CRC to be axed from April 2019 with significant tax reductions for current participants

Peter Ibbett -
& Lorna Forbes

The much anticipated outcome on the future of the CRC scheme was finally revealed last week: CRC is to be abolished. 

During the announcement, the Chancellor conceded that the CRC scheme is a tax in contrast to its initial conception as a scheme to encourage competition between big businesses to drive down energy usage. The Government will now be looking to simplify the carbon compliance process by increasing the Climate Change Levy (CCL) from April 19 onwards which will capture the majority of businesses rather than targeting the highest consuming organisations. 

In late 2015 there was speculation that the CRC scheme could be closed as soon as March 2017, after the consultation ‘Reforming the business energy efficiency tax landscape’ made clear the Government’s intentions to consolidate carbon and energy taxes whilst reviewing the current carbon and energy reporting requirements on organisations. The detail of the budget has now confirmed that the scheme will remain until the end of CRC Phase 2 (April 2019) with September 2019 being the final time businesses will be required to purchase allowances, if they have not purchased ahead in the forecast sales.

The good news for big businesses is that published figures from the 2016 Budget show that the overall increase in CCL to be implemented from April 19 will only be around a third of the CRC cost per megawatt hour. This is based on the average of the impact on gas and electricity. As a result, current participants will see their tax bill fall as the result of the changes; the story is not so positive for businesses that fall outside of CRC as they will see an increase in their CCL charges without a reduction in carbon taxation elsewhere.

As CCL captures a wider array of organisations (fewer exclusions apply in comparison to the CRC scheme, and there are no registration requirements) the resultant revenue from the CCL increases are expected to remain fiscally neutral with CRC. 

The Budget has also confirmed that there will be a rebalance of CCL charges for electricity and gas to reflect the recent data on fuel mix used in electricity generation, with rates intended to reach a ratio of 1:1 by 2025. This will result in a greater percentage increase to gas charges compared to electricity, intended to incentivise further gas usage reductions to support achieving the UK’s climate change targets. Increases to CCL will be offset for sites with Climate Change Agreements in place through more favourable CCL discount rates.

The Government plan to launch a consultation later this year on simplifying the energy and carbon reporting framework, potentially with a view to reach a ‘one tax, one reporting scheme’ ideology that would no doubt be welcomed with open arms by large businesses. Some caution is needed as it is not yet fully clear if this can be achieved and how the long term energy/carbon reporting requirements for businesses will look. This may become clearer once the consultation papers are published. 

In the meantime, the key actions for businesses are to focus on energy efficiency to reduce exposure to both CRC and CCL costs, whilst considering whether to make a response to future consultations to encourage a consolidated approach to the carbon reporting landscape.