CRC Change Highlights

• The creation of CRCEES as a pure tax punishes industrial companies in general and data centres in particular
• It moves the issue off the CSR agenda and out of the board room
• Those companies already paying the CLL will be taxed twice
• Other EU countries are delaying the implementation of CRC laws to help with economic recovery
• The UK is the most advanced and competitive market for data centres in Europe
• ITC activities add significantly to the UK’s GDP
• The tax of £12/tonne of CO2 will undoubtedly rise
• While it won’t affect existing data centres, new builds are less likely if the UK continues to legislate significantly ahead of other countries and/or if the tax rate is higher

I enjoyed the Datacenterdynamics conference in London massively a few weeks ago. A common concern running throughout was CRC legislation, so I thought I’d put my spin on how seriously recent changes will affect data centres. In particular whether it will force companies to relocate to avoid paying carbon taxation.

The Coalition Government Turns CRCEES Into A Pure Tax

In its Spending Review published in October, the UK coalition government made essential changes to the Carbon Reduction Commitment Energy Efficiency Scheme (CRCEES). In particular:

• “2.108 The CRC Energy Efficiency scheme will be simplified to reduce the burden on businesses, with 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. Further decisions on allowance sales are a matter for the Budget process.”

Initially the CRC was a voluntary scheme garnering board-level support from Britain’s largest companies – the idea of course was that by monitoring, measuring and reducing the usage of electricity would play a part in making the country greener. Early adopters made it part of their Corporate and Social Responsibility (CSR) strategies. Of course the credit crunch changed things for most countries – recession reduced carbon emissions by 20% as a result of reduced economic activity and few governments wanted to hamstring their own national companies with an extra tax at the most challenging of times. The talks at Copenhagen a year ago failed to reach agreement on new carbon emission reductions partially because of national governments concerns about recovering from the credit crunch.
In the UK however the Labour government pushed forward with making CRCEES compulsory for all organisations using 6,000MWh per year. The scheme had a number of interesting aspects. In particular:

• Organisations would purchase credits in advance, calculating how much electricity they expected to use in the year
• They would trade the credits at the end of the year, buying if necessary from others with a surplus
• The UK’s Department of Environment and Climate Change (DECC) was to publish a league table ranking the good and the bad in order of how they cut emissions
• 90% of the £1 billion collected from the scheme was to be redistributed to the better performers

The in-coming coalition government’s has now changed the scheme into a pure tax. The ‘delay’ in bringing the allowance sales is most probably because there is now no need to buy in them in advance or trade them with others. The tax is currently priced at £12 per tonne, but – like University tuition fees – this is likely to rise in future.

Companies Subject To The CCL Get Taxed Twice

Not only is the CRCEES now only a tax, but it is in addition to the Carbon Change Levy (CCL) charged to big industrial organisations. For some time the government has encouraged these companies to volunteer for Carbon Change Agreements (CCAs) – which allow discounts of up to 80% in exchange for taking on “sector targets with DECC on energy consumption relative to production output”. The current CCAs run out in 2013 and look likely to be replaced by a scheme with a much shorter life span (probably 2013-2017). Again there is plenty of scope for the government to withdraw or reduce discounts after that point. It will also become difficult for large industrial companies to keep in line with these two very different carbon tax schemes.
For now not only is the UK the only government in the EU to introduce CRC tax, but it will be changing those organisations subject to the CCL twice – less a CCA discount which it can wriggle out of soon. CRC taxes already exist in Japan and will inevitably come to all EU countries, but the UK government is in advance of all others – chargng twice. The French government, for instance, recently rejected introducing a similar scheme.
As far as CSR is concerned, CRCEES as just a tax will fall off the agenda and out of the board room in most UK companies, reducing their focus on environmental issues accordingly.

Will Extra Carbon Emission Taxes Force Data Centres Out Of The UK?

Currently we enjoy data centres are booming in the UK. A combination of strong connections with the US – both in terms of business models and language, the size of the financial sector (around 20% of GDP) and a hitherto deregulated environment have made this the location of choice for many. However the latest government changes in CRC challenge that.
When talking about the data centres James Dow of CSTechnology (which helped the New York Stock Exchange’s London build out) noted that for a trader the office location is not nearly as important as the closeness of your server to the trading system. While the NYSE’s data centres are currently located in Basildon and Slough he predicted that they might equally well move out to Paris or Amsterdam without negatively affecting the traders.
In a later presentation however Ron Mann of HP concentrated on the gaps in planning between IT and facilities management – pointing out that the first has a three to five year – and latter a ten to fifteen year – life cycle. I believe it is unlikely therefore that current operations will be forced out unless the tax rises significantly and other European countries continue to hold off. It will be a different story for new data centre builds, with multinational companies opting for more favourable locations. In discussion the CRC panel at the conferences discussed one case of a new data centre going to Ireland recently, partially as a result of the tax changes.
I’ve noted before – mainly in my discussion with Nick Razey of NGD – that data centres are susceptible to environmental taxes. New data centres use a lot of electricity and are always designed with energy efficiency in mind. CRC taxes are designed to encourage improvements in energy usage in normal business – there simply aren’t that many savings a new large data centre can make. In addition the current UK legislation makes no allowance for the use of alternative energy. If you use 100% alternative of nuclear electricity your tax will be the same as if you exclusive use power from fossil fuel. We believe that the UK government should invest more of its taxes into funding nuclear power stations if it really wants to reduce carbon emissions, starting with the £1 billion it now intends to take from CRCEES.
On balance, however I think the UK will keep its competitive edge in data centre operations over the rest of Europe – at least until the electricity supply starts to run down due to the government’s lack of investment in nuclear energy: but that’s another story….