Produced in partnership with Angus Evers of Shoosmiths
Brexit
11 pm (GMT) on 31 December 2020 marked the end of the Brexit transition/implementation period entered into following the UK’s withdrawal from the EU. At this point in time (referred to in UK law as ‘IP completion day’), key transitional arrangements came to an end and significant changes began to take effect across the UK’s legal regime.
For further guidance, see Practice Note: Brexit—impact on environmental law.
The Climate Change Agreements (Amendment of Agreements) (EU Exit) Regulations 2018
The Climate Change Agreements (Amendment of Agreements) (EU Exit) Regulations 2018, SI 2018/1205 (the CCA EU Exit Regulations) came into force on IP completion date. Regulation 2 of the CCA EU Exit Regulations make amendments to both umbrella agreements and underlying agreements under the Climate Change Agreement (CCA) scheme. The amendments update references to the European Commission’s guidelines setting out the definition of an undertaking in difficulty to the latest version of those guidelines. They also, in light of Brexit, correct deficiencies in cross-references to Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a system for greenhouse gas emission allowance trading within the Union and amending Council Directive 96/61/EC.
References:
The Climate Change Agreements (Amendment of Agreements) (EU Exit) Regulations 2018, SI 2018/1205
The Climate Change Agreements, CRC Energy Efficiency Scheme and Energy Savings Opportunity Scheme (Amendment) (EU Exit) Regulations 2020, SI 2020/711, reg 2
For more information on the commencement of Brexit SIs and on retained law, see Practice Notes:
Updated guidance
HMRC has updated its guidance Climate change agreements: information to report to HMRC to clarify that state aid reporting will change due to the agreement with the EU.
What is the climate change agreement scheme?
The CCA scheme entitles eligible facilities to receive a reduced rate (discount) on the climate change levy (CCL). See Practice Note: Climate change levy.
References:
CCAs are voluntary agreements that allow an eligible energy-intensive facility to receive up to 90% reduction in the CCL (and 100% reduction for energy used in certain energy-intensive (metallurgical and mineralogical) industrial processes), if it agrees to energy efficiency targets agreed with government.
CCA is defined in Schedule 6, paras 46–48 to the Finance Act 2000 (FA 2000). The CCA scheme operates under a two-tiered structure:
- umbrella agreements—the Department for Business, Energy and Industrial Strategy (BEIS) and industry sectors negotiate umbrella agreements. The agreement is then held between the sector or trade association and the administrator that contain sector commitments, obligations and administration procedures
- underlying agreements—individual agreements between the administrator and the operator of the eligible facility that set out the facility’s targets, obligations and administration procedures
The current CCA scheme commenced on 1 April 2013 and runs until 2025. Target periods run for two years starting in 2013, 2015, 2017, 2019 and 2021. Reconciliation will take place at the end of each target period and covers performance over the target period.
The Environment Agency has produced a number of guidance documents for the scheme and BEIS provides guidance on the gov.uk website.
References:
EA, Climate Change Agreements: Operations Manual, 2015
EA, Setting up a Climate Change Agreement
EA, Managing your Climate Change Agreement
Climate change agreements: statutory guidance
Who administers the climate change agreement scheme?
The Environment Agency is the administrator of the CCA scheme. The administrator is responsible for entering into agreements, keeping a CCA register and setting up sector accounts. Administration costs are recovered by a charging scheme run by the Environment Agency.
References:
FA 2000, Sch 6, Pt IV, para 52A–52C
Climate Change Agreements (Administration) Regulations 2012, SI 2012/1976, regs 3–5
Climate change agreements: statutory guidance provides guidance to the Environment Agency as administrator on how to carry out its administrative functions.
HMRC is responsible for overseeing the application of the reduced rate of CCL once a business has been certified as a participant of the scheme.
What facilities are covered by the climate change agreement scheme?
