Whether you are a sceptic, a convert or a believer, there is undoubtedly compelling scientific evidence of global warming, and that climate change is upon us. Legislation enacted by both Westminster and Holyrood sets challenging targets for the reduction of greenhouse gas emissions over the next decades.

The carbon footprint of buildings is responsible for around 50% of greenhouse gas emissions in the UK. So whether we like it or not, buildings and their owners are in the front line.

A key weapon in the Governments' armoury against climate change is the Carbon Reduction Commitment, a UK-wide emissions trading scheme, developed under the auspices of the UK Climate Change Act, that is due to come into effect in April 2010.

Although applying directly to many "large organisations", including public bodies, it will also affect many other organisations and individuals, particularly if they are tenants of landlords who are involved in the scheme. It will have a direct impact on an organisation's cash flow, and increase the administrative burden on companies that are already beleaguered by the effects of recession.

The key elements of the Carbon Reduction Commitment
If your organisation uses over 6,000 MWh of electricity from half hourly meters in the qualifying year of 2008 (which roughly equates to a total electricity bill of between £500,000 and £1 million) then you are likely to have to participate.

For many organisations, significant sums of money will have to be paid up front, to buy the allowances that participation in the scheme demands.

Where a company is a member of a group, then it will be the responsibility of the highest parent organisation in the group to collate all the energy use of its subsidiaries for the purposes of working out if it qualifies for the scheme in the first place. For organisations that own buildings which are leased, many issues arise that landlords and tenants are going to have to grapple with, particularly in the case of multi occupancy buildings, where consideration needs to be given to how the cost of CRC allowances are to be treated, for example by incorporation within service charge provisions.

Once organisations have purchased their allowances, the scheme administrators (the Environment Agency in England and Wales, and the Scottish Environmental Protection Agency in Scotland) will work out who has performed well and who has performed badly, and recycle the money received from the purchase of allowances, to the participants. Good performers will receive a bonus payment as well as repayment in respect of their original contributions, whereas poor performers will be penalised and will receive back less than they contributed. Over time, the amount of the bonuses and penalties will increase, making it more attractive to perform well and emit less, and less attractive to be a poor performer and a significant producer of carbon emissions.

This performance league table is the key to the successful operation of the Carbon Reduction Commitment for Government. Although a complicated administrative and financial burden, involving considerable record-keeping and reporting requirements as well as initial up-front funding, the league table is intended to encourage carbon friendly behaviour from businesses as they strive to improve their position, and thus their green credentials. Tensions clearly arise where buildings are let, as the actual occupiers are those responsible for making the emissions on which the reputation, and league table performance of their landlord depends, and little guidance is currently available from government about how such tensions may be addressed.

Understanding the implications of the scheme, and early preparation in the months leading up to its introduction, are essential to properly manage the impact that it may have on your business.

Ann Stewart is an associate specialising in commercial property with leading UK law firm Shepherd and Wedderburn LLP.
0131 473-5380

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