High fines are on the agenda for companies breaching climate-change regulations

Recently released information from the Government has revealed the high level of civil penalties imposed for breach of climate change regimes, including EU ETS, CRC, and ESOS.

05 April 2019

At the start of April the Government updated its list of civil penalties imposed for breaches of climate change-related regulations, including in respect of the European Emissions Trading System (EU ETS), the CRC Energy Efficiency Scheme (CRC), and the Energy Saving Opportunities Scheme (ESOS).

The highest fines include penalties for failure to comply with EU ETS regulations of £608,500 imposed on a CHP operator; £154,500 imposed on a brewer and distiller, and £68,000 imposed on a steel manufacturer. Penalties for breaches of CRC include fines of £31,000 levied on a visual effects and computer animation company and £21,500 levied on a gambling company.

Penalties for breaches of ESOS, include a fine of £45,000 levied on a digital networking company and a fine of £22,500 imposed on a care home operator. ESOS is entering its second phase with a deadline for compliance falling in December 2019.

The list demonstrates that enforcement of these regimes is a reality. The relevant legal regimes are relatively complex and errors are clearly costly. There are appeal mechanisms against the Environment Agency (the enforcing regulator) and, in the event of enforcement action it is worth considering the option of pursuing an appeal.

Furthermore while both EU ETS and CRC are (for differing reasons) potentially on their last legs, in both cases eligible companies could well retain a degree of historic liability.

EU ETS

EU ETS is a market-based mechanism aimed at reducing greenhouse gas emissions. Under EU ETS, eligible companies must report on their greenhouse gas emissions on a yearly basis and then surrender sufficient ‘allowances’ to account for these emissions. The system allows companies to buy emission allowance, either via auction from member states or on the secondary market. If companies fail to surrender sufficient allowances, they could be subject to civil penalty.

As an EU system, the future of EU ETS in the UK is highly sensitive to the outcome of Brexit discussions. Effectively there are three possible outcomes that could arise from Brexit:

  1. If the UK remains part of the EU, it will remain part of EU ETS.
  2. If the UK withdraws from the EU with the deal previously negotiated with the EU, the UK will remain in EU ETS until 31 December 2020.
  3. If the UK withdraws from the EU without a deal, the UK will come out of the EU ETS immediately. EU ETS will be replaced in the UK by a carbon tax.

It is important to note that even in scenario 3, where the UK comes out of EU ETS upon no-deal Brexit, operators will still be liable for emissions from EU ETS installations in the 2018 compliance year (January –December 2018).

In that event, EU ETS installations will still be liable to surrender allowances for their emissions in 2018. In order to provide for this and in the event of a no-deal Brexit, the deadline for surrender has been amended to reflect be the day on which such withdrawal takes place, but will in any event be no later than 30 April 2019.

CRC

By contrast, CRC is a UK domestic scheme that requires qualifying organisations to purchase and surrender CRC allowances in respect of group-wide energy consumption. CRC is not affected by Brexit but, as trailed in a previous update, is being phased out from April this year.

However, abolition of CRC does not remove companies’ historic liability for reporting on energy consumption and surrendering allowances for previous years, nor their obligations for meeting the CRC reporting and surrender deadlines for the final 2018 -19 compliance year (July 2019 and October 2019 respectively).

Next steps for business

As the enforcement by the Environment Agency to date has demonstrated, relevant businesses should bear in mind their obligations in respect of all climate change regimes, and consider review of their past compliance. Our team has experience advising on all climate change regimes and in representing companies on appeal against regulatory enforcement.

For further information or assistance, please contact Michael Barlow or Stephen Lavington.

Key contact

Michael Barlow

Michael Barlow Partner

  • Head of Energy, Power and Utilities
  • Environment
  • Water

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