CCAs can apply to installations or sites with one or more installations that:
References:
- carry out certain activities listed in Schedule 1 to the Environmental Permitting (England and Wales) Regulations 2016 (EPR 2016), SI 2016/1154, or
- carry out an eligible process defined in the Climate Change Agreements (Eligible Facilities) Regulations 2012 (Eligible Facilities Regulations 2012), SI 2012/2999
Environmental permitting activities
A site will be eligible if it carries out a Part A(1) or A(2) activity listed in EPR 2016, Sch 1, Pt 2, and includes:
References:
- Part A installations
- installations that would be Part A installations but for a threshold or exception
- installations that would be Part A installations if certain modifications were made
The UK government may extend eligibility to new sectors or amend it for existing sectors, with data centres and saw milling being added in 2014.
References:
FA 2000, Sch 6, Pt IV, para 50(3) and (4)
Eligible processes
An eligible process is a process or activity, or a combination of processes or activities, listed in the Schedule to the Eligible Facilities Regulations 2012, carried out at an installation or site, eg any reformation at an installation or site where natural gas is reformed.
References:
SI 2012/2999, reg 2, Sch 1
What installations are eligible facilities?
An installation or a site is an eligible facility only if:
References:
- at least 70% of the reckonable energy supplied to the installation or to the site is intended to be used in the installation(s) or parts of the installation(s), and
- the taxable commodities supplied to the installation or to the site by taxable supplies in the following 12-month period are intended to be burned or consumed in the installation(s), in part of the installation(s) or on the site of the installation(s)
The CCL discount will apply to the entire energy use of the facility where the energy used by the eligible processes is 70% or more of the total energy used in the facility.
The 70/30 rule acknowledges that during a 12-month period a facility that uses reckonable energy in eligible processes is likely also to use energy in non-eligible processes that do not comply, eg in offices. This will enable more installations to claim the CCL discount. It also removes the requirement for sub-metering.
References:
EA, Climate Change Agreements: Operations Manual, 2015
Reckonable energy is:
References:
- energy obtained from the burning or using of relevant commodities in the installations or parts of installations on the site
- electrical energy supplied to the installation, installations or parts of installations on the site
- energy in cooling supplies, or
- energy in supplies of steam
What is the available climate change levy discount?
The CCL is charged at a specific rate per unit of energy for each of the four categories of taxable commodity. The rates are based on the energy content of each commodity.
References:
The main rates are updated annually.
A reduced rate of up to 81% (increasing to 83% by 2021) applies to energy-intensive sectors provided these businesses meet pre-agreed targets of CO2 reduction and enter into a CCA with the scheme administrator. Electricity suppliers can receive up to a 92% reduction on the CCL to reflect the introduction of the carbon price floor.
References:
In 2014, the UK Government introduced a 100% exemption from CCL for energy used in certain energy-intensive (metallurgical and mineralogical) industrial processes. These businesses can claim 100% relief for those industrial processes now exempt from CCL and, where applicable, a CCA discount on all other industrial processes.
References:
Excise Notice CCL1/3, para 3.14
In the Spring 2016 Budget, the UK government announced the abolition of the CRC Energy Efficiency Scheme (CRC Scheme), with effect from the end of the 2018–19 compliance year. This was implemented by the CRC Energy Efficiency Scheme (Revocation and Savings) Order 2018, SI 2018/841, which came into force on 1 October 2018. To cover the cost of the abolition of the CRC Scheme in a fiscally-neutral way and incentivise energy efficiency in CCL-paying businesses the main rates of CCL increased from 1 April 2019. To compensate equivalently for the increase in CCL main rates, the CCL discount for sectors with CCAs also increased from 1 April 2019.
The Finance Act 2016 (FA 2016) legislated for the CCL main rate rises in line with the retail prices index (RPI) from 1 April 2017 and 1 April 2018. It legislated for above RPI increases for the main CCL rate from 1 April 2019 and for changes to the reduced CCL rate from 1 April 2019.
