Climate Change Agreements
Climate Change Agreements were introduced in 2001 so that energy intensive industries could benefit from an 80% reduction in the Climate Change Levy if they were able to meet challenging energy efficiency targets. The system recognised that the imposition of the Climate Change Levy could make energy intensive industries less competitive by increasing their costs. The aim of the Climate Change Agreements was to offset that disadvantage and to reduce energy demand from this type of industry thereby reducing emissions of greenhouse gases.
The original Climate Change Agreements were due to end in March 2013. The Government however announced that the scheme would continue until 2017, subject to state aid, and has now issued a consultation paper seeking views on changing the form and content of Climate Change Agreements to ensure that the scheme works in the most effective way. The deadline to respond to the consultation is 4 June 2009.
Proposed changes
Fixed or relative targets
At present companies can choose whether to have fixed absolute targets which they should meet regardless of what throughput they achieve or to have relative targets which are based on the amount of throughput they achieve. The Government is seeking views on whether to continue this dual system or whether to impose fixed targets to ensure overall reductions in carbon emissions in order to achieve the targets for carbon reduction set in the carbon budgets under the Climate Change Act 2008.
Length of target
Targets are currently set biennially however it is proposed that they will be set annually going forward in order to tie in with similar data provided for the Carbon Reduction Commitment and for the EU Emissions Trading Scheme which are calculated on an annual basis and would mean that companies are continuously focussed on energy efficiency issues.
Individual targets or sector targets
At present if an industrial sector meets the energy efficiency target then all the companies in that sector are deemed to have met the target even though in fact some may have exceeded the target and others may have failed to achieve it. It is proposed that in future all companies will have to meet the target either by actions that they have taken to improve their energy efficiency or by buying carbon allowances to offset the amount by which they have missed the target.
Target achievement
The present system recognises that there are legitimate circumstances in which companies may not achieve their energy efficiency target and allows them to do so without penalty if it is as a result of fuel supply disruption, measures that were imposed on the company by a regulator (for example new health and safety requirements) or where there are insufficient carbon allowances available to purchase in the market (for example because other companies have failed to over achieve against their targets thereby generating carbon allowances for sale). In the future it is proposed that the only allowable reason for missing the target would be the lack of available carbon allowances.
De minimis and materiality provisions
Under the current rules, the target is absolute so if a company only misses it by a small amount or by not buying carbon credits in time then it looses the full reduction in the Climate Change Levy. The Government is proposing that under the new Climate Change Agreements there should be provisions whereby if the failure to achieve the target is a small oversight, for example a failure to meet up to 1% of the target the company simply has to buy the relevant carbon allowances within 10 days and if the failure is between 1% and 2% of the target the company would also be fined for this oversight but would not loose the reduction in Climate Change Levy.
EU Emissions Trading Scheme
At present where a company makes energy efficiency savings which fall both within the Climate Change Agreement and the EU Emissions Trading Scheme a double counting mechanism is applied to ensure that the company only benefits once from the savings. In future it is proposed that where there is an overlap of the two systems the reduction in Climate Change Levy can only be claimed if both the EU Emissions Trading Scheme targets are met and the residual Climate Change Agreement target is met. Only over achievement against the Climate Change Agreement target would be converted into carbon allowances for sale.
Baseline
At present each industry sector can choose a baseline from 1990 onwards from which to measure the impact of Climate Change Agreements in reducing carbon emissions. The Government is proposing that the baseline for all industry sectors will be 2010 going forward to ensure consistency.
This article was first published in the Property Law Journal on 16 May 2009.
