Spring 2013

CARBON MATTERS

The Climate Change supplement to SHE MATTERS from DLA Piper UK LLP

IN THIS ISSUE RECENT NUCLEAR DEVELOPMENTS CLIMATE CHANGE AGREEMENTS CRC UPDATE MANDATORY CARBON REPORTING AND IMPROVED ENVIRONMENTAL DISCLOSURE In Brief – Aviation in the EU ETS & The Green Deal CARBON MATTERS

Teresa Hitchcock Partner T +44 (0)114 283 3302 [email protected]

At the end of last year, many expressed disappointment at How does the UK fare in this respect? It has to be the outcome of the Doha Conference, particularly understood that since the UK was a pioneer in this representatives of the developing countries who have respect in enacting the Climate Change Act, we can criticised the “lack of ambition” in decisions on mitigation realistically only expect consolidation in current and finance. developments, rather than revolutionary change. However, on the positive side, it should be said that the This edition of Carbon Matters reviews a number of the conference did agree a second Kyoto commitment period consolidating measures being taken by the Coalition to run for eight years, rather than five, with reduction Government: Support of the Carbon Price through the commitments to be reviewed by 2014. This provides an Energy Bill, the new scheme for Climate Change essential underpinning of the international carbon market. Agreements, the Simplification of the CRC Energy Efficiency Scheme and Mandatory Carbon Reporting. It should be pointed out that the Doha Conference was The Government has so far decided not to follow the only envisaged as a transitional conference on the way to more radical suggestions put forward last year by a future global agreement and it did also adopt a the CBI and others, that the CRC scheme should be two-pronged strategy towards a new global climate scrapped and replaced by a reformed Climate Change treaty in 2015, the timeline envisaged in the Copenhagen Levy and more widespread mandatory carbon reporting. Accord. The two-pronged strategy rests on action at It was argued that this would not only deal with the national level as well as international negotiations. It is complexity of the CRC scheme, but also create wider increasingly recognised that national legislation is a incentive effects. That may be an appropriate longer term key confidence-building measure, as domestic legislation goal, but the abolition of the CRC scheme would cause generally involves more tightly-binding commitments. considerable disruption. Furthermore, treaty obligations entered into on this basis will more closely reflect what the parties are It would also be frustrating for those who have put so actually prepared to deliver on. much energy into devising and complying with the scheme. The Government has chosen to compromise in retaining Arguably this was the true lesson of the Copenhagen the CRC scheme, introducing mandatory carbon reporting COPMOP. When the discussions of the rival texts broke on a modest scale, and making new arrangements for down, the COPMOP was rescued by the Accord Climate Change Agreements. For the time being, business between China, Brazil, India, South Africa and the certainty is the watch-word. We may also have here a US countries which between them were estimated to classic case of British muddling-through. account for some 85 per cent of global greenhouse gas emissions. This was constructed on the basis of the As this edition was going to press, an unexpected cause pre-COPMOP co-operation between the US and China, for alarm arose from a vote by MEPs, in a narrow majority which focussed on what they were prepared to deliver. of 19 votes, to reject a Commission proposal to support carbon prices in the EU ETS by delaying auctioning of In terms of national developments, there are significant allowances. While the proposal would have been at best a grounds for optimism. The recent Globe International temporary fix, and no real substitute for structural reform Climate Legislation Initiative surveyed domestic climate of the EU ETS, as sought by the UK Government, the vote change legislation in 33 countries. These countries are also sends an unfortunate signal to markets. It is to be hoped estimated to represent about 85 per cent of greenhouse that it will be reversed following further discussion at the gas emissions. The survey found that all of them except next meeting of the Parliament’s environment committee. Canada either had enacted, or were in the course of enacting, important climate change legislation.