References:
The UK government also intends to rebalance the main rates of CCL for different fuel types to reflect recent data on the fuel mix used in electricity generation. In the longer term, the government intends to rebalance rates further to deliver greater energy efficiency savings, to reach a 1:1 ratio of gas and electricity rates by 2025.
Spring Budget 2020 announced increases to the gas rates under the CCL for years 2022–23 and 2023–24 while freezing the rate on electricity in order to meet the UK’s net zero commitment by incentivising the use of electricity over gas, as electricity is a cleaner energy source. Building on the Budget 2016 announcement to make gas and electricity rates equal by 2025, the government announced that it will raise the rate on gas to £0.00568/kWh in 2022-23 and to £0.00672/kWh in 2023-24 whilst freezing the rates on electricity. To ensure the tax system treats fuels that are used off the gas grid more equitably, the government will freeze LPG at 2019-20 levels until April 2024.
Finance Act 2020 (FA 2020) legislated for the rate for electricity to decrease to £0.00811/kWh from 1 April 2020 and to £0.00775/kWh from 1 April 2021 and for the rate for gas to increase to £0.00406/kWh from 1 April 2020 and to £0.00465/kWh from 1 April 2021. Rates for any petroleum gas, or other gaseous hydrocarbon, supplied in a liquid state remain the same for both periods and the rates for other taxable commodities rises each year: to £0.03174/kWh from 1 April 2020 and to £0.03640/kWh from 1 April 2021.
References:
From 1 April 2018 the Climate Change Levy (General) Regulations 2001 are amended in relation to the formula used to calculate relief entitlement, to align them with changes made in FA 2016 to reduced rates of CCL from 1 April 2019.
References:
Climate Change Levy (General) (Amendment) Regulations 2018, SI 2018/118
From 1 April 2020 and from 1 April 20201, the Climate Change Levy (General) Regulations 2001 are amended in relation to the formula used to calculate relief entitlement, to align them with changes made in FA 2020 to reduced rates of CCL from 1 April 2020 and from 1 April 2021.
References:
The UK government will retain existing eligibility criteria for CCA schemes until 2025. The buy-out price for missed targets for target periods 3 and 4 (2017/18 and 2019/20) was increased in line with the retail price index from £12 to £14 per tonne of CO2 equivalent following a consultation in August 2016. The Climate Change Agreements (Administration) (Amendment and Related Provision) Regulations 2016, SI 2016/1189 implement the change by amending the Climate Change Agreements (Administration) Regulations 2012, SI 2012/1976. The buy-out price for missed targets for target period 5 (2021/2022) is £18 as specified in the Climate Change Agreements (Administration and Eligible Facilities) (Amendment) Regulations 2020, SI 2020/958.
How does a company enter into an agreement?
An operator can only enter into a CCA where an umbrella agreement is in place. Fifty-three industry sectors have umbrella agreements. They are available on the government’s website.
References:
EA, Setting up a Climate Change Agreement
EA, Climate Change Agreements: Operations Manual, 2015
The operator should check:
- whether it is an eligible facility, and
References:
- whether a sector association manages the agreement that covers the facility process and if so, ask the association for advice on the process
If the operator is not a member of the association it may be charged a fee for administering the CCA and assisting it to enter into an underlying agreement with the administrator.
Once a CCA has been agreed, reduced rate certificates list all the facilities within each sector that belong to a CCA and are eligible for the reduced-rate levy. A list of facilities currently eligible to claim CCL discount is available.
References:
EA, Setting up a Climate Change Agreement
EA, Climate Change Agreements: Operations Manual, 2015
Revised Template umbrella and underlying agreements were available from 1 January 2017 and supersede previous templates. They incorporate the increase in the buy-out price for missed targets for target period 3 (2017–2018) and target period 4 (2019–2020) announced on 9 December 2016.
The Climate Change Agreements (Administration and Eligible Facilities) (Amendment) Regulations 2020, SI 2020/958 amend the terms to be included in an underlying agreement relating to the buy-out fee, and amend the formulas to provide that any surplus will not be taken into account in calculating the buy-out fee for the new target period 5. They also insert a power for the administrator to vary a CCA to take account of any changes in the terms specified by the Climate Change Agreements (Administration) Regulations 2012, SI 2012/1976 from time to time as terms which must be included in agreement.
