised. Put simply, in order to mitigate against rising energy bills, energy efficiency must become a strategic priority for all businesses in time for the 2019 deadline but the Government would be very short-sighted if the new reporting regime does not incorporate a requirement to implement change.
Future consultations on a single reporting framework and energy efficiency incentives will be critical to ensure that 2019 rejuvenates the business energy landscape and actually delivers a reduction in carbon emissions. We will be monitoring progress closely and will keep you informed.