02 | Carbon Matters – Spring 2013 RECENT NUCLEAR DEVELOPMENTS

Regulatory developments of offshore wind will drop so much it will be on par with nuclear by 2020, there is no rationale for allowing Recent months have seen a number of developments in Hinkley C to proceed.” the UK nuclear sector, including some important regulatory developments. The Energy Bill includes the introduction of Contracts for Difference (CfDs), which the Government believes will On 29 November 2012, the Energy Bill 2012-13 was address both revenue and policy risk by guaranteeing introduced to Parliament and had its first reading in the long-term prices for the energy generated from nuclear House of Commons. The Bill provides for the creation of power stations through private law contracts (which the Office for Nuclear Regulation (ONR) as an cannot be changed retrospectively by future governments). independent statutory body, which will consolidate civil The intention is that CfDs will work by stabilising revenues nuclear and radioactive transport security regulation in for generators at a fixed price level known as the “strike one place. The Bill provides for the ONR to take over the price” (the price that generators will receive for each unit HSE’s responsibilities and functions in respect of nuclear of energy produced). safety, nuclear site health and safety, security, safeguards and transport of radioactive material. However, there is some uncertainty around the strike price, which will to a large extent be dictated by the The Bill also includes provisions creating civil liability for anticipated construction costs of the new nuclear reactor breaches of duties imposed by nuclear regulations that and its associated infrastructure. The strike price must be cause damage, irrespective of whether such breach also pitched correctly so that consumers receive a fair and constitutes an offence. A person who has suffered loss as affordable deal, but it must also be attractive to developers a consequence, such as personal injury, would be entitled and investors. The strike price would provide a guaranteed to sue for damages (unless regulations provided price for say 20 or 40 years (subject to what is agreed), otherwise). It will not be possible for persons to contract which would protect consumers from the often volatile out of such civil liability, although defences to such a civil energy market. However, the strike price, which is action may be provided for in any nuclear regulations. currently being negotiated, will require very careful The European Commission, on 7 March 2013, published an consideration by the Government because the wrong overview of the action taken in nuclear safety since the figure could lead to a huge additional cost to consumers. Fukushima nuclear disaster in Japan. All 14 member states Evidence to Parliament in 2012 suggested that a figure out with nuclear power plants and Switzerland have now by just £5 MW/hour could result in an additional cost of prepared national action plans which include timetables for £4 billion to the consumer by 2030. implementation. These plans will be peer-reviewed by Greenpeace also raised voiced concerns around the issue national teams at the end of April 2013. The Commission of nuclear waste. This is certainly a live issue, taking into and European Nuclear Safety Regulators Group will account that Cumbria County Council’s Cabinet recently review the status of the implementation of the decided that West Cumbria should no longer be recommendations for nuclear safety by June 2014. considered as a potential location for a deep geological Commercial developments repository to dispose of higher activity radioactive waste and the two districts of Copeland and Allerdale should be In February, it was reported that Centrica had withdrawn excluded from further consideration in the Government’s its plans to take part in the building of new nuclear Managing Radioactive Waste Safely process. reactors, blaming spiralling costs and delays. This follows the previous departure of Scottish and Southern Energy, It seems that the raft of regulatory measures in the Energy and German utility firms E.ON and RWE from the process Bill demonstrates that lessons have been learnt in the UK, in September 2011 and March 2012 respectively. post-Fukushima. Although there have been some drawbacks in the nuclear new build plans, the granting of In March, Energy Secretary, Ed Davey told MPs in the planning consent for Hinkley Point C is a step forward and Commons that he was granting planning consent for one which will set the precedent for the future of nuclear the French energy giant EDF to construct Hinkley Point C power generation in the UK. in Somerset. The proposed £14 billion power plant would be capable of powering five million homes and For further information, please contact: Mr Davey described it as “of crucial national Nicholas Rutherford importance”. However, this decision does not come Solicitor without controversy. Greenpeace executive director T +44 (0)114 2833042 John Sauven said “With companies now saying the price [email protected]

Carbon Matters – Spring 2013 | 03 CLIMATE CHANGE AGREEMENTS CLIMATE CHANGE AGREEMENTS

