UK carbon law undergoes welcomed reforms

Proposals to the UK’s CRC scheme will mean fund managers can more easily separate carbon reduction liabilities amongst portfolio companies, but the bureaucracy of the scheme for complex structures like private equity funds is still leaving room for concern.

Proposals to the UK government’s Carbon Reduction Commitment Energy Efficiency Scheme (CRC) will benefit fund managers hoping to separate liability between themselves and portfolio companies. 

Moreover the proposals mean GPs have been provided greater flexibility in separating portfolio companies’ carbon reduction obligations from each other. 

The government’s Department of Energy and Climate Change opened a consultation period on the scheme earlier this year with the aim to simplify the scheme’s operations and design. Consultation responses will accepted until 18 June. 

Currently firms must aggregate all majority owned portfolio companies into one group when registering with the scheme, and only after then are they able to disaggregate portfolio companies which would qualify for registration in their own right.

The consultation recommends that all portfolio companies, regardless if they were large enough to be captured by the scheme in their own right, should be entitled to disaggregation. 

Although this is a welcome break for firms, much of the industry does not think the proposals have gone far enough. “I think there is some disappointment over the criteria being used for qualification,” said Angus Evers, partner at law firm SJ Berwin.

He believes private equity firms are aggrieved that all their funds under management must be grouped together for reporting purposes as if they were a traditional corporate group. The concern stems from the UK government electing to use a specific legal definition that does not necessarily work for all organisations captured by the scheme, added Evers.

The industry is also pushing for the scheme to operate on a bottom up basis, meaning that small portfolio companies would be left untouched by the scheme, even if disaggregated as part of a wider GP portfolio. 

Michael Coxall, of law firm Clifford Chance, thinks the industry is still concerned with the level of complexity and will want to move toward looking at an alternative, such as the government suggestion of an alternative environmental tax.