Concerns over the CRC Energy Efficiency Scheme are leaving property owners aggrieved and feeling they are being dealt with unfairly, particularly those who have to pay for emissions produced by others that they cannot control.
Many commercial landlords may have to pay for carbon emissions they do not directly produce, and over which they have little influence. Given a key factor of the CRC is about performance improvement, this means that the industry could face a dim future at the bottom of the league of shame that will soon be drawn up. Outside the obvious cost, there are real investor issues about being stigmatised for the listed property sector.
In other respects, the CRC appears to have a sensible structure based around payments through carbon trading and a league table that rewards good behaviour and shames those underperforming. The best get paid by the rest, which have an incentive to improve.
But the scheme has caused contention as participants get more or less money depending on their position in the table, in spite of the fact that they all operate different business models and have varying abilities to improve.
The biggest concern for the property sector is that landlords will end up paying for the energy use of tenants.
There is a provision that requires a tenant to co-operate, but in practice there are no real drivers for occupiers to reduce their energy usage. Landlords can ask tenants to turn off the lights at night, but that does not mean that they always will.
Land Securities, the UK's largest landlord, estimates that it could face a bill of £3m per year that it cannot improve or recover if prices rise as dramatically as some forecast when the fixed rate of carbon trading ends.
The worries for large owners such as Land Securities of being anchored in the bottom half of the table are as much about reputation with tenants, business partners and investors as it is about money.
As a FTSE-100 company, there could be issues with certain institutional funds that use a "green screen" to pick investments. "Property companies will be in the bottom half, it is safe to assume," said Neil Pennell, head of sustainability and engineering at LandSecs. "It creates a stigma to the sector. There are SRI investors who will look at the table and property will be hit because of forever being in the second half."
The traditional UK lease structure complicates the situation. No existing leases will have been drafted with the CRC in mind. There is no easy way to pass on bonuses or penalties incurred from the scheme's league table through service charges, and disputes will inevitably arise. Payments will be at a group level rather than on individual buildings, causing trouble working out who should benefit.
Leases will need to be changed - not something that will happen quickly, given their length and the ability to renew on the same terms. Many owners lack knowledge of the scheme, and those not already using CRC clauses are likely to regret it even if the initial costs are low.
The first year of the CRC scheme will be used for data gathering, which means that companies will start buying allowances for next year. In the meantime, groups such as the British Property Federation will talk with the next government to ask that the principle of "polluter pays" is more fairly enshrined in rules.
But outside the cost sharing, if landlords and tenants can be encouraged to work together through better regulation and effective fiscal incentives, then the main beneficiary will be the government's carbon targets.
Source: Financial Times