References:
Climate Change Agreements (Administration and Eligible Facilities) (Amendment) Regulations 2020, SI 2020/958, reg 2(3)–(5)
What is required of a company that enters into an agreement?
In general, operators of a facility subject to a CCA will be required to deliver energy efficiency or carbon-saving reduction targets set out in the agreement and will be required to measure and report their energy use and carbon emissions against the agreed targets.
References:
FA 2000, Sch 6, paras 47–48, 116
Umbrella agreements include the overall target and milestones for the whole of the sector based on individual targets for target units (TUs) that are combined to calculate the sector total. A TU can consist of a single facility or a number of different facilities that are grouped together to form a single TU.
The underlying agreement will specify the individual targets for the TU.
Claiming relief from the climate change levy
Once the administrator has received the underlying agreement, it will be signed and one copy will be returned to the sector association. The operator is entitled to claim the reduced rate of CCL from the date the agreement is signed.
References:
The operator should send forms PP10 Supporting Analysis and PP11 Supplier Certificate to their energy supplier(s) using the date of the agreement as the start date of entitlement.
Once a facility has received a certificate stating it is entitled to the reduced rate it can then be used by the facility to support a claim for relief of CCL from HMRC.
Variation to a CCA
The scheme administrator can issue a variation certificate.
If a variation occurs, the agreement holder must submit revised versions of the PP10 and PP11 forms reflecting the change in their entitlement to CCL relief to HMRC.
References:
The Climate Change Agreements (Administration and Eligible Facilities) (Amendment) Regulations 2020, SI 2020/958 insert a power for the administrator to vary a CCA to take account of any changes in the terms specified by the Climate Change Agreements (Administration) Regulations 2012, SI 2012/1976 from time to time as terms which must be included in agreement.
References:
Climate Change Agreements (Administration and Eligible Facilities) (Amendment) Regulations 2020, SI 2020/958, reg 2(5)
Penalties
There are no penalties under the old CCA scheme other than loss of the CCA.
The Environment Agency may impose financial penalties where the facility:
References:
- (a) fails to provide information
- (b) provides inaccurate information with regards to progress towards meeting the target
- (c) provides inaccurate information with regards to whether the target has been met or complying with the terms of the underlying agreement, or
- (d) fails to make any necessary notifications required under the agreement
Penalties range from:
References:
EA, Climate Change Agreements: Operations Manual, 2015
- £250 or 10% of the amount of the CCL relief, whichever is the higher for (a), (c) and (d), or
- £250 or £12 per tonne of CO2 equivalent of the difference between the actual emissions and the reported emissions for the target period, whichever is the greater for (b)
Unpaid penalties can be recovered as a civil debt by the Environment Agency. For more information, see the guidance: Managing your CCA.
Appeals
Operators can appeal against the charging of penalties, as well as terminations of CCAs and the inclusion and exclusion of facilities.
References:
Relationship between climate change agreements and the EU ETS
A number of CCA TUs are covered by both the CCA scheme and the EU ETS.
References:
Greenhouse Gas Emissions Trading Scheme Regulations 2012, SI 2012/3038
Under the old CCA scheme, if operators of installations covered by both schemes reduced their energy use and emissions they could benefit under both schemes in relation to the same reduction, eg:
- under the EU ETS, if they had a surplus of allowances they could sell or bank them for future use
- under the CCA scheme, if they overperformed against their CCA target they could convert this into allowances for sale on the UK ETS (now closed)
The CCA target was then corrected in accordance with the methodology in the former DECC guidance paper CCA-D06 to avoid double counting of allowances.
Conversely, if their emissions and energy use increased, the operators would have to purchase allowances under the EU ETS and the historic UK ETS (now closed).