On 1 April 2013, a new scheme for Climate Change Agreements commenced operation. Climate Change Agreements provide a means for businesses which have certain energy-intensive facilities to mitigate their liability to Climate Change Levy, the tax levied on energy suppliers and passed on to their customers, in respect of the non-domestic consumption of certain types of energy (electricity, gas, solid fuel and liquid gas). Businesses that sign up to these agreements in respect of specified facilities receive a substantial discount from the Climate Change Levy paid in respect of supplies made to these facilities, in return for meeting challenging targets for energy-use reduction and energy efficiency. DLA Piper’s SHE team played a significant role in negotiating with Government the broad structure of Climate Change Agreements when the Levy was introduced under the Finance Act 2000, and in negotiating the specific forms of documentation applying to businesses in the steel industry sector. The Government announced in connection with the 2011 Budget that, subject to State Aid Approval, the CCA scheme would be extended from 1 April 2013 at an increase back to the original rate of discount of 80% and would continue to 2023, in order to provide business with confidence in the new arrangements. There would also be a significant simplification of the scheme, which would be the subject of consultations. Consultations followed in September 2011 and in January, March and October of 2012.

04 | Carbon Matters – Summer 2013 Following these consultations, the main features of the The terms of the extended scheme are set out in the new extended Scheme are: Climate Change Agreements (Administration) Regulations 2012, the Climate Change Agreements ■■ The introduction of a Scheme Administrator (the (Eligible Facilities) Regulations 2012, and Guidance. Environment Agency) which will be able to charge for its administration costs. Early in March 2013 amendments were made to these two sets of regulations. These amendments: ■■ An extension of the benefit of the discount by reducing the current “90% Rule” to a “70% Rule”. ■■ adjust the calculations of financial penalties applied to This means that where 70% of the energy used on new facilities to ensure the operators of new facilities the site of a particular qualifying facility is used for the that do not have data about the level of Climate purposes of that facility, supplies to the whole site Change Levy paid for the first year of the CCA are (not simply supplies to the qualifying facility) will not penalised; benefit from the discount. Up until now 90% of the ■■ amend the requirements for information to be used sites energy use was required to be discounted to to decide on the eligibility of a facility if a full year of the qualifying facility in order to achieve that benefit. data is not available. ■■ There will be two-year energy efficiency targets, with They also provide for emissions to be determined on the publication of emissions data at the end of the period. basis of tonnes of carbon dioxide equivalent, rather than ■■ There will be a Buy-out Scheme to allow those who tonnes of carbon dioxide. This brings the scheme into under achieve on their targets to buy “allowances”, to line with the Government’s existing Voluntary a limited extent, to match their under-achievement at Greenhouse Gas Reporting Guidelines. a fixed price of £12 per tonne. Previously allowances One element of uncertainty as regards the future of the had to be purchased from the trading registry of the Scheme arises as a result of the recent Budget obsolete voluntary UK Emissions Trading Scheme announcement of a proposed 100% exemption from which was replaced by the EU Emissions Trading Climate Change Levy for certain energy ­intensive System (“EU ETS”). Over-achievers will be able to metallurgical & minerals-processing sectors exposed to ring-fence any surplus for subsequent use, instead of “carbon leakage”, i.e. competition from industries in purchasing allowances. The fixed price for the sale countries not taking fiscal or regulatory action against of allowances will reviewed in 2016, as will targets. climate change. It is not clear how the continued ■■ The existing overlap of facilities with EU ETS facilities operation of CCAs in the affected sectors would fit with will be abolished, together with the associated the proposed exemption. “Rule against Double Counting” which many operators considered unfair. Instead there will be For further information, please contact: Split Targets, which will mean that EU ETS parts of a Teresa Hitchcock site will be removed from the target, but compliance Partner with EU ETS requirements will be a condition of T +44(0)114 283 3302 qualifying for discount. [email protected]

■■ Civil penalties will replace total loss of the discount for minor breaches of Agreements, as the latter is considered to be a disproportionately heavy sanction. With effect from 1 April, the discount for electricity will now be 90% of the levy, and the gas discount will be 65%.

