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As part of the Spending Review, the CRC Energy Efficiency scheme will be simplified to reduce the burden on businesses.

• The first allowance sales for 2011-12 emissions now taking place in 2012 rather than 2011.
• Revenues from allowance sales totalling £1 billion a year by 2014-15 will be used to support the public finances, including spending on the environment, rather than recycled to participants.

Henry Le Fleming, carbon reporting specialist sustainability and climate change, PwC, commented:

“The CRC has been a contentious scheme. A worrying proportion of companies covered by the scheme were behind with their necessary preparations. So the delay in the timetable for purchase of allowances will be welcomed by business.

"The proposed retention by government of auction revenues is a big change to the scheme and will substantially increase compliance costs for businesses. If companies do not take steps to reduce their CRC carbon emissions, the bottom line is they will face increasing costs to buy the permits to comply with the scheme.

"For a company with a £1 million energy bill (split 75% electricity, 25% gas) the cost of acquiring permits at £12 per permit in 2012 is likely to be in the region of £76,000. By 2014/2015, that cost will rise to £114,000, assuming the carbon allowance price rises to £18 per tonne by 2014/15 (as suggested in the Treasury documents).

"That's an 11.4% increase on the costs of a £1m energy bill, before companies factor in the costs of managing compliance, eg reporting requirements with the scheme."

"There are positive aspects to this change. It provides stronger and clearer incentives for companies covered by the scheme to invest in energy efficiency. Additionally the change in the timetable for the first purchase of allowances provides more time to prepare and delays the point at which companies need to commit cash to buying allowances."

Harry Manisty, environmental tax specialist, PwC

“On the basis that it looks like CRC revenues will be taken from the scheme by the government, the CRC will operate effectively as a tax on companies taking part.”

The HM Treasury Spending Review Document states that there will now be 'no recycling of revenues' in the scheme, and that it is expected to raise £3.46bn over the next four fiscal years. The initial design of the scheme fixed carbon permit sales at £12, but these revenue figures suggest the government is expecting the permit price to rise to £18 - £20 by 2014-2015 (allowing for some reduction in emissions).

Harry Manisty, environmental tax specialist, PwC further commented:

“Discrepancies between this price of carbon and the price paid for carbon emissions covered by the EU Emissions Trading Scheme are likely to emerge, undermining the search for a consistent carbon price signal throughout the UK economy.

“The change could also have implications for the Climate Change Levy (CCL). The government had proposed to reform the CCL from a tax on energy, to a tax linked to the carbon content of fuels, but now may face pressure to abandon these plans to avoid double taxation of carbon for CRC participants.

1. The HM Treasury Spending Review Document states that there will now be 'no recycling of revenues' in the scheme, and that it is expected to raise £715m, £730m, £995m, £1,020m over the next four fiscal years.
2. PwC modelling on the original CRC scheme had demonstrated that companies who plan ahead and performed well could have turned early losses in the scheme into a gain, seeing their energy costs reduced by over 8% in 2015. For a company with a total energy bill of £1 million, this would have being worth just over £85,000 in 2015 alone, or £150,000 over the course of the next five years.