The new scheme removes the overlap with the EU ETS by splitting the CCA targets into two elements:
References:
- emissions within a CCA and covered by the EU ETS are not subject to a CCA target but are eligible for the CCL discount, and
- a negotiated CCA target covering non-EU ETS emissions and electricity
The TU under a CCA is the eligible facility less any part(s) consuming energy covered by the EU ETS.
TUs no longer have to apply a complicated methodology to adjust their target for the overlap before their performance gets assessed at reconciliation.
The EA guidance document provides examples of how to calculate the energy consumption relevant to CCA where there is also an EU ETS installation associated with the eligible facility.
References:
EA, Climate Change Agreements: Operations Manual, 2015
Developments
The government announced in its Clean Growth Strategy published in October 2017 that it will evaluate CCAs to inform any successor scheme from 2023.
For more information on the Clean Growth Strategy, see News Analysis: Clean Growth Strategy—Environmental Headlines (October 2017).
The government’s call for evidence on helping businesses improve the way they use energy set out possible approaches to improving energy efficiency in business and industry by 20% by 2030, and sought views on the level of ambition and how to measure progress. It also sought views on the actions businesses and government could take to improve take up energy efficiency across buildings and industrial processes. The response was issued on 13 March 2019, and stated that the government was undertaking an evaluation of the effectiveness of the CCA scheme, which was expected to conclude by the end of 2019, see: LNB News 13/03/2019 115 and Consultation on energy efficiency—what’s next?.
However, Spring Budget 2020 announced an extension of the CCA scheme by a further two years, with the extended version of the scheme to be outlined in a consultation also consulting on long-term options for the scheme.
On 16 April 2020, BEIS published the consultation: Climate Change Agreements scheme extension and reforms for any future scheme which closed on 11 June 2020. The consultation sought views on proposals to:
- extend the current CCA scheme by two years, through:
- the addition of a new target period, from 1 January 2021 to 31 December 2022
- extending certification for reduced rates of CCL for participants meeting obligations under the scheme to 31 March 2025
- re-open the scheme from 1 January 2021 (with applications being submitted until September 2020), allowing eligible facilities not currently participating to apply to join (under current rules businesses have not been able to join the scheme since October 2018)
Views were also sought on potential reforms were there to be a future CCA scheme.
The second climate change agreements scheme evaluation was also published on 16 April 2020.
On 31 July 2020, the government published the consultation outcome. The majority of the 1010 respondents welcomed the extension and certainty surrounding the CCL discount. There was also support for keeping existing rules and eligibility criteria and a strong belief that the proposals were appropriate for extension. However, respondents raised concerns surrounding the tight timescales as well as certain aspects including an increase in the buy-out price and inability to use surplus in the added target period. Following the responses, the government has announced it would implement the changes mentioned, including laying the required legislation and that BEIS and the Environment Agency would provide more detail regarding target setting negotiations and new/varied agreements. The government also confirmed that further assessment will be undertaken regarding the purpose and targeting of a long term scheme following the extension, in addition to providing a timeline for further engagement on the future of the CCA scheme.
The Climate Change Agreements (Administration and Eligible Facilities) (Amendment) Regulations 2020, SI 2020/958, in force from 1 October 2020, make provision to:
- extend the scheme providing for a reduced rate of CCL until 31 March 2025
- amend the Climate Change Agreements (Administration) Regulations 2012, SI 2012/1976, to provide for a new target period from 1 January 2021–31 December 2022 (target period 5)
- amend the terms to be included in an underlying agreement relating to the buy-out fee, and amend the formulas to provide that any surplus will not be taken into account in calculating the buy-out fee for the new target period
- insert a power for the administrator to vary a CCA to take account of any changes in the terms specified by that statutory instrument from time to time as terms which must be included in agreements
- amend the Climate Change Agreements (Eligible Facilities) Regulations 2012, SI 2012/2999, to extend the scheme until 31 March 2025
The CCA scheme has now been extended until March 2025, find the latest CCA Operations Manual here.