Carbon Matters – Spring 2013 | 05 CRC UPDATE

In his Autumn Statement, delivered early in December, These changes will be made in the form of amendments the Chancellor of the Exchequer announced he would to the existing CRC 2010 Order, so that they can take not after all be scrapping the CRC Energy Efficiency effect during the introductory phase of the Scheme. Scheme, as he had threatened earlier in the year. The 2010 Order will remain in effect for this purpose. The Scheme would however be simplified, with some of The bulk of the 2013 Order is concerned with the the changes taking effect from 2013, and the Scheme’s Scheme after the introductory phase, and for this general effectiveness will be reviewed in 2016. purpose it will replace the 2010 Order. The Chancellor also indicated, for what that was worth, that the tax element in the scheme would be a high The draft order renumbers the phases of the Scheme, and priority for removal when public finances allowed. changes their commencement dates. In part this reflects the abolition of the requirement for Footprinting, and the Not long after the Autumn Statement more detailed fact that the deadline for registration will henceforth be proposals were set out in the form of a Government two months from the beginning of a phase. response to the March 2012 Consultation on Simplification of the Scheme. On 7 March this year Five new consecutive phases, each of five years, are DECC published the draft of the Order to implement envisaged (assuming the Scheme survives the 2016 the changes (“2013 Order”), which has been laid review). before Parliament and the devolved administrations. The first of these phases will start on 1 April 2014 and Key changes which will take effect from 1 June this year the last on 1 April 2039. and apply to the last two years of the Introductory Phase What would have been the second phase under the 2010 of the Scheme (2012/2013 to 2013/2014) are: Order is rather confusingly renamed the “Initial Phase”

■■ the reduction of the number of fuels covered by the under the 2013 Order. Scheme from 29 to 2, electricity and gas used for The 2013 Order carries forward the changes noted heating (whether space heating, or heating in above, and makes in respect of the Initial and subsequent processes). (There will also be a threshold for Phases a number of additional changes, which include reporting gas supplies of 2% of the energy equivalent the following: of the relevant electricity supplies. (This will replace the “Residual Percentage” or “90 per cent” Rule, so As part of the simplification of the Scheme qualification participants will have to report on 100% of electricity will be based on electricity supplied through Settled use, and also on any gas used for heating where the Half Hourly Meters only. The qualification threshold will threshold has been met); remain at 6,000 MWh.

■■ abolition of the performance league tables; There will be changes to the supply rules, so that there will no longer be a requirement for payment to be made, ■■ the deadline for surrender of allowances will be in order to establish a supply for CRC purposes. extended to the end of October each year; Participants will also in general be responsible for

■■ limits will be placed on the use of electricity supplies made at their direction, as well as those they generating credits, which are to be abolished after actually receive, and participants claiming that a supply of the introductory phase. electricity or gas is an “unconsumed supply”, because

06 | Carbon Matters – Spring 2013 part or all of it has been passed on unconsumed to a transfer to the tenant. Following the Consultation, the third party, will have to produce evidence in the form of minimum term for qualifying building leases has been measurement by meter or equivalent device. reduced from 40 to 30 years. Then are new rules on disaggregation, which will allow State schools in England will be withdrawn from organisations to participate in the CRC in their “natural participation in the Scheme, but the devolved business units”. Any subdivisions or group or subsidiaries administrations have decided that state funded schools of a group can apply for separate registration, and there in their jurisdictions will continue to participate as part will be no minimum threshold for disaggregation. It also of their funding organisation. appears that those subsidiaries which disaggregate are The Environment Agency has published on its websites not obliged to take their own subsidiaries with them out updated guidance to take account of the simplification of the Group for this purpose. Disaggregation will also be measures from the remainder of Phase 1. possible where the remainder of the Group would fall outside the qualification threshold. New registration guidance is due in April and detailed Phase 2 compliance guidance and case studies are There are also changes to the rules on Designated expected in the autumn. Changes, which provide for the purchase and sale of subsidiaries which meet the qualification threshold in their Undoubtedly the cumulative effect of these changes will own right (“participant-equivalent subsidiaries”) to be make compliance to CRC considerably easier for a taken into account for CRC purposes. For example under number of organisations. Critics will however note that the new rules, a Non-Participant can avoid becoming a there is very little room left in the Scheme for emissions Participant for the phase in which the change occurs, if it trading, which was its original purpose. They may also requires the Participant or participant-equivalent sympathise with the argument put forward by the CBI subsidiary it is acquiring to register for that phase. last year, that more effective carbon reductions would be achieved through an extension of climate change levy and There are special provisions which allow certain types of wider mandatory carbon emissions reporting. trustees to register the trusts that they operate as separate participants. These do not appear to apply to For further information please contact: private equity funds, but the new disaggregation Noy Trounson provisions should allow private equity firms to require Barrister in employed practice each of their portfolio companies to disaggregate from T +44 (0)207 7966318 or the fund and participate separately. +44 (0)114 283 3097 While in general landlords will remain responsible for [email protected] their tenants’ and licensees’ consumption, there will be an exception for building leases, where responsibility will

Carbon Matters – Spring 2013 | 07 MANDATORY CARBON REPORTING AND IMPROVED ENVIRONMENTAL DISCLOSURE

Readers of Carbon Matters will be aware Relevant emissions will include direct emissions from onsite activities, and from transport, plant and processes that last year the Government announced controlled owned or operated by the company, and also its intention to introduce legislation on indirect and fugitive emissions from its own activities. However the indirect emissions of suppliers will not be mandatory carbon reporting for companies. included. Companies will have to report on relevant The Department for Environment Food emissions from their own activities overseas, but on the emissions of subsidiaries, joint ventures etc, only to and Rural Affairs subsequently consulted the extent that they have control over those activities. on draft regulations to give effect to the The report will be required to state the methodology proposal, which will initially apply to all that has been used to calculate the emissions and whilst the legislation does not set out any specific methodology quoted companies (about 1,200 of the to be used the consultation document confirms that such UK’s largest listed companies). The scope methodologies could include that set out in Defra/DECC guidance or those already created by the World of mandatory emissions reporting will be Resource Institute/World Business Council for reviewed in 2015, and may be extended Sustainable Development, ISO Standard 14064 1 or the Climate Standards Disclosure Boards Climate Change from 2016 onwards to include over 20,000 Reporting Framework. large businesses. Where a company participates in the EU ETS, the CRC Energy Efficiency Scheme or Climate change Agreements, The consultation closed in October, and DEFRA data obtained for the purposes of these schemes may be subsequently held workshops to discuss draft guidance used to cut costs. to help companies comply with their obligations. Under the consultation proposals, reporting would have These obligations will apply to UK incorporated applied in respect of all financial years ending on or after companies whose equity share capital is listed on the 6 April 2013. However, it now appears that the obligation Main Market of the London Stock Exchanges, officially will apply in respect of company reporting years ending listed in an EEA state, or admitted to dealing on the on or after 1 October 2013. New York Stock Exchange or Nasdaq. Affected companies must “measure or calculate and report on” This has been done so that the obligations will take effect annual emissions as part of their directors’ report, and at the same time as changes to narrative reporting must thereafter assess progress annually. requirements being introduced by BIS under the Companies Act. This will however still mean that Relevant emissions will include all six categories of companies will have to report retrospectively on greenhouse gases covered by the Kyoto Protocol, where activities for the first whole year ending after that date, material to the company’s activities, and these must be and are likely therefore to have to report retrospectively reported on globally in tonnes of CO2 equivalent. on activities before the Regulations came into force. These are: carbon dioxide, methane, hydrofluorocarbons, It was explained at the workshops that DEFRA do not nitrous oxide, perfluorocarbons and sulphur hexafluoride. think that this element of retrospection will cause In practice most companies will probably only have to difficulties, because most quoted companies are already report on CO2 emissions. engaged in reporting on greenhouse gases on a voluntary basis, and because the introduction of mandatory reporting was widely known to be imminent.

08 | Carbon Matters – Spring 2013 A more convincing point, perhaps, is that the final version The intention of the guidance is to provide clear advice of the Regulations will contain provisions setting out the on how to measure and report environmental “Comply or Explain” principle. This will mean that if a performance using key performance indicators, to help quoted company was not able to collect all the missing determine which of those indicators are most relevant to data, then it would be able to explain why it had not been any particular company and to set out the rationale for able to do so, and this would be acceptable. managing environmental performance using them. There will not be any specific provisions for enforcement The previous guidance identified 22 key performance in the final version of the Regulations, as enforcement will indicators whilst the new guidance focuses on 5 key be the responsibility of the Conduct Committee of the environmental categories with a view to not only aiding Financial Reporting Council. This body is likely to rely corporate reporting of environmental issues but heavily on persuasion, though it has a general encouraging companies to take account of these when reserve power to apply to the Court for a declaration of setting corporate strategy. The 5 areas of environmental non-compliance, and an order for a new report. performance covered are water, waste, materials, air pollution and emissions and biodiversity and ecosystem DEFRA have indicated that revised guidance on the services. mandatory obligations will be included as a new chapter of a revised version of wider joint DEFRA and DECC It remains to be seen, however, how far the new guidance Guidance on “How to measure and report your will go in assisting and encouraging companies to report greenhouse gas emissions”. This is due to be published their environmental performance more fully. Recent media soon, and the final version of the Regulations is likely to reports indicate that whilst two thirds of FTSE listed be laid before Parliament at the same time. companies disclosed environmental information in 2009/10 less than a third actually used the Government’s reporting Environmental Disclosure guidance to do so. Defra has also issued for consultation new guidance For further information, please contact: intended to help UK firms improve environmental Alastair Clough disclosure more generally. This guidance replaces that Legal Director issued in 2006 and fulfils a commitment made by the T +44 114 283 3114 Government in the Natural Environment White Paper. [email protected]

Carbon Matters – Spring 2013 | 09 IN BRIEF

Aviation in the EU ETS The Green Deal The three principal EU institutions, namely the The Green Deal, the Government’s flagship loan Commission, the Council and the European scheme for energy efficiency improvements to Parliament, reached political agreement on 12 March domestic and business properties, was finally launched on the text of a proposal to “Stop the Clock” as on 28 January 2013. The scheme, discussed in detail in regards the implementation of the international the two previous editions of Carbon Matters, is a key aspects of the EU ETS in respect of aviation. part of the strategy to meet the carbon reduction targets established under the Climate Change Act and This involves suspending the obligation to surrender to combat fuel poverty. It provides a legislation envisaging allowances in respect of flights between framework to encourage private firms to install third countries and the EU for one year. energy improvements at no upfront cost to the The proposal is aimed at encouraging parties to find customer. The customers will repay the cost of a solution to the climate change issues raised improvements in instalments which will be added to by these flights at the 2013 Assembly of the their electricity bills, and the cost of the instalments is International Civil Aviation Organisation. In default intended to be offset by the savings resulting from the of an acceptable solution being reached, the EU ETS improvements. Early reports suggest good take-up for would be reapplied from 2013 onwards to cover all the scheme, despite widespread fears that high interest domestic and international flights that land or rates might discourage this and the appearance of an take-off from an EU airport. OFT report shortly before the launch which was critical of the domestic energy efficiency sector, and pointed to sharp trading practices. For further information, please contact: Ailish Oxenforth Legal Director T +44 114 283 3336 [email protected]

10 | Carbon Matters – Spring 2013 About the authors

Teresa Hitchcock Ailish Oxenforth Partner Legal Director Teresa Hitchcock is a Partner based at DLA Piper’s Ailish is a Legal Director in the SHE team with Sheffield office and national head of the firm’s 15 years’ experience of advising on a broad range of UK Safety Health & Environment team. A senior environmental and health and safety issues. A key environmental regulator before qualifying as a focus of Ailish’s work relates to advising on the solicitor, Teresa is an acknowledged expert in potential liabilities associated with contaminated land a number of fields, including contaminated land and negotiations with regulatory authorities. liabilities, waste and producer responsibility, climate change law, and strategic health and safety Nicholas Rutherford compliance, and has presented on these topics at Solicitor conferences held nationally and internationally. A former environmental consultant, with a Master’s Degree in Environmental Consultancy, Alastair Clough Nicholas is a solicitor within the SHE team and has Legal Director experience of advising on a range of environmental and health and safety matters. Alastair specialises in environmental and health and safety law as well as other regulatory issues including product and food safety and regulatory Noy Trounson licensing and enforcement. He advises on all aspects Barrister of environmental law (with particular expertise in relation to waste management and contaminated Noy, a barrister in employed practice, is an land issues) as well as health and safety law, product environmental and health and safety lawyer with the stewardship and regulatory licensing and SHE team. For many years an in-house lawyer with enforcement matters. the British Coal Corporation, he now specialises in contaminated land and climate change law in addition to matters relating to mining.

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